M.D.C. Holdings, Inc.

Hello and welcome to the MDC Holdings 2023 Second Quarter Earnings Call. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. I would like now to turn the conference over to Derek Kimmerle, Vice President and Chief Accounting Officer at MDC. Please go ahead.

Thank you. Good morning, ladies and gentlemen. And welcome to MDC Holdings 2023 Second Quarter Earnings Conference Call. On the call with me today, I have Larry Meisel, our Executive Chairman, David Mandrich, Chief Executive Officer, and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time... we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, Cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause the company's actual results, performance, or achievements to be materially different from the results, performance, or achievements of expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's second quarter 2023 Form 10-Q, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now I will turn the call over to Mr. Meisel for his opening remarks.

Thank you for joining us today as we go over our results for the second quarter of 2023 and provide some insight into the current market conditions and the outlook for our company. MDC reported net income of $93 million or $1.24 per diluted share for the second quarter of 2023 and driven by a delivery total of over 2,000 homes, resulting in home sales revenues of $1.1 billion. Order activity improved on a sequential and a year-over-year basis. We generated 2,167 net new orders on a sales pace of 3.1 homes per community per month. We also ended the quarter with over $1.8 billion in cash and marketable securities, giving us the necessary liquidity to reinvest in our business and increase our industry-leading quarterly dividend by 10% to $0.55 per share. Market conditions remained favorable during the second quarter as a combination of low existing home supply and a resilient economy resulted in healthy traffic trends in our communities. Buyers have adjusted to the higher mortgage rate environment and may have come to realize that the new home market provides much more in the way of quality construction, customization, and functionality as compared to existing home markets. The consistently strong traffic patterns during the quarter allowed us to scale back on many of the incentives we implemented earlier in the year, and we have begun to raise prices in communities where demand has been the strongest. Another positive development during the quarter was a noticeable improvement in building conditions. For the first time in several quarters, we achieved a sequential improvement in the average construction build time for those homes that closed in the quarter. Supply chain conditions and material availability have improved considerably since the pandemic, as we are now projecting a construction build time of under 180 days on the homes that we are starting today. A more streamlined and dependable supply chain will have a significant impact on our industry and should lead to better inventory terms and improve capital efficiency for our company. In light of the improvements we have seen in both demand and building conditions, we have become more active in the land market. In the second quarter, we approved the purchase of over 1,300 lots which go a long way towards giving us a land pipeline necessary to achieve our growth objectives. While the land market remains competitive, we believe that our size, scale, and access to capital provides us with a significant edge over smaller private builders who rely on project financing from local lenders. We believe that public builders will continue to gain market share from smaller builders as well as the existing home market. And MDC is intent on benefiting from this trend. With solid momentum on the order front and improved supply chain and a healthy balance sheet, MDC is well positioned to take advantage of the positive housing fundamentals as we see in our markets. The increase in mortgage rates has compelled current homeowners to stay put in their existing homes, creating a real opportunity for homebuilders to fill the void. In addition, there is a need for new housing in this country after years of underbuilding following the Great Recession. As a result, We are very optimistic about the outlook of our industry and MDC in particular. Now I'd like to turn the call over to David, who will provide more detail on our operation performance this quarter. David.

Thank you, Larry. MDC delivered strong results in the second quarter of 2023 thanks to a healthy demand environment. more favorable supply chain conditions, and solid execution by our home building teams. Order activity was fairly consistent throughout the quarter, with April being our strongest month from a gross order perspective, followed by a slight slowdown in May and a rebound in orders for June. Orr's trend so far in July have been typical for this time of the year and in line with our expectations. Each of our home building segments saw improvements in their sales base on both a sequential and year-over-year basis during the quarter, with the west segment outperforming both the east and the mountain segments. We also experienced strong sales results in our newer markets, including Boise, Albuquerque, and Nashville. Our gross margins from home sales in the quarter was 16.4. Excluding impairments, our gross margins from home sales was consistent with the first quarter of 2023 at 17.6. As Larry mentioned, we saw market-wide pricing improve as the quarter progressed, allowing us to curtail our incentive activity and raise prices in many instances. Gross margins and backlog are currently higher than we experienced in the second quarter, giving us confidence in our margin projections for the balance of the year. We ended the quarter with 2,155 unsold homes under construction, a significant increase from the prior year period. This increased level of spec inventory is part of a broader strategy switch from our company in response to the changes we've seen in the marketplace. Most buyers today want a shorter time between sale and move-in than associated with a build-or-order home. These buyers are also willing to forgo some personalization to get in their home quicker. From our perspective, we found a shorter sale to close time reduces cancellation and helps with our inventory terms. To be clear, we have not moved away from leveraging our home gallery design studios, nor have we abandoned our build-order business. Our goal is to have a mix of to-be-built and spec homes available at all of our communities. With spec homes furnished with some of the more popular amenities, options, and upgrades curated by our professional design teams. We believe that this shift will allow us to deliver homes in a more timely manner to our customers while still getting the gross margin benefits typically associated with our home gallery offerings. Overall, we feel good about the new home market and our company's positioning heading into the back half of the year. Buyers remain engaged and motivated to own a home despite higher interest rates. While job creation and economic growth in most of our markets continue to be favorable, we have designed our communities and homes to cater to the first-time homebuyer and have adjusted our business practices to deliver homes to these buyers more efficiently in the past. In short, I believe we have the right product in the right place with the right strategy to be successful in today's market. With that, I'd like to turn it over to Bob, who will provide more detail on our financial results this quarter.

Thanks, David, and good morning, everyone. During the second quarter, we generated net income of $93.5 million, or $1.24 per diluted share, representing a 51% decrease from the second quarter of 2022. Pre-tax income from our home building operations for the quarter was $92.1 million, which represented a 62% decrease from the second quarter of 2022. This was partly due to a 24% decrease in home sale revenues as a result of lower closing volumes. The pre-tax decrease was also caused by a lower gross margin from home sales, largely due to increased incentives and higher construction costs incurred on those homes that closed during the period, as well as $13.5 million of inventory impairments recognized during the period. Our financial services pre-tax income increased during the second quarter of 2023 to $21 million. The increase was due to lower compensation costs driven by lower headcount and increase in capture rate and the allocation of revenue from our homebuilding business associated with our financing incentives. Both our homebuilding and financial services pre-tax income benefited from increased interest income during the quarter. On a consolidated basis, we recognized $20.1 million of interest income during the second quarter, compared with only $708,000 in the prior year quarter. Our tax rate decreased from 26.8% to 17.3% for the 2023 second quarter. The decrease was primarily due to a windfall on equity awards that were exercised or vested during the quarter, and to a lesser extent, energy tax credits that did not benefit the 2022 second quarter, as they had not yet been extended into 2022 as of the prior year quarter. As a result, we now expect our effective tax rate for the full year to be roughly 23%. This estimate does not include any additional discrete items or any potential changes in tax rates or policies. We delivered 2,009 homes during the quarter, which represented a 21% decrease year over year. However, we exceeded our previously estimated range for the quarter of 1,600 to 1,700 closings. Closings for the quarter benefited from our continued execution of our spec strategy, as well as improvements in our construction cycle times. We expect our cycle times to continue to improve in the second half of the year, based on the projected cycle times of our homes under construction. As a result, we currently anticipate deliveries for the 2023 third quarter of between 1850 and 2000 homes. The average selling price of homes delivered during the quarter decreased 4% year-over-year to $549,000. This was in line with our previously stated guidance for the quarter and consistent with the first quarter of 2023. We expect the average selling price of homes delivered in the 2023 third quarter to be approximately $555,000. Gross margin from home sales for the quarter was 16.4%, compared to 26.8% in the prior year quarter. Excluding inventory impairments, gross margin from home sales for the quarter was 17.6%. This decrease was largely driven by an increase in incentives, as two-thirds of our closings during the quarter were spec homes. the majority of which were contented by the original home buyer. Current quarter home closings were also burdened with higher construction costs as compared to the prior year. As we continue to pivot our operations to prioritize an increased number of spec homes, we have recently introduced our Curated by the Home Gallery collection. These homes include finished details selected by members of our professional design team specific to home plans and geography. Our curated collection allows us to capitalize on our design expertise, given our experience with bill-to-order homes, to deliver thoughtfully designed homes to quick-moving buyers. As we see more of our curated spec inventory work its way into our closing population and we move further away from the period of peak construction costs, we should see gross margin improve from recent levels. We are currently expecting gross margin from home sales for the 2023 third quarter up between 18% and 19%, assuming no impairments or warranty adjustments. Our total dollar SG&A expense for the 2023 second quarter was $106.7 million, which represented a decrease of $27.1 million from the prior year quarter. This decrease was primarily driven by decreased general and administrative expenses due to a decrease in headcount as well as decreased stock-based and deferred compensation expenses. We also saw a decrease in commissions expense as a result of the decrease in home closings and a decrease in selling and marketing expenses due to the improved demand environment. While our SG&A expense as a percentage of home sale revenues increased slightly compared to the prior year quarter due to the decrease in home sale revenues, our cost savings initiatives implemented over the past year have allowed us to keep our SG&A rate below 10%. We currently estimate that our general and administrative expenses for the third quarter of 2023 will be between $55 and $60 million, depending on the timing of equity awards during the quarter. The dollar value of our net orders increased 37% year-over-year to $1.21 billion, driven by an increase in gross orders and cancellation activity that has returned to more normal levels. Gross orders for the second quarter of 2023 were 2,717, which is a 21% increase from the second quarter of 2022. Approximately two-thirds of our gross orders during the current quarter were for spec homes. Our cancellation rate for the second quarter of 2023 was 20% of gross orders. This compares to more elevated levels in recent quarters as we work through our backlog of bill-to-order homes. The average sales price of gross orders decreased 10% year-over-year to $552,000 due to decreases in base pricing during the second half of 2022. On a sequential basis, the average sales price of gross orders increased 2% from the first quarter of this year as a result of increases in base pricing and reduced incentives. Our active subdivision count was at 232 to end the quarter, up 12% from 207 a year ago. Looking at the graph on the right, the number of soon-to-be active communities continues to exceed the number of soon-to-be inactive communities at June 30, 2023. This indicates that our active subdivision count is likely to continue increasing in the near term. During the second quarter, we acquired 565 lots, resulting in total land acquisition spend of $77 million and incurred $80 million of land development costs. As Larry mentioned, We have become more active in the land market in light of improving industry conditions. During the second quarter, we approved 1,314 lots for acquisition in 22 communities across each of our home building segments. We ended the quarter with over 22,000 lots controlled and an additional 4,248 lots that are at various stages of due diligence. It should be noted that these lots still require approval by our Asset Management Committee prior to being reflected within our controlled block count. We ended the quarter with over $1.8 billion of cash and short-term investments, total liquidity of over $2.9 billion, and no senior note maturities until January 2030. Our debt-to-capital ratio at the end of the quarter was 31.7 percent, and our cash and short-term investments continue to exceed our home-building debt as of quarter end. We continued putting our capital to work during the second quarter, as we started 2,828 homes in an effort to increase our inventory of spec homes. As a result, we ended the quarter with 2,155 spec homes. However, our inventory of completed spec homes remains low, with less than one completed spec per active community. Even with our investments into work and process inventory during the quarter, we continue to generate strong cash flow from operations, with inflows of $226 million in the second quarter of 2023, compared with $53 million in the second quarter of 2022. In summary, we continue to successfully execute on our strategic decision to build more spec inventory. Our pivot to spec homes came at an ideal time, as existing home inventory levels have decreased to record lows, causing the demand for quick move-in homes to increase even further. We ended the quarter with 9.3 spec homes per active community, and the majority of these homes have been curated by our professional design teams. In addition, we believe we have now seen the worst of our construction cycle times make their way through home closings. We're now projecting a construction build time of under 180 days on homes that we are starting today, which represents a significant improvement from where we have been in recent periods. These cycle time improvements, coupled with our spec inventory strategy, should provide us with sufficient inventory for 2023 full-year deliveries of at least 8,000 homes. That concludes our prepared remarks.

I will now turn the call back over to the operator to start our Q&A session. We will now begin the question and answer session.

To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, Please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Michael Rehart of JP Morgan.

Go ahead.

Hi, everyone. Thank you for taking my questions. Congrats on the quarter. I just wanted to ask if maybe you could expand on some of the puts and takes on maybe the back half gross margins, maybe if you're expecting, I would presume, maybe more of a sequential increase in 4Q than 3Q. Anything you can give us there?

Sure. I'll start with the guide, 18% to 19% in the third quarter. Just to reiterate that, Then beyond that, I do think we have the potential for upside in Q4. We haven't quantified it, but based upon at least the activity pricing-wise, incentive-wise that we saw in Q2, the potential for progress from that 18% to 19% in Q4.

