Taylor Morrison Home Corp Q4 FY2024 Earnings Call

Good morning, and welcome to the Taylor Morrison Fourth Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at the time. As a reminder, this conference call is being recorded. And I would like to introduce your host, Mackenzie Aron, Vice President of Investor Relations.

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 at taylormorrison.com. 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 today is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. I will share an update on the market and our strategic priorities, while Erik will discuss our land portfolio and thoughts on the retail market, and Curt will detail our financial performance and initial guidance for 2025. I am proud to share the strong results of our fourth quarter, which I believe once again distinguished our team's execution and the merits of our diversified consumer and geographic strategy. Among the highlights, we delivered 3,571 homes at an average price of $608,000, producing nearly $2.2 billion of revenue with an adjusted home closings gross margin of 24.9%. Each of our operational metrics met or exceeded our prior guidance. Combined with cost leverage, improved financial services income and a favorable tax rate, this generated nearly 30% year-over-year growth in our adjusted earnings per diluted share and a 14% year-over-year increase in our book value per share to $56. From a sales perspective, as I shared on our last earnings call in October, we were seeing healthy demand trends in line with seasonal patterns. While interest rates increased sharply through the quarter, activity held up with impressive consistency through year-end. As a result, our fourth quarter net orders increased 11% year-over-year with an absorption pace of 2.6 per community up from 2.4 a year ago. This brought our annualized absorption pace to 3 for the year within our targeted range. I am pleased that this sales success was achieved with only a modest increase in incentives needed to address the impact of higher interest rates. This contributed to our better than expected fourth quarter adjusted gross margin which was still stable sequentially and up year-over-year in contrast to significant compression seen across our industry. As I have highlighted on recent calls, our margins have remained in a tight range over the last two years despite the volatile rate environment. I attribute our positive results to the quality locations of our communities which are concentrated in attractive core submarkets with minimal exposure to further out tertiary locations. As Erik will discuss, tertiary markets are facing the most pricing pressure from rising inventory as well as greater sensitivity to affordability constraints among first-time buyers attracted to such markets. Alternatively, our prime location strategy continues to benefit from attractive underlying fundamentals by serving well-qualified homebuyers in our entry-level, move-up and resort lifestyle segments. Across our portfolio, we further diversify by offering both to-be-built and spec homes aimed at meeting the needs and preferences of our customers. In addition to aiding our sales opportunities, this balanced mix further insulates our margins from broader market pressures as to-be-built homes generate superior gross margins. As we have discussed in the past, a high percentage of our resort lifestyle buyers prefer to select their own home, site, floor plan and elevation and generally spend three times more in lot and option premiums as compared to each of our other consumer groups. They also require fewer incentives than entry-level heavy spec homes. This makes our fourth quarter margin performance all the more notable when considering that 54% of the quarter's closings came from specs, including 21% that were sold and closed during the quarter, a higher-than-normal contribution that helped drive the upside to our closing volume. As we look ahead, we expect this balanced approach and longstanding emphasis on quality locations to serve us well as we balance pace and price in each community to maximize our returns. With the spring selling season officially kicking off this week following Sunday's Super Bowl, early indicators are encouraging. Appreciating that we have a difficult year-over-year comparison this quarter given the exceptionally strong sales recorded in the first quarter of 2024, we are pleased to see prequalifications growing by week and web traffic to taylormorrison.com almost up 40% from a year ago. This strong lift in website visitors is a direct correlation to our involvement in ABC's reboot of Extreme Makeover: Home Edition, where we serve as the season's official homebuilder, providing beautiful, functional homes to deserving families. In the fourth quarter and continuing into 2025, we're seeing healthy momentum in online home reservations with a 53% conversion to sale and a declining rate of participation with real estate agents. Most notably among customers using our online scheduling tool, we saw a sharp decline in the share of sales with a real estate agent to 67% last quarter from 80% a year ago. This shift is likely due to a number of factors including the recent NAR rulings, the pricing transparency delivered by our digital experience and our longstanding reputation as America's Most Trusted homebuilder 10 years running. Alongside the year's early momentum, we are strategically managing our pricing and incentives including the rollout of a national-based price increase in early January. As needed, we continue to prioritize customizable finance incentives to address each customer's unique circumstances. By working closely with our customers to personalize the most effective use of sales tools, we better manage our overall incentive cost while improving our customers' purchasing power. This customer-by-customer strategy has allowed us to maintain a relatively low utilization of mortgage forward commitments tied to below-market interest rates with just 38% of our fourth quarter closings using these most costly incentive structures. Similar to the last many quarters, about half of the customers using these forward commitments are first-time homebuyers. By consumer group, our fourth quarter orders consisted of 32% entry-level, 48% move-up and 20% resort lifestyle. On a year-over-year basis, orders were strongest in our move-up segment with 27% growth, while our entry-level sales were up 5% and resort lifestyle declined 9% in part due to the hurricane impact in Florida where this segment is heaviest, as well as the timing of opening and closeouts of Esplanade communities at year-end. In addition, Florida has been faced with some of the highest levels of rising inventory, but as Erik will elaborate on, we have found that most of this supply is not competitive to our communities and we are encouraged that Florida has started to show some positive signs year-to-date. Overall, I would characterize buyer demand across all of our buyer profiles as healthy, albeit with varying needs of assistance to overcome affordability challenges with the most pressure at the entry-level. Recognizing that there are more unknowns this year than typical given the new administration, we continue to be grounded in a positive view on the need for new construction that meets the needs and budgets of our targeted consumer groups. While interest rates are unlikely to provide near-term relief to affordability constraints, we believe our suite of incentive tools and broad product offerings are appropriately aligned to achieve our targeted sales goals. We will meet the market as needed as we look to maintain an annualized sales pace in the low 3% range while also generating healthy gross margins in the low to mid 20% range. As Curt will discuss in greater detail, our initial guidance for the year calls for 13,500 to 14,000 home closings at a gross margin between 23% to 24% and an SG&A ratio in the mid 9% range. Let me just end by saying that as an organization with significant tenure across our leadership and operating teams, we are well accustomed to facing uncertainty and market disruptions head-on. Our teams are nimble and have the flexibility to adjust our starts, product offerings and pricing structures as needed to minimize risk and maximize long-term profitability. Beyond the near-term potential headwinds, we remain confident in our outlook and look forward to providing more insights into our strengthened organizational capabilities at our upcoming Investor Day. We hope all of you will join us on March 6th at 12:00 p.m. Eastern Time for the webcast presentations which will highlight our multiyear growth trajectory and the many ways in which we have set up Taylor Morrison to succeed regardless of the market backdrop. For those of you able to attend in person, we look forward to seeing you soon. With that, let me now turn the call over to Erik.

