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MDC Holdings Inc (NYSE:MDC)
Q1 2020 Earnings Call
May 5, 2020, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to M.D.C. Holdings 2020 First Quarter Conference Call. [Operator Instructions] [Operator Instructions].

I'd now like to turn the conference over to Mr. Derek Kimmerle, Director of SEC Reporting. Please go ahead.

Derek Kimmerle -- Director of SEC Reporting

Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2020 First Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, Chief Financial Officer.

[Operator Instructions] [Operator Instructions].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 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 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.

Larry A. Mizel -- Chairman and Chief Executive Officer

Good morning, everyone, and thank you for joining us today as we review our results for the first quarter of 2020 to discuss the current state of our operations and outline the steps we are taking to mitigate the impact of the COVID-19 pandemic on our business. First and foremost, I'd like to emphasize that MDC is taking this situation seriously, and we are using the CDC guidelines to protect our employees, subcontractors and customers. We have adjusted our business practices to do our part to provide healthy work environment in an effort to combat the spread of the virus. These are trying times for everyone, and I have been very impressed on how our company has been able to adjust to this new reality in such a short amount of time. As evidenced by the results of our first quarter 2020, MDC was poised to build on the strong momentum we generated in 2019, thanks to a continued favorable economic backdrop, elevated consumer confidence and low levels of existing inventory. Demand for our homes was exceptionally strong in the period leading up to the escalation of the virus spread as buyers responded positively to our home offerings, particularly at the more affordable price points.

This order momentum began to deteriorate at the end of the quarter as it became evident that we had a nationwide need to take unprecedented actions to deal with this pandemic. While the pandemic has caused a slowdown that is unlike any other in our industry has faced, many of the steps we are taking to adjust to this new reality are the same ones we have taken throughout the downturns in the past and ultimately thrived. We have one of the most experienced management teams in the industry, a distinction that provides our company with the knowledge and history perspective to navigate challenging times, such as this. Although it is unclear what the full impact of the pandemic will be on our economy, I am confident that we have the right people and strategy in place to respond to the challenges we are facing. One of the keys to weathering any storm with how you is how you are prepared going into one, and MDC has always put an emphasis on being prepared for the unexpected. We consistently maintain one of the strongest balance sheets in the industry, and we believe this strength will be a considerable asset for our company during this time of uncertainty.

We ended the first quarter with a debt-to-capital ratio of 37% and a net debt-to-capital that was 25%. Total availability of liquidity at the end of the first quarter stood at $1.4 billion, including $452 million of cash and investments and $959 million available under our $1 billion line of credit. With low leverage, ample liquidity and senior notes coming due not coming due into 2024, MDC remains one of the most financially sound and well-capitalized companies in the homebuilding industry. MDC's first quarter earnings call points out the very exceptional points. MDC is well positioned from an operational standpoint to deal with a sudden slowdown. This business model that adheres to a build-to-order strategy and limit speculative home production. While we acknowledge that building up new home inventory in anticipation of demand can improve asset turns in good times, but it can also lead to distressed sales and depressed margins, especially in bad times. We believe the more prudent strategy is to have a buyer in place before building the home and that the opportunity to personalize a home is attractive to buyers.

We also believe that a buyer who has been engaged in the homebuilding process through the selection of finishes in their homes is more invested in the process and, therefore, is less likely to cancel. Excluding models, approximately 90% of our work-in-process inventory balance at the end of March was sold and that the remaining and that fact remains true even now as we through the end of April. Another way we have limited our downside risk is through our land management strategy, which targets approximately a three year land supply. We feel that this level of land inventory gives us an appropriate runway of lots to grow our presence in our markets while limiting our exposure when conditions deteriorate. We have additional flexibility with respect to our lot inventory, thanks to our use of option agreements to control land.

Not only is this a more capital-efficient way to manage our capital, it also gives us the ability and opportunity to renegotiate the terms of the agreement when selling conditions take a turn to the worse. In summary, the housing industry and the broader economy are currently facing an uncertain future brought about by a global pandemic. And though there are still many unknowns on how this will ultimately play out, we believe MDC is well prepared for whatever comes next to our seasoned leadership team, our solid financial condition and our risk-adverse operation strategy. We run our business to be successful through the entire homebuilding cycle, and we feel this mindset has made us better equipped to adversely handle all such issues. It has also allowed us to pay an industry-leading dividend to our shareholders, which translates to a 4.6% yield predicated on yesterday's closing.

