Landsea Homes Corporation (NASDAQ:LSEA) Q4 2024 Earnings Call Transcript

Landsea Homes Corporation (NASDAQ:LSEA) Q4 2024 Earnings Call Transcript February 27, 2025

Landsea Homes Corporation misses on earnings expectations. Reported EPS is $0.08 EPS, expectations were $0.38.

Operator: To all locations on hold, we are still checking in participants for today’s conference. Thank you for your patience, and please continue to stand by. Please standby. Your program is about to begin. If you need assistance on today’s conference, please press star zero. Good day, everyone, and welcome to the Landsea Homes Corporation fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note, this call may be recorded. I’ll be standing by should you need any assistance. It is my pleasure to turn the program over to Drew Mackintosh, Investor Relations.

Drew Mackintosh: Good morning, and welcome to Landsea Homes Corporation’s fourth quarter of 2024 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. Landsea Homes Corporation cautions that forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. These risks and uncertainties include, but are not limited to, the risk factors that are described by Landsea Homes Corporation in its filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Landsea Homes Corporation’s website and in its SEC filings.

Hosting the call today are John Ho, Landsea Homes Corporation’s Chief Executive Officer, Mike Forsum, President and Chief Operating Officer, and Chris Porter, Chief Financial Officer. With that, I’d like to turn the call over to John. Good morning.

John Ho: Thank you for joining us today as we go over our results for the fourth quarter and full year of 2024 and provide an update on our operations. In the face of challenging headwinds for our industry, Landsea Homes Corporation made progress on a number of fronts in 2024. The company made further strides towards becoming a large-scale homebuilder in several key markets across the country. Our goal is to be a top ten home builder in each of our markets, and we see a path to realizing that goal over the next few years. During 2024, we generated home sales revenue of $1.5 billion and new home deliveries of 2,831, both records for our company. We expanded our presence in the state of Texas by acquiring DFW-based Antares Homes, giving us a foothold in a key market with great long-term fundamentals.

We also fortified our operations in our existing markets by opening new communities and acquiring lots for future projects with an emphasis on affordability and functionality through our high-performance home series. Our growth has been fueled by a mix of organic expansion and M&A activity, and we continue to see opportunities on both fronts to grow our market share. 2024 was a pivotal year for our company, and we are excited about what the future holds in 2025 and beyond. In terms of the fourth quarter, Landsea Homes Corporation generated strong top-line growth of 22% year over year, driven by new home delivery growth of 41%. We are pleased with our team’s execution and success in delivering such a high volume of homes in the quarter. The combination of persistently high mortgage rates and buyer hesitancy pinched profitability, as we were compelled to increase incentives to move inventory.

We also made a strategic decision to reduce our standing inventory and generate additional cash rather than hold onto aging specs. Heading into the New Year, we felt that this was the appropriate path forward both in terms of our positioning ahead of the spring selling season and our goals for our balance sheet. During the quarter, we generated $47.8 million in cash flow from operations.

Chris Porter: Net new orders in the fourth quarter came in at 636, representing a 60% increase over the fourth quarter of 2023. Our high-performance homes continue to sell well against the competition and provide our company with a differentiated platform rooted in innovation, energy efficiency, and sustainability. We also benefited from the investments we’ve made in our online presence, where buyers can utilize tools such as 360-degree virtual home tours and interactive floor plans to find the perfect home for their needs. It also gives our salespeople important insight into prospective buyers so that they can make an effective pitch about why a Landsea Homes Corporation home is right for them. We are firm believers that technology can enhance the value of a new home and also plays an important role in our sales and marketing efforts.

During the fourth quarter, we executed a secondary offering on behalf of selling stockholders to achieve the dual goals of diversifying our shareholder base and reducing our ownership concentration by increasing our public float. Following this transaction, our biggest shareholder, Landsea Green, reduced its stake in our company to 17%, down from 54% at the beginning of the year. We feel that the concentrated nature of our shareholder base was an overhang for our stock and believe that the quality and stability of our new shareholders will be a long-term positive for our company. Looking ahead to 2025, we’re excited about the prospects for our company given our unique product portfolio, the long-term outlook for our markets, and our positioning within those markets.

Landsea Homes Corporation has demonstrated an ability to enter markets and quickly scale our local operations. We expect to have similar success in our newer markets. Our high-performance home series is an important differentiator for our company and allows us to draw a distinct contrast with our competitors competing for new home buyers. We feel that this is an important selling tool given the competitive nature of our markets. While affordability remains an issue for the industry, we believe that there is a strong desire for homeownership in this country and a structural lack of housing supply that should serve as a tailwind for new home construction for years to come. We also think that the recent trend of large public builders taking market share will continue given the cost of capital advantage and scale benefits associated with production homebuilding.

As a result, we believe the long-term outlook for our industry and especially Landsea Homes Corporation remains positive. With that, I’d like to turn the call over to Mike, who will provide more detail on our operation results.

Mike Forsum: Thanks, John, and good morning to everyone. Landsea Homes Corporation closed 937 homes in the fourth quarter of 2024, resulting in a record year for deliveries and homebuilding revenue for the company at 2,831 and $1.5 billion, respectively. The top contributors to that delivery total were Florida, followed by Arizona and Texas. Our Arizona team grew delivery by 38% and revenues by 40%. We also saw 118 deliveries in Colorado, and between opening Austin and acquiring our DFW portfolio in April, enjoyed 414 deliveries out of Texas. We are making great strides balancing our portfolio between our core markets: California, Florida, Arizona, and Texas. We continue to see a healthy construction environment in all of our markets as build times have significantly improved compared to a year ago.

Our sales pace in the quarter averaged 2.7 homes per community per month, a 23% improvement over the fourth quarter of 2023. Markets with the best absorption paces during the quarter were Colorado, followed by Arizona and Texas. We remain committed to generating between 3 to 3.5 sales per community per month. Financing incentives remain a key driver of demand, and most buyers are looking for ways to offset the impact of higher mortgage rates and property tax and insurance increases on their monthly payment. While this has been a great sales tool when selling against the existing home market, it has had a detrimental effect on our margin. Overall, these incentives were about 280 basis points higher in the fourth quarter than in the third quarter.

To combat this margin pressure, we have been aggressively rebidding the labor and material components that go into our project and reducing costs where possible. Lot cost inflation has been a driver of margin pressure, and we have engaged our land partners about the cost of future lot takedowns. We have seen some previously tied-up land deals hit the market again, and we are optimistic that this is a sign of underwriting discipline from our peers and a reset of expectations from land sellers. Additionally, we are in a very good position with our land. At year-end, we owned or controlled 111,000 lots. This represents just over four years of supply based on our last twelve months’ sales. Forty-four percent of these were owned, and 56% of these were under control through some sort of option contract.

As we have said, we are pushing to a more land-light strategy and anticipate shifting this percentage to 25% owned and 75% controlled by the end of 2026. As John mentioned, we sold a significant number of specs in the quarter to reduce our standing inventory and rebalance our community profiles as we head into the spring selling season. During the quarter, we opened four new communities and closed out eleven communities, primarily in Florida, as we position for growth in 2025. In 2025, we should expect our community count to grow in the low single digits for the year. The improvement in cycle times over the last year has diminished the need to operate with a higher level of spec inventory as we can now deliver a build-to-order home in around five months.

While we continue to have move-in ready homes for sale in each of our communities, we are taking a more balanced approach when it comes to spec versus build-to-order. As such, we have moderated our starts this quarter to be more in line with our desired levels and ultimately get closer to our 50/50 target of specs and build-to-order. This should also help our efforts to improve margins given that build-to-order homes typically carry better margins. Overall, I am pleased with how we ended 2024 and how we are positioned heading into the spring selling season. We are excited about the new communities coming online this year and feel that our existing communities will benefit from a more balanced approach to spec inventory. Our high-performance home series continues to stand out from the competition both in terms of quality and value, which we feel is a key advantage as buyers become more discerning.

The markets we build in remain economically vibrant and continue to benefit from job growth and in-migration from other parts of the country. Given these positives, I remain optimistic about the long-term outlook for our company. With that, I would like to turn the call over to Chris, who will provide more detail on financial performance and give some forward-looking guidance for the coming quarter. Chris?

Chris Porter: Thanks, Mike. Good morning, everyone. As Mike and John mentioned, we experienced record top-line deliveries and revenue for the quarter and for the year. Pretax income for the quarter was $6.5 million, bringing us to $26.7 million for the full year. Net income for the fourth quarter was $3 million or $0.08 per diluted share, and adjusted net income was $9.1 million or $0.25 per share. In the quarter, we recorded $7.9 million of purchase price accounting, which equated to $0.16 per share. We expect to continue to see the impact of purchase price accounting for the next couple of years, with approximately $21 million to $22 million amortized through 2025. Gross margins were 12.5% in the quarter and 14.7% for the full year, slightly below our guidance as incentives continued to rise as the quarter progressed.

Discounts and incentives for the quarter were just over 8%, about 300 basis points higher than the fourth quarter of 2023, and 280 basis points higher sequentially from the third quarter of 2024. We continue to see competitive pressures on interest rate offerings but have seen those abate some after the end of the year. The ten-year treasury has settled in around the 4.5% range, and we are seeing the market offer lower mortgage incentives than they were in the fourth quarter. Our adjusted gross margin was 18.4% in the fourth quarter and remained just over 20% for the year. We expect incentive levels to remain elevated through 2025, with the actual costs fluctuating with the overall mortgage rate environment. After the first of the year, we have consistently seen rate buy-downs in the 4.99% to 5.25% range for quick move-in homes as we kick off the spring selling season.

As Mike mentioned, we are also seeing a slight shift back to more build-to-orders, where fewer incentives will need to be offered. However, as we look into the first quarter, we would anticipate incentive levels to be in the 7% to 8% range. We also saw good performance this year from Landsea Elements, which provides mortgages, insurance, and title services for our buyers, as it generated $2.2 million of profitability for the year. I’m also very pleased with our SG&A leverage for the quarter as we continue to focus on expense reductions and leveraging our high volume. SG&A as a percentage of homebuilding revenue in the quarter came in at 12.5%, a 40 basis point improvement from the same time last year. For the full year, we saw a 150 basis point improvement from 2023 at an overall rate of 13.5% of home sales revenue.

Separating out just our G&A expense, this ratio as a percentage of home sales revenue improved from 8.7% in 2023 to 6.9% in 2024. And on a total dollar basis, our G&A was up only $700,000 on a year-over-year basis, and that included adding the Antares acquisition and about $8.5 million of one-time expenses through the year, including capital markets fees, acquisition fees, and severance costs. You will recall that during the second quarter, we took efforts to gain efficiencies in the operations through both headcount reduction as well as streamlining our reporting structure and eliminated 30 positions. We are seeing those efforts pay off. Our tax expense in the fourth quarter was $3.3 million, bringing our total for the year to $8.1 million for an effective tax rate of 30.5%.

This year, fewer homes qualified for the new more rigorous 45L tax credit. As the rules for 45L tax credits continue to tighten, we expect to have fewer of our homes qualify in 2025 as the cost to achieve is much larger than the overall tax credit. For 2025, we expect our tax rate to be between 25% and 26%. Now turning to our balance sheet, we ended the fourth quarter with $241.8 million in liquidity, $57.2 million in cash and cash equivalents, and $184.5 million in availability under our revolver. During the quarter, we generated $47.8 million in cash flow from operations, which helped reduce our leverage ratios, a goal we’ve been discussing since our acquisition of Antares earlier in 2024. Additionally, this year, our 11% $150 million private notes become prepayable with a 7.33% premium.

Our current high-yield notes are trading at around par or 8.78%, and we will look to refinance the private note when it opens and reduce our interest costs close to 200 basis points on a go-forward basis. With interest costs representing about 4% of our gross margin, this savings should begin to show up starting later this year. Additionally, this will extend our maturity profile with any new notes maturing in 2030 or later. At the end of the year, we maintained 51.8% debt to total capital and improved our net debt to total capital another 150 basis points sequentially from the third quarter to 47.7%. Now looking forward to the first quarter, we anticipate our new home deliveries to be between 600 and 700 at an average sales price between $475,000 and $500,000, with GAAP gross margins of 13% to 14% and adjusted gross margins between 18% and 19%.

For the full year, we anticipate new home deliveries to be in the range of 3,000 to 3,400 units, which at the midpoint represents a 13% growth over 2024. We expect the ASPs of these deliveries to be in the range of $500,000 to $525,000. Additionally, we expect GAAP home sales gross margin for the full year to be similar to 2024 at around 15%, and adjusted gross margins to be around 20%. This guidance assumes incentives stay elevated for the year and is based on our best estimate as of today with current market conditions. As inflation, incentives, and interest rates continue to change, overall results could change accordingly. That concludes our prepared remarks. And now we’d like to open up the call for questions.

Q&A Session

Operator: At this time, if you would like to ask a question, you may press star one. To withdraw yourself from the queue, you may press star two. Again, that is star one to ask a question. We’ll take our first question from Matthew Bouley of Barclays.

Matthew Bouley: Good morning. You have Elizabeth Ling, and I’m speaking for Matt today. Thank you guys for taking the questions. I just wanted to start off asking about incentives. You mentioned that you’re expecting them to come down to 7% or 8% in the first quarter, which should be down a little bit from 4Q. Is that a reflection of the mix you’re mixing more towards the build-to-order homes from the spec? Is that based on, like, what you’re seeing in the market right now in terms of trends and demand?

John Ho: Elizabeth, this is John Ho. I’ll take that first, and then I have Chris give some specifics. It’s both a combination of what we’re seeing that’s happening in the actual markets in the first couple of months of the year. We’re seeing that incentives trend down, both in terms of the total incentives and also the cost of those mortgage rate buy-downs. In addition, you’re right. As we shift our portfolio, in our offering in our communities where we’re offering both the spec, quick move-in homes as well as build-to-order, the build-to-orders have a higher margin with them. So and we’re not offering the same kind of typical mortgage incentives with that offering. So it’s a combination of both.

Chris Porter: Oh, that’s okay. I would just say just adding to that is that we’ve actually seen offerings, like I said, between 4.99% and 5.25% now. And with the ten-year settling out at kinda 4.5%, was up the spike in the beginning of January, but since then, it’s really kind of settled out. And so the cost is more stable as well as we’re buying at 4.99% to 5.25% now.

Elizabeth Ling: Got it. That’s helpful, color. And then just kind of staying on the margin topic a little bit, could you speak more about what you’re expecting in terms of land? I know that you said that inflation has been kind of a pressure. And just anything around underlying building costs and if you have anything any quantification you could give us around tariffs, that would be really helpful.

Mike Forsum: Sure. Hi, Elizabeth. It’s Mike. I’ll fill that question. Let me just sort of tackle the macro around the tariffs. Immigration, those questions that have been coming to us pretty routinely. Recently. So as of right now, we’re not seeing really any real impact that’s result of tariffs. For the most part, our contractors, vendors, suppliers, have already sort forward committed to their material purchases that are coming into our house before many of these tariffs were going into place. Also, by result of the distribution or the disruption to the distribution chain that came out of COVID, many of our suppliers now have multiple channels in which to access mature materials as opposed to before where they were single sourcing many materials from one single location, maybe one single foreign location.

So for the most part, we have not seen really any big impact as a result of tariffs. From that standpoint. Also, we’ve already had our spring selling season starts underway. Those started last year, and we’re kinda moving into what would be the second level of starts coming here late spring, early summer, We may see some impact then, but as of right now, we’re not seeing a lot of pressure. And the same with labor, we’re seeing labor outstanding labor conditions on all of our communities and all of our regions. We haven’t had any real any issues coming from our trades and concerns around that. So from our standpoint, we still see a sort of a clear path as it relates back to those big macros. Outside of that, as John had mentioned and I think I talked as well as we were consistently looking at every way to squeeze out costs out of our homes without sacrificing any of the elements around our high-performance home value proposition.

And so we’re in constant communication with our trades where we’re looking for different ways in which to do it. We’re also getting more micro pricing around our actual houses, getting really focused around premiums, lot premium, view premiums. These things that you can incrementally enhance your margins. As well as you know, other ways in which speed is also very helpful. So we’re really thrilled about our teams and how they’re now cycling through their production housing that they’ve got going through in this five-month period of time. You know, frankly, beating the cycle time by one month has real real value to our costs and our margins. And so so we’re looking under every rock, through every crevice, everywhere we can to find different ways in which to enhance our margins going through this cycle, which is know, I think, we have an amazing team and outstanding homebuilders at our local locations, and they’re doing a great job on that.

Elizabeth Ling: Thank you very much. I’ll pass it on.

Operator: We’ll take our next question from Carl Reichardt of BTIG.

Carl Reichardt: Hi, guys. Thanks for taking the questions. I appreciate it. Hope you’re well. I wanted to just I may have missed this, so I’m sorry if I did. But you talk a little bit about the delivery performance this quarter relative to guide? I think we’re about 10% light or so. Was that all a function of sales-related issues or did you have some kick in the first quarter, which also looks a lot higher than we expected?

Chris Porter: Carl, I’ll take that one. This is Chris. Yeah. It a lot of it was just really back-end loaded, and so some of that did kick into early January. And so that was primarily what the difference was along the way. You know, we pushed. We had a record quarter on closing. And so they were mashed into the last last minute of the of the year, and and we did have some that that shifted over into the first quarter.

Carl Reichardt: Okay. Thanks, Chris. And then you guys talked about some sort of goals in your for for selling three to three and a half per month per store I gotta go back, I think, to 2021 in the model to find a time when you did that. And, obviously, that was a an awfully good year for for everyone. So what is the pathway to get from where you are now on a sales per store basis to that number? Is it a function of of smaller product or or more of focus on turns? And then how have you tracked relative to that goal set so far in 2025?

Mike Forsum: Carl, this is Mike. So again, that number is a number that we set for it’s somewhat aspirational to some degree, but we believe that that is a natural rhythm of any community on a single-family detached community. On average. We will have some that are a little bit higher some that could be a little bit lower. But, generally, we feel like this the the even flow of a community should be roughly around three three net sales per month per community. That’s where we go and that’s where we drive our pricing towards against the competition. That’s where we look at it when we’re top load. Construction and we’re setting our starts. That’s generally what we do is just, again, to have sort of a a goal out there and going forward.

We’re slightly shy of that on average for the community because some are a little bit longer, some are a little bit shorter in that goal. There’s also the component of a task product, which doesn’t necessarily always relate specifically to that because when you’re starting a building, you may have eight units at one time, and then you’re kind of absorbing in the building as you’re going along. So it again, I just wanna sort of emphasize that that is sort of a a guiding light as opposed to a direct number that we need to hit. Because we want to be able again to have the teams focused on the goals that are out there in that three point eight. We are doing all things that are within our toolbox to be able to achieve that goal, including, again, the incentives of Chris has talked about, recycle times, Our footprints are shrinking a little bit to make them more affordable.

But, you know, at the end of the day, Carl, what we’re really just doing at this point is just making sure that we’re continuing a vibrant sales pace at every single one of our communities to get through this part of the cycle, to reduce our spec level inventory, to cycle through the land that we have right now, to generate cash, and to take that cash and redeploy it back into new land positions that will take us out in 2027, 2029. That’s really the goal. For us and for me, I’ve been haven’t done this a long time, you know, we do not look at Fanta margins. We believe in cash generation. This is a business that you have to be generating cash. You have to keep moving through, and so we are really focused on the sales side of this and doing what we need to do to continue to move through our inventory and the land and those things I just talked about.

So You know, Russ, I guess, we just we’re not gonna we we don’t wanna be the last one to move on this. We wanna be first movers. We’re gonna stay focused. We’re gonna be forward leading, you know, in our markets. And continuing, and that three point o sales pace is really the goal to continue to do that. That sort of thing.

Chris Porter: Yeah. Carl, I just add on to what Mike was saying. If you look at at for the year, Arizona, call California, and Colorado all had over three on their average selling. Pace. Florida and Texas You know, Texas just coming online in in Austin. And just working through the Antares acquisition for a full year, So, you know, we’ve we’ve got those those stronger ones already over that three. That Mike was talking about, and so we’ve gotta just work on Florida and Texas to get there.

Carl Reichardt: Okay. I appreciate that, guys. Thanks so much.

Operator: We’ll take our next question from Jay McCanless of Wedbush.

Jay McCanless: Hey. Good morning, everyone. So the first question I had, the fiscal 2025 closing price guidance was better than we were expecting. Is there some pricing power in there? Is that all just gonna be mix, you think?

Chris Porter: Yeah. I I think, Jay, it’s Chris. I I think it’s a little bit of both. So we’ve been able to look at pricing you know, on on the top line, but also you’ve got with some of the better pricing on the mortgage incentives, which is a contra revenue side of things, that automatically goes into ASP as well. So it’s kind of a double double edge short there.

Jay McCanless: And then, Mike, the the land that you’re seeing come back to market, you maybe give us a little more color on that? I mean, are these deals that were maybe tied up for only a few weeks or few months, or is this some longer dated stuff that that you’re seeing come back to market and and guess, what are what are you seeing with the the pricing from the Lend sellers that they’re trying to get it resold.

Mike Forsum: Yeah, Jay. I I think it’s a it’s a mix bag and it’s everywhere. There’s some Florida, Texas, Colorado, Arizona, not necessarily California, but mostly within large land sellers who are selling multiparcels out into the market, bringing in builders And I think what’s going on is that there’s a real strong discipline going through the market right now not to be in a position whereby you can’t have clear product segmentation and those kinds of offerings And so what we’re seeing is not a run to the full acquisition of those parcels. When the numbers are settling out, Excuse me. I’m battling a cold here. When the numbers settle out, and the builders are identified, we’re seeing leftover parcels in many of these master plans communities that did not make the first sale come back to the market at a recalibrated price.

And I think that that’s really good. It’s it’s keeping things very clear and distinct. And making sure that each builder is gonna be able to get a very defined value proposition when they’re doing these parcel acquisitions. So that’s what we’re seeing off a lot of. It’s it’s timelines are short term, long term. It’s kinda all out there. As you know, also, this industry is is turning to land bankers and land bankers are also part of this conversation and part of the mix in terms of the evaluation. So in many ways, we do have a new partner that’s helping us to look at opportunity along the way. And to the extent that they’re also hesitating, we’re also finding that You know? There isn’t that sort of strong momentum going into communities sort of blindly.

If we can’t be able to have a financing partner that’s willing to help us to save land light, there’s also some walkaways that are going on as well. We’re seeing that from our our competition too.

Jay McCanless: Click on it. That’s that’s very, very helpful. Thanks, Mike. And then just wanted to ask, you know, it sounded like you guys closed out a bunch of Florida communities. Maybe talk about what you’re seeing from demand there and and is that another is that a theme maybe playing through the guidance for the first quarter that you guys are trying to to move through of the communities there just given there there seems to be a a significant amount of new and existing home inventory especially in the middle of Florida at this point.

Mike Forsum: Right. Well, overall, there’s still strong, strong demand traffic country, at least in the in which we’re in. There’s a strong will a home the home buyer a homeowner. It’s still there. It’s just the challenge around affordability. Qualifications, as you would expect in the entry-level home buyer. So for us, that’s the constant conversation within our company in terms of how to be able to bridge that between the desire of our prior profile and the ability to deliver them a house in which they can acquire. So we’re always focused in on that. As it goes back to Florida, particularly, and what is going on in that market, I I I would say it’s the same. We still have great traffic gutter communities. We’re having great conversations with the buyer prospects.

We are doing a good job in converting them either online or through our online or our on-site sales presence. But it is as Chris has identified, you know, many times here today that you know, it’s really about the incentives in which we can deliver to them to be able to get that price point down or that monthly mortgage rate down And then, you know, I think a little bit of it now, we’re also being challenged around insurance premiums that are coming on, property taxes are going higher because this sort of the two-year cycle in which the county assessors are out now looking at values and so you’re seeing a little bit of a pop there. So you know, it’s just really it’s just a lot of pressure around affordability. But if we can find the great tool and do it in affordable way, that we can get that mortgage down to where they didn’t need to be.

We have still a lot of demand out in in the markets in which we’re operating at. In. Got it. And and just thought about this from what she said on the insurance. Have you guys been able to quantify how much on a percentage basis people’s homeowners insurance is going up in in Florida or even some of your California communities. Yeah.

Mike Forsum: Yeah. You know, it’s a great question. We’re looking for data to come flowing in. But that’s sort of the new the new the new thing now that seems to be poking its head up and we’re trying to get our arms around that, but I I don’t have anything specific for you.

Jay McCanless: No. Understood. Okay. Thanks, guys. Appreciate it.

Operator: And once again, to ask a question, please press star one now on your telephone keypad. We’ll move next to Alex Barron. Housing Research Center.

Alex Barron: Yes. Thank you. Good morning. I was hoping you guys could share some statistics around your starts, you know, this quarter versus a year ago and also your spec levels this quarter versus a year ago.

Chris Porter: Sure. I I think that that, as Mike said, this is Chris Porter. As Mike said, the the starts are really pacing with our order and really what we’re trying to do as well is we had to push at the end of the year to to get some of the standing inventory sold. And then also drive more of our build-to-order platform. So we really, you know, paced our starts specifically this quarter. And if you remember, this time last year, really, the industry was all about going full spec, and so you’ve seen that start to, to change slightly. If you look at our backlog, about roughly 40% of that is closing out longer. Than what we would consider a quick move-in home, and so we’re seeing some movement towards towards that objective. Overall.

Alex Barron: Okay. Yeah. My I get that directionally, but I was hoping you guys could have any numbers if possible?

Mike Forsum: Sure. Well, this this is Mike, Alex, and I’ll just sort of back drop a couple Chris was talking about. Is if you were a year ago looking at our strategy around spec starts for versus still to order. We were generally releasing, if you were to say, a construction start of ten What? Would have probably gone off with a ten to twenty build order and then the ninety to eighty percent or nine to eight lots would have been on spec. We are now moving towards a fifty fifty. Other words, we would like to see roughly around fifty Fifty percent of that ten per that ten lots being done built to order before we release to go into spec. So we’re moving towards a more traditional balance approach between taking spec inventory, against the build to order so that we don’t find ourselves in the end where we have inventory that’s moved its way through its production cycle and then we’re finishing up at the end of the month or the end of the quarter.

With more more near term finished cap inventory we are gonna have to more heavily discount to probably or incentivize to move along. So with the cycle times reducing that I had talked about earlier, we are kind of within that window now where the buyer is looking at That time frame is within their range in terms of understanding about where rates may or may not be, but the feeling around that is we have a higher level of comfort about where rates may or may not be in which we have to buy them down But it’s also exciting for them because now they’re getting to do a little bit more customization, personalization, those things in our design center. If you were looking a year ago, we had very few people going through our design center because we actually had specked out those houses Today.

You’re seeing a real heightened activity going through a design set and where people are choosing their floorings choosing coverings, doing those kinds of things to bespoke their houses. And that’s very helpful again in terms of adding extra revenue and extra profit into the business. So we like that.

Alex Barron: Right. Yep. That makes sense. Now in terms of you know, the change in Margins that were actually achieved versus expectations a quarter or two ago, What what changed? Because it doesn’t seem like the mortgage rates changed a lot. Was it just that the competitors We’re offering very low interest rates, and you guys have to sort of match to stay competitive or what you know, what what kind of change in your mind versus a quarter or two ago that caused margins to go down not just for yourself, but it seems for the whole industry.

John Ho: Yeah. Hey, Alex. This is John. Yeah. You’re right. The going into the end of the year, unsold finished spec inventory was definitely elevated across you know, the markets, particularly in markets like Florida and Texas. As we got into the end of the year, know, with mortgage rates increasing, obviously, with a lot of, volatility in the market, getting home buyers off the fence to commit to purchasing a home required more incentives. And Chris shared on the call in the pre His remarks was, you know, our incentives increased about two hundred ninety basis basis points sequentially from quarter to quarter. So that had the biggest impact on margins A lot of that unsold inventory has cleared. And everyone’s unsold spec inventory is now you know, has has decreased somewhat from fourth quarter going to first quarter.

We’re also seeing a lot, including ourselves, right, our shift being building more of these built to order. So that’s gonna help Yep. The competitive pressures to have to provide those kind of incentives. As across the board, in a lot of these markets, particularly in for Texas, Arizona, less incentives, and in some cases, even some price increases given that there’s less inventory.

Alex Barron: Okay. That makes sense. If I could ask one last one on the purchase accounting adjustments, is that likely to abate in 2025?

Chris Porter: So we’ll have probably kind of in that that mid $20 million range still that will will amortize through out 2025. It’s primarily related to the Texas acquisition So as we continue to take down lots and and sell homes there, any of the inventory that we purchased last April will have some sort of purchase price accounting on it. But we would anticipate kind of that know, $20 to $23 million being amortized throughout the year.

Alex Barron: Okay. Thank you so much, gentlemen. A great day.

Operator: And it appears that we have no further questions at this time.

John Ho: Thank you, everyone, for joining our call. We look forward to speaking to you again on the first quarter 2025 earnings call.

Operator: This does conclude today’s conference. You may now disconnect your lines. And everyone, have a great day.