Q2 2022 Meritage Homes Corp Earnings Call
Greetings and welcome to Meritage homes second quarter 2022 analysts call at this time all participants are in a listen only mode.
And then to answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now.
Ill turn the conference over to Emily to Dano, Vice President of Investor Relations and ESG at Meritage homes thinking you may begin.
Thank you operator.
And welcome to our analyst call to discuss our second quarter 2020 to break out we issued the press release yesterday. After the market close you can find it along with the slides we'll refer to during this call on our website at investors that meritage homes dot com or by selecting the Investor Relations link at the bottom of our homepage.
Yeah.
Please refer to slide to caution you that our statements during this call as well as the press release and accompanying slides contain forward looking statements, including but not limited to our views regarding the health of the housing market economic conditions changes in interest rates the potential benefits of rate locks community count and absorption.
Chen and construction costs supply chain and labor constraints and cycle time projected third quarter home closings and revenue gross margin tax rate and diluted EPS potential future distraction to our business from an epidemic or pandemic, such as COVID-19, as well as others.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
Any forward looking statements are inherently uncertain, our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically, our 2021 annual.
Court on Form 10-K, and quarterly reports on Form 10-Q, which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures.
With us today to discuss our results are Steve Hilton Executive Chairman Phillipe, Lord CEO and he left series, our executive Vice President and CFO of Meritage homes. We expect this call to last about an hour and a replay will be available on our website within approximately two hours. After we conclude the call and while remain active through August .
11, I'll now turn it over to Mr. Hilton Steve.
Thank you Emily welcome to everyone participating on our call.
Briefly as current market trends and provide an overview of our recent accomplishments.
We'll cover our strategy and quarterly performance and Hilo.
Providing overview of the quarter.
And forward looking guidance for Q3 22.
Let me start by congratulating the entire Meritage team for achieving our long term goal of three communities. This quarter ending June 2022, with 303 communities.
This milestone with high level of execution and dedication by all of our boys, but most longstanding supply chain constraints.
Labor availability present in the market since mid 2020.
We continue to believe that now is the right time to be operating across these new locations will allow us to market share.
For men commercial order in closing volume.
We think that the low supply of housing inventory at favorable demographics are positive factors long term volume of housing the mat housework formations.
We acknowledge that the housing market is softening from the unprecedented demand levels of the last two years.
Matilda.
Storage rates thought about.
And the fed sitting with.
Housing affordability of buyer psychology.
Sure what we're seeing.
And here on the ground in our markets today.
Now on to slide four for recent accomplishments.
The second quarter of 2022, we achieved our highest second quarter sales volume order.
So order volume of 3767 homes.
One 4 billion quarterly home closing.
I'm pretty record for quarterly gross margin of 31, 6%.
Lower outstanding share count, we achieved a quarterly record diluted EPS of $6.77.
Per share this quarter.
13 divisions at Meritage were recognized for customer service Excellence awards from avid this quarter, our southern California Division received the prestigious avid Cup in the production category for the first time in our company's history, which is the program's top honor given one builder in North America each year.
In addition to be named an energy star partner of the year for sustained excellence in 2020.
Yeah. They are.
Nice year for this distinction since 2013, we also earned the 2022 energy Star market Leader Award.
These EPA inhabit awards demonstrate our commitment to building better and more sustainable homes, while delivering the industry's highest level of customer satisfaction.
The announced the extension of our partnership operation home front.
Sure we're immensely proud.
Three dessert dairy families with brand new mortgage free Meritage homes in Houston, Nashville, and Tucson Metro areas.
This quarter, we held our annual purchasing summit.
We further strengthened our gypsum mutual has to work through current challenging environment with our key trades and also took this opportunity.
Unimproved inability of the mature products.
<unk> deficient home.
Now I'll turn it over.
Thank you, Steve our second quarter orders volume reflects both the solid demand in April and May and a softer demand in June .
After the June interest rate hike. The overall tone regarding general market has caused this caused a shift in buyers' expectations since.
Since last quarter, we've been offering rate locks to help bio secure their monthly payments and more recently have begun offering other incentives in many of our markets to offset slower demand today.
Today, we are experiencing there turn to seasonality as well as a pullback from the urgency to purchase a home that has been present for the last two years.
Additionally, many homebuyers are looking for a quick move in homes that can close in 90 days or less to lock in all certainties, which currently is primarily available in the resale market.
We believe new home demand and cancellation rates have been impacted by limited available completed spec inventory that will continue to be choppy over the next quarter or two as the existing pool of near finished spec inventory is mostly nonexistent in the new home space.
We expect to be able to better compete against the retail inventory in the later part of the year as the early stage that we started this quarter mature are near completion in the fourth quarter. Our teams on the ground are focused on navigating the supply chain and labor constraints over the next two quarters to get this inventory back into the short term moving category that today's buyer is looking for.
And which has been a core part of our strategy for the 7% for the past several years.
Over the next couple of quarters. We also expect the benefits of our disciplined land acquisition process to help us move down the price band as incremental affordable inventory comes online.
This low land basis combined at the date of industry, leading high gross margins provides us the cushion to absorb incentives to a much greater extent at any time in our company's history.
