MDC
#Sounds like four questions and a follow-up, so I'll try to answer a couple of them and maybe <UNK> will talk a little bit more on the product.
Our land spend is consistent with what we've done as a basic business.
That is our goal is approximately a three-year supply of land and we've done that for decades because we believe that's a risk factor in the balance sheet when people speculate on land and we don't do that.
The issues of cost, there's a good side and a bad side of cost.
The good side, it lends for higher employment in the industry.
It would not surprise me that in the entire country that almost every major builder or even minor builders could use 20% more labor and that's both a problem and an opportunity.
It's an opportunity for the country and it's not really a problem.
It's what you manage to.
I would rather have stronger demand and be looking for expanding our subcontractor base than having less work and having that not be an issue.
The land spend will over future periods reflect our desire and our intent to increase the work we're doing.
The other builders that you've commented on, and I'm not familiar with which ones you're speaking about, contraction in gross profit because of land cost, I think you can go back to the last cycle.
One of the things MDC demonstrated is that we were able to make a reasonable gross profit at that time without speculating in land and we made our profit by building and selling homes, not speculating in land.
The market that we're in now we believe that there's a reasonable balance between cost and expected market value of your inventory and with good management you should be able to develop a reasonable rate of return for your shareholders, which of course is what we focus on, is creating value for our shareholders.
Now, <UNK> maybe you ---+ <UNK> will answer your follow-up question, since I answered the three, about the Seasons to give <UNK> and everyone on the call a little more color of what it is and where we've done it and our expectations in it.
I'll comment on a couple areas.
First of all, the land spend that's coming through this quarter, it's not necessarily the more affordable stuff.
It reflects AMC approvals, our asset management approvals, from a few quarters ago.
I think we are seeing increasingly that what we are approving are those more affordable deals and that will contribute more significantly to land spend in future periods.
As for the ---+ just the Seasons product itself, that's one way that we're addressing affordability.
First of all, the incidence of sales of that product went from about 1.5% of our sales to 3% of our sales from Q1 to Q2.
Still a very small part of what we're doing but it's starting to grow pretty quickly for us.
Initially, we had built that product on subdivisions that we already had in place, land that we already owned, as a complement to product we already had there.
<UNK>, you asked, well, how do we combat increased costs, fees that are associated with some of these areas that are obviously a bigger piece of the pie when you're talking about a more affordable product.
I think really it's being innovative about what we're doing.
Colorado is really our biggest market for Seasons right now and we did something that most builders don't do and we didn't build a basement in this product.
Most homes in Colorado have a basement.
We said you know what, in order to drive the affordability we think maybe this first-time consumer can do without.
We think that still hits the mark.
We're able to take out quite a bit of cost by doing some of those things that maybe aren't the norm in a given market and drive affordability that way despite, some of the other costs that become a bigger percentage of our overall costs.
Hopefully that helps a little bit as well, <UNK>.
Right.
In terms of how we look forward, whether it's Seasons or other more affordable product, we have seen that our first-time buyer, the percentage of our overall pie of kind of true entry-level buyers has decreased to roughly 20% of our overall closings.
I think over time if you look in our history, that piece of our overall pie has been closer to a 40% type of number.
I think that's really the order of magnitude that we're thinking about provided that we do see this consumer continue to come back in a significant way.
That's how I'd answer that one.
With regard to market commentary, the stronger markets that we have seen, Colorado is certainly up there.
It's our home market but it continues to perform very well for us, absorption rate higher than the Company overall.
I think the same can be said for Washington.
California is our highest absorbing market right now.
I think it speaks to just overall how low of a level of production goes on in California relative to the rest of the market, but also the fact that we have ---+ we have stayed relatively affordable, I would say, in that market.
I think that has struck a pretty decent cord in that market.
The other one I would highlight is Las Vegas.
We have a very strong operation out there.
Even though we did see the absorption rate come down a little bit year over year in Las Vegas, it has consistently performed above the Company average from an absorption rate perspective.
On the other end of the spectrum, the one that I would say is on the lower end of performance would be our Mid-Atlantic market, both Virginia and Maryland.
I say it with a caveat.
It's one of our lower performers, but that performance has improved over the last year.
I think at this point last year it really seemed pretty depressed for us.
It's up year over year but I don't think we're out of the weeds yet.
We are focusing on that market constantly and of course we're mindful that we're in a political season here and that probably doesn't help things in the greater DC area.
Thanks.
Yes.
We've talked a lot about it in the past and as you heard from some of the comments that I had in the call, we're de-emphasizing gross margin a little bit.
If you look at gross margin before things like impairments and warranty adjustments, over the past five quarters it's been relatively stable.
There's I think been only a 70 basis point difference separating the high and low.
While I think there is room for improvement in gross margin over time, for the short term my outlook would be for really just continued stability.
I don't think there's anything significant to report on that front.
With the competitive land market and limited subcontractor availability driving our costs higher, achieving margin expansion is an uphill battle.
We have been able to offset the higher cost by raising prices where sales velocity justifies it but there's not a guarantee that we can continue raising prices in the future.
For now, we're really focused on hitting our internal goals for unit volume.
That's why you've heard us talk a lot on this call about the drivers of unit volume, absorption rates, backlog conversion, production levels, cycle times.
That focus on volume is really what gives us the best opportunity to improve our returns which, as <UNK> noted earlier, have already moved higher alongside our revenue gains in the second quarter.
I would say there's not a whole lot of difference sequentially.
Maybe still a little bit more in Denver, but if you look at our cycle time overall, sequentially it was stable from Q1 to Q2.
I think that's actually encouraging.
I mean, there's not a whole lot we do on the entitlement front.
We don't take entitlement risk on balance sheet, so it's not as big of a concern for us, but from what we kind of hear out there in the market and from people who are doing entitlement work for us, I don't ---+ nothing sticks out to me.
It always seems like it's a matter of the cities and just how busy individual jurisdictions might be in getting that processed.
Sure.
I think it's been pretty consistent, in line with what we're experiencing.
If we're able to find opportunities as you have seen by looking at our balance sheet, we have substantial liquidity.
We have substantial unused line of credit.
We're always opportunistic and you should assume that whatever is good, reasonable business judgment, we will continue to execute on and that should give you the comfort of knowing that we're always looking to the future and judging the present.
I think that you've got fixed and variable and I think our fixed is ---+ has legs to expand on the fixed and you'll be able to leverage into hopefully continued reduction in that number, at least in the short term, we can see an ability as our gross revenues increase.
Other than the variable expenses, the fixed should be kind of constant and that's a reasonable opportunity to look at.
Yes, I guess first of all, I think you could see some increase in the third quarter for Colorado.
There's a lot of subdivisions that we have.
Some of them have already opened.
Some of them are on the verge of opening.
A little bit of it depends on just the timing of when those occur and how much initial velocity that we get.
I think there's a chance for it in Q3 but to give ourselves a little bit of extra room, we've just really talked about the second half of the year.
As far as orders go, as I noted with an earlier caller, we didn't see any reason why ---+ we didn't see anything within the quarter, I should say, that would indicate that things were slowing down from a year-over-year perspective and that, that month of June was actually up a little bit more year over year than the other two months.
We actually saw a little bit of acceleration throughout the quarter when you're talking about the year-over-year comparatives.
No, no.
I think in and of itself, just that product is much better from a cycle time perspective.
Just early on, the product that we've built might be a three to four month cycle time versus overall.
For the Denver market, you're closer to a 9 or 10 month cycle time.
Just by virtue of the fact you can build it quicker, we don't feel the pressure to necessarily spec build it and that's even beyond just our overall feelings about the spec building strategy.
I think the more we're able to achieve higher unit volumes, higher absorption rate, that's one of the side effects, one of the very good side effects of that occurring is you can actually have some improvement to your margin by virtue of better leveraging that interest, better leveraging construction overhead.
I think that's a possibility to the extent we continue to see pace expansion as well as revenue expansion.
I guess first of all, with regard to regional margins we don't provide a whole lot of color there.
I don't want to get a whole lot into the regional margin picture.
With regard to asset allocation, community allocation, yes, I think you did see a little bit more of an increase in the East.
I think it's really a function of last year, we were still trying to get a lot of communities going in the east and they finally came to fruition and resulted in that increased count.
You're seeing a similar thing here in Colorado now, as already commented, came down a little bit because some of the communities are just now coming online and haven't reached that ---+ our magic number for active subdivisions, which is five sales to be active.
It's not indicative of a shift in strategy when you talk about the shift between East and Mountain, or I guess Mountain to East, in this case.
I don't think there's any huge shifts that would lead you one way or the other.
You can certainly kind of look at backlog and see how that's shifted.
I don't think there's anything that necessarily drives me one way or the other when I look at backlog and the direction backlog's gone over the last year on a market-by-market basis.
Relatively consistent going forward.
The only thing I will say is Mid-Atlantic did bump up just a little bit here, sequentially.
It went from 8% to 13% of closings.
You might see that moderate a little bit, come down just a little bit.
All right.
We appreciate everyone joining us on the call today and we look forward to talking with you again after we disclose the results of our third quarter.
