PulteGroup Inc (PHM) Q4 2020 Earnings Call Transcript

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PulteGroup Inc (PHM 2.19%)
Q4 2020 Earnings Call
Jan 28, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

[Operator Instructions] Good morning and welcome to the fourth quarter 2020 PulteGroup Inc earnings conference call. [Operator Instructions] I would now like to turn the conference over to James Zeumer, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Thank you, Andrew, and good morning. Pleased to welcome you to PulteGroup's fourth-quarter earnings call for the period ended December 31, 2020. We appreciate your time this morning and offer belated best wishes for the new year. I'm joined on today's call by Ryan Marshall, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP of Finance. A copy of this morning's earnings release and the presentation slides that accompany today's call have been posted to our corporate website at pultegroup.com. We'll also post an audio replay of this call later today.

I want to highlight that we will be discussing our reported fourth-quarter numbers as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period. A reconciliation of our adjusted results to our reported financial results is included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. Also, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slide. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

Now, let me turn the call over to Ryan Marshall. Ryan?

Ryan Marshall -- President and Chief Executive Officer

Thanks, Jim, and good morning.

I appreciate everyone joining today's call. I hope that your new year has started well and that you are -- and that you remain healthy and safe. It goes without saying that Covid19 and the resulting challenges made 2020 a year unlike any that we've experienced before. Let me just say right upfront that I'm extremely proud of how our entire team responded and how our organization remain engaged and focused during some very difficult times. Thanks to the sustained efforts of our dedicated team, we successfully navigated through a year that started strong, slammed to a halt, and then accelerated into the strongest demand environment this industry has experienced in more than a decade. As you read in this morning's press release, PulteGroup completed an exceptional year by delivering outstanding fourth-quarter results that included a 24% increase in orders, a 220-point increase in gross margin, and a 31% increase in adjusted earnings per share.

We also ended the quarter with $2.6 billion of cash and a net debt to capital ratio below 2%. Reflecting a lot of hard work by an amazing team, PulteGroup realized a 6% increase in full-year closings to 24,624 homes and a corresponding 7% increase in full-year home sale revenues to $10.6 billion. Benefiting from our ability to expand Homebuilding gross and operating margins along with dramatic gains in our financial services business, we converted the 7% topline growth into a 29% increase in pre-tax income of $1.7 billion. Our outstanding results extend beyond our income statement as we generated $1.8 billion in operating cash flow in 2020 after investing $2.9 billion in land and development during the year.

Beyond investing in land, we increased our dividend by 17%, effective with the payment we made this month and repurchased a $171 million of our common shares in 2020, despite having suspended the program for six months because of the pandemic. I am also extraordinarily proud to note that consistent with our focus on generating high returns over the housing cycle, we realized a 23.7% return on equity for the year. With 2020 complete, we enter 2021 in a strong financial position and with numerous opportunities to drive further business gains. Obviously, we can't control how the pandemic plays out but we are optimistic that the multiple vaccines getting distributed, mean that we can see a light at the end of this long tunnel. Bob will provide specific guidance as part of his comments, but let me offer a view of how we are looking at the business and how we plan to operate in the year ahead.

We expect a strong demand environment, which the housing industry experienced for much of 2020 and in reality for many quarters prior to Covid can continue well into 2021. We said for years that we thought housing starts needed to be around 1.5 million to meet the natural demand created by growth in population and household formations. We finally reached 1.5 million starts in 2020, but we have under built relative to this number for years.

Given this unmet need and the potential mix shift in demand toward more single-family and away-from-apartment living, we believe demand can remain strong going forward for our business. Beyond the demographic tailwind, we also believe that the pandemic has caused a permanent increase in the number of people who will be working from home full or at least part-time. Such a shift has profound implications in terms of what people need from their homes as well as where their homes can be located. For example, we believe a remote working dynamic expands the buyer pool because it can allow people to purchase more affordable homes in further out locations.

At the same time, working from home has the potential to increase the intent to buy new homes, which offer floor plans and technology features to better meet the needs of today's homebuyers. With such a strong demand environment, it works to our advantage to be among the nation's largest builders with access to land, labor, and material resources. We enter 2021 with more than 15,000 houses in backlog, 180,000 lots under control, of which half are controlled via option and long-standing relationships with suppliers and trade partners. The combination of these factors should allow us to increase 2021 deliveries by more than 20% over the last year. As we've demonstrated over the years, I am confident in our organization's ability to operate the business successfully and to get homes built, but I do think it's fair to acknowledge that there are points of friction in the system. Labor remains tight, although the change in administration may allow for some relief assuming immigration policies are eased. At the same time, product manufacturers are battling supply chain issues and the occasional Covid-related disruption within their plants. Although, I must say, our suppliers have been tremendous partners, going above and beyond in many instances to provide the materials we need.

Given high expectations for the Company's operating performance and our balance sheet strength at year-end, I believe we are exceptionally well-positioned to execute on all of our capital allocation priorities, more specifically, we are targeting land acquisition and development spend of $3.7 billion in 2021. This is an increase of roughly $800 million over our 2020 investment, but we think appropriate given the growth in our operations. Beyond our expected land investment, we have made great progress in planning for and selecting the location of our next offsite manufacturing plant. We still have a few details to work out with the owners of the sites under consideration, but we hope to finalize a plant agreement within the next couple of months and then begin installing the requisite production equipment later this year.

Our ICG operation in Jacksonville has exceeded our expectations, so we are excited to get this new plant up and running sometime during the first quarter of next year. Along with investing in the business and continuing to fund our dividend, as you read in this morning's press release, we will be using available cash to pay down $726 million of our outstanding debt in the first quarter. And finally, we will continue to return excess funds to shareholders through our share repurchase program. In response to the uncertainties caused by the pandemic, we had suspended share repurchase activities during the second and third quarters of last year. As detailed in our press release, we resumed the program and repurchased $75 million of stock in the fourth quarter, bringing our full-year total to $171 million. We have repurchased more than one-third of the Company's share since initiating the program and we expect to remain an active buyer of our shares going forward.

Housing demand was outstanding in the back half of 2020, with strength across all geographies and buyer segments. And I'm certainly pleased to report that this strength has continued unabated through the first few weeks of January. The housing industry has been extremely fortunate in being an economic engine, but we do not take this for granted nor would we forget how devastating Covid19 has been for thousands of businesses and millions of people.

It is certainly our hope that we are rapidly approaching the end of this pandemic. Let me now turn the call over to Bob.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Thanks, Ryan. Good morning. everyone, and let me add my best wishes and express my hope that we can all navigate the coming year in health and safety. As indicated in our press release, our fourth-quarter financial results were impacted by the following items: a $16 million net pre-tax benefit from adjustments to insurance-related reserves, a $22 million pre-tax charge from adjustments to financial services reserves, and a tax benefit of $38 million resulting from energy tax credits and deferred tax valuation allowance adjustments. Where appropriate, I'll reference the impact of these items during my review of the quarter. For our fourth quarter, home sale revenues increased 5% over last year to $3.1 billion. The increase in revenues for the period was driven primarily by a 4% increase in average sales price to $446,000 as closings were up 1% to 6,860 homes.

The increase in average sales price for the period reflects a strong pricing environment for all buyer groups. We're pleased to report that on a year-over-year basis. Our average sales price was higher for our first time move-up and active adult buyer groups. The demographic mix of our closings grew [Phonetic] slightly in the quarter and reflects changes caused both by the pandemic and by our strategic investment to serve more first-time buyers. Consistent with these dynamics, our fourth-quarter closings in 2020 consisted of 32% first-time, 46% move-up, and 22% active adult. In the fourth quarter of 2019, closings were comprised of 31% first-time, 45% move up, and 24% active adult.

Our net new orders for the fourth quarter increased 24% over last year to 7,056 homes, while our average community count for the period was down 2% from last year to 846. The decrease in community count reflects the slowing of our land activities earlier this year in response to the pandemic as well as the faster close out of communities due to the strong demand environment and related elevated absorption paces. Demand was strong across the entire period and actually accelerated toward quarter-end as December orders were higher than November and essentially flat with October. Given the strength of ongoing demand, our divisions are taking specific actions to manage sales pace and production so our backlog does not get over extended. We are also being thoughtful about adjusting priced to help cover rising house costs, especially the cost of lumber, which moved significantly higher in the quarter.

Consistent with what we experienced during the third quarter, demand was strong across all of our brands, including the ongoing acceleration in demand among active adult buyers. In the fourth quarter, first-time orders increased 27% to 2,084 homes, move-up orders increased 17% in 2,994 homes, while active adult orders increased 33% to 1,978 homes. In fact, our Q4 active adult orders were less than 100 units below the all-time quarterly high we reported in the third quarter of this year. After a pause in the first half of 2020, active adult buyers have clearly gotten off the fence. Our fourth quarter cancellation rate was 12% which is down from 14% last year. Based on the strength of our sales, our year-end backlog increased 44% over last year to 15,158 homes. Backlog value at year-end was $6.8 billion compared with $4.5 billion last year.

We believe our large backlog and continued strong demand for new homes has the company extremely well-positioned to realize significant year-over-year growth in closings in 2021. At the end of the fourth quarter, we had a total of 12,370 homes under construction, of which 1,949 or 16% were spec. In the fourth quarter, we focused on closing sold inventory, but we are actively working to increase production of sold and spec homes throughout our markets. Our large backlog makes this process a little easier, and we're working closely with our trades and product suppliers to ensure the needed capacity to deliver more homes going forward. With 12,000 -- 12,370 homes under construction at year-end, we expect deliveries in the first quarter of 2021 to be between 6,300 and 6,600 homes. At the midpoint, this would be a 20% increase in closings over last year. This growth rate is in line with what we expect for the full year as we are targeting deliveries to increase approximately 22% to 30,000 homes for all of 2021.

Given the strength of our move up and active adult sales along with price increases realized across all buyer groups, our average sales price and backlog was up 4% over last year to $448,000. Based on the prices in backlog, we expect our average sales price on closings to be in the range of $430,000 to $435,000 both for the first quarter and for the full year 2021. As we've said in the past, the final mix in deliveries can influence the average sales price we deliver in any given quarter.

Reflecting the benefits of the favorable pricing environment and our ongoing work to run a more efficient Homebuilding operation, our fourth quarter gross margin of 25% was up 220 basis points over last year and 50 basis points from the third quarter of this year. Driven primarily by increases in lumber and labor, our house costs will be higher in 2021, however, given strong demand conditions, we expect to pass through most of these costs through increased sales prices. As a result, we expect gross margins to remain high and be approximately 24.5% for both the first quarter and the full year.

Our reported SG&A expense for the fourth quarter was $280 million 9.1% of home sale revenues. Excluding the $16 million net pre-tax benefit from adjustments to insurance-related reserves recorded in the fourth quarter, our adjusted SG&A expense was $296 million or 9.7% of home sale revenues. Last year, our reported fourth quarter SG&A expense was $262 million or 8.9% of home sale revenues. Excluding insurance reserve adjustment of $31 million last year, our adjusted SG&A expense was $293 million or 10% of home sale revenues. At the outset of the pandemic, we took action to adjust our overheads in anticipation of a more difficult operating environment. Although nearly all furloughed employees have rejoined the company and we've hired back many of the employees we released, we still expect to realize improved overhead leverage in 2021.

At present, we expect SG&A expense in the first quarter of 2021 to be in the range of 10.5% to 10.9%, which is down from 11.9% last year. For the full year, we are targeting an SG&A expense of 10% of home sale revenues down from 10.2% on an adjusted basis last year. Our financial services operations continued to deliver strong results as we reported fourth quarter pre-tax income of $43 million, which is up from $34 million last year. It's worth noting that our fourth quarter 2020 results include the $22 million pre-tax charge from adjustments to our mortgage origination reserves as we settled claims tied to mortgages issued prior to the housing collapse.

The increase in pre-tax income in the quarter from our financial services business reflects continued favorable rate and competitive market conditions along with higher loan volumes resulting from an increase in mortgage capture rate. Our mortgage capture rate for the quarter was 86%, up from 84% last year. Our reported tax expense for the fourth quarter was $86 million, which represents an effective tax rate of 16.4%, and which reflects the tax benefit of $38 million resulting from energy tax credits and deferred tax valuation allowance adjustments recorded in the period. In 2021, we expect our tax rate to be approximately 23.5%, including the benefit of energy tax credits we expect to realize this year. Finishing up my review of the income statement, we reported net income for the fourth quarter of $438 million or $1.62 per share. Our adjusted net income for the period was $404 million or $1.49 per share. In the comparable prior-year period, the Company reported net income of $336 million or $1.22 per share and adjusted net income of $312 million or $1.14 per share.

Benefiting from the outstanding financial performance and resulting cash flows generated by our Homebuilding and Financial Services operations, we ended the quarter with $2.6 billion of cash. In addition, at the end of the year, our gross debt to capital ratio was 29.5% which is down from 33.6% last year, and our net-debt-to-capital ratio was 1.8%. In the fourth quarter, we repurchased 1.7 million common shares at a cost of $75 million or an average price of $43.69 per share. For the full year, the company returned $171 million to shareholders through the repurchase of 4.5 million common shares at a cost of $37.58 per share.

As noted in our earnings release, we expect to pay down $726 million of our outstanding senior notes in two separate transactions during the first quarter of this year. First, we will exercise the early redemption feature effective February 1, on $426 million of senior notes originally scheduled to mature on March 1 of this year. In addition, we initiated a tender offer this morning for $300 million of our 2026 and 2027 senior notes, which we expect to complete on February 26. Assuming full execution of the tender, the retirement of the $726 million will save the company approximately $34 million in annual interest charges and on a pro forma basis, lower our gross debt-to-capital ratio to 23.7%. In the fourth quarter, we invested $942 million in land acquisition and development, which brings our full-year 2020 spend to $2.9 billion. As Ryan mentioned, given our positive view of the market and the expected strong cash flow generation of the business, we currently expect to increase our investment in land acquisition and development to $3.7 billion in 2021.

And finally, we ended the year with slightly more than 180,000 lots under control, of which 91,000 were owned and 89,000 were controlled through auctions. I want to highlight that based on these numbers, we've effectively reached our stated goals of having 50% of our land pipeline controlled through options, and given our guidance targeting 30,000 closings in '21, we've also reached our goal of having three years of owned lots. Land acquisition could be lumpy, so the numbers could move around, but we remain disciplined in our investment practices and focused on enhancing returns and reducing risks through the use of options.

Now let me turn the call back to Ryan.

Ryan Marshall -- President and Chief Executive Officer

Thanks, Bob. When I took over as CEO in 2016, there were several areas where I saw an opportunity to enhance our long-term business performance. Among the targets we put in place were: to expand first time to be one-third of our business, to lower our lot position to three years of owned lots, to control 50% of our land pipeline via options, and increase our growth rates while continuing to deliver high returns for our shareholders.

Given our 2020 performance and our expectations for 2021, it is gratifying to see that we've achieved these initial goals. With this foundational work in place, we can now continue developing an even more successful business as we expand our operations, advance innovative customer-centric technologies, and integrate new construction processes. Our outstanding 2020 results in combination with continued strength in housing demand also has PulteGroup entering '21 with tremendous momentum. We begin the year with our largest backlog in well over a decade, along with great operating metrics and a strong balance sheet that gives us the flexibility to capitalize on market opportunities.

These opportunities include the expansion of our offsite manufacturing capabilities that I spoke about earlier, as well as the geographic expansion of our Homebuilding operations. I'm sure that most of you saw last week's press release that PulteGroup has established new operations in the greater Denver area, at the same time our Raleigh division is extending its reach and establishing a presence in the Triad area of North Carolina, which includes the cities of Greensboro, Winston-Salem, and Burlington. We have our initial land positions in place and we're working quickly to increase our lot pipeline in these new areas.

We are excited about the opportunities we see in both markets, as well as several other cities we are currently evaluating. With our goal to increase closings by more than 20% this year, along with investing $3.7 billion in land and our expansion into new markets, we believe we are well-positioned to grow our operations while continuing to deliver high returns.

In closing, I'm extremely proud of what our organization accomplished in 2020. And I want to thank all of our employees for their efforts toward delivering an outstanding home buying experience and homes of exceptional quality. I also want to thank our suppliers and trade partners who are working tirelessly to provide the resources needed to successfully run our business.

We enter 2021 with high expectations, but I know the pandemic continues to rage and so we will continue to operate our business, thoughtfully and safely. Let me turn the call back to Jim.

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Hey, thanks, Ryan. We're now prepared to open the call to questions so we can get as many questions completed as possible during the remaining time of this call. We ask that you limit yourself to one question and one follow-up. Thank you.

And now, I may ask Andrew to again explain the process and open the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

The first question comes from Mike Dahl of RBC Capital Markets. Please go ahead.

Mike Dahl -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my questions and nice results. Ryan or Bob -- as first question really is around land investment and in a way, capital allocation as well, and not to turn our nose up at any $100 million increase in land spend this year, it does seem like you guys are maintaining your typical balance when you're thinking about the debt paydown, the potential for share repurchases. A lot of your peers have started to more significantly ramp up land investment, just given the strength in demand and potentially some shortfalls in community counts coming. How do you think about this current environment and your allocation to land investment relative to your more balanced kind of through cycle mentality?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Mike, good morning. Thanks for the question. A couple of things that I would share with you. Number one: I would orient [Phonetic] you to the fact that we've maintained for, the better part of the decade, that we're running a balanced business through cycle where we want to invest in land, first and foremost, and grow our business, but there are other parts of capital allocation that we believe create long-term value. We are taking a pretty -- a pretty big step-up in our land spend this year as I think we've highlighted this morning, going to $3.7 billion. It's a big bump from where we were at in 2020.

Certainly, there were some delays in '20 that have rolled into '21. But even adjusting for that, we think it's a pretty big step-up. We are going to continue to be very thoughtful and responsible in making sure that we're driving the types of returns that we know create long-term value. We just don't believe that now is the appropriate time to get into -- back into the mentality where all available cash is funneled into land. The last thing, Mike, I would tell you is that we do, while we don't peg our land investment specific to this number, we do think about land spend as a percentage of revenue, and we think the numbers that we have allocated and projected for 2021 are an appropriate step-up, reflective of what is a very strong market

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, thanks, Ryan. My second question goes to the margin side and you clearly had success in terms of utilizing price and controlling costs to drive margin expansion. I think you alluded to margins potentially being slightly lower than the 4Q levels and mostly being able to offset the increase in house costs. Could you just elaborate more on the kind of magnitude of the increase in costs, maybe on a per square foot basis or however you want to quantify that, that you're expecting to come through to P&L? And also if you could share some sort of kind of price per square foot that you've been able to achieve? Just help us understand that -- that balance between price cost a little bit better.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yeah, Mike, it's Bob. I think, you know, important to remember, we're starting from a very strong margin position. And certainly, in the fourth quarter, we got the benefit of some spec sales and we don't have a ton of spec on the ground today. So as we're looking forward into the year, what we're trying to project is where are the sales prices that we've contracted, but we recognize that our house costs are going up, we are projecting them to be up in the neighborhood of 5%, next year, in fiscal '21, so that's inclusive of commodity input cost and labor.

So a little bit richer increase than we've seen for the past couple of years. Obviously, the market is strong. We think we can get most of that price back. The other thing we are conscious of is affordability and we want to make sure that we've got pricing that people can actually afford to close on. So, our teams are doing a nice job of managing that price equation as we're out in market. So the guide for the year at 24.5 [Phonetic], again, reflective of a very, very strong environment. And -- but we do recognize, especially with lumber having risen so rapidly that there'll be a little bit of pressure on margins with that.

Operator

The next question comes from Ivy Zelman of Zelman & Associates. Please go ahead.

Ivy Zelman -- Zelman & Associates -- Analyst

Thank you and congrats on the strong year and the fourth quarter. Maybe, Ryan, you can help us better understand when you think about the $3.7 billion of acquisition land as addition [Phonetic] to development on spend, even excluding Covid, we hear a lot from municipalities, with builders complaining, you know, we want affordable housing, just not in our backyard. And just thinking about some of the constraints on getting lots developed, is there anything that can change with maybe whether the -- some type of tax incentive to developers. There's a lot of focus on the demand side, at the buyers' [Phonetic] administration, but do you think that is not a constraint that appears to be, and you're overcoming that or is there something that has to change to continue to build more shelter for the country with municipalities being a bottleneck?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Ivy. Good morning, and thanks for the question. I think you've touched on an item that frankly we've been talking about as an industry and as a company for a while, and you hit the nail on the head. I think all municipalities want more affordable housing and shelter as they work to grow their job base and grow their own local municipalities in economies. But you know, you nailed it, they want it as long as it's not next door to existing residents or other folks that are already there.

So, I believe that's a -- more a local issue than it is a national issue and -- but that being said, I do think a tone from the top, from the administration, can certainly help to influence what local municipalities do. So look, there are challenges out there, but one of the things that I think we highlighted is our size. And I think the talented team that we have, we're working through what is a challenging environment out there and we are able to get our land entitled, we are able to get it developed, we are able to get investment. If things were a little easier, I think you could do even more, but we feel -- we feel very comfortable about the numbers that we put forth for 2021.

Operator

The next question comes from Matthew Bouley of Barclays. Please go ahead.

Matthew Bouley -- Barclays -- Analyst

Hey, good morning. Thanks for taking the questions. Wanted to follow up on the margin side. So you know, guiding gross margins up 20 basis points in '21 despite this pricing environment, I'm just wondering if there is any, I guess, other margin headwinds that we should be aware of beyond that increase in house costs, you just mentioned, Bob. So I'm thinking, whether it's the mix of option land that's come up and maybe now coming through or perhaps more first-time closings expected?

Just what else might be sort of playing into the puts and takes there on that guide? Thank you.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yeah, Matt, I don't think there's anything really dramatic, obviously land is more expensive, each successive lot -- as the vintage gets kind of worked through, you're bringing more expensive land on as the market has appreciated through the years, so that's a contributor. Other than that, I mean we've got a very large backlog, we've got pretty good visibility into what our margins are going to be. And in candor, we contracted these houses three months ago, and so the pricing environment isn't fully reflected in our sales right now, so you see that kind of on a little bit of a lag with us. We actually like that because it puts us in a position where we can understand our house costs going into it when we're contracting, but we do have a little bit of a lag in terms of where the pricing environment is right now versus what it's closing for us, for instance, in the first quarter.

Matthew Bouley -- Barclays -- Analyst

Okay, understood. That's helpful. Second one, just around selling pace. I think I heard you say that, December ended up by even stronger than November, and correct me if I misheard you of course, but just obviously Pulte like many others ending the year running faster than usual. Last quarter you guys talked about sort of intentional slowing of pace.

Do you think you have the capacity at this point to see further uptick on selling pace into Q1 as normal? And I guess, I think you mentioned January sort of continued unabated. I guess, and any additional color there would be helpful as well. Thank you.

Ryan Marshall -- President and Chief Executive Officer

Matt, good morning. It's Ryan. We did have a very strong fourth quarter and you heard correctly, December sign-ups were up over November and equal to what we did in October. And I think for those of you that have been following the industry for long as you have, that's atypical. Normally you see a seasonally downturn, October to November, November to December.

So, I think it's reflective of how strong the demand is, and then January is off to a very good start. So, we did in the majority of our divisions manage the number of sales that we were -- we were allowing to be sold either via lot releases or price increases or some combination of both. And that's really about making sure that we are matching our sales rate to our ability to produce homes.

We've significantly increased the production capacity that we have. So, we think we're doing a nice job working through that. And then the other -- the other factor that you've got to think about is lot availability. So we factor all of those things into our sales release and our pricing strategy. And all of those elements are reflective -- are reflected in the guide that we've given for the full year. So, it's looked -- as I highlighted in some of my prepared remarks, it's a great time to be in the Homebuilding business and I think there are a number of really strong demographic and economic trends that are going to continue to help support this industry.

Operator

The next question comes from Stephen Kim of Evercore ISI. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, thanks very much, guys. Good quarter. I was really intrigued by some of the things that give a glimpse into what could be coming. One of the interesting things I think that you pointed out is to give a built-to-order model which suggests that what we saw in the fourth quarter doesn't really fully reflect the environment, which it sounds like it was pretty enormously strong in the fourth quarter. So, it looks like that's still yet to come. And so, in that vein, I wanted to ask you about your outlook for pricing and therefore implicitly margins. You know, we couldn't help but notice that your order price this quarter was extremely strong and relative to the price that you are forecasting or your outlook for price for the full year, next year, I just did a quick analysis about going back through time, and we have never seen anything like the kind of decline that you're calling for in your full-year '21 closing price relative to the order price that you took this quarter, and in your commentary, everything seemed to suggest that there is actual momentum building in price.

And so, I just wanted to talk to you about what is embedded in that? Is there a significant mix shift of more entry-level communities that you are embedding in that assumption and are you not seeing what other builders seem to be seeing, which is a consumer is actually paying up for more options and upgrades, which your BPO model would capture and even a preference for larger homes because your guidance would seem to suggest that's not happening nearly to the degree that you're going to have a negative mix shift. It's kind of -- I'm curious. So, was wondering if you could address that?

Ryan Marshall -- President and Chief Executive Officer

Good morning, Stephen. It's Ryan. Thanks for the question. There was a lot in there to unpack and I'll try and touch on the key elements and if I miss anything, we'll come back and grab it in a follow-up. But we are seeing a robust pricing environment, as I think we've highlighted, as it relates to the pricing, the ASP guidance that we've given for the full year, it is being largely influenced by the increasing amount of first-time business that we have coming through our business along with geographic mix.

So, as you know, we build in kind of coastal locations, like Northern California, Southern California, etc. And so, the load of closings that come out of those divisions relative to other places in the country can certainly have an influence on ASP. As it relates to pricing and our ability to take a price, I think, Stephen, you know that we've long talked about our strategic pricing methodology and how that has been a large contributor of the company's outperformance in margin relative to the competition.

So certainly, we feel that'll continue to be a real strength for the Company. We're operating in the same market that I think everyone else is. And so, there's not really any reason to believe that we wouldn't benefit from the uptake in demand and the ability to push price.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, I certainly would agree with that. It's just that maybe we haven't seen it as quickly in your numbers just because you have a built-to-order model, but that should also allow you to capture, I would think if anything, a little bit more price because you give your customers the ability to option.

In that regard, we've seen a couple of other builders report so far that are spec builders, and in both cases we -- well, so far we've seen margins for the spec builders surprise to the upside even versus what they had thought a couple of months ago, and when we dig into that, some of it obviously is pricing, but some of it is also that cost per square foot seems like it didn't go up as much as they might have thought, and part of the reason for that is because they found that they're building somewhat larger homes. And that the somewhat larger homes have an actual lower cost per square foot because there is only one kitchen and only one roof, and all that kind of stuff. So, you get more efficiency when you build a slightly larger box. Was curious if you're seeing any of that and if you have incorporated any of that into your thinking about what cost per square foot will be over the next six months to 12 months?

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yes, Stephen. So, we've certainly factored in into the guide that we've given what we believe the product mix will be, but within a given community, the offering that you could have could easily range from -- just as an example, 2,000 feet to 3,300 feet. Within that there might be four or five floor plans, and you don't know what plan the customer is going to choose until they come into the sales office. So, we have made some assumptions.

I think as we highlighted in our prepared remarks, we're seeing customers do different things based on their current living situation, their work-from-home situation, the need for more space, more space for school, more space for home, gyms, etc. So there's -- I think there is certainly is a story to be told that there are some bigger homes being built. To your point I'd agree with you, bigger homes are a little bit more efficient. So, time will tell. We've factored in what we think are our best assumptions at this point in time and we'll continue to keep everyone updated as the year progresses.

Operator

The next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Michael Rehaut -- JPMorgan -- Analyst

Thanks. Good morning, everyone. Congrats on the results. I wanted to circle back to gross margins and I apologize if this is beating a dead horse a little bit, but just wanted to try and get a better sense of the levers here. And you hit on price but when you look at the 25% margin in the fourth quarter, it was up a little bit versus the guidance of 24.5%, and now you're also looking for 24.5% in the first quarter and -- of '21 and the full year of '21.

So, I was just curious, number one, what drove that differential, and if it was more temporary or mix driven per se? And number two, when you think about price versus cost inflation, I think a lot of builders had been looking toward, you know, some decent level of gross margin expansion in '21 versus '20, given your margins being so much higher historically, over the last few years, than most of the other builders, I'm wondering if there is any upward limitations on taking price from an affordability perspective or competitive perspective? if that's why, perhaps, we're not seeing as much expansion in '21 versus '20, just given the higher starting point?

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yeah, I think it's -- you know it's apples to oranges to a certain degree in terms of us versus others, so I can't comment on their relative margin performance. And, Mike, there is clearly nothing that prevents us from accelerating price if it's available in the market and if that's expensive to margin, we're going to do it. I think we've demonstrated it, and you saw it actually in fiscal '20 versus the prior year, you know, we were up that 25 -- that 25% was up 220 basis points over the prior year. So, we're paying attention to market and we're looking to get every dollar of price that we can.

I think in terms of the forward guide, we've got 15,000-plus homes in backlog. We kind of have pretty good visibility into what our margin profile is going to look like next year. There is nothing, and I want to be clear about this, nothing that will stop us from trying to expand that margin but based on what we see today, we want to give you the best estimate we've got. And as I said in an answer to an earlier question, we do see vertical construction costs escalating. Lumber, I think everybody is aware of. It's a busy market out there. There's a lot of people selling a lot of houses. We think there'll be some price on the labor side that we'll be asked to contribute for that.

So, at the end of the day, we are pretty -- we're pleased with our margin profile. We'll seek to try and push it to the extent that we can get more price going forward and if that more than covers the increase in costs including land, I think you can see us do that. And yeah, there is no -- there is no message here but we outperformed in this most recent quarter. If the opportunity's there, we'll seek to do the same going forward.

Ryan Marshall -- President and Chief Executive Officer

And Mike, on the Q4 outperformance, I just -- you asked, where did that come from? We mixed in more spec inventory in the -- in Q4 than we had anticipated. And so, there is a good example of we were able to get kind of current market pricing that helped help provide some outperformance in Q4.

Michael Rehaut -- JPMorgan -- Analyst

No. Thanks -- thanks for that, Ryan and Bob. That was very helpful. I guess, secondly, I just wanted to focus a little bit on community count and sales case. And your community count in the second quarter, just down a touch year-over-year, which was a relative positive, I think, versus some of your peers, having much greater declines.

At the same time, you've made comments, I believe, around, and correct me if I'm wrong here, but to a degree perhaps managing sales pace to make sure you're not getting too far ahead of your backlog and allowing your business to operate at a relatively consistent cadence. How should we think about '21 on those metrics? And specifically, community count, if you could give any directional guidance for the first quarter and where we should expect year-end to wind up? And to the extent that you've kind of limited or managed your sales pace, could we expect, you know, sales pace in '21 to be more kind of consistent even off of these levels?

Obviously, again, if you're not seeing in your numbers, maybe the dramatic year-over-year growth on some of your peers, and I'm just wondering if that could actually work toward your benefit as you get through the next few quarters?

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yes. So, I think the question sort of is: what's the community count for next year and how are we thinking about sales against that?

And that -- the way I think we'd ask you to think about community count is, we obviously had a slowdown in development spend this year, even some delayed ack [Phonetic]. We've highlighted that we're going to be investing at a more aggressive rate next year, Ryan walked through that. Where we see it is community count in Q1 of '21 versus Q1 of '20 is down about 5%, and then, if you'd fast forward to your question, at the end of the year, where do we think we'll be? We think we'll be down about 5% kind of end of year '21 versus end of year '20. We'll have some variability in that during the year and it will be dependent on what's the sales environment like, how quickly are closing out of communities, and what's the weather like, how did development go.

We'll obviously be looking to accelerate communities as much as we can. But the sales environment is going to drive some of that, number two. And we are looking at, you know, a pretty big step up in acquisition spend next year, which would obviously contribute to years beyond that.

Operator

The next question with apologies from Ms. Zelman, and a follow-up for a second question for her, from Zelman & Associates. Please go ahead.

Ivy Zelman -- Zelman & Associates -- Analyst

Hey, guys. Thank you [Speech Overlap]

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Finally, [Speech Overlap] I thought we scared -- I thought I scared you away with my last answer.

Ivy Zelman -- Zelman & Associates -- Analyst

Yeah. No, it [Speech Overlap] just a follow up.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

It was Zeumer's fault.

Ivy Zelman -- Zelman & Associates -- Analyst

It was Zeumer, right? Yeah, Zeumer's fault, there you go. Just digging a little bit on the lands bit [Phonetic]. You think about $73.7 billion, are you spending -- are you fully set up for '22 or are you still buying for '22, and how far out are you buying?

And just this year, just the perspective between the margin differential on the option loss versus on the own loss, if there is a differential from a price [Speech Overlap] margin perspective.

Ryan Marshall -- President and Chief Executive Officer

This year -- Ivy, both good questions. We're pretty well set up for most of '22 at this point. Some of the spend that will happen in '21 will influence the back half of '22 but we're mostly set up. So, given the difficulties that you highlighted in your first question with entitlements and approvals and things like that, we're largely into 2023 at this point in time. And we factored that into kind of everything, everything that we're doing.

In terms of -- and -- the second part of your question, I lost my train of thought on that one.

Ivy Zelman -- Zelman & Associates -- Analyst

The option [Speech Overlap]

Ryan Marshall -- President and Chief Executive Officer

Oh, the option. Thank you. Yeah?

Ivy Zelman -- Zelman & Associates -- Analyst

[Speech Overlap] margin and/or price differential?

Ryan Marshall -- President and Chief Executive Officer

Yeah, so, Ivy [Speech Overlap]

Ivy Zelman -- Zelman & Associates -- Analyst

I know you're focusing on returns -- I know you're focused on returns and I recognize that and I see that a faster return would be the option or a better return. But just thinking about the pricing in the market, the land grab right now is pretty heated. So what are you seeing if there is a differential when you're optioning a lot and what that may be from an impact to your gross margin, even if it's a better return?

Ryan Marshall -- President and Chief Executive Officer

Yeah, so I don't -- I don't want this to come across as a non-answer, Ivy, but you highlighted the most important point, which is we underwrite the return. Every single deal we do has got very different characteristics depending on who the seller is. As a general rule of thumb though, there is a cost to doing options. They're not free and we factor that into what the ultimate return is and the overall kind of risk-reward balance that we think we're getting for the option.

So, Bob, anything else you'd highlight on --?

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

The one thing I'd add is that in terms of the optionality, there is a couple of ways that that manifests itself, right. You know, are you buying -- are you doing a finished lot option transaction or are you tying up the bigger parcel where you're saying, all right, I want a third of the lots today, a third of the lots two years or three years from now, and a third of the lots two years to three years after that.

Remember, we're trying to manage against market risk as much as anything else. And so, I don't think that the kind of the step-up is as impactful on margin because of that, as opposed to just doing a straight finished lot option deal, so if you're in a master plan because there, they're getting real-time retail pricing for taking all that risk, for you to take just a time lot delivery. So, I don't know -- if you look at the book, a lot of our transactions are more what I've described as having -- you know, these are larger lot positions that it's just more than we need right now. And so, we're paying a little bit for people to carry the land, but then we might even be developing the land. It might not even be an option of finished lots.

So I don't think it's as deleterious from a margin perspective as some people think sometimes when they're looking at exactly the way you just did.

Operator

The next question comes from Ken Zener of KeyBanc. Please go [Technical Issues]

Ken Zener -- KeyBanc -- Analyst

Good morning, everybody.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Hello, Ken.

Ryan Marshall -- President and Chief Executive Officer

Good morning, Ken.

Ken Zener -- KeyBanc -- Analyst

Wanted to make sure I was connected. Great quarter. I mean your leverage is flat, your returns on capital, or as I look at it, returns on inventory are very high. So you should be investing in your company like you're doing.

So my -- I have two questions. First, go over your logic for this 50% owned option target, and how much the Del Webb legacy land play into that?

And then, my second question is: you're a built-to-order builder, yet, your start capacity is limiting your orders. So what does that mean for your kind of start capacity? I mean, you started at about 7,500 homes. We can calculate your starts, basically. So, what is -- you know, your 30,000 guidance reflect in terms of where your quarterly capacity is going? Thank you.

Ryan Marshall -- President and Chief Executive Officer

Good morning, Ken. So I'll maybe take the start capacity question first. And we feel good about how our production machine is running. We have ramped it up almost every single quarter and we continue to do so, and that's -- the guide that we've given for full-year deliveries are reflective of the pace that we believe our production capacity is on. Certainly, if we can do more, we'll work to do that, and we think the demand environment is there that would allow us. But there's a lot of -- there's a lot of moving parts in that, labor capacity, supplier capacity, etc.

So in addition to that, Ken, and I think everybody knows, we have long believed that the built-to-order model is better for a number of reasons, and it's the one that we've chosen to largely employ. But structure -- specs are a big part of kind of what we do as well, especially with our entry-level, lower-priced product. And so, in addition to building our sold-not-started backlog, we're also increasing the number of stocks that we have in the system.

I don't believe that the built-to-order model is limiting our ability for success because at some point in time, you've got to make a decision about how much you can build, whether you build that as a sold or you build out as a spec, you've still got a -- you've got to put the start in the ground at some point in time.

So, we're in a great time right now. We're excited about the prospects for 2021 and if we can keep some of the wins in our sales here, I think we're going to have a great year.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Andrew, are you still there? Who's next in the queue?

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

It is 09:30, could they have winded?

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Andrew?

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

I think we're still out on the call, but I don't know that we can get anybody up for the next Q&A. Operator, you there? Anybody wants to text me or email me a question, we can try answering it that way.

Ryan Marshall -- President and Chief Executive Officer

Yeah, Jim, I got a confirmation from a couple of folks that the audience can still hear. So, it sounds like it's an operator's challenge.

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Yeah, so if anybody wants to, we're still here. So, if anybody wants to text me a call -- text me a question, we'll do our best to take it that way because I'm not sure where our operator disappeared to. I'm not sure at this point in time in terms of technical difficulty how we're going to solve this, but again, we'll give it another couple of minutes if anybody wants to email me a question or text me a question, I'm happy to -- we're happy to answer it. And I apologize for this confusion. I guess, it's just a --

Operator

Pardon me. This is the conference operator. It looks like we're experiencing some technical difficulties. I'm going to go ahead and take over the call for now. It seems we are in the middle of our Q&A session, is that correct?

Ryan Marshall -- President and Chief Executive Officer

[Speech Overlap] correct.

Operator

Okay. Our next question comes from Jack Micenko with SIG. Please go ahead.

Jack Micenko -- SIG -- Analyst

It's always Zeumer's fault, isn't it?

Ryan Marshall -- President and Chief Executive Officer

You know, Jack, I think this one, we can actually let Zeumer off the hook. I'm not sure he had anything to do with it. [Speech Overlap]

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Getting touched through the phone.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

He was running around with wire cutters but I don't know what happened. He was using the [Speech Overlap] Jack.

Jack Micenko -- SIG -- Analyst

Probably, I thought of it. So, we got a huge backlog, got great visibility into it. The industry has seen backlog conversion rates come down, not surprisingly, coming out of some of the unique things we've dealt with in 2020. It looks like the 1Q guide is calling for continued pressure on backlog conversion, historically it still is a ramp in the back half of -- of this year, to hit that 20% growth.

Can we impact some of the -- the drivers that I think Bob talked about, increasing spec in the prepared commentary, but kind of what gives you confidence you can sort of build back some of that backlog conversion in the back half of the year while maintaining margin?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Jack, good morning. It's Ryan. We tend to look at our conversion of work-in-process inventory as opposed to backlog. So, we do have a larger backlog than we ordinarily carry, which is reflective of the strong sales environment. From a production standpoint, we're running very comparable to what we've historically run in terms of work-in-process conversion. And what I can tell you without giving you specific numbers is the daily, weekly, monthly start rates are increasing, working through that sold-not-started backlog and the spec inventory such that we feel like the guide that we've given for the full year is very achievable.

So, it's not necessarily a huge bet on a bunch of incremental spec inventory, which I think you may have been alluding to a little bit. Certainly, we want to put more in there, but it's really reflective of getting through the sold-not-started backlog, in addition, to put in some more spec in the ground. Our cycle times are a little elongated given some of the disruptions in the supply chain. I think the -- the areas where there is some -- a little bit of sand in the gears from a product standpoint are probably, fairly widely known. I'd highlight that the relationships we have, the size of our company, the talented procurement team that we have, we've done a really nice job working through that, but it is -- it is a challenge that is out there for sure.

Jack Micenko -- SIG -- Analyst

Then you've got -- you've got the one plant now in Jacksonville and you're bringing another one online, I think, early -- online early '22, right?

How should we think of -- where would that show up in the numbers? Is that going to be -- as a company level, is that going to be gross margin between the G&A ratio, maybe lower warranty reserves over time?

Where are working [Indecipherable] outside looking in, kind of expect to see the benefit of that in the model?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Jack, I'll let Bob take that one, and maybe what I'll do is I'll highlight the benefits that we think we're going to get out of these plants. And the reason -- the reason that we bought the first one, the reason that we're expanding into the second one, we're getting huge increases in our cycle time, efficiency, which is a big deal, and the labor efficiencies that we're picking up are tremendous as well. You combine those things with the added cost benefits that we're getting and we're very pleased with how these offsite manufacturing facilities are performing.

So, as I highlighted in my prepared remarks, Jacksonville has exceeded our expectations. We're onto plant number two. We're in the final stages of site selection and just working through some contract thing. So, we're excited about the prospect of what the future of this holds. And then, I'll let Bob touch on where you can see the numbers.

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Yeah, Jack, it's in Homebuilding, obviously. And so, you know, you'll see I think a couple of impacts. One is the contribution from the business itself, it's on the margin line, it's consistent with it -- not a little bit better than our building -- our Homebuilding operation. And then, you obviously have the benefit, we believe, in terms of both the cycle time that Ryan talked about but even some cost-benefit to the builder side of the business so the actual division's contracting with them.

And then, there is a cost to do in this, but it's not out of line with the rest of our business. So, I think it -- for all intents purposes, you won't see it impact things materially other than that we get improve the -- improved operation that Ryan was talking about.

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Operator, I think we have time for one more call if you're still there, one more question if you're still there.

Operator

No problem. Next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Susan Maklari -- Goldman Sachs -- Analyst

Thanks for taking my question. My first question is really around the active adult business, you know, you saw another nice lift there this quarter. I think, Ryan, in your comments you kind of mentioned the fact that it feels like that buyer's definitely out there. Can you just give us a little bit of color on what you're seeing in terms of the demand terms there? How you're thinking about that coming through and how much of this do you think is really being driven by the fact that maybe the existing market in some areas in the country like maybe the Northeast and in other parts that weren't as strong prior to Covid have really kind of picked up and allow these people to kind of get out of their homes and make that transition?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Susan, good morning, and thanks for the question. I think there is a number of things that are benefiting the active adult buyer right now. One is they were first to kind of go to the sidelines, they've certainly got more comfortable figuring out how to buy and figure not how to make the decisions that they want to make and as it relates to their retirement. The strong stock market behavior I think certainly plays a factor in that as retirement accounts are flush. And then finally, the strong resale market has made it a seller's market, and so very easy for that active adult buyer to sell their existing home and move into one of our new communities.

So, our expectation is that the Webb brand will continue to be a big part of our business and that buyer will continue to perform very well.

Susan Maklari -- Goldman Sachs -- Analyst

Okay. And my follow-up question is around capital allocation. I know you started to buy back some stock in the fourth quarter, can you just talk a little bit to how you're thinking about that for '21 and any kind of color you can give there?

Ryan Marshall -- President and Chief Executive Officer

Yeah, Susan, the stance that we've taken on stock buybacks is that we'll report the news. What we have highlighted is it is going to continue to be part of our capital allocation. We paused for the second quarter and the third quarter, given the pandemic, but as you saw in the fourth quarter, we reinitiated at a $75 million level. So, we will be active throughout 2021. We're not going to provide forward guidance on the amount of the spend, rather at the end of each quarter, we'll share with you what we've done.

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

And I think we've now kind of run out of time and I apologize for the technical difficulties for it, and we'll certainly look forward to getting back to everybody over the course of the day. We appreciate your time and we'll look forward to talking to you on our next earnings call.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Jim Zeumer -- Vice President of Investor Relations and Corporate Communications

Ryan Marshall -- President and Chief Executive Officer

Bob O'Shaughnessy -- Executive Vice President and Chief Financial Officer

Mike Dahl -- RBC Capital Markets -- Analyst

Ivy Zelman -- Zelman & Associates -- Analyst

Matthew Bouley -- Barclays -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Ken Zener -- KeyBanc -- Analyst

Jack Micenko -- SIG -- Analyst

Susan Maklari -- Goldman Sachs -- Analyst

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