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spk06: Greetings and welcome to the TriPoint Homes fourth quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Lee, General Counsel for TriPoint Homes. Thank you. You may begin.
spk00: Good morning and welcome to TriPoint Homes earnings conference call. Earlier this morning, the company released its financial results for the fourth quarter and full year of 2020. Documents detailing these results, including a slide deck, are available at www.tripointhomes.com through the investors link and under the events and presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. The discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, THE COMPANY UNDERTAKES NO DUTY TO UPDATE THESE FORWARD-LOOKING STATEMENTS. ADDITIONALLY, RECONCILIATIONS OF NON-GAP FINANCIAL MEASURES DISCUSSED ON THIS CALL TO THE MOST COMPARABLE GAP MEASURES CAN BE ACCESSED THROUGH TRI-POINT HOME'S WEBSITE AND IN ITS SEC FILINGS. POSTING THE CALL TODAY ARE DOUG BAUER, THE COMPANY'S CHIEF EXECUTIVE OFFICER, GLENN KEELER, THE COMPANY'S CHIEF FINANCIAL OFFICER, Tom Mitchell, the company's Chief Operating Officer and President, and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.
spk12: Thank you, David, and thank you for joining us today as we go over our results for the fourth quarter and full year 2020, provide an update on our strategic initiatives, and discuss current market trends. FredPoint Homes delivered another quarter of strong profitability to end the year, generating net income of $115 million, or $0.92 per diluted share. Highlights from the quarter included year-over-year home building gross margin expansion of 130 basis points to 23.2%, net new order growth of 14% on a 38% improvement in absorption pace, and unit backlog growth of 69%. These results are reflective of a housing market that is hitting on all cylinders and a strategy that has emphasized margin expansion without sacrificing order growth. Before going further, I would like to thank the TriPoint Homes team across the country for their dedication throughout 2020. Our teams adapted and embraced new ways of working and selling homes to Americans yearning for a safe place to call home. Our tenacious and loyal team members helped us set records for the full-year orders, deliveries, and pre-tax income in 2020. We are proud of the team's accomplishments, particularly in light of the obstacles we faced in dealing with the pandemic, and believe we can build on our success into 2021. 2020 was a challenging year for our nation. but a prosperous one for our industry and company. Our success was driven by accelerated housing demand, especially from first-time buyers and millennials. In 2020, 60% of our customers were first-time home buyers, and the millennial cohort made up 50% of our deliveries that were processed through our mortgage venture, TriPoint Connect. We feel the combination of limited housing supply low mortgage rates, favorable demographics, and pandemic-related factors will continue to drive the desire for home ownership across our markets. As a result, we enter 2021 anticipating another successful year. In mid-January, we formalized our move to operate nationally as one unified brand, TriPoint Homes. This change is allowing us to operate more efficiently by concentrating sales and marketing efforts around one brand instead of six and creating a stronger national awareness for the company with the goal of further improving our financial results. With that in mind, our focus continues to be on improving our return on equity through the strategic initiatives we discussed at our last earnings call, namely, harvesting investments in our long-dated California assets, increasing the scale and margin contribution from our early-stage divisions, improving inventory turns to a more asset-light model, enhancing operational efficiencies, and reducing the share count through our share repurchase program. We made progress in each of these areas in 2020 and believe we are well-positioned to make further strides this year given our operational focus, our strong balance sheet, and our expectation for a continuation of the favorable industry dynamics for the foreseeable future. With respect to our long-dated California assets, we continue to see the extensive development and investment we have made in these land holdings pay off in the form of new community openings, robust order activity, and strong profitability. Throughout Southern California in 2020, we had over 30 active projects in seven master plan communities, which yielded over 1,200 orders for our company. All these communities in Los Angeles County, San Diego County, and the Inland Empire outperformed with elevated absorption paces as a unique combination of innovative home designs with an affordable price point resonated with home buyers. Sales momentum at our Sundance master plan community in Beaumont was so strong in 2020 that we quickly closed out of our traditional homes with only the active adult project, Altus, remaining open for sale. We have also seen strong order momentum at our newer master plan community, Atwell, in nearby Banning, which has averaged over eight orders per month over the last six months within the five product segments we offer. Land development is progressing nicely at our 844 lot master plan community in North San Diego County, Citro, formerly known as Meadowood, where we expect to open five new communities in the third quarter of this year. As the transition from investment