Q3 2020 MDC Holdings Inc Earnings Call

I mean, it seems like that.

[music].

Good day and welcome to the M.D.C. Holdings, <unk> third quarter Conference call.

All participants will be in listen only mode.

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Please note. This event is being recorded I.

I would now like to turn the conference over to Derek Hemmerle Director of FCC reporting. Please go ahead.

Thank you good morning, ladies and gentlemen, and welcome to MDC holding 2023rd quarter earnings Conference call.

On the call with me today I have our chairman Larry Mizel.

Bob Martin Chief Financial Officer, and Stacy will the Chief Accounting 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 request that participants limit themselves to one question and one follow up question. Please.

Please note that this conference is being recorded and will be available for replay.

For information on how to access the replay please visit our website at MDC Holdings Dotcom.

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 about vision cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act.

The 95.

These statements involve known and unknown risks unfair.

Uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.

These and other factors that could impact the company's actual performance are set forth in the company's third quarter 2020 form 10-Q, which just which is expected to be filed with the SEC today.

It should also be noted that FCC 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. mizel for his opening remarks.

Good morning, Thank you for joining us today as we go over our results for the third quarter 2020 discuss the current rating and Barb.

Detail on <unk> outlook for the company.

M.D.C. holdings posted another quarter of strong operating results.

Well I did by year over year home sales revenue growth of 33% homebuilding operating margin expansion of 370 basis points and net income growth of 96%.

New order growth for the quarter increased 73% as compared to last year on the sales pace.

6.1 homes per community per month.

These results underscore the excellent homebuilding fundamentals, we are currently experiencing across our markets and demonstrate our ability to grow our operations well continue to improve our profit margins the.

The uncertainty surrounding COVID-19 pandemic has not diminished the demand for new homes and in many ways. It didnt agree to home buying activity, thanks to the growing importance of where and how we live.

Homes increasingly serve as offices classrooms, and places of entertainment. So the family and as a result people have gravitated to a living environment.

Then can be accommodated in this new reality.

Well this trend has been a positive development for the overall housing market it.

It has been particularly beneficial to the new home market for several reasons first there is the limited existing inventory for consumers to choose from according to the National Association of Realtors total housing inventories. He ended September totaled one.

<unk> point 4 million units, which was down 19% from a year ago and represents less than a three month supply of homes.

Duncan newly constructed home gives consumers the peace of mind that they will be living in a home that no. One else has lived in which is the real selling point for many families. During these uncertain times.

Third new homes meet the needs of today's family waves of existing homes can not with the latest smart technologies innovative designs and cash.

Demise, the bowl floor plans.

These trends play in the MDC strengths.

Thanks to our build to order operating model, which allows homebuyers touched.

Customize their homes and select AEP upgrades that suit their needs.

Supplementing the demand we've experienced the pandemic as that gets the mark [laughter] demographic shifts.

Towards home buying that we believe will serve as a tailwind for industry moving forward, but.

Millennials are increasingly aging into their prime home buying years, well baby boomers and empty nesters are looking to downsize into homes that sit there new lifestyles.

MDC is well positioned to take advantage of these demographic shifts due to our strategic focus on opening communities with affordable product.

Home buyers of all ages are looking for value when it comes to buying a home and we have found ways to accommodate the desires to more efficient floor plans, while the combination of lower rates and pandemic related bonds has spurred demand across.

All product types, we believe the more affordable segments of the market will be the most resilient overtime.

We have been fortunate in having a deep bench at M.D.C.

And to that end I'm pleased that Rebecca Gibbons has agreed to step into Michaels well.

Role as senior Vice President and General Counsel.

I also want to highlight the recent promotions as they see Woolsey, our chief Accounting officer, who is participating in the call with me today.

On the operation side, David vigorous moved into the important role as Chief operating officer are both homebuilding operations. Anthony barriers has been promoted to president of our financial services operations and Don who has taken on additional responsibilities.

These as senior Vice President of the best funnel for maintenance all of these individuals have proven themselves to be highly capable leaders during the time that MDC.

And I look forward to them contributing to our continued success in the future.

