Q2 2020 M/I Homes Inc Earnings Call
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Good afternoon, My name is harder and I'll be your conference operator today at this time I would like to welcome everyone to the M.I. homes incorporated second quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks.
It'll be a question answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you like to withdraw your question press. The pound key. Thank you I now like to times today's call over to our host Mr. feel Creek you may begin.
Thank you very much joining me on the call today as Bob Schottenstein, our CEO and President Tom May City VP.
Clutch president of our mortgage company and breed Hunker, VP corporate controller, and Kevin Hey, Senior VP first to address regulation fair disclosure.
We encourage you to ask any questions regarding issues that you consider material. During this call because we are prohibited from discussing significant nonpublic items with you directly and as to forward looking statements want to remind everyone that the cautionary language about forward looking statements contained in todays press release.
Also applies to any comments made during this call including comments related to cope with 19 also be advised that the company undertakes no obligation to update any forward looking statements made during this call also during this call we disclose certain non-GAAP financial measures a presentation.
Of the most directly comparable financial measure calculated in accordance with gap and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website.
With that I'll turn the call over to Bob. Thank you Phil. Thank you for joining us today on our call.
The second quarter was a record setting quarter for EMI homes. In fact, it was the best quarter in company history with record set in virtually every important financial metric.
We are excited to share our strong results with you.
As everyone knows the first half of 2020 has been a time of significant economic and social instability in our country.
And throughout the world.
Precipitated in large part by an unprecedented almost unimaginable health crisis.
We began the quarter in a highly defensive operating mode proceeding with extreme caution and concern doing our best to react to the challenging and complex conditions, while adapting our operations to safeguard and protect as much as possible our employees our customer.
Others, and our work environment.
All the while at the same time, continuing to try to sell and build quality homes.
The last half of March and early April saw a precipitous decline in our business with new contracts declining significantly.
Housing conditions, both for us and other builders then began to improve in the last half of April.
That improvement materially accelerated for us as our business rebounded significantly in May and June to record setting levels.
Specifically for the quarter April new contracts were down 26% year over year.
May was our best sales month ever at the time with new contracts up 39% year over year only to then be quickly surpassed by our record setting June sales with new contracts up 79% year over year.
We ended the quarter selling a record 2261 homes, 31% better than a year ago.
The tremendous sales momentum we experienced in May and June has continued into July.
We believe there are a number of macro and micro economic factors contributing to our strong sales results.
First the macro.
Historically low mortgage rates near record level near record low inventory levels.
Perhaps a bit of spring selling catch up from March and April.
And a noticeable shift in buyer preference as a result of the pandemic.
With certain households, choosing to move out of rentals or other housing and away from more densely located areas.
In terms of the micro factors, we believe that a good number of our EMI communities.
Most notably our most affordably priced smart series communities have outperformed the market.
And finally, our ability to generate material increase in our online sales leads into effectively convert those leads into sales has also contributed to our strong sales results.
I mentioned, our smart series and its positive impact on our sales performance.
As you know this is our most affordably priced product offering.
During the second quarter, we were offering our smart series homes are roughly 30% of our communities across the company.
And our smart series sales Cumbrous comprised more than 35% of total company sales. This compares to 24% a year ago.
On average our smart series locations produced better sales pace.
Better gross margins better cycle time, and better bottom line returns. There is no question that the continued success rollout and growth of our smart series homes has contributed to our record setting performance.
During the quarter overall company wide sales absorption pace improved to 3.4 sales per community per month compared to 2.7 a year ago.
As mentioned part of this improvement was clearly due to our smart series.
Other highlights from the quarter are we achieved second quarter record revenue of $714 million, an increase of 15% from last year, driven by a second quarter record level of 1835 home closings, which was 19% better than last.
Last year's second quarter.
Pre tax income for the quarter was a record $71.7 million, 74% better than a year ago. As a result of the increased volume along with a 30 basis point improvement in our overhead expense ratio when compared to last year's second quarter. Additionally.
Our gross margin improved during the second quarter to 21.9%.
Up 170 basis points from Q1 of this year, but up also 270 basis points from last years second quarter.
Net income for the second quarter increased 80% to a second quarter record $54.5 million and our diluted earnings per share increased to $1.89 per share from a dollar eight last year.
