Q3 2022 Beazer Homes USA Inc Earnings Call
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Good afternoon, and welcome to the Beazer homes earnings Conference call for the quarter ended June 30th 2020 to today's call is being recorded and a replay will.
Be available on the company's website later today.
In addition, Powerpoint slides intended to accompany this call are available in the Investor Relations section of the company's website at Www Dot Beazer dotcom.
At this point I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
Thank you good afternoon, and welcome to the Beazer homes conference call discussing our results for the third quarter of fiscal 'twenty two.
Before we begin you should be aware that during this call we will be making forward looking statements such statements involve known and unknown risks uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections.
Any forward looking statements speaks only as of the date. The statement is made we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information future events or otherwise new factors emerge from time to time and it is simply not possible to predict all such factors.
Joining me today is Allan Merrill, our chairman and Chief Executive Officer on our call today Al will discuss highlights from the third quarter <unk>.
Insight into conditions in the housing market and how we are positioned for this environment.
Ill then provide details on our quarterly results financial and operational expectations for the remainder of the year and our approach to capital allocation.
We will conclude with a wrap up by Allan.
After our prepared remarks, we will take questions in the time remaining I will now turn the call over to Alan.
Thank you, Dave and thank you for joining us on our call. This afternoon.
We generated excellent financial results in the third quarter, the strength of our backlog combined with disciplined execution in the field and careful management of overheads produced significant year over year growth and profitability.
Adjusted gross margin was about 28% up 390 basis points adjusted.
Adjusted EBITDA was $88 million up almost 12%.
And earnings per share were $1 76 up nearly 45%.
With a backlog of 3000 homes valued at more than $1 5 billion.
We have good visibility into the remainder of the fiscal year, allowing us to raise full year earnings expectations again.
While we were able to exceed our third quarter profitability expectations as we anticipated the sales environment has become significantly more challenging.
We've highlighted affordability risks in prior quarters drip.
Driven by higher home prices and higher mortgage rates.
Those forces together with the highest inflation reading since 1981, finally reached a tipping point with consumers during the quarter.
<unk> and lower traffic in sales and an uptick in cancellation rates.
This weakness represents an abrupt change from the past two years and it reflects both economic and perceptual concerns.
Many consumers are having to confront the limits to their purchasing power, while others are reassessing their confidence in our home purchase decision, even though they can manage the payments arising from higher rates.
While we can't know the duration or severity of this more difficult sales environment we.
We believe our consumer positioning operational processes and capital allocation approach will allow us to navigate the environment that lies ahead.
Our consumer positioning is both desirable and durable.
For many years, we have been refining our ability to deliver extraordinary value at an affordable price specifically through our three pillars.
Our mortgage choice program is designed to ensure that a carefully selected group of lenders compete for our buyers business.
This means our customers have access to an array of loan programs extended rate locks and buy downs that a single in house lender simply can't match.
These are surprising performance insurers are buyers have among the lowest utility bills or any new homebuyers.
Monthly payments at the center of most conversations with customers the value of low utility bills has never been more apparent.
Finally, our choice plans allow buyers to modify the floor plan of their homes to match their needs at no additional cost instead of having to buy a bigger home to get the types of space that they need our buyers can select pre engineered plant options to maximize the value they get from every square foot at all.
These three pillars deliver durable value to buyers, allowing us to have a consistent strategy even in challenging markets.
One of our most important operational processes as a weekly CMA review of every community. This involves deep analysis of competitive market data, including availability pricing features and incentives.
With this information we can quickly refine our offerings to best position our community.
As an example, we may decide it makes no sense for us to match the dollar value of our competitors closing cost incentives available on a completed spec homes.
We're selling to be built homes that will deliver next spring instead, we may offer a combination of credit to be spent in a design center and the contribution toward and extended rate loss.
Sometimes however, the market shifts more significantly.
In June our analysis led us to selectively increase the dollar value of incentives in many of our communities and reduced base prices and others.
To date these adjustments have been modest for three reasons.
First even though sales have weakened the structural imbalance between the supply and demand for homes remains in place and there is simply no way. This gap can close in the near term.
Second the labor market remains very strong with low unemployment and rising incomes in virtually every industry peers.
Period of stable home prices will improve affordability.
And finally locking in housing costs remains compelling.
Xyrem and a rising rental rates for apartments and single family homes.