We will continue to assess local market conditions and adjust our discount rate locks and pricing as needed to ensure we maintain our volume and market share.
I want to reiterate what we've been saying throughout the past few quarters. We welcome a return to a normalized market as we've always known that the extraordinary market conditions in 2020 in 2021 cannot continue indefinitely and we're creating anomalies in both asps and cost structures.
Our business model was designed for a normalized pace in the three to four net sales per month range as a seasoned management team that managed through the last downturn. We are navigating the changing dynamics do determined what today's normalized and know we are adjusting our specs and incentives to achieve this goal.
We believe our lower price point and product targeted today's largest cohort of the buying population the millennials and baby Boomers will continue to see demand at the right monthly payments.
In line with the current trends, we have been reducing the number of lots put under control since January and meaningfully dialed back our land development acquisition spend during the second quarter of 2022 compared to prior year and our prior expectations.
As the housing market continues to evolve we will continue to focus on strengthening our balance sheet and aligning capital appointment with both operational need and shareholder returns.
Now turning to slide five.
Given the long lead cycle times, we're pleased that our second quarter closings of 3221 homes were just 52 homes below the challenging comps to prior year.
Entry level comprised 83% of closings up from 76% in the prior year and.
In the second quarter of 2022, we lifted sales order.
Most of our communities quarterly orders of 3767 were 6% higher than the prior year driven by a 33% increase in average community count.
Despite slowing demand our second quarter 2022 absorption pace was four four per month, which was down from five five per month in the second quarter 2021 higher than our expected normalized average pace of three or four sales orders per month.
Entry level comprised 86% of quarterly orders up from 81% in the second quarter last year as Biocraft words favored our lower priced product.
At G level also represented 81% of our average active communities compared to 75% a year ago.
In a falling market our cancellation rate increased sequentially from 10% in Q1 to 13% in Q2 of 2022 and year over year from 8% in the last years in last year's Q2.
As we noted semis are canceling their contract and electing to purchase move in ready homes. Although we believe our remarks are creating a counter argument his decision for a large majority of our sold backlog.
We expect to continue to experience a higher cancellation.
Cancellation rate over the next quarter or two as buyers reconsider their home purchase decision until right and the market stabilizes or the Alexa purchased and immediately available retail. However, we do expect that casualty the cancellation rate to stabilize once this uncertainty will avaya works through their purchase decision.
Turning to slide six moving to the regional trends during the second quarter of 2022 average community count increase for all of our regions as we slightly exceeded our target of 300 communities while demand in fact, our regions in different ways.
Demand was strongest in our east region. There was this without region with double digit order growth of 24% this quarter, which was primarily due to a 37% increase in average communities also our largest regional increase this quarter this more than offset the 10% year over year decrease in average order pace to $4 seven per month.
Strong demand in Florida was evidenced by 46% greater order volume this quarter due to 28% more average community and 14% higher average absorption pace, the only market with a year over year increase in absorption pace.
South Carolina has the highest increase in order volume quarter at 64% year over year due to a significant community count ramp up over the last four quarters.
<unk> saw a 5% year over year, South Carolina due to our product mix shift to more affordable town, where communities over the last year, we closed out of a higher price first MOOC Muni and opened additional talent pools during the quarter nearly 40% of the state and <unk> level, if we sold affordable casual product under an ASP of 300000.
The regional orders volume for our Central region, which is comprised of Texas was essentially flat year over year, a 26% increase in absolute dollars was offset by a 22% decline in average orders made this quarter to $4 seven per month.
Our lack of move in ready homes in the Austin market due to various production delays caused today's homebuyers to shift to more readily available resume retail inventory. Additionally, general demand soften in Houston further impacting our sales in Texas pricing power in the region led to a 15% increase in ASP on orders compared to the same quarter last.
Here, our central region had the largest percentage of entry level communities, comprising 83% of average communities.
The West region second quarter, 2022 award volume decreased 6% year over year as a result of $35 at higher average community count that was offset by a 31% lower average order pace. The west region had the largest year over year increase in entry level communities, resulting in 79% of us average key selling entry level product during the quarter compare.
To 71, 1% in Q2 of last year.
<unk> put our highest regional increase in ASP on orders this quarter or 17% due to the region pricing power and a geographic mix shift with a higher percent percentage of California orders.
Colorado's orders declined 12% year over year with abyssinians up 28%, while Abi Georgian pace decreased 31%. This market experienced some of the most notable product availability issues. Although we expect to work through most of that backlog by the end of the year.
In Arizona, our quarterly orders decreased year over year by 10% due to various supply GSE, which led to a 34% decline in our average absorption pace. Despite a 35% growth in average communities.
Turning to slide seven.
We accelerated starts to over 5000 homes in the second quarter from approximately 4000 homes in the first quarter of 2022, both to replace our depleted available inventory and to start production at our new communities given the likely softer demand we anticipate for the rest of the year, we will moderate our future spec starts to adjust for this lower sales order volume.
As we work to complete the inventory we started this quarter.
We ended the period with nearly 4500 spec homes in inventory or an average of $4 seven per community as compared to approximately 2600 specs or an average of $11 three in the second quarter of 2021, while this is significantly under our optimal level of four to six months supply we do not anticipate a notable growth in our specs over the next couple of quarters as you.