Finally.

I'd like to congratulate David Mann Bridge.

Who is been elected as president and Chief Executive Officer of the company.

David it's been associated with the company since 1977.

Most recently as our president and Chief operating Officer.

And he is widely regarded as one of the most field leaders within the home building industry.

It's moved into the CEO role is a key step in the evolution of our company.

And I look forward to continued collaboration with them on strategic directions of the company.

David will be participating with me in our earning calls going forward.

With that I'd like to turn it over to Bob who will provide more detail on our results this quarter.

Thank you Larry and good morning, everyone.

We experienced strong top line growth for the quarter as home sale revenues increased by 33% year over year to $1 billion.

Homebuilding operating margin improved by 370 basis points from the prior year quarter, resulting in a 109% increase in pre tax income from our homebuilding operations to $101.7 million.

In addition, our financial services pre tax income increased $10.3 million or 73%.

The increase was due to our mortgage business, which continued to benefit from a higher interest rate lock volume an increase capture rate and better net interest income on loans originated during the quarter.

As a result, net income increased 96% to $98.9 million or $1.49 cents per diluted share for the third quarter of 2020.

Our tax rate increased from 19.5% to 21.5% for the 2023rd quarter.

The increase in rate was primarily due to changes in the estimated amount of energy tax credit to be received during the respective quarters.

For the fourth quarter, we currently estimate our 25% tax rate, excluding any discrete items.

Homes delivered increased 25% year over year to 2147, driven by an increase in the number of homes, we hadn't backlog to start the quarter and to a lesser extent an increase in our backlog conversion rate.

The average selling price of homes delivered during the quarter increased 6% to about $466000 incur.

The increase was the result of price increases implemented across the majority of our communities over the past 12 months as well as a shift in the mix of homes closed from Nevada to Southern California.

We're anticipating home deliveries for the fourth quarter of 2023 to between 20 420 600 units.

'cause or conversion for the fourth quarter will be significantly lower than the fourth quarter of 2019 as a result of the considerable year over year increase in orders during the 2023rd quarter, many of which are unlikely to deliver this year.

We expect the average selling price for 2024th quarter unit deliveries to again exceed $460000.

Gross margin from home sales improved by 170 basis points year over year to 20.5% I.

As Larry mentioned during his opening remarks, we're taking a measured approach to growth, which includes maintaining a good sales base at our communities. While also implementing price increases to offset cost inflation and to maximize returns.

While we have seen an increase in certain building costs, most notably lumber as a result of the pandemic and other factors.

We have been successful to this point in recruiting these increased costs through home price increases.

This has resulted in improved gross margins on both built to order and speculative home deliveries across each of our homebuilding segments.

Gross margin from home sales for the 2024th quarter is expected to approach, 21%, excluding impairments and warranty adjustments.

We continue to demonstrate solid operating leverage during the third quarter as our Sq any expense as a percentage of home sale revenues decreased 200 basis points year over year to 10.4% our.

Our total dollar Sta expense for the 2023rd quarter increased $10.9 million year over year, mostly due to variable commissions and marketing expenses that increased in line with our 33% increase in home sale revenues during the period.

Our general and administrative expense was down slightly when compared to the prior year, primarily due to a decrease in stock based compensation that was largely offset by an increase in salaries and other compensation related expenses. Our overall headcount has increased by 5% year over year as we work to support the company's strong growth trajectory.

For the fourth quarter of 2020, we may see our general and administrative expenses increased to between 50 and $55 million due to the 5% year over year increase in head count and I just mentioned additional bonus accruals in line with strong operating results and potential charitable contribution to our foundation.

As I previously mentioned as a result of the continued expansion of our gross margin and our improved operating leverage our homebuilding operating margin defined as gross margin from home sales minus terrestrial day rate grew by 370 basis points year over year to 10.1%.

On the strength of this improvement our last 12 month pre tax return on equity increased 560 basis points year over year to 21.8%, which is our highest level in 15 years.

I would now like to turn the call over to Stacy will be who will talk about our sales and backlog trends baby.

Thanks, Bob and good morning.

