Q3 2024 PulteGroup Inc Earnings Call
Adra: Good morning, my name is Adra and I will be your conference operator today.
Speaker Change: A significant risk factors that could affect future results are summarized as part of today's earnings release.
Speaker Change: In the accompanying presentation slides.
Speaker Change: These risk factors and other key information are detailed <unk> filings, including our annual and quarterly reports.
Speaker Change: Let me turn the call provide marsh right. Thank.
Speaker Change: Thanks, Jim I appreciate everyone joining our call. This morning, as we discuss another quarter of strong operating and financial results for <unk> as.
Speaker Change: As detailed in this morning's press release, driven primarily by a 12% increase in closings, we reported a 16% year over year increase in third quarter earnings to $3 35 per share.
Speaker Change: Inclusive of our strong Q3 financial performance for the first three quarters of 2024 multi group has realized double digit increases in closings wholesale revenues and pretax income along with a 22% increase in reported earnings of $10 28 per share.
Speaker Change: In addition to delivering significant growth in revenues and earnings for the trailing 12 months period Pulte group realized a return on equity of 27%, while continuing to drive strong cash flow and lowering our debt to capital ratio to 12%.
Speaker Change: Our strong financial performance also allowed us to continue returning funds to shareholders through the first nine months of 2024, we returned $1 billion to shareholders through share repurchases and dividends. This is an increase of $200 million or 25% from last year in terms of funds alley.
Speaker Change: <unk> back to our investors.
Speaker Change: These numbers are all the more impressive given the fluctuating macro backdrop the backdrop that we've all been working through.
Of course of the year, we have seen the 30 year mortgage rates climb from 675% in January seven 5% in April only to fall back to 6% in September and then of course, the recent climate interest rates back to 675% has the 30 year mortgage rates back to where we started 2000.
24.
Speaker Change: We track consumer sentiment among visitors to our website and our communities and as you might expect buyer confidence ebbs and flows with meaningful changes or even just volatility in interest rates. This again proved to be the case as buyers reacted to the movement in rates during the third quarter.
Speaker Change: Mortgage rates have around six 5% to begin in the third quarter buyers were generally less inclined to sign a purchase agreement.
Speaker Change: As interest rates declined through August and September However, we experienced a noticeable pickup in overall activity in fact of the three months in the quarter, we generated the highest not to orders and absorption paces in the month of September.
Speaker Change: Driven by September strong performance.
Speaker Change: Q3 absorption pace of two four orders per community per month.
Speaker Change: Certainly above the typical pre COVID-19 numbers for the third quarter.
Speaker Change: The recent.
Speaker Change: October has shown the highest web traffic foot traffic and lead volume up the year. However, the recent rise in interest rates has demonstrated a more typical seasonal seasonal selling patterns and incentives have remained elevated as a consequence.
Speaker Change: Between rate volatility impact of hurricanes in the upcoming presidential election, I think the upcoming spring selling season will offer the best assessment, a fundamental housing demand.
Speaker Change: I think by a reaction to the movement in rates, both down and now up again affirms that affordability remains a tough hurdle to get over for many potential homebuyers.
Speaker Change: The most recent S&P case Shiller index shows home prices continued to hit all time, new highs, although the rate of appreciation has slowed which in combination with expected lower mortgage rates could offer some relief to consumers going forward.
Speaker Change: Has been discussed extensively over the past few years, one of the pressure points that continue to push home prices higher.
Speaker Change: The fact that after years of under building. This country has a housing deficit estimated at several million homes.
Speaker Change: The mortgage bankers Association issued a useful graphic a few weeks ago that are shown on slides 15, and todays webcast slides.
Speaker Change: The graph shows housing stock added by decades since the 19 forties looking at the graph you can clearly see the significant drop in production during the past 15 years.
Speaker Change: At this point, even clearer we modified the MBA graft.
Speaker Change: <unk> bye overlay the growth in U S population over the decades.
Speaker Change: Do you see is that just since the 19 sixties, our country's population has almost doubled to just shy of 350 million people. While housing production has been flat to down over the decades.
Speaker Change: Given the high cost of homeownership rate buy downs remain a powerful incentive and helping consumers bridge the affordability gap.
Speaker Change: In the third quarter, approximately 30% of our homebuyers accessed our national rig program to.
Speaker Change: To take advantage of our national rate incentive homebuyers will typically need to close within 30 to 60 days of signing the contract. So it's important that we continue to have an inventory of homes in production.
Speaker Change: At the end of the third quarter, 43% of the homes in production of our stocks. So we are well positioned to meet demand as we close out 2024.
Speaker Change: Along with benefiting from having inventory available. We are also continuing to make progress in lowering our cycle times.
Homes delivered in the third quarter. Our average cycle time was 114 days down from 123 days in this year's second quarter cutting two weeks out of our production timeline is an important accomplishment and it keeps us on track to reach our goal of 110 days by year end and a hunter and be at 100 days in the first.
Speaker Change: Part of 2025 and.
Speaker Change: In truth, most of our divisions are already operating at or close to our 100 day ideal target.
Speaker Change: Our reported average is higher due to a handful of divisions, primarily those with large multifamily business where cycle times remain elevated in summary, operationally and financially we accomplished a lot in the third quarter and are well positioned to have 2024 be a record year for Pulte group.
Speaker Change: Let me turn the call over to Bob for review of our third quarter results.
Thanks, Brian and good morning, driven.
Bob: Driven by strong closing volumes, our third quarter home sale revenues increased 12% over last year to $4 3 billion.
Bob: Higher revenues in the period reflect a 12% increase in closings to 7924 homes, while our average sales price in the quarter of $548000.
Bob: Secondly, unchanged from the prior year in the second quarter of this year.
Bob: Average sales prices by buyer group were also consistent with the prior year.
Bob: The mix of our closings in the third quarter was 40% first time, 39% to move up at 21% active adult.
Bob: In the third quarter of last year, the mix of closings was 38% first time, 37% move up and 25% active adult.