Am I financial our financial services business also had a record quarter with $10.8 million, a pre tax income, 62% better than a year ago.
Derek Klutch, our CEO of EMI financial will discuss this in more detail later in the call.
Companywide, our backlog sales value at quarter end was $1.5 billion, an all time quarterly record and units in backlog were up 30% to another all time quarterly record of 3691 homes, while the average sale price in backlog.
Doug increased to $396000.
Compared to $395000 for last years second quarter.
Now I will provide some additional comments on our markets and I'll do this by region.
We experienced strong performances across both our northern and southern regions with new contracts in our nine southern regions markets, increasing 30% for the quarter in a similar 31% increase in new contracts in our six northern region markets.
Our deliveries also increased about 19% over last year in both the southern and northern region with the Southern region, which has nine of our 15 markets.
Comprising 60% of total deliveries.
We experienced very solid increases in closings sales and profitability in all four of our Texas markets as well as Charlotte for both the second quarter in the first six months and we continue to make significant progress and growing and improving our operation in Sarasota.
Orlando and Tampa continue to grow their unit volumes and profits and also continued to be two of our very strongest markets. They have recovered quite well after a march slowdown in Florida that continued into April.
In the Northern region Columbus in Minneapolis continued to perform at very high levels. They too are among our strongest markets and we experienced notable increases in our performance and volumes in both Indianapolis and Cincinnati.
We had 126 communities in the southern region at the end of the quarter down from 132, a year ago, and we had 94 communities in the northern region at the end of the quarter, that's up 7% from June of last year.
We have a very strong land position, allowing us to produce our current results as well as to achieve our growth goals in the coming years.
Companywide, we own approximately 15000 lots roughly a two year supply.
And on top of that control via option contracts in additional approximately 20000 lots.
So in total our owned and controlled lots equal roughly 35000 lots or about a five year supply importantly over half of the lots that we own and control, which is about 57% are not on our books.
40% of our owned and controlled lots or in the northern region with the balance roughly 60% in the southern region.
Before turning the call over to fill let me just conclude with several points one economic conditions remain uncertain due to the continuing impact of covert 19.
Accordingly, we will continue to manage and monitor conditions with appropriate caution.
Two.
We had a great quarter and could not be more pleased with the execution and effort of our teams. They continue to operate at a high standard meeting the needs and expectations of our customers.
Three our company is in excellent shape and we are poised to have an outstanding year, Phil Thanks, Bob Forest financial results new contracts for the second quarter increased 31% to 2261 at all time quarterly record compared to 1731 for last year's second quarter.
Our new contracts were down 26% in April up 39% in May end up 79% in June.
Our sales pace was 3.4 in the second quarter and our cancellation rate was 14%.
As to our buyer profile about 50% of our second quarter sales were to first time buyers about the same as the first quarter. In addition, 45% of our second quarter sales were inventory homes compared to about 50% in the first quarter.
Our community Count was to 20 at the end of the quarter. The same as last year second quarter. The breakdown by region is 94 in the Northern region, a 126 in the southern region. During the quarter. We opened 22, new communities, while closing 25, and we opened 39 new communities during the first half of the year.
Sure we delivered a second quarter record 1835 homes in the second quarter, delivering 56% of our backlog compared to 58% a year ago and revenue increased 15% in the second quarter, reaching a second quarter record of 714 million.
Our average closing price for the second quarter was 379003% decrease when compared to last year's second quarter average closing price of 389, and our backlog sales price is 396000 up slightly from 395, a year ago, and our backlog average sale price of our smart.
Series is 300 in 2000.
Our second quarter gross margin was 21.9% up 270 basis points year over year and up 170 basis points from the first quarter, a big reason for our margin improvement is due to our Texas operations. Our construction in labor costs were flat when compared to 2000.
Teen second quarter.
And our second quarter SGN expenses were 11.5% of revenue improving 30 basis points compared to 11.8, a year ago, reflecting greater operating leverage interest expense decreased 2.7 million for the quarter compared to the same period last year interest incurred for the quarter was.
10 point, not 10.3 million compared to 13.2 million a year ago. In this decrease is due to lower outstanding borrowings this year as well as a lower weighted average borrowing rate.