Thanks Sheryl and good morning. Beginning with our land portfolio, our owned and controlled lot inventory was 86,153 homebuilding lots at quarter-end. Based on trailing 12-month closings, this represented 6.6 years of supply of which only 2.8 years was owned. Of these total lots, 57% were controlled via options and off-balance sheet structures, up from 53% at the end of 2023 and 51% at the end of 2022. From an investment perspective, we allocated $293 million to homebuilding land acquisition and $297 million to the development of existing assets for a total of $590 million during the quarter. This brought our full year investment to approximately $2.4 billion, of which 57% was for lot acquisitions and 43% was for the development of existing parcels. In 2025 we are projecting our total homebuilding land investment to be approximately $2.6 billion with a similar split between acquisition and development. As always, our ultimate investment will be dependent on market opportunities and our increasing use of off-balance sheet financing tools to support our growth aspirations. Our use of such tools aims to generate enhanced returns on our invested capital and we are well on our way to achieving our near-term goal of controlling at least 60% to 65% of our lot supply. Supported by this investment, we expect our community count to grow in the quarters ahead with an anticipated ending outlet count between 340 and to 345 for the first quarter and at least 355 by the end of the year. As we have discussed previously, our average underwritten community size has grown materially in the last three years versus the prior three, while our targeted paces have increased by approximately 25% over the same period, allowing us to greatly expand our business on a smaller outlet count, all else equal. This shift to support higher sales paces and a more cost-effective structure, we believe will continue to provide greater returns over time. Turning to our Yardly built-to-rent business. As expected, we sold two wholly-owned assets during the quarter for a valuation that yielded a low to mid 5 cap rate. With 11 communities currently leasing across six markets, we are targeting five to seven additional asset sales in 2025 depending on market conditions. As we look out based on the pipeline of communities underway, we expect to ramp the level of annual dispositions until reaching a relatively steady state in the next three to four years. I look forward to providing a greater detail on this evolving business at next month's Investor Day. Another topic we will spend time on at the Investor Day is the quality of our land locations, which we believe is a defining characteristic of our portfolio. The importance of this focus is reinforced as resale home supply has increased in most markets, as has new construction inventory in many cases. While the aggregate level of new and resale homes on the market across the US remains well below historic averages, we are closely monitoring the impact of rising supply on our portfolio, given the 30% increase of resale months of supply across our MSA footprint over the last year. Despite these headline numbers, it is worth noting several meaningful market nuances. For one, there are still markets with very low supply, such as the Bay Area with less than two months of inventory. And after analyzing a number of our MSAs, including those in Florida and Texas where attention is most focused, and reviewing the submarkets in which we operate compared to those in which we do not, we overwhelmingly found lower months of supply reflecting our favorable strategic positioning. As you will recall, this recent analysis follows our previous community review which highlighted that approximately 17% of resale homes would be deemed competitive to our new home offerings after considering vintage, size, price and product type factors. This competitive set would be even lower after further filtering for community type, which is especially relevant among shoppers in age-targeted communities such as Esplanade, where resort lifestyle buyers intentionally seek out our distinctive amenities, concierge services and single-level product that they can personalize to meet their needs. As we look to invest to support our strong growth aspirations, we will remain mindful of these dynamics as we contemplate investment decisions while continuing to emphasize a strong preference for core locations. With that, I will turn the call to Curt.

Thanks Erik and good morning, everyone. For the fourth quarter, reported net income was $242 million or $2.30 per diluted share. After excluding legal impairment and other charges, our adjusted net income was $278 million or $2.64 per diluted share. This was up 29% from an adjusted earnings per share of $2.05 a year ago, driven by higher revenue due to increased closing volume and improved home closings gross margin, stronger financial services profitability and a lower tax rate. Our closings volume increased 12% year-over-year to 3,571 homes. The average closing price of these deliveries was roughly flat from a year ago at $608,000. In total, this produced home closings revenue of $2.2 billion. From a production standpoint, we moderated our starts volume by 5% to 2,779 homes or 2.7 per community per month from 2,912 homes or 3 per community per month a year ago. Recognizing that our finished inventory of 857 homes at quarter-end is slightly elevated compared to our historic run rate, we believe this inventory is well-positioned to meet expected consumer demand during the spring selling season, as evidenced by our team's success in selling and closing a record number of intra-quarter spec sales during the fourth quarter. Going forward, we will be mindful of our inventory levels and will continue to align new starts with sales as our strategy allows us to pivot based on market demand. In total, we ended the quarter with 7,698 homes under production, of which 3,437 were specs. During the quarter, our cycle times continued to improve and were down nearly 30 days year-over-year as our teams achieve the savings we targeted going into 2024. Based on our homes currently under production and the normalization in our production timelines, we currently expect to deliver between 13,500 to 14,000 homes this year. This includes approximately 2,900 homes in the first quarter. Based on the mix of these deliveries, we expect the average closing price to be in the range of $590,000 to $600,000 each quarter and for the full year. Turning now to margins. Our home closings gross margin in the fourth quarter was 24.8% on a reported basis and 24.9% adjusted for a $3 million impairment charge. This was stable from our reported margin of 24.8% in the third quarter, but up from 24.1% in the fourth quarter of 2023. We understand there is heightened focus on margin outlooks this year given the many crosscurrents at play. On the one hand, our beginning backlog of over 4,700 homes carry strong margins and the normalization in cycle times affords us the opportunity to start and close a greater number of high-margin to-be-built homes than in recent years. And as you've heard today, we expect our diversified portfolio to withstand relative margin pressure given the strength of our customer base. However, on the other hand, we are assuming a step up in incentives from the fourth quarter given the increase in interest rates thus far in the new year. We're also expecting a step up in land cost inflation to approximately 7% this year from 4% in 2024. Taking into account these factors and the anticipated mix of our deliveries, we expect our home closings gross margin to be between 23% and 24% this year, including the high 23% range in the first quarter. We are watching the evolving tariff situation closely and believe our range for the year appropriately accounts for the likely outcomes we could face based on our best understanding of product exposure. Fortunately, given the steps we have taken to streamline our options, SKU's, reshore products and strengthen our supply chain resiliency in recent years, we believe we are prepared for any potential disruptions should they arise. Importantly, we continue to expect our long-term gross margins to remain above our historic averages in the low to mid 20% range given production and operational efficiencies, cost leverage from our scale and lower capitalized interest burden. Now to sales. Our net sales orders increased 11% year-over-year to 2,621 homes. This was driven by an 8% improvement in our monthly absorption pace to 2.6 per community and a 4% increase in ending community count to 339 outlets, reflecting the sustained improvement in our absorption rates as we shifted into higher pacing communities and geographies. Our sales paces throughout 2024 remained well above our pre-2020 average in the low to mid-2 range. Specific to the fourth quarter, our 2.6 pace was well ahead of our historic average of 2. Cancellations remained within normal ranges and below industry averages at 13.1% of gross orders as we continue to benefit from our strong consumer base, diligent prequalification requirements and average customer deposits of approximately $50,000 per home. SG&A as a percentage of home closings revenue in the fourth quarter was 9.4%, down 30 basis points from 9.7% a year ago. As we look ahead into 2025, we expect our SG&A ratio to improve to the mid 9% range from 9.9% in 2024. Financial services revenue was $54 million with a gross margin of 48%, up from $43 million and 46% a year ago. Driving these results, our financial services team achieved a capture rate of 89%, up from 86% a year ago, reflecting the success of our incentive strategies, customer service and close partnership with our homebuilding teams. In the fourth quarter, buyers financed by Taylor Morrison Home Funding had an average credit score of 752, down payment of 23% and household income of $183,000. Turning now to our balance sheet. We ended the quarter with liquidity of approximately $1.4 billion. This included $487 million of unrestricted cash and $947 million of available capacity on our revolving credit facility which was undrawn outside of normal course letters of credit. Our net homebuilding debt to capitalization ratio was within targeted ranges at 20% at year-end and our next senior note maturity is not until 2027, providing us with financial flexibility. During the quarter, we repurchased 1.4 million shares of our common stock outstanding for $90 million, bringing our full year investment to 5.6 million shares and $348 million well ahead of our target. At year-end, our remaining repurchase authorization was $910 million. Having repurchased a total of $1.8 billion of our shares outstanding since 2015, or nearly 55% of our beginning share count, we expect to continue utilizing healthy cash generation to repurchase our shares, utilizing both programmatic and opportunistic strategies. For 2025, we are targeting total share repurchases in the range of $300 million to $350 million. After considering the midpoint of this repurchase target, we expect our diluted shares outstanding to average approximately 102 million for the full year, including 104 million for the first quarter. Now, I will turn the call back over to Sheryl.

Thank you, Curt. To wrap up, before we turn the page on 2024, I'd like to take a moment to reflect on this year's achievements, each of our long-term targets. When we introduced these targets last year for sales pace, closings growth, gross margin and return on equity, our intent was to help provide greater insight into the evolution of Taylor Morrison following years of strategic growth and positioning. These are multiyear targets that we believe are achievable based on the makeup of our communities, land investment strategy and diversified portfolio. I am proud that despite the challenges that arose over the course of 2024 from volatile interest rates, highly competitive pressures and extreme weather, we still met or exceeded each of these goals. By delivering nearly 13,000 homes, we increased our closings volume by 12%, well ahead of the 4% increase contemplated in our initial guidance heading into the year and our 10% average growth target. Along with this stronger volume, our adjusted gross margin of 24.5% was up 50 basis points year-over-year, more than 100 basis points better than our initial expectation and at the high end of our low to mid 20% target. As you've heard this morning, our annualized sales pace of 3 for the year also met our goal. Combined with nearly $350 million in share repurchases, these results helped drive our return on equity to approximately 16% and set the stage for further expansion this year. We also entered into the affordable Indianapolis market, prudently increased our controlled lot percentage towards our 60% to 65% goal and made further progress in streamlining our operations for greater profitability. Most importantly, while 2025 promises to bring new challenges, some of which we are just beginning to fully understand, we are confident in our ability to navigate the headwinds and deliver results that once again meet the long-term targets we have established. As our initial guidance for the year suggests, we expect to grow our business while producing better than historical margins and returns. As you will hear at our Investor Day, we are committed to outsized growth in the years ahead and believe we have established the operational capability to do so accretively. I look forward to sharing more in three weeks and as always want to end by thanking our teams for their dedication and execution. It is because of their efforts that Taylor Morrison has recently been named America's Most Trusted Home Builder by Lifestory Research for an unprecedented 10th year, and to Forbes inaugural Most Trusted Companies in America list where we ranked number 12 out of 300. Now let's open the call to your questions. Operator, please provide our participants with instructions.

Thank you. We would now like to open the lines for questions and answers. Our first question comes from Matthew Bouley of Barclays. Matthew, your line is now open.

Good morning. You have Elizabeth Langan for Matt this morning. Thank you for taking the questions. I just wanted to start off on gross margins. I know that you noted that incentives are moving higher. Could you talk a little bit about how you're thinking about the cadence for gross margins this year with the higher incentives and with your 1Q gross margin guide in the high 23% range? Would you mind speaking, kind of how you're thinking about it in the context of the year in that 23% to 24% range?

Yeah, Elizabeth, this is Curt. I'll take that one. For the first quarter, we're guiding to the high 23% range. As we look at our full year margin guidance, we're expecting our margins to moderate throughout the year due to increasing rates and the lot cost inflation we'll be facing. So, in summary, the margin will decline over the course of the year.

And Curt, would you say it's fair to look at what came through the P&L in the fourth quarter? It's probably a little bit different, and we're going to see that go up a bit because rates have increased. However, when we consider what we were offering on the sales floor in the fourth quarter, it appears that the exit rate is likely similar to what we expect, given that rates are generally in the same range.

That's fair.

Thank you. To follow up on the gross margins, you indicated that you are assuming land costs to be around 7% this year. Could you share your expectations regarding material costs and the potential impact of tariffs? I understand that you have reshored many of your products, but any additional information on that would be helpful.

Yeah. Another great question. It's very interesting. Up until a couple of weeks ago, I would say that the cost environment was probably pretty stable as well as the overall supply chain. But like you, we've been following the news relative to the discussions on tariffs. And so, as we look at that, depending on kind of which tariff and you want to speak to whether it's steel or any of the other tariffs relative to our friends to the north or to the south, we do expect some cost pressure from some of that. If it's just the steel, it's quite minimal from that perspective, maybe $1,200 a lot. And that would only impact us in the back half of the year. Relative to the other tariffs that are out there, as we're looking at it and doing our homework, it's really early in the process and depending on if they come back, when we're looking at it, it might be an impact of $4,000 to $5,000 a house, roughly speaking. But the time that that would get implemented and the impact on the year would largely be a fourth quarter kind of time period. So again, we think it's very manageable within the range guide that we gave for the year that it's been contemplated in that.

