Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc. Q1 2023 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Jim Zeumer, Vice President of Investor Relations. Please go ahead.

Great. Thank you, Audra. Good morning. I want to thank everyone for joining today’s call. As you read in this morning’s press release, PulteGroup had an exceptional first quarter and we are excited to discuss our operating and financial results. Participating on today’s call are Ryan Marshall, President and CEO; and Pablo Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior Vice President, Finance. A copy of our earnings release and this morning’s presentation slides have been posted to our corporate website at pultegroup.com. We will post an audio replay of this call later today. As noted in this morning’s earnings release, to be more consistent with industry reporting practices, effective with our first quarter 2023 reporting, the company has reclassified closing cost incentives and cost of sales to net revenues for all periods presented. This reclassification impacted the company’s reported home sale revenues and associated average sales price as well as home sale gross margin and SG&A percentages, but had no impact on reported earnings. An analysis of the impacts on the current quarter in comparable prior year period is included in this morning’s press release and can be found in our webcast slides associated with today’s call. Our comments today reflect these changes for all periods referenced. Also, I want to inform everyone that today’s discussion includes forward-looking statements about the company’s expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now, let me turn the call over to Ryan. Ryan?

Thanks, Jim and good morning. Based on the improving demand dynamics we experienced in the fourth quarter of last year, we were cautiously optimistic heading into 2023. I am extremely pleased to report that the market momentum that began building in Q4 continued to expand into the first quarter of 2023. Today’s stronger market conditions, combined with actions implemented by our outstanding field teams to enhance our competitive position helped drive our first – strong first quarter results that included a 15% growth in home sale revenues, a 100 basis point increase in operating margin and a 28% increase in earnings per share. Among the actions we have taken has been to increase our production of spec homes, a strategy we began implementing in the back half of 2022. As discussed on previous earnings calls, we made the decision to increase spec starts as we saw the opportunity to realize a number of strategic benefits within our homebuilding operations. With more units in production, we can better meet buyer demand as more consumers are seeking quick move-in homes as a hedge against rising mortgage rates. By maintaining the level of spec starts, we can commit to a more consistent start cadence. This is particularly valuable in today’s environment when negotiating with our trades and suppliers. Keeping units in production allows us to turn assets more efficiently which is critical to delivering high returns over the housing cycle. The importance of having an appropriate inventory of spec homes available can be seen in our first quarter sign-ups, which on a gross basis increased 1% over last year to 8,900 homes. Of these sign-ups, almost 60% were spec sales, so the decision to increase spec starts was the right one. That said I want to be clear that our strategy is to…

Thanks, Ryan and good morning. As Jim noted at the beginning of the call, we have reclassified closing cost incentives from cost of sales to net revenues for all periods presented. The total incentive reclassified amounts is $81 million in the first quarter of this year and $38 million in the first quarter of last year. This reclassification impacted our reported home sales revenue and associated average sales prices as well as our reported home sale gross margin and SG&A percentages. An analysis of the impact of this reclassification in the current quarter and prior year periods is included in today’s webcast slides. Where appropriate, any numbers referenced in my comments, current, past or future are inclusive of this reclass. Let me now get started with a review of our first quarter results. Home sale revenues in the first quarter increased 15% over the prior year to a first quarter record of $3.5 billion. Higher revenues for the period reflect a 6% increase in closings to 6,394 homes and a 9% increase in average sales price to $545,000. On a year-over-year basis, we realized higher average sales prices across all buyer groups, led by double-digit gains in both move-up and active adult. In the quarter, we reported 6,394 closings, which represents a 6% increase over the comparable prior year period. Our closings for the quarter came in above our guide as we capitalized on stronger demand for spec homes, an improvement in select areas of our supply chain that allowed us to close additional homes in the period. I’d like to take a moment to thank our procurement and construction teams working in partnership with our trades and suppliers for their contributions over the last several quarters. Their efforts during a time of extraordinary market volatility were instrumental to the…

