Q2 2020 Hovnanian Enterprises Inc Earnings Call
[music].
[laughter] Minion enterprises' fiscal 2022nd quarter earnings Conference call.
An archive of the webcast will be available after the completion of the call.
And ran for 12 months. This conference is being recorded or rebroadcast and all participants are currently in listen only mode.
It will make some opening remarks about the second quarter results and then open the line for questions. The company will also be won't casting a slide presentation.
Along with the opening comments from management. The slides are available on the Investor page of the company's website at Www Dot Cage Auvi Dot com.
Those listeners who would like to follow along Chanel log onto the website.
I'd now like to turn the call over to Jeff O'keefe, Vice President Investor Relations. Jeff. Please go ahead.
Thank you Alan Thank you all for participating this morning conference call to review the results for second quarter, which ended April Thirtyth 2020, all statements on this conference call that are not historical facts should be considered as forward looking statement during the meeting of the safe Harbor provisions.
The private skewed Securities Litigation Reform Act of 1995.
Such statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements of the company to be materially different from any future results performance or achievements expressed or implied by the forward looking statements such forward. Looking statements include but are not limited to statements related to the company's goals and expectations with respect its financial results for future.
Financial periods, although we believe that our plans intentions and expectations reflected in or suggested by such forward looking statements are reasonable we can give no assurance as such plans intentions or expectations will be achieved by their nature forward looking statements speak only as of the date fair made are not guarantees of future performance or results and are subject to risks uncertainties.
And assumptions that are difficult to predict or quantify therefore actual results could differ materially and virtually from those forward looking statements. As a result of a variety of factors such risks uncertainties and other factors are described in detail in the sections entitled risk factors and management's discussion and analysis, particularly the portion of Mdna entitled Safe Harbor statement.
And our annual report on form 10-K for the fiscal year ended October 30, Onest 2019, and subsequent filings with the Securities Exchange Commission.
Otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information future events changed circumstances or any other reason joining me today, our Ara Hovnanian, Chairman, President and CEO, Larry Sorsby Executive Vice President and CFO.
Brad O'connor Senior Vice President Chief Accounting Officer, and Treasurer, I'll now turn the call over to Ara Ara. Please go ahead.
Thanks, Jeff I hope that all of you and your family's remains safe and healthy during these challenging times.
I'd say the least the cobot 19 events of the past several months have been unprecedented and the impact the buyers will have on the economy in the industry over the long term is difficult to predict.
Im going to address the current market environment, including the steps we have taken to navigate these unprecedented times and then review our second quarter results as usual Larry Sorsby will follow me with more detail and we'll have an opportunity for Q1 day.
Gobain, it's changed the way, we do almost everything.
Our primary focus throughout the past several months of that pandemic and as we prepare for the future has first and always been the safety and well being of our associates customers and trade partners.
We've had for associates out of approximately 2000 test positive for the virus three of fully recovered in the fourth is quite recent.
I feel good that our safety protocols seem to have been effective in that we have better ratios than the country at large.
From an operations perspective, homebuilding was deemed essential business in virtually all of the markets where we operate.
Our construction sites remained open and our sales offices whereby appointment only.
We implemented CDC and Osha Cobot 19 safety guidelines and protocols throughout the company. However, we asked all of our associates in our corporate divisional mortgage and title offices to work from home during the shutdown.
Im pleased to say, we were extremely well prepared from a systems perspective, and the transition was relatively seamless.
We began the gradual phased reopening of our offices in some states and we look forward to the remaining stake guidelines for reopening.
Warranty work in general was more challenging we cut back on much of the non emergency warranty work.
That was based on requests from customers and from our trades.
Regarding materials, so far we've not seen any major disruptions in our supply chain.
In mid March we instituted a daily call with the presidents of all of our business units on the call. We discuss cobot related challenges and protocols I'm very proud of how our teams were able to perform during these extenuating circumstances.
Given the uncertain economic environment and consistent with many national Homebuilders, we took measures to preserve cash by delaying certain land purchases and land development activity. We also delayed starts on loans sold homes as we will discuss in a moment however, given the strong right.
Recent sales results, we've begun to loosen our purse strings.
Our second quarter was certainly affected by the grown a virus considering the challenging effect that cobot 19 had on the last half of our second quarter. We're pleased with our performance on slide four we compare year over year results for our second quarter.
As you can see in the upper left hand quadrant of the slide total revenues grew 22% to $538 million. During this year's second quarter. The growth was entirely driven by an increase in deliveries as average sales price was essentially the same year over year.
Moving to the upper right hand portion of the slide you can see that our gross margin was up it was 18.2% for the second quarter of 2020 compared to 16.9% during the second quarter of 29 team.
It was also up compared to 17.3% in the first quarter of Twentytwenty.
This was in line with our expectations of improved gross margins for the quarter.
In the lower left hand quadrant of the slide you can see our total SGN a ratio.
Our SJ dollars were down 7%, while revenues were up 22% as a result Rs gionee ratio for the second quarter. This year declined to 10.4% 330 basis points below last year's second quarter.
In the lower right hand quadrant of the slide we show that adjusted EBITDA more than doubled to $52 million this year compared to $24 million in last year's second quarter.
On slide five you can see that for the second quarter, our pretax income which includes slightly higher interest expense was $4 million compared with a 15 million dollar loss last year.
If you ignore the $1.2 million in land charges and loss on extinguishment of debt.
The pretax adjusted income was $5 million for this years second quarter compared with a $13 million loss in the same quarter a year ago.
Now shifting to the current sales environment, it's an understatement to say sales were extremely weak from mid March through mid April.
Slide six shows the number of consolidated contracts on a monthly basis for all seven of the current fiscal year, all seven months of the current fiscal year compared to the same seven months a year ago.
As you can see we were successfully executing our growth plans right through the month of March and we achieved significant year over year increases in contracts each month.
This was followed by March which was the start of the adverse impact cobot 19 had or in our sales.
We had a 16% year over year decline in contracts in March and April contracts were down 31%.
However, we started to see a significant improvement in our sales pace during the last two weeks of the month.
This was followed by a very strong rebound in may with the number of contract increasing 28% year over year for the month.
The 687 contracts in May of 2020 was the highest level of sales for any month since April of 2008.
If you look at contracts per community on a monthly basis as we do on slide seven you can see the similar negative impact cobot 19 header our sales pace in March and April however contracts per community increased 43% in may to 5.3.
