Good morning, and welcome to the Toll Brothers first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. The company's planning to end the call at 9:30 A.M. when the market opens. During the Q&A, please limit yourself to 1 question and 1 follow-up. Please note, this event is being recorded. I'd now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.
Thank you, Keith. Good morning. Welcome, thank you all for joining us. Before I begin, I ask you to read our statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. With me today are Martin Connor, Chief Financial Officer, Robert Parahus, President and Chief Operating Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, Gregg Ziegler, Senior VP and Treasurer. I'm very pleased with the strong first quarter results.
We've seeded the midpoint of our guidance on all key metrics, we have seen a meaningful uptick in demand that started in January and has continued through this past weekend. In our first quarter, we delivered 1,826 homes and generated homebuilding revenue of $1.75 billion, up 3.7% in dollars compared to the first quarter of fiscal 2022. Our adjusted gross margin was 27.5% or 50 basis points better than guidance and 190 basis points better than last year's first quarter. SG&A expense at 12.1% of homebuilding revenues was significantly better than both last year's first quarter and our guidance as we are benefiting from cost savings initiatives that we've implemented over the past year.
Moving forward, we will continue to execute on additional cost-saving plans to further reduce SG&A expense. Pre-tax income was $253.8 million, and earnings per share was $1.70 diluted of 26% and 37% respectively compared to last year's first quarter. At first quarter end, our backlog stood at $8.6 billion and 7,733 homes. Although we've seen orders decline 50%-60% on a unit basis over the past three quarters, backlog is down only 21% in dollars compared to one year ago. As a result, we continue to expect solid results this year, and we are reaffirming our full fiscal year 2023 guidance of an adjusted gross margin of 27% and $8-$9 of diluted earnings per share.
Turning to the sales environment, we are encouraged by what we have seen across our footprint over the past month and a half. Beginning in the first week of January, demand has picked up beyond the normal seasonality that we typically see at the start of the spring selling season and has continued into February. We've seen demand improve in most markets across the country, including Florida, Atlanta, South Carolina, Charlotte, DC Metro, Pennsylvania, New Jersey, Texas, Colorado, and Southern California. Over the past few weeks, we have also seen signs that demand is improving in markets that struggled the most in the second half of 2022, such as Boise, Phoenix, Reno, Las Vegas, and Austin. We attribute the increase in demand to improved buyer sentiment as inflation appears to be receding and the overall economic outlook seems to be more stable than it was a few months ago.
Over the past decade, the housing market has been driven by 75 million Millennials entering their prime home buying years, Baby Boomers who have been buying homes as they retire and adopt new lifestyles, and migration trends that have favored the Sunshine and Mountain States. At the same time, the U.S. has chronically underproduced new homes. Study after study has shown that home starts have not kept up with household formations for many years. As a result, there now exists a deficit of anywhere between 3 million-6 million homes in this country. This supply shortage was obvious during the pandemic when buyer urgency surged, demand spiked, and prices rapidly increased.
It was less obvious in the second half of 2022 when the impact of the sharp and rapid increase in mortgage rates caused many prospective buyers to put their searches on pause. However, with the traditional spring selling season upon us and consumer confidence improving, buyers are coming off the sidelines. The most telling sign that these fundamentals are real and meaningful is the fact that rates didn't have to go back to 3.5% or even 5.5% for buyers to come back out. This past week, we had the most deposits we have seen in a month, even though rates had moved back up over 6.5%. The improvement in demand is playing well into the strategy we outlined on our December call.
In the second half of fiscal 2022, with demand inelastic in many markets, that is, buyers were not all that moved by price concessions, and with extended delivery times and elevated building costs, we chose not to chase the market down. Instead, we focused on delivering our large high-margin backlog while taking a more patient and balanced approach to new sales and waiting for what we believed would be a better spring selling season. We are now replenishing our supply of spec homes and increasing community count into the spring selling season, taking advantage of improving supply chains, end cycle times, and building costs that are stabilizing, all while demand appears to be rebounding.
