Greetings, and welcome to the Meritage Homes Fourth Quarter 2021 Analyst Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth quarter 2021 and year-to-date results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to slide two, cautioning you that our statements during the call as well as the press release and accompanying slides contain forward-looking statements, including, but not limited to, our views regarding the health of the housing market, economic conditions and changes in interest rates, community count and absorptions, trends in construction costs, supply chain and labor constraints and cycle times, projected first quarter and full year 2022 home closings and revenue, gross margin, tax rate and diluted earnings per share, potential future distractions to our business from an epidemic or pandemic such as COVID-19 as well as others. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. 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 2020 Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q, which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect this call to last about an hour. A replay will be available on our website within approximately 2 hours after we conclude the call and will remain active through February 10th. I'll now turn it over to Mr. Hilton. Steve?

Thank you, Emily. Welcome to everyone participating in our call. I'll start with a brief discussion about current market trends and provide an overview of our significant accomplishments in 2021. Phillippe will cover our strategy, quarterly performance, and Hilla will provide a financial overview of the fourth quarter and forward-looking guidance for 2022. Demand in the fourth quarter continued to demonstrate the strength we have seen all year. Mortgages remained very affordable and home buying demand continued to outpace housing inventory, driven by favorable housing activity from millennials and baby boomers. As such, Meritage again broke several company records in the fourth quarter of 2021. In the face of prolonged supply chain constraints and a tightening labor market, we achieved our highest quarterly sales orders and our second highest quarterly home closings while accelerating our spec starts. Our fourth quarter results include the highest quarterly home closing revenue, home closing gross profit, and diluted EPS, as well as the lowest quarterly SG&A as a percentage of home closing revenue in our company's history. From a full-year 2021 perspective, I couldn't be more proud of what our team has accomplished. We achieved our highest annual sales orders of 13,808 homes and closings of 12,801 homes. Our 2021 annual home closing revenue was also a record at $5.1 billion, as was our full-year home closing gross margin of 27.8%. Price increases due to sustained strong demand, coupled with our operational efficiency and the leveraging of our fixed cost over higher home closing revenue drove our lowest full year SG&A rate of 9.2%, translating to our next full year diluted EPS of $19.29. Our community count grew 33% year-over-year. We're entering the spring selling season with 259 active selling communities and forecasting continued double-digit community growth in 2022. We expect that our strategy, capitalizing on the solid demand for entry-level and first move-up homes will produce increased volume coming from digital communities and will enable us to gain market share in all of our geographies. Now let's turn to slide four. In addition to delivering impressive financial results, we achieved numerous milestones related to our corporate social stewardship in the fourth quarter. As the team organized around the ambition to Start with Heart, Meritage employees donated countless hours to deliver a new mortgage-free home to a deserving military veteran and his family on Veterans Day in Florida through Operation Homefront. We also donated to various non-profit organizations to further strengthen diversity, equity, and inclusion missions and to help families during the holiday season in the communities in which we do business and to support tree planting programs to share our ongoing approach to long-term sustainability practices. Regarding DE&I commitments and our ESG milestones, we issued our inaugural ESG report during the quarter. We also joined more than 2,100 other companies by signing the CEO Action for Diversity and Inclusion pledge. We'll have more to share about our ESG efforts with you throughout 2022. We're excited about our employees', executive, and board-level commitments to these important issues. And with that, I'll now turn it over to Phillippe.

