Q2 2022 Lennar Corp Earnings Call
A detailed financial highlight and as noted in our press release give some very limited boundaries to assist in go forward thinking and modeling and then of course, we'll answer as many questions. As we can please limit to one question and one follow up.
So let me begin and start by saying that we're very pleased to announce another hard fought and well executed quarterly performance by the associates of <unk>.
Throughout our second quarter, we continued to sell homes and still offset.
Land labor and material costs.
Our gross margin as reported was 29, 5% net margin was 23, 4%. They continue to drive very strong cash flow and bottom line results as we continue to refine our business model for durability with a very efficient SG&A.
A six 1%, which is a 150 basis point improvement over last year and a record for third quarter.
With this strong performance and cash flow, we have continued to fortify our balance sheet with $131 3 billion of cash nothing drawn on our revolver and a 17, 7% debt to total cap rate.
Ratio as compared to 23, 1% last year.
Accordingly, we're very well positioned to pay down another $575 million of debt later this year as it comes due and further strengthen our balance sheet.
We also managed our sales price and pace through the second quarter and increased new orders by 4% year over year, even though we began to see signs of weakening in the overall market. This weakening has continued into the third quarter.
The housing market has cooled as expected in response to the fed's aggressive.
And rapid reaction to inflation.
The resulting very rapid almost doubling of the 30 year fixed rate mortgage rate in six months has had the desired effect of slowing price appreciation and moderating demand by increasing monthly payment costs and reducing affordability.
While the market has cooled it is clearly not stopped.
Demand remains reasonably strong as buyers still have down payments and have attractive credit scores and can't qualify.
Household formation has continued to rise and although we have adjusted some prices in many markets those prices remain higher on a year over year basis.
Buyers are seeking shelter from inflationary pressures at scale as scarce rentals drive rents higher.
Supply remains limited across the country and the need for affordable workforce housing continues to be at prices levels.
Nearly production months must catch up to the growing household numbers as production of dwellings over the past decade has lagged.
Prior decades by as many as 5 million homes.
Nevertheless, the rapid increase in interest rates together with price appreciation have created at least sticker shock and perhaps a more structural pooling of demand.
In a few minutes Rick is going to give a more detailed overview market by market review that will give a more comprehensive snapshot.
As to what we have seen to date.
Although these preliminary reflections of market conditions are not dispositive of the state of the market.
Indicators have been building since the fed tightening began.
And given the fed's expressed conviction to combat inflation by the definitive statements made recently it seems that these trends will harden as the fed continues to tighten until inflation subsides.
While we can choose to fight against the trend. The reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments.
So what is the playbook going forward.
We're going to keep it simple and we're going to adhere to our core strategies.
To begin we are going to sell homes, adjusting price pricing to market conditions and maintaining reasonable volume.
We have discussed over the past years that we have had a housing shortage across the country.
We will continue to build as slices.
As prices moderate and adjust in order to fill that shortfall and provide much needed workforce housing across markets.
As we have noted many times in the past whether the market is improving or declining we deploy our dynamic pricing model week by week to price products to current market conditions in order to maximize pricing and margin at pricing and margin, while we maintain a careful.
<unk> limited inventory level as the market moves we will continue to be responsive.
In sync with selling homes, we will continue to leverage our extraordinary management team across the country and improve our cost of doing business.
We have seen.
We have seen quarter over quarter improvements in our SG&A over the past years, and we expect to drive efficiencies through technology and process improvement to offset market adjustments wherever possible.
Next we will continue to focus on cash flow and bottom line to protect and enhance our extraordinary balance sheet.
Our great success over the past years to rise from the successes that the successes around careful land management and inventory controls, which have driven cash flows enables us to reduce our debt repurchase shares of stock and drive shareholder returns.
In the second quarter, we repurchased another $4 1 million shares of stock for approximately $320 million and drove our return on equity to 21, 4%, a 260 basis point improvement over last year.
Finally, we will conclude our long planned spin off by year end as we have continued to refine the three verticals of our spin company, we will spend a mature asset management company into the public markets along with billions of dollars of assets under management that we've previously held on Linde.
<unk> books.
Despite the final spin of our new company, which we will call Portera will trade under the stock symbol Q and as we have noted before will be an asset light asset management business that will have a limited balance sheet by.
By finalizing the spin we will further reduce <unk> asset base by another estimated $2 5 billion, which will drive higher returns on our assets and equity base and will not result in a material reduction of either our bottom line or our earnings per share.
We're very excited about the future prospects for core tariff as this will be the second spun company in our history, and we have great confidence in the future and the prospects for its future.
So let me conclude by saying that while the market might be shifting and adjusting to a new higher interest rate environment. We are prepared.
We are extremely well positioned financially organizationally and technologically to thrive and to succeed in this evolving housing market.
We recognize that interest rates are rising and inflation continues to be a legitimate threat. We know that the fed is determined to curtail inflation and this will take some time, but we also know that we can adjust as the market changes and we will.
We also know the difficulties in the supply chain continue to persist and we know that land and labor remain in short supply and.
