Q1 2020 Earnings Call
Greetings and welcome to the Meritage homes first quarter 2020 out of this call at this time all participants are gonna listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
My pleasure to introduce your host Mr., Brad Anderson, Vice President Investor Relations. Thank you Sir you may begin.
Thank you Donna.
Good morning, and welcome to our analyst calls to discuss our first quarter 2020 results. We issued a press release yesterday after market close you can find that along with slice it would be referring to during our call on our website at <unk> investors mirror, two times dot com or by selecting the Investor Relations link.
I remember hungry.
For you to slide two and remind you that our statements. During this call is all the press release and accompanying slides contain forward looking statements, including but not limited to our views regarding current business conditions and the potential adverse impacts related to the Cobas 19 pandemic.
Our expectations or projections regarding the demand for and prices costs mortgage financing margins overhead expenses cash flow and liquidity.
Those and other projection represent the current opinions of management, which are subject to change at any time, we assume no obligation to update them.
Any forward looking statements are inherently uncertain.
Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we've identified and listed on this slide as wells in our press release and our most recent filings with the FCC specifically our 2019 annual report on form 10-K, she tends to more detailed discussion of these risk well also be filing.
Our 10-Q shortly we have also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures.
With me today or at least a distant or Steve Hilton Chairman and CEO.
Let's briefly our executive Vice President and CFO and sleep, Lord Executive Vice President Chief operating Officer.
Meritage homes.
[laughter] called to conclude in about an hour and a replay will be available on our website within approximately an hour. After we conclude the call. It will remain active through may 13th.
I'll now turn the call over to Mr. Hilton to review the first quarter Steve.
Thank you Brett I want to welcome everyone participating on our call today and sincerely hope it all view as your families that maybe it will stay safe and healthy through this global health crisis.
Our Hearts go out to those who are sick or caring for loved ones stricken by the virus.
Oh, thanks to all the healthcare workers first responders and those who rely on the brightest necessities like groceries and gap.
During this time and most of us are saying in our home.
We are grateful for your service.
Number one concern so to grow the bars began to spread it's been the health safety and well being of our people, including each of our members team members and their families as well as our customers are business partners.
I commend our entire Americas team for their commitment to overcoming challenges we've never experienced before over the last six weeks.
Well cover what we're seeing on the ground in April shortly as well the changes we've made.
Well, we think it's important to also review a few of the financial highlights of the first of our first quarter performance, though we realize is not current indicator of the remainder of the year.
We believe the financial strength of our balance sheet nonstrategic market position excuse me Q1 will allow us to successfully whether the uncertainty over the upcoming quarters.
And be prepared for the near to midterm volatility, while keeping our long term focused or one with our strategy.
Turning to slide four.
Through most of the first quarter, we enjoyed strong demand for new residential construction amongst the highest demand I've seen in my 35 year career.
As you're well aware economic climate conditions deteriorate or across the U.S. since mid March, which coupled with declining consumer confidence and he tightening in the mortgage market.
Now I've negatively impacted our traffic and our sales.
Demand was especially strong community all during the first move up our strategic markets the make up 90% of our communities.
Well, we're able to capture that strong demand generated 23% order growth with almost 70% of that coming from spec inventory, we're able to close quickly.
They haven't turned drove 27% revenue growth.
180% earnings growth over last year's first quarter.
In addition, the simplifying and streamlining of our product can operations that we have completed as Barbara strategy has driven our costs down and result in the first quarter home closing gross margin.
Expanding 330, Bips with 160, Bips improvement interestingly they leverage.
In other words, while strong demand for the most.
While strong demand for most of the quarter provided the opportunity execution of our strategy a lot of to capitalize on opportunities and to deliver 180% Hermes growth.
We're also provides cash flow for early retirement of debt in December last year, while maintaining liquidity, we need for the flexibility through this period.
I'll now turn it over to fully to discuss more specifics regarding recent trends and changes we made in the way we operate.
Thank you Steve.
Likewise.
As reported earlier this month the threat of the Corona buyers began to have a notable impact quarter operation in the later half of March.
Despite 8% dropping orders compared to March 2018, following year over year increases of 38%.
If you want to attack in January February.
Our sales through the past weekend, we expect these orders to be down approximately 25 or 30% from April 2019 above 600, 650 sales compared to 960 last year.
Our order cancellation rates increased from 13% in the first quarter two the high teens in late March and are currently around 20% month to date in April.
Shelter in place orders are still in effect across most of our markets, but residential construction is currently deemed as essential service in almost all of our location, we'd be except you have a handful communities in California.
We're continuing to building liver hauling following the protocol is recommended by the CDC Osha and other government health agencies to stay safe and minimize our risk.
Slide six while the world we are living it today very different than it was just a couple of months ago I'm proud of the way in which our teams are quickly adapting to the new temporary model and we are leveraging our technology forward solutions to continue to operate grow the.
For example.
We are seeing customers, either virtually or by appointing only in our sales offices and studio and design centers, allowing customers to practice social distancing during their home buying process.
Our online traffic has held patients earlier in the year, it's almost it's almost 50% since last year April.
Additionally, approximately 15% of our net orders came from virtual towards a validation of the creativity and determination of our sales team. During these new time and the acceptance from prior to this home purchasing format.
Our sales counsellors also take photos or video sold homes under construction.
The home buyers on the progress of their home when they can physically visit the construction site.
We are getting costs into working remotely enter accelerating adoption of new technologies throughout the organization, which will continue to benefit us even after the market to fully functioning again.