And what were the main buckets, if you could quantify, that drove the outperformance in gross margin this quarter?

I think some upside on units that we both sold and closed during the quarter. As we went through the quarter, I guess, first of all, towards the end of Q1, we did have some base price increases that continued into Q2. And then in Q2, those that we sold in close, as the quarter progressed, given great sales activity, we didn't have to really give away quite as much as we expected.

Got it. That's all for me. I'll pass it on. Thank you. Thank you. Our next question comes from Paul Pritzker.

of Wolf Research. Go ahead. Thanks.

That's a possibility. I guess just to start off, and following on the prior gross margin question, Bob, what do you think is a normalized gross margin, you know, given your operating strategy, you know, shift to specs? What type of margin differential are you seeing right now between the spec and the bill-to-order stuff?

Yes, it's kind of a multi-pronged question. I guess in the quarter, we were probably more like a 500 basis point differential, dirt versus spec. But it's important to recognize that that was influenced by specs that are not of the curated variety. In other words, specs that came from cancellations versus the ones that we designed ourselves. We are actually seeing that those curated specs are doing a lot better than the ones that resulted from cancellation. In fact, they're not too terribly far off from our dirt margins once we get our designers really involved in what's going into the house. So it's a great fact for us. I think that gives us some additional confidence in our continued progress. for margins, given that really curated specs, not many of those have closed at this point since we just started that program this year. So in underwriting, we're typically somewhere around 20%, give or take, gross profit margins, and that will continue to be a target for us with our business model.

Okay. And I think you, in the past, you have alluded to a goal of three absorptions, which you achieved this quarter. And then Dave mentioned a little bit of, you know, normal seasonality, I guess, in July. As you look at the third quarter, are you happy with, you know, normal seasonality or would you maybe, you know, stop the price increases or take a pause on those to try and maintain that three absorption in the third and the fourth quarter?

I think we're happy with the normal seasonality. In this market with low supply, I think there's certainly a chance that we end up with a little bit better than normal seasonality. You can only fight it so much, the school schedules, the summer vacations, all those things. So we try not to push it beyond its limits. Appreciate it. Thank you.

Our next question comes from Ken Zenner of Seaport Research Partners. Go ahead.

Hello, everybody.

Just to clarify, I think you talked $55 million, $60 million on the fixed G&A expense in 3Q. Is that a fair run rate going forward, or should that be kind of tied to what your community counts? growth will be, or whatever, essentially the growth or the change?

A couple things. First of all, it's a bit influenced by expected timing of equity awards. So to the extent that we're at the upper end of the range, part of it is because just of the timing of the equity awards, which haven't necessarily been firmly determined at this point. So you kind of start from that 55 base, excluding the equity awards. And then from there, I think there's some level of tie to the subdivision count growing from there. We really haven't given a firm number on community count through the end of the year, but there would be a minor correlation in the increase in community count versus the increase in the...

Okay, but it's certainly, structurally, I should say, in that range, kind of 50 plus times four, because it's fixed, as opposed to the, you know, roughly 290 million we were seeing run rate annual in 22, correct? Correct. Okay. Appreciate that. Realizing, you know, it's been a volatile 12 months, you know, you know, and the variance the industry is seeing from a demand perspective, you highlighted some of the macro concerns. Obviously, the level of starts that you're doing in 2Q, I think you just said, you know, you can't avoid seasonality. But is there something about, you know, that pace in starts that you're seeing now that, you know, you are trying to hold kind of more from a level realizing 4Q will likely slow down from 3Q, 1Q, probably won't rise as much historically because you didn't decelerate as much. I'm just trying to get an understanding of how your decisions were affected by the last 12 months where you took down starts to low 600, now you're at 2,800. And if there's, you know, kind of a lesson that you might have or challenges you experienced that's going to guide your decisions here for production.

Yeah, I think clearly the 600 was very defensive in a time of uncertainty, and I know you acknowledge that, recognize that. The 2800 more recently is reflective of the shift in our paradigm to be more focused on specs. Like we said, we're not giving up on bill-to-order, but we do think specs are going to be the more popular option. way to go for a period of time just given that supply is so low. So when we're thinking about specs here in the back half, certainly we recognize that it may be a bit tougher to start houses in some of our winter markets. So there'll be some downward pressure there. We do want to keep up with those specs that we're selling and replace those specs. And then I guess the final leg of the stool is making sure we're ready for spring. We have ample inventory ready for spring. Given that already, we're at about 70% of our orders are coming from specs. We kind of think of it that way. What do we need to satiate that level of demand for Q1 orders? So all those things were taken into account. We feel pretty good about the starts environment, starting more houses, given that supply is low and the economy needs to be holding up for the moment. So that's how we think about it.

Good. And David, we haven't met, but I was reading an article from the, I think the 1970s, if not perhaps a little earlier when you built a house, I think in the, a day or two, if you recall that. So I'm sure you guys can continue to improve on your cycle time. Thank you.

Well, you have a good memory, or you're able to look in the archives, but in the 70s, you know, you've been through all these housing cycles, and it was a down housing cycle, and we did build a house in a day, and You know, I think we're proud of the fact that we gave all the proceeds to Children's Hospital in Colorado. So I think it's all been kind of our ability to move through different cycles. Please don't hold me for one minute. We're not going to do that again.

No, okay. I was going to say that would improve your working capital needs dramatically. You know, the last question I have that I've been asking more builders is realizing you do not have a lot of optioned land available Can you talk to your thinking or what you've been seeing out there in terms of what percent of your options are going to be contracted raw or finished? And then specifically as it regards to the finish lots, have you guys explored that path to avoid capital exposure to land? Thank you very much.

I think this latest quarter we were at about 17% of our total lot supply was options. So a fairly small percentage. Just one thing to note is there was 4,500 additional lots that we are actively doing due diligence on. that sometimes is reflected in other builders' numbers. We don't reflect it in our option number until it's actually approved by our Asset Management Committee, but that is a pretty big number relative to what we have officially under option in our numbers. So just one point there, and then as far as finished projects, versus developed, I think, on a relatively small number of approvals, we were 60-40. I believe finished versus developed in this most recent quarter. Typically what happens as the land market heats up is it's harder to get the finished lot contract. More lots become development projects. So we'll continue to look for the finished lots, but it wouldn't surprise me if you see it flip to more lots that we have to develop versus the lots that we buy finished. Naturally, there is a possibility, something you know very well about land banking that is a mechanism that's been used to get to finished lots, but it's not something that we've done before. And in this kind of interest rate environment, I can only imagine that it's going to get even more expensive to get those types of transactions done. So we'll focus on getting finished loss where we can, but I can't tell you that it's going to be the majority of what we do in the future.

Thank you.

Again, if you have a question, please press star, then one. Our next question comes from Jesse Lederman of Zellman and Associates. Please go ahead.

Hi. Congrats on the strong quarter, and thanks for taking my questions. Thank you. Just hoping you can elaborate more on what's embedded within your gross margin guidance for sequential improvement here in the third quarter, and then maybe a bit of improvement in the fourth quarter with regard to construction costs. Could you briefly talk about that? Are you expecting costs to improve as well alongside continued cycle time improvements, or are they holding flat? What's kind of embedded within your guidance?

I think it's more flat at this point. I think lumber costs are continuing to go down in our cost of sales, and that'll probably continue. It's offset to a large degree by a little bit of an increase in land costs coming through the P&L. So net-net, it's pretty neutral.

Got it. And just a quick follow-up on that. You don't expect any re-acceleration in costs given you and your competitors kind of ramping starts to take advantage of the tight resale market. You think maybe because of your size will be insulated from some reacceleration costs. You expect those to hold relatively steady over the next couple quarters?

Right now, I think it'll be steady. No doubt, higher demand, higher use of subcontractors, there's always that risk that costs could go up. But we don't have the supply chain issues that we did 12 months ago, 18 months ago, So I think it'll be a bit more tame at this point, even if we do continue to see great demand and great construction activity come through the system.

That's helpful. Thanks. My next question is just you talked about your ability to raise price in some of your communities where demand's been the strongest. You highlighted the West region was where you've seen some of the strongest demand. Are you able to quantify the percentage of communities in which you're able to either pull back on incentives or even push price, and which markets out west have been the strongest, and maybe across your other regions, if there's any in particular that have been troublesome for you to push price, or maybe you're still trying to find the market, if you can elaborate a little bit more on those as well.

Yeah, so I guess thinking about the percentage that we've been able to do something in. From a price increase standpoint, we have a stat that we put out about 70% of our communities, we increased price in on average 2%. On the incentive side, we're probably doing about 150 basis points better relative to what we were doing in Q1. So relative to sales price, 150 basis points less. I have to imagine it's the vast majority of communities that had some level of improvement, whether it's price or incentive. So really a great environment for us to pare back on the incentives and increase price in Q2. In terms of markets, that stood out. We saw great activity, I think, just about everywhere. Phoenix, we had a little bit more inventory. They really accelerated quite a bit from a sales standpoint, so that was a really good one for us in the West, but we saw good activity in all of our markets.

David, anything to add to that? No, I agree with Bob. I think that What we're seeing is really kind of a broad-ranged recovery. We're also seeing that I think the consumers this year are more accustomed to what I call market-rate mortgages, plus the undersupply of resale houses. I think overall, I think our markets are pretty good across the board.

Thank you. I appreciate the insight. Our next question comes from Stephen Kim of Evercore.

Go ahead.

Great. Thanks, guys. I had a question about the overall level of specs that you had in the quarter. I think you ended at a little over 9 per community. It was in the high 6s and 1Q. and like three last year. I understand the strategy, but I guess I'm wondering where is this level of spec per community likely to go? Do you sort of feel like at nine you're pretty much where you need to be, or is this number gonna continue to rise?

I think we're close, Steve.

We talk a lot about 10 per community internally, but that's just a general guideline. I think we've done a lot of good work. It was 2,000 specs I think we started in Q2, so we've done a lot of work already. I imagine we'll probably float just a little bit higher in the back half of the year in preparation for spring. We want to make sure that not only do we have spec inventory available, but that a good part of that spec inventory is really in the latter stages of construction. so that it really can sell in quotes in Q1.

Right, and that kind of leads to my follow-up here. I'm wondering if you felt like the level of specs in 2Q was optimized already. It sounds like it really wasn't quite. If you think about what happened over the course of the quarter, in other words, you probably could have taken more orders if you had had more specs entering the quarter than you did. and I'm thinking about how this could inform our thinking for orders for the next few quarters, because it sounds like you're pretty much getting to the point now where your spec situation will be optimized. So is that a fair way of thinking about it, that absorptions and orders in 2Q did not really yet reflect sort of an optimized spec assortment?

I think there's some truth to that. I think It's a limited data set, but we have seen a correlation between our ability to generate orders and the number of specs that we have beyond the frame stage. In fact, we alluded to it somewhere, but June orders were better than May, and I think that was part of the story.

Yeah, that's great. And then you talked about the margins. I think a couple of quarters ago, I think you had guesstimated maybe that margins on specs were like 100 basis points or something lower. than BTO. Today you're talking about how the curated could be pretty similar to BTOs. I just want to make sure that I got that right. And then with respect to these curated specs, I'm curious as to what would hold those from actually generating a higher margin than BTOs during this period where resale inventory is so low and customers, it would seem, might be inclined to pay a premium for the convenience of being able to move in relatively quickly. Have you explored that? Is there a theoretical reason why a margin on a curated spec could not actually be a bit higher?

I don't know that there is a reason why it could not. As you described, if the Supply-demand dynamics are there. It's certainly a possibility in this market because we've just started the curated spec program. They've tended to get sold a little bit earlier in their life cycle, but as we get more that are advanced in their age, meaning closer to the finish point, you might have something there, Steve, the ability to really generate some great margins off those units.

Okay. All right, that's great. I'll follow up later on that. Lastly for me is the amount of owned lots. I think you talked a little bit about the options and the refunds with refundable deposits, but I'm curious about the actual level of owned lots. Where do you see, you know, what is sort of the optimal level for you guys? Is it kind of like two and a half years worth or something like that?

Yeah, I would say two to three. I would say it tends to be closer to, I guess if you're just talking about the owned piece, maybe it's closer to the two and a half mark.

Okay. Perfect. That's great. Thanks very much, guys. Sure thing.

This concludes our question and answer session. I would like to turn the conference back over to Bob Martin for any closing remarks.

We appreciate everyone joining us for the call today. Look forward to speaking with you again following the release of our third quarter earnings.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.