Good morning, everybody. Welcome to Deutsche Bank's thirty-second annual Leveraged Finance Conference. My name is Andrew Kissell. I cover high-yield industrials. We're excited to have the team from Beazer Homes here. On my left is David Goldberg, Chief Financial Officer, and Nikki Stamaris, Treasury Manager, and I'll turn it over to Dave to get started.
All right. Thank you, Andrew. Thank you for everybody in the audience, and thank you for Deutsche Bank. I think we've been coming to this conference for about twenty years, and it's always great meetings, and great experiences. So hopefully, the mic isn't echoing too much. I don't know if the sound is okay. Maybe just give me a thumbs up, so we know. Okay, good enough. So, as Andrew said, I'm the CFO of Beazer Homes. I've been with the company for about ten years. The way we're going to go through the presentation today, we're going to start with an intro to Beazer, and what makes Beazer different from other home builders, and really talk about our business a little bit. We're going to talk about the current operating environment. Obviously, we're at the end of September.
It's our fiscal year-end, at the end of this month, so we can't really talk about current conditions or anything too far into that, but we'll give some overview on how we're thinking about the world. And then we'll move into a transition and talk about our multi-year goals. We have set three primary multi-year goals that we are focused on achieving through the end of 2026 . We'll talk about each one. The goals were very driven by our own strategy and what we heard from shareholders and debt holders. And so I think you'll see they align pretty well, with hopefully continuing improvements in our valuation.
I'll let everybody peruse forward-looking statements on their own time, but obviously, given the time of the year, pretty important, and I'm sure our General Counsel is listening, so he'd want me to point them out. So this is a kind of outline of Beazer at a glance. You can see in the upper left-hand corner, there's an overview of the company. We're a top twenty builder in the United States. We have operations in 16 markets across thirteen states. We curated those markets very deliberately based on supply and demand, demographics within each market, and our ability to really build successful, growing businesses in each of those markets. You can see the geographic footprint on the map.
As I said, about a decade ago, Beazer went from about 31 markets to 16, as we really tried to focus on the markets where we thought job growth and an ability to build... where we could build great businesses and larger businesses. So really strong footprint geographically. We always talk about delivering extraordinary value at an affordable price, and we'll break down each one of those as we go, what affordable prices mean, and really, what does extraordinary value mean to our buyers, with a particular focus on millennials and baby boomers. That is really the markets and the buyer groups that we target. About 50% to60% of our business is typically entry-level, first-time buyers, but more value-oriented versus pure price-oriented first-time buyers. And you can see, as I mentioned, we're a top U.S. single-family builder.
On the right side of this slide, you'll actually see the geographic breakdown of our revenue and inventory by region. You can see we have an over-weighting to the west. That is our, primarily our divisions in Texas, namely Dallas and Houston and San Antonio, but we also have big businesses in Las Vegas and in California, in Nashville, and in Maryland, and throughout the United States. I would pay particular attention, and this is really about talking about what makes Beazer different from other builders in the bottom left, and we call it our strategic pillars, but I would like to kind of focus on each one and walk you through them. It's really what makes us different, and it's all about the home that we build and the experience that we deliver to our buyers.
So when we talk about the home that we build, I'll kind of start from the bottom up and talk about that. Surprising Performance is really about the materials we use, the service you get, the quality of the home, and the energy efficiency of the home that we build. And we'll get into this in some depth in a couple slides, but Beazer is the only public builder in the United States to commit that 100% of our starts will be Zero Energy Ready by the end of calendar 2025. So we'll get into what that means. It's a Department of Energy program. It's about quality, it's about the home we build, the energy efficiency of the home, the quality of the air. We'll talk about that. Excuse me, forward a slide.
But it is a major differentiator compared to a lot of builders that are building more spec homes and just delivering more and more homes and maybe focusing on more price-sensitive buyers on the very low end of the market. The other two strategic pillars that are listed on the sheet are Choice Plans. So Beazer, in all of our communities and all of our homes, offers structural options that allow the house to live the way you want it to as a buyer at no additional cost. So a very simple way to think about this is, if you're the kind of person who wants more of an open concept, maybe you have an open dining room for entertaining, versus if you like formal dinners, we'll put a wall there and wall that off, so you have a more formal experience.
