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Text: I'm very pleased with our performance in the third quarter.
Demand continues to be very strong.
We are benefiting from our strategy of expanding our product lines, price points and geographies as we continue to grow the business, drive price, expand margins and improve our capital efficiency.
Home sales revenues of $2.23 billion were up 37% compared to the prior year period.
Adjusted gross margin of 25.6% was up 170 basis points compared to last year.
Both our pre-tax income of $303.4 million and our earnings per share of $1.87 more than doubled compared to last year.
We signed 3,154 net contracts for approximately $2.98 billion, up 11% in units and 35% in dollars compared to the prior year period.
These were third quarter records in both units and dollars.
In addition, our contracts per community at 10.2 were 20% above last year and our highest third quarter ever.
Our average selling price in the quarter was approximately $945,000, up $70,000 compared to the second quarter and up $163,000 year-over-year.
This increase in ASP shows the pricing power of our luxury business.
This strong demand has continued into our fourth quarter.
We've averaged over 300 non-binding deposits per week in the first three weeks of August, a pace that is consistent with May through July.
Not surprisingly, our deposits were down 15% compared to the same three weeks last August when demand surged following the lifting of COVID lockdowns.
However, compared to the same three weeks of August 2019, deposits were up 29%.
In some markets, demand still far outpaces supply, and we are limiting lot releases.
In other markets, we are seeing demand return to seasonal patterns.
I want to remind you that in summer and fall of 2020, we, along with the rest of the industry, experienced a historic surge in demand and sales.
From August 1 to September 15, 2020, the first half of our fiscal 2020 fourth quarter, net signed contracts were up 110% in units, and for the full quarter, they were up 68%.
We knew these growth rates would be unsustainable, and as a result, we expect our fourth quarter contracts to be down compared to last year.
While year-over-year order declines may make headlines, they don't reflect the current state of this housing market, which remains very strong.
In the near term, our biggest challenge is managing industrywide supply and labor constraints that are extending delivery times.
In our third quarter, cycle times grew by about two weeks, pushing some anticipated third quarter deliveries into our fourth quarter.
This same pressure will apply to our fourth quarter.
During the third quarter and into the start of our fourth quarter, we raised prices in most of our communities.
Just this past Monday, we rolled out another nationwide price increase.
These increases have more than offset cost pressures we've experienced this year.
In light of the pricing embedded in our backlog and our focus on managing costs, we are confident that our gross margin in fiscal 2022 will significantly exceed the 25.6% margin we project for fiscal 2021's fourth quarter.
It is important to note that our customers are generally better positioned to absorb price increases due to their higher incomes, investment portfolios and the benefit of increased values in their existing homes.
In terms of demand across our markets, strength in the quarter was broad based across both geography and product type, with especially strong demand in our affordable luxury and active adult communities.
With our strategic expansion in the Sunbelt and Mountain states, we continue to benefit from migration out of higher-cost markets into more affordable markets, lessening the impact of affordability as prices have risen.
Our backlog at quarter-end was a record in both units and dollars.
Backlog was $9.4 billion on 10,661 units, up 55% in dollars and 40% in units compared to last year.
As we noted last quarter, we expect meaningful growth in revenue, gross margins, earnings and ROE in fiscal year 2022.
We reaffirm these expectations, including a return on beginning equity for fiscal 2022, well above 20%.
These expectations are driven not just by the strength of the housing market and our backlog, but also by the structural and permanent changes we have made to many aspects of our business, especially to how we acquire and develop land in a more capital-efficient manner.
We remain bullish on the long-term prospects for the housing market, which is supported by many factors, including the significant imbalance between the supply and demand of homes.
On the supply side, this imbalance is the result of a decade of underproduction of new homes.
On the demand side, millennials, who make up the largest generation of Americans, are forming families and entering their prime homebuying years.
We have also seen baby boomers and other active adults reenter the market.
Many older workers are accelerating their plans, moving now and working virtually in places they might have planned to move to a few years later.
Interest rates remain low, the resale market is tight, Americans have a much greater appreciation of home and the overall economy is improving.
We believe that all these factors will continue to contribute to strong and sustained demand for new homes in the years to come.
And we are well positioned to capitalize on the opportunities this market presents.
At quarter-end, we owned or optioned approximately 79,500 lots.
Our option lots represented 53% of our total lots controlled at third quarter end compared to 49% one quarter earlier and 43% one year ago.
We have already made significant progress in moving toward the 60% optioned and 40% owned goal we set last quarter.
