Green Brick Partners Inc

NYSE:GRBK

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, everyone, and welcome to Green Brick Partners' earnings call for the second quarter ended June 30, 2020. [Operator Instructions] As a reminder, this call is being recorded and will be available for playback.

A slide show supporting today's presentation is available on Green Brick Partners' website, www.greenbrickpartners.com. Go to Investors and Governance, then click on the option that says Reporting, and then scroll to the page until you see the second quarter investor call presentation.

The company reminds you that during this conference call, it may make various forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including its financial and operational expectations for 2020 and the future. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, including, but not limited to, comments related to the anticipated impact of COVID-19 on our future operations, prospects and other aspects of business of Green Brick Partners are based on current expectations and are subject to risks and uncertainties.

Those factors that could cause actual results or outcomes to differ materially from those expected are set forth in our press release which was released on Tuesday, August 4, 2020, and the risk factors described in the company's most recent annual and quarterly filings with the Securities and Exchange Commission. Green Brick Partners undertakes no duty to update any forward-looking statements that are made during this call.

In addition, our comments will include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G regarding these metrics can be found in the earnings release that Green Brick issued yesterday and the presentation available on the company's website.

I will now turn the call over to Green Brick's CEO, Jim Brickman. Please go ahead, sir.

[James Brickman, executive]

Thank you. Hi, everyone. I hope this call finds everyone well. With me is Rick Costello, our CFO; and Jed Dolson, our President of the Texas Region. Thanks for joining our call.

As the operator mentioned, a presentation that accompanies this earnings call can be found on our web page at greenbrickpartners.com. At the top of the web page, click on Investors and Governance, then click on the option that says Reporting and then scroll down the page until you see the Second Quarter Investor Call Presentation. I'll give everyone a second to do this.

Okay. Despite the challenges of operating during the COVID-19 pandemic, our Q2 2020 results are by far the best in the company's history and continue to demonstrate the remarkable growth trajectory of the company. Our Q2 2020 revenues, EPS and ending backlog were at all-time records, and we could not be more thrilled with our results. The 69% year-over-year growth in pretax income is especially noteworthy as these results were achieved while reducing our net debt to total capital to 23.7%.

Throughout the current health crisis, we have continued to build and sell and close homes in all of our markets. After recognizing the increased market activity commencing in May and accelerating into June, we reinitiated much of the previously planned capital expenditures that we had placed on hold in March. This activity included construction of unsold units, purchase of lots and land and development of previously acquired land that we are actively managing in order to keep pace with the current sales progress.

As we move into the third quarter, we continued to see strong sales growth, as evidenced by July 2020 showing a 29% increase in net sales over July 2019. We have initiated moderate price increases to offset some of the cost input increases like lumber and expect to maintain our industry-leading high margin. We continue to monitor our fixed costs to position ourselves to be responsive to changing market conditions, and we have delivered this growth without returning to our prior overhead levels.

We remain optimistic that the pro-business markets in which we operate and the wide range of quality homes offered by our Team Builders will continue to drive future success despite the market disruptions caused by COVID-19. This optimism is grounded on the outstanding year-over-year sales growth we witnessed this May and June, where each month exceeded the same month in the prior year by 52% and 82%.

Please flip to Slide 4 of our presentation. We are a diversified builder with 8 brands in 4 major markets. Our diversification includes a wide array of product types and price ranges, including homes priced as low as $200,000 to homes priced in excess of $1 million. We believe this stratification of products will continue to appeal to a broad base of home buyers and expect our entry-level segment to continue expanding through the growth of our Trophy Signature and CB JENI brands.

Beginning in the fourth quarter of 2019, Green Brick made the decision to increase our equity ownership in most of our Texas builders. At the end of Q2 2020, our CB JENI, Normandy and Southgate Team Builders are now all wholly owned by Green Brick Partners and Center Living Homes is 90% owned. We believe this increased control will lead to a more adaptable and efficient operation of our Texas region that will empower our experienced management team and local operators to continue to produce superior risk-adjusted returns.

