MDC Holdings Inc (MDC) 2022 Q1 法說會逐字稿

Hello, welcome to the M.D.C. Holdings 2022 First Quarter Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I now would like to turn the conference over to Derek Kimmerle, Vice President and Corporate Controller. Mr. Kimmerle, please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2022 First 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.

(Operator Instructions) 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 MDC'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 first quarter 2022 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.

Good morning, and thank you for joining us today as we go over our results for the first quarter of 2022, provide our thoughts on current housing market conditions and give some insight into the future of our company. M.D.C. Holdings reported earnings of $2.02 per diluted share for the quarter, a 34% increase over the first quarter of 2021. This substantial year-over-year increase in earnings per share was largely driven by 19% rise in home sales revenue and a 380 basis point expansion in home sales gross margins to 25.7%.

Our teams did an excellent job delivering homes during the quarter, and what continues to be a challenging supply chain environment as we came in near the high end of our stated guidance with new home deliveries of 2,233. Average sales price on the homes closed in the quarter trended higher, rising 16% on a year-over-year basis as the combination of the healthy demand and limited supply continued to provide for a favorable pricing environment at our communities. This positive industry dynamic also led to a continuation of the healthy order activity we've experienced over the last several quarters, as we sold an average of 5.4 homes per community per month in the quarter. Demand was broad based from both a geographic and pricing standpoint with the millennial age buyer continue to being the driving force behind our sales success. This large population of buyers has reached a prime phase in their lives when homeownership became a much higher priority, whether due to changing family dynamics, a chance to build equity or the desire to put down roots.

Another driving factor that we have witnessed in our markets is the ongoing migration from high to low-cost areas by both companies and individuals. Factors, including taxes, affordability and overall quality of life are weighing more heavily into where business operates. While the emergence of online and remote work capabilities have given employees more freedom to live and work from where they choose. At MDC, we have positioned our company to take advantage of these trends by investing in the markets that are benefiting from this migration and by opening communities that appeal to millennials with innovative homes at more affordable prices. We believe that the demand forces we see today are long term in nature and will continue to support the new home market for the foreseeable future.

After years of historically low mortgage rates, buyers are now being faced with higher financing costs for their prospective home purchase as the average rate on 30-year fixed rate mortgage has moved approximately 200 basis points since the beginning of the year. While current mortgage rates are still attractive from a long-term historical perspective, it is natural to expect that this move hire may have a near-term impact in our business as buyers adjust to this new reality. Long-term, however, we believe that the demand factors in place, coupled with the lack of supply in our markets, keep the new home construction market on a solid footing.

In addition, it is important to note that while the absolute cost of owning a home has gone up with the rise in interest rates, the relative cost has stayed relatively stable given the concurrent rise in monthly rents across the country. With a strong balance sheet, a seasoned leadership team and a product profile that is tailored to today's buyers, MDC is in a great position to build on the track record of success and to adjust whatever changing rate environment may bring.

We continue to invest in the future of our company, while taking a long-term risk adverse approach to the business. Confidence we have in our ability to fund our operations and operate effectively through the housing cycle is borne out by our industry-leading dividend, which yields above 5% based on recent price levels. For those investors who believe in long-term viability of the housing market and who are seeking a healthy dividend, we believe MDC is a compelling value.

With that, I'd like to turn the call over to David, who will provide more details on our operations this quarter.

Thank you, Larry. MDC delivered strong results in the first quarter of 2022, both in terms of profitability and order activity. I am pleased with how our teams were able to sell and close houses despite ongoing operational challenges. Supply chain issues continue to be a headwind for our industry, but they were fairly consistent with what we faced in the fourth quarter of 2021. We made progress in the first quarter implementing strategies and finding workarounds to combat these issues. But every day, there seems to be a new delay or product shortage that prevents us from materially improving our cycle times. As such, we are not incorporating any improvements to the current operating environment in our forecast.

