M/I Homes, Inc. (MHO) Q3 2020 Earnings Call Transcript

Good afternoon everyone and welcome to the M/I Homes Third Quarter Earnings Release Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Phil Creek. Sir, please go ahead.

Welcome to our call. 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. I'll now turn the call over to Bob.

Thank you, Phil. And thank you for joining us today. We had an outstanding record-setting quarter highlighted by a 71% increase in new contracts, a 29% increase in homes delivered, and a 94% increase in net income. By the quarter, we sold 2,949 homes. Year-to-date through September we have 7,299 homes, 43% better than last year, and more than we sold in all of 2019. Our sales were strong across the board and throughout all of our markets. Our absorption pace improved significantly to 4.6 sales per community per month compared to 2.6 a year ago. A number of factors contributed to our strong sales performance: low interest rates, low inventory levels, a shift in buyer preference towards single-family homes and an increasing number of millennials opting for homeownership. All of these are fueling a robust housing market. In addition, we continue to gain market share in most of our markets based upon the strength and quality of our communities. The quality of our online marketing execution and generating online leads and converting those online leads into sales and the continued strong market acceptance of our most affordably priced smart series line of homes. Our smart series sales comprise nearly 36% of total companywide sales during the quarter compared to 28% a year ago. We are now selling our smart series homes in all 15 of our divisions and on average our smart series communities produce better sales pace, better gross margin, better cycle time and better return. We delivered 2,137 homes in the quarter, year-to-date through September we have now delivered 5,467 homes, which is 25% more than last year. Our backlog sales value at September 30 equaled $1.8 billion, an all-time record and units in backlog increased 54% to a record 4,503 homes. Our margins and returns during the quarter were also very strong. Gross margins during the third quarter improved by 240 basis points to 22.9% and our SG&A expense ratio improved by 60 basis points to 11.6%. And our pretax income percentage significantly improved to 11.2%. All of this resulted in a greater than 90% improvement in both pretax and net income for the quarter. Our financial services business also had a record quarter highlighted by strong income and excellent capture rate and very solid across-the-board execution. Now, I will provide some additional comments on our markets. As you know, we divide our 15 markets into two regions. The northern region consists of six of our 15 markets. Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit. Our southern region consists of the remaining nine markets. Charlotte and Raleigh, North Carolina, Orlando, Tampa and Sarasota Florida, Houston, Dallas, Austin and San Antonio, Texas. As I indicated earlier, we experience strong sales performance in the third quarter across all of our markets. New contracts in the southern region increased 63% for the quarter while new contracts in the northern region increased 85%. Our deliveries increased by 27% over last year in the southern region to 1,269 deliveries or 59% of company total. The northern region posted 868 deliveries, an increase of 33% over last year and 41% of total. We also had substantial income contributions from most of our markets led by Orlando, Dallas, Minneapolis, Columbus, Charlotte, Tampa and Cincinnati. With Indianapolis, Houston and Austin also having a very strong third quarter. Our controlled lot position in the southern region increased by 49% compared to a year ago and increased by 17% in the northern region. While we are selling through a number of our communities faster than anticipated, we are nonetheless very well positioned to handle demand. 35% of our owned and controlled lots are in the northern region with the balance roughly 65% in the southern region. We have an outstanding lien position companywide. In total, we own and control approximately 40,000 lots or about a 4.5 to 5 year supply. Importantly, roughly 60% of our lots are controlled under option contracts, which with more than half of our lots controlled by option gives us tremendous flexibility to react to changes in demand or individual market conditions. We had 121 communities in the southern region at the end of the quarter, which is down from 132 a year ago, and also down from 126 at the end of this year's second quarter. We had 86 communities in the northern region at the end of the third quarter, down slightly from a year ago, and down from 94 at the end of this year's second quarter. Before I turn it over to Phil, let me just make a few closing comments. Despite our record performance and strong sales, we acknowledge the continuing challenges our country indeed the world is facing in dealing with the effects of the COVID-19 pandemic. The pandemic continues to affect our operations, though our teams have managed through it very well. We continue to focus on building and selling quality homes, and we continue to manage our operations in our business with the highest standards for our employees, customers, and their accompanying work environment. Finally, let me conclude by saying that in addition to having a record shattering quarter, our company is in the best shape ever. Our financial condition is strong, our balance sheet is healthy. We have meaningful operating momentum and are poised to have an outstanding year.

