Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the quarter ended March 31, 2022. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the Q2 of FY 2022. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer.
On our call today, Allan will review highlights from the second quarter, discuss our positioning and strategy as it relates to affordability, and announce two exciting developments for the company. I'll then provide more details on our results, expectations, and balance sheet. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.
Thanks, Dave, and thank you for joining us on our call this afternoon. We had an exceptional quarter, highlighted by significant year-over-year growth in our gross margin, adjusted EBITDA, and earnings per share. Operationally, we generated new home orders slightly ahead of our expectations, expanded our controlled lot position, and reduced debt. Taken together, these results embody the goals of our long-standing balanced growth strategy, which is to grow profitability faster than revenue from a less leveraged and more efficient balance sheet. Given the visibility from our backlog and production universe, we now expect to generate full-year earnings per share of at least $6, inclusive of previously disclosed energy efficiency tax benefits of about $0.40 per share.
While our results for the balance of this year will reflect the demand we've enjoyed for the last few quarters, we know investors' focus is on whether we're at an inflection point for pricing and demand. Rather than trying to make predictions about specific outcomes, let me share with you the major factors we believe will determine those outcomes. Any discussion of the industry's longer-term outlook should start with the demographics of demand and the practical realities on the supply side. In the interest of time, we've summarized it in two charts. First, there continues to be a structural gap between the demand for housing and the total supply of housing. The age and ownership preferences of the demographics are compelling, but there is no practical way for the supply of lots, labor, or materials to meaningfully reduce this gap in the next several years.
Second, the level of unsold inventory of both new and used homes is at historically low levels. In fact, there's only a quarter of the unsold inventory that existed in 2006, which helps explain the strength in the current pricing environment, even as rates have risen. The other macro factor that bears watching is the mortgage market, and more specifically, the risk of foreclosures, defaults, or the removal of liquidity that could disrupt the housing market. The news on this front is pretty good because the mortgage market is in a very healthy place. The credit quality of the loan book is high, loan-to-value ratios are near historical lows, and importantly, there are almost no adjustable rate loans with looming pricing resets. Considering demand, supply, and the mortgage market, we think the multi-year context for new home activity is pretty positive.
Of course, against this reasonably optimistic backdrop, the obvious threat facing our industry is affordability. It doesn't matter how much demand there is for housing if consumers can't afford to pay a price that reflects the cost of production. On slide seven, we've updated the chart we presented last quarter, which reflects household incomes in relation to mortgage payments. As you can see, rising home prices combined with significant increases in mortgage rates over the last several months have caused affordability to move above the long-term historical average. Although faster wage growth, slower home price appreciation, and stability in mortgage rates can and likely will normalize affordability, that's not likely to happen quickly enough to dispel concerns. As it turns out, this is exactly the kind of environment we've been preparing for, both strategically and operationally.
Our consumer-facing strategy is driven by a simple ambition, to deliver extraordinary value at an affordable price, E-V-A-P or EVAP for short. Now, fortunately, this isn't our marketing slogan, but it is the inspiration for our strategy and many of our tactics. It makes us think deeply about value, not just price, and it forces us to consider affordability in a highly localized sense and in the context of monthly payments, not just home prices. Now, our strategy for delivering value to customers has been embedded in the three pillars we always talk about. Mortgage Choice, which requires lenders to compete for our customers' business, Surprising Performance, which delivers homes that cost far less to operate, and Choice Plans®, which provide our customers with a number of structural options at no additional cost.
These pillars are real differentiators, and in a market increasingly focused on value and affordability, they're immensely important and quite difficult to replicate. That's how we deliver value. Let me turn to how we're addressing affordability. While higher home prices have helped us offset material and labor cost increases, we're constantly looking for ways to make home ownership more accessible and more affordable. These efforts include simplifying our home designs, standardizing specifications, and substituting more cost and energy-efficient products. We also work with municipalities to identify ways to reduce development costs and fees, which are a significant component of housing costs. On the land side, the question of affordability begins when we consider buying a new community.
Before approving that community, we try and ensure that there are enough consumers in the location with the incomes and the propensity to buy a new home to support that community, while of course, allowing a measure of success for the likely competitors. This requires census tract level income analysis and detailed information about current and potential future competitors. In our underwriting, it also requires stress testing for affordability at higher than market mortgage rates since we've known that eventually mortgage rates were going to move up. On the sales side, this spring, we formalized the practice of testing all buyers in backlog at higher than current market mortgage rates. This yielded an insignificant number of cancellations and helps explain our confidence in our backlog.
Our affordability-driven efforts don't guarantee that every new community will perform exactly as expected or that every buyer in backlog will close, but they do help us manage affordability risks. Before turning the call back over to Dave, I'd like to highlight a couple of exciting new developments for Beazer. Today, we announced our plans to acquire substantially all of the assets of Imagine Homes in San Antonio. We've held a minority stake in Imagine for the past 16 years, so we are very familiar with the market, their business, and their highly capable team. With strong job growth and excellent affordability, we expect to be able to grow our business in San Antonio in the coming years.
