Q1 2023 Hovnanian Enterprises Inc Earnings Call
Speaker 3: Good morning, I'd like to be joining us for the Havnian Enterprises fiscal 2023 first quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen only mode.
Speaker 3: Management will make some opening remarks about the first quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page at the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website.
Speaker 3: I would now like to turn the call over to Jeff O'Keefe vice president and investor relations. And thank you all for participating this morning's call to re-view the results for our first quarter, which ended January 31st, 2023. All statements in this conference call that are not historical facts should be considered as four-looking statements within the meeting of the safe harbor provisions. All statements in this conference call that are not historical facts should be considered as four-looking statements.
Speaker 4: of the Private Security's litigation reform act of 1995. Such statements involve known and unknown risks on certainties and other factors that make those actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the forward looking statements.
Speaker 4: Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans and tensions and expectations reflected in are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans and tensions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees a future performance or result.
Speaker 4: and are subject to risks and certain decent assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors.
Speaker 4: Such risks and certainties and other factors are described in detail in the sections entitled Risk Factors and Management's Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement in our annual report on Form 10K for the fiscal year ended October 31st, 2022, and subsequent filing and the Security and Exchange Commission. Accept as otherwise you.
Speaker 4: acquired by Apple Gold Security Laws, we undertake new obligations to publicly update or revise any forward looking statements, whether as a result of new information, future events, change circumstances or any other reason. Joining me today on the call are Arahabnany and Chairman President and CEO Larry Sores be Executive Vice President and CFO and Brad O'Connor, Senior Vice President Keith Accounting Officer in Treasurer. I'll now turn the call over to Ara.
Speaker 4: Thanks, Jeff. I'm going to review our first quarter results and I'll also comment on the current housing environment. Larry Shoresby, our CFO , will follow me with more details and as usual, we'll open it up to Q&A. On slide five, we compare our first quarter results to our guidance.
Speaker 4: were all within our guidance range. Our FGN ratio was slightly above our guidance.
Speaker 4: High inflation, short year-over-year increases in mortgage rates and significant economic uncertainty, adversely impact the housing demand throughout the second half of calendar 42. As you can see on slide 6.
Speaker 4: Starting in the upper left-hand corner, this led to a 9% decline in revenues in the first quarter of fiscal 23, compared to 22. Our first quarter has traditionally been our slowest quarter, and this year is certainly no exception. However, because of the strength of our backlog...
Speaker 4: recent improvements in home sales case and above average gross margins on both new contracts and in backlog, we expect better financial performance for the remainder of the year, and we'll get some more specific guidance on our next quarter toward the end of the call.
Speaker 4: Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year.
Speaker 4: To enhance the affordability of our homes and to find the market clearing home prices, gross margins were adversely impacted by a 470 basis point increase in incentives and concessions compared to our first quarter last year.
Speaker 4: This was partially upset by the positive impact of lower construction costs, including lumber.
Speaker 4: Primarily, as a result of the climbing revenues, you can see on the lower left hand portion of the slide that our SGNA was 14.2% this year compared to 12.8% last year.
Speaker 4: In the lower right-hand portion of the slide, we show that adjusted EBITDA was $50 million compared to $64 million last year. On the left-hand portion of slide 7, you can see that our adjusted pre-tax income was $19 million in the quarter compared to $36 million.
Speaker 4: $5 million in net income in last year's first quarter.
Speaker 4: Turning to slide 8 on the left hand portion of the slide, you can see that contracts per community to the first quarter are down significantly compared to a year ago, but are close to the level we achieved in the first quarter of fiscal 19 before COVID. Although quarterly contracts show a low number.
Speaker 4: The monthly trend is a much more positive picture. Here on the right, we show monthly contracts per community, including and excluding 107 Bill for rent contracts in fiscal 23. I'm going to focus on the monthly contracts per community excluding the positive impact of the...
Speaker 4: continued with February 26th with contracts per community increasing the 3.4 which is above our February 19th pace before the COVID surge in demand occurred. So September 29th Davis ???ingston, CPC, willesser. He will stand there for 5 emerge. So September 29th Davis ???ingston, CPC, willesser.
Speaker 4: positive sales trend certainly both well for a strong spring selling season. We still have two days remaining in February , but we wanted to give you up to the moment transparency. Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month.
Speaker 4: Just one additional insight into the market. Last week, mortgage rates climbed to almost 7%. Despite this uncertain environment, our sales this past week were the best week in sales we have had in months.
Speaker 4: As you can see on the graph, our sales of VFR homes build for rent and boosts our sales a little further.
Speaker 4: And now on slide 9, we break out contracts from communities for the first quarter by our three geographic segments.
Speaker 4: Similar to what we reported in the fourth quarter of 22, and similar to what many of our home-building peers have reported, it's clear that contracts per community in this west segment were lower than our northeast or southeast segments.
Speaker 4: On slide 10, we show annual contracts per community for the past several years. You can see that for the full year of 22, contracts per community, excluding those verand contracts, retreated to 38.9.
Speaker 4: The same level we have for the whole year of 2019 before the pandemic. The bar on the far right portion of the slide shows the seasonally adjusted and annualized contracts per community for preliminary, February to date results, excluding the FBAR contracts.
Speaker 4: At 35.2 in its improving still below the normalized contract base of 44 shown on the far left. Our pace, including VFR sales, gets us closer to the normalized base with a result of 39.4.
Speaker 4: Turning to slide 11, you can see the month by month progression of our speedily adjusted and annualized contract pace for our community.
Speaker 4: May started the rapid decline and it appears that we trust in September with 21.2 contracts for the community.
Speaker 4: Since September , every month has shown an improvement with our preliminary February today's results coming in at 30-39.4.
Speaker 4: Clearly a dramatic improvement. If you turn to slide 12, you can see our cancellation rate as the percentage of growth contracts during the first quarter of 30 percent was still above our normal cancellation rate. However, it is an improvement sequentially.
Speaker 4: from the 41% rate we showed in the 4th quarter. If you turn to slide 13, here you can see that the trend and muskly gross cancellation rates improved greatly.
