Meritage Homes CORP Q4 FY2022 Earnings Call

Greetings and welcome to the Meritage Homes Fourth Quarter 2022 Analyst Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Emily Tadano, Vice President of Investor Relations and ESG. Thank you. Please go ahead.

Thank you, operator. Good morning and welcome to our analyst call to discuss our fourth quarter and full year 2022 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 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. 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 earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2021 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 today's 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 until February 16. I'll now turn it over to Mr. Hilton.

Thank you, Emily. Good morning and welcome to everyone participating in our call this morning. I'll start with a brief discussion about what we are seeing in the market and provide an overview of our recent company milestones. Philippe will cover our strategy and quarterly performance. Hilla will provide a financial overview of the fourth quarter and forward-looking guidance. Q4 marked a strong finish to a year of exceptional execution and dedication from the Meritage team. We delivered 29% more homes this quarter and generated $2 billion in home closing revenue in the fourth quarter, which was 32% higher than the fourth quarter of '21. Our home closing gross margin of 25.2% and quarterly SG&A leverage of 8.4% led to our quarterly diluted EPS of $7.09. Although favorable demographics and the low supply of housing inventory should drive long-term demand, we believe they were overshadowed in the back half of the year by ongoing economic uncertainty and buyer psychology, increasing mortgage interest rates, and inflation. With homebuyers hesitant about when to get back into the market, our fourth quarter sales orders declined 46% year-over-year, driven by a cancellation rate of 39%. Today's higher mortgage interest rates continue to pressure housing prices as monthly payments still remain above 2020 and 2021 levels despite price cuts and rate locks. We believe that until rates stabilize, home sales activity will remain choppy. We see some potential buyers who could qualify but are waiting for further price declines as they anticipate additional builder incentives are coming. Other current buyers with rate locks in place or below current market mortgage rates were canceling due to buyer hesitancy as they may have been nervous about the overall economy or their own financial positions. However, given our available inventory, we are seeing some buyers respond favorably to our quick movement selection as well as our incentives and company-wide sales initiatives. As the team that embodies our start with heart core value, Meritage employees donated countless hours to deliver three mortgage-free homes to deserving military veterans and their families on Veterans Day in Houston, Nashville, and Tucson. This is one of the most impactful annual initiatives that the entire organization looks forward to, and we were excited and humbled to continue that tradition in 2022. We also expanded our long-term history of contributing to local non-profit organizations to further our diversity, equity, and inclusion mission as well as voluntary time and donated financial support to organizations combating food insecurity across the country and providing shelter to those in need. This quarter, Meritage was recognized by the Phoenix business shareholder, both as one of the best places to work and one of the healthiest employers. And as a result of our overall commitment to ESG, Meritage was named one of the 2023 America's Most Responsible Companies by News League Magazine. Overall, we are proud of what our team members accomplished this quarter on top of solid operational execution. I'll now turn it over to Philippe.