It makes a huge difference to our buyers, especially in an affordability-constrained market, because it allows the home to live the way they want it to live, and then finally, we talk about, we mentioned Mortgage Choice. Mortgage Choice is a program we developed, more than a decade ago. Most builders have captive mortgage subsidiaries, so you basically have no choice. You can go with their captive, or you can go find your own, mortgage company. Beazer has a very different structure. We actually pre-vet lenders, multiple lenders in each of our communities that are appropriate for the buyers in those communities, and we force them to compete for our buyers' business.
We receive no remuneration from that arrangement, so it literally is us working with our buyers to find the best loans, the best rates, the best service, the best experience, versus having a captive and kind of pushing them into something that we profit from. So very, very different model. We're very much a product-driven company and an experience-driven company, and very differentiated from a lot of other builders out there. So as I mentioned previously, really obviously, given the time of the month, can't talk about current quarter. We've gotten a lot of questions over the last couple of days. What's happening in the market? How have rates, the rate decline in the last month really impacted demand? Obviously, we're in a quiet period right now, we can't talk about it.
But this is a slide that we showed last earnings call, and on the left side, you see inventory, and on the right side, you see monthly mortgage payments and really the affordability equation. So what I would comment on is we're getting a lot of questions in our meetings about new home inventories and new home inventories rising. What does that mean? And look, you will see short-term fluctuations in new home inventory levels based on demand. But the big story that we're focused on is we've underbuilt the housing market over the last decade by millions of homes. And so while you might have short-term fluctuations based on what's happening with rates and what's happening with buyers, the long-term trend is we need more housing because we have not overbuilt.
This is not like previous cycles, where we started a lot of extra homes, and we had to clear a lot of units. It's quite the opposite. As a nation, we are underbuilt relative to households and relative to household formation that's happened over the last decade. And that's one of the reasons we're so bullish about the housing market and our plans for growth. On the right side is a chart that we've been showing for probably about three years now, and it's a measure of monthly mortgage payments as a % of income. And you can see the kind of line; it's a dotted line. It looks like a solid line on the screen. That's your average level in that kind of 22% range. Affordability is, without a doubt, the biggest issue in the housing market.
It has been for a while. I would tell you we're optimistic that the move down in rates will be helpful. It certainly should help. But we do a lot to address affordability with our buyers, whether it's smaller square footages, taking specifications out of a home that don't really change the way the house lives, or even obviously, I think a lot of builders have talked about this, temp and permanent buydowns on mortgage rates to make homes more affordable. So that's what we're facing. You know, I'm hopeful that with mortgage rates down and there's not been a lot of home price appreciation, that line will continue to improve and go back towards that average level. But like I said, we actively address affordability in every one of our communities, in the way that we address our buyers.
I mentioned earlier, we have three multi-year goals that we're laser-focused on. We developed these goals in the Q2 of fiscal 2023. It was after consultation, frankly, with a number of shareholders and debt holders, our board, and thinking about our own strengths and strategy and what we wanted to be in the next couple of years and what we wanted to achieve. And we came up with three multi-year goals that we think, again, will significantly improve our story from a valuation perspective, from both a debt perspective and from an equity perspective, and drive real value for our shareholders and our debt holders. And those goals are listed here. The first goal, and we'll get into each one, is having more than 200 communities by the end of fiscal year 2026. This is a major growth, right?
It's double-digit growth in community count. For those of you that are unfamiliar with home building, community count is like store count, so it's kind of the selling efforts that we have, and it's what drives our revenue, right? Orders become closings, closings are revenue. Really significant growth in our communities, and quite frankly, we've had growth and pretty significant growth in 2024. We have the land we need to achieve the growth that you'll see in a second in 2025, and we are most of the way on the land that we need for 2026, and predominantly there already. We have really good visibility, and we'll talk about that in a sec in another slide. We expect our net debt to cap to be below 30% by the end of 2026.
