Beazer Homes USA Inc (BZH) Q1 2022 Earnings Call Transcript

Good afternoon and welcome to the Beazer Homes Earnings Conference Call for the Fourth Ended December 31, 2021. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer. Thank you, sir, you may begin.

Thank you. Good afternoon and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 22. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known risks, uncertainties, and other factors which are described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statements speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is simply not possible to predict all such factors. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will review highlights from the first quarter, comment on how we are addressing challenges in the current environment, and update some of our expectations for fiscal 2022. I will cover our first quarter results in greater depth and provide detailed expectations for the second quarter and full year. I will then give an update on continued growth in our land position and future care and community count, followed by wrap up by Allan. After our prepared remarks, we'll take questions in the time remaining. I will now turn the call over to Allan.

Thank you, Dave, and thank you for joining us on our call this afternoon. We generated excellent results in the first quarter, with higher home prices contributing to much higher operating margins and a substantial increase in profitability. For the quarter, we generated a 40% increase in adjusted EBITDA and more than doubled our EPS compared to a year ago. Operationally, we achieved our objectives in sales, closings, and land acquisition. In terms of sales, we carefully managed volumes to align with our anticipated spring production capacity. We remain unwilling to sell too far in front of our ability to start homes, both because of risks on the cost side and the frustration that causes homebuyers. On the closing side, we were able to deliver homes in line with our expectations, but it required a pretty heroic effort and a fair bit of timing flexibility from our customers. Appliances and certain HVAC components were a particular challenge this quarter, with both manufacturing and distribution bottlenecks arising in various markets. In terms of land activity, we continue to find attractive opportunities to either own or control through options, allowing us to expand our total lot position for the fifth consecutive quarter. One other highlight of note was in relation to our ESG efforts. In December, we published our first ever ESG summary, aligned with our industry SASB metrics. A link to this report is included in today's slides and is also available in the Investor Relations section of our website. The operating environment during our first quarter reflected many of the characteristics of recent quarters, notably continued strength in consumer demand and persistent supply chain challenges worsened by the surge in COVID cases in December. Even with a reduction in COVID cases, we expect these dynamics to remain in place over the balance of our fiscal year. On a longer-term basis, we believe the setup for our industry remains very strong. A robust employment market with meaningful wage growth like we are seeing now is a clear positive for housing. But we are also in the early stages of a demographic shift towards homeownership, which we believe has been amplified by the pandemic. Collectively, this represents a very strong case for housing demand for years to come. What makes this environment all the more encouraging is that there is by nearly all accounts a multi-million unit housing deficit that has accumulated over the past decade. Of course, when demand strength meets supply constraints there are going to be consequences and we are clearly seeing several of these including rising home prices, material and labor availability issues and cost increases. And no discussion of the challenges our industry faces would be complete without an acknowledgment that for the first time in at least a decade, the likely direction of mortgage rates is higher in the coming years. Ultimately, we're very confident the supply chain issues can be resolved. Investments in capacity, improved vendor information sharing, product substitutions and frankly a lot of hard work should see these challenges resolved over time. So in our view that leaves home affordability as the most significant and the most likely long-term risk to industry outcomes. As we would do with any significant systemic operational risk, we have done a lot of work on understanding the magnitude of this affordability risk and crucially implementing strategies to help mitigate it. As the media often reports, home price indices have been establishing new highs for several years. But when we look at monthly payments in relation to household income, we see a slightly different picture. We have provided a couple of charts to help illustrate this fact. But please, don't misunderstand their point of view. We understand that for most homebuyers, home prices are high and that mortgage rates may well move higher. That's why we take addressing affordability so seriously. Now, as much as I would like to, I am not going to try and sell you a new Beazer home during this earnings call, but I am going to point out that the three fundamental pillars of our value proposition for buyers all explicitly address affordability. First, our choice plans allow customers to select from a list of structural options at no additional cost. For many buyers, this is a great value since they have choices not present in spec homes but don't have to bear the additional expense to enjoy them. Second, our Mortgage Choice platform shines in a rising rate environment since the competition among lenders for our customers' business provides the most efficient origination mechanism a new home buyer can find. That's because we have eliminated the typical mortgage subsidiary middleman. There's no overhead to pay for and we don't participate in origination fees or loan sale profits. Instead, our customers simply save money. And third, our surprising performance pillar results in homes that cost far less to operate due to their energy efficiency. For our buyers, the energy savings embedded in our homes may be a deciding factor in their purchase decision. And unlike many of our competitors, who charge extra for these features, ours are included in every Beazer home at no additional cost. Taken together, these pillars help us compete for homebuyers with a coherent and compelling focus on affordability. At the outset of the year, we announced our expectation to earn more than $5 in earnings per share in fiscal 2022. Given the strength in our Q1 results and the visibility we have into our backlog, we are confident our full year results will be even better than we anticipated in November despite concerns about additional cycle time challenges. While it seems likely COVID cases will decline in the months ahead, we're extremely cautious about predicting improvements in material and labor availability. In fact, with the normal surge in spring construction activity looming, we think it is possible that industry cycle times will extend even further over the next few months. Trying to estimate the impact of potential future delays is nearly impossible. But even if cycle times do worsen from current levels, we are confident we can exceed $5 in earnings. This confidence comes from the number of homes, the average selling prices, and the margins in our backlog. If it turns out that the production environment is better than we anticipate, we'll have some upside. Separate and apart from the discussion of earnings so far, I'd like to also update you on a positive development in our tax rate. You may recall that in fiscal 2021, we realized about $12 million in energy efficiency tax credits. While the tax law that gave rise to these credits expired on December 31, we're in the process of documenting and claiming the benefit for thousands of homes delivered in recent years. In the first quarter, we realized another $3 million in these credits and we expect the full year fiscal 2022 benefit to be about $12 million, or about $0.40 per share. While these tax benefits are obviously nonrecurring, they are incremental to our earnings guidance and will add to the growth in our book value. Now with that riveting discussion about taxes completed, let me turn the call over to Dave.

Thanks, Allan. Looking at the first quarter compared to the prior year, our sales pace was 3.3 sales per community per month, as we continue to limit sales in many communities to manage our production capacity and ensure a positive customer experience. The pace we achieved was much higher than our first quarter average over the last decade. 15% higher average selling prices drove homebuilding revenue, up about 5% to $447 million. Our gross margin excluding amortized interest, impairments and abandonments was 24.2%, up more than 200 basis points. SG&A was down approximately 90 basis points as a percentage of total revenue to 11.8%. This led to adjusted EBITDA of $61.1 million in the quarter, up 40% and representing approximately 13% of total revenue. Interest amortized as a percentage of homebuilding revenue was 3.3%, down 110 basis points. Our tax expense for the quarter was about $6.5 million for an effective tax rate of 16%. This rate was reduced by the energy efficiency tax credits highlighted by Allan earlier. As a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expenses. Taken together, this led to approximately $35 million of net income from continuing operations, or $1.14 per share in earnings, more than double the same period last year. Finally, the value of our backlog was $1.4 billion, up more than 20%. Turning now to our expectations for the second quarter of this fiscal year. We expect to hold our average monthly sales pace in the low-3s as we manage the current production environment with a focus on profitability. This level is consistent with our long-term historical average for the second quarter. Average community count is expected to be around 120, up sequentially from the trough in the first quarter. Closings should again be between 1000 and 1050. Average selling price should be around $470,000, up nearly 20% versus last year. Gross margin should be up over 300 basis points versus the same period last year. SG&A on an absolute dollar basis should be up about $4 million, driven by both broad-based compensation increases and higher head count as we staff for future growth. Given the guidance we provided for closings and margins, EBITDA should be around $65 million or relatively flat versus the prior year. Interest amortized as a percentage of homebuilding revenue should be in the mid-3s and our tax rate to be approximately 17%, reflecting the expected tax credits. And while precision in EPS forecasting is difficult, we expect earnings per share to be up double-digits versus the same period last year. Looking at our expectations for full year results, we're confident we can exceed $5 in earnings. Here's why. Unlike in prior years, we have removed much of the production risk from our fiscal year expectations. The combination of homes already closed, homes in backlog, and spec units under construction represent more than 95% of our anticipated closing volume. In recent years that ratio on December 31 has ranged from 60% to 85%. Now, it may be that we can start and complete more homes by the end of the fiscal year, but our earnings expectations are not dependent on doing so. With such significant visibility into our expected closings, we now anticipate average selling prices for the full year to be over $470,000, or more than 15% higher than the prior year, and operating margins should be up about 200 basis points versus fiscal 2021. We ended the first quarter with over $400 million of liquidity, comprised of unrestricted cash of approximately $158 million and nothing outstanding in our revolver. We have a clear path to bring debt below $1 billion in fiscal 2022 and no bond maturities until 2025. Our substantial deleveraging combined with higher earnings has led to significantly better credit metrics for our business. This trend should continue as we move through this year and by year-end, we anticipate our net debt-to-EBITDA will be in the low-2s and our net debt to net cap in the 40s. In the appendix of this presentation, we provided a longer-term view of our improvement in these statistics. We spent over $130 million on land and development in the quarter, up nearly 20% compared to the same period last year. This increased land spending combined with our efforts to increase the percentage of our lots controlled through options has allowed us to grow our active lot position to over 22,000 lots. Looking forward, our cumulative investments in land will start translating into higher community count in the second quarter with further acceleration in fiscal 2023. With that, let me turn the call back over to Allan for his conclusion.

Thank you, Dave. The first quarter of fiscal 2022 was very productive for Beazer and our team was able to achieve outstanding results while adapting to a fluid and challenging operating environment. Financially, we expect a year of strong earnings growth supported by a constructive pricing environment and substantial margin improvements. These results will reflect another successful year of our long-term balanced growth strategy, which is to grow earnings faster than revenue from a more efficient and less leveraged balance sheet. Operationally, we are focused on delivering the best possible experience for our customers despite continued supply chain challenges while adding to our lot position to fuel growth in future years. And strategically, we are making investments in our team and many aspects of our ESG platform to allow us to further differentiate our career paths, our homes and our company's environmental impact from our peers. I want to thank our team for their resiliency and their professionalism. I remain confident we have the people, the strategy, and the resources to accomplish our goals in the coming years. With that, I'll turn the call over to the operator to take us into Q&A.

It is now time for the question-and-answer session of today's call. Thank you. Our first question comes from Tyler Batory from Janney. Your line is open, sir.

Good afternoon. Thanks for taking my questions and appreciate all the detail thus far. Yeah, first question I want to start is just on interest rates. Clearly top of mind for everyone right now. Interested if you could talk a little bit about what you're seeing perhaps in January in the business? Any impact there from the move higher in mortgage rates? And then when you look a little bit longer term certainly does appear like rates are at least going to be going higher. Just at what point do you think that really starts to impact your business? I mean, is it 4%? Is it 4.5%? Just interested in any thoughts or any perspective there as well.

Sure. Well, it's Allan. I'll take a stab at that. The short answer is we haven't really seen evidence of the rate movement affecting demand in January. We still feel quite in control. We are managing sales to our production capacity really not impeded by a change in mortgage rates. We agree that it does seem more likely that rates are moving higher. And it's one of the reasons we wanted to focus and we did in the script and provided a chart on kind of payments to income. And I think everyone can do their own math. But a 30 basis point, 40 basis point, 50 basis point move we're still in a historically fairly comfortable zone. Where that question gets slightly more complicated is there are at least three moving parts. What's happening to mortgage rates? What's happening to home prices, and what's happening to incomes? Now we could envision good, bad and in-between scenarios. If the only thing that happens is interest rates trend up and home prices were absolutely flat and, by the way, we've got some wage growth that's a pretty benign environment. The thing that we're really focused on and the risk that we're trying to be prepared for is if the shortage of available homes leads to heavy price action and we're not contemplating that. But the fact is there is a housing deficit in this country. If that price movement together with mortgage rates moves affordability faster than incomes move, that's where we get more concerned. And so we've provided this 30-year history to give a perspective on how we're thinking about that. I don't think everything comes to a screeching halt if we get to 21% or 22% or 23%. But certainly, you start to see numbers above the long-term trend lines and that is certainly a concern. And just related to that, we are underwriting every deal we do with the assumption that mortgage rates are substantially higher than they currently are to evaluate affordability in the environment of higher rates.

