Good day everyone and thank you for standing by. Welcome to the Meritage Homes Third Quarter 2020 Analysts Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Emily Tadano, please go ahead, ma'am.

Thank you, Hana. Good morning and welcome to our analyst call to discuss our third quarter and year-to-date 2020 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations' link at the bottom of the homepage. Please refer to slide two cautioning you that our statements during this call as well as the press release and the accompanying slides contain forward-looking statements, including, but not limited to, our views regarding the health of the housing market; disruptions to our business by COVID-19, economic conditions and changes in interest rates, community count and absorption, projected full year 2020 home closings and revenue, gross margins, SG&A expenses, tax rates, and diluted earnings per share as well as others. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we've identified and listed on this slide as well as in our press release and our most recent filings with the Securities and Exchange Commission, specifically, our 2019 annual report on Form 10-K and subsequent quarterly reports on Forms 10-Q, which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Chairman and CEO; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes. We expect to call the last about an hour. A replay will be available on our website within approximately an hour after we conclude the call and will remain active through November 5th. I'll now turn it over to Mr. Hilton.

Thank you, Emily. I'd like to welcome everyone participating on our call today and hope that you and your families are continuing to stay safe and healthy. Before continuing the call, we'd like to take a quick moment to say thank you to Brent Anderson, who is retiring as the Vice President of Investor Relations of Meritage after 15 years. He's done a great job representing the company to our investors and analysts and he will be sorely missed. I'd also like to introduce Emily Tadano, our new Head of IR. Good luck, Emily, you have big shoes to fill and hope you're with us at least for the 15 years like Brent. Now, this is the last time I'll address you as Chief Executive Officer of Meritage Homes on an earnings call. As we've previously announced effective January 1st, Phillippe Lord will transition to the CEO role and I will retire after 35 years to become the Executive Chairman of Meritage's Board. I will continue to participate on these calls, but Phillippe will be taking the lead. Phillippe and I have worked closely together for 12 years. In the past five years as Chief Operating Officer, Phillippe was the co-architect of our strategy to focus on the entry-level and first move-up markets while driving operational excellence and efficiencies throughout our organization. I feel confident that Meritage will continue to be an innovative leader, provide exceptional quality and value to our customers, and grow to new heights under Phillippe's stewardship. I look forward to partnering with him in our new roles. So, let's talk about the quarter ended September 30th, 2020. Meritage had many remarkable achievements. We delivered our highest quarterly orders, our strongest absorption since 2005, record quarterly closing revenue, and our best quarterly closing gross margins since 2014, despite record high lumber prices, while also achieving our lowest net debt to capital in our company's history. These outstanding results are due to both solid market dynamics and our strategy. So, I'll start with slide four. We saw 3,851 homes this quarter, which was 71% more than the third quarter of 2019 and surpassed the quarterly record we established in the previous quarter this year. Although we're still in a worldwide COVID pandemic, favorable macro-economic factors for the new home industry that began last quarter continued in Q3 including historically low mortgage interest rates, increased demand for healthier and safer homes, limited supply of existing home listings, and a decade's long supply shortage of new homes in the market. All these dynamics create an advantageous backdrop, which combined with our strategy focused on affordable entry-level and first move-up homes, translated into another record sales quarter for Meritage. Moving on to slide five, we believe we have a solid strategy and are executing at a high level. We are achieving strong growth in revenue growth with an increase in both pace and price, while we are increasing prices in all our geographies in alignment with local market conditions, we are not turning down sales where demand exists. We can and will capture demand whenever possible because of our available spec homes. Our spec homes strategy has allowed us to sell at a greater pace and take market share. In Q3 of 2020, we accelerated our main investments by spending nearly $300 million and put a record 9,000 new lots under our control. Our balance sheet remains very strong, which provides a long runway for growth as well as a safety net in the event of another downturn. We maintained plenty of liquidity and a low debt leverage even as we invest significantly for additional growth in all our existing markets. While the accelerated sales trends resulted in some early community closeouts this quarter, we are still on pace to achieve 300 active communities by early to mid-2022 and consistent with our strategy, our new entry-level communities will have a high volume of spec inventories immediately available for sale at community openings, which can be closed relatively quickly. I'll now turn it over to Phillippe to discuss more of the recent trends.

Thank you, Steve. Before I begin and on behalf of the entire company, I would like to thank Steve for 35 years of incredible leadership that has guided the company through both successful and turbulent times as well as instill the values, integrity, and beliefs that live within each of us at Meritage today. Steve's commitment to our employees, customers, and shareholders, as well as his vision and execution led us to the company's all-time records today. I would also like to personally thank Steve for his mentorship and guidance over the last decade. I am deeply honored to have the opportunity to serve this organization and its employees as the upcoming CEO and to continue working together with Steve in this next chapter of Meritage Homes' story. Slide six. We hit on all cylinders during the three months ended September 2020. Our absorption pace for the quarter was up 94% year-over-year. Five out of nine states had absorption increases of over 100% year-over-year this quarter. Much of this sales outperformance is due to the strength in the entry-level market. Entry-level represented 60% of our average active communities during this quarter compared to 42% a year ago, which puts us near our target ratio of 65%/35% between entry-level and first move-up. Absorption in our entry-level communities was 75% higher than last year and nearly 1.5 times the pace of first move-up communities. Entry-level comprised almost 70% of total orders for the third quarter, up from 54% in the third quarter last year. Our first move-up communities also experienced improved demand year-over-year with absorption 86% higher than a year ago. Slide seven, the outside demand in Q2 and Q3 of 2020 led to 23 early community closeouts this quarter. These shocks happened across all existing geographies. We anticipate both continued strong sales demand and choppiness in our community channel in the near future. We have ramped up land investments and will continue to do so to replenish our pipeline to keep up with demand and grow our community count. We have been aggressively securing new lots since mid-April following a pause due to COVID-19 related shutdowns. During 2019, we put 17,000 new lots under control, which translates to 134 new communities. We put approximately 16,000 new lots under control in just the first nine months of 2020, almost as much as all of 2019 and nearly 80% more than 2018. This translates into about 123 new communities put under control during the first nine months of this year, with dozens more to come in the fourth quarter. At September 30th, 2020, with nearly 48,000 total lots outstanding, representing 4.4 years of lot supply based on trailing 12-month closings, we've increased our land book by almost 30% from September 30, 2019. As part of our entry-level strategy, the average size of our communities has also expanded. We've been putting larger land positions under contract, often several hundred lots at a time, targeting a three to five-year community life, even at an accelerated sales pace. Year-to-date, September 30, 2020, our new lots under control were 81% entry-level with an average community size of 130 new lots. We are scheduled to open more than 150 communities in 2021 compared to opening 75 communities in all of 2019 and approximately 100 communities projected for the full year 2020 after being shut down for six weeks due to COVID-19. We believe that our aggressive pace of securing new lots and a strong pipeline of community openings will start to meaningfully show increased community count in the latter half of next year. At a pace of 50 sales per year and an average of 300 communities could reasonably produce 15,000 sales in 2022. Slide eight, moving to the regional level trends. All of our regions reflected solid year-over-year performance in Q3. Our central region comprising Texas led in order growth this quarter with an 82% increase in orders over the third quarter of 2019, despite a 40% decline in average community count. The central regions absorption doubled to six per month compared to three per month in the third quarter of 2019. Entry-level communities represented 63% of the central region's average active communities during the third quarter of 2020. Our orders in the West region were up 68% over the third quarter of 2019, driven by an 88% increase in absorption with 10% fewer average communities. Entry-level communities represented 63% of the West region's average active communities during the quarter. California produced the largest year-over-year growth in orders at 158% for the quarter and the highest absorptions of all nine states we operate in, selling an average of seven per month during the quarter of 2020, which was an increase of 137% in absorption year-over-year. Average community count in California also increased 9% year-over-year for the third quarter of 2020. We're seeing the success of the shift to newer affordable entry-level communities in California come through in the community count and sales performance there. Our each region experienced order growth of 63% on an 87% increase in absorptions year-over-year for the quarter, offsetting a 30% decline in average community count. 50% of our average active community in the East region were entry-level during the quarter. I will now turn it over to Hilla to provide additional analysis of our financial results.

Thank you, Phillippe. Let's turn to slide nine. We generated 56% earnings growth year-over-year in the third quarter of 2020 compared to the same period in 2019 as we had significant growth across all key metrics, with 21% closing revenue growth, 170 basis points increase in home closing gross margin, and 70 basis points improvement in SG&A as a percentage of home closing revenue. This quarter's closings were up 24% year-over-year with 71% of closings coming from previously started spec inventory. At September 30, 2020, approximately 14% of total specs were completed less than the last couple of quarters understandably as we're selling more specs in earlier stages of production. Although this pandemic is also driving a decrease in our backlog conversion rate over the last several quarters, our backlog conversion rate for the third quarter was 68%, which is slightly up year-over-year evidence that our construction pace is keeping up with sales. We generated over $1.1 billion of revenue in Q3 2020 as our year-over-year increases in closing volume reflect our record high sales, more than offset the decline in ASP net closings resulting from the shift in product mix towards entry-level. Our closing gross margin improved 170 basis points to 21.5% for the third quarter of 2020 from 19.8 a year ago. Higher home prices more than offset record lumber costs. The additional closing volume and the efficiencies achieved from our streamlined operations and national purchasing savings contributed to a 31% year-over-year increase in total closing profit. As we have previously covered, we have been able to continue to harvest savings in our material costs by reducing SKU count to achieve preferred vendor pricing and bulk purchasing discounts while taking advantage of pre-cut materials where available. Our streamlined production also allows us to obtain preferred labor pricing from our trade. SG&A as a percentage of home closing revenue was 10.1% for the current quarter, which was a 70 basis points improvement over 10.8% in 2019, due to greater leverage of fixed expenses and efficiencies and higher closing volume as well as cost savings from technology enhancements, particularly related to sales and marketing efforts. We also benefited from a lower tax rate with the extension of the energy tax credits into 2020 under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019. Our effective tax rate was 19.5% for the third quarter this year, versus 24.4% last year. Our third quarter diluted EPS of $2.84 also benefited from our repurchase of 1 million shares in the first quarter of 2020. To highlight just a few items for year-to-date results September 30, 2020 on a year-over-year basis, we generated an 86% increase in net earnings, orders were up 40%, closings were up 26%, we had a 250 basis points increase in home closing gross margin, and a 90 basis point improvement in SG&A as a percentage of home closing revenue. The strong start to 2020 and rapid recovery that started in mid-April more than offset any pullback experienced from COVID-related uncertainties in late Q1 and very early Q2. Moving on to slide 10, our balance sheet continues to be very strong even as we step up investments in land, acquisition, and development. We have plenty of liquidity including $610 million of cash, nothing drawn on our credit facility, and a lower net debt to cap in the lowest net debt to cap in our company's history at 15.7%. We grew our spec inventories back to an average of 11.2 spec for communities this quarter after dipping in the second quarter to about 9.3. We are committed to increasing our per-store spec count by year end with inventory on the ground available for a quick close. We anticipate our heavy backlog in increased volume of available specs entering into 2021 will result in improved backlog conversion and solid closing into next year. Slide 11, our land acquisition and development strategy is very nimble and we can aggressively increase our purchases in the housing market when it is hot and also pull back quickly when the housing market slows. We spent nearly $300 million on land development this quarter; our highest spend in a single quarter in our history. For the first nine months of 2020, we spent nearly $760 million on land acquisition and development, which was more than 28% higher than the same period of last year. We are using options or staggered purchasing terms to secure more lots, which allows us to preserve our liquidity. About 58% of our total lot inventory at September 30, 2020 was owned and 42% was options, which improves compared to September 30, 2019 with 66% owned and 34% options. Finally, I'll direct you to slide 12. 2020 will be a record year in spite of the pandemic. We anticipate continued strength in Q4, but caution these results could be impacted by uncertainty surrounding the election, COVID-19, or financial market volatility. For the full year 2020, we're projecting total closings to be between 11,200 and 11,500 units, home closing revenue of $4.2 million to $4.4 billion, home closing gross margin of approximately 21% to 21.5%, effective tax rate of 20% to 21% and diluted EPS of $10.25 to $10.50. With that I'll turn it back over to Steve.

Thank you, Hilla. Turning to slide 13. To summarize, Meritage Homes today is a different company than when I co-founded in 1985. Our culture and our strategic shift has been transformative. I'm proud of the innovative products, energy efficiency, superior quality, and affordability that we have delivered in every home that we build. Now, as one of the leading entry-level and first move-up home builders, Meritage is well positioned to capitalize on current market demand and deliver strong results into the future. Demand is through the roof, pun intended. Our closing revenue growth benefits from our focus on affordable product, which allows us to push both price and pace. Layering the leverage of SG&A and streamlined operations on top of closing revenue growth, we're seeing some of the strongest results in Meritage history. Our financial flexibility and growth comes from having a strong balance sheet with excess cash and the lowest net debt to capital we've ever had. We are focused on growth by accelerating land investments to get to our goal of 300 community count by early to mid-2022. We are driving an increase in volume and creating value for our shareholders. All this was the combination of the right strategy, ability to execute, and the dedication of an incredibly talented team. I truly believe the opportunities for future growth and success are boundless for Meritage. I'd like to personally thank our employees and everyone who has helped transform Meritage Homes, the executive team had a vision for this company and our people made it a reality. On a personal note, I want to say thank you to the investment community for your long-term interest and support for our company, and for my leadership. After 91 quarters of your thoughtful and brilliant questions, I'm not sure how we'll close without the anxiety of the quarterly full body scan. You'll know how much I really miss all of you. That concludes our prepared remarks. I'll now turn the call over to operator for instructions on Q&A.

Thank you. And we'll go first to Alan Ratner with Zelman & Associates.

Hey, guys, good morning. First off a big congrats to so I guess everybody on the line Steve, Brent, Emily, Phillippe. Steve, I think I speak for everybody that we will certainly miss you on these calls as well. But best of luck in the next chapter.

Thank you.

So, I think the obviously the big topic that everybody's focused on today is just this concept of, you know, have we hit a point where builders kind of have to intentionally slow the pace of activity for a multitude of reasons. And obviously, nobody is expecting 70% of growth to continue here. But you know, the community count big topic, and I think, 300 target by mid-2022 is certainly extremely positive and optimistic. And I guess the question is, what does that cadence look like? There's obviously concern that you have enough product on the ground heading into the selling season for next year. So is it going to be somewhat smooth for the year back halfway weighted, front halfway weighted, but I guess, on top of that, perhaps the better driver of your growth is spec inventory, as opposed to communities, since such a high percentage of your sales are spec. So, can you maybe give us a little bit of a target of what you're hoping to have on a year-over-year basis your spec counts, heading into 2021, just so we can get some idea of the planning and growth?

So, there's a lot to unpack there. Alan, I appreciate the question. And I appreciate yours and the support over these last couple of decades. You know, it's been a great ride. And you guys have provided us some very thoughtful coverage and research. And we really appreciate that. I appreciate that.

Thank you.

It's essential for investors and analysts to adopt a long-term perspective rather than focusing solely on the next couple of quarters. The upcoming quarters may show some fluctuations, especially if our strong sales persist, which I believe they will. We have significant opportunities ahead; it's not a matter of if but when these communities will emerge and contribute to substantial long-term growth for our company. As Phillippe mentioned, we should aim to sell at least 15,000 homes in 2022, and we have the resources to achieve this. We are entering the new year with a considerable backlog, as we have been selling homes earlier in the construction cycle, which is strengthening our backlog. Furthermore, we are actively working to increase our inventory of spec homes to about 3,000, having around 2,100 to 2,200 at present. We plan to ramp up our spec homes for the spring selling season, which will also benefit our deliveries next year. For those only considering the next quarter or two, it might be a bit challenging. However, for long-term investors looking at the company’s future, the outlook is promising, and I am genuinely excited about what lies ahead in our pipeline. I believe investors should share this enthusiasm.

Very helpful, Steve, I appreciate that context. And certainly, with the bumpiness, you know, you do have the balance sheet to take advantage of any shorter term disruptions that not occur on the shares as well. On the community count growth, it's going to be extremely strong, are there any SG&A expense considerations we should hear as far as front loading some expenses that might be associated with opening those communities? And when would those show up?

I'm going to let Phillippe, and he'll take that one.

Yes. Obviously, with the ramp up to 300 communities, you're talking about a 30% growth in our community count, even if the pandemic didn't occur. And so we have to add different layers to our organizations to support that, to support the higher scale of community. So, you can expect to see SG&A increase next year, year-over-year, it's mostly going to be time with the community, the community opening. So, you know, I would expect that to happen more in the back half of the year, the first half of the year, we're always trying to be very mindful of adding the overhead as we start to see the revenue occur specifically in the field overhead piece. So, it's going to be more weighted towards the back half of next year. But clearly, we've added land folks and land development folks, we have more land that we're processing today than we ever have in the history of the company, you know, as we strive to get to the 300 communities in the early to mid-part of 2022. And maybe Hilla wants to add something to this as well.

Yes. So I think you guys know, we have overhead and two different components, right? There's a portion that lives in margin and a portion that lives in SG&A. Both of them, obviously, we're going to have to add headcount in some capacity to grow the company, neither one is going to be very meaningful, right? There's going to be an offset in other direction. So, you're not going to be going to see continued improvement in our SG&A leverage, but you're not going to see a material deterioration either. So just wanted to make sure we have some guardrails on those numbers.

Very helpful. Thank you very much and great luck.

Thank you.

We'll go next to Truman Patterson with Wells Fargo.

Good morning, everyone. Congratulations to everyone on the call as well. Now that Brent has officially retired, I've been trying to convince him to finally move to Phoenix, so we'll see what happens with that. The first question is about the 18% decline in community count, which seems to be a result of your own success. Hypothetically, if the market is growing and orders are increasing by 20% or 25% in the first half of 2021, do you think you'll be able to respond to the market and offset some of this community count volatility through a higher absorption rate? I'm also considering that you're replacing 75% of your communities effectively in 2021, which should have a larger lot count and possibly a better absorption rate. Could you walk us through that scenario?

Well, I can't give you a specific guidance for the first quarter of 2021 and the first quarter of 2022. But as I said, it can be a little choppy if you just focus on the community count number. But with the higher absorptions we're getting, we should be all the produce, you know, some decent sales numbers, I don't know if we're going to be able to get to 20% greater than it was in 2020. We had a pretty good January and February in this year. So, as I said, look more closely at the backlog and the spec counts that we have one into 2021, which should produce some really good earnings numbers, for the first couple of quarters of 2021. After that, we're going to have to rely on the community count to start to kick-in and propel us into some really good 2022 numbers. And I don't know what else I could really tell you. The community count, it's an issue. But if it's a short-term issue, it's not a question of if, it's a question of when we've been, we bought a lot a lot. We're continuing to buy lots. We're not seeing resistance to finding lots that fit within our strategy. And, we're going to be opening more communities next year than we ever have before. And I think that long-term and I feel really good about the quality of the communities we are opening, the locations of the communities that we're opening. And, again, it's going to produce really solid long-term results.

We are unable to provide guidance for 2021 at this time. We will address that in our next quarterly call. However, I want to mention a couple of important points. There will be a turning point in 2021 regarding our community counts, but we won't reach the 300 community count target until 2022. While we can't specify which quarter will show a significant increase in our community count, we expect certain communities to start seeing a boost in sales, followed by closings shortly after. We aimed to outline our approach for the year, considering our substantial backlog. Eventually, there will be a turning point that will lead to substantial acceleration into 2022.

And in addition to that, these new communities as they open throughout 2021 will be more heavily skewed to the entry level to our LiVE.NOW brands, which come with even higher absorptions than our move up communities. So which will also propel the sales number as we get later into the year?

Thank you for that. With order growth at 70%, many investors are interested in whether builders can turn those orders into actual closings in the construction cycle. Is your construction cycle extending? Steve, I'm not sure if you addressed that earlier, but I have two questions. Are you experiencing any labor shortages that are causing delays in getting projects underway? Additionally, are there any product shortages that could be extending the cycle times?

We anticipated that question, and Phillippe got a response to you on that.

Yes. From our perspective, cycle times are not lengthening while sales are increasing, which means we need to get more specifications into the ground. As Steve mentioned, we're working to catch up with the specifications and have significantly increased our starting capacity since COVID. We're starting more homes now than ever before, but we're also selling more homes than we ever have. We're at a turning point where we're trying to accelerate specifications while community counts are declining, which is stretching out the backlog conversion. However, we are still constructing homes very quickly. Labor is performing well, and there are no issues on that front. You are aware of the supply chain dynamics, especially concerning lumber, but we’ve seen that stabilize and supply chains improve recently. As a spec builder, we’ve streamlined our operations, and labor performance remains strong. Although we are experiencing cost pressure, we are managing to offset that with market pricing, and our cycle times are likely even shorter than before. The main challenge lies in starting as many homes as we are currently, and the municipalities’ approval of permits is creating a bottleneck. Nonetheless, we are starting more homes than we ever have in history, and we are addressing these challenges, which represent our biggest opportunity for increasing capacity going forward.

All right. Thanks, everyone, and good luck on the upcoming quarter.

Thank you.

We'll go next to John Lovallo with Bank of America.

Hey, guys. Thank you for taking my questions. The first one, on the gross margin outlook for 2020. I think that implies 4Q gross margin of some around 22.5%, which is up 250 basis points or so I think year-over-year. I guess the question is, how much of this is pricing versus some of the savings that you guys have talked about? And in terms of that the latter part of the savings on the labor front, that you guys have worked out on the horizontal and vertical side. I mean, do you anticipate being able to hold on to those, as activity picks up here? Or do you think you're enough to give some of that back?

Hi, John, thanks for the question. So I think for us because we expect builder, a part of lumber increases is already reflected in our Q3 number, because of our pretty quick cycle times. There's another portion of the lumber increases, that's going to be coming through in Q4, but we're definitely able to offset that. Like you said, if you kind of do a back of a napkin math, you can see that we're projecting an increase in margins, in Q4 to hit our target of 20% to 21.5% for the full year blend. So that's coming from higher ASPs and some continued efficiencies we're seeing because on the cost side, at least in Q4, we are still going to have some increased cost pressure from lumber locks that were in place when we started out. So we're not really predicting anything yet for 2021. We're assuming lumber is going to stay steady, even though there's probably some green shoots that will come down a bit. But for right now, mostly what you're seeing are efficiencies that we're finding in the product, the ability to leverage that fixed overhead component in margin, and price increases.

Okay, got it. And then just looking at the full year guide again, and trying to back into the 4Q outlook, it would appear that at the high-end, the ASP would step up again here pretty nicely. Are you guys concerned at all about pricing folks out of the market in terms of affordability? And what can you do to sort of offset either that potential impact?

Yes, this is Phillippe. We are aware of that, which is likely why each community has its own unique story. The LiVE.NOW brand is crucial for us to remain below FHA levels. We believe that serves as a benchmark in the market, especially when considering entry-level communities that exceed FHA limits. Those communities are not experiencing the same demand that we are, as buyers struggle to qualify for conventional loans. Thus, staying below FHA is key. We have some opportunities to expand in certain areas since we remain well below FHA levels. In places like Phoenix, however, we're nearing that limit, and options for growth are limited. It's truly a market-by-market and community-by-community analysis, also influenced by competitor actions. The focus for us is on pace and leverage, which are essential for our entry-level business. We are attentive to our pricing, and so far, we've been successful in achieving both price and pace in the current market. Looking ahead to next year, there are real constraints that will prevent us from pushing too much further.

That's helpful. Thanks a lot guys.

Thank you.

We'll go next to Stephen Kim with Evercore ISI.

Thank you very much, everyone. We will certainly miss you, Steve and Brent, but we look forward to seeing you, Steve, or hearing from you on the calls, and wishing you the best in your future endeavors. Brent, I have a question regarding Studio M and the communities in California. Over the past year and a half, we've considered these two elements of your product mix to be significant. The ramp in the communities you have been planning for a couple of years in California seems to be aligning perfectly with the current market timing. On the other hand, I'm curious about Studio M. I don't believe it was discussed much during this call. Another builder mentioned an increase in activity at the higher end of the market, not quite entry level, but perhaps in the move-up segment that Studio M seems to target. Could you elaborate on what you have observed regarding the target market for Studio M and whether the California and Studio M products offer higher margins that we can anticipate for next year?

So, thank you, Stephen, for the kind words. I'll miss you all as well. However, it will be a relatively brief discussion.

Yes.

There's energy across all segments of the market right now. It's evident from what other builders are reporting, including one we heard from today with impressive results. Demand is strong at all price points, boosted by low mortgage rates and the extended time people are spending at home due to COVID. I've been surprised to see high-end homes, including those costing $10 million, selling like never before in my career. Studio M is performing well for us, with higher margins compared to LiVE.NOW, which also has solid margins. We are encountering more opportunities for land, as competition in our LiVE.NOW segment is less intense compared to the one and new segment. As I mentioned last quarter, we are pursuing larger deals, such as 200 to 500 lots, for our entry-level communities, because the absorption rates are significantly higher, and we aim to minimize community churn. Smaller communities can require more frequent transitions, leading to increased overhead and labor, which can be challenging for our organization. By staying in a community longer, we improve our bottom line and allow our land team to work more efficiently. We are facing less competition for these larger land parcels, with only a handful of major public builders competing against us, and fewer private builders. Thus, our land acquisitions are leaning in that direction. We still value Studio M and the one and new segments, and we’ll continue to acquire those parcels. We've also made progress in California this year to grow our community count there. However, finding land in California is tough and comes with risks; it can be expensive and involve lengthy processes with numerous hurdles. Despite these challenges, we are making improvements, but it remains a significant challenge for us and all builders.

Got it. Your land spend ran at $300 million this quarter. Hilla, you mentioned that was the highest you'd seen, I think ever, but it actually, I'm guessing that that number is probably going to rise in the fourth quarter. I was wondering if you could comment on where you could think you're going to wind up for the year. I think you said it, I missed it. I'm guessing around $1.1 billion or something like that still, and what you think is a reasonable outlook for next year?

We haven't given guidance into 2021 yet. I think you're pretty much spot on. We didn't get specific numbers. But between $1 billion and 1.2 billion is a good expectation for full year 2020. So you kind of do the math, we're at 760 year-to-date, obviously, we had a pause for six weeks there in the year. So we're going to be accelerating that. You can expect that number to continue to accelerate. We'll give more specific guidance. But there's no way to get to that 300 community count without continued acceleration in 2021 and 2022. You can go ahead and kind of model something a little north of that.

There's a big wave of land purchases, land deals that we've approved, development dollars that we need to spend coming through that will absorb a chunk of our cash and our retained earnings, and it's coming. And hopefully, we can make it even bigger, because we've got a lot of lots coming through our land committee in the fourth quarter. We've already approved a lot in October. And we're just really excited about these deals and the quality and the contribution they're going to make.

Yes, that's great. Phillippe, you mentioned the FHA loan limit and how there’s still a bit of room in a couple of areas, although we might be getting close. I wanted to clarify that the FHA loan limit typically increases once a year, right? And we usually find out about it a month or two in advance. So, if the entry level eventually faces affordability challenges due to significant price increases, that tends to be more of an issue later in the year, correct? Generally, there's quite a bit of headroom in the first half of the year during the spring selling season. Am I missing anything there, Phillippe?

No, you're not missing anything. That's exactly right. So we'll see the revisions next year, and what kind of opportunity that creates based on market comps. And clearly prices are up across the board.

Yes.

So, we do expect some sort of increase there to give us some opportunity.

Let me just add that we are currently dealing with last year's FHA numbers. Prices have been rising, as has been widely reported, probably about 1% per month. This year, we are already up 9% or 10%. In most places, FHA loan limits are around 300,000 or in the low 300,000s, so entry-level product prices have increased by 25,000 across the board. However, the FHA loan limit remains lower than last year, now just at the end of this year. I am not sure if we can assume it will adjust fully in line with our price increases, so we need to be cautious. As Phillippe mentioned several times, we need to stay within that number.

Yes, the one I seem to remember that kind of putting a bow around everything is that when we approved the deal, and we were underwriting to FHA at that time it was two years ago. That's why we kind of have this little bit of headroom, we're getting close to where the FHA limited today, but that's why we've been able to increase the amount that we have because we were underwriting to this then FHA limit will be adjusted.

The lower you go on the first band, the stronger the demand is. I would say we have communities with populations under 250,000 where it's almost unlimited. We could sell as many houses as we want and as quickly as we want at these lower price points. It really just comes down to production and getting the product in place.

Yes. And with the forced savings that everyone's had to do, because there's nowhere to blow all of our money. You've got down payment, not off the hurdle for people anymore. And then I've heard FICO scores are basically hitting record levels for folks across the nation. So all of that I assume you're seeing in your business and benefiting from as well, right?

Yes.

Yes.

Great. Thanks, guys. Good luck and look forward to speaking with you still afterwards.

Okay. Thank you.

We'll go next to Carl Reichardt with BTIG.

Thanks. Good morning, everybody.

Hi, Carl.

I have just one question, but first, I want to congratulate Steve. It took a lot of courage for you to execute such a significant business transformation in a company you co-founded and led for 30 years. It truly has been remarkable what has occurred in this company over the last several years. Is a lot of credit due for that?

Thank you.

I'm congratulating you and asking if I can model a better backswing for you.

I'm going fishing.

And welcome to Emily. I just had one question which is, if I look at LiVE.NOW and your penetration, obviously it's really significant in Phoenix and other places. But as you're looking at the next couple of years, what are the metros or states where you think you can really drive LiVE.NOW penetration and get it higher, where you lagging in terms of percentage of your mix? Thanks, guys.

Yes, the major opportunities for us are primarily in Texas and the East Coast. In the West, we expect the most growth from LiVE.NOW. While we encountered some opportunities in Colorado, affordability remains a significant issue there. However, we've made substantial progress in Texas, where LiVE.NOW is significantly boosting our performance. Dallas and Houston represent major opportunities for us, as Horton is the largest builder in those metropolitan areas by a considerable margin, and we plan to pursue them aggressively. Growth has been somewhat slower in our newer markets on the East Coast and Florida, but we've seen substantial improvement recently. In Orlando, for instance, community count growth is driven entirely by LiVE.NOW, as well as in other parts of Florida and in cities like Atlanta, Nashville, and the Carolinas. Therefore, the East Coast and Texas offer the biggest opportunities for us to enhance our presence and make substantial progress. I'd say also, additionally, that we're not ready to announce this yet, but we are going to be announcing some new markets. We're working vigorously now on several new markets and hopefully, by next quarter, we'll be able to make some specific announcements about which markets they are and will be able to start those markets with a little bit of a little bit of theme. So, as we've articulated, we have some room in our East Coast market, particularly in Florida, I think, to grow our LiVE.NOW brand, but we'll also have some new markets to go along with that.

And that 300 community account does not contemplate new markets, so that's just an extra cushion for us.

That is great to hear. All right, congrats. Thanks all.

Thanks Carl.

We'll go next to Michael Rehaut with JP Morgan.

Hi, this is on for Mike. First, congratulations on the results and best wishes to Steve and Brent on your retirement. My first question is if you could comment on traffic levels and sales pace so far in October? Also, is the market showing any signs of slowing down or is it following regular seasonality?

October continues to be strong. I'd say maybe not quite as strong as September because a little bit of seasonality. But I think we've already surpassed last year's sales number for October with nine or 10 days to go in a month, two weekends to go. So, I expect it will produce a pretty big order number versus last year's for October. And I don't see anything on the horizon that's going to change that dynamic.

Yes, traffic levels are stable. To describe this all because I think there's this election coming up here in a couple weeks, that usually slows things down. So, surprisingly, the market isn't even paying attention to the election, at least from a housing perspective, or maybe they are and they're all buying a house for shelter. But either way, traffic levels are extremely stable for this time of year.

We were going to put a gun in every house, we couldn't find them. Just kidding, sorry.

Really great to hear. And then I wanted to clarify something from earlier in the call. On prior calls, generally entry-level gross margin, the LiVE.NOW products were noted as higher than the first time move-up with maybe the gap narrowing a little bit helped by the Studio M. But I think now you mentioned that move-up gross margins may be at parity or even a bit above the entry-level offering. So, just wanted to get a little more clarity around those comments and make sure that I'm doing it right.

I'll let Hilla give you the specifics, but the pricing tower and the entry-level is really strong. So, I think that's where we're seeing the better margins. Just the demand down at that lower price point is really producing a supply/demand disconnect that's allowing us to push prices probably more than the higher end. So, I still believe our margins are higher in entry-level and first move-up. But I'll have Hilla give you the specifics.

Yes, our entry-level products kind of held consistent for this year. It's our highest producing margin products. First time move-up actually did increase a bit, there's a little bit more pricing power, but it still lags a bit behind entry-level when we're looking at them on a relative basis.

Got it. Thank you. Thanks guys.

Welcome.

And we'll go next to Alex Barron with Housing Research Center.

Yes, thanks guys and congratulations on the retirement and all the big turnaround of the company. I wanted to just focus in on the 300 communities and so forth. I just wanted to verify is this all based on organic growth or is there any expectation that you would have to acquire a builder to get that?

It's all organic. And we pretty much have all the land under contract stores to do it. So, it's not like we got to go and buy a whole bunch of land to make that happen. We already got the land. So, we have a high degree of confidence in getting there in early to mid-2022.

Okay.

It may be inconsistent along the way. As we mentioned, we might sell some communities faster than expected, as demonstrated this quarter when we closed out 58 communities. We could have closed them next quarter or the following one, resulting in a potentially higher community count this quarter and possibly at year-end. However, with home sales increasing by 71% in Q3, and approximately 60% to 70% more in Q2, homes are selling quicker than we anticipated, which is reducing the community count. Nevertheless, this will eventually rebound because we have the lots; we have acquired the lots, and we are developing them and moving them through the process. They will be available, albeit a bit later due to COVID and the rapid sell-out of the communities we closed in the last two quarters.

Okay, that's all good. I don't see any problem with selling out early just means you're taking buyers out of the market.

Exactly.

I wanted to ask if, since you mentioned that about 70% of the sales this quarter were entry-level and that the size of the communities you’re acquiring is increasing, we should expect the sales pace trends to continue rising. Additionally, should we anticipate that the percentage of entry-level sales will also rise over the next few years as you approach the target of 300 communities?

The sales pace has reached historically high levels, nearly six per month for each community. This figure seems to surpass much of our competition and represents our best performance ever. However, we do not base our financial projections on this pace, and I prefer not to speculate on whether we will maintain it. The second part of your question related to...

Community?

Yes, the ratio is probably accurate. We are still investing in the U.S., although it's a bit more challenging to find suitable land. The deals aren't large enough, and there is increased competition, but we are identifying that land, it just takes more time. However, I don't anticipate reaching an 80%/20% split between LiVE.NOW and the other initiative, or even 75%/25%. Our target is to achieve a 65%/35% ratio for LiVE.NOW compared to the other initiative from a communication standpoint. Naturally, this will result in a different percentage from a sales perspective since we project LiVE.NOW to have a higher sales pace than the other initiative.

Okay, possible. Well, best of luck and good job. Thanks.

Thanks Alex. I think this was our last question operator, right? Two more.

Yes, we have two more in queue. We'll go next to Susan Maklari with Goldman Sachs.

Thank you and congratulations to everyone. My question is around thinking about consolidation for next year. Given everyone's trying to load up on their lot positions, have community count ready to go and we recently saw one of your peers buying a smaller private builder. Do you think that we could see more of that in the industry next year as we look out?

I get to ask this question every quarter for the last 91 quarters, and it's really challenging to predict mergers and acquisitions. There are numerous factors at play, including social issues, the goals and objectives of inquiries or retirement plans, and what companies are planning. While there could be potential deals, I wouldn't say we're seeing more activity now compared to a year ago. Honestly, it has been relatively quiet. We are likely to be more selective when it comes to acquisitions, keeping our focus on our strategy. We are interested in builders that align with our goals. If a product doesn't match what we typically build, it won't be suitable for us. We believe we can achieve solid organic growth over the long term, and as mentioned, we will be entering a new market. We're always on the lookout, but it's difficult to forecast the pace of mergers and acquisitions.

Got you. Okay. And then just following up on that, can you talk a little bit about capital allocation, shareholder returns, given the kind of bumpiness that you're forecasting for the next couple of quarters, the liquidity that you do have on the balance sheet. Can you talk to what your willingness would be to restart share repurchases? Now, one of your peers earlier today commented that they're going to start to do a little bit of that in the fourth quarter, how are you thinking about it?

Based on today's share price, it appears much more attractive than it did a week ago. We are opportunistic regarding share repurchases and aim to buy enough shares to offset the dilution from our share issues. However, we will be utilizing a significant amount of capital from our balance sheet; we do not plan to maintain a 15% net debt to capital ratio. Instead, we will allocate funds to acquire land and enhance both our top and bottom lines. If share repurchases are advantageous, we will consider them. We do not pay dividends and have not committed to doing so, although we are still exploring the idea. That's our current stance.

Okay, great. Thank you. Good luck.

Thank you.

We'll go next to Jade Rahmani with KBW.

Yes, thanks very much for taking the question. Just for Steve, as you think about the road ahead for the homebuilding industry, maybe over a multi-year longer term time horizon, I was wondering if you have any parting words, since this is your last conference call for the industry or any message you want to send as it relates to the value being provided to the individual homebuilding communities, the industry's overall efficiency of future drivers of shareholder returns?

That's quite a lot to unpack. I didn't prepare a response to that, but it's definitely a valid question. As I mentioned in my Q&A, I believe the industry needs to adopt a longer-term perspective. We seem to have a very short attention span. Much of the trading in our stocks today is driven by algorithms. Despite good news recently, share prices are down, which is puzzling. It seems everyone has realized that comparisons will be more challenging next year. The industry continues to innovate, yet the way we construct homes hasn't significantly changed in the last 40 years. We don’t have control over our labor and rely on trades and contractors. We need to find a way to take charge of our future. There's a lot of innovation happening, particularly in sales, and there's likely more on the horizon, as well as improvements in how we manage our financial operations. I'm eager to see how this evolves, and I believe it's going to be exciting. Phillippe and his team are poised to do an excellent job. As for me, I'll be taking some time off to fish, but I'll stay involved, participate in these calls, maintain communication, lead the Board, and collaborate with Phillippe on our long-term vision and strategy. I'm looking forward to my future and the future of the company. Thank you for your support, Jade, and for your question.

Thank you very much.

Okay. Thank you. That wraps up our call today. We'll look forward to talking to you all at the end of our fourth quarter and we should have our earnings release at the end of January, and we'll talk to you then. Take care. Thank you.

Thank you.

Bye.

And that concludes today's conference. Thank you for your participation. You may now disconnect.