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

All right, everyone, we're going to try to keep it on schedule. So I appreciate you joining us for the 9:50 session. I'm thrilled to be able to welcome back PulteGroup to the Raymond James conference. My name is Buck Horn, the homebuilding and housing analyst for Ray Jay. To my left, I've got Jim Ossowski, the CFO of PulteGroup. We've also got Jim Zeumer the Chief Investment Relations specialist and thrilled. I mean, Pulte is the third largest homebuilder in the U.S., I'm sure many of you are familiar, but also one of the most successful in terms of the profitability metrics, consistent performance, consistent returns of capital to shareholders, best margins in the space or best-in-class margins in the space that have kind of preserved through this housing down cycle and we think are poised for a lot of improvement or well, certainly, profitability can improve quite a bit if we get some relief on the mortgage rates and some other things that could go in the demographic direction for housing. So I'm going to turn it over to Jim. He'll do a presentation, and we should have plenty of time for Q&A. So with that, Jim, I will turn it to you.

Thanks, Buck. That's a drop to mic moment you took all my thunder, but yes, PulteGroup. We're a premier national builder. Our operating margin is best-in-class in the space. And what I'd tell you is even more important. We have a relentless focus on generating high through-cycle returns for our organization. So I'm going to touch on today some of the different things that we believe differentiate ourselves as well as our key strategies and priorities that we believe deliver long-term shareholder value. In the past year, since I took over this role as a CFO, I get asked from time to time, what's the secret sauce for PulteGroup to generate long long-term shareholder returns. What I would tell you, it's interesting, if you look back over time, historically, for many years, we thought it was to be the biggest builder with the highest top line growth. However, back in 2011, we took a really good hard look at our organization and our results and what we determined was what really drove shareholder value were returns. And so coming out of that moment, we created something called our value creation initiatives. And it was really about what can we do to improve the returns of our organization and more importantly, how do we operate our organization day in, day out. What I'm happy to say is 15 years later, those value creation tenants are still part of our DNA, and I'm going to get into those in a couple of minutes. So we call this our value creation formula slide. There's really 3 ingredients to it, and I'll try and move through some of these quickly and dive into them in future slides. It really starts with our disciplined land underwriting process. When we look at it, we created a proprietary model that looks at returns for every single transaction we're going to evaluate. It creates a common language from our field operators up to our home office and our corporate team that approves it. And really what I tell you is most important is we look to mitigate risk in our underwriting process, but more importantly, we underwrite to returns. We compensate our operators for returns and we really get alignment around that. The second ingredient, I'll talk about design and build process. Really what I tell you is we have a very targeted segmentation strategy and we talk about it often. Both geographically and in the consumer segments that we attack and that we go after. The other one that we'll touch on a little bit later is our build-to-order model. There's always a balance, are you a build-to-order builder, are you a spec builder? We think we've got a really good healthy balance between that as we serve the different consumer groups that we go after. And lastly and most importantly, the third ingredient generating and allocating cash, I would tell you that this is probably one that we didn't spend as much time 15 years ago talking about. But what we talk about all the time today is we're like -- we need to generate significant operating cash flows to reinvest in the business. And after that, we look for things like growing our share dividend as well as looking at share repurchases, which we've done very consistently for the past decade. Looking at our underwriting, I'll boil it down. It's pretty simple. Really, what we do is every transaction we look at, we create a risk return threshold for that. And really, if it's a riskier transaction, it requires a higher return. And so really, what it does is it drives kind of a consistent message from both our corporate office all the way through the field. And so if you're an operator in our markets, and you're trying to do a new land deal that you want to buy, you're kind of balancing the risk and rewards. And again, it's striking that balance of getting the best deal you can to drive the highest returns for the organization. And really, the most important thing is the field teams or our operators are the ones buying the property, but it needs to be approved at a corporate level. And so again, we get buying all the way up and down the food chain. Sticking to the front end of the pipeline. One of the things I always say is land is the lifeblood of our company. It's really where it all begins. And so when you look at our organization, we've got a very healthy pipeline. We have about 235,000 lots we control, a little bit under 60% of those are under option. And so when we talk about how do we approach the land market, we look for optionality with underlying land sellers. It's about 80% of the lots that we have under option or with those. And really what we talk with our teams a lot about is it's not only about generating the highest returns that we can get but it's a risk mitigation tool. The best thing about having a healthy land pipeline is that if the market is in a good spot, you can very easily lean into it and take advantage. On the other hand, if the market is a little bit softer, you can pull back from the investment. And so that's something that we had to do in 2025. And so again, I think we've got a very healthy mix in our land pipeline.

