Q2 2023 Meritage Homes Corporation Earnings Call
[music].
Greetings and welcome to the Meritage homes second quarter 2023 analysts call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I'll now turn the conference over to our host Emily to Dano, Vice President of Investor Relations and ESG. Thank you you may begin.
Thank you operator, good morning, and welcome to our analyst call to discuss our second quarter 2023, right now.
We issued a press release yesterday after the market close you can find it along with the slides well refer to during this call on our website at investors that meritage homes dot com or by selecting the Investor Relations link at the bottom of our homepage. Please.
Please refer to slide two crushing you that our statements during this call as well as in the earnings release and accompanying slides contain forward looking statements.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update.
Any forward looking statements are inherently uncertain.
Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have outlined and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically, our 2022 annual report on Form 10-K, and recent 10-Q, which contains a.
More detailed discussion of those risks. We also have provided a reconciliation of certain non-GAAP financial measures referred to in our press release and prepared to their closest related GAAP measures.
With us today to discuss our results are Steve Hilton Executive Chairman Phillipe, Lord CEO and he left for that executive Vice President and CFO of Meritage homes. We expect today's call to last about an hour a replay will be available on our website within approximately two hours. After we conclude the call and will remain active.
Through August 10, I'll now turn it over to Mr. Hilton Steve.
Thank you Emily welcome to everyone participating on our call I'll start with a brief discussion about what we're seeing in the market provide an overview of recent company milestones lethal.
Felipe will then cover our strategy and quarterly performance and he will provide a financial overview of the second quarter and forward looking guidance.
The home buying environment remained healthy in the second quarter of 2023.
We made progress on our goals to improve gross margins and increase our available spec inventory sequentially.
Our cycle times began to show notable improvement back towards our historical averages.
Backlog conversion to nearly 90%.
We generated our highest second quarter of closings of 3490 homes.
In home closing revenue of $1 5 billion.
Home closing gross margin for the quarter was 24, 4%, which combined with SG&A of nine 6%, whereas the diluted EPS of $5 <unk> per share.
Second core demand held steady during the spring selling season at three nine sales per month near the top of our 4.0.
Goal as we continue to focus on affordable price points.
Borrowers are acclimated to the higher mortgage interest rates and the favorable demographics of millennials and baby boomers looking for entry level product.
But a large buyer pool for our homes and lastly, the resale home market remains tight as existing burgers are hesitant to leave their low rate mortgages, which limits available inventory and helps to increase new home demand.
These external factors all contributed to a strong sales pace and the return of pricing some pricing power for builders this quarter.
We believe that our strategy of having affordable entry level move in ready homes with a rate lock or buy down sounds where needed.
And a higher backlog conversion and a competitive advantage against both resale and other new home inventory in the quarters to come.
In keeping with a proud tradition of helping veterans.
We teamed up with operation home front for the 10th year.
This quarter to break ground on a new home that we donated to military families at our at our <unk> community in Babcock Ranch, Florida.
Which is the first fully solar powered town in the United States.
This quarter. We're also truly honored you have Meredith you receive a wide range of recognition related to our social and sustainable initiatives. When we received the 2023 Hearthstone builder Humanitarian award for a longtime philanthropic efforts. We earned the prestigious average production for the second consecutive year, the highest accolade presented to a bill.
<unk> were exceptional customer satisfaction scores.
And in terms of energy efficiency, we became the 10th at 10 time recipient of the U S E T. As 2023 market leader for certified homes.
Lastly, we were one of two brothers named one of America's climate leaders by USA today, we're proud to be recognized externally for our core values and corporate stewardship.
I'll now turn it over to Felipe.
Thank you Steve.
I wanted to jump right into sales on slide five.
Our sales orders were 3340 homes, a quarter, where entry level homes represented 85%.
Orders were down 11% compared to last year's challenging comp when we achieved 6% year over year growth versus 2021 day, and we were one of the only two builders of positive order growth.
As a reminder, we pull forward sales can help minimize cancellations in the prior year as we provide the first building utilizing we entered rate locks on those buyers in backlog and new sales yes.
The average absorption pace declined year over year from $4 four to $2 nine sales per month we.
We don't typically give details beyond quarterly due to month to month anomalies, but since the community activity distorted the quarterly average we wanted to provide some additional color. This quarter average absorption rate calculations were impacted by a high volume of April community closings and a district, just Fortunately large volume of Jews community openings.
Quarter, we increased our community count by 5% sequentially from the first quarter to 291 active communities at.
At June 32023.
We had 36 new community openings in Q2 of 2023 and while we are pleased with their performance. We continue to be disciplined about future openings as expect dollar we want to ensure when we opened a new community. We don't really have modeled won't complete but also the right amount of move in ready inventory that can close in 60 to 90 days.
Moving to the regional level trends in slide six.
