Q2 2022 MDC Holdings Inc Earnings Call
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Welcome to M D C holdings, 2022nd quarter Conference call.
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I would now like to turn the conference over to Darin, Kimberly Vice President corporate controller. Please go.
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Good morning, ladies and gentlemen, and welcome to M. D. C Holdings 2022 second quarter earnings Conference call.
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 information on how to access the replay please visit our website at M. D C Holdings dotcom.
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 second 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.
And now I will turn the call over to Mr. Mizel for his opening remarks.
Thank you for joining us today as we go over our results for the second quarter of 2022.
Provide an update on current business conditions and discuss the outlook for our company.
M D C. We reported earnings of $2.59 per diluted share in the second quarter of 'twenty 'twenty.
Representing a 23% increase.
Second quarter 2021.
Sales gross margin for the quarter improved.
370 basis points year over year.
26.8%.
New home deliveries and average sales price came in at the high end of our previously stated guidance for the quarter.
As our team did an excellent job overcoming construction delay and.
And delivering homes in what has become a more difficult operating environment.
We also ended the quarter with a solid backlog worth over $4.4 billion, putting us in a great position to continue to deliver strong revenues and operating profits as we enter the back half of 2022.
We are extremely pleased with our financial and operating results for the second quarter. Our order results fell short of our expectations.
Beginning around mid May.
We began to see a slowdown in traffic and order activity, which became more pronounced as the quarter progressed.
In addition, our net order results were negatively impacted.
And increase in cancellations as a higher number of buyers in backlog, where either unwilling or unable to move forward with their purchase.
We believe the negative shift in buyer sentiment was a natural reaction to the macro headwinds that have become increasingly difficult for buyers to overcome in the quarter, including a sharp rise in mortgage rates surge.
Junior inflation, and then overall uncertainty surrounding the health of our economy.
Our sense is that these demand headwinds will persist for at least the remainder of the year.
Which will likely put a damper on our order results as both buyers and the homebuilders adjust to this new reality.
Despite these near term challenges, we remain confident in the long term outlook for our industry and our company. We believe the demand drivers that propel our industry over the last few years continue to exist in.
Including a large population the millennials entering their prime home buying years baby boomers relocating to adjust their lifestyles and migration trends from high to low cost areas of the country.
In addition.
While we have seen a recent increase in new and existing home inventories they remain both well below historic levels well rent.
In many markets continue to rise.
M D C is well positioned to benefit from the industry trends over the long term.
Thanks to our affordable product focus and our geographic exposure.
Our homebuilding operations are in some of the most attractive homebuilding markets in the country with favorable job to permit ratios strong employment bases and rising incomes. We have spent the last several years retooling, our new home offerings.
To address affordability concerns in our markets and to target a broader pool of buyers.
These homes are in well located areas of the market and features some of the quality and craftsmanship at Richmond American homes are known for but it's scaled down footprint and price point, well know builder is immune to the broader market forces.
Currently affect our industry, we believe that they can the right where it gets the right type of product will lead to better results over the long term and gives us a distinct advantage over many of our competitors.
Another advantage our company has.
Is the well capitalized nature of our balance sheet.
Which allows us to operate from a position of strength during this period of uncertainty.
Entered the quarter with a debt to capital ratio of 34% and the net debt to capital ratio of 24%. The total liquidity stood at 1.74 billion at the end of the quarter with $590 million in cash and cash.
Equivalence and 1.14 billion available.
Under our unsecured revolving credit facility.
With a low leverage profile and ample liquidity, we are well positioned given the current level of market uncertainty and could potentially take advantage of.
T J opportunities should they arise.
We've always run our company to be successful through the entirety of the housing cycle.
Not just in the good times. This means we stay disciplined in our acquisition of new land deals.
Here are a build to order business model and limit the amount of speculative inventory in our communities well. This discipline may curtail some of the upside during the market peaks it limits our exposure during the market trough it allows us to pay in it.
Industry, leading give it and that's $2 per share on an annualized basis, which equates to a 5.5% odd.
Based on recent price levels, we believe these attributes along with the strength of our balance sheet.
And the experience of our seasoned management team.
Factors long term investors should consider when you're evaluating an investment in the homebuilding space.
With that I'd like to turn the call over to David.
We will provide more detail on our operational performance this quarter.
