Good day everyone and thank you for standing by. Welcome to the Meritage Homes Third Quarter 2020 Analysts Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Emily Tadano, please go ahead, ma'am.

Thank you, Hana. Good morning and welcome to our analyst call to discuss our third quarter and year-to-date 2020 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations' link at the bottom of the homepage. Please refer to slide two cautioning you that our statements during this call as well as the press release and the accompanying slides contain forward-looking statements, including, but not limited to, our views regarding the health of the housing market; disruptions to our business by COVID-19, economic conditions and changes in interest rates, community count and absorption, projected full year 2020 home closings and revenue, gross margins, SG&A expenses, tax rates, and diluted earnings per share as well as others. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we've identified and listed on this slide as well as in our press release and our most recent filings with the Securities and Exchange Commission, specifically, our 2019 annual report on Form 10-K and subsequent quarterly reports on Forms 10-Q, which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Chairman and CEO; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes. We expect to call the last about an hour. A replay will be available on our website within approximately an hour after we conclude the call and will remain active through November 5th. I'll now turn it over to Mr. Hilton. Steve?

Thank you, Emily. I'd like to welcome everyone participating on our call today and hope that you and your families are continuing to stay safe and healthy. Before continuing the call, we'd like to take a quick moment to say thank you to Brent Anderson, who is retiring as the Vice President of Investor Relations of Meritage after 15 years. He's done a great job representing the company to our investors and analysts and he will be sorely missed. I'd also like to introduce Emily Tadano, our new Head of IR. Good luck, Emily, you have big shoes to fill and hope you're with us at least for the 15 years like Brent. Now, this is the last time I'll address you as Chief Executive Officer of Meritage Homes on an earnings call. As we've previously announced effective January 1st, Phillippe Lord will transition to the CEO role and I will retire after 35 years to become the Executive Chairman of Meritage's Board. I will continue to participate on these calls, but Phillippe will be taking the lead. Phillippe and I have worked closely together for 12 years. In the past five years as Chief Operating Officer, Phillippe was the co-architect of our strategy to focus on the entry-level and first group of markets while driving operational excellence and efficiencies throughout our organization. I feel confident that Meritage will continue to be an innovative leader, provide exceptional quality and value to our customers, and grow to new heights under Phillippe's stewardship. I look forward to partnering with him in our new roles. So, let's talk about the quarter ended September 30th, 2020. Meritage had many remarkable achievements. We delivered our highest quarterly orders, our strongest absorption since 2005, record quarterly closing revenue, and our best quarterly closing gross margins since…

Thank you, Steve. Before I begin and on behalf of the entire company, I would like to thank Steve for 35 years of incredible leadership that has guided the company through both successful and turbulent times as well as instill the values, integrity, and beliefs that live within each of us at Meritage today. Steve's commitment to our employees, customers, and shareholders, as well as his vision and execution led us to the company's all-time records today. I would also like to personally thank Steve for his mentorship and guidance over the last decade. I am deeply honored to have the opportunity to serve this organization and its employees as the upcoming CEO and to continue working together with Steve in this next chapter of Meritage Homes story. Slide six. We hit on all cylinders during the three months ended September 2020. Our absorption pave for the quarter was up 94% year-over-year. Five out of nine states had absorption increases over 100% year-over-year this quarter. Much of this sales outperformance is due to the strength in the entry-level market. Entry-level represented 60% of our average active communities during this quarter compared to 42% a year ago, which puts us near our target ratio of 65%/35% between entry-level and first move-up. Absorption and our entry-level communities were 75% higher than last year and nearly 1.5 times the pace of first move-up communities. Entry-level comprise almost 70% of total orders for the third quarter up from 54% in the third quarter last year. Our first move-up communities also experienced improved demand year-over-year with absorption 86% higher than a year ago. Slide seven, the outside demand in Q2 and Q3 of 2020 led to 23 early community closeouts this quarter. These shocks happened across all existing geographies. We anticipate both continued strong sales…

