Green Brick Partners Inc (GRBK) 2019 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Green Brick Partners Earnings Call for the First Quarter ended March 31, 2019. (Operator Instructions) As a reminder, this call is being recorded and will be available for playback. A slideshow supporting today's presentation is available on Green Brick Partners' website, www.greenbrickpartners.com. Go to Investors & Governance, then click on the option that says Reporting, and then scroll down the page until you see the First Quarter Investor Call Presentation.

The company reminds you that, during this conference call, it will make various forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of Green Brick Partners are based on current expectations and are subject to risks and uncertainties.

A few factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the cautionary statement regarding forward-looking statements contained in the company's press release, which was released on Thursday, May 2, and the risk factors described in the company's most recent annual and quarterly filings with the Securities and Exchange Commission. Green Brick Partners undertakes no duty to update any forward-looking statements that are made during this call.

Today, the company will be referring to pretax income attributable to Green Brick as a percentage of homebuilding revenues; pretax income as a percentage of average invested capital, EBITDA, net income return on equity and adjusted homebuilding gross margin, which are non-GAAP financial measures. The reconciliation of adjusted homebuilding gross margin to homebuilding gross margin are contained in the earnings release that Green Brick issued yesterday.

I would now like to turn the conference call over to Green Brick's CEO, Jim Brickman. Please go ahead, sir.

Hi, everybody. With me is Rick Costello, our CFO; Jed Dolson, the President of our Texas region; and Summer Loveland, our CAO. I want to thank everybody for joining the call today.

As the operator mentioned, the presentation that accompanies this earnings call can be found on our web page at greenbrickpartners.com. At the top of the web page, please click on Investors & Governance, then click on the option that says Reporting, and then scroll down the page until you see the First Quarter Investor Call Presentation. I'll give everybody a second to open the presentation.

I'm pleased that we had the best first quarter in our company's history with a 33.3% increase in homebuilding revenues, record first quarter home closings and a record $12.6 million net income attributable to Green Brick, which was up 12.5% year-over-year.

Though the competitive market pressures remain, our business model demonstrated its strength, and we are growing through a tougher market. Best of all, we are on track to achieve moderate pretax income growth in 2019 while maintaining one of the most solid balance sheets in the industry. Finally, our newest homebuilder brand, Trophy Signature Homes, is off to a great start, and we expect continued momentum into the second half of 2019.

Please flip to Slide 5. Two of the best markets in the country are our core markets of Dallas and Atlanta. During the last 12 months, Dallas and Atlanta continued to be 2 of the largest markets in terms of generating job growth. On Slide 6, you can see that Dallas continues to be the #1 new-housing market in the nation, adding about 34,500 starts. Atlanta is the 4th-largest market, and our Challenger Homes affiliate operates in Colorado Springs, part of the 6th-largest market.

Slide 7 demonstrates what we mean by A-rated submarkets. John Burns Real Estate Consulting has published maps of our Dallas and Atlanta metropolitan areas, where they have designated grades on submarkets of most desirable A markets through most affordable F markets based on the variety of subjective factors such as quality of schools, proximity of jobs, the existence of infrastructure for quality of life. We have taken those maps and overlaid the locations of our Green Brick communities with green dots.

As you can see, the preponderance of our communities are in the very best A lots or most desirable submarkets. What the prior graphs do not tell you is how supply-constrained most primary locations still are. Green Brick owns or controls over 5,800 lots in the Dallas Metroplex and almost 1,000 lots in Atlanta primarily in A locations. Some markets have under a 2-year supply of lots, meaning these lots are currently under supplied. We think that bodes well for the future.

Slide 8 takes a closer look at our company growth story and the annual revenue and the related investment in land and land development. And look at the chart and you can see the direct correlation between our growth in total lots owned and controlled with resulting growth in our annual revenues. Over the last 12 months, we've grown our total revenues by 31% and our total lots owned and controlled by 34%.

Slide 11 further highlights our significant diversification efforts. Sorry, Jed. I want to thank the entire Green Brick team for their hard work and great results.

Next, Jed Dolson, President of the Texas region, will discuss growth drivers and diversification efforts. Sorry, Jed, for interrupting your day in the sun here. Go ahead, Jed?

Thanks, Jim. Green Brick is truly one of the best growth stories in the public homebuilder space. Take a look at Slide 9, titled Growth Drivers. The chart shows the growth in the last 12-month home closing revenues from Q1 2017 to Q1 2019 is 56% over that 2-year period. Even more impressive is our setup for the future.