And we know that cash flow matters and that our strong balance sheet enables us to operate.
To operate from a position of strength.
As we look to the remainder of 2022, we recognize that there are challenges in the market that we must carefully regard expect that we will meet the challenges and that we will continue to adjust to maximize opportunity and drive <unk>.
Into an ever better future.
With that let me turn it over to Rick.
Thanks, Stuart as you can tell from Stuart's opening comments to housing market has been reacting to a significant increase in mortgage rates increased sales prices continued inflation and the impact of the declining stock market.
These changing accelerated during the quarter with many marking the most pronounced impacts with this in mind I would like to focus my comments today on the monthly changes during our quarter.
Current sales environment in our markets and our strategic and operating focus as a company.
During the second quarter, our new sales orders increased 4% from the prior year on flat year over year community count.
Sales pace per community increased from four eight to five sales per month.
Continued to sell our homes later in the construction cycle to maximize prices and offset potential cost increases during.
During the quarter, we saw year over year increases in new sales orders in each month of the quarter.
With a variance of less than 125 sales orders between each monthly total.
Our sales incentives on new orders during the second quarter were down 10 basis points year over year.
However, the percentage did increase sequentially each month during the quarter with May and June sales order incentive totaling one 6% at the gross sales price of the home.
While the sales percentage and May Mark the high point during the quarter that was still relatively low from a historical perspective.
In fact sales order incentives in May was slightly lower than the average new sales order incentive for the latest 12 months.
Our cancellation rate during the quarter totaled 11, 8%, which increased sequentially during the quarter, but was significantly below our long term historical average.
Ended the quarter with only approximately 260 completed homes that were installed across our national footprint, putting us in a great position and a softening sales environment.
So far in June new orders traffic sales incentives and cancellations have worsened in many of our markets due to a rapid spike in mortgage rates and headwinds from negative economic headlines. Many markets that also slowed as we've entered a seasonally slower part of the year.
I would now like to give you some color on our markets across the country.
They really fall into three categories, one markets, reflecting no to minimal impact.
Two markets, reflecting modest impacts and three markets, reflecting more significant impacts.
During the second quarter and so far in June we had 19 markets.
Continued to perform well these.
These include our sixth Florida markets, New Jersey, Maryland, Charlotte, Indianapolis, Chicago, Dallas, Houston, San Antonio Phoenix, San Diego Orange County in the inland Empire. All of these markets are benefiting from extremely low inventory and many are benefiting.
The strong level of global economy employment growth and in migration.
While these markets have continued to be strong.
Our sales pace and pricing power has started to flatten or has flattened in each of these markets.
<unk> sales maintaining sales momentum, we have offered mortgage buyback programs and normalized marketing and incentives.
Our category <unk> markets, which reflect a modest softening in pricing and a slowdown in the markets includes 10 markets.
These include Atlanta, Colorado, Charleston, Myrtle Beach.
So Philadelphia, Virginia, The Bay area Arena, and Salt Lake City and.
In each of these markets traffic has slowed and we have seen an uptick in cancellation rates well inventory is limited in each of these markets. We've had to offer more aggressive financing programs and targeted price reductions to reduce our sales base to keep our sales pace in line with our production schedule.
Electively, reducing the sales price to solve for a mortgage payment networks for our buyers has worked well in these markets. Notwithstanding these price increases net pricing remains higher than year ago period.
Our category three markets, which reflect a more significant market softening and collection includes seven markets.
These include Raleigh, Minnesota, Austin, Los Angeles, with Central Valley, Sacramento in Seattle, I'd like to spend a few minutes discussing these markets and what we're doing strategically from a sales point.
Raleigh was an extremely strong market in the second quarter, but softened significantly at the beginning of June .
This stems from a combination of higher mortgage rates steep price increases over the last few years and some job concerns in the Texas.
We believe pricing pressure will continue until the market with SaaS, and we've been reducing pricing and offering aggressive mortgage finance programs, our pricing adjustments adjustments have started to take hold and sales activity has begun to stabilize.
On a positive note cancellation rates have not been a problem inventory is limited and our net new order pricing is still up on a year over year basis. As a result, we have room for any needed future pricing adjustments.
The Minnesota market has been very challenging.
Buyers have always been conservative in this market and as rates have increased there has been a strong push out against our current pricing.
There is very little immigration in Minnesota, which makes pricing much more challenging because we have a limited pool of only local buyers.
We have reacted with strong price reductions competitive mortgage programs and were solving to a mortgage payment that works, which is starting to rebuild sales.
Boston has been the most impacted market in Texas following back to back years of 40% plus appreciation in bidding more on available inventory.
Higher rates in June and headlines on a stock market decline and the distressed national economy has sideline many buyers who are waiting for a reset in home values.
While inventories limited cancellation rates have increased.
And we've reduced prices in many communities on a home by home basis and have offered extremely competitive as mortgage programs. These pricing adjustments are starting to generate increased sales activity.