Thanks Bob. As far as financial results, new contracts for the third quarter increased 71% to 2,949, an all time quarterly record compared to 1,721 for last year's third quarter. Our new contracts were up 75% in July, up 94% in August, and up 44% in September. Our sales pace was 4.6 in the third quarter compared to last year's 2.6. Our cancellation rate for the third quarter was 10%. As to our buyer profile, about 53% of our third quarter sales were first-time buyers compared to 50% in the second quarter. In addition, 40% of our third quarter sales were inventory homes compared to 45% in the second quarter. Our community count was 207 at the end of the third quarter, compared to 221 at the end of last year's third quarter. Breakdown by region is 86 in the northern region and 121 in the southern region. During the quarter, we opened 12 new communities while closing 25. And we opened 51 new communities during the nine months ended 9/30 this year. We delivered a third quarter record 2,137 homes delivering 58% of our backlog, which was the same percentage as a year ago. Revenue increased 30% in the third quarter, reaching a third quarter record of 848 million. Our average closing price for the third quarter was $380,000, a 1% decrease when compared to last year's third quarter average closing price of $382,000. And our backlog sales price is $404,000, up from $390 a year ago. Our backlog average sales price of our smart series is $315,000. Our third quarter 2020 operating gross margin was 22.9%, up 240 basis points year-over-year and up 100 basis points from the second quarter. Our third quarter SG&A expenses were 11.6% of revenue, improving 60 basis points compared to 12.2% a year ago, reflecting greater operating leverage. Interest expense decreased $3.4 million for the quarter compared to last year. Interest incurred for the quarter was $10 million compared to $12.9 million a year ago. The decrease is due to lower outstanding borrowings in this year's third quarter, as well as a lower weighted average borrowing rate. During the third quarter, we generated $111 million of EBITDA compared to $67 million in last year's third quarter. We have $22 million in capitalized interest on our balance sheet, which is about 1% of our total assets. Our effective tax rate was 23% in the quarter, compared to last year's 24% in the third quarter. Our third quarter rate benefited from energy tax credits that were retroactive to 2019. We estimate our annual effective rate this year to be around 23%. Our earnings per diluted share for the quarter increased to $2.51 per share from $1.32 last year. Now Derek will cover our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved record third quarter results in pretax income, revenue and number of loans originated. Revenue was up 115% to $28.9 million due to a higher volume of loans closed and sold, along with significantly higher pricing margins. For the quarter, the pretax income was $19.2 million, which was a 241% increase compared to 2019 third quarter, 76% of the loans closed in the quarter were conventional, and 24% FHA or VA, compared to 78% and 22%, respectively for 2019 third quarter. Our average mortgage amount increased to $314,000 in the 2020 third quarter compared to $312,000 last year. Loans originated increased to a third quarter and all-time record of 1,636 loans, 32% more than last year. The volume of loans sold increased by 39%. Our borrower profile remains solid, with an average downpayment of over 15%. For the quarter, the average credit score on mortgages originated by M/I Financial was 747, up slightly from 745 last year. Our mortgage operation captured over 85% of our business in the third quarter, which was in line with 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 $136 million outstanding under these facilities. We extended our repo line this month through October of 2021 and increased the commitment amount from $65 million to $90 million. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now I'll turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, our total homebuilding inventory at 9/30 was $1.8 billion, an increase of $16 million over last year. Our unsold land investment at 9/30/20 is $762 million, compared to $821 million a year ago. At September 30, we had $362 million of raw land and land under development, and $400 million of finished unsold lots. We owned 4,942 unsold finished lots with an average cost of $81,000 per lot. This average lot cost is 20% of our $404,000 backlog average sale price. Our goal is to maintain about a one-year supply of finished lots and we do own a two to three-year supply. Lots owned and controlled as of 9/30/20 total of 39,600 lots, 15,100 of which were owned and 24,500 under contract. We own 6,900 lots in our northern region and 8,200 lots in our southern region. A year ago, we owned more than 14,800 lots and controlled an additional 14,200 lots for a total of more than 29,000 lots. During this year's third quarter, we spent $107 million on land purchases and $89 million on land development for a total of $196 million. Year-to-date we have spent $267 million on land purchases, and $222 million on land development for a total year-to-date land spend of $489 million, and about 48% of our purchase amount was raw land. At the end of the quarter, we had 266 completed inventory homes, about one per community and 1,113 total inventory homes. Of the total inventory, 550 are in the northern region and 563 are in the southern region. As of September 30, 2019, we had 531 completed inventory homes and 1,513 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments.