As we execute on this strategy, we continue to make appropriate adjustments to product, price, and incentives at each of our communities based on a detailed assessment of local market dynamics, including elasticity of demand, the size of each community's backlog, and the depth and quality of our landholdings in the market. In our first quarter, about two-thirds of the $117,000 sequential decline in the average sales price of new contracts was attributable to mix. The remaining one-third was due to increased incentives, leading to a first quarter average incentive of about 8%. Today's incentive on the next home sold is about 6.5%. Historically, our average incentive has been approximately 3% over the past 15 years. Based on the recent strength in the market, we expect to continue to pull back on incentives in select communities.
With the retail market tight and buyers eager to lock their mortgages at contract and move more quickly into their new homes, demand for spec homes has been very strong. For the past several quarters, approximately one-half of our orders were for specs, which we have sold at various stages of construction. Please remember that we define a spec as any unsold home with at least a foundation in the ground. Considering current market conditions, we are strategically starting more spec homes in select markets, but most will be sold early enough in the construction cycle so the buyer will still have the opportunity to personalize their finishes, which is very important to our luxury buyers. We are also pleased that our cancellations have remained low. Cancellations in the first quarter totaled 244, down from the 312 cancellations we recorded in the fourth quarter.
As a percentage of backlog, cancellations were 3% versus our long-term average of approximately 2.3%. Our low cancellation rates speak to the financial strength of our buyers, the sizable deposits they make, and how emotionally invested they become as they personalize their new Toll homes. While we are encouraged that buyers are returning to the market, we recognize that the direction of the overall economy, mortgage rates, and the housing market remains unclear. In light of this uncertainty, we plan to remain prudent as we invest in the growth of our business through disciplined and capital-efficient land buying. We have sufficient land in our existing portfolio to support community count growth in both fiscal 23 and 2024, which allows us to be highly selective as we assess new land opportunities and takedowns under existing options.
At the end of our first quarter, we owned or controlled approximately 71,300 lots versus 76,000 lots at the end of our 2022 fourth quarter and 86,500 lots one year ago. 52% of our 2023 first quarter end lots were owned and 48% were controlled through options. Excluding the lots in backlog, 54% of our total lots were controlled through options. We continue to expect to generate substantial cash flow in 2023, and we have ample liquidity under our credit facilities. We intend to use excess cash to further reduce leverage and return capital to our shareholders. With that, I will turn it over to Marty.
Thanks, Doug.
We are pleased with our first quarter results. We grew both our top and bottom lines and operated more efficiently compared to last year. First quarter net income was $191.5 million, or $1.70 per share diluted, up 26% and 37% respectively, compared to $151.9 million and $1.24 per share diluted a year ago. Our net income and earnings per share were both first-quarter records. We delivered 1,826 homes and generated home building revenues of $1.75 billion. The average price of homes delivered in the quarter was $958,000. We signed 1,461 net agreements in the quarter, down 50% compared to the first quarter of fiscal year 2022. However, demand improved each month as the quarter progressed.
In fact, our January 2023 net agreements exceeded both November and December combined. Doug mentioned earlier, February continues to show strength through this past weekend. The average price of contracts signed in the quarter was approximately $995,000. This was down approximately 3% year-over-year and 11% on a sequential basis. Doug mentioned, two-thirds of this sequential decline was simply mix. Our first quarter adjusted gross margin was 27.5%, up 190 basis points compared to the 25.6% in the first quarter of 2022. Gross margin exceeded our guidance due to good cost control and less than expected incentives in our deliveries. Write-offs in our home sales gross margin totaled $8 million in the quarter.
Approximately $3 million of this was related to walk away cost on 4,100 option lots that we decided not to buy. The balance was related to one operating community in the State of Washington. SG&A as a percentage of revenue was 12.1% in the first quarter, compared to 13.4% in the same quarter one year ago. Note that our SG&A expense in the first quarter always includes accelerated stock compensation expense. It was $12 million this quarter compared to $10 million last year. This is an annual expense that only hits in the first quarter. The year-over-year 130 basis point reduction in SG&A margin reflects leverage from increased revenues as well as benefits from tighter cost controls. Total SG&A expense declined $15 million in the quarter compared to Q1 of 2022.
