Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Following the company's opening remarks, we will open the lines for questions.
Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com, through October 22nd. Conference call. Now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.
Thank you, Alex. Good afternoon, everyone, and thank you for joining us today to review our results for the Q3 of fiscal 2021. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer Matt Mandino and Rob McGidney, Executive Vice President and Co Chief Operating Officers Jeff Kaminski, Executive Vice President and Chief Financial Officer Bill Hollinger, Senior Vice President and Chief Accounting Officer and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the company does not and the company's ability to undertake any obligation to update them.
Due to factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission. Actual results could be materially different from those stated or implied in the forward looking statements. Q1. In addition, a reconciliation of the non GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and or on the Investor Relations page of our website at kbhome.com. And with that, here's Jeff Mezger.
Thank you, Jill, and good afternoon. Our performance in the 3rd quarter reflected significant year over year increases across the majority of our key metrics as we produce solid results and housing market experiencing great demand while also facing industry wide challenges in getting homes completed and delivered. These results will help drive our returns focused growth as we continue to expand our scale while generating a higher return on equity. Before I get into the highlights of the quarter and there are many, I want to address our shortfall in deliveries and revenues. Disruptions to our supply chain intensified as the quarter progressed and along with municipal delays resulted in our build times extending by about 2 weeks sequentially.
This pushed many deliveries into our 4th quarter and will similarly delay some 4th quarter deliveries into our 2022 Q1. We are taking aggressive steps to manage through these delays, including expanding our subcontractor base, partnering with our national suppliers and simplifying our products to stabilize our build times. We produced total revenues of $1,470,000,000 We achieved an operating income margin of 12.1 percent excluding inventory related charges, which grew 250 basis points year over year, driving a 40% expansion in our profitability per unit to nearly 52,000. 1. This was accomplished even with the leverage we lost from the delayed deliveries.
Our related gross margin of 22 As to capital allocation, we continue to take a balanced approach with disciplined investments in growth remaining our top priority. In the Q3, we invested about $780,000,000 in land acquisition and development. We expanded our lot position to almost 81,000 lots owned or controlled with our inventory continuing to rotate into a higher quality portfolio of communities. In addition to these investments, we returned a significant amount of cash to stockholders through both our regular quarterly cash dividend and the repurchase of $188,000,000 of our stock. These repurchases will further enhance our return on equity in 2022 beyond this year's expected 20% level, especially when combined with our projected increase in scale to over $7,000,000,000 in revenue and higher operating and gross margins.
Since we embarked on our returns focused growth strategy, we have produced meaningful expansion in our ROE. While we recognize We announced the promotion of Rob McGivney to Executive Vice President and Co Chief Operating Officer, a role he shares with Matt Mandino. We created a co COO structure with 2 simple objectives in mind, to accelerate the profitable growth of our business in order to drive increasing returns on equity and to enhance our execution. Rob is responsible for our West Coast and Southwest regions and Matt is responsible for our Central and Southeast regions. In addition to their regional responsibilities, Matt and Rob each have oversight of key strategic corporate functions as well.
The operating environment within our industry has become more complex over the past 18 months given the supply chain issues and municipal delays that I mentioned earlier and their impact on build times. Having 2 proven leaders running our operations will allow for a more hands on approach that is geographically focused, enabling greater day to day collaboration with our regional and division leadership. Matt and Rob will join me to respond to questions later on this call and can speak more specifically as to what is being done in their regions to compress build times. We successfully opened over 40 new communities in the 3rd quarter, marking the start of a sequential improvement in any community count that we anticipate will continue over each of the next five quarters. With the strong and growing lot pipeline that I referenced driving an acceleration in new communities, We expect to expand our community count to roughly 260 by year end 2022.
Our monthly absorption per community accelerated to 6.6 net orders during the Q3 from 5.9 in the year ago quarter and reflecting a more typical seasonal pattern sequentially while remaining at a historically elevated level. 1. Net orders were $4,085 represented a small decline year over year against a strong result in the prior year quarter. However, with our actions in taking price and moderating pace, our net order value was up more than 20% year over year. We continue to manage our selling pace to production, limiting our lot releases to prevent our backlog from getting overextended and started over 4,000 homes during the quarter.