Thank you, Steve. I want to start by focusing on affordability, which with the favorable pricing environment and the anticipated rate hikes coming this year is top of mind for everyone. Affordability is at the heart of our business strategy that is centered around entry-level and first move-up homes. When we first shifted to this market segment more than five years ago, we did so knowing eventually, interest rates would go up. Our focus over the past two years has been to continue to buy land for even lower ASP products to act as a counterbalance to the pricing strength all markets have experienced since mid-2020. Although we have taken increases in line with the market conditions, we expect our new communities to come online at still attractive and affordable ASPs, especially in light of increased FHA limits in all of our markets. To ensure our product remains affordable, we constantly evaluate the credit metrics of our buyers. Our customers' FICO scores and DTIs remained stable in the fourth quarter and were consistent with historical averages, demonstrating that they are not stretching financially to purchase our homes. Given the recent interest rate increases, we will continue to monitor the overall affordability of our homes. During the fourth quarter, we continued to meet our order pace in most of our communities to manage margins through supply chain challenges and the tightening labor market and ensure we provide our customers with a quality home-buying experience. By focusing on our construction and simplified product strategy, we still achieved record orders and closings in 2021, demonstrating our ability to navigate delays associated with supply chain materials, labor, entitlement, and permitting. In today's rising rate environment, we believe selling homes later in the construction cycle offers more favorable options to our buyers as they look to lock in their mortgage rate and close escrow, knowing the rates will be locked in. With these quarterly results in 2021, we also displayed our ability to achieve industry-leading gross margins. This was a function of the favorable pricing environment, first and foremost, but also our disciplined production approach to managing our construction costs. As we have mentioned before, spec building typically provides us the opportunity to lock in costs before determining ASP. However, in a rising cost environment riddled with supply chain issues, we went one step further to avoid cost risk and to better manage our margins. In some cases, where costs increase, such as lumber, continuing to build has led to construction delays, and our delayed sales releases allowed us to manage this additional cost exposure. Managing our order pace helped generate the meaningful list we have experienced in our gross margins. Although we do not forecast any improvement in supply chain challenges, once they do unwind, we expect to remove our sales metering and fully allow our community to capture true market demand while maintaining our margin profile. Now turning to slide five. Given the long-range cycle times, our fourth quarter closings totaled 3,526 homes, which was down 6% versus the challenging comps of the prior year. Entry-level homes comprised 81% of closings, up from 72% in the prior year. Total orders of 3,367 for the fourth quarter of 2021 reflected an increase of 6% year-over-year, driven by a 24% increase in average active community count, which was partially offset by the decrease in average absorptions. The decline from 5.3 per month in Q4 2020 to 4.5 per month in this current quarter was driven by the tightly metered order pace across most of our footprint, as well as new community openings occurring late in the quarter. We continue to reiterate that our sales metering is an intentional choice in order to maximize both our margins and the customer home-buying process as we manage through the current supply chain issues in the market today. Looking at our growing interest list and the early month sell-outs in our communities, we know that actual demand for our homes is much greater than what we were seeing in our absorption pace. Entry-level homes provided 80% of total orders, up from 72% in the fourth quarter last year. Entry-level homes also represented 79% of our average active communities compared to 67% a year ago. Moving to slide six, at the regional level, we continue to experience strong demand in all of our regions. Our Central region, comprising Texas, led in terms of regional average absorption pace with 5.3 per month this quarter. This 5% year-over-year decline was offset by a 17% increase in average active communities, which together contributed to an 11% increase in order volume. With the state's favorable economic development and growth environment, sustained home-buying demand generated a 20% year-over-year increase in ASP orders, the highest increase in all three regions. To address affordability challenges in the market, our East region continued to shift its product mix toward entry-level, which made up 81% of its average active communities. Out of our three regions, the East Region average community count increased the most by 34% year-over-year, which generated order volume growth of 6%. The East region's increase in community count was offset by a 21% decrease in average absorption pace. The West Region's fourth quarter 2021 order volume increased 2% year-over-year, mainly due to 19% more average communities, which was partially offset by 14% lower average absorption pace. Overall, we had a solid performance from all our regions despite ongoing challenges with the supply chain. As we accelerate spec production in all of our regions, we expect total order volume to increase throughout 2022. Turning to slide seven, of our home closings this quarter, 77% came from previously started spec inventory, which increased from 71% a year ago. We ended the period with nearly 3,200 spec homes in inventory or an average of 12.3 per community as we push to get homes on the ground. This compared to approximately 2,500 specs or an average of 12.9 in the fourth quarter of 2020. At December 31, 2021, less than 5% of total stacks were completed versus our typical run rate of one-third due to sustained demand and supply constraints. We accelerated starts to over 3,700 homes in the fourth quarter from approximately 3,400 homes in the third quarter, in line with approximately 3,800 homes in the second quarter, and we expect to continue ramping up spec starts in 2022 as our community count increases. Having available specs is not necessary for our 100% spec building strategy. Despite improving our total spec home inventory year-over-year, maintaining a 4 to 6 month supply of entry-level spec has been challenging given the surge in demand and supply chain constraints, and we expect that trend to continue at least in the near term. We ended the quarter with a backlog of over 5,600 units as our conversion rate declined from 71% last year to 60% this year, resulting from elongated cycle times. However, it was a slight improvement from 57% in the third quarter. As we look ahead into 2022, we aren't expecting any improvement in our backlog conversion since we do not anticipate any near-term improvements in the current supply chain. Once the supply chain stabilizes, we expect our cycle times will shorten and backlog conversion rate will pick up again, while order growth will also reaccelerate as we unwind sales metering. During the fourth quarter, ongoing supply chain disruptions lengthened construction time by about two weeks sequentially from Q3 to Q4 this year. Despite these expanded timelines, we still believe our streamlined operations and 100% spec building strategy for entry-level homes have given us a competitive advantage in today's supply chain and labor market conditions by locking in volume and providing consistency to our traders. Coupling these with our reduced SKU counts and streamlined product library has allowed us some incremental cost advantages. The benefits of pre-starting homes with simpler products to build up and our steady predictable and repeatable construction work make us the preferred builder of choice. These strong vendor relationships helped us deliver over 12,800 homes in 2021 and are key to accelerating starts in 2022. Since we have our facility processes dialed in, we've been able to give our partners more visibility into our business than ever before so they can plan for what we need. We provide our schedules to them well in advance to our dealers and pre-order. Our strong partnerships with our suppliers and our limited build-to-order options also allow us to pivot our product selections based on availability, if necessary, as we continue to stay nimble in these unusual times. Our executive team has been meeting with our top vendors to ensure capacity commitments for 2022. Given our significant increase in spec starts as we grow our community count this year, we have also backed up our supplier group with secondary alternative sources to help us with incremental needs should that become necessary. I will now turn it over to Hilla to provide additional analysis and our financial results. Hilla?

