Pultegroup Inc

NYSE:PHM

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Fourth Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Jim Zeumer, you may begin your conference.

[Jim Zeumer]

Great. Thank you, Rob. Good morning and thank you for joining today's call. We look forward to discussing PulteGroup's outstanding fourth quarter earnings for the period ended December 31, 2021.

I'm joined on today's call by Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of today's call later.

I want to highlight that we will be discussing our reported fourth quarter numbers, as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance.

Also, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now let me turn the call over to Ryan Marshall. Ryan?

[Ryan Marshall, President & Chief Executive Officer]

Thanks, Jim, and good morning. It's great to speak with you again and to have this opportunity to review PulteGroup's impressive fourth quarter and full year results. I am extremely proud of what our organization has been able to accomplish.

For starters, I want to thank the entire PulteGroup team for the tremendous effort demonstrated throughout 2021, but particularly in the fourth quarter, from sales to procurement and construction, to our financial services team, you clearly showed what a proud and talented group of determined people can achieve.

In a minute, Bob will review our fourth quarter results, but I want to highlight a few of our full year numbers to clearly demonstrate just how much success we've realized over the past 12 months.

Even with all the challenges, the homebuilding industry faced in 2021, from supply chain disruptions and labor shortages to municipal delays and COVID waves, we grew our closings by 17% to almost 29,000 homes, benefiting from the very favorable demand and pricing conditions, we increased homebuilding revenues by an even greater 27% to $13.5 billion.

We were then able to fully capitalize on this top line growth by expanding gross margins by 210 basis points to 26.4% and driving a 43% increase in our reported full year earnings of $7.43 per share.

Our financial discussions tend to focus on the income statement, but I would also highlight that over the past 12 months, we lowered our debt to capital ratio to a historic low of 21.3%, while raising our return on equity to 28%.

I would also highlight that over the course of 2021, we continued our disciplined allocation of capital in alignment with our stated priorities. This allocation included investing over $4 billion in land acquisition and land development, increasing our dividend pay rate per share in 2021 by 17%, retiring $726 million of bonds and repurchasing $900 million of stock, reducing our shares outstanding by approximately 6%.

There is a lot to be excited about with regard to PulteGroup's 2021 operating and financial results. In assessing our performance, we fully appreciate that we benefited from a very favorable supply and demand dynamics in the marketplace. On the demand side, we saw a strong desire for homeownership across all markets and buyer groups. At one end, we have maturing millennials driving extraordinary demand for first-time and first-move of product, while at the other end, we have empty nesters who are downsizing or retiring into their next stage of life. This demand strength drove an increase of 8% in our 2021 net new orders to almost 32,000 homes, including 6,769 orders in the fourth quarter. The reality is that these numbers could have been significantly higher, but COVID and other challenges impacted our availability of lots, labor and materials, which caused us to intentionally slow sales.

As part of our response strategy to these resource constraints, we raised prices in 2021 and actively restricted new home sales through lot releases or similar practices. We continue to implement these actions in the fourth quarter as we raised prices in effectively all our communities. At the same time, we continue to restrict sales in more than half of our communities. The strong demand experienced in the fourth quarter has continued into January with no signs that higher interest rates are impacting the desire for new homes.

As we look forward to the year ahead, we are well-positioned to meet the strong demand. We enter 2022 with twice as many spec homes in the production pipeline compared to last year along with a land pipeline that will allow us to expand our community count throughout this year. We also have all the lots we need for our 2022 deliveries and expect to increase our full year gross margins by upwards of 250 basis points.

In other words, we enter 2022 with tremendous momentum. While demand conditions are strong, the supply side of the equation has been extremely challenging, with no clear signs as to when things will get better. The limited supply of new and existing homes allowed prices to increase by double digits last year, but labor shortages and significant disruptions in the supply chain are limiting production and extending build cycles.

Our suppliers and partners are working hard to provide needed resources, but key products that are under allocation must be ordered months in advance or are simply not available. The ongoing surge in COVID infection rates is impacting our suppliers and is also making it very hard for trades to field crews consistently and expanding their teams is an even bigger challenge. Unfortunately, we expect construction processes to remain difficult through much, if not all, of 2022.

In response to these challenges, we continue to implement actions to help ensure we can complete high quality homes and grow our deliveries until supply chain issues are resolved. These actions include increasing spec starts, ordering earlier, narrowing option packages and even warehousing inventory of critical building products. These efforts are time consuming and we lose some production efficiencies, but for the foreseeable future, they are required to get homes built. We've said in the past that scale, particularly local stick scale matters and this is certainly the case today.

Let me now turn the call over to Bob for a review of our fourth quarter results. Bob?

[Bob O'Shaughnessy]

Thanks, Ryan, and good morning. As part of my review of our fourth quarter performance, I'll discuss our reported results and where appropriate, review our results adjusted for specific items in the current or prior year quarter. Along with reviewing the company's fourth quarter results, I will also be providing guidance on key performance metrics for both the first quarter and full year 2022.

Looking at the income statement. Wholesale revenues in the fourth quarter increased 38% over last year to $4.2 billion. Higher revenues for the period were driven by a 26% increase in closings to 8,611 homes, along with a 10% increase in average sales price to $490,000.

