Beazer Homes USA, Inc. Stock

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Second Quarter Ended March 31, 2026. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com.

At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the second quarter of fiscal 2016. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. After our prepared commentary, we will open up the line, and Allan and I will be happy to take your questions. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors.

I will now turn the call over to Allan.

Thanks, Dave, and thank you for joining us. I'm going to organize my comments today around 3 topics: the highlights from our second quarter results, our responses to a challenging demand environment and a review of our progress toward our multiyear goals. Relative to the second quarter, despite some new challenges in the macro environment, we were encouraged that our community count, sales pace, ASP and gross margin all came in right around our expectations. Of particular note, getting our sales pace back over 2 per community per month was important, as was the improvement in our Houston business, which was up nicely year-over-year.

Digging a little deeper into the quarter, we were able to drive to-be-built sales higher to 43% of gross sales, the highest level since the first quarter of 2024. And our new communities, which we define as beginning sales after March of last year, represented 34% of gross sales, up sequentially from 24% last quarter. Both of these positive mix dynamics will contribute to higher ASPs and margins in the back half of the year.

From a balance sheet perspective, we have maintained a robust pipeline with a healthy 60% controlled by options. During the quarter, we increased liquidity by upsizing our revolver and we grew book value per share by buying back more than 1 million shares at about 60% of book. Bottom line, our results reflected solid execution in a challenging operating environment.

Last quarter, we described the environment and operational results that would be necessary for us to grow EBITDA this year. Among other items, this included a sales pace above 2.5% in the second half of the year and 300 basis points of margin expansion by the fourth quarter. Several macro headwinds developed since then, notably higher mortgage rates and surging energy costs. Both are readily evident to potential home buyers and both undoubtedly contributed to the recent drop in consumer sentiment.

While these challenges may prove temporary, they've left us more cautious and reduce the likelihood of achieving sufficient pace and margin expansion to support full year EBITDA growth. We now think a sales pace above 2% for the balance of the year and margin expansion between 200 and 300 basis points by the fourth quarter or more likely and achievable outcomes.

With the additional benefit of a sizable mix-driven increase in ASPs and a modest ramp in community counts, we are positioned to sequentially improve profitability and returns in the next 2 quarters. In this environment, we could probably achieve a higher sales pace by increasing spec starts and offering more incentives. We think that would do a little more than spike revenue for a few quarters and burn through our valuable lot position.

More importantly, it would undermine the progress we are making in getting paid for delivering a more efficient home and the industry's highest rated customer experience. Our positive margin progression remains intact, but it is built on more than just lower construction costs. It also reflects a growing share of closings from both our newer and our higher-priced existing communities where we are effectively competing on quality and value.

While our sales pace isn't where we want it yet, we are actively building awareness with buyers, realtors and appraisers that our homes are different, perform better and cost a lot less to operate. We believe this approach will yield greater and more durable returns than simply putting more low-feature specs on the ground. Beyond improving margins, we believe the capital allocation decisions we are making will also improve our returns.

Land prices remain quite resilient and yet our share price implies our existing assets are worth a lot less than we paid for them, which we know is not the case. That's why our 2026 capital allocation approach has been to improve the efficiency of our land spend, sell nonstrategic assets at or above book value and buy back stock at a meaningful discount to book value, all while preserving our growing community count.

On our last call, we committed to completing our existing $72 million repurchase authorization this year, and we executed $30 million in the second quarter. Upon completion of the full authorization, we will have bought back nearly 20% of our shares since early fiscal '25. Taken together, growing profitability and efficiently allocating capital will increase book value per share this year.

Now looking further out, we are still heading toward our longer-term multiyear goals for growth, deleveraging and book value per share accretion. A combination, we believe, produces the best path for shareholder value creation. While progress isn't easy to synchronize in a difficult environment, we continue to pursue each goal. With 169 communities at quarter end, we are still targeting more than 200 active communities by the end of fiscal '27.

Sales paces in existing communities and the attractiveness of incremental land purchases will determine our path to reaching this goal. We remain focused on deleveraging to the low 30% range by the end of fiscal '27. However, as we indicated last quarter, we are prioritizing share repurchase activity in fiscal '26 and expect to make progress on our leverage goal next fiscal year.

Growing book value per share into the 50s remains our goal through both earnings and stock buybacks. At quarter end, book value per share was up versus last year, finishing at nearly $42 using weighted average shares and nearly $43 using period end shares.

With that, I'll turn the call over to Dave.

Thanks, Allan. During the second quarter, we sold 1,048 homes with a pace of 2.1 sales per community per month with pace increasing from January to February and plateauing in March. On a positive note, our spec sales mix continued to move lower at 57% in the quarter. This is down from 61% in the first quarter and well below the mid- to high 70% range we saw in the back half of fiscal '25.

This shift toward more to-be-built supports our margin expansion opportunities in the second half. Of note, the impact of the headwinds we mentioned earlier has not been an increase in cancellation rates. Instead, we simply didn't see our normal seasonal lead in traffic lift in March. Our average active community count was 167, representing 3% year-over-year growth. Our homebuilding revenue was $397.7 million, with 757 homes closed at an average price of $525,000.

As anticipated, our ASP continues to move higher given the positive mix shift we have referenced. In fact, with an ASP and backlog over $580,000, this trend should accelerate. Homebuilding gross margin was 15.6%, essentially in line with our first quarter results. SG&A was $64 million, approximately $4 million below last year. Surprisingly, taxes represented nearly an $18 million benefit. This reflected an adjustment in our quarterly interim tax treatment.

Interim taxes are definitely not intuitive in GAAP, so we've added disclosure in our Q discussing this change. All told, the second quarter diluted loss per share was $0.03, and adjusted EBITDA was $2.6 million. Now let's walk through our third quarter expectations. We expect to sell more than 1,000 homes, up nearly 20% versus last year's third quarter. This implies a sales pace roughly in line with the second quarter. We expect to finish Q3 with about 170 active communities, flat to slightly up sequentially.

We anticipate closing about 900 homes with an ASP between $535,000 to $540,000 and as our New York communities contribute a larger share of closings. Adjusted homebuilding gross margin should be up more than 50 basis points sequentially, reflecting both direct cost savings and mix benefits. SG&A dollars should be about flat with last year's third quarter. From a land sale perspective, we expect to generate about $30 million of revenue in the quarter and still expect $150 million for the full year.

Altogether, this should lead -- this should result in total adjusted EBITDA of $5 million to $10 million in the third quarter. Interest amortized as a percentage of homebuilding revenue to be about 3%. Given the variability of our interim tax rate, we're not giving tax or earnings guidance for the quarter. For the full year, we expect our energy efficiency tax credits will drive a net tax benefit of over $10 million. And more importantly, we expect to pay minimal cash taxes for several years as a result of these credits.

Finally, we expect further growth in book value per share in the third quarter. Coming into the year, we had 2 goals related to land spend. First, we wanted to sustain an investment level that supports community count growth. At the same time, we wanted to make our balance sheet more efficient to facilitate share repurchases. We feel pretty good about both. Our total land spend this year, net of land sale proceeds should be roughly in line with the dollar value of what we're delivering. That would typically lead to a flat community count, but we've been able to improve deal structure and timing and carefully grow our use of developer and land bank options.

The resulting balance sheet and land spend efficiencies are helping us to turn our assets more quickly and supporting both our growth outlook and buyback activity. Finally, our balance sheet remains strong with approximately $400 million of total liquidity. This includes $116 million of unrestricted cash and $285 million of revolver availability, and we have no maturities until October 2027. During the quarter, we expanded our revolver by $160 million to $525 million and extended its maturity by 2 years to March 2030.

With that, I'll turn the call back over to Allan.

Thank you, Dave. To wrap up, I'd like to summarize the reasons we're so confident will create substantial value for our investors. We have a clear and differentiated strategy. We have chosen to compete by offering a home built to lower homeownership costs as their key attribute. This is different from other builders, and we think that's a good thing and a lot less risky than trying to outmuscle all of the companies building lower feature homes. We are building momentum toward greater profitability.

Our sales pace improved this quarter. Our gross margins are headed in the right direction. Our average sales prices are trending higher, and our community count is growing. Together, this creates a powerful setup for operational leverage. Our balance sheet is strong. We have plenty of liquidity, no looming maturities, ready access to the capital markets and lots of tax credits that will shield a significant amount of our future profitability.

