Q4 2021 Meritage Homes Corp Earnings Call
Speaker 1: Greetings and welcome to the Meritage Homes fourth quarter 2021 analyst call. At this time all participants are in a listen-only mode.
Greetings and welcome to the Meritage homes fourth quarter 2021 analyst call. At this time, all participants are in a listen only mode.
Speaker 1: The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder...
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to Emily to Garner Vice President of Investor Relations. Thank you you may begin.
Speaker 1: I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations. Thank you.
Thank you operator good morning.
And welcome to our analyst call to discuss our fourth quarter 2021 and year to date results. We issued a press release yesterday. After the market close you can find it along with the slides we'll refer to during this call on our website at investors that Meredith Trump dot com or by selecting the Investor Relations link at the top.
Bottom of our homepage.
Please refer to slide to caution you that our statements during this call as well as the press release and accompanying slides contain forward looking statements, including but not limited to our views regarding the health of the housing market economic conditions and changes in interest rates community count and absorption trends in construction.
<unk> supply chain and labor constraints and cycle time projected first quarter and full year 2022 home closings and revenue gross margin tax rate and diluted earnings per share potential future distraction to our business from an epidemic or pandemic, such as COVID-19, as well as others.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
Any forward looking statements are inherently uncertain are.
Actual results may be materially different than our expectation due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically, our 2020 annual report on Form 10-K , and subsequent quarterly reports on Form 10-Q .
Which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures.
With us today to discuss our results are detailed in executive Chairman Felipe Lora, CEO and Helix series Executive Vice President and CFO of Meritage homes. We expect this call to last about an hour a replay will be available on our website within approximately two hours. After we conclude the call and will remain active through February .
I'll now turn it over to Mr. Hilton Steve.
Thank you welcome to everyone participating on our call I'll start with a brief discussion about current market trends and provide an overview of our significant accomplishments in 2021 fleet.
<unk> will cover our strategy poorly performance and he will provide a financial overview of the fourth quarter and forward looking guidance for 2022.
Demand in the fourth quarter continuing to demonstrate the strength, we have seen all year mortgages remain very affordable and homebuyer demand continue to outpace housing inventory driven by favorable online activity for millennials and baby boomers.
Marriage again broke several company records in the fourth quarter of 2021.
In the face of a prolonged supply chain constraints and a tightening labor market, we achieved our highest fourth quarter sales sale.
Sales orders and our second highest quarterly home closings, while accelerating our spec starts.
Our fourth quarter results include the high highest quarterly home closing revenue home closing gross profit and diluted EPS as well as the lowest quarterly SG&A as a percentage of homebuilding revenue in our company's history.
From a full year 2021 perspective.
Would it be more proud of what our teams accomplished we achieved our highest annual sales orders of 13808 homes and closings of 12801 or.
Our 2021 annual home closing revenue was also a record at $5 1 billion.
As well as our full year home closing gross margin of 27, 8%.
Price increases due to sustained strong demand coupled with our operational efficiency and the leveraging of our fixed costs over higher higher higher home closing revenue drove our lowest full year SG&A rate of nine 2%.
Turning to our highest full year diluted EPS of $19 29.
Our community Count grew 33% year over year, we're entering the spring selling season with 259 active selling communities and forecasting continued double digit community growth into 2022.
We expect that our strategy capitalizes on the solid demand for the entry level and first move up homes will produce increased volume coming from a digital communities and will enable us to gain market share in all of our geographies.
Now, let's turn to slide four.
In addition to delivering impressive financial results, we achieved numerous milestones related to our corporate social stewardship in the four quarter.
As a team organized around ambition to start with heart Meritage employees donated cows hours to deliver a new mortgage free homes to deserving military veteran and his family on veterans day in Florida through operation home front.
We also there is a various nonprofit organizations do for this struck strengthen the diversity.
And inclusion missions and to help families during the holiday season, and the communities in which we do business.
Andrew support tree planting programs to share our ongoing approach to long term sustainability practices.
The amendment and our ESG milestones, we issued our inaugural ESG report during the quarter.
We're also joined more than 'twenty 100, other companies by sign the CEO action for diversity inclusion.
Inclusion pledge.
We'll have more to share about our ESG efforts would you throughout 2022.
We're excited about our employees executive and board level commitment to these important issues.
I'll now turn it over to Felipe.
Thank you Steve.
I want to start by focusing on affordability.
Which with the favorable pricing environment and the anticipated rate hikes coming this year is top of mind for everyone.
Portability is at the heart of our business strategy that is centered around entry level and first move up homes.
When we first shifted to this market segment more than five years ago. We did so knowing eventually interest rates would go up.
Turning to buy land for even lower ASP pilot has been our focus over the past two years to act as a counterbalance to the pricing strength all markets have experienced since may 21.
Although we have taken increases in line with the market condition, we expect our new communities to come alive, and still I'm still attractive and affordable ASP.
Especially in light of increased FHA limits and all of our markets.
To ensure our product remains affordable we constantly evaluate the credit metrics of our buyers are customers FICO scores and DTI remained stable in the fourth quarter and consistent with historical averages demonstrating that they are not extremely financially to purchase our homes.
Given the recent interest rate increases we will continue to monitor the monitor the overall affordability of our homes.
During the fourth quarter, we continued to meet our order order pace and most of our communities to manage margin through supply chain challenges and a tightening labor market and ensure we provide our customers a quality home buying experience.
By focusing on our construction and simplified five strategy, we still achieved record orders orders and closings in 2021, demonstrating our ability to navigate delays associated with supply materials labor entitlement and permitting.
In today's rising rate environment, we believe selling homes later in the construction cycle offered more favorable options to our buyers as they look to lock in their mortgage rate and closed escrow WILDBERRY rate lock explorations.
With each quarterly quarterly result in 2020 . One we also displayed our ability to achieve industry, leading gross margins. This was a function of the favorable pricing and by our first and foremost, but also our disciplined production approach to managing our construction cost.
As we have mentioned before spec building typically typically provide us the opportunity to lock in costs before determining asps.
However, in a rising cost environment riddled with supply chain issues. We went one step further to avoid congress and to better manage our margins in cases, where cost increases such as lumber continue past. The start of construction are delayed sales releases allows us to manage this additional cost exposure.
Managing our order pace helped generate a meaningful lift we have experienced in our gross margins. Although we are not forecasting any improvement in supply chain challenges once they do and why we expect to remove our sales meeting metering and fully allow us to use the capture to market demand, while maintaining our margin profile.
Now turning to slide five.
Given our longer cycle times, our fourth quarter closings totaled 3526 homes, which was down 6% over the challenging comps with prior year and she level comprised 81% of closings up from 72% in the prior year.
Total orders of 3367 for the fourth quarter of 2021 reflected an increase of 6% year over year, driven by a 24% increase in average active community count, which was partially offset by the decrease in absorptions there.
The decline from $5 three per month in Q4, 2020 to $4 five per month as current quarter was driven by a highly needed orders paced across most of our footprint as well as our new community openings occurring late in the quarter. We continue to reiterate reiterate that our sales metering is an intentional choice in order to maximize both our March.
And the customer whole buying process as we manage through the current supply chain issues in the market today looking at a growing interest list and the early months sellouts are communities. We know the actual demand for our homes is much greater than what we were seeing in our absorption pace.
And she level, comprising 80% of portal versus up from 72% in the fourth quarter last year and she level also represented 79% of our average active communities compared to 67% a year ago.
Moving to slide six.
The regional level trends, we continue experienced strong demand in all of our regions. Our central region comprised of Texas led in terms of regional average absorption pace with $5 three per month. This quarter. This 5% year over year decline was offset by a 17% greater average active communities, which together contributed to an 11.
That decrease in order volume with.
With the state's favorable economic development and growth environment to stay home buying demand generated a 20% year over year increase in AFP, our orders our highest increase in all three regions.
To address affordability challenges in the market our east region continues shifting product mix towards entry level, which made up 81% of average asset teams.
All of our three regions the East region average community count increased the most by 34% year over year, which generated order volume growth of 6% each.
These regions, increasing community count was offset a 25% decrease in average absorption pace.
The West region fourth quarter, 2021 order volume increased 2% year over year, mainly due to 19% more average communities, which was partially offset by 14% lower average absorption pace.
Overall, we had a solid performance from all our regions despite ongoing challenges with the supply chain.
As we accelerate fast detection and all of our regions. We expect total vault order volume to increase throughout 2022.
Turning to slide seven.
Of our home closings this quarter, 77% came from previously started spec inventory, which increased from 71% a year ago. We ended the period with nearly 3200 spec homes in inventory or an average of 12.3 per community as we pushed to get homes on the ground.
This compared to approximately 2500 specs or an average of $12 nine in the fourth quarter of 2020.
At December 21, 2000 December 31, 2021, less than 5% of total specs were completed versus our typical run rate of one third due to sustained demand and supply constraints.
We accelerated starts over 3700 homes in the fourth quarter for approximately 3400 homes in the third quarter and in line with approximately 3800 homes in the second quarter and we expect to continue wrapping up spec starts in 2022 as our community count increases having.
Having available staff as necessary for our 100% spec building strategy.
Is that despite improving our total spec home inventory year over year, maintaining a four to six months supply of eventual stack has been challenging given the surge in demand and supply chain constraints and we expect that trend to continue at least in the near term.
We ended the quarter with a backlog of over 5600 unit as our conversion rate declined from 71% last year to 60% this year, resulting from elongated cycle times.
However, it was a slight improvement from 57% in third quarter. As we look ahead into 2022, we aren't expecting any improvement in our backlog conversion since we do not anticipate any near term improvement in the current supply chain.
Once the supply chain stabilize we expect our cycle times will shorten and backlog conversion rate will pick up again, while order growth was also reaccelerate as we unwind sales mirrored.
During the fourth quarter ongoing supply chain disruption slice and construction time by about two weeks sequentially from Q3 to Q4 this year.
Spite these expanded time wise, we still believe our streamline operations and 100% spec building strategy for Angela Holmes has given us a competitive advantage in today's supply chain and labor market condition I walking in volume and provided welcome Paul consistency to our trades.
Coupling these with a reduced SKU counts and streamline product library has allowed us some incremental cost advantages the.
The benefits of free starting homes with simpler product to build and our steady predictable and repeatable construction work make us a preferred builder of choice.
These strong vendor relationships helped us deliver over 12800 homes in 2021 and are key to accelerating starts in 2022.
Since we have a spec building processes dialed and we've been able to give our partners more visibility into our business than ever before so they can plan for what we need we provider schedules to them well in advance so our preorder our strong partnerships with our suppliers and our limited built order options also allow us to pivot our product selections based on availability.
