Q1 2020 Earnings Call
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Welcome to lend ours first quarter earnings conference call [laughter] time, all participants are in a listen only mode. After the presentation. We will conduct a question answer session. Today's conference is being recorded do you have any objections. Please disconnect at this time I will now turn the call over to Alexandria Lumpkin whatever.
Reading of the forward looking statement.
Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding when ours business financial condition results of operation cash flows strategies and prospects forward looking statements represent only when I've I've missed on the data. This conference call and are not intended to give any insurance it's actually.
Sure result, because forward looking statements relates not as they have not yet occurred. These statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause <unk> actual activity. The result to differ materially from the activities and results anticipated in forward looking statements.
These factors include those described in this mornings press release and are I think the filings, including those under the caption risk factors contained in the North annual report on form 10-K, most recently filed with the FCC.
Please note that when ours and no obligation to update any forward looking statements.
Thank you I would now like to introduce your host Mr. Stuart Miller Executive Chairman, Sir you may begin.
Good morning, everyone and thank you.
This morning on your in Miami, and as you can imagine the skill down clue.
Diane Bessette or Chief Financial Officer, and David Collins, Our controller, Bruce gross yield when our financial services and of course, Alex will you just heard from work here with me.
Rick Beckwitt, our Chief Executive Officer is in Dallas, and Jon Jaffe, Our President is in Irvine, California, and they're on the wine with US This morning.
We are all properly socially space.
In as much as this was a complicated time could have an earnings call, we're going to alter our traditional format.
I'm going to give an overview and Diane will give some brief financial highlights and then we'll attempt to answer as many of your questions as possible.
But as you all consider framing your question please.
Please remember the national landscape continues to evolve and the economy its stretching to find a way to pause in order to flatten the covert 19 curve.
Businesses across the country like ours are searching for Playbooks and institutional memory to help guide the way forward.
Those simply do not exist.
There are no financial model to populate and no views around dark corners to ILLUMENATE. There is only management hands on management working day by day, and making adjustments looking for signals and making decisions in an imperfect environment that we'll have to be considered.
And reconsidered as the landscape evolves.
This time is different.
Change has been has been sudden and unexpected and immediate and the changing has not subsided. It continues.
So as many of you know.
Our company experienced the grief of losing one of our Seattle Associates to Corona virus on March 2nd just after quarter ended.
A successful quarter turned quickly to shock and despair.
As this was only the third or fourth casualty of hope and 19 in the country.
Pete Anderson was known as the big deal in Seattle, because like many of our associates. He was an impact player and positively affected the hearts and minds of his Seattle team.
All of his customers and of many of our trade partners as well.
Pete participated in all of our Seattle divisions focused acts of Karen that is Lin ours charitable outreach to community program, while he made our customers tickle delighted unhappy as a customer care representative.
Perhaps was gone too far, but I simply had to tell the story to properly respect peak legacy.
As well as the Brave, Seattle, where north Seattle team that proudly supported him his family and the future of our business.
This very sad call to action focused our management's attention on the new day unfolding, even as we mourn the loss of an associate.
Our leadership team immediately began to take action to make safety first as the health and hygiene of our associates customers and trade partners became our number one priority while we remained open for business.
We flew to the problem not away from our senior management team immediately flew the Seattle to meet with our team there in order to have a first hand understanding of the issues and concerns have been affected population.
With first hand experience, we set up a daily call that Rick and Jon now lead.
And I must say parents ethically that there is simply no partnership in leadership that I've ever seen like the one defined by the respect engagement and camaraderie shared by Rick and Jon the strength and durability of this partnership has never been more evident Veneman then in this time of turmoil.
Their daily meeting includes our regional presidents, our corporate leaders along with leadership from when our financial services Lennar multifamily and Dr. Goldschmidt, who I mentioned in our earnings in our press release is now our Chief Medical Officer.
On this call our management team addresses issues and concerns around staying open for business.
In a real time setting the team reviews and implements the plan the protocols and procedures to manage our business, while we keep our people faith in this very fluid environment.
This daily management meeting is where we implement everything from quarantine protocols. The daily Weldments check ins for 100% of our associates and from pausing land purchases adjusting start base and to creating new closing programs and procedures.
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Our management team is rigorously evaluating every aspect of the business on a daily basis, and making the necessary adjustments to ensure that were on the best and of course safest course possible.
With safety first we still have an essential business to run.
People are still buying homes people are still closing on homes and Lenore, It's still building homes, let me give you some detail.
Even in the current environment, we are selling homes, our customers are attracted to the safety and security of a home of their own while interest rates are low and inventory is limited although fears of the general economic slowdown stock market signals and of course unemployment concerns.
May well come to bear.
What we've seen so far.
Since the end of the first quarter is that new orders have continued to be strong.
For the first two week, new orders were up 16% exceeding plan in each of our operating regions and traffic in our welcome home centers has remained relatively strong.
Nevertheless, we have started to see a slowdown in traffic over the past several days while at the same time, we've seen a higher conversion rate of traffic to sales as those coming out are now more serious buyers.
As the economy flows we expect that our traffic will decline and we will see the corresponding slowdown in sales.
We've moved to an import an appointment only environment in most of our welcome home centers and then all of our communities. We too are only one family at a time to prioritize the safety of our associates and of our customers.
Just as we are selling homes, we are also delivering or closing homes.
Our customers need and want their new home now more than ever.
Whether to live comfortably during an economic pause or to work comfortably from home to date, our customers have wanted to proceed to closing.
We have not yet seen an increasing cancellations nor an impact on closing since the end of the quarter.
We are working very closely with local municipalities to make sure that we can attain Ceos and continue to close homes.
With an increased focus on health and safety of both our associates and our customers. We have increased the number of digital closings and creating an end created an express drive through closing pros that program, where our customers can close their home from their car.
We are also implementing a virtual new home orientation process. So our home buyers can walk and review their completed own via face time.
In a changing environment, we are accelerating our digital platform to accommodate our customers desire to close on their own but to close without risk or contact.
Well, we're selling and closing homes, we're also continuing to build homes.
Our construction sites continued to be active and fully functional to date.
We have not yet seen an impact on our trades or on our supply chain.
We're very focused on the health and safety of our trades and have established clear protocols with this in mind.
We have been in constant communication with our trade partners to help the mid.
15.
Implement their own safety standards and understand the steps we're taking.
We also benefit from the fact that most of our construction activities are in open air environments with appropriate spacing.
We have begun using face time and other technology to help facilitate inspections and we've suspended all non emergency customer care to protect our associates, our customers and our trade partners.
Although our business has not shutdown we are keenly aware that this landscape can change very quickly.
We are focused on bringing money in the door, while limiting money going out the door and focusing on liquidity.
Maintaining and in it and innovating our sales construction and closing operations in this environment is critical to cash coming in.
To support these functions, we've accelerated various technology initiatives to accommodate our safety first mandate and to breed confidence in troubling times.
Likewise controlling our spend in uncertain times is critical to maximizing our cash position.
Land acquisition land development and home starts are three biggest areas of focus.
On land acquisition, we are working with land sellers to understand that since the overall economy has paused, we all need to pause as well in that regard we are working collaborative.
Collaboratively with our strong relationships with national regional and local developers to activate a circuit breaker pausing by extending the closing date of our land purchases this benefits us all.
We've also slowed down the amount of cash we are investing in land development and rephasing, our developments to produce to reduce the number of home sites developed at one time.
Finally, we are also adjusting our start pace and further limiting the amount of spec inventory production in order to closely match new starts with new sales.
While we are a safety first selling closing.
And building as well.
While we are with safety first selling closing and building homes and managing cash flow. We are also supporting our community.
I am proud to be a homebuilder and has never been prouder.
Then yesterday, when our leading builders of America Association initiated an industry wide plan to find surgical masks and I protection used in the industry in order to support our hospitals and health providers that are in great need of supplies.
The entire industry jumped right in and got to work to show the country that our homebuilders care and that we can do well by doing good I'm very proud to be partners with all of my competitors as we seek to contribute in this time of great needs.
So in conclusion, let me say land owners first quarter results were excellent and exceeded guidance and expectations on all metrics that is our first quarter results in a nutshell.
But beyond the first quarter as change.
And crisis have begun to old alter the broader economic foundation, our management team has been connected top to bottom on daily calls to adjust the way our business operates.
Most importantly, those first quarter results reflect the work of a very talented and hands on management team that carefully manages our business on a day to day basis.
We have faced adversity before and although this time it is different we have adopted and adjusted to meet the moment and to execute.
I hope you have heard that the health and safety of our associates customers and trade partners is and will continue to be our absolute number one priority people matter.
With ever with every day that is path. We've been focused on what is the right next step to keep everyone safe, while we remain open for business.
With each passing week, we have learned and evolved our work environment to match the way we work with the expectation with within the expectations of our associates.
This week for example, with a focus on social distancing, we've developed a program to allow as many of our associates for work from home as possible.
While this is new and we are just beginning.
We feel confident that with daily focus we can adjust learn evolve and manage all aspects of our business within the boundaries of this program.
We're very proud of the quick actions that we've taken to carefully manage our business through these difficult times.
We want to thanking conclusion, all of our associates for their tireless effort their focus on their dedication. We also want to save our trade partners, who have worked collaboratively with us to ensure not only a safe healthy home, but a quality homes and finally, we want to thank our customers for understand.
That we're working hard to adjusted many procedures and protocols to safely deliver the new home with their dreams.
So with that let me turn over to Diane.
Thank you Stewart and good morning to everyone. So I'd like to spend just a few minutes reviewing the highlights from our first quarter.
So for many decades, we has operated with a balance sheet first philosophy and a strong focus on liquidity and given todays uncertain environment. This is a very good place to start.
As noted in our release, we ended the quarter with $785 million cash on the balance sheet and 2.1 billion of additional availability.
Under our revolving credit facility.
We reduced our year supply of inventory own to 4.0 as a result, as our continued focus on cash flow generation at quarter end, our stockholders equity increased to 16 billion and our homebuilding debt to total capital ratio was 33.6% down from 38.
0.5% in the prior year.
As we look at the balance of the year, we have a very manageable level of debt maturities with only 300 million due in may and only 300 million due in November so.
So with those balance sheet highlights let me now briefly review our operating performance starting with homebuilding.
New orders increased 18% from the prior year end deliveries increased 17% from the same period, we ended the quarter with 1258 active communities.
Our first quarter gross margin was 20.5% up 40 basis points from the prior year and our SDMA was 9.2% six is the lowest first quarter SGN, 8% me as ever achieved.
These core results are evidence that we are managing our homebuilding business extremely well.
And our financial services team also executed at high levels mortgage operating earnings increased to 41 million from 15 million in the prior year, we continue with our technology focus which will be valuable as we manage forward.
Title operating earnings were 10 million net of non controlling interest compared to 5 million in the prior year.
And Thats commercial formerly our re Alto mortgage finance business produced operating earnings of 7 million compared to about breakeven in the prior year.
And just to spend a minute on our tax rate the tax rate for the quarter was 7.5% as a result of our tax teams tremendous effort to obtain the benefits from the new energy efficient hone credit extension passed by Congress in December 2019.
So in summary, our first quarter results demonstrate that we have a high quality management team that focuses on strategy and execution, which results in exceeding expectations.
And so to come back to where I started today, we find ourselves in turbulent waters and we will do what we always do we will manage our cash inflows and cash outflows with great focus to ensure we maintain our strong liquidity position and preserve the strength of our balance sheet.
So with those brief comments, let me turn it over to the operator, so that we can respond to your questions.
Thank you and at this time, if you would like to ask a question. Please press star one please UN mute your phone and record your name clearly when prompted.
And our first question today is from Ivy Zelman from Zelman and associates.
Thank you first I just want to.
Okay. Thank you Stewart for your calming and steady rational voice and this crisis and to commend all of the management team profit steps that you are taking for keeping your employees safe and all the protocol as you've implemented.
I know, it's really rough sailing out there that you guys are the best and we want to obviously here everything you have to say, let me start with a question about what we've seen any equity markets since a complete collapse of the values of the company's and your stock I think was trading at half of book, which is worse than close to where it changed if not at below.
So where traded during the crisis people are expecting massive impairments because they don't believe the book. So maybe you can help us first by walking through let's just make a put a stake in the ground and say this thing is behind us God willing by the end of the second quarter, and we're going to get back to normal.
With that was the case and I will say, making it even a more difficult question for you but.
You know me if you had to shut down completely you are mandated like boss said no doke construction job sites are allowed to continue using that to answer the impairment question. So two part question and then I I'll, let others ask us I know that's a lot. Thank you.
So first I want to say Ivy, we noted that that was the compound question. So that counts of the question [laughter].
Okay.
That's a that's an important serious question.
First as it relates to impairments.
No I I've emphasized in my opening comments that this time is different.
This is not a financially or financial sector, driven slowdown it does not derived from inventory buildup.
It doesn't derived from.
Overproduction of mortgages or excessive it is a true black Swan.
It comes from very different part of the world. So we're going to have to wait to see how this resolves and moves forward.
But.
The the impairment.
Question is really relates to.
What kind of duration, we have and to what extent.
We we see real impact to the overall and broader economy or to what extent we see.
Snap back.
We have to remember.
When you start to look at impairing assets. There is a built in kind of shock absorber.
Or.
Buffer between a reduction in the market.
And in impairment and that is our gross margin as you know what gross margin has.
Been robust.
And remains strong Youre also looking at inventory levels across the industry.
That have been defined by short supply so short supply.
And production deficit.
And so.
It's it's going to be some time before were called on to raise the question of impairment.
But with that said it's possible.
But the other counterbalancing.
Thought is to keep in mind that we started a number of years ago, a soft pivot to lighter and shorter duration land positions.
And those shorter duration land positions.
We'll certainly not suffer the kind of impairment that we've seen in prior cycles. Our balance sheet is in excellent said with shorter land position strong margins and a short supply of product in the market for population that has a great.
Eight affection for having the home that's defined by safety and security for the family. So.
I think it's premature to start thinking in terms of balance sheet impairments and asset imprint impairment, but I think as we look forward and think that there could be that question.
I think it's going to be muted relative to anything we'll have seen in the past.
So that's that's number one.
Shock absorber, though you mentioned that is that how far does gross margins at the fall I think I'd be helpful. If you put quantify the 10%.
Our gross margin before you have an impairment test.
You'd you'd probably have to see 50% of graver in a reduction in gross margin to start even thinking about.
Impairment.
Thank you.
Really as long as we are generally positive and generally cash flow positive and Diane gave rather magnificent impairment primarily as we went through the last ago as we went through the last downturn. So.
And perhaps you'd like to talk again, good Japan is I think about it you know again high level I mean, if you think about where our gross margins are in lets say, that's about 21% and the impairment process considers selling and marketing expenses sits around 6% CR really starting with a 15% net.
Margin is your starting point, so that's reasonably healthy higher than the net margin that we had kind of think around that 2006 timeframe.
Give or take so you know there's no crystal ball, it's very early but I do think that higher bar.
Very helpful to us.
So the second part of your question was a shutdown for a month to month period.
And that we in no way discount.
The.
Possibilities as we look around the corner right now.
So let me say that.
We've been very quick to react and as I noted in our in the opening remarks.
We absolutely have our fingers on all the levers relative to cash filling out.
If we are shutdown and cash stops coming in.
We will immediately be regulating as well of the other side of that equation.
I hope I have highlighted well.
But we are focusing on a people first people safety approach.
And that means that while.
We would regulate the outflow of capital relative to land acquisition land development and new starts.
The very last thing that we would be considering will be laying off or thinking about with decent reducing our.
Labor Force.
We are dedicated to supporting our people. We've made this very clear through the organization.
And so.
We think that Weve, that's our most valuable asset right now.
But I think that we can balance the inflows and outflows of capital by managing carefully land land development and production.
And maintain our.
Our organization in a constructive and healthy way.
Next question.
Your next question is from Stephen Kim Evercore ISI.
Thanks, very much guys, Oh, yes, Stuart I definitely agree and glad to hear you say the emphasis is on people first I think that's absolutely right.
I want to ask you.
About the your.
The bigger picture.
As we are heading into this downturn you can help us think back to previous downturns and in past downturns.
We saw that some builders chose to quote unquote total line on price and the ultimate we suffered for that as they were left with too much land and even worse market environment later, but due to your credit.
Discounted your homes and built out your communities as quickly as possible.
Order to work down your land holdings.
But as you said this time seems a bit different and it sounds like now you're looking to moderate production to keep it in line with demand and so my question kind of a two part question is one does this mean that if demand slowed sharply in the near term.
Thank you won't be as price elastic as in the past and therefore that you would be slower to discount your homes than in the past.
And then secondarily, if so how exactly what you do that would it still be left up to the discretion on the de piece of division Presidents, what would corporate being more involved in how long would you be willing to maintain that kind of a posture.
So Steve I really like your question because it is it highlights the the statements that I made a number of times and that is very very different this time.
And you know.
In a traditional economic slowdown economy driven slowdown.
Accelerating production there is a price discovery mechanism.
The question here is to what extent or markets going to be paused for a period of time.
And we'll we even be able to keep our construction sites moving forward.
So the the landscape is shifting and changing on a daily basis. The the answer to your question.
Is embedded in my statement that it's all about management, it's all about hands on management and adjusting to the landscape day by day as it unfolds. So the answer to your direct question is going to be we'll see let's see what the components are that define a slowdown but were.
Production and sales.
Let's see if.
Buyers are out there if they have appetite right now pricing isn't really the big issue.
Because we all know that that cuts our customers don't buy price they buy monthly payment and with interest rates low.
The ability to purchase at a price their pricing is good.
The question is do they have the capacity do they feel uncomfortable with unemployment.
Disabilities.
Where is the economy going how is that rebuilding we're going to have to wait and see navigating the waters is going to be a day by day process and that's exactly what we're doing it's an everyday focus and I would just ask.
Rick John would you like to chime in on this.
Yes, our reserve.
Okay.
[laughter] or partners.
What we're seeing is exactly what you described is prices not the issue right now.
Gee ITI is actually in most of our markets less than monthly rents. So it's very attractive for those that are out there they're shopping for new home. So we're going to after really react as we see things change on daily basis, and so we're already seeing as its different market by market, so and even within that I think we'll see fluctuations.
So we're going to adjust as we go.
And I don't think you can't underestimate Stuart's comments about the safety of having your own home.
We're seeing that much of the customers coming in.
They want to place where they can stay and.
Yes that combined with the low rate environments.
And limited inventory that that's continuing to drive the opportunities.
Great well, that's very encouraging obviously and it was also encouraging storage indicated that you really haven't seen a slowdown in the traffic or not meaningful increase in cancellations I should say and that that slowdown in traffic was actually met with an increase in conversion rates over the one question that I had.
Second question I had three which is shorter is basically if you're making any marketing changes are seeing any opportunity to make marketing changes using your strong online presence.
If you're finding that customers are anticipating that customers will be more willing to go further in the.
Variants online and if that might actually result in some unintended benefits such as just to pick one maybe a reduction in co broker commissions, let's say or maybe some other benefits from your investments you've been doing online.
So.
Hey at this time to be talking about unintended benefits, but the but the answer is.
We have a.
A focused team approach right now on looking at our digital and technology oriented initiatives and tying them together.
We basically have.
Three focused strands.
That our customer facing one of them is lean production through digital contracting.
The entire process of generating lead scoring the lead attributing leads.
Engaging our customers in the digital format through Internet New home consultants.
And bringing a.
Yes.
Digital representation of our homes the entire process of engaging our customers on a digital platform is something that we are accelerating we of course as you know and I've spoken about in prior earnings calls it has been a focal point of the company.
This is a time, where we're leaning into that.
And we'll of course.
The change management that might have been frictional in the past is less frictional today because.
It's just an opportunity to accommodate the market as it exists today. So the answer is a defined yes, the second stranded in the closing process.
We've been focused we've mentioned before a one tap solution.
All the way from from the contract through to the closing.
From mortgage application to mortgage approval title insurance appraisal all of the components Weve been working on digital platforms.
Bruce has been tirelessly working soup to nuts on that Weve regaled.
The progress that we've been making.
This just.
This just even focus of focuses our attention even more on getting to that digital platform and even in the interim the innovation around.
Digital closing or a drive by closing, which is an innovation on the on the fly.
Engaging the motorization process and the papers that need to be sign right from the comfort of someone's car not having to come into the office is an accommodation to the market that exists today and and boost in our financial services group has been working on that and then of course relative to warranty.
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We are working on.
A more robust zeroed defect closing necessitating.
Much less warranty engagement, which is not desired today I'll touch points are not desire and engaging our relationship with some of our digital partners to rethink our warranty program, but these strands and our digital platform.
Have you.
Given us a head start and are enabling us to think differently about how we manage our business through very quickly changing environment.
Next question that thank you. Our next question is from Buckhorn from Raymond James.
Hey, good morning, and thanks, and first of all do we start with just condolences to your team in Illinois our family.
Had heard about piece last well in the field last week and so I just want to pass that along and we're all thinking of your hope you all state David well. Thank you. Thank you first of all Yeah, and let me let me just clarify one thing are there any communities out there that are under an operational shutdown.
Due to shelter in place ordinances or anything that that close the shutting down operationally.
John There's there's just three or four small municipalities at this point.
Better impacted a couple of smaller engines of Philadelphia area.
New work and go away out here in California, but.
But for the most part even when there is been shelter in place ordinances construction.
Viewed as essential business continues.
Okay, great and when we're thinking about.
Trimming back on the land acquisition development spending.
To build the cash flow have you taken any initial.
Swags that kind of how much you trimmed the budget for this year or is it just kind of still all very much in flux at this point or how quickly could be I guess, the cash outflow from land purchases or development the trimmed back in a situation like this.
Rick you are leading that.
Well I'll tell you we.
Very focused on cash going out the door, we started the process immediately when.
This whole situation came up and it's really a weekly focus.
On each land transaction wire going out as far as my approval John's approval Stewart.
And so we've taken.
It is looked at the timeline of of all the all all of our deals Oliver deposits and we've engaged in dialogue with the close relationships that we've got.
Going out several several months and.
At some point this will come to a pass.
We're not walking away from these opportunities, where we really as Stuart said looking to postpone the closing and we're working hand in hand, what the developer.
Development.
Let me add to that Rick and say because.
But we've talked about is this is a legitimate circuit breaker.
Right now the market has shifted rather of abruptly I think we all recognize that this is a circuit breaker that enables.
The the world the market and ourselves to recalibrate, just a little bit to take a breadth and that's how we're talking to our land partners and Thats, how we view them they might be selling than we might be adverse that the negotiating table, but right now it's all about how are we going to migrate forward. The economy is taking a pause.
And so to do the land deals have to take a pause and we're working with most of them.
Won't be all of them, but most of them to put a pause in place and enable the market to reset.
And Thats the way to think about it right now, but it materially alters the outflow of capital as we prepare for stabilized balance sheet and foundation to navigate forward.
And I think that's the only other thing that I would add is and if it wasn't clear of land development is in the same category. Those dollars are equally large since that we looked at every single community. In every single dollar is being spent in key with the same level of Zika.
Very helpful. Thank you very much I'll jump back into queue. Thanks. Thanks.
Okay. Next question. Thank you and our next question is from Michael Rehaut from JP Morgan.
Thanks, Good morning, everyone and I also want to extend the my condolences to the when our team and your associates here in Seattle, very very sad to hear that and.
Commend everyone on and.
All of the.
But in a thoughtful approach that you've described particularly in terms of safety and health since that point or.
Perhaps than it started before that point such site.
The first question I had what kind of hearkens back a little bit too.
An earlier question around.
Just to current market backdrop amid a pause and you know again kind of recognizing how different and ended how different the drivers are of.
The current economic backdrop, and perhaps what's to come over the next quarter or two relative to the great financial crisis.
In that you don't have the same type of.
Drivers to the destruction of demand.
From either a mortgage market standpoint that excess inventory standpoint.
Curious if.
You know you've had comments.
As it relates you know with your other homebuilding tiers, you alluded to the fact before some of the efforts.
But by the industry Association around some of the surgical supplies, but from the from a market standpoint.
To the extent that you just have a pause not because of demand, but because of public safety and other factors.
Obviously, we've talked about home prices be pretty reasonable at this point, particularly coming off of the.
The affordability crunch 18 months ago.
I'm curious if you've talked to any of you other homebuilding tiers around in effect holding the line.
For a quarter or to not making any rash decisions.
Particularly given the fact that I think cash flows are also very different this time around.
So let me.
Hey, Mike.
One of the things, we we we don't ever do.
Is that have.
Coordinated efforts relative to pricing.
Or.
And as the operational side.
We compete head to head where competitors, but I do want to say in that light that I am a proud partner with our competitors in the jumped to action across the industry to think about how we can participate in fortifying supplies.
Both surgical masks as you know used and painting and other parts of our business.
As well as I protection to help our.
Our health services, so while I have to say most emphatically that we're not having the discussions around pricing, we're holding the line I'm not even sure that it would be appropriate to do that.
We are definitely.
Coordinated with our.
With our competitors as partners.
In serving our community and doing and serving the greater good as homebuilders really care.
And I appreciate that and and I guess my question was I didn't mean to imply any titles of coordination of price more just.
I guess for me, an informal approach, but but I I understand your response.
Let me say that is that.
Our competitive field is is a group of very smart.
Capable professional homebuilders, they're going to each and we're going to each make decisions day by day running our business is quite independently.
And we're all seeing the same.
The same data points in the market.
I think that intelligent decisions will be made across the industry.
Appreciate that I.
I guess second we yeah I.
Coming off of your comments around cash management, which is obviously critical here.
In the next quarter or two and hopefully it it isn't as necessary.
Perhaps as we get into the back half of the escapees hopefully normalize.
But you know you talked about.
Community by community, you know monitoring spend on land spend land development.
Ah et cetera.
I was hopeful to get a sense of.
You know maybe before this started what if you could remind us what your plans we're from a land spend that land development standpoint in terms of the dollars that youre expecting as part of the former guidance.
And to the extent that things go to a hard stop.
You know how much of that.
As you know could be pulled back.
And separately also again in this in this light of of of cash out the door. If there are elements of the you know corporate Gionee line and SDMA line that combines right now around 10%.
What parts of that.
Those line items could also be pulled back you know to the extent that business does grind to a halt for a period of time.
So.
Look.
As it relates to land, you'll remember that our based strategy has been had been continues to be.
Migrating to a.
Higher percentage of options lower percentage of owned land, we had been migrating to a materially smaller spend relative to land and our cash flows were starting to demonstrate that of course, we're continuing along those lines.
And so before.
Before the change in circumstance.
We were on path to materially.
Lighter land position and and expect to continue that trajectory.
As it relates to SDMA.
As I said.
It's people first right now.
So.
Let's not even think about.
The people side of the business because we're here to support our people and they are they have been I share supporting us.
But on the SGN a side.
There are marketing costs and.
Other costs.
That of course, we are managing and monitoring we've been watching our SGN a migrate downward anyway.
As an organic part of our business model.
That will be that will be something that we continue to focus on.
Basically say to you.
To focus on the fact that this is a management team that has its fingers in hands on all levers.
And as markets define themselves, we will be defining both the spend.
Liquidity and SDMA and managing in concert with market conditions.
Okay. Thank you.
Next question. Thank you. Our next question is from Carl Reichardt from BTI G.
Hi, good morning, everybody and mining is as well and hoped girls safe and healthy there.
In in your scattered locations, maybe a question for for Bruce.
In there.
I just wanted to get sort of a real broad sketches, how you're looking at the mortgage market now Bruce obviously and MBS investors worried about prepayments rates have been a little bit of place banks are snowed under with Rifai demand I just want to see how the mortgage market. In your view is is functioning right now.
And how your customers are reacting to the bounce around a rate.
Sure Good morning Carl.
So with respect to the mortgage market, we have not seen disruption thus far.
The fed stepping in and back in the MBS market. This week.
As offered quite a bit of sport.
If you think about where we so our loans to about 70% of them are so to the gses.
So to the extent enable investors and that subset.
Were to become weaker we could increase the percentage to the GRC so its functioning really well.
On top of that the GRC as had been great partners through this.
They're looking at things such as verification of employment, which people been asking about.
And where typically you have to get a verbal approval, they're looking at accepting emails in this environment instead of favorable verifications appraisals, they're looking at desktops and drive wise.
That would be helpful as well.
So there you are looking to eliminate friction points. So we're pleased with the fact that its operating.
Somewhat normal thus far people are trying to be anticipatory as far as what could be friction points.
And they are dealing with those one at a time.
With respect to US Stuart mentioned full digital closings are really helping.
So the fact that we focused on technology early really help so we went to our banks and we got approval for electronic notes to be sold through the banking system, which allows for a full digital closing for us.
That's already approved so when we have somebody that's working remotely where the remote online notary.
From a comfort of their home that could go ahead and electronically sign documents work with this remote notary go through our system digitally as you know transferred so there's no human contact.
So I think the fact that Stuart focused us on technology early and the financial service team has been working hard at this gave US a head start and puts us in a good position.
To take advantage of these technologies and the GRC is a great partners. So we feel like this is working more normal then certainly people are expecting at this point.
That is really helpful. Thank you Bruce and then.
Just a follow up on a couple of questions.
What about.
About residential construction be deemed it is an essential service.
In some of the shutdown and shelter in place orders.
Are you in your conversations with the other builders with NHP would be a laser with.
Governmental.
Entities.
Are you getting a sense that as this rolls out that the bay area model, which exempted residential construction is going to be the go forward model do you have any any sense of that at this point.
Thanks for the question club.
The.
The landscape is still defining itself and its too early to tell we have a general sense if that.
Is more the case, John maybe you'd like to weigh in on that.
Yes.
It's a somewhat of a murky.
Landscape right now each city is is acting independently. We found is there is actually as you noted in your question a coordinated effort through.
Through the building industry associations.
Working with each municipality to get clarity.
All I can tell you is what we've done today it is when we.
We have the opportunity to have that audience have the discussion to cities are clarifying that that construction and can't continue reporting offices for title transfer is can continue.
But it's that Theres no coordinated effort between municipalities at this point. This is all in a one off basis. So we're just going after monitor.
Thank Rick Carol.
Rick you have any different perspective.
No that's spot on.
At what's happening is here, you're seeing an increasing usage some of the newer technologies utilized by any of these municipalities engine inspections, and doing appraisals and keeping their businesses open.
They are very focused on not shutting down how's.
But we're going to have to see how this marks a over the next several that we will let me just add on and.
In real time, Nevado put out or order.
That there was confusion about just this morning that clarifies that construction as exempt so construction will continue in Nevada, which affects our Las Vegas in Reno, obviously, but thats just a good example of how it's one off of the building industry goes and meets with the.
The offices in this case with the Governor's office, because as with the state wide order.
And we ended up with that for the time being the resolution that construction will continue.
Thank you.
Thank you. Our next question is from Truman Patterson from Wells Fargo.
Hi, good morning, everyone I'm, sorry to hear about Pete and I hope the rest of you or a healthy and safe.
First question just it just a clarification Diane.
Following up on Ivys question, you you were talking about the impairment processing, you said, 21% gross margins, 6% showing costs. So I believe you are implying that really kind of a 15% decline in gross margin is really necessary for impairments is that clear or is that correct.
Directionally that's right those are the components and that's where the bar is right now so the starting point because you were only considering the selling and marketing not that division DNA. It's always the cost to directly associated with the land. So thats Directionally correct, but let me just also say because Diane raises point to me the other day.
And that is.
You know.
Even as you think of impairments and getting to that place.
The duration of land that we have sitting on our books is so much less than we ever saw before the biggest impacts our two year labor dated land and you know as you go through the impairment model, that's where the big impact is that even if you've got to that point the impact would be significantly less yeah, it's going up.
We estimate that as well that's right. So even if you've got there the amount of land that you're applying that to is fine line. So your numbers will be lower.
Okay. Thank you for that clarification actually Stuart you actually touched on kind of my main question on the land impairments clearly investors are very worried about this and then potential recession, but.
Could you maybe discuss you again already touched on this but how your business model has changed versus the 2006 crash seeking JV easier William structure.
Because I believe you all were a bit more one of the more aggressive to write off your land and those six crashing and also Stewart.
Your company has been around for 65 years any period in history, where you've seen material way and impairments outside of the great housing recession.
So.
So let me say that in India last downturn, if you dissect the way that we approach.
Financial downturn, what we think of its 2000 end of 56789.
Those years.
We adjusted first our home prices very quickly as we saw the markets start to deteriorate.
And we started selling homes at lower prices and fine and looking at price discovery that was our starting point and.
And of course, the market continue to migrate downward for an extended period of time, which at a later date translated into land impairments because the pricing was coming down.
So quickly in the current environment, we're not going up thinking about it this way.
Today, we have a.
A.
Shortage of supply of homes on the market a shortage of supply of dwellings, a production deficit that is still being made up since that downturn. It's still hasn't been made up there's still a need for dwelling. If you. If you go to the discourse.
Local communities across the country.
Before the current.
Issues arose arrived.
The discourse was about a lack of affordable housing.
Shortage of affordable housing and the concerns that has been that were being raised that local levels were how do we get more.
It's not we were not in an oversupplied situation.
In today's environment, we're looking at a very different.
Program.
Right now we're looking at an economic pause.
There's going to be a bigger there's a beginning.
There is there's going to be an end to that's how we will recover from there is going to be a question.
But with that said.
I don't think that we don't feel that.
Price and financial.
Instigators are going to be at the heart of this it's going to me more a recalibration of this is not an environment, where we're going to build into it and build up inventory and sell at price discovery.
What we've already highlighted as we're staying very close to the market.
We're looking at on and off switches to see what's available what we can do and it's going to be vary market by market case by case specific.
And Thats why highlight the value of that hands on management team that is meeting every day market by market to look at what's happening to define our way forward very very different landscape.
I don't think we can go backwards.
In history, either to the last downturn or any of the prior ones. We've not seen one that looks like that so there really isn't specific history to draw from.
We're going to have to create this playbook as we go and I think that we're uniquely positioned to be able to do that.
Okay. Okay, given that this is a pretty.
Unique situation and you all are focused on managing cash flow.
You know what does that imply near term for share repurchase and.
You All mentioned you have 300 million and debt coming due in May and another 300 million in November you plan on paying that down.
What do you plan on doing what's your dividend and then also you mentioned.
Adjusting the spec level does that mean that you all are going to remain extremely rational with pricing and just work off whatever specs you currently have on hand.
Yes, so thanks for that question.
As it looked as it relates to.
Stock repurchase.
Clearly pausing stock repurchase okay.
As we look ahead.
As we look ahead in today's environment, because there is enough uncertainty.
We are nothing is on autopilot nothing in our company is on autopilot everything that happens in this company is being considered on a day by day basis as it relates to our.
Debt pay down the 300 million coming due and then the next 300 million. It is our expectation right now that we will repaid those.
Those.
[music].
Outstanding.
Bonds.
And one of the things I would highlight is that we are in the enviable position with an already recast balance sheet and already strong liquidity, where we have the ability to meet those.
Opportunities to pay down that debt, which has been our primary focus for some time.
And to meet that quite comfortably so.
You know.
That is our thinking right now thats the way that will approaching the market not stock buyback, yes pay down the debt.
And manage the business and liquidity on a day by day basis, everything is being manually engaged nothing on autopilot.
Alright, Thank you all and great quarter.
Thank you.
Okay. What are we take one more.
All right. Our final question today is from John the follow from Bank of America.
Hey, guys. Thank you for putting in here.
I guess first question is accessing credit lines pretty challenging when things got tough during the financial crisis and in many cases as you know bank lines or banks pull these lines from companies have you considered preemptively drawing on your on your lines just been abundance of caution.
No John that really hasn't been the direction I think on our real focus is generating cash that's the better answers. So as you heard us thinking that this call, it's really managing attachment and it is not our desire our goal to draw down on our line has been the talk in today's market now I think that.
Look again, we look day by day and consider the world as it unfolds. We are in the enviable position of a strong balance sheet and strong liquidity.
With that said, we don't want to be caught off guard, but as we look at the national environment and what the government is doing right now it seems that the government is very very focused on getting ahead of focusing on liquidity.
In order to support businesses and support individuals as we migrate through the soft spot.
So.
Our knee jerk reaction right now is not too and we don't have to pull down on those lines.
Thats helpful. Then is actually feeds into another question here, you know with interest rates near zero in the fed seemingly doing a lot in the government willing.
Pull it all starts here you avoid a recession or even potentially a depression if stuart if you could ask the government who want to action that you think it helps to homebuilding industry will that be.
Look.
[laughter] such a hard question [laughter].
I think if I think if I could ask the government for one action.
It would be to demonstrate leadership and putting safety security and and.
Health Health and hygiene first and foremost.
You know across our landscape and it's probably a great place to conclude.
Across our landscape, we were faced with a tragedy.
And we we ran to the fire.
And we focused on what's the landscape, what's really happening and how do we address it how do we put people and safety first and foremost how do we focus on health and hygiene.
And how do we.
Operate in a socially connected environment in a way that is pro social and that keeps us all safe.
I think that leadership in these.
In these circumstances is critically important as the tone of our voice, it's the way that we can front and deal with the issues of the day.
And I think that.
Our work with our now Chief Medical Officer, Pascal Dr. Pascal Goldschmidt has helped us navigate the circumstances.
Operate our business and I think very much keep our people say well we operate in an appropriate way.
I guess I would ask of the government that it show the same leadership.
The same.
Focus on if you are six stay home.
If you are together they six feet apart and.
Let's don't shake hands, let's not even elbow them.
Let's let's focus on promoting safety, while we navigate the waters of finding a cure and ultimately a vaccine.
And so that's what I think would help the homebuilding world and perhaps the rest of the economy steel.
Appropriately and I would ask for just good strong smart focused leadership.
So.
With that.
Let's let's ended there and let me say thanks for joining us for a first quarter conference call.
And we'll look forward to keeping you apprised of the progress inside our company.
As we figure out have landscape is changing and as we run our business and do the best that we can and changing times. Thank you for joining.
Thank you understood conclude today's conference you may disconnect at this time.