Q2 2020 MDC Holdings Inc Earnings Call
Good day and welcome to the M.D.C. Holdings, Walkie Talkie second quarter Conference call.
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Thank you.
Morning, Ladies and gentlemen, and welcome to MDC Holdings, 2022nd quarter earnings Conference call.
On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer, and Bob Martin Chief Financial Officer.
At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we recruit we request that participants limit themselves to one question and one follow up question.
Please note that this conference is being recorded and will be about double for replay.
For information on how to access the replay please visit our website at MDC Holdings Dotcom.
Before before turning the call over to Larry It should be noted that certain statements made during this conference call, including those related to Mdcs business.
Financial condition results of operation cash flows strategies and prospects and responses to questions may contain forward looking statement within the meaning of the private Securities Litigation Reform Act of 90 95.
These statements involve known and unknown risks.
Uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the result performance or achievements expressed or implied by the forward looking statement.
These and other factors that could impact the company's actual performance are set forth in the company's second quarter 2020 form 10-Q, which is expected to be filed with the FCC today.
It should also be noted that's easy regulation G requires that certain information accompany the use of non-GAAP financial measures.
Any information required by regulation G is posted on our website with our webcast slides.
And now I will turn the call over to Mr. model for his opening remarks.
Great Good morning.
Welcome to M.D.C. Holdings second quarter 2020 earnings call.
As evidence by the results announced in our press release this morning.
Our homebuilding operations experienced a sharp rebound in the second quarter.
The combination of low interest rates constrained existing homes supply.
Heightened interest in single family home ownership.
Has resulted in a very favorable environment for industry.
Following a steep decline.
Mark by slower traffic in increase cancellations at the outset as a pandemic.
We begin to see order activity.
Turn to preach.
<unk> levels in May.
This momentum continued into June.
Net orders eclipsing last year's June totals by 53%.
For the corridor.
Net orders were up 5% year over year.
Which is remarkable giving the uncertainties and sales obstacles, we faced at the end to the first quarter.
The strong demand trends, we experienced in the quarter.
Were broad based both from a buyer segment and a geographic standpoint.
The strongest part of the market continues to be at the more affordable price points.
Which has been a strategic focus of ours for sometime now.
We're seeing an increased number of millennials, who were entering their prime home buying years.
And this trend has only been accelerated by the pandemic.
The new home industry is also benefiting from market share gains versus the existing home market.
As the combination of low existing supply.
And the increased preference for new construction.
Has served as Tailwinds.
Another driver orders to access.
Has been our continued focus.
On a build to order model.
Even with a high heights and.
Sense of urgency.
Oh, no how many home buyers continue to prefer the flexibility of personalization.
That comes in a home built.
With their preferred finishes and selections.
We believe this is especially true for or core buyer demographic.
Who are looking not only for value.
But also a home that fits their needs.
The benefits of this strategy for M.D.C. or that it allows for higher margin revenues from our home galleries.
Reduced volatility in our results and proves the competitive advantage relative to spec focus builders.
Or build to order operating model is also when it's the need to use price discounts or heavy incentives.
In fact in most markets, we have been actively raising prices and scaling back incentives due to the strong demand weve experience.
Our home building gross margin in the quarter increased to 20%.
Reflecting this pricing discipline.
In addition to maintaining pricing discipline.
With respect to our homes.
We also exercise cost discipline across.
Our organization during the quarter.
Leading to a 90 basis points year over year improvement in our S.G.N. a ratio.
This improvement can be attributed to the higher revenue we generated in the quarter.
As well as certain cost reduction measures taken during this period of uncertainty.
In summary.
I'm very pleased with our results this quarter.
Particularly in light of all that has transpired over the last four months.
Order activity improved as the quarter progressed and we posted.
If the good increases.
Do both revenues and profits relative to last year.
Given these favorable market conditions.
We're now targeting 8000 home deliveries.
For the 2020 full year.
In addition, we ended the current quarter in great financial shape.
Giving us the financial flexibility to continue to invest in or business and pay the industry leading did the dead.
The current pandemic as far reaching impact and how we live in work.
I could not be more impressed on how we're team members have adopted to an excelled in this new environment.
I am truly appreciative of all of their efforts.
Now I'd like to churn.
Over to Bob Martin for more detail.
And the read on the results of this quarter.
[music].
Thanks, Larry and good morning, everyone.
As you can tell from Larry's comments, we were pleased with our performance during the second quarter as the initial saga of the pandemic in March and April gave way to renewed consumer interest and home ownership in May and June.
The combination of our diverse selection of mobile homes combined with our increasingly distinct build to order business model has proven to resonate with homebuyers.
Before getting into more detail on current market conditions in order trends experienced during the quarter I would like to provide some commentary on what was ultimately a very resilient second quarter.
Net income increased 55% to $84.4 million or $1.31 cents per diluted share for the second quarter of 2020.
Both our homebuilding and financial services businesses contributed to these year over year improvements as pre tax income from our homebuilding operations increased 23 point.
$3 million or 38% and our financial services pretax income increased $14 million per 110%.
The increase in homebuilding pretax income was the result of the 21% increase in home sale revenues and a 160 basis point improvement to our homebuilding operating margins.
The increase in financial services pretax income was due to our mortgage business, which experienced higher interest rate lock volume an increase capture rate and increased net interest income on loans originated during the quarter.
Our tax rate decreased from 26.6% to 24.4% for the 2022nd quarter.
The decrease in rate was primarily the result of a windfall benefit on equity awards as well as energy tax credits related to homes closed during the quarter for the third and fourth quarters. We currently estimate at 25% tax rate, excluding any discrete items.
Homes delivered increased 25% year over year to 1900, driven by an increase in the number of homes, we hadn't backlog to start the quarter. The increase was slightly offset by decrease in our backlog conversion rates due to construction delays in certain markets as a result of the pandemic.
The increase in units delivered was slightly offset by a 4% decrease in or average selling price.
To about $467000.
This decrease was inline with our strategic focus on affordability as a percentage of our deliveries for more affordable product collections rose to 54% for the second quarter of 2020 versus 44% for the same period a year ago.
We are anticipating home deliveries.
For the third quarter of 2020 to be between 1900 and 2100.
Backlog conversion for the third quarter, maybe slightly lower than the third quarter of 2019 as a result of the significant increase in June orders compared to the prior year, which we are unlikely to deliver in the third quarter.
For the full year, we're estimating to deliver between 70 708000 homes.
As previously mentioned, our gross margin for home sales improved by 70 basis points year over year to 20.2%.
Gross margins increased on both build to order and speculative home deliveries driven by price increases implemented across the majority of our communities over the past couple of months.
It should be noted that during the second quarter of both 2020 and 2019, we reported decreases to our warranty accrual, which positively impacted gross margins by 20 basis points in each period.
Gross margin for home sales for the 2023rd quarter is expected to again approximate 20%, excluding impairments and warranty adjustments.
System with the 2022nd quarter.
We demonstrated solid operating leverage for the quarter as are asking a expense as a percentage of home sale revenues decreased 90 basis points year over year to 10.4%.
Our total dollar Epstein a expense for the 2022nd quarter was up $9.6 million year over year, mostly due to variable selling and marketing expenses that increased in line with a 21% increase in home sale revenues during the period.
Our general and administrative expense was up only modestly for the second quarter as increases in stock based compensation and bonus expense driven by strong operating results. During the quarter were partially offset by cost reduction measures implemented at the outset pandemic.
For the third and fourth quarter of 2020, we may see a significant increase to our general and administrative expense relative to the 40.4 million dollar expense. We just recognized in the second quarter. This would be in large part related to an increase to stock based compensation expense for performance share units if market conditions and our performance remained strong.
We saw this type of increase in 2019 from the second to the third quarter based upon a significant acceleration in that order activity. We may also see salaries and other compensation related expenses rise based on additional headcount that may be necessary to facilitate growth.
The dollar value of our net orders increased 8% year over year to $1 billion unit net orders increased by 5% driven by a 2% increase in our monthly absorption rate to 4.2, and a 2% year over year increase in average active subdivisions.
The average selling price of our net orders increased by 3% year over year, driven by price increases implemented over the past 12 months as well as a shift in mix to California, which has our highest average price.
On the next slide we've provided some detailed information on the monthly pace of sales and cancellations during the second quarter.
Larry noted earlier, we experienced a sharp rebound in order activity during the latter part of the second quarter, culminating with June.
Net new home orders, increasing 53% year over year. We also saw the rate of cancellations decrease as the quarter progressed.
Some of the improvement is likely the result of pent up demand after stay at home orders kept many buyers away from our communities. However, other favorable demand drivers such as low interest rates and constrained existing homes supply appetite and equally important role. We believe that these factors combined with the recent migration away from expensive high density Herb.
In areas, we'll continue to provide the tailwind for demand as we head into the second half of the year.
To that end, our third quarter sales have already started strong.
Based on the activity we've seen to date, we expect our July 2020, net orders to exceed our July 2019 orders by at least 50%.
We ended the quarter with an estimated sales value for our homes in backlog of $2.4 billion, which was up 23% year over year.
The average selling price of homes in backlog increased 3% due to price increases implemented over the past 12 months decreased incentives and shift in mix. The California. These factors were slightly offset by a shift in mix to lower priced communities consistent with our ongoing strategy of offering more affordable home plants.
With the uncertainty created by Cobot 19, especially during the first half the quarter. We proved only a 1244 lots repurchase during the second quarter of 2020.
This was a significant drop from each of the past four quarters.
However, even with the drop in lot approvals are lot supply to end the quarter was 6% higher than that at the same point in 2019.
Additionally, given the strong demand that we have seen in recent months, we have significantly accelerated our lot approval activity to start the third quarter.
We recognize that there are many uncertainties with regard to the pandemic and its ultimate impact on the U.S. economy, which have the potential to cause future disruption to our industry. However, we believe that our strong balance sheet is built to counter such disruption. If they do occur that said, we believe that MDC is well positioned for strong results in the set.
Half of 2020, given an improved backlog favorable industry trends and a strong strategic positioning.
Our build to order business model will remain a key fixture for our value proposition, providing a competitive advantage with home buyers looking for a quality home personalized to their unique preferences.
Most importantly, we remain committed to the safety of our employees customers and subcontractors as we work to provide much needed housing supply to families in the markets we serve.
That concludes my prepared remarks, we'll now open up the line for questions.
We will now begin the question.
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Follow up question.
At this time, we'll pause momentarily to assemble our roster.
The first question.
Oh.
Some of that associates. Please go ahead.
Hey, guys. Good afternoon, congrats on the strong quarter and glad to hear you guys are doing well.
We see a very strong order performance towards the end of the quarter and into July great to great to hear.
You're not a big spec builder, but we're seeing some really robust growth rates across the industry now, which obviously Leds leads the question.
What's going to happen when all these homes need to be built and I think the reality is is that starts probably need to pick up quite a bit from where they are right now in the industry and I'm curious what you're seeing on the ground from a labor perspective from a material perspective do you think the industry has the supply chain to satisfy this incredibly strong demand we've been seeing of late and how are you managing the.
At a pace versus price equation right now.
I think our strategy has been.
As you know consistent for decades.
And being a.
Builder, the only builds to order.
We've been able to.
Manage.
Construction pacing.
We see no reason.
The build spec homes and takes the risk of.
Cancellations and to have.
Or subcontractors.
Working on product or is.
Isn't a what we believe is profitable.
As a.
As the homes that we build.
To order.
And we've proven that by the.
Gross profit margin you might also look.
At the information you'll see that.
Oh, the thousands of homes were building, we only have I think a little over 100 homes that are finished that are.
Tons sold and.
As you know we manage your bed balance sheet very carefully.
And we're doing is making sure that we have the trades.
Serve as a us.
And we do it in a very a measured manner and we expect to continued to do so.
So just drilling in there I appreciate that you know just specifically on inflation and managing the trade it doesn't sound like you're seeing a lot of meaningful inflation. In spite of the fact that things have picked up quite quite a bit or am I interpreting that Ron.
Well I think the.
Everyone can decide what meaningful inflation means managing your cost of goods sold.
He is what we have to do.
Every day and Oh.
Builders the jump in and out.
Oh I have to deliver the different level.
And what we deliver is a very thoughtful level.
In the trades, we have I think oh.
We believe that they are really trade partners.
And they work with us and we work with them.
And its a.
Our goal and objective to.
Maintain the pricing.
Of the trades.
And that's something that.
We have factually done over many years and we expect continued to be able to do so.
Got it appreciate that and if I could just add one more on the land side.
Obviously, a little bit of it ticked down on lot acquisition in the quarter, but still up on a year over year basis. So any color you can give us just in terms of the phasing of community openings and closeouts over the next several quarters are there any supply side constraints you foresee on the land front or do you think that you've got the the supply to consume.
And you to satisfy demand assuming it remains like we've seen over the last couple of months.
Well you can look.
A in the Q.
You can see.
The increase of a land.
For the last period time, which I think is pretty interesting considered.
We're starting the year Uh huh.
February or March we're trying to figure out how to reduce or eliminate.
Whatever you can on the land side.
And 60 days later you're back buying.
Supplied to support your future growth.
And I feel very confident.
We have the skills and the ability to continue to do.
What we've done for decades.
We've always maintained or if you have money by all the land you want and I think through three or four cycles.
We've proven that out.
Well you certainly have the cash in the bank so.
Thank you very much good luck have a nice day.
[laughter].
Next question comes from John.
Well below of Bank of America.
<unk>.
Hey, guys I. Thank you for taking my questions as well.
The first one.
But given the strength that you saw.
In July on the order front, I mean would it be surprising on an absolute basis Threeq you orders were actually stronger than twoq.
Well with with seasonality, it's always tough to see that given a relatively flat.
Subdivision count, but as I indicated July as has started out very strong you don't typically the see that July that that ends up being almost just as strong as as at June we'll see where the final numbers shake out so.
I guess, it's certainly a possibility in this this very unique environment now that said, we're not the we're not taking that to the bank at this point.
Got it makes sense, Okay, and then maybe in terms of some of the markets that have been harder hit recently was coated I'm thinking.
You know Phoenix and parts of Florida.
Have you seen any softening in these markets at all and if not I mean do you anticipate some some impact here as we move forward.
We haven't seen any softening in those markets.
As you can see.
The disclosures, we've actually enjoyed a good growth.
Especially in Phoenix and.
The virus is.
It's not good for anyone or anything.
But at this point to.
It has affected the.
New home affordable market.
And the disclosure of cases.
Is always an argument.
Not at the death rate or is that a.
Better testing and.
That's not within the scope of a homebuilder.
But in answering your question.
At this point, we haven't seen in effect.
Thank you guys.
The next question comes from Michael.
Good morning.
[noise]. Thanks, good morning, everyone.
First question.
Hoping to get a sense of.
Yeah community count through the balance of the year, obviously with the incredibly robust sell through that you're seeing right now.
Most people would expect it to train down a little bit despite maybe turning back on the land.
Purchasing function.
Any kind of a directional guidance.
That you gave in that regard would be really helpful and you know.
I would assume you know along with that perhaps an expectation for for a return to growth maybe in the first half of next year, but you know any type of directional or degree if magnachip need a commentary would be helpful.
We're pleased with where we're at <unk>.
And we've had reasonable sequential growth.
And we expect to continue.
On the a pathway.
That is you know, we always do which is.
A a profitable conservative that always moving forward.
The maximum extend the weekend in the market.
And I know you might have been a little surprised on how well we did.
But.
I wasn't and.
I think you should assume that we will continue to perform in the way we are.
And on just add on.
Mike Yeah, when we look at our our we have assumed to be active and soon to be inactive community count and that's up 32 seem to be active and 30 soon to be an active so pretty even so that kind of points you to relatively flat subdivision growth between now and the ended the year I mean as you so eloquently put.
But with with accelerated sales anything can happen.
With that number including driving at lower because of the accelerated sales, but right now it looks pretty flattish through the ended the year and then I think for 2021 will will kind of take a look at what transpires over the course next quarter, so and and a comment further at at that point.
Okay, I appreciate that and Larry its and precedent, but you want surprise to 50% order growth.
Most people for the entire industry, where so I congratulate you there.
So Michael the reason why we weren't surprised as we were living it every day.
<unk>.
I I Gotcha Gotcha.
Second question I had is more you know just love to get some color regionally across your different markets. You know, obviously, when you're talking about a 50% growth rate I would assume most markets are doing extremely well and you highlighted Phoenix.
But you know any other markets.
Yeah that you know maybe you know grew well above that 50% or that you feel are exceptionally hot right. Now you know versus other markets, maybe that are up but you know below the corporate line average.
Yeah, I think Mike, California has been pretty resilient.
In the month of June and Yeah, I think a big part of that is that some of the more affordable parts. We added a a good amount of communities to Riverside in southern California. So that's really rebounded a in a fairly significant.
Away for us in the month as of June.
You already mentioned, Arizona, which is has done well I.
I mean really we've seen a strengthened a lot it but different spots, Colorado I think was was right in line with the company average.
Utah has done well so.
Really some some good performance in a lot of markets, but those are the ones I'd highlight.
Alright, thank you.
Sure.
The next question comes from Truman Patterson of Wells Fargo.
Go ahead.
I actually thought possible first I guess could you maybe add a little color on the number of finished lots that you have going into the second half. Another any reason why we which we should think that you might not be able to achieve the absorption that you.
Posted a last year.
<unk>.
But you know I mean, I think community count is probably the best thing to look at there.
We have a higher number of of active communities.
So I don't see anything in particular, obviously with the increased order activity in the month of July that I mentioned.
Of at least 50% that provides evidence that.
That we Oh, we have some continued ability to drive.
The to support that demand if it continues to be there so I'm not seeing anything in particular at this point.
Okay.
You've got three quarters now a a gross margins at or near a 20% have you made any changes in your underwriting criteria and and could you remind us what your no expected gross margin and return hurdles or.
We've not made any changes to our hurdles.
The the old added says kind of a 2000 2020 gross profit margin then.
And a 20% <unk> or is the rule of thumb, we do move up and down above and below that depending upon the risk that we're taking as it finished lots or does it require development.
Is that a new area that we're building in the or are we building in the same subdivision that we've built before so I wouldn't say it theres a lot of difference in the way we're buying lots at this point.
Certainly we're being very cognizant of.
The increased volume that we are getting and we're evaluating pricing as always on a weekly basis to make sure that we do increased price too.
Try to offset.
Cost increases that we know could be coming at at any moment, depending upon where the relationships with our subcontractors go I would also say we did spend sometime during the the a couple of months worth of downturn as we dived into the the.
Moment I'm getting some concessions from our.
Subcontractors and that's proven to be successful and additive to margin in the short term.
Whether or not it sticks longer term I remains to be seen as more and more starts to get recorded.
Thank you appreciate it.
The next question comes from Stephen Kim Evercore ISI. Please go ahead.
Thanks, very much guys.
Yes, hi, Larry stepping back a little bit it obviously, you're seeing historic [laughter] order growth right now and it's happening at the same time that the mortgage rate drop is providing unprecedented price elasticity.
And then you lay on layer on that the fact that.
Briefly in recent history labor constraints had been a challenge for the industry and so I'm trying to figure out whether or you have whether we're going to see that strength manifest itself in a significant pricing more pricing. Maybe then we have often seen in this industry.
Or if youre production machine has really been geared up well enough to make it. So that you can actually see it in a very significant increase in volume.
And maybe that would temper some of my views on pricing. So I'm. Just curious do you agree with the premise that the strong demand in the lower much lower rates drive to unprecedented price elasticity and then secondly, do you feel like we will see your production manifest in more volume or do you think.
We actually could see tremendous pricing power as a result of Oh labor constraint and strong demand.
I think there's about six questions depending on how you analyzed which you were asking but I'll.
Try to give you a reasonable response Steve.
Uh huh.
We see a.
Reasonable pricing power.
Very additive business.
And.
We're in a.
Market that.
Many of the builders the.
Bill.
You know similar housing.
Her in the same.
Elements the same areas.
Same cities.
There's a lot of competition.
And.
Some builders go for volume.
And what we believe we go for is a reasonable gross profit and building it really high quality home.
And so the there's always been the tension.
[noise] between volume and pricing.
And I think in the affordable and.
You have a competition volume pricing.
I believe the ability to.
Build the homes is.
Oh for the larger builders is not an issue.
There's always a.
You are always a little longer little short of what you need.
On the ground, but right now it seems to be balanced.
Oh the country is current the experiencing very high.
Employment.
Oh no in the.
Millions or tens of millions of people looking for work.
And I think Theres a.
Plenty of work that we can give them.
And.
Trades get paid really well.
Most of them are paid.
Piece as far as the.
The Labor force that works for the subcontractors so.
Order they work that we're production the more money theyre going to make so.
I believe at this point, there's a adequate flavor available.
And the market.
Has a strong demand.
And.
I look forward to the next period of years.
Yeah.
Will continue to provide affordable housing to what looks like a good demand not only the millennials.
But because of the virus of people want to move out into the suburbs and have a little grass.
Place for their children to grow up the good schools nice or environment, the urban setting so.
I think Steve were.
Fortunate to be experiencing.
In our industry, where we were right now.
Yeah, no doubt about that.
I wanted to ask your question about your build to order you talked about the fact that.
In this environment being able to offer choice to your buyers a it's a real advantage.
Our sense is that there is there have been some pretty significant changes in some of the amenity packages that people are kind of looking for I'm not very abrupt one on the anywhere in the post covet environment, particularly related to let things like home office and ER and you know that brought on by the work from home trend I was curious have you been able to able to change some of your.
Offerings are already to be able to address some of this demand is this something that we can look forward to over the course of the next call. It six months to a year that would allow you to get an even bigger premium versus let's say existing homes, just trying to get a sense for how quickly you our product is likely to be able to it.
Just to these changing preferences.
Well [noise].
The the factual religious want to changing preferences.
Is if you makes the home larger you have more space to work from home.
You in your own experienced even and others or do you have to be on the kitchen table versus having an extra bedroom.
It's different.
The homes the Richmond provide.
Are probably the most unique fine is finished basements and we do finished the basements and many of the products.
And that gives tremendous less to city.
And I think the work from home.
Ranges deals more with technology versus a square footage is you know Steven square footage cost money.
And as you can see from or average sales price.
Somewhat driven by mix, but focused on the more affordable product. If we're going to continue to work on providing an affordable product you have to watch the creep.
And the creep is the pricing cause significantly by larger square footage, so I don't see a magic but.
Other than people adjusting to their own personal circumstances.
They might change the corner in the kitchen of the or the Granny rumor.
Whatever was extra housing if they were fortunate enough to have it.
They're able to use it.
I don't see it is imagine but.
Other than.
Providing a nice new home the way they wanted which is you know you seen or product that's what we do continuously.
Yeah, Thanks, very much like appreciate it.
It's Steve take care.
Next question comes from.
<unk>.
James Please go ahead.
Hey, Thanks, guys. Congrats congrats on the quarter thoughts on as the absorption rates are rapidly improving here Ah you still have a few divisions in some markets where volumes are probably not fully optimized relative to what you have in.
You are more scaled markets like Colorado, how do you think about you know and as far as new land approvals going forward would it make sense to think about some geographic expansion in the or just anything that you would do to.
Increased density within existing markets or how do you think about new market opportunities I guess I'm I'm also thinking about Florida is an example, where could you extend a little bit further across the four core door or some other corollary to that that would help improve.
Overall division margin levels.
I think that you're.
Asking a question that is a very good question.
Because as we look at.
The markets that we're in.
And the markets that we've just gone into the last two or three years.
We believe that a good aspiration.
That's a goal I hope I've said it properly.
It is we'd always one of the in the top five.
So as you take some markets that we're in.
You can see where we're focused where we have several markets. We have significant shares of we want to maintain those shares and of course enhance the efficiency in the profitability.
But there's a plenty of market share that we will and can take in the markets were in without reinventing the wheel.
Or paying the tax of a.
Learning how to do at some place that we haven't been so we're excited about the markets. The we've just entered into in the last purity years.
Oh the.
Opportunities really are.
Unlimited when you have the financial strength.
We have in as you.
It looks to the Q.
You can see we have almost <unk> billion and I have liquidity available.
And though we are very busy.
Looking for opportunities, where we don't change the risk factor would we call. It is staying in the box.
That is a reasonable size subdivision.
With the utilities are available and zoning and we don't do Masterplans Oh, we built in so homes you know in a very controlled way and the markets, you're speaking of especially Florida you could.
Triple or quadruple in size and keep yourself busy there, but we expect to maintain and or grow.
Good sure the markets you could see by the material were located.
All right. That's very helpful. Appreciate that answer and maybe for Bob just curious if.
Maybe you could add a little extra color on the expected added equity incentive comp or other you know accruals that you might be coming in the third and fourth quarter <unk> is it too early to quantify that yet or how should we anticipate some of that additional you know maybe a little catch up I mean.
Obviously offset by the strong performance, but just how to think about modeling that.
Yeah, Doug I think your relative to where we are in Q2, you could see it it that bump up just on that you cannot DNA line by about 10 or 15%.
In Q3 in Q4 like you said it is it is tough to predict because it does based upon what up performance has transpired during that quarter and and kind of the full set of information.
But that might be a reasonable way does that made it.
At this.
Still think there is plenty of opportunity for year over year improvement in operating leverage, though even with that higher.
Level of.
DNA in Q3 in Q4.
Perfect that's great. Thank God Brett.
Thank you.
The next question comes from Jade handles Wedbush Securities. Please go ahead.
Thanks for taking my questions first one I had what was your average cycle time, you ended the quarter and how did that compared to 19.
Average cycle time, I guess start to finish was right around 145 days I believe I think it was down roughly 3% year over year. It was up just a smidge.
Sequentially from Q2, Q3, maybe 1%.
Right.
And then the second question I had it could you repeat what you said Bob about a more affordable homes what percentage they were of closings. This quarter and then maybe as we think about any count for the rest of the year.
Are you guys wanted to be increasing the communities focused on entry level borrowers or how is that going to play out.
Yeah, and just to clarify the cycle times I will start to finish not start to close.
But yeah in terms of our.
Percentage affordable, we went from 44% to 54% and I believe.
That was on the the closing line.
I think.
On the bales line, we actually increased to about 60% just over that's up from 55% I think both in Q1 and keep you from a year ago.
So yeah, I think that that 60% number you know maybe even a tad higher is probably.
Probably a good range that will settle in.
For the short term.
Great. Thanks for taking my questions.
Your next question comes from Alex Barron of housing Research Center. Please go ahead.
Thanks, guys and strong quarter.
Thank you I wanted I wanted to ask 'em did you can't do anything significantly different in the month of April versus the month of June.
To go from the minus 53% to the plus 53% I mean other than interest rates going down mid year incentives change a lot. It the way you approach sales change a lot can you kind of describe those three months how your.
Oh, Hi, you experience that.
They probably the incentives actually went down in June versus April.
If you look at cancellations, that's really one of the bigger factors, we had done a lot more a co bid related cancellations.
In in a April than we did in June.
So it really settled down on that front as people, obviously, we're not not out of the wood on the pandemic, yet, but I think people got at least.
A little bit of stability behind that as that things started to open up again in circuit certain markets.
Whether or not that that's six or not here over the course the next.
Quarter too so that's probably a bigger thing I mean, we also perfected.
To some degree some of the processes that we had a that we're going virtual so whether that be a virtual sales process.
Or anything supporting the virtual sales process using that technology in our home galleries. For example, I think those got better as we went through the month of April and got deployed to out to more markets, providing a certain level of stability.
Two out to the market, but other than that I think most of it has to do with people being able to gather homes again and start thinking more seriously.
Abouts, I'm getting into the homes and and signing the contract.
Okay, Great and then with regards to your approach to land investments.
Is their current growth rate.
Ah changing your.
Oh, I guess aggressiveness to buy more land versus you know three or four months ago, when before cobot started or.
In other words are you guys still expecting to by the same amount of land or more or less you know how sustainable do you think the Korean brokers.
No I would say are going to Larry sorry [noise].
Oh, I would say we expect to.
Continuing to expand or the acquisition of land.
Always focused in our box.
And we have.
Very skilled land professionals in each of the divisions.
And as the real momentum.
Carries a we will believes that we have an opportunity to.
Well, so a expand with the.
You know it was a bad for a few months good true few months.
And.
We're running a business.
Looking for where we order and also were going and we don't ever forget it so.
You should assume with his.
Legs of the market, we will accelerate.
In order to take advantage of it and to be very opportunistic.
So we will not be sitting still.
If the a momentum continues in the same way.
And.
As if you heard my comments earlier.
A you know could beginning is it your.
And March or April you're trying to reduce your land.
And by May or June you're trying to increase it and right now were.
Doing business aggressively everyday just like all of my competitors Oh, we're all in the market.
Looking for opportunities.
Okay. Thanks Lynn.
Thank you.
Again, you have a question. Please press Star then one on a touchtone phone.
Your next question comes from Ken Zener of Keybanc. Please go ahead.
[noise] afternoon all.
Afternoon.
Optum questions I'm personally obviously, a strong order left.
Well I think you talked about construction times about 145 days to just under five might start to finish I'm wondering is that that is.
Are you talked about up and down over a couple of months in terms outlets I realize things are bad [laughter]. What is crazy all I can I now like the stock market you know volatility.
Yeah.
Exactly what we are tied in school right.
But.
Wed actually kind of controls, whereas the constraints on.
Your production. So if you have an or if you have five orders timing.
Yeah, My big fan out pacing prices the concept, but.
It's like you don't really want to sell the house, if you're out at the local level. More then you know your construction time, because you'll be naked to inflating costs, but its lumber.
No that installation labor 'cause it seems as though you would take the orders.
If you could say I'm, just trying to really understand that Alan that yeah. It at the at the local community level.
Well the local community level is.
<unk> we.
Have a business model that is not a spec.
We have a personalization on all of our homes.
And.
We're able to probably better balance or production usually the.
Spec builder.
Comes in you know high gear.
Throws you know lots of homes builds and concurrently and you know full steam ahead.
And we're more measured.
And more focused and I think we're able to control or production.
Sequentially, a in a better manner than on a Uh huh.
<unk>.
Reactive manner, we're able to do it on a.
He.
It really.
Her four way.
And.
Or interest.
Deals with balance sheet risk.
And as you look at.
Our work in process.
I think it's over.
90% or might even be 95% now for work in process.
As a all pre sold so this is a.
Oh, we're.
Cautiously aggressive.
But we or.
Certainly able to execute.
And they robust man are subject to market conditions and adjusting for the risk that.
Out there and we've done there as you know for decades.
Yeah, So I guess that to the second question little.
You know measured against that the strong order Brett you highlighted running into July but I'd appreciate your and your insights. So obviously, it's yeah I don't want to say, we're having pull forward and ma'am and it's something very strong first job right. So when we had high levels of demand relative to jobs. Given your perspective, you know there was the mid to late eighties.
The 2000 and tax credit.
Yeah, what are your thoughts around this had a pull forward I know you guys are operating your business very.
And in a measured way, but for you know how do you think about that in some new markets that you've entered like Vancouver, Washington into Portland area can you be specific as to what youre seeing in terms of.
That's kind of I'd say I highlighted.
Not only coding concerns, but also yeah. The session on resolutely or think seen that from the <unk>. The suburbs I kind of two questions. Eric for demand you know in how you think that's playing out as well as the social unrest playing out right now in some cities and how that might be affecting suburban Denise. Thank you well [noise].
The last word or two.
Is the a new factor.
Social unrest.
I would say that's you know rescind the last few months.
So we have.
They are.
<unk>.
Opportunistic period of time.
Whoever believed you could get a 30 year loan.
At a 2.5%.
Or maybe it'll be lower before it's over.
Oh.
So I think all of US if we don't have a mortgage should go get one two and I have for sand.
You can buy twice the house that you could [noise].
On payment wise before.
You have a the age group I commented earlier or the millennials.
Their parents finally told them to get out of the basement.
And go do something.
You have people that are.
Looking to I think start families.
Yes people that don't want to live and a high rises and you'd think about it now.
So if you're in an elevator someone else starts to get in you almost one and tell them Willis and stay out of the elevator get the next one.
These are things that are all changing so we happen to be in the REIT industry right time with the right product.
With no problems with Oh, all the capital the skill and the resources and not just M.D.C., it's the industry.
And.
You know we go through cycles.
And I see this is a.
A very significant so I called that I believe will last.
Long periods of time, because there's a changes taking place and help people want to live.
And they don't want to live in the urban area.
The very last comment you made dealt with.
Social unrest well you add that [noise].
To the other things that.
That we've commented on.
Oh, I believe that too.
We're in for very a profitable period of time as an industry.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to ballpark <unk> Chief Financial officer for any closing remarks.
Thank you.
We appreciate everyone a attendance on the call today.
And we.
Look forward to talking with you again soon and we wish everyone, a safe and healthy third quarter. Thank you.
[noise] [noise]. The conference has now concluded. Thank you for attending todays presentation you may now disconnect.
[music].