This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Hello and welcome to the MI Homes third quarter earnings conference call. My name is Brica and I'll be the call operator for today. We will have a Q&A session today and if you would like to ask a question, please press star followed by one on your telephone keypad. I will now hand over to Phil Creek to begin today's presentation. So Phil, please go ahead.
spk08: Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President of Derek Clutch, President of our Mortgage Company, Ann Marie Hunker, VP, Chief Accounting Officer, Controller, and Kevin Haag, Senior VP. First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn the call over to Bob.
spk05: Thanks, Phil. Good afternoon, and thank you for joining us. We are pleased with our third quarter performance, highlighted by a number of records, including record revenue of $904 million, revised a record third quarter pre-tax income of $116.2 million, 22% better than a year ago, and a very strong return on equity of 27%. We sold 1,964 homes during the quarter, a decline of 33% from the record sales reported during last year's third quarter. Despite the decline in sales, housing demand throughout most of our markets remains very strong. Our decline in sales is due to the fact that we are operating in 15% fewer communities than a year ago, and we continue to limit sales in a majority of our communities in order to better manage deliveries and control costs. Our third quarter monthly sales base was 3.7 homes per community. Other than last year, This is the highest monthly per community sales pace we've seen in over 10 years and reflects the underlying strength of demand. Year to date, we have sold 7,340 homes, 1% ahead of last year's record, despite, as noted, community count being down 15% and continuing to limit sales in the majority of our communities. We ended the quarter with 176 active communities, we will be opening a record number of new communities in 2022. Specifically, we expect to grow our community count next year by 15% or more and end 2022 with between 200 and 220 communities. We closed 2,045 homes during the quarter, a 4% decrease from last year. Clearly, our closings were negatively impacted by the well-documented supply chain disruptions that continue to stretch our build times and impact the entire industry. On average, it is taking us 45 days longer to get homes closed. We have always been focused on achieving fast and efficient build times while assuring that homes are properly complete and ready to be delivered. We will continue to manage in this way. Our backlog is very strong. We ended the quarter with an all-time record backlog of $2.5 billion, 40% better than last year, and units and backlog increased by 20% to a third quarter record of 5,407 homes with an average price and backlog of $471,000, which is 17% higher than a year ago. In addition to reporting record third quarter income, our returns were also very strong. Gross margins improved by 160 basis points year over year to 24.5%, and our SG&A expense ratio improved by 90 basis points to 10.7%. Excluding the one-time charge for debt extinguishment, our pre-tax income percentage improved from 11.2% last year to nearly 14%. And as noted, all of this resulted in a very strong return on equity of 27%. Now I will provide some additional comments on our markets. First, let me begin by stating that I'm very excited to announce that we are commencing home building operations in Nashville, Tennessee, one of the nation's most dynamic and fastest growing housing markets, ranking 11th nationally in 2020 based on single family permits. Nashville continues to benefit from a very healthy economy, significant population growth and job growth, and we look forward to building our competitive position in the market over the next few years. As our 16th market, Nashville will, for reporting purposes, be included in our southern region, together with Charlotte and Raleigh, our four Texas markets, and our three Florida markets. We experienced strong performance from our home building divisions in the third quarter, led by Orlando, Tampa, Minneapolis, Dallas, Chicago, Columbus, and Charlotte. In fact, all of our markets produced strong results. Our deliveries decreased 8% from last year in the southern region to 1,169 deliveries, or 57% of the total. The northern region contributed 876 deliveries, an increase of 1% over last year. Our owned and controlled lot position in the southern region increased by 11% compared to last year, and increased by 5% in the northern region compared to a year ago. 34% of our owned and controlled lots are in the northern region, while the balance, roughly 66%, is in the southern region. We have a very strong land position. Company-wide, we own approximately 22,700 lots, which equates to a roughly two and a half year supply. On top of that, we control via option contracts an additional 20,300 lots. So in total, our owned and controlled lots are approximately 43,000 lots, or about a five year supply. Based on a record backlog, we expect to finish out the year with another very strong performance. Our financial condition is strong with $1.5 billion of equity at September 30th and a book value of $53 per share. We ended the quarter with a cash balance of $221 million and zero borrowings under our $550 million unsecured revolving credit facility. This resulted in and a net debt to net cap ratio of 24%. Our company is in excellent shape, the best shape ever, and we are poised to have an outstanding fourth quarter and an outstanding full year in 2021. With that, I'll turn it over to Phil.
