M/I Homes, Inc. (MHO) Q2 2020 Earnings Call Transcript

Good afternoon. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Incorporated Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. And now I would like to turn today’s call over to Mr. Phil Creek. You may begin.

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, 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 nonpublic 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, including comments related to COVID-19. Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call. Also during this call, we disclose certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website. With that, I will turn the call over to Bob.

Thank you, Phil. And thank you for joining us today on our call. The second quarter was a record-setting quarter for M/I Homes. In fact, it was the best quarter in company history, with records set in virtually every important financial metric. We are excited to share our strong results with you. As everyone knows, the first half of 2020 has been a time of significant economic and social instability in our country and throughout the world, precipitated in large part by an unprecedented, almost unimaginable health crisis. We began the quarter in a highly defensive operating mode, proceeding with extreme caution and concern, doing our best to react to the challenging and complex conditions while adapting our operations to safeguard and protect as much as possible, our employees, our customers, and our work environment, all the while at the same time continuing to try to sell and build quality homes. The last half of March and early April saw a precipitous decline in our business, with new contracts declining significantly. Housing conditions, both for us and other builders, then began to improve in the last half of April. That improvement materially accelerated for us, as our business rebounded significantly in May and June to record-setting levels. Specifically for the quarter, April new contracts were down 26% year-over-year. May was our best sales month ever at the time, with new contracts up 39% year-over-year, only to then be quickly surpassed by our record-setting June sales with new contracts up 79% year-over-year. We ended the quarter selling a record 2,261 homes, 31% better than a year ago. The tremendous sales momentum we experienced in May and June has continued into July. We believe there are a number of macro and micro economic factors contributing to our strong sales results. First, the macro, historically low mortgage rates, near record low inventory levels, perhaps a bit of spring selling catch-up from March and April, and a noticeable shift in buyer preference as a result of the pandemic, with certain households choosing to move out of rentals or other housing in a way from more densely located areas. In terms of the micro factors, we believe that a good number of our M/I communities, most notably our most affordably priced Smart Series communities, have outperformed the market. Finally, our ability to generate a material increase in our online sales leads and effectively convert those leads into sales has also contributed to our strong sales results. I mentioned our Smart Series and its positive impact on our sales performance. As you know, this is our most affordably priced product offering. During the second quarter, we were offering our Smart Series homes in roughly 30% of our communities across the company, and our Smart Series sales comprised more than 35% of total company sales. This compares to 24% a year ago. On average, our Smart Series locations produce better sales pace, better gross margins, better cycle time, and better bottom line returns. There is no question that the continued success rollout and growth of our Smart Series homes has contributed to our record-setting performance. During the quarter, overall company-wide sales absorption pace improved to 3.4 sales per community per month, compared to 2.7 a year-ago. Part of this improvement was clearly due to our Smart Series. Other highlights from the quarter are we achieved second quarter record revenue of $714 million, an increase of 15% from last year, driven by a second quarter record level of 1,835 home closings, which was 19% better than last year’s second quarter. Pre-tax income for the quarter was a record $71.7 million, 74% better than a year ago as a result of the increased volume, along with a 30 basis point improvement in our overhead expense ratio when compared to last year’s second quarter. Additionally, our gross margin improved during the second quarter to 21.9%, up 170 basis points from Q1 of this year, but up also 270 basis points from last year’s second quarter. Net income for the second quarter increased 80% to a second quarter record $54.5 million, and our diluted earnings per share increased to $1.89 per share from $1.08 last year. M/I Financial, our financial services business, also had a record quarter with $10.8 million of pre-tax income, 62% better than a year ago. Derek Klutch, our CEO of M/I Financial, will discuss this in more detail later. Company-wide, our backlog sales value at quarter end was $1.5 billion, an all-time quarterly record, and units and backlog were up 30% to another all-time quarterly record of 3,691 homes. While the average sale price in backlog increased to $396,000, compared to $395,000 for last year’s second quarter. Now I will provide some additional comments on our markets, and I will do this by region. We experienced strong performances across both our Northern and Southern regions, with new contracts in our nine Southern region markets increasing 30% for the quarter and a similar 31% increase in new contracts in our six Northern region markets. Our deliveries also increased about 19% over last year in both the Southern and Northern region, with the Southern region, which has nine of our 15 markets, comprising 60% of total deliveries. We experienced very solid increases in closings, sales, and profitability in all four of our Texas markets, as well as Charlotte, for both the second quarter and the first six months. We continue to make significant progress in growing and improving our operation in Sarasota. Orlando and Tampa continue to grow their unit volumes and profits and also continue to be two of our very strongest markets. They have recovered quite well after a March slowdown in Florida that continued into April. In the Northern region, Columbus and Minneapolis continue to perform at very high levels. They too are among our strongest markets, and we experienced notable increases in our performance and volumes in both Minneapolis and Cincinnati. We had 126 communities in the Southern region at the end of the quarter, down from 132 a year ago, and we had 94 communities in the Northern region at the end of the quarter, that is up 7% from June of last year. We have a very strong land position, allowing us to produce our current results as well as to achieve our growth goals in the coming years. Company-wide, we own approximately 15,000 lots, roughly a two-year supply and, on top of that, control via option contracts an additional approximately 20,000 lots. So in total, our owned and controlled lots equal roughly 35,000 lots or about a five-year supply. Importantly, over half of the lots that we own and control, which is about 57%, are not on our books. 40% of our owned and controlled lots are in the Northern region, with the balance roughly 60% in the Southern region. Before turning the call over to Phil, let me just conclude with several points. One, economic conditions remain uncertain due to the continuing impact of COVID-19. Accordingly, we will continue to manage and monitor conditions with appropriate caution. Two, we had a great quarter and could not be more pleased with the execution and effort of our teams. They continue to operate at a high standard, meeting the needs and expectations of our customers. Three, our company is in excellent shape, and we are poised to have an outstanding year.

Thanks, Bob. As far as financial results, new contracts for the second quarter increased 31% to 2261, an all-time quarterly record compared to 1731 for last year’s second quarter. Our new contracts were down 26% in April, up 39% in May, and up 79% in June. Our sales pace was 3.4 in the second quarter, and our cancellation rate was 14%. As to our buyer profile, about 50% of our second quarter sales were to first-time buyers, about the same as the first quarter. In addition, 45% of our second quarter sales were inventory homes, compared to about 50% in the first quarter. Our community count was 220 at the end of the quarter, the same as last year’s second quarter. To break down by region, it was 94 in the Northern region and 126 in the Southern region. During the quarter, we opened 22 new communities while closing 25, and we opened 39 new communities during the first half of the year. We delivered a second quarter record 1,835 homes, delivering 56% of our backlog compared to 58% a year ago. Revenue increased 15% in the second quarter, reaching a second quarter record of $714 million. Our average closing price for the second quarter was $379,000, a 3% decrease compared to last year’s second quarter average closing price of $389,000. Our backlog sales price is $396,000, up slightly from $395,000 a year ago, and our backlog average sale price of our Smart Series is $302,000. Our second quarter gross margin was 21.9%, up 270 basis points year-over-year and up 170 basis points from the first quarter. A big reason for our margin improvement is due to our Texas operations. Our construction and labor costs were flat compared to 2019 second quarter, and our second quarter SG&A expenses were 11.5% of revenue, improving 30 basis points compared to 11.8 a year ago, reflecting greater operating leverage. Interest expense decreased $2.7 million for the quarter compared to the same period last year; interest incurred for the quarter was $10.3 million compared to $13.2 million a year ago. This decrease is due to lower outstanding borrowings this year, as well as a lower weighted average borrowing rate. During the quarter, we generated $86 million of EBITDA compared to $58 million in last year’s second quarter. We have $22 million in capitalized interest on our balance sheet, about 1% of our assets. Our effective tax rate was 24% in the second quarter, compared to 27% in last year’s second quarter. This year, our rate benefited from energy tax credits. We estimate that our annual effective rate this year to be around 24%. Our earnings per diluted share for the quarter increased to $1.89 per share from $1.08 per share last year, and during the first quarter of this year, we repurchased two million of our outstanding shares. We did not purchase any shares in the second quarter. Now Derek Klutch will address our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved record second quarter results in pre-tax income, revenue, and the number of loans originated. Revenue was up 33% to $19 million due to a higher volume of loans closed and sold, along with improved pricing margins and a higher capture rate. For the quarter, pre-tax income was $10.8 million, which was a 62% increase compared to 2019 second quarter. The loan-to-value on our first mortgages for the second quarter was 83% in 2020, up slightly from 82% last year; 77% of the loans closed in the quarter were conventional and 23% were FHA or VA, same as 2019 second quarter. Our average mortgage amount increased to $311,000 in the second quarter compared to $308,000 last year. Loans originated increased to a second quarter record of 1,375 loans, which was 33% more than last year, and the volume of loans sold increased by 31%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 745, up from 741 last quarter. Our mortgage operation captured about 83% of our business in the second quarter, an increase from 79% last year. We maintain two separate mortgage warehouse credit facilities that provide us with funding for our mortgage originations prior to the sale to investors. At June 30, we had $92 million outstanding under the MIF warehousing agreement, which is a $125 million commitment that was recently expanded and expires in May of 2021. We also have $43 million outstanding under a separate $65 million repo facility, which expires in October of this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now I will turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, our financial condition continues to be very strong, with $1.1 billion in equity on June 30, and a cash balance of $94 million and no outstanding borrowings under our $500 million unsecured revolving credit facility. Also, in June, we did extend our credit facility maturity to July of 2023. We are carefully monitoring our cash and our expenditures in the current uncertain environment. We continue to manage our balance sheet carefully. Total homebuilding inventory at June 30 was $1.8 billion, an increase of $67 million above last year. Our unsold land investment at June 30 is $810 million compared to $797 million a year ago. And at June 30, we had $378 million of raw land and land under development and $432 million of finished unsold lots. We owned 5,159 unsold finished lots with an average cost of $84,000 per lot. And this average lot cost is 21% of our $396,000 backlog average sale price. Our goal is to maintain about a one-year supply of finished lots and to own a two to three-year supply. Lots owned and controlled as of June 30 totaled more than 34,500 lots, 14,800 of which were owned and 19,700 under contract. We own 6,900 lots in our Northern region and 7,900 lots in our Southern region. A year ago, we owned more than 14,800 lots and controlled an additional 14,200 for a total of 29,000 lots. During this year’s second quarter, we spent $84 million on land purchases and $72 million on land development for a total of $156 million. Year-to-date, we have spent $160 million on land purchases, and $134 million on land development for a total year-to-date spend of $294 million. At the end of the quarter, we had 405 completed inventory homes, about two per community, and 1,181 total inventory homes. Of the total inventory, 515 are in the Northern region and 666 are in the Southern region. At June 30, 2019, we had 464 completed inventory homes and 1,413 total inventory homes. This completes our presentation. We will now open the call for any questions or comments.

