Landsea Homes Corporation (LSEAW) on Q2 2024 Results - Earnings Call Transcript
Operator: Please standby. Your program is about to begin. [Operator Instructions] Good day everyone and welcome to today's Landsea Homes Corporation Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note that this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Drew Mackintosh, Investor Relations. Please go ahead.
Drew Mackintosh: Good morning and welcome to Landsea Homes' second quarter of 2024 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. Landsea Homes caution that forward-looking statements are subject to numerous assumptions, risks and uncertainties which change over time. These risks and uncertainties include but are not limited to, the risk factors described by Landsea Homes in its filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements. Additionally, reconciliation of non-GAAP financial measures discussed on this call to the most comparable GAAP measure can be accessed through Landsea Homes' website and in its SEC filings. Hosting the call today are John Ho, Landsea Homes' Chief Executive Officer; Mike Forsum, President and Chief Operating Officer; and Chris Porter, Chief Financial Officer. With that, I'd like to turn the call over to John.
John Ho: Thanks, Drew and good morning to everyone. Landsea Homes delivered strong top line growth in the second quarter of 2024, generating revenue of $431 million which represented an increase of 47% over the second quarter of 2023. New home deliveries totaled 760 units, well ahead of our stated guidance, as our teams did an excellent job of accelerating build schedules and closing homes in a timely manner. This allowed us to achieve a fully adjusted home closing gross margin of 21.1%, producing an adjusted net income of $13.3 million and adjusted earnings per share of $0.36. We continue to see solid demand trends during the quarter, driven by positive housing fundamentals in our markets. Though we did experience an increase in home inventory from record low levels in some markets, we do not feel these are a competitive threat at this stage. We generated 760 net new orders for the quarter, 35% more than the second quarter of 2023, on a sales pace of 3 homes per community per month. Financing incentives remain an important selling tool in our communities to help ease affordability concerns and drive monthly payments down. While these incentives spurred demand in the quarter, they continued to weigh on our home sales gross margin which came in a little below our expectations. The strong year-over-year growth we experienced in both sales and closings this quarter was a direct result of our strategic efforts to grow our company and achieve greater economies of scale. Average community count for the quarter was up 47% year-over-year, thanks to the investments we've made in our markets and the acquisitions we've done to grow our company. We are committed to growing the size and scale of our homebuilding platform, so that we realize better fixed cost leverage and receive better terms on the labor and materials that go into building our homes. Benefits of this strategy can be seen in our SG&A ratio in the second quarter which came down 220 basis points on a year-over-year basis to 13%. We are a much bigger and more diversified company than we were a year ago and we expect to reap the benefits of our larger homebuilding platform as our volume increases. While volume growth is an important part of our long-term strategy, we realized that doing so in a capital-efficient and risk-averse manner is equally important. That is why we have established relationships with land bankers and other capital partners to take some of the upfront cost and risk off our balance sheet. We want to continue to concentrate our efforts on the business of building and selling homes, not speculating on land. Sourcing lots from third parties on a just-in-time basis will allow us to do that, while also giving us some downside protection should the market conditions soften. Balancing out our growth objectives is our commitment to maintaining a strong financial position. We have made great progress over the last few quarters, improving our balance sheet by obtaining fixed-rate debt and strengthening our relationships with the lenders in our revolving credit facility. We are now on much more solid footing with respect to our access to capital and feel that we have entered a new phase in our company's evolution as a result of these actions. We ended the second quarter with a net debt-to-cap ratio of 45.4% which we expect to continue to go down as regions generate significant cash flow through the end of the year. As we look to the back half of 2024, I am pleased with how our company is positioned. Most of the heavy lifting associated with integration of our recent acquisitions has been completed and we look forward to realizing the benefits of those efforts. We have a solid backlog in place that will help us achieve our delivery goals for the year and bring our leverage ratio down from where it is today. We also have a product profile in our high-performance homes that continues to resonate with our buyers. As a result, I remain confident that Landsea is on track to achieve its long-term goals. Now, I'd like to turn the call over to Mike who will provide more color on our operational performance this quarter.
