Hilla Sferruzza : Now Carl, if you think that our last debt deal was at sub four and land banking costs 2x to 3x of that and you have a billion dollars of cash, it’s tough to make the math work on why you’d want to do land banking. But as we’re intentional about the growth and looking to accelerate that beyond our available cash flow, we’re definitely going to be utilizing land banking in the next year or so.
Carl Reichardt : Okay. And then… Sorry.
Hilla Sferruzza : It’s not availability market.
Carl Reichardt : Okay. And to your earlier point, Alan’s question, you feel like you’ve almost perfected to some degree the backend on the WIP turn. So the field production side, you’ve got turns really strong. Now we focus on the more on the front end. Phillippe, can you talk just a little, a bit about how the time it’s taking to get lots from raw stage to finish lot and then into the field, you’re talking about 120 or so stores for in ‘23 that you’ve invested in some way, shape or form and that being ’25. Is that time extending at all in terms of how long it’s taking and are there markets where it’s improving at all?
Phillippe Lord : I would say it’s kind of stable. Everything sort of changed coming out of COVID. The cities have moved very, very slowly. It takes much longer to get your plans through plan checks. The land development is taking longer as well. There’s more regulation there. So it all changed out of COVID. We used to believe that we could get lots on the ground in 12 to 18 months and now it’s 18 months to two years depending on the market. And it hasn’t changed for a while. That’s kind of what we run our forecast out at. We usually are fairly conservative when we buy new land. We assume closer to two years versus 18 months. And if things go faster than that, they go faster than that. I’d say it’s really sticky. We haven’t seen cities become more efficient as it relates to getting land and titles and getting our development agreements approved.
And frankly, we haven’t seen the developers, be able to move any faster as well. So it’s kind of right there, that’s the assumption and it’s not getting any worse, but it’s not getting any better.
Hilla Sferruzza: And then Carl, just to clarify, I think we hit on this in the prepared remarks. We hit our community count openings. We turned over 41% of our starting inventory from a community perspective since the beginning of the year. We opened over 110 communities this year. So it was really the closeouts that impacted our community count. So that elongated time cycle that’s in all the numbers that we’re already giving you. We’ve kind of been operating in this environment for a while.
Operator: Our final question today is coming from Susan Maklari from Goldman Sachs.
Susan Maklari: My first question is, when you think about the potential for some existing homes inventory to come back online over course of the year as rates move lower. Can you talk about how you can compete against that? And perhaps the benefit that you’re going to have as you are moving down in some of these ASPs to a more entry-level first-time kind of buyer, the ability that will give you to sustain that sales pace that you’re targeting?
Phillippe Lord: I think it’s really about what we are doing, right? Ever since we’ve pivot our strategy and now, we’re really focused on our spec strategy. In order to compete with the existing home market, it’s all about having products that consumers can move in on the same timeline. A lot of folks buy existing homes because they can move in on their timeline and when you buy a new home, you have to work on the builder’s timeline. So what we’ve done is we’ve increased our specs, we’ve increased our move-in ready inventory, so that we can stay in that consideration set when people are shopping for existing homes and time doesn’t become a factor. Now it’s just literally about location and price. So, we’re seeing — it’s what we’ve done and we believe as the existing home market pause out if rates were to drop and this lockout effect turns around, that will stay in that consideration set because we have move-in ready inventory.
Susan Maklari: And then one of things that you mentioned in your commentary is that part of the gross margin benefit that you saw was efforts to renegotiate with your suppliers. As you think over time about the growth that you’re expecting and perhaps the leverage that you’re gaining with that, how do you think about the puts and takes to the margin over time? As your land costs adjust and relative to that 22% target that you have, what are some of the levers that you can pull in there?
Hilla Sferruzza: I think that we do think there’s an opportunity to revisit that 22%. As we grow, all of those numbers should improve, right? So for right now, we’re experiencing elevated lot cost coming through, but the new land that’s coming through is not at these exceptionally high-level. They’re still elevated, but they’re starting to become more normalized. So land over time should revert back to more normalized number. We’ll definitely have to create a purchasing power. So some push on direct and then of course that leverage that we talked about that fixed component. And then hopefully over time also the incentives will normalize. So we see a lot of positives kind of beyond 2024, which is still a little bit murky. It’s hard to see all the pieces of 2024, but we see everything trending in the right direction over time to get us to a number that’s likely something nicer than 22%.
We don’t have a number yet, but we’re working through that math and as soon as we have improved internal targets, we’ll be sharing those externally.
Operator: Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Phillippe for any further closing comments.
Phillippe Lord : 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 your day and a great weekend. Thank you very much.
Operator: Thank you. That does conclude today’s teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