Thank you, Phillippe. Let's turn to slide nine. We generated 56% earnings growth year-over-year in the third quarter of 2020 compared to the same period in 2019 as we had significant growth across all key metrics, with 21% closing revenue growth, 170 bps increase in home closing gross margin, and 70 bps improvement in SG&A as a percentage of home closing revenue. This quarter's closings were up 24% year-over-year with 71% of closings coming from previously started spec inventory. At September 30, 2020, approximately 14% of total specs were completed less than the last couple of quarters understandably as we're selling more spec in earlier stages of production. Although this pandemic is also driving a decrease in our backlog conversion rate over the last several quarters, our backlog conversion rate for the third quarter was 68%, which is slightly up year-over-year evidence that our construction pace is keeping up with sales. We generated over $1.1 billion of revenue in Q3 2020 as our year-over-year increases in closing volume, reflecting our record high sales, more than offset the decline in ASP net closings resulting from the shift in product mix towards entry-level. Our closing gross margin improved 170 bps to 21.5% for the third quarter of 2020 from 19.8 a year ago. Higher home prices more than offset record lumber costs. The additional closing volume and the efficiencies achieved from our streamline operations and national purchasing savings contributed to a 31% year-over-year increase in total closing profit. As we have previously covered, we have been able to continue to harvest savings in our material costs by reducing SKU count to achieve preferred vendor pricing and bulk purchasing discounts while taking advantage of pre-cut materials where available. Our streamlined production also allows us to obtain preferred labor pricing from our trade. SG&A…

Thank you, Hilla. Turning to slide 13. To summarize, Meritage Homes today is a different company than when I co-founded in 1985. Our culture and our strategic shift has been transformative. I'm proud of the innovative products, energy efficiency, superior quality, and affordability that we have delivered in every home that we build. Now, is one of the leading entry-level on first move-up Home Builders, Meritage is well positioned to capitalize on current market demand and deliver strong results into the future. Demand is through the roof, pun intended. Our closing revenue growth benefits from our focus on affordable product, which allows us to push both price and pace. Layering the leverage of SG&A and streamline operations on top of closing revenue growth, we're seeing some of the strongest results in Meritage history. Our financial flexibility and growth comes from having a strong balance sheet with excess cash and the lowest net debt to capital we've ever had. We are focused on growth by accelerating land investments, to get to our goal of 300 community count by early to mid-2022. We are driving an increase in hourly and creating value for our shareholders. All this was the combination of the right strategy, ability to execute and the dedication of incredibly talented team. I truly believe the opportunities for future growth and success are boundless form Meritage. I'd like to personally thank our employees and outfits transform Meritage homes, the executive team had a vision for this company and our people -- people made it reality. On a personal note, I want to thank you, I want to say thank you to the investment community for your long-term interest and support for our company, and for my leadership. After 91 quarters of your thoughtful and brilliant questions. I'm not sure how we'll close without the anxiety of the quarterly full body scan. You'll know how much I really miss all of you. That concludes our prepared remarks. I'll now turn the call over to operator for instructions on Q&A. operator?

Thank you. [Operator Instructions] And we'll go first to Alan Ratner with Zelman & Associates.

Hey, guys, good morning. First off a big congrats to so I guess everybody on the line Steve, Brent, Emily, Phillippe. Steve, I think I speak for everybody that we will certainly miss you on these calls as well. But best of luck in the next chapter.

Thank you.

So, I think the obviously the big topic that everybody's focused on today is just this concept of, you know, have we hit a point where builders kind of have to intentionally slow the pace of activity for a multitude of reasons. And obviously, nobody is expecting 70% of growth to continue here. But you know, the community count big topic, and I think, 300 target by mid-2022 is certainly extremely positive and optimistic. And I guess the question is, what does that cadence look like? There's obviously concern that you have enough product on the ground heading into the selling season for next year. So is it going to be somewhat smooth for the year back halfway weighted, front halfway weighted, but I guess, on top of that, perhaps the better driver of your growth is spec inventory, as opposed to communities, since such a high percentage of your sales are spec. So, can you maybe give us a little bit of a target of what you're hoping to have on a year-over-year basis your spec counts, heading into 2021, just so we can get some idea of the planning and growth?

So there's a lot to unpack there. Alan, I appreciate the question. And I appreciate yours and the support over these last couple of decades. You know, it's been, it's been a great ride. And you guys have provided us some very thoughtful coverage and research. And we really appreciate that. I appreciate that.

Thank you.

