Taylor Morrison (NYSE:TMHC)
Q4 2015 Earnings Conference Call
February 3, 2016 8:30 AM ET
Jason Lenderman - Vice President, Investor Relations and Treasury
Sheryl Palmer - President and Chief Executive Officer
Dave Cone - Chief Financial Officer
Stephen East - Evercore ISI
Ivy Zelman - Zelman & Associates
Michael Rehaut - JPMorgan
Nishu Sood - Deutsche Bank Research
Mike Dahl - Credit Suisse
Jay Mccanless - Sterne, Agee & Leach, Inc.
Jack Micenko - Susquehanna Financial Group
Patrick Kealey - FBR Capital Markets & Co.
Will Randow - Citigroup
Good morning and welcome to Taylor Morrison’s Fourth Quarter 2015 Earnings Conference Call. At this time, 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 Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.
Thank you, Vanessa, and welcome everyone to Taylor Morrison’s fourth quarter 2015 earnings conference call. With me today are Sheryl Palmer, President and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer.
Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results along with our guidance for 2016. Then, Sheryl will conclude with the outlook for the business after which we will be happy to take your questions.
Throughout the prepared remarks, both Sheryl and Dave will be referencing a presentation to better summarize our results for 2015 and expectations for 2016. That presentation can be found on our Investor Relations website by clicking the Events tab at the top of the launch page. It has also been noted in our earnings release.
Before I turn the call over to Sheryl, let me remind you that today’s call including the question-and-answer session, includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today’s news release. 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 Securities and Exchange Commission and we do not undertake any obligation to update our forward-looking statements.
Now, let me turn the call over to Sheryl Palmer.
Thank you, Jason, and good morning, everyone. We appreciate you joining us today. Before we get into the details of our performance which I’m very pleased to share, I would like to discuss our 2015 journey and some specific highlights from the year.
As the calendar turns from one year to the next, I firmly believe in reflecting on our accomplishments and remembering the pivot point. By doing this, it provides an appreciation for the evolution of the company in a relatively short timeframe. Using the presentation previously mentioned by Jason, I want to begin on Slide 3.
As you can see, we focused on initiatives that allowed us to leverage our four-pillar strategy, while adhering to our capital allocation philosophy. We quoted at the beginning of last year that 2015 would be a transformative year and it was. Let me highlight how?
The year began with the sale of the Monarch business, which really set the stage for most of the activity for the balance of the year. We made a strategic decision to leave the Canadian market at a time when the valuation was very appealing, following an unprecedented run of appreciation in that market. This transaction yielded almost $500 million to the company and was the catalyst for many of the items on this slide.
Following the Monarch sale, our first move was to refinance debt. All told, we retired a $135 million of the $485 million principal of our 2020 senior notes, while simultaneously refinancing the remaining balance of the 2020s at a rate that was almost 200 basis points lower than the original coupon. This rate change will generate $17 million in annualized interest savings.
Next, returned our attention to growing our U.S. footprint and began the second quarter with our JEH Homes acquisition in Atlanta. This acquisition allowed for a seamless entry into a market that had been on our radar for sometime. In addition, it further strengthened our product offering to entry-level buyers. Our results since the acquisition have compared favorably to underwriting. Closings exceeded our underwriting by 15%, sales pace was better by 13%, SG&A as a percent of revenue was lower by more than a 100 basis points, and our EBIT margin was higher by just under 200 basis points.
At around the same time of the JEH acquisition, we renegotiated the terms of our revolving credit facility. As a result of that effort, we were able to meaningfully decrease our borrowing cost and related fees, while also increasing our capacity from $400 to $500 million.
The next meaningful highlight in the year was entering into a third joint venture in California to control an additional 300 coastal lots in San Juan, Capistrano. This JV along with our Sea Summit and Tramonto joint ventures give us a way to control high-quality coastal land holdings, grow our bottom line disproportionately compared to the number of units because of high price points, and be responsible stewards of our balance sheet.
With our continued focus on responsible growth, we further diversified our footprint, while targeting markets with good fundamentals. The acquisition of three divisions of Orleans Homes in Raleigh, Charlotte, and Chicago yielded approximately 2,100 lots. But more importantly and similar to JEH allowed us seamless entry into markets we were interested in pursuing. This integration is also meeting or exceeding our expectations, and the operating results are tracking tight to underwriting, but the backlog slightly ahead of our expectations entering into the New Year.
As we transitioned these new teams into the Taylor Morrison family, we also pursued our growth strategy through organic supplementation in the Dallas area. We do that by planting our flagship Taylor Morrison brand in the Dallas market, where we were currently only operating under the Darling banner.
As a reminder, our Darling business operates using a finished lot business model, whereas our Taylor Morrison brand focuses on developing and building. This added dynamic will afford us higher levels of control in that market. As this starts to take hold, we should see some synergies from operating both brands in Dallas.
Appreciating the ever-changing financial services environment, we decided to start our wholly-owned titled services business Inspired Title. It launched in the latter half of 2015 and it is now servicing our businesses in Florida and Texas. The fourth quarter launch has been very successful with 427 closings in 2015. We expect to expand the service offering to other areas of our portfolio in 2016. The success of this growth is directly attributable to our team at Taylor Morrison Home Funding.
TMHF has always been a strength and continues to be an organization that represents the best in the industry. This leads me to the final bullet point on the slide, which refers to the organizational move we made to accommodate our growth throughout the year. We realigned our field leadership structure to maximize our talent, while creating manageable areas of responsibility. Similarly, we adjusted our corporate structure to not only support our growth, but also enhance our ability to be strategically nimble and act swiftly as circumstances require.
These highlights are something that we should take pride in, but they do not reflect all that happened during the year. There were some unique challenges that we faced. Many markets experienced unprecedented severe weather throughout the year, which pressured cycle times. This was followed by a continued decline in the price of oil, which manifested in some softening in markets with higher exposure to that commodity, such as Houston.
Next, even though constrained labor has been an issue for the industry since the recovery began, it became an area of heightened discussion, as its bottleneck effect became more pronounced. And, of course, we can’t forget about trade or better referred to as know before you owe, being rolled out into the industry in the fourth quarter nor should we discount the impact of the uncertainty around interest rates and general federal monetary policy.
Knowing the Texas and more specifically Houston will be a topic in our Q&A. Let me provide some color on how we ended the year in that market. First, it’s important to point out that our relative exposure to Houston has been diluted, as the year progressed due to footprint expansion through acquisitions in different areas of the country and selective investment in other areas of our portfolio. In fact, we’re looking at land holdings on the balance sheet at the end of 2015, Houston was roughly 10.5% of our total. That was down 250 basis points from the end of 2014.
