Good morning, and welcome to Taylor Morrison's First Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations.

Thank you, and good morning. I am joined today by Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will provide an overview of our performance and strategic priorities, while Dave will share the highlights our financial results, after which we will be happy to take your questions. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Today's call, including the question-and-answer session, includes forward-looking statements that are subject to the safe harbor statement for forward-looking information that you will find in today's earnings release, which is available on the Investor Relations portion of our website. 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 let me turn the call over to Sheryl.

Thank you, Mackenzie, and good morning, everyone. I appreciate you joining us today and sincerely hope each of you and your loved ones remain healthy and safe. I am pleased to share with you our first quarter results, which reflect the initial benefits of our enhanced scale and local market depth as we continue to execute our strategic plan. We achieved a 42% increase in our monthly absorption pace to an all-time high of 4.3 net sales per community and a 320 basis point improvement in our home closings gross margin. In addition, we ended the quarter with a company record backlog of over 10,000 homes and more than 73,000 total homebuilding lots under control, positioning us to capitalize on the strong demand momentum we are experiencing across each of our price points and markets. And most importantly, we made progress towards our operational priorities aimed at increasing our profitability and return metrics over the next several quarters. After years of strategic growth and multiple acquisitions aimed at improving our long-term return potential, we are committed to delivering financial performance reflective of the size and operational advantages we have achieved in becoming a top side homebuilder. To that end, across the organization, our priorities are aligned to improve gross margins, increase asset efficiency, leverage our overheads and optimize our balance sheet. On the operational front, this work encompasses everything from streamlining our floor plans and design options, optimizing our strategic selling process, reducing our cost through procurement initiatives and leveraging our virtual sales tools. These efforts have always been key to our strategy, but there is still room to apply our best practices consistently across our newer markets to partially offset the higher land residuals and construction costs in our newly acquired communities. We are following the proven roadmap we…

Thanks, Sheryl, and good morning, everyone. Turning to the details of our first quarter results, generated net income of $98 million or $0.75 per diluted share compared to a net loss of $31 million or $0.26 per diluted share in the first quarter of 2020, which had been impacted by our acquisition of William Lyon Homes a year ago. During the quarter, our net sales orders increased 30% year-over-year to 4,492, the highest quarterly level in our company history. Our monthly absorption pace increased 42% year-over-year to 4.3 net sales orders per community, also an all-time company high. This benefited from an all-time company low cancellation rate of just 6%. As Sheryl noted, we achieved this record sales success, even while the strategy is designed to meet our sales activity to align with production capacity, underscoring the resiliency of the current demand environment and the competitive strength for our product offerings. This strength continued into April as we have managed absorption into the high 3 range. This order growth, combined with our large median backlog drove a 54% year-over-year increase in our ending backlog to 10,074 homes at quarter end, representing a sales value of $5.3 billion. The stronger-than-anticipated sales activity drove our average community count to 345 as accelerated community closeouts once again outpaced new community openings. This was below our prior guidance range due to a number of factors, including stronger-than-anticipated sales paces and ongoing extensions in municipality approvals. In addition, given the size of our backlog and commitment to our best-in-class customer experience, we opted to delay presales in a handful of communities and wait until models are fully complete to grand open. A strategy we believe ensures optimal margin performance on new openings. As a result, in the second quarter, our average community count is anticipated…

Thank you, Dave. Two weeks ago, we published our third annual environmental, social and governance report, which highlighted the ESG-related achievements we made in 2020 and the initiatives and priorities we are focused on for the future. At Taylor Morrison, we strongly believe that our people-centric approach to home building is foundational to our ability to generate long-term attractive returns for our shareholders. To that end, we incorporate sustainable, forward-thinking decision-making across all layers of our organization, from our land development, construction processes, people management, community engagement and governance. Among some of the highlights I am proud to share is the progress in our exclusive relationship with the National Wildlife Federation, with whom we collaborate to preserve and protect the natural environment in our communities. To date, we have certified nearly 4,000 acres of wild habitats and developed plans for over 170 more protected spaces, Monarch butterfly gardens and eco friendly playscapes across each of our divisions to foster responsible stewardship of the land we build on for generations to come. We also deepened our partnership with HomeAid America to renovate shelters in our local communities and provide housing options for our neighbors most in need. This is just one way in which we empower our team members to use our resources and talent to uplift our communities. A responsibility, which became even more important in 2020 as the pandemic laid bare the housing and security space by so many Americans, which is a crisis we feel uniquely charged to help address. This commitment to philanthropy recently earned us the 2021 Hearthstone BUILDER Humanitarian Award, which is presented annually in recognition of a lifetime commitment to bettering communities. And lastly, but certainly not least, I'm proud that we have helped pave a way for greater gender equality, and we feel similarly compelled to be a leader in representation for all races and ethnicities, starting with my own commitment to the CEO Action pledge, a promise to advance diversity and inclusion in our organization. In closing, I'd like to offer my deepest appreciation to our team members and trade partners for their tremendous efforts and commitment to our customers and our organization. Now I'd like to open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions]. Our first question comes from Matthew Bouley from Barclays.