Thank you, Steve. During the quarter and looking into 2023, we are analyzing the business through the lens of market events and actions that are within our control. We could not influence the macroeconomic factors impacting Q4 sales that Steve described. However, we can control how we react to them and how agile our business can be. We are focused around our core strategies that we have honed for many years now. To reiterate our strategies and the actions we have taken, we remain committed to prestarting 100% of our entry-level homes. This readily available home inventory puts us in a favorable position since buyers in the current market want homes that are ready to close within 45 to 60 days. Eliminating uncertainty and reducing stress are premium in today's murky economic environment. Further, line building allows us to complete homes on a shorter cycle time than a build-to-order model despite supply chain issues. Prestarting homes with a limited SKU library means we can also offer more affordable products as we pass on our savings to our customers. As an added benefit, when we have cancelled inventory, the lack of customization of our homes, stemming from our streamlined specifications, results in limited discounting for the future resale of that home. Since we mainly build entry-level products, we expect a higher average absorption pace and prioritize pace over price. Like all homebuilders, we benefited from the run-up in home prices during the first two years of COVID. Despite higher costs, we experienced industry-leading gross margin levels. More importantly, we increased our market share. Consistent with our strategy, we continue to target 3 to 4 net sales per month. As we had a net order absorption pace of 2.2 per month in Q4, we have taken additional actions to get back on our target, including lowering prices and utilizing a full range of incentives such as mortgage rate locks and rate buydowns until we find the market-clearing point to move our inventory and get back to our target sales pace. The timing of these actions aligns with the production timeline of our spec inventory, which is now completed or near completion and ready for quick moving sale ahead of the spring selling season. Further, during Q4, our operations team worked hard to close a significant portion of our backlog despite supply chain issues impacting cycle times. We also aggressively validated every home that remained in our backlog as of year-end. Most confirmed their commitment to their homes. Some used incremental pricing or rate adjustments that we were able to offer. In other cases, though, we had to cancel the sales; it was clear the buyer was not going to purchase a home with a reasonable incentive structure. By proactively showing our backlog, we likely identified some cancellations earlier in the cycle than normal, but this gave us more confidence in our backlog at the end of 2022 and added available inventory for sales into January. While we certainly don't have a crystal ball regarding what cancellation rates will do in 2023, we are comfortable that the buyers who purchased homes in early March 2022, under a different market and economic environment, represent a smaller portion of today's backlog compared to a greater portion coming from buyers that have a more comprehensive understanding of the current market conditions, their monthly payment expectations, and the relative advantage of their rates and pricing incentives. In addition to our sales initiatives, our purchasing team is actively rebidding our vertical costs to capture cost savings as incremental capacity is growing within our supply chain.

Thank you, Philippe. Like last quarter, we'll start by providing a bit of color on our built-for-rent business before reviewing the financials in detail. Sales through our built-for-rent partners in the fourth quarter only represented a low single-digit percentage of our net orders volume as the rental operators, much like the rest of the sector, are pausing to analyze their financial hurdles and adjust underwriting targets. We're encouraged to see some incremental interest in January and continue to believe in the viability of this channel due to the historical countercyclical strength of rental markets in a higher interest rate environment. Now let's turn to our fourth quarter financial results in more detail. Home closing revenue grew 32% year-over-year to $2.0 billion in the fourth quarter of 2022, combining 29% greater home closing volume, and 3% higher average selling prices when compared to the prior year as we overcame supply chain challenges to close a substantial portion of our backlog. Our fourth quarter 2022 home closing gross margin was 25.2%. The 380 basis points deterioration compared to 29.8% a year ago was the result of greater incentives and higher direct costs as well as several nonrecurring items, including $10.9 million in warranty adjustment related to two specific cases, and $4.2 million in write-offs for option deposits and due diligence costs for terminated land deals, which were partially offset by $5.4 million in retroactive vendor rebates. In the fourth quarter of 2021, we had $2.5 million in write-offs for terminated land deals and no warranty or rebate adjustments. Excluding these nonrecurring items, adjusted fourth quarter 2022 home closing margin was 25.7% compared to 29.2% in Q4 of 2021. We expect that price concessions and elevated discounts, along with continued financing incentives for rate locks and buydowns, will negatively impact gross margins in 2023. However, with our average selling price down 10% to $389,000 this quarter compared to last year, we've already taken material pricing action, demonstrating our commitment to elevating our sales pace. Although we're not projecting broad-based cost savings to offset the challenging market conditions today, we are starting to make some headway to reduce direct costs and improve cycle times. There are full company initiatives to drive substantial cost reductions, with success stories of $15,000 per home in savings already emerging in some divisions, particularly in our slower markets where trades have excess capacity. However, we likely won't benefit from the full impact of these savings until the tail end of 2023 and into 2024 as they will be captured in our home starts mid to late this year. We still believe that long term, our normalized gross margin will benefit from better operating leverage from our increased volume and streamlined operations and will end up at or above 200 basis points from our historical average of 20%, although the next several quarters are likely to be bumpy.

