PulteGroup (PHM) Q3 2023 earnings call transcript

Great. Thank you, Abby. We appreciate everyone joining today's call to discuss PulteGroup's third quarter operating and financial results. As detailed in this morning's earnings release, PulteGroup delivered another quarter of strong earnings as we continue to capitalize on our competitive strengths and balanced approach to the business. Joining me on today's call to discuss our Q3 results are Ryan Marshall, President and CEO, Bob O'Shaughnessy, Executive Vice President and CFO, and Jim Osowski, Senior Vice President and Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at PulteGroup. com. We'll post an audio replay of this call later today.

We want to inform everyone that today's discussion includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those who justify our comments. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now, let me turn the call over to Ryan. Ryan.

Thanks, Jim, and good morning. As we will discuss over the next several minutes, PulteGroup reported another quarter about Our financial performance demonstrates once again the importance of PulteGroup's balanced and differentiated operating model. Leveraging our broad geographic footprint and diversified product offering, we are working to maintain significant market share among all major buyer groups. At the same time, we are successfully executing both large-scale spec and build-to-order homebuilding businesses. Our spec business allows us to more cost-efficiently serve first-time buyers, while our bill-to-order business caters to move-up and active adult buyers looking to personalize their home location and design features. Specific to our financial results, I am extremely proud of our entire organization for their efforts in delivering third-quarter results that include a 43% increase in orders, industry-leading gross margins of 29.5%, Record third quarter earnings of $2.90 per share, and a return on equity that exceeded 30%.

In the quarter, I would highlight our active adult business as an important contributor to our sign-up growth and our gross margin performance. In an operating environment where rising mortgage rates are creating increasing affordability challenges, 47% of our Delaware purchasers were cash buyers. This is up from 33% just two years ago. Along with largely being cash buyers, these are customers who can afford the premium lots and upgrades that make Active Adult our highest margin business.

Just to demonstrate the brand power of the Del Webb name, in June we opened Del Webb Kensington Ridge in Michigan, not a market you might consider a hotspot for retirees. In a community where base home prices range from $370,000 to north of $600,000, we have already sold 114 houses in just over 100 days. We fully appreciate that to some degree all buyers are impacted by rising rates and macroeconomic concerns, but buyer groups can absolutely behave differently over the course of a housing cycle. For PulteGroup, we believe being diversified across all buyer groups can enhance both growth and stability. Beyond our diversification across buyer groups, PulteGroup's strong third-quarter financial performance also benefited from our ability to offer consumers both spec-built and built-to-order homes.

As we have discussed on prior calls over the past 24 months, we have transitioned our first-time buyer communities to a spec-build model to better serve these customers. Looking at our first-time business, spec-building allows us to maintain a more consistent cadence of starts in those communities, which drives construction efficiencies and is important in working with our trades. More directly to our quarter, having additional inventory available was important, given 49% of our sales in the period were spec sales. I would note that 49% spec sales in the quarter is down from 58% in Q1 of this year. I think the decrease in the relative percentage of spec sales in the quarter reflects two interesting dynamics. On one hand, the affordability challenges caused by higher interest rates are pushing some buyers, particularly first-time buyers, to the sidelines for now.

On the other hand, more affluent buyers who are less fearful about rates are comfortable contracting for a home where they've selected the lot, the floor plan, and the design options. On the construction side, I'm pleased to say that we continue to shorten our production cycle. Just to remind people, pre-COVID, our production cycle was approximately 90 workdays. At its worst, this number ballooned to 170 days. By the end of the quarter, we had reduced this number to about 140 days. Our teams continue to shave days and weeks off our build cycle, and we remain optimistic about our ability to get back below 100 days in 2024.

As you would expect, cutting more than a month off of our cycle time has positively impacted our cash flow, which we continue to allocate across our key business priorities. Through the first nine months of 2023, we have invested $3 billion in our business through land acquisition and development. Over this same period, we have returned over $800 million to shareholders through share-y purchases and dividends. In this most recent quarter, we even took advantage of market conditions to retire $65 million in year-term debt at prices just below par. PulteGroup has delivered outstanding operating and financial performance in the quarter and throughout the first nine months of the year, As we have leveraged our strong competitive position to capitalize on buyer demand.

