Q1 2022 MDC Holdings Inc Earnings Call
[music].
Hello, and welcome to the M. D C Holdings 2022 first quarter conference call.
All participants will be on listen only mode should you need assistance. Please signal our conference specialist start pressing that starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touched on far.
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Thank you good morning, ladies and gentlemen, and welcome to M. D. C Holdings 2022 first quarter earnings conference call on.
On the call with me today I have Larry Mizel, our executive Chairman, David <unk>, Chief Executive Officer, and Bob Martin Chief Financial Officer.
At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we request that participants limit themselves to one question and one follow up question.
Please note that this conference is being recorded and will be available for replay for.
For information on how to access the replay please visit our website at MDC Holdings Dot com.
Before turning the call over to Larry and David It should be noted that certain statements made during this conference call, including those related to Mdc's business financial condition results of operation cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private.
Securities Litigation Reform Act of 1995.
These statements involve known and unknown risks uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.
These and other factors that could impact the company's actual performance are set forth in the company's first quarter 2022 Form 10-Q , which is expected to be filed with the SEC today.
It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP financial measures.
Any information required by regulation G is posted on our website with our webcast slides.
And now I will turn the call over to Mr. Michael for his opening remarks.
Good morning.
You for joining us today as we go over our results for the first quarter of 2022 providers.
Provide our thoughts on current housing market conditions and give some insight into the future of our company.
M D C holdings reported earnings of $2.02 per diluted share for the quarter.
34% increase over the first quarter of 2021 .
This substantial year over year increase in earnings per share was largely driven by 19% rise in home sales revenue and a 380 basis point expansion in home sales gross margins to 25, 7%.
Our teams did an excellent job delivering homes during the quarter and what continues to be a challenging supply chain environment is.
We came in near the high end of our stated guidance with new home deliveries of 2233.
Average sales price on homes closed in the quarter trended higher.
Rising 16% on a year over year basis, as the combination of the healthy demand and limited supply.
Can you provide for favorable pricing environment and our communities.
This positive industry dynamics also led to a continuation of the healthy order activity.
We've experienced over the last several quarters.
As we sold an average of 5.4 homes per community per month in the quarter there.
Demand was broad based from both a geographic and pricing standpoint, what's.
What's the millennial age buyers continue to be the driving force behind our sales success.
This large population of buyers has reached a prime phase in their lives.
Home ownership became a much higher price already whether due to changing family dynamics.
Chance to build equity or the desire to put down roots.
The other driving factor that we have witnessed in our markets is the ongoing migration from high to low cost areas.
By both companies and individuals.
Factors, including taxes affordability and overall quality of life are weighing more heavily into where business operate well.
Well the emergence of online and remote work capabilities have given employees more freedom to live and work from where they choose.
At M. D. C. We have positioned our company to take advantage of these trends by investing in the markets that are benefiting from this migration and by opening communities that appeal to millennials with innovative homes at more affordable price.
We believe that the demand forces we see today.
Long term in nature, and we will continue to support the new home market for the foreseeable future.
After years of historically low mortgage rates buyers are now being faced with higher financing costs for their perspective for home purchase as the average rate on 30 year fixed rate mortgage has moved approximately 200 basis points since the beginning of the year.
While current mortgage rates are still attractive from a long term historical perspective.
It is natural to expect that this move higher.
Have a near term impact in our business as buyers adjust to this new reality.
Long term. However, we believe the demand factors in place coupled with a lack of supply in our markets should keep the new home construction market on a solid footing.
In addition, it is important to note that while the absolute cost of owning a home has gone up with the rise in interest rates. The relative costs has stayed relatively stable given the concurrent rise in monthly rents across the.
Country.
With a strong balance sheet.
Seasoned leadership team and the product profile that is tailored to today's buyers M.
M. D. C is in a great position to build on the track record of success and to adjust whatever changing rate environment may bring.
We continue to invest in the future for our company.
Taking the long term risk adverse approach to the business.
The confidence we have in our ability to fund our operations and operate effectively through the housing cycle is borne out by our industry, leading dividend, which yields above 5% based on recent price levels for those.
Yours, who believe in long term viability of the housing market and who are seeking a healthy dividend. We believe M. D. C is a compelling value.
With that I'd like to turn the call over to David who will.
I'll provide more details on our operations this quarter.
Thank you Larry MDC delivered strong results in the first quarter of 2022.
Both in terms of profitability and order activity.
I am pleased with how our teams were able to sell and close houses despite ongoing operational challenges.
Supply chain issues continue to be a headwind for our industry.
But they were fairly consistent.
With what we faced in the fourth quarter of 2021 .
We made progress in the first quarter implementing strategies in finding workarounds to combat these issues.
But every day, there seems to be a new delay or product shortage that prevents us from materially improving our cycle times.
As such we are not incorporating any improvements to the current operating environment and our forecast.
Despite the supply chain challenges, we continue to generate outstanding margins across to our homebuilding divisions as strong buyer demand and low inventory levels have allowed us to raise prices ahead of cost inflation.
Divisions that posted particularly strong margins in the quarter included Orlando Las Vegas in Riverside County.
As Larry mentioned, new home demand was broad based during the quarter with the mountain region, posting an absorption pace of five six.
The West region, a pace of 5.5 and the east the pace of 4.8.
These figures were indicative of the continued strong traffic we witnessed in our communities as well as online during the quarter.
Our sales for the quarter could it even higher if not for limitations that we imposed in many of our communities.
The visions with the best absorption basis during the quarter included Denver, Portland in Northern California.
We have continued to see good traffic levels in our community since rates started rising a few months ago, though we have noticed that the sales process has taken a little longer.
Most buyers seem to be adjusting to the higher rate environment as well and continued to be motivated to move forward with their purchase.
Additionally, we have seen very little change in cancellation rates among our buyers already in backlog.
As such our general sense is that market dynamics remain healthy and the demand continues to outstrip supply.
Particularly in the markets that we operate.
While it is unclear where rates will eventually settle out we believe our market positioning our more affordably priced product and our build to order strategy M. D. C has is in a great position to be a success with a number of interest rate scenarios.
From a land acquisition standpoint, we remain diligent in our land underwriting efforts.
<unk> focus on investing in market is poised for continued growth.
We recently announced that we've agreed to acquire substantially all of the homebuilding assets of the Jones company of Tennessee.
We believe this transaction combined with our organic land pipeline, we have already secured in the Nashville area. One year ago has the potential to launch M. D C and our leadership position in Nashville.
Now I'd like to turn the call over to Bob who will provide more detail on our results this quarter as well as some forward looking guidance Bob.
Thanks, David and good morning, everyone.
During the first quarter, we generated net income of $148 $4 million for.
Or $2 <unk> per diluted share.
Representing a 34% increase from the first quarter of 2021.
Pre tax income from our homebuilding operations increased $75 million or 66% from the first quarter of 2021 to $188 $5 million.
This increase was driven by home sale revenues, which rose 19% year over year to one point to $4 billion as well as our gross margin from home sales, which improved by 380 basis points to 25, 7%.
Our financial services pre tax income decreased to $13 $4 million in the first quarter of 2022.
As we have indicated for several quarters competition in the primary mortgage market has increased as refinance volumes have declined.
As a result, the gains on loans locked sold and closed have returned to more historical levels.
Our tax rate increased from 23, 3% to 26, 5% for the 2022 first quarter the.
The increase in rate was primarily due to federal energy efficient home tax credits, which have not been extended to 2022 and a decrease in the windfalls recognized upon the vesting and exercise of equity awards.
We delivered 2233 homes during the quarter, which represented a 3% increase year over year and exceeded the midpoint of our previously estimated range for the quarter of 2000 2300 closings.
The average selling price of homes delivered during the quarter increased 16% to about $556000.
This was the result of price increases implemented over the past year as well as the shift in the mix of our closings from Nevada to our northern California markets.
As David mentioned supply chain disruptions and labor constraints remain a headwind to the entirety of our production process from land development to final home inspections.
While these issues did not seem to worsen during the quarter. They remain an obstacle for our teams to navigate on a daily basis.
Based on what we're seeing in the field, we do not expect material or labor conditions to significantly improve in the near term.
As a result, our delivery projections for the second quarter as well as the remainder of the year are based on production schedules that reflect current labor and supply chain conditions.
We are currently anticipating home deliveries for the second quarter of 2022 of between 20, 420, 600 units and we expect the average selling price of these units to be between 560005 hundred $70000.
In addition, we are reiterating our full year guidance of between 10005 hundred 11000 home deliveries.
Gross margin from home sales improved by 380 basis points year over year to 25, 7%.
Excluding the inventory impairment and warranty adjustment recorded during the quarter, our gross margin from home sales would have been nearly 26%.