In fact, we are already seeing the impact of these trends -- I'm sorry. Sorry, I jumped ahead there.

On Slide 5, we highlight the resilience of our key markets of Dallas-Fort Worth and Atlanta. Like every other economy in the country, the COVID-19 pandemic created a major disruption in commercial activity and led to a significant rise in unemployment during the second quarter.

However, as shown on the graph on this page, our DFW and Atlanta markets ended the quarter with the lowest and third-lowest employment rates out of the 10 largest metro areas in the United States.

Additionally, the Dallas, Plano and Irving submarket had the second lowest year-over-year increase in its unemployment rate in the nation, with 82% of our ending active selling communities in these core markets of DFW and Atlanta, Green Brick is fully prepared to capture new homebuyers in these markets as demonstrated in our robust sales growth in the latter half of Q2 2020. We believe this strong bounce back from the lows seen in April 2020 is further proof that our focus on business-friendly pro-growth markets is the correct choice, and we'll continue to differentiate us from peers.

Thanks to the superior markets in which we operate, Green Brick is poised to capitalize on what we believe are long-term positive shifts in homeownership. As seen on Slide 6, the National Homeownership Participation Rate has risen since the Fed began reducing interest rates in August 2019. As of June 30, 2020, the national ownership rate now sits at 67.9%. This is a rate not seen since September 30, 2008.

With interest rates expected to remain low for the foreseeable future and an increased appreciation and demand for larger homes with dedicated work-from-home spaces, we fully expect this trend to continue.

Strikingly, this quarter saw the ownership rate of buyers under 35 exceeding 40% for the first time since December 31, 2009, with the ownership rate increasing 330 basis points from Q1 2020 to end at 40.6%. Millennials currently represent the fastest-growing ownership segment, and we believe this age group will continue to drive further increases in homeownership. While this trend will be constrained by the available supply of housing, we are of the opinion that this higher ownership rate, especially related to younger home buyers, should at a minimum, be considered a new normal.

With home ownership and buyers under the age of 35 still 300 basis points below its peak in the mid-2000s, we feel that this shift represents a true secular change in the homebuilding marketplace that Green Brick Partners is fully prepared to address. In fact, we are seeing the impact of these trends in our current operating results, as discussed on Slide 7.

At Center Living Homes, our urban single-family and townhouse builder in Dallas, we have seen home sales to buyers moving out of apartments roughly double and have achieved some of the highest sales months in the brand's history. This trend is in line with the 1/3 of urban residents that have expressed a desire to move out of high-density apartments and into less dense, single-family communities.

At the same time, we have seen the average age of our loan applicants, through our mortgage joint venture, drop by 5% as millennial buyers become more willing to purchase a home. This shift to a younger buyer has resulted from 188% growth in our revenues generated by our Trophy Signature and CB JENI brands, measured by year-over-year for the second quarter of 2020. These Team Builders have grown to represent 40% of our home closing revenues in the current quarter and are well-established to capture future demand in the DFW market.

With the median age of the Dallas and Atlanta populations well under the national average, we believe Green Brick is well positioned to meet the expanding needs of younger home buyers. Further, as working from home becomes more prevalent among employers, we believe commute times will become a much smaller consideration for many homebuyers. As such, we expect buyers to find the larger floor plans, dedicated office spaces and minimal maintenance requirements offered in our suburban communities to be in much higher demand.

Jed Dolson, our President of the Texas region, will now speak in greater detail to our land position and our gross margins. Jed?

[Jed Dolson, executive]

Thanks, Jim. Please move to Slide 8. John Burns Real Estate Consulting has published maps of our Atlanta and Dallas metropolitan areas where they have designated grades on submarkets of most desirable, being an A market, through most affordable, being an F market, based on the variety of subjective factors such as quality of schools, proximity of jobs and the existence of infrastructure for quality of life. We have overlaid the locations of our Green Brick communities with green dots. The preponderance of our communities on the submarkets rated as most desirable.

