KB Home (NYSE:KBH) Q4 2023 Earnings Conference Call January 10, 2024 5:00 PM ET

Company Participants

Jill Peters - SVP, IR

Jeffrey Mezger - Chairman, President & CEO

Robert McGibney - EVP & COO

Jeff Kaminski - EVP & CFO

Conference Call Participants

John Lovallo - UBS

Stephen Kim - Evercore ISI

Alan Ratner - Zelman & Associates

Matthew Bouley - Barclays Bank PLC

Michael Rehaut - JPMorgan

Jay McCanless - Wedbush Securities

Susan McCleary - Goldman Sachs

Alex Barron - Housing Research Center

Joe Ahlersmeyer - Deutsche Bank

Jade Rahmani - KBW

Operator

Good afternoon. My name is John and I'll be your conference operator today. I would like to welcome everyone to the KB Home 2023 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com through February 9, 2024.

And now I would like to turn the call over to Jill Peters, Senior Vice-President, Investor Relations. Thank you, Jill, you may begin.

Jill Peters

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter of fiscal 2023. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Rob McGibney, Executive Vice-President and Chief Operating Officer; Jeff Kaminski, Executive Vice-President and Chief Financial Officer; Bill Hollinger, Senior Vice-President and Chief Accounting Officer; and Thad Johnson, Senior Vice-President and Treasurer.

During this call items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory-related charges, and any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.

And with that, here is Jeff Mezger.

Jeffrey Mezger

Thank you, Jill. Good afternoon, everyone, and Happy New Year. We finished the year strong with a fourth quarter performance that exceeded our guidance across our key financial metrics. We produced total revenues of $1.7 billion and diluted earnings per share of $1.85. Our outperformance on closings at just over 3,400 homes was driven primarily by our continued improvement in build times along with a strong backlog of buyers who are committed to a timely closing when their home is completed.

With respect to margins, they remained solid at just under 21% in growth and 11% in operating income margin. In addition, we returned nearly $180 million of capital to shareholders, primarily through share repurchases. These results contributed to a healthy financial performance for 2023. We delivered more than 13,200 homes driving revenues of $6.4 billion and diluted earnings above $7 per share.

Our top line, together with an operating margin exceeding 11% and the repurchase of 11% of our shares outstanding at the start of the year contributed to 15% growth in book value per share to over $50. The strength of our results is notable when considering that our initial 2023 revenue guidance was about $5.5 billion equating to roughly 11,400 deliveries given the uncertainty in market conditions at the start of the year. As our new fiscal year gets underway market conditions are improving with rates having declined and consumer confidence increasing all while resale inventory remains low. We believe our company is well-positioned given shorter build times, a solid backlog, normalized cancellation rates, and planned community count growth.

The same factors that characterize the market today low inventory levels, solid employment, and wage growth are those that we believe will sustain the longer-term health of the housing market. Demographics, have been and will continue to be a significant factor with the largest generational cohorts, millennials and Gen Z, demonstrating a strong desire for homeownership.

One of our most important operational achievements of this past year was a significant reduction in our build times, which favorably impacted our business in several respects. Rob will share the details in a moment but for now, I will highlight the shorter construction times that helped to drive the outperformance in our deliveries and revenue relative to our expectations. In addition, the quicker conversion of homes in production to deliveries has unlocked a meaningful amount of cash. Going forward faster build times will boost our selling efforts as a build-to-order home with quicker delivery dates becomes even more compelling to a homebuyer and the cost to lock the interest rate on the mortgage for a short period of time will be lower.

We begin 2024 with a healthy backlog of more than 5,500 homes, valued at approximately $2.7 billion. Typically, our ending backlog represents about 40% of our subsequent year's deliveries, which aligns with our anticipated closings for this year. We expect our remaining deliveries in 2024 to come from net orders in the first half of the year that will drive starts as well as sales of inventory homes. We have nearly 7,000 homes in production of which approximately 30% are unsold.

On our last earnings call in September, we shared our projection of a monthly absorption pace per community, a range of net orders for our 2023 and fourth quarter based on normal seasonality assuming then current market conditions. As the quarter progressed, interest rates increased each week from late September through the end of October, which over this period significantly curbed demand and impacted our net order results. We elected not to take a sales of any price approach and pursue lower-margin orders and a softer demand period as we did not need additional orders to achieve our fourth quarter delivery target and we're also well-positioned for deliveries in our 2024 first quarter. As interest rates have now declined since the end of our fiscal year, demand has improved significantly. For the first five weeks of our first quarter, our net orders are 904 as compared to 403 in the comparable period of the prior year. Our orders in December were higher than in November which is unusual given that December is typically a slower sales month. To us, this speaks to the pent-up demand for homeownership.

That said, on a year-over-year basis, the comparison is somewhat distorted due to the low net orders in the prior year period. While we expect our net order comparison to moderate from the quarter-to-date level for the full quarter, we do expect it will be very favorable. We believe we are well-positioned to respond to the strengthening in buyer demand given our product positioning and price points as well as planned community count growth.

With that, I'll pause for a moment and ask Rob to provide an operational update. Rob?