to return continues in Southern California, we're also starting to see a real transformation as some of our early stage markets mature. As we discussed on our October earnings call, it takes time to scale operations of a new division to a level in which profitability is achieved on a consistent basis. We have made the necessary investments to move these divisions past the startup phase and expect their contributions to our profitability to continue to grow this year and beyond. For example, in Sacramento, we delivered 10 homes in 2019 and 106 in 2020. with an average absorption pace of 4.5 homes per community per month and strong gross margins above 20%. We plan on adding four new projects in 2021 and are on track to deliver 400 homes by 2022. We have similar growth expectations for our newer divisions in Dallas, Fort Worth, Austin, Charlotte, and Raleigh, where we have been aggressive in the land market to achieve our delivery goals. We currently have approximately 6,500 lots owned or controlled in these markets and expect to open 37 new communities over the next two years. Another way in which we are focused on enhancing our returns is through the acquisition and management of our land holdings. Increasingly, we are finding ways to defer the investment in land through option agreements and other financial arrangements. On our last call, we discussed the near-term goal of having 40% of our lots controlled by our option, and we have made significant strides towards that goal by increasing our option percentage to 37% at the end of 2020, compared to just 24% 12 months ago. Some of this is a function of our diversification in the markets in which land option arrangements are more readily available, but it's also a testament to our increased size and the long-standing relationships we have with key players in the land and financing market. We will continue to leverage these relationships to enable us to control more lots to grow our business in a more capital-efficient manner. Our focus on efficiencies extends to our day-to-day operations as well and has led to our evolution as a technology-driven company. Through the use of our technology platforms, we are finding ways to reduce costs, and shortened cycle times. Some of the current innovations we are working on, such as the automation of home buyer and customer care portals, smart contracting, and the redesign of closing services are all expected to contribute to a more seamless, cost-effective operating model. On the sales and marketing front, we are seeing real cost savings from the implementation of digital assets at all of our new communities. These technological tools have streamlined the home buying process, taking costs out of our business, and allowed us to work smarter and more efficiently. The final avenue that we have to improve our return on equity is our share buyback program. In 2020, we repurchased over 15 million shares at an average price of $16.53, lowering our year-end share count by roughly 10%. In November, our board authorized a new $250 million share repurchase authorization, giving us the ability to lower our share count even further. With our ability to generate positive cash flow from operations and our low leverage ratios, we believe we can continue to reduce our share count without sacrificing growth, providing us the flexibility to invest our capital where we see the best return. Again, while 2020 was a challenging year for our country, it was an excellent year for our company, and we are now poised to continue to make progress on our return profile given the health of the market and the initiatives I discussed above. With that, I will now turn the call over to Glenn, who will provide more detail on our results and outlook going forward.
spk09: Thanks, Doug, and good morning, everyone. I'm going to highlight some of our results and key financial metrics for the fourth quarter of 2020 and then finish my remarks with our expectations and outlook for the first quarter and full year 2021. At times, I will be referring to certain information from our slide deck that is posted on our website. Slide five of the earnings call deck provides some of the financial and operational highlights from our fourth quarter. As Doug mentioned earlier, demand continued to be robust in the fourth quarter with an absorption rate of four homes per community per month, representing a 38% increase compared to the prior year. Demand was strong across all geographies, and we continue to capitalize on that demand by raising prices in nearly all of our active communities, allowing us to meet or exceed the cost increases we experienced in both materials and labor. The demand trends have continued into 2021. For the first six weeks of 2021 through this past Sunday, February 14th, we have recorded 961 net new home orders, and our absorption rate has averaged five homes per community per month. We are excited about our future community pipeline and expect to open approximately 160 new communities over the next eight quarters. We started the year with 112 active selling communities, and for the first quarter of 2021, we expect to open 22 new communities and end the quarter between 120 and 125 active selling communities. For the full year, we expect to open approximately 70 new communities and end the year between 125 and 135 active selling communities. For 2022, we expect to open approximately 90 new communities and end the year between 150 and 160 active selling communities. Turning to deliveries