Fundamentally Austin is positioned for long term growth with low unemployment high apartment occupancy growth.
Low new home inventory and strong projected drop job growth.
Our communities in Los Angeles Central Valley, Sacramento have experienced a significant slowdown with traffic dropping off considerably in late may and into June .
With a spike in interest rates buyers in these markets have been extremely credit challenged and cancellation rates have increased we've adjusted prices are using financing incentives.
In some cases have included not only solar system, which is part of our home package to rebuild sales.
Net new order prices remain higher than the year ago period, and completed inventory for the most of our has not been a problem issue.
The issue continues to be a reset in pricing to solve to a mortgage payment that works in these markets. This is consistent with what Stuart said in his opening remarks.
Seattle was one of our strongest markets in the country over the last two years.
The market saw strong integration solid job growth and sales prices that grew approximately 20% annually in each of the last few years.
While market fundamentals with limited land supply and low inventory remain extremely strong buyers is pushed back for a reset in pricing.
The higher priced and highly sought after locations around Seattle has seen a significant pullback in sales in may and early June .
This pullback as a result of both continued price appreciation in the first quarter, causing concern over home values being overpriced and stock market corrections, which has had a direct impact on employee stock compensation plans.
We've adjusted prices in some communities Q4 pricing.
And it has seen a sales uptick with its correction, which demonstrates the underlying strength of the market.
Once again in this market we are at prices that are still significantly higher than the year ago period.
I Hope this gives you a better picture of our markets across the country and what we're doing to keep sales activity going the markets remain very fluid and we are making strategic decisions and adjustments every day.
As we said in the past, we're going to keep our homebuilding machine going maintain our start pace and price our homes to market.
I'd like to now turn it over to John .
Thanks, Rick This morning, I'll discuss our land position and give an update on the status of the supply chain I will be brief as I noted that sales and interest rates dominate the interest of our investors.
We're pleased with the excellent progress we continue to make on our land light strategy as evidenced by our controlled homesites percentage increasing to 62% at the end of the second quarter from 50% last year.
We also continued to make progress by reducing the years of supply of owned Homesites to three one years at the end of the second quarter down from three three years last year.
To date, we have worked with our land strategies group, which will become a vertical of criteria to continue to reduce our years of land owned even lower.
Using this strategy, we've cycled some $10 billion of land and land development from controlled as we refined the supply of just in time of home sites to our homebuilding machine.
Our extreme focus on our land lighter model saved us a significant amount of cash spend on land acquisitions during the quarter.
Ended the quarter as noted with $1 3 billion in cash no borrowings under $2 $6 billion revolver and homebuilding debt to capital of 17, 7%.
Stuart noted, we're very well positioned to manage through the changing interest rate environment with our excellent asset.
<unk> position and very strong balance sheet as a foundation for that position.
Turning to the supply chain and it's well documented challenges for the industry. Our second quarter started presenting some favorable news there were still intermittent disruptions and an increase in construction costs, but for the first time since the disruptions began we saw a flattening and cycle time.
Over the past four months cycle time has expanded by only five days, which we believe signals of peak Adil.
Additionally, about 25% of our markets experienced cycle time reductions in the second quarter compared to the first quarter.
Phil challenges that occur, but we are managing them effectively as evidenced not only by this flattening of cycle time, but also by being above the high end of our guidance for second quarter closings.
Our direct construction costs in the second quarter were up one 6% sequentially and 20% year over year, both lower than the comparable increases for the same periods in the first quarter and fourth quarter of 2021.
Rising labor costs accounted for all of the increase in the second quarter material costs were lower due to the lower price lumber from starts in the second half of last year.
We expect costs will rise again in the back half of 2022 as increases in lumber that spike in Q1 will flow through those closings.
The current drop in lumber prices that we're experiencing which started near the end of our second quarter will lower the cost of our starts in the second half of this year and related to deliveries in the first half of 2023.
And I'll now turn it over to Diana.
Thank you John and good morning, everyone. So Stuart Rick and John has provided a great deal of color regarding our homebuilding performance. So therefore, I'm going to spend a few minutes on the results of our other business segments and our balance sheet and then review our thoughts for Q3, so starting with financial services for.
For the second quarter, our financial services team produced a $104 million of operating earnings slightly above the high end of our guidance and then when you look at the details between mortgage and title mortgage operating earnings were $74 million compared to $92 million in the prior year as we've indicated for several quarters.
And as has been greatly documented in the media the mortgage market has become extraordinarily competitive for purchase business as refinance volumes have all been halted and resale inventories have declined as a result secondary margins had been decreasing this was the primary driver for our lower <unk>.
Second quarter earnings.
Title operating earnings were $30 million compared to $24 million in the prior year title earnings increased primarily as a result of higher premiums driven by an increase in average sales price per transaction.
And then turning to Ireland or other segment for the second quarter, our lunar our other segment had an operating loss of $108 million. The loss was primarily the result of non cash mark to market losses on our public company technology investments, which totaled $78 million. The remaining loss was primarily related to.
Other strategic investments in this segment.