We really spent a decade as a company from kind of the 2011, 2012, kind of to the early 2020s, buying back debt. We delevered the balance sheet through significant debt repurchases, more than $800 million of debt taken out. On a go-forward basis, we think this kind of reduction and further deleveraging is going to come from growth in the business, and profitability growth primarily, and we'll show you kind of the trajectory that we're on. Then, as I mentioned previously, we have committed to the Department of Energy Zero Energy Ready program, and that all of our starts after calendar year 2025 will be Zero Energy Ready. And we will talk about what that means in a second when we get to the slide.
This slide shows our community count growth over the last couple of years, and you can see we had a pretty significant drop-off in 2020 to 2021, and then kind of flattish in 2022 and 2023, and really starting to build as we've gotten into 2024, and then expectations for growth in 2025 and 2026. The real key here is you can look on the bottom, and you can see the land position growing and the growth in the land position that really started kind of 2020 to 2021 and then 2021 to 2022. In home building, it takes time to bring communities to the market, right? You've got to source communities, you've got to put them under contract, you've got to buy them. Frequently, you have to develop that land if you're not buying finished lots.
And so there's a lag between when you decide that you want to grow and when you actually start to see community count growth. And you can see that in this chart. We've grown the land position, really, again, starting in 2022, and you're starting to see the outcome of that and materialization that in community count. And you can see the further growth that we've experienced from 2022 to 2024, that will help continue to fuel our community count growth as we get into 2025 and 2026. As I mentioned previously, we have really good visibility into 2025. You need to. You basically need to own and be ready on most of the stuff that you expect to activate by the end of the year. So we feel very confident about that. We've talked about that publicly before.
And then again, as we talk about 2026, we have a lot of the land that we need pretty much done already for our 2026 community count growth. I think the key here is, and we get a lot of questions about this, so we'll go kind of off slide for a second and talk about options and our option percentage. Okay? It's a very big topic in the home building business. Are you going to be a low-option company? Are you going to try to be a 100% option company? At Beazer, I think we tend to think about it a little bit differently. There's really two governing factors that we think about. One is balancing financial leverage and balance sheet leverage with operating leverage.
You don't want to be a company where you have a very, very high option percentage and a lot of debt, because if those options, if the market turns down and those options are either renegotiated or you walk away from them, you don't have a lot of liquidity to go out and deal with your debt situation. The other thing that we think about is we don't want options to drive our strategy. So we're not a let's go be a 100% option company. We really want to focus on doing the best deals that we think offer the best risk-adjusted returns, and then try to finance them in the most efficient way that we can. So right now, our option percentage is about 55%. I think over time, we can increase that a little bit, and we've talked about that publicly before.
But what we try to do is identify the deals we want to do, that again, we think have the best risk-return characteristics, and then think about how we want to finance the deals on top of them. So we have gradually moved up our option percentage as we've delevered the balance sheet over the last few years. We were in the 20% option range three or four years ago. We've moved into the mid-50s%, but there will be a cap because we're not going to let options drive land strategy. We're going to let land strategy drive land strategy, and then think about financing in the most efficient financing strategies we can have to drive returns on top of that. So here's a look at the balance sheet. You know, we've chosen net debt to cap as being indicative.
Obviously, the reason is that as you go through cycles in the home building business, sometimes you're more liquid, sometimes as you're growing the business, there's less cash in the business. But we think it's indicative of kind of the direction that we're going as a company. You can see our expectations to get below 30% net debt to cap by the end of fiscal year 2026. We are on a trajectory to do that. There will always be short-term fluctuations quarter to quarter, especially as sales were a little bit sluggish in June and July, as we've talked about publicly. You probably have a little more inventory than you would have had otherwise.
You haven't sold quite as many spec homes, but very, very clear trajectory to bring our debt to cap or net debt to cap below 30% as we move forward. And we sensitize this a lot until very comfortable with achieving this metric in the next two years. So the final slide here is on our Zero Energy Ready starts, and we've started to talk about this a little bit, but I think it makes sense for people that are less familiar in the room to start with, what is the definition of Zero Energy Ready? And it's a Department of Energy program, and what it basically means is with a properly sized renewable attached to the home, so think solar. If you put solar on, the house will produce as much energy as it consumes, and it's capable of doing so.
