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MDC Holdings Inc (MDC)
Q2Â 2020 Earnings Call
Jul 28, 2020, 12:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the M.D.C. Holdings 2020 Second Quarter Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions].
I would now like to turn the conference over to 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 Second 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] 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 second 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 Mizel -- Chairman and Chief Executive Officer
Great. Good morning, and welcome to M.D.C. Holdings' Second Quarter 2020 Earnings Call. As evidenced by the results announced in our press release this morning, our homebuilding operations experienced a sharp rebound in the second quarter. The combination of low interest rates, constrained existing home supply and a heightened interest in single-family home ownership has resulted in a very favorable environment for our industry. Following a steep decline, marked by slower traffic and increased cancellations at the outset of the pandemic, we began to see order activity return to pre-COVID levels in May.
This momentum continued into June, with net orders eclipsing last year's June totals by 53%. For the quarter, net orders were up 5%, given the uncertainties and sales obstacles we faced at the end of the first quarter. The strong demand trends we experienced in the quarter were broad based, both from a buyer segment and a geographic standpoint. The strongest part of the market continues to be at the more affordable price points, which has been a strategic focus of ours for some time now. We're seeing an increased number of millennials who are entering their prime home-buying years, and this trend has only been accelerated by the pandemic.
The new home industry is also benefiting from market share gains versus the existing home market, as the combination of low existing supply and the increased preference for new construction has served as tailwinds. Another driver of our order success has been our continued focus on a build-to-order model. Even with a heightened sense of urgency to own a home, many homebuyers continue to prefer the flexibility of personalization that comes in a home built with their preferred finishes and selections. We believe this is especially true for our core buyer demographic, who are looking not only for value but also a home that fits their needs.
The benefits of this strategy for MDC are that it allows for higher-margin revenues from our home galleries, reduced volatility in our results and proves a competitive advantage relative to spec-focused builders. Our build-to-order operating model is also limits the need to use price discounts or heavy incentives. In fact, in most markets, we have been actively raising prices and scaling back incentives due to the strong demand we've experienced. Our homebuilding gross margin in the quarter increased to 20%, reflecting this pricing discipline. In addition to maintaining price discipline, with respect to our homes, we also exercised cost discipline across our organization during the quarter, leading to a 90 basis points year-over-year improvement in our SG&A ratio.
This improvement can be attributed to the higher revenue we generated in the quarter, as well as certain cost reduction measures taken during this period of uncertainty. In summary, I'm very pleased with our results this quarter, particularly in light of all that has transpired over the last four months. Order activity improved as the quarter progressed, and we posted significant increases to both revenues and profits relative to last year. Given these favorable market conditions, we are now targeting 8,000 home deliveries for the 2020 full year.
In addition, we ended the current quarter in great financial shape, giving us the financial flexibility to continue to invest in our business and pay the industry-leading dividend. The current pandemic has far-reaching impact on how we live and work. And I could not be more impressed on how our team members have adopted to and excelled in this new environment. I am truly appreciative of all of their efforts.
Now I'd like to turn over to Bob Martin for more detail on the results of this quarter. Bob?
Robert Martin -- Senior Vice President and Chief Financial Officer
Thanks, Larry, and good morning, everyone. As you can tell from Larry's comments, we were pleased with our performance during the second quarter as the initial shock of the pandemic in March and April gave way to a renewed consumer interest in homeownership in May and June. The combination of our diverse selection of affordable homes, combined with our increasingly distinct build-to-order business model, has proven to resonate with homebuyers.
Before getting into more detail on current market conditions and order trends experienced during the quarter, I would like to provide some commentary on what was ultimately a very resilient second quarter. Net income increased 55% to $84.4 million or $1.31 per diluted share for the second quarter of 2020. Both our homebuilding and financial services businesses contributed to these year-over-year improvements as pre-tax income from our homebuilding operations increased $23.3 million or 38%, and our financial services pre-tax income increased $14 million or 110%.
The increase in homebuilding pre-tax income was the result of a 21% increase in home sale revenues and a 160 basis point improvement to our homebuilding operating margins. The increase in financial services pre-tax income was due to our mortgage business, which experienced higher interest rate lock volume, an increased capture rate and increased net interest income on loans originated during the quarter. Our tax rate decreased from 26.6% to 24.4% for the 2020 second quarter. The decrease in rate was primarily the result of a windfall benefit on equity awards as well as energy tax credits related to homes closed during the quarter.