If necessary as we continue to stay nimble in these unusual times.
Our executive team has been meeting with our top vendors to short capacity commitments for 2022.
Given our significant increasing in anticipate starts as we grow our community count. This year. We have also a backfill or supply group with secondary alternative sources to help us with incremental need should that become necessary.
I'll now turn it over to Hela to provide additional analysis of our financial results Hilla.
Thank you Felipe, let's turn to slide eight and cover our Q4 financial results in more detail the.
The 6% year over year home closing revenue growth to $1 5 billion in the fourth quarter of 2021 as a result of a 13% increase in ASP is a strong market demand, even as we shifted our product mix.
Towards entry level phone. This is partially offset by a 6% decline in home closing volume did a clothing timing impacted by supply chain issues.
507 per minute in fourth quarter of 2020, My home closing gross margin to 29% from 24% a year ago was primarily driven by a full year of pricing power, which outweighed accelerating cost pressures and almost all cost category. We believe that despite the volatility in lumber and generally higher commodity costs, we can see.
Strong margins into 2022.
SG&A as a percentage of home closing revenue with eight 5% for the current quarter and 80 bps improvement over prior year, the higher revenue lower broker Commission and the benefits of technology on our sales and marketing efforts allowed us to better leverage our SG&A onetime items, including payments to our general counsel Gary.
Tired in December of 'twenty, 'twenty, one and a change in our company's retirement vesting eligibility for equity awards totaled $5 million and impacted SG&A expenses by 30 debt in the third quarter of 2021, we continue to pursue back office automation and greater technological side to drive incremental leverage of our SG&A.
The fourth quarter of 2021, the effective income tax rate was 23, 8% compared to 21, 9% in the prior years both years reflect reflected reduced rates, primarily from the eligible tax planning and qualifying energy efficient homes closed under the 2019 taxpayer certainty and disaster tax.
Relief Act increased profit indicates a higher tax rate and a reduced benefit from the energy tax credit due to the greater overall profitability of the company both contributed to the higher tax rate. This year since the energy tax rate tax rate has not yet been inactive for future periods, we're not assuming any such benefit beyond 2021.
And at this time.
Pricing power expanded gross margin and improved overhead leverage combined with lower outstanding share count all led to the 57% year over year increase in fourth quarter diluted EPS to $6 25.
To highlight a few full year 2021 result, and a year over year basis, we generated a 74% increase in net earned me order unit held steady at about 13800 for both ears closings were up 8%. We had a 580 that expansion of our home closing gross margin to 27.8.
Besides in 'twenty, 'twenty, one and SG&A as a percentage of home closing revenue improved 80 bps to nine 2% diluted EPS was $19 and 29, 75% increase from 2020.
Turning to slide nine our balance sheet remains strong even as we continued investing in land and land acquisition and development at December 31st 2021, our cash balance was 618 million compared to 746 million at December 31, 2020, reflecting increased investment in real estate into <unk>.
Inventory rose $956 million during the year and cause for share repurchases. During full year 2029, we repurchased about 640000 shares of stock for $61 million of which about 244000 shares totaling $24 million were repurchased during the fourth.
Quarter.
Our net debt to cap ratio was 15, 1% at December 31, 2021, compared with 10, 5% at December 31 2020.
Our current maximum target for net debt to cap is still in the high 20, which gives us the flexibility to manage liquidity and changing economic condition in December we extended the maturity date of our 780 million unsecured revolving credit facility to December 2026.
Given our strong balance sheet, we continue to focus our capital spend time now young Greg concentrating on community counts and increased back most of which we expect will drive profitability and help us gain market share. We also plan to continue routine share buybacks to offset new grants and keep our dilution neutral and be opportunistic.
We repurchase incremental shares.
Onto slide 10.
At December 31st 2020 in line with over 75000 total lots under control our land book increased 35% from year end 2020, and we had nearly six years supply of lots based on trailing 12 month closing well. This is slightly above our goal of four to five year supply of lots since we're in growth mode. The calculation.
On prior year's clothing is a fitness leading based on our forward clothing projection and about 15000 homes for 2022, we have a five year supply of lots.
We secured 9000 net new loss this quarter compared to approximately 11200 in the prior Q4. These new laws will translate to an estimated 45 net new communities of which 93% are entry level to address the higher orders paced and entry level products. The average community size, who contracted for it.
This quarter. It was nearly 200 lots up from the fourth quarter of 2020, whereas the average last night was about 150 lots during.
During the fourth quarter of 2021, we navigated around municipal delays and supply and labor disruptions to opened 48, new communities. We grew our community count by 23 net communities from 236 at the start of the quarter to 259 at year end 2021 on a year over year basis, we were.
At 33% or 64 net community.
During the full year, we opened 163 community up 55% from 105 in 2020, we are already seeing increased volume from our higher community count and expect to continue to benefit from incremental orders in closing in 2022 and beyond.
We spent about 507 million in land acquisition and development. This quarter in line with last year's Q4 spend and our targeted quarterly run rate, we expect land spend to be around 2 billion annually in 2022, and beyond and we get to and maintain our 300 community.
To finance land, we use options are staggered purchasing terms to preserve liquidity, where financially feasible and that 65% of our total lot inventory at December 31, 2021 was owned and 35% was option compared to prior year with 59% owned inventory and 41.
