Q4 2021 Pultegroup Inc Earnings Call
Hum.
Okay.
Good morning, My name is Rob and I will be your conference operator today.
At this time I would like to welcome everyone to the poultry group fourth quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press Star one.
Jim Zimmer you May begin your conference.
Great. Thank you Rob good morning, and thank you for joining today's call and we look forward to we look forward to discussing both the group's outstanding fourth quarter earnings for the period ended December 31 2021.
On today's call by Ryan Marshall, President and CEO .
Bob O'shaughnessy, Executive Vice President and CFO , and Jim S asking senior VP finance copy.
A copy of our earnings release and this morning's presentation slides have been posted slides have been posted to our corporate website at Pulte group Dot Com will also posted an audio replay of today's call later.
I want to highlight that we will be discussing our reported fourth quarter numbers as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period a reconciliation of our adjusted results to our reported financials is included in this morning's release and within todays webcast slides. We encourage you to review these tables to.
To assist in your analysis of our business performance.
Also I want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance actual results could differ materially from those suggested by our comments made today.
The most significant risk factors that could affect future results are summarized as part of today's earnings release.
And in 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 Marshall Ryan.
Thanks, Jim and good morning, it's great to speak with you again and to have this opportunity to review Pulte group's impressive fourth quarter and full year results I'm extremely proud of what our organization has been able to accomplish for.
For starters I want to thank the entire Pulte group team for the tremendous effort demonstrated throughout 2021, particularly in the fourth quarter from sales to procurement and construction to our financial services team you clearly showed what a proud and talented group of determined people can achieve.
In a minute, Bob who will review our fourth quarter results, but I want to highlight a few of our full year numbers to clearly demonstrate just how much success, we have realized over the past 12 months.
Even with all the challenges the homebuilding industry faced in 2021 from supply chain disruptions and labor shortages municipal delays in Covid waves, we grew our closings by 17% to almost 29000 homes.
Benefiting from the very favorable demand and pricing conditions, we increased homebuilding revenues by an even greater 27% to $13 $5 billion.
We were then able to fully capitalize on this top line growth by expanding gross margins by 210 basis points to 26, 4%.
And driving a 43% increase in our reported full year earnings of $7 43 per share.
Our financial discussions tend to focus on the income statement, but I would also highlight that over the past 12 months, we lowered our debt to capital ratio to a historic low of 21, 3%, while raising our return on equity to 28%.
I would also highlight that over the course of 2021, we continued our disciplined allocation of capital in alignment with our stated priorities.
This allocation included investing over $4 billion in land acquisition and land development, increasing our dividend paid rate per share in 2021 by 17% retiring.
Retiring $726 million of bonds, and repurchasing $900 million of stock, reducing our shares outstanding by approximately 6%.
There is a lot to be excited about with regard to Pulte group's 2021, operating and financial results and assessing our performance. We fully appreciate that we benefited from a very favorable supply and demand dynamics in the marketplace.
On the demand side, we saw a strong desire for home ownership across all markets and buyer groups at one end, we have maturing millennials driving extraordinary demand for first time and first move up product.
At the other end, we have empty nesters, who are downsizing or retiring into their next stage of life.
This demand strength drove an increase of 8% and our 2021 net new orders to almost 32000 homes, including 6769 orders in the fourth quarter.
The reality is that these numbers could have been significantly higher but COVID-19 and other challenges impacted our availability of lots labor and materials, which caused us to intentionally slow sales as.
As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases were similar practices.
We continue to implement these actions in the fourth quarter as we raise prices and effectively all our communities.
At the same time, we continued to restrict sales and more than half of our communities. The strong demand experienced in the fourth quarter has continued into January with no signs that higher interest rates are impacting the desire for new homes.
As we look forward to the year ahead, we are well positioned to meet the strong demand we enter 2022 with twice as many spec homes in the production pipeline compared to last year, along with a land pipeline that will allow us to expand our community count throughout this year.
We also have all the lots we need for our 2022 deliveries and expect to increase our full year gross margins by upwards of 250 basis points.
In other words, we entered 2022 with tremendous momentum.
Demand conditions are strong the supply side of the equation has been extremely challenging with no clear signs as to when things will get better.
The limited supply of new and existing homes allowed prices to increase by double digits last year, the labor shortages and significant disruptions in the supply chain or limiting production and extending build cycles.
Our suppliers and partners are working hard to provide needed resources, but key products that are under allocation must be ordered months in advance or simply not available.
The ongoing surge in Covid infection rates is impacting our suppliers and is also making it very hard for trades to field crews consistently and expanding their teams is an even bigger challenge. Unfortunately, we expect construction processes to remain difficult through much if not all of 2022 and.
In response to these challenges we continue to implement actions to help ensure we can complete high quality homes and growing deliveries until supply chain issues are resolved.
These actions include increasing spec starts ordering earlier.
Growing option packages and even warehousing inventory of critical building products. These efforts are time consuming and we lose some production efficiencies, but for the foreseeable future they're required to get homes built.