We continue to monitor the current level of demand.
70, 474% of our home closings. This quarter came from previously starting to inventory the same level as a year ago at June 32020 to less than 5% of total specs were completed versus our typical run rate of one third due to sustained demand and supply constraints.
Our Q2 cycle time Hasnt changed since the start of the year, but we're still about six to eight weeks of additional high from our pre COVID-19 construction schedules given elongated cycle times, we ended the quarter with a backlog of 71 units as our conversion rate declined from 63, 63% last year to 48% this year when the supply chain Dave.
<unk>, we anticipate cycle times will shortly and backlog conversion rates will pick up again.
Despite the second quarter 2022 during the second quarter of 2022, we unleash our sales efforts and sold inventory early in the construction cycle to both increased product availability and allow our customers to lock in their mortgage rates in a rising rate environment. We continue to experience further cost pressure for most card model. These out of the lumber while offering increased incentives.
Most of our geographies.
Despite the changing market conditions, we continue to restart 100% of our entry level homes to streamline our operations. In fact, we believe these strategies are beneficial both an accelerated as well as the weakening market. Our pace of pre starts is based on market demand allows us to flex with any choppiness in the market by slowing down start if the current soft demand continues.
Yes.
Our streamlined operations Japanese date enforcing since pre Covid limited F. Skus allows us to remain nimble and substitute our selection with vendors if certain product availability right now.
Which have helped us and continue to and our supply chain constrained environment.
Our team will continue to hunt for further cost savings as we expect they will become available over the next couple of quarters.
I will now turn it over to Hela to provide additional analysis of our financial results.
Thank you Felipe first I wanted to provide an update on our remarks. He believes are saved the right program alleviates the uncertainty for a buyer regarding their monthly payment by guaranteeing there right at the time of purchase we require all homebuyers eating our mortgage partner to lock in their rates and we provide applicable financial incentives to do so.
We have purchased about forward rate lock commitments. In addition to our backlog rate lock last quarter that are available to all of our divisions at terms that we believe are preferential to what is available on the market. Today. We think these financial solutions offer us a competitive advantage the cost of these remarks, we will impact our gross margin in Q3 and Q4.
We continue to monitor all of the rate lock options available to buyers and are prepared to provide incremental mortgage rate incentives as necessary second in the current quarter clothing with our bell format partners accounted for approximately 5% of our volume we expect that for Rentech comp for mid to high single digit percentage of our annual closing by.
Longer term, we continue to explore additional opportunities where we can leverage this new buyer group you various strategic avenues.
Let's turn to slide eight and cover our Q2 financial results in more detail.
I'm closing revenue grew 11% year over year to $1 4 billion in the second quarter of 2022 due to a 13% increase in ASP closing, even as our entry level mixed group closing volume declined 2% impacted by the continuing supply chain issues pushing some of our late quarter closing into Q3.
Our second quarter 2022 home closing gross margin was a record 31, 6% to 430 bps improvement from 27, 3% a year ago, mainly resulted from higher asps due to sustained pricing power over the last year, the low cost of land for entry level homes lower interest burden from our <unk>.
'twenty, one right refinancing and the leveraging of higher revenue and fixed cost all of which more than offset higher commodity costs.
Cynthia umbrella takes six to seven months to flow through the current construction cycle higher lumber costs impacted the Q2 financials and will continue to impact our margins for most of the balance of this year, while we will see the savings from decreased lumber cost late this year and into 2023, it will be muted by the continued cost pressures from <unk>.
Other labor and material increases.
SG&A as a percentage of home closing revenue was 8.3% for the current quarter, a 100 bps improvement over prior year. In addition to lower commission expense, our higher revenue and the benefit of technology in our sales and marketing effort all allowed us to better leverage our SG&A, even as we opened 49 new communities this quarter.
We will continue to pursue overhead efficiencies. Although we also expect commission and marketing cost to start to increase over the next couple of quarters, reflecting the current market condition. The second quarter of 2020 twos effective income tax rate was 24, 6% compared to 22, 4% in the prior year the higher rate in.
2022 reflects the expiration of the 20th 19 taxpayer certainty and disaster tax relief Act under which we earned eligible energy tax credits and qualifying homes closed in 2021 since in energy tax credit has not yet been enacted beyond 2021, we are not assuming any such benefit at this time, we are however.
Closely monitoring the proposed bill currently being negotiated which does address 45 hour extension.
Around pricing power expanded margins and improved SG&A leverage combined with the lower outstanding share count led to a 55% year over year increase in second quarter 2022 diluted EPS to $6 77.
To highlight just a few items from the first half of 2022 on a year over year basis orders were up 9% clearly things are relatively flat our home closing revenue increased 13% to $2 7 billion. We had a 490 that increase in home closing gross margin to 31 Plano percent SG&A as a person.
Tonnage of home closing revenue improved 110 bps to eight 4% and we generated 56% increase in net earnings turning to page nine we maintained a strong balance sheet and ample liquidity during the second quarter at June 32022, our cash balance was $272 million compared to 600.
$18 million at December 31, 2021, primarily stemming from growth in our with inventory and incremental share repurchases. Our net debt to cap was 26% as of June 32022, we have nothing drawn under our revolver and no debt maturities until 2025, we continue to target a maximum ceiling for <unk>.