We experienced improved gross margin from home sales across each of our segments with our eastern West segment, having the largest year over year increase.
These improvements were driven by price increases implemented across nearly all of our communities over the past year, which have been partially offset by increased building material and labor costs.
We expect to continue to produce strong gross margin from home sales based on the gross margin of our homes in backlog as well as our continued focus on pricing.
Our price increases taken during the first quarter of 2022 outpaced our rising input costs from lumber as well as inflationary pressures on other material and labor costs.
We are expecting our gross margin from home sales for the 2022 second quarter to exceed 26%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2022 first quarter increased $14 $3 million from the 2021 first quarter driven by increased general and administrative expenses.
Our SG&A expense as a percentage of home sale revenues decreased 60 basis points year over year to 10, 4% as we continued to drive improved overall operating leverage.
General and administrative expenses increased to $14 $8 million from the prior year quarter to $72 million.
The increase primarily resulted from an increase in salary related expenses due to higher average head count as well as increased bonus and stock based compensation accruals.
We currently estimate that our general and administrative expenses for the second quarter of 2022 will be approximately $75 million.
Despite the increase in home sale revenues, our marketing Commission expenses were little changed year over year, resulting in a 90 basis point improvement in these costs as a percentage of home sale revenues.
As we have noted previously we have been successful in controlling these costs given the current demand environment.
The dollar value of our net orders increased 12% year over year to $1.84 billion, driven by a 14% increase in our average selling price.
These sales absorption pace decreased slightly year over year to 5.4.
<unk> four orders per community per month.
We continue to moderate sales activity through a mix of pricing and limits on the number of lots, we released for sale at a given time.
We limited the number of lots released and the majority of our communities during the first quarter of 2022 to better match, our current pace of production.
As was the case last year. These actions caused a somewhat slower pace of sales in March relative to January and February .
Additionally, cancellation rates remained low during the quarter at eight 2% relative to beginning backlog and 16, 7% relative to gross orders.
We saw our active community count increased to 200 as of quarter end.
As we had 38 new communities become active during the quarter.
We ended the quarter with 42 active communities in Arizona and twenty-five in Florida. These.
These two states comprise our most affordable markets and the benefit from the migration from other parts of the country.
California, and Colorado, both at 41 active communities closely following Arizona for our highest number of active communities.
In addition, we opened our first community in Austin, Texas during the quarter we're.
We're pleased to experienced strong demand.
Community Count is always challenging to forecast.
As it is difficult to precisely predict when communities will open and when they will close out.
This challenge is made even more difficult by the current demand environment.
And the extended land development times, we continue to experience.
With that said, we expect our active community count to remain flat at approximately 200 communities. During the second quarter, followed by continued growth in the back half of the year.
We continue to forecast double digit percentage growth interactive community Count from December 31, 2021 to December 31 2022.
We approved 2000 and 740 lots for acquisition during the first quarter of 2022.
Which represented a 37% decrease from the prior year quarter.
This follows several quarters of significant land acquisition approval activity.
It can be seen by the 18% year over year increase in total lots controlled as of March 31.
In addition, we acquired 1909 months during the quarter, resulting in total land acquisition and development spend for the quarter of $309 million.
We expect that the acquisition of the majority of the homebuilding assets of the Jones Company of Tennessee will result in the addition of approximately 1700 controlled lots to our total lot supply.
The transaction is currently expected to close near the end of the second quarter of 2022.
We ended the quarter in a strong financial position with total cash and cash equivalents of $582 million total liquidity of over $1 $7 billion and the debt to capital ratio of 35, 5%.
We generated $118 $1 million in cash from operations during the quarter and believe that we have the opportunity to generate cash flow from operations over the remainder of the year as well.
We continue to prioritize our capital allocation to land investments that fit our risk adjusted business model and to our industry leading dividend.
As a result of our disciplined approach to capital allocation and our successful execution of strategic initiatives. Our pre tax return on equity over the last 12 months increased 530 basis points year over year to 32, 9% as of March 31 2022.
We have been able to achieve these impressive returns while continuing to maintain one of the strongest balance sheets in the homebuilding industry.
That concludes my prepared remarks, we will now open up the line for questions.
Yes. Thank you at this time, we will begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to try your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Yeah.
And the first question cautious Stephen Kim with Evercore ISI.
Yeah. Thanks, a lot guys. Thanks, very much for all the guidance I and all of that the commentary I guess are very helpful.
I guess the first question I had is on.
On the issue of potential incentives as you look to your gross margin outlook are you factoring in the need or the likelihood that there might be any in.
Incentives that materialize at the closing table, so not I'm not talking about sales in <unk>, but I'm talking about homes that would close into Q, where maybe the rate wasn't locked maybe it took a little longer than you expect it to deliver the home inside the customer comes back to you and says you know now I have to have a much higher rate.
Cause you know the delivery time was later that sort of thing.
Any of that incorporated in your guidance.
Well, yes, I think we talked about.
26% or greater gross profit margins.
For Q2, I think we recognize.
That there there is the need for that kind of thing from from time to time.
So.
We feel pretty good about our 26% plus estimate.
So implicitly it <unk>.
Incorporates.
Sort of Holistically everything that you think may happen, which is encouraging.
When you think about the overall strength of the entry level market versus.
Versus the move up segment of the market I know you've been focusing a little bit a lot more on the entry level.
There's a narrative out there that we've been hearing from folks that the entry level is actually the part that's going to get most squeezed by the rates and maybe therefore, you know an area of greater concern.
But by the same token that's also more need based buying rents are skyrocketing others. There's a it would seem to me that there's reasons to think that the entry level would be rain pretty strong people can trade down to them.
You look at the across your different price points, you look at the entry level in particular.
How do you feel the entry level is positioned.
For their higher rate environment.
And are you taking any actions in advance of.
Are you taking any actions today in anticipation that there might be some disproportionate weakening at the entry level.
So Steve I think it's a great question.
I believe that so far we've seen the entry.
Position.
Performed very well.
For us we call it more affordable.
We think that our product is really.
A product that can be accepted by a variety of consumers not just entry level move down as well, we do build to order so that tends to attract in some cases different kind of consumer so it's not just limited.
To the entry level.
Said, we're certainly cognizant.
Of rising rates, we do have programs in place to try to minimize the blow from rising interest rates long term lock programs that we've put in place things of that nature. So we think it's manageable we are always innovating on product, including our most popular seasons product.
To achieve new levels of affordability as well so I think that it's something that's being considered.
Actively.
Yeah, that's helpful, particularly about the idea of the Bto model, helping with a move down customer just to clarify when you're talking about rate lock programs and things of that nature.
Cost of those programs borne by the builder or is it borne by the customer.
Or is it shared.
It depends sometimes we run at where its exclusively the customer sometimes we'll run it where it's half and half.
Builder versus the customer just.
Just depends on the given month and the different promotions.
That we run.
So I think it's both.
Great. That's very helpful. Okay. Thanks, very much guys.
Sure thing.
Thank you and our next question comes from Ivy Zelman with Zelman and associates.
Thank you and good afternoon. Congrats on the strong results are very impressive community count growth and many have not been able to achieve.
Just thinking about.
Your strategy now to enter new markets at this stage of the cycle I do think there is potentially more on the horizon do you think the execution risk is entering a new market is.
Less than let's say investing in your existing footprint.
Yeah, you know Ivy this is David.
Good morning, Yeah. We are we think we think with the products that we have that.
And the land supply we've been able to get new markets really are going to be we're going to be fine for us. We just opened up in Austin with our <unk>.
Seasons product and it was widely acceptance so the build to order model is really pretty terrific for us.
But with the strain and labor issues is it more challenging to secure trades as a newer builder to a market and just thinking about you know.
Alternatively would you continue to invest more in our existing footprint and maybe just give us a perspective cause Austin, it's pretty frothy at with respect to.
Oh price depreciation and so recognizing that your products had a good reception, maybe talk about like going in it and how much lot right now and what you're paying up for a lot. It seems like the market is one of the strongest in the country as an example.
Yeah, Ivy I can answer that.
What we're finding is a lot of builders in say the Austin market has like burn through some of their burn through a lot of their older land and Theyre all coming in at kind of the same basis, we are.
So we think our land basis is pretty similar to some of the current builders.
And we think our build to order model is really going to be pretty popular in Austin.
So does that mean.
Expanding more so and existing footprint and you'll look for another other opportunities.
Well I did too.
I think I think.
Larry and I have always been opportunistic over the last 45 years, but we look at both.
And this <unk>.
First time, we actually expanded in a few markets that were pretty excited about to include Nashville.
So we feel pretty good about what we're doing Bob do you have anything to add.
