Q2 2020 Meritage Homes Corp Earnings Call
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This time, all participants are in 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. Please note that this conference is being recorded.
I'll now turn the conference over to our hosts Brett <unk> Anderson, Vice President of Investor Relations. Thank you you may begin.
Thank you Dave.
Good morning, and welcome to our analyst told to discuss our second quarter in first half 2020 results. We issued a press release yesterday after market closed and you can find it along with the slides will be referring to during this call on our website and investors that meritage homes that by supporting the Investor Relations.
The bottom of the home page.
Turning to slide two.
Well I caution you that any statements made during this call is what was the press release in the accompanying slides contain forward looking statements, including but not limited to our views regarding the health of the housing market.
Central adverse impacts related to the cope with 19 pandemic and the second wave sections.
Community count absorption.
Rejected third quarter and full year upon closing your revenue gross margins <unk> expenses tax rates and diluted earnings per share.
Well as economic conditions than others.
The old than any other projections represent the current opinions of management, which are subject to change it anytime.
Assumes no obligation to update them.
Any forward looking statements are inherently uncertain.
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 well as in our press release and our most recent filings with the Securities and Exchange Commission.
2019 annual report on form 10-K, and quarterly reports on forms 10-Q.
Which contain a more detailed discussion of those right.
We've also provided reconciliations of certain non-GAAP financial measures referred to in our press release as compared to their closely related GAAP measures.
Our speakers today or do you <unk>, chairman and CEO of Meritage homes, Heedless, Bruise Executive Vice President CFO.
And he loved our Felipe Lord Executive Vice President and Chief operating Officer.
We expect called the last about an hour and a replay will be available on our website within approximately an hour after we conclude.
We will remain active through August six.
I'll now turn it over to Mr. help me to review our second quarter Steve.
Thank you, Brad let me walk up or display our commentary and hope that you're saying Wow.
It's hard to believe that just three months ago, we were discussing the sharp drop in March orders due to the nationwide shutdowns in tend to slow the spread of the covert 19 and today will discuss a record orders for the second quarter in demand for homes.
But even surprised us.
It's been able to normal spring selling season, I can't remember those I'm like this and all my 35 years, we meritage.
I'll review some of the highlights of the quarter and explain what we believe is driving our success and how we're positioned for continued earnings growth.
I'll preface it by saying the one of the markets probably battery homebuilders, we believe our strategy and execution will continue to place meritage among the best performing homebuilders to well start with twice before.
Well report.
Before we are down just 15%.
Which was less than we had projected just a few weeks earlier.
Look like May worse could meet or beat May have 19.
We ended up set an all time record of made for a single month orders. So only the toll of 1320 homes.
Which we then surpassed the June with a new record of over 15 Hunter orders.
May orders were up 44% hard on last year in June was up 66% over last year.
We finished the quarter were 3509 seven total orders another all time record for Meritage at 32% higher than the second quarter 2019.
What's most surprising is that all those records came in the mid but pandemic then it's still dominated the news and effective nearly every aspect of our daily lives.
We firmly believe it's important to remain diligent and why the spread of the virus.
And just last week, we should more stringent protocols for our sales office and construction operations to safeguard our customer support is a great partners.
We're also continued about our virtual capabilities for selling Belvita delivery homes as we believe that's an important tool for us in today's environment and will likely permanently changed certain aspects of our industry.
Homewares use of our virtual capability to assist them efficiently and safely research tour purchase they close on their new homes.
I'll now turn to slide five.
That deal was it goes it may seem to be selling homes, a record level during a pandemic and record on employment. We believe it's a combination of market forces and our strategy.
While there are many series as to what's behind this unexpected trend.
That's why we believe is driving demand based upon feedback from our customers and why we believe American is so well positioned for this market as listed on slide five.
With injuries at historically low levels historic lows homeownership as affordable for millions of more Americans, who can qualify to purchase so many airplanes that they're not spending as much.
They're days on things like eating out going to sporting events or rather entertainment. So they have you must make more money to afford a new home.
For example, we sell I spy better bring about regard Raj home or board for about 336000.
Which is about 1950 hours a month P I see I.
Rental for a comparable mom is over 2700 among.
Inventories of existing homes for sale or very low and homeowners as well as buyers are uncomfortable about touring currently occupied homes.
No spec homes available for quick move and offer advantages typically associated with existing homes without those disadvantages.
As a nation, we have never appreciate the safety and security of <unk>.
Our homes more than we do today.
<unk> a healthy living environment.
We don't want small cram told the grinding urban centers most of us prefer a single family homes in the suburbs, we ever owes space Rashid amenities like elevators laundry facility to Jim's or pools.
We also need more interior space to work at how well our kids are also I'm not only when the schools will reopen or ones that will look like the combination of those conditions is driving demand for new homes Merit is one of the best position to look to deliver.
On slide six.
We made the decision to several years ago, the copthree exclusively on entry level and first move up.
What we saw the greatest opportunities going forward. It was the right move at the right time.
70% of our total second quarter 2020 orders were entry level at 26%, where first move up that's a dramatic shift war or just a few years ago entry level is outpacing everything else.
We are heard a differentiated compelling value proposition combined meritas quality construction and high end finishes with our M connect at home automation suite and signature energy efficiency standards, the make our home safe and healthy for our homeowners.