Net debt to cap ratio in the high 20, and we believe that we have sufficient flexibility to navigate the changing economic conditions over the next several quarters, we anticipated growth in our cash position that will reduce our net debt to cap ratio.
Our primary focus for our capital spend today is completing our specs in the ground and maintaining a normal level of available inventory.
In addition to routinely buying back shares to offset new grants and keep our dilution neutral we may opportunistically repurchase incremental shares we repurchased over 128000 shares of common stock during the second quarter of 2022 for $10 million and repurchased a total of $1 2 million shares so far this year, which totaled about three.
<unk> of our outstanding common stock. After these purchases we have $244 million remaining on our share repurchase authorization as he continues as we consider our cash spend we'd look to balance our operational cash needs with Mac maximizing long term shareholder value.
When looking at our inventory valuation, we wanted to remind everyone that our impairment assessments are conducted at least annually or more frequently when certain criteria are met we evaluate all of our real estate assets. Both of those that are active and those in the pipeline for Recoverability impairments are recorded when the cash forecasted to be generated from this.
Sale of homes in a community is not expected to cover the cost of that community looking at the projected revenue as compared to the costs and our balance sheet. We believe the deterioration in the markets would have to be sustained and significantly more pronounced than what we are anticipating today before material impairment would be incurred.
Onto slide 10 during the second quarter of 2022, we opened 49, new communities and grow our community count from 268 at the start of this quarter to 303 by June 32020 to spend approximately $422 million in land acquisition and development this quarter down from $551 million.
The second quarter of 2021, having achieved our community count goals, we plan to be around 300 communities for the rest of the year as we believe a more measured approach regarding future capital spend is warranted, while we gauge demand over the next several quarters. However, as we are no longer metering our pace. We may experience. Some early community Closeouts, which may cause.
Our community count to temporarily dip into the high 200 in the second quarter of 2022, we secured about 900 net new lives approximately 110th of the net new lots put under control in Q2 of 2021 net new loss translate at 12, new entry level community as we have all of the land we need for <unk>.
2023, and most of 2024, we are selective in our future land acquisition at June 32022 had over 71000 total lots under control, which was down sequentially from about 75000 total lots that the Q1 'twenty two and year end based on trailing 12 months closings, we had a five six year supply.
I have lots, which is slightly above our target of four to five years. However, we believe this older land vintage with lower lot basis will give us a competitive advantage when these communities come online.
About 66% of our total lot inventory at June 32020 was owned and 34% with the option in line with Q1 of 2020 Q as of June 32021, we had 63% owned inventory and a 37% owned option position our option position is predominantly comprised of acquisition.
With staggered purchasing date in addition to some land bank deal finally, turning to slide 11 due to the lack of visibility in the market. At this time, we are only providing Q3 guidance for Q3 'twenty 'twenty. Two we are projecting total clothing to me between 3500 3700 unit home closing revenue of one.
$5 75 to $1 67, 5 billion home closing gross margin between 27, five and 28, 5% an effective tax rate of approximately 25% and diluted EPS in the range of $6 and $6 80.
With that I'll turn it back over to Felipe.
Thank you <unk>.
To summarize on slide 12.
Our strategy remains centered on the affordable products pre starting entry level homes and streamlining our operations our business model is resilient and successful in a slower market as it prioritize cost efficiencies and as dynamic based on changing market conditions.
We've done the legwork to help navigate the limited visibility in the current market our land underwriting playbook has kept us disciplined as we grew our community count so our upcoming openings will continue to have low land residuals and we will be focused on affordability a record gross margins today provides us the necessary room to implement incremental incentives and absorb higher costs at the same time.
With our ample liquidity, we are prepared for a slower market scenario. We will continue to do the right thing for our customers like offering uncertainty with our below market fixed rate lock, while offering a superior product. We believe we can continue leveraging our incremental revenue with our greater scale of communities today, even at reduced pace and a slower demand environment.
With that I will now turn the call over the operator for instructions on the Cuba Q&A operator. Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
We ask that you ask one question and one follow up question and re queue for additional questions.
Our first question is from Stephen Kim with Evercore ISI. Please proceed.
Thanks, very much guys and thanks for all the color as usual.
It did have a couple of questions here first of all you talked about the rate lock, which you know congratulations on what you did last quarter by the way on that you indicated that you are sort of continuing to offer that and that's going to weigh a little bit on the gross margin. You also talked about lumber savings not really showing up until kind of sounded like late for Q. So I just wanted.
To get some sense of if you could quantify roughly be are the impacts of some of those things are these rate locks for example, as we think about a basis point impact.
What kind of a headwind should we expect for that.
And then maybe what.
With the lumber if we just segregate it out the lumber itself. What do you think the benefit of that may ultimately be.
Maybe at the end of the fourth quarter, and then more broadly incentives where do they stand relative to normal right now.
So when we look at incentives were not a believer that typically breaks out the incentives and in some of our peers do you look at it in the aggregate we don't break it out between finance financing incentives in general incentives.
Put that backlog rate lock in place in Q1, we actually had a high volume of incentives to our numbers in Q1, not two closings of course, but the numbers that were represented in our in our backlog. We continued that key in the current quarter and then probably added maybe another 100 beds.