This is Ashley Kim on for Matt today. So just given supply chain tightness, labor inflation, lumber inflation that you mentioned in the prepared remarks, can you just talk about your estimates around cost inflation and all isn't changed since given the full year outlook in 4Q? And then just maybe what assumptions on pricing and costs you're embedding in the gross margin guide?

Yes. Ashley, I'll start on the cost side. Clearly, the focus continues to be on lumber. We're hoping to see that normalize as we move through the year. With mills coming online, hopefully, some potential relief that the trade agreement has reached. There are other pockets impacted by costs as we've all heard, resin being one of those that's impacted cost and put some pressure on the supply chain. As we look out, I think from a cost increase standpoint for the rest of the year, it's probably around 400 basis points. But we're working with our trade partners on labor, getting materials and supplies onto the job sites, but I do believe we're going to see prices stay ahead of cost as we move through the rest of the year as well.

I might add to that, Ashley, because Dave's right, the biggest one that everyone's talking about is lumber. And I would tell you that the industry continues to raise the issues of lumber prices with the administration and probably members of Congress because it feels like we've been pretty slow to engage on the Canada negotiation. And I think even more concerning than that because I do understand we're getting close in the next many weeks. But I think even more concerning or maybe better said, the greater opportunity is if we could really respond with better domestic capacity. I mean, if you look across the border in Canada, we've seen that their mills have been kind of open at full speed since August. And we just haven't come back to full capacity yet. So I think we're all very excited about that opportunity in the months ahead.

That's helpful color. And then just my next one. As we get closer to the back half of '21 and start to think about normal sales pace, given communities are running low. Do you think sales pace kind of stays elevated on an absolute basis while just sequentially moving lower, kind of taking in normal seasonality? Or how are you thinking that will progress just given your start pace?

Yes. No, it's a good question. I think you have to look at a couple of things. One, when you say "stays elevated" right now, there's a few things that are at play, right? We're, as we reported, kind of a record pace in the first quarter. We are really managing that pace as we look forward, as we said, to align production. So I think if you want to talk about the demand side, the paces could remain quite elevated. And if you want to do a compare for us year-over-year, they're still tremendously elevated. But I'm going to share that we likely won't repeat this over four pace as we look through the balance of the year, partly because of our alignment to production, partly because of some seasonality. I think in April, we're probably somewhere in the 3.7 range. I think somewhere in those high 3s would be something that we would plan on compared to just anything over two as we look to the balance of the year.

Our next question comes from Carl Reichardt with BTIG.

Sheryl, I'm curious, so we're looking at a community count now that looks like it's going to be kind of flattish. It sounds like until so near the end of 2022. How do you expect those, since you'll be opening some and closing some -- that mix to change, if at all, between different product types and different geographies?

Carl, good question. A couple of things there. I think at the most global level, when you think about the consumer groups, I don't think you'll see a dramatic change. I mean, we've seen a shift, right? We're something close to -- I reported in my prepared comments, our mortgage consumers, we saw about a 40% share of first-time buyers. When I look at the first-time buyer set, we're up about 40% year-over-year. So I think this new structure that you can look deeply at our -- in our investment deck is probably the overall percentage. When you look specifically to the geographic penetration, there are -- there's definitely been some movement. You'll see in the press release, we've seen a reduction in our central, some of that is getting ourselves away from a finished lot business, which I would tell you, Texas historically was. And really making sure we can control our own destiny and not having the chance of gapping out based on development delays by controlling our destiny. So some of that by running larger, more efficient communities is part of it. So you might see some -- I'd say Texas is a place where you've seen that biggest change. But then when I look at consumers across the board, I'd say, pretty much status quo.

And then maybe can you talk a little bit about what the land market looks like now? We've had a couple of builders say, "Well, we're seeing a bit of erratic pricing in some markets." And then others say that the business remains largely rational. I'm just curious as to your perspective on that.

Thanks, Carl. You're always going to be able to point to those 1 or 2 crazy deals. I could probably do the same, but it's probably not where I would focus my effort. I think it's about how you approach the land market. I mean, everybody is out there, given the paces that have been recorded through the quarter. Everyone's running into the same challenges and opportunities to bring more land on board. But I would say, as we continue to stay focused on our strategy around key locations, actually, that's quite helpful because there's been a lot of movement out to the fringe. We're going to retain our strong processes and approval cadence and the way we look at deals. In fact, when I look at our land residual over the last 12 months, I would tell you that it's actually in line, and in some markets a little bit lower. Obviously, that's aided by price appreciation. The biggest shift we're seeing in our land kind of acquisition efforts, as we're seeing a much higher penetration of raw deals if you don't see the same finished lots available. But even with the activity that's out there, our return margin expectations remain higher than we've seen for a number of years.

The next question comes from Alan Ratner with Zelman & Associates.

First question. I'd love to drill in a little bit on the average order price, a huge increase this quarter, up 18% year-over-year. And I'm just curious, obviously, there's a lot of pricing power, but can you talk a little bit about whether any of that was impacted by mix? Or is a price in the mid-5s now kind of the right way to think about your business going forward? And assuming that's the case, I'm a little bit surprised, maybe there's not more of that upside flowing through to gross margin in the back half of the year. Just given, Dave, your commentary on cost inflation kind of in that 400 basis point range. So any conversation there would be great.

Yes, Alan, I'll start maybe with where we think ASP is going to trend to help you guys from a modeling perspective, given the ramp-up that we have seen in ASP. We're likely going to see the 2021 ASP in the 515 to 520 range, assuming pricing holds to where it is. Obviously, there's some additional pricing that we believe that's out there in the back half as we do believe it's going to stay ahead of cost. And then I can jump into the...

The margin, I guess, just perhaps maybe why that's not flowing through the margin a little bit stronger, just given how much pricing is up.

Yes. I mean, there's a couple of things. I mean, we are seeing the pricing power there. If you'd recall that with William Lyon, we did that acquisition, the legacy margins on the William side, William Lyon side are going to be lower than what the traditional Taylor Morrison on side is, just because it was a different cost structure. And we've talked a lot about the fact that it takes about 18 months to bring those margins up by working through the synergies. The synergies are in place now. But obviously, it took most of 2020 for that to get there. So many of the deliveries that we're seeing this quarter and to some extent in the second quarter are coming from those legacy William Lyon Communities that we started before those synergies were in place. As we move into Q3, those deliveries will have more of the synergies in there, which will be more apparent in the margins. And those synergies should start to be fully realized in about Q4 for us. The other component of that is just our level of spec inventory, Alan. We don't have a lot relative to what we'd normally have. Again, we had a lot around the time of the William Lyon acquisition. We sold through that pretty deeply, kind of right out of the gate, in part because of COVID, we were trying to push those through. A lot of those specs probably weren't the best specs. So we tried to be aggressive to generate the cash. And we're building -- trying to rebuild that spec population. It's just taking some time. So we just have a reduced number of specs that we can sell and close within the year.

Yes. And I think even more pointed than that, Alan. I mean, Dave's point on the spec and the to-be-builts is significant on how it's playing in your 2021 margin. So if we take you on a little -- as Dave tried, take you on a little bit of a history. We closed the deal, you might recall, we had something around 2,000, 2,200 Lyon specs. So when COVID happens, we shut down the spec machine. And to Dave's point, some of those were challenged specs, and we were going to make sure that we sold through those. And I would tell you, as we moved through the year, COVID would probably helped that quite a bit. Also continued focused on our to-be-built part of the portfolio and the way we doubled down on making sure those buyers could make it to the closing table with everything that was happening through the first half of last year. Coming into the year with a high penetration of to-be-built backlog and then having lumber move with those -- those prices already being contracted for. Sales prices being contracted for, put some more pressure. Obviously, as we moved into the end of the year and into the first quarter, and to Dave's point, to start building up some new spec inventory. We've deployed probably the same strategies many others have, and that is we're releasing those specs a little bit later in the construction cycle. We're making sure they get the full advantage of market pricing. But we didn't have that at the end of the year with the significant backlog that we came into '21 with.

Got it. I appreciate all of that color there, it's very helpful. And if I can just squeeze a second one in, Sheryl, thank you for the comments on the absorption pace and kind of helping us think through where that might normalize out at. The improvement you've had on your start pace over 4 months is very positive, especially given all the labor constraints out there today. And I know there's seasonality in that. But I guess I'm a little bit curious why, if you're starting over 4 a month right now per community and you just sold over 4 in the quarter, why that sales pace can't be sustained at over 4 a month, at least in the near term? And I'm curious, maybe land is the reason why, you just don't want to burn through more communities faster. But can you comment on that?

Yes. We want to continue to align pace and starts, sales pace and starts. So we've hit this pace of the 401. I think you have a couple of factors in there, Alan. One is some seasonality of where our starts can happen. I think, too, I wouldn't say land is really the governor at this point because I think where we're starting the homes, we actually have the land in inventory. But we're going to make sure that the trades can retain the pace. It is a fairly significant ramp up. And there was one more thing I was just going to mention. So when you think about the start pace, we're trying to put specs in there as well. I'm sorry.

And then obviously, we're continuing to push price.

Yes. We do want to continue...

That might meter pace a little bit as well.

Yes. And you're right, David. And the other thing I was going to throw out -- sorry, I lost it for a second, is we're really trying to make sure, Alan, that we only keep about two months of sales not started in front of us. Many of our buyers go through the design center process. We're trying to continue to streamline that process from contract to start. If you think about our active adult buyer and they might put somewhere in the range of 20%, 25% of purchase price into that home and options. So if you were starting off specs, Alan, it would be different. But we have a little bit of an elongated front end, which we continue to try to streamline, but I'd say that's part of it as well.

Got you. Our next question comes from Michael Rehaut with JPMorgan.

This is Maggie on for Mike. First question. First question on the active adult expansion beyond Florida that you talked about. As you look into the longer-term and you presumably continue that expansion into more markets, do you see any meaningful shifts in your mix of buyer types? Or will this more allow your active adult segment to grow in line with the rest of the business?

Yes. I think saying that it would stay generally the course, Maggie, is right. We really do like that part of the business. In the quarter, our active adult sales were up about 46%, our pace was up about 62%. That's a little bit guided by what happened at the end of the first quarter last year with COVID, and that was the buyer that really shut down. But I would tell you that they've come back with a vengeance and in fact, they've comes back with a slightly different attitude as well. And really, we see some urgency in their buying decision. But I would say somewhere in that 15% to 20% range of buyer mix as the business continues to grow. It's probably, for the next couple of years, about right.

Got it. And then second, I was wondering if we could get some more color just around the supply chain. I know you talked a little bit about how the Texas storms impacted the business in Texas. But as you look across the entire business, are there any other particular pressure points worth calling out?

There are. And I would tell you that ebbs and flows. What is a challenge today seems to get resolved tomorrow and a new challenge pops up. I mean, really, it's -- the labor is there. Obviously, that's the fight that it always is. We're seeing some labor pressure, but I would characterize that more or less as it's moderate. Some of the greatest challenges are just on allocations of supplies. So we seem to be fighting battles around drywall, doors, windows. Those come with extended lead times but it's not one thing that's overly disruptive. These things pop up, like I said. We basically have a war room that we're managing all this stuff out of and when problems arise, we find solutions, put them in place. And I expect that to continue throughout the year. So it is a challenge, but it's something that I feel like we can manage through.

And I think, what keys today's comments, Maggie, are it's so different market by market. I'll give you a couple of examples. There's an overarching one. If we were to go back say two quarters, appliances. They were trading out appliances literally across almost all of our markets because they were so back ordered on washers, dryers, refrigerators. Today, that's not a problem. And that was like 80% of the team's focus two quarters ago. If I go to a place like Texas, brick, which is, I mean, Texas, which is a predominantly brick market. There are certain colors of bricks that you can't get. A quarter from now, that will probably be different. You have a couple of markets where drywall is on allocation. You have many markets where it's not at all. So it's just -- it's a little bit of a [indiscernible] but we manage that each market. And I'd say the teams are generally doing a really nice job with it.

Our next question comes from Jay McCanless with Wedbush.

So my first question on G&A expense this quarter, up pretty meaningfully year-over-year and sequentially. Can you talk about that increase and what we should expect for a quarterly run rate going forward?

Did you say G&A?

Yes. The G&A dollars.

Yes. Some of that -- there is a little bit of timing that goes in there. I look at more as an overall SG&A leverage. We did leverage the selling expense. We didn't get the leverage on G&A just because of the lower closings, we talked about the push that we saw in Texas from the weather. Had we had that, we would have probably saw another, call it, 30 to 40 basis points of leverage overall on G&A. But we still are firm on our guidance that we're going to end up in, call it, the mid-9% range, depending on where ASP comes in, it could be slightly better. But it is something that we're focused on. And one thing I'd say is the strength that we generally lose on a pretty tight SG&A as a percentage of homebuilding revenue.

My second question, at the end of '19, on a pro forma basis, between you guys and William Lyon, they all had almost 450 communities. And now that's tracking down to 330 by the end of this year with a slow -- it sounds like a pretty slow growth rate to get to 23%. I guess why, from an operational or strategic perspective, do you want to keep the communities this low? And is it a lack of opportunities that you see in front of you to grow the count? Or you're just not willing to go out to some of these tertiary, excerpt markets to try and get some more community count and a little more volume?

