M.D.C. Holdings, Inc. (NYSE:MDC) Q2 2023 Earnings Call Transcript

M.D.C. Holdings, Inc. (NYSE:MDC) Q2 2023 Earnings Call Transcript July 27, 2023

M.D.C. Holdings, Inc. beats earnings expectations. Reported EPS is $2.59, expectations were $0.74.

Operator: Hello, and welcome to the M.D.C. Holdings 2023 Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Derek Kimmerle Vice President and Chief Accounting Officer at M.D.C. Please go ahead.

Derek Kimmerle: Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2023 Second Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, our Executive Chairman; David Mandarich, Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay please visit our website at mdcholdings.com. Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call including those related to M.D.C.’s business, financial condition, results of operation, cash flows, strategies and prospects and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company’s actual performance are set forth in the company’s second quarter 2023 Form 10-Q, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now I will turn the call over to Mr. Mizel for his opening remarks.

Larry Mizel: Thank you for joining us today, as we go over our results for the second quarter of 2023 and provide some insight into the current market conditions and the outlook for our company. M.D.C. reported net income of $93 million or $1.24 per diluted share for the second quarter of 2023, driven by a delivery total of over 2,000 homes resulting in home sales revenues of $1.1 billion. Order activity improved on a sequential and a year-over-year basis. We generated 2,167 net new orders on the sales pace of 3.1 homes per community per month. We also ended the quarter with over $1.8 billion in cash and marketable securities, giving us the necessary liquidity to reinvest in our business and increase our industry-leading quarterly dividend by 10% to $0.55 per share.

Market conditions remained favorable during the second quarter as the combination of a low existing home supply and a resilient economy resulted in healthy traffic trends at our communities. Buyers have adjusted to the higher mortgage rate environment and may have come to realize that the new home market provides much more in the way of quality construction, customization and functionality as compared to existing home market. The consistently strong traffic patterns during the quarter allowed us to scale back on many of the incentives we implemented earlier in the year. And we have begun to raise prices in communities, where demand has been the strongest. Another positive development during the quarter was a noticeable improvement in building conditions.

For the first time in several quarters we achieved a sequential improvement in the average construction built on for those homes that closed in the quarter. Supply chain conditions and material availability have improved considerably since the pandemic, as we are now projecting a construction build time of under-180 days on the homes that we are starting today. A more streamlined and dependable supply chain, will have a significant impact in our industry, and should lead to better inventory turns and improved capital efficiency for our company. In light of the improvements we have seen in both demand and building conditions, we have become more active in the land market. In the second quarter, we approved the purchase of over 1,300 lots, which go a long way towards giving us a land pipeline necessary to achieve our growth objectives.

While the land market remains competitive, we believe that our size, scale and access to capital provides us with a significant edge over smaller private builders who rely on project financing from local lenders. We believe that public builders will continue to gain market share from smaller builders, as well as the existing home market. And M.D.C. is intent on benefiting from this trend. With solid momentum on the order front and improved supply chain and a healthy balance sheet, M.D.C. is well positioned to take advantage of the positive housing fundamentals, as we see in our markets. The increase in mortgage rates has compelled, current homeowners to stay put in their existing homes, creating a real opportunity for homebuilders to fill the void.

In addition there is a need for new housing in this country after years of under building, following the great Recession. As a result, we are very optimistic about the outlook of our industry and M.D.C. in particular. Now, I’d like to turn the call over to David, who will provide more detail on our operation performance this quarter. David?

David Mandarich: Thank you, Larry. M.D.C. delivered strong results in the second quarter of 2023. Thanks to a healthy demand environment, more favorable supply chain conditions and solid execution by our homebuilding teams. Order activity was fairly consistent throughout the quarter. With April being our strongest month from a gross order perspective, followed by a slight slowdown in May and a rebound in orders for June. Orders trend so far in July, have been typical for this time of the year, and in line with our expectations. Each of our homebuilding segments saw improvements in their sales base on both a sequential and year-over-year basis during the quarter, with the West segment outperforming both the East and the Mountain segments.

We also experienced strong sales results in our newer markets including Boise, Albuquerque and Nashville. Our gross margins from home sales in the quarter was 16.4%. Excluding impairments, our gross margins from home sales was consistent with the first quarter of 2023 at 17.6%. As Larry mentioned, we saw market-wide pricing improved as the quarter progressed, allowing us to curtail our incentive activity and raised prices in many instances. Gross margins in backlog are currently higher than we experienced in the second quarter, giving us confidence in our margin projections for the balance of the year. We ended the quarter with 2,155 unsold homes under construction, a significant increase from the prior year period. This increased level of spec inventory is part of a broader strategy switch from our company in response to the changes that we’ve seen in the marketplace.

