Alan Ratner

Alan Ratner asked about the impact of Meritage Homes' strategy pivot on its return profile, specifically inventory turnover, accumulation of completed specs, and opportunities for cash generation and improved turns. He also inquired about the interplay between the strong 2026 community count growth outlook and future gross margins, assuming flat demand.

Answer

Phillippe Lord (CEO, Meritage Homes) explained that the company is still optimizing its strategy, aiming for a 4-month supply of specs (down from 5-6) and more efficient land deals to drive higher ROE and free cash flow. Hilla Sferruzza (EVP and CFO, Meritage Homes) added that the current higher completed spec count was intentional for margin preservation and will reset. Regarding 2026 margins, Phillippe Lord stated that new communities are expected to come online with margins similar to current levels, not necessarily providing a tailwind or headwind, due to the prevailing incentive environment. Hilla Sferruzza noted that increased volume from new communities should help leverage fixed costs.

Alan Ratner from Zelman Partners asked about the full-year volume outlook given current inventory levels and whether the company plans to accelerate share buybacks following a $500 million reduction in land spend.

Answer

CEO Phillippe Lord stated that while inventory is sufficient for higher volumes, a lack of visibility and seasonal patterns in Q3 led to the withdrawal of full-year guidance. CFO Hilla Sferruzza confirmed a rebalancing of capital, noting they will be 'pressing on the gas' with share repurchases. Lord added that given the stock's current valuation, investors can expect buybacks to continue exceeding the programmatic commitment.

Alan Ratner from Zelman Partners LLC asked about the full-year volume outlook given current inventory levels and whether Meritage was considering an acceleration of its share buyback program in light of a $500 million reduction in planned land spend.

Answer

CEO Phillippe Lord stated that while inventory is sufficient for higher volumes, a lack of visibility led to the withdrawal of full-year guidance. He noted spec starts are being moderated due to faster cycle times. EVP & CFO Hilla Sferruzza confirmed a rebalancing of capital, stating they will be 'pressing on the gas' with share repurchases. Lord added that they will continue buying back shares opportunistically above the programmatic commitment due to the stock's valuation.

Alan Ratner questioned the implied increase in average closing price in the full-year guidance without apparent pricing power, and asked about expectations for incentive levels for the remainder of the year.

Answer

CFO Hilla Sferruzza clarified that the higher average selling price (ASP) is driven primarily by product mix, as the backlog ASP is already higher than Q1's closing ASP. CEO Phillippe Lord added that April's sales trends are consistent with Q1, and confidence in full-year guidance stems from significant new community openings in the second half, not an assumption of improving market conditions or lower incentives.

Alan Ratner questioned the company's strategic trade-off between volume and margin, asking if there is a margin floor they would defend. He also asked if the growth required to reach 20,000 closings by 2027 would be organic or necessitate M&A.

Answer

CEO Phillippe Lord stated that the current sweet spot is 4-4.5 sales per community at a 22-23% margin, but they would accept lower margins to maintain pace if rates worsen. He confirmed that the path to 20,000 units is expected to be fully organic, supported by recent acquisitions and a strong land pipeline, with no further company M&A required. CFO Hilla Sferruzza reinforced this by highlighting their extensive lot supply.

Alan Ratner inquired about the drivers behind the guided 200 basis point sequential decline in Q4 gross margin, asking for a breakdown between higher incentives and product mix. He also questioned if margins could fall below the company's normalized range if incentive levels remain elevated.

Answer

CFO Hilla Sferruzza explained that the 'lion's share' of the anticipated Q4 gross margin decline is due to heavier-than-expected financing incentives driven by the current interest rate environment. She noted that while their quick-turn model reflects this pressure faster than peers, they are not currently forecasting margins to drop below their long-term target range.

Alan Ratner noted the solid order number despite a significantly reduced starts pace and asked how demand trended through the quarter. He questioned if the year-over-year order growth indicated an improvement in demand as rates declined, or if it was driven by a shift in incentive strategy, particularly an increase in the back half of the quarter.

Answer

Bill Wheat, CFO, stated that demand was decent but choppy due to rate volatility, and D.R. Horton leaned heavily into incentives. The moderated starts pace was to right-size inventory. Jessica Hansen, SVP of Communications, added that starts in the first half of the year are expected to increase from the recent pace. Paul Romanowski, President and CEO, addressed the 2026 closing guide, emphasizing that D.R. Horton is positioned to deliver on the units without assuming increased absorption per community, supported by a 13% increase in community count and existing production capacity. He acknowledged solid traffic but noted consumer confidence remains a factor.

Alan Ratner asked about demand trends during the quarter, questioning if the year-over-year order growth indicated demand improvement as rates declined or a shift in incentive strategy. He also inquired about the upside and downside risks to the 2026 closing guide, which is up slightly year-on-year despite lower homes under construction, asking if it's driven by community openings or a more positive demand outlook.

Answer

CFO Bill Wheat noted decent but choppy demand due to rate volatility, and that D.R. Horton leaned heavily into incentives while moderating starts to right-size inventory. SVP of Communications Jessica Hansen added that starts in the first half of the year are expected to increase. President and CEO Paul Romanowski affirmed D.R. Horton's ability to deliver on the 2026 unit guide, citing a 13% increase in community count and not assuming higher absorption per community. He observed solid traffic but cautious consumer sentiment.