Thank you, Phillippe. Let's turn to slide eight and cover our Q4 financial results in more detail. The 6% year-over-year home closing revenue growth to $1.5 billion in the fourth quarter of 2021 was a result of a 13% increase in ASP due to strong market demand, even as we shifted our product mix towards entry-level homes. This was partially offset by a 6% decline in home closing volume due to closing time being impacted by supply chain issues. The 500 bps improvement in fourth quarter 2021 home closing gross margin to 29% from 24% a year ago was primarily driven by a full year of pricing power, which outweighed accelerated cost pressures in almost all cost categories. We believe that despite volatility in lumber and generally higher commodity costs, we can sustain strong margins into 2022. SG&A as a percentage of home closing revenue was 8.5% for the current quarter, an 80 bps improvement over the prior year. The higher revenue, lower broker commissions, and the benefits of technology on our sales and marketing efforts allowed us to better leverage our SG&A. One-time items, including payments to our General Counsel, who retired in December of 2021 and a change in the company's retirement vesting eligibility for equity awards totaled $5 million and impacted SG&A expenses by 30 bps in the third quarter of 2021. We continue to pursue back-office automation and greater technological strides to drive incremental leverage of our SG&A. The fourth quarter 2021 effective income tax rate was 23.8% compared to 21.9% in the prior years. Both years reflected reduced rates primarily from the eligible tax credit when qualifying energy-efficient homes closed under the 2019 Taxpayer Certainty and Disaster Tax Release Act. Increased profit in states with higher tax rates and the reduced benefit of the energy tax credit due to the greater overall profitability of the company, both contributed to the higher tax rate this year. Since the energy tax rate has not yet been enacted for future periods, we're not assuming any such benefit beyond 2021 at this time. Pricing power expanded gross margin and improved overhead leverage, combined with a lower outstanding share count, all led to the 57% year-over-year increase in fourth quarter diluted EPS to $6.25. To highlight a few full-year 2021 results on a year-over-year basis, we generated a 74% increase in net earnings order unit held steady at about 13,800 for both years. Closings were up 8%. We had a 580 bps expansion of our home closing gross margin to 27.8% in 2021, and SG&A as a percentage of home closing revenue improved 80 bps to 9.2%. Diluted EPS was $19.29, a 75% increase from 2020. Turning to slide nine, our balance sheet remains strong even as we continued investing in land acquisition and development. At December 31, 2021, our cash balance was $618 million compared to $746 million at December 31, 2020, reflecting increased investments in real estate and development and inventory rose $956 million during the year, as well as for share repurchases. During the full year 2021, we repurchased about 640,000 shares of stock for $61 million, of which about 244,000 shares totaling $24 million were repurchased during the fourth quarter. Our net debt-to-cap ratio was 15.1% at December 31, 2021, compared with 10.5% at December 31, 2020. Our current maximum target for net debt-to-cap is still in the high 20s, which gives us the flexibility to manage liquidity and changing economic conditions. In December, we extended the maturity date of our $780 million unsecured revolving credit facility to December 2026. Given our strong balance sheet, we continue to focus our capital spend primarily on growth, concentrating on community counts and increased specs, both of which we expect will drive profitability and help us gain market share. We also plan to continue routine share buybacks to offset new grants and keep our dilution neutral, and they will opportunistically repurchase incremental shares. On to slide 10. At December 31, 2021, with over 75,000 total lots under control, our land book increased 35% from year-end 2020, and we had nearly 60 years' supply of lots based on trailing 12-month claims. While this is slightly above our goal of a 4 to 5-year supply of lots, since we're in growth mode, the calculation on prior year's closings is a bit misleading, based on our forward closing projection of about 15,000 homes for 2022, we have a 5-year supply of lots. We secured 9,000 net new lots this quarter compared to approximately 11,200 in the prior Q4. These new lots will translate to an estimated 45 net new communities, 93% of which are entry-level. To address the higher orders pace of entry-level products, the average community size we contracted for this quarter was nearly 200 lots, up from about 150 lots in the fourth quarter of 2020. During the fourth quarter of 2021, we navigated around municipal delays and supply and labor constraints to open 48 new communities. We grew our community count by 23 net communities from 236 at the start of the quarter to 259 at year-end 2021. On a year-over-year basis, we were up 33% or 64 net communities. During the full year, we opened 163 communities, up 55% from 105 in 2020. We are already seeing increased volume from our higher community count and expect to continue to benefit from incremental orders and closings in 2022 and beyond. We spent about $507 million on land acquisition and development this quarter, in line with last year's Q4 spend and our targeted quarterly run rate. We expect land spend to be around $2 billion annually in 2022 and beyond as we get to and maintain our 300 communities. To finance this plan, we will use options or staggered purchasing terms to preserve liquidity when financially feasible. About 65% of our total lot inventory at December 31, 2021, was owned and 35% was optioned, compared to the prior year with 69% owned inventory and 31% optioned. With over 80% of our own land currently actively under development and ready to open as a new community over the next several quarters, we believe we are nearing an inflection point on our owned versus option percentages due to our community ramp-up stabilizing over the next several quarters. At Meritage, we're dialed into our land playbook and our growth strategy. We are disciplined in our approach to refilling our land pipeline, even with strong competition and land price appreciation. We underwrite to normalized incentives and absorption. Although we haven't changed our underwriting gross margin hurdle, most deals are penciling above that, giving us some breathing room to absorb cost increases in future incentives while still exceeding our minimum margin threshold. We do not target an arbitrary percentage of option land; instead, we focus on managing our capital through balance sheet metrics and margin goals. We believe the current market demand trends, particularly at the entry-level, will be sustainable at least in the mid-term. Once the supply chain stabilizes, the more communities we have, the greater incremental market share we can gain in all of our geographies. Additionally, our focus on affordability starts with our land strategy, as Phillippe already covered. Our future communities opening in late 2022 and into 2023 are expected to have lower ASPs than what we're seeing in our existing active communities today. Our land strategy focuses on larger parcels, which limits some competition to land and lowers the per lot cost by spreading community-level overheads cost and reduces the churn of new community openings and closings. Finally, turning to slide 11. 2022 is off to a great start, pointing to a strong spring selling season, and we expect home-buying demand to remain robust. At the same time, we will continue to manage our order pace to preserve margin and maintain a high level of customer experience. We expect gross margins to remain elevated, and SG&A rates to be at all-time lows. For the full year 2022, we're projecting total closings to be between 14,500 and 15,500 units, home closing revenue of $6.1 billion to $6.5 billion, home closing gross margin around 27.75%, an effective tax rate of about 25%, and diluted EPS in the range of $23.15 to $24.65. We expect full-year community count year-over-year growth of 15% to 20%. As for Q1 2022, we're projecting total closings to be between 2,800 and 3,000 units, home closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 28.25% to 28.5%, and diluted EPS in the range of $4.45 to $4.85. With that, I'll turn it back over to Phillippe.