Let's look at our net new home orders information for the quarter on slide nine.

The dollar value of our net orders increased 89% year over year to $1.65 billion and unit net orders increased by 73% driven.

And then by a 70% increase in our monthly absorption rate of 6.1.

The average selling price of our net orders increased by 10% year over year, driven by price increases implemented over the past 12 months.

As well as the shift in mix to California, which has our highest average right.

During the third quarter, our California markets had nearly as many net new orders at our Colorado market.

I'd like to note that we ended the quarter with 194 active subdivision, which is slightly higher than a year ago.

The strong sales activity, we've experienced during the third quarter, we have a number of subdivisions that are approaching close out earlier than expected.

As a result, we anticipate roughly 185 active subdivision at year end.

Although this would be a decrease from the end of the third quarter. It would be unchanged from where we started the year.

On slide 10, we provided further net new order detail by month. Since April you can see that sales activity ramped up significantly after the initial slowdown related to the COVID-19 pandemic.

We saw order activity peak during the month of August September remains strong and well above the prior year, even after we increased prices in most of our septimus and.

We also saw the rate of cancellations continue to decrease as the month progressed.

We expect some seasonality to kick in during the fourth quarter. However October has remained very strong relative to the prior year.

Based on the activity we've seen today, we expect our October 2020, net orders to exceed our October 2019 order by at least 50%.

Now, let's turn to slide 11 to discuss backlog.

As a result of our strong sale, we ended the quarter with an estimated sales value for our homes in backlog of $3.1 billion, which was up 47% year over year.

The average selling price of homes in backlog increased 4% due to price increases implemented over the past 12 months.

Decreased incentives and a shift in mix to 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 plan.

And now I'd like to turn the call back over to Bob.

Thanks Stacy.

Ill now turn to land activity on slide 12.

The number of lots, we acquired this quarter increased 63% year over year, reflecting our confidence in market conditions and our focus on continuing to grow our business.

Well the number of lots we approved earlier this year were down due to the uncertainty created by COVID-19, we approved over 3800.

Lots for purchase during the third quarter of 2020.

And then in spite of immense volatility the number of lots approved over the last 12 months has increased by 34% compared to the prior year period.

As a result, our total lots supply to end the quarter was 8% higher than at the same point in 2019 supporting our growth potential for future periods.

We expect to see strong lot approval and acquisition activity continue into the fourth quarter given the robust demand that we've seen in recent months and our conviction about growth prospects for housing in future years.

In summary, clearly we are encouraged by the resilience. The housing market has shown in the third quarter given the immense challenges our country has faced in 2020, and we believe that we've executed our operating strategy well in this volatile environment.

More importantly, we see an opportunity exists to sustained growth well into the future supported by solid demographics and changing customer preferences.

Our current backlog not only puts us in position for a strong end to 2020, but also provides us with the opportunity for significant year over year increases in home sale revenues and pre tax income to start 2021.

With our strong balance sheet and current land pipeline, we are well positioned to grow community count significantly in 2021 and have a preliminary target of at least 10000 home deliveries for the coming fiscal year.

We are mindful that there are many risks to achieving this target, especially with COVID-19 still impacting our daily lives. These.

These risk will be closely monitor as we work to grow our company and the safety of our employees subcontractors and customers will remain a top priority.

Following our strong third quarter, our board of directors has declared a 21% increase in the quarterly cash dividend from 33 cents to 40 cents per share.

This represents a 33% increase from the prior year and demonstrates our commitment to rewarding our shareholders for their continued support.

That concludes my prepared remarks, we will now open up the line for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speaker phone please pick up your handset before pressing the keys.

If that's any time your question has been addressed and you would like to withdraw your question. Please press Star then too.

Please limit yourself to one question and one follow up question.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Michael Rehaut from JP Morgan. Please go ahead.

And for Mike.

My first question has to do with how you're thinking about community count into next year. I know you said you're in a position to grow significantly in 2012 line, but you're expecting the step down in four key love this year.

He has a more community closeouts. So you have a sense of when you'll be able to bring more of those lots online and how maybe the.