spk08: Thanks, Bob. New contracts for the third quarter decreased to 1,964 compared to 2,949 for last year's third quarter. And in last year's third quarter, our new contracts were a record and were up 71% from the prior year. Our new contracts were down 32% in July, down 41% in August, and down 24% in September. And our cancellation rate was 8% in the third quarter. As to our buyer profile, about 50% of our third quarter sales were to first-time buyers compared to 51% in the second quarter. In addition, 39% of our third quarter sales were inventory homes compared to 43% in the second quarter. Our community count was 176 at the end of the quarter compared to 207 at the end of last year's third quarter. And the breakdown by region is 85 in the northern region and 91 in the southern region. During the quarter, we opened 26 new communities while closing 25. And during last year's third quarter, we opened 12 new communities. We have opened 63 new communities in the first nine months of this year, compared to 51 last year. We delivered 2,045 homes in the third quarter, delivering 37% of our backlog, compared to 58% a year ago. Year to date, we delivered 6,322 homes, which is 16% more than a year ago. We now have 5,300 homes in the field, which is 20% more than the 4,000 we had this time last year. Revenue increased 7% in the third quarter, reaching a third quarter record $904 million. Our average closing price for the quarter was $430,000, a 13% increase when compared to last year's third quarter average closing price of $380,000. And our backlog average sale price is an all-time record of $471,000, up from $404,000 a year ago. And our backlog average sale price for our Smart Series is $374,000. Our third quarter gross margin was 24.5%, up 160 basis points year over year. And our third quarter SG&A expenses were 10.7% of revenue, improving 90 basis points compared to 11.6% a year ago. This reflects greater operating leverage, and it was our lowest third quarter percentage in our company history. Interest expense decreased $1.3 million for the quarter compared to last year. Interest incurred for the quarter was $9.3 million compared to $10 million a year ago. This decrease is due to lower outstanding borrowings and higher interest capitalization due to higher levels of inventory under development than last year. And during the third quarter, we issued 300 million of senior notes due 2030 and used the majority of the proceeds to redeem all of our 250 million of senior notes that were due in 2025. This resulted in a 9.1 million loss on early extinguishment of debt. We are very pleased with our returns for the third quarter. Our pre-tax income was 13%. and 14% excluding our debt charge versus 11% a year ago. And our return on equity was 27% versus 19% a year ago. During the quarter, we generated $132 million of EBITDA compared to $111 million last year's third quarter. And we used $34 million of cash flow from operations for the first nine months compared to generating $197 million a year ago, primarily due to our increased land purchases. We have 23 million of capitalized interest on our balance sheet. This is about 1% of our total assets. And our effective tax rate was 22% in the third quarter compared to 23% in last year's third quarter. We currently estimate our annual effective rate this year to be around 22%. And our earnings per diluted share for the quarter increased to $3.03 per share from $2.51 per share last year. During the quarter, we repurchased 243,000 of our outstanding common shares for 16 million, and we have 84 million available under our current repurchase authority. Our current plans, based on existing market conditions, are to continue repurchasing our shares. Now I'll turn it over to Derek to cover our mortgage company results.
spk07: Thanks, Phil. Our mortgage and title operations achieved pre-tax income of $9.9 million, compared with $19.2 million in 2020's third quarter. Revenue decreased 28% from last year to $20.8 million. This was due to a lower volume of loans closed and sold and, due to more competitive market conditions, significantly lower pricing margins than we experienced in last year's third quarter. The loan-to-value on our first mortgages was 82%, compared to 84% in 2020's third quarter. 81% of the loans closed were conventional and 19% FHA or VA compared to 76% and 24% respectively in 2020's third quarter. Our average mortgage amount increased to $349,000 compared to $314,000 last year. However, Loans originated decreased to 1,554 loans, down 5% from last year, and the volume of loans sold decreased by 8%. Our borrower profile remains solid, with an average down payment of almost 18% and an average credit score on mortgages originated by MI Financial of 751, up from 747 last quarter. Our mortgage operation captured 85% of our business in the third quarter, the same as last year. We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors. At September 30th, we had $142 million outstanding under the MIF warehousing agreement, which expires in May of 2022. We also had $70 million outstanding under a separate $90 million repo facility, which we recently extended through October 2022. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now I'll turn the call back over to Phil.