Most buyers today want a shorter time, between sale and move-in than associated with a builder order home. These buyers are also willing to forgo some personalization, to get in their home quicker. From our perspective, we found a shorter sale to close time reduces cancellation and helps with our inventory turns. To be clear, we have not moved away from leveraging our Home Gallery design studios nor have we abandoned our build-to-order business. Our goal is to have a mix of to-be-built and spec homes available at all of our communities. With spec homes furnished with some of the more popular amenities options and upgrades curated by our professional design teams. We believe that this shift will allow us to deliver homes in a more timely manner to our customers, while still getting the gross margin benefits typically associated with our Home Gallery offerings.

Overall, we feel good about the new home market and our company’s positioning heading into the back half of the year. Buyers remained engaged and motivated to own a home despite higher interest rates. While job creation and economic growth in most of our markets continue to be favorable, we have designed our communities and homes to cater to the first-time homebuyer and have adjusted our business practices to deliver homes to these buyers more efficiently in the past. In short, I believe we have the right product in the right place with the right strategy to be successful in today’s market. With that, I’d like to turn it over to Bob who will provide more detail on our financial results this quarter.

Bob Martin: Thanks, David, and good morning everyone. During the second quarter, we generated net income of $93.5 million or $1.24 per diluted share, representing a 51% decrease from the second quarter of 2022. Pre-tax income from our homebuilding operations for the quarter was $92.1 million, which represented a 62% decrease from the second quarter of 2022. This was partly due to a 24% decrease in home sale revenues as a result of lower closing volume. The pre-tax decrease was also caused by a lower gross margin from home sales largely due to increased incentives and higher construction costs incurred on those homes that closed during the period as well as $13.5 million of inventory impairments recognized during the period. Our financial services pre-tax income increased during the second quarter of 2023 to $21 million.

The increase was due to lower compensation costs driven by lower headcount and increase in capture rate and the allocation of revenue from our homebuilding business associated with our financing incentives. Both our homebuilding and financial services pre-tax income benefited from increased interest income during the quarter. On a consolidated basis, we recognized $20.1 million of interest income during the second quarter, compared with only $708,000 in the prior year quarter. Our tax rate decreased from 26.8% to 17.3% for the 2023 second quarter. The decrease was primarily due to windfall on equity awards that were exercised or vested during the quarter and to a lesser extent energy tax credits that did not benefit the 2022 second quarter as they have not yet been extended into 2022 as of the prior year quarter.

As a result, we now expect our effective tax rate for the full year to be roughly 23%. This estimate does not include any additional discrete items or any potential changes in tax rates or policies. We delivered 2009 homes during the quarter, which represented a 21% decrease year-over-year. However, we exceeded our previously estimated range for the quarter of 1,600 to 1,700 closings. Closings for the quarter benefited from our continued execution of our spec strategy, as well as improvements in our construction cycle times. We expect our cycle times to continue to improve in the second half of the year based on the projected cycle times of our homes under construction. As a result we currently anticipate deliveries for the 2023 third quarter of between 1,850 and 2,000 homes.

The average selling price of homes delivered during the quarter decreased 4% year-over-year to $549000. This was in line with our previously stated guidance for the quarter and consistent with the first quarter of 2023. We expect the average selling price of homes delivered in the 2023 third quarter to be approximately $55,000. Gross margin from home sales for the quarter was 16.4% compared to 26.8% in the prior year quarter. Excluding inventory impairments, gross margin from home sales for the quarter was 17.6%. This decrease was largely driven by an increase in incentives as two-thirds of our closings during the quarter were spec homes, the majority of which were contented by the original homebuyer. Current quarter home closings were also burdened with higher construction costs as compared to the prior year.

As we continue to pivot our operations to prioritize an increased number of spec homes, we have recently introduced or curated by the Home Gallery collection. These homes include finished details selected by members of our professional design team specific to home plans and geography. Our curated collection allows us to capitalize on our design expertise given our experience with built-to-order homes to deliver thoughtfully designed homes to quick move in buyers. As we see more of our curated spec inventory work its way into our closing population and we move further away from the period of peak construction costs, we should see gross margin improve from recent levels. We are currently expecting gross margin from home sales for the 2023 third quarter of between 18% and 19% assuming no impairments or warranty adjustments.

Our total dollar SG&A expense for the 2023 second quarter was $106.7 million, which represented a decrease of $27.1 million from the prior year quarter. This decrease was primarily driven by decreased general and administrative expenses due to a decrease in headcount as well as decreased stock-based and deferred compensation expenses. We also saw a decrease in commissions’ expense as a result of the decrease in home closings and a decrease in selling and marketing expenses due to the improved demand environment. While our SG&A expense as a percentage of home sale revenues increased slightly compared to the prior year quarter due to the decrease in home sale revenues, our cost savings initiatives implemented over the past year have allowed us to keep our SG&A rate below 10%.

We currently estimate that our general and administrative expenses for the third quarter of 2023 will be between $55 million and $60 million depending on the timing of equity awards during the quarter. The dollar value of our net orders increased 37% year-over-year to $1.21 billion driven by an increase in gross orders and cancellation activity that has returned to more normal levels. Gross orders for the second quarter of 2023 were 2717 which is a 21% increase from the second quarter of 2022. Approximately two-thirds of our gross orders during the current quarter were for spec homes. Our cancellation rate for the second quarter of 2023 was 20% of gross orders. This compares to more elevated levels in recent quarters as we work through our backlog of build-to-order homes.

The average sales price of gross orders decreased 10% year-over-year to $552,000 due to decreases in base pricing during the second half of 2022. On a sequential basis, the average sales price of gross orders increased 2% from the first quarter of this year, as a result of increases in base pricing and reduced incentives. Our Active subdivision count was at 232 to end the quarter up 12% from 207 a year ago. Looking at the graph on the right, the number of soon-to-be active communities continues to exceed the soon — number of soon-to-be inactive communities at June 30, 2023. This indicates that our active subdivision count is likely to continue increasing in the near term. During the second quarter we acquired 565 lots, resulting in total land acquisition spend of $77 million and incurred $80 million of land development costs.

As Larry mentioned, we have become more active in the land market in light of improving industry conditions. During the second quarter, we approved 1,314 lots for acquisition in 22 communities across each of our homebuilding segments. We ended the quarter with over 22,000 lots controlled and an additional 4,248 lots that are at various stages of due diligence. It should be noted that these lots still require approval by our asset management committee prior to being reflected within our controlled block count. We ended the quarter with over $1.8 billion of cash and short-term investments, total liquidity of over $2.9 billion and no senior note maturities until January 2030. Our debt-to-capital ratio at the end of the quarter was 31.7% and our cash and short-term investments continue to exceed our homebuilding debt as of quarter end.

We continue putting our capital to work during the second quarter, as we started 2,828 homes in an effort to increase our inventory of spec homes. As a result, we ended the quarter with 2,155 spec homes. However, our inventory of completed spec homes remains low with less than one completed spec per active community. Even with our investments into work in process inventory during the quarter, we continue to generate strong cash flow from operations with inflows of $226 million in the second quarter of 2023 compared with $53 million in the second quarter of 2022. In summary, we continue to successfully execute on our strategic decision to build more spec inventory. Our pivot to spec homes came at an ideal time as existing home inventory levels have decreased to record lows causing the demand for quick move-in homes to increase even further.

We ended the quarter with 9.3 spec homes per active community. And the majority of these homes have been curated by our professional design teams. In addition, we believe we have now seen the worst of our construction cycle times make their way through home closings. We’re now projecting a construction build-time of under-180 days on homes that we are starting today, which represents a significant improvement from where we have been in recent periods. These cycle time improvements coupled with our spec inventory strategy should provide us with sufficient inventory for 2023 full year deliveries of at least 8,000 homes. That concludes our prepared remarks. I will now turn the call back over to the operator to start our Q&A session.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Michael Rehaut of JPMorgan. Go ahead.

Michael Rehaut: Hi, everyone. Thank you for taking my questions. Congrats on the quarter. I just wanted to ask, if maybe you could expand on some of the puts and takes; on maybe the back half gross margins maybe if you’re expecting. I would presume maybe more of a sequential increase in 4Q than 3Q. Anything you can give us there?

Bob Martin: Sure. I’ll start with the guide 18% to 19% in the third quarter just to reiterate that. Then beyond that I do think we have the potential for upside in Q4. We haven’t quantified it. But based upon at least the activity pricing-wise incentive-wise that we saw in Q2 the potential for progress from that 18% to 19% in Q4.

Michael Rehaut: And what were the main buckets if you could quantify that drove the outperformance in gross margin this quarter?

Bob Martin: I think some upside on units that we’ve sold and closed during the quarter as we went through the quarter. I guess first of all towards the end of Q1 we did have some base price increases. That continued into Q2. And then in Q2 those that we sold and closed as the quarter progressed given great sales activity, we didn’t have to really give away quite as much as we expected.

Michael Rehaut: Got it. That’s all for me. I’ll pass it on. Thank you.

Bob Martin: Thank you.

Operator: Our next question comes from Paul Przybylski of Wolfe Research.

Paul Przybylski: I guess just to start off and following on the prior gross margin question. Bob what do you think is a normalized gross margin given your operating strategy shift to specs? What type of margin differential are you seeing right now between the spec and the build-to-order stuff?

Bob Martin: Yes. It’s kind of a multipronged question. I guess in the quarter we were probably more like 500 basis point differential dirt versus spec. But it’s important to recognize that that was influenced by specs that are not of the curated it. In other words, specs that came from cancellations versus the ones that we designed ourselves. We are actually seeing that those curated specs are doing a lot better than the ones that resulted from cancellation. In fact, they’re not too terribly far off from our dirt margins once we get our designers really involved in what’s going into the house. So it’s a great fact for us. I think that gives us some additional confidence in our continued progress for margins given that really curated specs not many of those have closed at this point since we just started that program this year.

So in underwriting we’re typically somewhere around 20% give or take gross profit margins. And that will continue to be a target for us with our business model.

Paul Przybylski: Okay. And I think you — in the past, you’ve alluded to a goal of three absorptions which you achieved this quarter. And then Dave mentioned a little bit of normal seasonality, I guess in July. As you look at the third quarter, are you happy with normal seasonality or would you maybe stop the price increases or take a pause on those to try and maintain that three absorption in the third and the fourth quarter?

Bob Martin: Yes, I think we’re happy with the normal seasonality in this market with low supply. I think there’s certainly a chance that we end up with a little bit better than normal seasonality. But you can only fight it so much the school schedules, the summer vacations all those things. So we try not to push it beyond its limits.

Paul Przybylski: Appreciate it. Thank you.

Operator: Our next question comes from Ken Zener of Seaport Research Partners. Go ahead.

Ken Zener: Hello everybody.

Bob Martin: Hey, Ken.

Ken Zener: Just to clarify, I think you talked $55 million $60 million on the fixed G&A expense in 3Q. Is that a fair run rate going forward, or should that be kind of tied to what your community count growth will be or whatever essentially the growth or the change?

Bob Martin: A couple of things. First of all it’s a bit influenced by expected timing of equity awards. So to the extent that we’re at the upper end of the range part of it is, because just of the timing of the equity awards, which haven’t necessarily been firmly determined at this point, so you kind of start from that $55 million base excluding the equity awards. And then from there, I think there’s some level of tie to the subdivision count growing from there. We really haven’t given a firm number on community count through the end of the year. But there would be a minor correlation in the increase in creating count versus the increase in the G&A number.

Ken Zener: Okay. But it’s certainly, structurally I should say, in that range kind of 50-plus times four, because it’s fixed as opposed to the roughly $290 million we were seeing run rate annual in 2022 correct?

Bob Martin: Correct.

Ken Zener: Okay. I appreciate that. Realizing, it’s been a volatile 12 months. And the variance the industry is seeing from a demand perspective you highlighted some of the macro concerns. Obviously, the level of starts that you’re doing in 2Q and I think you just said you can’t avoid seasonality. But is there something about that pace in starts that you’re seeing now that you are trying to hold kind of more from a level realizing 4Q will likely slowdown from 3Q, 1Q, probably won’t rise as much historically, because you didn’t decelerate as much. I’m just trying to get an understanding of how your decisions were affected by the last 12 months where you took down starts to low 600, now you’re at 2,800. And if there’s kind of a lesson that you might have — or challenges you experienced that’s going to guide your decisions here for production?

Bob Martin: Yes. I think clearly the 600 million was very defensive in a time of uncertainty. And I know you acknowledged that recognized that. The 300 more recently is reflective of the shift in our paradigm to be more focused on specs. Like we said, we’re not giving up on build to order. But we do think specs are going to be the more popular way to go for a period of time just given that supply is so low. So, when we’re thinking about specs here in the back half certainly we recognize that it may be a bit tougher to start houses in some of our winter markets. So, there’ll be some downward pressure there. We do want to keep up with those specs that we’re selling and replace those specs. And then I guess the final leg of the tool is making sure we’re ready for spring.

