PulteGroup, Inc. (PHM) Q3 2014 Earnings Report, Transcript and Summary

Good morning, my name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc. Third Quarter 2014 Financial Results Call. [Operator Instructions] Thank you. And Mr. Jim Zeumer, you may begin your conference.

Great. Thank you, Jonathan, and good morning, everyone. I want to welcome you to PulteGroup's earnings call to discuss our third quarter financial results for the 3 months ended September 30, 2014. On the call today to discuss PulteGroup's results are Richard Dugas, Chairman and President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; Jim Ossowski, Vice President and Financing Controller. Before we begin, I want to alert all participants that copies of this morning's earnings release along with presentation slide that accompanies today's call have been posted to our corporate website at pultegroupinc.com. Also posted to the website is the second release we issued this morning announcing a 60% increase in our quarterly dividend and the $750 million increase in our share repurchase authorization. We will also post an audio replay of today's call to the website a little later. Please note that today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. This risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now with that said, I like to turn the call over to Richard Dugas. Richard?

Thanks, Jim, and good morning, everyone. I am once again very pleased with the strong earnings and operating results PulteGroup reported this morning. A 29% increase in year-over-year pretax income and bottom line earnings of $0.37 per share reflect our relentless pursuit of operational improvement. We continue to work on a series of key initiatives, which are improving our fundamental business metrics in support of driving better long-term returns on invested capital. In a few minutes, Bob will review the details of our third quarter results, which demonstrate the operating and financial progress we continue to make against our goals. I'd like to take some time on this call to discuss the other release we issued this morning on dividends and share repurchases. For the past several years, you've heard us talk about our Value Creation strategy and our focus on driving better margins, overhead leverage and inventory turns. If you have been monitoring our results, you can see PulteGroup's relative performance on these metrics go from middle of the pack or even bottom in certain instances to among the industry leaders. The work we've done these past few years has clearly driven meaningful company-specific gains beyond any market lift the industry has realized since the housing recovery started in 2011. The critical next stage, which investors have been asking about, has been on the company's plans for future capital allocation. Beyond the more than $1 billion of cash we carry and related very strong balance sheet, investors see our operations continuing to grow more profitable and more capital efficient. These trends and the fact that PulteGroup won't be a cash taxpayer for several years, point to the potential for continued strong cash flow generation going forward. Based on these facts and trends the time is right for us to better define our capital allocation plans for the future. We will discuss these plans in much greater detail at our December 9 Investor Day here in Atlanta, but the basic components are as follows. First, to invest in the business to drive higher return on invested capital. Next we have increased our quarterly dividend to enhance the cumulative returns of our shareholders and finally, going forward, we plan to return available excess capital to shareholders routinely and systematically through share repurchase activity. Looking at our investment philosophy, you may recall that prior to implementing our Value Creation strategy we allocated capital almost exclusively into the business to acquire the land needed to support aggressive growth. We got the volumes about our expensive and heavy land pipeline hindered returns on invested capital and created outsized market risk. Among the many lessons learned from the last housing boom is that there are paces and rates at which you can effectively grow this business while still generating high returns. Exceeding those rates for multiple years in a row put significant stress on a company and can encourage an organization to take on excessive risk. We believe shareholders are not well served by doing either. So today, having fixed our balance sheet and improved our overall returns on invested capital to be above our cost of capital, it make sense to continue to increase our investment in land. In 2013, we invested $1.3 billion into land acquisition and development, which is an increase of 30% over 2012. In 2014, land investment will likely be up another 40% or more over 2013. And given our expectations for a sustained albeit gradual recovery in housing demand, we have authorized a land spend budget for 2015 of $2.4 billion. This is an increase of $600 million to $700 million of our expected 2014 expenditures for land acquisition and development. Notwithstanding our positive outlook on the market, we are steadfast in our view that we need to remain balanced and return funds to shareholders over the cycle. Having established the level of investment we want to pursue, we consider the form and size of the routine systematic returns of funds for our shareholders through dividends and share repurchases. This morning's announcement of a 60% increase in our dividend and a $750 million expansion of our share repurchase authorization is a direct reflection of this discipline. We've said from the start of the housing recovery that we expected a slow, measured improvement in buyer demand that would play out over a number of years. We have probably been more right than wrong in this forecast. Our forecast which we continue to support and now we are articulating our plans for capital usage throughout the cycle. From a demand perspective, I am pleased with what we saw over the course of the third quarter, as absorption paces improved for the third quarter on a row and our expectations are for sustained growth and demand going forward. We will, however, keep a watchful eye on the issues ranging from recent stock market volatility and interest rate fears, to fighting in the Middle East and health concerns developing in the U.S. to see if they impact consumer confidence going forward. More broadly, our view of the U.S. market remains positive, as continued improvements in both the economy and employment provide ongoing support to an industry that continues to benefit from low inventory, low-mortgage rates and favorable demographic trends. Further, we are encouraged by proposed changes at FHFA, which have the potential to improve mortgage availability, particularly for first-time homebuyers. Regardless of how the macro environment evolves, I feel really good about where we are as a company and how we're running the business. With the 134,000 lots under control, $1.2 billion of cash on the balance sheet, a gross debt-to-cap ratio of 28% and a disciplined capital investment process, we are in a great position to further improve our returns and the returns we generate for our shareholders. I think it's important to stop here and thank the employees of PulteGroup, who have been instrumental in putting us in such a strong position. Their efforts have allowed us to successfully execute our long-term plans while delivering the day-to-day actions needed to run this business. They are an amazing group of people. With that said, let me turn the call over to Bob for more details on the quarter. Bob?

Thank you, Richard, and good morning. The 2 press releases we issued today, demonstrate the ongoing benefits we're realizing by operating our business in alignment with our long-term Value Creation strategy. As Richard indicated, we realized strong year-over-year gains across a number of critical areas in the business. Before I get to the details, let me remind everyone that as we highlighted in this morning earnings release, we acquired certain real estate assets from Dominion Homes in August. In connection with this transaction, we gain control of 8,200 lots in the Columbus, Louisville and Lexington markets and assumed 622 Dominion Homes in our backlog. During our 5 weeks of ownership, these assets contributed 64 sign ups and 86 closings from 33 active communities. Looking at our income statement, home sale revenues in the third quarter increased 4% over the prior year to $1.6 billion. Our higher revenues were driven by an 8% or $24,000 increase in our average selling price to $334,000, partially offset by a 4% decrease in closing volumes to 4,646 homes. The increase in average selling price was driven by an 11% increase in ASP to $410,000 in our Pulte communities, and a 6% increase in ASP to $322,000 in our Del Webb communities. The average selling price of $204,000 in our Centex communities was essentially unchanged from the prior year. Our mix of closings by brand was consistent with the third quarter of last year, with 46% coming from our Pulte communities, 30% from Del Webb and 24% from Centex. Our reported gross margin in the third quarter was 22.9%, which is an increase of 200 basis points over the third quarter of last year. Our margins continue to benefit from higher average selling prices, lower interest costs and gains from our strategic pricing programs, which focus on maximizing revenue opportunities within lot premiums and home options. Lot premiums in the third quarter increased to 11% or approximately $1,200 over last year, while option revenues per closing increased 15% or approximately $6,500 versus last year. There's been a lot of market commentary relating to the potential for the industry's increasing use of incentives in certain markets. I'm pleased to note that we have not seen significant pressure to increase incentives in the majority of our markets. In fact, sales discounts in the quarter actually fell by 8% to just under $5,700 or 1.7% per house. We know there's a lot of focus on gross margins and while our margins are up 200 basis points compared to last year, we recognized that they're down 70 basis points from the second quarter of this year. Approximately 30 basis points of the decrease was driven by closings from Dominion's backlog, which carry very low margins because of acquisition accounting adjustments. The remaining decrease in sequential margins is due primarily to unexpected costs associated with the closeout of certain legacy communities, and a modest unfavorable shift in the mix of homes delivered compared to the second quarter, partially offset by a reduction in interest expense. It should be noted, that closing out the remainder of the Dominion backlog will continue to weigh on our reported margins for at least the next 2 quarters. The margin impact could be in the range of 50 to 100 basis points each quarter depending upon the volume and mix of units closed in each period. Beyond these short-term impacts, we continue to realize efficiency in sales pace benefits with commonly manage plans, which accounted for 45% of deliveries in the third quarter. The closing volume from commonly managed plans is up from 39% in Q2 of this year and we're now slightly higher than our year-end target of 40% for 2014. SG&A costs for the third quarter were $147 million or 9.5% of home sale revenues compared with a $139 million or 9.3% in the third quarter of last year. At $147 million, SG&A expenses for the period are consistent with previous guidance. Financial services reported pretax income of $11 million for the quarter, which is comparable with last year's results. Capture rate for the period was 80%, which is unchanged from last year and consistent with the first half of this year. For the third quarter, Pulte reported pretax income of $225 million, which is up $50 million or 29% over the $175 million of pretax income reported last year. Our income tax expense for the period was $84 million, which equates to an effective tax rate of 38%. In the third quarter of 2013, we reported a tax benefit of $2.1 billion relating to the reversal of substantially all of our deferred tax asset valuation allowance. Net income for the third quarter was $141 million or $0.37 per share. Last year's DTA reversal makes the EPS comparison hard to assess, but given the 29% increase in pretax income, we're extremely pleased with the progress we continue to realize in our financial results. Looking beyond the income statement, we had 6,865 homes under construction, of which 18% were spec at the end of the quarter. As a percentage of construction activity, this is consistent with prior year, and our finish spec inventory totaled only 335 homes, which remains well below 1 per community. During the quarter, we put 16,165 lots under control, half of which are related to the purchase from Dominion. Our third quarter investment of $525 million brings our total year-to-date land acquisition and development spend to $1.25 billion. As occurred last year, it's likely that we will not get our entire authorized spend targeted at $2 billion for 2014 invested this year and that will -- we will be closer to $1.8 billion for the year. This would represent a 40% increase in investment over 2013. And as Richard commented, our land acquisition and development investment authorization for 2015 has been set at $2.4 billion. I would point out the development and entitlement delays continue to grow more pronounced, which is impacting our ability to get money invested. Having said that, we want our divisions to remain disciplined and not force investment into the system by reaching for deals or taking on incremental risk just to get a contract signed. While deals are taking longer, the profile of the projects we put under contract has not changed. Consistent with our recent quarterly updates, roughly 75% of the transactions we entered into during the quarter are raw, which means additional time and dollars will be required to bring the communities online. We also continue to see the best return opportunities in projects targeted toward move up and active adult buyers. So the lion share of our investment was targeted toward these consumer segments. At the end of the quarter, we had 134,000 lots under control, of which 36,000 or 27% were controlled via auction. We continue to look for opportunities to auction rather than own assets, where such a structure allows us to enhance returns and or reduce risk. Of the 134,000 lots under control, approximately 23% are finished. During the quarter, we also paid a $0.05 per share dividend and repurchased 2.7 million shares of our stock for $50.3 million or $18.85 per share, in addition to the investment in the business. This brings our cumulative share repurchases since reactivating the program in July of 2013 to 14.9 million shares or 4% of our shares outstanding for $266 million or $17.82 per share. Even after having spent more than $600 million during the quarter on investment and return to shareholders, we ended the quarter with $1.2 billion of cash. We recognized that having $1.2 billion nonreturning asset is not advantageous. Today's announcement about our dividend and share repurchase authorization, in addition to stepping up our land investment in 2015 demonstrate our commitment to putting this capital to appropriate use. Moving on to sales activity, the dollar value signups in the quarter increased 3% over last year to $1.3 billion. While net new orders were essentially unchanged at 3,779 homes. Signups increased 8% at Pulte and decreased to 11% and 3% at Centex and Del Webb respectively. Aggregate absorption paces were flat during the quarter. However, if you exclude the 5-week impact of the Dominion assets, absorption paces were up 5% overall. Looking at this by brand, Centex and Del Webb communities increased 8% and 23% respectively, offset by a decrease of 4% in our Pulte communities. It's worth noting that our Del Webb community count was impacted by the close out of several selling positions since last year. Regardless, we're pleased by the stronger paces we continue to see within this brand. The ongoing improvement in our Centex communities continues to be an encouraging sign in terms of potential future demand. We finished the third quarter with 600 communities, which is comparable to last year's 604 communities. And we ended Q3 with a backlog of 7,934 homes valued at $2.6 billion, which is up from 7,522 homes valued at $2.4 billion last year. Now, let me turn the call back to Richard for some final comments.

Thanks, Bob. We were generally pleased with the overall level of demand experienced in the third quarter, but depending on the market, we did see a little more volatility from week-to-week. On the East Coast, we continue to see stronger demand in the southern markets and particularly in Florida and the Carolinas. The DC area showed some improvement as the quarter progressed. But demand conditions remained below expectations as you move further north of the Coast. Third quarter demand in the Midwest were generally positive, with ongoing strengthen in Michigan, Indianapolis and Cleveland. We're excited about the opportunities we see to improve the operating results we realized from the Dominion assets along with building out our position in these markets going forward. We have a strong experience team in place, so I am confident about the execution. Texas remains one of the strongest areas of the country, but we did see the market starting to ease a little from the torrid pace they have been setting. Out West, Southern California, Las Vegas and Phoenix picked up in the quarter, which is a positive sign. Northern California was little more volatile from month-to-month. Demand through the first few weeks of October has followed the usual seasonal pattern, with some uptick coming out of September, but with a little less consistency from market-to-market driven by local market dynamics. What we're also seeing from market-to-market is varying degrees of strain on the local trade basis, which are at times struggling to keep up with the current pace of production. It is likely that tight labor resources will create production challenges in the industry for the foreseeable future. In closing, I want to thank everyone for joining us on today's call. Taken together, I think this morning's 2 releases say a lot about the company and the strategies we are executing against. You see continued strong operating and financial performance supported by a more disciplined capital investment process working together to drive improve returns for our shareholders. I look forward to seeing you at the December investor meeting, where we can discuss these topics in greater detail. Thanks for your time this morning, and now I'll turn the call back to Jim Zeumer.

Great. Thank you, Richard. Before opening the call to questions, I do want to alert that -- investors that registration to attend our December 9, Investor Day, will open up Monday October 27. We will issue an email announcing the online registration is active and as space is limited, I'd encourage interested investors to sign up promptly. Now we'll open up the call for questions, so that we can speak to as many participants as possible during the remaining time of this call. [Operator Instructions] Jonathan if you will explain the Q&A process, we will get started.

[Operator Instructions] Your first question comes from Stephen East with ISI Group.

I really like what you're doing on the capital allocation side and could you talk more about that the decision process that you went through the criteria that you're looking at when you do it, what you think about the future capital allocation? How you look at the cap structure throughout the cycle just sort of the whole process that you went through?

Sure Stephen, this is Richard. I'll make some comments and then Bob can take you through a little bit more about how we're looking at the balance sheet. We've studied this very carefully, frankly over several years. And had really I think done our homework with regard to the entire housing cycle over a long history and frankly what we believe is that returning funds to shareholders through a very disciplined manner overtime is the best path toward total shareholder return and value creation for shareholders. So what you see is a little more formalized pronouncement of our strategy. We've obviously been operating the business with a view toward high returns for several years now, and the results I think are evident. Now we're just trying to be a little more explicit about additional return of funds to shareholders through dividend and share repurchase activity. So that's how we looked at it and our December 9, Investor Day, is going to get into frankly a lot more history and detail on how we came about these ideas, but maybe Bob you could explain a little bit about the balance sheet and what we're looking at there and then cash.

Sure. We -- as we look at this -- we -- it will hinge off of leverage to a certain extent. So you heard us talk about in the past that we want to or we're comfortable with 40% leverage. You can expect us now to target leverage between 30% and 40%. That's not a hard-and-fast rule if there's a particular transaction that makes sense we might go above or below that, but the guiding post for us will be 30% to 40% leverage overtime. And so then as we looked at it the first priority is always what are we going to invest in the business. You heard our commentary on what we're going to do for 2015. The goal obviously being to drive higher returns. So now that we've-- are actually earning above our weighted average cost of capital, we'd like to improve that, so returns have be accretive to that on investment in the business. At the same time, we want to be balanced. We talked about this too. The dividend, I think you can expect us to target a yield between 2% and 3% overtime. It will be important to us that we have the confidence that we can deliver that through cycle. So we've started I think the yield based on yesterday's close with about 1.7%. So if the market is feeling good, it's always subject to Board approval, but you can expect to see us increase that 2% to 3% overtime. We always want to be cognizant that M&A activity is available to us and we still look at it as land transactions, so Dominion is a very good example of that. And then what we'll do is as we look at our projected cash flows, capital structure again, targeted 30% to 40% leverage ratios, if we have money available beyond that in any period of time, we would seek to buy back stock with that. It's important to note that we're not actually looking to time the market on that. So you would see us put plans in place that are meant to do that ratably over a period of time. Those plans will be reactive to market pricing, so if there's dislocation I think we'd accelerate somewhat, but again it's not designed to say we're making a call on the equity value today. It's we're returning shareholders to -- money systematically and routinely as Richard said.

Okay. I really like the plan that you all are laying out on that. And just to follow along on the land spend side, you started ramping up your spend, you're still sort of in a catch-up mode if you will as far as getting new communities open as the others burn off. As you look at the $2.4 billion for next year what type of gross community count do you expect and how is that compared, what you think will be rolling off?

Yes, Steve, this is Richard. We're going to give some guidance on that number at our Q4 call as our budgeting process is kind of underway now. I think it's fair to say the increased investment at some point in time will yield community count growth, but we're not prepared to kind of get into that today, as we're still finalizing the numbers for next year.

Your next question comes from Jack Micenko with SIG.

Bob, the margin guidance this piece of Dominion is 50 to 100 each quarter, is that incremental or is that also sort of the run rate, how do we think about that next couple of quarters?

Yes, so what that does is it incorporates. We assumed 622 homes in their backlog, which because of acquisition accounting will be ascribed very low margins. We're just saying that mix of business in our total will drive our margins on an aggregate basis down between 50 and 100 basis points.

Okay, great. And then, Richard you said in October there was some volatility region-to-region, can you talk about maybe -- where maybe demand was little better versus maybe a little not as good?

Yes, Jack, we're not going to comment on specifics with regard to October, but it's candidly not a lot different than we saw in Q3. If you noted in our release, Florida was particularly strong, the Midwest was a good market for us. We saw some improving conditions in the Southwest and then a little bit weaker versus frankly probably unsustainable pace in Texas in the quarter, and then Northern California started to show a little bit more volatility. So what we're trying to indicate about October was that we saw a typical seasonal uptick coming out of September, but we do see some volatility week-to-week just based on all the world events.

Your next question comes from Ken Zener with KeyBanc.

I have 2 questions conceptually for you since you've gone through this exercise on returning of capital. Your 30% to 40% net leverage target, you're going to have confidence in that after you book second quarter backlog assuming it converts, so that assumes always a back half biased to share buybacks?

Ken, just one comment, it's a 30% to 40% gross leverage. It's not net, just FYI. You said net.

And candidly the seasonality within the businesses doesn't impact our leverage ratios much or at all.

And then, when you think about yield, that's yield to your current stock or that's what you value your own company at intrinsically?

It would be to current value. And we recognize that there's volatility. If we had made this announcement 1.5 week ago, and the price was $17, the yield would have been higher. So again it's -- we're thinking of this through cycle. Obviously, our belief in our forward cash generation will help to drive what we do. And if it turns out that its 1.9% yield or 2.7% yield is less important to us than the consistency and being able to deliver it through cycle.

Yes, and Ken, this is Richard. Just if I could illuminate on that just for a second, the goal here is to signal very clearly and deliberately that we want to be balanced in capital through cycle. And we're making a deliberate statement to suggest that our first priority is in the business, but at high returns. And to the extent that annually we have left over funds, which clearly we think will have a capacity for strong cash flow generation, a combination of dividends and repurchases we think is the best bet for shareholders over the long run.

Right. And I guess if I could ask for your comment just briefly on the news last week with the agencies and the SEC, the rulings about, if qualified residential mortgages, what are the factors that you're going to look at over the next month that you think are most indicative if in fact that's delivering higher demand?

Yes. Well, with regard to what's happening with FHFA right now, Mr. Watt's comments earlier this week certainly leave us encouraged. There's always a path between announcement and implementation, so we have to watch to see what ultimately gets implemented. But we have said for some time that mortgage availability is tight in the industry and we believe any clarity that can be brought with regard to how government loans are going to be treated is important for banks to want to underwrite. And we've heard that again and again from folks at Wells Fargo, JPMorgan Chase and others, so we believe what we've heard is the right step. And I think it's important that the administration has recognized that housing is not as big a driver in the economy as it could be, partly due to credit being a little bit tighter than is necessary. So we're watchful, we're cautious, we're not certainly predicting that anything dramatic changes here, but overtime, if some of these ideas get put into practice, it certainly has the potential to affect activity, particularly for that entry-level category. And I think we've all talked about for a couple of years now that that segment has been underrepresented in the recovery and if it gets going housing could get exciting again. So our view is that it's a positive statement.

Your next question comes from the line of Robert Wetenhall with RBC Capital Markets.

This is Desi filling in for Bob. Just speaking on that topic, maybe a little further along there, do you think the easing of credit standards could be -- maybe what gets us from 1 million starts today to 1.2 million to 1.3 million starts or is it more of smaller incremental upside from where we're at?

That's a really tough question to answer. Candidly, I don't know. I do think it's important to recognize that. A combination of factors will go into this. Number one will be the actual easing of credit to the extent it eases. And number two will be the press that goes around it that suggest to buyers that today could actually get credit that are not applying, to apply. There's certainly some evidence that people think that credit is tighter than it actually is. So a combination of people that are maybe a little bit uneducated with regard to credit today could get in the market along with some actual easing could help us we believe. But in terms of exactly what impact it is in terms of starts are, I don't know how to quantify that at this point.

All right. And then on just to give little clarity on the community count absorption pace that you talked about. In the absence of the acquisition of Dominion Homes, would your community kind of have been lowered year-over-year? I'm just trying to square the fact that orders were relatively stable with absorption pace at 5% and community count flat.

Yes, so what happened is we bought it. We have 33 active communities that came online in August and contributed some signup activity. But if you think of retail with same store concept, in our 600 ending communities, are 33 communities from there, so to directly to your question, we would have had 567 communities if we hadn't purchased Dominion. And our pace assumptions, so we've talked about a 5% pace increase. What it does is it takes the 33 out of our ending community count and then takes the signups, excluding the signups from those communities say how did the rest of the business do that was in for the entire quarter.

Your next question comes from Ivy Zelman with Zelman Associates. Ivy Lynne Zelman - Zelman & Associates, LLC: But the $600 million to $700 million incremental in land and development that you're planning on spending, we got lot of questions about Pulte is chasing land, they're late to the market. They stopped buy -- they didn't buy land when everyone else is buying land and now they're paying at inflated prices and given your disciplines around returns, my first question is really understanding how to comfort investors that you are not going to sacrifice returns by now incrementally buying more land?

Yes, Ivy, this is Richard. First of all, let me just refute directly the fact that we're taking on more risk than we should, as a matter of fact that would be countered to everything that we have said with regard to the last several years about investing in high return communities. We now have this 13-point risk adjusted scale for investment. And frankly, we have stuck to that discipline. We have not chased any land transactions. We do not build in forward price assumptions into our transactions. And in fact, I'm extremely pleased with the quality of the land that we are buying. And frankly, as one of the largest builders in the country, we do have access to land given the size of our checkbook and the land that have been pursuing is of really high-quality across the country. So I completely discount anybody's concern that we are reaching or chasing. And frankly, the rest of our announcement today is indicative of that, as evidence of the fact that we're not going to reach, given the incredibly strong cash flows that we have and frankly are likely to have in the future. We're going to be balanced to ensure in fact that we don't overreach. We've learned the lessons of the past. This company used to be very land heavy. We're not going back there. We want to be very balanced and a combination of prudent, smart, high-returning land, a combination of a growing dividend and maybe stepped up share repurchase activity, I think is evidence of that. Ivy Lynne Zelman - Zelman & Associates, LLC: Very helpful. And then secondly, as we talk about one of the proposals from director Mel Watt was to reintroduce the 97% LTV recognizing that with the loan limits are higher in most of the country relative to FHA, if you could talk about specifically Phoenix and some of the Northern Cal markets where it was more dramatic, whether it be Stockton, Fresno, maybe you're not in those areas as much. But if you could just talk about the potential impact that those markets with the higher loan limit and that 97% LTV could have on your business, is it -- in that -- those markets meaningful?

I guess, great question. It's certainly not insubstantial. A lot of people I think it flew under the radar when the loan limits got dropped. I think people got that really high-cost markets came down from $700 to say $550, but places like Phoenix that or kind of a lot of bread-and-butter housing, a $50,000 or $60,000 drop in loan limits made a big, big difference and took out of swath of the market. So it's again, per someone's earlier question, a little bit hard to quantify exactly what it could mean, but it's clearly a positive. And the only thing we're watchful for is to make sure that it gets implemented responsibly. We've heard the announcements and we're certainly excited about it and through the leading builders of America, our industry has done a good job of advocating for responsible credit and credit that is accessible to all with the right safeguards. And I think we have a good relationship with Mr. Watt and the administration and we're looking forward to seeing what comes of it, but directly to answer your question, it's -- it could be significant. I can't put an exact quantification on it, but it will certainly help housing.

Your next question comes from Mike Roxland with Bank of America Merrill Lynch.

As Bob mentioned, the commonly managed floor plans increased to about 45% from 39% in 2Q, yet your gross margins still declined sequentially even after testing for 30 bps of accounting adjustments related to Dominion. Can you talk about some of these that weakened mix shift that occurred in the quarter that negatively impacted margins. And I also believe if I recall correctly got in 2Q also had a weaker mix which impacted margins. So I'm just trying to get sense of what actually occurred this quarter and whether you expect this type of trend to persist or reverse going forward?

Yes, Mike, this is Richard. We indicated on the prepared comments, there were 2 factors. One was some unexpected legacy community closeout costs that impacted margins. And second was that mix shift that you mentioned. And frankly, it was less-high margin, Del Webb closings coming through and more lower margin syntax closings coming through. With regard to kind of future trends on mix, it's frankly almost impossible to predict. There is volatility in closing mix and candidly the trade base issues I mention persist in the industry. So overall you can have one particular region versus another closing homes in one quarter. But we continue to be very pleased with our margins. We clearly move from a low-margin company a few years ago to among highest in the space and we like our position overall.

Just as a follow-up, could you -- will it be fair to say that as you sell out of more of the higher-margin Del Webb and continued to see an acceleration in Centex than maybe you'll have this negative mix shift persist on a go forward basis? And then, just as a second question would be with respect to the accounting adjustments, once you get through them, the next 2 or 3 quarters, should we expect to see gross margins rebound to the 23% or 24% you had been achieving?

Yes, Mike, a couple points there. We have said that margins are going to vary quarter-to-quarter and we said that very consistently and I don't see any reason that kind of changed that view. With regard to the second part of your question, we don't have visibility to our margins much beyond the next couple of quarters given sort of our backlog. So frankly, I don't know what's going to happen say as you get into Q2 or Q3 going forward. I will point out that we do have favorable pricing dynamics. We continue to like what we see. We do offsetting that though have higher land cost and some trade pressures coming through. So it's going to be choppy and volatile from here. So it's difficult to give you a guidance number there.

Your next question comes from David Goldberg with UBS.

I wanted to follow-up Richard on the comments on labor tightness. And I am wondering if you could help us kind of connect that Common Plan Management system, how that's working with the trade, if it's allowing you to attract some of the trade a little bit more favorably because you have more consistent program going through and also if you can with that kind of talk about cycle times and what's happening on homes that are going through this system, what the cycle times would look like versus homes that haven't been -- maybe as valued engineer or as not as efficient right now?

Sure, David, it's Richard. From the labor comments, basically what you're seeing is I think has been well chronicled is, they're just not as many folks available to build the homes that are in production across the country as there were. With regard to Common Plan Management, we are able to attract trades that are more favorably inclined to candidly build for us for 2 reasons. Number one, we're big and we have a large backlog and trades understand that consistency to work is important. And then, our Common Plan Management allows for more ease of production as the trade base particularly on the labor side gets more familiar with the plans. So candidly, I would suggest that even though we're seeing some delays in closing as a result of labor shortages, it's probably less pronounced for us than candidly many folks who are smaller in this space and particularly the real small builders, I think are going through a very volatile time, with regard to overall labor. And we are very optimistic that the Common Plan Management rollout as Bob indicates continues to ramp up, it's a very productive part of our business for many, many reasons. With regard to cycle time, we are focused separately on house turn time and land turn time if you will internally. We have a lot of focus on both those areas. And frankly, we made a lot of progress on our house turns in the last few years, including this year. So how much further can we push it, it's hard to say. Frankly, we're -- inventory turns in total are one of the guiding posts around our focus on return, which has been helpful. So I hope that helps.

And then just a follow-up on the Common Plan Management system, on customer satisfaction, have you been able to do to gauge, I know it's kind of early in the process still, but in terms of quality of construction, in terms of the fact have you been able to kind of gets engage on overall customer satisfaction and warranty related issues on homes that have gone through this system versus the homes that haven't really even versus the historical where you've been?

David, we certainly have high expectations in that regard. It's probably a little early to look at warranty trends and customer satisfaction trends given the delay between putting these homes in the production closing them and then having people live in them for 1 year or more overall. But clearly everything that we're doing with Common Plan Management we believe has benefits, margin benefits sales space benefits, customer satisfaction benefits. And frankly, to your point, kind of long-term with regard to customer satisfaction and warranty. The features that we're putting in our commonly managed homes, I think a lot of investors appreciate the efficiency gains that we have. We are probably more excited about the actual buyer acceptance of these consumer-driven plans and if you recall the feature CNBC did on us about 1 year ago now, where we're putting homes in productions into prototype and warehouses and getting buyer feedback we're continuing that good work that our marketing and architectural teams are doing. And so we got a lot more of where that comes over time and this whole idea of continuing to refresh our product portfolio while reducing the overall number of floor plans we manage has benefits in all parts of the company.

Your next question comes from Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question I had was on the share repurchase and we appreciate obviously the increased focus there. I think it certainly helps the more balanced approach to capital, but when you talk about a gross leverage of 30% to 40%, I guess, right now, you are in the high 20s. And you also mentioned that you'd really be excess cash that you would be deploying after internal investment in dividends. So if I'm reading it right, it doesn't sound like this is going to be a sort of a relatively aggressive bulk purchase at any time more of kind of like the perhaps what you did in this past quarter and maybe a little bit more, but can you kind of give any color on that because certainly again from the gross leverage standpoint, it doesn't seem like you have that much wiggle room although, certainly you have a lot of cash on the balance sheet?

Yes, Mike, we do have lot of cash on the balance sheet. We also expect to be generating a lot of cash over the next few years, particularly as we realize the deferred tax asset. But the other thing we've made a point of is we're not stock pickers, so we're not going to be doing an accelerated plan generally. So you can expect us to be buying it sort of dollar cost average through the year, but I think the $750 million speaks to the fact that we're going to be buying more stock.

Yes, and Mike this is Richard. If I could just add having bought back about 4% of our shares with a frankly less-defined program over the past call it 12 to 15 months, we are not talking about insignificant activity, but Bob mentioned on his remarks earlier, we're talking about being routine and systematic and disciplined and balanced, and we see it all as part of a well-orchestrated, well-articulated plan. We think we have articulated our operating philosophy very well for the past several years. We're now trying to articulate our balance sheet and cash philosophy with that same degree of consistency. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. I appreciate that. And I guess, secondly, on the absorption pace, I think you mentioned Centex down 8%, Pulte down 4%. And generally people viewing the year ago comp is somewhat easier given the rate driven slowdown from last year. You'd also mentioned that the Common Plan Management does drive some improvement in sales pace. And I'm just trying to get a sense of if you're kind of pleased with the sales pace at current levels, did you think it would have improve off of perhaps an easier 1 year ago comp, and what could be done to perhaps increase that going forward?

So Mike, just a couple of points and Bob can give you the details, but our pace is in Centex and Del Webb were up sharply, especially in Del Webb, so you may have misheard that and we are pleased with our paces. So Bob maybe you can reiterate the numbers.

Yes, so it was up 8%, not down at 8%, Mike. So again, Pulte was up 4%, Centex up 8%, Del Webb up 23%.

Your next question comes from Stephen Kim with Barclays.

I wanted to sort of follow-up on the land question, the land spend question. You talked about $2.4 billion. We were already modeling it about $1.9 billion. We thought that that was pretty generous. So I was a little surprised, your targeted land spend was about $500 million more than what we're looking for. I was wondering if you could give us some understanding as to the breakout of that spend in terms of new lots versus development of existing lots. And maybe in answering that question if you could let us know whether the 23% of control lots that are finished, how much of those actually are owned versus auctioned?

Yes, so Stephen, we've expressed I'd say over the last 12 months that because we're buying more raw land, our spend during the year has changed. So 2 years ago we were probably we were 2/3 on land and 1/3 on development. It's now probably 50-50. So part of the spend that you're seeing us do next year is to develop the land we've been buying over the last 18 or 24 months. So I think not...

But only half though, but only half, right? Okay.

Yes, it's not an insignificant number though Steve. We're really pleased to with that number. And as we've indicated we have a very clear formula, we get above our cost of capital and we can find high returning assets. We want to grow the business and invest and we spent 2 or 3 years getting our business to that point. We're there now and just to reiterate a comment someone asked earlier, we're definitely not reaching for land. We are being very disciplined and prudent. And frankly, with still a lot of dry powder, we're continuing to return funds to shareholders elsewhere.

Yes, I don't think you got the -- I didn't get the finished number?

Oh sorry, he had asked another one, so say it again Steve please?

Well, yes, so my question was of the 23% of controlled lots that are finished, I assume the majority of those are owned, but I wanted to check on that. And one other one before I get cut off is that you had talked about in previous quarters perhaps a recovery in the entry-level. I think you'd pointed to some signs in your Centex division. I was curious if you could just quantitatively or qualitatively talk about whether you think that momentum is building, whether it's pulled back, just how you're feeling about the entry-level buyer at this point?

Yes, so Stephen the 80% of those finished lots are owned.

And then Steve, with regard to the entry level we are pleased with what we've seen. The absorption pace is up 8%. It was up -- excuse me, nicely the prior 2 quarters as well. We do think it's building. And as I indicated, while we don't want to get ahead of ourselves, the potential for some of what Mr. Watt outlined to be enacted has the potential to improve it further, we're going to wait and see what happens. But we thought it was a good announcement that they're at least considering it.

Yes, Stephen, the one thing that we have seen in terms of the entry-level buyer, they're still buying closer in. We haven't seen them really start to go out to some of the outer markets. We've had a couple meetings here in Atlanta and it's a perfect example. Strong demand in the closer in positions, but if you look at some of the outlining areas where there aren't finished developed lots available, they're still no buying going on out there, so we're pretty comfortable in our ability to respond quickly on this. But right now again, the demand is closer in and not further out.

Your next question comes from Nishu Sood with Deutsche Bank.

First, I wanted to follow-up on the conversation Desi and Bob are having earlier. If you take out the 30-odd communities from Dominion at the end of 3Q, it implies a pretty steep drop in the number of communities. I think you mentioned some of the factors. Obviously, there was the close out of the legacies, which impacted your gross margins as well. You also mentioned that delays in opening new communities. So the drop that we saw here, the significant drop is that just -- how should we think about that? Is that just a temporary mismatch and that the trend that established -- has been established in last few quarters of increasing community count should continue or is there something more than that?

We have guided between 560 and 580 throughout 2014. So X Dominion, we were right within the guidelines that we have provided.

And Nishu a little more color on that. Things are taking longer to open. There's no question about that overall. And as Bob indicated in his prepared remarks that persists. So we're trying to be balanced and not get communities open before they're ready and before we're ready to present a good sales image overall. But I don't think that implies anything one way or another kind of going forward. And as we indicated earlier, we will be giving guidance for 2015s community count on our Q4 call.

Your next question comes from Michael Dahl with Crédit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: I wanted to go back Richard to your comments on the entry-level buyer a minute ago. And I was curious because you still said that I think in earlier remarks, land deals are best for so that move up and active adult. So in your budgeting for next year, is that contemplating more of a shift towards more of the Centex type communities?

Mike, it's a good question. And the way we do that is when we allocate capital to the operations, we are agnostic as to where they spend it. We want it to go to the highest returning opportunities that they find, and they clearly have a targeted plan. But we don't push it towards say Pulte or Centex or Del Webb, any of the brands. So the answer is I don't know how exactly that's going to play out. Overall it depends on what we see in the market when folks are requiring property. What I will say is the same factors that go into the underwriting are the same ones. So what we said consistently is that up to now, while margins have been very acceptable in that category paces have not recovered yet to where we believe they are needed to underwrite a lot of Centex communities because given the limited pricing power that we have on the buyer income side with regard to Centex, we need more pace to support good returns. As the market recovers and particularly if the entry-level begins to see a little bit more credit availability, the potential does exist for that category to come back and therefore, for us to start seeing more land deals there. But it will be dependent on whether the pace comes back to a point at which that becomes a bigger factor. So I don't know exactly how that's going to play out. I think it's clear based on what we have purchased the last year or 2 that for the foreseeable year to 18 months most of our openings are going to be on the Pulte or Del Webb side, but we're hopeful that could change with a little better availability in the future for credit. Michael Dahl - Crédit Suisse AG, Research Division: That's helpful. And I guess as a follow-up at a high-level you also made comments that you want to be careful to avoid getting into stretching for growth rates that are going to put real strain on the organization and clearly you've had some runoff of legacy land, but this will be the second year looking out to 2015 that you're looking for 40% growth on the spend side and so a lot more of that coming. On development, that does support quite a bit of growth. So how do you reconcile that like how close are you to a level where you're less comfortable pushing for growth aggressively?

Yes, Mike, again, we're not giving kind of community count guidance, but land investment dollars don't necessarily translate into volume or community count directly. It totally depends on what you're buying, what markets you're buying it in, how expensive the land was where you are. So I am not concerned about us approaching the level of which we get concerned about growth. We are nowhere near candidly the growth rates of what we use to be in the past through the boom times. And as I started out the prepared remarks and my first question out of box today, we are not going back there. We're going to be very balanced with our view. We're going to be balanced with our capital allocation and mindful of what can happen when we get overly aggressive. So we're not close to that edge at all and frankly not concerned about it, but we're very mindful of it and are going to be cautious.

Your next question comes from Nishu Sood with Deutsche Bank.

Just a follow up I wanted to ask was Richard about the Investor Day. It's been quite some time since you had an Investor Day. And that certainly not from a lack of exciting things happening at Pulte. Value Creation strategy being conceived and executed well in the past couple of years, so I wanted to get your thoughts on what prompted the decision to kind of create an special outreach event for investors? And maybe if you could just some preview on what you will be covering, because clearly it has created some excitement around the event.

Yes, I appreciate that. First of all, this is not something that we intend to do every year. And it's been many years as you've indicated. We think we have a great story to tell. And while we have gotten pieces of the message out over the last several years, we don't feel like we have had a forum to really tell the entire story. So what you can expect is a little bit of a view onto what the details were and how we got to the philosophy that we are today. We're certainly going to expose you to some of the possibilities for the future with regard to what Common Plan Management can do for us, what our pricing philosophies can do and demonstrate for investors that there's more energy around some of the things that we have been working on than have yet kind of come to the market. And then we're going to get a little more detailed on this capital allocation strategy. How we got to it, what the parameters are and basically walk into a little more detail than we're able to do on an earnings call like today. So we think it's a very robust lineup. We look forward to seeing as many investors there as possible and it should be a good day for us.

And ladies and gentlemen, this concludes the question-and-answer session for today's conference. I will now turn the call back over to Jim Zeumer.

Great. Thanks everybody for your time this morning. We've gone through our allocated time for today's call. We're certainly available for the remainder of the day if anybody has got any follow-up questions. We will look forward to seeing you on December 9 here in Atlanta, Georgia. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.