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M/I Homes Inc (NYSE:MHO)
Q2 2020 Earnings Call
Jul 29, 2020, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Heather, and I'll be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes, Inc. Second Quarter Earnings Conference Call. [Operator Instructions]

I'd now like to turn today's call over to our host, Mr. Phil Creek, you may begin.

Phillip G. Creek -- executive vice president & chief financial officer

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP. First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call, including comments related to COVID-19.

Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call. Also during this call, we disclose certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website. With that, I'll turn the call over to Bob.

Robert H. Schottenstein -- chairman, president & chief executive officer

Thank you, Phil, and thank you for joining us today on our call. The second quarter was a record-setting quarter for M/I Homes. In fact, it was the best quarter in company history, with record set in virtually every important financial metric. We are excited to share our strong results with you. As everyone knows, the first half of 2020 has been a time of significant economic and social instability in our country and throughout the world, precipitated in large part by an unprecedented, almost unimaginable health crisis. We began the quarter in a highly defensive operating mode, proceeding with extreme caution and concern, doing our best to react to the challenging and complex conditions while adapting our operations to safeguard and protect, as much as possible, our employees, our customers and our work environment, all the while, at the same time, continuing to try to sell and build quality homes.

The last half of March and early April saw a precipitous decline in our business, with new contracts declining significantly. Housing conditions, both for us and other builders then began to improve in the last half of April. That improvement materially accelerated for us as our business rebounded significantly in May and June to record-setting levels. Specifically, for the quarter, April new contracts were down 26% year-over-year. May was our best sales month ever at the time, with new contracts up 39% year-over-year. Only to then be quickly surpassed by our record-setting June sales, with new contracts up 79% year-over-year. We ended the quarter selling a record 2,261 homes, 31% better than a year ago.

The tremendous sales momentum we experienced in June has continued into July. We believe there are a number of macro and microeconomic factors contributing to our strong sales results. First, the macro, historically low mortgage rates, near record level near record low inventory levels, perhaps a bit of spring selling catch-up from March and April and a noticeable shift in buyer preference as a result of the pandemic, with certain households choosing to move out of rentals or other housing and away from more densely located areas. In terms of the micro factors, we believe that a good number of our M/I communities, most notably, our most affordably priced Smart Series communities have outperformed the market. And finally, our ability to generate material increase in our online sales leads and to effectively convert those leads into sales has also contributed to our strong sales results. I mentioned our Smart Series and its positive impact on our sales performance. As you know, this is our most affordably priced product offering.

During the second quarter, we were offering our Smart Series homes in roughly 30% of our communities across the company. And our Smart Series sales comprised more than 35% of total company sales. This compares to 24% a year ago. On average, our Smart Series locations produce better sales pace, better gross margins, better cycle time and better bottom line returns. There is no question that the continued success, rollout and growth of our Smart Series homes has contributed to our record-setting performance. During the quarter, overall companywide sales absorption pace improved to 3.4 sales per community per month compared to 2.7 a year ago. As mentioned, part of this improvement was clearly due to our Smart Series.

Other highlights from the quarter are: we achieved second quarter record revenue of $714 million, an increase of 15% from last year, driven by a second quarter record level of 1,835 home closings, which was 19% better than last year's second quarter; pre-tax income for the quarter was a record $71.7 million, 74% better than a year ago as a result of the increased volume, along with a 30 basis point improvement in our overhead expense ratio when compared to last year's second quarter. Additionally, our gross margin improved during the second quarter to 21.9%, up 170 basis points from Q1 of this year, but up also 270 basis points from last year's second quarter. Net income for the second quarter increased 80% to a second quarter record $54.5 million, and our diluted earnings per share increased to $1.89 per share from $1.08 last year. M/I Financial, our financial services business also had a record quarter, with $10.8 million of pre-tax income, 62% better than a year ago.

