Q4 2023 Taylor Morrison Home Corp Earnings Call

Participants

Curt VanHyfte; Executive VP & CFO; Taylor Morrison Home Corporation

Erik Heuser; Executive VP & Chief Corporate Operations Officer; Taylor Morrison Home Corporation

Mackenzie Jean Aron; VP of IR; Taylor Morrison Home Corporation

Sheryl Denise Palmer; Chairman, President & CEO; Taylor Morrison Home Corporation

Alan S. Ratner; MD; Zelman & Associates LLC

Alex Barrón; Founder and Senior Research Analyst; Housing Research Center, LLC

Carl Edwin Reichardt; MD & Homebuilding Analyst; BTIG, LLC, Research Division

Elizabeth Ann Langan; Research Analyst; Barclays Bank PLC, Research Division

Jay McCanless; SVP of Equity Research; Wedbush Securities Inc., Research Division

Kenneth Robinson Zener; Senior Analyst; Seaport Research Partners

Truman Andrew Patterson; Director and Senior Research Analyst; Wolfe Research, LLC

Unidentified Analyst

William Wong

Presentation

Operator

Ladies and gentlemen, hello, and welcome to the Taylor Morrison Home Corp 4Q 2023 Earnings Conference Call and Webcast. My name is Maxine, and I'll be coordinating the call today.
(Operator Instructions)
I will now hand you over to Mackenzie Aron, Vice President of Investor Relations to begin. Mackenzie, please go ahead when you are ready.

Mackenzie Jean Aron

Thank you, and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release.
Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Sheryl Denise Palmer

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. I'm pleased to share the highlights of our team's strong performance in 2023 as well as an update on the market and our strategic priorities as we head into the new year. After my remarks, Erik will review our healthy land portfolio, while Curt will review our better-than-expected fourth quarter financial results and guidance metrics.
Our team's strong fourth quarter execution wrapped up another tremendous year for Taylor Morrison. In total, we delivered 11,495 homes to generate $7.2 billion of homebuilding revenue at a healthy adjusted home closings gross margin of 24%, driving adjusted earnings of $7.54 per diluted share. Our earnings, combined with $889 million of share repurchases over the last 4 years drove our book value per share to a new high of $49 which was up 15% from a year ago and 53% from 2 years ago.
While we face significant headwinds from rising interest rates, economic uncertainty, and global unrest, our business displayed the resiliency we have strategically positioned it for following years of intentional growth, transformative M&A, integrations and a tireless commitment to streamlining and optimizing our operational abilities.
As I sit here today, I'm incredibly proud of the results we delivered in 2023, which exceeded our guidance and even more excited when I look ahead to 2024 and 2025, as we expect to continue demonstrating the earnings' power of our balanced and disciplined operating platform.
We strongly believe that our diversification across buyer groups ranging from Entry-level, Move-up and Resort Lifestyle, combined with our emphasis on high-quality community locations are critical differentiators that enhance our bottom line potential, growth opportunities and risk mitigation throughout housings inevitable ebbs and flows as demonstrated with our results through a volatile fourth quarter. Our top priority as we move ahead is reaccelerating our growth now that we believe that we have firmly established the operational efficiency required for outsized market share gains.
In 2024, we expect to deliver at least 12,000 home closings, followed by approximately 10% growth in 2025 and thereafter. Our $1.8 billion land investment in 2023 was focused on supporting these growth aspirations, and with one of the strongest balance sheet in our company's history, we are well positioned to continue investing with an accretive, disciplined approach in 2024 with an initial planned land spend in the range of $2.3 billion to $2.5 billion.
Critically, our land investment approach will remain grounded in a returns-driven framework that balances capital efficiency with the associated cost of capital as we look to drive long-term performance. To achieve these goals, we are fortunate to have the strong land development expertise that is necessary for investing in larger, more efficient self-developed communities that are particularly well suited for our product and consumer portfolio.
This strength is evident in a shift in our acquisitions away from expensive finished lots, often in restrictive master planned communities by partnering with land sellers for larger self-developed parcels that offer greater margin and pace opportunity. For example, finished lots as a percentage of our total acquisitions have declined to just 12% over the last 2 years from 35% several years ago, while our underwritten monthly sales pace expectations have increased by about 30% in recent years, as average community sizes have also increased by approximately 50%.
While this is a modest headwind to the absolute level of communities, we believe this evolution towards larger, more efficient outlets is an important driver of our long-term returns. It also limits our exposure to the limited capacity of third-party land developers and improves our long-term planning visibility. These strategic shifts in our land investment decisions underpin our confidence in our annual monthly sales pace target in the low 3 range as compared to our historical average run rate in the low to mid-2s.
Following the sales pace of 2.8 per month in 2023, I am pleased that we expect to achieve this targeted low 3 sales pace goal in 2024 based on our mix of communities and the strength of the underlying market.
On the operational front, we are focused on continuing to fully leverage our scale and streamline portfolio to reduce costs, support growth and increase asset efficiency. This includes ongoing refinement of our product and floor plan library, utilization of our Canvas option packages and sales, marketing and back-office centralization efforts. Each of these areas of focus improve our ability to scale our business cost effectively, offset ongoing cost inflation and deliver improved affordability and product for our homebuyers.
Meanwhile, our innovative digital sales tools also continue to gain traction with outsized sales conversion rates nearing 50%. Specific to the fourth quarter, our net sales orders increased 30% year-over-year with strong acceleration in December that defined typical seasonal slowness into year-end and partially offset the moderation we experienced earlier in the quarter alongside higher interest rates. Our balanced mix of to-be-built and spec homes, including a 40% year-over-year increase in available inventory at quarter end meets demand among all consumer types.
The healthy trends we experienced as the quarter progressed allowed us to raise base pricing in nearly 60% of communities as our teams are focused on balancing price, incentives and pace to achieve desired sales goals and community performance.
I am pleased that the healthy momentum continued into January and thus far in February with sales, traffic and reservations, all trending positively as the spring selling season recently kicked off. In fact, in January alone, we saw the most online home reservations in a single month with the highest monthly sales contribution since March of 2021. These numbers continue to prove that consumers are eager to engage with us in new and different ways that tailored to their needs and provide pricing transparency, convenience and flexibility in their home shopping journey.
When I look at our online sales success and the breadth of our sales strength, it is clear that demand for new construction remains solid with limited supply of inventory across all price points and favorable employment and demographic trends continuing to drive activity.
By consumer group, our fourth quarter net sales orders were comprised of our Move-up category at 42%, our Entry-level segment at 34% and Resort Lifestyle at 24%. Sales across each of these groups were up strongly from a year ago with our Entry-level segment recovering most strongly on a year-over-year basis.
However, on a sequential basis, our Resort Lifestyle business performed exceptionally well and back to typical seasonal slowing as the only segment with quarter-over-quarter sales' growth, displaying the strength that we expect of those consumers amid interest rate volatility. One of the key factors driving our success is the financial strength of our targeted consumer sets. Among buyers financed by Taylor Morrison Home Funding, credit metrics in the fourth quarter remained excellent with an average credit score of 751, average down payment of 24% and average household income of nearly $180,000. These stats are especially impressive considering that 53% of these buyers were millennials and another 4% were Gen Z.
On the other end of the buyer spectrum, a vast majority of our Resort Lifestyle consumers utilize all cash for their home purchase. As a result, our use of mortgage incentives is heavily weighted to our Entry-level communities where first-time buyers are most sensitive to affordability constraints.
In fact, of the 28% of our fourth quarter closings that took advantage of a mortgage forward commitment or similar interest rate structure and outsized 50% were first-time buyers. In addition to these consumer benefits, the diversification of our platform extends to production advantages given our ability to capture both high-margin to-be-built sales along with highly efficient spec construction.
Our second Move-up and Resort Lifestyle communities operate largely as to-be-built businesses, which generate high-margin design center and lot premium revenue that exceeded $100,000 per home in the fourth quarter and helped generate superior gross margins, several hundred basis points higher than our Entry-level business.
Meanwhile, our Entry-level and first Move-up buyers are served primarily with spec home offerings, providing important protection efficiencies here to each consumer group's needs and preferences. In the fourth quarter, approximately 56% of our sales were for spec homes similar to the prior 3 quarters, but down slightly from the low 60% range in 2022.
To wrap up, the diversification of our business and long-standing emphasis on quality locations in core submarkets provide important strategic advantages that we believe position us exceptionally well going forward. With a concentrated focus on outsized growth in the years ahead, we have never been better equipped operationally to take advantage of the opportunities across our price points and geographies to serve our customers and create value for all of our stakeholders.
With that, let me now turn the call to Erik to review our land portfolio.

Erik Heuser

Thanks, Sheryl, and good morning. To help provide greater clarity into our lot position, we have adjusted our methodology for calculating owned and controlled lots. Specific to owned lots, we have excluded lots that have begun vertical construction. Those lots are defined separately as homes in inventory, which was 7,867 homes at quarter end.
With regard to controlled lots, we have expanded our definition to include those lots under contract with an earnest money deposit that have not yet been fully formally approved by our investment committee to offer a more complete look at our pipeline. We believe that these changes better reflect the intended use of such metrics to evaluate our balance sheet and the capital efficiency of our land portfolio and improve comparability to some of our peers.
Using this new methodology, our owned and controlled lot inventory was approximately 72,000 homebuilding lots in the fourth quarter, down from 75,000 lots at the end of both 2022 and 2021. Based on trailing 12-month closings, this represented 6.3 years of total supply, up from 5.9 years in the fourth quarter of 2022 and 5.5 years in the fourth quarter of 2021.
Our supply of owned lots equaled 3 years as compared to 2.9 years in the fourth quarter of 2022 and 2.8 years in the fourth quarter of 2021. Lots controlled via various structures and vehicles represented 53% of our total supply.
This was up from an in-kind 51% a year ago and 49% 2 years ago, as we have successfully increased our asset-light or investment approach to enhance long-term expected returns and risk mitigation.
The specific vehicles and structures that are employed to achieve this off-balance sheet control of pipeline land include the targeted use of joint ventures with homebuilders, seller notes and financing, option takedowns and land banking arrangements. While each of these offer varied risk, return and cost trade-offs, we seek to match each deal with the optimal tool. As Sheryl previously alluded to, over time, we have pivoted from a greater reliance upon finished lots being delivered through master plan developers to a heavy balance of raw self-developed acquisitions.
As an illustrative example of the margin impact associated with this pivot, I would share that the expected margin differential among finished lot deals underwritten in 2023 as compared with raw land deals was approximately 300 basis points. While finished lot deals have a role in our portfolio, we have found that self-developed communities provide greater optionality with regard to employing financing tools, improved control over lot deliveries and the noted margin enhancements of the business.
In the fourth quarter, we invested $313 million in homebuilding land acquisition and $224 million in development of existing assets for a total of $537 million. For the full year, we invested a total of approximately $1.8 billion with a nearly equal split between acquisitions and development at 51% and 49%, respectively. This was up from $1.6 billion in 2022 when acquisition spend represented 40% of the total and development accounted for 60%.
Today, with an eye towards monetizing our well vintage existing portfolio by driving community openings to support our growth plans, we now expect to further increase our land investment in 2024 to approximately $2.3 billion to $2.5 billion. Approximately 40% of this expected spend is allocated to development. Supported by this investment, we expect our community count to be relatively stable at each quarter and end of the year between 320 and 325 outlets before growing meaningfully in 2025 and beyond.
On the acquisition front, we have significant flexibility in our investment decisions as we are already either fully subscribed or well on track to support our strong anticipated growth trajectory over the next 3 years.
With that, I will turn the call to Curt.

Curt VanHyfte

Thanks, Erik, and good morning, everyone. In the fourth quarter, our adjusted net income was $223 million or $2.05 per diluted share while our reported net income was $173 million or $1.58 per diluted share, inclusive of legal settlements and other extraordinary charges. During the quarter, we delivered 3,190 home closings at an average closing price of $607,000, which produced total homebuilding revenue of $1.9 billion.
Our closings came in ahead of our previous guide due primarily to stronger backlog conversion that benefited from further improvement in construction cycle times and more spec homes sold and closed during the quarter. Our cycle times improved by another 4 weeks sequentially and 10 weeks year-over-year, aided by normalization in the supply chain and our team's focus on operational efficiency. We are pleased with the overall predictability that has returned across nearly all production stages and are targeting another 4 to 5 weeks of cycle time improvement in 2024.
In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters, given the solid demand backdrop to ensure we have adequate inventory available. In the fourth quarter, we started just over 2,900 homes or 3 per community per month, up from about 1,500 homes or 1.6 per community per month a year ago. Including these starts, we had 7,867 homes under production at quarter end. Of these homes, 41% or 3,225 were spec homes of which only 413 were finished with a skew towards our Entry-level communities where first-time buyers prefer quick move-in homes.
It's worth noting that our total spec inventory was up approximately 40% year-over-year as we have intentionally increased our inventory levels to meet buyer demand in the upcoming spring selling season. Based on the volume of homes under production, we expect to deliver approximately 2,700 homes in the first quarter and at least 12,000 homes for the full year. We expect the average closing price of these deliveries to be approximately $600,000 for the first quarter and for the year.
Compared to 2023, the reduction in our average pricing partly reflects a shift towards more affordable product, particularly in our Texas and Florida markets to meet consumer needs. This shift also aligns with our pivot to more self-developed communities as has been discussed by both Sheryl and Erik. Our fourth quarter home closings gross margin was 24.1%, up from 23.5% a year ago. This quarter's margins exceeded our previous guide due primarily to less-than-expected house cost pressure and greater overhead leverage from higher closing volume.
It's worth highlighting that our gross margin in the fourth quarter of 2022 included a $25 million inventory impairment, which resulted in an adjusted gross margin of 24.5%. We are pleased with the relative stability in our gross margin trends despite an increased use of targeted mortgage incentives over the past year with the resiliency driven primarily by reduced lumber costs and the strength of our to-be-built margins.
As we look ahead, we expect incentive costs to moderate in 2024, while construction and lot costs trend higher. As a result, we expect our home closings gross margin to be relatively stable in the range of 23% to 23.5% in the first quarter and for the full year.
Our net sales orders in the quarter increased 30% year-over-year to 2,361 homes. This was driven by a 29% increase in our monthly absorption pace to 2.4 per community and a 1% increase in ending community count to 327 outlets. As Sheryl noted, our sales improved over the course of the quarter with a strong pickup in December that is carried into the new year across all consumer groups. Our net sales order price in the fourth quarter was $629,000, up 9% year-over-year.
Cancellation rates remained low at 11.6% of gross orders. This was down from 24.4% a year ago. Our below-average cancellation rates continue to reflect the strength of our diversified buyers, proactive approach to securing meaningful upfront deposits from our customers and diligent prequalification of all buyers prior to signing sales contracts.
In the fourth quarter, customers and backlog had average deposits of $62,000 or 9% per home. SG&A as a percentage of home closings revenue was 9.7%, up from the record low of 7.3% in the year ago period. The reduced leverage was primarily due to lower home closings revenue, higher performance-based compensation expense and external broker commissions. Going forward, we will maintain a disciplined cost structure and are forecasting an SG&A ratio in the high 9% range in 2024, which would be consistent with 9.8% in 2023.
Our financial services team achieved a capture rate of 86%, which is up from 78% a year ago. This strong result drove financial services revenue to $43 million with a gross margin of 45.9% for the quarter.
By using finance as a sales tool, our talented financial service team has supported our success through well-executed personalized incentive programs that has allowed us to navigate the challenging interest rate environment cost effectively while providing compelling value to our customers.
Turning now to our strong capital position. We generated $827 million of cash flow from operations in 2023 and ended the year with significant liquidity of approximately $1.8 billion. This included $799 million of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside normal course letters of credit. Our homebuilding net debt to capitalization ratio was 16.8%, down from 18.8% in the prior quarter and 24% a year ago.
Equipped with this balance sheet and strong expected cash generation, we will maintain our disciplined and opportunistic capital allocation framework as we evaluate our main priorities of investing for future growth, maintaining strong liquidity and balance sheet health and returning excess capital to shareholders through share repurchases.
Since 2020, we have repaid approximately $1.8 billion of senior debt as we have successfully executed our post-acquisition debt reduction strategy. In total, these repayments have reduced our annual interest expense by about $105 million and driven a significant reduction in our debt to capitalization ratios. Our next senior note maturity is not until 2027, leaving us with financial flexibility in the years ahead.
Over the same 4-year period, we have deployed approximately $889 million into share repurchases, reducing our diluted share count by about 33 million or just over 30% of beginning shares driving higher earnings per share and returns for our shareholders. In total, since our repurchase program began in 2015, we have repurchased over $1.4 billion or approximately 50% of beginning shares. At quarter end, our remaining share repurchase authorization was $494 million. We are committed to continuing to return excess capital to shareholders in the years ahead and expect to repurchase approximately $300 million of our common stock this year.
Now I will turn the call back over to Sheryl.

Sheryl Denise Palmer

Thank you, Curt. To wrap up, we are extremely proud of our team's 2023 performance and look forward to delivering an even stronger 2024. In addition to our financial results, I'm equally proud of another important milestone we recently earned with our ninth year as America's Most Trusted Homebuilder. This concept of earning and maintaining brand trust year after year, especially during 2023, a year where consumers grew even more weary and skeptical of brand is not lost on us.
Through our tremendous team members across the country, we remain focused on the long game and continue to raise the bar in delivering an unmatched customer experience. Thank you to all of our team members for helping us to achieve this amazing accomplishment.
Our strategic plan since becoming a public company over 10 years ago, has been focused on building scale, diversification and operating efficiency to deliver superior performance for our shareholders. As you've heard today, the next leg of our strategic journey is focused on accretive growth. We believe that the strength of our core land portfolio, financial health of our targeted consumers and experienced teams will allow us to navigate the uncertainties that arise while our healthy inventory levels, improving cycle time and compelling sales and finance tools will allow us to meet our customers' needs. While we are early in the year, we have had a promising start, and we look forward to updating you again on our progress in April.
With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Question and Answer Session

Operator

(Operator Instructions)
Our first question today comes from Truman Patterson from Wolfe Research.

Truman Andrew Patterson

First, on your gross margin guidance in 1Q 23%, 23.5%, could you help us understand what's embedded in that guidance because it basically implies for the rest of the year, the remaining 3 quarters are kind of flat sequentially? And I'm thinking there's clearly some higher land costs, maybe stick and brick as we move through the year. So the potential offsets would be either some modest pricing embedded in your assumptions going forward or some incremental internal streamlining initiatives that could help offset. I'm just hoping you could walk us through that, please.

Curt VanHyfte

Truman, I'll take a stab at that. Just to kind of talk a little bit about the margins. As we said in our guide or in the prepared comments, we are assuming a slight kind of modest pullback in incentives over the course of the year, which are being offset to a certain extent with some increases in house cost and land costs.
But I think the one thing you need to keep in mind is, today, we're structurally a different company. We've done a lot of operational improvements in addition to the scale that we've achieved as a company as a result of all the M&A work. And so some of those operational efficiencies, whether it's floor plan rationalization, value engineering, focusing on kind of what we would call even flow production are going to kind of help us kind of work our way through that and provide that stability in our margins over the course of the year.

Truman Andrew Patterson

Okay. So if I'm hearing you correctly, maybe there's a little bit more juice to squeeze, so to speak, from some of the internal initiatives that you all have implemented. And then, Sheryl, you all have been one of the more acquisitive builders over the past decade. And I think we've seen 6 M&A deals so far in 2024, just in the industry overall, right?
And how are you thinking about M&A today as it relates to either larger transformative deals, tuck-in acquisitions, or are you all kind of comfortable with your footprint, land bank, streamlined strategy that you're not necessarily entertaining deals in the current environment?

Sheryl Denise Palmer

Yes, I appreciate the question, Truman. I think you said it correctly, over the years, we've certainly been known as one of the more inquisitive. And as you know, initially, that was to make sure that we had the right width on our map and then kind of follow that up with making sure we have the scale in each of our markets. So when we look at the map today, we feel really good about it. Given our historic kind of activity, we certainly have the opportunity to take a look at all the deals that come to the market. We're quite focused on the organic kind of growth that we laid out in our prepared remarks.
We have the opportunity to look at deals that are coming into the marketplace. And honestly, it would have to really provide some strategic benefit to the organization from a geographic or scale perspective, it would have to, from a product perspective, may also be accretive. Obviously, it has to work financially. So I'm not going to say that we would never do a deal but today, we're really focused on achieving our growth organically. And if the right opportunity comes along, we will take a look at it.

Truman Andrew Patterson

Okay. Perfect. And if I could just squeeze one more in, your '24 ASP guide of about $600,000, that's about 12% lower than your backlog of, I think, about $680,000. Could you just elaborate a little bit on what's going on there? It seems even with a shift to maybe some more affordable products back, et cetera, that seems a pretty meaningful shift, if you will.

Sheryl Denise Palmer

Yes, you're exactly right. And as we've been talking about really with the last 2 M&As and honestly, the shift, the settled pivot you've seen and our consumer groups, we are going to more and more affordable. So what you have in your backlog today, Truman, tends to be your Resort Lifestyle, Esplanade which tend to be at a much higher ASP.
But what we'll fill that in, in the subsequent quarters is the spec production we have and our specs, as we said, tend to be that first-time buyer as well as that first-time move-up. So you hate to point to mix. But in all honesty, that's exactly what it is.

Truman Andrew Patterson

Okay. Perfect. And good luck in '24.

Operator

The next question comes from Carl Reichardt from BTIG.

Carl Edwin Reichardt

Thanks for all the detail today. Appreciate it. Sheryl, you talked in the prepared remarks about market share gains. And I just granted if we don't believe the overall market grows at 10% and you do, then you're gaining share.
But still blunt question is from whom are you going to take the share? Is it a function of the private builders? Is it a mix shift towards move-up product that other publics aren't building? Or is it market-related? Can you just sort of expand on directionally who you're going to take the share from?

Sheryl Denise Palmer

Yes. I think it's all of the above, Carl. Certainly, what we're seeing is a different level of efficiency in our communities in much higher paces. So we may see some market growth, but obviously, we're having -- we're also anticipating grabbing share. And one of the things, Carl, that I would say are really working in our favor today is the strength of the diversity of our portfolio.
So when you look at our ability to offer both to-be-built, spec homes that are relatively equal with a relatively equal balance, when you look at us serving 1/3, 1/3 and 1/3, that first-time buyer, that first and second move-up and that Resort Lifestyle, it really gives us an advantage in each of the markets. As you see some of the volatility that we've seen certainly over the last year, I don't think we have experienced the same level of volatility.
If I think about the fourth quarter, everyone, we saw a lot of movement in interest rates, as you know. October was okay. November was pretty rough. December was our best December in the company's history. And I really credit the diversity of the portfolio that allows us to do that.

Carl Edwin Reichardt

Okay. And then you also talked about a pivot in how you're thinking about land and the off-balance sheet side. And if I operate under the assumption that JVs are kind of tough to structure, there are not that many seller financing deals, the default for more off-balance sheet is the land banking business. Can you talk a little bit about the availability of land bank capital, your plans to focus more on that if they exist? And then what you're seeing in terms of the cost of that capital right now?

Sheryl Denise Palmer

You want to take that?

Erik Heuser

Sure. Carl, it's Erik. Yes, I would say that we have all of those arrows in the quiver and we do employ all of them. The joint ventures are great. And when we've got alignment with a building partner and being able to develop that off-balance sheet, pull the lots just-in-time to the homebuilding business, it's great. And we do have 8 of those across the markets. And so they are meaningful as you think about percent control. When it comes to the seller financing, that's always the first ask of the divisions, have we looked to the seller for financing because that typically is the least expensive, and we do a fair amount of that.
To your point on land banking, I would say land banking is always available. I would say the cost of -- the comparison of cost relative to where we did a relatively large slug of the vehicle that we negotiated is up from there.
We expect that to moderate down, especially as kind of the perceived risk in the interest rate environment, kind of normalizes plateaus and kind of comes to a place that we find attractive again. And so the discussions are always being held. We haven't negotiated any real recent ones. But I would say discussions are ongoing. And what we look for, Carl, is for it to come in line with kind of our weighted average cost of capital. That's really where it starts becoming attractive for us.

Sheryl Denise Palmer

And Erik, if you were to look back to 18 months ago, when we did our first big deal on what land banking REITs are doing today, I mean, I think there's easily a 300 basis points.

Erik Heuser

Yes, to be pointing to your question, Carl, I would say it's 300 to 350 basis points relative as I compare to kind of where we originally negotiated our deal.

Operator

The next question comes from Matthew Bouley from Barclays.

Elizabeth Ann Langan

You have Elizabeth Langan on for Matt today. And I just wanted to kick it off pricing. You noted that you were raising prices in nearly 60% of communities. Where are you seeing those price increases? And is this trend kind of continues throughout the year, is that something that's contemplated since the high end of your guide? Or would this lend itself to upside on the side of margins?

Curt VanHyfte

Yes, we did have some pricing power in Q4, as you mentioned. We did -- we were able to raise our pricing by about on average -- in about 60% of our communities. And that is embedded into our guide, but any additional pricing power would continue to be upside.
Again, and then depending on what interest rates do, et cetera, that all plays into what the margin -- could have an impact on the margins.

Sheryl Denise Palmer

And I'd say the good news if you agree, Curt, is, Elizabeth is even though we saw that pricing opportunity in 60%, it was modest. And I think that's a much healthier place. And what we would hope to see as we move through '24 is continued modest pricing opportunity as well as some continued reduction discounts. Now it's early in the year. So we're going to have to play that out. Obviously, we've seen the volatility that's hit the market.
Certainly, yesterday, we saw it a couple of weeks ago with the single largest lift in interest rates that we've seen in the year. But all in all, we're in a much better place than we were a year ago. So we expect to continue to see some opportunity, all other things being equal as we move into the year.

Elizabeth Ann Langan

Okay. That's helpful. And I guess, kind of continuing on that, how are you balancing that with your use of incentives? I guess, obviously, when there's a pricing opportunity, you're going to take it, but does that mean that you're typically kind of dialing back on your incentives more or you're kind of keeping that pretty stable?

Sheryl Denise Palmer

Yes. I think we've been very fortunate and we've gotten pretty good at this, navigating this environment for -- it seems like nearly 2 years, and I think our tools have gotten better. And our appreciation of being able to personalize, I think Curt spoke to this in his prepared remarks, being able to personalize each incentive to the specific buyers' needs.
We certainly are in a market that we can't kind of paint any community or any market with a single brush. So it allows us to serve the customer in the best way for them and at the same time, protect the margin wherever -- however and wherever we can.
It's interesting as incent -- as interest rates started kind of pulling back and we saw last -- over the last few weeks, we saw rates drop as low as kind of the mid-6s. I started to see in some markets, kind of us going back, I mean, us being the industry, to some of the old habits and doing incentives off of options or lot premiums or discounting house where, in fact, we've stayed very, very focused on using finance as the best sales sold to give our consumers the best monthly rate. That allows us to pull back incentives one house at a time. We are early in the year. We have seen some volatility.
Once again, I think the good news is if I look at what those forward commitments were costing many months ago versus where we are today, it's significantly better even with the blip that we've seen this week, I still would expect over time. Maybe not as quick as the market it assumes seeing side cuts in March or May. But I think over time, we certainly expect additional stabilization, which will continue to bring incentives down.

Operator

The next question comes from Mike Dahl from RBC.

Unidentified Analyst

It's actually [Chris Claude] on for Mike. Just touching on the community count growth comments for 2025. I think you guys said you're expecting meaningful growth there. Could you just help us better quantify what that -- what meaningful kind of means there? And then in terms of the trajectory, just given the flat community count outlook for this year, should we expect that meaningfully stepping up as soon as 1Q '25? Or is that more of a back-half-weighted comment there?

Sheryl Denise Palmer

We really aren't at this point, going to give guidance -- specific guidance, obviously, for '25. But what I would tell you is that we do expect to see community count. We talked about 10% closing growth each year thereafter. I would think you're going to see something in a very similar light on the community count without us getting too specific.
And as we look at the land that's kind of in our pipeline today, I think you'll see that starting in early '25 and building through the year.

Unidentified Analyst

And then just on the share buyback expectation. You guys said $300 million for this year. Is that included in the diluted share count guide for both next quarter and the year-end? Just having trouble reconciling the -- to getting to 108 million and 109 million shares outstanding, is that in the guide? And then I guess if it is or if it isn't just a timing and expectation around deployment there?

Curt VanHyfte

Yes. Chris, that share repurchase guide is not included in the share counts that were in our release because they haven't necessarily happened yet. So those are not contemplated in that.

Operator

The next question comes from Jay McCanless from Wedbush.

Jay McCanless

So on the 40% of communities where you're not raising prices, is it holding prices stable or having to cut pretty aggressively? Maybe talk about what you're doing with that 40% of the count.

Sheryl Denise Palmer

I don't think there'd be one trend I'd point to, Jay. I think it's actually kind of reverted to a more normal environment where you might have closeouts where you do have some added discounts, you might have new openings where you're coming in strong and then wanting to build kind of equity for the customers over time. I'd say probably as a role, I'd say, probably held serve without taking a deep dive into every one of those 40%, I would say that would be the average, but I would say you probably have some added incentives. And certainly, you might have a few communities where you're going to close out where you discounted the house. But I would say the average would probably be hold serve.

Jay McCanless

And then maybe could you talk about what's happening with co-broker and outside broker commissions? What are you seeing there? And you're expecting that to be a headwind for '24's numbers?

Sheryl Denise Palmer

Yes. I'd say we saw that as a headwind actually in the back half of '23, as I'm sure you know, in '22, we reduced commissions, we reduced the base rate. We didn't put it on where we were seeing hobos, we excluded that from co-broke commission. So when the market kind of normalized, I think the market went back to that kind of average, every percent.
If I were to share some good news, though, as I look at our reservations and moving into 2024, for the first 6 weeks of this year, we've seen some really nice movement on co-broke trending down from the peak, I would say, generally, over the last couple of years, co-broke in our reservation and our reservations have been pretty consistent with the overall business, and we've known the opportunity is really to build trust with that consumer before they ever get a broker or put their house on the market. And we've finally started to see that. We'll hope it's sustainable. But all in all, when I look at the book of business outside of the reservations, my guess is books remain relatively consistent to the back half of '23.

Jay McCanless

And then the last question I had because I think I'm getting these numbers confuse in my head, but how many homes or closings, what percentage of closings had some type of discount during fourth quarter? And maybe talk about what the level of that discounting was? And what have you seen thus far into the spring?

Sheryl Denise Palmer

Yes. So I would say every house has some sort of discount. It's either a closing cost assistance. It might be finance tools, it might be some promotion in the design center. And I'd say that's just normal course of business. Specifically, if you're thinking about kind of our forward commitments and the specific tools that we've -- our consumers are enjoying in kind of rate buy-downs for 2023, about 20% of our closings utilized some sort of forward commitment.
The balance, like I said, would have used some sort of assistance and closing costs. Maybe it was a specific finance incentive. But kind of these tranches of forward commitments, that was 20% for the year and a little bit higher in the fourth quarter when we saw the spike in rates. But as we talked about in our prepared remarks, that generally leans heavily toward our first-time buyers where they really need more of that assistance to qualify from -- to qualify and get the monthly mortgage that they can enjoy.

Operator

The next question comes from Mike Rehaut from JPMorgan.

William Wong

Will Wong for Mike. So you mentioned earlier that you guys feel you have healthy momentum that continued into January and February as well, with January having the most online reservations since 2021. Obviously, that kind of gives some foresight into a strong spring selling season. But I was wondering if you could give a little bit of more color on your expectations relative to kind of spring selling season kind of historical norm and whether the size you see now make you feel like it could be stronger than usual of your outpace or something that's sort of in line?

Sheryl Denise Palmer

Yes. As I said, we really have had a nice start to the year, December being a company record, January continuing strong right out the gate. And I think we've seen that traction continue through February. It was interesting to me a couple of weeks ago when we saw that real spike in rates that we came out of that with probably the strongest weekend we had seen in a long, long time.
Hard to look forward, but I would say all indicators that we've seen, and as you mentioned, when we look at traffic, when I look at web traffic, when I look at the number of reservations, I think January might only be beat by February when I look at the number of reservations in the first 2 weeks of the month. All indicators are really strong.
And I think what's happened is we've moved to a place where the volatility in interest rates, the builders have the tools in their toolbox to really be able to help the consumer. And there are not a lot of inventory in the resale market. There's not a lot of inventory in the new home market. And I think I don't want to say the fear of missing out, I think that might be a -- I'm not trying to suggest we're going back to 21 days.
But I think we're in a healthy stabilized market and the consumer has met us more than halfway in understanding that interest rates in the 5s and 6s, are really, from a long-term perspective, a very good thing, and they're out and so forth.
I think the other thing, the last thing that I mention is, when I look at kind of the number of renters that we have in the U.S. today, and I look at every 50 bps of reduction in interest rate and what that does to open up the opportunity for renters to enjoy homeownership, I think they're sitting on the sidelines. So lots of, I think, sprinkles of good news that we're seeing and everything that we see today would lead us to believe it's going to be a really nice healthy spring selling season.

William Wong

And then if you guys can just touch on, is there any substantial differences in markets between the use of any type of incentive throughout the past quarter?

Sheryl Denise Palmer

Yes, it's an interesting point. There really is. Generally, I would say that, as I've said a couple of times, that our incentives are mostly used -- consistently used with our first-time buyers.
But when I look at markets like Seattle, I would say that's a market that very rarely uses kind of forward commitments. I would say the same for Sacramento. I would say, generally, when I look at the rest of our business with the first-timer, I would say there's an equal spread of using kind of those finance tools to help folks to the front door.
And then obviously, when I look at our Resort Lifestyle business, which is certainly moving across the U.S., but predominantly today in Florida, we still see a very high penetration of cash. And so we're not using nearly the same incentives for that consumer that we would be using for our first-time in our first-time move-out.

Operator

The next question comes from Kenneth Zener from Seaport Research Partners.

Kenneth Robinson Zener

I appreciate the disclosures around inventory, lockouts, et cetera, I think it's very informative. Can you talk to -- you talked about low freeze, I believe, for orders as a general pattern. But can you talk to your start process? What guides this? You mentioned even flow. So I'm trying to see how that supports the orders? Or does it actually define the orders? And then if you're kind of targeting that low 3s, how are -- what are you -- to that appropriate margins (technical difficulty).

Curt VanHyfte

Ken, we might have lost you.

Kenneth Robinson Zener

Can you hear me now?

Curt VanHyfte

Yes, sir.

Kenneth Robinson Zener

You can hear me?

Sheryl Denise Palmer

Yes. You were going in and out, Ken, during your question. Can you try it one more time?

Kenneth Robinson Zener

Okay. Sorry about that. I was just asking, you mentioned starts and orders, you mentioned in the low 3s. Can you talk about how those play together since you mentioned even flow, which suggests your starts might actually determine kind of what your order pace is and how do you -- or how committed are you to meeting that level, low 3s, would you give up margin, et cetera?

Curt VanHyfte

Yes. Ken, we've been consistently saying that we're going to match our starts to kind of sales with maybe some flexes here and there relative to timing of year, i.e., like we did this past year, we flexed our starts up in Q2, Q3 to get enough houses in the ground for the spring selling season of this year. But generally speaking, when I mentioned even flow earlier, we're looking really for kind of cadence -- predictable cadence, and that's one of the goals that we have. We find that, that's easier. It's more efficient for us. It doesn't put as much stress on the -- our trades, our internal teams, et cetera. And so we'll do our best to kind of keep that as even as possible. But the general guide is always will match starts in theory to sales.

Operator

Our next question comes from Alan Ratner from Zelman & Associates.

Alan S. Ratner

Thanks for all the great detail as always, very helpful. First, on a question, I think the commentary around the land strategy was really interesting. So I was hoping to understand a few of those points. First, with the self-developed deal tailwind on the margin side, looking at your '24 guidance down a little bit year-on-year, how should we think about that tailwind flowing through?
Is that going to be more prevalent in '25 and beyond as these deals get to the finish line? Or should we think about that more as an offset to some of the other headwinds that you might have, i.e. more land banking, optioning, higher land costs overall? Just trying to figure out the moving pieces on that part first.

Erik Heuser

Alan, it's Erik. Maybe a couple of things. Yes, really, the specific commentary in the prepared remarks was around the 2023 underwriting. And so kind of that tailwind, as you suggest, it's going to take some time to come through the system. Obviously, it takes time to bring those to market. So you'll see that over, not just through this year but over time. And then with regard to just kind of room for land banking, as somebody asked previously, we do view that as an important option for us, especially as we think about maximizing return, the kind of the prior tranches that we did, average of averages at a deal level, that kind of cost us about 175 basis points for a trade of about 600 basis points of return. If you blend that across the overall company portfolio, it's obviously pretty -- not de minimis, but it's much smaller, right? You might be thinking 20, 30 basis points to the overall portfolio. So hopefully, that helps with regard to timing and cost and use of tools.

Alan S. Ratner

That's helpful, Erik. And second on cash conversion. You guys have had really impressive cash conversion in these last 2 years, roughly 100% of net income converting to free cash. And a lot of that, I think, has come as you maybe shrunk the land position a little bit, rightsized it to some extent, inventory turnover has improved, working capital has shrunk.
As we think about this pivot towards more self-developed deal, should we temper that trajectory a little bit? Like is there going to be a little bit of a blip in the opposite direction as these deals kind of work their way through the development process?

Curt VanHyfte

That's a good question, Alan. I don't know if it's necessarily tempering because when we kind of look at everything we're looking at, we did have a good year of cash generation through -- in 2023. Even with some of the land spend targets that we have in play for 2024, we still believe we'll be in a real good cash position as we work our way over the course of the year from a cash flow generation standpoint. So without kind of getting into too futuristic kind of, I guess, a directional signs, we still feel really good about our, I guess, our cash generation even with land spend that we've, I guess, earmarked in our prepared comments.

Alan S. Ratner

And if I could squeeze in one last one, unrelated. Can you just give an update on Yardly and kind of the timing of single-family rental recognition of sale. I think I vaguely remember you mentioned in '24, you kind of had a bunch of deals in the pipeline to potentially close, but I know there's been some volatility in the SFR market, the VFR market. So any update you can give there would be helpful.

Erik Heuser

Yes, Alan, I appreciate the question. And maybe just a kind of frame, obviously, a pretty volatile rate and cap rate environment last year, maybe the last 18 months. So really have exhibit operated with a fair amount of prudence, making sure we're only bringing the cream of the crop to the business. The right way to think about the scale of that business today is we've got about 2 dozen projects working in about 8 different markets, 4 are actively leasing today.
And we'll have optionality to think about disposition of probably a couple of those this year depending on what the market tells us. And then of those kind of -- those couple of dozen deals, 13 are within the venture that we've previously talked about. So that really gives us a lot of capital efficiency. And then we've got a number of others that are kind of working through horizontal and vertical development.
So really constantly looking for deals, but they've got to be the cream of the crop as we think about kind of that volatility in the rate environment that we've seen. So really, from a timing standpoint, again, a couple this year, perhaps options and then maybe double that the following year and then you're really going to see prospective ramp-up.

Operator

Our final question today comes from Alex Barrón from Housing Research Center.

Alex Barrón

Yes, thanks for squeezing in. Great results in the quarter. And I'm sorry if I missed this. Did you guys discuss what the legal settlement charge was about?

Curt VanHyfte

Yes, Alex, good question. I think we -- in our 8-K, we did disclose that back in December, but it was from an asset that we got through the AV acquisition. It was -- it's from a -- it's limited to the state of Florida. It's a community called Solivita, and it was settled, and it's kind of behind us for now. And that's essentially what it was. If there's a lot of detail in the 8-K that we filed for it back in December, so feel free to kind of take a look at that. And if you have additional questions, let us know.

Alex Barrón

Okay. I'll take a look. My other question was on the share buyback, the $300 million number. Is that meant to be $75 million a quarter? Or is that meant to be whenever you guys feel it's opportunistic? And is there any potential upside to that number if the stock were to persist at a lower value?

Curt VanHyfte

Yes, Alex, I don't know if we necessarily have it prescribed kind of on a quarterly basis, but it's a goal that we have set out there as a target for 2024. So as we look at it, we typically do what we call an opportunistic approach and when we set out to buy our shares. And so we'll just kind of play it by year, see how the year goes and kind of buy shares as necessary as we go through the year.

Sheryl Denise Palmer

And we'll continue to operate on -- under a 10b5-1. And so probably a little more consistency than you've seen historically to make sure that, that gets out there, but no specific quarterly targets.

Operator

That does conclude our Q&A session for today. So I'll hand back over to Sheryl for any closing remarks.

Sheryl Denise Palmer

Thank you for the opportunity to share our 2023 results. We really look forward to being able to get into more detail with you on our Q1 on the April call, and I wish you all the very best. Have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.