This shift to more optioned land is a key part of our capital efficiency initiatives.
This land position provides the foundation for growth over the next several years, and we are currently benefiting from the significant percentage of our land that we acquired at lower pre-pandemic prices.
At quarter-end, we were selling from 314 active communities.
We continue to project growth to 340 communities at fiscal year-end and an additional 10% community count growth in fiscal 2022.
This guidance is based solely on land we already control today.
We also have the land under control today for meaningful further community count growth in fiscal year 2023.
Our strategic expansion into new markets, new product lines, new price points and especially the affordable luxury niche has positioned us well for growth and is contributing to improvements in both our gross margin and our ROE.
In fact, our affordable luxury homes are generating gross margins that are comparable to our luxury homes.
Affordable luxury comprised 44% of deliveries in the quarter ended July 31, up from 40% last year.
First-time homebuyers who are the primary buyers in our affordable luxury segment accounted for 29% of our deliveries this quarter compared to 27% one year ago.
Our affordable luxury product enables us to move into new markets and expand our presence in markets where we are already established.
These homes appeal to many millennials who are making their first home purchase and can be built up more quickly and efficiently and on less expensive land.
Just last week we announced the acquisition of StoryBook Homes in Las Vegas.
With about 550 owned and controlled lots, this acquisition allows us to quickly expand our affordable luxury offerings in the Las Vegas market.
StoryBook is a remarkably efficient builder, and we look forward to sharing lessons learned from its operations throughout the rest of our organization.
We continue to focus on additional ways to improve capital efficiency to bolster ROE.
Yesterday, we announced a new strategic partnership with Equity Residential, a world-class S&P 500 company focused on luxury apartment rentals to jointly acquire and develop sites into new rental apartment communities in key US markets of metro Boston, Atlanta, Austin, Denver, Orange County, Seattle and Dallas.
Over the next three years, we expect Equity Residential to invest 75% of the equity for each selected project with our apartment living unit investing the remaining 25%.
We expect these projects to be financed with approximately 60% leverage.
We are targeting an initial minimum co-investment of approximately $750 million in combined equity between the companies or nearly $1.9 billion in total capacity, assuming the 60% leverage.
We will act as managing member of each project, overseeing approvals, design and construction and will receive development, construction management and financing fees as well as a promoted interest upon the sale of each property.
Equity Residential receive fees for property management, leasing and marketing services, as well as construction oversight.
We've identified three land parcels that we already own to jump-start the venture.
The total anticipated cost of these three projects is approximately $242 million.
The ventures should allow us to develop more apartments with less capital, improving the capital efficiency of the apartment living business.
We also expect this venture to produce a more predictable stream of earnings from our apartment living business as we expect to sell each developed property at stabilization, in most cases to EQR.
We are very excited about this partnership with EQR and we hope we can expand on this relationship.
We are also looking at forming one or more additional programmatic relationships in markets and for products that are not covered by our agreement with EQR.
We expect that such a partnership would provide a similar capital efficient platform for the balance of the apartment living business.
Operationally, we had another great quarter.
Our production teams continued their solid performance as we managed through the labor and supply chain issues that have impacted homebuilders this year.
We delivered 2,597 homes at an average price of approximately $860,000, generating third quarter homebuilding revenue of $2.23 billion.
Deliveries were up 28% in units and 37% in dollars compared to one year ago.
We met our revenue projections due to a higher average price of deliveries than anticipated.
Our third quarter pre-tax income was $303.4 million compared to $151.9 million in the third quarter of 2020.
Net income was $234.9 million or $1.87 per share diluted compared to $114.8 million and $0.90 per share diluted one year ago.
Third quarter adjusted gross margin was 25.6% of revenues compared to 23.9% in fiscal year 2020's third quarter and 80 basis points better than projected.
The outperformance was due primarily to improved pricing power and favorable mix.
SG&A as a percentage of home sales revenue in the quarter was 10.5% or 110 basis points better than our guidance.
We attribute this primarily to lower than expected selling and marketing expenses as well as continuing and permanent overhead cost controls.
Joint venture, land sales and other income was $29 million in the third quarter compared to $3.6 million in the same quarter last year.
Our projection was approximately $20 million.
The outperformance was driven by better than expected results from our mortgage operations and our apartment living operations.
Our balance sheet remains strong.
We ended our third quarter with approximately $2.7 billion of liquidity, including $946 million of cash and approximately $1.8 billion available under our $1.9 billion revolving bank credit facility.
In the third quarter, we invested approximately $200 million in land acquisition and another $230 million in land development.
Due primarily to our focus on acquiring land more efficiently, our land and development spend is projected to be slightly lower in fiscal 2021 than what we spent two years ago in fiscal 2019 despite our significant growth since then.
These structural changes in how we acquire land are also permanent and are contributing to a significant increase in return on equity in 2022 and beyond.
We expect to generate $750 million in cash from operating activities in fiscal year 2021.
We will continue to use our cash to invest in the growth of our business, return cash to shareholders and further reduce our debt, including retiring $410 million of our 5.875% public notes that are due in February 2022.
We intend to call these bonds in our fourth quarter and retire them at par in mid-November 2021.
Our net debt to capital ratio stands at 33.1 at third quarter end, and we expect it to drop to the mid to upper 20% range at fiscal year-end.
During the quarter, we continued our program of returning capital to shareholders through share repurchases and dividends.
In our third quarter, we repurchased approximately 1.7 million shares at an average price of $57.66 for an aggregate amount of $95.4 million.
We expect to repurchase a similar amount in our fiscal fourth quarter.
In April we increased our quarterly dividend by 55% to $0.17 per share.
These actions reflect our confidence in our business and in the sustainability of our substantial cash flows moving forward.
Turning to fourth quarter and full year guidance.
Due to the production delays impacting our industry, we now we expect full year deliveries of approximately 10,100 homes compared to the midpoint of our previous guide of 10,300 homes.
These 200 deliveries, which are sold and have substantial deposits from our buyers, are now projected to settle in the first quarter of fiscal 2022.
So we now project our fourth quarter deliveries to be approximately 3,450 homes.
We estimate an average delivered price for the fourth quarter of approximately $840,000 per home and approximately $830,000 for the full year.
This is an increase of $15,000 per home compared to our previous fiscal year guidance.
We are projecting a fourth quarter adjusted gross margin of 25.6% of revenues and a full fiscal year 2021 adjusted gross margin of 24.9%.
This is an increase of 30 basis points compared to our previous full year guidance.
Based on the composition of our backlog, we are confident that our full year fiscal 2022 adjusted gross margin will significantly exceed the 25.6% margin we are projecting for the fourth quarter of fiscal 2021.
Our confidence is based on several factors, the most significant of which is the higher prices that are embedded in our backlog, which is the result of the steady and significant price increases we've achieved over the year.
Demand is allowing us to continue to push price in most of our markets.
In addition, we are intensely focused on our construction budgets and managing building costs.
Like the entire industry, we are seeing cost pressures on material and labor.
We enjoy stronger relationships with our trade partners and have tremendous operating scale, which helps us to manage these costs.
We also continue to benefit from our long land position.
The land for most of the communities that we'll be delivering homes in fiscal 2022 was put under control prior to the pandemic at lower prices.
Turning back to guidance.
We expect interest and cost of sales to be approximately 2.3% of home sales revenues for the fourth quarter and full year.
This full year guidance is 20 basis points better year-over-year and reflects the impact of debt reductions made earlier this year.
We expect our interest expense to continue to decline in fiscal 2022 as we further reduce our leverage.
We expect SG&A as a percentage of revenue to be approximately 9.8% in the fourth quarter and 11.3% for the full year.
This full year guidance is 50 basis points better than previously projected.
As Doug mentioned, we expect community count to be 340 at fiscal year-end, with 10% growth from there by fiscal year 2022.
Our full year guidance for fiscal year 2021 other income, income from unconsolidated entities and land sales is now $140 million for the full year, with approximately $40 million projected for the fourth quarter.
This is a $30 million increase from our projection last quarter and is driven by more sales projected in our apartment living division.
Our third quarter tax rate was 22.6%, which includes approximately $12 million in energy tax credits.
Our fourth quarter effective tax rate is projected to be approximately 26% and our full year guidance is 24.6%, 90 basis points better than our previous full year guidance.
Taking this all into account, we have increased our projected return on beginning equity for fiscal year 2021 to 15.9%, over 700 basis points better than fiscal 2020.
As Doug noted, we expected to exceed 20% in fiscal year 2022 and we believe our capital efficiency initiatives and the structural changes in our land acquisition strategy will keep it above 20% long-term.
They continue to demonstrate their dedication to taking care of each other and our customers, and for that, I am very grateful.
Now let me open it up to questions.
Andrea, ready to go.

user
qtrly earnings per share $1.87.
backlog value was $9.44 billion at q3 end, up 55% compared to fy 2020's q3.
sees deliveries of 3,450 units in q4.

assistant