Performance was driven by a diversified business platform that captured resilient demand from move-up and active adult buyers, particularly in Florida where orders grew 18%.
Management is executing a multi-quarter strategic pivot to return the business to a historic mix of 60% build-to-order (BTO) and 40% spec homes, with BTO orders rising to 43% this quarter.
A ‘K-shaped’ economic recovery is impacting buyer segments differently; affluent buyers remain active with lot premiums exceeding $100,000, while first-time buyers require significant incentives to solve the ‘affordability riddle’.
Operational discipline was demonstrated by adjusting starts to 6,500 units against 8,000 orders to clear excess inventory and reach a target range of 1.0 to 1.5 finished specs per community.
Gross margin compression to 24.4% was primarily attributed to elevated incentives, which reached 10.9% of sales price to drive inventory turnover in a competitive environment.
The company maintains a robust land pipeline of 230,000 lots, emphasizing risk mitigation through a strategy where over 85% of optioned lots are held with underlying land sellers rather than third-party bankers.
Full-year 2026 gross margin is projected between 24.5% and 25.0%, though management expects results to likely be toward the lower end of that range., with Q2 expected to be the annual low point due to the closing of heavily incentivized spec homes sold in Q1.
Management anticipates margins will recover in the second half of the year as the closing mix shifts toward higher-margin active adult and build-to-order homes.
The company reaffirmed its full-year closing guidance of 28,500 to 29,000 homes, supported by community count growth of 3% to 5% for the remainder of the year.
Guidance assumes incentives will remain elevated but may trend lower as the buyer mix shifts away from the more price-sensitive first-time segment.
Cash flow generation for 2026 is projected at approximately $1 billion, based on projected land acquisition and development spend of $5.4 billion and the expectation that house inventory will increase commensurate with an increasing level of build-to-order home sales.
Land impairments of $6 million (20 basis points) were recorded in two communities, triggered by price adjustments necessary to clear excess spec inventory.
House costs decreased 5% year-over-year to $75 per square foot, primarily due to lower lumber costs and procurement efficiencies, though management is monitoring potential fuel and metal price volatility.
The Board authorized an additional $1.5 billion for share repurchases, bringing total availability to $2.1 billion, while maintaining a net debt-to-capital ratio of effectively zero.
Cycle times have successfully returned to pre-COVID levels of less than 100 days, providing the operational flexibility required for the shift back to a build-to-order model.
