MDC
#Hello, Mike, it's <UNK>.
It's a good question, and you're right on the prior statement.
I would say at this point, we still have an opportunity to get to somewhere around that 5% increased level.
And 10% seems a little bit too optimistic at this point.
So closer to the 5% appears more reasonable.
Well, I guess on the interest and cost of sales, for the third quarter we were at about 280 basis points.
On a historical basis, we have seen it a lot lower than that.
So I think there is potentially room for improvement of that number, but it does depend on velocity, both what we are experiencing currently and what we expect to experience.
So that one comes with a caveat.
In terms of other gross margin improvements, we really don't forecast a number our there.
Certainly, we have been very focused on balancing price increases with an absorption pace to try to see if there is additional room to improve the gross profit margin.
And we will continue that focus as we move forward.
As for the land purchases, as I indicated in my prepared remarks, and we have been very cognizant.
We do not believe we have reduced our underwriting standards for the new stuff that we have bought.
So we will see how those ones turn out.
That's a good question, Steve.
There's a couple things.
First of all, the comment was with respect to the margins in backlog at 6/30 versus the margins in backlog at 9/30, September 30.
Just to be clear.
And it's not a dramatic decrease, I described it as slight, Steve.
There is a little bit of mix going on.
You've got Colorado in there, but we've got fairly decent margins in Las Vegas, and that moved down a little bit, so that's part of it.
We also saw spec margins move down just a little bit of backlog as well.
So those are two of the factors.
We commented in the second quarter, specific to Colorado, that we actually limited lot releases to slow down sales to a certain degree in that quarter.
Third and fourth quarter, the activity is not as robust anyways.
So it's a subdivision by subdivision look at things, certainly production levels, and how many units we have in backlog come into account as we are talking about that.
And I think as we get into the fourth quarter, but especially as we get into Q1 and Q2, we will continue to see how that story plays out and how aggressively that we want to increase prices.
But it is a part of the equation, the level of backlog no doubt about it, along with just our overall absorption pace.
It's certainly a balancing act.
I think we are in a period of time that all the factors are coming together that I believe will signal a strong housing market.
As to the numbers of whether you are going to do 600,000 sales or 800,000 sales or 540,000, it is not fully clear.
But one thing is clear.
The market has a good tone that the majority of builders have good demand that the mortgage market is certainly opening more and more every month.
There is a new lender coming in, so we are able to expand the perspective ---+ the mortgage supply to the buyers.
We see the aggregate unemployment rate in our country continuing to contract.
I think the building business as a business is going to as an industry is going to improve on a very solid basis.
There is not a lot of speculation going on.
The markets that we are in are ---+ we're very focused when you look at the West Coast.
You look at the salient places, whether they are Colorado, Arizona improving, Nevada continuing to perform.
Utah, you look at the unemployment rate, and I think it's like 3% and change and we are expanding there.
Washington, everyone kind of knows what's happening there, and California is pretty robust.
We are very pleased with our absorption rate.
We are pleased that we have continued to expand our land acquisition in light of the fact that we have controls that take us in the level of three 3 to 4 years of the land supply, and we are expecting to be able to meet those objectives.
I think this is a unique time for the industry.
Usually, it's not always where you have plenty of money, you have a good demand.
There is no drama going on per se in the United states, other than maybe a presidential election which will be interesting.
So I would say individually and as a person in the industry, this is pretty good.
And you give it time for execution over the next couple of years, I think people will be very pleased with the performance of this industry as it regains its traction from a decade ago.
I think the home price appreciation will mitigate the labor supply.
In all the years that we have been in the business, it's only natural that we have a labor shortage when we have a demand.
Usually, we have too much labor when there's no demand.
So does it work itself out.
The one thing about labor in this country, even though there is a shortage in our industry, it follows pricing.
And when you aren't able to get adequate labor at $18 an hour, maybe at $25 an hour there is migration from other parts of the country to those parts of the country where there's a demand factor.
And this is in several of the trades.
But I think it is all good.