Thank you Larry and thanks to everyone for joining us on the call today.
The second quarter of 2022 was marked by great execution and strong profitability across our homebuilding platform.
As well as by a slowdown in order activity, which was fairly widespread.
New home deliveries came in at 2536 for the quarter, which was 7% lower than last year's total.
But above the midpoint of our previously stated guidance.
The supply chain environment continues to be challenged as our company wide cycle time increased by five days on a sequential basis.
However, we are starting to see some improvement of the availability of labor and trades.
Particularly on the front end of the construction process, which hopefully will provide some relief.
Our home sales gross margin approached 27% in the quarter as we have been able to keep price increases I had a rising input cost over the last several quarters.
Each of our homebuilding regions posted gross margins in excess of 25% higher.
Highlighting the broad based nature of our pricing power.
Divisions with the highest gross profit profile include the Phoenix, and Southern California, and Riverside, California.
As Larry mentioned, we began experiencing a slowdown in order activity starting around mid may.
Which carried out then into June resulting in an absorption pace of 2.3 for the quarter.
On a regional basis, the east posted an absorption pace of 2.6.
The West 2.4 in the Mountain region 1.8.
Buying activity has been fairly resilient through the first quarter and into April .
However, the combination of higher interest rates and lower consumer confidence began to take a negative toll on homebuyer sentiment during the quarter.
This also led to an increase in cancellations.
Which further impacted our net order results.
It should be noted that some of the cancellations were a result of proactive efforts to confirm that homebuyers in backlog that were scheduled to close in the coming months would be able to do so.
We believe the quality of our backlog is in a much better place as a result of these actions and feel good about the revenue and profits we expect to generate from these closings.
While we are disappointed with the net order results for the quarter. We believe we are in a good position to adjust our sales efforts and adapt to the new reality.
We have very little standing inventory at the end of the quarter, there would be susceptible to heavy discounting thanks to our build to order business model.
We also have several incentive tools at our disposal.
Particularly as it relates to financing and lowering a buyer's monthly payments.
Which should offset some impact of a higher mortgage rate.
Fortunately, our gross profit margin profile gives us the ability to be more focused on our sales efforts and still post healthy profits.
Given these positives along with the natural advantage that comes with having product in well located communities. We feel good about our ability to adapt to the new market environment.
Now I'd like to turn it over to Bob who will provide more detail on the results for the quarter.
Thanks, David and good morning, everyone.
During the second quarter, we generated net income of $189 $5 million.
Our $2.59 per diluted share.
Representing a 23% increase from the second quarter of 2021.
Pretax income from our homebuilding operations increased $52 $8 million or 28% from the second quarter of 2000 $21 million to $243 million.
This increase was driven by our gross margin from home sales, which improved by 370 basis points to 26, 8%.
As well as home sale revenues, which rose 6% year over year to one point for a $5 billion.
Our financial services pretax income increased slightly during the second quarter of 2022 to $18 $7 million.
This increase was primarily due to our insurance operations, which benefited from increased premium revenue within our captive insurance companies.
While our mortgage operation continued to be impacted by increased competition in the primary mortgage market. It did benefit from an increase in interest rate lock commitments with many homebuyers electing to take advantage of long term lock opportunities and interest rate buy down programs. The.
The accounting treatment for these rate lock commitments had a favorable pull forward effect on pretax income in the quarter.
Our tax rate increased from 24, 9% to 26, 8% for the 2022 second quarter.
The increase in rate was primarily due to the 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 2536 homes during the quarter, which represented a 7% decrease year over year, but exceeded the midpoint of our previously estimated range for the quarter of 2400 2600 closings.
The average selling price of homes delivered during the quarter increased 14% to about $572000.
This was primarily the result of price increases implemented over the past two years and was partially offset by a shift in the mix of our closings during the quarter from California to Florida.
Our backlog conversion rate remained well below historical norms as our average sale to close cycle time reached nearly 10 months for those homes that closed in the second quarter.
While we continued to reflect current labor and supply chain conditions in our delivery productions deliveries in the second half of the year should benefit from the construction status of homes currently in backlog at 62% were beyond the frame stage of construction at the end of the second quarter compared with just 40% in the prior year.
We currently anticipate home deliveries for the 2022 third quarter of between 2200 2500 units. We expect the average selling price of these units to be between 580005 hundred $90000.
