PulteGroup, Inc. (PHM) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and thanks for joining us today for the 2023 UBS Global Industrials and Transportation Conference. I'm John Lovallo, I'm the Senior U.S. Homebuilding and Building Products Equity Research Analyst here at UBS. And we are very happy to have PulteGroup with us today. Jim Zeumer to my right here, who's the VP of IR and Corporate Communications. As most of you know, Pulte is the third largest homebuilder in the U.S. with very high-quality brands, including Pulte Homes, Del Webb, Centex, American West, to name a few. So with that, Jim, thanks -- thanks for coming.

Appreciate the opportunity.

Let's start sort of higher level, as we typically do here. But the housing market, home buyers in general, have been pretty resilient so far this year. What do you think is kind of the driving force behind this resilience that we've seen?

I think at the end of the day, it tells you that people want to buy homes. They desire home ownership. I mean I've been with Pulte since '97. I go all the way back to the Great Recession in 2008, where you couldn't give away a home. That's not what we have today. People want homeownership -- excuse me, rental rates are high. They've continued to increase. I appreciate that they pulled back a little bit, but people like the certainty. So what has happened is builders, through incentive programs, things like that, by putting more spec available that people can get into quickly, they've simply found or helped solve affordability for the consumer. If you go on, you mentioned one of our brands, Pulte Homes. If you go on our Pulte Homes website, the first thing you're going to see is a 30-year fixed rate mortgage at [ 4.99% ] . So I think at that point in time, consumers are saying, you know what, this is a rate that works for me. We talked about on our Q1 call, as we went through the quarter, our absorption pace is, our sales pace is -- were very reminiscent and consistent with what we had in 2019 and before, and I referenced those year simply as pre-pandemic and when things got a little bit crazy, if you will. I think what we're getting back to is just much of a more of a normal environment where people want homeownership. We've got population growth, we've got immigration into this country, and the builders, ourselves included, are finding ways to help find -- solve for affordability for those consumers.

Yes. That makes a lot of sense. And if we think about the dynamic that's out there today, it seems very interesting, where think about in the existing home side, there's incredibly low inventory, below 3-month supply. On the private builder side, there's arguably some of the smaller builders having challenges getting financing. And then to your point, the public builders can offer financing terms given their captive finance arms. So it feels like while demand may have slowed to some extent relative to a really robust couple of years, all that demand that's out there is sort of being funneled towards this group of public builders. How do you see this translating in terms of the opportunity for market share gains for companies like Pulte?

I think we have -- I think more -- the fundamental piece of this thing right now is we have a land supply. We control roughly 200,000 lots between half owned, half under option, which puts us in a position to serve the consumer. First and foremost, in this industry, if you don't have a lot, you don't have a house. I mean, that's just realities of it. There is certainly less inventory available on the existing home side, and that's important because that's our biggest competitor. I mean at the end of the day, it used to be 10:1 and now, it's 5:1 in terms of the volumes that transactions are taking place in. But I think we're certainly beneficiaries of that. Over the near term, including what we've experienced so far, I think the smaller builders, their challenges may be ahead of them with regard to their ability to get lots, for their ability -- for their developers to feed them lots, they're certainly making homes available, but I think we are in a fortunate position in that we are grabbing -- we are gaining some market share to the degree that we can continue to control lots going forward, which is where I think some of the other builders or smaller builders are going to struggle. I think the opportunity is certainly there for us to continue to do that. It's not a goal onto itself, it's simply over time. Our desire is to be bigger within the markets that we serve, and we're finding that opportunity.

Yes, makes sense. And so we talked about rates and the ability to sort of buy them down. But if you look out in the market today, the headline rate has bounced around quite a bit, but it's again closer to 7%. Do you think that the consumer out there today is going to block at that? I mean, we've seen fluctuations from 7% back down again, back up again. I think late November or November is when the first time we saw that 7% spike came down. March, we saw it again. Has the consumer adjusted, I guess, is the question?