Ladies and gentlemen, we will now start the question and answer session. Our first question today comes from Jay McCanless from Wedbush Securities. Please proceed with your question.

Hey, good afternoon, guys. Congrats on a really good quarter.

Thank you.

The first question I had, if you think about smart series versus the other product lines, maybe on a percentage basis, where were you all able to push price the most? On smart series or on the traditional product?

That's a really good question. My intuition is that we are focusing more on price rather than starting margin, and this observation seems to apply across the board. We've managed to expand margins significantly in a good range of our communities. However, before we achieved this margin expansion, our smart series communities generally had a higher base margin to begin with. Phil, I'm not sure if you have a more detailed perspective on this, but I believe the situation isn't fundamentally different. There are many non-smart communities where we've also been able to increase margins, and we are doing this cautiously. Generally, it’s challenging to know in the moment whether we've accurately gauged our actions, but we believe we've approached this prudently. Overall, I would argue that this trend is quite widespread.

Okay. And then the second question I had and thinking about the community count, and it sounds like you all ran through a fair number of communities during the quarter. Could you maybe talk about where you think the community count goes for the rest of the year? And then any help you can give us in terms of where the community count might go in 2021?

You know, Jay, that's really challenging situations for us. If you look through the first nine months of the year, we've closed 69 communities. Last year, the first nine months, we closed 46. So we've had 23 more communities closed this year, opening up the communities has about been the same year-to-year. We're trying to get communities opened the right way as fast as we can. Of course, the good news is that our absorption pace is up significantly, not giving any guidance, because that's just such a difficult answer. But we are hoping. We are focused on community count. And I think it will be difficult for us the next couple of quarters. But I think as we get into the latter part of next year, hopefully, we'll be in a little better situation. But having said that, as Bob said, there are more smart series communities, those sales pace are better. So we're watching it very carefully and do all we can.

The other thing I'd add to that is that there's two factors that are impacting community count in the very near term, there probably will be a little bit of choppiness. One of those factors is the very robust sales pace for the last four to five months, and selling even though we're controlling sales, if you will, in a very decent portion of our communities, not wanting to get too far out ahead of ourselves. Notwithstanding that, we are selling out of some communities faster than we anticipated. The other side of that is, is because of COVID-19 and work from home or furloughs. It's not everywhere, but in many of the locales in which we operate, the submarkets, the municipalities, the townships, etc. The entitlement process and the sign-offs needed to complete development and to commence new home construction and secure the first tranche of building permits and so forth have been delayed for no economic reason, but for just the reality of the shortage of people that are there to do the work. So, you're sort of getting pulled from both ends. Having said all that, we've said this before, we'll say it again, we're poised for growth. The growth may not be on an even plane, but we think we're really poised for growth based on what we believe today and what we know today, over the next 12 to 24 months.

Great. And then the last question I had, last year you guys had a backlog conversion rate in the fourth quarter, roughly 66%. Just wanted to see if you're running a similar rate to that with what you've converted so far. Or if there's any type of dispersion you can give us something when all the huge crop of orders in 3Q might deliver over the next couple of quarters?

Jay, we don't give any projections as far as fourth quarter closings are for your or anything else. I mean, we do hope and plan to close more houses in the fourth quarter than we did a year ago. The backlog is quite a bit higher. I would point out a couple things that when you look at the large amount of sales we had in the third quarter this year versus last year. For instance, if you look at the 9/30 backlog this year, like 65%, 66% of those sales and the 9/30 backlog came in the third quarter. It takes a certain amount of time to get those houses in the field and built. If you look at the backlog at September of 2019, about 58% of those houses were sold in the third quarter of 2019. So my point is, there's more recent sales in the current backlog. There's also a situation where even though I have a few more houses in the field 9/30 this year than a year ago, I do have 400 less specs. And those specs in general are not as far along construction-wise. So, I would not be surprised to see my backlog conversion rate lower in the fourth quarter. But having said that, we do hope and plan the same and things kind of stay the way they are that we will close a few more houses in the fourth quarter than a year ago. But it won't be any crazy number way above last year to kind of answer your question.

Okay. That's great. Very helpful. Thank you.

Our next question comes from Alan Ratner from Zelman and Associates. Please go ahead with your question.

Hey, guys, good afternoon. Congrats on the great results.

Thanks, Alan.

I wanted to double-check a number I might have misheard. I thought you mentioned having roughly 5,000 unsold finished lots. If that's correct, could you confirm that? Additionally, I heard your target is a one-year supply of finished lots. If the 5,000 number is accurate, it seems to exceed the one-year sales pace you've been running this year, which is closer to 8,000 to 9,000. Can you clarify if I'm understanding this correctly, or correct me if I'm wrong?

Yes, you are correct, Alan. I always refer to the most current closing rate; optimistic individuals typically use sales figures, but conservative financial professionals prefer the closing rate. I like the 7,500 figure, though we currently have less than that. We would also prefer to own two to three years' worth of our current run rate. Looking at our current closing rate, we're approaching that two-year mark. Regarding our land position, we believe it's very strong. Would we like to acquire a few more lots in specific situations? Yes, most likely. However, it's important to distinguish between finished lots that are ready to go versus raw land that is prepared for development. You need to analyze what is included in that option. Overall, we think our land position is robust, but adding a few more lots would definitely make us happier. Bob, do you have any thoughts on that?

Yes, apart from what I mentioned earlier, we have indeed sold more houses than we initially expected, and so has everyone else. Our new communities will likely launch a bit later than we had planned, perhaps about a month instead of a full quarter, which could affect our results. This is the reality we are facing in most of our markets. That said, I want to emphasize that we have a solid land position, and it’s not something that keeps us up at night right now. We are well-prepared for growth, enjoying excellent momentum and significant traction in many of our markets, which is a situation we could not have anticipated several years ago. It’s encouraging to have this momentum, and I feel confident about our performance in most of our 15 markets today. We do not take this lightly or for granted.

Got it. No, that's helpful. And thank you for walking me through that. So I guess the follow on to that then is very impressive increase in lots owned, or excuse me, option this quarter, big sequential increase in year-over-year as well. So do you have any way to kind of tell us the development phases of those lots that you tied up through option? I mean, are these lots that you would expect to contribute to 2021 growth at all? Is this more of a 2022 kind of community count driver? Just curious where these lots are located and in what development stage they're at?

I wouldn't be able to give you too accurate of a read. But I had to take us take a guess. My guess is that a small fraction of them will contribute to sales and closings in 2021, that the overwhelming majority is 2022 business and beyond. But we're in pretty good shape for 2021. Some of that additional stuff will create some additional sales and closings next year in 2021, but most of it will be pushed out beyond that. Phil, did you want to say something?

Yes. You actually looked at the numbers, Alan. The majority of the uptick in the control is actually in our Texas markets, happens to be primarily raw land pieces. And Bob is correct as usual. I mean, we're really in great shape for growth in 2021. And actually in really pretty good shape, even for 2022. So the uptick really is more for the second half of 2022 and 2023 in Texas.

Got it. Okay. Thank you for that. And if I could squeeze in one more. The cash position among the highest levels on record here. So great progress on the balance sheet. And obviously, I'm sure investing in land is the number one priority. But how do you see the balance sheet unfolding? I mean, your stock is at book value. Obviously, M&A has been an area in the past where you've selectively been able to allocate some capital towards deals to drive near-term growth. So how should we think about that $200 million cash balance over the near term?