We have ample inventory ready for spring. Given that already we’re at about 70% of our orders coming from specs we kind of think of it that way. What do we need to associate that kind of level of demand for Q1 orders so all those things were taken into account we feel pretty good about the starts environment starting more houses? Given that supply is low and the economy seems to be holding up for the moment. So, that’s how we think about it.

Ken Zener: Good. And David we haven’t met. But I was reading an article from the — I think the 1970s, if not perhaps a little earlier when you built a house. I think in a day or two if you recall that. So I’m sure you guys can continue to improve on your cycle-time.

David Mandarich: Well, you have a good memory or you’re able to look into the archives. But in the 1970s, we’ve been through all these housing cycles. And it was a down housing cycle. And we did build a house in a day. I think we’re proud of the fact that we gave all the proceeds to Children’s Hospital in Colorado. And so I think it’s all been kind of our ability to move through different cycles.

Ken Zener: Okay. I was going to say that would improve your working capital needs dramatically. The last question I have that I’ve been asking more builders is realizing you do not have a lot of options land. Can you talk to your thinking or what you’ve been seeing out there in terms of what percent of your options are going to be contracted raw or finished? And then specifically as regards to the finished lots, have you guys explored that path to avoid capital exposure to land? Thank you very much.

Bob Martin: I think this latest quarter we were at about 17% of our total lot supply was options so a fairly small percentage. Just one thing to note is there is — or there was 4500 additional lots that we are actively doing due diligence on that sometimes is reflected in other builders’ numbers. We don’t reflect it in our option number until it’s actually approved by our asset management committee. But that is a pretty big number relative to what we have officially under option in our numbers so just one point there. And then as far as finished versus developed I think on a relatively small number of approvals we were 60-40. I believe finished versus developed in this most recent quarter. Typically what happens as the land market heats up it’s harder to get the finished lot contracts more of less become development project.

So, we’ll continue to look for the finished lots. But it wouldn’t surprise me if you see it flip to more lots that we have to develop versus lots that we buy finished. Naturally, there is a possibility something you know very well about land banking. That is a mechanism that’s been used to get to finished lots. But it’s not something that we’ve done before. And in this kind of interest rate environment I can only imagine that’s going to get even more expensive to get those types of transactions done. So, we’re focused on getting finished loss where we can. But I can’t tell you that it’s going to be the majority of what we do in the future.

Ken Zener: Thank you.

Bob Martin: Sure.

Operator: [Operator Instructions] Our next question comes from Jesse Lederman of Zelman & Associates. Please go ahead.

Jesse Lederman: Hi. Congrats on the strong quarter. And thanks for taking my question. Just hoping you can elaborate more on what’s embedded within your gross margin guidance for a sequential improvement here in the third quarter and then maybe a bit of improvement in the fourth quarter with regard to construction costs. Could you briefly talk about that? Are you expecting costs to improve as well alongside continued cycle time improvements, or are they holding flat, or what’s kind of embedded within your guidance?

Bob Martin: I think it’s more flat at this point. I think lumber costs are continuing to go down in our cost of sales and that will probably continue. Its offset to a large degree by a little bit of an increase in land costs coming through the P&L. So net-net it’s pretty neutral.

Jesse Lederman: Got it. And just a quick follow-up on that. You don’t expect any reacceleration in costs given you and your competitors’ kind of ramping starts to take advantage of the tight resale market you think maybe because of your size will be insulated from some reacceleration in costs. You expect those to hold relatively steady over the next couple of quarters?

Bob Martin: Right now I think it will be steady. No doubt higher demand higher use of subcontractors. There’s always that risk that costs could go up. But we don’t have the supply chain issues that we did 12 months ago 18 months ago. So I think it will be a bit more tame at this point even if we do continue to see great demand and great construction activity come through the system.

Jesse Lederman: That’s helpful. Thanks. My next question is just you talked about your ability to raise price in some of your communities where demand has been the strongest. You highlighted the West region was where you’ve seen some of the strongest demand. Are you able to quantify the percentage of communities in which you’re able to either pull back on incentives or even pushed price? And which markets out West have been the strongest and maybe across the other regions if there’s any in particular that have been troublesome for you to push price or maybe you’re still trying to find the market. If you can elaborate a little bit more on those as well.

