Q3 2026 KB Home Earnings Call

September 22, 2026

Speaker #1: Yep.

Speaker #2: Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to the KB Home 2026 third-quarter earnings conference call.

Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 third quarter earnings conference call. All participant lines are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded and a replay will be accessible on the KB Home website until 22 October 2026. I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Speaker #2: All participant lines are in listen-only mode. Following the company’s opening remarks, we will open the lines for questions. This conference call is being recorded, and a replay will be accessible on the KB HOME website until October 22, 2026.

Speaker #2: And I'll now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Speaker #3: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter, fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Bill Hollander, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman, Rob McGibney, President and Chief Executive Officer, William Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

Speaker #3: During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them.

Speaker #3: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

Speaker #3: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as any other non-GAAP measure referenced during today's discussion, to its most directly comparable GAAP measure, can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.

Jill Peters: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure, can be found in today's press release and/or on the investor relations page of our website at kbhome.com. Finally, please note all figures are based on our quarter ended 31 August, and all comparisons are on a year-over-year basis unless otherwise stated. With that, here is Jeff Mezger.

Speaker #3: And finally, please note all figures are based on our quarter ended August 31st, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here is Jeff Mezger.

Speaker #1: Thank you, Jill. Good afternoon, everyone. The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates. Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week.

Jeff Mezger: Thank you, Jill. Good afternoon, everyone. The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates. Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week. These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home. In addition, resale inventory, which is our largest competitor, has increased to its highest levels in a decade, and we are seeing pricing starting to decline in more of our markets, adding to the tension in this environment. Against this backdrop, our third quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance. At a high level, our third quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05.

Speaker #1: These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home. In addition, resale inventory—which is our largest competitor—has increased to its highest levels in a decade, and we're seeing pricing start to decline in more of our markets, adding to the tension in this environment.

Jeff Mezger: In addition, resale inventory, which is our largest competitor, has increased to its highest levels in a decade, and we are seeing pricing starting to decline in more of our markets, adding to the tension in this environment. Against this backdrop, our third quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance. At a high level, our third quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05.

Speaker #1: Against this backdrop, our third-quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance. At a high level, our third-quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05.

Speaker #1: We remain balanced in our capital allocation, investing nearly $725 million in land acquisition and development for future growth, while also returning capital to our shareholders.

Jeff Mezger: We remain balanced in our capital allocation, investing nearly $725 million in land acquisition and development for future growth, while also returning capital to our shareholders. We repurchased about 890,000 shares of our common stock, or roughly 1.5% of our shares outstanding, at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, and contributing to improving our return on equity over time. Inclusive of dividends, we returned over $65 million in capital to our shareholders in Q3. The impact of our share repurchase program over the past five years has been meaningful, as we have returned more than $2.1 billion in total capital to shareholders from repurchases, plus our quarterly dividend, and reduced our share count by more than one-third.

Speaker #1: We repurchased about 890,000 shares of our common stock, roughly 1.5% of our shares outstanding, at an average price below our current book value per share.

Speaker #1: We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, and contributes to improving our return on equity over time.

Speaker #1: Including dividends, we returned over $65 million in capital to our shareholders in the third quarter. The impact of our share repurchase program over the past five years has been meaningful, as we have returned more than $2.1 billion in total capital to shareholders from repurchases, plus our quarterly dividend, and reduced our share count by more than one-third.

Speaker #1: During the third quarter, we expanded our book value per share to over $62. Our results in the third quarter support our expectations for full-year deliveries, housing revenues, and margins to be within the ranges that we provided in June, despite moderation in our outlook for the fourth quarter, as we continue to navigate current market conditions.

Jeff Mezger: During Q3, we expanded our book value per share to over $62. Our results in Q3 support our expectations for full-year deliveries, housing revenues, and margins to be within the ranges that we provided in June, despite moderation in our outlook for Q4 as we continue to navigate current market conditions. At this time, let me turn the call over to Rob for more details on the quarter's results and our outlook. Rob?

Speaker #1: At this time, let me turn the call over to Rob for more details on the quarter's results and our outlook. Rob.

Speaker #4: Thanks. Thank you, Jeff. A market like this one tests what a business model is built on. Our built-to-order model was designed to perform in exactly these conditions, and while we are not immune to the pressures in the operating environment, our approach did what it was supposed to do in the third quarter.

Rob McGibney: Thank you, Jeff. A market like this one tests what a business model is built on. Our built-to-order model was designed to perform in exactly these conditions. While we are not immune to the pressures in the operating environment, our approach did what it was supposed to do in Q3. It enabled us to sell before we build, know our costs before we commit capital to vertical construction, and keep our inventory risk low as demand softened. Our return to a predominantly built-to-order business is now firmly established. BTO homes represent nearly three-quarters of our deliveries in Q3, which contributed to a sequential improvement in our housing gross profit margin. The sales alignment with our BTO strategy across our divisions has been strong, which positions our delivery mix in the quarters ahead to be solidly within our targeted and historical range.

Speaker #4: It enabled us to sell before we build, know our costs before we commit capital to vertical construction, and keep our inventory risk low as demand softened.

Speaker #4: Our return to a predominantly built-to-order business is now firmly established. BTO homes represent nearly three-quarters of our deliveries in the third quarter, which contributed to a sequential improvement in our housing gross profit margin.

Speaker #4: The sales alignment with our BTO strategy across our divisions has been strong, which positions our delivery mix in the quarters ahead to be solidly within our targeted and historical range.

Speaker #4: During the quarter, buyers continued to demonstrate both the desire for homeownership and the ability to qualify. However, declining consumer confidence and lower affordability in most of our markets weighed on traffic in our communities, which, while still solid, went down year over year.

Rob McGibney: During the quarter, buyers continued to demonstrate both the desire for home ownership and the ability to qualify. However, declining consumer confidence and lower affordability in most of our markets weighed on traffic in our communities, which, while still solid, is down year-over-year. We saw more caution among prospective buyers, with many moving to the sidelines. As a result, while sales in June were resilient and slightly ahead of May, sales softened sequentially in July and August, resulting in a year-over-year decline in net orders. In this environment, the value of what we offer becomes even clearer. We build the home the buyer wants with the features, finishes, and ultimately a sales price that reflect the buyer's preferences for what they value and want to pay for.

Speaker #4: We saw more caution among prospective buyers, with many moving to the sidelines. As a result, while sales in June were resilient and slightly ahead of May, sales softened sequentially in July and August, resulting in a year-over-year decline in net orders.

Speaker #4: In this environment, the value of what we offer becomes even clearer. We build the home the buyer wants, with the features, finishes, and ultimately a sales price that reflect the buyer's preferences for what they value and want to pay for.

Speaker #4: Those choices are key differentiators relative to an inventory home, and also give our buyers a real tool to manage affordability, which is one reason our homes do not require heavy incentives to sell.

Rob McGibney: Those choices are key differentiators relative to an inventory home and also give our buyers a real tool to manage affordability, which is one reason our homes do not require heavy incentives to sell. We have remained disciplined in providing transparent pricing, adjusting price as needed to meet the market community by community while optimizing each asset for the best possible return. The same model that serves our buyers also protects our business, and it shows in our results. Our total unsold inventory is 26% of production, down from 41% a year ago, and finished unsold homes are just 9%, down from 16%. We also have roughly 1,100 homes sold, but not yet started. That illustrates our BTO approach at work, building homes for buyers who have already committed, not for buyers we hope to find.

Speaker #4: We have remained disciplined in providing transparent pricing, adjusting prices as needed to meet the market, community by community, while optimizing each asset for the best possible return.

Speaker #4: The same model that serves our buyers also protects our business, and it shows in our results. Our total unsold inventory is 26% of production, down from 41% a year ago, and finished unsold homes are just 9%, down from 16%.

Speaker #4: We also have roughly 1,100 homes sold but not yet started. That illustrates our BTO approach at work: building homes for buyers who have already committed, not for buyers we hope to find.

Speaker #4: Our direct costs on started homes in the third quarter were lower, both sequentially and year over year. That result reflects our deep supplier relationships that helped limit cost increases and fuel surcharges, active rebidding of our local and national contracts, value engineering of our products, and a simplified studio offering that drives improved efficiency.

Rob McGibney: Our direct costs on started homes in the Q3 were lower, both sequentially and year over year. That result reflects our deep supplier relationships that help limit cost increases and fuel surcharges, active rebidding of our local and national contracts, value engineering of our products, and a simplified studio offering that drives improved efficiency. While our overall average for direct costs was lower in the Q3, we experienced some increasing cost pressure from fuel, general inflation, and tariffs as the quarter progressed. We believe this will result in slightly higher sequential direct costs for our Q4 deliveries. As to our sold but unstarted homes, with starts volume declining across the industry, this backlog gives us real leverage with our trade partners, which we are utilizing to offset as much of the cost pressures as we can.

Speaker #4: While our overall average for direct costs was lower in the third quarter, we experienced some increase in cost pressure from fuel, general inflation, and tariffs as the quarter progressed.

Speaker #4: We believe this will result in slightly higher sequential direct costs for our fourth-quarter deliveries. As to our sold but unstarted homes, with starts volume declining across the industry, this backlog gives us real leverage with our trade partners, which we are utilizing to offset as much of the cost pressures as we can.

Speaker #4: I want to take a moment on build times, because they speak directly to one of the most common questions about built-to-order: How long a buyer has to wait?

Rob McGibney: I want to take a moment on build times because they speak directly to one of the most common questions about built-to-order, how long a buyer has to wait. Our BTO homes averaged 99 days from start to completion in the Q3, a slight improvement sequentially and 23 days or 19% faster than a year ago. At just over 3 months, our buyers are not waiting long for a home built the way they want it, and they can more cost-effectively lock in their interest rate than they could when build times were longer. Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days, with improvement from here expected to be more gradual given how much progress we have already made.

Speaker #4: Our BTO homes averaged 99 days from start to completion in the third quarter, a slight improvement sequentially, and 23 days or 19% faster than a year ago.

Speaker #4: At just over three months, our buyers are not waiting long for a home built the way they want it, and they can more cost-effectively lock in their interest rate than they could when build times were longer.

Speaker #4: Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days, with improvement from here expected to be more gradual, given how much progress we have already made.

Speaker #4: This is a real accomplishment, and I want to recognize our construction teams and trade partners who made it happen. The strength of our business also shows in the quality of our buyers.

Rob McGibney: This is a real accomplishment, and I want to recognize our construction teams and trade partners who made it happen. The strength of our business also shows in the quality of our buyers. Our mortgage joint venture, KBHS Home Loans, remains an important part of how we serve our customers and run our business, and its metrics have been consistent and favorable over the past year. In the Q3, our capture rate increased to 85%, up slightly from the Q2. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, and we consistently see higher customer satisfaction among buyers who use our joint venture. The average cash down payment was steady at 16%, or about $76,000. On average, KBHS customers had household income of about $134,000 and a FICO score of 742.

Speaker #4: Our mortgage joint venture, KBHS Home Loans, remains an important part of how we serve our customers and run our business. Its metrics have been consistent and favorable over the past year.

Speaker #4: In the third quarter, our capture rate increased to 85%, up slightly from the second quarter. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, and we consistently see higher customer satisfaction among buyers who use our joint venture.

