Q4 2023 Meritage Homes Corp Earnings Call

Participants

Emily Tadano; Vice President of IR and ESG; Meritage Homes Corporation

John Lovallo; Analyst; UBS Investment Bank

Stephen Kim; Analyst; Evercore ISI Institutional Equities

Michael Rehaut; Analyst; JPMorgan Chase & Co

Alan Ratner; Analyst; Zelman & Associates LLC

Carl Reichardt; Analyst; BTIG, LLC

Susan Maklari; Analyst; Goldman Sachs Group, Inc.

Presentation

Operator

Hello, and welcome to the Meritage Homes Fourth Quarter 2023 analyst call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Emily Tadano, VP of Investor Relations and ESG. Please go ahead.

Emily Tadano

Thank you so much. Good morning and welcome to our analyst call to discuss our fourth quarter 2023 results. We issued the press release yesterday after the market closed. You can find it along with the slides. We'll refer to during this call on our website at investors dot meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage.
Please refer to slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. And those and any other projections represent the current opinions of management which are subject to change at any time, and we assume no obligation to update them.
Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors which we have identified and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2022 Annual Report on Form 10-K and most recent 10-Q.
We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures.
With us today to discuss our results are Steve Hilton, Executive Chairman, Philippe, Lord CYO., and here through best Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour and a replay will be available on our website later today.
I'll now turn it over to Mr. Hilton sees.

Secondarily, while preserving and was using our call, I'll start with a brief discussion covering market trends and provide an overview of our recent company achievements, fleet will cover how our strategy drove our results and highlights of our operational performance. Spielo will probably provide a financial overview of the fourth quarter and 2024 for forward-looking guidance.
Home-buying demand this quarter was healthy as rate through three below 7% in December. As we previously discussed, two of the largest population cohorts, millennials and recently Gen Z are having life events leading to increased levels of need-based housing that currently cannot be met by the constrained resale home supply in the market.
These macro conditions are shifting buyer demand for move-in ready inventory into the new home space, giving us a competitive advantage with these consumer segments. Our Q4 2023 sales orders increased 60% over last year's fourth quarter as we push through the tougher months of October and November and capitalized on market conditions in December when interest rates loosened.
We delivered 3,951 homes in the fourth quarter of 2023, our second highest quarterly closings and achieved a record backlog conversion of 110%, which led to home closing revenue of $1.6 billion. Home-closing gross margin for the quarter was 25.2%, which can be combined with SG&A of 10.7% resulted in diluted EPS of $5.38.
We increased our book value per share, 17% year over year to $126.61 at December 31, 2023 and generated a return on equity of 17% for the full year 2023. Even with our higher ending book value, our price to book increased 56% year over year from 0.9 times to 1.4 times, reflecting impressive growth in shareholder value.
As it's well documented, mortgage rates have moderated recently and the general market expectation is for rates to either hold steady and move further down as the economy stabilize into the balance of 2024. We believe this will be making plus will make housing more affordable and continuing to give people confidence that now is the right time to buy a home.
Now on to slide 4, our recent milestones. We continue to focus on our D&I efforts and the feedback we gathered from our employees. We launched our first three employee resource groups this past quarter, starting with a focus on multicultural women and family structures.
We hope that over time, these employee-led groups will create inclusive and collaborative environments within the greater Meritage culture for additional resource groups. While we pursue these D&I initiatives for our team members is also humbling to see these efforts are recognized externally as well.
And in the fourth quarter, we joined the list of the U.S. News & World Report's best companies to work for and the Sanex Business Journal's Best Places to Work in order for us in our hometown. Given our long-standing tradition to make a company-wide impact from philanthropic causes, we continue to work with two specific nonprofits for a 2nd year in a row.
During the quarter, we packed over 200,000 meals for No Child hungry and completed our tree planting program with Arbor Day Foundation into cap off the year, we received the Arizona housing funds Partner of the Year Award, which is focused on addressing the homelessness crisis in Arizona.
Lastly, in addition, during a spot on Newsweek's list of America's greenest companies for 2024, we are excited to move into our newly built lead certified at corporate headquarters in Scottsdale this quarter.
With that, I'll now turn it over to Phillippe.