spk08: Thanks, Derek. As far as the balance sheet, we ended the third quarter with cash of $221 million and no borrowings under our unsecured revolving credit facility. Total home building inventory at 9-30-21 was $2.4 billion, an increase of a half a billion from September 30th of last year. And our unsold land investment at 9-30-21 is $991 million compared to $762 million a year ago. At 9-30, we had $663 million of raw land and land under development and $328 million of finished unsold lots. We own 4,343 unsold finished lots with an average cost of $75,000 per lot. And this average lot cost is about 16% of our $471,000 backlog average sale price. Our goal is to own a two to three year supply of land. And we now own 23,000 lots, which is about a two and a half year supply. During the third quarter, we spent $231 million on land purchases. and $124 million on land development for a total of $355 million, which was up from $196 million in last year's third quarter. And at the end of the quarter, we had 62 completed inventory homes and 1,042 total inventory homes. And of the total inventory, 658 are in the northern region and 384 are in the southern region. Last year at 930, we had 266 completed inventory homes and 1,113 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments.
spk01: Thank you. If you wish to ask a question, please press Start followed by 1 on your telephone keypad. We have the first question on the phone lines from Aaron Hickok from JMP Security. So, Aaron, Please go ahead, I've opened your line.
spk09: Hey guys, thanks for taking my questions and a nice quarter. Wanted to hear a little bit more about entering the national market. What's kind of attracting you to that area? And can you discuss the motivations of entering a new market versus allocating capital to an existing market?
spk05: Great question and thanks for asking it. First of all, we've been looking at Nashville for a long time, and we've always been interested in it for all kinds of reasons, not the least of which are the very strong macroeconomic metrics that seem to be dominating that market and have done so over the past nearly seven, eight years. It's one of the fastest growing markets in the United States. whereas maybe a decade ago it was not that easy for the large publics to compete there. That is less so today. We would have liked to have been open there even a few years ago, but we've been searching for the right leader. We have identified and hired the right leader and are very excited about starting up there. We believe strongly that we can be competitive there and that – It may take several years, but we will develop a very meaningful operational presence there. As far as allocating capital, there's really two pieces or parts to that question. One is we don't have to open up in a new market to achieve our growth goals. We're currently operating at a run rate of around 9,000-plus homes a year, and we expect to grow that over the next several years by capturing additional market share and through allocating capital to our existing markets. But at some point, we believe we begin to somewhat max out in the markets we're in. And another flag certainly wouldn't help or certainly wouldn't hurt. And we think we can do two things at the same time. We can continue to grow in the markets we're in, which remains job one. But job 1A is also to start deploying capital to Nashville. Our balance sheet is as strong as it's ever been, and we believe that we'll continue to see strong growth out of our existing markets while also beginning to establish real meaningful presence in Nashville.
spk09: Understood. That makes sense. And it sounds like you have a team leader already set up in the Nashville market. Have you acquired any land yet? Do you expect to – No, we're – Any sort of insights there?
spk05: Yeah, we haven't technically acquired any land yet, although we're beginning to look very seriously at a number of opportunities. And between now and the end of the year, we'll be adding additional leadership to the team there and begin to really put a full complement of people in place.
spk09: Understood. Thanks for the detail.
spk05: Thank you.
spk01: Thank you. We now have the next question on the phone lines from Ivy Zellman of Zellman & Associates. So, Ivy, please go ahead.
spk00: Thank you. Good afternoon, you guys. You know, just recognizing that, you know, their market is at such a robust level, I'd like to have you opine, you know, a little bit, Bob, on how you think about incremental lot purchases, finished lot purchases, whether it's optioned or outright bought. cash buys in terms of the $75,000, the average lot that you said. I mean, incrementally, the lots that you're acquiring today with a five-year land supply, are you concerned about the level of inflation we've seen in lot prices? And is it getting harder to pencil a return without making some assumptions that home prices will continue to rise and demand is going to remain at this robust level because there's lots of upward pressure on land prices? So just give me your big-picture thoughts and concerns.