We've said in the past that scale, particularly local stick Gail matters and this is certainly the case today, let me now turn the call over to Bob for a review of our fourth quarter results Bob.
Thanks, Ryan and good morning, as part of my review of our fourth quarter performance I'll discuss our reported results and where appropriate to review our results adjusted for specific items in the current or prior year quarter.
Along with reviewing the company's fourth quarter results I will also be providing guidance on key performance metrics for both the first quarter and full year 2022.
Looking at the income statement wholesale revenues in the fourth quarter increased 38% over last year to $4 2 billion.
Higher revenues for the period were driven by a 26% increase in closings to 8611 homes.
Along with a 10% increase in average sales price to $490000.
The higher asps in the quarter of double digit pricing gains from all buyer groups.
Closings came in slightly above guidance, thanks to a tremendous effort on the part of our homebuilding and financial services teams.
Consistent with comments made throughout 2021 favorable supply and demand dynamics for housing supported the strong price appreciation, we experienced across all markets and from all buyer groups.
The mix of closings in the quarter were a direct alignment with our long term goals and included 34% from first time buyers, 42% for move up buyers and 24% from active adult buyers.
Closings in the fourth quarter last year included 31% first time, 46% move up and 23% active adult.
Net new orders in the quarter totaled 6769 homes, which is a decrease of $4 from last year.
The decrease in orders reflects a decrease in community count as well as the ongoing actions to manage sales to better align the pace of our sales and production that Ryan mentioned.
Our average community count in the quarter was 785, which is down 7% from the prior year.
Buyer demand was strong in order volumes are fairly consistent across all three months of the quarter as we didn't experience the typical seasonal drop off in order volumes as we move through the quarter.
I would note that we continued to experience this strength and demand through January .
By buyer group orders by first time buyers increased 12% to 2207 homes, while orders by move up and active adult buyers both declined 10% in 2812 homes and 1750 homes respectively.
The primary drivers of the lower order rates among the move and active adult buyers was having senior communities and our decision to restrict sales.
We ended the fourth quarter with a large backlog of sold homes, which provides a strong base of production heading into the new year on a unit basis, our backlog at year end was 18003 homes, which is an increase of 19% over last year.
Backlog value at year end was $9 9 billion, which is an increase of 45% over 2012.
Even with the well documented challenges within the supply chain I can say that thanks to a lot of hard work by our teams trades and suppliers were getting homes into production.
As a result, we ended the year with 18423 homes under construction, which is up almost 50% over last year.
Also pleased to report that we've been able to increase our spec production is 23% of homes under construction are spec.
This is up from 17% in the third quarter, and it's getting us closer to our target of having between 25% to 30% stack.
Well, it's great to see homes getting into production. It is important to note that the overwhelming majority of these units are in the early stages of construction.
More specifically, 31% of our production pipeline is that the initial start stage with another 44% of the homes only at the framing stage.
At the other end of the production pipeline. We have only 411 finished homes. This figure includes both sold and spec units.
Given the number of homes under production and equally important their stage of construction. We currently expect to deliver between 5000 606000 homes in the first quarter of 2022.
In addition to the challenging production environment, Ryan discussed our Q1 delivery guidance reflects the impact of limited finished spec inventory and the longer construction cycle times your experience.
For the full year 2022, we expect to deliver 31000 homes.
This estimate assumes no meaningful change in the state of the supply chain and in turn our current cycle times.
If the favorable demand conditions allow us to sell and an even higher year over year growth rate.
Just to see if the supply of materials and labor will be equally supportive.
Based on what occurred in 2021, we want to be confident we can deliver a high quality and complete home at closing.
The supply of labor and materials does not allow for increased production. We will continue to emphasize price over pace restrict sales as needed as we focus on driving the best returns within each community.
As we move through 2022, we are well positioned to meet higher demand, giving our expectations for sequential increases in our community count and throughout the year.
For the coming four quarters, we project, our average community count to be 790 in Q1.
815 in Q2 840 in Q3 and 870 in Q4.
Given the land investments we've made we expect this trend to continue and see further community count growth in 2023.
As mentioned strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price and backlog increasing by 22% compared to last year.
Given the price of homes in backlog and the mix of homes. We anticipate closing we expect our average sales price to be between $500000 $510000 in the first quarter.
Our average sales price should move higher as we move through the year and we currently expect our full year average sales price to be approximately $515000.
As always the ultimate mix of deliveries can influence the average sales price we realized in any given quarter.
Driven by the strong price appreciation achieved throughout our markets. Our homebuilding gross margin in the FERC fourth quarter increased to 180 basis points over last year, and 30 basis points sequentially to 26, 8%.
With 18000 homes in backlog, we have good visibility on near term gross margins, but we also know that input costs are moving higher and that we expect to continue to incur what are now commonly called scrambled costs as we work to ensure product and labor availability.
Based on what we can see today, we expect gross margin to be in the range of 28, 5% to 29% in the first quarter and for the full year.
This guidance takes into consideration our current construction costs as well as the recent run up in lumber prices.
Based on these factors, we anticipate being towards the bottom end of the range in the first quarter, but towards the higher end of the range by the end of the year.
