Q4 2022 Taylor Morrison Home Corp Earnings Call
Thank you for your patience Tiger Barstool sports.
<unk> tried to chase any corporates cobalt brigade in approximately 10 minutes.
[music].
Good morning, and welcome to Taylor Morrison's fourth quarter 2022 earnings conference call.
Currently all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time.
As a reminder, this conference call is being recorded.
I would now like to introduce Mckenzie of Green Vice President of Investor Relations.
Thank you and good morning, everyone. We appreciate you joining us today before we begin let me remind you that this call, including the question and answer session will include forward looking statements that are subject to the safe Harbor statement for forward looking information that you can review in our earnings release on the Investor Relations.
A portion of our website at her remarks and dotcom.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the SEC and we do not undertake any obligation to update our forward looking statements.
In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release.
Now I will turn the call over to our chairman and Chief Executive Officer, Cheryl Palmer.
Thank you Mackenzie and good morning, everyone. Joining me as Lou Steffens, our Chief Financial Officer, and Eric Hughes, Our Chief Corporate operations Officer.
As always I will share our performance highlights an update on the market and our strategic priorities.
After my remarks, Eric will discuss our land portfolio and investments as well as an update on our build to rent business. While we will provide a detailed review of our financial results and guidance metrics.
Our team's strong fourth quarter execution wrapped up a historic year for Taylor Morrison marked by record levels of profitability and operational performance.
Despite the Swift change in housing market conditions that unfolded during the year our team delivered over 12600 homes and a record adjusted home closings gross margin of 25, 5%, which was up more than 500 basis points and an all time low SG&A ratio.
Eight 2%.
This produced a nearly 60% increase in our net income on a 10% increase in total revenue.
These earnings drove strong cash flow, which we deploy to further strengthen our balance sheet by significantly reducing our net homebuilding leverage to 24% from 34% at the end of 2021 and repurchased approximately 12% of our shares outstanding after invest.
One 6 billion into our core homebuilding business.
As a result, our book value per share increased 33% to more than $42 and our return on equity improved nearly 700 basis points to over 24%.
In total these record results validate the transformational impacts of our successful integration and operational strategies that have made us a stronger company with enhanced earning powers and increased optionality with which to invest for long term profitable growth.
Taylor Morrison, we benefit from the well balanced diverse mix of our portfolio and operating strategy.
Having expanded our market footprint and product positioning in recent years through our acquisitions and smart organic growth, we serve a broad range of customers and the entry level first and second move up and resort lifestyle segment across the country.
With each of these consumer groups demanding varying levels of home specification and affordability considerations, we have a dynamic and flexible operating strategy that allows us to best serve each of these segments and respond quickly to market conditions community by community to maximize our perform.
It.
Since interest rates began rising last year. This flexible, but prudent approach has driven important shifts in our pricing strategies starts volume and land investments as we quickly adapted to minimize risk and recalibrate affordability.
From a pricing perspective, we have adjusted to market conditions across the entirety of our portfolio to drive sales and turn our inventory while also protecting the value of our highly profitable backlog.
We flex our various pricing levers, starting with finance incentive and then lot and option premiums and most selectively based price with each community's mix of adjustments dependent on its backlog inventory duration competitive dynamics and of course consumer group.
Generally speaking our entry level communities respond best to a combination of mortgage incentive based price adjustment, while our higher priced move up and resort lifestyle communities emphasize reduced lot premiums design center concessions and mortgage incentives.
The success of these strategies was evident in our fourth quarter results and happen even more encouraging thus far in the new year.
We are in the early days of the spring selling season, and typical seasonality has been anything but typical in recent years, but so far we have been pleased with the positive momentum in sales activity and shopper sentiment since mid January .
Specifically through the first six weeks of the year, our gross sales orders have improved to a more normalized pace of approximately three per month and our cancellation rate has trended into the mid teens driving our net sales pace to 2.5 as compared to $1 nine in the fourth quarter.
Aiding the positive sales activity the vast majority of our customers and backlog are strongly committed to moving forward with their home purchase and are secured by an average deposit of 10% or nearly 70000 per home.
In addition, our buyers financed by Taylor Morrison home funding, whose capture rate improved to 78% had an average credit score of 753 and provided an average down payment of 24% in the fourth quarter, both of which were stronger than a year ago.
Together these factors contributed to our fourth quarter cancellation rate remaining well below the industry average and consistent with our long term trend at just over 7% of our opening backlog.
While housing market conditions overall remain well below peak levels and the outlook is highly uncertain. We believe these encouraging trends underscore the enduring desire and demand for home ownership and financial strength in our targeted consumer groups as well as the limited availability of competitive edge.
Inventory, particularly in our core community locations.
In addition to using strategic pricing tools to solve for the affordability constraints in the market our construction and purchasing teams are aggressively pursuing cost rationalization opportunities with our suppliers and within our building processes and product offerings.
Meanwhile, as Lou will detail in just a moment, we have moderated our starts volume to align with sales activity and targeted inventory levels, what they focus on driving healthy asset turns and cash generation.
Our heightened focus on rationalizing the breadth and depth of our option offerings and floor plan library since 2020, including the expanded use of our national campus option packages and off spec homes and a more targeted design center approach for our to be built homes has greatly improved our production.
<unk> and ability to quickly capture cost savings, while not reducing the average option revenue per home.
In fact, it's worth highlighting that 64% of our fourth quarter gross sales orders were for spec homes up from 47% a year ago and 28% two years ago enabled by our team's effective inventory positioning by price point. This shift has further streamline our purchasing.
In construction, while also allowing us to meet specific consumer demand. In addition, despite the meaningful increase in our spec sales our average square footage in 2022 was down less than 100 square feet year over year, suggesting that buyers across consumer groups continue to value of the space.
With our data, suggesting buyers would be willing to trade off included features and premium homesite.
On the topic of meeting consumers, where they are I'd like to also highlight the success. We are seeing from the ongoing advancement in our digital sales tools that empower our prospective buyers to engage and shop with us when and how they want to all while providing improved visibility into purchase price and.
Monthly payment and an online shopping experience unlike any other in the industry.
Our first of its kind online home reservation system is available for all spec homes and in most communities that offer to be built homes, allowing shoppers to choose their desired lot floorplan and exterior selections as well as popular structural options interior design packages and.
<unk> in the most recently enhanced version that we began rolling out last quarter.
In total our online reservation system was our top lead source last year with a conversion rate of 40% in the fourth quarter and 32% for the year driving 12% of our total sales.
With nearly 70% of these reservations for future home purchase made by consumers, who did so prior to ever visiting the community in person I believe its safe to say that this volume represents incremental business earned by engaging with customers in a way most fitting for them.
Backed by these exciting consumer insights our team continues to redesign the home shopping journey and I look forward to sharing our continued progress.
Our focus on operational flexibility innovation, and our sales program and customer experience.
The key messages that our leadership team recently delivered in person to each of our divisions. During a 19 stock Road show in January the first of its kind since before the pandemic.
To meet face to face with all of our nearly 3000 team members was a great way to kick off the new year and align on the operational strategies that will guide our path to success in 2023 and beyond.
Now I will turn the call over to Eric to discuss our land investment strategy.
Thanks, Cheryl and good morning, everyone.
I will share an update on our land portfolio. Our continued opportunistic approach to investments and some exciting developments in our build to rent business.
Iran. We owned and controlled approximately 75000 homebuilding lot comprising five nine years of total supply of which three and a half years his own.
Both measures remain within our targeted ranges.
Of our total lots, we controlled 41% via options and other off balance sheet structures, which was up from 38% a year ago and determining the optimal financing structure on a project by project basis, we are selectively targeting our land lighter investment approach to balanced cost of capital risk mitigation and expected returns.
In addition.
We continue to closely review and re underwrite every phase of land development lot takedown and deal closing with an emphasis on renegotiating timing terms and pricing to reflect expected market conditions and to ensure each dollar invested meets our stress tested risk adjusted return thresholds.
As a result of the scrutiny, we incurred $25 million of pre acquisition of abandonment charges in the fourth quarter related to land deals that no longer met our underwriting requirements.
For the full year, our homebuilding land acquisition and development investment totaled $1 6 billion.
Of which nearly 60% was spent on development.
This total was down from $1 $9 billion in 2021, and well below our initial full year investment target of two three to $2 $4 billion entering the year.
As I've shared on recent calls we took early action to reduce our land spend as the housing market softened last year and we're already in a highly opportunistic stance given our strong market position.
As an update the basis of approximately 58% of our own wildfire negotiated in 'twenty one.
Okay.
Let's look ahead to 2023, we expect our full year land spend to be similar to 2022, although the ultimate investment won't be dependent on market conditions and opportunities that arise.
During the quarter, we recognized approximately $25 million of inventory impairments. The majority of which was related to a single non core community in the west that we chose to monetize quickly given competitive pricing pressure.
Overall, we remain pleased with the composition and basis of our well underwritten capital efficient lot portfolio that is concentrated in prime core submarkets.
And finally, let me share an update on our build to run operations. During the fourth quarter. We reached an important milestone in the evolution of our build to rent business with the closing of our first project sale of property in Phoenix, which generated an attractive gross margin over 35% and.
In addition, we announced our new built around brand name Yardley, which is inspired by the private backyard space that are niche horizontal apartment offerings versus.
Traditional multifamily housing our bedrock concept.
Okay.
Specializes in cottage style for rent homes in branded lifestyle oriented communities developed and singled out parcels.
At year end, we owned 16 Russell projects in six markets.
All of which are under active development and we have more than 40 prospective land deals under review in our pipeline.
While we have moderated the pace of investment alongside our traditional for sale business. We remain constructive on the long term growth potential of the space as well as the barriers to entry that exist for our differentiated product that fills a void in the rental market for single family living all while offering an attractive solution to affordability.
<unk>.
As a reminder, our build to rent business supported by a capital efficient financing structure, which provides the benefits of relatively light unlevered capital exposure, while maintaining overhead leverage high returns and control with that I will turn the call Hulu.
Thanks, Eric and good morning, everyone I'll review, our financial performance and provide detailed guidance for the first quarter.
In the fourth quarter, we generated earnings of $2 51 per diluted share or $2 93, <unk> after adjusting for the impact of impairment lot abandonment and other onetime items.
Compared to the fourth quarter of 2021, the latter was up 32% due to improvement in our home closings gross margin SG&A leverage improved financial services profitability, and a 12% lower diluted share count.
During the quarter, we delivered 3700 97 homes at an average closing price of $626000, which generated home closings revenue of $2 4 billion.
For homes closed during the quarter average cycle times are extended several days as anticipated given the industry wide volume push at year end.
Specific to our Florida and southeast divisions that were impacted by Hurricane Maria.
Challenging supply chain dynamics delayed the delivery of some homes during the quarter, Although I am happy to report that our teams are back to a more predictable operating cadence.
Across the country, while we are beginning to see some relief in the early stages of this construction cycle, including a return to normalize product lead times and improved labor availability in some categories. We're not expecting any notable improvement in overall cycle times until later this year.
Given our roughly 60 40 split of spec and to be built homes sales, we manage our construction start pace by aligning with sales to maintain a targeted level of homes in production, including a healthy level of finished inventory.
This allows us to meet consumer demand and maintain efficient production schedules for our trade partners, resulting in improved asset turns.
At quarter end, we had approximately 7700 homes under production of which about 2300 were specs.
Of the specs only about 280 were finished.
We started approximately 1500 homes during the quarter or one six per community, which was up slightly from $1 five in the third quarter of 2022, but down from three four in the fourth quarter of 2021.
With fewer than one finished spec homes per community at quarter end and the recent positive momentum in sales, we expect to step up our start pace in the months ahead.
Our teams already have additional permits on hand, providing valuable flexibility as market opportunities dictate.
Based on these homes under construction and our projected starts volume. We currently expect to deliver between 2300 2400 homes in the first quarter and between 10000 to 11000 homes for the full year.
Given the elevated level of uncertainty in the market, we will look to provide additional full year guidance as the year unfolds.
From a pricing perspective, we expect the average closing price at our first quarter deliveries to be between $630 to $640000.
Turning to margins.
Excluding inventory related charges, our fourth quarter adjusted home closings gross margin was 24, 5% up 290 basis points from 21, 6% a year ago, including those charges our home closings gross margin for the quarter was 23, 5% up 190 basis.
Points year over year.
The improvement was driven by pricing gains achieved in prior quarters, and the ongoing benefit of operational enhancements, which offset higher construction costs and the impact from increased incentive and other price adjustments. We have offered in response to weaker market conditions.
Looking ahead, we expect our first quarter home closing gross margin to be stable sequentially at approximately 23, 5%.
This would be up from 23, 1% in the first quarter of 2022 <unk>.
SG&A as a percentage of home closings revenue improved 50 basis points to seven 3% from seven 8% in the prior year quarter. Despite the modest decline in revenue driven by lower performance based compensation costs as well as enhanced efficiencies in our sales and marketing capabilities.
This marked another company record low.
Going forward, we expect to maintain a disciplined cost structure and are forecasting an SG&A ratio to be approximately 11% in the first quarter.
Our net sales order in the quarter were down 42% year over year to 1800 10 homes.
The decline was driven by a 41% reduction in the monthly absorption pace to one nine net orders per community and a 2% decrease in our ending community count to 324.
As Eric noted, we have pulled back on land investment in both acquisition and development, which will impact our future community count in.
In the first quarter, we expect our ending community count to increase slightly to between 325 to 330 communities.
To wrap up we generated $1 $1 billion of cash flow from operations during the year, which is up from $377 million in 2021.
In addition, we took several steps to further solidify our strong capital position during the year, including retiring $265 million of 2027 senior notes in June increasing the size of our corporate revolving credit facility to $1 billion in September and redeeming $350 million of 'twenty.
23 senior notes in October .
These transactions reduced our future is capitalized interest burden and aligns our gross debt closer to targeted levels.
Our next debt maturity is in March of 2020 for which we have ample liquidity to address with cash on hand and are closely monitoring the market for potential refinance opportunities.
We ended the year with total liquidity of approximately $1 8 billion, including $724 million of unrestricted cash and $1 1 billion of available capacity on our revolving credit facilities, which were undrawn outside of normal letters of credit.
Our net debt to capitalization ratio equaled, 24% at year end down 11, 100 basis points from 34, 1% a year ago and consistent with our goal to reach the mid 20% range.
And lastly, during the year, we repurchased $14 6 million shares for $376 million, which represented approximately 12% of our beginning shares outstanding.
The average repurchase price was $25 83.
Nearly 40% discount to our year end book value of $42 34 per diluted share.
Our remaining repurchase authorization was $279 million at year end.
As we head into 2023, our capital allocation priorities remain grounded in a disciplined framework that balances our operational and growth objectives with the health of our balance sheet as we seek to generate attractive long term returns for our shareholders.
Now I'll turn the call back over to Sheryl.
Thank you Lou.
Before we close I'd like to recognize our Taylor Morrison team for their outstanding performance in 2022 their commitment to loving our customers is unwavering and they have continued to push ahead. Despite the challenges and I am so grateful for their tenacity and teamwork.
It gives me great pleasure to share that we were once again named America's most trusted homebuilder by life story research for the eighth consecutive year, an award that belongs to each of our team members, who earn home shoppers Trust day in and day out with integrity commitment to quality and transparency.
In addition, we were also once again, the only homebuilder to be recognized on Bloomberg's gender equality index for the fifth year running with increasing diversity. Among today's homebuyers, we recognize the critical importance of reflecting our consumer set in our team our marketing and our products and we have reached.
We launched a study with USC intended to understand anticipated shifts in housing needs related to greater diversity of the overall home buying population.
I am proud of our industry, leading gender diversity and the strides we're making to further drive our racial and ethnic representation.
To that end. We're also proud to share that we have launched a first of its kind Board fellowship in which we have added two outstanding professionals Hana Choi grenade and Michel sorry, Robinson as Nonvoting Board fellows to expand the perspectives in our boardroom they bring a wealth of knowledge from there Lee.
<unk> and digital transformation supply change in strategic management and will in turn gain invaluable real World Board experience and what we expect will become a model for expanding board diversity.
We look forward to sharing more with you on these exciting new initiatives and we thank you for your interest in Taylor Morrison, Let's open the call to your questions. Operator, please provide our participants with instructions.
Okay.
Yes.
Thank you.
I would like to ask a question then please press star one.
Pat.
If you change your mind, please press stop my spreadsheet.
Parents ask your questions. Please ensure that your phone is on mute it lately.
As a reminder, that you start with one question.
Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.
Okay.
Hey, Hey, good morning, everyone. Thanks for taking my questions.
First just clarity did you all say good morning did.
For clarity in the first six weeks did you say the normalized net order absorption pace was two and a half per month.
And then.
You all have reduced land spend in 2022, but you bumped up your option and JV mix.
Your first quarter community Count guide is basically flattish year over year, maybe up a little bit.
I'm just trying to understand based on your existing land development pipeline the planned openings as we move through the year.
<unk> just trying to understand what level you all are kind of hoping to in that in 'twenty three.
Well good morning, Chairman absolutely it will.
And I will tag team a couple of these starting with the sales yes, you heard US correctly, we said for the first six weeks that sales on a net basis, we're about two and a half and on a gross about three I'd add a little further color to say the first couple of weeks of January were very similar to December they were kind of modest.
Our best month was in November in the fourth quarter. So when I look at January that was actually about two and a half and we've seen continued momentum through February so I would say I'm a little higher in the first couple of weeks that really has offset the beginning January .
And with respect to land spend mm.
In terms of outlets to remain good morning.
We definitely with the 75000 lots that we have at the end of the year. Our strong pipeline ahead of us with definitely say through 2022 similar to the production environment land development and permitting timelines had extended so outlet growth little bit slower than we had expected.
Our teams have also with the software stopped softer sales environment shifted openings until models and entrances are complete so one time shift in some of our outlet growth and then lastly, as we mentioned on the script that there had been some walkaways some of which are deals that add finished lot opportunities. So there could be some small.
Outlet impact with walkways of finished lots and then further develop lot opportunities into the future, but overall I think with our strong land back still expect we can produce growth into the future and I think specifically for them and you asked about opening since I look at last year, we probably opened about.
You know something in the mid 90 range as far as communities go where this year, we expect that to be 25% to 30% higher but obviously impacted by a number of closings as well.
Okay. Okay. No. That's that's great color. Thank you Ann.
You will throughout 2022 have had a nice relative gross margin improvement versus the group.
Variety of items acquisition integration internal streamlining initiatives.
I'm trying to understand what inning, you all think that you're in.
And I realize what the macro pictures, they know messy with pricing incentives discounts et cetera, but trying to understand if there might be some more juice to squeeze on the relative performance versus peers as we move through 'twenty three.
Yeah.
Yeah. That's a great question Truman, yes, there's definitely puts and takes in terms of the margin profile going forward. As you know we have a decent sized backlog going into 'twenty. Three so homes sold earlier in 2002 very strong margin profile plus our 60 40 split of specs to to be built we still are seeing really strong margins.
On the <unk> side, where our customers are building their dream home and as you see in our deposits really strong deposit.
Deposits that they are putting up.
In terms of our vintage land bank, which we've talked about in the future I think that's also a source of good.
Margin for us going forward and then as you mentioned the operational enhancements since the beginning of 'twenty, one we reduced our options by simplifying our business and our plans over 20% in addition to putting our canvas.
Initiative almost fully into place now so we have those operational enhancements and simplification that helps us.
And as other builders have talked about favorable lumber tailwind into 'twenty three we do have cost reduction opportunities that we're seeing on the front end most of those though unfortunately will help us more in 2000.
We will see some small opportunities there and then on the take side with the softening demand environment, we have had elevated incentives on our spec homes specifically.
And with the lower mortgage rates until more recently, it's been helpful. As we prioritize our incentives towards finance.
Cost of buying down those rates had come down a little bit as you've seen in the last week or so.
Rates have gone up slightly again, so I'd say, there's puts and takes but we feel very strong about the opportunities for us. This year as we guided I think a really strong margin in Q1 and when do you think.
Knew that when I think about just the company big picture and our balanced approach to specs versus <unk>.
Well definitely back in a more historical norm I know we had this very unique period of time.
In the last 12 to 18 months, where specs were certainly yielding a premium but in today's environment and I'd say historically for a lot of years, that's not the case and we're seeing 567 hundred basis points in some instances between the two and I think our balanced approach of having both.
Both a <unk> business certainly we're seeing that within our lifestyle communities and how lucrative that is I think also continues to provide margin strength for us comparative to the group.
Perfect well. Thank you all for the time and now I'll pass it on.
Thanks, Jeremy.
Thank you.
Our next question comes from Colin White Top <unk> co. Please go ahead.
Thanks, Good morning, everybody.
So we're not perfect.
Hello, Hey, along the lines of <unk> question too is thinking about the 10 to 11000 unit guidance for 'twenty three.
Is your mix between entry level move up and resort lifestyle likely to change from what it's been.
Meaningfully.
I don't think so Truman I wouldn't say that there's any significant changes.
Obviously, we saw.
Some shifts in the quarter.
When I look at the mix compare to prior periods I mean, our entry level.
Certainly went up both year over year.
And sequentially.
Our active adult has also seen some good strength our lifestyle communities sequentially, but I think in the in the round I don't see our mix really changing.
Okay. Thanks, and then I wanted to clarify a comment you made about the research you've done that said that buyers with tradeoffs features in Homesites for what I think was.
But.
An empty box.
A larger square footage house with missiles can you can you sort of expand on that a little bit is that altering how youre thinking about rolling out design, how does that feed into Kansas, what does that do to margins and turnover. How does that research then impact what your numbers might look like in the next year or two.
Yeah.
Yes, great question Carl.
Thank the reason we pointed it out as I continue to be surprised that even in the back half of last year. When I think affordability was so stretched.
We really haven't seen significant movement in our square footage is right around that 2500, plus take out plus or minus over the last honestly several years.
And then when I look at things like what they are putting into the houses from a feature standpoint, both on the inventory because we have different levels of our canvas package.
So they can go with a very basic and this where they can really upgraded but theres still packages and then I look at our lifestyle communities and I look at.
What they are doing when they go in and really specify their homes they are continuing to spend.
So it's been interesting to me to watch that we haven't really seen any reduction in our options even with campus lot premiums has certainly come down a bit but that spend.
Kind of strategic on our end and certainly as we moved away from those Hobaugh highest and best offers and square footage Hasnt come down I think the other data point.
As as we've got more canvas and a higher percentage of our homes are option margin is actually slightly up so it's been really well received program because they've been so highly curated.
And once again, a lot of that might be might be.
Somewhat impacted by the shift in our lifestyle community, our active adult business ticking slightly up but its so slight that you would expect that the offset of first timers would impact it and honestly it just hasn't.
Great I appreciate the color. Thank you Sheryl thanks, everyone.
Okay.
Oh sure.
Thank you.
Our next question is from Matthew Bouley from Barclays. Matthew. Please go ahead.
Yeah.
Good morning, Elizabeth weighing in on for Matt today.
I just wanted to start off asking around your commentary on demand.
So you mentioned that it was improving through the year and you've.
You seem like good momentum into February .
Do you have a view at what point you might start to lean away from incentive pricing adjustments or is it too soon to tell for that.
It's a great question I think in total I'll, let you know.
I'd probably start out by its too soon to tell for sure, but then I would quickly jump in and say we already have.
Honestly, we already have seen a pullback in incentives.
Don't think we are seeing many adjustments further reductions in base pricing and as we said in our prepared comments Elizabeth kind of reductions in base pricing is the last place. We go certainly we've done that in some markets and a percentage of our communities, but we have some markets that we've honestly never reduced base.
Used incentives to lead the way and we've done that because you've heard me over time talk about the value of our partnership between the homebuilding business and our marketing teams and we really continue to believe that if he use smart finance incentives to create the most value for our buyers rather.
And just simply reducing the base price and allows us to get additional capture improve their experience and it's a much more cost effective way for us to stabilize the business.
And if you see a market turn like we have so quickly seen we find ourselves in a much better place.
So a lot there, but I would tell you we'll continue to watch the markets closely and obviously a lot of it is going to depend on other builder behaviors as they work through their backlog.
If they continue to adjust pricing downward and maybe just to add to that I'd say the incentive opportunities have been more favorable as of recent with the lower rates as I mentioned, our buy downs have been scheper, so depending on the rate environment.
Get the buyer to an acceptable interest rate, it's going to vary throughout the year. It's such an important point because if you think about where we were kind of in third quarter. When rates were in the mid Sevens and we were trying to get people to four per a high or compare to something today, that's at par in the low to mid sixes its a completely.
Different environment.
Part of that pullback so yeah.
Thank you Bob.
Okay.
You bet.
Thank you.
Next question is from Jay Mccanless from Wedbush. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I guess the first question I have is.
Any sense, you could give us about which way asp's are going to trend through the year, because you finish 'twenty two with an average backlog price over <unk> the average selling price, though for the fourth quarter was $5 78, I guess should we expect kind of a drift down through the year or any insights would be appreciated on that Tom.
But.
Yes, Jay its really good question, maybe starting off with the order ASP I think theres a lot of noise going through there. So you mentioned the $5 78 actually our gross order asps for the quarter was over 600, but what's happened is two things one adjustments, we made through the quarter for our fourth.
Quarter deliveries, we made some adjustments to our backlog to retain them and get them closed and then also what's flowing through the order ASP is any adjustments in our 5900 units that we made in backlog for future quarter closing, so that's adding a bit of noise to the ASP for the quarter. So.
Like I said gross orders were over 600, we definitely as we have a bigger mix of spec to to be built or spec asps are generally a little bit lower than our to be built.
But I would definitely say still solid asps over 600.
And to your point, though when I look at the number of folks that we've locked in backlog.
Our future quarters with some of our finance programs as you mentioned I mean, you always have the noise with kind of options running through that people go into the design center afterwards, but it's so immaterial to the total when you take it back.
Size of ours.
We work to secure it.
It had a significant impact on the ASP right.
Okay.
And then if you could maybe talk about the.
And then I know, it's not a huge portion of your mix, but just kind of wondering what youre seeing from the luxury or higher end buyer.
Whether that buyers.
You gave a little bit of commentary around it but just how interested and engaged those higher end buyers and if you were to roll active adult to it that would be great as well.
Stock market coming back.
Trying to stabilize just wondering what youre seeing from from those two buyer groups.
Yeah, I'd be happy to.
You know first of all when I look at just the overall kind of split between the different consumer groups. Our second move up was our strongest pace in the quarter.
And then when I look at our resort lifestyle, they really start picking up in the shoulder season, and we've seen continued improvement in the new year.
Now when we look at that buyer they generally come with some of our strongest margins there might be some exceptions to that I don't think we've seen that same return in Houston for example that we've seen perhaps.
When I look at the active adult shoppers just period over period, we've seen something like 600 basis points improvement.
Honestly looking at our inventory our biggest challenge in that by your sat in Florida as we just can't keep any inventory on the ground, but it hasnt slowed them down they just continue to.
<unk> built.
As you know that buyers a little bit less rate sensitive, but they're more sophisticated so they've been looking at kind of all the economic indicators.
When I look specifically at the quarter.
<unk>.
Both Sarasota, and Naples, which has the highest penetration.
They probably had the highest increase over kind of budget expectations and when I look at that.
Early in this year that just continues to make.
Headway.
It's interesting as you look across the country I would say we've seen a number of different kind of effect based on consumer groups I have many markets, where we've seen that.
Move outs first and second move up and active adult buyer being the strongest consumer group.
And in many markets, we've seen that first time buyer really show up the challenge has been their ability to get approved.
But I think when you put it all in the Blender honestly, Jay we've seen movement in almost all of the consumer groups.
It really has been how does their ability to qualify and that can affect it because even though as we said our can rate.
Move to for the first six weeks to kind of the mid teens and even once again just like following the sales cadence we've seen an improvement in cans and February over January .
It's not the same across the country places like Austin.
Even though their can rate has probably half from what it was in the fourth quarter, it's still a little higher because of that first time buyer and the size of that backlog.
<unk> purchase kind of at peak pricing maybe.
And maybe just to add to that Jay just to show the strength of our buyers are our deposits are up 20% year over year to just over 10%.
LTV at our buyers its come down to 76%, which are very solid and then our cash buyers in Q4, our company I think a record for us at 21%.
Really strong buyer profile.
And then maybe just using Naples as an example, as you think about luxury and active adult that's a place for greater than half of our buyers are boomers.
And actually greater than half are moving from some other place in the country.
And they actually have on average these folks are calling us greater than $200000 of income in closer to $2 million and $1 million network. So we can place were really performed well through COVID-19 and installed it's an important point, Eric because if you look at a place that enables where it's primarily just all resort lifestyle communities. It led the company and margin.
In Q4 and by non a little lot. So.
Great color. Thank you. Thank you for all the details appreciate it.
Thank you Jay.
Thank you.
Our next question comes from Michael Rehaut from JP Morgan. Please go ahead.
Hi, Good morning, guys, Doug Boardwalk on for Mike.
I was curious regarding your inventory charges was this number in this quarter, where you guys were expecting prior to the quarter and what do you envision for impairments moving forward throughout 2023.
Yes.
As we've talked about in previous quarters, we take a look at impairment every quarter.
There are always outliers on that bell curve and as we mentioned in the prepared remarks, we had one community that accounted for over 50% of the impairments in our noncore location that we made a conscious decision to accelerate and get out of there. So we do not see any system systemic impairments.
Yeah.
Overall portfolio, but there are always going to be outliers here and there. So we felt they were pretty modest considering that one project that was the outlier.
And but we will continue to look going forward and as we've guided I think we have a pretty strong margin profile going forward. So.
Pretty good about where we sit yes I agree.
On that asset, but I think it's important to note that we had to make an adjustment given market conditions and some pressures from some competitive things going on in the market.
All in the spirit of finding pace in which we have found right I think we've already sold half in January what we sold all of last year and that yeah. Good point.
Got it thanks, and then secondly in terms of you guys mentioned.
Some positive momentum through the first few weeks of February and this quarter and regarding that how should we think about incentives moving forward.
Demand this could stay where it is now do you expect to kind.
Taper slightly on incentives.
How would that balance.
What youre thinking about doing with price costs moving forward.
Yeah as I said earlier I think we're already seeing some reduction in our incentive.
Across the board and we will start there.
Have been very selective in where we've taken base price adjustments, we continue to use finance as a sales tool and as we mentioned earlier I mean, we have so many great programs to help our borrowers kind of overcome the obstacles in closing.
So even with the little movement that we've seen in rates. This last couple of weeks, we're really able to help in any way that makes sense for them and sometimes it's about getting a rate down sometimes it's cash to close.
The other thing is we have some very successful most recently.
Being able to buy kind of forward below market interest rates to give our customers the certainty that they need and we've been able to do that on quick closing we've also most recently.
Launched a new program by build secure that gives them a below market rate for a one year extended for to be built so we're really putting our focus around our finance incentives. Once again, it really I think long term protects the value of our communities at the same time gives us predictability and gives our customers confidence in <unk>.
Peace of mind to be able to move forward in their home purchase.
Okay.
Got it thank you guys.
Thanks, Doug.
Thank you.
Our next question comes from Mike Dahl from RBC capital markets. Please go ahead.
Hi, This is Ryan Frank on for Mike. Thanks for taking my question.
Just wanted to follow up and see if we can get any quantification kind of on the incentives do you have are you able to quantify the incentives.
<unk> seen so far year to date for either <unk> or last year.
Yeah.
It's really difficult, which is why we have not provided that color in the past only because it falls in so many different categories. You have in some places where we have not reduced prices based prices at all and so.
We might be higher.
A higher incentive we have other communities, where we have made some pricing adjustments and then you would have maybe just some closing cost incentives. So as you blend those numbers to be honest. It doesn't give you great visibility I think the visibility you get is in the strength of our margin profile.
And you really have to take a deep dive almost community by community to understand the impacts of incentives I have many markets across the country. When I look at our fourth quarter incentives they were actually lower year over year.
Okay.
Yes.
Thank you.
And then I think you guys are unique and kind of forecasting flat land.
Land spend year over year. So just kind of wanted to break that out is that will you be more aggressive on actually acquiring land. This year or is it really just kind of development spend to ramp up communities.
Yeah, I think Brian as we've shared.
Here quarters, we've really had a pivot, whereas most of our dollars are dedicated to development given the market conditions, but we are absolutely looking to be opportunistic and so we definitely could see a pivot, but the market is going to let us know when and where that is so I would say right now the conservatively, we're expecting flat and you would you should see a bit more focus on development for this.
Sure.
Market conditions play, that's where we'd be more aggressive on the land acquisition side and where the opportunities are out there we have the dry powder.
And as you can imagine our teams are being very aggressive in working with land sellers and in some places they're seeing some momentum with land sellers and Theres. Some that some sellers are just sitting on the sidelines.
So I think we'll continue to update you on this one each quarter.
The market movement is there.
Erik said, our teams did a great job getting our balance sheet and a great place at the end of last year. So we can be very opportunistic as those opportunities present themselves.
Yes.
Got it thank you very helpful.
Yes.
Yeah.
Thank you.
Our next question comes from Alan <unk>.
Salmon and associates. Please go ahead.
Hey, guys. Good morning, Thanks, as always for the great color.
First question on the specs. So I'm curious if you look at the 60% plus of your orders this quarter that were specs. How many of those were started intentionally as a spec versus kind of reselling canceled units from the back half of the year and follow on to that is where do you see the spec share going I mean, a big guidance for 10 to 11000 club.
<unk> do you have a number in mind.
Sumit do because you've got it kind of planned for that based on your starts.
Many of those are actually going to respect.
Yes. Good question, we do manage our specs.
Hi community. So if for example, we have a cancellation that means we don't have to start another specs.
I think we just look at our specs in total by community. What we believe is the right balance and the mix we have been closer to that 60 40 split for awhile, we love to be built but we react to the market as time progresses. There are a lot of buyers out there that are really looking favorably to having those units close to completion, but.
We still see a balance of people that would like to build their dream home. So we will adjust accordingly as the market shifts.
But it's been around that 60 40 split for the last several quarters, but we'll continue to balance it because over time, we'd like to drift back maybe a little higher to to be built but.
We will move with the market do you think Leila will generally follow our consumer split. So the first time buyer I would say, we're maybe to be built turned into specs Alan it's probably in that more first time, maybe first move up buyer.
But I would say.
When you look at the second move up and kind of active adult those generally continue to be.
Preferred to be built builder. So we'll put the facts in for those first timers, but will be much more I think cautious in the higher price points and as we mentioned on the prepared remarks, we are ramping up our starts were really pleased with having less than one finished spec per community. So we have some extra room to get some additional starts in the ground.
Got it.
Helpful.
Second question.
Might've been more appropriate task six weeks ago given tranches.
So it's clearly improve but.
When you kind of talk to your salespeople on the ground and kind of try to figure out the biggest challenges to selling more homes today, how would you rank order them between.
People don't want to give up their low mortgage rate in the resale or an existing home affordability challenges.
General Skittishness about the direction of the economy.
What do you see as the greatest challenges today to prevent sales were being even stronger than they are.
You are right that would have probably been a very different answer six weeks ago than it is today and we got some really interesting color from the sales teams in January when we were all on the road talking to them and I would say even in the last 30 days the answers would be very different if I were to go back to the start.
Of the year it was much more about sentiment.
And affordability with what was happening to the rates and the fear paying top dollar on both price and rate.
Today, I would say that has move to making sure. They can secure the right home and the REIT community.
I really do think we're doing a wonderful job overcoming some of the affordability concerns.
Our finance programs and giving them that peace of mind with.
It could be our 321 by down for some consumers it could be that forward.
By build secure program that I, just spoke about and so I think we're helping them overcome that.
The other thing I would say Alan is just the mix of consumers that were seeing across the board is really changing and so it's really sitting down and making sure that we have the programs in place to help them get to the end game, but it's very different I think the confidence.
That we saw the lack of confidence that we saw.
At the end of last year, where people really if you. If you go back six months. There was a lot of people that wanted houses it ended up not buying them and I think they pulled back I think we're seeing those folks come back into the market today, and just really understand it's about working with each of them individually.
Yeah.
Okay.
That's very helpful. Sheryl Thanks, a lot guys I appreciate it.
Okay.
You bet.
Yeah.
Thank you.
Our next question is from Tom <unk>.
<unk> Suisse. Please go ahead.
Thanks, very much I was wondering if with some of the commentary on the first time buyers would be financing issues.
Do you think about communities closing out over the course of 'twenty three so talk about what youre doing with opening new communities and getting them to models building such in terms of tactical changes is there anything that youre doing in terms of a bit of a shift to more move up communities opening up.
Or what is it overall if there are any changes in terms of community opening plans.
Now I don't think you'll see at <unk>.
<unk> shaft, and our consumer groups or when I look at it.
Portfolio of communities, if I were to talk about the shift in the overall portfolio I think it would be about the continuing presence that we're seeing of the millennials.
Nearly half of our sales.
In the quarter were from millennials and when I look at the financial stability of that consumer it's actually stronger than the consumer at March.
It's an interesting growth like I said about 50% of ours within our finance services company, where millennials.
Many of them are buying their second.
Home.
So theyre not really first time buyers, but in some in some communities. They may look like first time buyers. They have extremely strong credit profile with average credit scores in the mid seven hundreds as I mentioned before they're also a little bit more racially diverse in our total universe.
Which is another reason why you've seen us so committed to the initiatives that I shared in my comments, but I think except for that slight pivot within our consumer groups I would say the share of just total cohorts I don't think youll see significant shifts.
Great.
In terms of the capital allocation I think done a great job with the share repurchase over the last year, given where the shares were repurchased in the fourth quarter to 25 and change.
Stock is now substantially higher wondering how you look at that given that the.
<unk> is still well below book value here and thank you built some priorities for you.
Yes, it's a great question, Dan as we balance all of the allocation priorities first we wanted to first invest in the business Phil.
Our balance sheets in a really good place and we're really pleased to be able to buy so many of our shares last year, it's such a big discount to book.
But we're going to be opportunistic on the share repurchase front, we're not going to generally just buy a ton of shares to buy them, but be very opportunistic when the opportunities present themselves.
Great. Thank you.
Take care.
Thank you.
Our next question is from Ken <unk> from Keybanc, Ken. Please go ahead.
Good morning, everybody congrats on the Phoenix open.
Lots of fun.
Two questions.
What percent given your comment on this first six week generally speaking what percent of the quarter's orders is that I know Super Bowl weekend, which just happened in Phoenix as well can really distort that I'm just trying to sense, if that's half the quarter two thirds of the quarter.
This is my first question.
So I just wanted to make sure I understood that what percentage of what for the quarter.
I think what percentage of sales you commented on the order pace is that usually have the corner or <unk>.
Third in the quarter or less maybe just to give you. Some color maybe a color. There Ken is usually January is a little slower for us in February and March ramp up slightly month over month. So historically over many year average usually January is a little slower and then we pick up through the rest of the quarter.
Fairly typical.
I said in the prepared remarks.
You don't know what normal is like because it's been so long since we've seen it but it's just normal rate as we've seen but probably greater momentum and thanks for the comment on the open we actually we're really pleased not just tremendous visibility and new leads.
And our business I mean, thousands and thousands there was it was a good show.
Yeah. It does.
Your weekend there.
And again for the inventory units could you restate that number I think you said 7700, but.
My question is yes.
700 units.
Okay, Okay great.
Do you think given your closing forecast and your start schedule.
Do you expect those units to be up year over year by the time, we get to the fourth quarter.
And.
Just trying to think about how you'll measure.
<unk>.
Or how much how committed youll be I guess to the start pace because whenever you start I assume youre going to sell.
That's just what I'm trying to get a handle on it. Thank you very much.
No. It's a great question, Ken I really think it has a lot to do with what we see with cycle times going forward. If we were to go to our long term average and cycle times, we can carry 30% less inventory I still get to the same number of closing so I would say if we continue to see as we're seeing right now the front end is improving slightly.
Backend is still very challenging, but if we can start trending down and our cycle times, then most likely we won't need to carry as much even if we project growth of year over year.
Yeah. Thank you very <unk> be interesting to see what it is.
No problem.
Thank you.
Final question is from Alex Barron from housing Research Center Alex. Please go ahead.
Yes. Thank you.
Yes.
Guidance for first quarter margins was interesting because.
Basically flat.
Quarter over quarter, most other builders I guess indicated their margins would be trending lower so I'm curious if you guys.
As we look at the rest of the year. If you think this might be the low point given.
The current sales and incentive activity youre seeing year to date.
Flat sequentially and up year over year right. So yeah, we're pleased with that Alex as you know we're on the guidance for Q1 right now.
As we entered the year with a strong backlog that was sold earlier during the year.
I think we feel good about what the future holds for us this year.
Okay great.
I was curious if you guys could comment.
On how you guys are thinking about starting specs versus a year ago, how much of that shifted.
I realize.
Everybody.
Starting fewer homes when the sales were.
We're lower than fourth quarter, but.
Since it seems a lot of consumers are looking for SaaS close houses.
Has that shifted your approach to starting specs going forward.
Okay.
Yes, as we mentioned earlier, Alex we're definitely starting a lot more specs than we have historically.
Our <unk> our spec sales in Q4 was the highest we've seen so far over the last several years. So we're good with continuing to start spec, especially as we're able to sell them before they complete.
The real question is will there be a big ramp up in starts in Q1 with all the builders and will inventory starts to build up so we're keeping an eye on each and innovate each individual market, we're in and making those decisions market by market, but we have had really good success in selling specs. So yes, and I think the only thing I'd add is there is somewhat.
Misnomer that every consumer wants something that move in ready.
We actually really do once again like the balanced approach.
<unk> for certain consumer groups.
Balance, especially when we look at the margin profile. Once again, certainly a couple of years ago. We saw for the first time historically specs perform at a very different level, but I think the reason we don't have the margin pressure that youre seeing with others is our more balanced approach to to be built.
So we will continue to keep that balance in front of the business.
Makes sense, all right well best of luck. Thank you.
Yes.
Alex Thank you.
Thank you.
And she is now the end of the Q&A session and I will now hand, you back to show Palmer for closing remarks.
Well, thank you very much for joining us for our.
2020 to wrap up call. We look forward to speaking to you again in just a few weeks to talk about the first quarter take care.
This concludes today's call. Thank you for joining you may now disconnect your lines.
[music].
Yeah.
Yes.
Yeah.
Yeah.
Yes.