Yes, I think you've captured it pretty well I think theres, some larger markets, where we are getting more cash flow than more recent quarters and getting into.
Some of these newer markets is really.
Barry.
Good in terms of our current strategy of trying to make sure that we're keeping.
Affordability and the mix certainly we recognize that individual markets have depreciated significantly year over year, including Austin Nashville, but then again they still are very affordable.
Relative to other markets and there are attracting a lot of jobs, which I think really gives them a lot of long term potential even though if you are in the market and you are just looking at that market you'd say Wow there's.
There's been a lot of appreciation. So we love the long term potential and we think the benefits from diversifying our operations a little bit.
Very helpful as well.
Thank you for that and just one more from me just in terms of recognizing the cost inflation that we've seen on the built to order model.
<unk> seen pretty much everything across the board increasing.
Labor cost.
Quantify for us what the overall cost increases have been on an annualized basis through <unk>.
I think we're probably roughly.
Uh huh.
I guess up.
115%.
Year over year.
Is that a per foot basis, a little bit more skewed is that more skewed to any particular part of that.
Overall cost basket labor versus materials.
And are you I think it's probably more inflation for the remainder.
'twenty two.
I think it's it's a little bit more on the material side and particularly lumber.
I think it's contributing there.
Especially in our results.
We're going to get.
Some volatility for the remainder of the year in terms of how lumber comes through our results I think.
You'll probably see it back off a little bit.
In Q2, but then the more recent spike in lumber will will start coming through in <unk>.
Maybe the end of Q2 and into Q3 part of Q4, so there'll be some volatility.
Up and down for the remainder of the year.
Well good luck guys. Thank you.
Thank you.
Yeah.
Thank you and the next question comes from Michael Rehaut with J P. Morgan.
Hi, Doug Ward from Mike You guys you were talking earlier about how you implemented new strategies and workarounds for cycle times last quarter, but there were new issues arising I was wondering if you could give further color into those issues and last quarter, you kind of referenced municipal slowdowns as had been a big hit.
There is and I was wondering if theres any improvement on that thought.
Yeah, I think it's hard to quantify any any one thing it just seems like.
We do make progress in one area and then you see other things pop up so yeah. It would probably be a laundry list of things that pop up across the country. If you ask one of our our division Presidents I'm sure. They would reach a list a mile long of things that they've dealt with so the good news is I think.
There is active strategies to try to make sure that we're getting ahead of it.
Including ordering materials earlier in the process.
Making sure we're diligent in terms of our permitting process. So even though we're not a spec builder, making sure we're getting the permit as early as we can.
In the process, so that we're ready to start as soon as the sale occurs. So those are things that have helped us offset the surprises that come out any given day.
In our individual markets.
Awesome. Thank you and then secondly, and I apologize if you covered this little bit earlier, if you can kind of give a sense of how your demand and orders trended throughout the quarter and maybe there's a month by month breakdown was there any sort of pick up or slow down.
Yes, as we indicated.
In my prepared remarks I believe.
March was a little less than January and February that's similar to last year.
So as we go through the spring season, we implement limitations.
On lot releases as we increased.
Prices during the quarter, we saw a little bit.
Lower activity in March relative to the first two months.
But again not dissimilar to what what happened last year.
Also note that those increases during the first quarter pricing.
Price increases were about just shy of 10% from start to finish.
Yeah.
Awesome. Thank you guys.
Thank you and the next question comes from David Ragavan with Wells Fargo.
Oh.
Please go ahead, Mr hung up on your line is live.
Hi.
Thanks for that.
Afternoon, Thanks for taking my time I'm, sorry, thanks for taking my questions.
Hey, can you talk to the M&A pipeline since any continent.
Consummating one pretty soon.
Just given the macro.
Outlooks.
That are weakening and then there's the persistent supply chain issues that delta will be able to get or can.
Can we expect more M&A.
To happen and how are you thinking about your pipeline.
Oh M&A.
This is David.
I can answer it this way.
From time to time over the last decade, we've looked at a lot of transactions.
Last one is about 11 years ago, when the Jones company transaction came up.
It kind of checked all the boxes build to order very quality home builder.
A leader in Nashville, and we.
And we see a lot of packages.
But.
We felt pretty good about this one.
It would be it would fit in to our DNA.
Both our product and end market.
Question.
You'll also note.
Hey.
We have a great group of people at the Jones company.
That.
Really complements our existing team our existing team is very small because we've just gotten into the market. So it really gives us more holistic group of individuals to to move our operations forward, So really exciting for the company.
Alright, great another capital allocation question any interest and share buybacks.
Here, Yeah dividends are obviously pretty well appreciated we have a ton of catheter shareholders, but can share buybacks also come into the mix as you try to create value here.
Well, we have an authorization outstanding.
And have for quite some time that said we have not use it.
In quite some time.
So it's always an option that is open for us, especially with the valuations on the lower side.
More recently, however, as you know we have allocated more capital towards our industry, leading dividend, including growing that dividend over the course of the past couple of years.
As well as land assets, including the Jones company coming up here currently slated to close.
At the end of Q2, so a lot of great attractive opportunities for our capital.
Alright, if I can ask one quad.
Quantitatively, Bob any color on second half cadence I know I mean, I'm, assuming just given you a BPL.
Model, you probably have a little bit more visibility than you had last quarter.
I know at least can you talk to some of the scenarios that can play out so margin stable in the second half or even if clothing guide.
It's more Q4 weighted I mean anything to help us.
I understand the puts and takes in the second half I'd appreciate that.
Yeah, and I think yes.
The one variable I already talked about on the lumber side seeing that more recent spike in lumber come through in Q3.
I think that's one thing to be aware of.
Outside of that.
I'll leave it at the 26% plus for Q2.
We still think it's a it's a great.
Environment out there is solid demand.
So we think we've got a Ah.
Good shot at.
Keeping that margin going forward into the second half.
Okay. That's helpful. Thanks, very much and good luck.
Thank you and the next question comes from China, and Patterson with Wolfe Research.
Thanks actually it's possible scheme.
I was wondering following on <unk> question on the new markets.
How long does it typically take for you to get a new market.
To scale what what.
Volume to you need to breakeven and then become a meaningful contributor to the P&L and then what would be the drag on earnings right now from all these new market entrances.
So I think.
We love to be in that.
300 plus range.
In terms of closings and I think with the Jones acquisition that really gets us there for for next year potentially.
Just based upon their historical activity and the work that we've already done in the Nashville market to us as cure assets independent of the Jones company. So we feel pretty good about that one.
Getting up to scale.
In terms of the drag.
We've got relatively small teams.
In each of the four new markets naturally that will change with the Jones company coming on board in late Q2.
So I don't know that it'll be a material drag we will have.
In the second half of 2022.
Up to a 100 additional closings coming from Jones give or take it's a bit of a moving target right now.
And those will be lower on the margin spectrum call. It in the 10% to 15% range.
Simply because we have to.
Allocate the purchase price.
And I know youre, well aware of that process Paul.
It'll drag margins just a team that.
In the back half.
Of the year, but then again, we're just talking about 100 closings.
No.
Okay.
Sure.
Switching it up a little bit you know you've got 20% of your business in Denver and in.
Marshall fire destroyed 1000 homes out there, which is about 10% of annual production for the Denver market.
When will those homes start to you know.
Clear, the EPA and insurance hurdles et cetera, et cetera in Denver has one of the more constrained labor forces in the country is that going to cause.
Any kind of hiccups for you either from elevated cost or maybe happened to slow down sales because of the labor force is going to be.
Preoccupied from that rebuild.
This is David and I can I can answer that it's a slow process.
What they have to do to clean the site up what they have to do with the EPA.
And every one of those houses.
Different insurance policy on it and so it's a terrible thing that happened in fact it.
It affected some houses that we built over 20 years ago.
So what we're seeing is we're seeing a lot of people that are moving into houses for rent moving into apartments, and we're seeing we're seeing some of those consumers outlook looking to buy houses for us, but it's not going to be a one year process, it's going to take a few years to kind of.
Work its way through the system.
Okay.
Should we expect any kind of noticeable change in your Denver business because of this temporary period.
We really don't see it.
Okay, Alright, great I appreciate it.
Thank you and the next question comes from Jay Mccanless with Wedbush Securities.
Hey, Thanks for taking my questions.
First one could you talk about the.
The customer mix for the Jones company and how that compares to Mdc's current customer mix.
I think Jones.
A fantastic.
Product out of Nashville.
And it is very.
Very compatible with our build to order strategy.
So I think their business model is really.
Very much in line.
With what we do.
So is it more move up focus to entry level any kind of color around that split.
I would say, it's a little more move up focused.
Then our percentage, we're we're 65% what we call more affordable.
