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MDC Holdings, inc (MDC) Q3 2021 Earnings Call Transcript

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MDC earnings call for the period ending September 30, 2021.

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MDC Holdings, inc (MDC 1.29%)
Q3 2021 Earnings Call
Oct 28, 2021, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the MDC Holdings 2021 Third Quarter Conference Call. All participants will be in listen-only mode. (Operator Instructions Please note, todays event is being recorded. I now would like to turn the conference over to Derek Kimmerle, Vice President and Corporate Controller. Please go ahead, Mr. Kimmerle.

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Derek Kimmerle -- Director of Securities and Exchange Commission Reporting

Thank you. Good morning, ladies and gentlemen, and welcome to the MDC Holdings 2021 Third Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, Executive Chairman; David Mandarich, Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDCs business, financial condition, results of operations, 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 companys 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 companys actual performance are set forth in the companys third quarter 2021 Form 10-Q, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now I will turn the call over to Mr. Mizel for his opening remarks.

Larry A. Mizel -- Executive Chairman

Good morning, and thank you for joining us today as we go over our results for the third quarter of 2021 and provide an update on the outlook for our company. MDC generated net income of $146 million or $1.99 per diluted share in the third quarter of 2021, driven by a combination of strong revenue growth, continued price increases and improving overhead leverage. Home sales revenues grew 26% year-over-year, thanks to a 13% increase in deliveries and a 12% rise in average selling prices. Our home sales gross margin of 23.5% represented a 300 basis points improvement over the prior year period as our new home pricing stayed ahead of cost inflation. We also made further improvements to our fixed cost leverage as our SG&A expense fell 80 basis points year-over-year to 9.6%. We are extremely pleased with our financial results this quarter, particularly in light of the supply chain issues that continue to affect our industry. Order activity remained healthy during the quarter at 4.1 sales per community per month. This represents the second highest third quarter order pace for the company in the last 15 years. Buyers continue to be drawn to our more affordable price new home offerings, which allow for personalization through our build-to-order strategy.

We believe this operating model is a more prudent and capital-efficient way to run the business and leads to better risk-adjusted returns over time. We also believe that results in fewer cancellations as homebuyers naturally become more invested in their purchase when they played an active role in designing and furnishing their home. This is an important differentiator for our company, particularly in light of the lengthening cyclical times. From a capital standpoint, MDC continues to be in great financial shape. We ended the quarter with a debt-to-capital ratio of 39.7% and a net debt-to-capital ratio of 23.7%. During the quarter, we issued $350 million of senior notes due in 2061 [phonetic] 0:05:40 at an interest rate of 3.966 and made a tender offer for over $120 million of our senior notes due 2024, which carry an interest rate of 5.5%. And while the early retirement of debt resulted in a $12.2 million charge this quarter, we now have a lower cost of capital and a debt maturity schedule that extends out 40 years. Our total liquidity position at the end of the quarter stood at just over $2 billion, giving us plenty of capital to scale our operations in the coming years. It will also allow us to continue paying our industry leading dividend, which currently stands at $2 per share on an annualized basis. I will now turn the call over to our President and Chief Executive Officer, David Mandarich, for more insight into our homebuilding operations. David?

David D. Mandarich -- President, Chief Executive Officer & Director

Thanks, Larry, and good morning to everybody on the call. As Larry mentioned, we continue to see robust demand for our homes across our geographic footprint. With the West region posting the best order pace during the quarter at 4.9 homes per community per month, followed by the East at 3.7 and our Mountain region at 3.0. Pricing remained firm within our communities, and we did not win this any widespread use of incentives or discounting in our markets as each of the segments posted home sales gross margins in excess of 20%. As our existing operations continue to thrive, we have started to move into new markets that exhibit similar strong housing fundamentals. Earlier this year, we announced our expansion to Boise and Nashville. And in this quarter, we are pleased to announce our entry into Austin, Texas and Albuquerque, New Mexico.