It grows increasingly clear that Federal Reserve actions to raise interest rates are having the desired effect of slowing the economy, although the speed of deceleration has been slower than expected given the unprecedented ramp in rates. While arguably not the most supportive economic backdrop, new home demand in 2023 has benefited from a robust jobs market and rising wages. Financially resilient consumers and a continuing dearth of supply from the existing home market. And finally, as higher rates begin to bite, we've responded with adjustments in product, pricing, and incentive programs that successfully address consumers' biggest pain point, affordability. It's difficult to know if the Fed has done hiking rates for this economic cycle, and trying to guess when they will move to cut rates is challenging.

So we will remain disciplined in how we manage our business. We'll focus on serving our customers, supporting our employees, turning our assets, and allocating capital appropriately, while maintaining a strong and highly flexible capital position.

Now let me turn the call over to Bob for a detailed analysis of our Q3 results. Bob?

Thanks, Ryan. PulteGroup's third quarter results add to what has been an exceptional year for the company as we have grown revenues and earnings, Generated significant cash flow from operations, lowered our debt, and generally strengthened our entire operating platform. Specific to our third quarter, home sale revenues increased 3% over last year at $3.9 billion. Higher revenues for the quarter reflect a 2% increase in our average sales price to $549,000, in combination with a less than 1% increase in closings to 7,076 homes. The 2% gain in average sales price of homes closed in the quarter was driven by increases of 4% and 6% for move-up in active adult buyers respectively, partially offset by a 3% decrease among first-time buyers.

The lower ASP among first-time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year.

The mix of homes delivered in the third quarter changed just slightly from the prior year As we continue to operate within the range of our stated mix of business. For the quarter, closings among first-time buyers represented 38% of the business. Move-up buyers totaled 37%, and active adult buyers represented 25% of the homes closed. In the third quarter of last year, 36% of homes delivered for first-time, 38% were move-up, and 26% were active adult. Net new orders for the third quarter increased 43% over last year to 7,065 homes, as we realize year-over-year gains in both units and absorption pays across all buyer groups. Orders among first-time buyers in the third quarter increased 53% over last year to 2,979 homes.

The gain among move-up buyers is even greater as net new orders increased 56% to 2,524 homes. And finally, on a comparable community count, we realized that double-digit gain in sales among active adult buyers has net new orders for the quarter increased to 1,562 homes. In the third quarter, we operated from an average of 923 communities, which is up 12% over last year. Adjusting for community count, the monthly absorption pace in the third quarter averaged 2.5 homes, which is up from 2.0 homes per month in the third quarter of last year. As a percentage of beginning backlog, our cancellation rate in the third quarter was 9%, compared with 8% in the prior year. To be clear, on a unit basis, cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results in the cancellation rates being comparable.

Our unit backlog at the end of the quarter was 13,547 homes, compared with 17,053 homes at the end of last year's third quarter. On a dollar basis, the value of our ending backlog was $8.1 billion, down from $10.6 billion in the third quarter of last year. At the end of the third quarter, we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically managed starts and realized the benefits of faster cycle times. Of the homes under construction, 61% were halt and sold and 39% were spec units. As we have stated previously, we are comfortable putting spec units into production, but we are thoughtful about aligning the pace of starts with the It helps to reduce the risk of putting too much inventory on the ground.

Consistent with this measured approach to production, of the 6,700 spec homes currently under construction, fewer than 1,000 were finished. Given our Q3 community count of 923, we continue to carry approximately one finished spec per community, which is in line with our operating targets. Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be approximately 8,000 homes.

Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full year closings to be 29,500 homes. The change in our guide reflects the more challenging affordability conditions resulting from higher rates, as well as the slight shift in our mix toward built-to-order homes, which won't deliver until 2024.

Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closing to be in the range of $540,000 to $550,000 in a period. Our third quarter wholesale gross margin of 29.5% continues to lead the industry as we successfully turned our assets while still achieving high levels of profitability and driving high returns on investment. PulteGroup's reported results benefited from strong margin performance across all buyer groups, first-time move-up and active adult. Further, as we have talked about on prior calls, our diversified product portfolio is allowing us to capture higher gross margins that are typically available within our MUVA and active adult communities. As I would remind everyone, our primary focus is always on driving high returns on invested capital, but we appreciate margins are important contributing to achieving such returns.

This is why we remain disciplined in where we locate and how we underwrite our We will now turn the call over to the PulteGraph. That being said, I am pleased to say that we expect to continue delivering high margins and continue to expect home sale gross margin to be in the range of 29% to 29.5% in the fourth quarter. Given current interest rates, demand, and cost dynamics, we would expect to be toward the lower end of this range. SG&A expense in the third quarter totaled $353 million for 9.1% of home sale revenues. This compares with prior year SG&A expense of $350 million for 9.2% of home sale revenues. Based on anticipating closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately 8.8%.

In the third quarter, pre-tax income from financial services was $29 million, up from $27.5 million While market conditions remain highly competitive for our financial services operations, the business benefited from a higher capture rate of 84% compared with 77% last year. A large increase in capture rate relates to the expanded use of rate-based incentives which are executed through our mortgage operations. Looking at our taxes consistent with our prior guide, our third quarter tax expense was $209 million, or an effective tax rate of 24.6%. For the fourth quarter, we continue to guide to a tax rate of 24.5%.

PulteGroup's bottom line results show net income for the quarter of $639 million, or $2.90 per share, which is up from prior year net income of $628 million, or $2.69 per share. Given the ongoing financial strength and cash flow generation of our business, we repurchased 3.8 million shares from $300 million in the quarter. This is up from $180 million last year and $250 million in the second quarter of this year. In the third quarter, we also elected to allocate capital towards paying down a portion of our debt In total we notes through open market transactions at prices slightly below CAR Inclusive of these transactions, we lowered our debt to capital ratio to 16.5%, which is down 220 basis points from the start of 23, and down 600 basis points from the third quarter of 22.

Speaking for the $1.9 billion of cash on our balance sheet at quarter ends, our net debt-to-capital ratio was less than 1%. Beyond buying back our equity and debt in the third quarter, we also invested $1.2 billion in the business through land acquisition and development, which keeps us on track to invest upwards of $4 billion in 2023. Almost two-thirds of our investment in the third quarter was for the development of our existing land asset. Inclusive of our Q3 spend, we ended the quarter with approximately 223,000 lots under control, of which 53% are held via option. We continue to systematically rebuild the optionality of our land pipeline after having walked away from select land positions in the back half of 2022.

As part of this rebuilding process, and consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures. To date, we have completed land banking transactions for approximately 5,000 lots. Going forward, we will look to use such land banking facilities in order to create optionality in situations where the underlying seller requires a bulk sale. It's a disciplined process as we work to balance land costs, returns, and risks, but we are gaining momentum in our efforts. We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed, and we continue to develop most of the lots that we acquire.

As a large home builder, assuming you're confident in a third party's ability to consistently deliver developed lots on The decision to purchase finished lots versus raw dirt comes down to return. Finished lots cost more, but can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer. In all of our land transactions, we assess how best to drive higher risk-adjusted returns and to find opportunities and deals for finished and or undeveloped lots.

Now let me turn the call back to Ryan. As you would anticipate, given our 43% increase in net new orders, we saw strong demand throughout the quarter. Q3 displayed more typical seasonality than we have experienced in the three years since COVID as absorption pace eased as we moved through the quarter. Demand has been a little choppier in the first few weeks of October with more volatility in the day-to-day sales numbers. I am sure for some buyers, higher rates have pushed affordability just that much further away, while others may be worried about their jobs. For other buyers, global unrest may simply have them thinking of other things. We are fortunate to have an experienced operating team that will make adjustments if and when needed.