Commensal incentives above what we did for our rate lock so kind of all in we're right in line with our historical averages. So I would say, it's definitely more than what we were doing a year ago. My only about 100 beds or so higher than where we were in the first quarter core sales that has not yet flowed into.
The financial statement. So you look at the guidance that we gave last quarter, which was our full year guidance. We are projecting a gallon in gross margin anyway for the lumber luck Anthony.
Great lots of incentives you are already flowing through the incremental cost is demanding that we do have some.
The additional reserves at cancellation rates continue to remain elevated and we have to refile that it comes we're giving ourselves some breathing room for potentially additional incentives been part of the reason why we didn't provide full year guidance.
We're running kind of right around normal normalized.
It's a pace right now.
Got you that's very helpful. Thanks for that and I would just say that you know you gave this gross margin guidance of 27, five to 28 and a half which is obviously pretty strong anyway. So.
That kind of leads to my next question about.
The the way you're balancing absorptions and the incentives that you're planning to offer you talked about a three to four X four times absorption number as being quote unquote normal I will observe though that.
Will it change your business mix a bit over the years.
And you've introduced a number of communities that.
That you've indicated I think our lower.
Lower price a little more entry level those communities tend to run a little hotter or higher on absorption rate. So can you give us a sense for.
What you think is.
A normal level of absorptions going forward why that would not be higher than what it may had been in the past because of your mix shift.
And you are currently at normal levels of incentives.
Does that mean that we should consider.
What you're doing let's say in three Q, what we what you do in <unk>, but that would be a normal level of absorption just trying to marry the absorption comment being normal with the incentive.
Being normal.
Yeah. This is felipe.
A lot of parts of that question, but historically before we started pivoting to this new strategy five years ago, I think our absorption pace ran somewhere between 2.25 to two and a half per month, because we were predominantly a move up kind of luxury builder and so now we expect our.
Business to operate more between three or four depending on the mix of communities. We have between entry level and one M. U obviously right now we're weighted more towards entry level.
Intentionally and so we would expect in a normal housing environment, where interest rates are stable and theres predictability out there for the buyer that we would operate somewhere between that three or four range hopefully on the high side of that.
The entry level mix, obviously, we said this a number of times, we underwrite entry level land two across four months, that's kind of the ideal state. When we look at hurdles are land and one in your communities closer to three depending on where they are priced in the graph.
You asked about.
Q3, and I'm sure I'm going to get 1000 questions about July four I might as well start to answer that right now, but I don't think July is going to represent normal absorptions for us we're experiencing much like the rest of the builders are higher cancellation right now as buyers pivot out of.
Longer cycle time production to more readily available inventory, that's becoming more acceptable on the MLS.
So July is going to be a bit of anomaly is starting to feel a little bit better out there. We're seeing some green shoots that things are starting to stabilize as long as rates start to stabilize we think those turns and turned into reality for us hopefully August represents a more stable environment as can start to stabilize but we'll just have to.
Right now cancellations are elevated they started.
The elevated in the back part of June when the rate shock really hit and settled in the sort of stayed there were ticked up a little bit in July and so July is a bit of anomaly right now that we'll have to wait and see to see what August and September provide.
Great. Thanks, so much.
Youre welcome there one thing I want to add to that is just the gross sales number feels pretty good which is why we feel pretty good about the underlying demand and also as people are canceling their not going exiting the market. They are actually moving to go buy a resale home. So we feel good about the underlying demand.
It's just really the cancellations that are.
Meaning, making our net sales numbers not what we'd like to achieve in July .
Great. Thank you very much.
Our next question is from Truman Patterson with Wolfe Research. Please proceed.
Hey, good morning, everyone. Thanks for taking my questions Felipe on the cancellation rates I didn't quite catch it did you actually give a number and you know with that just trying to think through you all retroactively locked rates for the backlog you know to solidify back half closings.
For the year.
Were these cancellations, primarily you know more recent buyers so did sign contracts or were these kind of legacy buyers that it maybe.
<unk> ordered contracts in <unk>.
Yeah. So.
We did provide cancellation numbers quarter over quarter and.
They were 13% in Q2, we did it provide them month to month.
Say in June they were taking up to around 20% ish and as we look into July there kind of is there maybe a little bit higher but July is not over yet we still have a week of activity here.
The beginning of July is always a slow time for home sales, so, but we see them kind of staying the same or being a little bit higher in July .
As it relates to the can rates of recent sales versus quote unquote legacy sales. If you will it's kind of about 50 50, right now I wouldn't say, it's any a lot of Q1 people that bought homes in Q1 more mill probably month to month people that bought in April may versus June July .
Buy a home in early Q1.
Okay. Okay. Thanks for that and then nice nice orders results during the quarter and you know clearly the build to rent space. You know I think your product fits perfectly in our wheelhouse. There just you said that as a portion of orders I think it was 5% of <unk>.
Orders this quarter selling to investors what was that Q1I'm just trying to understand if there has been.
Any change in appetite from that buyer recently and then you.
Targeted that that 5% to 10%.
It's called about steady between Q1, and Q2 not a material change in the bulk of that increased some 5% to something higher is going to come from late fall community are coming online for our adult brand partners and individual home sales are comprised.