The higher ASP in the quarter – double-digit pricing gains from all buyer groups, while closings came in slightly above guidance, thanks to a tremendous effort on the part of our homebuilding and financial services teams. Consistent with comments made throughout 2021, favorable supply and demand dynamics for housing supported the strong price appreciation we experienced across all markets and from all buyer groups.

The mix of closings in the quarter were a direct alignment with our long-term goals and included 34% from first-time buyers, 42% for move-up buyers and 24% from active adult buyers. Closings in the fourth quarter last year included 31% first time, 46% move up and 23% active adult.

Net new orders in the quarter totaled 6,769 homes, which is a decrease of 4% from last year. The decrease in orders reflects a decrease in community count as well as the ongoing actions to manage sales to better align the pace of our sales and production that Ryan mentioned.

Our average community count in the quarter was 785, which is down 7% from the prior year. Buyer demand was strong and order volumes were fairly consistent across all three months of the quarter as we didn't experience the typical seasonal drop-off in order volumes as we moved through the quarter.

I would note that we continue to experience this strength in demand through January. By buyer group, orders by first-time buyers increased 12% to 2,207 homes, while orders by move-up and active adult buyers both declined 10% to 2,812 homes and 1,750 homes, respectively. The primary drivers of the lower order rates among the move up and active adult buyers was having fewer communities and our decision to restrict sales.

We ended the fourth quarter with a large backlog of sold homes, which provides a strong base of production heading into the New Year. On a unit basis, our backlog at year-end was 18,003 homes, which is an increase of 19% over last year. Backlog value at year-end was $9.9 billion, which is an increase of 45% over 2020.

Even with the well-documented challenges within the supply chain, I can say that thanks to a lot of hard work by our teams, trades and suppliers, we're getting homes into production. As a result, we ended the year with 18,423 homes under construction, which is up almost 50% over last year.

I'm also pleased to report that we've been able to increase our spec production as 23% of homes under construction are spec. This is up from 17% in the third quarter and it's getting us closer to our target of having between 25% and 30% spec. While it's great to see homes getting into production, it's important to note that the overwhelming majority of these units are in the early stages of construction.

More specifically, 31% of our production pipeline is at the initial start stage with another 44% of the homes only at the framing stage. At the other end of the production pipeline, we have only 411 finished homes. This figure includes both sold and spec units.

Given the number of homes under production and equally important, their stage of construction, we currently expect to deliver between 5,600 and 6,000 homes in the first quarter of 2022.

In addition to the challenging production environment Ryan discussed, our Q1 delivery guide reflects the impact of limited finished spec inventory and the longer construction cycle times we're experiencing. For the full year 2022, we expect to deliver 31,000 homes. This estimate assumes no meaningful change in the state of the supply chain and in turn, our current cycle times.

If the favorable demand conditions allow us to sell in an even higher year-over-year growth rate, we'll have to see if the supply of materials and labor will be equally supportive. Based on what occurred in 2021, we want to be confident we can deliver a high-quality and complete home at closing. If the supply of labor and materials does not allow for increased production, we'll continue to emphasize price over pace, restrict sales as needed as we focus on driving the best returns within each community.

As we move through 2022, we are well positioned to meet buyer demand, given our expectations for sequential increases in our community count throughout the year. For the coming four quarters, we project our average community count to be 790 in Q1, 815 in Q2, 840 in Q3 and 870 in Q4. Given the land investments we've made, we expect this trend to continue and see further community count growth in 2023.

As mentioned, strong demand and pricing conditions in 2021 resulted in higher prices across all buyer groups, which has resulted in our average sales price in backlog increasing by 22% compared to last year. Given the price of homes in backlog and the mix of homes we anticipate closing, we expect our average sales price to be between $500,000 and $510,000 in the first quarter.

Our average sales price should move higher as we move through the year, and we currently expect our full year average sales price to be approximately $515,000. As always, the ultimate mix of deliveries can influence the average sales price we realized in any given quarter.

Driven by the strong price appreciation achieved throughout our markets, our homebuilding gross margin in the fourth quarter increased to 180 basis points over last year and 30 basis points sequentially to 26.8%.

With 18,000 homes in backlog, we have good visibility on near-term gross margins, but we also know that input costs are moving higher and that we expect to continue to incur what are now commonly called scramble costs, as we work to ensure product and labor availability.

Based on what we can see today, we expect gross margin to be in the range of 28.5% to 29% in the first quarter and for the full year. This guide takes into consideration our current construction costs, as well as the recent run-up in lumber prices. Based on these factors, we anticipate being towards the bottom end of the range in the first quarter, but towards the higher end of the range by the end of the year.

Speaking of inflation, we are closely monitoring increases that are impacting the cost of labor and materials. As a result, we currently expect house cost inflation exclusive of land costs of 6% to 8% for 2022. More than ever, there are a lot of moving pieces, so we'll update our gross margin guidance if needed as we move through the year.

For the fourth quarter, our reported SG&A expense of $344 million or 8.2% of home sale revenues includes a net pre-tax benefit of $23 million from adjustments to insurance- related reserves recorded in the fourth quarter. Exclusive of this benefit, our adjusted SG&A expense was $367 million or 8.7% of home sale revenues.

In the comparable prior year period, our reported SG&A expense was $280 million or 9.1% of wholesale revenues, excluding a $16 million net pre-tax benefit from adjustments to insurance related reserves recorded in last year's fourth quarter, our adjusted SG&A expense was $296 million or 9.7% of home sale revenues.

Looking at 2022 overheads, we currently expect SG&A expense in the first quarter to be in the range of 10.7% to 10.9%, which would be flat to down slightly from last year. For the full year, we expect SG&A expense to decrease as a percentage of revenues to be in the range of 9.3% to 9.5% of home sale revenues as we realize incremental overhead leverage on the business.

In the fourth quarter, our financial services operations reported pre-tax income of $55 million. Prior year reported pre-tax income of $43 million included a $22 million pre-tax charge for adjustments to our mortgage origination reserves. During the fourth quarter, financial services pre-tax income was driven by increased loan production consistent with the growth in our homebuilding operations, offset by lower profitability per loan resulting from a more competitive market condition. Mortgage capture rate for the quarter was 85%, which is down slightly from last year's 86%.

Our reported tax expense for the fourth quarter was $193 million, which represents an effective tax rate of 22.5%. Taxes in the fourth quarter included a tax benefit of $9 million, resulting from deferred tax valuation allowance adjustments recorded in the period.

For 2022, we expect our tax rate to increase to 25%, driven by changes in certain underlying state tax rates and the fact that legislation to extend the energy tax credits beyond 2021 has not been passed. For the fourth quarter, we reported net income of $663 million or $2.61 per share and adjusted net income of $637 million or $2.51 per share. Prior year fourth quarter reported net income was $438 million or $1.62 per share with adjusted net income of $415 million or $1.53 per share.

PulteGroup's earnings per share continue to benefit from our share repurchase program. In the fourth quarter, we repurchased 5.6 million common shares at a total cost of $283 million or an average price of $50.11 per share. For all of 2021, we repurchased 17.7 million shares, driving a 6% reduction in our shares outstanding at an average cost of $50.80 per share.

For the year, we returned $897 million to shareholders through share repurchases, plus an additional $148 million of dividends. This brings the five-year total of share repurchases and dividends to approximately $3.2 billion. Having reduced our common shares outstanding by more than one-third over the past eight years, returning funds to shareholders has been a significant part of our capital allocation strategy. We fully expect such systematic repurchases to continue in the future, so we're extremely pleased with the Board -- announced today, approving a $1 billion increase to our repurchase authorization. At the end of 2021, we had $458 million remaining on the existing programs.

Given our improving financial results and cash flows even after returning over $1 billion to shareholders, investing over $4 billion in our business, paying down $726 million of bonds during the year. We ended the year with $1.8 billion of cash. Our debt-to-total capital ratio at year-end was 21.3%, which is a decrease of 820 basis points from last year. Adjusting for the cash on our balance sheet, our net debt to capital ratio was 2.5%.

As part of our overall capital allocation strategy, we have routinely talked about maintaining our gross debt-to-capital ratio in the range of 30% to 40%. As noted in today's press release, we are updating these numbers to better reflect how our business operates today.

Over the past several years, we have driven material and sustained gains in our operating performance and capital efficiency. These, in turn, have dramatically increased the cash flows we expect to generate. Taken in combination, we now believe we can grow our business and fund its operations while maintaining our gross debt-to-capital ratio in the range of 20% to 30%. This represents confirmation that the changes we've driven in the business continue to support long-term growth.

To further demonstrate this point, in the fourth quarter, we invested $1.4 billion of land acquisition and development. This brings our total land spend for 2021 to $4.2 billion. On paper, this is an increase of almost 50% over 2020 land spend. But I would remind you that we suspended land investment for almost six months when the pandemic first hit in 2020, so some of the 2021 spend was simply deferred for the prior year.

We currently expect to increase our land investment in 2022 to between $4.5 billion and $5 billion. Given the vast majority of land we acquire is undeveloped, more than half of our spend in 2022 will be from the development of existing land assets. Supported by the higher land spend, we ended 2021 with 228,000 lots under control, of which 109,000 were owned and 119,000 were controlled through options.

On a year-over-year basis, we ended 2021 with an incremental 30,000 lots under auction and remain focused on advancing our land life strategy going forward. I would note that included within our land position are approximately 1,400 lots that were approved under our strategic relationship with Invitation Homes and that we remain on track with our five-year plan of building 7,500 homes under this program with first closings expected in 2023.

Now let me turn the call back to Ryan.

[Ryan Marshall, President & Chief Executive Officer]

Thanks, Bob. For a number of reasons, we remain constructive on the outlook for the housing industry. Earlier, I spoke about the large demographic trends, which are aligned to support buyer demand over the long-term. In the near-term, most economic indicators point to an ongoing expansion of the US economy, which should keep the job market strong and increase wages even further.

We recognize that COVID and its various mutations are obviously a wildcard, but we hope that this latest surge may have already peaked and that conditions will begin to improve going forward. The impacts from COVID that don't appear to be waning are the desire for single-family living and the ability to work from home indefinitely.

We are certainly mindful of rising interest rates and the potential risk through affordability and overall demand and are prepared to respond appropriately should conditions change. Still, given a strong economy, high employment and rising wages, this is a market environment in which we can sell homes.

Before opening the call to questions, I do want to highlight an initiative that we've launched internally in 2020, but which you may begin hearing more about this year. Called our Hope to Home program, this is our effort to make available for sale more affordable housing and the possibility of homeownership to individuals who might not otherwise get the chance. We all know the benefits that homeownership can afford people over time, but we also can appreciate that not everyone has the same opportunity to access this path.

We are beginning to pilot Hope to Home in a few communities and believe it's a program that could ultimately result in the sale of a couple of hundred homes a year. Hope to Home is a for-sale program designed to complement, but run independently of our highly successful build-to-honor program through which we donate mortgage-free homes to wounded veterans.

Started in 2013, I'm extremely proud to say that Build to Honor will award its 75th mortgage-free home later this year. Now let me close as I begin by thanking our entire organization, as well as our suppliers and trade partners. You continue to prove yourselves to be an outstanding group of people focused on serving our customers and supporting each other.

[Jim Zeumer]

Thanks, Ryan. We're now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Rob, if you'll explain the process, we'll get started with Q&A.

[Operator]

[Operator Instructions] And your first question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

[Mike Dahl, RBC Capital Markets]

Good morning. Nice results. Thanks for taking my questions.

[Ryan Marshall, President & Chief Executive Officer]

Hi, Mike.

[Bob O'Shaughnessy]

Hi, Mike.

[Mike Dahl, RBC Capital Markets]

First question, just on the gross margin guide. It's great to see it up that much for the full year. It looks like it's up, but it's relatively stable through the year. Can you talk about some of the moving pieces? I mean, obviously, you've had some good sequential pricing.

You talked about the full year for cost inflation. But can you talk about the moving pieces throughout the year that keep that guidance a little bit flatter through the year and maybe there's a difference in inflation per se versus second half however you want to kind of frame that?

[Ryan Marshall, President & Chief Executive Officer]

Sure, Mike. Obviously, inflation is real. And maybe principal among that interestingly is lumber, which had trended down we're getting a little bit of a tailwind in the first half of the year, but pricing has moved right back up. And so that's influenced the back half of the year.

But I would tell you, you heard in the prepared remarks, we're projecting 6% to 8% increase in input costs for the house, plus kind of every new lot comes with a little bit more expensive cost than the ones that we just costed off, which is consistent with what you've seen for a couple of years now in a rising market, as we bring new assets to market, they're a little bit more expensive. So all those things factor in.

The good news is that, as we look at the year, we do see margins improving through the year. So in the prepared remarks highlighted, we'll be at the lower end of the range in the first quarter and towards the higher end of the range. So despite those cost pressures, we think we're getting enough price to offset some of those increases. And margins at 28% to 29% -- 28.5%, 29% are pretty stout.

[Mike Dahl, RBC Capital Markets]

Sure. Okay. Thanks. Second question is around cash flow and capital allocation. I mean, it's nice to see the new details this morning. I guess, if we take into account your land investment, it will be up a little, but clearly, your guide around income drivers are also up year-on-year. So it seems like all is equal, cash from ops or free cash flow will be higher in 2022 than 2021. Since you're already in that 20% range or the lower end of that 20% range on gross debt to cap, should we think about effectively all of cash flow in the immediate term is going to be given back to shareholders via buybacks and dividends?

[Ryan Marshall, President & Chief Executive Officer]

Yeah, Mike, it's an interesting question. And the simple answer is I don't think so. We've long said that we've got sort of a priority cadence, invest in the business, pay our dividend, return excess to shareholders. And there are a lot of things that we could do with that money. So I wouldn't want to say it would be restricted to any one thing. The land market, if it's attractive, you could see us investing. We've always told folks, we look at M&A, so some money could end up there.

So the good news is, and you've heard this from us before, we're in a position where we have choices to make. You can see with the amount of money that we used to buy back stock in this quarter at $283 million, that's a step up from what we had done, brought the full year to almost $1 billion. The Board increased the authorization by $1 billion. We put that out this morning.

So if you add that to the $400 plus million we had at the end of the year, we've got a lot of capacity there, but we'll look at everything. And so I wouldn't want to pigeonhole ourselves in the same, yet, it's all going back to shareholders. We'll use the same screen we always do in the business is going to be our primary driver as long as we can see an opportunity for higher return off of it.

[Operator]

Your next question comes from the line of Ivy Zelman from Zelman & Associates. Your line is open.

[Ivy Zelman, Zelman & Associates]

Thank you, and congratulations on a great year, guys.

[Ryan Marshall, President & Chief Executive Officer]

Thanks Ivy.

[Bob O'Shaughnessy]

Thanks Ivy.

[Ivy Zelman, Zelman & Associates]

Maybe, Ryan, you can help us a little bit just appreciating what you just said about with each asset you deliver slightly higher costs. When you think about pre-COVID and your underwriting land, what are you underwriting in terms of absorption? And what are you underwriting what you're buying at, let's say, today, that might not deliver until 2023, 2024? Just to give us some perspective relative to the normal trend line. Let's start there.