He said how community count will trend.

The first couple of quarters of next year and kind of ended the year.

We are not ready yet to share an exact number or percentage at this point, but based upon the current lots controlled and deals we plan to secure in the fourth quarter. We do believe that we have the potential for significant growth in 2021.

Possibly our biggest increase in quite some time cc as you mentioned she talked about community count going down in the fourth quarter to about 185 at the end of the year and that would be about even where we started 2020 and I think from there the growth will start in the first quarter.

And then not proceed from there. So so no exact numbers, but I think we'll start to see it in in Q1.

Okay. That's helpful on the Q1 color and I guess.

Another question I know you've said this strength was pretty broad based across the quarter, but are there any particular market that you want to call out on a relative basis as performing.

Maybe better or worse than the rest of the business.

You know I think of that as you indicated you were really seeing strength everywhere I think you can point to some of the areas that are affordable.

Like Vegas, Phoenix, Orlando, even though some of those areas have been impacted.

By the economy by.

Kits to hospitality, they still have performed well.

The other one that stands out to me.

A little bit of southern California.

You've you've heard mentioned a couple of times about a shift in mix back to southern California I think.

About a year ago, maybe 18 months, we talked about that market not doing so well we were positioned more in a b.

Price your price points in southern California.

Since then we've really shifted towards more affordable areas of southern California and.

And those are really served us well I'm talking areas like Riverside for example, really ups have performed pretty well to the point, where we almost had as many sales in California overall as we did in Colorado during the third quarter and that's not something we can say very often so that's probably the one that I would highlight.

As really standing out.

Got it thank you.

The next question comes from Ivy Zelman of Zelman and Associates. Please go ahead.

Well. Thank you guys for taking my call, but first and foremost I want to congratulate David Mandarin everyone else here with promoted and thank God, we are going to have Larry Phil on the conference call because I don't know early we do without an energy entertaining inside so congrats to you Larry and pleasure working with you or is that.

Okay. So I guess big picture jump all whoever wants to take it recognizing that you are obviously very well position the strength of the market to really provide supply have that start marketplace, but with price appreciation really excels.

Trading at a robust pace, even if rates, let's say stay low your input costs are rising across the board how much further can prices rise before we start to see consumers push back what sticker shock is there in your mind, a level where pricing will start to have clout otherwise.

He will mitigate the positive affordability, we see today, even with rates where they are.

I'd say.

You know like these that.

I go back two or three or four or five yeah.

And if you look from a base line to a high price point in that area.

It's substantially higher than what we currently expect.

Experience, so I do not see are the affordability issue.

As something that concerns me.

At all.

Well you do with the reference point, you mentioned a lot of the affordability Liz offset with exotic mortgage products that allowed for the market to continue to see appreciation, which don't exist today. So how do you respond to that.

Well I respond to the fact that as you know by your own published information we have a substantial demand backlog that has not been met over the last period of years. So we have a broader market in which to.

Peel too.

And therefore, the incremental difference of.

The percentage points that are possible over the next two years.

I don't consider to be an issue the issue deals with the focus on the affordability is a relative term as you know what.

And where do the edges.

For the mortgages is.

Two and a half or 4%.

You will have a reduction of certain people that are qualified but the demand factor for affordable homes and as you know the term affordable changes depending on each market that we're in I believe that there is a clear.

Our runway in front of us.

That will be very attractive.

Well. Thank you very much one more quick one for me and I'll, let everyone else get on just let's just take the theoretically say that next week, we get a democratic sweep tell us what that means for the housing market, both positive that they and anything negatively.

Well.

I understand that one of the key elements of our Democratic sweep is going to be a 15% a tax credit for making your homes more affordable and.

I couldn't think of anything better than supporting a 15% tax credit.

As you know that's not a deduction, that's a credit and that goes up and down the peoples individuals or a tax.

Tax rate so.

I don't expect a or homes are not price for people that are in over $400000, which is the focal point of the implication of additional taxes, but the offset was the 15000 dollar tax credit and I think.

We're prepared to deal with the the evolution of whatever takes place.