Alan Ratner of Zelman Partners LLC inquired about the trend in sales incentives through Q3 and into July, asking whether the increase was driven by competitive pressures or a strategic move to accelerate sales pace. He also asked for commentary on consumer strength, noting the decline in average FICO scores and the rise in LTVs, and questioned any visible impact from the resumption of student loan repayments.

Answer

President and CEO Paul Romanowski explained that incentives were adjusted throughout the quarter to maintain sales pace and meet annual guidance. EVP and COO Michael Murray added that the lower FICO scores are partly due to successfully incentivizing FHA loan products and that the company has not yet observed a significant impact from student loan repayments.

Alan Ratner of Zelman Partners LLC asked about the trend in sales incentives, whether they are driven by competitive pressures or a strategy to accelerate activity, and the overall strength of the consumer, referencing FICO scores, LTVs, and the impact of student loan repayments.

Answer

President and CEO Paul Romanowski explained that incentives have been choppy and were increased to maintain sales pace and meet annual guidance. EVP & COO Michael Murray added that starts were aligned with sales, and noted a shift towards more heavily incentivized FHA products, but has not seen a significant impact from student loans.

Alan Ratner of Zelman & Associates asked about the company's reduced start pace and low spec count, questioning if starts would ramp up for 2026 growth. He also asked if the gross margin guidance accounts for potential supplier price hikes due to tariffs.

Answer

President and CEO Paul Romanowski explained that improved construction cycle times allow for a leaner inventory model and that he expects starts to accelerate in Q3. EVP and COO Michael Murray added that any significant cost impact from tariffs is not expected to affect closings until fiscal 2026 and is not a major factor in the current margin guide.

Alan Ratner from Zelman & Associates asked about the declining start pace and whether the company would reintroduce build-to-order components or simply match starts to sales. He also inquired about strategic changes in anticipation of potential new housing policies.

Answer

President and CEO Paul Romanowski explained that improved cycle times allow for a lower inventory level, hence the lower start pace, and that future starts will likely align more closely with sales. Regarding policy changes, CFO Bill Wheat stated the company remains focused on affordability and supplying homes to meet core demand, adapting to administrative changes as they occur without preemptive strategy shifts.

Alan Ratner questioned D.R. Horton's market share strategy, noting their 2025 growth guidance appears more conservative than some peers and asking about the competitive dynamics influencing this outlook. He also inquired if the company might pivot back toward a build-to-order model from its current spec-heavy strategy.

Answer

President & CEO Paul Romanowski responded that the company is well-positioned with lots and inventory to capture demand if the spring market is strong, suggesting the guidance is a flexible starting point. EVP & COO Michael Murray stated there would be no 'sea change shift' away from the spec model, but local operators have the flexibility to do more presales based on community-specific conditions.

Alan Ratner sought an update on Tri Pointe Homes' spec position and strategy, particularly how it will bridge the backlog gap in 2026, and the pricing strategy for new communities opening next year.

Answer

CEO Doug Bauer explained that approximately three-quarters of current orders are specs, and the company aims to burn through existing inventory in Q1 2026 to achieve a more balanced approach. He emphasized focusing on price over pace and anticipating strong community count growth. EVP and CMO Linda Mamet added that total spec inventory was reduced by 17% quarter-over-quarter. Doug Bauer clarified that new communities, as a premium brand, will be priced appropriately to the market's value proposition, without a material shift in pricing strategy to build initial momentum.

Alan Ratner sought an update on Tri Pointe Homes' spec inventory strategy, particularly how it might bridge the backlog gap in 2026, and their pricing approach for new community openings.

Answer

Doug Bauer, CEO, explained that about three-quarters of current orders are specs, and the company aims to reduce existing inventory in Q1 2026 before returning to a balanced spec-to-be-built approach, prioritizing price over pace. Linda Mamet, EVP and CMO, added that total spec inventory decreased by 17% quarter-over-quarter. Doug Bauer reiterated Tri Pointe's premium brand strategy for new communities, focusing on value in prime locations rather than aggressive initial pricing to build momentum.

Alan Ratner questioned the company's strategy on pace versus price, noting weaker order trends compared to peers while margins are normalizing. He also asked about trends in contingent sales for move-up buyers and any related strategic shifts.

Answer

CEO Douglas Bauer reiterated the strategy to favor price over pace, attributing soft demand to consumer uncertainty rather than affordability for their buyer profile. COO Tom Mitchell clarified that recent margin changes reflect the timing of sales with varying incentive levels. EVP & CMO Linda Mamet stated that home-to-sell contingencies are a disciplined part of their strategy, currently representing 5% of backlog, and are not being used more aggressively.

Alan Ratner asked about the elevated SG&A guidance, questioning how much of the increase is due to costs from new market expansion versus general inflation. He also inquired if the current market is creating opportunities for talent acquisition and land deals in these new expansion markets.

Answer

CFO Glenn Keeler explained that higher SG&A is a result of both costs from three new divisions that are not yet generating revenue and broad wage inflation, noting the long-term goal is to return to a 10-10.5% ratio. CEO Douglas Bauer added that this is a strategic investment in building strong teams, which he prefers over acquisitions with goodwill. He confirmed they are seeing opportunities for talent and land deals and are being disciplined in their underwriting.

Alan Ratner asked why Q4 gross margin guidance is flat despite a sequential increase in incentives on new orders in Q3. He also questioned if the company could still achieve closings growth in 2025 given a lower starting backlog, and asked for a comparison of current spec inventory to the prior year.