Speaker 4: On a monthly basis, cancellation rates seem to have peaked in October at 45% and have been steadily coming down each month since then.
Speaker 4: The preliminary February results of 16% are back down to our typical average cancellation rates, similar to the beginning of February 22.
Speaker 4: Another positive trend is our website visits continue to be strong. We show our daily website activity over the past several years on slide 14.
Speaker 4: As we have said in the past, we think this is a leading indicator of future demand. Here we show daily website visits per community with the blue line near the bottom of the graph representing fiscal year 20's pre-COVID website visits. The dark green line is in fiscal year 21.
Speaker 4: and the gray line is Disco-22. Both of these recent years has elevated website visits during the time of extremely high demand for new homes during the COVID surge. On slide 15, we've added Disco Year 23 daily visits for a community shown that we the bright yellow line. We've added Disco Year 23 daily visits for a community shown that we the bright yellow line.
Speaker 4: Over the past several months, our website visits have been much closer to the high levels that we experienced in the COVID surge.
Speaker 4: The recent website visits are clearly better than the normal pre-cognitive levels we experience. This continuation of high levels of website activities encouraging and has translated to higher levels of contracts during the past few months. And now I'll save you on several steps that we have been taking to address the current market.
Speaker 4: To begin with, we continue to see that consumers are seeking homes that they can close quickly. On our last conference call, we talked about our temporary pivot, we have more quick moving homes or QMI, as we call them, in order to provide our customers with more certainty on what their mortgage payments would be at closing. We consider it home to be a QMI that day we begin construction.
Speaker 4: If you term the size 16, you can see that our QMI's procurement are consciously on the rise, and we discussed that last quarter. After a significant shortage of QMI's during the COVID surge in demand, we've gone from 3.2 QMI's procurement in the third quarter of 22 to 5.5 in the end of the first quarter of 23.
Speaker 4: This level of QMI is higher than our historical average, but similar to levels we had just before the COVID surge in demand. Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year, we've seen our QMI sales.
Speaker 4: increased to about 60% of our sales versus about 40% historically, representing a 50% increase. I venture to say that if we had more QMI's available in all of our communities, our sales would have been even stronger. Our temporary QMI target remains approximately 7 QMI's pro community, as we discussed last quarter, with just
Speaker 4: A few homes beginning construction and a few homes partly through construction.
Speaker 4: Recent sales have made it difficult to keep up at that level. Once we get to 7KMize per community and plan to match our start schedules with the then current sales pace, we think this approach will make certain that we don't start an excess of level up on sole homes.
Speaker 4: Furthermore, we're continuing to focus on selling these homes before completion. The competition for new homes are other new homes and existing homes for sale.
Speaker 4: On slide 17, we show that the number of existing homes for sale around the country currently stands at 870,000 homes. That is less than half of the historical average, which is over 2 million homes. The number of existing homes for sale around the country currently stands at 870,000 homes. That is less than half of the historical average, which is over 3 million homes. That is less than half of the historical average, which is over 3 million homes.
Speaker 4: The lower level of existing homes for sale certainly helps our sales. Another impactful step we've taken is with respect to incentives and concessions. We closely monitor our competitors' use of incentives and concessions on a community by community basis.
Speaker 5: After our fiscal 22-year ended, we became more aggressive with our use of concessions or new contracts. Our improving trend in contracts per community I just walked you through indicates that these steps were and that we found the right market clearing price to sell homes.
Speaker 6: We continue to offer customers incentive choices such as paying for a permanent or temporary below-market mortgage rates, paying for closing costs, offering discounts on options or upgrades or discounting home prices on select humanized. There's not a one-size-fits-all for all consumers, so we typically offer consumers a choice image ahead online.
Speaker 7: would eat their needs the best. In general, the highest levels of incentives are reserved for our more challenging home sites in our more challenging communities. Even after increasing our use of incentives, the average margin on the new homes that we are selling today remain in the low 20s percent range.
Speaker 8: Slightly above are an historical average adjusted gross margin of 20%.
Speaker 9: When we or other homebuilders for that matter hope in new communities we're generally starting with lower market driven base prices rather than using large incentives and concessions on new.
Speaker 10: communities. One reason that margins continue to be high today, despite our higher use of incentives and concessions, is lower lumber costs. Additionally, we help make purchasing blitz where we pittigar divisions against each other in friendly competition to see who could achieve the most savings per home.
Speaker 11: We spoke with our trade partners and our material providers to seek lower costs and our efforts have been successful thus far lowering our construction costs for future starts. Even after taking to account the recent housing rebound, the housing industry has slowed down from the red hot paced of the COVID surge.
Speaker 12: Our trade partners increase our construction costs during the COVID surge. We and the industry today are successfully falling back some of those increases now that the market is slowly.
Speaker 13: The benefits of the purchasing blitz should begin to positively impact our margins in the latter part of 23 and beyond as we deliver the homes that we are just starting now. Additionally, we are reviewing our staffing needs on a division by division basis and plan to finalize decision shortly. This is obviously an evolving situation.
Speaker 14: and will continue to reassess the steps that we're taking to make sure we are appropriate in our actions in light of changing market condition. I'll now turn it over to Larry Sores, B.R. Chief and Hasse Law Officer.
Speaker 15: Thanks, Sarah. I'm going to start with slide 18. You can see that we ended the quarter with 132 communities open for sale. Utility companies continue to present problems and are slowing down our ability to open new communities. If not for these utility company delays are number of communities.
Speaker 16: this goal 2023 [#C
Speaker 17: Ironically, the recent increase in sales space makes it more challenging to achieve community count growth.
Speaker 18: While the improved pace still leads to revenue growth, it also means we sell out of communities faster than previously anticipated. About 70% of our expected physical 2023 community openings will take place in our Northeast and Southeast segments. and what for for those LGBTQ journalists? den. ordinance views of future,
Speaker 19: and 30% will come from the West. As it turns out, given the recent better sales and margin trends in our Northeast and Southeast segments, that is a fortuitous ratio. This week shows that...
Speaker 20: During the rapid increase in mortgage rates last summer, we suspended most new land acquisitions. As a result on slide 19, we show that our lot count peaked in the second quarter of fiscal 22 at 33,501 loss.