On a year-over-year basis, our backlog grew 36% to $308 million as of March 31, 2019. During the last 12 months, we also increased our lots owned and controlled by 34% and grew the average number of selling communities by 42%. During the 12 months ended March 31, 2019, we increased our number of units started by 41% versus the 12 months ended March 31, 2018, with an increase to 1,644 units started. In fact, we have already -- we have averaged starting over 410 units per quarter from Q2 2018 through Q1 2019.

As of March 31, 2019, we had 1,170 units under construction, an increase of 54% year-over-year from the end of 2018. So Green Brick has the backlog, the construction starts, the level of units under construction and the lot inventory to sustain further dynamic growth.

On Slide 10, we highlight the diversification of our product offerings. In 2018, we significantly increased our focus on townhome communities thanks to years of planning, land acquisition and development. In fact, we've grown our townhome revenues 69% over the last 24 months, which is even higher than our robust single-family growth rate of 47% in the last 24 months.

Over this period, this has helped us to maintain affordability while offering a high-quality product. Over the last 2 years, our average sales price has risen by only 1.8% in total.

Slide 11 further highlights our significant diversification efforts. With our purchase of GHO Homes in 2018, we have entered Florida and specifically the H targeted segment. After 11 months, GHO has already -- is already 13% of consolidated homebuilding revenues over the last 4 quarters.

During the second half of 2019, we will see our first closings from Trophy Signature Homes, offering entry-level price points and affordable first-time move-up price points. Over the last 4 quarters, we grew in 3 states with 19% growth in Texas, 10% growth in Georgia and 13% of new revenues from our acquisition of GHO Homes in Florida.

Slide 12 demonstrates that our range of homes and diversified buyer banks have grown our revenues and provided stable earnings by not concentrating on any one homebuyer segment. We now address 5 distinct customer segments, which all experienced strong revenue growth into Q1 2019.

Our top-3 customer segments saw growth over the last 12 months ranging from 11% to 56%. But please remember what you saw back on Slide 8. Most of our communities are located in desirable A submarket locations. The additional move to include different consumer segments and product types are part of Green Brick's long-term strategy to diversify our offerings and limit risk without reliance on consistently growing sales, prices or a single group of homebuyers.

Next, Rick Costello, our CFO, will discuss our first quarter results in more detail.

Thanks, Jed, and thank you all for joining us today to review our 2019 first quarter financial results. First, let's review Slide 13, where I'm going to start with the highlights and then move into the details.

For Q1 '19 versus Q1 of '18 and those year-over-year comparisons, here are some key operational metrics. Net new orders increased by 2.3% for the quarter. Home deliveries increased by 38% with home sales revenues up by 33% for the quarter. Year-over-year, as Jed indicated, homes under construction are up 54% with homes started up 41%.

The dollar value of units in backlog increased by 36% year-over-year. Our portion of pretax income was up 12.7% for the quarter. And our net income was up 12.5% for the quarter over the same quarter of 2018.

Now for some more details. For the first quarter, the number of net new-home orders was 444 homes, an increase of 2.3% compared to the first quarter of 2018. Green Brick closed 368 homes for the quarter, 38% more than the first quarter 2018.

Homebuilding revenues were $161.6 million for the quarter, an increase of 33% over the first quarter of 2018. By the way, it was only surpassed by Q4 of last year. Similarly, total revenues grew 31% over Q1 of '18 to $168.6 million in Q1 of '19.

The average sales price or ASP of homes delivered was about $432,700 for the quarter, down 4% from Q1 of 2018. Now most of this decline in ASP of closed units for the Q is because of product mix and the addition of GHO Homes, whose homes are at lower price points than our other builders.

At March 31, 2019, our Builder Operations segment had a backlog of 658 sold but unclosed homes with a total value of approximately $307.5 million, an increase of 36% from March 31, 2018. At March 31, the average sales price of those homes in backlog was approximately $467,000, an increase of 1.6% compared to the prior year.

Let's introduce and review some of our key growth metrics on a last 12 months basis. Regarding sales, net new orders for the last 12 months stand at 1,407 homes, up 16% from 1,210 homes at the end of Q1 of '18.

Again, our backlog is up 36% year-over-year. For Q1 of 2019, Green Brick had an average of 78 selling communities, a year-over-year increase of 42%. Regarding lots inventory, the number of lots owned and controlled has grown to just under 8,500 lots, up from about 6,300 lots from the year ago period for an increase of 34% as of March 31, 2019. And this was accomplished despite starting almost 1,650 homes in the last 12 months.

Homes under construction increased 54% to 1,170 units as of March 31 compared to 760 units as of March 31, 2018. And in the last 12 months, as referred to, we started 1,644 homes versus 1,166 homes as of March 31, 2018, an increase of 41%.

During Q1, our homebuilding gross margin declined to 20.8% for the first quarter of 2019 from 25.9% for Q1 of 2018. First, please note that we have reclassified our sales commission expenses from cost of residential units to SG&A expense to be more readily comparable with the majority of our peers. Prior year amounts were also restated, but this does not affect net income in any period. Sales commission expense was 4.0% of revenue in Q1 of 2019.

Second, our decline in gross margin percentage during Q1 2019 is attributable primarily to increased incentives to customers to promote sales pace. This is where it's critical to understand the corresponding decrease in income allocated to our noncontrolling builder partners. From Q1 of 2018 to Q1 of 2019, our noncontrolling interest declined by 2.4%, which is approximately half of the gross margin decline. Our business model was established to incentivize our builders by sharing income after Green Brick earns lot profits in a high rate of return on our capital allocated to each builder.

When there is margin compression which impacts the profitability of one of our builders, that builder shares in the margin decline to the extent of their last-in-the-waterfall interest of typically 50%. So only half of any house margin decline is incurred by Green Brick Partners. Our business model is working as demonstrated with these strong results.

Now move to Slide 14, which demonstrates our performance as measured against our peers. The chart begins on the left with 2 critical measures of pretax income performance. Pretax income takes into consideration building margins as well as operating expenses. As you can see, pretax income as a percentage of revenues or our pretax margin stands at 10% even for the last 12 months. This puts us far above our small-cap and mid-cap peers.

The middle measure is adjusted pretax income performance based on return on total invested capital. Again, Green Brick's return of 10.5% for the 12 months stands heads and shoulders above our small-cap peers and as reflected on pretax income ROIC and comfortably higher than our mid-cap peers.

Most important, of course, is the bottom line net income. Green Brick's 2019 EPS for Q1 was $0.25 per share, an increase of 13.6% over Q1 of '18. Our net income return on equity stands at 11.7% for the 12 months ended March 31, 2019, which is in line with our mid-cap and small-cap peers.

In line, okay, but let's consider Slide 15 for the rest of the story. And as shown on Slide 15, our return on equity has been accomplished despite keeping one of the lowest net debt to capital rates of any public builder.

We have been able to grow rapidly while increasing our financial leverage through low interest rate revolving lines of credit. As of March 31, 2019, we have continued that gradual increase to the point where our net debt to capital ratio, where net debt is debt minus cash, has increased to 27.5%.

Note that other peer builders have leveraged to an average of 39%. But look more closely at the chart. The slide shows that the 7 builders on the left side, or the wrong side of the chart, are all small-cap and mid-cap builders. The net debt to capital ratios of those 7 peers ranges from 37% to 62% for an average of 48%. So they are accomplishing a return on equity that's similar to our return on equity but with over 75% more financial leverage than as Green Brick.

I'll now turn the call back over to Jim, who will wrap up our part of the call prior to opening things up to Q&A. Jim?

Okay. Thanks, Rick. In summary, our team did a really great job of managing pace versus price to generate the best first quarter net income and backlog in our history.

Unlike most peers, our neighborhood count is accelerating. Assuming decent weather, we should grow from 76 communities on January 1, 2019, to 92 communities by either the end of the year or the first quarter of 2020. That's very significant growth.

And this 21% community growth is being accomplished, as Rick just showed you, while maintaining a very conservative balance sheet. We now also have the most homes under construction in our history.

Operationally, we are seeing house margins improve and the benefits for our standardized operating system utilized by all of our builders. Our business is now scaled to where our title and mortgage business are expanding rapidly and profitability with little risk. Our entry-level first-time move-up/value builder, Trophy Signature Homes, is off to a great start and should be a significant part of our earnings growth story that we expect to replicate in other homebuilding markets.

I want to, again, thank the entire Green Brick team for their hard work and great results. I'll now turn the call back to the operator.

(Operator Instructions) Your first question comes from Michael Rehaut with JPMorgan.

This is actually Maggie on for Mike. First question, I was just hoping you could talk a little bit more about the incentives that you were pushing over the quarter. Could you give us an idea of how those trended month-by-month? And maybe how you're thinking about incentive levels in the second quarter?

Yes, sure. I'll -- this is Jim, and anyone else in the management team can chime in with me. Like most builders, we increased incentives. Again, it's -- this is as much our designs trying to figure out the best way to match pace versus price. The quarter is over. In April, we were actually seeing increased interest on the demand side, and we are starting to see cost savings on the construction side. But bear in mind, these things -- a home that we sell today is probably closing in the third quarter at the earliest and the fourth quarter. So this is a lagging indicator that we'll probably not see really impact financial statements until later on in the year.

Our absorption in January was probably much like Q4. It wasn't real strong, but our absorption picked up starting in February. Like we said on our last call, that absorption pace really resembles 2017 versus the accelerated absorption rates that we saw the first half of 2018. So lot more like 2017.

I think the other thing that we and probably every builder experiences is we open new communities, it's always slower in sales to start up a community then when you're in that middle time period. And as we grow more communities, our absorption rate goes down a little just because we're opening so many new communities relative to most of the peers you probably ventures against.

Okay. So looking into the second quarter and the rest of the year, do you think that you're -- that these kind of slightly elevated incentive levels will continue and continue to pressure margins like they did in the first quarter?

No.

We're -- this is Jed. We're seeing less spec packages from every builder for the most part across the industry regardless of what geography. So our competitors are putting less units out. We're putting a few less units out but growing our top line by more communities. So we actually see -- we think we've hit the bottom, at least, for a while on incentives.

And something else, Maggie, that's happening there with the slower level of starts and competitors not having the strong community growth. There is less product out there for the construction trades, and also the houses are smaller because a lot of builders are -- or have really run to the smaller product. So that's one of the reliefs on construction cost and why we're able to bring some of those costs down simply because the labor force has less square footage in total to build.

Tim Daley from Deutsche Bank.

So I guess my first question is, so strong community count growth expectations and as well appreciate the guidance for the net income or the pretax income to be up modestly year-over-year. So just curious if you guys could kind of provide a bit more color on what you mean by modest? Is that low single digits, mid-single digits and as well if you could help us understand the moving parts underpinning these expectations in terms of operating margins, obviously, given the restatement of the commissions, kind of there's probably going to be some more movement in SG&A gross margin but just kind of operating margins. And any other kind of puts and takes, if you could provide that would be very helpful.

Tim, I can answer your -- first part of your question and that is that we are too modest to describe modest. So we really can't get into that. Rick or Jed, you might want to field the second part of his questions.

I think the -- you'll see it when you do the math that the moving of the commission expense down to SG&A doesn't have a huge impact. Our range of commission expense from 2017 through -- all the way through now is anywhere from 4.0% to 4.4%. And I think it's -- probably be a lot more consistent at around 4% as we move forward and fully have GHO in all of our numbers. This is all within our expectation because we knew we were going to have great top line growth and we knew we were coming into some tougher margin regions. I think we're probably going to be skewed more heavily towards Q3 and Q4 based on our backlog. Last year, we had so many new homes put into backlog in Q1, that really pumped Q2 from a top line perspective that we don't have as much up now. But our pace has been very consistent from a start standpoint at just over 400 a quarter. So I think you'll see that be a good measure going forward from a top line standpoint.

All right. No, that's very helpful. And then, I guess, just thinking about kind of the product mix and the impact on absorptions, so absorptions were down a bit more than the homebuilding group average so far this quarter. Obviously, this is up against a really tough comp in 1Q last year, but was there any other kind of mix shifts that we should be thinking about as we head forward in the rest of the year? Obviously, comps ease a bit into the back half, but obviously, it's just with Trophy Signature coming in, and obviously, GHO getting laps. If you could help us out with some sort of directional absorption pace, at least, that would be great.

We've seen absorption -- this is Jim -- pick up a little this year -- I mean in this month in April. We hope it continues. I think the more relevant thing when you're looking at Green Brick versus peers that are -- if they're having stable community growth or, in some cases, negative community count growth, our investment in these significant growth in our new communities, that investment is already on our balance sheet right now. And we're just starting these houses, these -- all of that money that's on our balance sheet is not going to -- so there's not really any returns until much later this year or into 2020. So we think our metrics are looking really great relative to peers, but if you really anticipate how we -- how you have to front-load these investment in these communities and the lagging time in these communities to predict financial results, we think investors will be very pleased in 2020.

All right. Great. And then if I could just kind of ask one more here. So saw the announcement of the Trophy Signature model getting opened a couple days ago. So congratulations on that. But just kind of could you help us understand any kind of new incremental news out there about this new product type? Maybe you guys are targeting new markets or just kind of any update? And then as well start pace up 41% year-over-year, very impressive. How many of those were Trophy Signature, if you could provide that.

Very few of those were Trophy Signature just because the communities -- this is Jed, the communities that Trophy is going in were not yet open. As of today, Trophy is selling in 2 communities that we just started right at the 1st of this month. So most of that -- most of the growth was organic growth through our other divisions.

Yes. Trophy is kind of a case study what I was just talking about growing community count. Jed, what do we have? 1,300 owned and option lots, many of which are owned. We made the investment in Trophy. We haven't seen any current returns on that, yet we made good return metrics for Green Brick, and we think that Trophy is going to be very accretive to our business in 2020 when all these communities start hitting full stride.

Scott Schrier with Citi.

I wanted to ask a little bit more on the incentives. I'm curious if you could potentially break that out by region on a year-on-year basis and see how they trended versus some of your brands? And we've heard some talk about higher inventory due to 4Q '18 specs in certain markets. Can you speak to the extent that this might have impacted your business?

Yes, a little bit, and that probably is granular as you want it, Scott, but we saw -- in Atlanta, we didn't see the margin compression that, I guess, some of our peers saw in Atlanta. That's pretty much held its own. Where we saw the most margin compression was really in our townhome business in Dallas, which is a decent sized business here. It was twofold. We got -- we should have been more aggressive in selling spec homes in the third and fourth quarter of 2018. They got pushed into 2019, and that's never a good thing to have a neighborhood where you have more specs than you want. And the second thing is that we have found that the consumer was having choices, maybe not in the A location where we're building a townhouse, but they were having options of moving into smaller footprint homes in B locations, and some people were doing that. We think that's level now, and really, we just had a great month of sales in townhouses in Dallas, and we just hope it continues in May.

Got it. And then so more on your [touch] products. As we go forward, they've been -- or recently they've picked up as a percentage of your home deliveries. Should we expect that to be more of a tailwind for ROE growth given, I'm assuming they have higher asset turns associated with them?

Well, it's really interesting. It's a little bit more confusing than that. For example, one of our communities that we just opened up is called Pratt Stacks in Atlanta. It's a unique infill community outside the heart of Downtown Atlanta. That is not a fast turnover community. It's 4-story mid-rise townhomes. And that's a much slower turn community, but we are -- I was just in Atlanta last week, and we're in this -- we haven't even sheetrock-ed units. We have 28 homes under construction, and we presold about 20 of them. So -- but again, that's going to be a longer-cycle thing, a longer-cycle product, but the margins are good, and it looks like the demand is great.

And then one more. If you could talk about maybe the timing and progression of your goal to raise leverage a little bit towards that 35% number?

Jed, you can talk about that a little. I think Trophy is going to be a big component of that.

Yes. I mean, we don't break revenue growth out by builder, but I could -- we expect Trophy to go from probably 50, 60 closings this year to 250 next year at least. So you can kind of do the math and figure out how much more capital we'll be putting out, and to do that, we'll be modestly raising debt.

Of the -- of our community count growth, whereas Trophy was 0 communities as of the beginning of the year, probably by Q3, we'll have 6 active selling communities in Trophy. And when they start selling, that means that we're like within 60 days of closing houses. So that means that we're -- by the time we start selling, we'll actually have a lot of inventory, a lot of width in the ground so will be a substantial investment once you start seeing those communities pop open.

(Operator Instructions) Your next question comes from Carl Reichardt with BTIG.

I wanted to ask Jim or if -- or Rich if on the community count sort of plans for the year in getting to above 90 by year-end or Q1, is the progression of that over the course of the next 3 or 4 quarters pretty even? Or is there a front-end or back-end load in the community count?

It's fairly even as we go from quarter-to-quarter. But again, it's rare to have a land development complete on time because of the vagaries of wet weather. So that could stretch out a little bit longer, and that could affect what that flow is, but whether it happens over the next 3 quarters or 4 quarters, it should be relatively even based on what our builder's plans are.

Part of that goal was to have all 92 of them open this year, but we felt we'd better give it some slack after experiencing the worst rains in Atlanta history to push that back into summer in the Q1 of 2020.

Okay. That's helpful. And then let's go back to Trophy Signature for a second. There is a couple of different ways to think about first-time customers, and it's barebones, quick turn, fast spec, small houses. Or you're looking at a little bit more of a build-to-order model, maybe an opportunity to customize? So there's a couple of different ways to go with that customer. How are you thinking -- where does Trophy sort of fit in that bucket in terms of how you get to that first-time buyer?