for the quarter, we delivered 1,633 homes, resulting in home sales revenue of $1 billion on an average selling price of $640,000. As we mentioned on our last call, we anticipate growing our community count in our early stage divisions. These divisions focus more on the entry level and first move up segments, so we are expecting our average selling price as a company to come down over the next few years. We anticipate our full year average selling price to be approximately $600,000 in 2021 and $550,000 in 2022. Our home building gross margin percentage for the quarter exceeded the high end of our guidance range at 23.2%, a 130 basis point increase year over year. The strong gross margin performance reflects improvements in nearly all of our markets on a year over year basis, as consumers have continued to respond well to our new community offerings. California continues to deliver strong gross margins for the company, but as we have previously discussed, the majority of our future volume growth will come from outside California, where we have focused on growing our scale in more affordable and capital-efficient markets, such as Arizona, Texas, and the Carolinas. In the fourth quarter, our gross margins outside of California exceeded 20%, and our pre-tax income increased 88% compared to the prior year, which shows some of the progress we have made in increasing our scale and profitability in our growth markets outside of California. Another part of the business that contributes to outsized gross margins and differentiates us from the competition is our investment in delivering a world-class retail experience through our physical design studios and online digital shopping platform. Over the past few years, we have opened eight new design studios and expect to open an additional five more in 2021. For the full year of 2020, we generated $371 million in revenue from our design studios, with an average spend of more than $70,000 per home. SG&A expenses, a percentage of home sales revenue, came in at the lower end of our guidance range at 9.9%, leading to an overall pre-tax income margin of 14.7%, 150 basis point improvement year over year. We were active on the land front in the fourth quarter, INCREASING OUR ENDING LOTS OWNED OR CONTROLLED BY 12% OR APPROXIMATELY 3800 LOTS COMPARED TO THE BEGINNING OF THE QUARTER. AT QUARTER END, WE OWNED OR CONTROLLED OVER 35,000 LOTS OF WHICH 37% WERE UNDER OPTION. A DETAILED BREAKDOWN OF OUR LOTS OWNED WILL BE REFLECTED IN OUR FORM 10-K. IN ADDITION, THERE IS A SUMMARY OF LOTS OWNED OR CONTROLLED BY STATE ON PAGE 22 IN THE SLIDE DECK. LOOKING AT THE BALANCE SHEET, AT QUARTER END, WE HAD APPROXIMATELY 2.9 BILLION OF REAL ESTATE INVENTORY Our total outstanding debt was $1.3 billion, resulting in a ratio of debt to capital of 37.6% and a ratio of net debt to net capital of 24.4%, which was the lowest in the company's history. Year-to-date, the company generated $588 million in positive cash flow from operations and ended the year with over $1 billion of liquidity, consisting of $621 million of cash on hand and $536 million available under our unsecured revolving credit facility. Now I'd like to summarize our outlook for the first quarter and full year. For the first quarter of 2021, the company anticipates delivering between 1,100 and 1,200 homes at an average selling price of $625,000 to $635,000. Homebilling gross margin is expected to be in the range of 21.5% to 22.5%, and SG&A expense as a percentage of home sales revenue is expected to be in the range of 12% to 12.5% for the first quarter. Lastly, the company expects the effective tax rate for the first quarter to be approximately 25%. For the full year, we anticipate delivering between 5,700 and 6,000 homes at an average sales price of $600,000 to $610,000. Home and gross margin is expected to be in the range of 21% to 22% for the full year, while our SG&A expense as a percentage of home sales revenue is expected to be in the range of 10% to 10.5%. Finally, the company is forecasting an effective tax rate for the full year to be approximately 25%. I will now turn the call back over to Doug for some closing remarks.
spk12: Thanks, Glenn. To sum up, 2020 was a strong year for our company. We ended the year with 69% more homes in backlog as compared to the previous year. The cheap margin expansion in most of our communities generated significant cash flow and maintained low leverage on our balance sheet. We have set a course for better returns and have already started to see the early success of these efforts with a return on tangible equity in the mid-teens and more room to grow in the future. In addition, we have the financial strength to continue to expand our operations while doing so in a profitable manner. These positive factors give me great optimism about the future of TriPoint Homes. Finally, I'd like to again thank all of the hardworking men and women of this company for the record-setting year we delivered in 2020. The pandemic presented us with considerable challenges, both personally and professionally, and I'm extremely proud of how we responded to this adversity in a safe and effective manner. Our thoughts remain with the frontline workers who are working tirelessly to move our country past this challenging time. That concludes our prepared remarks, and now we'd like to open it up for questions. Thank you.
spk06: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Alan Ratner with Zellman and Associates. Please proceed with your question.
spk07: Hey guys, good morning. Congrats on a great year and glad to hear you're all doing well. So first question, Doug, I'd love to drill in a little bit on the pricing environment and what you guys are doing and seeing there. And then maybe kind of join that in with the gross margin guidance because it certainly sounds like there's a lot of pricing power out there in the market. And I'm just curious, with the guidance, it seems to imply margins do pull in a little bit as 21 goes on. So I'm curious if you could just talk through the moving pieces there, whether it's mixed, cost inflation, some of the newer markets starting to contribute, et cetera.
spk12: Yeah, Alan, it was a great 2020, and we look forward to having a great 2021. We think the housing industry is poised for several great years. So to answer your question on the margin gap, IN PRICING, LAST YEAR WE SAW ACROSS THE COUNTRY ANYWHERE FROM 6 TO 12, YOU KNOW, 8 TO 12% PRICE INCREASES AND 6 TO 10 ON THE COST. COSTS ALWAYS LAG REVENUES, SO YOU SEE COST INFLATION REALLY PEEKING ITS HEAD UP GOING INTO 21. SO, YOU KNOW, WE'RE FORECASTING COST INCREASES OF 8 TO 12%, AT LEAST IN OUR PLANNING CYCLE. And then we're also opening up, what is it, Glenn, 60 new communities, 70 new communities. So, you know, those communities were underwritten at an 18 to 22 percent margin. So when you add all that up, it's looking to be a great 2021.
spk07: That's incredibly helpful, especially, you know, I think that's an important point, the underwriting. Obviously, it's, you know, understandably below what you're currently delivering, very strong margins. So there should be some mixed impact unless home prices continue going up 10% indefinitely. So I appreciate that. Second question, I'd love just to hear a little bit about how you're thinking about the mortgage market, the cycle time. So what are you quoting a buyer today on a typical bill job? And is that buyer trying or attempting to lock in a rate now, or are they just assuming that rates are going to stay kind of at these low levels over the next X number of months, however long it takes you to build those homes? Because I guess the risk is if inflation does creep higher and rates are up above where they are today by the time that home delivers, you could have some sticker shock from the consumers and backlog.
spk10: Good morning, Alan. This is Tom. Yeah, good question. Certainly in the accelerated demand environment that we're currently experiencing, buyers are anxious to lock in their purchase and their rates without a doubt. They do understand because, you know, as part of our process, setting appropriate expectations and communicating well with the buyer and providing a great customer experience is really important. So we outline that up front. Nobody is surprised at the cadence of delivery timing. People are jumping in usually early, but we've experienced strong success, evidence by our cancellation rate. Buyers understand the current environment, but they would like to lock rates as soon as possible.
spk07: How far out are they actually able to lock that? Assuming you're quoting a nine-month period, Are they actually able to lock that far out, or do they have to wait, you know, three months, six months? Yeah, it's more of a typical three-month lock cycle is what we're experiencing. And is nine months, is that kind of a fair assumption on what, you know, a typical build job is being quoted at today, or are you actually above that at this point?
spk10: You know, that really varies by product, but I'd say that's a fair average. Got it. Okay, great. Well, thanks a lot, guys.
spk07: Best of luck. Thanks, Alan.
spk06: Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
spk13: Yeah, thanks very much, guys. This is Joe Allersmeyer on for Steve. Just a quick follow-up to Alan's question. You mentioned the underwriting of the new project. It's our understanding that in that underwriting process, you tend to be conservative on what sort of HPA you are baking in. Is it fair to say that you're not really baking in to your guidance any additional price than sort of what you have in your pocket at this point, particularly since much of your growth may actually come from these new projects, especially in the back half of the year. That's correct. Okay, great. Thanks. And then just on the 2022 ASP, understand the reason for the decline in ASP. Certainly, though, it's an acceleration of the declines that you've seen in recent years. Could you maybe just also talk about what the margins are like? I know you sort of touched on it a little bit, but, you know, we understand the idea that these can turn faster and they have better returns. But, you know, for the purposes of modeling your earnings in 22, it would be helpful to sort of understand how those margins can trend. And just to be clear, I'm not necessarily asking you to provide any comment on additional price. We can make our own assumptions in that regard. But just mechanically, that discrete shift to affordable, how that impacts the margins?
spk09: Hey, Joe, it's Glenn. You know, we've talked about it a little bit in the past, and Doug just mentioned it right now about our underwriting between 18 and 22. That's what we've been underwriting all these newer markets to. So if those projects achieve their underwriting metrics, we don't see any real detriment to our overall gross margin. just because the ASP is going down. It has a little bit of impact on SG&A leverage just because SG&A is going down a little bit. But overall, you know, revenue is growing with delivery growth and community account growth. So we should be able to make up that leverage with volume.
spk13: Okay, great. That's really encouraging. And just maybe a housekeeping item, if I could squeeze one in here. How many homes did you actually start in the fourth quarter itself?
spk09: I don't have starts in front of me, you know, full starts. I'll have to get back to you.
spk13: Okay, we can follow up on that.
spk09: Yep. Thanks, guys. Thanks.
spk06: Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.
spk03: Hi, thanks for taking my question. But I think I missed a couple of numbers that you threw out during the comments around current trends and expectations. Could you just repeat the comments around what the orders have been quarter to date, and if possible, split that out between Jan and Feb to date so we have a sense of monthly cadence. And similarly, just the community count comments, the cadence through the year to get from kind of where you exited the quarter at 112 to where you end the year at 130-ish would be great.
spk09: Sure. Thanks, Mike. This is Glenn. So I said for the first six weeks of the year, you know, through last Sunday, which was February 14th, we have 961 orders and the absorption is running at about five homes per community per month. The way that breaks down was it was 546 orders in January. That's a little bit lower than it would have been, though. We, because of the name change, we had some you know, basically paperwork to be filed with the local municipalities to be able to record orders in some of our sales offices. So that number in January would have been higher if that would have been complete. That has subsequently been completed in February. So that's reflective of the 961 for the first six weeks. And again, we were still taking reservations. We just weren't writing full orders for some of those communities in January. But that's all caught up now and baked into the 961 program.
spk10: Hey, Mike, I'll just add a little color there. This is Tom. That is really only related to certain California operations is where we were inhibited from being able to write orders. We were continuing to take hold reservations on lots, and so we had a backlog of to-be-contracted reservations that we're now caught up on.
spk09: And through the first six weeks, Mike, just so you know, that's running at about a 13% increase compared to the prior year through those first six weeks.
spk12: On a lower community count.
spk03: On a lower community count, yeah. Right. Okay, that's helpful. And on the community count, sorry, just the cadence of how you outline 1Q and maybe, you know, if you can talk through if there's then any lumpiness in 2Q or 3Q or if it's more straight line.
spk09: Yeah, exactly. So, We're opening 70 communities for the full year of 2021. We're estimating 22 of those in the first quarter. And then from there on out, it's pretty even throughout the remainder of the quarters to get to that 70. Maybe slightly more in the third quarter than the second and fourth is how that's kind of looking today where we sit. Okay.
spk03: And then...
spk09: we're going to end the year average, you know, a range between 125 and 135 communities. Right, right, right. And did you say 120 at the end of 1Q?
spk03: No, I, yeah, I said a range of roughly 120, but a range of I think 115 to 125 to average about 120. Okay, and then I guess my follow-up question is more kind of the obligatory one that I often ask about kind of pace, just given you obviously have a lot of moving pieces with community mix, product mix, and then just underlying demand strength. I mean, running five a month for the first six weeks is a continuation of kind of well above normal for you guys. You know, balancing out kind of some of these mix issues, how – How are you thinking about how the year kind of plays out if the current market holds? Would you think that you can hold the kind of four months that you did last year? Or you often talk us to a more normal level that's a bit lower than that.
spk12: Any color would be great. Mike, I'll take that. It's Doug. You know, historically, we've kind of looked at an average absorption per community of 3.0. I would say with our price decreases and more of what we call entry-level premium first move up, we would probably see that around 3.5. Okay. Thanks, Mike.
spk04: Thanks, Mike.
spk06: Thank you. Our next question comes from the line of Jay McCandless with Wedbush Securities. Please proceed with your question.
spk08: Hey, good morning, everyone. Thanks for taking my questions. Just want to ask first, Have you all been able to reload some of the spec inventory that you sold through in the second quarter and third quarter?
spk10: Hey, Jay. Good morning. It's Tom. We are working on that as we speak. Without a doubt, we'd like to be able to increase that spec inventory. We ended the year with just 68 completed specs, and we have ramped up starts to – to increase our spec inventory throughout all of our markets.
