管理層發言
Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Fourth Quarter and Fiscal Year Ended September 30th, 2024. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the fourth quarter and full year of fiscal 2024. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. New factors emerge from time-to-time and it is simply not possible to predict all such factors. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from our fiscal 2024 results, the recent environment for new-home sales, our preliminary outlook for fiscal 2025 and the significant progress we are making towards our multi-year goals.
I'll then provide detailed guidance for our first quarter results, additional color on our outlook for the full fiscal year and end with a discussion of both our balance sheet and our land spend expectations. Allan will conclude with a wrap-up, after which we will take any questions in the remaining time. I will now turn the call over to Allan.
Thank you, Dave, and thank you for joining us on our call this afternoon. We had a very productive fiscal '24, during which we invested for the future, generated double-digit returns for shareholders, and accelerated our adoption of Zero Energy Ready building practices. Each of these results contributed to our progress towards our multi-year goals. I'm particularly encouraged that we were able to achieve these outcomes in a new home sales environment characterized by stretched affordability and stubbornly high mortgage rates. Here are several highlights from the year. We invested more than $750 million in land and land development, up nearly 36% from the prior year. This allowed us to end the year with 162 active communities, up about 20% year-over-year. And we're poised for further community count growth, both this year and next. We generated $243 million in adjusted EBITDA and earnings per share of $4.53, representing double-digit returns on both capital employed and equity.
We dramatically accelerated our adoption of Zero Energy Ready, becoming the single-year and all-time leader in delivering homes under the DOE's national single-family program. And it wasn't just our homes that stood out. During 2024, we reached the top spot for customer experience among homebuilders, according to the only verified owner rating site, TrustBuilder. And finally, we maintained our position as an employer of choice in the industry, with recognition for culture and employee engagement from multiple third-party organizations. In summary, while the macro-environment for new home sales was challenging, we stayed on course and made meaningful progress on many fronts. Both the intermediate and longer-term outlook for new home sales remains very positive, characterized by a structural deficit in the housing supply and favorable demand demographics, particularly among the customer segments we target.
But the realization of this opportunity was quite uneven in fiscal '24 as our entire industry grappled with strained affordability, declining consumer sentiment, and later in the year, anxiety about the election. In fact, the sales environment had been quite challenging when we last addressed investors. At that time, it seemed like buyers were anticipating rate cuts at the Fed, bigger year-end discounts from builders, or simply more clarity on the direction of the economy. We also noted that we were considering how to modify our sales approach in a handful of markets to improve their sales pace. Ultimately, we did lower prices and lean into incentives in our pace challenged markets, focused on our specs and closeout communities. By September, these efforts, together with a modest improvement in consumer sentiment, led to substantially better sales. In October, we saw continued strength in sales momentum across both our spec and higher margin to-be-built homes, even as we began to withdraw the higher incentives.
October orders were up over 30% on a community count, it was up almost 20% as our sales pace returned to more normal levels. At this early stage in our fiscal year, with sales patterns as fluid as they have been, it seems both difficult and unwise to try and provide granular full-year guidance. Having said that, we will share an outlook for the year, informed by our visibility into community count growth and an assessment of how the macro-environment is likely to influence our sales, mix, and pace. Our average community count in fiscal '24 was 144. We expect our full year average community count will be up between 18 and 22 communities, which should lead to more than 10% top-line growth. At a macro level, we do not expect significant reductions in mortgage rates over the balance of the fiscal year. This is less optimistic than our view several months ago, but we're taking the movement in the bond market since September as a sign that mortgage rates may remain elevated.
Higher rates have typically led to a larger share of spec sales. As such, our outlook contemplates the specs which carry somewhat lower margins will represent more than 60% of our closings, the highest level in a decade. Despite elevated rates, we remain optimistic about both job and wage growth. The so-called soft landing may have been achieved and it seems likely that regulatory and tax policies will encourage more growth. Having addressed our most price-sensitive markets, we expect to improve sales paces to something closer to historical levels in a range between 2.5 and 3 sales per community per month. Taken together, our full-year outlook contemplates significant revenue growth, leading to a level of profitability that generates a double-digit return on our capital employed. For a company in the midst of a meaningful growth phase, we think that's pretty compelling. Beyond our expectations for revenue and profitability in fiscal '25, we also expect to make further progress on our multi-year goals.
