Meritage Homes CORP Q4 FY2020 Earnings Call

Welcome to Meritage Homes Fourth Quarter 2020 Analyst Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emily Tadano, Vice President of Investor Relations.

Thank you, Brack. We apologize for the technical difficulties just now, but good morning everyone and welcome to our analyst call to discuss our fourth quarter and full year 2020 results. We issued the press release yesterday after the market closed. You can find it along with the slides we will refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of the home page. Please refer to Slide 2 cautioning you that our statements during this call as well as the press release and accompanying slides contain forward-looking statements, including but not limited to our views regarding the health of the housing market, potential disruptions to our business by COVID-19, economic conditions and changes in interest rates, community count and absorptions, projected first quarter and full-year 2021 home closings and revenue, gross margins, SG&A expenses, tax rates and diluted earnings per share, as well as others. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2019 Annual Report on Form 10-K and subsequent quarterly reports on Forms 10-Q, which contain a more detailed discussion of those risks. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive VP and CFO of Meritage Homes. We expect this call to last about an hour. A replay will be available on our website within approximately two hours after we conclude the call and will remain active through February 11. I'll now turn it over to Mr. Hilton.

Thank you, Emily. I'd like to welcome everyone participating on our call today and hope that you and your families are continuing to stay safe and healthy. I'll start by giving a brief overview of our significant accomplishments in 2020 and current market trends. Phillippe will cover our strategy and quarterly performance. Hilla will provide a financial overview of the quarter and 2021 guidance. Despite the gravity and impact of the pandemic that affected so many individuals across the globe, 2020 ended up being a great year for the homebuilding industry and for Meritage in particular. We set the bar for new operational and financial records every quarter during the year culminating in our all-time high annual sales orders and home closings and turned our best average absorption pace to 5.2 per month since 2005. We also delivered our greatest annual home closing revenue and home closing gross profit and the second strongest annual home closing gross margin in our company's history. Even beyond the balance sheet and income statement, 2020 was quite a year. We closed our 135,000th home. And as the industry leader in energy efficiency, we were the first homebuilder to introduce MERV-13 nationwide, the most advanced air filtration system offered today for residential construction, which controls and improves air exchange within the home. And keeping with our commitment to innovation and enhancing the customer experience, we rolled out 100% contactless selling to our customers. Our home buyers can begin their search online, qualify for a mortgage to our models virtually, electronically meet the earnest money to earnest deposit, sign the sales agreement, and even close our home online safely. We are driving digital enhancements to improve the way customers, employees, and trade partners interact with Meritage. We'll have more to share with you on this initiative throughout 2021. We pride ourselves on our reputation as a premium homebuilder focused on customer satisfaction. 2020 marked the eighth straight year of award-winning recognition for Meritage as received various Avid Diamond, Gold, and Benchmark Awards across nine separate divisions. In line with our dedication to fostering healthy communities in which we live and work, we donated over half a million dollars to our Meritage Cares Foundation to non-profits like Feeding America and The Meritage Cares that are focused on helping those affected by COVID-19, fighting hunger, and combating homelessness. And to promote racial equity nationwide, we donated $200,000 to INROADS and the United Negro College Fund and began our multi-year partnership with these organizations. Our board of directors and management are committed to driving DEI, diversity, equity, and inclusion throughout our organization and our industry. We'll have more to share on DEI in 2021 as well. And we were also one of only three public homebuilders recognized as one of America's best mid-sized companies. Our employees accomplished all these milestones in 2020 while keeping the health and safety of our fellow team members, customers, and trades front of mind during this difficult year. Thank you to everyone at Meritage for their hard work. As we turn to 2021 and beyond, we look to favorable macroeconomic factors to provide visibility into future demand. The housing market remains robust with low mortgage interest rates, undersupplied new and existing homes for sale, and advantageous demographic trends in new home ownership for both millennials and baby boom generations. The homebuilding industry has already experienced an uptick in demand prior to COVID-19. And after a brief pause in late March and early April, 2020's unprecedented strength in the housing market was particularly focused on increased demand for healthier and safer homes at affordable price points. We anticipate these fundamentals to continue into the foreseeable future, which aligns well with our strategic focus on entry-level and first move-up homes. I'll now turn it over to Phillippe to discuss strategy and our quarterly performance.

