Good morning. My name is Julie, and I will be your confefence operator today. At this time, I would like to welcome everyone to the Q3 2021 PulteGroup, Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. Jim Zeumer, you may begin your conference.
Great. Thank you, Julie, and good morning. I want to welcome you to PulteGroup's earnings call for our third quarter ended September 30, 2021. Joining me to discuss PulteGroup's strong third quarter results are Ryan Marshall, President and CEO, Bob O'Shaughnessy, Executive Vice President and CFO, James Ossowski, Senior VP, Finance. A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of this call later today. As always, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.
These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan. Ryan?
Thanks, Jim, and good morning. I look forward to speaking with you today about PulteGroup's third quarter operating and financial results. In this morning's press release, you read that our home sale revenues in the third quarter increased by 18% over last year to $3.3 billion, while our gross margin expanded 200 basis points to 26.5%. In combination, top-line growth and margin expansion helped drive higher earnings per share of $1.82. This is an increase of 36% over the prior year's third quarter adjusted earnings of $1.34 per share. Inclusive of these strong third quarter numbers through the first nine months of 2021, our home sale revenues are up 22% to $9.2 billion, while our reported earnings per share are up 36% to $4.85.
The resulting strong cash flow being generated by our operations continues to put our company in an enviable position in which we can invest in our business, return funds to shareholders, and still maintain outstanding balance sheet strength and overall liquidity. More specifically, consistent with our constructive view on the housing market, we have invested $2.9 billion in land acquisition and development so far this year. Our $2.9 billion of land spend is comparable to what we invested for the full year in both 2020 and in the pre-pandemic year of 2019, and we remain fully on track to invest approximately $4 billion in total for the full year of 2021. I would highlight that while we are investing more into the business, we remain disciplined and focused on building a more efficient and lower-risk land pipeline.
At the end of the third quarter, our lots under option had grown to 54% of our total controlled lot position. Compared to when I set the initial 50% option target, we have over 65,000 more lots under option and now view 50% as the floor rather than the ceiling in terms of how we control our land assets. Consistent with our capital allocation priorities, along with investing $948 million more in land acquisition and development through the first nine months of 2021 compared with last year, we have also returned $726 million to shareholders through share repurchases and dividends and have paid off nearly $800 million in debt this year, leaving us with a net debt to capital ratio of only 5.7%.
Finally, consistent with our strategic focus, our operating and financial performance has helped drive a return on equity of 26% for the trailing twelve months. Just like the broader economy, our operations continue to be impacted by the pandemic. On one hand, we are managing through the disruptions COVID-19 and the Delta variant have inflicted on our workforce, our trade partners, and the global supply chain. On the other hand, our results have certainly benefited from the remarkable demand and pricing environment the home building industry has experienced over the past 18 months. Either way, to deliver our third quarter numbers during a global pandemic and with a supply chain that is clearly struggling reflects the commitment and tireless efforts of the entire PulteGroup team.
Since we updated our production guidance in early September, broader industry comments have validated the challenges within the construction supply chain are significant and don't have any quick fixes. Based on a myriad of calls and questions we have received, I think it's hard for everyone to appreciate the full magnitude of the issues we're facing when you're not dealing with them on a day-to-day basis. For some products, it's simply the materials aren't available. Sometimes you can switch to an alternative, but when you can't, you wait. For others, it's changing lead times where order fulfillment has gone from six weeks to 16 weeks, back to 11 weeks, and then back to 16 weeks. For others, it's seeing allocations being imposed as manufacturers and distributors do their best to keep their major customers, which I would note we are one, at least partially satisfied.
Our local divisions may not get much advance notice of the shortage and resulting allocations, so we have to adjust on the fly. In other cases, it's logistics. When you're forced to ship materials to solve near-term issues, this might be shipping siding from the southeast to the southwest, or our trades driving across the state for paint. In one form or another, these issues impacted our third quarter results, and as Bob will detail, will put additional pressure on our deliveries and margins in the fourth quarter. As difficult and frustrating as this is, I can say that our suppliers have been outstanding partners and routinely bend over backwards to get us the materials we need to solve our issues. I can say that we've been clear with our teams that we have to over-communicate with customers to keep them informed of any schedule changes.
We also have to be flexible and creative in sourcing materials, even if this means spending additional dollars to acquire needed resources. Finally, we must maintain our standards on the quality and completeness of each home that we deliver. Given the varied problems impacting the supply chain, we would expect that solutions will be found over different timelines depending on the supplier's underlying issue. In the interim, we will adjust our production estimates for the fourth quarter and work to position the business for more consistent cadence in the year ahead. We will also continue to work in close partnership with our suppliers to manage through the supply chain issues as quickly and as intelligently as possible. Now let me turn the call over to Bob for a detailed review of our third quarter results.
Thanks, Ryan, and good morning. Our teams have done an outstanding job navigating through the challenging production environment, which can be seen in the exceptional operating and financial results we delivered in the quarter. Starting with our income statement, our home sale revenues for the third quarter increased 18% over last year to $3.3 billion. The increase in revenues was driven by a 9% increase in closings to 7,007 homes, in combination with an 18% or $37,000 increase in average sales price to $474,000. The higher average sales price realized in the third quarter reflects meaningful price increases we've realized across all buyer groups, with first- time up 8%, move- up 10%, and active adult up 8%.
The mix of homes we delivered in the third quarter included 32% from first-time buyers, 44% from move-up buyers, and 24% from active adult buyers. In last year's third quarter, 30% of homes delivered were first-time, 45% were move-up, and 25% were active adult. Our net new orders for the third quarter were 6,796 homes, which represents a 17% decrease from last year that was driven primarily by a 14% decline in year-over-year community count. In addition to fewer open communities, orders for the period were impacted by ongoing actions to manage sales paces to better align with current production volumes. The actions to manage sales pace and outright restrict sales were more frequently targeted toward our first-time buyer communities as we strategically work to build up spec inventory within our Centex branded communities.
Looking at our third quarter orders in a little more detail, our orders from first-time buyers decreased 20% compared with last year. This decrease was driven primarily by our actions to restrict sales as our first-time community count was only down 6% compared with last year. In contrast, our orders from move- up and active adult buyers decreased 22% and 4% respectively, which was driven by comparable 22% and 5% decreases in community count, respectively. In the third quarter, we operated from an average of 768 communities. Consistent with the guide in our recent market update, this is down 14% from last year's average of 892 communities.
Our Q3 community count should be the low water mark for the year as we expect our fourth quarter community count to increase to approximately 775 active communities. Further, our existing land pipeline should allow us to realize a meaningful ramp-up in community count as we move through 2022. As is our practice, we will provide more specifics on 2022 community count as part of our fourth quarter earnings call. Our unit backlog at the end of the third quarter was up 33% over last year to 19,845 homes. The dollar value of our backlog increased an even greater 56% to $10.3 billion as we benefited from robust price increases realized over the course of this year.
At the end of the third quarter, we had 18,802 homes under construction, of which 83% were sold and 17% were spec. We have almost 900 more spec homes in production than we did in the second quarter as we've been working to increase spec availability, particularly in our Centex communities. In many instances, this has meant tightly controlling current period order rates, but we feel this is the appropriate action as we seek to better align our sales with the current pace of production. Given that 90% of our specs are early in the construction cycle and that we have only 109 finished specs, these units are about helping to position the company for 2022 rather than providing closings in 2021.
We face similar dynamics within our production of sold units, as two-thirds of these homes are in the earlier stages of construction, and we can see gaps in the supply of key building products needed to complete these homes. Given these conditions, we believe it appropriate to update our fourth quarter guide for expected fourth quarter deliveries and currently expect to deliver approximately 8,500 homes in the fourth quarter, which would represent an increase of 24% over the fourth quarter of last year. It's difficult to say there are positives to be gleaned from the challenging production environment, but one of the outcomes is that the limited supply of homes, coupled with ongoing strong demand, has supported higher prices across the market.
Reflective of these conditions, our average price in backlog increased 18% or $78,000 over last year to $519,000. Although more than half of our quarter-end backlog is expected to deliver in 2022, we will continue to see the benefit of rising prices in our fourth quarter as our average closing price is expected to be $485,000-$490,000. At the midpoint, this would represent an increase of approximately 10% over last year. Our reported home building gross margin in the third quarter increased 200 basis points over last year to 26.5%.
Given that our third quarter closings absorbed the elevated lumber prices from earlier this year, expanding our gross margin by 200 basis points attests to the strong pricing environment the industry experienced over the past year. It's worth noting that the strong market conditions also contributed to another step down in incentives in the period as discounts fell to 1.3%. This is down from 3% last year and down 60 basis points from the second quarter of this year. As our margin increase demonstrates, strong buyer demand has allowed the company to pass through the higher labor and material costs we've experienced. That said, and as Ryan discussed, we are knowingly incurring additional expenses to get houses built within today's challenged operating environment.
In addition to the incremental build costs we are absorbing over the short term to get homes completed, our reported gross margins are being influenced by the mix of homes closed. As we also highlighted in our recent market update, certain of the homes that we expected to close in Q3 slipped into Q4, and others have been pushed out of the fourth quarter into 2022. These conditions are impacting our reported gross margins in the third and fourth quarters of 2021, but set us up to realize gross margin expansion as we head into 2022. That said, with the changing mix of homes we currently expect to close in the fourth quarter, coupled with the added material, labor, and logistics costs we're paying to get homes closed, we currently expect our fourth quarter gross margin to be 26.6% or 26.7%.
This would represent an increase of 160-170 basis points over last year's fourth quarter and an increase of 10-20 basis points over the third quarter of this year. We see the opportunity to build on this momentum as the strong pricing conditions we've experienced, coupled with the lower lumber costs we expect in next year's closings, should result in further gross margin expansion in 2022. Our SG&A expense for the third quarter was $321 million or 9.6% of home sale revenues. Prior year SG&A expense for the period was $271 million, or a comparable 9.6% of home sale revenues.
Given the sequential increase in closings we expect to deliver in the fourth quarter, we should realize improved overhead leverage with SG&A expense in the upcoming quarter expected to fall to a range of 8.9%-9.2% of home sale revenues. Looking at our financial services operations, our third quarter pre-tax income was $49 million, compared with $64 million last year. As has been the case for much of this year, higher origination volumes have been offset by lower profitability per loan given more competitive market conditions. The company's reported tax expense in the third quarter was $145 million or an effective tax rate of 23.3%.
In the comparable prior year period, our effective rate was 14% as we realized the tax benefit of $53 million associated with energy tax credits recognized in the period. For the third quarter, our reported net income was $476 million or $1.82 per share. This compares with prior year adjusted net income, excluding the impact of the energy tax credits of $363 million or $1.34 per share. Moving over to the balance sheet, our business continues to generate strong cash flow, which allowed us to end the quarter with $1.6 billion of cash after significant investment in the business and continued shareholder distributions in the quarter.
In the quarter, we repurchased 5.1 million shares, or about 2% of our outstanding common shares for $261 million at an average price of $51.07 per share. The $261 million in stock repurchases is a sequential increase of $61 million from the second quarter of this year. As stated previously, we are fully prepared to allocate more capital to shareholders as conditions warrant. We also invested $1.1 billion in land acquisition and development in the third quarter. This brings our total land-related spend in 2021 to $2.9 billion and keeps us on track to invest approximately $4 billion in land acquisition and development for the year, which would be an increase of almost 40% over last year.
We ended the third quarter with a debt-to-capital ratio of 22.4%, which is down from 29.5% at the end of last year. Adjusting for our cash position, our net debt-to-capital ratio at the end of the quarter was 5.7%. We ended the third quarter with approximately 223,000 lots under control, of which 54.4% were controlled through options. Our divisions, and particularly our land teams, have done an outstanding job building a more efficient land bank while helping to reduce market risk. We're extremely proud of their efforts and the success that they've realized. Now let me turn the call back to Ryan.
Bookending the front of this call where I talked about supply, let me finish the call by providing a few comments about third quarter demand, which is a very positive picture. We continue to experience strong demand in the quarter with very consistent traffic and sign-up numbers across the period. I would also add that strong demand has continued through the first few weeks of October. While sign-ups in the quarter were lower compared with last year, the primary driver of the decline was the decrease in community count. Beyond the impact community count had on order rates in the quarter, our divisions continue to manage or outright restrict sales pace to better match sales with our current production.
As Bob indicated, this most recent quarter should be the low point of our community count this year, as we expect our community count to move higher on a sequential basis as we move through 2022. Reflecting the strong demand conditions and relatively limited supply of new and existing homes, we were able to raise prices in the quarter across most of our communities. The most typical increase in the quarter was in the range of 1%-3%, although some of our divisions were able to push pricing in select communities a little more aggressively. That being said, we continue to keep a close eye on affordability metrics within our local markets, especially given the recent rise in mortgage rates.
Between an improving economy, a strong jobs market, wage inflation, and government stimulus checks, consumers are in a very strong financial position and have proven they are prepared to pay today's higher prices for everything from food to autos to homes. We continue to see a very strong financial profile among our home buyers, with the average FICO score remaining above 750 and loan-to-value of 83% based on users of our mortgage company. Looking at demand across the country, I would tell you that generally where we have product available, we can sell it, and at a higher price than earlier in the year. Although frustrated at times because of limited supply, higher prices, and longer build cycles, consumers remain engaged in the home buying process and are anxious to get into a new home.
Just to wrap up, while there are certainly challenges in the business, PulteGroup remains in an excellent position, both operationally and financially. We have a strong and improving land pipeline that we continue to make more efficient through the use of lot options. We have an opportunity to further expand margins based on limited supply, strong buyer demand, resulting favorable pricing dynamics, and lower lumber costs in 2022. We have an outstanding home building operation that is generating tremendous cash flow. We have an exceptional balance sheet strength and liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities. Let me close by again thanking our employees for their tireless efforts to serve our home buyers and deliver outstanding business performance. Now let me turn the call back to Jim.
Great. Thanks, Ryan. We're now prepared to open the call for questions so that we can get to as many questions as possible during the remaining time of the call. We ask that you limit yourself to one question and one follow-up. Julie, I'll now open the queue for our questions and answers.
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from Truman Patterson with Wolfe Research. Please go ahead.
Hey, good morning, everyone, and thanks for taking my questions. First, I wanted to touch on gross margin. Is there any way you could just quantify the elevated costs you've incurred that that'll impact the fourth quarter? In the prepared remarks, you mentioned, you know, 2022 gross margin likely moving higher, which I think there's been a lot of investor uncertainty on that. You know, with prices moving up, lumber coming down, other costs accelerating, can you just help us think through, you know, the gross margin and backlog or kind of the incoming orders?
Yeah. I'll start with the fourth quarter, Truman. You know, we obviously have taken down our margin expectation for Q4, you know, depending on which, you know, where you peg the margin, it's call it 60 or 70 basis points from what we had originally guided. I would suggest the way to think about that is we've got mix changes very consistent with what we had in the third quarter as stuff has moved out of the fourth quarter into 2022. That's probably 30 basis points of it. You know, incremental costs, you know, you heard us talk about them in the prepared remarks, to get things done today is about $2000 a house for us, which is about 40 basis points.
That's sort of the magnitude of what we're seeing in the fourth quarter. We didn't provide a guide for 2022 gross margins, but you know, we obviously did highlight the significant pricing that we're seeing in our backlog. You know, it's up $78,000 a unit or 18%, plus we'll have lower lumber costs. Now lumber's variable. You know, it's moved down, it moved up a little bit. We'll see where that lands. But we'll see, on a sequential basis as we get into 2022, some decreases. You know, certainly the structure is there for lower margins. We'll give an estimate of what that is as we release our fourth quarter.
Higher margins.
Did I say lower? My apologies. Higher margins in 2022.
Okay, back and forth.
Jim had a horrified look on his face. I apologize for that. We'll give you some visibility to that as we release our fourth quarter earnings, and we'll have obviously better visibility into the year at that point.
Okay. I'm just hoping you could run through where the most common pressure points are in the supply chain and, you know, on the material side, any highlights on the vendors. Are they giving you a timeline as to when they expect their internal capacity, you know, begins improving and actually increasing product in 2022?
Yeah. Truman, it's Ryan. Good morning. It really depends on the region, Truman. You know, in like the Florida regions, there are challenges of block. You know, most of our homes there are built out of concrete block as opposed to lumber. We've been on allocation there for a number of months. Windows, I would tell you generally across the entire United States are a pressure point. Paint is a pressure point. Appliances would be some things that I think are common across the entire enterprise. You know, as I tried to highlight in my prepared remarks, we think that the timeline of fixing things will be varied. It really depends on what the underlying issue is for that particular distributor or manufacturer.
You know, there are some things that are obviously reliant on microchips like appliances, and I think that those challenges are well detailed. In some cases, it's chemicals, and things like resin. I think the paint suppliers, paint manufacturers have kind of highlighted some of the things they've done. You know, in particular, Sherwin-Williams recently purchased their own resin plants, in order to help solidify some of the challenges that they'd had in obtaining resin. You know, in some cases, it's logistics, and so there's just simply not enough transportation capacity to move things from the ports to the distribution centers or from the factories to our job sites.
I think what we're gonna end up with is a mixed bag of results and recovery timelines as we move through 2022. The relationships that we have with our suppliers are outstanding. We're communicating actively with them and collaboratively. There's no doubt there are some headwinds out there that we're fighting through each and every day. You know, as Bob highlighted, we'll talk more about 2022 as we get to the end of the fourth quarter, when we customarily provide our guidance. There are, you know, there's some favorable things with community count growth, opportunity for margin expansion, et cetera, that, you know, I think leave reason to continue to be optimistic.
Your next question comes from Alan Ratner with Zelman. Please go ahead.
Hey, guys. Good morning. Thanks for taking my questions. First question, you know, I'd love to dig in a little bit to the pricing environment. Your average order price was up way more than that, up 9%. I'm guessing the delta there is mixed, but, you know, I'm curious if you could just talk a little bit about what you're seeing in terms of pricing power, you know, now versus three months ago, six months ago. For you, a few other builders kind of suggested maybe pricing power is moderating a bit. It doesn't sound like you're seeing that in your communities, but, any color you can give there would be great.
Yeah. Alan, I would just. Good morning, by the way. You know, I'd highlight that the demand environment continues to be very strong, and in most communities, we continue to have pricing power. You know, we're exercising that through price increases obviously and in some cases we're you know outright restricting sales, which you know I think is in the same kind of family of actions that we take to manage the demand that we have. You know what I would tell you. You know, we highlighted on average most communities were 1%-3%. There were certainly some communities that were well in excess of that.
Those kind of outlier communities combined with the fact that you do have some mix in there as well is, I think, you know, the incremental increase that you highlighted in your question. In terms of kind of where things are at today, pricing power-wise relative to a quarter ago, two quarters ago, I'd suggest it's pretty comparable to where we were at in Q2. A little weaker than where we were at in Q1 in terms of kind of month-over-month or week-over-week pricing changes. We are keeping an eye on affordability. We highlighted that in our prepared remarks. I think it's something that while the consumer continues to be strong financially, you know, they don't have unlimited financial means and resources. You know, we need to be mindful of that, not only as a company
The temporary headwind that goes away as, you know, the supply chain normalizes. Do you think that even goes higher if builders are kind of cramming to try to get more specs on the ground? What's the assumption embedded within the outlook for margin improvement next year?
To be clear, we haven't given a margin expectation for next year. Part of the reason for that, Alan, is because, you know, we wanna give ourselves the opportunity to really evaluate that question more fully. You know, certainly the supply chain is not going to cure itself in the next three months, probably not the next six. You know, anybody's guess as to how long beyond that. There will be continued constraint. You also have kind of working in the other direction that most builders are kind of pushing towards their year-end in Q3 and Q4, so there's more kind of demand for service and materials and that will mitigate to a degree in the first half of next year.
You know, I think a lot of it will depend on how the supply chain kind of moves forward from here. Again, it's one of the reasons that we are waiting until the fourth quarter, not just convention, but also we think we'll get better information as we get into, you know, December, January, and can answer.
Your next question comes from the line of Michael Rehaut with JPMorgan. Please go ahead.
Thanks. Good morning, everyone. Thanks for taking my question on repurchase, but, you know, maybe just to shift the question a little bit on, you know, lot optioning and lot owning. You know, lot of progress on lot optioning, but. Actually, if you look at the years owned, it's staying around, you know, 3.8, 3.9 in terms of, you know, 3.8, 3.7 in terms of years owned supply. Any thoughts around trying to get that metric down over the next two or three years? You know, as a result, you know, I'd presume that it would free up even more cash to perhaps return to shareholders or invest in the company in other ways.
Hey, Mike. Good morning. It's Ryan. In terms of capital allocation, I'm really proud of what we were able to do in the quarter. You know, the health and the quality of the home building operations continues to generate outstanding cash flows, and so we were able to do a lot in the quarter. You know, we're very pleased with the total amount of land that we've been able to invest in the year. You know, we sit at right at $3 billion year to date and are on track for $4 billion, which will be a big year for the company. We had an outstanding quarter of returning funds to shareholders.
That's something, you know, that is very consistent with and right in line with our capital allocation philosophy of investing in the business and returning funds to shareholders. That we really are pleased with what our teams have been able to do to continue to maintain optionality, you know, optionality with the overall land supply. As far as your question on 3.7 years of supply, Mike, you know, that number would be calculated if you look forward, and I realize we haven't given, you know, visibility to what that forward number is. I think we've very clearly highlighted our desire to grow, and you've seen, you know, the early end of that with the amount of capital that we've been investing into the business.
you know, the other thing that I'd also, you know, just mention, and we've been consistent in stating that we haven't changed our land underwriting guidelines. We continue to, you know, approve land deals that are right in line with our target of three-year zoned land.