Housing is very important ER, everybody politically across the spectrum in favor of it.

And I look forward to the next period of time, regardless, because we're going to be there to do would you know that we've done for.

Almost 50 years is provides a superior product at a competitive price and we were always sensitive is the consumers' needs demands and requirements and we provide that to them.

Thanks, Larry well, congratulations again, and Oh to keep yourself busy enough, but if you need anything well well well give you some cat how that [laughter].

I always have time for more things.

All right well thank you.

The next question comes from John Lovallo of Bank of America. Please go ahead.

Hey, guys. Thank you for taking my question.

Maybe starting Larry with the appointment of David to the CEO position I mean, my understanding is that over the years gave it has been very involved in sort of the home design element at MDC I mean, do you anticipate any change in the direction of that element of the business with the tape at the helm.

No I don't David.

Prior responsibilities is current and perspective.

That product development with cheese.

Considered one of the.

Really the leaders in the industry will continue and will lead to flourish.

As I see the company or expanding substantially.

Okay. That's helpful and then maybe just.

As you're starting to see some of the single family start activity accelerate are there any markets, where you guys are.

Seeing an incremental tightness in labor.

Well I think.

Every place is a good market, there's always a little tightness in labor. The one thing I've learned over 50 years is a new nother a dollar per foot.

Foot per yard per any measurement always seems to bring adequate labor to take care of your needs and with the size come in we have in the volume and what we're able to deliver.

Two or subcontractors and suppliers and.

Trade Associates, Oh, we're able to competitively attract.

Adequate labor and materials to be very efficient in the delivery of what we do.

Thanks, guys.

The next question comes from Truman Patterson of Wells Fargo. Please go ahead.

Hey, good morning, everyone and congrats on a good quarter just wanted to follow up on on the Ivys question. You know there there does seem to be some affordability concerns with investors can you just discuss what you've been able to raise prices by over the past three to four months and what sort of.

The impact that's having on on demand you know it seems like you're for Q order growth rate might have decelerated a bit off from Threeq, just trying to parse out whether or not that's affordability and pricing or you know you intentionally slowing demand or you know just natural market deceleration.

I would take in all those elements you just does.

Really affordability is not one of the issues.

Oh I think that.

So we're really in the accelerated market and there shouldnt be confusion or within the.

Marketplace that.

The necessity in in the ability to expand production when you look at our gross and you look at the growth of our competitors ER business is robust there's legs on it and this is the part of the economy.

That is flourishing in rule, both economic and politically continue to grow.

ER or exam.

Exact percentage of price increases I'd say.

Was in the range of 6% plus or minus.

And we do two things one we adjust for cost of goods sold.

Oh, we adjust for bringing or pricing in line with the market.

Which means that we continue to be.

Competitive adds to our competitors or competition.

So the one thing about the housing industry, there's always healthy competition.

And I see a competition pricing power and the availability or really all working together and Oh. This is a a special period that.

Oh I see as I commented earlier I believe though has legs on it and we're fortunate to be part of it.

Thank you for that seems pretty pretty positive I'm just following up on that Larry you've been through a handful cycles before and I know that no. Two cycles are the same but is there a prior period that really reminds you of today's environment you know it.

Today, clearly, there's strong demographic tailwinds flow rates limited supply, but theres also a potential for you know a little of Cove. It ended up pulling forward demand or the economy remains lackluster moving forward just hoping you can give us your thoughts on some of the moving parts.

I think that MDC is that a.

Right.

Product mix.

To capture the growth that.

That is there in the market.

As you said this is I believe this is like the cycle.

If that is if we count 90 days earlier this year is this cycle.

Which is it was the shortest cycle of that would fit in.

As you recall at the end of last year business was good the beginning of this year business was good and then it slowed down for a couple of months is the world ER.

Focused on what was going on and now we are back really in a play a level playing field that I see going forward.

The 'cause prospects of the economy or the United States and really is a pretty reasonable no matter, whose numbers you take.

Oh, we do have volatility, but in a homebuilding business at this time.

Oh, there's superior transparency and the call your attention to our backlog.