Speaker #4: The average cash down payment was steady at 16%, or about $76,000. On average, KBHS customers had household income of approximately $134,000 and a FICO score of 742.

Speaker #4: Even with half of our customers purchasing their first home, we continue to attract buyers with strong credit profiles who can qualify for their mortgage and make a significant down payment, or pay cash.

Rob McGibney: Even with half of our customers purchasing their first home, we continue to attract buyers with strong credit profiles who can qualify for their mortgage and make a significant down payment or pay cash. About 8% of our Q3 deliveries went to all-cash buyers. As Jeff mentioned, we are maintaining our fiscal 2026 guidance for deliveries, housing revenue, and margins within the ranges we last provided. However, we are moderating our expectations for the Q4 with respect to ASP and gross margin. With over 80% of our Q4 deliveries already in backlog, we have solid visibility into the quarters. Starting with average sales price, the midpoint of our current guidance implies a Q4 ASP of approximately $480,000, compared to the roughly $500,000 implied by our prior guidance.

Speaker #4: About 8% of our third-quarter deliveries went to all-cash buyers. As Jeff mentioned, we are maintaining our fiscal 2026 guidance for deliveries, housing revenue, and margins within the ranges we last provided.

Speaker #4: However, we are moderating our expectations for the fourth quarter with respect to ASP and gross margin. With over 80% of our fourth-quarter deliveries already in backlog, we have solid visibility into the quarters.

Speaker #4: Starting with average sales price, the midpoint of our current guidance implies a fourth-quarter ASP of approximately $480,000, compared to the roughly $500,000 implied by our prior guidance.

Speaker #4: On our last call, we said the West Coast, and Northern California specifically, would be a meaningful contributor to our fourth-quarter ASP and gross margin.

Rob McGibney: On our last call, we said the West Coast and Northern California specifically, would be a meaningful contributor to our Q4 ASP and gross margin. Northern California has held and continues to perform as expected, and its projected Q4 ASP has increased modestly since June. The change in our outlook is principally driven by Southern California for two primary reasons. First, slower sales in the Q3 relative to our expectations have reduced the number of higher-priced Southern California homes we expect to close in the Q4, weighing on our overall ASP. Second, the mix of Southern California communities delivering in the quarter has shifted from what we anticipated in June. Together, these factors account for roughly the $20,000 reduction in our projected Q4 ASP.

Speaker #4: Northern California has held and continues to perform as expected, and its projected fourth-quarter ASP is increased modestly since June. The change in our outlook is principally driven by Southern California for two primary reasons.

Speaker #4: First, slower sales in the third quarter, relative to our expectations, have reduced the number of higher-priced Southern California homes we expect to close in the fourth quarter.

Speaker #4: Weighing on our overall ASP. Second, the mix of Southern California communities delivering in the quarter has shifted from what we anticipated in June. Together, these factors account for roughly the $20,000 reduction in our projected fourth-quarter ASP.

Speaker #4: As to our fourth-quarter gross margin, we now expect it to be about one percentage point lower than our prior guidance implied, as a result of market pressures and higher direct and land costs.

Rob McGibney: As to our Q4 gross margin, we now expect it to be about 1 percentage point lower than our prior guidance implied as a result of market pressures and higher direct and land costs. Bill will walk through the details of that updated outlook later in the call. We expect an ending community count in the Q4 of between 270 and 275 communities, roughly in line with the prior year. This projection includes approximately 115 new communities that we will have opened in fiscal 2026 by year-end, and a similar number of communities that will have sold out, representing a solid rotation of our assets. Our new community openings are an important part of sustaining a predominantly built-to-order delivery mix.

Speaker #4: Bill will walk through the details of that updated outlook later in the call. We expect an ending community count in the fourth quarter of between 270 and 275 communities, roughly in line with the prior year.

Speaker #4: This projection includes approximately 115 new communities that we will have opened in fiscal 2026 by year-end, and a similar number of communities that will have sold out, representing a solid rotation of our assets.

Speaker #4: Our new community openings are an important part of sustaining a predominantly built-to-order delivery mix. As we have shared in the past, prior to opening a community, we develop a list of interested potential buyers, and the anticipation and excitement that build in the months leading up to a grand opening translate into strong initial demand.

Rob McGibney: As we have shared in the past, prior to opening a community, we develop a list of interested potential buyers, and the anticipation and excitement that build in the months leading up to a grand opening translate into strong initial demand. As a result, our new communities generally open at a higher absorption pace, generating a strong volume of starts aligned with sales from the outset. Last year, we added two large land positions in the Las Vegas Valley, one of the most land-constrained markets in the country. The first, Meriden, sits in a highly desirable part of Henderson and is positioned to carry forward the success of our Inspirada master plan, also in Henderson, which is nearing closeout. Meriden is now open across all five of its product lines. Sales have been solid, and we expect first deliveries late in our Q4.

Speaker #4: As a result, our new communities generally open at a higher absorption pace, generating a strong volume of starts aligned with sales from the outset.

Speaker #4: Last year, we added two large land positions in the Las Vegas Valley, one of the most land-constrained markets in the country. The first, Meriden, sits in a highly desirable part of Henderson and is positioned to carry forward the success of our Inspirata master plan, also in Henderson, which is nearing closeout.

Speaker #4: Meriden is now open across all five of its product lines. Sales have been solid, and we expect first deliveries late in our fourth quarter.

Speaker #4: The second, Sandstone, is an attractive location in North Las Vegas, with price points that are affordable relative to much of the Las Vegas metro.

Rob McGibney: Sandstone is an attractive location in North Las Vegas with price points that are affordable relative to much of the Las Vegas Metro. Sandstone opens in Q4 with four distinct product lines and early demand is strong. We have built an interest list of more than 300 potential buyers, which should support a healthy absorption pace from day one. Both communities complement our broad presence across the Las Vegas Valley, including our established positions in the Southwest and Summerlin submarkets. With one of our best teams in the company leading the way, we are confident Meriden and Sandstone will produce strong results for many years to come. While we work to finish fiscal 2026, the foundation for fiscal 2027 is also taking shape.

Speaker #4: Sandstone opens in the fourth quarter with four distinct product lines, and early demand is strong. We have built an interest list of more than 300 potential buyers, which should support a healthy absorption pace from day one.

Speaker #4: Both communities complement our broad presence across the Las Vegas Valley, including our established positions in the Southwest and Summerlin submarkets. With one of our best teams in the company leading the way, we are confident Meriden and Sandstone will produce strong results for many years to come.

Speaker #4: While we've worked to finish fiscal 2026, the foundation for fiscal 2027 is also taking shape. We expect to begin the year with a higher backlog than we began fiscal 2026, and our faster build times are driving stronger results. Homes that took us over four months to build a year ago now take just over three, which means we can convert the same backlog into deliveries more quickly and sell further into the year for same-year delivery.

Rob McGibney: We expect to begin the year with a higher backlog than we began fiscal 2026 and our faster build times to drive stronger results. Homes that took us over 4 months to build a year ago now take just over 3, which means we can convert the same backlog into deliveries more quickly and sell further into the year for same-year delivery. That backlog is the heart of our built-to-order model, giving us visibility as we plan for the year. We will continue to match starts to our sales pace, keep our unsold inventory low, and manage each community individually for the best return. We have the business model, a favorable lot position of over 61,000 owned or controlled lots, providing a solid pipeline to support future growth targets, the balance sheet to grow when this market allows it, and the discipline not to chase volume while it doesn't.

Speaker #4: That backlog is the heart of our built-to-order model, giving us visibility as we plan for the year. We will continue to match starts to our sales pace, keep our unsold inventory low, and manage each community individually for the best return.

Speaker #4: We have the business model, a favorable lot position of over 61,000 owned or controlled lots, providing a solid pipeline to support future growth targets.

Speaker #4: The balance sheet to grow when this market allows it, and the discipline not to chase volume while it doesn't. And with that, I will turn the call back over to Jeff for his closing remarks.

Rob McGibney: With that, I will turn the call back over to Jeff for his closing remarks.

Speaker #2: Thanks, Rob. I want to thank our entire KB Home team for their ongoing commitment to serving our home buyers, and the discipline with which they have been executing our business model.

Jeff Mezger: Thanks, Rob. I want to thank our entire KB Home team for their ongoing commitment to serving our homebuyers and the discipline with which they have been executing our business model. Our strategic positioning remains a real strength. We have a broad geographic footprint and a balance sheet that supports growth. This provides the foundation for our long-tenured team with experience throughout varying housing market cycles to continue to navigate current conditions. We remain poised for the opportunity we believe is ahead once conditions correct. Our full-year guidance remains largely intact, which we view as a positive in this market environment. We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with up to $50 million of repurchases planned for our Q4.

Speaker #2: Our strategic positioning remains a real strength. We have a broad geographic footprint and a balance sheet that supports growth. This provides the foundation for our long-tenured team, with experience throughout varying housing market cycles, to continue to navigate current conditions.

Speaker #2: And we remain poised for the opportunity we believe is ahead once conditions correct. Our full-year guidance remains largely intact, which we view as a positive in this market environment.

Speaker #2: We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with up to $50 million of repurchases planned for our fourth quarter.

Speaker #2: We are committed to delivering long-term shareholder value, and we look forward to updating you at the end of the year. And now, I'll turn the call over to Bill Hollinger for the financial review.

Jeff Mezger: We are committed to delivering long-term shareholder value. We look forward to updating you at the end of the year. Now I will turn the call over to William Hollinger for the financial review. Bill?

Speaker #2: Bill.

Speaker #4: Thank you, Jeff. Let me start by briefly addressing our outlook. As Jeff and Rob mentioned, market conditions have weakened since our last earnings call and remain challenging.

William Hollinger: Thank you, Jeff. Let me start by briefly addressing our outlook. As Jeff and Rob mentioned, market conditions have weakened since our last earnings call and remain challenging, with greater pressure on both demand and pricing than we had anticipated. As a result, we have adjusted our Q4 expectations to reflect the current environment. While our outlook for the quarter has moderated, our expectations for the full year remain largely unchanged. I will provide the additional details throughout my remarks. As to the Q3, despite the difficult operating environment, we delivered solid results that, while below the year-earlier period, met or exceeded our guidance range across all metrics. In the quarter, we generated housing revenues of $1.3 billion, net income of $65 million, and diluted earnings per share of $1.05.

Bill Hollinger: Thank you, Jeff. Let me start by briefly addressing our outlook. As Jeff and Rob mentioned, market conditions have weakened since our last earnings call and remain challenging, with greater pressure on both demand and pricing than we had anticipated. As a result, we have adjusted our Q4 expectations to reflect the current environment. While our outlook for the quarter has moderated, our expectations for the full year remain largely unchanged. I will provide the additional details throughout my remarks. As to the Q3, despite the difficult operating environment, we delivered solid results that, while below the year-earlier period, met or exceeded our guidance range across all metrics. In the quarter, we generated housing revenues of $1.3 billion, net income of $65 million, and diluted earnings per share of $1.05.

Speaker #4: We are experiencing greater pressure on both demand and pricing than we had anticipated. As a result, we have adjusted our fourth quarter expectations to reflect the current environment.

Speaker #4: While our outlook for the quarter has moderated, our expectations for the full year remain largely unchanged. I will provide additional details throughout my remarks.

Speaker #4: As to the third quarter, despite the difficult operating environment, we delivered solid results that, while below the year-earlier period, met or exceeded our guidance range across all metrics.