As we have mentioned before we are required to mark to market. Many of our technology investments that are publicly traded and that valuation will fluctuate from quarter to quarter. However, we continue to believe that these technology partnerships provide significant operational efficiencies for both our homebuilding and financial services platform.
And greatly improve our homebuyers, expanding and then turning to the balance sheet. As we've mentioned we ended the quarter with $1 3 billion of cash and no borrowings on our revolving credit facility for a total of $3 9 billion of homebuilding liquidity.
And one note regarding our credit facility last month, we successfully amended and extended its facility. We now have almost $2 6 billion of commitments $350 million matures in 2024, and $2 2 billion matures in 2027, we were pleased with the execution, which was greatly.
Enhanced by our investment grade rating.
During the quarter, we as John mentioned, we continue to focus on becoming land lighter as a result at the end of the quarter. We owned 193000 home sites and controlled 319000 home sites for a total of 512000 Homesites. This portfolio of Homesites provides.
With a strong competitive position for continued market share expansion, our homesites controls increased to 62% from 50% in the prior year and our years owned improved to three one years from three three years in the prior year.
Planned transactions may fluctuate quarter to quarter, but progress is made year over year. We are still on track to reach our goal of $2 75 years owned and 65% Homesites controlled by year end.
And we remain committed to our focus on increasing shareholder returns as we mentioned during the quarter, we repurchased four 1 million shares totaling 321 million.
Additionally, we paid dividends totaling $111 million during the quarter. Our next senior note maturity is $575 million, which is due in November of this year and we have no debt maturity due in fiscal 2023.
As a result of all these transactions with our homebuilding debt to total capital of 17, 7%, which improved from 23, 1% in the prior year.
And then just a few more points on our balance sheet and return our stockholders' equity increased to 22 billion. Our book value per share increased to 70 412, our return on inventory was 35% and our return on equity was 21, 4%.
In summary, our balance sheet is strong and positions us well for the future.
With that brief overview I'd like to turn to our thoughts for Q3.
As we mentioned in our press release it is difficult to provide the more targeted guidance that we typically offer given the uncertainty in market conditions.
Alternative Alternatively, we thought it would be more appropriate to provide very broad ranges to give some boundaries to each of the components of our third quarter.
Starting with new orders, we expect Q3, new orders to be in the range of 16000 to 18000 homes, we anticipate our Q3 deliveries to be in the range of 17 to.
To 18500.
Our Q3 average sales price should be slightly higher than our Q2 average sales price, which as a reminder was 483000 <unk>.
<unk> gross margins to be in the range of 28, 5% to 29, 5% and we expect our SG&A to be between 6% and six 5%.
For the combined homebuilding joint venture land sales and other categories, we expect a loss of about $10 million.
And then we anticipate our financial services earnings for Q3 will be in the range of 70% to $75 million as market competition for purchase business continues to increase.
We expect earnings of about $20 million for our multifamily business and total in our other category. We expect a loss of about $20 million. This guidance does not include any potential mark to market adjustments to our technology investments since those adjustments will be determined by the stock prices at the end of our quarter.
We expect our Q3 corporate G&A to be about one 4% of total revenues our charitable foundation contribution will be based on $1000 per home delivered we expect our tax rate to be approximately 24% and the weighted average share count for the quarter should be approximately.
288 million shares so when you put all this together this guidance should produce an EPS range of approximately $4 55 to $5 45.
Sure for the third quarter.
And then turning to the full year as we mentioned, we're maintaining our previous deliveries guidance of approximately 68000 homes for the year.
At this time recognize recognizing that market conditions are fluid, we will not be providing updated guidance for the other components of earnings. We do look forward to updating our thoughts for Q4 on our next earnings call with that let me turn it back to the operator.
Thank you we will now begin the question and answer session of today's conference call. We ask that you limit your questions to one question and a follow up question until all the questions have been answered if you would like to ask a question. Please on mute your phone.
Star one and record your name clearly when prompted.
To withdraw your question you May you start to again that is star one to ask a question and our first question comes from Stephen Kim Evercore ISI. Please go ahead.
Yeah. Thanks, very much guys exciting times I appreciated all the color you gave on the call.
There was a couple of comments you made about incentives and lumber.
And you also gave a range of gas for <unk> gross margins and so I was curious it was a pretty strong <unk> gross margin number.
And I was curious how much of the sequential increase in incentives.
Is envisioned in that guidance I think you said incentives are running at one 6% in may so I'm kind of queuing off of that and then also how much of a headwind in luck from lumber.
Because I think John mentioned that there was going to be some of that so in both cases I'm talking sequentially from what you experienced in Q2.
Hey, Stephen it's John .
But relative to incentives.
I know there is still relatively low.
As Rick mentioned with coconut one 6%.
What we're seeing in today's market.
Some of those markets as they continue to adjust it might be a little bit more.
Lumber.
Flowing through our numbers and is already in our backlog, which gives us comfort.
So our guide on gross margins is about.
$6 square foot increase from workforce starts earlier in the year. So we have good visibility to exactly what that is.