Which is the highest contracts per community for a single month since March of 2005.
On slide eight the phenomenal sales in the first half of the quarter were offset by slow sales in the second half of the quarter in the end the poor sales during the peak of the pandemic were enough to result in a 4% year over year decline in contracts for the entire quarter. This broke a streak of four.
Our quarters in a row with double digit year over year increases.
Picture is a little better on a per community basis, which we show on slide nine.
Here you can see that we had 11.3 contracts per community for the second quarter. This year compared to 10.5 last year second quarter, that's an 8% increase year over year.
If you turn to slide 10, you can see another view of contracts per community with longer term trends.
On the left hand side, we show our average annual contracts per community from 97 to 2000 and too.
This was neither a boom or bust period for housing as we've said before we averaged 44 contracts per community during this period.
In the middle of the slide you can see the steady growth in contracts per community for each of the past several years on the right hand side of the slide we show that contracts per community for the trailing 12 months ended April were 40.8 compared to 35.6 a year ago.
While our contract per pace has certainly improved substantially over the last year, we're not add historical norms, let alone.
The market peaks yet.
Fortunately, we invested time and resources in fiscal 2019, establishing the state of the our National call Center.
The call Center is responsible for responding to leads from our website and our digital marketing efforts.
The contributions our call center made prior to Cobot 19, we're steadily increasing.
However, given how quickly the virus changed everything the call centers become a critical component of our recent sales success.
While our communities remained open for sale the majority of in person customer visits to our model homes were set up by appointment only.
The call center supported our ability to swiftly respond to incoming customer leads and their strong preference for virtual rather than in person model home towards during the pandemic shutdown in the months of April and March 41, homebuyers signed the contract without seeing.
The home at all.
The virtual tours and video tests were enough for customers to make a decision to buy one of our homes.
During the months of April and May appointments scheduled by our call center were up 90% year over year almost half of our total contracts in the month of April started from a call central lead there's no doubt that the investments we made in our call center are paying off in the large way I'll now turn it over to Larry.
Resource.
Thank you Sarah we don't typically provide weekly data as it can be quite volatile, but as I walk you through the next four slides you will see the impact cobot 19 had on various traffic and sales metrics on us on a weekly basis on slide 11, we show that the weekly traffic.
Troughed at the end of March and the first couple of weeks in April at roughly 600 units of traffic.
Since that time, we've seen improvements to almost 1500 traffic units per week last week.
Even though it was good to see traffic rebound off the lows. We still have not returned to February as average level of 1700, 10 traffic units, which we show on the far right hand portion of the slot. However, the traffic. We did see was very high quality further our website traffic remained strong through.
The entire shutdown period.
We also saw an increase in cancellation rates turning to slide 12, where you can see similar trend and weekly cancellation rates as a percentage of gross contracts. They peaked in the second full week of April at 46%, but come back down to more normal levels in the high teens in recent weeks.
Interestingly there were four weeks when the weekly cancellation rate were much higher than normal for March 29 through April 19th.
But even in those week.
Absolute number of cancellations didn't change much compared to the period prior to covert 19 shutdown.
However, during those same four weeks, our gross contracts per week declined significantly and that is what caused our cancellation rates to increase.
Slide 13 shows weekly cancellations as a percentage of beginning contract backlog here you can see that while there are some minor weekly ups and downs our backlog cancellation rate remained steady throughout the entire period, we really did not see a large cancellation from our backlog.
On Slide 14, we show weekly net contracts, which have been on the rise for the past seven consecutive weeks.
We have not increased incentives and most of our communities and we've not seen the level of incentives rise and most of our peers communities either we are not discounting home prices in order to drive the improvements in our sales pace, we're just seeing increased market demand.
Turning to slide 15.
This was a good quarter for financial services Division there year over year second quarter pretax earnings increased 30% to $5 million. These improvements were driven by both volume increases and improved operating margins.
Recently, there's been a lot of focus on whether customers can still qualify for a mortgage due to tighter loan underwriting standards and the unprecedented high number of recent job losses.
Whenever there are material changes to mortgage underwriting criteria, our mortgage company scrubs, our contract backlog to see if customers still qualify.
Fortunately the overwhelming majority of our customers still qualified for a mortgage amazingly only 10 of our customers who plan to close in our second quarter had lost their job and no longer qualified.
We entered the pre cobot 19 environment with an extremely strong sales pace.
On the top half slide 16, which show that we had a solid backlog of 2221 homes under contract at the end of the first quarter.
The number of homes in backlog was up 24% and the dollar amount was up 20%.
Notwithstanding the strong deliveries in our second quarter.
And the poor cobot 19 period of sales on the bottom half of the slide you can see that the number of homes in our consolidated contract backlog at the end of the second quarter fiscal 2020 was still 6% higher than it was a year earlier and there was a slight growth in contract backlog dollars.
April Thirtyth 2020, compared to the end of last year's second quarter.
To date.
Most of the customers in our backlog seem very motivated to close on slide 17, you can see that we closed 446 homes in March 2020.
In spite of covet 19, we close more homes in March this year than we closed on bar and both March of 2019 and in February 2020.
When we increase that level and closed 503 homes in April.
Despite the virus our customers clearly still wanted to move into their new homes.
If you turn to slide 18, you can see that our consolidated community count declined by 15 communities from 147 on April Thirtyth 2019 to 132 at the end of April this year.
This decline is due primarily to three factors number one selling through communities faster than we expected prior to the impact of Cobot 19.
Number two and total there were seven community Grand openings that were expected for the second quarter that were delayed some of these delays were due to covert 19, and others were related to normal developer.
Number three we contributed four wholly owned communities into unconsolidated joint ventures during the first quarter of fiscal 2020.
Given the impact of covert 19, and uncertain economic environment going forward similar to our peers. We took measures to preserve cash by delaying certain land purchases land development activity and beginning work on some unsold homes.
Turning to slide 19 in response to covert 19, we reduced our available spec homes from almost 800 at the end of January to just over 600 at the end of April. However, we've really not altered our spec strategy. Much. We had 4.7 spec homes per community at the end of the second.
Quarter, this year, which is consistent with our average at 4.6 spec homes per community since 1997.
During the second quarter fiscal 2020, 49% of our contracts where per spec homes compared to 46% and last year's second quarter clearly thus far during the pandemic demand for quick move in homes has remained strong given this demand we intend to gradually increase our level of spec home.
Comes back to be closer to the 790, we had at the end of our first quarter.
