Green Brick Partners, Inc. (NYSE:GRBK) Q2 2022 Earnings Conference Call August 4, 2022 12:00 PM ET
Company Participants
Jim Brickman – Co-Founder & Chief Executive Officer
Rick Costello – Chief Financial Officer
Jed Dolson – Chief Operating Officer
Conference Call Participants
Alex Rygiel – B. Riley
Carl Reichardt – BTIG
Jay McCanless – Wedbush Securities
Alex Barron – Housing Research
Bill Dezellem – Tieton Capital
Operator
Good afternoon and welcome to Green Brick’s Partners Earnings Call for the Second Quarter Ended June 30th, 2022. Following today’s remarks, we will hold a question — a Q&A session. As a reminder, this call is being recorded. And will be available for playback. In addition, a presentation will accompany today’s Webcast and is available on the company’s website, at investors.greenbrickpartners.com.
Joining us on the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Rick Costello, Chief Financial Officer; and Jed Dolson Chief Operating Officer. Some of the information discussed on this call is forward-looking including the company’s financial and operational expectations for 2022 and beyond.
In yesterday’s press release and SEC filings the company detailed material risks that may cause its future results to differ from its expectations. The company’s statements are as of August 3rd 2022 and the company has no obligation to update any forward-looking statements it may make.
The comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and in the presentation available on the company’s website.
With that, I will now turn the call over to Jim Brickman.
Jim Brickman
Thank you. We’re pleased to share results of another outstanding quarter. During the second quarter we delivered a record, 881 homes generated record quarterly total revenues for any quarter of $525 million and achieved a record homebuilding gross margin of 32.3%, despite a challenging supply chain and labor environment.
As a result, the company generated a record $101 million in net income or $2.08 per diluted share, representing a year-over-year growth rate in quarterly EPS of a 104%. Green Brick has a track record of generating some of the best returns among our peers and this quarter was even better with an annualized return on equity of 45.6%.
We encourage you to take the time to compare our results and key operating metrics with any of our homebuilding peers of any size. I’m also excited to share that we officially joined The S&P SmallCap 600 in July. This is a milestone that is not possible without a hard-working talented team.
During our call today, I would like to discuss why we believe that Green Brick is well positioned to succeed in a rapidly changing environment. Rick will discuss our Q2 2022 highlights. And lastly, Jed will provide some color on what we are seeing in the housing markets and the supply chain as well as updates on our capital allocation strategy.
While our second quarter performance broke records in many key financial and operational metrics we began to see moderation on the sales floor in the second half of the quarter. This happened due to multiple aggressive interest rate hikes by the Fed and inflationary pressures.
The market is still seeking for a new equilibrium after the Fed’s rate hikes that accelerated the Fed funds rate by 200 basis points from May 1st to July 27th. Despite what we see as a choppy market over the short-term we continue to believe that demand for single-family homes in our markets is here to stay over the long horizon. Here are a few reasons.
First, on slide 4 of the presentation over four million millennials between the ages of 35 and 44 are entering their prime homebuilding years.
For many of them, buying a house is not a discretionary purchase. In fact marriage alone doubles their homeownership rate. On top of that, a large amount of institutional capital flooded to build for rent space and created a unique group of homebuyers in the housing ecosystem that did not exist during the housing bubble. We believe the build-to-rent sector will provide more stability and future buyers for the housing market.
Next for the housing supply chart on slide 5, the inventory of new and existing homes today remains near historical lows and is a fraction of the supply compared to the great financial crisis or even the inventory adjustments seen in 2018 and 2019.
For Green Brick specifically, we ended the second quarter with only 10 finished spec homes. While the supply of home store sale will increase over the coming months, we believe that the recent decline in expected future reductions in single-family starts should mitigate a buildup of housing inventory in 2023.
Lastly as seen on slide 6 due to the limited housing supply, rental prices in major US cities are seeing double-digit growth, while occupancy remains at high levels. This further complicates the buy versus rent decision among first-time homebuyers whose urgency to purchase the first house will only grow as they age, marry and form families.