Thank you, Steve. I wanted to first thank our mariners team for achieving yet another great year, leading to our market share gains. Their hard work and dedication continue to change the lives of our customers and generate value for our shareholders.
Turning to slide 5, our sales orders for the fourth quarter were 2,892 homes, up 60% year over year due to a continuation of a stable housing environment. During the quarter, we leaned into our spec building strategy. And through the slower months of October November, we held true to our plan of restarting enough inventory to meet expected demand.
This allowed us to capture volume in the quarter and replenished our supply for the upcoming spring selling season. 88% of the order volume in the fourth quarter of 2023 came from entry-level homes, which has comprise over 80% of total sales orders since the second half of 2021 ASP. on orders this quarter of $415,000 was up 6% from prior year.
The elevated quarterly cancellation rate of 39% in the fourth quarter of 2022 impacted both volume and ASP last year as canceled homes with higher sales prices reduced the average sales price reported for Q4 2023 cancellation rate was 13%, which is roughly in line with our historical averages for Q4 2023.
Average absorption pace of 3.6 per month improved from 2.2 in the prior year. We experienced normal seasonality this quarter with an expected slowdown in pace around the holidays. Despite all the uncertainty and twists and turns in 2023, we are proud to report that we still achieved our targeted average monthly pace of 4.0 net sales per month in 2023, which is our goal with our mix shift mostly comprised of affordable products.
While the last four years having followed this historical seasonality trend, it feels like we are starting to return to a more traditional sales pattern in order to attain our targeted 4.8 sales pace. We adjusted pricing and made use of our full suite of incentives as needed on a community by community and home by home basis as a builder, particularly in affordability, we have always offered a range of incentives to buyers.
Historically, our consumers have opted to use incentives for closing costs, option upgrades, lot premiums, price concession or a financing incentive since early 2022 rate locks and buy-downs were the primary incentive choice as they were the most efficient way to solve for a payment rates have pulled back into the sixes.
We are seeing customers once again pick the incentive financing or otherwise that best fits their needs for pullback in rate related incentive utilization has allowed us to offer less costly alternative and has given us the dry powder to increase pricing where the market has allowed it in the fourth quarter of 2023, our average community count of 271 was essentially flat to prior year and down 44% sequentially compared to the third quarter of 2023. We opened 28 new communities this quarter and 111 new communities during the year.
Turning over 41% of our communities since the start of the year. We remain focused on bringing new communities online in 2024 and growing our total community count strength of homebuying demand in 2023 exceeded industry expectations, and we closed out more communities throughout the year than we originally forecasted.
We still anticipate further choppiness some small ups and downs over the next few quarters, but expect more meaningful growth in the second half of 2024 as we bring our existing land underdevelopment online, we own all the lots we need in order to grow our community count mid to high single digits year over year by the end of 2024. And almost all of what we need to grow our community count more meaningfully in 2025.
Now moving to Slide 6. During the fourth quarter of 2023, we continued to achieve a balanced performance across our geographic footprint between East Central and West region. All of the regions achieved year-over-year growth in volume and sales pace and saw an uptick in performance during the quarter into December.
The central region had the highest regional average absorption pace of 4.1 per month compared to 2.6 last year, double digit growth in average community count, combined with a robust supply of move-in ready homes allowed the central region to capture market share and grow as Fourth Quarter 2023 order volume by 70% to 72% year over year for each region achieved an average absorption pace of 3.5 per month this quarter compared to 2.5 in the prior year.
Given some of the tightest levels available existing homes for sale in these markets, we experienced the lowest cancellation rate in the with the strong start pace in Q4. The East entered the new year with the highest volume of per-store available move-in ready inventory, which we believe positions us to gain market share in spring selling season.
The West region had an average absorption pace of 3.0 per month, which was 88% higher than prior year fourth quarter of 1.6 as market conditions and buyer sentiment improved throughout the year, notably in our most challenged market challenged markets in 2022, including Arizona and Colorado as a testament to our spec building strategy.
This quarter was also the fourth quarter, one of our newer markets, Salt Lake City had available spec inventory to record both first sale and closing. We've made a concerted effort over the last year to realign our geographic footprint, more evenly across our markets with an increased focus on our community count in the East region, which is comprised of Florida, Georgia, Tennessee and the Carolinas.
These high growth but lower ASP market should generate a greater share of our business. Additionally, land acquisitions for the past several years in all of our markets has been focused on a lower price point to ensure sustained affordability for our product.
The combination of the mix shift in both location and product type will be visible in our 2024 results and will be reflected in our ASP. returning closer to the 400,000 level, which has been our top long-term objective. While this shift will create some pressure on our leverage in the short term, we believe this is the right strategy for Meritage, given the demographics we are targeting, there is a lack of supply of homes at this price point, which should drive higher absorption pace and elevated demand both of which will translate into improved long-term returns.
Now turning to slide 7, with over a third of our closings. This quarter also saw intra-quarter. We achieved a backlog conversion rate of 110%, which is once again a company record and notably higher than our ongoing target of 80% plus streamline operations enable us to build homes more efficiently and achieve one of the quickest cycle times in an industry.
Historically, it has taken us four to five months on average to build a home, a lower cycle times remain roughly the same from Q3 to Q4 at about 140 calendar days. It improved about six to seven weeks on a year-over-year basis and is nearing our long-term run rate goals. Given our strategy as the production environment continues to stabilize, we will reassess our backlog conversion targets.
With the solid demand we're experiencing. We continue to accelerate starts to replenish and build up our stack to ensure sufficient move-in ready inventory for the 2024 spring selling season. Our quarterly starts of approximately 4,000 homes in the fourth quarter were up from about 2000 in the prior year and are consistent with our quarterly cadence for most of 2023.
As part of our business model, we aligned our starts with our expected next quarter sales pace. Our spec strategy gives us the flexibility to ramp up and a strong demand environment for pullback starts any uncertain environment as we did in the second half of 2022. So we do not overbuild any road margins or compromise customer expectations.
We had approximately 5,009 our spec homes in inventory as of December 31, 2023, up 20% from rating 1,009 respect as of December 31st, 2022. This represented 22 specs per community this quarter which equates to six months of supply on the ground. We are intentionally at the upper end of our optimal level of four to six months supply of spec inventory as we prepare for the spring selling season.
Q1 2020 for starts pace will be dictated by the demand we see over the upcoming weeks of our home closings this quarter 92% came from previously started inventory, up from 79% in the prior year. 19% of total specs were completed as of December 31, 2023. Our targeted run rate for completed specs is approximately one-third. And as a result of elevated demand today, we are still working to achieve that goal.
Our ending backlog as of December 31, 2023 totaled approximately 2,500 homes, down from about 3,300 in the prior year as well as our cycle times drop and our intra-quarter sales to closing percentage increase our total backlog, our total backlog of 2,500 plus move-in ready inventory of nearly 5,900 units provides a universe of approximately 8,400 homes more than two supply as we enter the 2024 spring selling season.
I will now turn it over to Hilla to walk through additional analysis on our financial results. Hilla.

