M/I Homes Inc (MHO) 2021 Q2 法說會逐字稿

Hello, and welcome to the M/I Homes, Inc. Second Quarter earnings call. (Operator Instructions) Please note, today's even is being recorded. I would now like to turn the conference over to Phil Creek. Please go ahead, sir.

Thanks, and thanks for joining us. On the call today is Bob Schottenstein, our CEO and President; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Chief Accounting Officer; and Kevin Hake, Senior VP. First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant nonpublic items with you directly.

And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

With that, I'll turn the call over to Bob.

Thanks, Phil. Good afternoon, everyone, and thank you for joining our call. We had a record-setting second quarter, highlighted by a 97% increase in net income, a 23% increase in homes delivered, a 35% increase in revenue and a return on equity of 27%. All of this is a result of a high level of performance across all 15 of our housing operations as well as from our mortgage and title business. Our more -- our margins for the quarter were very strong. Despite significant cost pressures, our gross margins improved by 320 basis points over last year and improved sequentially by 70 basis points from the first quarter to a second quarter level of 25.1%. Our overhead expense ratio improved by 110 basis points from a year ago to 10.4% of revenues, reflecting greater operating leverage. And most importantly, our pretax income percentage improved significantly to 14.7% versus 10% a year ago.

Our record second quarter results continue our trend of strong growth in both revenues and earnings that we have achieved over the past decade. Since 2013, our revenues have grown at a compounded annual rate of 19%, and our pretax income has grown at an even more impressive annual rate of 43%. Demand for new homes continues to be very good and is reflected in our year-to-date new contracts, increasing by 24%, and our record second quarter new contracts, just slightly better than a year ago with 2,267 homes sold during the quarter. We achieved record second quarter sales, notwithstanding that we are operating in nearly 20% fewer communities than a year ago, and we are intentionally limiting sales in majority of our communities to control margins and better manage delivery times.

Given the drop in our community count and the difficult sales comps posed by this quarter and particularly the next quarter, the third quarter, I wanted to provide a little more color on our sales results. Last year was, to say the least, a most unusual year for our industry. No one could have predicted how our economy would fare when faced with one of the worst health crisis of our time, a worldwide pandemic. Knowing what we know now, it is clear that comparisons between 2021 and 2020 need to be viewed carefully.

Our second quarter sales comps more clear -- were clearly more challenging due to the unusually strong sales pace, which began in May and June of last year as our industry as a whole experienced a dramatic rebound in sales after the extreme initial COVID-related slowdown in March and April of last year. For M/I Homes, we sold 31% more homes in last year's second quarter, aided by the strength of last May and June. The increased sales pace continued and even got better, as you all recall, as we moved into last year's third quarter, where our sales grew by 71% over 2019. It was in the late stages of last year's third quarter and frankly, in all of the fourth quarter of last year when we first began to limit sales in many of our communities. And of course, we were raising our prices to try and meet the market demand. Despite these efforts, we began to sell-out of communities much faster than expected.

On top of that, new community openings within our industry occurred slower than expected, due in part to delays in the governmental approval and inspection process, largely because of COVID-related work-from-home protocols. Thus, a greater-than-anticipated drop in our community count. Looking ahead, we are very well positioned to grow our communities. We expect to open more new communities in the second half of this year than we did in the first half. And importantly, we expect to open a record number of new communities in both the first half of 2022 and the second half of 2022, all in support of our growth goals.

Finally, let me just say that our slowdown or decline in order growth is not indicative of demand. These are perhaps the best housing conditions we've seen, considering demand, bio demographics and buyer sentiment, and the very strong credit quality of our buyers. We will continue to manage or limit sales in many of our communities on a go-forward basis in order to control deliveries and maximize margins. And to-date, we've seen little, if any, evidence of push-back on price. All of our product lines from attached town homes to our diverse single-family lineup of homes as well as our homes geared to empty nesters have performed at or above expectations.

Speaking of our product line, our Smart Series, which represents our most affordable line of homes, continues to perform at a very high level. Smart Series sales in the second quarter accounted for just under 40% of total company sales compared to about 35% a year ago. We are selling our Smart Series homes in 35% of our communities compared to 30% of the communities a year ago. The average price of our Smart Series homes is now just under $350,000 compared to roughly $330,000 at the end of the first quarter. As we've said repeatedly over the last several years when discussing our Smart Series line of homes, on average, our Smart Series communities produce better sales pace, better margins, faster cycle time and thus, better returns.

Our backlog sales value at the end of the quarter was $2.5 billion, an all-time quarterly record, and 70% better than last year. Units in backlog increased by 49% to an all-time record 5,488 homes with an average price of homes in backlog equal to $454,000. This is 15% higher than a year ago. Now I'd like to provide a few comments on our markets. As I mentioned at the beginning of the call, we experienced strong performance from each of our 15 home-building divisions, with substantial income contributions from most of our markets, led by Orlando, Tampa, Minneapolis, Dallas, Columbus and Cincinnati.

Our deliveries increased by 18% over last year in our southern region, reminding you that our southern region consists of our 4 Texas markets, 3 Florida markets and 2 North Carolina markets. Deliveries in the southern region increased to 1,297 homes or 57% of the total. The northern region, which is the balance of our markets, 6 to be exact in Ohio, Indiana, Illinois, Minnesota, and Michigan, contributed 961 deliveries, which is roughly 31% better than a year ago. New contracts in our southern region increased by 3% for the quarter and decreased by 4% in our northern region.

Our owned and controlled lot position in the 9 markets representing our southern region increased by 35% compared to last year and increased by 15% in the 6 markets that comprise our northern region. 34% of our owned and controlled lots are in the north, with the balance roughly 66% in the south. We have a very strong land position. Company-wide, we own approximately 18,300 lots, which is roughly a 2-year supply. On top of that, we control, via option contracts, an additional nearly 26,000 lots. So in total, our owned and controlled lots are or slightly more than 44,000 lots, which is just below a 5-year supply. Perhaps most important, 59% of those near 44,000 lots are controlled under an option contract, which gives M/I Homes significant flexibility to react to changes in demand or individual market conditions.

Before I turn the call over to Phil, I'll just make a few closing comments. First, our financial condition is very strong, with $1.5 billion of equity at June 30, and a book value slightly over $50 a share. We ended the second quarter with a cash balance of 372 and 0 borrowings under our $550 million unsecured revolving credit facility. This resulted in a very healthy net debt-to-cap ratio of 16%. We believe our low leverage and substantial cash generation allows us to allocate capital to share repurchases, while also continuing to make significant investments in replenishing our land position for the continued growth of our company.

As a result, as stated in our press release, we announced today that our Board of Directors has approved a new $100 million share repurchase authorization. This replaces our existing $50 million share repurchase authorization, which had roughly $17 million of remaining availability. The $100 million share repurchase authorization reflects our expectation of the ongoing strength in our business and our commitment to creating long-term shareholder value, while always maintaining low debt leverage.

Finally, in closing, our company is in excellent shape. Given the strength of our backlog as well as the strength of our land position, we are poised to have an outstanding 2021. And with our planned new community openings, we are equally excited about our prospects for a strong 2022. Phil?

Thanks, Bob. New contracts in the second quarter increased to 2,267, a second quarter record, compared to 2,261 for last year's second quarter. And last year's second quarter was up 31% versus 2019 same period. Year-to-date, we have sold 5,376 homes, 24% better than last year. Our new contracts were up 103% in April, down 11% in May, and down 33% in June. Our sales pace was 4.2% in the second quarter compared to last year's 3.4%, and our cancellation rate for the second quarter was 7%. We continue to manage sales to closely align our sales with our ability to start and deliver our homes, along with focus on our margins, especially given our record backlog of 5,500 houses. As to our buyer profile, about 51% of our second quarter sales were the first-time buyers compared to 56% in the first quarter. In addition, 43% of our second quarter sales were inventory homes, the same percentage as the first quarter.

Our community count was 175 at the end of the second quarter compared to 220 at the end of last year's second quarter. And the breakdown by region is 79 in the northern region and 96 in the southern region. During that quarter, we opened 16 new communities while closing 28. During last year's second quarter, we opened 22 new stores and closed 25. We delivered an all-time quarterly record of 2,258 homes in the second quarter and year-to-date, we have delivered 4,277 homes, which is 28% more than last year. Production cycle times continue to lengthen, and we have started over 5,000 homes in the first half of this year, which is 1,500 more homes than the first half of last year.

Revenue increased 35% in the second quarter, reaching an all-time quarterly record of $961 million, and our average closing price for the quarter was $411,000, an 8% increase compared to last year's second quarter average of $379,000. Our second quarter gross margin was 25.1%, up 320 basis points year-over-year. Our construction and land development costs continue to increase. Recently, we have seen some -- we have seen lumber cost decline in some of our markets. In our second quarter, SG&A expenses were 10.4% of revenue, improving 110 basis points compared to 11.5% a year ago. This reflects greater operating leverage, and it was our lowest second quarter leverage in our company history. Interest expense decreased $2.1 million for the quarter compared to last year. Interest incurred for the quarter was $10.1 million compared to $10.3 million a year ago. This decrease is due to lower outstanding borrowings in the second quarter and also higher interest capitalization due to more inventory being under development. We are very pleased with our improved returns for the quarter.

Our pretax income was $14.7 million versus $10 million last year, and our return on equity was 27% versus 17% a year ago. And during the quarter, we generated $156 million of EBITDA compared to $86 million in last year's second quarter. We generated $174 million of positive cash flow from operations in the second quarter compared to generating $83 million a year ago, and we had $22 million in capitalized interest on our balance sheet, about 1% of our assets. And our effective tax rate was 24% in the second quarter, same as last year's second quarter, and we estimate our annual rate for the year to be around 24%. And our earnings per diluted share for the quarter increased to $3.58 per share from $1.89 per share last year.

With that, I'll turn it over to Derek Klutch to address our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved record second quarter results in pretax income, revenue and number of loans originated. Revenue was up 50% to $28.6 million due to a higher volume of loans closed and sold, along with higher pricing margins than we experienced in the second quarter of last year. Pretax income was $18 million, which was up 66% over 2020's second quarter. The loan-to-value on our first mortgages for the second quarter was 84% compared to 83% last year. 78% of the loans closed in the quarter were conventional and 22% FHA or VA. This compares to 77% and 23%, respectively, for 2020's second quarter. Our average mortgage amount increased to $336,000 in 2021's second quarter compared to $311,000 last year. Loans originated increased to a second quarter record of 1,704 loans, 24% more than last year, and the volume of loans sold increased by 48%.

Our borrower profile remains solid, with an average down payment of over 16% and an average credit score of 747, up from 746 last quarter. Our mortgage operation captured over 84% of our business in the second quarter compared to 83% last year. Finally, we maintained 2 separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors. At June 30, we had $134 million outstanding under the MIF Warehousing Agreement, which is a $175 million commitment that was recently extended and expires in May 2022, and we also had $34 million outstanding under a separate $90 million repo facility, which expires in October of this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually.

Now I'll turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, we ended the second quarter with a cash balance of $372 million and no borrowings under our unsecured revolving credit facility. And during the second quarter, we extended the maturity of our credit facility to July 2025 and increased the total commitment to $550 million. Total home-building inventory at June 30 was $2.1 billion, an increase of $250 million from last year, and our unsold land investment at June 30 is $782 million compared to $810 million a year ago. At June 30, we had $497 million of raw land and land under development and $285 million of finished unsold lots. We owned 3,872 unsold finished lots with an average cost of $74,000 per lot, and this average lot cost is 16% of our $454,000 backlog average sale price.

Our goal is to own a 2- to 3-year supply of land. And during the second quarter, we spent $150 million on land purchases and $87 million on land development for a total of $237 million, which was up from $156 million in last year's second quarter. And in the second quarter, we purchased about 4,000 lots, of which 78% were raw. In 2020 second quarter, we purchased about 2,100 lots, of which 67% were raw. In general, most of our Smart Series communities are raw-land deals and have above-average company pace and margin. And at the end of the quarter, we had 59 completed inventory homes and 869 total inventory homes. And of the total inventory, 498 are in the northern region and 371 are in the southern region. And at the end of the first quarter, we had 98 completed inventory homes and 708 total inventory homes.

This completes our presentation. We'll now open the call for any questions or comments.

(Operator Instructions) And the first question comes from Ivy Zelman with Zelman & Associates.

Congrats on the great quarter, guys. So, Bob, if we think about Smart Series, when you talked about that the home was $330,000 at the beginning of the year, [$550,000] on average now, recognizing that the pricing power in the market is obviously still very strong, do you think about -- is there a feeling as to where the consumer will start pushing back? That's my first question. And my follow-up question is if we look at that home, assuming you are -- consumer is signing a contract for, let's say, $350,000 home today, and we know that there's inflation in every category within the building materials that go into that home and the appliances and everything else and also, of course, labor is going up as well, will -- the consumer is obviously not going to have to pay that difference. Let's say that house is $350,000 when they sign the contract, but when they close the home, that has theoretically should be $400,000, don't you have to eat that $50,000 and therefore, isn't the margin of the home going to be compressed?

As to the first question, absolutely, there's a ceiling. We haven't reached it yet. There's a ceiling on everything. And I know that's not what you meant, but I mean there will come a point if pricing keeps going up, up, and up, where you could get to a point where you have to either cut prices or, but we're nowhere near that yet. We continue to see either steady or improving margins.

As far as how we manage in this crazy, super inflationary costing and -- cost environment that we've been in really for over a year, we've been able to stay ahead of it. Is it because we're omniscient? No. In some ways, the strength of the market has helped cover up what otherwise would have been a margin erosion. The -- but the other thing is, as much as possible, we try not to sell too far out in front. As much as possible we try to make certain we absolutely know all the costs when we price it, so we don't have to see an erosion like you described.

And then the other thing is that today, in most of our markets, we have a pretty healthy contingency built in on the cost side to cover unexpected stuff. So look, if conditions stabilize somewhat, that contingency is there, that would just go straight to margin. Right now, most of that contingency is being used just to deal with things. But we're very pleased that our margins ended up at about 25%. But for all the inflation, clearly, they would have been higher. Our Smart Series communities are averaging higher than the 25%. That's a company-wide average. But look, it's never perfect, but we've been able to manage the situation and so far we haven't seen situations where we're pricing our buyers out of the market.

And the next question comes from Alex Barron with Housing Research Center.

Yes, I think you mentioned that -- well, I guess I'll start off with this. Do you guys track what percentage of the buyers that are showing up today are coming in from out-of-state versus, say, 6 or 12 months ago?

I'm not aware that we do that. I'm looking at Derek Klutch, who runs our mortgage operation. They tend to have a lot of that data, but I don't know that we have that information handy. We don't track that. And it would differ so significantly market to market. What's the issue, Alex, that you're concerned about?

I guess the main question is whether the people who are moving, say, from New York to Florida or from California to Texas, those guys have a lot more money and in a bidding situation can outbid the local buyers. So I'm just kind of wondering if that's, in some ways, driving the strong price appreciation and the fact that people aren't giving a push-back because in a sense, they -- once they've made the decision to jump across state lines they're there, so they're going to pay whatever it takes. But I guess the question is, are we pricing at the local buyer?

I would answer it this way. One, I'm not sure, but my intuition is that while there is clearly some of our buyers and our competitors' buyers are individuals that are moving from markets where they maybe have sold their house and be sitting on a lot of excess cash as a result, they're now moving into a market where housing is cheaper. But I don't think it's a material enough percentage of the population to really be impacting price that much. You might be right, but that's not what I -- that's not what -- where I would come down. I think a lot of what's driving the demand or, I think, the biggest factor driving the demand and the pace of new home sales has been the noticeable increase in millennials moving from rentership to home-ownership. And I think that that has really been the largest component -- incremental component of the growth in new home production.

They're not even coming -- they're not coming from a house to sell. They're coming either from their parent's house or from an apartment.

Yes, that makes sense. The other question is, I think Phil said you guys have started 5,000 houses in the first half of the year. I'm curious if you could break that out by quarter and also, what's the outlook for future starts? I mean I know you guys are limiting sales. So are you planning to also limit starts or are you accelerating starts and selling homes at a later phase of the construction? How are you guys thinking about starts in the second half of the year?

Alex, when you look at that 5,000 in the first half, there was a little over 2,000 the first quarter, and then closer to 3,000 in the second quarter. So starts did accelerate in the second quarter. We're really pleased with the production increase. Again, last year, we closed 7,700 homes and obviously, our run rate right now on closings is a lot higher than that. So we are pleased with the extra production we're getting. We also were able to put a few more specs on the books at 630 versus 331. So again, we are happy there. So we feel really good where we are. When you start trying to grow businesses a lot more than 10%, 15%, that can really put some strains on things but there also are a number of issues now. Every market is a little different. Windows are a big issue in certain markets, plumbers are an issue in markets but we feel very good about where we are, very good about our volume increase. Bob talked about our backlog average sale price being up 15%, our margin's at 25%. So we think we're really poised well to continue producing really strong results.

Okay. And if I could ask one last one. Given all those constraints and delays in build times, curious if you have an estimate of how much build times have extended out and also whether you guys have some type of closing guidance for the year that you're aiming at?

Actually, no closing guidance or anything, but you can see that we've closed over 2,000 houses, the first couple of quarters. So that's good growth for us. So we feel good about that. When you look at cycle times, they've gone up a couple of weeks. If you look in general, in the past, we got houses in the field in August. We would get them closed that calendar year. This year, the way things are, we pretty much needed the houses to be in the field by the end of June. Of course, the Smart Series are quicker in general than the other, but it's definitely lengthened out another couple of weeks just in the quarter.

The next question comes from Jay McCanless with Wedbush.

So few questions. I think the first one, Bob, in your prepared comments, you were talking about starting more communities in fiscal first half '22 and second half '22. But what were you comparing that to? To what you'd done in '21 or just a historical average? I missed what your comparison was.

Yes. Let me restate that. And the answer is yes, really on the parts of that. We expect to open more communities, new communities, in the balance of this year than we did in the first half of this year, number one. And then number 2, in the first half of '22 and in the second half of '22, we expect to open a record -- historical record number of new communities in each of those halves of the year.

Okay. So we could look back at what you guys did for openings in previous years, and that's going to be a relevant stack, correct? It's not -- we're not talking about starting a community here. We're talking about actual openings ready for this.

This is opening for sale. Yes. Right now, as you know, we're -- even though not all communities are created equal, we're running at about 20% fewer stores or communities than we were last year at this time. And that situation will significantly change for the better as we move through the next 6 to 18 months.

And, Jay, just to make the numbers easy for you, in the first half of this year, we opened 37 new stores. And again, Bob's references we'll do more than that in the second half. And then if you look at last year, we opened 39 in the first half and 30 the second half of last year, again, just to give you some reference.

Okay, 39 in the first half and 30 in the second half, you said?

Yes. Last year, we opened 69 stores all year.

Okay. Great. And then my next question, I guess, kind of a 2-part question. What's the average time lag between starting a community from raw land and opening it currently, but then also have the municipal headwinds you talked about extended to the land development side as well as the actual building the house side?

Well, the headwinds that I referred to were strictly on -- they've been on both sides, but one of the things that's delayed us getting certain new communities open is that the -- is the municipal headwinds would work from home protocols and frankly, reduction in staffing in some select municipalities. That's an industry-wide issue, not one that's just unique to us. But the first question you asked, what's the typical time on a raw land deal from the day you start raw land development until you get open, that can vary pretty significantly. It could be in -- on some smaller deals, where there's fairly simple phases and no off-sites as little as 8 to 9 months from the time you complete that phase and then maybe get your model open or it could be as much as 12 to 15 months in places where the development is more complicated, more impacted by weather.

Not all months during the year are equal in all of our markets. It's very, very hard to generalize in that situation. But that's why when I say, in 2022, we'll open a record number of new communities, more than we've ever opened in any single year in the history of our company, that's taking all that into account. That's based on what we know and expect today and we're far enough along that we can make that statement.

That's great to hear. And then I guess the other side of this is your closeouts and with metering sales, it looks like April was an easy [COVID] comp. And then I guess the slowing the sales pace down, that's what drove the negative comps in May and June. But have you all been able to...?

That's part of the reason. Another thing that drove them was 20% fewer stores. So you got 2 things impacting order growth.

Yes. And again, just a little more information, Jay. When you look at last year, last April, we sold 400 houses. Last May, and this is 2020, we sold 800 houses. Last June, we sold 1,000 houses. So the 2,261 last year, again, 1,000 were in June and 800 in May, very tough comps. And again, we felt very good that we did surpass that this year with community countdown as much as it is.

Yes, but I guess the question though is, has -- is there any quantifiable effect on how many communities you're closing out now that you've slowed the sales pace down? I mean, is it a thing where if you hadn't slowed the sales pace down, you would have closed out 10% more, 15% more communities?

In hindsight, it's hard for me to say this because our margins were so strong, and our returns are so strong. Our return on equity is one of the best in the entire home-building industry. I'm really, really proud of our performance, but we didn't really start slowing or metering to use your term sales in any of our communities till late third quarter last year. By that point, we had already been running -- at a run rate of close to 1,000 sales a month for almost 3, 4 straight months. Had we started metering sales earlier, we probably would have a few more to sell today, but in a few less communities closed, but we also improved our profits by 100%. And our company is in the best financial shape ever.

I'm not going to look back and wish we had done A, B, or C difference, because you never know what's going to happen. When the pandemic first came on the scene in March of last year, none of the home-builders knew what was going to happen next. No one did. Some of our competitors furloughed and laid-off employees and only to hire them back. So you had a lot of things happening in the market that were very, very hard to know. And even when sales took off in May and June of last year, who knew how long that was going to last. It just seemed so implausible in light of the fact that half of the industries in the United States were either closed or underwater and the home buildings -- home-builders are selling houses like never before.

So it was really hard to reconcile a lot of that at the time. We did what we thought was best. We started slowing sales down late last year. Maybe we should have started a little sooner, but we are where we are. We like where we are, and we're really optimistic about what lies ahead.

And the other thing I'll add to that, Jay, is that, when we get down to a few lots, you're better off to go ahead and get out of the community. So we don't play games and say, let's take 3 off the market for 45 days. So we still have an open community at the end of the quarter because if we can go ahead and get sold out and closed out of the community, get the model closed down, go to a new site, it makes our operation a lot more effective. So again, we're trying to make the best business decision.

We're pretty much getting open what we thought we would get open. Because when we give our internal budgets and estimates and so forth, we try to allow a little bit of time extra for land development. In most situations, we don't open until the model was complete, we obviously try to fast track models. But we're getting open pretty much what we thought we would get open. What's changed continually is we're getting food communities quicker. But oftentimes, that's the best business decision also. But we are excited, as Bob said, about what we have in front of us. I mean, last year, we spent a little over $700 million in land. Obviously, we're looking -- if you just look at the first half of the year, we're looking at spending a lot more this year on land, and that has to come out. So we are looking for a lot more communities to open next year.

All right. And is it fair to say that the closeouts or a percentage of the closeouts we're seeing now is just the tail end of the strong sales activity from the back half of '20. And now that you started slowing things down, that's going to help slow the rate of closeout?

I'm not sure I understand the question.

Just, what I'm saying is, when you were -- you were running at a fairly hot sales pace in 2Q and 3Q of '20. Are the communities that are closing out now homes that you sold back then or at the end of the third quarter, and now these communities are closing out now. Is that why closeout seem to be running a little bit faster than we would have anticipated, is that?

Yes, that makes sense, because if you look at our closeouts, Jay, in the first quarter of this year, we had 36 closeouts. In the second quarter, we had 28. So we had 64 closeouts in the first half. We had 48 closeouts the second half of last year. So yes, I mean, when our sales started picking up in April and May, it takes 9 months or so to get through that. So yes, that's probably a good assumption.

And then I know other costs are rising, but the decline in lumber prices seems to be pretty dramatic. If everything stayed equal right now, when do you think the gross margin impact from those higher lumber costs is going to finish running through the income statement?

You know it, our markets are a little different as the way they deal with lumber, depending on if you're on a 30-day lock, a 3-month lock or those type of things in those situations, our vendors that have bought some higher price lumber. It takes a little longer to work through that. Most of that lumber is based on starts or whatever. So if I were asking when the -- guessing when the highest cost lumber is going to get through, I would say that would be by the second quarter of next year.

Okay. And then the last one I have and I'll jump back in queue. What percentage of your Smart Series sales are you getting up to like the dry in -- a dried in spec type level before you go ahead and accept the contract on that land?

Hardly any. In very few of our markets, are we holding houses off the market till they get to a certain construction level, we're really not doing that very often. We're handling it more on, okay, maybe we're going to sell 5 in there this month. The foundation -- I mean the slab may be in, there may be a little bit of construction going on. But no, there's not that much of, "Oh, let's make sure we get the house drywall before we sell it."

(Operator Instructions) As there are no more questions at the present time, I would like to return the floor to Phil Creek for any closing comments.

Thank you very much for joining us. Look forward to talking to you again next quarter.

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