Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Fourth Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Jim Zeumer, you may begin your conference.

Great. Thank you, Rob. Good morning and thank you for joining today's call. We look forward to discussing PulteGroup's outstanding fourth quarter earnings for the period ended December 31, 2021. I'm joined on today's call by Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of today's call later. I want to highlight that we will be discussing our reported fourth quarter numbers, as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. Also, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan Marshall. Ryan?

Thanks, Jim, and good morning. It's great to speak with you again and to have this opportunity to review PulteGroup's impressive fourth quarter and full year results. I am extremely proud of what our organization has been able to accomplish. For starters, I want to thank the entire PulteGroup team for the tremendous effort demonstrated throughout 2021, but particularly in the fourth quarter, from sales to procurement and construction, to our financial services team, you clearly showed what a proud and talented group of determined people can achieve. In a minute, Bob will review our fourth quarter results, but I want to highlight a few of our full year numbers to clearly demonstrate just how much success we've realized over the past 12 months. Even with all the challenges the homebuilding industry faced in 2021, from supply chain disruptions and labor shortages to municipal delays and COVID waves, we grew our closings by 17% to almost 29,000 homes, benefiting from the very favorable demand and pricing conditions. We increased homebuilding revenues by an even greater 27% to $13.5 billion. We were then able to fully capitalize on this top line growth by expanding gross margins by 210 basis points to 26.4% and driving a 43% increase in our reported full year earnings of $7.43 per share. Our financial discussions tend to focus on the income statement, but I would also highlight that over the past 12 months, we lowered our debt to capital ratio to a historic low of 21.3%, while raising our return on equity to 28%. I would also highlight that over the course of 2021, we continued our disciplined allocation of capital in alignment with our stated priorities. This allocation included investing over $4 billion in land acquisition and land development, increasing our dividend pay rate per share in 2021 by 17%, retiring $726 million of bonds and repurchasing $900 million of stock, reducing our shares outstanding by approximately 6%. There is a lot to be excited about with regard to PulteGroup's 2021 operating and financial results. In assessing our performance, we fully appreciate that we benefited from a very favorable supply and demand dynamics in the marketplace. On the demand side, we saw a strong desire for homeownership across all markets and buyer groups. At one end, we have maturing millennials driving extraordinary demand for first-time and first-move-up product, while at the other end, we have empty nesters who are downsizing or retiring into their next stage of life. This demand strength drove an increase of 8% in our 2021 net new orders to almost 32,000 homes, including 6,769 orders in the fourth quarter. The reality is that these numbers could have been significantly higher, but COVID and other challenges impacted our availability of lots, labor and materials, which caused us to intentionally slow sales. As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices. We continue to implement these actions in the fourth quarter as we raised prices in effectively all our communities. At the same time, we continue to restrict sales in more than half of our communities. The strong demand experienced in the fourth quarter has continued into January with no signs that higher interest rates are impacting the desire for new homes. As we look forward to the year ahead, we are well-positioned to meet the strong demand. We entered 2022 with twice as many spec homes in the production pipeline compared to last year along with a land pipeline that will allow us to expand our community count throughout this year. We also have all the lots we need for our 2022 deliveries and expect to increase our full year gross margins by upwards of 250 basis points. In other words, we entered 2022 with tremendous momentum. While demand conditions are strong, the supply side of the equation has been extremely challenging with no clear signs as to when things will get better. The limited supply of new and existing homes allowed prices to increase by double digits last year, but labor shortages and significant disruptions in the supply chain are limiting production and extending build cycles. Our suppliers and partners are working hard to provide needed resources, but key products that are under allocation must be ordered months in advance or are simply not available. The ongoing surge in COVID infection rates is impacting our suppliers and is also making it very hard for trades to field crews consistently and expanding their teams is an even bigger challenge. Unfortunately, we expect construction processes to remain difficult through much, if not all, of 2022. In response to these challenges, we continue to implement actions to help ensure we can complete high-quality homes and grow deliveries until supply chain issues are resolved. These actions include increasing spec starts, ordering earlier, narrowing option packages and even warehousing inventory of critical building products. These efforts are time-consuming and we lose some production efficiencies, but for the foreseeable future, they are required to get homes built. We've said in the past that scale, particularly local scale matters and this is certainly the case today. Let me now turn the call over to Bob for a review of our fourth quarter results. Bob?

