PulteGroup

PulteGroup’s CEO: “…we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices….we raised prices in effectively all our communities.” “Ryan Marshall — President and Chief Executive Officer: The reality is that these numbers could have been significantly higher, but COVID and other challenges impacted our availability of lots, labor and materials, which caused us to intentionally slow sales. As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices. We continue to implement these actions in the fourth quarter as we raised prices in effectively all our communities. At the same time, we continue to restrict sales in more than half of our communities.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

PulteGroup President: “The limited supply of new and existing homes allowed prices to increase by double digits last year…” “Ryan Marshall — President and Chief Executive Officer: In other words, we enter 2022 with tremendous momentum. While demand conditions are strong, the supply side of the equation has been extremely challenging, with no clear signs as to when things will get better. The limited supply of new and existing homes allowed prices to increase by double digits last year, but labor shortages and significant disruptions in the supply chain are limiting production and extending build cycles. Our suppliers and partners are working hard to provide needed resources, but key products that are under allocation must be ordered months in advance or are simply not available.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

PulteGroup’s CFO said his company saw a 10% in the average sales price for its homes. “Bob O’Shaughnessy — Executive Vice President and Chief Financial Officer: Home sale revenues in the fourth quarter increased 38% over last year to $4.2 billion. Higher revenues for the period were driven by a 26% increase in closings to 8,611 homes, along with a 10% increase in average sales price to $490,000. The higher ASP in the quarter reflects double-digit pricing gains from all buyer groups, while closings came in slightly above guidance, thanks to the tremendous effort on the part of our homebuilding and financial services teams. Consistent with comments made throughout 2021, favorable supply and demand dynamics for housing supported the strong price appreciation we experienced across all markets and from all buyer groups.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

PulteGroup CFO: “If the supply of labor and materials does not allow for increased production, we’ll continue to emphasize price over pace, restrict sales as needed as we focus on driving the best returns within each community.”“Bob O’Shaughnessy — Executive Vice President and Chief Financial Officer: If the favorable demand conditions allow us to sell in an even higher year-over-year growth rate, we’ll have to see if the supply of materials and labor will be equally supportive. Based on what occurred in 2021, we want to be confident we can deliver a high-quality and complete home at closing. If the supply of labor and materials does not allow for increased production, we’ll continue to emphasize price over pace, restrict sales as needed as we focus on driving the best returns within each community. As we move through 2022, we are well positioned to meet buyer demand, given our expectations for sequential increases in our community count throughout the year.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

PulteGroup’s CFO: “strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price in backlog increasing by 22% compared to last year.” “Bob O’Shaughnessy — Executive Vice President and Chief Financial Officer: For the coming four quarters, we project our average community count to be 790 in Q1, 815 in Q2, 840 in Q3 and 870 in Q4. Given the land investments we’ve made, we expect this trend to continue and see further community count growth in 2023. As mentioned, strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price in backlog increasing by 22% compared to last year. Given the price of homes in backlog and the mix of homes we anticipate closing, we expect our average sales price to be between $500,000 and $510,000 in the first quarter. Our average sales price should move higher as we move through the year and we currently expect our full year average sales price to be approximately $515,000. As always, the ultimate mix of deliveries can influence the average sales price we realized in any given quarter.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

PulteGroup’s CEO said the company had “very regimented pricing discipline in the way that we break down what the competitive set is, both from a resale and a new environment, both what’s on the ground as well as what we see coming into the pipeline.““Ryan Marshall — President and Chief Executive Officer: Yeah. Carl, it is more than local. It’s probably hyper local. All of our pricing decisions are made on a community-by-community basis. But that’s a company philosophy. We’ve got very regimented pricing discipline in the way that we break down what the competitive set is, both from a resale and a new environment, both what’s on the ground as well as what we see coming into the pipeline over the next six to 12 months. So I think the tools, the methodology, the proprietary pricing algorithms that we have, we think it served us very well and we’ve gotten very good results from that. I think Carl, we always try to be prudent in what we do and never get too far over our skis. I think the industry has seen over the years, if you push things too far, the consumer will be pretty quick to tell you that you’ve gone too far and it will shut down. So in the face of potentially some more inventory coming online with some higher rates, we’re going to continue to run our playbook, but take into consideration all the data that’s available.” (PulteGroup Q4 2021 Earnings Call, 2/1/2022)