Continued to achieve a balanced performance across our geographic footprint between east central and west regions during the second quarter.
The West region had the lowest average absorption pace for us this quarter at three four per month.
One of our most challenging markets are in this region as a result of higher ASP appreciation over the past few years.
Still working to find the market clearing price to hit our sales pace target in these geographies.
Some improvement in late June and into July .
The region had an average absorption pace of $4 three sales per month is based on all of our regions a greater availability of moving rates that <unk> second quarter 2023 sales days in line with its first quarter of 2023. This region also ended the quarter with the highest amount of completed specs, which we believe will support a strong future sales.
Our backlog conversion rate.
East region average absorption pace with $4 one per month during the quarter the region saw.
Exhibit strong demand across all of our geographies. So we can focus on reloading our available inventory in these markets as we believe this trend will continue given the strength of these local clients.
Turning to slide deck.
We manage our starts pretty unique aligning our sales pace with supply chain stabilizing and labor becomes more available. We can increase our slowdown starts to keep our targeted four to six months supply specs on the ground.
Strength of the housing market to increase our quarterly start to nearly 4000 homes in the second quarter growing 66% from approximately $2500 in the first quarter 2023.
Down from about 5000 in the second quarter.
We expect these homes to make up the core of the move in ready units for 60 90 built window in the third quarter we.
We ended the tier 4500 spec homes in inventory, which is up 6% sequentially from the first quarter.
This was at the Red This represented 54 specs per community around the low end of our specs for community growth due to the strong spring selling season.
Looking to Q3, we expect to maintain a high level of spec starts to assure sufficient move in ready inventory for the remainder of the year and into 2024.
During the second quarter of 2023, our closings of 3490 homes were 8% greater than prior year due to improved cycle times and strong execution.
As a percentage of total closings remained consistent with prior year at 83%.
The 3490 home closings this quarter, 87% came from previously started inventory up from 74% in the prior year.
18% of full stack completed at June 32023, which dropped from 25% in the FERC quarter, either complete specs were in a high demand for our typical run rate of completions back is about lender, which we are still targeting although it was a high demand for completed inventory. We are still working to meet that goal with 31% at all.
We closed the quarter also saw during the quarter, we improved our backlog conversion rate from 48% last year to eight 9% we.
We believe we can maintain 80% plus targeted conversion rate consistently once the supply chain and labor expense returned to normal our ending backlog for the quarter totaled approximately 3800 volts or five clients grew by over three weeks sequentially from Q1 for new starts in June. So we're close to returning to our pre COVID-19 outages are.
Long term relationship with our vendors the larger volume construction levels, we can offer at a top five builder.
Successful negotiation of all contributed to better build time for our new starts.
To wrap up we replenished with inventory have you been ready to sell for the remainder of 2023, and we are focused on increasing our footprint in our markets as we prioritize pace over price we plan to push the outpaced our active doors.
<unk> may be choppy over the next several quarters, we allow our sales teams on the ground to constantly adjust and take necessary pricing actions until we find the market clearing price to get to our targeted pace of Florida sales per month, so just to clarify focusing on pace over price doesn't mean leave my okay. We look to get our minimum target of <unk>, Yes, we are.
Cognizant of market dynamics, and increased pricing and reduced incentive alignment local trends.
In Q2, we are able to increase prices moderately and reduce incentives, which lead to sequentially higher margins in each increased margin expectations for the balance of the year.
Now I'll turn it over to you to walk through additional analysis of our financial results.
Thank you free to start I'll provide a quick update on BFR in the second quarter of 2023, we started to gain some traction on dedicating full communities to our BFR institutional partners, we will share additional information in the coming quarters as the data become more relevant to our results, but we're encouraged by the commitment from our multiple parts.
And they renewed interest from these operators in the new build space I'd like to turn to slide eight and cover our Q2 financial results in more detail home closing revenue increased 10% to $1 5 billion in the second quarter of 2023, driven by 8% Greater home closing volume from higher backlog conversion and a 1% increase.
In Asp's and clothing.
The increase was primarily a function of geographic mix on clothing gross margin decreased 720 bps to 24, 4% in the second quarter of 2023 from 31, 6% in 2022, although it increased 200 sequentially from Q1 this year the decline from <unk>.
<unk> thousand 22, whereas you get a cost of financial incentives and our results. This quarter and continued elevated direct costs are used to have mortgage rate locks and buy downs did not begin to impact our gross margins until the back half of 2022.
This quarter, we pulled back a bit on incentives and started to test some price increases given the strength in the market rate buy downs were not as pervasive in Q2, but selectively utilized in tougher market or for specific customer qualification.
Although we expect incentives will remain elevated for the remainder of 2023. They are moderating from the extreme levels, we experienced over the last several quarters when looking at our direct costs. They remain fairly sticky this quarter and outside of lumber. The savings. We are seeing are more muted than expected due to higher industry production levels.
Savings derived from our faster cycle times, though are starting to meet their way through our financial.
Continuing to actively negotiate with all of our trade and expect to see cost savings by the end of 2023 and into 2024.
SG&A leverage in the second quarter of 2023 was nine 6% compared to eight 3% in the second quarter of 2022, well, we're glad to see a drop into the single digits. We believe there are additional opportunities to find savings here as well the year over year increase was primarily due to a broker commissions and marketing.
Cost running above the lower 2022 levels, reflecting the current sales environment. We have started to pull back on some of these initiatives where demand is strongest as evidenced by the decline in marketing spend from Q1 to Q2 of this year and we'll continue to monitor local needs and leverage less expensive technology and digital solutions where possible.
Additionally, we had higher costs associated with maintaining a larger volume effects year over year, and some incremental technology spend as we start to set up our digital foundation for AI opportunities.
Our financial services result had a $7 $9 million in charges related to unused mortgage interest rate lock that expired in the second quarter of 2023, we didn't have any such charges in 2022 year to date, we wrote off almost $10 million relating to expired locks, we have added a tighter process on <unk>.
Dennis buying rate lock needs going forward to ensure we don't by excess capacity and expect such charges can be limited in the future.
The second quarter effective income tax rate was 22.1% in 2023 compared to 24, 6% in 2022, the 2023 rate benefited from energy tax credits and qualifying homes at the higher $2500 per home threshold in effect this year similar tax credit.
Didn't begin until Q3 in 2022, when the new energy tax law was retroactively approved overall, the lower gross margin and deleveraging of overhead in the current quarter, partially offset by increased home closing revenue and a favorable tax rate led to a 26% year over year decline in second quarter 2020.
Three diluted EPS to $5 and she said this performance drove our book value per share to a $115 55.
Up 24 cents at 24% year over year.
To highlight just a few results from the first half of 2023 on a year over year basis orders were down 11% closings were up 5% and our home closing revenue increased 6% to $2 $8 billion. We had a 750 bps decline in home closing gross margin to 23, 5%.
SG&A as a percentage of home closing revenue was nine 9% and net earnings declined 32% to $318 million.
As we turn to slide nine I wanted to share the exciting news that some of you may have already seen S&P double upgraded us to investment grade yesterday, we're proud to join the elite group of companies and even smaller group of public builders that have one or more rating agencies issued in the triple B rating, we know what the part of the reason for that.
Upgrade risk due to our steadfast focus on maintaining the health of our balance sheet and strong liquidity, we strive to balance growth in the business with returning cash to shareholders. We had nothing drawn under our credit facility cash of $1 2 billion and net debt to cap of negative <unk>, 2% at June 32023, we've done.
<unk> $356 million of free cash flow. So far this year, our land acquisition and development spend totaled $409 million this quarter in line with 2020 to 422 million.
But the demand environment stabilizing at a higher level, we expect to continue to accelerate our land acquisition and development spend above our prior annual target of $1 5 billion and look to be closer to 2 billion in 2024 and beyond.
During the quarter, we returned $9 $9 million in cash to shareholders in the form of a quarterly cash dividend of $24 seven per share and it's our intent to reset the dividend in the first quarter of each year.
From a share repurchase perspective. In addition to our objective of neutralizing annual dilution from new equity issuances, we will repurchase incremental shares Opportunistically, we did not repurchase any shares during the quarter. After buying 10 million back in Q1 and over $234 million remains available to repurchase under our authors.
Nation program as of June 32023.
As we have previously discussed we also expect to early retire portions of our 2025 bonds with our excess cash on to slide 10.
Given the ongoing momentum in the market, we put over 2800 net new lots under control during the quarter. A total of approximately 60000 lots were owned or controlled a quarter and holding steady from Q1, but declining from approximately 71000 total lots at June 32022.
The new Lotte added this quarter represent an estimated 26 future communities all for entry level product. We ended the second quarter of 2023 with four one year supply of lots at the low end of our target of four to five years further validating our need to increase related spend.
About 76% of our total lot inventory at June 32023 was owned and 24% with the option in the prior year, we had a 66% owned inventory and a 34% optioned lot position, while we're always looking for ways to carry our land off book, we believe owning a large percentage of our land.
Particularly in light of our negative net debt to cap ratio does not create undue balance sheet risk when only the best parts or option. So there's don't typically walk away from deals that are finance after eliminating the optionality of such transaction also the carry cost paid to finance off balance sheet transactions are quite a bit higher than that.
And our current debt costs and don't align with our margin accretion okay.
Finally, I'll direct you to slide 11 for our guidance, we have nearly 3800 units in backlog and another almost 4500 specs in the ground today, which provide good visibility into our potential clothing universe and go forward margin trends for the rest of the year.
The normalization of homebuilding condition, and our higher backlog conversion rate for full year 2023, we are projecting total closings between 13000 313800 unit home closing revenue of $5 85 to 6.7 billion home closing gross margin in the low <unk>.
4% range and effective tax rate of about 22, 5% and diluted EPS in the range of $19 12 to $19 and 80 <unk>.
For Q3 2023, we are projecting total closings to be between 33 and 3600 unit.
I'm closing revenue a 146 to $1 6 billion home closing gross margin of around 24, 5% an effective tax rate of about 22, 5% and diluted EPS in the range of $4 85.
$5 in 2009.
With that I'll turn it back over to Felipe. Thank.
Thank you.
To summarize on slide 12, we believe that our second quarter performance continues to reflect our focus on pace and commitment to our spec inventory. We will look forward to a strong back half of the year as we sell our available back and take advantage of price increases and reduced incentives and alignment with local market conditions.
Good times normalized we expect a higher inventory turns will lead to consistent backlog conversion in the 80% or greater we continue to believe in the strategy behind our business model and our healthy balance sheet and strong cash position will allow us to deliver results and grow shareholder value shareholder value even in a certain market conditions with that I'll now turn the call over to.
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Okay.
Our first question comes from Stephen Kim with Evercore ISI. Please state your question.
Okay.
Hey, guys. This is actually Trey on for Steve you've talked about demand being strong and healthy.
We've heard about demand youre running above typical seasonality and with that in mind could you walls.
Our absorptions fall as the year progresses.
Hum.
It feels like we're in a unique environment right now, especially with your shifts and the the extreme demand for spec in entry level.
We're wondering if you could see as the year progresses.
If your absorptions could be flattish or or even approach flawed actually as you go from <unk> to <unk>, especially as you have these newer communities now coming online.
Thanks for the question.
I think as we sit here today, the market still feels very healthy and stable.
We're four weeks through July and July feels good.
We have there is clearly still a shortage of you tell them to the market. So the new home market is really strong.
Can't predict the future, but I think as we sit here today and we look at our pipeline of buyers and the traffic in our communities. We feel like we can achieve our sales pace targets that we set for <unk> and.
And therefore, selling specs, we need you to achieve our full year guidance.
Yeah.
Yeah Felipe it's Steve So just just to put a finer point on that though.
Well I guess, we're just trying to figure out whether or not that's a statement you know the target for whatever is something that would hold.
For the full year.
Even even this year, which would probably require you to run close to four for the back half of the year, meaning <unk> and <unk>. So just trying to figure out whether that's a reasonable expectation.
Also I wanted to ask you about your backlog turnover ratio because that looks like it's also running higher than what you've often you know you've talked about think about 80%. It looks like you might need to run it like a 100% or something like that in the fourth quarter, which I can understand why but I would love to hear you sort of talk about is that a reasonable expectation for 100 and how long do you think.
You could stay elevated like that going forward.
Yeah. Thanks, Steven the first question.
Fair to say that we're going to achieve our sales targets that we put forward through the rest of this year, we're not seeing anything today that would suggest to get achieve that closer high high threes closer to four sales target Thats why we put forth the guidance before.
We don't need to convert 100% of our backlog to achieve the full year guidance that we put forth. We are 3800 houses.
In backlog to start the quarter, we had a 4500 specs.
Can close this year that we started over the last three months, we still have July and August to start homes. We're halfway through July . So we can absolutely operate at above 80% backlog conversion I do think it might be closer to 90, given the demand for move in ready inventory and enduring.
So we have a lot of confidence in achieving our full year guidance.
Thanks, very much guys.
Our next question comes from Paul Przybylski with Wolfe Research. Please state your question.
Yes, Thank you I guess.
Order pricing was up 2% sequentially was that really a function of mix or or true pricing power reduces so that's on the market.
Your prices now over over 500000.
For your new community openings. So are there any plans to bring that down.
But I don't think our prices over 500000 on average for our new community openings, that's not a number that we gave out I'm not sure on the math you can count on that one offline, but we're seeing some strength in the market for sure.
England to pull back on incentives and some green shoots on trying to actually just increased prices as well.
It's pretty small 2% on that mix, but that's definitely a function of a pullback and need to provide incentives.
Primarily financial in nature for qualification interest rate buy downs and locks, but just incentives in general have a little bit of a pullback.
From where we were a couple of quarters ago.
Okay.
Yes.
How are your absorptions in your your new communities performing relative to your legacy communities and then you mentioned some volatility.
Now for the rest of the year do you still think that 300 target is achievable.
Yeah.
Taking part one of that question.
And it's pretty consistent across our entire footprint I think we highlighted in our comments that theres still a couple of places in the West region that we're still working through but for the most part whether it's a new community our existing community demand is relatively stable I do think.
Part two of that question Jimmy accounts can be a bit choppy.
We are seeing stronger demand in this year than we expected and we're closing out of some communities faster.