In the current market environment, we believe that our superior market positioning will be key in differentiating our results from peers. This positioning is further strengthened by the lot supply shortage in both northern suburbs of Dallas and Atlanta, which we believe will be a strategic -- strategic advantage for us as we expect land development activity will slow in the coming months.

Our community count grew 20% from Q2 2019 to 90 active selling communities as of June 30, 2020 as we continue to open more communities geared toward first-time homebuyers. However, this increased focus on affordability has not been at the cost of increased risk. Based on our Q2 2020 home closings with our unconsolidated mortgage venture, Green Bricks saw an average FICO score of 758, with 85% of fundings exceeding a FICO score of 700. The creditworthiness of our average buyer profile is a fundamental strength of many of the A market -- A submarkets where we operate, which we believe will continue to mitigate risk for our business.

Slide 9 of our presentation compares our year-to-date Q2 2020 gross margins with available peer data. Our gross margin reported for the 6 months ending June 30, 2020, was 23.1%. This was 170 basis points over the year-to-date results for Q2 of 2019 and with the second quarter gross margins up 10 basis points over our strong margins reported in Q1 of 2020. We believe our superior margin experience is evidence that our conservative land underwriting and prudent planning are a winning strategy that has left the company well prepared to manage pace and price during the remainder of 2020.

The next 2 slides demonstrate the significant improvements Green Brick has made in diversifying our product lines over the past 2 years. Let's first look at Slide 10. As Jim mentioned earlier, with the addition of GHO Homes in 2018 and Trophy Signature Homes in 2019, we now offer 8 unique brands. A robust single-family growth in year-to-date revenues of 108% from Q2 2018 to Q2 2020 is highlighted by GHO's net revenue growth of $36.8 million and Trophy's additional revenues of $71.5 million in the current year.

GHO's and Trophy's homes sell at lower average sales prices with more affordable age-targeted product -- and affordable products, respectively. As a result of this product diversification, our ASP has decreased 7% since the end of the second quarter of 2018, all while maintaining higher-than-average industry gross margins and profitability. This improved affordability will be crucial in preserving and hopefully, improving our market share under the current economic conditions.

Slide 11 visually demonstrates that we have grown our revenues and provided stable earnings by not concentrating on any one homebuyer segment. We now address 6 distinct customer segments, which all experienced strong revenue growth and sales volumes through June 20 -- sorry, June 30, 2020. This revenue growth is in line with our 35% year-over-year growth in year-to-date net new orders and demonstrates the health of our markets despite the COVID-19 pandemic.

Our net new orders -- new order growth breaks down as follows: net new orders of entry-level single-family homes and townhomes were up 341% in Q2 2020 versus Q2 2019, thanks to the terrific expansion of our Trophy Signature brand and the successful migration of our CB JENI townhome product to lower average sales prices.

Likewise, our net orders for first-time move-up of single-family homes were up 96% year-over-year due to the strong reception in our DFW market to Trophy's value-oriented homes in highly desirable suburbs of North Dallas.

Finally, our second-time move-up of single-family homes and urban homes in Q2 2020 was up 11% and 77%, respectively, over Q2 2019. This growth is driven by the move of urban millennials away from dense apartment living as well as a demand for larger, more intentional living spaces, as Jim mentioned earlier.

Our expectation is for the entry-level segment, those homes priced under $300,000, to grow in size in terms of community count, sales orders and closings. In that regard, during the rest of the calendar year 2020, Trophy Signature Homes is expected to open 8 additional entry-level communities, up from the current 11 active entry-level communities across all Green Brick brands.

In total, Trophy expects to open 15 new selling communities by the end of 2020, with most of these openings occurring in the third quarter of 2020.

Next, Rick Costello, our CFO, will discuss our first quarter and annual results in more detail.

[Richard Costello, executive]

Thanks, Jed. And thank you all for joining us today to review our 2020 second quarter financial results. Please move to Slide 12 related to our financial highlights.

For the second quarter of 2020 versus the second quarter of 2019 and for year-to-date comparisons, here are some key operational metrics. Net new orders increased by 28.5% for the quarter. Now this increase was a function of a 6.8% increase in the absorption rate of net orders per community as well as a 19.5% increase in average selling communities.