With mobility restrictions in place the constant we're seeing today tend to be highly motivated buyers, who are ready and able to purchase the home we assist them in their research where their robots website customer contact center and agents available to answer questions by phone tax or E mail without the need to okcupid it community until they are comfortable consequently, our.
Conversion rate of traffic to sales have increased must be from earlier this year.
Customers are using our 24 seven online mortgage pre approval tool to help them move to the process of qualifying differences at home more quickly.
And teach mortgage consultants work with that to complete the process without ever needing becomes the office in most cases, we're also doing drive two closings and are now quit the process earnest money deposit on customers debit or credit cards remotely through a secure E Mailable week.
These tools and procedures make it more can be they prefer homebuyers to work with us.
As many of the changes we've made are also more efficient parents seek with days more digital lifestyle, we intend to keep and expand upon and to help reduce the cost of selling closing homes. Even after the current pandemic received.
We're working effectively remotely other municipalities and utility we do business, we had to enable us to get permits and complete inspection as well as billing and payment for services.
Our crews are typically able to maintain our construction because schedule and we have not experienced any significant supply chain disruptions so far.
For the safety of our employees and customers, we have temporarily suspended all non emergency warranty work involving the interior of occupied home.
We will begin warranty work as soon as allowable in our markets.
Moving on.
I think covering our offerings all as much detail as they typically do.
Point out just to highlight for the first quarter before turning it over to he got to review our financial results slide that.
The first 10 weeks or the quarter were exceptional by any measure absorptions were up 35% year over year. So despite having 9% thier community community opening on average than a year ago, we still achieved 23% order growth.
Our ongoing pivot entry level continues to benefit our adult entry level orders were up 69% year over year I'm represented 51% of our total any comedic talent at March 30, Onest 2020, and 61% of our total orders for the first quarter.
Those are up significantly from Q1, 2019, when 36% ever community and 45 years diver orders were entry level.
Orders from our non core assets, which is anything outside of energy level or first move out drops under 6% order volume for the quarter.
Slide eight.
Our stock inventory at quarter end was up 23% year over year to a total of just over 2700 home started which only 20% were completed.
The number of completed stocks at quarter end was down 7% from a year ago, we're selling horseback, calling for completion and had been able to resell homes to cancel typically without any additional concessions.
We ended the quarter with an average of a little over 11 specs per community compared to 8.5, a year ago, mainly due to having more entry level communities, which are 100% back.
Although we certainly reduce the volume of specs, we are starting over the last month, we do not plan to change our strategy of selling spec building. The I feel the space, we are managing spec inventory to keeping 40 months supply to meet the demand for quick moving.
About four to five months supply is based on order volume. So it will be smaller number as demand softened and larger when demand increases.
Slide nine.
Our orders in the West region were at a 35% over the first quarter 2019, driven by a 41% increasing absorption with five or 10 fewer communities on average and you level now makes up almost 70% of our total California communities with very limited exposure to the jumbo market total orders and order value in California more than doubled over last year's first.
Quarter.
Despite a 14% drop in Alberta community arrogant, Arizona again produced the strongest absorptions across the company at an average of 17.8 per ask me for the quarter up 44% year over year, resulting in 25% order growth for the border.
Our Texas region had a 41% increase in absorption and despite a 30% declining for me down orders were up 22% often had exceptional growth up 85% Youre a year for the first quarter due to our strong entry level driving with our live now communities. Overall, we believe taxes will be resilient as we continue to come.
Not at this downturn and as we as we experienced in the last cycle. We continue to see improvement in our east region. During the first quarter year over year order growth was 11% due to a 20% increasing resorts, which offset an 8% decline in average community count closings in order to reduce due to the devastating tornado in Nashville during March.
With that within the region North Carolina produced the largest year over year growth with a 25% increase in harder primarily driven by product mix, which contributes significantly to 39% increasing absorptions there.
Our backlog is solid we don't Calcutta you contract for buyers with the homes to sell unless the sales is just waiting to close.
We are seeing limited cancellations on our near term backlog and we expect most of it to close quickly which is an advantage in today's market do the employment uncertainties and higher standards to qualify for mortgage financing.
Our JV partners on emerging honoring all pre qualified mortgage approvals for customers in our backlog without requalifying them using the tighter qualification standards that exist with many lenders today.
I will now have now handed over to he like to provide some additional analysis of our financial result, Eva. Thank you for leap considering the fluid condition and lack of clarity regarding the timing impacts how more stable economy before I begin I'd like to know if they were Jain our previous guidance until the appropriate time in the future starting on slide 10.
We produced strong earnings growth at 180 per site in the first quarter of 2020 over 2019 and achieved that result with margin expansion and I can you elaborate in addition to the 27% home closing revenue growth.
Closings are up 31 for say over the first quarter of 2019, but 69% coming from spec inventory and a backlog conversion rate at 83% compared to 773% last year.
Our home closing gross margin increased 330 that over last year's Q1 to 20% for the first quarter 2020, traditionally our lowest margin corridor.
Our margin benefited from pricing power over the last couple of quarters as well as construction efficiencies due to simplification of our product and processing cost efficiencies from better negotiating power on a lower numbers skews and incremental efficiencies and construction overhead for any additional closing revenue, although weve not yet seen notable.
Discounting for new or resale homes in our market or high gross margin would be able to absorb material price concessions before we would have any concerns about taking meaningful impairment, which has been a topic of discussion among investors lately.