Bob: The slight decline in the percentage of closings from active adult buyers primarily reflects the timing of active adult community Closeouts in 'twenty three 'twenty four that we noted in our sign up commentary during our second quarter earnings call.
Bob: We expect the normalization of contribution from our active adult consumers when replacement active adult communities to begin opening in 2025.
Bob: Looking at our orders net new orders in the third quarter totaled 7031 homes, which is consistent with the 7065 net new orders recorded in the third quarter of last year.
Bob: It's worth noting that our average monthly absorption pace of two four homes in the current quarter remains higher than our historic third quarter pre Covid average, which was closer to two two homes per month.
Bob: Within the quarter, we did see a positive impact on monthly orders as interest rates declined from July through September.
Bob: Compared with the prior year Q3 orders decreased 3% for first time buyers increased 6% for move up buyers and decreased 5% for active adult buyers.
Bob: Consistent with our guide we operated out of the out of an average of 957 communities during the quarter.
Bob: Which is an increase of just under 4% compared with the third quarter of last year.
Bob: Based on activity during the quarter quarter end backlog was 12 89 homes with a value of $7 7 billion.
Bob: Which compares with the backlog of 13547 homes with a value of $8 1 billion at the end of the third quarter last year.
Bob: During the quarter, we started approximately 7800 homes and ended the quarter with a total of 17096 homes under construction.
Bob: Numbers are consistent with Q3 of last year.
Bob: At the end of the quarter, we had approximately 7400 spec homes in production of which 1300.
Bob: 57 homes were complete.
Bob: This represents about one four finished specs per community, which is consistent with the second quarter of this year.
Bob: On a unit basis, 58% of our third quarter sales were spec sales highlighting the importance of having inventory available to meet higher demand.
Bob: Your interest in spec production has been driven in part by our successful use of mortgage incentives, which are most effective when the consumer expects to close quickly.
Bob: As always we will continue to closely monitor consumer preferences for any changes if mortgage rates continued to decline.
Bob: Based on the units we have under construction and the current stage of production and currently expect to close between 7000 908300 homes in the fourth quarter.
Bob: I would highlight that this keeps us on track to meet or slightly exceed our full year closing target of 31000 homes.
Bob: Given the affordability challenges facing today's home buying consumers and evolving market dynamics in key cities in which we operate our pricing strategy seeks to ensure we maintain a compelling offering to all consumers with.
Bob: With that said our average sales price in the third quarter was $548000, which is consistent with our guidance for average pricing to be in the range of 540 $550000.
Bob: Looking at the fourth quarter. We currently expect our average sales price to be in a higher range of 565000.
Bob: $565000.
Bob: As we have discussed on prior calls this is largely due to a higher percentage of our closings coming from our western markets, where sale at selling prices are above company average.
Bob: Our third quarter gross margin came in at a strong 28, 8% as.
Bob: As we highlighted during our most recent earnings call our margins in this quarter reflect an increasing percentage of our closings coming from our western markets, which relative to other parts of our business.
Bob: Slightly lower margins.
Bob: Our third quarter margins were also impacted by higher incentive costs incurred during the period incentives in the third quarter was 7%, which is a sequential increase of 70 basis points from the second quarter of this year.
Bob: Given competitive market dynamics higher incentives were needed to help ensure we continue to sell homes and turn our assets.
Bob: As Ryan talked about buyer demand improved as interest rates declined in the third quarter, but overall market demand dynamics remain competitive as.
Bob: As such we expect incentives to remain elevated for at least the remainder of <unk>.
Bob: Given the anticipated geographic and product mix of fourth quarter closings and the expected need to maintain higher incentives.
We expect gross margin in the fourth quarter to be in the range of 27, 5% to 27, 8%.
Bob: Based on our fourth quarter guidance full year gross margin would amount to approximately 29%.
Bob: Continuing down the income statement, our reported SG&A expense in the third quarter was $407 million or nine 4% of home sale revenues.
Bob: This compares to the prior year SG&A expense of $353 million.
Bob: Nine 1% of wholesale revenues.
Bob: Our third our third quarter SG&A expense was in line with previous guidance and keeps us on track for SG&A expense of nine 2% to nine 5% of wholesale revenues for the full year.
Bob: I would note that our full year guidance excludes the impact of the insurance adjustments, we recorded in the first and second quarters of this year.
Bob: Our financial services operations reported another quarter of strong operating and financial results as third quarter pre tax income increased 19% over last year.
Bob: $5 million.
Bob: For the quarter, our financial services operations benefited from increased volumes driven by the higher closing volumes in our homebuilding business in combination with improved capture rates.
Bob: In addition, we experienced increased profitability, particularly in our mortgage operations due to improving market conditions driving higher margin.
Bob: In total for the quarter, we reported pretax income of $906 million, which represents an increase of 7% over the third quarter of last year.
Our tax expense for the quarter was $208 million.
Bob: Our effective tax rate of 23%.
Bob: Our effective tax rate for the quarter includes a $14 million benefit associated with the purchase of renewable energy tax credits completed in the quarter.
Bob: In the fourth quarter, we expect our tax rate to be in the range of 24 to 24, 5%.
Bob: Excluding the impact of any potential incremental energy tax credit purchases.
Bob: Looking at the bottom line our reported net income was 698 million $3 35 per share representing increases of 9% and 16% respectively over the third quarter of last year.
Bob: Earnings per share in the third quarter was calculated based on approximately 208 million diluted shares outstanding which is down 5% from the prior year as the company continued to systematically executed share repurchase program.
Bob: Consistent with our stated strategies continue to allocate incremental capital to the future growth of our homebuilding platform.
Bob: In the third quarter, we invested $1 $4 billion in land acquisition and development of which 56% was the development of existing land assets.
Bob: Year to date basis, we have invested $3 7 billion.
Bob: Acquisition and development and now expect our full year spend to be in the range of five to $5 2 billion.
Bob: As our land teams continue to do an exceptional job identifying and structuring land investments that meet our strict underwriting guidelines.
Bob: Inclusive of our land spend in the quarter, we ended the quarter with approximately 235000 lots under control of which 56% were held via option.