Thanks, Ryan, and good morning. As part of my review of our fourth quarter performance, I'll discuss our reported results and where appropriate review our results adjusted for specific items in the current or prior year quarter. Along with reviewing the company's fourth quarter results, I will also be providing guidance on key performance metrics for both the first quarter and full year 2022. Looking at the income statement, wholesale revenues in the fourth quarter increased 38% over last year to $4.2 billion. Higher revenues for the period were driven by a 26% increase in closings to 8,611 homes, along with a 10% increase in average sales price to $490,000. The higher ASP in the quarter reflects double-digit pricing gains from all buyer groups, while closings came in slightly above guidance, thanks to the tremendous effort on the part of our homebuilding and financial services teams. Consistent with comments made throughout 2021, favorable supply and demand dynamics for housing supported the strong price appreciation we experienced across all markets and from all buyer groups. The mix of closings in the quarter were a direct alignment with our long-term goals and included 34% from first-time buyers, 42% from move-up buyers, and 24% from active adult buyers. Closings in the fourth quarter last year included 31% first-time, 46% move-up and 23% active adult. Net new orders in the quarter totaled 6,769 homes, which is a decrease of 4% from last year. The decrease in orders reflects a decrease in community count as well as the ongoing actions to manage sales to better align the pace of our sales and production that Ryan mentioned. Our average community count in the quarter was 785, which is down 7% from the prior year. Buyer demand was strong and order volumes were fairly consistent across all three months of the quarter as we didn't experience the typical seasonal drop-off in order volumes as we moved through the quarter. I would note that we continue to experience this strength in demand through January. By buyer group, orders by first-time buyers increased 12% to 2,207 homes, while orders by move-up and active adult buyers both declined 10% to 2,812 homes and 1,750 homes, respectively. The primary drivers of the lower order rates among the move-up and active adult buyers was having fewer communities and our decision to restrict sales. We ended the fourth quarter with a large backlog of sold homes, which provides a strong base of production heading into the New Year. On a unit basis, our backlog at year-end was 18,003 homes, which is an increase of 19% over last year. Backlog value at year-end was $9.9 billion, which is an increase of 45% over 2020. Even with the well-documented challenges within the supply chain, I can say that thanks to a lot of hard work by our teams, trades, and suppliers, we're getting homes into production. As a result, we ended the year with 18,423 homes under construction, which is up almost 50% over last year. I'm also pleased to report that we've been able to increase our spec production as 23% of homes under construction are spec. This is up from 17% in the third quarter and it's getting us closer to our target of having between 25% and 30% spec. While it's great to see homes getting into production, it's important to note that the overwhelming majority of these units are in the early stages of construction. More specifically, 31% of our production pipeline is at the initial start stage with another 44% of the homes only at the framing stage. At the other end of the production pipeline, we have only 411 finished homes. This figure includes both sold and spec units. Given the number of homes under production and equally important, their stage of construction, we currently expect to deliver between 5,600 and 6,000 homes in the first quarter of 2022. In addition to the challenging production environment Ryan discussed, our Q1 delivery guide reflects the impact of limited finished spec inventory and the longer construction cycle times we're experiencing. For the full year 2022, we expect to deliver 31,000 homes. This estimate assumes no meaningful change in the state of the supply chain and in turn, our current cycle times. If the favorable demand conditions allow us to sell in an even higher year-over-year growth rate, we'll have to see if the supply of materials and labor will be equally supportive. Based on what occurred in 2021, we want to be confident we can deliver a high-quality and complete home at closing. If the supply of labor and materials does not allow for increased production, we'll continue to emphasize price over pace, restrict sales as needed as we focus on driving the best returns within each community. As we move through 2022, we are well-positioned to meet buyer demand, given our expectations for sequential increases in our community count throughout the year. For the coming four quarters, we project our average community count to be 790 in Q1, 815 in Q2, 840 in Q3, and 870 in Q4. Given the land investments we've made, we expect this trend to continue and see further community count growth in 2023. As mentioned, strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price in backlog increasing by 22% compared to last year. Given the price of homes in backlog and the mix of homes we anticipate closing, we expect our average sales price to be between $500,000 and $510,000 in the first quarter. Our average sales price should move higher as we move through the year, and we currently expect our full year average sales price to be approximately $515,000. As always, the ultimate mix of deliveries can influence the average sales price we realized in any given quarter. Driven by the strong price appreciation achieved throughout our markets, our homebuilding gross margin in the fourth quarter increased to 180 basis points over last year and 30 basis points sequentially to 26.8%. With 18,000 homes in backlog, we have good visibility on near-term gross margins, but we also know that input costs are moving higher and that we expect to continue to incur what are now commonly called scramble costs, as we work to ensure product and labor availability. Based on what we can see today, we expect gross margin to be in the range of 28.5% to 29% in the first quarter and for the full year. This guide takes into consideration our current construction costs, as well as the recent run-up in lumber prices. Based on these factors, we anticipate being towards the bottom end of the range in the first quarter, but towards the higher end of the range by the end of the year. Speaking of inflation, we are closely monitoring increases that are impacting the cost of labor and materials. As a result, we currently expect house cost inflation exclusive of land costs of 6% to 8% for 2022. More than ever, there are a lot of moving pieces, so we'll update our gross margin guidance if needed as we move through the year. For the fourth quarter, our reported SG&A expense of $344 million or 8.2% of home sale revenues includes a net pre-tax benefit of $23 million from adjustments to insurance-related reserves recorded in the fourth quarter. Exclusive of this benefit, our adjusted SG&A expense was $367 million or 8.7% of home sale revenues. In the comparable prior year period, our reported SG&A expense was $280 million or 9.1% of wholesale revenues, excluding a $16 million net pre-tax benefit from adjustments to insurance-related reserves recorded in last year's fourth quarter, our adjusted SG&A expense was $296 million or 9.7% of home sale revenues. Looking at 2022 overheads, we currently expect SG&A expense in the first quarter to be in the range of 10.7% to 10.9%, which would be flat to down slightly from last year. For the full year, we expect SG&A expense to decrease as a percentage of revenues to be in the range of 9.3% to 9.5% of home sale revenues as we realize incremental overhead leverage on the business. In the fourth quarter, our financial services operations reported pre-tax income of $55 million. Prior year reported pre-tax income of $43 million included a $22 million pre-tax charge for adjustments to our mortgage origination reserves. During the fourth quarter, financial services pre-tax income was driven by increased loan production consistent with the growth in our homebuilding operations, offset by lower profitability per loan resulting from a more competitive market condition. Mortgage capture rate for the quarter was 85%, which is down slightly from last year's 86%. Our reported tax expense for the fourth quarter was $193 million, which represents an effective tax rate of 22.5%. Taxes in the fourth quarter included a tax benefit of $9 million, resulting from deferred tax valuation allowance adjustments recorded in the period. For 2022, we expect our tax rate to increase to 25%, driven by changes in certain underlying state tax rates and the fact that legislation to extend the energy tax credits beyond 2021 has not been passed. For the fourth quarter, we reported net income of $663 million or $2.61 per share and adjusted net income of $637 million or $2.51 per share. Prior year fourth quarter reported net income was $438 million or $1.62 per share with adjusted net income of $415 million or $1.53 per share. PulteGroup's earnings per share continue to benefit from our share repurchase program. In the fourth quarter, we repurchased 5.6 million common shares at a total cost of $283 million or an average price of $50.11 per share. For all of 2021, we repurchased 17.7 million shares, driving a 6% reduction in our shares outstanding at an average cost of $50.80 per share. For the year, we returned $897 million to shareholders through share repurchases, plus an additional $148 million of dividends. This brings the five-year total of share repurchases and dividends to approximately $3.2 billion. Having reduced our common shares outstanding by more than one-third over the past eight years, returning funds to shareholders has been a significant part of our capital allocation strategy. We fully expect such systematic repurchases to continue in the future, so we're extremely pleased with the Board approving a $1 billion increase to our repurchase authorization. At the end of 2021, we had $458 million remaining on the existing programs. Given our improving financial results and cash flows even after returning over $1 billion to shareholders, investing over $4 billion in our business, paying down $726 million of bonds during the year, we ended the year with $1.8 billion of cash. Our debt-to-total capital ratio at year-end was 21.3%, which is a decrease of 820 basis points from last year. Adjusting for the cash on our balance sheet, our net debt to capital ratio was 2.5%. As part of our overall capital allocation strategy, we have routinely talked about maintaining our gross debt-to-capital ratio in the range of 30% to 40%. As noted in today's press release, we are updating these numbers to better reflect how our business operates today. Over the past several years, we have driven material and sustained gains in our operating performance and capital efficiency. These, in turn, have dramatically increased the cash flows we expect to generate. Taken in combination, we now believe we can grow our business and fund its operations while maintaining our gross debt-to-capital ratio in the range of 20% to 30%. This represents confirmation that the changes we've driven in the business continue to support long-term growth. To further demonstrate this point, in the fourth quarter, we invested $1.4 billion of land acquisition and development. This brings our total land spend for 2021 to $4.2 billion. On paper, this is an increase of almost 50% over 2020 land spend. But I would remind you that we suspended land investment for almost six months when the pandemic first hit in 2020, so some of the 2021 spend was simply deferred for the prior year. We currently expect to increase our land investment in 2022 to between $4.5 billion and $5 billion. Given the vast majority of land we acquire is undeveloped, more than half of our spend in 2022 will be from the development of existing land assets. Supported by the higher land spend, we ended 2021 with 228,000 lots under control, of which 109,000 were owned and 119,000 were controlled through options. On a year-over-year basis, we ended 2021 with an incremental 30,000 lots under auction and remain focused on advancing our land life strategy going forward. I would note that included within our land position are approximately 1,400 lots that were approved under our strategic relationship with Invitation Homes and that we remain on track with our five-year plan of building 7,500 homes under this program with first closings expected in 2023. Now let me turn the call back to Ryan.