Percent optioned with over 80% of our own land currently actively underdevelopment and ready to open a new community over the next several quarters. We believe we are nearing an inflection point on our owned versus option percentage is due to our community count ramp up stabilizing over the next several quarters.
Meritage, we're dialed into our land playbook and our growth strategy. We are disciplined in our approach to reselling our land pipeline, even with strong competition in land price appreciation, we underwrite to normalize incentives and absorption, although we havent changed our underwriting gross margin hurdle. Most deals are penciling above that's giving us some breathing room to.
Absorb cost increases in future incentives, while still exceeding our minimum margin threshold, we do not targeting arbitrary percentage of option land in sand instead, we focus on managing our capital through balance sheet metrics and margin goals. We believe the current market demand trends, particularly at the entry level will be sustainable.
At least for the mid term once the supply chain stabilizes. The more communities. We have created incremental market share, we can gain and all of our geographies.
Additionally, our focus on affordability starts with our land strategy as Felipe already covered our future communities opening later 2022 into 'twenty 'twenty three are expected to have lower asps.
What we're seeing in our existing existing active communities today, our land strategy focuses on larger parcels, which limit some competition for land lowers the promo cost by expanding community level level overheads across more lot and reduces the churn of new community openings and closings.
Finally <unk>.
Turning to slide 11, 2022 is off to a great start playing to a strong spring selling season, and we expect home buying demand to remain robust at the same time, we will continue to manage our orders pace to preserve margin and maintain a high level of customer experience. We expect gross margins to remain elevated and S. J.
Day rates to be at all time lows for the full year 2022, we're projecting total closing to be between 14000 515500 unit home closing revenue of 6.1 to $6 5 billion home closing gross margin around 27.75% and effective.
Tax rate and about 25% and diluted EPS in the range of $23 15 to $24 65.
We expect full year community count year over year, Greg and 15% to 20% as for Q1 2022 we're projecting total closings to be between 20 803000 unit home closing revenue of 1.2 to $1 3 billion home closing gross margin of $28 two 5% to 20.
Eight 5% and diluted EPS in the range of $4 45.
To $4 85.
I'll turn it back over to Felipe thank.
Thank you view.
To summarize on slide 12.
We enter 2022 with momentum and optimism, we believe meritage is poised to capitalize on market demand and drive sustainable long term growth with our proven strategy and operating model are healthy we have position and flexible balance sheet continued with solid execution, we have already demonstrated our ability to grow community count.
I would like to extend our deepest gratitude to our hard working employees and trade partners, who contribute to Meredith remarkable 'twenty 'twenty. One there are leadership drove our significant order volume closing as well as a 33% year over year ramp up in community count growth, while now navigating challenging conditions with that I will now turn the call over to the operator for instructions on.
The Q&A operator.
Thank you we will now be conducting a question and answer session.
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Okay.
Our first questions come from the line of Alan Ratner with Zelman and Associates. Please proceed with your questions.
Hey, guys. Good morning, Congrats on a great year.
So you know obviously the rate outlook is top of mind for everybody right now and certainly your 'twenty two guidance is that it was encouraging I'm curious if you could share with us any you know any thoughts or any feedback you're hearing directly from the field just given the pretty rapid increase we've seen over the last few weeks here you have you seen any discernible impact on.
On demand on order trends traffic et cetera, well you know what are you hearing that from your sales folks in the communities right now.
Thanks, Alan this Voip.
We don't really guide to Yamana.
Over months to trends and et cetera, but what I can share with you is that January feels extremely strong.
We haven't seen any discernible impact to demand.
Given the projections of interest rates and where interest rates have moved.
The last 30 days.
In the form of our backlog as we've gone back to our backlog.
And given them an indication of what rates are doing the backlog is stable.
As well as forward looking demand when we think about our priority list and the demand we're seeing across all of our leading indicators if anything it feels like it's accelerating.
It could be because people have a fomo and feel like rates are going to move up dramatically towards the back half of this year and they want to get in.
But it also just feels like more of the same.
It's really in my opinion being generated by the backdrop of supply.
Theres not us I mean, if you look into all the markets that we operate and there is just way more demand for housing than there is supply and so when they go into the market and Theyre looking for a retail home maybe initially they can't find anything and when a resale home lift in the market.
And it's a high quality home, there's usually 12 to 15 offers is what we're hearing anecdotally and they go under contract within a day or two so they're migrating over to the new home space and we only have so much to sell as well because we're metering.
Most other builders are metering, so I feel like the demand is being generated by the lack of supply and there is just this tremendous urgency to move.
Because people need to move right now and we want to move right now and Theres really no other options out there so to summarize it feels very strong we haven't seen any impact of rates thus far.
But we'll see how it goes throughout the year as rates continue to elevate.
Great I appreciate the comments there Felipe I know, it's a tough crystal ball to read here, but yeah.
Yeah on kind of on that topic, you're in a position where your backlog doesn't provide you a ton of visibility for the full year, you know youre, giving you, giving full year guidance and just focusing on the gross margin.
Full year very very strong does imply some continued.
Slight easing from kind of the peak levels, you put up in the back half of 'twenty, one and I'm. Just curious if you could talk through the the inputs to their what what's driving that that modest compression is it an assumption for higher cost maybe some creep back up incentives, which you kind of spoke about a few quarters ago is as a potential possibility.