There is a heightened risk of underperformance relative to our forecast this quarter due to the increased volatility of economic and industry conditions.
Also because of the increased volatility note that we are not reaffirming our full year deliveries guidance at this time, but we did have enough backlog units under construction as of the end of the second quarter to meet the range of deliveries we shared last quarter.
Gross margin from home sales improved by 370 basis points year over year to 26, 8%.
We experienced improved gross margin from home sales across each of our segments with our east and west segments, having the largest Europe year increased these improvements were driven by price increases implemented across nearly all of our communities. During the second half of 2021 and the first quarter of 2022, which have been partially offset by increased build of material and labor costs.
While the gross margin of homes in backlog remains healthy.
They have decreased slightly from their peak earlier this year as a result of higher lumber costs and an uptick in sales incentives.
As a result, we are currently expecting gross margin from home sales for the 2022 third quarter of between 24, 5% and 25, 5%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2022 second quarter increased $5 million from the 2021 second quarter, driven by increased general and administrative expenses.
Our SG&A expense as a percentage of home sale revenues decreased 20 basis points year over year to nine 2% as we continued to drive improved overall operating leverage.
General and administrative expenses increased $10 $9 million from the prior year quarter to $72 $9 million. This increase primarily resulted from an increase in salary related expenses due to higher average head count as well as increased stock based and deferred compensation accruals.
We currently estimate that our general administrative expenses for the third quarter of 2022 will be approximately $75 million.
Our marketing and commission expenses, both decreased year over year, resulting in a 70 basis point improvement in these costs as a percentage of home sale revenues.
Marketing expenses are likely to trend higher in coming quarters. As we continue to open new communities and increased our marketing spend in an effort to drive more traffic to our sales centers.
The dollar value of our net orders decreased 40% year over year to $882 $1 million due to a 48% decrease in unit, which was slightly offset by a 16% increase in our average selling price to $628000.
Our gross absorption pace during the quarter was $3 seven homes per community per month, which represented a 32% decrease year over year.
Well, we don't like to see a year over year decrease keep in mind that the slowdown occurred against the backdrop of both higher borrowing rates and a nearly 10% increase in our home prices from the beginning of the first quarter to the beginning of the second quarter.
We continue to closely monitor pricing and incentives on a community by community basis, and make adjustments where necessary.
Cancellations as a percentage of beginning backlog increased from five 7% in the second quarter of 2021 to.
297% in the second quarter of 2022, while this increase seems large in the context of the prior year, our historical quarterly cancellation rates prior to the pandemic were consistently above 10%.
We saw incentives on new orders increased during the quarter from the historically low levels of the past two years. In addition, we utilized rate lock in interest rate buy down programs during the quarter to address affordability concerns and we'll continue to use these tools to help drive orders and strength in backlog in the near term.
Our active subdivision count was at 207 to end the quarter up 11% from 187 a year ago.
This increase was driven entirely by our west segment with our eastern mountain segments, both experiencing year over year decreases.
Our Nevada, and California markets saw the largest year over year increase in community count, adding a total of 22 net new active communities.
We expect our active community count to continue to increase through the remainder of the year and we continue to forecast double digit percentage growth interactive community Count from December 31, 2021 to December 31 2022.
Due to the market uncertainty we have discussed at length. During this call we slowed our pace of land activity during the quarter as we approved just 607 lots for acquisition during the second quarter of 2022.
We acquired 1763 lots during the quarter, mostly in April resulting in total land acquisition spend of $159 million down 48% from $308 million in the 2021 second quarter.
We also added $151 million of land development spend during the 2022 second quarter up modestly from $130 million in the same quarter last year.
We incurred $15 $5 million of project abandonment charges during the quarter as we decided not to move forward with a number of projects at various stages of due diligence given the current level of industry uncertainty.
As a result of stepping away from these projects, we saw our controlled lot supply decreased 4% year over year to 33130 lives. However, we believe the supply is still sufficient to meet our operating needs for several years consistent with our philosophy of maintaining a two to three year supply of land.
As of quarter end, we had $40 $9 million in cash deposits and $11 million in letters of credit at risk associated with the 7296 lots currently under option.
As Larry highlighted we ended the quarter in a strong financial position with total liquidity of $1 $7 billion and no senior note maturities until 2030.
Well, we did see increase in our overall speculative inventory as a result of cancellation activity during the quarter.
