Q3 2021 M/I Homes Inc Earnings Call
Hello, and welcome to the AMRI high in third quarter earnings Conference call. My name is breakout and I'll be the cooperate careful today.
We will have a Q&A session today, and if you would like to ask a question. Please press star followed by one on your telephone keypad.
I will now hand over to feel great to begin today's presentation. So Phil. Please go ahead.
Thank you joining me on the call today is Bob Schottenstein, our CEO and President Eric <unk> President of our mortgage company.
Hunker, VP, Chief Accounting Officer controller, and Kevin Hake Senior VP.
First to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material. During this call because we are prohibited from discussing significant nonpublic items with you directly.
And as to forward looking statements want to remind everyone that the cautionary language about forward looking statements contained in todays press release also applies to any comments made during this call.
Also be advised that the company undertakes no obligation to update any forward looking statements made during this call with that I'll turn the call over to Bob. Thanks, Phil Good afternoon, and thank you for joining us.
We are pleased with our third quarter performance highlighted by a number of records, including record revenue of $904 million.
<unk> revised our record third quarter pre tax income of $116 $2 million, 22% better than a year ago.
A very strong return on equity of 27%.
We sold 1964 homes during the quarter a decline of 33% from the record sales reported during last year's third quarter.
Despite the decline in sales housing demand throughout most of our markets remains very strong.
Our decline in sales is due to the fact that we are operating in 15% fewer communities than a year ago, and we continue to limit sales and the majority of our communities in order to better manage deliveries and control costs.
Our third quarter monthly sales pace was three seven homes per community.
Other than last year. This is the highest monthly per community sales pace, we've seen in over 10 years and reflects the underlying strength of demand.
Year to date, we have sold 7340 homes, 1% ahead of last year's record. Despite as noted community count being down, 15% and continuing to limit sales and the majority of our communities.
We ended the quarter with 176 active communities, we will be opening a record number of new communities. In 2022, specifically, we expect to grow our community count next year by 15% or more and end 2022 with between 202 hundred 20.
Communities.
We closed 2045 homes during the quarter, a 4% decrease from last year.
Clearly our closings were negatively impacted by the well documented supply chain disruptions that continue to stretch our build times and impact the entire industry.
On average it is taking us 45 days longer to get homes closed.
We have always been focused on achieving fast and efficient build times, while assuring that homes are properly complete and ready to be delivered we will continue to manage in this way.
Our backlog is very strong we ended the quarter with an all time record backlog of $2 $5 billion, 40% better than last year and units in backlog increased by 20% to a third quarter record third quarter record of 5407 homes with an average price.
And backlog of $471000, which is 17% higher than a year ago.
In addition to reporting record third quarter income our returns were also very strong.
Gross margins improved by 160 basis points year over year to 24, 5% and our SG&A expense ratio improved by 90 basis points to 10, 7%.
Excluding the one time charge for debt extinguishment, our pre tax income percentage improved from 11, 2% last year to nearly 14%.
And as noted all of this resulted in a very strong return on equity of 27%.
Now I will provide some additional comments on our markets.
First let me begin by stating that I'm very excited to announce that we are commencing homebuilding operations in Nashville, Tennessee, one of the nations most dynamic and fastest growing housing markets ranking 11th nationally in 2020 based on single family permits.
Nashville continues to benefit from a very healthy economy significant significant population growth and job growth and we look forward to building our competitive position in the market over the next few years.
As our 16th market Nashville will for reporting purposes be included in our southern region together with Charlotte and Raleigh are four Texas markets and our three Florida markets.
We experienced strong performance from our homebuilding divisions in the third quarter led by Orlando, Tampa, Minneapolis, Dallas, Chicago, Columbus, and Charlotte in fact, all of our markets produced strong results.
Our deliveries decreased 8% from last year in the southern region to 1169 deliveries or 57% of the total.
The Northern region contributed 860, 876 deliveries and increase of 1% over last year.
Our owned and controlled lot position in the southern region increased by 11% compared to last year and increased by 5% in the northern region compared to a year ago.
34% of our owned and controlled lots are in the northern region, while the balance roughly 66% is in the southern region.
We have a very strong land position companywide, we own approximately 22007 hundred lots, which which equates to a roughly two and a half year supply on top of that we control via option contracts and additional 20300 lots so in total.