And with that, I would like to turn it over to Bob Martin, who will handle additional financial details and conditions and the state of our operations. Bob?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thank you, Larry. I will keep my comments on first quarter information relatively brief this morning so that I can focus more time on current market conditions, including the selected information for April that was published in our release this morning. During the first quarter, our homebuilding pre-tax income increased by 21% to $49.7 million, driven by 8% growth in home sale revenues to $697.1 million and a 100 basis point expansion in home sale gross margins to 19.9%. Our mortgage company was also successful during the quarter with a 65% increase in pre-tax earnings to $8.2 million. However, the success of our homebuilding and mortgage operations was offset by unrealized losses on equity securities of $13.9 million due to the severe impact of COVID-19 on the stock market, whereas in the prior year, we had an unrealized gain on equity securities of $4.6 million.

As a reminder, these equity securities form part of the investment portfolio held by our insurance companies, and the holding period of these investments is intended to align with the longer-term nature of the underlying insurance reserves held by these companies. Furthermore, about 1/3 of the unrealized value lost in the first quarter was recovered in April. As a result of the unrealized losses, net income for the first quarter of 2020 decreased to $36.8 million or $0.56 per diluted share versus $40.6 million or $0.64 per diluted share in the first quarter of 2019. Our tax rate dropped from 27.1% to 24.3% for the 2020 first quarter. The decrease in rate was primarily the result of a windfall on nonqualifying stock options exercise and lapse restricted stock awards during the quarter as well as energy tax credits related to homes closed during the quarter. These benefits were partially offset by a decrease in the amount of executive compensation that is deductible under Internal Revenue Code Section 162(m).

Homes delivered increased 14% year-over-year to one,547, driven by an increase in the number of homes we had in backlog to start the quarter. We estimate that we lost approximately 50 deliveries during the first quarter to delays or cancellations caused by COVID-19. The increase in units delivered was slightly offset by a 5% decrease in our average selling price to about $451,000. This decrease was in line with our strategic focus on affordability as a percentage of our deliveries from more affordable product collections rose to 56% for the first quarter of 2020 versus 49% for the same period a year ago. COVID-19 has created numerous challenges to the process of finishing and closing our homes, but many of those challenges were addressed by using technology to supplement or replace in-person processes, as needed. For most of our markets, residential construction activity is deemed an essential service, so construction activity has continued with precautionary measures in place even during shelter-in-place orders. Within our footprint, the most severe restrictions we encountered were in Washington State, which deemed residential construction as nonessential in late March.

However, in late April, the governor eased those restrictions, which has allowed our construction activities to resume with strict safety measures in place. Despite the ongoing challenges related to COVID-19, we still saw deliveries increase by 11% year-over-year in April. As previously mentioned, our gross margin from home sales improved by 100 basis points year-over-year to 19.9%. This increase was due to a lower percentage of spec home deliveries in the first quarter of 2020, which typically have lower gross margin than our build-to-order deliveries. Gross margin for both our spec and build-to-order deliveries also benefited from price increases implemented during the second half of 2019. Naturally, there is a potential for pressure on gross margins if difficult economic conditions persist and force home price reductions or increased incentives. However, to date, we have not widely adjusted prices or incentives, and therefore, our backlog margins have not changed significantly since the start of the year. Additionally, to protect gross margin, we are negotiating with our subcontractors for reductions to labor and material costs, given a more uncertain demand environment. Our total dollar SG&A expense for the 2020 first quarter was up $7 million from the 2019 first quarter.

The increase is mostly due to higher general, administrative and marketing expense due to increased compensation-related expenses driven by higher average headcount during the quarter. Marketing expenses were also impacted by increased sales office expense and product advertising due to an increase in average active subdivisions. Our general and administrative expense for the first quarter of 2020 includes approximately $800,000 of severance expense. Since mid-March, approximately 140 positions across the company and its subsidiaries have been eliminated given the uncertainties presented by COVID-19. These reductions have amounted to about 8% of our total workforce. The dollar value of our net orders increased 28% year-over-year to nearly $1.1 billion, driven by a 23% increase in unit net orders and a 5% increase in average selling price. Our monthly absorption rate of 4.3% was a 16% increase from the 2019 first quarter. The improvement occurred both in more affordable and traditional product categories, and the largest year-over-year percentage increases were in Phoenix, Seattle, Utah, Nevada and both Northern and Southern California. Our first quarter net orders further benefited from a 6% year-over-year increase in active average active subdivisions. The increase in average selling price for net orders was driven by a shift in mix to Southern California, which is one of our highest-priced markets. The average selling price also benefited from price increases implemented over the past nine months.

