Q3 2020 Meritage Homes Corp Earnings Call
Good day, everyone. You're currently holding for days Meritage homes CIRCOR third quarter 2020 conference calls are still sibling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.
[music].
Good day, everyone and thank you for standing by.
Welcome to the marriage home third quarter 2020 analysts call today's conference is being recorded.
At this time I'd like to turn the conference over to Emily to Donna. Please go ahead.
Yeah, Good morning, and welcome to our analyst call to discuss our third quarter and year to date 2020 results. We issued a press release yesterday. After the market closed you can find it along with the slides will refer to during this call on our website at investors that meritage homes dot com or by selecting the investor relation.
Sure Blake at the bottom of our home page. Please.
Please refer to slide two crushing use at our statements during this call as well as the press release and accompanying slides contain forward looking statements, including but not limited to our views regarding the health of the housing market disruptions to our business by COVID-19, economic conditions and changes in interest rates community count and absorption.
Projected full year 2020 home closings and revenue gross margins SDMA expenses tax rate and diluted earnings per share as well as better now.
Those in any other projection represents a current opinions of management, which are subject to change at any time and we assume no obligation to update any forward looking statements are inherently uncertain our actual results.
Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically or 2019 annual report on form 10-K, and subsequent quarterly reports on.
Forms 10-Q, which contain a more detailed discussion of those risks. We have also provided a reconciliation of our sort of any non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measure.
With us today to discuss our results or Steve Hilton Chairman and CEO, he likes to revamp executive Vice President and CFO ethylene Lord Executive Vice President and Chief operating officer of Meritage homes, We expect first call to last about an hour a replay will be available on our website within approximately one hour.
After we conclude the call and will remain active through November.
I'll now turn it over to Mr. Hilton Steve.
Thank you I'd like to walk you ever want to just stay on the call today.
Your family there continue to stay sales.
Healthy.
Well did you call you budget, because we cannot sustain sales people blessing Anderson, whose return it was just vice President Investor Relations are murdered after 16 years.
Great job serves as a company to our investors and analysts.
And he will be joining us, but also what's your interviews and we just don't know argues that was our oh.
Good luck here and what did you get a big shoes to fill and I don't know, where that's at least 15 years like right.
Now this is a lot of smart home receivables Chief Executive Officer American home on their earnings call.
As previously announced effective January 1st.
We feel pretty good she's going to see any no.
Oh, sorry, that's it.
After 35 years actually become executive Chairman Emeritus for.
I want to do especially on these calls, but we will be taking a week.
It was about eight years ago for 12 years.
That's one of the years excuse me <unk>, Chief operating officer Bleach sales of cohorts of the sports rights fees also issued a lot of assumptions a heartbeat.
Well done on the operational excellence dose efficiencies throughout our organization.
I feel hoppers, a very cool computer games innovative leader, but my example quality value our customers are going to be like under coli stewardship.
Well I'm sorry go ahead.
We will.
So let's talk about the corn really December 32014.
She has made remarkable achievements, we delivered the highest quarterly four quarters or so I still feel true since 2005.
Quarterly sales revenue.
I'm not the best quarterly gross margin since 2014.
As far as lumber prices well also achieved our lowest net debt to capital our company's history.
Ultimately results or even go so unhealthy dynamics endorsed strategy.
So I'll start on slide four.
We sold 3881 homes this quarter.
<unk> third quarter, 2019, and surpassing a quarterly record for me just snacks in the previous 40 this year.
Although we are still a wal marts koby pen down like that.
Favorable macroeconomic factors for the new home industry that began last quarter continued into Q3, we clearly saw the long distance rates.
Increased demand for healthier safer home.
In the supply of existing home sales things, it's a decades long supply shortage of new homes in the market.
All these I know squiggly I'd be dangerous backdrop.
Combining our strategy that we set up we're going to do a home translated to another exciting quarter from nervous.
Moving on to slide five.
We believe the home.
That's right you are executing at a high level.
She's very strong revenue growth, we believe reason both pace and price.
While we are increasing prices in all geographies no one in the local market conditions were not turning down sales where demand exists.
We can't or won't capture to do whatever possible because of our available sex home.
Especially the strategy of this allows us to sell at a greater pace and take market share.
In Q3 of 2014, we accelerated our main about since I save nearly $300 million and put a record 90000, new lots under control.
Our balance sheet remains very strong which provides a long runway for growth as world is facing that I mean is that as another downturn.
Moving to page 20, we would it be.
And a low leverage even as we invest to give everybody forgets how girls and all our existing markets.
Well the accelerated sales trends we sold it.
Early sales community Closeouts this quarter, we're still on track to achieving 300 active communities.
<unk> submitted its 2022 I guess is there a strategy our new entry level communities will have a hard ball I'm expecting indoors immediately available for sale that community openings, which is gonna be close relatively quickly.
I'll now turn it over to fully discuss more of the recent trends Luke.
Thank you Steve.
Before I begin and on behalf of the entire company I would like to thank Steve for 35 years of incredible leadership has guided the company through both successful and turbulent times.
As well as I'm still the values integrity and believes that live with teachers on marriage today.
Steve commitment to our employees customers and shareholders as well as the vision and execution letters to the company's all time records today.
I would also like to personally thank Steve for his mentorship and guidance over the last decade.
Deeply honored to have the opportunity to service organization and its employees at the upcoming CEO and to continue working together for Steve and his next chapter of Meritas home story.
Slide fitness.
We hit on all cylinders during the three months ended September 20 Twond.
Our absorption pace for the quarter was up 94% year over year.