Robert McGibney

Thank you, Jeff. I will begin by providing some additional color on our fourth quarter and net order results and discuss the steps we took to help buyers address higher mortgage interest rates. Our business strategy remains consistent in optimizing each asset on a community-by-community basis, balancing pace price, and margin. As a component of that strategy, we elected not to chase the sales target at significantly lower margins during the fourth quarter amid the rapid rise in interest rates and their impact on affordability.

Mortgage rates on the average 30-year fixed loan were approximately 60 basis points from the time of our last earnings call in September to their peak in late October. To put it in perspective, this has the same effect as a nearly 6% increase in the purchase price of a home, an impactful change that would have been costly for us to offset, particularly in a slower demand period. With our built-to-order model, we work from a large backlog, which allows us to thoughtfully execute our sales strategy without the pressure of having to cover inventory at any price to achieve our quarterly delivery plant.

We worked with buyers as they adjusted to the rising rate environment during the fourth quarter, and took steps to promote targeted rate buy-down programs. Roughly 60% of our orders had some form of mortgage concessions associated with them, including rate locks. This is an important tool, especially for our built-to-order buyers as we provide customers the ability to lock the rate upfront. As a result, there is a higher degree of confidence, both for buyers and for us of the likelihood of closing even if rates continue to rise. Our lock program comes with a one-time float-down option that customers can utilize if rates decline between the time of the initial lock and the close of escrow, which lessens rate-related anxiety and the buying decision. For buyers that use our rate buy-down program, the cost of the lock is built into the rate.

With mortgage rates treating the selling environment has become more favorable, and we resumed the faster pace of sales at higher margins than we would have otherwise achieved during the fourth quarter. To position ourselves for 2024 deliveries and increase the number of homes available to close during the spring selling season, we ramped up our starts during the fourth quarter. We started 2,589 homes ending the quarter with nearly 7,000 homes in production, of which about 70% are sold, consistent with our targeted range.

Shifting now to operations once again our divisions did an excellent job in reducing their build times during the quarter contributing to substantial improvement over the course of 2023. In December 2022, our construction times exceeded 8.5 months by year-end 2023, they were 5.5 months. Our progress earlier in the year was primarily on the front end of the build cycle. We maintain those improvements and picked up nearly two weeks in the fourth quarter in the latter stages from drywall to final, which is the bucket that most of our deliveries came from. We expect to continue driving efficiency throughout our construction process to return to our historical build times between four months and five months.

By compressing our build times, we also reduced our direct construction cost. We finished the year with an average savings of about $18,000 per home relative to peak cost in August of 2022. Although the costs of some materials such as stucco, masonry, flooring, and concrete pressure the cost of homes started in the fourth quarter, we experienced a reduction in lumber costs, which offset some of the cost increases. Most importantly, we were able to maintain the vast majority of our savings throughout the year.

Our key operational priorities remain consistent for 2024, executing our built-to-order model and providing the combination of best price and value to our customers while continuing to deliver high satisfaction levels to our buyers. We are focused on the reduction in our build times, incremental cost reductions through value engineering and community count growth for long-time grand openings.

And with that, I will turn the call back over to Jeff.

Jeff Kaminski

Thanks, Rob. Switching gears to our mortgage joint-venture, KBHS Home Loans. 87% of the mortgages funded during the quarter were financed through our JV, which is more than 10 percentage points higher year-over-year. This is a positive development as higher capture rates help us manage our backlog more effectively. The average cash down payment was 16% consistent throughout the year, equating to roughly $78,000. The household income of our KBHS customers averaged 127,000 and had an average FICO score of 741. The highest credit score reported for the past several years.

It was one-half of our customers purchasing their first home, we are attracting buyers with strong credit that are able to qualify at elevated mortgage rates while making significant down payments. We spent approximately $485 million to acquire and develop land during the quarter contributing to a full-year investment of $1.8 billion. The majority of which was spent on developing land we already owned. In 2024, we expect to accelerate our investment activity to support our future growth, while remaining diligent with respect to our underwriting criteria, product strategy, and price points.

As to our land position, it stood at roughly 56,000 lots, owned or controlled at quarter-end of which 40,800 are owned. About 65% of these owned lots were tied up in 2020 or prior before the run-up of in-land prices. We remain focused on capital efficiency, developing lots in smaller phases, and balancing development with our starts phase to manage our inventory of finished lots. We believe we are well-positioned as we currently own or control essentially all the lots we need to achieve our delivery growth targets through 2025. Our objective remains to achieve at least a top-five position in each of our served markets and all our divisions have a roadmap in place to achieve this ranking.

Our ending community count was essentially flat relative to the prior year. We opened 24 new communities during the fourth quarter achieving nearly all our planned grand openings, although many opened at the end of November, which limited their contribution to net orders. That said, these new communities, along with our first quarter openings have us well-positioned for the spring selling season. We expect our ending community count to grow sequentially as the year unfolds and we believe we will exit the year with a meaningfully higher number of open communities.

Our balance sheet is in excellent shape and we intend to continue allocating our strong operating cash flow toward reinvestment in growth and return of capital to our shareholders in 2024. Since we began our share repurchase initiative in our 2021 third quarter, we have deployed approximately $750 million to buy back over 20% of the outstanding shares at that time at an average price of $39.79 per share, which has been significantly accretive to both our book value and diluted earnings per share. During the same timeframe, included in our regularly quarterly dividends we've returned roughly $885 million to shareholders.