We have a streamline our operations to deliver homes that competitive affordable prices, while striving to offer a customer surprisingly more the makes back.
Our create hardware suppliers and customers shared the benefits through the efficiencies that we gain.
It's a win win win proposition, there's only driving sales, but gross margins that are exceeding our underwriting standards standards.
Oh, well continually raising the bar for the industry best customer satisfaction rating.
Moving to slide seven.
We believe the way it was solid strategy are executed at a high level, we have the strongest balance sheet, we've ever had with plenty of liquidity and load that leverage your provides tremendous flexibility for growth.
As well, just stating that the a bench of another downturn.
We purchase just under 6000, new lots of the second quarter is the main has rebounded includes a great because it shows that other below drop during the peak of the pandemic.
We have a robust pipeline with opportunities to acquire almost 50, new communities in July alone.
Our strategy for land acquisition development makes our teams more efficient at finding and assessing new positions quickly.
Improves our confidence that finished lot finished lot costs will allow us to achieve our target margins.
We're very close to being on plan that we announced at our Investor Day in November 2019, two or 300 communities opened by the end of 2021.
Well, maybe delayed into early 2022.
Due to the cold winter related shutdowns that we're experiencing.
That along with solid execution positions us well.
For future growth.
I'll now turn it over to fully to discuss more of the recent trends and opportunities that we see ahead of us Felipe.
<unk>.
This was an unexpected remarkable quarter in many ways.
We never met I imagine we'd be facing the conditions, we found ourselves at the beginning in the quarter and I'm proud of the way our entire organization stepped up to the challenge to deliver the results we did.
We decided we demonstrated ethylene capacity for our customers after why not or they never give up attitude creativity Ti work and perseverance to rise occasion time and time again.
I wanted to take each member of our team for living up to our core values and delivering the best for our customers every day.
I'll now provide some highlight recent trends on slide eight before turning over to you had to review our financial results for the board.
The market based the grim outlook at the start of the corridor, but we are taking steps recommended by the relevant health organization that will enable us to continue to self built and deliver home in a safe and healthy men.
When demand surge demand a shelter in place orders began lefty we were prepared to me that our virtual selling capability and safety measures allowed us to continue to operate and ultimately mean NN exceed expectations for the second quarter.
We sold about five boes per month thought Allergan our communities during the second quarter.
42% more than we did the same quarter last year.
About 48 of our community sold more than 10 homes last month.
You know due to our entry level positions, which was that represented 57% of our co active community count at June 30, 2020, compared to 41% a year ago.
And actually level made a 70% of teleborder since second quarter up from 51%, 51% and the second quarter last year.
Absorption in our entry level communities were over 19 homes per community on average for the quarter.
37% higher than the second quarter, 20, Nike and nearly double the pace of not entry level communities.
I've heard from though can you also performed very well with per store absorption is 25% higher than a year ago.
We've been investing aggressively for the last couple of years and building our pipeline for additional entry level communities, where demand is a strong.
Executing on that strategy, 80% of the Neulasta controlling second quarter. This year were for entry level homes and can you.
We pulled back on starts in March when demand fell off but we're able to wrap up quickly when do we have picked up strongly in late April thanks to our streamline process that makes us more nimble.
We ended the quarter with an average of a little over nine Baxter per community approximately the same as last a year ago I strong demand for spec homes off that accelerated construction pace over the last couple of months of the border.
Approximately 21% of total specs were completed last in the last couple of quarters understandably due to strong demand.
Slide nine.
Moving to the regional I will try to on slide nine.
Hours in the West region were up 27% over the second quarter 20, Ninee driven by 31% increase in absorption with 3% view fewer communities on out.
Well for you had the highest percentage I bet you all the community 61% as of June 30.
Arizona is still producing the highest absorptions have all I stage, we operate.
Selling it averaged just under seven per month per community during the second worth 32% higher than last year as the entry level marketing of Phoenix is red Hot.
Our California produced the largest year over year growth in order at 87% for the quarter without community count increasing 30 diver sad and absorptions up 35% are you live now affordable Angeliki meetings have been very successful.
We said last quarter that we believe Texas would be resilient as it came out of this downturn and that turned out to be correct. Our central region led in terms of order growth this quarter with a 47% increase in orders over the second quarter 2018, Despite a 7% declined an average community count absorptions, there or do you see pray for say over last year.
59% vegetable can you need now in Texas.
The man in Dallas, and you said has been very strong despite the weak energy market and often incentive so there's a San Antonio continues to outperform with our live now communities.
We had strong growth in our east region, as well with 23% order growth on a 36% increase in absorption.
Setting a 10% decline average community count.
51% Archimedes East region for at sea level at quarter end.
Georgia, and the Carolinas slip a strongest game well, Tennessee lagged movie aftermath of the tornado Nashville, and the first quarter.
Florida also performed better than we may have expected with order growth of 18% German by a 40% increase in absorptions.
I'll now hand over to he led to provide some additional analysis our financial results.
He left Inc. sleep, let's turn to slide.
We generated 78%, earning earnings growth in the second quarter 2020 over 2019, and we outperformed across all key metrics like 20% home closing revenue growth.