To be clear as market conditions evolve, we will adjust our approach in each community in ways that we feel best represent long term shareholder interests.
For the past decade, our approach to capital allocation has been driven by our balanced growth strategy.
This has allowed us to deliver improved profitability and returns from a less leveraged and more efficient balance sheet.
Several years ago, after improving operating margins and substantially reducing debt, we began allocating more capital to the growth of our lot position. These efforts have been successful even as we have continued deleveraging the balance sheet. We now have over 24000 lots controlled more than half of which are under option.
We remain active in the land market, because we remain confident in the multiyear supply shortage impacting housing.
But in the near term, we expect to be highly disciplined in the deployment of land acquisition.
As Dave will discuss in more detail both debt and equity repurchases are likely to also play a role as we attempt to maximize risk adjusted returns.
In summary, we believe we have the right consumer positioning the necessary operational processes and the correct approach to capital allocation for this environment.
That I will turn the call over to Dave Thanks, Alan looking.
Looking at some of the key metrics from our third quarter compared to the prior year. Our sales pace was two five sales per community per month.
During the quarter, we saw an uptick in our cancellation rate to 17%, although this remains well within our historical average.
Our gross margin, excluding amortized interest impairments and abandonments was 28, 1% up 390 basis points.
Our quarterly tax expense was about $13 million with an effective tax rate of 19, 5%, reflecting the benefit of energy efficiency tax credits as a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expenses.
This led to approximately $54 million of net income from continuing operations, yielding $1 76 per share in earnings up nearly 45%.
Yes.
While our backlog gives us good visibility in the fourth quarter financial results estimating sales is very difficult.
Over the past decade, we've generated fourth quarter sales paces ranging from two four to $4 four with an average just below three.
Based on what we've seen over the past 60 days sluggish gross sales and higher cancellations. Our best estimate is we'll be below our historical range close to two sales per community per month on a community count about 120.
In terms of our financial results for the fourth quarter.
Closings should be in the 1400 to 600 range, reflecting a backlog conversion around 50% up from 45% last year.
This would represent the first time since the fourth quarter of fiscal 19 that we experienced improvement in our conversion ratio.
While we continue to experience labor and material availability challenges conditions have stabilized somewhat given us confidence and the slight year over year pickup.
Average sales price should be around $515000 up over 20%.
Gross margin should be up around 200 basis points versus the same period last year.
SG&A as a percentage of total revenue should be approximately 10%.
And interest amortized as a percentage of homebuilding revenue should be in the low threes and our tax rate to be approximately 20%, reflecting expected tax credits.
Our.
Patients for fiscal 'twenty to reflect the continued successful execution of our balanced growth strategy as we are going to grow profitability at a faster rate than revenue reduce leverage and drive better returns.
Inclusive of previously disclosed energy efficiency tax credits of approximately <unk> 40 per share. We now expect earnings per share to be approximately $6 50.
More than 60%.
This will drive improvements in both returns and leverage with return on equity above 22% net debt to EBITDA in the low twos and net debt to net capitalization in the forties.
Yes.
Given our efforts over the last decade, we now have a liquidity maturity schedule and land position to enable significant flexibility as we consider our capital allocation priorities.
Specifically, we have three primary objectives, when we think about our future spend.
We want to allocate capital to land spend to enable future growth.
Second we want to drive a higher book value per share and finally, we want to continue to reduce our net debt to net capitalization.
I'd like to elaborate on each of these priorities in relation to how we're thinking about the coming year.
As with most homebuilders the primary focus of our capital allocation is land to sustain and grow the business by driving a higher option percentage over the past two years, we've been able to rapidly grow our total lot position without increasing our own lots.
As we encounter more challenging sales environment, we expect both land prices and deal structures to become more favorable in the quarters ahead.
In fact as rates began rising this spring we took the opportunity to re underwrite all pending land transactions. While these efforts are still at an early stage, we have already successfully reduced purchase prices restructured takedowns or walked away from a number of deals.
It's worth noting that over time, we have not only dramatically grown our book value per share, but we've also dramatically improved the quality of the book value.
Based on our third quarter results, our book value per share has grown at a compounded annual growth rate of more than 15% over the last seven years.
In the past our book value was primarily comprised of non earning assets specifically land held for future development in our deferred tax asset today. These items represent a small fraction of our networks.