Speaking of inflation, we are closely monitoring increases that are impacting the cost of labor and materials.
As a result, we currently expect house cost inflation exclusive of land costs of 6% to 8% for 2022.
More than ever there are a lot of moving pieces. So we will update our gross margin guidance if needed as we move through the year.
For the fourth quarter, our reported SG&A expense of $344 million.
Or eight 2% of home sale revenues includes a net pre tax benefit of $23 million from adjustments to insurance related reserves recorded in the fourth quarter.
Exclusive of this benefit our adjusted SG&A expense was $367 million or.
Or eight 7% of home sale revenues.
In the comparable prior year period, our reported SG&A expense was $280 million or nine 1% of home sale revenues exclude.
Excluding a $16 million net pre tax benefit from adjustments to insurance related reserves recorded in last year's fourth quarter, our adjusted SG&A expense was $296 million.
Or nine 7% of home sale revenues.
Looking at 2022 overheads, we currently expect SG&A expense in the first quarter to be in the range of 10, 7% to 10, 9%.
Which would be flat to down slightly from last year.
For the full year, we expect SG&A expense to decrease as a percentage of revenues to be in the range of nine 3% to nine 5% of home sale revenues as we realized incremental overhead leverage on the business.
In the fourth quarter, our financial services operations reported pretax income of $55 million.
Prior year reported pre tax income of $43 million included $22 million pre tax charge for adjustments to our mortgage origination reserves.
During the fourth quarter financial services pre tax income was driven by increased loan production consistent with the growth in our homebuilding operations offset by lower profitability per loan, resulting from a more competitive market conditions.
Mortgage capture rate for the quarter was 85%, which is down slightly from last year's 86%.
Our reported tax expense for the fourth quarter was $193 million, which represents an effective tax rate of 22, 5%.
Taxes in the fourth quarter included tax benefit of $9 million, resulting from deferred tax valuation allowance adjustments recorded in the period.
Yes.
For 2022, we expect our tax rate increased to 25%.
Driven by changes in certain underlying state tax rates and the fact that legislation to extend the energy tax credits beyond 2021 has not been passed.
For the fourth quarter, we reported net income of $663 million or $2 61 per share and adjusted net income of $637 million or $2 51 per share.
Prior year fourth quarter reported net income was $438 million or $1 62 per share with adjusted net income of $415 million or $1 53 per share.
Multi group's earnings per share continue to benefit from our share repurchase program in the fourth quarter, we repurchased $5 6 million common shares at a total cost of $283 million.
Or an average price of $50 11 per share.
For all of 2021, we repurchased $17 7 million shares driving a 6% reduction in our shares outstanding at an average cost of $50 80 per share.
For the year, we returned $897 million to shareholders through share repurchases, plus an additional $148 million of dividends.
This brings the five year total of share repurchases and dividends to approximately $3 2 billion.
Having reduced our common shares outstanding by more than one third over the past eight years, returning funds to shareholders has been a significant part of our capital allocation strategy.
We fully expect such systematic repurchases to continue in the future. So we're extremely pleased with the board's action, we announced today are proving a $1 billion increase to our repurchase authorization.
At the end of 'twenty, one we had $458 million remaining on the existing programs.
Given our improving financial results and cash flows.
Even after returning over $1 billion to shareholders investing over $4 billion in our business and paying down $726 million of bonds. During the year. We ended the year with $1 8 billion of cash.
Our debt to total capital ratio at year end was 21, 3%, which is a decrease of 820 basis points from last year.
Adjusting for the cash on our balance sheet, our net debt to capital ratio was two 5%.
As part of our overall capital allocation strategy, we have routine we have routinely talked about maintaining our gross debt to capital ratio in the range of 30% to 40%.
As noted in today's press release, we are updating these numbers to better reflect how our business operates today.
Over the past several years, we have driven material and sustained gains in our operating performance and capital efficiency.
These in turn have dramatically increased the cash flows we expect to generate.
Taken in combination we now believe we can grow our business and fund its operations, while maintaining our gross debt to capital ratio in the range of 20% to 30%.
This represents confirmation that the changes we've driven in the business continue continue to support long term growth.
To further demonstrate this point in the fourth quarter, we invested $1 4 billion in land acquisition and development.
This brings our total land spend for 2021% to $4 2 billion.
On paper. This is an increase of almost 50% over 2000 22020 land spend.
But I would remind you that we suspended land investment for almost six months when the pandemic first hit in 2020. So some of the 2021 spend was simply deferred from the prior year.
We currently expect to increase our land investment in 2022 to between four five and $5 billion.
Given that the vast majority of land, we acquire is undeveloped more than half of our spend in 2022 will be for the development of existing land assets.
Supported by the higher land spend we ended 2021 was 228000 lots under control of which a 109000 were owned and 119000 are controlled through options.
On a year over year basis, we ended 2021 with an incremental 30000 lots under option and remained focused on advancing our land light strategy going forward.