Mike Forsum: Thanks John and good morning to everyone. Landsea posted year-over-year delivery growth of 41% in the second quarter, as we benefited from faster cycle times and a higher community count relative to last year's second quarter. In terms of regional contributions, Florida led the way, followed by Arizona and California. Build conditions have improved significantly since the beginning of the year and we're seeing much better labor and trade availability to keep our operations running smoothly. This dynamic has also resulted in lower stick and brick cost inflation and in some instances, a decline in cost, as is the case with lumber. We believe lower lumber costs will be a margin tailwind for our company in the coming quarters; so much of it may be offset by higher land costs. Order activity was solid during the quarter, with weekly traffic fluctuations being dictated by movements in mortgage rates. We made the strategic decision to stay competitive in the marketplace and maintain sales momentum in an effort to stay on track to achieve our delivery goals and cash generation targets for the year. We are committed to delevering the company's balance sheet from current levels, as we will be in a position to redeploy capital into higher return projects by year-end. Our operations in California, Colorado, Arizona and Florida all achieved sales paces in excess of 3.0 homes per community per month for the quarter, while our operations in Texas achieved 1.5 per month. We see the pace in Texas improving in the third and fourth quarters, as we have the normal ramping up activities with transitioning an acquisition to our platform behind us. As has been widely reported, we have seen an increase in home inventory in Texas and Florida and this has marginally impacted demand in these markets. We believe this is a natural occurrence following several quarters of scarce inventory and home price appreciation and does not change the long-term outlook for these markets which should continue to benefit from outsized job growth and in migration. Additionally, most of these homes are significantly older and we would not consider them competition for our homes. Most buyers are looking for new, modern and up-to-date homes and our high-performance homes continue to stand out as a superior value in our markets. Additionally, new homebuyers can take advantage of our mortgage incentives that existing home sellers cannot offer. It is also important to note that while home inventory levels have trended higher recently, they still remain well below historical norms. Overall, I feel good about the current state of our industry and Landsea's positioning. The lock-in effect of lower mortgage rates for existing homeowners remains in place, while the need for affordable new housing persists, creating an ideal opportunity for new homebuilders to take the market share. Our access to capital as a public company gives us distinct competitive advantages over many of our smaller private builders in our markets, while our quality design and unique product offerings allow us to differentiate ourselves from many of the larger competitors. In short, I believe the homebuilding industry and Landsea Homes continue to have a bright future ahead. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results this quarter and give an update on our forward-looking guidance.
Chris Porter: Thank you, Mike. Landsea Homes reported net income of $2.9 million or $0.08 per share for the second quarter compared to $4.9 million or $0.12 per share in the second quarter of 2023. We reported a 9% increase in fully adjusted net income of $13.3 million or $0.36 per share compared to $13 million or $0.33 per share in the same period last year. Additionally, during the quarter, we had several transactions that created one-time items that impacted our net income and will not recur, including $2.6 million in transaction costs associated with our Antares acquisition, $5.2 million in deferred financing cost write-offs associated with the recast of our revolving credit facility with stronger credit banks and $1.4 million in restructuring costs associated with our reduction in force initiatives. We also booked $8.6 million in purchase price accounting in the quarter. As Mike mentioned, we had 760 deliveries which was 41% higher than second quarter of 2023 and our $550,000 average selling price was 2% over last year, both exceeding the high end of our guidance and produced a 43% increase in home sales revenue to $418.2 million. Total revenue increased 47% over 2023 to $431.1 million. Our gross margin of 14.9% came in just below the low end of our guidance, as our purchase price accounting was larger than expected at $8.6 million or an impact of 2.1% to our gross margin. We booked $52.2 million in total step-up on the Antares acquisition, reflecting the fair value of the balance sheet assets we acquired. We expect roughly $4 million of the Antares purchase price accounting to burn off in third quarter and fourth quarter each and approximately $12.5 million in 2025 and the remainder through 2026 and 2027. We also have $21 million in purchase price accounting remaining on our Florida acquisition and expect roughly $7 million to burn off for the balance of 2024. Our purchase price accounting estimates are highly dependent on the specific homes we are able to close during those periods. Incentives and discounts for the quarter continued to be elevated and were roughly 6% of revenue, reflecting the volatility of interest rates in the quarter. We did begin to see an improvement in this cost starting in July, as the 10-year treasury dropped below 4.5%. We ended the quarter with 84 average-selling communities, up 