Yes. I think there's a big difference between when interest rates move between 6% and 7%, and they move from 3% to 6%. 2022 was just a whole different experience. We are -- the reality is that we got through our spring selling season, and that was important, without a lot of rate anxiety or anything like that. So I think the consumer today, if they go into -- they've been shopping for a home. They went in a month ago, and they saw a price and a mortgage rate, and that got to a monthly payment of X, they're going to go in and they're going to see a higher payment. It's not going to be the startling price differential that they saw last year. And then the reality is that we're going to be able to sit there and say, yes, we appreciate what's going on. But at the end of the day, we still have an opportunity to get you into a home at a 5% mortgage rate or where the consumer -- Our experience, and what I've heard from a couple of the other like Zonda or John Burns who've been talking about that sweet spot, kind of like a 5.5%, which is very consistent with what we -- 5.5% mortgage rate, which is very consistent with what we've been seeing in that we would offer a 5% and the consumer would say, I don't need you to get me to 5%, get me to 5.5%, and let me utilize the additional dollars to help on my closing costs or I want the upgraded flooring or or I want better cabinets or countertops or something like that. I mean the movement up above may not be as startling to people or as concerning to people. Again, there will be buyers who at 6%, the answer was yes, and that 7%, the answer's going to be no. I mean, that's just the reality of it. But again, I think the movement is a more manageable span at 100 basis points as opposed to 300 to 350 basis points.

Yes. Makes sense. And aside from the rate buydowns which seemingly have been most popular among -- with Pulte and peers, what are some of the other things that you guys are doing to kind of make the math work for folks?

There are various incentives, but at the end of the day, it's how are you improving their price? And we've got some buyers, probably more so in the move-up category who basically say, Look, I don't need your incentive. I don't want your rate incentive, give it to me in price. Because they've been through this a couple of times before, they bought and sold homes, and their expectation is, I will be able to refinance lower. I'll come back in a year, whatever the number is, and I'll be able to get it down so I get the best of both worlds. So give me the lower price, give me those types of things. Everybody has their different hot buttons. I mean 25% of our business are active adults through our Del Webb brand. That's about 40% of those buyers buy for cash, so they're looking for something else. I want the better lot. Can I get that? Well, the lot premium is $100,000, maybe we can do for $75,000 or something. So there's different hot buttons but again, as you mentioned earlier, so far, the rate buydown has been the biggest driver.

And if we think about incentives in general, and maybe specifically to the rate buydowns, how sticky do you think these will be? Let's say, rates -- the headline rate were to pull back closer to 6%. I mean, would you anticipate the market pulling back even further on the incentives? Or do you think that buyers are going to say, hey, you guys were willing to sort of bias down 4%?

Yes. Every time every -- whatever the number is, 6 or 8 weeks, you come through an entire new group of buyers who didn't know what was there before. We talked about, on our Q1 call, we've actually started to find opportunities to pull back a little bit on incentives, to push price a little, and I want to emphasize the word little. It might be $500, it might be $1,000, and it's more -- it's as much psychological as it is financial in terms of what it's doing for us with the consumer. So no, I don't think incentives are permanent. And the reality is what we would prefer to do, and it's one of the things, we would like to have fewer incentives and would just get to what the clearing price is. To make up a scenario where you're advertising $400,000, but you've got $10,000 worth of incentives or $20,000. So really, the clearing price is $380,000. You get to the next community, you're probably going to start at $380,000 and have 0 incentives in effect because it's a better selling position than to try to -- how do you minimize the bring down? How do I maximize the increase on the other side? No, I don't think incentives conceptually are required, it's more just finding the appropriate clearing price.

Yes. Okay. That's helpful. One of the big concerns coming into the year was home prices, and there is a view out there that they could fall pretty dramatically. That's held up pretty well so far. How does Pulte think about home prices across major markets and nationwide? I mean, what -- how do you think the resilience of home prices will continue?