Let me just add to that Steve most of what Youre seeing flowing through our third quarter is already in backlog. So it's not just lumber thats in backlog. It's also many of the incentives there will be some cancellations in some rotation through and so we will see some movement through the quarter and as we know that given the.
The changing environment, it's going to be hard to say, what actually the numbers are going to round out to be theres going to be some averaging just remember that on the third quarter, we have a pretty good.
Sense of visibility.
Given the fact that a lot of our backlog is focused on the third quarter.
Yes, that's a that's a fair point and I saw I guess.
Regards to that I was curious as to the exposure to cancellations you know a lot of the builders will all the builders really except you guys are sort of providing your documents you know how much earnest money deposits they collect from the customers as a percentage.
We look at that as a percentage of the SP I was curious if you could talk about that and.
And.
The other part of my question relates to the single family rental business because Rick when you were going through all your markets. It was interesting you didnt really talk much about rents, but obviously, that's an important part of the equation.
I know that the single family rental appetite to acquire units have been really strong but people are talking about whether that bids going to disappear in the current environment.
And I was wondering if you could just sort of talk about the ability of you of your company to actually benefit. Unlike in cycles past from some of the rising rates pushing business into the rental arena.
So first let me address the question on backlog and deposits.
One of the things that.
Mortgage companies.
It really attack and lock, our Q3 and Q4 backlog.
At a very concentrated effort to make sure that people have mortgages in place so that when closing comes up they're good to go.
Not just mortgages in place with interest rate swaps interest rate swaps.
Okay.
And what was the back part of that question Steve.
It was referring to the single family rental.
Tight for newly built homes.
So let me say Steve that.
The entire rental market is interesting right now.
We've talked a lot over the quarters about housing shortage.
Is that even as interest rates go up people still need a place to live household formation remains strong.
I know you've covered a lot of these dynamics and at the end of the day, where we're probably going to push more people from homeownership towards rental.
<unk> multifamily traditional multifamily as well as single family for rent.
And I think there is theres going to be some dynamic shifting that moves around in all of these areas.
To the extent that we move more people out of home ownership and towards rental it increases the demand for an already supply constrained component of the market. That's the rental market, both <unk> and <unk>.
And traditional rentals if.
If you look at rental rates and where they have been moving over the past year, both on the traditional rentals and the multiple of the single family for rent you've seen pretty aggressive movement upward in rental rates that is a function of limited supply.
And.
Growing demand.
So how this is going to play out as part of what we point to as some of the confusion.
For some of the question marks that sit out there over the next quarters as the market reconciles to our new interest rate environment rental rates that are moving and shifting and even the SSR buyers.
Are going to have to rethink what their model looks like they have higher interest rates in their capital stack, but they also are getting higher rental rates.
From their customers. So we're going to have to see how that plays out.
And as I said in my comments.
John and Stuart and I are making daily adjustments in pricing to make sure that we maintain momentum and dose adjustments incorporate what's going on with rents in the single family communities in the investment.
Great. Thanks for your question.
Thank you. Our next question comes from Buck Horne from Raymond James. Please go ahead.
Hey, good morning, Thanks for the time.
Wanted to talk a little bit about the pace of starts that you maintained through the second quarter.
Interesting that the starts pace was still well ahead of the absorption pace.
Even as mortgage rates were consistently rising through the quarter was that a function of that.
Quality of the traffic you are seeing or that the buyers that you saw.
Coming in the front door in terms of their.
Ability to purchase or was there.
Some larger thinking in terms of maintaining the starts pace at that elevated the run rate.
No.
I think we've noted before our start pace is primarily a function of an orderly program of building and delivering homes on a recurring basis.
Our stock price our start pace has been more constrained by the availability of permits and people to actually generate the entitlements and permits.
That are.
It required in order to start a home and so youll see some variability in our starts.
As we look ahead to our third quarter, we actually see some modest pullback just because.
The difficulty in getting permits out.
I've said in my comments and I'll say again.
We've been looking at over the past years.
Supply.
Limited supply of housing across the country and while the country goes through.
The interest rate and sales price kind of reconciliation or rebalancing, we're going to continue an orderly start program.
Even as demand moves up and down we will adjust pricing in order to get.
The appropriate amount amount of deliveries into the system to make up some of the workforce efficiencies that exist in most major markets.
So we've said over the past year is that we really match our sales to our start pace versus the other way around or to maintain that orderly disciplined that George described we feel that gives us much better control of our cost inputs.
It keeps your machine very efficiently.
Things of that is behind the numbers is that we've been we strategically have as we've done in the last several quarters sold our homes later in the construction cycle, which works very effectively in this market because our buyers want to lock their loan.
Closer to the time that they're going.
Going to be closing on the home.
And as a result.
We've limited pre sales are early sales.
Which makes the start pace.
A little bit higher than the sales space.
Got it very helpful. Thank you for all that.
And following up a little bit on the.
Kind of the way the pricing adjustment process works, how youre managing through that.
