Tri Pointe Homes Inc (Delaware)

NYSE:TPH

Earnings Call Transcript 2021-Q4

[Operator]

Greeting! Welcome to TRI Pointe Homes, Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to David Lee, General Counsel. Thank you, you may begin.

[David Lee, General Counsel]

Good morning and welcome to TRI Pointe Homes earnings conference call. Earlier this morning the company released its financial results for the fourth quarter of 2021. Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call which are not historical facts, including statements concerning future financial and operating performance are forward-looking statements that involve risks and uncertainties. Discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through TRI Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

[Doug Bauer, Chief Executive Officer]

Thanks David! Good morning and thank you for joining us today. As we go over our results for the fourth quarter and full year 2021, providing an update on current business conditions and give insight into the future TRI Pointe Homes. 2021 was a record year for our company, capped off with earnings of $1.33 per share in the fourth quarter and $4.12 for the full year. Home Sales revenue rose 15% year-over-year for the quarter on a similar increase in new home deliveries. And our home sales gross margin for the quarter was 24.4%, which was an increase of 120 basis points year-over-year. SG&A expenses as a percentage of homebuilding revenue for the quarter improved 140 basis points to 8.5%, a record low for the company. For the full year we delivered 6,188 homes, which exceeded the high end of the original guidance we gave at this time last year. We're able to achieve all this despite persistent, industry wide supply chain challenges. We credit and thank our experience and skillful teams who look for creative solutions and took proactive approaches to new home starts, material sourcing and construction to get homes completed for our customers. Our sales pace for the fourth quarter came in at 4.3 homes per community per month, which is well above seasonal norms for that time of the year. Demand for new homes continue to outstrip supply in our markets during the quarter, a dynamic that is carried into 2022. Buyers continue to exhibit a strong sense of urgency to own a home, driven by strong demographics in migration to lower cost markets and an overall change in attitude toward homeownership, brought about by the pandemic. Leading the way in this demand surge is the millennial cohort. This demographic represents 57% of our home buyers in backlog, and is a sizeable population that should fuel the new home market for years to come. Another important demographic segment for our industry are the baby-boomers who have accumulated wealth and are now looking for new home alternatives. We have strategically positioned our company to address these demographics and believe we are primed for ongoing positive results. We made significant strides in our return metrics during the fourth quarter, culminating in a return on average equity of 20.3% for the full year 2021. We achieved this goal through several strategic initiatives, including our one brand launch at the beginning of the year, of last year, the ongoing monetization of our long dated California assets, increased profitability across our homebuilding platform, improved scale in our early stage divisions, more efficient land management and consistent share repurchases. Our one-brand launch in January 2021 has had the impact we anticipated, giving our company a unified brand message across our homebuilding platform, streamlining our marketing efforts and lowering overhead costs as a percentage of total revenue, which was reflected in our SG&A percentage of 9.6% for the full year 2021. With respect to our California long dated assets, we have a number of positive developments to report. We continue to generate strong orders and profits from our existing communities, particularly in Los Angeles, San Diego County and the Inland Empire. Thanks to our favorable land bases and outstanding market position. We open our 292 unit targeted planned community Altis at Skyline in Santa Clarita in the fourth quarter, as well as our 844 unit planned community Citro, in Fallbrook. Both