Our first question comes from Alan Ratner with Zelman and Associates.

Hey guys, good afternoon. Congrats on really an incredible quarter given the climate out there, and congrats on all the records that you set during this period.

Thanks, Alan. I guess it is always tricky when you see growth rates like you and others are reporting here just to kind of conceptualize what that means for the business going forward, because clearly, the housing market is not meant to be growing at an 80% clip. And I guess I’m just curious how you see the next few months playing out. I mean, I think your last disclosure on your spec supply looks like specs are down about 20% year-over-year. You and others presumably are going to have to start a lot more homes over the next few months. And I’m just curious how you plan on managing the business through that. Is there a point where it makes sense to push harder on price to slow things down because there are just the inefficiencies of growing at that level? Or do you feel like based on your land supply and labor availability that you can continue growing at maybe not these levels, but certainly greater levels than we saw in the past? Well, first of all, three months ago, if you would have asked me what our growth rate would have been in April, May, and June, I would have missed that guess by 100%. Yes, we didn’t see this coming. And so it is very hard to know what is around the corner. But I think the fact that it is so hard to know what is around the corner serves as a management guide. As I mentioned, the momentum has continued into July, and while we give no specifics on July, the month is not over yet, and there continue to be, I think, just very good conditions for us. I think I’m hearing that from some of our competitors as well, particularly with respect to the more affordably priced communities. I spoke about our land position. I think that it is as good as it has ever been, in terms of not just the number of lots and the fact that the majority of them are off of our books, which is a great position to be in, given the uncertainty that we live in today. The fact that the price points and the communities coming on gives us a lot of confidence, assuming that the market is there, for us to grow at acceptable levels. I think it is hard for businesses to grow much more than 10% or 20% a year. You start to get above that and things start to slip through the cracks. But I believe that we can do that if the economy is there. I think that there are certain challenges right now, less than you might imagine, but there are certain challenges on the construction side with certain logistics, mainly appliances and maybe a few other components that may be delaying things a little bit. But thus far, it has been manageable. We have been able to push price, not everywhere, but in many places, and I think the returns that we generated for the quarter support that. We are being careful with that at the same time. But you know how low the inventory levels are, particularly with respect to resales, and you know because you have great research that the new home sale piece of the pie has become a slightly larger share. I do think that there is a shift in preference, whether it lasts forever? I don’t know. But I think that the sanctity, the security, the comfort, the privacy of home is resonating with people perhaps like never before. I wish it didn’t take this for that to happen. But I think there is a tailwind from that. Also, I think we still don’t have homeownership rates in this country, particularly for the under 40 cohort that are where they probably should be based on certain historical standards. The numbers will probably look better next year at this time, given our results and some of our competitors. But I think we are rational. We are very optimistic, but we are also rational. That is what we are going to continue to do. I think we are poised to have an outstanding year. On the other hand, 60 to 90 days ago, we didn’t know where we would be here now. I think that, 90 days from now, there may be a few other surprises. But we will just have to see; no matter what it is, we are ready for it. We went into almost a full-time defensive mode at the end of March and early April, and we started to play more offensively as April unfolded. We were able to adapt quickly. I am really proud of our execution. This is not about me; it is not really about the people on this call; it is about the folks in the field who under very difficult circumstances have had to not just deal with wearing masks and maintaining distance, which gets very uncomfortable as we all know, but drive some closings and do a lot of things sort of left-handed. I think we are really good online. We don’t talk about it a lot, but I think our results let our results do the talking.

That is great. Thank you for all of that. And yeah, I agree. Certainly the results do the talking. Second question if I could. Gross margin, best level we have seen in quite a long time. I would think that a lot of that strength was actually probably pre-pandemic that contributed to this quarter’s great margins. So, I’m just curious if you can - I know you are not going to give specific guidance, but just talk to maybe the pluses and minuses that we should think about going forward off of this quarter’s record level.

First of all, I think Phil may want to add a few comments on this. A year ago, and certainly two years ago, we were not where we wanted to be regarding a number of our newer operations, not all of them, but certainly some. Several of our Texas operations were pulling us back; they weren’t performing at the level they should be. Those shifts have been righted; that is contributing to the lift. We are starting to get a lot of really good results from our firm in Sarasota, which is a newer market. Detroit will come, but it has a lot of upside down the road for us; not quite there yet. Minneapolis has just been a tremendous contributor. We have only been there less than five years. So I think that some of our internal operational improvement has contributed to margin. The other thing is, two years ago, Smart Series was about 15% of our business. Last year at this time, it was 24% of our business. Today it is 35% and growing, and our returns both at the gross margin line and the net line on our Smart Series sales and closings are better than on not. You know the average price is lower, but the returns, the percentages. So when you put all that together, you sort of get where we are today. I don’t know if you want to add anything, Phil.

The only thing, Bob, is that just to drill down a little bit. Alan, if you look, for instance, at Houston and San Antonio, where today the majority of our business is Smart Series. It was not that way a year ago, and the average sale price is more affordable, which is good. Also, the margins are quite a bit better. So we are definitely getting a benefit from a combination of Smart, Texas, and all four of our Texas markets; margins have improved. A year ago, those margins were all below company average. Now they are company average or better, plus a market like Sarasota, as Bob mentioned, where we are just kind of getting started and getting to scale as we are getting a little bigger there, we are getting a little more pricing power. So Sarasota is also helping. We are really pleased with our margin improvement. Obviously, as our sales price has stabilized or gone down a little bit, it is very, very important that we control our costs, get SG&A efficiency, but also get those margins up; that is very important to us. So we continue to work on that.

Fantastic. Good luck guys.

You guys hit on most of the major themes going on here, but I was wondering on the spec side, are the margins running on par with traditional builds right now, or is that spread still negative? And are you seeing buyers quickly, or are the buyers still preferring to build the home the way they want?

First of all, I will try to answer part of that. The margins on specs historically have been 100 to 200 basis points lower than margins on new builds; that has narrowed somewhat. In fact, we have a number of instances—it's pretty hard to paint it with too broad a brush—but we have a number of instances in certain of our markets where the spec margins are basically the same as 2B builds. I think that I didn’t mention that in response to the previous question, but that has probably provided some margin lift as well. So your question helps inform the previous question. In terms of buyer preference, I think that there has been a little bit more demand for specs over the last 90 days. Phil, I don’t know if you would—

April did drop off a little bit. But if you look at us, even the last few quarters, we tend to be in that 40% to 50% range. Also, I think a lot of it is that we try to have a pretty definite spec strategy on a subdivision level. Again, it goes back to Bob as far as our operators and the really good job they have done to make sure that we are very mindful of not only the lot we put the spec on, but the house, the product type, and the price point. Definitely some people do not want to stay in a housing transaction for six months; brokers tend to want to take buyers to places where they can get a home quicker, get their commission quicker, and so forth. The margins have improved on the specs; we think it is a strength that we have at our price point to have a couple of finished specs for the community. Also, a couple of specs in the process. If people want to make selections, they can, with a compressed cycle time. That also helps the construction schedule, in that we complete more of an ebb and flow type situation with our production teams and our costing. So, we do feel very good about that. We are down a couple of hundred specs now than we were a year ago, primarily just because of our very, very strong sales. Our community counts about the same, but hopefully we will reload that a little bit as we go forward. But again, that just depends on market conditions.

Right. And you talked about your land position being the strongest that you have had in years. But obviously, your orders are by magnitude we haven’t seen before. Is that going to cause some irregularities in terms of the timing of community rollouts or how you plan to phase in different land positions over the next couple of years?

It could—I think we will manage through it. I mean, we are dealing with it now. We are all over land development schedules, and land delivery schedules. Some of that you can’t totally control because you are relying on third-party inspections and that kind of stuff. But look, we own and control nearly 35,000 lots. Even if you add a factor of 10% or 20% to our current sales rate, that is at least a four-year supply. The thing I like about it most are two things: right price point, and we have the right to walk away from 60% if the world turns upside down.

It is a problem we have right now.

If you look at our communities in general, about 50% of our communities, we do the development, and we control the development. So, we think we have a pretty good mix of reliance on third party people and also things that are 100% on us. Sales pace—selling communities faster than we thought has obviously impacted our community count, but it really gets down to a division-by-division situation. We feel like overall, we are really in pretty good shape.

I think also, it is a situation where when you buy the land and you own the land, you are taking certain risks. I mean, our business tends to be a lot about who are the buyers, where are the buyers coming from, and when you buy something today, you may not actually be in there selling houses for a year. So if those jobs were to go away, if those jobs were to change, also competitive landscape and so forth. If you buy land today, perhaps you are probably getting cheaper than you would a year or two from now. But not only do you have carrying costs, you have market risks of what happens to the jobs. What happens to the economic factors, as Bob said? We think we can run our business really well. If we can own about a year of finished lots, and then, if we can on top of that own another year or two, and then control on top of that another year or two, that should give us a four or five-year outlook. We think that is a real proven way of running the business.

Hi on behalf of all the stockholders, we just want to thank you for the excellent management of this business.

Thanks so much for that. I appreciate it.

I just had two questions. In effect, what has happened is that inventories have grown a little bit over the last 12 months. You managed to pay back debt; your actual debt is down, and you have no borrowings on your bank loans at all. With mortgage rates at 3%, why do you keep talking about an ability to make money, make a good profit on the smart smaller homes? Why are you so cautious about buying land and increasing the inventory? It seems like this would be a good time with your financial position to go out and not be as cautious as the way you described yourself?

Well, I think two things can be true. You can own and control almost 35,000 lots, which is what we do own and control, and you can still be cautious about what you are doing. With what we have on our plate, we have the ability to grow this business pretty significantly over the next several years, assuming that the economic conditions allow for that kind of growth. We have a long track record, and we intend to take full advantage of the conditions that are out there. But I think it would be—I just wouldn’t feel honest, if we didn’t acknowledge that the conditions that exist within the economy are very hard to understand and predict. While housing conditions have managed to just pierce through all of the noise and calamity, whether they will continue to do so, I think there is at least a question about that. The caution that we have is not going to prevent us from achieving what I think would be acceptable growth goals.

I think also it is a situation where, when you buy the land and you own the land, you are taking certain risks. Our business tends to be a lot about who are the buyers, where are the buyers coming from, and when you buy something today, you may not actually be in there selling houses for a year. So if those jobs were to go away, if those jobs were to change, also competitive landscape and so forth. So if you buy land today, perhaps you are getting cheaper than you will a year or two from now. But not only do you have carrying costs, you have market risks of what happens to the jobs. What happens to the economic factors, as Bob said. So we think we can run our business really well. If we can own about a year of finished lots. Then if we can, on top of that, own another year or two, and then control on top of that another year or two, that should give us four or five years. We think that is a real proven way of running the business.

Is it more difficult to invest in land that you intend to build the smart homes, the smaller homes on? Is it harder to find?

It just depends. Right now we have got a really good pipeline. But we are not the only builder, as you probably know, that is hanging their head on increasing their output of affordable homes. So it is competitive. But we have got a really good pipeline.

This is Derek. We have looked at retail business refinancing and such. It is a totally separate business. We don’t just hang up a sign and do that. We have decided that we stick to what we do really well. We think the investment we have and the returns we get from the mortgage and title operations are a good spot for us.

That is all I got. Thanks for the time, guys. Good quarter.

Thank you.

Thanks, Aaron.

Your next question comes from the line of Art Winston with Pilot Advisories.

Hi on behalf of all the stockholders, we just want to thank you for the excellent management of this business.

Thanks so much for that. I appreciate it.

I just had two questions. In effect, what has happened is that inventories have grown a little bit over the last 12 months; you managed to pay back debt, your actual debt is down, and you have no borrowings on your bank loans at all. With mortgage rates at 3%, why do you keep talking about the ability to make money, make a good profit on the smart smaller homes? Why are you so cautious about buying land and increasing the inventory? It seems like this would be a good time with your financial position to go out and not be as cautious as the way you described yourself?

Well, I think two things can be true. You can own and control almost 35,000 lots, which is what we do own and control. But you can still be cautious about what you are doing. With what we have on our plate, we have the ability to grow this business pretty significantly over the next several years, assuming that the economic conditions allow for that kind of growth. We have a long track record, and we intend to take full advantage of the conditions that are out there. But I think it would be—I just wouldn’t feel honest if we didn’t acknowledge that the conditions that exist within the economy are very hard to understand and predict. While housing conditions have somehow managed to just pierce through all of the noise and calamity, whether they will continue to do so, I think there is at least a question about that. The caution that we have is not going to prevent us from achieving what I think would be acceptable growth goals.

I think also it is a situation where when you buy the land and you own the land, you are taking certain risks. Our business tends to be a lot about who are the buyers, where are the buyers coming from, and when you buy something today, you may not actually be in there selling houses for a year. So if those jobs were to go away, if those jobs were to change, also competitive landscape and so forth. If you buy land today, perhaps you are probably getting cheaper than you would a year or two to go. But not only do you have carrying costs, you have market risks of what happens to the jobs. What happens to the economic factors, as Bob said. So we think we can run our business really well. If we can own about a year of finished lots, then if we can on top of that own another year or two, and then control on top of that another year or two, that should give us four or five years. We think that is a real proven way of running the business.

Is it more difficult to invest in land that you intend to build the smart homes, the smaller homes on? Is it harder to find?

Just depends. Right now we have got a really good pipeline. But we are not the only builder, as you probably know, that is hanging their head on increasing their output of affordable homes. So it is competitive. But we have got a really good pipeline.