[indiscernible] It's a great question. So typically, you can go ahead and you can get an option, it's between a 5% and a 10% deposit. So if you'd rather, would I rather own 500 lots that I'm going to monetize over the next 5 to 10 years, would you rather walk from a 5% option, I would rather walk from a 5% option if the market is a little soft. Geographic diversification. So we're going to talk a little bit about both geographic diversification and consumer segmentation. From a geographic, you can see we're spread out around the country. We have over 1,000 communities that are open today in 47 different housing markets. And so what I would tell you, what we like about this diversity is that each market ebbs and flows over time. And so if I rewind the clock a couple of years ago, our California and Texas markets were some of the strongest markets that are out there in the U.S., they were a little choppier in 2025. And so the good thing about it is we have a very healthy Florida business, Midwest business and Southeast business, kind of picked up the load last year. And so again, I think sometimes people said, "Well, why don't you invest more in Florida? Why don't you invest more in California, for example, what we like to say is we like to be balanced. Because again, you're never going to be able to predict the ups and downs and so diversity and our portfolio is very important to us. Buyer segments, there's really 3 different buyer segments that we pursue. First one is first-time buyers, and we have move-up and active adult that I'll touch on in a minute. That first-time buyer was about 38% of our business in 2025. It's the deepest part or biggest part of the overall market. But with mortgage rates going up, affordability being stretched, it's been a little bit harder in that particular part of the market. So what we always talk a lot about is when we go after that segment, we need to be nimble. We need to have financing incentives for those consumers. We need to have inventory units that are ready and available for them to move into. So this is a part of the market that if you go back kind of pre-COVID it was about 30% of our business. We've actually increased that over time. And really, what we do is we like to index that to the markets that we operate in. So first time is a little bit choppier now. But in a couple of years, it could be the strongest performing segment that's out there. So we'd like to be balanced, and we never like to starve any one of our segments. Our move-up business. So about 40% of our volume last year came from our move-up business. This is typically under our Pulte brand. And I would tell you that this has been Pulte's bread and butter for many, many decades. We serve move-up consumers, family buyers who -- they worry about things like the location, schools, these are consumers that have more financial wherewithal than that first-time consumer. And so we've taken opportunities in this space. I would also tell you, one of the things that we like to do in this space is we talk about our build-to-order model this is where a consumer can come in and they've got choice. They want to pick out a particular lot. They want to go into their home. They want to pick their counters, their cabinets and their flooring. And so we offer them opportunities. So again, this has always been what Pulte has always been about and we serve it very well. The last segment is active adult. So this is a little bit over 20% of our business last year. This is the highest margin part of the business. Almost 50% of the customers who buy in our active adult space are paying cash. So they really pay attention to things like the stock market. They know what they want. It might be the last home that they ever purchased. And so we've got a phenomenal brand. I'd argue it's the most powerful brand in all of homebuilding under Del Webb. It's been the leader in this space for 65 years and through our Del Webb brand, we've always gone to market in its age-restricted communities, that are 55 plus. And so again, this has been a very attractive one. And even through 2025, when you read a lot of the headlines about first-time business or entry level being a little choppier. Our active adult business performed very, very well last year because these people, again, have the financial wherewithal. And I'd like to say I'm actually a Del Webb homeowner myself. So before I leave segmentation, I'd be remiss if I didn't take a seconds to talk about the evolution of Del Webb. So what I mentioned earlier is Del Webb has been geared for age-targeted communities that are 55-plus. What we've done is we've looked at that same concept, and we've expanded it now. So we've got what we call our Del Webb Explorer communities. This is targeting a slightly younger age. I think 45-plus Gen Xers, they still want amenities, they still want lifestyle. But what they've said is, look, we want an all-ages community. And so we've introduced a couple of these already, and we really see this as an opportunity not to take away from the original Del Webb business that we always do, but we view this as supplemental in the coming years. Balance sheet. So one of the things we talk about Pulte, I talked about it earlier, strong operating cash flows. We have a rock solid balance sheet. We've got low leverage. We've got investment-grade ratings. We've got a really strong cash position. I think what we always talk about internally is, look, leverage is an output of the decisions that we make. And so if we want to increase leverage, we always could do that if needed. But again, we're in a healthy pipeline. We feel like we have the opportunity to do everything that we need to do in our business today. And when we talk about what we spend money on in our business, first and foremost, I said it earlier, we want to reinvest in our business. We want to have a healthy land pipeline. We want to put our money to work. We want to put it into high returning projects that we can put under contract. And after that, we talk about things like we want to grow our dividend, and we want to have money available for share repurchases. So over the last decade, we've repurchased about 50% of the company or a little bit over 50% of the company. And so again, that's something that we've been very consistent, and we will continue to do. And Buck, I will wrap it up for any questions. But if you ask yourself why invest in PulteGroup, I've gone through a lot of them. I always go back to when I think about the strategic priority for our company, we talk about things like we want to generate strong operating cash flows. We want to have high returns on equity. We want to have a responsible balance sheet, and we want to profitably grow over time. And so that's part of our DNA. It's what we talk about all the time. It's done well for our shareholders, and we will continue to do well for our shareholders. So Buck?

All right. Jim, great overview. Great start. We should have plenty of time for questions as well. So if you guys want to queue some up, feel free to chime in. But let me start with the mortgage rate outlook is starting to improve, finally. We've got, it feels like 5 handles and starting or getting close to 5 handles on mortgage rates. We'll see how that stimulates some demand. I was wondering if you can talk through a little bit of what works in terms of the incentive structure that you guys are rolling out? How do you adjust that if mortgage rates do roll a little bit lower? What kind of differentiates what you guys are doing versus some of the peers that are really rolling heavy these mortgage rate buy-downs? And just talk us through that strategy?

Well, it's a great question. And mortgage rates are important. And I've heard other people say this and I use it a lot as well. Mortgage rates are as much mental as they are math. I think for the normal consumer that's out there today, they may not know what a mortgage rate is. They may not know what their monthly payment would be. But if you start to hear things in the news like mortgage rates have started to go down, you hear about it. You go out to dinner with your family and friends, and they say, "Hey, now is a good time to buy because mortgage rates have gone down, your wife's elbowing over there saying, our house is too small. I told you I want a new house. I think those are the kind of things that if you have a good healthy mortgage rate environment that's going down, and you've got a good employment. You've got a good job base and you feel comfortable in your job. That's all good news. You can almost see that as mortgage rates come down and it starts to get in the news, you'll see a little bit more foot traffic come into your communities. I would tell you that mortgage rate or buydowns are important to our organization, but maybe not as much as some of the competitors. So if you think about it, I showed some of the slides. Over 60% of our business today are move-up consumers and active adult consumers. And so they have more financial wherewithal. I said, Del Webb, consumers 50% of them pay cash. So when we get into like mortgage rate buydowns. Our buyers, we have to figure out how do we get them across the finish line, how do we solve for their monthly payment. We don't have to get as aggressive. We -- everybody asks us as mortgage rates go down, you keep buying rates down further, we really don't. We've been very static. And what you end up seeing is, look, you can stick a little bit of money into your pocket. You can use it for other incentives. A lot of customers really like when you say, "Look, I'll give you $5,000 to go pick options out of your community. So we just kind of move around the incentives in order to hope get the monthly payments solved for them.

What is the kind of the sweet spot for that entry-level buyer that you typically see nationally? What gets them most often over the finish line?

Everybody, here's, yes, every consumer is slightly different. I would tell you that what we've talked about for the past year, and it still holds true today, if you can get consumers in the 5s and so pick a number, if it's 5.25, 5.5, if you've got a good employment status, you feel good about it and you can get into that 5.25 to 5.5. Feels like it kind of fits the right balance, you can get consumers across the finish line or across the threshold.

Yes. It feels like we're -- it's interesting you mentioned how Florida has held up, you're seeing some signs of strength in Florida. We look at Florida and Texas kind of -- I kind of think of them as canaries in the coal mine to a certain degree because of the COVID inflow population. I mean post-COVID, Florida and Texas, we just saw just massive inflows of population. And we saw the builder response to that with aggressive new starts and entry levels. We saw a ton of housing starts. But now we're starting to see a little bit of differentiation, maybe it feels like Florida is coming out of it, maybe a little bit faster than Texas. I'm just wondering what you're seeing on the ground in terms of what differentiates those 2 regions of the country?

Yes. It's a great point. And if you've looked in the last 12 to 18 months, there's always headlines about Texas and Florida. And it's interesting because even within -- I'll start with Texas, and I'll pivot to Florida, which has been very resilient for us. Even within Texas, you've got different markets. So you've got an Austin market. They have a lot of in migration and tech space there. There have been resetting of prices there. You've had Houston that's more affordable, Dallas, you've had a lot of like IT jobs that are there. San Antonio has been different. So even within the states, it's different. So I would tell you that what we started to see in the back half of '25 is you started to see some of those Texas markets get a little bit stronger. We started to see some green shoots come out in places like Dallas and San Antonio. Florida is an interesting one because everybody talks about Florida and they talk about the amount of inventory that was out there in Florida. And I would tell you that a lot of that inventory were probably occasions where we weren't building. They were a little bit farther out, a little bit more affordable. Our Florida business has been the most resilient of all of our operations in the past year. And we have a really healthy move-up business and we have our active adult business. I said, if you go back to what I said earlier, those are consumers that today as a star market expands, active adults feel much more comfortable with their nest egg. So they might be willing to transact in a move-up buyer who said, "Look, I bought my house in 2018. It's appreciated 40% over the past so many years. I can sell it. I have more equity in it. They're not as impacted. And so our Florida business really well. And again, I look at places like Orlando, Fort Myers and even the Tampa area, they've been very strong for us all year.

Yes, yes. Fantastic. Speaking of land, I'm curious if we're seeing any signs that land sellers are starting to negotiate a little bit more, are you finding any pockets of price relief or extending terms or deals and -- maybe just talk through like you said, you -- Pulte's made a very intentional decision to stay very close to population centers and premium locations and kind of paying up for that. But -- how is the kind of the A-ring versus the B-ring C-ring? How are things playing out in the land market right now?

Yes, it's a great question. I always say land sellers, they have long-term memories. So they know that you saw -- you bought a piece of property from Jim a year ago at $200,000 of the acre and Darnet, my property is better than his, so I want 2.25%. I would tell you in the land space, what we saw in 2025 is you started to see some land owners get more open to it. Typically, what they're usually willing to do is if you approach them and say, "Look, I've tied up your property, I've entitled it. I'm open today. They usually give you time. Time is our best friend when we're going through that because the seller at the end of the day says, if I have to throw you off of the dirt and walk from it, walk from my contract, I have to go find somebody else, that's going to take a year, then they're going to entitle it. And so usually, they'll give you time. But even this year, we saw land prices start in 2025, you started to see some opportunity on land prices. What I would tell you is if you have an A+ cherry on top locations, you're not seeing the movement there. But as you start to get to the B-rings or even the C-rings, that's where you start to see land sellers get a little bit more opportunistic and more willing to play the game with you.

Yes. And you mentioned you still have a target of getting up to about 70% of kind of land optioning. How do you get to I mean, is there enough traditional land or I guess, core land sellers, but where do you have to pivot to land banking in a larger fashion. How do you think about land banking fitting into the equation?

It's a great question. If you go back maybe 5, 6 years ago, we used to be about 30% option. We got ourselves up to about 50% options a couple of years ago. And what we said was we started to feel a resistance point where every deal that we go into, we want to negotiate an option with an underlying land seller or a landowner in a market. Why? its most flexibility, usually smaller deposit requirements to your question earlier. And so those are the most ideal. And the good thing about it is about 80% of the lots that we have under option today are with underlying land sellers. It gives you great risk mitigation and it's capital efficient. But we have had to supplement it with land bankers. And so those are transactions that we look at. And when we approach them with land bankers and say, how do we get from 50% up to 70% in the coming years is what we want to do with land bankers is, first and foremost, you can get some capital efficiency off of it. But we want to make sure there's risk mitigation. Because at the end of the day, if all we're doing is paying for financing charges, we can go out and borrow a lot cheaper than that. But if there's true risk mitigation and even in a land banking transaction, if the market is not in a good spot, I want to renegotiate with that land banker. I don't want to see if there's opportunities to either get additional time or potentially change the price. So that's the way we do it. So we've got about 7% of our overall lots that we control are about 16,000 lots are under land banking. And so as we look over the next couple of years, we want to increase that. The one thing I would tell you, though, we don't want to be myopic about it. If tomorrow, I said, "Hey, let's turn into a 70% option book. We could do that, we could find people willing to loan us money and help us, but we're not looking for that. We want to look on a deal-by-deal basis, how do we programmically continue to increase that percentage.

I want to make sure there's time for any questions you guys want to chime in? Anybody having a. Yes.

Just as a follow-up on the [indiscernible] from the land sellers point of view. [indiscernible]

I mean it's interesting -- it's interesting. You would think everybody would say, no, I want my cash today. I want it now. I want to cash out of this, but what you find is a lot of the times land sellers, they're very sophisticated and so what they say is, look, I'll sell it to you under an option, but I want a financing component to it. So it's a little bit higher, really sophisticated land sellers, a lot of times what they'll say is, I'm really proud of my land and what I'd really like to do is we negotiate where maybe you have kind of a participation in profits. When you actually close that home 3 years from now with a customer, maybe they get a little bit of additional profit. So it's always interesting. Some of them are motivated, maybe you have 6 family that own a piece of property and they can't get along. They want to close that property now. Sophisticated land sellers might say, look, I'd rather sell it to you over time and they can maximize the value of their asset.

I think there was one more. Do you might have a hand up over here?

[indiscernible]

So there's a lot of talk out there. I guess, first and foremost, it's good that people are talking about housing. It's an important one. What I would tell you is that there's been a lot of ideas that have been thrown out there. I don't think there's any short-term fixes or anything like that. I think as you think of the state of the union in recent comments, I think there's been some positives that risks have been taken off the table. At one point, there was talk of getting more supply into the market, new home supply into the market, which that's not a good answer. That creates pricing pressure for new homes. It also creates pricing pressure for existing homes. And so I think some of those risks have been taken off the table. I would tell you if longer term in the coming years, there's abilities to impact local municipalities, whether it's density or zoning changes that will allow to build more affordable homes, that would really be the unlock. But again, that's probably a multiyear before we get there.

Can you give us some insight into your cost of raw materials [indiscernible]

It is, yes. I mean you go through that supply chain disruption that we had. Things are being delivered out of order. So what I would tell you is that as we look from the middle of 2024 until the end of 2025, our cost per square foot, what we were building, they stayed flat. We were at about $79 a square foot so they held. So I think our procurement teams did a great job looking for alternative suppliers and really squeezing it. As we look at 2026, we've said that we expect our house costs to be flat to slightly down. And so I think, again, our teams are doing a good job. We're seeing some different savings, whether it's in roofing or siding or maybe some of the drywall. So we started to see that start to come down. The other thing that's there is if you think about it from a labor standpoint, as builders slowed their start rates or their production last year, it created a little bit more availability of labor. So that can change on a dime if the market accelerates, but we've seen some opportunity there, not that the trades are being paid less, but probably squeezing some of the profit margins for the owners. So...

Some people that the immigration challenge making the labor situation change haven't [indiscernible]

We have not seen that in any of our local markets today.

[indiscernible]

Sure. So maybe I'll split it into 2. resale inventory, and again, this is hard to describe for the whole country. But I think resale inventory in most locations today is in a good spot. It's not 1 month or 2 months of supply like we had kind of in the middle post-COVID. But I think most inventory is in a good spot. And I think a lot of that is because you have consumers that are locked into their home. They're sitting on a 3% or 4% mortgage rate. And so they're like, well, I don't want a 7% mortgage rate to move. And so I think resale is okay. I would say new home supply has really gotten almost to an equilibrium where you'd want to be in most markets, not all of them. But what I would tell you is that builders ourselves and many others said, look, they slowed their production rate. We trimmed our spec inventory, for example, by 18% year-over-year. So I'd say that we're probably in my book, we're about 500 units higher than I want to be. We can get the last 500 units out. I would tell you we're at a very good healthy state. And I'd say most builders have done the same thing and kind of followed suit.

I want to go back to kind of the materials question. I mean you guys made a decision on ICR and to get out of the kind of the off-site manufacturing business. You guys have put a lot of time and effort into that. So maybe you're seeing some different things or new entrants into that market. Can you walk us through kind of the -- what you're seeing or the change in decision on that strategy? And what's kind of the future of building technology or off-site manufacturing, anything else?

Yes. We're as excited about off-site manufacturing as we were several years ago when we first pursued ICG and we acquired it. So what I would tell you, though, what we've learned over time is, one, ICG has been a great producer for us, high quality, gotten the material to our home sites on a timely basis. So it's been really good. But it's time intensive. There's a lot of capital investment, a lot of time and focus that you have to do. And so as we've seen other entrants come in, they're making significant investments in it. What we decided is, look, we want to take advantage of technology and innovation in this space going forward, but we'd rather do it as a buyer than an owner of it. And so we see opportunity, whether it's with ICG or with other facilities that are out there or other suppliers, we think we can take advantage of that better going forward.

All right. Sounds good. Well, I think we're running on time. So I just want to keep us on schedule. Thanks again, Jim. Great presentation. Thanks again, and we have a breakout session downstairs.

Thanks, Buck.