It sounds like as.
We talked with investors, there's still a lot of concern about potential.
Land impairment risks with falling prices from here.
But.
As you worked through this it sounds like all the pricing that you are still looking at is higher on a year over year basis.
Are there instances, where youre pricing adjustments are reducing base prices below what the backlog customers might have already paid.
Yeah.
And I think it's important to recognize we have virtually no land impairment risk.
In our backlog our margins remain healthy.
We remain focused on recognizing that prices are going to move around a little bit we'll continue to build efficiencies in the way that we create value for our customers.
<unk>.
But our land acquisition model and our land acquisition program has been rock solid and I think.
The market is going to have to fall an awful lot for us to start talking about impairments once again.
That's a throwback to the.
Last financial crisis and.
We just don't.
We have a lot of room in margin.
We have a lot of adaptability and our program.
Long way before we start thinking about impairments also very different from last cycle as I mentioned in my comments. Our land strategy is focus has been on really positioning land.
Control position and structures can.
Adjust to a changing market environment, which really gives us further installation from the potential of impairments.
The other thing that we've seen with regards to backlog is to the extent in many markets that someone cancels out we have a replacement buyer because there is such limited available inventory thats ready to close on.
That's all very helpful. That's perfect perfectly answer guys. Thanks for that.
Additional color.
Beth.
Thank you. Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions. Good morning.
Just wanted to follow up maybe incentives were I believe 1.6% when I'm thinking through the the midpoint of your third quarter orders, Gus kind of 4% to 5% year over year.
Pretty healthy in the market I think right now just what sort of incentives or pricing adjustments do you think are needed in the upcoming quarter kind of sequentially to to.
To hit that metric and then also when youre thinking across the three buckets of markets.
That you mentioned.
Are there any structural items.
Reasons no impact bucket.
Might not move closer to the second or third tier.
So first I'd say that.
Dallas is that Rick spoke about in the store, we're going to focus on daily as a community by community analysis. So you.
We got to first understand that it's very varied from from each community. So even when we speak of a market. That's a broad overview within that market will have some communities that are still performing very well and some that need the assistance with incentives or mortgage rate for items that were described.
And as we said, it's very hard to look forward is there is this rebalancing between price and interest rates that drove exactly one incentive will be muted and thats why its a regular focus on a community by community analysis.
As I said in my opening remarks.
Our incentives historically run much higher than the $1 six level as we look forward, there's probably another 0.1% that has been factored into our go forward look with regard to incentives.
And as John said that that could be zero percent in some markets and a little bit higher than others, yes.
I would even say don't let the 1% via a boundary of limitation I think the fact is.
Yeah.
Right now hearing from a group that has that is looking at these numbers real time on a market by market basis.
And it is changing and evolving in a variety of markets that tipping point from a tier one to tier two or three market as Rick properly.
Bribe them.
Sure.
As a matter of timing.
And it's a matter of.
Supply within that market and the confidence level, that's embedded in that market very hard to anticipate and you don't really get a warning sign before you see it.
So you're really hearing.
Youre seeing the picture kind of like a balance sheet snapshot of where we are today or tomorrow. It could move a little bit one way or the other.
Yes, yes, I know.
Understood and clearly you all are.
Maintaining elevated absorptions to drive returns but.
Next question on on your shift in your land Bank has been pretty dramatic over the past several years.
<unk> controlled lots are now up to 62% this quarter.
I'm trying to understand whether there's been any shifts in the land market. The past couple of months from either your land developers or land bank partners willingness to option deals change in terms of competition et cetera.
By year end is that kind of 65% metric maybe kind of cap the cycle.
Just like for US. This is all happening in real time that same evaluation.
No happens with our relationships, but to date there has been.
Willingness to proceed.
To acquire assets are appropriately underwritten.
I think as we sit here knowing what we know now we have a good feel confidence that we will be able to get to that 65% target.
But like with everything would have to see how things evolve where the market goes to.
We have a couple of strategies embedded in our land program.
First of all we have some really.
Comprehensive relationships with some of the land developers I think we've moved in sync.
And everybody understands that sometimes are markets move up we all make money together, sometimes markets move down we all shift and adjust to market conditions.
I think thats not a difference in the land development World, It's exactly the way that we've constructed our land development World. Additionally, Jon properly pointed out that our land strategy component of our core Tara ultimately asset management business is a really important structural change for the company we've built.
In <unk>.
Elasticity in that in that program.
Really to be able to act as a shock absorber as we go through the ups and downs of market conditions.
And I think it's one of the more important structural changes that will provide stability for our land programming as we go through the years and so this is something that we've been focusing one anticipating gyrations.
Generations of movements in the.
Homebuilding World and building land strategies that are flexible for times just like these.
Perfect. Thank you for your time.
Thank you. Our next question comes from Alan Ratner from Zelman <unk> Associates. Please go ahead.
Hey, guys. Good morning, Thanks for all the detail I appreciate it.
Your first question I guess really helpful kind of buckets those markets. There in terms of the ones that youre seeing maybe more of an impact versus others.