Finally, we have been disciplined capital allocators. Prior to and during the pandemic, we grew our active land portfolio significantly, setting us up for sustained community count growth. In recent quarters, we have improved the efficiency of our balance sheet to facilitate substantial share repurchases. We aren't spending time worrying about the macro or hoping for a turn in the market. We're executing against a differentiated strategy that is placed to deliver growing profitability and shareholder returns.

Let me finish, as always, by thanking our team for their ongoing efforts to create value for our customers, our partners, our shareholders and each other.

With that, I'll turn the call over to the operator to take us into Q&A.

[Operator Instructions] Our first color is Natalie Kulasekere with Zelman & Associates.

Could you tell us what your targeted share of to-be-built sales is in the long run? And can you expect this 43% to climb higher over the coming quarters? And if so, where are some changes that you made in the business? Do you accommodate this? And any detail around that would be helpful.

Sure. Natalie, it's Allan. I guess I'd answer that a few ways. When I think longer term, we would like a majority of the homes that we sell to-be-built. That is not going to happen over the next several quarters. So that's a longer-term goal to be a majority to-be-built company like we were, frankly, before the pandemic. In terms of the next couple of quarters, we're going to keep working to drive that percentage. But typically, what has happened in the fourth quarter is we have a slight increase in spec sales close to fiscal year-end.

So it's not a straight line, but I think we'll be able to do period-over-period comparisons over the next year and see just slow, steady progress comparing quarters to 1 another year-over-year where I think we will be able to show increases in to-be-built sales.

Got it. And what has the share been trending over, let's say, the past 4 quarters?

Well, I mean it was a year ago, it was in the 30s. Now it's 43%. It's the highest it's been since early '24, but it's -- and frankly, it's held in nicely this spring. So rather than going back to every quarter because I don't have that off the top of my head, but it's up over 10 points year-over-year. .

Okay. Got it. That's helpful. And just 1 more for me. Where are the margins you see in your backlog right now? Is your guidance of 300 basis points of margin expansion in the fourth quarter, is that based on what you're seeing in the backlog and the kind of interest you're seeing with your to-be-built sales?

Yes. Natalie, it's Dave. Look, I would tell you the margins in backlog are supportive of the guidance that we've given for the next 2 quarters. Obviously, we have a lot more visibility on Q3, just given that we're kind of middle of Q3 now. Where we end up and the reason we went to 200 to 300 is based on what happens with specs and the specs that we sell and close in the next 2 quarters.

And our next question is Tyler Batory with Oppenheimer.

So first 1 for me. Interested if you can give some more detail on what you saw in March and April, how sales in those months compared with normal seasonality?

So, march was fine, but it wasn't great. I would tell you January was kind of normal. February was up a little bit. We were feeling reasonably optimistic. I mean there was weather here and there -- but it felt pretty good. And I have to say, in March, it was fine, but we didn't see that we normally see is an increase sequentially from February and March in traffic and leads. It helped -- it didn't collapse. It didn't go anywhere, but it didn't move up.

And that's one of the things that's made us just a little bit more cautious as we look at the next couple of months. And April has been very similar to March.

Okay. Perfect. And then I'm really trying to understand the EBITDA guide here. And your $5 million to $10 million in Q3 I think there was some talk earlier about EBITDA perhaps being pretty close to where you were in the prior year for the full year. So certainly, if that were still the case, would imply a pretty significant ramp in Q4. So I'm assuming there's some the moving pieces, perhaps on the land side of things.

I understand that the environment is a little bit weaker than when we came into the year. But just still trying to understand perhaps some of the onetime items that might be moving around Q3, Q4 and just kind of how you see EBITDA for the full year playing out.

Yes. Look, Tyler, we're not giving a full year EBITDA guide, but I really want to start with what we did last quarter was all about trying to create a path and show me what a path could look like to get to growth in EBITDA year-over-year. And now said in his opening comments, in a tougher sales environment not doing in two and half sales base in Q3 and Q4, that becomes more difficult. So there's not really a significant change beyond what we just talked about. Our land sale guidance is still somewhere $150 million of land sales but when you compound having lower sales paces in Q3 and Q4, it has an impact on EBITDA and there's a lot of operating leverage.

The good news is, and Allan talked about this in his scripted remarks, -- there is also a lot of operating leverage the other way, right? So I'm happy to take it more offline if you want to, but there's really no change other than what we outlined in the script.

Okay. And then last 1 for me. Just thinking strategically about how you sell your homes kind of getting fair value, if you will, in the markets for what you offer I know you've made some changes to marketing and whatnot. Just talk about the sales process, consumer adoption people really appreciating or starting to appreciate even more the value that you provide in your homes. .

Sure i think it has to be personally, but any of us would have to be living under rocks to not be aware of the fact that energy, energy costs are much higher in consumers' minds than they have been in many years, and that actually is great for us. I think the thing that is really resonating -- there's some science. There's a proof statement as to how 1 of our new home counselors explained this to me and I thought that's got great benefit of both being true and being simple.

He said, -- if we save somebody $100 a month or $200 a month in their utility bills. And we can look at homes in the community, we can look at the third-party ratings that we get, the purchasing power that, that creates for them is enormous. And he said, he likes to tell people, and I like this. I mean it's obviously a little self-serving, but she said, $10,000 in price cost $50 a month. If we save you $200 a month, how does that $50 a month field? And I think the idea about energy efficiency that has been kind of elusive for most consumers is either they think they have to sacrifice something.

And I always joke about low-flow showers. Nobody I know has ever enjoyed a low-flow shower. Having an energy efficient home is not a sacrifice. The second thing that is challenging with energy efficiency to talk about is people think, well, what's the payback? And the way we like to talk about it is the payback is in weeks, like literally any difference in monthly payment is less than the savings that we're generating on the utility line. And when you get it that simple for folks, I think it is really easy.

Now there are a group of people who would say, "Well, how did you do that?" and that gives us a great chance to near out. But I think what we've gotten better at is not nerding out first and then explaining what the benefit is, but talking about the math and then when they want to say, "Well, tell me how you did that, then we've got lots of stuff to talk about.

[Operator Instructions] Our next caller is Julio Romero with Sidoti Capital Company.

Yes. My first question is just thinking about if demand were to worsen at all in the second half, what levers you have to pull on the margin front. Allan, you mentioned you can likely increase sales pace through incentives and increasing spec starts, but are there any other levers that you might have additional runway as potential offsets to help with margins.

Well, obviously, those are things that would go the wrong way in margins, and we've decided that in this environment, that's not really what we want to do. But if the market gets a lot tougher, we're going to evaluate like I think any builder would tell you everything. Are there changes we need to make to our product? Do we need to restructure the way we do our incentives. I feel like we've got a full suite of tools available to us.

And we proved I think, reasonably resilient over the last couple of years trying to match what the sentiment in the market is. I wish I could give you like here's the exact thing that we would do. The trick is, and you know this, mean Southern California is different from Indianapolis is different from Maryland. And so the things that you would do to adjust in the market would also be a little bit different.

Got it. understood. And just wanted to circle back on the to-be-built questions from earlier. How do you envision the fiscal 2017 mix of to-be-built to look like in your view?

Look, I -- it's not a guide, but my belief is that we are building with the new communities and with the enthusiasm around what we're doing. I'm pretty hopeful that we will be able to have year-over-year improvements in the mix of to-be-built sales. There will be quarter-to-quarter sequential volatility because we do typically have a higher share of spec sales in our fourth quarter.

But I would just say, year-over-year, our goal is to try and be higher than we were the year -- in the same quarter the year earlier. And that's the plan over the next year or 2.

And our last question comes from Alex Rygiel with Texas Capital.

David, Allan. A couple of quick questions here. Can you talk to incentives and just directionally where they were in the first quarter versus prior periods and directionally where you feel like they're going into fiscal third quarter.

Alex, it's Dave. Look, I would tell you on an overall basis, incentives were down sequentially in the quarter, but a lot of that had to do with mix. and kind of what was coming through from a spec perspective we would expect and we've talked about this a on our go-forward guidance, I think incentives are going to be down a little bit. But again, not at the house level, it's going to have to do with mix.

So we think we kind of peaked in Q4, and we've seen some improvements since then. But not a big expectation that house level incentives are can change or community level, it's more mix related.