On slide 20, we control 26734 lots or a 4.9 year supply at the end of the second quarter.
In spite of the adverse impact of Cobot 19, we still added 1200 89 newly controlled lots during the second quarter.
After temporarily slowing new land acquisitions due to covert 19, given the recent improvement in demand for our homes. Our land acquisition teams are back in the market sourcing new deals today.
We will remain disciplined to our underwriting standards using current home sales price current home sales pace and current construction costs. If we find land deals that pencil under the self adjusting criteria, we will purchase though.
Turning to slide 21, compared to our peers you can say that we had the third highest percent of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risk. We're pleased to control 60% of our land throughout.
Yes.
Looking at our consolidated communities in the aggregate, including mothballed communities and the $198 million of inventory not owned we have an inventory book value of $1.3 billion net of $194 million of impairments.
Turning now to slide 22, compared to our peers you see that we have the second highest inventory turnover rate for the trailing 12 month period, although we lag NVR industry, leading number turnover number our turns remain 42% higher than the next highest peer below us high inventory turn to our country.
Of our overall strategy.
Another area of discussion as related to our deferred tax asset our deferred tax asset is very significant and because of this fully reserved for by evaluation allowance. It is not currently reflected on our balance sheet. We've taken numerous steps to protect this asset as of April Thirtyth 2020, our deferred tax asset and the.
The aggregate was $597 million, we will not have to pay federal cash income taxes on approximately $1.9 billion of future pretax earnings.
On Slide 23, we show that we ended the second quarter with a shareholders deficit of $495 million. If you add back our valuation allowance as we've done on this slide that our shareholders' equity with their positive $102 million.
As you can see on slide 24, we ended the second quarter with $247 million of liquidity. This is slightly higher than liquidity, and then I'll liquidity target range of $170 million to $245 million and as higher than the $225 million, we had in the previous quarter.
In order to maximize financial flexibility and increase our cash position, we elected to draw in full our 125 million dollar credit facility on March 25.
During the second quarter those funds remained in our bank accounts, which insured the cash was available if we needed. It in late may we regain confidence in the financial markets and repaid our revolver and full.
Turning to slide 25.
On the top of this slide we show our maturity ladder at the end of the first quarter and on the bottom of the slide we show what it looked like at the end of our second quarter in March we extended our debt maturities by exchanging $59 million of our 10% second lien notes due July 2022 into 59 million.
Dollars of our 11 in a quarter percent one of the half lean notes due February 2026, we.
We remain pleased with the debt exchanges, we completed over the past seven months. These steps simplified our balance sheet and extended the maturities on more than $1 billion of our debt. We will continue to analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet.
Given the large unemployment numbers and uncertainty in the economy.
We are with drawing any goals or guidance, we offered in our earlier public comments and we will not be giving any guidance for the next quarter or for the full year now I'll turn it back over to era for some brief closing remarks.
Thanks, Larry.
Given the recent record unemployment levels and indicators of a possible recession, we decided to take the difficult measures to rightsize our organization to prepare for a further for further potential economic slowdown.
This strategy has several components first in April our corporate leaders took a voluntary salary reduction. These pay cuts will remain until we've got a better picture on how the economic recoveries unfolding.
In may we streamlined our organizational structure by transitioning from three homebuilding operation operating groups to too.
Additionally, we're consolidating several business units, resulting in the reduction of Threed divisional offices lastly, given the challenging conditions of the Chicago market for several years, we decided to gradually phase out of that market as we sell through our existing Chicago communities.
Considering these operational changes lose Smith, our chief operating officer is decided to retire effective November thirtyth 2020, his responsibilities will be spread among the senior leaders of our company.
Further we took measures to reduce our overhead through a combination of furloughs and lay offs and other cost reduction measures. We expect these steps to reduce our annualized overhead expenses by approximately $20 million as a result of these steps we expect to take a charge of approximately $3 million for.
Severance and other related expenses in our third quarter fiscal 20.
As the market rebounds from the pandemic, we believe that this new organizational alignment will not allow us to be even more cost efficient and nimble in pursuing our long term growth plans. It should also result in the more rapid repair of our balance sheet.
I want to emphasize that once the adverse impacts of this pandemic are behind us we're confident that even with our more streamlined organizational structure. We can continue to successfully grow.
Before I wrap up I, just want to take a moment to thank all of our associates, whether they be in the field in construction service or sales or the office staff that supports them they've all conduct themselves in the with a level of professionalism, that's absolutely beyond what good about store, especially the way.
Hey, their lives have been turned upside down at their own homes. During these challenging times.
That concludes our prepared comments and we'll now open it up for questions.
The company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to one question and one follow up.
There, which they will have to get back into the queue to ask another question.
We will open the call to questions asked a question let me the press Star one on your telephone to let Jay question Pester Pankey.
NFS question comes.
Alan Ratner with Zelman and associates.
Hey, guys good morning.
For stuff glad to hear your are doing well on that your associated to have recovered so far and.
Graduations on the at a strong bounce back in results so far in May.
Yeah, I guess my first question is and you just thinking about that that rebound that the you and others have seen it is quite remarkable considering where we were six weeks ago. Im curious if if you can kind of drilling a little bit on in terms of your different price points different product types segments is that recovery that.
Bounce back.
Eared more towards the entry level spec product that that I think auditors talked about recovering a bit sooner or have you seen that expanding throughout different segments thinking about active adults thinking about more appear to be built product Im just curious if if that portion of the business has has shown the same type of improvement.
And Thats a good question.
First.
In the beginning our active adult 55, plus communities were slower to recover compared to our other business as you might imagine it was a group that was more at risk. So they were a little more hesitant to get out to the sales offices.
I've got to say that they are that group is really starting to pick up just recently, so I think that will provide a little after burn or growth for us so coming up as they also follow the same home buying inclination that the rest of the market has.
Putting that aside.
I'd say, it's been narrowly.
Consistent at price points and regarding specs I think approximately half of our sales over the last two months have been specs homes that started without a sale and about half were to be built so that part is not dramatically different than.
What we've been seeing historically.
Perfect that's very helpful.
Second question, recognizing this might be a little bit difficult to answer at this point given all the uncertainties, but.
When you made the decision had a difficult decision to to undergo the restructuring there and right size. The overhead obviously it was it was a much different sales environment than we are sitting at today and I think it's obviously uncertain whether that will continue but you mentioned being able to continue to kind of perform at the newer more more lean over.
Overhead structure, but.
Assuming that the economy continues to bounce back and demand returns to levels that we saw pre kobe. It on a fairly sustainable basis going forward, how should we think about the growth opportunity of your business you just thinking about all the various levers you're pulling it is 21 im going to be a tougher to grow because of that.
Even if the market continues to accelerate just thinking about your land both for overheads.
I would say.
I do not feel our growth prospects are hampered whatsoever.
But by the reorganization I mean, we are now going to be a flatter leaner organization I think that makes us a little more nimble and the divisions that were consolidated.
We're divisions that were on the smaller side. So consolidating just makes it more efficient to operate with less overhead.
And the other thing I'll mention is.
A large number of our reductions were furloughed, so if we really belts.
So that it was necessitated by rising demand.
Assuming they have been.
So she a former associates didnt take a job elsewhere.
We have the ability to hire them back but.
While it was a very painful experience it always is to reduce staffing.
I think we're going to be a leaner more efficient company and and will absolutely be able to grow in no way in my mind hampered by the deductions.
Great appreciate that thanks, good luck.
Let's start.
With a little bit.
Because I agree with everything ourselves.
21, the growth opportunities in no way to we believe will be adversely impacted by restructuring decisions, but I do believe for us and the entire industry.
12 at night team is going to have an adverse effect on the industry's ability to grow as much as they would have otherwise grown because during the Calvin 19.
Environment land developers.
Work done land development builders weren't doing land development homebuilders delayed making land acquisitions all of those delays will impact the availability of finished lots that we can complete homes on so I think there will be an impact from from covet 19, it's just not going to be related to.
To the restructuring that we are other builders Doug.
That's a very interesting point. Thank you I appreciate that Larry.
Thank you.
That's fair minded to ask a question you will need to press star one on your telephone.
Your next question comes from Alex Bandwidth housing research. Your line is now open.
Yes. Thank you good morning, guys hope you're all well.
Thanks for taking my question.
Yes, I wanted to ask that gets a number of things if you'll allow me.
The first thing is.
We've obviously seen a pretty remarkable rebounding in sales activity.
And I'm curious what kind of feedback.
Your salespeople are getting is that people, who moved to the sidelines to see what happens in a now just coming back.
Or is there being a.
Some radical change in the mindset of the buyer, meaning like renters, who had no no thought of buying before but now suddenly see an urgency in buying what do you guys think is happening.
Yeah, we're really speculating just as others have speculated in order to answer that question, but I think it's all of the above.
I think there were people that were only cusp of buying right before the shutdown that were.
Back Analysed come into the market. So I think thats a portion of it I think theres also people that have been cooped up in small apartments, whether they'd be in urban areas or whether it be of suburban areas. During the shutdown that say I really don't want to or have to experience that again, so I'm looking at buying a home I think it's also related to the the.
The lower availability of product of used homes in the market lower MLS listings that are available for sale out there and therefore people that are ready to buy can't find what they want on the U.S side and thats, helping the new homebuilders.
And provide products that they're interested in.
And I also believe that had a lot.
With respect to as.
Different states started to be more optimistic about ending the shutdown and letting people gradually phase.
Back into the new normal environment, that's caused optimism and people willing to buy and then lastly, I think the over low interest rates and affordability are encouraging people to buy so I think it's a combination of all of those things.
That are causing.
Better than expected demand.
Yes, Oh Paula.
Just a couple of other anecdotes.
You know when you have people sheltering at home for a few months when you a bundled households, either roommates or people living with their parents. A there is an extra motivation to unbundle and have your own homes and then.
Larry mentioned people have been cooped up.
And.
If you're going to be in your nest for a long time, you really get a chance to look around and think about whether this is where you want to be or if you want to improve your nest. So to speak. So just think it got people to reflect and it really focused on ER on their home.
And their desire of homeownership and the type of home they want.
Got it.
So in the last couple of weeks you guys have.
Shown in your presentation, you you've seen like sales in the mid one seventies.
And is there any reason why that wouldn't be sustainable do you think and just to confirm have you guys.
Increase your incentives or vice versa. If you havent in customer you guys raising prices.
We have not yeah.
Increased our incentives in general at all.
And we are now exploring being a little more aggressive on price increases.
And we gave you the data week by week through May I'll tell you a that June is off to a phenomenal start as well. So we're definitely seeing of the market actually gain momentum right here.
And as Larry mentioned, the key thing, we'll just have to look at all homebuilders is.
We have enough improve log on the ground.
The.
Demand right now.
No as you mentioned developers slowed down challenge was slow in processing land development permits. So during the this pandemic so that will be more of the challenge, but I think that will be short term in that we'll be able to get through that.
Okay.
Mentioned I think.
We still have the overall economy being kind of a dark cloud over us right now.
The stock market is doing brilliantly, which is a forward looking vehicle typically so if anticipating the economy is going to bounce back, but we got to start seeing that unemployment number reduce if that unemployment number doesn't start reducing in the future at some point I do believe that we'll have an adverse.
Effect on the industry's ability to to sustain the current level of sales that we've been seen recently and and as just a cautious off high that we have constantly in the marketplace, we've not seen it yet, but 41 million plus jobs being a people being unemployed.
Yeah, that's that has a huge trickle down negative effect in the economy, if they don't start getting that work again.
Yeah, Hi agreed on that.
One last one if I could on your DTA. So what exactly is the criteria for you guys to be able to reverse it I mean, you've had positive.
Pretax income for the last two years you just posted positive income again this quarter.
It would seem as if the trends continue.
It should be a positive.
Pretax income for the rest of the year. So is there a real chance you could be reversing the DTA sometime in the not so distant future.
You have to be is that.
At a minimum we have been a three year cumulative profit that that's the first threshold, but it has to be substantial profit and can be small amounts of profit that can swing back and forth through a lot.
I would say something that we're certainly monitoring.
Unlikely something would happen physical 20, but if we're able to grow at physical 21, maybe by the end of fiscal 21, we'd be in a position to do that this remains to be seen how we perform.
All right well best of luck guys, thanks and spaces.
Thank you.
Thank you I'm not showing any further questions at this time and I like to turn the call back over to IRA doesn't mean for closing remarks.
Thank you very much.
Needless to say is already started as I stated at the outset. These are extraordinary times and it's not completely clear what the impact is going to be long term at the moment it feels very good.
In terms of home sales people definitely want to NAV. So we're going to do our job to providing the home for people to shelter in.
We'll look forward to giving you an update in the next quarter. Thanks, so much.
This concludes our conference call today. Thank you for participating have a next day all parties may now disconnect.
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Good morning, and thank you for joining us today for <unk> enterprises, let's call it 2022nd quarter earnings Conference call.
An archive of the webcast will be available after the completion of the call Unread for 12 months. This conference is being recorded or rebroadcast then all participants are currently and I'll listen only mode management will make some opening remarks about the second quarter results and then open the line for question. The company will also be casting a slide presents.
Station along with the opening comments from management. The slides are available on then but this page of the company's website at Www Dot Cage O V Dot com.
Those isn't there that would like to follow along Chanel log onto the website I.
I'd now like to turn the call over to Jeff O'keeffe's, Vice President Investor Relations. Jeff. Please go ahead.
Thank you Alan Thank you all for participating in this morning's conference call to review the results first second quarter, which ended April Thirtyth 2020, all statements on this conference call that are not historical facts should be considered as forward looking statement.
Meeting of the Safe Harbor provisions.
The private skewed Securities Litigation Reform Act of 1995.
Such statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements at the company to be materially different from any future results performance or achievements expressed or implied by the forward looking statement.
Such forward looking statements include but are not limited to statements relating to the company's goals and expectations with respect its financial results for future financial period.
Although we believe it or plans intentions and expectations reflected in or suggested by such forward looking statements are reasonable we can give no assurance as such plans intentions or expectations will be achieved by their nature forward looking statements speak only as of the date. There made are not guarantees of future performance or results and are subject to risks uncertainties and assumptions that are difficult to predict.
Extra quantify therefore actual results could differ materially had firstly from those forward looking statements as a result in a variety of factors such risks uncertainties and other factors are described in detail in the sections entitled risk factors and management's discussion and analysis, particularly the portion of Mdna entitle Safe Harbor statement and our annual report.
Form 10-K for the fiscal year ended October 31st 2019, and subsequent filings with the Securities Exchange Commission.
Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information future events changed circumstances or any other recent joining me today, our Ara Hovnanian, Chairman, President and CEO, Larry Sorsby Executive Vice President and CFO.
And Brad O'connor Senior Vice President, Chief Accounting Officer, and Treasurer, I'll now turn the call over to our Ara. Please go ahead.
Thanks, Jeff I hope that all of you and your family's remain safe and healthy during these challenging times.
To say the lease the cobot 19 events of the past several months have been unprecedented and the impact the buyers will have on the economy in the industry over the long term is difficult to predict.
Going to address the current market environment, including the steps we've taken to navigate these unprecedented times and then review our second quarter results as usual Larry Sorsby will follow me with more detail and we'll have an opportunity for Q1 day.
Covidien has changed the way we do almost every day.
Our primary focus throughout the past several months of the pandemic and as we prepare for the future has first and always been the safety and well being of our associates customers and trade partners.
We've had for associates out of approximately 2000 test positive for the virus three of fully recovered in the fourth is quite recent.
I feel good that our safety protocols seem to have been effective in that we have better ratios than the country at large.
From an operations perspective, homebuilding was deemed an essential business in virtually all of the markets where we operate.
Construction sites remained open and our sales offices whereby appointment only.
We implemented CDC and Osha Cobot 19 safety guidelines and protocols throughout the company. However, we asked all of our associates in our corporate divisional mortgage and title offices to work from home during the shutdown.
Im pleased to say, we were extremely well prepared from assistance perspective, and the transition was relatively seamless.
We've begun the gradual based reopening of our offices in some states and we look forward to the remaining state guidelines for reopening.
Warranty work in general is more challenging we cut back on much of the non emergency warranty work that was based on request from customers and from our trades.
Regarding materials, so far we've not seen any major disruptions in our supply chain.
In mid March we instituted or to daily call with the presidents of all of our business units on the call, we discussed cobot related challenges and protocols.
I'm very proud of how our teams were able to perform during these extenuating circumstances.
Given the uncertain economic environment and consistent with many national Homebuilders, we took measures to preserve cash by delaying certain land purchases and land development activity.
We also delayed starts on on sold homes as will discuss in a moment. However, given the strong recent sales results, we've begun to loosen our purse strings.
Our second quarter was certainly affected by the growing a virus considering the challenging effect that cobot 19 had on the last half of our second quarter. We're pleased with our performance on slide four we compare year over year results for our second quarter.
As you can see in the upper left hand quadrant of the slide total revenues grew 22% to $538 million. During this year's second quarter growth was entirely driven by an increase in deliveries as average sales price was essentially the same year over year.
Moving to the upper right hand portion of the slide you can see that our gross margin was up it was 18.2% for the second quarter of 2020 compared to 16.9% during the second quarter of 29 team.
It was also up compared to 17.3% in the first quarter of Twentytwenty.
This was in line with our expectations of improved gross margins for the quarter.
In the lower left hand quadrant of the slide you can see our total SGN a ratio.
Our SJ dollars were down 7%, while revenues were up 22% as a result, our SDMA ratio for the second quarter. This year declined to 10.4% 330 basis points below last year's second quarter.
In the lower right hand quadrant of the slide we show that adjusted EBITDA more than doubled to $52 million this year compared to $24 million in last year second quarter.
On slide five you can see that for the second quarter, our pretax income which includes slightly higher interest expense was $4 million compared with a 15 million dollar loss last year.
If you ignore the $1.2 million in land charges and loss on extinguishment of debt.
The pretax adjusted income was $5 million for this years second quarter compared with a 13 million dollar loss in the same quarter a year ago.
Now shifting to the current sales environment, it's an understatement to say sales were extremely weak from mid March through mid April.
Slide six shows the number of consolidated contracts on a monthly basis for all seven of the current fiscal year, all seven months of the current fiscal year compared to the same seven months a year ago.
You can see we were successfully executing our growth plans right through the month of March and we achieved significant year over year increases in contracts each month.
This was followed by March which was the start of the adverse impact Kogut 19 had or in our sales.
We had a 16% year over year decline in contracts in March.
In April contracts were down 31%.
However, we started to see a significant improvement in our sales pace during the last two weeks of the month.
This was followed by a very strong rebound in may with the number of contract increasing 28% year over year for the month.
The 687 contracts in May of 2020 was the highest level of sales for any month since April of 2008.
If you look at contracts per community on a monthly basis as we do on slide seven you can see the similar negative impact cobot 19 header our sales pace in March and April however contracts per community increased 43% in may to 5.3.
Which is the highest contracts per community for a single month since March of 2005.
On slide eight the phenomenal sales in the first half of the quarter were offset by slow sales in the second half of the quarter in the end the poor sales during the peak of the pandemic were enough to result in a 4% year over year declining contracts for the entire quarter. This broke as streak of four.
Our quarters in a row with double digit year over year increases.
Picture is a little better on a per community basis, which we show on slide nine.
Here you can see that we had 11.3 contracts per community for the second quarter. This year compared to 10.5 last year second quarter, that's an 8% increase year over year.
If you turn to slide 10, you can see another view of contracts per community with longer term trends.
On the left hand side, we show our average annual contracts per community from 97 to 2000 and too.
This was neither a boom or bust period for housing as we've said before we averaged 44 contracts per community during this period.
In the middle of the slide you can see the steady growth in contracts per community for each of the past several years on the right hand side of the slide we show that contracts per community for the trailing 12 months ended April were 40.8 compared to 35.6 a year ago.
While our contract for pace has certainly improved substantially over the last year, we're not at historical norms, let alone.
The market peaks yet.
Fortunately, we invested time and resources in fiscal 2019, establishing the state of the art National Call Center.
The call Center is responsible for responding to leads from our website and our digital marketing efforts.
The contributions our call center made prior to Cobot 19, we're steadily increasing.
However, given how quickly the virus changed everything the call center has become a critical component of our recent sales success.
While our communities remained open for sale the majority of in person customer visits to our model homes were set up by appointment only.
The call centers supported our ability just swiftly respond to incoming customer leads and their strong preference for virtual rather than in person model home towards during the pandemic shutdown.
In the months of April and March 41, Homebuyers signed a contract without seeing the home at all.
The virtual tours and video chat is where enough for customers to make a decision to buy one of our homes.
During the months of April and May appointments scheduled by our call center were up 90% year over year almost half of our total contracts in the month of April started from a call center lead Theres no doubt that the investments we made in our call center are paying off in the large way I'll now turn it over time.
Resource.
Thank you Sarah we don't typically provide weekly data as it can be quite volatile, but as I walk you through the next four slides you will see the impact covet 19 had on various traffic and sales metrics on us on a weekly basis.
On slide 11, we show that the weekly traffic trough at the end of March and the first couple of weeks in April at roughly 600 units of traffic since that time, we've seen improvements to almost 1500 traffic units per week last week.
Even though it was good to see traffic rebound off the lows, we still at not return to February as average level of 1700, 10 traffic units, which we show on the far right hand portion of the slot. However, the traffic we did see what's very high quality further our website traffic remained strong through the end.
Tire shutdown period.
We also saw an increase in cancellation rates turning to slide 12, where you can see similar trend and weekly cancellation rates as a percentage of gross contracts. They peaked in the second full week of April at 46%, but have come back down to more normal levels in the high teens in recent weeks.
Interestingly there were four weeks when the weekly cancellation rate were much higher than normal from March 29 through April 19th but even in those.
Absolute number of cancellations didn't change much compared to the period prior to covert 19 shutdown. However, during those same four weeks aren't gross contracts per week declined significantly and that is what caused our cancellation rates to increase.
Slide 13 shows weekly cancellations as a percentage of beginning contract backlog.
There you can see that while there are some minor weekly ups and downs, our backlog cancellation rate remained.
Daddy throughout the entire period, we really did not see a large cancellation from our backlog.
On Slide 14, we show weekly net contracts, which have been on the rise for the past seven consecutive weeks.
We have not increased incentives that most of our communities and we've not seen the level of incentives rise and most of our peers communities either we are not discounting home prices in order to drive the improvements in our sales pace, we're just seeing increased market demand.
Turning to slide 15.
This was a good quarter for financial services Division there year over year second quarter pre tax earnings increased 30% to $5 million. These improvements were driven by both volume increases and improved operating margins.
Recently, there's been a lot of focus on whether customers can still qualify for a mortgage due to tighter loan underwriting standards and the unprecedented high number of recent job losses.
Whenever there are material changes the mortgage underwriting criteria, our mortgage company scrubs, our contract backlog to see if customers still qualify.
Fortunately the overwhelming majority of our customer still qualified for a mortgage.
Amazingly only 10 of our customers who plan to close in our second quarter had lost their job and no longer qualify.
We entered the pre cobot 19 environment with an extremely strong sales pace.
On the top half slide 16 will show that we had a solid backlog of 2221 homes under contract at the end of the first quarter.
The number of homes in backlog was up 24% and the dollar amount was up 20%.
Notwithstanding the strong deliveries in our second quarter.
And the poor covert 19 period of sales on the bottom half of the slide you can see that the number of homes in our consolidated contract backlog at the ended the second quarter fiscal 2020 was still 6% higher than it was a year earlier and there was a slight growth in contract backlog dollars that.
April Thirtyth 2020, compared to the end of last year's second quarter.
Today.
Most of the customers than our backlog seem very motivated to close on slide 17, you can see that we closed 446 homes in March 2020.
In spite of covert 19, we close more homes in March this year than we closed end bar and both March of 2019 and in February 2020, then we increase that level and closed 503 homes in April.
Despite the virus our customers clearly still wanted to move into their new homes.
If you turn to slide 18, you can see that our consolidated community count declined by 15 communities from 147 on April Thirtyth 2019 to 132 at the end of April this year.
Decline is due primarily to three factors number one selling through communities faster than we expected prior to the impact of Cobot 19.
Number two and total there were seven community Grand openings that were expected for the second quarter that were delayed some of these delays were due to covert 19, and others were related to normal developer.
Number three we contributed four wholly owned communities and the unconsolidated joint ventures during the first quarter fiscal 2020.
Given the impact of covert 19, and uncertain economic environment going forward similar to our peers. We took measures to preserve cash by delaying certain land purchases land development activity and beginning work on some unsold homes.
Turning to slide 19 in response to covert 19, we reduced our available spec homes from almost 800 at the end of January to just over 600 at the end of April However, we really not altered our spec strategy. Much we had 4.7 spec homes per community at the ended the second.
Quarter, this year, which is consistent with our average of 4.6 spec homes per community sets 1997.
During the second quarter fiscal 2020, 49% of our contracts where perspective homes compared to 46% in last year's second quarter, clearly thus far during the pandemic demand for quick move into homes has remained strong given this demand we intend to gradually increase our level of spec home.
Back to be closer to the 790, we had at the end of our first quarter.
On slide 20, we control 26734 lots or a 4.9 year supply at the end of the second quarter.
Despite the adverse impact of covert 19, we still added 1200 89 newly controlled lots during the second quarter.
After temporarily slowing new land acquisitions due to covert 19, given the recent improvement in demand for homes. Our land acquisition teams are back in the market sourcing new deals today.
We will remain disciplined to our underwriting standards using current home sales price current home sales pace and current construction cost if we find land deals that pencil under the self adjusting criteria, we will purchase though.
Turning to slide 21, compared to our peers you can say that we had the third highest percent of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risk. We're pleased to control 60% of our land through ops.
Yes.
Looking at our consolidated communities in the aggregate, including mothballed communities and the $198 million of inventory not owned we have an inventory book value of $1.3 billion net of $194 million of impairments.
Turning now to slide 22, compared to our peers you see that we have the second highest inventory turnover rate for the trailing 12 month period, although we lag NVR industry, leading number turnover number our turns remained 42% higher than the next highest peer below us high inventory turns are a key component.
Of our overall strategy.
Another area of discussion as related to deferred tax assets are deferred tax asset is very significant and because of this fully reserved for by evaluation allowance. It is not currently reflected on our balance sheet. We've taken numerous steps to protect this asset as of April Thirtyth 2020, our deferred tax asset and the.
Aggregate was $597 million, we will not have to pay federal cash income taxes on approximately $1.9 billion of future pre tax earnings.
On Slide 23, we show that we ended the second quarter with a shareholders deficit of $495 million as you add back our valuation allowance as we've done on this line than our shareholders' equity with their positive $102 million.
As you can see on slide 24, we ended the second quarter with $247 million of liquidity. This is slightly higher than the liquidity and then I'll liquidity target range of 170 $245 million and as higher than the $225 million, we had in the previous quarter.
In order to maximize financial flexibility and increased our cash position, we elected to draw and full our 125 million dollar credit facility on March 25th.
During the second quarter those funds remained in our bank accounts, which insured the cash was available if we needed. It in late may we regain confidence in the financial markets and repaid our revolver and full.
Turning to slide 25.
On the top of this slide we show our maturity ladder at the end of the first quarter and on the bottom of the slide we show what it looked like at the end of our second quarter in March we extended our debt maturities by exchanging $59 million of our 10% second lien notes due July 2022 into 59 million.
Dollars of our 11 in a quarter percent, one and a half lean notes due February 20 to 26, we.
We remain pleased with the debt exchanges, we completed over the past seven months. These steps simplified our balance sheet and extended the maturity is on more than $1 billion of our that we will continue to analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet.
Given the large unemployment numbers and uncertainty in the economy.
We are with drawing any goals or guidance, we offered in our earlier public comments and we will not be giving any guidance for the next quarter or for the full year now I'll turn it back over to era for some brief closing remarks.
Thanks, Larry.
Given the recent record unemployment levels and indicators of a possible recession, we decided to take the difficult measures to rightsize our organization to prepare for a further for further potential economic slowdown.
This strategy has several components first in April our corporate leaders took a voluntary salary reduction. These pay cuts will remain until we've got a better picture on how the economic recovery is unfolding.
In may we streamlined our organizational structure by transitioning from three homebuilding operation operating groups to too.
Additionally, we're consolidating several business units, resulting in the reduction of Threed divisional offices lastly, given the challenging conditions of the Chicago market for several years, we decided to gradually phase out of that market as we sell through our existing Chicago communities.
Considering these operational changes lewd Smith, our chief operating officer is decided to retire effective November Thirtyth 2020.
His responsibilities will be spread among the senior leaders of our company.
Further we took measures to reduce our overhead through a combination of furloughs and lay offs and other cost reduction measures.
We expect these steps to reduce our annualized overhead expenses by approximately $20 million as the result of these steps we expect to take a charge of approximately $3 million for severance and other related expenses in our third quarter fiscal 20.
As the market rebounds from the pandemic, we believe that this new organizational alignment will not allow us to be even more cost efficient and nimble and pursuing our long term growth plans. It should also result in the more rapid repair of our balance sheet.
I want to emphasize that once the adverse impacts of this pandemic are behind us we're confident that even with our more streamlined organizational structure. We can continue to successfully grow.
Before I wrap up I, just want to take a moment to thank all of our associates, whether they be in the field in construction service or sales or the office staff that supports them they've all conduct themselves in the with a level of professionalism that's absolutely beyond what we could have asked for especially the way.
Hey that our lives have been turned upside down at their own homes. During these challenging times.
That concludes our prepared comments and we'll now open it up for questions.
The company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to one question and one follow up.
Which they will have to get back into the queue to ask another question.
We will open the call to questions asked a question let me at the press Star one on your telephone to withdraw your question press the pound key.
And our first question comes.
Alan Ratner with Zelman and associates.
Hey, guys good morning.
For stuff glad to hear your are doing well and that your associates have recovered so far and.
Graduations on the at a strong bounce back and results so far in May.
Yes, I guess my first question is.
Just thinking about that that rebound that you and others have seen it is quite remarkable considering where we were six weeks ago.
I'm curious if if you can kind of drilling a little bit on in terms of your different price points different product types segments is that recovery that bounce back.
Geared more towards the entry level spec product that that I think ought to build has talked about recovering a bit sooner or have you seen that expanding throughout different segments thinking about active adults thinking about more of your to be built product I'm. Just curious if if that portion of the business has has shown the same type of improvement.
Thats a good question.
First.
In the beginning our active adult 55, plus communities were slower to recover compared to our other business as you might imagine it was a group that was more at risk there were a little more hesitant to get out to the sales offices.
I've got to say that they are that group is really starting to pick up just recently, so I think that will provide a little after burn or growth for us coming up as they also follow the same home buying inclination that the rest of the market has.
Putting that aside.
I'd say, it's been fairly consistent at price points and regarding specs I think approximately half of our sales over the last two months have been spec.
Homes that started without a sale and about half were to be built so that part is not dramatically different than what we've been seeing historically.
Perfect that's very helpful.
Second question, recognizing this might be a little bit difficult to answer at this point given all the uncertainties, but.
When you made the decision had a difficult decision to to undergo the restructuring there and right size. The overhead obviously you as it was a much different sales environment than we are sitting at today and I think it's obviously uncertain whether that will continue but you mentioned being able to continue to kind of perform at the newer more more lean.
Overhead structure, but.
Assuming that the economy continues to bounce back end demand returns to the levels that we saw pre co bid on a fairly sustainable basis going forward, how should we think about the growth opportunity of your business can you just thinking about all the various levers you're pulling his 21 im going to be a tougher to grow because of that.
Even if the market continues to accelerate just thinking about your plan. Both your overhead et al and I would say it I do not feel our growth prospects are hampered whatsoever.
But by the reorganization I mean, we are now going to be a flatter leaner organization I think that makes us a little more nimble and the divisions that were consolidated.
We're divisions that were on the smaller side.
So consolidating just makes it more efficient to operate with less overhead.
And the other thing I'll mention is.
A large number of our reductions were furloughed, so if we really belt.
That was necessitated by rising demand.
Assuming they have been our associate former associates Didnt take a job elsewhere.
We have the ability to hire them back but.
While it was a very painful experience it always is to reduce staffing.
I think we're going to be a leaner more efficient.
Anthony and and will absolutely be able to grow in no way in my mind hampered by the reductions.
Great appreciate that thanks, good luck.
I'm sorry.
A little bit.
Because I agree with everything ourselves.
21, the growth opportunities in no way do we believe will be adversely impacted by restructuring decisions, but I do believe for us and the entire industry.
Opened 19 is going to have an adverse effect on the industry's ability to grow as much as they would have otherwise grown because during the Calvin 19.
Environment land developers.
Work done land development builders weren't doing land development homebuilders delayed making land acquisitions all of those delays will impact the availability of finished lots that we can complete homes on so I think there will be an impact from from cobot 19, it's just not going to be related to.
The restructuring that we are other builders have done.
Thats a very interesting point. Thank you I appreciate that Larry.
Thank you.
Minded to ask a question you'll need to press star one on your telephone.
Next question comes from Alex Barron with housing Research. Your line is now open.
Yes. Thank you good morning, guys hope you're all well.
Thanks for taking my question.
Yes, I wanted to ask that gets a number of things if you'll allow me.
The first thing is.
We've obviously seen a pretty remarkable rebound in sales activity.
I'm curious what kind of feedback.
Your salespeople are getting is that people, who moved to the sidelines to see what happens in announced just coming back.
Or is there being a.
Some radical change in the mindset of the buyer, meaning like renters, who had no.
No thought of buying before but now suddenly see an urgency in buying what do you guys think is happening.
Yes, we're really speculating just as others have speculated in order to answer that question, but I think it's all of the above.
There were people that were only cusp of buying right before the shutdown that were.
Pull back and that would come into the market. So I think thats a portion of it I think theres also people that have been cooped up in small apartments, whether they'd be in urban areas or whether they have suburban areas. During the shutdown that say I really don't want to or have to experience that again, so I'm looking at buying a home I think it's also related to.
The lower availability of product of used homes in the market lower MLS listings that are available for sale out there and therefore people that are ready to buy can't find what they want them to use side and thats, helping.
New homebuilders.
And provide products that theyre interested and.
And I also believe that had a lot.
With respect to as different state started to be more optimistic about ending the shutdown and letting people gradually phase.
Back into the new normal environment, that's caused optimism and people willing to buy and then lastly, I think over low interest rates.
Affordability are encouraging people to buy so I think it's a combination of all of those things.
That are causing.
Yes.
Better than expected demand.
Yeah, I'll, let Paul and.
Just a couple of other anecdotes.
You know.
When you have people sheltering at home for a few months when you have a bundled households, either roommates or people living with their parents.
There is an extra motivation to unbundle and heavier on home and then.
Larry mentioned people have been cooped up.
And.
If you're going to be in your nest for a long time, you really get a chance to look around and think about whether this is where you want to be.
If you want to improve your net so to speak so just think it got people to reflect and have really focused on.
On their home and their desire of homeownership and the type of home they walk.
Got it.
So in the last couple of weeks you guys have have shown in your presentation you you've seen like sales in the mid one seventies.
Is there any reason why that wouldn't be sustainable do you think and just to confirm have you guys increased your incentives or vice versa.
Having customer you guys raising prices.
We have not.
Increased our incentives in general at all.
And we are now exploring being a little more aggressive on price increases.
And we gave you the data week by week through May I'll tell you that June is off to a phenomenal start as well. So we're definitely seeing the market actually gain momentum right here.
As Larry mentioned the key thing, we'll just have to look at all homebuilders is.
We have enough improve log on the ground.
[music].
Demand right now.
As you mentioned developers slowed down towns was slow and processing land development permits. So during the this pandemic so that will be more of the challenge, but I think that will be short term in that we'll be able to get through that.
Okay.
Mentioned I think we still have the overall economy being kind of a dark cloud over us right now.
Stock market is doing brilliantly, which is a forward looking vehicle typically so if anticipating the economy is going to bounce back, but we got to start saying that unemployment number reduce if that unemployment number doesn't start reducing in the future at some point I do believe that we'll have an adverse.
Effect on the industry's ability to sustain the current level of sales that we've seen recently and that's just a cautious on high that we have constantly in the marketplace, we've not seen it yet, but 41 million plus jobs then.
Our people being unemployed.
That has a huge trickle down negative effect in the economy, if they don't start getting that work again.
Yeah, Hi agreed on that.
One last one if I could on your DTA. So what exactly is that criteria for you guys to be able to reverse it I mean, you've had positive.
Pretax income for the last two years you just posted positive income again this quarter.
It would seem as if the trends continue.
Shouldn't be a positive.
Pretax income for the rest of the year so.
There are real chance you could be reversing the DTA sometime in the not so distant future.
You have to be it add.
Got a minimum we have been a three year cumulative profit that's the first threshold, but it has to be substantial profit and can be small amounts of profit I can swing back and forth through a lot.
I would say something that we're certainly monitoring unlikely something would happen physical 20, but if we're able to grow in physical 21, maybe by the end of fiscal 21 way being positioned to do that does remains to be seen how we perform.
All right well best of luck guys, thanks and spaces.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to IRA lending for closing remarks.
Thank you very much.
Needless to say is.
Started as I stated at the outset these are extraordinary times and.
It's not completely clear what the impact is going to be long term at the moment it feels very good.
In terms of home sales people definitely want to nest. So we're going to do our job to providing the home for people to shelter in.
Well look forward to giving you an update in the next quarter. Thanks, so much.
I.
The conference call today. Thank you participating have a next day all parties may now disconnect.