See meaningful community count growth as we roll into next year and certainly the back half of next year.
Thank you.
Our next question comes from Mike Rehaut with Jpmorgan. Please state your question.
Thanks.
Good day and good morning, everyone.
Thanks for taking my questions.
Maybe just to circle back to the desired.
Desired sales pace targets, obviously in the fourth quarter.
There's always a bit of seasonality and whereas you know maybe you're targeting you know for <unk> for.
Are they on.
On average perhaps for the full year.
Often inclusive of some more moderate pace in the back half. So just kind of wanted to get your thoughts in terms of maybe not just third quarter, but also a fourth quarter.
If you know given some of the.
This target.
It's still inclusive of some amount of seasonality.
Or if you just feel like you can run the business now.
Closer before for the rest of the year with seasonality, maybe being a little more muted.
Due to a variety of factors, you know industry and company driven.
Yes.
I'm not sure what exactly we're going to see as it relates to seasonality.
July almost in the books and it feels pretty good.
Hard to say, what's going to happen the rest of this year, but.
The used home market is very restricted so we're seeing really strong demand in our communities. Our target is somewhere between three and four we think we're going to be closer to four.
Primarily because most of our business as entry level right now and secondly, because we have all the spectrum, we started and there's a lot of demand for move in retrospect, So IP with having all these facts that can close this year and there being a high demand for those move in ready stack.
We feel like we can achieve the sales targets and seasonality will be what it did but we can achieve the sales targets that we've exhibited that we've demonstrated and now we're going to need to achieve our full year guidance.
Great No I appreciate that belief I guess secondly.
Just following up on a prior comment you made about community count and that you would hope to have more meaningful growth in the back half of next year I know, obviously, we're a bit away from that and.
Not at a point to necessarily give a fine point on guidance, but for next year, but how should we think about community count over the next year or two I mean Q3.
Three years ago, I believe you put out that 300 community target.
That you're now kind of plus or minus act or should be out by the end of the year.
<unk>.
How should we think about community count maybe by the end of 'twenty four and into 'twenty five 'twenty six.
And does that also assume a further increase in cycle times, which actually might result in sellouts occurring a little faster than expected.
Yes, I mean, I think I'm expecting.
<unk> to be relatively where it's at today.
See anything out there changing.
The buyers have been resilient in this new rate environment.
So as long as rates stay where they are where they are at I think I expect the market to be normal our community count is going to be a little bit choppy here, just because demand has been so strong.
We stopped buying land for the back half of last year, So we're going to kind of navigate that.
We're going to have.
Community Count from here into next year as we roll into the back half of next year and then as we spoke in the script, we're ramping up land spend significantly right now so our pipeline for new deals coming through main committee is dramatically up.
We approved a bunch of deals towards the back half of last quarter and we're at a really been busy laying committee calendar the.
The rest of this quarter already had a busy July so our land spend is going to go up dramatically and all of those communities are going to land in 'twenty five 'twenty six and as we're expecting significant community count growth as we roll into two.
2025, and then beyond.
Yes, just a quick point, Mike I think somebody said that the reason why it's going to be choppy because of demand.
We have the unit.
Anything that's related to slowdown from transformers or any any other delays that was already baked into all of our estimates for the last couple of quarters. So the reason it's choppy because the market is so much stronger than anyone had anticipated, causing the gap out not because we can't get communities that don't have locked in place.
Great. Thanks, I appreciate it.
Thank you.
Yeah.
The next question comes from Alan Ratner with Zelman and Associates. Please state your question.
Hey, guys. Good morning, Thanks for taking my questions.
First.
But I'd love to dig in a little bit more on the pricing side. You made some comments that you know there were some moderate price increases or kind of dialing back incentives. This sequential increase in margin was pretty significant and certainly greater than you guys were expecting into the quarter.
If I look at your guidance in the back half it looks like Youre expecting pretty flattish margin, which I would've expected.
Incentives are on the decline there might've been a little bit more of a tailwind. There. So can you just maybe quantify exactly what's going on on the discounting and incentive and pricing side and what your expectation is for the back half of the year as more of these specs come to market.
Yes ill, let <unk> talk a little bit more about what's going into our guidance Alan violated congratulations on your <unk>.
Tenure over there.
Thank you.
Yeah, you're welcome.
But I'll talk a little bit about the pricing.
We're a spec builder so essentially we just look at the net price.
And over the last six months, we've been able to back off on incentives.
And we've been able to back off on using rate buy downs and a number of places, especially since we now have more move in ready inventory the rate locks are less expensive. So that's really driven the <unk>.
Margin for US we've raised prices moderately and some of the hottest places, but overall, it's just been backing off on the aggressive incentives.
And the rate locks, we were having to use to sell homes towards the back half of last year and into this year.
As we roll into the.
The rest of this year and I'll, let you jump in here.
The loans are started we know what their costs are we've already sold quite a few of those at their price. We know incentives we need to do the incentives are dramatically down from what we needed in the first half of this year, which is what's giving us confidence in our guide, but let me, let you jump in a little bit on some other.
Your details driving the guidance for margin for the rest of the year easily.
Obviously with $24 four was where we ended up for the quarter were guiding to around $24. Five we feel like the next quarter is looking pretty similar.
Those homes already in backlog, we have a decent understanding of where those margins will fall, although with about a third of our volume coming from same quarter activity. There is an opportunity for that to move a little bit which is why we said around 25% is back into Q4 from our full year guidance is actually quite a nice margin uptick in Q.
For which is exactly what you're mentioning here Allen is that expectation and we'll be able to pull back on incentives a little bit more based on what we're seeing in the market today for closing for Q4. So there is quite a nice uptick in Q4 projected margins to get to the full year, 24%, which is kind of off balance.
<unk>.
The balance on the 22, 4% in Q1, we have to balance that somehow and that's going to come from higher margins in Q4.
Got it okay. Thanks, Thank you for clarifying that.
That's exactly what I was getting at.
Helpful.
Second question, a little bit more of just a consumer detailed question here.
It's obviously, a great insight into the first time buyer and kind of their their credit quality and an aptitude to to afford a highest in today's market and a lot's been written about this idea of generational wealth transfer kind of offsetting some of the affordability challenges that would appear on paper.
Boomers.
Boomers, helping their kids Atwood, downpayments or perhaps even putting their name on the on the home and purchasing it for them I'm curious if you've seen any of that data in your your mortgage statistics or any anecdotes that you could point to that would either support or refute that thesis that that trend is.
It's been increasing.
Yeah, I'll take that one we're not seeing Sharon putting their name on their children.
Mortgages that we are seeing about a quarter of our volume have DPA the down payment assistance.
RFP, maybe it's not clear.
Clear generational wealth, but it's definitely assisting on the down payment side to make sure that they can they can buy that house the maintenance of your mortgage payments on a go forward basis is on the homeowner on on the mortgage side, we are seeing that for sure.
How does that compare to a few years ago.
It was about half.
Half that back half of 'twenty.
Got it yeah, Okay perfect really appreciate it guys. Thanks a lot.
Yes.
Our next question comes from John Lovallo with UBS. Please state your question.
Hey, guys. Good morning. This is actually Spencer Kaufman on for John Thank you for the questions and nice results.
Just piggybacking off of some of the prior questions on gross margins I think a <unk> margin is well understood. But can you just talk a little bit about what gives you guys a confidence that demand will hold in incentive activity won't need to accelerate to sort of hit your <unk> margin target.
Yeah. So.
Yeah, Sean redundant, but obviously every home that we need to close this year has already started so we know what the costs are so that's good.
We can only base our future view of demand based on our current view of demand and based on what we're seeing in the market today.
We're confident that we're going to achieve our absorption targets through the rest of this year.
I think a lot of it is being driven by what everyones been reading, which is the fact that there is no inventory in the market specifically on the Utah market and so the new home market is achieving a larger market share which is giving us.
Strong absorptions as strong biofuels so.
Do I know, what's going to happen in December today, no, but I know what's happening in July .
My views on what's happening in July .
Okay that makes sense.
And can you talk a little bit about what the benefit to gross margins were in the quarter from lower lumber rolling through.
Is it fair to assume that there could be maybe a little bit more of a sequential benefit in <unk>, but the majority of that benefit was probably in the current quarter.
Yeah.
All of that benefit has been rolling through Q1, and Q2 as you guys know lumber is actually starting to tick up not down now none of that's going to be visible yes.
Recent home starts data as closings won't happen until later and we've accounted for that as Sumit mentioned, we know all of our cost structure for clothing to the back of the year and all of that has been already a josh but I don't think that there's going to be an incremental ticked down from lumber sales flowing through the financial statements future savings in margin are going to come from cycle.
Im improvement and continuing a continuing push by the entire organization to get Youre at cost saves in other category.
Perfect. Thank you guys.
Thank you.
Our next question comes from Alex Barron with housing Research Center. Please state your question.
Alex spots you there, but your line is open.
Sorry, I was on mute, thank you and great job on the quarter guys.
Sure.
But can you discuss what's the level of incentives.
In the quarter and the closings versus orders and what is the kind of normal historical incentives as a percentage of sales.
So we've shifted quite a bit and you never expect though there is some incentives or just kind of part of the all in price, we don't really market.
<unk> price and then options and incentives like a traditional builder or no based on what we used to do in the past, but Ali they used to run about 6%.
Running quite a bit north of that right now we don't typically break out that level of detail, but I can share that between Q1, and Q2 day job Q3 hundred beds, which is exactly the savings we saw in the market. That's really really the benefit that youre seeing in the margin is the pull back on incentives.
Okay, but theres still running a little bit higher than historical normals.
Correct.
Okay.
Hopefully that means there's still room for improvement as the market gets back to normal.
I guess, a similar question on the Bill times.
What are the Bill times right now where were they at the peak of last year, let's say when things were super slow and what what's normal.
So.
In some of our markets when we were in.
The middle of the supply chain challenges were north of 200 days to build a house. So we didn't start a house in June we were going to close it.
Right now close to 160 days, so we're down from that.
That's 40 days I would say that's the biggest decline we've seen I think a company wide were down about three weeks, so 21 days or so.
For Covid, we were building homes in four months, so 120 to 148, depending on the market and we're looking to turn our assets anywhere between two and a half to three times a year.
We're definitely back above two.
In some markets I think we can get to three.
And that would be the goal. So we still have some opportunity to reduce our cycle times.
The trades are performing quite well right now although there are a bunch of starts going out we'll see if the capacity stays stays strong but.
We're all back we buy and Bill we have repeatable products. So I think we're going to be in the front row are getting the best cycle times in the industry along with some other folks so right now about 160 <unk>. Our goal is closer to 130.
We still have a little ways to go.
Okay. So again it seems there's still opportunities left.
And if I could sneak one last one.
I think I heard you say that start pace was 4500.
Was it last quarter and is that 4500, a good run rate of where you think you'll be going forward.
Yes, we actually started 4100 homes, but we are 4500 stats coming into the quarter just to clarify.
We think our run rate to about 4000 starts per quarter. That's our goal as we move through the rest of this year to start about 4000 homes.
We believe that we have the lots and the communities and the trade capacity to execute on that we did 2500 funds in Q1.
Because we were pulling back and we were trying to monitor the market.
Awesome, Thanks, so much and great job guys.
Thank you.
Our next question comes from Carl Reichardt with BTG. Please state your question.
Thanks, everybody.
I'm going to ask about land. Obviously, you guys are moving back in fairly aggressively some of your peers are too what are you seeing in terms of land pricing in the market and given the business model relative to say five years ago can you talk about the changes in your underwriting in terms of absorption or time to market or size of lots per community that all of that how is that underwriting.
Idea changed with the model transition.
Well it has changed significantly since our new strategy seven years ago to go into focus on the first time, an affordable one of these segments of the market and go to an off spec strategy. We're obviously looking at higher absorptions and turns.
We are.
Got on point to tell you that we think our margins are going to be better than they were prior to that point.
We were operating more than a 20% margin range now we're closer to 'twenty to 'twenty one 'twenty two.
We are looking we obviously look to.
Clothes dark when its shovel ready so that's a big priority as well we spent a lot of time and money.
Setting.
Our projects that don't close them until we can put a shovel.
We buy bigger deals because we expect more volume and.
We are trying to spread the development costs. So we can achieve the price points. So really everything has changed.
Things are going well, we continue to see deals that underwrite for that criteria allow us to stay on the bottom of the graph and the affordable, especially in the markets that we're in Atlanta.
The land is not on sale.
I was hoping to see land prices come down more materially from last year, given what happened in the back half of last year, but as we've always discussed land prices are sticky and as soon as the spring selling season turned around.
<unk> was back on the market, but the prices really haven't changed so there was kind of an opportunity early on to get something for cheaper.
Right now, it's back to being a pretty competitive market, but.
We see plenty of land, we have a deep pipeline.
Our folks out there in the field do a great job, giving us getting us some first looks on properties.
And we.
We have plenty of projects out there that underwrite based on the hurdles and the market positioning we're looking to achieve.
Thanks, Lee and then you're talking about guidance, we'll talk about this quarter's performance relative to guidance what were the one or two real critical positive surprises that you had during this quarter versus what you told us in April you do.
I think that to me.
These positive surprises was the conversion rate, we guided for a lower closing guidance. We werent sure that we were going to be able to christa trades to get all the homes closed so that 89% conversion rate was definitely a positive surprise and one that we're now running with alcohol and expect the trade to continue to deliver that especially as we have specs available in.
And further in the production cycle as we run into Q3 and then the other positive would be the margin growth I don't think that we as a sector I think everyone's giving you the same comment, but I don't think that we.
<unk> believes in the ability to pull back on the financial incentives as much as we did so with a third of our of our volume coming from same quarter sales were starting to see that benefit early so we're excited to be able to see that start to pull back in some of the incentives again, they're running hotter than historical but definitely some pullback.
From where we were at the back end of last year to where we are today.
Okay. Thanks, Sheila Thanks Ali.
Thank you.
Our next question comes from Joe Ahlers Meyer with Deutsche Bank. Please state your question.
Yeah, Thanks very much.
I just wanted to talk about the orders in the quarter and the community is really in the quarter as well you may not cut the data this way.