As we look to drive further book value per share growth one option, we will consider as repurchasing our stock at a healthy discount to book.
As a reminder, we currently have $48 million of capacity under our previously approved share buyback.
Of course, any buyback will also consider our final capital allocation priority, namely continuing to reduce our leverage.
Over the last seven years, we've retired nearly $500 million of debt and reduce our net debt to net cap by almost 30 points.
At the same time, we have termed out our debt complex eliminated near term note maturities and significantly reduced our cash interest expense.
After we get total debt below $1 billion at the end of this year, we expect further reductions to our net debt to net capitalization over time.
Primarily through retained earnings and matching the dollar value of any share buybacks with additional debt repurchases.
With that I'll now turn the call over to Allan for his conclusion. Thanks.
Thanks again.
The third quarter of fiscal 'twenty, two was very successful for beazer, and we're poised to deliver exceptional full year results.
Just as importantly, our efforts over the past decade have positioned us to weather what is undoubtedly a more challenging operating environment, specifically execution of our balanced growth strategy and adoption of our three pillars.
Have allowed us to structurally improve profitability.
We reduced debt, while efficiently expanding our lot position to fuel future growth.
None of this would have been possible without our team and I want to thank them for their ongoing efforts.
I remain confident that we have the people the strategy and the resources to create growing and durable value over the coming years.
With that I'll ask the operator to take us into Q&A.
Thank you we will now begin the Q&A session to ask a question. Please press star followed by one please.
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One moment, please while we wait for questions to come in.
Our first question is from Alex Barron with housing Research Center you May go ahead.
Yeah. Thanks, I wanted to see if you could elaborate on the share buyback then maybe debt buybacks and your thoughts around is the idea to basically not grow the company but to emphasize.
Those capital allocations going forward.
Well, it's Dave I think we tried to make it pretty clear, it's really about balancing the capital allocation priorities in that setting the business up for growth in the future from a land perspective.
Growing book value per share and continuing to Delever the business from a net debt to net cap perspective. So I think if you look at the land position that we currently have in place, especially what we've gone through an option perspective, we're actually set up pretty well to grow the business.
But what we've also done is create a lot of flexibility in our capital structure that if it makes sense from a risk adjusted return perspective to go out and buy back some debt or go back out and buy back some shares accompanied with debt repurchases, we have the flexibility to do that and still grow the business.
And while that sounds interesting.
I think I also heard you say that you guys.
Have implemented among your incentives are lowering base prices can you comment on to what extent, you've done that and something.
Some idea of how much you've reduced either how many percentage of communities or how much the price reductions have been.
So Alex it's Alan I would say across our portfolio, we have either increased incentives or reduce base prices on the majority of our communities.
Of that a larger share has been increased incentive a smaller share has been reduced based prices.
I'm familiar with base price reductions that had been 5000 10000, so relatively small percentages.
Previous base prices.
And the thing that comes into play is each each market and you know my my peers in the industry I think would would acknowledge this every city kind of has a different.
Competitive dynamics, so in some cities, you'll see what I call markup to Mark down where you tend to see increasing dollar value of incentives. There are some other cities where the denominator in the competition is more around based price more of the places we do business really emphasized the dollar value of it.
Incentives a handful of the markets really are are more about based pricing and that those are typically the places that we have made adjustments to base price, but I was I was careful to point out that to this point.
The adjustments that we've made the base price have been pretty modest.
You know single digit percentage of E. S. P. A low single digit.
Part of it is because I don't think in this psychological environment right now chasing with price is terribly effective.
We're in a transition period, and we need to deal with that adjustment and I don't think that price by itself is going to fix kind of that psychology piece.
We may find in future periods that we need to be more aggressive we may not but at this point its been pretty modest.
Okay. That's helpful and if I could ask one more.
Some builders seem to be sticking with build to order or other guys are.
I was saying you know that there's demand for quick move in specs.
Which way are you guys leaning here.
In terms of strategy are you guys looking at that.
So if you look we've historically run at about 60 40 to be built to specs.
I would tell you in the last couple of years, we've leaned a little bit more towards to be built.
And I would tell you that in this environment I think we'll kind of get back towards that 60, 40 historical split to be built the specs.
It certainly is important in this environment that if you have a buyer who can qualify at current mortgage rates you get them in and you have some standing inventory. So I would tell you kind of closer to that 60 40 level that we've seen historically.