The bulk of that 5% right now those are holding relatively relatively in line.
Uptake on May 22, but really in 2023.
And I would just add that the appetite is strong.
Many adult brand operators, but theyre looking for the same thing right. They are looking for products that they can purchase now and start to lease up.
Gives them certainty on what they are buying but there.
There's a strong appetite out there for this build for rent product, but at the same time, they're reading the tea leaves just like everybody else and making sure that they are purchasing houses at the right value.
Perfect. Thank you guys and good luck for the remainder of the year.
Thank you.
Our next question is from Alan Ratner with Zelman and Associates. Please proceed.
Hey, guys good morning.
Congrats again on achieving that the community count call and just great execution.
The last few years here.
So I guess first question on the start pace Felipe I think you made a comment that you guys have kind of reset that lower obviously, given the changes in the market demand environment I think that makes sense.
If I heard you right I think he started somewhere between five and six homes per month per community in <unk> should.
Should we assume that now you're running maybe more in that three to four range that you kind of view as normal or are you resetting it perhaps.
Even even lower as you have a pipeline of specs that are that's been building.
Yes, that's a great question.
I think it's probably going to be three to four and it might be more like three depending on how things look over the next.
60 days or it could before.
As we said in our script, we just have a lot of new communities that were trying to get the product out there.
As you know, we're an all spec builder in our entry level communities and so having more product in those communities to get some momentum going is critical but we are definitely slowing it down as you look into August we're well off the pace that we were in the previous quarter and I think a three to four numbers probably.
If August is.
Trending down from July or stabilizing will kind of reset that as we move through the back half of the year and that's the beauty of having a cadence of spec starts deeply you can make those decisions lie.
Slide <unk>.
You continue to gauge the demand in the marketplace, especially when it's kind of stable and shifting like we are today I mean, we had one just to give you guys a feel for how you know.
Agile we are we have one community.
We had a bunch of starts slotted ready to go permitted bid out.
And we just didn't do it.
We shouldn't put them in the ground. This quarter. So we can move pretty quickly community by community. We're pre permitting a lot of everything so we have the product when it when we need it and if we need to slow down and slow it down.
Alright, I appreciate the color there and I think that that makes a lot of sense and I guess the next piece of that is kind of on the land side and you know maybe I'm reading too much into this but I think your lot count did tick a bit lower sequentially and we've heard from some other builders they walked away from some option deals and I'd imagine you're you're kind of closely scrutinizing the deals.
Or have under contract. So can you just talk a little bit about whether you walked away from deals during the quarter, whether you're kind of in the process of either renegotiating or try to kick out some of those takedown schedules or.
We feel like everything you have at least in the near the near term still makes sense to move forward with.
Yeah.
This is probably the thing about the capability of our organization that I'm most proud of.
During COVID-19 when Covid hit we basically stopped everything for 30 days, we didn't drop everything we stopped everything and we're rationalizing everything those 30 days and then the next 30 days same theme.
And we pushed deals out and renegotiated deals and through that 90 day period. After Covid, we renegotiated a bunch of deals we got better deal terms on a bunch of deals and we only dropped a few and that really served us well we're doing the same thing right now.
We're pausing the rationalizing looking everything renegotiating things, we're pushing things out things that were supposed to close this quarter or by time to maybe close next quarter and we're going to re read.
Read the market for the next 90 days and we may push that out another another 90 days and I think the <unk>.
Generally the land market is going to give it to us right now because they are watching and reading the same news clippings that we are.
As it relates to the activity in Q2.
We did.
I wouldn't say, we walked from anything but we have new deals that we're looking at that we were spending due diligence dollars on.
<unk> looked at those deals through a different lens and we stopped spending money on those deals.
So we went back to those sellers said, we weren't going to continue to process the entitlements.
Ask them to give us some more time.
Where are they open to renegotiating I'd say, we had a pretty good hit rate on that we bought at the time, but then there are a few sellers had said no. We're not we're not giving you a time that we kind of walked away from a due diligence dollars there, but as far as walking for many options. We don't have a lot of those anyway. Most of those are just with land sellers that are really favorable for us and <unk>.
Actually walking away.
From a deal that we were supposed to close we haven't done much of that yet the primary reason behind that.
Wanted to buy.
By the time to really see how this thing is going to play out. So we don't make the same state that a lot of other folks made during COVID-19.
And second we a lot of the land we have coming through right now is stuff, we bought two years ago.
And the land basis is just very very attractive to us and we don't think we're going to ever get that land cheaper than that and so we have to look at it through that lens and figure out whether whether we need that land now at the other day.
If the market is going to slow for multiple quarters here or prolonged we certainly don't need any more lots than the ones. We have right now and maybe we need even less and so we have our bottom 10% of the projects that are going to close over the next two to three quarters and if the next quarter is often the following quarters off we'll probably we'll do those deals.
But as we sit here today, we don't have a lot of stuff that we see that we can't rationalize and that we're going to have a big write off on.
Just to clarify whats already kind of been determined to walk away from an early diligence time the dollars are very small.
With what we've done in any other quarter, which is why they won separately disclosed.
Pretty much par for the course for us.
