PulteGroup (PHM) Q1 2026 earnings call transcript

Good morning ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Polity Group, Inc. Q126, and the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to James Zimmer, Vice President of Investor Relations.

Please go ahead.

Thank you, Kelvin. Good morning. I want to welcome everyone to today's call to review Polity Group's operating and financial results for our first quarter ended March 31, 2026. Joining me on today's call are Ryan Marshall, President and CEO, Jim Osowski, Executive Vice President and CFO, and David Carrier, Senior Vice President and Finance. In advance of this call, a copy of our Q1 earnings release and this morning's webcast presentation have been posted to our corporate website at Polity Group. com. We will also post an audio replay of this call later today.

I would highlight that today's presentation includes board-looking statements about the company's expected future performance. Actual results can differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation. These risk factors and other key information are detailed in our RCC filings, including our annual and quarterly reports.

Now let me turn the call over Ryan. Ryan?

Thanks, Jim, and good morning. At last week's quarter of the operations review meeting, I made the following statement to the senior leaders of Polity Group's home building and financial services operations. In a quarter that grew increasingly more complicated, you delivered exceptional results both operationally and financially. I offer the same thoughts to open this call. In a period that saw every aspect of our consumers' lives impacted by domestic and global events, our discipline, focus, and proven business platform allowed us to deliver another quarter of strong business performance.

Financially, our $3.3 billion in home sale revenues, 24.4% gross margins, and lower share count all contributed to driving earnings of $1.79 per share. Supported by the ongoing strength of our operations, we positioned the company for future growth by investing $1.3 billion in land acquisition and development, while returning $360 million to shareholders through share repurchases and dividends.

After having allocated $1.7 billion to these activities, we ended the quarter with $1.8 billion of cash and a net debt-to-capital ratio of effectively zero.

Operationally, we were successful in growing our community count, which was an important driver of our 3% increase in net new orders.

And as shown in this morning's release, our results benefited from 18% order growth in Florida as our diversified business platform and exceptional land positions continue to deliver strong results. As pleased as I am with the growth in orders, I'm even more encouraged with the fact that many of these homes are built to order homes. In the first quarter, built to order homes accounted for 43% of net new orders, up from 40% in Q1 of last year.

On our last earnings call, we outlined our plans to shift our business back toward our historic mix of 60% built to order and 40% spec. This quarter was just the first step in a process that will take several quarters to complete. But I am encouraged by such a really success.

And finally, I would highlight the progress we continue to make on lowering our spec inventory, particularly our finished inventory. Reflecting actions taken by our field teams, we ended the quarter with an average of 1.4 finished specs per community, which is inside our target range of 1 to 1.5 finished backs per community.

This level of spec inventory allows us to effectively serve those home buyers needing quick moving homes while supporting our strategic shift back to selling more built to order homes. Overall, I would say that the first quarter developed as a typical spring selling season was the orders increasing sequentially as we move through the months. It is difficult to determine what impact global events may have had, but appreciate consumers were facing higher rates and costs in March.

Through the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still in the quarter, we experienced strong buyer traffic to our communities and sold more than 8,000 homes, which says consumers remain actively engaged and home buying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move up and active adult buyers.

Economic reports talk to the K-shaped economy and how lowered and middle income families are struggling much more than those in upper incomes. Housing demand over the past two years has been consistent with these dynamics. We saw this play out again in our first quarter results with both relative demand strength in our move up and active adult businesses and option and lot premium spend that continues to average over $100,000 per home.

However, on the lower leg of the K, first time buyers continued to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price as incentives in the quarter reach 10.9% of gross sales price.

Even at this level, I think we have done an excellent job of balancing the need to sell homes, particularly finished spec homes and turn our inventory while maintaining higher margins and supportive delivering strong returns on invested capital.

A critical support to this balance has been our ongoing willingness to adjust our start space in alignment with core demand. We again demonstrated such discipline as we started approximately 6,500 homes against orders of 8,000 homes in the quarter. This approach helped us to clear excess inventory and allow our communities to more easily sell from a position of strength while still providing sufficient production to achieve expected closing volumes for the full year.

While there's there's uncertainty about how events will develop over the next few quarters, I remain optimistic about long term housing demand and confident about the strength of our business model. I could drop the long list of our strengths, but what highlight the following three key points, we control approximately 230,000 lots, including 35,000 owned and finished lots. So we have a land pipeline that we believe can meet current sales and accelerate as buyer demand improves going forward.

We have a strong market presence across the major markets and an unmatched ability to serve all buyer groups. We are benefiting currently from having 60% of our business among more affluent, polity and Dela buyers, but we fully appreciate the importance of maintaining the presence of our syntax brand among first time buyers. And finally, we have a culture that is committed to delivering superior build quality and buyer experience into raising that arm every day. Thank you. And let me turn the call over to Jim Osaski for a review of our first quarter results. Jim.

Thank you Ryan and good morning. I look forward to providing a detailed review of pulled you group solid first quarter operating and financial results. On a year over year basis, the first quarter net new orders increase 3% to 8,034 homes with a value of $4.6 billion. Higher net new orders in the period benefited from a 9% increase in average community count to 1043, while absorption pace is decreased by 5% to 2.6 homes per month.

I would highlight that the growth in our net orders was driven by the ongoing strength for Florida operations. I am pleased to report that orders increased in every Florida market and rub 18% statewide. In addition to gradual improvements in Florida's new and existing home inventories, our strong performance reflects poultry groups, superior land positions, our ability to serve all buyer groups, and our outstanding leadership teams.

Our cancellation rate as a percentage starting backlog in the quarter was 13% compared with 11% last year. The percentage increase in our cancellation rate reflects the smaller starting backlog we had entering the period as unit cancellations are actually slightly down in the quarter relative to last year. In the first quarter, net new orders among move up and active at all buyers were higher by 3% and 14% respectively over the first quarter of last year.

By buyer group, net new orders in the first quarter consisted of 38% first time, 39% move up, and 23% active adult. In the first quarter of 2025, our net new orders were 39% first time, 40% move up, and 21% active adult.

Net new orders benefited from land investments made in prior years as we grew community count across all buyer groups.

Home sale revenues in the first quarter were $3.3 billion compared with $3.7 billion last year. Lower home sale revenues for the period where the result of a 7% decrease in closings, the 6,102 homes, in combination with a 5% decrease in average sales price to $542,000.

ASP was down mid single digits across each buyer group and reflects the generally competitive conditions and elevated incentives that exist in many markets across the country.

By buyer group, closings in the first quarter break down as follows, 38% first time, 39% move up, and 23% active adult. This compares with a prior year closing mix of 38% first time, 41% move up, and 21% active adult.

Based on sales and closings in the period, at the end of Q1, our backlog was 10,427 homes with a value of $6.5 billion.

We ended the first quarter with 14,090 homes in production, of which 6,349 were spec homes. As Ryan highlighted, inconsistent with our stated objective, we lowered total spec inventory by almost 900 homes from the end of 2025.

At quarter end, specs accounted for 45% of homes under construction. Of this spec center production, there were 1515 finished spec homes, which is a decrease of nearly 500 homes per 24% in just the past 90 days. At this level, we are in our target range of having an average of 1 to 1.5 finished specs per community.

Based on the homes under construction and their stage of production, we expect to close between 6,700 and 7,100 homes in the second quarter of 2026. This keeps us on track with our previous guidance on closings in the range of 28,500 to 29,000 homes for full year, 2026.

Consistent with the guidance provided on our last earnings call, given land investments made in prior years, we expect year over year community count growth of 3% to 5% in each of the remaining 3 quarters of 2026. Given competitive market conditions and our belief that incentives will remain elevated, we expect the average sales price of second quarter closings to be in the range of $540,000 to $550,000. For the full year of 2026, we reaffirm our previous guidance of ASP of $550,000 to $560,000 as we expect a higher mix of build order closings in the third and fourth quarters.

For the first quarter, we reported gross margin of 24.4%, which is down from 27.5% in the first quarter of 2025. The year over year decline in gross margin primarily reflects higher incentives, which were 10.9% of gross sales pricing, Q1, 2026.

This is an increase of 290 basis points in last year and is up 100 basis points sequentially from Q4 2025.

As we're getting the question more frequently of late, I would note that within our Q1 wholesale cost of revenues is approximately $6 million or 20 basis points associated with land impairments. Based on quarterly testing, impairments were triggered in two communities and are reflective of today's competitive market dynamics in combination with our ongoing efforts to clear excess spec inventory, particularly finished specs.

I'm pleased to report that thanks to a lot of outstanding work by our construction procurement teams, Q1 house costs were down 5% in the first quarter of last year, the $75 per square foot.

Savings were led by lower-lumber costs, but we have also achieved savings across a wide array of building products and services.

Based on anticipated closing mixing current selling conditions, we expect second quarter gross margin to be in the range of 24.1% to 24.4%. I would note that we expect Q2 gross margins to be the low point for 2026. We are forecasting gross margins to recover in the back half of the year as we benefit from increased closings of higher margin, active adult and built to order homes. As such, we maintain our guide for full year, 2026 gross margin to be in the range of 24.5% to 25.0% although likely toward the lower end of the range.

First quarter home building SG&A expense of $380 million for 11.5% of home sale revenues compared with $393 million for 10.5% in Q1 of last year. On the dollar basis, our SG&A expense in the quarter was down $13 million from last year when we lost leverage given fewer home closings and revenues in the period.

First quarter SG&A expense was in line with brighter guidance, so we are maintaining our guidance for full year, 2026 expense to be in the range of 9.5% to 9.7% of home sale revenues.

Full-piece financial services operations reported first quarter pre-tax income of $13 million, which is down from pre-tax income of $36 million in the first quarter of 2025.

Financial services pre-tax income in the first quarter was impacted by lower home building volumes and reduced capture rate along with lower net gains from the sale of mortgages. Mortgage capture rate in the period was 85% paired with 86% last year.

First quarter pre-tax income for Pulte Group was $449 million. In the period, we recorded a tax expense of $102 million or an effective tax rate of 22.8%. Our Q1 tax rate reflects the benefits of stock-based compensation and federal tax credits.

Looking out to the remainder of the year, we continue to expect our tax rate to be approximately 24.5%. Our expected tax rate does not take into consideration any discrete period specific tax events that might occur.

Pulte Group's net income for the first quarter was $347 million for $1.79 per share. In the comparable prior year period, the company reported an income of $523 million for $2.57 per share.

Earnings per share for the first quarter was calculated based on $193 million diluted shares outstanding, which is down 5% from the prior year.

In the first quarter, we repurchased 2.4 million common shares for $308 million, which brings total repurchases for the trailing 12 months to 10.3 million common shares for $1.2 million.

In a separate press release, we issued this morning, we announced that our board authorized an additional $1.5 billion for share repurchases, which brings total availability to $2.1 billion.

Along with returning capital shareholders, we continued to prioritize investing in the growth of our operations. In the first quarter, we invested $1.3 billion in land acquisition and development, which was evenly split between the two activities.

We ended the first quarter with 229,000 lots under control, which is down approximately 5,000 lots from the end of 2025. We remain focused and disciplined in our land activities as we look for opportunities to grow our business while achieving acceptable risk-adjusted returns and managing overall portfolio risk. After 24 months of variable housing demand and limited opportunities for price appreciation, land inflation has started to ease.

We are seeing land prices stabilize in many parts of the country and even move lower in individual deals in a handful of markets.

Every land deal is different and eight locations are still demand, but we are finding more opportunities to negotiate improved land terms, be it the price, the timing, or both.

In the first quarter, we issued $800 million, the senior notes split equally in tranches of 5 and 10 years. We used approximately $600 million of the proceeds to repay existing notes with the remaining $200 million to be used for general corporate purposes.

Inclusive of these transactions, we ended the first quarter with a debt-to-capital ratio of 12.3%. Adjusting for the $1.8 billion of cash we held a quarter in, her net debt debt-to-capital ratio was effectively zero.

Giving current market dynamics and are expected 3% to 5% growth in community count, we are projecting land acquisition and development spend of $5.4 billion in 2020 sales.

Assuming this level of land spend and the expectation that house inventory will increase, commensurate with an increasing level of built-to-order home sales, we would expect 2026 cash flow generation to be approximately $1 billion.

Overall, it was another very productive quarter for the company. Now, let me turn the call back to Ryan.

Thanks, Jim. Before opening the call to questions, I will offer a few additional comments on demand conditions in the quarter. Given everything that is happening in the world, demand has actually held up better than might be expected and could certainly improve if global tensions eased and interest rates came back towards 6%. This would be highly consistent with the increased buyer activity we saw developing early in the first quarter when mortgage rates dipped below 6%. Consistent with trends we experienced in the back half of 2025, the pockets of home buying demand strength and softness didn't change dramatically.

Home buying demand in our northeast, southeast, and Florida markets generally remain positive. First quarter demand in the Midwest was more variable across the markets than we had been experiencing. That being said, the weather conditions were a bit more extreme, so we'll have to see how the trends progress over the next couple of quarters. As I highlighted earlier, our Florida teams continue to operate at a high level as we benefit from a strong land pipeline and experienced leadership teams. Looking out to work, Texas and West markets, overall demand trends remain slower relative to the rest of the country, but I would suggest they may be finding more stable footing. Between ongoing pricing actions and incentives, the markets are finding clearing prices where transactions can happen.

We still have work to do in clearing some final spec inventory in California and Washington, but I am hopeful we are getting to the end of this tunnel. One final comment I would share on buyer demand, well positioned communities that offer the right product in a compelling value equation to the consumer or selling homes. From Boston to Naples and Raleigh to San Jose, consumers are looking for the opportunity to buy homes that work for their state of life and their financial capabilities.

Our job is to make sure Pulte Group communities meet their requirements. Let me close by thanking the entire Pulte Group organization for the great first quarter operating and financial results the company delivered. I also want to recognize our team for their tireless efforts to deliver a superior home buying experience. I'm proud to report that our customer surveys are now showing Pulte Group's net promoter score as measured one full year after the initial delivery of the home has risen to a score of 65.

To put this in perspective, these results place Pulte Group among such well known service leaders as Apple, Google and Chick-fil-A. It's this type of commitment to our customers and to each other that has Pulte Group again ranked among the Fortune 100 dust companies to work for. This marks Pulte's sixth year on this prestigious list. Our ranking on this list has never been a goal, or rather an outcome of the tremendous culture we work hard to maintain inside of our organization.

Now, let me turn the call over to Jim Zimmer.

Thanks, Ryan. We're now prepared to open the call for questions so we can get as many questions as possible during the remaining time of this call. We ask that you limit yourself to one question and one follow-up. Kelvin, now open the call to questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer the question. As we answer Q&A, we ask that you please limit your input to one question and one follow-up. As a reminder, to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to redo your question, please press the star button again.

Your first question comes from the line of John Lovelow. Please go ahead.

Yeah, John, I think you've got all the right pieces there. We are assuming a higher incentive load, but we'd expect it to, you know, likely come down driven by a couple of factors. One would be more built to order and more move up an active adult business where we tend to incentivize less. We've also cleared a lot of the finished spec inventory, which we're carrying higher incentive loads. So, you know, while we expect the overall environment to remain competitive and the elevated incentive load to stay the mix of product and consumers that we have coming through will bring, you know, could potentially bring the overall number down, which is why, you know, the full year staying kind of within our range.

You'll know that Q2 is going to be a low point for a couple of reasons. One of the big reasons in that is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing, some closing Q1, you got a bunch more that are closing in Q2.

