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spk12: Good afternoon and welcome to Four Star's second quarter 2021 earnings conference call. A brief 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. As a reminder, this conference is being recorded. I would now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton, the majority shareholder of Four Star. You may begin.
spk01: Thank you, Paul. We welcome each of you to the call to discuss Four Star's financial results. Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Four Star believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Four Star on the date of this conference call, and Four Star does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in Four Star's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This afternoon's earnings release is on Four Star's website at investor.fourstar.com, and the 10Q is expected to be filed by early next week. After this call, we will post an updated investor presentation to Four Star's investor relations site under events and presentations for your reference. Now, I will turn the call over to Dan Bartok, CEO of Four Star.
spk08: Thank you, Jessica, and good afternoon, everyone. In addition to Jessica, I am pleased to be joined on the call today by Jim Allen, our Chief Financial Officer, and Katie Smith, our new Director of Finance and Investor Relations. who joined Four Star a few weeks ago. I'd like to take a brief moment to have Katie introduce herself before we get started. Katie?
spk00: Thank you, Dan, and hello, everyone. I'm excited to get to know our current investor base and analysts, and I'm also looking forward to helping Four Star expand and build its shareholder base with new investors who are just as enthusiastic about Four Star's value creation strategy as we are.
spk08: Thank you, Katie. Given that Katie has just recently joined Four Star, she will not be an active participant today, but we are very excited to have her with us as a key member of our team. The Four Star team delivered a strong second quarter, outperforming our expectations, and we continue to achieve important milestones that create additional value for our shareholders. Our business is expanding rapidly, and we are capitalizing on the strength of the residential finished lot market. We delivered 7,155 lots to home builders in the first half of fiscal 2021, putting us on track to now deliver over 14,500 lots for the full year of fiscal 2021. I want to thank our development teams and our contractor base for the strong execution over the last several months, which has made this possible. We continue to gain market share in the undercapitalized and fragmented lot development industry. Four Star's lots sold to D.R. Horton continue to grow as a percentage of D.R. Horton's closings year over year. And our lot deliveries to third-party builders are at their highest level since D.R. Horton acquired a controlling interest in Four Star. Executing on our plan is translating into increased profitability. Our second quarter gross profit margin increased by 450 basis points year over year to 18.6%. There were several factors that contributed to this quarter's gross margin improvement. We delivered a larger mix than normal, mix of lots from communities with higher gross margins. We also made further progress delivering more lots in projects that were sourced by Four Star, and we did less lot banking in the quarter. Finally, the market remains strong with increased demand for lots from home builders. We remain committed to our returns-focused business model. Our high turnover, lower risk manufacturing strategy led to a 360 basis point year-over-year improvement in Four Star's return on equity. We expect to generate further growth in pre-tax income and to increase our returns on equity and inventory as our platform continues to gain scale and our team grows in their respective markets. Jim will now discuss our second quarter financial results in more detail.
spk06: Thank you, Dan. In the second quarter, Four Star's net income increased 196% to $28.4 million, or 59 cents per diluted share, compared to $9.6 million, or 20 cents per diluted share in the prior year quarter. Four Star's second quarter revenues increased 80% from the prior year quarter to $287.1 million. Residential lots sold during the quarter totaled 3,588 lots, an increase of 84% from the prior year quarter. The average lot sales price for the quarter was $78,100. 88% of lots sold in the quarter were from development projects, up from 65% in the same quarter in the prior year. Lots sold to D.R. Horton during the quarter represented 94% of Four Star's total lots sold, down from 98% in the second quarter of fiscal 2020. We sold lots to 11 builders other than DR Horton during the second quarter this year, up from six builders in the same quarter last year.
spk11: Dan?
spk08: Our pre-tax income for the quarter was $37.6 million, with a pre-tax profit margin of 13.1%. Our gross profit margin was 18.6% in the second quarter, up 450 basis points, from 14.1% in the prior year quarter. As I mentioned earlier, improvement in our gross margin was primarily due to an increase in development lot sale margin, which was largely driven by delivering a higher than normal mix of lots from communities with outsized gross margins. We continue to expect fluctuations in our gross and pre-tax margins due to the quarterly mix of our lot deliveries and the timing of track sales. SG&A expense as a percentage of revenues in the second quarter was 5.7% compared to 7% in the prior year quarter. We remain focused on managing our SG&A expenses efficiently while building out our platform to support our significant growth. And we believe we will continue to manage our business at an SG&A percentage significantly lower than most public home builders. Jessica?