47% from the second quarter of last year. During the quarter, we opened 7 communities, closed 6 communities and added 20 from our Antares acquisition, for a total ending community count of 85. Backlog ended the quarter with 694 homes for a total value of $391.1 million or an average selling price of $564,000. Our SG&A expense was 13% of home sales revenue this quarter, including our $2.6 million in acquisition-related costs. This is a 220 basis point improvement from the second quarter of 2023. During the quarter, we took efforts to gain efficiencies in the operations through both head count reduction as well as streamlining our reporting structure. We eliminated 30 positions for an annual run rate savings of approximately $5 million. We believe we are in a path to be more aligned with our peers and operate in the range of 11% to 12% next year. Our tax rate in the quarter was 29.8% but we do expect a full-year tax rate between 22% and 24%. Turning to our balance sheet; we ended the quarter with $330 million in liquidity, $106 million in cash and cash equivalents and $224 million in availability under our revolving credit facility. During the quarter, we completed the recast of our revolver led by Bank of America, U.S. Bank and Truist, that broadened and strengthened our bank group and extended the term into 2027. Our capacity is $455 million, with an accordion feature to increase up to $850 million should we need the capacity. Additionally, we updated our pricing to a grid pricing; we now have no debt maturities until 2027. Our leverage ratio has increased as expected with the acquisition of Antares, ending the quarter at 52.8% debt to total capital and 45.4% net debt to total capital. Our focus remains on generating cash flow from the acquisition and reducing leverage back to within our stated policies of 45% total debt to capital. Now looking forward to the back half of the year, we anticipate our new home deliveries to be between 625 and 700 in the third quarter and between 1,000 and 1,100 in the fourth quarter. Average selling prices should be between $495,000 and $510,000 for both quarters, with a relatively consistent mix of our division's performance. Adjusted gross margins should be in the range of 20% to 21% in the third quarter and in the fourth quarter between 23% and 24%. Our GAAP gross margins are expected to remain relatively consistent in the third quarter and improved to between 18% and 19% in the fourth quarter. These sales and gross margins reflect our best estimate as of today with the current market conditions as inflation, incentives and interest rates continue to change, overall results could change accordingly. With that, that concludes our prepared remarks and now we'd like to open up the call for questions.
Operator: [Operator Instructions] We will take our first question from Matthew Bouley with Barclays.
Matthew Bouley: Just kind of looking at the pieces of the guidance over the next couple of quarters. It looks like you're guiding to something like 1,700 plus closings over the next 2 quarters. I think there's around 700 homes in backlog. So I guess, presumably looking to build and sell a fair bit of spec homes over the next couple of quarters? And sounded like you're expecting Texas to pick up. So just kind of curious how you're thinking about starts and spec production, given a pretty dynamic market here and sort of how you build to that delivery guide?
John Ho: Matt, this is John Ho. I'll start it off and then I'll hand it over to Mike to talk about some of the specifics around the build in sales. For us, as we've said, we've invested in these markets that we think have long term, really strong prospects. I think in the second quarter really demonstrated that, with both Florida and Texas coming online and the number of new communities that we have opened now. That's really driving significant orders for us with actively selling communities that we have now. And then, being able to deliver that in the second half of the year. So we feel pretty confident that there is really strong demand out there. The use of incentives have been very effective, as you can tell. We will continue to see that, I think, in the second half of the year. Mike?
Mike Forsum: Yes. Sure. Matt, great question. Something we're thinking about a lot here but we have prepared ourselves operationally by the fact that we do have a very strong group of individuals running our teams out there, with their goals and objectives around achieving this number that we set forth here in this guidance. That being said, we're a little bit into the third quarter already and we're really happy with the performance around our sales rate. Our backlog is actually larger than what you were hearing right now because that's the second quarter-ending backlog. So currently, as of right now, we're over 75% of the way in terms of closings we have against the backlog that we have currently against the plan that we're trying to achieve. So to be in July and be roughly 75%, 80% of the way there, going into what we call sort of the fall bump that we normally get, we're excited. And we're particularly excited because we really haven't had the contribution out of our DFW team through the Antares acquisition that closed a little bit later than we had anticipated. It was in April. We were pretty well through the spring selling season at that point. So we missed some of that opportunity. But now being fully online, pretty much 100% integrated, having all those communities available to us and what we've been seeing out of Dallas in the last couple of weeks, we're feeling really good about our prospects of meeting our -- meeting or beating our goals here for the end of the year.