Despite the supply chain challenges, we continue to generate outstanding margins across our homebuilding divisions, as strong buyer demand and low inventory levels have allowed us to raise prices ahead of cost inflation. Divisions that posted particularly strong margins in the quarter included Orlando, Las Vegas, and Riverside County.

As Larry mentioned, new home demand was broad based during the quarter, with the Mountain region posting an absorption pace of 5.6, the West region a pace of 5.5, and the East a pace of 4.8. These figures were indicative of the continued strong traffic we witnessed in our communities as well as online during the quarter. Our sales for the quarter could have been even higher if not for limitations that we imposed in many of our communities.

Division is with the best absorption paces during the quarter included Denver, Portland, and Northern California. We have continued to see good traffic levels in our community since rates started rising a few months ago. Though we have noticed that the sales process is taking a little longer, most buyer seem to be adjusting to the higher rate environment as well and continue to be motivated to move forward with their purchase. Additionally, we have seen very little change in cancellation rates among our buyers already in backlog. As such, our general sense is that market dynamics remain healthy and the demand continues to outstrip supply, particularly in the markets that we operate. While it is unclear where rates will eventually settle out, we believe our market positioning, our more affordably priced product and our build-to-order strategy MDC has, is in a great position to be a success with a number of interest rate scenarios.

From a land acquisition standpoint, we remain diligent in our land underwriting efforts and focus on investing in markets poised for continued growth. We recently announced that we've agreed to acquire substantially all of the homebuilding assets of The Jones Company of Tennessee. We believe this transaction, combined with our organic land pipeline we have already secured in the Nashville area 1 year ago, has the potential to launch MDC in a leadership position in Nashville.

Now I'd like to turn the call over to Bob, who will provide more detail on our results this quarter as well as some forward-looking guidance. Bob?

Thanks, David, and good morning, everyone. During the first quarter, we generated net income of $148.4 million or $2.02 per diluted share, representing a 34% increase from the first quarter of 2021. Pretax income from our homebuilding operations increased $75 million or 66% from the first quarter of 2021 to $188.5 million. This increase was driven by home sale revenues, which rose 19% year-over-year to $1.24 billion, as well as our gross margin from home sales which improved by 380 basis points to 25.7%.

Our financial services pretax income decreased to $13.4 million in the first quarter of 2022. As we have indicated for several quarters, competition in the primary mortgage market has increased as refinance volumes have declined. As a result, the gains on loans locked, sold and closed have returned to more historical levels. Our tax rate increased from 23.3% to 26.5% for the 2022 first quarter. The increase in rate was primarily due to federal energy-efficient home tax credits which have not been extended to 2022, and a decrease in the windfalls recognized upon the vesting and exercise of equity awards.

We delivered 2,233 homes during the quarter, which represented a 3% increase year-over-year and exceeded the midpoint of our previously estimated range for the quarter of 2,000 to 2,300 closings. The average selling price of homes delivered during the quarter increased 16% to about $556,000. This was the result of price increases implemented over the past year, as well as a shift in the mix of our closings from Nevada to our Northern California markets.

As David mentioned, supply chain disruptions and labor constraints remain a headwind to the entirety of our production process from land development to final home inspections. While these issues did not seem to worsen during the quarter, they remain an obstacle for our teams to navigate on a daily basis. Based on what we are seeing in the field, we do not expect material or labor conditions to significantly improve in the near term. As a result, our delivery projections for the second quarter as well as the remainder of the year are based on production schedules that reflect current labor and supply chain conditions. We are currently anticipating home deliveries for the second quarter of 2022 of between 2,400 and 2,600 units, and we expect the average selling price of these units to be between USD560,000 and USD570,000. In addition, we are reiterating our full year guidance of between 10,500 and 11,000 home deliveries.

