Good afternoon, my name is Alex and I will be your conference operator today. I would like to welcome everyone to the KB Home 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website kbhome.com through October 22.

Now, I'd like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Jill Peters - Senior Vice President of Investor Relations

Thank you, Alex. Good afternoon, everyone and thank you for joining us today to review our results for the third quarter of fiscal 2021. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino and Rob McGibney, Executive Vice Presidents and Co-Chief Operating Officers; Jeff Kaminski Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.

And with that, here's Jeff Mezger.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Thank you, Jill and good afternoon. Our performance in the third quarter reflected significant year-over-year increases across the majority of our key metrics as we produced solid results in housing market, experiencing great demand, while also facing industry-wide challenges in getting homes completed and delivered. These results will help drive our returns focused growth as we continue to expand our scale, while generating a higher return on equity. Before I get into the highlights for the quarter and there are many, I want to address our shortfall in deliveries and revenues.

Disruptions to our supply chain intensified as the quarter progressed and along with municipal delays resulted in our build times extending by about two weeks sequentially. This pushed many deliveries into our fourth quarter and will similarly delayed some fourth quarter deliveries into our 2022 first quarter. We are taking aggressive steps to manage through these delays, including expanding our subcontractor base, partnering with our national suppliers and simplifying our products to stabilize our build times.

We produced total revenues of $1.47 billion, up nearly 50% as compared to the prior year period and diluted earnings per share of $1.60. We achieved an operating income margin of 12.1% excluding inventory related charges, which grew 250 basis points year-over-year, driving a 40% expansion in our profitability per unit to nearly 52,000. This was accomplished even with the leverage we lost from the delayed deliveries. Our related gross margin of 22% was a particular highlight and demonstrates that we are effectively managing pace, price and starts to optimize each asset.

As to capital allocation, we continue to take a balanced approach with disciplined investments in growth remaining our top priority. In the third quarter, we invested about $780 million in land acquisition and development. We expanded our lot position to almost 81,000 lots owned or controlled, with our inventory continuing to rotate into a higher quality portfolio of communities. In addition to these investments, we returned a significant amount of cash to stockholders through both our regular quarterly cash dividend and the repurchase of $188 million of our stock. These repurchases will further enhance our return on equity in 2022 beyond this year's expected 20% level, especially when combined with our projected increase in scale to over $7 billion in revenue and higher operating and gross margins. Since we embarked on our returns focused growth strategy, we have produced meaningful expansion in our ROE. While we recognized that returns across the industry have expanded, our rate of improvement is meaningful and we believe our return on equity in the low to mid 20% range is sustainable.

During the quarter, we announced the promotion of Rob McGibney to Executive Vice President and Co-Chief Operating Officer, a role he shares with Matt Mandino. We created a Co-COO structure with two simple objectives in mind: to accelerate the profitable growth of our business in order to drive increasing returns on equity and to enhance our execution. Rob is responsible for our West Coast and Southwest regions and Matt is responsible for our Central and Southeast regions. In addition to their regional responsibilities, Matt and Rob each have oversight of key strategic corporate functions as well.

The operating environment within our industry has become more complex over the past 18 months, given the supply chain issues and municipal delays that I mentioned earlier and their impact on build times. Having two proven leaders running our operations, will allow for a more hands on approach that is geographically focused, enabling greater day-to-day collaboration with our regional and division leadership. Matt and Rob will join me to respond to questions later on this call and can speak more specifically as to what is being done in their regions to compress build times.

We successfully opened over 40 new communities in the third quarter, marking the start of a sequential improvement in ending community count that we anticipate will continue over each of the next five quarters. With the strong and growing lot pipeline that I referenced, driving an acceleration in new communities, we expect to expand our community count to roughly 260 by year-end 2022.

Our monthly absorption per community accelerated to 6.6 net orders during the third quarter from 5.9 in the year ago quarter and reflecting a more typical seasonal pattern sequentially, while remaining at historically elevated level. Net orders were 4,085, represented a small decline year-over-year, against the strong results in the prior year quarter. However, with our actions in taking price and moderating pace, our net order value was up more than 20% year-over-year.

We continue to manage our selling pace to production, limiting our lot releases to prevent our backlog from getting over extended and started over 4,000 homes during the quarter. This compares to starts in the year-ago quarter of about 3,400. We currently have approximately 9,000 homes in production with 93% of these homes already sold. Only 240 of these homes are unsold past the foundation stage and our focus right now is on compression our build times to deliver our backlog.