Speaker 21: During each of the subsequent quarters, our lot count decreased, and we ended the first quarter of fiscal 23 with 29,123 loss. Given our recent increase in sales place, our land teams are once again actively pursuing new land parcels that meet our underwriting standards.
Speaker 22: By using current home prices, current construction costs and current sales pays to underwrite to a 20 plus percent internal rate of return are underwriting standards automatically self-adjust the changes in market conditions. As we have stated time and time again our land strategy is very
Speaker 23: decreased by 10% over the same time period.
Speaker 24: I also want to point out that 60% of our total lots are in our stronger Northeast and Southeast segment versus 40% in the West.
Speaker 25: We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investment as well as to reduce the risk associated with own land. On slide 20, we show our percentage of lots controlled by option increased from 44% in the first quarter of fiscal 15.
Speaker 26: to renegotiate land price in terms on slide 21.
Speaker 27: We show the vintage of our land position. 73% of our total 29,123 lots controlled will put under contract before November 1st, 2021. And 41% were controlled prior to November 1st, 2020. The vast majority of those lots were underwritten at lower home prices than today's housing market, which provides us
Speaker 28: with the flexibility to increase concessions and incentives while still delivering strong margins and returns. 27% of our total land position was controlled more recently in 22 and 23. Keeping with our strategy to further increase our inventory turnover and mitigate land risk, virtually all of physical 22 and 23 land vintage.
Speaker 29: was controlled by options and virtually all of our own land was controlled in physical 21 or earlier. Given how undervalued our stock was, we spent 17 million dollars repurchasing approximately 7% of our outstanding shares.
Speaker 30: at an average share price of $39.48 over the past two quarters. If our stock price declines from current levels, we may repurchase additional shares in the future. After $134 million of land spend in our first quarter, we ended the quarter with $366 million on the liquidity side.
Speaker 31: more than $100 million above the high end of our targeted liquidity range. Turning now to slide 23. Compared to our peers, you see that we have the third highest percentage of land controlled via options. We continue to use land options whenever possible to achieve higher inventory turns and hands-off return zone capital and to reduce risk.
Speaker 32: Turning to slide 24, we show year supply of own lots for us and our peers. With 1.6 years supply of own lots, we have the second lowest year supply, having a shorter supply of own lots along with a strong supply of option lots is a good way to reduce land risk in a less stable housing market.
On slide 25, you can see that we also have 5.5-year supply of controlled land, both owned and option-lots.
73% of which was controlled in fiscal 21 or earlier when home prices were lower. 71% of our total land position is controlled by options and only 29% is owned.
Turning now to slide 26. Compared to our peers, we continue to have the second highest inventory turnover rate.
High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years.
Turning now to slide 27. On this slide, we show our debt maturity ladder at the end of the first quarter. Since the end of fiscal 19, we retired $394 million of debt. Furthermore, in last year's fourth quarter, we amended our revolving credit facility strategy from 1988 formed a big, high fund and bobby fund which created a significant boost
to extend the maturity date to June 30th, 2024. After that, we don't have any debt that you're in until the first quarter of fiscal 2026.
Due to changing market conditions last summer, we temporarily shifted our focus to preserving liquidity and paused our near-term debt reduction plans. We remain committed to strengthen our balance sheet and intend to revisit our debt retirement initiatives once market conditions show sustained improvement.
Given our 347 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.3 billion of future pre-tax earnings.
This benefit will significantly enhance our cash flow and years to come and will accelerate our progress of improving our balance. Our financial guidance for the second quarter of fiscal 23 assumes no adverse changes in current market conditions.
including no further deterioration in our supply chain or material increases in mortgage rates, inflation or our cancellation rates. Our guidance assumes continued extended construction cycle times averaging 6 to 7 months compared to our pre-COVID cycle times for construction of approximately 4 months. Further, it excludes any impact to our SGNA expense from our phantom stock expenses related solely.
to the stock price movement from our $57.88 stock price at the end of the first quarter of fiscal 23. While we've met or exceeded most of our guided metrics over many quarters, there is a greater degree of uncertainty in the current environment given inflation, the potential of an economic recession, employment risk, utility company delays, and mortgage rate increases.
Additionally, given the difficult economic backdrop and the resulting uncertainty in the housing market, the company will not be providing full fiscal year 23 guidance at this time. With those caveats in mind, on slide 28, we show our guidance for the second quarter of fiscal 23. We expect total revenues for the second quarter to be between 525. 525.
and $625 million. We also expect adjusted gross margins to be in the range of 21 to 22.5%. SNA is a percent of total revenue that's expected to be between 13 and 14%. Our guidance for adjusted divit DAH is between $52 and $67 million. Our adjusted pre-tax income for the second quarter of fiscal 23.
is expected to be between $20 and $35 million. On our fourth quarter call, we talked about some assumptions that were built into our guidance for the first quarter. Those assumptions still apply to the guidance for the second quarter of 23, and I will now discuss those assumptions again. Our SGNA ratio is expected to increase over the prior year as we anticipate opening additional communities, as well as incur a higher than normal increase in wages as a result of inflationary pressures.
Due to slower market conditions, we are also anticipating increase in our advertising spend over the year. Despite lower levels of home building debt, our interest expenses expected to increase during fiscal 23 for two reasons. First, a slower sales pace extends the average community lifespan and results in a higher total community life interest cost. These interest costs are expense and cost to sales interest on a per delivery basis.
Therefore, when sales takes slows down, our interest cost for home delivered increases and conversely when the sales takes increases our interest cost for home delivered decreases. As a result, we expect the cost of sales interest expense per home will be higher in fiscal 23 than it was in fiscal 22.
Second, our inventory not owned has increased to $350 million at January 31, 2023, compared with a five-quarter average of $202 million from a year ago. This increase causes a corresponding increase in the interest cost. Lastly, in response to competitive pressures from outside lenders, and in order to offer lower mortgage rates so that more of our customers can qualify to purchase one of our homes, we also expect our financial services business will be significantly less profitable during fiscal 2023.
at 35.8%. We believe this is the most accurate measure of pure home building performance without regard to leverage. On slide 30, we show the trailing 12 month price to earnings ratio for us in our peer group. Even though home builder stocks have traded higher since the beginning of calendar 23, the group still trades at a significant discount to the overall stock market.