Simple question. It's a complicated answer. Tell me what the economy is going to do, tell me what the recession is going to look like, tell me what the Fed is going to do. The reality is when you look at price, when you look at incentives, I mean, they've held up but go back to where we were at the peak kind of mid-2022. And our prices have come in, I mean, the industry's prices have come in. I think you could look at most metrics and people who look across all the builders or just look across the space in total, you can see numbers that are 10% in totality. So prices have adjusted and whether it's price or incentive, I'm just kind of using them for the most part interchangeably. And that's what's enabled buyers to continue to be in the marketplace. As we get into today, again, I think the resilience of the buyer just demonstrates their desire for homeownership and limited inventory, as you talked about, of existing housing stock. There was a lot of concern when people say, oh, when rates rise, nobody's going to be able to buy a house. And what's really has happened is rates have risen and nobody is selling a house, which for us, it's been okay.

Yes. Okay. And then let's maybe translate that in the effect thereon to land prices. Land prices have also been pretty resilient. But if we couple that with our earlier conversation where maybe there's some stress coming in at some point for some of the smaller private builders, I mean, has Pulte seen any sort of discounted or distressed opportunities for land in the market?

No. I'll expand on it a little bit, but I mean, that's just reality. Really haven't. And you maybe -- we walked around -- walked away from, I think it was north of 60,000 lots that we had under option last year. Other builders did the same. So you've seen some of those deals that maybe have come back around. It was originally with this builder and now, it's come back around and maybe there's some opportunity. Probably been more around time. We don't need this June 1 because sales were a little bit slower. We need January 1, 2024 because sitting on our balance sheet doing nothing is an incredible killer of return, and that's what we focus on. So you've seen some opportunities have been the one-off deals where, yes, somebody walked away from it, it's being shopped around, there's a note attached to it that they've got to pay off, but not enough really to move the needle, so it is more opportunistic. And then you roll into 2023 and everybody heard the builder say, yes, you know what, Q1 was better than what we thought. And the land sellers are -- like my German shepherd, their ears perk up and the head tilts over and goes, wait, what? And all of a sudden, if you think that price was going down, now they're just drumming their fingers going, we'll wait.

Right.

So -- and it will be -- that will be the challenge. We own what we own for 2023, and it's not just Pulte, it's the industry. We've got most of 2024. The question will be for builders who have a shorter land pipeline. What do they do? If prices don't come in on the land side, their selling prices have come down, how do you make the math work? And I think this is where you'll get some of the interesting dynamics in this industry as people look out of their horizon and try to figure out how do I solve for 2020 -- late 2024, 2025 and beyond.

Yes. Okay. Makes sense. Let's talk about cycle times for a minute. How are they looking? Any improvement? And maybe where are the bottlenecks right now?

So just for perspective, pre-pandemic, if asked was at our -- our cycle time was about 90 days. Peaked out at north of 170, so borderline doubled because of supply chain disruptions and other challenges. As we got through Q1, I think we would probably have quoted you a number that says we're certainly below 170, probably getting back towards 160. So we picked up a couple of weeks, and would tell you that supply chain for the most part is functioning well, and I mean, specific to materials. We can talk about labor separately, but from a material standpoint, there are a couple of bottlenecks on some specific electrical components, transformers. The multiunit meter boxes that go into condos and townhomes and things like that. Their lead times are just -- their 12 months or longer type of a thing. And so if you have not ordered that appropriately, you've got -- you can run into an issue. But for the most part, on the material side, you can get it, you can get it in a reasonable span of time. You can get what your ordered. For a period of time there, you ordered 100 and you can get 80. So I think generally, the supply chain is functioning well. The question we think about is -- if is it in part because we're just asking it to do less. And so now if business does start to accelerate from here and now, instead of asking for 100, everybody asked for 120. Can it keep up with it? And there's nothing structural there that says it can't. There's nothing -- and one of the issues, for example, with windows in the pandemic, you just had -- there were no people in the plane, everybody was at home, and so those things aren't coming back. So I think we're pretty optimistic that, that piece can continue to serve the market. Labor is a little bit tight. Labor has been and will continue to be a little bit tight. The demographics and the population just seems to be dictating that, so we'll have to see if they can rebuild their crews and everything. But generally, as I said, our cycle times are getting shorter. We won't get back to 90 days in 2023. We think we can make some progress in it. But now, we'll start talking about can we get there in 2024? And the opportunities for us, primarily -- more particularly on the cash flow side, and we've got probably in excess of $1 billion hung up in excess WIP that we don't need to -- that won't need to be there if we can get our cycle times down.