I've got a nice day kind of Georgia, increasing over 100% year over year this quarter much.
Much of this sales performance is due to the strength in the entry level market.
Actually well represented 60% of our average active community starting this quarter compared to 42% a year ago, which puts.
Which puts us near our target ratio of 65%, 35% between entry level and first move up.
Absorptions are not actually Lucky beauty, we're studying fires that hires last year and nearly 1.5 times the pace a first move up communities.
As you all know comprise almost 70% of total orders for the third quarter up from 54% in the third quarter last year.
I personally know clearly also experienced improved demand year over year with absorption, 86% higher than a year ago.
Slide show.
Hi, Manny you two in Q3 of 2020 to 23 or will we see any close out this quarter.
These are all happening across all existing geography, we answer.
We anticipate continued strong sales demand and shopping that's what I've seen so in the near future.
Right.
Oh man about snakes, and we'll continue to do so to replenish our pipeline to keep up with demand and grow our community count we.
We have been aggressively securing new box since mid April following a pause due to cobiz Nike related shutdowns during <unk>.
During 2019, we put a 17000, new lots under control, which translates to 134 new communities we put.
We put approximately 16000 lots under control in just the first time buyers of 2020 almost.
Almost as much as all this morning, I see a nearly 80% more than 20 89000, new ball.
This translates into about 123, new communities put under control during the first nine months of this year with dozens more to come in the fourth quarter.
At September 32020, with nearly 48000 total outstanding representing 4.4 years of lot supply based on trailing 12 month closing we've.
We've increased our landfills by almost 30% from September 32019.
As part of our actually last Friday, the average size of our communities with also expanded we've been putting larger acquisitions under contract [noise] often.
Often several hundred lots at a time targeting a three to five year can be life, even out to accelerate sales place.
Year to date September 30, 20.8 are you lots under control or 81% actually level with an average TV size of a higher starting July.
We are scheduled to open up more than 150 communities in 2021 compared to opening 75 communities in all of 2019 and approximately 100 communities projected for full year 20 points.
After being shot sales were six weeks due to COVID-19, we believe.
We believe that our aggressive pace of securing new watch and a strong pipeline of new openings will start to meaningfully show increasing teach out in the later half of next year.
Pages 50 sales per year, an average of 300 communities could recently produced 15000 sales in 2022.
Slide eight.
Moving to the regional level trends on Friday, all of our regions, reflecting solid year over year performance in Q3.
Our central region comprised of Texas led is onboard rose this quarter with an 82% increase in orders over the third quarter 2018, Despite a 14% decline in average community count the sales.
The central regions absorption doubled to six per month compared to three per month in the third quarter of 2019 as you go.
I took all communities, representing 63% of central regions average active communities during the third quarter of 20 point.
I worked in the West region were up 68% over the third quarter 2019, driven by 88% increase in absorption with 10% fewer opportunities.
And she's all communities, representing a 63% of the West region average active communities during the quarter.
California produced the largest year over year growth in orders at a 158% for the quarter and the highest absorptions the Baltic States, we operate in selling it out or just don't know per month during the quarter of 2020, which was an increase of 137% in its largest year over year.
Our community Count in California, also increased 9% year over year for the third quarter 21, where.
We're seeing the success of the shift to newer affordable entry level communities in California come through in the comedic talent and sales performance there.
Our east region experienced order growth of 63% or 87% increase in absorptions year over year for the quarter offsetting a 30% decline in average community count 50% of Robert <unk> and the East region, we're actually levels during the quarter.
I will now turn it over to you I'll provide additional analysis of our financial result, you up into sleep.
Thank you Felipe, let's turn to slide nine we got.
We generated 66% earnings growth year over year in the third quarter of 2020 compared to the same period in 2019.
Significant growth across all key metrics with 21% closing revenue grew 270% increase in home closing gross margin and if that means that concerns me and I see M&A as a percentage of home closing right [noise] did.
This quarter's closings were up 24% year over year with 71% of closings coming from previously starting site inventory at September 32020, approximately 14% of total specs were completed last in the last couple of quarters Understandably I first online in earlier stages of production.
Although they say now make it also drive any decrease in our backlog conversion rate over the last several quarters [laughter] conversion rate for the third quarter was 68%, which is flat year over year.
Year over here I mean in fact construction pace it keeping up the sales.
We generated over 1.1 billion of revenue in Q3, 2020, and 30 year over year increases, including volume, reflecting our record high sales more than offset the decline in ASCII, how clothing, resulting from the shift in product mix towards entry level.
Clothing gross margin improved 170 debt to 21.5% for the third quarter of 2020 from 19.8 a year ago.
Higher home prices more than offset record lumber costs, you additional closing volume and the efficiencies achieved from our seamless operation and national purchasing savings teaching we did it you have 31% year over year increase in total closing profit.
As we have previously covered we have been able to continue to harvest savings and on material cost.
Do you think you can do it she's preferred vendor pricing and bulk purchasing discount bikinis down. It's just kind of curious where available I see my production also allowed us to obtain preferred labour pricing from Exane.
Ftn <unk> as a percentage of home closing revenue with 10, 21% for the current quarter, which was a seven cents improvement over time, just like they did 2019 due to greater leverage of fixed expenses and efficiency, even higher closing volumes as well as cost savings on technology enhancements, particularly as their leases.
Sales and marketing effort.
We also benefited from a lower tax rate with the extension of the energy tax credits into 2020 under the taxpayer certainty and disaster tax relief.
Access you know since December 2019.
Our effective tax rate was 19.5% for the third quarter this year versus 24.4 last year.
