Q3 2019 Earnings Call
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Now I'd like to turn the conference over to Brent Anderson, Vice President Investor Relations. Please go ahead.
Thank you Gerry.
Good morning, and welcome to our analyst call to discuss our third quarter 2019 results. We should the press release yesterday after market close and you can find it along with the slides will be referring to during this call on our website at investors Meritage homes Dot com.
Or by selecting the Investor Relations link at the bottom for home page.
Turning to slide to remind you that any statements during this call as well as within the press release on slides contain forward looking statements, including projections for full year 2019 operating metrics such as home closings closing revenue and gross margins as well as overhead and diluted earnings per share.
Mission to expectations about market trends.
Those and any other projections represent the current opinions of management, which are subject to change at any time do we assume no obligation to update them.
Any forward looking statements are inherently uncertain.
Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on the slide as well as in our press release and our most recent filings with Securities Exchange Commission.
Typically our 2018 annual report on Form 10-K , and subsequent 10-Q's.
Which can take a more detailed discussion now those risks.
We've also provided reconciliation certain non-GAAP financial measures referred to in our press release.
As compared to the closest related GAAP measures.
With me today to discuss our results are Steve Hilton Chairman and CEO of Meritage homes. He will spur the executive Vice President CFO and Felipe Lord Executive Vice President Chief Operating Officer, we expect to conclude the call within an hour and a replay will be available on our website within approximately one hour. After we conclude the call you could find those instruct.
In our press release, it will remain active through May.
Excuse me November six.
I'll now turn it over to Mr. Hilton to review, our third quarter results Steve.
Thank you Brenda I went to welcome everyone participating our call today.
Slide four.
As you saw the results reported yesterday, we had another very good quarter across all key operating metrics.
Our performance is the direct result of our strategic shift to entry level at first move up which are the strongest areas of demand across our markets.
We're not only provide bars, what they want in terms of affordable high quality homes, but we're building selling and delivering those homes officially a cost effective way by simplifying and streamlining our operations.
Because of that were growing at a faster pace in the market in taking market share.
Improving our margins and operating leverage to deliver better earnings grow our shareholders' equity.
We're generating positive cash flow and strengthening our balance sheet, providing ample rhiag capital to reimburse for future growth.
This you're sort of Stark contrast, the turbulence, we experienced the third fourth quarter of 2018.
Which response, you buy Swire Wayne spend for a few quarters and all three additional incentives on homes in the back up in 2018.
The man returned in the first quarter. This year has persisted through the second third quarters meeting the normal seasonal decline, we would have expected to see in the second half of this year.
Our orders <unk> third quarter were up 24% year over year, which supports our year to date order growth is 17% over 2018, despite a small decrease in community count.
Those results or do you goes down a sound strategic plan and solid execution I commend, our entire meritas damper, making it all happen.
Now turning to slide five.
We delivered 54% year over year order growth and the metro market with our live now homes.
We also made up 54% of our orders for the third quarter 2019 offer 43% in last year's third quarter, and 52% and Miss your second quarter.
43% of our commands a core RIN were entry level compared with 33% of the told communities a year ago.
Well year over year comparisons a third quarter, two doubt, making work easier. The first three quarters. The success of our entry level live now homes clearly exceeded the broader market in terms of year over year growth.
In addition, the successor Israel product.
Enhancers, we've incorporated into our first move up operations are starting to pay dividends positively impacting our financial and operating result.
Our first we will homes or provide buyers what they want.
We had a double digit increase it absorptions in our first we were homes over last year's third quarter and as expected those absorptions were not as Wafi as our live now absorptions, but made a material contribution to our year over year growth.
Move up buyers love to do studio M. designer collections in the low stress transparent process a personalized in their homes.
Consequently, there is plenty more higher margin upgrades to enhance the interiors or their home.
You can learn more about that are Investor day in New York on November 19, if you have yeah registered I highly encourage you to do so.
I'll now turn it over to poised to discuss some of the highlights of our sales trends.
Thank you Steve.
Demand was strong across all three regions, especially in the as you all the space, where we operate great value proposition without lived out.
Our 24% increase in orders for the third quarter 2019 was mostly driven by that segment, though we did see broad improvement across first move up as well.
I'll provide some additional color beginning with the west region on slide six.