Our owned and controlled lots are approximately 43000 lots or about a five year supply.
Based on our record backlog, we expect to finish out the year with another very strong performance or financial condition is strong with one $5 billion of equity at September 30th and a book value of $53 per share.
We ended the quarter with a cash balance of $221 million and zero borrowings under our $550 million unsecured revolving credit facility.
This resulted in a net debt to net cap to net cap ratio of 24%.
Our company is in excellent shape, the best shape ever and we are poised to have an outstanding fourth quarter and an outstanding full year in 2021 with that I'll turn it over to Phil.
Thanks, Bob New contracts for the third quarter decreased to 1964 compared to 2949 for last year's third quarter and in last year's third quarter, our new contracts were a record and were up 71% from the prior year.
Our new contracts were down 32% in July down, 41% in August and down 24% in September and our cancellation rate was 8% in the third quarter.
As to our buyer profile about 50% of our third quarter sales were to first time buyers compared to 51% in the second quarter and.
In addition, 39% of our third quarter sales were inventory homes compared to 43% in the second quarter.
Our community Count was 176 at the end of the quarter compared to two seven at the end of last year's third quarter and the breakdown by region is 85 in the northern region and 91 in the southern region.
During the quarter, we opened 26, new communities, while closing 25 and during last year's third quarter. We opened 12, new communities. We have opened 63 new communities in the first nine months of this year compared to 51 last year we.
We delivered 2045 homes in the third quarter, delivering 37% of our backlog compared to 58% a year ago year to date, we delivered 6322 homes, which is 16% more than a year ago. We now have 5300 homes in the.
<unk>, which is 20% more than the 4000, we had this time last year.
Revenue increased 7% in the third quarter, reaching a third quarter record $904 million.
Our average closing price for the quarter was 430000, a 13% increase when compared to last year's third quarter average closing price of 380000.
And our backlog average sale price is an all time record of 471000.
Up from four O four a year ago, and our backlog average sale price for our Smart series is 374000.
Our third quarter gross margin was 24, 5% up 160 basis points year over year.
In our third quarter SG&A expenses were $10 seven of revenue, improving 90 basis points compared to $11 six a year ago. This reflects greater operating leverage and it was our lowest third quarter percentage in our company history.
Interest expense decreased $1 3 million for the quarter compared to last year interest incurred for the quarter was $9 3 million compared to $10 million a year ago. This decrease is due to lower outstanding borrowings and higher interest capitalization due to higher levels of inventory under development.
Last year and during the third quarter, we issued $300 million of senior notes due 2030 and use the majority of the proceeds to redeem all of our 250 million of senior notes that were due in 2025. This resulted in a $9 1 million loss on early extinguishment of debt.
Sure.
We are very pleased with our returns for the third quarter, our pretax income was 13%.
In 2014%, excluding our debt charge versus 11% a year ago, and our return on equity was 27% versus 19% a year ago.
During the quarter, we generated 132 million of EBITDA compared to $111 million in last year's third quarter, and we used $34 million of cash flow from operations for the first nine months compared to generating $197 million a year ago, primarily due to our increased land purchases we had 23.
Million of capitalized interest on our balance sheet. This is about 1% of our total assets.
And our effective tax rate was 22% in the third quarter compared to 23% in last year's third quarter. We currently estimate our annual effective rate this year to be around 22%.
And our earnings per diluted share for the quarter increased to $3 <unk> per share from $2 51 per share last year.
During the quarter, we repurchased 243000 of our outstanding common shares for $16 million and we have $84 million available under our current repurchase authority. Our current plans based on the existing market conditions are to continue repurchasing our shares now I'll turn it over to Derek to cover our moral.
Company results.
Phil.
Our mortgage and title operations achieved pretax income of $9 9 million.
Compared with $19 2 million in 2023rd quarter.
Revenue decreased 28% from last year to $28 million.
This was due to a lower volume of loans closed and sold and due to more competitive market conditions significantly lower pricing margins than we experienced in last year's third quarter.
The loan to value on our first mortgages was 82% compared to 84% in 2023rd quarter.
81% of the loans closed were conventional and 19% FHA or VA compared to 76% and 24%, respectively, 2000, Twenty's third quarter.
Our average mortgage amount increased to $349000 compared to $314000 last year.
However loans originated decreased to 1554 loans down 5% from last year and the volume of loans sold decreased by 8%.
Our borrower profile remains solid with an average down payment of almost 18% and an average credit score on mortgages originated by <unk> financial of $7 51 up from 747 last quarter.
Our mortgage operation captured 85% of our business in the third quarter the same as last year.
We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations.
Here to the sale to investors at.
At September 30, we had $142 million outstanding under the MIF warehousing agreement, which expires in may of 2022.
We also had $70 million outstanding under a separate $90 million repo facility, which we recently extended through October 2022.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually.
Now I'll turn the call back over to Phil Thanks, Derik as far as the balance sheet. We ended the third quarter with cash of $221 million and no borrowings under our unsecured revolving credit facility total homebuilding inventory at $930 21 was 241 billion an increase of a half a billion dollars from September 30.
Last year.
Our unsold land investment at $930 21 at $991 million compared to $762 million a year ago.
At 930, we had $663 million of raw land and land under development and $328 million of finished unsold lots. We owned 4343 unsold finished lots with an average cost of 75000 per lot and this average lot cost is about 16%.
Of our 471000 backlog average sale price.
Our goal is to own a two to three year supply of land and we now own 23000 lots, which is about a two and a half years supply during the third quarter. We spent 231 million on land purchases and 124 million on land development for a total of $355 million, which was up from 100.
$96 million in last year's third quarter and at the end of the quarter. We had 62 completed inventory homes and 1042 total inventory homes and of the total inventory of 658 are in the northern region and $3 84 in the southern region last year at 930, we had 266.
Completed inventory homes and 1113 total inventory homes. This completes our presentation and we'll now open the call for any questions or comments.
Thank you.
I could go ask a question. Please press star followed by one on your telephone keypad.
We have the first question on the phone lines from Aaron Hecht from JMP Securities.
Please go ahead of it in July.
Hey, guys. Thanks for taking my question.
Nice quarter one.
Here, a little bit more about entering the Nashville market.
What is kind of attracting you to that area.
And.
Can you discuss the motivations of entering a new market versus allocating capital to an existing market.
Great question and thanks for asking it.
First of all we've been.
Looking at Nashville for a long time, and we've we've always been interested in it for all kinds of reasons not the least of which are the very strong macroeconomic metric.
Metrics that seem to be dominating that market and have done so over the past nearly seven eight years, it's one of the fastest growing markets in the United States.
Whereas maybe a decade ago it was not that easy for the large publics to compete there.
That that is less so today.
We would've liked to have been open there even a few years ago, but we've been searching for the right leader, we have identified and hired the right leader at a very excited about starting up there. We believe we can be we believe strongly that we can be competitive there in that.
It may take several years, but we will develop a very meaningful operational presence there.
As far as allocating capital Theres really two pieces or parts to that question. One is we don't have to open up in a new market to achieve our growth goals. We're currently operating at a run rate of around 9000, plus homes, a year and we expect to grow that over the next several years by capturing additional market share.
Through allocating capital to our existing markets, but at some point.
We believe we begin to somewhat Max out of the markets, we're in and another flag certainly wouldn't help.
We're certainly wouldn't hurt.
We.
We think we can do two things at the same time.
We can continue to grow in the markets, we're in which remains job one but job. One is also to start deploying capital to Nashville, our balance sheet is as strong as it's ever been and.
We believe that we will continue to see strong growth out of our existing markets. While also beginning to establish real meaningful presence in Nashville.
Understood that makes sense. It sounds like you have a team leader already setup and then add on.
Market.
Have you acquired any land yet.
You expect.
Yeah, I've been technically it's sort of insight.
Yeah, we haven't technically acquired any land yet, although we are beginning to look very seriously at a number of opportunities in an over between now and the end of the year.
We will be adding additional leadership to the team there and begin to really.
Put a full complement of people in place.
Understood. Thanks for the detail.
Thank you.
Thank you we now have the next question on the phone lines from Ivy Zelman of Zelman.
Please go ahead.
Thank you good afternoon guys.
Just recognizing that the market is at such a robust level.
I'd like to have you opine.
A little bit Bob on how you think about incremental lot purchases finished lot purchases, whether it's option door.
Alright.
Cash, but in terms of the $75000. The average lot that you said.
Incrementally the lots that you're acquiring today with a five year land supply are you concerned about the level of inflation, we've seen in lot prices.
Is it getting harder to pencil return without making some assumptions.
That home prices will continue to rise and demand is going to remain at this robust level because there is lots of upward pressure on land prices.
Just give us a big picture.
And I'm concerned although I appreciate first of all it's good to hear your voice secondly, that's a great question. Thank you heard yes, we are concerned but for we believe that the purchases, we're making are really smart very well located pieces prices are going up.
Everything you said about inflation and affordability is something that we're always balancing underwriting is getting more difficult because we're not going to sit here and believe that.
That conditions as they are now will necessarily be the same in two or three years. When some of these pieces are putting into service, but look we've we've comparatively speaking.
We've always had a healthy percent at least for the last seven 810 years, we've had a very significant portion of our owned and controlled lots controlled by options and while that can vary a little bit from quarter to quarter or inside of the year. We'll continue to try to at least have 50% of our control.
<unk>.
Land under option agreement, so that we have some flexibility if things that arent.
Expected to occur occur.
At the same time.
We're more focused than ever on trying to secure would appear to be very strong locations <unk> locations costs more money, but I think one thing we've learned over the arc of time is that.
As tend to hold up better through thick and thin and in fact, they are the only thing that holds up through thick and thin so.
We think we have a great land position.
We hope to close on every piece that we have under option, but we also have contracted for the right to walk away if things do begin to slowdown or go in a different direction.
We're not crazy bullish, but we're a whole lot more optimistic than not about housing and where it's likely to go over the next 12 to 24 months, we continue to see more and more millennials entering homeownership, rather than renter ship and it doesn't take that many too.
Move the curve and it doesn't take that many for us to capture additional market share. So you put all that in the blender and you sort of come up with where we are with our average lot price go up yet.
Will our smart series, which is now over 40% of our business.
Day two years ago.
It was less than 30% of our business.
Will it continue to help us produce more affordable product notwithstanding higher lot prices that will help greater density and smart series locations helps.
Somewhat mute the higher prices, we're paying for land we have additional products that we're launching under our smart series umbrella, which is an even smaller lots we've already begun to sell that.
And some of our markets and it's off to a great start.
So.
There's a lot of pieces and parts here, helping to strike the balance between affordability and raising land costs, but.
That's sort of how we think about all of it I don't know if I know Phil wants to add to that would add one other thing.
Obviously pay a lot of attention.
How much land, we have under control and the risk dollars for options in all of those things, but we pay special attention to what we own.
And as we said today, we own about 23000 loss when you look at our current sales rate of about 9000, a year, that's about two and a half.
Your supply.
They try to keep that in that two to three year range. So we do feel really good about the land we own and.
That's obviously more risks than what we have you know off the books, but overall, we feel very good about it Bob talked about all the communities that we're going to be opening next year, which we're really excited about but we realize fully that today, we're buying land at the top everybody's hope it is not.
The top top.
Right now that's all very helpful. I appreciate your realistic perspective in higher Youre balancing.
The risks with with the stronger market Youre in today, just switching gears a little bit you mentioned that 35% of sales were inventory homes, which was.
Slightly down from last quarter. When you go when you look at the fourth quarter were at least calendar quarter, we're seeing a big ramp up in snacks attempting to get homes.
Now on the market to get them closed.
Guys are talking about a 50% growth in community count.
And a lot of builders are talking and saying they're going to.
Crops me account double digits and as high as 40%, so kind of see a lot of supply, possibly coming with spec.
Becoming a bigger percent of most builders are willingness to.
Basically go after the market rather than dirt sales. So tell us how you think about all the spec ramp all the community count ramp and whether or not that's concerning to you in the face of what is clearly demand starting to although still very strong but starting to moderate.
I mean, I think that's a great point.
We think about that all the time at least you know.
Maybe not all the time that that a good part of the time I think that.
Ah yes.
If if we werent here's what I, let me start by saying this if we werent limiting sales and if our community count wasn't down.