Speaker #4: In the quarter, we generated housing revenues of $1.3 billion, net income of $65 million, and diluted earnings per share of $1.05. Our housing revenues for the quarter, which were at the midpoint of our guidance range, declined 20% from $1.6 billion for the prior period, primarily reflecting a 9% decrease in the number of homes delivered and a slightly lower overall average selling price.

William Hollinger: Our housing revenues for the quarter, which were at the midpoint of our guidance range, declined 20% from $1.6 billion for the prior period, primarily reflecting a 19% decrease in the number of homes delivered and slightly lower overall average selling price. We delivered 2,732 homes during the quarter, representing a backlog conversion rate of 60%, compared to 71% a year ago. The lower conversion rate reflected our focus on increasing the mix of built-to-order homes delivered. During the quarter, we achieved our goal of returning to a predominantly built-to-order business with these homes comprising a higher-than-expected 74% of homes delivered, up from the 60% in the Q2. As a result, we also generated our first year-over-year increase in our backlog in four years, providing a foundation for future deliveries.

Bill Hollinger: Our housing revenues for the quarter, which were at the midpoint of our guidance range, declined 20% from $1.6 billion for the prior period, primarily reflecting a 19% decrease in the number of homes delivered and slightly lower overall average selling price. We delivered 2,732 homes during the quarter, representing a backlog conversion rate of 60%, compared to 71% a year ago. The lower conversion rate reflected our focus on increasing the mix of built-to-order homes delivered. During the quarter, we achieved our goal of returning to a predominantly built-to-order business with these homes comprising a higher-than-expected 74% of homes delivered, up from the 60% in the Q2. As a result, we also generated our first year-over-year increase in our backlog in four years, providing a foundation for future deliveries.

Speaker #4: We delivered 2,732 homes during the quarter, representing a backlog conversion rate of 60%, compared to 71% a year ago. The lower conversion rate reflected our focus on increasing the mix of built-to-order homes delivered.

Speaker #4: During the quarter, we achieved our goal of returning to a predominantly built-to-order business, with these homes comprising a higher-than-expected 74% of homes delivered, up from 60% in the second quarter.

Speaker #4: As a result, we also generated our first year-over-year increase in our backlog in four years, providing a foundation for future deliveries. Turning to our outlook for deliveries and revenues, we expect fourth-quarter homes delivered to range from 3,000 to 3,500, and housing revenues to range from $1.45 billion to $1.65 billion.

William Hollinger: Turning to our outlook for deliveries and revenues, we expect Q4 homes delivered to range from 3,000 to 3,500 and housing revenues to range from $1.45 to $1.65 billion. For the full year, we expect homes delivered of 10,500 to 11,000, consistent with the outlook we provided on our last call. We have narrowed our range of housing revenues to $4.9 to $5.1 billion, reflecting our current expectations for the average selling price. For the Q3, the overall average selling price of homes delivered was $473,000 compared to approximately $476,000 for the prior quarter, and modestly higher than the Q2. Based on the current market conditions, the midpoint of our Q4 guidance implies a sequential increase in average selling price to about $480,000, as Rob mentioned.

Bill Hollinger: Turning to our outlook for deliveries and revenues, we expect Q4 homes delivered to range from 3,000 to 3,500 and housing revenues to range from $1.45 to $1.65 billion. For the full year, we expect homes delivered of 10,500 to 11,000, consistent with the outlook we provided on our last call. We have narrowed our range of housing revenues to $4.9 to $5.1 billion, reflecting our current expectations for the average selling price. For the Q3, the overall average selling price of homes delivered was $473,000 compared to approximately $476,000 for the prior quarter, and modestly higher than the Q2. Based on the current market conditions, the midpoint of our Q4 guidance implies a sequential increase in average selling price to about $480,000, as Rob mentioned.

Speaker #4: For the full year, we expect homes delivered to be between 10,500 and 11,000, consistent with the outlook we provided on our last call. We have narrowed our range of housing revenues to $4.9 to $5.1 billion, reflecting our current expectations for the average selling price.

Speaker #4: For the third quarter, the overall average selling price of homes delivered was $473,000, compared to approximately $476,000 for the prior quarter, and modestly higher than the second quarter.

Speaker #4: Based on the current market conditions, the midpoint of our fourth quarter guidance implies a sequential increase in average selling price to about $480,000, as Rob mentioned.

William Hollinger: Home building operating income for Q3 was $67 million or 5.2% of revenues, compared to $131 million or 8.1% of revenues for the year-earlier quarter. The year-over-year decrease primarily reflected a lower housing gross profit margin and higher selling, general, and administrative expenses as a percentage of revenues. Our Q3 housing gross profit margin was 16.5% compared to 18.2% for the year-earlier quarter, but was up sequentially from Q2. Excluding inventory-related charges of $3 million and $11 million, respectively, our adjusted housing gross profit margin was 16.8% compared to 18.9% a year ago, primarily reflecting pricing pressures, higher relative land costs, and reduced operating leverage. Our current quarter adjusted housing gross profit margin improved sequentially from 15.7% in Q2.

Bill Hollinger: Home building operating income for Q3 was $67 million or 5.2% of revenues, compared to $131 million or 8.1% of revenues for the year-earlier quarter. The year-over-year decrease primarily reflected a lower housing gross profit margin and higher selling, general, and administrative expenses as a percentage of revenues. Our Q3 housing gross profit margin was 16.5% compared to 18.2% for the year-earlier quarter, but was up sequentially from Q2. Excluding inventory-related charges of $3 million and $11 million, respectively, our adjusted housing gross profit margin was 16.8% compared to 18.9% a year ago, primarily reflecting pricing pressures, higher relative land costs, and reduced operating leverage. Our current quarter adjusted housing gross profit margin improved sequentially from 15.7% in Q2.

Speaker #4: Home building operating income for the third quarter was $67 million, or 5.2% of revenues, compared to $130 million, or 8.1% of revenues, for the year-earlier quarter.

Speaker #4: The year-over-year decrease primarily reflected a lower housing gross profit margin and higher selling, general and administrative expenses as a percentage of revenues. Our third quarter housing gross profit margin was 16.5% compared to 18.2% for the year-earlier quarter, but was up sequentially from the second quarter.

Speaker #4: Excluding inventory-related charges of $3 million and $11 million, respectively, our adjusted housing gross profit margin was 16.8% compared to 18.9% a year ago, primarily reflecting pricing pressures, higher relative land costs, and reduced operating leverage.

Speaker #4: Our current quarter adjusted housing gross profit margin improved sequentially from 15.7% in the second quarter. This sequential improvement reflected a stronger-than-expected mix of built-to-order homes delivered, which also contributed to our margin coming in slightly above the high end of our guidance range.

William Hollinger: This sequential improvement reflected a stronger than expected mix of built-to-order homes delivered, which also contributed to our margin coming in slightly above the high end of our guidance range. When we provided margin guidance on our last call, our outlook for Q4 was more favorable than it is today. At that time, we expected a sequential improvement supported by positive operating leverage, stronger contribution from our expanding BTO mix, and additional upside from a favorable shift toward higher price, higher margin West Coast deliveries. Since then, market conditions have evolved differently than we thought. We now anticipate housing gross margin to be down on a sequential basis in Q4. With the higher-than-expected BTO mix of homes delivered in Q3, we achieved our goal of returning to a predominantly built-to-order business earlier than we thought.

Bill Hollinger: This sequential improvement reflected a stronger than expected mix of built-to-order homes delivered, which also contributed to our margin coming in slightly above the high end of our guidance range. When we provided margin guidance on our last call, our outlook for Q4 was more favorable than it is today. At that time, we expected a sequential improvement supported by positive operating leverage, stronger contribution from our expanding BTO mix, and additional upside from a favorable shift toward higher price, higher margin West Coast deliveries. Since then, market conditions have evolved differently than we thought. We now anticipate housing gross margin to be down on a sequential basis in Q4. With the higher-than-expected BTO mix of homes delivered in Q3, we achieved our goal of returning to a predominantly built-to-order business earlier than we thought.

Speaker #4: When we provided margin guidance on our last call, our outlook for the fourth quarter was more favorable than it is today. At that time, we expected a sequential improvement supported by positive operating leverage, stronger contribution from our expanding BTO mix, and additional upside from a favorable shift toward higher-price, higher-margin West Coast deliveries.

Speaker #4: Since then, market conditions have evolved differently than we thought. We now anticipate housing gross margin to be down on a sequential basis in the fourth quarter.

Speaker #4: With that, and with the higher-than-expected BTO mix of homes delivered in the third quarter, we achieved our goal of returning to a predominantly built-to-order business earlier than we thought.

Speaker #4: As a result, we now expect less incremental margin benefit from the BTO mix in the fourth quarter. In addition, we now anticipate a smaller contribution from our higher-margin West Coast communities than previously projected.

William Hollinger: As a result, we now expect less incremental margin benefit from BTO mix in Q4. In addition, we now anticipate a smaller contribution from our higher margin West Coast communities than previously projected. While our Northern California business continues to perform as expected, our margins in Southern California have been impacted by a more competitive environment, and we have made pricing adjustments in response to market conditions and higher mortgage rates. More broadly, softer market conditions and greater affordability pressures have contributed to increased pricing pressures across many of our markets, and together with slightly higher costs, as stated earlier, they are creating an additional headwind to margins. While these factors have affected our Q4 outlook, they are less impactful to our full year projections. Accordingly, we have slightly lowered our full year gross margin guidance compared to the outlook we provided on our last call.

Bill Hollinger: As a result, we now expect less incremental margin benefit from BTO mix in Q4. In addition, we now anticipate a smaller contribution from our higher margin West Coast communities than previously projected. While our Northern California business continues to perform as expected, our margins in Southern California have been impacted by a more competitive environment, and we have made pricing adjustments in response to market conditions and higher mortgage rates. More broadly, softer market conditions and greater affordability pressures have contributed to increased pricing pressures across many of our markets, and together with slightly higher costs, as stated earlier, they are creating an additional headwind to margins. While these factors have affected our Q4 outlook, they are less impactful to our full year projections. Accordingly, we have slightly lowered our full year gross margin guidance compared to the outlook we provided on our last call.

Speaker #4: While our Northern California business continues to perform as expected, our margins in Southern California have been impacted by a more competitive environment. We have made pricing adjustments in response to market conditions and higher mortgage rates.

Speaker #4: More broadly, softer market conditions and greater affordability pressures have contributed to increased pricing pressures across many of our markets and together with slightly higher costs as stated earlier, we are creating an they are creating an additional headwind to margins.

Speaker #4: While these factors have affected our fourth quarter outlook, they are less impactful to our full-year projections. Accordingly, we have slightly lowered our full-year gross margin guidance compared to the outlook we provided on our last call.

Speaker #4: We now expect our housing gross profit to be in the range of 16% to 16.6% for the fourth quarter, and 16% to 16.2% for the full year, both assuming no inventory charges.

William Hollinger: We now expect our housing gross profit to be in the range of 16% to 16.6% for Q4 and 16% to 16.2% for the full year, both assuming no inventory charges. Our selling, general, and administrative expense ratio for Q3 was 11.3%, which was at the low end of our guidance range. Our SGA ratio increased from the 10% for the year-earlier period, mainly due to lower operating leverage, partly offset by lower costs associated with certain performance-based employee compensation plans and a 6% year-over-year reduction in personnel. For Q4, we are forecasting an SGA ratio to be in the range of 10.3% to 10.9%. For the full year, we maintain the midpoint of our prior guidance range while narrowing the range and now expect our SGA ratio to be in the range of 11.5% to 11.7%.

Bill Hollinger: We now expect our housing gross profit to be in the range of 16% to 16.6% for Q4 and 16% to 16.2% for the full year, both assuming no inventory charges. Our selling, general, and administrative expense ratio for Q3 was 11.3%, which was at the low end of our guidance range. Our SGA ratio increased from the 10% for the year-earlier period, mainly due to lower operating leverage, partly offset by lower costs associated with certain performance-based employee compensation plans and a 6% year-over-year reduction in personnel. For Q4, we are forecasting an SGA ratio to be in the range of 10.3% to 10.9%. For the full year, we maintain the midpoint of our prior guidance range while narrowing the range and now expect our SGA ratio to be in the range of 11.5% to 11.7%.

Speaker #4: Our selling, general, and administrative expense ratio for the third quarter was 11.3%, which was at the low end of our guidance range. Our SG&A ratio increased from 10% for the year-earlier period, mainly due to lower operating leverage, partly offset by lower costs associated with certain performance-based employee compensation plans and a 6% year-over-year reduction in personnel.

Speaker #4: For the fourth quarter, we are forecasting an SG&A ratio to be in the range of 10.3% to 10.9%. For the full year, we maintain the midpoint of our prior guidance range while narrowing the range and now expect our SG&A ratio to be in the range of 11.5% to 11.7%.

Speaker #4: Included in both our fourth quarter and full-year guidance is an estimate of an accelerated equity-based compensation charge associated with certain annual equity award grants expected to be granted in the quarter.

William Hollinger: Included in both our Q4 and full year guidance is an estimate of an accelerated equity-based compensation charge associated with certain annual equity award grants expected to be granted in the quarter. In the 2025 Q4, this charge was $16 million. We generated total pre-tax income of $81 million for the Q3, compared to $143 million for the year-earlier quarter. Our income tax expense was roughly $16 million, representing an effective tax rate of 19.6%, compared to 23.3% for the prior period. The tax rate was within our guidance range and reflected benefits associated with stock-based compensation as all remaining outstanding options were exercised during the quarter. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 26% for the Q4.

Bill Hollinger: Included in both our Q4 and full year guidance is an estimate of an accelerated equity-based compensation charge associated with certain annual equity award grants expected to be granted in the quarter. In the 2025 Q4, this charge was $16 million. We generated total pre-tax income of $81 million for the Q3, compared to $143 million for the year-earlier quarter. Our income tax expense was roughly $16 million, representing an effective tax rate of 19.6%, compared to 23.3% for the prior period. The tax rate was within our guidance range and reflected benefits associated with stock-based compensation as all remaining outstanding options were exercised during the quarter. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 26% for the Q4.

Speaker #4: In the fourth quarter of 2025, this charge was $16 million. We generated total pre-tax income of $81 million for the third quarter, compared to $143 million for the year-earlier quarter.

Speaker #4: Our income tax expense was roughly $16 million, representing an effective tax rate of 19.6%, compared to 23.3% for the prior period. The tax rate was within our guidance range and reflected benefits associated with stock-based compensation, as all remaining outstanding options were exercised during the quarter.

Speaker #4: Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 26% for the fourth quarter and for the full year.

William Hollinger: For the full year, we anticipate an effective tax rate of approximately 23%, which is in the midpoint of our previous guidance. As I previously mentioned, we generated a net income of $65 million and diluted earnings per share of $1.5. This compares to the net income of $110 million and diluted earnings per share of $1.61 for the same quarter last year. Our diluted average share count for the current quarter was down 9% year over year, reflecting the impact of our share repurchase activity. Turning to our balance sheet, we maintained a disciplined and balanced approach to capital deployment during the quarter, continuing to invest in the business while returning capital to shareholders.

Bill Hollinger: For the full year, we anticipate an effective tax rate of approximately 23%, which is in the midpoint of our previous guidance. As I previously mentioned, we generated a net income of $65 million and diluted earnings per share of $1.5. This compares to the net income of $110 million and diluted earnings per share of $1.61 for the same quarter last year. Our diluted average share count for the current quarter was down 9% year over year, reflecting the impact of our share repurchase activity. Turning to our balance sheet, we maintained a disciplined and balanced approach to capital deployment during the quarter, continuing to invest in the business while returning capital to shareholders.

Speaker #4: We anticipate an effective tax rate of approximately 23%, which is at the midpoint of our previous guidance. As I previously mentioned, we generated an income of $65 million and delivered earnings per share of $1.05.

Speaker #4: This compares to net income of $110 million and delivered earnings per share of $1.61 for the same quarter last year. Our diluted average share count for the current quarter was down 9% year over year, reflecting the impact of our share repurchase activity.

Speaker #4: Turning to our balance sheet, we maintained a disciplined and balanced approach to capital deployment during the quarter, continuing to invest in the business while returning capital to shareholders.

Speaker #4: With our investment in land and land development since the beginning of the year, our inventory has grown to $6 billion, up 5%. We ended the quarter with over 61,000 lots owned and under contract, while returning capital to our shareholders through share repurchases and dividends, as mentioned.

William Hollinger: With our investment in land and land development since the beginning of the year, our inventory has grown to $6 billion, up 5%, and we ended the quarter with over 61,000 lots owned and under contract while returning capital to our shareholders through share repurchases and dividends, as mentioned. We ended the quarter with cash of $159 million. Total liquidity was $942 million, including $783 million available under our unsecured credit facility, with $415 million drawn. As a result, our debt to capital ratio was 35.7% at the end of the quarter, compared to 33.2% a year ago. Despite this modest increase, we believe we have a healthy financial position supported by substantial liquidity and a well-laddered debt maturity profile. We believe the investments we have made in our land pipeline and community portfolio positions us well for the future while providing the capacity to adapt to evolving market conditions.

Bill Hollinger: With our investment in land and land development since the beginning of the year, our inventory has grown to $6 billion, up 5%, and we ended the quarter with over 61,000 lots owned and under contract while returning capital to our shareholders through share repurchases and dividends, as mentioned. We ended the quarter with cash of $159 million. Total liquidity was $942 million, including $783 million available under our unsecured credit facility, with $415 million drawn. As a result, our debt to capital ratio was 35.7% at the end of the quarter, compared to 33.2% a year ago. Despite this modest increase, we believe we have a healthy financial position supported by substantial liquidity and a well-laddered debt maturity profile. We believe the investments we have made in our land pipeline and community portfolio positions us well for the future while providing the capacity to adapt to evolving market conditions.

Speaker #4: We ended the quarter with cash of $159 million. Total liquidity was $942 million, including $783 million available under our unsecured credit facility, with $415 million drawn. As a result, our debt-to-capital ratio was 35.7% at the end of the quarter compared to 33.2% a year ago.

Speaker #4: Despite this modest increase, we believe we have a healthy financial position supported by substantial liquidity and a well-adhered debt maturity profile. We believe the investments we have made in our land pipeline and future will provide the capacity to adapt to evolving market conditions.

Speaker #4: We will continue to evaluate land investments, share repurchases, and financing activities through the lens of liquidity, cash flow generation, market conditions, and long-term strategic objectives.

William Hollinger: We will continue to evaluate land investments, share repurchases, and financing activities through the lens of liquidity, cash flow generation, market conditions, and long-term strategic objectives. While our outlook reflects a softer demand environment, primarily from continued affordability pressures, our higher backlog provides visibility into our expected Q4 performance. With our success in reestablishing a predominantly built-to-order business, our focus on operational execution, and the strength of our balance sheet, we believe we are well-positioned to manage through the present environment. As we look ahead, we remain focused on executing our strategy, capitalizing on growth opportunities, maintaining disciplined capital allocation, and driving long-term value for our shareholders while remaining responsive to evolving market conditions. We will now take your questions. John, please open up the line.

Bill Hollinger: We will continue to evaluate land investments, share repurchases, and financing activities through the lens of liquidity, cash flow generation, market conditions, and long-term strategic objectives. While our outlook reflects a softer demand environment, primarily from continued affordability pressures, our higher backlog provides visibility into our expected Q4 performance. With our success in reestablishing a predominantly built-to-order business, our focus on operational execution, and the strength of our balance sheet, we believe we are well-positioned to manage through the present environment. As we look ahead, we remain focused on executing our strategy, capitalizing on growth opportunities, maintaining disciplined capital allocation, and driving long-term value for our shareholders while remaining responsive to evolving market conditions. We will now take your questions. John, please open up the line.

Speaker #4: While our outlook reflects a softer demand environment, primarily from continuing affordability pressures, our higher backlog provides visibility into our expected fourth quarter performance. With our success in reestablishing a predominantly built-to-order business, our focus on operational execution, and the strength of our balance sheet, we believe we are well positioned to manage through the present environment as we look ahead.

Speaker #4: We remain focused on executing our strategy, capitalizing on growth opportunities, maintaining disciplined capital allocation, and driving long-term value for our shareholders while remaining responsive to evolving market conditions.

Speaker #4: We will now take your questions. John, please open up the line.

Speaker #2: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove a question from the queue. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we pull for questions. The first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Speaker #2: A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove a question from the queue.

Speaker #2: We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we pull for questions. And the first question comes from the line of Matthew Boulay with Barclays.

Speaker #2: Please proceed with your question.

Speaker #3: Good afternoon, everyone. Thanks for taking the questions. I want to start out on the gross margin outlook. And so kind of helpful color there you gave at the top around what's sort of changed around your expectations for Q4 sort of combination of changing market conditions and on the other hand, some things have stayed the same such as your Northern California mix.

Matthew Bouley: Good afternoon, everyone. Thanks for taking the questions. I want to start out on the gross margin outlook. Kind of helpful color there you gave at the top around what sort of changed around your expectations for Q4, sort of combination of changing market conditions and on the other hand, some things have stayed the same, such as your Northern California mix. The big picture question is: Given the state of market conditions today, is that Q4 kind of representative of what your mix should look like? Mix defined as built-to-order, defined as Northern California, Southern California, et cetera. Obviously, what I'm trying to get at is kind of what the H1 of 2027 should look like, and if there's any sort of additional changes in mix we should consider beyond Q4. Thank you.

Speaker #3: So, the big picture question is: Given the state of market conditions today, is that fourth quarter kind of representative of what your mix should look like? Mix defined as built-to-order, defined as Northern California, Southern California, etc.

Speaker #3: Obviously, what I'm trying to get at is kind of what the first half of '27 should look like, and if there's any sort of additional changes in the mix we should consider beyond Q4.

Speaker #3: Thank you.

William Hollinger: Okay. A lot embedded in that question. I'd just start with, as we look at our Q4 projections across the board and our guidance, that's all based on how we see it playing out based on current market conditions. As far as the mix goes, the Northern California piece that we described on our call last quarter came through basically in line how we expected. We talked about Southern California being down and one of the drivers of the ASP coming down. That is not something that we expect to continue. We were not pleased with the results that we got. We're taking steps there to get those sales back and bring those deliveries back online as we look ahead. So we expect that mix to rotate back in.