We recognize that our stock may trade at a discount to the group because of our higher leverage. However, given our industry leading returns on equity, our top quartile EBIT return on investment, along with our improving balance sheet, we believe our stock is the most undervalued of the entire universe of public home builders. Based on our price earnings multiple of two times that yesterday's closing stock price at $67.83, we're trading at a 59% discount to the industry average PE ratio.
We remain focused on further strengthening our balance sheet and look forward to reporting our progress in future periods. I'll turn it back to Eric for some brief closing remarks. Thanks Larry. Considering the economic environment, we're pleased with the financial performance of our first quarter of fiscal 23. It is frustrating as Larry is just pointing out to have the highest EBIT ROI in the industry with our mid-size peers the third highest of all peers.
Assuming the current sales environment continues, we expect a better financial performance for the remainder of the year. We're happy to see better trends in the beginning of the 23 spring selling season. Our traffic and website visits and weekly contracts remain elevated.
despite the recent uptick in mortgage rates. Consumers seem to be getting accustomed to a higher mortgage rate environment and their home purchase expectations appear to have adjusted accordingly. We'll continue to closely monitor the impact of mortgage rate movements and the actions taken by the Federal Reserve.
More importantly, the long-term fundamentals that drive the housing market remain solid today. We believe we've got the right management team to see us through this period, and we also have the right associates in the field to execute our game plan, which should allow us to continue to achieve industry-leading returns.
That concludes our four-month comment and we're happy to open it up for Q&A. Certainly, let me tell you what if you have a question at this time. Please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from like you, please press star 11 again. Our first question comes from the line of Alex Barrett from...
housing resource center. Your question please. Yes, thanks. Good morning, gentlemen. Great job on the quarter. I just wanted to inquire about, you know, the, you found, I guess, enthusiasm of buyers this year. And I guess now that race seems to be trickling back up. Are you guys maintaining the same level of incentives, or have you had to increase?
to maintain the sales momentum, just some color around the last couple months. Could we help? I think Alex, as we pointed out, and honestly, to many of our surprises, we actually increased home prices. Net home prices, net event centers, in about a third of our communities over the last month. So I think...
that gives you the answer. There are lots of movements and lots of different directions of incentives or base prices, but net net, we actually increased home prices over the last month. And I'll repeat again, last week, even after rates moved to 7%, we had one of the best weeks we've had in months. So, so far, the market seems to be adjusting.
to the current rate environment. Yeah, well, that's very encouraging. You know, I guess what's your best yes or understanding from maybe feedback in the field as to why this is happening? Why, I guess, even though home prices are...
So high and interest rates are high. People seem to be able to afford the houses that are they just More comfortable with the outlook you think First that pointed out there are alternatives are fewer than normal the number of existing homes available for sale is
Somewhere between half and the third of normal, that's competition for it. So less competition is helpful. Number two, people are just adjusting their home expectations.
I think when rates were 3.5 percent, they set their sites on some very large homes with very fancy finishes, if you will, and I think people have adjusted their expectations.
And it comes to terms with the current environment. They're a little bit over the sticker shock and are cautiously moving off the sidelines and back into the home buying market. Luckily, demographics...
seem to be helping the millennial seem to be helping and net net the market is definitely finding some solid footing right now. That's great to hear. Can you clarify, I'm not sure if I heard you correctly towards the end of the comments, but did you guys say you bought that stock or did I hear incorrectly?
No, we did buy back about seven percent of our outstanding shares and I think the number was about $1,000, man, I forget. $17,000, that's about right. And that was over the last two quarters.
by back about 7% of our outstanding shares and I think the number was about $1.00. What was the dollar amount? I forget. $17.00. And that was over the last two quarters. Okay.
All right, I'll reread through the press release. Maybe I missed it there. But anyway, so is there a limit to what you guys are allowed to buy back there? And why do you feel that's preferable to reducing the debt of you guys at previous report on it?
Well, I mean the price, I think we mentioned earlier, the lease was about a little over $39 of the shares that we purchased.
We just thought the price just made it an irresistible purchase. Notwithstanding the fact that our long-term plan is to reduce leverage and improve our balance sheet, it was just too good of an opportunity. We are authorized by the board to purchase, re-purchase more, but we're just really monitoring the price.
I suspect if it drops back again, we'll be back in the marketplace, but we haven't made that decision, and as I pointed out, we are authorized to buy more, it should be decided to. Okay, thank you, and I'm rest of luck. I'll let somebody else ask questions. Thank you. Thank you, you've won moment for our next question. Thank you.
And as a reminder, if you do have a question, please press star 111 on your telephone. Our next question comes from Lina, Tessie Litterman from Zellman Associates. Your question, please.
Hi, thanks for taking my questions and congrats on the strong results this far this year. I'd like to learn a little more about the land market. Have land sellers begin to capitulate on land and lot prices given that you and presumably some of your peers are back in the land market.
If so, I know it kind of depends on location and other factors, but are you able to give an example of some price adjustment in the land market you've seen recently, versus what you may have observed a quarter or two ago?
Sure, well first capitulate is a big word. I'd say many land sellers are starting to be realistic about the the appropriate pricing given net home pricing and absorbent.
I'd say the market was pretty inactive for six months from about mid-year 22. But the bid asked if you will for land was a big spread and there just wasn't a lot of activity.
But as the market has improved a bit in terms of sales page, as homebuilders' costs have improved a bit, and as land sellers' expectations have lowered a bit.
we are seeing more and more new transactions that make sense. So we're being cautious, but we are back in the market in numerous locations around the country buying new land. That's helpful. Thank you. Are you able to comment on maybe how far?
Hello, you know, a month or two ago, some of those line prices have kind of reset on a percentage basis. You know, it's hard. You know, I can't say that we looked at site A before and it's now down 18%. It's there are many, many moving parts including...
the pace of takedowns, if we're buying finished loss, the cost of land development. There's just many, many factors, but I'd say in general there's an easing of land prices. Not across the board. Some markets remain particularly tight.