I'm curious in the.
With the seven where are you you have been more aggressive on incentivizing and reducing prices are you able to quantify what the margin impact from all of those various actions you've taken is on the orders you have placed in June vis vis what maybe deliveries where orders were earlier in the year I'm just trying to figure out kind of men.
And all the tools, you're pulling but it's hard to tell exactly what the margin impact might be.
In those various buckets at this point.
Okay.
It's why we've we've.
Given broad boundaries set of guidance.
We don't want to guess because there are a lot of moving parts a lot of them.
The obvious ones like lumber prices and realtor costs.
Variety of things that.
That that we can put our finger on but then there is also operating leverage and where ASP is going to go in a variety of things. We know that we are trying to aim for a moving target and that target is moving.
In ways that we can't always anticipate so the answer to your questions, we're not quite sure yet.
We've tried to give some boundaries as to what we see coming up in the third quarter and we're going to address the fourth quarter as we get closer to it and see what that landscape looks like Allen.
To get more granular than that.
Would be a series of guesses, but I don't think brings any of us closer to something that's actionable.
Okay I appreciate it that's all right I know.
Yes, certainly a moving target here.
Second.
Congrats on the end of the land strategy shift in the execution, there getting the option share higher.
I guess just from a bigger picture standpoint, when you think about the land market and you think about your land portfolio.
A lot count is up about 70% over the last two years.
Growth has come entirely through option deals.
<unk> pieces.
Trunk a bit your closings this year youre going to be up about 25% over that two year time period, and you are talking about wanting to maintain a start pace. So even if we.
I kind of assume that through this choppy period here youre able to maintain volume.
It doesn't seem to me at least that there is a real reason why you would need 70% more lots under control and recognizing a lot of that is off balance sheet. There is still a fair amount of capital tying up that land.
Which is on your balance sheet.
Presumably when.
You kind of move forward on deciding whether to take down these deals.
Youre going to have to make that decision. So how are you thinking about tying up incremental land today have you slowed the pace of acquisitions and does it make sense at this point to maybe walk away from some of those deals if the market at best is maybe more flattish from a volume standpoint for the for the near term or intermediate term.
Well look Alan I think you know you've been around us in the business for a long time land is the most complicated and difficult part of the strategic composition of a homebuilder.
And we have spent.
Lamar has spent tremendous hours thinking about land strategies and how we can have how do we create greater visibility to our future without greater risk to our balance sheet.
That has very much been the balance that we've migrated over these last few years, it's what we're most enthusiastic about as it relates.
Two.
Our land strategy is vertical and portera.
The ability to tie up more land to.
To give us more visibility, but to do it in ways, where we have maximum flexibility the ability to as you say if the market changes in dramatic fashion. We can we can pull back or renegotiate or reposition some of the longer dated strategies. The shorter dated strategies are.
To be more durable and we will be able to just build through so what we've done is we've trifurcate into our thinking around land into short medium and long term buckets.
And and we have carefully crafted flexible programs. So that we can enhance our visibility and reduce the risk the balance sheet and enhance flexibility in doing so and I think thats, what youre seeing involved with our company.
Look at our balance sheet today. It is as it is as strong as it's ever it's stronger than it's ever been.
And the visibility to land only benefits our future.
Great Alright, thanks, a lot.
Thank you. Our next question comes from Mike Rehaut from Jpmorgan. Please go ahead.
Thanks, Good morning, and thanks for taking my questions.
I wanted to just circle back.
Also to the buckets of the different markets and appreciate all that detail it's extremely helpful.
What does it get a sense of in the second and third buckets.
Yeah.
Okay.
As a percent of sales perhaps.
What have those price adjustments been.
And or if we could talk about it perhaps on a net pricing basis inclusive.
Of incentives.
And you know.
Is it fair to anticipate that those adjustments would flow through into the fourth quarter.
Well as I said in my remarks.
We're adjusting pricing on a home by home basis and.
And many of these markets net pricing our gross pricing is 40% to 50%.
Over the year ago period.
So it takes relatively modest price adjustments to move the needle in order to spur some activity in these markets.
What buyers are really focused on right now is just sticker shock theres been a an increase in mortgage rates and that combined with the economic headwinds and people. Just are concerned are they making the right decision at this point in time reality is that that market said very limited inventory, we're seeing rent.
And all of these markets.
There are really just trying to make sure that they don't feel that.
When they talk to their neighbors that they are the Denmark pool.
People are working through the process they understand that values have adjusted and in the overall mix of what the composition of our company as a global margin basis.
These are very small percentage changes and what you've seen is a factoring those into the go forward guidance just one point of clarification as Rick had mentioned earlier the combination of.
Mortgage rate.
Systems in form of buy downs forward commitments arms combined.
Combined with some price adjustments.
The mortgage component, but there is a very important component as you deal with as Stuart mentioned earlier people by monthly payments. So we really most of the markets in the second two buckets you don't see much in the way of price adjustments versus a combination of mortgage rate help with a smaller price adjustment.
