M/I Homes, inc (MHO) Q2 2021 Earnings Call Transcript

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M/I Homes, inc (MHO -0.13%)
Q2 2021 Earnings Call
Jul 28, 2021, 4:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to M/I Homes Inc. Second quarter earnings call. [Operator Instructions]

I will now turn the conference over to Phil Creek. Please go ahead sir.

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Thanks. Thanks for joining us. on the call today is Bob Schottenstein, our CEO and President Derek Klutch, President of our Mortgage Company Ann Marie Hunker, VP Chief Accounting Officer. 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 asked you forward looking statements 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. Also be advised that the company undertakes no obligation to update any forward looking statements made during this call.

With that, I'll turn the call over to Bob.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Thanks, Phil. Good afternoon, everyone. And thank you for joining our call. We had a record setting second quarter highlighted by a 97% increase in net income, a 23% increase in homes delivered a 35% increase in revenue, and a return on equity of 27%. All of this is a result of a high level of performance across all 15 of our housing operations, as well as from our mortgage and title business. More our margins for the quarter were very strong. Despite significant cost pressures. Our gross margins improved by 320 basis points over last year, and improved sequentially by 70 basis points from the first quarter to a second quarter level of 25.1%. Our overhead expense ratio improved by 110 basis points from a year ago to 10.4% of revenues, reflecting greater operating leverage. And most importantly, our pre tax income percentage improved significantly to 14.7% versus 10% a year ago. Record second quarter results continue our trend of strong growth in both revenues and earnings that we have achieved over the past decade. Since 2013, our revenues have grown at a compounded annual rate of 19%. And our pre tax income has grown at an even more impressive annual rate of 43%. Demand for new homes continues to be very good. And as reflected in our year to date new contracts increasing by 24%. And our record set second quarter new contracts just slightly better than a year ago, with 2267 homes sold during the quarter. We achieved record second quarter sales notwithstanding that we are operating in nearly 20% fewer communities than a year ago. And we are intentionally limiting sales and majority of our communities to control margins and better manage delivery times.

Given the drop in our community count and the difficult sales comps posed by this quarter in particularly the next quarter the third quarter, I wanted to provide a little more color on our sales results. Last year was to say the least a most unusual year for our industry. No one could have predicted how our economy would fare when faced with one of the worst health crisis of our time. A worldwide pandemic. Knowing what we know now, it is clear that comparisons between 2021 and 2020 need to be viewed carefully. Our second quarter sales comps more quick, were clearly more challenging due to the unusually strong sales pace, which began in May and June of last year, as our industry as a whole experienced a dramatic rebound in sales after the extreme initial COVID related sales. slowed down in March and April of last year. For EMI homes, we sold 31% more homes and last year second quarter, aided by the strength of last May in June. The increased sales pace continued and even got better. As you all recall, as we moved into last year's third quarter, where our sales grew by 71% over 2019. It was in the late stages of last year, third quarter and frankly, in all of the fourth quarter of last year, when we first began to limit sales in many of our communities. And of course, we were raising our prices to try and meet the market demand. Despite these efforts, we began to sell out of communities much faster than expected.

On top of that, new community openings within our industry occurred slower than expected, due in part to delays in the governmental approval and inspection process, largely because of COVID related work from home protocols. Thus, a greater than anticipated drop in our community count. Looking ahead, we are very well positioned to grow our communities. We expect to open more new communities in the second half of this year than we did in the first half. And importantly, we expect to open a record number of new communities in both the first half of 2022 and the second half of 2022. All in support of our growth goals. Finally, let me just say that our slowdown or decline in order growth is not indicative of demand. These are perhaps the best housing conditions. We've seen, considering demand, buyer demographics and buyer sentiment, and the very strong credit credit quality of our buyers. We will continue to manage or limit sales in many of our communities on a go forward basis in order to control deliveries and maximize margins. And today we've seen little if any evidence of pushback on price on all of our product lines from attached townhomes to our diverse single family lineup of homes, as well as our homes geared to empty nesters have performed at or above expectations. Speaking of our product line, our smart series, which represents our most affordable line of homes, continues to perform at a very high level. Smart Siri sales in the second quarter accounted for just under 40% of total company sales compared to about 35% a year ago. We are selling our smart series homes and 35% of our communities compared to 30% of the communities a year ago. The average price of our smart series Homes is now just under $350,000 compared to roughly $330,000 at the end of the first quarter.