I think it's important for investors, analysts to look a little more long-term than just to the next couple quarters. Obviously, it's going to be a little bumpy for us on the next couple quarters, particularly if the strong sales continue, which I don't see a reason why they won't. But we got we have a lot. It's not a question of if it's a question of when these communities are going to come. And they're going to produce really solid long-term growth for our company. I mean, as Philippe said, in his section. We should be able to sell at least 15,000 homes in 2022. We'll have a source stores for it. And we're entering this coming year, with a really big backlog, because we've been selling homes earlier in the -- in the cycle times even though we've been selling predominantly specs. We're selling them when they're just starting versus when they're just finishing, which is building our backlog. In addition to that, we're really focused on trying to get about 3,000 homes start -- 3,000 homes into the spec pipeline, I think we're at around 2,100 or 2,200 now. So we're going to ramp up our specs for the spring selling season, which will also help us with our deliveries next year. But, if you're only looking for the next quarter or two, it's going be bumpy. But if you want -- if you're a long-term investor, and you're thinking about where this company is headed in the long-term, and long-term is not that long, it's, we're talking a year away. It looks pretty, it looks pretty good. And I'm pretty darn excited about what we have, you know, in our pipeline. And I think -- I think -- I think investors should also.

Very helpful, Steve, I appreciate that context. And certainly, with the bumpiness, you know, you do have the balance sheet to take advantage of any shorter term disruptions that not occur on the shares as well. On the community count growth, it's going to be extremely strong, are there any SG&A expense considerations we should here as far as front loading some expenses that might be associated with opening those communities? And when would those show up?

I'm going to let Phillippe, and he'll take that one.

Yes. Obviously, with the ramp up to 300 communities, you're talking about, 30% growth in our community count, even if the pandemic didn't occur. And so we have to add, different layers to our organizations to support that, to support the higher scale of community. So, you can expect to see SG&A increase next year, year-over-year, it's mostly going to be time with the community, the community opening. So, you know, I would expect that to happen more in the back half of the year, the first half a year, we're always trying to be very mindful of adding the overhead as we start to see the revenue occur specifically in the field overhead piece. So, it's going to be more weighted towards the back half of next year. But clearly, we've added land folks and land development folks, we have more land that we're processing today than we ever have in the history of the company, you know, as we strive to get to the 300 communities in the early to mid-part of 2022. And maybe Hilla wants to add something to this as well.

Yes. So I think you guys know, we have overhead and two different components, right? There's a portion that lives in margin and a portion that lives in SG&A. Both of them, obviously, we're going to have to add headcount in some capacity to grow the company, neither one is going to be very meaningful, right? There's going to be offset in other direction. So, you're not going to be going to see continued improvement in our SG&A leverage, but you're not going to see a material deterioration either. So just wanted to make sure we have some guardrails on those numbers.

Very helpful. Thank you very much and great luck.

Thank you.

We'll go next to Truman Patterson with Wells Fargo.

Hey, good morning, everyone. And let me throw out my congrats to everyone on the call as well. Now that Brent's officially retired, I've been trying to convince him to -- to move to Phoenix finally, so what we'll see what happens there. First question, clearly, investors are focused on the 18% community count decline, which clearly you're a bit of a victim of your own success, really, but, hypothetically, if the markets growing, orders in the market are growing, at a 20% clip or a 25% clip in the first half of 2021, do you think you all will be able to meet the market and really offset some of this community count volatility through an elevated absorption pace, I'm also thinking, you know, you're replacing 75% in your communities effectively in 2021, which should have a higher lot count, maybe a little bit better absorption pace, but you just walk us through maybe that, hypothetical?

Well, I can't give you a specific guidance for the first quarter of 2021 and the first quarter of 2022. But as I said, it can be a little choppy if you just focus on the community count number. But with the higher absorptions we're getting, we should be all the produce, you know, some decent sales numbers, I don't know if we're going be able to get to 20% greater than it was in 2020. We had a pretty good January and February and this year. So, as I said, look more closely at the backlog, and the spec counts that we have one into 2021, which should produce some really good earnings numbers, for the first couple of quarters of 2021. After that, we're going to have to rely on the community count to start to kick-in and propel us into some really good 2022 numbers. And I don't know what else I could really tell you. The community count, it's an issue. But if it's a short term issue, it's not a question of if, it's a question of when we've been, we bought a lot a lot. We're continuing to buy lots. We're not seeing resistance to finding lots of that -- that fit within our strategy. And, we're going to be opening more communities next year than we ever have before. And I think that long-term and I feel really good about the quality of the communities we are opening, the locations of the communities that we're opening. And, again, it's going to produce really solid long-term results.

But we can't get 2021 guidance. Yes, we're going to obviously do that next quarter on our next quarter call, but just a couple of directional items that I think we adjust in the prepared remarks, and maybe -- there will be an inflection point at some point in 2021, in the community counts, right. We're not going to get to that 300, committee count number all in 2022. So there will be a point in 2021. And we're not, we're not getting a target for which quarter where we'll see a material increase in our community count in those communities come with a lot of effect are you built on the ground eye opening, you'll see those sales pop at that time, and then you'll see the closings come very shortly after. So, I think that, we kind of tried to provide a little bit of a path there by -- by addressing how we will enter the year, a lot of back to the heavy backlog. And then at some point during the year, we'll have an inflection point where you're going to see everything kind of shift and really accelerate into 2022.