And let me just add. I think it's fair to say that at the house level, as I think about March and April, there was definitely a little higher cost to buy downs as rich ticked up. And that's 1 of the reasons why like we don't control the mortgage rate or what a buy down cost, I feel very good about the pull-through of the things that we can control to drive margins higher. But I think there is a little bit of a headwind from higher rates in the cost of buydowns that will affect that third and fourth quarter, and that is baked into what we've talked about for the rest of the year.

And then secondly, it appears that your cancellation rate declined quite a bit. I suspect that's also due to mix, but are you seeing any other positive trends from that?

I wouldn't tell you Alex, there's a big change in cancellation behavior. The number does look pretty good. It hasn't really concerned us in the last couple of quarters, even being a little bit higher. We typically run the business between 15% and 20% cancellation, right? So I don't see it being a big factor on a go-forward basis.

And at this time, I am showing no further questions, sir.

I want to thank everybody for joining us on our second quarter call and look forward to speaking to everyone in for our third quarter call in a few months. Thank you very much. This concludes today's call.

Thank you. Thank you for participating on today's conference call. You may go ahead and disconnect at this time.

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter Ended December 31, 2025. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal '26. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. After our prepared commentary, we will open up the line, and Allan and I will be happy to take your questions.

Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors.

I will now turn the call over to Allan.

Thank you, Dave, and thank you for joining us on our call this afternoon. We began fiscal '26 in a stubbornly soft demand environment, but stayed focused on actions within our control that can drive timely and measurable progress toward our 2026 and multiyear goals. Our efforts were concentrated on proving the value of our differentiation, reducing direct construction costs and enhancing balance sheet efficiency. While most metrics came in at or below our expectations, the December quarter is always our slowest and we have plenty of time to make up for the shortfall. While caution is certainly warranted, we have paths to grow both full year EBITDA and book value per share. Here's how.

First, since mid-December, we've seen better traffic and buyer engagement. In fact, January sales pace has been in line with the prior year after 8 quarters of year-over-year pace compression. Second, we have tangible catalysts in place that will drive higher homebuilding margins in the back half of the year. And third, we're managing our balance sheet and land spend to accelerate highly accretive share repurchases. Let's take these one at a time.

On sales, we're not just hoping market conditions continue to improve. We're also benefiting from the new branding and lead generation efforts we launched in the fall. The focus of our Enjoy the Great Indoors message is a more comfortable and healthier home and dramatically lower utility bills. This is a message other builders can't deliver and it amounts to thousands of dollars in savings per year for most customers. We're also extending our leadership in utility savings by introducing solar included homes in many communities. This makes the full potential of 0 energy ready homes and easy reality for our buyers. No complicated sizing decisions, no cumbersome leases or guessing at payback periods. From day 1, our solar included homes reduce monthly utility bills to a little more than a basic service charge.

Now there are two keys for making solar work for homeowners without tax credits or incentives. First, you must significantly reduce a home's energy consumption in order to shrink the size of the system. All of our homes do this. Second, you have to eliminate the many inefficiencies that have existed in residential solar business models. Working with our partners, we've been able to reduce installation costs for more than $4 per kilowatt hour to less than $2, and we know we can drive it even lower. Results thus far are promising. Homebuyer enthusiasm has been strong and margins in our fully solar communities are among the very best in the company. This is exactly the kind of offering that separates us from other builders in meeting the affordability challenge.

On profitability, last quarter, we laid out a series of specific catalysts for about 300 basis points of margin expansion between the first quarter and year-end. And these remain firmly intact. So far, we've reduced labor and material construction costs by more than $10,000 per home or nearly 200 basis points, which should be reflected in our third and fourth quarter results. By the fourth quarter, we expect another 100 basis points of margin expansion from the combination of positive mix shifts within our existing communities and the increase in contributions of new communities. These newer communities, which we have defined as those that started selling in or after April 2025 were just over 10% of first quarter revenue, but are projected to account for about 50% of fourth quarter revenue. ASPs and margins on sales in these communities are both substantially above existing communities. Finally, we're seeing a modest shift toward to-be-built sales so far this year, which if sustained would be another margin catalyst.

Turning to capital allocation. Our strategy remains disciplined and aligned with our multiyear goals. Within our portfolio, we continue to sell nonstrategic assets in submarkets that no longer match our differentiated product strategy or were intended for sale when we bought them. We now expect around $150 million in proceeds, increasing balance sheet efficiency and freeing up capital for higher return uses, particularly share repurchases. During the first quarter, we bought back $15 million of stock, bringing our trailing 12-month total to $48 million or about 7% of our shares. We have $72 million remaining on our share repurchase authorization, and we expect to fully execute it this year.

Selling land above book value to fund share buybacks below book value is obviously highly accretive for shareholders. Of course, we evaluate all of our actions through the lens of achieving our multiyear goals for growth, deleveraging and book value per share accretion. With 168 communities at quarter end and 23,500 active lots under control, we remain on track to reach our greater than 200 community count goal by the end of fiscal '27 even accounting for the impact of our planned asset sales.

We are committed to deleveraging to the low 30% range by the end of fiscal '27. With our plan to accelerate share repurchase activity, however, net leverage is likely to be flat year-over-year at or just under 40% at our fiscal year-end. Finally, book value per share finished the quarter above $41, up versus last year. Our goal remains to generate a double-digit CAGR in book value per share through the end of fiscal '27 through both profitability and share repurchases. Allocating $72 million to share repurchases through the rest of this year will certainly drive book value per share growth.

Even in a challenging market, we're determined to move profitability and returns higher, by capitalizing on our differentiated product strategy, reducing labor and material costs, driving toward a higher-margin community mix and allocating capital to maximize shareholder value. With that, I'll turn the call to Dave.

Thanks, Allan. During the first quarter, we sold 763 homes with a pace of 1.5 sales per community per month. While part of this weakness reflected a continued tough market, we also chose not to chase volume as many of our peers discounted homes into their year-end. Our average active community count continued to grow, reaching 167, up 4% year-over-year. Our homebuilding revenue was $359.7 million with 700 homes closed at an average selling price of $514,000. Homebuilding gross margin was reported at 14%, though this included a litigation-related charge arising from an attached product community that began in 2014. Excluding the charge, which represented about 180 basis points, our homebuilding gross margin would have been about -- would have been 15.8% in line with our guidance.

Looking at our mix, specs represented 70% of our closings, but only 61% of our sales. If the trend toward more to-be-built homes continues, it would add to margin in the back half of the year. SG&A was $65 million, in line with our expectations. Taxes represented a $1.5 million expense despite our pretax loss. This reflected our projected annual effective tax rate applied to our quarterly results. All told, first quarter adjusted EBITDA was negative $11.2 million and the diluted loss per share was $1.13, which again included a $6.4 million pretax or $0.23 per share impact of litigation-related charge.

Now let's walk through our second quarter expectations. We expect to sell approximately 1,100 homes comparable to last year. We expect to finish Q2 with about 165 active communities, another quarter with a year-over-year increase. We anticipate closing about 800 homes with an ASP around $520,000 to $525,000. Adjusted homebuilding gross margin should be relatively flat sequentially, excluding the impact of the litigation-related charge. SG&A total dollar spend should be about flat versus the prior year quarter. From a land sale perspective, we expect to generate about $30 million of revenue. This should result in total adjusted EBITDA of around $5 million, including gains from land sales. Interest amortized as a percent of homebuilding revenue should be about 3%.

Taxes are projected to be an expense of approximately $1 million, similar to Q1. This should result in a net loss of about $0.75 per diluted share. Depending on the prices paid for repurchase shares, we ought to be able to offset most, if not all, of the loss in book value per share by quarter end. Last quarter, we established the goal of generating growth in EBITDA for the full year. While the sales miss in our seasonally slowest first quarter certainly didn't help, we are still working to achieve this goal, excluding the impact of a litigation-related charge. Operationally, here's what needs to happen in the back half of the year. I'll start with the factors where we have higher visibility and more control of our outcomes.

First, our average selling price will need to reach $565,000 in the second half, which is in line with our current backlog ASP propelled by our newer communities. Second, the direct cost actions and positive mix shifts Allan outlined will need to materialize and drive 3 points of adjusted homebuilding gross margin expansion by the fourth quarter. Third, we need to keep growth in SG&A under $25 million for the full year. And fourth, we'll need to execute the $150 million of land sales we've discussed. We have very good visibility on these transactions and anticipate they will generate a double-digit EBITDA margin in the aggregate.

