Ladies and gentlemen, hello and welcome to the Taylor Morrison Home Corp. 4Q 2023 Earnings Conference Call and Webcast. My name is Maxine and I'll be coordinating the call today. I will now hand you over to Mackenzie Aron, Vice President of Investor Relations to begin. Mackenzie, please go ahead when you are ready.

Thank you and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session will include forward-looking statements. These statements are subject to the Safe Harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. I'm pleased to share the highlights of our team's strong performance in 2023, as well as an update on the market and our strategic priorities as we head into the New Year. After my remarks, Erik will review our healthy land portfolio, while Curt will review our better-than-expected fourth quarter financial results and guidance metrics. Our team's strong fourth quarter execution wrapped up another tremendous year for Taylor Morrison. In total, we delivered 11,495 homes to generate $7.2 billion of homebuilding revenue at a healthy adjusted home closings gross margin of 24%, driving adjusted earnings of $7.54 per diluted share. Our earnings combined with $889 million of share repurchases over the last four years drove our book value per share to a new high of $49, which was up 15% from a year ago and 53% from two years ago. While we face significant headwinds from rising interest rates, economic uncertainty, and global unrest, our business displayed the resiliency we have strategically positioned it for following years of intentional growth, transformative M&A, integrations, and a tireless commitment to streamlining and optimizing our operational abilities. As I sit here today, I'm incredibly proud of the results we delivered in 2023, which exceeded our guidance and even more excited when I look ahead to 2024 and 2025, as we expect to continue demonstrating the earnings power of our balanced and disciplined operating platform. We strongly believe that our diversification across buyer groups ranging from entry-level, move-up, and resort lifestyle combined with our emphasis on high-quality community locations are critical differentiators that enhance our bottom line potential, growth opportunities, and risk mitigation throughout housing's inevitable ebbs and flows, as demonstrated with our results through a volatile fourth quarter. Our top priority as we move ahead is reaccelerating our growth now that we believe that we have firmly established the operational efficiency required for outsized market share gains. In 2024, we expect to deliver at least 12,000 home closings followed by approximately 10% growth in 2025 and thereafter. Our $1.8 billion land investment in 2023 was focused on supporting these growth aspirations and with one of the strongest balance sheets in our company's history we are well-positioned to continue investing with an accretive disciplined approach in 2024 and with an initial planned land spend in the range of $2.3 billion to $2.5 billion. Critically, our land investment approach will remain grounded in a returns-driven framework that balances capital efficiency with the associated cost of capital as we look to drive long-term performance. To achieve these goals we are fortunate to have the strong land development expertise that is necessary for investing in larger, more efficient self-developed communities that are particularly well suited for our product and consumer portfolio. This strength is evident in a shift in our acquisitions away from expensive finished lots often in restrictive master-planned communities by partnering with land sellers for larger self-developed parcels that offer greater margin and pace opportunities. For example, finished lots as a percentage of our total acquisitions have declined to just 12% over the last two years from 35% several years ago, while our underwritten monthly sales pace expectations have increased by about 30% in recent years as average community sizes have also increased by approximately 50%. While this is a modest headwind to the absolute level of communities, we believe this evolution towards larger more efficient outlets is an important driver of our long-term returns. It also limits our exposure to the limited capacity of third-party land developers and improves our long-term planning visibility. These strategic shifts in our land investment decisions underpin our confidence in our annual monthly sales pace target in the low three range as compared to our historical average run rate in the low to mid-2s. Following the sales pace of 2.8 per month in 2023, I am pleased that we expect to achieve this targeted low three sales pace goal in 2024 based on our mix of communities and the strength of the underlying market. On the operational front, we are focused on continuing to fully leverage our scale and streamline our portfolio to reduce costs, support growth, and increase asset efficiency. This includes ongoing refinement of our product and floorplan library, utilization of our Canvas option packages, and sales marketing and back-office centralization efforts. Each of these areas of focus improve our ability to scale our business cost-effectively, offset ongoing cost inflation, and deliver improved affordability and product for our homebuyers. Meanwhile, our innovative digital sales tools also continue to gain traction with outsized sales conversion rates nearing 50%. Specific to the fourth quarter, our net sales orders increased 30% year-over-year with strong acceleration in December that defined typical seasonal slowness into year-end and partially offset the moderation we experienced earlier in the quarter alongside higher interest rates. Our balanced mix of to-be-built and spec homes including a 40% year-over-year increase in available inventory at quarter-end meets demand among all consumer types. The healthy trends we experienced as the quarter progressed allowed us to raise base pricing in nearly 60% of communities as our teams are focused on balancing price, incentives, and pace to achieve desired sales goals and community performance. I am pleased that the healthy momentum continued into January and thus far in February with sales, traffic, and reservations all trending positively as the spring selling season recently kicked off. In fact, in January alone, we saw the most online home reservations in a single month with the highest monthly sales contribution since March of 2021. These numbers continue to prove that consumers are eager to engage with us in new and different ways that are tailored to their needs and provide pricing transparency, convenience, and flexibility in their home shopping journey. When I look at our online sales success and the breadth of our sales strength, it is clear that demand for new construction remains solid with limited supply of inventory across all price points and favorable employment and demographic trends continuing to drive activity. By consumer group, our fourth quarter net sales orders were comprised of our move-up category at 42%, our entry-level segment at 34%, and resort lifestyle at 24%. Sales across each of these groups were up strongly from a year ago, with our entry-level segment recovering most strongly on a year-over-year basis. However, on a sequential basis, our resort lifestyle business performed exceptionally well, in fact, typical seasonal slowing as the only segment with quarter-over-quarter sales growth, displaying the strength that we expect of those consumers amid interest rate volatility. One of the key factors driving our success is the financial strength of our targeted consumer sets. Among buyers financed by Taylor Morrison Home Funding, credit metrics in the fourth quarter remained excellent with an average credit score of 751, average down payment of 24%, and average household income of nearly $180,000. These stats are especially impressive considering that 53% of these buyers were millennials and another 4% were Gen Z. On the other end of the buyer spectrum, a vast majority of our resort lifestyle consumers utilize all cash for their home purchase. As a result, our use of mortgage incentives is heavily weighted to our entry-level communities where first-time buyers are most sensitive to affordability constraints. In fact, of the 28% of our fourth quarter closings that took advantage of a mortgage forward commitment or similar interest rate structure, an outsized 50% were first-time buyers. In addition to these consumer benefits, the diversification of our platform extends to production advantages, given our ability to capture both high-margin to-be-built sales along with highly efficient spec construction. Our second move-up and resort lifestyle communities operate largely as to-be-built businesses, which generate high-margin design center and lot premium revenue that exceeded $100,000 per home in the fourth quarter and helped generate superior gross margins several hundred basis points higher than our entry-level business. Meanwhile, our entry-level and first move-up buyers are served primarily with spec home offerings providing important protection efficiencies to each consumer group's needs and preferences. In the fourth quarter, approximately 56% of our sales were for spec homes similar to the prior three quarters but down slightly from the low 60% range in 2022. To wrap up, the diversification of our business and long-standing emphasis on quality locations in core submarkets, provide important strategic advantages that we believe position us exceptionally well going forward. With a concentrated focus on outsized growth in the years ahead, we have never been better equipped operationally to take advantage of the opportunities across our price points and geographies to serve our customers and create value for all of our stakeholders. With that, let me now turn the call to Erik to review our land portfolio.

Thanks, Sheryl, and good morning. To help provide greater clarity into our lot position, we have adjusted our methodology for calculating owned and controlled lots. Specific to owned lots, we have excluded lots that have begun vertical construction. Those lots are defined separately as homes in inventory which was 7,867 homes at quarter end. With regard to controlled lots, we have expanded our definition to include those lots under contract with an earnest money deposit that have not yet been fully formally approved by our investment committee to offer a more complete look at our pipeline. We believe that these changes better reflect the intended use of such metrics to evaluate our balance sheet and the capital efficiency of our land portfolio and improve comparability to some of our peers. Using this new methodology, our owned and controlled lot inventory was approximately 72,000 homebuilding lots in the fourth quarter, down from 75,000 lots at the end of both 2022 and 2021. Based on trailing 12-month closings, this represented 6.3 years of total supply, up from 5.9 years in the fourth quarter of 2022 and 5.5 years in the fourth quarter of 2021. Our supply of owned lots equaled three years as compared to 2.9 years in the fourth quarter of 2022 and 2.8 years in the fourth quarter of 2021. Lots controlled via various structures and vehicles represented 53% of our total supply. This was up from an in-kind 51% a year ago and 49% two years ago as we have successfully increased our asset-light or investment approach to enhance long-term expected returns and risk mitigation. The specific vehicles and structures that are employed to achieve this off-balance sheet control of pipeline land include the targeted use of joint ventures with homebuilders, seller notes and financing, option takedowns, and land banking arrangements. While each of these offer varied risk, return, and cost trade-offs, we seek to match each deal with the optimal tool. As Sheryl previously alluded to, over time we have pivoted from a greater reliance upon finished lots being delivered through master plan developers to a heavy balance of raw self-developed acquisitions. As an illustrative example of the margin impact associated with this pivot, I would share that the expected margin differential among finished lot deals underwritten in 2023 as compared with raw land deals was approximately 300 basis points. While finished lot deals have a role in our portfolio, we have found that self-developed communities provide greater optionality with regard to employing financing tools, improved control over lot deliveries, and the noted margin enhancements of the business. In the fourth quarter, we invested $313 million in homebuilding land acquisition and $224 million in the development of existing assets for a total of $537 million. For the full year, we invested a total of approximately $1.8 billion with a nearly equal split between acquisitions and development at 51% and 49%, respectively. This was up from $1.6 billion in 2022 when acquisition spend represented 40% of the total and development accounted for 60%. Today with an eye towards monetizing our well vintage existing portfolio by driving community openings to support our growth plans, we now expect to further increase our land investment in 2024 to approximately $2.3 billion to $2.5 billion. Approximately 40% of this expected spend is allocated to development. Supported by this investment, we expect our community count to be relatively stable at each quarter and end the year between 320 and 325 outlets before growing meaningfully in 2025 and beyond. On the lot acquisition front, we have significant flexibility in our investment decisions as we are already either fully subscribed or well on track to support our strong anticipated growth trajectory over the next three years.

Thanks Erik and good morning, everyone. In the fourth quarter, our adjusted net income was $223 million or $2.05 per diluted share, while our reported net income was $173 million or $1.58 per diluted share inclusive of legal settlements and other extraordinary charges. During the quarter, we delivered 3,190 home closings at an average closing price of $607,000, which produced total homebuilding revenue of $1.9 billion. Our closings came in ahead of our previous guidance due primarily to stronger backlog conversion that benefited from further improvement in construction cycle times and more spec homes sold and closed during the quarter. Our cycle times improved by another four weeks sequentially and 10 weeks year-over-year aided by normalization in the supply chain and our team's focus on operational efficiency. We are pleased with the overall predictability that has returned across nearly all production stages and are targeting another four to five weeks of cycle time improvement in 2024. In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters given the solid demand backdrop to ensure we have adequate inventory available. In the fourth quarter, we started just over 2,900 homes or three per community per month, up from about 1,500 homes or 1.6 per community per month a year ago. Including these starts, we had 7,867 homes under production at quarter end. Of these homes, 41% or 3,225 were spec homes of which only 413 were finished with a skew towards our entry-level communities where first-time buyers prefer move-in homes. It's worth noting that our total spec inventory was up approximately 40% year-over-year as we have intentionally increased our inventory levels to meet buyer demand in the upcoming spring selling season. Based on the volume of homes under production, we expect to deliver approximately 2,700 homes in the first quarter and at least 12,000 homes for the full year. We expect the average closing price of these deliveries to be approximately $600,000 for the first quarter and for the year. Compared to 2023, the reduction in our average pricing partly reflects a shift towards more affordable product, particularly in our Texas and Florida markets, to meet consumer needs. This shift also aligns with our pivot to more self-developed communities as has been discussed by both Sheryl and Erik. Our fourth quarter home closings gross margin was 24.1%, up from 23.5% a year ago. This quarter's margins exceeded our previous guidance due primarily to less-than-expected house cost pressure and greater overhead leverage from higher closing volume. It's worth highlighting that our gross margin in the fourth quarter of 2022 included a $25 million inventory impairment which resulted in an adjusted gross margin of 24.5%. We are pleased with the relative stability in our gross margin trends, despite an increased use of targeted mortgage incentives over the past year with the resiliency driven primarily by reduced lumber costs and the strength of our to-be-built margins. As we look ahead, we expect incentive costs to moderate in 2024, while construction and lot costs trend higher. As a result, we expect our home closings gross margin to be relatively stable in the range of 23% to 23.5% in the first quarter and for the full year. Our net sales orders in the quarter increased 30% year-over-year to 2,361 homes. This was driven by a 29% increase in our monthly absorption pace to 2.4 per community and a 1% increase in ending community count to 327 outlets. As Sheryl noted, our sales improved over the course of the quarter with a strong pickup in December that has carried into the new year across all consumer groups. Our net sales order price in the fourth quarter was $629,000, up 9% year-over-year. Cancellation rates remained low at 11.6% of gross orders. This was down from 24.4% a year ago. Our below-average cancellation rates continue to reflect the strength of our diversified buyers' proactive approach to securing meaningful upfront deposits from our customers and diligent prequalification of all buyers prior to signing sales contracts. In the fourth quarter, customers and backlog had average deposits of $62,000 or 9% per home. SG&A as a percentage of home closings revenue was 9.7%, up from the record low of 7.3% in the year-ago period. The reduced leverage was primarily due to lower home closings revenue, higher performance-based compensation expense, and external broker commissions. Going forward, we will maintain a disciplined cost structure and are forecasting an SG&A ratio in the high 9% range in 2024, which would be consistent with 9.8% in 2023. Our financial services team achieved a capture rate of 86%, which is up from 78% a year ago. This strong result drove financial services revenue to $43 million with a gross margin of 45.9% for the quarter. By using finance as a sales tool, our talented financial service team has supported our success through well-executed, personalized incentive programs that have allowed us to navigate the challenging interest rate environment cost-effectively while providing compelling value to our customers. Turning now to our strong capital position. We generated $827 million of cash flow from operations in 2023 and ended the year with significant liquidity of approximately $1.8 billion. This included $799 million of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside normal course letters of credit. Our homebuilding net debt to capitalization ratio was 16.8%, down from 18.8% in the prior quarter and 24% a year ago. Equipped with this balance sheet and strong expected cash generation, we will maintain our disciplined and opportunistic capital allocation framework as we evaluate our main priorities of investing for future growth, maintaining strong liquidity and balance sheet health, and returning excess capital to shareholders through share repurchases. Since 2020, we have repaid approximately $1.8 billion of senior debt, as we have successfully executed our post-acquisition debt reduction strategy. In total, these repayments have reduced our annual interest expense by about $105 million and driven a significant reduction in our debt to capitalization ratios. Our next senior note maturity is not until 2027 leaving us with financial flexibility in the years ahead. Over the same four-year period, we have deployed approximately $889 million into share repurchases, reducing our diluted share count by about $33 million or just over 30% of beginning shares, driving higher earnings per share and returns for our shareholders. In total, since our repurchase program began in 2015, we have repurchased over $1.4 billion or approximately 50% of beginning shares. At quarter-end, our remaining share repurchase authorization was $494 million. We are committed to continuing to return excess capital to shareholders in the years ahead and expect to repurchase approximately $300 million of our common stock this year. Now, I will turn the call back over to Sheryl.

Thank you, Curt. To wrap up, we are extremely proud of our team's 2023 performance and look forward to delivering an even stronger 2024. In addition to our financial results, I'm equally proud of another important milestone; we recently earned our ninth year as America's Most Trusted Homebuilder. This concept of earning and maintaining brand trust year after year, especially during 2023, a year in which consumers grew even more weary and skeptical of brands, is not lost on us. Through our tremendous team members across the country, we remain focused on the long game and continue to raise the bar in delivering an unmatched customer experience. Thank you to all of our team members for helping us to achieve this amazing accomplishment. Our strategic plan since becoming a public company over 10 years ago has been focused on building scale, diversification, and operating efficiency to deliver superior performance for our shareholders. As you've heard today, the next leg of our strategic journey is focused on accretive growth. We believe that the strength of our core land portfolio, the financial health of our targeted consumers, and experienced teams will allow us to navigate the uncertainties that arise while our healthy inventory levels, improving cycle times, and compelling sales and finance tools will allow us to meet our customers' needs. While we are early in the year, we have had a promising start and we look forward to updating you again on our progress in April. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Thank you. Our first question today comes from Truman Patterson from Wolfe Research. Please go ahead, Truman. Your line is open.

Hi. Good morning, everyone and thanks for taking my questions.

Good morning.

Good morning. First on your gross margin guidance in 1Q 23%, 23.5%. Could you help us understand what's embedded in that guidance because it basically implies for the rest of the year the remaining three quarters are kind of flat sequentially and I’m thinking there's clearly some higher land costs maybe stick and brick as we move through the year. So the potential offsets would be either some modest pricing embedded in your assumptions going forward or some incremental internal streamlining initiatives that could help offset. I'm just hoping you could walk us through that please.

Yes. Good morning, Truman. I'll take a stab at that. Just to kind of talk a little bit about the margins. As we said in our guide or in the prepared comments, we are assuming a slight kind of modest pullback in incentives over the course of the year, which are being offset to a certain extent with some increases in house cost and land costs. But I think the one thing you need to keep in mind is today we're structurally a different company. We've done a lot of operational improvements in addition to the scale that we've achieved as a company as a result of all the M&A work. And so some of those operational efficiencies whether it's floor plan rationalization, value engineering, focusing on kind of what we would call even flow production are going to kind of help us kind of work our way through that and provide that stability in our margins over the course of the year.

Okay. So if I'm hearing you correctly maybe there's a little bit more juice to squeeze so to speak from some of the internal initiatives that you all have implemented. And then Sheryl you all have been one of the more acquisitive builders over the past decade. And I think we've seen six M&A deals so far in 2024 just in the industry overall, right? And how are you thinking about M&A today as it relates to either larger transformative deals, tuck-in acquisitions, or are you all kind of comfortable with your footprint land bank streamlined strategy that you're not necessarily entertaining deals in the current environment?

Yes, I appreciate the question, Truman. I think you said it correctly. Over the years we've certainly been known as one of the more acquisitive. Initially that was to make sure that we had the right width on our map and then kind of follow that up with making sure we have the scale in each of our markets. So when we look at the map today, we feel really good about it. Given our historic kind of activity, we certainly have the opportunity to take a look at all the deals that come to the market. We're quite focused on the organic kind of growth that we laid out in our prepared remarks. We have the opportunity to look at deals that are coming into the marketplace. And honestly it would have to really provide some strategic benefit to the organization from a geographic or scale perspective; it would have to from a product perspective may also be accretive. Obviously, it has to work financially. So I'm not going to say that we would never do a deal but today we're really focused on achieving our growth organically. And if the right opportunity comes along we will take a look at it.

Okay. Perfect. And if I could just squeeze one more in. Your 2024 ASP guide of about $600,000. That's about 12% lower than your backlog of I think about $680,000, could you just elaborate a little bit on what's going on there? It seems even with a shift to maybe some more affordable products back, et cetera that seems a pretty meaningful shift if you will.

Yes, you're exactly right. And as we've been talking about really with the last two M&As and honestly the shift, the settled pivot you've seen and our consumer groups, we are going to more and more affordable. So what you have in your backlog today, Truman, tends to be your resort lifestyle, Esplanade, which tend to be at a much higher ASP. But what we'll fill that in in the subsequent quarters is the spec production we have and our specs, as we said, tend to be that first-time buyer as well as that first-time move-up. So you hate to point to mix. But in all honesty, that's exactly what it is.

Okay. Perfect. Well, thank you and good luck in 2024.

Thank you.

Thank you. The next question comes from Carl Reichardt from BTIG. Please go ahead. Your line is now open.

Thanks. Good morning, everybody. Thanks for all the detail today. Appreciate it. Sheryl, you talked in the prepared remarks about market share gains. And just granted, if we don't believe the overall market grows at 10% and you do then you're gaining share. But the blunt question is from whom are you going to take the share? Is it a function of the private builders? Is it a mix shift towards move-up product that other publics aren't building? Or is it market related? Can you just sort of expand on directionally, who you're going to take the share from?

Yes. I think it's all of the above, Carl. Certainly, what we're seeing is a different level of efficiency in our communities in much higher paces. So we may see some market growth but obviously, we're having – we're also anticipating grabbing share. And one of the things, Carl, that I would say is really working in our favor today is the strength of the diversity of our portfolio. So when you look at our ability to offer both to-be-built spec homes that are relatively equal with a relatively equal balance, when you look at us serving one-third, one-third, and one-third that first-time buyer, that first and second move-up, and that resort lifestyle, it really gives us an advantage in each of the markets. As you see some of the volatility that we've seen certainly over the last year, I don't think we have experienced the same level of volatility. If I think about the fourth quarter, everyone – we saw a lot of movement in interest rates as you know. October was okay. November was pretty rough. December was our best December in the company's history. And I really credit the diversity of the portfolio that allows us to do that.

Okay. Thank you, Sheryl. And then you also talked about a pivot in how you're thinking about land and the off-balance sheet side. And if I operate under the assumption that JVs are kind of tough to structure, there are not that many seller financing deals the default for more off-balance sheet is the land banking business. Can you talk a little bit about the availability of land bank capital, your plans to focus more on that if they exist? And then what you're seeing in terms of the cost of that capital right now? Thanks.

You want to take that?

Sure, it's Erik. I would say we have several options at our disposal and we utilize all of them. Our joint ventures are beneficial, especially when we have alignment with a building partner, allowing us to develop off-balance sheet and bring in lots as needed for the homebuilding business. We currently have eight of these across various markets, which is significant when considering our level of control. Regarding seller financing, it's typically our first option, as it tends to be the least expensive, and we do engage in that frequently. As for land banking, it's always an option for us. We're seeing an increase in costs compared to a significant deal we negotiated previously. However, we anticipate that these costs will stabilize as the perceived risks in the interest rate environment normalize. Ongoing discussions are taking place, although we haven't finalized any recent deals. What we're looking for is for these costs to align with our weighted average cost of capital, as that's when they become more appealing to us.

And Erik, if you were to look back to 18 months ago when we did our first big deal on what land banking REITs are doing today, I mean I think there's easily a 300 basis points.

Yeah. to be pointing to your question, Carl, I would say it's 300 to 350 basis points relative as I compare to kind of where we originally negotiated our deal.

Okay. I appreciate that. Thank you for the detail. Thanks, Sheryl.

Thank you.

Thank you. The next question comes from Matthew Bouley from Barclays. Please go ahead, Matthew.

Good morning. You have Elizabeth Langan on for Matt today. And I just wanted to kick it off pricing. You noted that you were raising prices in nearly 60% of communities. Where are you seeing those price increases? And if this trend kind of continues throughout the year, is that something that's contemplated since the high end of your guide? Or would this lend itself to upside on the side of margins?

Yes, we experienced some pricing power in the fourth quarter, as you pointed out. We successfully raised our prices in approximately 60% of our communities. This has been factored into our guidance, but any further pricing increases could provide additional benefits. Furthermore, the impact on margins will depend on future interest rates and other factors.

The good news, if you agree, Curt, is that even though we experienced a modest pricing opportunity in 60% of our communities, I believe it's a much healthier situation. As we progress through 2024, we hope to see continued modest pricing opportunities along with some reduction in discounts. It's still early in the year, so we need to see how this unfolds. We've certainly observed market volatility, including the recent significant increase in interest rates, but overall, we are in a much better position compared to a year ago. We anticipate continued opportunities as we move further into the year, all else being equal.

Okay. Thank you. That's helpful. And I guess kind of continuing on that, how are you balancing that with your use of incentives? I guess, obviously, when there's a pricing opportunity you're going to take it, but does that mean that you're typically kind of dialing back on your incentives more or keeping that pretty stable?

Yes. I think we've been fortunate, and we've become quite adept at navigating this environment for nearly two years. Our tools have improved, and we’ve gained better understanding of how to personalize incentives to meet specific buyers' needs. It's clear that we can't generalize any community or market, which allows us to serve our customers in the best way while also protecting our margins as much as possible. Interestingly, as interest rates recently began to decline, we noticed rates drop to the mid-6s. In some markets, we observed a return to previous strategies like offering incentives on options or discounts. However, we've remained focused on utilizing financing as our primary sales tool to provide consumers with the best monthly rates. This approach enables us to gradually reduce incentives as needed. We are still early in the year and have experienced some volatility, but the positive news is that the costs of forward commitments have improved significantly compared to many months ago. Despite the recent fluctuations, I remain optimistic that we will see stabilization over time, which should help to further reduce incentives.

Thank you very much.

Thank you.

Thank you. The next question comes from Mike Dahl from RBC. Please go ahead. Your line is now open.

Hi, it's Chris Claude filling in for Mike. I just wanted to follow up on your comments about community count growth for 2025. You mentioned expecting significant growth there. Could you clarify what you mean by significant? Regarding the pace, considering the flat community count outlook for this year, should we anticipate a noticeable increase starting in the first quarter of 2025, or is that more likely to be a later development?

We are not providing specific guidance for 2025 at this point. However, we do expect to see growth in community count, with anticipated closing growth of around 10% each year thereafter. You can expect similar trends in community count, although we won't get into specifics. Reviewing the land we currently have in our pipeline, we expect to see progress starting in early 2025 and continuing throughout the year.

Understood. Thank you for that. Regarding the share buyback expectation of $300 million for this year, is this amount factored into the diluted share count forecast for both the next quarter and year-end? I'm having difficulty reconciling how we arrive at 108 million and 109 million shares outstanding. Is this included in the forecast? Additionally, whether it is or isn't, could you clarify the timing and expectations for deployment?

Yes. Hi Chris, that share repurchase guide is not included in the share counts that were in our release because they haven't necessarily happened yet. So, those are not contemplated in that.

Appreciate your help.

Thank you. The next question comes from Jay McCanless from Wedbush. Please go ahead, Jay, your line is now open.

Hey, good morning everyone. So, on the 40% of communities where you're not raising prices is it holding prices stable or having to cut pretty aggressively. Maybe talk about what you're doing with that 40% of the count?

I don't think there'd be one trend I'd point to, Jay. I think it's actually kind of reverted to a more normal environment where you might have closeouts where you do have some added discounts, you might have new openings where you're coming in strong and then wanting to build kind of equity for the customers over time. I'd say probably as a role, I'd say probably held serve without taking a deep dive into every one of those 40%, I would say that would be the average, but I would say you probably have some added incentives. And certainly you might have a few communities where you're going to close out where you discounted the house. But I would say the average would probably be hold serve.

And then maybe could you talk about what's happening with co-broker and outside broker commissions? What are you seeing there? And you're expecting that to be a headwind for 2024's numbers?

Yes, I'd say we saw that as a headwind actually in the back half of 2023 as I'm sure you know in 2022 we reduced commissions. We reduced the base rate. We didn't put it on where we were seeing hobos, we excluded that from co-bro commission. So, when the market kind of normalized, I think the market went back to that kind of average 3%. If I were to share some good news though, as I look at our reservations moving into 2024, for the first six weeks of this year, we've seen some really nice movement on co-broke trending down from the peak. I would say generally over the last couple of years co-broke in our reservation and our reservations have been pretty consistent with the overall business and we've known the opportunity is really to build trust with that consumer before they ever get a broker or their house on the market. And we've finally started to see that. We'll hope it's sustainable. But all in all, when I look at the book of business outside of the reservations, my guess is, we remain relatively consistent to the back half of 2023.

Okay. Great. Thank you for that. And then the last question I had, because I think I'm getting these numbers confused in my head, but how many homes or closings what percentage of closings had some type of discount during the fourth quarter? And maybe talk about what the level of that discounting was? And what have you seen thus far into the spring?

Every house has some form of discount, whether it's through closing cost assistance, financing tools, or promotions at the design center. This is just standard business practice. Specifically, regarding our forward commitments, about 20% of our closings in 2023 benefited from rate buy-downs. The remaining closings likely utilized some form of assistance or specific financing incentives. This 20% figure pertains to the entire year, with a slightly higher percentage in the fourth quarter coinciding with rising rates. As mentioned in our prepared remarks, first-time buyers tend to utilize these supports more heavily, as they often require extra assistance to qualify for the monthly mortgage payments.

Got it. Okay, great. Thank you. That’s all I have.

Thank you.

Thank you. Our final question today comes from Mike Rehaut from JPMorgan. Please go ahead, Mike, your line is now open.

Hi, guys. Good morning. Will Wong on for Mike. So you mentioned earlier that you guys feel you have healthy momentum that continued into January and February as well with January having the most online reservations since 2021. Obviously that gives some foresight into a strong spring selling season. But I was wondering if you could give a little bit more color on your expectations relative to spring selling season, historical norm and whether the size you see now make you feel like it could be stronger than usual or outpace or something that's sort of in line?

We have had a great start to the year, with December setting a company record and January also performing strongly. This positive trend has continued into February. Notably, a couple of weeks ago, we experienced a significant spike in rates, which resulted in one of our best weekends in a while. Looking ahead, all signs indicate strong performance. In terms of traffic, web engagement, and reservations, January is likely only to be surpassed by February based on the reservations from the first two weeks of this month. The overall indicators are very promising. The current volatility in interest rates has empowered builders to assist consumers effectively. The resale market is limited in inventory, as is the new home market. While I don't want to imply a return to previous rapid sales cycles, we are in a healthy, stabilized market where consumers are increasingly recognizing that interest rates in the 5s and 6s represent a positive long-term opportunity. Additionally, when I consider the number of renters in the U.S. and how every 50 basis points reduction in interest rates enhances their chances of becoming homeowners, I believe many are currently waiting for the right moment. Overall, we are receiving a lot of encouraging news, which leads us to anticipate a strong and healthy selling season this spring.

Great. And then if you guys can just touch on, is there any substantial differences in markets between the use of any type of incentive throughout the past quarter?

Yes, that's an interesting point. Generally, I would say that our incentives are mostly utilized with first-time buyers. However, in markets like Seattle, incentives are rarely used, and the same can be said for Sacramento. Overall, for our first-time buyers, there's a balanced use of financing tools to assist them in accessing properties. Additionally, in our resort lifestyle business, particularly in Florida, we still observe a high reliance on cash, which means we don't provide the same level of incentives for that consumer as we do for first-time buyers and those moving up.

Got it. Thank you, guys.

Thank you.

Thank you. Our next question comes from Kenneth Zener from Seaport Research Partners. Please go ahead, Ken.

Good morning, everybody.

Good morning.

Good morning.

I appreciate the information regarding inventory lockouts; it's very informative. Can you discuss your start process? You previously mentioned a low freeze for orders as a general trend. How does even flow support the orders, or does it actually define them? If you are targeting that low-3s, what is your approach to managing margins?

Ken, we might have lost you.

Can you hear me now?

Yes, sir.

You can't hear me?

Yeah. You were going in and out, Ken, during your question. Can you try it one more time.

I apologize for the interruption. I wanted to ask about the starts and orders you've mentioned being in the low 3s. Can you explain how they are interconnected, particularly in light of your mention of even flow, which implies that your starts may influence your order pace? Additionally, how committed are you to maintaining that low 3s level, and would you consider sacrificing margins to achieve it? Thank you.

We've consistently stated that we'll align our starts with sales, with some flexibility based on timing throughout the year. For instance, last year we increased our starts in the second and third quarters to ensure we had enough homes ready for the spring selling season. Generally, when I refer to even flow, we're aiming for a predictable rhythm, which is one of our key objectives. We find that this approach is more efficient and reduces pressure on our trades and internal teams. We will strive to maintain that evenness as much as possible, but our guiding principle remains to align starts with sales.

Thank you very much.

Thank you. Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead. Alan, your line is now open.

Hey, guys. Good morning. Thanks for all the great detail as always very helpful.

Good morning.

First, I found your commentary on the land strategy to be very interesting. I would like to understand a few points. Specifically, regarding the self-developed deal tailwind on the margin side, your 2024 guidance shows a slight decrease year-on-year. How should we view that tailwind moving forward? Will it become more significant in 2025 and beyond as these deals are completed, or should we see it more as a counterbalance to other potential headwinds, such as increased land banking optioning and rising land costs? I'm trying to clarify the various factors at play in that area.

Yeah. Hey, Alan, it's Erik. I wanted to touch on a couple of points. The prepared remarks specifically addressed the 2023 underwriting, and as you mentioned, the benefits from that will take some time to materialize. It will take a while to bring those to market, so you'll see the effects not just this year, but over time. Regarding land banking, as previously discussed, we consider it an important option, especially in terms of maximizing returns. The previous tranches we did averaged around 175 basis points in cost for a return of about 600 basis points at the deal level. When you consider that across the overall company portfolio, the impact is relatively modest, around 20 to 30 basis points. I hope that clarifies the timing, costs, and the use of tools.

That's helpful, Erik. Thank you. And second on cash conversion. You guys have had really impressive cash conversion in these last two years roughly 100% of net income converting to free cash. And a lot of that I think has come as you maybe shrunk the land position a little bit right-sized it to some extent, inventory turnover has improved, working capital has shrunk. As we think about this pivot towards more self-developed deals should we temper that trajectory a little bit? Like is there going to be a little bit of a blip in the opposite direction as these deals kind of work their way through the development process?

That's a good question, Alan. It's not necessarily about tempering our expectations. Looking at everything, we had a strong year of cash generation in 2023. Even with the land spending targets we have for 2024, we believe we'll maintain a solid cash position throughout the year as we continue to generate cash flow. While I won't dive too deep into future predictions, we remain confident in our cash generation despite the planned land spending mentioned in our prepared comments.

Okay. Thank you for that, Curt. And if I could squeeze in one last one on related. Can you just give an update on Yardly and kind of the timing of single-family rental recognition of sale? I think, I vaguely remember you mentioned in 2024 you kind of had a bunch of deals in the pipeline to potentially close, but I know there's been some volatility in the SFR market the VFR market. So any update you can give there would be helpful.

Yes, Alan, I appreciate the question. And maybe just a kind of frame obviously a pretty volatile rate and cap rate environment last year maybe the last 18 months. So really have exhibited operated with a fair amount of prudence, making sure we're only bringing the cream of the crop to the business. The right way to think about the scale of that business today is we've got about two dozen projects working in about eight different markets; four are actively leasing today. And we'll have optionality to think about disposition of probably a couple of those this year depending on what the market tells us. And then of those kind of, those couple of dozen deals, 13 are within the venture that we've previously talked about. So that really gives us a lot of capital efficiency. And then we've got a number of others that are kind of working through horizontal and vertical development. So really constantly looking for deals but they've got to be the cream of the crop as we think about that volatility in the rate environment that we've seen. So really from a timing standpoint again a couple this year perhaps options and then maybe double that the following year and then you're really going to see prospective ramp-up.

Perfect. Thank you, so much guys. Appreciate it.

Thank you. Our final question today comes from Alex Barron from Housing Research Center. Please go ahead, Alex.

Yes, thanks for squeezing me in. Great results in the quarter. And I'm sorry if I missed this. Did you guys discuss what the legal settlement charge was about?

Yes, Alex, good question. In our 8-K filed back in December, we disclosed that it was related to an asset we acquired through the AV acquisition. It pertains specifically to the state of Florida, in a community called Solivita. The matter has been settled and is behind us for now. There are details in the 8-K we filed, so feel free to take a look at that. If you have any further questions, let us know.

Okay. I'll take a look. Thanks. My other question was on the share buyback the $300 million number. Is that meant to be $75 million a quarter? Or is that meant to be whenever you guys feel it's opportunistic? And is there any potential upside to that number if the stock were to persist at a lower value?

Yes Alex, I don't know, if we necessarily have it prescribed kind of on a quarterly basis, but it's a goal that we have set out there as a target for 2024. So as we look at it, we typically do what we call an opportunistic approach and when we set out to buy our shares. And so we'll just kind of play it by year see how the year goes. And kind of buy shares as necessary as we go through the year.

And we'll continue to operate under a 10B51. And so, it's probably a little more consistency than you've seen historically to make sure that that gets out there, but no specific quarterly targets.

Got it. Well, thanks, and best of luck for the year. Thank you.

Thank you.

Thank you. That does conclude our Q&A session for today. So I'll hand back over to Sheryl for any closing remarks.

Thank you for the opportunity to share our 2023 results. We really look forward to being able to get into more detail with you on our Q1 on the April call and I wish you all the very best. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.