Some many sellers have not adjusted their expectations, but we don't need everyone in every market to adjust their expectations. We just need to find enough opportunities that pencil with the right returns for us to get that on our growth pattern. Makes sense.
My second question is just on your quick move in homes. So during February as sales activity improved, how does demand for your, I guess it's more about, I'm asking more about your built order product, but as sales activities improved in February , how does demand for your built order product trending? You know, you're the number of quick move in homes you have for communities held relatively stable. So presumably demand for that product has been high.
have you seen an equal increase in demand from bill to order as your quick move in products over the last month or so or as the increase really been mostly spec focused from home buyers. We've seen an increase in both bill to order and QMI's but as we mentioned our overall share has migrated to almost 60% QMI where it used to be.
40% so there's been more of an up to the QMI side but we have seen especially in the last few weeks a pickup on the build order as well That's helpful and any pricing nuances or pricing power differences you're seeing You know, I'm built to order versus back and maybe margin if you could give some color on the margin differential on your spec for if you're built to order product I think that'd be helpful as well
I would say the QMI tend to have a little lower margin, more incentive, especially around either mortgage rate by down or other discount closing costs. The 2B builds have been able to hold up and it remains to be seen hopefully those will hold and make it to the end of construction and delivery. Right now we are seeing a better margin on the bill the orders.
It wouldn't surprise me given the increase in demand to see that trend reverse because we're seeing an increase in demand for Q and M highs. And I think part of it is we just have not been a big Q and M builder in the past. And we are in the process of re-educating our sales team about charging more for Q and M highs rather than left.
for Cuomaz given an increased demand. It's not fully in place yet, but I think we're gonna reverse that trend. That's very helpful, Collar. Thank you again. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Huffmanian Freddie for the remarks.
Very good. Thank you very much. You look at the results we just reported in terms of profitability and deliveries are lagging results. What's really key are our new sales, gross margins on our new sales and website and on site traffic. I'm happy to say those leading indicators are really moving very in a very positive direction.
will begin shortly. To raise and lower your hand during Q&A you can dial star 1-1.
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Good morning, I think we're joining us for the Havnany and Enterprise.
to listen only mode. Management will make some opening remarks about the first quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page at the company's website at www.khov.com. Those listeners who would like to follow along should know.
of the Safe Harbor provisions of the Private Security's litigation reform act of 1995. Such statements involve known and unknown risks on certainties and other factors that make those actual results performance or achievements of the company to be materially different from any future results performance or achievements expressed or implied by the four-looking statements.
Such forward-looking statements include but are not limited to statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans and tensions and expectations reflected in are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans and tensions or expectations will be achieved.
By their nature, for looking statements, speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks and certainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors. Such risks and certainties in other factors are described in detail in the sections entitled, Risk Factors and Management's Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement in our annual report on Form 10K for the fiscal year ended October 31, 2022, and subsequent filing with the Security and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward looking statement.
environment. Lyra and Shoresv, our CFO , will follow me with more details and as usual, we'll open it up to Q&A.
On slide 5, we compare our first quarter results to our guidance. Total revenues of $515 million, adjusted gross margin of 21.8%, adjusted EBITDA of $50 million, and adjusted pre-tax income of $19 million were all within our guidance range.
Our FGNA ratio is slightly above our guidance. High inflation, short year-over-year increases in mortgage rates and significant economic uncertainty adversely impacted housing demand throughout the second half of calendar 22. As you can see on slide 6.
Starting in the upper left-hand corner, this led to a 9% decline in revenues in the first quarter of fiscal 23D compared to 22. Our first quarter has traditionally been our slowest quarter, and this year is certainly no exception. However, because of the strength of our backlog...
recent improvements in home sales space and above average gross margins on both new contracts and in backlog, we expect better financial performance for the remainder of the year, and we'll get some more specific guidance on our next quarter toward the end of the call.
Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year.
portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year.
To enhance the affordability of our homes and to find the market clearing home prices, gross margins were adversely impacted by a 470 basis point increase in incentives and concessions compared to our first quarter last year.
This was partially offset by the positive impact of lower construction costs, including lumber. Primarily, as a result of declining revenues, you can see on the lower left hand portion of the slide that our SGNA was 14.2% this year compared to 12.8% last year.
In the lower right-hand portion of the slide, we show that adjusted EBITDA was $50 million compared to $64 million last year. On the left-hand portion of slide 7, you can see that our adjusted pre-tax income was $19 million in the quarter compared to $36 million last year. On the left-hand portion of slide, we show that our adjusted pre-tax income was $20 million.
in last year's first quarter.
Turning to slide 8 on the left hand portion of the slide, you can see that contracts per community for the first quarter are down significantly compared to a year ago, but are close to the level we achieved in the first quarter of fiscal 19 before COVID.
community, excluding the positive impact of the bill for a contract.
From November's low point of 1.2 contracts per community, we increased to 1.8 in December and ended the quarter with 3.0 in January .
This positive trend continued through February 26th, with contracts per community increasing the 3.4, which is above our February 19 pace, before the COVID surge in demand occurred.
We believe this positive sales trend certainly both well for a strong spring of the selling season. We still have two days remaining in February , but we wanted to give you up to the moment transparency.
Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month.
Just one additional insight into the market. Last week, mortgage rates climbed to almost 7%. Despite this uncertain environment, our sales this past week were the best week in sales we have had in months.
As you can see on the graph, our sales of VFR homes build for rent and boosts our sales a little further. And now on slide 9, we break out contracts per community for the first quarter by our three geographic segments. Similar to what we reported in the fourth quarter of 22, and similar to what...
You can see that from the full year of 22 contracts per community, excluding those around contracts, retreated to 38.9. The same level we have for the whole year of 2019 before the pandemic. The bar on the far right portion slide.
shows the seasonally adjusted and annualized contracts per community or preliminary February to date results excluding the FBAR contracts.
left. Our pace, including VFR sales, gets us closer to the normalized pace with a result of 39.4. Turning to slide 11, you can see the month by month progression of our speedily adjusted and manualized contract pace for a community.
May started the rapid decline and it appears that we trust in September with 21.2 contracts for the community.
Since September , every month has shown an improvement with our preliminary February today's results coming in at 30-39.4.
Clearly a dramatic improvement. If you turn to slide 12, you can see our cancellation rate as the percentage of growth contracts during the first quarter of 30% was still above our normal cancellation rate. However, it is an improvement sequentially from the 41% rate we showed in the fourth quarter. The first quarter of 30% was still above our normal cancellation rate.
If you turn to slide 13, here you can see that the trend and monthly gross cancellation rates improves greatly.
On a monthly basis, cancellation rates seem to appease in October at 45% and have been steadily coming down each month since then. The preliminary February results of 16%
are back down to our typical average cancellation rates, similar to the beginning of February 22. Another positive trend is our website visits continue to be strong. We show our daily website activity over the past several years on slide 14. As we have said in the past,
We think this is a leading indicator of future demand. Here we show daily website visits per community with the blue line near the bottom of the graph representing fiscal year 20's pre-COVID website visits. The dark green line is in fiscal year 21, and the gray line is fiscal 22. Both of these recent years has elevated website visits during the time of extreme.
side visits are clearly better than the normal pre-COVID levels we experience.
This continuation of high levels of website activities encouraging and has translated to higher levels of contracts during the past few months. I'm now updating you on several steps that we have been taking to address the current market. To begin with...
We continue to see that consumers are seeking homes that they can close quickly. On our last conference call, we talked about our temporary pivot, that more quick moving homes, or Q&A, as we call them, in order to provide our customers with more certainty on what their mortgage payments would be at closing.
We consider at home to be a QMI that day we began construction. If you turn to slide 16, you can see that our QMI's per community are consciously on the rise, and we discussed that last quarter. After a significant shortage of QMI during the COVID surge in demand, we've gone from 3.2 QMI's per community in the third quarter of 22 to 5.5 in the end of the first quarter of 23.
This level of QMI is higher than our historical average, but similar to levels we had just before the COVID surge in demand. Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically, representing a 50% increase. I?
I'd venture to say that if we had more QMI's available in all of our communities, our sales would have been even stronger. Our temporary QMI target remains approximately 7 QMI's pro community as we discussed last for the material such as the media's
A few homes beginning construction and a few homes partly through construction. Reached the shelves and made it difficult to keep up at that level.
Once we get to 7KMISQ community and plan to match our start schedules with the DEN current sales pace.
We think this approach will make certain that we don't start an excessive level of unsold homes. Furthermore, we're continuing to focus on selling these homes before completion.
The competition for new homes are other new homes and existing homes for sale. On slide 17, we show that the number of existing homes for sale around the country currently stands at 870,000 homes.
That is less than half of the historical average, which is over 2 million homes. The lower level of existing homes for sale certainly helps our sales. Another impactful step we've taken is with respect to incentives and concessions. We closely monitor our competitors' use of incentives and concessions on a community by community basis.
choices such as paying for a permanent or temporary below-market mortgage rates, paying for closing costs, offering discounts on options or upgrades, or discounting home prices on select humanized.
There's not a one size fits all for all consumers, so we typically offer consumers a choice on what incentive would eat their needs the best. In general, the highest levels of incentives are reserved for our more challenging home sites in our more challenging communities. Even after increasing our use of incentives.
communities were generally starting with lower market driven base prices rather than using large incentives and concessions on new communities.
One reason that margins continue to be high today, despite our higher U7 centers and concessions, is lower lumber costs.
Additionally, we help make purchasing blitz where we pitted our divisions against each other in friendly competition to see who could achieve the most savings per home.
We spoke with our trade partners and our material providers to seek lower costs and our efforts have been successful thus far lowering our construction costs for future starts. Even after taking to account the recent housing rebound, the housing industry has slowed down from the red hot peak of the COVID surge. Our trade partners increased our construction costs during the COVID surge.
We and the industry today are successfully falling back some of those increases now that the market is slowing. The benefits of the purchasing blitz should begin to positively impact our margins in the latter part of 23 and beyond as we deliver the home that we are just starting now.
Additionally, we're reviewing our staffing needs on a division by division basis and plan this finalized decision shortly.
I'll now turn her over to Larry Sorsby, our chief and national officer.
or a source of VRT financial officer. Thanks, Sarah.
I'm going to start with slide 18. You can see that we ended the quarter with 132 communities open for sale. Utility companies continue to present problems and are slowing down our ability to open new communities. If not for these utility company delays, our number of communities open for sale would have been even higher. We are trying to grow our community count to our pre-COVID levels.
Even with continued long entitlement processes and slower land development schedules, we project that we will grow our community count during fiscal 2023. Ironically, the recent increase in sales space makes it more challenging to achieve community count growth.
While the improved pace still leads to revenue growth, it also means we sell out of communities faster than previously anticipated. About 70% of our expected physical 2023 community openings will take place in our Northeast and Southeast segments and 30% will come from the West. As it turns out, given the recent better sales and margin trends in our Northeast and Southeast segments.
That is a gratuitous ratio. During the rapid increase in mortgage rates last summer, we suspended most new land acquisitions. As a result, on slide 19, we show that our lot count peaked in the second quarter of a fiscal 22 at 33,501 loss.
During each of the subsequent quarters, our lot count decreased, and we ended the first quarter of fiscal 23 with 29,123 loss.
Given our recent increase in sales pace, our land teams are once again actively pursuing new land parcels that meet our underwriting standards. By using current home prices, current construction costs and current sales pace to underwrite to a 20 plus percent internal rate of return, our underwriting standards.
automatically self-adjust the changes in market conditions. As we have stated time and time again, our land strategy is very risk-averse.
with our focus on controlling lots primarily through option contracts. It is important to highlight that our own land position declined by 20% since the second quarter of fiscal 22, while our option land position only decreased by 10% over the same time period. I also want to point out that 60% of our total lots are in our stronger Northeast and Southeast segment.
versus 40% in the West. We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investments as well as to reduce the risk associated with own land. On slide 20.
