Earnings Call Transcript - TPH Q4 2021

Company Representatives, List of Company Representatives

Doug Bauer - Chief Executive Officer; Glenn Keeler - Chief Financial Officer; Tom Mitchell - Chief Operating Officer, President; Linda Mamet - Chief Marketing Officer; David Lee - General Counsel

Operator, Operator

Greeting. Welcome to TRI Pointe Homes, Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. The operator provided instructions on how participants may ask questions during the Q&A. Please note, this conference is being recorded. I will now turn the conference over to David Lee, General Counsel. Thank you, you may begin.

David Lee, General Counsel

Good morning and welcome to TRI Pointe Homes earnings conference call. Earlier this morning the company released its financial results for the fourth quarter of 2021. Documents detailing these results, including a slide deck, are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. Discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through TRI Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Doug Bauer, Chief Executive Officer

Thanks David! Good morning and thank you for joining us today. As we go over our results for the fourth quarter and full year 2021, I will provide an update on current business conditions and give insight into the future of TRI Pointe Homes. 2021 was a record year for our company, capped off with earnings of $1.33 per share in the fourth quarter and $4.12 for the full year. Home Sales revenue rose 15% year-over-year for the quarter on a similar increase in new home deliveries. Our home sales gross margin for the quarter was 24.4%, which was an increase of 120 basis points year-over-year. SG&A expenses as a percentage of homebuilding revenue for the quarter improved 140 basis points to 8.5%, a record low for the company. For the full year we delivered 6,188 homes, which exceeded the high end of the original guidance we gave at this time last year. We're able to achieve all this despite persistent, industry-wide supply chain challenges. We credit and thank our experienced and skillful teams who looked for creative solutions and took proactive approaches to new home starts, material sourcing and construction to get homes completed for our customers. Our sales pace for the fourth quarter came in at 4.3 homes per community per month, which is well above seasonal norms for that time of the year. Demand for new homes continued to outstrip supply in our markets during the quarter, a dynamic that is carried into 2022. Buyers continue to exhibit a strong sense of urgency to own a home, driven by strong demographics in migration to lower-cost markets and an overall change in attitude toward homeownership, brought about by the pandemic. Leading the way in this demand surge is the millennial cohort. This demographic represents 57% of our home buyers in backlog, and is a sizeable population that should fuel the new home market for years to come. Another important demographic segment for our industry are the baby-boomers who have accumulated wealth and are now looking for new home alternatives. We have strategically positioned our company to address these demographics and believe we are primed for ongoing positive results. We made significant strides in our return metrics during the fourth quarter, culminating in a return on average equity of 20.3% for the full year 2021. We achieved this goal through several strategic initiatives, including our one-brand launch at the beginning of last year, the ongoing monetization of our long-dated California assets, increased profitability across our homebuilding platform, improved scale in our early-stage divisions, more efficient land management and consistent share repurchases. Our one-brand launch in January 2021 has had the impact we anticipated, giving our company a unified brand message across our homebuilding platform, streamlining our marketing efforts and lowering overhead costs as a percentage of total revenue, which was reflected in our SG&A percentage of 9.6% for the full year 2021. With respect to our California long-dated assets, we have a number of positive developments to report. We continue to generate strong orders and profits from our existing communities, particularly in Los Angeles, San Diego County and the Inland Empire, thanks to our favorable land bases and outstanding market position. We opened our 292-unit targeted planned community, Altis at Skyline in Santa Clarita, in the fourth quarter, as well as our 844-unit planned community Citro in Fallbrook. Both feature new home options at attainable prices for the respective buyer segments and the initial response has been tremendous. In the Inland Empire, our planned community of Atwell with its detached entry-level and first-mover product generated over 21 orders per month in the fourth quarter. These California communities demonstrate our key focus on developing a mix of entry-level and first-mover product in core submarkets. Despite rising home prices, our median sales price of single-family homes in the fourth quarter in California was $599,000 compared to the state's median single-family existing home price of approximately $797,000. In addition to our California divisions, we saw excellent growth and financial results from our homebuilding operations around the country, with 60% of our fourth quarter deliveries generated outside of California. This strategic focus to diversify our company from a geographic perspective started several years ago and is providing greater opportunities for us to offer more entry-level and first move-up price points, while producing more efficient returns. We are especially pleased with the progress we have made in our newer divisions in Sacramento, Austin, Dallas and the Carolinas, which are making significant contributions to the bottom line with a substantial runway for growth. We made considerable investments in our operations in 2021 by enhancing our technology platforms, introducing more efficient and cost-effective floor plans, and refining our design studio process. These initiatives will directly result in improved efficiency and returns. Another focus has been our lot option agreements and land banking arrangements. Total lot counts stood at over 41,000 lots at year end, with 47% controlled at year end versus 37% a year prior. We believe this land approach lowers the risks that are inherent in the land and land development business, while improving our returns over time. The final component of our return-improving strategy has been our share repurchase program, and we were once again active buyers of our stock in the fourth quarter, purchasing more than 2.7 million shares at an average price of $22.64. This brought our full year total to over 13 million shares repurchased, at an average price of $21.13 for an aggregate dollar amount of $276 million. Yesterday our board authorized an additional $250 million under our existing stock repurchase program as we remain committed to this program and view it as a productive use of our capital, as well as a signal of confidence in TRI Pointe’s future. 2021 was a record-breaking year for our company and we believe we are poised to improve on those results in 2022 for a number of reasons. First, we started 2022 with a healthy backlog of over 3,100 homes. Our buyers in backlog who have been pre-qualified through our mortgage affiliate have an average debt-to-income ratio of 39% and an average FICO score of 748. With this steep backlog and the quality of our buyers, we are well positioned to deliver on our guidance, even with the uncertainty of rising interest rates. Second, demand has once again accelerated in 2022, building on already strong results we experienced in the fourth quarter. With the extremely low supply of housing in both the resale and new home markets, coupled with our strong buyer profile, we feel demand will remain healthy. We are currently managing sales at over 50% of our communities in an effort to account for rising costs and to maximize profits while matching sales cadence to our production capacity. Third, we are extremely pleased with our land pipeline and expect to open between 180 and 200 new communities over the next 24 months. The majority of those communities are located in our growth areas outside of California and in the more affordable entry-level and first move-up segments. Finally, with an all-time low net-debt to net-capital ratio of 21.1%, our balance sheet strength and our ability to generate positive cash flow from operations gives us the necessary liquidity to continue to grow our business and repurchase stock for strong returns to our shareholders. With that, I’d like to turn it over to Glenn who will provide more detail on our results this quarter and give an update on our forward-looking guidance. Glenn.