With the rise in our net order value to $2 billion, we are laying the foundation for future margin growth. Our pricing power is solid, while our pace remain strong and the demand for our homes at higher prices tells us that our price points remain attainable. The credit profile of our buyers is above our historical level with an average FICO score of 7.31 and down payment of 14%, translating to almost $60,000, which is noteworthy for our first time buyer. In addition, the internal indicators that we monitor for changes in customer behavior, including the square footage of homes purchased or spending in our design studios remain stable.

Our backlog now stands at roughly 10,700 homes, representing future revenues of over $4.8 billion. Our backlog value is up nearly 90% year-over-year with significantly higher margins within this backlog. This is an excellent position from which to finish 2021 and support another year of growth in revenues and expansion of margins in 2022.

Homeownership remains compelling and attainable and we believe the drivers are in place to support healthy market conditions for the foreseeable future. An insufficient level of supply exist at our price points to meet the demand for millennials and Gen Zs, which together number roughly $140 million. These two cohorts value the personalization and choice in our built-to-order business model, which is a significant factor in why our absorption rates have consistently been among the highest in the industry. This together with our experience in serving first time buyers, who represent 61% of our deliveries in the third quarter, has us well positioned to capture demand going forward.

Switching gears for a moment. I want to highlight our recent achievement in sustainability. KB Home received a record 25 ENERGY STAR Market Leader Awards from the EPA, further demonstrating our leadership position as the most energy efficient national homebuilder. We are proud to continue moving our environmental program forward, which is helping to lower the total cost of homeownership for our buyers, while doing our part to reduce the carbon footprint of our homes. Before I wrap up, I'd like to recognize and thank all of our employees for their outstanding efforts every day and working through the industry-wide challenges of material shortages and municipal delays. We have a remarkable team that is focused on execution and committed to customer service.

In closing, we are growing into a bigger business that is operating at meaningfully higher margins and generating considerably improved returns. We anticipate a return on equity this year of about 20% and further expansion in 2022, supported by double-digit growth in revenues and community count, with higher margins, as well as our recent share repurchase. Beyond next year, we believe our return on equity is sustainable in a low to mid 20% range.

With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Jeff Kaminski - Executive Vice President and Chief Financial Officer

Thank you, Jeff and good afternoon, everyone. I will now review highlights of our financial performance for the 2021 third quarter, discuss our current outlook for the fourth quarter and summarize expected improvements in several 2022 metrics. In the third quarter, we produced measurable year-over-year improvements in nearly all our key metrics, including a 49% increase in housing revenues that drove a 93% expansion in our earnings per diluted share. We also made substantial investments in land and land development to support continued growth and completed a significant share repurchase that among other things will enhance future returns and per share earnings.

Our housing revenues grew to $1.46 billion for the quarter from $979 million for the prior year period. This improvement reflected a 35% increase in the number of homes delivered and an 11% rise in our overall average selling price. As Jeff discussed, our current quarter deliveries were tampered by industry wide building material shortages and labor constraints that extended build times in most of our served markets. We anticipate similar challenges will apply to our fourth quarter and have considered these factors in our outlook.

Our ending backlog value expanded 89% to over $4.8 billion, driven by strong increases in each of our four regions. Considering our quarter-end backlog, the status of our homes under construction and expected construction cycle times, we anticipate our fourth quarter housing revenues will be in the range of $1.65 billion to $1.75 billion. In the third quarter, our overall average selling price of homes delivered rose to approximately $427,000 from approximately $385,000, reflecting the strength of the housing market. For the fourth quarter, we are projecting an overall average selling price of approximately $450,000, which would represent a year-over-year increase of 9%.

Our third quarter homebuilding operating income improved to $169.9 million as compared to $88.9 million in the year-earlier quarter. Operating income margin increased 270 basis points to 11.6% due to improvements in both our gross profit margin and SG&A expense ratio. Excluding inventory related charges of $6.7 million in the current quarter and $6.9 million in the year-earlier quarter, our operating margin was up 250 basis points year-over-year to 12.1%. For the fourth quarter, we expect our homebuilding operating income margin, excluding the impact of any inventory related charges, will be approximately 11.8% compared to 10.7% in the year-earlier quarter.

Our housing gross profit margin for the quarter was 21.5%, up 160 basis points from 19.9% for the prior year period. This margin expansion mainly reflecting a favorable selling price environment supported by healthy housing market dynamics and lower amortization of capitalized interest. Excluding inventory related charges, our margin for the quarter was up 140 basis points year-over-year to 22.0%.

Our adjusted housing gross profit margin, which excludes inventory related charges, as well as the amortization of previously capitalized interest was 24.5% for the third quarter compared to 23.7% for the same 2020 period. Assuming no inventory related charges, we believe our fourth quarter housing gross profit margins will be in the range of 21.6% to 22%, reflecting the impact of peak lumber prices when our forecasted fourth quarter whole deliveries were started.

Our selling, general and administrative expense ratio of 9.9% for the quarter improved by 110 basis points as compared to 11.0% for the 2020 third quarter, primarily due to increased operating leverage, partly offset by higher costs associated with performance-based employee compensation plans and additional resources to support growth. As we position our business for growth in 2022 housing revenues, we believe that our fourth quarter SG&A expense ratio will remain roughly the same as the second and third quarters of this year or approximately 10%. This would represent an improvement from 10.3% in the 2020 fourth quarter.

Our effective tax rate for the quarter was approximately 14%, reflecting $24.1 million of income tax expense, net of $21.5 million of federal energy tax credits. We expect our effective tax rate for the fourth quarter to be approximately 24% including a small favorable impact from energy tax credits compared to approximately 16% for the year-earlier period. Overall, we reported net income for the third quarter of $150.1 million or $1.60 per diluted share, compared to $78.4 million or $0.83 per diluted share for the prior year period.

Turning now to community count, our third quarter average of 205 decreased 14% from the year-earlier quarter. We ended the quarter with 210 communities open for sales, as compared to 232 communities at the end of the 2020 third quarter. On a sequential basis, as anticipated, we were up 10 communities from the end of the second quarter. We are planning to achieve continued sequential quarterly increases in our community count through 2022. We believe our 2021 year-end community count will be up slightly from the third quarter, resulting in a high single-digit decrease in the average fourth quarter count as compared to the prior year.

We invested $779 million in land, land development and fees during the third quarter with $467 million or 60% of the total representing new land acquisitions. In the first three quarters of this year, we invested $1 billion to acquire over 16,000 lots. We ended the quarter with a strong supply of nearly 81,000 lots owned and controlled, then we expect to drive a significant number of new community openings and steady growth in community count. At quarter end, we had total liquidity of over $1.1 billion, including $350 million of cash and $791 million available under our unsecured revolving credit facility.

In early June, we issued $390 million of 4.00% 10-year senior notes and used a portion of the net proceeds to redeem approximately $270 million of tendered 7.00% senior notes due December 15, 2021. We recognized a $5.1 million loss on this early redemption of debt in the third quarter. The remaining $180 million of the 7% senior notes, we redeemed as senior notes, partially offset by the new issuance, will result in annualized interest savings of nearly $16 million, contributing to our continued trend of lowering the interest amortization included in our housing gross profit margins. In addition, we see the $350 million maturity in September 2022 of 7.5% senior notes as an another opportunity to reduce incurred interest and enhance future gross margins.

During the third quarter, we repurchased approximately 4.7 million shares of common stock at a total cost of $188.2 million. The shares repurchased represented approximately 5% of total outstanding shares and will drive an incremental improvement in our earnings per share and return on equity going forward. For purchases of calculating diluted earnings per share, we estimate a weighted average share count of $91 million for the 2021 fourth quarter and $93.5 million for the full year.

For 2022, we are forecasting housing revenues of over $7 billion, supported by our anticipated 2021 year-end backlog, community count growth and an ongoing strong demand environment throughout next year. We expect approximately 200 new community openings over the next five quarters to drive sequential increases in ending community count. Consistent with the forecasted double-digit growth that we have discussed during the past two quarters, we believe our 2022 year-end community count will be up about 20% year-over-year and the full year average count will be about 10% higher as compared to 2021.

We also believe that gross margin expansion to a level above our guidance for next quarter, along with improvement in the SG&A expense ratio, will result in a measurable year-over-year increase in operating margin. Further, the anticipated increase in scale combined with a higher operating margin and the benefit of the recent share repurchase, should drive a meaningful improvement in return on equity relative to be approximately 20% expected for 2021.

In summary, we believe we are well positioned to achieve our targets for the both 2021 fourth quarter and 2022 fiscal year. Our forecasted 2021 full year results represent significant improvements across virtually all our key metrics with notable increases in our scale, absorption pace, housing gross margin and operating margin. In addition, we are particularly pleased with the forecast expansion in our full year return on equity and our anticipated further improvement in 2022. We believe our ongoing focus on accelerating profitable growth and expanding our returns by leveraging our larger scale, attractive inventory profile and uniquely compelling built-to-order business model, will produce measurable enhancements in both book and stockholder value in future periods.

We will now take your questions. Alex, please open the lines.

Question & Answers

Operator

[Operator Instructions] Our first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim - Evercore ISI - Analyst

Yes, thanks guys, I appreciate all the color. One of the interesting things that we saw in your results today was the share repurchase. And you actually increased your leverage to do it, which is something we haven't seen a lot of the builders doing. So, I was curious as to if you could give us a sense for where your targeted leverage is going to be over the course of the cycle and then how do you think that that may trend in the near term?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Sure, Steve, I can take that. When you look at - actually if you look at pro forma, our leverage at the end of the quarter, we're actually down 50 basis points from the end of the second quarter. So, we paid off the remaining notes that were not tendered subsequent to quarter end and it wasn't reflected in the actual results. So, we're actually down as I've said. We feel pretty comfortable with our current leverage ratio. We've been down below 40% for some time now and we'll continue to operate the company I think in a range that's appropriate and we saw the tremendous opportunity I think in the quarter to repurchase some shares and out the future and really just utilizing the excess cash over and above what we needed to grow the business and also at the same time de-levered a little bit this year by - through that transaction of the refinancing took about $60 million out as a result of the new issuance and a tender and then finally the redemption in September. So that's kind of where it stands right now for us.

Stephen Kim - Evercore ISI - Analyst

But Jeff, are you thinking that like - are you saying that around 35% of the level that we should be expecting for you guys or just simply below 40%? Is that - I mean that's a much higher level than what we've been seeing from any other builders, not that it's a bad level necessarily, but I just wanted to get a sense for - if you could give us a numerical range of where you expect to be sort of to manage the business over the course of the next several years?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

I would say we're comfortable at 30% to 40% range and like I said, we had been down below 40% for a while. We're treating a lot of equity as a result of the high level of learnings that we've had and as long as we're continuing to produce equity, I think - and with our excess cash, we may see opportunities to do just in this quarter, but for the moment, we're pretty confident of the capital structure and the improvements that we've generated over the years.

Stephen Kim - Evercore ISI - Analyst

Yes, that's great. Yes, I appreciate it. Okay. And then second question relates to your margin. Obviously, strong performance, but your guide for the 4Q was a little bit lower that we would have liked to have seen and obviously you've attributed some of that to lumber and peak lumber running through. I was wondering if you could give us a sense for the magnitude of that and sort of how that - how you're expecting the cadence of that to work off or to basically come down - what the reduction in the lumber costs could potentially benefit the next, the early part of 2022and then there was another comment that I think Jeff Mezger made regarding simplifying your products and I was curious as to what you meant? If you could elaborate on that a little bit more and because it sounded like that might make it more conducive to doing more spec versus BTO, but I assume that's not what you meant. So, just curious if you could elaborate on that.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Steve, that was like four questions patched into one. Let me kick the simplifying product out to Rob. Rob, you want to take that one?

Robert McGibney - Executive Vice President and Co-Chief Operating Officer

Sure. Thanks. Thanks, Jeff and Steve. Over the last several months, 18 months or so, we've really been focused on product and process simplification and in our design studio, we've driven a total SKU reduction of about 48% and our focus has been on retaining the items of the highest take rates from our customers and then matching that product availability that we're communicating with our national suppliers and local trade partners about and then on structural options, we've reduced almost 40%. So our options are generally standardized across our regions and across the country and it's just about removing complexity from the supply chain and simplifying that issue for us in our trades. We also go all the way to architecture and we'll simplify product design with fewer variations. We're reusing our plans, leveraging standard product series across our regions and divisions, even getting the design of the homes themselves and we're standardizing window sizes and cabinet box sizes and garage door. So, just simplifying it for us, for our customer, for our trades and really keying in on those items in the supply chain that are readily available where we can.

Operator

Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.

Truman Patterson - Wolfe Research - Analyst

Hey, good afternoon, everyone. Sorry, but Steve took all of my questions. Look, well clearly supply chain issues are impacting the entire industry, just kind of following up on one part of Steve's question. But in the release or in the prepared comments, you all mentioned partnering with national suppliers and expanding your sub-contractor base, I'm just hoping you can elaborate a little bit further on those actions you're taking outside of simplifying the offerings and I realize this is kind of a crapshoot at this point. But any guesstimate on when you think you might see construction cycle time start to stabilize?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Matt, you want to talk about the labor base?

Matt Mandino - Executive Vice President and Co-Chief Operating Officer

Sure. And yes, Truman. I would say, right now, the primary constraint is coming more from supply chain issues versus labor. But what we're trying to do is get out in front of it and really be proactive and identify where is the next bottleneck coming from. And we've got various tools and processes in place where we can analyze the capacity of our trade base and then as I said, get out in front of it. And an example of this, Truman, is so far year-to-date, we have already added little over 150 new trade partners. So, it's visibility and when the all clear is coming, it is difficult to assess, but we are trying to stay in front of it and with the expansion of our trade base, we think that's one of the best tools we have.

