Earnings Transcript for MDC - Q4 Fiscal Year 2021

Operator: Good day. And welcome to the MDC Holdings 2021 Fourth Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I now would like to turn the conference over to Derek Kimmerle, Vice President and Corporate Controller. Please go ahead.

Derek Kimmerle: Thank you. Good morning, ladies and gentlemen, and welcome to the MDC Holdings 2021 Fourth Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, Executive Chairman; David Mandarich, Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDC’s business, financial condition, results of operations, cash flows, strategies and prospects and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company’s actual performance are set forth in the company’s 2021 Form 10-K, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now I will turn the call over to Mr. Mizel for his opening remarks.

Larry Mizel: Good morning. And thank you for joining us today. As we go over our results for the fourth quarter and full year 2021, give an update on current business conditions and provide some insight into the future of our company. MDC Holdings reported earnings of $2.21 per diluted share in the fourth quarter of 2021 capping a strong year of profitability in which earnings per share grew by more than 50% as compared to the previous year. Home sales revenues grew 22% for the quarter on a 4% increase in unit closings and a 17% rise in average selling prices. Home sales gross margins expanded to 23.5% in the quarter, representing 150 basis point improvement over the prior year quarter. We continue to benefit from the strong demand in our markets, which has allowed us to stay ahead of cost increases, a trend we expect to continue into 2022. Sales activity during the quarter remained consistently above the normal sales patterns for this time of year, resulting in an absorption pace of 4.5 orders per community per month. We continue to see healthy demand from a wide array of buyers in our markets, driven by strong local economies, rising incomes and favorable demographics. Equally important has been the ongoing lack of existing supply, which is fueled the need for new home construction. According to the National Association of Realtors, total housing inventory at the end of December amounted to 910,000, units down 14% from one year ago. This amount of unsold inventory represents a 1.8 month supply at the current sales pace, a level that is well below what would be considered equilibrium for normal housing work. Given this lack of existing supply and favorable demand drivers in place, we believe that the near and long-term outlook for our industry remains positive. MDC is in a great position to take advantage of these positive industry fundamentals as we begin the new year. Thanks to our strong market positioning, and our more affordable products focus in our build to order operating model, we have historically positioned our company in some of the fastest growing home building markets in the country. Areas that feature steady population growth, expanding employment centers and rising income. While we cater to a wide array of buyers in our markets, we have placed a higher emphasis on the more affordable segments of the market in recent years to address the growing population of first time buyers, and the lack of supply at lower price points. This more affordable product focus has been on a key driver we've seen in our returns. And as a result in the higher margins and better asset churns. We believe our build to order operating model has also contributed to our improving returns by bolstering our margins and keeping our unsold inventory levels to a minimum. This strategy has also given us great visibility into all of our operations, and allows us to better manage costs increases. We ended the year with 7,640 sold homes in backlog which is 15% higher than the previous year, and represents a large percentage of the homes we expected delivered in 2022. Another way in which we are well positioned for a strong 2020 is through the investments we've made in our business, we ended the year with 29% more lots under control than we had at the end of the previous year, giving us a solid runway for community count growth in 2022. It has been a challenge to grow our active subdivision count, given the faster than expected close out of existing projects, and the delays associated with opening new ones. But we believe this trend will turn positive in 2022 and should be a nice tailwind for sales efforts as the year progresses. 2021 was a great year for our industry, and particularly for company as we believe we are positioned to deliver even better results in 2022, thanks to our sizable backlog, the margin profile of those homes in backlog and the favorable housing fundamentals we continue to see in our markets. We are achieving record levels of profitability as an industry and we are doing so with more discipline and risk mitigation than in years past yet, the homebuilding stocks continue to trade at low valuations. We believe MDC presents a compelling investment opportunity for long-term investors who recognize this disconnect and see the value inherent in our stock. Now, I'd like to turn it over to David, who will provide more detail on our homebuilding operations.

David Mandarich: Thanks, Larry. And good morning to everybody joining us on the call today. We experienced a strong continuation of strong, strong demand trends from earlier in the year throughout the fourth quarter of 2021. As buyers remain motivated to own a home, the demand was broad based as each of the regions post an absorption pace above 4.2 orders per community per month. The markets with the best absorption paces during the quarter were Orlando, Phoenix, Denver and Riverside County. In terms of profitability, or west region delivered the highest average gross margin, with our divisions in Nevada, Arizona and California being notably a standout. As Larry mentioned, we continue to experience solid demand in all of our markets, allowing us to stay ahead of cost increases and generate margin expansion. We believe our more affordable product focus has given us a longer one way for pricing power given the outsized demand for these homes and the lack of existing supply. And while the recent rise in interest rate has had a negative impact on our stock, so far, we have not seen it translate into a slowdown in demand for our houses. While the sales side of the business continues to run at a high level, the construction side of the business continues to be challenged with supply chain issues, material shortages and municipal delays. Our cycle times in the fourth quarter extended by roughly two weeks relative to the third quarter as we experienced ongoing disruptions at various stages of the build process. Our teams have done a great job working with our trade partners to find solutions and expedite the build process where possible. But based on what we see in the market today, we expect these issues to persist for the future. Fortunately, we have seen very few buyers fall out of backlog as a result of these closing delays. We are very active in the land market in the fourth quarter of 2021 acquiring over 5,000 lots per home building operations, bringing our total lot count over 38,000 owned and controlled lots at the end of the year. Each of our regions are now primed for growth with the east region adding 40% more lots to their yearend lot count to west adding 30% and a mount region 22%. Our expansion into new markets is progressing nicely with our first community in Austin scheduled to open in the first quarter of this year. And our first community in Nashville scheduled to open in the second quarter of this year. We started selling homes in Boise this past December and expect to start delivering homes in the market in the second quarter of 2022. Overall, we are pleased with the performance in the fourth quarter, and the way our company is positioned heading into the new year. With that, I'd like to turn it over to Bob who will provide you with more detail on our results for the fourth quarter and the full year.

Robert Martin: Thanks David. And good morning, everyone. We ended 2021 with another strong quarter as pretax income from our homebuilding operations increased by $51.2 million, or 36% from the prior quarter to $193.5 million. This increase was driven by home sale revenues, which rose 22% year-over-year to $1.44 billion as well as our gross margin from home sales, which improved by 150 basis points to 23.5%. During the fourth quarter, we accelerated the retirement of the remaining $126.4 million of our unsecured notes, due in January 2024. The retirement resulted in a loss of $11.4 million, which is included in homebuilding pretax income. Our financial services pretax income decreased to $15.6 million as our mortgage business continued to be impacted by increased levels of competition in the primary mortgage market. Compensation related costs also increased year-over-year as our mortgage business has increased its headcount in order to service our increasing number of homebuyers. Overall, net income for the quarter increased 10% to $162.7 million, or $2.21 per diluted share. For the full year, we generated net income of $573.7 million, which represents a 56% increase over the prior year and is the largest amount in MDC’s history. Our tax rate increased from 13.9% to 22.2% for the 2021 fourth quarter, the increase in rate was primarily due to a larger benefit from federal energy efficient home tax credits in the 2020 fourth quarter concurrent with an increase in the estimated amount of energy tax credits to be received. For 2022, I would roughly estimate an effective tax rate of 26.5%, which excludes any discrete items, any potential changes in tax rates or policy at any favorable impacts from energy tax credits. Federal Legislation extending the availability of tax credits for building energy efficient homes in 2022, has not yet been enacted. If the section 45L tax credit is extended at its current level, our 2022 effective tax rate would be favorably impacted by approximately 150 basis points. We deliver 2,663 homes during the quarter, which represented a 4% increase over the prior year. This increase was driven by the increased number of homes we had in backlog to start the quarter. Our backlog conversion rate remains below historical levels, as we continue to experience shortages of building materials, and tightness in labor markets, primarily due to the ongoing supply demand imbalance and disruption caused by the pandemic. As a result, we have seen our construction and land development times extend both year-over-year and relative to the prior quarter. We do not expect material or labor conditions to significantly improve in the near term. The average selling price of homes delivered during the quarter increased 17% to about $539,000. This increase was the result of price increases implemented over the past year, as well as a shift in the mix of our closings from Arizona to Southern California. We are anticipating home deliveries for the first quarter of 2022 of between 2,000 and 2,300 units, and we expect the average selling price of these units to be between $550,000 and $560,000. For the 2022 full year, assuming no improvement in our average sale to close cycle time from those experienced during the fourth quarter, we are forecasting home deliveries to reach between 10,500 and11, 000 units. Gross margin from home sales improved by 150 basis points year-over-year to 23.5%. While we continue to experience cost inflation, including the return of rising lumber costs, our price increases through the end of the quarter outpaced these cost pressures, which resulted in a healthy increase in our backlog margins year-over-year. As a result, we anticipate continued expansion in our gross margins from home sales as we move into 2022. We are expecting our gross margin from home sales for the 2022 first quarter to increase to approximately 25% assuming no impairments or warranty adjustments. Additionally, we believe that a sequential increase is likely for the second quarter based on the gross margin of homes currently in backlog. Our total dollar SG&A expense for the 2021 fourth quarter increased $12.1 million from the 2020 fourth quarter turned by increase general and administrative expenses. Our SG&A expense as a percentage of home sale revenues decreased to 90 basis points year-over-year to 9.1% as we continue to benefit from improved operating leverage. General and administrative expenses increased $13.8 million from the prior year quarter to $67 million. This increase primarily resulted from an increase in salary related expenses due to higher average headcount, as well as an increase in stock-based and deferred compensation. We currently estimate that our general and administrative expenses will be between $70 million and $75 million for the first quarter of 2022. Marketing and commissioned expenses decreased year-over-year as a percentage of home sale revenues as total dollars spent was little changed, even as home sale revenues moved notably higher. We have been able to control these costs effectively throughout 2021 given the backdrop of strong demand for new housing. The dollar value of our net orders increased 9% year-over-year to $1.43 billion, driven by a 12% increase in our average selling price. While our monthly sales absorption pace decreased slightly year-over-year to 4.5 orders per community per month. Sales remained strong throughout the fourth quarter, and our sales pace actually increased sequentially from the third quarter of 2021 within each of our homebuilding segments, this unseasonably strong fourth quarter demand underscores the current demand for new homes. Cancellation rates remain low during the quarter at 8.7% relative to beginning backlog, and 20% relative to gross orders modestly higher than the prior year. Moving to 2022. We were pleased with the order activity we saw in January. However, much like last year, we do not expect to see the typical seasonal jump in sales when comparing the first quarter of 2022 to the fourth quarter of 2021 since we did not see a typical seasonal drop off in the fourth quarter. We ended the year with 7,640 homes in backlog which was an increase of 15% from the fourth quarter of 2020 and was our highest yearend backlog unit level ever. The estimated dollar value of homes in backlog increased 32% year-over-year to $4.3 billion. This represented not only our highest yearend backlog dollar value in history, but the highest ever reported as of any quarter end period. Our current backlog provides a great base to support our full year 2022 growth goals. As highlighted last quarter, we had a number of legacy communities on the verge of close out. Our active subdivision count was further impacted during the quarter by the unseasonably strong order pace previously mentioned, resulting in certain communities closing out sooner than anticipated. New community openings remain challenging in the current environment due to delays in municipal approvals, and strain on the resources available to complete development work. With that said, we are currently projecting more than 40 new communities to open for sale and achieve their first order prior to the end of the first quarter of 2022, which should push our active community count higher in the near term. While we are forecasting double digit percentage growth inactive subdivisions during 2022. We will wait to provide further guidance on this metric until we have more visibility as to the timing of committee openings scheduled to occur later in the year. We approved 4,128 lots for acquisition during the fourth quarter, bringing the total number of lots approved for the year to over 20,000. This represents an increase of 54% over full year 2020 approval activity. We acquired 5,304 lots during the quarter, resulting in total land acquisition and development spend for the quarter of $679 million. For the full year, we invested $1.9 billion in land acquisition and development compared to $1.3 billion in the previous year. As a result of our land acquisition, and approval activity, our total lot supply to end the year exceeded 38,000 lots, representing a 29% increase from the prior year end. In addition to the 11,148 lots controlled via option, we had an additional 7,408 lots under contract that are at various stages of due diligence. While these lots still require approval by our asset management committee prior to being reflected within our control block count, they provide a fuller picture of our current land pipeline. We currently own all of the lots that we need to reach our anticipated 2022 delivery goals. We also believe that we now own or control the lot necessary to drive continued growth into 2023 as well. In summary, while 2021 was not without its challenges, we were able to achieve several significant milestones as an organization, including delivering record full year home sale revenues despite pressures on construction cycle times. Continuing to expand our homebuilding profit margin, which increased 330 basis points year-over-year to 13.4% for the 2021 full year, achieving record full year consolidated net income and driving record backlog dollar value levels despite minimal community count growth during the year. In addition, we expanded our geographic footprint during the year to cover 15 states with our strategic expansion into the Boise, Nashville, Austin and Albuquerque markets. Looking forward to 2022, we believe it has the potential to be an even stronger year based on the dollar value and gross margin of our current backlog and the ongoing strength of demand in the housing market. I would be remiss if I didn't take this opportunity to thank all of our employees and our board of directors for an incredible year, and their instrumental role in helping to achieve all of our great accomplishments during 2021. That concludes my prepared remarks. We will now open up the line for questions.

Operator: [Operator Instructions] The first question comes from Deepa Raghavan with Wells Fargo.

Deepa Raghavan: Hi, good morning, everyone. Thanks for taking the question. You mentioned a wide array of, you serve a wide array of demographics. Are you seeing any concerns? Or maybe strengthened activity across any of these buyer categories?

Robert Martin: Hi, Deepa. This is Bob. I don't know if I quite caught your question. Yes, I don't know that we've really noticed any significant differences across our buyer categories. You're right, we do service, a lot of different buyers, whether it's entry level buyers, or even move down buyers, sometimes from the same product line. But nothing really new to note there.

David Mandarich: Yes, this is David, just add on with what Bob said, we're really seeing consistent demand across the board, whether it's a first time out or first move up. So we're pretty happy with what I call a broad based recovery really across the board. So we think it's pretty strong across all our divisions. And I'll tell you one of the big theme points as I think every market that we're in, is got really limited supply of resale houses. And there's really a lot of demands. So we really feel really good about our footprint. Great question.

Deepa Raghavan: Thanks. My follow up is on the supply chain. You mentioned the production cycle extended by a couple of weeks. And it looks like versus the last quarter, most of your peers, including yourself are not assuming any meaningful improvement in the supply chain front in 2022 at all, which probably has some Omicron content in there. But should we completely take off the table any potential for supply chain improvements mid-year this year at all? Or do you think there are still some drivers that could help maybe turn if things don't get worse from here?

David Mandarich: I think right now we just don't have much visibility to things improving at this point. That's why we're not assuming that the cycle times will improve in 2022. Certainly, there's always the possibility, especially if we do see that COVID does not make another resurgence, things like that go in our favor. But right now, I just think there's too much uncertainty out there, which is why we stay on the conservative end.

Operator: The next question comes from Michael Rehaut with J.P. Morgan.

Maggie Wellborn: Hi, this is Maggie on from Mike. First question just on pricing and kind of how you're thinking about ASP for the year, I know that you are expecting I think 550,000 to 560,000 for the first quarter. And I believe you also said that you plan to continue to stay ahead of cost increases. As I'm looking at the average order price for the last three or so quarters. It's been relatively flat. So I'm wondering how you're thinking, how we should be thinking about ASP later on in the year and the potential for necessity for further price increases.

David Mandarich: Maggie, it's David, I'll start and then kind of turn it over to Bob. But I think a lot of our call flat pricing and not going over a bunch is really focusing on more of the first time house. And so we're actually like, we'd like to drive our average sales price down, if we can. But some of the markets that we're very active in, it's California, which has got an average sales price. So what you're seeing is really intended consequences of us really focusing on first time house. Bob, what do you have to add to that?

Robert Martin: Yes, and we talked about, and I think you said this 550 to 560 in Q1. And backlog right now, I think we're at about $563,000 average price in backlog and that's on $4.3 billion of total backlog, which would be a big chunk of 2022 revenues. So I think we like the ASP. Right now, those levels of ASP are our chance of achieving that during this year, although, as David notes, we're always looking for opportunities to make our products more affordable. And I guess the last thing I would say is, it's just with the continued supply demand, imbalance. I continue to think that we've got a good shot at using pricing to help manage our business, including helping to offset the cost increases that could occur during 2022.

Maggie Wellborn: Go it. Thank you. And then second question, just a clarification around the community count comments. I believe you said that near term, there should be an increase, and then you're looking for double digit growth in 2022. And I think that the prior comments last quarter, I think even the original expectation may have been that you were thinking there might be an increase from 3Q levels by the end of 1Q. Is it fair that because demand has remained so strong that increase from 3Q levels might be a bit pushed out? And kind of fair to assume just kind of step up across all the quarters this year?

Robert Martin: Yes, just with the what's going on, including more sales than we anticipated in Q4, certainly, that's caused some communities to close earlier than expected, having those 40 and that were scheduled to have our first sale in Q1, I think gives us a great shot at increasing our community count from where we were at the end of the year. I guess we hedge a little bit, because there's a lot of crazy things that have happened during 2021. A lot of volatility and nuances. But we're in a great position as we enter the spring selling season.

Operator: The next question comes from Stephen Kim with Evercore ISI.

Stephen Kim: Yes, thanks a lot, guys. Bob, I really appreciate you giving us that refundable, or lot count with refundable options. I don't think most people realize that actually adds three quarters of a year's worth of lots that you have under option. And that was particularly the case right before the pandemic. So my guess is would it be fair to guess maybe this would be a good question. Would be -- is it fair to guess that things that you were in due diligence on with these refundable options before the pandemic like right before the pandemic hit? That pretty much all of those subsequent to the pandemic you actually acted on and struck those options? Or would you say that was is just too optimistic?

Robert Martin: I guess when we're going back to right before the pandemic I think a lot of those deals that would have been in process we kind of temporarily put on hold. Certainly some got cancelled but in most cases I think we were able to just push them out and then proceed with them. Because demand came back so quickly in the matter of two or three months. I think that's what you're asking I thought.

Stephen Kim: That is exactly what I'm asking, right. Yes, [Indiscernible] I think some people like reflect on your land holdings. And they say, well, MDC doesn't have as much land or they didn't have as much, sort of cheap land tied up, at the beginning to pandemic and actually, largely, there's an impact there by you not including refundable deposits in your lot count. So that's great. Second question relates to, your SG&A which was very good despite the fact that your closings were a little on the lighter side. And I guess I'm curious as to whether or not there's some things going on there in the SG&A that were benefiting you this quarter. That could continue next year, like one of the things I'm thinking about is, is it possible that in this environment, you're actually seeing maybe some of your co broker commission rates coming down and things like that? Or were there other initiatives you took to sort of control overhead that resulted in a lower SG&A rate? I'm talking your combined G&A plus your selling.

David Mandarich: Yes. Steve, this is David. Good morning. I think overall, we reduced sales commissions in the last 12 months across the board. And pretty much I think we've seen the industry pretty much change what I call outside commissions to broker reduced too.

Stephen Kim: Great. Yes, that was, and there's no, it is not your expectation that those are going to come back. Right?

David Mandarich: I think with this current market, I think we're going to be pretty consistent where we're at right now.

Stephen Kim: Yes. That’s encouraging. And then last one for me, on gross margin, Bob, we've seen the lumber futures going all over the place, they started becoming a real problem again, or concern, in the late -- in the winter, the early part of the winter, and then, quick as a flash there, now that back down to 934. And so, my question is, can you remind us how you lock in lumber? Do you kind of have to guess, right, are you kind of doing it on a very frequent basis? Just give us a sense for how you handle your lumber buying amid such a volatile futures market? And is it right to think that your margin will benefit in 2Q from lower lumber, and then maybe get pressured again, a little bit in 3Q and 4Q, just to help us understand how it flows through?

David Mandarich: Steve, this is David, again, I'll give you kind of what I call high level, but, we're not speculating on lumber, we're not trying to hit it perfectly. And we've got a consistent policy in depending on which division we're in, we lock in for either 60 or 90 days. And we don't try and be, we don't try and say we're going to be better than the market, just pass it through on cost of goods. Bob, do you have anything to add to that?

Robert Martin: No, I think that's absolutely accurate. It's relatively real time. And we have made the active decision not to try to hedge it one way or the other, because we know at some point, we're just going to be wrong on that front.

Stephen Kim: And the impact on the gross margin for the year?

David Mandarich: Yes, I think, with cycle times, where they are, I think for the previous increase, we saw some of the peak increases coming through in Q4 which is part of the reason why we're seeing some bigger, some better margins going into Q1.

Operator: The next question comes from Truman Patterson with Wolfe Research.

Truman Patterson: Hey, good morning, everyone. Thanks for taking my questions. First, look, rate fears have clearly grabbed hold of the market. I'm just hoping you can give us some interest rate sensitivity to your backlog and potential cancellations now that, the 30 year mortgage is up 50 bps or so in short order and bigger picture, hoping that you can give some commentary about the depth of the buyer pool. Larry and David, I think you mentioned strong, strong demand trends. But I think investors right now are fearful that the Fed looks like they're clearly raising rates. And we'll see a replay of the back half of the year of 2018 just hoping you can give us some thoughts as to whether or not this cycle might look different compared to prior cycles.

David Mandarich: Truman, this is David. I'll start off turn it over to Bob but clearly and Larry and I, 45 years, when rates start moving up a little bit generally we see a lot of demand. And people come in and say, hey, they want to buy a house now get the price locked down and get a mortgage rates. On the other side, we stress test our backlog. So we know what our backlog can take on an increase in interest rate. And if we've got some people that are close, we work with them on to lock in their rates so that they're there and so they can afford the house. Bob, what do you have to add to that?

Robert Martin: Yes, nothing at this point, David. I think you captured it well, yes.

David Mandarich: Great question, Truman.

Truman Patterson: Okay. Thanks for that. And then on the fourth quarter closings came in a little bit below your guide, I'm just hoping you can help us understand any major product categories or regions or metros that might have caused the cycle times to extend further throughout the quarter.

David Mandarich: It was really broad based. And, it was a little here and a little there depending on which market but our cycle time has moved up. And I will say all of our people, our suppliers, our subcontractors, our superintendents, and division presidents are doing absolutely everything they can to make sure the houses get done, and get done what we call Richmond ready, which is full move in and punched out in good shape. So we really feel good about the process, even though we missed a few closings at the end of the quarter.

Operator: The next question comes from Alan Ratner with Zelman & Associates.

Alan Ratner: Hey, guys, thanks for taking my questions. So I think last quarter, Bob, you might have said that, you weren't necessarily intentionally limiting sales, but you really aim to be able to start a house I think within 60, or 90 days of writing a contract from a buyer experience standpoint, as well as from a cost perspective. And I was admittedly surprised to see your orders as strong as they were in the quarter and up sequentially, because even to your point cycle times did extend during the fourth quarter. So I'm curious if you could talk a little bit about where you are in kind of that thought process? Are you now selling maybe towards the higher end of that range, where the homes aren't necessarily starting within 70,80, 90 days, or, it are the delays, you're seeing maybe more kind of in the later stages of the construction process. And that's not limiting your ability to sell houses.

David Mandarich: This is David, I'll start off and kind of turn it over to Bob. But really, our process is we'd like to start a house in plus or minus 60 to 90 days. And one of the things that we have done is we pre-planned a lot of houses that kind of shorten our period of time to pick up a building permit from either the county or the city. So I think our processes have got a little sharper and a little quicker, but we really watch topside, any products that are sold not started that could be 90 days or more, which is pretty limited. Bob, what do you have to add to that?

Robert Martin: Yes, I think that's right. I think it's actually been a fairly good story on the start front, we've been able to start them on time. But as you alluded to Alan, on the back end, really, we saw some limitations. And that's why we were a little bit below the low end of our range, this quarter. Because of that, if you look at what we project for our closings in Q1, the midpoint of the range, we're really only projecting that we're going to close right around 60% of those houses that have achieved the frame stage of construction, or better. Whereas a year ago, we were able to convert about 86%. So you can see kind of the shift of even those that have gotten beyond frame and how many we expect to close in Q1 versus a year ago.

David Mandarich: Alan, this is David, I'd like to add one other thing that all of us builders are experiencing is what I call municipal slowdowns on inspections. Especially with COVID. So, across the board we're seeing the finals or the frame lock, or whatever it is from there -- from the municipalities being a little bit slower. And that certainly slowed our cycle time down a little bit.

Alan Ratner: Right. And I appreciate the color from both of you on that. That's helpful. Second question, I'd love to drill in a little bit in terms of what you're seeing in the land market. You mentioned that the lot count up 29%, year-over-year. Sequentially, the growth did slow a little bit from what you had been running at the last four or five quarters. I know, there's a lot of lumpiness in that. So I'm not reading too much into that. But how are you thinking about land underwriting today? What type of inflation are you seeing? And have you changed any of your underwriting assumptions, given any of the changes we've seen in the marketplace, whether it's higher rates, whether it's absorption cycle times, et cetera?

David Mandarich: And I'll let Bob add on to this, but we have not changed our underwriting over the years. And in we're seeing what I call decent deal flow up there. Certainly, the deal flow is better than what we saw in ’04 and ’05. And I think the whole industry is a lot more disciplined in last couple years. And I think builders are looking for a builder margin based on today's absorptions at today's cost. So I mean, I think the industry is pretty damn disciplines, which I feel real good about.

Alan Ratner: I guess the response or the question I would have to that comment, Dave, just on today's absorptions are phase absorptions are incredibly strong from historical perspective. So what does that mean, if in terms of the performance on these deals, if absorptions don't remain at these levels, maybe still remain healthy from an absolute standpoint, but not as strong as they are today? What does that mean for -- how these deals perform?

David Mandarich: Well, what we try and do is not say to ourselves, that we're going to absorb eight a month, okay. And we're absorbing fourth a month, even though we're seeing some absorptions that are pretty robust. So we try and stay very disciplined. And take a look at what I call a nice absorption rate, not what I call a crazy absorption rate that you might have in the last couple quarters.

Alan Ratner: Okay, so today's absorption is maybe a little bit of a longer term today over the last few years, you mean?

David Mandarich: Yes, we try to flatten it out a little bit. And the other thing we're doing is we're assuming longer cycle times in our underwriting. And to the extent that you did see absorption rates come down a little bit. And you would hope that's also accompanied by somewhat of a decrease in cycle time. So I think there's gives and takes there as the market moves forward, and if you see some normalization of some of those figures.

Operator: The next question comes from Jay McCanless with Wedbush Securities.

Jay McCanless: Hey, thanks for taking my questions. And another one on the community count and kind of outlook for this coming year. Is it all I guess your hesitancy Bob, based on the amount of close ups that you had during the fourth quarter? Or has the traffic and demand because of what David was talking about with higher rates? Have you all seen just a really strong surge in orders and traffic that may pull down your community capital faster than you anticipated?

Robert Martin: I don't know that's, I think we saw a good level in January, a level that we're pleased with. But with the 40 plus communities coming online in Q1 we feel pretty good about where active community count is going.

Jay McCanless: Okay. And then on pricing, and I apologize if you guys already gave the stat out, what percentage of your communities were able to raise price during the quarter and as you think about the price increases that are coming from some other suppliers, not just lumber but other inputs? Do you feel like you can race price efficiently enough to stay in front of that or how are you feeling about pricing as we move into ’22?

David Mandarich: We probably increased price in about two thirds of our communities’ kind of beginning community count during the quarter which is pretty darn good for a fourth quarter.

Jay McCanless: Okay, and then just that these incremental price increases ex lumber how do you feel about your ability to stay in front of those and pricing with current contracts that you're taking?

David Mandarich: I think the average kind of increase in those communities thrown around 3%. So call it 15,000 or 16,000. So I think that's a good amount of increase to manage some cost increases going forward.

Jay McCanless: And then the last one, and this made the community account, maybe too small to just be going to see, are you expecting any type of gross margin headwind as you move as you increase the number of sales and closings in these organic communities? Or is it just too small to matter at this point?

David Mandarich: When you say that the sales and closings in these organic.

Jay McCanless: Yes, I am sorry, the newer markets, Nashville, Albuquerque, et cetera.

David Mandarich: I think it's too small to matter at this point, I think typically, you'll get some level of lower margins to start, and then it'll increase from there in our newer markets, but typically it’s too small to matter against the whole.

Operator: The next question comes from Alex Barron with Housing Research Center.

Alex Barron: Thanks guys, and great job on the quarter. I wanted to ask if we were to get somewhat of a repeat of 2018 with rates moving up what's the playbook here. Do you have some way to lower or introduce more affordable houses to offset the increase in the mortgage rates?

David Mandarich: Alex, this is David. I think what we're really seeing is maybe when somebody comes in, and they look at interest rates, and maybe they was looking at 2,600 square foot house, maybe they say, well, listen, maybe I can live with a 2,200 square foot house. And so we're seeing a little of that. But quite frankly, these interest rates are really pretty modest on increases. And I think where we're driving as these more affordable product and doing more subdivisions in Florida that's more affordable. So we feel pretty good about what we're achieving here. And, Bob, I don't know if you have anything to add to that.

Robert Martin: Yes, I mean, I think the other things I think about is we're seeing incomes rise for a lot of our consumers as well. So that helps to offset your natural -- naturally, there's a lot of inflation out there, including housing, but it's not in a vacuum relative to incomes. So I think there's that and then David alluded to people go into a smaller house and I would say, when we look at the average size of the house that we're selling right now, it's not really skewed to the lower end we're still seeing kind of pretty consistent square footages. So it's not like our consumer has gone to the bottom of the barrel, in terms of affordability for product that's already out there.

David Mandarich: The other thing we're seeing is we have seen some inflation on people who have existing houses, even if they're in a condo or a townhouse, and they're saying, hey, I want to move up to a single family house. So we're seeing some people that's real equity moving. That's a good point.

Alex Barron: Yes, now those are good points and I guess I wasn't meaning so much been what has happened year-to-date. But just kind of thinking ahead, 6 or 12 months from now, since everybody's talking about the Fed raising four or five, seven times what impact that might have. But my second question was in these newer markets, like Idaho, and in Texas, what do you guys see the ramp up in the community being like a year from now?

David Mandarich: Well, I'll start and then I'll let Bob follow up. But I think in these new markets, we're getting started. We feel real good about deal flow. And but like Bob said earlier, it's going to be pretty small for 2022. And we're hoping that it's more meaningful for 2023 and 2024.

Robert Martin: Yes, I think between all those market, the four markets, just given the lead times for getting development work done and insert for the markets, and combined with some finished lot communities if we get to, I guess 10 plus active communities across all of those. So those markets combined, we'd be pretty happy by the end of this year.

Alex Barron: Okay, then just one last one. Bob, do you happen to have the start number for the quarter and what it was a year ago?

Robert Martin: I do, just one moment. I pulled that up. So for Q4 of 2021, we're at 2,534. And a year ago, it was 2.792.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin, for any closing remarks.

Robert Martin: Thank you all for being on the call today. We look forward to having you on the call again. After we report our Q1, 2022 earnings.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.