Time, we anticipate volume will be lower in the current environment, but we are still continuing to solve and close homes everyday well pop is always front of mind in the current environment. We believe it is important to continue to maintain cash flow from home closings to cover our fixed cost.
It's also important to maintain a production cadence the deliberate cost savings with our streamline construction process.
We continue to operate over the next couple of quarters, we will monitor market and religiously conditions with pricing decisions locally as necessary in order to maintain our minimum volume threshold.
The additional clothing revenue in Q1 also resulted in increased leveraging of art I've seen a which declined to 10.7% from 12.3, a year ago, we were on pace to hit our 10% long term target for the full year, although we aren't expecting that trajectory to continue in the current economic environment.
Earnings from our financial services segment were $2 million lower in the first quarter of 2020 compared to 2019th we changed our mortgage joint venture structure relating to customer incentives offered by using our mortgage JV last year such that the profit from those incentive is now included as part of home closing revenue rather than being reported as part of.
Financial services result.
Early repayment of died in December 2019, resulting in a $4 million net decrease in interest expense, but aided our first quarter 2020.
We also benefited from a lower tax rate with the extension of the energy tax credits into 2020, our tax rate with approximately 18% for Q1 this year versus 22% last year, our full year tax rate. This year is expected to be between 20 and 21%.
Our board had previously authorized $100 million for share repurchases and we repurchased 1 million shares at an average price of around $61 per share. This quarter. We have 23 million remaining authorized but we have suspended repurchases indefinitely in light of the current economic condition.
Benefit of the share repurchases is fairly limited in the first quarter 2020, as the majority of activity occurred in March, but he will more meaningfully but if they diluted EPS on a go forward beyond that.
Slide 11.
Our balance sheet is in the back condition, it's ever been with net leverage at one of the lowest point in our company's history, we have ample liquidity and our banking partners are willing to extend additional credit if needed we borrowed $500 million against our credit facility in March to provide additional flexibility during this period of extreme economic uncertainty.
And we expect the whole that Kashi there of at least for the short term the net cost of that that is very low under 2%.
We ended the quarter with almost $800 million of cash additional liquidity of almost 220 under the credit facility and net debt to cap and about 26.6%.
We have no debt maturities until 2022 and had been deferring the most of our land acquisition and development over the last six week, while eliminating non essential discretionary expenses and metering the production of spec homes to preserve ample liquidity for future uncertainty.
We don't feel any pressure to liquidate assets to generate cash and our recent operating results are trending better than our internal downside protection, but if I were cancellation and higher sales than we anticipated short term.
Lifestyles.
Then approximately 246 million Atlanta development in this year's first quarter that was about 110 million less than what we expected to spend when we enter 2020 due to deliberately curtailed spending in March we added about 2900 and that new lots during the first quarter 2020 to end March.
Smelly 41500 lot does about where we ended 2019 that represents a 4.2 year lot supply based on trailing 12 months closing.
We were on target for our goal is 300 communities by the end of 2020 line hired our decision Mitch mid March to pull back incur cash spend to preserve liquidity since mid March.
Fred approval of approximately 1800 additional locked in the quarter, we terminated several deals prior to the ended the quarter and a couple more sense in April prior to the expiration of their feasibility period resulted in very limited target of just under a million dollars. We continue to work with our land sellers takes that purchasing feasibility guideline.
Although most sellers have been willing to work with us and our offering acceptable terms, we're closely monitoring additional deal for termination its economic recovery is more protracted and currently anticipated we expect such action to only result in a limited amount of walkaway charges for the rest of the year. In addition, we haven't daily reviews.
Our upcoming land acquisition and development bank, but all land cash expenditures acquiring corporate level approval for the current time.
Only for last significant downturn in the market.
We have far less risk and our land, but now no speculative luxury projects no deals a significant development or entitlement risk and a well defined land playbook with consistent expected margin. The provides us with much more confident in our land position.
We also want to provide some additional information regarding our buyer profile in relation to mortgage financing on slide 13.
Our buyers have a solid FICO scores typically around 730 with more than 70% of that about a 700, mark even for entry level buyers. The average FICO is 720 and well over 60% of those buyers are over the 700 Mark.
I can be KPI for the average fire is below 40% that's true across all of our buyer group, including entry level and has been for many years.
Nearly two thirds of our buyers financed with conventional mortgage is a down payment averaging in the mid teen.
All of those are indicators of more stable credit the credit profile for traditional entry level buyers.
A longtime JV partner has been able to continue to deliver mortgage as far buyers were other banks and nonbank lenders cans or wrong in this environment. While there is a risk that the market could tighten further impact fires ability to qualify from mortgage there's no cash or put back risks married edge for mortgage servicing is our JV.
He is a broker only not a mortgage banker and doesn't own any loans or servicing asset we've been successful, thus far and working through mortgage solutions with our lender and navigating the financing environment, which seems to be shifting daily to date, we've had limited impact from the inability to qualify buyers that would have qualified pre covidien.
With that I'll turn it back over to Steve.
Thank you HILA ex.
As our first quarter results demonstrated our strategy was hitting on all cylinders until late March we closures of large sectors of the U.S. economy gas began severely impact the market.
Since then our focus a change as we are leaving and managing the company for a much different landscape now.
However, we have reminder, on boys partners homeowners and investors that this is not 2008.
Home inventories are still in short supply and the industry has been underproducing eroded demand for many years demand for homes is from buyers, who are taking possession and moving into them. The attraction in single family homes is even more compelling and today shows are in place world.
Prices are not being arbitrary inflated by investors looking to flip homes for a quick profit.
Mortgage standards are tighter interest rates are still very very low and builders are focused on bringing cost down to make homes more affordable rather than offer an aggressive discounts to harvest cash.
We believe Mary is well positioned in that regard with our strategy and simplify and streamline our operations, which has been very successful today and we believe we'll continue to serve as Walter this crisis in the future.
Our entry level live now home offer surprisingly more value than some are competitors at the bottom of the entry level market. So we can attract a higher credits buyer or first mover homes. Our point of the features of banks use that also attract some secular move up buyers, which expands our potential buyer pool.
We're also in a much better condition today than we were before the last recession, our balance sheet is as strong as it's ever been with ample liquidity and very manageable debt levels maturities, we have curtailed discretionary spending delays development projects, where possible reduce our cash outlays in 2020 and beyond as necessary.
We're carefully managing our spec starts of inventory will maintain the cost of things of that model to maintain a competitive edge for our entry level communities and help protect our margins.
We are well positioned the market with our entry level on first newer communities, which we believe we'll continue to serve as well we have an experienced management team who was in sync with our current strategy employee morale is good and we're supporting each other our families. Our business partners MCU means that we serve.
This is not be into the world. It's their most remarkable active global saw there there was ever seen.
And to that end, we rolled out a new Jersey charitable program last week.
We're marriage and our fair to scares Foundation and our employees are contributed $250000 to feed America.
I'm proud of our entire murdered steam for putting our customers first and working hard every day to make a positive contribution that concludes our prepared remarks I'd like to thank you for your supported Meritage homes, and we'll now take questions operator.
Thank you well there will be conducting a question answer session. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Confirmation total indicate your line is in the question Q.
Press Star to if he would like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Once again that star one to register questions at the time.
First question is coming from John Lovallo of Bank of America. Please go ahead.
Hey, guys. Thank you for taking my questions and I Hope you all are well.
First question, Phil I think you mentioned more recently.
The activity has improved a bit.
Maybe in the context of that 25% to 30% decline you're expecting in April can you maybe frame.
The pass two weeks maybe versus the first two weeks.
April in terms of year over year decline shifts, we got a gauge how things are progressing.
Lets flip to leave take that one yeah, I'll take that John sleep. So certainly.
When the shelter in places started to recurring stay home wars were.
Instituted we saw a dramatic slowdown that occurred back half of really last week of March and really the first two weeks of April were pretty slow. They were off you know 50 60 Percentish from last year in April but that as we move through the month of April things have gotten much better.
So that's where you start to see us being off you know, 20%. It really gets you to that 25% to 30% that we're talking about so what I would tell you is an April died over yet and we sell a few more days here, but we've seen a meaningful difference in the back half of April versus the first half of a growing sort of that last week of Mark.
Just one other point I'll actually that John.
Some other folks had mentioned a detailed describing a backlog and a higher cancellation rate during the last week and that's not difficult for us we Scott backlog everyday so we're not expecting an unusually high spiking cancellations to occur in the last day or two month, well, we'll report any contingent sales in our in our sales number.
There's real backlog numbers.
Got it that's all really helpful guys and then I think there was a mention.
I think 15% of orders came from virtual tours were something in that neighborhood just curious.
70 of those folks that will typically need to come in physically to see the house before purchasing.
Well I think they will all come in the house come to the house at some point in this process the point of that status, we're buying a house basically site on C. universally.
And then before they closed they'll come but come see it but.
It's a pretty remarkable staff, it's the stats I didn't even want to believe I couldn't believe I struggle to believe that people would actually buying a home without physically going out and Washington touching it but in the new reality.
We're happy that 50% of our bars are doing that and we think that that number could potentially increase.
That said that's that let me just have one more thing that.
And many of our markets, but shelter in place orders are are expiring and being replaced with.
The phase one of.
Erika reopening so many of our communities. This weekend and then into the following week and we'll be back to open for business other more of a normal.
Normal situation so.
And we will begin to bring sober are.
Offices back online.
Next week.
In those states where were well the shelter in place orders have been relax I was just added to squeeze that obviously having finished bass.
It's really how you're able to sell home virtually it's much difficult much more difficult to do that in a build to order environment.
Live now models are live now stacks, we have to carry more specs. We carry you know varieties back. So we're able to demonstrate that our home in a virtual tore you. What you see is what you get when you get out there and I would tell you that all of those sales for the most par on finished specs. It's a good proxy for folks that are nervous about it. This.
Sorry, as the inventory that being lifted decline.
People are nervous about getting towards and someone else at home.
Very good proxy for that.
Makes sense thanks, guys.
Q.
Thank you. Our next question is coming from Alan Ratner of Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning, glad to hear everyone's doing well and congrats on the and the strong performance both in the quarter and since then as well.
You know my first question I guess, just touching a little bit on that last comment about the advantage of having finished specs one of the things that we've been seeing on the resale side. In this current environment is there's been a huge decline and inventories as people are sheltered in their homes and presumably can't sell it if they're looking to move and I would imagine you guys have benefited to some extent from that.
That trend there.
I guess the question is as you look forward and eventually perhaps listings do you start to increase and you have to think about that four to five month ideal supply of spec city have on the ground. How quickly are you kind of adjusting that that start pace, because obviously that the trends are changing so dramatically by the week. So should we think about your current start.
Tivity kind of down in that 25, 30% range at that you're forecasting April to ban or are you, taking some differing view based on what's going to happen.
The resale inventory once eventually it does come back online.
The first on thank you for the question and Hope you guys are doing well also I will tell you I think our spec strategy.