Our orders in the West where you were up 38% over the third quarter 2018.
Given by a 29% increased absorption coupled with a 7% increase in average dr. can you.
Community Count growth is primarily in California, where are you have opened several new communities at lower price points in great locations.
Well, California remains the highest priced at least a formal market our focus on moving down the price bad is increasing our absorption pace.
Absorptions have nine homes per community on average for California, where they 25% year over year increase and inline with the company average.
Arizona again produced a strong as absorbs that across the company had an average I've talked about how orders per average community for the quarter.
51% year over year, which drove 39% order growth and 42% growth in total order value.
The market is strong in Arizona and Threepar attract increase in ASP was primarily due to a reduction in Dallas, the 2019 versus a year ago.
We increased our Albert can you tell in Colorado by one community over the past year, though absorptions were down 6% year over year to 7.76 per community for the quarter. The color Mark is still study, but not as red Hot as it has been the top last couple of years, especially at the higher price points above 500000.
Affordability is the most significant challenge in Denver, and we're working hard to open more affordable duplex in Calgary communities, replacing older move up here.
We expect that chip will increase absorbs and while reducing our SP in Colorado in future quarters.
Overall, the West was our best performing region. This quarter in terms of Rosen absorptions order volume and total order value, which was up 36% over the third quarter of 2018.
Slide seven central region.
Moving to decide what have you done taxes, how to 26% increase absorption that was partially offset by 19% decline in hours communities I'd be sold out can you just got to than anticipated pattern in the process of bringing more communities online over the next few quarters.
Resulted in 2% order growth for the quarter over last year.
A 7% reduction in S.P. from our shifts and you all at first move up offset the 2% increase in order volume, resulting in a fibers that declines in total order value for Texas.
Slide eight each region.
We're very pleased to see continued improvement in our east region.
Year over year order growth in each region have increased consecutively each quarter throughout the year.
These produced 32% order growth in the third quarter, where they comedy show some upside more outage I competing for the border and 23% increase in average absorptions.
Total order value was up 27% year over year I've order volume growth departure, partially offset by 4% decrease in ASP do greater entry level product mix.
The strongest market with Tennessee, where orders increased 62% over last year's third quarter due to an 11% increase in average community and a 46% increases auctions the national market continued to be strong at the more affordable price points.
Let me add also approved injured in Georgia, where orders for the quarter were up 55%, mainly driven by 69% increase in absorption, partially offset by 7% fewer communities on average.
The newer communities opening there the last couple of quarters are generating good volume.
Orders were up 35% in North Carolina due to a 13% expansion in our community count and a 20% increase in absorbed over last year, primarily from our live now communities.
George and held steady orders were down 50% year over year in South Carolina due to the Closeouts and strong community this year, which reduced our average community count by 17% compared to last year.
For opening some new lived cannot live now communities over the next couple of quarters that it should increase our absorption pace there.
Florida generated 27% increase in orders over the last third quarter last year's third quarter, resulting probably 20% increasing diversity is out any fibers had higher average absorption.
Slide nine.
We closed 12% more homes in the third quarter of 2019 than last year with just a few percent more orders and backlog entering the quarter as a result by having more spec homes available for quick movement, which is a critical part of our entry level strategy.
62% have our third quarter 2019, close clothing, we're from spec inventory up from 49% a year ago. Those facts closings also increase our backlog conversion rate, which was 66% in the third quarter. This year compared to 60% last year. We ended the third quarter 2018, with about 20 higher spec homes in it.
Inventory or an average of 11.2 per community compared to an average of 9.8, a year ago. However, only 23% of those facts were completed by the September Thirtyth 2018, compared to 30% in 2018, we're selling more spec home before completing construction for quick moving especially.
In the entry level space I'll now hand, it over to he like to provide some additional analysis of our financial result, you up. Thank you for me I'll provide some more detailed monarchy in our result is all lands and operating metric beginning with slide.
Our third quarter home closing revenue was up 7%, a 12% more unit clothing, partially offset by 4% reduction and our average sales price, resulting from a mix shift towards entry level homes.
Despite the lower if piece the additional entry level clothing deliberate increase margin in addition to increase revenue.
We said before we're not sacrificing margin with entry level homes in fact at your upon our producing the same or better gross margin than our move that tone.
Our home closing gross margin was 19.8% for the third quarter 2019, 170, that's higher than a year ago.
Third quarter 2018, gross margin was reduced by 30 that due to a $2.6 million charge from exiting a non strategic win with a community.
For the first three quarters at this year, how clothing gross margin improved 70 bets to 18.5%.
Jimmy expenses were down 30 bed as a percentage of home closing revenue for the third quarter 2019, compared to 2018 year to date 2019 achieved expenses were just slightly higher than 2018, mostly due to high brokerage commission from incentive in late 2018 in early 2019.
We also incurred sovereign an accelerated equity compensation costs of about $3.1 million earlier this year that impacted our year to date of January leverage.
Interest expense increased $1 million for the quarter, an 8.1 million year to date compared to last year, primarily due to less interest capitalized the assets under development, which is mostly the result of faster construction time and turnover of inventory, it's part of our spec building and simplification strategy, we expect interest.
Expense to be eliminated 2020, it's all interest incurred should be capitalized after we retire our senior notes due early next year, we now expect to complete that debt reduction later this year.
Pretax earnings for the quarter were 29% higher than the third quarter of 28 team and we generated a 35% increase and diluted earnings per share for the third quarter over last year, reflecting the benefit of our share repurchases in the second half of last year and first quarter of this year.
The 4% decline in year to date, not earning was primarily due to higher interest expense in 2019, and first quarter 2018 net earnings benefiting from a favorable legal settlement of approximately 4.8 million, which accounted for the comparative decline in net other income in addition, our effective tax rate.
3% higher for the first nine months of 2019 compared to 2018.
Okay, Great and 2018 benefited from a one year extension of energy tax credits for all qualifying homes closed in 2017, which totaled $6.3 million Bobby tax credits have not yet been renewed for 2018 or 29 team. They are still in the extenders Bill. So we're not only got the possibility that we could capture that Todd.
In the future.
Turning to a few highlights of our balance you can cancel items on slide 11.
We spent approximately 275 million on land and development and this years third quarter, putting over 5500 lots under control. This total spending was about $82 million more than last year's third quarter total of 193 million. This was our highest quarter Philana development spending in the last two here.
And the largest number blocks, but under control during a single quarter in over seven years as Steve noted, we're rebuilding our pipeline for new communities and are looking to materially grow our market share over the next two to five years.
We ended the third quarter of 2019, we're told a lot the type of 37300 lot compared to approximately 34400 lot at September 30, 2018, holding or your supply constant at approximately 4.2 years based on trailing 12 month clothing.
66% of our lot inventory was owned and 34% was option at September 32019.
Our net debt to capital ratio was 31.3 per site at the end of the third quarter 2019 down from 36.7% at the end of last year and 43.6% just two years ago at the end of September 27 piece.
Expected to continues to be lower than our historical average as our stockholders equity continues to increase with limited changes in our debt.
Turning to slide 12, we're encouraged by the outlook for interest rates and optimistic but demand for our homes and communities will remain strong.
Based on our results in the first three quarters of this year, we're projecting full year 2019 home closing approximately 8900 9100 unit and total home closing revenue around 3.5 billion.
We anticipate home closing gross margin to be in the mid to high 18% for the year with the fourth quarter being in the mid 19% range. We expect accudate as a percentage of home closing revenue can be just slightly higher for full year 2019 compared to 18, you did the increased commission expense earlier this year that we've just got and about.
10 bed of costs relating to opening an operating our new studio I'm show around.
But the tax rate between 24, and 25% for the year, we expect to generate approximately $5.50 to $5.70 diluted earnings per share for the full year 20, Nike without I'll turn it back over to Steve.
Thank you.
In summary, we were pleased with our third quarter and year to date 2019 results and believe we differentiated meritage, where there are live now product for the value conscious bar and our studio design centers for first move up buyers.
We're also streamlining and simplifying our business, who drive greater efficiencies and profitability, it's a way equation for our customers employees trade partners and shareholders.
I'm proud of our entire Meritas team for putting our customers first and working hard everyday to make the company successful we're confident in our ability to make the most of the opportunities ahead of us and we expect to continue to grow and deliver increased shareholder value. Thank you for your support of Meritage homes, operator, we'll now open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Please limit yourself to one question and one follow up if you have further questions. You may reenter. The question queue. At this time, we'll pause momentarily to assemble our roster.
The first question will come from John Lovallo of Bank of America.
Good morning, guys can take you for taking my question.
First question on Texas community Count being down about 20% year over year. I know you guys are working hard to get a that community count number back up again when can we anticipate you returning to growth again in community count in Texas.
You know were up we're sorting through that right now.
No really for the whole business.
We have an interim goal.
To get our community count to 300 communities by the end of they ended 21.
And.
We bought a lot of losses last quarter, we bought a wall loss this year.
Probably a lot more lots this year so for three quarters, we did all last year as he already articulated.
We're going to give you more guidance next quarter of specific community count growth numbers.
You know for next year.
On a more detailed basis, but right now we're just trying to figure out you know precisely where are those were those are going to fall.
Well.
Our.
Certainly been challenged in the log markets given communities online.
Because entitlement development delays and.
When developer delays, but we're working hard to grow our community count and expected over the next couple of years, we're going to have a meaningful improvement.
That's helpful. Steve and then as a follow up the efforts that you guys laid out to grow market share I mean do you anticipate the this is going to be done largely organically or are there you know arrangements or acquisitions that that could help facilitate that.
No we were really playing the do it organically I mean, certainly through absorptions and community count growth.
Well, we've seen over the last year has been primarily absorptions of course, we're always.
I have our eyes open for for smart acquisitions.
We just haven't seen any that makes sense.
Lately.
So we're not counting on those to come forth, but you know if the opportunities present themselves and they make sense, what we'll certainly try to take advantage of it.
Okay. Thanks very much.
Thanks.
The next question comes from Alan Ratner of Zelman and associates.
Hey, guys. Good morning, Congrats on another strong quarter.
So first question on the gross margin you know you guys have been talking for a while about the goal of getting back to 20%. Then you basically got there this quarter Big Big increase sequentially. Steve can you talk of just the drivers that that contributed to that that improvement where you guys more aggressive raising prices this quarter.
Any quantification, there and add it sounds like from your comments you think that's sustainable based on the Fourq you guys, but maybe just let US know if there was anything onetime or mix related it in there that we should be aware of thank you.
No. It's just generally.
The shifts the strategic shift that we've made to the entry level My first move up product.
The entry level product Weve.
Opened over the last few years.
Has higher margins lower incentives.
Better underwriting we have less land development bugs stronger segment of the market.
The two wherever you and above segments that were one of your way out of have more incentives.
Slower absorptions.
Hi, or impact on our overhead.
And you know as has dragged the margin downturn in previous years. Additionally, our one have you product.
With our new studio model.
Model has really also helped us improve margins, we're getting better cost.
Bye bye bundling these options and.
Reducing the number of skews.
And we're also able to drive higher revenues.
Through the design center because the customers.
We like the offerings that we have in our our spending more.
And the products that we sell the studio design center have higher margins than the home itself. So that drives your margins up as well so that's the strategy.
Strategies, everything and it's really making the difference just one other point to Alan I think we've been around that yes, Hi, 18, 19, 20% in most of our agents. The last couple of quarters. The kind of Big success story. This quarter is really the east region. Adjusted the point of comparison last year's third quarter.
The each region delivered 16.3% gross margin. They fear there were 18.5. So this story a change of our product in the success of the entry level really coming to fruition for the East region is really healthy before they were dragged on a consolidated margin now they're kind of holding the line are consistent with a companywide.
Again.
Yeah, I'd also say I'm sure really because question about construction costs, but.
We've got a really good job this year and actually driving our construction costs down.
Through the value engineering and.
Limiting to improve the.
Our product.
Product offering so even though there's cost pressures across the board on.
Construction cost.
And that basis, our car costs are flat to down.
Across most of our reserves.
That's great and I really appreciate it guys.
Second question the backlog conversion has been a huge tailwind for you guys. This here and obviously the spec strategy plays a lot into that if I back into the midpoint of your guidance for Fourq you closings. It looks like you're expecting conversion, maybe just to take a bit lower year over year. So it was I was curious if you can comment on that or are you starting to see.
Any labor constraints pop back and now that your orders and everybody else has it been so strong or is there something else just timing related that that's contributing to that.
Oh really I mean, when you know waivers just been constantly challenge, but it's not any worse you know this quarter or lose half back after the or that there was previously.
No there is.
There's always a issues out there whether you know we had weather issues are this month the already we had a tornado the towards drew Dallas.
We've had a bad storm my last weekend that went through a Florida and.
In the south and.
No, we're just trying to be prudent.
On a you know not let it all hang out there and try to deal with some of the unforeseen circumstances that that always present themselves, particularly.
The fourth quarter the year.
Understood. Thanks for that good luck guys.
Yeah.
The next question will come from Mike re hurt with JP Morgan.
Hi, This is a lot on for Mike.
So wondering if that incentive trends in the quarter and particular lean year on year.
Maybe I'll think California, it's encouraging to see that better result, but.
To get more detail on the second time move up over there and the corridor and I'm happy to more communities you have to close out and then is that there's got to offer there.
Thanks.
I'm, sorry, I just want to make sure I understood. The question are you asking about closeout communities in California.
I'm asking broadly about in fact the trends.
Across the company and then further and close that communities in California.
Oh, it's just generally about traffic trends throughout the country. So traffic remained relatively steady.
Throughout.
The corridor, we really haven't seen anything meaningful beyond sort of the typical seasonal pullback that even though that's been a little bit needed I think the interest rates are driving a lot of that and that obviously our live now positions like these that traffic tends to be more consistent throughout the year. So I'm trying to turns are pretty strong arm in California spin.
Typically you know other than what you've heard from everybody else that it's slower our traffic trends actually picked up through the quarter again, a lot of that had to deal with the Bakken. We've opened up some new communities that are better positioned in the market and are driving better traffic traffic trends for us overall.
As I was referring to incentivize.
And said this okay. Okay, sorry, we had a bad confectionery and pick that up so that is this a sleep again.
I'll talk about incentive generally for the company and then I'll talk about incentives for California. So in general on incentives have been declining throughout the year, we haven't had to incentivize our homes as much as as the market has grown gotten stronger certainly, Arizona the place where it really pulled back inside as Texas, we've been able to pull back.
Florida, you know the South has remained relatively consistent California incentives are pretty much static they increased in the back out the last year in the first quarter based on kind of the market trends, but we haven't had to dramatically increase those throughout the year. Although we do have some meaningful insight is out there in the market to combat sort of.
Market conditions and what other competitors are doing.
Okay. Thank you very helpful.
The next question will come from Paul Przybylski of Wells Fargo and once again, Mr reminder, to limit yourself to one question and one follow up Paul go right ahead.
Thank you.
To follow on Alan's question, Steve You had mentioned a 20% of being your gross margin goal as as live now has matured do you think that there is upside to that number you know moving forward into 20 and 21.
Oh.
Maybe but.
But yes, not not much I mean.
Entry level housing the volume again, not a more it's not it's not a it's not a pricing and margin game and you know as some of our larger peers have demonstrated now I guess civilly aboard.
No, it's really pace over pricing and.
And.
We want to deliver very compelling.
Price sensitive value conscious product so.
I think we choose a higher volumes then.
And higher margins, yes, I think generally a live now Paul it's very price sensitive.
And so you know you raise your prices push your margins you can do that incremental sale.
The incremental sale is really critical of the incremental to sale. So we're very focused on driving those incremental sales while holding our gross margins were there and.
And yes, we had we see the HP declining an extra two sales for community one sell for community over pushing our prices to Grand three Gram for Gran where that price as a buyer becomes very sensitive it makes that the opportunity Paul is going to be on the networks and on the pre tax net margin because I've always the gross margin.
Pushing the volume, we're going to be able to reduce our leverage our overhead to drive a higher net margin. So I think thats, where the game was going to be for us and I really want to get that net margin back to 10% or greater that's going to require that we.
You know, we get or over our SDMA down to 10% or less.
Okay, and then looking at your land strategy, how should we think about you know community size relative to your historical model you know with what live now and then also.
The community density within particular markets or you're going to have fewer larger communities.
Personal the historical model and then following on that is there any opportunity to increase your you're the option portion of your your land position.
We're now more larger communities and we have before we're really trying to.
Steer away from a small communities to reduce the community count churn and or do we have any stats out or average community does yet or every screen size coverage given the size of the 122 units which continues to creep.
Over the last several quarters as we're putting a larger can be any under control. So just to clarify policy, where it's not as he said, it's not fewer larger community.
More larger can need because it's the same number of months righted the absorption paces faster, it's actually seems a smaller size to when you community as far as I hear supply block, Yes, I mean, you think about trying to get four or five a month out of each live now community you know 150 watts sounds pretty good for live now.
Well.
Yeah, as we get more and more comfortable to go to more poor rail markets because receive extraordinary absorptions.
Due to low ASV price points, and those who knows the appropriate Marcus you know, we're going to continue to buy.
More stores out there.
You know there's the pool for.
Buyer pool under 300 barrels dude.
Now one of our markets is really really really deep and.
Really try to seize that opportunity.
And every everywhere that we bill.
The second part of your question with options and we are putting more lots under option I think this last quarter was a meaningful movement in that direction as Steve said as we're looking in these other markets. These tertiary market there seem to be more lots available for option and so we expect our lots under option to grow.
Sequentially as we continue to tie up live now Dirk further out.
Thank you I appreciate it.
The next question comes from Stephen Kim of Evercore ISI.
Hi, Thanks very much.
Oh, sorry.
Yeah, Yeah, sorry about that it was yeah [laughter] biologist good job in the quarter.
Lighting stop looking forward to the analyst day, I, just I guess I would presume the lens out a little bit I, just want to make sure I understand.
How we should be thinking about the leg up in gross margins on a you've you've given a lot of information on and I realize that but I just want to try to sort of step back and say or or or make sure I understand what drove the big year over year increase in the gross margin this quarter.
I know, we're talking about the fact that live now has good profitability and you're continuing to leg into live now but that was an ongoing factor you know all year I mean that was present in the two Q results as well, but your year over year broken margins wasn't nearly what we're seeing this quarter.
Similarly, I know you mention he'll out that the east saw 220 basis point increase in margins year over year.
Obviously that would seem to have contributed something there was it was that something that happened in a third quarter that was not present last quarter and if so why and the remainder of the big jump in year over year improvement in margins in gross margins I can you help me understand what that was were there some cost issues lumber.
Or something like that.
It altogether.
It's all the agrees that go into making the cake and you know, it's a mix and we have a lot of really really good entry level communities that we've opened this year.
There are really performing well both in the west is.
And in the East I mean, we have some some entry level stores here in Arizona, they're doing extraordinarily well and we for open more stores you know.
Clearly in the south that have driven that margin higher.
As I said before we made a lot of progress this year on managing our costs and as we value engineered all those products and brought more of a streamlined energy efficient entry level products online, we're able to producer to lower cost. It also helps the margin.
Studiod the studio am although it's pretty new.
And we don't have every single one market open, but we have many markets open words, showing fantastic results and delivering.
Much better margins than our design center so.
You know adult it's not one thing a flawless things and we think all those things are going to continue.
And we're going to Bill will maintain you know better margins than Weve produced over the last few years and get us close to about 20% growth margin and we're very confident.
It's the market do we haven't had to incentivize our stacks as much as we've moved to the year as we did in the first quarter beginning the second quarter. When we work as confident in what we're seeing in the market specifically the entry level space and the job from our nine and she level and first time that could be coming on.
Very limited I think that you'll see a little bit of noise. In Q3, Q4, and then it's de Minimis rolling into 2020 with a much bigger portion of our volume in 2018 times. He said how bad from here, they're everywhere the higher closing volume and additional leverage out of keep they are.
In line with what we would have expected to be and well be wed expect to continue to see we feel good about producing meaningful easiest growth.
Just by managing our costs.
An increase in our margins and driving better absorption, which will allow us to leverage our overhead and if we can if we could drive some topline revenue growth on top of that that will make it even better, but but even without that weren't we're we're doing a good job, bringing up the bottom line.
Yeah, no. It all goes into making what seems to be a pretty tasty cake. So a good job there.
Let's see I wanted to ask my second question related to your.
Leverage as we if we continue to see this kind of performance on a going forward basis, it isn't going to be too long before your net debt to cap is going to get down to levels that I don't ever recall seeing a for your company.
And you.
So I guess I'm curious as to.
How you think about the proper level of leverage you've talked about pretty aggressive goal out. The 2021, you obviously feel very good about the way the market is looking for the foreseeable future.
Land purchases are up significantly and obviously, that's going to be something that you're going to ultimately built homes on probably a couple of years out at least so how should we be thinking about your lower threshold. If you will on leverage does it make sense to have your leverage drift down below let's say, it's more down to a 20% level and that that the cap or is that too low.
Anything just talk a little bit about that.
You know I might have put is considering targets out there, but certainly.
It's going to be lower going forward than it has been in the past.
So I'm really bullish on how the market.
Primarily due demographic shift that we're experiencing nor the 8 million millennials that are buying homes are propelling the entry level business.
Let's move our business, but you don't want to go home and nine a tournament TV, you know and I watched all the cable news channels. You know makes my has been and you don't know what's going to happen. So I want to be very prudent about.
The macro economy, I will only be very prudent about what our balance sheet looks like in where we are.
Well if people think were late in the cycle I don't necessarily agree because I think there.
The demographics, you know as I said earlier, you know pretend ball for the housing industry. So what.
I could be wrong, but I just want to have one put on the gas in one form the break and be prudent about it and that's what we're doing so.
Aggregates the boundary that get on the bottom number of what net debt cash net debt to cap should be bad I think we're definitely comfortable with it being not in the mid 40.
Traditionally been comfortable and that you mean, Greg so we're not going to be fixated on a number in an effort to reduce our balance sheet leverage at the cost of growth. We think that we can get there would be aggressive go that he's making a 300, yet at 300 community by the end of 2020 mine, that's certainly going to require.
Quite a bit of cash.
So we're focused on both the ability to.
Harvest cash so much quicker from our simplification strategy in our entry level back that just allowing access to turn our balance sheet faster. So we don't have an exact targets that were willing to share at this point by Han He will continue to creep down. Although you know, it's not going to get into the teams or anything but it is going to continue to creep down.
Not excise increase Democrats.
Great. Thanks, a lot guys.
Thanks.
Next question will come from Carl Reichardt B T G.
Hey, guys how are you.
I do for you when I had a chance to stop by steel I'm not that long ago, and Steve you talked a little bit about it can you sort of tell me. If you look at the old way of of selling options that upgrades to the first time move up customer versus now maybe quantify how much more and a house, you're getting and how much the increase in margin might be I know the times.
Having said that customers is terrific in the twice that is is more organized and also more limited, but I'm just trying to get a mathematical sense of what it's doing tier numbers, but I'm going to put that over to fully because he's closer to that he's really architect strategy. So well let him answer that question. So if I got it right I think there was sort of three questions.
There there was no our people spending more money and what what's the math on that and we're seeing people spend about 2% more money than they were before.
So I hope to be took some more of the home price correct.
$567000 the house right, depending on the market I think the second question was you know is there any sort of high benefit and clearly you know people are going to our design studios in one appointment being able to select everything send a couple of hours no traditionally would see them come back.
Three or four times I'm going to traditional design center. So we're able to get them through the process get their homes started more quickly obviously deliver better quality et cetera. So we're definitely shrinking our cycle times, our ability to turn those homes over to our customers that we the final question, what's the kind of margins were made.
Looking on a better color.
Margins, I, obviously being driven by better cost and it's actually being driven by better cost, but also I think we're able to drive better value to the customer through the pricing equation and so our margins are.
About.
40, 40 debts or so on our cost so is traditionally we thought it.
Taken about 45% or so and we're making closer to 50% on those on those options that buyers are putting into the house.
Hello. Thanks, so much that's really great. That's great detail I appreciate that and the second question I'll try to keep it to one so obviously, Steve a lot of your peers, you're making a move that is not exactly similar but certainly want to go lower end out to more until the end markets look at smaller lot do smaller houses.
How our land prices feeling to you, especially as you've been aggressive making this move whether its smaller appears looking to to to go into this business gradually or more aggressive peers looking to go hog just kind of curious what you're seeing it does it differ much by by region or state. Thanks, well first I'd say good luck for my peers.
You know you're not going to be successful unless you have the product to go with it.
Because you can't build the the old product that we were all building.
At a cost competitive.
No.
Armies less expensive parochial Watson and.
We expect to compete successfully so you know it's it's a much more complicated move.
Just running out slipper free and part of those watts and it's something we've been working on for several years to get to this point.
But I'd say.
We're very very encouraged by the blocks that were finding the way and that we're seeing.
To feed our live now Parker entry level segment sleep and I've been on the road.
In almost all of our markets.
Over the third and fourth quarter this year.
You know, we're seeing a lot a great deals when you know a lot of losses.
Yes.
A good prices now it's a market by market thing and you know some markets like Phoenix. For example, you know it's getting its getting tough defined.
Affordable was but markets massaro markets in the Texas in Texas, even before in Florida.
No we're really really.
Really bullish on what we're seeing so.
We're going to.
We're going to we're going to satisfy that pipeline until we can produce community count growth.
Thanks, Steve.
And it looks like we have just a couple of questions left we have time to take them today.
Yes.
He will take the next question from Jade Rahmani of KBW.
Thank you very much can you talk to how active you are with the so called I buyers companies like open door and offer pad, maybe if you could give some color around what percentage of transactions.
I buys our accounting for whether it be out of your own closings.
Finally existing home.
And the move upside or just in terms of activity in the overall market.
So we partner with a couple other large I buy anything you're familiar with.
Okay split across the country by geography, where there must act as we don't you then to by our own inventory, but we do you use and when our customers coming with the home without.
Partner with on a.
Our weighted turn a contingent down into a tick down I think it definitely accretive on on the margin. It's not a huge volume of our business, where we are seeing that impacted I become more meaningful.
As we've done our buyers have done a few hundred 100, yeah, a few hundred a few hundred transactions over the last year.
So you know I don't think we offer in every single market, we offer it maybe half our markets rolling out throughout the rest of the country. There will be in I think there. So you know it's it's it's.
Less than 5% yes.
Okay and I.
I was wondering if you add content.
You are considering potentially selling new homes to.
Two I buyers, who then warehouse them aggregate them and potentially sell them to single family rental companies or other.
Real estate investors.
I want to make money selling new homes.
Okay. There's they say Ticky. We are leveraged is working on our our direct customers not necessarily any thoughts now I buyer that Dan so that you.
Single family Everything now you have another person of taking kind of profit. If he were thought to rental me. We just thought traditional directly I may have rental and rental buyers want to pay us within things that are our.
Regular customers pay us really happened seldom houses, but we've yet to find those guys. So.
We're we have a lot of demand for our products are going to continue.
So those traditional market.
Thanks.
Thanks.
The next question will come from Alex Barron of housing Research Center.
Hey, guys great quarter.
I wanted to ask you. So on your slide five you're showing a 43% of your communities are now entry level versus 33% year ago.
And I recall last quarter, you said I think 80 plus percent of the lots you were buying work towards entry level. So.
As we move towards the 300 communities by 2021, where where do you see that entry level percentage of communities going.
Above 50%.
Is it closer to the 80% than the 50%.
No I mean, if we were 80% entry level would be selling hardly any move.
Homes, because you know would sell more homes eventually little new new and move up so it's not going to get that high.
But.
You know.
Excuse me that could be somewhat above 50%.
And it's just going to be based upon the opportunities that we can find as.
What opportunities we can find for one of them you that we like.
And.
Need to be trying to be faster or feed you know.
It's really not about have not exact target, it's really about where the demand is.
No, where we can find the land that.
I mean, you will continue to see a large amount of lots that we purchased being the live now space just because we have so much work to do to get even to the 50 per se in some of our markets. So we'll continue to see that trend for a bit but we're still by quite a bit a move up first move up there as well and we have a lot of first move up projects.
Early in our existing Lamba.
Got it and.
In terms of your margins, obviously, you guys had a pretty good.
The improvement this quarter, so I'm, just trying to get a sense of.
Where are your entry level margins compared to the move up margins at this point in time.
What does that say about the future.
So that entry level margins are our north as our first time, that's they don't forget we still have a little bit of a drag from.
Other stuff that could be the now entry level or first time the ones that other falls off of our radar. Then then the margins in total were less but we're seeing.
Some way in entry level above 13 of the entire company kind of running at about 20 were a little bit north of data and the entry level.
Okay, great well keep up the good work thanks.
Thanks.
Okay.
This concludes our question and answer session I'd now like to turn the conference back over to Steve Filton for any closing remarks.
Well. Thank you very much for your support for engaging our call today, and we look forward to talking to you Oh in January for our yearend results. Thank you have a great day.
Thank you Sir the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.