For the 6 months ended June 30, 2020, our 35.2% growth is even more impressive, driven by a 22.4% increase in average selling communities and a 10.2% improvement in absorption.

Home deliveries increased by 40.4%, with residential units -- unit revenues up by 30.6% for the quarter. Year-to-date, residential revenues improved by 24.7% due to a 31.4% increase in homes closed.

Our average sales price of homes delivered declined by 6.3% for the quarter and 4.5% year-to-date versus the comparable periods in 2019. These declines over that 1-year period in ASP are attributable to the increasing contribution of Trophy Signature Homes and CB JENI Homes Townhome division to our total revenues. Both of these builders sell homes at average sales prices that are below the average price for the company. And as Jed emphasized, we believe this improved affordability will serve to preserve and improve our market share.

Year-over-year, homes under construction are up 4.9%, with homes started on a last 12-month basis up by 20%. Our pause in construction starts related to the onset of the COVID pandemic was temporary as we expect home starts to significantly expand over the balance of the year.

The dollar value of units in backlog increased by 34.8% year-over-year and 4.5% sequentially. Now with the start shifting from pause to go, we expect our year-to-date growth in backlog in our expanding community count to drive closing growth next year.

As Jed highlighted, homebuilding gross margin was up 130 basis points over Q2 of 2019, and adjusted homebuilding gross margin was up 110 basis points quarter-over-quarter and sequentially was up 10 basis points over Q1 of '20.

For the 6 months ended June 30, 2020, our homebuilding consolidated margin and adjusted homebuilding gross margins were up 170 basis points and 190 basis points, respectively. So those year-to-date margins are even higher than our Q2 expansion.

Turning to operating leverage. Green Brick experienced a 120 basis point improvement in quarterly SG&A expense as a percentage of total revenues as the ratio dropped to 11.0% in Q2 2020 from 12.2% in Q2 2019. Year-to-date, our SG&A expense dropped a similar 110 basis points from 12.9% in 2019 year-to-date to 11.8% this year for the 6 months ended June 30.

In addition to strong revenue growth in both the quarter and year-to-date, up almost 27% each, we also benefited from a large reduction in overhead that we implemented at the end of the first quarter. Now that 18% reduction in employee headcount, which we enacted effective April 1, is largely still in place as we have increased headcount from those reduced levels by less than 3% as of the end of the second quarter.

Our interest coverage of 14.3% for Q2 2020 represents a 96% growth over Q2 of '19 and clearly demonstrates our capacity to generate positive cash flow well above our needs. Year-to-date, our interest coverage of 11.3% represents a 64% improvement year-over-year. And last and most important, our bottom line Q2 2020 EPS set a new all-time record, obliterated it, of $0.67 for the quarter, an increase of 131% over Q2 of '19.

And even without the benefit of the energy tax credits of $6.7 million, our EPS would approximate $0.53 for the quarter and would still set an all-time record with 66% growth over the same prior year quarter. Likewise, on a year-to-date basis, our EPS of $0.98 is 85% higher than the same period last year. Again, without the tax credits recognized this quarter, year-to-date EPS would still have been approximately $0.85, a remarkable 60% improvement over Q2 '19 year-to-date EPS.

Now please turn to Slide 13. Here, we have compared our performance versus our small-cap and mid-cap peers to show that our risk-adjusted growth and returns are uniquely strong. We've provided 5 measures on this slide.

I should let you know that you can flip back to Slide 20 in our appendix, which includes the calculation of how we equal-weighted these measures and why Green Brick is at the top of the chart. In the previous slide, we already discussed our remarkable 30.6% growth in residential unit revenues during the second quarter, which as Jim mentioned earlier was primarily driven by organic growth at our CB JENI and Trophy Signature brands.

With both Team builders focused on increasing our offerings of affordable product, this growth is expected to bring further diversification and reductions in our overall average sales price. That dynamic growth rate can be seen in the first data column, where our growth rate ranks very high amongst our peers. And as we demonstrated again this quarter, our industry-leading gross margins drove excellent returns on revenues again this quarter.

Also included on Slide 13 is our year-to-date interest coverage of 11.3x EBITDA, which is a function of great earnings combined with conservative lower levels of financial leverage and lower-priced debt. This lower leverage is reflected in our -- is also reflected in our low net debt-to-capital, the fourth metric, which indicates our reliance on organic growth rather than leverage to maintain strong operating cash flows.

And finally, the last column, we include pretax return on average invested capital to measure each builder's return disregarding capitalization, the difference in leverage and tax rates.

Lastly, please look at Slide 14, which focuses on our lower leverage, which I just discussed. And as Jim stressed at the start of the call, we were able to achieve our record set in Q2 '20 results, while also decreasing our net debt-to-capital by 420 basis points. Our net debt-to-capital remains one of the lowest in the industry, which positions Green Brick to continue limiting risk while preserving profitability.

I'll now turn the call back to Jim, who will wrap up our part of the call prior to opening things up for Q&A. Jim?

[James Brickman, executive]

Thanks, Rick. With over 4 decades in homebuilding, I can say with certainty that the last few months have been really historic by nearly every measure of economic performance. The challenges and opportunities our company has faced have been unprecedented and, in large part, still remain as we enter the latter half of the year.

The past few months have truly vindicated that Green Brick's core operating principles are a winning strategy. Our goal is and always has been to provide the best risk-adjusted returns to our investors by focusing on consistent growth, while maintaining a conservative balance sheet.

Our operations are executed by a highly experienced management team with deep roots in some of the best markets in the country. Through a foundation built on strong relationships with employees, contractors, land sellers and developers, each of our Team Builders has been successful in establishing an organization that embodies core values that are set forth in an acronym we call HOME, which are honesty, objectivity, maturity and efficiency. This success has allowed Green Brick to continue to achieve record-breaking results and will be instrumental to our future accomplishments.

Despite the uncertainty surrounding the COVID-19 pandemic, I believe Green Brick has a very bright future, with our core markets of Dallas and Atlanta leading the national economic recovery, and our uniquely structured team builder model designed in part to quickly adapt to shifting consumer trends, we are well poised and eagerly prepared to capitalize on the new demand for quality homes across all price points and product points.

I'll now turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Rehaut with JPMorgan.

[Margaret Wellborn, analyst]

This is Maggie on for Mike. Congrats on the quarter.

First, I was hoping you could talk about the demand dynamics as you moved from June into July. Obviously, you said July orders were up 29%, which is a very impressive number, but still a bit of a step down from June.

So could you talk about some of the factors in the difference there? Was that mostly a function of the spike in COVID cases across your markets? Or are there some other factors that you could call out, such as maybe release of pent-up demand that you worked through in June or something like that?

[James Brickman, executive]

Yes. Maggie, this is Jim, and anybody else can chime in. But I think you hit the nail on the head. I think part of -- we had a bad -- well, first of all, June was unbelievable in terms of the growth over the prior June, but you're correct, and some of that was pent-up demand. And so it would be almost impossible to replicate what happened in June for us in any month going forward. And we were just thrilled, we have 29% growth in July, as a year-over-year comp.

So yes, I think it was pent-up demand that is not repeatable and that we're really thrilled about the trajectory so far in July that we've seen really starting to continue into August.

[Margaret Wellborn, analyst]

Okay. And next, I appreciate the color around the expectation for Trophy community openings through the rest of the year. Obviously, trophy is going to be the main growth vehicle kind of over the near to medium term. But as you look out over the next year or 2, how are you thinking about growth among your other builders? And as a -- maybe as a percentage of the overall business, where do you think Trophy might land once you've expanded it a bit more to kind of a more normalized level?

[James Brickman, executive]

Well Jed can chime in after me since Trophy is really his child here in Dallas much more than mine, with Stewart Parker that runs that brand for so successfully.

But Trophy is going to be our growth engine for many reasons. One of the most important is I think we have standardized our processes, procedures where we can export that model. It's a simpler model. It has a higher return on capital model where we can export that into other markets. Right now, we're really not focusing on that.

