Q2 2020 Earnings Call
Good morning, welcome to second quarter 2020 earnings call for T.R. and Americans filter the largest filter in the United States.
This time, all participants and elicit only mode.
Question and answer session. One father, the formal presentation, if anyone should require operator systems. During the conference. Please press start zero and your telephone keypad. Please note. This conference is being recorded I don't know tend to call over to Jessica had said Vice President Investor Relations <unk>.
Thank you Sherry and good morning, welcome to our call to discuss our results for the second quarter of fiscal 2020. In addition to current market conditions before we get started today's call may include comments that constitute forward looking statements as defined by the private Securities Litigation Reform acted 1995.
Although d. Overton believe any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be material is different.
Oh forward looking statements are based upon information available to deal working on the data This conference call and different does not undertake any obligation to publicly update or revise any forward looking statements I.
Additional information about issues that could lead to mature old changes in performance is contained in <unk> in a report on farm 10, K. and subsequent reports on foreign 10, Q., olive which are or will be filed with the securities and Exchange Commission.
This morning's earnings release can be found on her website and investors that deal hoarding Dot com and we plan to file or 10 Q. in the next day or two.
After this call we will post updated investor and supplementary data presentations during best relations site on the presentation section under news and events Fair reference now I will turn the call ever to date at all our president and see yeah.
Like you just kind of good morning, although we are in different locations, while practicing social distancing.
I am pleased to also be Jo it on this call, but Mike <unk>, our executive Vice President and Chief operating officer, and they'll wait for executive Vice President and Chief Financial Officer.
We'd like the first express our gratitude to our country dedicated filled with health care workers at all so we're on the front lines caring for communities.
Par thoughts remained with those affected by this pandemic had before we talk about our second quarter results.
I will address correct market conditions, well, we oh, all with the rest of the world. They advocate <unk> impacts cope with 19, and all the economy and our business operations.
Housing market and economic fundamentals horse solid throughout most of the second quarter.
Interest rates on mortgage loans remained below their own demand was scroll and there was a limit to supply problems that a portable crisis across most of our markets.
However, during the latter part of March and April the infection covert 19 and related widespread reduction.
Economic activity across the United States began to negatively affect our business operations as well yeah, the demand for new homes across all of our markets.
Experienced increases in sales cancellations <unk>, yeah late March and today in April as compared to the same period last year.
And almost all municipalities cross U.S., where social distinct other restrictions habit implemented.
Residential construction plot development financial services have been designated as a central business such as part of critical infrastructure.
Continued our operation to Los markets, <unk>, and it might appropriate adjustments to comply with social distinct has other standards.
The health safety of our employees customers and trade partners is our number one priority.
We believe we are well prepared to operate in there so I'm certain environment.
Or experienced operated teams.
Well old average and I strong liquidity position.
We play to maintain our flexible operation some financial position by generating strong cash flows from our homebuilding operations limiting land acquisition and land development spending and adjusting our product offerings incentives overpricing sell space and inventory levels to optimize the return on our inventory investments.
In each of the communities based on local housing market conditions.
Pertained delivered a strong second quarter. During this unprecedented time for our nation in while making significant adjustments to our operational practices in March.
So what are your pretax income for the quarter increased 34% to $621 million.
Nine per cent, increasing revenues to $4.5 million.
Pretax profit margin improve 260 basis points to 13.8%.
Let's sales holders increased 20%.
Oh, but it would turn on your mentor for the trends in 12 months. It at March 31st was 20.2%.
Consolidator return on equity for the same period was 19.1%.
<unk>.
Deluded earnings per share for the second quarter fiscal 2020 increase 40 per cent $1.30 cents per share compared to 93 cents for sharing the prior year quarter.
They didn't come for the quarter increase 37% to $483 million compared to $351 million.
Second quarter home sales revenues increased 10% to $4.4 billion on 14539 homes closed up from $4 billion I'm 13480 homes closed in the prior year or average closing price for the quarter was two per cent from last year. The 300.
Thousand $100 and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable Bill.
Net sales orders in the second quarter increased 20% to 20087 homes and the value of those orders with $6 billion, Oh, 22% for $4.9 billion per year.
Our average number of active selling communities increased one person from the prior year and was flat sequentially.
Or average sales price on net sales order seems like a core was $299700 Oh two per cent from the prior year.
The cancellation rate for the second quarter was 19 per cent flat with the same quarter last year.
As we disclosed in our preliminary release or March net sales orders increased 6% from last year to 6491 homes.
Installation rate for the month was 24%.
As a result of the P.N. pandemic are still doors begins decrease in late March any until April.
Cancellations have remained elevated throughout April today.
Although April is not quite over yet I'm net sales orders month today or approximately 11% lower than the same period a year ago.
This month today net sales trends may not be indicative of the full month of April because a significant number of our sales cancellations typically occur in the final days of each month.
However, we have seen an increase internet sales order volumes in the most recent two weeks compared to the preceding four weeks Jessica.
Are gross profit margin on home sales revenue in a second quarter with 21.3% at 30 basis point sequentially from the December quarter up 200 basis points compared to their prior year and in line with our expectation.
We remain focused on managing the pricing incentives and sales pace in each of our communities. During this uncertain environment to optimize the return on their inventory investments and adjust to local market conditions and new home demand if economic conditions remain difficult and the recent decline in new home demand per se, we expected our gross margin for the.
Klein from current levels so.
In the second quarter homebuilding <unk> as a percentage of revenues was 8.3%.
Down 70 basis points from nine per cent per year quarter.
55 basis points of the reduction in its Junaid. This war related to a decrease in the liability for our employee deferred compensation plan, resulting from the decline in the stock market during the course.
Our home building S.G.N.A. expense as a percentage of revenues is at its lowest point in our history and we remain focused on controlling your S.G.N.A., while ensuring that are infrastructure appropriately supports our business like we ended the second quarter with 33400 pounds in inventory 16700 of our total.
Homes were unsold of wage 4700 work completed.
We also had 1900 model homes at the end of the quarter.
We're cautiously managing our inventory of homes under construction relative to demand in each of our communities by controlling our construction starts of unsold homes and closely monitoring number unsold completed homes an inventory.
March 31st our home building lot position consisted of approximately 330000 lots of which 36% were owned and 64% were controlled through purchased contracts.
32% of our total owned lots are finished and at least 54% of our control lots are or will be finished when we purchased them David.
Oh, it's like a quarter hold building investment and a lot land and development totaled $1 billion, which $460 million. What's we're finished slots $350 million plus for land development and $230 million plus for land.
Getting into late March we have temporarily stopped are purchased some or all land and <unk> managing all finished lot purchases and development spending.
We are also working closely with their third already logical person, including <unk> to adjust the timing of our take Dallas schedules too much current demand levels.
Right.
<unk> are majority owned subsidiary as a publicly traded residential lot manufacturer operating and 50 markets across 21 stays at March 31st four stars lot position consisted of 52300 watts.
Of which 35800, our own and 16500 are <unk> controlled through purchased contracts, 80% of four stars own lots are already under contract for Dior, Horton or subject, you're right. It first off or under our master supply agreements.
Forestar it separately capitalized from D.R. Horton and as approximately $790 million of liquidity, which includes $440 million unrestricted cash and $350 million available capacity honest revolving credit facility.
During the quarter Forestar issue $300 million of five per cent senior notes do 2028, and repaid $119 billion of 3.75% convertible senior notes in cash at maturity.
At March 31st four stars net debt to capital ratio was 19.5% and their next senior note maturity is in 2024 with load leverage Apple liquidity and its relationship with your Horton four stars in very strong position to navigate through these uncertain economic conditions Jessica.
Financial services pre tax income in the second quarter was $24.7 million with a pretax profit margin of 23.6%.
<unk> $34 million and 33.5% and the prior year corridor.
In the late March and April our mortgage company experience lower pricing in games on sales of mortgage loans and servicing right.
Disruption in the secondary mortgage markets mini purchasers and Servicers have limited their purchases and Titans their credit standards due to liquidity and operational challenging caused by coded 19, and the uncertainty of the impact of forbearance provisions from the cares that we are closely monitoring developments in the mortgage markets and our prepare.
To make adjustments in our operations to adapt to further changes in market conditions.
For the quarter, 98% of our mortgage companies loan originations related to homes close by or humbling operations and our mortgage company handled the financing for 67% of our homebuyers.
S.H.A.N.V.A. loans accounted for 48% the mortgage companies volume.
Borrowers originating lines with the H.M. mortgage this quarter had an average spike a score of 720 and an average learned evaluation of 89%.
First time homebuyers represented 53% of the closings handled by our mortgage company, reflecting our continued focus on offering homes that affordable price points David.
The H.I. communities, yes, our multifamily rental company focused on suburban Gordon style apartments with operations, primarily in Texas, Arizona and Florida.
During the quarter the H.I. community sold in an apartment project in Florida for $67 billion and recorded again on sale of $28.2 million.
The H. hi communities for projects. So that it was a final. So we were expecting this year. The H.I. communities has three projects under active construction at one project that was substantially complete at the end of the court.
We are continuing lace up in construction of these four project what are delaying do acquisition 10, differing starting construction on other project until we have clever visibility into market conditions. The H.I. communities assets total $203 million at March 31st Bill.
Or balance capital approach focuses on being disciplined flexible and opportunistic.
Wrong balance sheet.
And lo leverage provide us with significant financial flexibility to withstand difficult economic conditions, and we planned to maintain or disciplined approach to investing capital.
And for longterm value of our company.
In the first six months of physical 2020, or cash provided by off homebuilding operations was $52 million compared to $216 million with cash used in the per year period.
30 burst, if we had $2 billion homebuilding liquidity, consisting of $1 billion unrestricted homebuilding cash in $1 billion available capacity or homebuilding revolving credit facility.
Our home building leverage improve 370 basis points to 90.2%.
The balance of our home building public notes outstanding at the end of the core was $1.9 billion and we have $400 million of senior note maturity in the next 12 months.
In March 31st for Stockholders' equity was $10.5 billion and book value per share with 28 dollar 77.
50 per cent from year ago.
For the trailing 12 month period ended more 30 version or return on equity was 19.1% compared to 17.6% a year ago.
During the quarter, we paid cash dividend $64 million in our board has declared a quarterly dividend at the same level to be paid in may.
So repurchase 4 million shares a common stock for $197 million.
Are outstanding share account was down 3% year over year.
We plan to cautiously manage or level of Fury purchases in the near term to maintain financial flexibility until we had better visibility to future market conditions indoor expected operating results Jessica as we mentioned in our press release, we have withdrawn or previously issued fiscal 2020 guidance due to the current uncertainty in the U.S. economy.
And our business operations, resulting from covet 19, we expect to provide new and no guidance, when we had clear visibility into our business and market conditions David.
In closing our results reflect the efforts of our dedicated operational teams, who continue to provide host families across the United States.
Oh, well positioned to effectively operate in this on certain environment, what's our experience team industry, leading market share raw geographic footprint hand, <unk> product offerings.
Strong balance sheet, <unk>, what city and a little leverage provide us with significant financial flexibility to withstand difficult economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long term value of our company.
Thank you to the entire <unk> for your focus and hard work your efforts had positive carrying spirit during this unprecedented.
Have been remarkable.
We are proud of your work ethic, and creativity and finding ways to safely continue helping our customers clothes on their much anticipated new homes.
Conclude separate bad remarks label now hosts questions.
Thank you know.
As he would like to ask a question. Please press star one on your telephone keypad confirmation tell indicate you align isn't the question Q. you May press start to if he were they to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the start he's please ask one question.
Follow question, and then re queue for additional questions.
Our first question is from John the Hollow with Bank of America. Please proceed.
Hey, guys I think you've taken my call and hope everyone is doing well first question is can you just help frame the magnitude of the improvement or in order activity over the past two weeks, maybe a year over year basis. I mean are we talking about kind of sound midsingle digits as a close flat year over year any any color would be helpful.
The Jon This is this bill we're not commenting on specific weeks from week to week sales you know gross sales scan activity net sales can be quite volatile. So we've provided or commentary on a month today basis, because we feel like that's the most representative information that we we can't provide we've we did indicate that are cancellation level has remade.
Dated into April, which obviously effects that sales as well.
Okay I understand and then maybe just in terms of the the order decline in April were there any particular regions that stood out you know maybe on a positive or negative basis, and then you know in in the regions that are starting to open up and sent in some of these states you guys doing anything different in preparation there.
Good morning, Jonases, Mike, we've seen probably Texas from Florida hold up pretty well, but I would say every market is down and down you know fairly consistently outside of Texas in Florida.
It's been a pretty broad based impact.
Got it and then are you guys doing anything different in some in the states that are are planning to open early.
Well Fortunately.
As we mentioned there are prepared remarks residential construction has been designated in essential business as part of critical infrastructures that we really haven't been heavily impacted in terms of shut downs and the biggest place. We we would have been impacted the Seattle since the state of Washington did not and consider residential construction as part of the net.
Central business the state of Washington was about 3% of our closings and calendar 2019, and then the other areas that have been you know quote shut down for construction has been the Bay area, New Jersey in Pennsylvania, and when you combine those with the state of Washington, We're still only around four per cent of our closing last year, so really the biggest impact his.
More been on just the ability to interact with consumers face to face and as we want to make sure. We comply with social distancing protocols. So majority of our offices ourselves offices or by appointment only our trades are limited to one one trade per job site at a time and I'm on numerous other you know new operational protocols, we put in place.
Which has slowed our build cycles and impacted the business, but by and large they true shut down has happened mainly in markets, where we don't operate heavily.
Thank you guys.
Oh and next question is from <unk> coral retire with V.T.I.T. Please proceed.
Thanks, very much hope everyone says safe in well my first questions on pricing and incentives and maybe you could talk generally neighbor whoever is like two about generally how you're looking at at pricing incentives now where you've adjusted what kinds of pricing instead of tested you made in how consumers are responding to them.
Mm.
Oh this is David.
We we were responding I guess community Black community.
We we've kind of race out expectations.
And absorption rate, where you were on.
Pace.
You know again you know.
Kind of gets old, saying, but it's.
To me, it's a it's a plaque by flick operation.
You got to maintain a certain level pace.
And well you adjust they on set ups to to maintain that pays so.
Reality, Yes, Texas, Florida.
Held up better given all the constraints.
Yeah.
Really after the shock of the first couple of weeks or people out there is a cat I got a rhythm I figured out how to sell houses and.
Oh <unk> from my perspective things are are better than than a headache that.
That I was concerned they might be so.
Okay. Thanks, David and then as a follow up can you talk a little bit about construction cycle times and.
If you're supply chain is struggled at all from a labor pool perspective, <unk> mixed things about labor availability, obviously sosa distancing be making it harder to get houses up and then of course inspection delays things like that maybe what percentage that'd be recycled times increased if they have in terms of sort of start to see about thanks a lot.
Thanks Girl this is Mike.
We haven't really seen a lot of the cycle time changes coming through in the in the data yet because these are fairly recent operational changes that we've made in the field.
Both ourselves and a lot of our governing municipalities with the the cadence of inspections.
So we'll let you know as we see those trends developed through the quarter, what they actually work out to be.
I've been very impressed with our teams and their ability to to keep each other safe and respond to to demand for housing and it'd be out their building with labor, we see a lot of our labor on site wants to wants to work.
We've not had a seeing lots of labor shortages that all you know I've not been able to travel like that normally have so I haven't seen as much coming into this call is that would've been prior calls by driving the Dallas Fort worth markets I've seen a lot of activity. The trades you know a lot of signage around in our neighborhood than other neighborhoods about Ah maintaining social.
Thing and seeing a lot of our labor activity being executed with people you know not heavily congregating in the streets are on the job site. So I've been very pleased with that.
Very pleased with the pace that we've been able to maintain in our communities.
Makes me.
Oh and next question is from Stephen Kim with Evercore I.S.I. Please proceed.
Yeah. Thanks, guys. Appreciate all the information and likewise hope you guys are staying safe, Dave and I wanted to follow up on the common <unk> made about how the tone of business. Thus far has been a little bit better than you would have initially feared they might they might be and youre indication that orders improved in the last two weeks.
Prior to the previous for relative to the prior for weeks.
Is it fair to say that in your what you have observed is that this increase what's not driven by placing actions, but by something else and if the ladder. What do you think that it's surprising strength was related to.
Yeah state stay on.
I like everybody else.
You know was like Hey news junkie coming when this thing <unk> and.
And and you you turn on the President's briefing.
Yeah, the world's gonna yet so.
You you kind of get hunker down mentality and as news has come out.
More and more and more.
You know it it it just you get a sense that it's not.
Going to be as bad as the initial.
Thought bought a bit.
And yeah, the key I guess.
To me, there's two things that really separates us from.
Everybody else is the the people we have out there representing.
The brand L.N., it's just the price point.
And and.
You know people people want to being a house right now.
And by being affordable, we we have more opportunities put them in a house and.
You know our competitors so.
That that to me is probably the.
<unk> the mood of the country seems to have improved significantly over the last 30 days.
And Uh huh.
Our ability to kind of managed the process three systems and communications and and just being more comfortable I think as.
Given us.
Oh, what a an opportunity to make things happen so.
But this is unprecedented types.
No doubt and but it certainly encouraging that what you're seeing what you're seeing a in even in advance of many parts of it almost any part of the country really opening up to guess began this past weekend. My second question relates to cancellations in in sort of tempering your commentary on the orders improving you you mentioned the cancellations tend to be clustered.
In the last few days of a month.
What's curious if you could give us a sense for roughly how much of the cancellation activity occurs in those last few days are we talking mikes three quarters of your monthly cancellations occur are we talking more like you know, 25% just dimensionalize that for us a little bit and in general are those cancellations that you have been seeing the degree to.
Would you have been seeing them already they talked to mortgage credit Ah standards tightening or is it tied to a something else as far as you can tell.
I think it's just timing you know what everybody wants to Oh.
Ourselves I just want to see people close the buyers want to close.
You push through all the credit they get to a closing point.
And.
Yeah, but <unk> about the majority of people close the last week of them up and.
When you're when you're bringing everything.
Do the point of closing.
Thanks, Paul out and.
Whether it's a cancellation alright push to the next month.
That that tends to happen no. The percentage hi, you know I I don't have any idea what how about we we have been very.
Purposeful and making sure that buyers in our backlog are going to be in a position to close though.
Historically that number.
Maybe 15, 20% the last week I don't know maybe a little more.
That's just not anything I track it just.
Ahead, just got sorry.
And clearly right now you know, it's always true that more happened at the end of the quarter, but we're we're anticipating there could be even more right now due to the current uncertainty in the market typically the main reason people cancel is because they can't ultimately qualify for the mortgage so are we going to have some fall out because it tightening credit standard potentially I think that bigger dry.
Right now is Jack job lots and lots of income certainty instead, there's a lot of buyers that are canceling because then some sort of interactive covered 19, that's out of their control and so I think that's the main driver for us putting that cautionary language. In there is there are still a few more days in April and we just don't know.
This is phenomenon, we do see every month and we saw it at the end of March it's easier to March over there was there was definitely a higher level of cans around the the last days of the month of March and David touched on it before is that most home buyers are trying to schedule their home closing towards the end of the calendar month because of the way their pre prayed and the escrows or find it it reduces or Adam.
Pocket cash requirement and so they're they're the outside realtors, often advise that so we see more of our closings.
In a given money scheduled trying to be scheduled by the buyers and their realtor.
For the last week on mine so as you bring those things together at the end of the month. That's when you find out you might have that outside lender, who could not get mortgage taking care of her something happens. It just a lot pushes all at once and so that's why we added the language to the to the press release into our commentary this morning.
Yeah, that's encouraging I. That's that's a that's very helpful. I mean, I suppose it's encouraging that the credit standards of already tightened and hopefully on Titan a whole lot more from here, which would be help but that's a very gray color I appreciate it and good luck with the rest of the corner.
Hi, <unk>.
Oh and next question is from Elle in writing there was it in associates. Please proceed.
A good morning, everybody. Thanks for all the info glad to hear everyone's doing okay and congrats on the strong performance. So far in this this difficult environment.
[noise] My first question.
Prickly specs have accounted for I think about 70% to 80% of your sales and just in terms of you know that level of homes. It started as a spec home you might have sold at at at various points at the construction.
So I guess I'm, a little bit curious how your suspect's starts have been trending your first I guess you know is there any reason to think that that that percentage might move lower here just given some change and strategy that you guys might be.
<unk>, but the the question is like how much they're your start down year over year for April because that I guess in my mind should be a fairly good leading indicator of what future order activity might look like.
[noise] Alan we don't have the April starts month today number here with US now, we'll we can probably follow up with you on that are certainly by the end of the.
Quarter will be putting that information out for the stars, but we're managing or or expect strategy. The same way, we always have instead of community by community level measuring demand in that community and and looking at what inventory is available today.
The the constructions data, so that inventory and seeing what needs to be available for those buyers in that given community. So that's a very local decision that our our teams are making on on a daily and weekly basis. It's it's nothing we're anticipating changing at this point in time.
We are obviously looking at that you know, what we would call a bill job, making sure that that buyer is still committed to the home before we start the house, if there's anything unusual with that house that it wouldn't otherwise be acceptable at the back if something happened to that buyer contract, we'd be happy to have that home and enjoy to sell to another buyer if need be that.
Happens from time to time as well.
So we would anticipate the 70 to 80 per cent the reference not changing what we have done is slower starts pace to match. The the reduction in current demand levels and will continue to make those adjustments community by community.
Got it yeah that that's what I was trying to get at as if that slowing of the starts you know tracking me a call it somewhere down 10% to 15% kind of what you're experiencing on the orders or for some reason you know, it's it's coming in lower than that but you can follow up at me on that if if you don't have the data handy second question, if I could just on the mortgage data you guys provided.
Curious if you have any additional granularity there you know we've heard some tightening his specifically on F.F.T.V.A., which was about half of your your business you know below certain psycho scores, whether that 646 60, I'm I'm not sure if there's a a magic cut off from the investors you're dealing with but do you have the percentage of your business that falls below say.
65 goes score and you know does the the P.C. or business that how your mortgage company does not capture the 30% plus it does that profile look any any different.
So I don't have insight to the outside mortgage company and that when you look at our inside mortgage company and we've been running about a 725 goes for on average and even are expressed buyers in around 700 to 710. So do we have some buyers that phone the band you're talking about sure, but it's not it's not <unk>.
Peace and typically our our mortgage company does a fantastic job of when those credit overlays and changes in terms of Psycho squares happen working to figure out a different mortgage product to to get that buyer and she was so it's not generally 100 per cent ball out although there can be some fallout.
Got it that's helpful. Thanks, guys. Good luck.
Thank you Alan.
Oh and next question is from my golf or not <unk>.
Gay people are again. Please proceed.
Thanks, Good morning, everyone in that congrats on the results. So far in also hope everyone's a a safe across a across the Dior hoarding organization.
The first question I had was trying to look at or or think about the April results from a different angle, obviously very encouraging.
In terms of the down 11%, even with perhaps even a higher can read in the last few days expected you know when you think about that relative to.
You know competitor reporting last week in terms of a sharper not fall off in April and other companies talking about you know even more challenging March quarter. So I'm trying to get it since I was wondering if you could comment around.
You know how you guys are operating or perhaps how your positions.
That that has allowed for the better results versus you know several of your peers.
Be it you know price point for you had also mentioned.
You know that if the current demand level person you know you'd expect gross margins to contract. So I'm curious if you know the the relative outperformance versus some of your peers in some of the stats is driven by you know existing.
Yeah, again price point or or or or you know geographic exposure.
Or if you have made some more aggressive adjustments in your you know pricing or incentives.
That that's my first question.
[noise] Thanks, Michael.
Completely appreciate the the the question and I will say that I'm.
Most impressed with David mentioned before the teams of people. We have out there that are operating that are empowered to make decisions at the local level and they're generally operating a business model that has inventory on the ground. It has has specs quick move in homes that are available and we're seeing.
You know a buyer come to us that may have been looking for an existing home and that's a very challenging transaction to to make happened today and so we're seeing some benefit of that and and working with a realtor relationships able to execute against that and bring those buyers to a new home situation, where we have in Missouri on the shelf ready to go as David mentioned before we.
Generally position to be an affordable.
Option for the buyers in the market.
And and finally were very encouraged by the the level of activity. We've seen the more recent weeks in April and that there are people out there that want to home and are able to to to qualify to getting their contract for this home and.
Enthusiasts stick as we see in watching our social media as those buyers are are super excited about the home they're able to acquire at this point in time in terms of incentives, which I think with other piece. Your question. We had started utilizing just the typical incentives we would in a period of market weakness. They're generally that include higher Cobra Commission.
Dollars toward closing costs, if you use our internal mortgage company and then just that array as.
Boys that are marketers come up with in terms of free Fridge Friday and try and then you know backyard landscaping a lot of different things. They can just repackage from week to week to where it's not necessarily a bigger hit too gross margin down the road, but it drives buyer urgency to get in different and send it out there from week to week or month.
So we have started to utilizing a slightly higher level of incentive because of the market weakness, but that that's what we would typically do in this kind of environment and often times, that's very helpful to energize and motivate our internal sales agents and their activity in their outreach program. So that's that's one of the reasons, we would generally do activities like that.
Hmm.
No that that helpline, you know again clearly you know your relative performance is impressive either way you look at it. So congrats on that I I guess the second question also perhaps along these lines Ah, but from a different angle is you know four star as you'd alluded to their results.
And you're prepared remarks, you know they recorded last week you know one interesting data point that they had was you know roughly only about 150 lot deliveries in.
In the month of April or so far in April versus you know a raid 650 to 700 and the February March month, and so you know, obviously that kind of points to a much sharper fall off you know similar more similar perhaps to some of the other competitors that I alluded to before.
The fall off in in in order pays that they had been seeing so it's just kind of curious I was hoping perhaps you can reconcile you know how you're you know April results.
Held up you know much better than that you know obviously as as.
E.R. hoarding is is the major yes overwhelming customer a four star. They are if you guys aren't seeing as as you know that type of degree of magnitude of fall off.
Why has the the forced or a lot deliveries you know falling so so much more dramatically.
Oh sure. Michael This is this is bill.
It's really a matter of timing and as a forced or you know pointed out on their call. They're working with you each of their builder customers. Obviously, we are the majority of their deliveries right now and and it's a matter of sitting down community by community looking at the inventory levels of lots of the builder currently has looking at the revised expect.
<unk> pace and then determining the timing of what take down that need to be adjusted to it. So for the first few weeks post the the the change in the market conditions. It's it's really a matter of I think everyone hits the pause button for just a short period of time to to reassess and and so pushing out take down.
Most of back the first month.
Were forced or is but as we worked through our adjustments. We would expect that there there take guns would become more steady going forward and it's gonna be community by community really as we work our way through this so there there is a timing difference on on on <unk> why purchases relative to home sales, but.
Ultimately to the extent that we're delivering we'll purchasing most of their life. So ultimately for storage pays will.
Match or or start to approximate wharton's after a period of time.
Or any of those adjustments and delays related to it seems in strike price for those lots or is it more primarily driven within a a degree of around you know timing of to take dance.
Primarily timing.
<unk>.
The pace community by community. So it's the vast majority of adjustments rolling timing.
Great. Thank you very much.
Mm.
Oh and next question is from Truman Patterson with Wells Fargo. Please proceed.
Hi, good morning, everybody and thanks for taking my questions I'm glad to hear you all are are safe unhealthy.
First on on S.G.N.A., you know you had a very good a number this quarter Gray control could you just run through the drivers of this and then also you know looking for word how are you all planning to adjust the head count I'm going forward or whether or not you are planning on adjusting any headcount.
It's it's bell indicated on the call that the main driver of or your every year improvement are are that's the name was down 70 basis point 55 basis points in that way you do a decrease in the liability for our deferred comp plans for employees, resulting from the significant declines in the stock market this quarter, they're really.
The only 15 basis points of their improvement was true leverage from the improved volumes, we've seen the market and then.
I think microphones going to China and yeah. The question on on the head to head count stream. It I would say that we are continually looking for ways to be as efficient as possible in the business. You know right now we don't have any broadbased lay off or or headcount adjustment plans were responding to what we see in demand in the marketplace and we will continue to do that mark.
By market, you know are most important asset or or the teams. The people that we have out there in the field and we've been a lot of work over the past.
15 years positioning accompanied be prepared for whatever economic situation that we're forced to to navigate through and our people are the most important part of helping us get through all this we have in the near term instituted a hiring freeze just during the current market uncertainty.
As you well no we were very overhead punches a company and.
The lowest point in our history.
As a percentage of a revenues and so clearly we know how to manage our overhead relative to revenues and as we see where things go on a local basis moving forward.
You can count it as manage well.
Okay. Okay, and then just jumping over to capital allocation. You know you guys have a billion in cash 2 billion I'm liquidity.
You know assuming that the market just stays down and you know that we'll call it 10% to 15% range moving forward.
And you'd be able to you know restart the share repurchase in relatively short order and then also jumping over to the emanating environment. You know I realize it's probably too soon but have you seen any increasing in you know potential dealflow or any kind of distress builders out on the market.
So I'll start with with.
Question three minutes as we stated we are.
Managing that it's too early to say exactly you know when or how we might be able to to address that going forward base case, we would not expect repurchase any shares in or third quarter as we assess market conditions and we we see how how things progress, but we we do expect to maintain a balanced capital allocation over the long.
German and we are focused on investing in our business, maintaining a strong balance sheet, maintaining and flexible position and instill delivery strong return.
And then true into the comment on him and I I I do believe it is still a bit early in the situation to to see any opportunities that may present, as a result of the most recent market change.
But we continued to evaluate opportunities generally with smaller private builders that are complimentary to our our platform.
In various market your product offerings. So we'll continue to to evaluate opportunities is at present.
It's nice to have the capital to make those those decisions to invest in the business.
You know just sad you know, even though are very happy with what we're saying today.
These are uncertain times, and nobody really knows what the ultimate <unk> well this has got to be.
And and being in a very.
Liquid.
The leveraged they risk.
Position.
Oh for a lot of opportunity for.
In the event.
<unk> distressed situation out there down the road.
So we're we're looking at liquidate the leverage has a very strong.
Advantage for us today.
<unk> Okay. Thank you all I appreciate that.
Mm mm.
Oh and next question, it's from Matthew well they with Barclays. Please proceed.
Hey, good morning. Thank you protect my questions you know hope everyone's well thanks for all the detail. So I want to ask on the construction labor side, and and maybe thinking a little more medium term.
I think there's there's sort of a debate out there around you know, perhaps increasing availability of labor you know that could emerge in the coming months as as industry volumes come down and you know, perhaps there's a wider pool of labor just given the unemployment situation, we'd seen across the market what what do you guys hearing on that front are.
Are you seeing the subs, perhaps trying to attract additional labor here just how are you thinking about whether that labour tightness. We've seen over these past few years, we'll continue thank you.
<unk> as you mentioned it there's a reduction in the activity level of the industry broadly that would create more labor available for the remaining starts at her out there and then obviously if if unemployment levels say at elevated rates that would create the opportunity to attract more people to the construction trades. If if they are as a builder for starting.
Homes.
So.
We've seen adequate supply of labor long largely from our long relationships and large market positions, we've not been heavily constrained with our labor.
And I expect that going forward will continue to be able to partner with those people and perhaps you know with additional labor available to us and given market. We can create some other efficiencies for us.
Okay understood and then I wanted to follow up on the the orders ones to date, the down 11% any sense of how that shakes out by by or group I guess, specifically, what what you're seeing what the entry level buyer through all this.
You know, it's really been across the board in terms of reductions in demand. So a little too early for us to parse exactly if there's one buyer type that that ultimately is is going to be hit harder and by the overall impact as what the whole world going through right now right. Now. It is just then broad basis and decline.
Demand across all price points and buyers.
Alright, Thanks again, everyone.
[noise] Oh next question, it's from Susan Maklari with Goldman Sachs. Please proceed.
Thank you good morning.
Hmm.
It's just can you talk a little bit to what you're seeing in terms of input costs have you seen any deflation maybe coming through or how are you thinking about that as you look over the next few quarters.
She's on our teams that are really good job of keeping control of the input costs for materials, especially we've seen are sticking brick costs per square foot basically that then flat as presented a revenue sequentially and year over year this quarter and so with that we've been been really good we've got national agreements.
In place with.
A significant portion of our manufacturing materials.
That had been able to give US you know very strong pricing in the marketplace, but we've not seen any significant deflationary effects come through yet.
Okay. Thanks, and you know looking a little bit further out perhaps thinking about what's going on on the ground, yeah, except that there could be a shaft or material shift and you're buyer segments and the break out of the business and what could that potentially me as we think about maybe them margins and some other tricks.
Three on that going forward.
I see we're just going to continue to focus on homes that affordable price point, so that doesn't necessarily only mean entry level buyers, we want to make sure we have an affordable or at least that value priced product offering across our entire family of brands I think at core piece of our business will always remain the entry level first time buyer because there's just.
Such a big population and and clearly the more affordable you can be the the bigger that pool is of potential buyers and they're really the focus for x. isn't necessarily x. specific demographic or by or type. It's just being affordable you know across multiple price points and proud.
<unk>.
Okay. Thank you.
Mm.
Oh and next question is from my doll with the RBC capital markets. Please proceed.
It's morning, Thanks for taking my questions.
For first question just on though I'm, making side I think David <unk>, you mentioned kind of purposefully managing the the backlog with respect to just getting visibility on the ability to close but but at the same time, you know everyone's pushing and invested in in taking it as far as long as close to the finish line.
On as possible and I think just they you mentioned that job loss or income uncertainty has been the main driver of cancellation, so far but when we think about the three buckets of kind of broad issues [noise].
You've got a job loss.
You've got income income loss or or D.T.I. issues, and then you've got the other credit standards may maybe you'd bucket those slightly differently, but when you sing across those <unk> what percentage of your backlog have you been able to actively verify all three of those buckets or or.
Necessary closing conditions at this point.
And like this bill.
Percentages on that we we do turn or backlog rather quickly.
Flipping burgers over 100%. This border. So we we do see fairly quickly with our site strategy, we're selling homes or you know during construction process, we're getting to buy a schedule closing date, probably relatively quickly and so you know we're supposedly six weeks into this change is significant change and working conditions.
We've we've we've probably work through a a very good portion of the backlog and as we work past the end of the month of April I think there's another step.
Process, but we'll see you know really an appreciable you'll move in terms of scrubbing. The the backlog after we really get past the month of April I would say largely we we will have a pretty good feel for where we where we stand with our backlog because a lot of our contract. So union backlog of that we'll have been injured more and more recently not 100%.
But but more recently in in buyers.
Right. After the beginning of the pandemic are probably looking at things a little differently than than those that were in back what prior to.
Mm.
Okay. Thanks, and my follow up question still on the lending side.
<unk> mortgage loans held for sale those are up over 70 per cent you're on your on the balance sheet and clearly you know revenues are only running up you know 10 per cent for the quarter potentially lower going forward. So can you explain that that differential or.
Are you effectively underwriting more at risk or balance shooting or more risk in order to get loans done today or what else explains that move.
No no change in those those factors.
The are volume increases the whole building site is is one factor also our mortgage company is is no capturing their capture rate of mortgages in the builder business has increased significantly over the last a year or so and so so that so the the mortgage loans over sale the mortgage origination volume.
By our our mortgage company is is.
Much stronger than than actual humbly revenues yeah. At this point April we've effectively sold all of our March loan originations from the mortgage company. So so no change their servicing and loans. So the data point on the capture rate and today, they're they're capture rate for the second quarter was 67% I think that might be the highest court early capture it we've reported for the mortgage company.
They've been actively working to capture more of the builder business. So that's been purposeful and that compares to only a 56% capture rate last year at that time.
Oh, Okay. So to be clear I guess, you're you are not underwriting any loans at this point that would not be eligible or or from a practical standpoint <unk> be sold into the secondary market with current standards.
Correct, we're continuing to underwrite and virtually everything is <unk> agency eligible.
Okay, great. Thank you.
Mm.
Oh and next question is from 10 summer with Keybank capital markets. Please proceed.
Good morning, everybody.
Even more than one again.
So just you guys talked about how many of your orders in two q., we're into recorder closings and if that shifted.
And you if you have it for April that'd be great, but if you saw something shift in March 1st that overall quarterly rate.
I don't have it for the quarter for or I don't have it from March or April specifically <unk> for the quarter, we folding clothes 48 per cent of our homes in the same quarter, which was up from 40 per cent sequentially and <unk> from 45 per cent European here. So you know we did have a very strong backlogged conversion rate, which is why you would anticipate.
Two of them more sold in closing the thing for this year than last year is this time.
Yep. So the reason I asked that question is and the trend seems to be that you close more based on what you just said there for your Prebuild approach, which obviously helps during your assets faster also allows you to compete with the existing market. So my question is.
You're 33400 units under construction.
Being that you're into cue.
Then with two Q.
Historically, you close about 95% give or take a couple of points youre under construction over the next six months.
Therefore, it seems and your comments don't seem to be that closing is yes, you you haven't really talked about a lot of.
Construction delays Bill Mike also it seems like I understand you called guidance. So you are your with your concern more be about.
Margins or I mean, you you have your your incident construction. So is it just.
David is it just that the demand might disappear I mean is it just that it's so why not offer guidance then potentially miss it because I mean, you have these units under construction.
Seems like your closing units you finish that what what where's the real volatility thinking you're.
Normal cadence of closings.
Disappearing verse margins verse demand fading.
How would just say that this has been this is bad but.
Unprecedented events taking place.
And we're managing through the process in responding to what we say.
Huh.
Huh.
So far I would say it's it it has been they better environment, because I think primarily because the way we are positioned with inventory and what the very creative and.
Energize sales force Hot there and and we get more clarity once we get more clarity I think we we we will probably share that with you but.
You know.
It's just an unprecedented.
Yeah, No I didn't make sense, it's just that it seems as though you're closings won't be off that much giving you already have these units under construction then you're still closing a lot of units and you know you're pretty about model. It helps so totally understand thank you very much of your time.
Mm.
We have reached the end of our question and answer session I would like to turn the conference call back over to Dave also closing remarks.
Like you share. We appreciate every one style of the cold a day and look forward to speaking with you again in July.
Until they aren't team.
Stay safe stay strong.
You are proving once again you are the best in the industry.
Don Horton and the entire executive team. Thank you for all you do every day.
Have they oh, great that.
Thank you. This concludes days conference you may disconnect two lines at this time and thank you for your participation.
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Yeah.
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