Q3 2022 MDC Holdings Inc Earnings Call
Okay.
Yes.
Good day.
And welcome to the MDC Holdings' third quarter 2022 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please first starving too.
Please note today's event is being recorded.
Now, let's turn the conference over to Darin, Kimberly Vice President and corporate controller. Please go ahead.
Thank you good morning, ladies and gentlemen, and welcome to M. D. C Holdings 2022 third quarter earnings Conference call.
With me today I have Larry Mizel, our executive Chairman, David <unk>, Chief Executive Officer, and Bob Martin Chief Financial Officer.
At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we request that participants limit themselves to one question and one follow up question.
Please note that this conference is being recorded and will be available for replay.
For information on how to access the replay please visit our website at MDC Holdings Dot com.
Before turning the call over to Larry and David It should be noted that certain statements made during this conference call, including those related to M. D. C. 's business financial condition results of operation cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private securities.
<unk> Litigation Reform Act of 1095.
These statements involve known and unknown risks uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.
These and other factors that could impact the company's actual performance are set forth in the company's third quarter 2022 Form 10-Q, which is expected to be filed with the SEC today.
It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP financial measures any information required by regulation G is posted on our website with our webcast slides.
And now I will turn the call over to Mr. Michael for his opening remarks.
Good morning, and thank you for joining us today as we go over our results for the third quarter of.
2022 and provide an update on current market conditions.
M D C generated net income of $144 million or $1 98 per diluted share in the third quarter of 2022.
Home sales revenues increased 12% year over year to $1 $4 billion and the home sales gross margins for the quarter were 22.7%.
Excluding home impairments home sales gross margins expanded 120 basis points year over year to 24.7 as.
As our team did an excellent job of delivering homes in backlog and maintaining price integrity and what continues to be a difficult market environment.
Since our last quarterly update we're good rates have risen and another 100 basis points, putting additional strain on new home affordability and demand in our markets.
Gross orders for the third quarter came in at 15, 69, which equated to an absorption pace of 2.4 homes per community per month. However.
Due to a spike in cancellations, our net order total for the quarter came in significantly below our expectations.
We believe the combination of rising interest rates and the steady stream of negative news surrounding the future of housing and the overall economy eroded the comps it into perspective, homebuyers and let them to reconsider their purchase.
Another factor that contributed to the order shortfall.
It was our strategic decision to focus on delivering homes in backlog rather than aggressively chasing sales during a typically lower seasonal period for industry.
We continue to believe that the long term fundamentals driving new home construction remain positive and that there is a strong desire to own a home in this country.
However, we expect the near term sales environment will remain challenging until there is more clarity around the future interest rates.
In light of these industry headwinds, we have refocused our efforts on generating cash.
To find the balance sheet and taking cost out of the business. We ended the third quarter was 744 million in cash and cash equivalents in marketable securities.
Debt to capital ratio of 33.2% and a net debt to capital ratio of 19, 9%.
Our controlled lot count declined 20% year over year as we approve virtually no new land deals during the quarter and walked away from over $11 million in option deposits and pre acquisition costs.
For the option agreements, we still have in place we have renegotiated or we are in the process of renegotiating. The terms of many of those agreements. These actions coupled with our focus on delivering the homes in backlog and Ray.
Sizing our cost structure.
It put us in a very strong financial position at year end.
Our leadership team has been through several housing downturns over the course of our careers.
Giving us a broad perspective on how to navigate difficult operating environments.
Market corrections are a natural and often times healthy occurring in our industry and usually lead to market share gains and the well capitalized builders when things do improve we plan on being one of those builders and are.
<unk> our company accordingly.
We have no senior note maturities coming due the remainder of this decade.
And enough lots in the pipeline so our delivery projections through 'twenty 'twenty, four allowing us to operate from a position of strength during this period of uncertainty.
Our financial strength should also give investors confidence in our ability to pay our industry, leading dividend, which currently stands at $2 per share on an annualized basis.
As a result, I continue to be optimistic about long term outlook for our company.
With that I'd like to turn the call over to David who will provide more detail on our operating performance this quarter.