Truman Patterson - Wolfe Research - Analyst

Okay. Okay. And then - sorry, go ahead.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

And Truman, I was going to add to that as we look at things where we got caught in the third quarter was in what I would call the second half of production, cabinets windows whatnot and that's what we're working on trying to compress today. We actually feel we've stabilized our build times and foundations and frames and mechanicals where we've addressed all the moving parts and we've expanded the base and we think we have that covered. And where we're still holding back as we don't know what we haven't even had to deal with yet because these things are popping up on a weekly basis and it's varied from city to city. But so we think we've stabilized the first half and the second half of the production cycle is what Matt is talking about addressing right now.

Truman Patterson - Wolfe Research - Analyst

Okay. And then in the press release, you all mentioned continued expansion of margins in '22. I didn't hear it in the prepared remarks, was that alluding to gross margin or op margin or both?

Jeff Kaminski - Executive Vice President and Chief Financial Officer

It's actually both. And just coming back I guess to a little bit of Steve's question on cadence and trajectory, we do see the fourth quarter as having a peak lumber impact and inclusive in that, we did lose a little bit in the fourth quarter of our previous expectation due to leverage loss with lower volume and also some mix shifts, but we're certainly and clearly seeing improving margins, both in our selling gross margins. So on a weekly basis, what we're seeing in selling GMs, as well as in our backlog and at the moment, we're really looking at a nice gross margin trajectory into next year.

And while we're not providing specific guidance on it, we did reference in the prepared remarks that we see our margins next year, clearly, in excess of our fourth quarter guide. And I think we'll see a very strong margin performance basically cascading down in the operating margin and then impacting return on equity in a very favorable way in 2022.

Operator

Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Matthew Bouley - Barclays Capital - Analyst

Hey, good afternoon, everyone. Thanks for taking the questions. Can I pick back up on a prior comment, Jeff, you just made about the challenges with the second half of the production cycle. I want to ask about the other side of that to start pace in the first half, I guess. So, relative to the challenges in closing and I don't know, presumably getting communities open across the country. Is your ability to put starts in the ground and given your business model, therefore driving sales? Is that less impacted relative to the other challenges that are simply driving cycle times longer or should we assume that your start pace could slow further as well related to the same challenges? Thank you.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Yes, Matt, I think we've done a pretty good job navigating the environment to get and start some - first getting the permits pulled and getting the starts. And if you look back over the last 12 months on a rolling 12 basis, we've started about 17,000 homes, which is within a couple of hundred of what we sold. So, we're pacing our sales and our starts are pretty well aligned right now and as we're working through, we think we've addressed the foundation issue. Back in January, February, March, it was framer issues.

We've addressed those and we're continuing to push it along. So, we don't expect any increased issues relative to starts and I also think we did very well in the quarter on the community openings. We hit right on top of the number we projected at the beginning of the third quarter. So over 40 openings we had was, with a great result and as part of the confidence we have in our community count guide going forward.

Matthew Bouley - Barclays Capital - Analyst

That's actually a perfect segue. Thank you for that. Jeff. I wanted to ask about communities just because you did have the one here this week, speaking about certain challenges and municipalities and sort of the cascading effect of supply chain on just getting communities open. And I think you gave the number at the top around 200 openings to come. I'm just curious, it's really just following up on the last point that your confidence around that 200 given challenges in getting communities opening. And I guess the second part of that, if there is any regional bias for that as we model it out? Thank you.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Yes, the community openings are broad based and I wouldn't target any one part of the country as being more difficult than others. I think a simple comment towards it as we've already taken the hits for the delays in our community openings as this year unfolded. So, we're past a lot of delays and this ended the blocking and tackling and it influenced our guide and our confidence for where we're headed next year. I wanted to throw the actual number out because we've observed that strategically align and grow community count a minimum of 10% a year, but with where the number is ending this year, we wanted to make sure that this group understood that it's much more than 10% next year. In fact, we're looking at 20.

Operator

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

Alan Ratner - Zelman and Associates - Analyst

Hey guys, good afternoon. Thanks for taking my questions. And Rob congratulations on the promotion. Nice to hear you on the call. Jeff, maybe the first question, just to clarify on the margin comments, I think the - it's helpful to remind everybody just the accounting nuance for you guys with some of those fixed expenses that flow through your COGS because I think that does explain maybe some of the shift in guidance for 4Q? Can you just remind us what is that rough dollar amount that flows through your cost of goods sold line every quarter? And would you expect that that increase in '22 based on your expected community count growth?

Jeff Kaminski - Executive Vice President and Chief Financial Officer

Right, it has increased a bit in '21 as we've put more resources towards some of the functions within that that fixed cost. I think the third quarter is right around $38 million and to your point, yes, with lower revenues, as I mentioned earlier, you take a leverage hit on the lower revenues as you move a bit a leverage on that fixed costs that containing cost of goods sold.

Alan Ratner - Zelman and Associates - Analyst

Got it. That's helpful, Jeff. Thanks for that update. Second, the $7 billion plus revenue guide for next year. I'm curious, first off, what does that assume for cycle times. Does it assume stability from this current level that's extended a bit here? And an add-on to that one, if I can, obviously it sounds like to start pace is keeping up with orders, but just given the challenges that you're seeing throughout the supply chain and the elongation there. Is there any consideration to maybe more significantly slowing that pace of order activity six to seven sales per community is incredibly strong and obviously the demand is there for it, but a lot of your peers have maybe been a little bit more forceful in bringing that sales pace down recently. So, I'm curious if there's any consideration to that just to allow things to kind of catch-up a little bit?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

If we saw signs of further blockage from here in the build times, we would slow it down and in fact we did slow it down some in many communities where we opted for price. But as we look at things today, we're now planning for a longer build time, it's extended and we get it. It's baked into our projections and our assumptions.

And we have a pretty nice rhythm right now where we're selling home, starting homes, getting them now through foundation and frame and we're heading into the second half on a lot of the backlog. So, we'll see. But right now we think we're in a pretty good balance. If you don't want to have backlog then you can't get build because your buyers get irritated with that too and we're very sensitive to the customer along the way. So if we feel, we're putting our customer on this, we're not going to do that.

Operator

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

Susan Maklari - Goldman Sachs and Co - Analyst

Thank you. Good afternoon, everyone. My first question is just following up on the cost side of things and inflation. I know you mentioned that you expect peak lumber to roll through in the fiscal fourth quarter, but can you talk to when we should expect the deflation in lumber to start to come through and how you're thinking about inflation in other building product categories that could potentially somewhat offset that?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Right. Well, the way we lock our cost on start. Any inflation we're seeing in various cost categories are really more affecting future sales and future backlog as opposed to what we may deliver out, for example, in the first or second quarter of next year. So on balance what we've been seeing is lumber has been tapering off. There's some pretty significant improvement in the cost side of things, leading to obviously higher gross margins in the backlog on a go-forward basis. I don't have a crystal ball.

So, I'm not exactly sure where first or second quarter in the costs are going or labor costs are going, but given the trends that we've seen on the pricing side and even if we maintain just even just a bit of pricing power, I think we'll be able to more than offset any future increase as we see again with the assumption that the favorable trend in lumber holds. That was a very significant cost category for us and whole industry for the peers and as that progresses, it's got some really good news I think for our margins out in the next year and given that we've lost a lot of those costs for deliveries in the first half of next year, we couldn't give out directionally where margins are headed?

Susan Maklari - Goldman Sachs and Co - Analyst

Okay, that's helpful. And then my follow-up question is around pricing. You guided to about 450,000 for the fourth quarter, which is up, I think about 9% or so versus last year. I know you mentioned in your comments that you're seeing a buyer with a higher FICO score, it sounds like overall they're in better financial position. Can you just talk to how you're thinking about pricing? The ability to continue to get that in your various markets and anything that's kind of changing on the ground around the buyers receptivity to pricing?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Yes. Susan, every community and every city will have a little bit different story relative to inventory on the ground and there really isn't any in job growth and population growth and whatnot. If you think of our buyer profile, the first time buyer predominantly. And yes, they're putting 60,000 down on their home and they have a FICO score of 737, that's a strongest buyer profile I've ever seen in our first time buyer business, very strong buying power out there, if you will.

And the first thing that we would see if we push price too far and we haven't seen anything like that yet, would be keep in mind were built-to-order, so the buyer would shift to a little bit smaller home. They still want a four-bedroom, they still want in that neighborhood and they may say that size home is too high now and I'll come down here or if I don't want to come down here, I won't buy it all. We're not seen anything like that at all today.

And if you think about the discussion we're having on the supply chain blockage, it's really making the inventory situation worse for the consumer, not better. Our industry is way behind in the number of homes, we've built versus what demographics and demand with support and you have this restriction now on homes being built because of the supply chain blockage. So, we don't think you're going to - there's so much demand for the limited supply. We don't think you're going to see for a while a customer that says we can't afford that. We're seeing no signs today. So, a very strong environment offer.