We would be posting sales similar to what we had a year ago, which were crazy crazy numbers very difficult comps, it's not an excuse. It's just it's just the fact, but we're down communities.
Pretty significantly limiting sales and over half of our communities today.
So I think that there's really tremendous demand out there right now.
I think that it's I think that there is a possibility that.
We're hopefully going to open more than 15 have more than 15% new stores next year. The number that we put out with somewhere between $202 20 at the end of next year, We've got 175 or 176 today in terms of community. So that could be as many as 30 to 50 new stores next year at this time.
The other builders are singing you know in one form or fashion is similar too and so what will that mean people are going to have lots to move all there'll be more specs will there be more discounting I mean, I think that's what's being you know a lot of the analysts and people that watch. The builders are are asking that same question.
Over the.
We've said this before and I think theres a lot of really good homebuilders out there, but execution matters location matters product matters quality matters.
And those are the those are the hooks that we hang our hat on and we've competed.
<unk> all kinds of times in the past and we think will be be able to compete very effectively in the future I do I'll, let Phil answer the spec the spec question.
It's been a challenge for us at least you know most of the other builders to get homes built whether they're direct or to be built I wish we had more specs but.
We sell them as quick as we as we start them and.
And you know with all the we're all sick of the words supply chain disruptions.
Tired to hear it about that but it is a reality no matter. What you are trying to buy in our economy, whether its a house or a window or a cigar.
It's tough to get anything and.
I think thats, hopefully thats bottomed out it appears that it has I don't think its getting better, but I think it's bottomed out and we dropped some closings because of it we haven't lost them Theyre, just sliding, but we will get them back.
In the fourth quarter and beyond Phil If you want to comment further on specs I would just comment that we've always been conservative operators.
Did get up at one time to five or six specs per community with one or two of those being complete.
Obviously less than that now.
It's just so difficult to get houses Bill we do have 20% more houses in the field and we did a year ago and we have this huge backlog of over 5000.
So I just don't see us changing our stripes much when being any type of real significant spec builder.
I think we can pretty much continuing to run the business the way it is.
And the last point I'll make on that and again I mean, it's.
Uh huh.
Sometimes you sounded like what's the line you're protesting too much.
A lot of houses that we could have closed that were almost done but not quite we don't do that.
And there was a period, maybe a decade or two ago. When we did do some of that but you ended up.
Paying for it later, either with dissatisfaction or greater warranty expense are paying for the same thing twice.
And it's taken us a long time to get to a very strong discipline at closing houses when they are done we have some of the highest home readiness scores in the industry and we intend on keeping that and Thats helped produce better returns lower warranty expense. So that's something that we're not going to depart from even when you start to see closing sliding because.
She can't get windows or some other some other commodity.
Got it well I appreciate all the detail and good luck.
Hey, Thanks, Ivy and good to talk to you.
Yeah.
Thank you we now have another question on the line from Alex Barron of housing Research Center. Please go ahead when you're ready.
Thanks, guys.
I know how many shares you bought back Bill I was hoping you could.
And I thought it was $60 million, but I didn't catch how many shares.
Along those lines what are the thoughts on share buybacks going forward.
Alex we bought back about 243000 shares and our current plans based on how things are in the market and so forth are to continue repurchasing shares we have about $84 million left under our current authority.
Book value is up to 53 Bucks a share.
It's up 12 months in the last 12 months, so we feel good about that.
And then is the idea.
To do it opportunistically or more consistently.
I mean, I'm not sure I understand that question Alex.
I mean like are you guys trying to.
Do it consistently every quarter or just when do you think the stock is cheap.
Alex that's something we look at.
Frequently and a lot of things go into it obviously with book value up to 53 box. We look at that we obviously look always at what our capital needs are for our existing markets et cetera. So we look at a lot of things, but again I mean.
The stock trading below 60.
And booking 53 that obviously is enticing to us to buy back shares.
Got it.
And then another question.
Yeah Yeah.
And another question.
As far as margins and trajectory of margins, but anything that you guys can comment on.
And what the outlook is based on your backlog price increases.
Lumber costs and all that stuff that you can comment as we move into 2022.
Well I'll make the comment that if you look at the first quarter of this year we were.