In closing, I want to recognize the entire KB Home team for their dedication to our buyers and their contributions to our achievements in 2023. It is another year during which we navigated changing market conditions while remaining strategic and flexible with a focus on the longer term. Our business is solid and profitable and we remain the industry leader in third-party customer satisfaction rankings. We have a recognized brand that consumers trust and an award-winning sustainability program. We look forward to sharing our results with you as 2024 unfolds.

With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Jeffrey Mezger

Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our financial performance for the 2023 and fourth quarter and full year, as well as comment on our outlook for 2024.

In the quarter, we produced solid results with housing revenues exceeding the high end of our guidance range and an operating income margin of nearly 11%. In addition, our robust cash flow supported significant share repurchases along with $483 million in land investments. Entering our 2024 first quarter, improving housing market conditions and our well-positioned portfolio of open-selling communities have generated strong momentum with significantly higher net orders in the first five weeks compared to the corresponding year-earlier period.

In the 2023 fourth quarter, our housing revenues were $1.66 billion compared to $1.93 billion in the prior year period, reflecting a 10% decrease in the number of homes delivered and a 5% decline in overall average selling price. Though fourth quarter deliveries were down relative to our 2020 results, we achieved our third consecutive quarter of sequential cycle time improvement, which contributed to the higher-than-expected number of homes delivered.

Looking ahead to the 2024 first quarter and the full year, we anticipate improved housing market conditions and continued favorable supply-chain trends. As a result for the first quarter, we expect to generate housing revenues in a range of $1.4 billion to $1.5 billion. For the 2024 full year, we are forecasting housing revenues in a range of $6.4 billion to $6.8 billion, supported by our backlog of sold homes, projected net orders per community, reduced construction cycle time, and expected growth in community count. In the fourth quarter, our overall average selling price of homes delivered decreased to approximately $487,000, due to both mix shifts and the impact of pricing adjustments and other homebuyer concessions such as mortgage rate locks and buy downs. We believe our 2024 first quarter average selling price will be approximately $477,000. For the full year, we are projecting an overall average selling price in a range of $480,000 to $490,000.

Homebuilding operating income for the 2023 fourth quarter totaled $180.9 million compared to $278.2 million for the year-earlier quarter. Our homebuilding operating income margin was 10.9% compared to 14.4% in the 2022 fourth quarter. Excluding inventory-related charges of approximately $1.2 million in the 2023 period versus approximately $27.9 million a year ago, our operating margin was 10.9% compared to 15.8%. We anticipate our 2024 first-quarter, homebuilding operating income margin will be approximately 10.5% and the full-year metric to be approximately 11%.

Our 2023 fourth quarter housing gross profit margin declined 170 basis points from the year-earlier quarter to 20.7%. Excluding inventory-related charges, our margin for the quarter was 20.8%, down from 23.9% in the 2022 fourth quarter, mainly due to price decreases and other homebuyer concessions, along with higher construction costs. We are forecasting a housing gross profit margin for the 2024 first quarter and full year of approximately 21%. This gross margin outlook assumes the current improved market environment remains stable. However, if the recent favorable economic trends continue through the spring selling season and beyond, we believe there is an upside to our full-year estimate as further declines in mortgage interest rates combined with the pent-up demand for housing and continued tight resale inventory conditions would provide an opportunity to reduce homebuyer concessions.

Our selling, general, and administrative expense ratio for the 2023 fourth quarter increased 190 basis points from a year ago to 9.9% mainly reflecting higher costs associated with certain performance-based employee compensation plans and sales commissions, as well as reduced operating leverage from lower housing revenues. We are forecasting our 2024 first quarter SG&A ratio to be approximately 10.5% up from 10.1% in the year-earlier quarter mainly reflecting higher costs, including marketing and advertising expenses associated with the planned increase in our community contract in the year as we position our operations for growth. We expect that our 2024 full-year SG&A expense ratio will be approximately 10%.

Our income tax expense of $49.3 million for the fourth quarter represented an effective tax rate of approximately 25%. The rate was favorably impacted by $5.8 million of federal energy tax credits reflecting the benefit of our industry-leading sustainability initiatives. However, these credits were lower than expected, largely due to the impact of recently issued IRS guidance that unexpectedly specified a higher energy standard for single-family homes built in California than for other states. We expect our effective tax rate for the 2024 first quarter and full year to be approximately 24%. Overall, we reported net income of $150.3 million or $1.85 per diluted share for the 2023 fourth quarter compared to $216.4 million or $2.47 per diluted share for the prior year period, which were among the highest fourth quarter levels in our history.

Reflecting on the full year, we are very pleased with our operational execution in 2023, in which we overcame volatile housing market conditions and stiff headwinds from rising mortgage rates to performed significantly better than our original expectations for the year. Relative to the full-year guidance we provided during our 2023 first quarter earnings call in March, our full-year housing revenue of $6.37 billion exceeded the midpoint of our guidance range by over $800 million or approximately 15%. In addition, our 11.3% operating income margin exceeded the midpoint of our guidance range by 80 basis points.

Turning now to community count, our fourth quarter average was essentially flat year-over-year at 236. We ended the year with 142 active communities, up 5% sequentially. We expect to end the 2024 first quarter with approximately 240 communities, which would result in a year-over-year decrease in the average community count for the quarter in the low-single-digit range. We expect our quarter-end community count to increase sequentially through the remainder of 2024, starting in the second quarter as openings each quarter are expected to outpace sellouts. We anticipate ending the year with approximately 270 communities, an increase of 12% and higher compared to the expectation last quarter of 265 communities at year-end. We believe our full-year average count will be up about 5%.

We invested $483 million in land, land development, and fees during the 2023 fourth quarter up 19% compared to the $443 million for the year-earlier period with $136 million of the total, representing new land acquisitions. We ended the quarter with a pipeline of approximately 56,000 lots, owned or under contract that we expect will drive significant new community openings and community count growth in 2024, as I noted earlier.

During the fourth quarter, we repurchased approximately 3.6 million shares of our common stock at a total cost of $162 million. For the year, we repurchased 9.2 million shares at an average cost of 11%, below our year-end book value per share. With $164 million remaining under our current common stock repurchase authorization, we intend to continue to repurchase shares with the pace, volume, and timing based on considerations of our operating cash flow, liquidity outlook, land investment opportunities, and needs, the market price of our shares, and the housing market and general economic environments.

We generated nearly $1.1 billion of cash flows from operations in 2023, as compared to $183 million in 2022, which drove an increase of nearly $400 million in a year-end cash balance, while also funding $411 million of stock repurchases, $150 million of debt repayments and $57 million in dividends, which included a 33% increase in the dividend rate effective in the third quarter. At year-end, we had total liquidity of $1.81 billion, including $727 million of cash and $1.08 billion available under our unsecured revolving credit facility with no cash borrowings outstanding.

Regarding our financial leverage, we are very pleased with the steady progress and favorable trend over the past five years that resulted in a 19 percentage point improvement in our leverage ratio. Over the past year, our debt-to-capital ratio improved by 270 basis points to 30.7% at year-end 2023 compared to 33.4% at the end of the previous year. We have no debt maturities until our term loans 2026 expiration with our next senior note maturity in June 2027.

In conclusion, we are pleased with our strong 2023 operational and financial performance and remain optimistic about the outlook for the housing market given the favorable fundamental demographic trends, constrained inventory of resale homes available for sale, and continued underproduction of new homes. In addition, we believe our strong financial position, including our liquidity profile and long runway for debt maturities, will allow us to continue to be opportunistic with capital deployment in 2024 and beyond.

In 2024, we plan to execute on the core principles of our unique built-to-order business model and returns-focused growth strategy carefully allocating capital with a focus on enhancing long-term stockholder value. We believe we are well-positioned to achieve our objectives, supported by the recent decline in mortgage interest rates, our solid portfolio of communities, anticipated expanded community count, improving cycle times, and healthy net order activity during the first five weeks of the new fiscal year ahead of the spring selling season.

We will now take your questions. John, please open the lines.

Question-and-Answer Session

Operator

Thank you, sir. We will now conduct the question-and-answer session [Operator Instructions]. And the first question comes from the line of John Lovallo with UBS. Please proceed with your question.

John Lovallo

Hi guys, thank you for taking my questions. The first one is, it appears that the sort of slight downshift in home sales revenue. The outlook from $6.5 billion to $7 billion to $6.4 billion to $6.8 billion was driven by the lower 4Q orders. So the first question is, is that, is that correct? If that is correct rates are down about 50 basis points from when you gave that initial guide. So is there not enough time during the first half of the year? Just sort of makeup to 300 to 400 home Delta to sort of stay on that $6.5 billion to $7 billion trend?

Jeffrey Mezger

Right, yes. I think I can take that. So, yes, thanks for the question. When we look at the change in the full year, it wasn't terribly significant move, it is about 2% at the midpoint, or about $150. You are right in saying, it was about $70 million a pull-forward into the fourth quarter and what happened in the fourth quarter, we had higher deliveries than we expected and land sales were a little bit lighter than what we were planning for. So our year-end backlog came down a little bit more than what we were anticipating when we provided that guide, but I would term it, John mostly as just refinement of the full-year guide. We do believe there is upside. We're trying to forecast the year based on the improved conditions that we have today, not necessarily looking at continued improvement as we go through the year. We're very encouraged by the start of the year in the first five weeks sales -- five weeks of sales that we've seen and remain optimistic about our potential in 2024.

John Lovallo

Okay, that's helpful. It seems like a little bit of conservatism maybe. In terms of the gross margin is expected to be about 21% in the first quarter and then 21% for the full year, I mean, are you expecting a relatively flat gross margin in each quarter, and if so what would drive that consistency versus the normal kind of second-half step-up that we would expect?

Jeffrey Mezger

Right. We had a relatively steady trend in 2023, a little less variability than what you normally see. It's been a pretty choppy market as you know. So we're trying to base everything of sort of current sales rates, current backlog margins, and what we're seeing embedded in the orders right now. Our current backlog margins are actually a little bit higher than our guide, but we always like to have a little bit of room there in case there's some contingencies related to either quick-moving units or continued for incentives or whatever.

So, yes. I would expect to see a relatively consistent gross margin profile for the year at this point in time. That said, we still have a lot of sales to make for the back half of the year and we'll have a better visibility of that as we get more into the spring selling season to see how that variability can go on the gross margin side. But we like the favorable economic trends you're seeing mortgage rates coming down, solid employment growing economy, pent-up demand for housing, the resale inventory tightness, all of those to me suggests opportunities to reduce concessions, which would be pretty much right to the gross margin line, to the extent we're able to do that if market conditions continue to improve.

Operator

Thank you. And our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim

Great, thanks a lot guys. Lot to like here. Obviously, strong performance and the market help you out but clearly, it's clear the market is, help you out here in the first five weeks, but you also executed very well. So congratulations on that. My first question relates to just the absorption rate. Implied you didn't really get obviously an order number, but certainly, it sounds like 2024 in terms of sales per community per month is, I don't want to put words in your mouth, but it certainly seems like it's going to be based on your closings guide but at least as good as what you saw in 2023 and maybe probably better. And so in that regard when we look at your historical absorption rate. In the past, you were very comfortably in the four-plus range on average for the year. You got as high as in the six’s in 2021 and I'm kind of curious where you feel comfortable with where absorption rates can ultimately settle out. And the reason, I am curious about this is, because if I look way back into the early 2000s, for example, your absorption rates were substantially higher at seven per month, and that kind of a thing. So just curious if you could give us some commentary about where you think a sort of sustainable level for absorptions is for your company given the way, it's configured today.

Jeffrey Mezger

Steve, I can start. First, thanks for the recognition on our -- the job we did in Q4. We have over the last five years or six years, we've gone through kind of a whipsaw. We came out with returns-focused growth we were working on lifting in our margins. So we kept our absorptions at four until we got our margins higher than our margins are higher and we keep using the term, optimize the asset and every community is a different story, but I would expect that it's probably around five on average. As we looked at 2023, we were soft coming into the year and that picked up. Then it softened again later in the year. So we fully expect our absorptions in 2024 will be higher than 2023 for the year. So, I would think five a month market runs, we could go higher than that, but it's on per community analysis, how many last we have left is easily replaceable. How do you run it, how big is the community, I think five is probably a good number.

Stephen Kim

All right. That's really helpful. I appreciate that. And then your commentary about the margins and the incentives and all that. You've talked about the fact that the first five weeks here have gotten off to a good start. And the way you're talking about the incentives or the concessions it sounds like you haven't really had not really reduced those concessions yet and you think you may as you go forward. Can you help us understand what it is that you think would be the trigger for reducing incentives? Would it be in fact absorptions let's say any in the late 1Q, early 2Q kind of getting into that five threshold in absorptions or would it be something else?

Jeffrey Mezger

Yes, Rob, do you want to take that you can walk through, what we're doing and where we're trying to get to?

Robert McGibney

Yes, so Steve, you're right, we haven't really done anything different than what we were doing in Q3 as far as concessions that we were offering. Obviously, you heard from the prepared remarks, we've seen a big uptick in sales. So that is how we're going to manage it, we always talk about optimizing each asset, balancing base price and margin, and if we -- as we go through Q1 or into Q2 when we start to see that at a community level get above what we think is optimal for that we're going to, we're first going to reduce those incentives, take it to price, we're going to be looking to lift margins on all those communities, where we're seeing that happen, and we're encouraged early by what we're seeing here in the first part of Q1. So that seems pretty realistic for us.

Operator

Thank you. And the next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.

Alan Ratner

Hey guys, Happy New Year. good afternoon, and thanks for all the great detail as always. Yes, my first question in a similar vein on the incentives, it doesn't sound like you really got kind of played that incentive game in the fourth quarter and I think that makes a lot of sense given your sales strategy and whatnot, but clearly, other builders did, which I think is now perhaps maybe why orders were a bit lighter than you were expecting coming into the quarter. We have seen, maybe more of the spec builders begin to dial back those incentives that they were offering into year-end. And if so any idea kind of how much net pricing has moved the year-to-date from some of your competitors that did play that discounting game?

Jeffrey Mezger

Robert, it's also for you.

Robert McGibney

Yes, I really haven't. I mean we're seeing some change in behavior, it's kind of hard to track what's going on with individual builders and they'll have certain deal of the day, deal of the week type things, but we do expect to see incentives overall come down as we move forward, just based on the uptick in demand that we've seen. We did do a little more in Q3, especially towards Q4 or towards the beginning to generate some additional net orders but as rates got to that 8% kind of threshold we saw buyers really pull back and it just didn't seem prudent to chase sales with that going on in the market. We continue to start homes and we're happy as we look back on it now as that's the approach that we took because we're seeing better sales obviously. We didn't think the margins and sales are really picking up. So that's been our approach.

Alan Ratner

Got it, okay, makes sense. Maybe a little bit early, but more the expectation into the spring, but that should come down. Second question on the margin guide and Jeff I appreciate kind of the commentary there. I'm just curious what your underlying assumptions are on costs because obviously, lumber was a big tailwind in 2023 versus 2022, you kind of mentioned some of the moving pieces there. I would imagine beginning of the year is kind of typically when you start to get some price increase announcements from your trades and they're probably seeing and hearing the same things you guys are as far as lower rates. So has that involved in the suppliers, the trades to try to push the envelope a little bit on cost yet or are they still kind of content with the current level then what's your expectation there for the year?