Thanks, Bob. I think there are a lot of positives to be taken out of our first quarter results, including we delivered record first quarter earnings, driven by higher closings, continued strong gross margins and improved overhead leverage. Overall market conditions continue to improve as we experienced strong demands and are finding opportunities to reduce incentives and/or increase prices in many communities. Supply chain conditions are stabilizing, and we have seen at least an initial turn towards shorter cycle times. At this point, the gains have been market-specific but we are optimistic that we’ve seen a high watermark in terms of construction cycle times. Our national and local teams are making strides and climb back construction days, which is critical because shortening our cycle time is an important driver to expanding our 2023 production universe. PulteGroup’s Board approved another $1 billion increase due to the company’s share repurchase authorization. We’ve bought over – we have bought back over 40% of our shares and clearly remain committed to the systemic return of bonds to our shareholders. One other positive I would highlight is that PulteGroup was once again ranked among the Fortune 100 Best Companies to Work for. This is our third year on this prestigious list and we again moved higher, climbing from number 43 last year to number 36 in the most recent ranking. We take fry and being included on this list because it is based on what our employees say about their experience as part of the PulteGroup team. Our success in delivering quality homes and delighting our customers starts and ends with our 6,100 employees dedicated to doing the right thing, taking care of our customers, focusing on quality and lifting the teammates around them. The amazing culture resident of PulteGroup doesn’t happen by chance, but rather it comes from a committed effort by every employee to create a world-class culture. I am extremely proud of our team and I want to thank all of our employees, along with our trade partners and suppliers for their tremendous work in helping to deliver another outstanding quarter of operating and financial results. Let me now turn the call back to Jim Zeumer.

Thanks, Ryan. We’re now prepared to open the call for questions so that we can get to as many questions as possible during the remaining time of the call. [Operator Instructions] Andre, do you want to get the process started. We’re prepared for Q&A.

Thank you. [Operator Instructions] We will take our first question from John Lovallo at UBS.

Good morning, guys. Thank you for taking my questions. The first one is you guys talked about some of the pressure on selling prices easing and the ability to pull back on incentives or even maybe raise prices in some markets. I think 50% of the markets you said – can you just help us maybe frame which markets you’re seeing the greatest opportunity to kind of pull back on the incentives and maybe the markets where it’s a little bit more challenging at this point?

Yes. Sure, John. We’re seeing continued strength in the Florida markets, the Southeast markets in Texas would be the three kind of regions that I would highlight with strength. Our Midwest business continues to be a steady performer. And then in terms of markets that are more challenging, it would really be the western markets, particularly the ones in the – the high-priced coastal areas Northern California and Seattle, probably being the two that I would highlight.

Got it. That’s helpful. And then recognizing that you guys are not a spec builder, I mean, the move-in effort has been – it’s been helpful, and it’s been meaningful. Maybe could you just help us outline sort of your thoughts on that today? Where do you see this going? And will this be perhaps a slightly bigger piece of the Pulte business than it has historically?

Yes, John, I think we’ve demonstrated exactly that. And I think it shows that when we started really talking about this middle of last year, that specifically with the first-time entry-level business, there was an opportunity to have more homes that were sooner deliveries, which help to alleviate – it really helped to alleviate pressure around interest rate, rising interest rates. It helped to alleviate pressure around certainty of when things we’re going to deliver and we made the strategic decision to put more spec in the ground. To your point, we’ve historically not been a spec builder, but it’s never been a 0% of our business. We’ve always had specs as part of our business, but we made the decision to make it a bigger piece. It got as much as high as about 45% of our total work in process inventory with spec. And I highlight that number, John, because that matches up pretty well with our Centex business, which is about 40% of our overall business, which is catered towards the entry-level first-time buyer. So in terms of where it goes in the future, we’re going to continue to – as we highlighted in our prepared remarks, match our spec production with what we think the market demand is. And right now, that’s certainly higher spec production than maybe what we’ve historically done. It’s working for us. And I think this most recent quarter’s results are a great example of how that strategy is working.