Yes. That makes sense. Okay. All right. Let's talk a little bit more specifically about Pulte. You guys have talked about sort of a reversion to the mean in regards to the spread between your entry-level, active adult and curtain sort of move up. And I think you alluded to the fact that it was maybe more of an entry-level kind of coming back down. But maybe help us with the dynamics with each of those segments? What is the -- what are the margin profiles look for them? And how has that changed?

Sure. Again, reference point being pre-pandemic, we could see 100, 150, 200 basis points between first time, and move up and gross margin. And then you could see another 150 to 200 basis points between move-up and active adults. so this could be a pretty big spread. And while we -- while people tend to focus on gross margin, we focus on return. And so you can certainly generate appropriate returns. In a first-time buyer or a first-time community, what you're typically going to see -- what you would typically see is smaller gross margins, faster absorption pace. So certainly compensative to create returns. As you moved up the price point, you were probably going to get a little bit less volume, but you got better gross margins, so again, it could drive great returns. What happened during the great run-up in pricing, if you were a spec builder, first-time oriented, you were holding your spec to the very end until it was completed and maybe a day or 2 after that, and then you would be able to sell and you saw everybody's margins accelerate. But now, what you're starting to see is more typical, at least what we started to see in the quarter, where you're starting to see, yes. Your first time margins are not quite as good, but your absorption paces are fine, and you're starting to see -- when we said that we're starting to see a little bit of a spread, it was like, oh, is everything going up? It's no, it's just you're starting to see first-time come back in a little bit, and that's fine. I mean, that's traditionally how you would have expected it to operate. It's one of the reasons why at Pulte, we do focus on serving multiple buyer segments. 40% of our business is first-time but there's 60% of our business then that's move-up and active adult, 35% move-up to 25% active adult, That just generates better gross margins for us. And I think prior to the pandemic, we were 200 to 300 basis points higher on gross margin than most of the peer set. I think you've seen some of that separation and seeing some of that spread reappear again.

Yes. Yes for sure. Okay. And then some of the Western markets, it seems like there's still a little bit of a demand challenge across some of the markets. Maybe talk about Pulte's presence there? Where they're seeing any challenges? And in those markets that are perhaps a little bit more challenged, are you seeing any signs of stabilization?

I don't think there's a demand challenge. I think there's a price challenge. That's what the issue is because people still want to buy houses. Yes. Our West part of the business would be kind of Arizona, Nevada, New Mexico and then go all the way over to the West Coast with California, Oregon, Washington. I think you've seen some improvement in kind of the Arizonas and the Nevadas of the world where you didn't -- it certainly had price volatility, but the absolute price is just very different. You still have challenges in places, tech-heavy markets. Bay Area, Seattle, I know we even -- bring that down just specifically to Austin, which is another tech-heavy area. We saw a tremendous run-up in those markets, and particularly in California, Oregon and Washington, where land availability is just so tight and it's just exacerbated things when demand gets strong and everything runs back up, I think we're still kind of in the discovery mode. I think most of the way through it in places like Arizona and Nevada, but we're still finding our way through it in Seattle and in Portland. Again, I think people still want to buy houses. It's just you have to figure out an affordability equation for them on a price point that's probably averaging $1 million for a first-time buyer product.

Yes. Okay. And then if we think about just that demand piece in general, broadly, how would you characterize demand as it kind of we progressed through the first quarter? I mean did you see gradual improvement or any standout months? And anything you can give us on the progression past the first quarter, if you can?

I give you in the past the first quarter by 3 weeks because that's where we reported our earnings, and that's about it. No, we saw -- as I said, we saw a pretty normal seasonal build. Each month got better than the one before. Our absorption pace is in terms of on a per community by month, Borderline spoton, what we had been doing pre-pandemic. And that's why I said it felt kind of like a normal market continue to see strength in through April, again, consistent with what you'd see in the normal seasonal market. And then you've certainly had other builders who've come out and said, yes, it's continued. So I think we all operate plus or minus in the same environment.

Yes. Okay. And then going back to your earlier comment about 40% is Centex, 60%, some of the move up in other brands. If we look about how the base -- those groups kind of performed in the first quarter, I think the first time was up 18%, active adult was -- and active adult was about -- yes something like that -- does that make the case where spec or Centex in general will become a bigger part of the business? Or is it just kind of you're going to move with where the market is going?

I think what it reflects is that Centex in Q1 or first-time in Q1, more community count, and it's where our spec inventory is. And to the degree that consumers were focused on buying it, that's what you're seeing. And it -- we've stated for a number of years. We wanted Centex to be about 40% of our business. Ryan Marshall became CEO -- 2016, I think? We were at that point time, I think we were about 30% first-time. And just said look, if we look at the market, the market in totality, including existing, about 40% for the first-time so that's what we moved to. So in any given quarter, could it be 43%? Could it be 39%? Yes, it will bounce around a little bit. But strategically, we will be looking for that to stay plus or minus around 40% of our business, and on a go-forward basis, it will lease back. When you're there trying to find a price point for that consumer, how do you get to that lowest or how do you drive efficiency? Standardized product offering, limited option, and you're kind of line building. You started lot 1 and you just work your way down the street as a way to drive affordability for that consumer. You have 1 or 2 options to let people personalize it, but on a go-forward basis, it will be spec for us. But generally, I would tell you, the market was -- across all the buyer segments, well I appreciate they were down. It felt pretty good.

Yes. Okay. Let's talk about the cancellation rate. It seems like stabilizing, which is a very good thing. How would you characterize sort of the health of the backlog, if you will? I mean, did the backlog feel pretty good at this point?

It does. What you saw as you got through 2022, you had people who -- especially because I see -- put the combination of really long build times and rising interest rates. So you bought a house in March, and you signed a contract and your rate was 3.25%. And then by the time you closed and it was November, and the rate was looking at 6.25% or higher. And all of a sudden -- and you knew what was happening, you were just hoping you could figure out something and you'd work with the builder and you try to get it to close, and what you saw was they couldn't. You saw a big cycling through which drove the high cancellation rate, and it's -- as most people calculate the do can rate against, it's against sign-up. So you had big backlog cancellations, you had limited sign-up pace out in front. Yes, I think as we got through that, so you've cycled through all those people. And now if you're buying a home, you're -- the rate that you're seeing today is going to probably be plus or minus what you're going to see when you get to closing. Yes, I think you would expect a lot more stability as you move forward.

Okay. That makes sense. You guys took the production potential outlook from 25,000 up to 27,000 to 28,000 homes. How much of this is attributable to more specs? How much is attributable to just improvements in cycle times? I mean, how would you kind of frame that, the -- all of the above?

So as we sold more houses than we had anticipated, we have -- we had put more starts in the ground in response to that. And then yes, we saw an improvement in cycle time. And if you just think about it at 25 -- at a production run rate, when we first said 25,000 a month, it's 2,000 closings. I mean, so it's meaningful. So the combination of a good start to the year, our willingness to put starts into the ground and then the improving cycle times. Now the reality is, though, it's kind of -- and people always -- because we get always, is that your capacity? And the answer is no. We can build more houses but at a 6-month build cycle, it's kind of what you get in the ground by the end of this month is what's going to be available. And that's why we tried to put some information out there, which is a little bit different than how we phrased it before, which is this is the universe of delivery that we could have based upon the idea that we still have to sell some houses and we know what our start cadence is, and we think this is what we'll be able to deliver. This what will start and anything that gets started after July -- excuse me, after July-ish, that July 1-ish, that's a 2024 delivery unless we continue to see improvement in cycle times.

Yes. Okay. One of the things I think that it's -- about many that separate Pulte is sort of what we think is a forward-looking view on an acquisition you made for an off-site construction acquisition that you made. And I think -- I guess the question is, labor is clearly tight. Doesn't seem to be a real solution there. There's been a lot of supply chain challenges. It's still continuing to this day. I mean, where does Pulte see off-site construction going over the next 5, 10 years?

I can see -- I'll tell you what we see it. For us, ideally in an end state, we would have probably 8 of these plants. And understand, ICG is the platform. We bought it in Jacksonville. We opened it up in Jacksonville, Florida. We opened up a new plant in Florence, South Carolina. We've actually struggled. It was interesting, one of the dynamics you saw -- because everybody had to order everything from Amazon, and every inch of warehouse space across this country was being bought up for exactly that, for warehouse. There are some specific things we need in terms of a warehouse [ burn ] and stuff like that to be able to bring in train cart loads of material. But it made it really, really hard to find new plants. But -- and so within the plants, initially it is wall panels, roof trusses and floor cassettes. So if you think of the shell of a home, we've got some longer-term opportunities. But right now, that's the focus of it. But ideally, we'd have about 8 of these plants being able to service about 70% of our business, improve construction cycle times, better quality. I mean, you're talking about automated equipment, laser guided everything, reduce waste and just greater overall production efficiency. Now in these plants, we actually will sell to other builders at points in time as a way to kind of level load the plant. So there are -- one of the challenges we ran into before, because we've been in plant production before, is in a cyclical industry, how do you size the plant? Well, if you're willing to sell to other builders, the idea is we can make up a number. It's a 2,000 units capacity, we could take all 2,000, we can take 1,500 and sell 500 and those types of things where you can kind of continue to make sure you're running the plant efficiently. But when you look out over time, and again, it's not meant to be disrespectful to anyone. There aren't a lot of millennials who want to come into the construction industry.

That's right.

And there's a mismatch because historically, you could help solve this with immigration, but we can't figure this out. We've got people who want to work and we won't let them, and then we have people who don't want to work when we need them. But at the end of the day, how do we build more houses going forward with a workforce that doesn't seem to be moving into that part of the business? And that's what we're trying to solve for.

So would the goal ultimately be to be able to service closer to 100% of the volume?

We won't get to 100% of our volume. If you think about production, manufacturing, whether it's cars or houses, you want long runs of standardized production going through it. One of the pieces that probably goes under the radar a little bit to get to off-site manufacturing, we spent a lot of years coming out of the Great Recession skinnying down our product portfolio. So you reduce the number of floor plants as you build, optimize those floor plants for material content and ease of constructability, and then you just build them a lot. We delivered probably 80% of our volume last year from about 500 of what we call commonly managed floor plants. You have to do all that work to enable the plan because if you think you're just going to run unlimited variation, it's going to blow up your plan. So there are parts of our business, particularly in the Bay Area, in D.C., things where -- or in New England, a lot more attached, a little bit more -- less standardized because it is site-specific. So we -- that's why I think we can get to probably 70%, 80% of our production. But the plant -- we won't put a plant that would be a position because again, you can only go 150, 200 miles in terms of distribution. So you probably wouldn't put one close enough to get to Seattle and the Bay Area given the variation in it. So no, we'd never get to 100% of our production, but we'd be able to serve a lot of really, really big high-volume markets.

Right. And if you think about just the market for off-site construction, there's been 2 of the larger sort of, I guess for lack of a better word, independent manufacturers that failed, frankly. And if we think about Pulte's positioning here, I mean, is the big advantage the ability to have sort of an installed base of homes that are going to be going through that? I mean, what separates what you guys are doing, you think than what happened with the other 2?

You want to know where some of the equipment from one of those sales companies is right now?

Is that right?

Yes, sir. Because one of the other challenges we ran into in supply chain was getting the equipment that needs to go into the plant. But if you scratch it off and you look underneath, it's -- Yes, it's basically the installed -- the committed base of demand that's going into it and where we locate it. And so its ability to service hours, you've aligned it. So we've given it -- in effect, you're putting dedicated volume through it and you've sized it appropriately. One of the issues, it's just hard in this country, we love variation. I want to be able to put that window over there, and I want to make it arched instead of square and all those types of things, which is the bane of manufacturing. And so you really just have to make sure you've aligned what you're going to service through that plant. And it is going to be panels that are very standard, it's going to be roof trusses that are very standard. But you also -- it goes back to where we said before, you have to make sure you align the size for the volume and for the dedicated capacity, and that's what we can bring in. We can bring in our volumes, we can supplement it with other builder volumes, and we just make sure we size it correctly.

Okay. Make sense. All right. Moving on to community count. The target is 5% to 10% growth this year. How should we think about the ability to flex that up if needed or if demand is better, if there is an ability to do that? Or to pare back if demand slows? And then maybe on top of that, what is sort of the mix of that community count coming on?

It will look a lot like what we have today. Again, I'll answer the front part of your question first. There is zero-ability to flex it. If we would -- if it's in flight to open this year, we will open it. You can't open them any faster. If anything, I would tell you we're going to be a week late on every community opening more so than a week early in community openings. If the business slows, we're still going to open it. We've already got invested capital. Now it's not just raw dirt, now it's developed, so that 5% to 10% is pretty reliable. The only -- the delta being probably more around if business were to slow a little bit, and we just didn't close out community as fast because when we talk community, it's a net community count. So you've got whatever you're opening less -- whatever you closed in that period of time. And really, what it does, it reflects land spend 18, 24 months ago. I mean, so if you want to get a sense and while there can be a little bit of movement based on geography because the dollars are different in California than in Texas, for example, just look at what we're doing on land spend. And as land spend increases over time, your community count will likely increase over time. If you see that land spend is shrinking over time, your community count will eventually follow suit.

Okay. And then let's talk about that, the land spend. You guys just took up that target this last quarter. I guess, is that a function of the better-than-expected demand for one? And have you seen other competitors in the private and public space sort of following suit?

Yes, it's reflective. Our increased land spend is in reflective of improved demand environment and just our expectations for what we -- how we -- our view of the marketplace in general. And again, recognizing that the dollar we put in today, realistically, you're talking about 2025 by the time it's really going to be selling homes on it. But yes, so it's reflective of that. Are we seeing other builders in the marketplace Yes. People are out there. They -- this goes back to some of the earlier conversation, what will you do when you are starting to chew through and you're chewing through your land pipeline faster? So some of the -- our land spend is acquisition and then some of it is just developing dirt, because we are burning through our assets a little bit faster than we thought we would be doing as we came out in 2023 -- excuse me, as we came out of 2022.

Yes. Okay. And maybe talking about capital allocation here a bit more, $1 billion increase to the share repurchase authorization. You guys historically have been very solid purchasers of your shares, for lack of a better way of putting it. Where is share repurchase -- where does share repurchases fit in right now? I guess thinking about it.

Our capital allocation priorities have not changed since we set them over a decade ago. First and foremost for us is to invest in the business. We talked about -- you referenced the idea that we're going to put, what did we say, $3.5 billion to $4 billion in our business this year. Again, assuming we can find high-returning projects. We have maintained and have grown our dividend for now, again, for close to a decade. Now the reality is that the absolute payouts, about $140 million, plus or minus a little bit because we raised the dividend, we've actually been shrinking shares. And then we return excess capital to shareholders principally through share repurchase. We bought back 45% of the company in the past decade, so I think we've got as active a share repurchase program as anybody in this space. One of the other things we've kind of looked at is with when rates have risen. We do have some debt outstanding. Can you make economic sense to maybe buy in some of that? The other side of that coin though is at 18% dense cap, we're kind of underlevered. And our CFO, Bob O'Shaughnessy, would tell you it becomes a little bit of a lazy balance sheet if you get that too far. But at the end of the day, you know what, we are in an incredibly strong balance sheet position. As we talked about, as cycle times improve, our cash flows are going to be pretty stout. And then the worst of our worst days, what are we going to do with all the cash? We won't -- we would certainly won't let it burn a hole in our pocket, but we're not afraid to if we have to carry a little bit extra cash to that. So what I think at the end of the day, I would ask people to take way, we have incredible flexibility to take advantages of what develops in the marketplace. Be it the business -- the homebuilding marketplace or the financial space.

All right. It's about all the time we have Jim. Really appreciate it.

Thank you for your time. I appreciate everybody listening today.