They are probably a little bit less than that I don't know the exact percentage because they don't necessarily.
<unk> category is it the same way we do.
Okay. Okay.
Definitely.
The move up side.
Okay.
Thank you and.
And then Paul I got my other question. He said, probably 100 homes with about a 10% to 15% gross margin and then what the purchase accounting should roll off after two to three quarters.
Yeah, I think as you get into 2023, you see less of that naturally it's dependent upon how quickly houses close.
Whether or not.
The.
The closing occurs as scheduled.
All of those kinds of things so.
A little uncertain at this point, but that's roughly.
The program right now that we can expect.
Okay. Thanks for taking my questions.
Thank you and once again. Please press Star then one if you would like to ask a question.
Uh huh.
And the next question comes from Alex Barron with housing Research Center.
Yes, Thanks, gentlemen, and great great job on the quarter.
I wanted to ask given.
Given that youre sticking to the build to order model with the interest rate.
Certainty.
How are you.
Assisting your clients.
In locking in rates or are they locking in at the time of purchase through an extended rate lock or do they have to wait till like 60 days out before the close.
The standard program is 60 days out, but we have rolled out programs, where they can do it for up to a year.
In advance so we have both options available depending upon the sensitivity of that consumer to the rate environment.
So is that an incentive you guys are offering or is that something they have to pay on their own.
It's both sometimes they bear the full cost.
<unk>, we will we will help them out with that.
Doing a promotion or something like that so a tool in our toolbox.
Got it and also given that you have.
This business model and your your backlog, which pretty much covers the rest of the year.
Is it.
Okay to assume that your margin that youre expecting for second quarter's going to be pretty similar for the back half of the year.
You know I think it's a reasonable assumption, yes, theres a lot going on in the market a lot that happens to our trade base and of course, they're strained so.
Don't want to imply that there's not any risk to that but it's probably.
The most reasonable estimate at this juncture.
I mean, just to be on the same point.
I mean do you get to lock in most of your expenses at the time will start or is there still some uncertainty that youre not able to lock in at the time the home starts because of the inflation and so on.
Well I think lumber for example until they deliver the lumber pack.
You are not certain on your pricing.
We have various lock periods on lumber.
So there's that that risk out there on the backend trades I think you have the same.
Potential.
For changes in pricing depending upon what.
Issues, they're up against with their own labor pool.
As well as as materials.
As much as we'd like to lock it in contractually when you.
We're dealing with.
Local or you've been regional.
People, who are your suppliers and subcontractors you really have to work with them.
And make sure that.
They are.
Moving forward that they are still still profitable in their endeavor last.
The last thing you want is for them to.
Be upset with you and go to a different site so from a pragmatic standpoint.
We're always in discussions with our subcontractors.
But we feel like we're.
We're in a pretty good position nonetheless.
To make a good margin.
On our backlog in.
In Q2 and into the second half of the year.
Okay. That's very helpful. If I could squeeze one more.
You guys talked about the.
The migration of people from the higher cost states to the lower cost States I'm wondering if you guys have quantified that in any way your percentage of sales that youre seeing that phenomenon happen.
Okay.
I don't think I quite caught your question from the higher cost base to the lower cost base.
Yeah, what have you guys quantified what percentage of your sales that that's happening you know people from moving from California to Arizona, Texas that that kind of thing.
This is David I could ask I don't think we've really quantified it but.
A clear example would be moving from say San Francisco in the Bay area.
Two to the East Bay, where people may have moved out of a.
Our cash unit, a townhouse and moving into a single family.
Single family House, with either three car garage or a big lots of them.
And we're seeing a lot of that that type of movement, which might be interstate.
Some.
Some that some people are moving into other states, but.
This work from.
From home phenomena has been really really interesting and people are looking to have more affordable housing Rob you of some of the evidence.
Yes, I was just going to say I apologize I.
Didn't hear the state part of your questions now I understand I think it varies state by state and naturally in some of your higher cost States you have less.
In migration, so you might only be.
5% to 10%.
From out of state.
Some of your lower cost states.
You could be north of 20% coming from other markets. So.
A wide.
Range.
Variability, depending upon which state you're talking about.
Alright, well best of luck guys. Thank you.
Thank you and that does conclude the question answer session I would like to return the Florida, Bob Martin for any closing comments.
Okay.
Thank you all for being on the call and we look forward to speaking with you again following the announcement of our Q2 earnings.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.