We ended the period with only 46 completed unsold homes.
With slower land acquisition activity this year.
We saw operating cash flow jumped to $171 million for the first six months of 2022 as compared with only $12 million for the first six months of 2021.
Our financial position and cash flow will remain a key focus for us, especially.
Especially as the economic picture remains unclear.
Uncertainty in the market persists, we believe there may be an opportunity to pursue new acquisition opportunities with better terms and or better pricing than it has been recently available.
In summary, we are pleased with our results for the first half of 2022 and believe that our homes currently in backlog position us to deliver strong home sell revenues and operating profits in the second half of the year.
While we are likely to continue to experience headwinds given the rapid rise in interest rates and other market uncertainties are strong balance sheet seasoned leadership and disciplined approach to operating the business will allow us to continue to successfully navigate market challenges as they arise.
That concludes our prepared remarks, we will now open up the line for questions.
Thank you well now begin the question and answer session.
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Today's first question comes from Stephen Kim with Evercore ISI. Please go ahead.
Yeah. Thanks, very much guys I appreciate all the color and detail. Our first question I had was related to the cancellations.
Obviously, it was you know a little bit high as you said as you pointed out at you said some of this was due to your cleaning the backlog basically you know all of a sudden on your part I was wondering if you could sort of maybe quantify that also maybe give us a sense for the vintage of the cancellations you know what what one where those contracts initially signed generally if there was something to say there.
And we calculated your Ernest deposits as a percentage of sales price of about 2% last quarter was kind of on the low side relative to your peers and I was wondering if there was any plans to increase the amount of earnest money that you collect from your buyers are and if not maybe why not.
Steve This is Dave good morning.
I'll answer a couple of questions.
Think we pretty much have decided that.
In addition to the 2% earnest money will also take additional earnest money.
Our gallery for sub analysis and.
Bob can talk about that and two I think what we said.
As with all this uncertainty what we did is we went through our entire backlog and said hey, if somebody if we have.
Got somebody does.
It's on the edge or maybe you won't go forward, let's figure out how to you know.
Cancel them or figure out how to put them in a loan program but.
We were very proactive on our entire balance sheet and in addition to that we wanted to make sure that we had a lot of these people that were locked in with with our mortgage program.
Either on a current lock or with the extended lock and so we were very proactive to make sure that if we had cash then we can move them over to us back in and sell them.
Bob can probably tell you a little bit more about Adrian.
So I think the majority of our cancellations were for homes that are sold within three months. Prior so pretty early in the construction phases. There were some that went out further than that but.
But mostly closer to the point of sale.
Within 90 days.
And it makes sense that we would have.
Some fallout as some consumers came in.
And yes, a February March.
Which were really good months for us sales wise and then just saw a big shift.
And rates you know I think it was important that we went through the backlog extra carefully and made sure that there weren't consumers in there who who didn't really have.
A good chance of ultimately closing, we don't want to be building houses for those consumers, who would rather just deal with it now and you know we always go through our backlog and make sure it's clean, but again, especially important when rates are changing.
So significantly.
I don't I don't have a specific number I guess you took.
To quantify for you that that relates to the kind of extra cleaning of the backlog I think it's just a part of our normal process and obviously cancellation rates are higher because of the shift in rates.
So far in July it looks like we're going to have a little bit lower.
Cancellations overall than than June , but that's only one month overall july's is looking.
A lot like June did.
Okay. Yeah. That's that's helpful and thanks for that color on July 2nd question related to the land options.
Notice that you walked away from a bunch and you talked about your option count I believe it's like a little less than half a year's worth of by our calculation.
Wanted to ask why you decided to walk away from so many as opposed to renegotiate terms because it would seem that you would walk away if you anticipate that land.
Prices effectively that you can lock in with your options would drop a relatively soon but you know our understanding into the landmark it tends to be kind of sticky you know it takes a while for land.
Land sellers will generally just renegotiate terms as opposed to cutting the price and that process. If it takes a while what's curious why are you why you opted to walk away at this point instead of just extending the terms and then maybe walking away later, if things don't Pan out could you just sort of talk us through your I think your thought process there.
Yeah, Steve It's Dave again.
What we did is we went.
Through every transaction and we looked at.
Where it was where it was in the market and one of the things that we've seen is that I think at this point a lot of the sellers were maybe a little more.
And flexible on that.
Negotiating.
Either extensions or a reduction in price.
And what we've seen.
Over the last 40 years is.
When these things happen you know prices have a tendency to go down and talking to a lot of the land sellers, but now we're seeing that prices are going to go down certainly terms you can get softer. So we decided the most prudent thing for us to do today was the objective.
Let's look at the ones, we have and say, we really don't want to do these do.
Do the.
Reduction in given the earnest money or due diligence cost and just move forward and find some some other deals where at some point, we'll renegotiate with these current sellers, but what do you have to add to that.
I think there are some instances.
We're lots got pushed out there were some renegotiation on uncertain deals, but there's others, where we had to make a decision.
In Q3 of the takedown was coming in and like you said on the stickiness factor.
So we're kind of at the front end of the rate increase so you know not all of our sellers solves the same way in terms of.
Trajectory.
Of of lot prices.
Or or deal flow so.
So we made some decisions and I think as David indicated.
I think we'll see more capitulation in coming quarters on on pricing in terms of potentially.
Got it that was really helpful. I mean would it be fair to just say that because your overall land holdings are rather lean to begin with that most of what you would have an options might be you know subject to more immediate take down terms and maybe some other builders and so that's why it you know you guys maybe more than others.
You know reacted the way you did whereas if you had a lot of land, let's say you you wouldn't you wouldn't feel that same pressure what is that a is that a fair characterization.
You know I could probably answer it a little differently, Steve I think with the way we looked at as we said listen you know, we've always had what I'd call. It a very short land supply. So when we looked at maybe the change in absorptions going forward. Some of this land coming our way in the next quarter or two or three we said.
But let's just take a look at what we think absorptions might be in the future and we think we'll get some softer softer terms and better pricing going forward. So, let's let's just move now I'll put it on our balance sheet right now and just stick to our netting and say hey, we're going to have two or three years of land based on kind of current absorptions.
Okay, great. Thanks, very much guys.
And our next question today comes from Depot Ragavan Ragavan with Wells Fargo. Please go ahead.
Hi, good afternoon, everyone.
Thanks for taking my question.
Can you talk about some of the market dynamics in your portfolio you gave us.
Absorption paces, but can you talk about some of the markets that surprised you positively or negatively in terms of volume or pricing.
Yeah, you know I guess I would.
Let's start with I.
I guess on the East coast in Florida, we saw some resilience there not to say that there there are immune.
From from what's going on with rates.
But we're in some affordable markets out there, namely.
Orlando and Jacksonville, and they've become a more significant part of our operations I think in part because of the affordability factor you know great great climate out there.
And other factors. So I think that's that's one that's been early.
Good for us as of late.
Yeah.
Okay.
Okay.
What are you talking about July a little but you said July looking largely like June at this point in time, but at the same time, you said cancellations, probably taking slightly lower.
What what's driving that cancellations.
Or is it the incentives the higher incentives, you're putting through more more marketing spend more commissions.
You know I forget could you talk through that and as part of your as part of the same question where are we with regards to your incentives commissions marketing and advertising spend and add those back to pre COVID-19 levels or are you still pretty far off from those pretty cool.
With levels two parts there. Thank you.
Yeah. So I would say, yes, it's always hard to say tell in terms of cancellation rate. It's only one month worth of data I guess I would point to a couple of things, though as David indicated we really tried to make sure that we were taking a serious look at that backlog and not getting ourselves in Q2, if there was somebody who just wasn't able to make it.
Add to the finish line or under our attachment we didn't think they would be able to make it to the finish line. We have some great visibility to that given our relationship with our lender AMC.
So that's one thing I would say beyond that.
We had a pretty big spike up.
Up in rates overall.
Correlated with mortgage interest rates, you know the 10 year spiked up to what three five and now it's settled back down.
And mortgage rates have gone through that same sort of of a roller coaster. So it's a little early to say that the rates have stabilized at this point, but at the very least kind of that initial shock.
Shock up seems to have abated, just a little bit so that might have something to do with it that a consumer says hey, I Miss the huge spike up and now that it's settling down a little bit they feel a little bit more comfortable moving forward, but really that's just kind of speculation on my part.
We'll see what happens in the coming months.
Oh on the part there you went through incentive commission spend marketing versus pre COVID-19 levels.
More like a six part question I forgot about that part, but thanks for reminding me.
I would say.
As Derek.
Or somebody indicated on the call maybe it was Larry or David and we do expect that marketing could come up a little bit I mean, it just stands to reason.
We were spoiled by not having to advertise as much because people were were really.
Very forthright.
Getting to our sales offices in signing a contract just this very high level of fans and we've seen over the course of the past year or so.
And you know where.
We're making sure that we're doing more on the marketing side.
So I don't have a specific number we're just on the front end of that but we'll continue to evaluate the market and see what additional is needed.
To make sure that people can find our sales offices and see Richmond first.
Before they see see others out there on the incentive side for the quarter, we ticked up.
A little bit.
I think we were just above 3% in the prior quarter and we were about four 5%.
And the second quarter, that's just on new sales.
So about call it 150 basis points.
There I think he asked about commissions as well not huge changes in the commissions at this point I think that's been a little little stickier of course, we're out there looking at what our competitors are doing with our outside.
[noise] brokers to.
To make sure that we're competitive but not a whole lot of movement there yet.
That's very helpful. Thanks for the color good luck.
Thank you.
And our next question comes from Sherman Patterson at Wolfe Research. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my question.
Wanted to follow up on Stephen's prior question about a lot option deposit walkaways.
There are certain geography or metros for these projects that you all are.
<unk> stepped away from in and also for the remainder of the 7000 option lots that remain I imagine that you're sharpening your pencil and any chance you could quantify the magnitude of the deals that might be you know.
Closer to not really hitting your underwriting criteria anymore.
Why don't I start and just say a couple of years I mean, we've we've looked at all of our options that go out for the entire company and I think what we decided is that and in a in a couple of markets. We thought absorptions were going to go down substantially.
So when we looked at our kind of our land pipeline et.
So if you know what.
If we thought the absorptions are going to go down substantially maybe the lots that we own are offshore a little law and so in that case, we decided to kind of move on and maybe Bob can give you a little color on a couple of markets.
Yeah, I mean, I would describe it as.
Similar to how to use it David I mean, it really we were looking at all of the markets.
And probably had write offs and just about everyone. Most if not all.
And I think the second part of your question, you're kind of asking it would.
Would we expect to see some more.
In the future and I imagine you will see it at a bit of a higher level than you normally see it I think every quarter you typically see some sort of walk away whether that's.
Just due diligence costs for outright deposits, but I would imagine it's going to remain a bit more elevated yeah I don't have a specific.
Percentage of those 7000 lots.
But I think we're going to have to continue looking at it pretty hard.
Okay, Okay, and then I'm kind of a two part question here, but first you know layering David you all been through multiple.
Multiple cycles, and you know clearly right now where we're going through a down cycle and it's early right now, but you all have brought up a couple of times about the potential for land price declines I'm just trying to understand how you all view the market you know over the next 12 months.
And that way just based on current conditions compared to past experience.
And then.
Part two just hoping you can help us quantify.
The incentives that you all had been bumping up into orders you know we'll call it in June or July .
Relative to the first quarter, our incentive levels and in orders.
Oh I'll take I'll take question, one and I'll, let Bob do number two but I think I don't know, which cycle area and our own drive six mini cycles.
But I will tell you that what we've experienced in the past.
And we can see today.
That land prices are clearly softening up terms are getting softer.
And our experience in the past when these things start going down a little bit of generally speaking maybe go down a little bit more so I think as you know as an abundance of caution I think all of us and our management team today.
We use the term time out let's call a time out and let's see what's going on.
We definitely have enough lots are for you know for us for the next short period of time, and we've got terrific land people in all the markets that got their antennas up. So we can see that definitely some prices are going down in terms, you're definitely getting softer.
I'll, let Bob answer the other one yeah. So Q1, we were at about 3% on sales for the incentives are part of thing gross sales.
And for Q2, we bumped up to about four and a half.
June a little bit higher than that I don't want to parse too much into monthly stuff.
Because I don't know that's necessarily indicative of where we're going to be longer term, but you saw that a three to four and a half shift.
And we'll continue to adjust to the market.
Okay, Okay, perfect and for clarity that is for kind of orders correct.
Yeah gross orders.
Perfect. Thanks, guys. Good luck in the upcoming quarters.
Thank you.
