Last week, D.R. Horton, Meritage, M/I Homes, PulteGroup, Ryland, and Standard Pacific all released results for the most recent quarter. There were hallmarks of a housing industry still making baby steps toward a recovery, but results to date have been largely better than many Wall Street analysts had expected. Although it's too early to call it a wrap on earnings season--M.D.C. Holding reports later this week, and Beazer Homes reports next week--a few themes have already emerged from the latest wave of public builder 10-Q filings.
First, despite soft housing demand, orders held up relatively well during calendar second quarter. Easier comps against last year's post-tax credit slump helped, but the numbers were also reflective of the public builders' move to open new communities and transition out of legacy communities. Some of the biggest jumps in new orders for the group came from two builders who have more recently accelerated community count growth. Ryland management saw orders shoot up 11.2% year over year, and Standard Pacific executives reported that orders climbed 6.2% during the quarter from last year.
The order stability among the group points to significant backlog growth. D.R. Horton, Ryland, and Standard Pacific all reported backlog growth of at least 20% compared with last year. Bigger backlogs suggest stronger revenues to come from future closings, a plus that may allow companies like Meritage and Horton to post a profitable year.
Given the stubbornly low sales volumes, costs have been difficult to keep in check. A number of builders saw SG#38;A decrease in absolute dollars and yet still saw increases in SG#38;A as a percentage of revenues during the quarter. But for as lean as many public builder operations have gotten, builder management teams are still finding ways to nip and tuck costs to help inch companies closer to profitability. Horton, for example, saw a 510 basis point improvement in SG#38;A as a percentage of revenues, coming in at an impressive 11.7%.
During the company's earnings call, Horton CEO Don Tomnitz said, "No one probably could've guessed we'd reduce our SG#38;A 510 basis points sequentially. D.R. [Horton] may have believed that, but I'm not sure I completely believed it."
However, showing up as a drag on earnings improvement was an outcrop of impairment charges. Compared with the kinds of charges builders took during the net operating loss tax carryback days, the size of the charges would seem nearly negligible. However, impairments are showing up on the public builders' balance sheets more frequently these days as builders move existing communities out of mothball and come to terms with the realities of today's new-home demand against their expectations during the land rush of 2009 and early 2010. M/I Homes took charges of $5.5 million this quarter while Ryland and Standard Pacific impaired to the tune of $5.8 million and $6.0 million, respectively. D.R. Horton took the biggest land-related charge at $9.9 million during the quarter; Meritage had the smallest charge at $590,000.
Although a number of analysts remarked on builder executives' more tempered outlook for the remainder of the year, it would appear that the bulk of the builders appear mostly on track vis-a-vis management teams' performance goals. Several are poised to make 2011 a profitable year, assuming no major changes or constraints on demand. As a group, they continue to work to tap into whatever pockets of demand are in the market, be it in certain geographies or for a specific product type. Texas continues to be a stronghold for a number of builders, and the move-up market is treating a number of builders a little better than the rest. But it's a moving target for builders, so there's pressure to move fast to close out legacy communities and open new ones that are better designed, positioned, and priced to meet today's market demand.