Q4 2024 Beazer Homes USA Inc Earnings Call
Good afternoon and welcome to the Beezer Homes Earnings Conference Call for the fourth quarter and fiscal year ended September 30, 2024.
Today's call is being recorded and a replay will be available on the company's website later today.
Speaker Change: In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beezer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
David Goldberg: Thank you. Good afternoon and welcome to the Beezer Homes conference call discussing our results for the fourth quarter and full year of fiscal 2024.
Speaker Change: Before we begin, you should be aware that during this call, we will be making four booking statements.
Speaker Change: Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections.
Speaker Change: Any forward-looking statement speaks only as the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Speaker Change: New factors emerge from time to time, and it is simply not possible to predict all such factors.
Speaker Change: Joining me today is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will discuss highlights from our fiscal 2024 results.
Alan Merrill: The recent environment for new home sales, our preliminary outlook for fiscal 2025, and the significant progress we are making towards our multi-year goals.
Speaker Change: I'll then provide detailed guidance for our first quarter results, additional color on our outlook for the full fiscal year, and end with a discussion of both our balance sheet and our land spend expectations.
Speaker Change: Alan will conclude with a wrap-up, after which we will take any questions in the remaining time. I will now turn the call over to Alan. Thank you, Dave, and thank you for joining us on our call this afternoon.
Alan Merrill: We had a very productive fiscal 24, during which we invested for the future, generated double-digit returns for shareholders, and accelerated our adoption of zero-energy-ready building practices.
Alan Merrill: Each of these results contributed to our progress toward our multi-year goals. I'm particularly encouraged that we were able to achieve these outcomes in a new home sales environment characterized by stretched affordability and stubbornly high mortgage rates.
Here are several highlights from the year.
Alan Merrill: We invested more than $750 million in land and land development, up nearly 36% from the prior year.
Alan Merrill: This allowed us to end the year with 162 active communities, up about 20% year-over-year. And we're poised for further community count growth, both this year and next.
Alan Merrill: We generated $243 million in adjusted EBITDA and earnings per share of $4.53. Representing double digit returns on both capital employed and equity.
Alan Merrill: We dramatically accelerated our adoption of Zero Energy Ready, becoming the single year and all-time leader in delivering homes under the DOE's National Single Family Program.
Alan Merrill: And it wasn't just our homes that stood out. During 2024, we reached the top spot for customer experience among home builders, according to the only verified owner rating site, TrustBuilder.
Alan Merrill: And finally, we maintained our position as an employer of choice in the industry, with recognition for culture and employee engagement from multiple third-party organizations.
Alan Merrill: In summary, while the macro environment for new home sales was challenging, we stayed on course and made meaningful progress on many fronts.
Alan Merrill: Both the intermediate and longer term outlook for new home sales remains very positive, characterized by a structural deficit in the housing supply and favorable demand demographics, particularly among the customer segments we target.
Alan Merrill: But the realization of this opportunity was quite uneven in fiscal 24, as our entire industry grappled with strained affordability, declining consumer sentiment, and later in the year, anxiety about the election.
Alan Merrill: In fact, the sales environment had been quite challenging when we last addressed investors. At that time, it seemed like buyers were anticipating rate cuts at the Fed, bigger year-end discounts from builders, or simply more clarity on the direction of the economy.
Alan Merrill: By September, these efforts, together with a modest improvement in consumer sentiment, led to substantially better sales.
Alan Merrill: In October, we saw continued strength in sales momentum across both our spec and higher margin to be built homes, even as we began to withdraw the higher incentives.
Alan Merrill: October orders were up over 30% on a community count that was up almost 20% as our sales pace returned to more normal levels.
Alan Merrill: At this early stage in our fiscal year, with sales patterns as fluid as they have been, it seems both difficult and unwise to try and provide granular full-year guidance.