Glenn Keeler, Chief Financial Officer

Thanks Doug, and good morning. I'm going to highlight some of our results and key financial metrics for our fourth quarter and then finish my remarks with our expectations and outlook for the first quarter and full year 2022. At times I will be referring to certain information from our slide deck which is posted on our website. Slide six of the earnings call deck provides some of the financial and operational highlights from our fourth quarter. As Doug mentioned earlier, demand continued to be strong in the fourth quarter with an absorption rate of 4.3 homes per community per month, which is an elevated sales pace for the fourth quarter from a historical perspective. Order activity was healthy across all geographies with the West Region reporting an absorption rate of 4.3 homes per community per month. The Central Region experienced an absorption rate of 3.9 and the East had an absorption rate of 4.9. Demand has further accelerated into the first quarter of 2022, with an absorption rate over five for the first six weeks of the year. We reported outstanding results on all key metrics this quarter that either met or exceeded our stated guidance. We delivered 1,885 homes, which was a 15% increase year-over-year. Home sales revenue was $1.2 billion, also an increase of 15% and our average sales price was $637,000. Our homebuilding gross margin percentage for the quarter was 24.4%, a 120 basis point improvement year-over-year. If you were to exclude impairments, our homebuilding gross margin would have been 26.1% for the quarter. The strength of our margins were a result of our ability to raise prices during the year to more than cover the cost increases we experienced. Finally, SG&A expense as a percentage of home sales revenue came in at 8.5%, a record for any quarter for the company, representing a 140 basis point improvement as compared to the fourth quarter of 2020. The improvement was the result of several factors, including increased leverage on our fixed costs due to the growth in revenue, efficiencies related to our shift to one brand and taking advantage of the strong market conditions to streamline our advertising spend. Turning to communities, in line with our guidance, we opened 21 new communities during the quarter bringing our total to 72 new community openings for the full year. For 2022 we plan to open 15 new communities in the first quarter and 35 new communities in the second quarter. We expect to open another 40 to 50 new communities in the second half of the year to bring the total for the year to between 90 and 100 new communities. As a result, we anticipate ending 2022 with between 150 to 160 active selling communities. Looking at the balance sheet, at quarter end we had approximately $3.1 billion of real estate inventory. Our total outstanding debt was $1.3 billion resulting in a debt to capital ratio of 35.3% and a net debt to net capital ratio of 21.1%. We ended the quarter with $1.3 billion of liquidity, consisting of $682 million of cash-on-hand and $601 million available under our unsecured revolving credit facility. We generated positive cash flow from operations of $420 million for the full year of 2021, while spending approximately $875 million on land and land development for the full year. For 2022 we expect to generate positive cash flow from operations and spend between $1.1 billion and $1.3 billion on land and land development. Now, I'd like to summarize our outlook for the first quarter and full year. For the first quarter we anticipate delivering between 900 and 1,100 homes at an average sales price between $650,000 and $660,000. We expect homebuilding gross margin percentage to be in the range of 25% to 26% for the first quarter of 2022 and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 13% to 13.5%. Lastly, we estimate our effective tax rate for the first quarter of 2022 to be in the range of 25% to 26%. For the full year we anticipate delivering between 6,500 and 6,800 homes, at an average sales price of $660,000 to $670,000. We expect our homebuilding gross margin range to be 25% to 26% for the full year. Our SG&A expense ratio is expected to be in the range of 9.7% to 10.2%. Finally, the company is forecasting its effective tax rate for the full year to be in the range of 25% to 26%. I'll now turn the call back over to Doug for some closing remarks.

Doug Bauer, Chief Executive Officer

Well, thanks Glenn. We have a lot to be proud of with our results in the fourth quarter and full year 2021. We met or exceeded our previously stated guidance on key operational metrics, with the return on average equity more than 20% for the year despite ongoing industry-wide supply chain challenges. We also positioned our company for further growth in 2022 and beyond thanks to a sizable year-end backlog and a substantial increase to our total lot count outside of California. We achieved this while also repurchasing more than 13 million shares of stock during the year, generating positive cash flow from operations and maintaining a healthy balance sheet. Given these positives, the extremely low supply of housing and strong demographics, we believe TRI Pointe Homes is poised for a very bright future. Finally, I'd like to thank all of the TRI Pointe Homes team members who have contributed to this record-setting year. Our people continuously impressed me with their talent, dedication and creativity that helped make this company what it is. We achieved several milestones in 2021, including record-breaking revenues, operating margin and earnings per share, and our successful year was not just revenue driven. We are constantly looking for ways to build on our passion and culture, which is validated by a Great Place to Work certification. I am gratified to work with our exceptional teams and I deeply appreciate their efforts. That concludes our prepared remarks and now we'd like to open the call up for questions. Thank you.

Operator, Operator

Thank you. The operator again provided instructions on the process for submitting questions. Our first question is from Stephen Kim with Evercore ISI. Please proceed.

Stephen Kim, Analyst (Evercore ISI)

Thanks very much guys. Yes, strong results and I'm really curious if you could provide a little bit more color around your comment about the first six weeks and absorptions being over five. Obviously that's a strong result. But I was wondering if you could give us some sense of how your pricing power has been moving as well and, perhaps more importantly, how start cycle times have been progressing in the first six weeks from what you can tell?

Tom Mitchell, Chief Operating Officer, President

Good morning, Stephen. There's a lot there, but all fairly good news. Relative to absorption and orders, this year we're off to a really strong start and we anticipate results that are going to be equal to or greater than last year. Our January was phenomenal and that's continued right into February. So we're expecting a strong spring selling season. On pricing, because of high demand we continue to have pricing power, and so we continue to be able to price our products to offset the rising cost pressures that we continually feel. We feel in good shape that that's going to continue through the spring selling season as well.

Doug Bauer, Chief Executive Officer

Stephen, our goal as a company is to have everything started by the end of May, because it's a very uncertain environment. Because of the supply chain — as you know it's well documented — we are pushing all our teams to get everything in the ground by May so we can have a successful year.

Stephen Kim, Analyst (Evercore ISI)

Got you. So I take it from that comment that certainly we are not seeing any improvement in the cycle times here as we enter this year. So I guess are you seeing any worsening of cycle times and could you give us a specific number on what you did in terms of starts in the fourth quarter?

Doug Bauer, Chief Executive Officer

Go ahead Linda.

Linda Mamet, Chief Marketing Officer

Sure. Stephen, in terms of starts in the fourth quarter, we started 1,377 homes. Of those, 49% of them were spec starts.

Tom Mitchell, Chief Operating Officer, President

Relative to cycle time, we are not seeing any further declines to our cycle times. We are managing that quite well and, as Doug said, the teams are being very creative in finding solutions to offset supply chain issues. So we're holding pretty well relative to that, but it is a significant increase year-over-year. It's probably about on average a 30-day delay from where we were a year ago.

Stephen Kim, Analyst (Evercore ISI)

Yeah, that all makes sense and is consistent with what we're hearing elsewhere too. Last thing for me is your SG&A was great. You talked about, among a few things, the shift to one brand. Can you give us a sense for how much impact or benefit you got from that specific move?

Glenn Keeler, Chief Financial Officer

I don't think we have disclosed anything specifically from a dollar amount perspective. It's hard to parse between the really strong market conditions we were in versus the specifics to one brand, but there definitely are a lot of efficiencies when it comes to marketing for one brand versus six, as we were doing before, and that's baked into the good numbers you saw.

Stephen Kim, Analyst (Evercore ISI)

Sure. Okay great. Well, thanks very much guys. Great results!

Doug Bauer, Chief Executive Officer

Thank you.

Operator, Operator

Our next question is from Tyler Batory with Janney. Please proceed.

Tyler Batory, Analyst (Janney)

Thank you. Good morning. Let me just start on the gross margin side of things, 25% to 26% for Q1 and same for the full year. Can you talk a little bit more about how you are thinking about the potential cadence and progression of gross margin as we go through the year? Also interested in your expectation for cost increases that are embedded in that guidance as well.

Glenn Keeler, Chief Financial Officer

Sure, Tyler. I think margins are going to be relatively consistent as you go through the quarters at that 25% to 26% range. We do our plan based on current costs and current revenues and that's how we put our plan together. But we are assuming costs are going to rise and we are planning based on that, and we are planning on, given the market issues that Tom mentioned, offsetting those with price increases.

Tyler Batory, Analyst (Janney)

Okay, great. And in the prepared remarks you talked about managing sales in 50% of your communities. Just remind us how that compares with prior quarters.

Doug Bauer, Chief Executive Officer

It decreased to the end of the third quarter and then it picked back up in the fourth quarter as supply chain challenges continued.

Tyler Batory, Analyst (Janney)

Okay, and the decision to do that — that's not related to demand at all, correct?

Doug Bauer, Chief Executive Officer

That's correct.

Tyler Batory, Analyst (Janney)

Okay, just wanted to clear that.

Doug Bauer, Chief Executive Officer

Demand is very strong. The supply chain is a huge factor and it's mostly at the front end — not only the supply chain, but also the municipalities that we deal with across the country and the continuous testing and COVID protocols. It's well documented. We're set up for another strong year. We had a record year in 2021, and while there are always going to be some bumps in the road because of the supply chain, we're very optimistic because demand in January and February has been very, very strong. So it should be a good year.

Tyler Batory, Analyst (Janney)

Okay, great. I'll leave it there, that's all from me. Thank you.

Glenn Keeler, Chief Financial Officer

Thank you.

Operator, Operator

Our next question is from Alan Ratner with Zelman & Associates. Please proceed.

Alan Ratner, Analyst (Zelman & Associates)

Hey guys, good morning. Congrats on the strong quarter and year. First question, Doug: I'd love to hear how you're thinking about raising prices in the current environment, whether the increase in rates has changed the way you're thinking about pushing price. Are you being more conservative given the affordability impact or is that not really factoring into your thought process at this point?