It is better to have a labor shortage with a strong demand, than to have something that was different that we previously experienced over the recession.
So these are all good problems, and like everyone, we will solve them because that is what our job is.
On dirt builds, you are probably talking in the neighborhood of 5% to 10%, just very roughly.
We really saw the opposite.
We saw more activity towards the end of the quarter, both sequentially and year over year.
We expect to be proactive on an active basis, so all the elements that one should be doing we are doing.
We have, from a decade ago, a authorization for buying back stock.
I think it's been ---+ what year was the year that we bought back stock.
2003.
2003, so it's something that was thought of, but anyway it's a factor.
The dividend, we are proud that we were able to maintain the dividend through a difficult period.
And we are sensitive to making a return for our shareholders, and we are focused very diligently on the growth of the Company and the profitability and all the options are always on the table.
And we will always evaluate them for whatever is the best for the shareholders.
Well one of the effects that no one has really articulated is is the banks, the regional banks, have opened the credit market to land developers, and where for many years all they had was problems.
You are now seeing the development of land beginning to open up and to come to market.
And I think that's really positive, because it's demand pulled, it isn't supply driven.
So we are able to see that this is an area that I believe will be properly supplied, and there's a reasonable amount of transparency.
There is reports available from different public sources of availability of lots, finished lots, land and development.
So over the next period of years, I expect to see the supply of land priced appropriately.
And the reason why it has to be priced appropriately, because if there is not a reasonable rate of return, the builders just won't buy it.
And these are factors for those people that are in the business every day, are pretty easily obtainable as far as the information and the metrics of how one should transact.
The only thing I can really think of is our preferred marketing dollars per home has trended up over the course of the past few quarters.
But it's not something we really focused on as a major driver.
Well I think for Denver, there's a lot of factors that come into play.
I think they are managing it on a community-by-community basis.
And depending on where they are at, they do some things that might slow down orders a little bit depending on the circumstances.
But it didn't strike us as really anything in particular that's an issue in Denver.
Obviously, prices have moved up quite a bit.
That's always going to have some impact.
But given that it's the third quarter, it's really not the time period that we hang our hat on.
We are really just focused on the build cycle at this point.
I don't think I'll comment on the fourth quarter at this point.
Especially given since we haven't even been through a full month at this point.
As I indicated, we were actually down slightly for the third quarter.
I think that's a really good sign, because you have such an increase in your backlog, beginning backlog, over the same period.
Beginning backlog or cancellations as a percentage of beginning backlog, were down 600 basis points.
I think I'd answered the first one earlier.
It's about 5% to 10% increase in cycle times.
And the answer on giving extra incentives is no.
We are not seeing that.
We really don't need that to keep people in backlog.
I think first of all, one of the big factors that we look at is just the overall increase in sales price.
And it has gone up, for us, it's gone up quite substantially across most of our markets.
And that's partly a shift to a higher-end mix, and that consumer segment has been pretty good to us.
So we can't complain about that.
At the same time, we do think it's wise to also have product available for more of that first-time buyer.
And specifically, we have also ---+ we are also aware that there's a millennial generation that's been delayed in coming to market, they've been getting married later, having kids later.
And I think the development of that kind of product is in response to that potential demographic becoming more active in the home-buying process as well.
It's too early to say at this point how it's doing.
We really haven't rolled it out broadly anywhere at this juncture, but it will go into production here in the next couple quarters.
But certainly, we are looking for land positions that support those kind of projects.
Yes, there is a lot of questions in there.
But I guess first of all, I'd be happy to give you a little bit more color.
And with regard to any future impairments, we did a really thorough analysis for Q3.
And that's how we came up with the $4.4 million of impairments.
Any impairment in future periods will depend on that the facts set in place when we update our analysis at that time.
So I want to make that clear.
As far as the impairments go, again, most of it was on three assets in the mid Atlantic.
And it has been a weaker segment of the country for us over the last few quarters.