Alan Merrill: Our average community count in fiscal 24 was 144. We expect our full-year average community count will be up between 18 and 22 communities, which should lead to more than 10 percent top-line growth.
Alan Merrill: At a macro level, we do not expect significant reductions in mortgage rates over the balance of the fiscal year. This is less optimistic than our view several months ago, but we're taking the movement in the bond market since September as a sign that mortgage rates may remain elevated.
Alan Merrill: Higher rates have typically led to a larger share of spec sales. As such, our outlook contemplates that specs, which carry somewhat lower margins, will represent more than 60% of our closings, the highest level in a decade.
Alan Merrill: Despite elevated rates, we remain optimistic about both job and wage growth. The so-called soft landing may have been achieved, and it seems likely that regulatory and tax policies will encourage more growth.
Alan Merrill: Having addressed our most price-sensitive markets, we expect to improve sales paces to something closer to historical levels, in a range between 2.5 and 3 sales per community per month.
Alan Merrill: Taken together, our full-year outlook contemplates significant revenue growth, leading to a level of profitability that generates a double-digit return on our capital employed. For a company in the midst of a meaningful growth phase, we think that's pretty compelling.
Alan Merrill: Beyond our expectations for revenue and profitability in Fiscal 25, we also expect to make further progress on our multi-year goals.
Alan Merrill: We have a clear path to ending fiscal 26 with more than 200 communities. We're on track to end this fiscal year with a community count around 180, and we have a land pipeline sufficient to ensure double-digit growth next year.
Alan Merrill: We also remain on track to have a net debt to net capitalization ratio below 30% by the end of fiscal 26.
Alan Merrill: We allowed this ratio to increase a little bit in fiscal 24 as we remain committed to our growth trajectory even in the face of lower closing volumes.
Alan Merrill: The cumulative profitability and cash flow we anticipate over the next two years will allow us to reach this target even as we sustain higher land spending.
Alan Merrill: Lastly, we continue to make significant progress toward our goal to have 100% of our homes zero energy ready. In the second half of FY24, 92% of our starts met the DOE standard.
Alan Merrill: While we'll still have a few starts from prior series in our closeout communities, by this time next year, we will be 100% zero energy ready.
Alan Merrill: Before I turn the call over to Dave, I want to spend a couple of minutes explaining why our commitment to zero-energy-ready homes is so important for shareholders.
Alan Merrill: In fact, there are many benefits to having a demonstrably better product for customers, including having access to new land opportunities in some of the country's preeminent master plan communities and attracting high-end talent to our company.
Dave: But for today, we can focus on the economics, because they are very attractive.
Dave: When we look at our backlog, the margins on zero energy-ready homes are already more than a point higher than our prior series homes, whether they're specs or to-be-builts.
Dave: And this is before recognizing the $5,000 federal tax benefit for zero energy-ready homes buried in our effective tax rate. That's almost a point of margin versus other builders' homes. And we're still in the very early innings.
Dave: We believe our sales pace, our build costs, and our realized pricing will all benefit as we refine and improve our production and sales efforts. That's why Zero Energy Ready is important for shareholders. These homes position us for even better profitability moving forward.
Speaker Change: With that, I'll turn the call over to Dave. Thanks, Allen.
Dave: This afternoon I will concentrate on providing some more specifics on our first quarter guidance and our outlook for the fiscal year. I will conclude my comments with a discussion of our balance sheet and our land position.
Dave: We have detailed our fourth quarter and full fiscal year 2020 results in our presentation, our press release, and our 10k, and of course, we're happy to discuss them during the Q&A portion of our call.
Dave: Let's start with our expectations for the first quarter of fiscal 2025.
Dave: Period end community count should be up about 20% versus the same period last year, as we benefit from our increased land spending over the past few years.
Dave: Adjusted gross margin should be around 19 percent. The sequential reduction in gross margin from the fourth quarter is a function of two related factors. First, specs increase as a percentage of our total sales in the back half of 2024 and have typically carried margins two to three points below our to-be-builts.
Dave: Even though we've since reduced these incentives, or in some cases sold out of the communities, margins will be impacted in the first quarter. The first quarter should represent a trough for our gross margin for the fiscal year.
Dave: SG&A as a percentage of revenue should be around 13%, about a point lower than the same time last year, helping to support our operating margin.
We expect to generate about $30 million in adjusted EBITDA.
Dave: Interest amortized as a percent of home building revenue should be just over 3%.
And our effective tax rate should be approximately 15%.
Dave: The higher tax rate versus 2024 is in line with our expectations, as we won't have the benefit of harvesting tax credits generated in prior years in 2025.
Dave: This should lead to diluted earnings per share of about 30 cents.
Speaker Change: I want to pick up where Alan left off on our full year outlook and give you a perspective on how we're thinking about the range of potential outcomes on community count, sales pace, and gross margin.
Speaker Change: Predicting community count with precision is pretty challenging, given variability in land development timing, weather, and closeouts. With this caution, we expect to add 18 to 22 communities to our average community count, reflecting 12.5 to 15 percent growth.
Speaker Change: We'd note our activations are weighted more to the back half of the year, and our community count could be flat or down sequentially in the second quarter, depending on the timing of closeouts.
Speaker Change: We are committed to achieving a sales pace between 2.5 and 3 sales per community per month for the full year, more in line with our historical norms, and an improvement off of fiscal 2024.
Speaker Change: The margin in our backlog at 930 is about 20.5 percent, including most of the lower-margin homes we'll close in the first quarter. This implies the balance of the backlog has much higher margins.
Speaker Change: The high end of the range is attainable if we're able to sell a greater share of TubiBuilds in the spring, or we can drive further reductions in incentives.
Speaker Change: ASP and SG&A are less subject to market fluctuation, and as such, we have better visibility into our expectations for the year.
Speaker Change: Given our ASP and backlog near $540,000 and the mix of community openings and closings, we believe our ASP should be over $530,000.
Speaker Change: Any improvement in our metrics above the low end of our ranges will drive EBITDA growth and even better returns.
Speaker Change: Our balance sheet remains healthy, with total liquidity exceeding $500 million at the end of the fiscal year, no maturities until October 2027, and more than enough liquidity to fuel our growth aspirations.
Speaker Change: We expect to end fiscal 2025 with a net debt-to-net cap in the low to mid-30s, and we're on a path to get our net debt-to-net cap below 30% by the end of fiscal 2026, as our improving profitability and cash generation will delever the balance sheet.
Speaker Change: Over the last five years, we've been able to sustain a double-digit return on capital and have grown our book value at a 19% compounded annual growth rate, even as we've increased our land investment.
Speaker Change: Our capital allocation and execution has increased the quality of our book value and positions us for another year of growth in fiscal 2025.
Speaker Change: Since fiscal 2020, we've grown our total owned and option land position from fewer than 17,000 lots to nearly 28,000 lots. And we've done that primarily through increasing our option lots, which have gone from 35% of our total to nearly 60%.
Speaker Change: With that, I'll now turn the call back over to Allen. Thank you, Dave.
Allen: In summary, 2024 was a successful year for the company as we executed our growth strategy and generated double-digit returns.
Speaker Change: Finally, I remain convinced we have the team and the strategy to create growing and durable value for our stakeholders in the years ahead. With that, I'll turn the call over to the operator to take us into Q&A.
Speaker Change: Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star 1, unmute your phone, and record your name clearly. If you need to withdraw your question, press star 2. Again, to ask a question, please press star 1.
Speaker Change: It will take a few moments for questions to come through. Please stand by.
Speaker Change: Our first question will come from Julio Romero with Sidotian Company. Your line is open.
Speaker Change: Hello, this is Alex Hampman on for Julio. Thanks for taking questions.
Good, how are you? Good.
Speaker Change: Great. Well, thank you very much for sharing, you know, the guide and maybe we could talk a little bit about the Community Count Ramp. We would love to hear how you're thinking about your confidence in the ramp you've outlined and that path for growth.
Speaker Change: Well, look, I would tell you, Alex, we feel pretty confident about the ramp. Obviously with the growth in the land position that we've had and the visibility that we have on kind of communities coming online, you know, we feel real good about the growth that we talked about, the 18 to 22 net new communities and ending the year around 180.
Speaker Change: Thank you. And maybe just touching on sales pacing, could you talk a little bit about what you're seeing in October, you know, maybe some improvement relative to September?
Speaker Change: And I was encouraged because we peeled away some of the heavier incentives that we had offered to clear out some older inventory, and we saw a nice pickup in to-be-built sales. So it wasn't just around more heavily discounted specs.
Speaker Change: Great, thank you for the context. We'll hop back in queue.
Thank you.
Speaker Change: Thank you. Next we will hear from Alan Ratner with Zellman and Associates. You may proceed.
Alan Ratner: Hey, guys. Good afternoon. Thanks, as always, for all the helpful details so far.
Alan Ratner: So, I know it's tough to give any, you know, full year guidance.
Speaker Change: Your absorption pace this year was just under two and a half per month and you know obviously the year ended challengingly but it was generally a pretty solid year especially in the spring so
Speaker Change: It seems like you've pulled back a little bit on those incentives that drove, you know, some of the momentum in October. So, what gives you the confidence that, you know, even at the low end of your guidance range, that they'll come in with a better absorption rate in 25 versus 24?
Speaker Change: SalesMix and not being in an 8% mortgage rate environment, which is obviously how we started last year. I think those two things together give us confidence we will be back in the range that we've historically been in. Now, exactly where in that range, I obviously don't know at this point, but we are going to be up in sales pace next year.
this year.
Speaker Change: I do that, too. I get confused between September and December. When I said next year, I meant 2025, our fiscal year. No, understood. I appreciate that, Alan. Second question, if I look at your 1Q margin guide, 19% adjusted, that would be...
Speaker Change: We're starting to hear a little bit of chatter from some LANs.
David Goldberg, CFP®, Financial Planner & Investment Advisor
Speaker Change: I think land prices are a little bit elevated relative to ASPs, but as I look back to that pre-COVID period, they're not substantially different than they were then.
Great. I appreciate the thoughts. Thanks a lot. Thanks, Tom.
Speaker Change: Our next question comes from Tyler Battori with Oppenheimer. Your line is open.
Speaker Change: Hey, good afternoon. Thanks for taking my questions. A couple for me, and I want to start, you know, Alan, in your prepared comments.
Speaker Change: is there to improve those and to drive the margin even higher.
Speaker Change: Well, let me take the second part first, because I can't give you basis points and answers, but directionally, you've touched on something that's hugely important to us.
Speaker Change: of delivering Zero Energy Ready. I mean, we are literally the first builder at scale in multiple markets and multiple climate zones to be committed to it. And it has been an enormous effort to retrain trades, to set up and strengthen supply chains for the products that are necessary to build these homes. We have internally some pretty ambitious goals about continuing to improve the quality of our homes, but I think we can deliver a lower cost to get to Zero Energy Ready.
Speaker Change: The second part of that is on the sales side, and I think we have a tremendous professional sales force, but they are selling something that hasn't been available before, and figuring out the science of what it is that we've done in the home.
Speaker Change: is terrific. But I've got to be honest, most of our buyers don't care about ACHs and HRS scores. So, we've really, we've trained the sales team. I think, by and large, they know the science, they know the statistics, they know the materials, they know the philosophy that goes into building these homes.
Speaker Change: And honestly, it's a little bit like batting practice. I think we just need practice.