Doug Bauer, Chief Executive Officer

No, good question Alan. It definitely factors into our thought process. Just for some data out there: last year on average we had 15% revenue increases versus a 13% increase in costs. So now to your question, we are being very measured in our pricing increases to offset our costs that are being thrown at us. Demand supports it, but we're being very measured because we realize that prices have gone up quite a bit over the last 18 months and it's not a secret that rates are going to go up too. So we're using common sense in our approach.

Glenn Keeler, Chief Financial Officer

Alan, I would add we are always continually pricing our product to balance pace and price and maximize our profitability, and with such strong demand we still see pricing power and we expect that to continue through the spring selling season.

Alan Ratner, Analyst (Zelman & Associates)

Got it. Second question: it wasn’t a big amount, but you did take an impairment or maybe it was lot option abandonment this quarter which was a bit larger than where it's been tracking. Can you add a little color behind what drove that this quarter?

Glenn Keeler, Chief Financial Officer

Sure Alan. It was mainly due to one project that was located in the Bay Area that was kind of a COVID casualty based on where it was located in an inner-city location, and we were just having slow sales there so we lowered price to move through the project. It was a one-off unique project from that perspective and that was the bulk of it.

Alan Ratner, Analyst (Zelman & Associates)

Right, thanks for that color Glenn. I appreciate it.

Doug Bauer, Chief Executive Officer

Thanks Alan.

Operator, Operator

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

Ryan Frank, Analyst (RBC Capital Markets) on behalf of Mike Dahl

Hey guys, this is Ryan Frank on for Mike. I just wanted to touch on the question on pace versus price again. You guys are selling at about five houses a month per community, which is well beyond normal. Why wouldn't you push price more and why do gross margins look like they are going to be down sequentially? Can you help us parse that out please?

Doug Bauer, Chief Executive Officer

Well, I'll take a stab at that. Mortgage rates have gone up about 75 basis points since the fourth quarter, so with a rising rate environment and given we have a full year to execute on, I think it's prudent to be more measured in your approach to pricing pace along with the supply chain environment.

Glenn Keeler, Chief Financial Officer

The margin dynamics relate to homes we sold earlier where you saw high lumber prices reflected in those overall margins. For the full year, we are in a tough rising cost environment and we think we can offset those with price. If price exceeds costs, you'll see us at the higher end of that margin range, but that's why we're guiding 25% to 26% in the first quarter.

Ryan Frank, Analyst (RBC Capital Markets) on behalf of Mike Dahl

Got it. Would there be any mix shift impact throughout the year? Are you expecting that to play a larger role going forward on the gross margin side?

Glenn Keeler, Chief Financial Officer

No. From a mix perspective it will be relatively consistent throughout the quarters, so margins should be relatively consistent between the quarters based on where we sit today.

Ryan Frank, Analyst (RBC Capital Markets) on behalf of Mike Dahl

Okay, last one: you historically don't sell at this pace, so what are you thinking about pace going forward for the rest of the year? Presumably it's going to come down, but what magnitude and do you think you're a structurally faster-turning company at this point?

Glenn Keeler, Chief Financial Officer

Compared to pre-pandemic levels, we're a structurally higher-turning company because we have a much greater presence in the entry-level and first move-up markets. Relative to this year, we expect higher absorption in the spring selling season and slower absorption in the back half of the year — normal seasonality — but still an overall elevated pace due to the strong demand.

Ryan Frank, Analyst (RBC Capital Markets) on behalf of Mike Dahl

Got it. Very helpful. I'll pass it on. Thank you.

Operator, Operator

Our next question is from Carl Reichardt with BTIG. Please proceed.

Carl Reichardt, Analyst (BTIG)

Thanks. Hey everybody. You have been doing a lot of new community openings and planning for more. As you're opening those communities, how are absorptions tracking there? Do you set initial prices low in early phases and raise them through, and do your absorption rates tend to be very good when there's a new community opening? How does that picture look relative to your legacy stores?

Tom Mitchell, Chief Operating Officer, President

Sure Carl. As you know, we like to get off to a strong start when we open new communities, but there's such a high pent-up demand and anticipation for those new communities, it's not just due to lower pricing. We price to the market on our openings and because of our great locations and our focus on design and innovation and our new product types being well received by the consumer, we get off to a great start. We expect that to continue. We are excited about the new openings coming up and this is a big growth year for us. We think we're moving into higher volumes going forward because of our new communities.

