Q1 2021 KB Home Earnings Call
Thank you, Joe and good afternoon, everyone.
We're off to a strong start in 2021 was solid execution in our first quarter that highlights our ability to strike an effective balance between capturing demand and disrobe housing market and measurably increasing our margins.
We're poised for profitable returns focused growth this year based on a number of factors. Most notably our backlog both its composition in size the success of our newly opened communities and a compelling lineup of openings for the remainder of the year.
Answer the details of the quarter. We generated total revenues of 1.14 billion and diluted earnings per share of a dollar to up 62% year-over-year housing revenues, where at the low end of our guidance range due to the weather disruption in Texas, which shifted some deliveries from our first quarter into our second quarterback.
Texas is our largest market by units and the severe weather shut down our operations for roughly ten days in mid February. We resumed activity in our communities by the last week of the month and nearly all of the impact at homes have already been delivered.
Our profitability was substantially higher year-over-year with a more than four hundred basis point increase in our operating income margin to 10.4% excuse inventory related charges. This result was driven by several key factors first strong demand for our personalized products at affordable price point home and our success in balancing pay some price second operating leverage from increasing our community absorption rate and the resulting higher revenues Thursday the ongoing benefit from The Cost Containment efforts. We put in place last spring and finally the continuing Tailwind from lower interest amortization.
Our profitability per unit grew meaningfully to over $41,000 in the first quarter 73% higher than in the prior year. These results are also generating a healthy level of operating cash flow to fuel the expansion of our scale in the first quarter. We increased our language by 37% year-over-year to roughly $560.
We grew our last position by approximately 3,000 lot since your end to nearly seventy Thousand Lives owned and controlled and maintained our option lights at 40% of our total dead.
We owner control all the lights. We need to support our growth Target for twenty twenty-two and although we remain opportunistic in seeking additional lots that can provide delivery next year. We are now primarily approving land Acquisitions for deliveries and 2023 and Beyond.
We are achieving our objectives in growing our lot count with a higher quality portfolio of assets and increasing our returns all at the same time.
Healthy tension exists within our division as they work to expand their business while staying on strategy. We have experienced land teams in our markets who have strong relationships with land developers and sellers and we continue to see good deal flow that meets our investment criteria. Although every acquisition is different wage requirement tailored set of assumptions regarding the submarket the number of blacks the type of product we plan to offer and the price point. We are generally underwriting our deal to a monthly absorption of between four and five.
We're being prudent with our investments yet. Opportunistic would pay some price based on market conditions once each community opens.
Our long-standing approach has been to underwrite in today's dollars and as such our land deals reflect our current ASP as well as our current costs and assume no future of price appreciation or cost inflation geographically. We remain in close proximity to where we've been investing in land over the past couple of years back in neighboring submarkets in order to grow a scale. But without moving to the more remote submarkets of each City or Las Vegas business provides a good example of this strategy. This division has increased its annual deliveries by almost fifty percent in the last three years and has achieved the number one ranking in the market.
We have a large business.
Susan Henderson at inspirada and we are well established in Summerland to expand further. We are investing more heavily in the Northwest and Southwest areas adjacent existing submarkets, which still offer good schools shopping and amenities at more affordable prices.
In terms of deal size. We continue to acquire lots that typically represent a one to two-year supply per Community consisting with our approach over the past several years.
We remain on track with respect to our 20 21 and 20 22 Community count goals that we share with you in January as we execute on our growth plan in the first quarter. We successfully open 22 new communities out of the approximately 150 openings. We anticipate for this year.
As we look to the remainder of 20 21, we continue to expect a sequential increase in our ending count each quarter and year-over-year Community count growth in the fourth quarter month. We remain well-positioned to extend this growth in the 2022 and still expect year-over-year Community Town expansion of at least 10% next year.
Our monthly absorption per Community accelerated 26.4 net orders during the first quarter a year-over-year gain of 39%
We achieved the sales rate even as we raise prices and the vast majority of our communities and manage lot releases in order to balance Pace price and starts wage optimize each asset.
USP of increase their capacity for processing permits heightening our ability to accelerate our starts which were up 40% year-over-year in the first quarter month going forward. We expect to continue matching starts to our order rates while we remain sensitive to affordability levels throughout the the past year. We have utilized price as our primary mechanism to manage our sales pace and the cover construction costs, which are under some pressure right now.
That being said our ASP expectation for this year reflects only mid single-digit percentage growth year-over-year this modest increase in our Blended a home reflects our effective approach to our community location and product positioning to help maintain affordability.
Retargeting the median household income in each submarkets.
we
Trying to position our communities below the new home medium price and at a reasonable premium to an older resale home.
Each of our divisions is aligned with this strategy and in some cases we're finding that we're actually below median resale levels as well given the State per appreciation that the existing Home Market has experienced.
We offer floor plans below 1600 square feet in approximately 75% of our communities. However, the median square footage of our homes and backlog is almost twenty one hundred square feet, which is consistent with the median footage of home. We delivered in 2020 fires are not adjusting the size of the homes that are purchasing or if they reduced their spending our Design Studios, which tells us that even with the uptick in race affordability remains favorable.
Have to overall market conditions Supply remains tight with existing home Inventory down nearly 30% year-over-year.
Resale home availability. It's hitting that record low levels representing 2 month supply and ferns are below that level in many of our markets.
This combined with the underproduction of new homes over. The last decade has resulted in Supply being virtually non-existent in terms of demand package rates while higher relative to where they were in January are down year-over-year and remain attractive generally around the low 3% range for a 30 year fixed rate mortgage.
Most notably demographic Trends are favorable especially with respect to first-time buyers is over seventy million Millennials are in their Prime home buying years with an even larger gen Z cohort right behind them now entering their home-buying age.
As a result of all these factors, but particularly the strong demographics We Believe demand will stay healthy for the foreseeable future.
Not orders in the first quarter grew 23% year-over-year to nearly 4,300 a solid result given the strength in that orders that we experienced in the prior Year's first quarter of not orders increased as the quarter unfolded reflecting typical seasonal Trend and remained at high levels exiting the quarter.
We produce double-digit growth in each of our four regions as demand for affordable price points. Remain robust across our footprint.
We continue to observe Trends in our underlying order data that are consistent with the patterns that emerge in the second half of last year fires favored a personalized built-to-order home and Millennials represented. Our largest segment of fires. The increasing presence of this cohort in our order activity is naturally translating into a higher percentage of delivering the first time buyers and 65% of our deliveries in the first quarter up eleven percentage points year-over-year.
the
Stop the man among first-time buyers and their ease of Mobility is an advantage for us. Given our expertise and serving these fires along with our location product and price points.
We offer features in our homes that today's consumers value a prime example of these features is our advanced Advanced Energy Efficiency, which helps to lower the total cost of home ownership of the industry and building Energy star-certified new homes having delivered more than 150,000 of these homes to date as well over 11,000 solar-powered homes.
As a result of our leadership. We were the only National home builder to be named to newsweek's 2021 list of America's most responsible companies wage recognition of our leading ESG practices.
We were the first national Builder to publish an annual sustainability report. We're excited to share our latest achievements in the 14th Edition of our report, which is scheduled for Thursday in conjunction with birthday next month.
Our backlog value grew substantially in the first quarter to three point seven billion dollars the $9,200 homes we have in backlog to gather with our first quarter delivery represent about 85% of the deliveries that were implied in our full-year Outlook. We provided in January.
Housing market conditions still healthy our ability to match starts with sales and reasonable build times. We are confident that we can exceed our original volume expectations for this year. This is driving our full-year Revenue guidance higher which Jeff will discuss momentarily.
On the mortgage side our joint venture kbhs home loan continued as strong execution for our customers.
RJ be handled the financing for 79% of our deliveries in the first quarter of eight percentage points year-over-year producing a significant increase in its income.
Consistent with the past few years conventional loans represented the majority of kbhs volume and the credit profile requires remained very healthy with an average down payment of about 13% and an average FICO score of 724, which is striking considering our high percentage of first time buyers.
As we continue to accelerate our Revenue growth over the balance of this year. We expect our income stream from the JV will grow as well.
We're positioned for remarkable twenty Twenty-One and achieving our objectives of expanding our scale and improving our profitability while driving a meaningfully higher turn on equity which we now anticipate will be above 18%
Like to take a moment to recognize the outstanding team of individuals that are producing are strong results.
We were gratified to be recognized by Forbes in his 2021 list of America's best midsize employers. Again, the only National Builder receiving this honor.
Job by how are your shaping up and look forward to updating you on our progress with that? I'll now turn the call over to Jeff for the financial review Jeff. Thank you should be good afternoon everyone. I will now cover highlights of our 2021 first-quarter financial performance as well as provide our second quarter and full-year Outlook. We are very pleased with the first quarter results with higher housing revenues and considerable expansion in our operating margin driving a 62% increase in our diluted earnings per share. In addition took that order is in the quarter combined with our substantial beginning backlog resulted in a 74% year-over-year increase in our quarter-end backlog value supporting our dog.
revenue and margin outlook for 2021
in the first quarter our housing revenues of one point one four billion dollars Rose 6% from a year ago reflecting increases in both homes delivered and the overall average selling price those homes. Looking ahead to the 2021 second quarter. We expect to generate housing revenues in the range of 1.42 to 1.5 billion dollars for the full year. We are forecasting housing revenues and Iranian 5.7 to 6.1 billion dollars up 150 million dollars at the midpoint wage compared to our prior guidance.
We believe we are well-positioned to achieve this top-line performance supported by our first quarter ending backlog value of approximately 3.7 billion dollars and our expectation of continued strong housing market conditions.
In the first quarter our overall average selling price of homes delivered increased 2% year-over-year to approximately $397,000 reflecting variances ranging from a 5% decline in our west coast region to an eleven percent increase in our southwest region. The west coast decline was mainly attributable to product and Geographic mix shifts of homes delivered for the 2021 second quarter. We are projecting an average selling price to approximately $405,000.
We believe our overall average selling price for the full year will be in the range of 405 to $415,000 a relatively modest year-over-year increase and a result of our focus on offering affordable product across our footprint.
Homebuilding operating income for the first quarter increased 90% to 114.1 million dollars from 60.2 million for the year-earlier quarter off. The current quarter included inventory related charges of 4.1 Million Dollars vs. 5.7 million a year ago.
