Elizabeth Langan: Good morning, you have Elizabeth Langan on for Matt today. I just wanted to kind of start off asking around your commentary on demand. You mentioned that it was improving through the year and you’ve seen good momentum into February. Do you have a view at what point you might start to lean away from incentives or pricing adjustments, or is it too soon to tell for that?
Sheryl Palmer: That’s a great question. I think in total, I’d probably start out by it’s too soon to tell for sure. But then, I would quickly jump in and say we already have–honestly, we already have seen a pull back in incentives. I don’t think we’re seeing many adjustments, further reductions in base pricing, and as we said in our prepared comments, Elizabeth, reductions in base pricing is the last place we go. Certainly we’ve done that in some markets in a percentage of our communities, but we have some markets that we’ve honestly never reduced base, we’ve really used incentives to lead the way. We’ve done that because you’ve heard me over time talk about the value of our partnership between the home building business and our mortgage teams, and we really continue to believe that if you use smart finance incentives to create the most value for our buyers rather than just simply reducing the base price, it allows us to get additional capture and improve their experience, but it’s a much more cost effective way for us to stabilize the business, and if you see a market turn like we’ve so quickly seen, we find ourselves in a much better place.
A lot there, but I would tell you we’ll continue to watch the markets closely, and obviously a lot of it is going to depend on other builder behaviors as they work through their backlogs, if they continue to adjust pricing downward.
Lou Steffens: Maybe just to add to that, I’d say the incentive opportunities have been more favorable as of recent with the lower rates. As I mentioned, our buy downs have been cheaper, so depending on the rate environment, to get the buyer to an acceptable interest rate, it’s going to vary throughout the year.
Sheryl Palmer: It’s such an important point, Lou, because if you think about where we were in third quarter, when rates were in the mid-7s and we were trying to get people to a high 4 compared to something today that’s at par in the low to mid 6s, it’s a completely different environment. That’s part of the pull back, so–yes.
Elizabeth Langan: Thank you.
Operator: Thank you. Our next question is from Jay McCanless from Wedbush. Jay, please go ahead.
Jay McCanless: Hey, good morning. Thanks for taking my questions. I guess the first question I have is any sense you could give us about which way ASPs are going to trend through the year, because you finished ’22 with an average backlog price over $680,000, the average selling price though for the fourth quarter was $578,000. Should we expect a drift down through the year, or any insight would be appreciated on that topic.
Lou Steffens: Yes Jay, it’s a really good question. Maybe starting off with the order ASP, I think there’s a lot of noise going through there. You mentioned the $578,000 – actually, our gross order ASP for the quarter was over $600,000, but what’s happened is two things: one, adjustments we made through the quarter for our fourth quarter deliveries, we made some adjustments to our backlog to retain them and get them closed; and then also what’s flowing through the order ASP is any adjustments on our 5,900 units that we made in backlog for future quarter closings. That’s adding a bit of noise to the ASP for the quarter. Like I said, gross orders were over $600,000. We definitely as we have a bigger mix of spec to to-be-builts, our spec ASPs are generally a little bit lower than our to-be-builts, but I’d definitely say still solid ASPs over $600,000.
Sheryl Palmer: And to your point, Lou, when I look at the number of folks that we’ve locked in backlog for future quarters with some of our finance programs, as you mentioned, Jay, you always have the noise with options running through, people going to the design center afterwards, but it’s so immaterial to the total. But when you take the size of ours and the amount of work to secure it, it has a significant impact on the ASP.
Jay McCanless: Then if you could maybe talk about the–I know it’s not a huge portion of your mix, but just kind of wondering what you’re seeing from the luxury or higher end buyer, whether that buyer–you know, I think you gave a little bit of commentary around it, but just how interested and engaged are those higher end buyers, and if you want to roll active adult into it, that would be great as well. With the stock market coming back and rates trying to stabilize, just wondering what you’re seeing from those two buyer groups.
Sheryl Palmer: Yes, I’d be happy to. First of all, when I look at just the overall split between the different consumer groups, our second move-up was our strongest pace in the quarter. Then when I look at our resort lifestyle, they really start picking up in the shoulder season, and we’ve seen continued improvement in the new year. As you know, when we look at that buyer, they generally come with some of our strongest margins. There might be some exceptions to that – I don’t think we’ve seen that same return in Houston, for example, that we’ve seen throughout Florida. When I look at the active adult shoppers, just period over period, we’ve seen something like a 500, 600 basis point improvement. Honestly, looking at our inventory, our biggest challenge in that buyer set in Florida is we just can’t keep any inventory on the ground, but it hasn’t slowed them down.
They’ve just continued to buy the to-be-built. As you know, that buyer is a little bit less rate sensitive, but they’re more sophisticated so they’ve been looking at all the economic indicators. When I look specifically at the quarter, both Sarasota and Naples, which has the highest penetration, they probably had the highest increase over budget expectations, and when I look at that early in this year, that just continues to make headway. It’s interesting – as you look across the country, I would say we’ve seen a number of different effects based on consumer groups. I have many markets where we’ve seen that move-up, first and second move-up and active adult buyer being the strongest consumer group, and in many markets we’ve seen that first-time buyer really show up.
The challenge has been their ability to get approved, but I think when you put it all in the blender, honestly Jay, we’ve seen movement in almost all of the consumer groups. It really has been how does their ability to quality and , because even though as we said, our can rate has moved to–for the first six weeks to kind of the mid-teens, and even once again, just like following the sales cadence, we’ve seen an improvement in cans in February over January, it’s not the same across the country. Places like Austin, even though their can rate has probably halved from what it was in the fourth quarter, it’s still a little higher because of that first-time buyer and the size of that backlog being purchased at peak pricing.
Lou Steffens: Maybe just to add to that, Jay, just to show the strength of our buyers, our deposits are up 20% year-over-year to just over 10%. The LTV on our buyers has come down to 76%, which is very solid, and then our cash buyers in Q4, I think a record for us at 21%, so really strong buyer profiles.
Erik Heuser: Then maybe just using as an example as you think about luxury and active adult, that’s a place where greater than half of our buyers are boomers, and actually greater than half are moving from some other place in the country. They actually have on average, these folks are telling us, greater than $200,000 of income and closer to $2 million than $1 million of net worth, so it’s a place where really we’ve performed well through COVID and after.
Sheryl Palmer: It’s an important point, Erik, because if you look at a place like Naples, where it’s primarily just all resort lifestyle communities, it led the company in margin in Q4, and by not a little, a lot.
Jay McCanless: That’s great color. Thank you for all the details, appreciate it.
Operator: Thank you. Our next question comes from Mike Rehaut from JP Morgan. Mike, please go ahead.
Doug Wardlaw: Hi, good morning guys, Doug Wardlaw on for Mike. I was curious regarding your inventory impairment charges, was this number in this quarter what you guys were expecting prior to the quarter, and what do you envision for impairments moving forward throughout 2023?