We have a clear path to ending fiscal '26 with more than 200 communities. We're on track to end this fiscal year with a community count around 180, and we have a land pipeline sufficient to ensure double-digit growth next year. We also remain on track to have a net debt to net capitalization ratio below 30% by the end of fiscal '26. We allowed this ratio to increase a little bit in fiscal '24 as we remain committed to our growth trajectory even in the face of lower closing volumes. The cumulative profitability and cash flow we anticipate over the next two years will allow us to reach this target even as we sustain higher land spending. Lastly, we continue to make significant progress toward our goal to have 100% of our homes Zero Energy Ready. In the second-half of FY ‘24, 92% of our starts met the DOE standard. While we'll still have a few starts from prior series in our closeout communities, by this time next year, we will be 100% Zero Energy Ready.
Before I turn the call over to Dave, I want to spend a couple of minutes explaining why our commitment to Zero Energy Ready homes is so important for shareholders. In fact, there are many benefits to having a demonstrably better product for customers, including having access to new land opportunities in some of the country's preeminent master plan communities, and attracting high-end talent to our company. But for today, we can focus on the economics because they are very attractive. When we look at our backlog, the margins on Zero Energy Ready homes are already more than a point higher than our prior series homes, whether they're specs or to-be-built. And this is before recognizing the $5,000 federal tax benefit for Zero Energy Ready homes buried in our effective tax rate. That's almost a point of margin versus other builders' homes. And we're still in the very early innings. We believe our sales pace, our build costs, and our realized pricing will all benefit as we refine and improve our production and sales efforts. That's why Zero Energy Ready is important for shareholders. These homes position us for even better profitability moving forward. With that, I'll turn the call over to Dave.
Thanks, Allan. This afternoon, I will concentrate on providing some more specifics on our first quarter guidance and our outlook for the fiscal year. I will conclude my comments with a discussion of our balance sheet and our land position. We have detailed our fourth quarter and full fiscal year 2024 results in our presentation, our press release, and our 10-K, and of course, we're happy to discuss them during the Q&A portion of our call. Let's start with our expectations for the first quarter of fiscal 2025. Period-end community count should be up about 20% versus the same period last year as we benefit from our increased land spending over the past few years. Our sales pace should accelerate versus the prior year by about 10%. More communities and a higher pace should generate year-over-year sales growth around 30%. We anticipate closing more than 925 homes with an average ASP of around $515,000.
Adjusted gross margin should be around 19%. The sequential reduction in gross margin from the fourth quarter is a function of two related factors. First, specs increase as a percentage of our total sales in the back half of 2024 and have typically carried margins 2 points to 3 points below our to-be-built. Second, we lean pretty heavily into incentives in a handful of markets in the fourth quarter, particularly on our spec homes to stimulate sales pace. Even though we've since reduced these incentives or in some cases sold out of the communities, margins will be impacted in the first quarter. The first quarter should represent a trough for our gross margin for the fiscal year. SG&A as a percentage of revenue should be around 13%, about 1 point lower than the same time last year, helping to support our operating margin. We expect to generate about $30 million in adjusted EBITDA. Interest amortized as a percent of homebuilding revenue should be just over 3%, and our effective tax rate should be approximately 15%.
The higher tax rate versus 2024 is in line with our expectations as we won't have the benefit of harvesting tax credits generated in prior years in 2025. This should lead to diluted earnings per share of about $0.30. I want to pick up where Allan left off on our full year outlook and give you a perspective on how we're thinking about the range of potential outcomes on community count, sales pace, and gross margin. Predicting community count with precision is pretty challenging given variability in land development timing, weather, and closeouts. With this caution, we expect to add 18 to 22 communities to our average community count, reflecting 12.5% to 15% growth. We'd note our activations are weighted more to the back half of the year and our community count could be flat or down sequentially in the second quarter depending on the timing of closeouts. We are committed to achieving a sales pace between 2.5 and 3 sales per community per month for the full year, more in line with our historical norms and an improvement off of fiscal 2024.
The margin in our backlog at 9/30 is about 20.5%, including most of the lower margin homes that will close in the first quarter. This implies the balance of the backlog has much higher margins. Nonetheless, for the full year, we anticipate gross margin will be between 19.5% and 20.5% because we expect spec sales and closings to remain elevated through the year. The high end of the range is attainable if we're able to sell a greater share of to-be-builts in the spring or we can drive further reductions in incentives. ASP and SG&A are less subject to market fluctuation and as such we have better visibility into our expectations for the year. Given our ASP and backlog near $540,000 and the mix of community openings and closings, we believe our ASP should be over $530,000. Further, while we're still investing heavily for growth, our higher community count should lead to revenue growing faster than our overheads in fiscal year 2025, driving our SG&A percentage to be about 11%.
Here's the key point. Even at the low end of each of the ranges, we expect to generate EBITDA that would represent another year of double-digit return on capital employed. Any improvement in our metrics above the low end of our ranges will drive EBITDA growth and even better returns. Our balance sheet remains healthy with total liquidity exceeding $500 million at the end of the fiscal year, no maturities until October 2027 and more than enough liquidity to fuel our growth aspirations. We expect to end fiscal 2025 with a net debt to net cap in the low-to-mid 30s and we're on a path to get our net debt to net cap below 30% by the end of fiscal 2026, as our improving profitability and cash generation will de-lever the balance sheet. Over the last five years, we've been able to sustain a double-digit return on capital and have grown our book value at a 19% compounded annual growth rate even as we've increased our land investment.
Our capital allocation and execution has increased the quality of our book value and positions us for another year of growth in fiscal 2025. Since fiscal 2020, we've run our total owned and auctioned land position from fewer than 17,000 lots to nearly 28,000 lots. And we've done that primarily through increase in our option lots, which have gone from 35% of our total to nearly 60%. In 2025, we expect land spend to grow to around $850 million and our owned and option lot position should exceed 30,000. With that, I'll now turn the call back over to Allan.
Thank you, Dave. In summary, 2024 was a successful year for the company as we executed our growth strategy and generated double-digit returns. We're entering 2025 with a growing community count, a differentiated product strategy, and a healthy balance sheet, positioning us to make real progress on our multi-year goals. Finally, I remain convinced we have the team and the strategy to create growing and durable value for our stakeholders in the years ahead. With that, I'll turn the call over to the operator to take us into Q&A.
分析師問答
Our first question will come from Julio Romero with Sidoti & Company. Your line is open.
Hello. This is Alex Hantman on for Julio. Thanks for taking questions.
Hey, Alex, how are you doing?
Good, how are you?
Good.
Great. Well, thank you very much for sharing the guide. And maybe we could talk a little bit about the community count ramp. Would love to hear how you're thinking about your confidence in the ramp you've outlined and that path for growth.
Look, I would tell you, Alex, we feel pretty confident about the ramp. Obviously, with the growth in the land position that we've had and the visibility that we have on kind of communities coming online, we feel real good about the growth that we talked about, the 18 to 22 net new communities and ending the year around 180.
Thank you. And maybe just touching on sales pacing, could you talk a little bit about what you're seeing in October, maybe some improvement relative to September?
Yeah, Alex, hey, it's Allan. Things got better in September. And as rates started to back up a little bit, I was concerned that we might see that slowdown. But frankly, October looked a lot like September. And I was encouraged because we peeled away some of the heavier incentives that we had offered to clear out some older inventory and we saw a nice pickup in to-be-built sales. So it wasn't just around more heavily discounted specs.
Great. Thank you for the context. I'll hop back in queue.
Thank you.
