Good morning, everyone, and thanks for joining us today for the 2023 UBS Global Industrials and Transportation Conference. I'm John Lovallo. I'm the Senior U.S. Homebuilding and Building Products Equity Research Analyst here at UBS. We are very happy to have PulteGroup with us today. Jim Zeumer, to my right here, he's the VP of IR and Corporate Communications. As most of you know, Pulte is the third largest home builder in the U.S., with very high quality brands, including Pulte Homes, Del Webb, Centex, American West, to name a few. With that, Jim, thanks. Thanks for coming. Appreciate it.
Appreciate the opportunity.
The housing market, home buyers in general, have been, you know, pretty resilient so far this year. What do you think is kind of the driving force behind this resilience that we've seen?
I think at the end of the day, it tells you that people wanna buy homes. They desire homeownership. I mean, I've been with Pulte since 97. I go all the way back to, you know, the Great Recession in 2008, where you couldn't give away a home. That's not what we have today. People want homeownership. Excuse me, rental rates are high, you know, they've continued to increase. I appreciate that they've pulled back a little bit, but people like the certainty. What has happened is, builders, through incentive programs, things like that, by putting more spec available that people can get into quickly, they've simply found or helped solve affordability for the consumer. You know, if you go on... You mentioned one of our brands, Pulte Homes.
If you go on our Pulte Homes website, the first thing you're gonna see is a 30-year fixed- rate mortgage at 4.99%. I think at that point in time, consumers are saying, "You know what? This is a rate that works for me." We talked about on our Q1 call, you know, as we went through the quarter, our absorption paces, our sales paces were very reminiscent and consistent with what we had in 2019 and before. I referenced those years simply as pre-pandemic and when things got a little bit crazy, if you will.
I think what we're getting back to is just much more of a normal environment, where, you know, people want homeownership, we've got population growth, we've got immigration into this country, and the builders, ourselves included, are finding ways to help find or solve for affordability for those consumers.
That makes a lot of sense. You know, if we think about the dynamic that's out there today, it seems very interesting where, you know, think about on the existing home side, there's incredibly low inventory, below three months supply. On the private builder side, you know, there's arguably some of the smaller builders having challenges getting financing. To your point, the public builders can offer, you know, financing terms, given their captive finance arms. It feels like while demand may have slowed to some extent relative to, you know, a really robust couple of years, all that demand that's out there is sort of being funneled towards this group of public builders. How do you see this translating in terms of the opportunity for market share gains for companies like Pulte?
I think more the fundamental piece of this thing right now is we have a land supply, that we control roughly 200,000 lots, between half-owned, half under option, which puts us in a position to serve the consumer. You know, first and foremost, in this industry, if you don't have a lot, you don't have a house, and that's just the realities of it. You know, there is certainly less inventory available on the existing home side, and that's important because that's our biggest competitor. I mean, at the end of the day, it used to be 10 to one, and now it's five to one .
Right
... in terms of, you know, the volumes that transactions are taking place in. I think we're certainly beneficiaries of that. Over the near term, including, you know, what we've experienced so far, I think the smaller builders, their challenges may be ahead of them with regard to their ability to get lots, for their developers to feed them lots. They're certainly making homes available, but I think we are in a fortunate position in that we are grabbing, we are gaining some market share to the degree that we can continue to control lots going forward, which is where I think some of the other builders or the smaller builders are going to struggle. I think the opportunity is certainly there for us to continue to do that. It's not a goal unto itself.
It's simply that over time, our desire is to be bigger within the markets that we serve, and we're finding that opportunity.
Yeah, makes sense. We talked about rates and the ability to sort of buy them down. If you look out in the market today, the headline rate has bounced around quite a bit, but it's again closer to 7%. Do you think that the consumer out there today is going to balk at that? I mean, we've seen fluctuations from 7 back, you know, down again and back up again. I think, you know, late November or November was when the first time we saw that 7% spike, came down. March, we saw it again. Has the consumer adjusted, I guess, is the question?
Yeah, I think there's a big difference between when interest rates move between six and seven, and they move from three to six .
Yeah.
You know, 2022 was just a whole different experience. You know, we are, the reality is that we got through our spring selling season, and that was important, you know, without a lot of rate anxiety or anything like that. I think the consumer today, if they go into... You know, they've been shopping for a home, they went in, you know, a month ago and then they saw a price and a mortgage rate, and they got to a monthly payment of X. They're gonna go in, and they're gonna see a higher payment. It's not gonna be the startling price differential.
Right
... that they saw last year. The reality is that we're gonna be able to sit there and say, "Yeah, we appreciate what's going on, but at the end of the day, we still have an opportunity to get you into a home at a 5% mortgage rate," or where the consumer, excuse me, our experience and what I've heard from a couple of the other, like a Zonda or a John Burns, who've been talking about that sweet spot, kind of like a 5.5%, which is very consistent with what we, 5.5% mortgage rate, which is very consistent with what we've been seeing in that, you know, we would offer a 5, and the consumer would say, "I don't need you to get me to five.
Get me to 5.5%, and let me utilize the additional dollars to help on my closing costs," or, "I want the upgraded flooring," or, "I want better cabinets or countertops," or something like that. I mean, the movement up above may not be as startling to people or as concerning to people. Again, there will be buyers who, at 6%, the answer was yes, and at 7%, the answer is going to be no. I mean, that's just the reality of it. Again, I think the movement is a more manageable span at 100 basis points, as opposed to 300 to 350 basis points.
Yep, makes sense. You know, aside from the rate buydowns, which seemingly have been most popular among, you know, with Pulte and in peers, what are some of the other things that you guys are doing to kind of make the math work for folks?
There are various incentives, but at the end of the day, it's how are you improving their price? We've got some buyers, probably more so in the move-up category, who basically say: Look, I don't need your incentive. Excuse me. I don't want your rate incentive. Give it to me in price. They've been through this a couple times before. They've bought and sold homes, and their expectation is, "I will be able to refinance lower.
Right.
I'll come back in a year," or whenever the number is, "and I'll be able to get it down, so I get the best of both worlds. Give me the lower price. Give me those types of things." Everybody has their different hot buttons.
Yeah.
I mean, 25% of our business are active adults through our Del Webb brand. That's a buyer. 40% of those buyers buy for cash.
Right.
You know, they're looking for something else. I want the better lot. Can I get that? Well, the lot premium is $100,000. Maybe we can do it for $75,000 or something. There's different hot buttons, but again, as you mentioned earlier, so far, the rate buydown has been the biggest driver.
If we think about incentives in general, maybe specifically to the rate buydowns, how sticky do you think these will be? Let's say rates, the headline rate, were to pull back closer to 6%, I mean, would you anticipate the market pulling back even further on the incentives? Or do you think that buyers are gonna say, "Hey, you know, you guys were willing to sort of buy us down before?
Yeah, every time, whatever the number is, six or eight weeks, you come through an entire new group of buyers who didn't know what was there before. We talked about on our Q1 call, we've actually started to find opportunities to pull back a little bit on incentives to, you know, push price a little, and I want to emphasize the word little.
Right.
It might be $500, it might be $1,000, and it's as much psychological as it is financial in terms of, you know, what it's doing for us with the consumer. No, I don't think incentives are permanent. The reality is, what we would prefer to do, and it's one of the things, we would like to have fewer incentives and would just get to what the clearing price is. Make up a scenario where you're advertising $400,000, but you've got $10,000 worth of incentives or $20,000.
Right.
Really, the clearing price is $380. You get to the next community, you're probably going to start at $380 and have 0 incentives, in effect, because it's a better selling position than to try to. How do you minimize the bring down? How do I maximize the increase on the other side? No, I don't think incentives conceptually are required. It's more just finding the appropriate clearing price.
Yeah. Okay. That's helpful. you know, one of the big concerns coming into the year was home prices, and, you know, there was a view out there that they could fall pretty dramatically. That's held up pretty well so far. how does Pulte think about home prices across its major markets and, you know, nationwide? I mean, how do you think the resilience of home prices will continue?
It's a simple question. It's a complicated answer.
Yeah.
Tell me what the economy's gonna do, tell me what the recession's gonna look like, tell me what the Feds are going to do. You know, the reality is, when you look at price, when you look at incentives, I mean, they've held up. Go back to where we were at the peak, kind of mid-2022.
Yeah
... and our prices have come in. I mean, the industry's prices have come in. I think you could look at most metrics and, you know, people who look across all the builders or just look across the space in total, you can see numbers that are 10%.
Mm-hmm
... I mean, in totality. Prices have adjusted, and whether it's price or incentive, I'm just kind of using them for the most part interchangeably. That's what's enabled buyers to continue to be in the marketplace. As we get into today, you know, again, I think the resilience of the buyer just demonstrates their desire for homeownership and the limited inventory, as you talked about.
Right
... of existing housing stock. There was a lot of concern when people say, "Oh, when rates rise, nobody's gonna be able to buy a house." what's really has happened is rates have risen and nobody's selling a house.
Right
... which for us, then it's been okay.
Yeah. Okay. Then let's maybe translate that, the effect there on to land prices. Land prices have also been pretty resilient. If we couple that with our earlier conversation, where maybe there's some stress coming in at some point for some of the smaller private builders, I mean, has Pulte seen any sort of, you know, discounted or distressed opportunities for land in the market?
No.
Yeah.
I'll expand on it a little bit.
Yeah
I mean, that's just reality. Really haven't. You, we walked around, walked away from, I think it was north of 60,000 lots that we had under option last year. Other builders did the same. You've seen some of those deals that maybe have come back around. It was originally with this builder, and now it's come back around, and maybe there's some opportunity. Probably been more around time. We don't need this June 1st, because sales were a little bit slower. We need it January 1st of 2024, because sitting on our balance sheet doing nothing is incredible killer of return, and that's what we focus on. You've seen some opportunities, then been the one-off deals where, yeah, somebody walked away from it's being shopped around.
There's a note attached to it that they've got to pay off. Not enough really to move the needle.
Yep.
It is more opportunistic. You roll into 2023, and everybody heard the builders say, "Yeah, you know what? Q1 was better than what we thought." The land sellers are they're like my German shepherd. Their ears perk up and their head tilts over and goes, "Oh, wait, what?" All of a sudden, if you think that price was going down, now they're just drumming their fingers going, "We'll wait.
Right.
It'll be the... That will be the challenge. You know, we own what we own for 2023, and it's not just Pulte, it's the industry. We've got most of 2024. The question will be for builders who have a shorter land pipeline, what do they do if prices don't come in on the land side? Their selling prices have come down. How do you make the math work? I think this is where you'll get some of the interesting dynamics in this industry as people look out over the horizon and try to figure out: How do I solve for late 2024, 2025, and beyond? Yep.
Okay, makes sense. Let's talk about cycle times for a minute. How are they looking? Any improvement, and maybe, you know, where are the bottlenecks right now?
Just for perspective, pre-pandemic, if asked, we would've said our cycle time was about 90 days. Peaked out at north of 170, borderline doubled because of supply chain disruptions and other challenges. As we got through Q1, I think we would probably have quoted you a number that says we're certainly below 170, probably getting back towards 160. We've picked up a couple weeks, and would tell you that supply chain, for the most part, is functioning well, and I mean, specific to materials. We can talk about labor separately, but from a materials standpoint, there are a couple bottlenecks on some specific electrical components, transformers-
Mm-hmm.
The multi-unit meter boxes that go into condos and townhomes and things like that, their lead times are just. They're 12 months or longer type of a thing. If you have not ordered that appropriately, you can run into an issue. For the most part, on the material side, you can get it, you can get it in a reasonable span of time. You can get what you order. You know, for a period of time there, you ordered 100, and you could get 80.
Right.
I think generally, the supply chain is functioning well. The question, we think about is if, is it in part because we're just asking it to do less?
Yep.
Now, if business does start to accelerate from here, and now instead of asking for 100, everybody asks for 120, can it keep up with it? There's nothing structurally there that says it can't. There's nothing. You know, one of the issues, for example, with windows in the pandemic, you just had there were no people in the plant. Everybody was at home, and those, so those things aren't coming back. I think we're pretty optimistic that that piece can continue to serve the market. You know, labor's a little bit tight. Labor has been, will continue to be a little bit tight. The demographics and the population just seems to be dictating that. So we'll have to see if they can rebuild their crews and everything.
Generally, as I said, our cycle times are getting shorter. We won't get back to 90 days in 2023. We think we can make some progress in it, but now we'll start talking about can we get there in 2024?
Yep.
The opportunities for us, primarily, more particularly on the cash flow side, and we've got probably in excess of $1 billion hung up in excess WIP that won't need to be there if we can get our cycle times down.
Yep, that makes sense. Okay. All right, let's talk a little bit more specifically about Pulte. You guys have talked about sort of a reversion to the mean in regards to the spread between, you know, your entry-level, active adult, and sort of move-up. I think you alluded to the fact that it was, you know, maybe more of a entry-level kind of coming back down. Maybe help us with the dynamics with each of those segments. What do the margin profiles look for them, and, you know, how has that changed?
Sure. Again, reference point being pre-pandemic, we could see 100, 150, 200 basis points between first-time and move-up on gross margin. Then you could see another 150 to 200 basis points between move-up and active adult, so this could be a pretty big spread. While people tend to focus on gross margin, we focus on return. You can certainly generate appropriate returns, you know, in a first-time buyer, or a first-time community, what you would typically see is smaller gross margins, faster absorption pace.
Sure.
Certainly can pencil to great returns. As you moved up the price point, you were probably gonna get a little bit less volume, but you got better gross margins, again, could drive great returns. What happened during, you know, the great run-up in pricing, you know, if you were a spec builder first time oriented, you were holding your spec to the very end until it was completed, and maybe a day or two after that, and then you would be able to sell, and you saw everybody's, you know, margins accelerate. Now what you're starting to see is more typical, at least what we started to see in the quarter, where you're starting to see, yeah, your first time margins are not quite as good, but your absorption paces are fine. You're starting to see...
When we said that we're starting to see a little bit of a spread, it was like, "Oh, is everything going up?" It's no, it's just you're starting to see first-time come back in a little bit, and that's fine. I mean, that's traditionally how you would have expected it to operate. It's one of the reasons why, at Pulte, we do focus on serving multiple buyer segments. You know, 40% of our business is first-time, but there's 60% of our business, then that's move-up and active adult, you know, 35% move-up to 25% active adult. That just generates better gross margins for us. I think, you know, prior to the pandemic, we were 200-300 basis points higher on gross margin than most of the peer set.
You know, I think you've seen some of that separation and seen some of that spread reappear again.
Yeah. Yeah, for sure. Okay, then, you know, some of the Western markets, seems like there's still a little bit of a demand challenge across some of the markets. Maybe talk about Pulte's presence there, where they're seeing any, you know, any challenges. In those markets that are perhaps a little bit more challenged, are you seeing any signs of stabilization?
I don't think there's a demand challenge. I think there's a price challenge, is what the issue is, because people still want to buy houses.
Yeah.
Yeah. You know, our west part of the business would be kind of Arizona, Nevada, New Mexico, and then go all the way over to the West Coast with California, Oregon, Washington. I think you've seen some improvement in kind of the Arizonas and the Nevadas of the world, where You've certainly had price volatility, but the absolute price is just very different.
Mm-hmm.
You still have challenges in places, tech-heavy markets, Bay Area, Seattle. I would even bring that down just specifically to Austin, which is another tech-heavy area, which saw a tremendous run up in those markets, and particularly in California, Oregon, and Washington, where land availability is just so tight, and it just exacerbates things when demand gets strong and everything runs back up. I think we're still kind of in the discovery mode. I think most of the way through it in places, like Arizona and Nevada, but we're still, you know, still finding our way through it in Seattle.
Right
... and Portland. Again, I think people still want to buy houses. It's just, you have to figure out an affordability equation for them on a price point that's probably averaging $1 million for a first-time buyer product.
Yeah. Okay. If we think about just that demand piece in general, broadly, how would you characterize demand as it kind of, we progress through the Q1 ? I mean, did you see gradual improvement over the, you know, any standout months? Anything you can give us on the progression past the Q1 , if you can?
I can give you the past the Q1 by three weeks, because that's where we reported our earnings, and that's about it.
Yeah.
No, we saw, as I said, we saw a pretty normal, seasonal build. Each month got better than the month before. Our absorption paces in terms of on a per community by month, borderline spot on what we had been doing pre-pandemic, and that's why I said it felt kind of like a normal market. Continued to see strength in through April, again, consistent with what you would see in a normal seasonal market. Then you've certainly had other builders who've come out and said, "Yeah, it's continued." I think we all operate plus or minus in the same environment.
Yeah. Okay. Then going back to the, your earlier comment, about 40% is Centex, 60%, some of the, you know, the move up in other brands. If we look about how those groups kind of performed in the Q1 , I think, you know, the first-time was up 18%, active adult was and, active adult was around 20%.
Yeah.
Yeah, something like that. Does that make the case where spec or Centex, in general, will become a bigger part of the business? Is it just kind of, you're going to move with where the market's going?
I think what it reflects is that Centex in Q1 or first time in Q1, more community count, and it's where our spec inventory is, and to the degree that consumers were focused on buying it, that's what you're seeing.
Mm-hmm.
We've stated for a number of years, we wanted Centex to be about 40% of the business. Ryan Marshall became CEO, 2016, I think. We were, at that point in time, I think we were about 30% first-time and just said, "Look, if we look at the market, the market in totality, including existing, about 40% for first-time." That's what we moved to. In any given quarter, could it be 43? Could it be 39? Yeah, it'll bounce around a little bit, but strategically, you know, we will be looking for that to stay ± around 40% of our business. On a go-forward basis, it will be spec.
You know, when you're there, trying to find a price point for that consumer, how do you, how do you get to that lowest or how do you drive efficiency? Standardized product offering, limited option, you know.
Mm-hmm
... and you're kind of line building. You start at lot one, and you just work your way down the street as a way to drive affordability for that consumer. You have one or two options to let people personalize it, but on a go-forward basis, it'll be spec for us. Generally, I would tell you the market was, you know, across all the buyer segments, while I appreciate they were down, it felt pretty good.
Yeah. Okay. let's talk about the cancellation rate. Seems like stabilizing, which is a very good thing. How would you characterize sort of the health of the backlog, if you will? I mean, does the backlog feel pretty good at this point?
It does. You know, what you saw as you got through 2022, you had people who, especially because you put the combination of really long build times and rising interest rates. You bought a house in March, and you signed a contract, and your rate was three and a quarter. By the time you closed, and it was November...
Right.
The rate was looking at 6.25% or higher, all of a sudden. You knew what was happening. You were just hoping you could figure out something, and you'd work with the builder, and you'd try to get it to close, and what you saw was they couldn't. You saw a big cycling through, which drove the high cancellation rate, and it's, you know, as most people calculate, the cancellation rate against, you know, it's against the sign-ups. You had big backlog cancellations. You had limited sign-up pace out in front.
I think as we got through that, you see, you've cycled through all those people, and now if you're buying a home, you're, you know, the rate that you're seeing today is gonna probably be plus or minus what you're gonna see when you get to closing. I think you would expect a lot more stability as you.
Yeah.
you know, as you move forward.
Okay. That makes sense. You guys took the production potential outlook from 25,000 up to 27,000-28,000 homes. How much of this is attributable to more specs? How much is it attributable to just improvements in cycle times? I mean, how would you kind of frame that?
D, all the above. It was. You know, we sold more houses than we had anticipated. We had put more starts in the ground in response to that. We saw an improvement in cycle time. If you just think about it, you know, at a production run rate of when we first said 25,000, a month is 2,000 closings. I mean.
Right
it's meaningful. The combination of a good start to the year, our you know, our willingness to put starts into the ground and then the improving cycle times. The reality is, though, it's kind of... People always, because we get, you know, "Oh, is that your capacity?" The answer is no, we can build more houses, but at a six-month build cycle, it's kind of what you get in the ground by the end of this month is what's going to be available.
That's why we tried to put some information out there, which is a little bit different than how we've rephrased it before, which is this is the universe of delivery that we could have, based upon the idea that we still have to sell some houses, and we know what our start cadence is, and we think this is what we'll be able to deliver. You know, this is what we'll start, anything that gets started after July, excuse me, after July-ish, July one-ish, that's a 2024 delivery, unless we continue to see improvement in cycle times.
Yeah. Okay. you know, one of the things I think that is, of many that separate Pulte, is sort of what we think is a, is a forward-looking view on an acquisition you made for an off-site construction acquisition that you made. And I, and I think, I guess the question is: labor is clearly tight. Doesn't seem to be a real solution there. There's been a lot of supply chain challenges. You know, it's still continuing to this day. I mean, where does Pulte see off-site construction going over, you know, over the next five, 10 years?
I can see. Tell you what we see it for us. Ideally, you know, in an end state, we would have probably eight of these plants. Understand, ICG is the platform. We bought it in Jacksonville. We opened up Jacksonville, Florida. We opened up a new plant in Florence, South Carolina. We've actually struggled. It was interesting, one of the dynamics you saw, because everybody had to order everything from Amazon. Every inch of warehouse space across this country was being bought up for exactly that, for warehouse. There are some specific things we need in terms of a rail spur and stuff like that to be able to bring in train carload, loads of material.
It made it really, really hard to find new plants. Within the plants, initially, it is wall panels, roof trusses, and floor cassettes. If you think of the shell of a home, we've got some longer-term opportunities, but right now that's the focus of it. Ideally, we'd have about 8 of these plants being able to service about 70% of our business, improve construction cycle times, better quality. I mean, you're talking about automated equipment, you know, laser-guided everything, reduce waste, and just greater overall production efficiency. These plants, we actually will sell to other builders at points in time, as a way to kind of level load the plant. There are...
You know, one of the challenges we ran into before, because we've been in plant production before, is in a cyclical industry, how do you size the plant? If you're willing to sell to other builders, the idea is we can, you know, make up the numbers. At 2,000 units of capacity, we could take all 2,000. We can take 1,500 and sell 500 and those types of things. You can kind of continue to make sure you're running the plant efficiently. When you look out over time, and again, it's not meant to be disrespectful to anyone, there aren't a lot of millennials who want to come into the construction industry.
That's right.
There's a mismatch because, like, you know, you historically, you could help solve this with immigration, we can't figure this out. We've got people who want to work, and we won't let them, we have people who don't want to work when we need them. At the end of the day, how do we build more houses going forward? with a workforce that doesn't seem to be moving into that part of the business, that's what we're trying to solve for.
Would the goal ultimately be to be able to service you closer to 100% of the volume?
We won't get to 100% of our volume. If you think about production, manufacturing, whether it's cars or houses, you want long runs of standardized production going through it. One of the pieces that probably goes under the radar a little bit, to get to off-site manufacturing, we spent a lot of years coming out of the Great Recession, skinnying down our product portfolio. You reduce the number of floor plans as you build, optimize those floor plans for material content and ease of constructability, and then you just build them a lot. You know, we delivered probably 80% of our volume last year from about 500, what we call commonly managed floor plans.
You have to do all that work to enable the plant, because if you think you're just gonna run unlimited variation, it's gonna blow up your plant. There are parts of our business, particularly in the Bay Area, in D.C., things or in New England, a lot more attached, a little bit more less standardized because it is site specific.
Right.
That's why I think we can get to probably 70%, 80% of our production. The plant, we won't put a plant that would be in position, because again, you can only go 150, 200 miles in terms of distribution. You probably wouldn't put one close enough to get to Seattle and the Bay Area, given the variation in it. No, we'd never get to 100% of our production, but we'd be able to serve a lot of really, really big, high volume markets.
Right. If you think about just the market for off-site construction, there's been two of the larger sort of, I guess, for lack of a better word, independent manufacturers that failed, frankly. If we think about Pulte's positioning here, I mean, is the big advantage the ability to have sort of an installed base of homes that are gonna be going through that? I mean, what separates what you guys are doing, you think, than what happened with the other two?
You wanna know where some of the equipment from one of those failed companies is right now? Is that right?
Yes, sir.
One of the other challenges you ran into with supply chain was getting the equipment that needs to go into the plant.
Sure.
If you scratch it off and you look underneath, it says there. Yeah, it's basically the installed, you know, the committed base of demand that's going into it and where we locate it, you know, and so its ability to service ours, you've aligned it. We've given it... In effect, you're putting dedicated volume through it, and you've sized it appropriately. You know, one of the issues, it's just hard in this country. We love variation. I wanna be able to put that window over there, and I wanna make it arched instead of square, and all those types of things, which is the bane of manufacturing. You really just have to make sure you've aligned what you're going to service through that plant.
It is going to be panels that are very standard, it's gonna be roof trusses that are very standard, you also, it goes back to what I said before, you have to make sure you align the size for the volume and for the dedicated capacity, that's what we can bring in. We can bring in our volumes, we can supplement it with other builder volumes, we just make sure we size it correctly.
Okay. Makes sense. All right, moving on to community count. The target is 5%-10% growth this year. How should we think about the ability to flex that up, if needed, or if demand is better, if there's an ability to do that, or to pare back if demand slows? Maybe on top of that, what is sort of the mix of that community count coming on?
It'll look a lot like what we have today. I'll ask to answer the front part of your question first. There is zero ability to flex it.
Yeah.
You know, if it's in flight to open this year, we will open it. You can't open them any faster.
Right.
If anything, I would tell you, we're going to be a week late on every community in opening, more so than a week early on any community opening. If the business slows, we're still gonna open it. We've already got it invested capital. Now, it's not just raw dirt, now it's developed dirt.
Mm-hmm.
That 5%-10% is pretty reliable. The delta being probably more around if business were to slow a little bit, and we just didn't close out communities as fast. Because when we talk community, it's a net community count. You've got whatever you're opening, less whatever you close in that period of time. Really, what it does, it reflects land spend 18-24 months ago. I mean, if you wanna get a sense, and while there can be a little bit of movement based on geography, because the dollars are different in California than in Texas, for example, just look at what we're doing on land spend. As land spend increases over time, your community count will likely increase over time.
If you see that land spend is shrinking over time, your community count will eventually follow suit.
Okay. Let's talk about that, the land spend. You guys just took up that target, this last quarter. You know, I guess, is that a function of the better-than-expected demand, for one, and have you seen other competitors, you know, in the private and public space, sort of following suit?
Yes, it's reflective. Our increased land spend is reflective of improved demand environment and just our expectations for what we, you know, how we, you know, our view of the marketplace in general, and again, recognizing that $1 we put in today, realistically, you're talking about 2025 by the time it's really gonna be selling homes on it. Yeah, so it's reflective of that. Are we seeing other builders in the marketplace? Yeah. People are out there. They, this goes back to some of the earlier conversation. You know, what will you do when you are starting to chew through and you are chewing through your land pipeline faster?
Some of our land spend is acquisition, and then some of it is just developing dirt because we are burning through our assets a little bit faster than we thought we would be doing as we came out of 2023. Excuse me, as we came out of 2022.
Yep. okay. Maybe talking about capital allocation here a bit more. A $1 billion increase to the share repurchase authorization. You guys historically have been, you know, very solid purchasers of your share, for shares, for lack of a better way of putting it. Where do share repurchases fit in right now, I guess, thinking about it?
Our capital allocation priorities have not changed, since we set them over a decade ago. You know, first and foremost for us is to invest in the business. You know, we talked about, or you referenced the idea that, you know, we're gonna put, what did we say? Three and a half to $4 billion in our business this year.
Yep.
Again, assuming we can find high-returning projects. We have maintained and have grown our dividend, for now, again, for close to a decade. The reality is that the absolute payout is about $140 million, plus or minus a little bit, because as we raise the dividend, we've actually been shrinking shares. Then we return excess capital to shareholders, principally through share repurchase. You know, we've bought back 45% of the company in the past decade, I think we've got as active a share repurchase program as anybody in this space. One of the other things we've kind of looked at is with when rates have risen, you know, we do have some debt outstanding. Can you make it, make economic sense to maybe buy in some of that?
The other side of that coin, though, is at 18% debt to cap, we're kind of underlevered.
Yeah.
You know, our CFO, Bob O'Shaughnessy, would tell you know, it becomes a little bit of a lazy balance sheet if you get that too far.
Yep.
At the end of the day, you know what? We are in an incredibly strong balance sheet position. You know, as we talked about, as cycle times improve, our cash flows are going to be pretty stout. You know, the worst if our worst day is what are we going to do with all the cash? You know, we won't, we certainly won't let it burn a hole in our pocket, but we're not afraid to, if we have to carry a little bit of extra cash, do that. What I think at the end of the day, I would ask people to take away, we have incredible flexibility to take advantages of what develops in the marketplace, be it the business, you know, the home building marketplace or the financial space.
All right. About all the time we have, Jim. Really appreciate it.
Thank you for your time. Appreciate everybody listening today.