spk01: Forrester's underwriting criteria for new development projects includes a minimum 15% annual pre-tax return on inventory and a return of the initial cash investment within 36 months. During the second quarter, investments in lots, land, and development totaled $380 million, of which roughly half was for land and half was for land development. For the six months ended March, investments in lots, land, and development totaled $850 million. Four Star continues to expect to invest at least $1.5 billion in lots, lands, and development in fiscal 2021 subject to market conditions. Four Star's lot position at March 31st increased 62% from a year ago to 84,500 lots, of which 58,700 lots are owned and 25,800 lots are controlled through purchase contracts. Of Four Star's 58,700 owned lots, 35% are under contract to sell to D.L. Horton, representing at least $1.5 billion of future revenue. Another 28% of Four Star's owned lots are subject to a right of first offer to D.L. Horton under the Master Supply Agreement. Lots sourced by Four Star continue to grow as a percentage of the company's owned lot portfolio, supporting long-term improvement in Four Star's gross margins. Of the company's owned lot position at March 31st, 48% were sourced by Four Star, up from 31% a year ago. Four Star continues to target a three- to four-year owned inventory of land and lots. Jim?
spk06: Four Star remains focused on maintaining a strong balance sheet with ample liquidity and modest leverage. During the quarter, we utilized our at-the-market equity offering program for the first time and issued 1 million shares of common stock for net proceeds of $23.3 million. We ended the quarter with $500 million of liquidity, including $170 million of unrestricted cash and $330 million of available capacity on our revolving credit facility. Total debt at March 31st was $655 million, and our net debt to capital ratio at quarter end was 34.1%. Earlier this month, we priced $400 million principal amount of 3.85% senior notes that will mature in 2026. The transaction is scheduled to close tomorrow. A portion of the proceeds will be used to redeem our $350 million 8% senior notes due in 2024 in full, and the remainder of the proceeds will be used for general corporate purposes. After we redeem the 8% notes, we expect to recognize a loss on extinguishment of debt of $18.1 million in the third quarter, which represents the call premium and write-off of unamortized debt issuance costs related to the notes. This refinancing transaction will result in substantial interest savings. Last week, we amended our revolving credit facility to increase the facility size to $410 million and extended the maturity date from 2022 to 2025. At March 31st, stockholders' equity was $944 million and our book value per share increased to $19.21, up 10% from a year ago. Dan?
spk08: We are excited about our team and their ability to execute the lot development model. Four Star continues to be uniquely positioned to gain market share through housing market and economic cycles in the highly fragmented lot development industry. Based on results for the first half of the fiscal year and today's market conditions, we now expect to deliver between 14,500 and 15,000 lots and to generate approximately $1.2 to $1.25 billion of revenue in fiscal 2021. We are now expecting our pre-tax profit margin for the full year of fiscal 2021 to be in the range of 10 to 3.5%. excluding the one-time charges associated with calling our 8% notes. We expect our tax rate for the third and fourth quarter to be in the range of 25% to 26%. At scale, we continue to expect our operating model to produce financial results and returns that are better than most mid-cap homebuilders. Before we turn to questions, I'd like to remind everyone of Four Star's investment highlights. We have a unique lot manufacturing business model that is very different than a typical land developer. We have no unentitled land. We are focused on developing lots for the affordably priced housing market. We have a seasoned management team experienced in consolidating market share and navigating through market cycles. We have a strong balance sheet and liquidity position with low net leverage. We have consistently We have been consistently profitable and are managing our business at an SG&A percentage significantly lower than most public home builders. And most importantly, we have a unique competitive advantage due to our relationship with D.R. Horton, the nation's largest builder. This highly strategic relationship allows us to expand our platform nationally while minimizing risk. To summarize, we are continuing to execute on our plan and are positioned for continued success. Paul, at this time we'll now open up the line for questions.
spk12: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from John Lavallo with Bank of America. Please proceed with your question.
spk11: Hi guys. Thank you for taking my questions tonight. The first one is, is on the gross margin and Dan, I apologize. You cut out when, when you mentioned the updated pre-tax margin guide, I think, I think you said 10 to 10.5. Was that correct?
spk08: Yes, that's correct.
spk11: Okay, great. Thanks. So on the gross margin, you know, the 18.6 was, was, you know, well ahead of what we were thinking. And you talked about several drivers and also mentioned that it could be a little bit bumpy. But I guess what we're trying to gauge is just how repeatable this margin might be. So maybe any thoughts on that? And along those lines, is there any way you could disclose what the average margin on development lots was and the average on banking deals in the quarter?
spk08: Well, John, it was really great that we had such a great quarter and everything aligned for us. But it also illustrates how lumpy our quarterly results can really be. You know, we don't anticipate a repeat of those strong gross margins over the next couple of quarters. You know, we really remain focused on returns and not on margins. It just really was, it just happened to be certain lots delivered that had higher margins. And I think as we've said before, you know, the longer The longer projects with more lots and a longer life are going to have more gross margin than the shorter ones because of our focus on returns.
spk01: And then we haven't given a gross margin breakdown between lot development sales and lot banking sales. Lot banking did decline again to about 12% of the overall lot sales for the quarter. And generally speaking, those are a lower gross margin than the development sale margin just because of underwriting to the returns rather than the gross margin associated with that.
spk11: Okay, understood. And then, you know, obviously builders have had the ability to raise prices pretty aggressively in this environment. I'm curious how, you know, Four Star has been able to sort of keep up with the price increases, you know, on new deals and also on, you know, as different phases are met in the existing deals. Have you been able to aggressively raise prices as well?
spk08: You know, we have definitely had opportunities to raise prices. You know, we're generally pricing lots maybe six to, you know, nine months to 12 months of delivery ahead of us. So we can't really do it in the short run. So I think you'll see a gradual improvement of that pricing power. But again, as we're so focused on returns, It's really also about how rapidly the subdivision is absorbing. So we really want to be careful not to raise too much so that the velocity in a particular subdivision gets curtailed.
spk01: And in terms of the mix, if you look at the ASP coming down, John, really that's been driven by Four Star's focus on selling lots for homes at affordable price points. And so they saw in previous quarters more higher lot sales deliveries from those higher priced projects today we think they've settled out to where it's going to be going forward call it high 70s low 80s for an average lot sales price I mean still a little bit of variability but that high 70s to low 80s generally leads you to a home sales price of three to three and a quarter or so so very much an affordable price point great if I could stick one more in here you know certainly some some tough weather in the quarter
spk11: Any impact on Four Stars results in the second quarter that may benefit as we move through the year? Just kind of a push forward.
spk08: You know, I really got to give credit to our team. They really delivered. In fact, we really kind of delivered lots faster than anticipated in several projects. The weather was tough, but we were pretty fortunate that being spread across the country like we are, being diversified, the impact for us was pretty nominal. If there was an impact, I'll take that impact every time because we just had a great quarter.
spk11: All right. Thanks very much, guys.
spk12: Thank you. Our next question comes from Ryan Gilbert with BTIG. Please proceed with your question.
spk09: Hi. Thanks very much. First question is, I guess, just going back to gross margin. It sounds like the real driver here was the mix of lots that were being delivered from kind of outsized gross margin communities. Because if I look at the land banking mix, it was pretty comparable to the first quarter of 21 when your gross margin was much lower. So maybe you can just talk about the characteristics of those communities, why they have such higher gross margins. and your ability to kind of replicate those communities in the quarters ahead?
spk08: It's probably highly driven by four-star sourced deals where we have gone a little bit longer in the size of a project. And because of our returns-focused nature, the longer duration of a project always result in a higher gross margin than the shorter duration projects. We like to have a good mix of both. And again, it just happened to be the stars aligned in which projects delivered lots. Frankly, a lot of it came in the last couple weeks of the quarter that just happened to have a great result. I know the question of being repeatable, I think John kind of alluded to that. Over the next couple quarters, the visibility that we have, I don't expect that to be repeated, but I think it gives a snapshot of what can be achieved down the road when we're really at scale and operating more efficiently and having projects at all cycles in every part of our project cycle. Is it going to happen next month or next quarter? I would highly doubt it, but Again, I think it gives us a good snapshot of what's achievable.