Carl, this is Jed. It's going to be more of the former. I'm sure you're familiar with Meritage's LiVE. NOW product. We -- by year-end will be in at least 2 if not 3 Meritage communities as a side-by-side builder with our version of LiVE. NOW.

Yes. And Carl, the other thing that's active, a lot of the lot inventory, a lot of the community count growth that you'll see in 2019 are ready-made lots, where we've been able to find available lot inventory so that we could gear up their operation, and because of the location of those lots, we're often in locations which are going to be not a first-time homebuyer but a first-time move-up buyer. It's a little bit of a different story, and it is a story in which the Trophy product will be made already ready-to-go and not offered for sale until your 45 to 60 days away from closing on the house. So it's basically here it is. Your options were already included. So that's our strategy. And it should -- even in the first-time move-up buyer, it should be of -- an excellent value proposition.

And then if I can squeeze one more in, just on the townhome side, again, sort of looking at the customer who you are targeting that product to, is it in general a sort of in between the first-time move-up and the entry-level buyer type or downsizers? Or how do you sort of think about your target customer for townhome product in Dallas and Atlanta?

Well, because of the -- because we are really in A-location markets, we have a very broad buyer. It's partly barbell where we'll have an affluent millennial buyer and a movedown buyer. But because our neighborhoods are also located in the same locations and are typically the top school districts, we're finding divorcees and other kind of buyers that are seeking out the schools. So it's unbelievably a diverse-type buyer, much more so than our Trophy-type homebuyer.

Bill Dezellem with Tieton Capital.

I had a couple of questions. The first one relates to your lot prices. Would you discus the increase that you're experiencing there? And I know that you mentioned that the home price decline is largely mix related in the adding of GHO, but if there is anything relative to lot prices increasing and home prices decreasing that's interesting, kind of incorporate that into the answer, if you would, please.

Yes. This is Jed. So as Jim mentioned, in some of these submarkets like Alpharetta and Atlanta or a real infill market in Dallas like Downtown Dallas, we may be seeing some slight increase in lot price just because of the very limited supply and a lot of demand to be there. But for the most part, we think lot prices have stabilized.

And apologies for the ignorance in this question, but would it be fair to understand that as -- if lot prices are up and home prices are flat, that, that-- all other things being equal, that, that would be a squeeze on margins?

It would be, except one thing is taking place that you haven't considered, and that is that builders are reengineering and redesigning their product and really [de-immediatizing] their product to lower their construction cost to maintain margin.

And the other dynamic that you have is that we typically buy the dirt and develop the land into finished lots. So the sales price for a lot of our builders' lots is from us. So in that regard, we're getting 100% of the lot profit. So there is a -- with 70%, 75% of homes delivered being from our existing inventory, it's not such a dynamic increase as you would think.

That's helpful. And then lastly, the cancellation rate ticked up in the quarter. Would you discuss that and the reasons that you're sensing are behind that and just the implications whether it's a worry or not and how to think about it, please?

So first of all -- this is Jim -- our cancellation rate is very low, around 15%. So that does not make us nervous. Any tick-up can occur because, when the market got more competitive and if competitors offered additional incentives, you can lose a customer to a competitor that was under contract that you thought was buying a home. So that might be responsible for some of the uptick, but it -- still, we have very low cancellation rates.

Yes. And it may have been up year-over-year from 10% to 15%, but in Q4 of last year, the cancellation rate was 22%. So it's actually dropped down significantly. You've had a lot of price discovery going on and rate discovery with our customers, whereas, rates had gone up and all of a sudden they couldn't qualify. But now rates have reversed and have come down substantially, and that's -- that means that they can actually afford more then perhaps if they came in the sales office in Q4.

And then one more follow-up as a point of ignorance again. What would you consider a normal environment's cancellation rate if that 15% is a really quite a good one? And then secondarily, is there seasonality tied to that cancellation rate that would lead to it declining? And I recognize that you just said that maybe the incentives were a little less appealing from competitors this quarter, so that may have helped, but is there any normal seasonality there?

This is Jed. We would -- I'd say 20% is our peer's average cancellation rate. So we're below our peers. I would say, seasonality, probably not. It would be more tied to a potential uptick in interest rates from time of contract to time of delivery.

And we -- as Trophy gets going, there might be some just natural increases in cancellation rates just because those are first-time buyers, but that will be taking place not in the next 2 quarters, probably down the road if it occurs at all.

We have now reached the end of our question-and-answer session. And this does conclude today's conference call. Thank you for your participation, and you may now disconnect.