Gross margin from home sales improved by 380 basis points year-over-year to 25.7%. Excluding the inventory impairment and warranty adjustment recorded during the quarter, our gross margin from home sales would have been nearly 26%. We experienced improved gross margin from home sales across each of our segments with our East and West segments having the largest year-over-year increase. These improvements were driven by price increases implemented across nearly all of our communities over the past year, which have been partially offset by increased building material and labor costs.

We expect to continue to produce strong gross margin from home sales based on the gross margin of our homes in backlog as well as our continued focus on pricing. Our price increases taken during the first quarter of 2022 outpaced our rising input costs from lumber as well as inflationary pressures on other material and labor costs. We are expecting our gross margin from home sales for the 2022 second quarter to exceed 26%, assuming no impairments or warranty adjustments.

Our total dollar SG&A expense for the 2022 first quarter increased $14.3 million from the 2021 first quarter, driven by increased general and administrative expenses. Our SG&A expense as a percentage of home sale revenues decreased 60 basis points year-over-year to 10.4% as we continue to drive improved overall operating leverage. General and administrative expenses increased to $14.8 million from the prior year quarter to $72 million. The increase primarily resulted from an increase in salary-related expenses due to higher average headcount as well as increased bonus and stock-based compensation accruals. We currently estimate that our general and administrative expenses for the second quarter of 2022 will be approximately $75 million.

Despite the increase in home sale revenues, our marketing commission expenses were a little changed year-over-year, resulting in a 90 basis point improvement in these costs as a percentage of home sale revenues. As we have noted previously, we have been successful in controlling these costs given the current demand environment.

The dollar value for our net orders increased 12% year-over-year to $1.84 billion, driven by a 14% increase in our average selling price. Our monthly sales absorption pace decreased slightly year-over-year to 5.4 orders per community per month. We continue to moderate sales activity through a mix of pricing and limits on the number of lots we released for sale at a given time. We limited the number of lots released in the majority of our communities during the first quarter of 2022 to better match our current pace of production. As was the case last year, these actions caused a somewhat slower pace of sales in March relative to January and February.

Additionally, cancellation rates remained low during the quarter at 8.2% relative to beginning backlog and 16.7% relative to gross orders. We saw our active community count increase to 200 as of quarter end as we had 38 new communities become active during the quarter. We ended the quarter with 42 active communities in Arizona and 25 in Florida. These 2 states comprise our most affordable markets and the benefit from in-migration from other parts of the country. California and Colorado both had 41 active communities, closely following Arizona for our highest number of active communities. In addition, we opened our first community in Austin, Texas, during the quarter, and we're pleased to experience strong demand.

Community count is always challenging to forecast as it is difficult to precisely predict when communities will open and when they will close out. This challenge is made even more difficult by the current demand environment and the extended land development times we continue to experience. With that said, we expect our active community count to remain flat at approximately 200 communities during the second quarter, followed by continued growth in the back half of the year. We continue to forecast double-digit percentage growth in our active community count from December 31, 2021 to December 31, 2022.

We approved 2,740 lots for acquisition during the first quarter of 2022, which represented a 37% decrease from the prior year quarter. This follows several quarters of significant land acquisition approval activity, which can be seen by the 18% year-over-year increase in total lots controlled as of March 31st. In addition, we acquired 1,909 lots during the quarter, resulting in total land acquisition and development spend for the quarter of $309 million. We expect that the acquisition of the majority of the homebuilding assets of The Jones Company of Tennessee will result in the addition of approximately 1,700 controlled lots to our total op supply. The transaction is currently expected to close near the end of the second quarter of 2022.

We ended the quarter in a strong financial position with total cash and cash equivalents of $582 million, total liquidity of over $1.7 billion and a debt-to-capital ratio of 35.5%. We generated $118.1 million in cash from operations during the quarter and believe that we have the opportunity to generate cash flow from operations over the remainder of the year as well. We continue to prioritize our capital allocation to land investments that fit our risk-adjusted business model and to our industry-leading dividend. As a result of our disciplined approach to capital allocation and our successful execution of strategic initiatives, our pretax return on equity over the last 12 months increased 530 basis points year-over-year to 32.9% as of March 31, 2022. We have been able to achieve these impressive returns while continuing to maintain one of the strongest balance sheets in the homebuilding industry.