Thank you, Philippe. Let's turn to slide 8 and cover our Q4 financial results in more detail. Fourth quarter 2023 home closing revenue was $1.6 billion, reflecting 13% lower home closing volumes and 5% lower ASPs compared to prior year. The decrease in ASPN. closings was due to more costly financing incentives and geographic mix.
Home-closing gross margin was 25.2% in the fourth quarter of both periods. This year's home-closing gross margin benefited from improved cycle time and lower lumber costs, which were partially offset by increased financing incentives and higher log costs.
Although full year direct cost per square foot in 2023 were slightly higher than 2022 costs declined in the second, third and fourth quarters ending this year lower than last year. About half of these savings were derived from lower lumber and the balance from our concentrated efforts to rebuild all costs with our trade.
Looking forward to 2024, as Philippe mentioned, there has been a pullback in customer utilization of financing incentives this quarter and as rates continue to decline, we expect this trend will continue. We expect to harvest savings from lower incentive costs as home from recent sales start to flow through our financials.
In a quarter or two. However, homes in our newer communities also have higher lot costs from out of the elevated land development spend over the past two to three years, which is muting the pickup from lower financing incentives. And as recovering the topic of home financing, we wanted to share this quarter's customer credit metrics.
As expected, our buyer profile remain relatively consistent with our historical averages. Our psycho scores near 740 DTI. is around 41, which is slightly more elevated than what we have seen historically, although it's in line with our mix shift to primarily our entry level.
At this time, LTVs remained in the mid 80s and almost all of the buyers who utilize our mortgage company, which is around 80% to 85% received some type of financing incentive. Fourth quarter 2023 concluding margin included $3.2 million of terminated land deal walk-away charges compared to $4.2 million in the prior year prior year.
Fourth quarter home-closing gross margin also included nonrecurring charges of $10.9 million in warranty adjustments related to two specific cases, which were partially offset by $5.4 million in retroactive vendor rebates. There were no similar items in the fourth quarter of 2023, excluding other nonrecurring items, adjusted home-closing margin was 25.4% and 25.7% for Q4 2023 and 2022, respectively.
As we frequently shared our long-term target of at least 22%. Gross margin is about 200 bps above our historical average. We continue to strengthen our relationships with national vendors, streamline operations, and we do cycle times we are evaluating how the pieces of the strategy come together in a stable environment, and we'll be reassessing our 22% goal has any opportunity for further improvement.
Sg&a in the fourth quarter of 2023 was 10.7% of home closing revenue compared to 8.4% in the fourth quarter of 2022. The 230 bed deterioration in leverage was primarily a result of increased performance-based compensation, higher commission rates and lower home closing revenue leverage. We're actively working to reduce our SG&A and expect to see an improvement to 10% or better in 2024.
Our longer-term SG&A target is 9.5% as our volumes are expected to grow over the next several years. The fourth quarter's effective income tax rate was 23.2% this year compared to 23.3% in 2022. The rate in both periods include energy tax credits on qualifying homes under the Internal revenues, inflation Reduction Act, all in lower home closing revenue and greater overhead costs led to a 24% year-over-year decline in fourth quarter 2023 diluted EPS to $5.38.
As for full year 2023 results compared to 2022, orders were up 12%, while closings were down 1% and our home closing revenue decreased 2% to $6.1 billion. We had a 380 bps decline in home closing gross margin to 24.8%, primarily due to more costly incentives, increased lot costs and slightly higher full year direct costs. Sg&a as a percentage of home closing revenue was 10.2% in 2023 versus 8.3% in 2022 as a result of higher commissions and marketing costs, reflecting the different sales environment, increased performance based compensation and insurance spend and a greater investment in technology.
Net earnings declined 26% to $738.7 million as we turn to slide 9, we had a disciplined approach to balance sheet management. We had nothing drawn on our credit facility, cash of $921 million and net debt to cap of 1.9% as of December 31, 2023.
Our net debt to cap remains well below our max ceiling, which is in the mid 20%. We also generated $355.6 million of operating cash flow and $59.7 million in total cash flows for full year 2023. Our healthy balance sheet allows us to pursue a comprehensive capital allocation plan that's focused on long-term shareholder value expansion through both growth in the business and returning capital to shareholders, while our goal is to consistently pay out dividends and repurchase stock on the internal front, when the economy is strong and growing, we look to allocate more cash to land acquisitions and development.
And when there's volatility or uncertainty in the markets, we pull back some of our spend and hold a higher cash flow. We strategically deploy capital across four categories investments in land, share repurchases, cash dividends and periodically debt redemption.
In the fourth quarter of 2023, we accelerated our investments in internal growth with $654 million spent on land acquisition and development, which was up 86% from the prior year and our highest ever quarterly spend. We increased land spend throughout the year as market conditions improved and demonstrated resiliency in demand spending a total of $1.9 billion on land acquisition and development in 2023.
We expect full year 2020 for land spend to increase to two to $2.5 billion as we develop our own land and ramp up our life portfolio for community count growth. This quarter, we bought back nearly 25,000 shares of common stock or 0.1% of our shares outstanding at the beginning of the quarter for $4.1 million, even with the stock price run-up. This brings our full year 2023 repurchases to $59 million, buying back approximately 44 hundred and 38,000 shares or 1.2% of shares outstanding at the beginning of the year.
Our approach to buybacks has been consistent since we started the buyback program about five years ago. Our first objective is to neutralize annual dilution from new equity issuances, which can occur either pro rata each quarter or faster or slower based on market conditions.
Second, we gauge the market for other share repurchase opportunities throughout the year. While we do have annual targets related to repurchases, that amount and timing each quarter may vary based on what we're seeing and what we're seeing in the market over the past five years, we repurchased 10% of our stock cumulatively $3.7 million shares on average, 3% below our stock price totaling $315 million we will continue this buyback strategy in 2024 and beyond. $185 million remained available under authorization program at December 31, 2023.
This quarter, we spent $9.8 million on our quarterly cash dividend payment of $0.27 per share. We initiated cash dividends at the beginning of 2023, totaling $39.5 million returned to shareholders for the year. In the coming weeks, we will be resetting the 2024 quarterly cash dividend amount, and we'll be sharing that externally once approved and from time to time, we may pay down all or portions of our public debt as we did in the third quarter of this year for full year 2023, we strategically deployed a total of $2.2 billion in capital spend activities comprised of $1.9 billion in land spend $150 million for a partial debt redemption, $59 million on share repurchases and almost $40 million of cash dividends. This compares to $1.5 billion in land spend and $109 million in share repurchases in fiscal 2022.
On to slide 10, in the fourth quarter of 2023, we ramped up our land approvals by putting about 7,600 net new lots under control to position us for future community count growth. As a reminder, in the fourth quarter of 2022 we intentionally pulled back on new land acquisitions to assess how the markets were adjusting to the elevated rate environment.
During that time, we didn't place any new lots under controlled and terminated land deals of roughly 3,700 lots that no longer met our underwriting standards this quarter was the first quarter since early 2022, where we meaningfully put more lots under control than home starts.
As of December 31, 2023, we owned or controlled a total of about 64,300 lots, equating to a 4.6 year supply, which compared to approximately 63,200 total lots for a 4.5 year supply as of December 31st, 2022. As a reminder, our target is four to five year supply of lots. New lots added this quarter represent 43 future communities all for entry-level product in our pipeline.
We also have another approximately 28,000 lots were due. Diligence is still ongoing, about 72% of our total lot inventory at December 31, 2023 was owned and 28% was optioned similar to the prior year, where we had a 73% owned inventory and a 27% owned lot position.
I wanted to take a moment to reiterate that our land financing strategy has remained consistent for the past decade or so. We have always been focused on balancing strong returns while ensuring we have sufficient liquidity to fund future land spend. You've heard us noted in the past that we do not have an artificial target for the percentage of optioned land.
While that's still true, we wanted to clarify that we're not opposed to land banking. We just haven't had the need to pull that lever over the past four years as we had excess liquidity. As a reminder, in the early two thousands, about 90% of our assets were off books and we were one of the most active builders in the land banking space. We still have very deep land banking relationships that we continue to cultivate, and we'll activate them as needed as we look into the next couple of years and expect a period of high growth, we don't expect to finance our acquisition and development with our own capitals.
And we plan to leverage these relationships with our land bankers to ensure we grow responsibly as we structure our long-term capital plan of balancing growth, shareholder returns and key metrics required to keep our investment grade status. We're comfortable that we have a methodical path to meet our cash needs without taking undue risk.
And finally, I'll direct you to slide 11 for our guidance. We believe our nearly 59 hundred specs give us dry powder for the spring selling season and will allow us to capitalize on improving consumer sentiment from the pullback in mortgage rates, our targeted focus on the affordable entry-level segment and more balanced shift in our geographic footprint to our newer markets in the southern US will result in a reduction in ASP. in 2024 into the low 400, which we believe is the right long-term trajectory for our business for the long. For the full year 2024, we are projecting total closings to be between 14,000 units and 15,000 units, including revenue of $5.8 billion to $6.2 billion from closing gross margin around 23% to 23.5%, SG&A of 10%, which will spike in the first quarter from certain accelerated compensation arrangements and lower revenue leveraged in the subsequent quarters, an effective tax rate of about 22.5% to 23% and diluted EPS in the range of $16.50 to $18.10.
As for Q1 2024, we are projecting total closings to be between 3,032 hundred units. Some closed closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 23.5% to 24% and an effective tax rate of about 22.5% to 23% and diluted EPS in the range of $3.30 to $3.60. The first quarter EPS guidance is inclusive of about $70 million of costs to unwind to rate locks, which will be incurred through our Financial Services segment.
With that, I'll turn it over to Philippe.

Thank you. With January in the books. We are off to a strong start and we are feeling positive about the spring selling season. We had a nationwide sales event in January, and it feels like potential homebuyers are excited about the interest environment and are comfortable pivoting to the new home space where inventory is more plentiful. We will report back on the spring selling season.
Our next call in April. To summarize on slide 12, we believe our available available spec inventory and anticipate growth in community count in the second half of the year, coupled with our focus on pace over price position us favorably in the industry to grow our market share while still earning outsized returns. We have remained true to our strategy supporting our spec building model and disciplined land purchases.
And with all the flexibility we have incorporated, we have specific levers we can pull to maximize risk, minimize risk during uncertain times and quickly maximize opportunities during high-growth periods. Our capital allocation strategy is disciplined and likewise flexible. So we can toggle between cash priorities with a senior purpose of long-term shareholder value creation.
With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Question and Answer Session

Operator

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. We ask you please ask one question and one follow-up then return to the queue. Once again, that's star one to be placed in the question queue, you may press star two if you'd like to remove your question from the queue. One moment, please while we poll for questions and please ask one question and one follow-up.
Truman Patterson, Wolfe Research.

Hey, good morning, everyone. Thanks for taking my questions. On the first, just on your 24 gross margin guide on, I think it implies down about 150 bps and also second quarter through the fourth quarter being below that of the first quarter. I'm just hoping you can help us think through what's embedded in that guidance, you know, land inflation stick and brick inflation as well as kind of the core pricing that's assumed in that? Are you assuming pricing is just stable as of January?

I think thanks for the question. So the numbers that we've guided, you can see they're higher in Q1 and then they pull back a little bit for the full year. That's as new land is going to be coming online and the new community openings, which are just coming online at a higher basis. Obviously, as our land development costs over the last couple of years are starting to flow through the financials.
We didn't assume a pullback in incentives even though we're starting to see some it's not something that we can we can telegraph to us quite yet. The numbers that you're seeing in Q1 is what's currently in our backlog obviously with 110% backlog conversion.
And in the current quarter, we pretty much have a good handle on what's going to convert in Q1, but we're not modeling additional pullback in incentives or pricing power for the back half of the year. And the assumption on direct is going to be relatively steady. We are seeing some increases in some categories that we think we have offsets and others that can keep that relatively neutral.

Okay, great. Thanks for that. And then I missed some of the spec commentary earlier on, but your community count is sitting around 270 kind of today, some, you know, and then you mentioned last call that kind of growing sequentially through the next four or five quarters or so. Is that how we should also think about your active spec count and orders, perhaps maybe a little bit more subdued than normal seasonality in the first half? Of the year and then a little better and maybe the normal seasonality in the back half of the year?

Yes. I think that I mean, I think that's right. We're carrying more specs per store right now because we always ramp up the amount of specs we come into the spring selling season because we expect to sell more houses during spring than we do in the back half of the year, and then we'll carry less back towards the back half of the year when we expect expect seasonality.

Operator

But obviously, in the back half of the year, you're going to see our community count start to grow. So you'll have less support per community, but you'll have more communities.

Perfect. All right. Well, thank you. And good luck in the coming year.

Thank you for being here.

Emily Tadano

Thank you.

Operator

John Lovallo, UBS.

John Lovallo

Good morning, guys. Thanks for taking my question as well. First one is it seems like at the midpoint, the SG&A dollars in 2024 are down a bit. I mean revenues down ever. So slightly. I think I guess the question is if we think about the components, how are you thinking about sort of G&A? I mean, are you thinking about that to be sort of flattish year over year? And then maybe the commission bucket, what are your assumptions within there?

Yes. So we have commission and selling costs as one category. And obviously, G&A is another. So you're definitely going to see some pullback in the commission and selling costs, media a tick on the commission. But the big chunk of that is going to be from from marketing and maybe some extra space that we're doing not so much the pure commission rate, but extra programs that we were doing to spur sales when the market was a little bit less strong on when interest rates ticked up in the middle of 2023.
So there's a piece of the savings that's going to be coming from the selling costs component on the G&A, I think you're going to see on that number coming down as well. It's a combination of these three kind of big areas. The first is the performance based compensation that a lot of yen plans have been restructured to better align what we expect to see in 2024 and beyond.
There's a focus and on all discretionary spend. So you're going to see that have a different, a different level of control. Obviously, with three years of COVID, 2023 was the year where we did a lot of travel and a lot of meetings, and it's something that's going to be pared back slightly.
And then on the last category is going to be on the technology spend so you're going to see all of those categories kind of on tick back in line to the percentage that they should be as a function of total revenue. So we're comfortable coming back to that 10% threshold, which is what we said is our long-term threshold.
And we're still comfortable that we're even putting out the number that beyond as our units start to materially grow into the future years. We think that we can bring that down below the 10% to 9.5% is a longer-term target.

John Lovallo

That's helpful color. Thanks. Hilla. And then on the cash flow, you guys generated about $356 million in cash flow from ops in 2023. I mean that probably will be another good year this year. I'm just I guess curious on what your thoughts are around cash flow and maybe what would it take? And I appreciate the detail you gave on capital allocation, but what would it take for you guys to become a little bit more aggressive, if you will? In terms of the buyback program?

I mean, I think our first priority. We are growing and we are growing our spend from $1.9 billion to $2.5 billion. So obviously, we want to maintain what we're doing on the share repurchases. We're going to be putting out numbers for the dividend to stay. Stay tuned for that. And we're growing our land development and acquisition spend in 2024 and beyond that when there's excess cash, we always look at the market for opportunistic times to jump in and buy incremental shares there. I think that's definitely something that we'll be looking for.

Yes, I think what's happening to our stockprice today would make us interested in buying some more shares right now.

John Lovallo

Yes, it makes sense, guys. Appreciate that. Thank you.

Operator

Our next question is coming from Stephen Kim from Evercore ISI. Your line is now live.

Stephen Kim

Yes, thanks a lot, guys. Appreciate all the color as usual. I found it interesting that you did you're not including a pullback in incentives or pricing power. Do you think that you're seeing some signs that might allow you to do that? Was wondering if you could describe for us if there's any difference between what you're seeing in the market, let's say this is like, I guess, February now versus what you were seeing in the market last year.
I think and particularly with respect to your customers coming out about sort of a high mortgage rate environment and kind of like what they were coming out of late 22, if you could sort of compare and contrast what you're feeling in the market today versus, let's say, a year ago?

It's it's two different environments from last year we were coming out of a huge spike in rates, and it was the first time rates had spiked in a long time. So there was definitely a buyer's where we're really not accustomed to that so I think this time around as rates elevated in the fourth quarter on fires, we're much more accustomed to it.
And as we roll into the spring right now, it doesn't feel like we're convincing buyers that it's a good time to buy. They already feel like it's a good time to buy. It's just about connecting them with the right home. So I would say buyer psychology feels a little bit different from I would also just say nothing's happening right now in January that we didn't expect on during the fourth quarter when rates were elevated.
We were still selling houses and it just felt seasonal to us, frankly, on in an elevated rate environment. And we knew we had the tools to help people get into the payments through our rate buydowns. So January is off to a great start. We kind of expected it to be off to a great start.
And I think buyers are just at this point accustomed to a higher rate environment. And they're also accustomed to the fact that they're not going to find product on the existing home market and they're coming to the new home, new home communities to BiDil.

Stephen Kim

That's encouraging. I appreciate that. And I think at one point when you met up over the last couple of months, you had talked about the leverage you get from an incremental unit. I think what you talked about, you know, absorption is going from, let's say, four if they were to go to five and a community participant, let's say you were suggesting that you could have the benefit you get to sort of leveraging the overhead overhead was very significant.
I was wondering if you could just sort of remind us again what the sensitivity or the incremental margin would be for you guys on your absorption, let's say, moves from four to five.

And so I don't have the math at my fingertips for four to five and the number of communities that we have, obviously. But typically the fixed component of our overhead between the first quarter and the last quarter of the year, we get an extra 100 bps of leverage. That's how impactful selling and closing the incremental homes becomes for us.
So that's why your events like our flash sale that we just had a big nationwide sale in January are getting those incremental sales, even if they come with a little bit more of an incentive end up yielding better total margins because the incremental volumes on compensate for that.
#So there's there's a fairly material portion of our fixed overhead that's a function of our reported gross margin that we can leverage better on higher volumes. That's where you really saw us on not take our foot as the gas in October and November, even though rates were high, we had a pretty darn good volume.
The 3.6 for the quarter was probably better than what we had expected with the interest rate environment doing what it did the first two months of Q4, obviously pulled back in December, but we continue to push on the sales because we knew that those incremental closings coming both in Q4 and Q1 we're going to help us better leverage total margin for the full year.

Stephen Kim

Just to amplify our mindset around pace versus price has changed. We used to think how do we balance those two out now it's pace and pace and price if we can get it.

So we're always focused on the incremental pace we're going to drive volume. The market share in our business, our manufacturing operating model. And then we when we can get price and margin to we'll take it. We've been operating in three years of unprecedented conditions, and we've been able to get both. But at the end of the day, it's not balancing the two out it's getting paid. And then if we can get margin on top of pace, we're going to get it.

Operator

Michael Rehaut, JPMorgan.

Michael Rehaut

Good morning, everyone. So I just wanted to clarify Hilla at the end of your comments, you kind of threw out that in the first quarter, expect $70 million of a hit in your financial services from.

And finally, on Slide 77. Our seven stock at the end of oh seven. Sorry, Mr.

Michael Rehaut

I'm sorry.

You said two seven. It was just seven. The number is six seven eight seven.

Michael Rehaut

Okay. Thank you so that and that actually kind of pushes the sows that not much material.
Then I guess the question then is when I'm doing the math on fiscal 24 and I take the midpoint of your revenue and home closing gross margin on an SG&A, I'm getting right at the high end of your EPS range. And so assuming my math is correct me if it's not least, please tell me, but and what am I perhaps missing there if there's anything below the line or if there's just an element of conservatism?
I'd love to get your thoughts on that.

Yes, there's nothing else below the line outside of that. That loan loan charge was taken in the first quarter on and unwinding some rate locks. I think your math is right. We can definitely take a deeper dive on on on the modeling offline. But yes, the I think your math is right, just making sure that universe. We've And I mentioned in the prepared remarks that you're going to see some shift in geography into our lower ASP. markets, and that's driving part of the pull back in and EPS temporarily as we ramp up.
We think that these are the high growth markets that we want to be in in affordable price. That's the most attractive to today's consumer. But in the meantime, as we shift to the lower ASP. before the impact of the higher volume kicks in with the community count growth, there's going to be on a temporary dip in 2024.

Michael Rehaut

Okay. No, that that's helpful. And then I guess just as a follow up, Tom, you're kind of looking past 24 obviously, I understand we might be reluctant here, but number one, the ASP. shift that we've described into the low four hundreds, it seems like you were stating that you do the math on the closings and the revenue to be around for 10 plus or minus. Just want to make sure we're thinking about that. That shift would primarily or predominantly occur in 24 and there wouldn't be any incremental spillover in 25.
And also, you know, at the beginning of the call, you kind of said that you expect community count growth to meaningfully accelerate in 25?
Yes. Just in terms of the right way to think about that, if you're growing year end mid to high single digits, this meaningfully accelerate, I assume that would be some type of low double digit rate from 24 as already mid to high. Just want to make sure I'm thinking about those parameters correctly.

Yes. Again, I think that that's an appropriate modeling variable. I think that the expectation that we're making, the majority of the shifts geographically in 2024 is probably right hard to predict what every community in a big portfolio is going to do. But the big shift in ASP. will be in 2024. So there's not like a sequential one to come after that. I think that's a fair that's a fair assumption.
And then on and then, yes, you should definitely expect to see something greater and community count growth in 2025 versus 2024. I don't know that we're putting a number or percentage around it, but more than 24 in a percentage basis.

Yes, I mean, all, obviously, we bought a tremendous amount of land this year and a lot of that land starts to come on in 2025.

Michael Rehaut

Okay. One last quick clarification. If I could squeeze it in in answer to an earlier question, first quarter gross margins are assuming incentive levels. So is it fair to say like roughly current in-sell incentive levels just given the high turnover and spec model, I'm thinking, you know, most recently December January, and you talked about that assumption, you know, as 24 progresses that you're kind of assuming current incentive levels, meaning in the last couple of months.
And I just wanted to make sure that I understood that right relative to the higher incentive levels that maybe you and the industry were seeing in October November.

You got that right? Yes, we're modeling incentives more that exists in our current backlog that were mostly December sales. And as we've rolled into January.

Although those are more elevated than historical averages, it's definitely less than what we've experienced in a spike in rates. There's definitely going to pull back on on rate lock usage, but we're still running north of historical averages for it.

Michael Rehaut

Perfect. Thanks so much.

Operator

Alan Ratner, Zelman & Associates.

Alan Ratner

Hey, guys. Good morning. Thanks. As always for all the great detail so far. On the first question, we've heard from a few builders putting out kind of intermediate-term growth targets, and I think 5% to 10% seems to be that the consensus that everybody's agreed upon in the industry. If I look at your at least your guide for 24, it seems like you're expecting growth in a similar range on that, at least from a volume perspective, you're maybe towards the lower end of that.
But if I look at your spec start pace the last few quarters, you've been starting roughly 4,000 homes a quarter annualizing out to 16 ish thousand units and which is obviously above what you're guiding for in 24 from a closing perspective.
So yes, I thought I heard you kind of say you're comfortable with your spec supply and you kind of aim to have a higher supply heading into the selling season, which makes sense. But is there something that's giving you pause on not kind of maintaining 4,000 quarterly start pace based on kind of what you're seeing in the markets or.
Yes, any color you can give there would be helpful.

Now it's not there's nothing about the pace of specs. In fact, we'll probably ramp up our spec starts pace in the back half of this year because what community count growth is just the absorption pace that we're assuming and throughout the balance of the year on around four a month is really driving the total guide for closings for the year in order to increase that, we would have to assume a higher absorption pace than what we're currently getting in the market.
So it's not about we would have to sell every spec. We started throughout the entire year for the most part to get to that number. And it's more so the guidance being driven by the absorption pace on range that we've set for our forecasts that are in it.

There's nothing magic about 4,000, right? It's just a number that makes sense at our current community count level, as we've mentioned, we're going to be ramping up community count towards the back half of the year. So we're looking to keep that four to six, our target of specs per store are 46 months' supply of targeted specs per store as we increase our store count that that number will go up with the community count.

Alan Ratner

Got it. Okay. That's helpful. And I appreciate that. And then the second question, your ROEs got as high as 30% during the pandemic craze. And if I look at your guidance for 24, it implies some further compression down to something more in the low 10s, which and it's probably actually going to be maybe a little bit below the industry average.
Yes, I'll just kind of think through the components of that, your inventory turnover has kind of stalled a little bit here as you've built up some spec supply. Obviously, the cash is building up on the balance sheet, which I think you talked a little bit about here and the strategy there. But I'm just curious if you guys have an intermediate longer-term target on ROE and what else can be done to drive that up in, assuming the current market conditions stay kind of where they are currently for the foreseeable future.

I mean, it's it's really going to be lower this year because we're ramping up our business or putting a lot of land on our books and that land doesn't come to the market until 2025. So that's really the drag on certainly as the earnings go up and our growth goes up in 2025 and beyond.
And we think we can get back get that back about 20% and long term. So it's really a point in time because we didn't buy land the back half of the year. And then we've ramped up our land spend. We spent almost $2 billion this year and a lot of those those communities aren't going to come to the market until back half of this year and 2025.

It can't you have to look at it in two different buckets. The first is a return on inventory like with inventory and not super quick. We have 110% conversion on our backlog. That's actually accelerating what Philippe mentioned, which is we're in the growth mode. Obviously, as you're looking to increase community count and your spending, you know, quite a bit more.
We were $1.5 billion last year in 2022 on land and development spend. And we're guiding to 2 to 2.5, I mean, just 24 months later. So that increase is definitely going to be a drag on return on inventory. But as those units come to market, there's going to be a large acceleration on the return part of the equity.
And I think that the combination of our share repurchases, which is obviously one way to impact the E on return on equity and now the dividend. Hopefully, the combination of those two are going to end up, resulting in an improvement in both the R. and the E in the calculation beyond 2024.

Alan Ratner

Perfect. Thank you, guys for that explanation negotiated.

Operator

Carl Reichardt, BTIG.

Carl Reichardt

Thanks, everybody. Alan took my question, but let me follow up on it on. So what would have to materialize for land banking to become a more significant sort of focus for you all in. What's what is your objection now? I recognize great balance sheet, so it allows you to hold more to self-develop. But as you as you think about a forward scenario is the cost of land banking availability in the markets where you really want to grow.
I'm just I'm curious what would need to show up for this to become a more significant portion of how you think about your land portfolio.