There are two other factors that will determine whether we can achieve EBITDA growth both of which depend on market conditions and competitive activity. Incentives will need to remain consistent with current levels for each community type, and we need to deliver a sales pace above 2.5% in Q3 and Q4 on a gradually increasing community count. Admittedly, we have not achieved this pace in the last 2 years, but it's a level well below historical trends. It's not going to be easy, but we do have a path to achieving EBITDA growth this year.

Independent of whether we reach our EBITDA growth goal in 2026, we still expect to grow book value per share at year-end by 5% to 10% as we execute the remaining $72 million of our buyback authorization. At current prices, our full repurchase capacity represents more than 10% of the company, which would bring our total buyback to nearly 20% over an 18-month period. Because of the strength of our land position, we expect to do this and still finish fiscal '26 with a net leverage at or below 40%.

We are focused on maintaining a strong balance sheet. At quarter end, we had more than $340 million of total liquidity, including $121 million of unrestricted cash and $222 million of revolver availability and no maturities until October 2027. As we said, net leverage will be flat this year as we balance our allocation of capital against our multiyear goals.

During the first quarter, we spent $181 million on land acquisition and development and generated $3 million in land sale proceeds. At quarter end, our active controlled lot position was approximately 23,500 with 61% of our lots under option contracts. Over the last several years, we built a very strong land position, allowing us to maintain our growth poster even while selling nonstrategic assets. We anticipate our land sales will be above book value in the aggregate demonstrating that even if assets that no longer fit our strategy are worth more than what we paid for them.

With that, I'll now turn the call back over to Allan.

Thanks, Dave. To wrap up, I just want to reiterate two key takeaways. First, it was a slower start to fiscal '26 than we would have liked. But the first quarter is a small piece of the picture, and we still have a path to full year EBITDA growth. We're seeing green shoots for the spring selling season, and we've got very good visibility on margin catalysts, ASP growth and profitable land sales into the back half of the year. Whether we're able to achieve our goal will depend on stability and normalization in market conditions, but we're working very hard to make it happen.

Second, we're fully committed to driving book value per share growth this year, independent of EBITDA growth. By realigning our land portfolio to accelerate share repurchases, we know we can create significant shareholder value. Let me just finish by thanking our team for their ongoing efforts to create value for our customers, partners, shareholders, and, of course, each other.

With that, I'll turn the call over to the operator to take us into Q&A.

[Operator Instructions] Our first question is from Alex Rygiel of Texas Capital Securities.

Is your repurchase plan contingent on the timing of the $150 million profitable land sales?

No, I mean, not really, Alex. I mean, obviously, we're not going to do all at once. We talked about that we would be over the timing of the year, but it's not contingent on specifically the timing of the land sales.

Helpful. And then generally speaking, sort of what is that gross margin spread between a build-to-order versus a spec home?

It depends widely, but it has always been in the 4% or 5% range, and I would say that's probably gotten a little wider in the last year. I don't have the exact percentage because, of course, you're comparing apples and oranges between geographies and communities. But it's 400- or 500-plus.

And then lastly, as it relates to sort of the favorable commentary about traffic in kind of the latter half of December and January. Do you see there -- is that kind of solely based upon interest rates sort of pulling back a little bit here? Or is it just because of a better mix? What are some of the reasons that you believe are driving that improved traffic?

I think there are a couple of things going on. The very last slide in the appendix of our slides is a chart that we've shown for years, which is the affordability math looking at monthly mortgage payments as a percentage of income. And what's been happening slowly, I mean, imperceptibly looked at day-to-day, but it's very obvious when you look at it over years is rates have moved down a little bit. Home prices have stabilized or on a net basis have come down. Incomes have kept moving forward, so we're a lot closer to that low 20% affordability band that has characterized really healthy housing demand. So I think that we shouldn't overlook that is going on in the background. And we can get excited about rates doing this or that on a day-to-day basis, but the trend that has been underway over the last year has been very positive and improving affordability. It's still elevated, but it's getting a lot closer.

Then I think the second part is just what you said, as we go from 10% of our revenue in the first quarter to 50% of our revenue in our newest communities just the demand patterns. And we talked about it before we launched them. We've talked about it since we've launched them. We've seen very good traction with communities that were purpose-built with our super high efficiency, our zero energy ready homes and an increasing share with solar included. A combination of things I think we're doing in this improving affordability backdrop, is, I think, what's contributing to what we've seen from a traffic and sales progression over the last month.

Our next question comes from Julio Romero of Sidoti & Company.

On your introduction of solar included homes, when do you expect those homes to begin to flow through orders and closings? And then any color you can provide and how accretive those homes are expected to be to either sales or profitability?

Well, right now, they're not a huge percentage of our closings, but we've got a couple of markets, and I'd highlight Las Vegas. There is some risk, I'll be wrong by a single community, but we basically had solar included across our attached and detached product in Las Vegas for the last couple of years. And that's really where we've been able to get after the supply chain and the installation protocols and sort of ring out what I call some of the excesses from the traditional solar residential solar business models. We've expanded that into Phoenix. And of course, we've got our big greenhouse community here in Georgia, the largest solar included community in the state. We've got it in a very big community in South Carolina that we're launching next month. So I think we're trending towards 20% of our business at the end of the year will be in solar included communities, but it's in our sales and closings now.

In terms of the mix, all I would say is that solar included communities definitely have higher margins than not just the average, but even of similar generation communities, like they are accretive. But it's a small enough sample size that I think we start getting into basis points and they could get dangerous, but this has helped. I wanted -- having been enthused about this, and I am, I want to be a little cautious about the fact that this is also a function, the adoption of this is going to relate to utility providers and their posture vis-a-vis rooftop solar.

What we've seen in the last year or 2 is kind of a 180 in some municipalities and with some public power companies where electricity demand has surged and we've all heard about data centers. And as that's happened, it has changed the dialogue with these utility providers, where all of a sudden, what had looked like competition becomes a little bit of a savior for them because now they have an opportunity for new communities to be much more self-sufficient or closer to self-sufficient, which takes some of the pressure off of the demands that they're experiencing.

Now we all know that the rate of growth in electricity demand is not evenly spread, but in markets where you're seeing significant growth in demand for power, and I would point out Western markets, including Arizona, we have definitely benefited from and are changing the conversation with utility providers because that's one of the bottlenecks, right? They have to be willing and they are not just net metering things. We don't really worry about net metering, but what are the hookup charges? What are the barriers to getting your permits. And I think we are finding a more and more receptive environment, but it isn't going to be everything all at once.

Very helpful. And you noted that your to-be-built mix was trending favorably in 1Q orders relative to the mix in your closings. Can you talk about the drivers of that positive mix trend and if that's expected to continue trending towards...

I think, a, it has to do with some of our newer communities that are drawing a lot of attention. I also think the fact that inventory is coming down is creating some buyers who are willing to wait because it's not everything about get me the house immediately. I think it's probably a combination of those two factors more than anything else.

The next question comes from Natalie Kulasekere of Zelman & Associates.

So last quarter, you mentioned that you're looking at a closings growth of 5% to 10% for fiscal 2026. And pardon me if I missed this on the call, but how exactly are you looking at it now? Are you still expecting to grow closings this year? And if so, what does it depend on?

Yes. Nate, what I would say is, obviously, some of it will depend on what happens in the selling season and what happens in the next 90 days. But our focus is really about our path to executing growth in EBITDA and book value per share. And we know that we have a path to go do so. And as I said in my comments, we're kind of independent of what happens from the EBITDA growth perspective. We're going to go and grow book value per share and it's to increase land sales and a little less spend, and we think that's really accretive for our shareholders.

Okay. And I guess my next -- just one quick follow-up. I'm just trying to figure out what happened in the first quarter. Was it particular markets that were underperforming? Or did you just see weakness across all your divisions as a whole?

So we had two or three divisions where sales pace was up in the first quarter, but it means we had a dozen or more of that sales pace was flat or down. So it was pretty broad-based. But I want to put it in a little bit of context. We're probably between 100 and 150 sales short of where we thought we would be, which is less than one home per community over the course of the quarter. The other thing, and it's why I said what I said about a path, first quarter normally represents about 15% of our order volume and 10 or 15 whatever percent miss on that, it's 2% or 3% of our total orders for the year. And we know that. We know this every December, in particular, we get into this dynamic where people are discounting like crazy to hit their fiscal year-end goals. .