For the third and fourth quarters, we currently estimate a 25% tax rate, excluding any discrete items.Homes delivered increased 25% year-over-year to 1,900, driven by an increase in the number of homes we had in backlog to start the quarter. The increase was slightly offset by a decrease in our backlog conversion rates due to construction delays in certain markets as a result of the pandemic. The increase in units delivered was slightly offset by a 4% decrease in our average selling price to about $467,000. This decrease was in line with our strategic focus on affordability as a percentage of our deliveries for more affordable product collections rose to 54% for the second quarter of 2020 versus 44% for the same period a year ago.
We are anticipating home deliveries for the third quarter of 2020 to be between 1,902 and 2,100. Backlog conversion for the third quarter may be slightly lower than the third quarter of 2019 as a result of the significant increase in June orders compared to the prior year, which we are unlikely to deliver in the third quarter. For the full year, we are estimating to deliver between 7,700 and 8,000 homes. As previously mentioned, our gross margin from home sales improved by 70 basis points year-over-year to 20.2%. Gross margins increased on both build-to-order and speculative home deliveries, driven by price increases implemented across the majority of our communities over the past 12 months.
It should be noted that during the second quarter of both 2020 and 2019, we recorded decreases to our warranty accrual, which positively impacted gross margins by 20 basis points in each period. Gross margin from home sales for the 2020 third quarter is expected to again approximate 20%, excluding impairments and warranty adjustments, consistent with the 2020 second quarter. We demonstrated solid operating leverage for the quarter as our SG&A expense as a percentage of home sale revenues decreased 90 basis points year-over-year to 10.4%. Our total dollar SG&A expense for the 2020 second quarter was up $9.6 million year-over-year, mostly due to variable selling and marketing expenses that increased in line with the 21% increase in home sale revenues during the period.
Our general and administrative expense was up only modestly for the second quarter as increases in stock-based compensation and bonus expense, driven by strong operating results during the quarter, were partially offset by cost reduction measures implemented at the outset of the pandemic. For the third and fourth quarter of 2020, we may see a significant increase to our general and administrative expense relative to the $40.4 million expense we just recognized in the second quarter. This would be, in large part, related to an increase in stock-based compensation expense for performance share units, if market conditions and our performance remain strong.
We saw this type of increase in 2019 from the second to the third quarter based upon a significant acceleration in net order activity. We may also see salaries and other compensation-related expenses rise based on additional headcount that may be necessary to facilitate growth. The dollar value of our net orders increased 8% year-over-year to $1 billion. Unit net orders increased by 5%, driven by a 2% increase in our monthly absorption rate to 4.2%, and a 2% year-over-year increase in average active subdivisions. The average selling price of our net orders increased by 3% 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.
On the next slide, we've provided some detailed information on the monthly pace of sales and cancellations during the second quarter. As Larry noted earlier, we experienced a sharp rebound in order activity during the latter part of the second quarter, culminating with June net new home orders increasing 53% year-over-year. We also saw the rate of cancellations decrease as the quarter progressed. Some of the improvement is likely the result of pent-up demand after stay-at-home orders kept many buyers away from our communities. However, other favorable demand drivers, such as low interest rates and constrained existing home supply, have played an equally important role.
We believe that these factors, combined with the recent migration away from expensive high-density urban areas, will continue to provide a tailwind for demand as we head into the second half of the year. To that end, our third quarter sales have already started strong. Based on the activity we've seen to date, we expect our July 2020 net orders to exceed our July 2019 orders by at least 50%. We ended the quarter with an estimated sales value for our homes in backlog of $2.4 billion, which was up 23% year-over-year. The average selling price of homes in backlog increased 3% 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. With the uncertainty created by COVID-19, especially during the first half of the quarter, we approved only 1,244 lots for purchase during the second quarter of 2020. This was a significant drop from each of the past four quarters. However, even with the drop in lot approvals, our lot supply to end the quarter was 6% higher than at the same point in 2019. Additionally, given the strong demand that we have seen in recent months, we have significantly accelerated our lot approval activity to start the third quarter.
We recognize that there are many uncertainties with regard to the pandemic and its ultimate impact on the U.S. economy, which have the potential to cause future disruption to our industry. However, we believe that our strong balance sheet is built to counter such disruptions, if they do occur. That said, we believe that MDC is well positioned for strong results in the second half of 2020, given an improved backlog, favorable industry trends and a strong strategic positioning.
Our build-to-order business model will remain a key fixture for our value proposition, providing a competitive advantage with homebuyers looking for a quality home, personalized to their unique preferences. Most importantly, we remain committed to the safety of our employees, customers and subcontractors as we work to provide much-needed housing supply to families in the markets we serve. That concludes my prepared remarks.
We will now open up the line for questions.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Alan Ratner of Zelman & Associates. Please go ahead.
Alan Ratner -- Zelman & Associates -- Analyst
Hey guys, good afternoon. Congrats on the strong quarter, and glad to hear you guys are doing well. Obviously a very strong order performance toward the end of the quarter and into July. Great to hear. You're not a big spec builder, but we're seeing some really robust growth rates across the industry now, which obviously led leads to the question, what's going to happen when all these homes need to be built?
And I think the reality is as that starts probably need to pick up quite a bit from where they are right now in the industry. And I'm curious what you're seeing on the ground from a labor perspective, from a material perspective. Do you think the industry has the supply chain to satisfy this incredibly strong demand we've been seeing of late? And how are you managing the pace versus price equation right now?
Larry Mizel -- Chairman and Chief Executive Officer
I think our strategy has been, as you know, consistent for decades. And being a builder that only builds to order, we've been able to manage our construction pacing. We see no reason to build spec homes and take the risk of cancellations, and to have our subcontractors working on product that isn't what we believe is as profitable as the homes that we built to order. And we've proven that by the gross profit margin.
You might also look at the information, you'll see that out of the thousands of homes we're building, we only have, I think, a little over 100 homes that are finished that are unsold. And as you know, we manage our balance sheet very carefully. And what we're doing is making sure that we have the trades to service us, and we do it in a very measured manner, and we expect to continue to do so.
Alan Ratner -- Zelman & Associates -- Analyst
So just drilling in there, appreciate that. Just specifically on inflation and managing the trades. It doesn't sound like you're seeing a lot of meaningful inflation in spite of the fact that things have picked up quite a bit. Or am I interpreting that wrong?
Larry Mizel -- Chairman and Chief Executive Officer
Well, I think that everyone can decide what meaningful inflation means. Managing your cost of goods sold is what we have to do every day. And builders that jump in and out have to deliver at a different level, and what we deliver is at a very thoughtful level. And the trades we have, I think, we believe that they are really trade partners. And they work with us, and we work with them, and it's our goal and objective to maintain the pricing of the trades. And that's something that we have factually done over many years, and we expect to continue to be able to do so.
Alan Ratner -- Zelman & Associates -- Analyst
Got it. Appreciate that. And if I could just add one more on the land side. Obviously, a little bit of a tick down on lot acquisition in the quarter but still up on a year-over-year basis. So any color you can give us just in terms of the phasing of community openings and closeouts over the next several quarters?
Are there any supply side constraints you foresee on the land front? Or do you think that you've got the supply to continue to satisfy demand, assuming it remains like we've seen over the last couple of months?
Larry Mizel -- Chairman and Chief Executive Officer
Well, you can look in the Q, and you can see we had an increase of land for the last period of time, which I think is pretty interesting, considering we're starting the year by February or March. We're trying to figure out how to reduce or eliminate whatever you can on the land side. And 60 days later, you're back buying supply to support your future growth. And I feel very confident we have the skills and ability to continue to do what we've done for decades. And I've always maintained, if you have money, you could buy all the land you want. And I think, through three or four cycles, we've proven that out.
Alan Ratner -- Zelman & Associates -- Analyst
Well, you certainly have the cash in the bank. Good luck.
Larry Mizel -- Chairman and Chief Executive Officer
Have a nice day.
Operator
The next question comes from John Lovallo of Bank of America. Please go ahead.
John Lovallo -- Bank of America -- Analyst
Hey, guys. So I thank you for taking my questions as well. The first one. But given, Rob, given the strength that you saw in July on the order front, I mean, would it be surprising if, on an absolute basis, 3Q orders were actually stronger than 2Q?
Robert Martin -- Senior Vice President and Chief Financial Officer
Well, with seasonality, it's always tough to see that, given a relatively flat subdivision count. But as I indicated, July has started out very strong. You don't typically see that, a July that ends up being almost just as strong as June. We'll see where the final numbers shake out. So I guess it's certainly a possibility in this very unique environment. That said, we're not taking that to the bank at this point.
John Lovallo -- Bank of America -- Analyst
Got it. Makes sense. Okay. And then, maybe in terms of some of the markets that have been harder hit recently with COVID, I'm thinking Phoenix and parts of Florida. Have you seen any softening in these markets at all? And if not, I mean, do you anticipate some impact here as we move forward?
Larry Mizel -- Chairman and Chief Executive Officer
We haven't seen any softening in those markets. As you can see from the disclosures, we've actually enjoyed good growth in the especially in Phoenix. And the virus is not good for anyone or anything, but at this point, it hasn't affected the new home affordable market. And the disclosure of cases is always an argument. Is that a death rate or is that a better testing? And that's not within the scope of a homebuilder. But in answering your question, at this point, we haven't seen an effect.
John Lovallo -- Bank of America -- Analyst
Thank you, guys.
Operator
Our next question comes from Michael Rehaut of JPMorgan. Please go ahead.
Michael Rehaut -- Analyst
Thanks. Good morning, everyone. First question, I was hoping to get a sense of community count through the balance of the year. Obviously, with the incredibly robust sell-through that you're seeing right now, most people would expect it to trend down a little bit despite maybe turning back on the land purchasing function. Any kind of directional guidance that you could give in that regard would be really helpful. And I would assume, along with that, perhaps an expectation for a return to growth maybe in the first half of next year, but any type of directional or degree of magnitude commentary would be helpful.
Larry Mizel -- Chairman and Chief Executive Officer
We think we're pleased with where we're at, and we've had reasonable sequential growth. And we expect to continue along the pathway that, as you know, we always do, which is a profitable, conservative but always moving forward to the maximum extent we can in the market. And I know you might have been a little surprised on how well we did, but I wasn't. And I think you should assume that we will continue to perform in the way we are.
Robert Martin -- Senior Vice President and Chief Financial Officer
And just to add on, Mike, when we look at our we have a soon-to-be-active and soon-to-be-inactive community count. And that's 32 soon to be active and 30 soon to be inactive, so pretty even. So that kind of points you to relatively flat subdivision growth between now and the end of the year. I mean, as you so eloquently put it, with accelerated sales, anything can happen with that number, including driving it lower because of the accelerated sales. But right now, it looks pretty flattish through the end of the year. And then I think, for 2021, we'll kind of take a look at what transpires over the course of the next quarter or so and comment further at that point.
Michael Rehaut -- Analyst
Okay. I appreciate that. And Larry, it's impressive that you weren't surprised of 50% order growth. Most people for the entire industry were, so I congratulate you there. My second question.
Larry Mizel -- Chairman and Chief Executive Officer
Michael, the reason why we weren't surprised is we were living it every day.
Michael Rehaut -- Analyst
I got you. I got you. Second question I had is more of I'd just love to get some color, regionally, across your different markets. Obviously, when you're talking about a 50% growth rate, I would assume most markets are doing extremely well, and you highlighted Phoenix. But any other markets that, maybe, grew well above that 50% or that you feel are exceptionally hot right now versus other markets maybe that are up but below the corporate line average?
Robert Martin -- Senior Vice President and Chief Financial Officer
Yes. I think, Mike, California has been pretty resilient in the month of June. And I think a big part of that is some of the more affordable parts. We added a good amount of communities to Riverside in Southern California. So that's really rebounded in a fairly significant way for us in the month of June. You already mentioned Arizona, which has done well. I mean, really, we've seen strength in a lot of different spots. Colorado, I think, was right in line with the company average. Utah has done well. So really some good performance in a lot of markets, but those are the ones I'd highlight.
Michael Rehaut -- Analyst
All right, thank you.
Operator
The next question comes from Truman Patterson of Wells Fargo. Please go ahead.
Paul Przybylski -- Wells Fargo -- Analyst
It's actually Paul Przybylski. First, I guess, could you maybe add a little color on the number of the finished lots that you have going into the second half? And is there any reason why we would we should think that you might not be able to achieve the absorptions that you posted last year in the second half?
Robert Martin -- Senior Vice President and Chief Financial Officer
I mean, I think, community count is probably the best thing to look at there. We have a higher number of active communities. So I don't see anything in particular. Obviously, with the increased order activity in the month of July that I mentioned, of at least 50%, that provides evidence that we have some continued ability to drive the to support that demand if it continues to be there. So I'm not seeing anything in particular at this point.
Paul Przybylski -- Wells Fargo -- Analyst
Okay. You've got three quarters now of gross margins at or near 20%. Have you made any changes in your underwriting criteria? And could you remind us what your expected gross margin and return hurdles are?
Robert Martin -- Senior Vice President and Chief Financial Officer
We've not made any changes to our hurdles. The old adage says kind of a 20-20. 20% gross profit margin and a 20% IRR is the rule of thumb. We do move up and down, above and below that, depending upon the risk that we're taking. Is it finished lots? Or does it require development? Is it a new area that we're building in? Or are we building in the same subdivision that we've built before? So I wouldn't say that there's a lot of difference in the way we're buying lots at this point. Certainly, we're being very cognizant of the increased volume that we are getting.
And we are evaluating pricing, as always, on a weekly basis to make sure that we do increase price to try to offset cost increases that we know could be coming at any moment, depending upon where the relationships with our subcontractors go. I would also say, we did spend some time during the couple of months' worth of downturn as we dived into the pandemic environment, getting some concessions from our subcontractors. And that's proven to be successful and additive to margin in the short term, whether or not it's fixed longer-term remains to be seen as more and more starts get recorded.
Paul Przybylski -- Wells Fargo -- Analyst
All right, thank you. Appreciate it.
Operator
The next question comes from Stephen Kim of Evercore ISI. Please go ahead.
Stephen Kim -- Evercore ISI -- Analyst
Thanks very much guys. Yes. Just Larry, stepping back a little bit. Obviously, you're seeing historic order growth right now, and it's happening at the same time that the mortgage rate drop is providing unprecedented price elasticity. And then you layer on that the fact that, in recent history, labor constraints have been a challenge for the industry. And so I'm trying to figure out whether you had whether we're going to see the strength manifest itself in significant pricing, more pricing maybe than we have often seen in this industry.
Or if your production machine has really been geared up well enough to make it so that you can actually see it in a very significant increase in volume, and maybe that would temper some of my views on pricing. So I'm just curious, do you agree with the premise that the strong demand and the lower the much lower rates drive unprecedented price elasticity? And then secondly, do you feel like we will see your production manifesting more volume? Or do you think that we actually could see tremendous pricing power as a result of a labor constraint and strong demand?
Larry Mizel -- Chairman and Chief Executive Officer
I think there's about six questions, depending on how you analyzed what you were asking. But I'll try to give you a reasonable response, Steve. We see a reasonable pricing power. This is a very competitive business. And we're in a market that many of the builders that build similar housing are in the same developments, the same areas, the same cities. There's a lot of competition. And some builders go for volume. And what we believe we go for is a reasonable gross profit in building a really high-quality home. And so the there's always been the tension between volume and pricing.
And I think in the affordable end, you have competition, volume, pricing. I believe the ability to build the homes is for the larger builders is not an issue. There's always you're always a little long or a little short of what you need on the ground. But right now, it seems to be balanced. The country is currently experiencing very high unemployment, as we all know, in the millions or tens of millions of people looking for work. And I think there's plenty of work that we can give them. And the trades get paid really well. Most of them are paid by the piece as far as the labor force that works for the subcontractors.
So the harder they work, the more production, the more money they're going to make. So I believe, at this point, there's adequate labor available. And the market has a strong demand. And I look forward to the next period of years that we'll continue to provide affordable housing to what looks like a good demand of not only the millennials. But because of the virus, people want to move out into the suburbs and have a little grass and a place for their children to grow up, with good schools and a nicer environment in the urban setting. So I think, Steve, we're fortunate to be experiencing in our industry what we are right now.
Stephen Kim -- Evercore ISI -- Analyst
Yes. No doubt about that. I wanted to ask you a question about your build to order. You talked about the fact that, in this environment, being able to offer choice to your buyers is a real advantage. Our sense is that there have been some pretty significant changes in some of the amenity packages that people are kind of looking for, a very abrupt one in the post-COVID environment, particularly related to things like home office and that brought on by the work-from-home trend.
I was curious, have you been able to change some of your offerings already to be able to address some of this demand? Is this something that we can look forward to over the course of the next, call it, six months to a year that would allow you to get an even bigger premium versus, let's say, existing homes? Just trying to get a sense for how quickly your product is likely to be able to adjust to these changing preferences?
Larry Mizel -- Chairman and Chief Executive Officer
The factual real adjustment to changing preferences is if you make the home larger, you have more space to work from home. When you and your own experience, Stephen, and others, if you have to be on the kitchen table versus having an extra bedroom, it's different. The homes that Richmond provides are probably the most unique, finest-finished basements. And we do finish the basements in many of the products, and that gives tremendous elasticity.
And I think the work from home changes deals more with technology versus square footage. As you know, Stephen, square footage cost money. And as you can see from our average sales price, it's somewhat driven by mix but focused on the more affordable product. If we're going to continue to work on providing an affordable product, you have to watch the creep.
And the creep is pricing caused significantly by larger square footage. So I don't see a magic button, other than people adjusting to their own personal circumstances that they might change the corner in the kitchen or the nook or the granny room or whatever was extra housing. If they were fortunate enough to have it, they're able to use it. But I don't see it as a magic button, other than providing a nice new clean home the way they wanted, which, as you know, and you've seen our product, that's what we do continuously.
Stephen Kim -- Evercore ISI -- Analyst
Yeah, thanks very much. Larry, I appreciate it.
Larry Mizel -- Chairman and Chief Executive Officer
You bet, Steve. Take care.
Operator
Next question comes from Buck Horne of Raymond James. Please go ahead.
Buck Horne -- Raymond James -- Analyst
Hey, thanks guys, and congrats on the quarter. Thoughts on as the absorption rates are rapidly improving here, you still have a few divisions in some markets where volumes are probably not fully optimized relative to what you have in your more scaled markets like Colorado. How do you think about and as far as new land approvals going forward, would it make sense to think about some geographic expansion? Or just anything that you would do to increase density within existing markets.
Or how do you think about new market opportunities? I guess, I'm also thinking about Florida as an example, where could you extend a little bit further across the I-4 corridor? Or some other corollary to that, that would help improve overall division margin levels.
Larry Mizel -- Chairman and Chief Executive Officer
I think that you're asking a question that is a very good question. Because as we look at the markets that we're in and the markets that we've just gone into in the last two or three years, we believe that a good aspiration, that's a goal, I hope in said it properly, is we'd always want to be in the top five. So as you take the markets that we're in, you can see where we're focused, where we have several markets that we have significant shares of. We want to maintain those shares and, of course, enhance the efficiency and the profitability. But there's plenty of market share that we will and can take in the markets we're in without reinventing the wheel, or paying the tax of learning how to do it at some place that we haven't been.
So we're excited about the markets that we've just entered into in the last period of years. The opportunities really are unlimited when you have the financial strength that we have. And as you look through the Q, you can see we have almost $1.5 billion of liquidity available. And we are very busy looking for opportunities where we don't change the risk factor, what we call it as staying in the box. That is a reasonable-sized subdivision with utilities available and zoning, and we don't do master plans. We build and sell homes in a very controlled way in the markets you're speaking of, especially Florida. You could triple or quadruple in size and keep yourself busy there. But we expect to maintain and/or grow market share in the markets, you could see by the material where we're located.
Buck Horne -- Raymond James -- Analyst
All right. No, that's very helpful. I appreciate that answer. And maybe for Bob, I was just curious if maybe you could add a little extra color on the expected added equity incentive comp or other expect accruals that you might see coming in the third and fourth quarter. Is there is it too early to quantify that yet? Or how should we anticipate some of that additional maybe a little catch up? I mean, obviously offset by the strong performance, but just how to think about modeling that.
Robert Martin -- Senior Vice President and Chief Financial Officer
Yes. Buck, I think, relative to where we are in Q2, you could see it bump up just on that G&A line by about 10% or 15% in Q3 and Q4. Like you said, it is tough to predict because it does base upon what performance has transpired during that quarter and kind of the full set of information. But that might be a reasonable way to estimate it at this point. I still think there is plenty of opportunity for year-over-year improvement in operating leverage, though, even with that higher level of G&A in Q3 and Q4.
Buck Horne -- Raymond James -- Analyst
Perfect. That's great. Congrats.
Larry Mizel -- Chairman and Chief Executive Officer
Thank you.
Operator
The next question comes from Jay McCanless of Wedbush Securities. Please go ahead.
Jay McCanless -- Wedbush Securities -- Analyst
Thanks for taking my questions. First one I had, what was your average cycle time at the end of the quarter? And how did that compare to 2Q 2019?
Robert Martin -- Senior Vice President and Chief Financial Officer
Average cycle time, I guess, start to finish, was right around 145 days, I believe. I think it was down roughly 3% year-over-year. It was up just a smidge sequentially from Q2 to Q3, maybe 1%.
Jay McCanless -- Wedbush Securities -- Analyst
Great. And then the second question I had, could you repeat what you said, Bob, about the more affordable homes. What percentage there were of closings this quarter? And then maybe as we think about community count for the rest of the year, are you guys going to be increasing the communities, focused on entry-level borrowers? Or how is that going to play out?
Robert Martin -- Senior Vice President and Chief Financial Officer
Yes. And just to clarify in the cycle time, that was start to finish, not start to close. But yes, in terms of our percentage, affordable, we went from 44% to 54%. And I believe that was on the closing line. I think on the sales line, we actually increased to about 60%, just over. That's up from 55%, I think, both in Q1 and Q2 from a year ago. So I think that 60% number, maybe even a tad higher, is probably a good range that we'll settle in for the short term.
Jay McCanless -- Wedbush Securities -- Analyst
Thanks for taking my question.
Operator
The next question comes from Alex Barron of Housing Research Center. Please go ahead.
Alex Barron -- Housing Research Center -- Analyst
Thanks guys and strong quarter.
Larry Mizel -- Chairman and Chief Executive Officer
Thank you.
Alex Barron -- Housing Research Center -- Analyst
I wanted to ask, did you guys do anything significantly different in the month of April versus the month of June to go from the minus 53% to the plus 53%? I mean, other than interest rates going down, did your incentives change a lot? Did the way you approach sales change a lot? Can you kind of describe those three months, how you experienced that?
Robert Martin -- Senior Vice President and Chief Financial Officer
Probably the incentives actually went down in June versus April. If you look at cancellations, that's really one of the bigger factors. We had a lot more COVID-related cancellations in April than we did in June. So it really settled down on that front as people obviously, we're not out of the woods on the pandemic yet. But I think people got at least a little bit of stability behind them as things started to open up again in certain markets, whether or not that sticks or not here over the course of the next quarter or two.
So that's probably a bigger thing. I mean we also perfected, to some degree, some of the processes that we had that were going virtual, so whether that be a virtual sales process or anything supporting the virtual sales process, using that technology in our home galleries, for example. I think those got better as we went through the month of April and got deployed to more markets, providing a certain level of stability to the market. But other than that, I think most of it has to do with people being able to get out of their homes again and start thinking more seriously about getting into the homes and signing a contract.
Alex Barron -- Housing Research Center -- Analyst
Okay. Great. And then with regards to your approach to land investment, is the current growth rate changing your, I guess, aggressiveness to buy more land versus three or four months ago when before COVID started? In other words, are you guys still expecting to buy the same amount of land? Or more or less? How sustainable do you think the current growth is?
Robert Martin -- Senior Vice President and Chief Financial Officer
No. I would say go ahead, Larry. Sorry.
Larry Mizel -- Chairman and Chief Executive Officer
No. I would say we expect to continue and expand the acquisition of land, always focused in our box. And we have very skilled land professionals in each of the divisions. And as the momentum carries, we will believe that we have an opportunity to also expand with it. It was bad for a few months, good for a few months. And we're running a business looking for where we are and also where we're going, and we don't ever forget it. So you should assume, if there's lags in the market, we will accelerate in order to take advantage of it and to be very opportunistic.
So we will not be sitting still if the momentum continues in the same way. And as if you heard my comments earlier, at the beginning of the year, in March or April, you're trying to reduce your land. And by May or June, you're trying to increase it. And right now, we're doing business aggressively every day. Just like all of my competitors, we're all in the market looking for opportunities.
Alex Barron -- Housing Research Center -- Analyst
Okay, thanks.
Operator
Thank you [Operator Instructions] The next question comes from Ken Zener of KeyBanc. Please go ahead.
Ken Zener -- KeyBanc -- Analyst
Good afternoon.
Larry Mizel -- Chairman and Chief Executive Officer
Good afternoon.
Ken Zener -- KeyBanc -- Analyst
I have two questions. First, obviously, a strong order lift. Bob, I think you talked about construction times, about 145 days, so just under five months, start to finish. What is it that is you talked about up and down over a couple of months in terms of outlook, so I realize things are volatile. What is it.
Larry Mizel -- Chairman and Chief Executive Officer
It's a little crazy. Like the stock market, you know, volatility.
Ken Zener -- KeyBanc -- Analyst
Yes. It's exactly what we were taught in school, right?
Larry Mizel -- Chairman and Chief Executive Officer
Right.
Ken Zener -- KeyBanc -- Analyst
But what actually kind of controls or is the constraint on your production? So if you have an order if you have five orders come in I'm not a big fan of pace and price as a concept, but is it like you don't really want to sell the house if you're out at the local level more than your construction time? Because you'll be naked to inflated costs, whether it's lumber, you know that insulation labor, because it seems as though you would take the orders if you could. So I'm just trying to really understand that element at the local community level.
Larry Mizel -- Chairman and Chief Executive Officer
Well, the local community level is remember, we have a business model that is not a spec. We have personalization on all of our homes. And we're able to probably better balance our production. Usually the a spec builder comes in, in high gear, throws lots of homes and builds them concurrently in full steam ahead. And we're more measured and more focused, and I think we're able to control our production sequentially in a better manner than on a reactive manner.
We're able to do it on a really careful way. And our interest deals with balance sheet risk. And as you look at our work-in-process I think it's over 90% or might even be 95% now of our work-in-process is all presold. So this is we're cautiously aggressive, but we are certainly able to execute in a robust manner, subject to market conditions and adjusting for the risk that are out there. And we've done that, as you know, for decades.
Ken Zener -- KeyBanc -- Analyst
Yes. So I guess the second question is a little measured against the strong order growth you highlighted running into July, but I would appreciate your insight. So obviously, it's yes, I don't want to say we're having pull-forward demand, but it's something very strong for a straw grab. So when we had high levels of demand relative to jobs, given your perspective, whether it was the mid- to late-'80s, the 2010 tax credit. What are your thoughts around this kind of pull-forward? And I know you guys are operating your business very in a measured way.
But for how do you think about that in some new markets that you've entered, like Vancouver or Washington or the Portland area. Could you be specific as to what you're seeing in terms of that's kind of, I'd say, highlighted this not only COVID concerns, but also the social unrest, what you think seeing that from the suburbs? It's kind of two questions there, pull-forward demand and how you think that's playing out and as well as the social unrest playing out right now in some cities, and how that might be affecting suburban demand?
Larry Mizel -- Chairman and Chief Executive Officer
Well, the last word or two is a new factor, the social unrest. I would say that's risen in the last few months. We have a opportunistic period of time. Whoever believed you could get a 30-year loan at 2.5%? Or maybe it will be lower before it's over. So I think all of us, if we don't have a mortgage, should go get one at 2.5% so you can buy twice the house that you could on payment-wise before. You have the age group, and I commented earlier, are the millennials.
Their parents finally told them to get out of the basement and go do something. You have people that are looking to, I think, start families. You have people that don't want to live in high rises. And if you think about it now, if someone if you're in an elevator and someone else starts to get in, you almost want to tell them, Well, listen, stay out of the elevator. Get the next one. These are things that are all changing. So we happen to be in the right industry at the right time, with the right product, with no problems, with all the capital, the skill and the resources.
And it's not just MDC, it's the industry. And we go through cycles. And I see this as a very significant cycle that I believe will last a long period of time because there's changes taking place in how people want to live. And they don't want to live in this urban area. And the very last comment you made dealt with social unrest. Well, you add that to the other things that we've commented on. I believe that we're in for a very profitable period of time as an industry.
Ken Zener -- KeyBanc -- Analyst
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin, Chief Financial Officer, for any closing remarks.
Robert Martin -- Senior Vice President and Chief Financial Officer
Thank you. We appreciate everyone's attendance on the call today, and we look forward to talking with you again soon. We wish everyone a safe and healthy third quarter. Thank you.
Operator
[Operator Closing Remarks].
Duration: 61 minutes
Call participants:
Derek Kimmerle -- Director of SEC Reporting
Larry Mizel -- Chairman and Chief Executive Officer
Robert Martin -- Senior Vice President and Chief Financial Officer
Alan Ratner -- Zelman & Associates -- Analyst
John Lovallo -- Bank of America -- Analyst
Michael Rehaut -- Analyst
Paul Przybylski -- Wells Fargo -- Analyst
Stephen Kim -- Evercore ISI -- Analyst
Buck Horne -- Raymond James -- Analyst
Jay McCanless -- Wedbush Securities -- Analyst
Alex Barron -- Housing Research Center -- Analyst
Ken Zener -- KeyBanc -- Analyst
