Q2 2021 LGI Homes Inc Earnings Call
Yeah.
Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
At Www Dot L. G I homes Dot com, we have allocated an hour for overpaid remarks, and Q&A if anyone should require operator assistance during the conference call. Please press Star zero.
At this time I will turn the call over to Josh <unk>, Vice President of Investor Relations at LG Island.
Thank you good afternoon, and welcome to <unk> homes conference call to discuss our results for the second quarter of 2021 and the 6 months ended June 32021.
Today's call contains forward looking statements regarding our business strategy outlook plans objectives and updated guidance for 2021.
These statements, which speak only as of today's call and are based on management's expectations are not guarantees of future performance and are subject to risks and uncertainties.
You should review our filings with the SEC, including our risk factors and cautionary statement about forward looking statements section for a discussion of the risks uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward looking statements.
<unk> homes assumes no obligation to publicly update or revise any forward looking statements.
Reconciliations of any non-GAAP financial measures discussed on today's call to the most comparable measures prepared in accordance with GAAP are included in the press release issued this morning and on our quarterly report on form 10-Q for the quarter ended June 32021 that we expect to file with the SEC later today.
This filing will be accessible on the SEC's website and on the Investor Relations section of our company website.
Our hosts today are Eric <unk>, Chairman, and Chief Executive Officer, and Charles Murray, and Chief Financial Officer, and Treasurer on.
Now I'll turn the call over to Eric.
Josh Good afternoon, and welcome to everyone participating on today's call.
I'll start by sharing some highlights of our quarter before handing it to Charles to provide more details on our financial results will conclude with a view on our performance in the third quarter and provide updated full year guidance we.
We delivered the strongest second quarter performance in our history exceeding our expectations and setting New company records for revenue closings absorptions and virtually all profitability metrics.
The housing market remains incredibly strong driven by dynamics that LTI homes is uniquely well positioned to capitalize on.
Here are a few highlights of our recent performance closings in the second quarter were up 42% over last year to a record 2856 homes and our average sales price increased over 15% to more than $277000.
This resulted in revenue, increasing 64% to $792 million, a new second quarter record and the second best quarter overall in our history.
Our continued success at offsetting cost inflation enabled us to achieve gross margins of 27% and adjusted gross margins of 28, 5%. Both second quarter Records, we achieved our lowest ever SG&A expense ratio that in turn helped drive a 400.
60 basis point improvement on our pretax net income percentage to an all time high of 18, 8%.
Finally, our net income was over $118 million, representing an increase of over 112%. This was a second quarter record and our second highest net income in our company's history.
During the second quarter, we averaged 9.1 closings per community per month companywide.
This was the second highest absorption rate in our company's history exceeded only by our fourth quarter 2020 absorption rate of 10 closings per community per month. This quarter Austin was our top market with a new company record of 20 closings per community per month.
Second was Houston with $13, 1 followed by San Antonio with $12.7 Dallas.
Dallas Fort worth was for what 12 on a half closings per community per month, and Jacksonville closeout, the top 5 with 11, 9%.
Our teams continue to manage through supply chain constraints input cost uncertainty and availability of lots to build on.
Have not seen a pullback in demand for homes related to declining interest in homeownership or affordability constraints. However, we remain focused on offering affordable homes that meet the needs of our target market.
For the quarter, our net orders were down 10% year over year solely as a result of matching our sales pace with our capacity to deliver homes to our customers. We're releasing new homes for sale later in the construction cycle. When there is more visibility into our cost construction.
Times and expected margins and.
Many of our communities our sales professionals are maintaining long wait lists of potential buyers, who are sidelined until either a new homes released or our current buyer canceled their contract.
Given the robust demand environment and the measures we've taken to support our margins. We expect to see continued negative near term order growth, particularly in the third quarter as we compare our results to last year's strong comp.
I'll share a few more highlights of the quarter before handing the call over to Charles.
Since our last earnings call, we made to opportunistic acquisitions to support our long term growth objectives on me.
Seventh we announced the acquisition of our home in Minneapolis and on July 15, we acquired Buffington homes and Central Texas.
Both acquisitions complement our existing footprint and increase our land positions in attractive markets.
We're pleased to welcome the employees of our home and Buffington to our L. Gi team and know they will play an important role in our continued success.
Finally during national Homeownership month in June we closed our 50000 pounds on.
This significant milestone in our history as a result of our ongoing commitment to help renters become homeowners and a testament to the success of our unique business model, which has proven so effective and making the dream of homeownership, a reality for thousands of families across the nation with that I'll turn the call.
All over to Charles for more details on our financial results.
Thanks, Eric as.
As highlighted in our press release revenue in the second quarter increased 64, 3% year over year to $792 million. This was our second best quarter in company history surpassed only by our performance in the fourth quarter of 2020.
As Eric noted, we closed 2856 homes, a 42, 4% increase year over year, and an 11, 5% increase sequentially.
These closings included 430 homes sold through our wholesale business this quarter, representing 15, 1% of our total closings compared to 199 homes or 9.9% of our total closings in the same quarter last year.
We continue to monitor cost and we're successful at raising prices to maintain our strong margins are.
Our average sales price during the second quarter was a record $277140 a 15, 4% increase over the same period last year.
Price increases were driven by a favorable demand environment that allowed us to pass through cost pressures as well as increased closings in certain markets and changes in product mix.
Gross margin as a percentage of revenue was a second quarter record at 27%.
Compared to 24, 5% during the same period last year.
This 250 basis point improvement year over year exceeded expectations and was driven by our success passing through cost increases lower capitalized interest expense and continued operating leverage partially offset by higher lot costs.
Gross margin, excluding wholesale was up over 300 basis points year over year, and 55 basis points sequentially.
Given our outperformance year to date and continued success managing cost inflation, we are increasing our gross margin guidance to a range of 26% to 28% representing a 130 basis point increase on both ends of our prior range.
Our adjusted gross margin as a percentage of revenue was a second quarter record at 28, 5% compared to 26, 6% for the same quarter last year, a 190 basis point increase.
Adjusted gross margin excludes approximately $10.4 million of capitalized interest charged to cost of sales during the quarter and $1.4 million related to purchase accounting together, representing approximately 150 basis points.
Similar to gross margin, we are increasing our annual adjusted gross margin to a range of 27, 5% to 29, 5% representing a 100 basis point increase on both ends of our prior range.
Combined selling general and administrative expenses for the second quarter were 8.6 percentage of revenue compared to 10, 4%. During the same period last year, representing an improvement of 180 basis points year over year, and 100 basis points sequentially.
This was the lowest SG&A expense ratio in our history.
Further highlighting the continued strength of demand across our markets.
Selling expenses for the quarter were $44.8 million or 5.7% of revenue compared to $30 million or 6.2% of revenue for the second quarter of 2020.
The 50 basis point improvement was primarily related to operating leverage realized partially offset by higher commissions paid to realtors as a percentage of revenue.
General and administrative expenses totaled $23.3 million or 2.9% of revenue compared to 4.2% for the second quarter of 2020.
The 130 basis point improvement driven primarily by operating leverage resulting from higher revenue increased absorptions and a larger percentage of wholesale closings.
Given our performance year to date, we are lowering our full year SG&A expense guidance by 50 basis points and now expect to range between 9% and 9.5%.
EBITDA for the quarter was $159.8 million and EBITDA margin as a percentage of revenue was 22% a 410 basis point increase over the same period last year, and a 120 basis point increase sequentially.
Our EBITDA margin in the second quarter was a new company record, surpassing our previous high of 21% in the fourth quarter of 2020.
Pre tax net income for the quarter was $149.1 million or 18, 8% of revenue an increase of 460 basis points over the second quarter of 2020, and a 130 basis point improvement sequentially.
This was a new company record, surpassing our previous high of 18, 6% in the fourth quarter of 2020.
For the second quarter, our effective tax rate was 28% and given our performance year to date, we now expect our effective tax rate for the full year will range between 25% and 21, 5%.
Our second quarter reported net income increased 112, 4% year over year to $118.1 million or 14, 9% of revenue in our second quarter earnings were $4.75 per basic share and $4.71 per diluted.
Sure.
Second quarter gross orders were 2677, a decrease of 11, 3% and net orders were 2025, a decrease of 10, 1% year over year.
However, underlying demand remains robust and recent declines in our orders are a function of lot availability pacing of sales and a desire to limit our buyers' time in backlog.
Our cancellation rate for the second quarter was 24, 4%.
We finished the second quarter with a backlog of 4801 homes, representing an increase of 125, 7% year over year.
The value of our backlog on June 30 was $1.4 billion on increase of 157, 1% year over year.
During the quarter, we made significant progress acquiring land to support our long term growth objectives as of June 30th our land portfolio consisted of 75910 owned and controlled lots a 71, 3% year over year increase and a 12, 8% increase sequentially.
We added over 6800, new lots to our owned inventory and finished the quarter with 42492 owned lots an increase of 33, 7% year over year and 10, 4% sequentially.
7859 of our owned lots were finished vacant lots and 29885 were either raw land or under development.
During the quarter, we started over 3200 homes and as of June 30th had 4748 completed homes information centers or homes in process.
Only 360 of these homes were complete compared to 671 completed homes, we had at the end of first quarter.
This sequential decline further illustrates the strength in demand we are seeing across all of our markets.
Finally, the total number of lots under our control was 33418 on increase of 166, 9% year over year and 16, 1% sequentially.
Turning to the balance sheet, we ended the quarter with approximately $111.7 million in cash compared to $48.2 million in the first quarter the.
The increase was attributable to excess proceeds from our new senior notes after giving effect to the temporary pay down of our credit facility we.
We expect our cash balance to return to a normalized level in the third quarter.
During the quarter, we continued to strengthen our balance sheet and lower our cost of debt.
On June 28, we successfully completed an offering of $300 million of 4% senior notes due in 2029 and use the proceeds to temporarily repay borrowings on our revolving credit facility.
At the end of June we had approximately $584 million in combined total debt outstanding under the 2026 and 2029 senior notes and our available borrowing capacity under our revolving credit facility was approximately $715 million.
Including cash on hand, we ended the quarter with total liquidity of $826 million.
At June 30, our net debt to capitalization ratio was 26, 8% compared to 37% at the same time last year and.
And in conjunction with our notes offering Moody's upgraded our credit rating to <unk>. This is another positive recognition of our outstanding growth consistent profitability and the improvements we've made to our balance sheet over the last several years.
On July 15th we used amounts available on our credit facility to redeem all of our outstanding 2026 senior notes.
In the third quarter of this year, we expect to recognize a $10.3 million expense for the early redemption of our 2026 senior notes and 2 expense $3 million of deferred financing costs and discounts that were previously being amortized in association with the 2026 senior notes.
This refinancing successfully pushes out our debt maturity 3 years resulted in interest savings of over $8.6 million per year and in combination with the recent amendment of our revolver will meaningfully lower the interest amortization reflected in our gross profit margins going forward.
In the last year, our shareholders' equity has increased by approximately $370 million to nearly $1.3 billion today.
Additionally, as a result of our strong operating results and profitability, we delivered an industry leading return on equity of 42% for the trailing 12 month period ending June 30th.
During the second quarter, we repurchased 335000 shares of our common stock for $55.8 million.
We ended the quarter with 24.6 million shares outstanding and $218.8 million remaining on our existing stock repurchase program.
We expect to continue to return capital to our shareholders as a component of our broader capital allocation priorities.
At this point I'll turn the call back over to Eric.
Thanks, Charles I'll close with what we're seeing so far in the third quarter and provide an update on our current outlook for the remainder of the year.
Q3 is off to a strong start subject to our normal review and verification of fundings. We expect to report 930 closings for the month of July representing a year over year increase of more than 50%.
Based on the results we share today and our current outlook for the rest of the year, we're updating our full year guidance.
We now anticipate closing between 10000 and 10500 homes in 2021 at an average sales price between 285 and $295000.
We maintain our prior expectation of closing the year with 112 to 120 active communities.
Reiterating the outlook Charles provided in his comments, we expect gross margin in the range of 26% to 28%.
Adjusted gross margin in the range of 27, 5 to 29, 5% and SG&A between 9 and 9.5%.
We're extremely pleased with our record setting accomplishments during the second quarter and expect the momentum we've created will carry into the second half of the year.
We remain focused on building selling and closing homes and are well positioned to deliver on all of our expectations for this year.
That concludes our comments on the quarter and we will now open the call for questions.
And thank you now as a reminder, we ask that you ask 1 question and 1 follow up to ask a question you will need to press star 1 on your telephone to Joel Your question press. The pound key please standby will compile the Q&A roster.
And again that is star 1 if you'd like to ask a question and our first question will come from Deepa Raghavan from Wells Fargo Security. Your line is now open.
Hi, Good morning, Eric Channel Josh.
For taking my question.
Pretty strong Roe.
In fact, the highest among the peers, but definitely in my coverage.
Yes.
Can you talk to some of the drivers within that.
Especially the ones that are sustainable and could help carryforward. These strong <unk> margin and also could you talk through the dose from that could be transitory.
Yes sure depot. This is Charles I can I can start I think first of all operating margins are certainly contributing to that so gross margin strength plus operating margins are certainly driving profitability in terms of.
What we are.
Achieving in terms of net income I think the other factor on what we're seeing is just the ability for our inventory turns to have increased as much as they have.
The beginning of 2020, we're now running at roughly about 1.3 times in terms of our inventory turns and that compares to about 1 times historically, so about a 30% increase in inventory turn so in other words.
As soon as we're putting the houses on the ground, we're closing them and that is certainly helping to drive a return on equity.
Got it.
And not sure if you have any comments.
Comments on SG&A I mean, you touched on operating margin does that is Jenny.
Being lower is that.
Sustainable.
Yes, so our guidance implies that year to date is at $9..1 certainly the second quarter at $8.6 was.
Very proud of that accomplishment and that was driven by the topline also driven by <unk>.
Absorptions coming in at $9, 1 this quarter so.
We're implying that the back half of the year is going to be in the 9 to 9.5 range for the third and fourth quarter, so that the full year.
Days within the range.
We continue to see.
Savings in our advertising and marketing spend given the demand environment.
It's unknown weather.
How long that continues or win that.
Starts to shift.
In terms of when.
Demand comes into play.
And then certainly from the G&A side, certainly driven by flat community count.
As well or in terms of negative community count this year so far.
It has certainly contributed to a.
Lower G&A as we're not expanding our.
Employee base as much as we otherwise would if community count was increasing.
That's helpful. My follow up is on your order commentary.
Based on the visibility that you have now Charles and Eric on that driven by your community count availability et cetera would you say Q3 is at worst other years for the worst audit quarter for the year or should Q4 be impacted significantly as well. Thanks.
Thanks, Nathan This is Eric Yeah, Great question and orders as 1 of the challenges. We have is we want to say, it's a challenge we think it's very positive because our backlog is so strong we had such a strong first quarter in sales selling out ahead of our.
Ahead of ourselves and now we're just catching up in construction.
Because of the cost inflation, we were seeing we decided to make a decision to not price our houses and sell them until we are comfortable with the costs and also comfortable with the construction.
Finalization date or the completion date. So we can provide exceptional customer service to our customers know where theyre going to move in.
Fortunately for us the <unk>.
Third quarter closings.
We're basically sold out.
<unk> that are available to close in the third quarter.
Most all of them have contracts already in place. So we are not creating hardly any new orders on a week to week basis, and we think thats a good thing, but when you start comparing orders in Q3 compared to last year's Q3.
Can be substantially down now.
Now in Q4, we don't have as much of a backlog already sold so we think orders will be better if you will but having a very strong like backlog creates this dynamic but again, we will look to look at that as a positive.
Great. Thanks, very much good luck on the quarter.
Thank you.
And thank you and our next question comes from Truman Patterson from Wolfe Research. Your line is now open.
Hey, good afternoon, everyone and thanks for taking my question just wanted to follow up on the prior question No I think right now.
Demand is strong enough that really orders going forward will really just be dependent on whatever.
The builders willing to release for sale.
Some builders are discussing what their quarterly starts capabilities are or just <unk>.
Active lot count that can be sold so I'm, just hoping that you can give us an update of how you're positioned in the back part of the year.
And also trying to understand maybe the timing mismatch as youre starting to.
Rebuild your spec count.
Yes. Truman this is Eric I can start and Charles can add I think we're very well positioned again, having a very strong backlog, it's very positive for us.
The construction teams nationwide are doing a fantastic job of delivering houses you were in an environment, where we had a very strong closing quarter and we're raising our guidance to give everybody an indication of how strong we feel about the second half of the year, we're raising our closing guidance and we're confident our construction team in <unk>.
Oliver the necessary houses to hit those closing guidance and I think the overall message on the orders again it comes back to timing, we had such a strong quarter in the first quarter sales.
And with our sales focus here at <unk>.
In the first quarter, we were selling houses not only that we're finished but once those were sold we sold them in frame stage and then sold them in slab stage and then we sold the next set of starts for the next few months and got way out ahead, and we were building.
Increases on our prices to cover the cost of inflation or what we've historically seen.
But that wasn't enough and a lot of cases, so we said no there's not a lot of reward to keep pricing houses that arent going to deliver literally for a few quarters down the road. So let's re track that and we had this big pipeline and when we said, we're not going to make a house available to sell until that houses.
Really in slab stage or the frame as drops a little bit specific to the market, where we're comfortable knowing exactly what's costs are going to be it for that house, we can price. It accordingly based on our margin and we're very comfortable providing that exceptional customer service to our buyer that says we are going to be delivering that house and you are going to be moving in on.
This day.
The other factor that was important to us is and I don't I don't think this has been consistent in the industry, but we make all our decisions based on the core values of the company.
And when we put all these houses under contract in the first quarter. We did not built in enough inflation a lot of cases about we sign a contract with a customer we told them we're going to close at this price and we have not canceled any customer contracts because we are not happy with the margins that we're making we're not losing money on housing.
In some cases were not making as much money as we would have made previously.
But we believe it's the right thing to do and that's the message we've been sending to our customers and employees across the country because that not all builders are doing that we hear media reports and different builders in different markets canceling contracts redoing and selling them to 2 other customers at higher prices and we're honoring all of the customer.
<unk> that we sold and we feel very good about that.
Other thing that I think is important to them on that.
As we haven't changed our business model at all we're not a build to order.
A builder, we don't have a design center. There is no options were still a spec builder.
Where we have 4% to 5 floor plans per community, we pre select the fit and finishes and we sell on the first quarter, we were selling that floor plan. The customer look at the house and know exactly what they're getting but it wouldn't deliver for a couple of quarters. So no change to our business model and real positive.
Thoughts on how we're trading customers and real positive demand, we're seeing in the market.
No no absolutely agreed building in kind of pricing contingencies I think.
On to an extent damages reputation long term understood on that.
You touched on this in your answer, but I'd like to dig in a little bit more on you bumped up your gross margin guide if we look at at the midpoint implies kind of flattish gross margin sequentially. The rest of the year and you left the full year guide.
The spread pretty wide of about 200 basis points.
I would imagine.
Given the size of your backlog do you have a pretty decent.
Idea of the margin profile on the back half of the year.
Could you just help us understand what some of these items are that.
Might push you towards the lower end or the higher end of the guide.
Yes, sure I mean, great question I can start.
We do have a very strong backlog, we've got the prices.
The customer locked yet, but 1 of the things Thats still open on the gross margin.
Positive to us the fact that we raised gross margin, but a lot of the houses that are going to deliver this year arent.
<unk> started yet.
There'll be started in August September in some cases, even October so those costs are a little bit unknown they seem to be trending in the right direction over the last 30 to 60 day. So that's a positive.
If that trend continues over the next 60 to 90 days that would probably indicate we may be at the higher side of our gross margin.
But I don't think anyone's rail comparable saying there may be more cost pressures over the next couple of couple of months, our supply chain shortages that'd be 1 aspect of it and then also the mix component of different parts of the country have different gross margin as Paris.
Terrible very similar gross margin nationwide, but it will matter, where those closings come from on the back half of the year.
Okay. Thanks for taking my questions and good luck on the upcoming quarter.
Youre welcome. Thank you.
And thank you and our next question comes from Michael Rehaut from JP Morgan. Your line is now open.
Hi, This is Maggie on for Mike.
First question on kind of how to think about closing pace through the balance of the year I think last quarter. You had made a comment that it would be kind of reasonable to expect something similar.
So 1 Q, obviously from Q came in higher and.
Your closings range for the rest of the year combined with the community count outlook kind of implies a step back down. So wondering if you could give some color about how we should be thinking about.
The closings pace.
Yes. This is Eric and Charles can add to it I think the closing page, we're very comfortable with our guidance.
No question 9.1 closings per community per month in the second quarter is very strong absorption pace highest second quarter on history, especially with the average sales prices of where we're at.
We're forecasting absorptions going down in the second half of the year. That's just the math on that but we don't look at that is slowing or a negative that just getting back to more historical absorptions are really still elevated but just not as strong as the 9.1 closings per month that we experienced in the second quarter, just because we just.
Don't like to forecast and guide to the best quarter in company history, That's a high bar.
1 would be shocked if we don't produce great numbers in the third and fourth quarter, but that's not how we give guidance.
The other thing I'd add Maggie is Charles would be that we have a number of high performing communities that are closing out.
And those are coming up so in terms of forecasting as we transition to replacement or potentially have a GAAP between those communities.
We certainly think that's a factor in the back half of the year as we transition from 1 community to the next.
Got it thanks.
And second question looking to 2022 and I recognize that it's still probably too early it's still too early to give official guidance, but.
Directionally speaking how are you thinking about your ability.
To go grow closings next year, particularly given that.
You are forecasting net.
Order declines.
In the near term and I believe in the past you've kind of spoken to a flattish community count outlook for the year.
Thanks.
Yes, it's a great question Maggie aircraft, we're not giving guidance on closings for 'twenty..2 we have said in the past, we expect community count to be similar but.
That would still be our expectation today.
Community Count is interesting because even our guidance this year $1.12 to 120, the stronger closings are in the back half of the year the lower the community count is going to be.
So no one's really really hoping for weaker community counts are weaker closings just have higher community count. So if you operate from the from the standpoint of communities are going to be similar.
End of year next year compared to end of year. This year that is really what's the absorption that everyone's going to expect.
This year is likely to end up on an annual basis with our guidance, we're giving is going to be the strongest absorption in our history.
Just a mathematical fact.
So when when investors and all of you are thinking about what's closings can be next year. It's really a question of what everyone believes absorptions going to do.
We'll get back to everyone on on our guidance for next year, but obviously if absorptions are as strong as they are now it would be similar number.
Absorptions go down to go back to historical averages that for us at 6% to 7 a month than closings will be down last year on Thats. Just next year. That's just a math equation. So we'll get back to everyone on our absorptions, but we feel like it's going to be a strong absorption pace either way, but 9.1.
As a comp and where we're going to end up this year.
You're going to be an unbelievable year from an absorption standpoint.
Got it thank you.
Youre welcome.
And thank you and our next question comes from Jay Mccanless from Wedbush. Your line is now open.
