Operating Margin Outlook
Q: Why is operating margin guidance lower than expected for 2025?
A: Management expects operating margins of 17% to 18% , and they are optimistic about mortgage rates stabilizing or decreasing. They've begun reducing incentives that were elevated in the fourth quarter and plan a nationwide price increase in the spring, combining these factors to drive optimism for next year.

Cash Flow and Stock Buybacks
Q: With cash flow projected similar to last year, why is stock buyback guidance lower?
A: They project approximately $1 billion in cash flow for 2025, similar to 2024. While they guide to $500 million in stock buybacks, lower than last year's $628 million , they note that historically they've exceeded initial buyback guidance and may do so again if opportunities arise.

Demand Trends and Q1 Outlook
Q: Can you provide color on strong demand and sales trends in Q1?
A: Demand over the last six weeks has been strong post-election. They are trending better than historical Q1 sales, projecting about 2 contracts per community per month, totaling around 2,400 to 2,500 contracts, which is better than traditional trends where Q1 is typically down about 10% from Q4.

Gross Margin Guidance and Interest Rates
Q: Does gross margin guidance assume interest rates will decline?
A: The guidance does not assume interest rates will decline or an improving market. They approach the year without building in rate reductions, focusing on factors within their control.

Incentives and Impact on Margins
Q: Can you quantify expected incentives and confidence in maintaining absorption rates?
A: They expect incentives to settle around $55,000 per home, which is 5% to 6% of the selling price. They've begun reducing incentives and are confident in maintaining absorption rates of 2 contracts per community per month.

Q1 Gross Margin Impact of Mix vs. Incentives
Q: How much of Q1's lower margin is due to mix versus incentives?
A: Approximately 80% of the lower Q1 margin is due to mix, with less revenue coming from the Pacific and Mid-Atlantic regions. The remaining 20% is due to increased incentives on finished spec homes.

Spec Strategy and Returns
Q: Would you adjust your spec strategy if the market softens?
A: They are unlikely to change their spec strategy, as it contributes to higher returns on equity through elevated gross margins, good operating margins, and capital redeployment. They believe the current mix is perfect for their business.

Regional Market Strength and Weakness
Q: Which regions are strong or weak, and where have you increased incentives?
A: They see strength in the Boston to Washington, D.C. corridor and in Dallas and Houston. Markets with some softness due to affordability issues include Austin and San Antonio. They are cautious about Phoenix due to increased inventories. In Florida, Jacksonville is strong, but other markets have elevated inventories and affordability issues.

Lot Supply and Land Strategy
Q: Do you need to accelerate lot acquisitions to meet demand?
A: No, they are comfortable with their land position and strategies to be more capital efficient, aiming for 1.5 to 2 years of owned land net of backlog. They are making progress toward this goal.

Potential Impact of Tariffs
Q: What's your exposure to tariffs and efforts to mitigate risks?
A: They've analyzed their supply chain and believe the impact will be minimal. Suppliers have shifted manufacturing closer to the U.S., and they are prepared to navigate any challenges.

Joint Ventures and Returns
Q: What's embedded in the JV investment and how will it affect returns?
A: The JV line includes investments in city living buildings, apartment projects (absorbing operating losses during development and recognizing gains on sale), and breakeven land development ventures designed to hold land off balance sheet and generate higher gross margins on the income statement.