spk09: Okay, that's great. So I guess just to kind of repeat what you just said, as we move to a higher mix of four-star sourced lots over the next couple of years, call it, you're going to see gross margins that are closer to the 18.6 that you did in this quarter versus the 14.4 that you did in the first quarter of 21. Is that the right way to think about it?
spk08: Yeah, and again, I still caution that it's lumpy, and even four-star source deals, we're doing small deals as well as big deals, and it's going to vary from quarter to quarter. But again, I say if I could align the stars the way this quarter happened every time, then I would say, yep, for sure, we can do that.
spk01: And our base case would be, Ryan, that on an annual basis, you will see Four Star's metrics improve year over year going forward. It's just the quarterly that we're talking about is lumpy to lumpy and not necessarily replicable today from that gross margin perspective.
spk09: Okay, got it. Thank you. Second question, you know, we're hearing a lot about supply-side constraints and, you know, I guess other areas of the supply chain here for homebuilders. And I'm wondering if bottlenecks elsewhere in the supply chain is kind of hurting the pace that the builders that you're selling to can take down lots or even your ability to get finished lots ready for builders to be able to take down.
spk08: You know, from a supply constraint, I will say that we're starting to see little impacts, you know, clearly on concrete in some of the markets. We're hearing about concrete allocations. But for us, at least at this point in time, knock on wood, we haven't really been impacted by that. And, you know, from the way I see the builders, you know, although we've finished a lot of lots this quarter. We sold them. Our finished lot inventory didn't go up, so as of right now, I'm not seeing any impact of their ability to take down lots and get houses on the ground. A lot of our sales are to Horton. I think 94% or something this quarter were to Horton. Whether that's repeatable by every builder, I can't answer that, but so far, We're not really seeing anything other than get more lots on the ground because we want them.
spk09: Okay, great. Thanks. I'll jump back in the queue. Appreciate it.
spk08: Thanks, Ryan.
spk12: Thank you. Our next question comes from Anthony Petinari with Citi. Please proceed with your question.
spk03: Good afternoon. Your guidance implies, I think, over 40% growth in locked deliveries for the year, I think, at the midpoint. And, you know, DR Horton's delivery or closings guidance for the year, I think, is low to mid-20s. Just wondering if you could talk about that delta, you know, is that just DR Horton purchasing more than it consumes to build back inventory? And if so, is there a way to think about sort of the length of time that you can sort of grow above DR Horton's pace before that maybe normalizes or corrects, or are there offsets that we should think about in terms of share gain or third-party sales that could keep your kind of outperformance or the fast clip going?
spk08: Yeah, I think right now, I don't remember the exact number of this quarter, but the number I remember seeing is that we delivered approximately 16% of Horton's lot needs. I think that we stated, and Horton stated previously, the goal is for us to get to 30% to 35% of Horton's lot needs. So we could double the number of lots they're taking before we get to, I think, their target. And again, it doesn't mean the target doesn't move when we get there. But for right now, that's been the discussion. So there's still significant growth just to get to that number. In addition, the third-party builder business is starting to kick in a little bit. I know the numbers still seem a little bit low, but 400 lots. Four Star Deloitte delivered 1,400 lots I think the first year I was here, so it delivered 400 lots to another builder that's kind of beginning that process. The more Four Star Source deals we have, the more of that becomes available. I think you're going to see growth in both areas. I think the percentage growth is going to be greater on the third-party builders because we're starting at a low base, but but we feel really good about the guidance.
spk01: And with Four Star's capital today, with their access to the capital markets, just compared to the land development industry as a whole, I mean, they are so well-positioned to continue to consolidate share, as Dan said, both not only through, you know, getting more deal-working lots on the ground versus also just selling more to third parties. There's really still unlimited potential for them to grow their share from where it's at today.
