Taylor Morrison Home Corporation (NYSE:TMHC) Q1 2024 Earnings Call Transcript

Taylor Morrison Home Corporation (NYSE:TMHC) Q1 2024 Earnings Call Transcript April 30, 2024

Taylor Morrison Home Corporation beats earnings expectations. Reported EPS is $1.76, expectations were $1.57. Taylor Morrison Home Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Taylor Morrison’s First Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce, [Operator Instructions] I will now hand you over to Mackenzie Aron, Vice President of Investor Relations. Please go ahead.

Mackenzie Aron: Thank you, and good morning everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session will include forward-looking statements. These statements are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements.

In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Sheryl Palmer: Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer, and Erik Heuser, our Chief Corporate Operations Officer. Today I will share the highlights from our first quarter as well as an overview of the competitive differentiators driving our strong performance. After my remarks, Erik will review our land portfolio and returns focused investment strategy, while Curt will detail our financial results and guidance metrics. In the first quarter, our team delivered a strong start to the year, including better than expected sales activity, upside to our gross margin expectations and efficient construction progress that has set the stage for continued success through the remainder of the year.

We delivered 2,731 homes at a better than expected home closings gross margin of 24%, driving earnings per diluted share of $1.75, and 14% growth in our book value per share to $50. With consistent activity throughout the quarter, our net sales orders increased 29% year-over-year driven by a monthly sales pace of 3.7 per community, putting us firmly on track to meet our annual sales pace goal in the low three range. Following this positive first quarter momentum, we are raising our full-year guidance and now expect to deliver approximately 12,500 homes at a home closings gross margin between 23.5% and 24% at an average price of 600,000 to 610,000. This improved outlook is reinforced by our healthy backlog of over 6,200 homes and includes the expected contribution from our entry into Indianapolis that I will share more on in just a moment.

Our strategic emphasis on broad consumer reach, quality locations, and a flexible production model is grounded in a through the cycle playbook that aims to deliver sustainable long-term profitability and cash flow generation while minimizing our exposure to housing cyclical forces. The success of this strategy is demonstrated with our increase in this year’s guidance for home closings, gross margin, and average closing price despite the renewed mantra of higher for longer interest rates. Since expanding our company scale over the last many years and then focusing on fine tuning our operations, I’m immensely proud of how our teams are executing on our long standing strategic priorities and even more excited for the meaningful growth and bottom line results we anticipate as we look ahead.

In addition to our strong company specific outlook, the housing market overall remains healthy despite the continued headwinds from elevated mortgage rates, some economic uncertainty, and global unrest. With a multimillion unit deficit of housing in our country and supportive demographics across multiple generations, the need for new construction that meets the demands of the evolving consumer is as apparent as ever. Guided by our deep consumer research, our land investment, product offerings, and sales strategies are focused on meeting these needs. The diversification of our consumer mix from entry level through first and second move up to resort lifestyle buyers is the foundation of our strong performance. We further maximize our results by optimizing our construction efficiencies and gross margin opportunity by offering both quick move inspects and personalized to be built homes aligned to our customers’ needs and preferences, while our geographic diversification adds another layer of risk mitigation and growth opportunity.

By design, this approach allows us to tap into the deep pools of demand that exist across the homebuyer spectrum, each with important advantages to our overall portfolio that we believe enhance our performance over the full course of a housing cycle as various consumer groups respond differently to various macroeconomic factors. Today, with affordability remaining stretched for many consumers at large amid volatile interest rates, our diversification has aided our ability to navigate these headwinds by allowing us to meet demand without sacrificing gross margins given relative pricing resiliency in our communities supported by our buyers’ financial strength. In the first quarter, our average buyer financed by Taylor Morrison Home Funding, which had an exceptional capture rate of 87%, had a credit score of 751, down payment of 23%, and household income of a 176,000, each of which are stronger than industry norms.