Hey, good afternoon, thanks for taking my questions.
The first 1 I had.
Just looking at the order absorption pace that you had in the second quarter. It looks like roughly 6.4 per month.
If we took that forward to the third quarter.
Where do you think thats going to end up for an order percentage being down like 40% to 50% is that where things are tracking right now.
Yes, I think at least that much Jay just because we have nothing to sell.
Orders would be a lot stronger if we release more inventory.
But it's probably going to be even greater percentage than 40% to 50% now it depends on what happens for the rest of August September, but its going to be substantially down just because we have nothing to sell and we're doing that on purpose. So.
I just want to make sure reiterating we're talking a lot about orders, but the demand we're seeing as soon as we release homes for sale that were comfortable with the cost and delivery date day.
<unk> as soon as a customer cash.
<unk> primarily related to financing there is another customer coming off our waiting list and putting that house under contract, but when we have a cancellation and replace it with a customer that's likely to be at a much higher average sales price that does not create a new.
Net order it's just.
Wash and order standpoint, so real strong demand environment don't get us wrong. Its just the math of the orders is going to be substantially down in the third quarter.
Got it okay. Thank you for that.
Right.
The second question.
Cancellation, it looks like for the actual second quarter can rate was down.
About 90 basis points year on year.
Is all of that just related to that.
Cans that you're getting now are just strictly people, who mortgage lender falls through its not anything about people not wanting to house anymore.
Just flush that out a little bit more for me if you could.
Yes.
It's all mortgage related as it is most times I mean, our customers under contract customers that bought or place an order. If you will on the first quarter they've got on how to built in equity in their houses prices have went up in every community nationwide. So everyone would like to close sometimes life gets in the way things affect the mortgage business.
Not able to but it's almost exclusively mortgage related.
Okay, Alright, thats good to hear and then the last 1.
It just seems like with.
Backlog, you've got enough homes in the backlog right now to meet your guidance closing guidance for the year. It seems like you've still got the pricing just wondering and you did a 27 gross margin essentially in the front half just wondering why you didn't take the low end of the gross margin guidance up higher.
I think it goes back to that about the uncertainty on cost J and a little bit of mix likely we previous said we're still.
Want to make sure we got enough cushion in there for potential cost increases for our August September and October starts.
Wholesale business has a impact on gross margins, if it's 15% of our closings in Q2.
We are still on track for that to be 10% to 15% of our business in Q3, and Q4, but that will have an impact on that percentage on whether we're at the height of middle end of the range certainly accretive to return on equity operating margins very strong demand, we're seeing in the wholesale business, but that will have an impact and we take.
Net into consideration.
<unk> published guidance.
Okay, great. Thanks for taking my questions.
Youre welcome.
And thank you and ladies and gentlemen, if you have a question that is star 1 again, if you would like to ask a question that is star 1.
And our next question comes from Alex Barron from housing Research Center. Your line is now open.
Yes, thanks, gentlemen, good job on the quarter.
I wanted to ask I know you are built time historically has been on the neighborhood of 60 or 62 days or something like that.
Does that look like these days given all the supply chain constraints.
Yes, great Great question. Alex This is Charles I mean, it is definitely extending out I mean, we are seeing.
Delays in terms of the supply chain in terms of ordering lead times are increasing we're managing around that our construction teams are doing a great job.
Working through those.
Those challenges if you will it's market specific so depending on the market.
For example, 1 market and maybe brick and other market, maybe something like windows or garage doors or some other things that we've been working through.
Lead times are definitely impacting construction delivery dates by several weeks.
We're building it into the schedule and then just managing the schedule around it.
Okay.
I mean I know also historically you guys have always kind of built.
And I guess closed a lot of houses before you even.
Find buyers and I guess now that market kind of flipped.
Where demand was so strong that that you guys are now <unk> been selling like you said.
Foundation stage.
So my guess is that you're trying to rebuild the pipeline.
Inventory. So can you talk about what your starts to look like what your plan is for starts in.
In the back half of the year, how you guys are thinking about it going forward.
Your ability is to start.
Specs to replenish that inventory.
Sure, Yes, we had roughly about 3200 starts in the second quarter. Our finished completed inventory was down to about 360 units at the end of the second quarter. So we've never seen.
On a number that low in our history to your point about really selling in advance also goes back.
So the inventory turn.
Comment we made in terms of how we've been able to deliver a strong return on equity.
But we've got 4300 houses that are in some stage of construction.
And I think we're releasing what we feel like is a comfortable number on a community by community basis. So in some markets like.
Like Texas for example, we can release.
More units at 1 time than we would maybe say in another market. So I think it comes down to lot availability.
We had just under 8000 finish.
<unk> finished lots and given our closing pace that would be less than we normally would like we'd like to have 1 year's worth of supply of vacant finished lots. So we're little under on that we've got 11000 units that are currently under development.
Our nearly 30000 net we have in raw and under development 11000, those are actively being being developed so I think the ideas is that depending on the community by community specific if we've got lots available to start and the demand is there based on what we're seeing in terms of contracts than we are.
We're starting as many as we can in that in that community.
Just continue to manage it that way.
Got it and then.
Just to focus in on the.
On the delivery side, a little bit. So you guys just kind of give us an estimate for July so.
And Mike to imply based on the order trends in on this.
It's more likely than third quarter deliveries will end up being higher than fourth quarter in other words they will be.
Similar to that.
The dip youre seeing in orders now that will follow through in the fourth quarter is that reasonable.
Yes, I mean, it could be Alex I mean, I think we're not getting that much specifics on community count, but certainly the third quarter is off to a great start with closings was 930 in July.
Got it and if I could ask just 1 last 1 the margin on these new homes that you are now starting and selling is it your sense that it's the homes in backlog is that your sense that it's better than what you've delivered so far.
Overall, it should be better.
That's reflected in our gross margin, there's a lot of case by case, but because of markets, but our backlog does have a lot of houses that were sold in the first quarter recent sales do have better gross margin than.
And then the backlog that is generally a true statement.
Okay very helpful. Thanks.
Welcome.
And thank you.
And our next question is a follow up from Truman Patterson from Wolfe Research. Your line is now open.
Hey, guys just a couple of follow ups here.
First 1 on affordability you all historically focused on affordability and kind of driving the lowest monthly.
Monthly mortgage payment and oftentimes, we think of it as a spread versus.
Our rental payment.
In the areas and renters that you're targeting how does that spread look like today versus maybe a year or 2 ago I'm trying to understand how much rental payments in your areas are kind of keeping up with home price appreciation.
Yes, I think Sherman, how we look at it as it's always been more expensive to buy homes, Mel Jive and the rent, but you are usually not comparing apples to apples.
Traditionally our numbers always show to rent an apartment, that's usually 1 or 2 bedrooms, where most of our buyers come from and to go into 1 of our LTI homes, including taxes and insurance.
On our association dues, it's 5 to $600 more on model.
1 other things that we're looking at is our average sales price is up I believe about 15% year over year.
<unk>.
A few hundred dollars.
$100 a month probably in payment so.
That's what we're closely monitoring affordability is important obviously all of us have seen the benefit of rates staying robo. So even though the average sales price is higher it hasn't had that big of an impact on monthly payment and I do think we're hearing from the field and seeing our buyers are more qualified than ever.
For the first time in our history last quarter, our partner loan depot on the mortgage business reported our average credit score was 708 and that was the first time that our average credit score was north of 700, and our debt to income ratios are lower than they were a year ago. So those are both positive signs as far as the buyers.
And their ability to take.
Take on the additional pricing, if you will and steel Phil feel good about it.
Okay, and then just to follow up on on 2022 kind of community count and potential there.
Look I appreciate youre, not forecasting demand or or anything like that and it depends on what absorptions are but if we just play a kind of a hypothetical and say that absorptions remain elevated and could even possibly expand based on demand just trying to understand what sort of internal capabilities.
You all have from a starts metric.
Per community.
Or just overall I believe you started about 3000 starts on each of the past couple of quarters is that a comfortable pace for you all.
Trying to balance this with you all have 11000 lots that are actively being developed just trying to understand what.
Potential upside there might be.
Yes, I mean, there is theres upside how many we can start per community and I think even in Austin, Texas, and Houston, San Antonio and you get absorptions of 12.13 plenty of mass on the case of Austin I mean, that's just a testament to our construction team on our leadership team do on an unbelievable job because most builders don't have the ability to start.
<unk> build on close at those type of basis.
Going back to your question.
The total number of available homes doesn't change a lot of cases, so we have a community that has 100 lots to build on.
If we're building at Ada month pace.
Or a 12 month pace youre still going to end up with the same month closings adjust your community count is going to be.
You got to go through it quicker if you will will be sold out of that community at 12 months and 8 months or at 8 a month would be sold out of the year. So the overall absorption doesn't change. So we have to look at that on a community by community basis, we have the ability to ramp up starts no question, but you also have do you have the ability of the lots ahead of you and getting ready and there is a lot of.
Timing challenges for us and for the industry right now.
Our absorptions are literally 30% to 50% higher than they've been over the last couple of years and our development forecast and are planning on putting lots on the ground was not based on this absorption. So we are we are behind schedule. If you will I put a new sections on the ground or buying replacement projects and of course our.
Now as the new deals were buying primarily buying land to.
To develop ourselves and when we buy a raw piece of land like we've been doing a lot of here over the last 12 months as evidenced by our numbers.
It takes 24 to 36 months for us to take a piece of raw land and converted into homes closings.
Okay, Okay alright.
Thank you all for your time I appreciate it.
Thank you gentlemen.
And thank you and our next question comes from a follow up from Alex Barron from housing Research Center. Your line is now open.
Yeah. Thanks.
I know historically you guys have.
Sent a lot of mailers and stuff like that to people.
So I'm guessing a lot of your historical buyers have been renters, but we've been hearing that there's also a lot of influx of other state people.
Coming into places like Texas, and Florida from California, and New York. So I'm curious if you guys are also seeing that pickup in those types of buyers or are you still generally seeing the same profile buyers you've seen historically.
Yes, it's a great question, Alex and I don't think we have really good data on that but we are hearing and seeing evidence that we are seeing out of state buyers for sure.
A lot of those individuals are still renters that are coming into this.
Market and just moving from those those high cost markets or more shutdown markets. If you will moving to Texas.
On finding employment here with all the job growth that we have I would also on moving to allow the markets. We new business in the Carolinas is real strong for US, Florida is a great great markets for Us Phoenix Las Vegas.
On a lot of really good job growth market. So we are seeing some of that we also see more investor activity most not only from our wholesale business, but also the non PON investor buying 1 or 2 or 3 houses at a time that is certainly elevated right now and just the overall demand in the market right now is this.
Good as we've ever seen it and I think all of these factors contributed contributes to that and while.
While we are talking about what does the market look like in 'twenty 2 'twenty 3 'twenty 4.
We're going to assume that it goes back to a more normalized market more of a 2017.2018 2019 market and we're back to the right.
Going directly to the customers that are paying rent through social media through direct mail.
Right now with our backlog all sold.
And not having very many homes to sell we're spending very little money on marketing and thats, helping the SG&A numbers like Charles talked about.
Okay. Thanks, and then.
On this issue about.
What stage to sell the homes generally speaking.
Your thought.
<unk> thought process at this point given supply chain given the time it takes to build the homes, where are you guys optimally pricing that houses at this point.
I'm guessing it's no longer foundation, but just curious if you can comment on that.
Yes, we're putting houses on the price list for our sales team to sell while we are comfortable that we understand all the costs and we're comfortable with the schedule on 1 that houses can be complete.
That's a little bit different than every market, but essentially a lot of times. It is when the slab gets done or when the frame drops and youre into construction at some point for your cash.
<unk> that you have the appliances youre going to have the window is going to have the break.
And we can provide a day to a customer that both of us can feel good about that we can deliver.
Okay, Thanks, and best of luck.
Thank you Angela.
And thank you and our next we have a follow up question from Deepa Raghavan from Wells Fargo Security. Your line is now open.
Hi, Eric.
A little.
Somewhat mixed messages I mean underlying.
Youre hitting numbers pretty strongly but you are definitely tempering some of our expectations going forward.
Just curious are you planning for a bar like normalized 6 to 7 absorption pace going forward.
Yes.
Or you think <unk> is still not off the table just given whatever your internal outlooks are.
Yes.
It depends on.
What category, we're talking about <unk> I think.
Our optimism is as high as it can be right now coming up 9.1 closings per month 28, 5% gross margins 18, 8% free tax 40% return on equity.
That is as good as Inc.
Yes that is the best quarter in <unk> history, and everybody is very excited about that.
We're not giving guidance for 'twenty, 2 but I would think most people on the homebuilding industry that have been doing this for 25 years like we have if you say what what is 'twenty 2 'twenty 3 'twenty 4 we're going to look like and for our history from 2014 through 2020, we've been in the <unk>.
6% to 7 closings a month and then this year goes to 8 to 9 in.
On the same with average sales price on average gross margins, we're going to forecast as far as our buying our land deals and how we're underwriting deals and how we're thinking about capital we're going to forecast historical absorption rates historical margins not vast quarter in the history of <unk> carrying on for the next 3 years.
Okay. The <unk> K.
Lots being on.
Being downloads you also mentioned thats less than.
On a year's worth of supply did I hear that right.
You only closing like 10.5.
Yes. It was <unk> Charles It was just under 8000 finished vacant lots that was under the year supply.
With 11000 under active development.
And how much of this 11000 active development Ken can be released next year.
If at all.
Yes, they are in various stages. Some of them are nearing completion. Some of them are just getting started so to Eric's point. It takes a couple of years.
Over over on a project by project basis to deliver lots to the stage in.
Throughout throughout the next 24 months.
Got it. Thanks, so much you bet on Youre welcome.
Thank you for your question I am showing no further questions I would now like to turn the call back over to Eric <unk> for closing remarks.
Thank you for participating on today's call and your continued interest in <unk> homes, everyone have a great day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Sure.