Okay. Thanks, I'll get back in the queue.
Thank you.
Thank you. The next question is from Julio Romero with Sidoti <unk> Company you May go ahead.
Hey, good afternoon, thanks, very much for taking my questions.
Hey, Julio ARIA.
I'm good thanks so.
<unk>.
You guys mentioned earlier that.
Labor and material availability challenges have lessened somewhat in June I was hoping you could expand on that at all.
Yeah, we're down to a handful of categories that are particularly problematic.
You probably heard the list of horrible.
Certainly garage doors are challenging.
In most markets HVAC equipment, and appliances are selectively challenging, but it's nice to have a shorter list of challenges than we've had in some prior periods.
The labor picture is it the glimmer. There is starts are actually down and so if you think about the bowling ball moving through the snake.
Of course as soon as I say that and I can't get the picture of why there would be a bowling ball in a snake, but anyway.
The front end trades are the ones that are starting to see that reduction in starts and that's where we're gaining a little confidence that we can move things faster the finishing trades what those towards the backend they're not feeling it yet there is still an enormous backlog in the industry out there in specs to be finished that are that are under construction, but I think if you.
Think about it sequentially that reduction in starts in June it will play through and that's one of the things that we're looking to particularly into Q1 and Q2 and why we think we may be at a turning point, where we can regain regain some of our cycle time.
Got it that's helpful. And then I guess my follow up I just wanted to ask about how you expect community count to trend beyond the fourth quarter and you also talked about you expect.
Land prices, maybe to become more favorable does that lend itself to maybe.
Land spend being a little bit more.
I guess for lack of a better word like larger chunks as you see some favorable opportunities ahead and like less.
Kind of steady.
Let me talk about the land market and Dave can talk about community count a little bit because I've been very involved in our land market.
Negotiations and strategies.
I don't think they necessarily lead to larger chunks I think it right now discretion is definitely the better part of valor.
And buying time renegotiating pricing re setting risk profiles like when do we need to buy it who's responsible for which costs. There are lots of dynamics like that that I think are available to us and frankly, I think there will be even better opportunities in the months ahead, but I don't think that that necessarily leads to bigger chunks if anything.
One deal is working on this morning, we've converted it to five takedowns from a bulk buy and reduce the price.
So the price is lower and the rate at which it consumes capital will be lower.
Winning on both of those fronts. So I think that's in front of us.
It won't be possible in every deal for sure, but I've been pretty pleased with our ability to to capture benefit.
From a software land market.
<unk> I would tell you from a community count look we've talked about them and still expect an upward trajectory next year.
Youre going to probably see some volatility quarter over quarter and look I would tell you that volatility is because it's harder to predict closeouts with more volatile sales and then you have delays in new community openings now look I think we're hopeful that as we move into next year. Some of those delays may ease a little bit, but it's still probably too early to tell from that perspective, so upward.
But some volatility.
Got it no that makes sense.
Thanks, very much for taking the questions.
Thank you Sir.
Thank you. The next question is from Susan Mcclary with Goldman Sachs. You May go ahead.
Thank you good afternoon, everyone.
And so.
My question is you know obviously Alan in the last month or so there's been a lot of focus on the state of the consumer their health.
Their willingness or ability to buy things including homes.
Step back how are you thinking about where your buyers mindsets hard today, and where the broader macro is and perhaps even going in you know what is giving people really pause as they think about potentially buying a home or not buying a home right now and just how some of these big factors could come together.
It's a question I wish I had an even better crystal ball for Sue but.
I think if we go back a couple of months the rate shock was the first wave it was kind of.
Eye-popping right.
Three become a four become a five nearly a six suggests there was a little shocking at just around the rate and that's even before you do the math, obviously that has an adverse effect on on payments and on affordability, but just the the almost stun stunned response.
I think you move past that and then you get into now Youre doing the work Youre doing the math you know what was 2500 dollar as a payment is now $3200 is a payment and how do I feel about that increase how does that compare to rent and that's a that's a process that takes a little bit of time and I would say we are in that process and then I think theres a third leg.
And that is what's going to happen to prices and you know I've listened to some but maybe not all of the industry calls I think theres been a fair bit of responsiveness on the part of builders, but with a high degree of discretion and what I mean is I think there's been a lot of adjustments.