And our next question today comes from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys. Good afternoon, Thanks for taking my question.
I guess first on the cancellation topic I think obviously everybody in the industry saw a pick up in June but it seems like yours might've been a bit more than others and it sounds like you know at least some of that was with you guys being proactive.
And as you think about those cancellations.
What percentage if you had to estimate our buyers that perhaps you could have saved if you increase the incentive is a bit more whether you know maybe it was a rate buy down or something that kind of keep them to be able to qualify for that loan and you. Just decided that you know financially that didn't make sense or you know where these cancellations truly buyers that were kind of either not going to move.
Forward for one reason or another regardless of kind of what you throw at them.
Oh.
I'll answer.
Part of your question I think when our team went through every cancellation.
There was possible, we always look and say hey can we put you in another mortgage program or can we buy it down and so we had some of those that just couldn't couldn't fit they might have had a change of circumstances also.
But we did have a number of people that just said Hey, you know qualify to got a mortgage and.
And moving.
Moving on maybe Bob can give you a little more color.
Well I think yes, maybe said another way we saw an uptick in the percentage of the cancellations related to what we call remorse, just kind of a more of a psychological Cai.
Kind of reason, so you talked to consumers and maybe in addition to the financial impact of interest rates being higher and having a harder time qualifying because of that it just seemed like they werent in the right frame of mind, just given the volatility in interest rates being worried at at walking too high I think we heard from a number of consumers who said why.
And I think rates are going to come back down.
And I just didn't want to want to work right away and.
And proceed forward.
No.
You know that that kind of psychological element by which maybe the consumer just wasn't willing to.
To move forward that was a bigger part of the cancellations than it's been.
A year ago.
Got it Okay. That's helpful color I appreciate that Bob and Dave.
Second.
If I think back to when I first started covering your company in 2005, I think you guys were definitely one of the earlier builders to kind of recognize the changing market and respond to that I know you guys enter exited a number of markets early on in the day in the downturn.
Yes, if I look at this quarter here.
See a lot of similarities to how you responded back then walking away from options maybe before some of your peers did purging are cleaning up the backlog being pretty diligently.
Yes, just listen to your comments it doesn't sound like you're anticipating.
A multiyear downturn you know in front of US here. So can you just kind of talk about a little bit how you're thinking about maybe some of the newer markets that you've entered over the last 12 or 18 months I mean, I think a number of those markets are ones. We're hearing are probably under some of the most pressure today from a pricing and absorption standpoint thinking like a boise.
And Austin, and Nashville, and it makes sense, given how much price appreciation theres been there so.
Can we expect maybe some pruning of the footprint as well if this kind of current trend persist for another few quarters or are you still committed to those markets.
First of all the.
You've followed us for a long time, and so you know that.
We're very very careful.
I think the new markets, we started and we started really small.
Okay, and I think we you know I think we like the we like the markets.
But.
Overall I think when you think about you think about land I think one of the things. We're looking at is we have just finished two years of what I would call.
Really no.
Yeah.
Phenomenal absorptions by us and others. So we think going forward, we don't see it you know, Larry and Bob and I don't see it like Oh, five where we could see a lot of headwinds on what I call no peaky mortgages.
Lot of a lot of things that were happening in <unk> five.
And those six with these easy to get a mortgage and so we see a lot differently today, we think the markets.
Markets, there's still a lot of demand for what we do we just think of absorptions.
Going forward are going to be less and we want to deal with it.
Do you have to add to that yes.
And for that reason I think we have a greater opportunity to continue to be successful in the new markets.
We've got a great balance sheet, we've got great.
Our liquidity to reinvest in those markets, but just like any of our other markets. Some of the deals that we originally thought would work might not work anymore. So if we have success in retooling those pipelines.
We've got an opportunity to move forward.
But we're going to look at it objectively.
As you indicated we're not afraid to make the decision quickly if a market is just not working out over multiple quarters.
Certainly take a look at it just like we take a look at acquisitions and our longstanding markets.
I really appreciate the thoughts and just to kind of put a bow on this none of those markets fit that description at this point, what where you're seeing kind of the warning signs and you feel like the risk outweighs the reward.
Well I think we evaluate all the markets all the time every day and I think one of the things that's great about our business model is we don't go long on land okay.
And we're not going to go long on land.
We think that our build to order market building work order.
Strategy really kind of works.
We're seeing we're seeing some successes in the mail.
New markets.
Okay, great. Thanks, a lot I appreciate it.
And our next question today comes from Jay Mccanless with Wedbush. Please go ahead.
Hey, Thanks for taking my questions.
So to take Alan's question the next level what.
If anything are you seeing right now that says maybe a little less focus on entry level or change in your go to market with the product that you have out right now and then also maybe just remind us what your entry level percentages at this point.
Yeah, Jay it's David I'll I'll kind of start.
Think one of the things that we have and Bob will give you all the percentage on and are our entry levels called the seasons.
And we think it's really a.
Terrific product.
We're essentially built in just about every market that we're in right now.
And one of the things that it does flex a little bit on pricing depending on the market.
We have seasons that range all the way from.
In Florida, we arrangement around 300 Grand and then.
In the Bay area in California were at 600000 with the same kind of product.
But we think it's the affordability is great ability orders great and.
And Bob will go through the percentages, but we think that product is.
It's pretty darn good and we've got we've got it essentially.
Every market that we're in in fact couple of markets like Orlando. We just we just all we do have seasons, Rob you've got.
Percentages.
For the past couple of quarters, what we view as our affordable offering which include seasons was about two thirds.
What we did on sales cover net sales metrics.
Jeff seasons alone it was about 57% of our sales in Q2.
And that's that's even up a little bit.
<unk> was 51% so I think season continues to resonate.
And part of that is what.
David mentioned that that ability to flex to different types of consumers.
And the fact that we didn't necessarily catering to.
Two just the first time buyer. It has some nicer features you can still do build to order and put a nice finishes.
Higher ceilings things like that that make it feel nicer it makes it appeal to different categories.
I think really is is a good thing in this kind of market when you need a little bit more flexibility with your product. So.
<unk> to be a good story for us.
So then if you think about the cancellations.
The consumer driven and MDC driven cancellations in the second quarter was which buyer group is it mostly focused on kind of this aspirational entry level buyer or is it more first move up second move up.
I mean, I think it was the same kind of percentages.
Almost exactly across all three okay.
Okay.
And then and <unk>.
I apologize.
I missed your commentary about the number of homes that you guys have it framed right now in backlog and what impact that might have on absorption for the rest of the year.
I think the comment was you look a year ago I think we only have maybe 40% in frame plus in backlog so at least frame.
Frame complete this year, we have closer to 60%.
So.
That gives us.
A better starting point as we start the back half of the year.
I think the key.
Our point is backend trades have certainly been difficult that's taking longer but we like the fact that we are.
Ahead of the game in terms of getting through frame.
Okay, great. Thanks for taking my questions.
Yeah.
And our next question today comes from Alex Barron with housing Research Center. Please go ahead.
Yes, thanks, guys.
I was hoping you could provide the number of starts in the quarter and I don't think I have last quarter's either so just for comparison.
And then related to that what are your thoughts on future starts are they.
Then the match.
You know kind of the sales pace similar to that and another question a lot of builders are saying that theres a lot of demand for homes that can close them 30 to 90 days, but you guys seem to be sticking to the built to order strategy. So just your thoughts around that thanks.
Alex It's David I'll kind of start I think what we what we said is hey, we're going to stick to or getting we're only going to build build order.
But what we have is we have we've had some cancellations.
So when we have some cancellations.
Which we don't have a bunch of finished houses, but we're going to stick to our knitting and then we're going to build the order as we get sales, we're not going to build ahead of him where to build them.
We've got a mortgage approval and when it gets started but Bob can give you a little bit of color on starts where we're at.
Yeah, So just getting to the exact numbers I think David to handle this strategy pretty comprehensively. So for Q2 2022.
2000, and 429 starts is what we did now note that.
That's above the roughly 1400 sales that we have and the reason it's about as we were kind of starting some that were sold in prior periods still but now are sold not started has gotten down to a lot lower levels.
So I wouldn't anticipate that big of a delta in the future.
Q1, I'm not sure if youre talking about Q1 or the prior year quarter, but Q1 was a three.
<unk> 3330, and then Q2 of 2021 was 3657.
Okay very helpful. Thanks, a lot guys best of luck.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for any final.
Yes.
We appreciate everyone being on the call today, and we look forward to speaking with you again following the reporting of our Q3 results.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.