And I understand it, but this was a year where we just decided this was not the time to be particularly aggressive and go toe to toe. And honestly, based on how the December traffic and the sales environment has changed, I'm pretty glad we didn't go ultra low in December to try and get an extra 100 sales because the repercussion across communities over the balance of the year would have been pretty significant.

[Operator Instructions] Our next question comes from Tyler Batory of Oppenheimer & Company.

I wanted to circle back on the guide and really the commentary about sales pace in particular in the back half in terms of the 2.5% there. Do you think that's achievable in the current backdrop? Do you think there needs to be a little bit of an improvement in the macro to hit that? And just kind of remind us what gives you confidence that there's going to be this ramp in the second half of the year versus the first half?

Well, look, Tyler, we certainly think it's achievable. I mean Allan kind of talked about what was happening in January and late December and improving buyer engagement, seeing more traffic, the receptivity to our Enjoy the Great Outdoors messaging. Is it what we did in '24 and '25? No. You're absolutely correct. It would be -- the last years haven't shown that. But if you look at historical trends, that's actually below what we used -- what we've done in Q3, Q4. So we think in a more normalized market with inventory levels coming down, some improvement in buyer demand that we've seen already into January, if that persists, it certainly is an achievable level. Look, I said in my remarks, and I think it's clear to say we have a path. It's not easy. It's not an easy path, but we clearly have a path. But our focus is on how we grow book value per share and get that EBITDA growth.

Okay. And then my follow-up, thinking about the gross margin progression here, you're flat quarter-over-quarter, Q2 versus Q1, and Q1 was a little short of what you had guided to previously. So just talk a little bit about the shortfall in Q1 and the moving pieces sequentially into Q2? And then just remind us and help us think about the progression in terms of the ramp in gross margin in the back half?

So let's talk about it. First, I don't need to pick a bone, but I would tell you, we said we'd be about 16.8 -- we've got 16%, excuse me. Ex the litigation charge was 15.8%. So it feels pretty close to about 16%. I mean that feels pretty close to me. In terms of queue, what's really happening in the back half of the year that's causing that change we tried to outline it. And look, it's not about incentives going down or us assuming the market gets better. Incentives do go down because of mix shift because we have newer communities coming online. We have some higher-priced existing communities that are delivering more homes, and we have those direct cost savings that we have very good visibility to in our new starts.

So it's very similar to what we said last year -- last quarter, excuse me, Tyler, last quarter about the 300 basis points. We still have good visibility into it. We obviously aren't trying to make a prediction on incentives of what happens in the back half of the year. But if incentives on like products stay the same, we've got some good improvement coming through in the back half.

Okay. And then last one for me. In terms of some of these newer communities, 10% of revenue in Q1, just remind us the ASP or margin premium on those communities compared with the other 90% of revenue that was coming through in Q1?

Well, you're starting to see it in the backlog ASP. I think backlog ASP is around $560 thousand. And that backlog are to be built from those newer communities. So that's giving you a flavor for what is going to happen to ASP in the back half of the year as those newer communities represent 50% or more of our revenue. On the margin progression, it's a couple of hundred basis points. I mean it is definitely material. And so moving from 10% to 50% on our revenue, picking up that kind of margin lift in addition to what we're seeing on the direct cost side, that's where our confidence in the movement of 300 basis points in margin comes from.

I would just add to that, Tyler. We don't give out specific ASP and backlog on new versus existing, but I would tell you, it is significantly higher.

Our next question comes from Rohit Seth of B. Riley Securities.

Just on the litigation expense, was that a onetime charge or is it ongoing?

That is a onetime charge. As we mentioned in the remarks and had to do with the community that we started construction in 2014, it's not our current product. It's not a repeating charge. It is a onetime charge.

Okay. And where do you guys stand now on incentives? What was the change into the...

Yes. We don't give the exact incentive numbers out. It's not something we publish. But I think it's safe to say that the margin degradation that you saw from Q4 to Q1 was in part because of higher incentives around mix.

Okay. And with the industry looking at clear inventory in the December quarter, you guys opted not to go that route. How is your inventory position heading into the new year?

It's very healthy. We've got a combined spec position of in the 6s per community, down from in the 7s. So it's a little bit lighter like everybody else's. The finished inventory, I think, is in great spot for the spring selling season. So it's lower, but I think it gives us an opportunity. I mean we really focus on what our production universe is as we think about tracking down profitability for the year. And I think the combination of better cycle times and the inventory position we have today give us the unit inventory that -- or the unit universe that can drive the EBITDA growth path that we described.

Okay. And if demand were to snap back, what are your cycle times now? Are you guys are well positioned to ramp back up pretty quickly?

Yes. In the first quarter, we added a little over 2 calendar weeks or reduced our cycle time by about 2 calendar weeks. And I think in the starts in this next quarter, we'll get a little bit more. And when I think about that year-over-year, I really think about what's the last day of our fiscal year that we can sell a to-be-built home and still get it started and closed by the end of our fiscal year. And gosh, in the middle of COVID, that cutoff date was like in January. And we've been slowly pushing it further out as we've been reducing cycle time. And in most of our markets now, we're in April or May. And that really helps, right? That's the way -- it's maybe not a perfect way to think about it, but it's like adding 2 weeks to your fiscal year if you compress cycle time by 2 weeks because you've got the opportunity for that additional period to make those sales that you can get started and closed.

Okay. And then final question, with the government talking about intervening in the housing market. For you guys and your customers, what do you think would be more impactful, something on the rate side or the down payment side?

That's an interesting question. I mean every buyer has got their own environment. We've been really focused on affordability, this math on the slide that I referred to. So I think a combination of wage growth and monthly payment reduction, and that's why we're so focused on utility savings and mortgage rate savings and all of the things that we do, I think that's probably more important for our buyers than down payment assistance.

I show no further questions.

Okay. I want to thank everybody for joining us on our call this quarter, and we will talk to you in 3 months. Thank you very much. This concludes today's call.

Thank you. This does conclude today's conference. You may disconnect at this time. Thank you, and have a good day.

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Fourth Fiscal Quarter and Full Year Ended September 30, 2025. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com.

At this point, I will now turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.

Thank you. Good afternoon, and welcome to the Beazer Homes Conference Call discussing our results for the fourth quarter of fiscal 2025.

Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors.

Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from the full year, the current operating environment, including the discussion of both our operational response and our strategic positioning and the progress we're making towards our multiyear goals. I will then provide some highlights from our fourth quarter results, guidance for our first fiscal quarter fiscal '26 results and some commentary on how we are thinking about full year fiscal '26 expectations. Updates on our balance sheet and liquidity, including our outlook for capital allocation and land spend and finish with a discussion about our shareholder rights agreement. Allan will conclude with a wrap-up after which we will take any questions in the remaining time.

I will now turn the call over to Allan.

Thank you, Dave, and thank you for joining us on our call this afternoon. Fiscal '25 was a productive but challenging year, highlighted by both community count growth, and prudent balance sheet management as we operated in a very difficult new home sales environment.

In the fourth quarter, we were able to improve our sales base, including in Texas, and exceed our expectations for home closings and profitability. For the full year, we were able to make continued progress on our multiyear goals. Specifically, we finished fiscal '25 with an average active community count of 164, up 14% from last year. We reduced our net debt to net cap below 40% and we grew book value per share to nearly $43 from a combination of profitability and the impact of share repurchases. It is certainly the case that fiscal '25 didn't go exactly like we expected at this time last year but I'm very proud of the resilience our team demonstrated. We effectively responded to the environment, allowing us to remain on track to achieve our multiyear goals for community count growth, deleveraging and book value per share accretion by the end of fiscal '27.

By this time in the quarterly reporting cycle, you've already heard from our peers that the macro environment remains quite challenging as consumers grapple with both confidence and affordability and builders work through excess inventory. For now, conversion and sales paces remain well below historical norms and aggressive incentives and move-in ready specs are still required to sell homes. However, we are encouraged by the recent decrease in months supply of new homes and the improvement in affordability arising from wage growth and lower mortgage rates. If these trends persist, we should see better selling conditions over the next year. But rather than waiting for the environment to improve, we are taking actions to enhance returns and capitalize on our differentiated strategy.

Over the course of fiscal '25, we took steps to improve both profitability and balance sheet efficiency. Relative to profitability, we rebid our material and labor costs, which has resulted in savings of about $10,000 per home so far. These savings should be fully realized in our closings by the fourth quarter and we continue to pursue additional opportunities. In the fourth quarter, we completed a reduction in force, a painful but necessary reflection of the current environment, which resulted in run rate savings of about $12 million per year. And we made product and sales leadership changes in several divisions, including Houston and San Antonio. Our Texas pace improved to 1.8 in the quarter, up from 1.3 last quarter.

To enhance balance sheet efficiency, we re-underwrote our portfolio to identify assets that were not a strong fit with our strategy, this led to asset sales of $63 million and a profit contribution of about $7 million. This portfolio realignment will continue in fiscal '26 with nonstrategic asset sales likely to generate more than $100 million in capital for reinvestment and likely to occur at or above book value in the aggregate. We increased the share of our lot position controlled by options from 58% to 62%, and we completed a sale leaseback of about 80 of our model homes to free up cash for higher return uses.

Our entire industry seems to use some version of the same affordability playbook. Higher purchase incentives, smaller square footage and fewer features, all help buyers attain home ownership. But they don't excite homebuyers and they don't address all of the costs that are straining affordability. At Beazer, we are focused on the total cost of homeownership by offering lower mortgage rates through competition and elimination of the middleman, lower utility bills from dramatically more efficient homes and lower insurance premiums through competition and advanced building practices.

On this slide, we've shown these savings for a recent closing here in Atlanta. This example demonstrates savings of about $3,000 per year versus comparable new homes. That represents nearly $50,000 in buying power or additional value for our buyers. And this is demonstrative of what we can do for every home buyer. We think that's an incredibly compelling value proposition in a housing market hampered by affordability constraints.

The next step in our journey and likely the most important one for our shareholders, is to ensure that homebuyers and realtors in our market know what we have created. Last month, we introduced Enjoy the Great Indoors. Our campaign to increase brand awareness and help our sales team explain the many benefits of owning a Beazer Home. Strategically, we believe we are uniquely well positioned to offer homebuyers solutions that address affordability concerns.

Both our operational responses and our differentiated strategy are designed to help us achieve our multiyear goals for growth, deleveraging and book value per share accretion. With 169 active communities at year-end and nearly 25,000 active lots under control, we are confident we can reach our greater than 200 community count goal over the next two years. In fiscal '25, we were able to deleverage to just under 40%, an important milestone on our progression. We anticipate decreasing net leverage by several points in fiscal '26 and our goal remains to reach a net debt to net capitalization ratio in the low 30% range by the end of fiscal '27.

Finally, we grew book value per share to nearly $43, extending our track record for strong book value growth. Our goal is to generate a double-digit CAGR in book value per share through the end of fiscal '27 through both profitability and share repurchases, which would equate to a book value in the mid-50s.

With that, I'll turn the call over to Dave.

Thanks, Allan. During the fourth quarter, we closed 1,400 homes well ahead of our expectations. Our stronger-than-anticipated closings in the quarter were a function of two factors: First, we executed 83 model home sale leasebacks to improve balance sheet efficiency. Second, we sold more specs that could close in the quarter than we expected. Given the competitive environment currently, the margins on the specs we sold and closed in the quarter were below our expectations heading into the quarter.

The combination of a higher percentage of specs and larger incentives resulted in a 17.2% gross margin. On the positive side, our strong fourth quarter closings led to improved operating leverage in the period with SG&A at 9.6% of total revenue. All told, in a tough market, we were able to deliver fourth quarter adjusted EBITDA of approximately $64 million and $1.02 in diluted earnings per share.

With that said, let's detail our expectations for the first quarter compared to the same quarter last year. Our outlook contemplates market conditions remaining challenging, with incentives elevated as builders push calendar year-end closings. We expect to sell approximately 900 homes with specs representing up to 75% of the total. We expect to end the first quarter with about 170 communities. We anticipate closing about 800 homes in the quarter with an ASP around $515,000. While spec sales will remain elevated, we expect a lower portion of these sales to close in the period compared to the fourth quarter.

Adjusted gross margin should be around 16%. This is primarily being driven by the higher level of incentive on specs and a very low share of to-be-built sales in the quarter's closings. SG&A total dollar spend should be relatively flat compared to last year's first quarter. We expect land sale revenue to be about $10 million with minimal P&L benefit. This should generate adjusted EBITDA between breakeven and $5 million. Interest amortized as a percentage of homebuilding revenue should be about 3%. We should generate a net tax benefit of approximately $2 million. All of this should lead to a net loss of about $0.50 per diluted share.

While it's difficult to predict full year results at a seasonally slower time of the year, we wanted to provide some commentary on our full year goals. Simply put, we want to meet or exceed our fiscal 2025 adjusted EBITDA despite beginning the year with fewer homes in backlog and lower first quarter margins. It won't be easy, but here's why we think we can do it.

We expect a combination of community count growth and a slightly improved sales pace, especially in the third quarter to help generate a 5% to 10% increase in closings versus fiscal 2025. ASP will also be up from a changing mix of communities delivering homes. We expect first quarter gross margin to represent the low point for the year, and we have a clear strategy to deliver about 3 points of margin improvement by the fourth quarter, assuming no reduction in current incentives. Here are the catalysts, we believe will drive this improvement.

First, the realization of the savings from our rebidding should grow sequentially over the year, adding about $10,000 a home or nearly 2 points of margin by year-end. Second, we expect to benefit from a positive mix shift within our existing communities. Our most aggressive incentives have occurred in our communities priced below $500,000, typically 3 to 5 points above our higher ASP communities. The share of our closings from these lower-priced communities should fall by double digits by the fourth quarter. And third, our newest communities are performing very well. The 48 opened since April 1 have generated margins more than 200 basis points above our reported margins. These new locations should grow to more than 1/3 of our closings by year-end. Any reduction in incentives or a more favorable mix of to-be-built homes would only help. Estimating the timing and exact impact of these factors is difficult but they should all contribute to sequential margin improvements this year.

Finally, SG&A as a percent of total revenue should be down compared to our full year fiscal 2025. Our balance sheet remains healthy with total liquidity at the end of the fourth quarter of nearly $540 million, with $215 million of unrestricted cash nothing drawn against our revolver and no maturities until October 2027, we have ample resources to fund our growth plans in fiscal '26 and still allocate capital toward our other goals.

In fiscal '25, we repurchased about 1.5 million shares for about 5% of the company. We continue to view our stock's current valuation as compelling, and we expect to repurchase at least that many shares in fiscal '26.

During the fourth quarter, we spent $122 million on land acquisition and development, bringing our full year fiscal '25 total to $684 million. At the same time, we generated $63 million in land sale proceeds for the full year, leaving our net land spend just above $600 million. At year-end, our active controlled lot position was nearly 25,000 with 62% of our lots under option contracts. With our 2027 community count under control, we're able to be very disciplined in our land spending allowing us to allocate capital to maximize flexibility and returns.

Finally, earlier this week, our Board unanimously authorized the company to enter into a new rights agreement to continue the protection of our deferred tax assets. At the end of September, our deferred tax assets totaled more than $140 million, about $84 million of which related to energy tax credits. The rights agreement is critical to reduce the risk of an unintended ownership change, which would limit our ability to realize benefits related to these credits.

We would note two important points about our rights agreement. First, at the end of the year, our DTA represented more than 10% of our book value and that percentage is expected to grow through June 30 as we continue to recognize additional energy efficiency credits. Second, the agreement will be presented for shareholder ratification at our upcoming annual meeting in February and will expire if shareholders do not support it. Ultimately, our board took this action because they believed it was prudent to protect these assets, which were earned through our incorporation of energy efficiency products in our homes on our way to becoming America's #1 energy-efficient builder.

With that, I'll now turn the call back over to Allan.

Thank you, Dave. 2025 was certainly challenging, but it was also productive. We demonstrated both operational agility and strategic discipline and we made progress towards each of our multiyear goals. Although we don't expect 2026 to be dramatically different at a macro level, we are encouraged by following new home inventories and better affordability.

But we aren't just waiting around hoping for better conditions. With a leaner, more efficient balance sheet and numerous catalysts for margin improvement, we're positioned to make further progress toward our multiyear community count, deleveraging and book value growth goals. Our homes are different, they're better, and in 2026, we expect that both customers and investors will notice.

Let me finish by thanking our team for their ongoing efforts to create value for our customers, our partners, our shareholders and for each other.

With that, I'll turn the call over to the operator to take us into Q&A.

[Operator Instructions] Our first question comes from Rohit Seth with B. Riley Securities.

Just on the gross margin, you got a 7.2% -- 20.3% in the fourth quarter. You're [guiding] to 16% in Q1, a little bit of a decline there, but you got the cost savings coming through. So just curious, you said you mentioned incentives are going up. Just curious when the rebate benefits start to hit, is that in Q2, Q3?

Well, yes, Rohit. Look, we really talked about three things. So you put it correctly in Q1, obviously, going in, we have incentives, higher and specs have been a higher percentage of our sales closings and backlog, frankly. So that you're going to see in Q1 and close in Q1. But as we go through the year, we didn't give an exact timing, but we talked about being able to pick up three points and those are really the three points that we talked about, right? The direct costs, which are nearly two points of margin improvement with the $10,000 of rebid we've got so far.

And frankly, what we continue to work on. And then you think about the mix shift that we discussed in some of our existing communities, we went into some depth about lower-priced communities and what that means and the shift away from lower-priced communities, that's going to add some margin accretion as we move through the year.

And then finally, and we talked about it pretty in-depthly, we've got a lot of new communities that have come online. The margin profile of our new communities is better than our existing communities. And frankly, as those constitute a higher percentage of our overall closings that will be accretive to margins.

So look, we try to make it pretty clear. We're not waiting for the market to get better. This isn't about assuming incentives are going to come down or that something is going to change in the macro environment. If those things happen, great, but what we're really trying to do is control what we can control.

And then on your orders, your orders improved substantially from your 3Q, I think you had some issues there that you want to resolve what you did. Q1 guide of about 900 orders. Just curious what you saw maybe October and November?

I think -- it's Allan, October was sluggish as it usually is, so it was sort of in line with our expectations. I would expect, as we have seen, I think, almost every year, November and December, we'll build on that. So nothing out of the normal seasonal pattern and I think the overall guide is to just below 2. I think it's about 1/8 for the quarter.

Our next question comes from Alan Ratner with Zelman & Associates.

Thanks, as always, for all the thoughtful comments, and I know it's not easy to give a '26 outlook right now, but I think you walk through the moving piece as well. Dave, just on -- or Allan, on the margin improvement for the year, I think you certainly walked through the tailwinds. One thing I didn't hear mentioned is land costs. And I would be surprised if your land, flowing through the P&L, at least is not somewhat of a headwind relative to '25. So how should we think about that as a at least a partial offset to the tailwinds you have on the material and labor side and mix?

So I understand the question entirely. You always ask very good ones. What I've seen and what we've seen, Alan, is that the newest communities that are starting to hit the P&L. They've referenced 48 that have opened since April have across the board had better margins than existing communities. Now they're very, very low impact in closings in Q1. And that grows. So I mean, there's got to be -- you're right about the fact that having bought later, they may have a per lot cost that is higher, but it appears to date that the mix of product and price is still allowing us to show margin improvement on those new communities. I realize that's a little contrary to some other narratives, but that's the experience we've had since April.

And there's not a big move in the percentage of land cost as you look forward. And remember, the ASP, we talked about is probably going to go up, especially in the second half of the year as we come out of some of our lower cost communities, and that's part of that percentage is not changing.

And then second, on the volume side, just 5% to 10% growth being, I guess, the goal for next year. I'm hoping you can help bridge that a little bit for me. I mean, I'm looking at your backlog, it's down 36% to start the year. I look at your spec count, that's also a bit lower than it was entering 2025 not that that's a bad thing, but your first Q orders guidance is also down year-on-year. So it feels like you had a pretty big hill to climb out of to put up closing growth for the year. So can you help us think through exactly how that's going to flow through at least based on your expectations?

Yes. Look, Alan, I would kind of focus on a couple of things. And there's a lot that goes into it, obviously, backlog is less and less predictive in a more spec-oriented market. And so what you really have to think about is units under production, your ability to turn units. And frankly, given the community count growth that we have and the sales pace improvement that we expect, especially in the third quarter off a pretty easy comp, we get to our 5% to 10% number. But that's really where it comes from.

Alan, you're a student of the industry, obviously. If you go back and look at '16, '17, '18, '19 and just look at units under production and the number of times they turn relative to closings in an environment where sales paces were not in the 3s, they were in the low, mid and high 2s in different years. We were turning the units under production 2.5x. We don't even have to turn the unit under production number from September at that speed to get to up and closings. So it really is a function of sales more than it is backlog or more than it is a function of units under production. And we absolutely think having a higher community count and having not repeating our Q3 challenge of 2025 will help us get there. But that's -- you characterized it, we characterized it. That's our goal. And we laid out very clearly the parts and pieces of how we can get there.

And if I could squeak in one last one, there's been a lot of chatter over the last month or so about things the administration is or might potentially do as far as getting involved in your guys' business to try to improve affordability, increase production, et cetera. There was an article in the Journal today about forward rate commitments, which was pretty negative just in terms of the mechanics of it, and I'm not going to get into it whether I agree or disagree with that. But you guys have a little bit of a unique mortgage program and yet you're competing against these aggressive rate commitment rate buydowns that your competitors are offering and you're probably doing it to some extent as well. What are your thoughts about forward rate commitments in terms of -- are they healthy for the market? Do you expect them to continue? Do you expect them to be cracked down upon by FHFA? And any thoughts you can give, I think, would be helpful.

It's obviously, a tricky topic because there are lots of different facts and we can look at different buyer profiles and different lenders and see things that are good or bad from our perspective. We'd like to give customers choices. And if they want to use incentive dollars to buy rates down, we have a mechanism for them to do that, and they get tremendous transparency from multiple lenders on exactly how those dollars are being spent on their behalf to achieve that rate buydown. If they want to use those dollars in the design center, if they want to use those dollars on the price, our buyers have the opportunity to make those choices. And I think any time you've got transparency in the marketplace and consumers are making choices. We feel pretty good about that.

Our next question comes from Alex Rygiel with Texas Capital.

Dave, I do appreciate all the guidance here for 2026. A couple of quick questions. The gross margin on your land sales was obviously low in the quarter, and you talked a little bit about your expectations for 2026. Can you just talk a little bit bigger picture sort of exactly what you're doing here with regards to your land sales and what the strategy is?

Yes. What we've done is a combination of probably two different things. The easiest part is a number of the communities that we've bought over the last three or four years were larger than we intended to use. And as we have brought them through entitlement and development, they're at a natural state now where we can -- what we call sell off a product line. We're at least consider selling off a product line. So that's just sort of absolute ordinary course. It doesn't happen a lot, but there have been instances where opportunity to control 300 or 400 lots, maybe four product lines. We want to do two or three of them, and we want to have a partner do the other one, but we control the asset. So that will be a part of our asset sale activity in 2026.

But the other thing, and I talked about this in the script was we went through this, we realized middle of last year, I mean, by the spring selling season, it was clear the demand environment did not take off. And we were very intentional about rescrubbing everything in our pipeline. And one of the things we realized that sort of links to the incentive discussion is in those lowest priced communities where incentives were the highest, those did not generate the kind of returns that we wanted. And I'm delighted with the fact that we've been able to sell. We sold $60-odd million of that in '25 at a nice gain. I think we've got other opportunities to harvest and reinvest that capital in locations where we can make great returns. It's hard to predict what will be the result of negotiations over individual sales, but we expect the aggregate value will be over 100, and we expect that in the aggregate, there will be a gain. It will be above our cost.

I don't know that, that will be true about every single asset, it's hard for me to predict that. But I feel excellent about the underwriting that we have done in our assets. I think that held value or gain value since we bought them. But we are aligning really the locations where we have the best opportunity to get paid for our differentiated value proposition.

You got to remember, and I don't mean to sound pedantic, but we're the first builder to do Zero Energy Ready at scale. And so figuring out which buyer profiles, which submarkets align best with that differentiated value proposition, there are some places that are price, price and only price, those are spots where I am happy that we've got a market to sell some land to others who want to play that way. We'll take our capital and put it in places where our value proposition is well rewarded.

And then coming back to your spec home strategy, with 75% of your sales in the quarter are up spec related. What's your view on sort of how we end 2026 and what that mix looks like sort of heading into 2027?

You ever heard the expression, "It's nice to want things"? Somebody -- if you got kids, they want something and you're like, "Oh, honey, that's great. It's nice to want things". I want for us to have a much, much lower spec ratio. We are dealing with the reality though that right now, the buyer dynamic is specs are how to drive an acceptable sales pace. So I think it can take -- I mean there are an infinite number of possible outcomes. But let's take kind of two ends of the spectrum. I think if the environment stays as it is, rates stay where they are, we're still fighting affordability. We're dealing with an overhang in markets of inventory. I think specs are going to stay much higher than we would like long term.

I think if we see some strengthening in the spring selling season, and I'm not predicting that, but it's certainly possible. We're seeing -- we talked about some green shoots and affordability, and it appears there's a little reduction in that inventory, which we anticipated, we could be in an environment where we can move back to 60-40 or 50-50. We don't love being at 75-25 because we absolutely do make more money on to to-be-built where we give buyers the opportunity to have the style selections in their home. But we are going to play in the market that is out there, not the one that we want. And so we've acknowledged that for the time being is different than we want, but it is the way it is.

And then one last question. Any directional thoughts on net land spend next year?

I think directionally, it's going to be on the order of what it was in '25. It could be a little more, it could be a little less. I mean but it's not going to be dramatically different. We've got development activity going on as we move toward that 200 community count and we'll have some takedowns as we open additional communities. But as Dave said, we have a lot of discretion over our land spending this year, which is a good place to be.

[Operator Instructions] Our next question comes from Sam Reid with Wells Fargo.

Just following up on the direct cost savings. You talked to that $10,000. It sounds like it's labor and material. I was wondering if you could just bucket those savings a little bit in greater detail. Some of your peers have called out some nice savings on the labor side, and we've heard anecdotally some nice savings on the material side, too, but just would love to see -- hear what you're seeing and the drivers behind that $10,000 number.

Sam, I appreciate the question, but we don't really bucket out the individual labor versus material cost. I don't know, Allan, if you have other thoughts.

Well, I can help you in one way and then it's something that's a little bit different for us, and we kind of committed to it last year that we would do it, and that is drive down the cost of delivering a Zero Energy Ready Home. And I think of that $10,000 probably it's not half, but probably several thousand dollars relate to finding efficiencies but maintaining the performance of our homes. Again, I come back to we're the first builder at scale to do Zero Energy Ready. And so some of the trades, some of the material providers we weren't getting discounts as we were doing that for the first time.

And I think we've been able to use our experience in the construction science that we have to reduce those costs. So that's a piece of that $10,000 but the larger share of it, as Dave said, is a combination of things. We've got some turnkey trades. We've got some piecemeal trades. So I kind of distrust people talking about labor and materials as they can completely bucket it because, again, in a turnkey market, if you've got a cost reduction, it's a combination of both, and you can't really know that.

And then just wanted to quickly hear any thoughts on the economics of the model home sale leasebacks. I mean I realize that's not something that's going to be big every quarter. But just kind of curious, high level sort of what those economics look like.

Yes. Look, just big picture. There were 83 sales and you can kind of work out the revenue impact from that. We've given that information. And the profitability was roughly in line with what we did as an overall business.

There was a financing cost. Look at it like if you're doing land banking or something like that, maybe a little better than that. I mean it was just a way to use our cash we can redeploy it in the business earning a higher return than that cost of funds.

Our next question comes from Julio Romero with Sidoti & Company.

You guys said that the sales pace in Texas improved sequentially in the fourth quarter. Can you just talk about your expectations for Texas from a sequential sales pace in the first quarter? And then secondly, what's kind of embedded with regards to the market in Texas from a full year standpoint?

Look, our full year forecast for all three of our Texas markets is subdued but it's nothing like what we experienced in the aggregate in the third quarter of last year. I don't want to get into quarterly state-wide projections but it's nothing like a snap back to what I would call normalcy. We were under 2 in the fourth quarter. I think we want 8, which is better than the one free for sure, but it's still not great. we're not assuming, as I said, some dramatic improvement. But I'm really, really happy with our teams in San Antonio and Houston. I mean, we struggled in the third quarter, and they really found a different gear. I'd like that whole state to lift up. It did have a huge effect for us as a company with nearly 40% of our communities in Texas. But I think we're taking a fairly cautious static view that, that market doesn't get dramatically better over the next 9 or 10 months.

And you mentioned one of the things that's encouraging you is the improvement in affordability arising from wage growth. Can you just speak to which markets in particular you're seeing that? And which markets are you encouraged about the prospects for improving wage growth helping your business in '26?

So we've got a national data slide, and I think it's -- I don't know what slide number it is, Slide 5, where we have tried to consistently for, I mean, multiple years and every quarter, just kind of track this percentage of what the mortgage payment represents as a percentage of the income. And it's -- we haven't done anything to manipulate the data. We've cited all of our sources, and we've just kind of done an apples-to-apples-to-apples over a period of time. And you can see that with rates being down 40 or 50 basis points, 2% or 3% and in some markets, more wage growth over the last year. Those two things together have changed the direction of travel of the line. It's still at an elevated level. I think trying to drop it down a market is not something I don't have that data in front of me, but we are super intentional about our footprint. The places where we are, we like because they have multiple sources of job growth. They have multiple sources of demand. Again, we're really committed to where we are and part of that is because we have confidence in the economies.

Our next question comes from Jay McCanless with Wedbush.

So good job on getting the specs down sequentially. I guess, should we expect further diminution there? Or you guys going to have to add some to get ready for the spring season? How should we look for the direction on that?

That's a great question. I think that number will pick up a little bit, honestly, as we do get ready for the spring selling season, but we're very careful. We watch sales paces. We don't start specs just to start specs. We react to where the demand is. So to the extent that it's up, it's going to be because sales pace is supported at being up, not because we were chasing a dream.

The second question I had, looking at the fiscal '26 slide, if you think about land revenue being up from $60 million to $100 million you're saying 5% to 10% closings increase. And just rough math makes me think high single digit, maybe potentially low double-digit growth in total revenues. I guess how much -- how good is the line of sight you think to getting to that $100 million in land sales and especially if you could walk us through again when you think this closings jump might occur back half or whenever?

Well, the closings are certainly going to be in the back half. I mean we know exactly where our backlog was coming into the quarter. We've guided to as few as 800 closings in the first quarter. So for us to have closings growth, it is going to be back half weighted to also where the community count growth will appear.

On the land sale side, Jay, we've got good visibility. I mean these are transactions where in every instance, we have multiple parties that we're either talking to or we're talking to before going under contract or under LOI. So I feel pretty good about it. These are highly desirable locations and we're going to get out of them at or above book. So I feel like that's going to be great because that's the capital we can recycle into higher returns.

And then just the last question I had makes a lot of sense on protecting the DTAs like you all talk about in the deck, assuming that the shareholders do vote for that, I guess, how much of that remaining balance do you think you guys can monetize whereas some portion of that is going to be lost within the program. I think in the deck, if it's ratified, it's still going to expire sometime in '28, I guess how much of that value do you think you can get out of those DTAs before it has to disappear?

Well, let's sort of separate it. We're really focused on the energy efficiency tax credits. And I think Dave quoted the number of $84 million. That number is going to grow through June of 2026, every Zero Energy Ready Home that we deliver is eligible for a $5,000 credit. So that's going to be the source of that number growing. The program ends in June but we will be able to use all of those energy efficiency credits. It's just a question of how quickly we can use them, which in turn, is a function of what level of profitability we have '26, '27, '28.

We think we will use them relatively quickly, and that's why one of the features of this rights plan is that subject to shareholder approval, it will go away the sooner of those energy efficiency credits being gone for three years. This is absolutely to allow our shareholders to recoup the costs that we've already incurred to build these homes. And I think we'll be able to do that over the next several years, and that's what the rights plan is really about.

At this time, I am showing no further questions.

All right. I want to thank everybody for dialing into our fourth quarter call, and we look forward to speaking to you on our first quarter call. Thanks so much. This concludes today's call.

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