Okay. Thank you. That's really helpful. Look forward to seeing you guys in March.

Look forward to it. Thank you.

Thank you very much. Our next question comes from Michael Rehaut of J.P. Morgan. Michael, the line is now open.

Thanks. Good morning, everyone. I appreciate the opportunity to ask my questions. To start, I would like to understand the pricing environment better. You mentioned only a slight increase in incentives for the fourth quarter and indicated that you are anticipating a price increase in January. This seems to contrast with what others in the industry are experiencing. I would like to know more about your overall pricing strategy and how you are approaching the market, especially considering that others might be seeing a significant rise in incentives. Additionally, I am curious about how much of your guidance for the first quarter and throughout 2025 includes an increase in incentives.

Yeah. Fair questions, Michael. Thanks for them. Let me start with kind of the fourth quarter. We saw kind of pricing power in just about 50% of our communities. So, we felt really good about the sales performance in the fourth quarter, even as you mentioned, a very difficult selling environment. Looking month-to-month over the quarter, performance felt like it was kind of more in line with historical patterns, albeit with maybe a few more little obstacles. But honestly, if anything, I was a little surprised how consistent each month was within the quarter, seeing a very, very small spread between the months. As we moved into '25, the price increase that you spoke of, we actually did do a national price increase. I think it was on the 2nd of January. The January started off pretty slow, I'll be honest. Very pleased with the pickup we've seen since mid-January and further pickup into February. Having said that, as I mentioned in my prepared remarks, we had a very robust Q1 last year. So, we're up against a very difficult comp. I'm not sure if we'll catch it, but I'm very optimistic about the traffic we're seeing. As you would expect, Mike, the pricing opportunities is very much a community-by-community decision. We even had one or two communities in the fourth quarter and maybe in January that we actually had a hobo. And so, when you're looking at these distinct locations with our move-up and active adults on unique lots, we actually do have pricing power. As I mentioned to Elizabeth, when I think about what came through the P&L in the fourth quarter, I would expect a small tick up in incentives. When I look at what we were actually offering on the sales floor, I think where we ended Q4 is generally what our expectations are for 2025. So yes, our guide does contemplate the environment we're in today. If we see something meaningfully different and rates go up significantly from where we are today, I'm not sure we'll have that captured. But generally, we feel we're in a pretty good place when we look, as Curt mentioned, the combination of our to-be-built and the higher margin opportunity they have as well as what's required in our first timers. And maybe I'll wrap that up, Mike, with just one more comment. And that's just the strength of our buyer groups. When we look at the move-up in the resort lifestyle, we just don't see the same need on the incentive side on rates because they're taking smaller loans. And obviously within our resort lifestyle, we're still seeing a great deal of cash.

Great. I appreciate all your insights, Sheryl. Regarding the SG&A guidance, I'm looking for some leverage this year. This seems to differ from some peers who may expect flat or slightly increased SG&A due to the challenging environment. I believe part of this leverage comes from the operational efficiency expected with some volume growth. I'm also interested in how you are allocating marketing dollars and commissions. How do these compare in the fourth quarter to a year ago? You mentioned the NAR settlement, but generally, there's also a more competitive landscape that might necessitate greater investment in this area. How are you approaching 2025 in terms of those two areas from a leverage or year-over-year perspective?

I'll ask Curt to discuss the overall SG&A. What we're noticing with NAR is that consumers are becoming increasingly aware. We're receiving more inquiries in advance about our commission rates. It seems consumers understand the dynamics at play, which is contributing to a decrease in co-broke. As I noted earlier, we're finally starting to see some relief in broker commissions through our virtual tools, with a reduction of over 10% year-over-year in the fourth quarter. In January, our online appointment rate decreased from 67% to 60%. When we begin to see these changes across all our virtual tools, it will have a significant impact. Would you like to add anything regarding the overall situation?

I believe we should consider that with the increase in closings and the related revenue growth, along with our teams' ongoing efforts to maintain an efficient business, we are achieving some SG&A leverage this year. This is a major focus for the team. We observe it across various overhead structures, including both sales and administrative areas. Overall, that's the main point.

Great. Thanks very much and see you next month.

Perfect. Thanks Mike.

Thank you very much. Our next question comes from Mike Dahl of RBC. Mike, your line is now open.

Thank you for taking my questions. I want to continue discussing pricing and incentives. It's interesting to see how you're testing the market with a general increase, but at the same time, you're indicating that the combination of incentives and cost inflation will lead to reduced margins throughout the year. Would you describe this as relatively modest overall? Are you just taking a bit where possible to counteract some pressures, or how would you define the scale of the base increases you're attempting?

If I'm understanding your question correctly, Mike, it really comes down to the mix of communities in the portfolio. We are seeing more pressure with first-time buyers and what we need to do to help them purchase their homes. The good news is that we've personalized the needs of our individual buyers and implemented programs that work for them. This allows us to focus our commitments without spreading them thin across the portfolio, which is a significant advantage. Earlier this year, we introduced a new program called Buy Build Secure, which assures customers who are not buying completed inventory that they will receive a rate generally 1% below the market rate at the time they close. This provides them with more assurance and is less costly than a forward commitment for someone closing in 45 days. As we utilize these different tools, recognizing that a third of our buyers are first-time buyers needing the most expensive incentives, and comparing that to other tools and the impact on our resort lifestyle buyers, we can expect some margin pressure. However, I believe we can withstand this pressure in comparison.

I believe the comparison is clearly positive. Just one quick follow-up or clarification and then another question. When you mention moderation throughout the year, does your guiding vision mean that you will stay within the range of 23 to 24 for each quarter of the year? Also, regarding the paper front, there seems to be some uncertainty in the market about what might happen with different aspects of immigration. Are you noticing anything significant on your job sites, and how do you plan to address and manage these potential challenges?

Mike, I'll address the first part of your question, and perhaps Sheryl can cover the latter part regarding immigration. From a margin guidance standpoint for 2025, we are currently providing guidance for Q1 and the full year, but we won't be offering additional guidance for the other quarters at this time. Overall, we do anticipate some moderation throughout the year. We feel confident about our margins for the year and maintaining that range despite the external challenges. Sheryl, I'll pass it to you for the immigration aspect.

You bet. More to come next quarter on the margin, right? On immigration, happy to report that we haven't seen anything hit the job site. Certainly, we've got protocols in place. We across the business have E-Verify protocols. Even though we've seen activity within markets, we have not seen anything hit our job sites. I'll be honest, Mike, coming into the year had a little bit of fear that we would see some absenteeism of folks, that maybe they didn't have a specific issue, but maybe a family member did and they may not show up. And we just haven't seen that so far. So, we'll keep you posted. But to date, I'd say there's been no disruptions.

Okay. All right. Thank you both.

Thank you.

Thank you very much. Our next question comes from Trevor Allinson of Wolfe Research. Trevor, your line is now open.

Hi, good morning. Thank you for taking my questions. First one, on demand by geography, focusing specifically on your central region. I know that's not exclusively Texas, but has a lot of Texas in it. And given the softness in that region, your 22% increase in absorptions was pretty notable. So, can you just talk about what is driving your strong performance in that region and any specific metros to call out?

I can certainly help with that. I'm pleased to report that the performance is generally strong across the board. Looking back at 2023, we remember that Austin experienced significant challenges due to high pricing. It was a tougher year for them. However, I want to highlight the impressive work of our Austin team, with sales increasing nearly 20% and absorptions rising nearly 30%. Houston is another excellent success story, with a lot to discuss. As Erik, Curt, and I have mentioned, we have been successfully repositioning our communities, resulting in improved paces and reduced discounts. In Dallas, we are witnessing significant growth, with plans to double in size in the coming years. In the Carolinas, we are seeing similar strength, with increased community counts, sales, and closings. The same is true for Raleigh and Atlanta. Overall, the performance is fairly balanced across the central region, which is very encouraging.

And Sheryl, I would argue regarding submarket positioning that we have indicated we assess our presence in the market. In each instance, the supply of resale homes in the areas where we operate is lower, which I believe improves the resale conditions.

Great point.

Your performance clearly supports that. Regarding the demand for resort lifestyle buyers, it's been stronger in recent quarters, but this quarter saw a slight decline. You mentioned some impacts from the hurricane and community count closeouts that may have affected the numbers. Can you share your expectations for growth by consumer segment in 2025? Also, do you anticipate a noticeable change in resort lifestyle closings as a percentage of your total closings in 2025 compared to 2024?

Certainly. When examining the fourth quarter, it’s clear we faced several challenges, including the impact of three hurricanes, which affected our communities despite their overall resilience. There were extended periods during which many of our communities were closed for hurricane preparation and recovery. Consequently, we adjusted the timing for some of our openings, resulting in three communities nearing closeout and three others postponed until early next year, alongside the timing of amenities. Overall, I am enthusiastic about Esplanade's performance and the potential for new developments across the country, currently at various stages such as underwriting, horizontal development, and land acquisition. Looking ahead to 2025, I anticipate our penetration will be quite similar to 2024. While there’s a possibility for growth in penetration as we expand, it may remain relatively stable. However, with the addition of new communities, I do expect a slight increase in Esplanade penetration, particularly in the active adult segment, which overlaps somewhat with our move-up category. The strength observed in our move-up segment, especially in the second move-up category, also blurs the lines between their presence in traditional communities and Esplanade.

Great. Thank you for all the color, and see you guys next month.

Thank you. Look forward to it.

Thank you very much. Our next question comes from Alan Ratner of Zelman and Associates. Alan, your line is now open.

Hey, good morning. Congrats on a great quarter and year. Great to see the consistency there in a challenging environment.

Thank you.

First question on the margin and incentive topic. Your rate buydown usage is obviously well below a lot of your peers and you have referenced multiple times the quality of your land, which you believe is driving your strong margins. I'm guessing even within the company there are differences from community to community regarding your use of incentives. I would like to gain more insight into the communities where you are offering more aggressive incentives and rate buydowns. Is there a common theme or driver contributing to that? Is it more resale competition in those areas? Are these entry-level communities where you are competing directly with more spec-focused builders? Can you point to anything in your portfolio regarding the difference between communities with below average and above average use of incentives?

It's a really interesting question, and we've looked into this quite thoroughly. When examining the fourth quarter rate, the absolute coupon rate at which we close deals is likely the lowest we've seen in over a year. This reflects where rates were during late summer and early fall, particularly in our first-time buyer communities, which are experiencing the most competitive pressure. Unfortunately, for these consumers, the requirements to qualify are quite strict. Our pre-qualifications are facing challenges, and these buyers tend to be very price-sensitive, with their financial ratios being a bit tougher. Despite this, the number of first-time buyers remains substantial, as they are eager to move away from what I would describe as high rental costs. One example that highlights the advantages for our consumers is our Buy Build Secure flex program. Instead of merely discounting the house or making costly forward commitments to assist a consumer with a guaranteed 1% reduction in the market rate, we can significantly reduce costs. For instance, with a $500,000 house and a 20% down payment, we typically face a cost of around $16,000 to achieve a similar monthly payment through our program. In contrast, achieving that same payment through price adjustments would range from $60,000 to $65,000. By using these efficient tools to support the consumer, we save significantly compared to the market rates, which can be upwards of 299 to 399 basis points costing up to 900 basis points in some cases. We're offering these programs at a much lower cost without affecting the house price, which helps us maintain our margin. However, there isn't a one-size-fits-all solution; it's tailored to each consumer. Since we're not distributing these forward commitments broadly across our portfolio and considering how much smaller this approach is than what the industry generally acknowledges, we are effectively preserving our margin strength.

And thematically, Sheryl, I think both at a number of them. You mentioned resales, but I think land supply and land competition remains highest on kind of those first-entry more tertiary markets. And so that's going to create a little pressure through the system. And then also as you mentioned resales, I think the new home competition as we think about supply is also the heaviest out there because across the US, I think the unsold finished new homes per community is 3.1 in first-time positions versus 2.5 for move-up. So that insulates us a little bit across our core location portfolio.

Yeah. It really does. And Alan, we're not suggesting that with these entry-level buyers that we're not having to spend more to get them. It is a very competitive environment as we move out of kind of the core and the move-up. And it's not our whole portfolio. The diversity of our portfolio is truly the benefit that you're seeing.

Got it. That's all really helpful and helps frame the strength you guys are seeing compared to others. The second question I had is about the land market. You mentioned an expectation for 7% lot price inflation impacting the P&L this year, which reflects what we observed in the land market a couple of years ago. I'm curious if you've noticed any signs of loosening or softening in land prices, perhaps with landowners being more willing to renegotiate current option contracts. That wasn't the case a couple of years ago when builder margins were over 30%. But now that some builders are returning to more normalized levels, I think it needs to be part of the discussion. So, I'm wondering if you've had any conversations with your land sellers or the people overseeing your contracts, and what your overall perspective is on land prices moving forward over the next couple of years.

Yeah. Hey, Alan, it's Erik. Thanks for the question. Yeah, to your point, I think your guys research and others would suggest that third quarter, fourth quarter, the demand for land categorically stepped down just a little bit. That doesn't mean it's easy. It's always hard out there. But I do think it means to your point that we've got a little bit more flexibility in terms of dealing structure. So that's where we're seeing it as we really work to continue to increase our percent control, do the OBS create greater efficiency in the balance sheet and increase our returns. That is front and center of all of our operators' minds to make sure that we're structuring deals in an efficient way. So, I think that's where we're seeing it. Not necessarily an absolute price, but flexibility.

Got it. Thanks Erik. Appreciate it guys.

Thank you.

Thank you very much. Our next question comes from Carl Reichardt of BTIG. Carl, your line is now open.

Thanks. Morning, guys. Appreciate the time. Alan and Trevor stole all my questions, but I have one follow up on Alan and I'd like to ask about land banking. And well, they're great questions. I want to ask about land banking costs and so my understanding at least out there is the amount of capital available for land banking continues to be significant. But I'm curious as to whether or not your expectation is that the cost of said land banking, which is expensive, will begin to moderate too. And part of what I'm curious about is if you look at your change in option mix, I'm assuming the vast majority of that change is related to land banking deals as opposed to sort of finish lot option contracts or farmer options. Is there a particular sort of trade-off that you look for in terms of risk versus takes versus option up front? And what do you think the trade-off is between gross margin impact and return on equity impact if you can sort of make it mathematical. And that's all I have. Thanks, all.

You covered a lot of ground there, and I appreciate it. To start with appetite and access, I think we've seen a number of established players in the market for quite some time, and I believe that this environment has improved in terms of risk management, with new participants entering the field. The demand for credit-oriented vehicles has been strong, leading to a reduction in costs. When we began this approach a couple of years ago, we managed to secure a very favorable interest rate. As for the trade-off concerning gross margin, I'll touch back on that. Interest rates increased slightly, but we adjusted our strategy and are now fully engaged again. I consider this a reliable and essential tool for our operations. Regarding the trade-off and its focus on gross margin, in our latest larger facility, we estimated a gross margin impact of around 197 basis points for a 750 basis point return impact, which results in a trade-off factor of approximately 3.8 times. Additionally, the use of various financial tools will be vital for us moving forward. Seller financing has historically been our most significant tool, and it continues to be effective. We have a variety of options, including joint ventures, joint development agreements, option takedowns, seller financing, and land banking, all aimed at increasing our control over time.

I appreciate the help. Thanks, all. See you next month.

Look forward to that.

Thank you very much. Our next question comes from Buck Horne of Raymond James. Buck, your line is now open.

Hey, thanks. Good morning, everybody. Going back to the land and the lot cost inflation question that was earlier there and just ways to maybe mitigate some of those costs. I'm just wondering if you think about leaning into just a more heavy mix of self-development lots or do you think in this year ahead or forward you'll put more emphasis on self-development. Or conversely, are you starting to see more finished lots on the ground that are already fully developed at more reasonable prices that could help mitigate the cost inflation.

Hi, Buck. It's Erik and I'll take that. Yeah, I would say that we've experienced a pretty significant pivot over the last five-plus years relative to finding finished lots, frankly and having to self-develop. Fortunately, that's been a core competence of ours and I would say a good 85% to 90%, give or take, are coming through the system are raw and self-developed. Now the important follow up on that is that we almost in every instance look for ways to mitigate that capital exposure by tying a tool to it, a financial tool. So, we are not finding a plethora of finished lots out there. We are used to self-developing and we're kind of looking at that going forward from today as well.

Got it. That's very helpful. And then just quickly going back to the Yardly business. If you've got a minute to talk about single-family rentals here. Just curious, kind of what you saw going into year-end in terms of the lease-up rates and the absorption pace of the build-for-rent communities. Is it getting more or less competitive with the amount of supply that's out there? And just any other thoughts on investor interest and pricing of those assets?

Yes, that's a great question, Buck. The two assets we sold had a monthly lease rate of 14 to 15, which was slightly lower than our initial projections. We have experienced some impact from the multifamily sector. However, in our horizontal apartment niche, there is less competition because of the specific renters we attract. Many of our renters come directly from nearby garden-style apartments and prefer the horizontal living option. We are monitoring the supply of multifamily units coming in 2024 and 2025, but it is not having as significant an impact as we initially anticipated.

I mean, early in the year, Erik, we have what, 11 communities that are in lease today and they're actually…

Yeah. And to your point, the last three, four weeks we've been running in the 40-plus for that particular portfolio. So, holding up well.

Very helpful. Thank you, guys. Congrats.

Thank you.

Thank you very much. Our next question comes from Alex Barron of Housing Research Center. Alex, your line is now open.

Yes, thank you. Good morning. I'm not sure if I missed it or if you mentioned it, but can you elaborate on the other income line item, the minus $47 million vs $80 million a year ago? What was included in that?

Hi, Alex. This is Curt. I'll address that. There are a couple of points to mention. First, a legal reserve was established in Q4 due to the court awarding the plaintiff's final attorney fees for the Solivita case, which was decided in 2023. We recorded approximately $17 million as an incremental amount to other income and expense. Additionally, there are some pre-acquisition write-off costs for projects we are no longer pursuing, totaling about $6.5 million for the quarter. Lastly, there is an increase in unrealized losses from prior policy periods in our captive insurance company, referred to as Beneva, which is roughly $17 million for the quarter as well. These are the main components affecting other income and expense for the quarter.

Got it. Thank you. And then likewise, what drove the increase in the Amenity line item versus previous quarters? And I guess along those lines, where do you guys account for the sale of the Yardly portfolio?

Yeah. The sale of the Yardly assets come through Amenity revenue. And so that's what you're seeing there is the two sales. We had one sale in Dallas and one in Phoenix that contributed to the revenue component to that. And then for the quarter, what we're also doing is we had a charge on the remaining last multifamily communities from the William Lyon acquisition to the tune of just under $18 million that is running through what is called Amenity and other expense in cost of revenue.

Okay. So, all these are one-time nature type things. Thank you so much.

That's correct. Yes. Thanks, Alex.

Thank you very much. We currently have no further questions, so I'd like to hand back to Sheryl Palmer for any closing remarks.

Well, thank you so much for joining us today. Look forward to seeing many of you next month at our Investor Day. Stay well.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.