Imagine Homes has long been a champion of green building practices, which fits well with our energy efficiency initiatives, including our commitment that every home we build will be Net Zero Energy Ready by 2025. Finally, I'd like to highlight a significant recognition we received this month. We were named the number one most trusted construction company on Newsweek's list of America's most trusted companies for 2022. This ranking reflects an extensive survey across customers, investors, and employees and was neither solicited nor paid for. It's a tremendous honor, and it reflects our commitment to doing what we say we're going to do. With that, I'll turn the call over to Dave.
Thanks, Allan. Looking at the second quarter compared to the prior year, our sales pace was 3.6 sales per community per month as we continue to manage sales in many communities to match our production capacity and ensure a positive customer experience. This pace was slightly higher than our long-term historical average for the second quarter. Nearly 20% higher ASPs offset lower closings to produce home building revenue of $507 million, down about 7%. Our gross margin, excluding amortized interest, impairments, and abandonments, was 26.8%, up approximately 460 basis points. SG&A on an absolute dollar basis was up $1.5 million as we prepare for future community count growth.
This led to adjusted EBITDA of $77.4 million in the quarter, up over 20% and representing approximately 15% of total revenue. Interest amortized as a percentage of home building revenue was 3.2%, down 120 basis points. Our tax expense for the quarter was about $10 million for an effective tax rate of 18.4%, reflecting the benefit of energy efficiency tax credits. As a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expenses. Taken together, this led to approximately $45 million of net income from continuing operations, yielding $1.45 per share in earnings, up nearly 80%. Finally, the value of our backlog was about $1.6 billion, up more than 14%. Turning now to our expectations for the Q3 .
We expect a monthly sales pace in the low 3s as we manage sales to deal with supply chain pressures and anticipate the impact of higher mortgage rates. Average community count is expected to be around 120. Closings should be in the 1,0501 to 1,100 range, reflecting a backlog conversion ratio in the mid-30%, down from approximately 42% last year, reflecting elongated cycle times. ASP should be around $500,000, up over 20%. Gross margin should be up nearly 200 basis points versus the same period last year. SG&A on an absolute dollar basis should be up between $3 million and $4 million.
Given our expectations for closings and margins, adjusted EBITDA should be around $75 million. Interest amortized as a percentage of home building revenue should be in the low 3%, and our tax rate should be approximately 20%, reflecting expected tax credits. We expect earnings per share to be up more than 10% versus the same period last year. With these expected results for Q3 and our confidence in the strength of our current backlog, we are increasing our financial expectations for FY 2022. We now expect earnings per share to be at least $6 inclusive of energy efficiency tax credits up from $5.40 previously. This assumes approximately 4,600 closings for the full year, or about 2,500 between the Q3 and Q4.
That's about the number of homes and backlogs scheduled to close this year, and we have another 500 specs that we expect to be finished by year-end. This should provide us enough homes to close if production conditions worsen and some upside if conditions remain stable or improve. Full year adjusted EBITDA should be up more than 20% versus the prior year, driven by 20% higher ASPs and operating margins that should be up over 300 basis points. Finally, we now expect our return on total equity for fiscal 2022 to be greater than 22%, or nearly 30% excluding our deferred tax assets. We ended the second quarter with over $400 million of liquidity, comprised of unrestricted cash of approximately $164 million and nothing outstanding in our revolver.
We retired $6 million of senior notes in the quarter on our path to bring debt below $1 billion by the end of fiscal 2022, and we have no bond maturities until 2025. Our credit metrics should continue to improve as we move through this year, and by year-end, we anticipate our net debt to EBITDA will be in the low 2s and our net debt to net cap in the 40s. During the quarter, we spent over $130 million on land acquisition and development. At the same time, we increased our option percentage and now control approximately 51% of our active lots through options.
We expect land spend for the remainder of FY 2022 to be relatively flat year-over-year, but up for the full- year, positioning us for continued growth in our lot position and a healthy increase in community count in FY 2023. I'll now turn the call over to Alan for his conclusion.
Thank you, Dave. The Q2 of FY 2022 was very successful for Beazer as we substantially improved profitability, expanded our land position, and improved our balance sheet. Despite the ongoing supply chain challenges across the industry, we are pleased to be able to raise our expectations for full-year financial results. None of this would have been possible without our team. I want to thank them for their ongoing efforts, and I would like to welcome our friends from Imagine Homes to the Beazer family. I'm confident that we have the people, the strategy, and the resources to create growing and durable value over the coming years. With that, I'll turn the call over to the operator to take us into Q&A.
