KBH - NYSE

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

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

Thank you, Jill. Good afternoon, everyone, and Happy New Year. We are speaking with you today from our corporate office in Westwood. I'd like to start by sharing a few comments on the Southern California fires. Words cannot describe the damage and loss in the areas where the fires have occurred and are ongoing. Our thoughts and prayers go out to all that have been affected. I would also like to recognize and thank the first responders and fire teams for their heroic efforts. Although it is not business as usual for some of our employees, all of our divisions, communities and sales offices are fully operational. We recognize that it will be a long road to recover from these disasters, but we also know that California and its people are strong and resilient with the tenacity to rebuild and move forward. We had a strong finish to our year with fourth quarter performance that was within our guided range across most of our key financial metrics. At $2 billion, our total revenues were significantly higher year-over-year, driven primarily by a 17% increase in deliveries that resulted from substantially lower build times. And our earnings per diluted share at $2.52 grew 36% from last year's fourth quarter. Our margins were healthy, expanding to just under 21% in gross and increasing to 11.5% in operating income. In addition, we returned nearly $120 million of capital to our shareholders during the quarter, the vast majority of which came from share repurchases. Our fourth quarter results contributed to a solid financial performance for 2024. We delivered nearly 14,200 homes, driving total revenues higher to roughly $7 billion and increased diluted earnings of $8.45 per share. Our book value expanded 12% from the prior year and we produced a higher return on equity. These results are notable in light of the volatility from shifting mortgage rates that shaped the housing market last year. Operationally, we executed well in 2024 as we opened 106 new communities and sold out of 90, reduced our build time by an average of 28% year-over-year and achieved the highest level of customer satisfaction in our company's history. The housing market is benefiting from solid employment and wage increases. Demographics have been and we expect will continue to be a significant factor in driving housing demand with the largest generational cohorts, millennial and Gen

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

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

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

[Operator Instructions] And the first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

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

Yes, thanks, Stephen and good working with you.

Yes, great. I -- you gave a lot, so I'm trying to digest all of it, but I think one of the things that really sticks out is the backlog turnover, the implied backlog turnover ratios, which clearly are going up. And I think you indicated that the cycle times actually really didn't improve significantly or at all quarter-to-quarter. And so I'm curious, as you look into like the first quarter and then the rest of next year, it looks like you're calling for a backlog turnover ratio to be up pretty meaningfully. It looks like on average somewhere probably approaching 70% or more? And I'm kind of curious how much of that is due to improving cycle time in your view versus maybe carrying more spec inventory on your balance sheet?

Yes. So, Steve, it's a function of all those factors actually. We -- the cycle time has improved, as you noted quite significantly and we do expect those numbers that you gave are about right for next year, particularly in the first quarter approaching 70%. So the cycle time first and foremost was the largest impact and has been of the improving backlog conversion over time. We have tilted a little more towards delivering some quick move in ready homes and that's also contributed to the backlog conversion rates. And as we're reacting to the market and what buyers want, we've carried a bit more inventory. We hope longer-term to come back right back to our traditional built to order percentages, but we'll always have them there for buyers. So the answer is really it's both. But the cycle time piece has been really significant, especially after the last couple of years. Those cycle times on the construction side despite quite high post COVID and we've had a lot of focus and a lot of really good work done out in the field on getting that back to our more traditional levels and that's been the primary driver on that.

Great. Yes, that's really helpful. And then you also gave some -- Jeff Mezger, you gave some comments about the order pace that you had seen in the first six weeks and doing a little bit of math, it seems that you're looking for -- you're probably looking for orders to be flat for the year, but -- flat for the quarter, which means that the remainder of the quarter is going to be probably up about 7%, call it, which is about how much your community count was up year-over-year at the end of the year. So basically, you're calling for kind of flattish year-over-year type absorptions for the rest of your first quarter. So I just wanted to confirm that that's actually -- that that's generally correct. And then secondly, with respect to absorptions and what we can expect going forward, in 2025, are the communities that you have open likely to generate stronger absorptions for any particular reason worth calling out, whether it be their geographic location, whether it be their size or something of that nature that would lend them to having maybe somewhat stronger absorptions even if the demand environment is consistent year-over-year?

Steve, you did quick math on the absorption calculations, that was pretty good. And your assumptions and analysis are correct. We're expecting the year to be similar to '24 and it's been choppy. One month will be good and the next one is off and then you come back and -- so we think it will be pretty typical with what we saw in '24. We have a lot of communities opening. We build our projections based on our performance and what we expect the communities to deliver -- sell and then deliver. But with the shift to more openings this year, it wouldn't surprise me if the openings hit that you'll see a higher pace out of them than you would if it was just communities that are ongoing because new communities always sell better at the opening. But I touched on it in my comments, our internal goals were higher than 3.7 in the fourth quarter. And when we had our call in September, things were solid and demand was strong, then it softened a bit. We've turned the corner. And so far, it's reflected '24. So, we're tying the units and the orders to basically what we saw last year on a per community basis, just lift in the communities.

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

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

Right. So on the rates probably are the driver of both the high and low-end in many respects of where the general economic conditions are affordability and the largest impact we expect for next year on affordability is where rates move. So that's part of the reason for the range as you had mentioned. It's a little difficult right now, obviously early in the year before the spring selling season to forecast out in the third or fourth quarters. We really base our margin estimates, particularly the first -- the next quarter out based on our backlog margins and that's exactly what we have in the first quarter. We also look at the leverage that we have on our fixed costs that are included in cost of goods sold. And in higher revenue quarters, we do a little bit better on margin because of that leverage. And that -- when you look at it sequentially, just focus now on the first quarter. When you look at the first quarter sequentially versus the fourth quarter, we're down about 70 basis points at the midpoint and that is mainly due to lower volume and the less leverage on the fixed costs. So basically more than -- more of what we just saw in the fourth quarter that we expect to see in the first. So a lot of those -- most of those homes have been sold and just be delivered out over the next couple months to end the quarter. The full year, like always, I mean, the longer you look forward, the less clear it is and the less you have booked in the backlog, particularly for that back half. So we'll come up -- the company will come back again at the end of the first quarter and have a little bit more visibility to it and clearly have a better idea of how the year is shaping up based on the spring selling season. So we hope to give some more detailed guidance at that point.

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

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

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

Hi. Good afternoon, everyone. Thank you for taking the questions. I'm glad to hear everyone's well in Los Angeles there and also best wishes to Jeff K. in the future. I wanted to go back to the Q1 order guide and kind of on that view that -- or on that data that absorptions look like they're kind of down double-digits quarter-to-date and it sounded like the communities were going to be relatively flat from where you are now to the end-of-the quarter. I mean, just what is it specifically that kind of allows you to look at that high single digit increase for the balance of the quarter? Is it going to be kind of a -- incentives, concessions, just price reductions? Just what is it that you think will kind of stimulate that sales base activity? Thank you.

Matt, I walk through the detail year-over-year because it's a very small number for an odd selling period, whether it's how the weekends break around the holidays or just the fact it's the month of December, it's not a big driver of our orders for the years and net -- or quarter or year. And that's why we said we know we'll close that gap over the balance of the year because of the -- whether it's just the general market improvement or the number of communities that we're opening and introducing here in January and February. The market doesn't have to dramatically change from where it is today. It's just a function of what we're doing with community openings.

Okay. Got it. I just wanted to double click on the incentives and concessions and if there was any type of assumption there. I guess on the second question, just thinking about the kind of starts versus sales over the balance of the year, I know you mentioned the sales came in a little lighter than expectations in Q4, but you did start a little bit more homes than you sold in Q4. And just -- I guess it kind of goes back to the margin question, but is there a margin level at which you would look to hold the line a little bit more and dial back on starts or just kind of how you thinking about maintaining that, that balance between starts and margins depending on how this market evolves this year? Thank you.

Yes. Matt, it's really a function of what we keep calling it optimizing every asset. There's an ideal run rate at an ideal margin that gets you the highest returns for that community and we target the highest return. So if we're -- if sales are off, we'll do things to improve the sales pace and try to optimize the asset. We won't just -- we don't have the need to just go blindly start a bunch of homes and hope we sell them someday at whatever the margin is. We're not in that kind of an environment. It's -- we're going to sell them, start them, close them and the sales pace will pull the levers on what we can with price or incentives or whatnot to ensure we hit our sales rates.

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

Thanks. Good afternoon, everyone, and hope everyone's safe with all the unfortunate tragedies in LA. And also, Jeff, it's been -- Jeff K., it's been great working with you and best of luck going forward. Just wanted to dial in a little bit on the gross margin guidance and make sure we're understanding it properly. In terms of the modest sequential reduction in 1Q to 4Q, if that's more just simply a function of operating leverage? I believe you said you're assuming a similar type of incentive environment, 1Q versus 4Q. So just wanted to make sure that I was getting that correctly and conversely going-forward from 1Q to the rest of the year, getting closer to the midpoint, if that's also more again a function of operating leverage versus anything else?

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

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

Yes, got it. Okay. So yes, sequentially, virtually all of the decline from the fourth quarter is due to the lower leverage on the fixed costs. So we have -- we're seeing similar profiles on pricing, costs, incentives, et cetera, that we experienced in the fourth quarter. The bulk of those homes are in backlog. We know the cost, we know the pricing, we don't expect to have a bunch of closing table giveaways or anything like that. And from the point of view of any quick move in ready homes, there's always some variability around that in the quarter, but we think that will be maintained about what we just saw in the fourth. So that's sort of the sequential piece on it. When you look forward to the full year, yes, as you know the leverage on the fixed costs always has an impact, sometimes favorable, sometimes unfavorable depending on the top-line. Within the quarter -- when I'm looking at the full year, I'm looking at it really more on a basis of, number one, you had the improvement coming off the first quarter, but first quarter is usually a pretty low volume quarter for us. So that is also mainly impacted those back three quarters in total. A lot of that is actually also the leverage side of it. But I think as importantly, we are seeing a slight decline versus 2024 in the full year margin. It's about 60 bps right now at the midpoint, mainly due to mix and mainly due to what we are just forecasting where these new communities will open and deliver out at. But a lot of that is based on our best estimates right now on everything we know. And we stayed fairly current on the underwriting on these communities and our divisions do a really good job forecasting current conditions out. But if conditions improve, we'd like to say we could do better than these numbers and the opposite if conditions go the other way, but it's our best guess at this point. And it is a slightly wider range than we normally like to give a full percentage point. But there's maybe a little bit more uncertainty as we enter the full year right now.

Right. No, good. Understood. Appreciate that. I guess secondly, I just also wanted to dial-in a little bit on incentives or mortgage concessions. I believe I heard right from Rob talking about the percent of communities where you offer incentives being roughly similar to the last two or three quarters. I just wanted to dial-in if that statement kind of holds true, if you were to kind of compare the level of incentives that you're offering at the beginning of the fourth quarter towards the end of the -- versus the end of the fourth quarter. And if part of the reason perhaps because your orders did miss maybe what your internal projections, if there was any type of -- it sounded like also a view of to the extent you held incentives, you're willing to hold margin a little bit, not do some of those base price reductions and you took the hit on the volume. That's the right way to think about how you approach the quarter versus maybe the industry itself being a little bit more consolidatory on incentives on the broader market basis.

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

Yes, so I think most of what you said there was right in the way that you presented them. We didn't – or ask the question, we didn't see a big change in the number of buyers that we were incentivizing or the level of incentives overall for the quarter. I would say that that did increase some as we moved throughout the quarter. You go back to September, we were in an environment where rates were coming down. I think there was some excitement about that, needed to do less just because rates were lower. That's gone the other way. We did choose to not chase sales in Q4 with big discounts or price cuts considering how choppy the markets were or the level of discounting that we saw many of our competitors putting in play in a slower demand time of the year. So, we haven't really adjusted in a meaningful way off of that, but it's still about finding the right deal for the buyers that are in. If we find that we're going to have to do a little bit more because rates are up, we will. And we're, as Jeff mentioned earlier, December is -- it's a tough time to do that. We're just now getting into the better time of year to sell -- entering the spring selling season. We always see the demand creep up and sales level improve. So, we're just going to put the periscope up as we go along and see what we need to do to keep incentivizing, but -- to keep selling. And if that means a little more on price, then that's where we'll take it. If we've got to help a little more on the rates, that's where we'll take it. But we're just now really entering that period where it makes sense for us to do that because we've been working off of the backlog that we had.

Thank you. Our next question comes from the line of Alan Ratner with

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

Yes. So, Alan, mostly it's just on the sellout side. We expect the sellouts to be significantly higher than 2024. So we're basically doing a lot of work just to keep up on that side of it. As we mentioned during the prepared remarks, we have a lot more grand openings coming out as well, but the pressure is really on selling out of more communities. So, it's a little bit of a tough year from that point of view. You're accurate in what you said about the fourth quarter. We wanted to give a little more color on the year. Normally, we just kind of go one quarter out in that end of year to indicate what's really happening. And as we're moving through the spring selling season, we'll have the first and second quarter some pretty good comps on a year-over-year basis on average community count. And that little dip in the fourth quarter is at this point in time what we expect to see is just a one quarter dip before it comes back fairly strongly prior to next -- the 2026 spring selling season. So, we're pleased with that. As far as delays or things like that due to any reasons, there's always things happening with communities and grant openings. There's a lot of factors outside of the control of anyone in the homebuilding industry, municipalities, weather, natural disasters, et cetera, all contribute to that, but on average, we do pretty good getting our communities opening. And like I typically will say, when we miss by a few openings in a single quarter, it's -- those communities still get open and it's not like they're opened a year later or eight months later, it's usually just missing quarter end and they're opening within weeks or at -- within a couple of months or the next quarter. So, it's not a tragic impact or a super negative impact on the business when you look at it from that point of view, but really the primary driver, the primary difference next year is just a much larger sell out population or anticipated sell out population than what we saw in 2024.

Got it. Okay. I appreciate that, Jeff. Second question, I know it's very early days as far as the potential impact from all of these fires, but California is about a third of your business, and I'm curious just how you're thinking about how this might play out for your business? I know there's no direct overlap, thankfully with your active communities, but do you anticipate any -- either acceleration in cost inflation as the labor pool gets diverted to repair and then fixing damaged homes or rebuilding damaged homes? Any changes you anticipate to the permitting process or insurance? Maybe just talking broadly about your insurance vis-a-vis some of these more mature markets as well, I think kind of a catch-all question there, but any thoughts going forward?

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

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

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

We just think on balance, we're right there. I mean, during the September call, everything was optimistic, right? When we're doing the call, rates have come down quite a bit and there's been just a lot of volatility up and down around the rate environment. And there's still this issue on the spreads between the mortgage rate and the treasuries and everything else. So look, we don't have a crystal ball in the macro and we don't know where that's heading. I do know there was a fair amount of uncertainty as we started each of the last couple years and we ended up having two really, really outstanding years as a company and we've kind of proven that we have been over -- able to overcome challenges as we move through the year. So, we'll just be watchful on it. We're just calling it like we see it today, Mike. I mean, we don't have any -- probably any more detail on the macro than you guys would, but that's how we're seeing it today. The backlog is number one for us. We look at where those backlog margins are at, what we're currently selling at and what our expectations are on the cost side. And when we sort of correlate all those things, we came up with our guidance numbers, but -- so that's why it's a range and I think that's why it's updated every quarter and we'll see as we go through the year.

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

Yes. I mean, look, we -- the one thing we're always really careful about is on trying to forecast order rates. Right now, the most important thing for us is order rates through the end of the spring selling season, that basically sets up the full year revenues. And we have better visibility into those numbers. Again, working out of a -- off our backlog, we like the built to order model partially for that reason that we do have visibility in the future. But we'll see where spring goes. And depending on the spring selling season, I think we'll get a better feel for the year, both in terms of overall absorption paces as well as housing revenues.