Also the backlog or competitors.

This is a.

A unique period and I don't see and I think I'd commented earlier about.

Crazy mortgages and the.

Prior period, Oh, I don't know three old swirled side, where we don't have crazy mortgages now Oh no you.

Actually you need a full set of documents that reasonable credit.

Pretty much yet they have a job.

So in one form or another.

And so we're no longer in that speculative so.

The main thing.

Bubble, but with a solid environment are dealing with people.

That can afford that had a home and Oh, that's probably the uniqueness is a very little thank.

Speculation that takes place in the market today, which is different from Oh.

You know as I said earlier so.

Oh I think we're in good shape, so the best I can say.

Thanks for that and then one for clarity Bob Your fourth quarter DNA guidance of I believe 50 to 55 million I imagine the employee promotions come with a compensation bump.

Does fourq to capture this or should we expect you know incremental costs going into 2021, and if so could you maybe frame that for us.

Yeah, I think Q4 captures that piece going forward, we are hiring some people so that that could influence what happens in 2021, but I think I'm kind of that 50 to 55 is is a a decent run rate for now.

Okay. Thank you.

The next question comes from Stephen Kim of Evercore. Please.

Yeah. Thanks, a lot guys and congratulations to all a.

With that the new titles, Larry I totally agree with you I have with respect to the the concerns about affordability likely being overblown, particularly at this point when it seems like things are just kind of get just getting going I wanted to ask you about.

The way price trended over the over the third quarter over the last four months basically would you say that it's gained momentum at all on a like for like basis or do you think was pretty steady through the quarter.

Oh Oh.

I Oh.

I don't see use you know the analysis, Steve the momentum.

Oh, it's a.

And if you look at Bob's comment.

Comments on backlog.

Oh, and kind of where we're going.

As you can see we're.

Uhhuh, which you'd coal steady Eddie will remain.

Positive constructive direction.

And ER.

The proof of the putting in the sense that Oh, we have a.

Bob can give you the good numbers or you've got it there or the dollars and the units in backlog.

That's your deliveries for the next six months. So you can see that it's fully transparency.

Yeah, No. It's great. The course, you know the order price being up 10% year over year really caught our eye I was wondering Bob you know how much of that number is aided by increased spending on upgrades.

From homes that were you know maybe play you know the waterfront placed earlier, but now that people are sort of spending more on upgrades versus let's say you know kind of a like for like.

You know the the increase isn't huge year over year on just the Hum Gallery spend it's probably up about 5% to 10% year over year, but.

Tom I don't think that's the big driver Yeah. The bigger drivers are the mix to California, and just overall price increases that we've taken over not just this past quarter, but over the past year.

Yeah got it and then you gave a guide the nice guide here for for Q gross margin ticked up about I think 250 basis points or something you're on your is it fair to think that much of what you see in that strong for Q gross margin, though doesn't really even to reflect the strengths that we've been talking about.

Out here manifesting in Threeq, you just given how long your delivery cycle is that was really more stuff taken a sold before that.

Yeah, I I mean, I think there's some truth to that just in that we did increase prices about 95% of our communities during Q.

Q3, and and not particularly first the backup.

As of Q3, and most of those houses are not likely to close by in till 2021.

That said of course, we are mindful of lumber costs that are not fully.

Flushed through either and the potential for other cost increases.

But you're right. The the price increases are not fully in that number.

Yeah, and then Larry you talked about one of the reasons why you are not overly concerned about affordability is that pay basically you're getting you're not seeing any evidence of people account for the homes. You know after all they are you know on the existing market. They are out bidding on what people left and right.

There are trying outbidding each other we understand and the existing home market prices are up usually 15%.

I'm curious about and you also mentioned that 15000 dollar you know potential freebie.

If you Gotta Biden Presidente in Blue Suede, but you didn't mention the FHA loan limit, which is also poised to increase by a much greater percentage than we've seen in quite some time, just given how strong pricing is going.

That should basically hit all.

All at once in January I'm curious are there are many markets, where you're operating I'm thinking maybe in California or other markets.

Where you got well you don't have a noticeable effect on your ability to gain some headroom on price for your FHLB dependent buyers.

I would say you know your question your UBS.

Observation.

Should say a year ago.

Those are further opportunities, but we don't have those opportunities.

Presented to you today [noise].

Because that would be speculative.

Assumptions.

And our obligation is to give you some facts as they exist.

And hope for better things.

Gotcha, well, thanks, very much guys keep up the good work.

Thank you very much for your support over the years.

The next question comes from Alex Barron of housing Research Center. Please go.

Well.

Yeah. Thanks, guys. Congrats on the good work and on the promotions.

I wanted to ask you know you guys have made a definite shift and towards affordability through seasons.

And other brands I was just kind of curious if you could quantify what percentage of your orders today those homes represented versus a year ago.

And where do you see that mix going into next year.

Yeah, as we look at what we've done this.

A quarter for sales I believe the number is about 40% seasons and.

And about 60.

60% or over.

Overall, when we think about.

Affordability.

And those are those products.

As I look a year ago, we are starting to kind of annualize on it.

I'm, not a little bit, but a year ago I think we're right at about.

53% affordable overall.

And the seasons was about 33% for.

For the quarter.

Got it and based on your land purchases you expect that that ratio will continue trending up.

I think it could I think you could see seasons move closer to 50%.

May be affordable could move closer to 70%.

Got it and so I guess that would imply that your sales pace that also move.

Move up a bit but do you feel that at this point you guys have hit some type of.

You know some type of a ceiling in terms of where sales pace is likely to go where are you in closing some.

Let's call it artificial sales caps on how many homes you are willing to sell for community, where you're pushing prices are where where are you guys seeing your capacity to absorb sales pace at this point.

I I don't think we've seen a a ceiling yet per se and we're balancing out we're not not cutting it off.

We are trying to make sure were balanced between the pace and price as I kind of think of it going forward. You know I always think of a four to five sales per community per month on an annualized basis as being a pretty healthy level. You know if you look back in history.

So that's a that's at least one benchmark out there.

Okay, great well best of luck for for next quarter. Thanks.

Thank you.

The next question from Jay Mccanless of Wedbush Securities. Please go ahead.

Hi, Thanks for taking my questions. The first one I had just wanted to find out what the spec count being down as much as it does versus last year, what what the plan is if.

If you're going to try and reload that spec count going into the spring and then also maybe talk about the differential now between spec and to be built margins.

Well first of all.

In D.C. policy as a concept.

Is no to.

Build specs.

On the specs that are created or strategic as two particular subdivisions and a fall out during the construction period.

We.

I consider it a.

Very advantageous to our business model.

To keep to spec count low right now specs are selling in a somewhat of a strong basis, but.

What I think is unusual.

That we're very proud of his or a work in process.

In aggregate or is Bob you can jump in at 96% of our whip.

That's right 96, and seven of our whip.

He is.

Three so.

And right now no one thinks about risk reward.

But over all these decades, if you listen to a.

Replays or or any aboard material.

We focus on risk adjusted returns.

And we found that we can make as much or more.

As in the industry with not speculating in land and not speculating in building new homes, there's always the timing.

That there's an inflection that like okay specs are pretty good today and things.

Thing long land is good but we found over the years a balance.

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But its land supply of two or three years works and we found that mitigating any speculative inventory, except that which is becomes endurable works because our risk adjusted returns contemplates.

That this is an industry that is cycles.

But you can also look of the confidence we have the board structure over the last 10 15 years and one of the maybe the only companies that maintain and had a large cash dividend, which you probably saw we substantially.

Increase.

So.

Our attitude on it really deals with getting the maximum or O E.

And maintaining a solid balance sheet and providing a return to our shareholders that weve done not only with the appreciation of the stock but also continue was a large dividends vis-a-vis our industry.

And that's really kind of how we looked at it.

And we're getting and stayed consistent.

We're not speculating in land and not speculating with specs because well.

Oh that is work best for us.

In or business model.

Great. Thank you. Thank you for that detailed explanation. So the next question I have.