Matthew Bouley: Perfect, super helpful there. Secondly, maybe sticking with the guide, just kind of noticeable to look at the adjusted gross margin guide. I think the Q3 to Q4 jump of about 300 basis points. So I'm thinking ex-purchase accounting, the adjusted gross margin. What are the pieces to that bridge? I mean, it sounded like maybe incentives have been ticking lower here into Q3. But between incentives, lower lumber costs, kind of what gets a lot better in the margin in the fourth quarter relative to the third quarter?
John Ho: Matt, this is John. I'll take a stab at that and then other members of my team can add on. It's a combination of incentives but really the contribution from different parts of our business. We're seeing some of the communities that have been hit with some higher costs. We're really pushing that through the business. So you can see that's why we really deliver on the high end or exceeded our deliveries in the second quarter. We're going to have new communities opening up. Some of those communities do have some lower expenses, costs associated with them and they'll be coming through the second half of this year. We'll also see some significant contributions from the opening average-selling communities in Texas as well. So it's really a combination of the geographic mix that's coming through our business as well as some of those lower costs.
Mike Forsum: Sure. Matt, it's Mike again. I might add also that as we pivot out of over Northern California business and increase our areas of contribution throughout the country, the distortion that comes from the BMR, below market rate units that we're pushing through in the first half of the year against the average sales price that these BMR units are a part of, that's going to be going away. So I think we'll also see just sort of organically that getting better as we go through it. We also are very excited about some of the new open communities that we have now. They are performing very well, taking less incentives, rates are going down. We're actually still raising prices in some of our locations, particularly in Northern Orlando and in some cases, even in Arizona and places where we can continue to thoughtfully and precisely raise prices to offset or even better beat some of the incentives that we have embedded into the numbers we're seeing right now. So we're feeling pretty good again that we're going to see that come through and team is working really hard to make that happen.
Operator: We'll take our next question from Carl Reichardt with BTIG.
Carl Reichardt: Just on this particular quarter, I think you beat your delivery guide on a unit basis, was it 22% at the midpoint? That's a ton. What were the drivers of that outperformance? I'm going to guess that you weren't really sure on Antares and what you'd get out of it and you got a lot more out of it than you thought. But can you sort of fill me in on why the beat was so significant?
Mike Forsum: Well, it's Mike. I got the finger point landed on me, Carl. So we have really, really been working hard with our sales proposition out in our local markets against the inventory that we have and really working with our mortgage affiliate and targeting the houses that needed to get moved. We are strong believers that this is a business of momentum. We really wanted to push as much inventory that we had available to us to close within the quarter because we wanted to get also in front of what we can see possibly coming down the pipe as our competitors, larger competitors also have some inventory that they're going to be pushing here in the next couple of months. And so it was really a targeted effort by the team over the last 3 or 4 months, essentially and with some increased contributions that we got from Texas. But really, Arizona has stepped up incredibly. Jeff and his team in Florida are really doing great. Megan, our sales leader there, is tremendous. They've really have identified the sweet spot of where we need to be, pricing incentives and we have houses we can deliver. And so that's really what came through.
Carl Reichardt: Okay. And then to talk a little bit about -- well, I guess, really two things. One, if you could help a little bit with the store count over the course of the rest of the year and maybe into '25 in terms of net new openings, that would be helpful. And then just as a side note, you talked a little bit about July, I am curious, it sounds like the elasticity to changes in rates is still really impacting traffic and turnover. I'm curious how July has been in that regard and whether or not the objections you hear from consumers are still really mathematical, meaning I can't afford it or I don't want to pay this price or whatever versus being psychological. I'm afraid to buy, I'm worried about my job, the election, whatever. So two very different questions but if you guys could address those.
Chris Porter: Yes, Carl, let me start with the community count. I think you saw the impact from the DFW area this quarter. And if you look at -- versus year-end, we were at 7.7% organic growth and then added on the Orlando -- or sorry, the DFW segment as well. We had said that we would be in that 10% to 15% organic growth and then add on DFW. I think we'll still be in that range which would put us in that kind of fourth quarter average right around the 90-ish communities. And then although we're not giving guidance at this stage of the game on 2025, I would definitely see our historical pattern continuing. So in that low double digits, high single-digit organic growth throughout '24 as an average.