Thank you. Next, we will hear from Alan Ratner with Zelman & Associates. You may proceed.
Hey guys, good afternoon. Thanks as always for all the helpful details so far. So I know it's tough to give any full-year guidance at this point. It's a pretty rapidly changing environment. But one of the data points I wanted to just drill in a little bit more on is your outlook for absorptions for the year. Given a range of 2.5, I guess at the low end to 3 at the high end, your absorption pace this year was just under 2.5 per month. And obviously, the year ended challengingly but it was generally a pretty solid year, especially in the spring. So I'm curious if you could just talk through a little bit more about your expectations there because it doesn't seem like you're anticipating any meaningful improvement in the macro as far as mortgage rates or the economy. It seems like you've pulled back a little bit on those incentives that drove some of the momentum in October. So what gives you the confidence that even at the low end of your guidance range that they'll come in with a better absorption rate in '25 versus '24?
It's a great question, Alan. Look, 2.4 was the lowest absorption rate we've had in a long time and it was disappointing and it was characterized by an 8% mortgage rate in the first quarter last year that made the October and November months really challenging. And as I told you and others on the call in August, I feel like we kind of got punched in the mouth by our competitors in May, June, and it took us a minute to find our footing. I think we had over-specced or over-specified the spec homes that we had started and we were a little bit out of position and we addressed that. And I think the combination of getting better dialed in on and accepting a somewhat larger share of specs as a part of our sales mix and not being in an 8% mortgage rate environment, which is obviously how we started last year. I think those two things together give us confidence we will be back in the range that we've historically been in. Now exactly where in that range, I obviously don't know at this point, but we are going to be up in sales pace next year. This year. Sorry, I do that too. I get confused between September and December. When I said next year, I meant 2025, our fiscal year.
No, understood. I appreciate that, Allan. Second question, if I look at your 1Q margin guide, 19% adjusted, that would be I think if our model is right, the lowest margin you've generated in over a decade. And I know you're expecting that to ramp through the year and I think your explanation makes sense to me. But we're starting to hear a little bit of chatter from some land sellers and developers that not necessarily Beazer specific, but some builders are attempting to maybe renegotiate some option terms and take down prices, just given the fact that rates have clearly stayed higher than many had expected, incentives have remained more elevated. So, as you look at where your margin is today and a relatively thinner margin than perhaps some of your peers and maybe where you had expected, are you in the process of maybe trying to take some of your more recent land buys and renegotiate them given the changing macro-environment? Or do you feel like as those deals come to market even with the choppier environment that will still generate margins better than you're generating today?
There are nearly 100 transactions currently underway, including letters of intent and contracts, making it somewhat challenging to provide a clear answer since I could present the information in various ways. Overall, we reevaluated several deals over the summer due to slow sales. We backed out of one deal that resulted in a $1 million write-off in the third quarter. We have renegotiated prices on a few deals and have become stricter in our underwriting for new acquisitions. However, our plans for 2025 and 2026 are mostly set at this time, so I wouldn’t suggest a major reset is possible. One perspective to consider is the finished lot cost as a percentage of our average selling price, which has returned to levels seen in 2000. While we experienced benefits in 2021, 2022, and 2023, inflating margins due to historical costs, land prices are somewhat elevated compared to average selling prices, but they are not significantly different from pre-COVID levels.
Great. I appreciate the thoughts. Thanks a lot.
Thanks, Alan.
Our next question comes from Tyler Batory with Oppenheimer. Your line is open.
Hey, good afternoon. Thanks for taking my questions. Couple from me. And I want to start, Allan, in your prepared comments, you talked about the Zero Energy Ready Homes and the benefit that you're seeing. You alluded to a point of margin higher than the prior series. Can you just unpack that a little bit more, explain what drives that higher margin? And then when you look at the sales process, when you look at construction as well, how much low-hanging fruit is there to improve those and to drive the margin even higher?
Let me address the second part first. While I can't provide specific numbers, you've highlighted something very crucial for us. I'm extremely confident that we can lower the cost of delivering Zero Energy Ready homes. We are essentially the first large builder in various markets and climate zones to commit to this initiative, and it has taken significant effort to retrain our trades and strengthen supply chains for the necessary products. We have set ambitious internal goals to enhance the quality of our homes, but I truly believe we can achieve a reduced cost in reaching Zero Energy Ready. Regarding sales, we have a highly skilled professional sales team. They're selling a product that hasn’t been available before, and understanding the science behind our homes is impressive. However, to be honest, most of our buyers don’t focus on ACHs and HERS scores. We've trained our sales team well; they grasp the science, the statistics, the materials, and the philosophy behind our homes.
The challenge is relating that information to each individual buyer. What resonates with them? Is it air quality, comfort, or savings on their monthly bills that will appeal most? It’s a bit like practice; we need to get better. I've spent significant time in the field discussing this with our new home counselors, and I'm confident we can showcase the value in a way that speaks to various buyers while also reducing costs. I’m unsure how much higher our margins could go, but they are certainly better than they currently are. As for the first part of your question about the real value of Zero Energy Ready, I recommend looking at one of our slides that discusses indoor air quality and overall comfort. To illustrate, I visited one of our communities in Maryland recently where we hosted an event with regulators, and we are now recognized as leaders in the delivery of Zero Energy Ready homes. I highlighted that the energy costs for our homes are nearly $500 less per month than a similar home from 20 years ago across the street—think about $500 a month in savings, which equals about $5,500 annually.
I asked my sales team how much the mortgage rate would need to decrease to achieve a similar $5,000 saving annually, and they had to do some calculations. The result was that the mortgage rate would need to reduce by over a point for the savings to match. In that moment, it became clear to the sales team that the efficiency of this home effectively trades out as having a mortgage rate that is a full point lower indefinitely. This realization about customer priorities is significant for many of our clients.
Okay. Excellent detail. Thank you very much. Follow-up question on the incentives. You sound like you ramped up incentives and you pulled back. I guess, which markets did you lean in a little bit more? Are those the same markets where you've been able to pull back? And then when you look ahead to fiscal '25, it sounds like lower incentives are part of that gross margin improvement. Just talk a little bit more about your kind of your confidence in that? Your expectations for incentives next year? And maybe just for the industry overall, I mean, it does appear like the competitive environment, it was pretty robust. There are lots of builders out there that are getting pretty aggressive in terms of what they're offering. I mean, what needs to happen for that to change? I mean, do you think these incentive levels are just kind of here to stay? Is it in a mortgage rate sort of scenario? I'd just be curious your thoughts on all those topics.
There's a lot to discuss. I'll address part of it and then hand it over to Dave. First, let me mention the incentives in the markets. Last quarter, I specifically pointed out a few markets where our sales pace was not meeting expectations, and we needed to make changes. I did this intentionally because it was the truth, but I know it didn’t sit well with my team in those areas. I’m pleased to report that we took the necessary actions in those markets. We improved our specification strategy and adjusted closing costs to reduce prices and enhance competitiveness. These changes resulted in a significant surge in sales pace in those markets. A notable shout-out to Houston, where, between August and September, we more than doubled our monthly sales. The sales pace in October remained high even as incentives were scaled back. I’m satisfied with how we identified and addressed the issue, applying a timely solution.
This approach allowed us to sell out some communities in areas and price points that are outside our usual markets, which I don’t believe will have lasting negative impacts. This situation is reflected in our margin guidance, particularly for Q1, which includes factors not present in Q2, Q3, or Q4. For the full year, we anticipate that specifications will account for 60% of our closings. In my experience, we have never achieved a year where 60% of our closings were specifications, and historically, they have generally yielded margins two to three points lower than our built-to-order homes, apart from the two years during COVID. Our outlook takes into account the current higher rate environment that will likely lead to a larger percentage of specifications, and we have adjusted our expectations for margins accordingly. If we have a strong spring selling season and are able to sell many built-to-order homes between now and April, we expect our full-year margins to exceed the lower end of our projections. Additionally, if there is any relief in interest rates, that could lead to reduced incentives and further benefit our margins, although we are not relying on that scenario.
Yeah. Look, the only thing I would tell you, Tyler, is Allan talked about some price costs on Zero Energy Ready. I think that's another opportunity to drive some margin that frankly is not in that low end of our range that we've given. But, look, I would tell you the 19.5% kind of on the low end assumes that that spec margin kind of goes back down to that 2% to 3% kind of differential that we've talked about, but not dramatically better than that.
Okay, great. So my last question is slightly challenging. I appreciate all the details provided for 2025. Updating a model in real-time can be tricky. Based on the low end of your guidance, it appears that EBITDA should be increasing next year. Do you anticipate seeing EPS growth next year, or could there be a tax-rate issue affecting the differing growth rates on a year-over-year basis?
So, let's start, Tyler, with the tax situation. So in 2024, we were still benefiting from harvesting energy efficiency credits from previous years. So the tax rate is going to be a little higher than what we saw as we look forward into 2025 and we gave Q1 guidance on being around 15%, that will affect the comparability. What I would tell you from a return on capital, and we made it pretty clear in our comments, we're expecting to generate a double-digit return on capital employed. Now this year, we were in the 11s. We'd be pretty disappointed if our ROCE was lower than it was this year. But again, we've kind of expressed that we expect it to be 10% or better.
Okay. All right. I'll leave it there. Appreciate all the detail. Thank you.
Thanks, Tyler.
Our next question will come from Jay McCanless with Wedbush. You may proceed.
Hey, good afternoon, everyone. Just want to clarify, on the fiscal '25 guidance, that is adjusted gross margin you're forecasting to, correct?
That is adjusted gross margin, Jay.
Okay. My next question is about reconciling the community count growth. I understand you anticipate growth, but there might be some challenges along the way. Why strive for higher absorption rates and aim for a more typical guidance level when there seems to be uncertainty about the speed of that growth? What is the reasoning behind being aggressive with the guidance despite potential obstacles regarding community count?
Well, there are two different things, right, Jay. I mean, community count and pace left hand, right hand. So on the pace side, we're simply we've done better in October. I expect that we're going to do better in November than a pretty easy comp. And I want us and we expect to sustain better paces. I don't think we'll have the problem next summer that we had this summer. So I think on balance, we ought to be up year-over-year on pace, and that's what we've guided to. Separate and apart from that, I mean, it's related clearly, but a different point is, we're entering the year with a bunch more communities. We're up 20%. We're up 20%, so it's more than 20%. The timing of the new communities coming on and the timing of close-outs, boy, you can miss by a month and slip from one quarter into the other quarter either because you sold a little faster in that community or a little slower or you had a two-week delay before you were able to grant open because the DOT didn't get the turn lane put in.
Those kinds of things can happen. So what we've said is, we're going to be up in average community count between 18 and 22 communities. Get to about 180 at the end of the year, that math all foots. What Dave said though is that between the first and the second quarter, I don't know, we don't know for sure whether we will be sequentially up from Q1 to Q2. But Q2 will be up double digits over Q2 a year ago. And Q3 will be up double-digits over Q3 a year ago. And Q4 will be up double digits over Q4 a year ago. So I think we were just trying to provide some clarity that the sequential move may be a little uneven, but the year-over-year growth is locked in for '25.
Yeah. Jay, the only thing I would tell you is and I understand the question, I would tell you that one of the reasons we gave ranges and really focus on words like outlook, there's a lot of uncertainty now. And I don't think we're being aggressive. I think we're trying to give you a low end of what we think could happen. And if things get better, as Allan said, and mentioned enough a number of scenarios where things could get better, then yeah, we'd expect to be toward the high end of the range.
Okay. For my final question, can you share what your community count goals are for 2025? Given the apparent increase in demand for move-up homes, whether first or second, do you have the ability to adjust the product mix to reduce the 60% spec, which I assume is mainly entry-level, and offer some of that as to-be-built homes? Or is that 60% mix fairly fixed based on your community openings this year?