And here are some results for the year. In Houston, closings were actually up year-over-year and in the mid single-digits. Sales were down about double that. But keep in mind, 2014 was a record year in that market from a sales perspective. Average selling price is expected to be down due to a shift in mix towards the first-time buyer and it was.
I said in the last call, we did see softening in the market, as 2015 progressed, and our full-year results reflect the change in the sales environment. We expect the volatility in Houston to continue through the year, but do believe Houston is a good long-term market and one that has diverse fundamentals different from prior cycles. We are confident in the quality of our land bank, as we believe our communities are well located and we’ll continue to perform well although at lower paces than recognized at the peak.
2015 was a busy and productive year with some challenges that were new, but also impactful. Through all of that, we maintained focus on our four-pillar strategy of pursuing core locations, building distinctive communities, maintaining a cost-efficient culture, and appropriately balancing price with pace. We delivered solid results, while concurrently positioning the business for what we believe to be a significant success in 2016 and beyond.
With that as a backdrop, I’m pleased to share our 2015 performance.
Please turn to Slide 4 in the presentation. With this slide illustrates is that in the phase of several challenges previously outlined, the U.S. was still able to deliver record results in community count, sales, closings, revenue, backlog unit, and dollars.
Specifically, we finished the year with an average community count of 259, which was a 26% increase over the prior year. It should be noted this follows a 30% increase in community count from 2013 to 2014. We had net home sales in 2015 of 6,681, which was a 17% annual increase.
Our full-year sales pace finished at 2.15, which gone in line with our expectations, given the adjustments in Houston. Closings for the year came in at 6,311, which reflects a 12% increase over 2014. These closings drove our ending revenue of just under $3 billion and a 10% increase from the prior year.
Our closing ASP was 458,000, which as expected was a slight decrease from 2014, given the introduction of our newly acquired divisions, which typically have a lower average selling price relative to our legacy divisions.
Year-end backlog units came in at 2,932 units, or a 30% increase from 2014. These backlog units are valued at just under $1.4 billion, a 27% increase from prior year, and positioned us very well moving into 2016. Our cancellation rate was 13.9% for the year.
I’m pleased with our results for the year, but I won’t shy away from the reality that my fourth quarter expectations above as year-end approach and it became evident, we’d sacrifice some closings to ensure a great customer experience. We will never compromise our customer’s experience for a short-term gain, that’s just not who we are as a homebuilder.
Now, let me turn the call over to Dave to provide you with a detailed review of our financial results for 2015.
Thanks, Sheryl, and hello, everyone. Before I begin, I did want to call attention to a change in reporting as we move forward. Given our growth over the last year, we have expanded our segment reporting from two to three segments in our homebuilding operations.
First, the West area, which is comprised of operations within California, Arizona, Colorado, and Illinois. Second, the central area comprised of operations within Texas. And lastly, the East area, which is comprised of operations in North Carolina, Georgia, and Florida. These new operating segments will be reported in our 10-K, which will be published later this month.
For purposes of this call, I’ll focus on total company results with some added color where necessary for different segments.
Now to our financial results, please turn to Slide 5 in the presentation. We finished the quarter with $970 million in total revenue. That included $935 million in revenue from our homebuilding operations.
Our adjusted home closings gross margin, excluding capitalized interest was 20.9%, which was in line with our expectations. The year-over-year moderation is due to several factors, including shifts in the geographic mix and higher construction costs, partially offset by lower material costs.
In addition, incentives declined sequentially from Q3, but are a little higher year-over-year. Also, we had about 20 basis points of impact due to purchase accounting from our 2015 acquisitions.
Moving to financial services in the fourth quarter, we generated $14 million in revenue, gross profit was nearly $7 million for the quarter, and our mortgage capture rate was 83%, compared to 74% in the prior year’s quarter. This is our highest capture rate since the fourth quarter of 2012. We are pleased with Taylor Morrison Home Funding’s continued strong performance, both operationally and financially. In fact, compared to the Mortgage Bankers Association average profit per loan of about 1,380, TMHF compares very favorably with a profit per loan of over $5,300.
SG&A as a percentage of home closings revenue came in at 9.3% for the quarter. As mentioned in our last quarterly call, we expected to delever SG&A, as it shaped up to be a transformative period in our company’s evolution.
With the activity that Sheryl outlined earlier, it wasn’t a surprise to see this metric tick up a bit in 2015 with acquisitions, as well as investments we made back into the business to strengthen our infrastructure with a focus on people and systems. In fact, I was comfortable with where we ended, given not only the transactions along with subsequent integrations, but also in light of some of the headwinds we faced with labor constraints resulting in closed homes being at the lower end of our guidance. As we move forward into 2016, we remain focused on driving efficiencies recognizing we had investments that needed to be made in 2015 to help set up future success.
Our earnings before income tax was $101 million for the quarter, or 10.4% of total revenue. Income taxes for the quarter were $36 million, representing an effective tax rate of 35.4%. This is an increase over last year’s fourth quarter rate, which was 21.6% in 2014, as we recognized an $18 million reversal of a portion of our valuation allowance on deferred tax assets.
We ended the quarter with $126 million of cash and had $115 million in outstanding borrowings under our $500 million unsecured revolving credit facility. At December 31, our net debt to capital ratio was 41%.
During the year, we spent $965 million in land purchases and development, excluding acquisition amounts for JEH in Orleans, which totaled around $230 million. We continue to be discipline in our investment strategy and are focused on supporting our legacy divisions even as we welcome our newly acquired businesses into the fold. That underwriting and investment discipline serves as well and is a big reason why we haven’t taken any land impairments since July of 2011.
Now, let’s focus on our land position. For that, please turn to Slide 6 in the presentation. Our total land bank at year end was 43,000 lots owned and controlled, excluding lots held in unconsolidated joint ventures. The percentage of lots owned was approximately 75% with the remainder under control. On average, our land bank had 6.5 years of supply based on a trailing 12 months of U.S. closing.
Our years of supply has been intentionally and progressively work down from the levels at the time of our IPO, which was just under 10 years. Within our land bank, we have 33% better finished, 33% better underdevelopment, and the remainder are raw. 48% of our lots are 2012 vintage or older, which are mainly located in Arizona and Florida. Our land position is naturally fueled by our capital allocation strategy, which as previously communicated consists of four primary tenants.
On Slide 7, the tenants are listed in order of priority, as circumstances dictate throughout the cycle a year or a quarter. 2015 was one of those unique years and that we’re able to employ each of the strategies at different points. We made investments organically and inorganically. We delevered our balance sheet and we utilized our share buyback program. As our circumstances changed and the environment around us shifted, we were nimble enough to adjust the strategy within our capital allocation methodology.
As part of our capital allocation strategy, we acquired over 934,000 shares through our share repurchase program to $50 million during the fourth quarter. In addition, we purchased an additional 338,000 shares for 5 million in January, which will be reflected in our Q1 results.
As of the end of January, we have $30 million of our $50 million share repurchase authorization available. As we said, 2015 was a transformational year for us, as we sold our Canadian operations, while acquiring four new markets through M&A. We achieved our goals regarding an increased diversification of domestic markets, including our most recent acquisition announced just a few weeks ago.
We have reached a pivot point in 2016, as we continued to focus on properly growing our business and driving leverage, but with an even greater emphasis on monetizing our assets and driving improved returns through actions, such as working down our completed spec inventory, while holding our land and development spend relatively flat to last year.
Now, turn to Slide 8, and I’ll review our 2016 guidance. For the year, we expect to have average community count between 310 and 320. Our monthly absorption pace is expected to be about 2.2. We anticipate closings growth between 10% and 15%.
As we consider homebuilding margin guidance, we anticipate a few things impacting the overall rate. First, we will continue to have purchase price accounting impacts in 2016, including our newest acquisition, which closed on January 8.
Second, we typically have 1 to 1.5 completed specs per community, and we believe we have the opportunity to increase the monetization of our assets by working down our completed spec inventory in 2016, which leads to a more efficient balance sheet and enhanced returns.
Specs typically have a margin rate a couple hundred basis points below that of to be built homes. Despite the short-term margin pressure this may provide to the margin rate, we like the idea of generating this cash and keeping our completed specs to about one or just under one per community.
Finally, we anticipate margin benefit from lower capitalized interest due to overall unit growth, as we’ve actively replaced the units from Monarch coupled with the lower interest expense, as a result of the debt pay down and refinancing in 2015. This leads us to a homebuilding margin, including capitalized interest in the low to mid-18% range, which should provide a rate generally flat on a year-over-year basis.
Capitalized interest should approximate about 240 basis points of homebuilding revenue leading to an adjusted homebuilding margin, excluding capitalized interest in the mid to high-20% range.
Please note that in the past, we have typically provided margin guidance, excluding capitalized interest only. This quarter we are providing margin guidance both with and without interest at clarity, so please take this into consideration for modeling purposes.
SG&A as a percentage of homebuilding, revenue is anticipated to be around 10%. JV income, as discussed previously is expected to be materially higher than the prior year coming in between $10 and $15 million, due to the ramp up at our coastal joint ventures. Our anticipated effective tax rate will be between 33% and 35%. Land and development spend will be at or just below the $1 billion range, which excludes our Acadia acquisition.
For the first quarter, we anticipate community count to be between 305 and 315. Closings are expected to be between 1,250 and 1,350 with homebuilding margin, including capitalized interest in the mid to high-70% range. Capitalized interest should represent about 250 basis points, leading to an adjusted homebuilding margin, excluding capitalized interest in the low-20% range.
Thanks. And I’ll now turn the call back over to Sheryl.
Thanks, Dave. As we look to 2016, it’s already gotten off to a good start with our sales up 17% in January on a year-over-year basis. I’m encouraged by the long-term market fundamentals, which remain positive and support a thesis for a sustained upward trajectory in our industry.
Household balance sheet continue to strengthen with a quarterly improvement in homeowners equity in real estate increasing by more than $350 billion, along with a decrease in the percentage of underwater mortgages now sitting at about 8%. These two data points represent a sample of a consistent upward trend that coincides with an improving job market, as reflected by a mid single-digit unemployment rate, some year-over-year wage appreciation, and a positive annual trajectory of new household formations.
At Taylor Morrison, we continue to see a very strong borrower profile with an average credit score of 744, and LTV of 76%, and an average DPI of 37%, on an average loan amount of 332,000. Using finance as a sales tool, TMHF attracts a strong first-time buyer, representing 30% of our 2015 Taylor Morrison Home Funding closings.
Interestingly enough, millennials represented 27% of our TMHF closings with credit scores higher and debt ratios lower than the national average. With all that said, Taylor Morrison enters the year poised to deliver. Staying on Slide 8 of the presentation, you’ll see, we kicked the year off by announcing our acquisition of Acadia Homes in Atlanta. The market is desirable. Their land positions are great. The team has experienced knowledgeable and respective.
Lastly, they were good partners throughout the negotiation. This acquisition provides us with a real scale in the market, provides approximately 1,100 additional lots in core submarkets and extends our product offering to price points in the low 400’s. This compares to our previous average price point in the market, which was in the mid-200’s. We’re excited about having the product diversity and an opportunity to find significant synergies through operations most immediately in our national purchasing and mortgage operations.
The Acadia team has put the business in a place for immediate benefit and we look forward to seeing it realized in 2016 and beyond. This is another example of our four-pillar strategy and capital allocation philosophy coming together to guide our decisions. Our most recent announcement is the addition of a member to our leadership team, Alan Laing as Executive Vice President and Homebuilding Operations.
Alan brings over 30 years of industry experience with positions in every facet of a homebuilding organization. Alan’s last position was CEO at Orleans Homes, where he successfully managed the company back to health from bankruptcy. I have known Alan for quite sometime, and I’ve always been impressed with his ability to drive results connect with people and find value in areas where it may not be so obvious.
His role was focused on operations and ensure we continue to deliver quality homes that are on time, while providing a superior customer experience. Alan’s approach and style are perfectly matched for Taylor Morrison, and I look forward to see his accomplishment and immediate impact.
At Taylor Morrison, we say that relationship and trust are the foundation of our success, and I cannot have been more proud than when hearing the news in January that we’ve been recognized as America’s most trusted homebuilder. The study now in its fourth-year attracts more than a 100 national homebuilders across the United States.
I’ll close with a huge thank you to our entire Taylor Morrison family. 2015 was a tremendous year for us in many ways, and I’m very grateful for all of the hard work you did and that you do everyday. 2016 is going to be filled with things that we expected and things that will undoubtedly be unexpected, but either way, I know you will deliver on our promise to our customers and investors, you always do.
With that said, I would like to open the call for questions. Operator, please provide our participants with instructions.
Thank you. We will now begin the question-and-answer session [Operator Instructions] And we have our first question from Stephen East with Evercore ISI.
Thank you. Good morning. You will had a lot going on this year when you recap it like that.
So, and I guess my first question goes back to a lot of that activity with your M&A. Maybe if you could talk a little bit a couple of different things, David, one, what do you think purchase accounting hits to the gross margin will actually be in 2016, also any SG&A?
And then can you talk about probably what type of orders or closings you expect all the acquisitions to contribute then? And then, Sheryl, if you wouldn’t mind just giving me an idea of where you think you are in the integration with the different acquisitions and how long you think it takes to get those acquisitions to where you want them to be, if you will?
Sure, I’ll go ahead and start with that. I think your first question was on the purchase accounting impacts to gross margin in 2016. As we look at the first quarter, we’re expecting about 20 to 30 basis points of drag there, and that’s including all three of the acquisitions we did. JEH probably be in the smallest amount of that mix. And I’m sorry, I gave you the wrong number, it’s 30 to 40 basis points for Q1 and 20 to 30 basis points for the full-year.
And then as far as the – our orders and closings expectations, we don’t break it out by the individual division. So that’s already included in our guidance for the year.
I think the only thing I would add to that, Steve, and then I’ll move into your question on integration activity. As you know, the paces are a little slower, as we build the volume in those communities in each of those markets, as we build the scale in each of those businesses, maybe with the exception of just Atlanta in total, given the new acquisition.
As far as where we are on the integration, I can’t be more pleased if I were to be honest with you, Steven. The teams have done a remarkable job. I mean, we learned a lot from the Darling integration. And we have a phenomenal path team that works through these integrations. Now, we are not a 100% there. JEH is a little further than Orleans recognizing we bought that three months before.
We have been converted into our new system. They went live on our website today at each of the closings and immediately started generating incremental traffic. They immediately worked into our cadence from a land acquisition underwriting approach. So, as we look at each of the big buckets, the people of the land kind of the systems, we’re in pretty good shape, and the system piece of it will really come together within the first-half of this year. And I just think that teams, I mean, each of the acquisitions have embraced it and excited about kind of the relationship.
Okay. Thank you. I appreciate that. And then, of course, Houston; thanks for splitting that out and giving us the detail. I guess, as you look at it, as you move into 2016, what do you do to combat what’s going on in that market? What’s your strategy for 2016? Do you see community growth there, or is this a steady-state type business as far as, as your investment that type of thing?
Yes, fair enough. And I think, I guess, I – first, let me talk about Houston, and then maybe what we’re doing to address that. I mean, I’m sure everyone had seen kind of the way the year ended. The resale market, very strong, produced like 82,000 closings last year, slightly down from the annualized peak that they’ve ever seen, but still very strong.
Inventory continued to fall. Actually, I think I’m about 3.5 to about 3.2, but well below the equilibrium. And so, when you kind of look at the macro factors of Houston, even with an weakened economic outlook, the market to-date really hasn’t been able to meet the demand. I would have expected to see resale activity slow down before now, but I think pricing has remained so favorable, which has been very helpful.
On the new home front, although the numbers would suggest it’s one of the top markets in the country, I think, the market continued to slow and fourth quarter starts were down 13%, 14%. Over a very frenzied 2014, and looks like about 28,000 units for the year. I think, as we look forward, projections are calling for another 10% or so reduction in starts, which would put it more in line with 2013, once again recognizing 2014 with a peak, so maybe about 25,000 starts.
And I think the last macro is very similar to what we saw in Phoenix. The store count and model count across the market was up substantially about 15% at the end of last year. So, as the market has moderated very similar to what we saw in Phoenix, the store count went up. So, as you think about all that kind of as a framework and I think about what is it we’re doing?
I’ll start with the land portfolio. Our land portfolio is very flexible between Darling and Taylor Morrison, and that has been very helpful. We entered the year with about a 3.7-year of supply of land compared to the company average of 6.5 years, and more important than the years of supply, Steven, as we have a great landing in Houston. We have very healthy deposits in our backlog, and we have a nice blend of consumer groups across the business to very portable, which everyone has articulated is very high in demand to the move-up buyer.
From a spec strategy, we have run the business about 75% to be built and 25% specs, which we think is a really nice balance. There are some builders that have very spec, heavy spec inventory in the market. And so we’ll see how that plays itself out, as we look at 2016, but I like our spec environment.
I think most importantly when you look at Houston, and this will be familiar to you from when we talked about Phoenix. As you just campaigns the market with one brush, there are some very strong market and there are some markets that are oversaturated and not performing as well.
The South and Southwest side of Houston continued to do very well. The Sugar Land area anything around medical city, we have very strong assets in Riverstone that continued to perform very well, or the North side it’s probably a little bit more challenging. And I’m really anxious to see what happens when the Grand Parkway opens in Q1, that’s been delayed for sometime, but that’s going to really change traffic patterns in Houston.
And I think lastly, Steven, and I think this is a little bit misunderstood in our numbers and that is our master plan philosophy. If you go on the website and you count communities, I’ve seen quite a range of what our Houston presence is. But I think what’s interesting is about six of our communities represents 60% of our units, or 60% of our total communities. What that means is, we have communities with two, three, four and five positions.
So some builders could count that as one community, if it has four different product sizes or lot sizes, we will count that as four. So when I look at the concentration of those communities, I’m pleased. I think the first quarter is going to be critical in understanding, I mean, generally, that market takes hold somewhere around February 1, we had a great last couple of weeks.
So I think the next 60 days we’ll really paint the picture for the year. And we’re going to keep a very careful eye on it, where we have a good land bank, we’re going to be very selective in new investments. As you know, our Darling business works a little bit hand to mouth, and so we’ll be – renegotiated some of those deals to make sure that the volumes are appropriate to the takedowns. And we’ll have a little bit of a look and see what happens over the next few months.
All right. Thank you very much, I appreciate it.
Thank you. And you know something, the last thing I should have mentioned there Steven is, when I look at January traffic in Houston leading into that kind of February start really good. I mean, our traffic was up darn close to 40%. So hopefully, that’s a fine good things to come.
Thank you. Thank you. Our next question comes from Ivy Zelman with Zelman & Associates.
Good morning and congratulations on a solid quarter, it’s pretty ugly on Wall Street. But as you talked about Houston and Main Street, it seems a lot more brighter even in Houston. I’m sure maybe you can talk about – and congratulations, Alan Laing, that’s awesome. Maybe you can talk a little bit about the market and your footprint, maybe give us the good, the bad, and the ugly. And it’s hopefully there’s not any ugly.
And just with respect to pricing, everyone is worried about the high-end, I think about the high-end is such a small silver of the production homebuilders overall operations and so there’s foreign buyer concerns. Can you just address around the tight activity into January, where you see the real strength, where you see potential softness beyond Houston, and differentiation between price please?
Absolutely, I can be that, Ivy. So little bit about the footprint in total, I actually think that it’s pretty broad-based strength across really all of our markets. We’ll come back to Texas, so let me go through the rest of the markets first.
California, we’re still seeing Southern Cal strong appreciation, I would probably expect that to flatten out a bit. When I look at the number of choices the consumer has in Southern Cal community count in places like Orange County, San Diego are up about 50% over the last 24 months. So I think with the buyer having more choices, you won’t see the levels of appreciation that you’ve seen, but I don’t think that’s all bad for us.
The Bay Area has been all about outlet counts. We had very strong outlets coming into 2014 and had great success since our outlet count is lower than we’ve seen in the prior couple of years. And so we’ve really seen a shift to the Sacramento market. I think Sacramento saw a little bit of moderation last year, as the year progressed.
I think that healthy from a land standpoint, I think builders took a kind of a look and see perspective. There were few transactions, as the year progressed. But I think that’s actually helpful, as we’re seeing new opportunities come forward. And so California all in all, as I cover both ends of the state, generally feel real nice about going into 2016, and we have some great new positions opening across all of those markets.
Arizona, Phoenix can just continues to be on fire. And all the strength that we had in 2014 and a moderating market has played to our strength in 2015 because of the quality of our position. Quite honestly in Phoenix, it’s just about getting them built. We come into the year with a strongest backlog we’ve ever had. In Phoenix and we are just bringing the market some new land positions that are really best of class, so can be more pleased about the business in Phoenix.
The Carolinas early days, we have great teams there. The business seem to be steady. The opportunity is getting both of those businesses, both Charlotte and Raleigh to a greater level of scale in the marketplace, good management teams, great assets. So feel good about the activity we’re seeing there.
The Denver market really continues to be very strong. There’s a lot of real economic drivers in that market, the new light rail that’s coming in April, a lot of new big commercial projects tailored resorts. So I think the news in Denver as well. I’m kind of jumping across the map, so sorry about that.
Florida continues to be steady. Conversions improved year-over-year. Traffic is a little bit down, but our conversions are much better. We expect a very strong winter visitor. Continue to see strong cash from our consumer groups there. The active adult business continues to be very strong for us in the Naples, Sarasota area. So both across North Florida all the way to Naples feel very good about that and the shoulder season has started out really quite strong at the end of the year.
Chicago would be the one that’s a little slower than we had hoped. I think as we said in our early discussions, it’s about when not if from an affordability standpoint, there’s remarkable runway. So we expect 2016 to pick up in Chicago. The fourth quarter was definitely a little slower than we had anticipated.
And then, if I were to go back to Texas, I think, I’ve talked enough about Houston, but maybe Dallas for a second. Largely unaffected by oil, 2015, the story there was weather and development delays. We should have been able to pump more volume out of Dallas, but it really did come down to getting especially in the Darling business model, getting lots in front of the business.
But when I look at some of the economic drivers, the corporate growth and relo’s really fueling that market. We talked before about Toyota, FedEx, and recently I heard about the Texas Rangers ballpark possibly being built. So, as you can see IBM, sorry, probably a long answer, but I feel pretty good across really all the markets.
It’s excellent, Sheryl. And if I can ask a follow up, a lot of people are looking at Taylor Morrison’s company and remembering Phoenix and thinking now with Houston obviously a big world focal point. What – maybe you can help us with your stock trading below liquidation value, which we think is a great opportunity for investors. Walk us through what’s happened with impairments, as home prices in Phoenix corrected? Did you have any impairment? I think you said you had no impairments since 2011. But what would have to happen in Houston and kind of the catastrophic, if it would be have to be catastrophic for you to actually recognize a significant impairment as opposed to maybe negligible impairment?
Yes, I think that’s a great point, Ivy. And we’ve pointed it out in our script for the first time, because we have not taken an impairment, since like you’ve heard Dave mentioned 2011. Even through the tough times in Phoenix, we continued in Phoenix to deliver some of the company’s best margins and that continues today.
Houston, really our top margins come with our long land banks and that’s Phoenix and West Florida, the exception to that is Houston. And Houston is not generally known as a high-margin business. If we go back year as it’s always been kind of high turns low-margin, that just hasn’t been the case for us.
So I would actually put us in a little bit different place than maybe the rest of the builder environment, because for us to take impairments with really company leading margins in Houston, there’s no projections that would anticipate the kinds of drop we’d have to see. No, I will never say never, because you never know what the crystal ball tells you. But when I look at our margins and I look at the quality of our land bank in Houston and recognizing we take, we don’t even carry a year supply in the Darling business. We have really mitigated that risk in Houston as well.
And if I could add to that, Ivy. If you look at all of our different markets, Houston consistently runs in the top three as far as highest margin rate in comparison. So to Sheryl’s point, we definitely have a room there, it would have to be something along the catastrophic nature.
Thanks, guys. Good luck.
Thank you, Ivy.
Thank you. Our next question comes from Michael Rehaut with JPMorgan.
Thanks. Good morning, everyone, and thanks for all the colors always. Just following on that point regarding Houston and the valuation, because again, as referred to before, I mean, valuation really does reflect something more you could argue on the catastrophic level. I – you said, I believe, Dave, you threw in at the end that Houston’s margins are within the top three markets of the company. I just want to make sure I heard that correctly.
And maybe you could just walk us through when you talk about impairments requiring a catastrophic scenario, just to put a little bit of numbers around that from couple of angles. One, just give us a sense so far where incentives are on a year-over-year basis in Houston, because I’m sure, you’ve already absorbed a little bit of the environment and maybe if not in closings, as it’s reflected in your guidance relative to the incentives on the order book.
So number one, where are the incentives currently on a year-over-year basis? And how much further of a net price decrease would it actually require, would it be something on a 10% to 15% range, for example, or even greater, because when you talk about catastrophic and above average margins, I think, given where valuations are, people need to hear a little bit of quantification I think to get more comfortable?
Yes. Thanks, Michael. First, as far as the margin rate, what I was comparing and really looking at Taylor Morrison of Houston. If you look at the margin just the rates, it’s in the top three. Darling Houston is a little bit lower, but also a smaller business. I guess more directly to your incentives question, what we’ve actually seen in Houston, incentives are down a bit…
…year-over-year. Sequentially, I think they were up just a little bit. But we haven’t seen a lot of movement really on incentives to-date. So between that and where the incentives rate and where the margin rate is, I think that goes back to kind of our opinion. It would have to be something fairly significant to impact that market.