Alan Ratner

First of all, on the suppliers. I mean, we haven't seen any significant change in behavior from the supply base. Pretty early, I'd say on the market recovery and in mortgage rate declining to see that. As we forecast margin would generally look at current pricing, current costs as we go forward, and assuming current market conditions. So if things get better, there is more upside and we've just talked about concessions a little bit with the last couple of questions.

One of the other important thing under concessions is to the extent they are tied to mortgage rates. So the buying rate is down to X percent, for example, loan rates go less cost of that concession. So even if we were to maintain some of those incentives out there they'd be less costly to us and less of a hit to gross margins, which is a real favorable.

So anyway, coming back to the cost side. Yes, it's, I think it's still a bit early on to see. Hopefully, we will see from a similar supply base, aggressiveness on that. We did see costs coming down quite nicely over the next 12 months and to the extent, those costs are baked into the backlog, those are already included in the forward guide and I'm just assuming kind of business-as-usual from there.

Operator

Thank you. And our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Matthew Bouley

Good afternoon, everyone. Thanks for taking the questions. So you guided your ending backlog or you've got your deliveries, the ratio ending backlog to deliveries of 40%, which is very normal versus pre-COVID times as you mentioned it's a lot better than the past couple of years, of course. So just cycle times, where they stand today kind of get you there, or would you still need some further improvement in cycle times in order to get to that number relative to where your backlog is today.

Jeffrey Mezger

We've built the year met based on current cycle times. So if we can continue to compress and Rob has got a lot of plans at play in order to do that as it could help us but we have spent steady-state when we're making our projections for.

Matthew Bouley

Yes, got it, okay. Thank you. And then so I think in terms of spec. I think you said 30% of your production was unsold. Correct me if I'm wrong, but I recall in years past that may be a little higher. You might have been closer to more like 20%, today it is a little higher-than-normal. Can you remind us if there is any margin differential on the kind of spec homes versus the build-to-order and how you're thinking about any margin impact from mix of higher-spec in 2024?

Jeffrey Mezger

Yes. Matt, we typically run about 25% unsold and we are up at 30%, it's about 300 units. So it's not a crazy number. And as the year unfolds, we'll see how our orders are on the built-to-order because we like the predictability of the delivery with a predictable margin and it's -- we are just saying it's far better. Typically, our inventory sales are running 2% to 3% points lower than built-to-order. So we would much rather prefer to keep running our business where we have for the last 15 years, but there is a certain phase where you have the starts to maintain in order to have your scale and your franchise in that city with a contractor base and we'll keep, and we'll get all the sales we can, the BTO sales for our X films, and inventory will do that.

Operator

Thank you. And our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Michael Rehaut

Hi, thanks, good afternoon, and thanks for taking my questions. First, I just wanted to zero in a little bit again on the first quarter gross margin. Looking for a roughly flat or even slightly up result or positive may roughly flattish results. It's actually in a positive contrast to typically when you have first quarter lower revenue then you are expecting lower revenues sequentially 4Q versus first, sorry, the first quarter versus 4Q. In the past, you kind of pointed to some negative operating leverage and we've seen a sequential contraction of gross margins anywhere of 100 basis points, 200 basis points at times over the last five years, six years, seven years. I was wondering kind of what happened to that negative operating leverage. If there had been any differences in mix or other drivers because normally I think we would have expected some type of sequential step-down.

Jeffrey Mezger

Right. Yes, that's a good question, Mike. A couple of things. One, you're not seeing quite the same magnitude of change between our fourth quarter and first quarter, as we have in certain years. So, I think it's about a couple of 100 million bucks or so at the midpoint, which isn't a tremendous impact on the leverage but there is some leverage off here but fundamentally, it's just offset by other factors. And where we see the backlog coming through with the mix of deliveries that we expect in the first quarter that slightly higher margins than we've been tracking too. We didn't think we'd hit an inflection point in the fourth quarter with the low point of margin, which we have seen and we do expect, even though it's only up incrementally still up and hopefully we'll out in the rearview mirror for us. So those are really two main factors, just a mix of the business.

And I think the other thing is, we used to have a fairly large mix impact between the fourth quarter and first quarter between West Coast and somebody of the divisions. That's been moderated a bit, as we've been trying to rebalance the business and frankly, some of the margins in the other regions have come up over the years, quite nicely. We're just not seeing that same type of impact on the first quarter.

Michael Rehaut

Right. Okay. No that's helpful, Jeff. I appreciate that. I guess secondly on the SG&A guide. Looking forward to be about flattish or maybe up 10 bps year-over-year and that is against the revenue range that is flat-to-up 7%, I'm just kind of curious, let's, for argument sake, I know the midpoint is obviously maybe up 3%, 3.5% perhaps you just kind of thing relatively modest revenue growth, not a lot of operating leverage, but to the extent that we were to see the higher end of that range up 7%. Would it be fair to assume or expect some level of modest SG&A leverage on that scenario or kind of are there other factors that are kind of depressed that for fiscal 2024?

Jeffrey Mezger

Sure, yes. So for starters we always estimate the leverage impact on both the gross margin, the fixed costs included in the cost of sales and the impact on gross margin as well as our SG&A percentage. we always basically calculate those at the midpoint of the ranges. So as we have been on the top line, you should be incrementally better on those two metrics, which is the case.

As far as the uptick like as I mentioned in prepared remarks, we're in a different situation this year in January than we were last year. We had a -- we're really facing stiff headwinds of these mortgage rate increases. Not quite sure how the year was going to sort out. We did way better than we thought we were going to during the let's say February-March of last year and where the year ended up and we had a little different approach on expenses, you always get a little more tighter on expenses, you're a little slower in replacing openings, sometimes you freeze headcount regardless of what's happening with the underlying positions and this year we're in more of a growth-minded mindset.

We anticipate growth in community count, we want to go to business and continue to take share. We're really happy with what we've seen on cycle times, and our ability to take customers from order to close in a much shorter period of time. So we're just in a more optimistic environment internally as we look at the market and we look at the company. And then also, I mean, if you want to grow the business, you have to invest in the business, so we are putting a few more dollars into various areas in order to support that growth. So that's, I'd say at a high level, those are the drivers. When you really look at it. I mean, a lot of this year almost rounding, it's 40 basis points. $6 million or something midpoint, so it's not a, not a huge, huge issue.

Like I said, on a growth mindset, the community count going up or going to spend some money on, particularly, advertising and marketing supporting those new openings in our openings are up significantly as we plan on today. we were up about 50% over the prior year. So we have a lot of work to do and we want to support it with the right level of expense.

Operator

Thank you. And our next question comes from the line of Jay McCanless with Wedbush Securities. Please proceed with your question.

Jay McCanless

Hey, good afternoon, and thanks for taking my question. The first one I had, it seems like you have more tailwinds this year between the cycle time getting better and it sounds like incentives may be coming off a little bit, but could you talk about why you're not expecting any improvement in the full-year gross margin for 2024 versus 2023?

Jeffrey Mezger

Yes, we like I said, we forecasted based on current cost current conditions, and the current market, even though it's an improved market, we didn't look forward and say let's assume a large increase, a significant increase in margins in the third quarter and fourth quarter reflecting, for example, a reduction in concessions and customer incentives. We didn't want to take that type of an outlook into the forecast based on a relatively short period of time improvement, we do expect that improvement to happen. We do anticipate that we'll see that improving market condition, but at this point in time, we just wanted to be a little bit cautious. We've taken that in the future guidance numbers and leave it up to you guys. I mean, if you have a more bullish outlook on the space and you're ready to make that stand right now then you can adjust as you think appropriate. But right now we're forecasting based on what we're seeing in the backlog, what we're seeing in the current sales rates, the type of incentives that we need today to book our sales, and our visibility is only about 40% of the year right now to what is the backlog. So the spring selling season. It's also what I mean I think next quarter's call we'll be able to dial in on a lot of these metrics more precisely and hopefully, give you a little bit more detail on what's going on in the markets and what we talked a lot about the improvements that we're seeing continue as we get through the first quarter and the spring selling season.

Jay McCanless

My second question, could you talk about how many communities, you were able to raise prices during the quarter? And as part of that as kind of a two-parter. Was the price action in terms of competition from the other builders, was it as frenetic as what you saw in 2022 or in the fall of 2022, or was it a little more well-behaved this year?

Jeffrey Mezger

Rob?

Robert McGibney

So we didn't have as much pricing action during Q4, which is what we talked about it in Q3. I think we had 60%, 65% of our community's price increases because of mortgage rates going up, the way that they did that just wasn't in the cards. The market wasn't there. We work as we optimize each community and asset we aren't seeing the need to raise prices to slow down absorption. So, we, I think price increases, maybe it was about 25% of our communities, fairly small increases in the range of 5-K or 6-K during the quarter. Most of what we saw from other builders was incentive action, not necessarily price moves.

Operator

Thank you. And the next question comes from the line of Susan McCleary with Goldman Sachs. Please proceed with your question.

Susan McCleary

Thank you. Good afternoon everyone and thanks for squeezing. My first question is, can you talk a bit about the just the level of activity you're seeing in the design centers, anything that's changed there as we've seen the move-in rates?

Jeffrey Mezger

Susan, I'm not sure. I heard the earlier question, I heard you say design centers. I didn't hear the rest of it.

Susan McCleary

Yes, I'm sorry, I'm on a train, and so I don't, can you hear me better now?

Jeffrey Mezger

Yes.

Susan McCleary

Okay, yes. So just wondering if there was any change in the input of the trends that you were seeing in the design centers through the quarter and even into the first couple of weeks of this year, just given the move-in rates.

Jeffrey Mezger

Now they are very similar to what we saw last year. And frankly, the last several years of spending in the studio has been very consistent. It's moved to more what I'll call value items, more permanent things that's not necessarily finished, but room layouts and optional islands and things like that, less jacuzzis, and sort of those stuff, but the spend has been very consistent.

Susan McCleary

Okay. And then I guess any thoughts just as we think about this year's priorities for uses of cash and you talked about still having some availability on the buybacks in there and just how you're thinking about that relative to perhaps land spend and some of the other larger buckets.

Jeffrey Mezger

Well, as you can tell from our balance sheet, Susan, we are in a very strong position right now. And first and foremost, we're always going to be growing the company and that's where our first dollars would go, but what we saw as 2023 evolved there was a lot of idle cash, I'll call it a nice problem to have, with the cash that was needed to fuel our growth and position us and we were opportunistic and bought back a lot of, lot of our stock and we then somewhat programmatic about it for a few years now. We intend to continue to be active and the level will be determined based on all the factors Jeff rattled off in the prepared comments and how are we doing on land spend and how is our liquidity position, how do we look what's the stock price and that will influence our behavior, but we do intend to stay in the market and continue to buy stock.

Operator

And the next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Alex Barron

Thanks, guys. In the last couple of years with the rising rates. Lot of builders look more towards offering spec homes and I guess it was understandable, but now that rates are going down, are you guys seeing more demand for build-to-order, is there any way you can gauge or measure that?

Jeffrey Mezger

Well, Alex, we always felt heavily to build-to-order, and it was certainly the case in our deliveries in the fourth quarter as well. It's kind of interesting to me the debate rages on build-to-order versus spec. If you look at our delivery cadence and our revenue. One of the values of build-to-order with a backlog is consistency in your results. And if you look back over the last two years to three years, our deliveries quarter-after-quarter-after-quarter are in a very narrow range we've been 2,800 to 3,400. No, broader than that from Q1 to Q4 from 2021 to Q1 2023, so it speaks to the consistency that we've been able to produce. Irrespective of what people say about once a better selling approach and we still maintain that we get better margins, we have predictability, we can align our land development with our pace of sales and starts. And it's just a far better rhythm and a better way to run the business. My expectation as you look forward in 2024, we have some inventory to sell and we always will but we will tell heavily 70% built to order.

Alex Barron

Great. Best of luck.

Operator

Thank you. And the next question comes from the line of Joe Ahlersmeyer with Deutsche Bank. Please proceed with your question.

Joe Ahlersmeyer

Hey, thanks a lot everybody for the question. I'll actually just dispatch my questions into one here given the time. The first one on the percentage of your land that you own and put under control before land inflation. Can you just speak to maybe the development cost inflation that may have come in after that or will continue to come in after inflation too cold in that part of the process? And then two, if you could just maybe provide a little additional detail on this California tax credits surprise?

Jeffrey Mezger

Rob, you want to talk to the development costs. And then Jeff will talk about tax.

Robert McGibney

Sure, yes. On the development cost, the vintage of our lots, we've got the majority of our lots going back to Warner before. So our land basis is solid. We have seen development costs increase and there has been a lot of work, whether it's new-home communities being built or the government work that's going on spreading that trade-based pretty. And so there was some pretty significant increases, inflation, and the development cost. We think that that's settled down now but it's kind of settled at a higher baseline. Although we combine where we are, our current development costs on those communities plus our land basis. We're in really good shape for our portfolio of communities and how it all balances out.

Jeff Kaminski

Okay, yes, in relation to the tax credits, the energy credit, it was pretty specific it was on the homes that have been built in California really affected the 2023 energy credit relating to those homes. It came from a little bit of clarification from the IRS in early fourth quarter were they talked about, where they actually changed the standard for ENERGY star specific to California to a higher standard than we see in other states. So we are assuming the national standard for all of our operations including our California operations. But once this new guidance came out we had to make the adjustments to the rate or to the energy credits, which take the rate up. I think it was actually rounded up percent but it was less than 1% impact on the tax rate for the year.

Operator

Thank you. And our final question will come from the line from Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani

Thank you very much. Could you provide any regional commentary on how demand is holding up specifically on California as possible? Also, Phoenix and the Sunbelt markets. Thanks.

Jeffrey Mezger

Rob, you want to take.

Robert McGibney

Sure, yes. Since then we've seen rates come down really the pickup in demand has been pretty widespread across our portfolio. The West California has remained strong really they've done really well, don't have anybody that's a big concern as far as sales pace or demand out of the West Coast to California. Really across the whole portfolio, Texas, Florida, the demand pickup that we've seen since rates started coming down is really influence sales and a positive direction. So, no real outliers to speak of there and optimistic about sales here as we progress throughout Q1.

Jade Rahmani

Thank you. And as a follow-up, the Sunbelt market has really high multifamily supply right now. Any concerns about competition? With that. Are going into the spring selling season.

Jeffrey Mezger

Yes, let me take that, Jeff.

Jeff Kaminski

Yes, yes go. Yes. I mean, as far as you know, there are a lot of multifamily completions coming online. We're seeing the starts of those multi-family units come down, I mean they are a competitor to some extent and we're primarily focused on the resale, That's always our biggest competitor. Resales have been down somewhat, it's created an opportunity for us for new homes, especially on our personalized homes and we have to stay connected to what's going on with rents because that's an alternative, but we don't really see that as our primary competitor. We think people say they want the American dream. They want to own a home and we're trying to make those homes at affordable as we can for them to get them into a new one.

Operator

And ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines.