Categories Consumer, Earnings Call Transcripts

Lennar Corporation (LEN) Q4 2021 Earnings Call Transcript

LEN Earnings Call – Final Transcript

Lennar Corporation (NYSE: LEN) Q4 2021 earnings call dated Dec. 16, 2021

Corporate Participants:

Alexandra Lumpkin — Deputy General Counsel

Stuart Miller — Executive Chairman

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Jon Jaffe — Co-Chief Executive Officer and Co-President

Diane Bessette — Vice President, Chief Financial Officer & Treasurer

Analysts:

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

Truman Patterson — Wolfe Research LLC — Analyst

Mike Rehaut — J.P. Morgan Securities LLC — Analyst

Steve Kim — Evercore ISI — Analyst

Alan Ratner — Zelman & Associates — Analyst

Matt Bouley — Barclays Capital, Inc. — Analyst

Presentation:

Operator

Welcome to Lennar’s Fourth Quarter Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. [Operator Instructions]

I will now turn the call over to Alex Lumpkin for the reading of the forward-looking statement.

Alexandra Lumpkin — Deputy General Counsel

Thank you, and good morning. Today’s conference call may include forward-looking statements, including statements regarding Lennar’s business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represent only Lennar’s estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in yesterday’s press release and our SEC filings, including those under the caption Risk Factors contained in Lennar’s Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

Operator

I would like to introduce your host, Mr. Stuart Miller, Executive Chairman. Sir, you may begin.

Stuart Miller — Executive Chairman

Great, and good morning, everyone. Thank you for joining. This morning, I’m here in Miami, joined by Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Bruce Gross, CEO of Lennar Financial Services; and of course, Alex, who you just heard from. We also have joining us Rick Beckwitt, who’s in Colorado; and Jon Jaffe, who is actually here in Miami, but not in the office. As usual, I’m going to give a macro and strategic Lennar overview. After my introductory remarks, Rick is going to talk about market strength around the country, land and community count as well.

Jon will give an update on the supply chain, production and construction costs. And as usual, Diane will give detailed financial highlights and additional guidance. And then we’ll answer as many questions as we can. And as usual, please limit to one question and one follow-up. So let me go ahead and begin and start by saying that our fourth quarter and full year 2021 reflect extraordinary focus and determination by Lennar’s management and operating teams across the country.

While the housing market remains very strong in all of our major markets, the ability to actually execute and deliver results has been challenged and tested by the supply chain that is all but broken, the workforce that is short in numbers while driven to produce more, and the never-ending competition for scarce entitled land assets. Lennar’s managers and operators have been absolute warriors recognizing that our customers need and want their homes and the burden of a strong, but stressed market simply can’t stand in the way.

The proud associates of Lennar are pleased to report an excellent quarter and year of accomplishments in spite of the elusive garage doors and short supply, the unimaginable scarcity of paint, the cabinet deliveries postponed by labor shortage, the electric meters, the windows and the countless other stumbling blocks and obstacles that have presented intermittently to ensure chaos in a production cycle that is difficult even everything is going right. The supply chain affects both land and construction and that will continue into the first quarter of 2022 and beyond.

But as we enter the second half of the year, we expect that the supply chain disruption will be stabilized and mitigated by the greater number of starts that we have started, by the lessons learned and incorporated in our Builder of Choice relationships, and by the simplicity embedded in our Everything’s Included offerings. And let me say that Kemp Gillis and his extraordinary purchasing team have done an amazing job of navigating this difficult landscape. I also want to warmly acknowledge Jon and Rick, our co-CEOs, who have chosen not to sit on high perch in difficult times but instead went to the problem and saw for themselves so they could be part of the solution.

Together, as partners, they visited each of our 38 divisions over a six-week period, met with our production and purchasing teams in the field, got a tangible feel for the most significant issues, and translated their visits into solutions. Time, focus, and attention problems are being solved, and that is simply the Lennar way. Even with the challenges in the market, in our fourth quarter, we delivered just under 18,000 homes, which is every single home that could be delivered as our customers expected in one of their home for the holidays.

We grew our deliveries 11% year-over-year, while our revenue from home sales grew 24% to almost $8.5 billion. And by remaining laser-focused on orderly targeted growth with our sales pace tightly matched with our pace of production, we drove a 300 basis point gross margin improvement to 28%. Alongside gross margin, we recorded a significant improvement in operating efficiency, as our SG&A decreased 150 basis points to 6%. We continue to limit our land — excuse me, we continue to limit our sales pace, especially as cycle times expand in favor of a significantly benefited bottom line. Accordingly, our net new orders grew 2%, and they’re expected to contract slightly in first quarter.

With our sales discipline, our net margin increased 460 basis points to a company all-time high of over 22% in our fourth quarter. This drove a 50%, after-tax and before mark-to-market items, bottom line improvement in net earnings to over $1.3 billion this year. So with our focus on bottom line over top line improvement, 24% revenue growth drove 50% bottom line growth. Additionally, our Financial Services group continued to perform exceptionally, adding $111 million of earnings, while supporting the closing of every possible home and making the closing process as joyful as possible in the current environment. With the strong performance of our core operating divisions, our balance sheet and returns continued to improve as well.

Even after the repurchase of 10 million shares of stock and the reduction of $850 million of debt in the quarter, we reported a cash balance of over $2.7 billion and an 18.3% debt to total cap ratio, while our return on equity grew almost 800 basis points year-over-year to 22.6%. All in all, our core operating numbers are very strong in the fourth quarter and we expect that strength to continue into 2022 and beyond. From a macro perspective, the housing market remains strong across the country. Demand has been consistently strong, while the supply of new and existing home remains limited.

Since new home construction cannot ramp quickly enough to fill the demand, short supply is likely to remain for some time to come. Even though home prices have moved much higher, overall affordability remains strong. Interest rates are still very attractive and personal savings for deposits are strong. Wages for the average family seem to be rising faster than monthly payments and those higher wages are starting to be reflected in government numbers and unfortunately, in inflation as well. The upward spiral of housing purchase is — purchases is accelerating.

Millennials are forming families, apartment dwellers are purchasing first-time homes, first-time homes are selling at higher prices, and appreciated equity is enabling first-time move-ups. The move-up home is selling at strong pricing with increased equity, enabling customers to purchase an even larger home, all this while supply is limited for everyone and the iBuyer and single-family for rent participants are providing additional liquidity to the marketplace. Against this backdrop, and although there has been some turbulence through the year, 2021 has been an extraordinary strategic year for our company. We established a strategic plan that included cash flow generation and debt reduction in order to improve returns on capital and equity.

