Ladies and gentlemen, good morning. My name is Abbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Incorporated third quarter 2023 earnings conference call. Today’s conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one a second time. Thank you, and I will now turn the conference over to Mr. Jim Zeumer, Vice President of Investor Relations. Mr. Zeumer, you may begin.

Great, thank you, Abbie. We appreciate everyone joining today’s call to discuss PulteGroup’s third quarter operating and financial results. As detailed in this morning’s earnings release, PulteGroup delivered another quarter of strong earnings as we continue to capitalize on our competitive strengths and balanced approach to the business. Joining me on today’s call to discuss our Q3 results are Ryan Marshall, President and CEO; Bob O’Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance. A copy of our earnings release and this morning’s presentation slides has been posted to our corporate website at pultegroup.com. We’ll post an audio replay of this call later today. We want to inform everyone that today’s discussion includes forward-looking statements about the company’s expected future performance. Actual results could differ materially from those suggested by our comments. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan. Ryan?

Thanks, Jim, and good morning. As we will discuss over the next several minutes, PulteGroup reported another quarter of outstanding and, for a number of key metrics, record financial results. Our financial performance demonstrates once again the importance of PulteGroup’s balanced and differentiated operating model. Leveraging our broad geographic footprint and diversified product offering, we are working to maintain significant market share among all major buyer groups. At the same time, we are successfully executing both large-scale spec and build-to-order homebuilding businesses. Our spec business allows us to more cost-efficiently serve first-time buyers, while our build-to-order business caters to move-up and active adult buyers looking to personalize their home location and design features. Specific to our financial results, I am extremely proud of our entire organization for their efforts in delivering third quarter results that include a 43% increase in orders, industry-leading gross margins of 29.5%, record third quarter earnings of $2.90 per share, and a return on equity that exceeded 30%. In the quarter, I would highlight our active adult business as an important contributor to our sign-up growth and our gross margin performance. In an operating environment where rising mortgage rates are creating increasing affordability challenges, 47% of our Del Webb purchasers were cash buyers. This is up from 33% just two years ago. Along with largely being cash buyers, these were customers who can afford the premium lots and upgrades that make active adult our highest margin business. Just to demonstrate the brand power of the Del Webb name, in June we opened Del Webb Kensington Ridge in Michigan, not a market you might consider a hotspot for retirees. In a community where base home prices range from $370,000 to north of $600,000, we have already sold 114 houses in just over 100 days. We fully appreciate that to some degree, all buyers are impacted by rising rates and macroeconomic concerns, but buyer groups can absolutely behave differently over the course of a housing cycle. For PulteGroup, we believe being diversified across all buyer groups can enhance both growth and stability. Beyond our diversification across buyer groups, PulteGroup’s strong third quarter financial performance also benefited from our ability to offer consumers both spec built and build-to-order homes. As we have discussed on prior calls over the past 24 months, we have transitioned our first-time buyer communities to a spec build model to better serve these customers. Looking at our first-time business, spec building allows us to maintain a more consistent cadence of starts in those communities, which drives construction efficiencies and is important in working with our trades. More directly to our quarter, having additional inventory available was important given 49% of our sales in the period were spec sales. I would note that 49% spec sales in the quarter is down from 58% in Q1 of this year. I think the decrease in the relative percentage of spec sales in the quarter reflects two interesting dynamics. On one hand, the affordability challenges caused by higher interest rates are pushing some buyers, particularly first-time buyers, to the sidelines for now. On the other hand, more affluent buyers who are less fearful about rates are comfortable contracting for a home where they’ve selected the lot, the floor plan, and the design options. On the construction side, I’m pleased to say that we continued to shorten our production cycle. Just to remind people, pre-COVID our production cycle was approximately 90 workdays. At its worst, this number ballooned to 170 days. By the end of the quarter, we had reduced this number to about 140 days. Our teams continue to shave days and weeks off our build cycle and we remain optimistic about our ability to get back below 100 days in 2024. As you would expect, cutting more than a month off of our cycle time has positively impacted our cash flow, which we continue to allocate across our key business priorities. Through the first nine months of 2023, we have invested $3 billion in our business through land acquisition and development. Over this same period, we have returned over $800 million to shareholders through share repurchases and dividends. In this most recent quarter, we even took advantage of market conditions to retire $65 million of near-term debt at prices just below par. PulteGroup has delivered outstanding operating and financial performance in the quarter and throughout the first nine months of the year as we have leveraged our strong competitive position to capitalize on buyer demand. It grows increasingly clear that Federal Reserve actions to raise interest rates are having the desired effect of slowing the economy, although the speed of deceleration has been slower than expected given the unprecedented ramp in rates. While arguably not the most supportive economic backdrop, new home demand in 2023 has benefited from a robust job market and rising wages, financially resilient consumers, and a continuing dearth of supply from the existing home market. Finally, as higher rates begin to bite, we have responded with adjustments in product, pricing, and incentive programs that successfully address consumers’ biggest pain point, affordability. It’s difficult to know if the Fed is done hiking rates for this economic cycle, and trying to guess when they will move to cut rates is challenging, so we will remain disciplined in how we manage our business. We’ll focus on serving our customers, supporting our employees, turning our assets, and allocating capital appropriately while maintaining a strong and highly flexible capital position. Now let me turn the call over to Bob for a detailed analysis of our Q3 results. Bob?

Thanks, Ryan. PulteGroup’s third quarter results add to what has been an exceptional year for the company as we have grown revenues and earnings, generating significant cash flow from operations, lowered our debt, and generally strengthened our entire operating platform. Specific to our third quarter, home sale revenues increased 3% over last year to $3.9 billion. Higher revenues for the quarter reflect a 2% increase in our average sales price to $549,000, in combination with a less than 1% increase in closings to 7,076 homes. The 2% gain in the average sales price of homes closed in the quarter was driven by increases of 4% and 6% from move-up and active adult buyers respectively, partially offset by a 3% decrease among first-time buyers. The lower ASP among first-time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year. The mix of homes delivered in the third quarter changed just slightly from the prior year as we continue to operate within the range of our stated mix of business. For the quarter, closings among first-time buyers represented 38% of the business, move-up buyers totaled 37%, and active adult buyers represented 25% of the homes closed. In the third quarter of last year, 36% of homes delivered were first-time, 38% were move-up, and 26% were active adult. Net new orders for the third quarter increased 43% over last year to 7,065 homes as we realized year-over-year gains in both units and absorption pace across all buyer groups. Orders among first-time buyers in the third quarter increased 53% over last year to 2,979 homes. The gain among move-up buyers was even greater as net new orders increased 56% to 2,524 homes, and finally, on a comparable community count, we realized a double-digit gain in sales among active adult buyers as net new orders for the quarter increased to 1,562 homes. In the third quarter, we operated from an average of 923 communities, which is up 12% over last year. Adjusting for community count, the monthly absorption pace in the third quarter averaged 2.5 homes, which is up from 2.0 homes per month in the third quarter of last year. As a percentage of beginning backlog, our cancellation rate in the third quarter was 9% compared with 8% in the prior year. To be clear, on a unit basis cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results in the cancellation rate staying comparable. Our unit backlog at the end of the quarter was 13,547 homes compared with 17,053 homes at the end of last year’s third quarter. On a dollar basis, the value of our ending backlog was $8.1 billion, down from $10.6 billion in the third quarter of last year. At the end of the third quarter, we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle times. Of the homes under construction, 61% were sold, and 39% were spec units. As we have stated previously, we are comfortable putting spec units into production, but we are thoughtful about aligning the pace of starts with the pace of sales to help reduce the risk of putting too much inventory on the ground. Consistent with this measured approach to production, of the 6,700 spec homes currently under construction, fewer than 1,000 were finished. Given our Q3 community count of 923, we continue to carry approximately one finished spec per community, which is in line with our operating targets. Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be approximately 8,000 homes. Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full-year closings to be 29,500 homes. The change in our guide reflects the more challenging affordability conditions resulting from higher rates as well as the slight shift in our mix toward build-to-order homes which won’t deliver until 2024. Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closing to be in the range of $540,000 to $550,000 in the period. Our third quarter home sale gross margin of 29.5% continues to lead the industry as we successfully turned our assets while still achieving high levels of profitability and driving higher returns on investment. PulteGroup’s reported results benefited from strong margin performance across all buyer groups - first-time, move-up, and active adult. Further, as we have talked about on prior calls, our diversified product portfolio is allowing us to capture higher gross margins that are typically available within our move-up and active adult communities. As I would remind everyone, our primary focus is always on driving higher returns on invested capital, but we appreciate margins are an important contributor to achieving such returns. This is why we remain disciplined in where we locate and how we underwrite our communities and how we design and build our houses, and in how we strategically price our homes in the marketplace. Given the ongoing strength of our margins, we continue to get questions regarding relative margin performance among the larger public builders. I want to quickly address the line of thought that our margins benefit from land positions within our older Del Webb legacy communities. The reality is that the margins for these communities are comparable to the rest of our active adult business, but they are not an outlier in our aggregate numbers. That being said, I’m pleased to say that we expect to continue delivering high margins as we continue to expect home sale gross margins to be in the range of 29% to 29.5% in the fourth quarter. Given current interest rates, demand, and cost dynamics, we would expect to be toward the lower end of this range. SG&A expenses in the third quarter totaled $353 million or 9.1% of home sale revenues. This compares with prior year SG&A expense of $350 million or 9.2% of home sale revenues. Based on anticipated closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately 8.8%. In the third quarter, pre-tax income from financial services was $29 million, up from $27.5 million last year. While market conditions remain highly competitive for our financial services operations, the business benefited from a higher capture rate of 84% compared with 77% last year. The large increase in capture rate relates to the expanded use of rate-based incentives, which are executed through our mortgage operations. Looking at our taxes, consistent with our prior guide, our third quarter tax expense was $209 million or an effective tax rate of 24.6%. For the fourth quarter, we continue to guide to a tax rate of 24.5%. PulteGroup’s bottom line results show net income for the quarter of $639 million or $2.90 per share, which is up from prior year net income of $628 million or $2.69 per share. Given the ongoing financial strength and cash flow generation of our business, we repurchased 3.8 million shares for $300 million in the quarter. This was up from $180 million last year and $250 million in the second quarter of this year. In the third quarter, we also elected to allocate capital towards paying down a portion of our debt. In total, we retired $65 million of our 2026 and 2027 senior notes through open market transactions at prices slightly below par. Inclusive of these transactions, we’ve lowered our debt-to-capital ratio to 16.5%, which is down 220 basis points from the start of 2023 and down 600 basis points from the third quarter of 2022. Adjusting for the $1.9 billion of cash on our balance sheet at quarter end, our net debt to capital ratio was less than 1%. Beyond buying back our equity and debt in the third quarter, we also invested $1.2 billion in the business through land acquisition and development, which keeps us on track to invest upwards of $4 billion for 2023. Almost two-thirds of our investment in the third quarter was for the development of our existing land assets. Inclusive of our Q3 spend, we ended the quarter with approximately 223,000 lots under control, of which 53% are held via option. We continue to systematically rebuild the optionality of our land pipeline after having walked away from selective land positions in the back half of 2022. As part of this rebuilding process and consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures. To date, we have completed land banking transactions for approximately 5,000 lots. Going forward, we will look to use such land banking facilities in order to create optionality in situations where the underlying seller requires a bulk sale. It’s a disciplined process as we work to balance land costs, returns, and risk, but we are gaining momentum in our efforts. We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed and we continue to develop most of the lots that we acquire. As a large homebuilder, assuming you’re confident in the third party’s ability to consistently deliver developed lots on time, the decision to purchase finished lots versus raw dirt comes down to return. Finished lots cost more but can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer. In all of our land transactions, we assess how best to drive higher risk-adjusted returns and to find opportunities and deals for finished and/or undeveloped lots. Now let me turn the call back to Ryan.

As you would anticipate, given our 43% increase in net new orders, we saw strong demand throughout the quarter. Q3 displayed more typical seasonality than we have experienced in the three years since COVID as absorption pace eased as we moved through the quarter. Demand has been a little choppier in the first few weeks of October with more volatility in the day-to-day sales numbers. I’m sure for some buyers, higher rates have pushed affordability just that much further away, while others may be worried about their jobs. For other buyers, global unrest may simply have them thinking of other things. We are fortunate to have an experienced operating team that will make adjustments if and when needed. On a year-over-year basis, for the first nine months of 2023, we have increased net income by $156 million and increased earnings per share by 17%. Over the same period, we’ve increased our cash position by approximately $1.6 billion while dropping our net debt to capital ratio effectively to zero. Based on guidance that we’ve given, we look forward to delivering exceptional full-year results for 2023. From population growth and demographics to supply dynamics and the tremendous opportunity for wealth creation through home ownership, we are bullish on long-term housing demand. Over the near term, however, we fully appreciate the affordability challenges being created by higher mortgage rates and the potential impacts from an economic slowdown the Federal Reserve is hoping to bring about. As such, we remain disciplined in how we operate our business particularly as it relates to investing in land, the pace of production, the allocation of capital, and the quality of homes and experience we deliver to our customers. We have a clear and successful operating model against which we have been executing for over a decade, so decision-making throughout the organization is consistent and actions are implemented quickly. This strong organizational foundation along with tremendous financial strength has PulteGroup well-positioned for ongoing success. In closing, I want to thank the entire team at PulteGroup for their tremendous efforts in delivering for our home buyers, our shareholders, and each other. I am so proud of what you accomplish every day. Let me turn the call back to Jim so we can begin Q&A.

Thanks, Ryan. We’re now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Abbie, we’re ready to open for Q&A.

Thank you. We will take our first question from Carl Reichardt with BTIG. Your line is open.

Thanks, good morning guys. I wanted to first just ask about the cycle time numbers - you talked about 140, trying to get down below 100 next year, so that’s more than a month off. What specifically, Ryan, needs to happen for those numbers to go down? Where are the best and most obvious lever points?

Yes, Carl, so a lot of the work has already been done, and what we’re seeing is some of the homes that are delivering now, and maybe better said, the homes that are starting now are on cycle times that will yield that overall cycle time of below 100 days, so it’s really about getting the older stuff that’s been in the pipeline, that’s got longer cycle times. As those numbers close out, I think we’ll see our overall cycle times come in line with that target of 100 days.

Right, thanks Ryan. Then you mentioned the choppiness in October, and I wonder if you could expand a little on that and talk a little bit, maybe about performance among the three segments in the month so far or particular markets, and then also from a cancellation perspective, if that’s beginning to sort of impact you in October too. Thanks.

Yes, Carl, I'm glad to discuss October. As I mentioned earlier, while our sales in October have been good, they've shown some variability on a day-to-day basis. The key takeaway is that, similar to what we observed in the third quarter, we have returned to seasonal sign-up trends similar to those we experienced before COVID, and this has continued into October. The absorption rates we're seeing per community are comparable to the healthy levels we had in 2018 and 2019, so overall, we are optimistic about the ongoing interest in home ownership. It's important to acknowledge that interest rates play a significant role, and there has been considerable movement in rates over the past month. However, I believe consumers have been managing this situation quite well.

Great, I appreciate the color. Thanks, fellows.

Hey, good morning guys. Thank you for taking the questions. Just a question around some of the comments you made at the top, Ryan, around addressing affordability and some of the challenges you’re seeing, particularly with the first-time buyer. Any additional elaboration on what you’re doing with incentives and rate buy-downs, and what’s working and not working as we get into September and October, and sort of the margin implications of all that? Thank you.

Yes, Matt, thanks for the question. We continue to use the permanent 30-year buy-down as our most significant incentive. Currently, we have national incentives offering 5.75% on a 30-year fixed mortgage. Given that market rates are over 8% right now, being able to secure a new home with our quality and design features at 5.75% is quite compelling. I’d like to highlight that we have simply shifted our historical incentives, which were previously focused on cabinets and countertops, to interest rate incentives. I believe this has been the most effective strategy for that segment of buyers.

Got it, okay. That’s really helpful. Then secondly, just one on stick and brick costs - you know, just as you’re addressing these issues and presumably there is margin pressure out of that, and the housing market has evolved here, what are you guys doing around construction costs, labor, sort of ability to push back on all that? How should we think about that over these next few months? Thank you.

Yes, well, you know, look - inflation is real, and we’ve previously talked about something in the neighborhood of 8% to 9% year-over-year inflation, which I think is part of the reason we’re in the rate environment that we’re in as the Fed’s trying to get a handle on that. What we’ve seen on our cost to build is on a year-over-year basis, we’re actually flat. Now, that’s a lot of commodity and material and labor increase in a number of categories that’s been offset by lumber save, so the headline is we’re flat on a price per square foot to build year-over-year, but it’s a lot of increases in material and labor offset by lumber.

Thank you. Good morning everyone. I want to take a moment to examine some of the dynamics at play. You mentioned that October has been volatile, but it seems to align more closely with the pre-COVID seasonal patterns. Additionally, on the flip side, you have indicated a slight decline in gross margin guidance for the fourth quarter compared to Q3, despite your expected volume. Can you provide insight on the level of incentives, either through your own offerings in October or perhaps more generally in the market? Do you believe that incentives have increased over the last couple of months? It seems that you are expecting a similar gross margin in the near term, so I'm curious about your broader perspective on how the market has responded to September and October.

Yes Mike, I’ll take part of that and then I’ll have Bob talk about the incentive load. As demonstrated by our orders in the quarter, we had 43% growth in new orders and it was a number of over 7,000, so I think we’ve clearly demonstrated that we’ve got the ability to sell homes. You’ve heard me talk about not being margin proud, but at the same time, we’re not going to give away price and incentives that we don’t have to, and I think we did exactly that in the third quarter and we’d continue to focus on making sure that we’re turning the asset and we’re getting the number of absorptions that we need in every single community to deliver the best return on invested capital that we can. Look, I think it was a great quarter. We’re happy with how sign-ups performed in October - you know, you heard me kind of talk about that on the question that Carl asked, so I won’t repeat it. Then Bob, if you can, maybe just talk a little bit about the incentive load.

Yes Mike, you know, you can see in our data we’ve got about a 6% incentive load - that’s $35,000 a unit, rough math. That actually is down 10 basis points from Q2 of this year. It is certainly up - it was 2.2% last year, but the sales environment that led to the closings in Q3 of last year was dramatically different, so you can see kind of a normalization here at 6%. I think you can take from our margin guidance for Q3 what we see closing in the fourth quarter, and we’ve got pretty good visibility into that at this moment, will not be significantly impactful. I would highlight that we’ve given a continuation of that same guide at 29.5% on margins. We have told you we’re going to be at the lower end of that, so there is some cost to this interest rate environment.

Thank you, Bob. Looking at the bigger picture, you mentioned earlier in the call the topic of your higher gross margin compared to your peers. Considering the 6% today compared to 2% a year ago, and with the understanding that the 6% might be slightly above your long-term average, likely around 3%, how does that align with the gross margins you're achieving now? Additionally, thinking forward over the next couple of years, we've heard varying perspectives from builders regarding potentially increased hurdle rates from underwriting and possibly higher land costs impacting us down the line. If the incentive levels remain stable, should we expect a slight moderation from current gross margins, or how should we generally view the direction of this metric in the coming years?

Yes Mike, at this point, we are not looking too far ahead, focusing on Q4. We’ve provided guidance for that quarter, and as we approach the end of Q4, we will offer a full-year outlook for the remainder of 2024. One thing I want to highlight is the current incentive load, which allows us to provide incentives on interest rates. This has been reflected in our margin guidance and results throughout the year. You can see the effect of offering below-market interest rates as a form of incentive, which has been evident in our Q2 and Q3 results and is also included in our Q4 guidance. We aren't providing guidance on margin directions beyond Q4 this year, but everything we have been doing is already reflected in our results and guidance.

Hey, good morning everybody. Thanks for taking the questions. I appreciate the data point about the active adult community in Michigan - hopefully snow removal is included in that HOA fee!

In fact, it is, Joe.

Good. Look, market conditions, that’s what’s going to determine the margin volume and price into next year. I think it’s an under-appreciated element of your business. Of course, the composition of that can vary, right, within the definition of success, but you are obviously appropriately acknowledging the headwinds here. Maybe if you could just talk instead to the return headwind from this, instead of either the absorption headwind or the gross margin headwind, just how are you thinking about returns on capital, and then similarly returns on inventory if interest rates remain high? You’re basically at net zero debt now. Just how you’re thinking about ROE relative to ROI.

Yes Joe, thanks for the question, and I’ll do my best to give you an answer. For the last decade, maybe even going on 12 years, the way that we’ve operated the business has been with a singular focus on delivering the best possible return on invested capital that we can. Given the capital-intensive nature of this business, for us we think that’s the best way to make decisions and to operationalize our platform in a way that delivers high return on assets, high return on equity, whatever metric you want to look at. I think we’ve clearly done that. I highlighted in my prepared remarks that for the trailing 12 months, we delivered return on equity over 30%, and part of that derived from running a good business but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes. We are paying a dividend, we’ve bought back nearly 45% of the company over the last 10 to 12 years that we’ve had our share buyback program in place, and we just highlighted this quarter we opportunistically took advantage of the opportunity to buy some debt in, near-term debt in that was trading below par. You know, I think maybe the best way I can describe it, Joe, we’re going to continue to focus on buying assets in great spots, turning those in a way that delivers high return on invested capital, and one of the other things that I think can also continue to give us flexibility and return-enhancing leverage is moving our land options to 70%, so we sit at 53% today, we’ve given you kind of a long-term target of 70%. We’ve got things in place and work underway that will help us get there.

Appreciate all those thoughts, Ryan. As a follow-up, just maybe on the comment around matching starts to orders, should we interpret that as roughly 7,000 starts in the fourth quarter, or is that more of a comment on what the fourth quarter orders look like, that’s what your starts might look like?

Yes, fourth quarter starts will be more reflective of order trends that we’re seeing in the fourth quarter. We’re starting more spec than we historically have. We’ve highlighted that we’ve completely moved our first-time business to a spec business, so some of that’s predetermined based on what we saw in the third quarter and what we would anticipate. But we’re just not going to get into kind of a position where we’ve got a build-up of spec inventory that creates pressure to do things that are unnatural on the pricing, but we are going to put some units in the ground to have those ready for Q1. You saw us do that last year, in the back half of last year that set us up for a really strong Q1 of 2023, so I’d want you to hear balanced approach, inventories going into the ground, we’re going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we’ve acknowledged are out there in this current rate environment.

Thank you very much, everyone. Great work, exciting times ahead. Ryan, in your opening remarks, you mentioned some reasons for how buyers seem to be responding to the rates, highlighting a psychological aspect, possibly math versus mental. I'm curious about what percentage of your buyers are opting for a rate buy-down. You’ve mentioned the 5.75% rate through the end of this year. As you're negotiating these buy-downs, where are you positioning new lots for the next phase in terms of contracted rates?

Yes, it’s Bob. This is an ongoing process. We typically purchase contracts on a weekly basis, and these are based on market rates. We determine the pricing, which affects the value we provide to consumers. The rate mentioned by Ryan is a negotiated price, and we cover the cost associated with offering that contract rate. There is an upfront fee for buying the contract, along with a rate buy-down included in that. We aren’t buying for three to six months ahead; these contracts are expected to be built within 30 days, and we usually fulfill them within a week. This approach is very responsive to the market. As rates increase, you’ll notice that what we offer has also risen slightly. Our costs have increased as part of this. We’ve been working through this process for about 10 or 11 months now since its implementation, and we have found it to be effective.

Stephen, the other thing that I’d maybe just add to your conversation is some buyers, you know, they take the available incentives that we have that get them all the way to 5.75%. There are other buyers that decide that they don’t need to go all the way to 5.75% and they’d like to have a little bit higher rate and use some of the other incentive money that we’re offering for other things that they see value in. We’re seeing about 80% to 85% of our buyers are getting some form of incentive towards interest rates. That doesn’t mean everybody will go to 5.75%. Just some fraction of our total sales end up in that very lowest category. The big headline is that we’ve got the tools out there and our sales team has got the tools out there to help individually solve what each and every buyer needs to make the transaction work for them.

Good morning everybody.

Morning Ken.

Just want to delve into the option impact on your margins. I think you’ve been saying options have been about 19% of your ASP. Is that still where we’re at in terms of the options?

We’ve talked about our options and lot premiums being a consistent driver of value. It’s part of the way we go to market. We think it’s one of the strengths of our sales process. In the most recent quarter, that was $107,000, it’s up $3,000 sequentially and year-over-year, so that is still part of our sales operation. It’s how we go to market, and yes, 20% is roughly where we are. I wouldn’t expect that to change as long as market dynamics stay where they are.

I understand that we discussed last quarter how options are higher margin, which historically accounts for a 300 to 400 basis point increase in gross margins compared to peers. With the current mix of options, could you clarify the cost or drag from the mortgage rate buy-downs? Specifically, how does the shift from 5.75% to 8% impact your gross margin? I recognize it's a factor of incentives, but quantifying that would be helpful. Also, can you explain the distribution of that impact? It appears that cash-paying active adults may not require it, so is this primarily affecting first-time buyers? I've heard the 80% figure, but I’d like to understand how that usage spreads in relation to these structurally positive options for you. Additionally, I find your mention of finished lots noteworthy since you focus on returns. I believe the market tends to concentrate too much on margin rather than turnover. Could you share what percentage of closings this quarter came from finished lots, and what the margin impact is? Thank you for addressing these two sets of questions.

Ken, there’s a lot to unpack. Let me start by saying that our incentive load is around 6%, or $35,000, indicating approximately 6.3%. The majority of that incentive is used for rate buy-downs to support financing, which addresses your first question. I apologize, but your second question was regarding the percentage of our...

Ken, it’s Ryan, I’ll jump in on that. We haven’t sliced the bologna quite that thin, and I won’t attempt to do it on this call. We are a return-focused company. There is no change there. I think we’ve been the purveyors of the message, we don’t focus on margin, it’s a component of the overall operating model. We’re focused on return, and depending on the number of units we sell in a particular community and how quickly you turn the asset, if you do that fast enough, then it can offset and you can allow for lower gross margins. If you’re getting a lot just in time and somebody else is developing it and carrying it, and we can build in the hundred days that we’re talking about, it allows us to run a high returning business at a lower margin. That’s not a new concept, that’s exactly what we do, and it’s exactly what we’ll continue to do.

Good morning guys. Thank you for taking my questions. The first one, so rates at 8% today, you guys are buying down to 5.75%. Can you just remind us, last quarter when rates were closer to 7%, what level you were buying down to?

Yes John, the lowest level we reached was around 5% to 5.25% nationally. There were certain specific markets where it dipped below 5%, around 4.99%. Essentially, as you've observed, the headline rate increased from 7.5% to 8%, and our promotional rate has adjusted upwards by the same 50 basis points.

Okay, and you would anticipate probably taking that same strategy as we move forward, if rates were to move up?

I think generally, that’s a good rule of thumb. Practically speaking, there’s a limit to how much money you can allocate relative to the headline number.

Morning, thanks for taking my questions. Ryan, I want to follow up on one of your previous responses regarding the practical limit on how much you can apply to the rate buy-down. We've heard varying information from different builders based on whether they are doing fewer buy-downs compared to the forward purchase commitments, which you mentioned earlier, and what qualifies as seller contributions. Could you provide more details on how you are implementing the buy-down to 5.75%? How much is designated for the forward purchase commitment versus pure points, and do you include the purchase commitments and their costs as part of your seller contributions?

I don't want to disclose all our strategies, but there are various regulations based on the government agency guidelines relevant to the mortgage program. The upfront fees we pay for a forward commitment do not count toward seller contributions, as these fees are incurred before having a contract on a home. However, additional incentives come into play once the home is under contract, and these do count toward seller contributions. To reach the 5.75% figure, there are fees incurred both at the beginning and end of the process. We consider these fees together, which are the figures Bob referenced.

Hey guys, good morning. Thanks for the info so far. Switching gears a little bit, I guess what I’d like to hear your opinion on is maybe what opportunities could potentially come about from this recent, I guess, softening or choppiness that you’re describing. Your balance sheet is obviously in fantastic shape, so is pretty much the rest of the public industry, but we are hearing anecdotes of AD&C capital tightening up for private operators and land developers, and we’re hearing build-for-rent deals potentially falling out of favor here. Have you started to see any increase in either distressed or opportunities that you feel like you might be able to take advantage of, if these current conditions persist for a handful of quarters?

Yes Alan, I think we’re hearing the same things that you are, particularly on maybe availability of capital or the cost of capital on the land development side. There’s definitely, I think, some strain or tightness in that arena. I think that certainly might continue to create an opportunity the longer that we stay in a high rate environment. I think it’s also a great opportunity for us to take market share. With our mortgage company, the size of our balance sheet, the ability to be active in the capital markets, I think it gives us an opportunity to do things that smaller local builders and maybe private builders can’t, so I think there is certainly a market share opportunity there as well. We’ve made build-to-rent a small piece of our business. We’ve got good relationships with national partners that we’re building some percentage of our annual deliveries for those operators, and I think we’ve talked extensively about that, that it will continue to be an arrow in our operational quiver. Look - I’m really, really confident and pleased with the way we’re operating. The health of the business, the volume that we’re selling in kind of the core operations, and then when you go to the balance sheet, I think we’re set up to do a lot of great things that will continue to set us up for success down the road.

That’s helpful, Ryan. Then I guess other builders have kind of put out an absorption target that they manage their business to, that tends to be maybe more the spec guys, entry level, where volume is certainly more of a consideration. But I’m curious, when you think about your price outlook and your margin profile and where your incentives are currently running at, right now you’re absorption pace is you’re probably going to be in the mid-2s somewhere. Is there a level where, if that pace dips below, that you would get much more aggressive on incentives, discounts, and even adjust base prices again? What would that level look like?

Yes Alan, it’s a good question. I frequently discuss this with our operators, spending considerable time in the field, in our communities, and in our division offices. Our company's guiding principle is to achieve a minimum of two sales in every community. While some price points in our communities do exceed two sales, as a production homebuilder, maintaining an active store with less than two sales makes it challenging to meet our return expectations. When sales drop below two per active community, we assess various factors such as our positioning, incentives, pricing, product offerings, and target consumers. There are several adjustments we can make, but for this quarter, we averaged 2.5 sales, with the two per community figure being our baseline.

Hey, good morning everyone, and Ryan, the screaming baby sale got me - I think that kid’s probably in high school or college by now.

We’re going to the way-back machine, Truman.

Exactly. I'm trying to understand your orders for entry-level homes performed well in the third quarter, with an increase of about 53% year-over-year. However, you also mentioned some cautious comments about that buyer segment. I'm hoping you could help us consider the monthly incentives needed for that buyer group compared to the active adult and move-up buyers who may not require as many incentives. I'm looking for insights into the larger trends you're observing in the near term.

Yes Truman, look, I think we’re really pleased with what our first-time business is doing. We’ve invested in it, and we’ve said our target was to get it to kind of 40% of our business, and we’ve done that. I think you’ve seen not only growth in absorptions but growth in communities, and the business is about where we’d like it to be. On one hand, that buyer doesn’t have a home to sell, they’re not locked into a low interest rate that they’re reluctant to get rid of, so I think that’s the positive with that first-time buyer. In terms of the headwinds, I think it’s obvious - it’s 8% interest rates, and that’s a buyer that’s got a down payment, hopefully, either they’ve saved it or it’s been gifted to them by parents, and then they’re going and getting a 30-year mortgage and they’re working on what they can afford based on their wages. The good news is wages are going up, which is helping affordability, but beyond rate-rate-rate, there’s probably not a bunch more that I could add in terms of the first-time buyer. Maybe just the last thing on the overall rate environment, look, high rates aren’t good for the consumer, they’re not good for housing, they’re not good for the broader economy, but we’re all kind of playing in the same environment and with the quality of the management team that we have and the way that we’re operating this company, I think we’ve proven that we’ve got the tools and the operational flexibility to be successful in any environment. This most recent quarter is a great example of that. Yes, regarding our product, one of the great aspects of our portfolio is the flexibility it provides for scaling up or down. We offer structural options that include smaller floor plans with extra space in the form of lofts or additional flex areas. We can adjust a base floor plan to meet various needs, and we're noticing buyers utilizing this flexibility to tackle affordability challenges. In our sales of options, buyers tend to choose items they find valuable, and we're also observing them making trade-offs in their spending on cabinets, countertops, and upgrades. Can you remind me of the last part of your question?

Your spec strategy, should we kind of assume that it’s pretty much stable from here, that you’re targeting about half the business perhaps as spec?

Yes, roughly. I think that’s a good go-forward run rate. It’s higher than what we experienced pre-COVID - that’s mostly reflective of the size of our first-time business and entirely moving that to spec. We did highlight this quarter, 49% - that’s down from about 60% earlier in the year, so we feel pretty good about that performance in the spec business.

Okay, appreciate everybody’s time today. Sorry we couldn’t get through to all the questions, but we’re certainly available over the remainder of the day for follow-up, and we’ll look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today’s conference call, and we thank you for your participation. You may now disconnect.