I would note that included within our land position to approximately 1400 lots that were approved under our strategic relationship with invitation homes and that we remain on track with our five year plan of building 7500 homes under this program with first closings expected in 2023.
Now, let me turn the call back to Ryan.
Thanks, Bob for a number of reasons, we remain constructive on the outlook for the housing industry earlier I spoke about the large demographic trends, which are aligned to support buyer demand over the long term in the near term most economic indicators point to an ongoing expansion of the U S economy, which should keep the job market is strong.
<unk> and increased wages even further.
We recognize that COVID-19 and its various mutations are obviously, a wildcard, but we hope that this latest surge may have already peaked and that conditions will begin to improve going forward. The impacts from COVID-19 that don't appear to be waning or the desire for single family living and the ability to work from home indefinitely.
We are certainly mindful of rising interest rates and the potential risks risks through affordability and overall demand and are prepared to respond appropriately should conditions change.
Given a strong economy high unemployment high employment and rising wages. This is a market environment in which we can sell homes.
Before opening the call to questions I do want to highlight an initiative that we've launched internally in 2020, but which you may begin hearing more about this year.
Our hope to home program. This is our effort to make available for sale more affordable housing and the possibility of homeownership to individuals who might not otherwise get the chance.
We all know the benefits that homeownership can afford people over time, but we also can appreciate that not everyone has the same opportunity to access this path.
We are beginning to pilot hoped to home in a few communities and believe it's a program that could ultimately result in the sale of a couple of hundred homes a year.
Hope to home as a for sale program designed to complement but run independently of our highly successful built to honor program through which we donate mortgage free homes to wounded veterans.
Started in 2013 Im extremely proud to say that built to honor will awarded 75 mortgage free home later this year.
Now, let me close as I began by thanking our entire organization as well as all our suppliers and trade partners. You've continued to prove yourselves to be an outstanding group of people focused on serving our customers and supporting each other.
Thanks, Ryan we're now prepared to open the call for questions. So we can get to as many questions as possible. During the remaining time on this call. We ask that you limit yourself to one question one follow up.
Rob if you'll explain the process, we'll get started with Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for a brief moment to compile the Q&A roster.
And your first question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Good morning, Nice results. Thanks for taking my questions, Hey, Mike and Mike.
Okay.
First question just on the on the gross margin guidance, it's great to see it up that much for the full year it looks like it's okay.
Yes, it's up to put its relatively stable through the year.
Can you talk about some of the moving pieces I mean, obviously you've had some good sequential pricing you talked about the full year for cost inflation, but can you can you talk about the moving pieces throughout the year that keep that guidance a little bit.
A little bit flatter through the year and maybe there is a difference in inflation first half versus second half or however, you want to kind of frame that.
Sure Mike.
Obviously inflation is real.
And maybe <unk>.
Principal among that interestingly is lumbered, which had trended down.
And a little bit of a tailwind in the first half of the year, but pricing has moved right back up and.
And so that's influenced the back half of the year.
But I would tell you you heard in the prepared remarks, we're projecting 6% to 8% increase in input costs for the house.
Plus kind of every new lot comes with a little bit more expensive cost and the ones that we just cost and off.
Which is consistent with what <unk> seen for a couple of years now in a rising.
Market as we bring new assets to market.
They are a little bit more expensive so all those things factor in.
The good news is as we look at the year, we do see margins improving through the year. So in the prepared remarks highlighted we will be at the lower end of the range in the first quarter and towards the higher end of the range. So despite those cost pressures, we think we're getting enough price to offset some of those increases.
Margins of 28 to 29, 25% to 29% are pretty stout.
Sure.
Thanks, Bob.
Second question is around cash flow and capital allocation I mean, it's nice to see.
The new details. This morning, I guess, if we take into account your.
Land investment will be up a little bit.
Clearly here.
Died around income drivers are also up year on year. So it seems like all else equal cash from ops or free cash flow will be higher in 'twenty two than than 'twenty one.
You are already in that 20% range or the lower end of that 20% range on gross debt cap should we think about effectively all of the cash flow.
In the intermediate term is going to be.
Given back to shareholders via buybacks and dividends.
Yes, Mike It's an interesting question and the simple answer is I don't think so.
We've long said that we've got sort of a priority.
Cadence invest in the business.
Pay our dividend dividend return excess cash to shareholders.
And there are a lot of things that we could do with that money. So I wouldn't want to say it would be restricted to any one thing.
The land market if it's attractive.
Could see us investing.
We've always told folks we look at M&A.
Some money could end up there.
So yes.
Yes, the good news is and you've heard this before we're in a position where we have choices to make you can see with the amount of money that we used to buy back stock in this quarter at $283 million, that's a step up from what we had done.
Brought the full year to almost $1 billion the board increased the authorization.
By $1 billion, we put that out this morning.
So.
If you add that to the 400 plus million we had at the end of the year, we've got a lot of.
Capacity there.
But we'll look at everything and so I wouldn't want to.
Pigeonholed ourselves in the same yet all going back to shareholders.
We'll use the same screen, we always do in the business is going to be our primary.
Driver as long as we can see an opportunity for high return off of it.