So basically, it's not that you're actually at zero. We're not mandating solar or forcing solar to our buyers, but rather, the homes that we build are so efficient that if you put a properly sized renewable on the house, you can get to zero. This is really when you think about energy efficiency and quality of home, the gold standard of what's being built in the United States today. We often talk about building the home of the future today, and really, as I mentioned, kind of in my opening remarks, no other builder has committed to this program in totality with their business. We are a company that builds the best production homes in the United States, bar none, and we don't just do it, you know, because it sounds good or it's an ESG metric. We get that question a lot.
Do you do this because of ESG pressures?" We think it's the right way to build a home. Now, in the appendix of the presentation, you'll see a lot about kind of what it means to build Zero Energy Ready, what are the benefits, and how do you achieve it? And I'll let people kind of cruise it on their own. But I think the really important thing for this group to understand is, it's not just about an energy bill. It's not just about how much energy your home uses. It's about the quality of the build, it's about the durability, it's about warranty costs, it's about air quality, it's about sound attenuation between rooms. The experience of living in a Beazer Home is different than living in a home that wasn't built to Zero Energy Ready standards.
Now, it does happen that we get a $5,000 tax credit for every Zero Energy Ready home that we build. That was part of the Inflation Reduction Act. We started this strategy years before that, so we didn't do it for a tax credit. We generally think this is the future of building, and that's why we're committed to it. We love to show people our homes. If you're ever in one of our markets where we have houses, please let us know. We'd love you to stop by and see. We do a really good job showing you what's different in a Zero Energy Ready home and in a builder, a Beazer Home versus our competitors. We'd love you to see it because I think the results speak for themselves. It really is a different product that lives differently.
All right, so we're going to talk a little bit about 2025, and we're under some limitations, obviously, in a quiet period, but this was a slide we showed before, in our earnings call, and it's really just to kind of set up why we expect to have growth in 2025, and you'll see this in our fiscal 2025 on our next slide, too. Typically, for a builder, you look at homes that are in backlog as a mechanism to predict what's going to happen in the coming year. So backlogs are homes that you've sold that haven't been delivered yet, that you're in the process of constructing. And in most years, that's a pretty good indicator of what's going to happen in terms of deliveries in the future year, in the next year.
This year, next year is setting up a little bit differently, and it's because our backlog is down a little bit year over year, but we continue to expect growth in our closings next year, and the reason is, if you look at the right side of the page, we're really focused on our units under production, so what that really tells you is units under production are kind of your backlog plus your spec homes, and our units under production are up year over year, and that's why we have a lot of confidence heading into the year that if the environment is good, we will be able to sell more homes and deliver more homes as we move through the year in 2025. We have the production universe to go do that, and that's what really matters in the business...
This just shows historically what percent of, first on the left side, our backlog we've closed. You can see that during the COVID years, that fell pretty dramatically. That was longer cycle times and supply chain disruptions caused that ratio to fall, so you could turn your backlog less quickly. As we've moved out of COVID, and we've kind of have moved away from a lot of the supply chain disruptions and vendor issues we've had, that number has continued to move up, and we think there are opportunities to, obviously, to have it at a higher number as we move forward, as we continue to improve our cycle times. On the right side of that chart, we actually show the units under production.
If you can see the gray bar, it is higher in fiscal 2025, heading into fiscal 2025, than it was heading into fiscal 2024, and that's that concept of units under production, which ultimately drive how big your business can be, as you can sell through those homes that are under construction. So one more slide on 2025 and our expectations for 2025. We've talked about why we think we're going to have more growth and more profitable growth in 2025. There's a couple reasons on the left side, but we really expect to grow revenue by about 20%. Now, we talked about community count growth, so we have more communities. We talked about units under production. We have a higher level of units under production heading into the year.