Third quarter diluted EPS of $2.84 also benefited from our repurchase 1 million shares in the first quarter of 2020.
Hi, just a few items for year to date results September Thirtyth 2020 on a year over year basis, we generated 86% increase in net earnings orders were up 40% what it means for us.
26%, we added 250 Bips increase in home closing gross margin and then 90 get them pretty me and at <unk> as a percentage of home closing revenue.
The strong start to 2020 and rapid recovery that started in mid April one and offset any pullback experience from covidien related uncertainties.
Q1, it's very early Q2.
Moving onto the site.
Our balance sheet continues to be very strong even have any step up investment in land acquisition and development, we have plenty of liquidity, including 610 million of cash nothing drawn on our credit facility and a lower net debt to cap in the lowest nice nice efficacy in our company's history at 16.7%.
We grew our spec inventory stocks, Mike I raised the lapping point Q specs per community. This quarter after dipping in the second quarter to about 9.3, we are committed to increasing our first stores that kinda by year end, but inventory on the ground available for a quick close yes.
We anticipate our heavy backlog increased volume as they also backs entering into 2021 results in your script with backlog conversion and solid clothing into next year.
Slide 11.
Our land acquisition and development strategy is very nimble and we can aggressively increased our purchases in the housing market is hot and.
And also pulled back quickly on the housing market.
We spent nearly 300 million on land development this quarter I assigned interest in a single quarter in our history for the first nine months of 2020, we spent nearly $760 million on land acquisition and development, which is more than 28% higher.
Period of last year.
We are eating options are staggering tricky in terms to secure more loss, which allowed us to preserve our liquidity.
58% of our sort of lot inventory at September 32020 was owned and 42% what option, which improved compared to September 32019 with 66%.
34% option.
Finally, I'll direct you to slide 12.
2020 will be a record year in spite of a fantastic. We anticipate continued strength in Q4 of caution eases off could be impacted by uncertainty surrounding the election, probably 19 or financial market volatility for the full year 2020, we're projecting total closings to be between 11.
I'll requeue hundred and 11500 units.
Closing revenue of four point to just 1.4 billion.
Including gross margin toxin, only 21% to 21.5% and effective tax rate of 20 to 21, Chris I ended mood and he has a $10 or 25 cents to $10 in debt.
With that I'll turn it back over to Steve.
Thank you you Oh.
Turning to slide 13.
To summarize.
Meritage homes today is a different company, though when I told about 90.
In 1985.
Our culture and our computers shift has been transformative.
I'm proud of the innovative products energy efficiency superior quality and affordability that we have delivered in every home that legal.
Now was one of the leading into the home pursue the home owners murders is well positioned to capitalize on current market demand and deliver strong results into the future.
Demand is through the roof.
An intended.
Our closings revenue growth benefits from our focus on a quarterly profit, which allows us to pursue both price and pace.
Whatever your leverage above DNA and streamlined operations on top of quarterly revenue growth, you're seeing some of the strongest results Emeritus history.
Our financial flexibility to grow comes from having a strong balance sheet with X.
The cats and the lowest net debt to capital we've ever had.
We are focused on a world class, so right away and investments judicial whole those 300 community count.
Early to mid 2022.
We are driving an increase in hourly and creating value for our shareholders.
All this was a combination of the right strategy ability to execute and the dedication of the incredibly talented team.
Truly believe the opportunities for future growth and success are boundless the meritage.
I want to personally thank our employees without their friends, one meritage homes exactly the same at a vision for this company and our people and the people made it a reality.
No I personally, though I want to say a few I want to say, thank you to the investment community. So your long term interest and support.
Company and for my leadership.
After 91 quarters.
First off what was really good question.
I'm not sure how will slow down the anxiety over the quarterly full body scan.
You know how much they're going to lose most all of you [laughter].
That concludes our prepared remarks.
I'll now turn the call over to our operator for instructions on today.
Operator.
Thank you.
If you would like to ask a question. Please signal by pressing star followed by the one on your telephone keypad Oh. So if you are using a speaker phone. Please make sure. Your mute function is turned off the line your signal to reach our equipment. Once again it is star one to ask a question.
And we'll go first to Alan Ratner with Zelman and associates.
Hey, guys. Good morning, first off a big congrats to a I guess everybody on the line Steve Grant Emily.
Steve I think I speak for everybody that we will certainly Miss you on these calls as well, but best of luck in the next chapter.
Yeah. So I think the you know obviously the big topic that everybody's focused on today is just this concept of fee or have we hit a point where builders have to intentionally slow the pace of activity for a multitude.
For a multitude of reasons, then obviously nobody was expecting 70% growth to continue here, but.
Yeah. The community Count is a big topic and I think you know 300 target.
Yeah, 22 is certainly extremely positive and optimistic and I guess the question is what does that cadence look like there's obviously concern that you have enough product on the ground heading into the selling season for next year. So it's going to be somewhat smooth for the year are back half weighted front half weighted but I guess.
On top of that perhaps the better driver of your growth. This spec inventory as opposed to communities in such a high percentage of your sales are stuck. So can you maybe give us a little bit of a target of what you're hoping to have on a year over year basis. Your spec count heading into 21, just so we can get some idea of the planning and growth.
So there's a lot the home passed there Alan and I appreciate the question and I appreciate years not only support.
I believe last couple of decades.
You know it's been a great ride in the you guys have provided us.
Provided us some very thoughtful coverage and researching would really appreciate that.
We shipped that you know I think it's important for investors and analysts to look a little more long term than just as the next couple of quarters.
Swayze.