Thank you, Steve. Since 2016, our strategy has centered around the entry-level and first move-up markets offering customers affordable yet high-quality homes. The strength in the housing market this past year enabled us to capture pricing power, which combined with our streamlined, more efficient operating model produced growing sales volume, higher margins, improved SG&A leverage, and our strong Q4 results. The fourth quarter of 2020 was another record quarter for Meritage, which reflected continued momentum from the first nine months of the year. We sold 3,174 homes this quarter, which was 52% higher than the same quarter of 2019. This represented the third highest quarterly orders only to be surpassed by Q2 and Q3 earlier this year. Home closing revenue of $1.4 billion in the current quarter increased 28% year-over-year. In the fourth quarter of 2020, we delivered our best quarterly home closing gross margin since 2006, improving by 420 basis points to 24% from 19.8% in the prior year. 2020 lacked the normal cadence and seasonality. The housing market remained robust during a traditionally quiet time of the year, capitalizing on the overall industry demand as well as the expansion of our community mix towards entry-level homes, which sell at a higher pace than our first move-up homes. Our absorption of 5.3 per month in the quarter was up 87% year-over-year, even as we increased pricing in all of our geographies in line with strong local market demand. The per-store absorption accelerated faster than total order growth, demonstrating our capacity to generate significant sales volumes once we achieve our 300 community target. Five out of the nine states that saw absorption increased over 100% year-over-year this quarter, despite a 90% decline in average active communities. We continue to focus on growing our spec inventory for our entry-level communities, as well as refining our offerings for the first move-up market, which has also experienced solid demand over the last two quarters. Entry-level homes comprised almost 70% of total orders for the quarter, up from 55% in the fourth quarter last year. Entry-level homes represent 67% of our average active communities during the current quarter compared to 45% a year ago. As we have hit our relative product mix goal, we expect these ratios to remain steady in the near to mid-term, although mix and individual geographies are always adjusting with communities opening and closing. Our first move-up communities also experienced improved demand year-over-year with absorption 91% higher than a year ago. All our regions reflected solid year-over-year performance in Q4. The strength in the market was driven by low interest rates, limited supply, and shifting buyer preferences for single-family less densely populated homes. Our East Region led in terms of order growth with a 76% improvement over the fourth quarter of 2019. Absorption in the East Region increased 118% year-over-year for the quarter, offset by a 20% decline in average community count. 64% of our average active communities in the East Region sold entry-level products during the quarter. The East Region performance and product mix are now in line with the rest of the company. The shift to the entry-level market has nearly been achieved, and average absorptions exceeded 5 per month. Our Central Region, comprised of our Texas market, increased orders by 46% over the fourth quarter of 2019, despite a 20% reduction in average community count. Entry-level communities represented 71% of the Central Region's average active communities during the fourth quarter of 2020. This region continues to see solid demand with shifting migration into the state, particularly in the tech sector, with Austin and Dallas/Fort Worth experiencing outside demand even by today's standards. Our fourth quarter 2020 orders in the West Region were up 34% over the same quarter in the prior year, driven by a 65% increase in absorptions, partially offset by 80% fewer average communities. Entry-level communities represented 67% of the West Region's average active communities during the quarter. Colorado had our highest per-store absorption in the company this quarter with an average of 6.4 homes per month in the fourth quarter of 2020, compared to 2.5 in the prior year. This produced a 48% year-over-year growth in orders reflecting the hardship down the ASP price band over the last four to six quarters. We closed 32% more homes in the fourth quarter of 2020 than in the prior year and our backlog was 4,672 units at the end of the fourth quarter, reflecting the high absorptions in the pace we achieved this quarter. Of the 3,744 homes closing this quarter, 71% came from previously started spec inventories compared to 61% a year ago. At December 31, 2020, less than 10% of total specs were completed versus one-third, which is our typical runway. We're selling more specs in early stages of production to meet the surge in demand and are focusing our production efforts on completing our backlog inventory. Our backlog convergent rate decreased to 71% in the fourth quarter of this year compared to 80% last year, reflecting the early stages of construction in our sold homes. We expect similar trends over the next couple of quarters as demand in the market absorbs our spec inventory at an accelerated pace. Spec building is a core tenant of our entry-level market focus strategy that results in a higher spec inventory of these communities compared to first move-up communities. We try to keep a four to six-month supply of specs on the ground for our entry-level product. We ended the fourth quarter of 2020 with a little over 2,500 spec homes in inventory, or an average of 12.9 per-comminity compared to approximately 3,000 or an average of 12.4 last year, reflecting the significant sales order growth during the fourth quarter. While specs per community grew, our total spec count did not quite achieve our goal of 3,000, as these homes converted to backlog as quickly as we started them. However, we are still focused on increasing our specs in January as we move into the spring selling season. I will now turn it over to Hilla to provide additional analysis of our financial results.

Thank you, Phillippe. Let's turn to Slide 8 and cover our Q4 financial results in a little more detail. As Phillippe noted, the 28% year-over-year closing revenue growth in the fourth quarter was the net impact of a 32% increase in home closings and a 4% decline in ASP. While this ASP decline reflects the shift in product mix towards affordable entry-level homes, it also includes price increases throughout 2020 and across all of our geographies from strong market demand. We had our highest quarterly home closing gross revenues since 2006 this quarter, reaching 24.0%, or a 420 basis point improvement from the prior year. The margin reflects our ASP increases achieved throughout the year, as well as the additional leveraging of fixed costs from higher closing volumes and operational efficiencies. Our entry-level and first move-up construction processes have really improved. We know all of the components of our homes intimately and continue to focus on reducing our cost of material. By maintaining consistent purchasing volumes on the limited number of SKUs, we're able to negotiate lower pricing and bulk purchasing discounts from our vendors. This consistency and transparency also provide scheduling visibility to our trades and suppliers, allowing all of us to be more efficient and enabling us to attract local labor as we look to be the builder of choice for our contractors. With this clarity, we have maintained tight control over our production and gained the confidence to start our spec homes on a structured cadence. Today, we've not experienced elongated cycle times from shortages in the labor pool, but we continue to monitor this space for any changes. As we look into early 2021, we acknowledge that the rising cost of lumber and other commodities are impacting construction costs across the building sector. Although lumber inflation has retreated a bit from its height earlier in the year, these costs still remain elevated. We've been able to mitigate the cost inflation with price increases during 2020, although this is also an area that we are watching closely. SG&A as a percentage of home closing revenue was 9.3% for the current quarter, which was our lowest quarterly percentage since 2007. The 80 basis points improvement over the prior year reflects greater leverage of fixed expenses from efficiencies and higher closing revenue and ongoing permanent cost benefits from technology enhancements, particularly relating to our sales and marketing efforts. We believe we can sustain strong margins in 2021, despite higher commodity costs. So we will incur minimal negative impact to our SG&A leverage over the next several quarters. As expected, we will have some additional costs relating to achieving our 300 community goal prior to the incremental closings and revenue from that new business. However, we expect to improve our SG&A leverage beyond 2021 once our higher community count starts materially contributing to closing. Included in our Q4 results were $20.3 million of impairment charges on land sale. The impairments consist of two projects, one in California that is no longer our strategy as it is not an entry-level or first move-up product and another in our active adult market, which we are looking to wind down. We anticipate both sales will close in the first half of 2021. The fourth quarter's effective income tax rate was 21.9% in 2020 compared to 6.3% in the prior year. In 2019, the extension of the eligible energy tax credits on qualifying homes occurred in December, resulting in a beneficial impact for fiscal years 2018 and 2019 reflected in Q4 2019, generating the low tax rate. With the extension of the 45 out provisions into 2021, we expect to continue receiving energy tax credits and a significant percentage of our closings into this year. Our fourth quarter diluted EPS was $3.97, increasing 50% year-over-year compared to $2.65 in the same quarter of 2019. To highlight just a few items for the full year 2020 results, on a year-over-year basis we generated a 70% increase in net earnings. Orders were up 43% and closings were up 28%. We delivered $4.5 billion in full-year home closing revenue, a 310 basis points increase in home closing gross margin to 22.0%, and a 90 basis points improvement in SG&A as a percentage of home closing revenue, ending the year at 10.0%. The trends covered for Q4 were primarily in place most of 2020, translating to these record results. Moving on to Slide 9. We continue to focus on strengthening our balance sheet even as we push toward our 300 community goal. We achieved several objectives this quarter; late in the quarter, we amended our revolving credit facility to extend the maturity date to 2025, changing our revolver to a five-year maturity. We opportunistically repurchased 100,000 shares for a total of $8.8 million in advance of the routine first quarter employee share issuance in 2021. On November 13, 2020, our Board of Directors authorized an additional $100 million for share repurchases under the existing stock repurchase program, and we also received two credit rating upgrades. At December 31, 2020, our cash balance was $746 million, reflecting positive cash flow from operations of $530 million despite increased land acquisition and development spend. Our net debt-to-cap reached an all-time low of 10.5%. We've previously noted that we've adjusted our maximum net debt-to-cap target to high 20s and low 30s range from our prior low- to mid-40s range as their assets trend quicker with entry level and first move-up offerings. We intend to use our excess cash on hand to aggressively pursue our community growth targets while also ensuring we do not overextend our balance sheet or liquidity. On to Slide 10. We already control all the land we need to achieve our 300 community goal. Our focus now is on developing the land to prepare the community for opening. We also plan to increase our spend on additional land and development in order to sustain this growth level beyond 2022. We spent $506 million on land and development this quarter, our highest spend in a single quarter in the company's history, and over a 100% increase year-over-year. For the full year 2020, we invested nearly $1.3 billion in land and development. We anticipate spending more than $1.5 billion annually in 2021 and beyond to sustain and replenish our 300 communities. In the fourth quarter of 2020, we secured a quarterly record of approximately 11,200 new lots, translating to 69 new communities. We put nearly 29,500 gross new lots under control in 2020, a 63% increase compared to about 18,000 lots in 2019. Adjusting for land sales and terminations, we secured approximately 27,200 net new lots in 2020, representing 192 new communities, of which approximately 81% are entry-level. At year-end with over 55,500 total lots under control, we had a 4.7-year supply of lots based on trailing 12 months closing, in line with our target of a four to five-year supply of lots on hand. We increased our land book by 34% from December 31, 2019. We are using options or staggered purchasing terms where financially feasible, allowing us to preserve our liquidity; about 59% of our total inventory at December 31, 2020, was owned and 41% was optioned, an improvement compared to the prior year of 63% owned and 37% optioned. We've been putting larger land positions under contract, several hundred lots at a time to address our accelerated sale pace; larger, higher volume entry-level communities reduce community level cost per lot and allow us to minimize the community count churn and inefficiencies associated with opening and closing communities. For the full year 2020, our new lots under control have an average community size of about 140 lots. Finally, I'll direct you to Slide 11. We're encouraged by the continued strength in the housing market. For full year 2021, we are projecting total closings to be between 11,500 and 12,500 units. Total home closing revenue will be between $4.2 billion and $4.6 billion. Home closing gross margin is expected to be 22% to 23%, an effective tax rate of about 23%, and diluted EPS in the range of $10.50 to $11.50. We ended 2020 with 195 active communities, down from 244 in the prior year. During the year we opened 105 communities, up 40% from 75 in 2019. Since we anticipate continued strong sales demand in 2021, the community count will remain around 200 for Q1 and Q2 as new community openings will be offset by community closings. Given the projected volume of closing between 11,500 and 12,500 for the full year, we expect to end 2021 with approximately 235 to 245 communities. The community count growth will continue into Q1 and Q2 of 2022, when we anticipate achieving our goal of operating 300 communities by June 2022. For Q1 2021, we are projecting total closings to be between 2,600 and 2,900 units, with home closing revenue of $950 million to $1.05 billion. Home closing gross margin is projected to be approximately 22.5% and diluted EPS in the range of $2.25 to $2.50. With that, I'll turn it back over to Phillippe.

Thank you, Hilla. Moving on to Slide 12, our results in 2020 validate that we have a solid strategy and are executing at a high level. We are achieving strong closing revenue growth due to market strength combined with an increase in both pace and price, while we are increasing prices in all of our geographies in alignment with local market conditions. We're also optimizing sales volume. Spec building has allowed us to sell at a greater pace and capture market share without sacrificing profit. Our efficiencies allowed us to accelerate 2020 closings, which in turn let us redeploy capital to fuel future growth. Our balance sheet strength reflects increases in operating cash at our lowest levels of net debt-to-capital. This, in turn, provides a long runway for growth, as well as a safety net in the event of a market downturn. Since the start of 2019, we've accelerated investments in land acquisition and development to support and sustain future growth levels. In the fourth quarter, we spent a record $506 million on land and secured approximately 11,200 new lots. We already control all of the land necessary to achieve our 300 active community goal by mid-2022. Our strong land position enables us to focus on developing lots to get those communities open and to continue to replenish the land pipeline beyond 2021. To summarize on Slide 13, we're entering 2021 with a heavy backlog of almost 4,700 sold homes and more than 2,500 specs completed or under construction, giving us additional visibility into 2021. With a solid strategy, strong balance sheet, a healthy land position, and a great team that is executing at a high level, we are well positioned for growth. In conclusion, I would like to thank all Meritage employees for their dedication and job well done in 2020. I look forward to a great 2021. With that, I'll now turn the call over to the operator for instructions on the Q&A.

Thank you. Our first question today is from Alan Ratner of Zelman & Associates. Please proceed with your question.

Good morning. It's Ivy Zelman and congrats on a strong fourth quarter and a great 2020, remarkable. Maybe Hilla, this is more directed towards you and your comments around buying larger land parcels as that is something that really allowed for you guys to expand more broadly the entry-level product offering. Can you talk about what you're seeing in land prices? I know that it might be a little bit better than buying finished lots and master plan communities, but just give us an idea of what overall lot inflation looks like for 2020 and what you see for 2021?

Yes, Ivy, this is Phillippe. I'll take that. So certainly coming out of COVID there was a pause on buying land across the industry. So we actually saw some softness in land prices that quickly changed as we moved into Q3 and Q4. I think people recognized that housing was going to be strong out of COVID and so pricing started to move up, but very modestly. As we look at 2020, for the most part, they were fairly flat with the pullback, and then moving forward as we're peeking into 2021, land prices are starting to move up and we expect that to occur. In Phoenix, some of the markets in the South are really where we're seeing the highest land cost pressure. As we continue to push out to the tertiary markets where we're focused on the entry-level strategy, we're still seeing really favorable land residual prices across the board. However, there are more people coming out there, which is increasing competition, and we expect those land prices to increase as we move to 2021. But I would just tell you through 2020, we didn't see a lot of pressure.

Yes, Ivy, one last comment. I think you hit the nail on the head. The larger community side allows us to reduce the per lot cost, so we're not expecting on a percentage basis for the lot cost to represent a higher percentage in 2021 than it did in 2020. In fact, we may be able to see it kick down a little bit because we're better able to leverage the cost over a larger number of lots in an individual community.

Very helpful, guys. So given that you're out in the tertiary markets; we follow the single-family rental industry and there's definitely significant expansion and capital being allocated to build-for-rent. We're hearing a lot of those projects are going out in the tertiary markets. Do you see that competition today? And does it concern you that it could cannibalize buyers? How do you frame that? I know you guys aren't doing rentals, but do you have any competitive perspective any concerns?

So far, we haven't seen a lot of those projects materialize. I know it's early and we certainly know of a number of projects that are in queue and are coming to the market. I think there are frankly two different buyers. I think, obviously, as home prices continue to increase, there will be demand for single-family rentals, which is, there's a whole thesis behind that strategy. But I still think home ownership is still highly appealing and we don't feel like that's direct competition for us where we sit. And finally, there, I'm not seeing a ton of that push that far out. I think it's sort of the second ring versus the third ring, if you will. And so where we're going, I think it's still more about the for-sale market versus the for-rent market.

Ivy, your first question probably ties into the second one. When you're buying a couple hundred lots at a time, that's probably outside of the comfort zone of the for-rent guys that are looking for something a little smaller. So maybe those tertiary markets with a larger lot count are still at this time reserved for the homebuilder group.

Yes. I just think what we see in the pipeline not this year and maybe even beyond 2021, but they're pushing further out just because land costs are up so much and they're trying to hit their return hurdles, but we'll obviously watch how that plays out. So, Phillippe, if you had to put your crystal ball and think about the future, what keeps you up at night the most about running the business today? And that's my final question. Thanks, guys.

I think we're very focused on affordability. That's the key to our strategy; our entire pivot is the light on the dashboard that we're watching the most closely. Pricing, as you all know, the pricing power in the market is significant, even with FHA limits being increased across the board. I still think that's a governor. And once you get past that, I think you move into a different part of the market and you get fewer buyers that can qualify. So it's really all about affordability for us. There's a lot of cost pressure out there. As prices continue to escalate, we're going to be very mindful of affordability and ensuring that we continue to position our product in the affordable segment of the market, which in turn goes back to your question about land prices and making sure that they don't escalate too much as well. So it's all about affordability for us as we move forward. We know exactly where we need to be to meet the long-term demand for affordable products, and that's what kind of keeps me up at night.

The next question is from John Lovallo of Bank of America. Please proceed with your question.

Hi, guys. Thank you for taking my questions as well. The first one just on the 300 communities by mid-2022, that implies, call it, 40% to 45% growth in the first half of 2022. Given the sales pace today and the closeouts that are happening, how confident are you in hitting this 300-ish number by June?

Yes, we're very confident. We've been kind of focused on this goal and the entire organization is aligned to achieve it. As Hilla mentioned and I reiterated, we bought the land to get there and we're continuing to buy land to make sure we achieve that goal. So we're very confident that we're going to hit it.

John, just to clarify, we talked about this last quarter, but it bears repeating that the communities experiencing accelerated closeouts now were not in the 300 community counts to begin with. Maybe they're closing a quarter or two early, but these were not communities that were going to be here six quarters from now. The communities we have our eye on for that 300 community count goal are still either in the pipeline or have enough lots to sustain themselves through June 2022.

That's helpful. And then maybe just following up on that, having land is a good start; any concerns about being able to procure the labor to get these communities built out on time?

The horizontal labor, I think, is what you're referring to—those guys pushing the tractors around and laying the pipe. No, I think if anything I have more concerns around municipal approvals and that type of thing, which we've talked about providing the biggest bottleneck for us to get out to market. But as it relates to the trades and getting the land developed, I'm confident in our trade base and that we will be able to deliver; it’s not a big concern for us right now.

Okay. Thanks, guys.

The next question is from Stephen Kim of Evercore ISI. Please proceed with your question.

Yes, thanks very much, guys. Obviously a good quarter. I had two questions. One on your volumes that you're forecasting for next year. You gave a range of 11,500 to 12,500. Let's just deal with the high end of that range because I think you're being pretty conservative. Even at the high end of that range, 12,500, I looked back at what I think you probably started over the last six months, and it looks like you've started well over 7,000 units in that same six-month period. It would seem that 12,500 is a pretty conservative forecast, given what you did over the last six months. Can you talk about what’s embedded in your assumption for only getting to 12,500? Is that truly a ceiling for you, or is that just something you’re projecting based on wanting to be cautious and not presume too much about demand over the next six months?

So, Stephen, you've got all the right components of the answer in your question, which is we're not having issues on cycle times as we've noted. We know the sales pace is maintaining. We're not assuming that sales pace is going to decline. It's just the availability of lots in communities. We wanted to give the community count guidance with that mid-point in the script as well to help with the guidance. So if there's not a demand or labor issue, that's limiting our guidance but just how quickly can we get you lots in the ground. And as Phillippe covered, our goals are fairly static. We have the labor to get to those community count targets, but there's not a way to accelerate that. So the governor is really the availability of lots in communities, not elongated cycle times or concerns about demand.

And as Hilla said, community count will be close to 200 for the first six months. So we're not going to see the community count growth until the back end of the year, which is going to make closings difficult. We're opening these communities in the last six months of the year.

If you look at it in a different way, the way that we think about it is a lot of the closings that were forecasted probably in the analyst models for 2021, we got a big chunk of those into Q4. We pulled them up because our cycle times were shorter, and we were able to get those closings into 2020. So if you combine the 2020 and 2021, and you do a five-quarter rolling average, we're probably right on top of where you guys thought we would be—just that it came into Q4 of 2020 instead of Q1 of 2021.

I think that’s an important point. We were able to accelerate the closings in Q4 due to our efficiencies. So if you put Q4 back into the mix, you get to that number.

The next question comes from Carl Reichardt of BTIG. Please proceed with your question.

Thanks. Good morning everyone. I was curious about when you're looking at controlling more lots going forward on land bankers versus traditional developer third-party options. Are you seeing an expansion in opportunities to use land banking, and are you using them? Obviously, that was a big part of your strategy back in the early 2000s, if I recall correctly. I'm just kind of curious what you're seeing?

Right now, most of it is through land development type of options where maybe we have stage take downs, not that traditional off-balance sheet financing that you're referring to. We're evaluating that each year, but it's pretty expensive these days and we have a lot of cash. So we're trying to figure out the most efficient use of our capital, but certainly it's a lever that we continue to evaluate as we want to grow our business beyond the 300 and sustain that while maintaining our balance sheet integrity going forward. So it's out there, and we talk to those folks every quarter to understand where the pricing is. But we haven’t deployed it just yet.