spk05: No, I appreciate it. First of all, it's good to hear your voice. Secondly, that's a great question. Thank you. Third, yes, we are concerned. But four, we believe that the purchases we're making are really smart, very well-located pieces. Prices are going up. Everything you said about inflation and affordability is something that we're always balancing. Underwriting is getting more difficult because we're not going to sit here and believe that – that conditions as they are now will necessarily be the same in two or three years when some of these pieces are put into service. But look, comparatively speaking, we've always had a healthy percent, at least for the last seven, eight, ten years. We've had a very significant portion of our owned and controlled lots controlled by options. And while that can vary a little bit from quarter to quarter or inside of a year, we'll continue to try to at least have 50% of our controlled land under option agreements so that we have some flexibility of things that aren't expected to occur. At the same time, we're more focused than ever on trying to secure what appear to be very strong A locations. A locations cost more money, but I think one thing we've learned over the arc of time is that A's tend to hold up better through thick and thin. In fact, they're the only thing that holds up through thick and thin. So we think we have a great land position. We hope to close on every piece that we have under option, but we also have contracted for the right to walk away if things do begin to slow down or go in a different direction. We're not crazy bullish, but we're a whole lot more optimistic than not about housing and where it's likely to go over the next 12 to 24 months. We continue to see more and more millennials entering homeownership rather than rentership, and it doesn't take that many to move the curve, and it doesn't take that many for us to capture additional market share. So you put all that in a blender and you sort of come up with where we are. Will our average lot price go up? Yes. Will our Smart Series, which is now over 40% of our business today, two years ago, it was less than 30% of our business, will it continue to help us produce more affordable product, notwithstanding higher lot prices? That will help. Greater density in Smart Series locations helps somewhat mute the higher prices we're paying for land. We have additional product that we're launching under our Smart Series umbrella, which is on even smaller lots. We've already begun to sell that in some of our markets, and it's off to a great start. So there's a lot of pieces and parts here helping to strike the balance between affordability and raising land costs, but that's sort of how we think about all of it. I don't know if
spk08: know Phil wants to add to that one other thing we obviously pay a lot of attention how much land we have under control and the risk dollars for options and all those things but we pay a special attention to what we own and you know as we said today we own about 23,000 lots when you look at a current sales rate of about 9,000 a year that's about two and a half your supply and We really try to keep that in that two to three year range. So we do feel really good about the land we own. And that's obviously more risk than what we have off the books. But overall, we feel very good about it. Bob talked about all the communities that we're going to be opening next year, which we're really excited about. But we realize fully that today we're buying land at the top. Everybody's hoping it's not the top top.
spk00: Right. No, that's very helpful. Appreciate your realistic perspective and how you're balancing the risks with the stronger market you're in today. Just switching gears a little bit, you mentioned that 35% of sales were on inventory homes, which was slightly down from last quarter. When you look at the fourth quarter, what we're, you know, at least the calendar quarter, you know, we're seeing a big ramp up in specs, attempting to get homes, you know, on the market to get them closed. You guys are talking about a 15% growth in community count, and a lot of builders are talking and saying they're going to grow community count double digits, some as high as 40%. So I kind of see a lot of supply possibly coming with spec becoming a bigger percent of most builders' willingness to basically go after the market rather than dirt sales. So tell us how you think about all the spec ramp, all the community count ramp, and whether or not that's concerning to you in the face of what is, you know, clearly demand starting to, although still very strong, but starting to moderate.
spk05: I mean, I think that's a great point. We think about that all the time, at least, you know, maybe not all the time, but a good part of the time. I think that... If we weren't, here's what I, let me start by saying this. If we weren't limiting sales and if our community count wasn't down, we would be posting sales similar to what we had a year ago, which were crazy, you know, crazy numbers, very difficult comps. It's not an excuse, it's just the fact. But we're down communities and we're pretty significantly limiting sales in over half of our communities today. So I think that there's really tremendous demand out there right now. I think that there is a possibility that we're hopefully gonna have more than 15% new stores next year. The number that we put out was somewhere between 200 and 220. At the end of next year, we got 175 or 176 today in terms of communities. So that could be as many as 30 to 50 new stores next year at this time, and other builders are singing, you know, in one form or fashion a similar tune. And so what will that mean? People are going to have lots to move. Will there be more specs? Will there be more discounting? I mean, I think that's what's being, you know, a lot of the analysts and people that watch the builders are asking that same question. You know, we've said this before, and I think there's a lot of really good home builders out there, but execution matters, location matters, product matters, quality matters, and those are the hooks that we hang our hat on, and we've competed during all kinds of times in the past, and we think we'll be able to compete very effectively in the future. I'll let Phil answer the spec question. It's been a challenge for us and at least most of the other builders to get homes built, whether they're dirt or to be built, I wish we had more specs, but we sell them as quick as we start them. And, you know, we're all sick of the word supply chain disruptions. I'm tired of hearing about that. But it is a reality, no matter what you're trying to buy in our economy, whether it's a house or a window or a cigar, it's tough to get anything. And I think that's hopefully that's bottomed out. It appears that it has. I don't think it's getting better, but I think it's bottomed out. And, you know, we dropped some closings because of it. We haven't lost them. They're just sliding. But we'll get them back here in the fourth quarter and beyond. Phil, if you want to comment further on specs.
spk08: I would just comment that we've always been conservative operators. You know, we did get up at one time to five or six specs per community with one or two of those being complete. We're obviously less than that now. And it's just so difficult, you know, to get houses built. You know, we do have 20% more houses in the field than we did a year ago, and we have this huge backlog of over 5,000. So I just don't see us changing our stripes much, you know, and being any type of real significant spec builder. I think we can pretty much continue to run business the way it is.
spk05: And the last point I'll make on that, and again, I mean, sometimes you sound like you're protesting too much. We had a lot of houses that we could have closed that were almost done but not quite. We don't do that. And there was a period maybe a decade or two ago when we did do some of that. But you end up paying for it later either with dissatisfaction or greater warranty expense or paying for the same thing twice. And it's taken us a long time to get to a very strong discipline of closing houses when they are done. We have some of the highest home readiness scores in the industry, and we intend on keeping that. And that's helped produce better returns, lower warranty expense. So that's something that we're not going to depart from, even when you start to see closing sliding because you can't get windows or some other commodity.
spk00: Got it. Well, appreciate all of the detail, and good luck.
spk05: Hey, thanks, Ivy. Good to talk to you.
spk01: Thank you. We now have another question on the line from Alex Barron of Housing Research Center. So, Alex, please go ahead when you're ready.
spk02: Thanks, guys. I missed how many shares you bought back. I was hoping you could fill me in. I saw it was $16 million, but I didn't catch how many shares. And along those lines, what are the thoughts on share buybacks going forward?
spk08: Alex, we bought back about 243,000 shares, and our current plans, based on how things are in the market and so forth, are to continue repurchasing shares. We have about $84 million left under our current authority. Book value is up to $53 a share. It's up $12 in the last 12 months, so we feel good about that.
spk02: And is the idea to do it opportunistically or more consistently?
spk08: I mean, I'm not sure I understand that question, Alex.
spk02: I mean, like, are you guys trying to, you know, do it consistently every quarter or just when you think the stock is cheap?
spk08: You know, Alex, that's something we look at frequently, and a lot of things go into it. Obviously, with book value up to $53, we look at that. We obviously look always at what our capital needs are for our existing markets, et cetera. So we look at a lot of things. But, you know, again, I mean, with a stock trading below $60 and book at $53, that obviously is enticing to us to buy back shares.
spk02: Got it. And then another question. yeah yeah um another question you know um as far as margins and trajectory of margins anything that you guys can comment on you know what what the outlook is based on your backlog you know price increases uh lumber costs and all that stuff that that you can comment as we move into 2022 well i'll make the comment that if you look at you know the first quarter of this year we were you know
spk08: 24-4 of the second quarter, we were 25-1. The third quarter, we were 24-5. Prices have continued. Our sales prices have continued to increase pretty substantially. Our third quarter costs really were fairly flat. Lumber did come back to us a fair amount, but we've had other things go up. Not making any specific predictions. We're very pleased where our margins are. Our returns are very, very strong. We've been below 11% SG&A the last two quarters. Our income percentage has been very strong. Our ROE is one of the higher ones in the industry. So we're still expecting to produce strong returns the next couple of quarters, having a backlog over 5,000. having a lot of houses in the field, we're expecting to have some strong results in the next couple of quarters.
