Hilla Sferruzza: Yes, I think that’s an appropriate modeling variable. I think that the expectation that we’re making the majority of the shift geographically in 2024 is probably right. It’s hard to predict what every community in a big portfolio is going to do, but the big shift in ASP will be in 2024. So there’s not like a sequential one to come after that. So I think that’s a fair assumption. And then, yes, you should definitely expect to see something greater in community count growth in 2025 versus 2024. I don’t know that we’re putting a number or a percentage around it, but more than 24 in a percentage basis.
Phillippe Lord: Yes. I mean, obviously, we bought a tremendous amount of land this year and a lot of that land starts to come on in 2025.
Michael Rehaut: One last quick clarification, if I could squeeze it in. In answer to an earlier question, first quarter gross margins are assuming incentive levels. Is it fair to say like roughly current incentive levels just given the high turnover and spec model, I’m thinking most recently December, January. And you talked about that assumption as ’24 progresses that you’re kind of assuming current incentive levels meaning in the last couple of months. Just wanted to make sure that I understood that right relative to the higher incentive levels that maybe you and the industry were seeing in October, November?
Phillippe Lord: No, you got that right. Yes, we’re modeling incentives more that exist in our current backlog that were mostly December sales as we’ve rolled into January.
Hilla Sferruzza: Although those are more elevated than historical averages, it’s definitely less than what we’ve experienced in the spike in rates. There’s definitely going to pull back on rate lock usage, but we’re still running north of historical averages.
Operator: Our next question is coming from Alan Ratner from Zelman & Associates.
Alan Ratner: The first question, we’ve heard from a few builders putting out kind of intermediate term growth targets and I think 5% to 10% seems to be the consensus that everybody has agreed upon in the industry. And if I look at your at least your guide for ’24, it seems like you’re expecting growth in a similar range on at least from a volume perspective, maybe towards the lower end of that. But if I look at your spec start pace the last few quarters, you’ve been starting roughly 4,000 homes a quarter annualizing out to 16,000 units, which is obviously above what you’re guiding for in ’24 from a closing perspective. So I thought I heard you kind of say you’re comfortable with your spec supply and you kind of aim to have a higher supply heading into the selling season, which makes sense.
But, is there something that’s given you pause on not kind of maintaining this 4,000 quarterly starts pace based on kind of what you’re seeing in the markets? Or any color you can give there would be helpful.
Phillippe Lord: No, it’s not, there’s nothing about the pace of specs. In fact, we’ll probably ramp-up our spec starts pace in the back half of this year because we’ll have community count growth. It’s just the absorption pace that we’re assuming throughout the balance of the year around four a month is really driving the total guide for closings for the year. In order to increase that, we would have to assume a higher absorption pace than what we’re currently getting in the market. So, if it’s not about we — would have to sell every spec we started throughout the entire year for the most part to get to that number and it’s more — the guide is being driven by the absorption pace range that we set for our forecast.
Hilla Sferruzza: Yes, Alan, there’s nothing magic about 4,000, right? It’s just a number that makes sense at our current community count level. As Phillippe mentioned, we’re going to be ramping up community count towards the back half of the year. So if we’re looking to keep that 4 to 6 target of specs per store, 4- to 6-month supply of targeted specs per store as we increase our store, that number will go up with the community count.
Alan Ratner: And then the second question, your ROE has got as high as 30% during the pandemic phase. And if I look at, you know, your guidance for ’24, it implies some further compression down to something more in the low teens, which, it’s probably actually going to be maybe a little bit below the industry average. And if I just kind of think through the components of that, your inventory turnover has kind of stalled a little bit here as you’ve built up some spec supply. Obviously, the cash is building up on the balance sheet, which I think you talked a little bit about, Hilla, and the strategy there. But I’m just curious if you guys have an intermediate longer-term target on ROE and what else can be done to drive that up and assuming the current market conditions stay kind of where they are currently for the foreseeable future?
Phillippe Lord: I mean, it’s really going to be lower this year because we’re ramping up our business. We’re putting a lot of land on our books and that land doesn’t come to the market until 2025. So, that’s really the drag. As the earnings go up and our growth goes up in 2025 and beyond, we think we can get that back above 20% long-term. So, it’s really a point in time because we didn’t buy land the back half of the year and then we’ve ramped up our land spend and spend almost $2 billion this year and a lot of those communities aren’t going to come to the market until back half of this year and 2025.
Hilla Sferruzza: You have to look at it in two different buckets. The first is a return on inventory, like WIP inventory and that’s super quick. We have 110% conversion on our backlog, so that’s actually accelerating. It’s what Phillippe mentioned, which is we’re in the growth mode obviously as you’re looking to increase community count and you’re spending quite a bit more. We were $1.5 billion last year in 2022 on land and development spend and we’re guiding to $2 billion to $2.5 billion in just 24 months later. So that increase, it’s definitely going to be a drag on return on inventory. But as those units come to market, there’s going to be a large acceleration on the return part of the equity. And I think that the combination of our share repurchases, which is obviously one way to impact the E on return on equity and now the dividend, hopefully, the combination of those two are going to end up resulting in an improvement in both the R and the E in the calculation beyond 2024.
Operator: Our next question is coming from Carl Reichardt from BTIG.
Carl Reichardt : Alan took my question, but let me follow-up on it. Hilla, what would have to materialize for land banking to become a more significant sort of focus for you all, and what is your objection now? I recognize great balance sheets, so it allows you to hold more to self-develop. But as you think about a forward scenario, is the cost of land banking availability in the markets where you really want to grow? I’m just — I’m curious, what would need to show up for this to become a more significant portion of how you think about your land portfolio?
Steve Hilton : It’s that our growth goals exceed the ability to utilize our own balance sheet to a point where we get uncomfortable with our liquidity position or our net debt-to-cap ratio. And that just hasn’t happened for three years. But as we think about our growth plans for the next three years, we can’t grow as fast as we’d like to grow utilizing our own balance sheet. So now the cost of capital makes sense for us, and we’re going to start utilizing land bank to achieve our growth goals. It’s really about the ability to utilize our balance sheet and maximize the liquidity and our capital markets. So once again, we’ve been able to fuel this top five builder position through our retained earnings while maintaining a really, really low net to cap — debt-to-cap ratio and excessive liquidity. Well, as we grow here over the next three years from 15,000 units, we’re going to start utilizing land banking to manage that.