I believe that buying back stock is often overvalued, which may not be a popular opinion to share. However, I hold this view based on my experiences in various industries. Economic conditions are currently uncertain; just a year ago, no one could have predicted the events of 2020, including not only the pandemic but its aftermath as well. In late March and early April, we anticipated a scenario similar to the great recession or possibly even worse. Yet by early May, we were surprised by an extraordinary rebound in demand, and by the end of May, we were experiencing record-setting sales, which no one had foreseen. Similarly, there are many uncertainties about the future at present. Interest rates are the main factor driving the housing market right now, with some demand also stemming from unique circumstances associated with the pandemic, such as very low resale inventories and a shift away from high-density urban areas. It's uncertain whether this shift is permanent or if it will change once the pandemic is hopefully behind us. However, I believe millennials are gradually returning to the market, driven more by shifts in family dynamics than anything else. As long as interest rates remain closer to three than four—and currently they're below three—I expect housing demand to persist. Given this context, we believe it's prudent to hold onto capital to invest in our business. We would like to expand into one or two additional markets if an opportunity arises, but thankfully, we can meet our growth objectives over the next two to three years without needing to do so. Nonetheless, we will likely require additional capital for future expansions. Considering all of these factors, I can confidently say our return on equity ranks among the top two or three in the industry. I hope we will be evaluated on various metrics rather than solely on our cash deployment strategies, especially by those who prefer seeing short-term buybacks.

Great. Now very, very detailed and thorough, Bob. Thank you very much and great luck.

Thanks so much, Alan.

Our next question comes from Aaron Hecht from JMP Securities. Please go ahead with your question.

Hey, guys, appreciate all the insight you gave on the land position so far, because it's a critical aspect of the business and totally understandable why there's going to be some volatility, given the results you guys have had, because it's really been amazing to watch. So I want to hear on the land. But wondering in terms of margins, there's been some cost inflation over the year, lumber being the one that's been called out a number of times. So wondering if we need to be sensitive of what the margin profile is going to look like over the next couple of quarters. And the orders that you took this quarter and earlier in the year, roll through with some of those cost inflation items?

When you look at stick and brick costs in general, lumber's definitely jumped up quite a bit, then come off somewhat. I think, if you look at across our company, in the third quarter, we had a 3% to 5% increase in those type costs. We had been raising price very, very aggressively. The good news is land development costs have not been up that much. We've been very, very pleased with the improvement in our margin the last couple of quarters. Don't predict what they will be. But I will tell you that we really try to focus on opening new communities, the best way we can. Demand is still very good. So, we're hoping very much to keep these strong margins we have. Our margins in Texas have improved dramatically. All four of our Texas divisions now are at that 500 unit a year run rate plus. And that's really given us more communities and more scale. And as Bob talked about the smart series, those margins being better. So we focused on it a lot. Hopefully, lumber's going to continue to come down a little bit. We are being very careful with sales getting too far out on delivery dates. And then making sure we have our costs not only locked in, but locked in with people we believe that can honor all those commitments and not get too far ahead of our sale. So having said all that, we're doing all we can to keep our margins as strong as we can.

And Bob, you made a comment to Alan about potentially looking at new markets. Do you want to share which markets you might be contemplating, entering at some point?

If we were further along, I would provide more information. Right now, it's important to be clear that we expect our unit growth to continue for the next several years. This year, we've experienced an extraordinary growth rate of 71% in the last quarter for units, which is not sustainable in the long term for us or anyone else. However, if we can achieve a growth rate of 10% to 15% or more over the next several years, we may need to consider entering an additional market or two. At this moment, there's no immediate need to make such moves to meet our growth targets over the next two to three years. We are exploring about four or five potential markets, but I cannot comment further as it wouldn't be wise and could be misleading.

Okay, And Phil, in terms of expense interest rolling through the income statement, is there now enough backlog to be to capitalize that interest? Or we should think that line could go to zero pretty soon?

I will not count on that. We have been pleased that our interest incurred has been going down. However, our land spend and some of our land activities have been kind of lower than we thought they would be. We did hit the pause button in that March, April May timeframe, would expect land activity to increase in the fourth quarter and next year. So hopefully, we'll continue to be efficient there. Would not see that number getting down that low of a level. But hopefully we'll continue to see some improvement.

Thank you very much. Great results.

Thanks a lot, Aaron.

Our next question comes from Art Winston from Pilot Advisors. Please go ahead with your question.

I suspect I can thank you guys on behalf of most of the shareholders for your excellent stewardship of this company. So thanks. I was wondering, in the second quarter conference call you gave your conservative outlook and all the things that might not be right. Yet it seemed like you stepped up your investment in land and communities very rapidly. And I wonder if anything changed during the course of the quarter, or anything changed in your procurement hurdle rates or anything like that?