Bob: We continue to make steady progress in increasing the percentage of our land that we controlled via option as we seek to drive greater balance sheet efficiency in support of higher returns in the future.
Bob: Based on our land pipeline and the expected timing of community openings and closings. We currently expect to operate out of an average of 950 communities in the fourth quarter, which would represent an increase of 3% over the fourth quarter of last year.
Bob: In addition to investing in the ongoing growth of our business continue to consistently return capital to shareholders in the third quarter, we repurchased two 5 million common shares at a cost of $320 million or an average price of $126 <unk> per share.
Bob: Through the first nine months of the year, we have repurchased seven 6 million shares or approximately 4% of our shares outstanding at the beginning of the year at a cost of $888 million or $115 74 per share.
Bob: Following these repurchases we ended the period with just over $1 billion remaining on our existing repurchase authorization.
Bob: And finally, we ended the third quarter with a gross debt to capital ratio of 12, 3%.
Bob: Adjusting for the one $5 billion of cash on our balance sheet, our net debt to capital ratio was one 4%.
Speaker Change: Now, let me turn the call back to Ryan for some final comments.
Speaker Change: Thanks, Bob.
Ryan: Very proud of our organization as our local and national teams have done a great job navigating the ups and downs of 2024 within.
Ryan: Within such an environment, it's more important than ever that we continue to focus on the critical business strategies and tactics that have been instrumental to our success.
Ryan: First we are continuing to invest in our business, we expect to invest just over $5 billion in land acquisition and development. This year underwriting to the same return hurdles and guidelines that we've had in place for more than a decade. Our disciplined process has allowed us allowed us to assemble a robust pipeline of what we believe are well located.
Ryan: At a high returning projects.
In the process of underwriting new deals, we continue our migration toward controlling more land via option.
Ryan: This will be a multiyear effort, but we see the opportunity for increasing our option lot count as a way to enhance returns and help mitigate market risk. They are a long term goal of getting to 70% optioned lots, which will be an evolutionary process as we work through our existing communities and add new option lot deals to the overall portfolio.
Ryan: Second while we continue to invest in new land positions, we have to make sure we are efficiently and intelligently turning our existing land assets within our business model, we seek to achieve higher returns by balancing the desire to maximize profitability of each hole, while making sure we are turning our land assets.
Ryan: We all have to use the phrase we can't be margin proud gross margin. It isn't it is an important driver of return on invested capital and we don't want to give away lots that we've worked hard to secure at the same time, we must be price competitive offer a clear and compelling value to potential home buyers I think our third quarter results show this balance.
Ryan: <unk> as we continue to generate historically high gross margins that we meaningfully increased incentives in response to the more competitive market conditions in which we're currently operating.
Ryan: And third we must continue to allocate capital in alignment with our long stated priorities I just discussed we continue to invest in the ongoing growth of our business through land acquisition and development.
Ryan: If we achieve our 2024 land investment target of $5 billion or five year land acquisition and development spend will total more than $20 billion.
Ryan: A world we're not in my backyard is alive and well such investment represents countless hours of hard work by our land teams throughout the country.
Ryan: After investing capital to support the ongoing growth of our business.
Ryan: We continue to systematically return funds to shareholders was 2024 being the fourth year in a row in which we will have returned over $1 billion back to shareholders through share repurchases and dividends.
Ryan: Over $20 billion invested in land over $4 billion returned to shareholders and to all while building a strong and highly supportive balance sheet with low leverage and high liquidity.
Ryan: I strongly believe this is a balance sheet that can support our growth plans as well as continue to see us through the ups and downs of buyer demand that inevitably roll through the housing industry.
Ryan: Let me close by thanking our entire organization for their hard work in delivering fully group's outstanding operating and financial results.
Ryan: Hurricanes made this effort even tougher over the past few months, but I am incredibly proud although not at all surprised of how our team rallied to support fellow employees directly impacted by these storms.
Ryan: Your compassionate efforts are wide Pulte group remains a great place to work.
Speaker Change: Now, let me turn the call back to Jeff.
Jeff: We're now prepared to open the call for questions. So we can get through as many questions as possible. During the remaining time of this call. We assay limit yourself to one question and one follow up thank you and I'll now ask Rob to again explain the process and open the call for questions.
Rob: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again.
Rob: And again, we ask that you. Please limit yourself to one question and one follow up to allow everyone an opportunity to ask a question.
Speaker Change: We'll go first to John Lovallo at UBS.
John Lovallo: Good morning, guys. Thank you for taking my questions. The first one is maybe just help us on the sequential walk in gross margin from $28 eight in the third quarter to the range of 27, 5% to 27 eight in the fourth quarter does that assume an incremental step up in incentives and what is sort of the breakout between.
John Lovallo: The headwind from incentives versus mix.
Speaker Change: Yeah, Hey, John.
I think it's.
Speaker Change: Reflective of the current market that we're operating in we highlighted.
In the commentary as it relates to Q3.
Speaker Change: Coming into the quarter, we had given the guide and said that incentives will be flat, obviously, they were a little bit richer than we had expected we had a lot of homes to sell in the third quarter.
Speaker Change: The activity that we have seen has had that higher incentive load, we still have homes to sell in the fourth quarter.
So it really is just a function of what we're seeing on the ground today.
Speaker Change: Yes, another thing more broadly that impacts this is.
Speaker Change: The slight step down in the active adult as a percentage of the mix and so were high.
Speaker Change: Highlighted during the second quarter.
Speaker Change: We saw some closeouts and so we've got some for lack of better word gap outs in active adult so you've seen the percentage of our total business did active adult shrink a couple of basis points.
Speaker Change: That obviously has the highest margin contribution so it's a combination of all those factors.
Speaker Change: Understood. Okay, and then Ryan mentioned the Hurricanes, obviously, there were two pretty devastating storms, Milton really hitting Florida pretty hard.
Speaker Change: And Helane going up into the Carolinas, what is the impact that you guys, perhaps saw in the quarter and what are you kind of contemplating as we move forward here I said potentially pack on whether it's still a breeze orders or whatever the case may be.