Operator

Thank you. Our next question comes from the line of Michael Rehaut with J.P. Morgan. Please proceed with your question.

Maggie - J.P. Morgan Securities - Analyst

Hi, this is Maggie on for Mike. Following up on the last question, I mean obviously the buyers credit profiles being strong and you're saying that affordability hasn't really been an issue to this point. Have you seen any shift in kind of buyer preferences? As a result of the recent price appreciation, I think last quarter you said that you haven't really seen any buyers adjusting the size of the home, but I'm curious if there is any update there?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

There was no movement at all in the size of the home, and the spend and the studio actually went up a little bit per unit incrementally $1,000. So the buyers behave in the same they were last quarter and the quarter before.

Maggie - J.P. Morgan Securities - Analyst

Got it. Thank you. And maybe asking kind of an earlier question in a little bit different of a way. You talked about the share repurchase this quarter and you talked about where you're comfortable going forward from a leverage perspective. But can you elaborate a little on the potential for share repurchase to become a more regular tool that's used?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

If you go back to Jeff's comments to a previous question, what we did in the quarter was take some excess cash that we had and apply to share repurchases, we spent over $700 million on land and development. So that would reinforce the first and foremost for all of our growth and as we look ahead, our top priority will continue to be - to support profitable growth trajectory and improve our returns and we also know our leverage ratio will continue to get better as we grow profits and that will lower your ratio on its own. So, first and foremost, we'll be working to growing the company. If at some point, we again determine we have excess cash, we'll evaluate what to do with it at that time.

Operator

Thank you. Our next question comes from the line of Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.

Deepa Raghavan - Wells Fargo - Analyst

Hi, good afternoon. I thought the order of pace was pretty good. Thanks for that. I don't know if I heard you talk about this, so apologize if I'm asking this, but when do you think you supply chain challenges stabilize i.e., you calling for 11% lower delivery in Q4. Do you think much of those - much of the known supply chain issues impact your Q4 the most or would early part of 2022 also see some strong headwinds there?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Well, Deepa, as we shared in our comments, we think we've stabilized the early parts of the construction cycle. There's still a lot of variables and unknowns on the finish side. While we stabilize it, it is at an extended timeframe. So we're now navigating, we're assuming our guide and our projection that build times don't get worse, but also don't get better and I think everybody have their own crystal ball on how we work through it and we will work through it, but it's going to take some time to get back to where we used to be.

Deepa Raghavan - Wells Fargo - Analyst

Okay, that's fair. You talked to some product challenges you faced in your draught year, you talked about windows and cabinets. Are there any issues we should think would get worse before they get better sometime mid of next year or you think most of them start to ease fast this quarter?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

It's hard to answer. If you'd have asked me on our last call, well, I thought we lose a couple of more weeks, I would have said, no, because we already thought that we'd extended a pretty significant from Q1 to Q2 and we're seeing good signs in some areas, but there's still a lot of unknowns. So, I don't know that we're prepared to say things are going to get better right away and we're hopeful we've taken steps to stabilize and we'll see how it goes over the next couple of quarters.

Operator

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

Michael Dahl - RBC Capital Markets - Analyst

Hi, thanks for taking my questions and the color so far. First, I just wanted to circle back to the, sorry to beat the horse a little on the fourth quarter margin. But just maybe asking again on the impact of lumber and I guess taking kind of a sequential approach if you look at your guide for ASP, you're up about 5% Q-on-Q and probably most of that is pretty similar on a square foot basis, at least up that much Q-on-Q. So with revenue per square foot up the way it is. Can you just help us understand again and then sequentially, I don't know if the fixed cost is really as much of a sequential driver, but just the exact impact of lumber that's impacting you guys and offsetting that improvement in revenues?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

So Mike, to give you an exact number is little bit difficult. I mean there has been a lot of mix shift between the quarters and we're not showing the same guidance in the fourth quarter as we did in the third. The margins are in the range quarter-over-quarter, there's not a huge change between the two quarters and what we wanted to point out was really we do believe we know actually that the lumber price increases and what we saw related to those homes that we expect to complete and deliver in the fourth quarter.

When we started those homes, we were at peak lumbar prices and as much an indication that we feel that we wanted to give us a lot about where things are heading beyond the fourth quarter as much as it is about specifically for that fourth quarter guide. When we guide the quarters, particularly in a short period, we guided delivery by delivery and we roll out from the bottom up. We lost a lot of delivery due to the construction delays and supply chain challenges and there was a bit of mix impact in there as well. And anything that we lost in the fourth quarter is coming back to us early part of next year.