Thank you Larry and good morning to everyone M. D. C was once able able to deliver on its stated guidance for the third quarter by closing 2387 homes at an average sales price of $5 90, and generating our homebuilding gross margin before impairments of 24.
4.7.
This was no small feat considering the supply chain issues labor shortages municipal delays that continued to act as headwinds for our industry.
Phoenix, Utah, and Sacramento Potus, the highest year over year delivered growth for our company, well Phoenix, Northern California, Jacksonville generated the best homebuilding gross margins.
Similar to last quarter, we saw improving conditions on the front end of the construction process, but continued to experience long lead times and delays on the backend.
We are working diligently with our trade vendors and suppliers to find solutions to these issues and expect to see some improvement over time as the slowdown in order activity translates into better trade availability.
Yeah.
As Larry mentioned, we experienced softer demand and increased cancellations in the third quarter, resulting in a disappointing net order total for the period.
Our monthly net order results mirrored the movement in mortgage rates with September being our most difficult mark.
Cancellation activity in the second quarter was largely driven by affordability issues due to the sudden increase in mortgage rates.
Cancellation activity in the third quarter seemed to be driven more by psychological factors than financial ones as.
As a percentage of buyers, who can still afford to move forward with their purchased at higher rates felt compelled to cancel.
We are currently offering incentives to spur demand in our communities, including financing incentives aimed at lowering a perspective monthly.
House payment in the third quarter incentives as a percentage of the dollar value of our gross new orders increased approximately 400 basis points year over year, and 280 basis points versus the second quarter of 2022.
Protecting the backlog and delivering as many homes in the fourth quarter as possible remains our primary goal for the remainder of the year.
However, as we close more of our legacy backlog and open new communities ahead of the spring selling season, our focus will be the sales side of the business with an emphasis on sales pace along with rebuilding the backlog.
Now I'd like to turn the call over to Bob who will provide more detail on our quarterly results and forward looking guidance on some key metrics for our business.
Thanks, David and good morning, everyone.
During the third quarter, we generated net income of $144.4 million or $1 98 per diluted share representing a 1% decrease from the third quarter of 2021.
Pre tax income from our homebuilding operations rose by $3 $1 million or 2% from the third quarter of 2021 to $168 $2 million.
This increase was driven by home sale revenues, which rose 12% year over year to one point for $1 billion.
However, the increase was largely offset by an 80 basis point decrease in our gross margin from home sales to 22, 7%.
The gross margin decline was primarily due to inventory impairments of $28 $4 million.
Impacting seven communities within our West segment in two communities within our East segment.
The impairments mostly related to communities already opened for sale.
As well as a couple of communities scheduled for opening during the fourth quarter.
Our financial services pre tax income decreased during the third quarter of 2022 to $17 $6 million. This.
<unk> was primarily due to our mortgage operations as we have seen profitability per loan locked sold and closed returned to more historical levels with the significantly increased level of competition in the primary mortgage market.
Further within our mortgage business, we saw a decrease in the number of loans locked during the third quarter due to the higher volume of long term interest rate locks utilized in the second quarter of 2022.
The decrease in mortgage operations was partially offset by our insurance operations, which benefited from increased premium revenue within our captive insurance companies.
Our tax rate decreased from 24, 3% to 22, 3% for the 2022 third quarter. The decrease in rate was driven by the extension of the federal energy efficient home tax credits during the quarter, which was partially offset by an increase in non deductible executive compensation.
We delivered 2000 and 387 homes during the quarter, which represented a 1% decrease year over year, but exceeded the midpoint of our previously estimated range for the quarter of 2200 2500 closings.
The average selling price of homes delivered during the quarter increased 13% to $590000. This was primarily the result of price increases implemented over the past two years.
Our sale to close cycle times for closed homes remained extended and are unlikely to materially improve in the fourth quarter with that said, we believe cycle times have the potential to improve in 2023 and be a positive catalyst for closing volume longer term.
We currently anticipate home deliveries for the 2020 to fourth quarter of between 2200 2500 units and we expect the average selling price of these units to be between 570005 hundred $80000.