But the fundamentals this knowledge that we've got that there is a shortage of housing in this country I just haven't seen and I don't anticipate candidly a big reduction in prices, but I think from the psychology of the buyers after grappling with the right after grappling with the payment now you've got <unk>.
Ask yourself, but is there a better deal that is going to be available and I think time will tell.
But over the next couple of months I think that's the phase that we're in and that's why I made the comment before I think chasing with price right now, let's let's see how it plays out that's kind of what we're doing we're wanting to be competitive, but we're not trying to go steal market share right now with price because I.
I think that the psychology is is still in that adjustment phase, where the dollar levers aren't really going to be the thing that makes the biggest difference.
Yeah, Okay, that's incredibly helpful and sort of building on that you as you think about the mortgage market rate and the role of higher mortgage rates.
Number one what are you seeing out there, especially as you think about your program that you have.
Unique to beazer as it relates to mortgage financing, but then just longer term any sort of newer programs or changes that could come through that perhaps help buyers as they do look to purchase homes.
Well.
I am going to try and resist the temptation to.
Give a marketing pitch in my response, but two it is absolutely the case.
With mortgage origination volumes, having collapsed and the elimination for the largest part of the refi market. The competition for high quality whole loans is very high so having multiple lenders compete for a buyer we see that in rate, but where we really see it in is locks and buy.
[laughter] downs and telling lenders, that's not going to be good enough you're going to have to sharpen your pencil and do better to win this deal and it doesn't stop there because once we've got somebody under contract that preapproved. They may be fully approved they can keep shopping right until roughly 30 days before the close.
<unk>.
So I think that dynamic that that lack of demand for mortgages right. Now is an extraordinary advantage because our dollar any any contribution that we're making in closing costs that is to be applied do things like buy downs and locks goes a lot further when you've got there.
That kind of competition among very hungry lenders.
So I think that's really the thing that we're saying and I admit theres a little myopia, there I'm sort of looking at that very closely at a broader level I'm, not saying crazy things happen from a mortgage origination risk perspective.
And I think we've we've squeezed most of that out of the system and appropriately so not saying you know riskier loans.
Dramatic changes in underwriting criteria I'm not seeing banks portfolio.
Subprime or anything like that so I think the mortgage market remains quite sound from an underwriting standpoint, and we're just trying to leverage that competition for the benefit of our buyers.
And know that that's great Alan Thank you for all the insights and good luck with everything.
Thanks Sue.
Thank you. The next question is from Alan Weber with.
With Zelman.
Please go ahead.
Hey, guys. Good afternoon, thanks for the time and taking the questions.
Yeah, Alan I know, the the price adjustments and incentives it sounds like they've been fairly modest up to this point, but I'm wondering if you could just talk a little bit about any kind of elasticity youre seeing from those adjustments. When you do make them are you finding that its making a notable difference either in conversions or traffic or anything like that.
Just on a similar line I noticed on your gross margin guide for <unk> and yet it does imply.
About 200 basis points or so of sequential pressure and I'm guessing it's too soon to really see the impact of those incentives. So I'm just curious if that's what's driving it or if it's more of a cost story. Thanks alright.
Thank you Alan will will divide and conquer here and I'll, let Dave talk about gross margins and by the way. Your instinct is right. It's early but Dave will talk about that I think the elasticity is an awesome question and I am Super interested in it every week with our teams and our weekly.
Weekly calls talking about sales.
I'd say that there is not as much elasticity as you might think you.
You have to be in a competitive range.
And then you have to really be in a counseling and value proposition establishment mode, but it isn't the last dollar that seems to be making the biggest difference I mean, I I again, I am going to talk our book.
Having people feel like they're getting absolutely the best possible mortgage execution. That's a win telling people you can't get a lower utility bill that's a win but you've got to make sure that your pricing and included features is in market. So if somebody's including a.
42 inch cabinet.
And we had 36 inch cabinets, maybe that's an adjustment we need to make to be in market to make sure that we're in the right solution set but it isn't $5000 more than that right. It's sort of these micro adjustments to make sure that you are in line and then you got to sell your value and part of that is company specific part of that is just.
Establishing confidence for this buyer.
In this in this transition period now.
Before Dave talks about margin if you want to follow up on that I'm I'm happy to.
Keep working to try and answer your question no.