That concludes my prepared remarks. We will now open up the line for questions.

(Operator Instructions) And the first question comes from Stephen Kim with Evercore ISI.

Thanks very much for all the guidance and that the commentary, I guess, very helpful. I guess the first question I had is on the issue of potential incentives. As you look to your gross margin outlook, are you factoring in the need or the likelihood that there might be any incentives that materialize at the closing table. So not -- I'm not talking about sales in 2Q, but I'm talking about homes that would close in 2Q, where maybe the rate wasn't locked, maybe it took a little longer than you expected to deliver the home and so the customer comes back to you and says, now I have to have a much higher rate because the delivery time was later, that sort of thing. Is that any of that incorporated in your guidance?

Well, yes, I think we talked about 26% or greater gross profit margins for Q2. I think we recognize that there is the need for that kind of thing from time to time. So we feel pretty good about our 26%-plus estimate.

Implicitly, it incorporates sort of holistically everything.

When you think about the overall strength of the entry-level market versus the move-up segment of the market, I know you've been focusing a little bit a lot more on the entry level. There's a narrative out there that we've been hearing from folks that the entry level is actually the part that's going to get most squeezed by the rates and maybe therefore an area of greater concern. But by the same token, that's also more need-based buying, rents are skyrocketing. There's -- it would seem to me that there's reasons to think that the entry level would remain pretty strong, people can trade down to them. As you look at the -- across your different price points and if you look at the entry level in particular, how do you feel the entry level is positioned for the higher rate environment? And are you taking any actions in advance of -- are you taking actions today in anticipation that there might be some disproportionate weakening at the entry level?

So Steve, I think it's a great question. I believe that so far, we've seen the entry position perform very well. And for us, we call it more affordable. We think that our product is really a product that can be accepted by a variety of consumers, not just entry-level, move down as well. We do build to order. So that tends to attract in some cases different kind of consumers. So it's not just limited to the entry level. That said, we're certainly cognizant of rising rates. We do have programs in place to try to minimize the blow from rising interest rates, long-term lock programs that we've put in place, things of that nature. So we think it's manageable. We are always innovating on product, including our most popular Seasons product to achieve new levels of affordability as well. So I think that is something that's being considered actively.

Yes, that's helpful, particularly about the idea of the BTO model, helping with the move-down customer. Just to clarify, when you're talking about rate lock programs and things of that nature, is the cost of those programs borne by the builder? Or is it born by the customer? Or is it shared?

It depends. Sometimes we run it, where it's exclusively the customer. Sometimes we'll run it where it's half and half builder versus the customer. It just depends on the given month and the different promotions that we run. So I think it's both.

And the next question comes from Ivy Zelman with Zelman & Associates.

Congrats on the strong results. Very impressive community count growth that many have not been able to achieve. Just thinking about your strategy now to enter new markets at this stage of the cycle, do you think there is potentially more on the horizon? And do you think the execution risk with entering a new market is less than, let's say, investing in your existing footprint?

Ivy, this is David. Good morning. Yes, we think -- we think with the products that we have that are in the land supply, we've been able to get new markets, really are going to be fine for us. We just opened up in Austin with our Seasons product and we're widely accepted. So the build-to-order model is really pretty terrific for us.

But with the supply constraints and labor issues, is it more challenging to secure trade as the newer builder to the market? And just thinking about alternatively, would you continue to invest more in the existing footprint? And maybe just give us a perspective because Austin is pretty frothy with respect to the overall price appreciation and so recognizing that your products had a good reception, maybe talk about like going in and how much lot right now, what you're paying up for a lot? It seems like the market is one of the strongest in the country as an example.