This compares to starts in the year ago quarter of about 3,400. We currently have approximately 9,000 homes in production with 93% of these homes already sold. Only 240 of these homes are unsold past the foundation stage and our focus right now is on compressing our build times to deliver our backlog. With the rise in our net order value to $2,000,000,000 we are laying the foundation for future margin growth. Tells us that our price points remain attainable.
The credit profile of our buyers is above our historical level with an average FICO score of 731 and down payment of 14% translating to almost $60,000 which is noteworthy for a first time buyer. In addition, the internal indicators that we monitor for changes in customer behavior, including the square footage of homes purchased or spending in our design studios remains stable. Our backlog now stands at roughly 10,700 homes, representing future revenues of over 4,800,000,000 Our backlog value is up nearly 90% year over year with significantly higher margins within this backlog. This is an excellent position from which to finish 2021 and support another year of growth in revenues and expansion of margins in 2022. Homeownership remains compelling and attainable and we believe the drivers are in place to support healthy market conditions for the foreseeable future.
An insufficient level of supply exists Together with our experience in serving first time buyers who represent 61% of our deliveries in the 3rd quarter as us well positioned to capture demand going forward. Switching
gears for
a moment, I want to highlight our recent achievement in sustainability. KB Home received a record 25 ENERGY STAR Market Leader Awards from the EPA, further demonstrating our leadership position as the most energy efficient national homebuilder. We are proud to continue moving our environmental program forward, which is helping to lower the total cost of homeownership for our buyers, while doing our part to reduce the carbon footprint of our homes. Before I wrap up, I would like to recognize and thank all of our employees for their outstanding efforts every day in working through the industry wide challenges of material shortages and municipal delays. We have a remarkable team that is focused on execution and committed to customer service.
In closing, we are growing into a bigger business that is operating at meaningfully higher margins and generating considerably improved returns. We anticipate a return on equity this year of about 20% and further expansion in 2022 supported by double digit growth in revenues and community count with higher margins as well as our recent share repurchase. I'll now turn the call over to Jeff for the financial review. Jeff?
Thank you, Jeff, and good afternoon, everyone. I I will now review highlights of our financial performance for the 2021 Q3, discuss our current outlook for the Q4 and summarize expected improvements in several 2022 metrics. In the Q3, we produced measurable year over year improvements and nearly all our key metrics, including a 49% increase in housing revenues that drove a 93% expansion in our earnings per diluted share. We also made substantial investments in land and land development to support continued growth and completed a significant share repurchase that among other things will enhance future returns and per share earnings. Our housing revenue is due to $1,460,000,000 for the quarter from $979,000,000 for the prior year period.
This improvement reflected a 35% increase in the number of homes delivered and an 11% rise in their overall average selling price. As Jeff discussed, our current quarter deliveries were tempered by industry wide building material shortages and labor constraints that extended build times in most of our served markets. We anticipate similar challenges will apply to our 4th quarter and have considered these factors in our outlook. Our ending backlog value expanded 89% to over $4,800,000,000 driven by strong increases in each of our 4 regions. Considering our quarter end backlog, the status of our homes under construction and expected construction cycle times.
We anticipate our 4th quarter housing revenues will be in the range of 1.65 to $1,750,000,000 In the Q3, our overall average selling price of homes delivered loans to approximately $427,000 from approximately $385,000 reflecting the strength of the housing market. Q4, we are projecting an overall average selling price of approximately $450,000 which would represent a year over year increase of 9%. Our 3rd quarter homebuilding operating income improved to $169,900,000 as compared to $88,900,000 in the year earlier quarter. 21. Operating income margin increased 270 basis points to 11.6% Including inventory related charges of $6,700,000 in the current quarter $6,900,000 in the year earlier quarter, Q4, we expect our homebuilding operating income margin, excluding the impact of any inventory related charges, will be approximately 11.8% compared to 10.7% in the year earlier quarter.