It's kind of too many deals that no longer pencils, we get closer to making a go no go decision.
Hello, just a clarifying item. Thank you when you do make that decision that youre not going to move forward do those lots of immediately kind of get removed from the euro lot count that you that you provide to us in the slides, even if you haven't necessarily officially walked away from the deal yet.
So just to clarify we noted that we had only 900 net new lots, but it's for 12 communities. If someone did the math are they probably realize that that doesn't really make sense with allot signed or the lot count that we typically go for and that's because you have an offsetting amount of terminated deals and there are lot or per lot size.
In the current deals that actually I think a 149, they're consistent with where we've been in the past so you're seeing the elimination of those terminated deals.
That were in the count last quarter, netting against that we were still a net positive of 900, but you asked a lot that we terminated our immediately removed from the lot counts.
Got it alright, guys. Thanks, a lot appreciate it.
Thanks.
Our next question is from Karl retired with B P. I G. Please proceed.
Thanks, Good morning, everybody can.
Can you talk a little bit about the margins youre seeing on the cans you are able to resell or what you're needing to do to move those split.
And so because our backlog.
Thanks, Carl because our backlog already has a fairly notable normalized incentive because we put a rate lock on everything in backlog or most everything in backlog already we're reselling them at similar incentive at times, the price of actually a little bit higher because some of those homes are older but for the most part it's not.
A material incremental margin deterioration outside of that 100 day of additional incentive I mentioned and in the first question yes.
That's an aggregate cost a statement too obviously.
Certain markets are.
Stronger than others right I mean in terms of the markets turning around and reselling that stack is fairly easy and we can sell it at a better price and other markets like Houston. For example, we are happy to offer a bit more incentives so the.
The markets are moving very differently right now.
So thanks, Felipe and when you think about the incentives the tools you have the bucket of finance and I guess a lot premiums incentives.
Have you gotten to a point, where you've needed to look at base price cuts have you done that has there been any elastic response and how is backlog reacted in the in the instances when you would have had to cut basis.
So.
Again, we're a we're expect builder. So we just have an all in price for our product.
And.
It's not really a base price minus an incentive.
As you know a rate lock program.
It's really just an all in price and the financing which drive a payment.
So.
My point being is when we added incentives, it's the same as reducing your base price in mind.
Because we're not selling dirt so as we add these incentives I guess you could say yes.
We're lowering the price of the home, but have we gone and actually lowered based pricing on.
Production no not not in very many places.
I would say net net.
The current I mean, you can see it in our in our sold AC.
Our all in price that ESG that we're reporting is increasing not decreasing for the folks in backlog. However, we still have a price advantage are.
Compared to the pricing today, except for me, Okay that especially you are getting in a key in certain months are certain weeks.
All in the.
And backlog, especially with her backtrack a rate lock are more favorable than like on the ground.
And again I don't want to make it more complicated than it needs to be but as our specs mature.
And they get to a point, where you know.
Consumers are interested in them, we set the pricing of that stat, where we think it needs to be to move the house.
And whatever that prices at prices and those prices are starting to come down as we offer different ways to move that product in today's market and I mean, it's not a surprise to everybody, but all of the public builders have large backlogs that we're trying to close over the next two quarters.
So we're certainly trying to give that backlog confidence and the homes. They bought and you start slashing our prices I think that doesn't provide that confidence and we also noted that 45, new community this quarter and as communities close out and replaced by new communities. We have an opportunity if you want to take a two week that pricing.
Backlog in those communities over the next couple of quarters.
Community Count churns and become new work, we will have the ability to do what we think the market needs it to do it.
<unk> demand can be spicy, although in today's market and our customer in particular, they are buying <unk> and not really concerned about the pace of the how and the ability for us when we're rate locking we're not just locking in a rate it's almost always with immaterial by down to the current market rate and logging data available in the marketplace that we're able to lower their.
Quite a bit to a comfortable enough place that that.
That's what they're driving piece of the incentives that we offer on the financing side are much more meaningful and a reduction in price.
Okay that detail really helps thanks very much I appreciate it all.
Our next question is from John Lovallo with UBS. Please proceed.
Hey, guys. Thank you for taking my questions. The first one is in.
In our opinion at least the market appears to be pricing in more than just demand moderation in the bear cases that there will be meaningful impairments and I know you talked hilla about.
The things that would need to happen for impairments to happen, but I was curious if you could put it in simpler terms. It just maybe from a gross margin standpoint, what sort of margin level would you need to get to before impairments would become meaningful.
Sure.
Impairment occur at below breakeven right, we're at 31, 6% today.
As reported with Crazy normal incentive right. So we already have some level of incentives built in so for for impairments to start occurring materially the entire population of our 300 community would need to drop by another.
20, plus percent right, we're talking about.
And a $408000.
We just thought it would be almost $100000.
Each and every home that we sell for us to have these kind of wholesale.
Actually that wouldn't even be in Canada that would just to get us to breakeven it would have to be something beyond that to get us to a loss situation.
It's unlikely that what's happening is that where the market and you would anticipate that that demand overall slows down and you're going to see some really material savings on the cost side, which would be offsetting that which would make the spread he below breakeven even larger so.
Is it possible I mean theoretically anything is possible in today's world, where we're sitting it doesn't look probable.