Thank you, Hilla. To summarize on slide 12, we enter 2022 with momentum and optimism. We believe Meritage is poised to capitalize on market demand and drive sustainable long-term growth with our proven strategy and operating model, our healthy land position, and flexible balance sheet continued with solid execution. We have already demonstrated our ability to grow community count. I would like to extend our deepest gratitude to our hardworking employees and trade partners who contribute to Meritage's remarkable 2021. Their leadership has driven our significant order volume and closing, as well as a 33% year-over-year ramp-up in community count growth while navigating challenging conditions. With that, I will now turn the call over to the operator for instructions on the Q&A.

Thank you. Our first questions come from Alan Ratner with Zelman & Associates.

Hey, guys. Good morning. Congrats on a great year. So obviously, the rate outlook is top of mind for everybody right now. And certainly, your '22 guidance is encouraging. Curious if you could share with us any thoughts or any feedback you are hearing directly from the field, just given the pretty rapid increase we've seen over the last few weeks here? Have you seen any discernible impact on demand, on order trends, traffic, et cetera? What are you hearing from the sales folks in the communities right now?

Hey, Alan. This is Phillippe. We don't really guide to month-over-month trends, etc. But what I can share with you is that January feels extremely strong. We haven't seen any discernible impact to demand given the projections of interest rates and where interest rates have moved over the last 30 days, both in the form of our backlog as we've gone back to our backlog and given that an indication of what rates are doing, the backlog is stable, as well as forward-looking demand when we think about our priority and the demand we're seeing across all of our leading indicators. If anything, it feels like it's accelerating. I would - it could be because people have the mindset that rates are going to move up dramatically towards the back half of this year and they want to get in. But it also just feels like more of the same. It's really, in my opinion, being generated by the backdrop of supply, which there's none. I mean, as you look into all the markets that we operate in, there's just way more demand for housing than there is supply. And so when they go into the market and they're looking for a resell home, they can't find anything. When a resell home is lifted into the market into high-quality homes, there's usually 12 to 15 offers. So they're migrating over to the new home space, and we only have so much to sell as well because we're metering, and most other builders are metering. So I feel like the demand is being generated by the lack of supply. And there is this tremendous urgency to move because people need to move right now, and they want to move right now, and there are really no other options out there. So to summarize, it feels very strong. We haven't seen any impact of rates thus far. But we'll see how it goes throughout the year as rates continue to rise.

Great. Appreciate the comments there, Phillippe. I know it's a tough crystal ball to read here. But on - kind of on that topic, you're in a position where your backlog doesn't provide you a ton of visibility for the full year, you've given full-year guidance. And just focusing on the gross margin, obviously, full year very, very strong. It does imply some continued slight easing from kind of the peak levels you put up in the back half of '21. And I'm just curious if you could talk through the inputs there? What's driving that modest compression? Is it an assumption for higher costs, maybe some creep back of incentives, which you kind of spoke about a few quarters ago as a potential possibility? What are the various drivers of that?