24 for the second quarter were 25, one in the third quarter were 24, 5% prices has continued our sales prices have continued to increase pretty substantially.
Our third quarter call.
Really were fairly flat.
<unk> come back to us a firm out, but we've had other things.
No.
Not making any specific predictions.
We're very pleased where our margins are our returns are very very strong we've been below 11% SG&A.
Last two quarters.
Our income percentage has been very strong our ROE is one of the higher ones in the industry.
So we're still expecting to produce strong returns in the next couple of quarters.
Our backlog of over 5000, and having a lot of houses in the deal we're expecting to have some some strong results in the next couple of quarters.
Alright, great best of luck. Thanks.
Thanks Al.
Thank you as a reminder, please press star followed by one could ask any further questions today.
We now have the next question from art Winston from pilot advisors.
Your line out. Please go ahead.
Thank you and thank you for the great results guys.
As a follow on to your sponsor Ivy's question.
Giving the 500 million plus the increase in inventories year to date and the already large number of new communities opened would you anticipate the growth of inventories going forward.
B.
More modest than it has been were small.
When you look at.
Our housing investment.
Right now about 20% versus a year ago.
Last year, we spent about 730 million on land had a few pretty big deals get postponed for different reasons. We spent 750 on land in the first nine months.
Having said that I would expect the inventory increases to not be as much in general the next few quarters.
Nashville will be more of a gradual ramp up unless we find a really good opportunity and again, we're considering continuing to look at stock repurchases, but yes, I would expect the housing investment inventories to moderate some for the next few quarters.
Yes, what I would anticipate that suggest strong free cash flow.
I wanted to the backlog the average cost of debt.
And the backlogs at $471000 price and with the growth in the Smart series, which are near 300 of thousands. It suggests to me that you're you're selling other has it somewhere.
$550 to $575000 to break the back of the price of the questions I have homes in the backlog to such a high level could you comment.
Thanks, sorry, if thats absolutely the case first of all there's a couple of things number one.
The smart series on average Smart series homes sell for.
Considerably less than the non smart series homes, but the other thing that's occurred and this is this also relates to <unk> question about affordability.
That.
Our smart series on average those prices have jumped a lot too.
It's still the most affordable product, we sell and still being a.
Very well received by consumers.
Strong sales pace strong returns and so forth, but everything is everything is sort of lifted up.
$25 to 50000 or so and.
Another way to think about it is if the smart series and stayed relatively flat at $30 to 35% instead of 40 or 42, our average price in backlog would be you know I'm, just guessing probably 10% higher.
So your points well made and the answer is yes, that's correct.
It is just as 42, 43% of our business is smart series.
Sure.
No.
58% isn't so that's where it comes from and just a couple of things on that I mean, we have a great business in Austin, Texas, and a round figures a year ago that backlog was a little below 400 and today that backlog is right at 500. So there has been like 25%.
<unk> plus increase in our Asp's in Austin.
And again in general there has been.
Pretty significant cost cost inflation in the last 12 months.
But we still think that.
<unk> is very important to us we're trying to address at a lot of different ways.
Smart series.
The Smart series, we kind of have a smart series plus smart series minus so we're trying to pay a lot of attention to that the other thing is the cost side of the equation.
For all kinds of good reasons gets tremendous attention.
But to really be discipline in the business you got to price to market.
And hopefully people always do price to market and the back of their mind. They know what their cost is in.
You try to you try to keep those things in perspective, if you focus too much on cost and price to cost you either a over price or under price. If you can get really smart and priced to market than you are doing the right thing.
Very good. Thank you. Thank you very much.
No. Thank you.
We now have a question from Jay Mccanless from Wedbush. Please go ahead, when you're ready.
Hey, good afternoon guys.
Several questions for you.
And welcome to Nashville.
The first one.
Lumber impact higher cost lumber from from earlier this year. When do you think we're going to see the worst of that Phil was it was it this quarter or is it going to be next quarter. How are you all thinking about that.
I think it's going to be maybe a little more in the fourth quarter than it was in the third quarter.
And then we will start getting some relief next year Jay.
Okay.
Then the next question I had I guess.
I guess I could ask it two ways one how many closings do you think pushed from <unk> to <unk>, but also when I look at how many homes all closed on a monthly average basis. It was like $4 three in <unk> than it decelerated to three nine and three Q.
Where is that running right now and maybe for <unk> and <unk>. How many closings did you guys move from one quarter to the next.
Jay.
Best estimate I can give you is.
We did revised budget. The first of July for the rest of the year and for the third quarter, we thought we'd close about 200 more houses than what we did.
So but the good news is if you look at profitability and so for the first quarter. This year, we closed 2019 and made $110 million pre tax in the third quarter. We closed two all four or five and without the debt charge. We made 125 pre tax so we feel good.
Good that our profitability and returns are getting better as far as the outlook for the rest of the year.
Said that we have 20% more houses in the field now than a year ago.
Obviously, a big part of that is what stage of construction their apps, but I.
I guess the.
Easiest kind of answer I'll give you is that we do expect to close more houses in the fourth quarter than the third.
But we continue to have challenges.
Sure.
I thought it was pretty interesting that both the southern and northern regions had roughly the same decline percentage decline in <unk> in orders versus last year.
When you when you balance it out it looks like.
Oh sure.
One of the things also just following the closing one of the things is that even though our spec levels are getting kind of where we want to that <unk> level.
A lot of it we don't have as many finished specs as we used to they close in the same quarter. So that also affects what we're close on a quarterly basis.
Okay.
And then just on the orders again for the southern in the Northern region to have basically the same percentage decline versus last year.
Got you to a monthly sales absorption of roughly $3 seven per month, I mean is that.
That three to four is that where youre limiting sales at the communities in terms of new orders in.
When when did those caps come off what do you guys need to see to start stripping those caps often.
But in your salespeople start selling more aggressively.
Let me take the second part of that first because I'm not sure if I understood. The first the three seven is a reflection of all of our communities on average.
Those that are capped and those that arent no I don't know if thats, what you were asking or not but.
No I just I think it's interesting that you had the same percentage decline and I didn't know if you were implementing the same level of cap across the entire footprint and Thats why orders were down.
It's the answer to that is the same as the answer to pricing to market. Its a market to market subdivision to subdivision analysis, we look to our R. R market operators to make that decision based upon one single criteria our ability.
<unk> to.
To get the homes built in a reasonable time.
With cost that we can control and.
And the reason that we've been capping sales as it was that that in itself.
Uncapped.
It was it was pushing cycle time out further and further and further if there were no supply chain issues whatsoever, and it was easier to to have daylight into.
Deliveries as well as cost we would not be capping sales.
So the issue that is really provoke that has been primarily.
The fact that we don't want to give people one year delivery times.
We like to be closer to six months, which pushed out about 45 days. So we don't want to keep pushing it out further and further.
And.
So it's really a function of that so when will we lifted when we believe well first of all we're getting very strong returns right now if the returns stay exactly exactly the way. They are I think that you know sign me up for that but.
But we'll we'll lift the caps when we believe that we can handle the volume without stretching out cycle times too much and.
I think thats really been the issue across the industry.
The other factor, which is sort of a secondary factor is running out of communities too fast and not being able to replace them and theres a little bit of that in there, but it's really mostly about managing our costs managing of delivery time and really managing the buyer.
No one knows what's going to happen and they have a backlog with homes that are closing.
10, 12, 14 months out that's not our business and we're not going to get in that business.
Our current estimate Jay.
<unk>.
We will still be probably limited sales and the majority of our communities in the fourth quarter.
Percentage might be a little bit lower but we think it will still be a majority.
The percentage has dropped.
Some in some respects because some communities that closed out.
But at one point it was over 75% now it's somewhere between 50 and 60%.
Okay.
Okay great.
And then a.
A year ago, a year ago, it's Jay.
Jay a year ago at this time I don't believe we were limiting sales.
If we were it was less than 10% of our communities. We really started to limit sales in the fourth quarter of last year.
Got it.
Thank you for that and also thank you for the.
Insight around the community count.
200 to 220 by fiscal year end, 'twenty twos pretty pretty impressive.
How how are you expecting those to ramp out is it going to be a nice easy progression or is it going to be more back half weighted into 'twenty two.
Slightly more back half and it looks more maybe 60 40, something like that yes.
Okay.
Part of that is.