Answer

CFO Glenn Keeler explained that the higher Q3 incentives were on a smaller order base and the overall backlog still contains strong margins, supporting the Q4 guidance. He acknowledged a lower starting backlog presents a challenge for 2025 delivery growth but highlighted the 1,300 spec homes available to capture spring demand. EVP & CMO Linda Mamet confirmed the current spec count is very similar to the 1,372 homes a year ago.

Alan Ratner from Zelman & Associates asked about M/I Homes' engagement with the administration and FHFA regarding housing policies and affordability, and sought insights into the future trajectory of gross margins, considering stabilizing construction costs and land costs, as well as SG&A expense trends.

Answer

President and CEO Bob Schottenstein stated that M/I Homes has not had direct discussions with the administration but welcomes the increased focus on housing affordability and policy changes, particularly addressing local zoning regulations as the biggest impediment. Regarding gross margins, Bob Schottenstein believes they are 'a lot closer to the bottom' than last quarter, attributing the year-over-year decline (excluding impairments) to mortgage rate buy-downs. EVP and CFO Phil Creek added that higher land costs and a greater proportion of lower-margin spec homes continue to pressure margins, while land development costs have stabilized. Phil Creek also noted that SG&A expenses increased due to higher community count, more personnel, and slightly higher sales commission rates.

Alan Ratner asked about SG&A expenses, specifically if increased co-broker usage to clear spec homes before year-end would lead to added selling costs in the fourth quarter.

Answer

Bob Schottenstein (President and CEO) stated M/I Homes is not incentivizing third-party brokers with higher commissions, preferring to invest in internal sales training and lead generation. Phil Creek (EVP and CFO) attributed the 6% year-over-year increase in SG&A expenses to a 7% rise in community count, 3% more personnel, and a slightly higher overall sales commission rate (internal and external) aimed at driving traffic.

Alan Ratner asked for commentary on performance variations across geographies and price points, the headwinds and tailwinds affecting gross margins, and the reason for the monthly order improvement from May to June.

Answer

Robert Schottenstein (Chairman, President & CEO) provided a detailed market-by-market overview, noting that Midwest markets have slightly outperformed the Carolinas, Florida is a mixed bag with Orlando strong and Tampa soft, and Texas has softened but remains a great market. He stated that margins, currently in the mid-20s, are starting to level off, with the primary pressure coming from mortgage rate buy-downs. He attributed the June order uptick to a brief improvement in buyer sentiment tied to a temporary drop in interest rates, not a change in incentive strategy.

Alan Ratner of Zelman Partners LLC inquired about M/I Homes' performance trends across different geographies and price points, the primary headwinds and tailwinds for gross margins, and the reasons behind the monthly order progression in Q2, specifically the uptick in June.

Answer

Robert Schottenstein, Chairman, President & CEO, provided a detailed geographic overview, noting that Midwest markets slightly outperformed the Carolinas, Florida was a mixed bag with Orlando stronger than a softer Tampa, and Texas markets like Dallas and Houston have softened but remain strong. He stated that gross margins are beginning to level off, with mortgage rate buy-downs being the main headwind, and he does not foresee another significant drop. The June order uptick was attributed to a brief improvement in buyer sentiment when it appeared interest rates might fall.

Alan Ratner inquired about shifts in buyer demand across different price points and geographies, and also asked about the company's spec home strategy, including its share of sales and margin differential.

Answer

CEO Robert Schottenstein explained that demand by price point remains stable, with the first-time buyer 'Smart Series' accounting for about 54% of sales. Geographically, he noted Tampa is rebounding after a struggle, while markets like Indianapolis and Chicago are strong. Regarding spec homes, Schottenstein stated they constitute 50-65% of sales, a balance the company prefers, with margins typically 150-200 basis points lower than to-be-built homes. Derek Klutch, President of the mortgage company, added that the spec strategy is managed on a subdivision-by-subdivision basis.

Alan Ratner inquired about market trends in Texas and Florida, specifically regarding incentives and inventory levels. He also asked if the company was altering its spec home strategy due to demand choppiness and sought clarity on the drivers of the sequential gross margin decline in the fourth quarter.

Answer

CEO Robert Schottenstein stated that Texas markets feel stronger than Florida, with Tampa being the most challenged. He confirmed the continued use of rate buydowns, which are critical for sales, and noted the company is maintaining its spec home strategy, as specs are essential for offering attractive, short-term financing incentives. Executive Phillip Creek added that rate buydowns are more cost-effective on homes closing within 30-60 days, reinforcing the spec strategy. Schottenstein explained the margin compression was due to the increased cost and usage of rate buydowns, which rose from one-third of buyers in Q3 to half in Q4.

Alan Ratner asked about demand differences across price points, particularly between the entry-level 'Smart Series' and move-up homes, and whether the company is shifting its strategy for the upcoming spring selling season. He also followed up on the potential impact of increased mortgage rate buydowns on M/I Homes' strong gross margins.

Answer

CEO Robert Schottenstein affirmed the strength of M/I Homes' diversified product offering, noting that sales were split 50/50 between the 'Smart Series' and move-up products, which provided stability. He stated there is no planned strategic shift, as the current mix is performing well. Regarding margins, Schottenstein conceded that 27% gross margins may not be sustainable long-term but does not foresee a significant decline, citing strong performance in many communities even with incentives. He believes margins will remain comparatively strong versus peers, though some slight downward pressure is possible depending on market conditions and interest rate movements.

Alan Ratner sought clarification on the implied Q4 SG&A guidance, specifically why it suggests a sequential tick-up despite similar revenue, and if this reflects conservatism.

Answer

CFO Curt VanHyfte explained the projected Q4 SG&A increase is due to a potential influx of broker commission costs and slightly lower top-line revenue from the Q4 closing guide.

Alan Ratner asked about the implied fourth-quarter SG&A guidance, noting a sequential tick-up despite similar revenue, and sought clarification on the underlying reasons.

Answer

Curt VanHyfte, CFO, explained that the implied tick-up in Q4 SG&A reflects a potential influx of commission costs due to competitive market dynamics and efforts to drive closings with brokers, combined with slightly less top-line leverage from a lower average sales price and unit volume compared to Q3. Alan Ratner also inquired about the success in land renegotiations, asking for quantification of margin impact and timing of benefits from deals involving price reductions and deferrals. Erik Heuser, Chief Corporate Operations Officer, detailed that 3,400 lots were renegotiated, resulting in an 8% average price reduction and six-month deferrals, primarily on deals from Q4 2023 to current. He noted that while these maintain original underwriting expectations, some opportunistic deals offer future upside, with benefits rolling through from 2027 onwards. He also mentioned an increase in finished lot pickups. Alan Ratner further asked if there was a common thread among land sellers more willing to negotiate terms versus those holding firm. Erik Heuser, Chief Corporate Operations Officer, stated that success was seen across all categories of sellers, including seller financing and land banking, with about 75% of renegotiated lots involving some form of price change or restructuring, while acknowledging instances where the company walked away from deals that didn't meet thresholds.

Alan Ratner inquired about the specific drivers behind the higher cancellation rate and questioned how the company plans to reaccelerate starts to achieve growth in 2026, given the declining backlog.

Answer

CEO Sheryl Palmer explained that while the cancellation rate rose, it remains low for the industry, with drivers including buyers' inability to sell their existing homes and some finding better deals elsewhere. Regarding 2026, she stated that reaccelerating starts is dependent on market conditions, with a focus on responsibly replenishing spec inventory and growing the to-be-built business.

Alan Ratner asked about pricing elasticity and whether incentives are as effective as before, and also questioned the multiyear impact of reduced land spend on the 2028 closings target.

Answer

Sheryl Palmer, Chairman and CEO, stated that financing incentives remain the primary tool and that base price cuts are a last resort, with the approach varying by community. Erik Heuser, Chief Corporate Operations Officer, addressed the land spend, explaining the company is well-supplied for the coming years and is securing more favorable deal structures, such as take-down options and finished lots, which mitigates the impact of reduced near-term cash outlay on long-term goals.

Alan Ratner of Zelman & Associates sought to understand the drivers behind incentive usage, asking where incentives are most aggressive, and inquired about current dynamics in the land market, specifically regarding potential price softening or renegotiations.

Answer

Chairman and CEO Sheryl Palmer identified the first-time buyer segment as requiring the most significant incentives due to affordability challenges. Chief Corporate Operations Officer Erik Heuser added that land and new home competition is also highest in these markets. Regarding the land market, Heuser noted that while demand has softened slightly, the primary benefit has been increased flexibility in deal structuring rather than absolute price reductions.

Alan Ratner asked if the company's analysis showing only 17% of resale listings are competitive is unique to Taylor Morrison's strategy or indicative of the broader new home market. He also questioned the nearly 20% year-over-year increase in inventory dollars and its future trajectory.

Answer

Chief Corporate Operations Officer Erik Heuser stated that while there might be some correlation for other builders, Taylor Morrison's unique positioning comes from its pride in core locations. Chairman and CEO Sheryl Palmer added that differentiation is stronger in move-up and active adult communities. Regarding inventory, Erik Heuser explained the increase was part of a planned growth strategy and that inventory dollar growth should moderate as their asset-light land approach takes further hold.

Alan Ratner inquired about the current state of consumer confidence, how it impacts demand despite lower interest rates, and whether any recent government initiatives like the 'Road to Housing Act' could positively affect housing demand.

Answer

Ryan Marshall, President and CEO, highlighted that consumer confidence is a key factor, noting that the financial benefits of lower rates are often offset by economic concerns. He expressed hope for an improvement in consumer confidence and potential rate cuts. Mr. Marshall also emphasized the positive trend of bipartisan focus on housing, advocating for policies that support the creation of one home for every two jobs to address the structural housing shortage.

Alan Ratner inquired about the current state of consumer sentiment, specifically if buyers are feeling more stretched or worried about jobs and the economy, and also asked about potential near-term or intermediate-term positives for housing demand from recent government actions, such as the Road to Housing Act.

Answer

Ryan Marshall (President and CEO, PulteGroup Inc.) emphasized that consumer confidence, currently near a 10-year low, is the key factor, noting that Pulte's current incentives offer better rates than market declines. He believes a lift in confidence, combined with potential future rate cuts, could unlock underlying housing demand. Regarding government actions, Mr. Marshall highlighted the positive trend of bipartisan political focus on housing as essential for economic growth, advocating for a 'two jobs, one home' mantra to address the structural housing shortage.

Alan Ratner of Zelman & Associates requested an update on market conditions in Florida, given its importance to PulteGroup and recent negative headlines. He also asked if tariffs could cause supply chain disruptions and impact cycle times, beyond just the direct cost increase.

Answer

CEO Ryan Marshall acknowledged that Florida's resale inventory is slightly elevated but stated PulteGroup's business is performing well, down only 5% YoY, due to its strategic focus on the stronger move-up and active adult segments. Regarding tariffs, he conceded that some supply chain disruptions are possible but expressed confidence that the procurement team can manage them, not anticipating issues on the scale of the COVID-19 pandemic.

Alan Ratner from Zelman & Associates asked for the rationale behind guiding to flat closings in 2025 despite a long-term growth target, and inquired about the sustainability of high margins in the Florida market given rising inventory and insurance costs.

Answer

CEO Ryan Marshall explained that the flat volume guidance for 2025 reflects the current balance of pace and price that yields the best return on invested capital, noting the incremental discount needed for more volume is not a favorable trade-off. Regarding Florida, he expressed confidence, highlighting the state's attractiveness, the company's effective insurance agency, and that its communities are built further inland, making them less susceptible to storm damage.

Alan Ratner asked about the specific impact of the Florida market on the Q4 margin guidance, given its above-average profitability, and also inquired about demand trends across the entry-level, move-up, and active adult buyer segments.

Answer

President and CEO Ryan Marshall stated the company remains bullish on Florida, noting improved inventory trends in Q3. EVP and CFO Robert O'Shaughnessy clarified the Q4 margin guide is more influenced by a higher mix of Western market closings, which have slightly lower margins, and elevated incentives, rather than a negative shift in Florida. Marshall then detailed that while entry-level buyers remain affordability-challenged, move-up demand is strong, and active adult buyers are showing caution ahead of the election.

Alan Ratner asked about KB Home's progress in returning to its historical built-to-order (BTO) share, the current mix of orders between BTO and spec homes, and the profitability differential between these two segments. He also sought to understand if the projected sequential decline in Q4 gross margin was primarily due to flushing remaining spec inventory.

Answer

Jeffrey Mezger, Chairman, President & CEO, explained that the shift to BTO was challenging during extended build times but is now more compelling with reduced build times. Rob McGibney, President & COO, noted that BTO homes generate 250 to 400 basis points higher margins than spec homes and that new communities will focus solely on BTO. Robert Dillard, EVP & CFO, clarified that the Q4 margin decline reflects a lag effect from competitive spring sales and mix, not an aggressive discounting of inventory.

Alan Ratner asked about KB Home's progress in returning to its historical built-to-order (BTO) share, the current mix of orders, and the profitability differences between BTO and spec homes. He also sought clarification on whether the sequential decline in the Q4 margin guide implied flushing through remaining spec inventory and a mixed headwind, with an expectation of reversal in 2026.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, explained that the shift away from BTO was due to extended build times in 2022, making BTO less compelling. Rob McGibney, President and Chief Operating Officer, stated that BTO homes currently generate 250 to 400 basis points higher gross margins than inventory homes. They are seeing incremental improvement in the BTO mix and expect significant progress towards a 70/30 or better ratio in early 2026. Mezger confirmed that the Q4 margin guide reflects a lag effect from competitive sales in the spring selling season impacting Q4 deliveries, rather than deeper discounting of inventory. Rob Dillard, Executive Vice President and Chief Financial Officer, added that mix variation is also a significant factor.

Alan Ratner questioned the company's progress in returning to its historical built-to-order (BTO) share, asking about the current mix of orders and the profitability differential between BTO and spec homes. He also sought clarification on whether the sequential decline in Q4 margin guidance was primarily due to flushing through remaining spec inventory, with an expectation for reversal in 2026.

Answer

Jeff Mezger, Chairman and Chief Executive Officer, explained that the shift to more inventory homes was a response to extended build times in 2022, making BTO less compelling. With build times now back to historical levels, BTO is a more attractive proposition, and the company is seeing incremental improvement in BTO mix, with more expected in 2026. Rob McGibney, President and Chief Operating Officer, added that BTO homes currently generate 250 to 400 basis points higher gross margin. Mezger clarified that the Q4 margin decline reflects a lag effect from competitive pricing during the spring selling season and is not an indication of deeper discounting to clear inventory, as the company prefers a prudent, strategic approach.

Alan Ratner of Zelman & Associates asked about the competitiveness of KB Home's base-price-focused strategy when other builders are increasing incentives, and whether this contributed to the order slowdown. He also requested a breakdown of the 3.2% direct cost reduction between lumber and other negotiated inputs.

Answer

President & COO Robert McGibney defended the strategy, stating it offers transparent value and that the company is happy with the results since returning to its traditional approach. He acknowledged some buyers are drawn to incentives but believes the company's method is effective. On costs, McGibney could not provide a specific breakdown but confirmed the 3.2% reduction includes significant decreases beyond just commodity drops like lumber, driven by divisional efforts.

Alan Ratner inquired whether the recent sales momentum was driven more by converting existing leads or by attracting new buyer traffic. He also asked how the company is managing its existing backlog in communities where base prices have been lowered.

Answer

COO Rob McGibney stated that while some sales came from past leads, the majority of the uplift was from new traffic generated by advertising the lower, more transparent prices online. Regarding the backlog, he explained that potential conflicts are handled on a case-by-case basis and that overall exposure is considered 'pretty small' because many existing contracts already had unique incentives.