Mike Forsum: So to follow up on that, Carl, the other part of your question was, I think, the psychology, the vibe that's out there and the narrative that's coming off of our sales floors as it relates to rates and where rates are today. I believe and what we're seeing is that essentially, that -- the market in which we're -- markets in which we're competing against and the competitors that are there that we're competing against. For the most part, everybody has some buydown program to the point that it's now become ubiquitous and it's just the same. And what we're really appreciating through that is that we can really now go back to differentiating ourselves by way of the products that we're building, our value proposition through our [indiscernible] strategy and just being a separator again where they can see the overall value proposition beyond the rates because for the most part, everybody is down in that kind of teaser rate in that 4.99 [ph] then it kind of comes up and everybody seems to be in that sweet spot of about 5, 5.5, 30-year fix [ph]. This is big generalization but that kind of gets you to where you need to get to. And that's moving homes; the homes that are moving, again, are the ones that people can clearly see that there's a superior value to them against whoever else were being judged by. So we like that because we're really proud of what we're building, how we're building them and the value that we're creating. So that seems to be working. There seems to be a bit of a capitulation in terms of just -- we're waiting things out. We're nervous. I think we've gotten along now. There's enough life change into the demand profile that we have out there that people do need to move, their houses are getting bigger, they're maybe shrinking. Whatever it is, that is coming back into the purpose of which they're coming to look at homes. And so it does kind of go up and down a little bit but it seems like we can modulate that with our buy downs as we're going through as long as we're kind of hitting that number. It still is about a monthly payment. And I just don't see like a lot of real concern or fear or we're going to -- we're going to wait for it to go lower. We're going to wait and see what happens to the election. We're going to be -- it's just do you have a house that is a house that can be delivered in the next 60 days that you're providing me with a long-term fixed mortgage rate that's going to make me hit a payment and is that house superior to the other houses that I'm looking at. And if you can win that proposition, you're going to move houses and we're doing that.
Operator: We'll take our next question from Alex Rygiel with B. Riley.
Alex Rygiel: One of your business priorities is to drive higher returns with improvements in cycle time and a focus on additional cost reductions. Where does your cycle time stand today? And where might it go? And on the cost reduction side, can you provide us with a few of the larger opportunities that you see developing over the next 6 months?
Mike Forsum: Alex, it's Mike. Thanks for the question. We're really proud of what we've been able to accomplish year-over-year in terms of reductions of our cycle time. A year ago, we were roughly around 9 months on average. And keep in mind that we build a variety of homes, attach and detach. So it's a pretty big spectrum. But today, currently, we're averaging around 135 days or 7 months. And in some cases, in Arizona and Florida, we're going from a start of foundation to final inspection in 4.5 months. So it's almost a 50%, well, close to it, increase in cycle times which is allowing us to do almost 2 inventory turns per year per house. So for us, that is a really exciting thing for us in terms of where we want to go in terms of execution and production capacity. Obviously, that draws down on the interest from holding those lots and keeping that with because we're going quicker. It's also allowing us to have more velocity, more volume in the communities and get our starts going which then allows us to get better pricing because we're going to the trades and we're able to commit a certain amount of starts per month, per week actually and getting, again, better pricing, better performance, better activity in our communities. So from that standpoint, I think it's all organic and interconnected. Again, as I said earlier, we really believe this is a business that demands velocity and also scale is super important. And so we're also driving collectively now as we've gotten bigger and bringing Antares online and the size of our business and the growth of our business, we're able to international purchasing exact more concessions and rebates that are becoming very, very helpful. In fact, we are right now around $2,500 a home in terms of rebates that are coming through. That goes right to the bottom line and we're very excited about that as well. So there's a lot of things that are in motion here for us. And again, as we've always said, we are on this journey of growth and scale and that all those attributes that come with it and the benefits come with it, we're starting to kind of see be coming into our business as we go forward.
John Ho: Then, Alex, this is John. The one item I would add to what Mike said is, with that scale, we're also always looking to improve our efficiency over our fixed costs and our SG&A. Chris talked about this in his prepared remarks. And we consolidated our operations in California. With the relocation of our headquarters to Dallas, consolidating a lot of our corporate operations here as well. We did a reduction in force that will result in about $5 million in annual savings as well to the company. So all those things are going to help us to drive higher returns as we continue to grow and scale and maturity as a business.
Alex Rygiel: Very helpful. And then can you talk a little bit more about the increase in inventory in certain communities, particularly in Texas? And part of me wants to think that, that actually might be a positive, given that you could have inventory available as we go into a more improved rate cycle later in the year with the expectation that that's catalyst to demand. But maybe you can comment on sort of that inventory position?
Mike Forsum: Sure. This is Mike again. I'll take a stab at this first and anybody can follow up if they want to. But Alex, what story goes on as much as we are driving towards even flow production, there are certain ways that go through the business in terms of when you start to sell and then bringing communities online and where they are in terms of the yearly cycle. So what we are seeing right now is a bit of a bold of some WIP coming through on starts that we started in the first and second quarter, getting ready for the third quarter, getting definitely ready for the fourth quarter. And with that, what is happening is -- in the market today is that a good portion, if not, 70% roughly of our closings or closings of which the sales took place about 45 to 60 days prior. That is generally the dynamic of the business today which is kind of the opposite of what it was years ago, decades ago, where you basically started a house that you sold and sort of built into that order. Effectively, what is happening today is that the new home build industry is really replacing the resell inventory that's out there. And that buyer is a buyer that needs to move into a house between 60 days, 45 days. So you have to have that kind of build-up of inventory to have it ready to be in a position to be able to transact and close in that period of time. So, that's -- you're just kind of seeing that little bolts coming through.
Alex Rygiel: Very helpful. And then lastly, as it relates to sort of your M&A strategy at least in the near term, understanding Antares' big acquisition, is it safe to assume that sort of M&A and kind of between now and year-end is probably off the table as you integrate? But next year is sort of a new year with a white slate of M&A opportunities.
John Ho: Alex, this is John. We are a company that is growth-oriented. So we are opportunistic but we're also very disciplined about it as we've proven in the past 5, 6 years. Pick out these opportunities that we think are good opportunities for us to be in. Dallas is somewhere we wanted to be in and that's why Antares was so instrumental in establishing this position for us. We are very focused, as we said, on generating cash flow, reducing our debt. At the same time, if our stock continues to remain below book value, while capital towards shared distribution -- shareholder distributions as well. We've also demonstrated that we can really grow the company, 45% growth year-over-year in terms of our deliveries, I think, is a demonstration of that. We're happy with -- in all the markets that we're in. But there are certainly other areas in Texas that we like to expand to as well as Florida. So, we'll be quite opportunistic in that nature and very selective.
Operator: We'll take our next question from Jay McCanless with Wedbush.
Jay McCanless: So with all the acquisitions this year, maybe could you level set us on what you think your product mix looks like right now between first time and move up?
Mike Forsum: Sure, Jay, it's Mike. Currently, we're roughly around 45% to 47% first-time homebuyers. We want to move that up into the 60s, high 60s. And then the tailing 30% would be half-half between first-time move up and then we'd like to have usually in any of our markets, a more of a luxury position. We think it's really good for brand building. It helps us to be subtle and future thinking around new products that are coming through and that can permeate back into our businesses in our containable pricing product. So we are moving in that direction, particularly with Dallas coming online, increasing our activities in Arizona and in the Orlando market, Orlando team. So you're going to start to see that percentage increasing over time. Organically, it's not going to really take an acquisition to do it. So that's the movement. So roughly, right now, I would say, I think I'm just looking at right here is about 47.3% of our current buyers are first-time home buyers and then the rest is kind of mixed through.
Jay McCanless: Right. That's great, Mike. And then following up on that, I guess, you talked about land costs potentially coming up and offsetting the savings on lumber. I guess, what are you seeing from land cost inflation right now? And then also, what can you buy from a lot perspective or move-up in luxury lots more available? Or what are you seeing in the land market at this point?
Mike Forsum: Yes. So unfortunately, with our ability and I guess our industry's ability to continue to drive volume through incentives and mortgage buydowns, everybody is keeping a pretty healthy pace in the communities of which they're building in. Land sellers see that. They don't think there's a problem. They don't really see or understand what it's taking, I think, from us and our competitors to continue to sell homes and get them done. So there's been a stickiness to being able to recalibrate land pricing against the backdrop of higher costs that were associated with some sticks and bricks but mostly around incentives and buy-downs. So what that is forcing a lot of us to do is to go further into the development profile, in other words, where you're finding better value as land that is entitled that may be partially developed or you're going to be doing your own development. And so that's where you're trying to kind of make those offsets. That, though, is a longer timeline and you have to be thoughtful and you've got to be able to work those in a timely way. So they synchronize in a way in which that it is consistent with what we want to do with our deliveries. If you are late in getting a community open because you didn't develop it in a timely way, you may find yourself gapping and that then forces you to go into the retail spot market for finished lots and master plan communities. And that's really expensive. There's a big delta between a finished lot out there today and then an entitled but raw piece of land. And so you're trying to do the best that you possibly can to be in a position whereby you cannot find yourself in a hole and you have to be forced to go out there and fill it with finished lots.