spk03: Okay, that's very helpful. And then your own lots increased by I think around 6000 from the prior quarter. I think your option lots increased by a much smaller number. I think around 500 Is this just a function of bringing more lots onto the book is you exercise options and get set up for accelerating lot development or is it you know or is it getting more difficult option lots in the current environment or is there anything to kind of read into that mix.
spk08: I think it's really just been execution of our plan. We have seen this as a growth platform. We need lots to continue the growth. Having a strong pipeline, we've been pretty proud of that. And I think the number of owned lots just shows that we're closing all the projects that we have put in contract earlier. You know, still having roughly 25,000 lots of control blocks. Again, that just shows we still got a pretty strong platform of future deals. But, you know, the flip side is, you know, land prices have been accelerating. And, you know, there's not necessarily going to be as many good deals today as there was six months ago or a year ago. But we think that'll be a, you know, I don't think it'll be a continued pace. In the meantime, we've built out our acquisition teams and our development teams, and we're just going to continue to execute and try to underwrite very conservatively to put strong deals on our books.
spk03: Okay. That's very helpful. I'll turn it over.
spk12: Thank you. Our next question comes from Truman Patterson with Wolf Research. Please proceed with your question.
spk10: Hey, good afternoon, everyone. First, Dan, I wanted to follow up on one of the prior questions just about some of the, you know, potential supply constraints. But really specific to horizontal development, you know, are you seeing enough labor and machinery to really, A, meet your growth needs? You know, could you just kind of characterize that? you know, how you think the industry is doing? Are you seeing any tightness, you know, that's beginning to delay your developments at all?
spk08: You know, from a labor and machinery standpoint, we have not really seen any problems. I think in the markets where we're building scale and we're building that reputation of a quick payer, if someone's going to keep their crews busy, you know, we're becoming kind of pretty large force in our bigger markets as we've grown our platform. So I actually feel really good about our contractor base and how that actually, I think, continues to improve. The only real issues I'm seeing is really in resin. So the plastic pipes, those prices have accelerated. It's a relatively small piece of the overall cost of developing a lot, and now more recently concrete. Concrete has actually been a little bit in shortage as well as the prices going up. So far, nothing has been outsized, and we've been able to pass through those costs as they're incurred.
spk10: Okay. Do you think on the horizontal labor and machinery not really facing any constraints, Is that really unique to Four Star, or do you think that the industry has ample capacity right now?
spk08: I don't know that I can answer that. I can talk to what we've been able to get accomplished. I'm not hearing that other people aren't able to get that, other than maybe on some other builder calls that I've listened in on in the past. But personally, our team has not been seeing any shortages in those areas.
spk10: Okay. Okay. And, you know, big picture land competition, you know, I'll just ask about, you know, builder behavior outside of D.R. Horton, right? What sort of builder underwriting are you seeing? Are they baking in price appreciation? And, you know, more recently, is there anything pushback just from lumber has inflated very materially the past month or so. Just wanting your thoughts there. Finally, are you still seeing builders really go after larger lot communities?
spk08: I really can't speak to the details of how they're getting to their underwriting. I definitely see them offering higher prices for land, in some cases almost taking out any development-type profits in that land. Obviously, we haven't won every deal because of that. We obviously need to underwrite the development profit. Are they getting into a little bit bigger deals? I'm seeing a little of that, but mostly I'm seeing them run up the pricing in the smaller projects. Heck, we've even had some offers for us of deals that we intend to develop that they're offering us for the land that we haven't put into development yet. I'm kind of like, how do they get to that price? I just think right now it's created some frothy pricing in the smaller projects that are ready to go and seeing a little bit of extra competition in the bigger projects.
spk10: okay okay and then final one uh for me um could you just give us an update on on your corporate and you know the divisional uh infrastructure you know where you think you are what ending you're at um and finally you know i believe as of the end of the year you were in about 51 markets are you pretty comfortable with that footprint or is there more geographic expansion
spk08: You know, I'd say most of our growth is going to occur in the markets that we're already in. I think we closed the quarter in 53 markets, so we did pick up a couple markets. But, again, they're smaller markets. I think we're in probably 30, 35 of the top 40 markets now. We now have 205 people on board as of the end of the quarter, so we continue to build our teams. It's mostly about building out teams in the markets that we're already in. We will probably enter some new markets on a selective basis, but you'll see the predominance of our growth being in the markets that we're already in. I don't know, do they have access to the investor deck yet or no?