No I think that makes a lot of sense, Alan and I guess, you know I don't think anybody's asked it up to this point so I'll just throw it out there in response to that I mean, it sounds like kind of a July trends then based on that would have been fairly similar to kind of where you exited the quarter like these adjustments assuming they've continued into July probably haven't drastically change the.
You know the direction of the market at this point.
No I haven't seen that in any of our.
And I'm not trying to be disparaging or the industry calls them wire reports you know as builders share sales across cities I haven't seen any big spikes in those in in in the aggregate and certainly for US you're right July has felt a lot like the way that June ended and Thats why we gave a guide on Q4 orders that sort of below historic.
<unk> average because I think that's the kind of environment. We're in right now during this adjustment period.
Sure makes sense, Yeah, maybe Dave you can add some color on the margin and then I do have a follow up after that if I can.
Sure.
Your intuition is exactly right Alan it it really is not the increased incentives in Q4, it's much more price cost.
Which was very favorable you know are the higher prices that rolled through in Q3, along with what had been kind of previously kind of lower cost, especially with predominantly to be built business. In Q4 again kind of sales. We made nine months ago price cost isn't quite as favorable and you have a little bit of sequential margin degradation, although still up year over year. So it.
Really is price cost as opposed to incentives and in the guide.
I think it has a lot to do with lumber locks as that is the truth when it where was lumber eight months ago versus where it was at 12 months ago and I think that's kind of one of the things that youre going to see in that Q3 to Q4 progression by the way you know lumber came down. So that's also going to help in the future but.
I think we've probably got our highest cost lumber rolling through in the fourth quarter.
Got it that makes sense and.
I guess second question, if I could David Thank you for the <unk>.
<unk> spent walking through the capital allocation kind of strategy there.
So if I look at your balance sheet today, your cash balance dip lower this quarter.
Back to the lowest levels, we've seen in a couple of years and obviously it sounds like you expect to generate a good amount of cash in the fourth quarter I'm sure a portion of that will be used to pay off debt the term loan.
Just thinking ahead, you know obviously you have a fairly positive view on the outlook for the next few years and kind of be in that.
Housing shortage thesis et cetera, but lets say Devil's advocate you know the market does continue to deteriorate into year end and Youre looking at your liquidity position and your balance sheet you have.
Oliver I believe correct me if I'm wrong.
Matures in 'twenty, four and you know the last time, we hit a kind of pocket during the early stages of the pandemic. Your first instinct to borrow against the revolver and just kind of boost our liquidity profile, which I think made sense at the time thankfully you didn't need it but kind of just let's let's take a worst case scenario here how would you react.
If the market falter.
Falters further and maybe the debt markets dry up a little bit and you're in a position where you do want to boost up that liquidity heading into year end or into 'twenty three.
Well look it's Dave I think as you know we have flexibility as we think about land spend heading into next year and frankly, we can be pretty cash generative in the business if conditions dramatically where does kind of fall off so you know what.
I think that's the flexibility that we're talking about in the script, we have quite a bit of land tied up under option. So looking forward and the ability to generate a lot of liquidity on a go forward basis, if the market were to deteriorate, giving us a lot of optionality and so that's kind of a moving target. We obviously didn't talk about 'twenty three land spend in the call specifically because as we kind of.
Or what's going to happen in the market and what we're seeing will be pretty flexible way to think about our capital allocation approach.
Got it I appreciate that Dave Alright, guys. Thanks, a lot. Thanks.
Tom.
Thank you.
Next question is from Alex.
B Riley you May go ahead.
Thank you good evening gentlemen, a couple of quick questions here the absorption guidance.
For the fiscal fourth quarter is to.
So we've gone from about three and a half down to two in about six months, if we were to assume that demand.
But why is that a new level.
In six months or how long might it take for you to get back to your target absorption rates and what is that.
So it's a great question and I again, as I said to an earlier question I wish our quest to Crystal ball were great, but I think this is a six to nine months kind of transition period psychologically economically I think we get into the spring selling season next year.
At this point I would predict that we will see some improvement in absorption rates across the sector and for US we certainly want to be in that three range when things are really going great.
Gets to four but that creates other issues.
Two is at a level that we want to sustain for very long, but I think sometimes you have to be a little bit patient you've got to work with buyers you've got to establish value and not just react overreact.
Because it may not be very effective so I would tell you I don't know one of the challenges of course will be seasonality.
And our first quarter.