Yes. Ivy, I can answer that. What we're finding is a lot of builders in say, the Austin market have like burned through some of their -- burned through a lot of their older land and they're all coming in at kind of the same base as we are, and so we think our land basis is pretty similar to some of the current builders. And we think our build-to-order model is really going to be pretty popular in...

So does that mean you will not be expanding more so in the existing footprint and you'll look for another -- other opportunities that you can, I think due to...

I think Larry and I have always been opportunistic over the last 45 years, but we look at both. And this is the first time we actually expanded in a few markets that we're pretty excited about to include Nashville. And so we feel pretty good about what we're doing. Bob, do you have anything to add?

Yes, I think you've captured it pretty well. I think there are some larger markets where we're getting more cash flow in more recent quarters and getting into some of these newer markets is really very good in terms of our current strategy of trying to make sure that we're keeping affordability in the mix. Certainly, we recognize that individual markets have appreciated significantly year-over-year, including Austin, Nashville. But then again, they still are very affordable relative to other markets and they're attracting a lot of jobs, which I think really gives them a lot of long-term potential, even though if you're in the market and you are just looking at that market, you say, wow, there's been a lot of appreciation. So we love the long-term potential, and we think the benefits from diversifying our operations a little bit is very helpful as well.

And just one more for me, just in terms of recognizing the cost inflation that we've seen on the build-to-order model. You've seen pretty much everything across the board, increasing labor cost, (technical difficulty) quantify for us what the overall cost increases have been on an annualized basis through 1Q?

Yes. I think we're probably roughly, I guess, up 15% year-over-year.

Is that at little bit more -- is that more skewed to any particular part of the overall cost basket, labor versus materials? And are you factoring in more inflation for the remainder of '22?

I think it's a little bit more on the material side and particularly lumber, I think has contributed there, especially in our results. And we're going to get some volatility for the remainder of the year in terms of how lumber comes through our results. I think you'll probably see it back off a little bit in Q2, but then the more recent spike in lumber will start coming through in maybe the end of Q2 and into Q3, part of Q4. So there'll be some volatility up and down for the remainder of the year.

And the next question comes from Michael Rehaut of JPMorgan.

Douglas Wardlaw on for Mike. You guys were talking earlier about how you implemented new strategies and workarounds for cycle times last quarter, but there were new issues arising. I was wondering if you could give further color into those issues. And last quarter, you kind of referenced municipal slowdowns has -- had been a big hindrance. And I was wondering if there's any improvement on that front?

Yes. I think it's hard to quantify any one thing. It just seems like we do make progress in one area and then you see other things pop up. So it would probably be a laundry list of things that pop up across the country. If you ask one of our division presidents, I'm sure they would reach a list a mile long of things that they've dealt with. So the good news is, I think there's active strategies to try to make sure that we're getting ahead of it, including ordering materials earlier in the process, making sure we're diligent in terms of our permitting process. So even though we're not a spec builder, making sure we're getting the permit as early as we can in the process so that we're ready to start as soon as the sale occurs. Those are things that have helped us offset the surprises that come out any given day in our individual markets.

Awesome. And then secondly, and I apologize if you covered this a little bit earlier. If you can kind of give a sense of how your demand and orders trended throughout the quarter and maybe there's a month-by-month breakdown, was there any sort of pick up or slow down?

Yes, we indicated in my prepared remarks, I believe, March was a little less than January and February. That's similar to last year. So as we go through the spring season, we implement limitations on lot releases as we increased prices during the quarter, we saw a little bit lower activity in March relative to the first 2 months. But again, that is similar to what happened last year. I'd also note that those increases during the first quarter price increases were about just shy of 10% from start to finish.

And the next question comes from Deepa Raghavan with Wells Fargo.

Can you talk to the M&A pipeline since you will be consummating one pretty soon. Just given the macro outlooks that are weakening and then there's this persistent supply chain issues not every builder will be able to get over. Can we expect more M&A to happen? And how are you thinking about your pipeline in M&A?