It's going to be a little bumpy for us in the next couple of quarters, particularly if the strong sales continue which I don't see any reason why they will be.
But you know we got we have a loss it's not a question of if it's a question of when these communities are going to come home and they're going.
And they're going to produce really solid long term growth for our company.
You know sleep. So the news section you know it.
You know, we should be able to so at least 15000 homes in 2000.
And 22.
Well the source for.
And literally this this coming year.
I mean, your you know with the really big backlog.
Because we've been selling homes earlier in the <unk>.
The cycle times, even though we've been selling predominantly sascar, we're selling them or they're just serving versus when they are just finishing.
Which is building in our backlog.
This is that we're really.
We're really focused on trying to get about 3000 home started 3000 homes into the specs like wine a cigarette rub 21 or 2200 now so.
So we're going to ramp up our specs for the spring selling season, which will also help us with our.
With our deliveries next year.
But you know if you're only looking for the next quarter or two.
Got to be bumpy.
But if you want if you're a long term investor in your thinking about where this company is having long term.
Long term is not that long ago, it's no we're talking a year away.
It looks like it looks pretty good and pretty darn excited about what we have.
In our pipeline and I think I think I think investors should should also.
Very helpful. Steve I appreciate that context, and certainly with the Bumpiness. You know you do about the balance sheet to to take advantage of any shorter term disruption does not occur in the shares as well so.
Any count growth, it's a it's going to be extremely strong are there any SGT expense considerations. We should we should consider here as far as front loading some expenses that might be associated with opening those communities and when would those show up.
Oh lets sleep and he will take that one.
Yeah, obviously with the ramp up to 300 communities you know you're talking about you know 30%.
30% growth in or can you tell even if the pandemic didn't occur and so we are bad you know.
Different layers to our organization to support that to support the higher skilled community. So you can expect to see as DNA increase next year year over year, it's mostly going to be timed with the community. The community openings. So no I would expect that to happen more in the back half of the year than first happier, we're always trying to be very mindful.
Of adding you know the overhead as we start to see the revenue will occur specifically in the field overhead piece. So it's going to it's going to be more weighted towards the back half of next year, but clearly we've got when folks and land development folks we have more land that we're processing today than we ever have in the history of the company you guys we thrive.
To get to the 300 communities or early to mid part of 2022, unless maybe he wants to add something to this as well, yes. I think you guys. You know we have over how do you see different components right hand washing that lives in my opinion. Unfortunately, I can't say no to that obviously very high tech hindsight, some capacity to grow the company.
You know my blanket the they're usually fall right, there's going to be offsets in other directions. So I know you're not really going to see continued improvement in our asking rents, but you're not going to see a material deterioration either there just wanted to make sure. We have found some guardrails on numbers.
Very helpful. Thank you very much and great luck.
Thank you.
Well go next to Truman Patterson with Wells Fargo.
Hey, good morning, everyone and let me throw out my congrats to everyone on the call as well now the Grinch officially retired I've been trying to convince them to it's moved to Phoenix. Finally, so we'll see what happens there [laughter], but [laughter] you know first crushing know clearly investors are sold.
Just on the 18% screen count decline, which clearly.
A bit of a victim of your own success really but.
Hypothetically if the market's growing you know orders on the market are growing at a 20% clip or 25% clip in the first half of <unk>.
2021.
Thank you all will be able to meet the market and really offset some of this community count volatility through an elevated absorption pace I'm also thinking no you're replacing 75% of your communities.
Affectively in 2021, what should have a higher lot count, maybe a little bit better absorption pace.
You just walk us through maybe that hypothetical.
Well I mean, I can't give you a specific guidance for the first quarter of <unk>.
The only one of the first quarter were 22, what I've just said, it's going to be a little choppy. If you just focus on the community count number.
But.
You know with a higher absorption you're getting.
We should be all that produce you know some decent sales numbers I don't know if we're going to go against the 20% greater than it was in.
2020, we had a pretty good January February.
And this year. So you know as I said.
Look more closely at the backlog.
In the spec count because we have.
And then the 21.
Which should produce some really good earnings numbers for the first couple of quarters of 21.
After that we're going to have to rely on the community count start to kick in.
James Propel us.
Into some really good 22 numbers.
And.
I don't know what else I can really tell you to.
You know can you count it's an issue, but it's a short term issue.
It's not a question that if it's a question of one when even before we bought a lot of loss.
Sales of our while we're not seeing resistance the body in white stuff that that.
Fit within our strategy.
And.
You know, we're going to be opening more communities next year than we ever had before.
And I think that's long term and I feel really good about the quality of the communities. We're opening the locations of which to me is the ROE for me.
And and again its going to produce really solid long term results.
We can yes, 21 Guy is yes, we're going to obviously do that next quarter on our next quarter call by its just a couple of directional items that I think we addressed in the prepared remarks, let me maybe I can barely keating.
There will be an inflection point at some point in 21 of the community count right, we're not going to get to that 300 community count number all in 22. So there will be a point in 21, and we're not we're not getting a target for which quarter, where well see material increase in our community count in that community count like a lot of back already.
That's on the ground I don't think you'll see that the sales topped at that time and you'll see the closings come very shortly after Kathy.
It kinda talk to provide a little bit of a pop Aaron I think how we will and she's been here a lot of back to the heavy backlog and then at some point Jamie here will have an inflection point, where you're going to see everything kind of shift and really accelerate.
20 here and there that show that these new communities as a because they open.
Throughout 2021.
Will be more heavily.
Skewed to the entry level short lived in L brands, which can.
Which come with even higher absorptions that our move up communities, So which will also propelled sales number as we get later into the year.
