Q2 2024 KB Home Earnings Call

Participants

Jill Peters; Senior Vice President - Investor Relations; KB Home

Jeffrey Mezger; Chairman of the Board, Chief Executive Officer; KB Home

Robert Mcgibney; President, Chief Operating Officer; KB Home

Jeff Kaminski; Chief Financial Officer, Executive Vice President; KB Home

John Lovallo; Analyst; UBS Eqities

Stephen Kim; Analyst; Evercore ISI

Michael Rehaut; Analyst; J.P. Morgan Securities LLC

Alan Ratner; Analyst; Zelman & Associates

Susan Maklari; Analyst; Goldman Sachs & Company, Inc

Jay McCanless; Analyst; Wedbush Securities

Presentation

Operator

Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to the KB Home 2024 second-quarter earnings conference call. (Operator Instructions)
Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com through July 18, 2024.
And now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin.

Jill Peters

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the second quarter of fiscal 2024. On the call are Jeff Mezger, Chairman and Chief Executive Officer; Rob McGibney, President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them.
Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory related charges, and any other non-GAAP measures referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.
And with that, here's Jeff Mezger.

Jeffrey Mezger

Thank you, Jill, and good afternoon, everyone. Our performance in the second quarter was solid with key metrics that were above the high end of our guidance ranges. In addition, we achieved positive year-over-year comparisons for both net orders and net order value. We believe we are well-positioned to achieve our goals over the remainder of 2024 with a backlog of committed buyers valued over $3 billion and meaningful improvement in our build times.
As for the details of our results, we generated total revenues of over $1.7 billion and detailed earnings per share of $2.15. Our margins were healthy with over 21% in growth and above 11% in operating income margin. This performance, along with the cumulative benefit of ongoing quarterly share repurchases, including an additional $50 million during the second quarter, drove our book value per share up 14% year over year.
Longer-term housing market conditions remain favorable, supported by an undersupply of new and resale homes, solid employment, wage growth, favorable demographics, and rising household formations. However, during the second quarter, we did see volatility returned to the market correlated to the rise in mortgage rates. Periods of rate increases create uncertainty for consumers, which can delay their purchase decisions.
Despite this, the desire for homeownership is strong and the appeal of a personalized home is clear as we generated a higher mix of sales of built to order homes in our second quarter than we have in several quarters. Personalization is a key differentiator for our company and its appeal is even stronger as our build times are normalizing and as most large production builders have migrated to an all spec model, particularly for first-time buyers.
We are affordably positioned in our served markets with products that include features that we know buyers value based on our survey data. Our buyers can significantly influence their final sales price as they personalize their choice of lot, elevation, and selections in our design studio aligning their monthly payment with their budgets.
While the majority of our business is built to order, we've always offered quick move-in homes in each of our communities. As a result, we are in a unique position to satisfy the majority of customers who value choice while also accommodating those buyers who prioritize a quicker move-in date.
Operationally and financially, we gained several key benefits from our built to order model. The even-flow production inherent in our approach provides visibility and consistency in deliveries, which is particularly important in periods of housing market volatility as we work from a large backlog and do not need to sell homes at any price to achieve our delivery targets in a given quarter.
In addition, the revenue that we generate from lot premiums and studio revenues helped to enhance our gross margins. Despite the movement in rates during the quarter, we saw indicators that reinforced strength in demand. As the quarter progressed, we experienced a sequentially higher level of traffic in our communities.
In addition, our cancellation rate was well below our average levels and one of the lowest that we have seen during a quarter of volatile rates. Both of these factors contributed to nearly 4,000 net orders during the quarter, a positive comparison relative to the year ago period.
On a per community basis, our absorption pace grew to 5.5 monthly net orders in line with the expectation that we shared on our last earnings call. Our focus remains consistent in optimizing each asset on a community-by-community basis and generating high inventory turns.
With that, I'll pause for a moment and ask Rob to provide an operational update. Rob?