Thank you, Hilla. To summarize, January is off to a great start, but it’s too early to quantify the strength of the spring selling season. We are prepared to find the right combination of product pricing incentives for all of our communities to achieve a pace of 3 to 4 net sales per month. Our commitment to prestarting 100% of our homes, streamlining operations, and prioritizing takeover positions us to capture market share, gain leverage, and maximize profitability as market conditions evolve. In conclusion, I would like to thank all Meritage employees for their hard work and the job well done in 2022. Their dedication drove our success.

The first question today is coming from Truman Patterson of Wolfe Research.

First, just making sure I heard this correctly. Did you all say previously that January net orders were about 1,200 and up 4% year-over-year?

Yes. We have sold approximately 1,200 houses in January, a little bit over 1,200, which is up about 4% over last January. And then our absorption pace per store was right around 4.5 sales per community.

Okay. Perfect. And I realize not reading too much into January trends. But we have lower lumber costs beginning to flow through the P&L. You all mentioned perhaps some other stick and brick costs maybe hitting later in the year. We also have some higher land costs and maybe an uncertain pricing or incentive environment that maybe you all found the floor. But I'm hoping you can help us think through Q1 gross margins if you all think that might be kind of the floor for the year? Or should we still expect it to be pretty choppy?

I'll let Hilla dive into a more detailed description of what's going on in Q1. But I mean, it's just really too murky right now to know what pricing is going to do. Obviously, we've been aggressive. We're an affordable spec builder. So we're going to price ourselves in the bottom two tiers of our competitor set, community by community, which is why our prices, our average selling prices are down now into the 300s from $480 at the peak. So, we feel like we've made some substantial adjustments to be affordable and to find the pace we need, and we feel we're well positioned for the long term. But it's hard to tell what our competitors are going to do. Some builders still have quite a bit of backlog that they're going to close out and I don't think they've adjusted pricing yet. So, we'll have to wait and see how that plays out and we certainly don't know what interest rates are going to do. We're happy to see them stabilize where they are and feel optimistic about that, but those two factors are really driving our inability to predict pricing at this point. And then, I'll let Hilla share kind of how we got to our Q1 margin guidance.

Yes. So thank you, Philippe. Our Q1 is primarily what we saw in activity over the last 4, 5 months as the average selling prices that you're seeing in our sales. As we mentioned, we had fairly decent gross sales. It's really the scrubbing of the backlog and the cancellations that brought the net sales down in Q4. So we think we found a market for 3 to 4 net sales per month. January definitely proved it. So right now, we're not comfortable giving guidance beyond Q1, but what we're seeing in Q1 reflects the current sales environment and does not reflect anything yet in the direct cost initiative. However, as we said, we don't think that those margins are really going to materialize until the latter part of the year. And that's assuming that there's no other increases that are coming our way. So kind of looking at where we are, we're comfortable at our current pricing structure. We're down almost 20% from the peak and we're able to sell at an acceptable pace. So we don't feel that we need to move it any further at this time, although we're constantly adjusting with market conditions.

Perfect. You have a streamlined business model with generally fewer vendor SKUs and floor plans than your competitors. I'm hoping we can leave lumber aside, as it's down significantly year-over-year and has risen quickly so far in January. However, I'd like to know if you can help us quantify the potential cost tailwinds you are experiencing, aside from lumber, based on today's starts. Any chance you can provide some insight on that?

We are currently involved in a comprehensive rebidding effort. As Hilla mentioned, we are actively rebidding all of our communities for spring starts. Additionally, we have paused the opening of some new communities to focus on rebidding and reducing our vertical costs as much as possible. It’s still too early to provide a detailed outlook on this. However, as stated earlier, we are experiencing success on the front end but facing challenges on the back end regarding construction. In some of the markets that were hardest hit, we have managed to recover over $15,000 per house, which is significant when considering a $200,000 construction budget. In other areas like Florida, the market remains stable with starts continuing at a good pace, and we haven't encountered similar recovery opportunities. That’s all we can share at this time, as we are in the midst of this process. The initial feedback from our vendors indicates that there are opportunities available, and we aim to capitalize on them. We will provide an update next quarter on our progress.