On the next slide, we provided some detailed information on the monthly cadence of sales and cancellations, including for April. As Larry noted earlier, we experienced a significant decline in traffic and order activity during the second half of March and continuing into April because of COVID-19. As a result, the strong year-over-year increases we saw in January and February faded to a 53% year-over-year decrease for net orders in April. As you can see on the table, a large part of the decrease for net orders was due to elevated cancellations. We estimate that approximately 100 of 305 cancellations accepted in April were directly related to the impact of COVID-19. Geographically, the largest year-over-year decreases in net order activity for April occurred in Washington, Nevada, Northern California and Florida. For gross orders, the year-over-year decrease for April was only 27%. Although this was still a significant decrease, we found it encouraging to see so many buyers writing contracts during such a turbulent time. Also, as many of our peers have already noted, order activity in the back half of April showed improvement relative to earlier in the month. Additionally, the level of gross order activity was encouraging, given that we have not widely used additional incentives or price decreases to drive sales activity.

Our patience in this area stems from several factors. First, the overall level of new and existing home inventory is low in our markets across the country; second, given our build-to-order model, we have a very low amount of unsold speculative inventory on our books, less than 400 units in any stage of construction at the end of March; finally, even after a lackluster month of sales in April, we had 4,487 homes in backlog, which was 18% higher than at the end of April a year ago. With the impact of COVID-19 becoming increasingly apparent in March, we approved only 2,087 lots for purchase during the first quarter of 2020, which was a significant drop from the 4,756 lots we approved in the fourth quarter of 2019. However, total land spend for the quarter still was up almost 35% year-over-year to $225 million. I would expect our rate of spend to decrease in Q2 based on steps we have taken to reduce cash outflows during this time of uncertainty. Specifically, we have worked with our land sellers to extend the closing date for many of the land purchases that were planned in the coming months.

Additionally, for lots we own, we have adjusted or delayed planned development activities to decrease cash expenditures in the short term. Our lot supply to end the quarter was 19% higher than at the same point in 2019, and 31% of the lot supply was controlled by option. To sum up, I first want to make it clear that safety will continue to be a top priority as we continue into the second quarter, even as we see some loosening of shelter-in-place restrictions. It is hard to take an optimistic view when COVID-19 pandemic continues to cause pain and uncertainty for so many people across the world. However, we are encouraged that low housing supply and interest rates continue to attract customers to our industry. We take pride in our strong balance sheet and strategic market positioning, which have been developed over time based on the experiences of our most senior leaders and allow us to reward our shareholders over the long term.

That concludes my prepared remarks, and we will now open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] First question comes from John Lovallo, Bank of America. Please go ahead.

John Lovallo -- Bank of America -- Analyst

Hey, guys. I thank you for taking my questions and I hope everyone is doing well. The first question is, it sounds like you guys have been very disciplined on the pricing front. But have you seen any easing in kind of pricing from some of your competitors in any of your markets? Has any of the discipline across the industry begin to erode?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think that where you have circumstances that some of the builders that have speculative inventory have probably become more inclined to have price adjustments because of carrying so many specs. As Bob mentioned, our entire company from foundations to completion only has 400 specs. And I think the completion amount of specs, Bob will have to comment when I'm through, is a reasonable amount. So it's a matter of how did you run your business, and MDC always runs its business on a strong backlog. As we commented, 90% of our WIP is all presold. So the markets are specific, and we compete by delivering a superior product on a competitive basis, and we have not followed that path.

John Lovallo -- Bank of America -- Analyst

Got it. Okay, that's helpful. And then in terms of, I think, Bob, you may have mentioned that, I have the numbers right here, about 105 of the cancellations were directly related to COVID. Can you just help us understand, I mean, is that because if you have insight in this, is that because of job loss? Is that because of mortgage contingency? Any help there would be appreciated.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes. I think we scrubbed our backlog pretty hard just to make sure that we understood where each of our buyers are at, as we always do, and I think a lot of it was just due to job loss. I think you had some that were just more nervous in this environment given the uncertainty. So those kind of things that we're floating through.