Alan Ratner questioned the lighter-than-expected community count guidance, asking if development delays were a factor. He also asked about the potential business impact from the California fires on costs, labor, permitting, and insurance.

Answer

EVP and CFO Jeff Kaminski explained the guidance reflects a significantly higher number of community sellouts in 2025, with a temporary dip in Q4 before growth resumes. Chairman and CEO Jeffrey Mezger stated it was too early to speculate on the fires' full impact but does not anticipate a major, long-term labor or material pinch, though rebuilding utility infrastructure could cause some short-term community opening delays.

Alan Ratner questioned the confidence in the 2025 revenue outlook, given that the backlog is down year-over-year, and asked if this implies an increase in spec building. He also inquired about future free cash flow generation and asset efficiency, particularly regarding the company's supply of owned land.

Answer

EVP & CFO Jeff Kaminski clarified that confidence in the 2025 outlook is supported by their forward view on starts combined with significant improvements in construction cycle times, which enables faster revenue conversion. Regarding cash flow, Kaminski stated the focus is on asset efficiency through inventory turn and further reducing build times, which is a major cash generator. He noted the strong balance sheet allows for more shareholder-friendly capital allocation.

Alan Ratner asked about Lennar's strategic pivot, inquiring if it's a short-term adjustment or a longer-term recalibration, specifically regarding the timing of dialing back incentives and the market's response. He also questioned the flexibility of Lennar's asset-light land strategy, particularly with Milrose and option contracts, in accommodating a slower start pace and whether land might accumulate on the balance sheet.

Answer

Executive Chairman & Co-CEO Stuart Miller clarified that the adjustment is not a change in strategy but a response to market conditions, aiming to take pressure off sales without pushing too hard. He noted that incentives have not yet been dialed back. Miller also emphasized that the land relationships are not a constraint, having been deliberately crafted for flexibility, including the ability to pause or walk away from programs. Co-CEO & President Jon Jaffe added that the focus remains on driving down the overall cost structure through efficiency and technology.

Alan Ratner followed up on Lennar's land strategy, asking if the slower start pace impacts takedown schedules or if land might accumulate on the balance sheet if starts don't reaccelerate.

Answer

Stuart Miller, Executive Chairman and Co-CEO, affirmed that Lennar's land relationships do not constrain its strategy, emphasizing deliberate flexibility to pause or adjust. He stated the focus is on reducing the overall cost structure, not land constraints.

Alan Ratner inquired about Lennar's strategic adjustments, specifically whether the recent pivot is short-term or a longer-term recalibration, and if incentives have already been dialed back with observed market responses. He also asked about the flexibility of Lennar's asset-light land strategy, particularly regarding takedown schedules and potential land accumulation on the balance sheet given a slower start pace.

Answer

Stuart Miller, Executive Chairman and Co-CEO, clarified that the adjustment is not a strategy change but a response to market stress, taking pressure off sales. He noted that incentive adjustments are forthcoming, not yet implemented. Regarding land strategy, Mr. Miller emphasized that Lennar is not constrained by land relationships, having deliberately built in flexibility to pause or adjust takedown schedules, and can walk away from programs if necessary. Jon Jaffe, Co-CEO and President, added that the focus remains on driving down cost structures for affordability.

Alan Ratner inquired if new land acquisitions are being underwritten to current high-incentive market conditions and asked about the potential for margin seasonality in the second half of the year.

Answer

Executive Stuart Miller and another executive confirmed that Lennar is actively underwriting new land deals based on current market information and incentives, with a focus on turning over older inventory. They noted that land sellers are beginning to adjust their price expectations. Regarding second-half margin seasonality, Stuart Miller declined to provide guidance beyond Q2, citing market uncertainty. He emphasized the core strategy of converting assets to cash and redeploying that capital based on the latest market conditions, even if it means accepting lower near-term margins.

Alan Ratner inquired about the drivers behind weaker-than-expected consumer demand during the quarter, given mortgage rates were not dissimilar to prior periods. He also asked about Lennar's pace-versus-price strategy for 2025, specifically questioning if there is a lower limit on margins the company would accept to achieve its volume targets.

Answer

Executive Chairman Stuart Miller attributed the demand softness to a combination of factors, including consumer difficulty in accumulating down payments, hesitancy from interest rate volatility, and seasonality, which required increased incentives. Regarding strategy, Miller reaffirmed Lennar's conviction to maintain sales volume by adjusting prices and margins, using steady production as a lever to rationalize land and construction costs over time, without specifying a hard floor for margins.

Alan Ratner inquired about the upcoming Millrose spin-off, specifically asking about the potential margin impact from its fee structure compared to existing land banking deals. He also questioned the revised gross margin guidance, which is now flat for the year instead of ramping up as previously expected, despite falling interest rates.

Answer

Executive Chairman Stuart Miller explained that Millrose will be a 'mirror image' of current land structures, with the main difference being its permanent capital REIT structure. He anticipates a 'relatively small' impact on Lennar's margin. Regarding the gross margin guidance change, Miller cited several factors: interest rates remained high for much of the quarter, consumer confidence has been slow to recover, and a temporary dip in community count required using incentives to maintain strategic volume goals during the company's operational restructuring.

Alan Ratner inquired about the upcoming Millrose spin-off, specifically its fee structure and potential margin impact, and questioned the revised gross margin guidance, which is now expected to be flat rather than ramping up as previously anticipated.

Answer

Executive Chairman Stuart Miller explained that while he is limited in what he can say about Millrose, he expects its margin impact to be relatively small and similar to existing land bank structures. Regarding gross margins, Miller stated that sticky interest rates early in the quarter, waning consumer confidence, and a temporary drop in community count prompted the company to use incentives to maintain its strategic volume goals, impacting near-term margins.

Alan Ratner from Zelman & Associates inquired about the drivers of the July order improvement, the sales trend in August, the expected duration of gross margin pressure from older assets, and the value of an anticipated Q4 joint venture consolidation gain.

Answer

Chairman and CEO Ara Hovnanian attributed the July sales uptick primarily to macroeconomic factors rather than specific company actions, though he noted a slight increase in incentives. Both Hovnanian and CFO Brad O'Connor described August sales as remaining 'choppy.' Regarding gross margins, Hovnanian explained that while a precise timeline is difficult, the company is actively working through lower-margin lots, particularly in slower geographies, and is having success renegotiating with land sellers. He highlighted that newly acquired land parcels have excellent margin profiles. O'Connor clarified that the upcoming Q4 JV consolidation gain is expected to be around $30 million, similar to past transactions, and is included in the pretax income guidance.

Alan Ratner asked for insight into the recent choppiness in housing demand, the outlook for the D.C. market amid potential federal layoffs, and whether any data points like resale inventory or traffic suggest a slowdown.

Answer

CEO Ara Hovnanian attributed demand volatility to a "flavor of the month" of consumer concerns, such as tariffs or global events, rather than a single factor. He noted that while the Maryland market could be affected by government layoffs, the company's larger Delaware and Virginia operations remain strong. Hovnanian also stated that while resale inventory has ticked up slightly, it remains far below historical norms. He confirmed that foot traffic was lower than expected, but CFO Brad O'Connor added that the most recent week showed a positive increase.

Alan Ratner inquired about the mechanics of the joint venture (JV) consolidation gain, its future impact on JV income versus wholly-owned margins, the sustainability of the ~22% gross margin, and the company's long-term Return on Equity (ROE) potential once its book value normalizes.

Answer

CFO Brad O'Connor clarified that while the consolidated JV's profits will now flow through the main income statement, new JVs are expected to keep the separate JV income line robust. He noted the consolidated project's margins will align with the company average due to a land basis step-up. O'Connor also affirmed that a ~22% gross margin is a reasonable Q4 expectation, though rising land costs could add pressure in 2025, potentially offset by lower mortgage buydown costs. CEO Ara Hovnanian addressed the ROE question by highlighting the company's superior EBIT Return on Investment (ROI), suggesting that this strong operating performance, which is independent of leverage, will ensure Hovnanian's ROE remains above peers' on a long-term basis.

Alan Ratner of Zelman & Associates asked about Toll Brothers' current 50/50 spec-to-build-to-order mix versus pre-COVID levels and the margin difference between the two. He also questioned how the industry might return to a more traditional build-to-order model.

Answer

Douglas Yearley, Chairman & CEO, stated the pre-COVID spec mix was 10-15%. He confirmed build-to-order margins are north of 30%, with spec margins about three percentage points lower. Mr. Yearley asserted that he does not see a return to a 90% build-to-order model, as the current 40-60% spec range offers capital efficiency and appeals to modern buyers. Martin Connor, CFO, added that the current mix generates excellent returns, and Mr. Yearley noted the strategy of reserving premium lots for high-margin build-to-order homes.

Alan Ratner of Zelman & Associates asked for qualitative commentary on how stock market volatility affected buyer behavior and inquired about the percentage of foreign national buyers.

Answer

Executive Douglas Yearley stated it was too early to see a definitive trend from recent stock market stabilization but noted consumer confidence is the primary driver for their affluent buyers. He mentioned modest positive signs like improved traffic quality. On foreign buyers, he said they constitute less than 5% of their business, with no significant change in demand year-to-date, and noted that the Chinese buyer remains particularly strong in California.

Alan Ratner asked about the company's analysis of potential tariff impacts on its supply chain and requested more color on the composition of its joint venture investments on the balance sheet.

Answer

Executive Chairman and CEO Douglas Yearley stated that while they are monitoring the situation, they believe any tariff impact will be 'de minimis.' CFO Martin Connor detailed the JV investments, which include apartment projects, a small number of City Living buildings, and land development ventures with other builders that are structured to be 'breakeven' and hold land off the balance sheet.

Alan Ratner of Zelman Partners LLC questioned the optimism in the Q4 order guidance, which implies a significant sequential increase, asking how this aligns with a flat gross margin outlook. He also asked if the opening of new communities could lead to cannibalization of sales from existing, slower-selling communities in the same submarkets.

Answer

SVP and CFO David Goldberg and Chairman and CEO Allan Merrill defended the guidance by pointing to a growing community count and a commitment to improving the sales pace in Texas from its Q3 low. Merrill explained that while incentives may increase in Texas, the overall margin is supported by a backlog of higher-margin, to-be-built Zero Energy Ready homes. He also stated that he does not believe community cannibalization is a significant issue for the company.

Alan Ratner of Zelman & Associates asked for specifics on the Q1 order pace shortfall, questioning whether it was driven by competitor incentives or particular markets. He also inquired about the company's commitment to its energy efficiency strategy amid potential political changes and the risk of land impairments given thin margins.

Answer

CEO Allan Merrill attributed the order softness, especially in December, to 'shocking' price and incentive aggression from competitors in Texas and Florida. Regarding the energy strategy, Merrill affirmed they are 'full steam ahead,' stating the commitment is based on building a superior product, not tax credits. CFO David Goldberg addressed impairment risk, stating they see no expectation for material changes and that their land costs are in line with the market.

Alan Ratner asked for the rationale behind the optimistic fiscal 2025 absorption pace guidance, questioned if land deals were being renegotiated given the low Q1 margin forecast, and inquired about the potential impacts of the upcoming administration change on labor and housing.

Answer

Chairman and CEO Allan Merrill explained that the fiscal 2024 absorption pace was unusually low due to an 8% mortgage rate environment and being out of position on spec homes, issues that have since been addressed. He confirmed some land deals were renegotiated but stated a 'wholesale reset' is not occurring as the '25 and '26 pipeline is largely set. Regarding the new administration, Merrill noted they have internalized that rates may stay elevated but see potential for economic enthusiasm from deregulation, while the impact of immigration policy on labor remains unclear.

Alan Ratner of Zelman Partners LLC asked about the financial model for the Hearthstone acquisition, competitive pressures in the land banking space, the potential for lower land prices amid builder pullbacks, and opportunities to reduce land development costs through technology.

Answer

VP, CFO & Treasurer Kim Tobler confirmed the Hearthstone business should be modeled based on assets under management. President & CEO Daniel Hedigan addressed the other points, stating that high demand in the land banking space mitigates competitive pressure, and Five Point's uniquely positioned California land allows it to remain patient on pricing despite market softness. Mr. Hedigan also noted that while technology like AI is being explored for efficiency, it has not yet changed development budgets.

Alan Ratner asked about the potential secondary effects of recent California fires on the insurance market and Five Point's operations. He also requested more details on the San Francisco project's strategy, specifically regarding the initial capital outlay, development timeline, and potential for joint ventures.

Answer

Executive Daniel Hedigan explained that while the insurance market is a key concern, Five Point's fire-resistant master-planned communities have a proven track record of safety, which should help maintain insurance availability. He noted the product mix has already shifted away from large attached buildings. Regarding San Francisco, Mr. Hedigan stated that engineering for the initial infrastructure phase is underway, with construction expected to begin early next year and last 12-18 months. He confirmed Five Point can finance the horizontal development and is exploring various options for the vertical construction.

Alan Ratner inquired about Five Point's future growth strategy, specifically the 'asset-lighter' model beyond its legacy projects, whether the company retains land pricing power amid builder incentives, and any shifts in builder demand for different housing product segments.

Answer

Executive Daniel Hedigan explained that the company aims to replicate its Great Park partnership model, focusing on non-generational projects within California initially, working with a broad spectrum of builders. Hedigan stated that California's acute land shortage supports land values, allowing for price appreciation despite builder incentives, particularly in Irvine. He noted that demand remains consistent for family-oriented communities and has not seen a significant shift away from any particular product segment.

Alan Ratner of Zelman Partners LLC questioned the extent of land price concessions from sellers and whether they impact active communities. He also asked about the implied Q3 pretax margin and the risk of further impairments.

Answer

CEO Robert Francescon clarified that land renegotiations are more about structuring deals and pushing out takedowns rather than significant price cuts, which are not widespread. CFO J. Scott Dixon noted the Q2 impairment was specific to five closeout communities and that the market would need to deteriorate significantly for more impairments. He also clarified that impairment tests exclude SG&A costs.

Alan Ratner inquired about the timing of the guided 200 basis point incentive increase for Q2, asking if it was a recent reaction to April's softness. He also questioned the counter-seasonal full-year absorption guidance, and whether it depends on this increased incentive level. Lastly, he asked about the potential for supply chain disruptions due to tariffs.

Answer

CFO John Dixon confirmed the incentive increase is a prospective measure recently implemented in response to the market volatility and consumer pause observed in April. He affirmed that the stable full-year absorption guidance of 2.8 is predicated on the strategy of using incentives as needed to achieve that pace. CEO Robert Francescon addressed tariffs, stating that while they see no immediate impact, they are aware of potential future disruptions and are working on mitigation plans.

Alan Ratner from Zelman & Associates questioned the company's pace versus price strategy, asking when they might increase incentives if absorption rates remain weak. He also inquired about any observed or anticipated impacts from immigration enforcement on construction labor.

Answer

Financial Officer John Dixon responded that the spec model allows them to right-size inventory to demand and that they are bullish on the spring selling season. He mentioned levers like moderating square footage to maintain affordability. Regarding labor, CEO Robert Francescon stated that while it's early, they have not seen any impact on their job sites or cost structure to date and are in a 'wait and see' mode.

Alan Ratner sought clarification on the Q4 sales absorption outlook, asking if the expectation for it to be 'similar sequentially' to Q3 was based on the higher end-of-quarter community count. He also asked about geographic performance trends and any impact from recent storms.

Answer

Chairman and Co-CEO Dale Francescon clarified the outlook for similar absorptions applied to Q4 as a whole compared to Q3. Co-CEO Robert Francescon addressed the storm question, stating there was no material negative impact on closings or operations, and no significant damage to homes, thanks to modern building codes.