Is seasonally our lowest absorption rate quarter again looking back 10 years. So some of the sequential <unk> may be a little bit trickier, but when I think about kind of where do we get back to and I think the thrust of your question is when do we get back to something that feels like more normalized absorption levels I'm guessing it's it's.
Next spring.
And it's very helpful.
And then.
I'm trying to think about community count kind of.
912 months down the road and I know you plan on opening 15 communities in the next six months I guess I'm kind of struggling with the quantity of closings over the next six to nine months.
Any further.
Color you can add to that.
Oh yeah.
I'll tell you Alex a couple of things one we do kind of we have talked about the challenge that we face frankly in predicting closeouts.
With the volatility of sales and I think youre right. It is difficult, which is why we didn't really give community count guidance further add other than talked about an upward trajectory and overall.
Community Count I think if you look at page 27 in the deck.
It can give you a sense of kind of what's happening in the next six months in terms of new community openings, what's kind of underdevelopment, that's not going to.
Opened in the next six months that we have some visibility into.
And then frankly deals that are approved but aren't yet closed looking past kind of that what's under development and then frankly, what's coming offline in the next 12 months.
And so I think when you kind of think longer term. It helps you to think about trajectory.
If not exact timing.
And I'd add.
One other way to kind of think about it we'd have to sell at a really rapid pace.
<unk> be in a place where we're opening more communities and we're closing out.
Cause we can control well control, we can't pull forward openings right. There is a land development aspect to that but you can accelerate the closeout. So if we're in a robust selling environment. We may struggle in certain quarters to have the growth, but given the number of communities under development and approved.
I would say we'd have to sell at a much faster pace than I think is likely for us to not have community count growth.
And then real quick you know some of your peers have mentioned.
You know their July trends and seeing some green shoots did you see any green shoots in July and the month of July .
We did more in the traffic side than the sales side I.
I would tell you that traffic and a bunch of our markets did show nice improvement.
And I think that's why you know Ive got some some confidence I think this is an adjustment period I think people are back out there looking they're curious they seen stability in mortgage rates over a number of months.
Not the one way upward.
Rocket that we were on there for a few months.
That didn't really translate into significant changes in the in the cadence of sales.
Again informed how we thought about our Q4 guide on order pace.
Very helpful. Thank you very much.
Yeah.
Thank you. The next question is from Kweku broke glass with Goldman Sachs. You May go ahead.
And congrats on the quarter. Thanks for fitting me in I know its getting a little bit late but I just wanted to revisit your comments from earlier about re underwriting some of your land and how that sort of from connects with the uptick in land spend during the quarter just wanted a little bit of the puts and takes about what exactly you want the reevaluation of REIT.
Underwriting consisted off in them and then we'll move forward from there.
Yes, so in any period the land cash spend relates to things approve developed in prior periods. So when we talk about our re underwriting that's going to have an effect on the fourth quarter on the first quarter really doesn't happen typically within the same quarter. So that's the <unk>.
Thing second thing is when you think about rate when we think about re underwriting I think about really three things what are going to be the price of these homes.
What's the pace that we're going to be able to sell these homes.
And what incentives or what costs are we going to incur and revisiting all of those assumptions.
Asps.
Our sales paces and incentives and cost led us to in a number of cases say you know this market feels different than when we first either contracted or started negotiating on this and we went back very directly to sellers and said still doesn't work.
Needs to be a different structure it needs to be a different price we dropped some we renegotiated some and we absolutely lowered the price on some now the sample sizes is a couple of dozen deals that I am describing but we have more underway and I'm pretty encouraged by the success that we had in those.
<unk> and I am given 24000 lots under control I am perfectly happy to walk away from a deal. It doesn't work we don't have to go chase a land deal to get to our lot position, we put ourself in a spot now where we can we can show a lot of discipline and making sure that the deals work in this environment not the environment that we used to have.
Thanks for that color I really was very helpful and.
You talked about.
The landfill, which has been a little bit more willing to or more.
Willing to negotiate or are you seeing that improve as the summer progresses.
Or it has has sort of the realization that the market has changed not filtered into the through the land side yeah.
You know it has certainly become more and more evident over.
Over the last 60 days in May when we started having April really in May started having conversations yeah. We got a few sideways looks by today there isn't a I don't think there's a land seller in the country that doesn't expect to have this kind of a discussion now whether or not the price was struck on terms that still are justified that may be the case, so I'm not sure.