In addition to those long-term tailwinds, we believe that Green Brick is strategically positioned to navigate in this evolving environment as shown on slide 7. To begin with we operate in some of the best markets in the country. Demographic shift and migration will continue translating into housing needs over the long haul. DFW, our biggest market has experienced tremendous business activity over the last 18 months. According to the Dallas Chamber of Commerce over 120 companies have announced office relocations or expansions into the DFW area in 2021 and 2022. We believe our markets will exhibit more resilience in a weak economy and a higher growth rate in a booming economy.
Second, within our strong growth markets we primarily build in infill locations. Over 80% of our year-to-date 2022 revenues were generated from those infill submarkets. Those submarkets are typically land and lot constrained and face limited competition. Development in those submarkets requires our recognized expertise and local knowledge to address more complicated entitlement, regulatory and development processes. The mixed-use neighborhood of retail multifamily units and a 450-unit residential lot neighborhood, which we closed in the North Atlanta suburbs upcoming is an excellent demonstration of our ability to successfully manage and navigate a complicated development pipeline in very supply-constrained locations.
Third, since we went public in 2014, we have been focused on maintaining a strong balance sheet despite significant business growth and aggressive stock purchases. Among our peers, we had one of the lowest debt to total capital ratios at 28.9% despite purchasing $102 million of stock year-to-date through July at an average price of under $21 per share. Our repurchases represents almost 10% of total shares outstanding at the end of 2021. Further, 87% of our debt outstanding as of June 30, 2022 is long-term and fixed rate. At the end of the second quarter, our weighted average interest rate was only 3.4%.
Fourth, we believe we’ve always had one of the best lot positions that will support our future growth. Together with a strong balance sheet, we are in a position to stay opportunistic of our growth and manage our business in a way that’s accretive to shareholder value.
Lastly, since inception, we have incrementally improved our back office and homebuilding operations over time and we’ll continue to look for ways to increase our efficiency.
With that, I’ll now turn it over to Rick. Rick?
Rick Costello
Thank you, Jim. Please turn to slide 8 of the presentation. Our total revenues in Q2 2022 increased 40% year-over-year to $525 million. Our residential units revenue increased 54% year-over-year to $513 million driven by record closing volume in ASPs.
During the quarter, we delivered 881 homes for a 16% year-over-year increase and ASPs climbed 32% year-over-year to $579,000. We continue to make good strides on operating efficiency.
Our SG&A leverage ratio improved by 200 basis points year-over-year to a record low of 8.2% during the second quarter. And higher residential units revenue led to a 550 basis points improvement in homebuilding gross margin year-over-year to 32.3%, the highest in our company history. Sequentially, our gross margin increased 450 basis points.
As demonstrated on the comparative bar chart on slide 9, we have consistently demonstrated superior margin versus our mid-cap and small-cap peers. In the second quarter, our gross margin performance tops the chart.
Diluted EPS was up 104% year-over-year to $2.08 during the second quarter as a result of growth in revenue and improvement in both gross margin and SG&A leverage. Sequentially, EPS grew 73% on a 33% growth in total revenues.
Our year-to-date annualized return on equity was 37.4% as compared to 23% last year. As Jim mentioned earlier, we started to see a slowdown in traffic which accelerated in June and continued into July.
Record-breaking heat has also discouraged buyers from visiting our model homes in DFW. As a result, net new orders freezed 9.8% year-over-year. However, our absorption rate during the second quarter was up 4.4% year-over-year to 7.1 homes sold per average active selling community.
Our cancellation rate ticked up each month during the quarter and the overall second quarter cancellation rate increased to 11.4%, which is still lower than many of our peers. During the last eight quarters, our cancellation rate has varied between 6.0% and 12.3%.
We believe our lower cancellation rate is based on higher buyer quality and the larger amount of earnest money that we require. To put the topic in perspective, we have consistently stated that a cancellation rate in the range of 15% to 20% is appropriate in a normal environment for the industry prior to COVID.
As of the end of June, we had 1,087 homes in backlog with an ASP of $653,000 compared to 1,876 homes with an ASP of $519,000 at the end of June last year. Backlog units decreased 42% year-over-year due to one, closing a record number of homes during the second quarter; and two, moderation of demand in the second half of the second quarter.
The decline in backlog units was partially offset by a 25.8% increase in the ASP of backlog units resulting in a total backlog of $710 million. We expect the majority of our current backlog to close by the end of 2022 or Q1 2023.
Spec units under construction rose from 45% of total units under construction last year to 57% as of the end of Q2 2022. While this level is slightly higher than our historic range, our Trophy brand now represents a higher portion of our units under construction.
We believe many first-time home buyers are willing to forego the selection process to buy a spec home that can be delivered within two months after contract where the buyers mortgage interest rate and delivery date can be known. As a result Trophy’s business model contemplates a higher proportion of spec units than our other brands.
One of our many priorities for the remainder of the year is to find a good balance between our backlog and spec units as well as to manage sales pace, home prices, and start pace which Jed will expand on shortly.
With that, I’ll turn it over to Jed. Jed?
Jed Dolson
Thank you, Rick. With high inflation, volatile rates, and lumpy demand, we are closely monitoring our operation and are laser-focused on several key priorities that we believe will drive better performance for Green Brick. These priorities are summarized on slide 10.
First, we will continue to manage closings of our backlog. During the second quarter our buyers through mortgage company partners at an average credit score of 750 and a debt-to-income ratio of 34.9%. Approximately 30% of our buyers year-to-date are first-time home buyers.
We expect our buyer quality to remain consistently high. When necessary, we are assisting our buyers in securing financing with our mortgage companies through rate locks or rate buydowns. Currently, over 50% of our buyers who are utilizing our mortgage companies and are scheduled to close in the third quarter have locked their rates.
As Rick mentioned earlier, our cancellation rate went up to 11.4% during the second quarter, primarily due to more mortgage disqualifications. In some instances, we were able to transfer the buyers to other more affordable homes, featuring less square footage in order for them to secure financing and close.
Second, we will continue to manage our sales pace and starts as we seek to get an even flow. To counter a slowdown in foot traffic, we offer incentives on a community-by-community basis for new orders signed in June and July, which averaged approximately 2%. These incentives included a combination of moderate price cuts, credits towards closing costs, and rate buybacks.
Additionally, in some communities we are selling at earlier stages of construction to allow personalization of optional features. Given our industry-leading gross margin position, we believe we have the flexibility to be more aggressive on incentives of our markets required rate. That said, we do not intend to lead the market downward.
Third we continue to focus on managing capital allocation prudently. We are fortunate to have a great land book today that allows us to be opportunistic. We believe it will also give us an edge on margin due to attractive cost basis relative to the current market. Additionally we self-develop most of our lots, which has provided us an advantage in achieving an exceptional level of margins versus peers and controlling our own destiny and delivery dates.
We’ve been conservative with underwriting and where we’re being even more diligent and cautious when we look at land opportunities now. We want to ensure we are capital efficient and only invest capital that we believe will generate long-term value for the company and shareholders. Our expansion in Austin has been an excellent example.
We remain bullish in its long-term fundamental backdrops and are on track to start construction in early 2023. Last, we intend to continue strengthening our balance sheet. We have a strong balance sheet today, providing us more flexibility to manage our business in a changing environment.
Let’s switch gears to the labor markets and supply chain. As new starts slow down, we’re seeing some signs of relief in the labor and trade markets. For example during the last several weeks we have seen an increased number of inquiries from subcontractors for more work as they have more available crews.
We are seeing this primarily with the subcontractors used at the front end of the construction process. The labor market remains tight for finding well-trained professionals, but we believe we will see more pricing power shift in the coming months, if housing starts decelerate as we expect. The supply chain remains disruptive and lumpy, but we believe we are also at or close to an inflection point with cycle times.
As to lumber costs, we will start to see a tailwind from decreased prices reflected in our margin late this year and into 2023 as the lower prices pass through those future home persons [ph]. With our position as the third largest builder in Dallas-Fort Worth and the improved technology and processes in place, we believe that we are in a great position to manage costs and cycle times.