In fact, our conventional buyers in the first quarter had nearly 400 basis points of average rate cushion in their ability to qualify and could absorb an additional half point increase in interest rates with negligible impacts to their DTI ratio and monthly payment. Capturing the strong start to the spring selling season, our first quarter net sales orders increased 56% sequentially and 29% year-over-year, driven by improvement in our monthly pace to 3.7 per community. This pace marked our strongest since the first quarter of 2021 and was well ahead of our first quarter average of 2.6 from 2013 to 2019, reflecting the multiyear evolution of our portfolio to higher pace communities. I am also pleased that sales converted from online reservations increased 47% year-over-year as these tools continue to gain traction among our buyers further enhancing our success.

As the quarter progressed, held activity was consistently strong each month allowing us to raise pricing in more than 60% of our communities and selectively reducing incentives. When I look across the country, it’s notable that our markets with the broadest consumer diversification performed most strongly during the quarter, while divisions with a heavier entry level concentration generally performed in line to slightly below our expectations. Looking even more closely at our consumer data, we see that in the markets where our median customer income exceeds that of the overall MSA by a wide margin, our sales paces and pricing strength have held up most resiliently over the last several quarters, again reinforcing the benefits of our diversified consumer base.

Now as you’ve heard me discuss before, our resort lifestyle and move up buyers, which accounted for a combined 63% of our first quarter sales tend to utilize all cash or minimal financing when making their purchase and have the means to spend upwards of a $150,000 on lot and design upgrades to personalize their to be built homes. This contributes to a gross margin advantage of several 100 basis points compared to our company average. On the other end of the spectrum, our entry level communities benefit from a significant pool of pent up demand among first time buyers for simplified spec homes, albeit with more limited financial flexibility that does require a higher use of incentives and other discounts. As a result, while only a third of our first quarter closings utilize mortgage forward commitment to secure their desired interest rate, nearly 50% of those were first time buyers.

Ultimately, by serving the full spectrum of consumers, we capture the dual benefits of both healthy demand and pricing strength, which contributes to more durable long-term earnings. As I shared last quarter, we are targeting at least 10% home closings growth annually beginning in 2025, following the high single-digit growth now expected this year based on our revised guidance. This growth is critical to maintaining and further solidifying the many competitive and operational advantages associated with our strong local, regional, and national scale. The vast majority of this growth is expected to be organic within our existing markets of operation. But as I’ve said in the past, we’re in the fortunate position of being able to evaluate other opportunities presented by single market local builders, many of whom are finding it difficult to grow given constrictive capital availability, tighter labor resources, and other constraints in the private market.

One such opportunity recently arose that met our high threshold for strategic fit and financial accretion, and I am pleased to share this morning our entrance into Indianapolis by way of approximately 1,500 homebuilding lots from Pyatt Builders. Nearly 55% of these lots are controlled via auctions, and we funded the purchase with cash on hand. We’re excited to add this healthy and growing market to our map within our central region under the leadership of Pyatt’s strong existing team of tenured operators. Indianapolis boast meaningful net migration that ranks Top 10 in the country, peeled by above average employment growth of 3% over the last 12 months, and favorable affordability that is highest among the country’s top 30 major metros. Due to its low land residuals, its housing market has been remarkably resilient over time, and we are encouraged by the capital efficient growth opportunity the market presents.

Curt will provide more specific details as to Indianapolis’ financial contribution for the remainder of the year, but let me just say again that I’m so excited about this compelling opportunity that further strengthens our portfolio’s consumer and geographic diversification. As I’ve laid out this morning, this unique diversification combined with our operational capabilities provide important competitive advantages that we believe will deliver superior growth and profitability in the years ahead. I’d like to share a few of the long-term targets we have established that demonstrate this. First, on the top line, as I said earlier, we are targeting at least 10% home closings growth annually in 2025 and beyond. With over 74,000 homebuilding lots, our existing land pipeline and planned community openings will support this growth over the next few years as we already own or control over 90% of the lots needed through 2026.