Thank you for your comment. In response to your question, there are several factors at play. We have experienced much faster sales than anticipated and have sold out to communities more quickly, which made us realize we needed to adopt a more aggressive approach in certain markets for the next few years. Additionally, some of the increases in purchases have been driven by better operating performance and execution, along with growing confidence in our abilities in markets that had previously struggled. For instance, a few years ago, our performance in some Texas markets was lacking, but now we are performing much better. It’s important to first address our foundational performance before pursuing growth targets. In a few markets, we have transitioned from average or below-average results to achieving a high level of performance. We now feel confident that we can elevate those markets further, given the competitive landscape. We believe we have the capability to compete effectively, and this combination of factors has led to an increase in the land we are managing.

Understood. It seemed like a risk tick, right, that the investment, new investment for community is higher, that you're buying bigger, bigger communities or investing in bigger land from larger communities. Is that possible?

I think in general, when you look at our smart series communities, they tend to be more lots. They also tend to be, if it's 200 lots. We may be putting the 75 or 100 lots on the ground as opposed to 50. Just because sales are so strong, and we don't want to go dark in there. So yes, communities have gotten a little bit larger. But that's also something that we can manage closely and quickly if demand or the market changes.

Got you. One last question. I heard what you said about stock repurchase, even though historically, you've done a very judiciously and effectively. But what about the outside possibility of just blowing another $100 million or $150 million at 3% or something and putting it on the balance sheet case you ever need it. You could afford to pay the interest rate right now. Is that added consideration?

I think that, as Bob talked about, even though business is very, very good, there is a lot of uncertainty. We think we have a very good business positioned well, but also we do think the land spend is probably going to tick up the next couple of quarters. We also think that being in a lower leverage situation during these uncertain times probably makes a lot of sense. We are very glad in good shape to have a $500 million bank line undrawn, which we can get to if we need. So we think we have a lot of liquidity there if we need. So again, it's something that we look at constantly and discuss with our board, and we'll continue to.

Okay. Well, thanks for everything.

Thanks Art.

And our next question comes from Alex Barron from Housing Research Center. Please go ahead with your question.

Hey, guys, good afternoon and congrats on the strong results.

Thank you.

I was curious if you guys could comment on roughly the trend of the orders in the quarter. And also whether you could offer any comments about how October is going?

I'll let Phil discuss the monthly and year-over-year increase from September, August, and July. We do not provide any guidance on the current month. Phil, would you like to address the three months in the quarter?

Yes, Alex. I mean, the demand really was solid all the way through the month. When you start looking at the numbers, it depends a little bit on how last year's July was. How last year's August was. Did we do a little more managing of sales as we went through the quarter? The answer is probably yes. Again, not wanting to get delivery dates out too far to outrun our cost protection. Not get out in front. We do still have supply challenges with those appliances, each market are different. I think we're working through all things, okay. By full time, it's not really gotten any worse. But demand has continued to stay very, very strong.

Okay, great. So that said, is right now, there's this conversation about price versus pace. Right now, you still feel comfortable that you can handle the current pace? Or are you guys, I guess more inclined to be limiting sales and pushing the prices?

That's a subdivision by subdivision decision. And we trust our experienced area presidents, along with our region presidents to work through those things. The backlog is significantly higher than last year. We had a very, very strong sales pace. Our margins were up, 250 basis points. So hopefully we're pulling the right levers. It just really comes down to a subdivision by subdivision answer, Alex.

Got it. One other question on the SG&A. Notice the corporate dollar amount, I guess, was a little bit higher than last year obviously. But I was curious, do you feel like this is kind of a new run rate that we should expect going forward? Or was there any one-time items in there?

A significant factor in that was the incentive compensation for our leadership team and our employees, who are largely rewarded based on bonuses, income, customer service, and similar metrics. These bonuses are recorded mainly as income is realized. We achieved almost $100 million pre-tax this quarter, which is our best quarter ever, leading to increased bonus accruals. Thus, this was the primary reason for the increase.

Got it. Okay, well, best of luck for the rest of the year, guys. Thanks.

Thanks, Alex.

Thank you.

Ladies and gentlemen, with that will conclude today's conference call. We do thank you for attending. You may now disconnect your lines.