Robert Mcgibney

Thank you, Jeff. I will begin by providing additional color on our order results. At 5.5 net orders per community, our monthly absorption pace was above our average second quarter level of the last decade. This is notable, given the volatility in interest rates during the quarter moving above 7% and the fact that we raised prices modestly in the majority of our communities, helping to offset the cost of mortgage concessions.
As Jeff mentioned, our cancellation rate remained low, improving slightly as compared to the first quarter to 13% of our gross orders and stable at 10% of our backlog at the beginning of the quarter. These levels are below our historical averages, which indicate to us that buyers have confidence in their purchase decisions.
Mortgage concessions in the second quarter were flat as compared to each of the prior two quarters with roughly 60% of our orders having some form of mortgage concession associated with them. While we believe that we could lower our use of these incentives as the spring selling season unfolded, given the strength of the market conditions early in the spring, the move-in rates impacted demand to an extent, and we continued using mortgage concessions to support our buyers.
As we had anticipated, we accelerated our starts in the second quarter on a sequential basis. We started nearly 4,300 homes, ending the quarter with about 7,700 homes in production. Together with a backlog of 6,270 homes, we believe we are well-positioned for the second half of 2024, and we are beginning to shape the early part of our fiscal 2025 as well.
Moving on to build times, we achieved a significant sequential improvement during the second quarter. And as a result, our starts are now being completed in about five months. We are realizing the benefits of product and design studio simplification, efficiency enhancements in our construction schedules, and systems and processes that are back in rhythm, given the return of a predictable supply chain in most areas.
Now that we have lowered our build times to the high end of our four to five month historical range, we are focused on further improvement to drive build times closer to four months. Delivering a personalized home in a shorter timeframe will make our built to order homes even more appealing to buyers as the gap between a 60-day spec home and a 4.5-month personalized built to order home narrows.
We are seeing the benefit of this with built to order homes representing more than 60% of our net orders in the second quarter, as Jeff referenced. In addition, faster construction times improve our inventory turns and expand the population of homes available for delivery.
Before I wrap up, I will review the credit metrics of our buyers who financed their mortgages through our joint venture, KBHS Home Loans. We had a solid increase in our capture rate with 86% of the mortgages funded during the quarter having been financed through our joint venture as compared to 80% in the prior year quarter. Higher capture rates help us manage our backlog more effectively and provide more visibility in closings, which benefits our company as well as our buyers.
In addition, we see higher customer satisfaction levels from buyers who use KBHS versus other lenders. The average cash down payment was 16%, up slightly year over year, equating to over $77,000. On average, the household income of our KBHS customers was about $130,000 and they had a FICO score of 744. Even with about one half of our customers purchasing their first home, we are attracting buyers who can qualify for their mortgage while making a significant downpayment.
With the first half of the year now behind us, we are focused on a strong close to 2024 with a daily emphasis on maintaining our high customer satisfaction levels, further improving build times and value engineering our products to lower direct costs. More broadly, our objectives are to increase our scale, profitability, and returns by or by acquiring more lots while adhering to our underwriting standards, opening our communities on time, driving net orders, and balancing pace and price to grow our margins and returns.
And with that, I will turn the call back over to Jeff.

Jeffrey Mezger

Thanks, Rob. During the quarter, we invested over $275 million to acquire land and another $390 million to develop plots that we already own. In total, an increase of nearly 70% year over year. We are accelerating our land investment in 2024 as we position the company for future growth, while remaining diligent with respect to our underwriting criteria, product strategy, and price points.
We are also mindful of macroeconomic conditions, and we will remain flexible in adjusting our pace of investment as market conditions warrant. We grew our lot position by 17%, ending the quarter with over 65,500 lots owned or controlled, of which roughly 39,900 were owned. Of these owned lots, over 16,000 are in a finished condition.
We are pleased with the composition of our portfolio, including the quality of the locations, geographic mix, and cost basis. Our focus is on capital efficiency, developing lots wherever possible in smaller phases and balancing development with our starts pace to manage our inventory of finished lots. We currently own or control all the lots that we need to achieve our delivery targets for 2025 as well as the majority of our deliveries in 2026.
As we have stated in the past, our divisions have roadmaps in place to reach at least a top five position in each of our served markets. For those divisions that are already top five, the next step is to achieve a top three ranking. And for those divisions currently in the top three in their markets, we have targeted growth plans in place.
Overall, we feel we have significant upside opportunities through taking share in the markets we serve. We continue to generate a strong level of cash flow and are taking a balanced approach in allocating this capital. We are reinvesting in our growth and returning cash to stockholders through a significant share repurchase program, utilizing the $1 billion authorization that our Board approved in April as well as our quarterly dividend, which we raised during the second quarter.
Our top priority is to invest in the growth of our business. Having said that, we are generating sufficient cash to accomplish our growth goals and also return cash to stockholders. While we had previously guided to share repurchases this year in the range of $200 million to $400 million, we're now raising the minimum level of repurchases to $250 million. Since we began repurchasing shares on a regular basis in 2021, we have repurchased over 22% of the shares then outstanding accretive to both our diluted earnings per share and returns. Over this period of time, we have returned more than $1 billion in cash to our stockholders.
In closing, I want to thank the entire KB Home team for their commitment to serving our homebuyers and contributing to our solid performance. We are realizing the potential of our business as our operations return to a steady rhythm, given faster build times and a normalizing supply chain.
Our buyers are demonstrating a preference for our build to order model and see the benefit of flexibility in making choices based on what they value and can afford. We have a healthy backlog, which together with our homes in production and starts is well balanced to achieve our $6.8 billion revenue projection this year.
Our expanding lot count will drive future community count growth and our business is better diversified today relative to the past few years as our newest divisions ramp up their scale, we remain committed to driving stockholder value through the profitable growth of our company in driving volume and returns as well as returning capital to stockholders, which we continue to execute on.
We have again incrementally raised our full-year guidance, which we expect will drive an increase in our year-over-year return on equity. As we move through the remainder of '24, we look forward to updating you on our business.
With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Jeff Kaminski

Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our 2024 second-quarter financial performance and provide our current outlook for the third quarter and full year. We are pleased with our second-quarter execution that produced financial results, exceeding our expectations across all key metrics amid a volatile and uncertain mortgage interest rate environment.
Alongside our healthy top line performance and double-digit operating margin, we generated robust cash flow, enabling us to reinvest in our business, return capital to our stockholders through common stock repurchases in a higher quarterly dividend, and ended the period with over $1.7 billion of liquidity.
Our housing revenues of $1.7 billion for the quarter were down 3% from the prior year period, reflecting a 4% decrease in the number of homes delivered, partially offset by a slight increase in our overall average selling price. The number of homes delivered in the second quarter represented a backlog conversion rate of 61%, the highest second quarter rate since 2013, and a significant improvement from 52% for the year earlier quarter due to both our improved build times as well as the lower cancellation rate in the current period.
Based on our current construction cycle times and backlog, we anticipate our 2024 third-quarter housing revenues will be in a range of $1.65 billion to $1.75 billion. Additionally, based on housing market conditions and anticipated continued improvement in our build times, for the full year, we expect to generate housing revenues in a range of $6.7 billion to $6.9 billion, an increase of $100 million at the midpoint versus our prior guidance.
In the second quarter, our overall average selling price of homes delivered increased to $483,000 from $479,500 in the prior year period, reflecting shifts in geographic and product mix. For the 2024 third quarter, we are projecting an overall average selling price of approximately $482,000 and expect a sequential increase in the fourth quarter due to a higher mix of deliveries from our West Coast region, which has the highest ASP of our four regions. We believe our average selling price for the full year will be approximately $485,000 to $495,000.
Homebuilding operating income in the current quarter was $188.2 million as compared to $202.1 million in the year earlier quarter. The current quarter included abandonment charges of $1.2 million versus $4.3 million a year ago. Excluding inventory-related charges, our operating margin for the current quarter was 11.1% as compared to 11.7% in the prior-year period, primarily reflecting higher selling, general, and administrative expenses incurred to position our operations for future growth.
We expect our 2024 third-quarter homebuilding operating income margin, excluding the impact of any inventory-related charges, to be in the range of 10.8% to 11.4%. For the full year, we expect our operating margin, again excluding any inventory-related charges, to be in the range of 11.0% to 11.4%.
Our 2024 second-quarter housing gross profit margin of 21.1% was even with the year earlier quarter. Excluding inventory-related charges, in both periods, our gross margin decreased by 20 basis points to 21.2%. Assuming no inventory-related charges, we are forecasting a 2024 third-quarter housing gross profit margin in the range of 21.0% to 21.4% and a full-year margin in a range of 21.1% to 21.5%.
Our selling, general, and administrative expense ratio was 10.1% for the 2024 second quarter compared to 9.6% for the 2023 second quarter, mainly reflecting higher marketing and other expenses associated with the planned increase in community count and growth in housing revenue. We believe our 2024 third-quarter SG&A expense ratio will be in the range of 9.9% to 10.3% and our full-year ratio will be about 10.1%.
Moving on from operating income, another contributor to our pretax earnings in the current quarter was a $12.5 million gain on the sale of an ownership interest in a privately held technology company, which was included in the interest and other line items. Our income tax expense for the second quarter of $52.7 million represented an effective tax rate of 23.8% compared to 23.5% for the prior year period.
We expect our effective tax rate for the 2024 third quarter to be approximately 24% and for the full year to be approximately 23%. Overall, we produced net income for the second quarter of $168.4 million or $2.15 per diluted share compared to $164.4 million or $1.94 per diluted share for the prior year period. The 11% year-over-year growth in earnings per share reflected both the 2% improvement in net income and the favorable impact of our share repurchases over the past several quarters.
Turning now to community count, our second-quarter average of 243 decreased 4% from the year earlier quarter. We ended the quarter with 247 communities, roughly flat year over year and up 4% sequentially. We anticipate our average community count for the 2024 third quarter to be up in the low-single digits year over year with a sequentially flat quarter-end community count, resulting in a mid- to high-single-digit increase over the third quarter of 2023.
We believe our 2024 fourth-quarter average community count will also be higher than in the prior year period, as we remain focused on increasing the number of open selling communities to drive top-line growth and market share. At the same time, while we expect year-over-year growth in our community count in the last two quarters of 2024, we are anticipating more sellouts in the second half of the year. This will impact our year-end community count now expected to be in the range of 250 to 255.
To drive continued new community openings, we invested 668 million in land and development during the second quarter, an increase of 69% compared to the prior year, and ended the quarter with a pipeline of over 65,500 lots, of which 61% were owned and 39% were under contract. The percentage of lots under contract is up significantly compared to 27% as of our 2023 year end and 25% a year ago.
During the quarter, Moody's Investor Service upgraded the Company's debt rating to Ba1, reflecting the company's scale and anticipated expansion, strong market position across our regions, deleveraging track record, and disciplined approach to balance sheet management. We ended the quarter with a debt-to-capital ratio of 29.8%.
In April, our Board approved an increase in the quarterly cash dividend to $0.25 per share from $0.20 per share and authorized the repurchase of up to $1 billion of our outstanding common stock. We repurchased nearly 765,000 shares of our common stock at an average price of $65.38 during the quarter.
As Jeff mentioned, we intend to continue to repurchase shares and expect the pace, volume, and timing of share repurchases to be based on considerations of our cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares, and the housing market in general economic environment. At quarter end, our total liquidity was over $1.7 billion, including nearly $1.1 billion of available capacity under our unsecured revolving credit facility with no cash borrowings outstanding and $644 million of cash.
In conclusion, we are very pleased with our solid second-quarter financial performance and strong operational execution. We intend to sustain our focus on expanding our scale through land investments in new community openings while also maintaining our balanced approach to capital allocation by returning cash to stockholders through common stock repurchases and quarterly dividends.
We will now take your questions. John, please open the lines.

Question and Answer Session

Operator

(Operator Instructions) John Lovallo, UBS.

John Lovallo

Hi, guys. Thank you for taking my question. First one just could just kind of trying to do is quickly the back-of-the-envelope math. It looks like the outlook would sort of imply that fourth quarter revenue of about call it $1.9 billion, so call 14%-ish sequential step up from the third quarter.
And it seems like gross margin will be relatively flat third quarter, to fourth quarter and the way we thinking about it. So first question is, are we thinking about that correctly? And why would there not be a little bit more leverage on the gross margin front? What are the kind of the puts and takes there?

Jeff Kaminski

Right. First of all, yes, you are thinking about that correctly. Did the math on the fly pretty accurately. On the leverage, we're facing a lot of things on the gross margin side, as we talked about earlier in the year, we -- like most people had an expectation of rates actually coming down and being able to reduce some of the mortgage interest rate incentives that we've had out there that unfortunately has not happened as of this point and that put a little bit of pressure on the back end margins.
We are seeing some mix shift in deliveries in the back half of the year. But honestly, we're pretty happy that we've been able to raise incrementally the full year gross margin outlook for the company despite some of those headwinds.
And we're continuing to work on all the other factors that go into it. Obviously, pricing has been more difficult, but despite that, we've had some limited price increases in the majority of our communities during the quarter and the largest headwind right now, is to send this mortgage rate side, but we've been powering through that pretty well.
And we're actually fairly pleased with the outlook for the second half of the year and especially being able to incrementally raise some of those guidance points as we look towards the end of 2024.

John Lovallo

Yeah. May make sense. Okay. And then on the land front, the owned and controlled lots, I think a lot of last quarter you had what you needed to satisfy 2025 deliveries and now you're talking about through the majority of 2026.
I guess first part of that is how would you sort of frame your confidence in the near term demand is that you're feeling better about that versus just kind of building the pipeline? And secondarily, I mean, would we expect you to sort of take your foot off the gas at this point? Or how are you thinking about future land spend?

Jeffrey Mezger

John, good question. It's really a pedal and a break. Demand remains very solid right now. As we shared in our prepared comments, there is sensitivity to affordability, and we are not straying from our underwriting approach targeting the median incomes, what type of products in that submarket can kind of allow us to accomplish that.
So there's a healthy tension in that land isn't available -- readily available in all locations to achieve that type of strategy. So we're finding enough deal flow to expand our investments and we are not looking at it right now as if we would slow that down.
We are, however, remaining diligent in our standards. So for the year we think our land spend will be up pretty significantly year over year, and we're comfortable with the investments we're making and the returns we expect on those.

Operator

Stephen Kim, Evercore ISI.

Stephen Kim

(technical difficulty) take on the longer-term outlook for growth. I think you sort of talked about what you're expecting in there here in the next quarter or so a quarter or two. But from a longer-term perspective, can you give us a sense for what kind of volume growth or revenue growth, you are setting your land strategy up to be able to achieve?

Jeffrey Mezger

Steve, it's a ground-up build in every market and I shared the targets we have for the scale we want in every city and we're working on that, and we're making inroads more into the top five and more into the top three and several that have the opportunity possibly over next year to be number one in their market.
So it's more about the market share in each city with our investment strategy and how we're allocating capital. We think we can fuel growth in the over 10% a year community count range around the system. That probably means on average 14% to 20% revenue growth between a little bit of pricing and a continued community count growth.
So if we do all that, you'll hit 10% to 20% revenue growth and your bottom-line growth would be a little higher than that. But it's built ground up with a strategy in each market and we don't have limits on the divisions right now on what we'll invest. It's up to them to go find the deals that pencil.

Stephen Kim

Yes, got it. That's great. That's exactly what I was looking for. And so that kind of leads to my second question, which relates to absorption. I guess that those kind of numbers suggest that you expect to have discussions here (technical difficulty) you've talked about the rapid absorption or a little above historical levels (technical difficulty) and whether or not we can expect is to -- why we can expect this to be kind of a new normal or larger (technical difficulty) some of the increase in absorptions or are there other things that we should be thinking about there?

Jeffrey Mezger

Steve, as you know, it's a balance. And what we heard about 20% of your question, it was really a bad connection, but I'll take a shot at it.
We were balancing things to optimize each asset. We've been talking that way for quite a while. And our margins are higher now. And we have a nice property equation working and in areas where the land is easily replaceable, we'll go for more absorption than the 5.5.
If it's an infill location in California, we'll go for the best margin we can because you can't replace it and you take your time to optimize profits. But as we build our strategy of growth with the community count we're targeting will assume current absorption rates.
And if our margins were to move a little higher because there's no inventory, which I think they could over time, our margins move higher. You'd see a higher absorption rate along with it. But at the same time, we've kind of got a floor on our run rates at around 4, 4.5 per community. And so you can do the math and toggle between community count growth and any unit growth we get, but it always be to optimize the assets.

Operator

Michael Rehaut, JPMorgan.

Michael Rehaut

Great. Thanks, everyone. Thanks for taking my questions. Good afternoon. I wanted to first kind of zero in a little bit on how you felt demand has progressed throughout the quarter and even so far into the third quarter rates, obviously, rate came up a bit about the 1 month, 1.5 it's come down a little bit more recently.
Has this impacted, as you kind of alluded to earlier, maybe incentives being elevated a little bit more in terms of mortgage concessions or other areas of closing cost, perhaps. Just wanted to get a sense for how demand and pricing has progressed and any take on the last several weeks with the most recent move in rates.

Jeffrey Mezger

Mike I'll ask Rob to answer that question relative to the rhythm and the demand. But just to clarify one thing. It's not that concessions are up. They've held steady. We expected they may go down a little bit as the year unfolded because of the stronger conditions we saw in March and early April before, the rates came up at about the time of our last call.
So we're not seeing concessions go up this time. They're just not going down the way they we thought they would. Rob you want to give some commentary on the demand through the quarter?

Robert Mcgibney

Sure. In terms of the second quarter sales, I would say the business performed very well on a portfolio basis. We mentioned we have 5.5 net orders per month per community. But in addition to that, each one of our regions on an individual basis achieved at five a month or more every single month of the quarter, and we really didn't see much change.
We do expect to see things slow down as it always does seasonally as we move into the summer here. But demand really across our footprint and from month to month was fairly consistent. And as Jeff mentioned, not really a change in the incentives that we had to offer to drive that. It's just we didn't get the mortgage rate pullback that we thought we might. And that remained relatively flat over the last couple of quarters.

Michael Rehaut

Okay. That's very helpful. I appreciate that. I guess secondly, would love to just get your thoughts on how to think about gross margins maybe a little bit longer term and you look at what you did from 2013 to 2018, 2019, we averaged about 17% -- 18% you kind of been more consistent in the last year, 1.5 around 21% mid 21%. And what's changed in your view that that's kind of allowed you to hold on to this higher level?
And, I don't want to put words in your mouth. So you had two factors that come to mind. But what are your thoughts on the sustainability of the current margins? And if you decide to continue to shift perhaps a little bit more to option lots, which sometimes carry a lower gross margin. And if that any potential strategy shifts might impact that going forward.