So, we're very optimistic about margin expansion on a go-forward basis and not only gross margin expansion, but operating margin as well with a higher revenue guidance for next year. So beyond that, I don't really want to get into quarter-by-quarter sequentially in '22 or any details out into that type range. We'll bubble back up in January when we're reporting out on our fourth quarter, given there's a lot of detail in 2022, but we normally don't touch on margins for example the during this call and it's kind of limited to community count and revenues, but we wanted to give an indication what we're seeing. The numbers are so strong within our backlog and within our selling gross margins that we wanted to indicate that.

Michael Dahl - RBC Capital Markets - Analyst

Yes. I appreciate that and it makes sense in terms of just looking at to go into next year with already about 70% of what you're projecting in revenues already in backlog, which should look pretty strong on the margin side. So that not all makes sense. I guess the second question, just the pay side of the equation. When you're looking at getting to, you're turning over, I think you're turning over - if you're opening 200 communities and then the next year to 60, you fell like 75% community turnover. Anything you can share in terms of whether the pace expectations for new community openings are still for roughly similar in terms of the mix or is there a different - any sort of difference in what you direct us towards in terms of pace as you look out to next year and what you've got coming online?

Jeff Kaminski - Executive Vice President and Chief Financial Officer

Mike, the 200 is over five quarters not - it's not a one-year term, it's a little more than that. In the prepared comments, we were talking about not just where we think we'll be at the end of '22, we're positioning the business to continue to grow our community count beyond that into '23. So, we have everything owned for '22, most of everything owned and all controlled for '23. So, we're comfortable with the guide and we like how we're positioned finally with our community count trajectory.

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Right. And I'd just add to that Mike. When you look at current pace and what we've seen over the last year and as we're projecting forward, there's two things happening. One, a lot of the new communities, obviously we've just replenished a lot of our communities. So we have a lot more lots going forward. And we're actually projecting fewer closeouts in next year than we had in 2021, which is helping us to grow that count. And it's not because we're projecting absorption pace being off that much. The base assumptions are still very strong going into next year, which is a function of how many lots we have, lots going into the year and the large number of openings that we had in 2021, after mentioning the new openings next year.

So, I think we're pretty well aligned. This year caught us by surprise, I think it got a lot of people by surprise with the accelerated pace and a lot more closeouts than any of us anticipated, but then good news. For me if you're closing out a lot of communities and those units and those lots are going from available in communities into our backlog that takes some risk off next year and it supports the top line and the delivery numbers and I think that's great. While you have some pressure in community count as a result of that, as we have to see the pressure there, if any pressure on having to sale to fill that revenue expectation. So, we're in great shape heading into not only the fourth quarter, but particularly into 2022, it's a pretty [Indecipherable].

Operator

Thank you. Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.

Jay McCanless - Wedbush Securities - Analyst

Hey. Thanks for taking my questions. The first one pretty impressive decline in the cancellation rate. Just wondering with the cancels that you are getting, what's the reasoning behind that?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Yes, Jay, it's a mixed bag. If somebody got transferred, somebody gets divorced occasionally by a remorse. We're not seeing too much of that. We do a pretty good job of screening the buyer before we report the sale. We get up a pre-qual [Phonetic], so we're having very little loan issues as well. So, let's say, a mixed bag. That's a small number at the end of the day.

Jay McCanless - Wedbush Securities - Analyst

All right. Understood. And then the second question you talked earlier in the call about having the front half of the build cycle completed and now you're working on the back half. Just wondering if that also includes getting your final inspections, your COs, etc. What type of issues are you seeing on the municipal side and are those issues improving versus where they were earlier this year?

Jeffrey T. Mezger - Chairman of the Board, President and Chief Executive Officer

Yes, Rob, you want to talk to the inspection side and what we're seeing?

Robert McGibney - Executive Vice President and Co-Chief Operating Officer

Yes, sure. Jeff. Jay, it's one of the biggest issues we're seeing on the inspection side on the back-end is just COVID and the delta variant. With that, we're getting the surprises. Without those surprises, it's running fairly smooth and most of divisions have strong relationships with the people in our municipalities and we're able to navigate that pretty smoothly. Where we see some hiccups or when a group of inspectors or even a single Inspector may have an exposure and they get sent home for 10 days, but that's what we're fighting through out there. It's not necessarily the volume, but the impacts from COVID.

Operator

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Q3 2021

Earnings Transcript

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