Rob McGibney: Okay. A lot embedded in that question. I'd just start with, as we look at our Q4 projections across the board and our guidance, that's all based on how we see it playing out based on current market conditions. As far as the mix goes, the Northern California piece that we described on our call last quarter came through basically in line how we expected. We talked about Southern California being down and one of the drivers of the ASP coming down. That is not something that we expect to continue. We were not pleased with the results that we got. We're taking steps there to get those sales back and bring those deliveries back online as we look ahead. So we expect that mix to rotate back in.

Speaker #4: Okay, a lot is embedded in that question. I'll just start with, as we look at our Q4 projections across the board and our guidance, that's all based on how we see it playing out, based on current market conditions.

Speaker #4: As far as the mix goes, the Northern California piece that we described on our call last quarter came through basically in line with how we expected.

Speaker #4: We talked about Southern California being one of the drivers of the ASP coming down. That is not something that we expect to continue.

Speaker #4: We were not pleased with the results that we've got. We're taking steps there to get those sales back and bring those deliveries back online as we look ahead.

Speaker #4: So we expect that mix to rotate back in. As we look at Southern California specifically, one of the things that we didn't mention in the prepared remarks was just some missed community openings that are relatively high-ASP communities.

William Hollinger: As we look at Southern California specifically, one of the things that we didn't mention in the prepared remarks was just some missed community openings that are relatively high ASP communities. So

Rob McGibney: As we look at Southern California specifically, one of the things that we didn't mention in the prepared remarks was just some missed community openings that are relatively high ASP communities. So

Speaker #4: So, those will open; those will come through. As we look out, we're not giving guidance on 2027. Obviously, market conditions are pretty volatile and choppy right now, but we're pleased with our shift back to built-to-order.

Rob McGibney: Those will open, those will come through. As we look out, we are not giving guidance on 2027. Obviously, market conditions are pretty volatile and choppy right now, but we are pleased with our shift back to built-to-order. We know that that is going to continue. We are going to continue aligning starts with sales, and we will update you on our outlook for 2027 as we get closer to it.

Speaker #4: We know that that's going to continue. We're going to continue aligning starts with sales, and we'll update you on our outlook for 2027 as we get closer to it.

Speaker #3: Okay, got it. Well, thank you for those details. Secondly, I wanted to touch on the direct cost side between both materials and labor. I think I heard you mention that there have been some changes, specifically regarding how you're thinking about materials inflation going into Q4.

Matthew Bouley: Well, thank you for those details. Secondly, I wanted to touch on the direct cost side between both materials and labor. I think I heard you mention that there has been some changes specifically on how you are thinking about the materials inflation into Q4, but I did not hear you mention much about labor. Obviously, this is in context of your peer last week speaking about some challenges with, call it immigration, and maybe demand for labor from data centers and so forth. How is that playing out across your communities nationwide, and how are you thinking about the impact to your own labor costs, either in Q4 and beyond? Thank you.

Speaker #3: But I didn't hear you mention much about labor. Obviously, this is in the context of your peer last week speaking about some challenges with, call it, immigration and maybe demand for labor from data centers and so forth.

Speaker #3: And so, how is that playing out across your communities nationwide, and how are you thinking about the impact to your own labor costs either in Q4 and beyond?

Speaker #3: Thank you.

Speaker #4: Yeah, really, the pressure that we're referencing is mostly on the material side. You've got fuel prices that have gone up. That's embedded in a lot of the products, but it's also a direct cost that our trade partners are living with and experiencing every day.

Rob McGibney: Yeah. Really, the pressure that we are referencing is mostly on the material side. You have got fuel prices that have gone up. That is embedded in a lot of the products, but it is also a direct cost that our trade partners are living with and experiencing every day. So we expect to see that creep into some of our costs on directs and land development as well as we move throughout. We have also set those up as direct fuel surcharges, so when and if fuel prices pull back, we can immediately extract those out. As to labor, I would say what we are seeing across most markets is that starts are down. We really have not had a lot of issues getting labor to our job sites.

Speaker #4: So, we expect to see that creep into some of our costs on directs and land development as well, as we move throughout. And we've also set those up as direct fuel surcharges.

Speaker #4: So when fuel prices pull back, we can immediately extract those out. As to labor, I would say what we're seeing across most markets is that starts are down.

Speaker #4: We really haven't had a lot of issues getting labor to our job sites. We are hearing stories, just anecdotally, about some of the labor challenges that are out there.

Rob McGibney: We are hearing stories just anecdotally about some of the labor challenges that are out there, but direct experience, that is not been a big part of what we are seeing on the cost side of things.

Speaker #4: But direct experience, that's not been a big part of what we're seeing on the cost side of things.

Speaker #2: Thank you. The next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Speaker #5: Hi, this is Rhonda on for Stephen. Thanks for taking my question. First, now that KB has achieved its goal of returning to a predominantly built-to-order business model, I wanted to ask if you have an update on your long-term gross margin targets.

[Company Representative] (Evercore ISI): Hi, this is Randa on for Steven. Thanks for taking my question. First, now that KB has achieved its goal of returning to a predominantly built-to-order business model, I wanted to ask if you have an update on your long-term gross margin targets. I believe that you previously stated 22% gross margin.

Randa Shaw: Hi, this is Randa on for Steven. Thanks for taking my question. First, now that KB has achieved its goal of returning to a predominantly built-to-order business model, I wanted to ask if you have an update on your long-term gross margin targets. I believe that you previously stated 22% gross margin.

Speaker #5: I believe that we previously stated a 22% gross margin.

Speaker #4: Yeah, certainly. I mean, that is still our target. Market conditions have not been exactly conducive to listing margins lately, but as we're underwriting deals, we're sticking to our discipline there.

Rob McGibney: Yeah. Certainly. That is still our target. Market conditions have been not exactly conducive to lifting margins lately. But as we are underwriting deals, we are sticking to our discipline there. Frankly, it is one of the reasons that we have walked from many of the deals that we have had under contract, land deals that is, because they just no longer met our returns. As we look out into the future, that is still in play and still a target for us.

Speaker #4: Frankly, it's one of the reasons that we've walked from many of the deals that we've had under contract because they just land deals, that is, because they just no longer met our returns.

Speaker #4: So, as we look out into the future, that is still in play and still a target for us.

Speaker #5: Got it. Thank you. And then, your land spend in the quarter rose pretty significantly, both on a year-over-year basis and sequentially. I'm curious what drove the substantial investment in land this quarter, and then how should we think about that going forward?

[Company Representative] (Evercore ISI): Got it. Thank you. Your land spend in the quarter rose pretty significantly, both on a year-over-year basis and a sequential one. Curious what drove the substantial investment in land this quarter, and how should we think about that going forward?

Randa Shaw: Got it. Thank you. Your land spend in the quarter rose pretty significantly, both on a year-over-year basis and a sequential one. Curious what drove the substantial investment in land this quarter, and how should we think about that going forward?

Speaker #4: Yeah. So, when you're looking at that land spend, it's comprised of really three things: it's the actual land, the raw land that you're purchasing; it's the development; and then it's the fees.

Rob McGibney: Yeah. When you are looking at that land spend, it is comprised of really three things. It is the actual land, the raw land that you are purchasing. It is the development, and then it is the fees. Most, if not all, of the increase that you are seeing is related to development and fees that we are paying for land that was previously purchased that is working through the system.

Speaker #4: So most, if not all, of the increase that you're seeing is related to development and fees that we're paying for land that was previously purchased that's working through the system.

Speaker #2: Thank you. And the next question comes from the line of John Lavala with UBS. Please proceed with your question.

Operator: Thank you. The next question comes from the line of John Lovallo with UBS. Please proceed with your question.

Speaker #6: Good evening, guys. Thank you for taking my questions. The first one is on the cost side. I mean, if you're still seeing costs on homes that were started in the third quarter down versus the homes that were started in the second quarter, I would expect costs to be down quarter over quarter in the fourth quarter, maybe even into the first quarter.

John Lovallo: Good evening, guys. Thank you for taking my questions. The first one is on the cost side. If you are still seeing costs on homes that were started in Q3 down versus the homes that were started in Q2, I would expect costs to be down quarter-over-quarter in Q4, maybe even into Q1. Just help me understand why that thinking is wrong and what would be offsetting it.

Speaker #6: Just help me understand why that thinking is wrong, and what would be offsetting.

Speaker #4: Yeah, John, part of it is just the speed at which we're building now. Before, we would have more visibility if we started it and it was taking us six months to build.

Rob McGibney: Yeah. John, part of it is just the speed at which we are building now. Before, we would have more visibility. If we started it and it is taking us six months to build, you can see that coming. Right now, as fast as we are building, as those costs come, and you get more pressure throughout the quarter like we have seen here, even though our average for homes started was down on a sequential and year-over-year basis, it did increase throughout. So homes that we are starting later in Q3 that we will deliver in Q4, they are going to have that extra embedded cost pressure. That is why we are projecting that or thinking that that is coming.

Speaker #4: You can see that coming. Right now, as fast as we're building, as those costs come and you get more pressure throughout the quarter, like we've seen here—even though our average for homes started was down on a sequential and year-over-year basis—it did increase throughout.

Speaker #4: So homes that were starting later in the third quarter, that will deliver in Q4, they're going to have that extra embedded cost pressure in them.

Speaker #4: So that's why we're projecting that, or thinking that that's coming.

Speaker #6: Okay, understood. And then Jeff, at the top and in the press release, you guys talked about some deterioration in the market since the last quarter.

John Lovallo: Okay. Understood. Then, Jeff, at the top and in the press release, you guys talked about some deterioration in the market since the last quarter. That is pretty similar to what your competitor said last week. Although, I have noted that our channel checks with big builders and other companies across the complex had suggested at least some early signs of stabilization. I guess the question I have for you is that would you agree that the housing market is at least getting closer to a bottom here, and that any reduction in oil prices or rates could be a pretty powerful catalyst on the upside?

Speaker #6: That's pretty similar to what your competitor said last week, although I've noted that our channel checks with big builders and other companies across the complex have suggested at least some early signs of stabilization.

Speaker #6: So I guess the question I have for you is: Would you agree that the housing market is at least getting closer to a bottom here, and that any reduction in oil prices or rates could be a pretty powerful catalyst on the upside?

Speaker #4: Yeah, John, I think if you get a little jolt of consumer confidence, you'll see a lift in housing demand. The people are out there.

Rob McGibney: John, I think if you get a little jolt of consumer confidence, you will see a lift in housing demand. The people are out there. Our traffic is down, but it is down order of magnitude about 10%. So there is a lot of people out still looking for homes. They are just cautious, and there is a lot of things going on right now that they are trying to digest. But if they feel better about where things are headed, I think you will see demand come right back. So you have to deal with today, and you keep an eye on it, and I think they will come back. Even since the end of our quarter in August, rates have ticked up 20, 30 bps. Every time you get a little movement like that, it takes time for the consumer to digest it.

Jeff Mezger: John, I think if you get a little jolt of consumer confidence, you will see a lift in housing demand. The people are out there. Our traffic is down, but it is down order of magnitude about 10%. So there is a lot of people out still looking for homes. They are just cautious, and there is a lot of things going on right now that they are trying to digest. But if they feel better about where things are headed, I think you will see demand come right back. So you have to deal with today, and you keep an eye on it, and I think they will come back. Even since the end of our quarter in August, rates have ticked up 20, 30 bps. Every time you get a little movement like that, it takes time for the consumer to digest it.