It's 100% related to costs. And what we're seeing on the cost side is they're increasing as of right now. We feel like we have the pricing power to maintain our margins into next year. It feels like the market is going to give us the pricing power we need to and given the lack of supply in the market, we will be able to overcome that. But it's all costs. We are not making any change in incentives right now. We're not modeling any additional sales and marketing costs that we need to sell homes. So it's all being driven by costs. That being said, we're coming into the year with 5,500 units in backlog. We have 3,200 specs started and we already have another 4,000 specs set to start in Q1. So that's why we have strong confidence in what we're going to do there. We know what the margin is on those specs that we have tee'd up to start in the first quarter. And once we get to those starts, we're almost there on our 15,000 sort of midpoint target. So we have a lot of confidence in our margin profile as we move through the year. And certainly, the ability to raise prices here in the early stages of the spring selling season is giving us even more confidence.

Perfect. That’s really helpful. Thanks a lot, guys.

Thank you. Our next questions come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yeah. Thanks a lot, guys. Thanks for all the information here. I wanted to start off by asking a question about your cycle times. You talked about the fact that they lengthened. I think I heard correctly, two weeks; they lengthened two weeks from Q3 to Q4. I was curious if you could give us a little bit more granularity about that to the degree you can? I think KB had mentioned that they hadn't seen cycle times increasing, I believe, in November and December. I was curious if you could talk about it a little bit more granularly, therefore, and maybe what you're seeing in January? And then related to that, you said you're not forecasting any improvement in cycle times in your projections; are you forecasting any worsening in the near term?

Thanks, Stephen. The back-end trades were part of the challenge in Q4. I think you've heard everything you need to hear about garage doors, but there are some other back-end trades that are just adding some extra weeks into our cycle times to make sure we deliver the house 100% complete to our customers. Just to assure that things are pretty unpredictable right now that we have the right amount of time to get our homes built and meet the quality we're looking for. As we look into 2022, we feel like that's our best metric today. It gives us a little room, and we don't see any reason right now for those to improve based on the conversation we're having with our trade partners. Our labor does not expect to improve, so we don't expect it to improve through 2022, and we're not modeling either to get better or to get worse from what we saw in Q4. It's taken us six or seven months to build the house right now. And given our position in entry-level, we think that's a really good number, and we can deliver a great home to our customers.

Got it. That's very helpful. So you're basically saying that you're sort of doing this in terms of your - that two weeks is sort of what you're embedding in your assumptions to keep yourself some wiggle room just in case something unexpected happens, which it's been tending to do here, so it sounds like it's a bit of a cushion kind of two weeks?

I don't know if I can call it a cushion. This is our actual cycle time right now, Stephen. So we're modeling our actual cycle time, although to your point, the delays are occurring from a different trade every day. So maybe one trade is getting a little bit better, but another trade has a delay. I think that we're comfortable maintaining our current expected cycle time. Again, with a 60% backlog conversion in Q4, it's easy to calculate what that is. So I think that we're comfortable with that. But I wouldn't say that it's two weeks of cushion. This is our actual cycle time.

And as we sit here today, just very difficult for us to indicate that we see something out there that would suggest it's going to get better. That being said, we have a ton of houses permitted and teed up. If we can increase the production capacity and it does get better, we're in a real great position to go out and capture that. We have the communities, we have the lots on the ground, and we're pre-permitting a lot of homes and laying it out. So we can always accelerate that if the supply chain does get better.

Yes, yes, it makes perfect sense. No reason to assume. All right. In terms of your gross margin, again, very encouraging results. The Q1 though - the quarter move - the move from Q4 to Q1 is always a little bit tricky because you got community-level fixed costs and that sort of thing. We also have had lumber gyrating all over the place. So can you help us to disaggregate a little bit about what you're seeing there in the Q1 guide on gross margins? How much of the headwind are we seeing from fixed level community costs and then in lumber? And then as you think further out, in your guidance, you gave a number for the full year, which was obviously welcome. But I was curious, you mentioned, I think, earlier about costs that you're taking into consideration there. Are you also assuming anything in terms of incremental pricing from here in that gross margin outlook for the full year?

We do not anticipate expected increases in average selling price. Instead, we account for cost increases when we are aware of them, while market-driven costs are beyond our control. Therefore, we are forecasting the current cost trends we are experiencing, along with any known increases. We are not projecting additional increases in average selling prices, which is why we expect our margins to remain steady at 27.75% for the full year; we believe we will maintain pricing power to offset the increases we are encountering. The slight decrease from a 29% gross margin to our guidance of 28.25% to 28.5% for Q1 is partly due to lower volume and the ramp-up of our communities. It's too early for the effects of lumber locks to appear in the Q1 financials, but we are seeing other costs that have risen over the past three to six months reflected in that Q1 figure, which affects our guidance for the rest of the year. The impacts from lumber pricing are starting to show in our financial statements.

Excellent. Thanks so much, guys. Appreciate all the help.