Similar to Boise and Nashville, we believe these two markets should show positive growth trajectory for new construction, thanks to a steady influx of jobs, favorable affordability and an excellent quality of life. We have land deals in place in both markets and look forward to establishing profitable operations in the years to come. As we head into the end of the year, MDC is focused on delivering homes and backlog while setting the stage for additional growth in 2022. Our lots owned and controlled at the end of the third quarter increased by 37% year-over-year, giving us a great opportunity to capitalize on the positive housing fundamentals in our markets. We have several new communities scheduled to open in the coming quarters, which Bob will give in more detail in a moment. With that, Id like to turn the call back over to Larry for a few additional comments.

Larry A. Mizel -- Executive Chairman

Thanks, David. MDC delivered another quarter of strong profitability in the third quarter and remains poised to continue that trend, thanks to favorable industry dynamics, our excellent market positioning and our sizable backlog of homes. While we expect the current supply chain issues to persist for the foreseeable future, we also expect the current demand drivers to remain in place as well, giving us a great opportunity to finish the year on a high note and build on our success in 2022. As a result, we are optimistic about the future of our company. Id now like to turn the call over to Bob for more detail on our results this quarter and an update of our companys outlook.

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Thanks, Larry, and good morning, everyone. During the third quarter, we generated net income of $146 million or $1.99 per diluted share, representing a 48% increase from the third quarter of 2020. Home sale revenues grew 26% year-over-year to $1.26 billion, while gross margin from home sales improved by 300 basis points. The growth in home sale revenues and margin expansion resulted in a 62% increase in pre-tax income from our homebuilding operations to $165.2 million. As Larry mentioned, we accelerated the retirement of $123.6 million of our unsecured notes due in January 2024 through a cash tender offer during the quarter. The retirement resulted in a loss of $12.2 million, which is included in homebuilding pre-tax income. Financial services pre-tax income increased 13% year-over-year to $27.5 million. All of our financial services companies benefited from the increased volume of our homebuilding operations during the quarter. Our mortgage company also benefited from a $3.5 million gain recognized on the sale of conventional mortgage servicing rights during the period. This increase was mostly offset by increased competition in the primary mortgage market, increased compensation-related costs and a temporary decrease in our capture rate. Our tax rate increased from 21.5% to 24.3% for the 2021 third quarter.

The increase in rate was primarily due to a decrease in tax windfalls recognized upon the vesting and exercise of equity awards, which was partially offset by a year-over-year increase in home energy tax credits. For the remainder of the year, we currently estimate an effective tax rate of approximately 24.5%, excluding any discrete items and not accounting for any potential changes in tax rates or policy. Homes delivered increased 13% year-over-year to 2,419 during the third quarter, driven by an increase in the number of homes we had in backlog to start the quarter. Our ability to convert backlog and closings continues to be negatively impacted by increasing permitting times and labor and material shortages. As a result, we saw cycle times increase by approximately two weeks sequentially from the second to third quarter of 2021. The number of homes delivered during the quarter was below our previously estimated range of 2,500 to 2,700 units and was a direct result of the extended cycle times that we experienced.

The average selling price of homes delivered during the quarter increased 12% to about $520,000. The increase was a result of price increases implemented across the majority of our communities over the past 12 months. For the fourth quarter, we are anticipating home deliveries to reach between 27,300 units, with an average selling price between $530,000 and $540,000. Gross margin from home sales improved by 300 basis points year-over-year to 23.5%. We experienced improved gross margin from home sales across each of our segments, with our West segment showing the largest increase year-over-year as well as having the highest absolute level overall. These improvements were driven by price increases implemented across nearly all of our communities over the past year, which have been partially offset by increased building material and labor costs. While we have seen lumber prices decrease in recent months, we continue to experience cost pressures on other building materials and labor costs. Gross margin from home sales for the 2021 of fourth quarter is expected to increase to between 23.5% and 24%, assuming no impairments or warranty adjustments.

Our total dollar SG&A expense for the 2021 third quarter increased by $16.5 million from the 2020 third quarter, driven primarily by increased general and administrative expenses. Our SG&A expense as a percentage of home sale revenues decreased 80 basis points year-over-year to 9.6%. General and administrative expenses totaled $59.9 million during the third quarter due to increases in compensation related expenses, including increased bonus and stock-based compensation accruals. We currently estimate that our general and administrative expenses will grow to between $65 million and $70 million for the fourth quarter of 2021. Marketing expenses increased $900,000 as a result of increased master marketing fees relating to increased closings volume. However, marketing expenses as a percentage of home sale revenues were down 50 basis points year-over-year as we were able to continue limiting advertising expenses in this high demand environment. Our commission expense as a percentage of home sale revenues decreased 60 basis points year-over-year as we have taken steps to control these costs during this period of strong demand for new housing. The dollar value of our net orders decreased 21% year-over-year to $1.31 billion due to a 32% decrease in unit net orders. This decrease was driven by a 33% year-over-year reduction in our monthly sales absorption pace. Our sales absorption pace for the third quarter of 2021 was a healthy 4.1 orders per community per month.

While this represented a year-over-year decrease from the third quarter of 2020, it was a 14% increase from the pre pandemic levels experienced in the third quarter of 2019. The year-over-year decrease in our sales absorption pace was due to the return of more normal seasonal patterns as well as our efforts to moderate sales activity, as we have mentioned on prior calls. Overall, we believe demand levels remained highly favorable during the third quarter. Were also pleased with the start of the fourth quarter from a demand standpoint based on the net orders weve seen to this point in October. The average selling price of our net orders increased 16% year-over-year as we have raised prices across most of our communities over the past 12 months. While price increases slowed during the third quarter, pricing remained firm and continues to more than offset the higher input costs related to building materials and labor. Looking at backlog metrics on slide 11. The dollar value of homes in backlog increased 38% year-over-year despite the decrease in third quarter activity. While cycle times remain the biggest challenge to our backlog conversion efforts, we believe we are well positioned entering the fourth quarter with construction started on 84% of our backlog and 42% at frame stage of construction or beyond.

We approved 5,892 lots for acquisition during the quarter, representing a 54% increase year-over-year. This brings the total number of lots approved for acquisition during the year to 15,978 lots and marks the third time in the last four quarters, our approval activity exceeded to 5,000 lots. We closed on 3,214 lots during the third quarter, which included about a 100 finished lots within our first subdivision in Austin, Texas. Total land acquisition and development spend for the quarter was $420 million. As a result of our land acquisition and approval activity, our total lot supply to end the quarter was nearly 37,000 lots, representing a 37% increase from the prior year quarter. In addition, 34% of our lot supply was controlled via option as of period end. We believe that this lot supply, combined with the continued lot approval and acquisition activity, provides us with a solid platform for growth in 2022 and beyond. Our active subdivision count was at 203 to end the quarter, up 5% from 194 a year ago. We saw an increased number of active subdivisions in both the East and West segments with the East segment experiencing the largest increase. Active subdivisions in the Mountain segment were down 8% year-over-year. Were actively selling out of our first Boise subdivision as of quarter end.

And with the acquisition of finished lots in Austin during the third quarter, we expect to be open for sales in this new market by the end of the year. New community openings remain challenging in the current environment due to delays in municipal approvals and the strain on the available resources to complete development work. Also, we have a number of legacy communities on the verge of closing out, as you can see from the number of soon to be inactive communities as of September 30, 2021. This indicates that our active subdivision account could decrease over the next few months as we work to open and begin selling out of our new communities. Due to this potential short-term volatility in our active subdivision count, we are not reiterating any year-end guidance for this metric. However, we do expect to see an increase from our 203 active communities at the end of the third quarter before we reached the end of the 2022 first quarter in time for the spring selling season. While we expect further active subdivision growth from that point through the end of 2022, we will wait to provide further guidance until we have more visibility as to the timing of these community openings. In summary, we are pleased with our financial results for the third quarter and believe the housing backdrop remains favorable. While we expect the current supply chain issues to continue in the near term, our current backlog and land position have us poised for continued growth into 2022.

Our financial position remains strong with over $2 billion of total liquidity and a net debt-to-capital ratio of 23.7% as of quarter end, providing us with the ability to continue to grow our business and invest in our new markets. On behalf of the company, I would like to thank all of our employees and subcontractors for their hard work and tireless efforts as we continue to work together to mitigate the supply chain issues impacting our industry. Without their efforts, we would not be in the position we are today, poised to deliver more than 10,000 new homes to our homebuyers for the 2021 full year. With that, I will now turn the call back to the operator for a question-and-answer session.

Questions and Answers:

Operator

And the first question comes from Stephen Kim with Evercore ISI.

Stephen Kim -- Evercore ISI -- Analyst

Yeah. Thanks very much guys. Congratulations on a strong quarter. A couple of questions for you. One is, I was curious if you could give us a sense for whether youre seeing a little difference in the profitability. Im thinking primarily gross margin between homes that you are selling on a dirt sale basis, which is your core model and the homes that you are selling after theyve canceled or in some form of construction already underway? I know thats not your core business, but I also know that there are some of those sales that you make. Im curious whether those spec margins are higher than your dirt margins at this point?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

I guess going through closings, certainly, the spec margins are higher at this point, kind of benefiting from, kind of, current pricing, whereas for the dirt units, theyre a little bit lower, but will probably come up over time as the price increases start coming through the closing levels.

Stephen Kim -- Evercore ISI -- Analyst

And Bob, you got a rough range of how much more margin youre seeing with the spec units, right now? Are we talking a couple of hundred basis points, kind of, thing?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Right now, its probably, call it, 500, 600 basis points.

Stephen Kim -- Evercore ISI -- Analyst

Got it. That makes sense. Okay. And then second question relates to the issue of affordability. What weve been hearing from folks is that builders want to be very judicious about pushing prices. Theyre cognizant that theres a psychological aspect to homebuying and that, particularly with the entry-level or first time buyer, they want to make sure that theyre not sort of, crossing any lines, psychological lines that may trigger a buyer strike or that kind of thing. At the same time, were hearing that whenever theres product available to be sold, it sells very quickly and that buyers seem to be having plenty of opportunity -- plenty of ability to come up with extra cash if they need to, all of which suggest that there is still plenty of room ahead for price increases and that actual affordability is absolutely fine, right now. I was wondering if you actually agree with that characterization or if theres any color you can provide around the effort and the interest in, sort of, keeping your product "affordable"? Is it actual affordability or in affordability that youre bumping up against or not?

David D. Mandarich -- President, Chief Executive Officer & Director

Steve, this is David. You know what, I think we got a couple of positive things happening with this. A, were doing a lot more affordable product, which you know youve seen the seasons. And then two, weve got some new products coming out thats even a little smaller and more affordable. The third leg of the stool is really interest rates. Interest rates are still pretty darn affordable. So I think when you look at down payments and house payments, were in a pretty good place, Steve.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, no doubt.

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

And I would add on to that, Steve, just with a couple of the metrics for Q3 being at 4.1 from a0n absorption rate standpoint, thats the second highest in our history. And thats after having increased prices probably close to 25% to 30% over the preceding 12 months. So that is something that were very pleased with, considering that level of price increases. And I guess the final thing is, at the end of the quarter, we only had 21 finished specs out there, which is down even from last year. So clearly, its hard to keep any finished inventory around. Its going pretty quickly.

Stephen Kim -- Evercore ISI -- Analyst

Yeah. Great. Thanks very much guys.

Operator

Thank you and the next question comes from Michael Rehaut with JPMorgan.

Maggie Jane Wellborn -- JPMorgan -- Analyst

Hi. This is Maggie on for Mike. First question, I noticed that during the quarter, there was a pretty large sequential step down in the number of homes that you started to around 2,400 homes. And I was wondering, as you look to 2022, can you talk about the time line and your level of confidence in ramping that start pace back up?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Yeah. I think we feel pretty comfortable with the starts part of things. I think 2,400 really just marries up with the number of houses we sold during the period, which also happened to be about 2,400. In prior periods, we were well in excess of 3,000 units started. So I think and we do have the ability to ramp-up fairly significantly from what we did in Q3.

Maggie Jane Wellborn -- JPMorgan -- Analyst

Got it and second, you mentioned that youre seeing some cost pressures from other building materials besides lumber and some increases in construction costs. I was wondering, as you look at your cost basket, can you quantify any of those cost increases maybe year-to-date or from last quarter? And how are you thinking about that inflation and, kind of, those increased costs relative to lumber still being below peak levels as you think about 2022.

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Well, I guess going through closings, were probably up somewhere between $13 and $15 a foot. For costs, I guess, direct costs going through the P&L. And thats versus, call it, $25 a foot on prices having gone up per foot year-over-year. And I guess, as we look toward next year, as we see lumber and other things come through, lumber is probably peaking out in our P&L sometime in, call it, Q4 and early Q1 and then should start to see some improvement going through our P&L from there. The rest of the costs, its tough to say. I think were still battling through, trying to make sure were getting the house disclosed. So I dont want to put any predictions out there on that one.

Maggie Jane Wellborn -- JPMorgan -- Analyst

Okay. Thats helpful. Thank you.

Operator

Thank you. And the next question comes from Truman Patterson with Wolfe Research.

Truman Patterson -- Wolfe Research -- Analyst

Hey. Good afternoon everyone. Thanks for taking my questions. First, wanted to start off. Bob, when you were talking about community count growth in 2022, I didnt catch it in the prepared remarks. Did you actually quantify that? And what Im hoping to think through for the communities that are coming online, was this land bought more recently in 21? If so, is there any way to quantify this or is this earlier vintage land thats a bit more self-developed, if you will?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Thats a lot in one question, but Ill -- so as far as the community count goes, essentially, we had said we thought wed be up 10% year-over-year, and we actually did see an increase year-over-year as at the end of Q3. But theres a little bit of volatility there. So that 10% increase year-over-year, we may have to wait a couple of months after the year-end to see that come through, essentially, is what were saying. So we might not be up 10% year-over-year right at 12/31/2021. But we still think were going to be up from where we were at, at the end of the third quarter by the time we get to the spring selling season, which is really the most important part of things. In terms of the vintages of the land, I think its a mix. Weve been able to get some finished lots on board. So those would be lots that we approved in 2021. But I think weve also got some coming through on a development basis that would have been approved in 2020 or maybe even a little bit earlier since development is taking a longer period of time nowadays. So I guess, its a little bit of both on that front.

Truman Patterson -- Wolfe Research -- Analyst

Okay. Thanks for that and then second question, how should we think about some of the start-up costs for our recent market entrances? And is continued geographic expansion, a part of your strategy going forward or are you pretty comfortable with your footprint now?

David D. Mandarich -- President, Chief Executive Officer & Director

Yeah. Truman, this is David. Were very comfortable with our footprint today, but we really saw these four new markets that were going into, very similar in nature to the ones were in. We think our products are going to be great. Weve been able to get a decent land supply to start. And our start-up costs are fairly minimal. So weve done start-ups in the last couple of years that have ended up being very successful. We expanded in Riverside County three years ago. Now were one of the leading builders in Riverside County. So we just think its very natural for us to do organic growth versus going out and trying to buy another homebuilder.

Truman Patterson -- Wolfe Research -- Analyst

All right. Thank you all for your time.

David D. Mandarich -- President, Chief Executive Officer & Director

Thank you.

Operator

Thank you and the next question comes from Deepa Raghavan with Wells Fargo.

Deepa Raghavan -- Wells Fargo -- Analyst

Hi. Good morning everyone. Thanks for taking my question. One for you, Bob, and one for Dave and Larry. Bob, can you talk about allocation trends across your community? I mean, the second highest absorption pace is somewhat in contrast to that -- are you even on allocation? If so, what percent of your communities are on allocation and any thoughts when you can be meaningfully off of it?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Yeah. I think were not really operating under allocation, and weve been fairly consistent about this, not doing that versus trying to manage through price increases. And then to the extent that we do allocate it would only be -- because we dont think we can start the homes within, call it the next 60 to 90 days. So if we end up in that situation, then we would be likely to maybe hold back on some lots. But I would say for the most part, were not doing that allocation across the country.

Deepa Raghavan -- Wells Fargo -- Analyst

Okay. So is four then a normalized number for us to expect? Is your more normal -- an absorption pace that youre comfortable with even on some lower community count or is that going to probably change a bit on the momentum side of it?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

I mean four is a pretty darn good third quarter. Its second highest in the last 15 years, only eclipsed by last year, which was way off the charts at 6.1%. So even if you saw it a little bit lower than that, I think it still would be a really good third quarter or fourth quarter. I think longer term, being in somewhere in the 4% to 5% range on an annualized basis, thats more where we seek to be. So thats, kind of, where we stand on that part.

Deepa Raghavan -- Wells Fargo -- Analyst

Okay. Last one, more bigger picture. So can you talk to how your recent foray into your Boise and other markets have progressed so far? Any surprises, positive or negative, given that youre opening communities in a pretty challenging time environment and also, can you talk to what are the newer upcoming market youre probably excited to enter in. Thanks, and thats it for me.

David D. Mandarich -- President, Chief Executive Officer & Director

Yeah. This is David. I think I can answer it this way. I think were enthusiastic that in all the new markets that weve started in that weve actually been able to get a land supply. We know we got the right product for the market. So in the four markets were starting, we feel pretty good about it. The developers have embraced our product and our build-to-order strategy. So were feeling pretty darn good about starting those new markets.

Deepa Raghavan -- Wells Fargo -- Analyst

Thanks so much. Ill pass it on.

Operator

Thank you and the next question comes from Alan Ratner with Zelman & Associates.

Alan Ratner -- Zelman & Associates -- Analyst

Hey, good afternoon. Thanks for taking my questions. First question, Bob, just on the corporate G&A guidance, thats a bit of a step-up from where youve been running at previously. And I know, David, you just mentioned the start-up costs with the new markets is not overly material. So just curious whats driving that if the start-up markets have any impact there? And if not, is that $65 million to $70 million, kind of, the new run rate we should think about going forward?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Yes. Its a good question. I would say the bulk of it is compensation related costs. So its not so much the new markets, but we just see compensation-related costs going up across the board because of the competitiveness of the job market. Youve got a couple of things coming through there. The PSU units tend to be somewhat volatile and when we recognize that expense. And part of it is anticipation that we might reach some hurdles set forth in those PSU units. So that can be a little volatile. But other than that, I think were probably in that 65-plus range going forward here.

Alan Ratner -- Zelman & Associates -- Analyst

Thats helpful Rob. Thank you. Second question, I forgot who was David or Larry that made this comment early on, so I apologize for not remembering. But referring to your cancellation rate and the idea that the build-to-order model, kind of, invests the buyers into the home and, kind of, keeps them in backlog. And I certainly would agree with that. But on the other hand, your current can rate is still running well below, kind of, where you historically run at. And I would argue that, thats a function of the strong price appreciation that those buyers have seen since theyve written the contract. With your comments that pricing has, kind of, normalized a little bit here. Are you at all concerned about cancellations starting to creep back up to those more normal levels if the buyers dont have that embedded equity-like they do today, especially with cycle times extending and buyers having to wait as long as they do today for their home.

David D. Mandarich -- President, Chief Executive Officer & Director

Yeah, I am David. I look at it a couple of different ways. Number one, our consumers are invested in their house with their colors, their personalization. But the other thing, were in a really healthy market. So its not a lot of demand and lower supply. So when people get in, I think theyre happy to have their house on their lots. So we feel very good about our business model today.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. Appreciate that Dave. Thanks a lot.

Operator

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

Alex Barron -- Housing Research Center -- Analyst

Well,thanks guys and good job on the quarter. Good job in the quarter. I wanted to ask, so you guys just raised the dividend, which was good to see, but wondering if you could share your thoughts around share -- potential share buybacks?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Well, I mean, it is something we have in our arsenal. We have an authorization outstanding as we speak. That said, we havent done that in about 20 years. So clearly, our preference has been to reward shareholders through the dividend and increases in the dividend, as youve seen just this quarter, but we havent taken share buybacks off the table.

Alex Barron -- Housing Research Center -- Analyst

And how big is the outstanding authorization, Bob?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Its four million shares.

Alex Barron -- Housing Research Center -- Analyst

Got it. Okay and one last thing on the supply chain issues, what would you say are the top two or three things that are the most pricing at this point?

David D. Mandarich -- President, Chief Executive Officer & Director

This is David. Its a mixed bag. Its different from market-to-market. So I cant really tell you that its one category or the other, but were seeing what Id call spotty supply chain in each one of our markets. And so overall, I dont think its just one thing.

Alex Barron -- Housing Research Center -- Analyst

Okay. Thanks so much.

Operator

Thank you.[Operator Instructions] And the next question comes from Jay McCanless of Bedford Securities.

Jay McCanless -- Bedford Securities -- Analyst

Hey. Good afternoon. What was the cancellation rate in the quarter and what was it last year?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

I guess, so about 7% relative to beginning backlog. A year ago, I think it was about 12% and then if youre looking for relative to gross, I think we were about 19% during the quarter. And a year ago, I think it was $14 million or $15 million.

Jay McCanless -- Bedford Securities -- Analyst

And was that increase in the gross focused on any certain area of the country or any color you can give us behind that?

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Well, I think we had a much higher absorption rate last year, and thats why we like to refer to it relative to beginning backlog and the absolute number of cancellations was actually lower year-over-year. And thats really whats important to me, considering we have a much bigger backlog.

Jay McCanless -- Bedford Securities -- Analyst

So Larry and David, what finally pulled you over the fence on Texas, I thought that was a market historically, you guys didnt want to operate?

David D. Mandarich -- President, Chief Executive Officer & Director

Well, Im going to give you a good answer because I think both Larry and I would -- and I watch Larry laughing because were actually going to Austin, Texas, OK? And so were getting started there. We think that market has got a lot of demand for our, kind of, product. And so right now, weve just made the decision to go to Austin, OK? And we think it fits into our business model. Larry, you want something to add?

Larry A. Mizel -- Executive Chairman

Yeah. I can say over 40, 50 years from time-to-time, we change our mind.

Jay McCanless -- Bedford Securities -- Analyst

Well, thanks guys. Appreciate you for taking my questions.

Operator

Thank you. And this concludes the question-and-answer session. I would like to turn the call to Bob Martin for any closing comments.

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Thank you. We appreciate everyone being on the call today, and we look forward to having you when we conclude our fiscal year on our fourth quarter earnings call.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Derek Kimmerle -- Director of Securities and Exchange Commission Reporting

Larry A. Mizel -- Executive Chairman

David D. Mandarich -- President, Chief Executive Officer & Director

Robert Nathaniel Martin -- Senior Vice President, Chief Financial Officer & Senior Vice President & Principal Accounting Office

Stephen Kim -- Evercore ISI -- Analyst

Maggie Jane Wellborn -- JPMorgan -- Analyst

Truman Patterson -- Wolfe Research -- Analyst

Deepa Raghavan -- Wells Fargo -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Jay McCanless -- Bedford Securities -- Analyst

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