James Zeumer - Investor Relations Ryan Marshall - President and Chief Executive Officer Robert O'Shaughnessy - Executive Vice President and Chief Financial Officer James Ossowski - Senior Vice President, Finance.

Michael Dahl - Barclays Timothy Daley - Deutsche Bank John Lovallo - Bank of America Merrill Lynch Michael Rehaut - JP Morgan Stephen Kim - Evercore ISI Ivy Zelman - Zelman and Associates Robert Wetenhall - RBC Capital Markets Jack Micenko - Susquehanna Financial Stephen East - Wells Fargo Carl Reichardt - BTIG Alex Barron - Housing Research Center Mark Weintraub - Buckingham Research Susan Maklari - Credit Suisse.

Good day, and welcome to the PulteGroup's 3Q, 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Zeumer. Please go ahead, sir..

Great. Thank you, April, and good morning. I want to welcome all participants to PulteGroup's third quarter earnings call. Joining me today are Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance.

A copy of this morning's earnings release and the presentation slide that accompanies today's call, have been posted to our corporate website at pultegroupinc.com. We will also post an audio replay of today's call a little later today.

I want to highlight that as part of today's call we will be discussing our reported results as well as our results adjusted to exclude the impacts of certain significant items. A reconciliation of these adjusted results to our reported results is included in this morning's release and within the webcast slides accompanying this call.

We encourage you to review these tables to assist in your analysis of our results. Also I want to alert all participants that today's presentation includes forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan Marshall.

Ryan?.

Thanks, Jim, and good morning. I appreciate the opportunity to speak with you today at our PulteGroup's strong third quarter operating and financial results. We continue to realize top and bottom line growth driven by the business strategies and capital allocation priorities we've executed over the past several years.

As reported in this morning's release, even with the severe weather conditions in Q3 our 11% increase in sign-ups, 100 basis point increase in operating margins, and 40% increase in adjusted earnings per share attest to the strong financial performance we were able to deliver.

Before we discuss our results in detail, I want to provide a few comments about hurricanes Harvey and Irma and the impacts they had and are having on our business. First and foremost, I'm thankful that we can say that all of our employees are safe and we're actually working to support members of our team whose lives were disrupted by the storms.

In less than 48 hours PulteGroup employees contributed well over $100,000 which the company in turn matched to aid any employees impacted by the hurricanes. While I was not at all surprised by the outpouring of support it was still gratifying to see.

We we're also fortunate in the damage to our communities in Texas, Florida, and the Carolinas was minimal. More specifically, none of our homes under construction, our models, or our sales centers were flooded or suffered significant wind damage.

Depending on the specific market once the storm surpassed our communities were fully operational within a few days to a couple of weeks. That being said, the process of closing down and then reopening approximately 175 communities at various times resulted in the loss of numerous selling and construction days across multiple major markets.

These disruptions were compounded by the resulting impact on the consumer in the days leading up to and after the storms.

Rather than estimating the number of potential sign-ups that were lost we can tell you that the sign-ups in July and August were up roughly 15% over last year, but that increase fell to just 3% companywide for the month of September resulting from the disruptions in Houston, Florida and coastal Carolinas.

Two takeaways from these numbers, overall buyer demand was robust in the quarter and the slowdowns caused by hurricanes Harvey and Irma were significant. Customer traffic has improved in the weeks following the storm, but as I'm sure you can appreciate, the process of recovery has varied by market.

One final point that I would like to make relating to the storms is that while trade labor availability has held up a little bit better than we expected, we are certainly incurring higher prices for that labor and the associated materials.

In addition, municipal resources needed for permitting and/or utility crews to bring power to communities and homes have been strained. Fortunately, municipalities are beginning to wind down hurricane response activities which is allowing them to shift more of their resources toward builder related permitting.

At the same time the utility crews are being freed up to work on connecting power to new homes. In summary, the damage from hurricanes Harvey and Irma could have been much, much worse, but we did and will continue to feel the impact on our business for several quarters.

Despite the hurricanes, there are so many positives to be taken from our third quarter results. As Bob will detail, we continue to realize meaningful growth in our business with an 11% increase in sign-ups and a 9% increase in homebuilder revenues compared with the prior year.

We were then able to compound this topline growth into 40% growth in adjusted earnings per share. I would emphasize the point that we are not just growing for growth sake, rather we are operating in alignment with our strategic focus on delivering higher returns.

For the trailing 12 months ended September 2017 our return on equity increased by more than 200 basis points over the comparable prior year period and is now about 14%.

Overall, we are extremely pleased with our third quarter and our year-to-date performance and with our third quarter backlog at a 10-year high we are well-positioned to deliver strong full-year results. Now, let me turn the call over to Bob for a more thorough review of our quarterly results..

Thanks Ryan and good morning everyone. As Ryan discussed, our third quarter results were impacted by the severe weather that disrupted our businesses in a number of important markets. Where possible, I'll highlight some of the areas of impact as I review our third quarter financial performance.

Starting with sign-ups our net new orders in the quarter increased 11% over the prior year 5300 homes. It is worth reiterating that as a result of the hurricanes we experienced a meaningful drop in the year-over-year growth in sign-ups in September as compared with our business in July and August.

Our reported Q3 sign-ups were also impacted by cancellations related to a fire you may have read about at one of our 50-unit low rise buildings in the Boston area. The building which was effectively sold out will need to be raised and rebuilt.

As a result, 33 customers elected to cancel their contracts rather than wait 12 months for the new building to be completed. We are trying to find other housing options for these buyers, but these 33 cancellations reduced our reported year-over-year growth in sign-ups by about one percentage point.

The fire will also impact future closings which I'll address shortly. Looking at 11% increase in Q3 sign-ups a little more closely, we experienced higher sales of our first-time [indiscernible] buyers partially offset by a decrease in sign-ups among active adults.

For the quarter sign-ups among first-time buyers increased 24% over the prior year to 1611 homes and sign-ups among move-up buyers gained 16% [ph] 2443 homes, while sign-ups among active adult buyers decreased 9% to 1246 homes.

The decline in active adult sign-ups was largely due to [indiscernible] in Houston, Florida and our costal Carolina markets related to the hurricanes.

Adjusting for community count our third quarter absorption pace was up 1% over Q3 of 2016 and reflects a 15% increase among first-time buyers and a 2% increase among move-up buyers partially offset by our lower active adult sales.

Turning to the income statement, home sale revenues increased 9% over the prior year $2.1 billion as we continue to benefit from the increased investments we have made in our business in recent years.

These higher revenues were driven by a 7% or $25,000 increase in average sales price to $399,000 in combination with a 2% increase in closing volumes of 5151 homes. At 5151 homes closings for the period were below the low end of our prior guidance range.

The lower closing volume for the quarter was primarily the result of hurricane related delays, with delays in permitting and other municipal approvals particularly in the West also negatively impact Q3 closing results. Breaking down our Q3 closings by buyer group, 28% were first-time, 47% were move-up and 25% were active adult.

In the third quarter of 2016 closings by buyer grew by 29% first-time, 44% move up and 27% active adult. At quarter end we had 10,439 homes under construction. Based on our assessment of the current production environment, we currently expect to deliver between 6400 and 6700 homes in the fourth quarter.

This estimate reflects the impact of lost construction days, trade availability and municipal processing capabilities in storm affected markets. Our Q4 estimate also reflects the loss of all closings from the building in Boston that burned and which had been scheduled to deliver in the quarter.

As noted previously, our average sales price for the quarter was $399,000. The higher average sales price was driven by the modest mix shift toward more move-up homes combined with higher selling prices realized across all buyer groups.

For the quarter, our average sales price of first-time home buyers increased 5% to $293,000, move-up increased 5% to $467,000, and active adult increased 9% to $390,000. Looking at our backlog ASPs also continue to rise increasing 10% to $431,000.

I would note that geographic mix is impacting this quarter from quoted backlog as higher sign-ups from California, particularly Northern California, resulted in higher average sales prices.

Looking at our margins our reported gross margin was 23.9% which is up 50 basis points sequentially from the adjusted gross margin we realized in Q2 of this year and in line with our previous guidance range of 23.6% to 24.1%.

Our gross margins continue to be supported by our ongoing focus on capturing more option revenues and lot premium dollars wherever possible. For the quarter option revenues and lot premiums increased 8% or approximately $5600 over last year's $76,200 per home.

In the quarter incentives as a percentage of gross sales improved 40 basis points sequentially from the second quarter of this year but were up 40 basis points compared to the third quarter last year. Looking at the fourth quarter we expect gross margins will come in towards the lower end of our previous guidance range of 23.6& to 24.1%.

This estimate considers the impact of the storms which will result in the delay of certain high margin closing in parts of Florida, the loss of the building in Boston as well as higher labor and material costs being incurred in certain markets.

Looking at our overheads, reported SG&A for the third quarter was $237 million or 11.6% of home sale revenues which includes a $5 million charge related to the resolution of certain insurance matters.

Prior year SG&A of $251 million or 13.3% of home sale revenues included $12 million of charges for restructuring costs resulting from actions to reduce our workforce as well as costs associated with shareholder activities.

Based on our strong operating performance and the increased leverage our overheads resulting from the actions we took in 2016 our third quarter operating margin improved to 12.3%. These results keep us on track to achieve our full year operating margin guidance of 11.7% to 12%.

Note that this guidance excludes the impact of the significant items we highlighted during the first three quarters of the year. Turning to our financial service businesses we reported pretax income of $18 million compared to $21 million in the third quarter last year.

The decrease in pretax income was primarily driven by a more competitive pricing environment for mortgage originations. Mortgage capture rate for the first quarter was 80% compared with 81% last year. In total, the company reported pretax income for our third quarter of $268 million which compares with $212 million last year.

We also reported third quarter income tax expense of $91 million which represents an effective tax rate of 33.8%. The slightly lower tax rate relative to previous guidance was driven by certain state tax law changes along with a benefit from stock option exercises and other employee stock transactions during the quarter.

Looking at the bottom line we reported Q3 earnings of $0.58 per share which represents 57% increase over our prior year reporting earnings of $0.37 per share. On an adjusted basis, the company's Q3 earnings were $0.60 per share which represents a 40% increase over our prior year earnings of $0.43 per share.

Diluted earnings per share for Q3 was calculated using approximately 300 million shares outstanding which is a decrease of 42 million shares or 12% from 2016. The lower share count resulted from the company's share repurchase activities.

Turning to the balance sheet we ended our third quarter with $197 million in cash on hand after spending $260 million to repurchase 10.4 million shares of our stock at an average price of $25.11 per share.

Through the first nine months of the year we've repurchased $660 million worth of stock and expect to complete the targeted $1 billion of share repurchases in the fourth quarter. As always, our decision to repurchase stock is subject to market conditions.

Consistent with prior guidance that our share repurchase activity would modestly increase our leverage in the short-term, we ended the third quarter with a debt-to-capital ratio of 42%. While this remains just outside our targeted debt-to-cap range of 30% to 40%, we expect to move back inside the range in 2018.

I want to also highlight that subsequent to the end of the third quarter, we retired $123 million of bonds that matured. We also exercised the accordion feature of our bank revolver providing us an incremental $250 million of liquidity.

Finally, moving over to operations, we had 10,439 homes under construction at the end of the quarter which is an increase of approximately 1,200 homes or just over 13% compared with the end of the third quarter in 2016. The increase was primarily driven by higher sold backlog units as specs fell to 22% of homes under construction.

We remain disciplined with regard to production and spec inventory as we entered the quarter with only 576 finished spec homes. For the quarter we operated out of 778 communities which is an increase of 10% over the prior year and is in line with our guidance.

As is our practice we will provide guidance on 2018 community count when we release earnings in January. In addition to our share repurchases we used $295 million of capital in Q3 for new land acquisitions.

This brings our nine months spend to $773 million and keeps us on track with prior guidance of investing approximately $1.1 billion in land acquisition in 2017. During the quarter we approved 52 deals covering approximately 5,500 lots or an average of just over 100 lots per community.

Consistent with our stated goal of wanting to be more asset efficient and return friendly, 46% of these lots will be optioned. Inclusive of the parcels put under control in the quarter we now own 90,400 lots and control another 48,800 lots under option. This increases the percentage of our land controlled under option to 35%.

We're pleased with our progress as we continue to successfully build our land pipeline to support future growth while providing added flexibility and greater asset efficiency. Now let me turn the call back to Ryan for some final comments.

Ryan?.

Thanks Bob. Before we open the call to questions let me provide a few comments on the housing market and the demand conditions we experienced in the quarter. The last release from the Census Bureau reported the seasonally adjusted annual rate of new home sales for the country at 560,000 which was little change from last year.

Based on our results and feedback from our divisions we would tell you the demand in the quarter generally felt stronger than the government suggest and more in line with the 5% to 10% growth that many are forecasting.

Certainly the hurricanes make comparisons in certain market specific analysis a little more difficult, but overall we're very pleased with the demand environment. As has been the case for the past few years housing demand is benefiting from the strength of the overall economy.

Going forward we expect that the ongoing job and wage growth, high consumer confidence and historically low interest rate environment can support the continued growth of housing demand. And while interest rates have moved a little higher, I don't think that the modest increases had a significant impact on buyer demand.

With an 11% increase in sign-ups it should come as no surprise that I would say demand in the quarter was solid growth across most of our markets.

More specifically we saw generally good demand on the East Coast although cancellations caused by the fire in our New England division along with the impact of hurricane Irma in Florida will distort our reported results.

Sign-ups in the Southeast were positive, although we are still seeing some choppiness at the higher price points in certain communities. In the middle third of the country we continue to be pleased with traffic and demand in our Midwest markets.

The incredible flooding in Houston obviously impacted Q3 demand in that market, but overall we experienced good traffic and demand trends in Texas overall. And finally out West we would consider our Western markets to be among the strongest in the country with particularly high buyer interest in Northern California, Arizona and Nevada.

Through the first few weeks of October we continue to see good buyer traffic with the typical seasonal patterns heading into the fourth quarter. We are looking forward to a strong Q4 and a continuation of the good demand conditions experienced through the first nine months of the year.

In closing, I want to thank all of our employees for their tremendous work during the quarter. Whether you were taking care of our customers or each other I'm extremely proud of your efforts during some very challenging conditions. Now, let me turn the call back to Jim Zeumer.

Jim?.

Great, thank you Ryan. We'll now open the call for questions so that we can speak to as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one followup. April, if you'll explain the process we'll get started with Q&A..

Thank you. [Operator Instructions] And we'll take our first question from Mike Dahl with Barclays. Please go ahead sir..

Hi thanks for taking my questions. Just starting off on the kind of the storm impacts and hopefully how things have progressed post the quarter, more really in the quarter, so two pretty different storms impacting Houston and Florida in terms of kind of types of disruption that we were seeing in damage.

So could you give us a little bit more color on how you're seeing those respective markets recover if one is proceeding or rebounding faster than I guess your proactive Florida markets versus Houston, anything you can give us on how things were progressing over the course of September and early October?.

Yes Mike, good morning, this is Ryan. As I mentioned, kind of at the end of our prepared remarks we've actually seen buyer demand rebound quite nicely in both Houston as well as in Florida. The damage and the implications for the storm were very different in the two geographies.

I'll start with Houston, a lot of the work that's being done there is related to drywall, paint and trim and as we indicated in the prepared remarks we are seeing pretty good labor availability in terms of labor being there, but we are paying a little bit up for that labor and as we mentioned in our prepared remarks we've rolled that into our margin implications for Q4, but from a demand standpoint we're seeing that market recover pretty well.

I'll move to Florida, the damage there was mostly related to clean up, landscaping, and the power grid.

The power grid and the kind of the associated power crews that we need to energize new sites, hook up power meters, energize new homes, et cetera, that was definitely strained as was permitting and permitting related activities in the municipalities, because those community leaders were focused on storm recovery.

We're starting to see that kind of break free and we're getting back into what I would characterize as a normal environment.

Southwest Florida is one that I would highlight, it's a very big market for us, that's where the hurricane made landfall and some of the most widespread damage was in a broader sense and so that particular market from a buyer demand standpoint hasn't quite recovered where we would have expected it to.

So I think I touched on everything that you had there Mike?.

Yes, you did and I understood and I know this is difficult, but if you look at the margin impact that you're forecasting collectively between the delays of high margin communities, the labor materials, the Boston community, is there any way you can parse out the relative magnitude of those and you know how we should if you have any initial thoughts on you know clearly 4Q is one quarter out but as we look out into 2018 how we should be thinking about those impacts?.

Yes we didn’t parse it out and it certainly has had an impact. But you know the guide that we gave at the end of our second quarter for the back half of the year was 23.6% to 24.1%. We had a sequential improvement of 50 basis points over the second quarter going to 23.9% in this quarter.

For the fourth quarter we still anticipate staying within our guide, but as Bob mentioned in his remarks will be towards the lower end of that guide and that factors in the impacts we're expecting from higher labor costs and the loss of those higher margin communities..

We'll take our next question from Nishu Sood with Deutsche Bank. Please go ahead..

Hi this is actually Tim Daley on for Nishu.

So I just wanted to touch a bit on the capital allocation for 4Q and then kind of looking into 2018? So first I was wondering how much of the share repurchases have been done quarter-to-date through I guess October 23rd or 24th? And then secondly, I just wanted to ask about the land acquisition versus development spend that was guided to previously in the year and I think it was 1.1 and 1.6 respectively, are you still on track for that total to be around 2.7? Thank you..

Yes, we haven't provided any update on repurchase activity in the fourth quarter. We did indicate that we currently expect to complete the $1 billion share buyback so that would obviously show that we're going to be buying during the quarter.

In terms of the spend, yes we had just under $300 million of land spend brings us to just under $800 million, so we had guided to 1.1. We think we will be just around there and on development spend yes we think we'll be here the guidance we've given at the beginning of the year..

And we'll take our next question from John Lovallo with Bank of America. Please go ahead..

Hey guys it's actually Pete Gallo [ph] on for John. Good morning..

Hey John..

I was wondering if we could focus on Slide Six, Bob giving really good detail there around kind of the owned optioned strategy going forward and I guess just from a higher level is there any kind of timeline out there in terms of, how long it would take you just organically to get to that 50% option range? And then I guess part B to that question would be, is there any reason why you wouldn't target that closer to 60% or two-thirds kind of options over the long term?.

Yes, it's a fair question and I think we've been pretty consistent over time that when we look at optionality what we're really looking for is market risk transfer. And so it's not about putting money source between us and the land, if it doesn't transfer that market risk because that's actually too expensive.

So what we really get down to is on an transaction-by-transaction basis are we able to affect a structure that actually serves both parties where we actually are able to manage our market risk by creating optionality and asset efficiency.

So I don't know that there is a - we have to be at 50% at any one point in time nor what I say that we were targeting two-thirds or whatever, if we can get there great, but it really is sort of a transaction-by-transaction dialogue..

Pete, this is Ryan. The other thing that I'd just add in there is, one of the things that is, one of the things going on in the entire industry is land entitlements are taking longer and so part of the reason that we set the milestones at 50% owned, 50% options is I think it gives us the predictability of our forward business that we believe we need.

It also takes into consideration the impact of our Del Webb assets which tend to run a little bit longer than a Centex or a Pulte branded community. So I think Bob hit the nail on the head.

What we're really looking for is risk transfer, more option is generally better, but as governing guidepost for the your organization we think 50-50 is the right mix..

We’ll take our next question from Michael Rehaut with JP Morgan..

Thanks, good morning everyone. I was hoping to focus a little bit on how you think about growth over the next couple of years and understanding that that there are different levers obviously to create value, but over the prior - before this year in prior couple years, community count growth was a little bit more modest or flattish.

It started to increase or it's starting to increase, how should we think about 2018 and 2019 where you have different peers of yours kind of targeting maybe either mid, high, single digit or low double-digit overall volume growth? How does community count growth figure into that as I'm sure you have one, two, three year plans in place?.

Yes, Mike good morning. This is Ryan. We haven't provided any guide to 2018 at this point as Bob mention in his remarks we’ll plan to do that as part of our Q4 call. We’ll give you some guidance ranges for next year including community count.

I think you've seen from the land investments that we've been making that we've certainly been growing our land pipeline which as you know will translate into community count and volume growth over time.

We have been putting up some pretty strong growth numbers this quarter being yet another one this year with a 11% growth and I think it's reflective of how we've been increasing investments into the business.

We've talked for a while that we want to grow with or even above the market and so I think at a broader level that's how we're thinking about our growth prospects for the future is that we'll be keeping up or growing slightly faster than the market..

I appreciate that Ryan.

I guess second question I apologize this was asked earlier, but in terms of labor materials in Texas and Florida how are those markets trending right now in terms of the inflation trends that obviously have been an issue even before the hurricanes hit? Obviously it's still probably pretty early days, but certainly wanted to get a sense if you have any intelligence on the ground in terms of any changes that you might have seen to the labor pool in particular and what kind of expectations that you might have next year in terms of any change in labor availability or cost?.

Yes, so Mike, we're seeing generally pretty favorable availability on labor but we're paying for it, specifically in Houston. That's the place where we're seeing premiums being paid predominantly around drywall, trim and paint labor. We've been able to keep the labor on our job sites but we have had to pay up for it.

A little bit of the same thing going on in certain parts of Florida, again the labor is there but it is coming at a premium given some of the recovery efforts. The one that I'd highlight Mike, that I think has a national impact which we're paying very close attention to is lumber.

Lumber was on an upward trend even before some of the catastrophic natural disaster events that we've seen over the last 60 to 90 days. So that's the one that I think we all need to be paying attention to for 2018. I think the premiums that are being paid for labor in Houston and Florida that will subside in time.

the lumber impacts could be longer lasting..

And we’ll take our next question from Stephen Kim with Evercore ISI..

Thanks very much guys.

Can you hear me?.

Hey Stephen, good morning.

Are you there, Stephen?.

Yes, sorry about that, I had some technical difficulties there, can you hear me?.

Yes, good morning..

Okay, okay, good morning. Sorry about that. I wanted to turn the question to land spend and your approach to land and I was gratified to hear your answer to an earlier question where you indicated that it wasn't as simple as just simply talking about the share of your land in units which are optioned. I agree with that.

It seems to me that, the best way to maybe think about it is in terms of land dollars spent. I think you had indicated that you spent $228 in the quarter for acquisition. I didn't get a development spend number.

I assume it was probably around $500 million, but I wanted to see if you…?.

Yes, to clarify it’s 295 of land acquisitions spend in the quarter and development was $382 million..

Okay, great. That's helpful. Thank you for that. Okay and so that would bring you at about a low 30% of revenues which is kind of what it looks like you're going to be maybe spending for the year give or take a little bit based on what you indicated your goals were for the year.

And my question relates to what amount of land spend do you think you need to maintain current sales rate? So I'm assuming like basically 15% revenue growth let's say.

If you were to carry that forward and say we want to run our business to be able to meet that kind of top line what level of land spend would you need on an ongoing basis?.

That's a hard one to answer Stephen because the mix matters, price points that you're buying cost of land in the markets you're looking at how much is optioned. So it doesn't serve to answer that generically. Right I know that’s not a real answer for you, but it really depends on mix and how you're buying..

We’ll take our next question from Ivy Zelman with Zelman and Associates..

Thank you. Congrats guys on a strong quarter..

Thanks Ivy..

You know Ryan could you talk a little bit about affordability? We get a lot of questions about concerns with the strength of home price inflation.

Are you seeing any pushback from consumers and we haven't really seen too much of it but obviously your markets, you're seeing strong demand? Are you seeing any resistance? And maybe thinking about mortgage underwriting and what you're seeing on the credit side is allowing any incremental consumer ability to buy pricing power despite pricing power, maybe give us a little bit of color around the horn to just talk specifically about Northern Cal which is one of the markets that you know we've heard a lot of concern around, Denver and some of the other markets in the Western areas seem to be the most concerning to investors?.

Yes, Ivy good morning. What I would tell you around credit availability is it's generally okay and in fact it's gotten better over the last 90 days specifically with the GSC programs. The one exception to that is FHA. FHA I would tell you is unchanged. We are seeing more competition come into the FHA world from the non-banks.

And that's helping a little bit, but in terms of credit availability on the FHA side it's unchanged.

I think the False Claims Act, the prosecution if you will under the False Claims Act needs to be dealt with and until that happens I think that the bigger banks are going to continue to be hesitant in underwriting to the full availability of the credit box. So that's my broader comment on credit availability.

We look at it clearly from the side of the mortgage company which we have an amazing mortgage company that Deb still runs for us and her and her team they're doing a very nice job. She helps keep Bob and I fully informed and what's going on in the mortgage world.

When you look at it from the builder side of the business, I wouldn’t say that mortgage availability or credit availability is impacting our ability to stop homes. That being said, we are seeing a little bit of resistance at the higher price points because of affordability and I think that's a broader concern that affects the entire business.

There's a little bit more price opportunity at the lower price points, but that's also the buyer group that's going to run into a ceiling the quickest in that they have absolute kind of maximums in terms of what they can spend.

So there are you know there are a few markets around the country that have been running hot and the premium between resale and new has grown larger than maybe what historical trends have been and those are places that I think from an affordability standpoint we all need to pay attention to.

So hopefully that helps provide a little bit of color to what you're asking Ivy?.

It does thank you.

Let me ask one other cost question, what's your appetite around M&A given that we've seen some acquisitions and maybe strategic opportunities to get into either new markets or maybe bolt-on and existing markets, are you in the market looking and do you see attractive opportunities?.

Yes, really no change in our appetite for M&A. I'd point you back to our capital allocation philosophy which we defined and we continue to reiterate.

We want to invest in our business in new land acquisition and we've put M&A in that category sort of the extent that there's an attractive opportunity from a land pipeline standpoint and we think we give some added benefits from that acquisition we're certainly open to it.

The challenges with M&A is as you well know are the integration challenges, but if the land opportunity makes enough sense I think you'll figure out how to how to make that integration happen, so no change in our appetite. We look at a lot of deals, but really no different than organic land acquisition. We want to make sure that it makes sense..

And we have a followup question from Stephen Kim with Evercore ISI. Please go ahead..

Thanks guys. Yes, sorry I got cut off there. No, no, sweat. Yes so I'm just going to move on to another question because it sounds like the total answer my question was in kind of the way you are thinking about things.

But when we talk about the options which you do have, last I looked and again correct me if I'm wrong, it looked like you're putting down about 9% of the purchase price on your options. That's a number that I have here from your K and I didn't know whether or not that was the way you looked at it as well.

And could you could just give us some context for what you generally put down on your options and if there's a cap on the amount that you're willing to commit to an option before you actually take it on your books? Thanks..

Yes, I've not looked at it in the aggregate the way you just suggested, but the 9% certainly kind of fits within if you look at deal-by-deal. We're typically going to be between 5% and 10%. There are always unique circumstances, so we might go as high as 15% in some cases, but I don't think you'd see us north of that..

Well take our next question from Bob Wetenhall with RBC capital markets. Please go ahead..

Hey good quarter and nice job navigating the hurricane disruption. You guys did great on SG&A this quarter.

There's a lot of cost control, how much runway is there on the cost side and incremental SG&A leverages we're thinking about next year?.

Hey Bob, good morning. This is Ryan. Thanks for the comment on SG&A. It's certainly been a focus. I think we've done a nice job getting it tightened up. It would execute against the business plans that we put in place for the year.

As far as continued improvement on that we're always going to be looking to improve the efficiency, but any substantial gains in the future will really come with growth of the business. So that's where I would look to it. We have done a nice job against the guide that we provided for 2017 and we're certainly kind of proud of that.

We'll look to give kind of future guidance for 2018 in our fourth quarter. Keep in mind we did make the accounting change with commissions at the beginning of the year. So, our commissions are fully rolled into our SG&A spend at this point in time.

So, I think you pull that out and you look at it in historical terms how we have typically have reported it. The gains are pretty substantial that we've made on the SG&A front..

Yes, well done it's a lot of progress there. I hope it continues. I wanted to ask you as well about order growth in the West Region which was up over 30% and what's driving demand and as you're thinking about 2018 what are your favorite markets, where do you see the most strength happening on a regional basis? Thanks and good luck. Nice execution..

Thanks Bob. The West has been very strong. I highlighted in some of my prepared remarks it's really been driven by California. California, right now is doing well and I think you've heard that not only from us but some of our competitors. Nevada has performed very well for us this year as has Arizona.

So those are the markets that are driving the order growth for us in current quarter.

As far as markets for next year, my favorite markets are any place where there is strong job growth because I think when you look at the underlying fundamentals that will continue to fuel housing demand and housing growth is in those markets where we're seeing growing economies and added jobs, so that's where my bet would be for 2018..

We'll take our next question from Jack Micenko with SIG. Please go ahead..

Hi, good morning. Looking at the balance sheet into 2018 lands coming down you're running the three-three strategy.

Conceptually how do you think or how would you force rank once you fund the business and fund necessary land development costs, how do you force rank buybacks dividends and deleverage beyond this year?.

Yes, Jack fair question and certainly we'll give you some color on that as we release our fourth quarter we'll think about for 2018, but I think generally I go back to something Ryan said a couple of minutes ago, the capital allocation strategy that we put in place back in 2014 still drives our primary decision making, so first and foremost into the business to your point.

Next we want to be able to fund the dividend through cycle, so we look at that candidly every quarter as we announce our current dividend we think about we want to do with that. That will be influenced by the cash flow we think the business generates in 2018 and beyond. And then if we have excess capital beyond that we'll buy back stock.

I think if you think about it we've been pretty consistent with that and highlighted that we have probably pulled forward some repurchase activity over the last 18 months through the end of this year. So leverage becomes part of the dialogue.

We’ve highlighted that we're a little bit outside of the range that we'd like to operate in being 30% to 40%, so I think you'll see us want to get back inside that range. We've highlighted we think it happens in 2018 essentially through earnings.

And then cash flow capabilities above and beyond that will think about how quickly we can and want to grow the business. If there’s availability beyond that, we look at dividends and share repurchase, so same exercises we've followed for the last four years or so..

Okay, thanks for that. And I think in your opening comments Ryan you said sales were running maybe up 15% year-over-year in the first two months and then you hit the headwind from the storms and in September you did have a pace of growth although modest but it seems like it would have been higher had the storms not occurred.

So I guess the question is, are you letting the dog off the leash a little bit on sales pace or is that really more a function of mix? I'm just trying to get a sense of where we stand on the pace price debate that we're always trying to manage..

Yes, Jack it's a great question and to your point we ran 15% up in July and August which I think speaks to the strength of the market. September was 3% up and that was, in our view anyway purely driven by the storm related impacts.

From the pace price equation that's certainly something that we pay attention to in every single community and it truly is a community by community decision that we make. Our focus is and always has been that we're looking to drive the best possible return that we can for the shareholder.

In some cases that's going to be pace, in some cases that’s going to be price, so I think we let the dog off the leash where it makes sense. We're looking for the best financial outcome. And I think all of our shareholders and investors should take comfort in that.

In terms of maybe just same store growth or absorption growth, we are up 15% in first time which probably doesn't come as a surprise. I think the entire industry is seeing growth with that consumer group and we are as well.

We were 2% up in move-up and then we are down 10% active adult and I really put that decline on Florida because we've got such a high concentration of active adult communities there as with Houston, we've two Del Webb communities in Houston and between Houston as well as the entire state of Florida that's a big part of our active adult business and that's I think what drove that 10% down..

And we’ll take our next question from Stephen East with Wells Fargo. Please go ahead..

Thank you. Actually this is [indiscernible] for Stephen.

Ryan, you spoke a little bit about lumber inflation, I was wondering if we could get a little bit deeper into what you're saying from a core excluding the storm impacts on material and labor this quarter? And then also if you could give us any kind of expectation on when we might see gross margins inflect on a year-over-year basis?.

Well, we had given you guidance coming into the year that we felt we were 1.5% to 2% to your own labor input cost increases. We are still in that range trending higher and as Ryan talked about lumber has trended higher. You’ve got the fires in Canada, you've got terrace, I mean there is a lot of things driving lumber rates up.

For us that's next year business. The way we buy our lumber we've got relative constrained on what's going to impact our Q4 deliveries. So having said that we're still in that 1.5%, 2% range for the current year. We will give you some color on what we think it means for next year when we give our fourth quarter earnings.

So at this point core cost increases are kind of trending where we thought they would be. The outlier to that is really the Houston and Florida markets that Ryan walked through earlier on the call where we are seeing some specialized labor input cost increases..

And Paul, I think the guide that we gave on margins for the back half of the year at 23.6% to 24.1% reiterates the fact that, what Bob just talked about with the 1.5% to 2% guide we are still right there, everything is trending in the direction that we thought and we've made the one-time adjustments based on some of the things that have happened or will pull us towards the lower end of that guide for the fourth quarter results..

And you mentioned earlier on the call that you're ROE was up 200 basis points but that over the past 12 months, do you have a goal for that metric moving into 2018?.

Well, we'd certainly like it to continue to move higher. We haven't articulated a goal and that’s something that we'll consider as the full sort of guidance that we provide for 2018..

Thank you. I appreciate it..

We'll take our next question from Carl Reichardt with BTIG. Please go ahead..

Thanks, good morning guys..

Hey Carl..

How are you? I wanted to ask about the land spend so far this year.

I think $775 million is what you mentioned? Has there been a change in terms of new land? If you look at your current product mix, is your new land spends sort of matching that product mix split between first-time, move-up and active adult or is it changing?.

I think what you would see is its changing. We've moved a larger percentage and it's not tectonic, there's a shift towards the first-time space with a little bit less emphasis on move-up..

And Carl, that really reflects some of the commentary that I think you've heard from me consistently over the last year since I've been in the chair where we wanted to be more reflective of what the market opportunity is and I think you're seen that start to happen.

So to Bob's point, not a tectonic shift, but definitely a shift where we started to see increased investment in that first-time space.

It will take time to move the entire portfolio given the size of it, but we're happy with the direction that our field operators are taking and assessing the market opportunity and putting capital to work against all buyer groups..

Okay, thanks. And then we've talked about labor and material price increases. Can you talk a little bit about the land inflation that you're seeing and maybe break it out by market? Is it shrinks as a percentage of the overall cost base which we have not seen very often I guess, I'm just kind of curious what you're seeing? Thanks..

Yes, that's a hard one. I mean, I think the market is efficient and you've got everybody interested. So we are finding deals, but we are finding them also harder to underwrite quite candidly. They are - the market is pretty positive at the moment.

Certainly and if you think about what Ryan said about which markets is he most interested in, I think everybody would answer that pretty much the same way and so the land in those markets gets bid up a little bit more. Having said that, we're still finding your return characteristics on the land we are buying having changed dramatically.

So the market is pretty solid. I don't know that I want to say market A is up 1% versus another market. Each piece of land is different..

And we will take our next question from Alex Barron with Housing Research Center. Please go ahead..

Thanks guys and nice job on the quarter.

Just kind of wanted to see if you have any guidance on what the tax rate might look like for next quarter?.

For next Q4 we've guided to 36.5% being our normalized rate. We were below that in this quarter. Its two things; one is there was a state law change that actually allowed us - but we booked a benefit because our deferred tax assets became a little more valuable because of the state tax rate increase.

We also highlighted earlier in the year that there was a change in the accounting rules that benefits running through from stock option and stock transactions for employees which used to run through the equity section now go through the income statement.

That actually drove our rate down, but ex- those two things 36.5% we think is still a good rate for Q4..

And as far as the increase in the price of the orders this quarter, I think you noted Northern California is one of the regions that drove that, but was there any other, was that also driven by some mix changes or was that just a general improvement in the overall markets?.

Yes Alex, certainly mix matters a lot when you're looking at that, but you know the big driver was Northern California where the price points tend to run significantly higher than any of the other regions that we operate in.

And our business there is more and more concentrated in the Bay Area which starting prices there start with 6s and 7s as opposed to 2s and 3s..

We'll take our next question from Mark Weintraub with Buckingham Research. Please go ahead. .

Thank you. One followup was on the lumber and maybe wood products more generally.

If you said what the raw materials themselves are as a percentage of your total sales, so not including the labor and the installation affiliated with it, but roughly how much is lumber as a percentage of revenues if just looking at the lumber? And then maybe more broadly if you threw in structural panels and other wood products what would that represent as a percentage of sales?.

Yes Mark. The range I would give you 7% to 10% of total revenue is what the lumber would represent. In terms of the material or the house cost piece it can run in the 15% to 20% range depending on the market..

Okay.

I suspect that probably includes installation related stuff as well just to clarify?.

That's correct it does..

Okay. And I will follow back up then, but and then second, I'm trying to think through that the strategy around pricing and pricing power.

Do you look at it differently when for instance you referenced in Texas and Florida labor being up what you think is going to be on a temporary basis versus if you're going into next year and then you find that some of the materials are going to be higher for the year ahead as you put it in place.

Do you think about that differently is how you then go to market and I recognize at the same time you're balancing this price versus pace issue, maybe a little bit of color on the thought process?.

Yes the thought process is Mark, one of the things that we've done over the last three to four years, we've put a lot of investment into dynamic pricing tools and pricing strategy is part of our value creation efforts and our value creation toolset.

And we've done a lot of work around dynamic pricing that has allowed us to realize some of the pricing gains and margin gains that we've realized over the past four to five years and we'll continue to do that. So certainly cost is an input. We pay attention to it.

We do not price to cost, we price to the market and so what you're looking for is what is the market opportunity and what's the market's ability to absorb those price increases. So it's a little bit of a given and a take where we're certainly looking to cover the input costs that are going into the project.

But if the consumers are unable or unwilling to take it, that's what you've ultimately got to react to..

Yes the only thing I would add to that is given the length of our backlog we have pretty good visibility into our input costs on the construction side of our backlog. So we're not out a year in advance in terms of the backlog and so the way we buy our materials is to Ryan's point we sell to market but we know our cost structure is going in for that..

And we'll take our final question from Susan Maklari with Credit Suisse. Please go ahead..

Thank you good morning..

Hi Susan..

Just quickly, you know I know that it's still kind of early probably, but have you gotten any sense from your sales people in Florida that there's been any change in how potential buyers perceive living in this day or they are looking to perhaps maybe little closer its away from the coast or anything like that following the storms that could perhaps on a longer term impact them from a psychological perspective?.

Susan this is Ryan. I may be a little biased because I love the beach and I love the sunshine and I love the water and I think the majority of our buyers do as well. So I'd say that a little bit tongue in cheek. The simple answer is no, we have not seen any kind of a psychological impact in the buyers in terms of how they're thinking about Florida.

In fact it may go the other way that you had what was a 100-year or maybe even a 200-year type storm event and Florida really performed well. The flooding for the most part was under control which I think is a testament to the way that we're developing communities and the way the drainage systems are working.

From a wind standpoint your structures withstood category four, sometimes category five sustained winds and performed very well. Landscaping was really the major - the landscaping and power grid those were the things that were damaged the most.

So time will tell, hard to predict what buyer psyche will do, but we are still bullish on Florida and I think the buyers will be as well..

Okay.

And then just building on that quickly, do you think that given the success that Florida saw and its construction codes and the drainage and all those things that you mentioned that there could be other areas of the country that use that as sort of a basis and start to adapt some of that, especially because with weather patterns changing it seems like drainage systems are becoming a bigger issue in lots of different parts of the U.S.?.

Yes Susan, I hope that common sense prevails. The things in Florida while warranted are expensive and the construction codes and the methodologies that we use there are more expensive than other parts of the country. So I think you want all good things in measure.

I don't know that you want to necessarily overreact and overbuild where it is not required. You know as far as drainage and water retention and some of those things, I'd point to Houston and it wasn't just our communities.

I think you probably heard from all of our entire industry the newer communities performed quite well when it came to managing and dealing with the water on the construction sites especially in the newer development areas.

So I'd like to believe that things are performing about as expected and as we continue to cycle out some of the older housing stock and bring things up to current code and current drainage standards I think things are performing pretty well..

That concludes today's question-and-answer session. I would now like to turn the call back to you, Jim Zeumer..

Great. Thank you everybody for your time this morning. We will certainly be available throughout the day if you have any followup questions; otherwise we will look forward to speaking with you next quarter. Thank you..

This concludes today's presentation. We thank you for your participation you may now disconnect..