Speaker Change: You know, I spent a lot of time in the field, and I talk to our new home counselors a lot about this. So I am very confident we can do both of those things, that we can establish the value in a way that is very resonant with different buyers, and we can reduce the cost.
Speaker Change: I don't know how high high is but it is certainly a better margin profile than we have right now
Speaker Change: you know, leader in the clubhouse for having delivered zero-energy-ready homes, and the annual leader. Like, we're the expert in this now, and people are kind of paying attention. And so I was standing in front of the home. I was making the point that the energy cost on the home in our model
Speaker Change: is nearly $500 a month lower than a similarly sized home that was for sale across the street.
A 20-year-old home.
Think about $500 a month in savings.
Speaker Change: I mean, we're talking $6,000 or $5,500, I think it was $470, so I think it was $5,500 of annual savings. So I asked my sales team, I said, OK, so $5,000 a month or a year is a lot of money. How much would the mortgage rate have to drop on this home?
to create a $5,000 savings.
Speaker Change: You know, they weren't all supercomputers. They had to, you know, go crunch a few numbers to come back with the answer. And the answer was the mortgage rate would have to drop by more than a point.
Speaker Change: on that home in order to realize a similar $5,000 savings. And it was, I mean, in that moment, it was a little bit of a light bulb moment, I think, for the sales team as we were talking. They realized, gosh, this home is effectively equivalent to having a whole point less in your mortgage rate forever because of how energy efficient it is.
Speaker Change: So when we talk about what's really important to a customer, for a lot of our customers, that makes a big difference.
Speaker Change: Okay, excellent detail. Thank you very much. Follow-up question on the incentives, you know, you sound like you ramped up incentives and you pulled back. I guess, which markets did you lean in a little bit more? Are those the same markets where you've been able to pull back? And then when you look ahead to fiscal 25,
Speaker Change: It sounds like lower incentives are a part of that growth margin improvement. Just talk a little bit more about your confidence in that, your expectations for incentives next year, and maybe just for the industry overall. I mean, it does appear like the competitive environment
David Goldberg, CFP®, Financial Planner & Investment Advisor
Speaker Change: All right, well gosh, there's there's a lot there. How about I'll take a piece of it I'm going to hand the baton to Dave and let him take a piece of it But but let me talk for just a second
Speaker Change: about the incentives in the markets. I'm not trying to be a smart aleck, but last quarter I singled out a couple of markets and said, hey, our sales pace is just not good here, and we've got to fix it.
Speaker Change: And when I did that, I did it intentionally, it was accurate, but I've got to tell you, it made my team in those markets not feel very good. They know who they are.
Speaker Change: and we lowered prices to be more competitive. So we did all of these things and it led directly in those markets to a dramatic improvement in sales pace. In fact, I will give a little shout out to Houston because I called on them last quarter. I think between August and September, and this number is approximately right, I know we more than doubled our monthly sales.
Speaker Change: I know that that sales pace in October stayed quite elevated, even as they were withdrawing the sales incentives. So I feel pretty good about it. We diagnosed the problem, and I think we applied an appropriate and short-term solution. The good news is it allowed us to sell out of some communities and submarkets and at price points that's really not our wheelhouse, and so I don't think that that has a long-term lingering effect. And that is certainly part of our margin guide that Q1's got some stuff in it that's not
Speaker Change: Now, for the full year, I think we said something really important.
Speaker Change: We expect specs to be 60% of our closings. In my tenure, we've never had a year where closings were 60% specs. And definitely, they have consistently had, well, but for two years in the middle of COVID, they've consistently had margins of two to three points lower than our to-be-builts.
Speaker Change: So, that's predicated, or our guide, or our outlook is sort of predicated on that. We are accepting that we are in a higher rate environment that's going to carry out a larger specs percentage, and we have reflected in what we've shared today that outcome in our margins.
Now, if we get a robust spring selling season...
Speaker Change: where we're able to, between now really and April, sell a bunch of TubiBuilds.