It is going to be defined elements.
Over overall strategy and it's going to be what allows us to gain market share in this downturn.
Because many dollars don't do it.
And we believe very strongly that buyers in this environment and the environment going forward going away from home.
And the.
They want to move quickly and we have that inventory for them.
That said.
Obviously, our April starts are going to be down significantly. We don't report starts but I could tell your April starts will be down significantly.
From a previous months and from what's normal for us because we're fine tuning, where we want specs and where we where we all we have made where we have too many and where we don't have enough.
And we're where we where we're selling houses.
Thats, great and there are many places.
We're going we're building the specs.
So how do we manage that we manage it daily everyday we figure out what we sold it where we need to replace it.
And.
We have denied together fleet Lindsay I heard our matter I support him.
I can tell you is this is havent had combat we're managing that are that part of the business very aggressively as we're managing our land acquisitions, our land development.
Not just about conserving cash, but about putting the right product on the ground the right place at the right Bryce.
That's very helpful. I appreciate the insights there. Your second question just as you think about your footprint I know it seems like there's some markets that at least from a job perspective are being hit harder by this this current pandemic when you're thinking about say Houston with what's going on with oil.
Maybe Orlando, obviously with the Disney resorts, there being shutdown indefinitely. So when you look across your footprint are you seeing any discernible differences and trends of late maybe ones where them or the demand hasn't seemed to bounce back a sharply perhaps due to that job uncertainty or is this the strength over the last week or two is that is that pretty widespread across your foot.
<unk>.
I would say that.
So I think about Carl just the way you just laid it out going into this pandemic than through it I was the most concerned about Orlando in Houston right. There is 75000 people are in Orlando the worked for Disney.
Furloughed 43000 people a couple few weeks ago nodes resort market travel leisure market very worried about Orlando.
Also very worried about Houston with a you know almost zero dollars for a barrel oil but surprisingly.
Our sales in Houston, I've been very robust.
For April.
A floor, how well we're selling homes in Houston this month.
Orlando.
You know sales have been an awful but.
Not as much as I would have expected.
Really were wherever the most challenges this moment would be California.
California, because the.
The one state that that can be most challenged by Fortunately our oh.
Our footprint in California is not that large were only up 29 communities in California.
Yes.
But that's what I'm concerned about I'm also a bit concerned about Colorado.
Our community count as fall dramatically in Colorado from from 23, a year ago to 13, because we've been selling out of communities and replacing them with new lower priced entry level communities, but the price of houses pretty high in Colorado, and I think I think bars, there are being a little bit more cautious but.
The man in Arizona.
It is.
Stellar.
Even through the last six weeks.
And demand and most or Texas markets continue to be very good as well so.
Hopefully that answers your question Yeah. That's great. Thank you for the color and good luck and stay healthy.
Thank you.
Thank you. Our next question is coming from Truman Patterson of Wells Fargo. Please go ahead.
Thanks, actually that's a possibility I guess, Steve. This is we look you know for an inflection and demand what would you need to see to give you copper to reengage the land market.
How long would you know.
Remain conservative.
What we're not we're not engaged okay.
No.
We're.
We're going through our land pipeline.
You know, maybe we had a couple hundred deals in escrow, maybe a 100 of them we had gone hard on.
We're reviewing those who may have some of those a modest amount of those that we decide to part ways with.
And.
And so we're not just good completely blow up the way in pipeline, we're gonna reanalyze, everyone own every market is different.
I think some land prices are going to be somewhat sticky in certain places, but I think in other places they may go down.
And you know, we don't want to be in a position we overpaid for land. We also think.
Other builders private builders are going to be a stressed in this environment and they're gonna have to let go some land that we may be wanted to buy them couldn't buy that maybe now we'll be able Dubai.
And we're going to be very strategic and we're going to use this.
This this opportunity this is an opportunity to increase or market share. So I don't know that we're going to be able running around buying land tomorrow, but we're going to be ready to summer for sure.
Particularly if this.
If our city sales rates were there were experienced particularly in some markets hold up we're going be ready to buy land.
Where it makes sense so.
As I said earlier. This is not 2008, we're just throw in the pots and pans off the ship.
So float.
It's a different situation just to clarify how we've only walk away from a handful Neil so far for the most part we've done is just pushed out the timeline debt for the deal that we have we'll have some more deals a lot will walk away from this quarter there'll be some some expensive for that but I don't think it's going to be that material.
Okay.
And handle earlier in the call you mentioned you had significant headroom I'm on the incentive front before triggering impairments do you have any color on the magnitude is probably about 10% range.
Yeah, I mean, you guys saw the margins this quarter were 20 per site and there's quite a long runway between that and break even.
There's some additional cost spent for.
Not to get can be candy accounting part, but the IRS, making sound a little bit more money, but you probably have between 10 and 15% decline before you would even in a piece before we would even need to start having conversation about impairment and that's assuming that there was no price concessions that ought to be gotten into market today, which obviously there are so I think that kinda.
The combination of all those items gives us a lot of grading them.
We had 30% to 40% price declines.
In the last great recession.
Which.
Certainly call doubles impairments or margins were really strong demand there even stronger at that time, but we're not seen any real price declines yet, but certainly you know incentives there are a picked up a little bit, but not but not not meaningfully.
Okay. Thank you.
Thank you. Our next question is coming from Stephen Kim of Evercore ISI. Please go ahead.
Yeah. Thanks, a lot guys are encouraging stuff good to hear.
Yeah. It certainly does seem like things are holding up a lot better than they are they were looking like they were going to be a few weeks ago.
I guess I'm curious as to.
Whether you could comment on what you're expecting or what you're anticipating.
It will be different as you into markets, where you reopened.
First is the markets I mean, where the states are kind of reopening versus the states, where it'll be more delayed and what specifically are you looking for in these markets that are opening up earlier.
To gauge, how you're going to perhaps pivot your strategy and the other markets that may follow.
Well I mean, it's traffic.
You know its its sales activity.
Buyer engagement.
Yes, its pricing what incentives or.
Necessary or not necessary to get people to transact maintenance.
It's no different than in a in a good time then into bad time.
And.
The activity that were seen in the field has been the communities is really going to good driver decisions around.
Building specs and buying land.
It's a pretty simple so pretty simple formula I.
I mean, we in the markets you know, Georgia opened up a little bit.
South Carolina.
We're now seeing Texas open up here in the markets that are sort of paving the way for opening we're seeing incremental traffic right away, we're seeing buyer engagement as Steve articulated.
So we're seeing all that I mean, it'll just be key to watch the sort of the economic landscape for each one of these markets no I think someone mentioned where the job losses going to occur keep an eye on that but we've already seen you know buyer engagement improve just with the idea of opening backup so we're certainly.
Expecting incremental activity in traffic when we actually can be open up for open up without.
Non virtual appointment only environment.
Yeah absolutely.
Particularly seeing things improve over the last couple of weeks is an important do you attribute.
Or how would you like how are you anticipating that you're going to utilize incentives. During this once you might call a diagnostic phase you've you've indicated you've seen some nice pickup in traffic in dire engagement I'm, assuming that that is in the absence of a material increase in incentives on your part or any special program.
Yeah.
Can you talk about the degree to which you are planning to maybe pull back on incentives in the near term or Conversely to increase incentive as these markets open up.
Well the question really should be more what we're on centers in April and I would say.
We used a variety of tools in April, but they all add up to about 150 bips.
So what's commissions.
So it was.
More closing costs.
A variety of different things that we did that said we are raising prices in March.
So I don't believe that our April incentives that 150, bips that we spent.
Is going to have a meaningful impact on our margin because I think our prices were on the upswing in a number of our inventory going into April so they kind of washes.
But you know I'm going to refrain from telling you what we're going to do in May I know one of our competitors listen to these calls as well read the transcript. So I don't want to telegraph to the market, where we're going to do what I can tell you. This you know we're not going to sit on our hands.
And what's the movie go by we're going to we're going to be aggressive and active.
And making sure that we maintain or volume to a reasonable level and move our products and compete.
And that's what the really.
Good entry level builders do.
And not just at this would be good builders do period. They did it in the last downturn, they're going to do it now and we're going to we're going to we're going to be right up there you know with them. So.
I don't know well take I can tell you on that but I I'm not going to tell you precisely what what incentives were going out we're going to be offering I was just add yeah. This is not a peanut butter approach every community as a different story you know we believe we're going to sell over 650 houses in April.
Largely sheltering in place environment.
We have a lot of community, especially in the entry level that performed.
At or above our original underwriting expectations.
We're not looking to over incentivize, especially as we think they'll do better coming out of that so every community. We look at and we evaluate where competition is doing and what's the story of that community with our spec story. So it's a community by community being a market by market. They and now it also tell you again I believe is advantage.
Having staff.
You know when you look at incentivizing stack, it's very different than incentivizing dirt.
You can control the margin erosion in much better.
Yeah, I know, it's all very encouraging appreciate it and you also didn't mention the fact that lending standards tightened a little bit too in the recent weeks and so a strengthened its early encouraging. Thanks, a lot guys appreciate it.
Thank you.
Thank you. Our next question is coming from Carl Reichardt of the T.I.T. Please go ahead.
Thanks morning Foods.
Good to hear your well I was curious if you could talk about April in terms of entry level live now spec versus the move up side of the business and maybe how absorptions on a net or gross basis had had turned to between those two segments.
No I don't have those that's right enterprise front I mean for April yet on how much of that was entry level versus one and you versus sort of our non strategic assets.
But I can look at the Dave just in front of me I can tell you. The live now has continued to perform very strongly there has been modest pull back into one and you it's definitely stronger there than in most now and that.
You know the two and you stop is definitely more slower much more slower than the first quarter. So I'll just tell you in general entry level, you know entry level plus lower end first venue is all performing much better than the higher and stuff and I think you'll see that trend in April and as we come into may as well at higher I'm sorry.
Yes, with only 6% in total volume for Q, why it's not not really even no fracs anymore and he is holding relatively consistent and about 150%.
First time move that entry level is it 550%.
Absorption pace in first tangled up in those ratios are holding relatively consistent you know say that.
We really look watches over competitors and we do have a few communities that are closer to what I would deem as ultra entry level.
And I see that some of those are or more challenge because they're they're impacted their there the buyers are less credit worthy.
And they're tending to have lower credit score, we cater do a little bit more of a premium entry level buyer.
Well, it's a better credit score our original buyers grades is generally over 700.
We do have some in the six hundreds, but we don't have any of those low 600, given high 500.
Entry level buyers that some other people might have so.
So you know our entry level communities I'm not really seem a.
Drop off in.
An activity.
Okay I appreciate that answered thanks, guys and then.
You talked before at the Analyst day in previously about community Count what 20 would have been which was a transition year before 21 community count grew.
If lets operate under the assumption that you're sort of down 25, 30% and that's kind of where we are for a few months before there is some type of the rebound.
Is your sense, then that effectively you'll just run your community count down or replace communities that do sell out at a slow rate.
I guess the question to me is what the market need to look like before you start to think about a more aggressive expansion of your community count.
Carl It's just too hard to answer at this moment in time.
Yes, so many moving parts.
We have some communities that we frozen development for a short period of time to see what's going on so those will be but some of those would be delayed there were planned opening later this year.
We have some committees that are selling out a little bit slower. The may continue to be opened due to year. We have some that are going faster.
It's just we're just and I are the storm right now and I don't want we don't want to give any guidance on community count until we get a little farther down the road with this I think next quarter more reasonable question to ask.
We definitely still have our.
Our mindset in our target on getting that 300 communities. We wanted to be there by the end of 21.
We're still going to get there is going to take us a little bit longer adult the curve ball here and I think you know with these low interest rates and the tight supply the housing.
That we're going to get through this.
In a pretty good away.
But I don't want to give any kind of guidance like that yet I think that Steve had in his prepared remarks, we're just trying to navigate the short and mid term, but nothing's changed for US long term that's still the strategies to hit the 300 community might not sure it's going to happen on the quarter that we thought it was going to happen and buy on that's still the iron.
Hi.
Okay I appreciate it thanks.
Thank you. Our next question is coming from Michael We heard of JP Morgan. Please proceed with your question.
Thanks, and good morning, everyone.
I hope everyone saw healthy unsafe.
First question I was just hoping to get.
Maybe in some ways a more of a clarification on some of the numbers provided earlier specifically.
Just around via down 20 to 25% to 30%.
In April that.
That appears to be more of a gross decline and.
You know if you kind of extrapolate than that.
It's not it's net Mike we had I think there's a slide in our presentation. We had 916 sales last year's April next and we're projecting.
North of 650 net so that's how we're getting to that 25 to 30 said that already has all of the cancellations in there.
Okay.
Okay. That's.
Helpful I guess.
Follow up offline with some of those numbers and but also around the.
Down 50 to 60 in the.
Early in April and then down 20 in the last couple of weeks is that also net or gross.
This is on that so you know the first two weeks of April we were I'm trying to think about a week to week trends year over year as what the question why that I'm not sure if on spot on I think the point is is the last two weeks as we move through this week, our meaningfully stronger than the first two weeks of April I mean do it again.
Hi up on a weekly percentages I think that take away is that where the refer in March it's been improving steadily everything can we expect April to close out 25% to 30% net.
And as we've mentioned likely April will be the toughest seven months, considering almost the entire country shelter in place right now and we're exiting out of that rolling into yes.
You know those human knows long time, but you know.
Sales numbers always build as you get later in the month, Okay goes incentive that expire sales you will get more motivated they work harder is at the end of the Muslim they do at the beginning of the mom people cleanup their backlog and takes can so as you move through a month numbers are always building.
So that said the last two weeks in deep in March as he looked at numbers were declining.
And the first two weeks April numbers were were lower than when you expect for the prime time of the selling season.
But the last couple of weeks, particularly this last week.
It's been pretty strong.
We we endeavor to.
To deal with our cans on a daily basis and you know.
We're always reporting that numbers.
Okay. Okay, I think maybe I'd also just confused with the on the on the Bar chart that there was a 600 number in there for the month.
That's again, where we can follow up on but I appreciate the clarity.
I guess secondly.
Just on the.
Gross margins in the in the first quarter understanding.
A lot will change you know off the current market conditions going forward, but you know there was a very impressive number around 20%.
Gross margin for the first quarter and compares to the mid teens that youre expecting so just hoping to get a little bit in terms of what the drivers were.
That upside on a relative basis.
And if that's kind of the new starting point.
All else equal.
You know if you're to kind of take out maybe what incentives and market demand is going to do but if there was any type of.
No kind of a mix shift or timing that that benefited that quarter or at par structurally perhaps you're at a higher level and you realized.
Well, here's the thing with our strategy in our model, we're able to sell homes in a quarter and close of.
Okay, because we had at 83% conversion ratio in Q1, so we have a robust January and a robust.
First half a February.
We were able to sell inventory and closed within the quarter.
Allowed us to outperform the guidance that we gave you.
For closings.
Drove a higher margin because we didnt have to.
You know, creating additional overhead.
To to a you know produced that revenue so.
That's why it's important.
To keep building in San Juan.
Because the overhead leverage is significant and as a tremendous impact on the bottom line. So because January February were so strong and we sold quite a few more homes than we expected to we were able to close those than you know and produce a better gross margin. So Mike every looking.
Year over year Q1 to Q1 of that 330 that imprimis about E better that increased leverage from the higher volume. The rest of that is a combination of what we talked about which is our ability to increase pricing that stream that he talked about coming into the quarter, but also those cost efficient easy.
And improving our processes in our product because we've been talking back for the last couple of years. So the culmination of all that.
He became having clothing in Q1, so again not threethirty.
Mostly comprised France improved processes and cost reductions, although there is 80 beds in their spend that overhead leveraging for any additional volume.
Okay. Thank you.
Oh excuse me. Thank you. Our next question is coming from Jade Rahmani of KBW. Please go ahead.
Good morning. This is actually Ryan Thomas Allen on for Jade. Thanks for taking the questions that was wondering if you're seeing any early indications for potential increase in acquisition opportunities across the landscape and you know, including large scale M&A in the market.
No no no one's look acquisition you know the know a pandemic.
And then.
I don't think many builders.
Inclined to be selling right now unless they're looking for a lifeline.
So.
Short answer is no.
Okay. And then you know are are you seeing any preliminary signs in your markets today of increasing demand as a result of specifically that pandemic from multifamily renters.
I think it's too early to tell I mean, we believe long term that people are going to want to own a home they're going to want to be in the suburbs are going to want to socially distance you know not live in a take orders. We think we're going to get influx of people from the from the from a high density cities to move out to the Sunbelt, we'll rebuild.
But you know we're just we're only a few weeks into this thing.
You can't really.
Take any trends way from this based upon anecdotal evidence yet it's too early.
Okay.
Next question operator.
Our next question is coming from.
Third housing Research Center. Please go ahead.
Yes. Thanks [laughter]. Thanks Hope you guys are well.
I wanted to ask about.
How much is your bill time being affected by social distancing and all that stuff.
Yes, thanks houses bleak.
The first thing I would say, it's not getting any worse.
In fact, I would tell you that we're seeing more effective construction activity.
We think thats largely attributed to perhaps being a central service being carved out. This is what the trade crews are performing at a very high level right now they're getting to the job site faster they have less other work to do that the distraction.
Supply chains are moving effectively at this point and so we're building houses probably faster than we ever have right now because of all those reasons and our cycle times are still extremely tight I think we are seeing a little bit of a lag with permits and things like that but it's nothing too big and were.
Certainly making that up on the bill time, the actual vertical build time. So you know again I think it'll start to unwind over time, but I would tell you. The trade crews are performing the best I've ever seen in the last you know five to 10 years, it's been such a struggle and right now they're executing at extremely high low.
Yes, I'd say, Alex we're doing big builder friends early in the pandemic shutdown construction.
And those crews came over to our job site and you know so again, we double up and to ensure that come on over let's let's get some more stuff bill so.
You know those guys are reading the paper to and they're very nervous and they're working hard to maintain their their share as well.
That's good to hear.
The other question as Steve you set your you're not going let anybody else I guess, you're going to be aggressive.
Now, let others or take your market share. So my question is how much flexibility does each individual sales person have.
On getting a sale done in other words do they have some pull of money that.
They can work on incentives or do they need to check more you know all the way up to you guys.
I guess I'm trying to understand how centrally controlled the tales and incentives arbors instead of each sales person have their own kind of flexibility I'm just trying to get any you don't get the sale done regardless of what it takes.
Obviously, they have a little bit of pocket discretion, but.
We control things.
Locally at the Division office to the regional leadership and centrally corporate so you know that's our job at least job you monitors that every day.
He has a hands on the wheel. These these former levers as needed.
And.
We don't have a delay a reacting to what's happening on the ground.
And I mean, we rarely go into an environment, where salespeople are empowered to just get.
Buyers on paper at whatever cost had we're certainly a long ways from that does not how we operate.
Okay and my last question is if you go to Oh communities that.
Maybe haven't had a sale for for a few weeks or what's the trigger take time to reevaluate your incentive or your pricing how many we couldn't equal they'll buy.
Without seeing any activity before you need to cannot we look.
That's a little too granular I don't think we're going to talk about that but clearly we have we're not showing houses somewhere for whatever the reason is that could be multiple reasons. It could be something with a salesperson it could be something wrong with the primary can be a rational with the competition is doing.
Cetera.
We're going to as we're going to send the Swat team in their figure out what the problem is.
You are making adjustments accordingly, but we don't I'm not I can't tell you a formula.
After three weeks, if we're going to slash the price.
Function that way.
Okay, Thanks, and best of luck for this year, thanks, Alex they will.
Operator, I think we're getting close to the and do we have any more questions may take one more first time for one last question, which will be from 12% of Goldman Sachs. Please go ahead.
Hey, good morning, gentlemen, I'm, calling for Susan today. My first question is can you discuss different trends that you're seeing on the labor and material costs through April and if you believe these could provide detailed went to the margins in 2020, assuming a weaker demand environment.
I would say the.
We haven't had a price increases in April or cost increases from our trade base.
Certainly we did experience some in March but it's been more muted.
I do think with the low price of oil.
We will.
Be able to get some price concessions going forward cost concessions as you say from our trade today.
And I also believe the lumber is.
We have a lot of lumber contracts expiring.
Tomorrow, and we're going to be renewing those contracts, we believe that lower.
Lower Ah.
At lower lower lower cost, maybe 10% to 20% lower.
A certain geography is of course more than others and others less than others.
But I think the.
The cost environment.
It's become more favorable for us and for builders moving forward.
Okay. Thank you Thats very helpful.
I would like to go back a little bit more on the DNA and obviously, even if you don't hit your 10% target for the year do you give us a sense of like where things could go on the as Ginny for each year and where do you expect.
To trend overall for the year.
Well that would be guidance, we're not we're not we're not giving guidance. So I don't I don't I don't know how to really to respond to that this.
We can't we can.
That percentage is a function of revenue and we're not giving out revenue numbers. The only thing below staying within a couple times during their prepared remarks is we're pulling back dramatically on non essential discretionary spend so we're going to be controlling costs very tightly but the revenue piece is still markese I don't think we're prepared to provide any guidance on that.
And I am.
Okay. That's helpful.
Okay. Thank you. So that concludes our question and answer on prepared remarks today. We appreciate everybody come in joining our call. We hope you stay well and navigate through this crisis and come on his side. So we'll look forward to talk me again next quarter. Thank you very much no great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.
[music].