It's that our growth goals exceed the ability to utilize our own balance sheet to a point where we get an uncomfortable with our liquidity position or a net debt to cap ratio. And that just hasn't happened for three years. But as we think about our growth plans for the next three years, we can't grow as fast as we'd like to grow utilizing our own balance sheet.
So now the cost of capital makes sense for us, and we're going to start utilizing lending to achieve our growth goals. It's really about the ability to utilize our balance sheet and maximize liquidity, the liquidity and our capital markets. So on once again, we've been able to fuel this top five builder position through our retained earnings call, maintain a really, really rough low net debt-to-cap ratio and excessive liquidity.
Well, as we grow here over the next three years from 15,000 units. And we're going to start utilizing land bank land banking to come to manage that.

Karl, if you think that our last debt deal was at sub-4. And when banking costs two to three times that and you have $1 billion of cash, it's tough to make the math work on why you'd want to do land banking. But as were intentional about the growth and looking to on to accelerate that beyond our available cash flow, we're definitely going to be utilizing land banking in the next year or so.

Carl Reichardt

Okay. And then are you able to say sorry.

It's not availability.

Carl Reichardt

Okay. And to your earlier point downs question, you feel like you've you've almost perfected to some degree the back end on the width turn. So the field production side, you've got turns really strong. Now we okay now we focus on I'm more in the front and Okay, sorry, can you talk just a little bit about how the time it's taking to get lots from raw stage to finished lots and then into the field, you're talking about 120 or so stores for in 23 that you've invested in, in some way, shape or form.
And that being 25 is that time extending at all in terms of how long it's taking in, but are there markets where it's improving at all?

I would say it's kind of stable on everything sort of changed coming out of COVID the cities have moved very, very slowly. It takes much longer to get your plans to plan checks on the land development is taking longer as well. There's more regulation there. So it all changed out of COVID.
We used to believe that we could get lots on the ground in 12 to 18 months, and now it's 18 months to two years, depending on the market and it hasn't changed for a while. That's kind of what we run our forecast out at. We usually are fairly conservative when we buy new land.
We assume closer to two years versus 18 months ago. If things go faster that they go faster than that, I'd say it's really sticky. We haven't seen some cities become more efficient as it relates to getting land entitled and getting our development agreements approved.
And frankly, we haven't seen the developers be able to move any faster as well. So it's kind of right there. That's the assumption and done. It's not getting worse, but it's not getting any better than call it.

Just to clarify, I think we had on this in the prepared remarks, we had our community count openings. We turned over 41% of our starting inventory in a from a community perspective. Since the beginning of the year, we opened over 110 communities this year. So it was really the close-outs that impacted our community count. So that elongated time cycle, that's in all the numbers that were already giving you we've kind of been operating in this environment for a while.

Carl Reichardt

That's great. Thanks a lot. Appreciate it. Thanks.

Okay.

Operator

Susan Maklari, Goldman Sachs.

Susan Maklari

Thank you. Good morning, everyone, and thanks for fitting me in. I my first question is when you think about the potential for some existing homes inventory to come back online over the course of the year as rates move lower.
Can you talk about how you can compete against that and perhaps the benefit that you're going to have as you are moving down in some of these ASP.s to a more entry-level first-time kind of buyer. The ability that will give you just is that sales pace that you're targeting?

Yes. Thanks. I think it's John. It's really about what we are doing right now ever since we've pivoted our strategy. And now we're really focused on our spec strategy in order to compete with the existing home market. It's all about having products that other people that consumers can move in on the same time line, a lot of folks buy on existing homes because they can move in on their time line.
And when you buy a new home, you have to work on the builder's time line so what we've done is we've increased our specs. We've increased our move-in ready inventory so that we can stay in that consideration set when people are shopping for existing homes and time doesn't become a factor.
Now. It's just literally about location and price. So on, we'll see what we've done. And we believe as the existing home market thaws out, if rates were to drop in this lockout effect turns around that will stay in that consideration set because we have move-in ready inventory.

Susan Maklari

Okay. That's helpful. And then what I think that you mentioned in your commentary, is that part of the gross margin benefit that you saw was some efforts to renegotiate with your suppliers as you think over time about the growth that you're expecting and perhaps the leverage that you're gaining with that think about the puts and takes to the margin over time as your land costs adjust and relative to that 22% target that you have. What are some of the levers that you can pull in there?

Yes, that's a great question, Susan. I think that we do think there's an opportunity to revisit that 22% as we grow all of those numbers should improve, right? So for right now, we're experiencing elevated loss cost coming through, but the new land that's coming through is not at these exceptionally high level there. They're still elevated, but they're they're starting to become more normalized land over time, should revert back to a more more more normalized number will definitely have greater purchasing power.
I so there are some some push on direct. And then, of course, our leverage that we talked about that's fixed component of the and hopefully, over time also the incentives will normalize. So we see a lot of positives kind of beyond 2024, which is still a little bit murky.
It's hard to see on all the pieces of 2024. But we see everything trending in the right direction over time to get us to a number that's likely something nicer than 22%. We don't have a number yet, but we're working through that math. And as soon as we have from improved internal targets, we'll be sharing those externally.

Operator

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Philippe for any further or closing comments.

Thank you, operator. I'd like to thank everyone who joined the call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend, and thank you very much.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.