On a year-over-year basis, for the first nine months of 2023, we have increased net income by $156 million and increased earnings per share by 17%. Over the same period, we've increased our cash position by approximately $1.6 billion, while dropping our net debt-to-capital ratio effectively to zero. And based on guidance that we've given, we look forward to delivering exceptional full-year results for 2023.

From population growth and demographics to supply dynamics and the tremendous opportunity for wealth creation through home ownership, we are bullish on long-term housing demand. Over the near term, however, we fully appreciate the affordability challenges being created by higher mortgage rates and the potential impacts from an economic slowdown the Federal Reserve is hoping to bring about. As such, we remain disappointed in how we operate our business, particularly as it relates to investing in land, the pace of production, the allocation of capital, and the quality of homes and experience we deliver to our customers. We have a clear and successful operating model against which we have been executing for over a decade. So decision-making throughout the organization is consistent and actions are implemented quickly.

This strong organizational foundation, along with tremendous financial strength, has PulteGroup well positioned for ongoing success. In closing, I want to thank the entire team at PulteGroup for their tremendous efforts in delivering for our homebuyers, our shareholders, and each other. I am so proud of what you accomplish every day.

Let me turn the call back to Jim so we can begin Q&A.

Thanks, Ryan. We're now prepared to open the call for questions so we can get to 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. Abby, we're ready to open for Q&A.

Yeah, Carl, so a lot of the work has already been done, and what we're seeing is some of the homes that are delivering now, and maybe better said, the homes that are starting now, are on cycle times that will yield that overall cycle time of below 100 days. So it's really about getting kind of the older stuff that's been in the pipeline that's got longer cycle times that as those numbers close out, I think we'll see our overall cycle times come in line with that target of 100 days.

All right. Thanks, Ryan. And then you mentioned the choppiness in October, and I wondered if you could expand a little on that and talk a little bit maybe about performance among the three segments in the month so far. And then also from a cancellation perspective, if that's beginning to sort of impact you in October, too. Thanks. Yeah, Carl, I'm happy to, you know, talk on October. And as, you know, I mentioned in the prepared remarks, we've seen sales in October. While good, they've been a little bit choppier than, you know, the day-to-day kind of numbers have been a little choppier. I think that the biggest thing that I'd want you to hear is that similar to what we saw in the third quarter, we actually have seen a return to what we would consider seasonal type signup trends that we experienced pre-COVID.

And we've seen that continue into October. On an absorption rate, the numbers that we're seeing on absorptions per community are pretty similar to what we saw in 2018 and 2019. Pre-COVID levels, which were pretty healthy. So, all things considered, we feel pretty good about the continued ongoing desire for homeownership. And it's not lost on any of you out there listening. Rates matter. And there's been a lot of rate movement over the last 30 days. And so, I think the consumer, all things considered, has handled that really well.

Great. I appreciate the color. Thanks, Phil.

Matt, thanks for the question. We continue to use the permanent 30-year buy-down as probably our most powerful incentive. Right now, we've got national incentives that offer 5.75% on a 30-year fixed. So, you know, I think given, you know, rates today on the open market would be over 8%, you know, to be able to get a new home in a great location of the quality and the design features that we have at 5.75%, I think is pretty powerful. I'll remind everybody, what we've done is we've simply redistributed incentives that we've historically offered toward cabinets and countertops and things of that nature. We've redirected those to interest rate incentives, and I think that's been the most powerful thing for that buyer group.

Got it. Okay, that's really helpful. And then secondly, just one on stick and brick costs, you know, just as you're, you know, addressing these issues, and presumably there is margin pressure out of that, you know, and the housing market has evolved here. What are you guys doing around construction costs, labor, sort of ability to kind of push back on all that? You know, how should we think about that over these next few months? Thank you. Yeah, well, you know, look, inflation's real, and, you know, we've previously talked about, you know, something in the neighborhood of 89% year-over-year inflation, which I think is part of the reason we're in the rate environment that we're in is the Fed's trying to get a handle on that.

What we've seen on our cost to build is on a year-over-year basis, we're actually flat. Now, that's a lot of commodity and material and labor increase in a number of categories that's been offset by lumber saved. So, headline is we're flat on a price per square foot to build year-over-year, but it's a lot of increases in material and labor offset by lumber. Got it. Thanks, Ryan. Good luck, guys.

Good morning, Mike. Just wanted to kind of take a step back and understand some of the dynamics. You talk about, you know, October being choppy, but at the same time, it sounds like more in line with, you know, seasonality pre-COVID.

And you also, you know, the flip side of that is, you know, with volume, you know, you're putting out a gross margin guidance for the fourth quarter.

You know, maybe a touchdown from 3Q. Thank you. Can you just give us a sense of the level of incentives through your own offerings in October or maybe even more broadly in the marketplace? Have you feel like incentives have started to come up over the last couple of months? Because certainly, I guess, in the near term, you're looking for a similar gross margin. And, you know, maybe just more broadly, how you feel the market is reacting to, you know, September and October.

Yeah, Mike, I'll take part of that, and then I'll have Bob talk about the incentive load. But, you know, it's demonstrated by our orders in the quarter. We had 43% growth in new orders, and it was a number, you know, of over 7,000. So, you know, I think we've clearly demonstrated that we've got the ability to sell homes. You've heard, you know, me talk about not being margin proud, but at the same time, we're not going to give away price and incentives that we don't have to. I think we did exactly that in the third quarter, and we've continued to focus on making sure that we're turning the asset and we're getting the number of absorptions that we need in every single community to deliver the best return on the best capital that we can.

So, look, I think it was a great quarter. We're happy with how, you know, signups performed in October. You know, you heard me kind of talk about that on the question that Carl asked, so I won't repeat it. And then, Bob, if you can, maybe just talk a little bit about the incentive load.

Yeah, Mike, you know, you can see in our data, you know, we've got about a 6% incentive load. That's $35,000 a unit rough math. That actually is down 10 basis points from Q2 of this year. It is certainly up. It was 2.2% last year, but, you know, the sales environment that led to the closings in Q3 of last year were dramatically different. So you can see kind of a normalization here at 6%. I think you can take from our margin guide from Q3 that what we see closing in the fourth quarter, and we've got pretty good visibility into that at this moment, will not be significantly impactful. I would highlight if we've given a continuation of that same guide at 29 to 29.5% on margins, we have told you we're going to be at the lower end of that.

So there is some cost to this industry environment. Right. Now, appreciate that, Bob.

Mike, our crystal ball, at this point, a couple of years out, we're not there yet. We're still focused on Q4. We've given a guide for that quarter. When we get to the end of Q4, we'll certainly give a full-year guide for the balance of 2024. But, you know, maybe the thing I do want to address is the incentive load that we currently have that is allowing us to offer incentives on the interest rate. That's been in our margin guide and our results for the entire year. So you seeing the impact of offering below market interest rates as an incentive It been in Q2 results it was in our Q3 results and it in our Q4 guide So you know no guidance about what margin direction will be beyond Q4 of this year but that's all embedded in our, you know, to this point, everything that we've been doing, that's embedded in the results that we've delivered and the guide that we've given.

In fact, it is, Joe. Good. Look, market conditions, that's what's going to determine the margin, volume, and price into next year. I think it's an underappreciated element of your business, of course, that the composition of that can vary, right, within the definition of success. But you are obviously appropriately acknowledging the headwinds here. Maybe if you could just talk instead to the return headwind from this instead of either the absorption headwind or the gross margin headwind. Just how are you thinking about returns on capital and then similarly returns on inventory if interest rates remain high? You're basically at net zero debt now. Just how you're thinking about ROE relative to ROI. Joe, thanks for the question.

I will do my best to give you an answer. For the last decade, maybe even going on 12 years, the way that we have operated the business has been with a singular focus on delivering the best possible return on investor capital that we can. Given the capital intensive nature of this business, for us, we think that is the best way to make decisions and to operationalize.

We have a lot of time to operationalize our platform in a way that delivers high return on assets, high return on equity, whatever metric you want to look at. I think we've clearly done that. You know, I highlighted in my prepared remarks that for the, you know, the trailing 12 months, we delivered return on equity over 30%, and part of that is derived from running a good business, but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes. We were paying a dividend. We've bought back near 45% of the company over the last 10 to 12 years that we've had our share buyback program in place.

We just highlighted this quarter we opportunistically took advantage of the opportunity to buy some near-term debt in that was trading below par. So, you know, I think maybe the best way I can describe it, Joe, we're going to continue to focus on buying assets in great spots, turning those in a way that delivers high return on invested capital. One of the other things that I think can also continue to give us flexibility and return-enhancing leverage is moving our land options to 70%. We sit at 53 today. We've given you a long-term target of 70. We've got things in place and work underway that will help us get there.

Yeah, fourth quarter starts will be more reflective of order trends that we're seeing in the fourth quarter. You know, we're starting more spec than we historically have. We've highlighted that we've completely moved our first-time business to a spec business. So some of that's predetermined based on what we saw in the third quarter and what we would anticipate. But we're just not going to get into kind of a position where we've got to build up of spec inventory, you know, that creates pressure to do things that are unnatural on the pricing front.

But we are going to, you know, put some units in the ground to have those ready for Q1. You saw us do that last year in the back half of last year that set us up for a really strong Q1 of 2023. So, you know, I want you to hear a balanced approach. Inventory is going into the ground. We're going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we've acknowledged are out there in this current interest rate environment.

Yeah, hey, Stephen, it's Bob. It's an evergreen process, honestly. We are buying contracts typically weekly, actually, and they are market-based. We set the pricing on that, and that determines the price to us to offer that value to the consumer. So the rate that Ryan talked about is a negotiated price, and essentially, you know, we fill the cost of being able to provide that contract rate to our consumer. There's an upfront fee for purchasing the contract, and then there's the rate buy-down as part of that. And so, it's not like we're buying now for three and six months from now. These are contracts that we enter into that we expect to fill candidly within 30 days, and typically we're filling them within a week.

So it's very market responsive. As rates go up, it's why you've seen what we've offered has moved up a little bit. We've increased our cost as part of that to a degree. So it's a process we've been working through for, gosh, 10 or 11 months now since we put it in place, and we found it works pretty well.

These are 30-year rate buy-downs for the consumer.

Stephen, the other thing that I would maybe just add to your conversation is some buyers, they take the available incentives that we have and get them all the way to 5.75%. There are other buyers that decide that they don't need to go all the way to 5.75%, and they'd like to have a little bit higher rate and use some of the other incentive money that we're offering for other things that they see value in. So, you know, we're seeing about 80 to 85% of our buyers are getting some form of incentive toward interest rates. That doesn't mean everybody will go to 5.75%. You know, just, you know, some fraction of our total sales end up in that, you know, very lowest category.

You know, the big headline is that we've got the tools out there, and our sales team has got the tools out there to help individually solve what each and every buyer needs to make, you know, the transaction work for them.

Maybe to put a finer point on that, Ryan said 80 to 85 percent of people have an incentive program. Only 25 percent of the business in the quarter was through that national campaign that you asked about. So those are targeted to specific inventory units typically, but we offer incentives to all of our consumers. We always have. And as Ryan has stated already today, the vast majority of those incentives now across all of our buyers is financing-oriented.

Yes, Stephen, we are at a lower leverage rate than what we've historically run at. I think that's really more than anything. It's a testament to the strength of the business. We've been operating really well, and we have been generating a lot of cash. We've really been touching kind of all the critical parts of our capital allocation philosophy. We've invested a lot of money into land and land development. We've been paying our dividend. We've bought back the highest single quarter spend in shares this year in the third quarter at $300 million, and we bought back some debt. So, and with that, we still grew the cash balance. So, I think it really demonstrates how strong the business is operating.

In terms of kind of your question on kind of pricing and discounts and elasticity or inelasticity, you know, we're going to continue to price and set incentives at a level that we think are appropriate for the market. We're going to be responsive. We're not going to be margin proud. But at the same time, I think we've got a good understanding of what value is. And you shouldn't expect to see kind of the national year-end blowout, red tag, kind of screaming baby sale from us. I don't think that helps the consumer. But I think you're seeing us put the appropriate incentive loads such that we're turning the asset, we're turning the inventory, we're making sure that we're getting a minimum of kind of two sales per active community, which is kind of a level that I think you need to be at in production home building to deliver the types of return on assets, return on inventory, return on invested capital that we want.

Thank you, Steve.

Good morning, Ken.

Yeah, we've talked about our options and lot premiums being a consistent driver of value. It's part of the way we go to market. We think it's one of the strengths of our sales process. In the most recent quarter, that was $107,000. It's up to $3,000 sequentially and year over year. So that is still part of our sales operation. It's how we go to market. And yet, 20% is roughly where we are. I wouldn't expect that to change as long as market dynamics stay where they are.

Let me start with that. I highlighted this before. Our incentive load is about 6%, $35,000. That would tell you 6.3%, something like that. Again, I think we've highlighted the majority of that incentive is rate buy-down or financing support. I think that's the answer to your first question. And I apologize, your second question was, I think, what percentage of our- Right, you were talking returns, right?

There is no change there. I think we've been the purveyors of the message. We don't focus on margin. It's a component of the overall operating model. We're focused on return. And depending on the number of units that you sell in a particular community and how quickly you turn the asset, if you do that fast enough, then it can offset and you can allow for lower gross margins. So, you know, if you're getting a lot just in time and somebody else is developing it and carrying it, and we can build in the kind of 100 days that we're talking about, it allows us to run a high-returning business at a lower margin. So, that's not a new concept.

That's exactly what we do, and it's exactly what we'll continue to do.

Yeah, John, we were, I think the lowest we were was 5.25 at a national level. We had some specific markets that may have been sub-5 at 499, but basically, you know, as you've seen the headline rate move from 7.5 to 8, you've seen our promotional rate move up by that same 50 basis points.

I think generally that's a good rule of thumb. I mean, there is, I think practically speaking, there's a limit to how much money you can throw at the rate relative to what the headline number is. It makes sense.

Yeah, I think very consistently what we've said, I think we'll be up 5% to 10% over fourth quarter of last year. And then we haven't given anything for 24 yet, John, but as we've said in the past, you can see the capital that we've spent or the land that we've spent this year, pretty good indicator of what community count will be in the future.

It's a proxy for what community count can turn into in the future.

Yeah, so I don't want to give away all of our kind of trade secrets on that, but suffice to say there are different rules based on who is, you know, depending on which government I will now turn the call over to the government agencies rules you're using for that mortgage program. For the upfront fees that we're paying on a forward commitment, because those are done prior to having a home under contract, those fees do not count toward seller contribution. But there are additional incentives that have to be applied to the deal once the home is under contract. Those do certainly count towards the seller contribution. So, you know, to get to 575, you've got some fees on the front end, you've got some fees on the back end.

We do look at them in the aggregate, and those are the numbers that, you know, you're hearing, you know, Bob talk about.

Okay, that's helpful. And then my follow-up is, if we think about the movement in rates, I don't know if you've looked at it this way, and I'll ask it in a historical context, year-to-date. If you look at your year-to-date orders or closings, maybe let's focus on closings. Have you run an analysis of how many of those buyers just wouldn't have qualified at today's rates versus the rates that you were able to get them year-to-date?

No, we haven't run that analysis. I would highlight that no matter the rate that we're offering, we qualify the buyer on the 30-year rate. A lot of the incentives that we've been doing have been 30-year fixed rates, so that is the rate we're qualifying. But in the case that you do a temporary buy-down, the buyer is qualified at what the permanent 30-year rate will be. So, I think everybody knows that, but I think it's worth highlighting because none of us want to see the industry back in a situation that we were in in 2008.

Yeah, Alan, I think we're hearing the same things that you are, particularly on maybe availability of capital or the cost of capital on the land development side. There's definitely, I think, some strain or tightness in that arena. I think that certainly might continue to create an opportunity the longer that we stay in a high-rate environment. I think it's also a It's also a great opportunity for us to take market share. With our mortgage company, the size of our balance sheet, the ability to be active in the capital markets, I think it gives us an opportunity to do things that smaller local builders and maybe private builders can't. So, I think there's certainly a market share opportunity there as well.

We've made Build the Rent a small piece of our business. We've got good relationships with national partners that we're building some percentage of our annual deliveries for those operators. And I think we've talked extensively about that. That'll continue to be an arrow in our operational quiver. So, look, I'm really, really confident and pleased with the way we're operating, the health of the business, the volume that we're selling, and kind of the core operations. And then when you go to the balance sheet, I think we're set up to do a lot of great things that will continue to, you know, set us up for success down the road.

Yeah, Alan, it's a good question. The thing that I talk about with our operators, and I spend a lot of time in the field, in our communities, in our division offices, talking about exactly this. You know, the mantra that we have inside the company is a minimum of two sales in every community. Now, certainly we have certain price points in communities that sell way more than two per community, but as a production home builder, it's hard to have an active store that does less than two.

You just, you know, you can't make the returns work to the level of our expectation. So, you know, below two per active community, that's where we start looking at, hey, are we positioned right? Do we have the right incentives? Do we have the right pricing? Do we have the right product? You know, are we going after the right consumer? There's a number of those levers that we pull, but, you know, it nets out to, for this quarter, we were two and a half, but, you know, that two per community is kind of the level that we look at.

We're going in the way back machine, Truman.

Yeah, Truman, I look, I think we're really pleased with what our first time business is doing. We've invested in it. It's, you know, we've said our target was to get it to kind of 40% of our business. And we've done that. And I think you've seen not only growth and absorptions, but growth in communities. And, you know, the business is about where we'd like it to be. Obviously, on one hand, that buyer doesn't have a home to sell. They're not locked into a low interest rate that are reluctant to get rid of. So I think that's the positive with that first-time buyer. In terms of the headwinds, I think it's obvious. It's 8% interest rates, and that's a buyer that's got a down payment, hopefully.

Either they've saved it or it's been gifted to them by parents. And then they're going and getting a 30-year mortgage, and they're working on what they can afford based on their wages. Good news is wages are going up, which is helping affordability. But beyond kind of rate, rate, rate, there's probably not a bunch more that I could add in terms of kind of the first-time buyer. And maybe just the last thing on the overall rate environment, look, high rates aren't good for the consumer. They're not good for housing. They're not good for the broader economy. But we're all kind of playing in the same environment, and with the quality of the management team that we have and the way that we're operating this company, I think we've proven that we've got the tools and the operational flexibility to be successful in any environment.

This most recent quarter is a great example of that.

Yeah, so in terms of product, Truman, you know, the one great thing about our product portfolio is that we offer a lot of flexibility to scale up, scale down. You know, we offer structural options that allow a, you know, a smaller floor plan with added square footage in the We have the ability to take a base floor plan, scale it up or scale it down, and we're seeing buyers use that flexibility to help address some of the affordability challenges that are out there. You know, in our – the way that we sell options, you know, we see buyers pick the things that they see value in, and we're also seeing buyers make tradeoffs in terms of how they spend those dollars in terms of cabinets, countertops, upgrades, et cetera.

Yeah, roughly. I think that's a good go for a run rate. You know, it's higher than what we experienced pre-COVID. That's mostly reflective of the size of our first-time business and entirely moving that spec. We did highlight this quarter 49%. That's down from about 60% earlier in the year. So, we feel pretty good about the performance of the SPAC business.

I appreciate everybody's time today. Sorry we couldn't get through to all the questions, but certainly available over the remainder of the day for follow-up. And we'll look forward to speaking with you next quarter.