I just want to.
Correct My partner, Rick and just say Zellmer pool was a little severe.
Greater pool was a little bit.
No.
Okay.
Go ahead Mike.
I appreciate that.
And just for clarity also.
Some of those mortgage rate.
Either adjustments or areas of help.
B.
And that would also flow through the <unk>.
Cost of goods sold or impact the gross margin as opposed to the financial services line just wanted to make sure we understood that.
But my second question is also kind of shifts to the core Tara.
Spin by the end of the year and just.
You said that you would expect to $5 billion of assets to come off our balance sheet. If you could give us any sense of what the total amount of <unk>.
Either.
Any additional detail around portera itself in terms of.
Total assets under management.
And obviously you have the different businesses any type of review or update.
It would be helpful. There.
So we're not giving regular updates on core characters yet.
I don't want to get locked in that bucket, but I think we've given some boundaries in our past calls as to assets under management.
Relative to quarter I don't want to give you a number right now I don't have it at my fingertips.
But what I did say is an additional $2 $5 billion over overtime I think John day lighted some of the migration of some of our land assets.
Our loan strategies program, but we've really seen that.
A lot of assets come off our balance sheet already relative to our core verticals and the way they have developed over the past couple of years.
I think as we move forward, we're going to continue to see our land strategies program really.
We continue to develop.
And that will benefit <unk> it will also benefit.
Sure.
But the $2 5 billion that is delighted is additional to the dollars that have already been.
That is already migrated from one of our balance sheet too to.
To the core Tara.
Private equity components.
And Mike what was the first part of your second question.
No. It was just a clarification or follow up Peter the answer to my first question on <unk>.
Mortgage.
Mortgage buy downs or adjustments.
Or do they have different components.
Where that flows through on the income statement, if it's the financial services or its cost of regular gross bookings.
Cost of sales line.
Okay perfect. Thank you so much.
Hey, you bet why don't we take one more question.
Thank you our last question comes from Susan Mcclary from Goldman Sachs. Please go ahead.
Good morning. Thank you good morning, everyone or good afternoon I guess.
Afternoon.
My first question is you commented that you had seen some relative improvement in the supply chain and it feels like we are maybe at or coming off of the peak. There can you give a bit more color in terms of what youre seeing on that side and obviously as the demand does shift and moderate a bit how youre thinking of the further improvement that can.
Come through there.
Relative to the second part of your question as always there is a lag between any shift in market and a shift in.
What's going through in terms of construction volume as the construction trades through the supply chain build through the backlog.
Under construction.
Relative to what we're seeing as I said in my comments Theres still disruptions, but both we and our suppliers are much better positioned today, everyone has learned a lot over the last two years and are able to respond very quickly to solving problems were.
The earlier parts of the pandemic and those options it sometimes could take months to solve problems that are now being resolved in days.
The two areas, where there is so ongoing shortages as really an electrical equipment in blackstock.
But even those were close.
<unk> with our trade partners that supply that they've got all the visibility in terms of what our needs are for the coming quarters.
It's very close working relationship.
The resolution of supply chain issues is not so much of the supply chain has gotten easier.
We've figured out and worked hard to manage it better we have the residual impact of the fact that our cycle time still remains a sticky.
Kind of larger version of itself. So it's still taking us longer to produce the home which is inefficient.
Riveted supply chain management.
Okay. That's helpful color.
My follow up question is when you do think about balance sheet and uses of cash in general you noted that you did buyback some stock in the second quarter, if things do moderate but you continue to pursue your strategy around land and the spin of core Tara and all these other.
Efforts that <unk> been working on how do you think of uses of cash and especially maybe shareholder returns in a more moderate housing environment.
Well.
Yes.
Here's the positive thing about whats happened is over the past years.
We've had terrific prosperity and we've used those moments not to sit back on our laurels, but instead to really focus on enhancing our business model.
We've refined the cost of operation.
Focus on cash generation, we built models that limited inventory and limit the exposure to lend on our balance sheet and enables us to generate a tremendous amount of cash.
We expect to continue to thank very much the same way as we go forward that we're going to be.
Positioning our company.
With.
Land visibility that enables us to continue.
Continue to build our business in an orderly fashion, we expect to continue to pay down debt. We expect to continue to Opportunistically buy back stock and we have the capital and the balance sheet to be able to do that even while we're spending $2 $5 billion of additional capital from core to arrow.
So with <unk>. So I think that we are in an enviable position of strength. We said so at the end of our press release and in my comments.
And that position of strength at times like this is a great way to be positioned and to deal with the market condition.
So I think thats a good.
Off road good time, two to wrap up let me say that we as a group as a management group are happy to have our partner Rick back in the in the fold after his belt with.
Covid last week, he was manned down for a few days, but the company was still able to operate without losing a step but now we're at full strength and we look forward to reporting back at the end of the third quarter, hopefully with a bit more certainty. Thank you everyone.
That concludes today's conference. Thank you for participating you may now disconnect. Your line and please enjoy the rest of your day.