We show our percentage of lots controlled by option increased from 44% and the first quarter of fiscal 15 to 71% and the first quarter of fiscal 23. This has been a specific focus of our strategy and we continue to make progress.
A low percentage of owned watch strongly mitigates land risk and gives us flexibility in the declining market to renegotiate land price in terms.
percentage of own lots strongly mitigates land risk and gives us flexibility in a declining market to renegotiate land price in terms. On slide 21.
We show the vintage of our land position. 73% of our total 29,123 lots controlled will put under contract before November 1st, 2021. And 41% were controlled prior to November 1st, 2020.
The vast majority of those lots were underwritten at lower home prices than today's housing market, which provides us with the flexibility to increase concessions and incentives while still delivering strong margins and returns. 27% of our total antivision was controlled.
more recently in 22 and 23. Keeping with our strategy to further increase our inventory turnover and mitigate land risk, virtually all of Fiscal 22 and 23 land vintage was controlled by options, and virtually all of our own land was controlled in Fiscal 21 or earlier.
given how undervalued our stock was, we spent $17 million repurchasing approximately 7% of our outstanding shares at an average share price of $39.48 over the past two quarters.
If our stock price declines from current levels, we may repurchase additional shares in the future. Turning to slide 22. After $134 million of land spend in our first quarter, we ended the quarter with $366 million of liquidity.
more than $100 million above the high end of our targeted liquidity range. Turning now to slide 23. Compared to our peers, you see that we have the third highest percentage of land controlled B of options. We continue to use land options whenever possible to achieve higher inventory turns.
and Hands Harbor Turned on Capital and to reduce risk. Turning to slide 24, we show year supply of own lots for us in our peers. With 1.6 years supply of own lots, we have the second lowest year supply, having a shorter supply of own lots along with a strong supply of option lots is a good way
71% of our total land position is controlled by options and only 29% is out.
of our total land position is controlled by options and only 29% is owned. Parting now to slide 26.
Compared to our peers, we continue to have the second highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years.
Turning now to slide 27. On this slide we show our debt maturity ladder at the end of the first quarter. Since the end of fiscal 19 we retired $394 million of debt.
Furthermore, in last year's fourth quarter, we amended our revolving credit facility to extend the maturity date to June 30, 2024. After that, we don't have any debt-bitering until the first quarter of fiscal 2026. Due to changing market conditions last summer, we temporarily shifted our focus to preserving liquidity.
and paused our near-term debt reduction plans. We remain committed to strengthen our balance sheet and intend to revisit our debt retirement initiatives once market conditions show sustained improvement. Given our 347 million deferred taxes set, we will not have to pay federal income taxes on approximately $1.3 billion of future pre-tax earnings. This benefit will significantly enhance our cash flow and an even greater economic onset, as fiscal term Security Councils that have participated in companies'
extended construction cycle times averaging six to seven months compared to our pre-COVID cycle times for construction over approximately four months. Further, it excludes any impact to our SGNA expense from our Phantom stock expenses related solely to the stock price movement.
from our $57.88 stock price at the end of the first quarter of fiscal 23. While we've met or exceeded most of our guided metrics over many quarters, there is a greater degree of uncertainty in the current environment given inflation, the potential of an economic recession, employment risk, utility company delays, and mortgage rate increases. Additionally,
given the difficult economic backdrop and the resulting uncertainty in the housing market, the company will not be providing full fiscal year 23 guidance at this time. With those caveats in mind, on slide 28, we show our guidance for the second quarter of fiscal 23. We expect total revenues for the second quarter to be between 525 and 625 million dollars. We also expect adjusted gross margins to be in the range of 21 to 22.5%.
S.GNA is a percent of total revenue is expected to be between 13 and 14%. Our guidance for adjusted divit.da is between $52 and $67 million. Our adjusted pre-tax income for the second quarter of fiscal 23 is expected to be between $20 and $35 million. On our fourth quarter call, we talked about some assumptions that were built into our guidance for the first quarter. Those assumptions still apply to the guidance for the second quarter of 23.
and I will now discuss those assumptions again. Our SGNA ratio is expected to increase over the prior year as we anticipate opening additional communities as well as incur a higher than normal increase in wages as a result of inflationary pressures. Due to slower market conditions, we're also anticipating increase in our advertising spend over the year. Despite lower levels of home building debt, our interest expense is expected to increase during fiscal 23 for two reasons. First, a slower sales price extends the average community lifespan.
and results in a higher total community life interest cost. These interest costs are expense and cost of sales interest on a per delivery basis. Therefore, when sales takes slows down, our interest cost for home delivered increases, and conversely when the sales takes increases, our interest cost for home delivered decreases. As a result, we expect the cost of sales interest expense per home will be higher and fiscal 23 than it was in fiscal 22.
Second, our inventory not owned has increased to $350 million at January 31, 2023, compared with a five-quarter average of $202 million from a year ago. This increase causes a corresponding increase in the interest cost. Lastly, in response to competitive pressures from outside lenders, and in order to offer lower mortgage rates so that more of our customers can qualify to purchase one of our homes, we also expect our financial services business will be significantly less profitable during fiscal 2023. On slide 29, we show compared to our peers that we have the third highest consolidated EBIT return on investment at 35.8%.
We believe this is the most accurate measure of pure home building performance without regard to leverage. On slide 30, we show the trailing 12 month price to earnings ratio for us and our peer group. Even though home builder stocks have traded higher since the beginning of calendar 23, the group still trades at a significant discount to the overall stock market. We recognize that our stock may trade at a discount to the group because of our higher leverage. However, given our industry leading returns on equity, our top quartile, ebit return on investment, along with our improving balance sheet, we believe our stock is the most undervalued of the entire universe of public home builders. Based on our price earnings multiple of two times at yesterday's closing stock price at $67.00 and $83.00.