And in addition to that, these new communities as they open throughout 2021 will be more heavily skewed to the entry level to or living out brands, which come with even higher absorptions than our move up communities. So which will also propel the sales number as we get later into the year?

Okay, Okay. Fair enough. Thanks for that. And then clearly, you know, order growth of 70% a lot of investors are, you know, focused on the builders ability to convert those into closings in the construction cycle. But is your construction cycle expanding? Steve, I -- I couldn't tell if you actually mentioned that earlier. But kind of two parts to that, are you seeing any labor shortages? Having a lot of issues getting starts on the ground? And then, you know, on the flip side, or are you seeing any product shortages that are leading the cycle times extend?

We anticipated that question, and Phillippe got a response to you on that.

Yes. So cycle times, at least from our perspective, are not expanding, sales are expanding, which means we have to get more specs in the ground. And we're, as Steve had articulated, we're chasing the specs a little bit, we've ramped up our starts capacity dramatically out of COVID. So we're starting more homes than we've ever started in history. It's just that we're selling more homes than we've ever sold in history. So, we're in this inflection point where we're trying to ramp up specs with community count decline going the other way. So that's really what's stretching out the backlog conversion. But the cycle times, we're still building homes extremely quickly. Labor is performing very well, we're not seeing any issues their capacity is there. You guys know and aware of the supply chain dynamics, specifically around lumber, although we've seen that level off and supply chain boosted up recently there. So from our perspective, at least, because we're spec builder, because we've streamlined our operations, labor's performing really well. We're seeing cost pressure, we're able to cover that cost pressure with the pricing in the market, and cycle times are actually probably even a little bit lower than they were -- we continue to dive within and are building homes really quickly. And then on the start side, that's the biggest challenge, just starting as many homes as we are today and the municipalities approving the permitting. That's a bit of a bottleneck. But as I said earlier, we are starting more homes than we ever have in history. So, we're working through those -- those challenges, but that's probably the -- the most, the area of the biggest opportunity. If we were to increase capacity from here.

All right. Thanks, everyone, and good luck on the upcoming quarter.

Thank you.

We'll go next to John Lovallo with Bank of America.

Hey, guys. Thank you for taking my questions. The first one, on the gross margin outlook for 2020. I think that implies 4Q gross margin of some around 22.5%, which is up 250 basis points or so I think year-over-year. I guess the question is, how much of this is pricing versus some of the savings that you guys have talked about? And in terms of that the latter part of the savings on the labor front, that you guys have worked out on the horizontal and vertical side. I mean, do you anticipate being able to hold on to those, as activity picks up here? Or do you think you're enough to give some of that back?

Hi, John, thanks for the question. So I think for us because we expect builder, a part of lumber increases is already reflected in our Q3 number, because of our pretty quick cycle times. There's another portion of the lumber increases, that's going to be coming through in Q4, but we're definitely able to offset that. Like you said, if you kind of do a back of a napkin math, you can see that we're projecting an increase in margins, in Q4 to hit our target of 20% to 21.5% for the full year blend. So that's coming from higher ASPs and some continued efficiencies we're seeing because on the cost side, at least in Q4, we are still going to have some increased cost pressure from lumber locks that were in place when we started out. So we're not really predicting anything yet for 2021. We're assuming lumber is going to stay steady, even though there's probably some green shoots, that will come down a bit. But for right now, mostly what you're seeing is efficiencies that we're finding in the product, the ability to leverage that fixed overhead component in margin, and price increases.

Okay, got it. And then just looking at the full year guide again, and trying to back into the 4Q outlook, it would appear that at the high-end, the ASP would step up again here pretty nicely. Are you guys concerned at all about pricing folks out of the market in terms of affordability? And what can you do to sort of offset either that potential impact?

Yes. This is Phillippe. We are very mindful of that, which is probably why every community has its own story. The LiVE.NOW brand, it's really important that we stay below FHA. We think that's the governor, as we look at the market, and you look at entry level communities that operate above FHA. They're not seeing the demand that we're seeing, that buyer just can't get qualified in a conventional loan. So that's really the governor. So we have a little -- we definitely have some opportunities to continue pushing in some places, because we're still well below FHA. And other places like Phoenix, we're getting there and there's not a lot of opportunity and upside there. So it's market-by-market, it's community-by-community. It's also what the competition is doing. But that's really the story for us. We're about pace. We're about leverage. That's what the entry level business is all about. And so we are mindful of our pricing, although we've been able to get both price and praise in today's market. As we move into next year, there's absolute governor out there that will limit us pushing it much further.

That's helpful. Thanks a lot guys.

Thank you.

[Operator Instructions] We'll go next to Stephen Kim with Evercore ISI.

Yes. Thanks a lot, guys. Well, yes, we're going to miss you, Steve and Brandon, but we look forward to still seeing you Steve on or hearing you on the calls and best of luck with everything. Brent, in particular. My question starts off, I guess, talking about Studio M and California communities. I remember over the last year-and-a-half or so these were two aspects of your product mix, which we thought was -- we thought was going to be -- we thought we're going to be putting important watch, the ramp in communities that you've been planning for a couple years now in California, looks like it's hitting just at the right time. Meanwhile, Studio M, I'm intrigued about. You didn't talk too much about it I don't think on this call. But what -- one of the other builders today was talking about how there's been a lot more energy at the higher end of the month. Not exactly the entry level, but maybe the move up segment of the market, but Studio M, seems to go after. So, can you talk about what you saw specifically with the target market for Studio M, and whether your California and Studio M products carry with them higher margins that we can be looking forward to next year?

So, there's -- Stephen, thanks for the kind of words first of all. I'll miss you guys too. But it'll be a relatively around.

Yes.

There's energy in all segments of the market right now. I think you're hearing that from other builders, there was a builder right before us today with phenomenal results. I think there's energy at all price points. And I think the low mortgage rates and the fact that people are spending more times in their homes with COVID has created demand in all price points. I think I'm shocked to see some of the multimillion dollar $10 million homes that are selling some of these high priced discos, it's like I've never seen before in my entire career. Studio M works well for us, the margins higher than the LiVE.NOW, maybe it touch not really, but the margins, we're getting out of LiVE.NOW are solid. We're seeing more opportunities for land though, it's less competitive for us in our LiVE.NOW segment than it is in the one and new segment. I think I alluded to this last quarter in our call, we're building -- we're chasing bigger deals, 200 lots, 300 lots, 400 lots, 500 lots deals for our entry level communities, because the absorptions are much higher. And because we're trying to reduce the churn, the community count churn. If you buy a smaller community and you're only in it for a year or two, you're starting off, you're finishing up, you're opening models, you're closing models, there's a lot of overhead, labor that goes with that. It's hard on the organization, but if you can be in a community a little bit longer, it's better on the bottom-line, and it allows our land people to not have to work as hard to find replacements. So, we're finding less competition for those bigger parcels. We only have a few big public builders that we compete with. We don't compete with as many private builders for those parcels and even some of the public's. So, our land acquisitions has been a bit skewed in that direction. That's not to say that we don't love Studio M, or we don't believe in one and new because we do and we are buying those parcels. And we're going to continue to do so. And we've opened with you in California this year to increase our community count there for sure. But with respect to California, specifically, it's a tough place to find land. And it's risky, and you got to pay up. It takes a long time. And there's a lot of hurdles. So we're happy to do that. We're doing better there. But it is a -- it's a big challenge for us and for all builders for that matter.

Got it. Your land spend ran at $300 million this quarter. Hilla, you mentioned that was the highest you'd seen, I think ever, but it actually, I'm guessing that that number is probably going to rise in the fourth quarter. I was wondering if you could comment on where you could think you're going to wind up for the year. I think you said it, I missed it. I'm guessing around $1.1 billion or something like that still, and what you think is a reasonable outlook for next year?

We haven't given guidance into 2021 yet. I think you're pretty much spot on. We didn't get specific numbers. But between $1 billion and 1.2 billion is a good expectation for full year 2020. So you kind of do the math, we're at 760 year-to-date, obviously, we had a pause for six weeks there in the year. So we're going to be accelerating that. You can expect that number to continue to accelerate. We'll give more specific guidance. But there's no way to get to that 300 community cap without continued acceleration in 2021, and 2022. You can go ahead and kind of model something a little north of that.

There's a big wave of land purchases, land deals that we've approved, development dollars that we need to spend coming through that will absorb a chunk of our cash and our retained earnings, and it's coming. And hopefully, we can make it even bigger, because we've got a lot of lots coming through our land committee in the fourth quarter. We've already proved a lot in October. And we're just really excited about these deals and the quality and the contribution they're going to make.

Yes. That's great. Phillippe, you made a mention about the FHA loan limit, how you still had a little bit of room, a couple of places, maybe we're getting a little close. I just wanted to clarify something, the FHA loan limit generally rises once a year, right. And it usually rises pretty much we'll hear about it, I was thinking a couple of months or something, or a month or two. So theoretically, to the degree that the entry level will at some point bump up against some kind of affordability challenges, due to the significant price increases. That's -- that actually is a little bit more of an issue later in the years generally, is that not right? And I think about that, right? So you're -- you have a fair amount of headroom, generally, the first half of the year in the spring and selling season and all that. Am I missing something there Phillippe?

No, you're not missing anything. That's exactly right. So we'll see the revisions next year, and what kind of opportunity that creates based on market comps. And clearly prices are up across the board.

Yes.

So, we do expect some sort of increase there to give us some opportunity.

Let me just add on that. We're dealing with last year's FHA number right now. And prices have been rising. It's been widely reported. And it's not fiction, probably 1% a month. So we're not -- this year, we're up 9% or 10% already. And most places FHA loan limits are around 300 or low 300s for us, so prices are up 25,000 on entry level products across the board. But the FHA loan limit is still lower last year, now just at the end of this year. But I don't know if you can go to the bank on the fact that it's going to adjust completely in line with what our prices have increased. So we got to be mindful. So Phillippe articulated a couple times already, that we stay inside that number.

Yes, the one I seem to remember that kind of putting a bow around everything is that when we approved the deal, and we were underwriting to FHA at that time it was two years ago. That's why we kind of have this little bit of headroom, we're getting close to where the FHA limited today, but that's why we've been able to increase the amount that we have because we were underwriting to this, then FHA limit will be bought away.

I mean the lower you on the first band, the stronger the demand is, I would say, we have communities under 250,000 and some places, it's almost unlimited. We could sell as many houses as we want to do as fast as we want to, at some of these lower price points. It's just about -- it just comes down to production, and putting the product on the ground.

Yes. And with the forced savings that everyone's had to do, because there's nowhere to blow all of our money. You've got down payment, not off the hurdle for people anymore. And then I've heard FICO scores are basically hitting record levels for folks across the nation. So all of that I assume you're seeing in your business and benefiting from as well, right?

Yes.

Yes.

Great. Thanks, guys. Good luck and look forward to speaking with you still afterwards. All right.

Okay. Thank you.

We'll go next to Carl Reichardt with BTIG.

Thanks. Good morning, everybody.

Hi, Carl.

I only have one question, but just a comment and Steve congratulations. And it took a lot of courage for you to make such a significant business transformation in a company that you co-founded and ran for 30 years. Up you write a book. It really is -- it's been remarkable what's happened in this company last several years. Is there a lot of credit for that?

Thank you.

I'm -- congrats, I am modeling a better backswing for you? That's what I am asking. It can only--

I'm going fishing.

And welcome to Emily. I just had one question which is, if I look at LiVE.NOW and your penetration, obviously it's really significant in Phoenix and other places. But as you're looking at the next couple of years, what are the metros or states where you think you can really drive LiVE.NOW penetration and get it higher, where you lagging in terms of terms of percentage of your mix? Thanks, guys.

Yes, the big the big opportunities for us are really -- is on in Texas and the East Coast. In the West, I think the most maturation of LiVE.NOW is really where it's going to be. Although we had some opportunities in Colorado, because that's just such an affordability issue out there. But we've really pivoted in Texas as we said we're up huge in Texas with LiVE.NOW. It's driving a lot of the performance there and we have a lot of LiVE.NOW stuff come in. Dallas and Houston are big opportunities for us Horton is the largest builder in those two Metropolitan by a longshot and we intend to go after that. And then it's been slow for -- a little bit slower for us in our newer markets on the East Coast, and Florida. But that's all come in dramatically here. In Orlando, when you look at community count growth, it's all going to come from LiVE.NOW and the rest of Florida, and then a lot of stuff coming in Atlanta, Nashville, and the other parts of Carolina. So, it's really on the East Coast and Texas is the biggest opportunities for us to really continue that penetration and move the needle.

I'd say also, additionally, that we're not ready to announce this yet, but we are going to be announcing some new markets. We're working vigorously now on several new markets and hopefully, by next quarter, we'll be able to make some specific announcements about which markets they are and will be able to start those markets with a little bit of a little bit of theme. So, as we've articulated, we have some room in our East Coast market, particularly in Florida, I think, to grow our LiVE.NOW brand, but we'll also have some new markets to go along with that.

And that 300 community account does not contemplate new markets, so that's just an extra cushion for us.

That is great to hear. All right, congrats. Thanks all.

Thanks Carl.

We'll go next to Michael Rehaut with JP Morgan.

Hi, this is [Indiscernible] on for Mike. First, congrats on the results and best of luck to Steve and Brent on your retirement. My first question was, I was curious if you could comment on traffic levels and sales pace so far in October? And if the market is starting to show any signs of slowing or regular seasonality?

October continues to be strong. I'd say maybe not quite as strong as September because a little bit of seasonality. But I think we've already surpassed last year's sales number for October with nine or 10 days to go in a month, two weekends to go. So, I expect it will produce a pretty big order number versus last year's for October. And I don't see anything on the horizon that's going to change that dynamic.

Yes, traffic levels are stable. To describe this all because I think there's this election coming up here in a couple weeks, that usually slows things down. So, surprisingly, the market isn't even paying attention to the election, at least from an housing perspective, or maybe they are and they're all buying a house for shelter. But either way, traffic levels are extremely stable for this time of year.

We were going to put a gun in every house, we couldn't find them. Just kidding, sorry.

Really great to hear. And then I wanted to clarify something from earlier in the call. On prior calls, generally entry-level gross margin, the LiVE.NOW products were noted as higher than the first time move-up with maybe the gap narrowing a little bit helped by the Studio M. But I think now you mentioned that move-up gross margins may be at parity or even bit above the entry-level offering. So, just wanted to get a little more clarity around those comments and make sure that I'm doing it right.

I'll let you Hilla give you the specifics, but the pricing tower and the entry-level is really strong. So, I think that's where we're seeing the better margins. Just the demand down at that lower price point is really producing a supply/demand disconnect that's allowing us to push prices probably more than the higher end. So, I still believe our margins are higher in entry-level and first move-up. But I'll have Hilla give you the specifics.

Yes, our entry-level products kind of held consistent for this year. It's our highest producing margin products. First time move-up actually did increase a bit, there's a little bit more pricing power, but it still lags a bit behind entry-level when we're looking at them on a relative basis.

Got it. Thank you. Thanks guys.

Welcome.

And we'll go next to Alex Barron with Housing Research Center.

Yes, thanks guys and congratulations on the retirement and all the big turnaround of the company. I wanted to just focus in on the 300 communities and so forth. I just wanted to verify is this all based on organic growth or is there any expectation that you would have to acquire a builder to get that?

It's all organic. And we pretty much have all the land under contract stores to do it. So, it's not like we got to go and buy a whole bunch of land to make that happen. We already got the land. So, we have a high degree of confidence in getting there in early to mid-2022.

Okay.

It may be choppy along the way. As we said, because we may sell out some community faster like we did this quarter, we closed out 58 communities this quarter; we would have closed out those communities next quarter or the quarter after. So, our community count would have maybe been a little higher -- would have been higher this quarter and maybe higher at year end. But when we're selling 71% more homes in Q3, and what was the Q2 number 60% or 70%, more in Q2, the homes are fly off the shelf faster than we anticipated and is driving the community count down. But it's going to rebound because we have the lot. We bought the lots, we have the lots, we have the stores, we're developing them, we're moving them through the process, and they will be here. This will be a little bit later because of COVID and because of the quick sell out of the communities that we closed out in the last two quarters.

Okay, that's all good. I don't see any problem with selling out early just means you're taking buyers out of the market.

Exactly.

The other question I had with regards to -- I think you said about 70% of the sales this quarter were entry-level and I think you also said that the size of the communities that you're buying is growing. So, basically, should we expect that the trends in sales pace will keep increasing? And should we expect basically, that the percentage of entry-level will also keep going up over the next couple years as you're heading towards the 300 communities?

Well, the sales pace, historically high levels were at almost six per month per community. I mean I think it's higher than much of our competition I was looking at and higher than we've ever been. I can't tell you the -- we don't underwrite to that pace and whether we'll continue with that pace, I don't want to make any predictions. But was the second part of the question was about the--

--community?

Yes, I don't -- yes, the ratio is probably where that. I mean we still are investing in one in U.S., as he said, it's a little harder to find that land. The deals aren't big enough. It's more competitive, but we are finding that land, it's just slower. But I don't think we're looking at being at 80%/20% LiVE.NOW one, or even 75%/25%. The goal is to be 65%/35% LiVE.NOW versus one of you from a communication perspective. And, of course, that'll result in a different percentage from a sales page because we underwrite LiVE.NOW to a higher sales pace than one and you.

Okay, possible. Well, best of luck and good job. Thanks.

Thanks Alex. I think this was our last question operator, right? Two more.

Yes, we have two more in queue. We'll go next to Susan Maklari with Goldman Sachs.

Thank you and congratulations to everyone. My question is around thinking about consolidation for next year. Given everyone's trying to load up on their lot positions, have community count ready to go and we recently saw one of your peers buying a smaller private builder. Do you think that we could see more of that in the industry next year as we look out?

I know -- I get to ask this question every quarter for the last 91 most quarters and it's just so hard to predict M&A. There's so many factors that go into it. So many social issues, what are the goals and objectives of the -- inquiry or the retirement plans or what are their plans and what are thinking? I'm sure there could be, but I wouldn't say that we're seeing more deals now than we saw a year ago. Frankly, it's been kind of quiet. We're probably going to be more particular about acquisitions, because we're focused on our strategy. And we're going to be interested in builders that fit within our strategy. So, if the product is outside of the product that we build, it wouldn't be a fit for us. And we just feel like we can grow solidly organically over the long-term and we will be entering a new market as they said. So, our eyes are always open, but it's hard to tell what the pace of M&A is going to be.

Got you. Okay. And then just following up on that, can you talk a little bit about capital allocation, shareholder returns, given the kind of bumpiness that you're forecasting for the next couple of quarters, the liquidity that you do have on the balance sheet. Can you talk to what your willingness would be to restart share repurchases? Now, one of your peers earlier today commented that they're going to start to do a little bit of that in the fourth quarter, how are you thinking about it?

Well, based on the share price today, it looks pretty -- a lot more appetizing than it did a week ago. We're opportunistic when it comes to share repurchases. I think we certainly want to try to buy at least enough shares to cover the dilution from our share issues. But we're going to be using a lot of capital that's on our balance sheet today -- I mean, we're not going to stay at a 15% net debt to cap, we're going to be using the money to buy land, to grow the topline, to grow the bottom-line. And to the extent share repurchases makes sense, we'll take advantage of them and pursue them. We're not a dividend paying company. We never have been. We continue to explore the concept, but we have made a commitment to doing that. And that's where we are.

Okay, great. Thank you. Good luck.

Thanks Susan. Last caller?

We'll go next to Jade Rahmani with KBW.

Yes, thanks very much for taking the question. Just for Steve, as you think about the road ahead for the homebuilding industry, maybe over a multi-year longer term time horizon, I was wondering if you have any parting words, since this is your last conference call for the industry or any message you want to send as it relates to the value being provided to the individual homebuilding communities, the industry's, overall efficiency of future drivers of shareholder holder returns?

Well, that's a mouthful. I mean, I didn't prepare anything to respond to that question, but it's a good question for sure. Just as I said, in my in the Q&A, I think the industry needs to be a little more longer term thinking. We seem to have a very short attention span and horizon. And I think so much of the trade in our stocks -- our shares today, not as up to everybody is, it's programmed by computers. And everybody had -- everyone's got really good news today, yesterday, next week, with the share prices are going down, pretty hard to figure that out. I mean, everybody, I guess, just woke up to the fact that the comps are going to get tough next year. So, I think the industry continues to innovate. I think the way we build houses has to change. Homes are really built pretty much the same way they were built 40 years ago. We don't control our labor; we're dependent on trades and contractors. We've got to figure out how to control our own destiny more. I think there's a lot of innovation coming on the text -- on the sales side. We've seen a lot already there's probably more coming. There's a lot coming in the back office, on how we manage the financial functions of the business. So, I'm excited to see where this is going to go, and I think it's going to be fun. It's going to be interesting and I think Phillippe and his team are going to do a phenomenal job. Me, I'm going to be fishing for a while. But I'll still be around and I'll still be on these calls and keeping in touch and leading the Board and working with Phillippe on our long-term vision, our strategy, and -- I'm so excited for my own future and I'm excited for the company's future as well. So, appreciate your support Jade and thanks for the question.

Thank you very much.

Okay, thank you. That wraps up our call today. We'll look forward to talking to you all at the end of our fourth quarter and we should have our earnings release at the end of January, and we'll talk to you then. Take care. Thank you.

Thank you.

Bye.

And that concludes today's conference. Thank you for your participation. You may now disconnect.