Stephen Kim: Yes, exciting times. I appreciate all the color. And particularly, the commentary on January really dovetails with what I’ve been hearing. A lot of excitement out there but everyone seems extremely cautious about predicting the sustainability of the rebound. So with regard to that, obviously, the sales that were extremely good. You were over your 3 to 4 order per month pace in January. And so the market clearly has done a kind of an about face. And I’m wondering if you’re beginning to ratchet down incentives at the community level or taking other actions which would effectively mean that you’re raising your net price.
Phillippe Lord: Yes. So at the end of the day, we’re going to try to get 4 net sales per store. And that’s how we built our business and we’re going to try to get a 21% to 22% margin at that pace. And we — everything from that point of view. So we went out there, we had some additional inventory. And I’m optimistic that having that inventory really is why our sales rebounded in January. We’re not sure the market, frankly, is any better other than the fact that it’s the spring and not the winter and interest rates have somewhat stabilized. From our perspective, it’s about having move-in ready inventory which we have. That’s what consumers want. And that’s why we feel like we saw the January result. In a number of communities where we made adjustments, we did see very strong elasticity in demand when we lowered prices and we were able to achieve even above our 4 net sales.
So in those communities, we’re pulling back on incentives where we think that’s sustainable. And we’ll back off on rate buydowns. We don’t have to use rate buydowns nearly as much as we did now that we’re selling all specs. People can move in relatively quickly and we can drive those costs down. So it’s community by community. But it’s one month and we’re going to go take market here right now. We’re going to be aggressive. If we can do more than 4 months at today’s margins, we’ll probably take more than 4 months at today’s margin. It’s spring selling season and we want to go get this market share while other builders don’t have the spec homes to go get it. So, we’ll pull back a little bit where it makes sense. But for the most part, we’re comfortable where our absorptions are, our entire margins are.
And we’re going to go try to sell more houses.
Stephen Kim: Yes, that makes a lot of sense. Your commentary, though, about community count and your rollout of those communities would seem to be a bit at odds, though, with running hotter than 4 a month. So correct me if I’m wrong. If this demand actually proves to be deeper and broader than anyone is really willing to bet on yet, do you have the ability to do an about face on your community count openings or community openings so that you can maintain a positive year-over-year community count over the course of the year?
Phillippe Lord: We can always accelerate opening our community. The demand is really strong. I think we don’t feel that that’s prudent today. So it would have to be really strong for us to make the decision to do that. Right now, we’re seeing some meaningful opportunity to lower our vertical costs on those new openings and I think that’s probably more critical for the long-term success of the community than opening it up early and getting community count comps because we have these big investments we made. And we don’t want to compromise the integrity of those communities by opening them up at high vertical costs that don’t underwrite. So that’s number one. Number two is it’s still not getting any easier to open these communities, get the municipality, municipal approval, get transformers to the job site and, frankly, get finished inventory so that when we open up a community, we have ready to — move in ready inventory in every single one of community.
So that’s driving the decision is the operational discipline there. And I don’t think we’re going to compromise that just to hit — to accelerate community count this year. It’s more about opening up those communities with strong momentum, opening them up clean, well executed, opening up with Sandy inventory ready to move in and opening up with the best vertical cost structure we can.
Hilla Sferruzza: Just to clarify, Stephen, the 300 community count target that we say we’re going to hit in a couple of quarters, that already peaks in the rebidding process. So as we said, it’s going to take us a couple of quarters to get through the full rebid. We said we’re not going to have those home starts until the latter part of this year which is exactly aligned with our community count opening target that we just provided. Opening a community without inventory doesn’t really work. As we said, the volume that we’re seeing is because we have available specs. And putting a whole bunch of specs in the ground at an inflated cost and you know it’s coming down in just a couple of quarters doesn’t seem to be the right decision.
So we’re willing to be patient to make sure we drive that accelerated pace while not sacrificing what sales price, we can set the targets at and just have those sales in the back half of the year instead of more anaemic at a lower margin pace in the front end of the year.
Phillippe Lord: And just one last comment, the cancellations in Q4 were all part of the issue was people opening up communities without production. And then you’re hoping to hold on your buyer for 9 months and that just doesn’t make any sense when we don’t know what interest rates are going to do. So we want to open up with move-in ready inventory. Customers are willing to engage with something that moves in 30, 60, 90 days. They can lock their rate. And I think it minimizes your cancellation exposure. So we’ve got our cancellations down to where we want it now. And we’re going to run our business to make sure we keep those cancellation rates low, assuming that interest rates will continue to remain volatile.
Stephen Kim: Yes. So that’s interesting, Philippe, because I think that you mentioned that you’d like to see rates stabilize. And what you just said is that we’ve seen a lot of volatility in the mortgage rate which we certainly have. And so I’m curious — you sort of suggested that buyers need to see some rate stability. But I’m curious if that’s really true. For instance, if we were to see the mortgage rate drop into the which it certainly seems as possible here in the relatively short term, do you not think that, that might represent an additional boost to a home buyer sentiment as that starts to make the headlines?
Phillippe Lord: I mean, clearly, you’re asking me a trick question. If rates are lower, there’s more demand. It’s absolutely one-to-one relationship. So yes, if rates go to 5, we’re going to see stronger demand. But we’re going to stay with our operational discipline of selling move-in ready specs. It’s about our supply chain. It’s not our cost structure and it’s about not knowing what the future holds. We could see a great — a strong spring selling season. But rates could go up in the back half of the year. The Fed made their speech yesterday. They certainly didn’t say they were going to lower them. So we don’t know yet and we’re going to focus on operating the way we think is in the best interest of our company.
Operator: The next question is coming from Alan Ratner of Zelman & Associates.
Alan Ratner: Thanks, as always, for all the great info. First on the pricing side, Hilla, you brought up average order price down 20% over the last couple of quarters which is obviously way more than the market is down and certainly way more than your peers are. And it sounds like maybe some of that is you guys being more aggressive. But I would imagine there’s a decent amount of mix in there as well. So, I’m just curious if you’re able to kind of parse that out for us because I do recall a couple of quarters ago when you were kind of giving the impairment sensitivity. I think you said like home prices would need to drop 20% for there to be any meaningful impairment risk. And now you’re saying there’s obviously not a ton of risk out there which makes a lot of sense given the current market. I’m just curious if you could kind of drill into that a little bit.
Phillippe Lord: I’ll let you unpack the impairment question but I would just tell you, it’s not a lot of mix. It’s mostly just price. We absolutely — our ASP was close to middle of last year and we’re now close to 390 and it’s mostly store-to-store. Primarily, the biggest adjustments have been in the West and certain parts of Texas, although a little bit to the east. And our position is that we’re an affordable builder. We have to get to a payment that makes sense for our customers. And we believe that payment exists when we’re under 400 ASP. So we underwrote most of our land that’s come into our income statement 2 years ago, assuming our ASP was going to be in the 3s to low 4s and that’s where we position our product. And so we’re about competitively positioning ourselves at the bottom of the graph or slightly above the bottom of the graph and being the affordable new homebuilder in our competitive set; so all that is mostly price.
It’s — yes, we’ve opened up a few new communities and they’re maybe at lower ASPs. But it’s pretty much all priced. And then Hilla can speak to the impairments.
Steve Hilton: Well, we do have geography with the East.
