MDC (2020 - Q3)

Good day, and welcome to the M.D.C. Holdings 2020 Third Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Derek Kimmerle, Director of SEC Reporting. Please go ahead. Derek Ki

Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2020 Third Quarter Earnings Conference Call. On the call with me today, I have our Chairman, Larry Mizel; Bob Martin, Chief Financial Officer; and Staci Woolsey, Chief Accounting Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to M.D.C.’s business, financial condition, results of operations, 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 third quarter 2020 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 third quarter of 2020, discuss the current operating environment and provide some detail on our outlook for the company. M.D.C. Holdings posted another quarter of strong operating results, highlighted by year-over-year home sales revenue growth of 33%, homebuilding operating margin expansion of 370 basis points and net income growth of 96%. Net new order growth for the quarter increased 73% as compared to last year on a sales pace of 6.1 homes per community per month. These results underscore the excellent homebuilding fundamentals, we are currently experiencing across our markets and demonstrate our ability to grow our operations while continuing to improve our profit margins. The uncertainty surrounding COVID-19 pandemic has not diminished the demand for new homes, and in many ways, it has increased home buying activity, thanks to the growing importance of where and how we live. Homes increasingly serve as offices, classrooms and places of entertainment for the family, and as a result, people have gravitated to a living environment that can be accommodated in this new reality. While this trend has been a positive development for the overall housing market, it has been particularly beneficial to the new home market for several reasons. First, there is a limited existing inventory for consumers to choose from. According to the National Association of Realtors, total housing inventory at the end of September totaled 1.4 million units, which was down 19% from a year ago and represents less than a 3-month supply of homes. Second, a newly constructed home gives consumers the peace of mind that they will be living in a home that no one else has lived in, which is a real selling point for many families during these uncertain times. Third, new homes meet the needs of today’s families in ways that existing homes cannot, with the latest in smart technologies, innovative designs and customizable floor plans. These trends play into M.D.C.’s strengths, thanks to our build-to-order operating model, which allows homebuyers to customize their homes and select upgrades that suit their needs. Supplementing the demand we’ve experienced as the pandemic is a demographic shift towards home buying that we believe will serve as a tailwind for our industry moving forward. Millennials are increasingly aging into their prime home buying years, while baby boomers and empty nesters are looking to downsize into homes that fit their new lifestyles. M.D.C. is well positioned to take advantage of these demographic shifts due to our strategic focus on opening communities with affordable product. Home buyers of all ages are looking for value when it comes to buying a home. And we have found ways to accommodate the desires to more efficient floor plans while the combination of lower rates and pandemic-related buying has spurred demand across all product types, we believe the more affordable segments of the market will be the most resilient over time. We have been fortunate in having a deep bench at M.D.C. And to that end, I am pleased that Rebecca Givens has agreed to step into Michael’s role as Senior Vice President and General Counsel. I also want to highlight the recent promotions of Staci Woolsey, our Chief Accounting Officer, who is participating in the call with me today. On the operations side, David Viger has moved into the important role as Chief Operating Officer of our homebuilding operations. Anthony Berris has been promoted to President of our financial service operations; and Dawn Huth has taken on additional responsibilities as Senior Vice President of National Finance. All of these individuals have proven themselves to be highly capable leaders during their time at M.D.C., and I look forward to them contributing to our continued success in the future. And finally, I’d like to congratulate David Mandarich, who has been elected as President and Chief Executive Officer of the company. David has been associated with the company since 1977, most recently as our President and Chief Operating Officer, and he is widely regarded as one of the most skilled leaders within the homebuilding industry. His move into the CEO role is a key step in the evolution of our company, and I look forward to continued collaboration with him on strategic directions of the company. David will be participating with me in our earnings calls going forward. With that, I’d like to turn it over to Bob, who will provide more detail on our results this quarter.