Yes, exciting times. I appreciate all the color. And particularly, the commentary on January really dovetails with what I've been hearing. A lot of excitement out there but everyone seems extremely cautious about predicting the sustainability of the rebound. So with regard to that, obviously, the sales that were extremely good. You were over your 3 to 4 order per month pace in January. And so the market clearly has done a kind of about-face. And I'm wondering if you're beginning to ratchet down incentives at the community level or taking other actions which would effectively mean that you're raising your net price.

Yes. So at the end of the day, we're going to try to get 4 net sales per store. And that's how we built our business and we're going to try to get a 21% to 22% margin at that pace. And we consider everything from that point of view. So we went out there; we had some additional inventory. I'm optimistic that having that inventory really is why our sales rebounded in January. We're not sure the market, frankly, is any better other than the fact that it's the spring and not the winter, and interest rates have somewhat stabilized. From our perspective, it's about having move-in ready inventory, which we have. That's what consumers want. And that's why we feel like we saw the January result. In several communities where we made adjustments, we did see very strong elasticity in demand when we lowered prices and we were able to achieve even above our 4 net sales. So in those communities, we're pulling back on incentives where we think that's sustainable. We'll back off on rate buydowns. We don't have to use rate buydowns nearly as much as we did now that we're selling all specs. People can move in relatively quickly, and we can drive those costs down. So it’s community by community. But it’s one month and we're going to take the market here right now. We're going to be aggressive. If we can do more than 4 units at today's margins, we'll probably take more than 4 units at today's margins. It's spring selling season, and we want to go and capture this market share while other builders don't have the spec homes to go get it. We'll pull back a little bit where it makes sense. But for the most part, we're comfortable where our absorptions are and overall margins are. And we're going to go try to sell more houses.

Yes, that makes a lot of sense. Your commentary, though, about community count and your rollout of those communities would seem to be a bit at odds with running hotter than 4 a month. So correct me if I'm wrong. If this demand actually proves to be deeper and broader than anyone is really willing to bet on yet, do you have the ability to do an about-face on your community count openings or community openings so that you can maintain a positive year-over-year community count over the course of the year?

We can always speed up the opening of our community because the demand is quite strong. However, we don't believe that it is prudent to do so at this moment; it would require exceptionally strong indicators for us to make that decision. Currently, we see significant opportunities to reduce our vertical costs for these new openings, which I believe is more crucial for the long-term success of the community than simply increasing our community count too quickly. We have made substantial investments that we don't want to jeopardize by opening communities with high vertical costs that aren't sustainable. Additionally, it remains challenging to open these communities due to the need for municipal approvals, delivering equipment to the job sites, and ensuring we have completed inventory ready for move-in when we launch a community. These factors greatly influence our decision-making, and we are not willing to compromise our operational discipline just to increase the number of communities this year. Our focus is on opening these communities with strong momentum, doing so effectively, with available inventory, and the best possible cost structure.

Just to clarify, Stephen, the 300 community count target that we say we're going to hit in a couple of quarters, that already peaks in the rebidding process. So as we said, it's going to take us a couple of quarters to get through the full rebid. We said we're not going to have those home starts until the latter part of this year, which is exactly aligned with our community count opening target that we just provided. Opening a community without inventory doesn't really work. As we said, the volume that we're seeing is because we have available specs. Putting a whole bunch of specs in the ground at an inflated cost and knowing it's coming down in just a couple of quarters doesn't seem to be the right decision. So we’re willing to be patient to ensure we drive that accelerated pace while not sacrificing the sales price we can set the targets at and just have those sales in the back half of the year instead of more anemic at a lower margin pace in the front end of the year.

And just one last comment, the cancellations in Q4 were all part of the issue; people were opening up communities without production. Then you're hoping to hold on to your buyer for 9 months, and that just doesn't make any sense when we don't know what interest rates are going to do. We want to open up with move-in ready inventory. Customers are willing to engage with something that moves in 30, 60, or 90 days. They can lock their rate. I think it minimizes your cancellation exposure. So we've got our cancellations down to where we want them now. We're going to run our business to ensure we keep those cancellation rates low, assuming that interest rates will continue to remain volatile.

Yes, that's interesting, Philippe, because you mentioned wanting to see rates stabilize. You've pointed out the volatility we've experienced in mortgage rates, which is evident. I'm curious if you truly believe buyers need rate stability. For example, if mortgage rates were to drop into the 5s, which seems possible in the near term, do you think that could boost homebuyer sentiment as it begins to make headlines?

I mean, clearly, you're asking me a trick question. If rates are lower, there's more demand. It's absolutely a one-to-one relationship. So yes, if rates go to 5, we're going to see stronger demand. But we're going to stay with our operational discipline of selling move-in ready specs. It's about our supply chain. It's not our cost structure, and it’s about not knowing what the future holds. We could see a strong spring selling season. But rates could go up in the back half of the year. The Fed made their speech yesterday. They certainly didn't say they were going to lower them. So we don't know yet, and we're going to focus on operating in the best interest of our company.

Thanks, as always, for all the great info. First on the pricing side, Hilla, you brought up an average order price down 20% over the last couple of quarters which is obviously way more than the market is down and certainly way more than your peers are. And it sounds like maybe some of that is you guys being more aggressive. But I would imagine there's a decent amount of mix in there as well. So, I'm just curious if you're able to parse that out for us because I do recall a couple of quarters ago when you were kind of giving the impairment sensitivity. I think you said like home prices would need to drop 20% for there to be any meaningful impairment risk. And now you're saying there's not a ton of risk out there, which makes a lot of sense given the current market. I'm just curious if you could kind of drill into that a little bit.

I'll let you address the impairment question, but I want to emphasize that the issue is primarily related to pricing rather than a significant mix. Our average selling price was around $480 in the middle of last year, and now it's approximately $390, mainly varying by location. The most notable adjustments have occurred in the West and certain areas of Texas, along with a slight impact to the east. We position ourselves as an affordable builder and aim to achieve a payment structure that is favorable for our customers. We believe that a sustainable payment option is feasible when our average selling price is below $400. When we evaluated our land two years ago, we anticipated our average selling price would range from the 30s to low 40s, which shaped how we position our product. Our strategy is to be competitively placed at the lower end or just above it in the market, presenting ourselves as the affordable new homebuilder within our competitive set; therefore, this is predominantly a pricing issue. While we have launched a few new communities that may feature lower average selling prices, the main factor is still pricing. Hilla can elaborate on the impairments.

Well, we do have geography with the East.

When we're looking at it, Alan, we mentioned just on a mix perspective, 89% of our sales in the quarter were entry-level. It's not that different from 82% last year's fourth quarter. So the mix is in the 80s category. So that's not probably a material shift that would create this significant a price reduction given that we're still north of 20% margin. That gives us the confidence to say that as we sit here today, we don't see broad-based impairment with north of 20 margins not just in the current quarter but in the quarter that we gave guidance for. So, how does that math work? How can you drop 20% from 31.6% and still be above 20%? There are some other pieces that go into the mix, certainly some increased efficiencies and simplification of the product. But then also the high volume is helping us leverage some costs, particularly as we saw in the fourth quarter. So there are a lot of other pieces that roll into those calculations. But overall, you're seeing the impact of lower prices already in our numbers, which is why we feel comfortable, especially looking at our January numbers, that without any large material shifts in the market, we have a good average selling price to hit our 3 to 4 net sales.

And where we've made the most meaningful adjustments in Phoenix and Denver, we've also seen the most meaningful direct cost savings, which have softened what our margins have done. When we quoted earlier in our script that we got $15,000 per house, that's in Colorado and Phoenix. That's where we got those numbers, where the market has adjusted the most and also where prices ran up the most over the last three years.

That's all really helpful. I think it's really impressive that you've been able to reduce prices as much as you have and bring the affordability equation to a more reasonable level for your consumers and still generate the margins you are. I think it speaks to the execution of the operation there. So well positioned to continue taking share from that regard. The second question is we heard from another builder last night that kind of gave similar commentary on January activity, but they did kind of add in a comment that they might have seen a bit of a leveling off of the improvement over the last week or two, kind of implying that things really accelerated kind of back half of December into early January. Not to get too fine here on weekly activity, but is that a statement you would agree with? Or do you feel like the market is continuing to gain momentum at this point?

I mean we just gave out monthly numbers. Now you want weekly sales trends. I can just tell you, we would not agree with that statement.

I appreciate your willingness to address my questions. I wanted to revisit the discussion around the gross margin details, keeping in mind that you're only providing guidance for the first quarter at this time. If I understood correctly, you mentioned that you anticipate your long-term gross margins to be in the 21% to 22% range, which aligns with your first-quarter figures. How should we view the factors influencing gross margins beyond the first quarter, at least in a general sense? It seems we have talked a lot about decreased construction costs, whether in materials or labor, which could act as a positive factor, potentially affecting late 2023 or early 2024 as you suggested. Is there anything that could counterbalance that as you aim for a 21% to 22% margin? Also, is there any delay in the effects of the incentives and pricing conditions you've observed in recent months that could lead to a drop in the second quarter compared to the first quarter?

So thanks for the question, Mike. The 21% to 22% that we guided to for the first quarter is based on existing homes under production. So we know what those costs are. They’re closing in the quarter. We either came into them with backlog or there are specs that can close in the quarter. So we have good visibility into Q1. Now not to be too cute here, but when we spoke about our long-term trend, obviously, we're not talking about 2023 as a whole. We're talking about long-term trends. We said at or above from the normal margin of 20%. So I think that what we're trying to communicate is that long-term margins are 22% or north of that. To be honest, we kind of just got our whole operational structure in place right when COVID hit, right? 2019 is the first year that we really kind of had all engines coming in a new strategy. Then we hit COVID and it was impossible to predict what a normalized environment would be. So in the beginning, we thought it would be 21%. Since then, we've raised it to 22%. On today's call, we said normalized would be at or north of 22% as we continue to harvest the efficiencies we're seeing in the business. So when we look at Q1, I can't predict sitting here today if it's the trough. I know the builder took that position, so that's going to be the low point for the year. By not providing guidance for the whole year, we're not confident that we understand all the dynamics yet for the rest of 2023. We do feel confident in the long-term operational structure we have, so long-term is 22% or higher. As that clarifies over the coming quarters, we'll give additional insight there.

I know you mentioned about potentially being more open to returning capital to shareholders. But just thinking about your liquidity position, the stock's valuation, there's no debt coming due until 2025. I mean, is there an opportunity here to get aggressive on share buybacks?

Sure. There's an opportunity to get aggressive on share buybacks to consider other methods of returning cash to shareholders. We're looking at everything and trying to make sure that what we do optimizes the return to shareholders while keeping us in the strongest balance sheet position possible. There are definitely some actions that we'll be taking in 2023, but the magnitude and which action it will be, we're still going through our Board. So stay tuned for next quarter's call for more visibility into that.

It's great to hear that. Regarding the 89% of orders for entry-level products, how much higher can this number go? What is your target for that? Also, could you remind us if there’s any margin difference between entry-level products and other segments of your portfolio?

Yes, and there's really no differential. We have three consumer segments that we focus on: entry-level buyers, what we call the move-down value-conscious buyers, and then we move up the value-conscious higher. And it's kind of blurry. The lines get blurry. Some of them are the same people, same families, aspirational entry-level buyers kind of moved up the value-conscious. So I think you could go all the way up to 90%, 95% based on your definition of our customers in our communities. But our target is 70%, 75% entry-level and 25% to 30% value-conscious move-down and move-up buyers. I think it can vary depending on what interest rates are doing and what the market is doing but that's kind of the sweet spot.

Philippe, you mentioned that cycle times in Arizona and Colorado were the longest in the company. I'm just curious why is that?

It's a good question. I think they are both different actually, not the same reason. But in Arizona, there was just so much demand during COVID. I just don't think the trade capacity could keep up with the number of starts that were being pushed out, both in multifamily and single-family. So tremendous ramp-up in 2020 and 2021, just put a lot of constraints on them and they just weren't able to keep up, and we saw some pretty meaningful expansion in cycle times across many categories, not just front end versus back end but across the board. So just big market, lots of demand. Colorado has always had a labor issue. It's always been difficult to attract skilled labor there. A lot of folks don't get into that business there. It's always been somewhat constrained. When you add a surge in demand that we saw again out of COVID, you just saw our cycle times get really, really long. So two different reasons; I think Phoenix recovers relatively quickly as demand has slowed significantly here. We're already seeing that. I think we'll be able to get our cycle times down here relatively quickly as demand slows. Denver is always going to be a challenge. We always have the longest cycle times there. We build basements. We do a lot of high density there because of affordability. So we'll continue to have challenges there but hopefully, we'll do better as the market slows there as well.

And then second, in the past, you've talked a lot about the importance of keeping your pricing near to below FHA conforming loan limits. Obviously, you've had a big increase in those limits. Has that helped at all in January? Are you hearing that from consumers or seeing that in terms of applications?

No. It's really not even a factor for us anymore because FHA and conforming loan limits have gotten so high. So now it's just all about where we're positioned against our competitive set. We want to be, as I said earlier, at the bottom to the middle of the bottom of the graph, depending on who we are competing with and really be the affordable offering in the market. So it's just driven by our pricing and our research department that looks at every community every week and tells us where we need to price our inventory to find the ideal pace. But it's no longer really connected to that unless it is; it certainly matters. We want to be below that but we probably want to be well below that these days given how high we are.

Just for visibility, Carl, FHA for the year for us was 15% of our total mortgage pool. Certainly, some people are using FHA but it's so high that a lot of people are just getting conventional loans. They don't need the assistance from FHA; the dollars kind of became a little bit disconnected. It was a 2-year lag to where they needed to be and they came up right when average selling prices started to come down.

Yes. I wanted to ask regarding your land position, how you guys are thinking about what's transpired, I guess, in the last few weeks and your approach to land going forward, if there's going to be opportunities to replace the stuff you guys cancelled at better deals? Or are you just going to hold off? Or how are you guys thinking about the current land environment?

We're definitely going to be cautious and patient here. We're going to get through certainly the spring and sort of re-evaluate what the market looks like, what the long-term prospects look like. We're seeing some opportunity out there. I saw a survey recently that land prices have started to decline modestly, I think, around 5%. I don't think that's enough. We've got to get our land development costs down as well, if things are hard to underwrite. Today’s interest rate environment is the new reality; so we have plenty of land. As you've articulated, we have the ability to maintain our 300 community count trajectory for the next couple of years without really buying anything. So it will be about when it's time to grow from there. We're in some new markets. We clearly want to be active there, but we want to be patient as well. So, I think you're just going to see us be really, really patient. We're definitely going to get through the next couple of quarters to read the tea leaves, kind of evaluate what 2024 and 2025 are going to feel like before we start ramping it up. That being said, we have $850 million sitting in the bank. If opportunities present themselves, we'll certainly go get them.

Yes. Alex, just to clarify, you're hearing from all of our peer builders. A lot of folks are dropping options that don't make sense. We're walking away from land deals. Those land deals still exist. They're just going to be repackaged and sold to the builders at a cheaper price. At some point, there is going to be a jumping point that we're going to enter the market opportunistically, more than having land committee every week and buying land aggressively, but there will be opportunities to buy land at more attractive prices.

Well, we're always learning. I think that we've demonstrated over the last five years that we're probably one of the most agile and proactive organizations. We've been ahead of a lot of the trends. We came out of COVID more aggressively than anybody, grabbing market share. We pivoted our strategy. I think we're playing on the right side of the right part of the market. We have specs. We will continue to be agile. We do this job 24/7. We're paying attention to everything. We have a very aligned, engaged team out there. We talk all the time. We listen to one another, and we're going to continue to collaborate as a team and move quicker and faster than we have before so that we can take advantage of whatever opportunities represent themselves in this market, but also properly manage the risks that are still evident as well. So it's about being agile. It's about being willing to change and innovate constantly, and we have a real strong capability here and we'll continue to invest in that. And that's what we've learned, right? Don't continue to think that everything that was is going to be and just be willing to evolve and adapt. Thank you. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend.

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