feature new home options at attainable prices for the respective buyer segments and the initial response has been tremendous. In the Inland Empire, our planned community of Atwell with its detached entry level and first mover product generated over 21 orders per month in the fourth quarter. These California communities demonstrate our key focus on developing a mix of entry level and first mover product in core submarkets. Despite rising home prices, our median sales price of single family homes in the fourth quarter in California was $599,000 compared to the state's median single family existing home price of approximately $797,000. In addition to our California divisions, we saw excellent growth and financial results from our homebuilding operations around the country, with 60% of our fourth quarter deliveries generated outside of California. This strategic focus to diversify our company from a geographic perspective started several years ago and is providing greater opportunities for us to offer more entry level and first move-up price points, while producing more efficient returns. We are especially pleased with the progress we have made in our newer divisions in Sacramento, Austin, Dallas and the Carolinas, which are making significant contributions to the bottom line with a substantial runway for growth. We made considerable investments in our operations in 2021 by enhancing our technology platforms, introducing more efficient and a cost effective floor plans, and refined our design studio process. These initiatives will directly result in improved efficiency and returns. Another focus has been our lot option agreements and land banking arrangements. Total lot counts stood at over 41,000 lots at year end, with 47% controlled at year end versus 37% a year prior. We believe this land approach lowers the risks that are inherent in the land and land development business, while improving our returns over time. The final component of our return, improving strategy has been our share repurchase program, and we were once again active buyers of our stock in the fourth quarter purchasing more than 2.7 million shares at an average price of $22.64. This brought our full year total to over 13 million shares repurchased, at an average price of $21.13 for an aggregate dollar amount of $276 million. Yesterday our board authorized an additional $250 million under our existing stock repurchase program as we remain committed to this program and view it as a productive use of our capital, as well as a signal of confidence in TRI Pointe’s future. 2021 was a record breaking year for our company and we believe we are poised to improve on those results in 2022 for a number of reasons. First, we started 2022 with a healthy backlog of over 3,100 homes. Our buyers and backlog who have been pre-qualified through our mortgage affiliate, have an average debt-to-income ratio of 39% and an average FICO score of 748. With this steep backlog and the quality of our buyers, we are well positioned to deliver on our guidance, even with the uncertainty of rising interest rates. Second, demand has once again accelerated in 2022, building on already strong results we experienced in the fourth quarter. With the extremely low supply of housing in both the resale and new home markets, coupled with our strong buyer profile, we feel demand will remain healthy. We are currently managing sales at over 50% of our communities in an effort to account for rising costs and to maximize profits while matching sales cadence to our production capacity. Third, we are extremely pleased with our land pipeline and expect to open between 180 and 200 new communities over the next 24 months. The majority of those communities are located in our growth areas outside of California and in the more affordable entry level and first move up segments. Finally, with an all-time low net-debt to net capital ratio of 21.1%, our balance sheet strength and our ability to generate positive cash flow from operations gives us the necessary liquidity to continue to grow our business and repurchase stock for strong returns to our shareholders. With that, I’d like to turn it over to Glenn who will provide more detail on our results this quarter give an update on our forward-looking guidance. Glenn.