Your next question comes from the line of Ivy Zelman from Zelman and Associates. Your line is open.
Thank you and congratulations on a great year guys.
Thanks, Craig you can help us a little bit just depreciating, what you just said about.
Ask that you deliver slightly higher cost when you think about pre COVID-19 and your underwriting land what what are you underwriting in terms of absorption and what are you underwriting what you buy that.
Let's say today that might not deliver until 'twenty three 'twenty four just to give us some perspective relative to the sort of normal trend line, let's start there.
Yes.
Thanks for the question and I would I would tell you that I think one of the things that has enabled us to deliver the results that we're delivering is a very consistent.
Land underwriting screen that candidly hasnt changed through time.
We're certainly underwriting at current market conditions, and we kind of have to do that in order to remain competitive.
So the absorptions that we are underwriting communities at today are certainly a little bit higher than probably what we are underwriting land acquisitions at.
Say three years ago.
That being said we're.
We're cognizant of the fact that absorption over the last 12 to 15 months have been.
Slightly higher than normal.
So I think some have said from time to time trees don't trees don't grow to the sky. So.
We wouldn't necessarily expect that to continue kind of in perpetuity.
The thing that I would highlight I view some of the things I mentioned in my prepared remarks, we think some of the structural changes that have occurred and buyer preferences for single family living and perpetual work from home will continue to benefit this industry.
We're also not in.
An oversupply environment and given some of the supply chain challenges that we've highlighted we don't anticipate that changing anytime in the near future either.
And then probably what I would conclude on the most important thing that I think we've structurally done as an organization is to integrate more optionality into our land pipeline, we're at north of 52% and over 119000 lots that are controlled via option, which I think gives us tremendous.
<unk> flexibility.
Should there be a change in market conditions.
No that's really helpful and maybe Bob.
Yes, you can said that's been follow up of <unk>.
<unk> historically I know, we've got at our data, but with mix shift.
I don't know that its a little bit higher Orion of Arkan conditions right now are back to absorptions per community.
Public companies is back to where it was.
During the great financial boutique.
On a trend line basis, so that's EBIT with restricting sales, but the cost inflation in land has been substantial so maybe you can give us some perspective on how much is land that you acquired today undeveloped land relative to what maybe we're thinking about it from a baseline of 19 and what are you paying if you are on finished.
Even if youre optioning, what does the.
Cost embedded in those acquisitions.
And I'm done thank you.
Yes.
That's a hard question to answer kind of apples to apples. Let me note two parcels are the same.
Certainly the market is pretty efficient and as Ryan laid out for you.
It's a competitive market so we have to be competitive.
So we.
Make our bids in pricing.
Based on what we see in terms of pricing that we can see in the market. What we think our cost to construct is in the ultimate return we can generate from the asset.
And youre going to see different price appreciation in land in different parts of the country and for different buyer groups honestly, so all of those things.
Would make it really challenging to blanket say pricing is up X <unk>.
Percent.
Suffice to say it is up and it's one of the reasons I highlighted that as part of our our margin guide.
<unk>.
Hopefully that answers your question.
Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.
Good morning.
Good morning, Anthony.
I was wondering if you could talk about kind of credit metrics for your average buyer or your buyer types in terms of FICO or LTV.
And then I think you indicated that rising rates you haven't really seen an impact.
To date, but I'm just wondering.
As you look at previous hiking cycles, what you would anticipate in terms of behavior between your different buyer types or.
Trading down market or maybe it's more affordable offerings any any comments you can give.
Sure Anthony Good morning, Thanks for the question the credit metrics out of we obviously have visibility to the credit metrics.
As a whole from loans that are running through our mortgage operation and they've largely remain unchanged for the last probably a decade.
Heiko scores that we see are north of 750.
So incredibly strong credit.
Loan to value ratios.
Very very strong as well so I think the credit metrics.
We're seeing from the buyers would indicate.
And maybe reiterate the financial strength that I think what you've seen.
Personal balance sheets so.
Not a not a huge concern there honestly, Bob anything you'd add on on many of the credit metrics that we've seen to this point only that interestingly enough even among our first time buyers. If you look at them relative to the kind of the broader universe.
Got a higher mix of FICO scores even there.
So yes.
Interestingly in a rising rate environment.
The history is a guide that.
People were selling to at that slightly higher price point.
Little bit healthier balance sheet that folks that are.
Just at the edge of qualified.
As far as.
Rising rates go Anthony in our prepared remarks, we highlighted that we have not seen it impact demand.
And I think.
A large part of that is because we've been restricting sales and because demand is outstripping supply.
We are.
Closely monitoring the impact of further increases in the 30 year mortgage and what that will ultimately due to affordability.
But as we've said for a number of years and we'll continue to talk about it.
We do believe that history is a guide housing can be strong in a rising rate environment as long as the broader economy continues to show strength, which it is.
We've got historically low unemployment, we are seeing some real wage growth and I think those are fat and consumer confidence remains high.
Those are things that I think we will continue to prune.
Prove.
Will bode well for the industry, even against the backdrop of slightly higher rates that being said even with with.
Some increases in the 30 year mortgage they're going to remain at historically really really low rates, which we think is encouraging.
Okay. Okay, that's very helpful.
And then in your comments I think you indicated youre not expecting supply chain synergies to ease over the course of the year.
You talked about lumber can you talk about any other categories that are I don't know, maybe getting worse versus getting better and then there was a comment on potentially warehousing certain building products and to the extent that you can I don't know if you can talk about sort of the magnitude of that or or what that looks like.
Yes, Anthony we don't actually anticipate things to get.
Better through 2022, so we've assumed.
It will continue to have.
A shortage of what we what we want in totality and most of that's coming through either delays or allocations that we and frankly the entire industry has been given from from certain key supplies.
<unk>.
There are some some real bottlenecks and manpower availability due to COVID-19 . So some of the factories that are suppliers come out over running at less than full capacity because of manpower issues, we're seeing less availability in terms of transportation.
And truck drivers there was a shortage there to begin with and when you factor in Covid and that's just further exacerbated in.
<unk>.
Those domino effects I think we see flow through the entire supply chain.
We are seeing some green shoots and and we have over the last six months kind of gone through some peaks and valleys, where one particular supply seems to start getting better in lead times shorten only for things to go back to where they were.
And so it's for that reason that.
We're not anticipating that we completely turned the corner and have a fixed supply chain in 2022.
Just in terms of the items that were seeing challenges with <unk>.
<unk> trusses appliances.
Citing.
Paint do a certain degree so things are pretty critical for us to build and deliver homes cabinets is another one that I would tell you all the all of the cabinets come out of factories.
Where they have been challenged by historic high demand and manpower issue. So those are a few comments on the supply chain side.
Our next question comes from the line of Michael Rehaut from Jpmorgan. Your line is open.
Hi, Thanks, good morning, everyone.
Wanted to go back to an earlier question around.
Just trying to get around Triangulating normalized gross margins, let's say as you continue to buy land in.
To the extent that youre not going to have.
10%, 15%, 20% home price appreciation over the next few years.
If you look back into like 2017, 2018 Youre doing.
93% to 24% gross margins, which.
Was that the higher end.
Broader homebuilding sector.
Yes.
To the extent that home price depreciation normalizes could.
Could you see a scenario over the next two to three years where give.
Given your current underwriting you can get back to those types of levels, which again would still.
Sensibly be.
Is mean reversion I would assume still be at the higher level of of the broader sector.
Or is there anything that kind of changed in.
How you are either approaching land.
Your own cost structure with greater scale for some of the improvements et cetera, perhaps on the.
Construction efforts that you're embarking upon.
That you could see kind of a.
A slightly even slightly higher.
Gross margin trend over time.
Yeah, Hey, Mike It's Ryan good morning, and thanks for the question I think I'd go back a decade ago, when we really laid out.
A thesis around.
Making investments to drive industry, leading returns and so I think the way you have seen us.
<unk> investments in land the way that we've managed that the way that we've allocated capital to share repurchases and dividends.
<unk>.
That has.
And frankly, the way that we've re completely restructured our land.
Ownership structure with so much being toward options, that's all been aimed at delivering.
Top quartile top tier returns.
Margins are certainly a component of that.
And it's long been part of our strategy to have.
Leading leading margins.
The thing that I would highlight Mike is that we're at 28, 5% to 29% gross margins through the rest of 2022, which as Bob highlighted it's pretty stout.
And.
We're not giving any visibility beyond 2022.
I think.
It's a little early for that but what you have seen from us is continuously.
Hi, and top tier return on invested capital and Thats going to continue to be our focus so what that's yielded.
And this just this past year. We just finished was roes that are north of 28%. So we think the operating model that we have Mike can work in multiple market cycles. This one happens to be certainly, particularly good.
Great. Thank you for that Ryan.
I guess secondly.
Just wanted to focus in on the.
The.
The community count growth.
A nice trajectory that you've laid out for 2022.
Just on.
The land the land book that you have.
How should we think about.
Community Count growth and obviously now passed 22, and obviously not trying to get too granular and beyond what you are prepared to say in terms of formal guidance, but.
This has been an area where as I'm sure you know.
People have expressed concerns around.
Some of the growth on the community count side.
Are we kind of turning a corner here.
Where we could see perhaps a little bit.
More consistent growth going forward in this metric.
Any thoughts around.
Where we would go past the 870 at the end of 'twenty two would be pretty helpful for people.
Yes, Mike I appreciate the question its Bob.
Not going to give you a guide for 2003.
We did want to give a level of granularity more than we have for 'twenty two to show the sequencing.
That shows growth each quarter sequentially.
And ultimately to a higher point at the end of the year and in our prepared remarks actually said based on spending we expect that to continue.
Like every year, we will give you a guide for 'twenty three as we approach 23, Mike the only thing that I'd add to that is I think if you look at the trend of our land spend over the last three years, we've been a consistent investor in our land portfolio and was 225000 lots under.
Control.
I'll turn into active communities. So we're pleased with.
What's coming into the pipeline.
Your next question comes from the line of Carl Reichardt from BT IAG. Your line is open.
Thanks, everybody.
One for you Ryan.
And just on pricing strategy headed into the spring I mean, you've got more demand than you conserve costs are going up.
But rates could come up.
And we know there's going to be more competition across the board from other builders and you've got more spec. So are you approaching pricing. This spring would you say more conservatively than you have in past Springs, and I know, it's not necessarily a.
At corporate and in Atlanta type of decision, perhaps it's more local but maybe you can talk a little bit about how you're thinking about pricing strategy given the cross current.
Carl It is it is more than local it's probably hyper local all of our pricing decisions are made on a community by community basis, but that's a that's a company philosophy, we've got very regimented pricing discipline in the way that we breakdown what the competitive.
That is both from a resale and a new environment.
Both what's on the ground as well as what we see coming into the pipeline over the next six to 12 months. So.
I think the.
The the tools the methodology the proprietary pricing.
The algorithms that we have we think it served us very well and we've got we've gotten very good results from that.
I think Karl we always try to be prudent in what we do and never get too far over our skis.
I think the industry has seen over the years, if you pushed things too far the.
The consumer will be pretty quick to tell you that you have gone too far and that will shutdown. So in the <unk>.
Base of.
No.
But potentially some more inventory coming online with some higher rates.
We're going to continue to run our playbook, but take into consideration all the data that's available.
Great. Thank you Ron and then just a follow up on <unk> question. If you look at the palms, you plan to deliver in 'twenty, two I'm, assuming that effectively none of them are on lots that you bought post the.
The middle of 'twenty, So post pandemic land when would you start to see the majority of your delivery volume be delivered on land you bought post pandemic were contracted for a post pandemic.
Well Carl we we're basically turning the majority of the land that we're buying we're turning in about three years. So.
Our when we buy it we essentially are putting under contract about three years worth of land. So a third of that year, one a third of that year to a third of that year. Three so you've always got old land cycling now and new land cycling in so theres never.
<unk>.
There's never a time when youre going to have.
A complete fall off the cliff of the entire land book and a whole new land book comes on.
Theres always a mixing going on.
Development timelines are elongated relative to historical as well so land that from the time that we buy it it's taken US 12 months plus or minus to get it.
Fully developed and ready to start selling homes. So.
Karl I think the simplest way that I can tell you is that we always have new stuff coming in we always have old stuff going out.
All of that is factored into the guide that we've given certainly for 2022.
Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.
Yes, thanks, very much guys really impressive results and I know folks are excited about the guide, but I actually wanted to explore a few areas where it seems to me like your guidance could actually be incorporating a nice healthy dose of conservatism.
And it's really around Asps.
Volume and the implications of volume on margin.
You look at your <unk>.
ASP.
You guided I think for the full year of around $5 15.
Your order Asps has been running at around $5 56, I think for the past two quarters, maybe I'm wrong on that but just if that's the case 515 themes.
LOE for for closings number ASP number and then regarding your volume I think you said 31000 closings and I know the cycle times is an issue out there, but it looks to me like you started over 34000 in fiscal 'twenty, one and even 8200 or so.
In fourth quarter, so although you're guiding.
If there's no improvement in cycle time coming it would seem that your actual what youre doing on the ground and what you did in terms of starts is leaving open the possibility that they will get better.
I don't think you would've started that mini and <unk>.
And then if I'm right that closings could actually do better than your guidance won't you have some benefit on SG&A and scrambling costs.
So that's kind of like the general framework of my question. Let me ask this SG&A question, specifically, if you do better than your guidance on closings what is the incremental SG&A, we should apply to that was incremental revenues.
Stephen Good morning. Thanks for the question I think all of these things are related so I'll do my best to kind of tie them together and allows for probably a little help from Bob at some point in terms of Asps.
Steven.
We've consciously been starting more stock most of the spec that we're starting is in our lower priced communities.
Specifically in our Centex first time buyer communities, where those price points are significantly lower they will those will sell as specs later in the cycle and so that's all been factored into the ASP guide that we've given.
To your point about orders being at a higher price point over the last couple of quarters, that's largely be that's largely been because we've been selling more of our del Webb and our pulte.
Branded communities that come at a higher price point so.
<unk>.
It's a fair question, you've asked I understand why you've asked it but I think we factored in what we see or what we would expect to be our ultimate brand mix as we move throughout the year.
In terms of the closing guide Steven and what we've started.
As we highlighted in our prepared remarks, we've factored in.
What we've what we've started and we're very pleased with how much inventory been able to put into the ground both for sale and spec inventory.
We.
Updated our delivery guide based on our current cycle time, and what we anticipate to happen throughout the year.
With the supply chain so.
You know.
Wouldn't I wouldn't probably go down the path of assuming that there is conservatism in that guide.
I can tell you that if 22 is anything like 'twenty one it was the hardest year of homebuilding.
We've ever seen as an organization.
And so we're going to stand firm on the 31000 units that we've guided to if things can improve we will all be thrilled.
Yes.
For sure.