Our home building operating income margin improved to 10.0% compared to 5.6% for the 2020 first quarter, excluding inventory related charges are operates charging for the current quarter increased 430 basis points year-over-year to 10.4% reflecting improvements in both our gross margin and sg&a expense ratio, which I will cover in more detail in a moment.
For the 2021 second quarter, we anticipate our home building operating income margin excluding the impact of any inventory related charges will be in a range of 10.0 to 10.55% for the 4 year. We expect this metric to be in the range of 11.0 to 11.8% which represents an improvement of 310 basis points at the midpoint as compared to the prior-year.
Our 2021 first quarter housing gross profit margin improved 340 basis points to 20.8% excluding inventory related charges a gross margin for the quarter increased to 21.1% from 17.9% for the prior-year quarter. This Improvement reflected the favorable impact of selling price increasing pacing construction cost inflation increase operating leverage and fixed costs and lower amortization previously capitalized interest.
Assuming no inventory related charges. We are forecasting a housing gross profit. Margin for the 2021 second quarter in a range of 20.5 to 21.51% We expect our full-year gross margin excluding inventory related charges to be in a range of 21 to 22% and Improvement of 70 basis points. Just a midpoint compared to our prior guidance and up 190 basis points year-over-year.
Are selling General and administrative expense ratio of 10.7% for the first quarter reflected in an improvement of 110 basis points from a year ago mainly due to the continued containment of cause following overhead reductions implemented in the early stages of the COVID-19 pandemic lower advertising costs and increase operating leverage from higher wage in revenues.
We are forecasting our 2021 second-quarter sdn a ratio to be in the range of 10.4 to 10.8% a significant Improvement compared to the pandemic impacted prior. As we expect to realize favorable leverage impacts from anticipated increase in housing revenues. We still expect that our full-year sg&a expense ratio would be approximately 9.9 to 10.3% which represents an improvement of 120 basis points at the midpoint compared to the prior-year.
Martin
Contact expensive twenty six point five million dollars for the first quarter represented an effective tax rate of approximately 21% and was favorably impacted by excess tax benefits from stock-based compensation and federal tax credits relating to current year deliveries of energy-efficient homes, the Cornerstone of our industry-leading sustainability projects.
We currently expect our effective tax rate for both the 2021 second quarter and full-year to be approximately 24% including the impact of energy tax credits relating to current year deliveries. Overall. We reported net income of 97.1 million dollars or $1.02 per diluted share for the first quarter wage compared to fifty nine point seven million dollars or $0.63 per diluted share for the prior-year.
Turning out a community count. Our first quarter average of 223 was down 11% from the corresponding 2020 quarter primarily due to Strong net or activity driving accelerated Community close out over the past twelve months consistent with our forecasts. We ended the quarter with 290 communities down 15% from a year ago. We believe our quarter and Community count represents. The low point for the year is grand openings are expected to outpace Closeouts during each of the remaining quarters while expect this Dynamic to result in a sequential increase of five to ten communities by the end of the second quarter. We anticipated our second quarter average Community count will be down by 500 to Mid double-digit percentage on a year-over-year basis.
We currently expect continued strong market conditions to drive an elevated number of community Closeouts during the remainder of the Year resulting in a single digit year-over-year percentage increase in community health that you're a however, we remain very focused on our goal meaningfully growing our community health given our land Pipeline and current schedule a community openings. We are confident that we will achieve at least a 10% increase in our 2022 Community count to support further market share gains and growth pact in revenues.
During the first quarter to drive future Community openings. We invested $556 and land and Land Development including a 43% year-over-year increase in land acquisition Investments to 275 million dollars.
A quarter inch Mota liquidity was approximately 1.4 billion dollars including $788 of available capacity under our unsecured revolving credit facility month with no borrowings under the credit facility in the 2021. First quarter. Our debt-to-capital ratio is 38.9% at quarter-end and we expect continued Improvement near the end of the year. We still expect strong operating cash flow and current year to fund levels of land acquisition and development investment needed to support our targeted teacher brought a community count and housing revenues.
Our current Community portfolio and backlog along with expected. I'm going to strengthen the housing market we continue to expect significant year-over-year improvement in our revenues profitable credit and return metrics in 2021 in summary using the midpoints of our new guidance ranges. We expect a 42% year-over-year increase in housing revenues and significant expansion of our operating margin to 11.4% driven by improvements involved gross margin and our sg&a expense ratio.
In addition achieving our new revenue and profitability expectations would drive a return on Equity of over 18% for the year.
He's expected results reflects our views that continued emphasis on our returns Focus growth strategy will enable us to further enhance long-term stockholder value.
We will now take your questions. Please open the line.
At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation Towing indicate. Your lawn is in the question queue. You may press star to if you would remove your question from the Q4 participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keys as a reminder. When asking a question, we ask that you limit yourself to one main question and one follow-up. Our first question comes on line of Truman Patterson with wolf research. Please proceed with your question. Hey, good afternoon. Everyone. Thanks for taking my questions. I appreciate it off first Jeff Jeff orders in first-quarter. I believe you all said, we're up about 44% in the first six weeks. It looks like they were basically flattish in the final six weeks. Could you just really walk us through what's driving this it sounds like, you know internal initiatives driving pricing or yep.
May be tapping tapping and production and and limiting lot sales. But but on the flipside if I heard you correctly it doesn't sound like interest rates have had any real negative impact to to me and yet so if you could just walk me through what's really driving that and I don't think I heard of March today order update.
Truman I can talk to that some Jeff pile on a couple of things going on with order, is we shared back in January with our year-end call our January to February last year were very good. And yes, our comp was up forwarding some percent at that point in the quarter, but we knew it would come down because last year, I've frankly February demand was as good as it is today in our orders were very strong. So we had a much tougher cop. We had favorable numbers through the quarter demand remained strong through the quarter no no sign of slowing up. So so you had this math on the comp while at the same time. We did take some steps in February and particular to slow down a bit and capture the price opportunity. That's out there. We have a large backlog. We're balancing our starts with our our sales in our backlog and we
acted to go for more price and
Our margin opportunity and still generated a pretty significant orders per Community for the quarter at 6.4. So I think that answered your question on the compact actually is a compounded up about where we guided in the in the first quarter call cuz we said it would come down. We didn't talk specifically to march in that as everyone on the call. We had a very disrupted cute to last year and for the quarter the cops going to be very large, but it it isn't really a reflection on what we're doing now. It's a reflection on the speed bump we had in orders last year. So rather than give a distorted number, I just share that demand Trends remain very strong right now. We're not seeing any impact from interest rates of like he's still favorable and as you look at our cute too from last year the comp is going to be incredible.
Okay, okay and may be asked another way, you know, you all did a little bit under $4,300 orders in your matching starts the orders. Is that a a level that you're comfortable with?
Yeah, we starts were up 40% in the in the first quarter and we'll continue to to keep our starts in our sales in line and if we can keep starting to keep selling it face, right? Okay, okay, and on your community account, I believe you said at the end of 21 upload to mid-single digits off and then in 2022, you're comfortable with 10% growth. Could you just run through what what absorptions, you know is included in that guidance and could just talk a little bit or characterize the health of the horizontal land developers and the municipalities the you know regulatory process. Are you seeing any incremental tight-knit tightness that that might took away some Community openings?
Right. I can talk a little bit about the community account and they just want to comment on the land development. But you know as far as Community kind of numbers go, you know, the largest variable like always in are closed. So our Focus right now is on getting our opening up and running and you know driving count based on that, you know, if we get to the end of the year and we had some variants in count up or down. It's just go off the a trade-off between the community counter backlog numbers frankly. So, you know, if the page continues at the current levels or even goes higher than than what we've seen we may close out a few more community-based with those fails would obviously end up in backlog and not really impact either current your revenues or next year revenues. We think will will still be around the same number. So we just driving towards that the page, um, you know, as far as Cadence goes we do expect to see sequential Improvement and not only sequential Improvement through the end of the year, but out in a 2022 as well and you know as we're getting me down.
In the 21 we're starting.
Our plans for next year. We have a large number of grand openings on on the docket again, and we do expect next year to see the the close out to moderate a little bit as we have some larger lot counts, you know to start the year and some of those communities and we did in this year which which will see I'd caught in an abnormal number or level of closeouts in the current year. So, you know, we try to forecast that I guess get back to your original question. We try to consider current absorption pays in the numbers and you know take into account seasonality a bit and Thursday and you know do the best job we can on on for casting those close-ups with actually the grand openings are much more impactful on the future of the business and the growth in the community company close also jump timing.
Our next question comes on line of Matthew bouley with Barclays. Please proceed with your question. Hey, good afternoon. Congrats on the quarter. Thanks for taking the question. Let's go back. I guess to the sales pace of 6.4, you know, you talked about obviously the 10 days in Texas is impacting deliveries. Did it have an impact on the sales Pace as well and overall just you know, Jeff you're talking going forward about matching starts and you know in order to confirm to keep this pace elevated is you know, and and you had the 40% in the quarter. So, you know has the the the capacity to to get those starts in the ground is life changed at all versus you know, how you guys were thinking a couple of months ago given everything. We're seeing around labor and materials and all that. So kind of a two-parter on sales pace and Texas and and and starts birth.
Thank you. All right. Thanks man. I'll make a few comments and refer it to Mad can give you the color on the the capacity. But I'm in in Texas in February. It impacted deliveries more than they would impact sales sales are in the cube for a while and it's more of a paper process. You can do. It virtually dead. People can do it from their apartment and we can do it remotely as well on the delivery side where we got pinched was the last group of city finals the last group of appraisals Thursday. We need when the home is completed those types of things. So I would say that it was a slight speed bump in deliveries and I shared that that we've already closed the vast majority in March whether it's Land Development to Truman asked about or or here on the operational side in general. I can say that the wage
The industry and the municipalities and everyone has has responded in in ways to to navigate through this post COVID-19 environment that we're in fact the hits that we took in the delays actually were last summer and fall and we've now got a much more predictable business. We're continuing to to work on wage to compress things whether it's on the land development side, whether it's on the the permits side where the cities are doing far better and in turn on the construction side as well. So it's not we're not feeling stress on our capacity right now. It's making sure things just go in their normal Rhythm and and we're more predictable busy right now, but Matt you want to give him some color on build times and what we're doing sure I the is Jeff touched on Thursday.
all of our divisions are
Are very focused on expanding our overall capacity. That's that's simply recruiting additional trades getting them on board. And man, I think as we progress through the year, we're going to see a reduction in cycle time as as we can take advantage of that additional capacity on the municipality side is the economy starts to open up, you know and Staffing at with the cities improves will see a reduction there. So I think there are while there are certainly some challenges still in front of us in this environment. There are many things coming that as we progress that our cycle time, which has been running, you know around seven months can get back to to our Norm of six months. We're not assuming that Improvement within the guidance we provided but you know, we we we've got enough things in place that we're dead.
This that we can start to get back to to to our Norm.
Perfect. No, thank you for the details for hitting both parts of my question their second one on the gross. Margin just thinking a little more near-term. The the guide suggests took a step lower in the in the second quarter. I'm just curious, you know to the extent your guiding deliveries higher sequentially. So perhaps some greater fixed leverage, you know, clearly the pricing Trends have been you know on the favorable side is the expectation that that just cost has gotten that much worse such that the price first cost is a little less favorable to or is it more just mix any more color on that? Thank you.
Right. Yeah, the dynamic between q1 and Q2 is mainly mix. We we end up beating the the first quarter guy in our first quarter forecast like quite a bit. A lot of that was just the units that were closed closed higher-margin units in the first quarter. Obviously the host will not be closed now in the second quarter and some lower-margin units will be so it's mainly next if you really look at the same time for the full year. The second half margin is going to be closer to 22% Margin in the first half margins all together for the first six months of because the 21% and we are seeing Improvement sequentially as we go from Q2 to Q3 to Q4. So actually, you know, the Outlook is quite positive and quite favorable as far as continued strength in the margins side, and we were quite pleased to be able to lift that guidance by 70 basis points this quarter based on our backlog what we're seeing in the backlog and success wage.
Communities and you know very importantly the pricing vs. Construction cost inflation Dynamic that we've been experiencing in able to control quite effectively up to now dead.
Our next question comes on line of Stephen Kim with evercore. Please proceed with your question.
Yeah, thanks guys strong results. Obviously Jeff. I guess it'd be fair to say that the pricing environment and the the sales environment is about as strong as we've ever seen in history and you you go back a long way obviously, but my guess is you could probably sell every home you can build but you made a comment that I thought was very interesting about the existing package Market, you know pricing, you know, being up a little more or very aggressively and you know in general my thought is that in the existing Market, you know, every home that sells is effectively and suction whereas Builders generally have an you know an asking price and they generally don't sell over the asking price. But recently we've heard that some major Builders are at least in some communities actually having their communities down for additional sales.
But if you were willing to pay a surcharge of you know tens of thousands of dollars. Yeah, they'll go ahead and actually sell it to you and I'm curious as to whether you're doing that or whether you are would consider doing auctions or not. And if not, why not?
Stephen that's a good question for starters. What you're describing is not very customer-centric and you can get more price on that sale, but you're going to lose brand over time. I'm very sensitive to that cuz we've got a a great brand. What we will do is is part of what I touched on with our our our sales releases. Well we'll do is drop back to reservations where we can gauge the interest level at different price ranges and do something for pricing if you will and if we get strong enough interest it it uh you open up for sale at a much higher price and people are on our waiting list and they we go through the the waiting list right now, but I'd rather keep the good relationships with the customer base and the realtor community and go through our process to capture our prices. It's it's not
Does it work we're taking a lot of price right now, but it's in a it's in a controlled way to to make sure we retain the relationships with the customers.
Okay, have you heard of what I'm describing, you know happening? And is this something that you are actually competing against off this something that you know, you have not heard of yet. I just saw to me. It's more of a one-off that was covered on a another Builders analyst coverage but it's it's certainly not something we're seeing broad-based or that we would entertain.
Got it.
Great, and then secondly, Jeff Kaminski, you had given the guide for you know to to gross margins and obviously gross margins have been like a balloon that's you know, like they're trying to catch. It just keeps going up and up here a little faster than you can can expect and I'm curious as to whether may be part of the the reason for that is because there are you know increase sales going on in the design studio perhaps or other sorts of things which happen after the the home has been sold that you're maybe not quite capturing in your methodology and whether you know that Dynamic drove nearly a hundred basis points better gross margin in the first quarter than you thought three months ago could possibly play a role again in 2 Q or if you know, there's some reason why you you don't think I'm surprised he's on 1 Q is is repeatable.
Right. I I've never say, you know doing better than what we say is not repeatable. You know, that's always potential. We we kind of call it how we see it. You know, we have a large backlog and I'm pretty consistent backlog that clothes and again, you know, we did see some mix shift in the quarter and the the total units came in a little lower than what we had expected so that certainly had an impact the other hand package we see every quarter is we do have a certain number of units that sell and close within the quarters. So as you know, you know, we rebuild order Builder but typically will have 70% billion about 30% inventory and obvi inventory about a third of that sells and closes in the same quarter. So we'll see some variability there and typically, you know Wilfork a slightly lower margins on that and frankly in the first quarter of the environment was so strong. We didn't really take a haircut on those sales and closings. So there's potential for that. But again, you know, we call like we see we don't Reserve
Question that we're showing up 70 basis points for the full year reflecting the strong sales that we saw in the corridor in the Cost Containment everything else altogether. So, you know, we stand by our life to the second quarter and four year and you know enjoying the the more favorable Outlook and more favorable forecast. It's driving not only margins but we're turns up quite significantly as well for the employers. Who are you sure about that?
Our next question comes on line of Alan Ratner with dominant Associates. Please see what your question. Hey guys good afternoon and congrats on the very strong results Jeff first question kind of similar to the last one on margin, you know, I was just curious a few other builders have kind of talked to the idea that as communities close out. They generally met your generate the strongest gross margins of the over the life of that project, you know for a multitude of reasons, you've got obviously price appreciation, but also kind of some true UPS of of accruals over the course of the the life project and you know, you guys are turning your communities quite a bit this year. You're closing out of a lot in Euro also opening up quite a bit and and obviously a lot of the new openings probably won't be deliveries until next year. I was just hoping you could kind of talk through what impact if any that turnover in in community account is potentially going to have on your gross. Margin over the next, you know call at twelve to eighteen months.
Sure. Yeah, one of the the
It's really about the communities. We're opening today are you know the time when they were went through our underwriting it was pretty pandemic and premarket run up. So, you know, they had fairly often. Um, I think modest as peace involved. Obviously, we've seen some cost inflation since that time but more so on the price so, you know, they're a little bit better than than how we under Road and am quite frankly, you know, our our base Community portfolios in the same boat, you know with improving market conditions. We're seeing more strength than those margins as well. So, you know, as far as the trade-off though, I'm I'm optimistic about the new communities or performed very well the vast majority of them are performing a bubble and book and really contributing to that. You know low twenties a larger Network down joining and I don't see any any real risk of that like, you know coming off the rails just cuz we open it a bunch of new communities and it's been so far. So good week long.
Quite a few communities over the last two or three quarters have closed out and The Replacements that have come in have been you know, haven't really missed an equally been right there on the margins a guide. So as far as the portfolio itself goes, it's it's solid and it's improving. I like what I'm seeing, you know from the point of new openings and the fact that most of our delivery Zone next year will still be generated off what I'll call Pre pandemic land prices is another real positive. I think for the overall health of the community portfolio.
Right, that's very helpful. I appreciate that second question maybe for Jeff and I'm just you know, obviously your bill to order model. Your buyers are sitting in your backlog for for a while and your rates have moved. I know you don't seem overly concerned about that. But I'm curious, you know, you're you're can rate right now is probably at all-time lows. If not, we close to it. So have you seen any you know increased uh chat or call volume from buyers and backlog that are you know asking questions about locking in rates or what she could do to lock and right to prevent further increases going forward or anything. That would be a potential warning sign about you know, that there's some skittishness unfolding there.
Yeah, I I wouldn't call it skittishness messerly only are coming in now and ask him to lock the race which when rates were sliding they don't like to do it. As soon as they are rates are going up. They'll they'll lock and are the lock program. We have covers the the time to build the home. So if they think rates are going up and they want to come in and lock we accommodate that off the other color. You want to give ya Alan taking a look at our pipeline of what we have currently off the percentage of buyers who have elected to lock is ten to fifteen percent and that's very comparable to where we were a year ago. So even with the deadlines on on rates and rates are potentially moving up it has not, you know triggered our buyers to to make an additional step but the good thing is we dead.
A program in place the buyer likes to do that.
We can put them in that lock but have not seen that happen yet l.
Our next question comes the line of Susan maklari with Goldman Sachs. Please proceed with your question.
Thank you. Good afternoon. Everyone. My first question is, you know, can you talk a little bit about the construction costs that you're seeing? You know how inflation kind of came through in the quarter wage you're thinking about that as we look through the next couple of quarters.
Sure. So, you know as far as construction costs goes the percentage of overall average selling price. It's remained incredibly steady and constant for quite some time off. So, you know what we've been saying and and doing we continue to see which is offsetting inflation on the construction cost side with with selling prices and that's working effectively, you know, there are concerns obviously in a in a tight market and a hot market like we're seeing now there's a lot of pressure on the supply chain both, you know in the office building certain commodity categories as well as in labor and you know are purchasing folks are very very busy right now trying to manage that and they're doing a really good job. It's very challenging. It's a challenging environment, but you know, they get paid to solve problems and they've been solving the problems. So I think what we're really seeing now is just our ability to just continue to rely on our long-term.
Some relationships and whether there with some of the large National suppliers that we've had in in Partnership or that we been in partnership with for a long time or some of the large local, you know labor wage earners and subcontractors, um, just really gotten played with with the supply base and providing a lot of visibility. We have a big backlog built. So it's a huge Advantage for us wage exactly what we're building where we're building it. We share those back on details with our suppliers so that they can plan accordingly and you know to talk to fire but so far civilian and you know, the high-class problem might try to be facing this then then trying to go out and get sales or anything else you can think of and filter of operations have been done. I would say an outstanding job managing through it not only getting their deliveries and you know trying to compressor there's cycle times but also controlling as much as possible the the inflamed
On that side of it.
Okay. That's very helpful color. And then my next question is, you know going back to the question around higher rates. One of the things that we have heard is that you know with with the savings rate having risen significantly last year and stimulus money coming through and and the fact that just home prices overall have risen some people that are you know, either doing a move up or or some, you know, moving from an existing home to a new home are putting more down payment down to help office gate the order to help mitigate the impact of the higher rates and I know you mentioned that your average down payments around 13% or so. Have you seen that change or are you seeing that people are able to put more down and is that to any extent kind of helping in terms of the rate environment and in their ability to get in there and get all the options in the upgrades and all those kinds of things that they still want.
Susan I don't know that that the 13% is changed much in the last couple of years maybe a percentage point no more. But if you put it in the contract 65% of the buyers were first time buyers in the quarter and you know average selling price about 400. So they're they're putting $50,000 down on their home purchase and you in the traditional lens. The first time buyer is going FHA putting down the minimum cuz that's all they have. This is a well-heeled first time buyer and it's a what we've been catering to for the last couple of years. So, you know, FICO score is 724. They they can borrow more they're not stressed in qualifying and and I don't think they're draining the bank at closing either. I think they have a liquidity leftover match you have any other color on that relative the studio or or or just yep.
Think about you know, the the loan product that they're selecting, you know, they're a year ago. They were 55% conventional and we're still seeing that so I think they're they're just not been a significant, you know movement over the last six quarters the the loan that they're selecting and it's just as Jeff touched down his comment. This is a a high credit score. You know, this is a buyer in a very strong position and ready to move forward, you know, and is this the boss know the millennial who waited and has now been able to accumulate a very strong deposit good credit score. That's what we're seeing.
Our next question comes on line of John lovallo with Bank of America. Please see what your question. Hey guys. Thank you for protecting. My questions tonight name is Lee. You're performing at a very high level which is encouraging just have a question just rounding out the affordability conversation here. If we think back to 2018, the economy was improving founding demand was solid and also improving no fiscal stimulus was expected to you know, put more money in Byers pockets and offset the effect of higher rates and everything felt pretty good from from a banking standpoint and then the music sort of stopped in the fall. And so I guess the question is what were some of the early signs that you can recall that things were were kind of coming to a head and getting rid of pause and any thoughts around that
As we look back on it. There's a couple things that are are different back then interest rate sticks up more than they have right now, but then Builders were pushing price off. There's a couple other things going on one. There's there is literally no inventory in back in eighteen and nineteen inventory was was more plentiful and imbalance and and I think the month the maturing of the Millennials and the starting the family and saving the money, they're significantly more demographic demand today than it was back in in eighteen and nineteen and we shared the story when when we saw the slow down that I would say our traffic probably picked out a little or people took a little longer to buy them see things like that. But we quickly moved to reposition our model parts to smaller homes that were lower-priced more affordable where we would go from a 22 on
Hold down to a seventeen or eighteen hundred foot model.
Put it in the model part. It would have a similar room count albeit a little smaller rooms, but would lift the same and we were ready for this this affordability Crunch and Munch. The buyer came back after about 120 days. I think it was more the adjustment to the rate at the time cuz race didn't come back down when our sales picked up again and off so we were positioned for a tougher affordability environment and the buyer came right back rates, then did come down and it we didn't need to take advantage of what we have done in our average home size today is similar to what it was back in eighteen and and nineteen but we're well-positioned if it were to happen again, cuz we still have the product out there and found can move just as quickly and we've actually done a lot of Look Back research right now cuz it's so topical and if you if you look at many of our markets we took off.
Same communities where we moved price but rates are lower in in some cases the payment right now year-over-year is up thirty bucks. I think the worst one I saw was off $180 in in that community. So the the uh, this move with interest rates while it's come up a little bit. It's still pretty compelling out there and affordability. So the settlement, it's still very favorable.
Okay, that that's helpful Geoff and then you know, maybe one other one. I think you mentioned that your land purchases are pretty consistent with recent history. I sort of one to two-year supply per Community. One of the things that we offered from folks in the field is that other builders may not be you know, being quite as disciplined and and are buying lots and greater size and paying up quite a bit for some of these lots. Are you seeing this kind of land grab any of the markets that you're competing in?
We are seeing larger purchases occur. And you know, somebody wants to do that and that's their strategy strategy. Hopefully it works out for him. We'd like our approach. We like to be in the compact make your money being a home builder turn the asset move on and we think over time that's part of why our return on Equity is increasing. So well, we're we're not off north of 18 and we call it returns Focus growth and it's if you can keep turning your assets generate your profits generate your cash move on to the next one like we've effectively done you can get to be very nice returns along the way and and we take our approaches the right one.
Our next question comes the line of Michael rehaut with JPMorgan. Please see what your question.
Takes good afternoon. Everyone just a couple of questions here, maybe more clarifications, you know on the guidance. I was just curious on the the raising of of the revenues which is obviously encouraging given some of the timing issues in first quarter second quarter, but at the same time I was found it interesting that you did not offer lower sg&a, which typically, you know, LLC fluid would have some operating leverage against that higher Revenue. So any comments around that would be home.
Right. Yeah, the The Leverage impact on the $159 range is not terribly significant. We are trying to prepare the company and and moving the company to a larger scale wage. So we're pushing that pretty hard and and you know as we're scaling up the business we're trying to scale up the resources at the same time. So you're seeing a little bit of sg&a like dollar build as you go through the year. We also have a lot of new communities opening, you know, as Jeff mentioned we're looking open about a hundred and fifty communities this year. That's about 50% up on what we've seen last year. And in fact over the last two or three years. It's a pretty large step off and you end up, you know, you put in a little more expensive upfront on that but we're seeing pretty nice leverage. We're going to see a nice step down and sg&a. Second quarter is compared to second quarter of last year and you know for the full year, we'll we'll see some progress on the sg&a side as well. So we're pleased with that and you know, it's it's Jeff.
I have a very strong operating margin for us as well as we go through the year will continue to look for opportunities and continue to cost contain an ESPN a side. But first and foremost for us is is to get this this operating scaled up and we'll continue to investigate it to give up and we're seeing a lot of success obviously on your order side and the construction side now with our starts, you know, basically ma'am our sales page. So we want to continue to support it with a company resources as we move forward.
No, it's it's it's great trip. Thank you for that. Secondly. I just wanted to zero in a little bit on on current demand Trends and I know obviously off in disgust a lot so far this call and you know noted you've noted that you basically haven't seen much of an impact that or any of an impact from rates so far the men friends were very strong. So, you know, are we to take that that you know, like you did that 6.4 orders per month per community and the first quarter. Should we be expecting something similar or even slightly stronger as you typically, you know, get a some improvement as you go through the screen selling, is that a fair expectation and again, obviously, you're trying to match sales Pace with starts. So maybe you know, the answer is, you know, we're seeing if the Panthers
Limit on starts and expect a similar sales Pace, but just trying to get a sense for how we should think about two Q on that regard because again, you said the man does remain strong you are looking to maintain this start space. So, you know, just trying to you know, I mean logic would would say perhaps that you would be able to walk in a similar sales Pace. It's not a Little Bit Stronger Just giving the general seasonal Improvement.
Michael there's a couple of things to qualify that if market conditions remain as they are today will continue to be opportunistic and and frankly take faith in Christ. Like we did in the first quarter. If you think of our our business model in our state is Blended absorption 5 a month and the spring is a stronger time of year for the average 5 a month for a year. You're going to be 6 6 and 1/2 in our second quarter. So I I think it's fair to assume similar absorption to what we saw in q1 and and that at that level we we hit the starts everywhere and we're in a nice balance and a a nice Rhythm to deliver on the year and suck up a growth for 22. I think that's a reasonable assumption.
And our final question comes to the line of Mike Doyle with RBC Capital markets. Please proceed with your question.
Hey, thanks for squeezing me in and I appreciate the color so far. I guess Jeff just a quick follow-up on that. I wanted to ask about just how the kind of phasing of thought into the pace and and maybe if you could give any qualification around what percentage of your communities you've shifted to a phased re-release model and Ed anything around kind of what those phases or timing of those phases actually look like compared to say 3 or 6 months ago. If they're you know, either a shorter or longer. And in between when you release the next set of offs.
Matt you want to take that sure we
is it is we look at our business. We we just we think about each community and and how we underwrote that that deal and what was that under, you know, what was that pace that we used to underwrite it. We will toggle as we move forward and occasionally, you know, half the brake so to speak and a strict some of the releases within a given week, but it does vary by community and and it's fluid and I don't mean to be vague because in some cases we may elect to continue to run it at an accelerated Pace if we secured an additional community that could be in the same submarkets.
If I Community type analysis and review that I do with all of our division presidents in trying to meet her it out. But also make sure that we're positioning ourselves for growth as we're moving through the year. So like I don't know if that hits what you were looking for. If not, feel free to you know, clarification question that that home. Thank you. My second question. You know. I know you guys have spoken numerous times throughout the the call around kind of your
on the cost.
Adam Price cost side and matching matching price with cost of the clearly exceeding cost with your with your pricing based on the margin guide. I was wondering if if I could get a little more color on, you know, your overall ASP expect to be up 5% for the year. Clearly. There's some Nicks impact there any any qualification that you can provide on what what your underlying price per square foot Trends would would be doing or any other way that you would kind of normalize that and help us understand a bit better. What kind off the true core pricing power is
Sure. Yeah, the number one driver on the on the cost side has been Lumber as we all know, you know, when you look outside of that across all the other commodity categories, there's been ups and downs including labor costs, but it really hasn't moved the needle much so, you know, the whole gang the whole story on on cost has been a number and you know, it's a pretty it's a commodity and it's it's a market where their future pricing and everything else and they're expected to come down as we go to a year. But he knows what I can tell you is when you look at our forecast, we're fairly consistent in our total cost percentage of a its P relative to you know, the core of the cadences we go to the year 213 Q4. So, you know, it's it's about matching on a percentage basis what you're seeing on the on the same price side, you know what we're currently forecasting but just caution, you know a lot of variability on the lumber I think in a point in time this whole bumper issue is going to become more of a Tailwind for the industry wage.
And then then what we've seen I think there is a limit to how high it can go. I'm not sure what that limit is just yet. I'm not sure the timing of it but I do believe that's going to come back into a long-range were more accustomed to when I think there's going to actually be some upside coming off of that. But for now it's you know, it's been satisfying and and we're very, uh, thank for that we've been a manager process as well as we have given the big pressures on Lumber and uh continuing to keep the construction machine going and the cost in a fairly I'd say a good state of control given me the margin expansion that we're seeing and being able to take advantage of what we're seeing in the market and off at any cost inflation. So no, I'm not overly concerned at this point. In fact, we we've been confident enough and thought about the year favorably enough to lift the the margin guidance as we go so we're we're actually even feeling a little bit better about profitability than we were three months ago dead.
And with that disc include today's question-and-answer session as well as his conference call you may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.