spk02: All right, great. Best of luck. Thanks.
spk05: Thanks, Alex.
spk01: Thank you. As a reminder, please press star followed by one to ask any further questions today. We now have the next question from Art Winston from Pilot Advisors. So I've opened your line, Art. Please go ahead.
spk03: Thank you, and thank you for the great results, guys. As a follow on to your response to Ivy's questions, giving the 500 million plus increase in inventories year to date and the already large number of new communities open, would you anticipate the growth of inventories going forward would be more modest than it has been or small?
spk08: When you look at our housing investment, it's up right now about 20% versus a year ago. Last year we spent about $730 million on land, had a few pretty big deals get postponed for different reasons. We spent $750 million on land the first nine months. Having said that, I would expect the inventory increases to not be as much in general the next few quarters. Nashville will be more of a gradual ramp up unless we find a really good opportunity. And again, we're considering continuing to look at stock repurchases. But yeah, I would expect the housing investment inventories to moderate some of the next few quarters.
spk03: Yeah, that's what I would anticipate. So that suggests strong free cash flow. I wanted to, the backlog, the average cost of a home in the backlog is at $471,000 price. And with the growth in the smart series, which are in the $300,000s, it suggests to me that you're selling other houses somewhere $550,000 to $575,000 to bring the price of the cost of the homes in the backlog to such a high level. Could you comment?
spk05: Thanks, Art. That's absolutely the case. First of all, there's a couple of things. Number one, the smart series, on average, smart series homes sell for considerably less than non-smart series homes. But the other thing that's occurred, and this also relates to Tyvie's question about affordability, is that our smart series, on average, those prices have jumped a lot, too. it's still the most affordable product we sell and still being very well received by consumers, strong sales pay, strong returns, and so forth. But everything is sort of lifted up, you know, $25,000 to $50,000 or so. And another way to think about it is if the smart series had stayed relatively flat, at 30 or 35% instead of 40 or 42, our average price and backlog would be, I'm just guessing, probably 10% higher. So your point's well made, and the answer is yes, that's correct. Just as 42, 43% of our business is Smart Series, 58% isn't. So that's where it comes from.
spk08: And just a couple of specifics on that. I mean, we have a great business in Austin, Texas. And around figures a year ago, that backlog was a little below 400. And today, that backlog is right at 500. So there's been like a 25% plus increase in our ASPs in Austin. And again, in general, there's been pretty significant cost inflation the last 12 months. But we still think that affordability is very important to us. We're trying to address that a lot of different ways. You know, smart series. Within the smart series, we kind of have a smart series plus, smart series minus. So we're trying to pay a lot of attention to that.
spk05: The other thing is the cost side of the equation, for all kinds of good reasons, gets tremendous attention. But to really be disciplined in the business, you got to price to market. And hopefully people always do price to market. In the back of their mind, they know what their cost is, and you try to keep those things in perspective. If you focus too much on cost and price to cost, you either A, overprice or underprice. If you can get really smart and price to market, then you're doing the right thing.
spk03: Very good. Thank you very much. No, thank you.
spk01: We now have a question from Jay McClennan from Wedbush. So, Jay, please go ahead when you're ready.
spk10: Hey, good afternoon, guys. Got several questions for you. And welcome to Nashville. The first one, lumber impact, higher cost lumber from earlier this year. When do you think we're going to see the worst of that fill? Was it this quarter or is it going to be next quarter? How are you all thinking about that?
spk08: I think it's going to be maybe a little more in the fourth quarter than it was in the third quarter, and then we'll start getting some relief next year, Jay.
spk10: Okay. Then the next question I had, I guess I could ask it two ways. One, how many closings do you think pushed from 3Q to 4Q, but also when I look at How many homes y'all closed on a monthly average basis? It was like 4.3 and 2Q, then it decelerated to 3.9 and 3Q. I mean, where is that running right now? Maybe for 4Q and or how many closings did you guys move from one quarter to the next?
