Taylor Morrison Home - Q4 2023

Transcript

Operator (participant)

Ladies and gentlemen, hello and welcome to the Taylor Morrison Home Corp 4Q 2023 earnings conference call and webcast. My name is Mackenzie, and I'll be coordinating the call today. If you would like to ask a question, you may do so by pressing Star followed by 1 on the telephone keypad. I will now hand you over to Mackenzie Aron, Vice President of Investor Relations, to begin. Mackenzie, please go ahead when you are ready.

Mackenzie Aron (VP 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. These statements are subject to the Safe Harbor Statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. 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, Sheryl Palmer.

Sheryl Palmer (Chairman and CEO)

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer, and Erik Heuser, our Chief Corporate Operations Officer. I'm pleased to share the highlights of our team's strong performance in 2023, as well as an update on the market and our strategic priorities as we head into the new year. After my remarks, Erik will review our healthy land portfolio, while Curt will review our better-than-expected fourth-quarter financial results and guidance metrics. Our team's strong fourth-quarter execution wrapped up another tremendous year for Taylor Morrison. In total, we delivered 11,495 homes to generate $7,200,000,000 of home-building revenue at a healthy adjusted home closings gross margin of 24%, driving adjusted earnings of $7.54 per diluted share.

Our earnings, combined with $889,000,000 of share repurchases over the last 4 years, drove our book value per share to a new high of $49, which was up 15% from a year ago and 53% from 2 years ago. While we face significant headwinds from rising interest rates, economic uncertainty, and global unrest, our business displayed the resiliency we have strategically positioned it for following years of intentional growth, transformative M&A, integrations, and a tireless commitment to streamlining and optimizing our operational abilities. As I sit here today, I'm incredibly proud of the results we delivered in 2023, which exceeded our guidance, and even more excited when I look ahead to 2024 and 2025 as we expect to continue demonstrating the earnings power of our balanced and disciplined operating platform.

We strongly believe that our diversification across buyer groups ranging from entry-level, move-up, and Resort Lifestyle, combined with our emphasis on high-quality community locations, are critical differentiators that enhance our bottom-line potential, growth opportunities, and risk mitigation throughout housing's inevitable ebbs and flows, as demonstrated with our results through a volatile fourth quarter. Our top priority as we move ahead is reaccelerating our growth now that we believe that we have firmly established the operational efficiency required for outsized market share gains. In 2024, we expect to deliver at least 12,000 home closings, followed by approximately 10% growth in 2025 and thereafter.

Our $1,800,000,000 land investment in 2023 was focused on supporting these growth aspirations, and with one of the strongest balance sheets in our company's history, we are well positioned to continue investing with an accretive, disciplined approach in 2024, with an initial planned land spend in the range of $2,300,000,000-$2,500,000,000. Critically, our land investment approach will remain grounded in a returns-driven framework that balances capital efficiency with the associated cost of capital as we look to drive long-term performance. To achieve these goals, we are fortunate to have the strong land development expertise that is necessary for investing in larger, more efficient self-developed communities that are particularly well-suited for our product and consumer portfolio.

This strength is evident in a shift in our acquisitions away from expensive finished lots, often in restrictive master-planned communities, by partnering with land sellers for larger self-developed parcels that offer greater margin and pace opportunity. For example, finished lots, as a percentage of our total acquisitions, have declined to just 12% over the last two years from 35% several years ago, while our underwritten monthly sales pace expectations have increased by about 30% in recent years, as average community sizes have also increased by approximately 50%. While this is a modest headwind to the absolute level of communities, we believe this evolution towards larger, more efficient outlets is an important driver of our long-term returns. It also limits our exposure to the limited capacity of third-party land developers and improves our long-term planning visibility.

These strategic shifts in our land investment decisions underpin our confidence in our annual monthly sales pace target in the low 3 range as compared to our historical average run rate in the low to mid 2s. Following a sales pace of 2.8 per month in 2023, I am pleased that we expect to achieve this targeted low 3 sales pace goal in 2024 based on our mix of communities and the strength of the underlying market. On the operational front, we are focused on continuing to fully leverage our scale and streamlined portfolio to reduce costs, support growth, and increase asset efficiency. This includes ongoing refinement of our product and floor plan library, utilization of our Canvas option packages, and sales, marketing, and back-office centralization efforts.

Each of these areas of focus improve our ability to scale our business cost-effectively, offset ongoing cost inflation, and deliver improved affordability and product for our home buyers. Meanwhile, our innovative digital sales tools also continue to gain traction with outsized sales conversion rates nearing 50%. Specific to the fourth quarter, our net sales orders increased 30% year-over-year, with strong acceleration in December that defied typical seasonal slowness into year-end and partially offset the moderation we experienced earlier in the quarter alongside higher interest rates. Our balanced mix of to-be-built and spec homes, including a 40% year-over-year increase in available inventory at quarter-end, meets demand among all consumer types. The healthy trends we experienced as the quarter progressed allowed us to raise base pricing in nearly 60% of communities, as our teams are focused on balancing price, incentives, and pace to achieve desired sales goals and community performance.

I am pleased that the healthy momentum continued into January and thus far in February, with sales, traffic, and reservations all trending positively as the spring selling season recently kicked off. In fact, in January alone, we saw the most online home reservations in a single month with the highest monthly sales contribution since March of 2021. These numbers continue to prove that consumers are eager to engage with us in new and different ways that tailor to their needs and provide pricing transparency, convenience, and flexibility in their home shopping journey. When I look at our online sales success and the breadth of our sales strength, it is clear that demand for new construction remains solid, with limited supply of inventory across all price points and favorable employment and demographic trends continuing to drive activity.

By consumer group, our fourth-quarter net sales orders were comprised of our Move-Up category at 42%, our Entry-Level segment at 34%, and Resort Lifestyle at 24%. Sales across each of these groups rose strongly from a year ago, with our Entry-Level segment recovering most strongly on a year-over-year basis. However, on a sequential basis, our Resort Lifestyle business performed exceptionally well and bucked typical seasonal slowing as the only segment with quarter-over-quarter sales growth, displaying the strength that we expect of those consumers amid interest rate volatility. One of the key factors driving our success is the financial strength of our targeted consumer sets. Among buyers financed by Taylor Morrison Home Funding, credit metrics in the fourth quarter remain excellent, with an average credit score of 751, average down payment of 24%, and average household income of nearly $180,000.

These stats are especially impressive considering that 53% of these buyers were Millennials and another 4% were Gen Z. On the other end of the buyer spectrum, a vast majority of our Resort Lifestyle consumers utilize all cash for their home purchase. As a result, our use of mortgage incentives is heavily weighted to our Entry-Level communities, where first-time buyers are most sensitive to affordability constraints. In fact, of the 28% of our fourth-quarter closings that took advantage of a mortgage-forward commitment or similar interest rate structure, an outsized 50% were first-time buyers. In addition to these consumer benefits, the diversification of our platform extends to production advantages given our ability to capture both high-margin To-Be-Built sales along with highly efficient spec construction.

Our second move-up and resort lifestyle communities operate largely as to-be-built businesses, which generate high-margin design center and lot premium revenue that exceeded $100,000 per home in the fourth quarter and helped generate superior gross margins several hundred basis points higher than our entry-level business. Meanwhile, our entry-level and first move-up buyers are served primarily with spec home offerings, providing important production efficiencies geared to each consumer group's needs and preferences. In the fourth quarter, approximately 56% of our sales were for spec homes, similar to the prior three quarters but down slightly from the low 60% range in 2022. To wrap up, the diversification of our business and longstanding emphasis on quality locations in core submarkets provide important strategic advantages that we believe position us exceptionally well going forward.

With a concentrated focus on outsized growth in the years ahead, we have never been better equipped operationally to take advantage of the opportunities across our price points and geographies to serve our customers and create value for all of our stakeholders. With that, let me now turn the call to Erik to review our land portfolio.

Erik Heuser (COO)

Thanks, Sheryl, and good morning. To help provide greater clarity into our lot position, we have adjusted our methodology for calculating owned and controlled lots. Specific to owned lots, we have excluded lots that have begun vertical construction. Those lots are defined separately as homes in inventory, which was 7,867 homes at quarter-end.

With regard to controlled lots, we have expanded our definition to include those lots under contract with an earnest money deposit that have not yet been fully formally approved by our investment committee to offer a more complete look at our pipeline. We believe that these changes better reflect the intended use of such metrics to evaluate our balance sheet and the capital efficiency of our land portfolio and improve comparability to some of our peers. Using this new methodology, our owned and controlled lot inventory was approximately 72,000 home-building lots in the fourth quarter, down from 75,000 lots at the end of both 2022 and 2021. Based on trailing 12-month closings, this represented 6.3 years of total supply, up from 5.9 years in the fourth quarter of 2022 and 5.5 years in the fourth quarter of 2021.

Our supply of owned lots equaled 3 years as compared to 2.9 years in the fourth quarter of 2022 and 2.8 years in the fourth quarter of 2021. Lots controlled via various structures and vehicles represented 53% of our total supply. This was up from 51% a year ago and 49% two years ago, as we have successfully increased our asset-lighter investment approach to enhance long-term expected returns and risk mitigation. The specific vehicles and structures that are employed to achieve this off-balance sheet control of pipeline land include the targeted use of joint ventures with home builders, seller notes and financing, option takedowns, and land banking arrangements. While each of these offer varied risk, return, and cost trade-offs, we seek to match each deal with the optimal tool.

As Sheryl previously alluded to, over time, we have pivoted from a greater reliance upon finished lots being delivered through master-planned developers to a heavy balance of raw self-developed acquisitions. As an illustrative example of the margin impact associated with this pivot, I would share that the expected margin differential among finished lot deals underwritten in 2023 as compared with raw land deals was approximately 300 basis points. While finished lot deals have a role in our portfolio, we have found that self-developed communities provide greater optionality with regard to employing financing tools, improved control over lot deliveries, and the noted margin enhancements of the business. In the fourth quarter, we invested $313,000,000 in home-building land acquisition and $224,000,000 in development of existing assets for a total of $537,000,000.

For the full year, we invested a total of approximately $1,800,000,000, with a nearly equal split between acquisitions and development at 51% and 49%, respectively. This was up from $1,600,000,000 in 2022, when acquisition spend represented 40% of the total and development accounted for 60%. Today, with an eye towards monetizing our well-vintage existing portfolio by driving community openings to support our growth plans, we now expect to further increase our land investment in 2024 to approximately $2,300,000,000-$2,500,000,000. Approximately 40% of this expected spend is allocated to development. Supported by this investment, we expect our community count to be relatively stable at each quarter and end the year between 320 and 325 outlets before growing meaningfully in 2025 and beyond.

On the lot acquisition front, we have significant flexibility in our investment decisions as we are already either fully subscribed or well on track to support our strong anticipated growth trajectory over the next three years. With that, I will turn the call to Curt.

Curt VanHyfte (CFO)

Thanks, Eric, and good morning, everyone. In the fourth quarter, our adjusted net income was $223,000,000 or $2.05 per diluted share, while our reported net income was $173,000,000 or $1.58 per diluted share, inclusive of legal settlements and other extraordinary charges. During the quarter, we delivered 3,190 home closings at an average closing price of $607,000, which produced total home-building revenue of $1,900,000,000. Our closings came in ahead of our previous guide due primarily to stronger backlog conversion that benefited from further improvement in construction cycle times and more spec homes sold and closed during the quarter.

Our cycle times improved by another 4 weeks sequentially and 10 weeks year-over-year, aided by normalization in the supply chain and our team's focus on operational efficiency. We are pleased with the overall predictability that has returned across nearly all production stages and are targeting another 4-5 weeks of cycle time improvement in 2024. In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters given the solid demand backdrop to ensure we have adequate inventory available. In the fourth quarter, we started just over 2,900 homes or 3 per community per month, up from about 1,500 homes or 1.6 per community per month a year ago. Including these starts, we had 7,867 homes under production at quarter-end.

Of these homes, 41% or 3,225 were spec homes, of which only 413 were finished, with a skew towards our entry-level communities where first-time buyers prefer quick move-in homes. It's worth noting that our total spec inventory was up approximately 40% year-over-year as we have intentionally increased our inventory levels to meet buyer demand in the upcoming spring selling season. Based on the volume of homes under production, we expect to deliver approximately 2,700 homes in the first quarter and at least 12,000 homes for the full year. We expect the average closing price of these deliveries to be approximately $600,000 for the first quarter and for the year. Compared to 2023, the reduction in our average pricing partly reflects a shift towards more affordable product, particularly in our Texas and Florida markets, to meet consumer needs.

This shift also aligns with our pivot to more self-developed communities, as has been discussed by both Sheryl and Erik. Our fourth quarter home closings gross margin was 24.1%, up from 23.5% a year ago. This quarter's margins exceeded our previous guide due primarily to less than expected house cost pressure and greater overhead leverage from higher closing volume. It's worth highlighting that our gross margin in the fourth quarter of 2022 included a $25,000,000 inventory impairment, which resulted in an adjusted gross margin of 24.5%. We are pleased with the relative stability in our gross margin trends despite an increased use of targeted mortgage incentives over the past year, with the resiliency driven primarily by reduced lumber costs and the strength of our to-be-built margins. As we look ahead, we expect incentive costs to moderate in 2024 while construction and lot costs trend higher.

As a result, we expect our home closings gross margin to be relatively stable in the range of 23%-23.5% in the first quarter and for the full year. Our net sales orders in the quarter increased 30% year over year to 2,361 homes. This was driven by a 29% increase in our monthly absorption pace to 2.4 per community and a 1% increase in ending community count to 327 outlets. As Sheryl noted, our sales improved over the course of the quarter, with a strong pickup in December that has carried into the new year across all consumer groups. Our net sales order price in the fourth quarter was $629,000, up 9% year over year. Cancellation rates remained low at 11.6% of gross orders. This was down from 24.4% a year ago.

Our below-average cancellation rates continue to reflect the strength of our diversified buyers, proactive approach to securing meaningful upfront deposits from our customers, and diligent pre-qualification of all buyers prior to signing sales contracts. In the fourth quarter, customers in backlog had average deposits of $62,000 or 9% per home. SG&A, as a percentage of home closings revenue, was 9.7%, up from the record low of 7.3% in the year-ago period. The reduced leverage was primarily due to lower home closings revenue, higher performance-based compensation expense, and external broker commissions. Going forward, we will maintain a disciplined cost structure and are forecasting an SG&A ratio in the high 9% range in 2024, which would be consistent with 9.8% in 2023. Our financial services team achieved a capture rate of 86%, which is up from 78% a year ago.

This strong result drove financial services revenue to $43,000,000, with a gross margin of 45.9% for the quarter. By using finance as a sales tool, our talented financial service team has supported our success through well-executed, personalized incentive programs that have allowed us to navigate the challenging interest rate environment cost-effectively while providing compelling value to our customers. Turning now to our strong capital position, we generated $827,000,000 of cash flow from operations in 2023 and ended the year with significant liquidity of approximately $1,800,000,000. This included $799,000,000 of unrestricted cash and $1,100,000,000 of available capacity on our revolving credit facilities, which remained undrawn outside normal course letters of credit. Our home-building net debt to capitalization ratio was 16.8%, down from 18.8% in the prior quarter and 24% a year ago.

Equipped with this balance sheet and strong expected cash generation, we will maintain our disciplined and opportunistic capital allocation framework as we evaluate our main priorities of investing for future growth, maintaining strong liquidity and balance sheet health, and returning excess capital to shareholders through share repurchases. Since 2020, we have repaid approximately $1,800,000,000 of senior debt as we have successfully executed our post-acquisition debt reduction strategy. In total, these repayments have reduced our annual interest expense by about $105,000,000 and driven a significant reduction in our debt to capitalization ratios. Our next senior note maturity is not until 2027, leaving us with financial flexibility in the years ahead.

Over the same four-year period, we have deployed approximately $889,000,000 into share repurchases, reducing our diluted share count by about 33,000,000 or just over 30% of beginning shares, driving higher earnings per share and returns for our shareholders. In total, since our repurchase program began in 2015, we have repurchased over $1,400,000,000 or approximately 50% of beginning shares. At quarter-end, our remaining share repurchase authorization was $494,000,000. We are committed to continuing to return excess capital to shareholders in the years ahead and expect to repurchase approximately $300,000,000of our common stock this year. Now, I will turn the call back over to Sheryl.

Sheryl Palmer (Chairman and CEO)

Thank you, Curt. To wrap up, we are extremely proud of our team's 2023 performance and look forward to delivering an even stronger 2024.

In addition to our financial results, I'm equally proud of another important milestone we recently earned with our ninth year as America's Most Trusted Home Builder. This concept of earning and maintaining brand trust year after year, especially during 2023, a year where consumers grew even more weary and skeptical of brands, is not lost on us. Through our tremendous team members across the country, we remain focused on the long game and continue to raise the bar in delivering an unmatched customer experience. Thank you to all of our team members for helping us to achieve this amazing accomplishment. Our strategic plan, since becoming a public company over 10 years ago, has been focused on building scale, diversification, and operating efficiency to deliver superior performance for our shareholders. As you've heard today, the next leg of our strategic journey is focused on accretive growth.

We believe that the strength of our core land portfolio, financial health of our targeted consumers, and experienced teams will allow us to navigate the uncertainties that arise while our healthy inventory levels, improving cycle time, and compelling sales and finance tools will allow us to meet our customers' needs. While we are early in the year, we have had a promising start, and we look forward to updating you again on our progress in April. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Operator (participant)

Thank you. If you would like to ask a question, you may do so by pressing Star followed by One on your telephone keypad now. If you do change your mind, please press Star followed by Two. When preparing to ask your question, please ensure that your line is unmuted locally. Our first question today comes from Truman Patterson from Wolfe Research. Please go ahead, Truman. Your line is now open.

Truman Patterson (Director and Senior Housing Equity Research Analyst)

Hey, good morning, everyone, and thanks for taking my questions. First on the gross margin guidance. Hey, good morning. First on your gross margin guidance in 1Q2023, 23.5%, could you help us understand what's embedded in that guidance? Because it basically implies for the rest of the year, the remaining three quarters of kind of flat sequentially. And I'm thinking there's clearly some higher land costs maybe sticking brick as we move through the year. So the potential offsets would be either some modest pricing embedded in your assumptions going forward or some incremental internal streamlining initiatives that could help offset. I'm just hoping you could walk us through that, please.

Erik Heuser (COO)

Yeah, good morning, Truman. I'll take a stab at that. Yeah, just to kind of talk a little bit about the margins. As we said in our guide or in the prepared comments, we are assuming a slight kind of modest pullback in incentives over the course of the year, which are being offset to a certain extent with some increases in house costs and land costs. But I think the one thing you need to keep in mind is today we're structurally a different company. We've done a lot of operational improvements in addition to the scale that we've achieved as a company as a result of all the M&A work.

And so some of those operational efficiencies, whether it's floor plan rationalization, value engineering, focusing on kind of what we would call even flow production, are going to kind of help us kind of work our way through that to provide that stability in our margins over the course of the year.

Truman Patterson (Director and Senior Housing Equity Research Analyst)

Okay. Okay. So if I'm hearing you correctly, maybe there's a little bit more juice to squeeze, so to speak, from some of the internal initiatives that you all have implemented. And then, Sheryl, you all have been one of the more acquisitive builders over the past decade. And I think we've seen six M&A deals so far in 2024 just in the industry overall, right? How are you thinking about M&A today as it relates to either larger transformative deals, tuck-in acquisitions, or are you all kind of comfortable with your footprint, land bank, streamlined strategy that you're not necessarily entertaining deals in the current environment?

Sheryl Palmer (Chairman and CEO)

Yeah, I appreciate the question, Truman. I think you said it correctly. Over the years, we've certainly been known as one of the more inquisitive. And as you know, initially, that was to make sure that we had the right width on our map and then kind of follow that up with making sure we had the scale in each of our markets. And when we look at the map today, we feel really good about it. Given our historic kind of activity, we certainly have the opportunity to take a look at all the deals that come to the market.

We're quite focused on the organic kind of growth that we laid out in our prepared remarks. We have the opportunity to look at deals that are coming into the marketplace. And honestly, it would have to really provide some strategic benefit to the organization from a geographic or scale perspective. It would have to, from a product perspective, also be accretive. Obviously, it has to work financially. So I'm not going to say that we would never do a deal, but today we're really focused on achieving our growth organically. And if the right opportunity comes along, we will take a look at it.

Truman Patterson (Director and Senior Housing Equity Research Analyst)

Okay. Okay. Perfect. And if I could just squeeze one more in, your 2024 ASP guide of about $600,000, that's about 12% lower than your backlog of, I think, about $680,000. Could you just elaborate a little bit on what's going on there? It seems even with a shift to maybe some more affordable products, spec, etc., that seems a pretty meaningful shift, if you will.

Sheryl Palmer (Chairman and CEO)

Yeah, you're exactly right. And as we've been talking about, really, with the last two M&As and honestly, the shift, the subtle pivot you've seen in our consumer groups, we are going to more and more affordable. So what you have in your backlog today, Truman, tends to be your resort lifestyle Esplanade, which tend to be at a much higher ASP. But what will fill that in in the subsequent quarters is the spec production we have. And our specs, as we said, tend to be that first-time buyer as well as that first-time move-up. So you hate to point to mix, but in all honesty, that's exactly what it is.

Truman Patterson (Director and Senior Housing Equity Research Analyst)

Okay. Perfect. Well, thank you, and good luck in 2024. Thank you.

Sheryl Palmer (Chairman and CEO)

Thank you.

Operator (participant)

The next question comes from Carl Reichardt from BTIG. Please go ahead. Your line is now open.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Thanks, morning, everybody. Thanks for all the detail today. Appreciate it. Sheryl, you talked in the prepared remarks about market share gains. And it's granted if we don't believe the overall market grows at 10% and you do, then you're gaining share. But the blunt question is, from whom are you going to take this share? Is it a function of the private builders? Is it a mixed shift towards move-up product that other publics aren't building, or is it market-related? Can you just sort of expand on directionally who you're going to take this share from?

Sheryl Palmer (Chairman and CEO)

Yeah, I think it's all of the above, Carl. Certainly, what we're seeing is a different level of efficiency in our communities and much higher paces.

So we may see some market growth, but obviously, we're also anticipating grabbing share. And one of the things, Carl, that I would say are really working in our favor today is the strength of the diversity of our portfolio. So when you look at our ability to offer both to-be-built, spec homes at a relatively equal balance, when you look at us serving a third, a third, and a third, that first-time buyer, that first and second move-up, and that resort lifestyle, it really gives us an advantage in each of the markets. As you see some of the volatility that we've seen, certainly over the last year, I don't think we have experienced the same level of volatility. If I think about the fourth quarter, everyone, we saw a lot of movement in interest rates, as you know. October was okay. November was pretty rough.

December was our best December in the company's history. And I really credit the diversity of the portfolio that allows us to do that.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Okay. Thank you, Sheryl. Then you also talked about a pivot in how you're thinking about land and the off-balance sheet side. And if I operate under the assumption that JVs are kind of tough to structure, there are not that many seller financing deals, the default for more off-balance sheet is the land banking business. Can you talk a little bit about the availability of land bank capital, your plans to focus more on that if they exist, and then what you're seeing in terms of the cost of that capital right now? Thanks.

Sheryl Palmer (Chairman and CEO)

You want to take that?

Erik Heuser (COO)

Sure. Hi, Carl Reichardt. Yeah, I would say that we have all of those arrows in the quiver, and we do employ all of them.

The joint ventures are great. And when we've got alignment with a building partner and being able to develop that off-balance sheet, pull the lots in just in time to the homebuilding business, it's great. And we do have 8 of those across the markets. And so they are meaningful as you think about % control. When it comes to the seller financing, that's always the first ask of the divisions. Have we looked to the seller for financing? Because that typically is the least expensive. And we do a fair amount of that. To your point on land banking, I would say land banking is always available. I would say the cost of the comparison of cost relative to where we did our relatively large slug of the vehicle that we negotiated is up from there.

We expect that to moderate down, especially as kind of the perceived risk in the interest rate environment kind of normalizes, plateaus, and kind of comes to a place that we find attractive again. And so the discussions are always being held. We haven't negotiated any real recent ones. But I would say discussions are ongoing. And what we look for, Carl, is for it to come in line with kind of our weighted average cost of capital. That's really where it starts becoming attractive for us.

Sheryl Palmer (Chairman and CEO)

And Erik, if you were to look back to 18 months ago when we did our first big deal and what land banking rates are doing today, I mean, I think there's easily a 300 basis point difference.

Erik Heuser (COO)

Yeah, to be pointing to your question, Carl, I would say it's 3-350 basis points as a compare to kind of where we originally negotiated our deal.

Carl Reichardt (Managing Director and Senior Equity Research Analyst)

Okay. I appreciate that. Thank you for the detail, Erik. Thanks, Sheryl.

Sheryl Palmer (Chairman and CEO)

Thank you.

Erik Heuser (COO)

Thank you. The next question comes from Matthew Bouley from Barclays. Please go ahead, Matthew.

Elizabeth Langan (Equity Research Analys)

Good morning. You have Elizabeth Langan on for Matt today. And I just wanted to kick it off by saying you noted that you were raising prices in nearly 60% of communities. Where are you seeing those price increases? And if this trend kind of continues throughout the year, is that something that's contemplated since the high end of your guide, or would this lend itself to upside on the side of margins?

Curt VanHyfte (CFO)

Yeah, hi there. Yeah, we did have some pricing power in Q4, as you mentioned. We were able to raise our pricing by about, on average, or in about 60% of our communities. That is embedded into our guide. But any additional pricing power would continue to be upside. Again, then depending on what interest rates do, etc., that all plays into what the margin could have an impact on the margins.

Sheryl Palmer (Chairman and CEO)

I'd say the good news, if you agree, Kurt, is, Elizabeth, is even though we saw that pricing opportunity in 60%, it was modest. I think that's a much healthier place. What we would hope to see as we move through 2024 is continued modest pricing opportunity as well as some continued reduction of discounts. Now, it's early in the year, so we're going to have to play that out. Obviously, we've seen the volatility that's hit the market. Certainly, yesterday, we saw it a couple of weeks ago with the single largest lift in interest rates that we've seen in a year. But all in all, we're in a much better place than we were a year ago. So we expect to continue to see some opportunity, all other things being equal as we move into the year.

Elizabeth Langan (Equity Research Analys)

Okay. Thank you. That's helpful. And I guess kind of continuing on that, how are you balancing that with your use of incentives? I guess, obviously, when there's a pricing opportunity, you're going to take it. But does that mean that you're typically kind of dialing back on your incentives more, or are you kind of keeping that pretty stable?

Sheryl Palmer (Chairman and CEO)

Yeah, I think we've been very fortunate, and we've gotten pretty good at navigating this environment for, it seems like, nearly two years. I think our tools have gotten better. Our appreciation of being able to personalize, I think Curt spoke to this in his prepared remarks, being able to personalize each incentive to the specific buyer's needs. We certainly are in a market that we can't kind of paint any community or any market with a single brush. So it allows us to serve the customer in the best way for them and at the same time protect the margin however and wherever we can. It's interesting as interest rates started kind of pulling back, and we saw over the last few weeks, we saw rates drop as low as kind of the mid-sixes.

I started to see in some markets kind of us going back, I mean, us being the industry, to some of the old habits and doing incentives off of options or lot premiums or discounting house, where, in fact, we've stayed very, very focused on using finance as the best sales tool to give our consumers the best monthly rate. That allows us to pull back incentives one house at a time. We are early in the year. We have seen some volatility. Once again, I think the good news is if I look at what those forward commitments were costing many months ago versus where we are today, it's significantly better. Even with the blip that we've seen this week, I still would expect over time, maybe not as quick as the market had assumed, seeing Fed cuts in March or May.

But I think over time, we certainly expect additional stabilization, which will continue to bring incentives down.

Elizabeth Langan (Equity Research Analys)

Thank you very much.

Sheryl Palmer (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Mike Dahl from RBC. Please go ahead, Mike. Your line is now open.

Chris Cataldo (Investment Banking Analyst)

Hi. It's actually Chris Cataldo on from Mike. Just touching on the community count growth comments for 2025. I think you guys said you're expecting meaningful growth there. Could you just help us better quantify what meaningful kind of means there? And then in terms of the trajectory, just given the flat community count outlook for this year, should we expect that meaningfully stepping up as soon as 1Q25, or is that more of a back-half-weighted comment there?

Sheryl Palmer (Chairman and CEO)

We really aren't, at this point, going to give specific guidance, obviously, for 2025. But what I would tell you is that we do expect to see community count we talked about 10% closing growth each year thereafter. I would think you're going to see something in a very similar light on the community count without us getting too specific. And as we look at the land that's kind of in our pipeline today, I think you'll see that starting in early 2025 and building through the year.

Chris Cataldo (Investment Banking Analyst)

Understood. Appreciate that. And then just on the share buyback expectation, you guys said $300,000,000 for this year. Is that included in the diluted share count guide for both next quarter and the year-end? I'm just having trouble reconciling the getting to that 108,000,000 and 109,000,000shares outstanding. Just is that in the guide? And then I guess if it is or if it isn't, just the timing and expectation around deployment there.

Curt VanHyfte (CFO)

Yeah. Hi, Chris. That share repurchase guide is not included in the share accounts that were in our release because they haven't necessarily happened yet. So those are not contemplated in that.

Chris Cataldo (Investment Banking Analyst)

Understood. Appreciate all help.

Operator (participant)

Thank you. The next question comes from Jay McCanless from Wedbush. Please go ahead, Jay. Your line is now open.

Jay McCanless (Managing Director and Senior Equity Research Analyst)

Hey. Good morning, everyone. So on the 40% of communities where you're not raising prices, is it holding prices stable or having to cut pretty aggressively? Maybe talk about what you're doing with that 40% of the count.

Sheryl Palmer (Chairman and CEO)

I don't think there'd be one trend I'd point to, Jay. I think it's actually kind of reverted to a more normal environment where you might have closeouts where you do have some added discounts. You might have new openings where you're coming in strong and then wanting to build kind of equity for the customers over time. I'd say probably as a role, I'd say probably held serve without taking a deep dive into every one of those 40%. I would say that would be the average. But I would say you probably have some added incentives. And certainly, you might have a few communities where you're in closeout where you've discounted the house. But I would say the average would probably be hold serve.

Jay McCanless (Managing Director and Senior Equity Research Analyst)

And then maybe could you talk about what's happening with co-broker and outside broker commissions? What are you seeing there, and are you expecting that to be a headwind for 2024's numbers?

Sheryl Palmer (Chairman and CEO)

Yeah. I'd say we saw that as a headwind, actually, in the back half of 2023. As I'm sure you know, in 2022, we reduced commissions. We reduced the base rate. We didn't put it on where we were seeing HABOs. We excluded that from co-broke commissions. When the market kind of normalized, I think the market went back to that kind of average 3%. If I were to share some good news, though, as I look at our reservations and moving into 2024, for the first six weeks of this year, we've seen some really nice movement on co-broke trending down from the peak.

I would say generally, over the last couple of years, co-broke and our reservations have been pretty consistent with the overall business. We've known the opportunity is really to build trust with that consumer before they ever get a broker or put their house on the market. We've finally started to see that. We'll hope it's sustainable.But all in all, when I look at the book of business outside of the reservations, my guess is it will remain relatively consistent to the back half of 2023.

Jay McCanless (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thank you for that. And then the last question I had because I think I'm getting these numbers confused in my head, but how many homes or closings, what percentage of closings had some type of discount during fourth quarter? And maybe talk about what the level of that discounting was, and what have you seen thus far into the spring?

Sheryl Palmer (Chairman and CEO)

Yeah. So I would say every house has some sort of discount. It's either a closing cost assistance. It might be finance tools. It might be some promotion in the design center. And I'd say that's just normal course of business.

Specifically, if you're thinking about kind of our forward commitments and the specific tools that our customers are enjoying in kind of rate buy-downs for 2023, about 20% of our closings utilized some sort of forward commitment. The balance, like I said, would have used some sort of assistance in closing costs. Maybe it was a specific finance incentive. But kind of these tranches of forward commitment, that was 20% for the year and a little bit higher in the fourth quarter when we saw the spike in rates. But as we talked about in our prepared remarks, that generally leans heavily toward our first-time buyers where they really need more of that assistance to qualify and get the monthly mortgage that they can enjoy.

Jay McCanless (Managing Director and Senior Equity Research Analyst)

Got it. Got it. Got it. Okay. Great. Thank you. That's all I had.

Sheryl Palmer (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Mike Rehaut from JP Morgan. Please go ahead, Mike. Your line is now open.

Doug Wardlaw (Equity Research Analys)

Hi, guys. Good morning. Doug Wardlaw on from Mike. So you mentioned earlier that you guys feel you have healthy momentum that continued in January and February as well, with January having the most online reservations since 2021. Obviously, that kind of gives some foresight into a strong spring selling season. But I was wondering if you could give a little bit more color on your expectations relative to kind of spring selling season's kind of historical norm and whether the signs you see now make you feel like it could be stronger than usual if you're on pace for something that's sort of in line.

Sheryl Palmer (Chairman and CEO)

Yeah. As I said, we really have had a nice start to the year, December being a company record, January continuing strong right out the gate. I think we've seen that traction continue through February. It was interesting to me a couple of weeks ago when we saw that real spike in rates that we came out of that with probably the strongest weekend we had seen in a long, long time. Hard to look forward, but I would say all indicators that we've seen and as you mentioned, when we look at traffic, when I look at web traffic, when I look at the number of reservations, I think January might only be beat by February when I look at the number of reservations in the first two weeks of the month. All indicators are really strong.

And I think what's happened is we've moved to a place where the volatility and interest rates, the builders have the tools in their toolbox to really be able to help the consumer. And there's not a lot of inventory in the resale market. There's not a lot of inventory in the new home market. And I think I don't want to say the fear of missing out. I think that might be, I'm not trying to suggest we're going back to 21 days. But I think we're in a healthy, stabilized market, and the consumer has met us more than halfway in understanding that interest rates in the fives and sixes are really, from a long-term perspective, a very good thing. And they're out in full force.

I think the other thing, the last thing that I mentioned, is when I look at kind of the number of renters that we have in the U.S. today, and I look at every 50 bps, every reduction in interest rate, and what that does to open up the opportunity for renters to enjoy home ownership, I think they're sitting on the sidelines. So lots of, I think, sprinkles of good news that we're seeing. And everything that we see today would lead us to believe it's going to be a really nice, healthy spring selling season.

Doug Wardlaw (Equity Research Analys)

Great. And then if you guys can just touch on if there were any substantial differences in markets between the use of any type of incentive throughout the past quarter.

Sheryl Palmer (Chairman and CEO)

Yeah. It's an interesting point. There really is. Generally, I would say that, as I've said a couple of times, that our incentives are mostly used, consistently used with our first-time buyers. But when I look at markets like Seattle, I would say that's a market that very rarely uses kind of forward commitments. I would say the same for Sacramento. I would say generally, when I look at the rest of our business with the first-timer, I would say there's an equal spread of using kind of those finance tools to help folks to the front door.

And then obviously, when I look at our Resort Lifestyle business, which is certainly moving across the U.S., but predominantly today in Florida, we still see a very high penetration of cash. And so we're not using nearly the same incentives for that consumer that we would be using for our first-time and our first-time move-out.

Doug Wardlaw (Equity Research Analys)

Got it. Thank you, guys.

Sheryl Palmer (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Ken Zener from Seaport Research Partners. Please go ahead, Ken.

Ken Zener (Senior Equity Research Analyst)

Good morning, everybody. Good morning. Morning. Hello? Oh, good. Sorry. Just checking. Appreciate the disclosures around inventory breakouts, etc., etc. I think it's very informative. Can you talk to you talked about low threes, I believe, for orders is a general pattern. But can you talk to your start process, what guides this? You mentioned even flow. So I'm trying to see how that start supports the orders, or does it actually define the orders? And then if you're trying to targeting that low freeze, what are you to that apropos margins?

Erik Heuser (COO)

Ken, we might have lost you.

Ken Zener (Senior Equity Research Analyst)

Oh. Can you hear me now?

Erik Heuser (COO)

Yes, sir.

Ken Zener (Senior Equity Research Analyst)

You can't hear me?

Sheryl Palmer (Chairman and CEO)

Yeah. You were going in and out, Ken, during your question. Can you try it one more time?

Ken Zener (Senior Equity Research Analyst)

Okay. Sorry about that. Sure. I was just asking, you mentioned starts. Orders you mentioned in the low threes, can you talk about how those play together? Since you mentioned even flow, which suggests your starts might actually determine kind of what your order pace is, and how do you or how committed are you to meeting that level, low threes? Would you give up margin, etc.? Thank you. That's it.

Sheryl Palmer (Chairman and CEO)

Yeah. Hey, Ken. We've been consistently saying that we're going to match our starts to kind of sales with maybe some flexes here and there relative to timing of year, i.e., like we did this past year, we flexed our starts up in Q2, Q3 to get enough houses in the ground for the spring selling season of this year. But generally speaking, when I mentioned even flow earlier, we're looking really for kind of cadence, predictable cadence.

That's one of the goals that we have. We find that that's easier. It's more efficient for us. It doesn't put as much stress on our trades, our internal teams, etc. And so we'll do our best to kind of keep that as even as possible. But the general guide is always we'll match starts, in theory, to sales.

Ken Zener (Senior Equity Research Analyst)

Thank you very much.

Operator (participant)

Thank you. Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead, Alan. Your line is now open.

Alan Ratner (Managing Director and Senior Equity Research Analyst)

Hey, guys. Good morning. Thanks for all the great detail, as always. Very helpful. Good morning. First line of questioning, I think the commentary around the land strategy was really interesting. So I was hoping to better understand a few of those points.

Sheryl Palmer (Chairman and CEO)

First, with the self-developed deal tailwind on the margin side, looking at your 2024 guidance down a little bit year on year, how should we think about that tailwind flowing through? Is that going to be more prevalent in 2025 and beyond as these deals get to the finish line, or should we think about that more as an offset to some of the other headwinds that you might have, i.e., more land banking/optioning, higher land costs overall? Just trying to figure out the moving pieces on that part first.