Okay, great. Appreciate all that color. Just as a follow-up question on gross margin certainly very strong in the quarter. The guidance implies an acceleration into Q2 here. Just if you could, I assume that price is really the big driver there. But if you could talk a little bit more about what you're seeing on the cost side of the equation both what you saw in the quarter and then what you're expecting as well in Q2?

Well, Tyler kind of two things. It's Dave. First I would tell you that certainly you're correct in that the guidance is implying higher margin in the second quarter. And certainly from what we see in backlog that is indicative of the higher margin that we expect. I would tell you in terms of what we saw in the quarter, certainly some higher costs but the ability to raise prices to offset those costs and feel pretty comfortable with the margin guidance that we've given accordingly. I'm sorry I thought there was a third part to the question I believe if I missed it.

Just if you could quantify a little bit more and talk a little bit more about the cost environment. Obviously, lumber has been pretty volatile out there right now. So just, kind of, just how you're thinking about that flowing through to your gross margin as well?

Sure. And look we gave gross margin guidance for the full year with that in mind.

For the quarter.

For the quarter, and we talked about more operating margins for the full year being up 200 basis points around 200 basis points. The answer is, with the backlog that we have and the production that we've already started and got underway, we obviously have a lot of the year kind of underway and have some decent cost visibility into it. It's one of the reasons though Tyler, I would tell you back to Allan's comments earlier, about really managing our start pace and managing our sales pace. We want to be thoughtful and not have cost visibility as we're starting new homes in the business. So pretty good visibility as we move through this year and pretty good visibility obviously to the full-year guidance that we gave on the operating margin side.

Okay. Great. I’ll leave it there. Thank you for the details.

Thank you, sir.

Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Thank you and congratulations on a great quarter, everyone.

Hi, Sue.

Thank you.

Allan, my first question is thinking about the operational side of the business you mentioned in your remarks that you do see the opportunity for the issues on the supply chain to be resolved over time. But how do you think about the labor side of the equation? Do you think that that also will incrementally, perhaps loosen up, or what is Beazer and the broader sort of industry's opportunity to overcome those headwinds to continue to add the volume that's needed on the ground?

It's a great question. We have a significant demographic challenge in this country, and we can't retroactively change birth rates or immigration policies from decades past. This means there is a limited labor pool to work with. However, I believe there are a few reasons for optimism regarding navigating these challenges. The immediate issues we face have been exacerbated by disruptions during the pandemic. For example, manufacturers may have to halt operations due to positive COVID-19 cases, resulting in lost productivity just as they're ramping up for peak production seasons. I expect we'll move toward a more stable environment with fewer of these sudden shocks. Importantly, we are witnessing a shift toward substituting components and panels in markets that traditionally used stick-built methods. In some areas that have historically been slow to adapt, we're seeing a swift change. There is indeed some capital for labor substitution occurring. Another factor contributing to temporary labor constraints is the unusual work-from-home situation we find ourselves in. I refer to it as "weird" because, although I recognize the safety concerns, it presents specific challenges. For instance, in one of the counties where we operate, there is a significant backlog of over 700 building permits. Normally, they have a team of 37 to process these permits, but they are currently down to only seven due to layoffs and long-term COVID-related absences. These seven employees can process about 12 permits daily, compared to their former capacity of 250 per week. Everyone involved, including our competitors, is aware of this issue. I don't believe this county will remain staffed at such a low level forever. They have started to implement technology for permit submissions, and we’ve been proactive in getting our permits in earlier. While I don't think the department will return to a full staff of 37, increasing to 15 would significantly enhance their productivity. It's remarkable how a small number of personnel can influence production outcomes across our industry. So, while I acknowledge the overarching demographic challenge, I believe that as COVID cases decline and we see more product substitution, along with the resolution of administrative bottlenecks, we'll find a path forward. I foresee this unfolding over a period of nine to eighteen months, and I don't expect a quick resolution within the next three to six months. Nonetheless, I am encouraged that we will see a return to more typical construction cycles.

Yes, that’s incredibly helpful color Allan. Thank you. And my follow-up question is a bit broader and maybe longer term in nature which is we've obviously seen Beazer benefit from some really impressive margin expansion in the last two years. It's driven your EBITDA up really nicely. But as you think about the path forward and understanding you're not giving 2023 guidance how do you think about what the opportunity set is for the business? And where we can kind of go from here just given all the different puts and takes as it relates to mortgage rates and operations and all those sorts of efforts.

I mean it's a great question. Look there are tons of uncertainties about the spring selling season and the summer and the resolution of production issues. But fundamentally the supply and demand characteristics are super positive and I think two things we're really confident in. I think we're going to have a really big backlog as we end our fiscal year because we're going to sell a bunch of homes this spring and through the summer and we're not expecting to deliver those in this fiscal year. So, 2023 is going to start with a pretty darn good head start. We're also going to have a larger community count. Dave talked about it expanding in the second quarter and we think that that will move forward sequentially. So bottom-line Sue is, and Dave may look at me funny when I say this, I'm going to be very, very surprised if we don't have earnings growth next year.

Well, that’s great Allan. Happy to hear that and good luck.

Thanks Sue.

Thanks Sue.

Thank you. Our next question comes from Alan Ratner with Zelman & Associates. Your line is open.

Good afternoon, everyone. Thank you for taking my questions. Looking at the sales pace guidance you provided for the second quarter, indicating low-3s for absorptions, it seems roughly flat sequentially, possibly even a slight decrease. Historically, there has been significant sequential improvement in absorption during the second quarter, especially as it aligns with the spring selling season. Therefore, someone not considering your remarks might be worried about rates, but that doesn’t seem to be the issue here. Could you explain why you aren't anticipating any seasonal lift? I recognize the supply constraints and other factors at play, but one would expect the second quarter to yield your strongest absorption pace of the year.

We've got a very clear understanding at least over a 30 to 60-day window the starts that we can get and the promises that we can keep to our customers about when we can deliver homes. And because a pretty significant majority of our homes are to be built, we're not principally selling specs. That's an important promise that we're making. And so, our conservatism or lack of leaning into a strong selling season is really principally about making sure that we can do what we say we're going to do. And if we see opportunities to move a little faster through that, if we can open up that spigot for starts and we see the availability of the products that have been problematic, we'll certainly have the capacity in this demand environment to do a bit better than that. But we wanted to be clear today that we are letting that govern to a certain extent the level at which we're going to allow sales to occur because I don't want to end up with a bunch of unhappy customers in backlog.

Got it. That’s helpful. So I would assume reading between the lines there and I know you're not giving guidance for the back half of the year, but you see the year probably unfolding in a pretty atypical fashion from a seasonality perspective maybe there's not as much of a drop-off in the back half either, it's more kind of steady state through the year?

I think that is a pretty good perspective. And again, I don't know the number of decimal points of precision, two, three quarters out, but for sure, there is an environment here of more stability. It doesn't resemble quite the waves that we see in a normal historical pattern.

Got it. Okay. Great. The second question is about the potential risk of rising rates. I believe you mentioned that the addition is likely to increase rather than decrease. We're uncertain about the extent or speed of this change. I'm interested to know if your perspective has shifted in the past month, considering the apparent increased risk of rising rates. Are there any strategies you might be implementing differently in the business, such as exploring different land deals, focusing on more affordable projects, or considering longer-term projects to counteract a potential rate increase? Additionally, are you adjusting the discount rates in your underwriting models? Any changes in how you're approaching the business with the prospect of higher rates?

So, not really. I will tell you Alan, I mentioned this before, we underwrite to a substantially higher mortgage rate. When we're looking at the ability to be a home buyer of a home in a community that we are underwriting, we assume that the rates at the time we're selling homes are quite a bit higher. We look at current incomes and say, what is the opportunity set of buyers in that submarket, who can pay this price and what share would we have to have of those available buyers for this community to work. So, I feel like we've sort of stress tested and have consistently been stress testing for a much higher rate environment. I will tell you one area that's more operational that is of I guess, it's relevant to your question. And look you know a ton about the mortgage origination market. You know what happens in the mortgage origination market. As rates move up, initially the refi business, there's a little spurt but you get to certain levels and the refi business goes away. And when the refi business goes away, the level of competition on the purchase money mortgage side gets pretty frothy. I mean they start doing things to win business. And it's why I said our Mortgage Choice platform kind of shines in a rising rate environment because we've literally created the Hunger Games for our lenders. We want them to compete for our customers' business. So, we have reminded our sales teams, we reminded all of our lenders that participate in our Mortgage Choice program that we want their absolute best proposal for every customer. And I think in this environment, we have certainly repeated that, restated that. I mean it's a fundamental characteristic of that program. But I think this is a window where we can see its real value.

Okay. Appreciate the perspective. Thanks a lot.

Thanks, Alan.

Our next question comes from Julio Romero with Sidoti & Company.

Hey good afternoon. Thanks for taking the question. My first question is can you speak to any trends with regards to land acquisition? Is that maybe becoming even more competitive than the housing market? And are you seeing any changes with regards to the supply of land available to acquire in your target markets?

The land markets are currently very strong. Over the past 90 days, there hasn't been a significant change in fundamentals. Last spring provided an excellent selling environment, which positively influenced land sellers' expectations during the summer and fall. We focus on identifying areas where we excel, particularly in products where we can maximize value, manage costs effectively, and build efficiently. Always, we consider deal structure. In some markets, larger competitors are eager to secure large deals, but we have found success with smaller deal sizes. In other markets with different dynamics, we have collaborated with another builder to divide lots, demonstrating our adaptability in aligning our strengths with market opportunities while avoiding direct competition with well-capitalized bidders.

Julio, I only add to your question just to be clear finding opportunities across the footprint to hit our underwriting nothing has really changed from that perspective and very focused on the risk side and controlling risk by not changing markets not moving outside the footprint staying very focused on the products we know in the areas that we know in the submarkets that we know.

Got it. I appreciate that color. And on the leverage ratio you spoke about that approaching the low-2s by the end of the year. I guess how do you think about capital allocation at that point? Do you maybe see more cash going to reinvesting more land or maybe some further debt reduction beyond your targets?

We have set a goal to reduce our debt to below $1 billion. This is part of our strategy to achieve a net debt-to-EBITDA ratio below 2. We will make decisions as the situation evolves. Given the opportunities in the land market, we are confident in our ability to expand the business, invest in land, and increase our land holdings. For now, our primary focus is on maintaining our debt below $1 billion.

Understood. Thanks for taking the question.

Thanks, Julio.

Our next question comes from Alex Barron with Housing Research Center. Your line is open.

Thank you and great job on the quarter guys. Yes, I wanted to talk about the kind of the big picture. So it seems like prices have been moving up, units have been trending lower because of all the supply chain issues, etc., taking longer. But as rates go up do you guys envision your product mix to stay at these price points, or are you guys thinking over time you're going to I don't know make smaller homes or make them simpler or something to try to bring the price point down, or is it just you know whoever can afford these houses and even if it means slightly lower units?

It's a great question, Alex, and honestly, we do have an ambition to make sure that we are in a very affordable context in every market that we're in. And that isn't the lowest price. That's not the entry level. That's not typically our bread and butter. But we have adopted more attached product, you'd see villa product, duet product from us, you'd see more townhomes. We are definitely very focused on staying in that affordability corridor whatever that means in a particular market. And we're more likely to innovate on the product side than we are in the sub-market side. I would tell you that, rushing out to cheaper land sub-markets to us you're always late by the time you get there. I'd rather stay in the sub-markets that we know. So yes, I think – in fact, we've seen it in our business. We've seen a shift in product types. Our homes have gotten slightly smaller. And while I don't think we're going to see the kind of house price appreciation we've seen over the last year, one of our counter moves to that is to make sure we're really focused on getting the envelope the right lifestyle, but to get it in the most affordable format that we can.

Okay. Great. My second question has to do with the backlog conversion ratio, particularly in the Southeast region. As I look back at your orders and the ratio over the last two quarters, I mean, can you just help us understand why such few homes got delivered in that region this quarter? Like what changed?

Well, some of the administrative issues that I alluded to in the answer to a prior question, and I don't want you to get me in trouble here and make me start naming counties. But I will tell you that, some of the most acute permit and inspection holdups in the single-family industry right now happen to fall within our Southeast segment. That is a fairly material component of that. So I would say, it's a slightly worse picture in the Southeast in some of those administrative contexts than it is in the rest of the country.

Okay. But I'm assuming that's not going to be permanent. I mean is some of it attributable maybe to, I don't know rises in COVID cases or something like that?

Yeah. No. I mean, and I gave a long answer. I don't want to repeat it. But yes, these counties aren't going to have remote work forever. They're not going to be working with skeletal staff saying, hey, we get into the office on Thursdays, and we'll pick up packages on Thursdays, and we'll get back to you sometime. I think we will see a resumption of kind of normal operating procedures in time. But I do think that this is – well, let me say, it more succinctly, this is not the new normal. This is the normal today, but I think it will – you'll start to see a resumption of better cycle times, and frankly, better backlog conversion rates, particularly as we get into next year.

Okay. If I could ask one last one. I know you guys have been focused on delevering the balance sheet. But at the same time, I mean, your stock is trading at three times earnings. So any thoughts around purchasing back some stock?

Well, I think Dave answered part of this question by saying, we're finding a lot of opportunities to grow the business. And I think that's one thing that has been missing is we have delevered and improved profitability. We haven't really had a top line growth story, and I think we are pretty excited about having one. And you can see a community count expansion coming. But the fact is, we do have an authorized share repurchase program. We haven't exhausted that. And I will tell you, there are certainly values at which that is within our capital allocation framework. I'm not announcing a target price, but I will tell you we have that within the toolkit Alex. And that's probably as far as I can go.

All right. Thanks so much guys. Thanks.

Thanks, Alex.

Thank you. Our next question comes from Jay McCandless. Your line is open, sir. From Wedbush.

Hi. My first question just wanted to make sure I'm following the math on the guidance page. Are you guys expecting roughly 4,300 4,400 closings for this year? Is that where that math should get us to?

No. That's not correct. Let me help you out a little bit. If you think about what's already closed that's 1,019, backlog is 2,908 and specs are 744, that's 4,671. We said that represents more than 95%. So you can pick a number 95% or higher and divide it into that and that sort of gives you a sense of the range, but the sum of those numbers is larger than the number that you had.

Okay. Okay. Thanks. I did misread it. I thought that you were saying it was 95% times that closing, so it's closer probably to 5,000, is what you're all targeting for this year?

Yeah. It's a number above 4,671. And again, the math is just divide that by 0.95, 0.96 pick a number. But that number is kind of a baseline and we think that there is a little up from there, but not a lot in the current production environment.

Okay. But if cycle times are going to slow like you think later this year, does that number accounts for that or include that?

Yes, it does. That's why that 95% is so important. Looking back three or four years, we were closing around 5,000 to 5,200 homes. The total from those years would have been between 3,500 to 3,700, which still left us with about 2,000 homes that we needed to start, sell, and close. We've essentially eliminated that backlog because we are not in the position we were three or five years ago. However, I want to emphasize that if we see some movement or improvement from our current situation, there could be potential for some upside.

Okay. So the next question, when I look at the community count slide from the fourth quarter 2021 deck versus the one in today's deck, it doesn't seem like there's been much change on the opening in the next six months and under development. Is the slower sales pace that you're talking about the 3s on absorption just to maintain communities longer and sell a little more – for a little more profit. And eventually the community count is going to start to catch up. Is that the right way to think about it? It seems like a stretch to assume that you're going to see meaningful growth when you haven't really seen much change in what's coming down the pipe?

Yes. Although, bear in mind that just to pick some numbers off of that slide, if you take 25 opening in the next six months, that's almost certainly comprised of a very different 25 than the 25 that was on that slide 90 days ago, right? Because some have closed out and been replaced by those. So it's not as if those 90 or those 25 were stuck and didn't move or the 45 were stuck and didn't move. Like the line is moving in all of those categories. But it is absolutely the case that the supply chain issues, the labor availability issues has made land development a slower exercise and it's why we're only going to see modest sequential growth in community count into the second quarter with – and I think the phrase that Dave used was right, acceleration in 2023.

Okay. Thanks for taking my questions.

Sure, Jay. Thank you.

Thank you. And I'm currently showing no other questions in queue at this time.

Okay. I want to thank everybody for joining us on the call today and we will talk to you in three months at the end of our next quarter. This concludes today's call.

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