spk08: You know, Jay, the best estimate I can give you is, you know, we did revise budgets the first of July for the rest of the year. And for the third quarter, we thought we would close about 200 more houses than what we did. But the good news is, if you look at profitability and so forth, the first quarter of this year, we closed 2019 and made $110 million pre-tax. In the third quarter, we closed 2045. And without the debt charge, we made 125 pre-tax. So we feel good that our profitability returns are getting better. As far as the outlook for the rest of the year, I said that we have 20% more houses in the field now than a year ago. Obviously, a big part of that is what stage of construction they're at. But I guess the easiest kind of answer I'll give you is that we do expect to close more houses in the fourth quarter than the third. But we continue to have challenges.
spk10: Sure. I thought it was pretty interesting that both the southern and the northern regions had roughly the same decline, percentage decline in orders versus last year. When you balance it out, it looks like... Oh, sure.
spk08: One of the things also, just to follow up on the closing, one of the things is that even though our spec levels are getting up kind of where we want to, that thousand level you know, a lot of it, we don't have as many finished specs as we used to that close in the same quarter. So that also affects what we're closing on a quarterly basis.
spk10: Okay. And then just on the orders, again, for the southern and the northern region to have basically the same percentage decline versus last year, it got you to a monthly sales absorption of roughly 3.7 per month. I mean, is that that three to four is that where you're limiting sales at the communities, uh, in terms of new orders. And, um, when, when did those caps come off? What do you guys need to see to start stripping those caps off and, um, letting your salespeople start selling more aggressively?
spk05: Let me take the second part of that first. Cause I w I'm not sure if I understood the first, the 3.7 is a reflection of all of our communities on average. those that are capped and those that aren't. Now, I don't know if that's what you were asking or not.
spk10: No, I think it's interesting that you had the same percentage decline, and I didn't know if you were implementing the same level of cap across the entire footprint, and that's why orders were down a very similar percentage.
spk05: The answer to that is the same as the answer to pricing to market. It's a market-to-market, subdivision-to-subdivision analysis. we look to our market operators to make that decision based upon one single criteria, our ability to get the homes built in a reasonable time with costs that we can control. And the reason that we've been capping sales is it was that that in itself, the uncapped, it was pushing cycle time out further and further and further If there were no supply chain issues whatsoever and it was easier to have daylight into deliveries as well as cost, we would not be capping sales. So the issue that has really provoked that has been primarily the fact that we don't want to give people one year delivery times. We like to be closer to six months. It's pushed out about 45 days. So we don't want to keep pushing it out further and further. So it's really a function of that. So when will we lift it? When we believe, well, first of all, we're getting very strong returns right now. If the returns stayed exactly the way they are, I think that sign me up for that. But we'll lift the caps when we believe that we can handle the volume without stretching out cycle times too much. And I think that's really been the issue across the industry. The only other factor, which is sort of a secondary factor, is running out of communities too fast and not being able to replace them. And there's a little bit of that in there, but it's really mostly about managing of cost, managing of delivery time, and really managing the buyer. No one knows what's going to happen. And to have a backlog with homes that are closing 10, 12, 14 months out, that's not our business and we're not going to get in that business.
spk08: Our current estimate, Jay, is that we'll still be probably limiting sales in the majority of our communities in the fourth quarter. The percentage might be a little bit lower, but we think it will still be a majority.
spk05: The percentage has dropped in some respects because some communities have closed out. At one point, it was over 75%. Now it's somewhere between 50% and 60%. Great. And then thank you for the – A year ago at this – Jay, a year ago at this time, I don't believe we were limiting sales. If we were, it was in less than 10% of our communities. We really started to limit sales in the fourth quarter of last year.
spk10: Got it. Thank you for that. And also, thank you for the insight around the community count. 200 to 220 by fiscal year in 22 is pretty impressive. How are you expecting those to ramp out? Is it going to be a nice, easy progression, or is it going to be more back half weighted into 22?
spk05: Slightly more back half. Yeah, it looks more. Maybe 60, 40, something like that. Yes. Part of that is weather. A meaningful part of our footprint feels winter.