So, Jay, I really appreciate this question, but I want to clarify something for you. When we mention specs at 60% and you refer to that as entry-level, I wouldn’t view it that way in the case of Beazer. In any given community, if we plan to sell, say, 50 homes in a year, maybe 30 of those are specs in that community and 20 are to-be-builts or some other ratio, but it's not the same as the specs in other communities. Do you follow me?
Yeah.
We focus on the variety within the communities we already have rather than targeting different communities. It’s important to acknowledge that we are not the price leader in the market. I wouldn’t categorize us as a move-up builder because in each market we operate in, there is always a builder offering a lower-priced home. When we build Zero Energy Ready homes, they are not the most affordable option available; they represent a higher quality home. The size can vary, ranging from 2,000 to 3,000 square feet, and pricing can range from $400,000 to $1 million, depending on the market. On average, as David mentioned, our prices will be around $530,000, but our specifications do not reflect entry-level products, as that’s not our focus.
Look, I would tell you, Jay, the commitment to get to 100% Zero Energy Ready is exactly the demonstrative of it, right? All the homes we build specs or to-be-built are very, very high quality.
Next, we will hear from Alex Rygiel with B. Riley. Your line is open.
Thank you. Nice quarter, gentlemen. Any chance you could sort of go around the country and talk to us a little bit about some of the strengths and weaknesses across the different geographies?
I'd be happy to share my thoughts, but I want to emphasize the typical caution that arises when analyzing market performance. Sometimes our success is due to our efforts, and other times it's simply the strength of the market. In the fourth quarter, we saw a diverse mix of markets across various locations and price points performing well. For instance, our team in Virginia excelled, as did our Myrtle Beach team, where we encounter a very different buyer profile compared to the suburbs of DC and Virginia. Atlanta also performed well, and out west, Las Vegas and Northern California stood out positively. While certain markets exhibited generally healthy conditions, I believe part of our success is attributable to our efforts, while the broader market also played a role. In contrast, we faced challenges in Texas during the third quarter, largely due to our own shortcomings, which we've since addressed, and I'm feeling optimistic about our position there. However, our presence in some other major markets is limited, leading to a somewhat unique experience that might not reflect broader trends. For example, I would hesitate to comment on Phoenix, as there are several builders in that market significantly outperforming us, and they would provide a more accurate perspective. I can only share insights on how our specific communities performed there.
Very helpful. And then it sounded like in September and October, dirt builds actually picked up a little bit.
It did.
But yet your messaging is, in the next 12 months to sort of expect the mix shift towards more spec builds. So if you could maybe reconcile those two.
Yeah, it's coming off of a crazy high number. I mean, August was 70-ish kind of percent of specs and September was a little bit lower than that and October was lower than that. So the trend is definitely in the right direction in terms of a little bit more strength in the to-be-builts. But candidly, it was still a majority of specs. It just wasn't as exaggerated a majority as we experienced in July and August. So the 60% reflects a higher level than normal for us, but certainly better than where we were in August and September.
Super helpful. Thank you.
Thanks, Alex.
Our last question will come from Alex Barron with Housing Research Center. Your line is open.
Hey guys, thank you and I appreciate all the details. I was hoping you could elaborate what changed and the example you gave of Houston where the sales doubled, if you could give more specifics on what's driving the confidence in the increase and sales pace you guys are expecting this year?
Well, I think, in the specs in particular, in Houston, some of the things that we did, and let me be clear, we took some lower margins, like that helped. But I think we had over-specced the specs. The flooring, the cabinet, the countertops, I think we aimed a little high and we found ourselves out of the market. And I think a very detailed review of that spec level proved that we were putting money in the home that we weren't getting paid for. And so we had to get over ourselves, fix it. And the next spec start didn't have it. But we did other things. We took our closing costs away and moved it into a price reduction or we substantially reallocated the incentive to price reductions. Sometimes it's as simple, honestly as geography. If you're advertising $419,000 with a $40,000 incentive, you might be better off advertising $379,000. And I think it was some things like that that we did. Now, in fact, there were some margin consequences, but we were very scalpel-like as it related to specs and closeout communities. And I think it was a combination of getting those communities working and then just dialing in a little bit our strategy with specs and to-be-built pricing that has kind of helped us sustain a heavier or a healthier level of activity.
I understand. It makes a lot of sense. Opting for a lower margin to potentially double your sales or achieve a 30% increase is reasonable. As you are expanding your specifications, are you also considering offering forward commitments or buyback options, or any strategies that would help people manage those before they reach completion?
Well, I mean, we've always had a temporary and a permanent buydown set of options for our customers. I feel like our mortgage toys program gives us a great lineup. We get multiple lenders bidding effectively for that customer's business. And if a short-term buydown to conserve some cash is important, they can do that. If a permanent buydown so that they can qualify is important, we get proposals or our customers get proposals for that. So yes, we've got the full arsenal of mortgage tools and I would argue really more than most because literally every customer in order to get our closing cost incentive, one of our policies is you have to get more than one loan proposal. So we know our customers are getting the benefit of choice.
Got it. And if I could ask one last one, any thoughts on share buybacks given your stock is still below one-time book?
No, Jay, I would tell you that we always think about this the same way. We consider excess capital and excess liquidity in the business, along with risk-adjusted returns. While we're certainly not opposed to pursuing opportunities if they offer the highest risk-adjusted return using our excess capital, it is one of the options we consider. However, our primary focus has been on land spending and growth, and that will remain unchanged.
Okay. Best of luck, guys. Thank you.
Thanks, Alex.
Thank you. And now we do have a follow-up question from Alan Ratner with Zelman & Associates. You may proceed.
Am I in trouble now, Alan?
No, thank you for including me again. I'm not sure it's an easy question, but I'm curious.
I know you too well to expect a softball, my friend, so I'm ready.
No, absolutely. I'm surprised it didn't come up, which is why I jumped back in. We're a week post-election and still a few months away from the administration change. I'm curious about all the proposals and discussions that have emerged so far regarding various issues. Do you have any thoughts on how discussions about topics like mass deportation might impact labor availability? What about GSE reform? I'm just throwing this out there, but I'm interested in your thoughts on the upcoming administration change.
I'm going to avoid discussing GSE reform since I'm on the Board of one of the GSEs. However, as we consider other issues, there are various factors at play, and things are not set in stone, as you've noted. I believe it's quite significant. One recurring theme in our discussions this quarter is the realization that it's more likely than not that rates will remain high compared to my expectations from 90 days ago. We were seeing a consistent decline in mortgage rates through July, August, and early September, but that has changed. In fact, rates are currently 50 basis points higher than the last time we spoke. We've come to accept that factors like tax reductions or increased spending, or a mix of both, may realistically keep mortgage rates elevated, regardless of Fed actions. That's a new assumption we've adopted. On the growth side, I think that when we begin to discuss and implement some deregulation and clarify tax cuts or tax levels, and when there's less fear of negative changes, that will boost enthusiasm in the economy.
The third aspect you mentioned involves immigration policy, which is quite complex. The levels of undocumented and non-legal immigration have clearly affected our society. However, they don't seem to be significantly employed in the housing sector according to our trade requirements. Nevertheless, if many people are removed from the workforce who perform other jobs, it could introduce competition for labor, altering the dynamics. While I believe the mandate is ambitious, the details and timing remain unclear. I'm keeping an eye on that, but I can't accurately predict its specific impact. Overall, I am optimistic about increased confidence in rates, tax rates, and regulations, and I think we may see higher mortgage rates as a result.
Very helpful. Thanks again.
You bet, Alan.
Thank you. We are showing no further questions at this time.
All right. I want to thank everybody for joining us on our fiscal fourth quarter call and we look forward to talking to everybody in next quarter. Thank you so much. This ends today's call.
Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.