Speaker Change: because that's really the biggest driver. And then secondarily, if we see any rate relief, there will be some reduction in incentives, and that would flow through as well. But we are not betting on any of that.
Speaker Change: I think that's another opportunity to drive some margin that frankly is not in that low end of our range that we've given. But look, I would tell you the 19.5 kind of on the low end assumes that that spec margin kind of goes back down to that 2% to 3% kind of differential that we've talked about, but not dramatically better than that.
Speaker Change: Okay, great. So, last question for me, and I don't want to put you too much on the spot here. I appreciate all the detail for 2025.
Speaker Change: sometimes updating a model real-time can be a little bit treacherous, but just just based on the, if I've used the low end of your of your guide, I mean it sounds like EBITDA should be growing.
next year. Do you think you can beat EPS?
Speaker Change: growth next year, or perhaps there's a tax rate issue that's impacting just the different growth rates there on a year-over-year basis? Yeah, so let's start, Tyler, with the tax situation. So in 2024, we were still benefiting from harvesting energy efficiency credits from previous years.
Speaker Change: We're expecting to generate a double-digit return on capital employed. Now this year we were in the 11s We'd be pretty disappointed if our ROCE was lower than it was this year But again, we've kind of expressed that we expect it to be 10 or better, right?
Speaker Change: Okay, all right, I'll leave it there. I appreciate all the detail. Thank you.
Speaker Change: Our next question will come from Jane McAnlis with Wedbush. You may proceed.
Speaker Change: Hey, good afternoon everyone. I just want to clarify on the fiscal 25 guidance, that is adjusted gross margin you're forecasting to, correct? That is adjusted gross margin, yeah. Okay.
Speaker Change: And then I guess the next question I have, I guess, could you guys reconcile...
Speaker Change: Ben, I know you said the community count is going to grow, but there may be some pickups along the way. I guess, why try to push on absorptions and get back to a more normal level in the guidance?
Speaker Change: Well, they're two different things, right, Jay? I mean, community count and pace, you know, left hand, right hand. So on the pace side, we're simply, we've done better in October. I expect that we're going to do better in November than a pretty easy comp.
Speaker Change: And I want us, and we expect to sustain better paces. I don't think we'll have the problem next summer that we had this summer. So I think on balance we ought to be up year over year on pace, and that's what we've guided to.
Speaker Change: Separate and apart from that, I mean it's related clearly, but a different point is we're entering the year with a bunch more communities. We're up 20. We're up 20 percent, so it's more than 20.
get to about 180 at the end of the year.
Speaker Change: I don't know, we don't know for sure whether we will be sequentially up from Q1 to Q2.
Speaker Change: But Q2 will be up double digits over Q2 a year ago, and Q3 will be up double digits over Q3 a year ago, and Q4 will be up double digits over Q4 a year ago. So, you know, I think we were just trying to provide some clarity that the sequential move may be a little uneven, but the year-over-year growth is locked in for 2025. Yeah, Jay, the other thing I would tell you is, and I understand the question, I would tell you that one of the reasons we gave ranges and really focused on work like outlook,
Speaker Change: There's a lot of uncertainty now. I don't think we're being aggressive. I think we're trying to give you a low end of what we think could happen. And if things get better, as Alan said and mentioned, a number of scenarios where things could get better, then yeah, we'd expect to be toward the high end of the range.
Speaker Change: Okay, and then the just the last question I had was with what you guys are going to open on community count and 25
Speaker Change: and given what seems to be better demand across the industry for move-up, you know, whether it's first or second move-up homes.
Speaker Change: You know, to bring that 60% spec down, which I'm assuming most of that's going to be entry level. Bring some of that down and put it out there as TB built, or is your mix that 60% pretty locked in with what you're opening on the community front this year?
Speaker Change: So Jay, I really appreciate this question, but respectfully, I want to disconnect something for you. When we say specs at 60 percent,
Speaker Change: and you left to, that's kind of entry-level, I wouldn't think about it that way in the case of Beezer.