Speaker #4: Our traffic is down, but it's down quarter magnitude—about 10%. So there's a lot of people out still looking for homes; they're just cautious.

Speaker #4: And there's a lot going on right now that they're trying to digest. But if they feel better about where things are headed, I think you'll see demand come right back.

Speaker #4: So, we're—you have to deal with it today, and you keep an eye on it. And I think they will come back. And even since the end of our quarter in August, rates have ticked up 20, 30 basis points.

Speaker #4: And every time you get a little movement like that, it takes time for the consumer to digest it. They don't want to feel like they overpaid for a house because they bought it at the peak of the rates, and now rates are coming back down that 20 or 30 percent.

Rob McGibney: They do not want to feel like they overpaid for a house because they bought at the peak of the rates, and are rates coming back down that 20% or 30%. So they wait to see if rates are coming back down, and they digest the rate move. So rates ticked up a little bit. That puts them on pause again, and you got to wait for it all to get digested. But the demographics are there and the people are out there, and there is still demand. It is just getting everybody comfortable with it all, and you move.

Jeff Mezger: They do not want to feel like they overpaid for a house because they bought at the peak of the rates, and are rates coming back down that 20% or 30%. So they wait to see if rates are coming back down, and they digest the rate move. So rates ticked up a little bit. That puts them on pause again, and you got to wait for it all to get digested. But the demographics are there and the people are out there, and there is still demand. It is just getting everybody comfortable with it all, and you move.

Speaker #4: So they wait to see if rates are coming back down, and they digest the rate move. So rates ticked up a little bit; that puts them on pause again.

Speaker #4: And you’ve got to wait for it all to get digested. But the demographics are there and the people are out there, and there’s still demand.

Speaker #4: It's just about getting everybody comfortable with it all, and you move.

Speaker #2: Thank you. Our next question comes from the line of Susan McClary with Goldman Sachs. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker #7: Thank you. Good afternoon, everybody. My first question is on the ability to value-engineer the homes, which you talked about in your prepared remarks.

Susan Maklari: Thank you. Good afternoon, everybody. My first question is on the ability to value engineer the homes, which you talked about in your prepared remarks. Can you talk a little more of what are the changes that you're making, how we should think about that coming through in future quarters and maybe the offsets there as we think about value engineering relative to the BTO model that you've now really gotten into?

Speaker #7: Can you talk a little more about what changes you're making? How should we think about that coming through in future quarters?

Speaker #7: And maybe the offsets there, as we think about value engineering relative to the BTO model that you've now really gotten into.

Speaker #4: So, when I think about the value engineering process and just getting more efficient building envelopes that we're working with, or getting more efficient with our studio offerings, it's never an event that we say we're done with at some point.

Rob McGibney: When I think about the value engineering process and just getting more efficient building envelope that we're working with or getting more efficient with our studio offerings, it's never an event that we say that we're done with at some point. It's an ongoing process, and I feel like we've made a lot of great progress as a company over the last few years, especially starting with when the supply chain crunch hit. Some of that was just, we had to get more efficient quickly and reduce our SKUs in order to be able to get material and build the houses on a reasonable timeline. One of the big things that we're focused on today is standardization.

Speaker #4: It's an ongoing process, and I feel like we've made a lot of great progress as a company over the last few years, especially starting with when the supply chain crunch hit.

Speaker #4: And some of that was just, we had to get more efficient quickly and reduce our SKUs in order to be able to get material and build the houses on a reasonable timeline.

Speaker #4: One of the big things that we're focused on today is standardization. So when we're looking at our floor plans, there are opportunities still out there today to simplify—whether it's offsets or overhangs, if you're thinking about the outside of the building and pulling those back.

Rob McGibney: When we're looking at our floor plans, there are opportunities still out there today to simplify, whether it's offsets or overhangs, if you're thinking about the outside of the building and pulling those back. As long as we can get those types of things approved through the municipality, the consumer still accepts it. The house still looks good. There's really no value taken away from the customer. But it does result in meaningfully lower cost. As I said, it's an ongoing focus. I think we've been through a lot of the low-hanging fruit that was out there, if there was any, and now we're focused on things more related to the actual building themselves and how do you squeeze out another few cents or dollars per square foot in the actual homes that we're building. So ongoing process with our architecture team as we seek more efficiency.

Speaker #4: As long as we can get those types of things approved through the municipality, the consumer still accepts it, the house still looks good, there's really no value taken away from the customer, but it does result in meaningfully lower cost.

Speaker #4: And as I said, it's always an ongoing focus. I think we've been through a lot of the low-hanging fruit that was out there, if there was any.

Speaker #4: And now we're focused on things more related to the actual buildings themselves and how do you squeeze out another few cents or dollars per square foot in the actual homes that we're building.

Speaker #4: So, it's an ongoing process with the architecture team as we seek more efficiency.

Speaker #7: Okay, all right, that's helpful. And then one of the other things that you mentioned is the ability to actually build an interest list as you are starting to open new communities, which is in contrast to what we're hearing in terms of consumer confidence and overall conditions.

Susan Maklari: Okay. All right. That's helpful. Then one of the other things that you mentioned is the ability to actually build an interest list as you are starting to open new communities, which is in contrast to what we're hearing in terms of consumer confidence and overall conditions. Can you talk about what you're doing in order to build that interest list? Has something changed? Is there a difference in the type of buyer that's coming out there and just anything notable within that and how you're approaching it?

Speaker #7: Can you talk about what you’re doing in order to build that interest list? Has something changed? Is there a difference in the type of buyer that’s coming out there?

Speaker #7: And just anything notable within that, and how you're approaching it?

Speaker #4: Yeah, it's a discipline that we've had in the company for a long time—something that we're consistently training on. But the main thing is that we start early.

Rob McGibney: Yeah. It is a discipline that we have had in the company for a long time, something that we are consistently training on. The main thing is that we start early. We have got a good runway of time leading up to a community opening, and it is very local, and we will start within that market. It might be signage in the beginning, and then we are reaching out through a digital interest list of people that either call in or they will scan a QR code on that sign, and it just starts building slow. If you imagine a new community that is coming to a parcel and we put our sign up and you start to get a little interest and you capture those people and you take them through the process, it tends to grow.

Speaker #4: We've got a good runway of time leading up to a community opening, and it's very local. We'll start within that market. It might be signage in the beginning, and then we're reaching out through a digital interest list of people that either call in, or they'll scan a QR code on that sign.

Speaker #4: And it just starts building slowly. But if you imagine a new community that's coming to a parcel, and we put our sign up, you start to get a little interest.

Speaker #4: And you capture those people, and you take them through the process, and it tends to grow. One of the next steps would be grassroots marketing that our teams are doing with local businesses and realtors there.

Rob McGibney: One of the next steps would be grassroots marketing that our teams are doing with local businesses and realtors there, and you get a little more interest from that. Then you get your land development going. People see that project is starting to become real, and it grows a little from that. Then once you go vertical with the model construction, even more comes. Then you ultimately get to the point where you have got an open model. You try to bring all of that pent-up demand or interest that we have got in, and then you start the qualification process to see how many people on that interest list are real buyers that can qualify.

Speaker #4: And you get a little more interest from that. And then, when you get your land development going, people see that the project's starting to become real, and it grows a little from that.

Speaker #4: And then, once you go vertical with the model construction, even more comes. And then you ultimately get to the point where you've got an open model to try to bring all of that pent-up demand or interest that we've got in.

Speaker #4: And then you start the qualification process to see how many people on that interest list are real buyers that can qualify. The goal for us is once we open that community for sale, we're getting about two months of our expected run rate of sales.

Rob McGibney: The goal for us is once we open that community for sale, we are getting about 2 months of our expected run rate of sales in the first week to 10 days from when we grand open that community and then keep it running on whatever our projected sales pace is for that community on an ongoing basis. You start small, you start grassroots. It builds up as you go. By the time that you get to that grand opening event, you have got this pool of ready, able, and willing, qualified buyers ready to go.

Speaker #4: And the first week to 10 days from when we grand open that community, and then keep it running on whatever our projected sales pace is for that community on an ongoing basis.

Speaker #4: So, it's really that you start small, you start grassroots—it builds up as you go. But by the time that you get to that grand opening event, you've got this pool of ready, able, and willing, qualified buyers ready to go.

Speaker #2: Thank you. Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Speaker #6: Hey, guys. Good afternoon. Thanks for all the detail so far. You guys have made the pivot toward more of a base price model, I guess, as opposed to the kind of incentive burden that some of your peers have seen.

Alan Ratner: Hey, guys. Good afternoon. Thanks for all the details so far. You guys have made the pivot towards more of a base price model, I guess, as opposed to the incentive burden that some of your peers have seen. I am curious now with built-to-order and your backlog of pre-sold, when rates move as much as they have in a relatively short period of time, are you forced to kind of throw some incentives at the closing table at buyers in order to get them to either pull the trigger and move forward or even qualify in some cases? I am imagining they probably thought they were going to come in with a lower rate when they originally signed the contract.

Speaker #6: And I'm curious now—with bill-to-order and your backlog of pre-sold—when rates move as much as they have in a relatively short period of time, are you forced to kind of throw some incentives at the closing table for buyers in order to get them to either pull the trigger and move forward, or even qualify in some cases?

Speaker #6: Because I'm imagining they probably thought they were going to come in with a lower rate when they originally signed the contract.

Speaker #4: Yeah, Alan, it happens. The first thing that we do is try to lock the buyers early on in the process as we can. And I mentioned in my earlier prepared remarks, it's a little more challenging to do when your build times are longer.

Rob McGibney: Yeah, Alan, it happens. The first thing that we do is try to lock the buyers early on in the process as we can. I mentioned in my earlier prepared remarks, that is a little more challenging to do when your build times are longer. When we are at roughly 90 days now, there is more visibility, and it is easier, it is less expensive to lock that loan up front. That is the first approach that we take, is try to get everybody locked as early as possible. Sometimes buyers are not on board for that. They want to play the market and hope that rates come down. We have seen in backlog some situations where we have had to make some minor adjustments, either just to keep them in the deal or to get them qualified. But it is minimal overall, especially when we can get them locked early and upfront.

Speaker #4: But when we're at roughly 90 days now, there's more visibility and it's easier. It's less expensive to lock that loan upfront. So that's the first approach that we take: try to get everybody locked as early as possible.

Speaker #4: Sometimes buyers aren't on board for that. They want to play the market and hope that rates come down, and we have seen in backlog some situations where we've had to make some minor adjustments either just to keep them in the deal or to get them qualified.

Rob McGibney: Sometimes buyers are not on board for that. They want to play the market and hope that rates come down. We have seen in backlog some situations where we have had to make some minor adjustments, either just to keep them in the deal or to get them qualified. But it is minimal overall, especially when we can get them locked early and upfront.

Speaker #4: But it's minimal overall, especially when we can get them locked early and upfront—their loan's locked, that is.

Rob McGibney: Their loans locked, that is.

Speaker #6: Got it. That's very helpful. Second question, just on the balance sheet and capital allocation. You guys are going to spend north of $300 million this year on buybacks and dividends.

Alan Ratner: Got it. That is very helpful. Second question, just on kind of the balance sheet and capital allocation. You guys are going to spend north of $300 million this year on buybacks and dividends. I know you do not give cash flow guidance, but you are trending well below that from a free cash standpoint for the full year. Just kind of curious now with leverage back at roughly 30%, how much longer can you continue to return more capital to shareholders than cash you are bringing in the door on a free cash basis? I guess, what I am asking is how high are you willing to bring that leverage ratio, assuming cash flow does not materially increase from here?

Speaker #6: I know you don't give cash flow guidance, but you're trending well below that from a free cash standpoint for the full year. Just kind of curious, now with leverage back at roughly 30%, I mean, how much longer can you continue to return more capital to shareholders than cash you're bringing in the door on a free cash basis?

Speaker #6: I guess what I'm asking is: how high are you willing to bring that leverage ratio, assuming cash flow doesn't materially increase from here?

Speaker #4: Well, Alan, as we've demonstrated over the years, it's a disciplined balance. And you know the inputs: How much are we going to spend on land?

Rob McGibney: Well, Alan, as we've demonstrated over the years, it's a disciplined balance and you know the inputs. How much are we going to spend on land? What's our appetite to grow? What's the timing on development? What's the timing on WIP and cash coming in, and what's our revenue and profit? Everything that we factor into it. If you look at our business has rotated over the last three years. Our inventory has actually grown a few hundred million while our build times have come down significantly. So we took the cash from the build times coming down, and we put some of it to repurchases, and we put a lot of it to acq and development. Our acq and development's been going up the last two years.

Jeff Mezger: Well, Alan, as we've demonstrated over the years, it's a disciplined balance and you know the inputs. How much are we going to spend on land? What's our appetite to grow? What's the timing on development? What's the timing on WIP and cash coming in, and what's our revenue and profit? Everything that we factor into it. If you look at our business has rotated over the last three years. Our inventory has actually grown a few hundred million while our build times have come down significantly. So we took the cash from the build times coming down, and we put some of it to repurchases, and we put a lot of it to acq and development. Our acq and development's been going up the last two years.

Speaker #4: What's our appetite to grow? What's the timing of development? What's the timing on WIP and cash coming in? And what's our revenue and profit?

Speaker #4: Everything that we factor into it. And if you look at our business as rotated over the last three years, our inventory has actually grown a few hundred million, while our build times have come down significantly.

Speaker #4: So, we took the cash from the build times coming down, and we put some of it to repurchases. And we put a lot of it to Acken Developments.

Speaker #4: And our Acken developments have been going up the last few years. As we look ahead, we'll continue to balance all those. And I think in the current environment, where the land market's been a little chunky, where we have a couple of big deals we've done, and we'll phase out the development and get that back in balance, you'll probably see our land spend come down a little.

Rob McGibney: As we look ahead, we'll continue to balance all those. I think in the current environment where the landmark has been a little chunky, where we have a couple of big deals we've done, and we'll phase out the dev and get that back in balance. You'll probably see our land spend come down a little, and depending on how the WIP is, that will influence how much our repurchases will be. It'll all stay programmatic and opportunistic at the same time, depending on the dynamics at that point in time. Our balance sheet remains solid, and we'll stay focused on growing the company.

Jeff Mezger: As we look ahead, we'll continue to balance all those. I think in the current environment where the landmark has been a little chunky, where we have a couple of big deals we've done, and we'll phase out the dev and get that back in balance. You'll probably see our land spend come down a little, and depending on how the WIP is, that will influence how much our repurchases will be. It'll all stay programmatic and opportunistic at the same time, depending on the dynamics at that point in time. Our balance sheet remains solid, and we'll stay focused on growing the company.

Speaker #4: And depending on how the WIP is, that will influence how much our repurchases will be. And it'll all stay programmatic and opportunistic at the same time, depending on the dynamics at that point in time.

Speaker #4: But our balance sheet remains solid, and we'll stay focused on growing the company.

Speaker #2: Thank you. And the next question comes from the line of Rafe Jadrasich with Bank of America. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.

Speaker #7: Hi, good afternoon.

Rafe Jadrosich: Hi, good afternoon. Thanks for taking my questions. You gave some helpful color on sort of fiscal 2027 with your backlog up and better build cycles. On the community count, you're flattish this year. As you look at your current pipeline, can you give us some help on what we should expect for next year? Do you expect to return to growth on community count?

Speaker #6: Thanks for taking my questions. You gave some helpful color on fiscal '27 with your backlog up and better build cycles. On the community account, you're flattish this year.

Speaker #6: As you look at your current pipeline, can you give us some help on what we should expect for next year? Do you expect to return to growth on Community account?

Speaker #4: Well, we're not given guidance. I mean, it's a roundabout way of asking for community account guidance, and I appreciate the effort, but it's really still early, right?

Rob McGibney: Well, we are not giving guidance. It is a roundabout way of asking for community count guidance, and I appreciate the effort, but it is really still early, Rafe. We are focused on finishing 2026 strong. We will come back to you on 2027. But overall, with 61,000 lots owned and controlled, we feel like we have plenty of runway to provide growth if the market conditions allow it. That is where we are today.

Speaker #4: We're focused on finishing 2026 strong. We'll come back to you on 2027. But overall, with 61,000 lots owned and controlled, we feel like we've got plenty of runway to provide growth if market conditions allow it.

Speaker #4: And that's where we are today.

Speaker #6: Got it. Okay, thank you. Fair enough. And then, just on the fourth quarter gross margin outlook, it was a little bit below your prior expectations.

Rafe Jadrosich: Okay. Thank you. Fair enough. Then just on the Q4 gross margin outlook, it was a little bit below your prior expectations, but fiscal Q3 was better. Can you just talk about what drove upside to the fiscal Q3 versus your expectations, given the fact that the macro was worse? If you could just bridge us from Q3 to Q4, what are the different puts and takes on gross margin? Thank you.

Speaker #6: But fiscal Q3 was better. Can you just talk about what drove the upside to the fiscal third quarter versus your expectations, given the fact that the macro was worse?

Speaker #6: And if you could just bridge us from Q3 to Q4, what are the different puts and takes on gross margin? Thank you.

Speaker #4: You had that.

William Hollinger: You can have this. Okay. Let me, I guess, jump in there. The bridge, let us say, from the Q3 to Q4, as we said, is going to be down. Where we ended up with Q3 at 16.8%, we are now anticipating 16.3%. It is primarily, I would say, based on that we are going to do as we expected last time. There will be some improvement that is going to be positive from leverage in the Q4 compared to the Q3. But these are going to be more than offset that leverage. So if we are up a leverage about, let us say, 50 basis points, we think we are going to then lose basically a point. That point is going to come from pricing pressures, higher costs, as well as product and geographic mix, as we said, specifically like

Speaker #2: Okay, let me, I guess, jump in there. The bridge, let's say from Q3 to Q4, as we said, it's going to be down.

Bill Hollinger: Okay. Let me, I guess, jump in there. The bridge, let us say, from the Q3 to Q4, as we said, is going to be down. Where we ended up with Q3 at 16.8%, we are now anticipating 16.3%. It is primarily, I would say, based on that we are going to do as we expected last time. There will be some improvement that is going to be positive from leverage in the Q4 compared to the Q3. But these are going to be more than offset that leverage. So if we are up a leverage about, let us say, 50 basis points, we think we are going to then lose basically a point. That point is going to come from pricing pressures, higher costs, as well as product and geographic mix, as we said, specifically like

Speaker #2: And where we ended up with Q3 at $16.8, we're now anticipating $16.3. It's primarily, I would say, based on that we're going to do as we expected last time.

Speaker #2: There will be some improvement that is going to be positive from leverage in the fourth quarter compared to the third quarter, but these are going to be more than offset.

Speaker #2: That leverage—so for up a leverage of about, let's say, 50 basis points—we think we're going to then lose basically a point. And that point is going to come from pricing pressures, higher costs, as well as product and geographic mix, as we said, specifically like in our Southern California area.

Rob McGibney: in our Southern California area. So I think that there is an up and down and some noise in there, but net-net, it is just a half a point.

Bill Hollinger: in our Southern California area. So I think that there is an up and down and some noise in there, but net-net, it is just a half a point.

Speaker #2: So I think that there's an up and down, and some noise in there. But net-net, it's just half a point. Thank you.

Operator: Thank you. The next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Speaker #2: And the next question comes from the line of Buck Horn with Raymond James. Please proceed with your question.

Speaker #6: Hey, thanks. Good afternoon, guys. Kind of want to follow up on the tail end of that and just kind of drill into the lot cost inflation as we're kind of working through the bridge.

Buck Horne: Hey, thanks. Good afternoon, guys. I want to follow up on the tail end of that and just drill into the lot cost inflation as we are working through the bridge into Q4. You guys mentioned that lot costs were one of the factors going into Q4. What are lot costs trending? What were they up year over year in Q3, and then how is that trending into Q4?

Speaker #6: Into the fourth quarter, you guys mentioned that lot costs were one of the factors going into the fourth. What are lot costs trending, or what were they up year-over-year in the third quarter, and then how is that trending into the fourth quarter?

Speaker #4: So, I go back to something I said earlier on the lot cost, just to get everybody grounded in it. The fees are one of the bigger—it’s a big cost.

Rob McGibney: I go back to something I said earlier on the lot cost, just to get everybody grounded in it. The fees is one of the bigger. It is a big cost that is embedded between, you got the three things. You got the fees, you got the land development, and then you have the land. We have seen pretty significant fee increases over the last year, even longer than that in many of the markets. I will go year over year on the lot cost. If we just look at the arithmetic alone, it would appear to be up pretty meaningfully on a year over year basis. But especially with our business and the weighting of California, a lot of that is mixed. It is not really just pure land inflation.

Speaker #4: It's embedded between—you've got the three things. You've got the fees, you've got the land development, and then you've got the land. And we've seen pretty significant fee increases over the last year, even longer than that, in many of our markets.

Speaker #4: So, I'll go year over year on the lot costs. If we just look at the arithmetic alone, it would appear to be up pretty meaningfully on a year-over-year basis.

Speaker #4: But especially with our business and the weighting of California, a lot of that is mixed. It's not really just pure land inflation. When I look at how that gets made up, the big portion of the year-over-year decline in revenues was really concentrated in some of our lower lot cost markets.

Rob McGibney: When I look at how that gets made up, a big portion of the year over year decline in revenues was really concentrated in some of our lower lot cost markets, like our Texas divisions, where lot costs are much lower generally than certainly California or the West, but most parts of the country. But if I look at that and you hold last year's delivery mix constant to remove that component, the increase on a year over year basis that we are looking at is really in the low single digits. It is not a massive move, and as I said in the beginning, a lot of that is driven by fees.

Speaker #4: Like our Texas divisions, where lot costs are much lower generally than, certainly, California or the West—but most parts of the country. But if I look at that, and you hold last year's delivery mix constant to remove that component, the increase on a year-over-year basis that we're looking at is really in the low single digits.

Speaker #4: So, it's not a massive move. And as I said in the beginning, a lot of that's driven by fees.

Speaker #6: Okay, that's helpful color. I appreciate the extra context on that. And you guys also mentioned that you are seeing some additional pricing pressure from the resale market.

Buck Horne: Okay. That's helpful color. Appreciate the extra context on that. You guys also mentioned that you are seeing some additional pricing pressure from the resale market. I think that was cited last week as well. There's, I guess, some sellers out there starting to rationalize with these higher rates as well. I'm just wondering if there's any specific markets, or your markets in particular, where you're seeing that additional resale inventory become more competitive or having a more outsized impact.

Speaker #6: I think that was cited last week as well. So, I guess there are some sellers out there starting to rationalize with these higher rates as well.

Speaker #6: I'm just wondering if there are any specific markets, or your markets in particular, where you're seeing that additional resale inventory become more competitive or have a more outsized impact.

Rob McGibney: It really, I've said this, it's probably not a satisfying answer, but it's really sub-market by sub-market within all of these different regions. You hear a lot about Texas and the resale markets there. I think in Texas, the resale markets have generally been more of a pace story than a price story. We are starting to see, I would say, the sellers capitulate a little bit more and either prices come down or concessions going up. I think ultimately it's good that we're starting to see that become more in balance and work through the resale that's out there. I think in a lot of cases for the last couple of years, there have been a lot of listings on the market, depending on what part of the country you're in, but they're listed at really high prices, probably not realistic.

Speaker #4: As I've said, this is probably not a satisfying answer, but it's really sub-market by sub-market within all of these different regions. You hear a lot about Texas and the resale markets there.

Speaker #4: I think in Texas, the resale markets have generally been more of a pay story than a price story. But we are starting to see, I would say, the sellers capitulate a little bit more.

Speaker #4: And either prices come down or concessions go up. I think ultimately it's good that we're starting to see that become more in balance and work through the resale that's out there.

Speaker #4: I think, in a lot of cases over the last couple of years, there have been a lot of listings on the market, depending on what part of the country you're in.

Speaker #4: But they're listed at really high prices—probably not realistic. I would call them the "make-me-move" type of price. And I think we're starting to see maybe the sellers, the resale homeowners, get a little less patient with that and starting to adjust.

Rob McGibney: I would call them the make me move type of price. I think we're starting to see maybe the sellers, the resale homeowners, get a little less patient with that and starting to adjust. So overall, I would agree, resale levels have generally come up. It's becoming more of a formidable competitor than it's been over the last several years. It really is a market by market story. Florida is another one where you've got resale inventory. It's still elevated in a lot of markets, even though it's improved in places like Jacksonville. So you really have to look at the details and within a reasonable radius of each community that we have and what that resale competitive pool looks like.

Speaker #4: So overall, I would agree resale levels have generally come up. It's becoming more of a formidable competitor than it's been over the last several years.

Speaker #4: But it really is a market-by-market story. Florida is another one where you've got resale inventory; it's still elevated in a lot of markets, even though it's improved in places like Jacksonville.

Speaker #4: So you really have to look at the details, and within a reasonable radius of each community that we have, and what that resale competitive pool looks like.

Speaker #4: And we certainly have to stay tethered to that with our pricing, because it has been, and likely always will be, one of the biggest competitors that we have out there for our product.

Rob McGibney: We certainly have to stay tethered to that with our pricing because it has been, and likely always will be, one of the biggest competitors that we have out there for our product.

Speaker #2: Thank you. And the next question comes from the line of Trevor Allensen with Wolf Research. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Truman Allison with Wolfe Research. Please proceed with your question.

Speaker #7: Hi, good evening. Thank you for taking my questions. You talked about the benefit from your higher-margin Bay Area communities coming through, as you guys were expecting.

Truman Allison: Hi, good evening. Thank you for taking my questions. You talked about the benefit from your higher margin Bay Area communities coming through as you guys were expecting. Can you talk about the pipeline there? What portion of your business are these high margin communities, then how long should we expect an outsized contribution from those communities?

Trevor Allinson: Hi, good evening. Thank you for taking my questions. You talked about the benefit from your higher margin Bay Area communities coming through as you guys were expecting. Can you talk about the pipeline there? What portion of your business are these high margin communities, then how long should we expect an outsized contribution from those communities?

Speaker #7: Can you talk about the pipeline there? What portion of your business are these high-margin communities? And then, how long should we expect an outsized contribution from those communities?

Speaker #4: Well, I would say it's just really getting back to what we once were in Northern California. For a long time, it was one of our biggest revenue drivers.

Rob McGibney: Well, I would say it is just really getting back to what we once were in Northern California. For a long time, it was one of our biggest revenue drivers and biggest profit drivers, and we talked about on our last call how we kind of lost some of that business, and we have been building it back. I think we have still got a few more quarters in front of us of ramping up because we are still bringing communities online at good margins and high ASPs. At some point, a few quarters out, I think we will find a new equilibrium where the newness effect of that has kind of been assimilated into the business. But always looking at that as, along with all of our businesses, an opportunity to grow.

Speaker #4: And biggest profit drivers. And we talked about on our last call how we kind of lost some of that business, and we've been building it back.

Speaker #4: I think we've still got a few more quarters in front of us of ramping up, because we're still bringing communities online at good margins and high ASPs.

Speaker #4: At some point, a few quarters out, I think we'll find a new equilibrium where the newness effect of that has kind of been assimilated into the business.

Speaker #4: But always looking at that, along with all of our businesses, as an opportunity to grow. But I think we've got a few more quarters for that to really get in balance as we open up some of the new stores that we have in Northern Cal.

Rob McGibney: I think we have got a few more quarters for that to really get in balance as we open up some of the new stores that we have in Northern Cal.

Speaker #7: Okay, thank you for that color. And then, second, on absorption pace—it looks like this year is going to land anywhere between 3.3 and 3.4 per month for the full year.

Truman Allison: Okay. Thank you for that color. Second is on absorption pace. It looks like this year is going to land anywhere between 3.3 and 3.4 per month for the full year. Obviously, the slowest you have been for a while is a product of a softer environment. With mortgage rates moving higher here, how should we think about your willingness to let that absorption pace continue to drift lower from where it is running at this year to protect gross margin? Associated with that question, is there a pace that you all view as a floor for you guys on absorption? Thanks.

Trevor Allinson: Okay. Thank you for that color. Second is on absorption pace. It looks like this year is going to land anywhere between 3.3 and 3.4 per month for the full year. Obviously, the slowest you have been for a while is a product of a softer environment. With mortgage rates moving higher here, how should we think about your willingness to let that absorption pace continue to drift lower from where it is running at this year to protect gross margin? Associated with that question, is there a pace that you all view as a floor for you guys on absorption? Thanks.

Speaker #7: Obviously, this is the slowest you've been for a while, as a product of a softer environment with mortgage rates moving higher here. How should we think about your willingness to let that absorption pace continue to drift lower from where it's running at this year, to protect gross margin, and kind of associate it with that question?

Speaker #7: Is there a pace that you all view as a floor for you guys on absorption?

Speaker #4: We established it’s really, again, community by community. So we establish a minimum run rate that we need to hit for each community, and that changes over time depending on what season we’re in, or the number of lots that we have remaining, or the ease of replacing those lots.

Rob McGibney: It is really, again, community by community. So we establish a minimum run rate that we need to hit for each community, and that changes over time depending on what season we are in or the number of lots that we have remaining or the ease of replacing those lots. It also does include community-level margins and a long list of other factors. But over time, we want to target around four sales per month per community when you annualize it out, and we are trending below that this year. We certainly have designs on getting back to that. With market conditions as choppy as they are, we are not looking to force that and at the great expense of margin. So I do not have an overall company-wide target that I would set other than over time, we want to hit that four per month per community.

Speaker #4: And it also does include community-level margins and a long list of other factors. But over time, we want to target around four sales per month per community when you annualize it out.

Speaker #4: And we were trending below that this year. And we certainly have designs on getting back to that, with market conditions as choppy as they are.

Speaker #4: We're not looking to force that, and at the great expense of margin. So, I don't have an overall company-wide target that I would set, other than over time, we want to hit that four per month per community.

Speaker #4: But in the meantime, with choppy market conditions, we're going to manage it asset by asset, community by community, and just gear them towards getting the best return profile for each individual community that we can.

Rob McGibney: In the meantime, with choppy market conditions, we are going to manage it asset by asset, community by community, and just gear them towards getting the best return profile for each individual community that we can.

Speaker #2: Thank you. And our final question comes from the line of Sam Reed with Wells Fargo. You may proceed with your question.

Operator: Thank you. Our final question comes from the line of Sam Reid with Wells Fargo. You may proceed with your question.

Speaker #6: Thanks, everyone. Actually, I wanted to follow up on the last question around Northern California. So it sounds like you still have some more communities you're looking to bring online there.

Sam Reid: Thanks, everyone. Actually wanted to follow up on the last question around Northern California. It sounds like you have still got some more communities you are looking to bring online there. Is that a backdoor way of saying that we could potentially see a mixed benefit into 2027, simply from more Northern California communities hitting the market?

Speaker #6: Is that a backdoor way of saying that we could potentially see a mixed benefit into 2027, simply from more Northern California communities hitting the market?

Speaker #4: Yeah, I would expect that we will. I'd say we're three-quarters to a year out before we get to kind of what I would say is our equilibrium there.

Rob McGibney: Yeah, I would expect that we will. I would say we are three quarters to a year out before we get to what I would say is our equilibrium there. As we ramp up and we get more sales and deliveries out of that region, I think we will continue to see some mixed benefit coming from that.

Speaker #4: So, as we ramp up and get more sales and deliveries out of that region, I think we will continue to see some mixed benefit.

Speaker #4: Coming from that.

Speaker #6: That's helpful. And then, switching gears here a little bit, I believe you said earlier in the call something in the order of 80% of your closings, more or less, are kind of booked for the fourth quarter.

Sam Reid: That is helpful. Then switching gears here a little bit. I believe you said earlier in the call, something in the order of 80% of your closings, more or less, are kind of booked for Q4. Could you just give us some context on what you are assuming for your backlog margin versus what you are embedding for your homes sold and closed inter-quarter for Q4? Thanks.

Speaker #6: Could you just give us some context on what you're assuming for your backlog margin versus what you're embedding for your homes sold and closed, inter-quarter, for Q4?

Speaker #6: Thanks.

Speaker #4: Backlog. So, if I'm understanding the question right, are you asking about the spread between what we've got on our bill-to-order sales versus our inventory sales, which has stayed pretty consistent over the last couple of years?

Rob McGibney: Backlog. If I am understanding the question right, are you asking, I think, the spread between what we have got on our built-to-order sales versus our inventory sales, which has stayed pretty consistent over the last couple of years, and it is right around 4%. There is a range usually between 3% and 5%, but when we distill that down, we typically see about 4 points better margin on built-to-order sales than we do on inventory, whether we are selling that and closing it within the quarter or you sell it even earlier than that.

Speaker #4: And it's right around 4%. I mean, there's a range, usually between 3% and 5%. But when we distill that down, we typically see about 4 points better margin on build-to-order sales than we do on inventory, whether we're selling that and closing it within the quarter, or you sell it even earlier than that.

Speaker #6: Satisfactory. Okay.

Jeff Mezger: It is factored in the guide.

Speaker #4: Yes, right. That combination—those two put together—as we've laid out our quarter, is all factored into our guidance.

Rob McGibney: Yes, right. Yeah, that combination, those two put together, as we have laid out our quarter, is all factored into our guidance.

Operator: Thank you. Ladies and gentlemen, that concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.