Ryan Milton: Yes, John its Ryan.
Speaker Change: First thoughts and prayers go out to the <unk>.
Speaker Change: Communities in the individual families who were impacted by the storms they were certainly both.
Speaker Change: Both very large and devastating in different ways.
Speaker Change: I'll, maybe start first by highlighting how well our communities performed both.
Speaker Change: Our communities that are in active construction as well as homes that we've recently closed.
Speaker Change: The new construction standards and the quality that we build to the wave to drainage systems are designed I think are a real testament to just how effective some of those standards are so we had very little damage and our active communities, which is good news.
The biggest impact is really two things John one loss of time, so the three to four days to shut job sites down in advance of the storm and then the three to four days kind of following the storms with cleanup.
Speaker Change: Those are days that are just hard to get back.
Speaker Change: Power is the second issue, so, especially with Milton.
The power outages were really widespread in Florida, especially in the Tampa and southwest Florida areas. So.
Speaker Change: Our crews are focused on bringing the power grids back online, they're not as focused on setting new electrical meters for homes that will deliver in Q4.
Speaker Change: So we're still kind of working to quantify what those exact numbers are we're confident in the guide that we have the Bob's provided to you.
Speaker Change: And we.
Speaker Change: We'll know more I think in the coming weeks as the as the power companies recover.
The other maybe.
Speaker Change: Kind of third tier item would be some of the municipalities will be a little slower and responding to inspections.
Speaker Change: As they are dealing with kind of cleanup areas in the hard hit communities.
Speaker Change: Great. Thanks, very much guys.
Speaker Change: Sure.
Speaker Change: We'll move next to Alan Ratner Zelman <unk> associates.
Alan Ratner: Hey, guys. Good morning, Thanks for taking the questions.
Alan Ratner: Right Yeah, just following up on the margin Guide you you mentioned the mix of the business the active adult et cetera.
Alan Ratner: And you kind of touched on the storms, but I guess this is kind of like a two part question specific to Florida.
Alan Ratner: Margins in Florida are well above company average so I'm curious if that's impacting specifically the <unk> numbers.
Alan Ratner: Specifically for the guidance, but.
More importantly, I guess, if you could just talk a little bit about what you are seeing in Florida outside of the storm impact you know theres a lot of concern about rising resell inventory in the market challenged affordability and I'm. Just curious how you guys are thinking about that market relative to your very strong margins do you think there's an opportunity maybe to take advantage of.
Alan Ratner: That was taken.
Alan Ratner: Taking share maybe more incentivizing.
Alan Ratner: Or do you feel like your land position in that market is so strong that you are you guys. You mentioned not looking to give away those lots.
Speaker Change: Yeah, Alan where actually we remain very bullish on Florida.
Alan Ratner: Talked about it a little bit.
At the end of our second quarter.
Alan Ratner: On a positive note, we had a great third quarter out of Florida.
Alan Ratner: And a lot of the inventory trends, both on resale inventory and new inventory of improved and they're down from where things peak. So I think that's a positive in a quarter, which is typically one of the slower quarters in Florida as you know U N. The the <unk>.
Ishares, the nicer weather summer months up north.
Alan Ratner: We move into the fourth quarter and we get into what is the traditional shoulder season in Florida, where the snowbird start coming back into town.
Alan Ratner: I think we're well positioned to have a pretty good fourth quarter. So.
Alan Ratner: We're in every major city are almost every major city in Florida, We don't do a lot of business in Miami.
Alan Ratner: But we're you know our brands are really strong there we've got great community. So I think I think Florida will continue to be a positive for us yes Alan.
Speaker Change: It's interesting.
Alan Ratner: Heard Brian say, how well our markets held up there.
Speaker Change: So we don't see a mix shift in the fourth quarter pending of course.
Speaker Change: <unk> ability to actually deliver permits, which you think they will and we think we'll be able to work through we had highlighted the geography and that the margin is really that western markets have.
Speaker Change: On a relative basis slightly lower margins for us and that's going to be a higher percentage in the fourth quarter than it was the third.
Speaker Change: And then it's the incentives on the spec for entry level.
Speaker Change: Probably that have more influence as we highlighted in the prepared remarks, our expectation is that.
Speaker Change: Yeah, the incentive levels are going to stay high.
Speaker Change: Got it that's helpful. Bob and you kind of touched on you mentioned entry level higher incentives I guess more broadly you know you guys are one of if not the most diversified builders from a price point perspective can you just drill in a little bit in terms of what youre seeing at the various segments in terms of demand right now between entry move up in <unk>.
Speaker Change: Active adult I know you gave the numbers on orders, but that doesn't always tell the whole story, given community count openings and closings et cetera.
Speaker Change: Yeah.
I'll take that one I mentioned in my prepared remarks in October.
We've talked about it on prior calls we do a survey with buyers that come to our website just about how confident they are about now being a good time to buy.
Speaker Change: We're at a 12 month high in that number so I think that's generally.
Speaker Change: A positive sign for the business our website traffic our lead traffic and our foot traffic into our stores also at 12 month highs. So.
Speaker Change: Theres a lot of real positive activity in the top of the funnel.
Speaker Change: September was the best month in the quarter drilling down into the individual brands.
Speaker Change: The entry level buyer continues to be most challenged by affordability. So when rates came down in September I think we saw.
Speaker Change: A nice pickup in buying power.
Speaker Change: A very favorable impact to that particular buyer so.
Speaker Change: I think that's a positive the move up buyer continues to be really strong for us.
Speaker Change: With that being 40% of our business I think we're really well positioned for that consumer group to continue to perform well in the current environment.
Speaker Change: And if we're fortunate enough to see some improved rates and the you know the next couple of months as we go into spring selling season I think.
Speaker Change: That particular buyer group performed very well and then active adult and we've talked about this in years past. This is a buyer group that's.
Speaker Change: Probably most impacted by volatility in the market and uncertainty in the market and right now the thing that we're hearing the most about the election.
Speaker Change: And there's just there's a lot of uncertainty around.
Speaker Change: Non stop garage that we're getting with the election on a couple of weeks. So we're we're kind of waiting for the.
Speaker Change: So the next couple of weeks to be over.
Speaker Change: And we think that buyer will come back into the market shortly thereafter.
Speaker Change: I appreciate it thanks, a lot guys.
Speaker Change: Thanks Alan.
Speaker Change: And we'll go next to Stephen Kim Evercore ISI.
Stephen Kim: Yeah. Thanks, very much guys I appreciate all the information so far I wanted to focus.
Stephen Kim: Focus specifically on timing I think you.
Stephen Kim: You've made a couple of comments about what.
Stephen Kim: What you think may happen.
Speaker Change: Next year I think you indicated that you thought that given the sort of the volatility in buyer demand due to rates that may be we're really going to have to look to the spring selling season to sort of see how the market is ultimately going to settle out and I think you're right on that I think that the spring selling season is going to be a big focus probably for <unk>.
Stephen Kim: Yours as well.
Speaker Change: And so I'm just trying to get a sense for how you might see a timing of certain things that you've talked about evolve here over the net but what it means for timing I guess I should say so first of all you talked about the hurricane impact.
Speaker Change: You think that some of the delays that you felt from.
Speaker Change: From that well will impact fully <unk> do you think that theres going to be any spill over into <unk>, particularly as it relates to deliveries you know the revenues you talked about the timing of the active adult gap out I think you indicated that you thought that that would get better in 2025 can you give us a sense for sort of when in 2025.
Speaker Change: And when in particular that might affect like revenues because you know obviously these homes may take a while to build.
Speaker Change: Those are the two major ones that I wanted to understand better what youre thinking about from a timing perspective.
Ryan Milton: Yes, Stephen it's Ryan Thanks for the question.
Ryan Milton: We've given a we've given the guide for Q4 that were confident in so we think we've factored in kind of our best estimate of what the hurricane related delays and impacts will be.
Ryan Milton: If things go quicker and better than expected potentially we get a few more closings in the fourth quarter, but.
Ryan Milton: We're confident in the guide that we've given.
Ryan Milton: Then.
Ryan Milton: As it relates to <unk>.
Ryan Milton: 2025, and spillover impact from the Hurricane we haven't given a guide at this point, we will do that at the end of next quarter.
Ryan Milton: History is a guide I think you know.
Ryan Milton: The system will come back online and.
Ryan Milton: Other than again power related.
Ryan Milton: Setting of Transformers, and energizing communities you know those those are the things that I think we sometimes see some delays around.
Ryan Milton: But we'll we'll.
Ryan Milton: Tell you more about that as we get closer as it relates to kind of active adult Wil.
Ryan Milton: Also give you our community Count guide next year.
Ryan Milton: The those communities have been in the pipeline for a long time. They are actively being developed right now so we've got great visibility to when they're going to open.
Ryan Milton: Most of those will start to open in the back half of 'twenty five.
Ryan Milton: And then start to show closings.
Ryan Milton: In 2026.
Ryan Milton: But we.
Speaker Change: No. We haven't we haven't given a guide for 2025 other than I would reiterate we've talked about kind of our long term growth guide of wanting to operate the business and a 5% to 10% growth window.
And if we look at just staying on the active adult side, a little bit it sounds like 2020 for most of the 24.
I had maybe a richer mix of active adult then we're going to have in 2025, and just and then it will it sounds like it'll become a little richer again, when you're thinking about managing the business over the long term Ryan Oh.
Speaker Change: Which is more typical of what you're you think that the product mix, particularly I'm speaking about active adult is likely to be for your company are you managing it with the land that you're that you're sort of purchasing today are you managing it to more like a mix of 'twenty 'twenty four or more of a mix of 2025.
Speaker Change: Yes, Steve we're still running the company.
Speaker Change: And managing the land mix for it to be 25 about 25% of the business. So.
Speaker Change: The current mix in 'twenty four is actually on the light side.
Speaker Change: And as these new communities, where we're in a little bit of a gap out as those come online in 2025, you'll actually and Bob mentioned in his prepared remarks youll see the mix go back to our kind of typical contribution levels, which is in that 20, roughly 25% overall overall overall.
Speaker Change: <unk>.
Speaker Change: Gotcha, and certainly as it relates to orders Okay. I Gotcha. That's a that's helpful. Thanks very much guys.
Speaker Change: Yeah.
Speaker Change: We'll go next to Anthony Pettinari of Citi.
Anthony Pettinari: Good morning.
Anthony Pettinari: I was wondering if you could talk about stick and brick costs in the quarter and then assumptions for <unk>.
Anthony Pettinari: And it seems like lumber may have been kind of a good guy for for part of this year on a year over year basis, but it's kind of ticked up recently I'm. Just wondering if you could remind us your lag on lumber prices and any any thoughts there.
Speaker Change: Thanks for the question.
Speaker Change: To be honest, we've experienced minimal inflation on our vertical costs. This year were running right at $80 a square foot, which is consistent with the last three quarters actually consistent with third quarter of last year. So when we look at it for the full year, we expect kind of a very low single digit inflation on our vertical costs.
Speaker Change: And as it relates to lumber.
It varies by market most of our lumber we buy on a 13 week trailing random length average.
Speaker Change: It effectively helps lock.
Speaker Change: Lock in the margin.
Speaker Change: At the time of contract with the customer so that we're not experiencing.
Speaker Change: Margin volatility during the build process.
Speaker Change: Got it got it.
Thank you and then just following up on retail inventories Ryan I think you indicated inventories were kind of maybe getting a little bit better or normalizing a bit compared to three months ago in Florida and I was just wondering if there were other markets, Texas or out west where retail inventories are a little bit elevate.
Speaker Change: Good or or Conversely, where.
Speaker Change: Markets, where inventories feel a fuel type.
Speaker Change: Yeah I wouldn't highlight.
Any other markets in terms of kind of inventory issues, you mentioned, Texas, Texas is a market that's been a little chop here in the last few months, it's it's a place where there is.
Speaker Change: Probably more competition every major builder is in every market in Texas, So and there were a few markets Theyre Austin's one I'd highlight that had unprecedented price appreciation as they were really high paying jobs when they are post COVID-19.
Speaker Change: With a lot of relocations in their short inventories. So we saw may.
Speaker Change: Maybe.
Speaker Change:
Speaker Change: Less than <unk>.
Speaker Change: Less than then.
Speaker Change: Kind of moderated pace around price depreciation so I think there's a few markets there that are probably still going through some price normalization.
Speaker Change: Those are markets, but I think we'll continue to fair well there.
Speaker Change: There's good jobs their taxes are relatively affordable and there are places where people want to be so.
Speaker Change: We're still confident in our Texas markets as well.
Speaker Change: Okay. That's helpful I'll turn it over.
We will take our next question from Michael Rehaut at Jpmorgan.
Speaker Change: And Michael Your line is open you may have yourself muted.
Speaker Change: Thank you.
Michael Rehaut: Thanks, everyone. Good morning.
Michael Rehaut: Wanted to.
Michael Rehaut: Circle back a little bit too.
Michael Rehaut: You know the cadence of incentives during the quarter.
Speaker Change: I think you broadly kind of described incentives as having remained elevated throughout the quarter you expect it to remain elevated into the fourth quarter I was curious on where incentives began.
Speaker Change: <unk> and where it ended.
And if there was any decline in incentives in September as you said you had a particularly strong demand.
Speaker Change: Yeah, Mike I think you can see from the guide that we've given and we suggest that suggests that we've told you we see elevated incentives continuing.
Speaker Change: You didn't really see those mitigate trade the cooler that's worth highlighting.
Speaker Change: The rate that we're offering is below market already and so the movement in the 30 year doesn't really influence us as much as what do we need to do both competitively and from the affordability construct for the for the consumer.
Speaker Change: So if you see a 25 basis point move in the 30 year.
Speaker Change: We're already 100, plus inside that with our incentive programs.
Speaker Change: And so what we're what we're telling you is that the consumer need some help with the affordability and the incentives and the way we're getting there.
Speaker Change: Right I guess.
Speaker Change: What I'm getting at is you know.
Speaker Change: Typically when you do see an increase in demand maybe it's not the initial reaction, but over let's say several months I believe it is kind of normal to see incentives start to tick down is that overall higher level of demand.
Speaker Change: Works through some periods that that's really what I'm more curious about maybe if it's not the first month of a reaction given that you said it was really more concentrated in September in terms of the improvement in demand.
Speaker Change: That were to have been more sustained over the following months, if you would normally see that.
Speaker Change: What I would characterize it as a typical decline in incentives.
Speaker Change: For the move up buyers, perhaps the current helped as much by that.
Speaker Change: That rate buy down that's what I'm more curious about I guess.
Speaker Change: Yeah, well, we'll have to see I think is the answer to that.
Speaker Change: We rates ticked back up right. So at the end of the day, we will see.
Speaker Change: The fed continues.
Speaker Change: On a path to reduce interest rates.
Speaker Change: Ryan said in his prepared comments.
Speaker Change: Think that the.
Speaker Change: The selling season is going to be a better indicator of overall demand and to your point if the rate environment improves and demand is strong I think we'd have an opportunity to reduce our insights.
Speaker Change: Right.
Speaker Change: Secondly, just on from a regional perspective, we've kind of highlighted the inventory.
Speaker Change: The dynamics in Florida, and Texas I'm curious also for those markets relative to the rest of your markets. If you've seen an increase in incentives in those markets just given all the hype around.
Speaker Change: Resale inventory levels, if you've seen a significant or unusual increase in incentives in those markets, let's say.
Speaker Change: Today versus six months ago.
Yes, Texas, Mike is the market that I would tell you, it's probably been more competitive just because of the number of competitors that are there.
Speaker Change: I don't.
Speaker Change: Nothing that I would.
Speaker Change: Suggest is I wouldnt suggest anything we've done is out of line or as you know.
Speaker Change: The level of making us uncomfortable, but probably higher incentives in the Texas markets than what we saw earlier in the year.
Speaker Change: I think Bob just indicated we will see what the fourth quarter kind of provides us, possibly we see some reduction in interest rates and that may give us the opportunity to back off of incentives a little bit.
Speaker Change: Yeah.
Speaker Change: Great. Thanks, so much.
Perfect.
Speaker Change: Okay.
Speaker Change: We will go next to Nick <unk> at RBC capital markets.
Speaker Change: Hey, Thanks for taking my questions.
I'm going to stick with the margin dynamics, So Bob I think last quarter. When you guided to kind of the sequential step down in margins in <unk> relative to <unk> you already anticipated the mixed dynamic. So it is the mix even different and more of a headwind in <unk>.
Speaker Change: Q than you originally anticipated or is the right way to think about the sequential in <unk> gross margins really you already you've highlighted the <unk>.
Speaker Change: That's what it is but the delta versus your prior guide is really the incentive.
Speaker Change: Yes on balance.
Speaker Change: No.
Speaker Change: Not changing dramatically, we've got a little bit more western market business again, the strength there on a relative basis.
Speaker Change: It really relates to the incentives.
Speaker Change: Or as we've highlighted a couple of times now.
Speaker Change: It's a challenging affordability equation and we're looking to meet it so that we turn our assets.
Speaker Change: Yes that makes sense and then the follow up is really drilling down on on.
Speaker Change: Incentives if you can provide a little more color you talked about the 7% on total incentives load and that's up.
Speaker Change: 70 bps sequentially in the commentary it seemed like you suggested it's really that.
Speaker Change: The incremental change may have been predominantly on entry level can you help us quantify what the incentives on entry level.
Speaker Change: Are or were in <unk> and then your <unk> guide and maybe how that compares quarter on quarter.
Speaker Change: Yes, that's probably a slice of that building a little too thin again affordability is a challenge for all of our consumers.
Speaker Change: The entry level feels it first and the most and so it's going to be a little bit richer for them, but I wouldn't want to parse it quite definitely.
Speaker Change: Got it okay. Thank you.
Speaker Change: We'll go next to Carl record at P. T E.
Speaker Change: Thanks, Hi, guys.
Speaker Change: <unk>.
Speaker Change: I want to go back to Florida, again sort of bigger picture and longer term. So obviously theres been some talk about intermediate term migration patterns changing there whether that's the frequency of weather insurance conditions high prices. So if youre thinking about investing capital say in 2007 or beyond in new deals. There did these dynamics impact.
Speaker Change: We're thinking, especially given those markets are competitive to as you were talking about Texas do you require a higher rate of return to invest there. How do you think about sort of beyond the very the intermediate term. The short term in terms of where you place capital regionally. If you think these dynamics in Florida might be changing or are you sticking with it.
Speaker Change: Yes, Karl Thanks for the question of Florida has been very good to our business.
Speaker Change: We do have a lot of capital.
Speaker Change: Invested there today so.
Speaker Change: For what it's worth.
Speaker Change: To continue to see Florida performed well.
Speaker Change: For the investments that we've already made in the capital has already been committed as it relates to future stock I think we'll take inputs.
Speaker Change: As they come from the market, we're not going to blindly.
Speaker Change: Continue to go after things if we're seeing a change in.
Speaker Change: Market conditions. So I think that's one of the disciplines that we have in our underwriting criteria.
Speaker Change: I still remain really bullish on Florida and in fact, if you look at the parts of Florida, where we're investing.
Speaker Change: They are they are a little more than one.
Speaker Change: On higher ground Theyre not places that are being impacted by the things that you see on television.
Speaker Change: Some of the things that you see on television.
Speaker Change: Sure.
Speaker Change: Uh huh.
Speaker Change: Things that are right on the beach or the coastal areas.
Speaker Change: There are homes that were built in the Seventy's and eighty's not up to current code.
Speaker Change: As devastating as terrible I don't think anybody would want it to happen.
Speaker Change: But.
Speaker Change: My sense is our business is not.
Speaker Change: Probably directly impacted by some of the things that youre seeing on television.
Speaker Change: Highlight that some of the moves that youre seeing are kind of within Florida.
Speaker Change: Intra, Florida moves as opposed to out of Florida moves.
Speaker Change: Florida remains a place that's got great quality of life.
Speaker Change: Maybe.
Speaker Change: Not as Ah Ah.
Speaker Change: Favorable of this deal as it used to be but still relatively affordable. There's good jobs. There is no state income taxes. So there are some offsets to some of the things like rising interest are rising insurance rates and the like.
Speaker Change: Thanks, Ron I appreciate that and then my second question is on off balance sheet, 56% off balance sheet now or option lots and 70% is the goal is it still your intention to bridge that gap via effective land banking and as opposed to let's say farmer options.
Speaker Change: What are you seeing right now in the land banking market in terms of pricing terms have had the negotiations discussions you've had with the large bankers kind of gone as you expected or are you seeing challenges there that you didn't expect thanks guys yeah.
Speaker Change: Yes, Carl we're making nice progress on the land options.
Speaker Change: Up to 56% in the quarter.
Speaker Change: We've highlighted it will be a journey, we think it'll probably take somewhere around three three to three and a half years in total.
Speaker Change: As we cycled through our land portfolio to accrete up to the 70% level, but.
Speaker Change: We're clicking off the milestones as intended so I'm really pleased with how our land teams are performing on that front.
Speaker Change: We would expect 50% of our lands to be with farmer options or land seller options. The other 20% that we're looking forward to the auction will come from bankers.
Speaker Change: Our land banking team has done a really nice job.
Speaker Change: Building out a.
Speaker Change: <unk> portfolio of bankers that were working with.
Speaker Change: They're consistent they're behaving.
Speaker Change: In a very predictable way and.
Speaker Change: It's working out incredibly well for us.
Speaker Change: Interest rates.
Speaker Change: Their money is tied to kind of what you're seeing the interest rate environment more broadly in the market. So.
Speaker Change: We got a little bit of improvement on some stuff that we did in the third quarter.
Speaker Change: We'll have to see how things go in the fourth quarter, depending on what happens with rates, but we're pleased with what heartland those land banking programs working.
Speaker Change: Thanks, Brian Thanks, everybody.
Speaker Change: We'll take our next question from Trevor Allinson at Wolfe Research.
Trevor Allinson: Hi, Good morning. Thank you for taking my questions first a question on conversion rates you guys talked about 5% to 10% growth annually. I think that included 2025, just given where your backlog is trending I think that would imply a pretty notable improvement in backlog conversion rate next year to globe real closing, 5% or more so.
Trevor Allinson: Any commentary on is that what you are expecting an improvement in conversion rates and then if so maybe talk about the drivers of that whether that be the improved cycle times that you guys referenced earlier or you know any additional spec any other drivers to call out.
Speaker Change: Yes Trevor.
Trevor Allinson: Backlog conversion rate.
Speaker Change: But.
Trevor Allinson: That's a number that can be impacted by two things one cycle time getting better or worse.
Trevor Allinson: Indicated in the prepared remarks, our cycle times will continue to come down. So it will certainly get some benefit from that and then the other pieces spec inventory by the.
Trevor Allinson: Asian those homes that are in production that are spec or not in backlog.
Trevor Allinson: No.
Trevor Allinson: A lot of those will sell and convert in the same quarter and they won't show up in that metric.
Trevor Allinson: No.
Trevor Allinson: I don't I don't want to tell you how to run your models, but.
Trevor Allinson: Given the percentage of spec inventory that we're starting that selling given the current interest rate environment.
Trevor Allinson: Probably a better metric is to look at homes in production total homes in production is a good indicator of whether or not we have the.
Trevor Allinson: Available all of us to deliver into next year's closing volume.
Speaker Change: Okay understood and then I guess, the second question that would be.
Speaker Change: Kind of following up on that.
Finished inventory one for finished specs per community.
