PulteGroup Inc (PHM) — Q1 2022 Earnings Call Transcript

Great. Thank you, Abby. Good morning. Thanks, everyone, for participating in today’s call to discuss PulteGroup’s first quarter earnings for the period ended May 31, 2022. Q1 represents another quarter of strong financial results and has gotten the year off to a great start for us. I am joined on today’s call by Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP of Finance. A copy of our earnings release and this morning’s presentation slides have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. Please note that as part of this morning’s call, we will review our prior year results as reported and as adjusted to exclude the impact of a $61 million pretax charge associated with the bond tender and a $10 million pretax insurance benefit recorded in the period. A reconciliation of prior year adjusted results and reported financial results is included in this morning’s release and within today’s webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. I also want to alert everyone that today’s presentation includes forward-looking statements about the company’s expected future performance. Actual results could 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 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 Marshall. Ryan?

Thanks, Jim, and good morning. PulteGroup delivered impressive financial results for the first quarter, showing an 18% increase in home sale revenues and a 43% rise in adjusted earnings per share compared to last year. This significant growth in our earnings per share is due to several factors, including higher selling prices, improved gross margins, increased overhead leverage, and our active share repurchase program. Our first quarter results are part of a series of strong quarters that have boosted our return on equity to 29.4% for the past year. There is much for investors to be enthusiastic about concerning our operational and financial performance. Overall, the supply and demand dynamics in the first quarter align with the trends we've seen in the industry recently. Demand was strong, inventory was limited, and new supply was restricted. Consumer interest in purchasing new homes remained high throughout the quarter. Demand was strong across various price points, buyer groups, and markets. The U.S. housing market benefits from favorable demographics, a robust economy, an excellent job market, and rising wages. New home sales are also positively influenced by significant increases in rental rates for single and multifamily dwellings. According to John Burns Real Estate Consulting, rental prices for single-family homes rose by over 5% in 2021, while multifamily lease rates increased about 13% from the previous year, with forecasts indicating further increases in 2022. Despite higher prices and rising rates, owning a home can still be a wise economic choice for many consumers, as homebuyers can secure comparable or lower monthly payments that tend to be more stable over time. Due to strong demand in the first quarter, we managed to raise prices in nearly all our communities, typically seeing increases between 1% and 5% across the country. The increase in home prices is also supported by a lack of available inventory in both new and resale markets. People shopping for homes are aware of the competitive market conditions. On the supply side, our teams successfully advanced homes through construction, even exceeding our high-end closing guidance. I want to commend the efforts of our homebuilding teams in navigating the challenges concerning labor and material availability that affect everything from land development to home construction. In many markets, labor and material availability have remained stable, but in some areas, conditions have worsened, resulting in longer build cycles. As a result, our production timelines increased by about one week in the first quarter, averaging between 145 to 150 days in most divisions. With only a few days left in April, barring a significant change in dynamics in the coming weeks, any improvement in the supply chain would primarily benefit our production in 2023. We will reaffirm our expectation of delivering 31,000 homes in 2022, with this guidance based on the availability of labor and materials remaining steady. With our production timelines extended, we exercise tight control over sales in most communities across the country. Although these restrictions may frustrate consumers, they are the right strategic decision given the current conditions. From both a customer experience and business risk standpoint, it makes little sense to elongate our backlog for the sake of recording additional sign-ups. Despite these challenges, it’s worth noting that we initiated nearly 9,000 homes in the first quarter, and we currently have about 5,200 spec homes in production, though most are in early stages like start and framing. These homes are expected to deliver in the latter half of 2022, with a focus on our entry-level communities for spec production. In summary, housing demand remains strong, home prices continue to increase, and the availability of new construction homes is limited. However, the Federal Reserve's clear intent to raise interest rates to combat high inflation poses potential challenges for the housing industry. While favorable market factors could sustain buyer demand despite increasing rates, the Fed is aiming to slow the economy, which could impact our industry. Given this situation, we see it as prudent to position our business for continued success, particularly by focusing on our land acquisition strategies. We are committed to increasing our option lot position, targeting 65% to 70% of future land pipeline controlled under options. Our disciplined land investment approach has led to strong land positions that we'll be closing on in 2022. Moving forward, we will remain thoughtful in our business investments and ready to adapt to shifting market conditions, aiming to identify excellent land opportunities while ensuring only the best projects receive approval. Now, I’ll turn the call over to Bob for more insights on our first quarter. Bob?