spk01: It'll be posted right afterwards.
spk08: When you look at the investor deck, in there we always have that map of our footprint, and you'll see that Texas and Florida are a good 50% or more of our lot positions. That's where there's several markets in each state. They're the top producing markets, and that's going to be the predominant focus. You'll also see Arizona, Georgia, and the Carolinas Again, where we find the best values for land is where we're going to be putting the bulk of our dollars.
spk10: Okay. Thank you, and good luck on the upcoming quarter.
spk08: Great. Thanks a lot.
spk12: Thank you. Our next question comes from Michael Rahat with J.P. Morgan. Please proceed with your question.
spk04: Hi. This is Elad Hillman on for Mike. Congrats on the results, and thanks for taking my questions. So first, just going back to gross margins for a moment, I was curious if you could disclose what percent of deliveries this quarter were for source compared to last quarter.
spk08: Yeah, that's really not something that we're disclosing. You know, I think what you'll see, though, is about 50% of our own lots now is four-star owned source lots. And you'll continue to see a trend towards more and more deliveries from four-star projects. But we're not providing the information on the sales side.
spk04: Okay, understood. And then also, I was wondering if you could talk a little bit more about any maybe regional standouts. You mentioned Texas and Florida being top producing markets, but anything particular to this quarter from a geographic perspective that maybe benefited the quarter?
spk08: Yeah, I just really think those are the two key states that we've made a lot of investment in. They are producing. Arizona is a strong third behind it, and our Atlanta division is building a great infrastructure as well. I don't think there was any change in sales from one state to the other that would create any differences quarter to quarter. It's just really kind of continuing to deliver where we have a lot of positions.
spk04: Great, thanks. And then my last question is just in terms of the M&A front and maybe further consolidating the land development market, is this something that you guys are thinking about kind of in the near term to be able to acquire more land more easily, or are you still kind of a ways out from that?
spk08: You know, we think about it all the time. We have discussions from time to time with possible candidates. I think the market right now is pretty strong. We prefer not to buy at the top of the market. I think we'll look for some stress down the road before we actually do any transactions.
spk04: Sounds good. Thank you.
spk08: Thank you.
spk12: Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. Please proceed with your question.
spk05: Hi. Good evening, Dan, team. Thanks for taking my question. Hi. So my first one is on the last earnings call, you guys mentioned strong demand in second half of the year, especially for lots. I think the implication was Second half, there's going to be a second half weightage in lot guidance. Your updated guide, 14.5 to 15K, implies an almost even split first half of this year versus second half. Anything change there with regard to demand cadence? Maybe there was some pull forward, or is it just conservatism in the second half?
spk08: I don't think it was demand-driven before. We clearly maybe steered to a softer second quarter than what we experienced. I just really have to give the credit to our development teams and our contractors that really delivered lots faster than we anticipated. So we were able to pull forward not just from one quarter to the next, but kind of our whole platform, which is why we've increased guidance for the year. But it was just a strong execution by our teams, and I give them all the credit.
spk05: Okay, got it. On your balance sheet capital raises, can you talk a little bit on why you felt the need to raise equity when your debt access is much stronger now? I mean, any covenants that you needed to maintain or any ratios that you were kind of mindful of? I just want to understand, when do you need to trigger such equity assurances?
spk06: Jim, do you want to take that one? Sure. We've always said we want to raise a balance of debt and equity capital, being mindful of our target 40% net debt to capital ratio that we keep an eye on. We used the ATM for the first time this quarter. It's proven to be a very effective tool to efficiently raise primary equity capital. I think we'll continue to take a disciplined and opportunistic approach to utilizing the ATM in the future.
spk01: And would anticipate continued opportunity raises of both equity and debt going forward as part of their long-term capital plans.
spk05: All right. Got it. A housekeeping one for me and the final one. Any one-time items you may want to call out from either last year's second half or even within this year, are there any shifts, first half, second half? Anything we should be mindful of as we try to model you guys out for the rest of the year?