Erik Heuser (COO)

Yeah. Hey, Alan. It's Eric. Maybe a couple of things. Yeah. Really, the specific commentary in the prepared remarks was around the 2023 underwriting. And so kind of that tailwind, as you suggest, is going to take some time to come through the system. Obviously, it takes time to bring those to market.

Sheryl Palmer (Chairman and CEO)

So you'll see that over not just through this year, but over time. And then with regard to just kind of room for land banking, as somebody asked previously, we do view that as an important option for us, especially as we think about maximizing return. The kind of the prior tranches that we did, average of averages at a deal level, that kind of cost us about 175 basis points for a trade of about 600 basis points of return. If you blend that across the overall company portfolio, it's obviously pretty not de minimis, but it's much smaller, right? You might be thinking 20, 30 basis points to the overall portfolio. So hopefully, that helps with regard to timing and cost and use of tools.

Alan Ratner (Managing Director and Senior Equity Research Analyst)

That's helpful, Eric. Thank you. Second on cash conversion, you guys have had really impressive cash conversion these last two years, roughly 100% of net income converting to free cash. And a lot of that, I think, has come as you've maybe shrunk the land position a little bit, right-sized it to some extent. Inventory turnovers improved. Working capital has shrunk. As we think about this pivot towards more self-developed deals, should we temper that trajectory a little bit? Is there going to be a little bit of a flip in the opposite direction as these deals kind of work their way through the development process?

Curt VanHyfte (CFO)

Yeah. That's a good question, Alan. I don't know if it's necessarily tempering because when we kind of look at everything we're looking at, we did have a good year of cash generation in 2023. Even with some of the land spend targets that we have in play for 2024, we still believe we'll be in a real good cash position as we work our way over the course of the year from a cash flow generation standpoint. So without kind of getting into too futuristic kind of, I guess, directional signs, we still feel really good about, I guess, our cash generation, even with land spend that we've, I guess, earmarked in our prepared comments.

Alan Ratner (Managing Director and Senior Equity Research Analyst)

Okay. Thank you for that, Curt. If I could squeeze in one last one unrelated, can you just give an update on Yardly and kind of the timing of single-family rental recognition of sales? I think I vaguely remember you mentioning 2024. You kind of had a bunch of deals in the pipeline to potentially close, but I know there's been some volatility in the SFR market, the BFR market. So any update you can give there would be helpful.

Curt VanHyfte (CFO)

Yeah, Alan. Appreciate the question. And maybe just to kind of frame, obviously, a pretty volatile rate and cap rate environment last year, maybe last 18 months. So really have really operated with a fair amount of prudence, making sure we're only bringing the cream of the crop to the business. The right way to think about the scale of that business today is we've got about 24 projects working in about 8 different markets for our actively leasing today. And we'll have optionality to think about disposition of probably a couple of those this year, depending on what the market tells us.

And then of those kind of those couple dozen deals, 13 are within the venture that we've previously talked about. So that really gives us a lot of capital efficiency. And then we've got a number of others that are kind of working through horizontal and vertical development. So really constantly looking for deals, but they've got to be the cream of the crop as we think about kind of that volatility and the rate environment that we've seen. So really, from a timing standpoint, again, a couple this year, perhaps, options, and then maybe double that the following year. And then you're really going to see prospective ramp-up.

Alan Ratner (Managing Director and Senior Equity Research Analyst)

Perfect. Thank you so much, guys. Appreciate it.

Curt VanHyfte (CFO)

You bet.

Sheryl Palmer (Chairman and CEO)

Thank you. Thank you.

Operator (participant)

Our final question today comes from Alex Barron from Housing Research Center. Please go ahead, Alex.

Alex Barron (President and Lead Analyst)

Yeah. Thanks for squeezing me in. Great results in the quarter.

Sheryl Palmer (Chairman and CEO)

I'm sorry if I missed this. Did you guys discuss what the legal settlement charge was about? Yeah, Alex.

Erik Heuser (COO)

Good question. I think in our 8-K, we did disclose that back in December, but it was from an asset that we got through the AV acquisition. It's from. It's limited to the state of Florida. It's a community called Solivita. And it was settled, and it's kind of behind us for now. And that's essentially what it was. There's a lot of detail in the 8-K that we filed for it back in December. So feel free to kind of take a look at that. And if you have additional questions, let us know.

Alex Barron (President and Lead Analyst)

Okay. I'll take a look. Thanks. My other question was on the share buyback, the $300,000,000 number. Is that meant to be $75,000,000 a quarter, or is that meant to be whenever you guys feel it's opportunistic? And is there any potential upside to that number if the stock were to persist at a low value?

Erik Heuser (COO)

Yeah, Alex. I don't know if we necessarily have it prescribed kind of on a quarterly basis, but it's a goal that we have set out there as a target for 2024. So as we look at it, we typically do what we call an opportunistic approach when we set out to buy our shares. And so we'll just kind of play it by year, see how the year goes, and kind of buy shares as necessary as we go through the year.

Sheryl Palmer (Chairman and CEO)

And we'll continue to operate under a 10b5-1.And so it's probably a little more consistency than you've seen historically to make sure that gets out there, but no specific quarterly targets. Got it. All right. Well, thanks, and best of luck for the year.

Alex Barron (President and Lead Analyst)

Thank you.

Sheryl Palmer (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. That does conclude our Q&A session for today. So I'll hand back over to Sheryl for any closing remarks.

Sheryl Palmer (Chairman and CEO)

Thank you for the opportunity to share our 2023 results. We really look forward to being able to get into more detail with you on our Q1 on the April call. And I wish you all the very best. Have a great day.