0.9% for the prior year period. This margin expansion mainly reflecting a favorable selling price segment supported by healthy housing market dynamics and lower amortization of capitalized interest. Excluding inventory related charges, our margin for the quarter was up 140 basis points year over year to 22.0%. Our adjusted housing gross profit margin, which excludes inventory related charges as well as the amortization of previously capitalized interest was 24.5% for the 3rd quarter compared to 23.7% for the same 2020 period. Assuming no inventory related charges, we believe our 4th quarter housing gross profit margin will be in the range of 21.6 to 22%, reflecting the impact of peak lumber prices when our forecasted 4th quarter haul deliveries were started.
Our selling, general and administrative expense ratio of 9.9% for the quarter improved by 110 basis points as compared to 11.0 percent for the 2023rd quarter, primarily due to increased operating leverage, partly offset by higher costs associated with performance based employee compensation plans and additional resources to support growth. As we position our business for growth in 2022 housing revenues, we believe that our 4th quarter SG and A expense ratio will remain roughly the same as the second and third quarters of this year or approximately 10%. This would represent an improvement from 10.3% and the 20 24th quarter. Our effective tax rate for the quarter was approximately 14%, reflecting $24,100,000 of income tax expense net of $21,500,000 of federal energy tax credit. We expect our effective tax rate for the 4th quarter to be approximately 24%, including a small favorable impact from energy tax credits compared to approximately 16% for the year earlier period.
Overall, we reported net income for for the Q3 of $150,100,000 or $1.60 per diluted share compared to $78,400,000 or $0.83 per diluted share for the prior year period. Turning now to community count, Q3 average of 205 decreased 14% from the year earlier quarter. We ended the quarter with 210 communities open for sales as compared to 232 communities at the end of the 2023rd quarter. On a sequential basis, as anticipated, We were up 10 communities from the end of the second quarter. We are planning to achieve continued sequential quarterly increases in our community count through 2022.
We believe our 2021 year end community count will be up slightly from the 3rd quarter, resulting in a high single digit decrease in the average 4th quarter count as compared to the prior year. We invested $779,000,000 in land, land development and fees during the 3rd quarter with $467,000,000 or 60% of the total representing new land acquisitions. In the 1st 3 quarters of this year, Nearly 81,000 lots owned and controlled that we expect to drive a significant number of new community openings and steady growth in community comp. At quarter end, we had total liquidity of over $1,100,000,000 including $350,000,000 of cash and $791,000,000 available under our unsecured revolving credit facility. Approximately $270,000,000 of tendered 7% senior notes due December 15, 2021.
We recognized a $5,100,000 loss on this early redemption of debt in the 3rd quarter. The redemption of all our 7% senior notes, partially offset by the new issuance will result in annualized interest savings In addition, we received a $350,000,000 maturity in September 2022, 7.5 percent senior notes as another opportunity to reduce incurred interest and enhance future gross margins. During the Q3, we repurchased approximately 4,700,000 shares of common stock at a total cost of 188 $200,000 The shares repurchased represented approximately 5% of total outstanding shares and will drive an incremental improvement in our earnings per share and return on equity going forward. $91,000,000 for the 2021 Q4 $93,500,000 for the full year. For 2022, we are forecasting housing revenues of over $7,000,000,000 supported by our anticipated 2021 year end backlog, community count growth and an ongoing strong demand environment throughout next year.
1. We expect approximately 200 new community openings over the next 5 quarters to drive sequential increases in ending community count. Count will be up about 20% year over year and the full year average count will be about 10% higher as compared to 2021. We also believe that gross margin expansion to a level above our guidance for next quarter Further, the anticipated increase in scale combined with a higher operating margin and the benefit of a recent share repurchase to drive a meaningful improvement in return on equity relative to the approximately 20% expected for 2021. In summary, we believe we are well positioned to achieve our targets for both the 2021 Q4 and 2022 fiscal year.
Our forecasted 2021 full year results represent significant improvements across virtually all our key metrics with notable increases in our scale, absorption pace, housing gross margin and operating margin. In addition, we are particularly pleased with the forecasted expansion in our full year return on equity and our anticipated further improvement in 2022. We believe our ongoing focus on accelerating profitable growth and expanding our returns by leveraging our larger scale, attractive inventory profile and uniquely compelling built to order business We will now take your questions. Alex, please open the lines.
Thank you. At this time, we will be conducting a question and answer session. 20 Our first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Yes. Thanks, guys. I appreciate all the color. One of the interesting things that we saw in your results today was the share repurchase and you actually increased your leverage to do it, which is something we haven't seen a lot of the builders do. And so I was
curious as to If you could
give us a sense for where your targeted leverage is going to be over the course of the cycle? And then How do you think that that may trend in the near term?
Sure, C. B. I can take that. When you look at actually if you look at pro form a, our leverage at the end of the quarter, we're actually down 50 basis points from the end of the second quarter. So we paid off the remaining notes that were not tendered subsequent to quarter end and it wasn't Reflected in the actual results.
So we're actually down about 80 basis points as I said. We feel pretty comfortable with our current leverage ratio. We've been down below 40% for some time now and we'll continue to operate the company I think in a range that's appropriate. And we saw the tremendous opportunity I think in the quarter to repurchase some shares and help the future and Really just utilized some excess cash over and above what we needed to grow the business and also at the same time delevered a little bit this year by through that transaction of the refinancing took about $60,000,000 out as a result of the new issuance and the tender and then finally The redemption in September. So that's kind of where it stands right now for us.
But Jeff, are you thinking that like are you saying that around 35% is a level that we should be Expecting for you guys or just simply below 40% is that I mean that's a much higher level than what we've been seeing from the other builders, not that it's a bad level necessarily, but I just wanted to Get a sense for if you could give us a numerical range of where you expect to be sort of to manage the business over the course of the next several years.
Yes. I would say we're comfortable in that 30% to 40% range. And we like I said, we've been down below 40% for a while. We're treating a lot of equity as a result of the high level of earnings that we've had. And as long as we're continuing to produce that equity, I think and with our excess cash, We may see opportunities to do what we just did in this quarter, but for the moment we're pretty comfortable with the capital
Sure. And then second question relates Your margin, obviously strong performance, but your guide here for the 4Q was a little bit lower than we would have liked to have And obviously, you've attributed some of that to lumber and peak lumber running through. I was wondering if you could give us a sense for the magnitude of that and sort of how that How you're expecting the cadence of that to work off or to basically come down? What the reduction in the lumber costs to potentially benefit the next the early part of 2022. And then there was another comment that I think I'm sorry, I missed your question.
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Yes, I missed your question. And because it sounded like that might make it more conducive to doing more spec versus BTO, but I assume that's not what you meant. So just curious if you could elaborate on that.
Steve, that was like 4 questions, pass you into 1. Let me kick the Simplifime product out to Rob. Rob, you want to take that one?
Sure. Thanks, Jeff and Steve. Over the last several months, 18 months or so, we've really been focused on product and process simplification. And in our design studio, we've driven a total SKU reduction of about 48%. And our focus has been on retaining And then on structural options, we've reduced almost 40%.
So our options are generally standardized across our regions and across The country and it's just about removing complexity from the supply chain and simplifying that issue for us and our trades. It also goes all the way to architecture, simplified product design with fewer variations. We're reusing our plans, leveraging standard product series across Our regions and divisions, even getting to the design of the homes themselves, we're standardizing window sizes and cabinet box sizes and garage doors. So just simplifying it for us, for our customer, for our trades and really keying in on those items in the supply chain that are readily available where we can.
Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.