As we've said repeatedly over the last several years when discussing our smart series line of homes. On average, our smart series communities produce better sales pace, better margins, faster cycle time, and thus better returns. Our backlog sales value at the end of the quarter was $2.5 billion and all time quarterly record and 70% better than last year. units in backlog increased by 49%. To an all time record 5488 homes with an average price of homes in backlog equal to $454,000. This is 15% higher than a year ago. Now I'd like to provide a few comments on our markets. As I mentioned at the beginning of the call, we experienced strong performance from each of our 15 homebuilding divisions, with substantial income contributions for most of our markets led by Orlando, Tampa, Minneapolis, Dallas, Columbus, and Cincinnati. Our deliveries increased by 18% over last year in our southern region, reminding you that our southern region consists of our four Texas markets, three Florida markets and two North Carolina markets. Deliveries in the southern region increased to 1297 homes, or 57% of the total. The northern region, which is the balance of our markets, six to be exact in Ohio, Indiana, Illinois minutes Soda in Michigan contributed 961 deliveries, which is roughly 31% better than a year ago. new contracts in our southern region increased by 3% for the quarter and decreased by 4%. In our northern region, our owned and controlled lot position in the nine markets representing our southern region increased by 35%, compared to last year, and increased by 15%. And the six markets that comprise our northern region 34% of our owned and controlled lots are in the north, with the balance roughly 66%. In the south, we have a very strong land position. company wide, we own approximately 18,300 lots, which is roughly a two year supply.

On top of that, we control the option contracts, and additional nearly 26,000 lots. So in total, are owned and controlled lots are slightly slightly more than 44,000 lots, which is just below a five year supply. Perhaps most important 59% of those near 44,000 lots are controlled under an option contract, which gives me my home's significant flexibility to react to changes in demand or individual market conditions. Before I turn the call over to Phil, I'll just make a few closing comments. First, our financial condition is very strong with one and a half billion dollars of equity at June 30, and a book value slightly over $50 a share. We ended the second quarter with a cash balance of $372,000,000.00 borrowings under our $550 million unsecured revolving credit facility. This resulted in a very healthy net debt to cap ratio of 16%. We believe our low leverage in substantial cash generation allows us to allocate capital to share repurchases, while also continuing to make significant investments in replenishing our land position for the continued growth of our company. As a result, as stated in our press release, we announced today that our board of directors has approved a new $100 million share repurchase authorization. This replaces our existing $50 million share repurchase authorization which had roughly $17 million of remaining availability. The $100 million share repurchase authorization reflects our expectation of the ongoing strength in our business and our commitment to creating long term shareholder value, while always maintaining low debt leverage. Finally, in closing, our company is an actual is in excellent shape. Given the strength of our backlog, as well as the strength of our land position, we are poised to have an outstanding 2021.

And with our planned new community openings, we are equally excited about our prospects for a strong 2022. Phil?

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Thanks Bob. new contracts and second quarter increased to 2267. A second quarter record 2261 for last year second quarter. And last year second quarter was up 31% versus 2019. Same period. Year today, we have so 5376 homes 24% better than last year. Our new contracts were up 103% in April, down 11% in May and down 33% in June. Our sales pace was 4.2 in the second quarter compared to last year is 3.4. And our cancellation rate for the second quarter was 7%. We continue to manage sales to closely align ourselves with our ability to start and deliver our homes along with focus on our margins, especially given our record backlog of 5500 houses. As to our buyer profile. About 51% of our second quarter sales were to first time buyers, compared to 56% in the first quarter. In addition 43% of our second quarter sales for inventory homes, the same percentage as the first quarter. Our community count was 175 at the end of the second quarter compared to 220 at the end of last year second quarter, and the breakdown by region is 79 in the northern region and 96 in the southern region. During the quarter we opened 16 new communities while closing 20 During last year of second quarter we opened 22 new stores and close 25. We delivered an all time quarterly record of 2250 and homes in the second quarter. And year today we have delivered 4277 homes, which is 28% more than last year. production cycle times continue to lengthen.

And we have started over 5000 homes in the first half of this year, which is 1500 more homes than the first half of last year. revenue increased 35% in the second order, reaching an all time quarterly record of 961 million. And our average closing price for the quarter was 411,008% increase compared to last year second quarter average of 379,000. Our second quarter gross margin was 25.1%. Up 320 basis points year over year. Our construction and land development costs continue to increase. Recently we have seen some we have seen lumber costs decline in some of our markets. And our second quarter SG and a expenses were 10.4 revenue, improving 110 basis points compared to 11.5 a year ago. This reflects greater operating leverage, and it was our lowest second quarter leverage in our company history. Interest expense decreased 2.1 million for the quarter compared to last year. Interest incurred for the quarter was 10 point 1 million compared to 10 point 3 million a year ago. This decreases due to lower outstanding borrowings in the second quarter, and also higher interest capitalisation due to more inventory being under development. We are very pleased with our improved returns for the quarter. Our pre tax income was 14.7 versus 10 last year, and our return on equity was 27% versus 17%. A year ago. And during the quarter we generated 156 million of EBITDA compared to 86 million in last year second quarter. we generated 174 million of positive cash flow from operations in the second quarter compared to generating 83 million a year ago. And we have 22 billion in capitalized interest on our balance sheet about 1% of our assets. And our effective tax rate was 24% in the second quarter, same as last year, second quarter, and we estimate our annual rate for the year to be around 24%. And our earnings per diluted share for the quarter increased to $3.58 per share from $1.89 per share last year.

With that I'll turn it over to Derek Klutch to address our mortgage company results.

Derek Klutch -- President and Chief Executive Officer of M/I Financial

Thanks, Phil. Our mortgage and title operations achieved record second quarter results in pre tax income, revenue and number of loans originated revenue was up 50% to $28.6 million due to a higher volume of loans closed and sold, along with higher pricing margins. And we experienced in the second quarter of last year. Pre tax income was $18 million, which was up 66% over 2000 and 22nd quarter. The loan to value on our first mortgages for the second quarter was 84% compared to 83%. Last year. 78% of loans closed in the quarter were conventional, and 22%, FHA or VA. This compares to 77% and 23%, respectively, for 2000 and 22nd quarter. Our average mortgage amount increased to $336,000 in 2021 second quarter compared to $311,000. Last year. Loans originated increased to a second quarter record of 1704 loans 24% more than last year, and the volume of loans sold increased by 48%. Our borrower profile remains solid, with an average down payment of over 16% and an average credit score of 747 up from 746 last quarter. Our mortgage operation captured over 84% of our business in the second quarter, compared to 83% last year. Finally, we maintain two separate mortgage warehouse facilities that provide us with funding for mortgage originations. Prior to the sale to investors. at June 30, we had $134 million outstanding under the MIF warehousing agreement, which is a $175 million commitment that was recently extended and expires in May 2022. And we also had $34 million outstanding Under a separate $90 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 and Chief Financial Officer

Thanks, Derek. As far as the balance sheet we ended the second quarter with a cash balance of 372 million and no borrowings under our unsecured revolving credit facility. And during the second quarter, we extended the maturity of our credit facility to July 2025, and increased the total commitment to 550 million. Total homebuilding inventory at June 30, was 2.1 billion, an increase of 250 million from last year, and our unsold land investment at June 37 or 82 million compared to 810 million a year ago. at June 30. We had 497 million of raw land and land under development, and 285 million of finished unsold lots. We owned 3872, unsold finished lots, with an average cost of 74,000 per lot. And this average lock cost is 16% of our Foreign Earned 54,000 backlog every sale price. Our goal is to own a two to three year supply of land. And during the second quarter, we spent 150 million on land purchases, and 87 million on land development for a total of 237 million, which was up from 156 million in last year, second quarter. And in the second quarter, we purchased about 4000 lots of which 78% were all in 2,022nd quarter, we purchased about 2100 lots of which 67% were all in general, most of our smart series communities are rolling deals, and have above average company pace and margin. And at the end of the quarter, we had 59 completed inventory homes, and 169 total inventory homes. Another total inventory 498 are in the northern region in 371 are in the southern region. And at the end of the first quarter, we had 98 completed inventory homes, and 708 total inventory homes.

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

Questions and Answers:

Operator

Yes, thank you. [Operator Instructions] And the first question comes from Ivy Zelman with Zelman and Associates.

Ivy Zelman -- Zelman and Associates -- Analyst

Hi, good afternoon. Congrats on the great quarter guys. So Bob, if we think about smart series, and he talked about that the home was 330 at the beginning of the year 550 on average now, recognizing that, you know the pricing power in the market is obviously still very strong. Do you think about is there a ceiling as to where the consumer will start pushing back? That's my first question. And my follow up question is if we look at that home, assuming you are consumers signing a contract for let's say, a $350,000. home today. And we know that there's inflation in every category, within the building materials that go into that home and the appliances and everything else. And also, of course, labor's going up as well. Well, the consumer is obviously not going to have to pay that difference. Let's say that house 350 when they sign the contract for when they close the home, that house theoretically should be 400,000. Don't you have to eat that 50,000 and therefore isn't the margin on the home going to be compressed?

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Thanks, Ivy, first of all, good to hear you. As to the first question. Absolutely. There's a ceiling. We haven't reached it yet. There's a ceiling on everything. And I know that's not what you meant. But I mean, there will come a point of price pricing keeps going up up and up, where you could get to a point where you have to either cut prices or but we're nowhere near that yet we continue to see either steady or improving margins as far as how we manage in this crazy, super inflationary, costing and cost environment that we've been in really for over a year. We've been able to stay ahead of it. Is it because we're omniscient. Now, in some ways, you know the strength of the market has helped cover up what otherwise would have been it you know, margin erosion. The but the other thing is as much possible, we try not to sell too far out in front. As much as possible, we try to make certain we absolutely know all the costs when we price it. So we don't have to see us an erosion like you described. And then the other thing is that today, in most of our markets, we have a pretty healthy contingency built in, on the cost side to cover unexpected stuff. So look, if conditions stabilized somewhat, you know, that contingency is there, right, that would just go straight to margin. Right now, most of that contingencies being used just to deal with things. But you know, we're very pleased that our margins ended up at about 25%. But for all the inflation, clearly, they would have been higher. Our smart series communities are on are averaging higher than the 25%. That's a company wide average. But, you know, look, it's never perfect, but we've been able to manage this situation. And so far, we haven't seen situations where we're pricing our buyers out of the market.

Ivy Zelman -- Zelman and Associates -- Analyst

Thanks, Bob. Well, good luck, and I appreciate your time. Thanks.

Operator

Thank you. And the next question comes from Alex Barron with the Housing Research Center.

Alex Barron -- Housing Research Center -- Analyst

Yeah, thanks, guys. Yeah, I think you mentioned that. Well, I guess I'll start off with this. You guys track what percentage of the buyers that are showing up to there are coming in from out of state versus say, six or 12 months ago?

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

I'm not aware that we do that. I'm looking at Derek clutch who runs our mortgage operation, they tend to have a lot of that data. But I don't know that we have that information handy. We don't we don't track that. It would it would be for so significantly Market to Market.

Alex Barron -- Housing Research Center -- Analyst

Okay.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

What's the issue? Alex, that you're concerned about?

Alex Barron -- Housing Research Center -- Analyst

I guess the the main question is whether the people who are moving say from New York to Florida, are from California to Texas, you know, those guys have a lot more money and and, you know, in a bidding situation can outbid the local buyers. So I'm just kind of wondering if that's, you know, in some ways driving the strong price appreciation and the fact that people aren't giving you pushback, because, in a sense, you know, they, once they've made the decision to jump across state lines. I mean, they're there. So they're going to pay whatever it takes. But I guess the question is [Indecipherable]

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

I would answer it this way. One, I'm not sure. But my intuition is that while there is clearly some of some of our buyers and our competitors, buyers, are individuals that are moving from markets where they maybe have sold their house and be sitting on a lot of excess cash as a result. They're now moving into a market where housing is cheaper. But I don't think it's a material enough percentage of the population to really be impacting price that much. You might be right. But that's not what I that's not what I where I would come down. I think a lot of what's driving the demand, or I think the biggest factor driving the demand. And the and the pace of new home sales has been the noticeable increase in millennials, moving from renter ship to homeownership. And I think that that has really been the largest component, incremental component of the growth in new home production. Okay, that's helpful. They're not even a question. They're not even coming. They're not coming from a house to sell. They're coming either from a parent's house or from an apartment.

Alex Barron -- Housing Research Center -- Analyst

An apartment. Right? Yeah, that makes sense. The other question is, I think, Phil said, you guys have started, you know, 5000 houses in the first half of the year. I'm curious if you could break that out by quarter. And also, what's the outlook for future starts? I mean, I know you guys are limiting sales. So are you planning to also limit starts Where are you accelerating starts and selling homes at a later phase of the construction? How are you guys thinking about starts in the second half of the year?

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

You know, Alex when you look at that 5000 the first half, there was a little over 2000 the first quarter and then closer to 3000 in the second quarter. So Starks did accelerate in the second quarter. You know, we're really pleased you know, with the Production increase. You know, again, you know, last year we close 7700 homes, and obviously, our run rate right now in closings is a lot higher than that. So we are pleased with the extra production we're getting, we also were able to put, you know, a few more specs on the books at 630 versus 331. So again, we aren't we are happy there. So, you know, we feel really good where we are, you know, when you start trying to grow businesses a lot more than, you know, 10 15%, that can really put some strain on things. But there also are a number of issues. Now, every markets a little different. You know, windows are a big issue in certain markets, plumbers are an issue in markets. But you know, we feel very good about where we are very good about a volume increase. You know, Bob talked about our backlog, average sale price being up this same percent, our margin did 25%. So we think we're really poised well, to continue producing really strong results.

Alex Barron -- Housing Research Center -- Analyst

Okay, now, if I could ask one last one, you know, given all those constraints and delays, and build times, curious, you know, if you have an estimate of how much build times I've extended out, and also, whether you guys have some type of closing guidance for the year that you're aiming at.

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

No closing guidance or anything, but you know, you can see that, you know, we've closed over, you know, 2000 houses the first couple of quarters. So that's, that's good growth for us. So we feel good about that, you know, when you look at cycle times, they've gone up a couple of weeks. You know, if you look in general, in the past, we kind of got houses in the field in August, we would get him close that calendar year. This year, the way things are, we pretty much needed the houses to be in the field by the end of June. Of course, the smart series are quicker in general than the other. But it's definitely lengthened out another couple of weeks, just in the quarter.

Alex Barron -- Housing Research Center -- Analyst

Okay, thanks so much. Good luck, guys. Thank you.

Operator

Thank you. And the next question is from Jay McCanless with Wedbush.

Jay McCanless -- Wedbush -- Analyst

Hey, guys, so few questions. Think the first one, Bob, in your prepared comments, you were talking about starting more communities in fiscal first half 22 and second half 22. But what we can compare that to to what you've done in 21, or just a historical average? I've missed one.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Yeah, let me let me let me restate that in that the answer is yes, really, on the parts of that, we expect to open more communities, new communities in the balance of this year than we did in the first half of this year, number one, and then number two, in the first half of 22. And in the second half of 22, we expect to open a record historical record number of new communities in each of those halves of the year.

Jay McCanless -- Wedbush -- Analyst

Okay, so we could look back at what you guys did for openings in previous years. And that's going to be a relevant stat. Correct? It's not Yeah, we're not talking about starting a community here. We're talking about actual openings, ready positions

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

This opening this is opening for sale.

Jay McCanless -- Wedbush -- Analyst

Okay.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Yeah, right now, as you know, you know, we're, even though not all communities are created equal. We're, we're running at about 20% fewer stores or communities than we were last year at this time. And that situation will set significantly change for the better as we move through the next 16 to 18 months. And Jay, just to kind of make the numbers easy for you. You know, in the first half of this year, we opened 37 new stores. And again, Bob's references will be more than that in the second half. And then if you look at you know, last year, we open 39 the first half and 30 the second half of last year, again, just to give you some reference 39 in the first half and 30. In the second half. He said, Yeah, last year, we open 69 stores all year.

Jay McCanless -- Wedbush -- Analyst

Okay, great. And then my next question, I guess, kind of a two part question. What's the the average time lag between starting a community from from raw land and opening it currently, but then also, of the municipal headwinds? You talked about extended to the land development side as well as the actual building the house side?

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Well, the headwinds that I referred to which directly on. They've been on both sides. But one of the things that's delayed us getting certain new communities open is that the munis is the municipal headwinds would work from home protocols and, and, frankly, reduction in staffing. In some selected municipalities, that's an industry wide issue, not one that's just unique to us. But the first question you asked, What's the typical time on a raw land deal, from the day you start start raw land development, until you get open? That can, that can vary pretty significantly. It could be and, you know, on some smaller deals where there's fairly simple phases, and no off sites, as little as eight to nine months from the time you complete that phase, and then maybe get your model up, open, or it could be as much as 12 to 15 months in places where the developments more complicated, more impacted by weather, not all months during the year are equal in all of our markets. It's very, very hard to generalize in that in that situation. But that's why when I say into 2022, we'll, we'll open a record number of new communities more than we've ever opened in any single year in the history of our company, that's taking all that into account. That's based on what we know and expect today, and we're far enough along that we can make that statement.

Jay McCanless -- Wedbush -- Analyst

That's great. And then I guess, the other side of this is your close out. And with metering sales. I mean, it looks like April, was an easy COVID. comp. And then I guess the slowing the sales pace down. That's what drove the negative comps in May in June. But how many that's part of the that's part of the reason. Another thing that drove them was 20% fewer stores. Right? So you got to think about two things impacting order growth.

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Yeah. And again, just a little more information. Jay, when you look at last year, last April, we sold 400 houses. Last May, this is 2020. We sold 800 houses. Last June, we sold 1000 houses. So the 20 to 61. Last year, again, 1000. Were in June and 100 in May, very tough comps. And again, we felt very good that we did surpass that this year, you know, with community camp down as much as it is. Yeah, absolutely. But I guess the question, though, is, is has, is there any quantifiable effect on how many communities you're closing out now that you slow the sales pace down? I mean, is it a thing where if you hadn't started the sales face down, you would have closed out 10% 15%? more convenience? In hindsight, it's hard for me to say this, because our margins were so strong and our returns are so strong, you know, our return on equity is one of the best in the entire homebuilding industry. You know, I'm really, really proud of our performance. But we didn't really start slowing or metering to use your term sales in any of our communities till late third quarter last year. By that point, we had already been running heavy at a run rate of close to 1000 sales a month, for almost three, four straight months. You know, had we started metering sales earlier, we probably would have a few more to sell today, but a few less communities closed.

But you know, we also improved our profits by 100%. And our company's in the best financial shape ever, I'm not going to look back and wish we had done a, b or c different, because you never know what's going to happen. You know, when the pandemic first first came on the scene in March of last year, none of the home builders knew what was going to happen next, no one did you know some of our competitors furloughed laid off employees, and only to hire them back. So you had a lot of things happening in the market that were very, very hard to know. And even when sales took off in May in June of last year, who knew how long that was going to last? It's just seemed so implausible, in light of the fact that half of half the industries in the United States were either closed or underwater, and the home builders, home builders are selling houses like never before. So it was really hard to reconcile a lot of that at the time. We did what we thought was best we started slowing sales down late last year. You know, maybe we should have started a little sooner, but we are where we are. We like where we are. And we're really optimistic about what lies ahead.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

And the other thing I'll add to that, Jay, is that when we get down to a few lots, you're better off to go ahead and get out of the community. So we don't play games. Inside, let's take three off the market for 45 days. So we still have an open community at the end of the quarter. Because if we can go ahead and get sold out and closed out of the community, get the model closed down, go to a new site, it makes our operation a lot more effective. So again, you know, we're trying to make the best businesses decision, we're pretty much getting open what we thought we would get open. Because when we give our, you know, internal budgets and estimates, and so forth, you know, we try to allow a little bit of time extra for land development, in most situations, we don't open until you know, the model was complete, we obviously try to fast track models. But, you know, we're getting open pretty much what we thought we would get open, what's changed continually is we're getting food communities quicker. But oftentimes, you know, that's the best business decision also. But we are excited, as Bob said about what we have in front of us. I mean, last year, we spent well over $700 million in land, obviously, we're looking, if you just look at the first half of the year, we're looking at spending a lot more this year on land, and that has to come out. So we are looking for, you know, a lot more community stoven next year.

Jay McCanless -- Wedbush -- Analyst

Alright, and is it fair to say that the close outs or or a percentage of the close outs we're seeing now is just the tail end of the strong sales activity from the back half of 20. And now, now that you started slowing things down, that's going to help slow the rate of close out? Yeah, I'm not sure I understand the question, as well just know, what I'm saying is when when you were I mean, fairly high, the sales pace in two Q and three q 20. Are the communities that are closing out now homes that you sold back then, or at the end of the third quarter? And now these communities are closing out now? Is that why close out seem to be running a little bit faster than we would have anticipated?

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Yeah, that makes sense. Because we look at our close outs, Jay, you know, in the in the first quarter of this year, we had 36, close outs. In the second quarter, we had 28. So we had 64. Close outs the first half, we had 48 close outs the second half of last year. So yeah, I mean, when our sales started picking up in April in May, yeah, it takes, you know, nine months or so to get through that. So yeah, that's that's probably a good assumption.

Jay McCanless -- Wedbush -- Analyst

Okay, all right. Good, thank you. And then I know other costs are rising but the the decline in lumber prices seems to be pretty dramatic. If everything stayed equal right now, when do you think the gross margin impact from those higher lumber causes is going to finish run into the income statement?

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

You know, it our markets are a little different as the way they deal with lumber. Depending on if you're on a 30 day locked a three month locker, those type things in those situations, you know, are vendors that have bought some higher price lumber, takes a little longer to work through that. Most of that lumber is based on starch or whatever. So if I were asking when the guessing when the highest cost lumber is going to get through? I would say that would be by the second quarter of next year.

Jay McCanless -- Wedbush -- Analyst

Okay, and then the last one I have and I'll jump back and Q What what percentage of your smart cheery sales? Are you getting up to like the dry in I guess a dried inspect type level before you go ahead and accept the contract on that?

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Hardly any. Hardly any in very few of our markets. are we holding houses off the market till they get to a certain construction level? You know, we're really not doing that very often. We're handling it more on Okay, maybe we're gonna sell five in there this month. I mean, the foundation made the slab may be in there may a little bit of construction going on. But now there's not that much of a let's make sure we get the house drywall before we sell it.

Jay McCanless -- Wedbush -- Analyst

Okay. All right. Thanks for taking my questions.

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Thank you.

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Thanks, Jay.

Operator

Thank you. [Operator Instructions] All right, as there are no more questions at the present time, I would like to return the floor to Phil Creek for closing comments.

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Thank you very much for joining us. I look forward to talking to you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Phillip G. Creek -- Executive Vice President and Chief Financial Officer

Robert H. Schottenstein -- Chairman, President and Chief Executive Officer

Derek Klutch -- President and Chief Executive Officer of M/I Financial

Ivy Zelman -- Zelman and Associates -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Jay McCanless -- Wedbush -- Analyst

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