Thanks, Ryan, and good morning. As Ryan highlighted, the year has gotten off to an excellent start as home sale revenues in the first quarter were up 18% over last year to $3.1 billion. Higher revenues for the quarter were driven by an 18% increase in average sales price to $508,000, while closings of 6,039 homes were consistent with last year. The higher average sales price for the period was driven by double-digit gains in pricing within our first-time move-up and active adult buyer groups. By buyer group, our mix of closings for the first quarter was also consistent with last year, as we remained well balanced across the primary buyer groups. In the quarter, 35% of buyers were first time, 40% were move-up and 25% were active adult. In the comparable prior year period, the breakdown was 33% first-time, 44% move-up and 23% active adult. In the first quarter, we recorded net new orders of 7,971 homes, which is down 19% from last year. Lower orders for the quarter were primarily due to the 7% decrease in community count, combined with the impact of aggressively controlling sales paces, given ongoing disruptions in the supply chain. As has been the case for the past several quarters, we continue to restrict sales in many communities in order to align sales with current production pace. Looking more closely at our order activity, orders to first-time buyers decreased 13% to 2,710 homes, while orders to move-up buyers were lower by 22% to 3,341 homes and active adult orders declined 23% to 1,920 homes. The relative outperformance among first-time buyers is due to the availability of the spec production we started in the back half of 2021 that supported some incremental orders. Between delays in municipal approvals and extended land development timelines, it is taking longer for some communities to open for sale. As a result, in addition to being down from the prior year, our first quarter average community count of 777 was slightly below our previous guidance. We expect the modest drag in the community openings that we experienced in the first quarter to continue for the remainder of the year. As such, we now expect that our average community count in the second quarter will be 780, with growth to 800 in the third quarter and 830 in the fourth quarter. Reflective of the strong demand conditions we experienced in the quarter, our cancellation rate remained exceptionally low at 9%. In total, we ended the first quarter with a unit backlog of 19,935 homes, which is an increase of 5% over last year. The dollar value of our backlog increased 31% to $11.5 billion, which reflects the 5% unit growth combined with a significant year-over-year increase in our average sales price and backlog. As Ryan noted, our teams are doing a great job moving homes through the production cycle in light of the challenges the industry is facing and the availability of labor and materials. As a result, we ended the first quarter with 21,269 homes under construction, which is an increase of 44% over last year. This production number includes 5,181 spec homes that are currently in the pipeline, which is almost triple our spec units at this time last year. At quarter end, specs were 24% of units under production as we continue to make steady progress toward our goal of 25% to 30%. Our overall production pipeline is still early in the construction process as 28% of these homes are at the initial start stage with 43% of the homes at the framing stage. We ended the quarter with only 64 finished specs, which is consistent with our comments that homes made available for sale sell quickly. Based on the universe of homes in production, as well as their stage of construction, we currently expect to deliver between 7,200 and 7,600 homes in the second quarter. Again, assuming no significant improvement or erosion in the availability of labor and/or materials, we still expect to deliver 31,000 homes for the year, which would be an increase of 7% over last year. On our prior earnings call, we noted that, given supply constraints and limited opportunity to meaningfully increase construction pace, we would rely on price as the bigger lever to maximize return. Looking at the dollar value of our backlog and new orders, you can see that this is what has occurred. Based on the average price in backlog and the mix of homes we expect to deliver, we expect our second quarter closings to have an average sales price in the range of $525,000 to $535,000. Inclusive of the $508,000 average sales price realized in Q1 and the first-time spec homes we expect to deliver in the back half of the year, we now expect our average sales price for the full year to also be in the range of $525,000 to $535,000. As we always highlight, the final mix of deliveries can influence the average sales price we realized in any given quarter. Given the ongoing strong demand conditions, we have been able to increase sales prices sufficiently to offset rising costs and to further expand our gross margin. In the first quarter, homebuilding gross margin was 29%, which is an increase of 350 basis points over the first quarter of last year and is up 220 basis points sequentially. In addition to the strong demand and pricing environment, our Q1 deliveries also benefited from the flow-through of lower cost lumber, as prices for wood products rolled over in the back half of last year. Until a recent pullback, lumber prices had moved significantly higher since the beginning of the year, which will impact our closings in the back half of this year. Beyond lumber, we are continuing to see meaningful inflation in most materials and labor costs. As such, even with the recent pullback in lumber, we expect house cost inflation exclusive of land cost to be in the range of 10% to 12% for the full year. Based on the strength of recent selling conditions and despite the volatility in the materials and labor market, we now expect our gross margin to be in the range of 29.5% to 30% for each of the remaining three quarters of the year. Given the timing and impact of lumber and other input costs, we expect to be towards the higher end of this range in Q2, but likely toward the lower end of the range in the third and fourth quarters. As always, there are a lot of moving pieces, so we will update you on our gross margin guidance if needed as we move through the year. Our SG&A expense in the first quarter was $329 million or 10.7% of home sale revenues, which is in line with our earlier guidance. In the comparable prior year period, our reported SG&A expense of $272 million or 10.5% of home sale revenues included a pretax insurance benefit of $10 million. Exclusive of that benefit, our adjusted SG&A expense was $282 million or 10.9% of home sale revenues. Given expected homebuilding revenues for the coming quarters, we currently expect SG&A expense in the second quarter to be in the range of 9.4% to 9.6%, which would be a 30-basis-point improvement over the prior year at the midpoint. For the full year, we now expect SG&A expense to be in the range of 9.2% to 9.5% of home sale revenues. First quarter pretax income for our financial services operations was $41 million, compared with prior year pretax income of $66 million. Lower pretax income for the current period is reflective of a much more competitive market conditions which negatively impacted our capture rate and overall profitability per loan. Mortgage capture rate for the quarter was 81%, down from 88% last year. Our reported tax expense for the first quarter was $145 million for an effective tax rate of 24.2%. Our effective tax rate in the period was lower than our recent guidance. We recorded benefits related to equity compensation in the quarter. Looking ahead, we estimate our tax rate to be approximately 25% in each quarter over the balance of the year. Our reported net income for the first quarter was $454 million or $1.83 per share. In the comparable prior year period, our reported net income was $304 million or $1.13 per share, while adjusted net income was $343 million or $1.28 per share. In the first quarter, the company repurchased 10.3 million common shares or approximately 4% of the shares outstanding at the end of 2021 at an average price of $48.59. Relative to the first quarter of last year, our share count is down by almost 10%. In addition to allocating $500 million to share repurchases in the first quarter, we invested $1.1 billion of land acquisition and development. This keeps us on track to achieve our prior guidance of $4.5 billion to $5 billion of land spend for the full year, with more than 50% of that spend being for the development of existing land assets. Inclusive of our first quarter spend, we ended the quarter with approximately 235,000 lots under control, of which 52% were held under option. Our strong land pipeline provides us with the lot need to grow our business, while allowing us to focus future investment on projects that meet our underwriting standards. Even after allocating approximately $1.6 billion to investment in the business and share repurchases, we ended the quarter with $1.2 billion of cash and a gross debt-to-capital ratio of 21.5%. It’s worth mentioning here that as highlighted in this morning’s earnings release, Moody’s Investors Service recently noted the strength of our operations and overall financial position when they upgraded PulteGroup’s senior unsecured ratings from Baa3 to Baa2. As Ryan discussed, given the Federal Reserve comments that we were in for a period of rising rates, we are acutely focused on ways to mitigate land related risks. In recent years, we have established a land pipeline that can support the ongoing growth of our operations, but provides optionality should demand conditions change in the future. Going forward, we will continue to emphasize the use of lot options or comparable structures to control rather than own positions and we are actively working to increase our percentage of option lots within our land portfolio. Now let me turn the call back to Ryan.

Thanks, Bob. We realized continued strong buyer demand in the first quarter, and buyer interest has remained high through April. That being said, a 200-basis-point increase in mortgage rates since the start of the year is likely to have an impact on consumers. Even with the potential for changes in demand, I think the limited supply of available homes means prices can remain high and puts the construction industry in an advantageous position to weather future demand volatility. As we sit here today, the bigger challenge by far isn’t getting houses sold, but rather getting them built. That said, it is important that we take actions now to put PulteGroup in the best possible position for continued success. Based on recent field visits and walking numerous job sites, I can personally tell you that our teams are doing an amazing job getting our homes constructed. I want to thank our entire organization for their efforts, and I have to highlight the work of our corporate and field-based procurement teams, sourcing even the most basic materials can change from week to week, but this group has learned to adapt and find solutions to the most challenging situations. Before opening the call to questions, I would also like to highlight that PulteGroup was again ranked among the 100 Best Companies to Work for by Great Place to Work and Fortune Magazine. We didn’t just rank again this year but jumped up 32 positions to number 43 on the list. Being ranked is certainly a nice acknowledgment, but much more important is actually having an amazing and supportive culture that makes PulteGroup a place where people want to be. This is an important competitive advantage when working to attract and retain the most talented individuals. Now let me turn the call back to Jim.

Great. Thanks, Ryan. We are 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. Thank you. Abby, if you will explain the process, we will get started.

Hi. This is Ashley Kim on for Matt today. Thanks for all the colors. So, just my first question, understanding that you kind of saw order strength across the business, but just wondering if there’s any reason to think that those communities are specifically thinking entry level buyers may begin to see greater challenges given where rates are going?

Well, actually, I think it’s a fair question. As we highlighted in our prepared remarks, the demand that we saw in the first quarter was exceptionally strong, and that’s continued into April. To your point, if there is a buyer group that will be more impacted by rising rates, it’s certainly the first-time buyer. For that reason, among others, we have maintained the importance of our diversified and balanced consumer strategy. We have about 35% of our business that’s specifically targeted to entry level. We do tend to play at the higher price points within the entry-level consumer group. So I think it gives us some room to move around. The other piece that we have done here to help with the kind of buying process is most of those homes are starting to specs, and we are not releasing them for sale until they are closer to the delivery window, which I think shortens the amount of time that a buyer will be waiting to take delivery of their home in our backlog.

Thanks for that. And then have you done any recent stress tests on your backlog to kind of see what the potential risk there as your buyers kind of sit in backlog for a while to lock in rates?

We have Bob who will provide some insights on that.

We are always in close contact with our backlog. We have noticed that people are opting for longer rate locks, and we've indicated that a 100-basis-point increase in rates has a modest impact on our backlog. Interestingly, most of our clients have significant equity in their homes and have shown a strong desire to close. We have various strategies to assist them in reaching that goal, such as sourcing additional income or offering different down payment programs. Overall, our backlog remains solid, and we adapt to changes in circumstances to help clients move towards closing.

Thanks for that and good luck on the quarter.

Hey, guys. Good morning. Thanks for taking my questions and nice quarter.

Thank you.

There is a lot we could discuss regarding the land portfolio. You are clearly working to increase your options. Currently, you have about 235,000 lots, which is an increase of around 50,000 to 60,000 since the end of 2020. I estimate you have delivered approximately 30,000 to 35,000 lots during that period. Should we understand that, irrespective of the options and ownership split, roughly 90,000 to 100,000 lots, or about 40% of your portfolio, has been contracted or tied up for the last 15 to 18 months? I know there are many factors involved, so could you provide some insights into the age of your land portfolio and how much has been tied up recently?

Sure. Alan, one way to think about this is in terms of pre- and post-pandemic, and we would say that it's roughly half and half. We typically have things under control well in advance of actually starting on the lots, which makes owned versus option relevant. Overall, it generally takes us about 12 to 24 months to move from contract to opening communities. So I hope this helps clarify that approximately 50% is pre-pandemic or dated two to three years ago.

Half of it is pre-pandemic, and half of it is post-pandemic. We typically manage things well in advance of closing on the lots, which plays a role in the distinction between owned and option. Generally, it takes us about 12 to 24 months from signing a contract to opening communities. So, approximately 50% is from two to three years ago.

Yeah.

Got it. Okay. That’s helpful. And that was, I guess, pretty close to the numbers I was getting to there. So I guess when you think about the land market today and the move towards off-balance sheet and what’s going on in the industry in general. Have you seen any let up over the last few months in the competitiveness of the land market? What’s the inflation rate running at across your portfolio right now? And what’s the outlook going forward, I mean, do you think that some of these deals might get re-traded if things do soften a little bit or is there just so much embedded kind of margin profit in them right now that kind of what’s spoken for is likely going to move forward?

Yeah. Alan, it’s Ryan. I would tell you the land market remains competitive. Certainly, we have other new homebuilders that are buying for the prime parcels, and there are other options as well, might it be apartments or other types of users for the land. So I think if you have got a well-located parcel of land, it’s competitive, always has been, I think, always likely will be. In terms of kind of what we have seen with more recent optionality. We have pushed from two years ago or three years ago where we were kind of in the 30%s, 30% range in terms of amount of options. Today, we sit at 52%. As you have heard, we are going to push that higher; we have kind of set a goal and a target for ourselves to be in the 65% to 70% range. In terms of your question about, is there potential for things to be re-traded, we are purchasing this year, Alan, I would tell you there’s likely no need for that. To your point, there’s a lot of embedded value. These are parcels that were put under contract or under control 18 months to 24 months ago and so, they are great deals and we are going to close on them. We are going to be really thoughtful and judicious around what we are underwriting. What we are putting under control now that will be closings in 2023 and 2024. Those are the parcels that, I think, are more susceptible to being tighter in terms of economics that meet our standards and it’s part of the reason that we think it’s so important that you have got optionality in your land portfolio because it gives you the flexibility to maneuver.

That’s great. I appreciate the color there. And if I could sneak in one just housekeeping question, do you have the share of your orders this quarter that be considered kind of non-primary buyers thinking single-family rental, investors/like homeowners? I am not sure if you track that, but any disclosure you can give there and the trend would be great?

Yeah. It’s pretty consistent with history at about 3% to 5%, Alan.

Great. All right. And that includes the SFR business that you have been involved with?

We don’t have much of that at this point. Those closings are coming next year.

Good morning. Thanks for taking my question. Ryan, thanks for the balanced commentary. I wanted to press on the strategy of restricting sales a little bit, because I think we are all sensitive to the supply chain issues, and obviously, in recent quarters, being very clear that that’s the right thing to do, but this is a pretty dynamic and rapidly evolving market, especially with rates. You seem to be acknowledging being a little bit more guarded around what may or may not happen with demand at least in the near-term. And so why is it still the strategy to be so restrictive on sales versus, say, you get the buyers signed up, get them into backlog, and then be able to work with them on extended rate locks or things like that could give a little bit more certainty and visibility?

It's a great question. The main reason is inflation. We are currently facing a hyperinflationary environment globally. As we mentioned earlier, bringing in another buyer who won't be able to close on their home for another year isn't a good experience for anyone. Consumers aren't willing to wait that long and are exposed to various potential interest rate fluctuations that they might struggle to manage. We have fixed our pricing based on what we charge consumers when signing contracts, but we face over a year of potential commodity inflation changes, which we believe negatively impacts both the customer experience and our economics. However, we are pleased with how the production environment is developing. We started nearly 9,000 homes this quarter, indicating our capability to get units underway. We also closed homes at the upper end of our guidance, showing that we have solid control and predictability over our production. We are actively working to reduce our backlog so we can start relisting more properties for sale, and we are looking forward to that.

Got it. And just as a follow-up to the last one. As you make that progress, I mean, how do you envision the year playing out in terms of the restrictions and your ability to lift those? And then as kind of follow-on to the first one, but if I could add a second different question. Just anything you are seeing around upgrades, options, things that might be more leading edge in terms of highlighting some new buyer sensitivities?

Yeah, Mike, as you know, we don’t provide guidance on new orders, so I won’t go into that on this call. However, we are experiencing some small successes in the supply chain and are having decent progress with getting homes constructed. The first quarter often involves dealing with significant weather, so achieving 9,000 new starts indicates that our production pipeline is improving. If we maintain this pace, it’s reasonable to expect that we will start lifting some restrictions on how we release lots and homes for sale throughout the year. We are reaffirming our guidance of 31,000 closings for the year, which assumes that the supply chain situation remains stable.

Yeah. In response to your question about option and lot premium spending, it was nearly $100,000 per unit in this instance. That's an increase of 23%, which I believe reflects the strength of the market. Although we don't provide detailed information on the orders we have taken, you can see from the rising average sales prices that there hasn't been much change in that aspect at all.

Okay. Great. Thanks, Ryan. Thanks, Bob.

Thanks. Good morning, everyone. Thanks for taking my question. First, I just wanted to, and I apologize if I missed this earlier, but wanted to dial in a little bit in terms of intra-quarter trends, and I know sometimes you are reticent to get into month to month. But as you have seen, obviously, a tremendous move in rates during the quarter, I was curious if you witnessed any change in terms of either cancellation rates month-to-month or any change in the marketplace, let’s say, not just you, but with regards to incentives or discounts or even rate of price increases that have occurred?

Good morning, Mike. This is Ryan. That’s a great question. The sales pace during the quarter was very steady because we managed it effectively. We established a sales rate that we were comfortable with, which led to similar performance from January to February and February to March. Typically, during the spring selling season, you would expect sales orders to increase throughout the quarter, but we decided not to allow that this year. Discounts were virtually nonexistent, remaining below 1% for the quarter, which is a decrease compared to the same quarter last year. Price increases have continued at a steady and predictable pace over the past six to nine months. In short, the market remains healthy, demand is strong, and there are more buyers than we can currently accommodate in terms of home construction.

Great. Great. Thanks for that. Secondly, just a question on the planned increase to lot option, I was wondering whether or not that’s going to be driven by predominantly just by simply an increase in option lots going forward and perhaps keeping the owned lots flat. You did see your own lots go up, looks like about, I want to say, roughly 15% or so over the last few quarters, wondering if that might reverse even. And with a significantly higher level of lot optioning, if the, with the cash flow generation or reduced cash requirements of running a business like that, how that might change your repurchase or other uses of capital?

Yeah. Mike, I wouldn’t want to speculate on actual owned lots at any one point in time. I think we are trying to grow the business; to do that, you have to have lots on the ground. You have to develop them. Some of it will depend on whether we are buying raw that we are self-developing or if we have arrangements that provide us finished lots. So there’s a lot of things that will influence that. In terms of what that does ultimately to our capital allocation, I think you have seen us, as we have driven that option percentage higher, we have been generating a significant amount of cash and we have been using that cash to continue to invest in the business and to buy back stock. You saw that we obviously bought back a lot of stock this quarter. Our lens on that doesn’t change, right? So, if we have excess capital and if that’s being generated by a more efficient balance sheet, we will evaluate the needs for that capital and one of those is going to be share repurchases. So I think at the end of the day, it does a couple of things for us. One, it provides us some flexibility and protection from market risk. It yields higher returns and it yields higher free cash that we would use, again, consistently with what we have done over the past 10 years.

Great. Thanks so much guys. Appreciate it.

Hi. Good morning. Thanks for taking my question. First I just wanted to ask, compared to prior periods of rising mortgage rates, how quickly would you have seen an impact and then how does that compare to how homebuyers have responded with this most recent spike in rates?

It’s challenging to compare periods of rising rates because the factors driving those increases are quite different. Currently, we find ourselves in an inflationary environment with a robust economy. We're observing real wage growth, low unemployment, and a notable supply shortage. Additionally, it's important to consider the pandemic's impact in this rate environment. Although comparisons to other rising rate periods are possible, the insights gained may not be very useful.

Okay. That makes sense. And then, can you just give a little more color on the shift initiatives there shift more towards lot of option, do you have sort of timeline for the shift to the 65% to 70%? And then, can you just talk about willingness and ability to work with land developers and bankers to shift more towards option contracts?

Yeah. So it will take some time. It will be probably the next two plus years that you will see us progressively move there. But history is guide, I think, when we have laid targets like this out for our operating team. And frankly, we shared it with the investment community, we have executive against it. We certainly think that we do that here as well, which gives us the reason that gives us that we have got confidence to kind of put that target out there. I think it’s very doable. There are number of ways in which will effectuate moving from where we sit today to higher level of optionality. Some of that will be done directly with the land sellers. We think that’s arguably the best way to do it. Sometimes we will work with development partners that are actually putting finished lots on the ground for us, and there are some other alternative arrangements that you can use to get optionality in the land book as well. So I think you should expect us to probably use a mix of all of those things as we move to more optionality. We think it’s got a lot of benefits in terms of managing risk. But certainly very capital efficient; it helps to drive returns to a better place and we will use that in cash flow for some of the things that Bob highlighted a minute ago, including share repurchases.

Okay. Great. Thank you.

Hey. Good morning, everyone. Just wanted to follow-up on that prior question with you all targeting more option land over the next couple of years, I am just hoping, if you look at today maybe versus six months ago, regarding land bankers or landowners, developers that you are optioning from. Have you seen any change in terms of the deals, deposits, interest costs, etc. or even any sort of change in their appetite to continue doing deals?

I don’t really think the market has changed much. We haven't noticed a decrease in interest; there's still capital available. Our main focus has always been on whether we can make the economics work. While we've seen some tightening, which is a positive sign, we're aiming to create transactions that provide us with a reasonable return and some flexibility. We're expanding our relationships and engaging with various parties. Initially, we usually work to negotiate with land sellers. Currently, we're assessing if it makes sense to involve a third party before finalizing a deal if sellers are hesitant to consider options. We’ll have more updates on this, but it will require some time as we navigate through it.

Okay. Thanks for that. And then, Bob, I believe earlier you mentioned that there’s been some increase in buyer interest and extended rate locks. I am just hoping to understand, have you all proactively gone to the buyers in your backlog and encourage them to lock, are you introducing rate lock programs? And in a similar light, are you all increasing either deposit escrow requirements given the current market strength in the face of rising rates?

Yeah. To the latter one, we always seek a fair deposit, and we are continuing to do that today. In terms of working with our consumers, we still enjoy a very robust capture rate. We do offer, we think, attractive rate lock programs. We have seen people go out a little bit longer. They are locking a little bit earlier. And we are encouraging them to do that because the rate environment is going to move, it seems, and has moved against them. So we have seen, in particular, the sort of the 60-day rate lock environment, which is when people are getting closing dates typically. We have seen a lot of people participating in that.

Okay. Got you. But not too much longer than 60 days?

Yeah. That goes to the individual, candidly. We offer it. We have got long rate locks. But it gets expensive, Truman. So they are great for the consumer.

Thanks, Truman.

Good morning, guys. Thank you for taking my question. The first one, it sounds like with your community count expectations over the next few quarters and in your current spec production we could see a nice re-acceleration in orders in the back half, so just curious your thoughts on that? And then along the lines, the outlook doesn’t seem to include or incorporate any improvement in labor room materials. But if we take a step back, just curious what your view is on that, I mean, how do you assess the probability that we could see some improvement in those areas in the back half and if we could see some potential ramp in production?

Good morning, John. Thank you for the question. We're currently lagging behind where we ideally want to be in terms of community counts, primarily due to delays in getting approvals from local governments. The entitlement process has always been challenging and has taken considerable time. Although most cities and councils are operational again, the approval process is still taking longer than expected. It has taken us a few extra months to get past these hurdles. Regarding the supply environment, we expect challenges to persist for the remainder of 2022, which is why we have reiterated our previous guidance. We originally anticipated that 2022 would be a tough year for the supply chain, and that hasn’t changed. As I mentioned earlier, if there is to be any improvement—and I remain hopeful—it will likely start benefiting our production in 2023. However, we are not ready to provide any guidance on that yet. Lastly, the increase in new orders, more community developments, and fewer sales restrictions can all be viewed positively for the future. Nevertheless, we don’t offer forward guidance on orders, so while we are optimistic, we will share updates as things progress.

Okay. That’s helpful, Ryan. And then just lastly, on the sequential price increases of 1% to 5%, can you just remind us, how does that compare to the last couple of quarters?

It’s very similar. Not a lot of change. It was a strong quarter and pretty similar to what we saw in Q3 and Q4 of last year.

Yeah. Thanks a lot, guys. My observation is that investors are just really struggling to understand how in the face of such higher rates, the demand is still holding up. And Ryan, I thought you did a good job of clarifying that, it’s really just that the supply is so constrained that the demand can come down, but it will still be greater demand than supply. So just to push on that a little bit more and to clarify, when you talk about rate locks, which is something that we have been hearing builders talk a lot more about in recent days, I just want to confirm that the orders that you are taking and that you have taken, let’s say, over the last month, forgetting about the closings, but the orders, those buyers are qualifying at today’s rate, and if they are locking, they are basically at today’s rate. So there’s nothing about the orders today that reflects an obsolete rate environment. I just wanted to have you confirm that for us?

Yeah. Stephen, that’s exactly right. Buyers that are purchasing today or purchased in the first quarter, we qualified them at the rate when they applied for a mortgage. It’s part of the reason that Bob touched on, the comment that we made about stress testing our backlog. Those buyers would have qualified at whatever rate was there in a prior period. And largely, those buyers are still able to qualify, and for the ones that are maybe a little tighter. We have got programs and things that we can do to help get them over the hump. But to your question, Stephen, and I think the most important thing is, yeah, the buyers that are signing up today are qualifying in today’s rate environment. And the reason that they are locking or doing longer rate locks is because they are making the trade between the cost of that forward longer term rate lock against the volatility that they think might play out in the interest rate environment.

I understand your concern, and it's important to address this. We've noticed that some people seem a bit confused about the situation. Thank you for clarifying. Regarding the second question on incentives and rates, I've been curious about the potential impact of rising rates and longer cycle times. In the upcoming quarters, we might see a scenario where buyers' rate locks expire or they didn't secure a rate lock, resulting in a later closing than expected, which could mean they face higher rates. My question is whether your gross margin guidance takes into account the possibility of last-minute incentives, such as a rate buy down, due to these unusual circumstances. I’m trying to understand how this may be factored into your gross margin guidance as we move forward.

Yes, Stephen, there are certainly unique situations where we have to address some challenging circumstances with the consumer. We take pride in providing an excellent customer experience and doing what is best for the consumer, which generally we do consistently. The buyers in backlog have significant equity built from their purchases. They are eager to close, so there isn't much need for negotiation at the closing table. They want to move into their homes and have substantial value accumulated. They are closing. The gross margin guidance we provided takes into account all the information we have and what we expect to happen in the upcoming quarters and throughout the year, and it reflects a healthy gross margin, as you can likely understand.

Thanks for the help. I just wanted to clarify your comment about half of your land being pre-pandemic. If that refers to half of your controlled land, it implies that virtually all of your owned lots are indeed pre-pandemic. You control about half of your lots, which are also owned, right?

Yeah. Stephen, that’s fair.

Hi. Good morning, everyone. Thanks for taking my question. There’s a lot of talk on supply chain constraints, how it’s getting better, in fact, a week elongated. But even with all of this, your closings came in above your high-end of guide. I am curious was there anything that particularly drove the beat, like did you find additional resources quicker than expected, maybe had better work around or was just maybe things like Omicron or weather were just not as bad as you anticipated when you originally guided?

Well, look, we are slightly on the high end and so high end of our guide, which we are thrilled with. I think it’s more a testament to the strength of our operations team, our construction team that really worked incredibly hard to deliver homes in a tough environment and it’s hard out there. I think we have done a better job based on being in this environment now for a year, probably going on almost two years that we have probably got better forecasting methodologies and assuming how and how quickly things are going to move through the cycle. But it continues to be tough out there, but that’s not taking anything away from our construction team that I think really knocked it out of the park.

No, that's fair. It was good execution, no doubt. But I was just wondering if the guidance was set a bit conservatively from the start. My follow-up concerns supply chain issues, particularly in relation to different categories. Are any of your categories, like active levels versus first-time buyers, facing tougher supply chain challenges compared to others, considering some products may be unique to certain categories, or are the constraints similar across the board? Additionally, if we do encounter a market slowdown in the near term, could you discuss which categories you believe you can gain the most market share in? Thank you.

And to your first question on are there particular supplies? No. I think it’s consistent across buyer groups, and it’s kind of the same commodities, the same items that continue to see constrained things that involve microchips are hard to come by. There are some commodities, some lumber components that are difficult for sure. So, but in terms of differences between buyer groups, I wouldn’t highlight anything. As for kind of are there consumer segments where we could take share. I would tell you, we are looking to grow our company across the Board. Our mix of business today is exactly where we want it positioned, and so as we look to grow the company, we will look to do it equally across all consumer segments. I’d highlight that our Del Webb brand remains the most recognized and powerful brand within the active Adult Consumer Group. And so we like what we are able to do there. Similarly, we like the gains that we have made in the entry level consumer space with our Centex product, which that product is mostly being sold or started as a spec home and sold just prior to the home being finished.

Thanks very much. Good luck. I will pass it on.

Thanks. Good morning, guys. Deepa actually asked one of my questions, so I just have one. I wanted to ask how traffic trended during the quarter and into April. And then how much does it matter? If interest lists are heavy relative to what you can use and you are using best and final offer pricing more frequently and more Internet marketing, is traffic still the leading indicator of sales that we have all used to think it has been. I am just interested in your perspective on that and that’s all I got. Thanks, guys.

Yeah. Carl, I think, to your point, traffic is not as good an indicator of the strength of the market as maybe what it used to be. Most of our communities don’t have available inventory that you can buy off the lot, so to speak. So some of the things that we are really paying attention to today are the traffic to our website, virtual visits, in addition to the customers that actually come into the stores or the model parks physically. So it’s important, trust me, we pay attention to it; it’s something that I watch on a weekly basis, what’s going on with our traffic. But it is a little bit different right now compared to how it used to be. The difference maybe between now and pre-pandemic is the virtual traffic, which is ridiculously strong compared to maybe a prior cycle.

And how was walk-in over the course of the quarter, Ryan, and into April?

I don’t have those numbers. Does that walk-in, Carl, you were asking...

Yeah. It’s interesting, because of everything Ryan just said, that is relative to pre-pandemic good, but declining a little bit and mostly because I think people know there’s no inventory to look at. So they are not coming into the stores often, but they are still searching for homes and literally and figuratively. Many places have such limited lot releases that there’s not anything to go look at.

Okay. Thank you, Bob. Appreciate it. Thanks, Ryan.

Great. Appreciate it. Thank you, Abby. Appreciate everybody’s time today. We are certainly available for questions as we go through the remainder of the day, and we will look forward to speaking with you on our next call. Thank you.