Great. Thanks, Ryan.

We will go next to Alan Ratner at Zelman.

Hey, guys. Good morning. Nice quarter and thanks for the time. Following on that last question, I guess, obviously, it seems like you saw a strong demand for the spec inventory you have on the ground. Would you say the momentum you saw in the market overall was similar in your BTO business as well and the skew towards more spec was just a function of where you had the inventory or do you still see kind of currently more of a desire for those quick moving homes versus build-to-order?

Yes, Alan, it’s a good question. I would tell you, broadly, we saw strength in all price points. That being said, there is a higher likelihood of the entry-level buyer transacting at this point in time because they don’t have a home to sell. And so they are not hampered by the low interest rate that they may be hanging on to with their existing home. But look, as we’ve talked in prior calls, life continues to happen for buyers, marriages, more kids, relocations, job promotions all the things that I think create a need for a family and a potential buyer to move into a different home for whatever reason, our move up in our active adult business, they are certainly benefiting from that as well. We are seeing easing of sales price pressure in both the move-up and the active adult segment, which is allowing us to moderately raise prices and moderately pull back on incentives. And I think that demonstrates some of the strength we’re seeing. We intentionally don’t build a lot of spec in those price points. We find the debt buyer group. They prefer to have the build-to-order model. But when it comes to our entry-level first-time SendTech business, we’re leaning in more with the spec first strategy, and it’s working for us.

Got it. That makes a lot of sense. And I guess on that note, if we think about the price point segmentation and entry level seemingly a bit stronger in the near-term. You kind of alluded to this when you talked about the margin differential reverting back to more historical norms where end level is a bit of a lower margin but higher turn business for you. How should we think about the margin going forward, assuming the mix of the business kind of continues on this current trajectory? You guided for margins to be down about 100 bps sequentially, which probably is some of that mix impact there. But can you quantify exactly what that mix looks like today and what it would look like if this mix holds steady here overall for the business?

Yes, Alan, it’s Bob. We haven’t given a guide. There is a lot of moving pieces out in the market. So we’ve got pretty good visibility based on our backlog and the sales activity we’re seeing. The commentary was – if you think about the last several years, there is been sort of a compression in margins. And you saw it both in our results and our peers where some of the folks that were selling entry-level had higher margins than they historically would have – that was based on availability, pricing dynamics, a lot of different things. What we’ve now seen is sort of in our book of business, and I think you see it more broadly in the market, that differentiation in margins between first-time move-up and active adult for us, pretty consistent in the most recent quarter with what I would characterize as the norm from several years ago, obviously, still very strong margins. You can see it both in our results and in our guide. So as you go forward, you heard Ryan say about 40% of our business is targeted at that entry level. That’s a little bit richer than it was 4, 5 years ago for us. That was conscious on our part. And so if you think about mix adjusted over time, we will see a little bit more contribution from a margin perspective, worthing to always highlight we don’t underwrite the margin. We are focused on return. And you made the point, I agree with you. That’s a business that typically spins a little faster. So we’re able to get the returns out of that business by virtue of that velocity coupled with the margins that we’re able to generate.

Understood. Appreciate that. Thanks a lot, guys.

Thanks, Alan.

We will go next to Stephen Kim at Evercore ISI.

Thanks very much, guys. Yes, lots of interesting stuff here, encouraging news. Let me – let’s start with the – with your orders. I’m kind of curious as to whether or not we whether you think that absorptions per community over the course of the next year or so, can be higher than the roughly $2.4 billion per month over the course of the year that you did pre-pandemic. And you talked about a production capacity of $27 to 28,000, up from what you said last time. But I’m curious, does this assume any continued improvement in cycle times or is this literally if things just stayed exactly the way they are right now?