Weather.
The.
But a meaningful part of our footprint.
Feels winter.
And most of our smart series communities are self developed.
And of course, there's issues there materials and delays.
We have factored in extra time for that.
But again like Bob said right now our thoughts on the majority of it will be the second half of next year.
One of your competitors earlier today talked about having.
Certain pieces for horizontal land development seeing some delays there or are you all feeling the pinch on those as well.
A little bit.
But.
I don't want to act like.
We can't get better at that because I think we can but I also think we've been quite proactive.
We sit down with our.
We sort of look at that the same way, we look at national accounts or national suppliers by that I mean in each market there might be.
One or two large site contractors that.
We will seek to have do most of our work if not all of it and we will sit with them at the beginning of the year or the beginning of a period and say these are the projects. We've got coming on over the next 12 months to 18 months pencil them in get us ready.
So we don't have to worry about finding people when we're 60 days out.
Got it.
Thanks.
Having said that you know.
Not to throw too much.
Gasoline on the fire.
There is a pipe shortage.
It seems like every month there is a different commodity that's that it's hard to find.
There is a pipe both PVC and I think.
Iron pipe shortage that has begun to rear its head in Texas, and maybe maybe Florida, I know, Texas for sure and.
That's something that we're now working on also so the other builder may have been referring to things like that.
Sure.
And then just on pricing how much did you guys raised pricing during the quarter and.
How much are you all trying to push that right now just given given the.
One that we've already seen this year in home price appreciation.
That's a hard one to answer.
I don't know off the top of my head.
I don't have that in front of me.
How much we raised prices.
To meet market.
During the quarter.
That's a very subdivision specific thing.
There are I do know that we have communities, where we continue to raise prices as we speak.
I don't think its the majority of our communities I think it's probably less than a third but it's probably somewhere in that 15% to 35% range where prices are still being raised maybe every two weeks or every four weeks, but the majority of our communities I do not believe we're raising prices right now.
I don't have the specific on that.
Okay.
Well. Thank you for taking all my questions appreciate it.
Okay. Thanks Jay.
Thank you we now have a question on the line from Anthony <unk>.
Let's go for asset management.
I think your line.
Yes, Adam start with it at but in any case.
Results look pretty good in the current environment, how long as Youre building cycle time.
And how many months will it take you to build out and close on the current backlog.
Well, thank you Doug today.
Today compared to a year ago, we're about depending on the market 30 to 60 days longer.
If you look at our backlog today of over 5000 houses.
Hopefully, we will be able to get through that.
The next three quarters.
Our current run rate is about 9000 from a sales standpoint.
Delivery rates are a little less than that.
Obviously are planning and hoping to close Morehouse next year than this year.
We've talked about having.
<unk> thousand houses in the field now.
Our average build time across the entire company from dig.
Commencement of construction to closing is about 160 days on average.
And that's about that's about.
30, or so days longer than it was a year ago at this time.
We've also seen a slight stretch and the pre.
Contracted dig on that part of the cycle time, but actual hardcore construction from the time, we start to.
Dig dig on the lot until we get the house completed and it depends upon the house, but on average it's about 160 days.
And how far.
Smart series would be the smart series houses would be less than that they make up a bit.
Earlier, 40%.
And the more expensive ones would take longer but how far does that cycle do they enter backlog. That's when you have a contract a one day.
Day, one day, one if you bought it.
Bought a house for much yes, if you bought a house from US yesterday, Adam It would be in your contract was approved you would be part of our backlog today, and we try to get quite a bit.
It's not in backlog.
No no backlog is anything thats sold but not yet closed.
Got it and how much.
How much of your inventory is prospect now.
By 1000 houses.
So roughly 20% okay. Thanks, a lot that's very helpful and keep up the good work.
It still with some little leverage compared to the other guys.
Maybe you should give classes.
Okay.
Well thanks for your comments I appreciate the questions nice to talk to you. Okay. Thank you your result.
Thank you we have no further questions on the line as a reminder, its star one to ask any further questions.
We have no further questions on the line.
I'll hand, it back to Mr. Phil Creek.
Thank you for joining us.
That does conclude today's call. Thank you all for joining you may now disconnect your lines.
Uh huh.
Sure.
Yes.
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