spk01: I think this is a pretty clean quarter. There's not much we would call out. Track sales were minimal in both last year's quarter and this year's quarter. So really the only thing I think which we proactively scripted was to take note of the loss we will take on extinguishment of debt in the third quarter. But outside of that, pretty straightforward.
spk08: And again, other than what we said before on margin, we believe the margin in this quarter was a little bit outsized. So I wouldn't use that number on a continued go-forward basis.
spk05: Got it. That was helpful. Thanks very much.
spk12: Thank you. Our next question comes from Alex Barron with Housing Research Center. Please proceed with your question.
spk02: Yeah, thanks and great job on the quarter. I was hoping you could help me understand how to think about the growth trajectory for four-star You guys gave us guidance for 2021, but as I look beyond that into next year, is there constraints to your growth based on labor availability or is it just a function of how fast you guys are growing your lot inventory?
spk08: Yeah, I think part of it's lot inventory, part of it is capital. I think the guidance, what we've said in the past, is with our current capital base, and earnings pace that we feel pretty comfortable that we can grow at about a 20% rate year over year without additional capital events. Additional capital events should help us accelerate that in future years.
spk02: Okay. And another question, in terms of the rationale behind paying down the 2024 bonds, I mean, I know, obviously, you're getting a lower cost of debt with the new issuance, but why not keep that other debt just to allow you to have more capital to keep growing? Why pay it down now?
spk08: Again, we're really trying to keep a conservative and strong balance sheet. We pay very close attention to our net debt to cap. At this point, we feel comfortable with the total amount of debt level that we have. It's really about lowering our cost of funds, which You know, it lowers our interest costs significantly on a year-over-year basis. I think it's roughly a one-year payback of the cost of refinancing. It extended that maturity another couple of years. You know, and eventually that saved interest cost will roll through our cost of goods sold, you know, in future years and help increase margins.
spk01: And I think, Alex, our thought was always that we were to have the opportunity to do that. It was an inaugural offering for the new Four Star before we really had a chance to prove out the new business model, which ultimately is leading to higher credit ratings, which we've already seen some movement on. And we believe that Four Star is going to continue to demonstrate progress to where their cost of capital is going to continue to go down in the future. So really, it was just opportunistic to refinance that high coupon note.
spk06: All right. And we also have $500 million of liquidity at the end of the quarter. So, I mean, we have the ability to be opportunistic in when and how we raise capital.
spk02: Got it. Okay. Well, thanks again, and best of luck for the year.
spk08: Great. Thank you.
spk12: Thank you. Our last question comes from Ryan Gilbert with BTIG. Please proceed with your questions.
spk09: Hi, thanks for taking the follow up. I had a question about land banking. It seems like there's been kind of a recent proliferation of land banking, maybe some new entrants or at least increased willingness on the part of builders to use land banking. Dan, I just appreciate your perspective on what you're seeing in the marketplace around kind of financial participants in the land development market and the extent that you feel like you're competing with them for either land or customers.
spk08: Yeah, you know, Ryan, it's interesting that we have seen maybe some new entrance into the investment in land business, so to speak. We're seeing, or at least we're hearing, I haven't seen anything happen yet, but we're hearing about an expectation of a little bit lower cost of funds to do land and lot banking than what was there before. And I'd say some of the people that were in the business are maybe lowering their return expectations, which I think makes it As far as competing with them, I don't know that we're competing with them. As far as the projects that we're going after, I'm not hearing that they're chasing the same things we are. I think they're more just trying to align with builders. At least that's what I'm seeing, trying to align with builders to help them maybe take some stuff off their balance sheets. Again, I'm not really seeing any direct competition from them, but to repeat, it is interesting that maybe they're lowering their return expectations a little bit from where they were over the prior years.
spk09: That is interesting. Okay, great. Thanks very much.
spk00: Thanks, Ryan.
spk12: There are no further questions at this time. I would like to turn the floor back over to Dan Bartok for closing comments.
spk08: Thank you, Paul. And thank you to everyone on the four-star team for your focus and hard work. We look forward to working together to continue growing and improving our operations over the coming years. We appreciate everyone's time on the call today and look forward to speaking with you again in July to share our third quarter results. Thanks, everyone.
spk12: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.
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