There continues to be a heightened risk of underperformance relative to our forecast this quarter due to the increased volatility of economic and industry conditions.
Gross margin from home sales decreased by 80 basis points year over year to 22, 7%.
As previously mentioned the decrease was primarily due to inventory impairments recognized during the quarter. However increased building costs as well as an increase in incentives also contributed to the decline.
Incentives on closed homes increased 130 basis points year over year of which 40 basis points related to financing incentives offered through our mortgage company.
The level of financing incentives will likely increase in the near term as we continue to use these incentives as a tool to address affordability concerns brought about by higher mortgage rates.
Excluding inventory impairments, our gross margin from home sales improved across each of our segments.
With our west segment, having the highest absolute level in our east segment, having the largest year over year increase these.
These improvements were driven by price increases implemented across nearly all of our communities over the past two years.
We are currently expecting gross margin from home sales for the 2020 to fourth quarter of between 20% and 22% assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2022 third quarter increased $21 $3 million from the 2021 third quarter, driven by increased general and administrative expenses.
This resulted in a 40 basis point increase in our SG&A expense as a percentage of home sale revenues.
General and administrative expenses increased $29 million from the prior year quarter to $89 million. This increase primarily resulted from an increase in stock based compensation expense as we recognized $15 million.
Of expense related to equity awards granted during the quarter.
As Larry noted, we have taken steps to reduce our general and administrative expenses moving forward, we have seen our quarter end head count decreased 11% from its peak earlier this year and continue to evaluate other opportunities for additional cost savings.
We currently estimate that our general and administrative expense for the fourth quarter of 2022 will be approximately $70 million.
The dollar value of our net orders decreased 88% year over year to $152 $8 million due to an 88% decrease in net unit orders.
Net unit orders were negatively impacted by a number of cancellations during the quarter, which more than doubled from the prior year to 1270 cancellations.
Given our build to order business model. We believe it is best to analyze cancellations as a percentage of getting backlog.
In the third quarter of 2022 cancellations as a percentage of beginning backlog were 17, 1% compared to the prior year quarter of seven 4% and our longer term quarterly average over the past 10 years of 13, 9%.
In large part the cancellations during the quarter were from orders that occurred prior to the run up in mortgage rates with 59% of our third quarter cancellations coming from orders that occurred prior to March 31 2022.
As David mentioned, we also saw a higher percentage of cancellations during the third quarter from buyers, who can still afford to move forward with their purchase at higher rates. This type of buyer equated to approximately 43% of cancellations during the third quarter compared to 36% of cancellations during the quarter that were strictly due to.
The buyer no longer qualifying for a mortgage <unk>.
In contrast, during the second quarter the greatest percentage of cancellations was attributable to those who no longer qualified for a mortgage.
Before cancellations, our gross order activity for the third quarter was down 47% year over year and 30% from the second quarter of 2020 to.
About 50% of our third quarter.
Gross order activity with spec inventory.
Looking at the monthly cadence of activity each month of the third quarter saw fewer gross orders and more cancellations than the month before with September having the lowest number of gross orders and the highest number of cancellations for the quarter.
With a few days ago, the number of gross orders and cancellations for October seem like they will be similar to the numbers we reported in September .
Looking at our average sales price of new orders, we analyze this metric on a gross basis, given the magnitude and mix of cancellation activity during the quarter on.
On a gross order basis, our average sales price of new orders increased approximately 4% as compared to the prior year and decreased approximately 5% as compared to the second quarter of this year.
The decrease in our average selling price from.
From the second quarter of 2022 was due to an increase in incentives as well as a decrease in base pricing for certain communities.
Our active subdivision count was at 220 to end the quarter up 8% from 203, a year ago. This increase was driven entirely by our west segment with our east and mountains segments, both experiencing year over year decreases.
Our Arizona, and California markets saw the largest year over year increase in community count, adding a total of 22 net new active communities.
We expect our active community count to continue to increase through the remainder of the year and into the 2023 spring selling season.