Every deal is going to be re traded because some of them are actually you know entirely appropriate in the current environment, but I definitely have seen that change. The only thing I would tell you is sophisticated land sellers I mean, the smartest land sellers that we do business with we're among the first to say we get it the market's different we need to do some different things there.
Professional land sellers they have been I would say more open the occasional land seller or the accident a land seller of the one off land seller, that's usually a little stickier. It usually takes a little bit more time, and a little more education to get to a different deal.
Perfect and this one is for you David on the debt side on or our capital allocation side.
What conditions would you guys consider perhaps being a little bit more aggressive.
Your debt repurchases given you know.
<unk> traded at a discount or deep discount bomb for few months now and you know it.
It presents opportunities perhaps for you guys.
Well I think the answer really and I'm not going to be kind of a playbook, specifically, but I would tell you more broadly it's about risk adjusted returns in the business it's about opportunities.
And it's about what we're seeing in the business overall and balancing the three priorities that we talked about which is continued deleveraging growing the book value and setting the business up for growth.
As we look forward, we'll keep obviously watch very very carefully the renegotiate or unweighted Allen was talking about thinking about overall liquidity watching yields and frankly watching the share price and finding how we can maximize our risk adjusted returns for shareholders and for our debt holders and increase the overall value of the company. So it's a little bit of a vague answer for you, but that's how we.
Think about capital.
Perfect Tom Best of luck guys. Thank you. Thank you Sir.
Thank you and our last question comes from Jay Mccanless with Wedbush You May go ahead.
Hi, good afternoon.
So on slide 28.
Spec count moved up pretty dramatically I can't remember what the number was in the second quarter, but up nearly 100% plus year on year. I guess is that a lot of cancellations that you booked at the end of the quarter or those aged specs, maybe if you could give us a little color on that and when when you might anticipate.
Those go into the Golan to closing.
Well Jay it it really isn't about cans are I mean, we had fewer 200 cans total in the quarter across all of our sales really what that reflected was back in February .
And in fact, even earlier than that our desire to have a little bit more production and frankly, a little better environment to get starts out in the field and we had a year ago. We had combination last spring of explosive sales and the supply chain largely for Covid reasons. We're just stuck so there was no way to <unk>.
Have specs, we were well under spect, we did not have enough in Q3, a year ago. So I think this is back in the order of kind of a normal number for us.
It certainly feels a nice to have very few finished.
And that's the thing that I spend more time focused on and I think there continues to be you know.
A reason we've got a 60 40 mix some of our markets. It's terrific for us to have homes that stage eight stage 10 that are relatively quick move in for buyers.
Hey, this is a pretty healthy place for us to be.
Okay.
And then.
What type of impact or the base price cuts, having on your backlog or people trying to cancel out and get a better price or get some of the incentives that the newer buyers are getting what type of impact is that having on your backlog currently.
Well for most of our backlog moving five Grand down just as an example in a base price.
Theres still $95000 in the money.
I'm exaggerating to make a point, but if you were 698 million or 12 months backlog.
US moving around a few dollars between incentives and base price today has really no effect on the value proposition that you've contracted for so I don't think what we've done so far is have really any effect on our on the backlog.
Okay.
The last question I had and I think someone already asked it but just based on.
Slide 20, I think it's 27, where the community count isn't it looks it looks difficult.
To get to any type of meaningful sustainable sustainable community growth.
Was your answer I think that you're not going to be closing out of some of these as fast as you had been before and that's how you're going to drive it or do you feel like Theres. Some land deals you can bring on in the interim that will help pull that count higher.
Well, Jeff I think actually if you kind of go through slide 27, and you see whats quote whats opening in the next six months Whats underdevelopment, which as you know obviously coming not in the next six months, but we have good visibility on and then what's approved in the system, there's a versus whats closing in the next 12 months there is a pretty good.
The picture of the trajectory of upward community count growth, So happy to chat with you offline, but that that's really what we talked about in the responses you can kind of see what's coming on and what's been approved versus frankly, what's closing out and the kind of growth potential in our community count roll.
Okay, alright, thanks for taking my questions.
Thanks, Jeff.
And I'll turn it back to the speakers for any closing remarks.
I want to thank everybody for joining the call today, and we look forward to talking to you for our year end call and.
In three months. Thank you very much this concludes today's call.
Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.