Speaker Change: A little bit above your longer term target number of one can you talk about how you feel about your current complete its next level.
Speaker Change: And how you're thinking about spec production and moving forward.
Speaker Change: Yeah.
Speaker Change: And in the current environment, where we're selling at almost 40% of our business is coming through first time, which tends to be predominantly stocker, mostly stock and in the current interest rate environment, we actually want.
Speaker Change: Higher spec inventory.
Speaker Change: Percentage of <unk>.
Speaker Change: And what we had historically pre COVID-19 operated at so the things that you've heard us more most recently talked about as being between 35 and 40, 45% of total with and at the end of this most recent quarter were at 48, 42%.
Speaker Change: Of our total inventory is spec so.
Speaker Change: We feel like we're right in line there on the finish side.
Speaker Change:
Speaker Change: When we were operating at more of a build to order model I think one per community was.
A pretty good number.
Speaker Change: And we're not abandoning that we're slightly over that at one four.
Speaker Change: But we don't feel that we have any.
Speaker Change: Inventory exposure.
Speaker Change: Got us uncomfortable at this point.
Speaker Change: We're selling over 50% of the homes that we're selling right now.
Speaker Change: Our selling at some form of.
Speaker Change: Got.
Speaker Change: It was a spec so there are some form of kind of.
Our production moving through the pipeline so.
Speaker Change: We feel pretty good.
Speaker Change: Feel pretty good there as well.
Speaker Change: Okay makes sense. Thank you for taking my question and good luck moving forward.
Speaker Change: Yeah.
Speaker Change: Next we'll go to Sam Reid at Wells Fargo.
Sam Reid: Awesome. Thanks, so much our last quarter I want to say you guys mentioned that land costs are likely to trend up about high single digit in 2024, just looking to confirm how that trended in the third quarter, what's embedded in the fourth quarter guidance.
Sam Reid: And then I know you're not necessarily talking 2025, net now, but you do have some visibility here. So just curious as to whether that's a reasonable assumption into next year.
Sam Reid: Yes.
Speaker Change: We did see high single digit lot cost increase in Q3, we do see that in Q4, we have not provided a guide for 'twenty five.
Speaker Change: We've said this before our lot cost <unk> decreased in more than a decade land is more expensive.
Speaker Change: As you cycled through older land the stuff coming out as works expenses, Yes, we will.
Speaker Change: Give some color as to what that means for 25, when we give our 25 guidance.
No. That's fair and then just thinking just kind of housekeeping questions and apologies. If this was already covered but just wanted to ask about options and lot premiums as a percent of ASP.
Speaker Change: I think last quarter. It was around 104000, and just curious what that was in Q3, and then perhaps what's embedded in guidance for the fourth quarter.
Speaker Change: Yeah, we were a 100 in Q3.
Speaker Change: So relatively consistent and.
That is embedded in our guidance for Q4 as well.
Speaker Change: Worth it to highlight that a lot of that.
Speaker Change: Option revenue and lot premium.
Speaker Change: It comes from our move up and active adult buyers so you're at.
Speaker Change: Call it.
Speaker Change: 60% of our business is driving most of that.
Speaker Change: And to further the comment that Ryan made earlier.
Speaker Change: That's not where we're doing most of the speculative building.
Speaker Change: <unk>.
Makes sense. Thanks, so much.
Speaker Change: And we will go next to Matthew Bouley at Barclays.
Matthew Bouley: Hi, Good morning, guys. Thanks for taking the questions.
Matthew Bouley: Back on that 5% to 10%.
Matthew Bouley: Growth that you've kind of reiterated as a long term target I'm wondering if if in fact that is still the plan for 2025 specifically.
And kind of to what extent, you're willing to flex around that growth target, maybe depending on where rates are or kind of general consumer demand is and any thoughts around if theres a margin or incentive trade off in your mind, you know at which you might kind of dialed back that volume growth. Thank you.
Speaker Change: Yes, we havent given a 25 guide we'll do that at the end of next quarter.
Speaker Change: The long term guide that we gave was meant to be that it was kind of a multiyear guide of how we're positioning the business and investing in the land.
Speaker Change: So.
Speaker Change: Specifically, we will tell you more next quarter.
Speaker Change: Okay Fair enough and then maybe one on the balance sheet, just the I think the net debt to cap of one 4%.
Speaker Change: I'm curious if the kind of increase in land banking.
Speaker Change: That you're targeting is actually playing into how you're managing the balance sheet here. If there is kind of a need to either hold onto more cash or kind of keep leverage low if that is playing into it at all.
Speaker Change: Or just more generally what what what would be your thoughts around kind of increasing that leverage back to prior levels. Thank you yeah, Matt we've talked about this a little bit.
Speaker Change: I think on prior calls.
Speaker Change: Our view is we've got a view on how we're investing in the business, how we're growing the business.
Speaker Change: And that's driving what our capital needs are we then look to what operating cash flow is how much.
Speaker Change: The business investment strategy, we can finance with our own cash and what the operating cash flow and then we go to kind of debt or other capital market mechanisms.
Speaker Change: The way to look at Leverages within the outcome as opposed to a peanut driver.
Bob anything else to the other.
Speaker Change: No other than to say in terms of land banking, specifically, what what it is really going to do is free up cash.
Speaker Change: We increased the relative percentage.
Speaker Change: Of Optionality, our balance sheet on a relative basis gets smaller.
Speaker Change: So it gives us more choices to Ryan's point about what to do with that cash.
Speaker Change: Alright, Thanks, guys. Good luck.
Speaker Change: And that concludes our Q&A session I will now turn the conference back over to Jim for closing remarks.
Jim: I appreciate everybody's time today, we're certainly available as anything goes on for any additional questions. Otherwise, we'll look forward to speaking with you on our fourth quarter call. Thank you.
Speaker Change: And that concludes today's conference call. Thank you for your participation you may now disconnect.
Jim: Okay.
Jim: [music].
Jim: Okay.
Jim: Okay.
Jim: [music].
Okay.
Jim: [music].