Thank you. Our next questions come from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Hi, thanks. Good morning, everyone. Congrats on the results. First, I just want to make sure I understood your answer before, Hilla, around gross margins. Obviously, a key topic as always. You've said that you're modeling costs - some cost inflation as you see it now, the cost trends continuing, but not modeling any future price increases. At the same time, I thought I heard you say you expect to be able to continue to offset cost with price. So I just didn't know how to reconcile those two statements? Or is it really the former statement that you're just being, for all intents and purposes, a little bit cautious on your future pace of price increases?

I wouldn't say that we're cautious on future pace of price increases. I would say that the reason that, that full year margin is coming in lower than Q4 actual. So full year '22 is coming in a little bit lower than what we've experienced for the last two quarters. It's because we know we have some costs that are already - I've already been telegraphed that they're going to be increasing. So we know what those increases are. We think that beyond that, future increases will be offset by future price or ASP increases. So we're kind of holding our current structure as we see it today and assuming that anything above and beyond that will have the pricing power in the marketplace to offset it.

Okay. That's helpful. I appreciate that. I guess, secondly, maybe just on the topic of price. I was wondering if you had a sense of during the fourth quarter and maybe compare that to the third quarter, what percent of communities were you able to achieve price increases and by roughly what average either for the quarter or the month?

We would have to follow up with you on that. I don't think we have that data available to us. But I would say, in the fourth quarter, I thought prices were relatively stable. We're very mindful of affordability in our business. We realize that price is the ultimate amenity. Really focused on just getting the pace we were looking for and not looking to push pricing on to our customers right now. So I don't think we raised prices a lot in Q4, although we get in certain places where demand was really strong. But once again, in January, it feels like things have accelerated again, which gives us some confidence as we look at our priority list and the people waiting for our homes that are being metered. We feel like there's some more pricing power that, frankly, we didn't think we were seeing in Q4; we're seeing now.

Phillippe, could you be a little more granular in terms of your comments around January when you say extremely strong or accelerating? I know you don't want to go to get too detailed on a month-to-month basis. But what are some of the things out there that you're seeing in either foot traffic or perhaps either better pricing power or sales pace? What are those things that you're seeing right now that gives you that increased confidence now with the spring selling season right around the corner?

Yeah. I mean, usually the spring selling season starts a little bit later in the year. And we've just seen a lot of people that wanted to buy a home last year who were able to are back in the market; they're very active. There's a lot of urgency. Our priority feels in our communities are growing versus stabilizing. So we're adding more people. We have more people waiting for our homes where we're metering to our homes. The quality of the traffic is extremely high. These buyers have very strong credit profiles as well as debt payments. We're seeing our competitors have strong traffic. We're seeing continued and robust activity in the retail market where it exists, all of the above. It feels like the spring selling season, at least as we sit today, is going to be relatively strong even if interest rates have risen. And I said that earlier, maybe it's because people think that rates are rising, and they're coming into the market with sort of a fear-of-missing-out mindset. But it also feels like there's still a lot of people out there. Their rents have gone up, and they want to buy a home. They're moving into our markets. We're in the best housing markets in the country. There's tremendous job growth and in-migration going on. I mean, across all fronts, Michael, really across all fronts.

I would add two more other data points. The first, Phillippe mentioned in his prepared remarks that when we need, there's a certain number of units we can sell per community. And we're seeing us reaching that goal early in the month, very early in the month. Once we release the lots for sale, they sell. So we're hitting that metering pace earlier than in prior months. So that's another indication that the demand out there is really robust. And as Phillippe mentioned, we increased prices, but on a much more muted basis in Q4. We've really increased the pace of ASP growth in just January. Part of that is because the market allows us, and also, we're seeing the increased costs come through, but we've seen no pushback from our customers as we've increased pricing. So that's another data point that's giving us confidence on the strength of January.

Great. Thanks so much, guys.

Thank you. Our next questions come from the line of Carl Reichardt with BTIG. Please proceed with your questions.

Thanks, everybody. I wanted to talk about customers for a second and for a while you've mentioned in releases about sort of entry-level customers, millennials and you've got baby boomers. I was curious if you could talk a little bit about the baby boomer component of the demand curve, the move-down customer? And then also just following on to that, do you have any sense as to what percentage of your buyers in the fourth quarter, whether orders or closings came from a different state than the one that they purchased in?

Those are pretty specific, Carl. Let us do a little bit of homework and circle back with you on the in-state migration. It's obviously largest in Florida, Texas, and Arizona, but we can dig in a little bit more and provide you with some metrics there. And then as far as the baby boomers, I'm not sure exactly what data point you're looking for. They continue to be a material percentage of our business, although we're seeing millennials, but the generation coming up right behind them is also starting to enter the home-buying years that we think over the next couple of years, while baby boomers are still going to be a very active part of our business, there will be another buyer cohort that early entry rather than a move-down component. So we're starting to see that play through, although we think that will be much more meaningful over the next two to three years.

Given the affordability of our product and the quality of our community and locations, we're seeing a very diverse group of folks come to our stores. It's Gen Z, it's millennials. It's move-down buyers that are looking for more affordable housing; it's all the folks that are moving to Florida and Texas and the South in Arizona and Colorado because they're leaving colder states or less affordable states. It's a very diverse group of customers that are moving through our communities, and it's being all driven by the affordability and the location.

One other data point anecdotally; we mentioned for the last several quarters that the size of our communities is growing in lot counts. As we do that, we typically have more robust amenities in those locations. And for those baby boomers that are looking for that lifestyle, active community type of deals, the type of amenities that we're providing in our larger communities aligns with those needs as well.

I mean, obviously, the spear point of the question is the interest rate sensitivity of the customer types maybe different, which is why I asked. But - and just shifting to the balance sheet or cash flow for a second, you were significantly OCF positive in '20, obviously, not so much this year as you invest in there. What's your thinking, Hilla on '22? And the sense of whether or not you might be OCF positive or negative looking at the land spend and the delivery pattern? Thanks.

It's hard to model things on a quarter-by-quarter basis. I mean for the full year, we've guided to $2 billion of acquisition and development. That's the same thing that we did this year on a much lower volume if you look at our guidance for next year versus where we ended up this year. So we think there'll be a lot of variability intra-quarter, but for the full year, we would expect to be neutral or slightly positive. I would expect, since we're spending a similar amount of money walking out the door, bringing in a larger percentage.

Thanks a lot. Appreciate the time on.

One other data point, sorry, just to clarify, now that I understood your question a little bit better. The percentage of our cash buyers hasn't really moved too much in the last 18 to 24 months. So if that's a proxy for you for baby boomers, that's kind of holding steady.

Thank you. Our next question has come from the line of Deepa Raghavan with Wells Fargo. Please proceed with your questions.

Hi. Good morning, everyone. Thanks for taking the question. It is pretty interesting that you talk about price increases in January, but also mentioned that your ASP for the upcoming communities could be lower as you want to be mindful of affordability. Do you have a sense for what's the ASP sweet spot range is for your buyers? And is that what you would be working towards as you target a 15,000 steady-state home sales?

Yeah. I mean, obviously, we're in a lot of different markets where the sweet spots are different. We used to be really thinking about our business below FHA. With the recent increase in FHA, we can get lower than that. I think we're constantly looking for land that allows us to position our products in the 3s and 4s. We like those price points depending on the market. As interest rates rise, we think that payment is very attractive to the people that are seeking homeownership, whether it's millennial, Gen Z, or move down anything with a three or four in front of it we think is very attractive to that consumer segment. So I'd say it's somewhere around all that. And then depending on the concentration by market, we figure out kind of where our blended ASP is.

You can see, Deepa, if you look at our backlog, our backlog ASP is 443. But our sales for the current quarter are 433. So you can start to see the product mix shift starting to impact us, because obviously, we're continuing to increase prices if our net ASP is coming down that trend is due to the new products that we're introducing.

We bought a lot of great land in 2019 and 2020 that's coming to the market, really great, deep land position at a very attractive basis. And when we underwrote that land, a lot of that product was in the 3s. So maybe it's high 3s now or low 4s. But that's kind of the sweet spot.

Got it. It looks like there's good run rate with, should prices stay pretty stable here. That's good to know. Just switching gears a little bit and just for some peace of mind for investors around here is, what kind of sensitivity are we looking with your buyer profile, should the 30-year mortgage rate increase about 4%?

So we constantly look at that to make sure that we're priced according to what our consumers can afford to buy. We ran a sensitivity analysis at 50, 75, and 100 bps from today's prices, so kind of about 4.5 north of that. So even in that scenario, if we were to increase a full 100 bps from today's rate, the deterioration in our backlog is like mid-single digits, low double digits, assuming that they buy exactly the same products and don't buy a slightly less expensive or slightly less amenitized homes. So we think that there's a minimal overall impact other than psychologically on the balance sheet of the consumer. There's certainly the capacity to be able to absorb 50, 75, maybe even 100 bps. And the small percentage that would fall out, we think could be substituted with additional qualified buyers that are in our pre-qualified pool.

That’s great. Thanks for the color. I’ll pass it on.

Thank you. Our next question has come from the line of Truman Patterson with Wolfe Research. Please proceed with your questions.

Hey. Good morning, everyone. Thanks for taking my questions. First, just wanted to touch on your continued shift to more affordable areas which generally means a little bit further out. In these newer communities that have come online, just hoping to get an early gauge are absorptions and wait lists in line with some of your legacy communities. And then competitors in tertiary markets, kind of the outskirts, if you will. Are you seeing any increased incentives now that rates are moving up?

I'll take the last and then you work backwards. We have not seen any incentive activity in the market across any of the competitive stats, whether private builders, public builders, rental, or the retail market. People are getting full ask, at least in all of our markets, if not above ask, so no incentives yet. Haven't seen anybody push out any sort of lock incentives yet either that tends to show up in the market when the rates start to go up. And then as we think about our new communities, and I think I said this before, but we're not going way far out. We're just sort of staying within what the infrastructure is. And so we're seeing tremendous interest in our new communities. Every new community that we've scheduled to open, we start to build a priority list 90 days out from releasing the homes, and they are extremely robust. There is a tremendous amount of interest in these new stores.