During the quarter, we generated 86 million of EBITDA compared to 58 million in last year's second quarter, and we had 22 million in capitalized interest on our balance sheet about 1% of our assets.
Our effective tax rate was 24% in the second quarter compared to 27% in last year's second quarter.
And this year our rate benefited from energy tax credits, we estimate that our annual effective rate this year to be around 24%.
Earnings per diluted share for the quarter increased to $1.89 per share from 108 per share last year and during the first quarter of this year, we repurchased 2 million of our outstanding shares we did not purchased any shares in the second quarter.
Now Derek Klutch will address our mortgage company results. Thanks, Phil our mortgage and title operations achieved record second quarter results in pre tax income revenue and the number of loans originated.
Revenue was up 33% to $19 million due to a higher volume of loans closed and sold along with improved pricing margins and a higher capture rate.
For the quarter pre tax income was $10.8 million, which was a 62% increase compared to 2019 second quarter.
The loan to value on our first mortgages for the second quarter was 83% in 2020 up slightly from 82% last year.
77% of loans closed in the quarter were conventional and 23% where FHLB or via the same as 2000 Nineteens second quarter.
Our average mortgage amount increased to $311000 in the second quarter compared to $308000 last year.
Loans originated increased to a second quarter record of 1375 loans, which was 33% more than last year and the volume of loans sold increased by 31%.
For the quarter the average borrower credit score on mortgages originated by my financial was 745 up from 741 last quarter.
Our mortgage operation captured about 83% of our business in the second quarter and increased from 79% last year.
We maintained two separate mortgage warehouse credit facilities that provide us with funding for our mortgage originations prior to the sale to investors.
At June Thirtyth, we had $92 million outstanding under the Miami Warehousing agreement, which is a 125 million dollar commitment that was recently extended and expires in may of 2021.
And we also had $43 million outstanding under a separate $65 million repo facility, which expires in October of this year.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually now I'll turn the call back over to Phil Thanks, Derek as far as the balance sheet. Our financial condition continues to be very strong with 1.1 billion in equity at June Thirtyth, a cash balance of 94 million and no out.
Standing borrowings under our 500 million unsecured revolving credit facility.
Also in June we did extend our credit facility maturity to July of 2023.
We are carefully monitoring our cash and our expenditures in the current uncertain environment. We continue to manage our balance sheet carefully total homebuilding inventory June Thirtyth was 1.8 billion, an increase of $67 million above last year.
Our unsold land investment at June Thirtyth is $810 million compared to 797 million a year ago and at June Thirtyth, we had $378 million of raw land and land under development and 432 million at finished unsold lots, we owned 5159 unsold.
Finished lots with an average cost of 84000 per lot and this average lot cost is 21% of our 396000 backlog average sale price. Our goal is to maintain about a one year supply of finished lots and do you own a two to three year supply.
Lots owned and controlled as at June Thirtyth totaled more than 34500 lots.
14800 of which were owned and 19700 under contract. We owned 6900 lots in our northern region and 7900 lots in our southern region and a year ago, we own more than 14800 lots and controlled on additional 14200 for a total of.
29000 lots.
During this year's second quarter, we spent 84 million on land purchases and 72 million on land development for a total of 156 million year to date, we have spent 160 million on land purchases and 134 million on land development for a total year to date spend of 294 million and at.
We ended the quarter, we had 405 completed inventory homes about two per community and 1181 total inventory homes and of the total inventory 515 or in the northern region and 666 or in the southern region.
At June Thirtyth 19, we had 464 completed inventory homes and 1413 total inventory homes.
This completes our presentation, we'll now open the call for any questions or comments.
Okay.
I would like asking all your question press Star and the number one I guess telephone coupon again star followed by the number one I have telephone keypad, well pause for just a moment to compile the kian I roster.
Your first question comes from the line of Alan Ratner with Zelman and associates.
Hey, guys. Good afternoon, congrats on really an incredible quarter, given the climate out there and congrats on all the record to reset this this period.
Alan.
You know I guess, it's always tricky when you see growth rates like like you and others are reporting here just to kind of conceptualize what that means for the business going forward because clearly the housing markets not meant to be growing at an 80% clip and I guess I'm just curious how you see the next few months playing out I mean, I think your last disclosure on your spec supply.