With that, I will turn it over to Jim for closing remarks. Jim?
Jim Brickman
Thank you, Jed. In closing, we believe our infill locations, disciplined capital allocation, strong balance sheet, superior land positioned and efficient operations will allow us to be defensive and offensive in a normalizing marketplace.
I would like to thank our entire Green Brick team. Going forward, we believe Green Brick is in a position of strength to manage our business in an evolving housing landscape. We remain focused on creating shareholder value and to continue looking for ways to build a better company.
This concludes our prepared remarks. We will now open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Alex Rygiel with B. Riley. Your line is now open.
Alex Rygiel
Thank you. Good morning, gentlemen. Very nice quarter. You’ve got a very large number of homes under construction at a time when new orders are softening a bit here. Can you discuss your flexibility in altering those plans to possibly accommodate a buyer that is in need for a longer average selling price?
Jim Brickman
Yes, Alex. This is Jim Brickman, and Jed you can chime in after I talk a little bit about this. Alex, right now everybody is trying to really figure out how elastic or how pricing is going to really impact demand of that first-time buyer. Trophy is our entry level and first-time move-up builder and is more dependent on that first-time buyer than our other brands. But as we noted in the call about 80% of our revenues are still being generated from less competitive supply constrained infill markets.
So we feel really good about those markets. And we really don’t have a lot of visibility right now into what is going to be taking place in that first time entry level buyer. It’s very spotty right now and we think it’s going to improve but we’re just not sure.
Jed, do you have anything you want to add to that?
Jed Dolson
I would just echo what Jim said the A locations, we don’t have a ton of lots in the A locations per neighborhood. So we will adjust sales philosophy accordingly. Oftentimes those lots are very hard to or near impossible to replace. And then in the entry-level community, we’re seeing some green shoots of the first-time buyer at low prices and we’re opening up a bunch of new neighborhoods in the coming months where we think the ASPs will be at/or below — possibly below 400,000. So we feel good about being able to bring an affordable product going forward.
Alex Rygiel
Excellent. And then one of the challenges that we have is to try to model and forecast what kind of pressure if any could be on gross margins from some of these incentives and price discounts and so on and so forth. And if we look back into Green Brick’s history back in 2018, gross margins did decline from a 26% level to a 21% level when demand moderated. I didn’t follow the company back then. So I’m looking to you for a better understanding of maybe some of the dynamics that played out in 2018 that caused that gross margin erosion and how in the next 12 months could be different?
Jim Brickman
Yeah. Good question. There are a lot of differences this time around. First of all in 2018, one of the reasons the margins went down was we had purchased a whole chunk of very inexpensive lots in 2013, 2014 and those very high-margin lots. We’re burned off of our business and we were replacing those lots with most of our self-developed lots. So that was part of the reason for margin erosion.
The second big component is since 2018 in those four years, we have worked very hard on our back-office operations. This is purchasing national accounts and just really running our business better. And I don’t think you’re going to see that margin degradation to 21% or anything like that, like, we experienced in 2018 because we have really a great lot book going forward. And we were just running the company so much better today than we were four years ago.
Alex Rygiel
Excellent. Thank you very much.
Operator
Your next question comes from the line of Carl Reichardt with BTIG. Your line is now open.
Carl Reichardt
Thanks everybody. You’ve talked a little bit Jed about slowing starts we’re hearing that from others. Can you talk a little bit about how current conditions might impact your decision to open new communities? Is it still full speed ahead with your ramps, or are you starting to think about holding some of those back?
Jed Dolson
No. We’re full steam ahead. We’re excited about the new communities. Many of them were bought, coming right after COVID set in. So they were bought at very attractive cost base. This is the land development costs, were much lower for the majority of those communities. So where — most of them are geared toward entry-level buyers. We’re extremely excited about the new community.
Carl Reichardt
Okay. Thanks, Jed. And then Jim, you and I have talked a number of times about your own lot position is 84% of your lots are owned versus option. And I’m interested in sort of, how you’re seeing with the potential change in the market here, how you’re seeing that position knowing that you’ve got a relatively low basis, know you work hard on the pricing and the process of getting those to market. How do you contrast your position versus the folks, who are more focused on option lots and where their risk profile sits compared to yours?