A lot is wrapped up in there, Jay. Let me give it my best shot. So no, I don't think there's a strategic effort or initiative to keep it low. I would tell you, there's some places where we're going to trade-off doing 30-, 40-, 50-unit communities for larger communities. And I mentioned that in Texas, that was certainly one market where we were reliant on a lot of developers, and we've absolutely changed that. But that's not a company initiative to keep it low. I think when you look at the total number of communities back in like you said, '19, and then we look at what actually came on board when we acquired William Lyon. There's a number of different ways that we count communities. So I would tell you, the 450 combined was probably never quite right because when we aligned it to our community, every product line as a community, we had a slight shift there. You'll probably recall from a couple of quarters ago, we also took some of the underperforming assets with William Lyon, and we made the decisions to dispose of those. And so what you're seeing now, Jay, is really more of a timing as we continue to regrow the business. One, because we've sold PRU at a 4.2 pace, which is a 50% higher than our historical pace. So that burned through relatively quick. It doesn't bring any of the future ones forward. But the teams are quite focused on year over growth. And you'll see, as we move into next year, you'll see that continue to tick up with strong growth for the following year.

Yes. Jay, we still plan to open nearly 150 communities this year. I mean some of it is, as Sheryl said, selling through more quickly. Some of it is just delays in getting some new communities open. And we're focused on that. Some of that is from just municipalities and working through. But for me, the big takeaway, as Sheryl said, we're going to see growth in '22 over '21, but really towards the end of '22. And into '23, you're going to see that inflection point where you'll see the community count grow more meaningful. So it is really timing.

And then lastly, on active adult. Is the older product down in Florida that you acquired from AV, just wondering, is it selling at or better than the same pace that you're seeing for maybe some of the newer properties that you talked about in California and North Carolina?

Yes. So if you're speaking, I think, specifically on one project in Florida called Solivita. I would say that's in line with the balance of our active adult communities. What we have looked at doing, Jay, is rationalizing the product line across the state. So I would say it's not even the product that I would speak to in a community like Solivita. I would tell you that when an active adult kind of makes this decision, first, they look at the lifestyle component and then they find the house. And so we find that our consumers travel the state to look at, do they want a country club experience, which they might be able to go find in Naples? Do they want a water experience, which they can find in Sarasota? Do they want something that's more kind of in town, which you can find in Orlando? Or do you want a community that's further out? And I would say kind of away from the crowd, and you can find that out in Solivita. But the reality is, is the penetration is pretty similar across all of those. And it's really about the consumer selecting which lifestyle is right for them. And then they have plenty of home style sizes to pick from. We are seeing -- I don't know if it was part of the question, but I'll go ahead because I think it's interesting. We are seeing a little bit of a shift since COVID with what that buyer is looking for. And specifically on the product. And I find that interesting because usually, you don't hear a lot of talk around the product with the consumer. And it might be because we're seeing a pickup in that Midwest/Northeastern buyer, and they want more of an outdoor experience. But we are seeing this really conscious desire to have greater outdoor spaces. That can mean large screened-in patios. That can mean outdoor kitchens, but that's probably the biggest shift we've seen in that buyer.

Our next question comes from Truman Patterson with Wolfe Research.

First, just wanted to touch on the community count guidance again, just really trying to understand what shifted over the prior quarter for you all to update your guidance, maybe rank order? Was it primarily the elevated absorption pace that you're now baking in? You also mentioned some local municipality constraints. Could you touch on that a little bit? Maybe how much the approval process is extending. And then finally, on the land development side, everybody is really trying to ramp up community count today as quickly as possible. Are you seeing any internal development delays as well?

Sure, Truman. So on the community count, I would break down the difference, probably 60% was accelerated sales pace and about 40% was a delay in getting the communities open. Again, that's kind of a timing issue. So those were getting pushed to Q2, might see a little bit Q2 into Q3, pushed a little bit. But when we look at where our communities are, what we have left to sell, we know that we'll probably offset some of those new community openings with some additional closeouts, but it gets us down to that 330 number. So we feel pretty good about that. It's going to stay at that run rate as we move through the next quarter -- couple of quarters all the way to year-end.

And when you look at that 40%, Truman, I mean when -- delays is a big word, right? Because that could be -- I mean, land -- it's not really land delays because we knew about those when we gave our guidance. It's really about how we bring the product to market. So for example, there might be a half dozen of those communities where we decided not to enter presale, but complete the model complex, make sure it's 100% buttoned up. Because when we look at the production cadence and when we're going to start those houses, there was no reason to rush it to market. So there's a lot of things when we talk about that 40%. And I'd say the smallest piece of that would be land delays, but really just how we bring the positions to market and you move them a month, and obviously, it changes your community count.

Okay. Okay. And then, Sheryl, in your prepared remarks, I didn't quite catch this, and I'm hoping if you could elaborate on it a little bit further, a question on affordability. And you were discussing your backlog and how much, I'll just say, kind of wiggle room your backlog has relative to rates before being, we'll say, unable to qualify.

Yes. I sure did, Truman. And this is a stat that I've been giving every quarter, I don't know, at least 2, 3, 4 years. And it's really fascinating because it's almost, with all the discussions that we're hearing in the marketplace and certainly on, I think, the calls this quarter. We're actually seeing a cushion that's almost at an all-time high. So it really speaks to kind of the change in the consumer. So to your point specifically, what I said is that the average cushion our conventional buyers has is about 700 basis points in range. And the FHA buyer has about 500 basis points. And as I mentioned, the overall credit profile is really improving, even though we've seen prices go up. And even though we've seen an increase in our pool of first-time buyers. The other thing that I find fascinating is, I would have expected that there would have been an offset with square footages. And that may be what people were doing, were buying smaller houses. But that's actually not the fact at all. Our square footages are either flat to slightly up. We're seeing that our inventory home square footages are down, which makes sense that, that would be more of our more affordable, first-time buyers is where we would put our inventory. But our buyers that are selecting a lot in a home site, their actual square footages are going up. And so I think the important thing here is to really put all of this in context. So you can look at that room that we have and say, hey, they might have 500 to 700 basis points but emotionally, I don't know that if interest rates went to 7% or 8% that, that won't shut down the market because I think the spike of the buyer would be quite impacted. So I try to ground myself with like where is the consumer today from a year ago. And if I look at where we are from a year ago, we will probably have a 30 to 40 basis point improvement from first quarter last year in interest rate today, and that gives the consumer somewhere around $17,000 to $20,000 of more buying power. If I think about where that is today, which is somewhere 3% or under for both conventional and FHA to the peak in the last 12 months, we're about 70 to 80 basis points higher. And then if you want to kind of look long-term at the affordability of -- the NAR's affordability index, we're actually considerably more affordable than on our long-term 20-year average. So a lot of moving parts and pieces. And absolutely, we've seen prices move. But the good news is the consumer is making some decisions that still make this a very affordable time to buy.

Our next question comes from Alex Rygiel with B. Riley.

Can you give us an update on your build-to-rent strategy?

You bet. Thanks for asking the question. So we have 2 projects in Phoenix that have begun production. And we actually just closed on our first deal in Phoenix, which is going to be a combo deal with our traditional homebuilding side as well as our build to rent. We've got our vertical construction amenities, obviously, going forward in our first projects in Phoenix. But probably most importantly, as we look at the growth of the business, we have about 20 deals at some stage from accepted LOI through contract that you'll see coming to market over the next couple of years. I think what's probably most important from a modeling standpoint is we have no real impact on the financials until we begin to sell the assets, which will likely be in late next year. You'll start to see some immaterial rental income come in to the business next year. And when we give next year's guidance, we'll include that. But excited about kind of the trajectory. And as we said last quarter, by the end of this year, we'll have 9 markets with BTR in the portfolio at one stage or another.

Our next question comes from Tyler Batory with Janney.

I appreciate all the commentary thus far here. Just had one multi-part question on my end here. Just interested in your views on leverage and capital allocation in this environment. I mean, I think you've laid out an outlook with the community count ramp and the margin improvements, and there should be a substantial amount of earnings power coming through the business. And you also have a very strong backdrop right now, strong demand, strong fundamentals. How much of a priority is lower leverage right now? Where would you like to see leverage move in the long term. And given the environment and your outlook over the next couple of years, how would you rank leverage against some of the other uses for your capital, cash, whether it be repurchases or really ramping up the land acquisition side of things even more from here?

Yes, Tyler, thanks for the question. First and foremost, we're return focused. The actions that we take are designed to improve our returns, and we strive to be top quartile there over time. Leverage is important. It gets balanced with all the other opportunities that are out there. We've talked about, by the end of this year, we'll be in the low 30% range from a net debt-to-cap standpoint. I expect that to drop further next year as well. What we can do around leverage is somewhat constrained just based on that we have due. We're in a great position that we don't have any debt due till 2023. When I look at where current rates are right now, it's a little bit expensive to take those out. It gets more appealing as we move through the year. So we balance that with other investments that we make, just in general, whether that be back in the business through organic growth, buying back stock or paying down debt. So we'll continue to look at all those. We're focused on buying back stock right now, just given the limited opportunities when we look at debt, at least here in the short term. We continue to believe strongly our stock is undervalued. We have about $48 million of share repurchase authorization left. I think you will probably see us go through that maybe a bit sooner than later. And then once we're through that, we'll reassess our investment opportunities. But again, this is about driving returns for the business first and foremost.

Our next question comes from Mike Dahl with RBC Capital Markets.

Appreciate the color so far. My first question is in some ways a follow-up on capital allocation. But first, in terms of the community count, your previous expectation with respect to '22 was kind of modest growth later in '22 relative to a base of kind of 360, 365 communities. So now when you're referencing the modest growth expectations still in late '22, is that now off the 330 base or would you still expect that you could get something kind of closer into the 360s by year-end next year? The second part of this is, I know you talked about kind of harvesting and the returns focus. But given the sales pace, community count has shifted relative to how you would have viewed things over the past year or 18 months. Has your attitude towards the M&A changed at all? Is there a willingness to look at opportunities going forward?

So we'll start with community count. So yes, Mike, we end the year with, call it, the 330. We do expect to grow that in 2022. Obviously, as the year goes on, and we'll refine where we think that expectation is, but it's probably somewhere in the mid-300s. And then we'll see that inflection point as we get to the end of 2022. We expect to start, call it, an additional wave of growth on the community count and we'll see that move higher in 2023.

And then to your M&A question, Mike. I think as we had said last quarter, right now, we are a year into a fairly significant transformative M&A, and we're just anxious to get everyone back to work full time, working on-site, so that we can finish the cultural integration, make sure that we're seeing all the synergies pull-through. So it's head down for us on getting this one done. And too early to talk about anything in the future.

Okay. Understood. My follow-up question, it's more around kind of the cost comments. And Dave, I'm trying to reconcile the comments around cost impacts peaking. It sounded like soon in 2Q. I didn't know if that was on an absolute basis or relative to your margins given pricing power kicking in. And then the 400 basis points, it just seems like with lumber and panels, where they are today and inflation and some other things, labor, land, building materials. I know some of the other categories don't necessarily make up a ton, but they're all inflating. It just -- that sounds a little quick and low in terms of the peak and magnitude of cost inflation. Can you just elaborate a little more there?

Yes, I threw out 400 basis points. What I'm talking about is we see what's coming down the pipe from a cost per perspective between now and the end of the year. It's not necessarily going to be tied to what's in our backlog. For example, in Q2 those costs are generally known.

Yes. I think, Mike, the difference is with the exposure that we had in the backlog. So when you think about kind of where we go from here, it's how we've been able to adjust price to overcome it. And so the greatest pressure -- so the 4% is, to your point, Dave, from here, right? So the greatest pressure, Mike, was really the first half where we brought in the big backlog. And when you think about the impact to the balance of the year, we actually think we have -- we're in pretty decent shape.

And we are seeing advantages of our new sites as well. That is helping us when we go to the table to negotiate costs. It's much around cost avoidance as anything else and getting folks and materials onto our site.

Our next question comes from Deepa Raghavan with Wells Fargo Securities.

Can you provide -- Sheryl, can you provide any thoughts on the pricing strength? And how we should think about 2022 and beyond, especially as inflation starts to ease? Like is there a case to be made for continued but moderate price increases, say, 1% to 2% perhaps into next year, even if there is a giveback on price because inflation would probably ease at that time?

Yes. It's a great question, Deepa. I think we're all trying to understand exactly the longevity of the strength that we're seeing out in the market today. What I would tell you today is we have a supply issue in this country. And as a result of it, it's giving a great deal of pricing opportunity. As we sit here today, we continue to see those advantages and opportunities really across the board. It's very hard to say when you look 6 months or 12 months out and new supply comes to the marketplace, will they continue at the pace we've seen? My crystal ball would say we're going to continue in a very strong market for some time, given the undersupply that we have today. But the first that will begin to moderate will be price, right? So when I look at the pricing power we've had, if I just take a quarter, Deepa, and say, on average, maybe we're seeing 2% on the quarter. Do I think that's long term sustainable? Probably not. Do I think that we'll continue to see pricing above cost? Probably so, but hard for me to estimate what exactly that will look like in 2022.

Okay. That's fair. I'd probably ask you about some incremental concerns from buyers, perhaps. I mean, I appreciate the rate sensitivity you gave from your end. It's pretty -- statistically pretty compelling. And I also appreciate that the migrant population -- the immigrant population, sorry, is probably driving some of that -- price increases in some markets. But are you hearing about any incremental concerns from your local buyers, especially prices have been trending so sharply higher? And I'm just curious, at some point in time, it needs to have an impact on demand. And the immigrant population cannot keep flowing forever. So just curious, any incremental concerns you're hearing from local buyers? That's the crux of the question.

Yes. It's a good question, Deepa. And I guess I'd respond in a couple of ways. First, I would say if there's noise in the system. And of course, there's always going to be some noise, right? I would tell you that, that's probably at the more affordable first-time buyer. And I'm quite delighted as we look at the kind of dynamic of our first time buyer, it's a very well balance sheet, first time buyer/consumer. And so we're not feeling it tremendously. But if I look at our most affordable communities, I would say that's where we are very careful in our pricing strategy. The other thing, to your point, and it's why I highlighted in my prepared comments the California migration, is in most of our markets as we bring Californians in, and if I were to point to a market, I think like Vegas, I think we're seeing 20%, the buyers came out of California in the quarter. Their perspective of affordable is very different. So to your point, you might see that local consumer that wants to sell their house. And even though it's a really good time to sell and they've got appreciation in their home. Having been in the market for so long, they're going to look at that price movement a little different, but then they're going to rely on what is it going to cost me on a monthly basis. And now go back to the statistics I shared with you from a year ago, it's still more affordable. So I hope that helps.

Next question comes from Ken Zener with KeyBanc.

Appreciate your guys' time here. And I'll just -- I have two simple questions. The first one is, can you talk about the option trends you're seeing? And generally, if that's margin accretive for you? And then the second question is a broader one, but -- what a year to be integrating William Lyon and with all the integrations you've done. When you take a broader look at your kind of returns, it's just under -- it's about four years of land today, what do you think is the biggest driver that you guys are going to focus on to improve your asset turns?

So I'll start with on the option side. I would say that's holding in very nicely. The margin for options overall are accretive to the homebuilding margin. So obviously, we try to push that where we can. But I'm actually very pleased with where it's holding in, especially given the pricing environment that we're seeing right now.

Yes. And if you wanted to be even more specific for you without getting into the crazy detail, I mean, year-over-year, we're seeing accretion, slight accretion, but it's accretion on a per unit basis and as a percentage basis, as our ASP continues to grow. I think a lot of that is continuing to come from our active adult buyer. We're seeing tremendous strength. And I go -- I think it goes back to the psyche I discussed earlier around this buyer, and they want what they want, they can afford what they want, they want it when they want it. And we're absolutely seeing that in the design center today. As far as the question around timing of the acquisition, I think that was one of your questions late in there.

So really just the asset turns.

Be more specific [indiscernible]

Just like you guys have done an amazing job. You were given lots of operational challenges in even normal times. And you guys have done very well during these very difficult times. But as you kind of look out in the next year or 2 or 3 with your asset turns, inventory turns kind of being at that one, give or take level. How do you think you might be improving those? Is it lowering the land? Is it somehow making homes faster, which is difficult. Just try to think about the capital somehow put in net turns.

It's a great question. And yes, we're always focused on asset turns. Again, our priority is driving returns, and that's key. We've talked a lot about optioning our land more so, controlling it versus owning it. We moved that up to 32%. We're targeting to get to 40% over the next, call it, 2 years. And with that, lightening that balance sheet will enhance the returns. We're always aspiring to reduce cycle times in production. We're looking for ways to improve that constantly. But obviously, in the market that we're in right now where demand is so high and labor and materials are so constrained. Just even holding serve is a win, I would say. That will start to ease at some point. It always does. That will just help turns later on.

And then I think the key in what Dave is saying, Ken, is there's not a silver bullet here. When we talk about the term operational excellence, we have to be focused on all of it. And thanks for the kind words on integration because over the last 2.5, 3 years, we've brought in 2 very large companies. And so getting that alignment is probably the single greatest thing we can do. Because I can sit here and talk to you about the difference and the more affordable mix, which will allow our terms to move up a bit. I can talk to you about the Canvas initiatives I mentioned in my prepared comments about simplification. So we streamline that time from contract to start. I can talk to you about architectural alignment, the land, as Dave talked about, more off balance sheet. All those things are going to have a play. You're going to see the impact of all of those coming together, and that's why we always say, give us 18 months before you really -- because the first year you're just burning off really what they had in the pipeline in production. You didn't get to influence any of it. Now what's going in the ground today actually has the benefit of the work that we've been doing. Until you actually turn through the land, you don't get the full benefit. Because I can't save my way to prosperity. It's really about cycling through the land and bringing new land in with the understanding of how you can bring it to market most efficiently.

Next question comes from Alex Barrón with Housing Research Center. Alex Barrón: Yes. I just wanted to focus on a couple of things. One was your land strategy. It seems like you're options have been going up recently. I'm just trying to figure out where -- how far you guys think that could go over the course of this year? And the second question, I think last quarter, you talked about migration from other states. Wondering if you can give an update on what you're seeing there.

Sure. From a controlled land aspect, like I said, we're at 32%. We expect to move that a little bit. Each quarter, hopefully, sequentially, we might see a couple where it stalls maybe for a quarter, but then picks back up. But that's a little bit harder to predict quarter-to-quarter, Alex. So we're looking more at the end of call it, 2022, where we're aspiring to be at that 40% controlled level.

Yes. And I think it's important. It's not like this is a new aspiration, Alex. Remember that when we did some of these acquisitions, I'll go back to AV. That really changed our mix and we were happy to do that because of the age and when that land had been acquired. But now we had to start working that back down. So we're just kind of back on track. As far as the migration question, probably the best data I can share is in 2020, about 13% of our sales or closings came from out of state. In our backlog right now, that number is almost 20%. So a significant shift in migration patterns, and we're seeing the probably most noticeable increases in Arizona, Nevada, Florida and our Texas markets.

And I'm not showing any further questions at this time.

Well, thank you all for joining us today to share our Q1 results. I'm excited to talk to you again next quarter. Stay safe.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.