Cycle times on your to be built homes, where where those stand now versus maybe this time last year.

Yes the.

The number from sale to close is about 215 days.

A year ago. It was up was 198.

If you're just talking about the the start to finish.

It's about 142 days versus 132, a year ago.

And then the last one for me just central did talk about October sales growth being up could you give us what the order count was for October 2019.

The Fivesixty six.

Net.

I see okay, great. Thanks for taking my questions.

Again, if you have a question. Please press Star then one on.

Telephone keypad.

The next question comes from and tenor of Keybanc. Please go ahead.

Good morning, everybody.

More than.

So I just want to make sure I had connection.

It's obviously.

Easier right now to take an order than it is to started a house. So can you talk to perhaps some of the growth constraints, we should think about and what I'm referencing there on your inventory units are up about 26% year over year and your backlog is up 41.

Percent, obviously, there's quite a bit of momentum.

Can you talk to other builders, while taking good orders actually ran out of available communities and Thats why 20 ones that kind of limited structural growth I can if the with 96% of your wet sold.

How do you know what what is your propensity to really start building more and what are some of the issues that you're facing there because I think the demand is there you know writing in order.

Can be done easily but the reality is there's a lot of hearts that need to come together so well.

Can you talk.

About four and a half units of orders that was something you threw out there which could be a reference point for next year, but.

But whatever issues that you think about I mean could you face another quarter of such strong seasonal order growth or how are you hitting a system you know a constraint right now that you're just that you could outline for us. Thank you very much.

Yeah, I think there was a there was a lot to that question and I'll try to tackle that you know like I think a with a lot of demand coming on you always face to face that question is there enough labor out there I think there's lots of reasons to believe that.

The situation is better today than it was several years ago is when we saw a cycle times increase more substantially you've got multifamily maybe that's not doing as well apartments condos, you've got oil and gas not doing as well and that tends to steal our labor sometimes so.

That that gives me some optimism about the situation that we're in now even with a lot of demand coming on.

That said I I still think it is you know a headwind for us that will face as we go into next.

Next year I don't think you can quite quantified it at this point, but we've got a great team in place to out to handle those challenges and to this point, they've they've been able to manage it.

I want to add a further comment.

Sure in D.C. as you go to a prior period of time.

So where I believe we delivered 15000 homes.

ER and ER. So this isn't a new area or that we don't have an awareness of our construction teams.

Or oh.

Really.

Unusual.

The industry.

Hi, usages of broader tone, not just for in D.C.

It really has a a higher level of UBS.

Management skills of personnel that work in the major companies.

That to maybe the general public doesn't realize it's become.

Really a industry that ER has a highly educated or in.

Individuals are managing it we get people in this field with the great skills, we have the technology that.

Moving the elements around in the the opportunity is expanding a production.

Is that something that.

Oh, we're fully engaged with.

And I think we're confident that the.

We'll deal with the challenges that yeah. It presents and they're all good challenge is by the way they're all good problem right. They say good problem I guess, let me ask the same question.

In order words, what is your order or time.

Taking the order into when you actually start the house can you can you I mean, it's obviously you must be starting your orders, but if that has anything changed there then.

Thank you.

We're actually doing more which you might call pre planning.

The cities.

Cities as they've adjusted to extra business.

We found that we have to help help in supplement.

Their processes and procedures and though we are consistent with your question.

We are moving forward, we do in a tighter timeline or whether it deals with getting building permits or inspections.

All these are elements.

I don't think any of those six months ago I thought that the mortgage industry in our world.

Would be remote that a you could run multi billion dollar mortgage operations with people working from home Oh, it's pretty exciting to see the changes and a even though the office loads it gone down and many companies.

Many industries.

I really see a great productivity.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Bob Martin for any closing remarks.

Thank you.

As we bring the call to a close I would like to make special mention of our longtime general Counsel Michael Talbot.

Who has announced his retirement after 26 years of service Michael has been an integral part of our leadership team since 1994, and we wish him well in his next chapter. Thank you Michael.

And with that.

We will conclude our earnings call and we look forward to hosting you again after we complete our fourth quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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