For growth beyond 2026, we are focused on investing efficiently with a growing percentage of controlled lots and a preference for balance sheet friendly self-developed projects in prime locations as Erik will discuss in more detail. Secondly, we are targeting an annualized monthly sales pace in the low three range as compared to our historic run rate in the low to mid-twos, which improves our asset turnover and returns on invested capital. This pace expectation is driven primarily by the newer often larger communities that we have underwritten over the last several years as well as our higher share of spec sales and expanded geographic footprint. Third, we expect our homebuilding gross margins and returns to remain well above our historic average due to increased production and operational efficiencies, greater cost leverage from our scale, and lower capitalized interest burden from our reduced debt levels.

Reflecting these changes, underwritten gross margins on homebuilding lots approved over the last four years exceeded those of lots underwritten in the prior four years, buying average of more than 200 basis points. At the same time, we are committed to continually looking for ways to optimize our SG&A, including ongoing centralization and other cost reduction efforts such as our technology driven efficiencies. And lastly, the strength of our balance sheet is exceptional and we have significant financial flexibility, giving us confidence and strong cash flow generation and ongoing capacity to return excess capital to shareholders in the form of share repurchases with a $300 million repurchase goal this year. Based on these long-term targets, we expect to generate consistent mid-to-high teens returns on equity and ongoing book value growth for our shareholders with the ultimate goal of delivering top quartile results within our peer set.

With that, let me now turn the call to Erik.

Erik Heuser: Thanks, Sheryl, and good morning. Our owned and controlled lot inventory was 74,182 homebuilding lots at quarter end. Based on trailing 12 month closings, this represented 6.5 years of supply, of which 3.1 years was owned. Controlled lots represented 53% of our total supply. The specific vehicles and structures used to achieve this off balance sheet control include joint ventures with like-minded homebuilders, seller notes and financing, option takedowns, and land banking arrangements. With each of these tools offering different risk return and cost tradeoffs, we aim to match each deal with the ideal financing structure with a focus on generating optimal returns for each investment opportunity. As we look ahead, we expect to continue to gradually increase our control lot percentage to 60% to 65%, with the timing of achieving this multi-year target dependent on the cost and availability of such tools.

During the quarter, we invested $367 million in homebuilding land acquisition and $221 million in development of existing assets for a total of $588 million up from a total of $321 million a year ago. For the full-year, we continue to expect our land investment to be between $2.3 billion and $2.5 billion with approximately 40% allocated to development. The total investment amount will ultimately be dependent in part on our deployment of land deferral tool throughout the year. As Sheryl noted, we already own or control over 90% of the lots needed to fulfill our growth plans through 2026, providing flexibility when evaluating lot acquisitions that are primarily targeted for deliveries in 2027 and beyond. On the development front, we are focused on bringing our existing lot positions to market with well over 200 new community openings planned through the end of 2025.

As a reminder, we have gradually increased our average underwritten community size to approximately a 150 lots from a 100 lots historically, which has been a modest headwind to our absolute community count level, but a significant driver of our stronger expected sales paces and cost leverage. Based on these openings and our sales expectations, we now expect our second quarter and year end community count to be in the range of 330 to 340, inclusive of approximately 10 new communities in Indianapolis. Compared to our prior guidance, we also benefited from a handful of communities that opened earlier than anticipated in the first quarter. Before passing the call to Curt, I’d like to spend a moment elaborating more on our land approach, which has gradually evolved over the last many years to take greater advantage of our strong internal land development expertise to help drive our growth and enhance our returns.

As we shared last quarter, given the scarcity of finished lot deals, we have reduced our reliance on expensive finished lot acquisitions delivered by master plan developers in favor of balance sheet friendly self-developed land parcels. By developing more of our own land, we gained many important advantages, including increased operational control and enhanced gross margin profile, increased cost leverage from larger more efficient community layouts, higher expected sales paces, and expanded investment opportunities that often involve less competition from other builders less inclined to self-develop. Importantly, we undertake these self-development investments with a sharp focus on returns and capital efficiency. In fact, over the last two years, 58% of the raw and partially finished lots we have approved have had some form of capital release, most often in the form of seller financing or a takedown structure.