Derek Klutch, our CEO of M/I Financial, will discuss this in more detail later in the call. Companywide, our backlog sales value at quarter end was $1.5 billion, an all-time quarterly record, and units in backlog were up 30% to another all-time quarterly record of 3,691 homes, while the average sale price in backlog increased to $396,000 compared to $395,000 for last year's second quarter. Now I will provide some additional comments on our markets, and I'll do this by region. We experienced strong performances across both our Northern and Southern regions, with new contracts in our nine Southern region markets increasing 30% for the quarter and a similar 31% increase in new contracts in our six Northern region markets. Our deliveries also increased about 19% over last year in both the Southern and Northern region, with the Southern region, which has nine of our 15 markets, comprising 60% of total deliveries. We experienced very solid increases in closings, sales and profitability in all four of our Texas markets as well as Charlotte for both the second quarter and the first six months, and we continue to make significant progress in growing and improving our operation in Sarasota.

Orlando and Tampa continue to grow their unit volumes and profits and also continue to be two of our very strongest markets. They have recovered quite well after a March slowdown in Florida that continued into April. In the Northern region, Columbus and Minneapolis continue to perform at very high levels. They, too, are among our strongest markets. And we experienced notable increases in our performance and volumes in both Indianapolis and Cincinnati. We had 126 communities in the Southern region at the end of the quarter, down from 132 a year ago. And we had 94 communities in the Northern region at the end of the quarter, that's up 7% from June of last year. We have a very strong land position, allowing us to produce our current results as well as to achieve our growth goals in the coming years. Companywide, we own approximately 15,000 lots, roughly a two year supply.

And on top of that, control via option contracts and additional approximately 20,000 lots. So in total, our owned and controlled lots equal roughly 35,000 lots or about a five year supply. Importantly, over half of the lots that we own and control, which is about 57%, are not on our books. 40% of our owned and controlled lots are in the Northern region, with the balance, roughly 60%, in the Southern region. Before turning the call over to Phil, let me just conclude with several points: one, economic conditions remain uncertain due to the continuing impact of COVID-19. Accordingly, we will continue to manage and monitor conditions with appropriate caution; two, we had a great quarter and could not be more pleased with the execution and effort of our teams.

They continue to operate at a high standard, meeting the needs and expectations of our customers; three, our company is in excellent shape, and we are poised to have an outstanding year. Phil?

Phillip G. Creek -- executive vice president & chief financial officer

Thanks, Bob. As far as financial results, new contracts for the second quarter increased 31% to 2,261, an all-time quarterly record compared to 1,731 for last year's second quarter. Our new contracts were down 26% in April, up 39% in May and up 79% in June. Our sales pace was 3.4% in the second quarter and our cancellation rate was 14%. As to our buyer profile, about 50% of our second quarter sales were the first-time buyers, about the same as the first quarter. In addition, 45% of our second quarter sales were inventory homes compared to about 50% in the first quarter. Our community count was 220 at the end of the quarter, the same as last year's second quarter. The breakdown by region is 94 in the Northern region and 126 in the Southern region. During the quarter, we opened 22 new communities while closing 25, and we opened 39 new communities during the first half of the year.

We delivered a second quarter record 1,835 homes in the second quarter, delivering 56% of our backlog compared to 58% a year ago. And revenue increased 15% in the second quarter, reaching a second quarter record of $714 million. Our average closing price for the second quarter was $379,000, a 3% decrease when compared to last year's second quarter average closing price of $389,000. And our backlog sales price is $396,000, up slightly from $395,000 a year ago, and our backlog average sale price of our Smart Series is $302,000. Our second quarter gross margin was 21.9%, up 270 basis points year-over-year, and up 170 basis points from the first quarter. A big reason for our margin improvement is due to our Texas operations. Our construction and labor costs were flat when compared to 2019 second quarter.

And our second quarter SG&A expenses were 11.5% of revenue, improving 30 basis points compared to 11.8% a year ago, reflecting greater operating leverage. Interest expense decreased $2.7 million for the quarter compared to the same period last year. Interest incurred for the quarter was $10.3 million compared to $13.2 million a year ago. And this decrease is due to lower outstanding borrowings this year as well as a lower weighted average borrowing rate. During the quarter, we generated $86 million of EBITDA compared to $58 million in last year's second quarter. And we had $22 million in capitalized interest on our balance sheet, about 1% of our assets. Our effective tax rate was 24% in the second quarter compared to 27% in last year's second quarter. And this year, our rate benefited from energy tax credits. We estimate that our annual effective rate this year to be around 24%. Our earnings per diluted share for the quarter increased to $1.89 per share from $1.08 per share last year. And during the first quarter of this year, we repurchased $2 million of our outstanding shares. We did not purchase any shares in the second quarter.

Now Derek Klutch will address our mortgage company results.

Derek J. Klutch -- President and Chief Executive Officer

Thanks, Phil. Our mortgage and title operations achieved record second quarter results in pre-tax income, revenue and the number of loans originated. Revenue was up 33% to $19 million due to a higher volume of loans closed and sold, along with improved pricing margins and a higher capture rate. For the quarter, pre-tax income was $10.8 million, which was a 62% increase compared to 2019's second quarter. The loan-to-value on our first mortgages for the second quarter was 83% in 2020, up slightly from 82% last year. 77% of the loans closed in the quarter were conventional, and 23% were FHA or VA, the same as 2019's second quarter.

Our average mortgage amount increased to $311,000 in the second quarter compared to $308,000 last year. Loans originated increased to a second quarter record of 1,375 loans, which was 33% more than last year. And the volume of loans sold increased by 31%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 745, up from 741 last quarter. Our mortgage operation captured about 83% of our business in the second quarter, an increase from 79% last year. We maintain two separate mortgage warehouse credit facilities that provide us with funding for our mortgage originations prior to the sale to investors. At June 30, we had $92 million outstanding under the MIF Warehousing Agreement, which is a $125 million commitment that was recently extended and expires in May of 2021. And we also had $43 million outstanding under a separate $65 million repo facility, which expires in October of this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually.

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

Phillip G. Creek -- executive vice president & chief financial officer

Thanks, Derek. As far as the balance sheet, our financial condition continues to be very strong with $1.1 billion in equity at June 30, a cash balance of $94 million and no outstanding borrowings under our $500 million unsecured revolving credit facility. Also in June, we did extend our credit facility maturity to July of 2023. We are carefully monitoring our cash and our expenditures in the current uncertain environment. We continue to manage our balance sheet carefully. Total homebuilding inventory at June 30 was $1.8 billion, an increase of $67 million above last year. Our unsold land investment at June 30 is $810 million compared to $797 million a year ago. And at June 30, we had $378 million of raw land and land under development and $432 million of finished unsold lots.

We own 5,159 unsold finished lots with an average cost of $84,000 per lot, and this average lot cost is 21% of our $396,000 backlog average sale price. Our goal is to maintain about a one year supply of finished lots and to one a two to three year supply. Lots owned and controlled as of June 30, totaled more than 34,500 lots, 14,800 of which were owned and 19,700 under contract. We own 6,900 lots in our Northern region and 7,900 lots in our Southern region. And a year ago, we owned more than 14,800 lots and controlled an additional 14,200 for a total of 29,000 lots. During this year's second quarter, we spent $84 million on land purchases and $72 million on land development for a total of $156 million. Year-to-date, we have spent $160 million on a purchase and $134 million on land development for a total year-to-date spend of $294 million. And at the end of the quarter, we had 405 completed inventory homes, about two per community, and 1,181 total inventory homes. And of the total inventory, 515 are in the Northern region and 666 are in the Southern region. At June 30, 2019, we had 464 completed inventory homes and 1,413 total inventory homes.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Alan Ratner with Zelman & Associates.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good afternoon and Congrats on really an incredible quarter, given the climate out there, and congrats on all the records that you set this period. I guess it's always tricky when you see growth rates like you and others are reporting here just to kind of conceptualize what that means for the business going forward because clearly, the housing market is not meant to be growing at an 80% clip. And I guess I'm just curious how you see the next few months playing out. I mean, I think your last disclosure on your spec supply, it looks like specs are down about 20% year-over-year.

You and others presumably are going to have to start a lot more homes over the next few months. And I'm just curious how you just plan on managing the business through that. Is there a point where makes sense to push harder on price to slow things down because there's just inefficiencies of growing at that level? Or do you feel like based on your land supply and labor availability that you can continue growing at maybe not these levels, but certainly greater levels than we saw in the past?

Robert H. Schottenstein -- chairman, president & chief executive officer

Well, first of all, three months ago, if you'd have asked me what our growth rate would have been in April, May and June, I would have missed that guess by 100%.

Alan Ratner -- Zelman & Associates -- Analyst

I think we all would have.

Robert H. Schottenstein -- chairman, president & chief executive officer

Yes, we didn't see this coming. And so it's very hard to know what's around corner. But I think the fact that it is so hard to know it's around the corner, I think, serves as guide, as a management guide. As I mentioned, the momentum has continued into July. And while we give no specifics on July, first of all month's not over yet, there continues to be, I think, just very good conditions for us. And I think I'm hearing that from some of our co competitors as well, particularly with respect to the more affordably priced communities. And I spoke about our land position, I think that it's as good as it's ever been in terms of not just the number of lots and the fact that the majority of them are off of our books, which is a great position to be in given the uncertainty that we live in today.

But the fact that the price points and that the communities coming on give us a lot of confidence, assuming that the market is there for us to grow at acceptable levels. I think it's hard for businesses to grow much more than 10% or 20% a year. You start to get above that and things start to slip through the cracks. But I believe that we can do that if the economy is there. I think that there are certain challenges right now, less than you might imagine, but there are certain challenges on the construction side with certain with certain logistics, mainly appliances and maybe a few other components that may be delaying things a little bit. But thus far, it's been manageable. We have been able to push price, not everywhere, but in many places. And I think the returns that we generated for the quarter support that.

We're being careful with that at the same time. But look, you know how low the inventory levels are, particularly with respect to resales. And you know because you've got such great research that the new home sale piece of the pie has become slightly larger. And then I do think that there is a shift in preference, whether it lasts forever, I don't know. But I think that the sanctity, the security, the comfort, the privacy of home is resonating with people perhaps like never before. I wish it didn't take this for that to happen. But I think that there is a tailwind from that. And I also think that we still don't have home ownership rates in this country, particularly for the under 40 cohort that are where they probably should be based on certain historical standards. The numbers will probably look better next year at this time, given our results and some of our competitors.

But I think we well, I think we're rational. We're very optimistic, but we're also rational. And that's what we're going to continue to do. I think we're poised to have an outstanding year. But on the other hand, we didn't 90 days ago, we didn't know where if we'd be here now. I think that 90 days from now, there may be a few other surprises. But we'll just have to see. No matter what it is, we're ready for it. We went into almost a full-time defensive mode at the end of March and early April, and we started to play more offense as April unfolded, and then we were able to adapt quickly. Really, really proud of our execution. This is not about me, and it's not really about the people on this call. It's about the folks in the field who under very difficult circumstances have had to not just deal with wearing mask and maintaining distance, which gets very uncomfortable as we all know, but drive through closings and just doing a lot of things sort of left-handed. I think we're really good online.

We don't talk about it a lot. But I think our results we let our results do the talking.

Alan Ratner -- Zelman & Associates -- Analyst

That's great. And I agree, certainly, the results do the talking. Second question, if I could. Gross margin, best level we've seen in quite a long time. I would think that a lot of that strength was actually probably pre pandemic that contributed to this quarter's great margin. So I'm just curious if you can I know you're not going to give specific guidance, but just talk to maybe the pluses and minuses that we should think about going forward off of this quarter's record level.

Robert H. Schottenstein -- chairman, president & chief executive officer

First of all, and I think Phil may want to add a few comments on this. We a year ago and certainly two years ago, we were not where we wanted to be with regard to a number of our newer operations, not all of them, but certainly some. Several of our Texas operations were pulling us back. They weren't performing at the level they should be. Those have been those ships have been righted. That's contributing to lift. We're starting to get a lot of really good results from Sarasota, which is a newer market. Detroit's time will come. But it's got a lot of upside down the road for us, not quite there yet. Minneapolis has just been a tremendous contributor. We've only been there less than five years.

So I think that just some of our own internal operational improvement has contributed to margin. The other thing is, two years ago, Smart Series was about 15% of our business. Last year, at this time, it was 24% of our business. Today, it's 35% and growing. And our returns, both at the gross margin line and the net line on our Smart Series sales and closings, are better than on not. Now the average price is lower, but the returns, the percentages. So when you put all that in the blender, you sort of get where we are today. I don't know if you want to add anything, Phil.

Phillip G. Creek -- executive vice president & chief financial officer

Yes, the only thing, Bob, is that just to draw down a little bit, Alan, if you look, for instance, at Houston and San Antonio, where today, the majority of our business is Smart Series. It was not that way a year ago. And the average sale price is more affordable, which is good. And also, the margins are quite a bit better. So we're definitely getting a benefit from a combination of Smart, Texas, all four of our Texas markets. Margins have improved. A year ago, those margins were all below company average.

Now they are at company average or better. Plus market like Sarasota, as Bob mentioned, where we're just kind of getting started, kind of getting scale, as we're getting a little bigger there, we're getting a little more pricing power. So Sarasota is also helping. So we're really pleased with our margin improvement. Obviously, as our sales price has stabilized or gone down a little bit. It's very, very important that we control our cost, get SG&A efficiency, but also get those margins up is very important to us so we continue to work on that.

Alan Ratner -- Zelman & Associates -- Analyst

Fantastic. Good luck, guys.

Phillip G. Creek -- executive vice president & chief financial officer

Thanks,

Operator

Your next question comes from the line of Aaron Hecht with JMP Securities.

Aaron Hecht -- JMP Securities -- Analyst

Hey, guys. I doing great quarter.

Robert H. Schottenstein -- chairman, president & chief executive officer

Thanks, Aaron. Good to talk to you yeah,

Aaron Hecht -- JMP Securities -- Analyst

I didn't talk you too. You guys hit on most of the major themes going on here. But I was wondering on the spec side, are the margins running on par with traditional builds right now? Or is that spread still negative? And are you seeing buyers prefer spec to get into a home quickly? Or is the buyers still preferring to build the home the way they want it?

Robert H. Schottenstein -- chairman, president & chief executive officer

First of all, I think that this I'll try to answer part of that. The margins on specs historically have been 100 to 200 basis points lower than margins on new builds, that's narrowed somewhat. And in fact, we have a number of instances it's pretty hard to paint it with too broad a brush but we have a number of instances in certain of our markets where the spec margins are basically the same as to-be-builts. And I think that I didn't mention that in response to the previous question, but that's probably provided some margin lift as well. So your question helps inform the previous question. In terms of buyer preference, I think that there has been a little bit more demand for specs over the last 90 days. Phil, I don't know, if you would...

Phillip G. Creek -- executive vice president & chief financial officer

April did blip up a little bit. But if you look at us, even the last few quarters, we tend to be in that 40% to 50% range. Also, I think a lot of it is that we try to have a pretty definite spec strategy on a subdivision level, again, it goes back to Bob as far as our operators and the really good job they've done to make sure that we're very mindful of not only the lot we put the spec on, but the house, the product type, the price point. Definitely, some people do not want to stay in a housing transaction for six months. Brokers tend to want to take buyers to places where they can get a home quicker, get their commission quicker and so forth.

But the margins have improved on the specs. We think it is a strength that we have at our price point to have a couple of finished specs per community. Also a couple of specs in the process where people still want to make selections they can with a compressed cycle time. Also, it does help the construction schedule in that we kind of can keep more an even flow type situation helps in our production teams and our costing. So we do feel very good about that. We are down a couple of hundred specs now than we were a year ago, primarily just because of our very, very strong sales. Our community count is about the same. But hopefully, we'll reload that a little bit as we go forward. But again, that just depends on market conditions.

Aaron Hecht -- JMP Securities -- Analyst

Great. And you talked about your land position being the strongest that you've had in years. But obviously, the orders are up by a magnitude we haven't seen before. Is that going to cause some irregularities in terms of the timing of community rollouts? Or how do you plan to phase in different land positions over the next couple of years?

Robert H. Schottenstein -- chairman, president & chief executive officer

We could. I think we'll manage through it. I mean we're dealing with it now. I mean we're all over land development schedules and land delivery schedules. Some of that you can't totally control because you're relying on third-party inspections and that kind of stuff. But but I look, we own and control nearly 35,000 lots. And even if you add a factor of 10% or 20% to our current sales rate, that's at least a four year supply. And the thing I like about it most are two things: right price point, and we have the right to walk away from 60% if the world turns upside down.

Aaron Hecht -- JMP Securities -- Analyst

It's a good problem to have right now.

Robert H. Schottenstein -- chairman, president & chief executive officer

Yes.

Phillip G. Creek -- executive vice president & chief financial officer

If you look at our communities, in general, about 50% of our communities, we do the development, we control the development. So we think we have a pretty good mix of reliance on third-party people and also things that are on us 100%. And I mean, sales pace, selling to community is faster than we thought. It has obviously impacted our community count, but it really gets down to a division by division, subdivision by subdivision situation. But we feel like overall, we're really in pretty good shape.

Aaron Hecht -- JMP Securities -- Analyst

Great. And then on the financial services side, it was noted they had a higher capture rate. What was the degree of difference in that capture rate? And is that something you can maintain? Would that squeeze some internally to drive that? Or was that because of this unique situation?

Phillip G. Creek -- executive vice president & chief financial officer

The comparison was 83% this quarter to 79% last year in the second quarter. Year-to-date, we're actually close to 85% capture rate. So it's high. We think that's a little bit on the high side. But we feel pretty confident that we'll be able to maintain mid- to low 80% capture rate going forward.

Robert H. Schottenstein -- chairman, president & chief executive officer

And I don't want to speak for Derek, but I will. I think that he would also say that our in addition to the better pace, better margins, better returns with our Smart Series, our capture rates, I think there's greater opportunity to capture, if you will, on Smart Series homes. That buyer that is a lower price point doesn't walk in with their own lender or private banker or hang their honor or anyone else. So that will that could and should contribute to us being able to keep it at this high level.

Aaron Hecht -- JMP Securities -- Analyst

All right. Well, that's all I got. Thanks for the time guys.

Robert H. Schottenstein -- chairman, president & chief executive officer

Thank you.

Aaron Hecht -- JMP Securities -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Art Winston with Pilot Advisories (sic) Pilot Advisors.

Art Winston -- Pilot Advisories -- Analyst

On behalf of all the stockholders, we just want to thank you for your excellent management of this business. I just have I have two questions. The in effect, what's happened, the inventories have grown a little bit over the last 12 months, and you managed to pay back debt, your actual debt is down, and you have no borrowings on your bank loans at all. And with mortgage rates at 3%, why do you keep talking an inability to make money, make a good profit on the smart smaller homes. Why do you why are you so cautious about buying land and increasing the inventory? It seems like this would be a good time with your financial position to go out and not be as cautious as the way you described yourself.

Robert H. Schottenstein -- chairman, president & chief executive officer

Well, I think two things can be true. I think you can own and control almost 35,000 lots, which is what we do own and control, and you can still be cautious about what you're doing. And with what we have on our plate, we have the ability to grow this business pretty significantly over the next several years, assuming that the economic conditions allow for that kind of thing. We have a long track record, and I think that we intend to take full advantage of the conditions that are out there. But I think it would be I just wouldn't feel honest if I if we didn't acknowledge that the conditions that exist within the economy are very hard to understand and predict. And while housing conditions have somehow, some way managed to just pierce through all of the noise and calamity, whether they'll continue to, I think is I think there at least is a question about that. The caution that we have is not going to prevent us from achieving what I think would be acceptable growth goals.

Phillip G. Creek -- executive vice president & chief financial officer

I think also it's a situation where that when you buy the land and you own the land, you're taking certain risks. I mean our business tends to be a lot about who are the buyers, where are the buyers coming from. And when you buy something today, you may not actually be in there selling houses for a year or so if those jobs were to go away, if those jobs were to change. Also, competitive landscape and so forth. So if you buy land today, perhaps, probably you are getting it cheaper than you will a year or 2.

But not only do you have carrying costs, you have market risk of what happens to the jobs, what happens to the economic factors, as Bob said. So we think we can run our business really well if we can own about a year of finished lots. Then if we can, on top of that, own another year or two and then control on top of that another year or two, which would give us four or five years, we think that's a real prudent way of running the business.

Art Winston -- Pilot Advisories -- Analyst

Is it more difficult to invest in land that you intend to build the Smart homes, the smaller homes on? Is it harder to find?

Robert H. Schottenstein -- chairman, president & chief executive officer

It just depends. Right now, we've got a really good pipeline. But we're not the only builder, as you probably know, that's hanging their hat on increasing their output of affordable homes. So it's competitive. But we've got a really good pipeline.

Art Winston -- Pilot Advisories -- Analyst

Good. I have one more question. On the finance operations, your company your division has done very well with low mortgage rates, high mortgage rates, etc. Is there any way to make some kind of an acquisition to make this business bigger than the natural growth you're getting by higher capture and stuff? In other words, to expand this business at a greater pace, given I think your success in return on investment in the past.

Robert H. Schottenstein -- chairman, president & chief executive officer

Maybe, although that's not something that's part of our current thinking at all. We've done some small acquisitions. The our entrance into Detroit was about a $90 million acquisition a couple of years ago. We continue to look at additional markets to enter.

Art Winston -- Pilot Advisories -- Analyst

No, I'm talking about finance, the finance company.

Robert H. Schottenstein -- chairman, president & chief executive officer

I missed that.

Art Winston -- Pilot Advisories -- Analyst

Yes, I'm sorry. I'm waiting for that.

Derek J. Klutch -- President and Chief Executive Officer

This is Derek. We've looked at retail business, refinance business. It's a different a totally separate business. You don't just hang up a sign and do that. And we have decided that we stick to what we do really well. We think with the investment we have and the returns we get from the mortgage and title operations is a good spot for us.

Art Winston -- Pilot Advisories -- Analyst

Thank you for everything

Derek J. Klutch -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jay McCanless from Wedbush.

Jay McCanless -- Wedbush -- Analyst

Hey, good afternoon, everyone. Congrats from me as well for the quarter. So let me try and ask the land question this way. With the pipeline you have, when might the community count start to inflect back higher? Because amazing sales this quarter. It sounds like July is doing very well also. I'm just worried about how quickly are you going to run through the communities? And when based on what you have in front of you right now, when that count might start to turn back higher?

Robert H. Schottenstein -- chairman, president & chief executive officer

While Phil is getting ready to answer that, I'll simply say this. I think community count is look, we get we were giving guidance in two areas. One was land spend. We've suspended that. And the other was community count. We've suspended that. We'll probably reinstate both of those at some point down the road. So the fact that we were giving guidance on community count must make us think, as you do, that it is important. But I also think it can be very deceiving. As an example, most of our Smart Series communities have significantly more single-family lots in them than a typical move up or higher price community.

I don't have the exact number, but I would guess that an average Smart Series community has 150 to 200 lots, some have even more, whereas typical other community might be 50 to 80 lots, believing you can get through it in a couple of years. And pace has an impact on that when you look at the when you analyze whether to buy or not to. So I think that community count's really important. I'm not saying it isn't. But total lots owned and controlled, and our belief as to whether we can achieve growth goals, I think, is at least as important, if not more so, given the slight change in the product offering with Smart now comprising almost 40% of our business.

Phillip G. Creek -- executive vice president & chief financial officer

Jay, the only thing I would add is that, I mean we're in the subdivision business. That's what it's all about. That's how we run the business. And it is a very, very important item for us. Echoing definitely what Bob said, all communities are not created equal. The Smart Series tends to give us higher absorptions, higher profitability, etc. We are, probably never say never these crazy days, we're probably going to open less communities this year than we had thought, obviously, with especially the March and the April craziness in the world. So we are going to probably open less than we thought. Also, if sales continue strong as they have in July, we're going to sell more than we thought. So the community count increase is definitely going to be challenged this year.

Having said that, again, echoing what Bob said, we think we are positioned very well from a land standpoint to continue our growth. If you look at this year, right now, we're like a 7,000 unit run rate. A couple of years ago, we were doing 4,000. So in our 15 divisions, as we continue to grow those divisions on average to 500, 600, some might be 800, some might be 400, we still think there's quite a bit of room to grow in our existing 15 markets in the next couple of years. And then having said that, obviously, community count is very much a part of that. We are buying more land now than we were in the first couple of quarters because things have kind of picked back up. But again, we feel like we are in good shape to continue growing the business.

Jay McCanless -- Wedbush -- Analyst

What on pricing power, can you talk about what percentage of your communities you were able to raise price during the quarter?

Robert H. Schottenstein -- chairman, president & chief executive officer

I don't really have any I don't have a good percentage on that.

Phillip G. Creek -- executive vice president & chief financial officer

I mean we feel good about our margins. We spend a lot of time on opening communities the right way. We try to very much to control communities and don't get too far ahead of ourselves because cost protection is always challenging in our business. So we try to run the business, you sell five or six houses, you take the price up even for just $500 or $1,000. So every community is a little different, but we are getting some pricing power. You can see that in our margins, and we'll continue to focus on that.

Jay McCanless -- Wedbush -- Analyst

Got it. And then two other quick questions. First, the I know most of the builders were running some incentives in late March and parts of April. Just wondering if there's any if you guys were doing any of that that we should expect maybe could be a small headwind to gross margin as we think about the back half of the year?

Phillip G. Creek -- executive vice president & chief financial officer

We don't give any margin projection. I would not say specifically, we were doing a lot of incentives right after the pandemic started hitting or whatever. With our sales being so strong, like Bob said, selling 800-plus in May and then beating that in June and continuing in July, we've definitely tried to inch price up. The issue you get into is, there are some supply challenges out there. Cycle times, I think, will probably be a little slower in the second half with some of the issues. Every market is a little different. But Jay, we're laser-focused on margins. That's a big part of the profitability of our business, will continue to be that way.

Jay McCanless -- Wedbush -- Analyst

Absolutely. Yes. And you actually that was going to be my other question is just where cycle times now versus where they were last year.

Phillip G. Creek -- executive vice president & chief financial officer

They're up a couple of days. If you look overall, company average, we're in the 140, 150 range overall. If you look at the Smart Series, they're in the 120, 130 range. But they are up a couple of days compared to last year.

Jay McCanless -- Wedbush -- Analyst

Okay. Congrats again. And thanks for taking my questions.

Phillip G. Creek -- executive vice president & chief financial officer

Thanks, Joe.

Operator

We have no further questions from the phones.

Phillip G. Creek -- executive vice president & chief financial officer

Thank you for joining us. We look forward talking to you next quarter.

Operator

[Operator Closing Remarks].

Duration: 50 minutes

Call participants:

Phillip G. Creek -- executive vice president & chief financial officer

Robert H. Schottenstein -- chairman, president & chief executive officer

Derek J. Klutch -- President and Chief Executive Officer

Alan Ratner -- Zelman & Associates -- Analyst

Aaron Hecht -- JMP Securities -- Analyst

Art Winston -- Pilot Advisories -- Analyst

Jay McCanless -- Wedbush -- Analyst

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