[Glenn Keeler, Chief Financial Officer]

Thanks Doug, and good morning. I'm going to highlight some of our results and key financial metrics for our fourth quarter and then finish my remarks with our expectations and outlook for the first quarter and full year 2022. At times I will be referring to certain information from our slide deck which is posted on our website. Slide six of the earnings call deck provides some of the financial and operational highlights from our fourth quarter. As Doug mentioned earlier, demand continued to be strong in the fourth quarter with an absorption rate of 4.3 homes per community per month, which is an elevated sales pace for the fourth quarter from a historical perspective. Order activity was healthy across all geographies with the West Region reporting an absorption rate of 4.3 homes per community per month. The Central Region experienced an absorption rate of 3.9 and the East had an absorption rate of 4.9. Demand has further accelerated into the first quarter of 2022, with an absorption rate over five for the first six weeks of the year. We reported outstanding results on all key metrics this quarter that either met or exceeded our stated guidance. We delivered 1,885 homes, which was a 15% increase year-over-year. Home sales revenue was $1.2 billion, also an increase of 15% and our average sales price was $637,000. Our homebuilding gross margin percentage for the quarter was 24.4%, 120 basis point improvement year-over-year. If you were to exclude impairments, our homebuilding gross margin would have been 26.1% for the quarter. The strength of our margins were a result of our ability to raise prices during the year to more than cover the cost increases we experienced. Finally, SG& A expense as a percentage of home sales revenue came in at 8.5%, a record for any quarter for the company, representing 140 basis point improvement as compared to the fourth quarter of 2020. The improvement was the result of several factors, including increased leverage on our fixed cost due to the growth in revenue, efficiencies related to our shift to one-brand and taking advantage of the strong market conditions to streamline our advertising spend. Turning to communities, in line with our guidance, we opened 21 new communities during the quarter bringing our total to 72 new community openings for the full year. For 2022 we plan to open 15 new communities in the first quarter and 35 new communities in the second quarter. We expect to open another 40 to 50 new communities in the second half of the year to bring the total for the year to between 90 and 100 new communities. As a result, we anticipate ending 2022 with between 150 to 160 active selling communities. Looking at the balance sheet, at quarter end we had approximately 3.1 billion of real estate inventory. Our total outstanding debt was $1.3 billion resulting in a debt to capital ratio of 35.3% and a net debt to net capital ratio of 21.1%. We ended the quarter with $1.3 billion of liquidity, consisting of $682 million of cash-on-hand and $601 million available under our unsecured revolving credit facility. We generated positive cash flow from operations of $420 million for the full year of 2021, while spending approximately $875 million on land and land development for the full year. For 2022 we expect to generate positive cash flow from operations and spend between $1.1 billion and $1.3 billion on land and land development. Now, I'd like to summarize our outlook for the first quarter and full year. For the first quarter we anticipate delivering between 900 and 1,100 homes at an average sales price between 650,000 and 660,000. We expect homebuilding gross margin percentage to be in the range of 25% to 26% for the first quarter of 2020 and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 13% to 13.5%. Lastly, we estimate our effective tax rate for the first quarter of 2022 to be in the range of 25% to 26%. For the full year we anticipate delivering between 6,500 and 6,800 homes, at an average sales price of $660,000 to 670,000. We expect our homebuilding gross margin range to be 25% to 26% for the full year. Our SG&A expense ratio is expected to be in the range of 9.7% to 10.2%. Finally, the company is forecasting its effective tax rate for the full year to be in the range of 25% to 26%. I'll now turn the call back over to Doug for some closing remarks.

[Doug Bauer, Chief Executive Officer]

Well, thanks Glenn. We have a lot to be proud of with our results in the fourth quarter and full year 2021. We met or exceeded our previously stated guidance on key operational metrics, with the return on average equity more than 20% for the year despite ongoing industry wide supply chain challenges. We also positioned our company for further growth in 2022 and beyond. Thanks to a sizable year-end backlog and a substantial increase to our total lot count outside of California. We achieved this well, also repurchasing more than 13 million shares or stock during the year, generating positive cash flow from operations and maintaining a healthy balance sheet. Given these positives, the extremely low supply of housing and strong demographics, we believe TRI Pointe Homes is poised for a very bright future. Finally, I'd like to thank all of the TRI Pointe Homes team members who have contributed to this record setting year. Our people continuously impressed me with their talent, dedication and creativity that helped make this company what it is. We achieved several milestones in 2021, including record breaking revenues, operating margin and earnings per share and our successful year was not just revenue driven. We are constantly looking for ways to build on our passion and culture, which is validated by a great place to work certification. I am gratified to work with our exceptional teams and I deeply appreciate their efforts. That concludes our prepared remarks and now we'd like to open the call up for questions. Thank you.

[Operator]

Thank you. [Operator Instructions]. Our first question is from Stephen Kim with Evercore ISI. Please proceed.

[Stephen Kim, Evercore ISI]

Thanks very much guys. Yes, strong results and you know I'm really curious if you could provide a little bit more color around your comment about the first six weeks and absorptions being over five; you know obviously that's a strong result. But I was wondering if you could give us some sense of how your pricing power has been moving as well and at the end probably more importantly is the starts of your cycle times, how that's been progressing in the first six weeks from what you can tell?

[Tom Mitchell, Chief Operating Officer, President]

Good morning, Stephen. This is Tom. A big question there; there's a lot there, but all fairly good news. Relative to absorption and orders, this year we're off to a really strong start and we anticipate results that are going to be equal to or greater than next year. Our January was phenomenal and that's continued right into February. So we're expecting a strong spring selling season. On pricing we continue because of high demand to have pricing power, and so we continue to be able to price our products, to offset the rising cost pressures that we continually feel and we feel in good shape that that's going to continue through the spring selling season as well.

[Doug Bauer, Chief Executive Officer]

Stephen, this is Doug. I’ll add that our goal as a company is to have everything started by the end of May, because it's a very uncertain environment. The best way to - because of the supply chain as you know it's well documented, so this is not new news. So we are pushing all our teams to get everything in the ground by May, so we can have a successful year.

[Stephen Kim, Evercore ISI]

Got you. So I take it from that comment that certainly we are not seeing any improvement in the cycle times here as we enter this year. So I guess are you seeing any worsening of cycle times and could you give us a specific number on what you did in terms of starts in the fourth quarter?

[Doug Bauer, Chief Executive Officer]

Go ahead Linda.

[Linda Mamet, Chief Marketing Officer]

Sure. Stephen, this is Linda. In terms of starts in the fourth quarter, we started 1,377 homes. Of those, 49% of them were spec starts and then Tom, do you want to address the cycle time?

[Tom Mitchell, Chief Operating Officer, President]

Yeah, relative to cycle time, we are not seeing any further declines to our cycle times. We are managing that quite well and as Doug said, the teams are being very creative in finding solutions to offset supply chain issues. So we're holding pretty good relative to that, but it is a significant increase year-over-year. It's probably about on average a 30 day delay from where we were a year ago.

[Stephen Kim, Evercore ISI]

Yeah, that all makes sense and is consistent with what we're hearing elsewhere too. Last thing for me is your SG&A was great. You talked about among a few things shift to one brand. Can you give us a sense for how much impact or benefit you got from that specific move?

[Glenn Keeler, Chief Financial Officer]

I don't think we have said anything specifically from a dollar amount perspective. I think it's, because it's hard to parse between the really strong market conditions we were in versus the specifics to one brand, but there definitely are a lot of efficiencies when it comes to marketing for one brand versus six, as we were doing before, so – and that's baked into the good numbers you saw.

[Stephen Kim, Evercore ISI]

Sure. Okay great. Well, thanks very much guys. Great results!

[Doug Bauer, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Tyler Batory with Janney. Please proceed.

[Tyler Batory, Janney]

Thank you. Good morning. Let me just start on the gross margin side of things, 25% to 26% for Q1 and same for the full year. Can you talk a little bit more about how you are thinking about the potential cadence and progression of gross margin as we go through the year? And also interested, you know your expectation for cost increases that are embedded in that guidance as well.

[Glenn Keeler, Chief Financial Officer]

Sure, Tyler its Glenn. I'll take that one. I think the margins are going to be relatively consistent as you go through the quarters at that 25% to 26% and we did – we do our plan based on current costs and current revenues and so that's how we put our plan together. But we are assuming you know costs are going to rise and we are planning on, you know based on the market issues that Tom said offsetting those with price increases.

[Tyler Batory, Janney]

Okay, great. And in the prepared remarks you talked about managing sales in 50% of your communities. Just remind us how that compares with the prior quarters.

[Doug Bauer, Chief Executive Officer]

This is Doug. It decreased to the end of third quarter and then it picked back up in the fourth quarter as supply change - supply chain challenges continued.

[Tyler Batory, Janney]

Okay, and the decision to do that, you know that’s not related to demands at all, correct?

[Doug Bauer, Chief Executive Officer]

That's correct.

[Tyler Batory, Janney]

Okay, just wanted to clear that.

[Doug Bauer, Chief Executive Officer]

The demand is very strong. I mean the demand is very strong. It's – the supply chain is a huge factor and it's mostly at the front end, not only as the supply chain, but it's also the municipalities that we deal with across the country and this continuous testing and COVID protocols, so it's well documented. We're set up for another strong record year and hopefully in ’22 we had a record year and ’21, but it's really just managing though the supply chain. So there’s always going to be some bumps in the road, but we're very optimistic that demand the first through February here has been very, very strong. So it should be a good year.

[Tyler Batory, Janney]

Okay, great. I'll leave it there, that’s all from me. Thank you.

[Glenn Keeler, Chief Financial Officer]

Thank you.

[Operator]

Our next question is from Alan Ratner with Zelman & Associates. Please proceed.

[Alan Ratner, Zelman & Associates]

Hey guys! Good morning. Congrats on the strong quarter and year. So the first question Doug, I’d love to and I'm sure this ties in a little bit to the sales limitations. But I'd love to hear just how you're thinking about raising prices in the current environment, you know whether obviously you're still seeing very strong demand, but has the increase in rates changed the way you're thinking about pushing price. Are you perhaps being a little bit more conservative there, just given the affordability impact or is that not really factoring into your thought process at this point.

[Doug Bauer, Chief Executive Officer]

No, good question Alan. It defiantly factors in to our thought process. Just for – just some data out there. Last year on average we had 15% revenue increases versus a 13% increase in [inaudible]. So you know now to your question, we definitely are being very measured in our pricing increases to offset our costs that are being thrown at us, so we'll continue to do that. Demand supports it, but yeah I guess the best way to say it is we’re being very measured, because we realize that prices have gone up quite a bit over the last 18 months and it's not a secret that rates are going to go up too. So that’s – we’re using strong common sense is what I’d call it.

[Glenn Keeler, Chief Financial Officer]

Yeah Alan, I would add, we are always continually pricing our product to balance pace and price and maximize our profitability there, and with such strong demand we still see pricing power and we expect that to continue through the spring selling season.

[Alan Ratner, Zelman & Associates]

Got it. Thanks for that color guys. I appreciate it. Second question, it wasn’t a big amount, but you did take an impairment or maybe it was lot option abandonment this quarter, which was you know a bit larger than where it's been tracking at. So I’m just curious if you can add a little bit color behind what drove that this quarter?

[Glenn Keeler, Chief Financial Officer]

Sure Allen. This is Glenn. Good question. It was mainly due to one project that was located in the bay area that was kind of a COVID casualty based on you know where it was located in a kind of inner city location and so we were just having slopes over there and so we lowered price just to kind of move through the project. So it was a kind of a one-off unique project from that perspective and that was the bulk of it.

[Alan Ratner, Zelman & Associates]

Right, thanks for that info Glenn. I appreciate it.

[Doug Bauer, Chief Executive Officer]

Thanks John.

[Operator]

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

[Ryan Frank, RBC Capital Markets]

Hey guys! This is Ryan Frank on for Mike. I just wanted to touch on kind of the question on pace versus price again. I mean you guys are selling at 5x or five houses a month, which is kind of well beyond normal at this point, it’s very strong. So I guess just wondering why you wouldn't be pushing price more and why gross margins are actually like sequentially looking like they are going to be down. Can you just help us parse that out please?

[Doug Bauer, Chief Executive Officer]

Well, yeah I'll take a stab at that. I mean mortgage rates have gone up about 75 bips since the fourth quarter, so with a rising rate environment and we've got a whole year to still execute on. I think it's prudent and smart business management to be more measured in your approach to pricing pace along with the supply chain environment.

[Glenn Keeler, Chief Financial Officer]

And the margin’s been up in the first quarter if that was your question. I mean those relate to homes we sold, you know back in the first and second quarter of last year where you saw high lumber prices and so that's kind of reflected in that overall margin. And then for the full year, you know we are in a tough rising cost environment and we think we could offset those with costs or with price and if price exceeds costs, you'll see us being at the higher end of that margin range, but that's kind of you know why margins are 25 to 26 in the first quarter.

[Ryan Frank, RBC Capital Markets]

Got it. And then would there be any I guess mix shift impact throughout the year? Are you expecting that to kind of play a larger role as we go forward on the gross margin side?

[Glenn Keeler, Chief Financial Officer]

No. I think from a mix perspective it'll be relatively consistent throughout the quarter. So I think margins will be you know relatively consistent between the quarters based on where we sit today.

[Ryan Frank, RBC Capital Markets]

Okay, and then last one, a quick one for me is, I guess you guys historically don't sell in this type of pace, so what are you thinking about pace kind of going forward for the rest of the year. Presumably it's going to come down, but I guess the magnitude of that and do you think you're kind of a structurally faster turning company at this point?

[Glenn Keeler, Chief Financial Officer]

I think compared to you know pre-pandemic levels, we’re a structurally higher turning company, because we have much more, a greater presence in the entry level and first move up markets. But you know relative to this year how we’ve looked at the year, yes, higher absorption in the spring selling season, the front half of the year with slower absorptions in the back half of the year, kind of normal seasonality that we saw you know last year, but still at an overall elevated pace due to the strong demand.

[Ryan Frank, RBC Capital Markets]

Got it. Very helpful. I’ll pass it on. Thank you.

[Operator]

Our next question is from Carl Reichardt with BTIG. Please proceed.

[Carl Reichardt, BTIG]

Thanks. Hey everybody! You have been doing – Hey! You guys have been doing a lot of new community openings and planning for more. As your opening those stores, how are absorptions tracking there? Are you doing what we’ve seen in the past? Meaning, you try to set those prices low in early phases so you can raise them through and your absorption rates tend to be very good when there's a new community opening. So can you just talk a little bit about what that picture looks like relative to your legacy stores?

[Tom Mitchell, Chief Operating Officer, President]

Sure Carl. This is Tom. As you know, we do like to get off to a strong start when we open new communities, but I like to think that there's such a high pent up demand and anticipation for those new communities, it's not just due to lower pricing. We price the market on our openings and I think because of our great locations and our focus on design and innovation and our new product types being so well received by the consumer that we get off to a great start, so that continues. We expect it to continue. We are really excited about the new openings that we have coming up, and as you mentioned, this is a big growth year for us. So we think we're moving into new volumes going forward because of our exciting new communities coming.

[Carl Reichardt, BTIG]

Okay, thanks Tom. And then sort of along similar veins, as you're looking at the supply chain continuing to be difficult, this fourth quarter and into the first quarter, where in the process are you actually releasing homes for sale. Obviously a lot of your peers are doing it in the right frame [ph]. How early are you putting homes into the market?

[Linda Mamet, Chief Marketing Officer]

Hi Carl! This is Linda. You know we are continuing to balance between to be build homes and spec homes. So in the fourth quarter, 52% of our orders were to be built homes and that's slightly down from the prior quarter as we were able to get most spec starts into the ground.

[Carl Reichardt, BTIG]

Okay, thanks Linda. Thanks everybody.

[Doug Bauer, Chief Executive Officer]

Thanks.

[Operator]

Our next question is from Jay McCanless with Wedbush Securities. Please proceed.

[Jay McCanless, Wedbush Securities]

Hey! Good morning! Congrats on a great quarter. So on the SG&A percentage, it looks a little higher than what we were expecting for the first quarter. Could just talk about, you know is that some cost being built in for all the community growth this year or just less leverage on the top line?

[Glenn Keeler, Chief Financial Officer]

Yeah, this is Glenn, Jay, good question and it's a bit of both, right. So you know our guidance with 900 to 1,100 deliveries for the first quarter, so there's some top line. You know there's a fixed amount of G&A that is impacted by the top line in the first quarter, but we are expecting higher sales and marketing costs related to the 90 to 100 new communities we are opening this year. So that’s a part of it as well.

[Jay McCanless, Wedbush Securities]

Okay, right, thank you for that. And then it looks like you guys had less than I think 30 finished specs at the end of the fourth quarter. I mean where – what's the longer term target for that and I think Linda you said you guys had some success at putting in more specs in the ground, but where do you envision that going as we move through the year?

[Tom Mitchell, Chief Operating Officer, President]

Well, I’ll take it. Typically we like to see about three to four specs for community across the country. But I think it's actually 27 or 30, but I may be off by a couple. I think 12 of those are in Houston or something I guess, yes, so it’s – I’m laughing Jay, because it’s just not a lot of inventory right and that's part of the issue. There's no inventory both on the new and retail side and despite rising rates here in the short term, the consumer is still looking for housing and has strong demand. So ultimately we like to see that three to four number, but it's going to take us some time to get there.

[Glenn Keeler, Chief Financial Officer]

But we may not be able to get there given the strong demand.

[Jay McCanless, Wedbush Securities]

Yeah, exactly.

[Glenn Keeler, Chief Financial Officer]

Because as we start specs, they get snapped up and purchase before we can get too far along in the construction process.

[Linda Mamet, Chief Marketing Officer]

Right. So currently we have 8 homes per community sold under construction, but those are selling quickly.

[Jay McCanless, Wedbush Securities]

Thanks for that. And then I know, I think Doug you talked about the prepared comments about the municipal issues starting to flare up again. Now that omicron seems to be receding, have those started to improve and is it – I think you said it was on the front end, but I mean is it across the board you know with finals and also with permits or was it just strictly getting permits pulled and getting moving on the homes?

[Doug Bauer, Chief Executive Officer]

Yeah, it's – we see most of the delays in the front end. When you say Tom, I mean it's between the municipality delays and Omicron is you know – and the mass mandates are you know just recently coming off, so it’s too early to say how the cities and counties will adopt. Most municipalities are virtual Jay, so it's still going to be a real labor intensive process to move through the permitting process. But once you get past the front end of the construction process, we've had pretty good success staying on task.

[Jay McCanless, Wedbush Securities]

Okay, that’s good to hear. Thanks for taking my questions.

[Doug Bauer, Chief Executive Officer]

Yep.

[Operator]

Our next question is from Alex Barrón with Housing Research Center. Please proceed.

[Alex Barrón, Housing Research Center]

Yeah, thank you guys and great job on the year. I wanted to see if you can help me reconcile the guidance in terms of the deliveries for the first quarter versus the full year. 900 to 1,100 seems pretty low, so you know what's contributing to that? You know is there any aspect that's weather related or you know – I mean you guys didn't hit that level anywhere last year. So I'm just trying to understand that and then how are you ramping up to the 6,500 to 6,800. Is that a function of assuming the sales pace is very strong in the spring selling season or can you just can help us out there?

[Glenn Keeler, Chief Financial Officer]

Good questions Alex. This is Glenn. The 900 to 1,100 for the first quarter is just a function of timing. So we had strong absorptions in the fourth quarter, but a lot of those were either unstarted or as Linda said just early in the starts and so those don't deliver until later and so it's really just timing. And for the full year, we stated with a healthy backlog, about 50% of our guidance in backlog to start the year and we are off to a strong sales pace in the beginning of the year. Like Doug said, we are hoping to get all of our starts in the ground by May to hit those deliveries and so we feel comfortable we will able to get up that 6,500 to 6,800 for the full year.

[Alex Barrón, Housing Research Center]

Okay. And you know when it comes to I guess thinking about the impact of mortgage rates, obviously nobody seems to have seen any negative impact yet, but maybe it's too soon. But if the fed raises as many times as people think, do you guys build that into your assumptions about what's going to happen to the demand in sales pace as the year progresses.

[Doug Bauer, Chief Executive Officer]

Yeah, we do a backlog test, we test our backlog. We've got a very healthy backlog; stress test them up to 100 bips. As I'm mentioned earlier, mortgage rates already increased 75 basis points. I agree with what you're saying Alex. I do think though, I think the mortgage rates have already baked in, at least the March announcement. That's my own feeling and actually our mortgage company’s feeling too. So we’ll continue to monitor our backlog offer long term rate locks as well going into the year. But the demand is still very strong despite recent increases in rates.

[Tom Mitchell, Chief Operating Officer, President]

Alex, this is Tom. Just real quick, absolutely to answer your question, we do factor in the current rising rate environment into our business plan and guidance. So we have been a little bit more conservative in our assumptions taking that into account.

[Alex Barrón, Housing Research Center]

And the long term rate lock, what kind of impact does that have and is it on your margins or is it on your financial services line, like where would that be reflected and how much does that cost typically?

[Glenn Keeler, Chief Financial Officer]

Yeah, it does get reflected in revenue, because it's an incentive we would give to the party. So it would impact margin and Linda, what's the usual cost or something like that.

[Linda Mamet, Chief Marketing Officer]

You know in the current high demand market, we are finding that we are generally not needing to use a lot of incentives to encourage customers to rate lock. It could be between $1,000 and $2,000 that we might contribute to that at this current time.

[Alex Barrón, Housing Research Center]

Got it. Okay, thanks and best of luck!

[Doug Bauer, Chief Executive Officer]

Thanks.

[Operator]

And now our final question is from Deepa Raghavan with Wells Fargo Securities. Please proceed.

[Deepa Raghavan, Wells Fargo Securities]

Hi! Good morning everyone. Thanks for taking my questions. Start with community count growth, pretty strong 35%, 40%, growth that you're exiting. You talked about it last quarter too. Obviously your setting yourself up for a better 2023, and looks like given your land send, you know you're continuing to invest in more communities as well. How should we think about 2023 community count growth just give – is 2022 your strongest investment in that. And also any color if these newer communities you're bringing online this year have more lots than traditionally and therefore your growth potential is perhaps much stronger into 2023.

[Glenn Keeler, Chief Financial Officer]

Deepa, yeah good questions. This is Glenn. We will seek community count growth into ’23. We haven't given the specific ending community count number, but in Doug’s remarks you mentioned we are opening between 180 and 200 new communities over the next 24 months, so similar number of communities opened in ‘23 as ’22. So you will see a rise in that ending community count number in ‘23 pretty significantly, and that will lead to higher deliveries assuming continued strong market conditions. And on the size of communities, overall there hasn't been a shift I would say in larger communities. Although I would say that in Texas for example, we are really focused on growing that area. We have invested in some larger land positions in Dallas, Austin and Houston and so you will see larger community positions in those markets.

[Deepa Raghavan, Wells Fargo Securities]

Okay, and as you're investing, are you thinking about Florida market actively here?

[Glenn Keeler, Chief Financial Officer]

Say that again sorry.

[Deepa Raghavan, Wells Fargo Securities]

As you are investing, are you considering you know getting into Florida more actively here?

[Doug Bauer, Chief Executive Officer]

We're not actively in Florida, I think is your question. We can be…

[Deepa Raghavan, Wells Fargo Securities]

Are you, your newer – as you are investing in land, are you looking to enter that market?

[Doug Bauer, Chief Executive Officer]

We continue to look at opportunities.

[Deepa Raghavan, Wells Fargo Securities]

That’s the one growth market that’s pretty. Yeah sorry, go ahead.

[Doug Bauer, Chief Executive Officer]

Yeah from an M&A standpoint, both organically and M&A we continue to look at the southeast. We’ve had tremendous growth planned already in – the land is already owned and controlled for the Carolinas. We're going to look at expanding along the coastal part of the Carolinas, and you know the rest of the southeast is definitely on our radar screen as we look at our strategic plan of getting up to $6 billion in revenues by 2028. So that's definitely on the radar, but we're currently not building there.

[Deepa Raghavan, Wells Fargo Securities]

Okay, got it. My last one, any sensitivity analysis you can provide on interest rate moves, every 50 bips move perhaps you know might not impact your backlog based on percentage. Any sensitivities there?

[Glenn Keeler, Chief Financial Officer]

Yeah Deepa, as Doug mentioned, we do run a sensitivity on a regular basis relative to our backlog and our analysis shows that a 50 bip adjustment really has no impact. We have a high quality of backlog and our buyer profile is very strong, so that component and amount of price movement would not be a factor. As it moves to a 1% increase in interest rates, we have a high single digit to low double digit impact on our backlog and that's as we look at debt to income ratio. So we feel really good about our backlog relative to a rising rate environment.

[Deepa Raghavan, Wells Fargo Securities]

Alright. This is helpful. Thanks very much for the color. And good luck! Very strong outlooks. Thank you.

[Glenn Keeler, Chief Financial Officer]

Thank Deepa.

[Glenn Keeler, Chief Financial Officer]

Thank you.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Doug Bauer for closing comments.

[Doug Bauer, Chief Executive Officer]

Well, thank you everybody for joining us today. We're very proud of our results in 2021 and look to capitalize that in 2022. I hope all of you have a great week and we look forward to chatting with you in April. Thank you.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.