Thanks, Philippe. And then the orders this particular quarter were, I think, stronger than we and a lot of other folks were looking for. I'm interested to know whether pricing is controlling absorption. I give it that you want to keep your affordability consistent, but did you think about not doing phase releases to slowly order pace down? Or was it just a function of, look, demand is here, you’ve got the product, we should take the orders now, because obviously implications on EPS guidance is for a bit of potential decline in earnings next year. So I'm just curious about that thought of price versus pace this quarter, and also just phase releases—did you slow those down at all?

That’s a great question. So the price and pace discussion we've been echoing—it's about both. Pace is really important. You guys saw the leverage we got out of the pace, taking buyers out of the market today we believe is the right strategy when we have the product on the ground. We had the product on the ground and took those buyers, but not because we were compromising price. We seem to be able to get meaningful pricing power while maintaining the pace that we want to achieve right now. So we're in some pretty good times right now, where we can get pricing power and we haven’t gotten to the point where we believe we have to meet our sales. Honestly, sales are being meted out in some ways. Anyway, we just get the lots on the ground and continue to keep the lots in front of us. There’s only so much we can do there.

The next question is from Adam Baumgarten of Credit Suisse. Please proceed with your question.

Hey guys, good morning. Just given such low leverage that you guys are at now, should we expect the ramping of share repurchase or even kind of a renewed interest in acquisitions?

Good morning, Adam. We’ve mentioned in the past that we’re looking to keep the share count neutral and whatever we intend to issue in employee awards annually. We try to repurchase at least that amount—that’s our current strategy. It doesn't mean we won't be opportunistic if we see dips in the stock price; obviously, we purchased 100,000 shares earlier this year. So we have enough cash to do both, but we're not aggressively repurchasing shares above our target. We're keeping an eye on the market for dips.

As far as the acquisition question, we look at M&A all the time. We’re open for business. But we have tremendous conviction in our strategy. And we’re only looking at things that fit our strategy. We feel like we can invest our capital in our existing teams, our existing markets, and potentially new markets down the road to grow favorably organically. We’re looking and if there’s something that fits, we’re active around it, but we haven’t found an attractive candidate just yet.

Okay. Got it. And then can you give us a sense of what type of like-for-like pricing you guys pushed through in the quarter across the business?

For the full year it’s been low double digits... I would say the trend is pretty consistent, about 3% to 4% this quarter on average. Obviously, there are some communities that are running harder and some communities that aren’t depending on local market demographics, but that’s a fair expectation.

The next question comes from Michael Rehaut of JPMorgan. Please proceed with your question.

Hi. This is Elad Hillman on for Mike. Just following up on that. Are there any regional standouts you’ve been able to push prices more aggressively than other markets?

It’s more of a community-by-community story. Honestly, some communities have more competition or are located within master plan communities where we're building in a row, and then other communities we have are standalone locations in-fill, or you got some more competition. Generally across the board, we're seeing good appreciation in the markets we operate in, but it's more about a community-by-community basis.

There's no place for not raising prices.

Got it. Okay. And so just following up on that—Arizona seems to have a deceleration from 6.5 per month last quarter to 4.8 this quarter. Any color on what's driving that slower pace? Is it related to price increases or mix? How do you think you’re comparing to the underlying market there?

Yes. That's more about just the lots on the ground and community count collection. We closed out some really high-selling communities in Phoenix. We're replacing them with some also really high-selling communities, but it's just the inflection that you're seeing. We really haven't seen any slowdown in Phoenix yet, although we've been pushing prices aggressively there. But there's a lot of migration going on in Phoenix and the market's really strong, so there's no slowdown in pace. It's more about a rotation of community counts.

The next question is from Charles Perron of Goldman Sachs. Please proceed with your question.

Hey, good morning, everyone. I'm in for Susan this morning. My first question is on the supply chain environment. We've heard of shortages across multiple building products. Can you provide some color on what you're seeing there for you guys? And what initiatives you're putting in place to ensure minimal impact on home production?