The PulteGroup told analysts the Fed’s moves were discouraging buyers and home sales

PulteGroup’s CEO told analysts interest rate hikes were discouraging potential home buyers, “some because they can no longer afford a home and others because they were unsure if now it’s truly the best time to buy a home.” “Ryan Marshall – President & Chief Executive Officer: As we move throughout the quarter, you could almost see demand ebb and flow with the movement of interest rates. Softness in July’s home buying demand eased as mortgage rates fell in August. The positive trend in demand was short-lived, however, as interest rates surged higher in September in response to Federal Reserve actions and hawkish commentary from Chairman Powell. The pullback in demand was widespread across geographies and consumer groups as potential home buyers move to the sidelines, some because they can no longer afford a home and others because they were unsure if now it’s truly the best time to buy a home.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup’s CEO: “As the Fed clearly desires, new home sales rates and selling prices are in the process of adjusting lower in response to higher interest rates.” “Ryan Marshall – President & Chief Executive Officer: Housing this front and center in the Federal Reserve’s battle against inflation. As the Fed clearly desires, new home sales rates and selling prices are in the process of adjusting lower in response to higher interest rates. With home sales slowing, we are adjusting how we approach ongoing land investment.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup’s CEO: “We’re absolutely seeing buyers that can no longer afford, we’re also seeing buyers that still can’t afford, but they’ve gotten cold feet for whatever reasons.” “Ryan Marshall – President & Chief Executive Yeah, Ivy, thanks for the questions. I appreciate it. In terms of the cancellations that we’re seeing, it’s both. We’re absolutely seeing buyers that can no longer afford, we’re also seeing buyers that still can’t afford, but they’ve gotten cold feet for whatever reasons. And in many cases, they’re walking away from pretty sizable earnest money deposits that economically don’t make a ton of sense, but that’s where you really get into the psychology. They’re just not confident in making a purchase.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

The PulteGroup reported rising deal cancelations and less investments in future home building

PulteGroup’s CEO: “ as it relates to forward starts of new inventory, we’ve significantly slowed that, and we’re matching that to what our sales rate is.” “Ryan Marshall – President & Chief Executive Officer: The last thing and I highlighted in my prepared remarks, as it relates to forward starts of new inventory, we’ve significantly slowed that, and we’re matching that to what our sales rate is. So we think we’ve done exactly what we said we were going to do and we’ve made additional adjustments based on how we see market conditions at the moment.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup’s CEO said rising mortgage rates were the main reason their cancelations had increased 24% in the past quarter.“Ryan Marshall – President & Chief Executive Officer: The impact of consumers dealing with issues of financing or fear also extended to our backlog as cancellation rates increased 24% in the quarter. While there are a number of factors influencing housing demand, the rise in mortgage rates has likely had the most significant impact on today’s consumers. Based on their commentary, expectations are that the Federal Reserve will continue to aggressively raise rates to control inflation for at least the remainder of 2022 and then likely hold rates higher for longer. Given these market dynamics, we continue to meaningfully adjust our operating practices as we adapt to today’s more challenging market conditions.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup told analysts that in response to slowing sales it had canceled agreements on 14% of their lots and $800 million of future land acquisition. “Ryan Marshall – President & Chief Executive Officer: At the end of the second quarter, we controlled 130,000 lots under auctions. Given the more challenging demand conditions we face today, we are re-underwriting our land deals using price, pace and cost assumptions based on current market conditions, with a view towards assessing whether expected returns still achieve or exceed our required hurdle rates.As a consequence of these reviews, in the third quarter, we canceled agreements accounting for approximately 19,000 lots or 14% of the lots we held via option at the end of the second quarter. In taking these actions, we walked away from almost $800 million of future land acquisition spend. No one wants to write off $24 million of deposits and pre-acquisition spend, but the flexibility to exit these transactions reaffirms the strategic importance of building more optionality into our land pipeline.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup told analysts that new net orders for homes declined 28% in the third quarter, primarily because of higher interest rates.“Bob O’Shaughnessy – Executive Vice President & Chief Financial Officer: Net new orders in the third quarter totaled 4,924 homes, which is a decrease of 28% from last year. The year-over-year decline in orders reflect softer demand, resulting primarily from higher interest rates as our absorption pace fell to 2.0 homes per month, down from three homes per month for the same period last year. Along with a slower pace of sales, our reported net new orders in the third quarter were impacted by a significant increase in cancellations. Our cancellation rate for the third quarter was 24%, which compares with 10% in the third quarter of last year and 15% in the second quarter of this year.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

Despite rising interest rates the PulteGroup reported billions in sales at higher prices, funding nearly $1 billion in buybacks

PulteGroup still reported $3.8 billion in home sales in the third quarter, 16% over the previous year, at average sales price of $545,000, 15% over the the previous year.“Bob O’Shaughnessy – Executive Vice President & Chief Financial Officer: Thanks, Ryan, and good morning. There’s a lot to review this quarter, so I’ll dive right in. Home sale revenues for our third quarter totaled $3.8 billion, which represents an increase of 16% over the same period last year. Higher revenues for the quarter were driven primarily by a 15% increase in our average sales price to $545,000. The year-over-year increase in average sales price of $71,000 was driven by improved pricing across all buyer groups as first time was up 20%, move-up gained 16% and active adult was up 15%. Unit closings in the quarter increased by 1% over last year to 7,047 homes.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup reported spending nearly $1 billion on stock buybacks in nine months thanks to higher net income.“Bob O’Shaughnessy – Executive Vice President & Chief Financial Officer: In total, PulteGroup’s reported net income for the third quarter increased to $628 million or $2.69 per share. The company’s prior year net income was $476 million or $1.82 per share. In the third quarter, we continued our share repurchase activity, buying 4.4 million shares or another 2% of our outstanding common shares for $180 million or an average price of $41.20 per share. Through the first nine months of the year, we have repurchased approximately 9% of the shares we had outstanding at the beginning of the year for $975 million. Along with buying back stock, we invested $1.3 billion in land acquisition and development in the quarter, of which 56% was for the development of existing land assets. As Ryan discussed, in response to changing market conditions, we are re-underwriting every land transaction based on current price, pace and cost dynamics.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

The PulteGroup indicated that with less money invested in home building, more could be spent on buybacks and dividends

One Wall Street Analyst asked PulteGroup if less investments in home building meant “could you be more aggressive on buybacks or continue to be aggressive on buybacks?”“John Lovallo, Analyst: Good morning, guys. Thank you for taking my questions as well. The first one is just given the more cautious near-term stance, pulling back on land spend, which is clearly prudent in our view. I mean, where do you intend to allocate the capital? I mean, could you be more aggressive on buybacks or continue to be aggressive on buybacks?” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)

PulteGroup’s CFO agreed with the assessment because “spend is going to be down…we think we’re going to be cash flow positive,” “Bob O’Shaughnessy – Executive Vice President & Chief Financial Officer: Yeah. We’ll go through the same exact exercise we always have. It’s interesting we highlighted in this call. We are out on our revolver, which is – we started borrowing a little bit last quarter. We’re actually out on the line today first and foremost, we’ll pay that off. Our expectation is that we’ll be able to do that in short order. Then what we always do is look at what the next several years. So it’s not a point in time, capital generation and usages and we’ll consider investment in land. We’ve highlighted that we think spend is going to be down, we’ll be building and monetizing our backlog. So we think we’re going to be cash flow positive. And so we’ll look at the capital base that we’ve got and what to do. And we’ll have choices. We can – we will obviously continue our dividend. We can look at share repurchases. We will also be looking at our leverage.” (PulteGroup, Inc Q3 2022 Earnings Call, 10/25/2022)