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Text: Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings including our annual and quarterly reports.
I look forward to speaking with you today about PulteGroup's third quarter operating and financial results.
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 9 months of 2021, our home sale revenues were 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 9 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 12 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 homebuilding industry has experienced over the past 18 months.
Either way, to deliver our third quarter numbers during the 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, you wait.
For others, it's changing lead times where order fulfillment has gone from 6 weeks to 16 weeks, back to 11 weeks and then back to 16 weeks.
And 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 advanced notice of the shortage 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 be -- that we have to overcommunicate 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.
And finally, we must maintain our standards on the quality and completeness of each home that we deliver.
Given the very problems impacting the supply chain, we would expect a solution that -- we would expect that solutions will be found over different time lines, depending on the suppliers' 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.
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 8% 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 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 watermark 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% respec.
We have almost 900 more spec homes in production than we did in the second quarter as we have 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 we have only 109 finished specs, these units are about helping to position the company for 2022, rather than providing closings in 2021.
We faced similar dynamics within our production of sold units as 2/3 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 to $490,000.
At the midpoint, this would represent an increase of approximately 10% over last year.
Our reported homebuilding 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 attest 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 to 170 basis points over last year's fourth quarter and an increase of 10 to 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 for a comparable 9.6% home sale revenues.
Given there's still increase in closings, we expect [Technical Issues] in the upcoming quarter expected to fall to a range of 8.9% to 9.2% of home sale revenues.
Looking at our financial services operations.
Our third quarter pre-tax income was $49 million versus $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, for an effective tax rate of 23.3%.
In the comparable prior year period, our effective rate was 14% as we realized a 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 repurchase 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 of 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% 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.
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 -- 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% to 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 homebuyers with the average FICO score remaining above 7 50 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 homebuilding operation that is generating tremendous cash flow, and we have an exceptional balance sheet strength and liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities.

user
compname reports q3 earnings per share $1.82.
q3 earnings per share $1.82.
qtrly home sale revenues increased 18% to $3.3 billion.
quarter-end unit backlog of 19,845 homes up 33%.
quarter-end total value of homes in backlog up 56% to $10.3 billion.

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