Speaker Change: In any given community, if we're going to sell, let's say, 50 homes in a year, maybe 30 of them are specs in that community, 20 of them are to-be-builts, or some other ratio. But it's not like the specs are other communities.
Speaker Change: different communities, it's just the mix within the communities that we have. And clearly, we are not the price leader in the market. So I don't know that I call us a move-up builder, but there are, in every market we're in, there is a builder with a home with a lower price.
Absolutely.
Speaker Change: You know, when you're building zero-energy ready, that is not the least expensive home.
Speaker Change: you know, it's a better home. Now it may be 2,000 square feet, it may be 3,000 square feet. It may cost $400,000, it may cost $1.2 million in a given market. And for us, the average, as David said, is going to be about $530,000. But it's not, our specs are not entry-level product. We really don't do that.
Speaker Change: Look, I would tell you, Jay, the commitment to get you 100% zero-energy ready is exactly demonstrable of it. Right? All the homes we build, specs for two we built, are very, very high quality.
Okay, got it. Great. Thanks, Jeff.
You got it, buddy.
Speaker Change: Once again, if you would like to ask a question at this time, you can press star 1 and record your name when prompted. Next, we will hear from Alex Riegel with BRiley. Your line is open.
Alex Riegel: Thank you, a nice quarter, gentlemen. Any chance you could sort of go around the country and talk to us a little bit about some of the strengths and weaknesses across the different geographies?
Speaker Change: I'd be happy to tell you that. I have to offer you, though, my traditional Surgeon General health warning, which is, you know, when we see a market perform really well,
Speaker Change: Maybe it's because we're awesome. We did great. And maybe it's because the market did great. And I'll try and differentiate that. You know, we had an interesting mix of, in the fourth quarter in particular, we had an interesting mix of markets in very disparate locations and price points that did pretty well. I mean, I would highlight our Virginia team did a nice job, our Myrtle Beach team. Now, that's a very different buyer that we see in Myrtle Beach than what we see in the closer-in suburbs of D.C. and Virginia. Atlanta was pretty good. And then, out west for us, Las Vegas and Northern California really showed up.
Speaker Change: And I think in those markets, they were generally healthy conditions. So part of it's got to be us, but I think part of it was probably the market. You know, where we struggled in the third quarter was in Texas. And I think a lot of it was us, candidly, and I think we've addressed that.
Speaker Change: and I feel pretty good about where we are in Texas.
Speaker Change: We're just not very big in some of the other major markets, and so I just feel like our experience, good or bad, is a little bit more idiosyncratic, and I'd be reluctant to comment on them because I don't want to make a comment, for example, about a phoenix at some...
Speaker Change: level because, gosh, there are seven or eight builders there that are doing five to ten times the volume we are. They can probably give you a better read on the market, and I can only tell you how our handful of communities there did.
Very helpful. And then it sounded like...
Speaker Change: in September and October. Dirt builds actually picked up a little bit, but yet your messaging is
Speaker Change: in the next 12 months to sort of expect a mixed shift towards more spec builds, so if you could maybe reconcile those two.
Speaker Change: Yeah, it's coming off of a crazy high number. I mean, August was 70-ish kind of percent of specs, and September was a little bit lower than that, and October was lower than that, so the trend is definitely in the right direction in terms of a little bit more strength in the Tubi builds.
Speaker Change: But, candidly, it was still a majority of specs. It just wasn't as exaggerated a majority as we experienced in July and August. So the 60% reflects a higher level than normal for us, but certainly better than where we were in August and September.
Super helpful. Thank you. Thanks, Alex.
Speaker Change: Our last question will come from Alex Barron with Housing Research Center. Your line is open.
Hey, guys. Thank you.
Speaker Change: I appreciate all the details. I was hoping you could elaborate, you know, what changed in the example you gave of Houston, where the sales doubled.