There was a few other assets that were impaired, three more, but the bulk of the remaining impairment was just a couple assets that we had designated for sale for a couple different reasons.
Nothing very significant.
With regard to your comment on absorption pace getting a little bit stronger in the mid-Atlantic.
I think Maryland, you said specifically.
I think that's necessarily contrary to the story.
First of all, it was coming off of a fairly low base.
But second of all, certainly, in those markets and in certain subdivisions, including the ones that we impaired.
We recognized the need to decrease prices to drive absorption pace, so to a certain degree that goes hand in hand in this case.
Yes.
I get the question there, Mike.
I think first time in the quarter was about 25% of what we did.
And I would characterize that first-time buyer as maybe a little bit more on the higher end.
There's another category of starter home, I would call it, and we don't focus on that as much.
You have about 50% that's in that first time move up category, and then the balance, about 25%, would be in that second move up category.
I wouldn't say that's been typical in the past.
I think we have always been ---+ tried to do a little bit of a nicer house than the comparison that you brought up.
That express type of house.
We have done, I think, a little bit better product than that throughout.
But certainly our mix has shifted towards a little bit more of a move up type of house as we indicated based upon the increase in our ASP for closings and sales.
Well I think that it looks, first of all, it's tough to compare the analytics of 15 years ago just off the top of my head.
But to give a little tone of where we have seen the sales momentum is building, the price of course of everything over 15 years has certainly changed.
I think the ratio of land to the sales price has increased as things have become more complicated in development.
So as everything the government's influence starting from the local city for zoning and tap fees and all these various costs and the regulatory world, it's just like many industries.
It's changed a lot, but so have the incomes.
The affordability factor I think is one of the higher affordability factors in many, many years.
So these things are all balancing out.
As you see where gross profit margins, we are improving ours and others are adjusting as to the balance between land that had not been previously or land that had been previously impaired and large parcels of land that had a speculative factor.
We're very focused on executing a plan, and the plan deals with appropriate absorptions which I think the market is moving in that direction.
And the rate of return to the shareholders is in line ---+ our objectives are in line with that as reasonable within our industry.
And we expect to do a little bit better, and we are on track for doing that.
We've got more than adequate liquidity at this time for what we are doing.
We are very pleased with the absorption rate.
And when you look at Colorado, Nevada, and California, we are able to attract maybe a third of the lots are finished, and two-thirds require development.
And you put all those factors together and you add to it or be sensitive that our net debt to cap is about 34%, which is very healthy.
Which shows that we have an adequate balance sheet for growth.
And that is what our desire and our objective is.
I think the absorption that we are doing is moving towards three.
I think the industry is not much greater, except in certain markets.
The affordability is at an all-time attractive level and the mortgage market is improving.
I believe if you have a job, you have good credit, and you have a down payment, and you have a full set of documents you are going to find a loan for the person.
And the variable in some cases made be the down payment, but the mortgage market is opening up and it's opening up on a sequentially improving basis.
More people are changing their credit requirements, and even the government in some form, is trying to help.
And the underwriting requirements, there is some new regs that have gone into effect, but every one of us that are in the industry will comply.
And that's just part of the government world that we live in.
We are in a regulated mortgage market for certain products, and all of us are obligated to conform to whatever it might be.
We will follow.
We don't comment on individual market gross profits, at least at an absolute level.
Our 10-Q will be coming out a little bit later today, and I think you will see the dynamics in play in there in our MD&A section.
Well, I think first of all, on the land front.
We don't know what will happen with land prices, generally speaking.
But it is going to be dependent upon what demand is out there.
And if we do have more limited production capacity, I think you see builders who have bought land in the past may be anticipating higher levels of turnover or higher levels of overall volume in the short term will no longer necessarily be as hungry for that land going forward.
So I think that affects the balance on the land front.
As for us, we continue to try to move our margin equation from our land acquisition standpoint asset by asset, and we are going to continue to be very careful about the underwriting.
Great.
Thank you very much for being on the call today.
We look forward to being with you again for our fourth quarter earnings call.