What are the various drivers of that.
It's 100% related to cost and what we're seeing on the cost side.
Yes.
They are increasing as of right now we feel like we have the pricing power to maintain our margins into next year. It feels like the market is going to give us the pricing power, we need to and given the lack of supply in the market, we will be able to come out but it's all costs. We are modeling any change in incentives right now we're not modeling any.
Additional sales and marketing costs that we need to sell homes.
So its all being driven by costs that being said, we're coming into the year with 5500 units in backlog. We have 3200 spec started and we are already have another 4000 stacks slotted to start in Q1. So that's why we have strong confidence in what we're going.
Do we know what the margin is on those spark those facts that we have teed up to start in the first quarter and once we get to those starts were almost there.
Our 15000 sort of midpoint target. So we have a lot of confidence in our margin profile as you move through the year and certainly the ability to raise prices here in the early stages of the spring selling season is giving us even more confidence.
Perfect. That's really helpful. Thanks, a lot guys.
Okay.
Thank you. Our next question is coming from the line of Stephen Kim with Evercore ISI. Please proceed with your questions.
Yeah, Thanks, a lot guys.
Thanks for all the the information here I wanted to start off by asking a question about your cycle times, you talked about the fact that they liked and I think I heard correctly two weeks. They lengthened two weeks from <unk> to <unk> I was curious if you could give us a little bit more granularity about that to the degree can I think Katy.
He had mentioned that they hadn't seen cycle times, increasing I believe in November and December and was curious if you could just talk about it a little bit more granularly, therefore, and maybe what you're seeing in January and then related to that you said, you're not forecasting any improvement in cycle times going in your in your projections are you forecasting.
Any worsening in the near term.
Thanks Steven.
You know the backend trades were part of the challenge in Q4, I think you've heard everything you need to hear about garage doors, but there are some other backend trades that we're just adding some extra weeks into our cycle times to make sure we deliver the house, 100% complete to our customers.
Just to assure as things are pretty unpredictable right now that we have the right amount of time to get our homes built and at the quality we're looking for.
As we look into 2022, we feel like that that's our best metric today gives us a little room and we don't see any reason right now for those to improve based on the conversations we're having with our trade partners and our labor. They don't expect to have it improves. So we don't expect it to improve through 2022 and we're not.
Modeling.
He either to get better or to get worse from what we saw in Q4.
It's taken us six or seven months to build a house right now and given our position in entry level. We think that's a really good number and we can deliver a great a great home to our customers.
Got it that's that's very helpful. So you're basically saying that you know you're sort of doing this are in terms of your that two weeks it sort of what's your sort of embedding in your assumptions are to keep yourself. Some wiggle room, just in case, something unexpected happens, which it's been tending to do here.
So it sounds like it's a bit of a cushion a kind of a two weeks.
Actual and this is our actual cycle time right now Stephen So we're modeling our actual cycle times all of that.
Your point.
The delays are crane from the different training every day, so maybe one change getting them out of it better but another change kind of delay. So I think that we're comfortable maintaining our current expected cycle times again, it was a 60% backlog conversion in.
In Q4, it's easy to calculate we've had is that I think that we're comfortable with that but I wouldn't say that that two week. His question and this is our actual cycle time and as we sit here today, it's just very difficult for us to indicate that we see somebody out there that would suggest it's going to get better that being said, we have a ton of houses.
It and teed up.
If we can increase the production.
Capacity and it does get better we're in a real great position to go out and capture that we add to the communities. We have the lots on the ground and we're pre permitting a lot of homes and laying it out. So we can always accelerate that if the supply chain does get better.
Yep.
Yeah. It makes perfect sense no reason to assume.
Right.
In terms of your gross margin.
Again, a very encouraging result.
The <unk>.
The court and move the move from <unk> to <unk> is always a little bit tricky because you got you know community level fixed costs and that sort of thing. We also have had lumber gyrating all over the place.
So can you help us hilla, maybe disaggregate a little bit about what you're seeing there in the <unk> guide on gross margins how much of a headwind are we seeing from fixed level community costs, and then and lumber and then as you think further out in your guidance you gave a number for the full year, which was obviously.
Welcome, but I was curious you mentioned I think earlier about costs that you're taking into consideration. There are you also assuming anything in terms of incremental pricing from here in that gross margin.
Outlook for the full year.
We don't model on expected increases in Asp's, we do model expected increasing in cost in line. When we can when we go in the other one is market, Germany, we can't control like quite quite to the same extent so for US we're modeling the current cost trends that we're seeing plus any known increases.
Not modeling incremental increases in Asps, which is why we guided for margin holding steady at that 27, 575% for the full year. We believe it will have the pricing power.
<unk> continued to offset the increases that we're seeing in that slight tick down from that 29 slide Q4 gross margin to $28. Two five to 20 28.5 guidance for Q1 and beyond.
Exactly right a piece of it and box leveraging number of Amish lower volume, but number two it's also the ramp up of the Canadians we continue to ramp up in community here, there's a little bit of that and then a little bit of noise I don't think that it'll number yet coming through it's a little bit too quick for that number locks to show up in our financials in Q1, it's a little bit of the other costs.
That have gone up over the last three to six months that you're seeing come through in our Q1 number the rest of the guidance that severely that El Abra loss that we're seeing dark starts had bleed through the financial statement.
Excellent. Thanks, so much guys I appreciate all the help.
Thank you. Our next question comes from the line of Michael Rehaut with J P. Morgan. Please proceed with your question.
Hi, Thanks, good morning, everyone. Congrats.
Congrats on the results.
Firstly I just want to make.
Make sure I understood your answer before Hilla.
Around gross margins, obviously, a key topic as always.
You had said that you're modeling costs.
Cost inflation as you see it now the cost trends, continuing but not modeling any future price increases at the same time I thought I heard you say you expect to be able to continue to offset cost with price. So.
I just didn't know.
How to reconcile those two statements or is it really the former statement that youre, just being for all intents and purposes, a little bit.
Cautious on on on your future pace of price increases.
I wouldn't say that we're cautious on future pace of price increases I would say that the reason that that full year margin is coming in lower than Q4 actual full year 'twenty two is coming in a little bit lower than what we've experienced for the last two quarters. It's because we know we have some some costs that are already.
I've already been telegraphed that they're going to be increasing so we know what those increases are we think that beyond that future increases will be offset by future.
Our ASP increases so we're kind of holding our current structure as we see it today and assuming that anything above and beyond that we'll have the pricing power in the marketplace to offset it.
Okay.
That's helpful. Appreciate that.
I guess secondly, maybe just on the.
The topic of price I was wondering if you had a sense of.
During the fourth quarter, and maybe compare that to the third quarter.
What percentage of communities, where you were able to achieve price increases and by roughly what average either for the quarter or the month.
We would have to follow up with you on that one I don't think we have that data available to us, but I would say in.
In the fourth quarter I thought prices were relatively stable.
We're very mindful of affordability in our business, we realize that prices the ultimate amenity and so.
We were we really focused on just getting the pace, we were looking for and not looking to push pricing onto our customers right now.
So I would think we raised prices a lot in Q4, although we did in certain places where demand was really strong.
But once again in January it feels like things have accelerated again, which gives us some confidence as we look at our priority list and the people waiting for our homes that are being metered, we feel like theres. Some more pricing power that frankly, we didn't think we were seeing in Q4 and what we're seeing now.
Okay Felipe.
Could you give me a little more granular in terms of your comments around January when you say extremely strong are you know AXT.
Celebrating I know you don't want to go to get too detailed on a month to month basis, but what are some of the things out there that youre seeing and you know.
Either you know foot traffic or perhaps.
Either better pricing power or.
Sales pace, what are those things that you're seeing right now that that gives you that increased confidence now with.
With the spring selling season right around the corner.
Yeah, I mean, usually the spring selling season starts a little bit later in the year and we've just seen a lot of people that wanted to buy a home last year, who weren't able to are back in the market are very active there is a lot of urgency our priority list in our communities are growing.
Versus sort of stabilizing a tricky so we're adding more people.
We have more people waiting for our homes, where we're metering metering for our homes.
The quality of the traffic is extremely high these buyers have really strong.
Credit profiles as well as down payments.
We're seeing our competitors have strong traffic, we're seeing continued and robust activity in the resale market where it exists.
All of the above it feels like the spring selling season at least as we sit today is it going to be relatively strong.
Even as interest rates have risen and as I said earlier, maybe it's because people think that rates are rising and they're coming into the market with sort of a photo of a mindset, but it also feels like theres, you'll still a lot of people out there their rents have gone up they want to buy a home they're moving into our markets. We're in the best housing markets.
The country Theres, a truck ton of job growth and in migration going on.
I mean across all fronts, Michael really across all fronts.
Kumar other data playing the first Felipe mentioned in his prepared remarks that when we when we need it as a certain number of units we can tell for community.
And we're seeing as you reach that goal early in the month very early in the month. Once we released the lots for sale. They thought they were hitting that that I'm hearing case earlier than in prior months. So that's another indication that the demand out there is really robust net suite mentioned, we increased prices and a much more muted basis.
In Q4, we really increased the pace of ASP.
Growth in just January here, along part of that is because the market allows us and also we're seeing the increased costs come through but we've seen no pushback from our customers and the increased pricing. That's another data point, that's giving us confidence on the strength of January .
Great. Thanks, so much guys.
Yeah.
Thank you. Our next question is coming from the line of Carl Reichardt with <unk>. Please proceed with your questions.
Thanks, everybody.
I wanted to talk about customers for a second and for a while you've mentioned didnt releases about sort of be that entry level customers millennials and you've got baby Boomers and I was curious if you could talk a little bit about the baby Boomer component of the demand curve the move down customer and then also just following on to that do you have any sense as to what percentage of your of your buyers in fourth quarter.
Order, whether orders or closings.
It came from a different state than the one that they purchased in.
Those are pretty specific highlights why it's still a little bit of homework and circle back with you on the in state migration.
Obviously largest in Florida, Texas, and Arizona, but we can we can dig in a little bit more and provide you. Some metrics there and then as far as the baby boomers are not sure exactly what data points, you're looking for they continue to be a material.
Percentage of our business and.
Although we're seeing millennials, but the generation coming up right behind them is also starting to enter the home buying years that we think over the next couple of years, while the baby boomers are still going to be a very active part of our business there'll be another buyer cohort at that early entry rather than a move down components that we're seeing we're starting to see.
That played here, although we think that'll be much more meaningful over the next two to three years, given the affordability of our products and the quality of our community and locations.
Seeing a very diverse.
A group of folks come through our stores its Gen Z millennials.
It's moved out buyers that are looking for more affordable housing.
All the folks that are moving to Florida, and Texas, and the south in Arizona, and Colorado, because theyre, leaving colder states or less affordable states.
It's a very diverse group of customers that are moving to our communities and it's being all driven by the affordability and the location one other data point anecdotally, we mentioned after the last several quarters at the size of our community is growing.
Lot count.
As we do that we typically have more robust amenities and location and for those baby boomers that are looking for that lifestyle active community type deal.
Type of amenities that we're providing in our larger communities align with those needs as well.
Thanks, Hilla I mean, obviously the spear point of the question is is the interest rate sensitivity of the customer the customer types, maybe different which is why I asked but and just shifting the balance sheet, our cash flow really for a second you were significantly boost yet positive in 'twenty, obviously, but not so much this year as you as you invest in there.
What's your thinking coupon on 22, and the sense of whether or not you might be in the CF positive or negative looking at the land spend in the and the delivery pattern. Thanks.
It's hard to know.
Ted to model things on a quarter by quarter basis, I mean full year, we've guided to $2 billion of acquisition and development. That's the same thing that we did this year and are much lower.
If you look at our guidance for next year versus versus where we ended up this year. So we think there'll be a lot of variability intra quarter, but full year.
I would expect Q2 be neutral or slightly positive I would expect since we're spending similar amount of money walking out the door back by bringing in a larger percentage.
Thanks, a lot appreciate the time up at one other data point, sorry, just to clarify now that I understood. Your question, a little bit better the percentage of our cash buyers hasn't really moved too much in the last 18 to 24 mindset. That's a proxy for you for a baby boomers.
That kind of holding steady.
Okay. Thanks, very much hilla.
Thank you our next questions come from the line of Deepa Raghavan with Wells Fargo. Please proceed with your questions.
Hi, Good morning, everyone. Thanks for taking my question.
Hello, Paul.
It is pretty interesting that you talk about price increases in January but also mentioned.
You mentioned that your ASP for the upcoming communities could be lower.
You want to be mindful of affordability.
Do you have a sense for what's the S. C suite spot range is for your buyers and is that what you would be working towards as you target a 15000 steady stayed home sales.
Yeah, I mean, obviously, we're in a lot of different markets, where the sweet spots are different.
And then we used to be really kind of thinking about our business below FHA with the recent increase in FHA. We think it's lower than that I think you know we're constantly looking for land that allows us to position our products in the threes and fours.
We like we like those price points, depending on the market as interest rates rise, we think that payment is very attractive to.
To the people that are seeking out homeownership.
Whether it's millennials Gen Z or move down anything with a three or four in front of it. We think is very attractive to that consumer segments I'd say, it's somewhere around all that and then depending on the concentration by market, we figure out kind of where where our blended ASP.
You can see that Deepak do you look at our backlog our backlog ESP is 443 by our sales for the current quarter. Our force 33. So you can start to see that the product mix shift starting to impact asset. Obviously, we're continuing to increase prices. If our net ASP is coming down that trend.
Due to the new product that we're introducing we bought a lot of great land.
In 2019, and 2020, that's coming to the market.
Really great deep land position that very attractive basis, and when we underwrote that land a lot of that product was in the threes.
So maybe it's in the high <unk> now or low fours, but that's kind of a sweet spot.
Got it looks like there's this there's good run rate with should prices stay pretty stable here.
That's good to know.
Just switching gears, a little bit and just for some peace of mind for investors around here is what kind of sensitivity are we looking.
With your buyer profile should the 30 year mortgage weight increase about 4%.
So we constantly look at that to make sure that we're pricing according to what our consumers can afford and we ran a sensitivity analysis at 50, 75, and 100 deaths from today's prices has kind of about four and a half ignore some das so even in that scenario if they were to increase our full.
<unk> hundred persons today's rate the deterioration in our backlog is like mid single digit low double digit assuming that they buy exactly the same product in don't buy a slightly less expensive or slightly less than that it's high time. So we think that there is a.
Minimal minimal overall impact other than psychologically on the on the balance sheet to the consumer there. There's certainly the capacity to be able to absorb 50 75, maybe even 100 beds. Since it's a small percentage that would fall out we think can be substituted.
Substituted with additional qualified buyers that are in our RFP qualified pool.
That's great. Thanks for the color I'll pass it on.
Thank you. Our next question is coming from the line of Truman Patterson with Wolfe Research. Please proceed with your questions.
Hey, good morning, everyone. Thanks for taking my questions.
First just wanted to touch on your continued shift to the more affordable areas, which generally means you know a little bit further out in these newer communities that have come online just hoping to get an early gauge.
Our absorptions in Waitlists.
In line with some of your legacy communities and then you know competitors in tertiary markets kind of the outskirts. If you will are you seeing any increased incentives.
Now that rates are moving up.
I'll take the last and then work backwards, we have not seen any incentive activity in the market across any of the competitive sets.
Private builders public builders.
[laughter] rental.
Or are the resale market.
People are getting full asking lease and all of our mortgage if not above ask so no incentives yet haven't seen anybody push out any sort of lock incentives yet either that tends to show up in the market when the rates start to go up.
And then as we think about our new communities.
I think I've said this before but were not going.
Way far out we're just sort of the infrastructure is and so we're seeing tremendous tremendous interest in our new communities every new community that we scheduled to open and we start to build a priority list.
90 days out from releasing the homes and they are extremely robust and there is a tremendous amount of interest in these new stores.
Okay. Thanks for that and then.
You know prior to the pandemic you all basically at gross margins in the 19%, maybe 20% range, but over the past five.
Five years or so you all have made significant changes to your business model and quite frankly, I don't know that we can necessarily look at historical gross margin based on the strategic shift, but just hoping to understand where you think you know a long term normalized gross margin level is.
For you all today, you know relative to history.
So I think youre right to mean, we can't really look at what we get pre pandemic to where we are today the lift in our margin is not really a function of just the current demand.
Demand environment his ways, everyone by I think it's the change in our product mix in our operating model, that's really driving that incremental couple of hundred bed stack that we're seeing a bad meaning the industry averages.
I think that our we discussed it previously.
We've probably reset what averages it's not it's no longer <unk> 19, or 20, it's probably a couple hundred bps above that just because of the nature of the type of product and who we are as a builder today.
I don't know that we're ready to put a marker understand and what that number is right now, but it's definitely north of 19 or 20.
Okay. Thank you for that.
Thank you our next questions come from the line of Ken Zenner with Keybanc capital markets. Please proceed with your question.
Good morning, all.
Morning, Glenn.
So we see you're.
Rising inventory units, obviously, it's a function of.
Starts, but it's also partly helping to offset lower cycle times.
We measure you talked about two week week.
We measured as with as a percent complete my one question is that your five roughly five starts per community that you've done in the last two quarters talked about in the first quarter I believe.
Can you.
Talk about that being operational decision there.
He's lower cycle times right.
Cycle time slowed to 10% you could have 10% more inventory that would kind of neutralize that as opposed to.
What you think your business model your production types.
Section level can be because ultimately you're start decisions in our view dictate your your order levels. So it's five kind of a rate per community that is part of your more entry production level or is there some component there that.
And we should think about us as governing your kind of longer term. Thank you. Thank you very much.
Sure. The number is probably a little lower than where we want it to be obviously, we've addressed the supply chain constraints, we're definitely not.
Starting homes at the pace that we would like our start to pay for significantly below where we'd like it to be both on a per community basis and then in the aggregate. Obviously, it's also going to grow just as a function of increasing community stay kind of getting a doubling effect there for us we're really focused on four to six months supply of lots in entry.
Level, which at this point is like 80% of what we own so probably a good proxy for Eric for most of our community. So we're looking at 46 months supply of lots at not just a function of what the market is going to get back in the.
The peak here, when we're saying five six units a month.
And in those communities, we're going to be starting an equal amount and what we're selling we always want to keep that four to six months supply ahead about youre going to see a ramping up of that because we don't own at Ford or we don't have 46 months supply of inventory on the ground right now so you're going to see is on the ramp up to that I supply chain constraints unwind.
But then we're kind of going to maintain that pace if you're at that four to six every month sales are substituted by that one start you'll see is that at somewhere around that five to six per month on the entry level and just a tick below that in the first time move up.
Thank you.
Okay, operator, we'll take one more question.
Thank you our final question for today comes from the line of Susan Mcclary with Goldman Sachs. Please proceed with your questions.
Thank you everyone. This is actually Charles Piranha for Susan today, Thanks for taking my questions squeezing me in.
I guess my first question is regarding the affordable dynamic. These days how quickly can you adjust the specs of your unsold homes such as floor plans are finishing to meet the affordability standard, especially when considering how early you need to order certain materials to build those homes in this environment.
Once we start a house theres not a lot we can do all.
Other than the price.
But on future starts.
We can start smaller square Footages square footage is with less features in them or holds the bus features.
To help lower lower the price, but on a pre started home there's really nothing we can do.
Got it got it and then just as a follow up with this rising rate environment. How do you expect this to impact the demand trends across entry level relative to move up buyer and it's specifically do you still expect the entry level to outperform giving their continued desire to own a home that you mentioned in the past or maybe you think that youre going to see.
More move up buyer coming out in your pipeline I think began their increased ability to meet higher housing payments given their recent home price appreciation.
Yeah, I think both I mean, clearly our thesis is that as rates increase people are going to move down price because they still need a home and the entry level buyer and in particular need to hub and with the pressure on rents, they're really looking for homeownership. So as rates rise, we think the entry level.
Buyer performs relatively well as long as they don't get too high.
And he was talked about where we think they're going to go and what the opportunity is and then clearly the one that new buyer exactly with especially the move up buyer that we're focused on which is a more affordable move move up buyer. We think they moved down into the entry level communities when rates go and they don't feel like they want to spend as much.
Money on a home on a per month basis. So we see a shifting of that but we're not targeting sort of the what I'll call. The very affordable price sensitive entry level buyer entry level buyer were targeting more of the higher end and do you have a buyer that's more qualified looking for a nicer home.
It's not all about the lowest price, it's really about the best home for the payment Theyre looking for and we call them entry level and first time move up to themselves. They're just the buyer right. So they're gonna software price point, because we can offer them.
In our pipeline.
At the what we call my name you when interest rates are a little bit lower that's fine if not they're going to go to the next community and solve for that monthly price point, which is where we have the bulk of our community.
Thank you I really appreciate the color on this.
Thank you well. Thank you operator. Thank you everyone for your continued trust and support and we hope you have a great rest of your day. Thanks again.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.
Okay.