Jim Brickman
Interesting question. It’s going to be really interesting to watch this play out. I think that Wall Street, really has oversimplified this land-light model. In that — first of all, the land bankers that provide financing for this land model, are some of the smartest people in the room and they’re not allowing builders just at all of a sudden magically make money at their expense. So any builder that goes land-light, has a very high cost of capital that is paying a land banker. That’s number one.
Number two, is these lots on a takedown requirement where these builders have to buy lots. And they’re paying retail prices for lots, not our wholesale prices for lots. So in an economic slowdown builders that said, “Oh we’re land-light are now going to be taking down lots and putting retail price lots, on their balance sheet. Number three is, I don’t think investors understand that — many of these lots in a slowing economy, have 6% price escalators in their lots. So lots that land-light builders are taking down today, are going to be 6% more expensive at this same point in time next year.
Fourth is, gosh they can walk away from their options. Well they can, but that’s a very expensive proposition on most really good lot deals we’re putting 15%, of the retail price of the lot as a first lost — lot earnest money deposit that they would have to walk away from. So, I don’t have a real crystal ball, about how this is going to work out over the next year. But I can say that, I think we’re in a really strong position relative to some guys, that bought land-light lots at a very high price they’re going to be putting them on the balance sheet.
Carl Reichardt
Thanks, Jim. You didn’t have that speed prepared or anything did it? It sounded like you might have. If you don’t mind, if we…
Jim Brickman
No, I’ve been wanting to talk about this for about the last 10 conference call.
Carl Reichardt
Well, I have one more for you, if you don’t mind me to squeeze in one more in, which was on share repurchase. And obviously, the substantial amount of stock you bought back over the last this quarter in particular was a surprise at least to us. You have $57 million left on the authorization. Can I assume that, even though the price is substantially higher than the $21 million, you average that that you’ll continue to look at buybacks. And then sort of, how once you’re through that, will you think about buybacks compared to other potential uses of capital particularly getting — investing more dollars and developing those lots that you do have?
Jim Brickman
Well, first of all, we look at everything all the time in a way the opportunities of growing the business, buying land, buying stock. And really one of the things I’m excited about more than I ever have been in the past is that as builders are not going to be aggressively probably growing revenues over the next 12 months. I think we’re going to see opportunities in the private acquisition sector that we haven’t seen really since we bought GHO, five years ago and we may want to have capital reserve for that potential going into 2023, because I just don’t see the builders that sold last year and the year before, the private builders probably did a great job but I think it’s going to be a much more competitive landscape and a more attractive buying market possibly next year.
Carl Reichardt
Thank you so much. Appreciate it, guys.
Operator
Your next question comes from Jay McCanless with Wedbush Securities. Your line is now open.
Jay McCanless
Good morning, everyone. Thanks for taking my questions. So Jed, I’m encouraged to hear your comment about an inflection in the supply chain. Could you maybe dial down on that?
Jed Dolson
Yes sure. I mean it’s wide ranging. It goes from – on the land development side being able to get 8-inch water line pipe as needed. It’s still very expensive. We think that as inventories increase. I’m just using that as an example that prices will eventually come down because there comes a point when the suppliers yards aren’t big enough to hold all the excess water lines being manufactured. So I’m just using that as again one case study but we’re seeing that time and time again right now. So there are still some items that are hard to get but we’re seeing much better supply chain today.
Jay McCanless
Okay. And when they’ll be on vertical construction?
Jed Dolson
Yes it’s I mean the same thing could be set for HVAC coils because we said for any – I mean we’re seeing some instances were like smart locks that use chips. Those are the ones that you punch in that your door code to enter. Those are still hard to get. So it’s not everything has been cured but we’re in much, much better shape than we were this time last year or even at the start of this year.
Jay McCanless
Great. And then when I look at the order decline for this quarter, could you talk about geographic differences in that? I mean Dallas and Atlanta, your two core markets, did both of them suffer equally, or was it more pronounced in certain areas versus others?
Jim Brickman
Jed, why don’t you take that or Rick, we look at this really on a daily basis. We get a sales report on every house in every neighborhood in our foreign markets. So Jed and Rick, why don’t you take the rest of the question?
Jed Dolson
We’ve seen a universal kind of decline as we pointed out in our release in sales in the second half of the quarter. When we look at the Dallas market within the Texas and we talked — we are now this winter, we’ll be opening up in Austin. So we talked to our peers and our mortgage companies that do business across the state of Texas for example.
And I can tell you, Dallas is weathering the storm much better than and seeing much smaller declines than other parts of the – yes, other parts of the state, and we still see strong demand in Atlanta and Florida. Florida has been a smaller division for us over the years. So we — again as Jim has pointed out before we really like where our book of business is and we really like our basis in our land book. And we’re excited about the next 12 months to 24 months.
Rick Costello
Hey, Jay. This is Rick. One of the things that we’re keenly aware of is the huge difference getting back to the 2018-2019 era when there were multiple reasons for what was happening back then. But yes, the interest rate spike back then and you had a low period in terms of sales. This is a very recent phenomenon for us a couple of months’ worth of lighter sales going from position of metering sales.
And we have 10 finished units as of the end of the quarter, two months worth of — just lighter sales is not going to create an inventory accumulation simply because A, we have backlog; and B, because we were metering sales there’s not that much coming through the pipe on a short-term basis.
So it’s really an interesting conundrum that we’re going to be interested to see, how do you have an inventory adjustment when there’s no inventory. So we’re going to be watching as well and just adjusting as we go through it. But starting with the very best margins in the industry is certainly a preferred position.
Jim Brickman
Rick, let me add one thing though because I think the analysts are correct in that in Dallas, for example, we were running in the first quarter at a 60,000-ish annual start rate. And builders generally did continue to start homes to expecting a 60,000 start rate. So if we reduce to 45,000 or anybody who knows what the number is going to be. But there is going to be a reduction in starts and some demand.
So yes, there is going to be some of those starts that are going to finish over the next two or three quarters. But at the end of the day, we still are very confident about our markets whether Dallas is a 40,000, 45,000, 50,000 start market it’s still probably going to be the largest housing market in the United States and we think we have the best lot position. In Atlanta, it’s a little more unique for us. We are totally in the very AAA location infill locations.
And interestingly, John Burns came out with a report last week that still ranked Atlanta is a higher or better market than Dallas. Florida is just very seasonal. Our builder that we own 49.9% of in Colorado Springs and Denver. Colorado Springs is still just gangbusters and Denver has really slowed down. So that’s pretty much about how we’re looking at the market.
Jay McCanless
Okay. That’s great. Thank you, guys. Appreciate it.
Operator
Your next question comes from the line of Alex Barron with Housing Research. Your line is now open.
Alex Barron
Yes, thank you gentlemen. I was just wondering if you guys could comment on your approach to competitive actions by others whether it be incentives or price cuts what your general philosophy is? And do you feel that this slowdown is — which is something temporary or something that might be more extended?
Jim Brickman
Jed?
Jed Dolson
Yes sure. I can take that. It really varies all over the place. And builders with big backlogs are going to be hesitant to incentivize or take price changes because they want — they would like to close that backlog at higher margins. Spec builders that have less backlog are going to be are not going to want to sit on eventual finished home, so they’ll be more incentivized to discount finished homes.
So, in Dallas Fort Worth, you have every public builder except MDC here — sorry and MVR and you have a lot of private. So, there’s everybody is going to have a different strategy.
So, we’re not seeing a universal strategy right now just because of the wide mix of private and public builders that you have. And I think that I would say that carries across the country in the markets that we operate in.
Alex Barron
Right. I understand each has different strategies, but I’m kind of starting to see several builders resorting cutting prices which frankly surprised me because I didn’t think it merited that so soon for the reasons you stated that it would scare people in backlog. But I’m just wondering if you guys are doing that or thinking of doing that, or if not how do you sustain sales with others doing that?
Jim Brickman
Well, Alex, this is Jim. Obviously we don’t set the market we meet the market. As we said 80% of our revenues are more infill that are a little bit insulated from this. I read D.R. Horton’s investor call with great interest as a builder that’s doing 80,000 or 90,000 starts. Obviously, if we’re down the street from Horton in some neighborhoods, we’re going to have to be very aware of what Horton does because we think we can sell our homes for incrementally more dollars, but we are not immune.
And when we get into a very perimeter location to what a competitor like Horton does. We — that said, we haven’t seen in any neighborhood whether we are down the street from Horton major price cutting. But we’re going to watch it very closely day-by-day.
Alex Barron
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.
Unidentified Analyst
Hi everyone. This is Andrew on for Mike. I was hoping I can ask about if you guys have been — have you seen anything in terms of the cancellation rate? Have you guys been proactive in making sure customers can still close? And if you’ve seen anything how much of an impact does that had?
Jim Brickman
Yes. And obviously in our entry-level brand at Trophy, the cancellation rate is more elevated than it is in other brands. We have no crystal ball really trying to figure out how cancellation rates are going to trend. Our cancellation rate is very low. But we think that with the entry-level buyer at Trophy it’s just going to be really a battle all the time in terms of keeping people qualified for mortgages. Jed do you have anything you want to add to that?
Jed Dolson
Yes. I mean it’s very — we do stress test the backlog, but it’s — most of our cancellations come either right after a contract is in and the buyer has buyers’ remorse or at the closing table when there’s been a like some kind of underwriting change or life change for the buyer. So, it’s hard to predict the ones that don’t cancel at the last second.
Jim Brickman
I mean one of the other differentiators we do that I think we’re doing is to — and even in our perimeter neighborhoods whereas some peers will allow a buyer to contract for a home for $1000, plus or minus earnest money deposit. We’re getting a multiple of that even in our entry level buyers because we don’t want to have the cancellations and we want to try to maintain and understand our backlog a little bit better. So, we aren’t really going after that bottom, bottom pool buyer.
Unidentified Analyst
Yes. No that makes a lot of sense. I guess just a follow-up. Can you kind of speak to SG&A outlook for the rest of the year? I know you guys had a nice improvement there.
Jim Brickman
Yes, we had a great improvement just because revenues our quarter is a little bit more lumpy. We had — we’re able to convert a tremendous amount of backlog. SG&A if you just take a look on an annualized basis, we think it’s going to be pretty consistent. So it all gets down to how many revenues you’re going to push through the company each quarter.
Unidentified Analyst
Okay. That’s all for me. Thank you so much for taking the question. Congrats on the quarter.
Jim Brickman
Thank you.
Operator
Your next question comes from the line of Bill Dezellem with Tieton Capital. Your line is now open.
Bill Dezellem
Thank you. A couple of questions. First of all, specifically in your markets what are you seeing from competitors in terms of their start rates?
Jim Brickman
Across the board and Jed can take the rest of this Jed just had dinner with four division presidents last week and it’s varied. Some have reduced starts one large builder and I think it’s the fourth largest builder was that really is in all very perimeter neighborhoods to us they were aggressively cutting starts. Other builders are not cutting starts very much and we’re kind of in between.
Bill Dezellem
Thanks. And then what are you seeing in terms of buyer behavior in terms of their requesting smaller homes or any other actions that buyers may be taking to make homes more affordable or reduce the price?
Jim Brickman
Well three months ago when we opened up communities, we were really surprised in that we had floor plans ran from 1850 to let’s say 2200 square feet. And we weren’t selling any 1800 square foot houses low interest rates. We’re driving these people to buy a bigger house. And Jed aren’t some of these people now for the first time converting to smaller houses.
Jed Dolson
Yes. We’re seeing people by 1600 to 1800 square foot homes that nobody wanted really a year ago.
Bill Dezellem
Great. Thank you.
Operator
There are no further questions. This concludes today’s conference call. Thank you for attending. You may now disconnect.
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