Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2024 Fourth Quarter Earnings Conference Call. Currently, all participants are in listen-only mode. Following the Company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website kbhome.com through February 13, 2024. And now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter and full year fiscal 2024. On the call are Jeff Mezger, Chairman and Chief Executive Officer; Rob McGibney, President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory related charges and any other non-GAAP measures referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, here is Jeff Mezger.

Thank you, Jill. Good afternoon, everyone, and Happy New Year. We are speaking with you today from our corporate office in Westwood. I'd like to start by sharing a few comments on the Southern California fires. Words cannot describe the damage and loss in the areas where the fires have occurred and are ongoing. Our thoughts and prayers go out to all that have been affected. I would also like to recognize and thank the first responders and fire teams for their heroic efforts. Although it is not business as usual for some of our employees, all of our divisions, communities, and sales offices are fully operational. We recognize that it will be a long road to recover from these disasters, but we also know that California and its people are strong and resilient with the tenacity to rebuild and move forward. We had a strong finish to our year with fourth-quarter performance that was within our guided range across most of our key financial metrics. At $2 billion, our total revenues were significantly higher year-over-year, driven primarily by a 17% increase in deliveries that resulted from substantially lower build times. And our earnings per diluted share at $2.52 grew 36% from last year's fourth quarter. Our margins were healthy, expanding to just under 21% in gross and increasing to 11.5% in operating income. In addition, we returned nearly $120 million of capital to our shareholders during the quarter, the vast majority of which came from share repurchases. Our fourth quarter results contributed to a solid financial performance for 2024. We delivered nearly 14,200 homes, driving total revenues higher to roughly $7 billion and increased diluted earnings of $8.45 per share. Our book value expanded 12% from the prior year, and we produced a higher return on equity. These results are notable in light of the volatility from shifting mortgage rates that shaped the housing market last year. Operationally, we executed well in 2024 as we opened 106 new communities and sold out of 90, reduced our build time by an average of 28% year-over-year and achieved the highest level of customer satisfaction in our company's history. The housing market is benefiting from solid employment and wage increases. Demographics have been and we expect will continue to be a significant factor in driving housing demand with the largest generational cohorts, millennial and Gen Z buyers, demonstrating a strong desire for homeownership and contributing to the growth in household formations. As to supply, although existing home inventory has risen, it is still below historically normalized levels in most markets, especially at our price points. While longer-term housing market conditions remain favorable, affordability constraints stemming from rising mortgage rates are influencing near-term demand. We generated 2,688 net orders in the fourth quarter, up 41% year-over-year against a soft comparison in the year-ago quarter. Our net orders were driven by a significantly higher monthly absorption pace per community of 3.5 homes compared to 2.7 in last year's fourth quarter. Our cancellation rate remained stable sequentially at historically low levels, indicative of a solid pool of buyers ready and able to close on their homes. Having said all this, we did miss our internal sales goals as rising mortgage rates tempered our selling pace as the quarter progressed. Favorable year-over-year traffic within our communities as well as leads from our website indicate to us that consumers have a strong interest in homeownership, but are hesitant due to discomfort with the volatility in rates. Affordability drives decision-making, and we help buyers solve for this with our Built to Order model, which offers choice and flexibility. Buyers can meaningfully influence their final sales price by selecting their floor plan, lot, square footage, elevation, and personalized finishes in our design studios. In addition to offering buyers choice, our Built to Order model provides visibility in our forecasting and consistency in converting backlog to closings with more than 60% of our fourth-quarter deliveries coming from Built to Order sales. Buyer hesitancy has continued to some degree in our current quarter-to-date. And as a result, for the first six weeks of our 2025 first quarter, our net orders are 1,026 as compared to 1,170 in the comparable period of the prior year. As we are now entering the stronger selling months of the quarter and with a meaningful number of community openings projected, we do expect to close the gap on net orders relative to last year's quarter. We estimate that our net order comparison for the full 2025 first quarter will be roughly flat versus a strong comparison in our 2024 first quarter. And with that, I'll pause for a moment and ask Rob to provide an operational update. Rob?

Thank you, Jeff. I will begin by providing additional color on our net order results. Our fourth-quarter traffic increased 12% year-over-year, reflecting demand for homeownership, improved market conditions, and a higher community count relative to the year-ago quarter. In addition, as Jeff mentioned, leads from our website were also up as compared to the fourth quarter of last year. However, the continued volatility of mortgage interest rates along with general uncertainty headed into the election and other global and macroeconomic concerns slowed our sales pace as the quarter progressed to below our internal target. Although the Federal Reserve announced two interest rate cuts totaling 75 basis points during our fourth quarter, the rate on a 30-year fixed mortgage actually increased from September to October and again in November. As a result, some buyers hesitated on their purchase decisions, particularly in the last two months of our quarter. In a shifting rate environment, the one-time rate float-down option offered by our joint-venture, KBHS home loans, is a valuable tool for our Built to Order buyers. This feature allows buyers to reset their mortgage rates lower if they decline while their home is under construction. With the consistency in closings that our Built to Order model provides, we were well-positioned for the fourth quarter with our backlog and had also begun to shape our 2025 first quarter. As a result, we held base prices on Built to Order homes in our communities relatively stable rather than chase additional sales with price decreases during a seasonally slow period. That said, we continue to support our buyers during the fourth quarter with roughly 60% of our net orders having some form of mortgage concession, whether a rate lock or a buy-down. This was a consistent level relative to the past four quarters despite the rise in rates. Mortgage concessions helped buyers gain comfort with the timing of their purchases, serving to offset the option of waiting for a more favorable rate. Although our goal is to wind-down the use of these incentives as a selling tool, we will use them as needed to support our sales. We begin 2025 with a backlog of more than 4,400 homes valued at over $2.2 billion. While our backlog is lower year-over-year, driven by a 28% improvement in our average build time for fiscal 2024, we can convert our backlog more quickly into revenue. In addition, faster build times provide an enhanced value proposition to our customers purchasing a personalized home and allow us to sell later in the year and still achieve a year-end closing. As a result, our 2025 deliveries will be comprised of the homes we have in backlog, Built to Order homes sold through the early part of our third quarter and sales of inventory homes. We started approximately 2,800 homes in the fourth quarter, contributing to a 14% year-over-year increase in starts in 2024 and roughly 6,500 total homes in production at the end of the year. Going forward, we plan to continue aligning our starts with sales, with the majority of those starts already sold. While we averaged an improvement of 28% in build times for 2024, they were essentially flat quarter-over-quarter at about five months, which was a positive considering that the hurricanes in the Southeast temporarily impacted our fourth-quarter build times, although we did not incur any significant damage in our communities. We expect to be able to drive build times lower in our 2025 first quarter as we progress toward our goal of four months from start to home completion, which is the lower end of our historical range assuming no change to the availability of trade labor. To that last point, we recognize that investors are trying to understand the impact the tariffs and immigration policy could have on the homebuilding industry. It is very early as the new administration is not even in place yet. So, while we will have to wait and see how policies unfold, I will share a few of our current thoughts. As to tariffs, the majority of the products we use are produced domestically. Although tariffs could result in a higher demand for products made in the U.S., thereby driving up the cost of those products, we would look for ways to offset those costs and work with our suppliers on volume-based pricing. We have managed through disruptions in our supply chain before, and we are confident we will navigate any future interruptions as necessary. With respect to trade labor, even in times past when trade labor was very tight, we relied on our long-standing subcontractor relationships to ensure that we had the crews necessary to get our homes built. Working from a backlog of sold homes, our even flow production provides visibility to our trade partners, which is advantageous in their planning process. We continued to reduce direct costs on our homes started during the fourth quarter, which were down both sequentially and year-over-year, helping to offset the impact of mortgage concessions and increases in land costs. The categories where we saw the most favorable changes over the course of the year were lumber and concrete, despite volatility in lumber pricing in the closing months of our fiscal year. There are always opportunities to find cost reductions on our products, and we continue to focus on this, which should help with affordability for our customers, driving incremental sales. Before I wrap up, I will review the credit metrics of our buyers who financed their mortgages through our joint venture, KBHS home loans. We maintained our 2024 third-quarter capture rate with 88% of buyers who financed their homes using KBHS. Higher capture rates help us manage our backlog more effectively and provide more visibility in closings, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment was stable both sequentially and year-over-year at 16%, equating to about $80,000. On average, the household income of customers who use KBHS was over $131,000, and they had a FICO score of 742. Even with half of our customers purchasing their first home, we are still attracting buyers who can qualify for their mortgage while making a significant down payment. Our longer-term goals of increasing our scale, profitability, and returns have not changed. With our expanded investments in land acquisition and development in 2024, we are positioned for growth. We have a significant number of planned community openings in the first half of 2025 in time for the spring selling season. Our success will be a function of our solid execution on the fundamentals, maintaining our high customer satisfaction levels, further improving build times, value engineering our products to lower direct costs and improve buyers' affordability, and optimizing each asset on a community-by-community basis to increase our margins and returns. And we are confident in our ability to execute. And with that, I will turn the call back over to Jeff.

Thanks, Rob. During the quarter, we invested $744 million in land acquisition and development, an increase of 54% year-over-year. For the year, we invested over $2.8 billion to acquire and develop land. This represented a year-over-year increase of more than $1 billion as we continue to focus on growing our community count. Along the way, we remain diligent with respect to our underwriting criteria, product strategy, and price points. We increased our lot position by 37% year-over-year, ending 2024 with nearly 77,000 lots owned or controlled, almost one-half of which are optioned. We plan to increase our community count in both our established and newer markets. The latter group now includes a start-up division that we are in the process of opening in Atlanta, which continues our strategy of expanding our growth platform through de novo market entries similar to what we have accomplished in Seattle, Boise, and Charlotte. Atlanta is a top 10 housing market that we know well, and we have hired a seasoned division president with years of experience in this market who already has a defined market strategy and is actively pursuing land acquisitions. Across our footprint, we are focused on capital efficiency, developing lots in smaller phases wherever possible, and balancing development with our starts pace to manage our inventory of finished lots. With the cash that our business is generating, together with a healthy balance sheet, we are able to continue reinvesting in our expansion, which is our top priority, and also return a meaningful amount of capital to shareholders. We completed $350 million in share repurchases in 2024, representing 6% of our shares outstanding at the start of the year. Since we began repurchasing shares on a regular basis in late 2021, we have bought back 26% of our shares, accretive to both our earnings per share and return on equity, returning $1.3 billion in capital to stockholders, including dividends. We plan to maintain our balanced approach in 2025, reinvesting in our business and repurchasing our shares. In closing, I want to recognize the entire KB Home team for their ongoing commitment to serving our homebuyers and contributing to our strong results in 2024. Our company is well-positioned for future growth as we intend to continue meaningfully reinvesting in land acquisition and development. Due to the market dynamics we experienced in the closing months of our fiscal 2024 that have continued into the start of fiscal 2025, we lowered our housing revenue guidance for this year to $7.25 billion at the midpoint of our range. Although there is always a degree of uncertainty as to how a new year will unfold, we have a long-tenured management team and seasoned operators in our divisions that are highly skilled in executing our business model and navigating fluctuating market conditions. Longer-term housing market conditions remain favorable. We have the communities and products to meet demand. We remain committed to enhancing long-term shareholder value by profitably expanding our volume, driving higher returns, as well as continuing to return cash to shareholders through both share repurchases and our quarterly dividend. Before I turn the call over to Jeff, I want to take a moment to recognize him as this will be his last earnings conference call with the company. Jeff has been a valuable partner of mine and a critical part of our leadership team for the past 14 years. He has helped KB Home grow into a stronger company, producing higher margins and returns and with a healthy balance sheet. He leads the company having developed a highly capable and long-tenured team in accounting and finance that I am confident will help ensure a smooth transition. Thank you for your many contributions, Jeff. We wish you all the best in retirement. And with that, I'll now ask Jeff to provide the financial review.

Thank you, Jeff, for those kind words and especially for your leadership and our close working relationship during my time as CFO. It's truly been the high point of my professional life working with you here at KB Home. And I'm extremely grateful for the privilege to be able to complete my career with this outstanding company. I would also like to express a heartfelt thanks to the entire KB Home team for their dedication and contribution to our success during my tenure. I sincerely appreciate the professional relationships and my countless interactions with this special group of people. I will now cover highlights of our financial performance for the 2024 fourth quarter and full year as well as comment on our outlook for 2025. In the quarter, we produced solid results with a 20% year-over-year increase in housing revenues and an operating income margin of 11.5%, driving a 36% increase in earnings per share. In addition, our robust cash flow supported $744 million in land investment along with continued share repurchases. In the 2024 fourth quarter, our housing revenues grew to $1.99 billion compared to $1.66 billion in the prior year period, reflecting a 17% increase in the number of homes delivered and a 3% rise in our overall average selling price. Our fourth-quarter homes delivered of 3,978 represented a backlog conversion rate of 69%, a significant improvement from 49% in the year-earlier period. Our current quarter delivery performance was favorably impacted by continued improvements in build times and lower cancellation rates. Looking ahead to the 2025 first quarter, we expect to generate housing revenues in the range of $1.45 billion to $1.55 billion. For the 2025 full year, we are forecasting housing revenues in a range of $7.0 billion to $7.5 billion supported by our backlog of sold homes, projected net orders, and reduced build times. In the fourth quarter, our overall average selling price of homes delivered rose to approximately $501,000, with increases in three of our four regions. We expect our 2025 first quarter overall average selling price to remain flat sequentially at approximately $501,000. For the full year, we are projecting an overall average selling price in the range of $488,000 to $498,000. The expected decline in the full-year average selling price relative to the first quarter is primarily due to the higher mix of deliveries forecasted for the Southeast region in the full year period. Homebuilding operating income for the 2024 fourth quarter increased 27% to $229.1 million compared to $180.9 million for the year-earlier quarter. Our homebuilding operating income margin expanded to 11.5% compared to 10.9% in the 2023 fourth quarter, reflecting improvements in both gross profit margin and the SG&A expense ratio. We anticipate our 2025 first quarter homebuilding operating income margin will be approximately 9.5% and a full year metric to be approximately 10.7%. Our 2024 fourth-quarter housing gross profit margin increased 20 basis points from the year-earlier quarter to 20.9%. Excluding inventory-related charges of $0.9 million for the current quarter and $1.2 million for the year-earlier quarter, our gross margin for the 2024 quarter was 20.9% compared to 20.8% in the prior year period. We are forecasting a housing gross profit margin for the 2025 first quarter in the range of 20.0% to 20.4% and for the full year in a range of 20.0% to 21.0%. This gross margin outlook assumes the market conditions we experienced in 2024, with persistently elevated mortgage interest rates continuing. As a result, we expect no significant change in our use of homebuyer concessions to address affordability concerns. In addition, we intend to continue our focus on reducing direct costs to help offset the impact of these concessions as well as higher land costs, as Rob stated earlier. Our selling, general and administrative expense ratio for the 2024 fourth quarter improved 50 basis points from a year ago to 9.4%, mainly due to improved operating leverage from higher housing revenues. We are forecasting our 2025 first quarter SG&A ratio to be in a range of 10.5% to 10.9% and that our 2025 full-year SG&A expense ratio will be in the range of 9.6% to 10.0%. Our income tax expense of $57.1 million for the fourth quarter represented an effective tax rate of 23.1%. The rate was favorably impacted by additional tax benefits related to stock-based compensation and our earning more tax credits from building energy-efficient homes as compared to the year-ago quarter. We expect our effective tax rate for the 2025 first quarter to be approximately 23%. The full year tax rate is expected to be around 24%, up 1% as compared to 2024, primarily due to decreases in energy tax credits. Given the elevated IRS tax credit qualification requirements and our focus on maintaining the affordability of our products, we anticipate fewer of our homes will qualify for these tax credits in 2025. To be clear, we remain committed to building highly energy-efficient homes that meet the EPA's ENERGY STAR certified standards. However, we believe the additional costs necessary for some of our homes to satisfy the higher IRS tax credit qualification standards outweigh the possible benefits from meeting them for both our business and our buyers. Overall, we reported net income of $190.6 million or $2.52 per diluted share for the 2024 fourth quarter compared to $150.3 million or $1.85 per diluted share for the prior year period. The 36% increase in our diluted earnings per share reflected the 27% increase in net income as well as the impact of our common stock repurchases that lowered our fourth-quarter average diluted share count by 7% as compared to the prior year period. Reflecting on the full year, we are very pleased with our operational execution in 2024 that drove significant year-over-year improvements in financial performance. Our full-year housing revenues of $6.9 billion were up 8% as compared to the prior year and were nearly $300 million higher than the midpoint of our guidance range provided last January. In addition, our $8.45 of earnings per diluted share improved by over 20%, and our return on equity for the year increased to 16.6% compared to 15.7% a year ago, despite the persistently high mortgage rates for much of the year. Turning now to land, the $744 million invested in land, development, and fees during the quarter contributed to the full-year total of over $2.8 billion, which was up 58% compared to 2023 and represented the highest level since 2006. We ended the year with a pipeline of approximately 77,000 lots owned or under contract, supporting our plans to drive a significant increase in new community openings in 2025 and early 2026. Regarding community count, our fourth-quarter average of 256 was up 8% year-over-year. We ended the year with 258 active communities, up 7% year-over-year. We expect to end the 2025 first-quarter with approximately 260 communities, which would result in an 8% year-over-year increase in the average community count. We also expect to maintain roughly 250 to 260 open selling communities throughout the second and third quarters of 2025, generating favorable year-over-year comparisons in the quarterly average community counts. While we plan to open more communities in 2025 than we did in 2024, we also foresee higher community sell-out. Based on the expected timing of these sell-outs, we currently anticipate ending the year with approximately 250 communities before it grows again in early 2026, just ahead of that spring selling season. During the fourth quarter, we repurchased approximately 1.3 million shares of our common stock at a total cost of $100 million, contributing to a total of 4.7 million shares repurchased over the full year and 23.6 million shares, or 26% of the starting share count, repurchased since implementing our share buyback program in late 2021. With $700 million remaining under our current common stock repurchase authorization, we intend to continue to repurchase shares with the pace, volume, and timing based on considerations of our operating cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares, and the housing market and general economic environments. At year-end, we had total liquidity of $1.68 billion, including $598 million of cash and $1.08 billion available under our unsecured revolving credit facility with no cash borrowings outstanding. Regarding our financial leverage and credit metrics, we are pleased with our continued progress and a recognition of our strong position as reflected in the ratings upgrades for both S&P and Moody's in 2024. Over the past year, our debt-to-capital ratio improved by 130 basis points to 29.4% at year-end compared to 30.7% at the end of 2023. We have no debt maturities into our term loans 2026 exploration, with our next senior note maturity in June 2027. In conclusion, 2024 marked another year of strong operational and financial performance, and we remain optimistic about the outlook for future growth. In addition, we believe our solid financial position, including our liquidity profile and long runway for debt maturities, will allow us to continue to be opportunistic with capital deployment in 2025 and beyond. We believe we are well positioned to achieve our objectives in 2025 as we execute on the core principles of our unique Built to Order business model, supported by our improved build times and solid portfolio of communities, as well as our returns focused growth strategy and balanced capital allocation approach centered on enhancing long-term stockholder value. We will now take your questions. John, please open the lines.

And the first question comes from Stephen Kim with Evercore ISI. Please go ahead with your question.

Yes. Thanks very much, guys. Appreciate all the color. As usual, Jeff, it's not going to be the same without you, but best of luck and thanks for all the help over the years.

Yes, thanks, Stephen, and good working with you.

Yes, great. You provided a lot of information, so I’m trying to process it all. One thing that really stands out is the backlog turnover ratios, which are clearly increasing. You mentioned that the cycle times didn’t improve significantly from one quarter to the next. As you look ahead to the first quarter and the rest of next year, it seems you're forecasting a meaningful increase in the backlog turnover ratio, likely approaching 70% or more on average. I am curious about how much of this increase you attribute to improved cycle times versus possibly holding more spec inventory on your balance sheet.

Yes. So, Steve, it's a combination of several factors. The cycle time has improved significantly, and we expect that the numbers you mentioned are about correct for next year, especially in the first quarter, approaching 70%. The cycle time has been the largest factor in the improving backlog conversion over time. We've also moved towards delivering more quick move-in ready homes, which has contributed to the backlog conversion rates. In response to market demand, we've maintained a bit more inventory. Ideally, we hope to return to our traditional built-to-order percentages long-term, but we will always have options for buyers. So, the answer is really that it's both factors at play. However, the cycle time aspect has been particularly significant, especially after the last couple of years. Cycle times in construction were quite high post-COVID, but we've put a lot of focus and effort into bringing them back to more traditional levels, and that has been the main driver behind the improvement.

Great. Yes, that's really helpful. Jeff Mezger, you mentioned the order pace observed in the first six weeks, and from my calculations, it seems you expect orders to remain stable for the year, but flat for the quarter. This suggests that in the remaining weeks, orders could increase by about 7%, which aligns with the year-over-year growth in community count at the end of the year. Essentially, it seems you anticipate relatively unchanged year-over-year absorption rates for the remainder of the first quarter. I just wanted to verify if that understanding is accurate. Additionally, regarding absorptions and what we might expect moving into 2025, do you believe the communities you have open could achieve stronger absorption rates due to specific factors such as their geographic locations, sizes, or other characteristics that might enhance their performance, even if demand remains consistent year-over-year?

Steve, your calculations on the absorption rates were impressive, and your analysis is accurate. We anticipate that this year will resemble 2024, which has been somewhat inconsistent. Some months perform well while others do not, but we believe it will follow a typical pattern like we observed in 2024. We have many communities set to open, and our forecasts are based on our past performance and our expectations for these new communities to sell and deliver. Given the increase in openings this year, I wouldn't be surprised if these new locations perform better than existing ones since new communities tend to have stronger sales initially. I mentioned earlier that our internal targets for the fourth quarter were higher than 3.7. Back in September, demand was strong, but it did taper off a little. However, we seem to have turned a corner, and early indicators for 2024 are promising. We are aligning the units and orders with the performance metrics from last year, focusing on a per community basis, which suggests an increase in community performance.

Thank you. And our next question comes from the line of John Lovallo with UBS. Please proceed with your question.

Hi, guys. Thank you for taking my questions as well. And Jeff, best of luck to you in your retirement. First question is the 20% to 21% range for the gross margin is on the wider side, but understandable given the volatility in rates and the importance of the spring season. I guess, the question is, what are the main factors besides rates that could drive kind of the high or low end of that range?

On rates, they likely influence both the high and low ends of the range due to general economic conditions and affordability. We anticipate the largest effect on affordability next year will come from rate movements. This is partly why we have a broad range. It's quite challenging at this moment, especially early in the year before the spring selling season, to make predictions for the third or fourth quarters. Our margin estimates for the next quarter are largely based on our backlog margins, which are what we have for the first quarter. We also consider the leverage we have on our fixed costs included in the cost of goods sold. In quarters with higher revenue, our margins typically improve due to this leverage. If we look at the first quarter sequentially compared to the fourth quarter, we're down around 70 basis points at the midpoint, primarily because of lower volume and reduced leverage on fixed costs. Essentially, we're seeing less in the first quarter than we did in the fourth. Many of the homes sold previously are just scheduled for delivery in the coming months to close out the quarter. As always, the longer we project into the future, the less certain it becomes, especially with less booked in the backlog for the latter half of the year. The company will revisit this at the end of the first quarter with clearer visibility and will provide a better outlook based on the spring selling season. We aim to share more detailed guidance at that time.

Yes, makes perfect sense. And then, Jeff M., you talked about just inventory levels. Obviously, there's a lot of concern in the market about overall inventory. So I was just hoping maybe you could flush out those comments a little bit. I mean, it does appear that on a national basis that inventory is in pretty good shape, but there are some markets where it has stood out as increasing. So maybe just if you can go a little bit around the horn, if you will, and just give us thoughts on what you're seeing.

Yes, most of the markets, John, are in pretty similar inventory situations, resale inventory levels three and a half to four months in that range. There's a couple I can call out that are higher than that. One would be in Austin and the other for us would be in Jacksonville. And in both of those cases, if you look at the resale inventory and the pricing, it's at price levels much higher than we operate at. And certainly in Austin, we're priced below median resale with our products. So we're in a competitive position in those where inventory has moved up a bit. But you run through California, Arizona, Nevada, and other parts of Texas are a little higher. They’re probably in the four and a half to five months range, but still at our price points, not a lot of inventory there. So, I think it's important as you guys are looking at the various markets, to look at the price points of the inventory as well, not just the numbers and how quickly they're trading.

Thank you. And the next question comes from the line of Matthew Bouley with Barclays. Please proceed.

Hi, good afternoon, everyone. Thank you for taking the questions. I'm pleased to hear everyone is doing well in Los Angeles, and I also want to send my best wishes to Jeff K. Looking back at the Q1 order guide, it appears that absorptions have been down in double digits so far this quarter, and it seems like the communities will remain relatively flat from now until the end of the quarter. Can you clarify what factors lead you to expect a high single-digit increase for the remainder of the quarter? Will this be driven by incentives, concessions, or price reductions? What do you believe will stimulate that sales activity? Thank you.

Matt, I detailed the year-over-year numbers because they are quite small for an unusual selling period, influenced by weekend breaks around the holidays and December not being a major driver of our annual or quarterly orders. This is why we believe we'll bridge that gap in the upcoming months, due to either the overall market improvement or the number of communities we plan to open and introduce in January and February. The market doesn't need to change dramatically from its current state; it's primarily about our efforts with community openings.

Okay. I wanted to focus on the incentives and concessions and if there were any assumptions there. Regarding the second question, I'm considering the relationship between starts and sales for the remainder of the year. I know you mentioned that sales were slightly below expectations in Q4, but you also started more homes than you sold in that quarter. This relates to the margin question—do you have a margin level at which you would consider slowing down on starts? How do you plan to balance between starts and margins as the market changes this year? Thank you.

Yes. Matt, it's really about optimizing every asset. There's an ideal run rate at an ideal margin that maximizes returns for the community, and we aim for the highest return. If sales are falling short, we'll implement strategies to enhance the sales pace and optimize the asset. We won't simply start a number of homes with the hope of selling them later at any margin. We're not operating in that type of market. We will sell them, start them, close them, and adjust what we can with pricing or incentives to ensure we achieve our sales rates.

Thank you. And the next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Thanks. Good afternoon, everyone, and I hope everyone is safe given the unfortunate events in LA. Jeff, it's been a pleasure working with you, and I wish you the best moving forward. I wanted to clarify the gross margin guidance to ensure I'm understanding it correctly. Regarding the slight sequential decrease from the fourth quarter to the first quarter, is that primarily due to operating leverage? I recall you mentioned that you're assuming a similar incentive environment in the first quarter compared to the fourth quarter. I just wanted to confirm my understanding. Additionally, looking ahead from the first quarter to the rest of the year, as we approach the midpoint, is that also primarily driven by operating leverage rather than any other factors?

Right. So I'm not sure when you're talking about the operating leverage, Mike. Are you talking year-over-year? Are you talking sequentially? Where are you coming from there?

Well, sequentially, right, because you're talking about 1Q gross margins being down a little bit versus 4Q and then looking forward, the margin is improving a little bit to get from 1Q to the midpoint of the whole year.

Yes, understood. The decline from the fourth quarter is primarily due to lower leverage on fixed costs. We're seeing similar trends in pricing, costs, and incentives as we did in the fourth quarter. Most of those homes are in backlog, and we have clarity on their costs and pricing, so we don't anticipate significant discounts at closing. There can be some variability with quick move-in ready homes in the quarter, but we expect to maintain a level similar to what we saw in the fourth quarter. Looking ahead to the full year, fixed cost leverage will have an effect, which can be either positive or negative depending on revenue. While the first quarter generally yields lower volume and affects the remaining quarters, it's important to note that we project a slight decline in margins compared to 2024, around 60 basis points at the midpoint. This is largely due to the mix and where we anticipate new communities will open and perform. Our estimates are based on current data, and we believe our divisions excel at forecasting. If conditions improve, there's potential for better performance, but conversely, if they worsen, our figures could decline. This year, we have a broader range in projections, a full percentage point, reflecting the increased uncertainty as we approach the full year.

Understood, thank you for that. I wanted to ask about incentives or mortgage concessions. If I heard correctly from Rob, the percentage of communities offering incentives has stayed roughly the same compared to the last couple of quarters. I’d like to know if this holds true when comparing the level of incentives at the start of the fourth quarter to those at the end. Is part of the reason for the dip in orders, compared to your internal forecasts, related to the decision to maintain incentives rather than reduce base prices, even if it means accepting a decrease in volume? Is that the correct way to understand your strategy for the quarter, particularly in contrast to the industry trend of being more conservative with incentives across the market?

Mike, I can make one or two comments and then pass it to Rob because he's got the detail and lives the trends every day. But it's a good example of the difference in how we operate versus a lot of our peers that are 100% spec builders because they'll just keep upping the incentive till they clear the house or until they hit their number. And a big chunk of our deliveries were sold four, five, six months ago, and they're waiting on us to complete their homes. So, there's no incentives needed. It's just get the home built as quickly as you can. And we're sharing on this call that our build times are continuing to compress, which is really a good thing for our business. But Rob, why don't you walk through again the mortgage concessions and what you saw in the quarter with some of the rate locks you were having to do.

Yes, I believe most of your points were accurate. We didn't notice a significant change in the number of buyers we were incentivizing or the overall level of incentives for the quarter. This did increase somewhat as the quarter progressed. In September, we were in a situation where rates were decreasing, generating some excitement and allowing us to offer fewer incentives. However, that trend has reversed. We made the decision not to pursue sales aggressively in Q4 with significant discounts or price cuts, especially given the volatility in the markets and the heavy discounting by many competitors during this slower time of year. We haven't made substantial adjustments to our approach, but we're focused on finding the right deals for our current buyers. If we determine we need to offer more due to rising rates, we will. As Jeff mentioned earlier, December is a challenging time for this. We're just beginning to enter a more favorable selling season with spring approaching, when we typically see increased demand and improved sales levels. We will monitor the situation closely and adapt our strategies as needed to keep selling, including potentially adjusting prices or offering more support on rates. We're just entering a period that makes it sensible for us to take these actions, as we've been managing the backlog of our previous sales.

Thank you. Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hi guys, good afternoon. And just want to echo everybody else's comments thinking about all you guys with the buyers out there and good luck to Jeff K. on the upcoming retirement. My first question on the community count guide. Admittedly that was a little bit lighter than we were expecting, and it sounds like the dip in the fourth quarter you view as temporary, but I'm just curious, when I look at your lot count, it's ramped up pretty meaningfully over the last year to two. I know that there's obviously lags there, but are there any delays driving that kind of flattish community count through the year, either on development or maybe some communities getting pushed out either in California because of these fires or in the Southeast because of the hurricanes or was this really kind of consistent with your expectations all along?

Yes. Alan, primarily it's about the selling out process. We anticipate that sell-outs will be significantly higher than in 2024, so we are focused on keeping up with that demand. As mentioned during our prepared remarks, we have many grand openings planned, but the key challenge lies in selling out more communities. This year poses some difficulties from that perspective. You rightly noted our expectations for the fourth quarter. Traditionally, we provide insights on just one quarter ahead, but we wanted to offer more clarity for the year. As we enter the spring selling season, the first and second quarters are likely to show strong year-over-year comparisons in average community counts. We expect the slight dip in the fourth quarter to be just a temporary setback before a stronger performance leading into the 2026 spring selling season. We are optimistic about that. Regarding any delays, there are always issues related to communities and grand openings. Various factors, such as local government regulations, weather conditions, and natural disasters, can affect this, but overall, we manage to open our communities well. Typically, when we miss a few openings in a quarter, those communities still launch shortly afterward rather than facing long delays. So, the impact is not severe from a business standpoint. The main takeaway for next year is the expected increase in the sell-out population compared to 2024.

I appreciate that, Jeff. For my second question, I know it's early to assess the potential impact from all of these fires, but since California represents about a third of your business, I'm interested in your thoughts on how this may affect you. Thankfully, there’s no direct overlap with your active communities, but do you expect any acceleration in cost inflation due to the labor pool being diverted towards repairs and rebuilding efforts? Are there any expected changes to the permitting process or insurance? I'd also like to hear your insights regarding your insurance in relation to some of the more mature markets as a general question.

Yes. Alan, I think in general, it's too early to speculate and that the fires are still ongoing, and we're monitoring, and we're helping our employees, and we're keeping an eye on everything. This will be an extremely complex situation to deal with, and it's going to take some time. So we don't expect that six months from now, there will be 8,000 housing starts in L.A. County as all these homes go right back up. I think it will be in a onesie, twosie kind of a cadence. And a lot of things have to get worked out in the meantime and no different than the geography is vast in Southern Cal. But the population is big, and the capacity is there to handle a lot. So I don't expect a lot of labor or material pinch. If we get something, it will be very short order, and then you deal with it, and you move on. I do think we have to be nimble with utilities, for instance. There's going to be a lot of challenge here on utility crews to rebuild infrastructure and get power brought back to thousands and thousands of homes. So we'll be watchful of that. And we have assumptions in our community openings, and maybe a community loses another couple of months as you touched on because we can't get power. And that may be a potential, but I don't see a big hit to labor and material necessarily. It will take a long time to get this thing rebuilt.

And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Thanks for taking my questions in. Just back on kind of margins and incentive dynamics, I guess the simple question is if incentives crept up through the quarter, demand slowed, and missed your expectations later in the quarter. And then it sounds like the first six weeks started off low. Why is the assumption of flat incentives for the quarter and the year the right one to make at this point, especially with rates continuing to creep higher?

We believe we are in a good position overall. In the September call, we were quite optimistic, especially since rates had decreased significantly and there has been a lot of fluctuations in the rate environment. There are still concerns regarding the spread between mortgage rates and treasuries. We acknowledge that we cannot predict the macroeconomic landscape and are uncertain about its direction. Historically, we have started each of the last few years with some uncertainty but ended up achieving exceptional results, showing our capability to navigate challenges throughout the year. We will remain attentive to these developments. We're sharing our perspective as it stands today. We don’t have more insight into the macro environment than you do. Our top priority is our backlog, and we analyze the margins within that backlog, our current sales, and our cost expectations. By correlating this information, we arrived at our guidance, which is why it is presented as a range and updated each quarter as the year progresses.

Got it. Okay. And then just a quick one, just to make sure I heard it right in response to this piece, early question. The pace assumptions, did you say for the year the right assumption or what you're kind of currently planning for is about flat on a per community basis?

Yes. We are always cautious when it comes to forecasting order rates. Right now, the key focus for us is on order rates through the end of the spring selling season, as this will largely determine our full year revenues. We have better visibility into those figures. Additionally, we appreciate the built-to-order model because it provides us with insights about the future based on our backlog. We'll see how things progress in spring, and this will help us gain a clearer understanding for the year, both in terms of overall absorption rates and housing revenues.

Ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.