Thank you. We will now begin the question-and-answer session. To ask a question, please press star followed by one. Please ensure your phone is unmuted and record your name clearly when prompted. To withdraw your question, press star two. Again, to ask a question, that is star followed by one. One moment, please, while we wait for questions to come in. Our first question is from Alan Ratner with Zelman & Associates. You may go ahead.
Hey, guys. Good afternoon. Thanks for the time and questions. Appreciate it. Maybe Alan, first one, just reading kind of your prepared commentary in the release, just kind of flagging your expectation for a more challenging sales environment going forward. I don't think, there's too much shock in that statement, but I'm curious, how you see it playing out in that regard. I mean, we've heard from some other builders saying, "Hey, we think the volume side will be fine.
It's just a matter of whether we have pricing power and can kind of offset the cost inflation and, you know, whether we need to incentivize a little bit more." I'm reading your comments, and I'm sensing maybe a little bit more concern about volume, but correct me if I'm wrong and just kind of talk me through how you see this playing out over the next few months, assuming rates, stay at these levels and maybe even tick a bit higher from here.
Okay. Well, I feel a little bit like an economist where, let's get the direction right, and then we'll worry about the timing. 'Cause I would tell you, I don't have some crystal ball that's so great, two months out, three months out. I'd start, Alan, with the point that I really do believe that there is a structural gap between the supply and demand for housing. I am generally in alignment with what you said some of our peers have commented. I think that the volume opportunity for our industry for new homes is pretty stable. I feel good about that. How that plays out when, we meet the affordability challenge, I don't know. In a given division, in a given quarter, there may be volume and/or price.
In general, I expect there to be, first, a loss of pricing power, which frankly, I think we will have some opportunities on the direct cost side to go regain pricing power on that side, before I think we're gonna see significant volume risk. I mean, you know the numbers better than I do in terms of the production universe that's out there across the industry. You can relate that back two to four years. We're still at pretty low levels. I don't first think about volume. I really agree with the comment that it's more gonna be on the pricing leverage side, at least initially.
Okay. No, that's helpful to hear how you're thinking through that, so I appreciate that. Second question, on the mortgage side, you've obviously touted your Mortgage Choice program over the years, and we're hearing again, not to keep citing other builders, but it seems like rate locks are becoming more of a focal point and, some builders are using their internal mortgage companies to provide some incentives to either keep buyers in backlog that might have, you know, signed a contract a few months ago when rates were much lower or maybe on go-forward contracts just to kind of give some peace of mind. So I'm guessing that's not a tool you guys really have, given you don't have your own internal mortgage sub.
I'm curious if your partners or you have any programs that you can work out with your partners to provide a similar service to your customers?
Well, the short answer is yes. In fact, it's even better spending other people's money on rate locks. What I've been excited to see is the competition among lenders has been on multiple fronts. It's been always about product and service. It's about rate, and it is absolutely about rate locks. We've got markets where lenders are going out eight to nine months, giving no-cost rate locks to customers, and I guarantee you, they wouldn't be doing that but for the competitive dynamic that's embedded in Mortgage Choice. Yes, I think rate locks are an important part, particularly for a builder like us that has a to-be-built business that is a big part of our company. Having the ability for lenders to compete with one another to offer those rate locks to our customers is a big deal.
Are you able to have any visibility into your backlog, what percentage of those buyers actually are locked in at this point?
Oh, absolutely. Look, we talk about our backlog every hour, every week. I would say the absence of a mortgage company has almost nothing to do with visibility into our backlog. We have extraordinary visibility, and we are constantly looking at that portion that is locked, that portion that's not locked, and we are forcing our teams and our outside, you know, Choice Lender partners to look at where the breakpoints are, where those customers may be in trouble from a qualification standpoint. To the extent that they're not gonna qualify up 10 basis points to 50 basis points, there is an absolute discussion about it's time to lock or, you know, we're taking a risk and you're taking a risk that that is untenable. That's why I said we've gone through that.
It's been a consistent practice, but we really formalized it in the first calendar quarter, and I was excited that we had very little dropout from the backlog. Yeah, I think that there are pluses and minuses, and I can certainly understand what others say about their mortgage companies giving them visibility. I would tell you, I don't apologize to anybody ever about lack of visibility in our backlog. We have extraordinary visibility, and we get to have our lenders with that backlog that's not yet committed. Frankly, even when they are committed, they can still switch lenders until you know, roughly 60 days out from closing. That keeps the pricing really tight, right? If markets move and there's a better rate available, our customer can move, and our lenders know that we will do that.
Now we only are able to do that because we don't charge them, right? That's the benefit of Mortgage Choice in a nutshell.
Great. Appreciate the thoughts there. Thanks a lot.
Thanks, Alan.
Thank you. Next we have Jay McCanless with Wedbush. You may go ahead.
Hey, thanks for taking my question. When do you expect to close the Imagine deal, and is it a cash deal? Any color details you could give us would be great.
Yeah, it's gonna close, we think, at the end of May. We'll only have about a month and a quarter this year. It's a small business. It is a cash deal. It's immaterial to our financial results for the foreseeable future, but it's a great growth platform for us with a team that we've known, as I said in the script, for 16 years.
I mean, to play devil's advocate here, you and Alan were just talking about things potentially getting weaker near term and/or builders having to get a little more aggressive in how they go to market. If you're concerned about that, why are you going out and making an acquisition ahead of what may be rougher waters ahead?
Yeah, look, I think there's no perfect time when you're in a relationship like we've been in with Imagine. You know, we don't control the timing that one of the founders wants to retire, and that really has created the opportunity. The size of this business is such that it really doesn't change. We're still buying land. We're gonna spend many multiples of the purchase price of Imagine on land in this environment because we do our underwriting. We're confident in the intermediate and longer term. Frankly, we have yet to see, and I made this point in my quote in the press release, Jay, we've yet to really see that adversity.
Combination of right now the environment is good, and as we look through a year or two and beyond, we're really optimistic about the need for single-family homes. You come to San Antonio in particular, and you say it's got one of the best affordability pictures and one of the highest growth rates of any city in the country, that's a pretty good time to be coming to San Antonio.
Got it. And then community count. Are you all still thinking that's gonna trend up through the rest of the year, or how's that playing out right now? And what are you seeing on the municipal side? I think that's been one of the more vocal complaints we've heard from your competitors this earnings cycle.
Yeah, Jay. We talked about it in the script. You know, we're gonna see some growth in 2022, but we're gonna see a healthy increase as we move into 2023. In part, some of that kind of when it kind of takes up and when it, starts to get that healthy growth in 2023 reflects some delays that we've had in the development process. I think you're right on in the comments, but we've troughed, and you can see clearly from the land position, and from our lots owned and controlled, that they're our best indicators for future community count, and we feel good about that healthy increase as we move into next year.
Okay, great. Thanks for taking our questions.
Thank you, sir.
Thank you. Just a reminder, if you would like to ask a question, please press star followed by one. Our next question is from Alex Barron with Housing Research Center. You may go ahead.
Yeah, thank you and great job on the quarter.
Thanks, Alex.
I wanted to ask about Imagine Homes. Can you give us, roughly what size of operation that is? How many communities or how many homes they closed in the last 12 months?
Alex, we're not releasing specific transaction details, but as Alan said, it's a relatively small builder. We have aspirations to grow the business in San Antonio because we like the market a lot. We like the economics, we like the fundamentals in the market and we like the opportunity. Frankly, we know the team, and we know the capacity is there for us to grow this business.
Okay. I know you guys commented about your goal of lowering debt, but right now, the stock is at a pretty interesting opportunity relative to your book value. Can you guys comment on your appetite to do some share buybacks here, given that it would be pretty accretive?
Well, Alex, just gonna go over the math again. We had a $50 million board authorization. We've used about $38 million. There's $12 million remaining on that board authorization. I would kinda point out historically, we spent the $38 million very effectively. We bought the stock below $10 when we were buying it. Look, I think big picture, there's competing uses for our capital. We're finding good opportunities in the land market to go out and do deals. There are clearly stock prices where it's very compelling for us to go out and buy stock. I won't kinda get into the details on that, but clearly we see opportunities out there at certain stock levels.
We're excited about not just the land market, but frankly, what's out ahead of us.
Okay. If I could ask one last one. G iven the concerns about affordability, is there anything about your new communities that is addressing that in terms of, are they smaller homes or lower upgraded, features or anything that helps on that front?
Absolutely. It's a little bit of everything. Of course, in any one location, it's a subset. I would say square footages, we haven't really seen a big movement there. Maybe a little bit, but the weighted average numbers, if I look across quarterly or semi-annual sales, there isn't a lot of evidence of that. Yes, standardization, you know, making sure that we are able to control costs the best we can. One of the best ways to do that is to use, parts and pieces that are in common. Specification levels, and I talked about that in my comments. We have absolutely streamlined specification levels, particularly in those most price-sensitive areas. Then substitution.
We have been successful in finding ways to substitute products and either to drive down cost or to contribute to energy efficiency, which drives down the owner's cost of ownership, which helps from an affordability standpoint, just on the other side. I would say all three S's are in play: standardization, substitution, and specification simplification.
All right, great. Well, best of luck for the year. Thank you.
Thanks, Alex. Thanks so much.
Thank you. At this time, we have no further questions.
All right. I wanna thank everybody for joining us on our Q2 call, and we look forward to talking to you in 90 days. Thank you very much. This concludes today's call.
Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.