We also articulated a drive and desire to have a strong focus on new technology-driven efficiencies in our core business, while we spin ancillary businesses and become a pure-play homebuilding company. Our 2021 performance reflects focus on these strategies and 2022 will be extension — an extension of the same focus. In 2021, we generated almost $3 billion of homebuilding cash flow to enable a reduction of debt by $1.3 billion and a purchase of 14 million shares of stock for a 4.5% reduction in share count. Accordingly, our debt to total cap is below 20% and we have $2.7 billion of cash on hand.

Our total debt is $4.7 billion and will continue to be reduced. We also reduced our land holdings to three years as promised and increased our land controlled versus owned to 59%, exceeding our goal at the beginning of the year. We have almost certainly established Lennar as a technology-enabled and engaged company. We invested in numerous new technologies, while eight prior investments were either sold or went public, which resulted in significant extraordinary profit for the company this year. Perhaps more importantly, we have invested in companies that have enabled improvement in our core business, while we have benefited both through the investment and through incorporation in our core.

But this is just the beginning. We are working with numerous additional technology companies that are working to solve some of the most difficult problems facing our industry. As a case in point, we’re working to solve the issues in supply chain, labor shortages and production using innovative technology in innovative ways. Many of you have read and commented on our investment in ICON, the 3D printing building company in Austin, Texas. We expect to start our first 3D printed community in Austin sometime in 2022 and hope to reduce labor, material and time as we help refine this structural production process.

Alongside ICON, we have invested in two additional innovative production companies called Veev and Cover, and they’re engaged in innovative factory-based manufactured solutions to production. Both Veev and Cover are focused on a more comprehensive solution beyond just the structural components and encompass mechanical, electrical and plumbing solutions in the factory as well. These companies are working on each of the major components of the home and building better and more precise delivery systems that will reduce the need for labor and enhance precision and cycle time.

All of these companies are focused on the most frictional and problematic elements of the production process and driving towards solutions for the industry. Given today’s supply chain and workforce constraints, we should all be interested, if not laser-focused, on the success of these critical solutions, Lennar most certainly is. And finally, 2021 has, in fact, been a year of focus on the strategy of becoming a pure-play homebuilding company. We have been hard at work refining our SpinCo that I’ve described in the past. As you can see from our balance sheet and cash flow, the case for SpinCo has become more compelling with each quarter’s successes.

We have excess capacity and balance sheet to spin our well-established ancillary businesses, and we expect to complete a tax-free spin by the second or third quarter of 2022. To that end, in November, we took our first significant step to complete the spin by formally filing a request for a private letter ruling from the IRS. We are getting very close to being prepared with defined business lines, a refined business plan and a balance sheet. We expect to file our at-first confidential Form 10 by the end of January or beginning of February, at which time we expect to have a name other than SpinCo and a management team in place. Some have asked about the time we have taken to disclose greater detail.

The fact is we’re building a durable and sustainable public company that has to hit the ground running on day one. To that end, Matt Zames, as senior advisor to the company, has been focusing on the configuration and execution of our SpinCo strategy. In addition to and supporting that, Jeff McCall and a sequestered team of senior internal leaders, have modeled various configuration with different asset composition that have focused on getting both the program and the story right for the public markets. We have concluded that the spin company will be an asset-light asset management business that will have a limited balance sheet.

Many of the assets that we targeted for spin originally will be either part of the limited balance sheet of SpinCo or will be monetized in the form of assets under management housed within the private equity verticals of SpinCo or have been or will be resolved or monetized in other ways. The monetization has been and will be completed over the next year or so, and the cash proceeds will be deployed in Lennar to fortify our balance sheet or to continue to buy back stock on an opportunistic basis, and when our stock is on sale, like today, we’ll be purchasing. Three core verticals have been identified and business planned for the spin, and they are multifamily, single-family for rent, and land strategies.

Each of these verticals already have raised third-party capital and are active asset managers. LMC, our Multifamily platform, has approximately $9 billion of gross capital under management and is raising its third fund. LSFR, our growing single-family for rent platform, currently manages approximately $1.5 billion of equity already raised. And our land strategies platform is still being refined for SpinCo, and will provide more detail in the near future. The remaining Lennar Corporation will drive higher returns on our assets and equity base, and the spin will not result in a material reduction of either our bottom line or our earnings per share as we project them.

Bottom line, this was a year of hard work at Lennar in the face of many issues, and there were no feet up on the desk during the year. So let me wrap up and conclude by saying that we have simply never been better positioned financially, organizationally and technologically to thrive and grow in this evolving housing market. The market, in general, remains strong. While difficulties in the supply chain present challenges for Lennar and the industry, the housing market remains strong and supply of new and existing homes is very limited.

We remain focused on an orderly targeted growth strategy with our sales pace tightly matched with our pace of production. We focus on gross margin by selling in step with production, while controlling costs and reducing our SG&A, and therefore, driving our net margin. As we look to 2022, we see continued strength in the market and double-digit growth for Lennar. As we noted in our press release, we’re projecting 12,500 deliveries at a 26.75% margin in the first quarter and 67,000 deliveries at a 27% to 27.5% margin for the year. At this pace, we will have a strong bottom line with a projected spin-off in the second or third quarter, 2022 will be another record year for Lennar.

And with that, let me turn it over to Rick.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Thanks, Stuart. As you can tell from Stuart’s opening comments, the housing market is very strong, our team is extremely well-coordinated, and our financial results continue to benefit from a solid execution of our core operating strategies. Key to that has been running a fine-tuned homebuilding machine where we carefully match homebuilding production with sales on a community-by-community basis. We have continued to strategically sell our homes later in the construction cycle to maximize sales prices and to offset potential cost increases.

To that end, we have slowed sales to generate higher profits. Our fourth quarter results prove out the success of this strategy, as we achieved gross margin increases of 300 basis points year-over-year and 70 basis points sequentially. During the fourth quarter, we started 4.5 homes per community, sold 4.3 homes per community, and we ended the quarter with less than 160 completed unsold homes across our entire footprint. This production margin-driven and sales-focused program will continue to improve margin and lead to increased deliveries and profits in fiscal 2022.

In the fourth quarter, new orders, deliveries, gross margins were solid in each of our operating regions. We continue to achieve price increases and saw strength in all product cost categories, from entry-level to move-up and in our active adult communities. Here’s some color on some of our stronger markets across the country. Florida continues to benefit from core local demand, as well as in-migration from the Northeast, the Midwest and the West Coast, which is driving both sales pace and price. Inventory is extremely limited. The hottest markets in Florida continue to be Naples and Sarasota in the Southwest, Miami and Dade and Broward in the Southeast, and Tampa.

Orlando has also been sustaining a strong recovery with a significant rebound in tourism. These are all markets where we are the leading builder with the best brand position. In the Carolinas, Raleigh, Charlotte and Charleston are extremely strong markets. Inventory is very limited and the combination of core local demand and in-migration continues to push both sales pace and price. We are also the top builder in each of these markets. Indianapolis continues to see strong and steady growth. The combination of in-migration from the northern markets and the West Coast, as well as affordable housing and quality of living is driving sales pace and pricing.

We’re the largest builder in this market. Texas continues to be the strongest state in the country with in-migration from East and West. The state’s pro-business employer-friendly economy is driving corporate relocations and tremendous job growth, especially in the technology sector. The state is also benefiting from a recovery in the oil and gas sector. The strongest market in the country continues to be Austin, with recent announcement by Samsung Electronics to invest $17 billion in a new chip manufacturing plant and Tesla’s announcement to relocate their corporate headquarters to Austin, in addition to finishing construction this month on a $1.1 billion Gigafactory.

These two companies alone will create thousands of new jobs in Austin. The Colorado market picked up momentum in the fourth quarter and we saw strength in both sales pace and price with over one sale per community matching our starts pace. Phoenix and Las Vegas continue to be strong markets, both benefiting from business-friendly environments, real job growth and in-migration from California. The casinos in Vegas are full and the city is benefiting from increased tourism. Phoenix is thriving because it’s incredibly affordable. We entered the Boise market with two communities during the quarter and anticipate having eight active communities by the end of 2022.

This market continues to have strength, driven by tremendous population growth, and we’re excited about our land position and our Lennar Boise team. The Pacific Northwest continues to be a strong market as natural supply constraints and constraints by urban growth boundaries limit production. In spite of being land constrained, we are seeing solid year-over-year growth in these markets, as we expand our geographic footprint. The California markets remain strong. Driven by the state’s severe housing shortage, there is more demand than supply.

As reported last quarter, the Inland Empire, Sacramento, and East Bay Area have remained as some of the strongest markets with homebuyers looking for square footage and affordability. During the quarter, we saw resurgence in the core markets of the Bay Area as more employees are returning to their offices or anticipate returning in the near future. As such, both core and inland markets are firing on all cylinders. As I said, these are some of the strongest markets, but there is strength and depth of market across the country.

Now, I’d like to spend a few moments talking about growth and community count. During the fourth quarter, our community count increased 7% year-over-year and 6% sequentially, as we continue to focus on growth in our existing and new markets. We expect our Q1 community count to be about 5% lower than year-end 2021. However, community count will start to increase in the second quarter, and we should end 2022 with a low-double-digit increase in community count year-over-year. While supply chain issues and inspection delays are impacting the timing of some community openings, we are in an excellent position for strong growth in 2022.

Our land pipeline remains robust with plenty of land in the queue to meet our goals over the next several years. We continue to see good buying opportunities in all of our markets and are confident this pipeline will produce strong community count growth for the next several years, as we pursue deals to backfill beyond the near-term deals that are already owned and controlled. We are also pleased with the excellent progress we made on our land light strategy, as evidenced by our years owned supply of homesites improving to our previously stated goal of 3 years at the end of the fourth quarter from 3.5 years last year, and our controlled homesite percentage increasing to 59% from 39% for the same period.

Equally important, these improvements were achieved, while growing our overall owned and controlled land position by 44% year-over-year, with all of that increase in controlled homesites. Given the progress we’ve made, our new goal for 2022 is to end the year with 2.75 years of owned homesites and with a 65% controlled position. Our extreme focus on the land lighter model generated significant cash flow during the quarter. We ended the quarter, as Stuart said, with $2.7 billion of cash, no borrowings on our $2.5 billion revolver, and this was after repurchasing just under $1 billion of our common stock and paying off $850 million in debt.

I’d like to thank our team of great associates across the country for their focus and solid execution to make all this happen.

Now, I’d like to turn it over to Jon.

Jon Jaffe — Co-Chief Executive Officer and Co-President

Thanks, Rick. I will now give an update on how we managed through the impact of supply chain disruptions in the fourth quarter, and how we’ve planned for managing through them in 2022. As Stuart noted, we’ve had to deal with our fair share of disruptions. Similar to the third quarter, these disruptions are affecting different trades at different times and in different geographies. They are intermittent and they continue. It continues to be a game of whack-a-mole that creates stress and uncertainty for an already strained labor base as materials often do not show up when expected.

In the fourth quarter, the supply categories that were most impacted on a national basis were garage doors, windows, paint, HVAC condensers and flex duct and cabinets. Regionally, there were a variety of disruptions in the delivery of materials and/or the availability of labor. On average, this increased our fourth quarter cycle time by an additional two weeks from the third quarter, bringing the year-over-year increase to a range of four to six weeks. Despite these disruptions and the associated increase in cycle time, the team at Lennar still managed to deliver approximately 18,000 homes in the quarter as expected.

This was in large part due to a record number of starts in our second quarter of 19,500 homes to ensure we had enough inventory to meet our delivery goals. Additionally, the extraordinary supply chain, purchasing and construction teams at Lennar have never been better coordinated and are managing their scheduling on a day-by-day basis in partnership with each of our trade partners. We continue to work with our partners to solve issues in real time, as well as planning ahead for our future demand needs. Examples of the strength of our strategic trade partnerships is when we had to take business away from our primary garage door manufacturer.

They constructively worked with us to move the business over to another vendor. When our major cabinet manufacturer fell behind due to labor and material shortages, they opened their factory for us on a weekend to manufacture 350 homes worth of cabinets in order to catch up. These are just two out of many examples, where we and our valued trade partners found solutions to the challenges of the current environment. Our decades-long platform of Everything’s Included continues to be a strategic advantage in lessening the impacts of the supply chain shortages.

It’s a simple program with fewer SKUs to manage, allowing us to plan ahead and order our material needs far in advance. As discussed in prior quarters, we are in our sixth year of focusing on being the Builder of Choice for our trade partners. This program has successfully created close-knit relationships with our strategic building partners, allowing both parties to be nimble in adjusting to these disruptions. We believe our strategic relationships have allowed us, together with our partners, to learn lessons from 2021, so we can be better prepared for 2022.

We have been meeting with our key partners along with additional new partners to allocate projected 2022 volume as opposed to just prioritizing available volume. This way, we identified potential gaps in availability upfront, allowing for proactive versus reactive solutions. We have completed about half the categories and will complete the remaining ones in the next few weeks. We have added manufacturing and trade partners in key categories to ensure availability along with a continuous process of simplification to ongoing SKU reductions.

Lastly, we have secured alternative distribution solutions to provide safety stock of certain commodities and short supply materials. We believe the combination of all these efforts will allow for the stabilization of the supply chain for Lennar in the back half of this year. Turning to the construction cost impacts on our fourth quarter closings, were primarily from the lumber increases taken earlier in the year that are now impacting cost as homes close. In the fourth quarter, costs were up $6.78 per square foot over the third quarter, and lumber accounted for $4.18 of that increase. We will still see increased costs from lumber in our first quarter deliveries.

But starting in Q2 and through Q3, we will benefit from lumber cost reductions. We experienced cost pressures in Q4 in other material categories and on labor that will start to flow through closings in the second half of 2022. On a final note, as Stuart mentioned, Rick and I recently spent six weeks on the road visiting communities and construction sites in each and every one of our markets. While we knew what to expect in terms of the supply disruptions and labor shortages that we would see, it was important for us to experience this firsthand, so we can most effectively manage through this environment.

Importantly, this gave us the opportunity to meet with our teams and trade partners in the field, listen to their ideas, and shake their hands to thank them for their incredible dedication and effort they give in delivering quality homes to our customers. We can assure you that Lennar culture is alive and well and as strong as ever. We’d like to take this opportunity to again thank all of our Lennar associates and trade partners for the incredible quarter that they delivered.

Thank you. And I’ll now turn it over to Diane.

Diane Bessette — Vice President, Chief Financial Officer & Treasurer

Thank you, Jon, and good morning, everyone. Stuart, Rick, and Jon have provided a great deal of color regarding our homebuilding performance. So therefore, I’m going to spend a few minutes on the results of our other business segments and our balance sheet, and then provide detailed guidance for Q1 2022, and high-level guidance for fiscal year 2022. So, starting with Financial Services. In the fourth quarter, our Financial Services team produced $111 million of operating earnings. Mortgage operating earnings decreased to $77 million, compared to $125 million in the prior year.

As we’ve indicated for several quarters, the mortgage market has become more competitive with purchase business, as refinance volumes have declined. As a result, secondary margins have been decreasing. This was the primary driver for our fourth quarter lower secondary margins as compared to the prior year. Title operating earnings were $30 million, compared to $28 million in the prior year. Title earnings increased due to growth in profit per transaction, partially offset by a decrease in volume, driven by a reduction in refinance orders. Quarter-after-quarter, our Title team has been focused on automation and efficiencies with the goal of driving higher productivity.

And then turning to Lennar Other. For the fourth quarter, our Lennar Other segment had an operating loss of $176 million. This loss was primarily the result of non-cash mark-to-market losses on our strategic technology investments which totaled $180 million. As we have mentioned before, we are required to mark-to-market many of our technology investments that are publicly traded, and that valuation will fluctuate from quarter-to-quarter. While the technology investments had downside with losses for this quarter, overall, for the fiscal year, our investments provided approximately $500 million of unrealized gains.

In addition, and most important, our investments continue to add value to our core homebuilding operations. And then, turning to our balance sheet. For the quarter and the year, we focused on becoming land lighter. As a result, at quarter end, we owned 182,000 homesites and controlled 257,000 homesites for a total of 439,000 homesites. Our year’s supply owned decreased to 3 years from 3.5 years in the prior year, and our homesites controlled increased to 59% from 39% in the prior year. We were also laser-focused on generating cash flow, reducing debt, and increasing returns, as you’ve heard. Therefore, we ended the quarter with $2.7 billion of cash and no borrowings on our $2.5 billion revolving credit facility.

We also retired $850 million of senior notes that were due in 2022. Together with $300 million of senior notes paid in the third quarter, we retired a total of $1.15 billion of senior notes in 2021. Our next senior note maturity is $575 million, which is due in November 2022, and we have no maturities due in fiscal 2023. Also, during the quarter, we repurchased 10 million shares totaling $977 million, bringing the total repurchase for the full year to 14 million shares, totaling almost $1.4 billion or 4.5% of our outstanding shares at the beginning of the year.

Additionally, we paid dividends totaling $76 million, which brings total cash returned to shareholders for dividends for the year to $310 million. The result of all these transactions was a homebuilding debt to total capital of 18.3%, which was down from 24.9% in the prior year. As you can see, our primary focus was cash generation and capital allocation during 2021, but it’s the continuation of our multi-year strategy. During fiscal 2021, we generated almost $3 billion of homebuilding cash flow.

However, over the past three years, 2019 through 2021, we generated about $8 billion of homebuilding cash flow and allocated approximately $5 billion to debt reduction as our first priority, approximately $2 billion to share buybacks, and approximately $600 million was returned to shareholders through dividend payments. And this focus will, of course, continue in 2022. And just a final few points on our balance sheet. Our stockholders’ equity increased to approximately $21 billion. Our book value per share increased to $69.52. Our return on inventory was 27%, excluding consolidated inventory not owned.

And our return on equity was 22.6%. So with that brief overview, I’d like to provide some detailed guidance for the first quarter, and then high-level guidance for fiscal 2022, starting with the first quarter. We expect our Q1 new orders to be in the range of 14,800 to 15,100 homes, as you heard us say, as we continue to moderate sales pace to match production cycle changes. This is consistent with the approach we have taken for quite a while. We expect our Q1 inventory — I’m sorry, our Q1 ending community count to be about 5% lower than the end of year 2021.

However, community count will then increase in the second quarter, and we should end 2022 with low-double-digit year-over-year growth. We believe our Q1 deliveries will be around 12,500, but similar to last quarter, this estimate has some plus or minus to it, because the supply chain challenges continue to bring a great deal of uncertainty. So the final number of homes delivered will be dependent on outcomes to the supply chain challenges which, of course, we are navigating each and every day. Our Q1 average sales price should be about $460,000, and we expect our gross margin to be around 26.75% which reflects the impact of peak lumber prices from last year and less field expense leverage.

We expect our SG&A to be between 7.8% and 7.9%, as we continue to continue to focus on simplification and efficiencies. Now, I will note again that gross margin and SG&A estimates will move up or down a bit depending on the number of homes delivered. And for the combined category of homebuilding joint venture, land sales and other categories, we expect a loss of approximately $5 million. Looking at our other business segments and other additional items. We believe our Financial Services earnings for Q1 will be in the range of $85 million to $90 million as market competition for purchased business continues.

We expect a loss of about $10 million for our Multifamily business. And for the Lennar Other category, we expect to be about breakeven, but remember, this guidance does not include any potential mark-to-market adjustments to our technology investments, as this will be determined by their stock prices at the end of our quarter. We expect our Q1 corporate G&A to be about 2% of total revenue. Our charitable foundation will be based on $1,000 per home, and we expect our tax rate to be approximately 25%.

And the weighted average share count for the quarter should be approximately 297 million shares. And so, when you pull all this together, this guidance should produce an EPS range of $2.54 to $2.57 per share for the first quarter. And then turning to the full-year 2022. We expect to deliver approximately 67,000 homes with an average sales price of about $460,000. This would result in about $31 billion of homebuilding revenue which should be an increase of approximately 20% from fiscal 2021. We expect our full-year gross margin to be in the range of 27% to 27.5%. And with our continued focus on technology and efficiencies, we expect our fiscal year SG&A to decrease to the range of 6.8% to 6.9%.

We believe our Financial Services earnings will be in the range of $440 million to $450 million as market competition continues. And finally, our tax rate should be approximately 25%. And so, as we continue to execute on our core operating strategies, maintain strong balance sheet, and remain focused on cash flow generation and returns, we are well-positioned to have a strong fiscal year 2022. Before I turn it over to the operator, let me take a moment to thank our finance teams, accounting, planning and all others involved.

Our earnings release went out yesterday, 15 days after year-end, and we are hosting our earnings call today, 16 days after year-end. We’ve been holding our quarterly calls within this general timeframe for over a year. Although the time frames have been consistent, make no mistake, the work has continued. Our goal is to not be satisfied with what has been accomplished, but rather to make incremental progress through automation and efficiencies each and every quarter, while we compile and report our actual or forecasted results. The incremental progress is the result of a lot of hard work. So, congratulations team and a sincere thank you for what you’ve accomplished this year.

And with that, let me turn it over to the operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

Thank you. Good morning everyone, and congrats on a great quarter.

Stuart Miller — Executive Chairman

Thanks.

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

My first question is really, thinking about the positive setup that you described, Stuart, against supply relative to demand, and that against the guide that you’ve given us for 2022, can you kind of walk us through a bit and maybe talk through where you see the potential for upside and downside within that, and especially maybe as we think about the upcoming selling season and how you’re thinking about some of those pieces coming together?

Stuart Miller — Executive Chairman

Sure. Let me — before answering the question, I just want to second Diane’s congratulations to the finance team with David Collins sitting here. A lot of hard work goes into getting the year and quarter close, and they’re doing a great job. But let me give an — left me answer that, Susan. The reality that we’re seeing in the field, as we have come to our year-end and even as we go into December is the market remains strong. Traditional seasonality is coming back. But still relative to that seasonality, we’re seeing basic strength in the marketplace.

The constraining factor right now is the production cycle, and we have been decidedly focused on matching our sales pace with that production cycle, recognizing that we’re going to maximize execution in bottom line by keeping those two pieces in parity. So, as we think about the upcoming selling season, it is feeling to us — as we look at the market, as we look at week-by-week sales, traffic, demand, it is feeling to us that this is going to be a very, very strong selling season. It is going to be more of a traditional selling season in that as we get to the end of February, March, we expect to see even more of a pickup. But make no mistake it’s strong out there right now.

With that said, the production cycle, as I’ve noted, the cycle times have been extending through the quarters. We’re cognizant of that. We recognize that it’s a bit of, as Jon said, whack-a-mole out there. One day, its garage doors; another day, its windows or paints. And that kind of configuration is, at least in our world, starting to feel like we’re stabilizing it. I noted our purchasing team, and the work that they have done around our Builder of Choice programs or Everything’s Included programs, working to really stabilize that purchasing side and logistics side of our business.

And as we go forward, I think you’re going to see that parity, that pairing of production cycle stabilizing and high demand in the marketplace start to move things towards, what I think, is going to be more of an upside in 2022. And we’ll just have to wait and see if it plays out that way. We’ve clearly conservatized some of our numbers to recognize the landscape that exists today, and we’ll see how the market plays out as we go forward.

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

Okay. That’s very helpful color. Thank you. And my follow-up is, shifting to capital allocation and appreciating all the detail that Diane gave in her commentary around that, as we sort of look out and we think about the community count growth, and obviously, the overall growth that you’re sort of building and ramping the business too, can you talk about how you think about also balancing that with the shareholder returns and improving the overall return profile of the business, even as you kind of aim for a faster growth pace?

Stuart Miller — Executive Chairman

What is it that you wanted me to compare it to? I missed that part, the first part.

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

Well, just sort of thinking about, as you are obviously investing for growth going forward, right, but at the same time, you’re — it seems like you’re a lot more focused on shareholder returns as well, and thinking about the considerable buyback you did this quarter, how should we think about that going forward and your continued diligence and dedication to the shareholder return piece?

Stuart Miller — Executive Chairman

Okay. So, look, it’s — I think we’ve made it clear in the past and we’re — I think our fourth quarter performance relative to share buyback made it even more clear. We’re in a cash generation mode. We are clearly generating a lot of excess cash and we’re much shy about opportunistically jumping into the market and making strategic purchases. I think that you can expect that to continue as we go forward. We’re laser-focused on returns.

We’re very focused on bringing our asset base down as we amp up our bottom line returns. And I think you’ve heard that as a strategic message. You’re going to see it over and over again in execution, and I think that there’s a balance. We’re going to pay down debt. We’re going to limber up the balance sheet. You can expect that we’re going to pay down the debt that’s coming due over the summer, what is it, $575 million?

Diane Bessette — Vice President, Chief Financial Officer & Treasurer

$575 million.

Stuart Miller — Executive Chairman

$575 million. We’re going to pay that out of cash flow, but we’re going to continue a stock buyback program, as we focus on those bottom line returns.

Sue Maklari — Goldman Sachs & Co. LLC — Analyst

Got you. Okay. Thank you. That’s very helpful and good luck.

Stuart Miller — Executive Chairman

Okay. Thank you.

Operator

Thank you. Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.

Stuart Miller — Executive Chairman

Good morning.

Truman Patterson — Wolfe Research LLC — Analyst

Hey, good morning everyone. And thanks for taking my questions. I appreciate it. Stuart, in your prepared remarks, I believe you were talking about the SpinCo being somewhat asset-light, and I think you even mentioned potentially liquidating a portion of it. Is the asset spin still going to be about $5 billion to $6 billion? And then in tandem with that, you’re targeting 65% option land by the end of this year. Where do you think this could go after the spin, 80% plus? And with that, I’m kind of thinking just longer term over the next two, three years, I mean, is there any possibility maybe you’re getting maybe 80%, 90% option land?

Stuart Miller — Executive Chairman

So, we’re going to take that in stride, and let the — let’s play that out over time. I don’t want to get out over my skis. Your first question relative to the SpinCo, we have been — look, you have to — as we’ve configured SpinCo, we’ve gone back and forth on an asset-heavier, asset-lighter approach. We think that in terms of defining the company going forward, our best program going forward is an asset-light approach to SpinCo. That means that many of the assets that we’ve targeted at the outset will end up either in AUM or we will liquidate in orderly course on the Lennar books. It’s still the same basic configuration of asset base.

We’ve just been — it’s all been about turning assets into cash and deploying the cash or deploying the assets, so that we lighten up our inventory and we end up with a spun ancillary business program that enables our pure-play focus on homebuilding and Financial Services. So it’s kind of a zero-sum game. The asset base is still the same. It’s just where the asset is going to fall. Is it going to fall balance sheet, AUM or liquidation? And all of it’s going to basically solve to the same equation.

Truman Patterson — Wolfe Research LLC — Analyst

Okay, okay. And for my follow-up question, you all, I believe, are guiding to low-double-digit community count growth in 2022. Over the past four quarters, you’ve been starting about 4.5 to 5 homes per community per month. Are you pretty comfortable with this range going forward as you open more communities, just given all the constraints in the market? And hypothetical, internally, do you have the active land and labor available to possibly move above that range if the material supply chain begins improving throughout 2022?

Stuart Miller — Executive Chairman

Let me invite Rick, and then Jon to weigh in on this.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yeah. So, on the community count, I think, as I said in my remarks, we’re really well-positioned right now. While we’ll dip a little bit in Q1, that’s really just a timing issue. It’s tough to map some of these things out over a 12 or a 24-month timeframe. But we will see solid growth in the back-half of this year starting in Q2. And based on our land pipeline, we’re pretty comfortable that we’ll see continued growth in 2023. As I said, we increased our overall owned and controlled pipeline land position by 44% year-over-year. That’s a lot of work from our teams, and all of that came from — all of that real increase came from option contracts. So it’s a remarkable repositioning and change in direction of the ship, all during a time period where we’re really driving growth. I’ll let Jon talk about starts pace, because I think we’re pretty comfortable.

Jon Jaffe — Co-Chief Executive Officer and Co-President

Yeah. We’re very comfortable that we’ll be able to look at 2022 as an increase in starts over 2021, and so some of that typical seasonality with Q2 being our strongest start quarter. But I think, as we look across our platform, we are well-positioned with our relationship with our trade partners to be able to manage a very healthy start pace. And to the extent that we do see more stabilization relative to the supply chain, I think what you’ll see is a tightening of the cycle time more than an increase in start pace. I think we’re already planning on maintaining a very disciplined approach to our start pace. What we’ll pull in is the cycle time from the extended periods that we’re seeing now.

Truman Patterson — Wolfe Research LLC — Analyst

Okay. Thanks for that. And good luck on the upcoming year.

Stuart Miller — Executive Chairman

Thanks.

Operator

Thank you. Our next question comes from Mike Rehaut from J.P. Morgan. Please go ahead.

Mike Rehaut — J.P. Morgan Securities LLC — Analyst

Thanks. Good morning, everyone. And thanks for taking my question — or questions. First, just on the gross margins, I think the guidance initially last night, maybe earlier this morning caught a little people off — some people off-guard with the first quarter down sequentially. Certainly, it is consistent, though, with your — before 2021, you had a consistent sequential decline. But I was hoping to delve into; number one, if you could kind of break out perhaps what was the incremental negative headwind in terms of lumber? I believe you mentioned that you expect peak lumber costs in the first quarter versus just the reduced overhead leverage. And as you think about the full-year guidance, I think more importantly even, what are some of the drivers there in terms of upside or downside and the lumber cost assumption for the back half of the year?

Stuart Miller — Executive Chairman

So, let me start by saying that our margins are very strong. When you look at the first quarter, you’re basically looking at peak lumber and you’re getting to the edge of peak lumber as we fall into the second quarter where it really starts to moderate. And number two, you’re really looking at leverage relative to field expenses. So, you see a little bit of a minor down in the first quarter, but our margins are still coming in at a very strong level, and you see that in our look forward to 2022.

And I’d just say that, Mike, relative to looking ahead, it’s always difficult to look out numerous quarters, particularly in the market where labor and materials and logistics are moving around. I think that we feel pretty optimistic about our margins as we go forward, and I think you see the beginnings of that reflected in our year-end — or our total year 2022 projections or forecast. Jon, do you want to weigh in?

Jon Jaffe — Co-Chief Executive Officer and Co-President

I think you pretty much covered it. It’s — the peak pricing of lumber will hit us in Q1, and then we’ll start benefiting from significantly lower prices. And if you follow the topic on lumber now, we’ll probably see some uptick as we look at lumber purchases in the first and second quarters that will impact some of the back-half of the year, but likely offset by what we spoke about in terms of very strong spring selling season, which should increase our ASP to offset that.

Mike Rehaut — J.P. Morgan Securities LLC — Analyst

Right. Okay. No, no, that’s helpful. Thank you for that. Secondly, if I could, just a couple of clarifications on earlier questions. Number one, around the share repurchase. It seems like you have a lot less wood to chop in terms of debt pay down this upcoming year. At the same time, presumingly, you’d have a higher amount — equal to higher amount of cash flow. Everything else equal, that would point to potentially a greater amount of share repurchase in 2022, just want to make sure I’m thinking about that right? And just lastly, on the spin, that it did sound like, in answer to Truman’s question, you’re kind of still expecting to offload about $5 billion to $6 billion of assets one way or another, if I heard you right.

Stuart Miller — Executive Chairman

Okay. So, the answer to question one is, as I noted, we will continue to buy back stock on an opportunistic basis. I don’t think there’s any flaw in your thinking as to order of magnitude of cash flow and how we’re situated to be able to do that. I don’t want to speak specifically about stock buybacks. I don’t want to kind of lay out a road map, but we’re going to do that opportunistically, and we have significant cash flow as we look forward. As it relates to number two, the answer is yes. That’s the answer that we gave. I basically laid out three buckets. It’s either going to be balance sheet for SpinCo, AUM within SpinCo or liquidation with cash flow enabling greater stock buyback, and that’s how we’re focusing on it.

Mike Rehaut — J.P. Morgan Securities LLC — Analyst

Great. Thanks so much.

Stuart Miller — Executive Chairman

Okay, Mike.

Operator

Thank you. Our next question comes from Stephen Kim from Evercore ISI. Please go ahead.

Steve Kim — Evercore ISI — Analyst

Yeah. Thanks a lot, guys. Lots of good info here. I wanted to start by talking about the supply chain and your cycle times. So, if we just did this ratio, we compared your fiscal 2022 closings guide, full-year closings guide to what you actually did in this past fourth quarter, and we looked at that through time. And what we see is that your guide is assuming a ratio or a multiple of 4Q 2021 closing that’s pretty consistent with previous years. But given how unusual and crazy the supply chain was in 4Q and your earlier comments that you think that it’s going to start to get better, I’m kind of curious why you’re not expecting that you could close more homes relative to what you just did in the 4Q than in prior years?

And then, at a higher level, once your cycle times do stabilize or even contract, I’m curious how you’re going to balance orders relative to your production. Like, should we expect to see order growth reaccelerate while your backlog turnover stays kind of low? Or should we expect to see your turnover rates increase and your order growth continue to remain constrained for a while?

Stuart Miller — Executive Chairman

Jon, Rick?

Jon Jaffe — Co-Chief Executive Officer and Co-President

So, I think, Steve, we’ve just taken a straight shot look at what we know today about our cycle times and projected production. And as I said in my response to the prior question, if we do see the stabilization, I think what you’ll see is a reduction in our cycle time versus a material pickup in our start pace. And if that does happen, it should lead to a pickup in closings. Relative to sales, as Stuart has commented, as Rick commented, we see a very strong sales environment. So to the extent that we change our start pace, not our closing pace, but our start pace, we would adjust our sales pace to match that. But as I said, I don’t see a lot of upside in terms of increasing start pace. So I would think our sales would remain pretty consistent with the way that we planned them.

Steve Kim — Evercore ISI — Analyst

And then price will just be the thing that sort of equalizes it?

Jon Jaffe — Co-Chief Executive Officer and Co-President

Right.

Steve Kim — Evercore ISI — Analyst

Kind of like what happened last year and.

Jon Jaffe — Co-Chief Executive Officer and Co-President

I just don’t see any reason to sell ahead of how we’re starting homes.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yeah.

Stuart Miller — Executive Chairman

Rick?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

We could sell another 1,000 homes in the quarter if we wanted to without too much effort. It just doesn’t make sense to do that. Jon and Stuart are exactly right. It doesn’t make sense to get over our skis, but we’re good skiers. The market starts to improve a little bit and the supply chain normalizes itself out, we’ll close more homes. That’s just the reality of the situation.

Stuart Miller — Executive Chairman

So, Steve, let me just add to this and say, at the end of the day, the math would indicate — just simple math would indicate that you’re right. We’ve pushed some closings from 2021 into 2022. We’ve increased starts through the year. And there should be higher closings and opportunity to sell kind of as we go forward. The choppiness of the supply chain really tells us to stay on the conservative side until we see what the market actually does and how things actually play out. So if you just sit down and look at the math, I understand your question, it’s an excellent question. But if you look at the way the market is playing out and how cycle times are moving and the whack-a-mole kind of environment that we’re in, we’re just going to let it play out and not get over our skis, as Rick says.

Steve Kim — Evercore ISI — Analyst

Yeah. Makes perfect sense. And I believe you actually used a derivative of conservatism in your opening remarks. I think you said you conservatized some assumptions in your guidance. And so I wanted to pull on that thread a little bit, that conservatism thread. Last year, your gross margin ultimately exceeded your initial guide by about 300 basis points, and despite the fact that there was this massive unforeseen spike in lumber costs and scrambling costs from the supply chain and all that. And so you’ve addressed the lumber a little bit in the fact that the first quarter is going to have a little bit of a headwind.

I assume you meant by that, that the $4.18 increase is going to be bigger than — in the first quarter. I just want to confirm that, maybe Diane, you can confirm that. But then the other big part of it is home price, right? So nationally, home prices look like they’re still rising at about 1% a month. You just mentioned that you think a strong selling season is going to drive your ASP higher. But your ASP guide for the full year 2022 is actually below the order price that you booked this quarter. And I’m wondering if there’s anything specific that is driving that, or again if it’s just conservatism incorporated in your outlook?

Stuart Miller — Executive Chairman

Let me just say — and I’m sorry, Rick, for stepping on you, but let me just say that we are a little bit shy about projecting too much ASP growth. And I think that it’s going to be interesting also to see what happens with interest rates, which I don’t know how to factor in either right now. I kind of like what we’re looking at and what we’re projecting. I feel pretty good about our ability to accomplish and maybe exceed some of those metrics. Rick, I stepped on you. I apologize.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yeah. And I would — I agree with exactly what Stuart said, there’s a good feel in the market. As I walk through the markets, there’s market strength in all product categories. We’re seeing strength. It’s all about getting the homes built and reducing that cycle time. Sales price, we have good room in sales prices. Some of the ASP is higher percentage of deliveries in the Texas markets, which are a little bit lower priced markets. But we’ll see how the year progresses.

Jon Jaffe — Co-Chief Executive Officer and Co-President

Well, Steve, the answer to first part of your question is, yes, Q1 should be the peak lumber prices and by the end of the quarter, we’ll start to see them fall. But overall, for the quarter, it will be up from the fourth quarter.

Steve Kim — Evercore ISI — Analyst

Okay. Thank you very much guys. Appreciate it.

Stuart Miller — Executive Chairman

Thank you, Steve.

Operator

Thank you. Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner — Zelman & Associates — Analyst

Hey, guys. Good afternoon, now. And thank you for taking the questions. First, I’d love to expand a little bit on that pricing conversation you just had with Steve. I totally understand the conservatism there, not wanting to get too bullish, especially with the uncertainty on the rate environment. But if I look at your 2021 pricing, while you guys obviously grew prices at a very nice rate, and certainly, based on your margin, it looks like you took advantage of the strong pricing environment, the growth was a little bit less than some of the other builders.

And I’m curious if there’s any — when you look at your business on the pricing side, are there any actions you guys are taking, recognizing affordability constraints where you’re trying to offset maybe apples-to-apples price gains with either building smaller square footage product, maybe moving out into some more affordable submarkets as a way to keep your product more affordable? Or am I reading too much into that and you’ll tell me, no, it’s just a mix of deliveries from quarter-to-quarter?

Stuart Miller — Executive Chairman

Rick?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

So, it’s a combination of all those things. As we move out to some other markets that are a little bit further out, those are generally lower priced compared to sort of the more infill stuff. We are adjusting and building a smaller footprint in many of our markets, and where Jon and I constantly balance with the team, pace and price. And you’ll continue to see good ASP growth.

Jon Jaffe — Co-Chief Executive Officer and Co-President

I think also, as Rick mentioned earlier, I don’t think it’s a quarter-to-quarter mix as much as Rick and I and the division has been very focused on driving down the price curve as you deal with affordability. So, we are consciously trying to experience product that is smaller, more affordable as well as a significant focus on picking up our market share in Texas, which does drive that ASP.

Alan Ratner — Zelman & Associates — Analyst

Perfect. Thanks for the color there, guys. Second question on the land strategy, the lot count. You guys highlighted the 40% plus growth in total lots controlled, and you’re not necessarily unique in that standpoint, I think public builders as a group are probably up 30%, 40% year-over-year. So clearly, there’s been a huge push for tying up more land.

And on one hand, it’s all tied up through option contracts, which is great because it’s obviously capital efficient. But on the other hand, it doesn’t seem like the market is going to be capable of delivering that type of growth anytime soon. So effectively, the way I look at it, tail of your land supply is effectively continuing to grow unless we could just see these huge bottlenecks resolved here over the next year or two.

And while it’s off-balance sheet, you still do have $1 billion more of capital tied up in option deposits today than you had five or six quarters ago. So it’s not completely asset-free or capital-free. So I’m just curious, should we expect that growth to maybe start slowing here? Or are you comfortable effectively growing that tail because you want to have your kind of arms around all corners of the market for when the market does resolve itself from these constraints?

Stuart Miller — Executive Chairman

Look, I would say, Alan, that on an overall — for all homebuilders basis, the math and your questions probably hold water. And the positive side of that is, this market is not going to enable there to be a sizable overbuilding, which has been an overhang in past cycles. On the other side, I think that if you look at our land strategy and programming, I think that we’re — the land market is definitely constrained. And — but I think that given our position in our strategic markets, we’re just going to be able to outperform. And I think that we’re really positioned to be able to do that. Rick, do you want to weigh in on that?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

I feel very comfortable with what we’ve done. So, incredibly comfortable and pleased with the relationships that we’ve established across the US with just some incredible land folks, regional developers. And that’s what’s really propelling this. It’s given us an opportunity to get involved with some larger communities that are battleship communities that will have multiple price points and products going at various points in time that have the ability to feed on themselves. Just really couldn’t be more pleased with where we are right now.

Alan Ratner — Zelman & Associates — Analyst

All right. Thanks a lot, guys. I appreciate it.

Stuart Miller — Executive Chairman

Yeah. Thank you. And let’s make the next one the last question, please.

Operator

Absolutely. Our last question comes from Matthew Bouley from Barclays.

Alan Ratner — Zelman & Associates — Analyst

They totally didn’t answer that.

Matt Bouley — Barclays Capital, Inc. — Analyst

Hey. Sorry, that wasn’t me. Thanks for squeezing me in here and congrats on the quarter. So just a clarification around what’s assumed in the guide related to supply chain. And you — so you mentioned in the Q&A that you’re embedding conservatism in the guide, but I think at the top, Stuart, you mentioned in the second half that you do expect some, I think you said mitigation in the supply chain disruptions. I’m just curious, as you think about closings in community guide, kind of what degree of contingency is built into that guide? Or is there an assumption within the guide that, that supply chain does get better somewhat? Thank you.

Stuart Miller — Executive Chairman

So, you’re right, I did daylight that the second half of the year, we expect to see some stabilization in the supply chain. And if we — what we basically daylighted is that it’s self-imposed stabilization, meaning we’ve increased the number of starts in order to be able to accommodate the fact that the cycle time has expanded, deliveries are somewhat impaired. I think the supply chain disruptions I can’t predict what’s going to actually happen in the field.

But what we’ve done is we’ve put buffers out there in increased starts, our Builder of Choice program working with our subcontractor base, our building partner base to activate kind of safeguards and programming to enable a better delivery system and logistics system, and additionally, our Everything’s Included program, really reducing the number of SKUs in our product offering is working to our benefit and helps with our Builder of Choice program to really create embedded buffers that I think are going to really position us well in the second half of the year.

So your question is what kind of conservatism have we injected? I think that we’re kind of expecting more of a steady-state program through the year. We’re certainly not getting over our SKUs and expecting that everything will stabilize and rise to the level of perfection as we get to the second half. I can’t give you a number in that regard. But conceptually, we’ve taken a conservative approach to looking to the remainder of the year. But we think that the market is going to stabilize, at least, on the supply chain side.

Matt Bouley — Barclays Capital, Inc. — Analyst

That’s great color. Thank you for that, Stuart. And then, last one on the gross margin guide. Just to clarify the cadence you’re assuming, obviously, the normal step-down in Q1 with fixed field expenses. And simply looking at the math for getting to the full year guide, it’s almost like assuming a normal levering of your fixed expenses as you go through the year without really much else that different, is simply doing the math.

So, I’m just curious between — you mentioned clearly lumber tailwinds emerging as you get to Q2. I’m wondering if there’s any other pressures to the gross margin that we should be aware of. Rick, you just mentioned more mix to Texas, lower priced homes, for example, or perhaps the mix of delivering option lots. Just what other headwinds might be part of that gross margin guide? Thank you.

Stuart Miller — Executive Chairman

Well, look, I think that you have a number of cross-currents in just the cost side of the equation. Yes, lumber is moderating, and we’re going to bypass the first quarter’s peak. But at the same time, you have pressures from labor and materials in other areas that are clearly offsets to the benefit that we’ll get from the lumber reduction.

So, the cost side of the equation is moving around. We’ll still have to see where ASP goes, and you’re correct that when we start to normalize our field expense and lumber starts coming down, there’s somewhat of a gap in some of our numbers, but we’re going to have to see how that gap’s filled by the other traditional areas where costs are going up.

Don’t underestimate what’s happening in labor. In a constrained labor market, you got to pay more. And sometimes to get things done, you got to pay a lot more. Same thing on logistics. So, that’s what’s happening in the field right now. We can’t predict it. All we can do is lay out our expectations, and that’s what we’ve done.

Matt Bouley — Barclays Capital, Inc. — Analyst

Great. Well, thanks. Good luck and happy holidays.

Stuart Miller — Executive Chairman

Okay. Same to you. Thank you very much. So, let’s leave it there. Thank you, everyone, for joining us. We look forward to reporting 2022 quarter-by-quarter, and we expect a very positive record-breaking year for 2022. Thank you.

Operator

[Operator Closing Remarks]

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