This allows us to still benefit from the capital efficiency of just in time lot deliveries, while retaining the operational advantages and financial upside associated with self-development. Ultimately, our land investment decisions are made on a project-by-project basis grounded in a returns driven underwriting framework that seeks to generate attractive full cycle performance. With that, I will turn the call to Curt.

Curt VanHyfte: Thanks, Erik, and good morning, everyone. As you’ve heard this morning, we are pleased with our first quarter results and the momentum we have built for the remainder of the year. For the quarter, our net income was $190 million or $1.75 per diluted share. We delivered 2,731 home closings at an average price of $599,000, which produced total homebuilding revenue of $1.6 billion consistent with our prior guidance. Our average cycle times improved by about one week sequentially, driven by our team’s focus on operational efficiency and normalization of supply chain dynamics. By year end, we are targeting another three to four weeks of improvement, which would bring our average cycle time back to pre-pandemic norms of approximately five to seven months depending on the product profile.

In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters to manage appropriate inventory levels and meet our closing goals. In the first quarter, we started 3,442 homes or 3.5 per community per month, up 35% from 2,549 homes or 2.6 per community per month a year ago. Including these starts, we had 8,578 homes under production at quarter end. Of these homes, 38% or 3,299 were spec homes, of which only 415 were finished with a skew towards our entry level communities where first time buyers prefer quick move in homes. Based on these homes under production, we expect to deliver approximately 3,000 homes in second quarter. And for the full-year, we now expect to deliver approximately 12,500 homes, up from at least 12,000 homes previously.

This includes around 175 homes in Indianapolis for the remainder of the year. We expect the average price of our home closings to be approximately $605,000 for the second quarter and now anticipate a range of $600,000 to $610,000 for the year. Our home closings gross margin was 24%, up slightly from 23.9% a year ago. This exceeded our guidance due to a combination of favorable mix, lower incentives with our diverse consumer offerings and greater cost savings. Based on the strength of our backlog, we now expect our home closings gross margin to be at least 23.5% for the second quarter and between 23.5% to 24% for the full-year, inclusive of our new Indianapolis assets. This improved margin outlook reflects the pricing power we achieved thus far in the year and our conviction that incentives will remain manageable even with the recent move in interest rates given the strength of our buyer profile.

As Sheryl discussed, we expect our gross margin to remain above our pre-pandemic averages given the benefit of meaningful operational enhancements and greater overall scale that has structurally improved our profitability. Our net sales orders increased 29% year-over-year to 3,686 homes. This was driven by a 28% increase in our monthly absorption pace to 3.7 per community, which was our highest pace since the first quarter of 2021, and a 2% increase in ending community count to 331 outlets. Our net sales order price was $608,000 down 3% year-over-year. Cancellation rates remain low at just 7% of gross orders. This was down from 14% a year ago. Our below average cancellation rates continue to reflect the strength of our diversified buyers, diligent pre-qualifications, high conversion among well researched buyers utilizing our online reservation tools, and a proactive approach to securing meaningful upfront deposits from our customers, which averaged $57,000 per home at quarter end.

SG&A as a percentage of home closings revenue was 10.4%, up from 9.9% a year ago due primarily to higher external broker commissions. Going forward, we will maintain a disciplined cost structure and are still forecasting an SG&A ratio in the high 9% range this year. Our financial services team achieved a capture rate of 87%, up from 82% a year ago. This strong result drove financial services revenue of $47 million with a gross margin of 46.5%, up from $35 million and 37% a year ago, respectively. By using finance as a sales tool, we benefit from the strong execution of our financial services business, which provides customized solutions for our homebuyers and improves our operational control and visibility. Turning now to our strong capital position.