spk08: And most of our Smart Series communities are self-developed. And of course, there's issues there, materials and delays. So we have factored in extra time for that. But again, like Bob said, right now our thoughts are the majority will be the second half of next year.
spk10: Yeah, one of your competitors earlier today talked about having certain pieces for horizontal land development, seeing some delays there. Are you all feeling the pinch on those as well?
spk05: A little bit. But I don't want to act like we can't get better at that because I think we can. but I also think we've been quite proactive. We sit down with our, we sort of look at that the same way we look at national accounts or national suppliers. By that I mean in each market there might be one or two large site contractors that we'll seek to have do most of our work, if not all of it, and we'll sit with them at the beginning of the year or the beginning of a period and say, these are the projects we've got coming on over the next 12 to 18 months. Pencil them in. Get us ready so we don't have to worry about finding people when we're 60 days out.
spk10: Got it.
spk05: Having said that, not to throw too much gasoline on the fire, there is a pipe shortage. It seems like every month there's a different commodity that's that's hard to find. There is a pipe, both PVC and I think iron pipe shortage that has begun to rear its head in Texas and maybe Florida. I know Texas for sure. And that's something that we're now working on also. So the other builder may have been referring to things like that.
spk10: Sure. And then just on pricing, how much did you guys raise pricing during the quarter and How much are you all trying to push that right now, just given the run that we've already seen this year in home price appreciation?
spk05: That's a hard one to answer. I don't know off the top of my head. I don't have that in front of me, how much we raised prices to meet market during the quarter. That's a very subdivision-specific thing. I do know that we have communities where we continue to raise prices as we speak. I don't think it's the majority of our communities. I think it's probably less than a third, but it's probably somewhere in that 15% to 35% range where prices are still being raised maybe every two weeks or every four weeks. But the majority of our communities, I do not believe we're raising prices right now. I don't have the specific on that.
spk10: Okay. Well, thank you for taking all my questions. Appreciate it.
spk09: Thanks. Okay. Thanks, Jay.
spk01: Thank you. We now have a question on the line from Adam Tarr of Gulf Asset Management. So, Adam, I've opened your line.
spk06: Yeah, it's Adam Tarr with an S. But in any case, results look pretty good. In the current environment, how long is your building cycle time? And how many months will it take you to build out and close on the current backlog?
spk08: Well, if you look today compared to a year ago, we're about, depending on the market, 30 to 60 days longer. If you look at our backlog today of over 5,000 houses, hopefully we'll be able to get through that in the next three quarters. Our current run rate is about 9,000 from a sales standpoint. The delivery rate is a little less than that. We obviously are planning and hoping to close more houses next year than this year. We talked about having 5,000 houses in the field now.
spk05: Our average build time across the entire company from dig, commencement of construction to closing is about 160 days on average. And that's about 30 or so days longer than it was a year ago at this time. We've also seen a slight stretch in the pre-contracted dig on that part of the cycle time. But actual hardcore construction from the time we start to dig on the lot until we get the house completed. And it depends upon the house, but on average it's about 160 days.
spk06: And how far into that?
spk05: The smart series houses would be less than that. They make up about, as I said earlier, about 40%.
spk06: And the more expensive ones would take longer. But how far into that cycle do they enter backlog? That's when you have a contract?
spk05: Day one.
spk06: Day one. Day one.
spk05: If you bought a house from us yesterday, Adam, and your contract was approved, you would be part of our backlog today. But if it's a spec house, it's not in backlog. No. Backlog is anything that's sold but not yet closed. Gotcha.
spk06: And how much of your inventory is for spec now?
spk08: About 1,000 houses.
spk06: Okay. So roughly 20%. Okay. Okay. Thanks a lot. That's very helpful, and keep up the good work. You know, you do it with so little leverage compared to the other guys. You know, maybe you should give classes.
spk05: Well, thanks for your comments. Appreciate the questions. Nice to talk to you.
spk06: Okay. Thanks for your results.
spk01: Thank you. We have no further questions on the line, but as a reminder, it is staff One, to ask any further questions. We have no further questions on the line, so we'll hand it back to Mr. Phil Creek to close.
spk08: Thank you for joining us.
spk01: That does conclude today's call. Thank you all for joining. You may now disconnect your lines.
Disclaimer