As we've discussed, our cycle times continue to come down, and we think we can make further improvements on our cycle times. You get a little bit of sales pace improvement with more stores, with a little bit of increase on average selling prices, and you can drive some really significant revenue growth, which is what we expect for the coming year. We also talk about the ability to drive operating margin expansion. When you think about our push to get to Ready Series, the first kind of leg of that push was, let's get the technology right. It's hard to imagine, but we had to redesign the floor plans on every single home that we built, right? Zero Energy Ready requires a complete redesign of what you're doing. A very simple example of that is we build with two-by-six on our exterior walls versus two-by-fours.
That means that every single stud that we put in the house now needs to be designed differently. The reason you do that is it creates a bigger cavity for insulation, so it improves the envelope of the wall. But it literally means that every home that we built, we needed to reconfigure. We put a lot of the effort into designing those homes and get ready for Zero Energy Ready. 93% of our starts as of last quarter were Zero Energy Ready starts, which was on the previous page. The focus now that we've predominantly made this transition, we're ready to get to 100%, is how do we reduce the cost of Zero Energy Ready? And how do we sell it more effectively and get paid for it more effectively?
We think a combination of getting paid for it and reducing our input costs and finding ways to simplify our efforts to get to zero, or the way we're getting to zero, will drive some gross margin improvement for us. You can see that's in the Ready Series cost reductions. The other part was SG&A leverage. Quite frankly, in 2023, and even into 2024, we've been building our team for growth. There are upfront costs you have to take as you grow communities. Those communities are not producing revenue yet, right? They will be in 2025, and the improvement that comes from top-line growth should drive some significant SG&A leverage, as we laid out in our last earnings call. We'll kind of wrap up here with a couple slides on the balance sheet and land investment, and liquidity.
This slide just shows our land spend for the last four quarters. You can see it's up pretty significantly. It's the highest level of land spend that we've done in a decade. I think it's worth noting that it's not that it's a "Hey, we're going to grow. We're going to grow no matter what." We've been very responsible in all growth. We've stayed within our footprint. We've stayed within the products that we build and the, frankly, the submarkets that we build in. It's just we went from a company who largely was paying back debt and kind of keeping the balance sheet improving through debt repurchases and keeping our top line pretty steady, to a company two or three years ago, where we really started to anticipate growth, and now the land spend is coming through.
And you can see this on the chart. The red line on the top shows the option percentage. I think we talked about that quite a bit. It feels like mid-50s to 60s is kind of where we'll be. We are incredibly focused on balance sheet efficiency as a mechanism to drive return on capital, but we won't let the tail wag the dog. It won't just be about optioning everything. It'll be buying the best land and then find out the most efficient way to finance it. Here's our debt structure. You can see we have maturities in 2027, 2029, and 2031, and then some junior sub-notes in 2036. It's very liquid. It's a very plain vanilla cap structure. We feel very comfortable with our interest burden and our debt, and our debt refinancings ahead.
The market has been available to us over time. I think we've been a pretty good issuer over time. Feel very comfortable with the current liquidity in the business and, and frankly, the debt terms that we have, the term structure of our debt that we have right now. We worked hard to get it this simple. Three or four lines feels pretty good in the future, and we manage this obviously very, very closely. We'll end with the slide on book value per share growth. Look, this is a metric we're incredibly focused on. You can see over the last five years, we've achieved a 20% CAGR on our book value. It's really reflective of our opportunities for growing the business.
And not only have we grown the book value, but we've improved the quality of the book value over time. We still have a DTA on our books. That has diminished as a percent of the overall book over time as we've kind of continued to grow profitability, since 2020. So you can see we've achieved a 20% CAGR, in our growth rate. And again, kind of given the growth we expect, we think there's more upside from here. So there's a lot of appendix slides I'll let folks look through as they want to, but I can open the floor for questions.
Again, I'm sorry, we will be a little bit limited on the kind of questions we can answer about current conditions, but happy to talk about longer term, what's going on with the business, and more macro stuff as much as we can. Happy to do. We don't give exact levels by state, so I'm kind of limited on what I can say, but we can say that we have a big business in Dallas and Houston. Businesses in, certainly in California and Vegas, that, a little bit less capital. California, a little more capital intense, a little bit smaller from a revenue and closing perspective, but we don't give specific breakouts. Dallas, frankly, has been one of the best markets in the country. We have great business in Houston. We entered San Antonio.
We had a joint venture there, that we owned a third of. Two years ago, we bought out our joint venture partners, and we've been growing our San Antonio business and are incredibly excited about that opportunity.
I know we can't talk about current conditions, but I guess, in your mind from a macro perspective, mortgage rates, you know, the response to demand, is that nonlinear? Is it linear? You know, every kind of like, I guess the second part of the question would be, does it itself, especially like at Beazer, have to be the kind of all that demand folks have talked about?
So, let's start with the second part of the question, then we can talk about where the sweet spot is, because I think that's a tough question to answer. In terms of capacity, no, I think there's been some limitations in the cyclicality of the business in the cycle, and it doesn't really matter if it's underwriting standards or it's vendor capacity or it's land capacity. This is not a market that can grow indefinitely, and it's one of the reasons we haven't overbuilt in this cycle path, you know, compared to previous cycles. It is increasingly difficult to get land permitted. It is difficult to bring land to the market. It is difficult to find trades.
We really don't have a trade issue right now, but if you were to try to go stress the trades 20% or 30%, I think we'd be in a different story. So no, I don't think there's an ability as an industry to really ramp that quickly. We could ramp 10% to 20%, but it gets tougher as you get past that. So it's one of the things that actually gives you some comfort, is that this isn't an industry that can easily just overbuild and get to a position like we were in in the financial crisis, where we just had tons and tons of housing, and quite frankly, we don't have a mortgage market that supports that kind of growth anyways. This is not a, people are doing NINJA loans, and there's bad stuff going on. That. This is not that kind of market.
There's a lot of very plain vanilla lending in the market. If you look at the quality of Fannie and Freddie's books, they're very high-quality loans that have been made, and that's public data you can go look at. LTVs and FICO scores of the loans that are being made are pretty good, and delinquency and foreclosure rates are really low. So it actually gives you a lot of comfort in the stability of the market, or it gives me a lot of comfort in the stability of the market, but I think it would be hard to just hit the gas and ramp as hard as we could as an industry. The first question was on rates, and I think that's a bit of a challenging question, right? Builders, including Beazer, do a lot of buy down on rates, right?
We do permanent buy downs, we do temporary buy downs, we do forward commitments to buy rates down. You only have to go on Instagram to see builders advertising 2.99% rates on quick move-in homes and communities. I don't think the question is necessarily a rate question. I think that's there. I think there are people that are struggling to afford homes, and that's part of the equation. But I think the other part is consumer confidence and what's going on from a sentiment perspective, right? Rates went up, consumers get nervous. Then, kind of in July, consumers said, "Well, the Fed's going to cut rates, so that means mortgage rates are going to come down," and you find yourself in a conversation with people about forward curves, and it's anticipated, and it's already moved down.
People just think the Fed's cutting and rates are going to come down. So I think what we really need to see is some increased consumer confidence, but we're hopeful, right? We have a presidential election coming up that's generated a little bit of negativity, which is kind of normal. I suspect when we get past that and we have some clarity around what the environment looks like, that will help consumers, and I think in the face of Fed rate cut, rate cuts and declining mortgage rates, we'll see some improvement in demand. Take it away, sir.
Talk about just affordability and how you kind of action functions or plans less stuff in the home rather than a bunch of builders. How is Beazer responding to that? I guess I don't know if you can track the amount of homes like that are just stock kind of without options and they're operating?
Yeah. Look, I think you got to be careful in de-speccing the home. You certainly try to take costs out, right? And you try to take costs out in ways that don't impact the livability of the home or the buyer experience. We are not a company that's just going to sell, hey, it's a very, very basic house across the board, right? Our Zero Energy Ready program, in and of itself, is a massive upgrade to what most builders do in terms of the quality of the home. So look, we're really committed to quality and durability in what we build. I think you do. You know, you can take specifications out. I think you have seen some drop in square footage. That's absolutely the case for us. Some of that, though, is stuff that we planned years and years ago.
Like, we've been talking about affordability for three or four years, right? This is kind of persistent in our dialogue, and you can look back at our earnings calls. We've talked about affordability literally for three or four years. You plan for smaller square footages, you plan for higher density. There's a higher mix of townhomes, those kind of things, to try to address affordability concerns. And then, frankly, Andrew, the question is, every buyer is different. You have to address their situation. Where can they qualify? As you know, on a permanent buy down, you can qualify at a lower rate. So if you're having a qualification issue, maybe you're going to focus on a permanent thirty-year buy down on your, on your thirty-year mortgage. If you have more payment concern, you might focus on a temp, if you can qualify at a higher rate.
So you might go for a temp and use the money elsewhere. So that's all done buyer by buyer, and that's what our NHEs are great at doing, working with our buyers and working with our Mortgage Choice lenders to really figure out for a buyer who is, you know, at that point where they can buy a home, what works best for them. Absolutely. Yeah, there's absolutely an increase in cost for Zero Energy Ready. We kind of talked about, we really focus on the technology first, building the house, getting to that point where we get to 100% of our starts as Zero Energy Ready by the end of 2025. Now, what you're seeing is it's 93% today. The reason is we have some older communities that we haven't converted to Zero Energy Ready, because they're toward the end of the community.
Those will close out, and as we activate new communities, they're all Zero Energy Ready. So we're kind of there from a technology and innovation part of it. In terms of the cost, you know, there is definitely an incremental cost. The good thing is, Beazer came into Zero Energy Ready as kind of the leader in energy efficiency already. We've been Energy Star certified in all of our homes for, you know, more than a decade now. So we kind of had that leg up. So the incremental cost wasn't as much as maybe if you were a builder building the code homes or not Energy Star compliance. The real key to us this year and into next year is how do we find the ways to reduce that cost?
So if it's costing you a couple points, frankly, in terms of margin, you do get the $5,000 energy tax credit. The geography is a little bit different, right? That flows as a tax benefit versus the gross margin line. But then how do you think about reducing the cost and finding a way to really explain the value to the buyer, so that we can make this, margin accretive to us over time? Please. Well, look, I feel like we should have talked to the panel yesterday about the White House and the race for the White House and politics, because housing affordability is a huge issue, in this election, both on a local basis, on a state basis, and on a national basis. And permitting and the challenge of bringing land to the market is absolutely one of the reasons.
And the answer is, there's no simple solution. There's no silver bullet that if you can do this, you can figure out permitting. It is an exasperating process in almost really all of our markets, and it significantly adds to the cost of land and the cost of building, and there is no shortcut to get around it. You've got to know your local municipality. You obviously need to know your regs. We work with developers, and you go through the process, and you go through what is often an arduous process to get things done. And there really is no solution to how do you do it faster.
By the way, to Andrew's earlier question about ramping home, it's really hard to do because permitting and entitlement times are not getting easier, they're getting tougher, they're getting more delayed, and there's no way to circumvent it. We work in markets where it's two-plus years to get land entitled, and it's just, you just have to kind of know what you're doing, work with the right engineers, and go through the process. Please. In most of our markets, and soon in all of our markets, we'll be testing solar in our communities. Frankly, what we don't try to do because of issues around can you get it appraised, how do you pay for it? We don't mandate solar, right? That's why we're zero energy ready. I would tell you that solar adoption has been...
In California, it's mandated, but outside of where it's mandated, we've seen some, but not a massive amount of solar adoption because of the incremental cost. We're working on ways to address that and make it more affordable for buyers. One of the things to really think about, though, is the more energy efficient your home is, the fewer solar panels you need to make that home zero, right? So the tighter the box, the less energy you use, the less solar you need to offset that energy. And so that's one of our ongoing efforts, is while you continue to work to bring your Home Energy Rating System scores down, right? You're trying to make a more and more efficient home as you go. We don't. We use outside companies that do it.
Right on time. Appreciate everybody listening to us. We're always available if you have any questions, and thank you for your attendance.