Hi looks expects are down about 20% year over year, you and others, presumably you're going have to start a lot more homes over the next few months I'm just curious how how you just plan on managing the business through that is there appear a point, where it makes sense to push harder on price to slow things down because theres just inefficiencies of growing at that level or do you feel like based.
On your land supply and labor availability that.
You can continue growing at at maybe not these levels, but certainly greater levels and we saw in the past.
Well first of all three months ago, if you'd have asked me what our growth rate would have been in April and June.
I would have missed that gas by 100%.
No we always ethylene.
Yes, we didn't see this coming and so it's very hard to know what's around the corner, but but I think the fact that it is so hard to know what's around the corner I think serves as a guide as a management guide as I mentioned the momentum has continued into July and while we give no specifics on July 1st of all months not over yet.
There continues to be I think just very good conditions for us and I think I'm hearing that from some of our coal competitors as well.
Particularly with respect to the more affordably priced communities and I spoke about our land position I think that.
It's as good as it's ever been.
In terms of not just the number of lots in the fact that the majority of them are off our books, which is a great position to be in given there given the uncertainty that we live in today, but the fact that the price points and that the communities coming on.
Give us a lot of confidence assuming that the that the market is there for us to to grow at acceptable levels. I think it's hard for businesses to grow much more than 10 or 20% of year, you start to get above that and things start to slip through the cracks, but I believe that we can do that if the economies there I.
I think that there are certain challenges right now.
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Less than you might imagine, but there are certain challenges on the construction side with certain with certain logistics, mainly appliances and maybe a few other components.
That.
That may be delaying things a little bit but.
Thus far it's been manageable, we have been able to push price not everywhere, but in many places and I think the the returns that we generated for the quarter.
Support that.
Were you know, we're being careful with that at the same time.
But.
Look you know you know how low the inventory levels are particularly with respect to resales and you know and you know because you got such great research that the new home sale piece of the Pie has has has become a slightly larger.
And.
And then I do think that there is a shift in preference whether at last forever I don't know, but I think that the sanctity that security the comfort the privacy of home.
Is resonating with people, perhaps like never before I wish it didnt take this for that to happen, but I think that there is a tailwind from that and.
You know a.
I also think that.
We still don't have homeownership rates in this country, particularly for the for them. The under 40 cohort cool cohort that are where they probably should be.
Based on certain historical standards.
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The numbers, we'll probably look better as the next year at this time given given our results in some of our competitors but.
I think where we're.
We are I think were rational we're very optimistic, but we're also rational and.
And that's what we're going to continue to do I.
I think we're poised to have an outstanding year.
But on the other hand, we Didnt 690 days ago, we Didnt know where we'd be here now I think that 90 days from now you know.
There may be a few other surprises, but we'll just we'll just have to see no matter. What it is we're ready for it.
We went into almost a full time defensive mode. At the end of March in early April and we started to play more offenses April unfolded and then we you know we were able to adapt quickly.
Really really proud of our execution. This is not about me and it's not really about the people on this call. It's about the folks in the field, who under very difficult circumstances have had to not just deal with wearing masks and maintaining distance, which gets very uncomfortable as we all know but in.
Drive-thru closings and and just doing a lot of things sort of left handed.
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I think we're really good online we don't talk about with a lot, but I think our results we let our results due to the talking.
That's great. Thank you for all of that and Yeah I agree certainly the results to the talking.
Second question, if I could.
Gross margin.
Yes level, we've seen in quite a long time.
I would think that a lot of that strength was actually probably pre pandemic that that contributed to this quarter's great margin. So I'm. Just curious if you can I know you're not going to give specific guidance, but just talk to maybe the a the pluses and minuses that we should think about going forward off of this quarter's record level.
First of all and I think Phill may want to add a few few comments on this.
We.
A year ago.
And certainly two years ago.
We were we were not where we wanted to be with regard to a number of our newer operations not all of them, but certainly some.
Several of our Texas operations were pulling us back they weren't performing at the level. They should be those have been those ships have been righted, that's contributing to lift.
We're starting to get a product really good results from our from from Sarasota, which is a newer markets.
Detroit Detroit's time will come but you know, it's got a lot of upside down the road for us not quite there yet.
Mini Atlas is just spent a tremendous contributor we've only been there.
Less than five years.
So I think that just some of our own internal operational improvement has contributed to margin. The other thing is you know two years ago Smart series was about 15% of our business last year at this time it was 24% of our business today, it's 35% and growing.
And our returns both at the gross margin line in the net line on our Smart series sales and closings are better than on not now the average prices lower but the returns the percentages. So when you put all that in the blend or you sort of get where we are today I don't know if you want editing, Phil and Elting, Bob is that a just a.
Drew down little bit Alan if you look for instance that.
Houston, and San Antonio where today you know the majority of our business is smart series. It was not that way a year ago and the average sale prices more affordable, which is good and also the margins are quite a bit better. So we're definitely getting the benefit from a combination of smart.
Taxes, all four of our Texas markets margins have improved a year ago. Those margins were all below company average now they are a company average or better plus market like Sarasota as Bob mentioned, where we're just kind of get started kind of getting scale.
Creating a little bigger there were getting a little more pricing power. So Sarasota is also helping so we're really pleased.
With our margin improvement, obviously as our sales price as stabilized or gone down a little bit it's very very important that we control our costs get SGN efficiency, but also getting those margins up is very important to us. So we continue to work on that.
Fantastic Good luck guys.
Thanks Al.
Your next question comes from the line.
And.
With JMP Securities.
Hey, guys great quarter.
Thanks, Aaron good to talk to you, yes, good tognino.
Yes, now most of the major things going on here, but was wondering on on the specs side are the margin was running on par with traditional bill right now or is that spreads will negative.
And our equaling buyers prefers back to get new home quickly or orders.
And.
The.
The buyers still preferring to the builds on the way they want.
First of all I think that this this.
Now I'll try to answer part of that.
The the margins on specs historically have been 100 to 200 basis points lower than margins on new builds that's narrowed somewhat and in fact, we have a number of instances, it's pretty hard to painted with two broad brush, but we have a number of instances in certain of our markets where the spec mark.
And serve our you know basically the same is to be belts.
And I think that I did mention that response to the previous question, but thats probably provided some margin lift as well. So your question helps inform the previous question in terms of buyer preference I think that this that there has been a little bit more demand for specs over the last 90 days.
Phil I don't know with April did blip up a little bit, but if you look at us even the last few quarters, we tend to be in that 40% to 50% range also I think a lot of it is that we try to have a pretty definite spec strategy on a subdivision level again, it goes back to Bob as far as you know our operator.
Ears, and that really good job they've done it to make sure that we're very mindful of not only the lot. We put this back on but the the house that product type the price point.
Finally, some people do not want to stay in housing transaction for six months brokers tend to want to take buyers to places where they can get a home quicker if their commission quicker and so forth, but the margins have improved on the specs. We think it is a strength that we have.
At our price point to have a couple of finished specs per community also a couple of specs in the process what people still want to make selections. They can with a compressed cycle time also it does help you know the construction schedule in that we kind of can keep more on even flow type situation helps in our.
Our production teams and our costing so we do feel very good about that we are down a couple of hundred specs now than we were you know a year ago, primarily just because of our.
You know very very strong sales our community counts about the same but hopefully we'll reload that a little bit as we go forward.
But again that just depends on market conditions.
Right and you talked about your land position being the strongest that you've had in years.
But obviously the orders are up.
By magnitude, we haven't seen before is that going to cause.
Irregularities in terms of the timing of community Rollouts or how you plan to.
The phase and different land positions over the next couple of years.
Could I think we'll manage through it I mean, we're dealing with it now I mean, we're all over land development schedules and land delivery schedules.
Some of that you can't totally control because you're relying on third party inspections and that kind of stuff but.
But I look we own and control nearly 35000 lots.
And even if you add a factor of 10 or 20% to our current sales rate that's at least a four year supply.
And the thing I like about at most.
Our two things right price point.
And we have the right to walk away from 60% of the world turns upside down.
It's a good problem to have right now [laughter], yes, I mean, if you look at our communities in general about 50% of our communities. We do the development we control the development. So we then we have a pretty good mix of reliance on third party people and also things that are on us 100%.
And meet sales pace selling communities faster than we thought it's obviously impacted our community count, but it really gets down to a division by division subdivision by subdivision situation.
We feel like overall, we're really in pretty good shape.
All right and then on the financial services side.
As noted that yet to a higher capsule rate lower to the degree of difference that capture rate.
Is that something you can maintain outfits internally to drive that are with the this unique situation.
The the comparison was 83% this quarter to 79% last year in the second quarter.
Year to date, we're actually close to 85% capture rate. So we it's high we think thats little bit on the high side, but we feel pretty confident that we'll be able to maintain.
Mid to low 80% capture rate going forward and I don't want to speak for Derek but I will I think that he would also say that are.
In addition to the better pace better margins better returns with our smart series.
Our capture rates I think there's I think theres greater opportunity to capture if you will on smart series homes that buyer that is a lower price point does a walk in with their own lender or private banker or hangar on or anyone else. So.
That will that could and should contribute to the us being able to keep it that keep it at this high level.
Right.
Thats all I got thanks for the time guys good quarter. Thank you. Thanks.
Hi, Dan if you would like to ask a question that star one on your telephone keypad. Your next question comes from the line of art Winston with pilot at batteries.
On behalf of other stockholders, we just want to thank you for the are excellent management of the this business.
Thank you so much for that I appreciate it.
I just had two questions.
The in effect with SAP in the inventories have grown a little bit over the last 12 month and you managed to pay back debt you actual debt is down and you have no borrowings on your bank loans at all in with mortgage rates at 3% why do you keep talking and an ability to make money.
Make a good profit on this might slow homes, what do you where you so cautious about buying land in increasing the inventory. It seems like this would be a good time with your financial position to go out and not be his question is the way you described yourself.
Well.
You know I think two things can be true.
I think you can you can own and control almost 35000 lots, which is what we do own and control and you can still be cautious about what you're doing and with what we have on our plate. We have the ability to grow this business pretty significantly over the next several years assuming.
You know that the economic conditions allow for that kind of thing.
We have a long track record and I think that.
We intend to take full advantage the conditions that are out there, but I think it would be.
I just wouldn't feel.
Honest if I, if we didnt acknowledge that the conditions that exists within the economy are very hard to understand and predict.
And while housing conditions, if somehow someway managed to just pierce through all of the noise and and calamity, whether they'll continue to.
I think is I think.
There are at least as a question about that.
The caution that we have is not going to prevent us from from achieving what I think would be acceptable growth goals. I think also as a situation where that when you when you buy the land in you on the land.
No you're taking certain risk I mean, our business tends to be a lot about you know who are the buyers where other buyers coming from and when you buy something today, you may not actually be in their selling houses for a year. So if those jobs where to go away those jobs were to change.
Also competitive landscape and so forth. So if you if you buy land today, perhaps probably you are getting a cheaper than you will a year too, but not only do you have carrying costs you have market risk of what happens to the jobs what happens to the economic fat.
Theres as Bob said, so we think we can run our business really well if we can own about a year of finished lots.
Then if we can on top of that own another year or two and then control on top of that another year or two would you give us for five years, we think thats, a real prudent way of running the business is it more difficult to.
Invest in land that that you intend to build the smart home the smaller homes on is the harder to find.
Just depends you know right now we've got a really good pipeline.
But we're not the only builder as you probably know that's hanging there had on increasing their their output of affordable homes, so its competitive but.
You know.
We've got a really good pipeline.
Good I have one more question.
On the finance operations. Your company. Your division has done very well with low mortgage rates high mortgage rates et cetera is there any weight to make some kind of an acquisition to make this business bigger than the natural growth you're getting by higher captured stuff no words to expand this business.
At a greater pace given I think your success in return on investment in the past.
Maybe a although that's not something thats part of our current thinking at all.
Okay.
We've done some small acquisitions.
The our entered our entrance into Detroit.
Was about a $90 million acquisition, a couple of years ago.
We continue to look at additional markets to enter now talking about finding the finance company.
Uh huh.
I Miss I missed that yeah I'm sorry.
With that this is Derek we looked at retail business refinance business.
It's a different a totally separate business.
You don't just hang up a sign and do that and we have decided that we stick to what we do really well, okay. I think with the investment we have in the returns we get from the mortgage and title operations.
As a good spot for us.
Hi, Thank you for everything.
Thank you.
Your next question comes from the line.
Jay Mccanless from land base.
Good afternoon, everyone. Congrats from me as Jay Edgewater me.
So let me try and ask the land question. This way with the pipeline you have.
When might the community count store to inflect back higher.
Because you know amazing sales this quarter.
It sounds like July's doing very well also I'm just worried about how how quickly you are going to run through the communities.
And when based on what you haven't for any right now when that count might start to turn back higher.
The while Phil is getting ready to answer that I'll simply say this huh.
I think community Count is look we get we were giving guidance in two areas. One was land spend we've suspended that the other was community count we suspended that will probably reinstate both of those at some point down the road.
So the fact that we were giving guidance on community count must make us think as you do that it is important.
But I also think it can be very deceiving.
As an example.
Most of our smart series communities have significantly more single family lots in them.
Then.
Typical.
Move up or higher price.
Community.
I I don't have the exact number but I would say I would guess that an average smart series community has.
150 to 200 lost some have even more whereas typical other community might be 50 to 80 lots.
Believing you can can skip through at a couple of years and pace has an impact on that when you look at the you when you analyze whether to buy or not too. So you know I think that ins community counts really important I'm not saying it isn't but total lots owned owned and controlled and our belief as to whether we can achieve growth goal.
Goals I think is at least as important if not more so given the slight change in the product offering with smart now comprising.
So almost 40% of our business.
You know jangling I would add is that I mean, we're in the subdivision business. That's what it's all about that's how we run the business and it is a very very important item for us.
Excellent definitely what Bob said all communities are not created equal the smart series tends to give us higher absorptions higher profitability et cetera.
We are probably never say never these crazy days, we're probably going to opened less communities. This year than we had thought obviously with especially the March and April craziness in the world. So we are going to probably opened less than we thought also if sales continue strong as.
They have in July.
Sell more than we thought so the community count increase is definitely going to be challenge. This year, having said that again ankle what Bob said, we think we are positioned very well from a land standpoint to continue our growth.
If you look at this year right now you know were like.
7000 unit run rate couple of years ago, we were doing 4000. So in our 15 divisions you know as we continue to grow those divisions on average to 500 600, some might be 100, some might be 400, we still think there's quite a bit of room to grow in our.
Existing 15 markets in the next couple of years, and then having said that obviously community count is very much of a part of that.
We are we are buying more land now than we were the first couple of quarters, because things have kind of pick back up but again, we feel like we are in good shape to continue growing the business.
Great. Thank you for for the information on that.
What.
On pricing power can you talk about what percentage of your communities were able to raise price during the quarter.
I don't really haven't I don't have a good percentage on that.
We feel good about our margins.
We spend a lot of time on opening communities the right way.
We try to very much to control communities and don't get too far ahead of ourselves because you know cost protection is always challenging in our business. So we try to run the business you sell five or six houses take the price up just 500 bucks or a thousand so every communities all day.
Different but we aren't getting some pricing power you can see that in our margins and you know will continue to focus on that.
Okay.
And then two other quick questions first the.
I know most of the builders were running.
Some incentives in late March in parts of April.
Just wondering if there's any if you guys were doing any of that that we should expect maybe could be a small headwind to gross margin as we think about the back half of the year.
We don't give any margin projection.
I would not say specifically, we were doing a lot of incentives.
Right. After the pandemic started hitting or whatever you know with our sales being so strong like Bob said, you know selling you know.
800, plus in May and beating band in June and continuing in July we definitely try an inch price up the issue you get into is you know there are some supply challenges out there cycle times I think we'll probably be a little slower the second half with some of the issues every mark.
Gets a little different but.
Hey, we're we're laser focused on margins, that's a big part of profitability of our business will continue to be that way.
Absolutely, yes, you actually that was going to be my other question. It's just we're cycle times now versus where they were last year.
You know they're up couple of days, if you look overall company average where the 141 50 range overall look at the Smart series there in the 121 30 range, but they are up a couple of days compared to last year.
Okay, Congrats again and thanks for taking my questions.
Thanks Jay.
We have no further questions from the phones.
Thank you for joining us both foreign talking to you next quarter.
This concludes today's conference call you may now disconnect.
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