Carl Reichardt, Analyst (BTIG)

Okay, thanks Tom. And sort of along similar lines, as you're looking at the supply chain continuing to be difficult this fourth quarter and into the first quarter, where in the process are you actually releasing homes for sale? How early are you putting homes into the market?

Linda Mamet, Chief Marketing Officer

Hi Carl. We are continuing to balance between to-build homes and spec homes. In the fourth quarter, 52% of our orders were to-build homes, which is slightly down from the prior quarter as we were able to get most spec starts into the ground.

Carl Reichardt, Analyst (BTIG)

Okay, thanks Linda. Thanks everybody.

Doug Bauer, Chief Executive Officer

Thanks.

Operator, Operator

Our next question is from Jay McCanless with Wedbush Securities. Please proceed.

Jay McCanless, Analyst (Wedbush Securities)

Hey, good morning. Congrats on a great quarter. On the SG&A percentage, it looks a little higher than what we were expecting for the first quarter. Could you talk about whether that's some cost being built in for all the community growth this year or just less leverage on the top line?

Glenn Keeler, Chief Financial Officer

Yeah Jay, good question. It's a bit of both. Our guidance of 900 to 1,100 deliveries for the first quarter means there's some fixed G&A that is impacted by the top line in the first quarter. We're also expecting higher sales and marketing costs related to the 90 to 100 new communities we are opening this year, so that's part of it as well.

Jay McCanless, Analyst (Wedbush Securities)

Okay, it looks like you had less than 30 finished specs at the end of the fourth quarter. Where's the longer-term target for that? I think Linda said you had some success putting more specs in the ground; where do you envision that going as we move through the year?

Tom Mitchell, Chief Operating Officer, President

Typically we like to see about three to four specs per community across the country. The current number is around 27 to 30, though that may vary by region. That is not a lot of inventory right now and that's part of the issue: there's low inventory in both new and resale markets. Despite rising rates in the short term, the consumer demand remains strong. Ultimately we like to see that three to four number, but it's going to take time to get there.

Glenn Keeler, Chief Financial Officer

We may not be able to get there given the strong demand, because as we start specs they get snapped up before we can get too far along in the construction process.

Linda Mamet, Chief Marketing Officer

Right. Currently we have eight homes per community sold under construction, and those are selling quickly.

Jay McCanless, Analyst (Wedbush Securities)

Thanks for that. I know Doug talked about municipal issues starting to flare up again. Now that Omicron seems to be receding, have those started to improve and is it across the board with finals and permits or was it strictly getting permits pulled and getting moving on the homes?

Doug Bauer, Chief Executive Officer

We see most of the delays at the front end. Even with Omicron receding and many municipalities operating virtually, it's still a labor-intensive process to move through permitting. Once you get past the front end of the construction process, we've had pretty good success staying on task.

Jay McCanless, Analyst (Wedbush Securities)

Okay, that's good to hear. Thanks for taking my questions.

Doug Bauer, Chief Executive Officer

Yep.

Operator, Operator

Our next question is from Alex Barrón with Housing Research Center. Please proceed.

Alex Barrón, Analyst (Housing Research Center)

Thank you and great job on the year. I wanted to reconcile the guidance in terms of deliveries for the first quarter versus the full year. 900 to 1,100 seems relatively low; what's contributing to that? Is there any weather-related component or other timing? How are you ramping up to the 6,500 to 6,800 full-year deliveries — is that a function of assuming a very strong spring selling season?

Glenn Keeler, Chief Financial Officer

Good questions Alex. The 900 to 1,100 for the first quarter is a function of timing. We had strong absorptions in the fourth quarter but many of those were unstarted or early in the start process and so they don't deliver until later. For the full year, we started with a healthy backlog — about 50% of our guidance in backlog at the start of the year — and we are off to a strong sales pace. We are hoping to get all of our starts in the ground by May to hit those deliveries and we feel comfortable we'll be able to get to 6,500 to 6,800 for the full year.

Alex Barrón, Analyst (Housing Research Center)

Okay. When it comes to the impact of mortgage rates, nobody seems to have seen a negative impact yet, but if the Fed raises as many times as people think, do you build that into your assumptions about demand and sales pace as the year progresses?