spk08: Okay, great. And then the other question I had, just with everything going on in Texas, you know, some of the power outages, et cetera, are you guys thinking that could push some closings from this quarter to next quarter, or do you feel like you're on track to deliver everything on time?
spk12: Right now, right now I would, I can't really tell you because our division president Houston's bundled up in front of a gas-fired oven to stay warm. So I'm laughing, but it's not a laughing matter. So give us another week to assess the situation. But it's obviously a significant weather event, and we hope and pray that everybody in Austin and Houston and Dallas stays warm and And it comes out of this strong. I didn't think anything could stop Texas other than an ice and snowstorm now.
spk08: Agreed. Okay, great. Thanks for taking my question.
spk06: Thank you. Our next question comes from the line of Soham Bansal with SIG. Please proceed with your question.
spk05: Hey, guys. Hope you're all well. You know, just trying to make sure I understand, I guess, your expectations for order growth. in 2021 because, you know, just looking at the guide, it looks like community town is going to be flat to down this year. And you sort of put that together with the delivery guide and what seems like a preference for, you know, price over pace. So should we sort of expect, I guess, you know, a flattish order growth year just with, I guess, much better margins all said and done?
spk09: Hey, Saham, it's Glenn. It's a good question. We're not guiding specifically to orders. Like Doug said on the previous call, absorption pace in the mid-threes is kind of where we're seeing the year based on our pipeline and how we see the year folding out. But obviously with the community count starting the year much lower than the previous year, that's going to be some tough comps throughout the year. I wouldn't be surprised if flat to potentially down could happen on the order side, but we'll have to see how the spring selling season and how people react to our new community openings.
spk12: I'll add a little color to that. It's pretty hard to compare yourself to a pandemic. There was accelerated demand. The selling season happened in the spring, fall, and winter. All the builders across the country are sitting with great backlogs like ourselves, and accelerated demand means that you've got to reload the pipeline. That pipeline gets reloaded. Obviously, some of the development work was delayed a little bit, whether it was 30 days or 45, but that all adds up. So, you know, I'm very, very excited about the year. You know, we're going to have, most notably, double-digit delivery growth revenue and EPS growth, and we'll have a great year compared to 2021. while we reload the pipeline with 160 new communities. So, you know, this business isn't done in a manufacturing plant, so it doesn't happen evenly every quarter or so, especially in light of a pandemic and how it accelerated demand in a very different part of the year when you usually are selling in the spring and early summer. Now you're selling in the summer and fall and winter. So we're all adjusting to it, and it's tough for you guys to really compare it to.
spk05: Yeah, no, that makes sense. And then, Doug, I guess, you know, you highlighted some of the levers around ROE available to you earlier. And so I'm wondering, is there sort of an ROE target that you're comfortable putting out today for 21 and maybe just 2022 even?
spk12: Well, as I mentioned in the earnings script, I mean, we're very proud of our five strategic objectives. And we're going to stick to those objectives. We talked about those in October, harvesting investments, growing our early stage divisions. increase in our inventory turns, increase profitability, and then through our programmatic share repurchases. So we are aiming to be very consistent in generating ROE. We got to the mid-teens by the end of the year, and we expect to maintain that and hopefully improve on that, you know, subject to market conditions. So we are very, very focused on providing a strong return to our shareholders over the next several years and be very consistent about it. And we're very excited about that. We've got a great team. We have great land that's teed up for basically the next three years to do that. So I'm very excited. All right. Thanks, guys.
spk06: Thank you. Our next question comes from the line of Carl Riker with BTIG. Please proceed with your question.
spk11: Thanks. Morning, guys. I got my Texas question. You got my ROE question. Glenn, I wanted just to ask about this quarter, your top line and gross margin were a fair degree above your guide. SG&A was kind of in the range. Were there – I would have expected, I guess, a little more leverage on SG&A given the top line. Were there some additional expenses either related to branding or store openings that hit this quarter? And can you talk a little bit about how that SG&A might roll out over the course of the year cadence-wise given the store opening plans and the rebranding?
spk09: Sure. Good question, Carl. For the fourth quarter, there wasn't anything unusual in the expenses. We did come in at the lower end of our range because we did get a little bit more higher deliveries, and we're higher on the revenue side. So that was within our expectations. I think there was a little bit of cost to the rebranding, but I wouldn't say that moved the needle that much. And then as far as how it rolls out, we had our guide for the first quarter up 12% to 12.5%. And it continues to go down from there as we deliver the majority of our homes in the back half of the year to get to that full year guidance of 10 to 10.5.
spk11: So pretty much normal cadence then. Okay, thanks, Ben. And then just as you transition to quicker-term product in markets outside of California, when you think about the lower-end stuff, are you thinking to move more towards spec-oriented, or are you going to continue to focus on sort of the premium first-time products? first-time buyer market, which I'm guessing is sort of a combo of spec and build-a-suit.
spk10: Yeah, Carl, it's Tom. You nailed it with that hybrid product concept. We certainly are focused in those new early-stage divisions on a lower ASP overall, but it's still a premium first-time buyer position with the ability to personalize. And You know, the build-to-order market is strong. The consumer is heavily desirous of that type of product right now. But we do try to balance that. We want to improve our overall returns and our cycle times, and so that does involve prudently planning appropriate amount of spec building. So we're trying to find that appropriate balance point.
spk11: Great. Thanks, Tom. Thanks, all.
spk10: Thank you.
spk06: Thank you. Our next question comes from the line of Alex Regal with B. Reilly FBR. Please proceed with your question.
spk02: Thank you, gentlemen. What's a more comfortable level of specs and how long do you think it'll take to get there?
spk10: Alex, we are, as I mentioned, trying to increase our spec starts. Obviously, we're very low comparatively. Historically, we'd like to have, you know, three to five specs per community going. I think it's going to take multiple quarters to be able to get us back to that range just because, you know, order demand is so strong. Anything that we are putting out there is getting purchased and under contract. So continue to try to balance that focus on our backlog and get the appropriate number of spec starts out there.
spk12: And Alex, I would add to that. I mean, historically, we've run about three specs per community. That number will probably go up as our ASP goes down because we'll get more comfortable with more specs, but we're obviously woefully below that right now because of the strong demand environment that we're working in.
spk02: Sure, and I apologize if this was already asked, but construction times today for contracts signed basically this week, where do they stand, and how does that compare to maybe a year ago?
spk10: Yeah, we've looked at that very closely, and obviously, you know, a pandemic environment has had an impact on cycle times. I'd say on average our cycle times compared to a year ago are about increased by 10%. And as we talked about earlier, one of the questions, on average, it varies very much by product and community, but on average we're probably nine months in terms of a total cycle. contract completion cycle time.
spk02: Thank you.
spk06: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.
spk04: Thank you. Thank you, gentlemen, and great job on the quarter. I wanted to ask If you guys have kind of started to see, I guess, what I would call an acceleration in the traffic and orders coming from out-of-state buyers, in other words, people leaving California, people leaving other states, and is that having an impact on pricing?
spk01: Hello, Alex. This is Linda. Yes, there are submarkets where we're seeing an acceleration of out-of-state buyers. So, for example, in our Las Vegas division, in the last 12 months, 20 percent of their buyers have come from California and about 33 percent from out of state for all states. Austin is another market where we're seeing a higher percentage of out of state buyers, currently at 10 percent coming from California, and then the next one, you know, very We're used to seeing more California buyers in Arizona, and that was 6.5% of our Arizona sales in the last 12 months.
spk04: Okay, very helpful. And is that having a noticeable impact on pricing or just on the velocity?
spk01: As a percentage, out-of-state buyers are still not that significant in most states. So I would say pricing is more driven by local market supply and demand conditions. And certainly we still see a very healthy order pace in California as well.
spk04: Okay, great. And then my other question was related to the delivery guidance for next quarter. It seems a little bit low compared to any of the orders that you guys have received in the last four quarters. So I was just curious if that was just like a lag effect back from when the pandemic started, or is there something else happening there?
spk09: Alex, it's Glenn. That's just timing of, you know, if you're thinking about backlog conversion, we had, you know, so many orders in the back half of the year. So our backlog is maybe on the younger side compared to historically how it is to start the year from an age perspective. So all that is is timing.
spk04: Got it. Okay. Well, great. Best of luck for the year. Thank you.
spk09: Thanks, Alex.
spk06: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Bauer for any final comments.
spk12: Well, thank you everyone for joining us on this year-end 2020 earnings call. And we hope everybody stays safe and warm. I know most of the country is under a pretty strong freeze warning. So stay safe and warm. during these times of coming out of this pandemic, and we'll look forward to talking to you in the first quarter of this year. Have a great day. Thank you.
spk06: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your
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