Okay. Thanks for that. And then prior to the pandemic, you all basically had gross margins in the 19%, maybe 20% range. But over the past five years or so, you all made just significant changes to your business model, and quite frankly, I don't know that we can necessarily look at historical gross margin based on the strategic shift. But just hoping to understand where you think a long-term normalized gross margin level is for you all today relative to history?

So I think you're right, Truman; we can't really look at what we did pre-pandemic to where we are today. The lift in our margin is not really a function of just the current demand; the current demand environment has raised everyone. But I think it's a change in our product mix and our operating model that's really driving that incremental couple of hundred bps that we're seeing above maybe the industry averages. I think that we've discussed this previously; we've probably reset our averages. It's no longer 19 or 20. It's probably a couple of hundred bps above that just because of the nature of the type of product and who we are as a builder today. I don't know if we're going to put a marker on what that number is right now, but it's definitely north of 19 or 20.

Okay. Thank you for that.

Thank you. Our next questions come from the line of Ken Zener with KeyBanc Capital Markets. Please proceed with your questions.

Morning, all.

Morning.

So we see your rising inventory units. Obviously, it's a function of starts, but it's also partly helping to offset lower cycle times as we measure. You talked about two weeks; we measured as what as a percent complete. My one question is this, your five - roughly five starts per community that you've done in the last two quarters you talked about in the first quarter, I believe. Can you talk about that being an operational decision to ease lower cycle times, right? Just take time slowed 10%, you can have 10% more inventory that would kind of neutralize that. As opposed to what you think your business model, your production types - your production level can be because ultimately, your start decisions, in our view, dictate your order level. So is five kind of a rate per community that is part of your more entry production level? Or is there some component there that we should think about as governing your kind of longer-term thinking? Thank you very much.

Sure. The number is probably a little lower than where we wanted to be. Obviously, we've addressed the supply chain constraints. So we're definitely not starting homes at the pace that we would like. Our start pace is significantly below where we'd like it to be, both on a per community basis and then in the aggregate; obviously, it's also going to grow just as a function of increasing communities. You're kind of going to see a doubling effect there. For us, we're really focused on 4 to 6 month supply of lots in entry-level, which at this point is like 80% of what we own. So probably a good proxy for most of our communities. So we're looking at 4 to 6 months supply of lots, and that's just a function of what the market is going to give us. At the peak here when we're selling 5, 6 units a month in those communities, we're going to be starting an equal amount of what we're selling. We always want to keep that 4 to 6 month supply ahead of us. You're going to see a ramping up of that because we don't own or we don't have 4 to 6 month supply of inventory on the ground right now. So you're going to see us ramp up to that as supply chain constraints unwind, but then we're kind of going to maintain that pace. If you're at that 4 to 6 every month sales are substituted by that one start. So you'll see that at somewhere around that 5 to 6 per month on the entry level and just a tick below that in the first time move up.

Thank you.

Operator, we'll take one more question.

Thank you. Our final question for today comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your questions.

Thank you, everyone. This is actually Charles Perron on for Susan today. Thanks for taking my questions, squeezing me in. I guess my first question is regarding the affordable dynamic these days. How quickly can you adjust the specs of your unsold homes such as floor plans or finishing to meet the affordability standard, especially when considering how early you need to order certain materials to build those homes in this environment?

Well, once we start a house, there's not a lot we can do other than the price. But on future starts, we can start smaller square footages, square footages with fewer features in them or homes to plus features in them to help lower the price. But on a pre-started home, there's really nothing we can do.

Got it. Got it. And then just as a follow-up, with this rising rate environment, how do you expect this to impact the demand trends across entry level relative to move-up buyer? And specifically, do you still expect the entry level to outperform given their continued desire to own a home that you mentioned in the past? Or maybe you think that you're going to see more move-up buyers coming out in your pipeline as they begin to increase their ability to meet higher housing payments given their recent home pricing?

Yeah. I think both. I mean, clearly, our thesis is that as rates increase, people are going to move down price because they still need a home. And the entry-level buyer in particular needs a home. With the pressure on rents, they're really looking for homeownership. So as rates rise, we think the entry-level buyer performs relatively well as long as they don't get too high. And Hilla talked about where we think they're going to go and what the opportunity is. The one new buyer is especially the move-up buyer that we're focused on, which is a more affordable move-up buyer, we think they move down into the entry level communities when rates go up, and they don't feel like they want to spend as much money on a home on a per month basis. So we see a shifting of that. But we're not targeting sort of what I'll call the very affordable price-sensitive entry-level buyer. We're targeting more of the higher and entry-level buyer that's more qualified looking for a nicer home. It's not all about the lowest price; it's really about the best home for the payment they're looking for.

And we call them entry-level and first-time move-up to themselves; they're just a buyer. So they're going to sell for a price point. So if we can offer them a price point at what we call one and when interest rates are a little bit lower, that's fine. If not, they're going to go to the next community and solve for that monthly price point, which is where we have the bulk of our communities.

Thank you. Really appreciate the color on this.

Thank you. Well, thank you, operator. Thank you, everyone, for your continued trust and support. We hope you have a great rest of your day. Thanks again.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.