We acquired 447 lots during the quarter, resulting in total land acquisition spend of $74 million down 73% from $273 million in the 2021 third quarter.
We also had $169 million of land development spend during the 2022 third quarter up modestly from $147 million in the same quarter last year, we incurred $11 $8 million of project abandonment charges, largely resulting from non refundable deposits on land transactions that were no longer viable in the current market.
<unk>.
This charge is in addition to the $15 $5 million of project abandonment charges recognized in the second quarter.
As of quarter end, we had $24 $1 million in cash deposits and $5 $9 million and letters of credit at risk associated with the 5364 lots currently under option.
During the third quarter, we approved just one new land deal with 12 lots for acquisition. This minimal activity coupled with a number of project abandoned over the last six months resulted in a 20% year over year decrease in our controlled lot supply 29256 lots. However.
However, we believe the supply is sufficient to meet our operating needs for several years consistent with our philosophy of maintaining a two to three year supply of land.
With Florida land acquisition activity. So far this year operating cash flow has increased to $344 million for the first nine months of 2022, compared with $86 $5 million of cash used to fund operating activities for the first nine months of 2021.
With cash balances increasing during the quarter, we purchased approximately $292 million of U S. Treasury securities during the third quarter. These marketable securities have enhanced our yield but are of short duration with initial maturities upon purchase of six months or less.
Our work in process inventory has decreased $152 million from its peak at the end of the second quarter. This year, despite an increase in our overall speculative inventory.
As of September 30th we had 1082 spec units of which only 187 units were complete.
We ended the quarter with total liquidity of $1 89 billion with no senior note maturities until 2030, and our book value per share of $42.23.
In summary, while we remain confident in the long term growth prospects for the industry given the underproduction of new homes over the past decade, the demand for new homes is likely to continue to experience headwinds in the near term.
As I mentioned last quarter, our financial position and cash flow will remain a key focus for us, especially as the economic picture remains unclear.
Homes in backlog during the fourth quarter will be key to the continued improvement to balance sheet and cash flow metrics.
Furthermore, as uncertainty in the market persists, we believe that our strong balance sheet and liquidity will put us in a position to pursue new land transactions with better terms and or better pricing than has been recently available which could be a great opportunity for our company. Our strong financial position also supports the continued payment of our quarterly dividend, which was again.
Approved by our board after <unk> 50 per share level. This week, continuing our long established record of consistent or increasing dividend payments dating back to 1994.
That concludes our prepared remarks, we will now open up the line for questions.
Thank you we will now begin the question and answer session.
I ask the question anyway, if I started with the 100 and touched on phone.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Today's first question comes from Stephen Kim with Evercore ISI. Please go ahead.
Yeah. Thanks, very much guys I appreciate the color Bob just a housekeeping item do you have the inventory break out you know the housing completed and under construction versus the land and land inventory. If you if you land and land under development. If you have those that would be helpful.
But I wanted to while you're looking that up I also wanted to ask you about.
What percent of your backlog is rate locked at this point and what was that in at the end of two Q.
I think rate locks.
For Q4, specifically, we are probably right around.
50%.
Yes, overall, we're probably somewhere in the neighborhood of about 40%.
The.
The prior.
A quarter after check on this Steve, but I think it was closer to 30% overall.
And why wouldn't those numbers you know why wouldn't you proactively seek to get those numbers higher because it just it seems like with all the volatility and with the uncertainty in the market that might be an effective way to sort of mitigate the effects of cancellations.
And then also you mentioned a lot of the cancellations are sort of psychological and you back that up with some of the with some of your commentary are you in those situations are you keeping the deposit and Ah you know that.
The earnest money. These folks have had put down in and we've noticed that you're earnest money percentages kind of on the low side and we were wondering whether you're actually looking to take more earnest money. These are things that could theoretically mitigate your cancellation experience and just wondering if you're pulling some of these levers.
Yeah. So a couple of things I'll try to answer as much as I can remember.
So first of all just speaking to the interest rate lock situation.
Speaking as of September 30.
And I would say.
Certainly on the interest rate lock side of things we're focused on the ones that are closing the quick hits the ones that are quickest cash flows of locking those in at least a quarter ahead.