Bob what are what got it what about that incremental SG&A ratio that we should be thinking about and then just my only other question long term.
Is your land supply in years.
At some point the pandemic will hopefully fade.
So I'm thinking five years out here 345 years out.
What level of land, what's the lower bound lower range of.
Years of land owned that Pulte can operate at is it like two years because some of your competitors are running that low or approaching that low could could that be a level that you guys get to eventually once things have normalized in three to five years down the road.
Yes, Stephen I think we've talked about the SG&A question before and.
Honestly, if you if you were to toggle the.
Volume.
We wouldn't suggest.
And is it is a.
If we are if youre increasing volume it is it is accretive to our overhead efficiency.
I wouldn't want to put a percentage because it depends on how much volume you are talking about.
But certainly we would if we had more volume lever the central overheads.
Youre selling costs don't change as a result of more volume.
And then in terms of land supply.
We've been consistent honestly since Ryan.
<unk> the CEO that we're targeting three years owned three years optioned.
If you use a trailing 12 month volume were a little bit rich on that if you look forward.
It's more in line.
Hi.
It's hard to say.
Where ultimately Optionality can go.
I think we would love to see it become a bigger part of our business as long as we can do it in a way.
That for us creates value and that is a to be economically workable and b create true market risk you won't see us, creating optionality just to do optionality. So.
We will.
Be seeking market has some level of market protection from that I E.
We can walk away from the transaction.
If something changes.
Again, I think very consistent from us.
Whether the developer base can get big enough to support a lower level of years.
Supply for Us time will tell.
Certainly if you look back over the last 40 or 50 years, there were points, where the developers were active enough.
That the builders could take lots on an adjusted time basis.
That developer base has not reestablished itself since the downturn in 2789.
If that happens I think you'd see us participating in.
Your next question comes from the line of John Lovallo from UBS. Your line is open.
Good morning, guys. Thank you for taking my question.
First one maybe starting at a high level, we've been hearing that demand in foot traffic may have actually inflected positively in January I'm, just curious if thats consistent with what you guys have seen.
Yes. It is John we're seeing.
Really strong interest from buyers in.
We think it's driven by some of the things we highlighted.
The desire from for single family living in the work from home.
<unk>.
Continue I would highlight not all the traffics on foot.
I think our digital selling tools have probably advanced.
708 years over the last 18 months, which I think is.
Overall, good for the business.
Okay. That's helpful. And then maybe drilling down just on the West region in particular deliveries declined slightly year over year.
The universe is pretty big gains in most other regions was this just a timing related issue or is there something else to be thinking about there.
Yes, it's really just community turnover.
Nothing nothing to note honestly.
Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Hey, good morning, everyone and thanks for taking my questions just had a couple.
Follow ups.
Some prior questions but.
On some of the materials and Labour supply chain challenges and what it means to cycle times I am just hoping to get some clarity.
By the end of 2021 call. It November December have you actually started to see.
Cycle times stabilize and the reason I'm asking is outside of the recent flare with one micron, we had been hearing that builders largely to become more efficient in working with the whack a mole environment in summit stabilized cycle times.
Well Truman I think like any.
Game, if you play it long enough you certainly get better at it.
And <unk> is no different but it still whack a mole for sure.
What we've seen in our business, we've actually been able to take we've actually seen increased cycle times in the front half of the.
Overall production cycle through kind of framed it frame and windows stage.
Which has been really related to the truss availability framing labor some of those kinds of things and windows candidly, we've been able to make up some time in the back half of the schedule.
So there have been some pushes and pulls but overall, it's been a net increase so cycle time.
We've assumed.
But that doesn't get any better in 2022, and that's all been factored into the guide that we've given.
Okay. Thanks for that and then.
You all.
Have mentioned some improvement in your new home inventory in 'twenty, two recognizing all the constraints but.
In this market.
Today orders are really a function of inventory and production capabilities in my mind I'm, hoping.
That you might be able to give us an update on your expectations for starts in the first quarter and whether or not.
Your first quarter orders could inflect positive year over year on a pretty challenging comp based on your internal.
Inventory capabilities.
Yes, Truman we don't guide or haven't guided on either one of those and so probably I'll stop short of giving you any additional insight we do feel very good about what we have in the production pipeline and I think we've demonstrated really over the last nine months, a very predictable start cadence where we <unk>.
Have been able to get volume into the ground, it's taking longer for it to move through the overall production cycle, but again.
That's been factored into.
Our deliveries delivery guide for the year.
Last thing.
I would really highlight on that note Truman as that.
<unk>.
We've got I think.
As I said in my prepared remarks, I know I've said in my prepared remarks, we've got double the amount of spec inventory. So it's something north of about 4000 units.
That will certainly benefit us as we as we move through 2022.
And we have reached our allotted time for questions. Mr. <unk> I turn the call back over to you for some closing remarks.
Alright. Thank you Rob I. Appreciate every time everybody's time. This morning, we will certainly be available over the course of the day for additional questions.
Good rest of your day and look forward to speaking with you on our next call. Thanks, everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Okay.
[music].