Jeff Kaminski

Sure. So yeah, just a few comments on the margins. So when you look at the company, scale helps a lot. Not only on leveraging some of the fixed costs that are included in margin, but particularly on the supplier side, materials, labor, et cetera, in the market. So that's why there's such a focus within the company, within the company's divisions on achieving a large scale in each of our served markets. So that's been a very favorable factor for the company.
Number two, as you know, Mike, we've done a tremendous amount of work on our capital structure over the years and particularly back to the period that you mentioned, our interest amortization is way down compared to prior, that's direct improvement in margin that just went right to the margin line, and that is very sustainable.
And in fact, future potential there as well as our inventory balance continues to grow, our debt levels stay either constant or slightly decreasing. And we have a really nice capital structure now. And now with our new Ba1 status with Moody's and the recent upgrade. We also received -- we're in really good shape on the capital side of things and the interest side of things. So that's good.
So as far as sustainability goes, if you look at 21% low 20%, let's call it margins. I think they're very sustainable and in fact, things that we can build upon as we achieve higher levels of scale in our served markets as we grow the total company top line. And as we move forward with some of our supplier and cost strategies, I certainly think margins are sustainable and could even expand from here.
So we'll see as we go. I think the single largest tailwind that we could experience is just reduction of incentives. As you know, we're not really an incentive based company. We've been playing that game for a while in the face of these higher interest rates in order to generate affordability for our buyers.
But also along with most people don't think these rates are here to stay for the long term. And although they may not reach the low levels that they once were at, there's a fairly sizable margin pickup that could be gained just from seeing that go away. So those are the I guess my high-level thoughts on that margin question as far as auction lot strategy, we're not seeing much change internally from a margin point of view on that side of things.
We'll take the option lots of they're out there and available. If they're not, we're pretty focused on just expanding community count in developing our own lots as we go. So we'll see how that shakes out. But overall, pretty pleased with margins. So very pleased with the expansion and the sustained higher level that we've been experiencing the last few years, and hopefully we can build upon those in the future.

Operator

Matthew Bouley, Barclays.

Good evening. (inaudible) for Matthew, thanks for taking my questions. So first off, I think you said that bill times are now at around five months, which is within your target historic four to five range. Just wondering if this is still the target range. Or maybe if there's further push on this and then what levers you're taking to get there? Thanks.

Jeffrey Mezger

Rob?

Robert Mcgibney

So yeah, we're at five months, not satisfied with five months. We've been faster than that in the past. We've talked about a range of four to five months. We've had many businesses that have built in faster than four months. So we're not going to take our foot off the gas on that. I think there are still opportunities out there.
We have some divisions that are performing much better than others. So that's an opportunity to kind of get the underperforming divisions aligned with the better performing ones, but also proactive things that we're doing and we've been talking about for several quarters, like simplifying our product and building into cadence, driving cost out just an overall simpler formula.
That combined with really things getting back in rhythm with the supply chain now being much more stable. The systems, the processes as that we've used for years are working as they should. And I think that's going to create additional opportunities for us to keep driving build times down and reap the benefits that provides for our business.

Got it. Super helpful. Thanks. And then my second question, you guys talked about the resiliency in buyer demand. I guess more specifically, what trends are you may be seeing in consumers utilizing the design studio and like around options and upgrades? Any thoughts on that would be helpful? Thanks.

Jeffrey Mezger

It's very interesting. And that's why we always like to share the credit profile of the buyers. When you think were 50% first time and the average income is over 130 and they're putting $77,000 down with a high cycle, which are very well-heeled first time buyer.
Having said that, the size of the homes has not moved much for many quarters. And the studio spend has been very consistent. What they're selecting in the studio can move around some. But the dollars that they're spending in the studio has been pretty consistent for the last 8 to 12 quarters. So not seeing really any change in consumer preference, even with the higher prices that we've been operating at.

Operator

Alan Ratner, Zelman & Associates.

Alan Ratner

Hey, guys, good afternoon. Nice quarter and thanks for all the detail so far. First question maybe this is digging in a little bit to the regional trends a bit. But we have seen you mentioned obviously, rates have stayed higher for longer than expected. I think probably the one other macro development that may or may not be surprising as we have seen, resale inventories are moving higher in certain markets that are at a pretty decent rate, albeit off of incredibly low levels.
And if I look at your order performance by region, the Southeast kind of stands out a little bit on roughly flat sequentially orders. And normally you would see a 20% to 30% sequential uptick in your second quarter. In that also kind of overlaps where we've seen some pretty decent increases in resell inventory.
So we just hoping you can kind of discuss a little bit what you're seeing on the resale front. Do you feel like you are seeing more competition in certain markets? And if so, what are you doing to respond to that?

Jeffrey Mezger

Rob, you want to take that?

Robert Mcgibney

Sure. It's a good question. Resale is always our biggest competitor. So we're always focused on it. We've got to stay tethered to resale pricing. We have to have a reasonable premium, but I don't think we've really seen any big changes in demand yet related to resale levels coming up.
I mean you talk about Florida and the headline is going to be something like resale inventory levels have exploded. They're double year over year. But when you dig into the markets, like I was specifically looking at [Tampa] earlier today, we're talking about going from, I think 1.8 months of supply to 3.6 months of supply. So while it has increased and it has become more of a formidable competitor than it was when the supply was less than two months.
It's still well below the historical norms. I think historical norms close to six months of supply that would be considered imbalance. So definitely keeping an eye on it. Probably some impact to our sales in Florida in the quarter.
But as I mentioned earlier, all of our all of our regions performed well, every one of them with sales per month per community above five each month of the quarter. So I wouldn't say that we're seeing a big impact from that yet. It's just something that we will certainly stay tuned into and adjust as needed, though.

Alan Ratner

Perfect. And I appreciate that detail. Second question on the land front. So your total lot count increased 18% sequentially in that I got to go back to second quarter of 2004 to find a quarter where your lot count rose by such a meaningful rate.
I know when we've talked about this in the past. One of the things you always highlighted a lot of these deals are either in due diligence or has been kind of tied up or locked in way before it shows up as an increase in your lot count. So I'm not assuming you went out and all of a sudden contracted for 10,000 loss this quarter.
But I was hoping you can give us a little color in terms of, where are these lot center, what type of negotiation or pricing, what that has been given the fact that it seems like this growth has all come through auction lots as opposed to owned. It is a pretty significant one quarter increase compared to what we've seen historically.

Jeffrey Mezger

A lot of it, Alan, is the timing of when it's secure to your point, we could be working on a purchase agreement for three, four, five months, sometimes with sellers hammering out the details before you put the money up and control is not entitled or whatever you need to do.
We've intentionally staffed up our land teams and we are working with the division pretty intensively to grow our community count, and we've had fits and starts over -- ever since COVID there's been interest rate rises, COVID demand, no demand and we pulled some chips off the table a few times to keep the dry powder and let's see where the market's headed and that did impact our community count over the last couple of years.
We're past that now. We see many markets where the dynamics are no inventory and the lots have value. As I shared, we're continuing to be diligent in our underwriting standards, but we're finding adequate deal flow. And it's the healthy tension that I've already mentioned of holding divisions, accountable to our standards, and underwriting and product and geography and encourage them to go tie up deals and the deals that have to hit our return.
So we were successful in the quarter and it's not one or two large deals it's many, many 100 or 150 lot deals that we've secured around the system. And we we're seeing growth in all of our markets right now in our lots owned and controlled. So we like the portfolio and the strategy. We've set an update a pretty nice trajectory for '25 and '26.

Operator

Susan Maklari, Goldman Sachs.

Susan Maklari

Thank you. Good afternoon. Thanks for taking the questions. My first question is I wanted to go back a bit to the gross margin, you made a comment that you have seen lot premiums and upgrades that are benefiting the profitability of the business. Can you quantify that?
And then can you also talk to the potential upside from there. As you think about rates coming down and your buyers perhaps having a bit more purchasing power where that could go over time and how it could benefit profitability?

Jeff Kaminski

Sure, Susan. I'll take the second part of that first and then come back on lot premiums in the studios. Like I mentioned before, you were to unusually high level of incentives out there in this mortgage interest rate. And if we can eliminate that, it's a 4% basis margin improvement for the company of all else being equal.
So if we hold costs equal, assuming land, values, that equal et cetera, it's a pretty significant upside for us. So that factor alone, I think, gives me some really good feelings about the future potential of gross margins.
When you start looking at things like lot premiums and studio, the good news on the studio side is the spend and even as ASPs have gone up. And as affordability, there's been a lot of headlines and affordability, we're still seeing buyers come into the studio and user studio process.
And as we've talked often in the past, we use their studio mainly as a differentiator on the sales side and pull more buyers. And we do believe that's part of the reason why we see very high absorption pace per community relative to the peers. But despite that, we still do have incrementally higher margin on studio sales in our base house margins, but it's not an area where we really focus to kind of cream it and add a big dollars on that side of it.
We'll take it. Where it comes in. We tried to keep our options are pretty close to market and go from there. Lot premiums dissolve always a focus area is a focus area of all builders. It's almost if you think about a pure profit. There's no incremental cost to one line versus another lot of developed community. But to the extent you can get lot premiums on those lots, it's incrementally positive to gross margins.
So that's really how we look at it on those two factors. Again, on the incentive thing, we're looking forward to getting back to our base business model, how we like to operate the business, which is more or less everyday low pricing without offering huge incentives out there without discounting our homes and offer and the buyer's choice and personalization in order to drive an above average absorption pace per community.

Susan Maklari

Yeah, okay. That's helpful color. And then maybe thinking about the consumer at a higher level, there's been a lot of different data points that have come through and comments from various companies, across the consumer landscape in the last couple of months or so.
And even your competitor this morning made some comments about consumers perhaps being under more financial stress, which seems like that's in contrast to the stats that you gave around your buyer in your prepared comments. I guess when you step back, how do you think about the health of the consumer and the buyer that's coming through today?
And has it changed at all? Are you seeing anything different in there? And how do you think about the profile of the businesses as perhaps rates start to come down and we expand pool of demand.
I think you touched on it, Susan. I was -- we quote -- Rob quoted in his script, the income levels, the FICO score and how much they're putting down as observed it's a well-heeled first-time buyer. But their debt loads are up. You see it in the statistics. Credit card balances are higher, car loans, whatever it is. There's a lot of pressure in there in their cost of living outside of homeownership.
So we are very sensitive and in tune to doing what we can to help improve affordability. And I think if rates came down, it would help a lot of things, but we don't assume rates are going to come down anytime soon. So you have to navigate through it and we're benefiting as the buyer demand is strong enough that you're able to operate your business pretty successfully with this higher credit profile customer.
But I think we would say to that they're a little more credit challenged and there's a little more debt burden, then there was a couple of years ago.

Operator

Jay McCanless, Wedbush Securities.

Jay McCanless

Thanks for taking my questions. I guess, Rob, could you talk more about what was going on in the Southeast and also in the West region during the quarter, I know you said absorptions were pretty solid relative to the overall average, but the orders were down there. Is that a function of communities and do you expect to catch up on the community side in those regions later this year?

Robert Mcgibney

Part of it is a little bit driven by community count and in Florida, and I do expect that to catch up, we've had some general delays in getting communities opened, it's not communities that are going away, but just get pushed out a little bit. So I don't know, Jay Can, if you've got the specific stat, but I think it was community count was down sequentially there a little bit.
But overall demand in both regions remain relatively strong. We talk about the Southwest Las Vegas continue to have that highest sales rate we've had in the community. Inland Empire did really well in the West, all of California, really Texas performed very, very well.
Those businesses are back in sync, they've normalized can rate actually lower than normal. That drove a better net sales result. So outside of the uptick in inventory in Florida that we've been reading about, which I think is still well below the historical norms. I don't really see any storm clouds out there for us. But as I mentioned before, it will continue to monitor and watch it.

Jay McCanless

Got it. And then just on gross margin, it sounds like you're getting a decent amount of pricing not big pricing, but enough to cover mortgage concessions.
It also sounds like you might have a positive product shift with more California in the fourth quarter. I guess why not be a little more aggressive on the gross margin guide for especially for the full year. What's holding you back there?

Jeff Kaminski

Jay, we forecast gross margins based on our backlog, it's one of the advantages of the BTO business. We have a lot of visibility into the future and for the sales, particularly in the spring selling season, which are mainly delivered out in the fourth quarter, the mix of business and the mix of sales and the mix between the divisions that we see basically, we roll them all up and we're trying to what we're seeing right now in our backlog numbers and what we anticipate selling through move-in ready homes in the third and fourth quarter that deliver up before the end of the year.
So there's not tons of guesswork there. We've been pretty consistent in gross margin in our estimates really have been coming in closer to the high end of our range is now for the past several quarters, and we're pleased with the consistency in the business and what we're seeing and how things are progressing, and we'll keep you guys updated as we go.
So we lifted the full year range up very incrementally right now, and we'll continue to monitor it. We did expect at the beginning of the year to see a similar pattern to what we're seeing now. But for different reasons. We thought we'd get a little more help on the interest rate side and be able to do things with incentives and pricing that we have not been able to do because of the macro, but we've been able to offset that through other initiatives within the company. We're pleased with that.

Operator

And ladies and gentlemen, that does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines.