KB Home Stock

Good afternoon. My name is John, and I'll be your conference operator today. I'd like to welcome everyone to the KB Home 2026 Third Quarter Earnings Conference Call. [Operator Instructions] This conference call is being recorded and a replay will be accessible on the KB Home website until October 22, 2026. I'll now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them, due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission. Actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as any other non-GAAP measure referenced during today's call, to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended August 31 and all comparisons are on a year-over-year basis unless otherwise stated.

And with that, here is Jeff Mezger.

Thank you, Jill. Good afternoon, everyone. The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates. Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week. These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home. In addition, resale inventory, which is our largest competitor, has increased to its highest levels in a decade, and we're seeing pricing starting to decline in more of our markets, adding to the tension in this environment. Against this backdrop, our third quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance.

At a high level, our third quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05. We remain balanced in our capital allocation, investing nearly $725 million in land acquisition and development for future growth, while also returning capital to our shareholders. We repurchased about 890,000 shares of our common stock, or roughly 1.5% of our shares outstanding, at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, and contributing to improving our return on equity over time. Inclusive of dividends, we returned over $65 million in capital to our shareholders in the third quarter. The impact of our share repurchase program over the past five years has been meaningful, as we have returned more than $2.1 billion in total capital to shareholders from repurchases, plus our quarterly dividend, and reduced our share count by more than one-third. During the third quarter, we expanded our book value per share to over $62.

Our results in the third quarter support our expectations for full-year deliveries, housing revenues and margins to be within the ranges that we provided in June, despite moderation in our outlook for the fourth quarter, as we continue to navigate current market conditions. At this time, let me turn the call over to Rob for more details on the quarter's results and our outlook.

Thank you, Jeff. A market like this one tests what a business model is built on. Our built-to-order model was designed to perform in exactly these conditions. And while we are not immune to the pressures in the operating environment, our approach did what it was supposed to do in the third quarter. It enabled us to sell before we build, know our costs before we commit capital to vertical construction, and keep our inventory risk low as demand softened. Our return to a predominantly built-to-order business is now firmly established.

BTO homes represent nearly three quarters of our deliveries in the third quarter, which contributed to a sequential improvement in our housing gross profit margin. The sales alignment with our BTO strategy across our divisions has been strong, which positions our delivery mix in the quarters ahead to be solidly within our targeted and historical range. During the quarter, buyers continue to demonstrate both the desire for home ownership and the ability to qualify. However, declining consumer confidence and lower affordability in most of our markets weighed on traffic in our communities, which, while still solid, was down year over year. We saw more caution among prospective buyers, with many moving to the sidelines. As a result, while sales in June were resilient and slightly ahead of May, sales softened sequentially in July and August, resulting in a year-over-year decline in net orders. In this environment, the value of what we offer becomes even clearer.

We build the home the buyer wants with the features, finishes, and ultimately a sales price that reflect the buyer's preferences for what they value and want to pay for. Those choices are key differentiators relative to an inventory home and also give our buyers a real tool to manage affordability, which is one reason our homes do not require heavy incentives to sell. We have remained disciplined in providing transparent pricing, adjusting price as needed to meet the market community by community while optimizing each asset for the best possible return. The same model that serves our buyers also protects our business, and it shows in our results. Our total unsold inventory is 26% of production, down from 41% a year ago, and finished unsold homes are just 9%, down from 16%. We also have roughly 1,100 homes sold but not yet started. That illustrates our BTO approach at work, building homes for buyers who have already committed, not for buyers we hope to find.

Our direct costs on started homes in the third quarter were lower both sequentially and year-over-year. That result reflects our deep supplier relationships that helped limit cost increases in fuel surcharges, active rebidding of our local and national contracts, value engineering of our products, and a simplified studio offering that drives improved efficiency. While our overall average for direct costs was lower in the third quarter, we experienced some increasing cost pressure from fuel, general inflation, and tariffs as the quarter progressed. We believe this will result in slightly higher sequential direct costs for our fourth quarter deliveries. As to our sold but unstarted homes, with starts volume declining across the industry, this backlog gives us real leverage with our trade partners, which we are utilizing to offset as much of the cost pressures as we can. I want to take a moment on build times because they speak directly to one of the most common questions about built to order: how long a buyer has to wait.

Our BTO homes averaged 99 days from start to completion in the third quarter, a slight improvement sequentially and 23 days or 19% faster than a year ago. At just over three months, our buyers are not waiting long for a home built the way they want it, and they can more easily, more cost-effectively lock in their interest rate than they could when build times were longer. Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days with improvement from here expected to be more gradual given how much progress we have already made. This is a real accomplishment, and I want to recognize our construction teams and trade partners who made it happen. The strength of our business also shows in the quality of our buyers. Our mortgage joint venture, KBHS Home Loans, remains an important part of how we serve our customers and run our business, and its metrics have been consistent and favorable over the past year.

In the third quarter, our capture rate increased to 85%, up slightly from the second quarter. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, and we consistently see higher customer satisfaction among buyers who use our joint venture. The average cash down payment was steady at 16% or about $76,000. On average, KBHS customers had household income of about $134,000 and a FICO score of 742. Even with half of our customers purchasing their first home, we continued to attract buyers with strong credit profiles who can qualify for their mortgage and make a significant down payment or pay cash. About 8% of our third quarter deliveries went to all cash buyers. As Jeff mentioned, we are maintaining our fiscal 2026 guidance for deliveries, housing revenue, and margins within the ranges we last provided.

However, we are moderating our expectations for the fourth quarter with respect to ASP and gross margin. With over 80% of our fourth quarter deliveries already in backlog, we have solid visibility into the quarter. Starting with average sales price, the midpoint of our current guidance implies a fourth quarter ASP of approximately $480,000 compared to the roughly $500,000 implied by our prior guidance. On our last call, we said the West Coast and Northern California specifically would be a meaningful contributor to our fourth quarter ASP and gross margin. Northern California has held and continues to perform as expected, and its projected fourth quarter ASP has increased modestly since June. The change in our outlook is principally driven by Southern California for two primary reasons. First, slower sales in the third quarter relative to our expectations have reduced the number of higher-priced Southern California homes we expect to close in the fourth quarter, weighing on our overall ASP.

California communities delivering in the quarter has shifted from what we anticipated in June. Together, these factors account for roughly the $20,000 reduction in our projected fourth quarter ASP. As to our fourth quarter gross margin, we now expect it to be about 1 percentage point lower than our prior guidance implied as a result of market pressures and higher direct and land costs. We'll walk through the details of that updated outlook later in the call. We expect an ending community count in the fourth quarter of between 270 and 275 communities, roughly in line with the prior year. This projection includes approximately 115 new communities that we will have opened in fiscal 2026 by year end and a similar number of communities that will have sold out, representing a solid rotation of our assets. Our new community openings are an important part of sustaining a predominantly built-to-order delivery mix.

As we have shared in the past, prior to opening the community, we develop a list of interested potential buyers, and the anticipation and excitement that build in the months leading up to a grand opening translate into strong initial demand. As a result, our new communities generally open at a higher absorption pace, generating a strong volume of starts aligned with sales from the outset. Last year, we added two large land positions in the Las Vegas Valley, one of the most land-constrained markets in the country. The first, Meriden, sits in a highly desirable part of Henderson and is positioned to carry forward the success of our Inspirata Master Plan, also in Henderson, which is nearing closeout. Meriden is now open across all five of its product lines. Sales have been solid, and we expect first deliveries late in our fourth quarter. The second, Sandstone, is an attractive location in North Las Vegas with price points that are affordable relative to much of the Las Vegas metro.

Sandstone opens in the fourth quarter with four distinct product lines, and early demand is strong. We have built an interest list of more than 300 potential buyers, which should support a healthy absorption pace from day one. Both communities complement our broad presence across the Las Vegas Valley, including our established positions in the Southwest and Summerlin Submarkets. With one of our best teams in the company leading the way, we are confident Meriden and Sandstone will produce strong results for many years to come. While we work to finish fiscal 2026, the foundation for fiscal 2027 is also taking shape. We expect to begin the year with a higher backlog than we began fiscal 2026 and our faster build times to drive stronger results. That took us over four months to build a year ago now take just over three, which means we can convert the same backlog into deliveries more quickly and sell further into the year for same year delivery. That backlog is the heart of our built-to-order model, giving us visibility as we plan for the year.

We'll continue to match starts to our sales base, keep our unsold inventory low, and manage each community individually for the best return. We have the business model, a favorable lot position of over 61,000 owned or controlled lots, providing a solid pipeline to support future growth targets. The balance sheet to grow when this market allows it and the discipline not to chase volume while it doesn't.

And with that, I will turn the call back over to Jeff for his closing remarks. Thanks, Rob. I want to thank our entire KB Home team for their ongoing commitment to serving our home buyers and the discipline with which they have been executing our business model. Our strategic positioning remains a real strength. We have a broad geographic footprint and a balance sheet that supports growth.

This provides the foundation for our long-tenured team with experience throughout varying housing market cycles to continue to navigate current conditions. And we remain poised for the opportunity we believe is ahead once conditions correct. Our full-year guidance remains largely intact, which we view as a positive in this market environment. We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with up to $50 million of repurchases planned for our fourth quarter. We are committed to delivering long-term shareholder value, and we look forward to updating you at the end of the year. And now I'll turn the call over to Bill Hollinger for the financial review.

Bill. Thank you, Jeff. Let me start by briefly addressing our outlook. As Jeff and Rob mentioned, market conditions have weakened since our last earnings call and remain challenging, with greater pressure on both demand and pricing than we had anticipated. As a result, we have adjusted our fourth quarter expectations to reflect the current. While our outlook for the quarter has moderated, our expectations for the full year remain largely unchanged, and I will provide you additional details throughout my remarks. As to the third quarter, despite the difficult operating environment, we delivered solid results that, while below the year-earlier period, met or exceeded our guidance range across all metrics. In the quarter, we generated housing revenues of $1.3 billion, net income of $65 million, and diluted earnings per share of $1.05. Our housing revenues for the quarter, which were at the midpoint of our guidance range, declined 20% from $1.6 billion for the prior period, primarily reflecting a 19% decrease in the number of homes delivered and slightly lower overall average selling price. We delivered 2,732 homes during the quarter, representing a backlog conversion rate of 60% compared to 71% a year ago.

The lower conversion rate reflected our focus on increasing the mix of built-to-order homes delivered during the quarter. We achieved our goal of returning to a predominantly built-to-order business with these homes comprising a higher than expected 74% of homes delivered, up from the 60% in the second quarter. As a result, we also generated our first year-over-year increase in our backlog in four years, providing a foundation for future deliveries. Turning to our outlook for deliveries and revenues, we expect fourth quarter homes delivered to range from 3,000 to 3,500 and housing revenues to range from $1.45 to $1.65 billion. For the full year, we expect homes delivered of 10,500 to 11,000, consistent with the outlook we provided on our last call. We have narrowed our range of housing revenues to $4.9 to $5.1 billion, reflecting our current expectations for the average selling price. For the third quarter, the overall average selling price of homes delivered was $473,000 compared to approximately $476,000 for the prior quarter and modestly higher than the second quarter.

Based on the current market conditions, the midpoint of our fourth quarter guidance implies a sequential increase in average selling price to about $480,000, as Rob mentioned. Home building operating income for the third quarter was $67 million or 5.2% of revenues compared to $131 million or 8.1% of revenues for the year earlier quarter. A year-over-year decrease primarily reflected a lower housing gross profit margin and higher selling, general and administrative expenses as a percentage of revenues. The third quarter housing gross profit margin was 16.5% compared to 18.2% for the year earlier quarter, but was up sequentially from the second quarter, excluding inventory related charges of $3 million and $11 million, respectively. Our adjusted housing gross profit margin was 16.8% compared to 18.9% a year ago, primarily reflecting pricing pressures, higher relative land costs, and reduced operating leverage. Our current quarter adjusted housing gross profit margin improved sequentially from 15.7% in the second quarter. This sequential improvement reflected a stronger than expected mix of built-to-order homes delivered, which also contributed to our margin coming in slightly above the high end of our guidance range. When we provided margin guidance on our last call, our outlook for the fourth quarter was more favorable than it is today.

At that time, we expected a sequential improvement supported by positive operating leverage, stronger contribution from our expanding BTO mix, and additional upside from a favorable shift toward higher price, higher margin West Coast deliveries. Since then, market conditions have evolved differently than we thought. We now anticipate housing gross margin to be down on a sequential basis in the fourth quarter. With the higher than expected BTO mix of homes delivered in the third quarter, we achieved our goal of returning to a predominantly built-to-order business earlier than we thought. As a result, we now expect less incremental margin benefit from BTO mix in the fourth quarter. In addition, we now anticipate a smaller contribution from our higher margin West Coast communities than previously projected. While our Northern California business continues to perform as expected, our margins in Southern California have been impacted by a more competitive environment.

And we have made pricing adjustments in response to market conditions and higher mortgage rates. More broadly, softer market conditions and greater affordability pressures have contributed to increased pricing pressures across many of our markets. And together with slightly higher costs, as stated earlier, they are creating an additional headwind to margins. While these factors have affected our fourth quarter outlook, they are less impactful to our full-year projections. Accordingly, we have slightly lowered our full-year gross margin from what we provided on our last call. We now expect our housing gross profit to be in the range of 16% to 16.6% for the fourth quarter and 16% to 16.2% for the full year, both assuming no inventory charges. Our selling, general and administrative expense ratio for the third quarter was 11.3%, which was at the low end of our guidance range.

Our SG&A ratio increased from the 10% for the year earlier period, mainly due to lower operating leverage, partly offset by lower costs associated with certain performance based employee compensation plans and a 6% year over year reduction of personnel. For the fourth quarter, we are forecasting an SG&A ratio to be in the range of 10.3% to 10.9%. For the full year, we maintain the midpoint of our prior guidance range while narrowing the range and now expect our SG&A ratio to be in the range of 11.5% to 11.7%. Included in both our fourth quarter and full-year guidance is an estimate of an accelerated equity-based compensation charge associated with certain annual equity award grants expected to be granted in the quarter. In the 2025 fourth quarter, this charge was $16 million. We generated total pre-tax income of $81 million for the third quarter compared to $143 million for the year earlier quarter. Our income tax expense was roughly $16 million, representing an effective tax rate of 19.6% compared to 23.3% for the prior period.

The tax rate was within our guidance range and reflected benefits associated with stock-based compensation as all remaining outstanding options were exercised during the quarter. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 26% for the fourth quarter. For the full year, we anticipate an effective tax rate of approximately 23%, which is in the midpoint of our previous guidance. As I previously mentioned, we generated net income of $65 million and diluted earnings per share of $1.05. This compares to net income of $110 million and diluted earnings per share of $1.61 for the same quarter last year. Our diluted average share count for the current quarter was down 9% year over year, reflecting the impact of our share repurchase activity. Turning to our balance sheet, we maintained a disciplined and balanced approach to capital deployment during the quarter, continuing to invest in the business while returning capital to shareholders.

With our investment in land and land development since the beginning of the year, our inventory has grown to $6 billion, up 5%, and we ended the quarter with over 61,000 lots owned and under contract while returning capital to our shareholders through share repurchases and dividends as mentioned. We ended the quarter with cash of $159 million. Total liquidity was $942 million, including $783 million available under our unsecured credit facility with $415 million drawn. As a result, our debt to capital ratio was 35.7% at the end of the quarter compared to 33.2% a year ago. Despite this modest increase, we believe we have a healthy financial position, supported by substantial liquidity and a well-laddered debt maturity profile. We believe the investments we have made in our land pipeline and community portfolio positions us well for the future while providing the capacity to adapt to evolving market conditions. We will continue to evaluate land investments, share repurchases, and financing activities through the lens of liquidity, cash flow generation, market conditions, and long-term strategic objectives.

While our outlook reflects a softer demand environment primarily from continued affordability, our higher backlog provides visibility into our expected fourth quarter performance. With our success in reestablishing a predominantly built-to-order business, our focus on operational execution and the strength of our balance sheet, we believe we are well positioned to manage through the present environment. As we look ahead, we remain focused on executing our strategy, capitalizing on growth opportunities, maintaining disciplined capital allocation, and driving long-term value for our shareholders while remaining responsive to evolving market conditions. We will now take your questions. John, please open up the line.

Thank you. We will now conduct a question and answer session. [Operator Instructions] The first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Good afternoon, everyone. Thanks for taking the questions. I want to start out on the gross margin outlook. And so, kind of helpful color there. You gave the top around with sort of change around your expectations for Q4, sort of combination of changing market conditions. And on the other hand, some things have stayed the same, such as your Northern California mix. So the big picture question is, is given the state of market conditions today, is that fourth quarter kind of representative of what your mix should look like? Mix defined as build to order, defined as Northern California, Southern California, et cetera. Obviously what I'm trying to get at is kind of what the first half of '27 should look like.

And if there's any sort of additional changes in the mix, we should consider beyond Q4. Thank you.

A lot embedded in that question. I'd just start with as we look at our Q4 projections across the board and our guidance, that's all based on how we see it playing out based on current market conditions. As far as the mix goes, the Northern California piece that we described on our call last quarter came through basically in line how we expected. We talked about Southern California. Being down and one of the drivers of the ASP coming down, you know, that is not something that we expect to continue. We were not pleased with the results that we've got. We're taking steps there to get those sales back and bring those deliveries back online as we look at the future. So we expect that mix to rotate back in, you know, as we look at Southern California specifically, one of the things that we didn't mention in the prepared remarks was just some missed community openings that are relatively high ASP communities.

So those will open, those will come through as we look ahead. We look out, we're not given guidance on '27. Obviously, market conditions are pretty volatile and choppy right now, but we're, we're pleased with our shift back to built-to-order. We know that that's going to continue. We're going to continue aligning starts with sales, and we'll update you on our outlook for '27 as we get closer to it.

Okay, got it. Well, thank you for those details. Secondly, I would like to, I wanted to touch on the direct cost side between both materials and labor. I think I heard you mention that there's been some changes specifically on how you're thinking about the materials inflation into Q4, but I didn't hear you mention much about labor. Obviously, this is in context of your peer last week speaking about some challenges with, call it, immigration and, you know, maybe demand for labor from data centers and so forth. And so how is that playing out across your communities nationwide? And how are you thinking about the impact to your own labor costs, either in Q4 and beyond? Thank you.

Yeah, really the pressure that we're referencing is mostly on the material side. You've got fuel prices that have gone up. That's embedded in a lot of the products, but it's also a direct cost that our, our trade partners are living with and experience in every day. So, we expect to see that creep into some of our costs on directs and, uh, and land development as well as we move throughout. And we've also set those up as direct fuel surcharges. So when and if fuel prices pull back, we can immediately extract those out. As to labor, I would say what we're seeing across most markets is that starts are down.

We really haven't had a lot of issues getting labor to our job sites. We are hearing stories just anecdotally about some of the labor challenges that are out there, but direct experience that's not been a big part of what we're seeing on the cost side of things.

Thank you. The next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Hi, this is Randa on for Stephen. Thanks for taking my question. First, now that KB has achieved its goal of returning to a predominantly built-to-order business model, I wanted to ask if you have an update on your long term gross margin targets. I believe that you previously stated 22% gross margin.

Yes, certainly. I mean, that is still our target. Market conditions have been not exactly conducive to listing margins lately, but as we're underwriting deals, we're sticking to our discipline there. It's one of the reasons that we've walked from many of the deals that we've had under contract because they just, land deals that is, because they just no longer met our returns. So as we look out into the future, that is still in play and still a target for us.

Got it. Thank you. And then your land spend and the quarter rose pretty significantly, both on a year-over-year basis and a sequential one. Curious what drove the substantial investment in land this quarter, and then how should we think about that going forward?

Yeah, so when you're looking at that land spend, it's comprised of really three things. It's the actual land, the raw land that you're purchasing, it's the development and then it's the fees. So most of, if not all of the increase that you're seeing, is related to development and fees that we're paying for land that was previously purchased that's working through the system.

Thank you. And the next question comes from the line of John Lovallo with UBS. Please proceed with your question.

Good evening, guys. Thank you for taking my questions. The first one is on the cost side. I mean, if you're still seeing costs on homes that were started in the third quarter down versus the homes that were started in the second quarter, you know, I would expect costs to be down quarter over quarter in the fourth quarter, maybe even into the first quarter. Just help me understand why that thinking is wrong and what would be offsetting it.

Yeah, John, part of it is just the speed at which we're building now. We would have more visibility if we started it. It's taking us six months to build. You know you can see that coming right now. As fast as we're building as that, those costs come and you get more pressure throughout the quarter. Like we've seen here, even though our average for homes started was down on a sequential and year over year basis, it did increase throughout. So homes that were starting later in the third quarter that will deliver in Q4, they're going to have that extra embedded cost pressure in them. So that's why we're projecting that or thinking that that's coming.

Okay, understood. And then, you know, Jeff, at the top and in the press release, you guys talked about some deterioration in the market since the last quarter. That's pretty similar to what your competitor said last week. Although, you know, I've noted that our channel checks with big builders and other companies across the complex had suggested at least. Some early signs of stabilization. So I guess the question I have for you is that would you agree that the housing market is at least getting closer to a bottom here and that any reduction in oil prices or rates could be a pretty powerful catalyst on the upside?

Yes, John, I think if, if you get a little jolt of consumer confidence, you'll see a lift in housing demand. The people are out there. Our traffic is down, but it's down quarter magnitude about 10%. So there's a lot of people are still looking for for homes. They're just cautious and there's, there's a lot of things going on right now that they're. Trying to digest. But if they feel better about where things are headed, I think you'll see a demand come right back. You have to deal with today and you keep an eye on it. I think they will come back.

Even since the end of our quarter in August, rates have ticked up 20, 30 bps. And every time you get a little movement like that, it takes time for the consumer to digest it. They don't want to feel like they overpaid for a house because they bought at the peak of the rates and our rates coming back down that 20 or 30%. So they wait to see if rates are coming back down and they just they digest the rate move. So, rates ticked up a little bit, that puts them on pause again. And you gotta wait for it all to get digested. But the demographics are there and the people are out there and there's still demand is just getting everybody comfortable with it all and you move.

Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Good afternoon, everybody. My first question is on the ability to value engineer the homes, which you talked about in your prepared remarks. Can you talk a little more of what are the changes that you're making, how we should think about that coming through in future quarters and maybe the offsets there as we think about value engineering relative to the BTO model that you're that you've now really gotten into. So, um,

When I think about the value engineering process and just getting more efficient building envelope that we're working with or getting more efficient with our studio offerings. It's never an event that we say that we're done with at some point. It's an ongoing process. And I feel like we've made a lot of great progress as a company over the last few years, especially starting with when the supply chain crunch hit. And some of that was just, we had to get more efficient quickly and reduce our SKUs in order to be able to get material and build the houses on a reasonable timeline. One of the big things that we're focused on today is standardization. So, when we're looking at our floor plans, there are opportunities still out there today to simplify, whether it's offsets or overhangs. If you're thinking about the outside of the building and pulling those back, as long as we can get those types of things approved through the municipalities. The municipality, the consumers still accept it, the house still looks good.

There's really no value taken away from the customer, but it does result in meaningfully lower cost. And as I said, it's always, it's an ongoing focus. I think we've been through a lot of the low hanging fruit that was out there if there was any, and now we're focused on things more related to the actual building themselves? And how do you squeeze out, you know, another few cents or dollars per square foot in the actual homes that we're building. Ongoing process with our architecture team as we seek more efficiency.

Okay, all right, that's helpful. And then one of the other things that you mentioned is the ability to actually build an interest list as you are starting to open new communities, which is in contrast to what we're hearing in terms of consumer confidence and overall conditions. Can you talk about what you're doing in order to build that interest list? Is something changed? Is there a difference in the type of buyer that's coming out there? And just anything notable within that and how you're approaching it?

Yeah, it's a discipline that we've had in the company for a long time, something that we're consistently training on. But the main thing is that we start early. We've got a good runway of time leading up to a community opening. And it's very local, and we'll start within that market. Be signage in the beginning and then we're reaching out through a digital interest list of people to either call in or they'll scan a QR code on that sign and it just starts building slow. But if you imagine a new community that's coming to a parcel and we put our sign up and you start to get a little interest and you capture those people and you take them through the process and it tends to grow. The next steps would be grassroots marketing that our teams are doing with local businesses and realtors there. And you get a little more interest from that.

And then when you get your land development going, people see that that project starting to become real and it grows a little from that and then once you go vertical with the model construction, um, you see. And then you ultimately get to the point where you've got an open model. You try to bring all of that together. Pent up demand or interest that we've got in and then you start the qualification process to see how many people on that interest list are real buyers that can qualify. And the goal for us is once we open that community for sale, we're getting about two months of our expected run rate of sales in the first week to 10 days from when we grand open that community. And then keep it running on whatever our projected sales pace is for that community on an ongoing basis. So it's really, you start small, you start grassroots, it builds up as you go, but by the time that you get to that grand opening event, you've got this pool of ready, able, and willing qualified buyers ready to go.

Thank you. Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.

Hey guys, good afternoon. Thanks for all the details so far. You know, you guys have, uh, made the pivot towards more of a base price model, I guess as opposed to, you know, the kind of the incentive burden that some of your peers have seen. And I'm curious now with build to order and your backlog of pre-sold, you know, when rates move as much as they have in a relatively short period of time, are you forced to kind of throw some incentives at the closing table at buyers in order to get them to either pull the trigger and move forward or even qualify in some cases? Because I'm imagining they probably thought they were going to come in with a lower rate, when they originally signed the contract.

Yes, Alan, it happens. The first thing that we do is try to lock the buyers early on in the process as we can. And I mentioned in the earlier prepared remarks, you know, that's a little more challenging to do when your build times are longer. But when we're at roughly 90 days now. Is more visibility and it's easier, it's less expensive to lock that loan up front. So that's the first approach that we take is try to get everybody locked as early as possible. Sometimes buyers aren't on board for that. They want to play the market and hope that rates come down. And we have seen in backlog some situations where we've had to make some minor adjustments, either just to keep them in the deal or to get them qualified, but it's minimal overall, especially when we can get them locked early and up front.

Their loan's locked, that is. Okay.

Got it. That's very helpful. Second question just on kind of the balance sheet and capital allocation. You know, you guys are going to spend north of $300 million this year on buybacks and dividends. I know you don't give cash flow guidance, but you're trending well below that from a free cash standpoint for the full year. You know, just kind of curious now with leverage back at roughly 30 percent, I mean, how much longer can you continue to, uh, you know, return more capital to shareholders and cash you're bringing in the door on a free cash basis. I guess, you know, what I'm asking is how, how high are you willing to bring that leverage ratio assuming cash flow doesn't materially increase from here.

Well, Alan, as we've demonstrated over the years, it's a discipline balance and you know the inputs. How much are we going to spend on land? What's our appetite to grow, what's the timing of development, what's the timing on and WIP and cash coming in and what's our revenue and profit, everything that we, we factor into it. And if you look at how our business has rotated over the last three years, our inventory has actually grown a few hundred million while our build times have come down significantly. So we took the the cash from the build times coming down and we put some of it to repurchases and we put a lot of it to, uh. Development and our R&D development has been going up the last few years. As we look ahead, we'll continue to balance all those. And I think in the current environment where the land market's been a little chunky where we have a couple of big deals we've done and we'll phase out the dev and get that back in balance. You'll probably see our land spend come down a little.

And depending on how the WIP is, that will influence how much our repurchases will be. And it'll all stay programmatic and opportunistic at the same time, depending on the, dynamics at that point in time, but our balance sheet remains solid and we'll stay focused on growing the company.

Please, Michelle.

Good afternoon. Thanks for taking my questions. You gave some helpful color on sort of fiscal '27 with the, Thank you.

Okay, let me, I guess, jump in there. The bridge, let's say, from the Q3 to Q4, as we said, it's going to be down and where we ended up with Q3 at 16.8%. We're now anticipating 16.3%. It's primarily, I would say, based on that we're going to. Do as we expected last time. There will be some improvement that is going to be positive from leverage in the fourth quarter compared to the third quarter. But these are going to be more than offset that leverage. So if we're up a leverage about, let's say 50 basis points, we think we're going to then lose basically a point. And that point is going to come from a. You know, pricing pressures, higher costs as well as product and geographic mix, as we said, specifically like in our Southern California area.

So I think that there's an up and down and some noise in there. But you know, net-net, it's just a half a point.

Thank you. And the next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Hey, thanks. Good afternoon, guys. I want to follow up on the tail end of that and just drill into the lot cost inflation as we're working through the bridge into the fourth quarter. You guys mentioned that lot costs were one of the factors going into the fourth quarter. What are lot costs trending? What were they up year over year in the third quarter and then, and how is that trending into the fourth quarter? So,

Back to something I said earlier on the lot cost just to get everybody grounded in it, the fees is one of the bigger, it's a big cost, it's embedded between, you know, you got the three things, you've got the fees, the land development and then you've got the land and we've seen pretty significant fee increases over last year, even longer than that, in many of our markets. So I'll go year over year on the lot costs. You know if we just look at the arithmetic alone it would appear to be up pretty meaningful on a year over year basis, but especially with our business and the weighting of California, a lot of that is mixed. It's not really just pure land inflation. You know, when I look at how that gets made up, the big portion of the year over year decline in revenues was really concentrated in some of our lower lot cost markets. Like our Texas divisions where lot costs are much lower generally than certainly California or the West, but most parts of the country. But if I look at that, and you hold last year's delivery mix constant to remove that component, the increase on a year over year basis that we're looking at is really in the low single digits. So it's not a massive move.

And as I said in the beginning, a lot of that's driven by fees.

Okay, that's helpful, Collar. Appreciate the extra context on that. And you guys also mentioned that you are seeing some additional pricing pressure from the resale market. I think that was cited last week as well. So there's, I guess, some sellers out there starting to, you know, rationalize with these higher rates as well. I'm just wondering if there's any specific markets, um, or your markets in particular where you're seeing that additional resale inventory become more competitive or having a more outsized impact. Yes.

It really, I've said this, it's probably not a satisfying answer, but it's really submarket by submarket within all of these different regions. You know, you hear a lot about Texas and the resale markets there. I think in Texas, the resale markets have generally been more of a pay story than a price story. But we are starting to see, I would say, the sellers capitulate a little bit more and either prices come down or concessions going up. I think ultimately it's good that we're starting to see that become more in balance and work through the resale that's out there. I think in a lot of cases for the last couple of years, there have been a a lot of listings on the market, depending on what part of the country you're in, but they're listed at really high prices, probably not realistic. I would call them the make me move type of price.

And I think we're starting to see maybe the sellers, the resale homeowners get a little less patient with that and starting to adjust. So overall. I would agree, you know, resale levels have generally come up. It's becoming more of a formidable competitor than it's been over the last several years, but it really is a market by market story. You know, Florida is another one where you've got resale inventory. It's, it's still elevated in a lot of markets, even though it's improved in places like Jacksonville. So, you really have to look at the details and within a reasonable radius of each community that we have, and what that recent likely always will be one of the biggest competitors that we have out there.

For our product. Thank you. The next question comes from the line of Trevor Allinson with Wolfe Research. Please proceed with your question.

Hi, good evening. Thank you for taking my questions. You talked about the benefit from higher Northern California communities coming through as you guys were expecting.

At some point, if you equilibrium where the newness effect of that has kind of been assimilated into the business. Always looking at that as, along with all of our businesses, as an opportunity to grow. But I think we've got a few more quarters for that to really get in balance as we open up some of the new stores that we have.

Okay, thank you for that color. And the second is on absorption pace between 3.3 and 3.4 per month for the full year. Obviously, the slowest you've been for a while is a product of a softer environment. With mortgage rates moving higher here, how should we think about your willingness to let that absorption pace slow, continue to drift lower from where it's running at this year to protect gross margin and, and kind of associated with that question, is there a pace that you all view as a floor for you guys on absorption?

You know, the minimum run rate we need to hit each community, and that changes over time depending on what season replacing those lists. You know, over time, we get back to that, you know, the gross expanded margin. I don't have an overall company-wide target that I would set other than over time we want to hit that four per month per community. But in the meantime, with choppy market conditions, we're going to manage it asset by asset, community by community, and just gear them towards getting the best return profile for each.

Question from the line around Northern California. So it sounds like you've still got some more communities you're looking to bring online there. Is that a backdoor way of saying that we could potentially see a mixed benefit into 2027? Uh, simply from more California, Northern California communities hitting the market.

Yeah, I would expect that we will, you know, I'd say we're, you know, three quarters to a year out before we get to kind of what I would say is our equilibrium there. So, as we ramp up and we get more. Sales and deliveries out of that region, I think we will continue to see some benefit coming from that.

That's helpful. And then switching gears here a little bit, I believe you said earlier in the call, something in the order of 80% of your closings more or less are kind of booked for the fourth quarter. Could you just give us some context on what you're assuming for your backlog margin versus what you're embedding for your home sold and closed in your quarter?

For Q4, thanks. Backlog. So if I'm understanding the question right, are you asking, I think the spread between what we've got on our built-to-order sales versus our inventory sales, which has stayed pretty consistent over the last couple of years. It's right around 4%. I mean, there's a range usually between three and five, but when we distill that down, we typically see about four points better margin on a built-to-order sales than we do on inventory. Whether we're closing that, selling that and closing it within the quarter, or you sell it even earlier than that. And the guy. Yes, right. Yeah, that combination, those two put together, you know, as we've laid out our quarter is all factored into our guidance.

Thank you, and ladies and gentlemen, that concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.

This live transcript is auto-generated without human intervention or review.

Good afternoon. And my name is John and I'll be your conference operator today. like to welcome everyone to the kb home 2026 second quarter earnings conference call All participant lines are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded, and a replay will be accessible on the KB Home website until July 23rd, 2026. I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin. Thank you, Jill.

Thank you, John. Good afternoon everyone and thank you for joining us today to review our results for the second quarter of fiscal 2026. On the call are Jeff Mesker, Executive Chairman, Rob McGivney, President and Chief Executive Officer, Bill Hollinger, Senior Vice President Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and or reconciliation of the non gap measure of adjusted housing gross profit margin, as well as any other non gap measure reference during today's discussion to its most directly comparable gap measure can be found in today's press release and or or on the investor relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended May 31 and all comparisons are on a year over year basis unless otherwise stated.

And with that, here is Jeff Mesker.

Thank you, Jill, and good afternoon, everyone. We are pleased to report second quarter results that met or exceeded the midpoint of our key guidance ranges and reflected sequential improvement in our adjusted housing gross profit margin. Operationally, our execution remains strong, as we achieve double digit year over year community account growth and further reduced our build times. We exceeded our expected mix of built-to-order sales during the quarter, and with the return to this core business model, we expect to have more predictability and delivers at better gross margins than we would achieve by relying on selling inventory homes. At a high level, our second quarter results included total revenues of $1.1 billion and diluted earnings per share of 43 cents. With our significant financial flexibility, we remain balanced in our capital allocation, investing for growth, while also returning capital to our shareholders. We repurchase 1.4 million shares of our common stock at an average price below our current book value per share.

We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, contributing to improving our return on equity over time. Inclusive of dividends, we returned over $90 million in capital to our shareholders in the second quarter. In a In addition, we continue to expand our book value per share to nearly $62.

At this time, let me turn the call over to Rob. Thank you, Jeff. Our teams continue to execute well, balancing pace and price in response to market conditions, driving further efficiencies and build times, and managing our direct cost with discipline. I will spend most of my time today talking about our strategic return to what KB Home does best in utilizing a built order model. One year ago on our second quarter fiscal 2025 earnings conference call, we shared our intention to return to predominantly BTO business. We acknowledge that doing so would create a temporary trough in deliveries, which we believe is now behind us. The PTO approach and the benefits of it extend beyond any single quarter's results. It is a structural repositioning of our company that we believe will enable stronger, more sustainable performance over time and across market cycles.

The fundamental premise of our built order model is putting the customer at the center from day one. Our buyers choose their lot, floor plan, and personalized finishes. The result is a home that has real, specific value to the people who will live in it. Homes built to customer specifications do not require heavy incentives to sell. The buyers are already invested in and feel a connection to the homes they created. This is in contrast to a speculative business model where incentives are used to create value. In that model, the builder increases the incentives to the point at which the buyers believe they have been adequately compensated for features and finishes they did not choose.

Our low cancellation rate reinforces this point. Buyers who commit to a built-to-order home are genuinely invested in it, which means our backlog converts into closings. Critically, for how we run the business, built-to-order creates a sold backlog before a single foundation is poured. Of the 3,317 net orders we generated in the second quarter, 73% were built-to-order homes. is not just a mixed metric. It is the result of a deliberate focus creating a backlog of sold not yet started homes, which we believe has three principal benefits. First, it gives us visibility and predictability. We enter our construction cycle with certainty about the key variables, the buyer, the price, our cost to build, and the expected close date.

When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins. Crucially, we know the margin we will achieve at delivery before we start. We view this as a fundamentally lower risk profile than a speculative model where a builder starts at home with an assumption of the future sales price and then finds later at the time of sale that market conditions may require price reductions or heavy incentives, which compress the margin that looked attractive when construction began. The visibility and predictability that BTO provides translates directly into more efficient operations and more dependable margins at delivery. Second, it gives us leverage with our trade partners. We currently have over 1,500 sold homes that have not yet started construction. pipeline of pending starts is an asset we can leverage in negotiations, particularly when starts are lower in most of our markets as they are now.

Our trade partners want volume and predictable workflow, and we can offer both. In exchange, we secure better costs, keep skilled crews on our job sites, and maintain the even flow production cadence of weekly starts per community that drives efficiency across our entire build cycle. Third, it supports margin quality over time. We can produce better margins on BTO homes because we are building homes for buyers who have made choices for themselves with the personalization and value that matter to them. A predominantly BTO business operating at scale with disciplined execution is the foundation that enables us to expand our margins over time. We focused our selling efforts in our second quarter on BTO homes and our divisions delivered solid performance that will benefit our results in the second half of our fiscal 2026. The PPO homes represented nearly three quarters of our net orders, as I mentioned earlier.

This outcome is a clear positive in what was a challenging spring selling season. Although buyers continue to demonstrate the desire for homeownership and the ability to qualify, consumer confidence remains low driven by a variety of factors from elevated mortgage interest rates and affordability pressures to rising inflation and geopolitical uncertainties. We continue to attract a healthy level of traffic to our communities, signaling both consumers' interest in purchasing a home and the appeal of our locations and products, and our cancellation rate was stable, reflecting high-quality, committed buyers who can close. However, market conditions precipitated a less-than-optimal optimal conversion of traffic to sales as many consumers lack the confidence to purchase, resulting in a community absorption rate of four net orders per month. Looking at our net orders in more detail, we shared on our last earnings call that sales in March had started out a little slower sequentially. This contributed to average weekly sales for the month of March that were softer than February, which we attributed to a further weakening in consumer confidence associated with the start of the conflict in the Middle East. combined with rising mortgage interest rates. Moving into April, average weekly sales rebounded, helped by lower interest rates, as well as steps we took to improve affordability, adjusting pricing in certain communities, which allowed us to capture more of the market.

While market conditions became more challenging in May, with mortgage rates moving higher and inflation accelerating, our sales remained resilient. We view this as an encouraging result given the overall environment. We ended the second quarter with 280 active communities, up 11% year over year, and we achieved the high end of our target for new communities, including the grand opening of Meridian with five different product lines in Henderson, Nevada, one of the two large land parcels in the Southwest that we acquired last year. The second of these parcels, Sandstone in North Las Vegas, with four distinct product lines, is scheduled to open later this year. With more than 70 new communities in the first half of this year, we had also attained our peak community count during our second quarter as planned. As we stated on our last earnings call, depending on the pace of sellouts, we expect community count to step down in the second half of this year, and we estimate our third quarter ending community count will be between 270 and 280. Our backlog at quarter end was 4,526 homes, which grew 26% sequentially.

With the level of BTO net orders that we achieved in the second quarter, we are moving closer to growing our backlog year over year and narrow the gap significantly as compared to our first quarter. Looking ahead, we expect to continue growing our backlog sequentially in the third quarter and believe this will also be the quarter in which we return to year over year backlog growth. support our projected sequential increase in deliveries during the second half of fiscal 2026 and positions us favorably entering fiscal 2027. Our production is as well balanced across the various stages of construction as we have seen in a long time. Having this cadence is another important aspect of our even flow production and ability to negotiate costs with our trade partners. We have a total of 3,989 homes in process. of which are sold. We reduced our finished unsold inventory to 11% of our total production as compared to 25% in the first quarter, having sold through much of our aged inventory. Our teams continue to get better and better in efficiently constructing our homes and further reduced our build times in the second quarter by eight days sequentially to 100 days from home start to completion on BTO homes.

The ongoing progress made on this key metric is remarkable, driving build times that are now at their lowest best levels in more than a decade. This is an important factor in the customer value proposition of a BTO home, sharply reducing the differential in the time that it takes to build a personalized home versus purchasing a resale home. Historically, our largest competitor Shorter build times also allow our customers to lock their mortgage rates more easily and cost efficiently. With faster build times, we can sell later in the year for year-end delivery. In 2025, it took us about five months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery. Today, with build times closer to three months, we could continue selling BTO homes into the summer for same-year delivery. By capturing more volume and revenue in the current year, we can better leverage our costs, thereby improving our margins and increasing our cash flow.

As to direct cost, they have improved significantly in the past three years. The magnitude of improvement varies by division as regional mix and product types impact results, and in certain divisions, we have reduced our directs by as much as 15%. More recently, we have seen some pressure on material costs, in particular lumber, which we are working to offset with savings and trade labor costs. Our lumber strategy is diversified with a variety of wood species and lock periods that helped us mitigate the volatility in lumber for homes that we started in the second quarter. Our teams are drawing on our deep supplier relationships to limit cost increases while also actively rebidding and negotiating our local and national contracts to help manage directs very tightly. In addition, value engineering our products and simplifying our studio offerings are offsetting some of the increases in material costs. Moving on, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans.

These metrics have remained consistent and favorable over the past year. starting with our capture rate with 83% of buyers who financed their home in the second quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 15% was fairly steady as compared to prior quarters and equated to about $70,000. On average, the household income of customers who use KBHS was about $136,000, and they had a FICO score of 741. Even with one half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying cash. About 8% of our deliveries in the second quarter were to all cash buyers.

Before I wrap up, let me spend a moment on how we see the remainder of the year unfolding. As we anticipated and is evident in our guidance, we are expecting sequential growth in deliveries, revenue and gross margin in our third quarter and again in our fourth quarter. Specific to our third quarter deliveries, more than 80% of these homes are already in our backlog. Although Bill will provide the details of our guidance in a moment, let me share some context around our Bay Area business, which we expect to be a meaningful gross margin contributor in the back half of this year and beyond. We took a patient selective approach to investment in this market, given the longer entitlement and development timelines. That positioning is now paying off with the select group of new communities with high ASPs at healthy margins. These communities are now selling and as deliveries ramp up through the second half of 2026, and into fiscal 2027, we expect them to be a meaningful driver of the margin expansion we are discussing today.

In conclusion, while we are managing through a difficult market environment, we are also reestablishing our operating identity as a company that builds homes based on decisions that buyers make, creating real value for them. This model enables backlog visibility, cost leverage, and margin predictability that we believe are meaningful differentiators and supports stronger performance over time, both operationally and financially. We acknowledge that we have more work to do on further improving our gross margin, which we're building toward with intention, and with second quarter results that demonstrate the start of what we expect to be ongoing progress.

that I will turn the call back over Jeff thanks Rob we have a favorable lot position owning or controlling over 59,000 lots at the end of our second quarter 38 percent of which were controlled and with only one community with approximately 100 lots that was land banked are we The long-standing approach has been to self-finance our land acquisitions, as we believe that only in certain situations does land banking make economic sense for our company, given the gross margin erosion and limited risk transfer from the transaction. This approach has the added benefit of a balance sheet that is more transparent. Our growth strategy remains primarily centered on expanding our share within our existing markets with a geographic footprint that we believe is positioned for long-term economic and demographic growth. That said, with the success we've had in selectively entering new markets over the past five years in Seattle, Boise, and Charlotte, with deliveries that are expected to represent about 10% of our fiscal 2026 volume, this year marks our return to Atlanta. This is a top 10 housing market characterized by strong demand, as well as population and job growth. Our local team is led by a division president with 25 years of experience in this market with deep relationships with landowners and sellers that he developed through his years of working for both national and local home builders. We are excited to expand our growth in our Southeast region in this thriving market and we are off to a solid start.

We have recently acquired our first land parcel in Atlanta, projected community opening date in early 2027. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested just under 500 million in land acquisition and development in the second quarter with roughly 75% of our investment going toward the development and fees for land we already own. In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our B2O model, which which we believe will result in a stronger company going forward. Our year is progressing with expected further sequential improvement in quarterly deliveries, revenues, and gross margin in the back half of fiscal 2026. In addition, our anticipated backlog growth will lay the groundwork for fiscal 2027.

We are rewarding our shareholders with a steady return of capital and we plan to continue our share repurchase program with between $50 million and $100 million of repurchases planned for our third quarter. We remain optimistic about the long-term housing market, the favorable demographics underpinning higher demand over time, the ongoing structural undersupply of homes, supporting our opportunity for meaningful future growth. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. And now, I'll turn the call over to Bill Hollinger for the financial review.

Thank you, Jeff. In the 2026 second quarter, we generated housing revenues of $1.11 billion, net income of $27.3 million, and diluted earnings per share of 43 cents. We continued our balanced approach to capital allocation with land-related investments, and returning capital to shareholders through share repurchases and dividends. We also kept our debt to capital ratio at a healthy level. As you recall, last quarter we provided limited guidance for the 2026 full year. With greater clarity following our second quarter results, including the softer than expected spring selling season, we have refined our 2026 outlook and are providing detailed guidance for both the third quarter and full year. Our housing revenues for the second quarter just above the midpoint of our guidance range declining 27% compared to $1.52 billion in the prior period. This result reflects a 23% decrease in the number of homes delivered and a 5% decline in their overall average selling price, primarily driven by general market conditions.

The 2,395 homes we delivered in the quarter represented a backlog conversion rate of 66% compared to 70% a year ago. The modestly lower conversion rate was expected this quarter as we continued our strategic shift to a higher mix of built to order homes delivered. In the second quarter, we exceeded our expected mix of BTO net orders. Our renewed focus on built to order continues to drive sequential backlog growth with our total number of homes in backlog up 45% since the beginning of the year. This trend reflects both our buyers contracting earlier in the construction cycle and provides greater visibility into future deliveries. And as Rob noted, based on this momentum, we expect our year-over-year ending backlog comparison to turn positive in the third quarter. Our order was 461,900, up 2% sequentially due to product. and geographic mix.

Let me address the anticipated trajectory of our average selling price for the rest of the year. We believe our average selling price will continue rising sequentially with the increase becoming more pronounced in the fourth quarter as a larger share of deliveries comes from our higher price West Coast region, including Northern California as Rob highlighted. With the current scale of our business. Even modest shifts in regional mix can meaningfully impact our average selling price, and we expect these dynamics to work in our favor as the year progresses. Based on our current outlook, we expect third quarter homes delivered to range from 2,600 to 2,800 and our housing revenues to range from 1.2 to $1.35 billion. For the 2026 full year, we are updating this guidance. provided last quarter. For homes delivered, we are maintaining the same midpoint while narrowing the expected range to 10,500 to 11,000 homes.

We have also narrowed our range of expected housing revenues to 4.9 to $5.3 billion. Home building operating income for the second quarter was $28.2 million compared to $131.5 million for the prior year quarter. Operating income in both the current and year earlier quarters included total inventory charges of $5.6 million. In the current quarter These charges included a $3.1 million inventory impairment related to a single community, which was not due to any market factors. Our home building operating income margin for the quarter was 2.5% compared to 8.6% for the last year's second quarter, mainly due to to our lower housing gross profit margin and selling general and administrative expenses as a percentage of revenues. Our second quarter housing Gross profit margin was 15.2% compared to 15.3% in the first quarter and 19.3% for the year earlier quarter. The year over year decrease primarily reflected pricing pressures, higher relative land costs and reduced operating leverage, excluding inventory related charges, our housing gross profit margin was 15.7%. which came in just above our guidance range and reflected a modest sequential improvement from the 15.5% for the first quarter.

For comparison, the housing gross margin excluding inventory related charges in the year earlier quarter was 19.7%. We are forecasting our housing gross profit margin for the 2026 third quarter in the range of 16 to 16.6%. And for the full year in the range of 16.1 to 16.5%, assuming no inventory related issues. charges. Our full year outlook reflects our expectation of a more pronounced sequential margin improvement as the year progresses, supported by increased operating leverage, a growing proportion of built-to-order homes delivered, and favorable mixed shift toward higher price higher margin West Coast communities, particularly in the Northern California. Once these factors take hold, we anticipate the year-over-year housing gross margin gap to continue to narrow over the balance of the year. Let me take a moment to expand on the sequential margin progression we anticipate for the remainder of the year. midpoint of our third quarter guidance at 16.3% represents a 60 basis point of of sequential improvement. We expect our third quarter margin to benefit mainly from an increase in operating leverage of roughly 30 basis points, along with a lift from a higher mix of BTO deliveries.

Our four-year margin guidance implies a further step up in fourth quarter. At the midpoint, about 100 basis points of sequential expansion. We anticipate this improvement to be driven primarily by roughly 60 basis points of positive operating leverage, along with more meaningful contribution from our expanding BTO mix and additional upside from a favorable mix shift towards higher price, higher and the Emerging West communities. The projected sequential improvement also reflects some modest offsets which are incorporated into our guidance. Our selling general and administrative expense ratio for the 2026 second quarter was 12.7% at the midpoint of our guidance. SG&A for the quarter included 1.5 million of expenses related to the planned relocation of our corporate headquarters to Tempe, Arizona in 2027, which we announced in April. We anticipate recognizing additional relocation related expenses each quarter until the move is fully completed.

We will outline the estimated total costs in our second quarter form 10Q, which we plan to file on or about July 9th. These anticipated expenses are included in our guidance, while our total overhead for the quarter decreased from a year ago, our SG&A ratio increased mainly due to lower operating leverage. We are forecasting our 2026 third quarter SG&A ratio to be in the range of $1.5 billion of 11.3% to 11.9% and our 2026 full year ratio to be in the range of 11.4 to 11.8%. We expect our SG&A ratio to continue to improve sequentially in the second half of the year, mainly due to increased volume and resulting higher revenues. Our income tax expense of $9.9 million for the quarter represented an effective tax rate of 26.6% compared to the 24.2% for the year earlier quarter. The higher than expected rate versus our previous guidance was primarily due lower benefits from stock-based compensation, reflecting fewer stock options exercises than anticipated. All our outstanding stock options are set to expire in October.

We expect our effective tax rate to range from 19% to 21% for the 2026 third quarter, which assumes the exercise of all outstanding stock options. For the full year, we anticipate our effective tax rate will be approximately 22 to 24% which is slightly lower than last quarter's guidance. As we noted our previous earnings call, our tax rate in the second half will reflect the reduced impact of energy tax credits due to their elimination of for homes delivered after June 30th, 2026. As I previously mentioned, we generated an income of twenty seven point three million dollars and diluted earnings per share of forty three cents. This compares to net income of one hundred and seven point nine million dollars and diluted earnings for a share of $1.50 for the same quarter of last year. Diluted average share count for the current quarter was down 12% year over year, reflecting the impact of our share repurchase activity. Turning to the balance sheet, we continued our balanced approach to capital allocation, investing in future growth, and returning excess capital to shareholders.

In the second quarter, our investment in land acquisition and development was nearly 500 million, bringing our year-to-date total to $1.06 billion. This is down 26% from last year's first half when we purchased the two large land parcels. in our Southwest region, as Rob referred to earlier. We ended the quarter with an inventory balance of approximately 5.7 billion, slightly from where we ended 2025. During that quarter, we repurchased 1.4 million shares of our common stock at a total cost of 75 million, bringing our total to a year to date pre-purchases to 2.2 million shares at a total cost of 125 million. With 775 million remaining under our current board authorization and a solid balance sheet, we have the flexibility to continue to repurchase shares. In the second quarter, we also paid roughly $15 million in $50 million in dividends representing an annualized yield of approximately 2%. We ended the quarter with total liquidity of $1.12 billion, including $200 million of cash and $923 million available under our unsecured revolving credit facility. with $275 million of cash borrowings outstanding.

Our deficit capital ratio was 34.1% at the end of the quarter, compared to 30.3% at the end of 2025, reflecting the credit facility borrowings. We have no debt maturities until June of 2027. With our land position, liquidity, and well-laddered debt maturities, we feel prepared to manage through the current environment. strengths support a balanced and disciplined approach to capital allocation in 2026 and beyond and our continued focus on long-term value creation for our shareholders. For For the remainder of 2026, the volume, pace, and timing of land investments, share repurchases, and financing activities will depend on several factors, including our operating cash flow, liquidity outlook, land investment opportunities and needs, and our share price and broader housing market and economic conditions. To wrap up, while the spring selling was softer than expected, given consumer affordability challenges and eptech and mortgage interest rates and broader macroeconomic and geopolitical uncertainty, we made meaningful progress in returning to a predominantly built-to-order business. business and positioning our operations for future profitable growth. With the first half of the year now behind us and our backlog up sequentially over that period, we have a greater clarity on the driver shaping the remainder of 2026 and believe we are poised to deliver on our outlook. We will now take your questions.

John, please open the lines.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. press star 2 if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment please while we poll for questions.

Thank you. And the first question comes from the line of John Lavala with UBS. Please proceed with your question.

Good evening guys and thank you for taking my questions. The gross margin walk that you guys provided from 2Q to 3Q and 3Q to 4Q was really helpful, so appreciate that. But I guess the question I have is, I believe you mentioned 30 basis points of sequential operating leverage, 2Q to 3Q, and then 60 basis points from 3Q to 4Q. is how would this compare in your mind to kind of a normal year? So in other words, is there anything unusual in this expected leverage?.

Yes, John, I think it's a pretty normal trend. We always deliver more in the second half than we do the first half. It's probably, there was less leverage in Q2 because we had the trough in deliveries than we would have in a normal Q2. And we have an overhead structure in place that can continue to handle the scale as we get into 27 as well. In part, it's what we're seeing in Q3 and Q4, but we think we can continue to benefit looking ahead.

Okay, that's helpful. And then, you know, you did a nice job of answering my next question as well, but maybe I could just ask it a little bit differently. And that's the fourth quarter delivery ASP, you know, you did talk about some of the drivers of that. It seems like it's going to approach somewhere around 500,000, which would be up sort of 30,000 sequentially. And you talked about BTO and some of the Bay Area deliveries. I guess the question would be, is there any way to kind of parse out the benefit from just BTO versus the Bay Area deliveries? And is there anything else that we should sort of consider in that step up in ASP?.

I think you've really got them all 3 there, John, between the leverage from the scale, the shift and then what we're expecting is a mix change that's favorable for both and margin. and revenue in Q4. Yes, we haven't really parsed through outside of the leverage piece, the specific drivers.

the other part of that incremental step up. Thank you. And the next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Good afternoon everyone thanks for taking the questions. So kind of similar line of questioning on the BTO mix and the California mix. I think I heard you say for the fourth quarter gross margin the midpoint is around 17.3 and correct me if I'm wrong. that fourth quarter is the BTO mix kind of at the, at the, you know, targeted run rate. And so we can kind of run with that jump off point for 2027. And then on the California mix, similar question. I think I heard you say you're going to expect benefits there into 2027. So kind of a finer point. on your 4Q expectations and what it means for 2027 there on both those fronts.

Thank you.

As far as the mix, I wouldn't say we'll be fully there. We expected the on deliveries is probably going to be plus or minus in the 70% range when we get to Q4. I think there's some. Potential upside beyond that, and we'll still have some coverage that we're doing likely as we get into. into Q4. What was the other part of the question? Oh, yes, the West Coast piece. So we talked about this a little bit on our last call. certainly we see that playing through in the numbers, but when we think specifically about our, Northern California and really the Bay Area business, both South and North, our teams there have done a good job of growing the lot pipeline. We're coming off of a few years where that lot pipeline was a little thinner, deliveries were a little thinner, but we're seeing a good book of business that's coming through, high ASPs, strong margins. We don't see that as a Q4 event really.

That's see it more as a structural change that's going to be with us for a long time now that we've got our discipline and our rhythm back in that.

area of the country. Awesome. Great, great. Thanks for that, Collar. And then secondly, I wanted to, I guess, touch a little bit on the comments around the spring selling season. I think you said there were some price adjustments. In April, and then you said in May, there might have been additional challenging market conditions. I'm curious, number one, maybe if you could draw that into June, anything you've seen more recently. But then also, I'm wondering if these factors are included in the margin guidance for 2026 or any of these kind of pricing adjustments, you know, could they still kind of bleed into what you see in 2027? Thanks guys and good luck.

Yes, so we've just to take the last part 1st, we've absolutely put in everything into our guidance as we see it. We're just, we've got a lot better visibility than we've had in prior years because of the backlog that we have resulting from our, our shift to. So, it's fully baked into our guidance and our projections for the. back half of 2026. As far as June goes, I would say we're Not really seeing any surprising changes from how things trended in the second quarter. We're seeing the typical seasonality trends coming out of the spring selling season, but our order pace has been steady and it's tracking right in line with our expectations. Nothing in the cadence through June has given us any cause for concern. It's playing out about the way that we would expect it to so far.

And it supports our plan and our guidance for the back half of the year. On top of that, our BTO mix continues to build as a percentage of orders, which we're pleased with.

Thank you. And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yes, thanks very much, guys. Appreciate all the color. Bill, nice to hear you on the call again. I guess my first question, I'm going to start with the California or the Bay Area deliveries. In the communities in particular, I think you indicated that this is something that's going to provide a positive impact, just this year, but I think you said this year and beyond. And I wanted to touch on that phrase. So, you know, we obviously have a select group of communities in the Bay that, you know, with higher ASPs, higher margins, all that kind of thing. But I wanted to make sure that I'm understanding that you're saying that this is actually, that there's a pipeline of similar communities in your land holdings behind that.

I wanted to make sure that that's actually true. I'm not going to see things drop back once these communities sell out, for example. So can you talk about the pipeline of the communities at sort of this, that kind of price point? And can you talk about maybe what what drove the change effectively, why maybe the dropout, why you had a period where you didn't have those communities, and just provide some color there. Thanks.

Sure, Steve. So, um, you know, as far as the communities themselves, we've got generally, you know, larger lock counts in the community portfolio or the book of business and just more of them coming. Some of them are on structured takedowns, but as we look at the, the way that this area has developed for us to the 2nd, part of your question, it's really. getting back to what we once were in the in this Bay Area business. So we have, you know, had some changes with the management teams up there over the last several years. We're happy with the team we've got now. They've been delivering good deal flow. with the communities that they've opened, and we've continued to invest in those areas. There was a time when the core South Bay was one of our most profitable divisions for a long time, and it had really shrunk down to a pretty small business and we've been growing that back and we're just now getting to the point where we're seeing the results of that flow through the delivery. So it was a bit of a trough, if you will, and deliveries coming out of that specific region that we've now got back on.

track and we're pleased with. Yes, that sounds really great. Kind of more of a normalization then. That's great. Next question relates to land. And so when we look at your land holdings, it seems like you walked away from, I don't know, maybe 1,750 lots or something like that in most in your option count it seems like so you walked away from some options I was wondering if you could talk about your thinking around that decline you know what sort of drove it or there's some you know is that is that getting you to a level that you feel comfortable with. Maybe if you could talk about what you think the long-term optimal, level of land owned an option is not mix but your supply of each that would be great thanks.

So we try to target a three to five year supply of lots. And you know, there are ins and outs and puts and takes with that. And if it's the right deal, we may go longer than that. We certainly buy deals that, you know, are closer to just a year's worth of deliveries. But as far as the lots that we've chosen to walk away from, it's really just been about staying disciplined to our approach and making sure that as we're focused on driving growth, that that's profitable growth. And as you know, the market's been choppy. Things have moved around a lot.

And we're not afraid to walk away from deals that we have under option or under contract if they no longer make financial sense. And our first salvo is to go approach the landowner or the seller and renegotiate a better price or better terms. But we don't always get that. And that's really the the the driver of why we've walked away from some of the uh the lots that you're referring to most of them really all of them have been deals that we've tied up with a deposit and we're in feasibility or through due diligence and haven't gotten a lot of money invested in at that point. And we We're just not going to keep proceeding down a path on a deal that we don't see as meeting our return hurdles.

Thank you. And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Thanks for taking my questions. Sorry for the repetitive ones on California, but can you just remind us maybe what the What percentage of deliveries and revenues did that division used to represent for you? What did it drop down to these past couple of years? And then when you're talking about kind of having the pipeline, does that assume, can you just help us quantify a little bit better, like what percentage of mix this represents, since it does seem to be sort of a meaningful.

thing for you. Mike, we don't really have that data at hand. The reason that we specifically called out the Bay Area in the second quarter, what Rob walked through, we had a challenge situation up there. wasn't delivering, our results really eroded. And we didn't share on our calls that the results were eroding because it would have just come off as an excuse. And we powered through it, and we rebuilt the business. pipeline's back where it's healthy and going in the right direction and For years and years, the South Bay Division was 10-15 percent of our profits, just that one division. A lot of that went away and now it's coming back and it's a combination of a high ASP, high margin, area that is also performing very well right now. It's one of the best housing markets in the country. we're calling it out now because at our current scale, the change in ASP can be pretty significant, as you're seeing in our guide for the fourth work. But the pipeline's there and we continue to expect bigger and better things in future years.

Yes, okay. I hear you, Jeff. I think a finer point at some point might be helpful just to underscore like the – and help us all with the conviction that that's going to be like something that is kind of a good go-forward run rate or continued kind of improvement lever. I guess just shifting gears back to the demand side, I appreciate the comments on June being seasonal. Can you just that cadence through May, if you were at four a month for the quarter, Can you be more specific about kind of where May sat and then when you talk about June seasonal, was that seasonal as in what you'd see in 3Q versus 2Q typically or was it seasonal off of what was a weaker than normal May? Just help us dial that in a little bit better if you could.

Well, really, March, which we usually expect to be one of our best-selling months of the spring selling season, was what we really saw. And as I walked through in the prepared remarks, there was a lot going on at that time, I think a lot weighing on the consumer psyche specifically. late February, the very end of February, the conflict in the Middle East kicking off. So we were happy with the way that sales rebounded in April. And I would say that April and May were stronger than March were, if you were to distill it all down. Yes. we've gotten into June, really it's continued about with where we ended up with March. The orders have been strong, they've been in line with our expectations. And it's about this time of year we usually start to see more of a seasonal summer slowdown and without getting into the specific sales results and dates and weeks, I'd say what we're seeing right now is aligned with that typical seasonal pattern.

Thank you. And the next question comes from the line of Allen Ratner with Zellman and Associates. Please proceed with your question.

Hey guys, good afternoon, early evening. Appreciate all the details so far and nice job with the the improvement towards pivoting back to BTO. My first question, you want to add on to some of the questions on the lot count and I guess the land market more broadly. Your lot count is down quite a bit over the last four to five quarters, down over 20% from where it peaked early last year. And I'm just curious though, A, as we think about community count beyond this year, how should we think about the impact of the decline we've seen in lot count over the last five quarters? Is that going to result in some compression or kind of an air pocketing community count, maybe out into 27 or 28 and the follow-on TO THAT I GUESS IS MORE BROADLY IN THE LAND MARKET IN GENERAL HAVE YOU SEEN ANY RELIEF FOR CORRECTION AND LAND PRICES THAT GET YOU GUYS YOU KNOW EXCITED THAT THERE MIGHT BE SOME OPPORTUNITIES TO REBUILD THAT PIPELINE OVER THE NEXT FEW QUARTERS THANK YOU.

Yes, Alan, I'll take the first half and I'll kick it to Rob for the current environment. If you think about it, the lots owned and controls started going down as the markets started going down. As things got very volatile, if you will, with pricing and consumer sentiment and whatnot, we were having trouble getting things to underwrite. And if you go back to 2021, 22, market was going the other way, it was easier to underwrite and we tied up a lot of deals. So as we sit here today, we're actively looking at deals each week. We intend to grow the company and we're positioned Our balance sheet supports it, and we do have growth targets out there for 27 and 28 that the divisions are pursuing. What is interesting, and then I'll hand it to Rob, we're seeing some opportunities for finished lot deals as the markets are resetting, where we can get into things, We have plug and play product and get to delivery sooner than later as opposed to what we been through in the Bay Area with long-term entitlement plays.

So the market is rational to me and there's finished lot opportunities and we're chasing those right now.

Yes, as far as the overall land market goes, I would say that we're beginning to see more than what we've seen over the past couple of years as far as the sellers starting to TAB, Ryan Schuchard, LGO Admissions & Program Manager, Come to terms with the reality of the current market. I wouldn't say that it's fully adjusted to the point where you can go out and you know most of our markets and just start adding lots of TAB, Ryan Schuchard, LGO Admissions & Program Manager, It scale that would meet our underwriting hurdles today, but certainly looking at things like better terms in some cases prices coming down and maybe less competition out there for some of the lots. But overall, I would say that the sellers are starting to get a little more constructive with tethering their lot price and the finished lot price that we would get to where current prices are today and where the current values are today. So I think there's more work to do. And it's again, like with a lot of these things, market by market story. Some have softened up more than others, especially where you've seen house prices come down and there's data to point to. But overall, I'd say it's getting – there's more rational thinking as far as the land sellers go on the value of their.

Great. I appreciate the call, guys. Thanks a lot. And the next question comes from the line of Rafe Jadrasech with Bank of America. Please proceed with your question.

Hi, good afternoon. Thanks for taking my question. Can you guys just provide the percent of deliveries that were bill to order in the second quarter and maybe the cadence for the back half of the year? Are you talking orders or deliveries? How much were deliveries in the second quarter for BKO? Yes, it was 60% in the second quarter.

And we see that progressing, you know, we're not going to call the ball on the exact number. But as I said, we think that'll continue to ramp up. And by the time we get to Q4, I would expect that we would be plus or minus around 70% of our deliveries coming from bill to order. Chris, that's helpful. And then as you look at.

sort of the outlook for gross margin. Just you mentioned you're starting to see some lumber inflation. What's the assumption in terms of sticking brick costs and land inflation as you move through the back half of this year?.

So we look at, you know, anytime we're putting financials together or guide together, we're basing everything off today. So it's today's sales prices, today's cost. We don't have a crystal ball with where things are headed. Certainly there's been a lot of talk about pressure around fuel related price increases, and we've been pushing those off and negotiating those off. Now you've got fuel prices coming down. So we're not looking out and projecting where commodity prices or things like that may go. We're basing it on, you know, as we see it today, where our prices are, where the revenue side is, and where our cost side is coming in.

Yes, the other thing, you know, we are seeing, I mentioned it in my prepared remarks, but across most of our markets, probably close to all of our markets, we're seeing a pretty significant decline in starts year over year. And I mean, mentioned the 1500 homes that we have that are sold not started right now. I think that's a great asset and a powerful tool that we can leverage for better costs. So even as things get, you know, if they get a little bumpy or prices move around, We've got that asset that we can lever for those starts. And generally when starts are coming down, our trade partners get hungrier for work, and that will either keep a lid on costs or potentially drive them down from today's levels.

Thank you. And the next question comes from the line of Paul Przbylski with Wolf Research. Please proceed with your question.

Thanks, good afternoon. I guess to start off, congratulations again on the bill to order shift. Related to that, historically, I think Build-A-Water has had a 300 to 500 basis point gross margin premium to spec. Are you seeing that spread continue to hold or you had to shrink that somewhat to get that increased mix?.

No, we actually haven't seen that change and probably the better part of 2 years. It's been within that range and really the mid point is about right. I mean, we could probably even tighten that. So it's right around 4 points of spread is what we typically see between B. and in spec sales even within the same community same product.

Okay. And then I guess you mentioned your reentry into Atlanta. How long do you think it'll take you to get that market to scale and why now? And do you have any other markets on your radar?.

Yes, well, you know, we had our, our startup in Seattle several, several years ago, and that's been really a, a model for us that we would like to follow and only a few years have passed since we entered that market. And we've now grown it to a top 3 position. So we'd like to replicate that in Atlanta, just like we're working on in Boise and, uh, Atlanta is very new. We just acquired our first land deal there. I don't really have a prediction for when or how big we can get there, but we think there's a great opportunity. It's a top 10 housing market, and we've got a really good template with what we've done with Seattle, what we've done with Boise and other places that we can follow there. And we're excited about the opportunity and the growth opportunity we can drive coming out of Atlanta.

Thank you. And the next question comes from the line of Jade Romani with KBW. Please proceed with your question.

Thank you very much. Just on the San Francisco question, which happens to be, I think the strongest real estate market in the country. What's the sustainability of your community count and land supply in the market and the current demand outlook that you're seeing?.

Yes, well, like I said, we're happy with the footprint and the portfolio that we've developed and it really all comes down to acquiring new deals as we sell through and deliver on the assets that we've got. So, you know, our teams are out there. We feel like we've got a really strong land team in that market. They know how to work entitlements. They know how to work the processes. They're well connected. So our approach is to grow it, certainly from where we are today. As we mentioned, it had shrunk down.

We didn't like seeing that happen. We're happy with getting it back to what I would call stable and now growing, and our focus is on continuing to grow it as long as we can continue to find profitable land deals.

And could you quantify by what magnitude you're expecting to ramp up land investment in the Bay Area?.

No, I mean, we're I'm going to stay away from that one. We're looking to grow all of our cities that we operate in, all of our divisions, all of our regions. So we don't really do capital allocation in a way that we would say we're going to allocate X to this division or this area. We look at every deal. We're open for business every Monday on land committee. And if a deal meets our hurdles, and we like the proposition that we're going to do it, but we don't really look at it in terms of... you know, allocating a certain amount of capital or defining a certain level of land acquisition that we're after in a specific market.

Thank you. And the next question comes from the line of Jay McCandless with Citizens Bank. Please proceed with your question.

Hey, good afternoon. My first question just with the very high level of M&A we've seen this year, is that opening up any potential potential tailwinds for KB or is it creating some headwinds as the 7a wave seems to keep going?.

It Jay for us, it's business as usual. We. We don't want to comment on what what others have done, but we see our. Real opportunities to grow and stay focused on. KB home. You know, a logo changes, I don't know anything else changes.

Right. Well, I just, I kind of, Alan stole my question around the community count, but I didn't know if all this turnover and ownership was giving you guys an opportunity to maybe grow the community count, add some lots a little bit faster.

Well, we're always looking at the private builders and it's most of the time it's difficult to get it to Pencil because they want a premium to sell their communities and you throw the premium on and then you don't get the margin. So we're saying here is keep turning all the rocks over and see what we can find. So we are out looking at M&A, but we haven't been able to find one that works in the last couple of years.

Understood. Okay, thanks for taking my question. Thank you. And ladies and gentlemen, that is the end of the question and answer session, and that also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

[Call has ended.]

Hello, and welcome to the Annual Meeting of Stockholders of KB Home. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Jeff Mezger. Mr. Mezger, the floor is yours.

Good morning, and welcome to KB Home's 2026 Annual Meeting of Stockholders. I'm Jeff Mezger, Executive Chairman of the KB Home Board of Directors, and it is my pleasure to call the meeting to order. The meeting will be conducted under the posted rules of conduct so that we can have an orderly proceeding.

I will start by identifying the other members of the Board of Directors who are participating in the meeting. Jose Barra, Principal of Proinco Strategic Advisors LLC; Art Collins, Founder and Managing Partner of theGROUP; Dorene Dominguez, Chairwoman and Chief Executive Officer of the Vanir Group of Companies; Kevin Eltife, Founder and Owner of Eltife Properties; Dr. Stuart Gabriel, Director of the Ziman Center for Real Estate at UCLA and Distinguished Professor of Finance and Arden Realty Chair at the UCLA Anderson School of Management; Dr. Tom Gilligan, Emeritus Director and Senior Fellow at the Hoover Institution at Stanford University; Cheryl Henry, Former President, Chief Executive Officer and Chairwoman of Ruth's Hospitality Group; Jody Kozlak, Founder and CEO of Kozlak Capital Partners; and Rob McGibney, President and CEO of KB Home.

I will also recognize and thank James Weaver, CEO and Chairman of CW Interest, who is stepping down from the Board today after 9 years of exemplary service to KB Home. We will now proceed with the official business of the meeting and for that I will turn the meeting over to Brian Woram General Counsel.

Thank you, Mr. Chairman, and good morning, everyone. This part of the meeting is being conducted according to the notice of meeting and proxy statement made available beginning on March 13, 2026, to all stockholders of record on February 25, 2026. As noted by our Executive Chairman, the meeting is being conducted under the rules of conduct that are posted to the meeting site. Among other matters, the rules cover how stockholders may ask an addressable question at the meeting. The minutes of the KB Home Annual Meeting of Stockholders held on April 17, 2025, are available through Mr. Tony Richelieu, our Corporate Secretary. Mr. Richelieu and Mr. [Mark Cano] of Computershare will act as inspectors of election.

The inspectors have reported that the holders of significantly more than a majority of the outstanding capital stock of the company entitled to vote at this meeting are present in person or by proxy. On behalf of our Chairman, I therefore declare that a quorum is present, that this meeting is duly constituted and that the polls are open. Stockholders who have not voted or who wish to change a vote may do so now by clicking on the Vote tab on the website. Any stockholder who has already voted and does not wish to change his or her vote need not take any further action. We will now proceed to the presentation of the items of business for this meeting that were included in the proxy statement and that are subject to stockholder vote.

The first item of business is the election of 10 directors to serve on the KB Home Board. As set forth in the proxy statement, your Board has nominated and recommends the election of the following 10 persons to serve for a 1-year term. Mr. Jose M. Barra, Mr. Arthur Collins, Ms. Dorene Dominguez, Mr. Kevin Eltife, Dr. Stuart Gabriel, Dr. Thomas Gilligan, Ms. Cheryl Henry, Ms. Jodeen Kozlak, Mr. Robert McGibney and Mr. Jeffrey Mezger. To be elected, each director nominee must receive more votes for the nominee than votes against the nominee. The second item of business is a nonbinding advisory resolution to approve named executive officer compensation as set forth in the proxy statement. This advisory resolution will be considered approved if a majority of eligible shares present or represented at the meeting are voted for approval.

The third item of business is to ratify the appointment of Ernst & Young LLP as KB Home's independent registered public accounting firm for the current fiscal year ending November 30, 2026. This appointment of Ernst & Young LLP, a representative of which is participating in the meeting, will be considered ratified if a majority of eligible shares present or represented at the meeting are voted for ratification. I declare that polling for the matters presented at this meeting and online voting are now closed.

The final results of the matters voted on at this meeting will be reported in an appropriate public filing within the applicable filing deadline. This completes the official business of the meeting. Per the rules of conduct, a stockholder may ask up to 2 questions on topics pertinent to the meeting. The company may address questions during the meeting orally or through the chat function on the meeting website. Additionally, if a stockholder has a follow-up question on a pertinent topic, the company will attempt to respond after the meeting concludes. We have received no pertinent questions. May I have a motion to conclude the meeting? I move.

Second.

Thank you. I declare the meeting concluded and thank all our stockholders for attending.

This concludes the meeting. You may now disconnect.

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 First Quarter Earnings Conference Call. [Operator Instructions] The conference call is being recorded, and a replay will be accessible on the KB Home website until April 24, 2026.

And I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission. Actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin as well as further non-GAAP measures referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended February 28, and all comparisons are on a year-over-year basis unless otherwise stated.

And with that, here's Jeff Mezger.

Thank you, Jill. Good afternoon, everyone. We are pleased that our first quarter financial results were within our guidance ranges. Operationally, our divisions continue to execute well, and we achieved our highest community count in many years, contributing to year-over-year growth in net orders. Perhaps most importantly, we have returned to a mix of sales that are predominantly built to order which we believe will enable us to achieve 70% build-to-order deliveries in the second half of this year. We have a renewed focus on this core strategy as a central component in strengthening our company going forward. With the lag between sales and delivery for build-to-order homes, we expect to continue growing our backlog, a larger backlog will provide many benefits, including greater predictability in our deliveries and higher gross margins than we achieved on inventory sales, typically in the range of 300 to 500 basis points.

As to the details of our first quarter results, we produced total revenues of about $1.1 billion and diluted earnings per share of $0.52. We continue to have significant financial flexibility and remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 843,000 shares of our common stock at an average price below our current book value per share, which we believe is an excellent use of our cash, accretive to both our earnings and book value per share and a factor in improving our return on equity over time. Inclusive of dividends, we returned almost $70 million in capital to our shareholders in the first quarter. In addition, we continued to expand our book value per share compared to the year ago period to over $61. Consumers have been faced with a variety of challenges over the past 2 years, and the conflict in the Middle East that began at the end of February, has added another layer of uncertainty. Against this backdrop and taking into consideration that our net orders in the first quarter were below the level we needed to hold our prior year -- our prior full year delivery guidance, we are lowering our range for the year. Rob McGibney will provide more color on this in a moment.

Before turning the call over to Rob, I want to congratulate him on his promotion. As part of our long-term succession plan, Rob assumed the role of President and Chief Executive Officer on March 1, and I transition to Executive Chairman of the Board. Rob is a proven results-oriented leader with a deep understanding of our business, gain over the past 25 years with the company. He began his career at KB Home in our Las Vegas division, historically our largest and most profitable, where he rose to Division President and then continued on in roles of increasing responsibility within the company. Rob has worked side-by-side with me during the past 5 years while running our homebuilding operations and both the Board and I are confident that he is ready to lead KB Home forward.

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

Thank you, Jeff. I am honored to step into the role of CEO and excited about KB Home's future. With our distinguished brand, differentiated product offerings and industry-leading customer service, there are significant opportunities to create value for both our homebuyers and our shareholders. In addition, our strong financial position provides us with flexibility and the ability to support growth of our business over time. One of the traits that define our operations in fiscal 2025 was consistency in our operational execution that led to meaningfully improving our build times and tightly managing our direct cost. We will continue to focus on these key areas in fiscal 2026 together with our renewed focus on our build-to-order strategy. We are confident the multiple advantages of our BTO model will ultimately result in a stronger company. We remain optimistic about the long-term housing market with favorable demographics supporting higher demand over time, together with the structural undersupply of homes. Near term, buyers continue to demonstrate the desire for homeownership and the ability to qualify, although tepid consumer confidence, elevated mortgage interest rates and affordability pressures have stifled underlying demand. More recently, the conflict in the Middle East has created more uncertainty for an already cautious consumer.

In the first quarter, healthy traffic in our communities, a steady conversion of traffic to sales, the lowest cancellation rate we've experienced in the past 4 years and our higher community count drove a 3% year-over-year increase in net orders. While the growth in net orders is clearly a positive at 2,846, our sales were below what we needed to maintain our prior full year delivery guidance, as Jeff noted. The meaningful improvement in cancellations reflects high-quality committed buyers who are ready and able to purchase a home and also supported net orders at an average absorption pace of 3.5 per month per community. Although this pace was slightly lower year-over-year, we remain focused on our long-standing annual average target of 4 net orders per community to optimize our assets. Most importantly, our order mix demonstrates a deliberate and strategic shift in how we are positioning the business for the long term. We are returning to our core built-to-order model, a foundational element of how KB Home operates. This is how our teams are trained, how we manage our communities, and how we create value. While this will result in a temporary trough in deliveries for the first half of the year, as the higher level of BTO homes we are selling now will benefit our third and fourth quarter deliveries, and we have intentionally slowed our inventory starts is a purposeful reset that positions us to be a stronger, more predictable company in the second half of the year and beyond.

We are making considerable progress increasing our built-to-order sales. They represented 44% of our net orders in October, growing each month through the first quarter. We exited February at 68%. And in the early weeks of March, we are now above 70%. Built-to-order homes typically generate between 300 and 500 basis points of incremental gross margins compared to inventory homes and as a result, have a greater percentage of BTO deliveries will drive higher margins, having a greater percentage of BTO deliveries will drive higher margins.

As we increase our mix of build-to-order homes, we are building a solid backlog, a solid sold backlog that has not yet started construction. This backlog provides greater visibility into future deliveries and revenues, improves efficiency in our starts and production processes and gives our trade partners clearer line of sight into their upcoming workloads. In turn, this predictability supports better execution and over time, contributes to more favorable cost structures. We can leverage the pending starts into more favorable bids and keep our trade partners on our job sites, which is more efficient and further improves build times.

Internally, our cost structure benefits from managing to even flow production. With the makeup of our net orders in the first quarter, together with our expectations for BTO sales in the second quarter, we anticipate reaching a turning point in the second quarter in growing our backlog relative to the prior year period. As a result, we expect to drive sequential increases in deliveries as we move through the back half of the year. More broadly, we view this as more than just a mix shift. It is a reset back to our core operating model that extends well beyond the current fiscal year results, which will allow us to operate with greater precision, less volatility and stronger alignment among sales, starts and deliveries. It reduces the need for speculative inventory, lowers our exposure to pricing swings and supports more disciplined capital deployment.

Over time, we believe this will translate into a more durable and differentiated business, one that is better positioned to generate sustainable margins and returns across cycles. We also expect our deliveries in the second half of this year to reflect a more favorable regional mix with increased contribution from our Northern California businesses. Our communities in these markets have historically had higher ASPs and higher margins. More of these community [indiscernible] now. And with deliveries projected in the third and fourth quarters and beyond, we expect to see the benefits in our financial results.

Finally, with greater delivery volumes at higher ASPs in the second half of the year, we expect to regain operating leverage on the fixed cost component of our gross margin. Our ability to build homes more efficiently continues to be strong. We had already achieved our company-wide target of 120 days from home start to completion on built-to-order homes in the fourth quarter of fiscal 2025, yet we further improved in this critical area in the first quarter, with a sequential decrease to 108 days. This is an important factor in the value proposition of a BTO home from a customer standpoint relative to the time it takes to purchase a resale or an inventory. Shorter build times also allow our customers to lock their mortgage rates more easily and cost efficiently.

In reducing our build times, we have now meaningfully expanded our selling window within the year. Last year, it took us about 5 months to build a home, which meant early spring was the latest we could sell BTO homes for same year delivery. Today, with build times closer to 3.5 months, we can continue selling BTO homes for same-year delivery into the summer. The result is simple. More of what we sell this year turns into deliveries and revenues by year-end, which improves both our volume and cash flow. We ended the first quarter with 276 active communities, the highest count we have had in many years, up 8% year-over-year. We achieved 37 grand openings in the first quarter, in line with our target and project another 30 to 35 community openings in our second quarter. These new communities will contribute to a peak for community count sometime within our second quarter at the height of the spring selling season.

With more communities, we are positioned to drive more sales and our new communities typically sell at a stronger initial absorption pace, benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process. As we look beyond the second quarter, depending on the pace of sellouts, we expect the community count to step down somewhat in the second half of the year. Our production is in better balance today with a total of 3,353 homes in process, split between 70% sold and 30% unsold. This balance aligns with our expectation to increase our BTO deliveries to at least 70% of our total in the second half of this year.

As to direct costs, we continue to benefit from lower trade labor expense in most markets, but there is some pressure on material costs from lumber. We are managing our lumber locks strategically and drawing on our deep supplier relationships to limit cost increases while also continuing to actively rebid our local and national contracts as well as value engineer our products and simplify our studio offerings to help manage our overall direct cost.

Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home loans. Our capture rate remained high with 81% of buyers who finance their homes in the first quarter using KBHS, higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 16% was fairly steady as compared to prior quarters, and equated to over $72,000. On average, the household income of customers who use KBHS was about $133,000 and they had a FICO score of 743. Even with 1/2 of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. 11% of our deliveries in the first quarter were to all-cash buyers.

In conclusion, we continue to navigate market conditions with a focus on strong operational execution and disciplined adherence to our build-to-order model to drive results. We are confident that our personalized product offerings and transparent pricing approach are compelling for our buyers. Further, with an increasing number of communities in attractive submarkets set to open in our second quarter, and expected higher percentage of BTO deliveries as well as an anticipated regional mix weighted towards higher ASP, higher margin Northern California deliveries later this year, we believe we are well positioned for stronger results in the second half of fiscal 2026. And finally, as we continue to align our overhead to our delivery volume, we have taken steps to reduce our cost, including an unfortunate but necessary 10% year-over-year headcount reduction. While it takes a little time to see the impact of these measures in our financial results and our SG&A ratio is also a function of our revenue level, we do expect this ratio to be lower in the second half of 2026 as well.

And with that, I will turn the call back to Jeff.

Thanks, Rob. We have a favorable lab position owning or controlling over 63,000 lots at the end of our first quarter, 41% of which were controlled. Our growth strategy remains primarily centered on expanding our share within our existing markets with the geographic footprint that we believe is positioned for long-term economic and demographic growth. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested about $560 million and land acquisition and development in the first quarter with roughly 60% of our investment going toward developing land we already own.

In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our build-to-order model, which we believe will result in a stronger company going forward. Although market conditions remain challenging, we are focused on the appropriate levers to drive improved results, renewing our focus on build to order, reducing our build times, lowering our costs, opening new communities and staying balanced in our capital allocation.

We plan to continue our share repurchase program in fiscal 2026 with between $50 million and $100 million of repurchases plan for our second quarter. Following the end of the spring selling season, we expect to have more clarity on our year. As a result, we anticipate providing margin guidance with our 2026 second quarter earnings announcement in June. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold.

Now I'll turn the call over to Rob Dillard for the financial review.

Thanks, Jeff. I'm pleased to report on the first quarter fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market maintaining a healthy pace and delivering our build-to-order advantage. We expect that this strategy of providing a personalized home that the customer prefers will also benefit our financial performance as we shift the delivery mix towards higher-margin built-to-order homes in 2026 and beyond. In the first quarter of fiscal 2026, we were within our guidance range with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis.

We delivered 2,370 homes in the quarter. This result was near the midpoint of our guidance range as we continue to experience moderate demand from a cautious consumer. Deliveries benefited from a 22% reduction in build times for built-to-order homes to 108 days, a 9% sequential reduction. Lower build times, increased capital efficiency and benefit volume, as Rob discussed.

Average selling price declined 10% to $452,000 due to regional and product mix and general market conditions. Average selling price declined 3% sequentially due primarily to regional mix. Health and gross profit margin was 15.3% and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower, primarily due to pricing pressure, higher relative land costs, regional mix and lower operating leverage. We continue to manage cost effectively and achieved an 8% reduction in total direct construction costs per unit.

SG&A as a percent of housing revenue increased to 12.2% as lower costs were offset by a decrease in operating leverage. SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and fixed cost controls. SG&A benefited from a favorable impact of an $8 million insurance recovery, while such recoveries occur from time to time, the absolute size and relative impact of this quarter's recovery was greater than usual.

Homebuilding operating income for the first quarter decreased to $33 million or 3.1% of homebuilding revenues. Net income was $33 million or $0.52 per diluted share benefiting from a 13% reduction in our weighted average diluted shares outstanding.

Turning now to our guidance. Our guidance for the second quarter and full year 2026 reflects the current uncertainty of the new home market, which we believe has been impacted by affordability concerns and recent geopolitical tensions. We continue to focus on controlling the controllables and have improved our operations with lower build times and lower costs. We believe that this operational improvement, combined with our strategy to shift to a higher mix of built-to-order homes will further benefit our financial results in the second half of 2026 and beyond, as Rob detailed in his comments.

In the second quarter of 2026, we expect to generate housing revenues between $1.05 billion and $1.15 billion based on expected deliveries of between 2,250 and 2,450 homes. Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15% and 15.6% for the second quarter of 2026. Price will continue to be the primary driver for margin pressure as we balance price and pace for the remainder of the year. Margins are expected to be impacted by higher relative land costs, regional mix, and reduced operating leverage as deliveries are expected to remain below prior year levels. We expect to continue to partially offset this margin pressure with lower direct construction costs per unit.

We continue to expect margins to improve in the second half of 2026 driven largely by positive operating leverage from typical seasonality and a more favorable regional mix with a shift to higher-priced, higher-margin West Coast communities as well as our strategy to increase the mix of built-to-order homes delivered. The second quarter 2026 SG&A ratio is expected to be between 12.4% and 13% due to expected reduced operating leverage despite cost controls. We had solid results, reducing both fixed cost and direct construction costs in the first quarter, and we expect this to continue in the remainder period of 2026.

We expect our SG&A ratio to decline in the second half of the year due to lower fixed costs and increased volume. Our effective tax rate for the second quarter is expected to be approximately 19%. The tax rate is expected to trend higher in the second half of 2026 due to reduced impact of energy credits. For the full year 2026, we expect housing revenues of between $4.8 billion and $5.5 billion based on between 10,000 and 11,500 deliveries. This full year guidance is based on current market conditions. We anticipate refining full year guidance and providing additional details as we gain further clarity on the spring selling.

Turning now to the balance sheet. We continue to manage our capital with discipline. With a dual focus on funding growth and returning excess capital to shareholders with over $5.7 billion in inventories, a 1% sequential increase, we believe that we are well positioned to fund growth in the near and long term. We own our control over 63,000 lots, including approximately 26,000 lots that we have the option to purchase. We continue to invest in growth, as indicated by the $567 million we invested in land and development, while also exercising discipline through our rigorous underwriting standards, that resulted in abandoning contracts to purchase 3,400 lots at a cost of $2.2 million. We believe that this rigorous land process has improved the quality of our land inventory and will benefit future profitability. We're confident that we'll continue to identify and execute land opportunities, matching our consistent cash flow and considerable liquidity. At quarter end, we had total liquidity of $1.2 billion, consisting of $201 million in cash and $1 billion available under our $1.2 billion revolving credit facility. As with last year, the $200 million in utilization of our revolving credit facility is seasonal in nature.

We have no debt maturities until June of 2027. We will continue to be thoughtful in managing our capital structure to ensure we capitalize on favorable market conditions to refinance any maturities. We continue to target a debt-to-capital ratio in the neighborhood of 30% to support our strong BB positive credit rating. We are comfortable with our current 32.9% ratio. Our strong balance sheet, combined with the returns from our operations has enabled us to return over $1.9 billion to shareholders in the form of dividends and share repurchases in the past 4.5 years. In this period, we have repurchased 37% of our shares outstanding, which we believe is the highest percentage of shares repurchased during this time among our peer companies.

Returning capital remains a core part of our focus on delivering strong total shareholder returns in all market conditions. In the first quarter, we paid $17 million in dividends, representing a 1.8% yield, and we repurchased 843,000 shares for a return of capital of $50 million. We ended the quarter with $850 million available under our current repurchase authorization. We expect to repurchase between $50 million and $100 million of common stock in the second quarter. As we look ahead, our strategy is to enhance our results through increased operating rigor as we shift our delivery mix towards higher-margin build-to-order homes. We believe that this operating strategy when combined with our shareholder-focused capital strategy will maximize shareholder value over the long term.

With that, we'll now take your questions. John, would you please open the line.

[Operator Instructions] And the first question comes from the line of Matthew Bouley with Barclays.

So first, I guess based on the numbers you gave around inventory homes, it seems like the build to orders really improved kind of beyond what you get just from cutting spec starts. So my question is, obviously, we talk about the sort of gross margin benefit, it's pretty clear. But when you talk about mixing the business back to build to order, maybe this will be a preview of your Investor Day a little bit. But what does that kind of more full and visible backlog do for your sales folks, your operators, what changes around your thought process on production and starts? Just any more color on why the business overall runs better relative to spec production.

Sure. Matthew, thanks for the question. When we look at our build-to-order business, as I mentioned in my prepared remarks, it's really part of our DNA. It's how we set up things. It's how we look at the world, it's how we train our salespeople. So we're not surprised to see the shift to build to order. And part of it is just we haven't been starting the specs so we're not competing with ourselves in our own communities with both heavy spec load as well as build-to-order. But the benefits that it provides to the business in predictability. The first place I would go is that we've got this backlog of sold not started homes that we can leverage that gives us a cadence where we can operate on even flow production. That benefits all across the board, whether that's on our fixed cost or just managing to a consistent level of construction in our communities. Plus we can use that cash, if you will, of homes that we have sold not started because it also gives our trade partners visibility. And most of the markets that we're operating in right now, we're seeing starts are down pretty significantly year-over-year, and there are trade partners that are hungry for work. So that's the first place that we point to with this guaranteed sequence of starts that's coming up. You mentioned it, but one of the obvious ones is the big margin, incremental margin that we see within the same community, selling build-to-order versus the inventory. And from a customer's perspective, our view, my view is that we're creating something different. And it's not just treating a home like a commodity or a widget, where people take what's out there and available, but they're getting to create their own personal value by picking their lot, picking their floor plan, picking their elevation, going through the design studio process and really making that home their own and designing it to fit their needs and their lifestyle and fit their budget as well.

Okay. Got it. No, that's super helpful. Second one, just kind of jumping into the guide. So mean you talked about, I guess, removing roughly 1,000 deliveries from the full year guide. Q1 orders were up year-over-year. I know you mentioned that it wasn't the level you needed to hold on to the guide. What I'm trying to get at is, I guess, was that Q1 order number, the entire driver of the guidance change? Or is this -- should we also think you're trying to reflect any more recent shifts in the market in March or any other changes on kind of the progression towards build-to-order. Anything else that's kind of changed relative to when you gave this guidance in January?

Yes. It's really the combo of the things that you mentioned. Part of it is the orders, our orders while was a positive year-over-year comp, and we're pleased with the transition to more BTO sales. They were below our internal expectations that we had and how we built the plan for the year. As we get into the early part of March, there's a lot of noise out there. And we mentioned in our prepared remarks, this conflict in the Middle East. That started right at the end of February. And we saw pretty good sales results in the first week of March. But the last couple of weeks have been a little softer than what we would like to see or what we normally get this time of year. And we just don't have a lot of visibility right now as I don't think anybody does into how long this conflict may go on, and how it's going to impact consumer psyche and confidence. But we feel that right now, it's weighing on the consumer. So those are really the two reasons why we adjusted the guide and provided a little wider range than we normally would for full year deliveries and revenue because of the lack of visibility we got into the short-term kind of acute nature of the market right now.

And the next question will come from the line of John Lovallo with UBS.

This is actually Matt Johnson on for John. I appreciate the time. I guess, first, if we could just talk about gross margin a little bit. If I recall, I think last quarter, you guys had expected 1Q to be the low point for the year. on gross margin. Now it looks like at the midpoint of your outlook, you're expecting 2Q to be down from 1Q. So can you guys just give us some more color on what's driving that kind of what's giving you guys confidence that margin will, in fact, ramp from 2Q to 3Q? And then just if you guys could give us some numbers, I think you gave some numbers on the mix of BTO versus spec orders, but if you give some numbers around the mix of BTO for spec deliveries in 1Q versus 2Q, that would be great.

Yes. As we thought about the sequential mix on where gross profit is going to go, I think that we think it's actually relatively flat as we're guiding to a range, we're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery cost reductions. So I think there should also be some mix factor in there that's going to be drawing it down before we see the ramp. As you think about the second half of the year, it's something that we've been talking about in the past, the shift of ETO should accumulate to an increase in gross profit margin. We do expect some seasonal unit uplift that we would -- that we've kind of -- that's implicit in the guide, that should have some uplift in margins. And then also further cost reduction should have a benefit as well. So it's really those three factors that we think are going to benefit the margins as we go through the year. We have pretty confidence in that because we're selling the houses now and marketing doses now. And that's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with the spec, you kind of never know until it's done.

I'd add to that as we look out towards the back half of the year, I mentioned it in my prepared remarks, that we have a lot of things that are just structurally different that we see that are going to lift margins. And Rob mentioned the shift to BTO leverage on [ WIP ] with greater scale. But a big one that I mentioned is the shift or the transition back to a bigger, better business in Northern California. So as we look to the back half of the year, we're getting deliveries from communities, from stores that are open in Northern California today that have a much higher ASP and have very healthy margins. And as those become deliveries, some of these average selling prices are between $1.2 million to over $2 million. So it has a big impact on the overall company margins, and we see that happening today. As you think about Northern California, we've gone through a little bit of a trough here with communities over the last couple of years. It used to be one of our biggest, most profitable businesses. And in that area of the country, it takes a really long time to bring lots to market. So we've been working on these things for years. They're finally here, we're delivering, and we like what we see, and it's going to provide a real tailwind for margins on the on the back half of this year.

Yes. That all makes a lot of sense. I appreciate all the color there. I guess then if I could just follow up on the direct costs, specifically, I think you guys they were down 8% year-over-year, which is really strong, obviously, although it sounded like there are some puts and takes within that. So I guess if you guys could just talk a little bit more about the impact from materials for labor within that? And then just any -- obviously, it's early days here, but any disruption from what's going on in the Middle East, just broader supply chain kind of what you're hearing from your suppliers in terms of potential price or availability impacts there?

Yes. Overall, we like you noted the number year-over-year. We've made good progress with the things that we can control and value engineering our products and rebidding and renegotiating, reworking our national contracts. So that's all structural and will stand Lumber has started to tick up here recently, and we've got various locks in a lumber strategy where we have different lock periods for different divisions. And there's potentially some tailwind or headwind coming from that as we relock some of these depending on what happens with lumber. But we think that our strategy is sound there, and I don't think that it's going to be a significant impact and likely it may just be an offset to further direct cost reductions that we'd otherwise be able to go out and get and achieve. As far as the impact from the situation in the Middle East, it's just really difficult to tell. With oil prices being higher, certainly, that can bleed into land development and vertical construction. And then a lot of the products that go into a home, there's petroleum that's involved in those products at some point. So potential cost increases there, we're hopeful that we can continue to offset that with some of the proactive things that we're doing, but it really is a total unknown at this point. We haven't seen it yet. It hasn't showed up yet in our cost.

And the next question comes from the line of Stephen Kim with Evercore ISI.

Yes, the move to BTO is very clear. It's obvious that there's some margin benefits there. With it, though, you're probably also going to see you would think, slower backlog turns and maybe a temporary drag on cash flow. I'm trying to get a sense for what we should be thinking in terms of a going forward, backlog turnover ratio in 2017 to 2019, pre-COVID, you were kind of running at like your exit rate of the year, your fourth quarter, which usually was your highest was like kind of in the low 60s. I'm wondering, is that like kind of a reasonable level that we should be thinking about for the business to kind of return back to that kind of a level? Or do you think you can do better than that? I noticed you said your build time was like 3.5 months, that would imply a backlog turnover ratio of like 86%. So I mean just some guidance here or some color would be really helpful.

We don't really think about the business that way. But I think somewhere between that 60% number and the 80% number is probably where we'll fall. The backlog turn that we've had has kind of been a false read versus what our typical business is because we're going into a quarter, and we may have 500, 600, 700 sales -- same quarter sales and closings of inventory turn that weren't in that beginning backlog number. So it's pumping up that ratio. With our build times where we've got them, and we build the plan from the ground up when we do our quarterly and full year plans. And we're banking on the cycle time improvements, the build time improvements that we've gotten so far. But I think 70% -- 60% to 70% is probably a good target. Yes.

Steve, just to clarify one other thing. Our build-to-order approach is actually better with cash. If you think about carrying a couple of thousand spec homes that you have to sell and close they're fully loaded and all the cash is out, and we're setting this up where it's real-time deliveries, the home gets completed, the loans approved and the buyer goes and close. So it's actually better cash management. If you can just roll through the WIP sold at the percentage we're targeting.

Got you, okay. That's really helpful. Then another side effect of moving to more BTO is that it potentially exposes you to higher cancellation rates. I know cancellation rates are super low this quarter. And it's -- one of the things I've been thinking about is that your customer deposits as a percentage of ASP are about 2%, which is pretty low even relative to other build-to-order builders, and I know you've traditionally run with some lower customer deposits than other builders. And I'm curious if you could sort of talk about why that is, why you adopt that as part of your strategy? And is that something that you might change going forward?

Steve, I'd say it's something that we always evaluate, and we might change going forward depending on market conditions. When market conditions are really strong, it's easier to command a higher deposit. But today, with the way things stand, we don't want to let that deposit upfront be a major obstacle to somebody purchase in their home. And my view on it is that when somebody comes in and buy the personalized home and they go through that process that I described earlier, and there creating their own personal value that's unique to them. That's as much of a hook is getting them to stay in the deal as the deposit is. So we don't anticipate that we're going to have real issue of cancellations. The backlog quality that we've got, the buyer profile is very healthy. They're creating their own value in their home. And we feel good about how we're positioned with that.

And the next question comes from the line of Michael Rehaut with JPMorgan.

I wanted to first just revisit kind of the first quarter and March to date sales trends, which was obviously behind the guidance reduction? And also just better understand if possible, how the year-over-year sales pace trended throughout the first quarter in terms of December, January, February? And if there's any incremental color in terms of at least on a year-over-year basis, how that kind of played into March.

Sure. Our sales cadence or the order cadence progressed generally as we would expect seasonally, really improving each week as the quarter unfolded. And so we mentioned we delivered 3.5 sales per community for the quarter. And December was a slower start for us and put us behind on our year-over-year comp. Then we saw solid momentum through January and February and ultimately finished the quarter up 3% year-over-year. As to March, as I said, the last couple of weeks of March have been a little softer than we would have liked. And this conflict in the Middle East, I think, which kicked off right at the end of February, beginning of March, there's clearly some near-term pressure on the consumer psyche from that. And that's one of the things that's limiting some of the visibility in the short term. But as I mentioned before, we just -- we don't know how long that's going to go, or how long this will weigh on the consumer, but we've reflected that in, I think, appropriately in our guidance by taking a more measured approach with that, including a wider full year revenue and delivery range than we normally provide at this point.

Okay. That's helpful. I appreciate that. And I guess, secondly, with regards to the gross margin outlook for the back half. I know you talked about ASPs and the mix benefiting from California, more California in the back half of the year. I think it would be extremely helpful if there's any way to kind of size or give any type of rough degree of magnitude or range, 50 bps, 100 bps, 200 bps, however you want to characterize it, but any way to quantify perhaps the degree of magnitude of improvement that you're expecting in 3Q and 4Q gross margins relative to your 2Q guide. I think it would be very, very helpful for people to try and get their arms around, modeling and trying to anticipate what level of improvement you're thinking of at this point?

Yes, Michael, there's a couple of key factors that we're thinking about that have that have been driving that second half margin uplift that are giving us a lot of confidence. The first one that we've talked about in the past is the BTO shift. And if you can just do the rough math around increasing BTO mix from where it is today to around 70% and then the 300 to 500 basis point differential in the margin there that equates to about 50 basis points of margin uplift as you get to that BTO mix and where we're targeting. Further, we've got regional mix in there, which is relatively meaningful. The difference in gross profit and some of those higher-margin communities can be as much as 1,000 basis points, and it's something that will have a meaningful impact just on that with the price. So things that you should consider there is that there will be a shift in the ASP that's just associated with mix, and there will be a shift in the profitability that's just associated with mix as well. Other factors are the reducing cost and then the uplift in units, which could have -- we're not really calling that, and that's the component that we're still thinking about, but that's anywhere historically in the range of 0 to 100 basis points.

And the next question comes from the line of Alan Ratner with Zelman & Associates.

Thanks for all the details so far. First, just on the pricing side and the strategy. Obviously, with the shift to BTO, I know you've also been focused on more of a base price model as opposed to a heavy incentive model. I'm just curious, as you look at your portfolio, obviously, there's uncertainty in the market and maybe there might need to be adjustments on the pricing side. What have you seen over the last month or 2 in terms of pricing at your communities? Do you feel like you've hit that point of where pricing has stabilized. I know you mentioned orders were a little bit below your expectations for the quarter. So are you still seeing a meaningful percentage of your communities where pricing is still going lower?

Alan, as I always say, it's really a community-by-community story. Overall, pretty stable. About 70% of our communities during Q1 either had no change, or they had some level of small price increases. They were outpacing what our optimal projections are. We did have still about 30% of our communities where we've moved price down further and different degrees, depending on the community as we just work to find the market and optimize that asset. So changes from quarter-to-quarter. But again, that is a community-by-community focus, it changes, not just on a metro level, but a submarket level and then down to within the community, and degree of change, it can be anywhere from -- it might be a $2,000 change, or it might be $10,000 change. But we're making these incremental movements to try to hit the optimal pace to get the best return result out of each community.

Got it. Okay. That's helpful. And then second, on your backlog, which is obviously growing here. I'm curious how you're thinking about the risk of higher rates now that rates are beginning to creep up again. And I guess what I'm trying to get at is, if you go back a couple of years ago, obviously, when rates surged, people that enter the contract expecting to close at a certain mortgage rate. You either had difficulty qualifying at that higher rate, or simply didn't want to move forward at that higher rate. And I know you're trying to get away from incentives and rate buydowns, but how are you thinking about the folks that might have contracts over the last month or 2 when rates were 25, 30, 40, even 50 basis points lower than they are today. Is there a risk there? Are you working with those buyers to lock in a rate or a buy down a rate if necessary to get them to qualify. Just curious how you're thinking about that if rates do continue to move higher here?

Yes, it's a good question. I'd say if you go back to what you were drawing the comparison to before in different markets. One of the things that was challenging for us there is the way that build times had expanded. And when you're getting up to 8 or 9 months from sale to close, you're exposed to a lot of rate volatility in that time period. And now that we're building in 108 days, we've got less time exposure there. Certainly, with rates being as volatile as they have been over the last couple of weeks, there's some exposure to a limited number of the homes that we've got in backlog. But generally, we're trying to get the buyers locked in with a loan before that home starts at least, if not before. So it's limited exposure to a subset of houses that we have in backlog, mostly in our sold not started yet universe. And if we need to and find that we have to, we're not so rigid on the no incentive approach that we're not willing to help out and do something to buy that rate down to keep that buyer basically in the same position. But it's something that we'll evaluate as we go. And rates have been bouncing around wildly from day to day. So when we hit the low spots, we're going to work to lock as many buyers as we can.

And the next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is on the SG&A. You mentioned that you did some head count reductions. Can you talk about how comfortable you are with where the business is running today, and how we should think about that potential benefit and the flow-through of that coming in over the upcoming quarters?

Well, Susan, I would say that the adjustments that we made were to adjust to the new reality of what our deliveries and our revenue and our production levels are. So as we look ahead, if the market were to improve and volumes go back up, I think there's some structural change in there that we'll be able to get the benefit of. But the moves that we've really made on headcount and other fixed cost changes are to rebalance and reposition things with where we now think revenues are headed for the year.

Okay. All right. And then turning to land, can you just talk a bit about what you're seeing there? Has there been any adjustment on the land market? And what you're watching for to potentially start to ramp up some of your spend on that side?

So we're still in the land market. We're searching every day for the right deals that fit our profile and that fit the return hurdles that we believe that we need to drive profitable growth over time. It's been a little more challenging on the land front to drive a lot of deal flow because the market has been pretty sticky with price. And there's patient land sellers that generally have not adjusted to the new reality of what's happened with sales prices and demand over the last year or so. As we look at our existing portfolio of deals or deals that we have under contract to purchase, we're having success with landowners in renegotiating terms. That's generally been the easiest thing to renegotiate, which is helpful on the financial side of things, too, because often, that means we're doing a structured takedown instead of a bulk purchase, or we're able to kick out the closing to tie back close of escrow on the land much closer to when we can start turning dirt in development of the lots or in some cases, actually going vertical on the houses. But overall, I think there's still some adjustment that's got to happen in the land market, to reduce the gap between the bid and the ask. At the same time, there are still sellers out there that have adjusted. And that's what we're really focused on is building up our portfolio with new deals that fit our return hurdles today based on current conditions and current pricing and costs.

And the next question comes from the line of Mike Dahl with RBC Capital Markets.

It's actually Stephen Mea on for Mike Dahl today. I was hoping to dive more into the BTO versus inventory dynamic. The messaging of BTO typically being like 300 to 500 bps above inventory isn't really helpful. But I was hoping you could impact how this dynamic has been rolling through your most recent orders given all the adjustments to the base price you've had to make in all directions given the choppiness of the market but are you trending on like higher end, lower end, or is there any sort of potential expansion or shrinking of this delta like embedded within your outlook?

Are you referring to the margin difference or the percentage of sales?

The margin difference.

I would say that, that stayed pretty consistent. We're able to -- we've got visibility on that on both the closing side as well as the sales side and haven't seen much of a change there. It's been pretty consistent in that we've got that 300 to 500 basis point delta we're built to order margins are better than inventory. One of the things that I think we're starting to see now is as we have cleared out some of the inventory, and you don't have as much in a community, and there's buyers for that community that may want or need that quick move in because they've got an apartment lease or something that's coming up. So in communities where we've only got the handful of inventory, and we're primarily selling BTO, there's a little bit less of a reduction in the margin on those inventory sales versus where in the past, we've had quite a few to choose from, both in inventory that's completed as well as build to order. So as we're making this transition to the build-to-order, I think we're definitely getting higher margins on the build-to-order sales, and it will probably help somewhat on the inventory that we do have as well.

Got it. That's so helpful. And then lastly, just a very broad question, just what you're seeing in your markets at a regional level, if you could speak to any notable pockets of strength and potential areas that are lagging just would be helpful to get a heat check considering all of the choppiness that's out there.

Sure. Every market's got its own story. And there's places in each metro that are still doing just fine and selling very well, and there's places within the metros that are challenged. But from a regional perspective, we're seeing relative strength on the West Coast, including most of California, Seattle and Boise, Las Vegas continues to perform very well. Texas remains more competitive. Houston has held better with Austin and San Antonio, both grappling with higher inventory and just a very competitive market to secure those customers who are ready to transact. Florida is a little more mixed. Orlando and Jacksonville, I'd say are seeing better demand than Tampa right at the moment. But overall, pricing in Florida, I think, still has stabilized. It's just that the the level of demand isn't quite producing the volume that we'd like to see. But every market's got its own story, and each metro has got those communities that are performing well and those that aren't appears to be maybe a little bit of a flight to quality with the top submarkets performing better than maybe some of the drive to qualify -- drive to qualified type communities, but that's not the bulk of our business anyway.

And our final question comes from the line of Sam Reid with Wells Fargo.

Actually, I just wanted to confirm your start pace in the first quarter. I can back into that based on your homes in production, but maybe just wanting to confirm the number because I believe the math would imply something less than 1,000 units versus, say, the 1,800 that you started in Q4. And then maybe just piggybacking off of that, how start pace versus sales pace should look as we move through Q2, Q3 and Q4.

Yes. So we've -- as we've mentioned, we've intentionally been pulling back on the spec starts and matching our starts to our built-to-order sales. So our starts were down, but it was right around 1,800. I believe it was 1,805 in the first quarter. So as we look ahead into Q2, we expect to generate more BTO sales and generate our starts from those sales. And right now, we've got a healthy backlog of homes that haven't started yet that are at the sold not started stage. And that's going to feed our starts over the next couple of months.

That's helpful. And then if it was already covered, I apologize. But maybe could you just give me the final expectation for Q2 on spec versus build to order. And any context on what spec versus build to order look like on orders for the first quarter?

I walk through the cadence on that earlier. So I don't know, Rob, if you have the overall average. But we exited February at about 68% BTO. And January and December were slightly below that. But kind of looking at that as the rearview mirror. So as we go forward, we know we left -- we exited February 68%. Early March, we're tracking above above 70%, and we think we'll maintain that or get at least 75% as we move through

Ladies and gentlemen, thank you. That does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines.

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference call is being recorded, and a replay will be accessible on the KB Home website until January 18, 2026.

I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter and full year of fiscal 2025. On the call are Jeff Mezger, Chairman and Chief Executive Officer; Rob McGibney, President and Chief Operating Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, an explanation and/or reconciliation of the non-GAAP measures of adjusted housing gross profit margin, adjusted net income and adjusted diluted earnings per share as well as any other non-GAAP measure referenced during today's discussion to it's most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.

And finally, please note all figures are based on our fiscal November 30 year-end, and all comparisons are on a year-over-year basis unless otherwise stated.

And with that, here is Jeff Mezger?

Thank you, Jill, and good afternoon, everyone. We are pleased to share our results for our 2025 fourth quarter and fiscal year. It was a year that tested consumers' resilience as they face various economic and geopolitical issues yet through it all, they continue to demonstrate a desire to own a home. We helped nearly 13,000 individuals and families achieve the dream of homeownership while maintaining our industry-leading customer satisfaction ratings. The total revenues of over $6.2 billion and nearly $430 million in net income, we produced a 10% increase in our book value per share. We further strengthened our financial flexibility with the recent expansion of our new $1.2 billion revolving credit facility and the extension of our term loan. And through our balanced approach to capital allocation, we rewarded our shareholders with a healthy return of capital totaling more than $600 million in fiscal 2025, including dividends. We continue to lead our peer group in the cumulative amount of capital returned to our shareholders over the past 4.5 years, as a percentage of market capitalization.

In 2025, we repurchased 13% of our outstanding shares at an average price below our current book value, which we believe is an excellent use of our cash and accretive to both our earnings and book value per share.

As for the details of our fourth quarter results, we produced total revenues of just under $1.7 billion and adjusted diluted earnings per share of $1.92. We returned about $115 million in cash to our shareholders, including the repurchase of 1.6 million shares. We remain optimistic about the housing market as we believe favorable demographics will be a key driver supporting higher demand over time, together with the structural undersupply of homes. Near-term conditions continue to reflect underlying demand for homes, supported by population, household formation, job and wage growth. However, low consumer confidence, affordability concerns and elevated mortgage rates continue to constrain the pool of actionable buyers.

Consumers are demonstrating their interest in buying a home reflected in our website visits, leads and traffic to our communities. They're just taking much longer to make their home buying decisions. We produced 2,414 net orders in the fourth quarter with a consistent approach to pricing, offering transparent and affordable prices rather than inflated prices masked by heavy incentives. This remains the foundation of our competitive position as it allows us to advertise our compelling pricing directly on our website and is also how we build trust with our customers. We were disciplined in not taking overly aggressive steps to capture sales during the seasonally slower fourth quarter. By doing so, we believe we are positioned to achieve better margins on these sales in our 2026 first quarter than we would otherwise have produced.

Before I turn the call over to Rob McGibney, I will make a comment on the approach we are taking with respect to our guidance for fiscal 2026. As detailed in today's press release, we are providing our outlook for fiscal 2026 deliveries and housing revenues. We expect to have greater visibility on both operating and gross margins as we get into the spring selling season and plan to provide our projections for these metrics when we report our 2026 first quarter results in March.

Let me pause here for a moment and ask Rob to provide more details on our sales as well as an operational update. Rob?

Thank you, Jeff. Consistent with our operational success throughout fiscal 2025, our divisions continued to execute well in the fourth quarter and maintaining high customer satisfaction levels, further improving build times, lowering direct cost and balancing pace and price to optimize each asset. Traffic in our communities was steady during the fourth quarter. And at 18%, our cancellation rate was stable, supporting net orders at an average absorption pace of 3 per month per community. This pace was in line with our average fourth quarter pace of the past 2 years.

As we look ahead to the full year 2026, although we began the year with a lower backlog than we have carried in some time, the fundamentals of our operating model and the improvements we have made over the last few years provide a clear and, we believe, achievable path to meeting our delivery objectives. Our beginning backlog represents 27% of the midpoint of our full year delivery target compared to 34% at the start of 2025. While this is a smaller starting position, it must be viewed in the context of our significantly faster build times and our expectation of expanding our community count with new community openings. We have become more efficient in building homes with build times improving roughly 20% year-over-year in the fourth quarter.

We achieved our company-wide target of 120 days or better from home start to completion on built-to-order homes during the quarter, with several divisions averaging fewer than 100 days in November. Our faster build times allow us to extend sales much deeper into the year and still achieve delivery of the home. At quarter end, we had 271 active communities, up 5% as compared to the prior year period. In our 2026 first quarter, we are planning to open between 35 and 40 new communities and expect to hit a high watermark for community count during our second quarter at the height of the spring selling season.

With this broader base of communities, we are very well positioned to capture the typical seasonal lift in demand during this period. Our new communities typically generate strong early demand benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process. Importantly, these new communities are expected to generate favorable gross margins, supported by a sales mix that is predominantly built to order.

As we have discussed, we are focused on returning our built-to-order homes to a higher percentage of our total deliveries from 57% in Q4 of 2025 to our historical 70% or higher. While we always have some inventory homes available for those buyers that need a quicker move-in date, the superior margins we generate on BTO homes will allow us to realize greater value from our communities. Our gross margins on BTO homes are trending 3 to 5 percentage points higher than on inventory sales, and we began to see a shift toward more BTO sales during November, an encouraging trend that has continued into December.

As we remain focused on selling our BTO homes and these sales become deliveries over the course of fiscal 2026, we expect to achieve a favorable trajectory in our gross margins. We are aligning our starts with our BTO sales and started 1,827 homes in our fourth quarter.

Our divisions together with our national purchasing team are doing an outstanding job in driving costs lower. These efforts, combined with our value engineering and studio simplification initiatives contributed to direct costs that were about 4% lower sequentially and 6% lower year-over-year on our homes started during the fourth quarter helping to offset the impact of higher land costs.

Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans. Our capture rate was high with 80% of our buyers who finance their homes in the fourth quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our joint venture versus other lenders. The average cash down payment moved up slightly, both sequentially and year-over-year to 17%, equating to nearly $80,000. On average, the household income of customers who use KBHS was about $130,000, and they had a FICO score of 743.

Even with over 1/2 of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. 10% of our deliveries in the fourth quarter were to all-cash buyers.

In conclusion, we remain firmly committed to delivering high customer satisfaction and strong operational execution to drive our results. We believe our portfolio of communities, products and pricing are well aligned with the needs of today's buyers and with improved build times and expanded community footprint and stronger operational consistency, we are confident in our ability to achieve our fiscal 2026 delivery objectives.

And with that, I will turn the call back over to Jeff.

Thanks, Rob. With respect to our lot position, we owned or controlled roughly 65,000 lots at year-end, 43% of which were controlled. Our footprint is focused on markets that we believe are positioned for long-term economic and demographic growth. As our newest divisions in Seattle, Boise and Charlotte continue to mature, their contribution to our results is becoming more meaningful. In addition, we see an opportunity to expand our share in all of our served markets over time. We remain selective with our land positions across our business. And as part of our regular review of land purchases in our pipeline, we canceled contracts to purchase approximately 3,500 lots, representing about 20 communities in the fourth quarter, which no longer met our underwriting criteria. Our lot pipeline is healthy, providing us with the flexibility to be patient in adding to our controlled lot count until we find opportunities with better terms that will provide higher returns.

One of the key benefits of our build-to-order approach that it provides visibility into the need and timing for replacement communities based on each community sales pace, local market dynamics and expected sell-out date, which is beneficial in our effort to be capital efficient. We are also developing lots in smaller phases wherever possible and balancing development with our start pace to manage our inventory of finished lots.

Our business generates healthy cash flow and we remain consistent in our balanced approach toward allocating it. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested $665 million in land acquisition and development in the fourth quarter with about 2/3 of our investment going toward developing the land we already own.

With nearly $430 million in net income generated for the year, lower land acquisition and development spend and the improvement in our build times unlocking cash, we returned more than $600 million in capital to our shareholders in fiscal 2025. This includes approximately $540 million in share repurchases at an average price of $57.37 per share. At these levels, the repurchases are an excellent use of capital and will enhance both our future earnings per share and our return on equity.

In closing, I want to thank the entire KB Home team for their commitment to serving our homebuyers. We believe we have the most talented and experienced operators in the business who are driven to produce results. Our divisions executed well this past year despite challenging market conditions and controlled the controllable in achieving a significant reduction in build times, lowering direct costs and opening a meaningful number of new communities.

In fiscal '25, we returned the highest level of capital to our shareholders in a single year in our company's history. We plan to continue our share repurchase program in fiscal 2026 with between $50 million and $100 million of repurchases planned for our first quarter. As we begin the new year, we do so with a balance sheet that is stronger than it has ever been and with added financial flexibility. We believe we are well positioned for the spring selling season with our expected community count growth, and I have confidence that our renewed focus on build-to-order sales will generate higher margins as the year progresses.

Our objectives for fiscal 2026 are centered on continuing to deliver outstanding service to our homebuyers and driving higher shareholder value, and we look forward to updating you as the year unfolds.

Now I will turn the call over to Rob Dillard for the financial review.

Thanks, Jeff. I'm pleased to report on the fourth quarter and full year 2025 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market, maintaining a healthy pace and delivering our built-to-order advantage. This strategy has led to relatively consistent results in a constrained market in 2025.

In the fourth quarter of 2025, we exceeded the midpoint of our guidance range with total revenues of $1.69 billion and housing revenues of $1.68 billion, a 15% decrease. We delivered 3,619 homes, which exceeded the midpoint of our implied guidance, largely due to reduced average build times in our 268 average communities for the quarter. Average selling price declined 7% to $466,000 due to regional and product mix and general market conditions.

Housing gross profit margin was 17% and adjusted housing gross profit margin, which excluded $13.7 million of inventory-related charges was 17.8%. Adjusted housing gross profit margin was 310 basis points lower due to pricing pressure, negative operating leverage, higher relative land costs, regional mix and product mix which was pronounced due to the age and price of incremental volume versus guidance. This margin pressure was again partially offset by lower direct construction cost per unit. It's notable that average cost per unit declined in the quarter as direct construction costs and material costs declined more than lot costs increased.

SG&A expense as a percent of housing revenues was 10%. The SG&A expense ratio was 9.1% when adjusted for the $16 million of accelerated equity-based compensation expense. This expense reflects a change in policy for divesting of certain long-term incentive awards. This affected only the timing of expense recognition and there was not an increase in the total compensation cost of these rewards. Homebuilding operating income for the fourth quarter decreased to $117 million or 6.9% of homebuilding revenues and homebuilding operating income, excluding the inventory-related charges, and the accelerated equity-based compensation expense was $147 million or 8.7% of homebuilding revenues. Net income was $102 million or $1.55 per diluted share benefiting from a 13% reduction in our weighted average diluted shares outstanding.

Adjusted net income, which excludes the inventory-related charges, the accelerated equity-based compensation expense, and approximately $1 million for early extinguishment of debt was $126 million or $1.92 per diluted share. For the full year 2025, we delivered 12,902 homes and generated $6.24 billion of total revenues. Housing revenues were down 10% to $6.21 billion. Diluted earnings per share was $6.15 and book value per share increased 10% to $61.75.

Turning now to our guidance. Our guidance for the first quarter and full year 2026 is based on our belief that we're well positioned for the present operating environment through our strategy of providing customers the best buying experience and the best value by delivering a personalized build-to-order home. In the first quarter of 2026, we expect to generate housing revenues between $1.05 billion and $1.15 billion, based on expected deliveries of between 2,300 and 2,500 homes. Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15.4% and 16% for the first quarter of 2026.

Margins are expected to be affected primarily by negative operating leverage and typical seasonality in the quarter. So we also expect a continued margin trend impacts of pricing pressure and higher lot costs as well as some regional mix. We expect to continue to partially offset this margin pressure with lower direct construction cost per unit.

We expect margins to improve throughout 2026 due to positive operating leverage and typical seasonality as well as our strategy to shift the mix of homes sold and delivered to favor build-to-order homes. We believe that we are well positioned to execute this mix shift in 2026 as we start the year with 271 communities and we expect a considerable number of new community openings in the first half of 2026.

The first quarter 2026 SG&A ratio is expected to be between 12.2% and 12.8%, due mainly to expected reduced operating leverage despite cost controls. This is our highest seasonal SG&A quarter and compares to 11% in the first quarter of 2025. We had solid results, reducing both fixed cost and direct costs throughout 2025, and we expect this to continue in 2026.

Our effective tax rate for the first quarter is expected to be approximately 19%. It's notable that we expect the tax rate to be lower only in Q1 of 2026. We expect the tax rate to increase and end the year with an average of between 24% and 26% due to reduced energy credits given the end of 45L credits in 2026. For the full year 2026, we expect housing revenues of between $5.1 billion and $6.1 billion based on between 11,000 and 12,500 deliveries. This full year's guidance is based on current market conditions, and will be expanded to include our customary components as we gain an understanding of spring selling season market dynamics.

Turning now to the balance sheet. We believe that we're well positioned with over $5.7 billion in inventory at the end of 2025. We owned or controlled over 64,000 lots, including 27,000 lots that we have the option to purchase. Our option lot position is 27% lower than a year ago due to our continued focus on only allocating capital to position that align with our strategy and return expectations. We continue to invest selectively to augment our land position, and we invested over $665 million in land development and fees during the fourth quarter and over $2.6 billion in 2025.

During the fourth quarter, we entered into a new credit facility to increase liquidity and improve covenants, and we amended our $360 million term loan to extend its maturity to 2029. We now have no debt maturities until June of 2027. At quarter end, we had total liquidity of $1.43 billion due to $229 million in cash and no cash borrowings on our $1.2 billion revolving credit facility.

We continue to target a total debt to capital ratio in the neighborhood of 30% to support our strong BB positive credit rating, and we are pleased with our current 30.3% ratio. This strong balance sheet enables us to provide shareholders with a healthy dividend, which currently has an approximately 1.6% yield as well as return capital to shareholders in the form of share repurchases. In the fourth quarter, we repurchased 1.6 million shares for a return of capital of $100 million. In 2025, we repurchased approximately 9.4 million shares or 13% of our outstanding shares at the beginning of the year.

We have now repurchased nearly 36% of our outstanding common stock since implementing our share buyback program in late 2021. Over the past 4.5 years, we have returned over $1.9 billion to shareholders in the form of dividends and share repurchases. In the fourth quarter, our Board of Directors approved a new $1 billion share repurchase authorization to support our capital return strategy. We ended the year with $900 million available under this authorization, and we expect to repurchase between $50 million and $100 million of our common stock in the first quarter.

As we look ahead, our strategy is to enhance our results through continued discipline and a focus on higher-margin built-to-order homes. We believe that this operating strategy when combined with our shareholder-focused capital strategy, will maximize shareholder value over the long term.

With that, I'll now take your questions. John, would you please open the lines?

[Operator Instructions] And the first question comes from the line of John Lovallo with UBS.

The first one is maybe just a little bit more philosophical. I mean I understand the changes in the way you're providing the outlook relating to the full year deliveries and the gross margin. But there also seems to be a bit of conservatism, particularly in the gross margin guide that maybe wasn't always the case. So I mean -- can you help me understand if there's been some change there and maybe instilling a little bit more conservatism into the outlook? And also, is there a chunk of spec that's going to be delivered in the first quarter that's going to negatively impact that margin?

John, I can make a few comments and then pass it over to Rob Dillard. There is still some inventory that we have to clear as part of our transition to more built-to-order sales. And we have factored that in, in the guidance that we provided. One of the things that we touched on in our comments is that some of this inventory is aged in that it was built at much higher build costs. And as we've reacted to the market, we're lowering our costs on new deliveries, but we have to clear these older specs that have a higher cost base. So it is impacting the margin. It's a short-term thing, but it's something we have to power through.

Within our guide, I would say that it's just a guide. It's not conservative. It's not aggressive. It's just realistic. And -- if you think about it, one of the real drivers of the lesser margin in the quarter is the loss leverage because our revenue is down. And it's a fairly significant move sequentially from Q4 to Q1 due to the loss in revenue leverage. I don't know if you got any other color, Rob, do you want to?

Yes. Those are the two main points there, John. I think that it's you can't express enough how important in Q1, the seasonality and the leverage is having an impact on that Q1 margin expectation. Typically, that's 100 to 150 basis points, and we think that we'll be near the top end of that, if not above it, that there is a real opportunity for leverage as we get through the year, as Jeff said, and that the leverage in Q1 given kind of our conservatism on the delivery numbers is creating some conservatism as you see it through the cycle of that guide. There are also, as Jeff said, with some product mix as we shift through some of the older and older specs that haven't had the benefit of the direct cost reductions. And we saw a bit of that also in Q4 as well, which I think was really the incremental units versus guide and a big part of the margin compression versus where we thought we were going to be. So we think that there's real opportunity as we go through the year. but we're really pegging where we expect to be in Q1 on those factors.

Okay. Yes, that's really helpful. And maybe sticking on a similar topic, I don't recall you guys ever giving an adjusted EPS number before. And I'm curious kind of the thought process behind excluding the accelerated stock comp, if it's really just timing related and seemingly future quarters could benefit from less stock comp if the total amount is changing. And also, it seems a little bit unusual to exclude impairments from adjusted EPS. So just maybe your thoughts on that would be very helpful.

Yes, John. We just wanted to give you a like-for-like number because the timing on the equity expense just where it was, it was significant enough that we wanted to give you a like-for-like number that was relevant so that you could make comparisons and so that you could also make a comparison versus our guide.

And the next question comes from the line of Stephen Kim with Evercore ISI.

Just to start off with, if we could get the spec numbers the finished and the under construction specs at the end of the quarter and also a clarification on your community count comment. Think you said 2Q was going to be the high watermark. I just want to make sure that we're clear that you're saying that the community count will actually be highest in 2Q and then it will descend from there.

The community cadence in cost.

Okay. So -- Steve, as we're looking at the setup for the year, I mentioned in my prepared remarks, we ended the quarter with 271. We're on an upward trajectory for that. We do expect to hit the peak for community count for the year kind of right in the heart of the spring selling season right in the middle of Q2 and be up from that 271. We're not pinpointing a number, but we think we'll be up somewhere between 9 to 13 communities from that number by the time. And by the time we get right into the middle of that second quarter. So that's driving some of our assumptions on the -- and projections on the deliveries for the year. As far as the inventory levels, we've got about 1,700 homes in inventory right now across the company, and those are inventory that we're expecting to cover here over the next few months.

Okay. That's total, right? Total inventory, not necessarily finished inventories, is that right? Like just trying to get a sense how much is finished and how much is under construction.

Well, since we haven't been starting -- haven't been starting specs, we've seen some of that shift out of the under construction. So love the 1,700, we've got a little over 1,000 that are at or near the finish stage.

Okay. Got you. That's helpful. And then a general question about your community -- I'm sorry, your shift to BTO. What you're describing is that you have a number of new communities that are going to be opening up and that will really facilitate your transition to more BTO sales, which are also higher margin? And I guess, it would be helpful for me to understand what is it about a new community that necessarily makes it easier for you to make a shift in your BTO strategy. Because to a degree, I would think that most of your -- pretty much all of your communities were initially designed around the BTO concept and sort of market reality sort of kind of pushed you to do a little bit more spec than you would normally like. So that's my perception. Is that an incorrect perception? Do you actually have communities that you kind of just earmarked the kind of spec communities and just not doing any of those as we go forward. Just if you can help me understand what -- how the transition is facilitated by a new community opening up per se?

Yes,. Let me go back up top and start with when we got into starting specs, it was largely driven by the supply chain crunch that we had and our cycle times have expanded big time and it just made it difficult for a lot of reasons to sell BTO when it was taking 220 days, 240 days to deliver that home. So that, combined with virtually no inventory in the market. And then as we've worked through this process, it's been difficult to get off of that, and we draw a hard line in the sand earlier this year or in 2025. And as I look at it, I think a core strength of our company is the ability to sell the advantage of the build-to-order model. And frankly, we created an internal conflict with ourselves with those specs that we started. And in a lot of ways, we've been competing with ourselves to some extent. And with our BTO program, with our build times, we're now building in less than 120 days. So that competes much better with the time line for resales and spec homes. And we're giving our customers the ability to lock the loan and leverage the onetime float down in the event that mortgage rates decline. So it's really what's driving the improvement is sharper alignment around our build-to-order model and just execution and driving that discipline and consistency in how our teams position our value with the great base price and transparency and the ability to personalize. And our focus is really reinforcing the importance of selling the home through the customers' eyes and helping them understand the trade-offs and the cost certainty and the long-term value of getting exactly what they want rather than pushing that spec solution. So it's -- I would characterize this as less of a change in strategy is more stronger execution against a proven business model that we've operated with for a long time. And when our sales teams fully believe in and consistently sell the benefits of that build-to-order, the results follow. And with these new communities, we don't have specs to compete with at all, and we're quickly working through the specs in our existing communities where it's creating that competition.

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

Thanks for all the details so far. I was hoping to get an update on kind of your pricing strategy shift. I know you're obviously focusing on increasing the BTO mix. And I guess, part of that or in addition to that, I know a few quarters ago, you mentioned kind of the push to get towards more of a base price model as opposed to the kind of the kitchen sink incentive model that a lot of your competitors are operating with. And it seems like since then, if anything, the incentive environment has gotten even more competitive. I mean, we're seeing rate buydowns advertised on a lot of the builder websites 2%, 3%. So I'm just curious, A, how has it been competing in this environment with your new strategy? And B, do you have an update on kind of what the actual base price adjustments that you've seen up to this point and what the expectation is going forward?

Yes. So there's really not much to report on the price change front. I mean, overall, it was a relatively stable quarter for us in terms of pricing and as Jeff said in the beginning, and we said last quarter, we were -- we've been disciplined and didn't chase volume during what was typically a lower demand environment and more inelastic. So not a lot of change on the price front. I expect that, that will probably change as we get here deeper into Q1 and into the selling season. But -- so far, what we've seen, especially in communities where we've worked down the level of specs we have, and we're not competing with ourselves. We've seen our mix shift trend more towards BTO. And in November, we saw that move into the mid- to high 50s. December, we don't have a lot of data to go off of in December. We've only had one full week of reported sales so far. But so far, we've seen that shift up into the 60s. So we like the trend that we're seeing and expect that's going to result in higher margins over time.

Got it. And that was kind of the -- the second question I was going to ask on that improvement or increase in BTO you've seen. Is there something you can attribute the increase you've seen recently to? Is that a function of maybe the overall inventory environment kind of improving across the industry? We've heard from a lot of your spec-focused peers like they pulled back a lot on starts over the last handful of months. So are you actually seeing a little bit of relief on the spec competition side? Or is it more something you're doing internally that's driven that recent mix shift?

Alan, one of the things that got blurred with what Rob walked through on the supply chain crunch and then the inventory that we put in and others put in is you lose sight of the value in the build-to-order approach. And don't underestimate the benefit of many of our divisions now building in less than 100 days. So would you rather have a completed spec with a lot of incentives to move it or do you want to build your own home and create your own value and close 30 days later or 45 days later. So what we're seeing is with our build times coming down, the value proposition of the personalized home at an attractive price is more compelling. So we don't think that our customers are competing with the specs. We focus on resale and we offer a brand-new home that's within range of the refill median, and they really value the personalization. So it's naturally coming back to us because we're prioritizing it and focusing on much better than we did in the last couple of years.

Our next question comes from the line of Rafe Jadrosich with Bank of America.

I just wanted to kind of follow up on some of the comments on the BTO mix. I think you said 57% of deliveries for BTO in the fourth quarter. How are you expecting for the fiscal first quarter? And then what would that be for the full year kind of at the midpoint of guidance? Wondering sort of where the exit rate will be for the year compared to that 70% target you have?

Yes. That's a good question. I mean in the first quarter, I expect that we are going to continue covering some of that inventory. So the ratio is going to be tilted more so towards probably that 57% to 60% range. The exit rate, I think, is what's more important. And we're very focused on getting back to at least a 70-30 ratio, and we see that a great opportunity to drive that change. With the new communities we've got coming with the onset of the spring selling season as we work the built-to-order model and could go that route. We expect that we'll exit at that rate, and it will be kind of a gradual progression to get there through the first couple of quarters of the year.

Great. So similar mix in fiscal first quarter versus the fourth quarter?

Most likely, yes.

And then just the fiscal -- the first quarter gross margin, the quarter-over-quarter decline, you spoke about the fixed cost deleverage and the amount that you're getting pressured there. But the decline is sort of greater than that. What are the other pieces to sort of bridge us to the first quarter decline?

It's outside of the leverage piece, it's just largely driven by regional and product mix within our cities, combined with some pricing pressure on moving the inventory. As Jeff mentioned, we've got this tale of inventory that we're working through that has higher direct cost and a lower margin, and that's going to -- that bled into the deliveries and will continue in the short term. Overall, with the higher-margin BTO sales becoming a larger percentage of our deliveries and the improved leverage that we'll get on fixed as we move throughout 2026. We expect Q1 to be the bottom in margins, and we're going to go up from there.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

One more on the BTO dynamic. I guess, look, if you [ op ] your spec starts, it's pretty easy to mathematically move your mix of BTO up. So I'm trying to understand in context your order pace was light. So as you go into next year, you have a view that you can kind of manage this transition and the demand will be there. What are you willing to tolerate on kind of pace to force the issue versus just if you get into the spring selling season, the demand responses and they are kind of pivoting back to spec? I guess and anything you can give us on -- aside from just percentage mix, maybe like some sales pace stats on some of the newer communities that are more BTO versus some of the spec communities. Just looking for a little more color there.

Yes. Mike, there's a few factors in the response. One, every community is a different story. And while Rob was sharing the mix shift we're seeing to BTO, it's not just on the brand-new community. Some communities had little inventory and has sustained the mix and others had more than they should have, and we're solely working through that. But it's working across the system. And I've shared on past calls, we keep walking through the optimize the asset approach. And for our company, it seems to -- you get the best returns of doing at least 4 a month on average per community. Our sales pace in the fourth quarter would seasonally adjust to 4 a month. So we were on the 4 a month pace in the quarter. As we look ahead into the spring selling season, our intent is to support our sales rate with build-to-order sales more so than forcing the inventory. And in part, we like it because we know what the margin is when we start the home. And you can fool yourself with a spec start in the thinking you're going to make this margin and then lo and behold 5 months later, it's down 4 or 5 points. So we would rather pull the levers on a build-to-order approach in the spring per community and ensure that we hold to that 4 a month pace.

Okay. My second question, look, I appreciate the dynamics at play with the margin between seasonality and the spec dynamic that you expect to work past as the year goes on. If we look at the 1Q operating margin guidance, it is low single digits, which if we think about normal distribution, there would presumably be some healthy number of communities that were kind of breakeven or below. So my question is really around your impairment process and testing. And I know there's a component that's probably duration and your projections about BTO. Hypothetically, if you were to sustain these types of margins in kind of the mid-teens, what are the set of assumptions that would be required where -- to make the charge -- I mean $14 million in charge is still kind of nominal this quarter? What would lead you to take kind of I guess, for lack of better word, much larger charges because it seems like this is getting closer to where some land might be impaired?

Mike, I'll say a few things, and I'll hand it to Rob Dillard. We've already shared that the first quarter margins are in the low watermark, and we expect improvement quarter-over-quarter as the year progresses from there. And it's a combination of better leverage as we grow revenue back and better margins as our community mix rotates around. I can say we've had the same impairment process for years and years. It's very rigorous. Every community is analyzed every quarter. And it starts with what's the margin in the community and you have a positive margin or not. And even at today's margin, there's a significant gap before any kind of major impairments would get triggered. And when you throw out that number on impairments, keep in mind, half of it was abandonments on communities we elected not to go forward with. So it's not a reflection of a margin. It's a reflection of a community we decided not to go close on. I don't know if you want to say anything else?

Yes. I mean just to concur with what Jeff said, I mean, the impairment process is incredibly rigorous and it is community by community, and it's pretty much actually a constant process that we're evaluating these communities and understanding what the trends are within the communities and the relative returns and profitability of the communities. We have a certain number of communities that kind of hit excess scrutiny and that list of communities is actually relatively limited. We did decide to take an impairment on 2 communities, one of which was relatively small as it was about to close out and then the other one was a community in our Central division in Colorado, where we had -- which was associated with the same issue, which is a change in some of the requirements on housing, which change the cost profile of those houses and led us to an impairment on those products. So we think that that's fully behind us now. So as we evaluate these impairments, there would have to be some kind of meaningful shift or a trigger that would change our perception of the community's profitability over time. And right now, we haven't seen that. And so I would also say that all of these profitability measures are fully loaded with corporate and everything else in there. And so that has an impact and those are also costs that we're evaluating as we go forward.

And the next question comes from the line of Trevor Allinson with Wolfe Research.

First question on the ASP implied by the midpoint of your 2026 revenue deliveries guidance. I believe the midpoint in '26 is above your 4Q '25 ASP. Is the expectation to be able to increase prices in fiscal '26? Or are there mix impacts driving that? Just trying to understand what should the base case be for pricing to move higher versus where it was in 4Q?

Trevor, we're not assuming price. That is totally mixed. We have some very high-end communities in very good locations in California that are opening soon. In fact, one is already open and they'll be delivering pretty sizable number of homes in the third and fourth quarter. So our mix shift is going to trigger higher ASP as these higher-priced communities hit volume.

Okay. Makes sense. And then the second one is on returning cash to shareholders in fiscal '26. You gave the guide for 1Q. Typically, it's a smaller quarter for you guys. So should we think that you continue to return capital to shareholders at a similar $50 million to $100 million rate post 1Q? Or how are you thinking about that beyond the first quarter?

Well, we've demonstrated with our activity that we're programmatic now with the share buyback program. And we typically are a little lighter in the first quarter because of the cash position we're in at the end of the year, and we want to evaluate it as the spring comes. And it's a few factors that we evaluate not just our cash and balance sheet, but where is the stock price and do we have a lot of opportunity to grow the company. And that's one of the key areas that we want to continue to pursue as well. But I would say that as the quarters roll by the 50 to 100 a quarter is reasonable.

And our next question comes from the line of Jade Rahmani with KBW.

You mentioned transparency on price and emphasizing pricing over incentives. Are you seeing other builders follow suit in cutting price? And are you worried at all that this could lead to price wars in many locations?

I really haven't seen it. I mean most of what we see is that builders are trying to cover their spec inventory that they've got, and it's kind of the same game. You've got inventory, you designed it, and it's out there and it may not be exactly what people want. So they're discounting that product and giving rate buydowns and everything else. We see very little competition with our build-to-order focus, especially on the first-time buyer space.

And then on the option walkaway charges, have you identified a pool of communities that you may not exercise additional options? And do you anticipate further charges through this year 2026?

That's just a normal part of our land procurement process that we have options, which are really just payments, earnest money or what have you as we go through the process and execute due diligence. And sometimes we decide to proceed and sometimes we don't. And I think that we're holding the line with really stringent underwriting standards, and we're ensuring that we're sticking to our strategy. And that's kind of led to maybe what is more than typical kind of abandonment, but it's not something that's indicative of us of a low quality or anything like that. We're pretty pleased with how that's progressing and think that, that's -- it's not a normal way thing that we expect to see in a really fulsome market, but it's a characteristic of this market.

Our next question comes from the line of Sam Reid with Wells Fargo.

Just curious where incentive loads landed in the fourth quarter as a percent of revenues? And any sense as to what's embedded in the first quarter? And then kind of a knock on to that is talk to how you're incentivizing some of this aged inventory that you're selling through?

So -- yes, I'm not sure I have a perfect answer for you on the incentive piece on Q4. I know that any mortgage concessions that we did, it was right around 1%. When we look at our book of business and the inventory that we've got, that's really the -- one of the few places we're applying any of those incentives at all. So most of that's coming through that side of it. As we look out through the balance of the year, we project that we're going to get even further away from that and incentive usage should come down even more.

Yes. There's no like unusual incentives. Like what you would read through our incentive disclosure is really more just the normal way incentive that we give, which is like closing cost assistance and things like that. There's nothing unusual and that equates to just 1% or 2% typically.

That helps. And then this is perhaps more of a follow-up to some of the prior questions. But when you look at your range of delivery volume outcomes in '26, it's pretty wide. The question really is, is there a different assumption for spec versus build-to-order embedded at the high end of that delivery volume range versus the low end. And then, I mean, would it be fair to assume that the low end of that range is just a scenario where build-to-order doesn't come in as planned. Would just love some context on that.

Yes. We're really focused on driving the build-to-order sales, as we said. And the range is driven by -- we're in December right now. We've got the spring selling season in front of us. We've got a lot of communities open. But -- we just don't have great visibility into what the spring might be. I'd say that the 2025 spring selling season was a disappointment, and we baked our -- where we've made our -- prepared our plan and our strategy for the year around what I would consider a normal spring selling season with that community count growth, maybe even slightly below average. As we piece it all together, we're only counting on needing to drive about just slightly over 4 build-to-order sales per community in the first half of the year. And as we look at the past years, to get us to the midpoint of our delivery range. And when we look at past years, it seems like that should be relatively easy to do. If we're better than that, and we have a spring selling season like we saw a couple of years ago than we'll probably hit the high end, but we just don't know yet.

And our final question comes from the line of Michael Rehaut with JPMorgan.

You have Andrew Azzi here on for Mike. Just wanted to drill down. I believe you guys said traffic was relatively stable within the quarter. Was there any meaningful difference in sales trends month-to-month? Or was it more of the same?

Well, month to month, I mean September was our strongest month and we see that almost every year, and then it ticks down in October and November. So this year followed that typical seasonal pattern that we did that we saw. Traffic has held stay. Our conversion has actually improved a little. So we're focused on driving more traffic. It's just challenging to do in November and December. So...

Okay. I appreciate that. And then maybe within 1Q's gross margin and even as we go throughout the year, what are kind of your assumptions for construction costs and lot costs within your guide in 1Q and maybe your outlook for the year?

Yes. I mean we're not expecting a meaningful change in construction or lot costs. I mean we do feel really good that we've kind of bent the curve a little bit on unit costs in the sense that direct construction costs and material costs, we've been able to offset the lot cost inflation. And sequentially the year-over-year change in lot cost has gone -- went down pretty meaningfully from third quarter to fourth quarter. And so we feel like we're getting to a better position there in terms of being able to draw some profitability off of our cost savings initiatives. But we don't have like a specific guide on lot cost change that we would give you at this point. Yes, it's baked in.

Thank you. And ladies and gentlemen, that does conclude the question-and-answer session, and that also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2025 Third Quarter Earnings Conference Call.

[Operator Instructions] This conference call is being recorded, and a replay will be accessible on the KB Home website until October 24, 2025. And I will now turn the call over to Jill Peters, Senior President, Investor Relations. Thank you, Jill. You may now begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2025. On the call are Jeff Mezger, Chairman and Chief Executive Officer; Rob McGibney, President and Chief Operating Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. .

During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission. Actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory-related charges and any other non-GAAP measures referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, here's Jeff Mezger.

Thank you, Jill. Good afternoon, everyone. We are pleased with the solid financial results that we achieved in our third quarter, meeting or exceeding our guidance ranges across our key metrics as we continue to navigate the current environment. And with a healthy balance sheet and significant cash flow, our flexibility remains strong.

While we continue to invest in new communities to position ourselves for future growth, we are also returning a significant amount of cash to our shareholders. We repurchased more than $188 million of our shares in the third quarter, near the high end of our guided range, contributing to total repurchases of roughly $440 million year-to-date. This total represents approximately 11% of our outstanding share count at the beginning of the fiscal year, which was repurchased at an average price that is below our current book value.

We believe this is an excellent use of our cash and highly accretive to both our earnings and book value per share. Including dividends, we have now returned more than $490 million in capital to our shareholders this year. From an operational standpoint, we have some critical achievements in terms of materially reducing our build times, which helped to generate closings that were slightly above our expectations and also continuing to lower our direct costs.

These accomplishments were realized while maintaining outstanding customer satisfaction levels. As for the details of our results, we produced total revenues of over $1.6 billion and diluted earnings per share of $1.61. We delivered higher profitability on our revenues than we had projected with a gross margin of 18.9%, excluding inventory-related charges, above the high end of our guided range.

With a continued focus on prudently managing our costs and aligning our overhead structure with our delivery volume, we held SG&A expenses to 10% of our housing revenues. The outperformance of these 2 metrics relative to guidance drove an adjusted operating income margin of 8.8%. We grew our book value per share to over $60, an 11% year-over-year increase.

Moving on to market conditions. The longer-term outlook for the housing market remains favorable, driven by demographics and the ongoing undersupply of homes. With respect to current conditions, we are pleased to see stability in demand in June, which continued as our third quarter progressed. We are encouraged by the decline in mortgage interest rates, which should support greater demand for homeownership.

We produced 2,950 net orders in the third quarter, maintaining the pricing approach we implemented earlier this year. Our focus is on offering the most compelling value at a transparent price while limiting the use of incentives. When we discuss with buyers the alternative of the lower sales price we offer versus a much higher price that can be offset by incentives, buyers recognize that they have a better opportunity for building wealth through equity over time with our home that has the lower starting price point.

We continue to focus on optimizing our assets to generate the highest returns, balancing pace and price on a community-by-community basis relative to local market conditions. We exceeded our community count guidance, which, together with a stable cancellation rate, contributed to a monthly absorption pace per community of 3.8 net orders. This pace was lower than our third quarter pace of the past couple of years. And as a result, our net orders were below our internal sales goal. Our fourth quarter sales approach will emphasize our built-to-order homes, while continuing to sell through our inventory.

As we discussed on our last earnings call, our goal is to steer our business back to our historical range of build-to-order homes, which has averaged close to 70% over more than a decade from around 50% currently. It is our core competency and a key competitive differentiator. And with the significant reduction in our build times that has become a more compelling selling proposition. We offer buyers an attractive home at an affordable price with features we know they value based on our survey data.

Our buyers can then meaningfully influence their final sales price in selecting their lot, floor plan and exterior elevation as well as personalized design studio selections aligning their monthly payment with their budgets. This choice model contributes to our high customer satisfaction scores as buyers draw value from our process and is a key driver of our monthly absorption pace, which is among the highest in our industry.

As our build-to-order mix grows, we believe it will support a higher gross margin as these homes currently generate a gross margin that is 250 to 500 basis points higher than our inventory homes. In addition, increase in our build-to-order mix will help us establish a larger backlog, which provides greater visibility into future closing projections. As we have shared in past years, our fourth quarter is typically one in which we elect not to take aggressive steps to capture inventory sales as it is a seasonally slower period and discounting by the speculative home builders pursuing year-end deliveries tends to be elevated in the final months of their fiscal years.

Our land positions are valuable, and there is merit to exhibiting discipline when incremental volume gains are low. We do not intend to sell at any price to make up for the shortfall in net orders in our third quarter. Taking us into consideration, we are projecting $1.65 billion in housing revenues in our 2025 fourth quarter and $6.15 billion in housing revenues for our 2025 fiscal year both at the midpoints of our guidance ranges.

Let me pause here for a moment and ask Rob McGibney to provide more details on market conditions as well as an operational update. Rob?

Thank you, Jeff. One of the key operational themes of our third quarter was our strong execution. Our divisions continued to perform well on the fundamentals of our business, maintaining high customer satisfaction levels, consistently improving build times, further lowering direct cost and balancing pace and price to optimize each asset.

In addition, we successfully opened 32 new communities during the quarter. The significant progress we made in continually reducing build times during the third quarter helped to drive better financial performance from capturing slightly more deliveries than we had planned. Traffic in our communities was steady, and our cancellation rate was stable at 17%, supporting net orders at an average absorption pace of 3.8 per month per community.

We continue to utilize a simplified approach to sales, focused more on offering a transparent price rather than incentives to provide the most compelling value that is competitive with resale pricing. By advertising the true base price on our website, we let buyers know exactly what to expect before they ever visit a community without the need for back and forth negotiations to uncover the real deal.

It is a clear upfront way of doing business that makes the home buying process easier and more straightforward. As a result, we believe we draw more traffic to our communities than we might otherwise attract if our pricing was dependent on incentives. In the third quarter, pricing in our communities was as stable as we've seen this fiscal year, with 70% of our communities experiencing steady or increased prices and the other 30% price reductions as we continue to balance pace and price to optimize our assets.

We are encouraged by the stabilization and believe our communities are well positioned in the current market. In terms of affordability, it has improved compared to the start of our third quarter, driven by the decrease in mortgage interest rates, which have fallen roughly 60 basis points.

This equates to approximately $30,000 of additional purchasing power at our average sales price, a significant boost for a first time or first time move-up buyer, which comprise about 70% of our home buyers. I will add to Jeff's comments on our fourth quarter sales approach by reiterating our focus on optimizing our assets as we maintain an appropriate selling cadence in our communities, including sales of inventory homes.

We do not need to chase incremental volume in a seasonally inelastic demand period where speculative builders are discounting heavily to close out their fiscal years. In those conditions, the additional sales produced tend to be limited and they come at a great cost to our margins. We have approximately 3,000 homes in backlog that can be delivered in our 2025 fourth quarter leaving just over 500 same quarter sales and closings needed to achieve our implied fourth quarter delivery guidance.

This is less than the number of homes that we sold and delivered in the fourth quarter of last year and equates to less than one sale per community per month. At quarter end, we had 264 active communities, up 4% year-over-year, contributing to an average of 259, an increase of 3% as compared to the prior year period.

The third quarter marked our best performance in several years in opening communities and the number of communities we opened was the highest in any quarter in more than a year. We typically see an above-average sales pace in new communities and the sales performance of our third quarter openings was strong with an absorption pace that outperformed their overall average pace for the quarter.

We expect to end our 2025 fiscal year with 260 active selling communities, with a projected ramp-up in early 2026 in time for the spring selling season. We moderated our starts in the third quarter with 2,761 homes started as part of our effort to rotate our business back to a higher mix of built-to-order homes over time. We ended the quarter with 6,550 homes in production, including models of which 52% were sold.

Further improving our build times was another area of strong execution by our divisions in the third quarter, with a 10-day reduction sequentially to 130 calendar days. Compared to our annual build times going back a decade, we are building homes at some of our best levels today. Although continuous improvement becomes more difficult as we move further away from the peak, our divisions have been producing results each quarter with a focus on returning to a company-wide average of 120 days or better from start to home completion.

We are quickly approaching this point at 122 days for built-to-order homes, and some of our divisions are already below our target level. The benefits of lower build times are numerous, including a more compelling selling proposition for our customers purchasing a built-to-order home relative to the 60 days it typically takes to complete an existing or speculative home purchase, better inventory turns and monetizing our assets quicker.

The focus from our divisions, together with our national purchasing team to drive lower cost as well as our value engineering and studio simplification efforts collectively contributed to direct costs that were about 2% lower sequentially and 3% lower year-over-year on our homes started during the third quarter helping to offset the impact of higher land costs.

Before I wrap up, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans. We maintained a high capture rate with 83% of buyers who finance their homes in the third quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers.

In addition, we see higher customer satisfaction levels from buyers who use our joint venture versus other lenders. The average cash down payment was stable, both sequentially and year-over-year at 16%, equating to over $76,000. On average, the household income of customers who use KBHS was more than $130,000 and they had a FICO score of 740.

Even with 1/2 of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or pay in cash. 11% of our deliveries in the third quarter were to all-cash buyers. In conclusion, we are focused on delivering results and our third quarter performance reflected strong operational execution across multiple dimensions.

We believe our communities are well positioned in their submarkets, and we are approaching sales in a simple and transparent way, which we feel best serves our buyer. Our divisions are committed to achieving our projected fourth quarter results for a solid finish to fiscal 2025. And with that, I'll turn the call back over to Jeff.

Thanks, Rob. With respect to our lot position, we own or control over 65,000 lots, 42% of which are controlled. Our footprint is focused on markets that we believe are positioned for long-term economic and demographic growth, and we've been selective with our land positions in these markets. .

Our lot pipeline is healthy and at a sufficient level to support our community count growth targets. We regularly review the land deals in our pipeline to ensure that the rationale for each deal is still sound. During the third quarter, we canceled contracts to purchase approximately 6,800 lots, representing about 45 communities that no longer meet our underwriting criteria.

We feel we have ample opportunity in our served markets to add to our controlled lot count with lots that have better economics and terms. And with our lot position at quarter end, we can wait until we find better prospects. One of the key benefits of our build-to-order approach is that it provides visibility into the need and timing for replacement communities based on each community's pace and expected sell-out date, which is beneficial in our effort to be capital efficient. We are also developing lots in smaller phases wherever possible and balancing development with our start pace to manage our inventory of finished lots.

We remain consistent in our balanced approach towards allocating the healthy cash flow that our business generates. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested $514 million in land acquisition and development in the third quarter, with almost 80% going toward development and fees on the land we already own.

We are beginning to see a more constructive land market as prices have softened somewhat, and we were able to obtain more favorable terms. As I mentioned earlier, we continue to view the long-term outlook for the housing market favorably and have the flexibility to resume a higher level of investment at any time. With the earnings that we have generated to date in fiscal '25, land acquisition and development spend that is 7% lower year-over-year and the improvement in our build times unlocking cash, we have returned more than $490 million in capital to our shareholders in the first 9 months of fiscal 2025.

This includes approximately $440 million in share repurchases at an average price of $56.30 per share, which, as I noted earlier, is below our current book value. At these levels, the repurchases are an excellent use of capital and will enhance both our future earnings per share and our return on equity.

In closing, I want to thank the entire KB Home team for their commitment to serving our homebuyers and driving the best possible performance from our business in the current market. We believe we have the most talented operators in the industry, and we were honored to be the only homebuilder named to Time Magazine's 2025 list of world's best companies. One of the 3 dimensions that define the companies recognized on this list was employee satisfaction based on anonymous survey data of a large sample of employees.

For this reason, the recognition is particularly meaningful to us. Our divisions are executing well and producing results across some of the most impactful operational areas of our business by reducing build times and direct costs and opening new communities on time. We continue to approach our land opportunities through a thoughtful and selective lens, with a healthy lot position that has our business primed for growth.

Year-to-date, we've returned the highest level of capital to our shareholders for a 9-month period in our company's history. Over the past 4 years, our cumulative return of cash for share repurchase and dividends as a percent of market cap leads the industry. We plan to continue our share repurchase program in both our '25 fourth quarter and in fiscal 2026. Our balance sheet is strong. We have significant financial flexibility and an experienced team that is committed to producing results going forward. And now I will turn the call over to Rob Dillard for the financial review.

Thanks, Jeff. I'm pleased to report on the third quarter 2025 results. As Jeff and Rob stated, we're managing the business with discipline in an effort to drive employee engagement, customer satisfaction and long-term shareholder value. We believe that we are well positioned to deliver solid results in the present operating environment, with our dedicated customer focus, leading brand, transparent pricing strategy and differentiated built-to-order product.

In the third quarter of 2025, we generated total revenues of $1.62 billion. Housing revenues exceeded the midpoint of our guidance range at $1.61 billion, an 8% decrease from the prior year. We delivered 3,393 homes in the quarter, which exceeded the midpoint of our implied guidance largely due to reduced build times. While we experienced consistent traffic at our communities, net orders totaled 2,950, a 4% decline.

Lower orders and improved build times, which reduced backlog more quickly and efficiently contributed to a 24% reduction in our ending backlog to about 4,300 homes. In the third quarter, our overall average selling price was relatively consistent on a year-over-year basis and decreased 1% to $475,700. Mix was a factor as lower average selling prices in the Central and Southeast regions were largely offset by increases in our West Coast and Southwest regions.

Housing gross profit margin was 18.2%, and adjusted housing gross profit margin, which excludes inventory-related charges, was 18.9%. This strong margin performance exceeded the high end of our guidance range, mainly due to our continued success at managing costs. Adjusted housing gross profit margin was 180 basis points lower than a year earlier due to pricing pressure, higher relative land cost and geographic mix, partially offset by lower construction costs.

SG&A expenses as a percent of housing revenues were 10%, a 20 basis point increase from a year ago, primarily due to decreased operating leverage. We're actively managing SG&A for the current market environment and have reduced our headcount to align with volume levels. This focus led to a favorable result relative to our guidance range.

Homebuilding operating income for the third quarter decreased to $131 million or 8.1% of homebuilding revenues and homebuilding operating income, excluding inventory-related charges, was $143 million or 8.8% of homebuilding revenues. Total pretax income was $143 million or 8.8% of total revenues.

We reported net income of $110 million or $1.61 per diluted share, benefiting from solid operating performance and a 12% reduction in our weighted average diluted shares outstanding from the prior year. Consistent with our strategy to optimize every asset, we are maintaining discipline on price and pace and have adjusted our guidance for 2025 to reflect this priority.

In the fourth quarter of 2025, we expect to generate housing revenues between $1.6 billion and $1.7 billion. For the full year, we now expect housing revenues between $6.1 billion and $6.2 billion. We expect a fourth quarter average selling price between $465,000 and $475,000 and a full year 2025 average selling price of approximately $483,000. This variation on projected average selling price is primarily due to regional mix.

Housing gross profit margin, assuming no inventory-related charges is expected to be between 18% and 18.4% for the fourth quarter and between 19.2% and 19.3% for the full year. This expected year-over-year margin reduction is due to market conditions, higher land costs, including development and fees as well as mix variation, which we expect to be partially offset by lower construction costs. The fourth quarter SG&A ratio is expected to be between 9.3% and 9.7%. And the full year SG&A ratio is expected to be between 10.2% and 10.3%.

We expect the fourth quarter homebuilding operating income margin of between 8.5% and 8.9%, and we expect the full year operating income margin of approximately 8.9%. These projections assume no inventory-related charges. Our effective tax rate for the fourth quarter and the full year is expected to be slightly above 23% as energy tax credits and other adjustments are expected to remain approximately at their current levels.

Turning now to the balance sheet. Our balanced capital strategy is focused on minimizing the cost of capital, maximizing flexibility, optimizing returns from investment in land and returning capital to reward shareholders. We believe that we are well capitalized for the current market. We continue to invest in land to drive future growth with a continued focus on the highest return opportunities, while also returning more capital to shareholders in the form of share repurchases.

We had inventories consisting of land in various stages of development and home completed or under construction totaling $5.8 billion at the end of the third quarter. We invested over $514 million in land development and fees during the third quarter compared to $845 million in the third quarter of 2024. In the first 9 months of 2025, we invested over $1.9 billion in land, development and fees compared to $210 million in the corresponding period of 2024.

With our inventory position, we own or control over 65,000 lots, including 27,000 lots that we have the option to purchase. We believe that we are well positioned to benefit from improving market conditions. At quarter end, we had total liquidity of $1.2 billion or $331 million of cash and $832 million available under our revolving credit facility. The current $250 million outstanding on the revolving credit facility is associated with seasonal working capital investment.

Our strategy is to maintain our strong BB positive credit profile as we believe it facilitates reliable access to capital at low cost and significant flexibility. We'll continue to target a total debt-to-capital ratio in the neighborhood of 30% to support this rating, and we are comfortable with our current 33.2% ratio. This strong balance sheet enables us to provide shareholders with a healthy dividend, which currently has an approximately 1.6% yield as well as return capital to shareholders in the form of share repurchases.

In the third quarter, we repurchased 3.3 million shares at an average price of $57.12 for a return of capital of more than $188 million, which combined with dividends, resulted in a total return of capital of $205 million. Over the first 9 months of 2025, we have repurchased approximately 7.8 million shares or approximately 11% of outstanding shares at the beginning of the year.

With this strategy and our solid earnings, we have increased our earnings book value per share to $60.25, an 11% increase over the prior year. Over the past 4 years, we've returned over $1.8 billion to shareholders in the form of dividends and share repurchases. We have now repurchased over 34% of our outstanding common stock since implementing our share buyback program in late 2021. We believe that this is the highest percentage of shares repurchased based on market capitalization among our homebuilder peers over this period and is an indication of our shareholder focused strategy.

We expect to repurchase between $50 million and $150 million of common stock in the fourth quarter, subject to our outlook for operating environment, capital market conditions and land investment opportunities, among other factors. In conclusion, we're pleased with our solid results and disciplined operating strategy, and we expect to optimize shareholder value over the long term by augmenting these results with shareholder-focused capital strategy that balances investing for growth, optimizing returns and increasing returns to shareholders.

With that, we'll now take your questions. John, would you please open the line?

[Operator Instructions] And the first question comes from the line of Stephen Kim with Evercore ISI.

Appreciate all the commentary and guidance. Yes, good results here in a tough environment. I did want to ask you a little bit about the order ASP, if I could. It was -- it's kind of been down pretty significantly sequentially. I know you've talked about the simple -- more transparent pricing model. But I was curious, I think you gave a comment that 70% of your communities had stable to increasing prices. And I wanted to square that with the 4% sequential decline in the order ASP.

So maybe help us understand sort of maybe how we can reconcile that and what your outlook is for the order ASP as we get into the fourth quarter and into next year, is this level of ASP a level you're generally comfortable with? Or do you still think it has downward movement?

Well, a lot of where it's going to head is going to depend on market conditions and where things are headed and we talked in our prepared remarks about optimizing each asset. We're going to continue to do that. We've also had success on moving cost down as well as some of this has been shifting down. But I think a lot of what you're seeing in the ASP is just mix driven.

If you look at year-over-year, we've got more deliveries coming out of the Southeast and lower percentage coming out of California. And then there's mix -- sorry, out of the West. And then there's even mix within the West to where we've got ramp-up in deliveries coming out of Boise and Seattle that have some lower ASPs, generally than the rest of California. So Steve, I think a lot of what you're seeing there is mix.

And as far as comfort with the ASP, obviously, we're focused on the margin piece of that. So to the extent we can continue to drive cost down and offset any decreases that we've had to do, we'll be happy with that.

Yes, that's helpful. I mean I guess what I'm hearing you say, Rob, is that nobody should read into the sequential order price decline as a leading indicator of a step down in the margins, there's really more mix effects going on. So I appreciate that. Speaking about the demand, we've kind of had a number of weeks here where the mortgage rate has sort of moved down pretty meaningfully.

I was wondering if you could comment on sort of what you've seen. We've heard that there's been a pickup in traffic pretty much across a lot of builders we speak to and people are kind of waiting for the conversion into sales. I was wondering if you could comment on what you are seeing with respect to the conversion of traffic and whether or not you would be more inclined at this point to push price if demand comes in stronger or if you would be more inclined at this point to maybe push volume given the fact that you've pulled your volume down a lot most recently.

I guess the way that we would react to it really depends on the community. If it's a community, we've got a lot of runway in front of us, and we see an opportunity to get higher volumes with more demand, we'll probably be less aggressive on price and get a little more volume. If I contrast that with -- some of the -- we call the jewel box communities we've got in California that are infill type communities that are difficult to replace.

We're going to continue leaning on price and margin. As far as the way the buyers have reacted, I mentioned in my prepared remarks, it's a huge impact to the buyer in terms of affordability. I mean $30,000 of purchasing power at our ASP is big. We've seen traffic stay steady. Orders have been good, but I wouldn't say that we've seen a big uptick yet or maybe the uptick that we would expect to see from such a change in mortgage rates.

And I think to some extent, buyers are in maybe a bit of a wait-and-see mode, maybe waiting for rates to come down further, maybe they were waiting around for the actual fed event expecting that to have some immediate impact on rates. But the thing that we're focused on is, really, our messaging and the way that we're approaching this in the sales offices. And with our build-to-order model, we're really talking to all of our customers about their ability to buy a build-to-order home.

And if they believe rates are coming down in the future, then it's perfect because we've got a onetime float down option for them. And if that happens, they can take advantage of that. I think that's something that is unique to our approach, and we're leveraging that everywhere we can.

Our next question comes from the line of John Lovallo with UBS.

The first one is, if we think about sort of the third quarter gross margin beat versus expectations, about 20 basis points on the high end and maybe a slightly lower-than-anticipated fourth quarter gross margin, I'm curious if there was some toggle on delivery timing or mix between the quarters relative to internal expectations, given the fact that the full year gross margin is maybe up a touch from where you had thought before.

Yes, John, that's a good question. It's something we think about a lot, but it actually wasn't really in play there. I mean the real drivers there were there was some mix there, but it was really, really strong performance on the construction side and getting the right product. So we feel really good about how the third quarter ended from a margin perspective, we're being really thoughtful about what fourth quarter is going to do in d we're still working through inventory and transitioning to more [ BTO ].

Understood. And then maybe with that in mind, how should we sort of think about the year-over-year and sequential movement in stick and brick costs and land into the fourth quarter? And to the extent that you can comment on what you're expecting in 2026, that would be helpful. .

Yes. In fourth quarter, we're not expecting like a trend shift from the third quarter in terms of the year-over-year impact of land or sticks and bricks, like I think that we've been able to offset most of that with construction productivity, but you're seeing that kind of having an impact on the margins for sure. I think going forward, we think that there's still opportunity to continue to offset that. And as Rob said, from a community -- by community perspective, there's a lot of play in price there as well. .

Our next question comes from the line of Rafe Jadrosich with Bank of America..

If we move historically on this third quarter call, you've sort of given an outlook on the out here revenue, at least like a preliminary view. I understand that that's a pretty volatile environment. So it might be a little bit tougher right now. But can you maybe just help us and maybe puts and takes like kind of going into next year as you shift back to BTO, just how we might think about the revenue outlook for next year? Or if you're still providing that?

Rafe, we're not going to give guidance on this call for next year, but directionally, we shared we're going to have an uptick in community count in time for the spring selling season. And with rates coming down and improving affordability, at some point in time, that has to have a favorable impact, and we just don't know when or how strong it will be. So our expectation is that -- as we look ahead to next year, affordability improves, community counts up, we'll be setting up a solid year again. And as we shift to more build-to-order and work through the last of the inventory, we expect that our margins will improve over time.

That's helpful. And then just on the fourth quarter, the guidance implies, I think, pretty good leverage on SG&A or at least better than normal seasonality. Can you talk about when -- do I have that right? And then maybe what's driving some of that improvement sequentially as you go into the fourth quarter? .

[indiscernible] detail on that?

Yes. It's not really leverage as much as it is actually the gross number is expected to be down 15% on a year-over-year basis quarterly. And a lot of that is just kind of the fixed costs we've taken out of the business and how the yearly kind of total compensation scheme is going to play through the SG&A profile

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

Thanks for all the detail so far and nice performance in a tough market. I would love to chat a little bit about the goal or the target to get back to your more historical BTO share. I think this is a market where a lot of builders that have historically been more heavy on BTO have seen that share decline. And there's a lot of spec inventory out there that you're competing with.

And I'm just curious, as you move towards that pivot, have you made any headway there yet either throughout this quarter or maybe even thus far in September in terms of the mix of your orders. Is it skewed a little bit more towards BTO? And I guess from a profitability perspective, can you talk about the current margin differentials between your BTO business specs today?

I can make a few comments, and then I'll pass it to Rob McGibney. We were 70% or more sold as recently as 2022. And if you look at what the industry's dealt with, starting in 2022, that's when the supply crunch hit, build times really extended. We got as high as 11 months to build in many cities. And it's hard to have a compelling build-to-order story when it's 11 months out. The buyer can't even lock a rate that long. .

So you can't tell them what their rate or their payment will be, and they're not going to hang around 11 months to get their personalized home. So we had to do something, and we opted to introduce more inventory into our WIP. And frankly, over the last couple of years, that's been the hardest houses for us to sell because our culture and our wiring as a sales team is to focus on the values of build to order. And past that, then rates start to run up and it compounded the problem a little bit more for us.

So rates have come back down. Our build times have come right back down to historical. It's a far more compelling value, and we're just not going to introduce a lot of inventory into the ground. We're going to focus on the build-to-order side. We've seen some incremental improvement in the build-to-order mix, and we're -- we expect to see a lot more as we get into '26. So margin-wise, Rob, do you want to add any more comments or you want to get into the margin difference?

Yes. We mentioned in our prepared remarks that the margin difference is some -- depending on the community and the plan, it can be from 250 to 400 basis points. So it's a significant difference. And today, as Jeff mentioned, we're in an environment where we have the inventory because we started it, and we've got to take a balanced approach to moving through that.

But as we look forward, especially as we bring on new communities, we're focused solely on BTO. And so I think it's not going to be an overnight change, but over time, and I think we'll make really good progress towards that as we get into the early part of '26, we expect to shift back to that 70-30 or better ratio at higher margins. .

Got it. That's really helpful, Rob. And then in terms of the 4Q margin guide, I think if I'm doing the math, it's down about 70 bps sequentially. Given your comments about pricing being pretty stable through the quarter in the majority of your communities, should I interpret that sequential decline as more kind of flushing through some of the remaining spec you have? And that mix headwind? And then hopefully, as you get into '26, that reverses?

A couple of things, Alan. There's a lag effect from sale to when everything runs through into revenue. So a lot of the deliveries were on houses that were sold in the spring selling season when it got pretty competitive out there. So there is a lag. And you're seeing more of that than you are an assumption that we're going to go deeper on inventory.

In fact, we stated in our prepared comments, we're not going to chase the units by [indiscernible] dump in inventory with a heavy discount. We'd rather be prudent with it and strategic and take our time and cover the inventory in the better selling season January, February and March. So I can't remember what the other part of his question was I was going to kick it to you.

Was it margin differential?

Yes.

It is -- a fair amount of it is still mix, and you're totally right. Some of it is like market conditions, but really a lot of it is just the mix

Our next question comes from the line of Matthew Bouley with Barclays.

you have Elizabeth [indiscernible] for Matt today. I was wondering if you could touch -- you mentioned that you've had success in lowering direct costs. I was wondering if you could touch on what those direct costs are? And like if there are any categories that you would call out where you're having a little bit more success with that?

It's really across the board. Clearly, lumber costs have come down. So that's been a tailwind for us. It's a fair -- lumbers are pretty large component of the overall construction costs. But it's certainly not just limited to the commodity side of it. Across many -- I'd say probably most of our markets, we've seen starts come down pretty significantly over the last several months, and we're using that as an opportunity to work with our trade partners.

And they're hungry for work, which gives us an opportunity to drive down cost lower as we feed starts into the system. So on the cost side, whether it's really we're looking at all of the direct costs. When sales prices get pressured, we're looking for any opportunity we can to to lower cost, whether that's direct or SG&A. But I'd say, overall, it's pretty broad-based across all of the direct cost components that go into our homes. And there's part of it that's just renegotiating because market conditions have changed and starts have come down and part of it is true value engineering and changing the product that we build. So I'd say it's probably pretty even split between those components of the improvement that we've seen.

Okay. And just to kind of follow up on the general dynamics of those negotiations. Is that something that would carry on into 2026 in terms of seeing those benefits? Or is it something worth more real time and so you might see depending on the demand and if there's a recovery in starts next year?

Yes. The more recent reductions we've seen in lumber that's going to show up in our deliveries in early next year. The rest of it, I'd say we're -- it's not ever something that we stopped focusing on, but the market isn't always willing to accept that. A few years ago, we were going through labor and supply chain crunches, we were still trying to fight the lower direct cost just weren't making much headway. But we've been able to have more success with that now. And it is somewhat dependent on market conditions.

But while starts and volumes are down, we're going to keep working to leverage that into lower cost if there's a really healthy spring selling season, I would expect that we're going to have less success, but at the same time, our house prices are going to be going up. So that's how I view it.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

First, a follow-up on the recent demand dynamics. Just to kind of put a finer point on it, this is normally a time of the year where you see some seasonal ebb in your absorption pace. So when you say that demand was steady through the quarter, you haven't necessarily seen an uptick in 4Q to date. Can you be more specific about what your -- maybe what your monthly sales pace cadence has been including how you're tracking in September?

Yes. Mike, as we shared in the comments and you look back through the third quarter was pretty consistent for us. June was the best month, but July and August were close. So we would depend on timing of openings and sell-outs and all that, orders were pretty consistent. So I would say it was stable for us through the quarter. We haven't seen much of a shift yet in September. So it's only 2 weeks for us. So I don't want to make any comments on September, but it's more of the same.

Okay. Got it. And then, Jeff, I guess, bigger picture, when you think about the timing of this shift in, say, okay, let's get back to the build-to-order and coupled with your comments around we don't know when the inflection will be, but we do think there's one out there. It seems like that strategy when you're going into next year with a backlog that in the unit and dollar terms, it looks like it will be down pretty meaningful.

It seems like that strategy is really relying on there being some reasonably good inflection in demand next year. Otherwise, you might have kind of a pretty big gap out year in your revenues. So I don't know if you want to address that a little bit more, but also then a specific question would be, if mortgage rates don't come down, we have seen an uptick then over the past week or so. So if you don't get the relief would, as you go into next year, do you pivot back? Or how do you think about that strategy if we don't actually get the type of results you're looking for?

Yes. Well, there's a few components to your question, Mike, and it's a good one. Our backlog will be down at the end of the year. Fourth quarter sales and fourth quarter deliveries obviously influence that, but it will be down a similar range to how much our build time is done. So it actually positions us for similar pull-throughs based on the backlog heading into '26. Every year as we go into the year, the spring selling season dictates how good or how poor your results may be for the year.

And part of -- it's not like we just flip a switch and say, we want to be built to order with the inventory that we put out there, you create competition among yourself with the consumer and your sales teams when you're trying to sell inventory and build to order. And with the margin erosion to cover the inventory, it gets in the [ way of sell ] and build to order. And we're already seeing communities where you rotate out of the aged inventory, you're just focused on your core value and your best value to the customer and it works just fine.

So we're really not expecting a trough, as you called it. I think you'll see pretty consistent performance. And depending on the spring, we'll share that with you in the spring time, but that's really what will drive the second half of next year.

And our next question comes from the line of Michael Rehaut with JPMorgan.

This is Andrew Azzi on for Michael. I started to drill down a little bit in terms of the inventory charges and such. If you could comment on the land environment and your ability to find new lots for future growth, especially as the industry kind of developing a much stronger appetite for the land-light model?

Well, as we shared, the land markets are rolling over a little bit. We're seeing some cities where prices have come down a little. You definitely can get more terms, meaning you can close with a better entitlement in place so you can get to turning the dirt and developing a lot quicker. So that's a good thing. So that's helping us on the land market. Relative to what we shared in the quarter on the abandonments, we walked on deals that we've had tied up and with the [ shifts ] in the market, they don't hit our underwriting hurdles. So we elected to abandon them and write off the entitlement and pursuit costs that we had incurred.

And we know that in some cases, we could go back in and buy the same asset with better price and better terms. We've seen some of that already. But that's what future move. But it's our expectation with starts being way down and what went on in the market this year, we think that the land market will be a little friendlier as we look ahead.

That makes a lot of sense. I appreciate that. And are there any kind of markets where you're seeing -- I'd love to kind of drill down to see how things are progressing by markets, if you can make a few call-outs, and if you're seeing any -- specifically any increased competition from resale or anything like that?

It's a pretty broad question, but I'll do my best to give you a quick overview here. I'd say just in general, demand across the whole footprint of our business remains somewhat mixed. There's clear areas of strength, some that have remained softer in other markets. It seem to be improving or stabilizing faster. It's just -- it's difficult to paint any one metro or region with a broad brush in terms of demand as it's just nuance based on the submarkets within that metro and then there's even another layer of nuance within those submarkets themselves.

But in the quarter from a demand or sales perspective, some of our stronger markets were Inland Empire, Riverside and [indiscernible] North Bay and the Central Valley in California was strong, Las Vegas, Houston, Charlotte, all posted pretty solid demand during the quarter. A couple of the more challenged ones were some of our higher-priced communities, I would say, in coastal California. Seattle was a pretty difficult market for us in Q3, but that tends to follow a little different seasonal pattern, and we've seen demand improve there more recently.

Denver is one of the markets that's more challenged. You just had home prices that surge big time with after COVID and the incomes didn't keep up and you've got supply there meaningfully up I think the good news there in other markets like that, we're seeing starts come down significantly, 15% to 20%. So I view that as positive as the industry in general, showing some disciplined by not adding further supply to some of those weaker markets.

You mentioned resale inventory in Florida and Texas, I think we're the first ones just the states where we saw resale and new home inventory increase. And we responded to that with targeted price adjustments and then cost reductions that supported better absorption. And if you look at Florida, I think our orders in Q3 were actually higher than in Q2. So seeing some signs, I think, of stabilization there. And the work that we've done has resulted in better absorption. So now we're focused on lifting price where we can.

We've actually found in some cases, we've gone above what we needed to. So in order to optimize those assets, we're now increasing price. Texas is pretty similar. But again, it's different by metro. Houston, it's remained relatively strong. We really didn't have the run-up that we saw in San Antonio and Austin where prices moved up, and we've got more resale -- resale was building higher there. But I think Texas and Florida in general, I would say, are stabilizing markets, and that's a good sign for us, and we're seeing that as a result in our communities as well.

Our next question comes from the line of Trevor Allinson with Wolfe Research.

I want to ask a question about the Southeast region, specifically, order prices were down almost 6% sequentially, but volumes are actually quite good. They were up about 7% quarter-over-quarter, Rob, I think you were just referring to some of that in Florida. It's quite a bit better than normal seasonality. You've talked about not chasing volume, but was the strategy different in the Southeast in the quarter just to liquidate some inventory? Or what drove the order ramp there, but a pretty big ASP decline sequentially.

Yes. It wasn't really chasing the inventory. I think that was a market that we saw the resale inventory and new home inventory start to accumulate and sales had really slowed for us in Q2, which was normally our best time of year. So we took action and we reduced price. I think that's what's showing up in the numbers that you're seeing. But I think the good news for us is that worked, which now you're seeing the orders come back up as a result of that.

It's also, as I mentioned earlier, one of the markets where we've seen the biggest decline in starts. So we've had some of our best result in cost reductions there, too. And now as I'm calling that is starting to stabilize, we've got that combination. And I think we found the market. We've driven costs down, and now we're starting to take it back the other way. So I'm not necessarily calling it an inflection point for the whole state of Florida. But we've been encouraged by what we've seen recently.

Okay. Makes a lot of sense. And then Jeff, I wanted to follow up on your comment about starting to see land prices soften. Can you just talk about how widespread that is? Any specific geographies where that's most common? And can you help us with some sort of number on the magnitude of the declines that you're seeing in the market [indiscernible].

Well, I would say that there's a slight easing. We're not seeing rapid drops, but we are seeing some easing and we're -- the power of no is working. We've had deals tied up where we've said no and walked. And lo and behold, they come back at a lower price. So it tells you that the land sellers are recognizing, it's a little less strong than it was for them and their -- they need to move their inventory, too. And I'd say, we're seeing that pretty much across the system. None of them are big magnitude. They're not market movers, but they are incrementally starting to ease. So we're encouraged with that

And our final question will come from the line of Susan Maklari with Goldman Sachs.

My first question is on the design studios. As you think about the shift back to more BTO, can you talk about how you can position the design studios? Is there anything that you're focused on from that element of the business in order to help drive that shift and attract the consumer back to that side of the business relative to the specs that are out there.

Good question. I don't think we need to change anything as far as our approach to the studio. It's just leveraging what we've always done. And we really use the studio as a tool to help us sell homes. And we want to start by offering the best base price we can with a quality home that's designed based on our market survey and the data that we have is kind of a starting point and then really use the studio to let people personalize their home there if they choose to.

So I think that there's a lot of personalization options and choices that we offer, and we're always kind of rotating through that to make sure that they stay current and they're up-to-date with what people want. But I don't really see it as a shift in the way that we're approaching that business. We just want to drive more of the business to build to order and leveraging the studio.

Yes. Okay. That's helpful. And then maybe turning to capital allocation. You mentioned the continued focus on shareholder returns, especially the share repurchases. Just any thoughts on how we should be thinking about the magnitude and what we can expect there as we finish up this year and look to the next year and how you're balancing that relative to the budget that you've put out for land development and acquisitions? .

Yes, Susan, that's a good question. We're very thoughtful about kind of how we're allocating capital. You can see this year, we've been really thoughtful and responsive to ensuring that we can continue to fund growth, but do it in a smart way and ensure that we're awarding shareholders as well. And the capital return and the cash flow that we're generating right now is really healthy. And so we feel like in the future, we'll be able to continue to reward shareholders at a similar rate, but we haven't quite yet figured out the magnitude.

And I think that there's also a component of that, which is market driven by how attractive the land market is. So we feel really good about our way and position going into next year and feel really good about how it's set us up for the next 3 to 4 years. And I think that that's going to give us a lot of flexibility in terms of returning capital

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.