We're trading at a 59% discount to the industry average PE ratio. We remain focused on further strengthening our balance sheet and look forward to reporting our progress in future periods. I'll turn it back to Eric for some brief closing remarks. Thanks, Larry. Considering the economic environment, we're pleased with the financial performance of our first quarter of fiscal 23. It is frustrating as Larry is just pointing out to have the highest EBIT ROI in the industry with our mid-size peers, the third highest of all peers, and still have the lowest PE ratio. We recognize there's a penalty for a high leverage, but as Larry said, we believe that our continued improvement in our balance sheet and a solid financial performance will have our PE ratio correct itself over time. We are glad to see the pick up in traffic and contracts in the months of December , January and February .
field to execute our game plan, which should allow us to continue to achieve industry leading recharge.
That concludes our formal comments and we're happy to open it up for Q&A. Certainly. Let me tell you what if you have a question at this time. Please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from like you, please press star 11 again. Our first question comes from the line of Alex Barrett from Housing Research Center. Your question, please.
Yes, thanks. Good morning, gentlemen. Great job on the quarter. I just wanted to inquire about, you know, the newfound, I guess, enthusiasm of buyers this year. And I guess now that rate seems to be trickling back up. Are you guys maintaining the same level of incentives or have you had to increase to maintain the saleswoman and just some color around the last couple months?
Could we help? I think Alex, as we pointed out, and honestly, to many of our surprises, we actually increased home prices. Net home prices, net event incentives, in about a third of our communities over the last month. So I think that gives you the answer. There are lots of movements and lots of different directions of incentives or base prices.
But net net, we actually increased home prices over the last month. And I'll repeat again, last week, even after rates moved to 7%, we had one of the best weeks we've had in months. So far, the market seems to be adjusting to the current rate environment.
Yeah, well that's very encouraging. I guess what's your best yes or understanding from maybe feedback in the field as to why this is happening. Why, I guess even though home prices are still high and interest rates are high, people all seem to be able to afford the houses that are a little just.
more comfortable with the outlook you think? There are many factors. First, as I pointed out, there are alternatives are fewer than normal. The number of existing homes available for sale is...
Somewhere between half and the third of normal, that's competition for us. So less competition is helpful. Number two, people are just adjusting their home expectations. I think when rates were three and a half percent, they set their sights on some very large homes with very fancy finishes, if you will. And I think people have adjusted their expectations.
That's great to hear. Can you clarify? I'm not sure if I heard you correctly towards the end of the comments, but did you guys say you bought that stock or did I hear incorrectly?
Now, we did buy back about 7% of our outstanding shares and think the number was about $1,000. What was the dollar amount?
$17,000. 17,000, that's about right. And that was over the last two quarters. Yeah, fair. Yeah.
$17,000. $17,000. That's about right. $17,000. And that was over the last two quarters. Yeah. OK.
All right, I'll reread through the press release. Maybe I missed it there. But anyway, so is there a limit to what you guys are allowed to buy back there? And why do you feel that's preferable to reducing the debt of you guys at previous replenishing?
Well, I mean the price, I think we mentioned earlier, the lease was about a little over $39 of the shares that we purchased. We just thought the price just made it an irresistible purchase. Notwithstanding the fact that our long-term plan is to reduce leverage and improve our balance sheet, it was just too good of an opportunity. We are authorized by the board to purchase, re-purchase more.
Thank you, one moment for our next question. And as a reminder, if you do have a question, please press star 111 on your telephone. And our next question comes from Lina, Jesse, a leader, man, from Zelman Associates. Your question, please. Hi, thanks for taking my questions. Then congrats on the strong results thus far this year. I'd like to learn a little more about the land market. I'm.
have land sellers begun to capitulate on land and lot prices given that you and presumably some of your peers are back in the land market. If so, I know it kind of depends on location in other factors but are you able to give an example of some price adjustment in the land market you've seen recently versus what you may have observed a quarter or two ago? Sure. Well, first capitulate is a big word. I'd say many land sellers are starting to be realistic about the appropriate pricing given net home pricing and absorbions. I'd say the market was pretty inactive for six months from about mid-year 22.
That's helpful. Thank you. Are you able to comment on maybe how far below a month or two ago, some of those line prices have kind of reset on a percentage basis?
You know, it's hard. You know, I can't say that we looked at site A before and it's now down 18%.
There are many many moving parts including the pace of takedowns If we're buying finished loss the cost of land development. There's just many many factors But I'd say in general there is an easing of land prices not
across the board, some markets remain particularly tight. Many sellers have not adjusted their expectations, but we don't need everyone in every market to adjust their expectations. We just need to find enough opportunities that pencil with the right returns for us to get that on our growth path.
Makes sense. My second question is just on your quick move in homes. So during February as sales activity improved, how does demand for your, I guess it's more about, I'm asking more about your built order products, but as sales activities improved in February , how does demand for your built order product trending? You know, your, your, um,
The number of quick move-in homes you have for communities held relatively stable, so presumably demand for that product has been high. Have you seen an equal increase in demand from bill to order as your quick move-in products over the last month or so or as the increase really been mostly spec focused from home buyers.
We've seen an increase in both build order and QMI's, but as we mentioned our overall share has migrated to almost 60 percent QMI where it used to be 40 percent. So there's been more of enough to go on the QMI side, but we have seen, especially in the last few weeks, a pickup on the build order as well. That's helpful and...
Any pricing nuances or pricing power differences you're seeing, you know, I'm built to order versus back and maybe margin. If you could give some color on the margin differential on your spec products, or if you're built to order product, I think that'd be helpful as well. I would say the QMI tend to have a little lower margin, more incentive, especially around, you know, either mortgage rate by down or other discount closing costs. The 2B builds have been able to hold up, and it remains to be seen helpful with those who hold.
and make it to the end of construction and delivery. Right now we are seeing a better margin on the bill the orders. It wouldn't surprise me given the increase in demand to see that trend reverse because we're seeing an increase in demand for QMI's. And I think part of it is we just have not been a big QMI builder in the past. And we are in the process of reeducating our sales team about charging more for QMI's rather than less for QMI's given an increased demand. It's not fully in place yet, but I think we're going to reverse that trend. That's very helpful. Caller, thank you again. Thank you. This does conclude the question.
Thank you very much. Thank you, ladies and gentlemen, for your participation at today's conference. This does include the program. You may now disconnect.