Also have longer term lock programs available for consumers.
They are interested in that but the main priority as I tried to walk folks and that are going to close within the coming quarter.
That's one to your housekeeping item I think you were just asking about the split between.
With and the land.
And that is in our release.
It's $2 2 billion on web and $1 8 billion on the Atlanta Count.
Our total $4 billion of inventory.
In terms of the the other items the other thing I heard of we received the deposit policy we.
We feel pretty comfortable about our deposit policy, but.
Like everything else in a changing market. We have reviewed that we have made changes to that policy and we continue to make some changes to that policy.
So it's a bit of a balance because we want to make sure our backlog is secure.
Then again, we want to make sure that buyers so comfortable entering into new contracts as well and of course, we're looking at what the rest of the market is is doing.
So certainly we're very focused on on reviewing a lot of our practices.
As we continue to operate through a very volatile market.
Okay. That's helpful. I appreciate that and then lastly for me is how many how many of your net sales would you say were dirt sales versus spec sales in the quarter.
I'm not sure if we split out the net the gross is about 50%.
I guess, 50% gross.
Derek maybe 16, it's a little bit less meaningful on the net basis, but on a gross basis.
50%, which is up.
Where it was in Q2.
And of course, a year ago.
In the third quarter.
So the gross sales, you're saying, 50% of your gross sales were dirt sales and that that share of gross sales being part sales is higher than it was before.
No.
The percentage of spec sales.
Got you that's what I thought okay right, Okay that makes more sense gotcha. Okay. Thanks, very much guys I appreciate it.
Okay.
And our next question today comes from Truman Patterson of Wolfe Research. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my questions.
First was just hoping on the $28 million inventory impairment charge, hoping you could give some color. There was it concentrated to you know a single land deal or multiple communities. I'm also hoping you can give color was it related to a specific metro or region.
As well as kind of the the vintage of when that land was bought.
Yes, it's a bit of a mixed bag.
On all fronts I think overall it was a nine different communities.
We said on the call at two in the East seven in the West.
So the two in the east where in Pennsylvania. It was actually a newer area that we're operating in so.
So in that case, it was an area, where we encountered some unexpected costs that one.
Different.
Animal out there, but those two are in Pennsylvania.
If you look out west.
The biggest areas for the impairments was Phoenix and southern California that we kind of had a little smattering.
Elsewhere.
We are we had one in Vegas for example.
So naturally in this environment, we're still at pretty high levels of cost overall.
Of course, we're dealing with higher levels of incentives so that tripped a couple triggers.
In a few areas.
So we did the analysis and and that's the number that we came up with so we are we made sure. We were very thorough in that analysis and we really used today's assumptions with what's going on so.
Yeah, that's the scoop vintage again it was.
Different vintages.
I don't have kind of one.
Specific time to point to that.
Different periods of time that those were originally contracted.
Okay, Okay. Thanks for that Bob.
And then I I, Bob I heard you give commentary earlier about the.
Level of incentives in your closings.
I'm, hoping you could just give you know where third quarter.
Order incentives or base price cuts kind of combined.
Might've been for you know the third quarter and you know what kind of the exit rate was in September October time period.
Sure.
So as far as incentives grow I think for sales for the quarter. Overall, we were about 7%, but I think they were trending up towards 8% as we got to the end.
Of the quarter.
As we looked at.
Base price decreases.
Hang with me for one second.
I can get you a more exact number Derek what page is that.
Okay.
Price decreases were pretty pretty small relative.
Range. It was I think a one or 2% overall kind of.
A relatively de minimis number relative to the incentives.
But I can get paid back.
Yeah.
Okay perfect. Thanks for that Bob and then just one final for me whenever we're thinking through you know the level of incentives are there any you know.
Markets metros regions to call out where you're seeing a relatively elevated level and you know any way you could put some numbers behind that.
Yeah.
In terms of price decreases.
Yeah, just the level of order incentives.
Probably.
The you're getting some in most markets some of the outer lying areas of Phoenix might be a little bit more elevated relative to those numbers.
I don't have an exact percentage for you.
But that's one that I would call out.
Okay. Okay, all right well. Thank you all for your time and good luck in the coming quarter.
Thank you. Thank you and our next question today comes from Michael Rehaut with JP Morgan. Please go ahead.
Hello, everyone. This is Dan Drowsy I'm on for Mike.
I just wanted to ask was there could you kind of give any more color around the build cycle times.
Any relief that you see in the future I know you spoke to Q4, not really materially improving any more detail there.
I mean, we're at.
I think 303 days on the houses that closed during the third quarter and that's.
The sale to close including the time and the front end.
Before we start the house.
And we expect it's going to be at that level or maybe even a little bit more than that in Q4. So in terms of the actual period of construction from the time you start the house.
Finish.
I don't know that we've seen a ton of relief there yet.
But we expect there could be some opportunity for that.
In 2023 simply because.
There's going to be less houses started less working through the pipeline I think the finished trades are still plenty busy.
So we haven't really seen any relief there yet.
So I'm hesitant to put any quantification on it.
At this point.
Other than to say before we went through this period of time.
We were just under 200.
As our.
Sale.
To close cycle times and this is on dirt.
Sell houses.
I would say so that's been the the recent low.
Certainly not saying, we can necessarily get there in 2023, but we have done it in the past at a much.
Lower levels in terms of cycle time.
Got it that's helpful. And then I think in the prepared remarks, I heard you guys, saying something about cost cutting initiatives I wanted to see if you could expand on that at all.
Yes, I think from from our peak in terms of head count we're down.
About 11%.
And that includes that does as of the end of the quarter that includes some attrition where.
Folks left and we Didnt replace position and then I.
A couple of situations, where we reduce our staff more proactively.
Got it and then one more for me.
Is there any change in the go to market strategy are you any less focused on entry level or any color there.
You know, we've got a pretty good spectrum of products.
We're still a bit more focused on the affordable.
Realm.
Much as we have been over the course of the past few years.
Got it that's it for me. Thank you so much guys.
And our next water say goodbye.
Alan Ratner with Zelman and associates. Please go ahead.
Hey, guys. Good afternoon. Thanks for taking my questions first revisiting the impairments for a second Bob do you happen to know I guess, probably more relevant to the active communities what type of net price adjustments triggered those impairments you mentioned the incentives companywide, but I'm guessing those.
<unk> might have been a bit larger.
And do you have an updated figure in terms of a watch list in terms of communities that might not have been impaired this quarter, but I might've shown some potential indicators of impairment as I believe that's a figure that that you and others used to disclose back in the day and I'm guessing Mike might be disclosed going forward here.
Yeah.
I don't have a watch list for you.
I will say.
Nearly in this market, if we see more deterioration.
We're going to be doing the same impairment analysis at the end of the quarter. So impairments are always possible in the wake of changing.
Industry.
Conditions. So we'll continue to do the impairment analysis every quarter and report.
Back.
In terms of the magnitude each app that I think is is different in terms of what drove it and in some cases I mentioned there was a couple of communities where Canadian wasn't even open.
Yet and we see the the direct comps maybe those selling our spec inventory.
Showing decreases.
Pretty pretty big significance.
Whether or not that is just clear the spec inventory for their current fiscal year or if it's a longer term trend its hard to say whether or not the prices are going to stick at that point, but we can only kind of deal with the facts and circumstances that we have.
At the time when we're looking at those impairments that we took the information.
That was available and made the calculation.
Got it that's helpful Bob.
Second question.
On cancellations, obviously been increasing across the industry you.
You mentioned that your priority is kind of closing the backlog that you have in place and making sure that as many of those homes get to the finish line as possible.
Rate was a bit higher than the group average at least what we've seen so far as a percentage of backlog.
I'm curious.
When you think about the equation of whether you offer incentives to the buyers in backlog or discount the price further in order to keep those buyers in place versus kind of letting them walk.
Because you did mention.
Chuck and I could sell it for it to move forward. It sounds like it was more of a confidence slash pricing decision there.