Doug Bauer, Chief Executive Officer

Yes, we do stress test our backlog. We've tested the backlog up to 100 basis points. Mortgage rates already increased about 75 basis points. My sense, and our mortgage affiliate's sense, is that some of the rate increases are already priced in. We continue to monitor backlog and offer long-term rate locks going into the year. Demand has remained strong despite recent increases in rates.

Tom Mitchell, Chief Operating Officer, President

Alex, we do factor the rising-rate environment into our business plan and guidance and we've been a bit more conservative in our assumptions because of that.

Alex Barrón, Analyst (Housing Research Center)

And the long-term rate lock: what kind of impact does that have and is it reflected in margins or in the financial services line? How much does that cost typically?

Glenn Keeler, Chief Financial Officer

It does get reflected in revenue because it's an incentive we would give to the buyer, so it would impact margin. Linda, what's the usual cost?

Linda Mamet, Chief Marketing Officer

In the current high-demand market, we generally are not needing to use a lot of incentives to encourage customers to rate lock. It could be between $1,000 and $2,000 that we might contribute at this time.

Alex Barrón, Analyst (Housing Research Center)

Got it. Okay, thanks and best of luck.

Doug Bauer, Chief Executive Officer

Thanks.

Operator, Operator

And now our final question is from Deepa Raghavan with Wells Fargo Securities. Please proceed.

Deepa Raghavan, Analyst (Wells Fargo Securities)

Hi, good morning everyone. Thanks for taking my questions. Start with community count growth: you're exiting with pretty strong growth. You talked about it last quarter too. Obviously you're setting yourself up for a better 2023 and it looks like given your land spend you're continuing to invest in more communities. How should we think about 2023 community count growth — is 2022 your strongest investment year? Also any color if the newer communities you're bringing online this year have more lots than traditionally so your growth potential is stronger into 2023?

Glenn Keeler, Chief Financial Officer

Deepa, good questions. We will seek community count growth into 2023. We haven't given a specific ending community count number, but Doug mentioned we are opening between 180 and 200 new communities over the next 24 months, so you'd see a similar number of communities opened in 2023 as in 2022. You'll see a rise in the ending community count number in 2023 and that will lead to higher deliveries assuming continued strong market conditions. On the size of communities, overall there hasn't been a major shift toward larger communities. However, in Texas we are focused on growing and have invested in larger land positions in Dallas, Austin and Houston, so you will see larger community positions in those markets.

Deepa Raghavan, Analyst (Wells Fargo Securities)

Okay, and as you're investing, are you thinking about Florida more actively here? Are you looking to enter that market?

Doug Bauer, Chief Executive Officer

We're not actively building in Florida right now. From both an organic and M&A standpoint, we continue to look at opportunities in the Southeast. We have tremendous growth planned in the Carolinas — the land is already owned and controlled — and we'll look at expanding along the coastal part of the Carolinas. The rest of the Southeast is on our radar as part of our strategic plan to get to $6 billion in revenues by 2028. So it's on the radar, but currently we are not building there.

Deepa Raghavan, Analyst (Wells Fargo Securities)

Okay, got it. My last one: any sensitivity analysis you can provide on interest rate moves? For example, every 50 basis points move might not impact your backlog — any sensitivities you can share?

Glenn Keeler, Chief Financial Officer

Yes Deepa, as Doug mentioned, we run a sensitivity on a regular basis relative to our backlog. Our analysis shows that a 50 basis point adjustment really has no impact given the high quality of our backlog and buyer profile. As it moves to a 100 basis point increase in interest rates, we see a high-single-digit to low-double-digit impact on our backlog based on debt-to-income ratios. So we feel really good about our backlog relative to a rising-rate environment.

Deepa Raghavan, Analyst (Wells Fargo Securities)

Alright, this is helpful. Thanks very much for the color and good luck. Very strong outlooks. Thank you.

Glenn Keeler, Chief Financial Officer

Thank you.

Operator, Operator

We have reached the end of our question-and-answer session. I will turn the conference back over to Doug Bauer for closing comments.

Doug Bauer, Chief Executive Officer

Well, thank you everybody for joining us today. We're very proud of our results in 2021 and look to capitalize on that in 2022. I hope all of you have a great week and we look forward to chatting with you in April. Thank you.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.