Hilla Sferruzza: Sure. There’s an opportunity to get aggressive on share buybacks to consider other methods of getting cash to shareholders to look at the debt paydown. We’re looking at everything and trying to make sure that what we do optimizes the return to the shareholders while keeping us in the strongest balance sheet position possible. So there’s definitely some action that we’ll be taking in 2023 but the magnitude and which action it is, we’re still betting through our Board. So stay tuned for next quarter’s call for some more visibility into that.
John Lovallo: Okay, that’s good to hear. And then the 89% of orders for entry level, how high can this go? And how high would you like it to go? And is there — just remind us, is there any margin differential on the entry level versus other parts of your portfolio?
Phillippe Lord: Yes and there’s really no differential. We have 3 consumer segments that we focus on entry-level buyer, what we call the move-down value-conscious buyer and then we move up the value-conscious higher. And it’s kind of blurry. The lines get blurry. Some of them are the same people, same type of families, aspirational entry-level buyers are kind of moved up value-conscious. So I think you go — it can get all the way up to 90%, 95% based on your definition of our customers and our communities. But our target is 70%, 75% entry level and 25% to 30% value conscious move down and move up buyers. And so I think it can move around depending on what interest rates are doing and what the market is doing but that’s kind of the sweet spot.
Operator: The next question is coming from Carl Reichardt of BTIG.
Carl Reichardt: Philippe, you mentioned that cycle times in Arizona and Colorado were the longest in the company. I’m just curious why is that.
Phillippe Lord: It’s a good question. I think it’s a couple of different things. I think and they’re both different actually, not the same reason. But in Arizona, there was just so much demand during COVID. And I just don’t think the trade capacity could keep up with the amount of starts that were being pushed out both in multifamily and single-family. So tremendous ramp-up in 2020, ’21, just put a lot of constraints on them and they just weren’t able to keep up and we saw some pretty meaningful expansion in cycle times across a lot of categories not just front end versus back end but across the board. So just big market, lots of demand. Colorado has always had a labor issue. It’s always been difficult to attract skilled labor there.
It’s — a lot of folks don’t get into that business there. It’s always been somewhat constrained. And then when you add a surge in demand that we saw again out of COVID, you just saw our cycle times get really, really long. So 2 different reasons; I think Phoenix recovers relatively quickly as demand has slowed significantly here. And so we’re already seeing that. I think we’ll be able to get our cycle times down here relatively quickly as demand slows. Denver is always going to be a challenge. We always have the longest cycle times there. We build basements. We do a lot of high density there because affordability. So we’ll continue to have challenges there but hopefully, we’ll do better as the market slowed there as well.
Carl Reichardt: And then second, in the past, you’ve talked a lot about the importance of keeping your pricing near to below FHA conforming loan limits. Obviously, you’ve had a big jackup in those limits. Has that helped at all in January? Are you hearing that from consumers or seeing that in terms of apps?
Phillippe Lord: No. It’s really not even a factor for us anymore because FHA and conforming loan limits have gotten so high. So now it’s just all about where we’re positioned against our competitive set. We want to be, as I said earlier, on the bottom to the middle of the bottom of the graph, depending on who we’re competing with and really be the affordable offering in the market. So it’s just driven by our pricing and our research department that looks at every community every week and tells us where we need to price our inventory to find the ideal pace. But it’s no longer really connected to that unless it is, right? It clearly matters. We want to be below that but we probably want to be well below that these days given how high we are.
Hilla Sferruzza: Just visibility, Carl, FHA for the year for us was 15% of our total mortgage pool certainly, some people are using FHA but it’s so high that a lot of people are just getting conventional loans. They don’t need the assistance that comes from FHA, the dollars kind of got a little bit disconnected. It was a 2-year lag to where they needed to be and they came up right when ASP started to come down.
Operator: Our final question today is coming from Alex Barron of Housing Research Center.
Alex Barron: Yes. I wanted to ask regarding your land position, how you guys are thinking about what’s transpired, I guess, in the last few weeks and your approach to land going forward, if there’s going to be opportunities to replace the stuff you guys cancelled at better deals? Or are you just going to hold off? Or how are you guys thinking about the current land environment?
Phillippe Lord: We’re definitely going to be cautious and patient here. We’re going to get through certainly the spring and sort of re-evaluate what the market looks like, what the long-term prospects look like. We’re seeing some opportunity out there. I saw a survey recently that land prices have started to decline modestly, I think, around 5%. I don’t think that’s enough. We’ve got to get our land development costs down as well, if things are hard to underwrite. Today’s interest rate environment is the new reality; so we have plenty of land. As you’ve articulated, we have the ability to maintain our 300 community count trajectory for the next couple of years without really buying anything. So it will be about when it’s time to grow from there.
We’re in some new markets. We clearly want to be active there but we want to be patient as well. So, I think you’re just going to see us be really, really patient. We’re definitely going to get through the next couple of quarters to read the tea leaves, kind of evaluate what 2024 and 2025 are going to feel like before we start ramping it up. That being said, we have $850 million sitting in the bank. And if opportunities present themselves, we’ll certainly go get.
Hilla Sferruzza: Yes. Alex, just to clarify, you’re hearing from all of our peer builders. A lot of folks are dropping options that don’t make sense. We’re walking away from land deals. Those land deals still exist. They’re just going to be repackaged and sold to the builders at a cheaper price. So at some point, there is going to be a jumping point that we’re going to enter the market opportunistically more than having land committee every week and buying land aggressively but there will be opportunities to buy land at more attract prices.
Alex Barron: Got it. And if you reflect back to the last 2 years, I mean, we had supply chain issues, then we had rising interest rates. What do you think are the, I guess, lessons for you guys? Or how are you thinking about maybe if either of those 2 things — let’s say, the market reaccelerates and we start to see supply chain issues again, what do you think you’d be doing differently this time to capitalize on these opportunities? Or how would you approach things differently this time around, given your experience in the last 2 years?
Phillippe Lord: Well, we’re always learning. I think that we’ve demonstrated over the last 5 years that we’re probably one of the — we’re an extremely agile and proactive organization. We’ve been ahead of a lot of the trends. We came out of COVID more aggressively than anybody, grabbed market share. We pivoted our strategy. I think we’re playing in the — with the right side in the right part of the market. We have specs. So we’re going to continue to be agile. We do this job 24/7. We’re paying attention to everything. We have a very aligned, engaged team out there. We talk all the time. We listen to one another and we’re going to continue to collaborate as a team and move quicker and faster than we have before so that we can take advantage of whatever opportunities represented in this market but also properly manage the risks that are still evident as well.
So it’s about being agile. It’s about being willing to change and innovate constantly and we have a real strong capability here and we’ll continue to invest in that. And that’s what we’ve learned, right? Don’t continue to think that everything that was is going to be and just be willing to evolve and adapt. Thanks. Thank you, operator. I’d like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you.
Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.