Thank you, Larry, and good morning, everyone. We experienced strong top line growth for the quarter as home sale revenues increased by 33% year-over-year to $1 billion. Homebuilding operating margin improved by 370 basis points from the prior year quarter, resulting in a 109% increase in pretax income from our homebuilding operations to $101.7 million. In addition, our financial services pretax income increased $10.3 million or 73%. The increase was due to our mortgage business, which continued to benefit from a higher interest rate lock volume and increased capture rate and better net interest income on loans originated during the quarter. As a result, net income increased 96% to $98.9 million, or $1.49 per diluted share for the third quarter of 2020. Our tax rate increased from 19.5% to 21.5% for the 2020 third quarter. The increase in rate was primarily due to changes in the estimated amount of energy tax credits to be received during the respective quarters. For the fourth quarter, we currently estimate a 25% tax rate, excluding any discrete items. Homes delivered increased 25% year-over-year to 2,147, driven by an increase in the number of homes we had in backlog to start the quarter and, to a lesser extent, an increase in our backlog conversion rate. The average selling price of homes delivered during the quarter increased 6% to about $466,000. The increase was the result of price increases implemented across the majority of our communities over the past 12 months as well as a shift in the mix of homes closed from Nevada to Southern California. We are anticipating home deliveries for the fourth quarter of 2020 to reach between 2,400 and 2,600 units. Backlog conversion for the fourth quarter will be significantly lower than the fourth quarter of 2019 as a result of the considerable year-over-year increase in orders during the 2020 third quarter, many of which are unlikely to deliver this year. We expect the average selling price for 2020 fourth quarter unit deliveries to again exceed $460,000. Gross margin from home sales improved by 170 basis points year-over-year to 20.5%. As Larry mentioned during his opening remarks, we are taking a measured approach to growth, which includes maintaining a good sales pace at our communities while also implementing price increases to offset cost inflation and to maximize returns. While we have seen an increase in certain building costs, most notably lumber, as a result of the pandemic and other factors, we have been successful to this point in recouping these increased costs through home price increases. This has resulted in improved gross margins on both build-to-order and speculative home deliveries across each of our homebuilding segments. Gross margin from home sales for the 2020 fourth quarter is expected to approach 21%, excluding impairments and warranty adjustments. We continue to demonstrate solid operating leverage during the third quarter as our SG&A expense as a percentage of home sale revenues decreased 200 basis points year-over-year to 10.4%. Our total dollar SG&A expense for the 2020 third quarter increased $10.9 million year-over-year mostly due to variable commissions and marketing expenses that increased in line with our 33% increase in home sale revenues during the period. Our general and administrative expense was down slightly when compared to the prior year, primarily due to a decrease in stock-based compensation that was largely offset by an increase in salaries and other compensation-related expenses. Our overall headcount has increased by 5% year-over-year as we work to support the company’s strong growth trajectory. For the fourth quarter of 2020, we may see our general and administrative expense increase to between $50 million and $55 million due to the 5% year-over-year increase in headcount I just mentioned, additional bonus accruals in line with strong operating results and a potential charitable contribution to our foundation. As I previously mentioned, as a result of the continued expansion of our gross margin and our improved operating leverage, our homebuilding operating margin, defined as gross margin from home sales minus our SG&A rate, grew by 370 basis points year-over-year to 10.1%. On the strength of this improvement, our last 12 months pretax return on equity increased 560 basis points year-over-year to 21.8%, which is our highest level in 15 years. I would now like to turn the call over to Staci Woolsey, who will talk about our sales and backlog trends. Staci?

Thanks, Bob, and good morning. Let’s look at our net new home order information for the quarter on Slide 9. The dollar value of our net orders increased 89% year-over-year to $1.65 billion and unit net orders increased by 73%, driven by a 70% increase in our monthly absorption rate to 6.1%. The average selling price of our net orders increased by 10% year-over-year, driven by price increases implemented over the past 12 months as well as a shift in mix to California, which has our highest average price. During the third quarter, our California markets had nearly as many net new orders as our Colorado markets. I’d like to note that we ended the quarter with 194 active subdivisions, which is slightly higher than a year ago. With the strong sales activity we’ve experienced during the third quarter, we have a number of subdivisions that are approaching closeout earlier than expected. As a result, we anticipate roughly 185 active subdivisions at year-end, although this would be a decrease from the end of the third quarter, it would be unchanged from where we started the year. On Slide 10, we’ve provided further net new order detail by month since April. You can see that sales activity ramped up significantly after the initial slowdown related to the COVID-19 pandemic. We saw order activity peak during the month of August, but September remained strong and well above the prior year, even after we increased prices in most of our subdivisions. We also saw the rate of cancellations continue to decrease as the months progressed. We expect some seasonality to kick in during the fourth quarter. However, October has remained very strong relative to the prior year. Based on the activity we’ve seen to date, we expect our October 2020 net orders to exceed our October 2019 orders by at least 50%. Now we’ll turn to Slide 11 to discuss backlog. As a result of our strong sales, we ended the quarter with an estimated sales value for our homes in backlog of $3.1 billion, which was up 47% year-over-year. The average selling price of homes in backlog increased 4% due to price increases implemented over the past 12 months, decreased incentives and a shift in mix to California. These factors were slightly offset by a shift in mix to lower-priced communities, consistent with our ongoing strategy of offering more affordable home plans. And now I’d like to turn the call back over to Bob.