So Stephen, let me start with absorptions per community. Going back over the last several quarters, you’ve heard me talk about, we’re not going to be margin proud and that we are going to work and take market share and turn our assets. And I think you’ve seen us do that. I highlighted in my prepared remarks today, that we’re very pleased with the absorptions that we turned out – the absorbent for a community that we turned out of the first quarter. And we were able to do it at outstanding margins as well. So I think we were successful on both fronts there. Going forward, we are going to continue to follow that same approach. We think it’s really important to continue to turn the assets and to continue to have high – reasonably high absorptions per community. And we will combine that with what has been historically best-in-class margin profile. And so we think we’ve got a lot of the elements of our playbook and our strategy working well. In terms of the second part of your question, remind – cycle times. So Stephen, for our total year delivery, what we’ve highlighted is that we’ve got a production universe in process with – what’s in process and what we expect to start, it will give us a universe that will allow us to potentially close up to 27,000 to 28,000 homes. We have assumed the cycle times that we are currently seeing. So we have not incorporated any improvement. We have seen improvement, and we’ve incorporated that. We haven’t incorporated further improvement. And certainly, we’ve got lofty goals that we’re endeavoring to claw back even more cycle time, but that’s going to take a lot of hard work by our teams and our trades and suppliers.

Great. And if I could sort of just follow-up on that last point, that production capacity of $27,000 to $28,000 is an encouraging number, obviously. And yet, your starts this quarter were a little on the lighter side relative to what we had been thinking. And certainly much lower than what you’re expecting to close next quarter. So can you talk a little bit about why the start number was kind of where it was? And what gives you confidence that, that number can rise from here? That would be very helpful. Thanks.

Yes, Stephen, it’s a multi-month kind of program that we look at in terms of the – our starts cadence and what we put into the ground I think it’s widely well known that the first 3 months of the quarter tend to be more difficult on the weather side, especially for our businesses in the Midwest and the Northeast. So probably a little bit of an impact on the number being a tad lower, but our forward plans in terms of our starts cadence, that’s all wrapped up into the 27,000 to 28,000 unit range kind of production guide. So I’d probably look at everything in its entirety, not just what we started in Q1, but what was in backlog, what was in production, what we started in Q1, plus the kind of implied Q2 start rate. I think that all that all works into the way that we’re running the business.

Okay. So I’m hearing there that you expect 2Q starts to increase. I don’t remember – Bob, did you actually give a starts forecast for 2Q, because that would be helpful if you had it?

That’s not a number we provided, Stephen.

Okay. Okay, that’s all I have. Okay, thanks, guys.

We will go next to Anthony Pettinari at Citi.

Hi, good morning. Cancellation rate came down pretty sharply quarter-over-quarter. I’m just wondering, was there a particular month where that step down was most significant or was it pretty smooth throughout the quarter? Just wondering if the kind of normalization in cancellation rates is maybe more of a change in overall biopsychology or maybe just reflects kind of the backlog working itself through, any thoughts there?

Yes. There wasn’t – it wasn’t a cliff. It was a pretty consistent cadence. And I think your point is a good one. The consumer has I think, largely now oriented themselves around the stability and rates that Brian talked about, they are moving, but they are not moving anywhere near as much as they were in the back half of last year. Couple that with the fact that most of the backlog and folks that signed contracts back when rates were much lower and got to a much higher rate at the closing table and the kind of the shock and cancellation impact from that has largely worked through the system. So I think the combination of those two things has the current contracted customer base and people signing contracts today are less sensitive to those rate movements than we saw in the back half of this year. And I think that’s why you’ve seen the can rates. And candidly, the reason we provided it, we had less total cancellations in the first quarter than we did in the fourth, I think for all those reasons.

Okay. Okay. That’s very helpful. And then just from a big picture perspective, when you look at the quarter and think about the drivers of your gross margin beat versus your expectations. Was it primarily stronger pricing or executing on the cost side, maybe without cutting it too finally, I’m just wondering what sort of surprised you the most around the quarter?

Yes, I’d like to tell you it’s cost, but it really wasn’t. I mean that was for the stuff that we closed in the quarter, those costs were baked in. We’re working with our trades to find efficiencies going forward. Lumber was obviously a benefit, but we knew that. So that was in our guide. I think it really – and we highlighted this in our remarks, it was reflective of the sales environment. It was the relatively strong demand. It was our ability to manage our incentive load. So we’ve had a national mortgage rate buydown program in effect since the beginning of the year. And what we’ve been able to do is use that as another selling tool. And so for some people, it’s, hey, get my rate as low as you can get it. For others, I want my rate down a little bit, and I want you to help you with closing costs. The nice part is that, that incentive replaced the incentives that we were offering before as opposed to added to it. And then you couple that with the fact that we highlighted that we were able to stop reducing prices and actually started to increase prices in more than half of our communities. Now these aren’t massive increases, but it’s the psychology of sales that relative strength was better than we had forecast in our guide for the quarter and showed up in the margin for the quarter.

Okay, that’s very helpful. I will turn it over.

Thanks, Anthony.

We will move next to Michael Rehaut at JPMorgan.

Thanks. Good morning, everyone. First question, I just wanted to zero in a little bit, if possible, on the pricing trends. As you mentioned before, you said that you had increased prices maybe in about 50% of your markets. Just wanted to get a sense between the reduction or moderation in incentives that you’ve seen so far year-to-date as well as maybe between that and some of the base price increases. If you could give us a sense of how much pricing – net pricing has improved from 4Q end to 1Q end?

Yes, Mike, we haven’t given that level of granularity. I think the previous question that Bob just answered really highlighted what we’ve seen, which has been a build of kind of sales momentum if you remember going back to November, December of last year. The market was still pretty tough, but we did comment on our year-end report that we had in January that we are starting to see some momentum building in the back half of January or December and into January, we’ve seen that continue, and that’s allowed us to pull back on incentives. It’s allowed us to take some very moderate price increases, but it’s definitely a change in kind of the sentiment that we’re seeing from buyers. I think some of that is interest rates stabilizing. I think some of that is the interest rate incentives that we have done, I think a lot of that is kind of buyer psychology. And then the biggest thing as I go back to, we’ve got a housing shortage in this country, and that hasn’t changed. And so in the places where we’ve been able to demonstrate value, which we’ve worked very hard to do, we’re seeing some nice momentum on the sales floor. And I think you’ve heard from us, we’ve seen that continue into April. And that’s allowed us to be optimistic and bullish with our forward start projections and some of the things that we’re anticipating to be able to do for the balance of the year.

Great. I appreciate that, Ryan. I guess secondly, looking at the gross margins for the second quarter, you’re expecting about 100 to 150 bps of potential contraction, just wanted to get a sense of if that is just due to the lagged impact of higher incentives from the back half of last year. And if that – because I believe you also mentioned that – if I heard right, and apologies, if I didn’t, but that you are also going to see the benefit of lower lumber costs in the second quarter. But if the driver is that lagged impact of higher incentives from back half of ‘22, do you feel that that’s mostly – will have mostly played itself out by the second quarter, or could there be incremental negative impact in the back half of ‘23?

Well, we haven’t given a guide beyond Q2. And there is a lot of moving parts in the market. The reason I mentioned that we are only going to go out one quarter, we have got lumber. It’s ticking up again. That will be later in the year or into next year. It’s worth that while looking at the cost environment, we still see inflation. We think that it’s a little bit lower in rate than we probably projected at the beginning of the year, but we are still feeling cost increases and labor in particular is pretty sticky. We have talked about that. And obviously, if you look at the production cycle, our land is typically more expensive as we move through time. So, we have got incremental cost against a relatively flat at some points during the last two quarters, decreasing pricing. So, I think that’s what’s actually resulting in the margin decline year-over-year. The strength in the market that we saw last year produced largest we had never seen before, Mike. And this is just a reflection of the reality that costs are up, and we haven’t been able to offset all of those to-date.

Okay. Great. Thank you.

Thanks Mike.

Our next question comes from Matthew Bouley at Barclays.

Good morning everyone. Thanks for taking the questions. So, just thinking about kind of the strength of sales pace during the quarter, kind of look back on the quarter, obviously there was a period where mortgage rates reached over 7% again. We had the sort of regional banking crisis where perhaps there was some impact on housing activity for a few weeks. I am curious from Pulte’s perspective, did you see kind of impacts to your own sales pace during those periods, any kind of color on sort of the cadence through the quarter? And as we have kind of moved past that, how is sales pace trending to sort of exit March and into April relative to some of those uncertain periods during the quarter? Thank you.

Yes. Matt, what we saw in the quarter was a strengthening of sales pace as we move January to February, February to March. Sequentially, sales paces got stronger. And then we have seen April continue to the first 3.5 weeks, three weeks of April continue to perform at a really strong level. So, we are pleased with what we are seeing. To your point, I think in certain markets, particularly on the West Coast during the banking, regional banking crisis, I think certain buyer groups in certain cities were probably more impacted psychologically than others. I think most of the things that we were seeing resulting from that have dissipated and we are continuing to see good momentum on the sales force.

Got it. Thank you for that. And then secondly, you mentioned at the top, some eventual opportunities to sort of put your liquidity to work if credit constraints with smaller builders amount. I guess I am curious how that might take shape from your perspective, kind of what are you seeing and hearing on the ground today from a competitive perspective versus these smaller builders?

Yes. Nothing necessarily on the ground yet, Matt. I think we are more being responsive to some of the things that have been widely written about and talked about that the smaller banks that provide operating lines and project-specific financing, that credit has gotten tighter. We are not in a position where we use project-specific financing. We are self-funded for almost everything that we do, and we have the ability to given our size to tap into the public capital markets, if so needed. So, I think when it comes to land development, land acquisition, the desire or the decision to put more spec into the ground, we have got tremendous flexibility because of the way that we are capitalized. And I do think that could potentially give us the opportunity to take advantage of any kind of dislocation that might appear. It’s an always-on mindset, which we have always had, not trying to send any kind of a message there other than there was a banking crisis, credit has gotten tighter, and we have got our ears open to any opportunities that that might create for us.

Got it. Thanks Ryan. Good luck guys.

And we will move next to Mike Dahl at RBC Capital Markets.

Good morning. Thanks for taking my questions. Just a follow-up on the land dynamics and market [ph] dynamics, you did raise your land spend on the top end is up quite a bit versus last quarter. So, I wanted to just ask, is that incorporating any potential flex in acquisition spend and as you look to take advantage of potential disruptions later this year, or is that more of kind of a core something changed, either more deals kind of penciling that you thought you would walk away from or something else going on with either development or acq spend that you care to highlight in terms of that increase in the forecast spend?

Yes. Fair question. That is just our projection of what we see on the ground. And so the increase in absorptions that we have seen, the relative stability in pricing gives us a little bit more confidence as we are looking at some of the deal flow that we – for land transactions, it does not anticipate or incorporate any M&A or anything of that sort that would happen separate from that, and we would evaluate it. But we haven’t projected that in the overall increase.

Got it. Okay. Thanks Bob. And then my follow-up, you called out the order trends by buyer segment, which was pretty interesting. Could you help us understand maybe the community count or absorption by our segment first time move up active adult? I think you said that the total was maybe up 18% in first time, but then down in the 20s on the other two segments.

We haven’t given that level of detail in a while. I think from a community count perspective, you have heard us say, we are investing in the entry level. So, our – a lot of the growth that you saw, we had growth across all three buyer segments in our community count. It was more oriented towards the first time. And interestingly, then next to the move-up and the active adult is those are bigger positions, so they don’t – we don’t have quite as much flexibility in those over time. But the 13% was spread across all, but it was largely in the first time.

Okay. Got it. Thank you.

Thanks Mike.

We will move next to Susan Maklari at Goldman Sachs.

Thank you. Good morning everyone. First question is talking a bit about the SG&A. You mentioned that you are cautiously adding some headcount there. Can you just give some sense of how that’s trending? And where do you expect that, that can go over time as you think about the level of deliveries you are targeting?

Yes. Susan, I think Bob highlighted in his prepared remarks, just with the increased potential for production in the year. We have raised our production potential by 2,000 to 3,000. So, we have added sales and construction headcount in the right locations that matches up where we have been able to kind of turn up the volume there just a little bit. We will – I think Bob highlighted, we will continue to maintain SG&A leverage as a percentage of revenue, so no hidden message there, nor should there be an expectation that you would see dilution to our leverage rates.

Okay. And you increased the authorization on the buybacks this quarter as well. Can you talk a bit about your appetite to buyback the stock here? And any thoughts on how you are thinking of the cadence of that going forward?

Yes. We don’t provide forward guidance, Susan. But in terms of appetite, I think the increased authorization, which we are very pleased our Board made the decision to increase the authorization by $1 billion. I think it shows that we have got a continued appetite for this to be a part of our capital allocation philosophy, which has been a consistent part for going on nearly 10 years. So, if consistency is a virtue, if it’s not, we should make consistency of virtue, I think we are demonstrating that we are living up to the capital allocation philosophy that we have articulated for our shareholders.

Okay. Thank you and good luck.

We will go next to Dan Oppenheim at Credit Suisse.

Hi. Thanks very much. I was wondering if you can just talk about the West where you talked about some of the tougher conditions, how are you thinking about spec at higher price points and where it’s more challenging? Are you doing – do you have much less in terms of spec per community in the West than you have in other regions? I am just curious how you are handling that?

Yes. Dan, in terms of the West, for us, it encompasses the coastal markets, California and Seattle, but also includes Las Vegas, Nevada, Colorado, New Mexico. So, there is a mix of different cities and geographies and product types in the West. When we get into the coastal markets, we build a lot of multifamily three and four-story product. And so those buildings actually generally start as spec just by the nature. So, there is spec there and there is not anything that we are necessarily concerned about. We have – I would highlight in the West, we have seen some strengthening in Las Vegas and particularly – and Phoenix over the last two months to three months, we have actually started to see those markets firm up and start to get back on to some pretty positive sales trends and positive footing. So, the two places that we are continuing to kind of pay attention to Northern California and Seattle, those are markets that I think are pretty tech-heavy. The price points are generally higher. Affordability is more challenged. Also a couple of the areas that are probably more directly impacted by some of the regional bank crisis, so – but on the whole, we are still very optimistic about the way our West business is positioned just relative to Texas, the Southeast and Florida, those markets have done exceptionally well.

Sure. It makes sense. And I guess you talked about cycle times coming down. How much – if we think about the conversion, how much would you say is driven by some improvement in cycle times versus just the specs and the shorter time from contract to closing on those specs?

Well, Dan, the way we are really looking at is, we are looking at it from start to final. And certainly, we pay attention to overall cycle time from start to close which has improved by a quicker flow-through on the spec side. But when we talk about cycle time, it’s separate and independent from anything related to a buyer. It’s purely within how long does it take us to build a home, and that’s where we are starting to see some gains being made, particularly on the front end. So, for homes that are going into the ground now we measure it from slab to kind of frame as an example, frank stage. We are starting to see some pretty meaningful gains out of that front end of construction. The back end of the homes that are finishing now, they are still – those homes are still on longer cycle times, but we would expect to extend the gains that we were recognizing currently on the front end. As those homes get into the back end trades, we would expect to pick up time there as well.

Great. Yes. I was thinking about in terms of the backlog conversion from those two issues. Great. Thanks very much.

Next, we will move to Truman Patterson at Wolfe Research.

Thanks for taking my questions. First on the entry-level orders, I believe you all said were up like 18% year-over-year. That’s quite a bit stronger than where we think underlying entry-level spec demand is. Could you help us understand that a little bit? Is it easier comps, community location? Have you all early in 1Q – did you bring incentives more in line with the market, etcetera, just trying to understand that result a little bit better. And then could you help us understand just where overall absorption stood exiting the quarter in March?

I was going to say it’s hard to react to that. I think what we have seen reflected in our results is that we started fair number of homes that were speculative last year. They were available, and we have been able to sell them. We – I wouldn’t characterize it as a huge incentive. I have mentioned earlier, we have a national rate buy-down, and it is probably most appealing to that buyer group. But it probably is only a relatively small percentage of our total population of signups that actually took that. They may have other things that are more important to some buyers.

The one thing Truman, that I think I would probably highlight is that our entry-level product tends to be on the higher side of the price – the entry level price band, the locations are excellent. And so I think we have got a well-located product that’s still within the affordable range that appeals to a first-time entry level buyer. And so if our performance exceeds maybe kind of what you are expecting, my guess is on a relative basis, that’s probably some of the strength as we have got excellent locations for those entry-level communities. And then as far as kind of the exit rate for the quarter, that’s not a number that we have quoted. I did highlight though on one of the previous questions, we saw absorption strength progress as we move through the quarter. So, March was our highest sales and the highest absorption rate of the quarter. We have seen strength continue as we have moved into April.

Perfect. Thanks guys. And then can you provide an update on the strategic relationship with Invitation? I am just wondering if that might have been pushed back a little bit in the current environment with higher rates and higher cap rates.

Yes. We are very happy with the relationship that we have with Invitation. And I would probably answer the question more broadly about single-family rental. We have made it a small part of our overall production environment. We are looking at opportunities where we can provide a very, very small number of our total deliveries to the build-for-rent operators, Invitation being a big part of that. So, we are happy with how it’s performing. We talked about it being something in the range once we get to full capacity of about 5% of our annual deliveries. We are still on track as we get this ramped up that that’s about what it will be, and we are pretty comfortable with that.

Alright. Thank you.

We will take our final question from Rafe Jadrosich at Bank of America.

Hi. Good morning. Thanks for taking my question. I just wanted to follow-up on some of the comments on the tighter credit. Can you talk about the potential impact to your land developers? Are you seeing any stress out there? And could that have any impact on your ability to option, or would you have to support your partners or take on more lots for yourself?

Yes. Candidly, no, most of the folks that we work with are pretty well capitalized. They are big developers in their market. And the truth is that we self-develop a great deal of the land that we control anyway. We are not – the vast majority of our business is actually self-funded. So – but for those deals where we have got partners, they are typically pretty well capitalized.

Thank you. That’s helpful. And then you mentioned earlier that the improving sales environment contributed to the gross margin upside versus your expectation, was the stronger sales improving traffic or better conversion or like a combination of both? Any color you can give on sort of quantifying which one of those drove upside to your initial expectation?

Yes. Traffic, I think was pretty consistent with what we expected. Conversion was better and the incentives that we had to provide to get that conversion were better than our expectations, which is what really contributed to the margin outperformance.

Alright. Great. Thank you.

And that does conclude today’s question-and-answer session. I will turn the conference back over to Jim for any closing remarks.

I appreciate everybody’s time today. We are certainly available for the remainder of the day for any follow-up questions. Otherwise, we look forward to meeting with you in the next quarter.

And that does conclude today’s conference call. Thank you for your participation. You may now disconnect.