I imagine you have a sense of how this would go if I think about your new openings and what you've closed out it seems like really only about 250 communities started and ended the quarter actively selling and so it's not <unk>.
Hard to kind of maybe those that stayed open the entire quarter, we're still running at above four pace. Just curious if maybe you would agree with that.
I would fully agree yes.
We said in the.
In the script our comments, we had just some outsized communities that closed out in April they have some remaining homes to sell from Q1. After Q1 was so strong and then really most of the openings, we actually didn't open up our communities until late in the quarter again, primarily.
Just really focused on opening our communities right right now.
Our priority of cycle time, so we don't want to open up communities that don't have move in ready inventory that can close within 60 90 days. So you are exactly right. It is.
Little bit details, but that's exactly what happened and the rest of our business operated above <unk>.
Yes, it makes sense and then.
Congrats on the Triple B I know that's important to you guys and that's really exciting I'm thinking about your cash balance having grown in these recent quarters, though and you talked about the pause on the land side.
Late last year and the momentum that you're now seeing in the current quarter in the land market would you maybe mind sizing that even just.
Qualitatively can.
Can we expect your your cash balance to come down as you maybe deploy and redeploy.
The current excess balance and the cash youre getting from closings and then similarly in kind of in the same vein.
Talking about your cash and being opportunistic with share repurchases. How are you also thinking about opportunities on M&A as a way to achieve your growth aspirations.
Yeah.
As we said, we're ramping up land spend significantly.
Our target net debt to cap has always been kind of in the low mid twenties were way off of that so as we start to reinvest in land, we're going to see that kind of revert back to that I would hope but.
But not not go higher than that I think we have plenty of liquidity to drive our growth without exceeding.
That kind of parameter.
And then.
We are very active.
The M&A, primarily focused on any private builders that are looking to.
Sell their business focus on the ones that are inside of our markets that we're already in.
We still have a number of markets, where we're trying to achieve top three or top five where we're not so an M&A opportunity in those markets would be really compelling to us.
Looked at quite a few here over the last 90 days, we haven't gotten to the finish line.
We're looking at all of them and we certainly think that that's something you could see from us over the next year or so.
Thanks, very much good luck everyone.
Thank you.
Our next question is from Susan Mcclary with Goldman Sachs. Please state your question.
Hi, everyone. This is Charles Perron for Susan today, Thanks for taking my question and congrats on great quarter.
Maybe first.
Talking about SG&A, considering the trajectory that you talked about end demand recovering and obviously closings do you guide for the back half how.
How should we think about SG&A cadence for the back half of the year as part also of the brokerage commission is likely to come down.
Yeah, So I think that that youre right that.
We're aggressively looking to just squeeze SG&A umbrella that lower we always used to say under 10 is a good place and as we continue to be a bigger builder that under tender, becoming something lower so I think that it is an appropriate expectation to continue to see that number.
Pulled back, especially when when we're giving has consistent or increase in closing volume.
Broker Commission you should see some benefit.
They're in the back half of the year as far as longer term initiatives need thats why to 'twenty, four 'twenty, five and general sales and marketing trends.
The commission piece for sure should be visible in the back half of this year.
That makes sense. Thanks for that and then just maybe a broader questions to follow up we've seen industry single family housing starts obviously approaching 1 million unit. This spring and given the bullish outlook for new home construction can you talk about maybe the measures you can put in place today to ensure that your supply chain are holding better this time around than during the uptick that <unk> seen over the last few.
Years.
Hearing that some materials like AWP are very hard to find these days and even an allocation. Some reason so how do you mitigate against those looking forward.
If things were to go back to let's say 2021 starts level.
Yes, I think theres some lesson learned lessons learned I think communication with the trades.
A higher level of transparency and more frequent communications as part of it.
Theyre already.
Talking to us about.
What might happen. If this were to occur and trying to get ahead of it and they are being more thoughtful about it. So I think it starts there, but I also think our strategy is key.
Other builders you can see are following as it relates to more specs and less complexity and less products that go into the into the business of the entire industry.
Does more of that I think we allow our trade partners and the labor to perform at a higher level.
I think it's more of that and.
We're continuing to migrate even further into less complexity more repeatability and less less products that go into our homes.
So that's what we're focused on as the capacity increases are steady.
Steady cadence continuing to start and keep those folks busy.
Really the best thing we can do.
One other benefit it would be.
Migrates to more and more and more spec starts.
Our ability to substitute products in the home, it's our choice someone didnt pick it out in your design studio. So if there are issues with one product type or one supplier, we can at our discretion substitute the product or something else.
That's very good color. Thanks for the time guys.
Okay, well I think that that's all the questions we really appreciate.
Your interest in.
Taking time to listen to our comments. Thank you operator, I want to thank everyone, who joined US joined the call today and your continued interest in Arizona, but I hope you have a great weekend. Thank you.
Thank you Marty.