Q2 2021 KB Home Earnings Call
Good afternoon. My name is Alex and I will be your conference operator today I would like to welcome everyone to the Kb home 2021 second quarter earnings Conference call. At this time, all participants are in a listen only mode.
Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website Kb home Dot com through July 23rd.
Now I would like to turn the call over to Jill Peters Senior Vice President Investor Relations Jill you may begin.
Thank you Alex good afternoon, everyone and thank you for joining us today to review our results for the second quarter of fiscal 2021.
On the call are Jeff Mezger, Chairman, President and Chief Executive Officer.
Man Dino Executive Vice President and Chief operating Officer.
Jeff Kaminski Executive Vice President and Chief Financial Officer.
Oh, Hollinger senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer.
During this call items will be discussed that are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future results and the company does not undertake any obligation to update them.
Due to factors outside of the company's control, including those detailed in today's press release and in filings with the Securities and Exchange Commission.
Actual results could be materially different from those stated or implied in the forward looking statements.
In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release <unk> on the Investor Relations page of our website at Kb home Dot com.
Before I turn the call over to Jeff I will note that year over year comparisons should be considered in the context that our performance in the 2022nd quarter was significantly and negatively affected by the broad economic downturn and the extensive public safety measures put in place across the country beginning in March.
Due to the COVID-19, pandemic and with that here is Jeff Mezger.
Thank you Jill and good afternoon.
We delivered healthy results from the second quarter marked by 1 on the strongest quarters for both operating and gross margin performance in some time.
Operationally our divisions are doing an excellent job of navigating this environment.
Demand strength and well publicized supply chain constraints as.
As we effectively balance pace pricing starts to.
To optimize our assets and manage our production.
With our full year coming into better view, we are poised for continued returns focused growth.
Expanding our scale to about $6 billion in revenues and generating a return on equity of roughly 20%.
And so the details of the quarter. We produced total revenues of 144 billion and diluted earnings per share of $1.50.
We achieved an operating income margin of 11, 3%.
Given by several factors.
In addition to strong market conditions, we are benefiting from solid performance in our newer communities.
Operating leverage from both the increase in our community absorption rate as well as overall higher revenues.
Disciplined management of our SG&A costs, and the ongoing tailwind from lower interest amortization.
Our profitability per unit grew meaningfully on a sequential basis to nearly $47000.
We achieved or surpassed our expectations across our financial metrics, although deliveries were at the low end of our range as some of our deliveries shifted into the third quarter due to supply shortages municipal delays.
That said with the benefit of local scale on most of our divisions. We are relying on our longstanding relationships with subcontractors and trade partners to mitigate delays.
With the progression of our work in process and our success in accelerating starts we are confident in our ability to achieve full year deliveries.
2000, 14000, and 14500 homes.
Our balance sheet is solid.
We worked through the bulk of our inactive assets our inventory is rotated into a higher quality portfolio of communities.
We have grown our equity, while reducing our debt, resulting in a significantly lower leverage ratio, which we expect will decline further by year end.
We recently completed a $390 million debt offering.
The net proceeds from which together with a portion of our existing cash will be used to retire our 'twenty 1 maturity in full.
Ultimately the operating will contribute to a reduction of our debt levels and lower our average borrowing rate provided an ongoing tailwind to our future margins.
Yes.
We continue to allocate the substantial cash we are generating in a consistent manner.
Prioritizing our future growth to drive greater earnings and returns.
In addition, our balanced approach includes returning cash to stockholders, primarily through our quarterly dividend, which we have raised in each of the past 2 years.
And reducing our debt as I just mentioned.
In the second quarter, we invested $575 million in land acquisition and development.
Expanding on our lot position sequentially by 7800 logs to roughly 77500 lots owned or controlled.
With 45% of the total option.
This growth in active inventory.
Together with improving margins should help to drive further improvement in our return on equity.
As we discussed last quarter, we are assuming a lower monthly absorptions in our underwriting as compared to our current pace.
And no inflation, either in AOSP or costs.
In addition, we are pursuing moderately sized deals in our preferred submarkets.
Averaging between 100, and 150 lots and staying on strategy and positioning these new communities to be attainable near the median household income for that sub market.
We believe using this disciplined approach helps to manage our risk as we acquired land throughout a cycle.
While we expect our near term growth to come primarily from our existing markets as we work to gain market share and expand our scale.
We're also selectively entering new markets.
Along with our success in Seattle and recent re entry into Charlotte, we're announcing today that we have started up a division in Boise, Idaho, a top 25 housing market.
We see a meaningful opportunity in this fast growing metro area to offer our personalized homes at affordable prices.
And we're excited about extending our market strategy to Boise.
We now have over 900 lots under control and anticipate our first land parcel closing in the third quarter.
We successfully opened 33 new communities in the second quarter. However.
However, as a result of the heightened demand for our homes, we sold out of more communities than we had projected and also experienced slippage in some community openings.
Jeff will provide more detail on our community count expectations for this year in a moment.
Looking forward to 2022 with our strong lock pipeline, we remain on track for double digit year over year community count growth.
As we prepare for the significant acceleration of new community openings over the next 6 quarters.
We have also stayed focused on building our backlog to drive our revenues for the balance of this year and into 2022.
Our monthly absorption rate rose to 7 net orders per community during the second quarter.
Even as we managed sales primarily through price increases.
And secondarily through lot releases in order to balance pace price and starts.
We're sensitive to affordability as we work to stay within appropriate range near the median household income of each sub market.
Our order ISP has climbed in the past 3 months, reflecting a combination of mix as well as rising prices.
Our largest sequential net order increase within our West Coast region.
Although this region carries our highest average selling price.
It remains competitive with 3 sales within our Submarkets.
Our Los Angeles Ventura business provides a good example.
This division generated the strongest sequential order growth in the second quarter.
Although it operates at a higher ASP.
It is still below the median resale price of homes, and it's submarkets, which are as much as 100000 higher and selling within a few weeks of being listed.
Resale prices have moved significantly.
And our relative position has actually been enhanced.
As to lot releases, our approach is similar to how we gauge interest in a new community.
Home buyers completed an application and go through their initial credit process to join a list of qualified buyers.
We then work through that list as we release lots.
We're typically raising prices in conjunction with each lot release.
And have not seen a decrease in the conversion of qualified buyers even as rate base prices have risen.
Our teams worked hard to earn our place as the number 1 customer ranked national Homebuilder and third party customer satisfaction surveys.
By prioritizing service and the relationships, we have with our buyers and we're focused on continuing to do so during this time of limited supply.
The metrics that we monitor internally for shifts and affordability are stable.
Buyers are not adjusting the size of the homes, they're purchasing to stay in the market.
Although we offer floor plans below 600 square feet and.
And over 75% of our communities.
Buyers are still selecting homes, averaging 2100 feet.
Which is consistent with their choices over the past couple of years.
As is evident in our results the desire for home ownership is strong and we believe we will remain so for the foreseeable future.
There are 2 primary factors informing our view.
The first is an acute shortage of supply stemming not only from limited resale inventory, but also from the underproduction of new homes over the past 15 years.
This deficit will take many years to correct and until inventory reverts to more normalized levels. The imbalance between supply and demand should continue to support new home sales.
Another key factor is demographics.
The size of the millennial population and the pent up demand from this cohort together.
Together with the Gen Z now reaching their home buying years.
From a large and healthy pool of prospective buyers.
Demographic groups value personalization, and we believe we are well positioned to capture increases in home sales given our expertise in serving the first time buyer, which represented 64% of our deliveries this past quarter.
With our built to order approach.
Net orders were 4300, our best second quarter since 2007 with strength throughout the quarter.
Resulting in year over year growth of 145%.
This comparison narrowed at the end of May when we experienced a significant acceleration in order rates that has lasted for the past year.
We are matching starts to sales and in the first half of this year, we have quickly scaled up our production to start over 8500 homes.
To put this in context the homes, we started in the past 2 quarters represented about 75% of the total homes. We started for the full year 2020.
Almost 95% on the homes in production are already sold.
And we remain committed to our build to order business model.
We value the visibility that our even flow production provides.
And the flexibility that it affords and positioning our communities to move with demand.
Operating on personalized home creates meaningful differentiation for our company, which we view as an advantage because buyers value choice.
Nearly 80% of our orders in the second quarter were for personalized homes.
Which also creates an additional revenue stream from our design studios and with lot premiums.
Our studio revenue per unit rose sequentially in the second quarter and.
And is continuing to average about 9% of our higher base prices.
We continually monitor the frequency of studio selection and.
And it had been raising prices on some products enhancing an already accretive studio margin.
As per lot premiums, we have found over time that if buyers can pick the home they want and build at home on a lot. They choose they are willing to pay for that choice and we can generate additional revenue.
Every incremental dollar of lot premium as an additional dollar of margin.
Between studio revenue on lot premiums, we were averaging about $40000 per home today and believe there is opportunity to continue to grow this going forward.
We ended the quarter with a robust backlog value of $4.3 billion up 126% year over year, representing over 10000 homes.
As I referenced earlier, our backlog supports the higher revenues, we anticipate this year.
And sets the stage for another year of revenue growth in 2022.
K VHS home loans, our mortgage joint venture.
Continues to be a solid partner for our customers.
Handling the financing for 75% of the homes, we delivered in the second quarter.
These buyers have a strong and consistent credit profile with an average down payment of about 13% are over $50000.
And on an average FICO score that inched up to $7.27.
The majority of our buyers are opting for conventional loans.
For the past few years.
Switching gears, we published our 14th annual sustainability report in April.
The longest running report in our industry.
We've been on this journey for over 15 years and the commitment we have made to sustainable homebuilding.
As resulted in Kb home being the industry leader in energy efficiency.
We have built over 150000 energy star certified homes to day more than any other builder and.
And have the lowest lowest published.
Average home energy rating system or hers index score among production homebuilder.
And we're striving to be even better with an aggressive goal to further improve our average per score from 50 down to 45 by 2025 <unk>.
A level, which translates into an additional estimated reduction in our kb homes carbon emissions of about 8% per year.
In closing we are poised for an incredible year of expansion in revenues margins and return on equity.
As we execute on our ongoing plan to increase our scale, while driving a higher Roe.
Equally as important we are positioned for a strong start to 2022 with the expected increase in our year end backlog and projected community count growth next year.
We are pleased with how this year has unfolded and look forward to updating you on our continued progress.
I'm appreciative of the hard work and commitment of the entire Kb home team and I want to thank them for their efforts as we navigated through the challenges brought about by the pandemic, while never wavering from delivering high levels of customer satisfaction throughout this past year.
With that I'll now turn the call over to Jeff for the financial review.
Thank you, Jeff and good afternoon, everyone I will now cover highlights of our financial performance for the 2021 second quarter and provide our current outlook for the third quarter and full year during.
During the quarter, we generated improvements in all our key profitability measures and continued to enhance our balance sheet strength and liquidity.
With our operations performing well, we leveraged 58% growth in housing revenues to generate a 216% increase in operating income for the quarter in.
In addition on our net orders reached their highest second quarter level in 14 years.
Based on our robust financial results and net order performance. We are once again, raising our outlook for the remainder of 2021.
Our housing revenues of 144 billion for the quarter increased from $910 million in the prior year period, reflecting a 40% increase in homes delivered and a 13% increase in overall average selling price considering our current backlog and construction cycle times, we anticipate our 2000.
'twenty, 1 third quarter housing revenues will be in the range of 1.5 to 158 billion for the full year, we're projecting housing revenues in a range of 5.9 to $6.1 billion. We believe we are very well positioned to achieve this top line performed.
That's due to our strong second quarter net orders and ending backlog of over 10000 homes, representing nearly $4.3 billion and ending backlog value.
In the second quarter, our overall average selling price of homes delivered increased to nearly $410000, reflecting strong housing market conditions, which enabled us to raise prices in the vast majority of our communities as well as product and geographic mix shifts of homes delivered.
For the 2021 third quarter, we are projecting an overall average selling price of $420000. We believe our asps for the full year will be in the range of 415 to $425000.
Homebuilding operating income significantly improved to $162.9 million as.
Paired to $51.6 million in the year earlier quarter, reflecting an increase of 560 basis points and operating income margin to 11, 3% due to meaningful improvements in both our housing gross profit margin and SG&A expense ratio <unk>.
Excluding inventory related charges of <unk> <unk>.
$5 million in the current quarter and $4.4 million of inventory related charges and $6.7 million of severance charges in the year earlier quarter. This metric improved to 11, 4% from 6.9%.
We expect our homebuilding operating income margin, excluding the impact of any inventory related charges to further improve to a range of 11.7 to 12, 1% for the 2021 third quarter.
For the full year, we expect our operating margin, excluding any inventory related charges to be in the range of 11, 5% to 12.0%.
Our housing gross profit margin for the second quarter expanded to 21, 4% up 320 basis points from the prior year period.
The current quarter metric reflected the favorable pricing environment over the past several quarters when most of the orders relating to the second quarter deliveries were booked.
Increased operating leverage due to higher housing revenues and lower amortization of previously capitalized interest.
Excluding inventory related charges, our gross margin for the quarter increased to 21, 5% from 18, 7% for the prior year period.
Our adjusted housing gross profit margin, which excludes inventory related charges as well as the amortization of previously capitalized interest was 24, 2% from the 2021 second quarter compared to 21, 9% from the same 2020 period.
Our continued gross margin improvement trend demonstrates that we have been successful in offsetting input cost inflation with selling price increases. In addition, with our strategy of locking in material and labor costs at the time each home starts we have largely mitigated the impact of cost inflation during the construction process.
Assuming no inventory related charges, we expect a sequential increase in our 2021 third quarter housing gross profit margin to approximately 21, 7%.
And further improvement in the fourth quarter.
Considering this expected favorable trend, we believe our full year housing gross profit margin, excluding inventory related charges will be within the range of $21, 5% to 22.0%, representing a 215 basis point year over year increase at the midpoint.
Our selling general and administrative expense ratio of 10, 1% for the quarter improved from 12, 6% from the 2022nd quarter.
The 250 basis point improvement reflected the continued benefit of overhead cost reductions implemented last year in the early stages of the pandemic incur.
Increased operating leverage from higher revenues and the severance charges in the year earlier quarter.
Considering anticipated increases in future revenues in our continuing actions to contain costs. We believe that our 2021 third quarter SG&A expense ratio will be approximately 9.8% and our full year ratio will be in a range of 9.8 to 10, 2%.
Our income tax expense for the quarter of $33 million, which represented an effective tax rate of 17% reflected the favorable impacts of $14.8 million of federal energy tax credits recorded in the quarter relating to qualifying energy efficient homes, we expect our effective.
Tax rate for the full year to be approximately 20%, including the expected favorable impact of additional federal energy tax credits in the third and fourth quarters.
Overall, we produced net income for the second quarter of $143.4 million or $1.50 per diluted share compared to $52 million or <unk> 55 per diluted share for the prior year period.
Turning now to community count our second quarter average of 205 communities decreased 17% from the year earlier quarter.
We ended the quarter with 200 communities as compared to 244 communities at the end of 2022nd quarter.
On a sequential basis, our average community count decreased 8% from the first quarter and ending community count was down 4%.
The decreases were due to our strong absorption pace of 7 monthly net orders per community during the quarter, which drove 42 closeouts as well as community openings that were delayed to the third quarter.
Over the past 12 months, our robust absorption pace has driven the closeout of over 150 selling communities.
Although they will not generate additional net orders, we will continue to produce revenues and profit in future quarters associated with nearly 80% of the sold out communities as we work through the construction and delivery of the sold homes.
Side from our strong pace of orders is now reflected in our backlog, which will drive increased future housing revenues.
Our expectation of continued strong net order activity will drive elevated levels of community Closeouts in the second half of this year.
Our goal is to offset the impact of these closeouts by opening a higher number of new communities in both the third and fourth quarters to achieve sequential growth.
We anticipate our 2021 third quarter ending community count will increase sequentially by approximately 5% followed by another modest sequential improvement in the fourth quarter.
With our significant year over year increase in lot supply and our focus on developing developing and opening new communities as quickly as possible over the next 6 quarters. We believe we can achieve sequential increases in our quarter end community count on over that period.
We remain committed to our target of double digit year over year growth in community count for 2022.
Favorable operating cash flow in the quarter generated primarily from homes delivered net of higher levels of land investment resulted in quarter end total liquidity of approximately $1.4 billion.
Including $608 million of cash and $788 million available under our unsecured revolving credit facility.
Earlier this month, we completed the $390 million issuance of 4% 10 year senior notes and used a portion of the proceeds to redeem approximately $270 million of tendered 7% notes that mature on December 15.2021.
We expect to realize a charge of approximately $5 million for this early extinguishment of debt in the third quarter.
It is our intention to redeem the remaining $180 million of the 7% notes at par value on September 15th.
Once completed this redemption, partially offset by the new issuance will result in a net $60 million reduction in debt.
In an annualized interest savings of nearly $16 million contributing to a continuing trend of lowering the interest amortization included in future housing gross profit margins.
In addition, we believe the $350 million on our maturity in 2022 of 7.5% senior notes represents another opportunity to reduce incurred interest and enhanced future gross margins.
In summary <unk>.
Given the size and composition of our quarter on backlog of over 10000 homes, along with our expanded production capacity. We expect further improvement in our financial results and return metrics and 2021 as compared to our expectations at the time of our last earnings call user.
Using the midpoint of our new guidance ranges, we now expect a 45% year over year increase in housing revenues and further expansion in our operating margin to 11, 75%.
This profitability level should drive a return on average equity of approximately 20% for the full year.
We believe our emphasis on returns focused growth will continue to drive improved financial results increased scale and higher returns to further enhance long term stockholder value.
We will now take your questions Alex Please open the lines.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
Confirmation tone will indicate your line is on the question queue. You May Press Star 2 if you would like to remove your question from Mchugh from participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Please limit to 1 question and 1 follow up question.
Our first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good afternoon, congrats on the results thanks for taking the questions.
First 1 on the <unk>.
Reising relative to resell on a market level Jesse.
Jeff you gave some great color there on the on the life insurer market curious if you could expand a little bit on that point.
Because I think it is an important point, but perhaps if you could maybe walk around some of your markets just any other interesting anecdotes or quantification on how.
Our product is comparing versus resell and this clearly in an environment, where resale prices continue to move much higher. Thank you sure sure.
Thanks for the question and the comments Matt.
It's a different story on every sub market as you know around the country, but the pricing on resale homes in most of the Submarkets were in is moving pretty dramatically, primarily because theres no inventory on the re sales side either.
So a lot of the headline coverage of homebuilding has been talking about how much are prices are moving and they ignore how the resale pricing, which is our biggest competitor is moving as fast.
If not faster than where we're sensitive to.
Affordability as I shared in my comments and we're also always mindful of how are we positioned versus the resale market.
Whatever our prices are up in the sub markets. We operate in the re sales are up a similar level.
If not higher and in many cases, we're actually enhancing our position right now.
On a specific city doesn't come to mind I can tell you in general every city, we operate in resale prices moving as quickly if not quicker than the new home side, where builders are mindful of of affordability and while we're opportunistic we may not be as opportunistic as <unk>.
Re sales because we are mindful of that.
No wonder if all that's really great color there.
The second 1 obviously in an environment of production constraints you talked about I believe you said 8500 starts year to date.
And correct me, if I'm wrong, but if that equates to roughly 6 to 7 starts per month per community should we think of that as kind of your ongoing production capacity and therefore could you continue.
To sell at that pace.
Demand is there as you mentioned 7 selling pace this past quarter.
Or Conversely should we think of some more normal seasonality in general to demand, perhaps rearing. Its head again this year. Thank you.
Matt It's an interesting topic and you've followed us for a while if you go back over.
The evolution of the past few years on our business, we worked hard to lift our margin and get our margins back up to normalized levels and we've now done that.
There were years, when we put a cap on how many we would sell and opted for just margin until we can get our margins up and when we did that our construction machine had the capability to build more houses, but we were pushing on the price on the margin pedal a little harder over the last year.
Obviously incredible demand.
The strong selling environment and we've been letting out the string if you will on sales because our margins are strong and improving and we have the capability to build more so I felt it was important to communicate on my comments that we're not selling out ahead of starts where we're selling and start.
Net.
Our comparable.
Level around the system and.
On my Hunch is that.
Everybody will have a different crystal ball wouldn't surprise me if sales slow a little bit through the summer I think we slowly revert back to a normal.
Our home sales environment I don't know what we'll do.
Each month of the third quarter, but.
We don't need to do 7% to hit our growth targets, but if we're in a community where the market is strong and we have the ability to to start that many homes a month and we're lifting our margins we would take advantage of the opportunity.
<unk> so find out.
To wrap that up.
We may not solid 7% in this quarter, we will see how the market conditions are and how things operate but we have the capability to build at that level.
And again I thought it was important to make sure the investor World understands that our our construction machine has more capacity than we had demonstrated in the last few years.
Thank you. Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.
Yeah, Thanks, a lot guys.
You said that your I think you said, you've ramped up production to be about 18, 5 which I guess it was basically what you started this quarter times 4.
And you said that you are basically starting in line with your sales.
Sales pace. So just wanted to make sure that I'm clear on that.
It suggests that you are not.
Trying to in any way change the point at which you sell the home to be later.
In the construction cycle at all that Youre very happy where it is so roughly where is that level right now at what point are relative to the starts would you say that you are selling your homes.
Yeah. Good question Steven.
On the cycle time, as we call it we're averaging today.
45 to 60 days from contract to start and.
5 months, a little over 5 months, depending on the city for the build time so it's.
7% to 7.5 month cycle from contract to close.
We continue to really prioritize sell it get the loan approved let the buyer pick everything at the studio and then start the home and Thats, our business model and I believe over the long run that will prove out to be the best returns the lowest risk.
You can take the the argument that while you can sell it more down the road if you hold off on releasing it but we'd rather have certainty of close visibility of margin and keep the balance.
To our business, so we're continuing to sell them.
And then start them in every city has got a different.
Our strategy on how far out yourself.
Set up your pipeline and your your construction within net city.
Great Yes.
That's really helpful. So just so I'm clear.
You are definitely taking a strategy, where you do not want to follow.
Some other players in the market who are deliberately selling homes later in the construction process.
Feeling that while you may you could theoretically be under pricing.
The market near term debt longer term the risk reward.
Favre as a consistent strategy I just want to make sure that that's actually that I'm, saying that properly.
That is our view Stephen I'd, rather know when we start the home.
We know what the margin is when we start the home our costs are locked so you have a little risk between.
Between the contract on the start is something weird happens on your cost structure and you may give up a point or 2 of price versus down the road, but you're also not exposed to that nasty incentives word if you get the home completed on it Hasnt sold and we've seen that movie. So we like knowing when we start the home thats going on.
And we know what the margin is and its predictable for our contractor base and it helps us in our forecast.
Thank you. Our next question comes from Truman Patterson with Wolfe Research. Please proceed with your question.
Hey, good afternoon, everyone.
Just wanted to touch on.
Some affordability very strong margin strong pricing.
It looks like as of the fourth quarter Youre getting more than enough pricing to cover all of the spot cost today and lumbers come back in or at least lumber futures have come back in.
If inflation levels off in the back part of the year as Youre attempting to bring on more communities. How should we think about pricing or are you all going to step off the gas gas a little bit to try and maintain affordability.
Or is it truly just kind of pricing to market without really concern for potentially rising.
Interest rates.
Yeah.
When our communities opened Truman will.
Price it to the opportunity we before we open up community. We create interest lists we call them and we can figure out where demand is and where the price can be and if it's above your pro forma youll take the higher price on Youll run.
And so we're opportunistic once we're open in that sub market when it comes to the investment in the new community in a sub market. We are very mindful of affordability and household incomes and it needs to be attainable and we can move around with lot size or the size of the homes that we offer in our model.
Park to get close to that median income and then if you open up and demand is stronger you take advantage of the opportunities. So it's up.
It's per community and its pricing to market not to not necessarily to cost. So if we can be opportunistic we'll take it.
Okay. Okay. Thanks for that and then.
I don't know if theres any way you can help us out with this to quantify how deep the buyer pool is I know you all have interest lists or wait lists have you seen those change at all.
Compared to maybe a few months ago are you seeing any buyer pushback or fatigue from recent price increases just trying to to understand how deep that buyer pool is.
Yes.
As I shared in the comments from in the markets are very strong today, and we may spend 2 to 3 months.
Developing an interest list before we Grand opened a community in if if not 2 or 3 months period.
Can get hundreds of people on a waiting list and the early entry to the waiting list then are going to see the prices moved more than the later entries on the waiting list and we've had some cases where.
Somebody who pre qual and okay, we opened for sale and they don't like the price and they say never mind I don't want it but there is many people behind them, saying I'll take it lets write it up today as the prices have increased but.
Share to my comments is we're releasing lots for sale today.
At the higher prices per phase release, we're not seeing a tapering in demand it may be off a little bit from.
The strength that was in March but March it was really really strong and now it's just really really strong it's a very good market environment out there today.
Thank you. Our next question is from Alan Ratner with Zelman <unk> Associates. Please proceed with your question.
Hey, guys. Good afternoon, thanks for taking my questions.
Thanks, Jeff.
Question I just want to clarify so I think you made a comment earlier on that from the time you start the house you have kind of certainty of costs and <unk>.
You said on afterwards that your typical timeline is about 45 to 60 days from contract to start so.
Am I thinking about that right where in that call. It 60 day window. If there are cost increases like that that's the variability on.
On your margin and I guess, the follow up to that as you know I'm hearing some builders are starting to build in some like cost escalator clauses into sales contracts in case costs do go awful lot. So curious if youre doing that to protect yourself against any cost pressure on net window.
We're not putting the escalators on the contracts with the customer our division do factor in contingencies and their budgets and all that when were pricing new products. So we can absorb.
I will say some of the costs lumber runoff.
Was much stronger and quicker than anybody anticipated nodes is coming back down but in our.
Our larger businesses with scale that are good at going from contract to start we didn't see much if any margin erosion from <unk>.
Contract to start in that 45 to 60 day window, and a smaller business where.
Where we may not have the scale youre, a little more exposed but.
As Jeff just shared in our guidance, we have been able to not only cover that cost but to increase our pricing more than the costs, where we expect over the second half of the year are to continue to expand margin from what we just reported.
So we're on a pretty good place right now.
That's helpful on that yeah, I just wanted to understand the kind.
And the timeline there.
Question, you know you guys have been entering a handful of new markets lately and I think you mentioned Boise on the call today and.
Cases.
Fascinating market, it's probably 1 of the hottest if not the hottest in the country at least in terms of price appreciation. So I'm curious as you enter these markets and maybe pick on Boise and specifically.
How long have you been looking at that market and how do you get comfortable with kind of starting to buy land in a market that has seen the type of run up in home prices and I'm, assuming land prices as well over the last 12 months or so.
Good question now.
I would compare it to Seattle, if you look at what we did in Seattle, everybody said, Seattle's very land constrained you can't get scale and it's very expensive and we have a very good team up there that are very seasoned in the Seattle land market with a lot of connections and we were able to introduce product that was <unk>.
Rice, well below where the new homes we're on.
<unk> competitive with resale and we quickly grew our market share through our ability to penetrate the market and that approach. So we're well below the median new home price in Seattle today, and running very very strong margins and as we look at Boise.
The person that we've had there pursuing the land activity is a seasoned veteran in the market been there a long time and we're doing the same thing we're targeting affordability.
And.
Approaching it a little bit different than a lot of local builders, who have moved upscale and their footage it moved up in their pricing.
Our chasing price we're coming in underneath so we think it's a good time.
A real good opportunity for our business model to go into Boise, where nobody really operates that way today.
Thank you.
Our next question comes from Deepa Raghavan with Wells Fargo. Please proceed with your question.
Hi, good evening, everyone. Thanks for taking my question.
Jeff can you comment on how much of your deliveries was pushed out to Q3, you mentioned the timing issue there.
Also mentioned.
You also called out some municipal delays and supply chain could you elaborate on debt as well.
Sure.
As far as deliveries it was less than 100, I don't know that we have the exact number but somewhere in that range.
I would say that quote we took the bullet in the second quarter for a lot of things that went on.
Where our build times extended a little bit and we have now adapted to that and adjusted and we're looking at things and Thats why we.
Based on how our width is today and how we're projecting out our completions. We're confident in the delivery numbers that we shared and talked about municipal delays, we're seeing issues as the city's ramped back up where inspectors don't show up to do final inspections for many days.
From when they were supposed to in for.
We're seeing some cities where utility companies are seeing a lot of delays in setting meters or showing up to put in the underground zone.
We throw the utility companies and with the.
Municipal delays.
So.
Crude analogy, it's like whack a mole.
In the cities we operate in every city has a little different menu of things that are coming up whether it's.
Lumber dropped didn't show up the day it was close to where the installation didn't show up or the Inspector didn't show up but we can't get garage doors today and it's it's all those things you have to.
To manage through and navigate when you're in a <unk>.
Building supply constrained environment, and we have good teams out there and we think we are.
Adapted and adjusted and Thats why were still confident with the numbers we gave from here.
Okay got it.
Did that include did that increase your cycle time.
Just a few months ago or is that still similar as just the problems on your because your debt back in the home example debt different problems and added a few days to our build time nothing nothing dramatic just a few days here a week over there and the city.
If you lose.
3 days, it's more on 100 units at our scale. So you have to keep working to compressor build times.
Thank you. Our next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you.
My first question is you mentioned in your comments that your studio options and you're a lot premiums are adding about $45000 per home can you give us some sense of how that compares historically, where that's been and you mentioned that there is upside to that over time can you talk to how you think about where that.
You can get to and the benefit that that can drive in margins over time.
Good question, Susan that the way we.
Separate the 2.
If you go into the studio.
The primary focus for us with our studios to help sell houses and give people choice and make.
Allow them to personalize web.
That's job 1 job 2 along the way you can make additional profit and keep finding ways to make more money in the studio.
I wanted to make sure that in the comments what was heard and you heard it while our base pricing has gone up the percentage of base out of the studio has held steady so if a year ago. Our ASP was $3.70, or 89% of base and now were 420, it's still 9%.
So buyers are spending more in the studio and it's a combination of what theyre selecting and also with our frequencies. We can gauge what's the strongest interest for the buyer.
If it's something that they can't go shop at home depot, because its customer for that debt.
Debt floor plan, we can get a higher margin there and that's that's what we're looking at now to mine more margin, which has resulted in a little more.
More studio revenue, so I would.
I would expect that over time as if our base pricing continues to go up that will still find ways to keep the studio at about 9% of base. So it's a it's.
It's an increment and on.
On the lot premiums side, our company goal right now is 2.5% of base sales.
Having trouble hearing you.
But my Smartwatch love that content.
So.
And is having trouble hearing me by the way.
So in the lot premiums, we targeted 2.5% of base.
<unk>.
We've ranged in some years, we've been as low as 1 on our quarter, 1 and a half and then there's years, we've done on 2 and a half we're not at $2..5 today. So we think we can at least get to our our stated goal and that's what we're working on.
Okay, but both of them.
Yes, they are driving.
Additional margin opportunity in the future for us.
Yes, Okay, Alright, and then you know obviously you've seen some delays in bringing some of these communities online I know you mentioned that you still expect to grow your community count double digit next year, but as we think about the puts and takes net of coming that are coming through over the next 2 quarters should we expect that there is actually maybe some upside to that.
10% target that you've given us for 2022 or how should we think about the way that that could come together.
We certainly have the lots and the communities in the queue to create upside from that and we're absolutely committed to the to exceed 10%. So there could be upside if all goes well its such a difficult.
Number to guide to because.
How quickly sellout changes.
Dependent on the city and the price point and what's going on there.
And the delays that we've incurred here in the second quarter all of those communities are opening and in June for the most part so.
We missed the community count for our hard community count number, but it's by a couple of weeks it's not.
When we guided to it and felt we were going to get there. So we did see some delays there and again, we've adapted to that and.
Our backyard at it right now and if you look at our our business and our cadence. We know we're going to end the year with a nice increase in our backlog we have the backlog today to support but we're already selling into Q1 of next year, we have the backlog to support the revenue guidance that we got.
And set us up for nice momentum into 'twenty, 2 and then the community count growth all will hit coming out of this year and we think we're setup to sustained nice revenue growth for 'twenty 2.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Please proceed with your question.
Hi, This is Maggie on for Mike.
First question, just trying to get a sense of how your sales pace trended sequentially.
On an absolute basis could you give us.
That piece was from month to month during the quarter and maybe any comments on what you've seen through the first.
3 weeks.
This quarter.
I don't know that we have it by weaker.
The trends through the month megabit.
Sheridan our comments demand was very strong during the whole quarter, we didn't see demand lightened up at all from.
March through May and you've seen.
The reports in June that housing demand is very good right now.
Got it and 1 more.
I think you said that for from Shriek, you you're expecting the.
Gross margin.
About 21, 7 and to get to your full year range that implies.
A step up into <unk>. So could you give us any puts and takes there is I mean is that.
Primarily volume leverage or any changes in kind of price cost dynamics that you are foreseeing.
I think as far as the progression goes for the remainder of the year. It's just more a reflection on what we've been seeing in the markets as we've been selling into third and fourth quarters.
On the third quarter represents probably the first quarter that we'll see the brunt of the lumber price increases hitting.
Full quarter deliveries and likewise in the fourth quarter. So that's a challenge that we had to overcome in order to continue that sequential increase.
We just had 5 consecutive quarters of increasing gross margins and we just guided to 2 additional quarters of increasing gross margins, which if we achieve it it makes 7 in a row, which we're quite happy about and proud of.
So.
Everything is kind of go on the right way for US we're seeing expansion in our selling margins right now we're seeing an expanded margin contained within our backlog.
As I mentioned, we are seeing the additional cost pressure from.
From the lumber price spike on those starts that it'll be generating the third and fourth quarter deliveries, but there'll be overcome by other factors. We do expect to see continuing good news out of amortized interest.
And we've seen debt also continue at least from the past couple of years and we think we have some runway ahead of us on that 1 and a lot of favorable trends right now as far as the margin goes on that end.
Just really supports our focus.
Towards increasing our returns and we think.
The 2 levers of increasing our scale and expanding our gross margin are the key items will debt return expansion goal and target that we have and we think we're well.
Very well supported by that we're very happy to and we're very happy to increase our our estimate for the current year up to around that 20% range for Roe.
And.
To be able to continue to build on that so.
Very very important and very key for us and we're seeing some excellent trends in.
Like you said definitely expect to see them continue into the foreseeable future.
Thank you. Our next question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Thanks for taking my questions I wanted to ask 1 more on the affordability side, Jeff I think you mentioned early.
Early on.
In your internal tracking youre seeing stability in the affordability.
B metrics on our affordability related metrics that Youre looking at I think you cited.
Square footage is 1 but could you just elaborate a little bit more about.
But what you are looking at internally.
When you are when you are referencing the stability there.
While on part of it is how deep that demand as Mike versus.
The supply that's out there so.
If we have a hunter lot community.
Interest list, the 3 or 400, when you open it theres more demand debt.
Then there is supply and.
Buyers are moving right along when we release labs, and saying I'll take that 1 at debt at that price and the buyer profile that we have it's very interesting to me you think of the high mix, we have a first time buyers at 64% and our average.
Borrowers through our JV, which is 75% of our sales are good good indication theyre, putting $50000 Dom and the FICO scores actually went up in the quarter the quality of the buyers today.
Our strong and.
We're not seeing any issues with qualifying payments right now versus income, it's a very strong buyer out there we're not seeing any indication that that affordability distressed if that does start to appear then we'll quickly pivot to smaller product and move on some lot sizes in <unk>.
And move with the demand like we've done in the past.
But right now it's just the demand is way outpacing supply.
Okay. That's helpful. Thanks, My second question just relates to some of the new market entries and also I guess broader capital.
Location, you've now entered 3 major markets organically.
Which is kind of an interesting choice of New York at his Syria.
Our public builders often do.
And it coincides with a period, where just given the given the dynamics in the land market.
We would expect that some M&A activity would potentially pick up could you just talk about how you're evaluating the organic versus M&A.
On a decision when youre looking at these new markets and is isn't.
Is M&A.
Potential Avenue for you as you look at additional ones.
Yes.
Well M&A is certainly an.
An additional avenue and.
As things come along we do engage with people that are 1 on seller their companies the premiums not light so you're you're absorbing a premium and then you have the integration risk.
As we look so we'll always look at those but what were we feel right now.
We have a nice growth trajectory in our organic growth in our existing markets, where we're nowhere near maxed out on where we can take our existing business. So we have the ability to bolt on.
Yes.
Softer market entries at the same time and let them mature.
And just like our Seattle example, where it took a couple of years and then you have.
Our revenue and then you have real revenue and profits and it becomes a real.
Driver in your company profitability and Thats, how we look at <unk>.
Charlotte in Boise, we have the.
With our current growth trajectory, we have the capacity to continue to grow and bring these markets along.
A little slower pace, but you avoid any big premium in any.
<unk> issues and it's.
Typically a better quality.
It just takes a couple of years longer.
But we'll also look at M&A. So we're not opposed to anything we're continuing to look at ways to grow our topline.
Thank you. Our next question comes from Alex Barron with housing Research Center. Please proceed with your question.
Yeah. Thanks, Thanks, guys good job on the quarter.
I was just kind of curious.
As far as the sharp price increases we've seen so far this year, especially this year to date.
And how you guys are thinking about that.
Particularly do you have a measure on what percentage of your buyers are coming in from other states that might be driving these prices up the way they have.
I don't have it on the call Alex I don't know how much.
We really track that what percentage of buyers come from California, and New York curve.
Wherever they sourced from I do think Thats, that's part of it but I think the bigger driver right now of price is the strong demand in all the markets.
And no supply it's the classic lack of supply and I think it's going to take time to.
To correct that and.
The California out migration that youre. So much about I think is overstated I think theres some of that but there's been some of that for you.
3 or 4 decades people have been moving to Arizona, Texas, Nevada.
On the California are moving to Florida from from.
From New York, but I think it's more just core demand.
And a lot of it in all the cities that we operate in today.
Got it and.
What's your sense, if the lumber costs start to go down and supply chain issues start to resolve themselves is it your sense that pricing is going to stay up here and margins are going to expand or is it your sense that.
Somehow the prices are going to start to work their way back down.
But.
In other words, where builders pass along some of the cost savings when they will start to happen.
Yes, I think we will be taking it to margin.
It will depend on the competitive landscape in each city and what I'd say.
The competition is not just new it's used homes.
But our hope and expectation is we will take it to margin.
Thank you. Our final question comes from Jay Mccanless of Wedbush Securities. Please proceed with your question.
Thanks for taking my questions. The first 1 I had with the land that you're out buying today when when do you anticipate that land will go into service.
And maybe could you talk about what youre, assuming for HPA, because you can move forward on on land buying.
As HPA home price appreciation.
Yes.
We don't assume any appreciation on price we take the view that it's got to work today and if prices go up costs, probably went up with it and youre not going to get more margin.
Over time, that's typically how it happened so we don't underwrite with inflation.
Own and control everything for 'twenty 2.
On a good chunk of 23.
80, 85%, 90% of 23 today, so the things that we're looking at probably a late 'twenty 3 if not into 'twenty 4 so there are ways out.
So.
The things, we're bringing to market today, we probably control too.
2 years ago for the most part.
Okay.
Helpful.
On the other question I had just at the beginning of the prepared comments, Jeff you talked about how Kb has flexed up but can the starts and the ability to start more homes inside the company. But then can you can you relate that back to the basics.
Basically just raising the lower end of the guidance and not taking the guidance up further was was that comment to mean that you ramped up starts she can maintain the pace you expected at the beginning of the year.
Just wanted to figure out how those 2 comments relate with each other.
Well.
Our build times.
On the starts in May are probably kicking into even December.
Deliveries, so you'll I think you'll continue to see an evolution of our.
The benefits of our community absorptions flow through not just coming out of the fourth quarter, but into the first quarter of next year and beyond.
We've actually been raising the revenue guide each quarter I believe the midpoint is up a $100 million yes.
So we are lifting it as we go Jay.
Ladies and gentlemen. This concludes today's teleconference. Thank you for your participation you may now disconnect your lines.