Thanks, Staci. I will now turn to land activity on Slide 12. The number of lots we acquired this quarter increased 63% year-over-year, reflecting our confidence in market conditions and our focus on continuing to grow our business. While the number of lots we approved earlier this year were down due to the uncertainty created by COVID-19, we approved over 3,800 lots for purchase during the third quarter of 2020. In the end, in spite of immense volatility, the number of lots approved over the last 12 months has increased by 34% compared to the prior year period. As a result, our total lot supply to end the quarter was 8% higher than at the same point in 2019, supporting our growth potential for future periods. We expect to see strong lot approval and acquisition activity continue into the fourth quarter given the robust demand that we have seen in recent months and our conviction about growth prospects for housing in future years. In summary, clearly, we are encouraged by the resilience the housing market has shown in the third quarter, given the immense challenges our country has faced in 2020, and we believe that we have executed our operating strategy well in this volatile environment. More importantly, we see an opportunity to sustain growth well into the future, supported by solid demographics and changing customer preferences. Our current backlog not only puts us in position for a strong end to 2020 but also provides us with the opportunity for significant year-over-year increases in home sale revenues and pretax income to start 2021. With our strong balance sheet and current land pipeline, we are well positioned to grow community count significantly in 2021 and have a preliminary target of at least 10,000 home deliveries for the coming fiscal year. We are mindful that there are many risks to achieving this target, especially with COVID-19 still impacting our daily lives. These risks will be closely monitored as we work to grow our company and the safety of our employees, subcontractors and customers will remain top priority. Following our strong third quarter, our Board of Directors has declared a 21% increase in the quarterly cash dividend from $0.33 to $0.40 per share. This represents a 33% increase from the prior year and demonstrates our commitment to rewarding our shareholders for their continued support. That concludes my prepared remarks. We will now open up the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Rehaut from JPMorgan. Please go ahead.

[Audio Gap] for Mike. My first question has to do with kind of how you’re thinking about community count into next year. I know you said you’re in a position to grow it significantly in 2021, but you’re expecting the step down in 4Q of this year because of more community closeouts. So do you have a sense of when you’ll be able to bring more of those lots online and how maybe the pace of how community count will trend through the first couple of quarters of next year and kind of to the end of the year?

We are not ready yet to share an exact number or percentage at this point. But based upon the current lots controlled and deals we plan to secure in the fourth quarter, we do believe that we have the potential for significant growth in 2021, possibly our biggest increase in quite some time. Staci, as you mentioned, she talked about community count going down in the fourth quarter to about 185 at the end of the year, and that would be about even where we started, 2020. And I think from there, the growth will start in the first quarter and then proceed from there. So no exact numbers, but I think we’ll start to see it in Q1.

Okay. That’s helpful on the Q1 color. And I guess another question. I know you – that the strength was pretty broad-based across the quarter. But are there any particular markets that you want to call out on a relative basis as performing maybe better or worse than the rest of the business?

I think, as you indicated, we’re really seeing strength everywhere. I think you can point to some of the areas that are affordable, like Vegas, Phoenix, Orlando, even though some of those areas have been impacted by the economy, by hits to hospitality, they still have performed well. The one that stands out to me a little bit is Southern California. You’ve heard mention a couple of times about a shift in mix back to Southern California. And I think, about a year ago, maybe 18 months, we talked about that market not doing so well. We were positioned more in the pricier price points in Southern California. Since then, we’ve really shifted towards more affordable areas of Southern California. And those have really served us well. I’m talking areas like Riverside, for example, really have performed pretty well, to the point where we almost had as many sales in California overall as we did in Colorado during the third quarter, and that’s not something we can say very often. So that’s probably the one that I would highlight as really standing out.

Got it. Thank you.

The next question comes from Ivy Zelman of Zelman & Associates. Please go ahead.

Well, thank you guys for taking my call. But first and foremost, I want to congratulate David Mandarich and everyone else who was promoted. And thank God, we’re going to have Larry still on the conference calls, because I don’t know what we would do without his entertaining insights. So congrats to you, Larry, and it’s been a pleasure working with you for a decade. So I guess big picture, jump ball, whoever wants to take it, recognizing that you are obviously very well positioned for the strength of the market to really provide supply to kind of that starved marketplace. But with price appreciation really accelerating at a robust pace, even if rates, let’s say, stay low, your input costs are rising across the board. How much further can prices rise before we start to see consumers push back with sticker shock? Is there in your mind, a level where pricing will start to have to flow? Otherwise, you’ll mitigate the positive affordability we see today, even with rates where they are?

I think, Ivy, that I go back to 2003, 2004, 2005, and if you look from a baseline to a high price point in that area, it’s substantially higher than what we’ve currently experienced. I do not see the affordability issue as something that concerns me at all.

Well, even with the reference point you mentioned, a lot of the affordability was offset with exotic mortgage products that allowed for the market to continue to see appreciation, which don’t exist today. So how do you respond to that?

I respond to the fact that, as you know, by your own published information, we have a substantial demand backlog that has not been met over the last period of years. So we have a broader market in which to appeal to. And therefore, the incremental difference of the percentage points that are possible over the next two years, I don’t consider it to be an issue. The issue deals with the focus on affordability is a relative term, as you know it, and whether the interest for the mortgages is 2.5% or 4%, you will have a reduction of certain people that are qualified. But the demand factor for affordable homes, and as you know, the term affordable changes depending on each market that we’re in, I believe that there’s a clear runway in front of us that will be very attractive.

Well, thank you very much. One more quick one for me, and I’ll let everyone else get on. Just let’s just theoretically say that next week, we get a democratic sweep. Tell us what that means for the housing market, both positively and if anything, negatively?

Well, I understand that one of the key elements of democratic sweep is going to be a 15% tax credit for making homes more affordable. And I couldn’t think of anything better than supporting a 15% tax credit. As you know, that’s not a deduction, that’s a credit, and that goes up and down people’s – individual’s tax rate. So I don’t expect, our homes are not priced for people that earn over $400,000, which is the focal point of the implication of additional taxes, but the offset was the $15,000 tax credit. And I think we’re prepared to deal with the evolution of whatever takes place. Housing is very important. Everybody, politically across the spectrum, is in favor of it. And I look forward to the next period of time, regardless, because we’re going to be there to do what you know that we’ve done for almost 50 years, is provide a superior product at a competitive price. And we’re always sensitive to the consumers’ needs, demands and requirements, and we provide that to them.

Thanks, Larry. Well, congratulations again. And hope you keep yourself busy. But if you need anything, we’ll give you some chat.

I always have time for more things.

All right. Be well. Thank you.

The next question comes from John Lovallo of Bank of America. Please go ahead.

Hey, guys. Thank you for taking my question. Maybe starting, Larry, with the appointment of David to the CEO position. I mean, my understanding is that over the years, David has been very involved in sort of the home design element at M.D.C. I mean, do you anticipate any change in the direction of that element of the business with David at the helm?

No, I don’t. David’s prior responsibilities, current and prospective, that product development, which is considered one of the, really the leaders in the industry, will continue and will even flourish as I see the company expanding substantially.

Okay. That’s helpful. And then, maybe just as we’re starting to see some of the single-family start activity accelerate, are there any markets where you guys are seeing incremental tightness in labor?

Well, I think every place there’s a good market. There’s always a little tightness in labor. The one thing I’ve learned over 50 years is another dollar per foot, per yard, per any measurement always seems to bring adequate labor to take care of your needs and with the size company we have and the volume and what we’re able to deliver to our subcontractors and suppliers and trade associates, we are able to competitively attract adequate labor and material to be very efficient in the delivery of what we do.

Thanks guys.

The next question comes from Truman Patterson of Wells Fargo. Please go ahead.

Good morning, everyone and congrats on a good quarter. Just wanted to follow-up on Ivy’s question. There does seem to be some affordability concerns with investors. Can you just discuss what you’ve been able to raise prices by over the past 3 to 4 months? And what sort of impact that’s having on demand? It seems like your 4Q order growth rate might have decelerated a bit from 3Q, just trying to parse out whether or not that’s affordability in pricing, or you intentionally slowing demand or just natural market deceleration?

I would take in all those elements you discussed. Really, affordability is not one of the issues. I think that we’re really in an accelerating market. And there shouldn’t be confusion within the marketplace that the necessity and the ability to expand production when you look at our growth and you look at the growth of our competitors, business is robust. There’s legs on it, and this is a part of the economy that is flourishing and will both economic and politically, continue to grow. Our exact percentage of price increases, I think, was in the range of 6%, plus or minus. And we did 2 things. One, we adjust for cost of goods sold. We adjust for bringing our pricing in line with the market, which means that we continue to be competitive as to our competition. The one thing about the housing industry, there’s always healthy competition. And I see competition, pricing power and availability, really all working together, and this is a special period that I think, as I commented earlier, I believe has legs on it. And we’re fortunate to be a part of it.

Thank you for that. Seems pretty positive. Just following up on that, Larry, you’ve been through a handful of cycles before. And I know that no two cycles are the same, but is there a prior period that really reminds you of today’s environment? Today, clearly, there’s strong demographic tailwinds, low rates, limited supply, but there’s also a potential for a lull of COVID, ended up pulling forward demand or the economy remains lackluster moving forward. Just hoping you can give us your thoughts on some of the moving parts.

I think that M.D.C. is that right product mix to capture the growth that is there in the market. As you said, this is – I believe this is my fifth cycle. That is if we count 90 days earlier this year as a cycle, which is – it was the shortest cycle I’ve ever been in. As you recall at the end of last year, business was good. The beginning of this year, business was good. And then it slowed down for a couple of months, as the world focused on what was going on. And now we are back, really in a level playing field that I see going forward, the prospects of the economy of the United States really is pretty reasonable. No matter whose numbers you take, we do have volatility. But in the homebuilding business at this time, there’s superior transparency, and I call your attention to our backlog, also the backlog of our competitors, this is a unique period. And I don’t see – and I think Ivy commented earlier about crazy mortgages in the prior period of, I don’t know, 2003, 2004, 2005. Well, we don’t have crazy mortgages now. Now you actually need a full set of documents, that they have reasonable credit. Pretty much, you have to have a job in one form or another. And so we’re no longer in that speculative financing bubble, but we’re in a solid environment dealing with people that can afford to have a home. And that’s probably the uniqueness, that there’s very little speculation that takes place in the market today, which is different from – as I said earlier. So I think we’re in good shape, the best I can see.

Thanks for that. And then one for clarity, Bob. Your fourth quarter G&A guidance of, I believe, $50 million to $55 million. I imagine the employee promotions come with a compensation bump. Does 4Q capture this? Or should we expect incremental costs going into 2021? And if so, could you maybe frame that for us?

I think Q4 captures that piece. Going forward, we are hiring some people, so that could influence what happens in 2021, but I think kind of that $50 million to $55 million is a decent run rate for now.

Okay. Thank you.

The next question comes from Stephen Kim of Evercore. Please go ahead.

Yes. Thanks a lot guys and congratulations to all with the new titles. Larry, I totally agree with you, with respect to the concerns about affordability likely being overblown, particularly at this point, when it seems like things are just kind of getting going. I wanted to ask you about the way price trended over the third quarter, over the last 4 months, basically. Would you say that it has gained momentum at all on a like-for-like basis? Or do you think it was pretty steady through the quarter?

I – I don’t see news, the analysis, Steve, of momentum. It’s – if you look at Bob’s comments on backlog and kind of where we’re going, as you can see, we’re what you call a Steady Eddie, we’re in a positive, constructive direction and the proof is in the pudding, in the sense that we have – Bob can give you the public numbers or you’ve got it there on the dollars and the units in backlog. And that’s your deliveries for the next six months. So you can see that it’s fully transparent, Steve.

Yes, no, it’s great. Of course, the order price being up 10% year-over-year, really caught our eye. I was wondering, Bob, how much of that number is aided by increased spending on upgrades from homes that were maybe – the orders were placed earlier, but now the people are sort of spending more on upgrades versus, let’s say, kind of a like-for-like.

The increase isn’t huge year-over-year on just the Home Gallery spend, it’s probably up about 5% to 10% year-over-year. But I don’t think that’s the big driver. The bigger drivers are the mix of California and just overall price increases that we’ve taken over, not just this past quarter but over the past year.

Yes. Got it. And then, you gave the guide, the nice guide here for 4Q gross margins up about, I think, like, 250 basis points or something year-on-year. Is it fair to think that much of what you see in that strong 4Q gross margin though, doesn’t really even reflect the strength that we’ve been talking about here, manifesting in 3Q, just given how long your delivery cycle is, that was really more stuff taken, sold before that?

Yes. I mean, I think there’s some truth to that, just in that we did increase prices about 95% of our communities during Q3 and particularly towards the back half of Q3, and most of those houses are not likely to close until 2021. That said, of course, we’re mindful of lumber costs that are not fully flushed through either and the potential for other cost increases. But you’re right, the price increases are not fully in that number.

Yes. And then, Larry, you talked about, one of the reasons why you’re not overly concerned about affordability, is that basically, you’re not seeing any evidence that people can afford the homes, after all they are, in the existing market, they’re outbidding people left and right, they’re trying to outbid each other. We understand in the existing home market, prices are up easily 15%. I’m curious about – and you also mentioned this $15,000 potential freebie if you get a Biden presidency and Blue Sweep. But you didn’t mention the FHA loan limit, which is also poised to increase by a much greater percentage than we’ve seen in quite some time, just given how strong pricing is going. And that should basically hit all at once in January. I’m curious, are there many markets where you’re operating? I’m thinking maybe in California or other markets where that will have a noticeable effect on your ability to gain some headroom on price for your FHA dependent buyers?

I would say your question and your observation should say, yes, those are further opportunities, but we don’t have those opportunities presented to you today because that would be speculative assumptions and our obligation is to give you the facts as they exist and hope for better things.

Got you. Well, thanks very much guys. Keep up the good work.

Thank you, Stephen for your support for the years.

The next question comes from Alex Barron of Housing Research Center. Please go ahead.

Yes. Thanks guys. Congrats on the good work and on the promotions. I wanted to ask, you guys have made a definite shift in, towards affordability, through Seasons and other brands. I was just kind of curious if you could quantify what percentage of your orders today, those homes represent versus a year ago? And where you see that mix going into next year?

Yes. As we look at what we’ve done this quarter for sales, I believe the number is about 40% Seasons and about 60% overall when we think about affordability and those products. As I look a year ago, we’re starting to kind of annualize on it a little bit. But a year ago, I think we were right at about 53% affordable overall, and Seasons was about 33% for the quarter.

Got it. And based on your land purchases, do you expect that, that ratio will continue trending up?

I think it could. I think you could see Seasons move closer to 50%. And maybe affordable could move closer to 70%.

Got it. And so I guess that would imply that your sales pace could also move up a bit. But do you feel that at this point, you guys have hit some type of a ceiling in terms of where sales pace is likely to go? Or are you imposing some, let’s call it, artificial sales caps on how many homes you’re willing to sell per community, where you’re pushing prices? Or where are you guys seeing your capacity to absorb sales pace at this point?

I don’t think we’ve seen a ceiling yet, per se. And we’re balancing it. We’re not cutting it off. We are trying to make sure we’re balanced between the pace and price. As I kind of think of it going forward, I always think of four to five sales per community, per month, on an annualized basis as being a pretty healthy level. If you look back in history, so that’s at least one benchmark out there.

Okay. Great. Best of luck for next quarter. Thanks.

Thank you.

The next question comes from Jay McCanless of Wedbush Securities. Please go ahead.

Thanks for taking my questions. The first one I had, just wanted to find out, with the spec count being down as much as it is versus last year, what the plan is, if you’re going to try and reload that spec count going into the spring? And then also maybe talk about the differential now between spec and to-be-built margins.

Well, first of all, M.D.C.’s policy as a concept, is not to build specs and the specs that are created are strategic as to particular subdivisions and fall out during construction period. We consider it very advantageous to our business model to keep the spec count low. Right now, specs are selling in a somewhat of a strong basis. But what I think is unusual that we’re very proud of, is our work in process, and aggregate is, Bob, you can jump in, it’s 96% of our WIP?

That’s right.

96% of our WIP is presold. And right now, no one thinks about risk and reward, that over all these decades, if you listen to replays or any of our material, we focus on risk-adjusted returns, and we found that we can make as much or more as in the industry, with not speculating in land and not speculating in building of homes. There’s always a time that there’s an inflection that, like, okay, specs are pretty good today. And being long land is good, but we found over 60 years, a balance of land supply of two or three years works. And we found that mitigating any speculative inventory, except that, which becomes normal works because our risk-adjusted returns contemplate that this is an industry that’s in cycles, but you can also look at the confidence we have of our structure over the last 10, 15 years and one of the – maybe the only companies that has maintained and had a large cash dividend, which you probably saw, we substantially increase. So our attitude on it really deals with getting the maximum ROE and maintaining a solid balance sheet and providing a return to our shareholders that we’ve done not only with the appreciation of the stock, but also a continuous large dividend vis-à-vis our industry. And that’s really kind of how we look at it, and we’re going to stay consistent with not speculating in land and not speculating with specs because that has worked best for us in our business model.

Great. Thank you. Thank you for that detailed explanation. So the next question I have, cycle times on your to-be-built homes, where do those stand now versus maybe this time last year?

Yes. The number from sale to close is about 215 days. A year ago, it was 198. If you’re just talking about the start to finish, it’s about 142 days versus 132 a year ago.

And then the last one for me, just since you all did talk about October sales growth being up, could you give us what the order count was for October 2019?

566 net.

566. Okay. Great. Thanks for taking my questions.

[Operator Instructions] The next question comes from Ken Zener of KeyBanc. Please go ahead.

Good morning, everybody.

Good morning.

So just I want to make sure I had connection. It’s – obviously, it’s easier right now to take an order than it is to start a house. So can you talk to perhaps some of the growth constraints we should think about? And what I’m referencing there, your inventory units are up about 26% year-over-year. And your backlog is up 41%. Obviously, there’s quite a bit of momentum. Can you talk to other builders, while taking good orders, actually ran out of available communities in FY 2021. So that kind of limited structural growth. Can – with 96% of your WIP sold, how – what is your propensity to really start building more? And what are some of the issues that you’re facing there? Because I think the demand is there, writing an order can be done easily. But the reality is, there’s a lot of parts that need to come together. So you talked about 4.5 units of orders. That was something you threw out there, which could be a reference point for next year. But what are issues that you think about? I mean, could you face another quarter of such strong seasonal order growth? Or are you hitting a system, a constraint right now that you’re just – that you could outline for us? Thank you very much.

Yes. I think there was a lot to that question, and I’ll try to tackle it. I think with a lot of demand coming on, you always face that question, is there enough labor out there? I think there’s lots of reasons to believe that the situation is better today than it was several years ago when we saw cycle times increase more substantially. Yes, you’ve got multifamily, maybe that’s not doing as well, apartments, condos, you’ve got oil and gas not doing as well, and that tends to steal our labor sometimes. So that gives me some optimism about the situation that we’re in now, even with a lot of demand coming on. That said, I still think it is a headwind for us that we’ll face as we go into next year. I don’t think you can quite quantify it at this point. But we’ve got a great team in place to handle those challenges. And to this point, they’ve been able to manage it.

I want to add a further comment for M.D.C., as you go to a prior period of time where I believe we delivered 15,000 homes, and so this isn’t an area that we don’t have an awareness of. Our construction teams are really unusual. The industry, and I use it as a broader term, not just for M.D.C., really has a higher level of management and skills of the personnel that work in the major companies, that maybe the general public doesn’t realize it’s become really an industry that has highly educated individuals managing it. We have people in this field with great skills. We have technology that moves the elements around and the opportunity of expanding production is something that we’re fully engaged with. And I think we’re confident that we’ll deal with the challenges that it presents. And then they’re all good challenges, by the way. They’re all good problems, they say.

Right, good problem. I guess, let me ask the same question, shorter words. What is your order time, taking the order in to when you actually start the house? Can you – I mean, it’s – obviously, you must be starting your orders. But is that – has anything changed there? Thank you.

We’re actually doing more of what you might call pre-planning. The cities, as they’ve adjusted to extra business, we found that we have to help and supplement their processes and procedures, and we are, consistent with your question, we are moving forward what we do in a tighter time line, whether it deals with getting building permits or inspections. All these are elements. I don’t think any of us six months ago thought that the mortgage industry, in our world, would be remote that you could run multibillion-dollar mortgage operations with people working from home. It’s pretty exciting to see the changes, and even though the office loads have gone down in many companies, many industries, I really see great productivity.

Thank you.

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

Thank you. As we bring the call to a close, I would like to make special mention of our long-time General Counsel, Michael Touff, who has announced his retirement after 26 years of service. Michael has been an integral part of our leadership team since 1994, and we wish him well in his next chapter. Thank you, Michael. And with that, we will conclude our earnings call, and we look forward to hosting you again after we complete our fourth quarter.

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