John Lovallo -- Bank of America -- Analyst

Okay, thanks guys.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thank you.

Operator

Our next question comes from Alan Ratner, Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good afternoon. Glad to hear your both doing well. First question, just on that the last topic on cancellations. Can you talk a little bit about what's going on in the mortgage market in terms of any of those cancellations occurred maybe not necessarily by direct job loss but because your buyers couldn't qualify for a loan any longer given tightening? The loan program doesn't exist, maybe their FICO score was below an overlay cut off? And more broadly, what you've been seeing in terms of the trends of credit tightening over the last couple of weeks?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think what we've done is we've looked at each one individually. And we all know there was some credit tightening both on raising FICO scores and jumbos. As you saw, our average sales prices in most markets are all in a conforming nature. And the job loss, the fallout was both by employment and, I would say, not so much underwriting. We are conservative in our mortgage operations, so our backlog with quality buyers has been carefully vetted. And what we have done is go back again and where there was any conditions of selling their home or other unique circumstances that normally would have a lower risk, we've taken them out of backlog. We continue to dialogue with people, but we don't want to be under construction on something we believe has a unreasonable risk of closing. We have been able to successfully close our backlog using remote activities and technology, as they say. And Alan, it's working out just fine, and we're maintaining that backlog quality. And as Bob said, it's a large backlog, and we're managing it, as you would expect us, on a very conservative but aggressive basis as far as getting the job done.

Alan Ratner -- Zelman & Associates -- Analyst

That's very helpful, Larry. So just interpreting what you said, it sounds like a good chunk of these cancellations were on homes that you either haven't started construction on yet, or perhaps they were early enough in the construction process where you felt comfortable kind of scrubbing that backlog and making sure you didn't put additional dollars into the ground. Is that a fair characterization?

Larry A. Mizel -- Chairman and Chief Executive Officer

I would say it's reasonable characterization. We're not interested in building homes that don't have a real commitment, whether the commitment is from our own mortgage company or from others. Where we had outside loan commitments in writing from others in our mortgage company, we evaluate, we have and we are and we will, the quality of those commitments and the information that they had when they issued the letters. So we're doing a, you might say, double scrub. Relying on someone else, not so much; relying on ourselves, of course. And so, therefore, we're going through it in a proper way that makes it balanced. We're getting that backlog, maintaining that 90% that was sold with WIP.

Alan Ratner -- Zelman & Associates -- Analyst

It will that's helpful, thanks a lot. Good luck, and stay safe thank you.

Larry A. Mizel -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Stephen Kim, Evercore ISI. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much guys. First question, I guess, to talk a little bit about the end markets. I guess, particularly in April, would be what I'd be interested in. I guess, you could talk about cancellations, but also just the gross order activity. On your across your portfolio, seasons versus some of the more move up products, do you see any change that was worth calling out between those various product types?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think that what you see is probably the affordable as defined in each market is different has got more attention. It is a deeper, broader market. Every as you know, every market is a little different in every product and subdivision. And as you know, Stephen, that we are focused on affordable product. And we have a broad range of affordable product, and we've been able to bring it into almost every market we're building in. And this has in addition to being able to individualize, first, the homes yourself, you're also able to get a new and now evolving more modern look on the products. And as you can see from the disclosure, our model homes have increased, and that is new and exciting product. But also, those the growth in the subdivision count we continue to move forward. And I think during these different times, we will be able to focus on expanding even more the depth of our affordable product offerings.

Stephen Kim -- Evercore ISI -- Analyst

Great. Yes, that's certainly a continuation of what you've been saying. Another area of difference is social distancing, and I'm curious as to two ways in which you might have seen that play through your business, if you could just comment on that. One is, on the construction, the actual physical construction of the units, it didn't look like there was much of an impact in the 1Q, maybe just a 1% impact on the turnover. I was curious as to whether you expect cycle times to increase in 2Q. Would that be kind of a reasonable expectation or not? And then secondly, in terms of the sales, which are happening with a greater virtual content, that process, are you seeing any ability to because of your greater interaction with customers virtually to reduce your co-broker commission?

Larry A. Mizel -- Chairman and Chief Executive Officer

First of all, in the construction side, we are very proud that we have implemented handwashing, distances, disinfectants, masks as requirements that we have on our subdivisions. And I can say that there has been testing by different regulatory groups, and some of the builders didn't get the message quick and realized that if you're going to continue construction, you need to be in the compliance. And we do have the handwashing stations, the disinfectants and the masks and do require social distancing. And I don't think it's been a big impediment. It took a little adjustment for the guys in the field to get the message. But if they want to work and they want to get paid, then they follow the rules, and those are the rules when you work on one of our jobs.

Sales, it took a little bit of adjustment, but I think it's pretty awesome. Our skills, I would say as others, have improved substantially, our sales skills. And it has required the individual salesperson, the sales managers and the division managers to really, really focus on how valuable every lead is and every person that comes in through our portals. Those are leads that are extremely valuable, and they've learned to work them even better. So I would say when we look back on this period of time, we've probably improved our skills by some factor by being forced to change. And in this case, in sales, I believe it'll have a very positive effect on our capture rate vis-a-vis whatever the market might be. We're not going to lose any of them because we didn't pay attention one lead at a time.

Stephen Kim -- Evercore ISI -- Analyst

Okay. But no specific outlook or what you're seeing on co-broker commissions specifically?

Larry A. Mizel -- Chairman and Chief Executive Officer

So on the co-broker, we have consistently been in the brokerage community as a co-broker participant. There has been a few builders that have increased that, first of all, maybe didn't do co-ops. Now they're doing them. And we've done consistent pricing and stayed in the relationship with the brokerage community. And our commissions are consistent with what they've been, and we welcome that brokerage community, as we always have, in all the markets. So our application of that issue or experience with that issue is consistent with what we think is good business, which is to maintain, whether good times or bad times, that relationship.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much.

Larry A. Mizel -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ken Zener of KeyBanc. Please go ahead.

Ken Zener -- KeyBanc -- Analyst

Hello, gentlemen. I just have one question, which is on you're focused on backlog for margin preservation, understand that. As you look forward on costs, so pricing with your vendors, because there's obviously more than one step to construction, can you walk us through how you envision dialogues around price work, given that the environment we're in right now or if it continues to be down? For example, framing versus installation versus painting. There are three different phases, obviously, to a house. So have you been able to have discussions? Or is essentially the trade saying, "Look, too early, we don't know if there's going to be a bounce back in May as restrictions get out of Northern California and Washington as opposed to what you're seeing in Denver." Could you give us some thought around how that might that discussion might work out?

Larry A. Mizel -- Chairman and Chief Executive Officer

The discussion has worked out well. We started asking for price adjustments maybe six weeks ago. We've continued those efforts. We are receiving in current payment cycle many of the concessions that we receive. We expect to and are being successful in reducing costs in many of the areas across the country, and expect that to continue with the reduction of apartments, reduction of commercial and the overall reduction of residential. Our trade partners understand that when they have the some of them, not all of them, had the euphoria of last year of every month, things are getting better, the reciprocal is working now. Maybe every month, we'll get a little slower and the trades are adjusting, and they're responding by giving us, in some cases, the meaningful concessions. And we are using those concessions as applicable in enhancing what we're working on in opportunities of pricing.

The other thing that you didn't mention, but I will, is the land sale part of it. Most not all, but most of the land sellers are extending time of performance out. They are extending, in some cases, pricing. And since our discipline of acquiring land is very conservative, we are never in a position that we have a meaningful amount of dollars invested that are at risk regardless of what happens. So we've spread the risk in our contracting. And the land developers, I think, are being very smart by extending, giving you time and, in some cases, some price concessions, they really enhance the relationships and they need the relationship with the large builders because that's their source of cash flow and profit. So I would say, purchasing has worked out well, and we're continuously working on it. And we're on this current pay period, many of the concessions we're realizing, and that's kind of how things stand at this point on your question.

Ken Zener -- KeyBanc -- Analyst

I appreciate that. Yes, was there any issues with your trade going bankrupt due to all these cash flow concerns? I know there's a lot of stimulus out there, but have you seen any contractors going bankrupt due to the lack of liquidity?

Larry A. Mizel -- Chairman and Chief Executive Officer

Well, first of all, we always assume that they're in trouble, even if they're not. So to the maximum extent we could or can, we do joint check them. So if a person provides labor and material, if it's meaningful, we joint check them. And we keep a very, very close eye on our trade partners and understand that that's a traditional risk. But usually, the risk doesn't have an exposure greater than 30 days of payment because one thing about the construction industry, no one shows up to work if you don't pay them for a little bit, and a little bit could be a couple of paychecks. So the labor part, we're able to nail quickly. And the part that we watch and we document is the materials that are supplied to the subs when they provide labor. And at this point, we haven't found an issue that we were not on top of, and that's part of just running our businesses and staying on top of the credit issues with the trade partners.

Ken Zener -- KeyBanc -- Analyst

Thank you.

Operator

Our next question comes from Buck Horne, Raymond James, please go ahead.

Buck Horne -- Raymond James -- Analyst

Hey, thanks, good afternoon. Not to belabor the cancellation question a whole lot further, but I just want to I understand if there was a timing differential between when you saw the most cancellations in April. Were there with the fallout in March, I mean, did you see a surge of early cancellations immediately in early April? Or was it more back-end loaded into the end-of-the-month closings? And how do you feel about the potential for a similar playing out of that in May? How would May differ from what you saw in April?

Larry A. Mizel -- Chairman and Chief Executive Officer

Bob, you want to answer that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Sure. Buck, with cancellations, it's kind of hard to specify it week by week. I think there was a lot of uncertainty in the first part of April and the last part of March, and we talked about how our net orders improved in the back half of April. So that certainly tells you something. I think we look at the backlog very hard and try to be conservative with our backlog, as Larry noted earlier, to try to make sure that we aren't starting houses that don't make sense to start. So every week, our division management meets goes through the backlog and really evaluates it based upon kind of what was happening at that time. And of course, earlier on in April, I would say the uncertainty was a little bit greater. To the extent that, that continues to get better, that we have less uncertainty here going into May, that may help our cancellation circumstance. But there's still quite a bit to be resolved in May, so we'll wait for the next call to make reports on what's happening in May.

Buck Horne -- Raymond James -- Analyst

Okay. That's helpful. And maybe just maybe focus more on the gross order trends through the month. But I'm curious if you can give any extra color on how some of the maybe more diversified markets like a Denver or maybe a Phoenix performed or started to recover relative to the more tourism-related markets like Orlando or Vegas for you. Were there any signs of improvement in some of the in Orlando or Vegas? Or how do those compare and contrast versus some of your other markets?

Larry A. Mizel -- Chairman and Chief Executive Officer

Yes. I would say your question is, like, on point is as you look at Orlando and Las Vegas, you have obviously, the entertainment tourism business is a key element. And as you look at Phoenix and Denver, you have a broader base economy. And I think you'll see from all the builders, those two cities have a very good tone. In the first two cities you mentioned, in Vegas and Orlando, needs improvement, and improvement will come with the reengagement of tourism and gambling, which is tourism. So all these items are yet to be fully discovered. But every week, things have continued to have a better tone, just like the stock market. It's a little crazy, but when it's up the $334 right now, you feel good. And a couple of days ago, you didn't feel so good. So but our business has a good tone, and those markets, except dealing with tourism, have continued to feel better every week as discovery of where people's lives and their jobs are has become more transparent, individuals become more confident to go through and have the opportunity to buy a home. And I think it's all good. And long-term mortgages, three and change for 30 years fixed, wow. We see that as a great opportunity to put people into affordable products at very, very competitive full payment that in most cases are less than the new apartments that are being built and opened. So the millennials now have an opportunity to have a little space in the backyard. And I think it's all going to work out as good as it could in light of the circumstances at this time.

Buck Horne -- Raymond James -- Analyst

At this time. Thanks guys. Really appreciate the color.

Larry A. Mizel -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Maggie -- JPMorgan -- Analyst

Hi, thanks. This is actually Maggie [Phonetic] on for Mike. First, just a question on the incentives. I know that you earlier, you said that you haven't really adjusted incentive levels yet, but I was wondering if you could talk a little bit about what you would have to see in the market for you to go out and start adjusting those incentive levels.

Larry A. Mizel -- Chairman and Chief Executive Officer

I think we look at it, I would almost tell you, almost every day. But we have quick communications between the sales office and the home office, and we're able to see gross traffic daily, net traffic daily, and we're able to see gross profit margins daily as they incur at the beginning of the sales process. So Maggie, we'll adjust specifically as we believe is necessary. And at this point, we've not found it necessary to have a substantial adjustment at this time. And remember, we're in spring selling season, too. So you've got emotional and psychological recovery. You've got spring selling season. You've got lifetime historically low interest rates for a new mortgage. So if you were ever going to buy one, Maggie, this is a good time to buy a home.

Maggie -- JPMorgan -- Analyst

Okay. And then following up on an earlier question on your affordable versus traditional project products, and I apologize if I missed this, but can you talk about any differences that you saw during April in terms of the cancellation rates between the two products or even kind of the pace of improvement or, like, any kind of improvement that you saw in the back half of April? Was it pretty steady across the board for all of your products? Or did you see it more so in certain pieces of your business?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think that the general answer we saw kind of across the board in those individual markets that are more tourism centric, the Orlando, Las Vegas, I think a lot of these people are going to get reemployed. We were in a market that everyone that wanted a job could get a job. And of course, we're looking at 30 million people unemployed in the country, but as things reopen, so I would say it kind of was broad, but you will see probably more growth than people expect as the economy reengages. And for everybody in every industry, I'm hopeful that, that takes place. I'm confident it's going to take place for MDC because we're at the right place at the right time with the right product and great financing. So we expect to participate in that which is going to take place.

Maggie -- JPMorgan -- Analyst

Okay, thank you.

Larry A. Mizel -- Chairman and Chief Executive Officer

You're welcome.

Operator

[Operator Instructions] Our next question comes from Truman Patterson of Wells Fargo. Please go ahead.

Trevor Allinson -- Wells Fargo -- Analyst

Hi, this is Trevor Allinson on for Truman. My first question is on option lots. We saw a nice increase there. Was that driven by a delay in purchasing land given the demand pause? Or is that done intentionally prior to the mid-margin demand slowing?

Larry A. Mizel -- Chairman and Chief Executive Officer

That was done intentionally as a continued push that we have for optionality. And the usually the best rate of return, we believe, in inventory terms comes from option lots if you structure the transaction properly, which is a reasonable deposit and enough time line in order to absorb through the product. So we would always prefer to option land and, hopefully, finish lots or added lots. So the closer you can tie up a parcel, in our case, we don't speculate land, we only buy lots. So our business objective is to push hard on optioning finished lots first, and then whatever level that you're able to achieve it in order to improve your return on all levels.

Trevor Allinson -- Wells Fargo -- Analyst

Okay. And then my follow-up is around land strategy. Bob, I know you said you thought that plan spend might come down a little bit in 2Q. But I'm assuming you're probably seeing a little less competition there than you were previously. And so is this would you consider maybe becoming more aggressive on your land spend from that standpoint that perhaps maybe pricing is a little more because you're getting a little better pricing now than what you were just a couple months ago?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I think it's always tempting to step in, but I think what our strategy is, we have to deal with what uncertainty exists right now. So I don't think it's an automatic that we jump in at this time. I think right now, we're focused on making sure that we are in a position to generate cash, and then we would move forward with acquisitions at such time as we start to see a little bit more clarity in the market. At this point, I don't really think that a lot of sellers out there are wholesale saying that they're going to take price concessions. It's more about really just pushing out the transactions for a period of time.

Trevor Allinson -- Wells Fargo -- Analyst

Okay, got it. Thank you. Good luck.

Operator

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Bob Martin, Chief Financial Officer. Please go ahead.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I'd like to thank you all for participating on our call. Our thoughts are with everyone as we continue to navigate through the COVID-19 pandemic, and we look forward to talking again after our next earnings announcement.

Larry A. Mizel -- Chairman and Chief Executive Officer

Thank all of you.

Operator

[Operator Closing Remarks].

Duration: 56 minutes

Call participants:

Derek Kimmerle -- Director of SEC Reporting

Larry A. Mizel -- Chairman and Chief Executive Officer

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

John Lovallo -- Bank of America -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Ken Zener -- KeyBanc -- Analyst

Buck Horne -- Raymond James -- Analyst

Maggie -- JPMorgan -- Analyst

Trevor Allinson -- Wells Fargo -- Analyst

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