That's really helpful. Okay. Thank you.
And then.
Understanding that there's uncertainty out there, but you know if you're moderating the land purchases are being a little bit more cautious there and your net financial leverage is in good shape. So why not put more cash flow into share repurchases.
Well I think we've said it a couple of times in the script, but it's definitely something that we intend to do but this was not the right quarter for it this was the quarter.
Tremendous.
Inventory growth getting.
Record high.
Spec starts and a record high backlog kind of churning through that's where the cash needed to be.
It is absolutely a focus for us as we continue to progress through the year and into 2023 as you see our cash balance right.
Shareholder returns.
Our high level of focus for us not just growth of our inventory they definitely stay tuned for additional guidance in that direction over the next quarter or so.
Good to hear thank you.
Yeah.
Our next question is from Dan Oppenheim with Credit Suisse. Please proceed.
Thanks, very much I was wondering in terms of the comments on selling to some of the single family rental companies.
How much of that is the are you selling some of the canceled homes were completed specs.
And I'm sort of wondering about the margins on those sales or in terms of the communities to be sold in the back half of the year. How are you looking at the obviously, it's easier in terms of selling but wondering about the margin impact there.
I think we missed the first part of your question can you say it was a little bit foggy there can you restate it.
Sure just wondering how much of the sales to the U S. If our companies.
How much of that is occurring based on homes that were cancelled or.
Our completed specs versus sort of planned sales there.
And wondering are the margins on those or in terms of full communities. What you expect in terms of those sales in terms of the margins.
Yes, so most of the cans, we're taking we're just selling those to a new buyer I don't think we started packaging goes up and moving those to a BFR.
Channel, we have specific product throughout our footprint that we're targeting for bill for Red in the cans that we're seeing from customers most of that product in those communities those are for owner occupied business.
As it relates to what are the margins on build to rent.
Up to this point, it's been pretty agnostic.
We were able to offset some of the cost sales sales and marketing cost.
Whether it's a just selling homes or actually selling a whole subdivision, which we've already done a couple of those we have a few more planned for next year. The margin is essentially the same at.
At least so far.
To see if these changed here over the next couple of quarters, but as we look out into the homes that we have scheduled to close with our build for Rep partners in Q3, and the full subdivision level ones that we're doing.
Really the margins are basically the same.
Great. Thanks.
Our next question is from <unk> <unk>.
<unk> with Wells Fargo. Please proceed.
Hi, good afternoon, Thanks for taking my question.
We will refrain from giving the full year guidance, which is understandable at a high level, but it appears your Q4 gross margins could be higher than Q3, only because your spec inventory looks like will become more available which can provide some volume leverage.
And also Theres this lumber benefit that starts to percolate by then.
Is that a fair way to think about it and is there a way to think about how much higher it can be what is it like 200 bps or so and the reason I gave.
A number out there like 200, Pepsi as some of your peers have guided to.
Pretty healthy benefit from lumber.
Yes.
So I'm, assuming it would be pretty substantial for you too.
Yeah. So we're not comfortable giving full year guidance I'm not sure you are giving Q4 guidance is is that is where we're what we're prepared to do today I think we mentioned in our prepared remarks that the impact of lumber will continue through most of Q4. So I don't know that I would be modeling material savings from from lumber coming during that period of time I think all of our peers.
<unk>.
Ourselves included have noted that there continues to be a push upward in both labor and other materials that are.
Absorbing the majority if not all of the lumber savings at this point now numbers are our numbers locked so it's a little bit longer to feel the experience from that whereas other commodities and labor.
It is a spot rate.
Changes in India and declines in that cost could be could.
Could be experienced a little bit sooner, but for the most part we're seeing still an increase.
In most other components of the home, it's fine having that spec inventory available.
Inventory is going to be sold with.
With the App.
Themed incentive as what we're selling today. So I don't know I think we'll be selling.
At potentially a different pace, because we have more inventory.
That fits the preferred box for our buyers, but I don't know that we're going to be selling it for a lower discount.
Yes.
Okay, that's fair.
Switching gears to buybacks I know you said, you'll provide a little bit more color later on.
But you know I.
Just wanted to talk a little bit on buybacks. If you are able to provide some color around it.
What level of repurchases would you be comfortable with.
You mentioned you want to offset some of the dilution.
That doesn't come with moderating housing scenario, but it looks like you'd probably have much more firepower than that.
Question is what is the level that you could be comfortable with.
Going forward with buybacks. Thank you.
So we always try to restate I shouldn't say since 2018, we've been trying to re queue.
Offset the effect of granted the neutralization on the dilution is always the goal opportunistically above that we've certainly done a lot more over the years.
$244 million remaining on our stock.
We purchase authorization there were certainly prepared to do quite a bit more on over the last several years, we've not been shy about going back to our board and getting an increase to that authorization. When we felt we needed to so we're certainly prepared to do more but it's going to be a function of stock price and cash availability. So that that's really going to be the driver for the determining.
On a go forward basis.
Thank you.
Everybody. Thank you operator, I think that was the final question.
Once again, thank you for joining our call. We appreciate your continued trust and support and we hope you guys have a great rest of your day.
Yeah.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
[music].
Yes.
[music].