Yeah, hard to know whether it gets extended or not, John. I think ultimately the consumer will have to decide that. But, you know, as I tried to highlight in my prepared remarks, when rates came down, you know, to six, maybe even a touch below six, things were moving along really well.

Despite the things that are going on globally, it was still, it's still, I think, a very good spring selling season. And we're pretty pleased with kind of what we've delivered and how it is set us up for the full year. I can promise you that we didn't have any of the current geopolitical disruption on our bingo card as we kind of laid out our full year guide and, you know, set expectations for how the year would play out. But as we look at the actual numbers for Q1, we're, you know, we're in line with kind of where we wanted to be, where we thought we were going to be, which is, you know, the big reason that we're reaffirming kind of our full year.

So, all things considered, John, I'm incredibly pleased with how we performed. I'm really pleased with how the consumers behaving. And I think, you know, there's bias to the upside. If things can get resolved rates were to come down a little bit, I think, yeah, I think things could be even a little bit better.

The next question comes from the line of Alan Ratner. Please go ahead.

Good morning. Thank you.

Yeah, Alan, there's definitely there's definitely more incentive on spec broadly. And then, and then there's more incentive as a percentage on first time spec. And, you know, I tried to provide some some nuance around that my comments around the K economy. And that first time entry level buyer, they're the most challenged by affordability. And that's where we tried to lean in more in order to solve the affordability equation. I think we've done a pretty effectively.

And then when you move into the move up in the active adult buyers, you know, we're in sending there as well that the types of incentives vary. There's still a fair number of incentives that are going into a forward commitment program that's specifically targeted to dirt sales. So it's not as low as a 30 year fixed rate mortgage that we'd offer on a spec that's complete, but, you know, still in the kind of low to mid 5% range and materially below the current market.

And it's locked in for the entire duration of the bill cycle. So there's a lot of value that we think is being offered there and there's a cost to that, but that's factored in the incentive load. So, you know, all things considered Alan, you know, as I said, we we'd still expect incentives to remain higher. But, you know, given the mix shift in buyers as well as spec to build the order, we think the overall incentive load for us as a company will come down.

Yeah, sure, Alan. Happy to go into it. I'm going to ask Jim to give you some of the specific details, but before he does philosophically the way we've structured our land book for the better part of six or seven years. We want as many losses we can possibly control with underlying land sellers. And today that represents well over 50% of our controlled land is controlled with options with underlying land sellers.

In our move to go from 50% controlled option to 70, we knew we were going to need to incorporate some element of land banking and we've done that. We've maintained a diversified book of land banking partners, which I'm very pleased with the number of partners and the alignment that we have with those partners. And then our overriding focus has been we want risk transfer.

So we're looking for the ability to walk away in the event that things go sideways on a single on a single individual transaction.

So this, this overarching belief or idea of risk transfer risk mitigation is the entire foundation of our land banking portfolio with that. I'll have Jim share a few more details with you.

Sure. Thanks Ryan. I'll tell you in a couple of things. So as it relates to land banking, the 229,000 lots that we control, we have about 18,000 with land bankers. So it's about 8% of the book of business.

So Ryan's point, what we really want to do is we would love to get underlying optionality with land sellers directly. And what I tell you, the 127,000 lots that we have under option over 85% of those with underlying land sellers. So again, it's the vast majority. That's what we task our teams do. Let's go for that first and foremost. We can supplement it with banking, we will, but we'd love to get a deal with people on the ground first.

Yeah, I tell you that most bankers that are out there today, it's usually about a 15% deposit that they request on those. And then rates will be in the low double digit range, typically for those. To give you context, our deposits as a percentage of future purchases is only $7,000 per unit for the whole company. Sorry, 7.5% for the whole company. So the vast majority are at very low deposits with underlying land sellers, but the bankers carry a little bit richer mix.

Your next question comes from the line of Steven team of Evercore ISI. Please go ahead.

Yeah, great question, Steven. So there isn't an assumption that we have any significant increase in our own land supply. We've certainly been working down our house inventory in recent quarters as we talked about as we moved our spec down, but there's an anticipation. There'll be a little bit more built to order that's going to come in in the back half of the years. We set ourselves up for 2027. So it's really on the house side. We'll see a little bit of an incremental increase.

I'll take that as a real positive, obviously, because it suggests that this is just kind of a temporary thing and that free cash flow conversion should improve once you get over this build of BTO.

Yes, Steven. So maybe starting with the cash flow, the conversion of net income into cash flow is a big focus for us. We believe it's a very meaningful and powerful driver of value for shareholders. So I think Jim provided some nice breadcrumbs in terms of where we're going and why it's at a billion. Hopefully there's slight bias to the upside this year, but it is as we rebuild that home inventory and built order. I agree with you. That's a good thing. It means we're selling homes and we're selling homes that are dirt.

In terms of, and I do think it is a kind of temporary situation that as we move into next year, you'd see kind of better, more normal conversion rates from us. And then as it relates to built order target mix of 60, 40, we make great progress in Q1. I'd expect that to continue as we move through the year.

The fact that we were able to reduce so much spec inventory in Q1 is also a powerful driver in that journey. I think it might take a tad longer than the end of this year, but not much beyond Q1 of next year. So we'll keep the updated as we move, but we're going to do this in a measured balanced way, but we're also not going to drag it out forever.

Your next question comes from the line of Anthony, heading area city. Please go ahead.

Sure. Great question. You know, I guess first what I tell you is, you know, as we, as we did, you hit on it, we had a really good first quarter. Our procurement teams have done a great job. They were down 5% year over year. You know, as we look out over the balance the year, we want to reaffirm or, you know, we said that our house costs would be flat to slightly down. We still believe that and that's baked into our guide.

And your question on lumber, when will we see that? It's usually two quarters out because the way that we buy the lumber today, those are going to turn into closing two quarters out from now. You know, it has inflected higher in recent weeks. You know, the other thing that we're keeping an eye on are fuel costs. We're monitoring that. You know, at this point in time, we've done a good job. You know, you'll hear of things like fuel surcharges. We've, we've combated those so far. But, you know, in recent weeks, as the cost of fuel started to come down a bit from the highs, we're keeping an eye on it. But, you know, again, I'll go back to what I said.

Q1 was a really great one. And even with some of those headwinds for lumber, we still believe we can be flat to slightly down for the remaining quarters.

And Anthony, you know, in terms of kind of the metal and some of the other related costs, we'd see that being later in the year before we would see an impact. One of the things that our procurement teams have worked with our suppliers and trade partners on is let's just take a, a, a mock of patients here, you know, where we are in a conflict. If it continues, there will be real cost increases, but we're not going to overreact to kind of the website of markets up markets down based on kind of what's happening on a day to day basis from the conflict.

Here next question comes from the line of Michael Rihod, please go ahead.

Yeah, Mike, I know offense, but I think you made things up there. I think what we talked about is in Q one, there were spec sales. What I said is there were spec sales in Q one elevated incentives. Which is impacting the guide that we're providing for Q two. It's part of the reason that we're saying that's the low point and we'd expected to go back into the range that we've guided to for the full year.

In terms of kind of how whether it was closings or signups, it's probably slicing it a little too thinly Mike. You know, we report the incentives on closings. You know, that's, I think the best approach that we've been taking, we're going to stay consistent with that. And then the incentive load on, you know, future backlog, future closings, all that is embedded into our guide.

But, you know, as I said a couple of times, we're actually optimistic that while the overall incentive environment will stay elevated. We can see incentives come down because of buyer mix and brand mix.

Yeah, like we're we're very happy with what we will feel we're seeing out of Florida and this has been the third or fourth quarter of a row where we've highlighted the strength of the Florida market. If you went back a year ago, I think we were an outlier outperforming the market. That was arguably a little tougher and Florida has continued to get better over the last 12 months and it's at the best point that we've seen it in a while.

In addition to that, the strength of our communities, the positioning of our communities, the expertise of our teams there has allowed us to outperform what is a pretty strong health, a pretty healthy market there right now. So we're happy about Florida. You know, it's not without his challenges insurance costs are high affordability is stretched there. Just like it is in a lot of other places.

You know, there's been some recent headlines about affordability in Florida. And I think that's because Florida historically was very affordable. There are some, you know, some attributes of Florida that aren't changing. It's a pro growth pro business kind of state that's got a lot of great jobs and more diversified economy that has ever had low taxes, no taxes, no income tax anyway, no state income tax. So I think there's, there's, there's a lot of reasons why people still want to go to Florida.

But I can also understand and appreciate why it's maybe not the best fit for others. But, you know, maybe this is somewhat all up like we love our Florida business. And I think this quarter's results are, you know, good demonstration of that.

Sure. We have seen inventory come down in certain locations, you know, some of the more affordable parts of the state Northport link when they're still a little bit elevated, but we've been really pleased with, you know, both new and existing is come down in the places where we do business.

Next question from the line of myself, RBC capital market, please go ahead.

Yeah. I mean, I'm going to tell you, you know, what we're seeing on the sales board today, what we have out there, you know, Ryan highlighted our floor to business has done really well or northeast or southeast business, which carry a higher margin profile as well. So, you know, we're, we're looking at what we sold in Q one and kind of making predictions about what goes out over the balance of the year. But again, there's a lot of parts and pieces that go into it, but the bill to order mix. And the act of the dollar, the two biggest components that will drive the increase.

Yeah, you know, the way I would probably guide you on that is that we're, we're inside the target range that we want for specs. And we're very comfortable operating at the lower end. We're very comfortable operating at the higher end of that range. But we want to be inside that range beyond that. We want to be at a low end entry level or more of a move up type community. So, you know, that's the reason I think we give a range on that. We've said we're not going to chase the volume. We're, we're going to get our company back to a built order model, which we're doing.

We make excellent progress. We've reaffirmed kind of the full year number. And that we were going to be matching starts to sales cadence. So the starts that you saw in Q1 were really reflective of the sales that we had in Q4. You'll see our starts in Q2 more closely matched the sales that we just had in Q1. So that's the kind of build that you want to see from us. And, you know, we're very comfortable with where we're at on the overall number of homes we have in production. How many we started in Q1, what we'll start in Q2 and kind of how that sets us up for the full year.

I will note, you know, a big reason why we've been able to do it this way this year is because we've gotten build times cycle times back down to pre COVID cycle times of less than 100 days. So, you know, there's, there's a lot of things that are working exactly the way that we've designed our operating model to work.

Your next question comes from the line of Sam Reed of Wells Fargo. Please go ahead.

Yeah, you know, Sam, we look at pricing all the time and make sure that we're competitively priced. You know, discounts, I think are an important thing psychologically for buyers today. So, we try to have the right relationship between headline price and what incentives are. You know, they're tethered together. There are some communities where we have taken price cuts and Jim highlighted in some of his remarks.

That's been a big driver in the communities where we've had to take impairments. It's typically been the price cuts. Fortunately, it's just two communities and it was a fairly small number. So, you know, hopefully that's a bit indicative that we've made, you know, very few kind of top line major price reductions.

That's helpful. And maybe switching gears to the financial services line item. I noticed financial services pre-tax was lower. And I believe one of the reasons you called out were lower gains on mortgage sales. So, just maybe curious, the moving pieces behind that lower gain and curious if it's also a function of perhaps a step up in adjustable rate activity.

So, just wondering if that could be one of the drivers of the financial services pre-tax change year over year.

Sure, Sam. Great question. You know, let me start first off saying we're very pleased with the operating performance of our financial services organization. They do a great job supporting our home building operations and supporting our customers. On the question on arms, arms were 9% of all closings in the first quarter versus 7% for all of last year. So, a little bit higher, but nothing meaningful.

You know, when you look year over year, a couple of things I'll point out. And some of this is just timing and we'll expect improvement over the balance of the year. But, you know, home building volumes were down. We noted lower net gains on a sale of mortgages as rates kind of ticked up on us. We had lower value ascribed that's time that we do our rate locks.

And then as well, we had slightly higher expenses as, you know, we've invested in people and technology for the year. So, again, I think they performed very well in the first quarter. And, you know, I'd argue it's a little bit of timing and, you know, we'll continue to see improvement in that over the balance of the year.

Next question comes from the line of Matthew Billy, please go ahead.

You'll have both the richer mix of built order, but then as well as Ryan highlighted and I said in my prepared comments, as we've gotten more of that finished spec inventory off the books that will be less influential as you get out to Q3 and Q4. So a little bit more built order in as well. Some of these finished specs that came through in Q1 and Q2 for us.

Yeah, Matt, it's, it's not a, it's not as if we've got a gigantic chasm to cross from where we're at today to where we're going to be Q1. We were, you know, at 24 or four. We're going to be, you know, in that same kind of zip code for Q2 with a heavy load of finished specs that came with heavy discounts. And then, you know, to go back to our, you know, kind of full year targeted range of 24 and a half to 25. So, it's, it's not as if there's got to be colossal shifts in margin performance in order to be in the guide that we've given.

General of thumb is 50 50, you know, some markets, it goes 60 40. But, you know, general of thumb, I think it's pretty, pretty good 50 50 in terms of kind of timing from one week contract piece to land to one you start seeing it flow through the P and L. It's typically in the kind of 18 to 24 month range, depending on how lengthy, how lengthy the entitlement processes.

So, you know, anything that we're contracting today at lower costs, it's, you know, you're well into 27 late 27 and beyond before you're going to see the benefit of the lower land cost.

Thanks Ryan. Good luck guys.

Thank you.

Your last question will come from the line of Trevor Alanson of Wolf Research. Please go ahead.

Yeah, Trevor. This is Ryan. I'll take that one. I'd reiterate that we've been incredibly disappointed on capital allocation. Our focus is on investing in our business. That is, that is our number one priority. We're structuring the business and then we're paying a dividend and we're using the share buybacks as a way to return excess cash. It's being generated by a really well running business back to shareholders in a very tax efficient way.

So, you know, do we have the ability to do a levered buyback is what I think you're suggesting? Well, sure. We, you know, we've got, we've got the leverage capacity. You could do it. We don't think it's in the best interest long term of the company. And so, you know, what you're going to see us do is it relates to leverage and we've talked about this for the better part of the year.

A debt to cap ratio will be an outcome as opposed to a targeted goal. We're going to decide the cash needs of the business based on how we're going to grow it. How much land we're going to buy, how much land we're going to develop, how much inventory, house inventory, etc. And we'll see how much cash we have. We'll see how much debt we need to go raise to do that.

That's going to be the driver of kind of our debt debt to cap leverage ratios as opposed to saying, you know, we want to be a set number if that makes sense.

Yeah, we're still really happy with our Midwest performance. It's been great. It continues to be very good. There were a couple of markets that maybe didn't do quite as well as what they had been doing, but it wasn't widespread across the entire Midwest. So we're, you know, for the couple of markets or maybe a tad slower than what they had been, we're going to keep watching them. The Midwest and Northeast for that matter actually had a real winter for the first time a long time.

You know, Boston is an example. I think had snow four or five times. It's probably been at least four or five years since they've had a winter like that. So, you know, it was a tougher, I think it's a tougher winter season than what we've historically seen.

But, you know, our Midwest business does also tend to be more move up an active adult, which, you know, is, I think we've highlighted quite a bit continues to be, you know, one of the stronger consumer groups.

That concludes the Q&A session. With that, I will now turn the call over to James Zimmer for final closing comments. Please go ahead.

Thank you. Appreciate everybody's time this morning. Sorry, we weren't unable to get through all the questions in the queue, but will certainly be available for the remainder of the day. And we will look forward to talking to you on our external call.