Or do you draw the line and what type of results have you had where you can point to reselling some of those canceled units what is the margin.
Price difference look like compared to what it was originally in backlog for.
Yeah, I mean, I think the most important thing is that where we're communicating with those buyers that are canceling and at least get taken a shot.
At seeing if we can keep them in backlog.
So I think we've.
We've even gone to the point, where we want our division presidents have conversations with every one of those.
Consumers, whereas in the past we may have just had the sales manager or someone else.
Have that conversation so.
It's a really skilled group we have of division managers out there, they're having those conversations and they're making a business decision.
And we've got a lot of tools out there for them to use we've got the.
Interest rate locks at below current market prices, which are great in some cases, it's in.
Increased incentive or.
Or something else, but in lot of cases, it just comes down to payment and to the point on those who still can afford it and a lot of cases, they are just a little bit.
<unk> in this market and Theres really not much we can we can do to bring them back.
We certainly keep that.
That relationship fresh in and try again.
Maybe things settle down a little bit.
In terms of resale of specs I would say we've had a pretty good record on that you heard the 50%.
Number in terms of our overall gross orders that related to specs.
A recent high for us.
And we can certainly see that there is some demand out there when somebody gets that certainty of I can get that house relatively quickly and I know what my my payment is so I think.
Our management teams have done a great job of getting those results.
And just on that point that Bob So in the event, where you are reselling it and you look at the price you've achieved.
Does that inform any decisions going forward, perhaps in terms of maybe yeah are you coming in lower than you would have if you would have maybe met the.
The better are the buyers price that was in backlog or is it a situation, where you're you feel like youre getting a better price than you would have if you had to kind of discount to keep that original buyer in place.
I think our division managers or are well aware of what the current trade is what the current house pricing is and how that relates to the fire. That's already in backlog. So I would say, they're doing a good job of kind of managing against what they think they could get post cancellation versus what they can can get before.
Before I cancelled so theyre, taking all that into account.
Got it Okay I know, it's a tough equation to figure out here. So I appreciate the thoughts.
Sure.
And our next question comes from Alex Barron with housing Research Center. Please go ahead.
Yes. Thank you.
Bob I wanted to test.
I heard the market involved into the impairment but.
How many communities.
<unk>.
Got impaired this quarter and what what's roughly the.
But the thing that triggered the impairment is at the gross margin or the operating margin.
What is it that triggered that.
It was nine communities.
And it's really the operating margin.
That's you have to look at and why.
Once you go negative so if you go a dollar negative unexpected cash flow and undiscovered basis.
Then you trigger an impairment and you did discounting the cash flows and Thats what determines what it is but really its on the operating level.
Within that one company I should say.
Got it and also I'm not sure if I missed it or Didnt give you happen to have the number of starts in the quarter and philosophically speaking.
How are you guys thinking about spec starts going forward I know in the past few years you guys have been inclined to go towards built to order model.
But some other builders are saying that there is.
More demand for homes that can close within 30 to 90 days. So I'm wondering if that's changing here.
Your perspective on that.
Yeah, I think those are good questions.
With regard to.
The spec start philosophy, yes.
Kevin.
Changed anything at this point.
I will say we have generated.
A lot of great cash flow and when you're in a good balance.
Balance sheet position. It gives you the optionality too.
Specs for example, if if you really need to if conditions warrant. So that's something that that will continue to evaluate.
We still want to be a place where a buyer can.
For our built to order a house too so.
It's a balance and we'll continue to kind of assess that.
As we go.
As we look at just what happened in terms of starts during the quarter I think we're at right around 900 in Canada was the number for the quarter.
Got it.
Okay and.
In terms of.
Again, you know what.
Triggering this impairment is it just mainly like you said newer communities and Youre looking at comps or are you actually.
Cutting prices on existing homes that that's getting some convenient there.
So that's their communities, but some of its older communities that just had higher costs. I mentioned. The example of a couple of in Pennsylvania and in the area, we haven't operated much than before.
Some unexpected cost that that.
We were hit with.
So it is different things for different communities certainly in some cases it was directly related to the fact that there is some discounting going on out there, whether that's us or a competitor.
We take that into account from brokerage to cash flows.
Got it okay guys. Thanks a lot.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from Jay Mccanless with Wedbush Securities. Please go ahead.
Hey, Thanks for taking my questions I guess the first one.
Well the majority of the cancellations in the quarter customer driven or did you guys decided proactively cancel out some people that you thought might not get to the finish line.
Yeah, I guess, it's a it's a combination because we are coming through our backlog.
Constantly and if we find a buyer we just don't think it's going to make it and we will have that conversation proactively.
As I mentioned.
Earlier, and David hit on it as well we saw more of that were in that were Morris category. So that's more where the buyer proactively comes back to us.
You know what.
They really just didn't want to proceed.
At this point, so a mixed bag number one being that we're Morris category number two being financing.
And so if the if the vintage of the cancellations for people who'd side I think you said Bob before March.
<unk> 31, and you're on a 300 day cycle.
Does that suggest that closings from <unk> 22 to <unk> 23 are going to take a steeper drop the normal just because of that gap do you have.
For Q.
Did you say <unk> 'twenty 'twenty to 'twenty two into one Q 'twenty three just trying to think about.
Volume ramifications looked like on that.
I mean, we put out our 2200 2500.
Range on closings.
For Q4, so that's that's your best information for there.
We haven't put out any guidance for.
Q1, but I will say when you do get a cancellation.
And it dates back to Q1 or Q4 of last year.
Of course that means you've got us back that you can potentially sell and close.
Within the quarter or maybe even into Q1, so a lot of those units will be.
Additive to future periods, even if we had to cancel them in the current period.
And then the last question I had.
Not to pick apart strategy, but when you said that the majority of openings. This quarter were in Arizona, and California are those more entry level lower affordably priced or is this land that you had to go ahead and open because it seems like you're opening more communities and some of the tougher areas.
Okay.
I think we continue to open communities and a lot of our markets. Those two just stuck out as the ones that had the greatest increase in community count in some cases community count is going up a little bit more than expected because the sales rate is a little bit lower CF fewer closeouts.
So from a strategic standpoint.
<unk> got a fairly limited supply of land. So I don't think we're of the mindset that we're just going to sit on communities, we're going to open them.
They already have become available.
And with a short land supply.
We have the ability to convert to cash readily easily and then reinvest in the market.
Later on when it makes sense so.
That's really really the strategy and we'll continue to open communities as.
As they are ready to come online.
Okay got it thanks for taking my questions.
And our next question comes from Kevin Stewart of Longfellow. Please go ahead.
Okay. Thank you.
You know a few months back.
Your firm file this rather substantial.
Shell for registration.
And <unk>.
You've emphasized certainly on this call.
And on prior conference calls you know definitely you have solid liquidity here.
No pressing bond maturities.
I've always been kind of curious in terms of what the thought was behind that shelf filing where you've taken a look at doing a potential acquisition at a time.
And if my conspiracy theory is wrong.
Just kind of curious in terms of once this down cycle ends and they typically do.
What your firm's viewpoint is on.
Industry consolidation in this space. So overall just more color on that would be great. Thank you.
Yes, I don't think there was any.
Particular transactional activity anticipated when we did that that shelf.
Theres really no.
<unk>.
Kind of incremental.
Work or that much cost involved with doing five versus two versus one.
So.
It was kind of one of those things, where you might as well.
But in terms of industry consolidation.
That's not what I'm <unk>.
Smart enough to figure out.
I think there's been a lot of others out there who have been been a lot more acquisitive than us.
Nothing out there right now that I'm aware of that stuff that's cooking.
Okay, but I mean, clearly that's something that you would entertain I mean at some point from a strategic perspective to take a look I would just I would figure.
Well I think any company public company has to look at things as they come along.
And do what's in the best interest of the shareholders.
Okay, Alright, thank you very much.
Ladies and gentlemen, ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
We appreciate you being on the call today, and we look forward to speaking with you again after year closes and we jump on our Q4 earnings call.
Okay.
Thank you everyone. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.