Speaker Change: If you could give more specifics on what's driving the confidence in the increase in sales pace you guys are expecting this year.
Speaker Change: Well, I think, you know, in the specs in particular, in Houston, some of the things that we did, and let me be clear, we took some lower margins. Like, that helped. But, I think we had over...
SPECT. The Specs.
Speaker Change: You know, the flooring, the cabinet, the countertops, I think we aimed a little high and we found ourselves out of the market. And I think a very detailed review of that spec level proved that we were putting money in the home that we weren't getting paid for. And so we had to get over ourselves, fix it, and, you know, the next spec start didn't have it. But we did other things. You know, we took our closing costs away and moved it into a price reduction.
Speaker Change: or we substantially reallocated the incentive to price reductions. Sometimes it's as simple, honestly, as geography. If you're advertising 419 with a $40,000 incentive, you might be better off advertising 379.
Speaker Change: and I think it was a combination of getting those communities working and then just dialing in a little bit our strategy with specs and to-be-built pricing that has kind of helped us sustain a heavier or a healthier level of activity.
Speaker Change: got it yeah no it makes a ton of sense I think taking a little bit less margin if you can double your sales or 30% increase your sales makes a ton of sense
Speaker Change: Now that you guys are building more specs, are you by the same notion
Speaker Change: offering you know either forward commitment or a share buyback share sorry rate buy down or something that causes people to basically absorb those before they get to completion?
Speaker Change: Well, I mean, we've always had a temporary and a permanent buy-down set of options.
Speaker Change: Yes, we've got the full arsenal of mortgage tools, and I would argue, really, more than most because literally every customer, in order to get our closing cost incentive, one of our policies is you have to get more than one loan proposal. So we know our customers are getting the benefit of choice.
Speaker Change: And if I could ask one last one, any thoughts on share buybacks given your stock is still below one times book?
Speaker Change: and we think about risk-adjusted returns, and so while we're not certainly opposed, if it's the highest risk-adjusted return with our excess capital, we certainly think about it, and it's an arrow in the quiver. That said, the primary focus, as it has been for a while, has been land spending growth, and that's not going to change.
Okay, best of luck guys. Thank you. Thank you, Saratog.
Speaker Change: Thank you. And now we do have a follow-up question from Alan Ratner with Zellman & Associates. You may proceed.
Uh-oh, am I in trouble now, Roland?
Thank you for squeezing me in again.
Speaker Change: Well, I'm not sure it's a softball, but I'm curious. I know you too well to expect a softball, my friend, so I'm ready.
Speaker Change: Absolutely. Well, I'm surprised it didn't come up, which is why I hopped back in. So, you know, we're a week post-election, and obviously, you know,
Any thoughts about kind of how, what impact, if any?
Speaker Change: that it is more likely than not that rates stay elevated compared, frankly, to what I thought 90 days ago.
Speaker Change: I mean, we were on a pretty good rate of decline in mortgage rates through July, August, and the beginning part of September, and that's all gone away. In fact, I think rates are 50 basis points higher today than they were the last time we talked.
Speaker Change: could stay elevated. So that's one thing that we've internalized and, you know, we could be wrong, but that's that's
an assumption that we've made that's different.
Speaker Change: I don't think that they are broadly employed in the housing sector. You know, the policies that we have, that we require our trades to have, would suggest that they're not direct beneficiaries.
Speaker Change: But of course, if a number of people are withdrawn from the country who are doing other jobs, does that create some competition for labor that changes the dynamic? That could certainly happen.
I think as ambitious as that mandate
David Goldberg, CFO Alphabet and Google
Very helpful. Thanks again.
Be back, Tom.
Speaker Change: Thank you. We are showing no further questions at this time.
Speaker Change: All right, I want to thank everybody for joining us on our fiscal fourth quarter call, and we look forward to talking to everybody next quarter. Thank you so much. This ends today's call.