300 that increase in home closing gross margin in 70, better improvement and asking a lot rich closings are up 23 precise over the second quarter of 2019 with 74% of clothing coming from PDP started spec inventory and if I caught converting at 78% compared to 70%.
Last year, we generated over $1 billion a revenue in Q2 2020 as our increases in home closing volume more than offset the declines in community count in ASP is consistent with our strategy clearly our margin them to me demonstrated the savings achieved from our streamline operations.
Your product and process simplification as well as efficiencies of scale margins also benefited from pricing power over the last several quarters, we carefully nice manage price increases to keep bonds I recognize that leverage come from each additional sal.
In the second quarter. This year, we also had some temporary cost confession burning through our cost of sale that accounted for approximately 20 to 40 best of the improvement. Although we expect most of that expire in the next couple of quarters.
The 21.4% gross margin included contract termination walkaway charges of 3.3 million were approximately 30 best in the second quarter of 2020.
I comparison, we had about half a million dollars a similar charges and the second quarter 2019, <unk> at about 10 that.
Our 70 that improvement and I've seen a was primarily due to additional closing revenue in Q2 that improved our leverage to fixed expenses well, we took immediate action to reduce discretionary expenses in late March we thankfully it did not have any reductions in force <unk>.
It's a man began to improve in a matter of weeks rather than mine. We were grateful to have both staffing to manage the increase in activity then shirts stability in our operation in May and June.
Earnings from financial services were $2 million lower in second quarter 2020, compared to the prior year I'd be a previously explained we changed our mortgage joint venture structure related to customer incentives offered for using our mortgage JV last year such that the profit from the incentive is now included as part of our home closing.
Revenue rather than being recorded its part of our financial services revenue.
Interest expense decreased by $1 million net which savings from our early repayment of Dyson December 2019, partially offset by interest under $500 million that we borrowed under our revolving credit facility in March of this year to provide liquidity should we have needed. It in a protracted recessionary environment caused me to.
Kobe related economic disruption.
We also benefited from a lower tax rate with the extension of the energy tax credits into 2020, our tax rate was approximately 22% for acute you a bit here versus 25% last year.
Our second quarter to Moody's P.S. as $2 in 38 cents further benefited from the repurchase of 1 million shares we completed in the first quarter of this year.
Q1, and very early cute too.
Moving on to fight 11.
Our balance sheet isn't the best condition is ever been with plenty of liquidity, including $485 million of cash and the lowest tonight that to cap leverage and the company's history of 24%.
Pay the full 500 million that we had borrowed against our 780 million credit facility by the end of me. So we had nothing drawn and the credit line as of June 30th 2020.
Referring to siteswap.
We spend approximately 214 million Atlanta and development and this your second quarter, almost $40 million higher than last year's Q too. Despite in your shut down on spending for most of April we have accelerated our land acquisition and development spending a sales activity rebounded as Steve.
Both cupboard, we still expect over $1 billion total spend for 2020 as we push forward to achieve our goal of 300 actively sign communities by early 2022.
We added about 1800 net new locks in the second quarter of 2020 to end June with approximately 42900 lots of which 40 per cent of our options that represented a four two year lot supply be centralia, 12 months clothing's slightly higher than a year ago.
Finally, I'll direct you to slide 13.
After one quarter suspension of guidance, where resurrecting and updating our guidance for the year barring any unforeseen repercussions from a second co big wave, we see continued strength with the returned from a more normal seasonality in the back half of the year for the full year, we're projecting total home clothing to be between 10850.
And 11350 units home clothing revenue a four to four 3 billion gross margin of about 21% and effective tax rates of about 22% and dilutive EPS of $8 and 75 to $9.25 for.
For the third quarter, we're projecting clothing between 20, 729 50 units home cooking revenue of one to one 1 billion.
Gross margin of approximately 21% and diluted EPS of $2.15 to $2.35 with that I'll turn it back over to feed.
New York.
More of an unprecedented times national on a former levels are very high and there's still a goal pandemic, but as yet can be brought under control.
We're doing all dog to protect our boys trade partners in customers and we encourage everyone that would be respectful and at least through the basics, where a mouse social distance and wash your hands.
At the same time, we're enjoying it very strong housing market and helping thousands of families move into their first new home.
All cylinders will solve strategies strong balance sheet and a great team that has extra at a high level, we're setting new Rutgers what preparing to celebrate our 30th anniversary.
Very well position for continued growth, while they're still a great deal of uncertainty on many levels were confident that were up to the challenges of whatever lies the head I'm proud of our entire Maryland Street reported customers first and bringing their best efforts to deliver great results every day.
That concludes our prepared remarks I'd like to thank you for your support American Jones, and we'll know J questions operator.
Thank you at this time will be conducting a question and answer session.
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Our first question comes from Alan Ratner with development and associates. Please to your question.
Hey, guys good morning.
Grandson, I'm truly remarkable quarter, and obviously great execution during the <unk>, that's very difficult timeframe. So.
My first question just looking at the guidance for the back half of the year. It seems very strong and obviously continuation of the good trends you've seen for the quarter.
When I look at your spec our supply of specs, that's roughly flat year over year, yet you're you're expecting continued growth at least in closings in the back half. So I guess my first question is.