With this improved operating efficiency, we are lowering our projected SG&A expense as a percentage of home building revenue for the full year by 30 basis points. We now expect the full year 2023 SG&A margin of 11%. Joint venture, land sales and other income was $16.8 million during the first quarter compared to $29.9 million in the first quarter of fiscal year 2022. We exceeded our guidance by approximately $7 million even after a $13 million impairment to mark down land we intend to sell to its fair value. We ended the first quarter with $2.6 billion of liquidity, including approximately $790 million of cash and $1.8 billion of availability under our revolving bank credit facility.
Last week, we extended our 22 bank $1.905 billion revolving credit facility out 5 years to February of 2028. We also extended the maturity of $487.5 million of our $650 million term loan out to February of 2028. The remaining 162 and a half million dollars of our term loan will mature in part in November of 2025 and November of 2026. Importantly, $400 million of our $650 million term loan has been hedged through November of 2025 with interest rate swaps that are fixed at approximately 1.5%. Our net debt-to-capital ratio was 27.5% at first quarter end, down from 31.9% 1 year ago.
We plan to further reduce our debt by repaying $400 million of senior notes when they come due in April 2023. After we repay these notes, we will have no significant maturities of our long-term debt until fiscal 2026. Our book value per share at quarter end was $55.98. I remind you that we have almost no intangibles on our balance sheet. In the first quarter of fiscal 2023, we returned $32 million to shareholders through share repurchases and dividends. We continue to target $400 million of annual share repurchases. We continue to pay a quarterly dividend of $0.20 per share. Our community count at quarter end was 328, compared to our guide at 340.
The variance from our guide was almost entirely due to selling out 11 communities faster than we anticipated. Our openings generally met our plan. Our forward guidance is subject to the usual caveats regarding forward-looking information. That being said, the 7,733 homes in backlog at first quarter end gives us good visibility for the remainder of the year. We are projecting fiscal 2023 second quarter deliveries of approximately 2,050-2,150 homes, with an average delivered price of between $980,000 and $1 million. For fiscal year 2023, we are maintaining our guidance to project deliveries of between 8,000 and 9,000 homes, with an average price between $965,000 and $985,000.
We expect our adjusted gross margin in the second quarter of fiscal year 2023 and for the full year to be approximately 27%. We expect interest in cost of sales to be approximately 1.5% in the second quarter and for the full year. This would represent a 20 basis point reduction in interest expense and cost of sales year-over-year as our leverage continues to decline. We project second quarter SG&A as a percentage of home sales revenues to be approximately 11.2%. As I mentioned, for the full year, we now expect it to be 11.0%. Other income from unconsolidated entities and land sales gross profit is expected to be approximately breakeven in the second quarter and $125 million for the full year.
Much of this full year other income is projected from second half sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. While the market for the sale of these stabilized rental properties is unpredictable due to volatility in the capital markets, our occupancies remain strong, and we do currently expect to sell our interest in four of these joint ventures by the end of the fiscal year. We project the second quarter tax rate at approximately 26% and a full year tax rate at 25.7%. Our weighted average share count is expected to be approximately, I'm sorry, 112 million shares for the second quarter and 111 million shares for the full 2023 fiscal year.
This assumes re-repurchase a targeted $100 million of common stock for the second quarter and $400 million for the year. Putting this all together, that works out to be between $8-$9 per share for the full year, which would move our book value above $60 at fiscal year-end 2023. Lastly, as Doug mentioned, we expect to continue generating strong cash flow in 2023. We remain cautious on new land spend. Based on the land we currently own or control, we continue to expect community count to grow by 10% by the end of fiscal year 2023. This would be off the base of 348 communities that we started the year with. We also control enough land to grow community count in fiscal year 2024.
Now let me turn it back to Doug.
Thank you, Marty. Earlier this month, Fortune magazine named us the number one World's Most Admired Home Building Company. This is the eighth time we have received this honor. I would like to thank all of our Toll Brothers team members for achieving this tremendous recognition. For that, I'm very grateful. I'm so proud of our team and of our company. With that, Keith, let's open it up to questions.
Yes. Thank you. We will now begin the question and answer session. As a reminder, the company is planning to end the call at 9:30 A.M. when the market opens. During the Q&A, please limit yourself to one question and one follow-up. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question comes from Stephen Kim with Evercore ISI.
Thanks very much, guys. Thanks for all the great color here. Obviously, it seems like the tone of your demand has stayed strong. I'm not gonna ask about that. Probably others will, but it's very encouraging. I was curious about your customer acquisition costs. You know, this environment we've been living through over the last couple of years has been so unusual. As you look forward with a market that potentially is normalizing, can you give us a sense for what your customer acquisition costs look like, relative to, let's say, what it was like pre-pandemic?
I'm thinking things like external broker, fees and maybe increased use of the internet to, you know, attract incremental customers, to give us a sense for where your SG&A margin, you know, is likely to trend over the next couple of years.
Sure. It's a great question, Stephen. You know, the money we spend is 99% digital today. You know, you won't find Toll Brothers on the TV, on the radio, or in the Sunday paper. It's become more and more efficient as we've gotten better and better at how we target clients through digital means. You know, we're very proud of our website. We have an internal web team. That's all they do. And we get lots of compliments from our clients on their ability to navigate on our website to try to find, you know, the homes that they want. I think we will continue to become more and more efficient with the dollar spend when it comes to the digital marketing, which is so important to us.
The biggest expense, of course, is brokers, realtors, and we have been comforted and happy to see that the, the realtor engagement involvement with the client is coming down. You know, back 5, 10 years ago, as you know, we were running about 60% of our sales, you know, had a realtor. And that number today is down around 40%. You know, you could, you could argue 1 year ago when we were on allocation, you know, and we sort of had clients lined up, that you had more clients that were coming in without the realtor because they were just waiting in line for their opportunity.
In today's market, for that number to be down around 40%, you know, we're very encouraged, and we're hearing from the client that with the resale markets being tight, they are moving faster or exclusively to new homes, and they're able to go on our website to learn everything they need to learn where they are confident and comfortable that they can buy, on their own without the broker. You know, the realtor community is important to us. We support that community. We, we know we need them, but it is a significant expense, and it has come down. We're gonna have to wait a few quarters to see if this is a, you know, a longer-term, permanent change to the business.
For the last couple quarters, you know, it's been down at that 40% range at a time when you wouldn't think it would be down. For that, we are encouraged, and I think we're gonna get more and more efficient on the S of the SG&A.
Gotcha. That's, that's helpful. I wanted to also ask about the difference you're seeing in your, let's call it your afflux or affordable luxury customer versus your more traditional luxury customer as it relates to your comments about incentives. I think that you had talked about incentives actually, you know, running at 6.5% today versus, you know, 8%, you know, in the past quarter, which would imply, obviously, that things are getting better. I wanted to understand, is that reduction in the incentive due primarily to the fact that the mortgage rate buydown is not costing you as much just because the prevailing market rate has come down?
Is that actually due to, you know, actions, proactive actions on your part, to not have to not offer significant incentives? Is there a difference between what you're seeing in the incentive trend at the lower, not low end, but you know, affordable luxury end versus the traditional luxury end?
Sure. Let's start with sales. The sales cadence between affordable luxury, and what we call empty nester active adult, which is boomers, for the first quarter was the same. We were down 50%, as we mentioned, and each of those segments was virtually identical. They're all performing about the same. When it comes to the inc- it is slightly higher on the age-restricted than it is on the affordable luxury, and it is quite significantly lower on the true luxury, our bread and butter. Let's just take a number of 8% to go back to the fourth, to the first quarter. Age targeted, age restricted ran about 8.5%, affordable luxury ran about 8%, and the luxury ran around 4-ish, in that range.
You know, the luxury client is wealthier. They're less impacted by rate. They, you know, it's just a different buyer as we've talked about for many, many years, and we think we've had that advantage in a, you know, in a volatile rate market. With respect to what we're doing with incentives, you know, there's the increase in demand in January and now into February, when we look back on it was partially driven by us increasing some incentives, as I mentioned in the prepared comments. As we saw demand become more elastic, we could incentivize a little more and see good results. We think it is more driven by buyer sentiment, by the seasonality, by people coming back out. They absorbed, they were able to absorb the higher rate. They wanted to buy.
When they went out to the market, they realized the resale market is so tight, there's no opportunity. They came to us, and they started hearing our salespeople talk about significant increase in traffic. The boss saying, "I may be raising prices or dropping incentives." There became this sense of urgency with the client that, oh, boy, it sure sounds like we're off the bottom, and I don't wanna miss this opportunity even though, yes, the rate is higher. It sounds like Toll Brothers may be raising some prices or dropping some incentives. That urgency was created, and it's real. We are dropping incentives. We are raising prices.
We're doing it selectively, we're doing it surgically, but it's happening throughout the country, which is one of the reasons why I explained in my prepared comments that today's incentive is less than it was, you know, back in December. We think that's gonna continue to go down. That's the market environment. That's the breakdown between our product mix. I hope I helped you.
Thank you. The next question comes from Michael Rehaut with JP Morgan.
Thanks. Good morning, everyone. You know, I know there's, you know, a lot of discussion. You just, kind of alluded to some things around, you know, buyer confidence versus interest rates, and it's obviously very interesting that you're saying the strongest sales weekend has been this past, and that is obviously after a pretty tumultuous February so far. You know, I guess the question is, you know, obviously, sometimes it takes a little bit of time for a move in rates to have its impact into the marketplace. The MBA Purchase Index was down pretty sharply this morning. Just wanted to get your take as you've seen the volatility in rates over the past 6 months, 6, 7 months, how you view this most recent move.
You know, obviously, it's a pretty encouraging data point over this past weekend. You know, how do you put into context this most recent move over the past month? Does it, you know, kind of create any concerns or anything in terms of traffic over the last few weeks that might make you concerned as, you know, you saw a lot of volatility, obviously, over the last 2 or 3 quarters?
Mike, if you'd asked me, "Doug, if a rate goes from seven and three-eighths to six and a quarter, are these buyers going to be rolling back in?" I honestly would've told you, "I don't know. I don't think I don't know if that's enough." They did. When you asked me, "Doug, in a two-week period of time, when the rates go from six and a quarter to six and three-quarters, what's that going to do?" I'd tell you the truth. I'd be worried. It's not that I'm not worried. You're right. It's only one week. We've had rates go up now for two weeks, and we've had two good weeks, with this last week being the better of the two.
The prior week was the Super Bowl week, which isn't, you know, historically isn't quite as strong as the week following the Super Bowl, which is what we're now in. It's too early to be running around here with a lot of high fives. I get that. It is very encouraging that buyers came back out at 6 and a quarter. It didn't take 5 and a half. It didn't take 4.99. It certainly didn't take the good old days of a year ago of 3. That was really encouraging, and it's even more encouraging with a very short timeframe data point that as those rates moved from that 6 and a quarter to 6 and three-quarters, they're still out. Traffic is really good. Web activity is really good.
We have continued to create urgency in the sales center because we are dropping incentives, we are raising prices. The buyers are out. I'm not gonna sit here and tell you that, you know, it's that we're out of the woods. We understand the volatility to rates. We understand, you know, the, the clouds over the economy. They haven't all cleared yet. It's looking better. You know, inflation's coming down. The Fed seems to be doing their job. The stock markets until the last few weeks have performed well. Our buyers are less impacted by rates for all the reasons we've been talking about, you know, back to the top. Toll used to talk about it 25 years ago. We're encouraged by the recent activity.
That's the best I can tell you, and it's happening in this 6.5%+ rate environment. Remember that the 10-year, the spread from the 10-year to the 30-year is 300 points. You know, historically, it runs in the high 100s. If that spread does tighten to more of historical norms, you know, we're gonna be in good shape. The buyer doesn't have a mentality of, "I'm locked into this 6.5% rate for 30 years." You know, refi happens all the time. Our buyers are sophisticated. Most of them have owned homes before. Almost all of them have refied in their life. They know for $2,000, $3,000, $4,000, they can get out of a high rate and jump into a low rate. There's also that mentality.
They wanna move on with their lives. They took eight months off. They're now sensing some urgency, and they're back. I'm not saying rates aren't important and they don't impact affordability, they do. For our business model, it is not the number one thing.
Right. No, no, I appreciate those comments, Doug, and certainly a lot of it, you know, makes sense, particularly on the refi side. I guess secondly, just wanted to make sure I heard right from the prior question. The decline in average incentives going from 8 to currently 6.5, I just missed if that was, you know, driven by actual outright incentive reductions or the cost of the, you know, mortgage rate buydowns being less expensive. You know.
Incentives.
more broadly... Sorry?
It's incentives. It's not a difference in buydown rates.
Okay. Well, the heart of the question though, was, you know, looking at the guidance, you took down, you know, SG&A due to some, you know, progress on cost saves. The gross margin, though, I'm curious if that was more based on the 8% average incentive and if, you know, you continue to have, you know, 6.5% or potentially even lower, could that ultimately drive some upside in your gross margin guidance for the full year? I think you said that the upside in the first quarter was due to less incentives as well.
Yeah, Mike, it's Marty. Thanks for your questions. We expect our gross margin to be relatively consistent through the balance of the year to get to that 27% for the year. There's estimates in that obviously with respect to what's in the backlog and what may be sold and settled in the interim. you know, we feel like we've accounted for the puts and takes that we should in the guidance we've given you.
Part of that, Mike, there is a budget in place as part of that guidance for that occasional need to, you know, work with some of the backlog to get them to close. You know, we've been very pleased with how low that cancellation rate is and how little we have had to spend with that backlog.
Thank you. The next question comes from Rafe Jadrosich from Bank of America.
Hi, good morning. It's Rafe. Thanks for taking my question.
Absolutely.
Just first, the net debt-to-cap is already kind of at the low end of your historical range. Can you just talk about the right level you're thinking about going forward? With the market improving a little bit here and supply chains improving, you're gonna generate a lot of cash. How do you think about land spend versus buybacks going forward?
With respect to the net debt to cap, I think we're comfortable with a gross level in the high 20s and a net level in the mid-20s. That's consistent with our discussions with the rating agencies. It may fluctuate a little bit around those numbers based on timing and maturities. With respect to new land and debt pay downs and stock repurchases, as it relates to capital allocation, it's a delicate balance. We are fortunate based on our financial flexibility to do a little bit of all of those. Right now, the deal flow for land has to hit a much higher underwriting threshold and has been a little bit less.
There are plenty of deals in our pipeline that meet those thresholds, particularly those that were underwritten, a number of years ago, and we continue to execute on those. We have $400 million of debt that we'll be paying off in the second quarter here, while we continue to buy land and buy stock back.
I would point out that over the last five quarters, we have walked away from 14,000 option lots. Part of our strategy a few years ago to get more capital efficient and have less risk in our landholdings was to option more land. As you've seen by the modest walkaway costs that we've, you know, had over those five quarters, it's been pretty painless to walk away from those lots because in today's environment, they weren't working. Now that will be replenished at the right price and also with capital efficient strategies. I think it shows. It's the payoff of being very capital efficient and selective in how we've been buying land that we can walk away from that number of options painlessly.
That's... Thank you. That's helpful. Then in the gross margin guidance, can you talk about sort of the underlying assumptions or just what you're seeing in terms of construction costs going forward here? For example, can you talk about maybe for a house started today, what's the construction cost that you would anticipate versus a similar house three months ago? Like, have you started to see that come down, and what's the tailwind can we expect from a, from a margin perspective there?
Sure. Let's start. Supply chain is improving. Cycle time is improving as contractors have more capacity. Costs have stabilized, except for lumber, which is our biggest material cost, has come down significantly. There's a very nice tailwind with lumber. You know, it's flattened out in the last month or so, 6 weeks maybe. Before that, it was, you know, it was coming down pretty rapidly every week. We do believe, as the year progresses, that there will be other costs, both labor and materials, that will be coming down. Right now, costs are stabilized, except for lumber, which is a nice tailwind. Stay tuned for the balance of the year. We are actively talking to trades.
You know, the normal conversation is the trade that didn't have capacity now comes and says, "Hey, I've got an extra framing crew or two that could use some work." That is the opening to get a price concession. That, that is the beginning of the process of seeing costs come down.
Thank you. The next question comes from John Lovallo with UBS.