Jed, we're talking about 900-ish closings with Trophy next year. Again, to remind our listeners, Dallas is such a huge market. We're doing about 40,000 housing starts in Dallas, over 25,000 of those starts are entry-level, first-time move-up that we view Trophy being a very significant player in Dallas. So Trophy can grow at 7% of its target market in Dallas and still be 1,500, 1,700 homes, which is what we're going to focus on for the next 12 months. But I'm also looking at acquisition opportunities in other markets and within Texas to expand the Trophy brand there when we think it's the right time.

Jed, do you have anything you want to add to that?

[Jed Dolson, executive]

No. I think, Jim, you pretty much covered it.

[Margaret Wellborn, analyst]

And if I could sneak one more in. You said you're looking at possible acquisition targets in other markets, could you tell us what those -- which markets you're potentially looking at?

[James Brickman, executive]

We don't discuss particular markets. And let me just preface that in that I'm always looking at builders to buy because we can learn. Every time we look and we see what fits and doesn't fit. But we don't have any specific markets.

I have a conversation tomorrow. Typically, these deals don't work. Generally, we're much more interested in growing organically for cultural reasons and because, in most instances, when we really go through the underwriting process, most of the private builders don't meet our return on invested capital hurdle rates. But we did make 2 wonderful acquisitions, one with Bill Handler and GHO in Florida that's performing marvelously. And the other is a minority investor with Brian Bahr and Tom Hennessy, who runs that platform, where we have a 49% ownership in Challenger. And those have been great deals for us, but they're just few and far between.

[Operator]

Your next question comes from the line of Carl Reichardt with BTIG.

[Carl Reichardt, analyst]

Hope you're well. Jed , I just wanted to have one clarification question. You mentioned, I think, a slowdown or moderation in lot development activity in Dallas, referred to that compared to your lot position, which is quite solid. Can you just expand on what you meant by that and what you're seeing right now in terms of developers getting back into the market or builders doing more self development?

[Jed Dolson, executive]

Yes, Carl. Thanks. We -- currently, the Metro Study in RSI in Dallas are projecting that we have an 18-month supply of lots, given the uptick in starts. So 24 months, it's typically standard lot supplies. So we're undersupplied today as we speak.

We're just seeing very -- we're seeing a lot of difficulties with the municipalities being able to hold public hearings, with the staff being able to review plans. So we are very confident that there is going to be a lot shortage in at least Dallas and possibly Atlanta.

[James Brickman, executive]

And Carl, one of the things we've done, and we don't generally talk about prospectively deals that we put under contract, but I can tell you that in May, when we started seeing things turn around, some sellers that we have been working with for a very long time we had talked to and have -- we're first -- we usually get first looks or certainly among the first looks of many deals in the market, and we've been very aggressive in tying up some really nice properties to fund Trophy and our other builders growth into 2021 and beyond.

[Carl Reichardt, analyst]

I appreciate that. And then back to Trophy Signature for a second and making sure I understand, I know Trophy is not just pure entry level, there's a first-time move-up element to it and some of the very first communities where maybe even slightly higher end than that. As you look at Trophy Signature sort of now versus the end of the year, what is sort of the mix between what you'd consider true entry-level versus a higher spec entry level?

[Jed Dolson, executive]

So Carl, I'll answer it this way. This is Jed, again. Trophy sells currently from $225,000 to $575,000 price points. So we like the diversification. We look at it opportunistically based on lot position. We feel like we have, in that price range, we have a plethora of product to meet consumer demand. And so really, at the end of the day, we're working backwards to, do we like the lot position? Because we feel like we can deliver the vertical component.

[Carl Reichardt, analyst]

Got it. That makes sense.

[Jed Dolson, executive]

That being said, we're seeing more opportunities in the pure entry-level spectrum.

[Richard Costello, executive]

Yes, Carl, this is Rick. As we said on one of our charts and I think briefly during the call, if Trophy is opening 15 new communities by the end of the year, 8 of those 15 are going to be in the entry. And so that's their increment at least for this portion of the year. But Jed's mentioning what's coming up in 2021.

[Carl Reichardt, analyst]

Okay. And then last, just on the starts numbers that you've got, I think you're up 4% on starts as it sits here, with backlog having inflated some, Rick. How are you thinking about ramping vertical activity over the course of the next sort of 2 to 3 months to get that backlog delivered? Can we expect your cycle times to -- mix suggested, can we expect your cycle times to extend? Or are you going to rush to get through that? A number of builders are sitting with very heavy backlogs and they're like contractors right now. So I'm just trying to think about what your plans are to ramp starts to get those backlog units delivered?

[Richard Costello, executive]

Great question. We definitely are going to ramp up in the second half of the year, but on a community by community basis. There is nothing excessive about it at the individual level. It matches the demand that we have seen. It's going to push revenues into next year. But you'll see some higher than sustainable levels in total during Q3 and Q4, it's not just the next 2 or 3 months, but it's through the rest of the year that we'll spread this across. We'll see it throughout our markets, including in Atlanta, but most predominantly in the Dallas market.

So the backlog and the -- typically, we don't look at backlog conversion rates. But what you can look at is the units under construction. And typically what closes in the next -- from 2 quarters past to the current quarter that you're looking at, it's about 75% to 80%. And that seems to be reasonable on a going-forward basis. But we are going to see that -- those levels increase through the end of the year to what you would have expected our year-over-year growth in ending units under construction would be to match the growth in demand.

[James Brickman, executive]

And Carl, this is Jim. To answer your question about cycle times, we're seeing our cycle times improve. There are a lot more starts right now. I think as we look at all of our builders in Dallas in particular, where we're building how many homes a year right now, Jed, in Dallas?

[Jed Dolson, executive]

We're on pace for 2,000 in Dallas.

[James Brickman, executive]

And by combining, basically, purchasing, we moved some key vendors relationships, we're seeing cycle times improve. We have seen some cost input pressure on some materials, particularly lumber. That's always hard to guess how that's going to play out throughout the year, but we're able to pass through basically the input costs and the materials in higher prices in our houses right now.

So it's really kind of a Goldilocks situation there. So we're very pleased with cycle times and input costs, which is why I think when we talked earlier, we think we're going to maintain really nice margins.

[Operator]

Your next question comes from the line of Matt Dhane with Tieton Capital Management.

[Matthew Dhane, analyst]

I was curious, I know in the past, workforce availability has been a real challenge with growing the starts. I was curious with the changed unemployment situation, what are you seeing today? Are you seeing people that are moving to the construction industry as a workforce and making that a little less daunting for you folks?

[Jed Dolson, executive]

Yes. Matt, this is Jed. Thanks for the question. Yes, we are seeing a migration. For example, the restaurant workers, we are now seeing get hired on by painting and tile line companies.

The other thing that kind of gets lost in the start numbers is most of these homes being started are simpler and smaller square footage homes than were previously built in the past 2 years to even 5 years ago. So the simplicity of our -- we have really done a good job of simplifying our product to make it easier on our vendors. Our plans are better today. They can get through the -- as Jim mentioned, they could build the houses faster. We're using larger subs with more -- with more availability of workforce personnel. So yes, we are seeing some migration. And -- but we're also building smaller square footage homes.

[Operator]

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

[Aaron Hecht, analyst]

I like the insight that was provided on the buyer profile mix. And obviously, moving towards millennials, getting younger. But wondering if you're also seeing more single people buying homes? And are people from out-of-state becoming a higher percentage of the mix yet?

[Jed Dolson, executive]

Aaron, this is Jed, I'll take that. In our most recent mortgage data, we are seeing the preponderance of our buyers being renters today and a little bit younger than they have historically been. Now just because they're renter doesn't mean they're in an apartment. But for example, our in-town division, we see that all of our buyers are apartment renters in that division. As we work our way to the suburbs, some are renters in stand-alone house and with the mortgage rates they're seeing -- we're seeing this as the time to buy given the low mortgage rates.

We're seeing a little bit of immigration from out of state. But I think given the travel restrictions and just everybody's hesitancy to fly, we're not seeing that as strong as we have in years past.

[James Brickman, executive]

Aaron, this is Jim. Let me add one thing to that, and it was so interesting. About 3 weeks ago, we had a buyer buy a home from us that was relocating from a major northeastern city. The buyer hired a national firm, Compass. We have a strong relationship with Compass here in Dallas.

The buyer contracted for the house, never seen the house. The buyer made all of the selections, carpet, paint colors, all that over Zoom. The buyer closed the home never having visited the house or seen the neighborhood before.

Now that's probably an anomaly, but technology has made all this possible. Our title company is really on top of how to close homes with COVID-19. And I think these kind of trends, I don't want to say this is going to be a universal thing, but I think our industry, we're going to see a lot more of these type of transactions possible that we never thought would have been possible 5 years ago.

[Aaron Hecht, analyst]

Right. It's definitely interesting is you got the technologies playing out in your space today. Are you seeing a similar demographic dynamic going on with the buyers looking at attached product versus detached? Obviously, the detached demand way up, but still attached is up year-over-year. It is like people wanting to be in less dense environment.

So any thoughts around the demand profiles there and how you see it holding up?

[Jed Dolson, executive]

We're seeing -- Aaron, we're seeing equally strong across our attached and detached. I think, obviously, attached, you're going to be in a little bit more urban environment. So I think the buyer profile is really -- they're choosing. Do they want the amenities and do they think the amenities have kind of live-work environment are coming back? Or do they think they're going to be working from home for the next 5 years and they want to get a dog and move out some place where they have a yard?

[Aaron Hecht, analyst]

Right. And then obviously, you guys got as much demand as you could have wanted as we got later into the quarter. But I was just wondering your thoughts on relationships with single-family rental companies to drive volumes in the future. Seems like if more renters want to own or be in a single-family home, percentage of them might be renters. So any thoughts there?

[James Brickman, executive]

Well, we've been contacted by a number of rental housing companies to ask if we would be interested in being in either joint venture or some kind of partner. And let me address that right off the bat in that we're a return-on-capital-driven business. We made a little over 14% return-on-capital. And we're never seeing a rental -- we've never seen a rental for sale community provide anywhere near that kind of opportunity. So I doubt whether we're going to get into that space.

And we really haven't seen, because the rental for home community, we really haven't seen that buyer show up and want to buy many of our homes, whether it's a Trophy home entry-level or one of our town houses. So we haven't seen a lot of transferring from the rental home buyer to our single-family buyer or townhouse buyer.

[Richard Costello, executive]

Aaron, this is Rick. Specifically on the married versus single, it's fairly flat on that particular statistic year-over-year for me to -- we're up maybe from 42% to 45%, along those ranges.

[Operator]

[Operator Instructions] We have a follow-up question from Carl Reichardt with BTIG.

[Carl Reichardt, analyst]

So I have one other question for you, Rick, actually. The valuation allowance reversal for lot options, which we saw this quarter. Are you anticipating potentially any more of those in Q3?

[Richard Costello, executive]

No. I think we're where we need to be. And we have -- like Jim and Jed were talking about, we've got lots of new -- new deals under LOI that we're evaluating. So we don't expect to see any more allowance changes.

[James Brickman, executive]

Except it's the opposite. We have builders, Carl, calling us all the time, wanting our lots.

[Carl Reichardt, analyst]

I figured as much. I think the question really is of the significant alteration in thought process and strategy that happened over the course of like basically 4 or 5 weeks, impacted the decision to reverse the valuation allowances. So I just wanted to make sure.

[Operator]

[Operator Instructions] At this time, there are no additional questions in the queue.

[Richard Costello, executive]

Okay. Well, that concludes our call. So thank you, everybody, for joining us. And we look forward to hearing from you this coming quarter.

[James Brickman, executive]

Thank you.

[Richard Costello, executive]

Thanks.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect.