PulteGroup (PHM) Q3 2024 earnings call transcript

Thank you, Audra. Good morning. I want to welcome all participants to today's earnings call to review Paltai Group's operating and financial performance in the company's third quarter ended September 30, 2024. Here to review Paltai Group's Q-3 results, Ryan Marshall, President and CEO, Bob Buschana C, Executive Vice President CFO, and Jim Osowski, Senior Vice President and Finance. A copy of our earnings release on this morning's presentation slides have been posted to our corporate website at PaltaiGroup. com.

We will post an audio replay of this call later today. I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Action results can differ materially in 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 company's presentation slides.

These risk factors and other key information are detailed on our ICC filings, including our annual and quarterly reports. Now, let me turn the call over Ryan Marshall.

Thanks, Jim. I appreciate everyone joining our call this morning as we discuss another quarter of strong operating and financial results for Paltai Group. As detailed in this morning's press release, driven primarily by a 12% increase in closings, we reported a 16% year-over-year increase in third quarter earnings to $3.35 per share. Inclusive of our strong Q3 financial performance, for the first three quarters of 2024, Paltai Group has realized double-digit increases in closings, home sale revenues, and pre-tax income, along with a 22% increase in reported earnings to $10.28 per share. In addition to delivering significant growth in revenues and earnings for the trailing 12-month period, Paltai Group realized to return on equity of 27%, while continuing to drive strong cash flow and lowering our debt-to-capital ratio to 12%.

Our strong financial performance also allowed us to continue returning funds to shareholders. Through the first nine months of 2024, we returned $1 billion to shareholders through share repurchases and dividends. This is an increase of $200 million or 25% from last year in terms of funds allocated back to our investors. I think these numbers are all the more impressive, given the fluctuating backdrop that we've all been working through. Over the course of the year, we have seen the 30-year mortgage rates climb from 6.75% in January, 7.5% in April, only to fall back to 6% in September, and then of course a recent climb in interest rates back to 6.75% has the 30-year mortgage rate back to where we started 2024.

We track consumer sentiment among visitors to our website and our communities, and as you might expect, buyer confidence ebbs and flows with meaningful changes, or even just volatility in interest rates. This again proved to be the case as buyers reacted to the movement in rates during the third quarter. With mortgage rates hovering around 6.5% to begin the third quarter, buyers were generally less inclined to sign a purchase agreement. As interest rates declined through August and September, however, we experienced a noticeable pick up in overall activity. In fact, of the three months in the quarter, we generated the highest net two orders absorption cases in the month of September.

Driven by September's strong performance, the Q3 absorption pace of 2.4 orders per community per month was certainly above the typical pre-COVID numbers for the third quarter. The recent October has shown the highest web traffic, foot traffic, and lead volume of the year. However, the recent rise in interest rates has demonstrated a more typical seasonal selling pattern, and incentives have remained elevated as a consequence.

Between rate volatility, the impact of hurricanes, and the upcoming presidential election, I think the upcoming spring selling season will offer the best assessment of fundamental housing demand.

I think buyer reaction to the movement rates, both down and now up, again, affirms that affordability remains a tough hurdle to get over for many potential home buyers. The most recent S&P, Kay Shiller Index, shows home prices continue to hit all-time new highs, although the rate of appreciation has slowed, which in combination with expected lower mortgage rates could offer some relief to consumers going forward.

As has been discussed extensively over the past few years, one of the pressure points that continue to push home prices higher is the fact that after years of underbuilding, this country has a housing deficit estimated at several million homes. The Mortgage Bankers Association issued a useful graphic a few weeks ago that has shown on slide 15 in today's webcast slides.

The graph shows housing stock added by decades since the 1940s. Looking at the graph, you can clearly see the significant drop in production during the past 15 years. To make this point even clearer, we modified the MBA graph by overlaying the growth in U. S. population over the decades. What you see is that just since the 1960s, our country's population has almost doubled the just shy of 350 million people, while housing production has been flat to down over the decades.

Given the high costs of home ownership, rate buydowns remain a powerful incentive in helping consumers bridge the affordability gap. In the third quarter, approximately 30% of our home buyers access their national rate program. To take advantage of our national rate incentive, home buyers will typically need to close within 30 to 60 days of signing the contract. So it's important that we continue to have an inventory of homes and production. At the end of the third quarter, 43% of the homes and production were spucked. So we are well positioned to meet demand as we close out 2024.

Along with benefiting from having inventory available, we are also continuing to make progress in lowering our cycle times. For homes delivered in the third quarter, our average cycle time was 114 days down from 123 days in this year's second quarter. Cutting two weeks out of our production timeline is an important accomplishment. And it keeps us on track to reach our goal of 110 days by year end and be at 100 days in the first part of 2025.

In truth, most of our divisions are already operating at or close to our 100 day ideal target. Our reported average is higher due to a handful of divisions, primarily those with large multifamily business or cycle time to remain elevated.

In summary, operationally and financially, we accomplished a lot in the third quarter, and our well positioned to have 2024 be a record year for policy. Now, let me turn the call over to Bob for review of our third quarter results.

Thanks, Ryan. Good morning driven by strong closing volumes, our third quarter home sale revenues increased 12% over last year to $4.3 billion.

Our higher revenues in the period reflect the 12% increase in closing 7,924 homes. While our average sales price in the quarter of $548,000 is effectively unchanged for the prior year and the second quarter of this year. Average sales prices by fire group were also consistent with the prior year.

The mix of our closing to the third quarter was 40% first time, 39% move up and 21% active adults. In the third quarter of last year, the mix of closings was 38% first time, 37% move up and 25% active adults.

The slight decline in the percentage of closings from active adult buyers primarily reflects the timing of active adult community closeouts in 23 and 24. That we noted in our sign up commentary during our second quarter earnings call. We expect the normalization of contribution from our active adult consumers when replacement active adult communities begin opening in 2025.

Looking at our orders, net new orders in the third quarter totaled 7,031 homes, which is consistent with the 7,065 that two orders recorded in the third quarter of last year. It's worth noting that our average monthly absorption pace of 2.4 homes in the current quarter remains higher than our historic third quarter pre-COVID average, which was closer to 2.2 homes per month.

Within the quarter, we did see a positive impact on monthly orders and interest rates declined from July through September.

Compared with the prior year, Q3 orders decreased 3% for first time buyers, increased 6% for move up buyers, and decreased 5% for active adult buyers.

Consistent with our guide, we operated out of an average of 957 communities during the quarter, which is an increase of just under 4% compared with the third quarter of last year. Based on activity during the quarter, quarter end backlog was 12,089 homes with a value of $7.7 billion, which compares with the backlog of 13,547 homes with a value of $8.1 billion at the end of the third quarter last year.

During the quarter, we started approximately 7,800 homes, and ended the quarter with a total of 17,096 homes under construction. These numbers are consistent with Q3 of last year. At the end of the quarter, we had approximately 7,400 spec homes in production, of which 1,357 homes were complete. This represents about 1.4 finished specs per community, which is consistent with the second quarter of this year.

On a unit basis, 58% of our third quarter sales were spec sales, highlighting the importance of having inventory available to meet buyer demand. Buyer interest in spec production has been driven in part by our successfully use of mortgage incentives, which are most effective when the consumer expects to close quickly. As always, we will continue to closely monitor consumer preferences for any changes that mortgage rates continue to decline.

Based on the units we have under construction and their current stage of production, we currently expect to close between 7,900 and 8,300 homes in the fourth quarter. I would highlight that this keeps us on track to meet or slightly exceed our full year closing target of 31,000 homes.

Given the affordability challenges facing today's home buying consumers and evolving market dynamics and key cities in which we operate, our pricing strategy seeks to ensure we maintain a compelling offering to all consumers.

With that said, our average sales price in the third quarter was $548,000, which is consistent with our guide for average pricing to be in the range of $550,000.

Looking at the fourth quarter, we currently expect our average sales price to be in a higher range of $565,000 to $565,000. As we have discussed on prior calls, this is largely due to a higher percentage of our closing coming from our Western markets, where sales prices are above company average.

Our third quarter gross margin came in at a strong 28.8%. As we highlighted during our most recent earnings call, our margins in this quarter reflect an increasing percentage of our closing coming from our Western markets, which, relative to other parts of our business, has slightly lower margins. Our third quarter margins were also impacted by higher incentive costs incurred during the period. In sentences in the third quarter were 7%, which is a scheduled increase of 70 basis points from the second quarter of this year.

Even competitive market dynamics, higher incentives were needed to help ensure we continue to sell homes and turn our assets. As Ryan talked about, higher demand improved as interest rates declined in the third quarter, but overall market dynamics remain competitive. As such, we expect incentives to remain elevated for at least a majority.

Given the anticipated geographic and product mix of fourth quarter closings and the expected need to maintain higher incentives, we currently expect gross margin in the fourth quarter to be in the range of 27.5% to 27.8%. Based on our fourth quarter guide, our full year gross margin would amount to approximately 29%.

Continuing down the income statement, our reported SGA expense in the third quarter was $407 million for 9.4% of home sale revenues. This compares with prior your SGA expense of $353 million for 9.1% of home sale revenues.

Our third quarter SGA expense was in line with previous guidance and keeps us on track for SGA expense of 9.2% to 9.5% of home sale revenues for the full year. I would note that our full year guide excludes the impact of the insurance adjustments we recorded in the first and second quarter of the issue.

Our financial services operations reported another quarter of strong operating and financial results. The third quarter of pre-tax income increased 90% over last year to $55 million. For the quarter, our financial services operations benefited from increased volume driven by the higher closing volumes in our home building business in combination with approved capture rates. In addition, we experienced increased profitability, particularly in our mortgage operations due to improving market conditions driving higher market performance.

In total for the quarter, we reported pre-tax income of $906 million, which represents an increase of 7% over the third quarter of last year. Our tax expense for the quarter was $208 million, or an effective tax rate of 23%. Our effective tax rate for the quarter includes a $14 million benefit associated with the purchase of renewable energy tax credits completed in the quarter.

In the fourth quarter, we expect our tax rate to be in the range of 24 to 24.5%, excluding the impact of any potential incremental energy tax credit purchases.

Looking at the bottom line, our reported net income was $698 billion, $3.35 per share, representing increases of 9% and 16% respectively over the third quarter of last year. Earnings per share in the third quarter was calculated based on approximately 208 million diluted shares outstanding, which is down 5% for the prior year. The company continued to systematically executed share repurchase programs.

Consistent with our stated strategies, we continued to allocate incremental capital to the future growth of our home building platform. In the third quarter, we invested $1.4 billion in land acquisition development, which 56% was for the development of existing land assets.

On a year to date basis, we have invested $3.7 billion in land acquisition development, and now expect our full year spend to be in the range of $5.2 billion. As our land teams continue to do an exceptional job identifying and structuring land investments that meet our strict underwriting guidelines.

Inclusive of our land spend in the quarter, we ended the quarter with approximately 235,000 lots under control, of which 56% were held via options. We continue to make steady progress in increasing the percentage of our land that we control via options as we seek to drive greater balance sheet efficiency and support of higher returns in the future. A federal land pipeline in the expected timing of community openings and closing, we currently expect to operate out of an average of 950 communities in the fourth quarter, which would represent an increase of 3% over the fourth quarter of last year.

In addition to investing in the ongoing growth of our businesses, we continue to consistently return capital to shareholders. In the third quarter, we repurchased 2.5 billion common shares that cost $320 million, for an average price of $126.05 per share. Through the first nine months of the year, we have repurchased 7.6 million shares, or approximately 4% of our shares outstanding at the beginning of the year, that cost of $880 million for $115.74 per share.

Following these repurchased, we ended the period with just over $1 billion remaining earnings, existing repurchased authorization. And finally, we ended the third quarter with a gross debt to capital ratio of 12.3%. Adjusting to the $1.5 billion cash on our balance sheet, our net debt to capital ratio was 1.4%.

Now, let me turn the call back to Ryan for some final comments.

Thanks, Bob. A very proud of our organization as our local and national teams have done a great job navigating the ups and downs of 2024. Within such an environment, it's more important than ever that we continue to focus on the critical business strategies and tactics that have been instrumental to our success.

First, we are continuing to invest in our business. Underwriting to the same return hurdles and guidelines that we've had in place for more than a decade. Our discipline process has allowed us to assemble a robust pipeline of what we believe are well located in high returning projects. In the process of underwriting new deals, we continue our migration toward controlling more land via option.

This will be a multi-era effort that we see the opportunity for increasing our option lot count as a way to enhance returns and help mitigate market risk. We have a long term goal of getting to 70% option lots, which will be an evolutionary process as we work through our existing communities and add new option lot deals to the overall portfolio.

Second, while we continue to invest in new land positions, we have to make sure we are efficiently and intelligently turning our existing land assets. Within our business model, we seek to achieve high returns by balancing the desire to maximize profitability of each home while making sure we are turning our land assets. At the same time, we must be price competitive and offer a clear and compelling value to potential home buyers.

I think our third quarter results show this balancing act as we continue to generate historically high gross margins, that we meaningfully increase incentives in response to the more competitive market conditions in which we're currently operating. And third, we must continue to allocate capital in alignment with our long stated priorities. And just discussed, we continue to invest in the ongoing growth of our business through land acquisition and development.

If we achieve our 20, 24 land investment target of $5 billion, our five year land acquisition and development spend will total more than $20 billion. In a world where not in my backyard is alive and well, such investment represents countless hours of hard work to fire land teams throughout the country. After investing capital to support the ongoing growth of our business, we continue to systematically return funds to shareholders with 2024 being the fourth year in a row, in which we will have returned over $1 billion back to shareholders through Sherry purchases and dividends.

Over $20 billion invested in land, over $4 billion returned to shareholders and all while building a strong and highly supportive balance sheet with low leverage and high liquidity. I strongly believe this is a balance sheet that can support our growth plans, as well as continue to see us through the ups and downs of fire demand to inevitably roll through the housing industry. Looking close, I think in our entire organization for their hard work and delivering faulty groups outstanding operating and financial results.

Hurricanes made this effort even tougher over the past few months. But I am incredibly proud, although not at all surprised, of how our team rallied to support fellow employees directly impacted by these storms. Your compassion of the efforts are why faulty group remains a great place to work.

Now let me turn the call back to Jim.

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 then we'll follow up. Thank you. And I'll now ask Arthur to again explain the process and open the call for questions.

Hey, John. I think it's, you know, reflective of the current market that we're operating in. You know, we highlighted in the commentary as it relates to Q3.

Coming into the quarter, we've given the guide and said that incentives would be flat. Obviously, they were a little bit richer than we had expected. We had a lot of homes to sell in the third quarter. You know, the activity that we have seen has had that higher incentive load. We still have homes to sell in the fourth quarter.

So it really is just a function of what we're seeing on the ground today. You know, another thing more broadly, the impact this is. You know, the slight step down in the active adult as a percentage of the mix. And so we're, you know, we highlighted during the second quarter that we saw some close outs. And so we've got some for lack of network gap outs and active adult. So you've seen the percentage of our total business active adult shrink a couple of basis points.

That obviously has the highest margin contribution. So it's the combination of all those factors.

Yeah, John, it's Ryan, you know, first thoughts and prayers go out to the communities and the individual families who were impacted by the storms. They were certainly both very large and devastating in different ways.

I maybe start first by highlighting how well our communities performed both our communities that are in active construction as well as homes that we've recently closed. The, you know, the new construction standards and the quality that we built to the way drainage systems are designed, I think a real testament to just how effective some of those standards are. So we had very little damage in our active communities, which is good news.

The biggest impact is really two things, John, one loss of time. So the three to four days to shut jobs sites down in advance of the storm and then the three to four days kind of following the storms with cleanup. Those are days that are just hard to get back. Power is the second issue, so especially with Milton, the power outages were really widespread in Florida. Especially in the Tampa and Southwest Florida areas.

So, you know, power crews are focused on bringing the power grids back online. They're not as focused on setting new electrical meters for homes that will delivered in Q four. So we're still kind of working to quantify what those exact numbers are. We're confident in the guide that we've the Bob's provided to you.

And, you know, we'll know more, I think, in the coming weeks as the power companies recover. You know, the other maybe kind of third tier item would be some of the municipalities will be a little slower and responding to inspections.

You know, as they're dealing with kind of cleanup areas in the heartache communities.

Yeah, Alan, we're actually, you know, we remain very bullish on Florida. We talked about it a little bit in the, at the end of our second quarter. And, you know, on a positive note, we had a great third quarter out of Florida. In a lot of the inventory trends, both on resale inventory and new inventory of improved and they're down from where things peak. So I think that's a positive in a quarter, which is typically one of the slower quarters in Florida is, you know, the nicer, you know, the nicer weather, summer months up north.

As we move into the fourth quarter and we get into what is the traditional shoulder season in Florida, where the snowbirds start coming back into town. You know, I think we're well positioned to have a pretty good fourth quarter. So we're in every major city or almost every major city in Florida. We don't do a lot of business in Miami.

But we're, you know, our brands are really strong there. We got great communities. So I think Florida will continue to be a positive for us.

Yeah, Alan, you know, it's interesting to heard Brian say how well our markets held up there. So we don't see a mix shift in the fourth quarter pending, of course, the municipality's ability to actually deliver permits, which you think they will. And we think we'll be able to work through, you know, we had highlighted more of the geography in the margin is really that Western markets have on a relative basis, slightly lower margins for us. And that's going to be a higher percentage in the fourth quarter than it was the third.

And then it's the incentives on the spec for entry level. Probably that have more influence. And as we highlighted in the prepare for marks, our expectation is that. You know, the incentive levels are going to stay high.

I know you give the numbers on orders, but that doesn't always tell the whole story given, you know, community count openings and closings, etc. Yeah, Alan, I'll take that one. I mentioned that my prepared remarks in October. And we talked about it on prior calls. We do a survey with buyers to come to our website just about how confident they are about now being a good time to buy.

We're at a 12 month high in that number. So I think that's that's generally, you know, a positive sign for the business. Our website traffic or lead traffic and our foot traffic into our stores also at 12 month high. So, you know, there's a lot of real positive activity in the top of the funnel. And September was the best month in the quarter drilling down into the individual brands.

The entry level buyer continues to be most challenged by affordability. So when rates came down in September, I think we saw, you know, a nice pickup in buying power that had a very favorable impact to that particular buyer. So I think that's a positive. The move on fire continues to be really strong for us. And with that being 40% of our business, I think, you know, we're really well positioned for that consumer group to continue to perform well in the current environment. And if we're fortunate enough to see some improved rates in the, you know, the next couple of months as we go into spring selling season, I think, you know, that that particular buyer group will perform very well.

And then active adult. And we've talked about this in years past. This is a buyer group that's probably most impacted by volatility in the market and uncertainty in the market. And right now the thing that we're hearing the most about is the election.

And there's just, there's a lot of uncertainty around, you know, the nonstop garage that we're getting with the election in a couple of weeks. So we're, we're kind of waiting for the next couple of weeks to be over. And we think that buyer will come back into the market shortly thereafter.

Yes, Stephen, it's Ryan. Thanks for the question. You know, we've given a, we've given a guide for Q4 that we're confident in. So we think we've factored in kind of our best estimate of what the hurricane related delays and impacts will be. You know, things go quicker and better than expected. You know, potentially, you know, we get a few more closings in the fourth quarter. But we're confident in the guide that we've given.

Then as it relates to kind of 2025 and spillover impact from the hurricane, we haven't given a guide at this point. We'll do that at the end of the next quarter.

You know, history is a guide. I think, you know, the system will come back online. And, you know, other than again, power related. Setting of transformers and energizing communities, you know, those are the things that I think we sometimes see some delays around.

But, you know, we'll, we'll, you know, tell you more about that as we get closer as it relates to kind of active adult. Will, you know, we'll also give you our community count guide next year. The those communities have been in the pipeline for a long time. They're actively being developed right now. So we've got create visibility to when they're going to open. And most of those will start to open in the back half of 25 and then start to show closings in 2026.

But, you know, we haven't, we haven't given a guide for 2025. Other than, you know, I would, you know, reiterate, we've talked about kind of our long term growth guide of wanting to operate the business in a 5 to 10% growth window.

Yeah, Stephen, we're, we're still running the company and managing the land mix for it to be 25 about 25% of the business. So the current mix in 24 is actually on the light side. And as these new communities where we're in a little bit of a gap out as those come online in 2025, you'll actually then Bob mentioned in his prepared remarks. You'll see the mix go back to our kind of typical contribution levels, which is in that 20 roughly 25% overall overall overall business.

Thanks for the question. I'm just going to talk a little bit about what we're going to do is consistent with the last three quarters and actually consistent with a third quarter of last year. So when we look at it for the full year, we expect kind of a very low single digit inflation on our vertical cost. And days it relates to lumber. It varies by market. Most of our lumber we buy on a 13 week trailing random length average.

You know, it effectively helps lock in the margin at the time of contract with the customer so that we're not experiencing.

You know, margin volatility during the bill process.

Yeah, I wouldn't highlight any other markets in terms of kind of inventory issues. You mentioned Texas, Texas is a market that's been a little choppier in the last few months. It's, you know, it's a place where there's probably more competition. Every major builder is in every market in Texas. So, you know, and there were a few markets there, Austin's one I highlight that had unprecedented price appreciation that there were really high paying jobs when they're post COVID with a lot of relocations and there were short inventories. So we saw maybe, you know, less than, less than kind of moderated pace around price appreciation. So I think there's a few markets there that are probably still going through some price normalization.

You know, those are markets that I think will continue to farewell. There's good jobs there. Taxes are relatively affordable in our places where people want to be. So we're still confident our Texas markets as well.

Yeah, Mike, I think you can see from the guide that we've given and we've suggested we've told you we see elevated incentives continuing. We didn't really see those mitigates during the quarter. And it's worth highlighting, you know, the rate that we're offering is below market already. And so, you know, the movement in the 30 year doesn't really influence us as much as what do we need to do both competitively.

And from the affordability construct for the, for the consumer. So, you know, if you see a 25 basis point move in the 30 year, you know, we're already a hundred plus inside that with our incentive programs. And so what we're telling you is that the consumer needs to help with the affordability and the incentives is the way we're getting there.

Yeah, we'll have to see. I think is the answer to that. You know, we rates tick back up, right. So at the end of the day, we'll see, you know, if the fed continues down a path to reduce interest rates and you have Ryan said it is prepared comments. We think that, you know, the selling season is going to be a better indicator of overall demand.

And to your point, if the rate environment improves and demand is strong, yeah, I think we'd have an opportunity to reduce our incentive.

Yeah, Texas Mike is, you know, the market that I would tell you has probably been more competitive just because of the number of competitors that are there. I don't, you know, it's nothing that I would suggest is that it wouldn't suggest anything we've done is out of line. Or is, you know, on the level of making is uncomfortable, but, you know, probably higher incentives in the Texas markets than what we saw earlier in the year.

You know, I think Bob, you know, just indicated we'll see what the fourth quarter kind of provides is, you know, possibly we see some reduction in interest rates and that may give us the opportunity to back off of the incentives a little bit.

Yeah, you already, you've highlighted the mix. That's what it is, but the delta versus your prior diet is really the incentive. Well, yeah, on balance, it's, you know, not changing dramatically. We've got a little bit more Western market business. Again, the strength there on a relative basis. It really relates to the incentives or as we've highlighted a couple of times now, you know, it's a challenging affordability equation and we're looking to meet it so that we turn our assets.

Yeah, that's probably slice of the little too thin. Again, affordability is a challenge for all of our consumers. You know, the entry level feels it first and the most. And so it's going to be a little bit richer for them, but I wouldn't want to parse it quite that thinly.

Yeah, Carl, thanks for the question. Florida has been very good to our business. We do have a lot of capital invested there today. So, you know, for what it's worth, we'd like to continue to see Florida perform well. You know, for the investments that we've already made in the capital, it's already been committed as it relates to future stuff. You know, I think we'll take inputs as they come from the market. We're not going to blindly, you know, continue to go after things if we're seeing a change in a part of conditions. I think that's one of the disciplines that we have in our underwriting criteria.

I still remain really bullish on Florida. In fact, you know, you look at the parts of Florida where we're investing.

They're, you know, they're a little more inland. They're on higher ground. They're not places that are being impacted by the things that you see on TV.

You know, some of the things that you see on TV are, you know, the things that are right on the beach. They're the coastal areas. Their homes that were built in the 70s and 80s, not up to current code. It's devastating. It's terrible. I don't think anybody would want it to happen.

But, you know, my sense is our business is not probably directly impacted by some of the things that you're seeing on TV. I'd highlight that some of the moves that you're seeing are kind of within Florida. So they're in intra Florida moves as opposed to out of Florida moves. You know, Florida remains a place that's got great quality of life.

You know, maybe it's not as, you know, favorable of a deal as it used to be, but still relatively affordable. There's good jobs there. There's no state income taxes. So there are some offsets to some of the things like rising insurance rates and the like.

Yeah, Carl, we're making nice progress on our land options, you know, up to 56% in the quarter. You know, we've highlighted it'll be a journey. We think it'll probably take somewhere around three, you know, three to three and a half years in total as we cycle through our land portfolio to create up to the 70% level. But, you know, we're clicking off the milestones as intended.

So I'm really pleased with how our land teams are performing on that front. We'd expect 50% of our land to be with farmer options or land seller options. The other 20% that we're looking forward to the option will come from bankers. Our land banking team's done a really nice job building out a portfolio of bankers that we're working with. They're consistent, they're behaving in a very predictable way, and it's working out incredibly well for us.

You know, interest rates, you know, their money is tied to kind of what you see in the interest rate environment or broadly in the market. So, you know, we got a little bit of improvement on some stuff that we did in the third quarter. You know, we'll have to see how things go in the fourth quarter, depending on what happens with rates. But, you know, we're pleased with how land banking programs work.

Yeah, Trevor, you know, backlog conversion rate is something that, you know, that's a number that can be impacted by two things. One cycle time, getting better or worse, you know, we indicated in the prepared remarks, our cycle times will continue to come down. So, we'll certainly get some benefit from that. And then the other piece is spec inventory by, you know, the definition, those homes that are in production that respect are not in backlog.

So, you know, a lot of those will sell and convert the same quarter and they won't show up in that metric. So, you know, I don't want to tell you how to run your models, but, you know, given the percentage of spec inventory that we're starting and selling. Given the current interest rate environment, I think probably a better metric is to look at homes in production, total homes in production as a good indicator of whether or not, you know, we have the available homes to deliver in the next year's closing volume.

Yeah, in the current environment where we're selling in almost 40% of our business is coming through first time, which tends to be predominantly spec or mostly spec. And in the current interest rate environment, we actually want higher spec inventory as a percentage of whip. And when we had historically pre COVID operated that so the things that you've heard us most most recently talk about is being between 35 and 45% of total whip. And at the end of this most recent quarter, we're at 40, 42% of our total inventory is spec. So, we feel like we're riding line there on the finish side.

You know, when we were operating in more of a built order model, I think 1 per community was, you know, a pretty good number. And we're not abandoning that. We're slightly over that at 1.4, but we don't feel that we have any inventory exposure that's got us uncomfortable at this point.

You know, we're selling over 50% of the homes that we're selling right now are selling at some form of, you know, as a spec. So they're at some form of kind of production movement through the pipeline. So we feel pretty good. Feel pretty good there as well.

Yeah, we, we did see high single digit. A lot cost increase in Q3. We do see that in Q4. We have not provided a guide for 25, you know, but we've said this before. Our lot costs haven't decreased in more than a decade, you know, land is more expensive. And as you cycle through older land, the stuff coming on is more expensive.

You know, we'll give some color as to what that means for 25 when we give our 25 guide.

Yeah, we were 100 in Q3. So relatively consistent and that is embedded in our guide for Q4 as well. You know, worth it to highlight that, you know, a lot of that option revenue and law premium comes from our move up and active adult buyers. So you're at call it, you know, 60% of our business driving most of that.

And to further the comment that Ryan made earlier, that's not where we're doing most of the speculative building.

Yeah, Matt, we haven't given a 25 guide. We'll do that at the end of the next quarter. You know, the long term guide that we gave was meant to be that it was kind of a multi year guide of how we're positioning the business and investing in the land. So, you know, 25 specifically will tell you more next quarter.

Yeah, Matt, we talked about this a little bit. I think I'm prior calls and our view is we've got a view and how we're investing in the business, how we're growing the business. And that's driving what our capital leads are. We then look to what operating cash flow is. How much of the business investment strategy we can finance with our own cash and with the operating cash flow.

And then we go to kind of debt or, you know, other capital market mechanisms. I think, you know, the way to look at leverage is it's an outcome that's opposed to a being a driver.

No other than the same terms of land banking specifically what what it is really going to do is free up cash. You know, as we increase the relative percentage of optionality, you know, our balance sheet relative basis gets smaller. So it'll give us more choices to Ryan's point about what to do with that. Cash.

Appreciate everybody's time today. We're certainly available as the day goes on for any additional questions. We'll look forward to speaking with you on our portfolio call. Thank you.