We ended the quarter with liquidity of approximately $1.6 billion. This included $554 million of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside of normal course letters of credit. Our net homebuilding debt to capitalization ratio was 20.1%, down from 21% a year ago and remaining within our long-term targeted ranges. Our next senior note maturity is not until 2027, providing us with financial flexibility. Reflecting this strong capital position, we are pleased that Moody has recently upgraded our credit rating to BA1 from BA2 with a stable outlook. During the quarter, we repurchased 1.5 million shares of our common stock outstanding for $92 million. At quarter end, our remaining share repurchase authorization was $403 million, and we still expect to repurchase a total of approximately $300 million of our common stock this year.

Based on our share repurchases completed and settled in the first quarter, we now expect our diluted shares outstanding to average 108 million in the second quarter and for the full-year. As is our normal practice, this guidance does not reflect the potential benefit of any future share repurchases that may occur over the remainder of the year. Now I will turn the call back over to Sheryl.

Sheryl Palmer: Thank you, Curt. As we wrap up, let me once again reiterate that as you have heard us discuss today, our priority is driving growth and returns for our shareholders. To do so, our strategy is grounded in diversification across consumer groups and geographies with a focus on financially secure buyers in core locations. We continue to expect first time buyers to represent a meaningful portion of our sales and closing, but appreciate how the array of our consumer groups help mask the pressures today’s home buyer is facing. We believe that our diversification is truly a differentiator and our ability to compete in the marketplace. It improves our resiliency against interest rate and affordability pressures, makes us better, more efficient purchasers of land, and ultimately our opportunity to sustain attractive long-term returns for our shareholders.

We have achieved this diversification over years of intentionally broadening our consumer segmentation, geographic footprint, and strengthening of our operational capabilities. Given the associated financial benefits that we’ve discussed this morning, we expect our business to deliver meaningfully stronger results than our legacy operations allowed as reflected in our long-term target for sales pace gross margin and returns. In addition to exceeding our historic performance, we are also striving to drive top tier results within our industry. We’re excited about the opportunities ahead of us and look forward to continuing to update you on our progress. And most importantly, let me share my deepest appreciation to all our talented team members across the country.

To each of you, thank you so much for your dedication to our organization and customers. I am truly proud to share the results of all of your efforts. With that, let’s open the call to your questions. Operator, please provide our participants with instructions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question today comes from the line of Michael Dahl with RBC Capital Markets. Please go ahead. Your line is now open.

Michael Dahl: Good morning. Thanks for taking my questions. Certainly appreciate the diversification….

Sheryl Palmer: Good morning.

Michael Dahl: Good morning and the benefits that that’s provided you. I want to drill down first on Shelby, the comments about the first time buyer exhibiting maybe a little more sensitivity as the quarter went progressed and rates went up. Can you drill down a little bit more as kind of the pace that you were seeing kind of intra-quarter with your first-time buyers and then maybe zoom out and give us a flavor for what April has looked like in aggregate for your company?

Sheryl Palmer: Yes, absolutely. Thanks for the question, Michael. As far as pace, we saw a good strong pace, actually up significantly year-over-year with our first-time buyers. Our highest pace was with our move up buyers, but pretty close, honestly, when I look at the — when I compare the two. When I talk about the affordability of the first-time buyer, I don’t think given what’s happened to pricing, interest rates, just general inflation, that this should be a surprise. I think it’s very consistent with what we’re hearing from others. There’s a number of different stats I could share that really show the meaningful difference. When I look at Q1, we generally saw rates down, as you know, and then they started moving up a little bit as we moved into the end of the quarter and into April.

When I look at our backlog as kind of a proxy for the impact to a first-time buyer and I look at what if rates were compared to our closing interest rate, average closing interest rate. If we look at our backlog, as of the end of the quarter and rates move to 7.5%, the impact to a conventional buyer is modest. I mean, they move from a DTI of 39, just over 39 to just over 40. And their payment moves modestly to, let’s say, $275, but their average income is $17,600. If I compare that to an FHA buyer or their average income is $11,200 and rates move to 7.5%, their payment would go up $468. And that’s on a lower loan amount, and their DTIs would be somewhat stressed going from 46 to 51. So obviously, with this large pool of affordable buyers and first-time buyers, That gives us the opportunity to work with lots of different customers to get them to that place, but it just takes a little more dollars because they just don’t have another lever to pull.

They don’t have more dollars they can bring in for a down payment. They are highly dependent on gift funds, compared to our overall buyer group. So just a couple examples.

Michael Dahl: Yes, that’s really helpful and I guess just to dovetail on that for my second question. With respect to incentives, I think Curt made the comment that your guidance assumes kind of your conviction that incentives will be manageable. It’s kind of thought short of saying stable, but again another theoretic cushion that for some of your buyers. But in practice, we have seen the market kind of fluctuate up and down with incentives pretty directionally correlated with rates. So again, maybe just a little more specificity on where your incentives were on closings and orders in the quarter and maybe what specifically you’re assuming in terms of the cadence for the balance of the year on incentives.

Sheryl Palmer: Yes, year-over-year, I would tell you our incentives are down actually, fairly meaningfully. Quarter-over-quarter, they were just modestly up. They do. You’re exactly right, Michael. They do travel with interest rates. We’re not chasing the lowest rate. When we look at the average rate, I mean, we’ve been marketing generally about 5.49 for conventional buyers. Our FHA buyers, we might have had some 4.99. We might have had some 5.25. That cost moved quarter-to-quarter, But it was about a third of our buyers, as I said, but most of those were, at least half of those were our first-time buyers. So when I look forward, obviously, it’s so dependent on what happens to rates. But when I look at the overall portfolio, I actually don’t expect a significant move. If rates drop, I would expect that number to drop fairly meaningfully. But I actually think given where rates are today, with what we saw in first quarter, we should be in a generally good position.

Michael Dahl: Okay. Thank you.

Sheryl Palmer: Thank you.

Operator: Our next question comes from Matthew Bouley with Barclays. Please go ahead, Matthew.

Matthew Bouley: Good morning, everyone. Thank you for taking the questions and for all the detail. Maybe just I want to pick up on one of the higher level points you made, Sheryl around gross margins. I heard you say that over the past four years, your underwritten gross margins had exceeded the prior four years by 200 basis points. I mean, I think that’s a big step up. I’m curious if you could elaborate a little on what’s really allowed you to improve your underwriting to that degree? Is it scale? I mean is there like a market driven aspect to that where the land counterparties are also seeing a better return? It seems kind of meaningful as we think about your go forward gross margin. So curious if you can expand on that a little bit. Thank you.

Erik Heuser: Hi, Matt. It’s Erik. I’ll take a quick shot at that and, let Sheryl fill in any blanks. But yes, it’s something that’s noticeable, and we track it pretty closely over time. I would say it’s a function of a number of things. One of them is related into the type of land we’re buying. We’ve mentioned that we’re self-developing, a lot more land, albeit off balance sheet in every circumstance we can. And so that self-development, we expect a higher gross margin for. And so we’ve seen that flow through the system gradually over time. I would also say that, our general scale and kind of the operational benefits that we’ve spoken about are also flowing through the system. And so and lastly, just the general efficiency in the land market as we know, there have been more builders, kind of gaining market share. And so I think that’s created some degree of efficiency generally in the market. So those would be the three things I would point to.

Sheryl Palmer: And then, Curt, I would assume just our overall balance sheet paying down the debt, that’s also going to pay.

Curt VanHyfte: Yes, I mean as we’ve highlighted, I guess last year, Matt, we paid down $350 million of debt. Last year, we paid off a significant amount in ’22 as well. So just our overall infrastructure from a debt and interest kind of capacity is down over that period of time as well.

Matthew Bouley: Got it. Yes, absolutely the cap interest for sure. That makes sense. Okay. And then maybe we’ll just stick on that long-term gross margin outlook. I think you said in the release sort of thinking about low to mid-20. The second part of the margin question would be what are lot costs doing in the gross margin today? And is there a period where kind of as you deplete that sort of pre-COVID lower cost land, should we expect that there’s kind of a correction in the margin like a one-time correction as you see kind of newer cost land flow through, how would that sort of play through into that longer-term margin guidance? Thank you.

Erik Heuser: Yes, Matt. This is Erik. I’ll take a stab at that again and then Curt can fill in some blanks. Yes, to your point, we do still have some pre-COVID land. It’s still about a third of our land. And so we will continue to see that flow through and it’s been very consistent. We’ve seen that percentage kind of decrease 3%, 4%, 5% per quarter over time. And so, we won’t see a material fall off or cliff in that regard. So we do still have some. Our average vintage of our land portfolio, today is about 3.8 years, and it really hasn’t changed that much over the last number of years. So that’s not terribly different from history either. So that’s kind of the rearview mirror. In terms of today and current, taking a look at surveys and peers, I would say that land is increasing both raw dirt as well as the development side of the equation kind of 8%, 9%, 10%.

And that really is somewhat normal. And obviously, you need about 2.5%, 3% of ASP left to cover that over time. And so that seems somewhat balanced and “normal” as we’ve seen over time. And then lastly, and Curt can elaborate on this, we’re seeing in terms of our flow through the P&L, we are seeing a little bit of increase, but it’s not terribly meaningful. It’s kind of floating in that 3%, 4% range as we think about the lot — average lot costs coming through the P&L. And then very lastly, I would say, we track very closely our expected gross margin and land residual ratio in our underwriting. And I could tell you that our most recent land residual ratio is the same as it has been over the last nine years on average. And so that coupled with kind of our gross margin consistency and underwriting gives us confidence that we’re going to see kind of that somewhat normalized land appreciation and being able to cover it.

Curt VanHyfte: Yes, and Matt, just to kind of double down on that, as Erik alluded to, year-over-year ’23 to ’24, we’ve got assumed in our guide about a mid-single-digit kind of appreciation factor or inflation in our lot cost, so right around that mid-single-digit kind of threshold.

Matthew Bouley: Great, thanks everyone. Good luck.

Sheryl Palmer: Thank you.

Operator: The next question comes from Carl Reichardt with BTIG. Please go ahead.

Carl Reichardt: Thanks. Good morning, everybody. Nice to talk to you. Just following up on those last couple of questions. Hey, the increase in margin at least in part is a function too of growing your lots per community by what, 50% over what they used to be, right? So you’ve got some better fixed cost spread in the stores, I’m assuming. But I’m curious about the price and availability of off balance sheet capital today. When you talk about self-developing helping your margin, but self-develop off balance sheet is going to cost you something. So can you guys elaborate a little bit on what you’re seeing in terms of availability of capital and the price of that capital today, whatever off balance sheet structure you’re choosing?

Erik Heuser: Yes, hi, Carl. It’s Erik. Yes, it’s a good question. I’ll start, kind of on the cost side of the equation. When we have joint ventures, which we do have a fair number of, you got alignment with kind of like minded builders. And so the cost of that really is nominal, because you’re kind of off balance sheeting that in a separate vehicle. Land banking, to your point, I think has gotten more expensive. We do still have a decent amount of our lots in land bank at 6,000 or 7,000 lots. And that was a single-digit number. And so that is something that we found great comfort in. We’re continuing those negotiations today, and think we’ll find something that’s attractive as an ongoing vehicle with regard to land banking. Seller financing is actually our largest bucket.

I could tell you from an average cost of that capital, it’s about 4.5% to 5% across the portfolio. And lastly, it’s just general takedown structures, and that when we’ve got escalators, they tend to gravitate to about 7%. So you put that all in a blender, and it’s actually a pretty attractive cost of capital for the deferral vehicles we’ve used.

Carl Reichardt: Okay. That’s very helpful. Thank you, Erik. I appreciate that. Okay. And then just to go back to the current trends, can you show drill down a little bit on how Florida is performing across the price points, especially during this particular quarter and what your outlook is given that obviously we’ve begun to see a bit of an increase in existing home inventory and some whispers of the slowing market there at least in the existing side. So just curious as to your perspective on that market now. Thanks so much.