Thanks, Bob. For a number of reasons, we remain constructive on the outlook for the housing industry. Earlier, I spoke about the large demographic trends, which are aligned to support buyer demand over the long-term. In the near-term, most economic indicators point to an ongoing expansion of the US economy, which should keep the job market strong and increase wages even further. We recognize that COVID and its various mutations are obviously a wildcard, but we hope that this latest surge may have already peaked and that conditions will begin to improve going forward. The impacts from COVID that don't appear to be waning are the desire for single-family living and the ability to work from home indefinitely. We are certainly mindful of rising interest rates and the potential risk through affordability and overall demand and are prepared to respond appropriately should conditions change. Still, given a strong economy, high employment and rising wages, this is a market environment in which we can sell homes. Before opening the call to questions, I do want to highlight an initiative that we've launched internally in 2020, but which you may begin hearing more about this year. Called our Hope to Home program, this is our effort to make available for sale more affordable housing and the possibility of homeownership to individuals who might not otherwise get the chance. We all know the benefits that homeownership can afford people over time, but we also can appreciate that not everyone has the same opportunity to access this path. We are beginning to pilot Hope to Home in a few communities and believe it's a program that could ultimately result in the sale of a couple of hundred homes a year. Hope to Home is a for-sale program designed to complement but run independently of our highly successful Build-to-Honor program through which we donate mortgage-free homes to wounded veterans. Started in 2013, I'm extremely proud to say that Build to Honor will award its 75th mortgage-free home later this year. Now let me close as I begin by thanking our entire organization, as well as our suppliers and trade partners. You continue to prove yourselves to be an outstanding group of people focused on serving our customers and supporting each other.

Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Rob, if you'll explain the process, we'll get started with Q&A.

And your first question comes from Mike Dahl from RBC Capital Markets. Your line is open.

Good morning. Nice results. Thanks for taking my questions.

Hi, Mike.

Hi, Mike.

First question, just on the gross margin guide. It's great to see it up that much for the full year. It looks like it's up, but it's relatively stable through the year. Can you talk about some of the moving pieces? I mean, obviously, you've had some good sequential pricing. You talked about the full year for cost inflation. But can you talk about the moving pieces throughout the year that keep that guidance a little bit flatter through the year and maybe there's a difference in inflation per se versus the second half however you want to kind of frame that?

Sure, Mike. Inflation is certainly a reality, and one notable factor is lumber, which had initially decreased but is now seeing prices rise again. This has impacted the second half of the year. As mentioned in the prepared remarks, we're anticipating a 6% to 8% increase in input costs for homes. Additionally, every new lot tends to come with slightly higher costs compared to previous ones, consistent with trends over the past few years in a rising market. Despite these challenges, we expect our margins to improve throughout the year. As highlighted, we anticipate being at the lower end of our range in the first quarter and moving towards the higher end as the year progresses. Even with these cost pressures, we believe we can achieve sufficient pricing to offset some of those increases. Margins in the range of 28% to 29%, specifically around 28.5% to 29%, are quite strong.

Sure. Okay. Thanks. Second question is around cash flow and capital allocation. I mean, it's nice to see the new details this morning. I guess, if we take into account your land investment, it will be up a little, but clearly your guide around income drivers are also up year-on-year. So, it seems like all is equal, cash from ops or free cash flow will be higher in 2022 than 2021. Since you're already in that 20% range or the lower end of that 20% range on gross debt to cap, should we think about effectively all of cash flow in the immediate term is going to be given back to shareholders via buybacks and dividends?

Yeah, Mike, it's an interesting question. And the simple answer is I don't think so. We've long said that we've got sort of a priority cadence, invest in the business, pay our dividend, return excess to shareholders. And there are a lot of things that we could do with that money. So, I wouldn't want to say it would be restricted to any one thing. The land market, if it's attractive, you could see us investing. We've always told folks we look at M&A, so some money could end up there. So, the good news is, and you've heard this from us before, we're in a position where we have choices to make. You can see with the amount of money that we used to buy back stock in this quarter at $283 million, that's a step up from what we had done, brought the full year to almost $1 billion. The Board increased the authorization by $1 billion. We put that out this morning. So, if you add that to the $400 plus million we had at the end of the year, we've got a lot of capacity there, but we'll look at everything. And so, I wouldn't want to pigeonhole ourselves in the same, yet, it's all going back to shareholders. We'll use the same screen we always do in the business; it is going to be our primary driver as long as we can see an opportunity for higher return off of it.

Your next question comes from the line of Ivy Zelman from Zelman & Associates. Your line is open.

Thank you, and congratulations on a great year, guys.

Thanks Ivy.

Thanks Ivy.

Maybe, Ryan, you can help us a little bit just appreciating what you just said about with each asset you deliver, slightly higher costs. When you think about pre-COVID and your underwriting land, what are you underwriting in terms of absorption? And what are you underwriting what you're buying at, let's say, today, that might not deliver until 2023, 2024? Just to give us some perspective relative to the normal trend line. Let's start there.

Yeah, Ivy, thanks for the question. And I would tell you that I think one of the things that has enabled us to deliver the results that we're delivering is a very consistent land underwriting screen that candidly hasn't changed through time. We're certainly underwriting at current market conditions, and we kind of have to do that in order to remain competitive. So the absorptions that we're underwriting communities at today are certainly a little bit higher than probably what we were underwriting land acquisitions at, say, three years ago. That being said, we're cognizant of the fact that absorptions over the last 12 to 15 months have been slightly higher than normal. And as I think some have said from time to time, trees don't grow to the sky. So we wouldn't necessarily expect that to continue in perpetuity. The thing that I would highlight, Ivy, is some of the things I mentioned in my prepared remarks. We think some of the structural changes that have occurred in buyer preferences for single-family living and perpetual work from home will continue to benefit this industry. We're also not in an oversupply environment and given some of the supply chain challenges that we've highlighted, we don't anticipate that changing anytime in the near future either. And then probably what I'd conclude on, the most important thing that I think we've structurally done as an organization is to integrate more optionality into our land pipeline. We're at north of 52% and over 119,000 lots that are controlled via option, which I think gives us tremendous flexibility should there be a change in market conditions.

No, that's really helpful. And maybe, Bob, in the future you can send us and follow-up sort of absorptions historically. I know we've embedded our data. But with mix shift, it's I don't know that it's a little bit higher, Ryan. Our market conditions right now are back to absorption per community just for the public companies is back to where it was during the great financial boom peak on a trend line basis, and that's even with restricting sales. But the cost inflation in land has been substantial. So maybe you can give us some perspective on how much of land that you're acquiring today, undeveloped draw land relative to what maybe you were thinking about from a baseline in 2019? And what are you paying if you are on finished lots, even if you're optioning, what is the outlook cost embedded in those acquisitions? And I'm done and thank you.

Yes, Ivy, that’s a tough question to answer in a straightforward way. No two parcels of land are identical. The market is quite efficient, and as Ryan pointed out, it’s a competitive environment, so we price our bids based on market conditions. We consider our construction costs and the potential returns from each asset. You’ll notice varying price increases in land across different regions of the country and among various buyer groups. All these factors make it difficult to simply state that pricing has increased by a specific percentage. That said, prices are indeed rising, which I noted as part of our margin guidance. I hope that answers your question.

Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.

Hi, good morning.

Good morning.

I was wondering if you could talk about kind of credit metrics for your average buyer or your buyer types in terms of FICO or LTV. And then I think you indicated that rising rates you haven't really seen an impact to date? But I'm just wondering, as you look at previous hiking cycles, what you would anticipate in terms of behavior between your different buyer types or trading down market or maybe to more affordable offerings? Any comments you give?

Sure, Anthony. Good morning, and thank you for the question. We have clear visibility into the overall credit metrics from the loans processed through our mortgage operation, and these metrics have largely remained stable for the past decade. The FICO scores we observe are over 750, indicating very strong credit. Additionally, the loan-to-value ratios are also very robust. Therefore, the credit metrics from the buyers suggest, and perhaps reinforce, the financial stability we've noticed in personal balance sheets. Overall, there isn't a significant concern on that front. Bob, do you have anything to add regarding the credit metrics we've observed so far?

Only that interestingly enough, even among our first-time buyers, if you look at them relative to the kind of the broader universe, we've got a higher mix of FICO scores even there. So interestingly, in a rising rate environment, history as a guide, the people we're selling to have that slightly higher price point have a little bit healthier balance sheet that folks that are just at the edge of qualifying.

As for the rising rates, we noted in our remarks that we have not seen an impact on demand. A significant reason for this is our restriction of sales and the fact that demand exceeds supply. We are closely watching the effects of further increases in the 30-year mortgage on affordability. However, as we've stated for several years, we believe that housing can perform well in a rising rate environment as long as the overall economy remains strong, which it currently is. Unemployment is at historically low levels, we are experiencing real wage growth, and consumer confidence is high. These factors will likely support the industry, even with slightly higher rates. Nonetheless, even with some increases in the 30-year mortgage, rates will still be at historically low levels, which we find encouraging.

Okay. That's very helpful. And then in your comments, I think you stated you're not expecting supply chain size to ease over the course of the year. You talked about lumber. Can you talk about any other categories that are, I don't know, maybe getting worse versus getting better? And then there was a comment on potentially warehousing certain building products. And to the extent that you can, I don't know if you can talk about sort of the magnitude of that or what that looks like?

We don't expect conditions to improve throughout 2022. We anticipate continuing shortages across the board, primarily due to delays or allocations imposed on us and the entire industry from key suppliers. There are significant bottlenecks in workforce availability caused by COVID, which has led some factories to operate below their full capacity. Additionally, there is decreased transportation availability because of a shortage of truck drivers, which has been worsened by COVID. These challenges create a ripple effect throughout the entire supply chain. While we have noticed some positive signs, we've also experienced fluctuations where certain supplies improve and then revert back to previous delays. Therefore, we do not expect to fully resolve our supply chain issues in 2022. Specific items facing challenges include roof trusses, appliances, certain types of siding, and paint. Additionally, cabinets are facing production difficulties due to historically high demand and labor shortages in the factories that produce them. These are some insights regarding our supply chain challenges.

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

Hi, thanks. Good morning, everyone. I want to revisit an earlier question regarding normalizing gross margins as you continue to acquire land and considering that you might not see significant home price appreciation in the next few years. Looking back at 2017 and 2018, you achieved gross margins of 23% to 24%, which was among the highest in the broader homebuilding sector. If home price appreciation stabilizes, do you foresee a scenario in the next two to three years where, based on your current underwriting, you could return to those levels? Even with potential mean reversion, I would assume you would still be above the average of the sector. Have there been any changes in how you're approaching land acquisition, your cost structure with increased scale, or improvements in construction efforts that might allow for a trend of slightly higher gross margins over time?

Hey Mike, it's Ryan, good morning. Thanks for the question. I want to reflect on a decade ago when we developed our strategy focused on making investments to achieve industry-leading returns. The way we've invested in land, managed debt, and allocated capital towards share repurchases and dividends has all been directed at delivering top-tier returns. Additionally, we've completely restructured our land ownership to favor options, which also supports this aim. Margins play a crucial role in this strategy, and we've consistently aimed for leading margins. I want to highlight that we're achieving gross margins of 28.5% to 29% for the remainder of 2022, which, as Bob mentioned, is quite strong. We’re not providing visibility beyond 2022, as it’s a bit early for that. However, you can see that we've maintained a high return on invested capital, which will remain our focus. This past year, we concluded with return on equity above 28%. We believe our operating model can perform well across various market cycles, and this particular cycle is certainly favorable.

Great. No, thank you for that, Ryan. I guess, secondly, just wanted to focus in on the community count growth. A nice trajectory that you've laid out for 2022. Based on the land book that you have, how should we think about community count growth and obviously, past 2022 and obviously not trying to get too granular and beyond what you're prepared to say in terms of formal guidance. But further this has been an area where, as I'm sure you know, people have expressed concerns around some of the growth on the community count side. Are we kind of turning a corner here where we could see perhaps a little bit more consistent growth going forward in this metric? Any thoughts around where we would go past the 870 at the end of 2022 would be pretty helpful for people?

Yes, Mike, I appreciate the question. It's Bob. We're not going to give you a guide for 2023. We did want to give a level of granularity more than we have for 2022 to show the sequencing that shows growth each quarter sequentially and ultimately, to a higher point at the end of the year. And in our prepared remarks, I actually said based on spending, we expect that to continue. Like every year, we'll give you a guide for 2023 as we approach 2023.

Mike, the only thing I'd add into that is I think if you look at the trend of our land spend over the last three years, we've been a consistent investor in our land portfolio. And with 225,000 lots under control, those all turn into active communities. So we're pleased with what's coming into the pipeline.

Your next question comes from the line of Carl Reichardt from BTIG. Your line is open.

Thanks, everybody.

Hi, Carl.

One for you, Ryan. Hey, just on pricing strategy headed into the spring, I mean you got more demand than you can serve, costs are going up, but rates could come up and we know there's going to be more competition across the board from other builders and you've got more specs. So are you approaching pricing this spring, would you say, more conservatively than you have in past springs? And I know it's not necessarily a corporate and in Atlanta type of decision, perhaps it's more local. But maybe you can talk a little bit about how you're thinking about pricing strategy given the crosscurrents?

Yes. Carl, it is more than local. It's probably hyper-local. All of our pricing decisions are made on a community-by-community basis. But that's a company philosophy. We've got very regimented pricing discipline in the way that we break down what the competitive set is, both from a resale and a new environment, both what's on the ground as well as what we see coming into the pipeline over the next six to 12 months. So I think the tools, the methodology, the proprietary pricing algorithms that we have, we think it served us very well, and we've gotten very good results from that. I think, Carl, we always try to be prudent in what we do and never get too far over our skis. I think, the industry has seen over the years, if you push things too far, the consumer will be pretty quick to tell you that you've gone too far and it will shut down. So in the face of potentially some more inventory coming online with some higher rates, we're going to continue to run our playbook but take into consideration all the data that's available.

All right. Thank you, Ryan. And then, just a follow up on Ivy's question. If you look at the homes you plan to deliver in 2022, I'm assuming that effectively none of them are on lots that you bought post, say, the middle of 2020, so post-pandemic land. When would you start to see the majority of your delivery volume be delivered on land you bought post-pandemic or contracted for post-pandemic?

We're essentially cycling through the majority of the land that we purchase over about three years. When we acquire land, we typically secure contracts for approximately three years' worth. This means that each year, one-third of the land is from the current inventory, which ensures a continual mix of older land being replaced with new land. This prevents any sudden drop in our overall land holds. Additionally, the development timelines are longer compared to historical norms. From the time we buy the land, it generally takes around 12 months for it to be fully developed and ready for home sales. In summary, we consistently have new land coming in while older land cycles out, and this is all accounted for in our guidance for 2022.

Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.

Thank you very much, everyone. The results are impressive, and I know there’s enthusiasm about the guidance, but I would like to discuss a few aspects where your guidance might reflect a cautious approach. Specifically, this concerns ASP volume and how volume affects margin. Looking at your ASP, it looks like you’ve guided for the full year around 515. However, your order ASP has been about 556 for the last two quarters. If that's accurate, 515 seems low for the closings ASP. Regarding your volume, you mentioned expecting 31,000 closings, but I recall you started with over 34,000 in fiscal 2021 and around 8,200 in the fourth quarter. While I understand cycle times are a challenge, your actual performance and what you've initiated suggest there might be room for improvement in cycle times, especially given the number of starts in 4Q. If closings end up exceeding your guidance, could that lead to some advantages in SG&A and scrambling costs? So, in general, my question revolves around that. Specifically, if you surpass your guidance on closings, what additional SG&A should we consider for those increased revenues?

Stephen, good morning. Thank you for your question. I believe everything is interconnected, so I'll try to connect the dots and may ask Bob for assistance at some point. Regarding the average selling price, Stephen, we have intentionally started more speculative builds, primarily in our lower-priced communities, particularly in our Centex first-time buyer areas where the prices are significantly lower. These will be sold as specs later in the cycle, and we have accounted for this in our average selling price guidance. Regarding your observation about orders being at a higher price point recently, this has been mainly due to an increase in sales from our Del Webb and Pulte branded communities, which are at higher price points. It's a valid question, and I understand your reasoning, but we have considered our anticipated brand mix as we progress through the year. Concerning the closing guidance, Stephen, we've incorporated what we have started, and we are very happy with the amount of inventory we have been able to get in place for sale and as spec inventory. We've revised our delivery guidance based on our current cycle time and our expectations for the supply chain this year. I wouldn’t characterize that guidance as overly conservative. Looking back at 2022, it was one of the most challenging years in homebuilding we've experienced. Therefore, we are committed to our guidance of 31,000 units. If conditions improve, we would all be pleased.

Stephen, we've previously discussed the SG&A question. If you consider increasing volume, it positively affects our overhead efficiency. I hesitate to assign a specific percentage since it varies with the volume in question. However, having more volume would give us leverage on central overheads. Selling costs remain unchanged regardless of volume. Regarding land supply, we've consistently targeted a three-year ownership and three-year option since Ryan became CEO. Using a 12-month trailing volume, we might be slightly ahead, but looking ahead, it aligns better. The future of optionality is uncertain, but we want it to be a significant part of our business if it creates value, ensuring it's economically viable and presents genuine market risk. We won't pursue optionality just for its own sake; we need some market protection to allow transactions if conditions shift. We have consistently stated that whether the developer base can sustain a lower supply level is uncertain. Historically, there have been times, especially over the past 40 to 50 years, when developers were active enough that builders could source lots as needed. Unfortunately, that developer base hasn't rebounded since the downturn in 2007, 2008, and 2009. If it does, we would certainly want to participate.

Your next question comes from the line of John Lovallo from UBS. Your line is open.

Good morning, guys. Thank you for taking my question. First one, maybe starting at a high level. We've been hearing that demand and foot traffic may have actually inflected positively in January. Just curious if that's consistent with what you guys have seen?

Yes, we are seeing strong interest from buyers, which we believe is driven by the ongoing demand for single-family living and the work-from-home trends. It's important to note that not all traffic is on foot. Our digital selling tools have significantly advanced in the last 18 months, which is overall beneficial for the business.

Okay. That's helpful. And then maybe drilling down just on the West region, in particular, deliveries declined slightly year-over-year versus pretty big gains in most other regions. Was this just a timing-related issue or is there something else to be thinking about there?

Yes. It's really just community turnover, nothing to note, honestly.

Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.

Hey, good morning, everyone and thanks for taking my questions. Just I had a couple of follow-ups from prior questions. But on some of the materials and labor supply chain challenges and what it means to cycle times? I'm just hoping to get some clarity. By the end of 2021, call it, November, December, have you actually started to see cycle times stabilize? And the reason I'm asking is outside of the recent flare with Omicron, what we've been hearing that builders largely become more efficient in working with the whack-a-mole environment and some had stabilized cycle times?

I believe that, like any game, practice leads to improvement, and whack-a-mole is no exception. In our business, we've noticed increased cycle times in the first half of the overall production process, particularly in the frame and window stages, which are largely affected by trust availability and framing labor. However, we've managed to recover some time in the latter part of the schedule. Although there have been some fluctuations, the overall trend has been an increase in cycle time. We expect this situation to remain unchanged in 2022, and this has been taken into account in our guidance.

Thanks for the information. You mentioned improvements in your new home inventory in 2022, despite the constraints. In today's market, I believe orders largely depend on inventory and production capabilities. Could you provide an update on your expectations for starts in the first quarter? Also, do you think your first quarter orders could show a positive year-over-year change, given the tough comparison based on your internal inventory capabilities?

We don’t provide guidance on those matters, so I’ll refrain from offering further insights. However, we are very optimistic about our production pipeline. Over the past nine months, we have shown a consistent start cadence, managing to get volume into the ground, even if it takes longer to progress through the production cycle. This has been considered in our delivery guidance for the year. Additionally, I want to emphasize that we have doubled our spec inventory, which now exceeds 4,000 units, and this will certainly help us as we move through 2022.

And we have reached our allotted time for questions. Mr. Zeumer, I turn the call back over to you for some closing remarks.

Great. Thank you, Rob. Appreciate everybody's time this morning. We'll certainly be available over the course of the day for additional questions. Have a good rest of your day, and look forward to speaking with you on our next call. Thanks, everybody.

This concludes today's conference call. Thank you for your participation. You may now disconnect.