This is David, and I can answer it this way. From time-to-time over the last decade, we've looked at a lot of transactions. The last one we did was about 11 years ago. But when the Jones Company transaction came up, kind of checked all our boxes, build to order, very quality home builder, a leader in Nashville, and we see a lot of packages. We felt pretty good about this one that it would fit into our DNA and both on product and the market. Great question.

Also note, we have a great group of people at the Jones Company that really complements our existing team. Our existing team is very small because we've just gotten into the market. So it really gives us more holistic group of individuals to move our operations forward. So really exciting for the company.

All right, great. Another capital allocation question. Any interest in share buybacks here? Your dividends are obviously pretty well appreciated in way of return of capital to shareholders, but can share buybacks also come into the mix as you try to create value here?

Well, we have an authorization outstanding and have for quite some time. That said, we have not used it in quite some time. So it's always an option that's open for us, especially with valuations on the lower side. More recently, however, as you know, we have allocated more capital towards our industry-leading dividend, including growing that dividend over the course in the past couple of years as well as land assets, including the Jones Company coming up here, currently slated to close at the end of Q2. So a lot of great attractive opportunities for our capital.

All right, if I can ask one. Quantitatively, Bob, any color on second half cadence? I know -- I mean, I'm assuming just given your BTO model, you probably have a little bit more visibility than you had last quarter. And at least, can you talk through some of the scenarios that can play out for margins maybe in the second half or even if closing guide is more Q4 weighted. I mean, anything to help us understand the puts and takes in the second half, I'd appreciate that.

Yes. And I think the one variable I already talked about on the lumber side, seeing that more recent spike in lumber come through in Q3. I think that's one thing to be aware of. Outside of that, I'll leave it at the 26% plus for Q2. We still think it's a great environment out there, solid demand. So we think we've got a good shot at keeping that margin going forward into the second half.

And the next question comes from Truman Patterson with Wolfe Research.

Actually, it's Paul Przybylski. I was wondering, following on Ivy's question on the new markets. How long does it typically take for you to get a new market to scale? What volume do you need to breakeven and then become a meaningful contributor to the P&L? And then what would be the drag on earnings right now from all these new market entrances?

So I think we love to be in that 300-plus range in terms of closings. And I think with the Jones acquisition, that really gets us there for next year potentially just based upon their historical activity and the work that we've already done in the Nashville market to secure assets independent of the Jones company. So we feel pretty good about that one getting up to scale.

In terms of the drag, we've got relatively small teams in each of the 4 new markets. Naturally, that will change with the Jones Company coming on board in late Q2. So I don't know that it will be a material drag. We will have in the second half of 2022 up to 100 additional closings coming from Jones. Give or take, it's a bit of a moving target right now. And those will be lower on the margin spectrum, call it, in the 10% to 15% range simply because we have to allocate the purchase price, and I know you're well aware of that process, Paul. So it will drag margins just a little bit in the back half of the year. But then again, we're just talking about 100 closings or so.

Okay. Then I'm -- switch things up a little bit. You've got 20% of your business in Denver and the Marshall fire destroyed 1,000 homes out there, which is about 10% of annual production for the Denver market. When will those homes start to clear the EPA insurance hurdles, etc., etc. And Denver has one of the more constrained labor forces in the country. Is that going to cause any kind of hiccups for you either from elevated costs or maybe happen to slow down sales because the labor force is going to be preoccupied from that rebuild?

This is David, and I can answer that. It's a slow process. I mean, what they have to do to is clean the site up, what they have to do with the EPA. And every one of those houses has a different insurance policy on it. And so it's a terrible thing that happened. In fact, it affected some houses that we built over 20 years ago. So what we're seeing is we're seeing a lot of people that are moving into houses for rent, moving into apartments, and we're seeing some of those consumers out looking to buy houses for us, but it's not going to be a 1-year process. It's going to take a few years to kind of work its way through the system.

Okay. So we shouldn't expect any kind of noticeable change in your Denver business because of this of this improving temporary period?

We really don't see it.

And the next question comes from Jay McCanless with Wedbush Securities.

First one, could you talk about the customer mix for the Jones Company and how that compares to MDC's current customer mix?

I think Jones builds a fantastic product out in Nashville, and it is very compatible with our build-to-order strategy. So I think their business model is really very much in line with what we do.

Is it more move-up focused entry level? Any kind of color around that split?

I would say it's a little more move-up focused than our percentage. We're 65% what we call more affordable. They're probably a little bit less than that. I don't know the exact percentage because they don't necessarily categorize it the same way we do. But definitely more on the move the upside.

And then Paul got my other question. He said probably 100 homes with about a 10% to 15% gross margin and then what the purchase accounting should roll off after 2 to 3 quarters?

Yes, I think as you get into 2023, you see less of that. Naturally, it's dependent upon how quickly houses close, whether or not the closing occurs as scheduled, all those kind of things. So a little uncertain at this point, but that's roughly the program right now that we can expect.

(Operator Instructions) And the next question comes from Alex Barrón with Housing Research Center.

Given that you have this business model and your backlog, which pretty much covers the rest of the year, is it okay to assume that your margin that you're expecting for second quarter is going to be pretty similar to the back half of the year?

I think it's a reasonable assumption. There's a lot going on in the market, a lot that happens to our trade base, and of course, their strain. So I don't want to imply that there's not any risk to that, but it's probably the most reasonable estimate at this juncture.

I mean just to be on the same point, I mean, do you get to lock in most of your expenses at the time of start? Or is there still some uncertainty that you're not able to lock in at the time the home starts because of the inflation and so on?

Well, I think lumber, for example, until they deliver the lumber pack you are not certain on your pricing. We have various lock periods on lumber. So there's that risk out there. On the back-end trades, I think you have the same potential for changes in pricing depending upon what issues they're up against with their own labor pool as well as materials as much as we would like to lock it in contractually. When you're dealing with local or even regional people who are your suppliers and subcontractors, you really have to work with them and make sure that they are moving forward that they're still profitable in their endeavor. Last thing you want is for them to be upset with you and go to a different site. So from a pragmatic standpoint, I think we're always in discussions with our subcontractors, but we feel like we're in a pretty good position, nonetheless to make a good margin on our backlog in Q2 and into the second half of the year.

Okay. Very helpful. If I could squeeze one more. You guys talked about the migration of people from the higher cost states to the lower cost states. I'm wondering if you guys have quantified that in any way, percentage of sales that you're seeing that phenomenon happened?

I don't think I quite caught your question from the higher cost states to the lower cost states.

Yes, have you guys quantified what percentage of your sales that's happening, people moving from California to Arizona or Texas, that kind of thing?

This is David. I can answer. I don't think we've really quantified it, but a clear example would be moving from, say, San Francisco and the Bay Area to the East Bay where people may have moved out of an attached unit, a townhouse and moving into a single-family house with either a 3-car garage or a big lot. And we're seeing a lot of that -- that type of movement which might be interstate, but some -- some people are moving into other states, but this work from home phenomenon has been really interesting. And people are looking to have more affordable housing. Bob, do you have something to add to that?

Yes, I was just going to say I apologize, I didn't hear the state part of your question, now I understand. I think it varies state by state. And naturally in some of your higher cost states you have less in migration, so you might only be 5% to 10% from out of state. In some of your lower cost states, you could be north of 20% coming from other markets. So a wide range of variability depending upon which state you're talking about.

Thank you. And that does conclude the question-and-answer session. I would like to return the floor to Bob Martin for any closing comments.

Thank you all for being on the call, and we look forward to speaking with you again following the announcement of our Q2 earnings.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.