Bob Martin: Yeah. So I guess thinking about the percentage that we’ve been able to do something in. From a price increase standpoint, we have a stat that we put out about 70% of our communities we increased pricing on average to 2%. On the incentive side we’re probably doing about 150 basis points better relative to what we were doing in Q1. So relative to sales price 150 basis points less. I have to imagine it’s the vast majority of the communities that have some level of improvement whether it’s price or incentive. So really a great environment for us to care back on the incentives and increased price in Q2. In terms of markets that stood out. We saw great activity. I think just about everywhere Phoenix we had a little bit more inventory. They really accelerated quite a bit from a sales standpoint. So that was a really good one for us in the West but we saw good activity in all of our markets. David, anything to add to that?

David Mandarich: No. I agree with Bob. I think that what we’re seeing is really kind of a broad range recovery. We’re also seeing that I think the consumers this year are more accustomed to what I call market rate mortgages. So I think and plus the undersupply of resale houses. So I think overall I think our markets are pretty good across the board.

Jesse Lederman: Thank you. I appreciate the inside.

Operator: Our next question comes from Stephen Kim of Evercore. Go ahead.

Stephen Kim: Great. Thanks, guys. I had a question about the overall level of specs that you had in the quarter. I think you ended at like a little over nine per community. It was like in the high 6s in 1Q and like three last year. I understand the strategy. But I guess I’m wondering where is this level of spec per community likely to go? Do you sort of feel like at nine you’re pretty much where you need to be, or is this number going to continue to rise?

Bob Martin: I think, we’re close, Steve. We talk a lot about 10 per community internally, but that’s just a general guideline. I think we’ve done a lot of good work. It was 2,000 specs. I think we started in Q2. So we’ve done a lot of work already. I imagine, it will probably flow just a little bit higher in the back half of the year in preparation for spring. And we want to make sure that not only do we have spec inventory available. But that a good part of that spec inventory is really in the latter stages of construction, so that it really can sell and close in Q1.

Stephen Kim: Right. And that kind of leads to my follow-up here. I’m wondering, if you felt like the level of specs in 2Q was optimized already. It sounds like it really — it wasn’t quite — if you think about like what happened over the course of the quarter. In other words, you probably could have taken more orders if you would have more specs entering the quarter than you did. And I’m thinking about what this — how this could inform our thinking for or orders for the next few quarters when — because it sounds like you’re pretty much getting to the point now where your spec situation will be optimized. So, is that a fair way of thinking about it that absorptions and orders in 2Q did not really yet reflect sort of an optimized spec assortment?

Bob Martin: I think there’s some truth to that. I think, it’s a limited data set. But we have seen a correlation between our ability to generate orders and the number of specs that we have beyond the brain stage. In fact, we allude to it somewhere, the June orders were better than May. And I think that was part of the story.

Stephen Kim: Yes. That’s great. And then you talked about the margins. I think a couple of quarters ago I think you had guesstimated maybe that margins on specs will like 100 basis points or something lower than BTO. Today, you’re talking about how the curated could be pretty similar to BTOs. I just want to make sure that I got that right. And then, with respect to these curated specs, I’m curious as to what would hold those from actually generating a higher margin than BTOs during this period, where resale inventory is so low and customers that would seem might be inclined to pay a premium for the convenience of being able to move in relatively quickly. Have you explored that? Is there a theoretical reason why a margin on a curated spec could not actually be a bit higher?

Bob Martin: I don’t know that there is a reason why it could not. As you described, if the supply/demand dynamics are there, it’s certainly a possibility in this market as we’ve just started the curated SPEC program. They’ve tended to get sold a little bit earlier in their life cycle. But as we get more that are advanced in their age meaning closer to the finish points, you might have something there Steve the ability to really to generate some great margins of those units.

Stephen Kim: Okay, all right. That’s great. I’ll follow up later on that. Lastly for me is the amount of owned lots. I think you talked a little bit about the options and the refunds with refundable deposits. But I’m curious about the actual level of owned lots. Where do you see — what is sort of the optimal level for you guys? Is it kind of like 2.5 years’ worth or something like that?

Bob Martin: Yes, I would say two to three. I would say, it tends to be closer to — I guess if you’re just talking about the owned piece, maybe it’s closer to the 2.5% mark.

Stephen Kim: Okay. Perfect. That’s great. Thanks very much guys.

Bob Martin: You bet.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin for any closing remarks.

Bob Martin: We appreciate everyone joining us for the call today. Look forward to speaking with you again following the release of our third quarter earnings.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.