Okay. Okay fair enough. Thanks for that and then clearly you know order growth of 70% a lot of investors are focused on the builders ability to convert those into closings in the construction cycle, but is your construction cycle extending I see like <unk>.
I couldn't tell if you actually mentioned that earlier, but.
You know kind of two parts to that you know are you seeing any labor shortages.
Having a lot of issues getting starts on the ground and then you know on the.
Flip side or are you seeing any product shortages that are you know waiting.
No cycle times extend.
Well Weve anticipated that question Who's got a response rate on that.
Yes, so cycle times, a week from our perspective are not expanding sales are.
Sales are expanding which means we have to get more specs on the ground and were as Steve articulated we're chasing the specs a little bit we've ramped up our starts capacity dramatically out of Kobe. So we're starting more homes and we've got to start in history. It's just that we're selling more home some better results history. So we're in this inflection point.
We're trying to ramp ups backs with community count decline going the other way so.
So that's really what's stretching out the backlog conversion, but the cycle times were still probability home extremely quickly labor is performing very well, we're not seeing any issues. There capacity is there you guys no no and are aware of the supply chain dynamics, specifically around lumber, although we've seen.
That level off and supply chain loosen up our recently there so from our perspective, a lead because we're a spec builder on because we streamlined our operations labor is performing really well, we're seeing cost pressure, we're able to cover that cost structure with the pricing in the market and cycle times are actually probably even a little bit.
Lower than they were we continue to dial it in and our Bill Helms real quickly and then I'll just start side you know that's the biggest challenge.
Starting as many homes as we are today and the municipalities are proving the permitting that's a bit of a bottleneck on but as I said earlier, we are starting more home than we ever have the history. So we're working through those those challenges, but that's probably that the most the area of the biggest opportunity. If we were to increase capacity from here.
Alright, thanks, everyone and good luck on the upcoming quarter.
Thank you.
Well go next to John Lovallo with Bank of America.
Hey, guys. Thank you for taking my questions.
The first one on the gross margin outlook for 2020, Yeah, I think that implies for Q gross margin of somewhere around 22.5%, which is up 250 basis points or so I think year over year I used. The question is how much of this pricing versus some of the savings that you guys have talked about and in terms of that.
The latter part of the savings on the Labor front that you guys have worked out on the horizontal and vertical side would you anticipate being able to hold onto those as activity picks up.
As activity picks up here or do you think you would have to give some of that back.
Hi, John Thanks for the question, So I think Uh huh.
Become more spec sales or a party in lumber increases.
Already reflected in our Q3 number because of our pretty quick cycle time is another portion.
Increase and that's going to be coming through in Q4, but were definitely able to offset that I think that if you kind of back of the napkin math you can see that way.
Projecting an increase in margins in Q4 to hit our target of 20 to 21 and a half.
All your blend so that's coming from.
Hi, its Steve and some continued efficiencies we're seeing because on the cost side at least in Q4, we are still going to have some increased cost pressure from lumber locks that lime play I mean, my restarting accounts that were not really predicting anything yet for 2021 I'm assuming in London is gonna stay steady.
Even though there's probably found some green shoots that hell come down a bit but right now mostly what you're seeing efficiencies that we're finding the product the ability to leverage fixed overhead component and margins and I think we said.
Okay got it and then.
And then.
Just looking at the full year guide again in trying to back into it for Q outlook.
It appears that at the high end.
S.P. would step up again here pretty nicely.
Are you guys concerned at all about pricing folks out of the market in terms of affordability and.
What can you do to sort of offset.
A potential impact.
Yeah. This is felipe.
We are very mindful of that which is.
Which is probably why you know every community has its own story you know.
You live now Brad it's really important that we stay below FHLB, we think thats the governor as we look at the market and you look at your entry level communities that operate above FHLB there, they're not seeing the demand that we're seeing a fire just can't get qualified in a conventional loan. So that's really the governor so we have a.
A little we definitely have some opportunities to continue pushing in some places because we're still well below our paycheck and other places you know like Phoenix, where we're getting there and there's opportunity and upside there. So it's it's market by market its community by community. It's also what the competition is doing but.
But that but that's really the story for US you know we're about pace, we're about leverage that's what the entry level business is all about and so we are mindful of our pricing, although we've been able to get both price and price in today's market as we move into next year. There is absolute governor out there that will limit us pushing that much further.
That's helpful. Thanks, a lot guys.
Thank you.
And as a quick reminder, if you'd like to ask a question that is star one we ask that you. Please limit yourself to one question and one follow up question well go next to Stephen Kim with Evercore ISI.
Yeah, Thanks, a lot guys well yeah.
Yeah, we're going to we're going to Miss it Steven Brent <unk>, but you know what we look forward to Ah just because there's still fan I used to run out or hearing you want to call them that product with a with everything a branch in particular Mike.
My question starts off I guess talking about studio and California communities, you know I remember over the last year and a half or so these were two aspects of your product mix, which.
We thought was a would be called is gonna be rethought very pretty important to watch the ramping communities that you've been planning for a couple of years now in California looks like it's hitting just at the right time me off studio I'm intrigued about you didn't talk too much about it I don't think on this call, but one one of the other builders today, we're talking about how there has been a lot more energy at the higher end of.
I'm not exactly the entry level, but maybe the move up segment of the market, but studio on seems to go. After so can you talk about what you saw specifically with a target market for studio and whether you are California and studio M products carry with them higher margins.
That we can be looking forward to next year.
So you know there's two is actually the kind words first of all.
Unless you guys too but [laughter].
Well still be around.
HM.
You know there's energy at home segments of the market right now I think you're here and there's some other builders you know there's a border issue for US today, it's phenomenal results I think theres interviewed all priced ones that I think the low mortgage rates and the.
The fact that people are spending more times in their homes with Kogas you knows those crude demand in all price points I think I'm shocked to see some of the multimillion dollar 10 million dollar homes that are selling in some of these no high priced zip codes.
I've never seen before my entire career.
Career.
You know to be around.
You know works well for us are the margins higher than their lives now maybe it's not it's not not really but but the margins were getting that live now are solid we're seeing more opportunities for land, though it's less competitive for us.
No lives now segment than it is an invasion the a one a new segment I think I alluded to this last quarter I call you know.
You know we're building we're chasing bigger deals 200 lost three our laws foreigner loss I've heard a lot of deals for entry level communities because the absorptions.
Much higher and because we're trying to reduce the churn the community count I'm sure you'll be buying smaller communities and your own earlier too.
You know you're starting off your finishing up your you opened a malls or close models. There is a lot of overhead labor that goes with that.
Harbor the organization, but he can do you know, it's been a community a little bit longer.
It's better on the bottom line and if you know allows our land people to not to work as hard to find replacement. So we're quite a bit less competition for those bigger parcels.
I have a few big public builders really competing with we don't have to be good as many private builders growth parcels them.
And even some of the public so.
So our you know our land acquisition was a benefit skewed in that direction, that's not to say that we'd all love studios. So we don't believe in one of them you because we do and we are going those parcels and we're going to continue to do so and we do open you know a few in California. This year to increase our community count there for sure.
But you know with respect to California, specifically, the tougher to find land.
As risky and you got to pay up it takes a long time and there's a lot of hurdle. So.
We're happy that we're doing better there, but if it is a business. It's a big challenge for US is the girl build or for that matter.
Got it.
Your land spend ran a $300 million this quarter.
You mentioned it was the highest you've seen I think ever but it actually I'm guessing that that number is probably going to rise in the fourth quarter was one.
I was wondering if you could comment on where you think you're going to wind up for the year. I think you said it I missed it I'm guessing around 1.1 billion or something like that still and what you think is a reasonable outlook for next year.
Well, we haven't given guidance into 21, yet I think you're pretty much spot on.
We have specific numbers that between <unk> billion and selling into the that good expectations for our full year two.
Our full year 2020.
So you kind of get the math right, having 60, a year to date, obviously, we had a positive six weeks, there and you're still going to be accelerating you can expect that number to continue to accelerate we'll give more specific guidance, but there's no way to get to that 300 Kt has continued acceleration in 21 and 22.
I didn't hear any kind of milestones along the way.
There's there's a big wave.
Well you purchases Wayne deals that Weve approved development dollars that we need to spend them come.
Coming through that will absorb a chunk of our cash.
And our retained earnings and it's coming and hopefully we can make it even bigger as we go.
We've got a lot of the loss or come to our line to move US four quarters already proved a lot in October.
And yeah, we're just really excited about these deals and the quality and the contribution there going on that.
Oh, Yeah, that's great.
You made a mention about yeah, hey loan limit how you still had a little bit of room couple of places maybe getting a little close I just wanted to clarify something that youre actually Loma generally rises once a year right. I mean, usually ride is pretty much a you'll hear about it I would think in a couple of months or something or a month or two.
So theoretically to the degree that the entry level at some point a bump up against some of kind of affordability challenges due to the significant price increases that's not actually goes it's a little bit more of an issue later in the years generally is that not right am I thinking about that right for your you have a fair amount of.
Fair amount of headroom generally the first half of the year and that's in the spring selling season, all that and I am I missing something definitely.
No you're not missing anything that's exactly right. So we'll see the revisions next year on what kind of opportunity that creates based on market comps and clearly prices are up across the board. So we do expect some sort of increase there you give us some opportunity let me just add on but you know we're dealing with last year's afraid Jay number right now.
The prices have been rising it's been widely reported its not fiction, probably 1% a month.
So we're not you know this year for a nine or 10% already.
You know and those places appreciate loan limits around 300, a low three hundreds.
Gross so.
No prices are up you know 25 dry.
25 dreaming.
Our entry level products across the board, but yes, they say loan limit the still.
Still lower fertilizer know Josephine this year.
I don't know if you go to the bank and the fact that it's good jobs completely in line with what our prices have increased.
So we.
We got to be mindful, so fully articulated a couple of times already that we.
Yeah, we say inside of that number.
No one I seem to remember that kind of pretty heavy expending a bar on everything is that when we approve the deal and we were underwriting I think that's fine. It was two years ago I was kind of topic a little bit ahead here, we're getting close to where were thinking when they see.
We've been able to increase the amount that we have because you're right. It is then a ceiling on how we bought land.
When you go into freshmen that strong.
The stronger demand is I would say you know we have communities under 250000 in some places it's almost unlimited and so you can sales many houses as we want to do is stop because we want to let some of these lower price points.
It's just about six just some jobs that production.
And putting the profit.
Yeah, I'm looking for savings that everyone's had to do because there's nowhere to blow all of our money.
You know you've got down payment not a hurdle for people anymore, and then I heard FICO scores are basically hitting record levels for folks across the nation. So all of that I assume you're seeing in your business and benefiting from as well right.
Yes, yes.
Right. Thanks, guys good luck and.
You know what you still afterwards all right.
All right. Thank you.
Well go next to Carl record with BTG.
Thanks, everybody.
I only have one question to get that comment.
Congratulations.
It took a lot of courage for you to make such a significant business transformation in the company that you co founded it ran for 30 years.
Okay Red book It really is it's been a remarkable what's happened in the company. The last several years, there's a lot of credit for that thank you.
Uh huh.
Well I congratulate you.
Modeling a better back swing for you that's [laughter] get older.
[laughter].
Welcome to Emily.
I just have one question, which is if I look at would now and your penetration obviously really significant in Phoenix Other places that as you're looking out. The next couple of years, what does a metros where states where you think you can really drive penetration and get a higher were lagging in terms of in terms of the percentage of the mix.
Thanks, guys.
Yeah. The thing the big opportunities for US are really is on in Texas and the east coast in the West.
To be the most maturation of live now is really where it's going to be and although we have some opportunities in Colorado because.
Because that's just such an affordability issue out there by you know, we really pivoted in Texas as we said we're up huge in Texas with live now it's driving a lot of the performance there and we have a lot of live now starts come in Dallas and Houston are big opportunities for our supporters that largest builder in those two.
Metropolitans buyout by a long shot and we intend to go after that and then it's.
It's been slow.
Little bit slower for us in our newer markets on the east coast, and Florida, but but that's all come in dramatically here.
Orlando when you look at community count growth, it's all back on them with now and the rest of Florida and that a lot of stuff coming in Atlanta, Nashville, and the other part of the Carolina. So it's really on the East Coast in Texas Ami is the biggest opportunities for us to really can.
To really continue that penetration and moves the needle sales.
Also there's only the.
Well that you announced this yet, but we are going to be announced in.
Soon some new markets.
Working vigorously now on several new markets and.
Hopefully by next quarter.
We will be able to make some specific announcements about which markets. They are or will be will start in those markets with a little bit of a a little bit of c. So.
Articulated we have some room there is those markets studio in Florida today.
So to grow our lives no brand.
But we'll also have some new markets to go along with that and that's 300 community count does not contemplate new markets, but that's just an extra cushion for US you know.
That's great to hear alright, congrats thanks home.
Thanks, Phil.
Well go next to Michael Rehaut with Jpmorgan.
Yes.
Hi, This is a line home in on for like out that's congrats on the results and best of luck in front on your retirement.
My first question was I was curious if you could comment on traffic levels and sales pace so far in October.
And if the market is starting to show any signs of slowing or regular seasonality.
October continues to be strong.
I'd say, maybe not quite as strong as September because of a little bit of seasonality.
But I think we've already surpassed.
Last years.
Sales number for October with.
You know a nine or 10 days ago, and amongst two weekends ago. So I expect we will produce a pretty good.
A pretty good order number versus last years for October and.
No I don't see any.
I don't see any maybe on the horizon that's going on.
Change that dynamic yeah traffic levels are stable.
To this problem has all because I think theres this election coming up here in a couple of weeks, but usually slows things down.
So surprisingly in the market.
Even paying attention to the election at least from a housing perspective, or maybe they are and they're all buying a house for shelter.
But either way.
Traffic levels are extremely strict extremely stable for the time.
Yes, we were going to go to government knows it also could you could find them.
[laughter]. This kid sorry, [laughter] I really think they had and then I wanted to clarify something from earlier in the call on prior calls generally entry level gross margin led now product, but no data is higher than the first time move up with maybe the gap narrowing a little bit Uh huh.
I do the land.
But I think now you mentioned that move up gross margins, maybe at parity or even better Bob.
C level offerings I, just wanted to get a little more clarity around those comments and they tried to hearing it right.
Although he will give you the specifics, but the pricing dollar on the entry level is really strong.
So I think that's that's where we're seeing the better margins just the demand down at that lower price point is really producing a supply demand disconnect that's allowing us to push push prices probably more than you know the higher Ed. So I still believe our margins are higher in entry level and first move up at all how.
If you would give you the specifics now our entry level products kind of health consistent but it's here, it's our highest producing margin product first time, you actually did increase a bit there's a little bit more pricing power they still lagging a bit behind entry level when were looking at them on a relative basis.
Yeah, I think it like that.
Welcome.
And we'll go next to Alex Barron with housing Research Center.
Yeah, Thanks, guys and congratulations on the retirement on them and all the big turnaround at something.
I wanted to just focus in on the on that.
On the 300 communities on and so forth.
I just wanted to verify that's all.
Based on organic growth or is there any expectation that you would have to.
Acquire a builder to get there.
It's all it's all organic.
And.
We pretty much have all the land under contract stores to do it so.
So it's not like we got it wrong by a whole bunch of winning in to make that happen, we already got going on.
So.
We have a high degree of confidence in getting there in early to mid 22.
And okay, maybe choppy along the way as we said because we may sell out of some communities faster like we did this quarter. We closed 58 communities. This quarter, we would have closed on those communities next quarter or the quarter. After so our community count would have babies that although I was a little bit higher this quarter.
And maybe higher urea.
But when we're selling 71% more homes in Q3, and what was the Q2 number 60 or 70% more in Q2, you know just the home to fly off the shelf.
Faster than we anticipated and driving the community count down, but it is going to rebound because we definitely have the loss we bought the loss. We now build lots we have the stores, we're developing home, we're moving through the process and they will be here.
This will be a little bit later because of co good and because of the quick so out of the other communities.
The communities.
You know that we close out the last two quarters.
Okay. That's all that's all good I don't see any problem with selling other needs. It just means your.
Picking buyers out of the market.
I'm not going to get.
The other question I had what's what.
What's what's regards I think you said about 70% of the sales this quarter were entry level and I think you also said that the size of the communities that you're buying is growing.