[Ryan Marshall, President & Chief Executive Officer]

Yeah, Ivy, thanks for the question. And I would tell you that I think one of the things that has enabled us to deliver the results that we're delivering is a very consistent land underwriting screen that candidly hasn't changed through time. We're certainly underwriting at current market conditions, and we kind of have to do that in order to remain competitive.

So the absorptions that we're underwriting communities at today are certainly a little bit higher than probably what we were underwriting land acquisitions at, say, three years ago.

That being said, we're cognizant of the fact that absorptions over the last 12 to 15 months have been slightly higher than normal. And as I think some have said from time to time, trees don't grow to the sky. So we wouldn't necessarily expect that to continue in perpetuity.

The thing that I would highlight, Ivy, is some of the things I mentioned in my prepared remarks. We think some of the structural changes that have occurred in buyer preferences for single-family living and perpetual work from home will continue to benefit this industry. We're also not in an oversupply environment and given some of the supply chain challenges that we've highlighted, we don't anticipate that changing anytime in the near future either.

And then probably what I'd conclude on, the most important thing that I think we've structurally done as an organization is to integrate more optionality into our land pipeline. We're at north of 52% and over 119,000 lots that are controlled via option, which I think gives us tremendous flexibility, should there be a change in market conditions.

[Ivy Zelman, Zelman & Associates]

No, that's really helpful. And maybe, Bob, in the future you can send us and follow-up sort of absorptions historically. I know we've embedded our data. But with mix shift, it's I don't know that it's a little bit higher, Ryan. Our market conditions right now are back to absorption per community just for the public companies is back to where it was during the great financial boom peak on a trend line basis, and that's even with restricting sales.

But the cost inflation in land has been substantial. So maybe you can give us some perspective on how much of land that you're acquiring today, undeveloped draw land relative to what maybe you were thinking about from a baseline in 2019? And what are you paying if you are on finished lots, even if you're optioning, what is the outlook cost embedded in those acquisitions? And I'm done and thank you.

[Bob O'Shaughnessy]

Yes. Ivy, that's a hard question to answer kind of apples-to-apples. I mean no two parcels are the same. Certainly, the market is pretty efficient. And as Ryan laid out for you, we are -- it's a competitive market, so we have to be competitive. So we make our bids and pricing based on what we see in terms of pricing that we can see in the market.

What we think our cost to construct is and the ultimate return we can generate from the asset, and you're going to see different price appreciation in land in different parts of the country and for different buyer groups, honestly. So all those things would make it really challenging to blanket, say, pricing is up x percent. Suffice to say it is up. And it's one of the reasons I highlighted in that as part of our margin guide. Hopefully, that answers your question.

[Operator]

Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.

[Anthony Pettinari, Citigroup]

Hi, good morning.

[Bob O'Shaughnessy]

Good morning.

[Anthony Pettinari, Citigroup]

I was wondering if you could talk about kind of credit metrics for your average buyer or your buyer types in terms of FICO or LTV. And then I think you indicated that rising rates you haven't really seen an impact to date? But I'm just wondering, as you look at previous hiking cycles, what you would anticipate in terms of behavior between your different buyer types or trading down market or maybe to more affordable offerings? Any comments you give?

[Ryan Marshall, President & Chief Executive Officer]

Sure, Anthony. Good morning. Thanks for the question. The credit metrics out of -- we obviously have visibility to the credit metrics as a whole from loans that are running through our mortgage operation. And they've largely remained unchanged for the last probably decade.

The FICO scores that we see are north of 750. So incredibly strong credit. The loan-to-value ratio is very, very strong as well. So I think the credit metrics we're seeing from the buyers would indicate and maybe reiterate the financial strength that I think we've seen of personal balance sheet. So not a huge concern there, honestly. Bob, anything you'd add on any of the credit metrics that we've seen at this point?

[Bob O'Shaughnessy]

Only that interestingly enough, even among our first-time buyers, if you look at them relative to the kind of the broader universe, we've got a higher mix of FICO scores even there. So interestingly, in a rising rate environment, history as a guide, the people we're selling to have that slightly higher price point have a little bit healthier balance sheet that folks that are just at the edge of qualifying.

[Ryan Marshall, President & Chief Executive Officer]

As far as rising rates go, Anthony, in our prepared remarks, we highlighted that we have not seen it impact demand, and I think a large part of that is because we've been restricting sales and because demand is outstripping supply.

We are closely monitoring the impact of further increases in the 30-year mortgage and what that will ultimately do to affordability, but as we've said for a number of years, and we'll continue to talk about it, we do believe that, history as a guide, housing can be strong in a rising rate environment as long as the broader economy continues to show strength, which it is.

We’ve got historically low unemployment. We're seeing some real wage growth -- and I think those are -- and consumer confidence remains high. Those are things that I think will continue to prove -- will bode well for the industry, even against a backdrop of slightly higher rates. That being said, even with some increases in the 30-year mortgage, they're going to remain at historically really, really low rates, which we think is encouraging.

[Anthony Pettinari, Citigroup]

Okay. That's very helpful. And then in your comments, I think you stated you're not expecting supply chain size to ease over the course of the year. You talked about lumber. Can you talk about any other categories that are, I don't know, maybe getting worse versus getting better?

And then there was a comment on potentially warehousing certain building products. And to the extent that you can, I don't know if you can talk about sort of the magnitude of that or what that looks like?

[Ryan Marshall, President & Chief Executive Officer]

Yeah. Anthony, we don't actually anticipate things to get better through 2022. So we've assumed that we'll continue to have a shortage of what we want in totality. And most of that's coming through either delays or allocations that we and frankly, the entire industry has been given from, from certain key supplies.

I think there are some real bottlenecks in manpower availability due to COVID, so some of the factories that our supplies come out of are running at less than full capacity because of manpower issues. We're seeing less availability in terms of transportation in truck drivers. There was a shortage there to begin with, and then you factor in COVID, and that's just further exacerbated. And that -- those domino effects, I think we see flow through the entire supply chain.

We are seeing some green shoots, and we have, over the last six months, kind of gone through some peaks and valleys where one particular supply seems to start getting better and lead times shorten only for things to go back to where they were. And so it's for that reason that we're not anticipating that we completely turned the corner and have a fixed supply chain in 2022.

Just in terms of the items that we're seeing challenges with; roof trusses, appliances, sighting, paint to a certain degree. So things are pretty critical for us to build and deliver homes, cabinets is another one that I would tell you all the cabinets come out of factories where they've been challenged by historic high demand and manpower issues. So those are a few comments on the supply chain side.

[Operator]

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

[Michael Rehaut, JPMorgan]

Hi, thanks. Good morning, everyone. I want to go back to an earlier question around those -- I believe was trying to get around triangulating normalized gross margins, let's say, as you continue to buy land and to the extent that you're not going to have 10%, 15%, 20% home price appreciation over the next few years.

If you look back into like 2017, 2018, you were doing 23% to 24% gross margins, which was at the higher end of our -- of the broader homebuilding sector. To the extent that home price appreciation normalizes, could you see a scenario over the next two to three years where given your current underwriting, you could get back of levels, which again, would still extensively be -- if there is a mean reversion, I would assume, still be at the higher level of the broader sector, or is there anything that's changed in how you're either approaching land, your own cost structure with greater scale or some of the improvements, et cetera, perhaps on the construction efforts that you're embarking upon that you could see kind of a slightly -- even slightly higher gross margin trend over time?

[Ryan Marshall, President & Chief Executive Officer]

Yeah. Hey, Mike, it's Ryan, good morning. Thanks for the question. I think I'd go back a decade ago when we really laid out a thesis around making investments to drive industry leading returns. And so I think the way you have seen us make investments in land, the way that we've managed debt, the way that we've allocated capital to share repurchases and dividends that has -- and frankly, the way that we've completely restructured our land ownership structure with so much being toward options, that's all been aimed at delivering top quartile, top tier returns. Margins are certainly a component of that, and it's long been part of our strategy to have leading margins.

The thing that I would highlight, Mike, is that we're at 28.5% to 29% gross margins through the rest of 2022, which, as Bob highlighted, is pretty stout. And we're not giving any visibility beyond 2022, I think it’s little early for that. But what you have seen from us is continuously a high and top-tier return on invested capital, and that's going to continue to be our focus. So what that yield in just this past year, we just finished with ROEs that are north of 28%. So we think the operating model that we have, Mike, can work in multiple market cycles. This one happens to be certainly particularly good.

[Michael Rehaut, JPMorgan]

Great. No, thank you for that, Ryan. I guess, secondly, just wanted to focus in on the community count growth. A nice trajectory that you've laid out for 2022. Based on the land book that you have, how should we think about community count growth and obviously, past 2022 and obviously not trying to get too granular and beyond what you're prepared to say in terms of formal guidance. But further this has been an area where, as I'm sure you know, people have expressed concerns around some of the growth on the community count side. Are we kind of turning a corner here where we could see perhaps a little bit more consistent growth going forward in this metric? Any thoughts around where we would go past the 870 at the end of 2022 would be pretty helpful for people?

[Bob O'Shaughnessy]

Yes, Mike, I appreciate the question. It's Bob. We're not going to give you a guide for 2023. We did want to give a level of granularity more than we have for 2022 to show the sequencing that shows growth each quarter sequentially and ultimately, to a higher point at the end of the year. And in our prepared remarks, I actually said based on spending, we expect that to continue. Like every year, we'll give you a guide for 2023 as we approach 2023.

[Ryan Marshall, President & Chief Executive Officer]

Mike, the only thing I'd add into that is I think if you look at the trend of our land spend over the last three years, we've been a consistent investor in our land portfolio. And with 225,000 lots under control, those all turn into active communities. So we're pleased with what's coming into the pipeline.

[Operator]

Your next question comes from the line of Carl Reichardt from BTIG. Your line is open.

[Carl Reichardt, BTIG]

Thanks, everybody.

[Ryan Marshall, President & Chief Executive Officer]

Hi, Carl.

[Carl Reichardt, BTIG]

One for you, Ryan. Hey, just on pricing strategy headed into the spring, I mean you got more demand than you can serve, costs are going up, but rates could come up and we know there's going to be more competition across the board from other builders and you've got more specs. So are you approaching pricing this spring, would you say, more conservatively than you have in past springs? And I know it's not necessarily a corporate and in Atlanta type of decision, perhaps it's more local. But maybe you can talk a little bit about how you're thinking about pricing strategy given the crosscurrent?

[Ryan Marshall, President & Chief Executive Officer]

Yes. Carl, it is more than local. It's probably hyper-local. All of our pricing decisions are made on a community-by-community basis. But that's a company philosophy. We've got very regimented pricing discipline in the way that we break down what the competitive set is, both from a resale and a new environment, both what's on the ground as well as what we see coming into the pipeline over the next six to 12 months. So I think the tools, the methodology, the proprietary pricing algorithms that we have, we think it served us very well, and we've gotten very good results from that.

I think, Carl, we always try to be prudent in what we do and never get too far over our skis. I think, the industry has seen over the years, if you push things too far, the consumer will be pretty quick to tell you that you've gone too far and it will shut down. So in the face of potentially some more inventory coming online with some higher rates, we're going to continue to run our playbook, but take into consideration all the data that's available.

[Carl Reichardt, BTIG]

All right. Thank you, Ryan. And then, just a follow up on Ivy's question. If you look at the homes you plan to deliver in 2022, I'm assuming that effectively none of them are on lots that you bought post, say, the middle of 2020, so post pandemic land. When would you start to see the majority of your delivery volume be delivered on land you bought post pandemic or contracted for post-pandemic?

[Ryan Marshall, President & Chief Executive Officer]

Well, Carl, we're basically turning the majority of the land that we're buying. We're turning in about three years. So -- or when we buy it, we essentially are putting under contract about three years' worth of land. So a-third of that year one, a-third of that year two, a-third of that year three, so you've always got old land cycling out and new land cycling in. So there's never a time when you're going to have a complete fall off the cliff of the entire land book and a whole new land book comes on. There's always a mixing going on.

Development timelines are elongated relative to historical as well. So land that -- from the time that we buy it, it's taken us 12 months, plus or minus, to get it fully developed and ready to start selling homes. So Carl, I think the simplest way that I can tell you is that, we always have new stuff coming in, we always have old stuff going out, and all that is factored into the guide that we've given certainly for 2022.

[Operator]

Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.

[Stephen Kim, Evercore ISI]

Thanks very much guys. Really impressive results, and I know folks are excited about the guide, but I actually wanted to explore a few areas where it seems to me like your guidance could actually be incorporating a nice healthy dose of conservatism. And it's really around ASP volume and the implications of volume on margin.

So if you look at your ASP, you guided, I think, for the full year, around 515. Your order ASP has been running at around 556, I think, for the past two quarters. Maybe I'm wrong on that, but just if that's the case, 515 seems kind of low for a closings number, ASP number.

And then regarding your volume, I think you said 31,000 closings. And I know the cycle times is an issue out there, but it looks to me like you started over 34,000 in fiscal 2021 and even 8,200-or-so in fourth quarter. So although you're guiding as if there's no improvement in cycle time coming, it would seem that your actual -- what you're doing on the ground and what you did in terms of starts is leaving open the possibility that they will get better. Otherwise, I don't think you would have started that many in 4Q.

And then if I'm right, that closings could actually do better than your guidance, won't you have some benefit on SG&A and scrambling cost? So that's like the general framework of my question. Let me ask this SG&A question specifically. If you do better than your guidance on closings, what is the incremental SG&A we should apply to those incremental revenues?

[Ryan Marshall, President & Chief Executive Officer]

Stephen, good morning. Thanks for the question. I think all of these things are related. So I'll do my best to kind of tie them together, and I'll ask for probably a little help from Bob at some point.

In terms of ASP, Stephen, we've consciously been starting more spec. Most of the spec that we're starting is in our lower priced communities, specifically in our Centex first-time buyer communities where those price points are significantly lower. They will -- those will sell as specs later in the cycle, and so that's all been factored into the ASP guide that we've given.

To your point about orders being at a higher price point over the last couple of quarters, that's largely been because we've been selling more of our Del Webb and our Pulte branded communities that come at a higher price point. So it's a fair question you've asked. I understand why you've asked it, but I think we factored in what we see are what we would expect to be our ultimate brand mix as we move throughout the year.

In terms of the closing guide, Stephen, and what we started, as we highlighted in our prepared remarks, we've factored in what we've started, and we're very pleased with how much inventory have been able to put into the ground, both for sale and spec inventory. We've updated our delivery guide based on our current cycle time and what we anticipate to happen throughout the year with the supply chain. So I wouldn't probably go down the path of assuming that there's conservatism in that guide. I can tell you that if 2022 is anything like 2021, it was the hardest year of homebuilding that we've ever seen as an organization. And so we're going to stand firm on the 31,000 units that we've guided to. If things can improve, we'll all be thrilled.

[Stephen Kim, Evercore ISI]

For sure. Bob, what about that incremental SG&A ratio that we should be thinking about? And then just my only other question long term is your land supply in years. At some point, the pandemic will hopefully fade and I'm thinking five years out here, three, four, five years out, what level of land, what's the lower bound, lower range of years of land owned that Pulte can operate at? Is it like two years, because some of your competitors are running that low or approaching low? Could that be a level that you guys get to eventually once things have normalized in three to five years down the road?

[Bob O'Shaughnessy]

Yes, Stephen, I think we've talked about the SG&A question before. And honestly, if you were to toggle the volume, which we wouldn't suggest, it is a -- look if we are -- if you're increasing volume, it is accretive to our overhead efficiency. I wouldn't want to put a percentage because it depends on how much volume you're talking about. But certainly, we would if we had more volume levers up the central overheads. Your selling costs don't change as a result of more volume. And then in terms of land supply, we've been consistent, honestly, since Ryan became the CEO that we're targeting three years owned, three years option. If you use a trailing 12-month volume, we're a little bit rich on that. If you look forward, it's more in line. It's hard to say where ultimately optionality could go.

I think we would love to see it become a bigger part of our business as long as we can do it in a way that, for us, creates value, and that is, a, to be economically workable; and b, create true market risk. You won't see us creating optionality just to do optionality. So we will be seeking market -- some level of market protection from that, i.e., we can transaction if something changes.

Again, I think very consistent from us, whether the developer base can get big enough to support a lower level of year's supply for us, time will tell. Certainly, if you look back over the last 40 or 50 years, there were points where the developers were active enough that the builders could take lots on it on a just-in-time basis, that developer base has not reestablished itself since the downturn in 2007, 2008 and 2009. If that happens, I think you'd see us participating.

[Operator]

Your next question comes from the line of John Lovallo from UBS. Your line is open.

[John Lovallo, UBS]

Good morning, guys. Thank you for taking my question. First one, maybe starting at a high level. We've been hearing that demand and foot traffic may have actually inflected positively in January. Just curious if that's consistent with what you guys have seen?

[Ryan Marshall, President & Chief Executive Officer]

Yes, it is, John. We're seeing really strong interest from buyers, and we think it's driven by some of the things we highlighted the desire from -- for a single-family living and the work from home trends continue. I would highlight not all the traffics on foot. I think our digital selling tools have probably advanced seven, eight years over the last 18 months, which I think is overall good for the business.

[John Lovallo, UBS]

Okay. That's helpful. And then maybe drilling down just on the West region, in particular, deliveries declined slightly year-over-year versus pretty big gains in most other regions. Was this just a timing-related issue or is there something else to be thinking about there?

[Ryan Marshall, President & Chief Executive Officer]

Yes. It's really just community turnover, nothing to note, honestly.

[Operator]

Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.

[Truman Patterson, Wolfe Research]

Hey, good morning, everyone and thanks for taking my questions. Just I had a couple of follow-ups from prior questions. But on some of the materials and labor supply chain challenges and what it means to cycle times? I'm just hoping to get some clarity. By the end of 2021, call it, November, December, have you actually started to see cycle times stabilize? And the reason I'm asking is outside of the recent flare with Omicron, what we've been hearing that builders largely become more efficient in working with the whack-a-mole environment and some had stabilized cycle times?

[Ryan Marshall, President & Chief Executive Officer]

Well, Truman, I think like any game, if you play it long enough, you certainly get better at it. And whack-a-mole is no different, but its still whack-a-mole for sure. What we've seen in our business, we've actually been able to take -- we've actually seen increased cycle times in the front half of the overall production cycle through kind of frame and windows stage, which has been really related to trust availability, framing labor, some of those kind of things and windows, candidly.

We've been able to make up some time in the back half of the schedule. So there have been some pushes and pulls. But overall, it's been a net increase to cycle time. We've assumed that, that doesn't get any better in 2022, and that's all been factored into the guide that we've given.

[Truman Patterson, Wolfe Research]

Okay. Thanks for that. And then, you all have mentioned some improvement in your new home inventory in 2022, recognizing all the constraints. But -- in this market, today, orders are really a function of inventory and production capabilities in my mind.

I'm hoping that you might be able to give us an update on your expectations for starts in the first quarter? And whether or not your first quarter orders could inflect positive year-over-year on a pretty challenging comp based on your internal inventory capabilities?

: Yeah, Truman, we don't guide or haven't guided on either one of those. And so probably, I'll stop short of giving you any additional insight. We do feel very good about what we have in the production pipeline.

And I think we've demonstrated, really over the last nine months, a very predictable start cadence where we have been able to get volume into the ground, just taking longer for it to move through the overall production cycle. But again, that's been factored into our deliveries -- delivery guide for the year.

The last thing that I'd really highlight on that note, Truman, is that, we’ve got -- I think I said in my prepared -- well, I know I said in my prepared remarks, we've got double the amount of spec inventory. So it's something north of about 4,000 units, and that will certainly benefit us as we move through 2022.

[Operator]

And we have reached our allotted time for questions. Mr. Zeumer, I turn the call back over to you for some closing remarks.

[Jim Zeumer]

Great. Thank you, Rob. Appreciate everybody's time this morning. We'll certainly be available over the course of the day for additional questions. Have a good rest of your day, and look forward to speaking with you on our next call. Thanks, everybody.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.