Hi, guys. Thank you for taking my questions as well. The first one is on just going back to SG&A, down $15 million year-over-year on a similar revenue base. I know you talked about broker commissions and a few other things, Doug, but what are some of the more structural cost-saving plans that you guys have been successful with?
Headcount. We're trimming the firm. We're learning how to be more efficient with less people. As we have retirements, we're replacing from within. We're promoting from within without needing another person. We've gone through a very difficult, thoughtful round of cuts in the last 30 days. You know, we have a plan for, you know, to become even more efficient with headcount and some other initiatives in the firm, but it's primarily headcount.
Got it. Maybe if I could just follow up on that. Is there a risk that you're going to, you know, negatively impact growth if things were to pick up here, given those headcount reductions?
No.
Okay. Great. Second question is, you know, just digging into buyer mentality and psyche here, which is pretty interesting. I mean, it looks like there was a slight step-up in cash buyers quarter-over-quarter, at least as a percentage. You mentioned some fear of missing out, maybe more confidence. You know, in general, from what you're hearing, do you think folks are just getting more accustomed to higher interest rates?
Yeah. Cash went from 20% of our buyers to 23%. That we expected. It's common sense, right? As rates go up, if you can afford to write the check, you write the check. I do believe, as we thought, you know, it would take some time for the buyers to adjust to a higher rate environment. That's exactly what happened. It happened back, you know, from the mid-1990s to the mid-2000s, which was good market, we were at 6% plus mortgage rate environment. You know, it's been many years since we've been there, and now we're back there and it took some time. I think that's the primary... We have great fundamentals. I know I went through them.
The migration trends, the demographics with millennials and boomers, the pent-up demand, the tight resale market, 3 million-6 million too few homes in this country, that big demand supply imbalance that's been there for a decade. All of that can't be ignored. As the buyer took a pause and absorbed the higher rate, it appears they're coming back out. That's what we've seen over the last seven weeks.
Thank you. The next question comes from Susan Maklari with Goldman Sachs.
Thank you. Good morning, everyone. My first question is around the commentary that you gave of increasing your spec construction, just given that people are looking for quick move-in homes. Can you give a bit more detail on the number of specs you have and how you're thinking about adding supply as we go further into the spring?
Sure. Susan, our model right now, we have about 2,200 specs, to answer your question. Those are, again, we define a spec as foundation or beyond. We sell a lot of these with enough time left for the client to pick finishes, so they can get kitchen cabinets and countertops and flooring and some of the other fancy things that we show up in our design studios. Our business model right now is to be about 30%-35% spec, which means we will be starting more homes without a buyer. We're not holding them off the market. That's the, you know, that's the business model at the moment. It's obviously market dependent, community dependent, based upon, you know, local dynamics, that is what we are targeting.
I'm very comforted when I look at those 2,200 specs and where they are spread between permit and foundation and framing and finishes and complete. We break all that down, it's a really good mix. When the client comes in, they want a house in 60 days, we may very well have it. If they want it in 4 months and they wanna pick some finishes, we may very well have it. It's really nicely spread. What we're talking about is the cadence of the starts of the new specs to continue to fill in as we sell what we have.
We have a very detailed plan in place, but it should get to about that 30% this year. Yeah, Susan, I think it's, and Doug hinted at this, but it's a very carefully managed process as to how many specs to start based on what you just sold, what stage of construction other units are in. We've developed some pretty sophisticated ways of looking at this by market, by community, by stage of construction, by pace of sales. Yep.
Given the guide and the commentary, is it fair to assume that the margin that you're realizing on those specs is not materially different than what you're getting on the core product?
Through COVID, specs generated a higher margin because people were paying a premium to get into a home quickly. From the summer through the end of the year, specs were getting a lower margin than to-be-built because the market was a lot softer as buyers were on the sideline. Now we are trimming the incentives on specs faster than the to-be-built. That's a long answer to say yes, today, the margin between spec and to-be-built has narrowed, and we think if this demand for specs continues, we're gonna get back to having the spec margin be a bit higher. We're not there yet, but it is beginning to trend in that direction.
Thank you. The next question comes from Truman Patterson with Wolfe Research.
Hey, good morning, guys. Thanks for.
Morning, Truman.
... taking my questions. First, I'm just hoping to get perhaps a clean number on orders pricing because a couple quarters ago, I think there was a accounting and mix issue in the order ASP. You know, I understand that incentives have reduced recently, but sometimes incentives can turn into base price cuts, et cetera. I'm trying to understand what core pricing might be down from peak between base price cuts and just all-in incentives.
Well, we tried to address that in our comment that one third of the price difference this quarter versus last quarter was associated with incentives. Call that $35,000-$40,000. Which is also base price drop. Yes. It's all one bucket. Right.
Okay. Gotcha. Okay. That's kind of an all-in number that you all gave. Perfect. You know, over the past decade or so, you all have had some pretty nice geographical expansion from, you know, mid-Atlantic, Northeast, out West and South, et cetera. I'm trying to understand, you know, given, you know, the softness in the market, the recession that we've just gone through, are there any areas that you might find some land opportunities or geographical areas that you're targeting to expand to in the coming years?
We've expanded quite a bit in the last three or four years. We went into San Antonio, we went into Tampa, we've gone to, Portland, Oregon, we've gone to Salt Lake City, we went to Spokane, Coeur d'Alene. At the moment, Truman, We're going to Long Island. We just opened in Long Island. Thank you, Marty. At the moment, there's no hot new market that we have our eyes on that we're far enough along, you know, to tell you that we think we're going. We're always looking. I think we're most focused, however, on getting bigger and more diversified in the existing core markets where we're operating really well.
That's also gonna really help leveraging the SG&A because some of these smaller market startups are pretty inefficient for a number of years before you get the machine going. I think over the next couple of years, you'll see less of the secondary, tertiary market expansion and more growth in our core markets. The one market you didn't mention is Nashville, where we do have expense, and we don't have any communities open yet. Right.
Thank you. The next question comes from Mike Dahl with RBC Capital Markets.
Morning. Thanks for fitting me in. A follow-up on the, excuse me, on the orders environment. It, you know, it's helpful in terms of the color on January being greater than November, December combined. I guess high-level math would be, you know, January had to be at least around 750 orders compared to 350, give or take, in November, December. Could you put a finer point on just to help walk us through the monthly trends? Then when you talk about the February improvement, if you can give us some sense of quantification on orders, not just deposits.
I got it right here. November was down 72% year-over-year. December was down 55% year-over-year. January was down 31% year-over-year. January sales were the highest pre-January 2020 since January of 2005. February is the same as January.
Okay. That's very helpful. Thank you. When you say same as January, in unit terms or percent change? Per what?
Units.
Units. Units.
Units.
Units.
Yeah.
Okay. Thank you. My follow-up question, just on the land side, I mean, you guys obviously tightened up your underwriting quite a bit. You've given some high-level metrics in terms of combined margin and IRR thresholds in the past. You know, where do those stand now? Have you maintained the similar threshold? Have you shifted that threshold at all up or down based on what you're seeing?
We've kept it the same, which is. You know, we used to be 55% combined gross margin IRR to buy ground. That went to 60. It's now 65%. You know, if you're gonna have a 25 gross margin, you're gonna need a 40 IRR. If you're gonna have a 30 gross margin, we'll give you a 35 IRR. It's tight. It's hard to find deals. We have deal flow, it's happening, but we are being very disciplined right now in that very high combined underwriting.
We're using current paces, you know?
Correct.
In other years, we might have had a 12-month pace put in front of us. We say the 12 months don't matter. We need to see what happened over the last 4 weeks, 8 weeks kind of pace, because that's what you should annualize, not the full 12 months.
Right. Now, as cycle times come down, as some building costs come down, you know, the team are allowed to plug in current conditions for that too, but they have to work off of current market conditions when it comes to sales price and sales pace. We have some frustrated land teams out there, but that's good. They're hustling. We celebrate deals. We're doing deals, and we make sure everybody knows that the treasury is open. It's just tight.
Thank you. This concludes our question and answer session. I would like to turn the conference back over to management for any closing comments.
Keith, thank you very much. Thanks, everyone for your interest and support. We appreciate it very much. We're always here to answer any individual questions you may have. What is it, 60 degrees Fahrenheit in Philly today. Spring is coming. Thanks so much. Take care.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.