So basically should we expect that the trends in sales pace will keep increasing and should we expect.
Basically that the percentage of entry level will also keep going up over the next couple of years as you're heading towards a 300 communities.
Well the sales pace you noted still expect historically high level high levels were at almost six per month per community I mean, I think it's.
I think it's hard as much of our competition I was looking up.
And finally, we've ever been I can't tell you that you know, we don't underwrite to that pace.
And with that we will continue with that pace, you know I I don't want to make any predictions.
But what was the second part of the question was about.
Yes community.
Yeah. The ratio is probably whereas out I mean, we still are investing in one M.U.S. as he said, it's a little harder to find out when the deals aren't big enough more competitive, but we are finding that Atlantic this slower.
But I don't think we're looking at you know being 80, 20% live now what have you or even 70 525, you know that the goal is to be 65 35, you know live now versus wanting to you from a community count perspective and of course that will resolve in a different percentage from a sales pace because you underwrite live now.
Our sales pace in one area.
Okay awesome, Okay best of luck in the job. Thanks.
Thanks Charles.
This is our last question Jennifer it right.
[noise] Oh anymore.
Yes, we have two more in Q and we'll go next to Susan Mcclary with Goldman Sachs.
Thank you and congratulations to everyone.
No quick.
My question is is there well you know thinking about consolidation for next year, given everyone's trying to load up on their lot positions have community count ready to go and we recently saw one of your peers buying in smaller private builder that we could see more of that in the industry next year as we look out.
Oh, you know get those assets.
This question every quarter for the last night, you look orders.
It's so hard to predict M&A.
No.
So many factors that go into it so many social issues you know what are the goals and objectives of the acquiree as a retirement plan under.
You know what are they what are their plans really thinking I'm sure it could be but I will.
I wouldn't say that the work.
We're seeing more deals now than we saw a year ago.
Frankly, it's been kind of quiet.
You know, we're probably going to be more particular about.
Acquisitions, because we're focused on our strategy.
And you know, we're only going to be pursuing builders that fit within our strategy. So this product is outside of the profit rebuild it wouldn't be good for us.
And we just feel like we can grow solidly organically over the long term and we'll be entering some new markets as I said, so there's always open but part.
Hard to tell us what the pace of them is going to be.
Got you Okay, and then just following up on that can you talk a little bit about capital allocation shareholder returns given the kind of bumpiness that you're forecasting for the next couple of quarters. The liquidity that you do you have on the balance sheet can you talk about your willingness would be two we start share repurchases now wouldn't be ups.
Here's earlier today commented that they're going to start to get a little bit of that in the fourth quarter. How are you thinking about it.
Well based on share price today, it looks pretty outlooks local advertising that does a week ago.
You know were opportunistic when it comes to share repurchases I think we.
Oh, no we certainly want to try to buy at least enough shares to cover the dilution from our you know share issues.
But.
You know.
We're going to be using a lot less capitalized on our balance sheet. Today I mean, we're not going to stay at a 15% debt to cap was going to be using the money to boil it down to grow the top one grow the bottom line and to the extent share repurchases make sense, we'll we'll take advantage of them pursue them.
We're not a dividend paying company, we never have done we continue to explore the concept, but we haven't.
We haven't made any commitments to doing that and.
No that's where we are.
Okay, great. Thank you good luck.
Thanks, Susan.
Wes last caller.
Well go next to Jade Rahmani with KBW.
Yes. Thank you very much for taking the question just for Steve as you think about the road ahead for the homebuilding industry, maybe over a multi year a longer time horizon. I was wondering if you have any parting words. Since this is your last conference call for the industry or any message you want it.
And as it relates to the value being provided to the individual home building communities in their industries overall efficiency or future drivers of shareholder holder returns.
Well, that's a mouthful I mean.
But there is going to respond to a question. That's a good question for sure you know just.
You know just as I said in my finger acumen, I think the industry needs to be a little more longer term thinking right.
We seem to have a very short attention span and rising.
And you know I think so.
So much of the trading or stocks or shares today, not just us everybody's which program by computers.
And everybody have your Edwards got really good news today yesterday next week, but the share prices are going down.
Pretty hard to figure that out I mean, everybody.
Everybody I guess, just woke up to the fact that you know the comps are itself next year.
[laughter] so.
You know I think the industry continues to innovate I think the way we build.
The way we build houses is that's the change.
Homes or you know really go pretty much the same when they were below 40 years ago.
No, we don't control or labor, we're dependent on the tracing contractors, we've got to figure out how do too.
Controlling dust anymore.
I think there's a lot of innovation coming on the text only a home sales side, we've seen a lot already there's probably more coming there was a lot coming in the back office well now.
Well no we may.
We managed the financial functions of the business, So I'm excited to see.
I'm excited to see where this this this is going to go and I think it's going to be it's going to be fun.
Going to be interesting Oh, and I think we've been his team are going to do a phenomenal job.
No decision for a while.
Well still be around they'll still be on these calls and then keep in Ah keep in touch and lead the board.
And working with relief on our long term vision and our strategy.
And something so sales of my own future and I'm excited for the Companys future as well so I appreciate your support getting.
Thanks for the question.
Thank you very much.
Okay. Thank you.
Our call today, we'll look forward to talking to you all.
Oh, that's me in the fourth quarter, which should help our earnings release into January and we'll talk to you then.
Take care. Thank you. Thank you.
And that concludes today's conference. Thank you for your participation you may now disconnect.
[noise].
[noise] HM.
[music].
Oh.
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[noise] Oh [noise].