Sure. I know we sound a little bit like an outlier, but I think that's because of the strategy we put in place four years ago, when we rationalized our product and everything we were putting into our product. We partnered with our national trade vendors and local trade vendors to understand the supply chain, and so we're not seeing a lot of issues. Although we're certainly aware of them being out there, we know what our other builder friends are experiencing. Our business model has allowed us to sort of navigate that probably a little bit better. That's why we were able to close the homes we closed in Q4. Our cycle times are not getting elongated, and you see our margins, so we're maintaining a pretty good cost structure, although there's pricing power in there. What we have seen are some COVID disruptions here and there, certain plants being shutdown, crews sometimes being shut down. Navigating that has been the trickiest part at this point, but the supply chain has been relatively stable from our perspective. Our alignment around our SKUs with our vendors allows us to manage our supply better.

Yes. We can give them more visibility earlier on in the cycle, right? We're not waiting for the customer to be halfway through the build and make decisions in the design studio. So for us, they're able to pre-order a couple of months in advance and get the supplies ready. It's a limited number of product offerings, a limited number of SKUs, so they have a lot more visibility that allows them to match pace with us.

Thank you for the color on that. And then my follow-up is on the SG&A margin outlook. I understand you think it will, as unit margins, go up this year due to ramping up communities, but you also think it will improve beyond that. I'm just wondering if there's a rule of thumb we should follow to understand how much volume changes are impacting your SG&A, but also maybe community count growth as well?

I don’t know if there’s a great rule of thumb. It’s a function of how quickly we have to staff up. We’re reaching kicking points in divisions where the additional personnel on the ground need supervisory employees. I wouldn’t say there is a mathematical relationship you can use for a model. I would say, as we mentioned in the script at 10% full-year SG&A—it’s something we’re really proud to have achieved that in 2020. We will probably see a little north of that in 2021. We’re adding more folks and costs, but once we hit 2022, I would expect to see that number decline and stay sub-10 level.

The next question is from Jade Rahmani of KBW. Please proceed with your question.

Thank you very much. Just a big picture question, wondering to what degree you think the impact of this pandemic has driven any pull forward of demand. Are there any customer survey data you are capturing at your local communities or overall demographics that you believe point to the sustainability of the current demand trends that you're seeing?

Yes, I think the number one driver right now is interest rates. With interest rates where they are, home ownership is more accessible than it's been before, so people are taking advantage of this and I think that's driving a lot of what's happening. The second factor for us is the supply conditions. The retail market is relatively non-existent right now. So the supply is driving demand dislocation with supply. Finally, the third factor would be the pandemic, and certainly I think with the pandemic consumer behavior, people are thinking about their housing situation today and what it could look like—and they're considering where they're homeschooling their kids, working from home, etc. That said, I think this demand can continue as long as interest rates are low. To me, that will have the biggest impact on where we're at today and where we're going.

Thanks very much. It seems that those three factors you gave are all highly correlated because the reason interest rates are so low is due to the pandemic and due to government interventions. At least that's a significant driver. The reason that supply conditions are low is that no one really is moving right now because of all the risk factors. Are there risk management factors that you're considering in order to manage any potential downstream shortfall in demand that could occur?

Yes. I mean, we're always managing the risk of ramp-up in a lot of ways. From how we're sourcing land, what the right land prices are, and how we manage the development phasing—keeping as much off book as we can. I think Hilla talked a lot about where we're comfortable taking our balance sheet as well. So we're not looking to get long on land here. We aim to find the right amount of four to five-year supply to serve our targeted 300 community count goal and the units that follow. So land is the most risky thing we do in our business, and we’re constantly looking at keeping as much of the land off balance sheet as possible.

I think we demonstrated at the end of Q1 and early Q2 that we have the ability to pull the breaks if there's a sharp market correction, right? We can slow down certain developments; we can't accelerate it, but we can certainly pull back. We can also exit out of projects, and we would forfeit some cost, but we could avoid spending additional capital. Having said that, our underwriting standards have not changed—we haven't assumed price appreciation or accelerated sales pace. We're built to operate at a much lower absorption pace per month, so if that occurs, we can certainly flex up.

Not to mention our incredibly low leverage and our bulletproof balance sheet.

There are no additional questions at this time. I would like to turn the call back over to Phillippe Lord for closing remarks.

All right. Well, thank you very much. We appreciate your support. We appreciate all the questions, and we apologize again for the technical difficulties we had early on. We'll make sure to get that right next time, and we'll see you next quarter. Appreciate everything. Stay safe and healthy.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.