Hey, good afternoon, everyone. Sorry, but Steve took all of my questions. Look, clearly supply chain issues are impacting the entire industry, just kind of Following up on one part of Steve's questions, but in the release or in the prepared comments, you all mentioned partnering with national suppliers You're taking outside of simplifying the offerings and I realize this is kind of a crapshoot at this point, but any guesstimate on when you think you might
Matt, you want to talk about
Sure. And Truman, I would say right now the primary constraint is coming and really be proactive and identify where's the next bottleneck coming from. And we've got various tools and processes in place So we can analyze the capacity of our trade base and then as I said get out in front of it. And an example of this Truman is So far year to date, we have already added a little over 150 new trade partners. So It's visibility on when the all clear is coming is difficult to assess, but We are trying to stay in front of it and with the expansion of our trade base, we think that's one of the best tools we have.
Okay. And then sorry, go ahead.
Well, Truman, I was going to add to that as we look at things. Where we got caught in the Q3 was in what I would call the second half of production, cabinets, windows, Whatnot and that's what we're working on trying to compress today. We actually feel we've stabilized Our build times in foundations and frames and into mechanicals where we've addressed all the moving parts and we've expanded the base. We think we have that covered and where we're still holding back as we don't know what we haven't even had to deal with yet because these things are popping up on a weekly basis and it's varied from city to city. But so we think we've stabilized the first half and the second half of the production cycle Is what Matt is talking about addressing right now.
Okay. Okay. And then in the press release, you all Mentioned, continued expansion of margins in 2022. I didn't hear it in the prepared remarks. Was that alluding to gross margin or op margin or both?
It's actually both. And just coming back, I guess, So a little bit of Steve's question on cadence and trajectory. We do see the Q4 is having our peak lumber impact and inclusive in that. We did lose a little bit in the Q4 We're certainly and clearly seeing improving margins both in our selling gross margins. So on a week to week basis, trajectory into next year.
And while we're not providing specific guidance on it, we did reference in the prepared remarks That we see our margin next year clearly in excess of our 4th quarter guide. And I think we'll see a very strong margin performance Basically cascading down in the operating margin and then impacting return on equity in a very favorable way in 2022.
Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good afternoon, everyone. Thanks for taking the questions. Can I pick back up on a prior comment, Jeff, you just made about The challenges with the second half of the production cycle? I want to ask about the other side of that, the start pace in the first half, I guess. So Relative to the challenges in closings and I don't know presumably getting communities open across the country, is your ability to put Starts in the ground and given your business model, therefore, driving sales, is that less impacted Relative to the other challenges that are simply driving cycle times longer or should we assume that your start pace Could slow further as well related to the same challenges.
Thank you.
Yes. Matt, I think we've done a pretty good job navigating The environment to getting the starts and first getting the permits pulled and then getting the starts. And if you look back Over the last 12 months on a rolling twelve basis, we started about 17,000 homes, which is within a couple of 100 of what we sold. So we're pacing our sales and our In January, February, March, it was framer issues. We've addressed those and we're continuing to push it along.
So we don't expect and the increased issues relative to starts. And I also think we did very well in the quarter on the community openings. We hit right on top of the number we projected at the beginning of the Q3. So the over 40 openings we had was a great result and as part of the confidence we have in our community count guide going forward.
That's actually a perfect segue. Thank you for that, Jeff. I wanted to ask about communities just because you did have the one peer this week speaking about Certain challenges in municipalities and sort of the cascading effect of supply chain on just getting communities open. And I think you gave the number at the top around 200 openings to come. I'm just curious, it's really just Following up on the last point, but your confidence around that 200 given challenges in getting communities opening.
And And I guess the second part of that if there's any regional bias for that as we model it out. Thank you.
Yes. The community openings are broad based and I wouldn't target any one part of the country as being more difficult than others. I think a A simple comment towards it as we've already taken the hits for the delays in our community openings as this year unfolded. So We're past a lot of the delays and it's into the blocking and tackling and it influenced our guide and our confidence where we're headed next year. And I wanted to throw the actual number out because we've observed that strategically we want to grow community count a minimum of 10% a year, but with where the number is ending this year, we wanted
to make
sure that this group understood that it's much more than 10% next year. In fact, we're looking at 20%.
Thank you. Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey guys, good afternoon. Thanks for taking my questions and Rob congratulations on the promotion. Nice to hear you on the call. Jeff, maybe the first question just to clarify on the margin comments. I think the it's helpful to remind everybody just the accounting nuance for you guys with some of those fixed expenses that flow through your COGS because I think that does explain maybe some of the shift in guidance for 4Q.
Can you just remind us What is that rough dollar amount that flows through your cost of goods sold line every quarter? And would you expect that to increase in 'twenty two based on your expected community count growth?
Right. It has increased a bit in 2021 as we've put more resources towards some of the functions within that fixed cost. I think in the Q3, it's right around $38,000,000 And to your point, yes, with lower revenues, as I mentioned earlier, you take a leverage hit
Got it. That's helpful, Jeff. Thanks for that update. 2nd, the $7,000,000,000 plus revenue guide for next year, I'm curious, first off, what does that assume for cycle times? Does it assume stability from this current level That's extended a bit here.
And
add on
to that one, I can. Obviously, it sounds like the start pace is keeping up with orders. Just given the challenges that you're seeing throughout the supply chain and the elongation there, is there any consideration To maybe more significantly slowing that pace of order activity, 6 to 7 sales per community is incredibly strong and obviously the demand There for it, but a lot of your peers have maybe been a little bit more forceful in bringing that sales pace down recently. So I'm curious if there's any consideration to that just to allow Thanks to kind of catch up a little bit.
If we saw signs of further blockage It's for price, but as we look at things today, we're now planning for a longer build time. It's extended and we get It's baked into our projections and our assumptions and we have a pretty nice rhythm right now where we're selling homes, starting homes, Getting them now through foundation and frame and we're heading into the second half on a lot of the backlog, so We'll see, but right now we think we're in a pretty good balance. You don't want to have backlog that you can't get built because Your buyers get irritated with that too and we're very sensitive to the customer along the way. So if we feel we're putting our customer risk, we're not going to do that.
Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.
Thank you. Good afternoon, everyone. My first question is just following up on the cost side of things and inflation. I know you mentioned that you expect peak lumber to roll through in the fiscal Q4. But can you talk to when we should effect, the deflation in lumber to start to come through and how you're thinking about inflation in other building product categories that could potentially somewhat offset that?
Right. Well, the way we lock our costs on starts, Any inflation we're seeing in the various cost categories are really more affecting future sales and future backlog as opposed to what we may deliver out, for example, in the 1st or second quarter of next year. So, on balance, What we've been seeing is numbers been tapering off is some pretty significant improvement in the cost side of things, leading to obviously higher gross margins in the backlog on a go forward basis. I don't have a crystal ball, so I'm not exactly sure where Q1. 1st or second quarter input costs are going, their labor costs are going, but given the trends that we've seen on the pricing side and even if we maintain Even just a bit of pricing power, I think we'll be able to more than offset any future increases we see again with the assumption that the favorable trend It's got some really good news, I think, for our margins out in the next year.
And given that we've locked a lot of those costs for Regional region first half of next year with feeling pretty good about direction of where margins are headed.
Okay. That's helpful. And then my follow-up question is around pricing. You guided to about 450,000 for the Q4, which is up, I think about 9% or so versus last year. I know you mentioned in your comments that you're seeing a buyer with a higher FICO score.
It sounds like Overall, they're in better financial position. Can you just talk to how you're thinking about pricing, the ability to continue to get that in your various markets and anything that's kind of changing on the round around the buyers' receptivity to pricing.
Yes. Well, Susan, as you know, every community in every city will have A little bit different story relative to inventory on the ground and there really isn't any and job growth and population growth and whatnot. If you think of our buyer profile, the first time buyer predominantly and yes, they're putting 60,000 down on their home And they have a FICO score of 737. That's the strongest buyer profile I've ever seen in a first time buyer business. Very strong buying power out there if you will.
And the first thing that we would see If we push price too far and we haven't seen anything like that yet, it would be keep in mind we're built to order so the buyer would shift to a little bit smaller home. They still want a 4 bedroom, they still want it in that neighborhood and they might may say that size home is too high now and I'll come down here or if I don't want to come down here, I won't buy it all. But we're not seeing anything like that at all today. And if you think about the discussion we're having on the supply chain blockage. It's really making the inventory situation worse for the consumer, not better.
Our industry is way behind in the number of homes we've built versus what demographics and demand would support. And you have this restriction now on homes being built because of the supply chain blockage. So we don't think you're going There's so much demand for the limited supply. We don't think you're going to see for a while a customer that says we can't afford We're seeing no signs today. It's a very strong environment out there.
Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Hi, this is Maggie on buyers credit profiles remain strong and you're saying that affordability hasn't really been an issue to this Have you seen any shift in kind of buyer preferences as a result of the recent price appreciation. I think last quarter you said that you hadn't really seen any buyers adjusting The size of the home, but I'm curious if there's any update there.
There was no movement at all in the size of the home and The spend in the studio actually went up a little bit per unit, incrementally $1,000 So the buyers They're even the same as they were last quarter and the quarter before.
Got it. Thank you. And maybe asking kind of an earlier question in a little bit different of a way. You talked about the share repurchase this quarter and you talked about kind of where you're comfortable going forward from a leverage perspective. But can you elaborate a little on the potential for share repurchase to become a more regular tool that's used.
Yes. If you go back to Jeff's comments to A previous question, what we did in the quarter was take some excess cash that we had and apply it to share repurchases. We spent over $700,000,000 on Land Act and Development, so that would reinforce the first and foremost for all of our growth. And as we look ahead, Our top priority will continue to be to support profitable growth trajectory and improve our return and we also know our leverage ratio will continue to get better as we grow profits and that will lower your ratio on its own. So 1st and foremost, we'll be looking at growing the company.
If at some point we again determine we have excess cash, we'll evaluate What to do with it at that time.
Thank you. Our next question comes from the line of Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
Hi, good afternoon. I thought the order pace was pretty good. Thanks for that. I don't know if I heard you talk about this, so I apologize if I'm asking this, but When do you think your supply chain challenges stabilize, I. E, you're calling for 11% lower delivery in Q4, Do you think much of those much of the known supply chain issues impact your Q4 the more most or would early part of 2022 also see some strong headwinds there.
Well, Deepa, as We shared in our comments, we think we stabilized the early parts of the construction cycle. There's still a lot of variables and and unknowns on the finish side. While we stabilize it, it is at an extended timeframe. So we're now Navigating more soon than our guide and our projection that build times don't get worse, But also don't get better. I think everybody will have their own crystal ball on how we work through it and we will work through it, but It's going to take some time to get back to where we used to be.
Okay, that's fair. You talked through some product challenges you've faced and you brought you talked about windows and cabinets. Are there any issues we should think would get start to ease fast this quarter.
It's hard to answer. If you'd have asked me On our last call, whether I thought we'd lose a couple more weeks, I would have said no, because we already thought that it extended it Pretty significant from Q1 to Q2. And we're seeing good signs in some areas, but there's still a lot of unknowns. So I don't know that we're prepared to say things are going to get better right away and we're hopeful we've taken steps to stabilize and we'll see how it goes over the next couple of quarters.
Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.
Hi. Thanks for taking my questions on the call so far. First, I just wanted to circle back Sorry to beat the horse a little on the 4th quarter margin, but just maybe asking again on the impact of lumber and I guess Taking kind of a sequential approach, if we look at your, guide for ASP, you're up up that much q on q. So with revenue per square foot up the way it is, can you just help us understand again, I mean sequentially, I don't know if the fixed cost is really as much of a sequential driver, but just the exact impact of lumber That's impacting you guys and offsetting that improvement in revenues.
Well, Mike, like I said to give you an exact Pam, it's a little bit difficult. I mean, there's been a lot of mix shift between the quarters and we're not showing the same product obviously in the 4th quarter as we did in the 3rd. The margins are Related to those homes that we expect to complete and deliver in the Q4, when we started those homes, we were at peak number pricing. And This is much an indication that we feel that we wanted to give everyone about where things are heading beyond the 4th quarter as much As it is about specifically for that Q4 guide, when we guide the quarters, particularly in a short period, We guided delivery by delivery. We roll up from the bottom up.
We lost a lot of deliveries due to these construction delays and supply chain challenges and there was a bit of mix impact in there as well and anything that we lost in the 4th quarter is coming back to this early part of next year. So we're very optimistic about margin expansion on a go forward basis and not only gross margin expansion, but operating margin as well with the higher revenue guide for next year. So beyond that, I don't really want to get into quarter by quarter sequentially in 2022 or any details out into that type range will bubble back up in January when we're We wanted to give an indication of what we're seeing because the numbers are so strong within our backlog and within our selling gross margins that Yes, I appreciate that. And
it makes sense in terms of just looking at Going to next year with we are already about 75% of what you're projecting in revenues already in backlog, which Should look pretty strong on the margin side, so that all makes sense. I guess the second question, just The paid side of the equation, when you're looking at getting to you're turning over I think you're turning over If you're opening 200 communities and ending next year at 260, you've got like 75% community turnover. Anything you can share in terms of whether the pace expectations for new community openings Are still for roughly similar in terms of the mix or is there a different any sort of difference in What you'd direct us towards in terms of pace as you look out at next year and what you've got coming online.
Mike, the 200 is over 5 quarters, not 4. So it's not a 1 year term, it's a little more than that. In the prepared comments what we were talking about is not just where we think we'll be at the end of 'twenty two, we're positioning the business to continue to grow our community count beyond that into 'twenty three. So we have Everything owned for 'twenty two, most of everything owned and all controlled for 'twenty three. So we're comfortable with the guide And we like how we're positioned finally with our community count trajectory.
Right. And I'd just add to that, Mike. When you look at current pace and And what we've seen over the last year and as we're projecting forward, there's 2 things happening. 1, a lot of the new communities, obviously, we've just replenished a Our community, so we have a lot more lots going forward. And we're actually projecting fewer closeouts in next year that we had in 2021, which is helping us to grow that count.
And it's not because we're projecting absorption pace being off that much. The pace assumptions there are still very strong going into next year. It's just a function of how many lots we have left going into the year and The large number of openings that we had in 2021, not to mention the new openings next year. I think we're pretty well aligned. This year caught us by surprise.
I think it caught a lot of people by surprise with the accelerated pace and a lot more closeouts than any of us anticipated, but that's good news. For me, if you're closing out a lot of communities and those units and those lots are going from available in communities into our backlog. That takes some risk off next year and it supports the top line and And the delivery numbers, and I think that's great. While you have some pressure on community count as a result of that, I'd rather see the pressure there than the pressure on having to sell to fill that revenue expectations. So we're in great shape heading into not only the Q4, but particularly
Question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.
Hey, thanks for taking my questions. The first one, pretty impressive decline in the cancellation rate. Just wondering, with the cancels that you are getting, What's the reasoning behind that? Jay, it's a mixed bag. It's somebody that got transferred, somebody gets divorced Occasionally buyer remorse, we're not seeing too much of that.
We do a pretty good job of screening the buyer before we report sale, we get a pre call. So we're having very little loan issues as well. So it's a mixed Bag that's a small number at the end of the day. All right, understood. And then the second question, you talked earlier in the All about having the front half of the build cycle completed and now you're working on the back half.
Just wondering if that also includes Getting your final inspections or COs, etcetera. What type of issues are you seeing on the municipal side? And Are those issues improving versus where they were earlier this year? Yes. Rob, do you want to talk to the inspection side and what we're seeing?
Yeah, sure, Jeff.
Jay, it's one of the biggest issues we're seeing on the inspection side on the back end is just COVID and the Delta variant. That's where we're getting the surprises. Without those surprises, it's running Fairly smooth and most of the divisions have strong relationships with the people in our municipalities and we're able to navigate that pretty smoothly where we see some hiccups or when a group of inspectors or even a single inspector may have an exposure and they get sent home
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