PulteGroup Inc (PHM) — Q1 2024 Earnings Call Transcript

Great, thanks Jeannie. Good morning. Let me welcome everyone to today’s call. We look forward to discussing PulteGroup’s outstanding Q1 operating and financial results for the period ended March 31, 2024. I’m joined on the call today by Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning’s presentation slides has been posted to our corporate website at pultegroup.com. We’ll post an audio replay of this call later today. We 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. Ryan?

Thanks Jim, and good morning. As you read in this morning’s press release, PulteGroup reported record first quarter results across many of our key financial metrics. From top line revenues of $3.8 billion and gross margins of 29.6% to bottom line earnings of $3.10 per share, it was an exceptional quarter. These strong first quarter results helped to drive a return on equity of 27.3% for the trailing 12-month period. Our strong first quarter results reflect long-term strategic planning and a disciplined capital allocation process that have underpinned PulteGroup’s success for more than a decade. I would suggest that another driver of our record Q1 results are the decisions we made in the fourth quarter of last year, decisions that I think are emblematic of the balanced approach we take to running our business and delivering high returns. On our last earnings call, we talked about decisions we made in the fourth quarter of last year to not lower our prices in a chase for volume. As you will recall, demand in the fourth quarter of 2023 had started slowly but improved as interest rates began to moderate. As we made the decision to push incentives aggressively as the quarter progressed, we likely could have delivered higher closing volumes in ’23. With demand improving in the fourth quarter, we elected to hold our pricing and have had more inventory available for the 2024 spring selling season. The result of this decision is that we were in a position to sell and close more homes in the first quarter of 2024, at higher margins. That’s what you see in our Q1 results - closings and gross margins above our guide as demand dynamics allowed us to sell more homes with better net pricing. When buyer demand is rising, we’re often asked how many more homes we can sell given the value we place on entitled lots and our focus on driving high returns. More volume is not the only answer as we work to balance pace and price to drive high returns. Within our operating model, stronger demand provides choices: we can sell more houses or we can raise prices, or as was the case in the first quarter, we can do both. What we experienced in the first quarter is that areas of strong demand last year, such as the southeast, Florida, and Texas, continued to perform well into 2024. Even more positive is that areas that struggled in 2023, notably Arizona, California, and Nevada, showed significant improvement in 2024. Consistent with the favorable conditions in the first quarter, almost all our markets displayed pricing dynamics that were stable or improving, which allowed us to raise net pricing in more than half of our communities. As you’ve heard us say many times, our pricing decisions are made with a goal of delivering high returns and the best overall business outcomes. Depending upon the community and the buyer’s wants and needs, we may have raised base prices or lowered incentives, resulting in net pricing in the quarter across many of our markets up between 1% and 5%. The impact of these actions on our business performance is powerful. As Bob will discuss, we are increasing guidance for both full-year closings and gross margins. Against generally favorable demand conditions, the supply of available housing remains tight. We have a long-term structural issue resulting from a decade of under-building that has the country short approximately 4 million housing units. The available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates. As a homebuilder, this is a great operating environment as we are supplying a product that a lot of people need and want. However, I appreciate that our country’s housing shortage can create hardships for today’s consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn’t wait any longer for rates to roll back. In a market where home prices are high and because of limited inventory, they will likely continue moving higher. Our company’s ability to offer targeted incentives, particularly mortgage rate buy-downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage, especially relative to the existing home seller. Higher interest rates create additional challenges for today’s home buyers, but we appreciate that rates are moving higher because of a resilient economy and a strong job market. Given these conditions, we are optimistic about 2024 and PulteGroup’s ability to continue delivering strong financial results. Now let me turn the call over to Bob for a review of our first quarter results.

Thanks Ryan, and good morning. As Ryan noted, the company delivered exceptional operating and financial results in the quarter, which have us well positioned to realize outstanding financial performance throughout 2024. In the first quarter, we reported home sale revenues of $3.8 billion, which represents an increase of 10% over the prior year’s first quarter. Higher revenues in the period were driven by an 11% increase in closings to 7,095 homes, partially offset by a 1% decrease in average sales price of $538,000. The lower closing price compared to the first quarter of last year reflects a shift in the geographic mix of homes closed as we realized relatively higher closings from our southeast and Florida markets with more modest increases in our higher priced western markets. Closings in the quarter came in above our guide as we had available spec inventory to meet the strong buyer demand we experienced this period. As Ryan highlighted, by choosing not to chase volume in last year’s fourth quarter, we had additional inventory in Q1 that we were able to sell and close with better margins due to the improving buyer demand activity in the quarter. Our spec production is predominantly within our first-time buyer communities, so on a year-over-year basis we realized increased closings from first-time buyers. In the quarter, our closing mix included 41% first-time, 36% move-up, and 23% active adult. In the first quarter of last year, the mix of closings consisted of 38% first-time, 36% move-up, and 26% active adult. Reflecting the favorable demand conditions we experienced in the first quarter, net new orders increased 14% over last year to 8,379 homes. In the quarter, we realized a year-over-year increase in gross orders and a reduction in cancellation rates. Cancellations as a percentage of starting backlog fell to 10.1%, down from 12.7% in the first quarter last year. Average community count for our first quarter was 931, which is an increase of 6% over the prior year and in line with our guidance for year-over-year community count growth of 3% to 5%. The resulting absorption pace of approximately three homes per month for the quarter was above our historic average for the period, excluding the pandemic-impacted years of ’21 and ’22. I would also like to highlight that orders in the quarter were higher across all buyer groups, which is another sign of the overall strength of the market. More specifically, net new orders among first-time buyers increased 8%, move-up increased 22%, and active adult increased 12%. Consistent with earlier comments, the large increase in orders among move-up buyers was influenced by improving market conditions in the west, where our business mix is much more heavily weighted towards move-up. Given this strong start to our spring selling season, our quarter-end backlog increased to 13,430 homes with a value of $8.2 billion. We started approximately 7,500 homes in the quarter and ended the period with a total of 17,250 homes under construction. Our production pipeline includes approximately 7,000 or 41% spec homes, of which 1,337 are completed. We are operating just above our target of one finished spec per community but believe carrying a few more finished specs was the right strategy, given buyers’ preferences and the fact that we are still in the more active spring selling season. Given the units we have under construction and their stage of production, we expect to close between 7,800 and 8,200 homes in the second quarter. With the strong start to the year in both orders and closings, we are raising our guide for full-year closings to approximately 31,000 homes. This would represent an 8% increase over 2023, which is the higher end of our long-term goal of growing our closing volume between 5% and 10% annually. Closings in the first quarter had an average sales price of $538,000, which was slightly below our guide for pricing of $540,000 to $550,000. Relative to our guide, pricing in the quarter was influenced by the geographic mix of closings along with a higher volume of spec homes closed in the period. As we move through the remainder of the year, we expect the mix of homes closed in each quarter will result in ASPs consistent with our prior guide of $540,000 to $550,000. For the first quarter, we reported a gross margin of 29.6%, which is an increase of 50 basis points over the first quarter of ’23 and a sequential gain of 70 basis points from the fourth quarter of ’23. At 29.6%, our first quarter gross margin was also notably higher than our guide. Beyond Ryan’s comments that we are achieving higher returns by actively managing both pace and price, mix had an impact on our reported Q1 margins. Higher demand increased as the quarter advanced, which allowed us to sell and close more homes in the period than forecast. On a relative basis, more of these closings occurred in our higher margin markets in the southeast and Florida, resulting in a meaningful increase in reported gross margins for the quarter. Based on Q1 sign-ups and the composition of our backlog, we expect the geographic mix of closings to be more balanced as we move through the remainder of the year. That being said, we’re raising our gross margin guide for the remainder of ’24. We had previously guided to quarterly gross margins of 28% to 28.5%, but we now expect gross margins in the second quarter to be approximately 29.2%. Based on current backlog, we would expect gross margins for our third and fourth quarters to be approximately 29%, but we still have homes to sell and close, so demand conditions over the coming months will impact the results we ultimately report. Beyond buyer demand and near-term pricing dynamics, the gross margin guide for the remainder of ’24 also reflects expected changes in the geographic mix of homes we expect to close. Given recent sign-up trends, we anticipate closing more homes in our west region, which currently have a lower relative margin profile due to the fact that we adjusted pricing in these markets over the course of ’23 to achieve appropriate sales pace. Looking at our costs, reported SG&A in the first quarter was $358 million or 9.4% of home sale revenues. As noted in our press release, our reported SG&A for the period includes a $27 million pre-tax insurance benefit. SG&A in the first quarter of ’23 was $337 million or 9.6% of home sale revenues. Consistent with our previous guide, we continue to expect SG&A expense for the full year to be in the range of 9.2% to 9.5% of home sale revenues. Based on normal seasonality, we expect to realize increased overhead leverage as we move through the remaining quarters of the year. Our financial services operations reported pre-tax income of $41 million for the first quarter, which is an increase of almost 200% from last year’s pre-tax income of $14 million. The increase in Q1 pre-tax income was driven by better market conditions across our financial services platform. Financial services also benefited from higher capture rates across all business lines, including an increase to 84%, up from 78% last year in our mortgage operations. As noted in this morning’s press release, in the first quarter, we completed the sale of a joint venture that resulted in a gain of $38 million. On our income statement, this gain was recorded in equity income from unconsolidated entities. Our reported first quarter pre-tax income was period record of $869 million, an increase of 24% over last year. Against that, we reported tax expense of $206 million, which represents an effective tax rate of 23.7%. Our reported Q1 tax rate was impacted by energy tax credits and stock compensation deductions recorded in the period. For the balance of the year, we continue to expect our tax rate to be in the range of 24% to 24.5%. In total, our reported Q1 net income was $663 million or $3.10 per share, compared with prior year reported net income of $533 million or $2.35 per share. Earnings per share in our most recent quarter benefited from a 6% reduction in share count compared with the prior year as we continue to systematically repurchase our stock. Moving past the income statement, we invested approximately $1.1 billion in land acquisition and development in the first quarter. Consistent with our recent land activity, 60% of our land spend in the quarter was for the development of our existing land assets. Our Q1 land spend keeps us on track with our plans to invest approximately $5 billion in land acquisition and development for the full year, of which we continue to expect about 60% will be for development with the remainder for the acquisition of new land positions. We ended the quarter with approximately 220,000 lots under control, of which 51% were held via option. The purchase of several large land positions in combination with the decision not to move forward with a few option transactions during the quarter lowered our lot option percentage from the end of 2023. I would highlight, however, that 74% of the lots we had pre-approved in this most recent quarter were under option. As our first quarter numbers indicate, we continue to work toward our multi-year goal of controlling 70% of our land by buying via option. Looking at our community count, we continue to expect average community count for 2024 to increase 3% to 5% in each quarter over the comparable prior year period. Along with investing in our business, we continue to return capital to shareholders. In the quarter, we repurchased 2.3 million common shares at a cost of $246 million for an average price of $106.73 per share. In the quarter, we also opportunistically purchased approximately $10 million of our outstanding bonds. After allocating approximately $1.4 billion to investments and the return of funds to shareholders, we ended the first quarter with $1.8 billion of cash. Taking all of this into account, our quarter-end gross debt to capital ratio was 15.4%, while our net debt to capital ratio was only 1.7%. Now let me turn the call back to Ryan for some final comments.

Thanks Bob. As you would expect, given the strength of our first quarter results, buyer interest was high in the period as order paces increased beyond typical seasonality. That sales momentum continued into April, although we are now seeing some moderation of traffic into our communities due to the recent increases in interest rates, particularly within the Centex brand. While the change is relatively modest and based on a limited number of days, consumer feedback suggests that higher rates are causing some buyers to evaluate the timing of their activity due to the volatile interest rate environment. We’ll continue to monitor how buyers respond to changes in the rate environment and are prepared to adjust pricing or incentives to ensure we are appropriately turning assets. During our last earnings call, we talked about the opportunity for PulteGroup to grow its business 5% to 10% annually. Given the lengthy land investment process, organic change in this industry takes time to accomplish, but we have been systematically planning and positioning to deliver against this goal for the past few years. I think that the company’s efforts are reflected in the allocation of capital into growing our business. Including our Q1 spend, since 2021 our operating teams have invested approximately $14 billion in land acquisition and development, with plans to invest another $5 billion in 2024. Along with the land, we have been investing in our people and working to ensure the needed trade capacity is available to support our expanding operations. I’m proud to say that we have accomplished this while adhering to the same underwriting hurdles and investment disciplines which have been the cornerstone of PulteGroup for the past decade. Such discipline has allowed PulteGroup to more consistently grow its earnings, drive substantial cash flow from operations and deliver high returns. We have accomplished this while maintaining the superior build quality and customer experience which PulteGroup home buyers have come to expect. Before opening the call to questions, I want to take a minute to recognize and celebrate our team for once again being named a Fortune 100 Best Company to Work For. What makes this recognition so important and gratifying is that it’s based on feedback from all of our employees. This marks PulteGroup’s fourth consecutive year on the list and is a testament to the culture of personal caring and professional development that we work to maintain. I am proud to lead such an organization that is committed to taking care of our customers and each other. Let me now turn the call back to Jim Zeumer.

Great, 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. Jeannie, if you would explain the process, we’ll get ready to start our Q&A.

Yes, thanks very much, guys. Impressive results, and appreciate all the guidance that you provided. I guess my first question relates to your longer term targets with respect to land. Ryan, I think the last time I asked you this question, I was curious about where your long-term target is, and I think I stated it in terms of years owned. I understand that you want to have about seven years controlled with about 30% optioned over the long term - that would put you at about a little over two years of owned land. You’re quite a bit above that now, and so my question is, am I thinking about that right? Is your long-term target for owned land - you know, a little over two years owned, and over what time span do you think we should expect you to migrate to that, if that is in fact your target?

Yes Stephen, thanks for the question. I think your overall target of seven years controlled is about right, and then we stated our long-term target of optionality at 70%. We do think it will be a multi-year journey in getting there, and that’s really driven by the fact, Stephen, that we want to do it in a very organic, natural way that drives ideal economics for each individual transaction. We highlighted in the prepared remarks, Bob did, that in the quarter, 74% of the deals that we approved were under option. We think that type of activity over the next several years will have us arrive at our long-term target in a very natural way. When we do that, to your point, we’ll be right around something just over two, two and a half years of owned land at that point.

Thank you for that. As you move forward, it will generate additional cash flow alongside your net earnings, so I would like to discuss cash flow next. Previously, you provided guidance for cash flow from operations for the full year at about $1.8 billion. You’ve had a strong first quarter, and you’ve raised your outlook for both volume and gross margin, as well as operating margin for the year. Can you provide an update on your expectations for cash flow from operations for the full year given these changes? More importantly, what can we expect regarding dividends and share repurchases? For instance, this quarter, the buybacks were nearly equal to cash flow from operations, and your leverage has stabilized at low single digits. Should we assume that the cash flow from operations, with some variability from quarter to quarter, will generally match what you will allocate for dividends and repurchases?

Yes Stephen, it’s Bob. Good morning. We didn’t update the guide on cash flow because it’s early in the year. We’re considering our investments in the business. If you look at the balance sheet since the end of the year, we’ve increased our investments by about $300 million, approximately half in land and half in houses. To your point, we definitely expect that with increased volume and margins, we will generate a healthy amount of cash. Some of that will be directed towards achieving the 5% to 10% growth we’ve discussed, and we will have more updates on this as the year goes on. I think the trend will favor more cash from operations. Regarding capital allocation, we've been consistent for the past 10 years since we established our capital allocation strategy: Invest in the business, pay a growing dividend, and buy back stock with excess capital while maintaining a modest debt profile. Our leverage is lower than we anticipated. We consider liability management in our capital allocation, so I wouldn’t go as far as to say cash flow from operations will directly match our repurchase activity. We’ve been clear about communicating our repurchase plans, but in a scenario where we’re generating that level of cash, especially if we have less capital tied up in the balance sheet moving towards that 70% target, it will create more available capital. We will determine how to utilize that capital as it is generated.

Okay, well we’ll be staying tuned. Thanks a lot, guys, and congratulations on the strong results.

Thanks Stephen.

Morning everyone. Thank you for taking the questions. In the fourth quarter, as you mentioned, you didn’t raise incentives to chase volume. Now speaking to rates being higher for longer, eventually we’ll be past the peak of the spring demand and all that, so I guess going forward, how are you thinking about that trade-off with incentives from here, given where your margins are? Is there an opportunity to perhaps trade a little bit of that margin to drive better growth, obviously in the context of supporting returns? Thank you.

Matt, good morning, it’s Ryan. Thanks for the question. We’ve said in the past, we’re not going to be margin proud, and I would tell you that remains true. As we highlighted in some of my prepared remarks today, we believe our operating platform and how we’ve positioned our specific community investments, we’re in a great position to command excellent pricing, get pace and price, which you saw in this most recent quarter. Given the interest rate environment that we are clearly going into, higher for longer, we’ve got the ability to use the very powerful tool of forward mortgage rate commitments that allow us to offer a pretty attractive incentive program. Right now, we’re at 5.75% nationally, and about 25% of our buyers are taking advantage of it. The other thing I’d highlight is that 60% of our business is move-up and active adult, which tends not to be quite as rate-sensitive as the first-time buyer. With that first-time buyer, that’s where predominantly our Centex brand is focused, and we see a higher percentage of those buyers take advantage of the forward rate commitments. The last piece, Matthew, that I’d probably point out is that our guide for the balance of the year assumes that the incentive load that we currently have, which on the most recent quarter, closings was running at 6.5%, we’ve assumed that that stays flat going forward.

Got you, okay. Thank you for that, Ryan. The second one, I wanted to move to the topic of land costs and land inflation. I think last quarter, you had spoken to the potential for mid to upper single-digit inflation in land, but maybe it wasn’t totally clear on exactly when that would impact your gross margin. I’m curious, can you kind of walk us through the timing of land costs flowing into your gross margin, and then what are you seeing in real-time in the land market? Has the market started to decelerate at all, or is it still chugging along at that mid upper single-digit rate? Thank you.

Matt, it’s Bob. That mid to high single-digit increase in our lot cost was in our Q1 and is expected to continue through the balance of the year. When we gave the margin guide, we had pretty good visibility into our lot costs because those are typically lots already on the ground, so it’s there. In terms of the current market conditions, it’s still competitive out there. I’ve said this before - land hasn’t gone on sale, and slight variations in the market typically don’t result in prices declining. The market is super efficient on the way up, a little bit sticky on the way down, so for quality parcels, it’s competitive.

Got you, all right. That’s clear. Thanks Bob. Good luck, guys.

Thanks, morning guys. I think this is the first time since mid-2020 when you have addressed construction cycle times, so I thought at least I’d ask. Across the markets, products, and geographic markets, are cycle times effectively normalized now for you, or are we still a little bit longer than you were pre-COVID?

Good morning Carl, thanks for the question. We saw a couple of days of cycle time improvement in the most recent quarter, so we were at 128 days, down from 130 that we ended the fourth quarter of 2023 in. We are still on track and still are targeting being at 100 days by the end of the year. When we look deeper at our Q1 numbers, we had some long cycled closings that had been in production for a long time, in many cases were multi-family and condo buildings that we think kept the overall number that I just shared with you of 128 days a little bit higher than what we think is our actual run rate at this point. When we look at a lot of our markets, we’re already back to pre-COVID cycle times of even sub-100 days, so we’ve made a lot of progress in a lot of places. We have a few markets that are a little stickier, where we’re working hard to get cycle times back to where we’d like them to, but by and large, we still feel that the target we’ve set of 100 days is very much in reach.

Thank you, Ryan. You mentioned the increase in existing home inventory that we're observing in some data. Can you elaborate on whether this inventory will have a net neutral effect on the demand-supply dynamic? Specifically, are we seeing homes being sold by investors or second homeowners that are effectively vacant, and how does this differ from homes that are actively being occupied? What insights do you have on this? Thank you.

Yes, there may be some markets where there is available investor-driven inventory that could be considered new supply. However, in most of the markets where we operate, any existing resale inventory that comes to market is likely from buyers looking to purchase another home. Therefore, we believe it has a largely neutral effect on the overall supply situation.

Good morning. I was wondering if you could talk about maybe the potential impact of the NAR settlement on your business, or maybe the broader industry and any kind of potential secondary impacts to Pulte.

Yes Anthony, we’re watching it closely, as I think a lot of the real estate world is. Where we think it ultimately goes is it will create better transparency around the fee structure and will likely change over time the way that the providers of those services charge and the users, or the consumers, of those services ultimately pay. Realtors are an important part of our business and probably over 60% of the sales that we have include a buy-side realtor involved, so we certainly support the realtor community; they’ve been an important part of our company for a long time, but we are watching the way that the landscape there will certainly change.

Okay. Then you talked about stronger trends regionally, I think in Nevada, Arizona, California if I got that right. Is there anything particularly driving that in your view, and maybe if you can just talk about the long term attractiveness of that region as you build out the community count.

Yes, a couple of things happened there. It was a market that saw a lot of price appreciation in the COVID years. Affordability, we think got strained for certain. Last year, we did a fair amount of price discovery as we worked to right-size what our go-to-market price was in those markets. That combined with, I think, a general improvement in buyer sentiment contributed to the lights coming back on in the western markets. Some of the markets that we’d highlighted pretty consistently last year - Seattle, northern California, southern California, Las Vegas, Phoenix - those were strong contributors to our overall results in this most recent quarter. We’d expect that to continue. Bob highlighted that the relative margin contribution out of those markets will be lower than some of the other parts of our business. We’ve incorporated that incremental volume that we’re getting at a slightly lower margin contribution profile into our guide. Look - we’re pleased that those markets are contributing. We’ve got a lot of capital invested there, they’re big housing markets. People want to live there for a number of reasons - climate, jobs, etc., so we’re pleased that they’re doing well.

Okay, that’s helpful. I’ll turn it over.

Hey guys, good morning. This is Andrew Azzi on for Mike. A quick one. I just wanted to drill down, if I could, on the demand trends you’ve been seeing over the last few months, just given the change of rates and some concerns in the market. I’d love any kind of progression you saw in the quarter and here into April.

Yes, it was a strong quarter, a strong first quarter. We highlighted that we saw some trends that were even stronger than normal seasonality. The first few weeks of April have continued to show signs of strength. We did highlight that as we look at traffic, new traffic that’s coming into the stores, while a limited number of days in that data set, we are seeing a small downturn that we think is reflective of the change in the rate environment. We’re going to keep an eye on it. We don’t at this point think it’s anything to be too alarmed about, but we’re watching it.

Great, thank you. Then I guess secondly on the material cost, how have these trended, and any kind of detail on how that’s reflected in your 2Q gross margin, kind of your assumptions for stick and brick costs?

Sure. Build costs were stable in the first quarter, about $80 a square foot for base house. That’s flat with Q4 of ’23 and it’s actually down from $84 a square foot in the first quarter of last year. As we look at ’24, we expect cost inflation on labor and materials to be pretty manageable with low single-digit increases, and we’ve factored that into our guide.

Thank you so much, I appreciate it. Congrats on the quarter.

Thank you.

Good morning guys. Thank you for taking my questions as well. The revised full-year gross margin outlook is about flat year-over-year, and I think previously you had talked about pricing being flat year-over-year - that was a little bit better in the first quarter, for sure, mid to high single-digit land cost appreciation, kind of low single-digit construction cost appreciation. Just curious how you guys are managing that to actually achieve a flat year-over-year gross margin in that kind of cost environment with what had previously been expected to be sort of flattish pricing.

Yes, I think it’s the strength of the market, John. We highlighted that we’re raising prices in a number of our communities, that 1% to 5%. That’s really the driver combined, certainly in this first quarter, with the mix differential that we had highlighted.

So is it pricing and mix a little bit better than previously expected?

Yes, and just to be clear, John, the mix was really a Q1 issue. We think that smooths out based on the relative strength of volume that Ryan highlighted out west, so we’ll get more of that relatively lower margin profile in the back half of the year.

Okay, and that was sort of my follow-up. If we think about the positive mix impact of the first quarter, how much of the slight step-down from 29.6 to 29.2 in the gross margin outlook for the second quarter is the reversal of that mix impact, or is that really more of a back half phenomenon?

It’s both, right, but you’ll see some of it in Q2 based on the sales that we did in the first quarter, and then you’ll see more of it later in the year. That’s part of the reason for the step-down in margin. The other thing that we highlighted on the call, we still have a lot of homes to sell for the back half of the year, and so the point we were making is it depends on how the demand environment holds up. If it does, that’s good; if the market changed, you could see plus or minus depending on whether it’s a positive change or a negative change.

Awesome. Thanks so much, guys, for taking my questions, and thanks for the incremental color on April, especially the traffic detail. It definitely makes sense that the Centex buyer is a bit more rate-slash-payment sensitive, but I wanted to drill down on this a bit more and maybe see if you had any perspective on traffic across other parts of your business, that 60% that’s kind of active adult and move-up, and what you’re seeing from that buyer cohort, if anything, as rates move.

We are not analyzing the traffic data in that detail for this call. However, I will mention that while we have observed a decrease in store traffic over the past few days, our website traffic has been exceptionally strong. This indicates that there remains high demand and interest in home ownership. Rate fluctuations can certainly disrupt buyer behavior, but we believe the overall demand for housing is still very robust, and we are operating in a supply-constrained environment. The general view is that the operating conditions for both the industry and our company have been strong, even in a high interest rate climate. We expect to maintain this success for the remainder of the year. While affordability remains a challenge that we will continue to address, we believe we have the necessary tools to navigate it.

That’s helpful. Then maybe switching gears here, it’s been a little while since this topic has come up, but can you talk to your relationship with Invitation on the single family rental side, and give us an update on where things stand, perhaps how many homes you’re looking to sell to them this year. Any color there would be great, thanks.

Yes, when we started our strategy regarding single-family rentals with Invitation Homes and our partnerships with other local operators, we aimed for approximately 5% of our total volume to be allocated to the single-family rental channels. For this year, the closings we have lined up for that pipeline are indeed around that 5% mark. The current interest rate environment does make it more challenging for single-family rental operators to underwrite their deals. While we don't anticipate this situation lasting indefinitely, it does currently make it somewhat tougher for those operators to make their deals work. This is part of why we see it as an important segment of our business, but not so large that it disrupts our overall operations.

That’s helpful. I’ll pass it along, guys.

Hi, good morning. Thanks for taking my questions. I was wondering if you could talk a little bit about on the cost side, what are you seeing today in terms of the cash costs for land and materials relative to what’s flowing through your P&L, and what’s kind of the outlook on the cost side.

Certainly on the materials side, it is pretty consistent, and as Jim highlighted, our build cost per foot flat. The only thing where we’re really feeling any pressure there is on OSP, which has run up a little bit. In terms of the land, we’ve highlighted that high single digit increase in lot costs - that is, candidly, continuing a theme that has been going on for a number of years and is likely to persist. I’ve often described it as a conveyer belt of land - you know, three years of lots that we buy in any or control at any one point in time, and they kind of roll on, the most recent year falls off. Every new year coming on is a little bit more expensive, and that’s a combination of increased land costs and increased development costs, but we haven’t seen a step change in that, if that’s really what you’re focused on. Again, I think you can and should expect to see our lot costs going up for the foreseeable future.

Got it, that’s helpful. Then just looking at the first quarter gross margin, can you just talk about the drivers of the quarter, the 70 basis point quarter-over-quarter step-up, and then what were the upsides to your initial guidance?

Sorry, were you asking about the sequential data or the year-over-year data?

Sequentially.

Yes, we experienced a 70 basis point increase, partly due to the strength of the market compared to our guidance. For the spec homes we sold, we achieved better pricing, which contributed to a relative margin benefit over the fourth quarter. Additionally, we saw a shift in mix—not only geographically, as we previously mentioned, but also in terms of product type. Sequentially, there was a movement toward more move-up homes, which tend to have a higher margin compared to first-time homes. I don’t want to overcomplicate this, but there are various factors at play. When considering the sequential margin performance, it’s clear that the market's strength exceeded our initial expectations, and the increased presence of move-up homes, with their higher margins, has also played a significant role.

Great, thank you.

Hi, thanks for taking my questions. I’m going to stick with margins. Bob, you kind of alluded to this - it’s a tricky time when you’ve just had this rate move, you’re maybe just on the front end of seeing some traffic impacts but you’re having to give guide out a few quarters, and so I appreciate that there’s still some uncertainty when you’ve got a third of your full year closings yet to be sold. Maybe just talk through the assumption for flat incentives against this move in rates. Just talk about why that is the baseline assumption, or if it just felt like the right placeholders and matches what your backlog margins look like today. Maybe just a little more detail on how you went through this process at kind of an odd time when the rate move just happened.

Yes, it’s interesting. I’d refer back to something Ryan offered, which is the affordability is still a challenge. Against that backdrop, our expectation is that we will need to continue to incentivize folks, and the predominant way we’re doing that today is through our national commitments and some sort of rate finance support. Our expectation is that that continues. That was our expectation coming into the year. In the first quarter, you heard us say it was 6.5% again, just like the fourth quarter - that’s roughly $35,000, $40,000 a house. In a world where rates are actually trending back up, I think that we’re going to need to continue to support that. It’s a little bit challenging, to your point, but I think on balance, our expectation is that’s where we’re going to need to be to meet some of the affordability needs. It’s one of the reasons we think you’ll continue to see this strong market performance on a relative basis of new versus resale because we can offer those incentives.

As a follow-up, this suggests that your advertised rate flow will gradually align with market movements to maintain your competitive edge. If you've allowed your rate to increase by around 40 to 50 basis points compared to a month or two ago, what have you observed regarding recent demand trends, especially within your Centex brand? I realize this may not significantly impact your move-up or active adult segments, but for Centex, how sensitive have you found demand to a 40 to 50 basis point rate change?

For the true entry-level buyer, this is a significant issue, and we have programs that provide lower cost incentives and more rate support compared to other options available. It's important to note that we have a national program, and while there are many details regarding what we can offer, it ultimately depends on the needs of the consumers. Some buyers may find themselves unable to purchase a home due to rising rates, but this is not the case for our active adult and move-up buyers. Many of our Centex buyers, with an average sales price of $419,000 in the last quarter, are not typically entry-level buyers, as we are targeting a slightly higher price range. Our first-time communities are usually more aligned with entry-level buyers. Regarding the variation of our offerings, the answer is yes; we have been adjusting them. We are actively managing our national programs and making commitments in smaller amounts to avoid being affected by market fluctuations. This strategy allows us to adapt our offerings based on market conditions. As rates decreased, we lowered our offer rates to provide real savings compared to current market rates. Now that rates are going back up, we are slightly increasing our rates. This approach requires a balance between art and science, and we aim to listen to consumers to offer them the programs that meet their needs.

Thanks Bob, appreciate that.

Hey guys, good morning. Thanks for squeezing me in here. Nice quarter. Would love to get your updated thoughts on specs versus build to order. I know you and others ramped the spec production as cycle times re-elongated and there was a premium, or at least that margin differential spec versus BTO was kind of smaller than it historically has been. I’m just curious if you’re thinking about that any differently today with cycle times continuing to normalize and rates seemingly being higher for longer. It sounds like maybe the Centex offering, which is predominantly spec, I would think, is maybe seeing more of that impact than the move-up rate, so are you at the point now where you are kind of dialing back the spec starts a bit, or do you still want to maintain the current mix of your business?

We’re satisfied with our current operations, and we focus on the ratio of build-to-order versus spec sales, which is currently about 50/50. In Bob’s remarks, we mentioned that 40% of our width is spec, and we have slightly more than one final per active community. We closely monitor this and dedicate considerable effort to managing it in response to market conditions. Most of our Centex business is spec, while Pulte and Del Webb lean more towards a build-to-order model, although we do have some spec in those brands as well. We're attentive to the situation, and in a higher interest rate environment, having available specs allows us to apply incentives more effectively, particularly with forward mortgage rate commitments. This makes spec inventory more appealing, and we expect to maintain our current position.

Great, appreciate your thoughts there, Ryan. Then pivoting to the incentive environment, I think obviously you guys certainly made the right call by not chasing the market lower in the fourth quarter, based on your performance this quarter. It sounds like from your guide for flattish incentives, you’re not expecting to have to ramp discounts as the selling season moves into its later stages, but what is the sensitivity you’re looking at there? How much longer will the more recent, I guess softer traffic trends, or maybe sales activity, how long would that have to persist before you would sit there and say, you know what, we need to maybe increase those incentives a little bit to bring up the sales pace? Is it a few months, is it getting past the peak of the selling season and you’re sitting on more inventory than you’d like? What’s the decision process there look like?

Yes Alan, we analyze sales rates every day, checking the previous day's figures as one of my first tasks. We also consider both qualitative and quantitative feedback from our field operations during our decision-making process. What I can tell you is that any change in the rate—regardless of what it was or where it's headed—has led to pauses in buyer behavior over the last two years. Each time there's been a significant shift and the media coverage that comes with it, it has had a substantial effect on how buyers act. Time does appear to resolve these issues. However, I want to emphasize that affordability remains a significant concern, so we need to find a balance there. We plan to closely monitor the headline rate, as Bob mentioned earlier. Our national mortgage rate incentives can adapt based on market conditions, allowing us to present competitive offers without incurring significant additional costs beyond our current expenses. Lastly, Alan, we are committed to maintaining our production processes. As a production builder, we will optimize our returns, adjusting prices or discounts that affect affordability, enabling us to continue moving our assets and retaining our market share.

Thanks a lot for the thoughts, guys. Appreciate it.

Good morning everybody.

Hey Ken.

Wonder if you could just give some context on the regional comments you made, and I want to narrow it down to Florida because it’s a segment that obviously generates quite a bit of your EBIT. Can you, within Florida, talk about how that existing market supply rising affected, let’s say, the Centex versus your move-up brand, realizing Orlando is different than coastal markets? It’s such a big market for you guys profitability-wise. If you could maybe give a little color related to the margin swings you’re kind of seeing with those trade-up buyers’ entry within markets that are seeing the pick-up in inventory specific to Florida, thank you.

Yes Ken, I want to ensure I grasped the entire question. Let me provide some insights on Florida, and then feel free to ask for more details if needed. Florida plays a vital role in our business. We are present in almost all major housing markets there except for Miami. A significant portion of our operations is centered around move-up and age-targeted segments. While we do have some entry-level offerings in Tampa and Orlando, the other major markets primarily focus on move-up and age-targeted buyers. We also see some move-up and entry-level activity in Jacksonville. The business is robust, driven by job relocations and many individuals wanting to be there due to flexible work arrangements that allow them to work from home or other locations. The challenges in Florida mainly stem from affordability, as we've witnessed significant price increases in most Florida markets. Additional challenges include property taxes and insurance costs. Despite these obstacles, Florida remains a crucial component of our operations and a promising area for our growth.

Great, appreciate everybody’s time today. We’re around the remainder of the day for any follow-up questions, and we will look forward to speaking with you at various upcoming conferences and/or on our next quarter’s earnings call. Thanks for your time.