Jay McCanless: Got it. And then, John, I think you talked in the prepared comments about wanting to be more landlight. It looks like option lots for 57% of the total this quarter which was up, if I'm reading the numbers right, a little bit over last year. I guess, where do you want to go with this longer term? And how does that play into getting your leverage down?
John Ho: Yes. I think it's a combination of -- we've been growing pretty rapidly and we've always stated that really need land -- owned land and have it -- willing to have it on the balance sheet if we can get on it and build a house and deliver it into the next 12 and 18 months. Beyond that, we really want to control land. And as we continue to grow, particularly in the geographies like Texas and Florida and also in California as well, too, we're going to want to use land bankers. We're going to want to structure them as options because that allows us to be more asset-light, allows us to drive higher returns which we know continue -- will drive share price as well, too. So they're connected and it is a strategy that we think, particularly in the markets that we're in will be highly successful for us.
Jay McCanless: Okay, great. And then the last one I had, on the last call, you guys talked about being able to raise prices in the majority of your communities. Could you talk about how that trended in the second quarter? And then also what type of price increases have you been able to implement in July?
Mike Forsum: Yes. So we continue to be anywhere between 3% to 7% Jay, depending upon the releases that are going out. We're not getting sort of this exponential jump in pricing that we've seen before coming out of the pandemic. So it's a steady price increase around specific homes that we're trying to drive. We're also using price increases in ways in which we're getting better pricing or we were able to get price increases around dirt starts versus inventory that's out there. So we're kind of using that to move people more towards the inventory. If they want to do a dirt start, if they want to have the home more built towards their customization, we're able to get in the higher pricing range around 7% to 10% in that regard. So it's, again, targeted. It's dynamic. It's very focused. We're also doing price increases around lot premiums, view premiums, other ways of gathering overall price increases, not just at the absolute pricing that we're marketing it.
Operator: We'll take our next question from Alex Barrón with Housing Research Center.
Alex Barrón: I joined a little bit late, so I apologize if maybe you already answered this. But can you provide updated thoughts on share buybacks, given the price of the stock versus the book value? That's my first question.
John Ho: Yes. This is John Ho. As I mentioned, we're -- we've been growing the company and we've been very successful in doing that. Our leverage is a little bit higher than our say policies. And usually, when we make an acquisition like this within 12 months, we're looking to reduce debt. At the same time, in the second half of the year, our guidance at this point to significant cash flow generation. The stock is below the book value which it is. We'll look for opportunities to use our share buyback program to buy back stock. And then lastly, we'll continue to focus on opening new communities in the markets that we're in as well. So we can continue to grow our economies of scale in our homebuilding platform.
Alex Barrón: Okay. And the other question was -- I'm trying to, I guess, understand the sequence you guys are expecting between third and fourth quarter for deliveries and the fourth quarter number seems a bit high compared to previous history. Are you expecting to get a ton of orders that can close quickly in the next few months? Or what would drive that sequential jump in the fourth quarter to that extent?
John Ho: Yes. It's really how our business is growing. I think Mike mentioned this earlier, is that -- so we closed on Antares acquisition, April 1. We've got our first quarter being in this market. We see a lot more contribution from that business as well as -- Florida as well, too, coming into the second half of this year. So it's really about our business and the organic growth that we experienced but also all these new communities that we've opened. Our average selling communities increased over 40% year-over-year. So we have a lot more storefronts now. And with that, in the momentum that we're driving through the business in terms of increased orders, the use of incentives, we do see strong order growth absorption in the second half of the year that's going to allow us to deliver on those deliveries.
Operator: There are no further questions at this time. I'll turn the call back over to management for closing remarks.
John Ho: Thank you all for joining us on our second quarter earnings call. We look forward to speaking with you all next quarter.
Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