Do you see any supply side constraints, two ramping that specht supply over the next few months either as far as labors concerned municipalities dealing with permitting.
Or are you kind of gradually maybe shifting the sales strategy, a little bit willing to sell a little bit more presale given some of the constraints on on the the labor side.
So I'll give you kind of a complex answer.
Of course, you know early in the pin them, we pulled back on spec starts.
But we quickly.
Re engaged in that area.
Late April come into May I think we've started.
About a thousand specs last month.
And.
In addition, we started build orders on top of that.
We're going to be trying to start even more specs. This month. So we do have to feed them I'm going to gas to get our expect inventory.
Back up at the same time there are some.
Some.
Code would related.
Apply chain issues out there with.
Different vendors, who bad factories close.
Have.
Slow down the delivery of certain items.
But it has an impact that our business yet.
We're being very mindful, we have an isolated cove related issues with trades, but we've been able to work around it.
And we don't see.
Any reason why we can't continue to.
To stay on our plan for the rest of the year due to Cove it.
One other data points to add is satcom per store, even though job to nine on the entry level side. We were at 14 last quarter for store and now we're at 12.
Fairly limited job, it's actually just kind of a shifted the communities and mix and what we're doing and Ah non-core app that through the spec levels next so overall the job on the entry level, which obviously is 70% of our business right now.
Ted.
Got it that's very helpful.
Second question.
V C you're expecting a lot of growth on community count over the next year and a half over 20% and presumably that's probably what you're targeting just overall growth in the business as well so.
I guess my question is what would you need to see that would cause you know maybe change the current path you're on as far as both feet on the gas here Steve.
Unemployment remains very high yet you're seeing strong demand on the ground. So would it simply have to be just order is starting to pull back quite a bit from the current levels or is there anything from a macro perspective that would perhaps give you a little bit of cause for concern.
No. It's as simple as you just that one and then when we talk to our customers every single day.
And.
For some reason, we see order started to pull back.
So.
That's the gate the reasons for that.
But.
Land strategies to build would provide.
Our product.
Right locations are compelling.
Value basic price points.
And we think that's sweet Florida.
<unk> the market going forward.
Andrew level, and first move up and.
<unk> been able to find quite a bit of land that were pretty happy with.
They were going to be bringing on.
Next year to go to grow our community Count you know going forward. So.
I don't see anything on the horizon right now.
Dampens or ecclesiastical for growth.
To add to add to that Allen, we demonstrated that we can pull back is very very quickly and marching early April lane.
It was very uncertain into the ability with new zero, we were able to pull back and spend very quickly so hour.
Can see on the gas should there be another.
Pick up in the economy or in the in this sector, we certainly can pull that quickly.
Alright, Thanks, a lot guys. Good luck.
Our next question comes from John Lovallo with Bank of America America. Please state your question.
Hey, guys. Thank you for taking my questions are the first one, Texas and Arizona I have to have been two of your hotter markets.
Obviously, now being a little bit more impacted by Covid over the past couple of weeks have you seen any changes in consumer behavior given.
The heightened concern around the virus.
No.
Pretty much the opposite.
The Arizona market in particular has said shows no signs of retreat.
And.
We continue to have strong demand.
And our sales office here, even the myths of the increasing pandemic and.
Very warm weather that we have down here in July.
So no not at all and and highly qualified virus.
Not seeing buyers that don't have jobs or are worried about their job.
So have strong balance sheets to buy home nope, not seeing a bunch of investors show up to the party. It's just true household formation of households demand.
For affordable housing Yeah, we gave guidance on the call that.
And a relief that cancellation rate got to 15% blended but that job from 20% in April down to 13% in June. So we're seeing a fairly rapid decline in cancellation rates typically point the biotech coming in.
Well qualified.
Oh, that's really encouraging okay, great and then in terms of the community account outlets that you guys laid out how should we sorta thing about the cadence of that too early 2022 and should we expect to.
A similar sort of ramp SG&A so screen these kids.
Come to fruition.
Hello commune account's gonna be down this year.
Flight of sit down.
Particularly considering we're selling through will want to communities even faster than we expected.
Many communities got delayed.
Due to covered.
Are experiencing challenges many cities getting our plans approved and get into the entitlement breakfast.
But we have a huge.
You know for lack of another description.
Moving through a snake here for next year.
Sure, we got a big pipeline that communities coming online throughout 20.
21.
And we should be that or pretty close to our goal.
300 communities open.
By the end of 21.
And you can certainly do the math on that.
That means for.
R. R orders and deliveries are guidance, obviously for the remainder of the year built in the declining to flattish community calm for 2020.
It's going to pop in 2021, I don't think we're prepared to get that.
By the end of the year as well.
I can't tell ya quarter to quarter, where it's gonna look like.
Okay guys. Thank you.
Thank you.
Our next question comes from Truman Patterson with Wells Fargo. Please say your question.
Hi, good morning, everyone and thanks for taking my question great quarter.
So first you know about the balance sheet and capital allocation, 20% and at the total capital almost 500 million of cash on hand.
Just thinking about what you're going to do going forward.
This purely to reinvest.
And the business and land and really grow the company.
Are you looking to reduce that further or possibly start to share repurchase program M&A just trying to get your thoughts because you are in a pretty strong situation right now.
Reggie number one is to grow the business organically.
Invest some more land grow community counts.
And I see.
The point.
Most or if not all of our capital and that strategy, we don't want any plans reduce our debt.
We don't want any plans at the moment to buy our stock back.
We've been pretty opportunistic about that.
Bye.
A million shares early in the quarter.
What's the average price on there and then $60 $60.
But we're not buying shares right now and I don't expect that we will be buying shares in the next quarter, but as I said earlier, we have 50 almost 50.
Potential computerland deals for almost 50 potential communities that we use the severe approved or potentially going to improve this month.
That's not too.
You can talk about what's on our plate for the next month and the months ahead for the remainder of the year. So we have a really robustly and pipeline.
And we're going to direct and a capital towards that.
Okay. Okay. Thank you for that and then also I hopped on a few minutes late so I apologize.
Address this but could you give an update on July order trends.
I would imagine we're coming up on tougher comps year over year. So maybe there's some settling on the growth rate, but are the absolute units kind of in line.
With the June levels.
Any.
Any disparity recently, a mountain regions really and kind of June and July that we should know about or do they have been pretty much trending in line with what they didn't <unk>.
I wanted to give you a specific number.
I think June is going to be.
July quite a bit bacon here before the call, but I got out voted on there.
I can tell you in July is going to be very strong very strong.
And.
Maybe not as much as June but certainly in line with me.
Okay, well I'm kind of an absolute basis.
On a percentage basis increase okay. Okay got you a fair enough alright. Thank you all appreciate it okay. Thanks.
Our next question comes from Stephen King with Evercore ISI. Please to your question.
Yeah, Thanks, very much guys, yeah exciting times.
I wanted to see if I could.
Ask a little bit about what you're seeing in terms of the ability to push price I imagine. This is something that you're you're managing on a community by community basis, and you've been obviously seeing the mortgage rates coming down.
I'm curious about the the ability to push price across the the both the entry level as well as some of your move a product.
Are you finding that.
Drop in rates is creating an opportunity more on the pricing side than on the ramp and sales in other words, it's pushed it's affecting price more than pace because I think some people have felt like maybe the lower rates, just pulling forward demand or something like that where it might be.
[noise] with it it would probably just allow you to price higher than that probably yeah actually operate on a bit of of lag curious what your thoughts are with respect to that and if there's any difference between entry level and move up in that regard.
Let me all all business model like a few other large entry level focus builders is.
It's really.
Driven by pace.
More than price.
Leveraging are overhead is absolutely critical to our strategy.
So.
That.
May we do certainly may we weren't pushing price and may.
Because we were coming out of the.
People were just coming back and we didn't really know how strong demand was going to be we did start to push price more in June.
Well, we probably left some dollars on the table, we could've done we could've done more on price.
But then as we've gone into July.
<unk>.
The price.
A little harder and I'll put you <unk> in July.
But that said, we're still gonna have robust.
<unk>.
Order Grove.
We're probably we're probably not.
B as aggressive on prices other builders R.
Because we want to keep up that strong absorption level that strong pace.
But in Phoenix in.
<unk> other markets that were in.
There's a lot opportunity big you could probably get even more price.
Because it's a very very strong demand market right now. Please I don't know if you want to add to that.
Yeah. I mean, we are we are getting price and pay right now because the market is so strong as D said, we certainly focus on pay is coming out of the shelter in place environment.
Deficit and you weren't sure what the market was doing but.
Starting in June and July we've been able to get prices and pace as far as the mindset are the kind of the thesis around pulling demand for.
We talked about this a lot around here I don't see that being a demand pull forward scenario I think the lower mortgage rates is actually increasing demand.
I think the pandemic is increasing demand I think I'll thing that we mentioned in our call is actually increasing the demand pool.
Pull the buyers versus pulling a four we're seeing buyers that we hadn't seen before because they are currently looking for a new home and they were not looking for a new home in fact that you were not planning on moving.
To the situation, whether it's the mortgage rates and then just feel like it's too good of an opportunity at this point or whether they feel like the house it doesn't suit them anymore or just a fantastic time, where they have money in the bank, but they didn't have before I don't think we're pulling demand for it at this point I think we actually have increased demand in the market.
Yeah, No. That's that's very encouraging just to clarifying point, Steve you were talking about how you definitely want to be able to push price I'm, sorry, I pushed pace over price.
And you might not raise prices as much as some of your peers.
It seems it would seem from your results of that.
Already got a little bit.
The gap.
Price gap between you and the competition already established and you're able to sort of outsell a lot of your competitor so to the degree that the whole marketplace. These pricing move up there'll be no reason to see that your pricing growth from here would be less than the market would there because you already have that gap establish I'm I'm thinking.
That right or are you actually thank you. Thank you will raise prices from here less than what the market might otherwise dictate.
No I think we'll be in line with the market.
Look at mostly in most situations are live now communities.
Compete with other entry level builders, and we're not the lowest price so.
Why are you going to pay a little move a premium for a marriage home because of the energy efficiency because of the home automation because of the extra design that you get you get great values pay a little bit more for our home. Then then brand XO brand y.
But we have to be mindful of what that spread is.
And to the extent the brand X and Y a reason their prices will be raising ours.
In line with theirs.
To maintain that yeah that appropriate premium.
Yeah.
Yes.
They'll get theirs, and we will get ours.
Got it.
Yeah. Another question I want to you and we've seen pricing power on one of them you as well there's been just as much price and Valerie.
That that whenever you buyer verses entry level buyer.
Sometimes sometimes they overlap frankly.
But there's been strong pricing power everything under 400000 really if you look at kind of our global footprint.
Got it and then just last one for me is M. M. I right in thinking that for your affordably minded buyer the ability to come up with the downpayment and having elevated levels of student that have historically been two of the bigger impediments that your buyers had to get.
Over.
And if so I'm curious as to whether or not you've seen those he's in part by by virtue of the forbearance on student loans that got put in place with a cares act that goes through September.
Not necessarily a direct correlation that we've tracking of survey, although we do see the ability to come up with a down payment for whatever reason maybe.
Student loan for behind being one does.
Easier to come up with a down payment.
<unk> during the time that could certainly do you wanted the drivers.
Allowing them or thanks, very much money from mom and dad.
Great Alright, thanks, a lot guys. Thanks.
Our next question comes from Michael re heart with J P. Morgan Please to your question.
Thanks, Good morning, everyone and congrats on the results again.
First question.
I wanted to hit on some of the comments around virtual and how it relates to the SG&A.
You know, we recently put out a survey and one of the interesting.
Results was the real strength and it's something that you guys have been talking about.
The last several months, but.
Well over half.
The respondents.
That have border plan to buy.
And that are focused on new homes.
Would be comfortable buying a home without visiting in person and so obviously that kind of puts with a lot of the strength that you've seen.
The digital side from the virtual side and all the investments you've put in.
I'm curious how that might translate over time too.
You're SG&A cost structure, if you'd kind of thought about.
This for me.
<unk> standpoint.
The investments that you've put in place if it could even impact.
You know.
Your broker fees and such.
Just any thoughts around there over the next couple of years.
In terms of habits might impact the SG&A side of the business would be interesting.
And that's something that we're thinking about everyday.
Along with our competitors are thinking about that as well.
How we reduce costs.
Only 44% of our customers came to our community with a realtor, even though a realtor co broke is above 70%, but they were registered with realtors.
Prior to their visit.
Many of our customers are getting some real estate commissions back through the Realtors, which I think is keeping the co broke right really high.
But really it's about starts with our website the whole virtual selling processed starts there our website traffic was up 82%.
You too over Q2, a year before it makes sense because of the because of the.
Pandemic, but it also connects to our inside sales team, we have a really strong inside sales team.
Work those leaves on the website.
And they said a lot more appointments.
They ever had before both both in person appointments, but mostly virtual appointments.
So.
We're in the early innings figure out how we can.
We can squeeze that the cost of the SG&A, we have now for several a coupla years and Billy less models, what most of our community is only have one model versus we used to have two or three or four.
The old days, so we've been reducing that costs, we've been reducing the cost of how we.
Furniture, those models, reducing the cost of our sales offices.
So the hard cost of that goes into a marketing have changed but we are having to spend more money.
Digital.
With.
The googles and the ZIP close of the world position us on the Internet.
It's important part of our marketing plan so.
Yeah.
Hope that over extended period of time.
Some of the things we learn from the pandemic become part of the new normal that our marketing cost come down, but I don't think it's going to happen overnight.
Definitely Ernie early innings, Mike I think that there is.
A lot of great lessons right now for sure we'll be able to harness some efficiencies and what we're C.
Being accomplish virtually excuse rather than offset and higher technology spend but it's a much smaller increase on the technology sides versus the manual components are some of the processes and incrementally marketing collateral that we were providing previously.
Certainly a lot of opportunity for us, but like seats that this isn't that cute three Q for kind of into that we're learning what work, we don't want to turn off let's figure it to the sales machines that we're we're treading cautiously, but you can expect an declined over the next year or so and not in that area.
That's helpful and obviously I think it's an area of the of opportunity over the next couple of years without a doubt.
I guess secondly, maybe another kind of bigger picture question.
And you guys are obviously had a tremendous amount of success with the live now.
And how you kind of turn the company over.
And the last two three years.
Your reiterating your community count outlook.
Effectively or maybe slightly delayed but.
The big plans for next year in.
Obviously near term.
Focused on managing through.
This current highly volatile backdrop, but curious around taking a step back there are some parts severe G got geographic exposure that.
You could add to potentially over time, obviously Las Vegas is very close and I know we've had.
A lot of reservation, Steve about that market in the past.
But with live now.
You you would think that that can be very well suited for that market also even in the Pacific northwest.
Seattle in Portland of hit affordability affordability issues over time, you could argue that that's another market maybe that there could be some good good traction. So how do you think of those markets bigger picture from a portfolio standpoint.
And is this something that if you are thinking about it you would be thinking about more from an organic standpoint, or a acquisition bolt on standpoint.
Good question, Mike There are some new markets.
We're working on entry.
Organic basis.
There's some in the west and there are some of the east.
And maybe we can give you some more color on that on our next call in November, but we are working behind the scenes too.
Formulated strategy.
For us organically or some some new markets and 2000.
21.
Not part of our plan to get to 300 communities, but.
As we can to grow a market share in all of the market. So are in we realized.
That will have to add some new markets at some point and we're gonna we're going to do that primarily organically. If there's a there's an <unk> that comes about that is interesting we certainly.
Pursue it but we can't we can't wait for that and.
We're going to be coming up with a plan to inner some new markets organically. So we'll pay more about that next quarter.
Alright looking forward. Thanks again thanks.
Our next question comes from Atom bomb Garden with Credit Suisse. Please to your question.
Hey, good morning.
Do you guys expect any labor savings over the balance of the years you may have been able to renegotiate some contracts earlier and <unk> and if so would you expect would you expect that to revert given such strong demand in the industry right now.
So.
This is felipe when the pandemic occurred we were able to re contract and get some meaningful savings.
Have played itself out in Q2 and potentially into Q3, those contracts generally where setup to sunset. After nine days because none of the trades wanted to commit to a long-term deal because no. One knew really what was going on we're seeing those those sunset for the most part because.
Demand is now.
Across the board. So we got some cost and labor savings that should play itself out clothing. It did play dolphin Q2 should place elbow two three.
As we move into Q for them to five reply back to a previous previous cost structure Ah don't expect to see.
Labour savings going forward I don't we're not seeing a lot of pressure on labor labor seems to be in a good place.
Across most of our categories.
Capacity seems good.
I do expect to see cost pressure I think you guys know lumber has reset that are pretty good high here. So we do expect to see some cost pressure in the back half of this year, let's see how that kind of shakes out over the next six months out expect to see any savings.
Going forward, Adam we quantified that the impact Windows 90 day reset that phillipe adjust.
What about 20 to 40 bits and as you said you don't really expect to see that is continuing much beyond very all right now.
Got it thanks, and then just second or are you seeing any meaningful land price appreciation.
Just as competition may be increasing for these entry level lots.
Yeah, I mean <unk>.
The landmark it is always competitive when it's.
When when it's not.
Situation.
We saw on April that alive.
Stepped away from deals and it took a pause on deal.
<unk> didn't come down land prices are sticky so as the market recovered and May may and June.
There wasn't a lot of people willing to negotiate off the original price even with the pandemic backdrop and as we're moving forward, especially in some of our hotter markets.
Phoenix is one that you're seeing prices land prices go up but again, we're really tight on our strategy really tight on what works.
We know what the right price of Atlanta, and when were saying disciplined on that but certainly there is land pressure and some of these hot market.
Seeing builders compete for finished lots even in the secondary markets and tertiary market. So.
Certainly seen land prices increase in the hotter markets.
Got it thank you.
Our next question comes from Jade Romani with K W. Please state your question.
Yes, thank you very much.
Do you have any statistics, you might be able to share regarding the percentage of demand currently being driven by move outs from multifamily.
No.
We don't we don't.
We on track.
I mean, we do track.
People movie rentals, but we don't distinguish if it's from a single family rental or multifamily rational yeah that was that what does that number we have that.
50%.
We have it I'm sorry, we don't have that number and find out who you didn't get that back to you.
We do track like decided whether you're moving from an.
Owner occupied versus a for rent situation. So we can get you don't have her but we don't break out whether it's a multifamily rental versus a single family right now.
Okay. Thank you very much even within the rental market just given the distribution of units I would expect the majority is from multifamily of move out from those rentals.
Also if you could quantify what the average household size of Maritimes is typical homebuyer is are these families with children are are they in the first time homebuyer.
Bucket.
Yeah, perhaps in relationships, but not yet that that children stage, yes, we track that as well, it's pretty granular but.
It was like three two.
So.
I think.
Have our buyers are traditional families and the other half or either young young adults.
Pointing to have a family are working at a family or mature couples.
Already had already had their families and that gives them moved on.
Thanks for taking the questions.
Thank you.
Our next question comes from call Reichardt with <unk>. Please to your question.
So everybody.
I wanted to ask about.
Lot supply and your supply obviously it backwards looking number it at four two is that kind of where you guys are comfortable and 60 40 split owned option is that sort of target, where you want to be or over the next couple of three years. Do you think you could move that here supply up are you interested in that or that option. One mixed then.
Would that change in any way.
Historically, operator that four to five year banned but I think.
I'm, sorry intention to probably stay in there.
We are focused on.
<unk> and continuing to improve our return on equity.
So, although we want to get larger communities that we can stay on longer and reduce the churn.
We have to be mindful of.
What the impact this to our balance sheet.
I think I think.
I think we certainly we'd like to do more options.
The extensive they're available.
But I generally don't come with that of course and.
They're not it's not as easy as it may sound to convert from one strategy two options strategy, it's not like it wasn't what cycle cost is pretty high and the cycle and.
So I don't expect it to change very much from really where it is today.
Just to say I think Steve hit the nail on the head.
<unk> ability liquidity, then we have we're not really really willing to pay up to have options B R. Lambie option to off balance sheet, having said that the 40% the highest it's been quite a while if you look at the last eight to 10 quarters were very slowly inching up as we're finding deals structures that aren't necessarily landbank.
Book, but ideal structures that will work with existing salaries to allow us to luggage catch a little better yeah.
Yeah, I mean, if yourself developing out the exurbs I'm guessing.
You can you can turn those.
Faster anyway, so that makes sense I also just wanted to ask a little about studio M. In the first time, the first I moved up side, which had some good absorptions.
Can you just give me an update on how studio and rolled out and maybe talk a little bit about the margin profiled that business relative to two entry level. Thanks guys.
Yeah, I'll I'll take the.
Rollout and then Gila talking about the margin but.
It's effectively rolled out everywhere.
That was kind of a last year initiatives. So we had a couple of stragglers that came into this year.
We are now effectively rolled out across our entire footprint.
We are pretty much our entire backlog is moving we don't have any sort of a KL backlog that's on the old process, even in the markets that one of the last one's to convert.
So we're effectively rolled out across the company and is the highly successful program in Hilo can comment on the margins. Yeah. I think we said previously that the margins on an entry level, our strongest margins and the company first time that is.
Strange sense, the mice and margin near how strange thing with the rollout a studio and obviously, we're able to leverage costs.
And efficiency, a little bit better so we're actually seeing those improve as well, there's still a little bit of a differential with entry level, just a little bit ahead, but they're pretty much in line with one another.
Thanks, you, let's say said Bunny.
Thanks.
Mr. Helton, we're just about at the bottom of the hours do have time to take a another question or two or would you like to conclude.
Oh, let's do one more question.
Our final question comes from Alex Barron with housing Research Center. Please state your question.
Hey, guys, thanks for choosing in and.
Great job on the order I wanted to ask is there any physical constraints or any reason.
Y.
If there are the buyers there I'm ready to buy.
<unk>.
1500.
And the words.
Labour constrained land finish slot.
Is there anything like that with preventing you from.
Continuing at that please.
Are there.
I'm going to repeat your question because you were cutting out just a little bit I think your question is there any constrained.
Where are we couldn't deliver another 1500 lots of sales, including any labor or material can change that way to block us from that level of performance that quick answer is no, but I'll actually perceive expand on it I mean, the only constrained we have right now is our community Council.
We have a decline and can you calvert selling outta things faster than we previously thought and so can you continue to drive higher absorptions on sort of declining community count over the next couple quarters, but as far as having this the home's being I'll start the homes the capacity in the labor market to build those homes there's nothing.
Preventing us from doing that it's really about can we get get the volume out of the community, but can you can count that we have at as we go through the next couple of quarters.
Okay, Great and when you said that you're starting a thousand specs I'm, assuming that that wasn't including that was only respects in other words, if youre doing 1500 sales.
And you're starting a thousand spec that's kind of implied you would be starting 500 bill towards at home does that correct.
Not quite that many but close.
We are starts have been.
Behind our sales the last couple of months because the sales were.
More than we expected.
But.
As we get into July and August we're going to get back on track to match up those numbers more closely.
But that has been that has been a bit of a challenge correct.
Yeah.
Not all sales at some of them are dirt.
Thanks, Alex I'm, sorry, we didn't get John sooner operators, and you're going to take where thing where you say one more question.
One more out there alright, yes. Our next question comes from Susan Macquarie.
Please go ahead with your question.
Thank you thanks for squeezing the N.
I guess first question is just you touched a little bit on the MMA environment earlier, but can you talk a little more about what you're seeing out there in terms of opportunities to maybe pick up some.
<unk> deals are some smaller private has anything changed over the last couple of months.
Only if you promise to write something nice about us [laughter] I Hope you wrote something nice about your last night.
Okay.
No there hasn't been <unk>.
Changed on the M&a's long.
We just haven't seen anything that's.
That compelling I don't think coded.
Scared a bunch of builders into selling their companies.
Actually one of the Titans of M&A just passed away.
A few weeks ago, My Con who did many.
Deals with the company in the early stages.
And the 90 902, thousands he was icon.
And that segment of the industry.
We more or less passing.
But.
Yes, there has there hasn't been a lot of M&A activity that we've seen.
And certainly we're going to be more picky.
Without this with our business strategy, but we were able to be opportunistic on some dropped land deals from <unk>.
The code environment, we actually.
Picked off.
<unk>. Some other builder then resurrected are only deals that we initially job to end up net positive on land deals that we jobs and then picked up from Kobe. In addition to our radio pipeline.
Community activity, Yeah, I don't see in the early stages of the pandemic part of the waves with the land deals that we didn't approve that we'd like to lease.
Felt like had the biggest wrist.
And then.
And then we went out and saw a lot of deals that others as we liked it we grabbed so.
Okay, Alright, that's helpful and then on the mortgage market side, obviously, you know it seems like things there remain accommodative to buyers is there anything that you've seen that's really changed over the corner or anything that could change your ability to qualified people looking out.
No I think we're going to be sharing the analysts slides right. After the call you'll see that historical trend Dci the company.
Oh 38.
No no real changes fries.
Everything so hunting along it's like surprisingly like.
Just to know change I mean, you would expect to see some type of changing zero change yeah.
Alright, alright that sounds good. Thanks, good luck with everything thank you Susan.
That wraps up our presentation lay in our Q&A. We thank you for participating Meritage home second quarter call and we'll look forward to talking to you again.
And laid October.
Thank you help argument disconnect have a great day.
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