Yes. And maybe I would add to that, Dave, what’s been interesting about watching Houston as we still as I mentioned earlier are maintaining a very tight supply. So you haven’t really seen pricing pressure at this point. Now, I expect that to change. I think we’re going to not continue at a three-month supply and over time, we could see that hiccup.
But once again, if you believe in the underlying premise that we can’t still meet the demand that’s there, that’s going to hold somewhat of a natural governor on pricing. And so this catastrophic environment that I guess should be supposed, just doesn’t seem quite realistic, because once again, there’s a very tight supply and, at least, in the last 12 months, we have not seen as a marketplace in either the resale or the new home environment significant price pressures.
That’s very helpful. I appreciate that additional color. One more on the topic again, because and I wouldn’t drive so hard on this unless I felt like obviously the stock price and there’s, I believe some exaggerated concerns when you think about it relative to the price-to-book valuation here.
Relative to your 2016 guidance, maybe you could give us a sense of what type of scenario you’re anticipating or what type of scenario Houston is how that’s reflected in the guidance from a closing standpoint? And what you anticipate gross margins to do in that market? And how that’s included in what I presume is obviously included in the guidance that you’ve conveyed today?
Yes, maybe we’ll both chime in here. We look – the business plan the team put together is based on the underwriting the teams do and the quality of our location. The market is expected to have kind of take a 10% decrease in overall volume. And I think it would be prudent for us to assume about the same, which is generally the range that we’ve included in our guidance.
I think the only other piece I should have mentioned, Michael, when we talk about margin pressure. We also have to remember that there’s offsets. And I expect that we’re going to see some offset on the construction side. And I know the team is already diligently working, because as the starts reduce, we’re going to have some opportunity to renegotiate costs. Anything else, Dave?
No, I think you hit the last point on the margins. It’s really – probably see incentives tick up, but we do believe that that’s going to be offset by the labor side.
That’s a good – that’s a great point. One last one, if I could. The SG&A guidance at roughly 10%, just wanted to clarify there. You finished 2016 at 10.2%, you are expecting closings growth of 10% to 15%, and I would assume – maybe you could give us a sense of ASPs. But I would assume something similar on the revenue growth side. Should we expect some degree of leverage relative to that 10.2%, or are there other things that we are not taking into account?
We’re expecting a little bit of leverage. We have a little bit more on the M&A front for Acadia, as well as we’ll have some integration costs to get through with Acadia and some for our prior ones – our prior acquisitions. And then we’ve made a lot of reinvestments back into the business there in 2015. So we’re anniversarying some of that.
So, as we look kind of if we break up year in the first-half, we’re actually anticipating maybe a better deleverage. But then as we get to the back-half, we’ll see that cost structure normalize and we’ll drive some leverage leading to something around kind of the 10% range. So we feel comfortable that, because even with the modest leverage we’re expecting, we still believe we’re going to continue to have one of the leanest cost structures in the industry.
And then I think you also had a question on the ASP, our expectations. For the first quarter, I think what you’ll see us be is in line with Q4, but possibly down year-over-year just a bit because of our new markets. I would say overall, we expect to get some price appreciation in the year. But we’ll see some of that kind of way us – ways on us on the first-half as we anniversary those new markets and then we’ll have the pressure of Acadia in the back-half.
And if you look at just from a consumer standpoint, we averaged about 20% first-time buyers. But when you look at the first quarter that jumps pretty significantly the 25%, 26%. So, as you start to see that come through the business can have an impact on ASP.
Great. Thank you.
Thank you, Michael.
Thank you. Our next question comes from Nishu Sood with Deutsche Bank.
Thank you. I wanted to start out by looking at the community count guidance versus the closings growth. So in 2015 in the very helpful summary slide that you guys gave. So the 26% community count growth versus the 12% closings growth, you laid out some of the factors that impacted that, obviously Houston, weather labor issues, there were some mix issues impacting that as well.
Now 2016 lays out pretty similarly, 20% to 24% community count growth versus the 10% to 15% closings growth. Now, a lot of the factors you mentioned for 2015 are already in the numbers, if you will, for 2015. So what are you anticipating to serve as a drag as we look ahead to 2016 that would keep the closings growth less than the community count guidance growth?
So I mean, it’s a couple of things. One, obviously the new markets those take a little bit of time to come online. Houston, obviously, we’re looking at that maybe call it a little bit of conservatism from that standpoint. But for us as we look at closings for the year, I think we like to get into the spring selling season and see how that turns out and that will give us a better indication. But we’re comfortable with that 10% to 15% as we move forward.
Yes, I mean I agree. I think the single largest drag is the new market when you just look at a pace standpoint and what we expect those to deliver, and we just don’t have the history there yet, and you put that with Houston. And the number seem pretty right unless the spring selling season delivers something different.
Got it, got it. Okay, thanks for that. And, Sheryl, I think you mentioned on the specs like – I’m sorry, Dave, I think you are talking about that. Working down the spec to below 1 finished per community from the 1 to 1.5 range currently, that that clearly makes a lot of sense. But it’s a – from some other builders we’ve heard about some judicious use of not finished spec, but in progress spec as a way to help mitigate some of the labor and delivery issues that came up.
So I was just wondering, is that something you considered as the – is a – does that – would that run counter? Is that why you are not considering it in terms of bringing down the finished spec? What are your thoughts there and just a broader update, I guess, on that topic in terms of getting delivery schedules back on track.
Yes, it’s a fair question, Nishu. I think the important distinction here is we like specs, we don’t like finished specs. We can have as many specs in progress, which does exactly what you just said and that’s making sure you keep visibility in front of the trade base. So they understand and they can plan for it.
It really comes down to what’s the right level of finished inventory when I think about just the drag on the balance sheet. So given the labor impact, you’re absolutely right. We need to control our environment and we need to work with the trades very carefully and have a plan production, which is our to be built and our inventory. So they can plan ahead of their business.
We need to make sure that we just are very thorough in keeping complete packages in front of the trade base, having job ready sites, our focus on our safety program is much simplicity, as we can build into their environment it will only help. And then making sure that we get a good jump on the year with new starts and pray for good weather.
Yes, I think that’s the biggest thing, I think if you compare what we expect 2016 versus 2015, we really just saw the bottleneck in labor especially at the year end because of the weather and delaying all the starts. So, hopefully, we’ll see a little bit more normalized pattern around the weather.
And as Sheryl said, our goal is to ultimately sell every spec before it’s finished, that doesn’t always work out. So this is really just helping to manage the balance sheet and drive cash flow where we can.
Thank you. Our next question comes from Mike Dahl with Credit Suisse.
Hi, thanks for taking my questions. I have a two-part question on margins. I guess first, Dave, if I take a look at the guidance and some of the moving pieces with interest and also purchase accounting, it seems like kind of ex interest, ex purchase accounting, you are expecting roughly flat. So first is just a clarification of whether that is correct.
And then the second part is, if we think about from a regional standpoint and you guys have broken out under the new regions where the margins stand. And then you’ve had a lot of moving pieces both within some of your markets and then different product categories, shifts in land vintage. So, just wanted to get your sense of where you think you are from a regional standpoint on a margin basis. Are these kind of the appropriate go-forward margins to look at the 2015 levels, or are there opportunities for say like the West Coast to catch up a bit and maybe some of the offsets on does the East moderate with some of these acquisitions? Any color there would be great.
Sure, Michael. I guess, I’ll kind of stick with margin guidance for the company kind up for the quarter and the year. We do expect to see a little bit higher land costs, as we continue to burn off some of that that older land, which is probably most pronounced in our Darling and California business.
The first-half we have to anniversary some of the higher construction costs relative to the increases we saw in 2015. But that should probably moderate as we get to the back-half and then, of course, we have the purchase accounting, which I said 30 to 40 bps in the first quarter, 20 to 30 bps for the full-year. And then potentially we could have some additional pressure, as we do try to move through some of the specs to get that closer to one finished spec per community.
So there’s definitely some puts and takes there. I think, if you were to look at it to your point without probably the spec and some of the purchase accounting, we would be closer to flat when you look at it from a pre-interest standpoint. All in though, and you consider the benefit we’re getting from capital interest that amortization we expect to be flat kind of on that post-interest number.
And I think, Dave, it’s worth mentioning that we’re pleased that we’re finally after just one year of anniversarying Monarch, we are going to see a benefit in that capitalized interest.
Yes, and this is – the first quarter is actually the first one we saw it flat year-over-year. So we are going to see that benefit really come through beginning in the first quarter to roughly call it start about 2.5% of sales then it will settle into about 2.4% for the year.
From a regional perspective, we don’t break out the regional guidance. But as you kind of go around and look at the different markets, on the East, we are actually probably going to have some of the largest purchase accounting impacts, given three of the markets are there.
If you go to Texas, again, as we talked about Houston really been the driver there around some of the puts and takes probably higher on the incentive, but hopefully offset that with the labor. And then in California, probably more flattish. That’s one where we see probably the higher land costs coming through just because we would keep a shorter supply of land there in California.
Thank you. That’s helpful. And then my follow-up question is just from taking a step back and thinking about the whole portfolio management. Obviously, you guys have had a tremendous amount going on this year between Canada and the additions in the US. And now you’ve kind of built out the Atlanta as far as diversified and you’ve got pretty good product platforms in most of your other core markets.
So just how are you thinking about the balance between growing within your core markets? And then maybe continuing to expand into new markets as you are looking at 2016? And if there is any better kind of top of mind that we should be thinking about?
Yes, fair question, Michael. 2015 was a very busy year for us and feel really good about the geographic expansion, and really 2015 on top of that pretty big 2014 as well. So we continue to always look at opportunities, but I would tell you that the focus is operational excellence, and make sure that the organization manages through all the growth that we’ve taken.
In addition to that, we want to make sure that we have the right scale on our markets and certainly there’s opportunities within the new businesses. But when we think about what it takes to integrate and we’ve made great progress, but I don’t want to cut that short managing the business at these new levels, I think, that’s our top priority and that certainly impacted the decision to change our structure and ask Alan to join the organization.
We’ll always look and like we’ve always said to you in the past, we went to probably plan to buy two companies within 90 days of each other, but they both made sense and they were accretive and they were in markets that made sense. So we are ready for those kind of opportunities. But truly the focus is back to the basics make sure the blocking and tackling is happening, especially given the external environment that we are recognizing.
Okay. Thanks and good luck.
Thank you. Our next question comes from Jay Mccanless with Sterne, Agee.
Good morning, everyone.
First question I had, what was the cancellation rate in the fourth quarter?
Give us one second.
They are 18.2%.
Okay. And how did that compare to last year?
It was up a few hundred basis points and that really was an impact of Texas.
Okay. And then sticking on Texas for a second, what in terms of land prices in Houston? And then I think you guys may have made some comments about Austin in the last conference call. What are you seeing there and are you seeing opportunities maybe to rebid on some parcels that you’ve looked at previously?
We haven’t really seen prices move. I think the land sellers haven’t gotten the memo yet that there’s a maybe a moderation in the market. But it always takes a little bit of time. What we have seen and I just commend the teams they’ve been very thorough in working with the sellers on change in terms especially on the takedown business, some of the true ups.
So I guess at some level that impacts the overall cost of the lot, but certainly impacts the returns and right sizes it to the volume we’re seeing in the business. It generally takes that couple of quarters, Jay, before you really see any shift, if you do see any shifts in the actual value of the land that you’re buying. So it’s generally terms first, structure in terms, and then price follows later if it happens at all.
And I think that what we’ve seen in Austin, because Austin with the price appreciation that we thought over the last year, we really haven’t seen the land market adjust one bit. If I go back to Phoneix, we saw terms come into the market. We saw a little bit every setting, but pretty immaterial in the big picture, and I would tell you all that’s gone again. So we can’t sit and wait assuming prices are going to drop. We have to be very – and that’s why our underwriting process is so rigorous.
Got it, and thank you. And the last question I had – that’s encouraging that you think you are going to be able to reprice some of the labor cost in Houston. But could you talk about labor rates and labor availability in the rest of the country and maybe where you are seeing some improvement or additional labor?
Yes, it’s interesting, because labor becomes a real topic of conversation at quarter end and certainly it did at year end. And as we mentioned in our prepared remarks, given the weather bottleneck, it certainly impacted Dallas, Denver, and Phoenix, given the volume. The stat that I like to share, because I think it helps articulate really what the industry is dealing with is if you think back to the peak, we’re probably about 50% back in skilled labor and we’re probably about 50% back in starts, excuse me, from the peak. If you think about skilled labor and the actual bodies around the company, we’re about a third of the way back.
In addition to that, we’ve just had an aging out within the trade base and the average plumber/electrician is in their mid-50s today. So you’re not back on bodies and you certainly aren’t back on expertise is that you’ve actually given out some of your greatest expertise. So this shouldn’t be a surprise.
Having said all that this is what we do is work through this and we’re working on some pilot programs, for example, we’re working on one in Phoenix right now, where we’re doing a job match helping our trades really being a trade partner and helping them match skills with garden reserve vets in the marketplace that are out of work. So we have a lot of different initiatives in place today that some of them will have an immediate impact and some of them will help us through this cycle and the next to rebuild the infrastructure.
From a labor rate perspective, Jay, we saw pretty modest increase sequentially Q3 to Q4. And then as we go forward, we do expect to see some relief that Sheryl mentioned it’s always tougher at quarter end, probably maybe with the exception of Phoenix that market continues to be pretty strong.
Okay, sounds good. Thanks for taking my questions.
Thank you. Our next question comes from Jay Micenko with SIG.
Well, I got a new name. Hey, good morning. Hi, there. I guess, Sheryl, a high-level question to start out. Obviously getting after the buyback pretty aggressively out of the gate. What’s your thought process around obviously buying back here accretive to book value versus the tighter flow? We’ve talked about it in the past and just curious if your thoughts have changed there any around sort of managing the float and any discount that comes from that versus getting the stock here under book value?
Yes, I’ll let Dave to take that one. The only thing I would say Jack is, it’s always going to come down to best use of cash and when we – where we can generate the greatest returns. But you want to go into specifics?
Yes, Sheryl is exactly right, and that’s how we approach it. We go through kind of our waterfall around our capital strategy, where to put that cash. And obviously, we’ve done a lot around delevering our balance sheet from a senior notes perspective and really just using our revolver kind in and out of that.
But when you look at the flow, I mean, obviously there’s a limited float and that did play a factor in our original sizing of the authorization. But we have $30 million left in authorization, which is roughly 8% of the publicly traded float. So we don’t know if that’s really going to impact the float as much, but we do look at it as Sheryl said, best use of cash buying the stock back what we did, and once the share is normalized from a price perspective, which we think will happen, it’s going to provide a nice long-term shareholder return in the future.
Which is at the end of the day should be what they’re most focused on. And to Dave’s point the 1 million shares we bought back isn’t going to change the dynamic on the float that hopefully represents our approach to cash and the balance sheet.
Okay. I guess the question on the JV line, you came in a little lighter this year than I think you had initially established in guidance, and I’m guessing that’s tied to everything else in terms of delays and that sort of thing. But you got a nice tick up in 2016. And because it is a more material number, I’m wondering if you can, Dave, maybe give us a little bit more clarity on the cadence, or first-half versus back-half when we think those JV figures are going to more flow through the income statement?
Yes, sure thing. When we look at Q4, we were a bit off there and that was primarily due to just some construction issues just from the timing of it. So give us another week longer in the year we probably would have hit that number. The vast majority of that is going to be coming from our Sea Summit Marblehead position in Southern California, which is really starting to ramp up. So you’re going to see that number increase, as we go through each quarter primarily backup loaded.
Okay. Thank you very much.
And thank you. Our next question comes from Patrick Kealey with FBR.
Good morning. Thanks for having me on.
So first question, again, over the past, call it, 12 to 18 months you guys have made two acquisitions in the Atlanta market. So maybe if you could give us a little bit more detail on why that market, maybe give us dynamics on land and pricing that make it particularly attractive to you given options for you to allocate capital and several other markets within your business?
Sure. When we bought JEH, we have been looking for the right entry into Atlanta for a while. And I think you probably appreciate all the dynamics in Atlanta just from a – for us from an expansion opportunity, given those dynamics looking unemployment really that declining supply we’ve seen there very early days of price appreciation. We’d like the market a lot. Adding Acadia with a strategic opportunity to increase our closings, revenue, earning, and garner some scale in what we think is a very important market with an improved geographic footprint within the market and consumer expansion.
And as I mentioned in my earlier comments, the JEH business was just a phenomenal acquisition for us. And it was – it’s probably about 85%, 90% of their business is highly affordable first-time buyer. With the added segmentation of Acadia and recognizing that the Acadia outlet and the JEH outlets don’t compete, it truly is one plus one. I mean, I would almost argue, it could be 2.5, because we get the benefits of that scale, while we are getting this consumer expansion infill product, millennials, they have a nice active adult business.
So when I think about a complementary opportunity to generate the benefits of scale, this was it. And to do, we have two great teams in the market and just couldn’t be more excited about it.
Okay, great. And then maybe just sticking with kind of acquisitions. I know you talked about how land prices haven’t really moved much given kind of activity within the homebuilding market at large begin 2016. So maybe thinking more about on the M&A side, when you are out there looking at potential sellers, have you seen any changes in seller pricing given kind of the pullback in valuations with homebuilders? And do you think maybe as we move through the year that creates more opportunities for builders with capital to continue to acquire builders and grow their footprint?
Yes, it’s a interesting question. The honest answer is I think every deal is so very different. We have had a lot of success not going and participating in a process where price is driven up when you generally have this bake mandated process, it creates a different kind of tension, which I don’t think is really healthy at the end of the day.
Our successes really come in negotiating, finding an operation that we think is very advantageous with good people, good land positions, because I think you get to a better place for both parties. I haven’t seen prices or expectations really come down in any of the processes that we’ve looked at, which is really what’s driven our strategy.
If you look at the overall valuations, they’ve only been down for a couple months. So I think it takes a while for sellers to kind of wrap their head around that that new valuation. I think ultimately it’s going to depend on how long the evaluations are depressed.
Yes, that’s why you’ve seen some deals come on the market and off the market through a process, it’s because I don’t think those expectations were being met.
Great. Thank you.
Thank you. Our last question comes from Will Randow with Citigroup.
Hey, good morning, and thanks for setting me in.
Good morning, Will.
In terms of acquisitions I was just curious how you think about, number one, the payback period on the acquisitions you’ve done. Number two, similarly speaking, I mean, the market is not valuing overbook, so how does that change or skew your view? And very similarly, how do you think about future acquisitions?
So in reverse order, I think, I’ve already hit the future acquisitions, we’ll always look, but feel very good about where we are and certainly not going to force any future acquisitions we like the geographic expansion. I can’t reconcile how the market has valued us to be quite honest, Will. It just – when I look at the overall balance, it just doesn’t make sense, so…
For us and the sector.
Absolutely, but I don’t think you’ve probably talked with the CEO who likes the valuation, and I would fall in that camp. The third one or actually, which was his first…
Yes, which was the payback period between acquisitions. We – the deals that we do, we generally look to be accretive immediately, but it will take time for the cash flow and it depends on the deal. So it’s going to range on a pure payback period.
So I would say, yes, one to – probably one to three years depending on the deal.
Well, really appreciate everyone joining us today. Thank you for all your questions and for being with us, and have a great day.
Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. And you may now disconnect.
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