This is Derek. We have looked at retail business refinancing, and it is a different—a totally separate business. We don’t just hang up a sign and do that. We've decided to stick to what we do really well. We think the investment we have and the returns we get from the mortgage and title operations is a good spot for us.

That is all I got. Thanks for the time, guys. Good quarter.

Thank you.

Thanks, Aaron.

Your next question comes from Jay McCanless from Wedbush.

So, let me try and ask the land question this way. With the pipeline you have, when might the community count start to inflect back higher? Because, amazing sales this quarter. Sounds like July is doing very well also, I’m just worried about how quickly you are going to run through the communities, and when based on what you have in front of you right now, when that count might start to turn back higher?

While Phil is getting ready to answer that, I will simply say this: I think community count is—look, we were giving guidance in two areas. One was land span we suspended that; the other was community count, we suspended that. We will probably reinstate both of those at some point down the road. The fact that we were giving guidance on community count must make us think as you do that it is important, but I also think it can be very deceiving. As an example, most of our Smart Series communities have significantly more single-family lots in them than atypical move-up or higher price communities. I don’t have the exact number, but I would guess that an average Smart Series community has 150 to 200 lots, some have even more, whereas a typical other community might be 50 lots to 80 lots. You know, believing you can skip through with a couple of years. And pace has an impact on that when you analyze whether to buy or not to. I think community count is really important; I’m not saying it isn’t, but total lots owned and controlled and our belief as to whether we can achieve growth goals is at least as important, if not more so. Given the slight change in the product offering with Smart now comprising almost 40% of our business.

Generally, I would add is that we are in the subdivision business. That is what it is all about; that is how we run the business. It is a very, very important item for us, echoing what Bob said. All communities are not created equal. The Smart Series tends to give us higher absorptions, higher profitability, etc. We are probably never say never; these crazy days, we are probably going to open fewer communities this year than we thought, obviously with—especially the March and the April craziness in the world. So we are going to probably open less than we thought. Also, if sales continue strong as they have in July, you are going to sell more than we thought. So the community count increase is definitely going to be challenged this year. Having said that, again echoing what Bob said, we think we are positioned very well from a land standpoint to continue our growth. If you look at this year, right now we are like a 7,000-unit run rate; a couple of years ago we were doing 4,000. So in our 15 divisions, as we continue to grow those divisions on average to 500, 600; some might be 800, some might be 400. We still think there is quite a bit of room to grow in our existing 15 markets in the next couple years. Having said that, obviously, community is very much a part of that. We are buying more land now than we were in the first couple of quarters because things have kind of picked back up. But again, we feel like we are in good shape to continue growing the business.

Great. Thank you for the information on that. On pricing power, can you talk about what percentage of your communities were able to raise price for the quarter?

I don’t have a good percentage on that. I mean, we feel good about our margins. We spend a lot of time on opening communities the right way. We try to very much to control communities and don’t get too far ahead of ourselves because cost protection is always challenging in our business. So we try to run the business—you sell five or six houses; you take the price up even for just $500 or $1,000. Every community is a little different, but we are getting some price and power. You can see that in our margins, and we will continue to focus on that.

And then two other quick questions first. I know most of the builders were running some incentives in late March and parts of April. Just wondering if you guys are doing any of that, that we should expect maybe could be a small headwind to gross margin as we think about the back half of the year?

You know, we don’t give any margin projection. I would not say specifically we were doing a lot of incentives right after the pandemic started hitting, or whatever. With our sales being so strong, like Bob said, selling 800-plus in May and then beating that in June and continuing in July, we have definitely tried to inch price up. The issue you get into is there are some supply challenges out there; cycle times, I think will probably be a little slower the second half with some of the issues. Every market is a little different. But, Jay, we are laser-focused on margins; that is a big part of profitability in our business and will continue to be that way.

Absolutely. And you actually—that was going to be my other question is just where cycle times now versus where they were last year?

They are up a couple of days if you look overall company average, more than 140 to 150 range overall. Look at the smart series, they are in the 120 to 130 range, but they’re up a couple of days compared to last year.

Alright, okay. Congrats again, and thanks for taking my questions.

Thanks, Jay.

Thank you for joining us. We’re looking forward to talking to you next quarter.

This concludes today’s conference call. You may now disconnect.