霍頓房屋 (DHI) 2010 Q2 法說會逐字稿

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  • Operator

  • Welcome to the D.R.

  • Horton, America's Builder, the largest home builder in America, second quarter 2010 earnings release conference call.

  • At this time all participants are in a listen-only mode.

  • A brief question-and-answer session will follow the formal presentation.

  • (Operator Instructions).

  • As a reminder, this conference is being recorded.

  • It is now my pleasure to introduce your host, Don Tomnitz, President and CEO for D.R.

  • Horton.

  • Thank you.

  • Mr.

  • Don Tomnitz, you may begin.

  • Don Tomnitz - President & CEO

  • Thank you, Melissa, and thank you for joining us this morning.

  • Good morning.

  • Joining me this morning are Bill Wheat, Executive Vice President and CFO, and Stacey Dwyer, Executive Vice President and Treasurer.

  • Before we get started, Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

  • Although D.R.

  • Horton believes any such statements are based on reasonable assumptions, there's no assurance actual outcomes will not be materially different.

  • All forward-looking statements are based upon information available to D.R.

  • Horton on the date of this conference call and D.R.

  • Horton does not undertake any obligation to publicly update or revise forward-looking statement.

  • Additional information about issues that could lead to material changes in performance is contained in D.R.

  • Horton's current report on Form 8-K dated February 8, 2010, which updated our annual report on Form 10-K and our most-recent quarterly report on Form 10-Q, all of which are filed with the Securities and Exchange Commission.

  • Don?

  • Don Tomnitz - President & CEO

  • Thank you, Stacey.

  • It is all about sales.

  • One of our Hortonisms is nothing happens until we sell something.

  • Well, there were and are a lot of good things happening at DHI.

  • We to want thank all of our DHI team members for generating an operating profit for the second consecutive quarter.

  • Congratulations to each of you.

  • You are successfully completing in a challenging housing market.

  • Your success securing new lot positions at attractive prices, your tremendous control of construction and overhead cost and your terrific sales efforts this spring have been positioned DHI to produce strong profits and market share gains this year.

  • It also provides us the privilege of telling the public about your accomplishments on this conference call.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • Our net income for the first quarter -- excuse me, the second quarter was $11.4 million, or $0.04 per diluted share, compared to a net loss of $108.6 million, or $0.34 per share in the prior-year quarter.

  • Our continued goal this year is to be profitable in each quarter and for the entire fiscal year.

  • We achieved profitability in the second quarter by delivering a record 103% of our beginning backlog and improving our home sales gross margin to 18%.

  • We continue to expect our strongest deliveries and net income in the June quarter, which is different from the usual seasonality of realizing our strongest deliveries in net income in the September quarter.

  • As a substantial portion of our current backlog and April sales are scheduled to close by June 30th, deliveries and profitability in the September quarter will largely be dependent on future sales.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Net sales orders for the second quarter were 6,438 homes, up 55% from the same quarter in the prior year.

  • The increase was due primarily to improved absorptions, as our active selling communities were up by low single digits, both sequentially and year over year.

  • Our average sales price on net sales orders in the quarter increased approximately 1% from the year-ago quarter to $204,700.

  • Our cancelation rate was 21%.

  • Our sales backlog increased 38% from the prior year to 6,314 homes, or $1.3 billion.

  • Our second quarter home sales revenue increased to $894.8 million from $770.7 million in the year-ago quarter.

  • Our average closing price for the quarter was $210,000.

  • Don?

  • Don Tomnitz - President & CEO

  • Our gross profit margin on home sales revenues in the second quarter was 18.0%, up 470-basis points from our home sales margin in the year-ago period and up 90-basis points sequentially from our December quarter.

  • The sequential increase was primarily due to the average cost of our homes declining by more than our average selling prices, partially due to our success constructing and closing homes on recently-acquired finished lots in new communities.

  • 25% of our second quarter closings were from new deals that were put under contract in fiscal 2009 or later.

  • Margins on closings in our new projects are approximately 200 to 300-basis points higher than on the remainder of our closings.

  • Bill?

  • Bill Wheat - EVP & CFO

  • As we indicated in our year-end and first-quarter calls, we expect lower impairments in 2010 than in 2009.

  • As we saw an increase in our home sales gross margin to 18% and great sales volume this quarter, we continue to expect lower impairments in 2010, if our sales prices, sales absorptions and expected margins stay at the current levels.

  • During our second quarter impairment analysis we reviewed all projects in the Company and determined that projects with a pre-impairment carrying value of $8.5 million were impaired.

  • We recorded inventory impairments of $2.3 million as a charge to cost of sales.

  • We refer to our projects, which have indicators of potential impairment but were not impaired as our watch list, which represents those projects that are deemed to be the highest risk for future impairments.

  • Our watch list is currently $525.3 million, up slightly from $478.7 million at December 31st.

  • The largest concentrations in our current lot watch list are in Illinois, California, and Florida.

  • We will continue to evaluate sales demand, sales prices, and expected margins in each of our markets, as well as levels of job creation or losses in the broader economy and their effects on evaluations of our assets.

  • Our inventory impairment process in the June and September quarters will incorporate any changes in market conditions and any adjustments we make in our business.

  • Don?

  • Don Tomnitz - President & CEO

  • Our consistent focus on controlling SG&A has been a key to our return to profitability.

  • We have leveraged our SG&A structure to focus on opportunities in our existing markets with our current division operations.

  • Homebuilding SG&A expense for the quarter, which includes all corporate overhead, was $128.7 million, or 14.3% of homebuilding revenues, compared to 16.4% from the year-ago quarter.

  • SG&A increased only $1.8 million, or 1%, on a 19% increase in homes closed.

  • We will continue to actively manage our SG&A levels relative to our expected number of home closings.

  • Bill?

  • Bill Wheat - EVP & CFO

  • We recorded $22.7 million in homebuilding interest expense during the quarter.

  • We are required to expense a portion of our interest incurred as interest expense while our homebuilding debt level exceeds our active inventory.

  • Financial Services pretax income for the quarter was $1 million compared to a pretax loss of $12.4 million in the year-ago quarter.

  • 92% of our mortgage's company's business was captive during the quarter.

  • Our companywide capture rate was approximately 61%, our average FICO score was 714, and our average combined loan to value was 91%.

  • Our product mix in the quarter was essentially 100% agency eligible, with government loans accounting for 60% of our volume.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • During our March quarter we received a tax refund of approximately $352 million related to our taxable loss in fiscal 2009.

  • Our current $29 million income tax receivable is expected to be received from state and federal tax refunds in future periods.

  • Our deferred tax asset is now $894.1 million and is fully reserved at March 31st.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Our total inventory increased by approximately $178.7 million during the second quarter.

  • We reduced our residential land and lots and land held for development by $70 million while we increased our homes in inventory to support the demand we experienced in the spring selling season.

  • Our homes in inventory at the end of March totaled 13,900, of which 1,200 were models, 7,300 were speculative and 2,900 of these specs were completed.

  • Our speculative homes as a percentage of our total homes inventory declined to 53% at March 31st from 63% at December 31st due to the strong sales volume we saw in our March quarter.

  • We continue to manage our total homes in inventory relative on our expectations of our sales demand and we offer spec homes primarily to accommodate our first-time home buyers, who represented 58% of the second quarter closings captured by our mortgage company.

  • Don?

  • Don Tomnitz - President & CEO

  • Our land and lot acquisition investments remain controlled and we continue to evaluate our land development plans based on current sales trends.

  • We have been actively contracting for finished lots to supplement our existing land positions and increase our gross margins.

  • In the second fiscal quarter we invested approximately $200 million, primarily in finished lots.

  • Our spending on finished lots will remain largely dependent on our sales pace while our spending on land and development costs will continue to be at low levels.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Our supply of owned land and lots in March 31, 2010, was approximately 88,500 lots, of which approximately 21,000 are finished.

  • We control an additional 22,000 lots through option contracts and our net earnest money deposit money for the lots is only $8.7 million.

  • We are focused on managing our supply of owned finished lots in line with our sales demand in a low-risk, capital-efficient manner.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • Cash flow from operations for the March quarter totaled $208 million.

  • Exclusive of our $352 million federal income tax refund we received during the quarter we used $145 million of cash in operations.

  • The main operating use of our cash in the quarter was the 21% increase in homes in inventory from December.

  • We ended the quarter with approximately $1.8 billion of unrestricted homebuilding cash and marketable securities.

  • During the quarter we repaid $130.9 million of our 4.875% senior notes, which matured in January, and we redeemed the remaining $95 million of our 5.875% senior notes due 2013 in February.

  • We also repurchased approximately $139.4 million of our outstanding notes in the open market.

  • The balance of our public notes outstanding at March 31st was $2.5 billion.

  • Subsequent to quarter end we have repurchased $6.5 million of our outstanding notes.

  • Our remaining note maturities in fiscal 2010 totaled $69.7 million.

  • Our board recently increased debt repurchase authorization to $500 million effective through November 30, 2010.

  • At March 31st our homebuilding leverage ratio, net of cash and marketable securities, was 22.2%, a 1,200-basis points improvement from a year ago.

  • This improvement in leverage compared to the prior year is due primarily to the increase in our cash balances, continued reductions in outstanding debt, and to a lesser extent, the issuance of our convertible senior notes.

  • Don?

  • Don Tomnitz - President & CEO

  • In summary, our financial performance this quarter demonstrates the progress our Company has made toward building sustainable profitability, balance sheet strength, and market share gains in this challenging and uncertain housing market.

  • Our most important accomplishment this is quarter include; we were profitable for the second consecutive quarter with a pretax income of $12.1 million.

  • We saw a 55% increase in our sales with our SP -- ASP up slightly year over year.

  • Our fully-loaded homebuilding SG&A, which again includes all corporate overhead as a percentage of revenues, was 14.3%, up only $1.8 million, or 1% on a 19% increase in homes closed.

  • We have reduced our homebuilding debt this fiscal year to date by $524.8 million.

  • We improved our gross margin further to 18.0% this quarter as we continue to improve the cost and design of our products and as we continue to open new communities on recently-acquired loss at higher margins.

  • There is still challenges in the homebuilding industry.

  • Rising foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards, the expiration of certain government support for housing and mortgage markets and weak consumer confidence.

  • However, new home inventory remains low, interest rates are favorable, and housing affordability is near record highs.

  • We will continue to focus -- continue our focus on providing affordable homes for the first-time home buyer, controlling our costs, contracting for new communities with attractively-priced finished lots, and maintaining our strong balance sheet.

  • Again, we want to thank all of our DHI team members who continue to out sell and out perform the industry.

  • Keep up the great work.

  • D.R.

  • Horton is leading the industry into the housing recovery with a superior business model.

  • This concludes our presentation and we'll host any questions you may have.

  • Operator

  • Thank you.

  • (Operator Instructions).

  • Our first question is from Stephen East with Ticonderoga Securities.

  • Please proceed with your question.

  • Stephen East - Analyst

  • Thank you.

  • Good morning, guys.

  • Congratulations.

  • Don Tomnitz - President & CEO

  • Thank you.

  • Stephen East - Analyst

  • You talked about the third quarter being the strongest revenue quarter.

  • I assume that's because of the tax credit sales coming through.

  • If you look at the fiscal second quarter, what percentage of sales do you think -- did the people actually take advantage of the tax credit and then what's your game plan for how you deal with that once the credit expires?

  • Stacey Dwyer - EVP & Treasurer

  • The best indication, Stephen, of the percentage of our buyers that may have used the home buyer tax credit is still going to be our first-time home buyer percentage, which was 58% in the quarter.

  • That is the percentage of first-time home buyers that actually closed their homes through DHI Mortgage.

  • We don't actually have visibility into who then subsequently files for the tax credit.

  • Don Tomnitz - President & CEO

  • As far as after the tax credit, we believe that we're in a preeminent position.

  • We have opened more new communities than any other builder, our cost structure we believe is the best in the industry, and we're prepared to compete in the industry with or without any government tax credits.

  • Stephen East - Analyst

  • Okay, and then a combined question here.

  • Your watch list went up a little bit even though your gross margin went up, so I guess I'm intrigued by why that would happen?

  • And then your gross margin expectations as you -- one, where do you take your new communities as a percentage of total and what's that do for your gross margin assumptions looking out?

  • Bill Wheat - EVP & CFO

  • Well, in terms of the watch list, as you know, the watch list is compiled, really, on an individual project basis, and there are always some projects that are performing better and some projects that may not be performing as strongly, so its simply a compilation of those projects.

  • Given still some uncertainty and challenging conditions in the market, we did not expect to see our watch list drop too much yet even though we did see improvement overall in our gross margins.

  • Of course a portion of those gross margin improvements are because of new communities and so the watch list does not have any new communities on it.

  • But we'll continue to evaluate those projects, we'll see what the market looks like here later in the year, and I would begin -- as we get better visibility into the market, I would expect to see those projects begin to resolve themselves on the watch list; either drop off the watch list or be addressed if market conditions justify a valuation adjustment.

  • Operator

  • Thank you.

  • Our next question is from Michael Rehaut with JPMorgan Securities.

  • Please proceed with your question.

  • Michael Rehaut - Analyst

  • Hi, thanks.

  • Good morning, everyone.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Michael Rehaut - Analyst

  • First question just on the order growth, which was really impressive and congrats on that.

  • I noticed you're still ahead of your peers in terms of community count.

  • Most of your peers are down still 20% or more community count year over year, and you said you were up low single digits.

  • I was wondering if you could give us some direction as to where that's going to be perhaps by the end of this year and then the next few years, what are your plans for community count growth and also regionally where did you see strength from an order perspective?

  • And then I have a follow up.

  • Don Tomnitz - President & CEO

  • Well, we anticipate our community growth to continue to increase.

  • We're actively working finished lot deals across the country and clearly we've entered into more finished lot deals than anyone else in the industry because we feel like that's a good supplement to our core margins.

  • Higher would be my answer.

  • Stacey Dwyer - EVP & Treasurer

  • In terms of regional strength, Mike, we saw sales increases in each of our individual regions, so generally year over year, especially we saw strong results in each of our regions and most of our markets.

  • Michael Rehaut - Analyst

  • Okay.

  • Second, just going back to the watch list question, if I can ask it from a different angle, most what we have been hearing is that most regions continue to stabilize at least in terms of their pricing trends sequentially, things aren't getting worse, things if anything are getting a little bit better in terms of sequential pricing.

  • So I was wondering if you could talk to how the watch list increased and granted it wasn't a large increase, but if that was driven by certain regions and certain pricing trends in certain regions and maybe just speak more broadly to what you're seeing in terms of price in the markets that you compete?

  • Don Tomnitz - President & CEO

  • We're seeing good price stability in most of our markets today.

  • We're seeing some price increases in the California market as you have read.

  • But in general I think what we're doing is looking -- I know what we're doing is we're looking at specific projects and a project may become a good -- better project or a weaker project just based upon the existing competition in that particular market or how quickly we want to work our way through that existing deal.

  • Bill Wheat - EVP & CFO

  • And overall, in terms of using broad market information on the watch list, we certainly -- that certainly does color things a bit, but we are only two quarters into the year, we're not totally finished with the spring selling season.

  • There is still more sales to achieve and still a little more visibility we need to resolve how we might approach some things on a broader level.

  • Really the only thing to call out in terms of the change in the watch list this quarter is, as you will note on our concentrations, Illinois is a stronger -- is a larger portion of the watch list.

  • Again, it comes down to individual projects and there's a couple of projects that are on the watch list now that weren't before.

  • Don Tomnitz - President & CEO

  • And Chicago, quite frankly, entered into the downturn later than most all of our other markets so basically we're seeing weakness in Chicago at a later stage just simply because of where they are in the cycle.

  • But, again, we're one of the few builders who share our watch list with you.

  • I don't know if anyone else does.

  • Michael Rehaut - Analyst

  • The only builder.

  • Don Tomnitz - President & CEO

  • The only builder.

  • We're comfortable.

  • Next question.

  • Operator

  • Thank you.

  • Our next question is from Jonathan Ellis with Banc of America.

  • Please proceed with your questions.

  • Jonathan Ellis - Analyst

  • Thank you.

  • You mentioned that 25% of sales are on newer lots purchased, can you help us understand any differences in that number by region and are there some regions where that percentage is higher and others where it tends to be lower?

  • Don Tomnitz - President & CEO

  • Yes.

  • Clearly in our operating regions -- do you want to discuss the financial regions?

  • Bill Wheat - EVP & CFO

  • Yes.

  • In terms of the financial regions, the largest percentages you will see are in our South Central and our Southeast regions.

  • We are seeing greater community growth there, and that's reflected somewhat in the sales growth you see, as well.

  • Stacey Dwyer - EVP & Treasurer

  • And, Jonathan, just to clarify, the 25% was actually our closings number.

  • Jonathan Ellis - Analyst

  • And in terms of --

  • Don Tomnitz - President & CEO

  • In terms of sales, I don't believe we have said that, but our sales during the quarter, 35% of our sales during the quarter came from communities that were contracted in fiscal 2009 or later.

  • Jonathan Ellis - Analyst

  • Okay, that's helpful.

  • Just in terms of pricing as you think about over the source of this year, I guess is your sense that the tax credit-driven demand is potentially having more of an impact on price given mix ,meaning more value-oriented buyers, and that perhaps ASPs could trend high in the back half of the year albeit on lower deliveries, or do you not get the sense that the tax credit is really having as much influence on pricing as it is on sales velocity?

  • Stacey Dwyer - EVP & Treasurer

  • Yes, it's an interesting question, Jonathan.

  • If you look at our Q1 thriver r delivery over 60% were to first-time home buyers and our sales process is just north of $200,000.

  • This quarter we had a lower percentage of first-time home buyers and a higher ASP and I think that may be again what you see in the June quarter.

  • We'll have to see how it evolves, but if you have a lower mix of the first-time buyers with concentration in the closings in any given quarter you could see a higher average sales price in the back part of the year.

  • Bill Wheat - EVP & CFO

  • Our pricing in all most all of our communities is compelling, very competitive, with foreclosures, so as a result I think we're beginning to see other than first-time home buyers, obviously, come into our subdivisions and take advantage of compelling pricing.

  • Operator

  • Thank you.

  • Our next question is from Josh Levin with Citigroup.

  • Please proceed with your question.

  • Josh Levin - Analyst

  • Hey, bood morning, everybody.

  • Don Tomnitz - President & CEO

  • Good morning, Josh.

  • Josh Levin - Analyst

  • You had terrific order growth during the quarter.

  • As you look into your backlog, is there any sense you had to trade a bit of gross margin to get that order growth?

  • Bill Wheat - EVP & CFO

  • Well, in terms of our overall gross margin we're continuing to see that stabilize and improve, so on a global level I think the answer would have to be no.

  • Individual communities, that may vary some.

  • Josh Levin - Analyst

  • Okay.

  • And over the past few weeks how has demand changed for homes that you're selling, which customers know will not be able to close by the June 30th tax credit deadline?

  • Don Tomnitz - President & CEO

  • We're try -- we're more focused, quite frankly, on what our sales are going to be on May 1st and May 2nd and not sure we're really tracking that.

  • To answer your question, our sales are still solid in the last week.

  • Bill Wheat - EVP & CFO

  • We have seen strong sales in April -- in the month of April.

  • Operator

  • Thank you.

  • Our next question is from Nishu Sood with Deutsche Bank.

  • Please proceed with your question.

  • Nishu Sood - Analyst

  • Thanks.

  • Had a question on your mix of land and your investment.

  • You folks were arguably the first big builder out there buying land last year and obviously that was a great decision in retrospect given how things have evolved, so now we see, obviously, a lot of your peers catching up in terms of that and accelerating in the second half of the year, so that the gap between, let's say, your land purchases, your aggressiveness in land purchases and peers is shrinking.

  • At the same time you mentioned that you're going to minimize -- you're going to continue to minimize the development of your current-owned lots that aren't fully developed, so I was wondering when might we see some shift, if the land market returns a little bit more towards normal with full participation from all the builders, at what stage do you begin to develop -- put more money into developing the 75% of your lots that aren't fully developed already?

  • Don Tomnitz - President & CEO

  • First of all, I would like to clarify something, we're not out buying land, we're out optioning land and putting up very low earnest money amounts to secure the right to purchase the lots on a go-forward basis, so we have purchased very little land other than, as I said, optioning a lot of different subdivisions across the country.

  • The other thing I would say to you is, as the market becomes more competitive and some of our peers once again try to copy our business model but not effectively implement it, is that we are out in the subdivisions and have been there for quite some time in many communities and many cities, proving to the land sellers and the banks that we're willing to put spec inventory on the ground to appease first-time home buyers.

  • And as a result, even though we got more competition, if you're a seller of lots today, then you're going to choose D.R.

  • Horton because we've got a more active business model of putting spec inventory on the ground and working them through their lots at a faster pace than the builders who are focusing on a build-to-order model.

  • Bill Wheat - EVP & CFO

  • And that's a key thing to point out.

  • To the extent that there is noise or color that people are hearing regarding our land purchases, you have to keep in mind our volume.

  • We have a significant sales volume, we have a significant size of operation, and we are simply purchasing lots on option contracts in line with the sales demand we are seeing, but on a global level our land and inventory continues to decline.

  • Our dollars in land continue to decline.

  • Nishu Sood - Analyst

  • Got it.

  • What about the shift to developing lots that are not fully developed, because you folks mentioned you're going to continue to not spend much money on land development?

  • Don Tomnitz - President & CEO

  • Right now our focus is on any deal we do that we want our capital back in twelve months post that investment and that's the way we're going to approach land development deals on a go-forward basis.

  • Our window might increase from 12 months to 18 months to 24 months, but that's not the criteria today.

  • So as we approach the days when we're going to have to begin developing more of our own land and lots, we're going to operate with a much more conservative strategy than what we have in the past; i.e., we're going to want our capital back in a much shorter period of time.

  • Stacey Dwyer - EVP & Treasurer

  • And it's not that we're not doing development.

  • We are currently selectively developing lots that we own.

  • We're just evaluating the uses of our capital for development versus opportunities that we find on option lots, which typically may take less capital up front.

  • Don Tomnitz - President & CEO

  • As a matter of fact, most of our inventory increase this quarter was a function of building more homes.

  • It was all a structure in progress.

  • Operator

  • Thank you.

  • Our next question is from David Goldberg with UBS.

  • Please proceed with your question.

  • David Goldberg - Analyst

  • Good morning, everybody.

  • Don Tomnitz - President & CEO

  • Good morning, David.

  • David Goldberg - Analyst

  • Question is actually kind of a follow up on Nishu's question before, and, Don, I was wondering if you could give us some more -- maybe some more color.

  • I understand what you're seeing about the banks and land sellers wanting to work with you guys because you move through the land position faster.

  • I think that makes sense but the question I'm trying to get my hands around is, what's to stop your competitors from saying, okay, look, the model is better, we'll do exactly the same thing?

  • Are the market share gains I think you're taking today really sustainable?

  • Don Tomnitz - President & CEO

  • Well, I don't know whether they are but clearly we're out performing everyone else in the industry and to use an old adage "a bird in the hand's worth two in the bush" and I would say to you that we've proven beyond any reasonable doubt that we are willing to put spec inventory on the ground and work the sellers of lots do their lots at a faster pace.

  • If I were a seller -- and I have been a seller of lots because we've developed lots and sold them to other builders -- I can tell you, I'm going to choose the person who has a proven track record as opposed to someone verbally telling me what they're going to do with my land in the lot position.

  • So I look -- we look forward to it.

  • Let them come on.

  • David Goldberg - Analyst

  • Great, and then just a quick follow up.

  • I know it is a little bit different -- difficult with the mix shift and maybe a little lower percentage of entry-level buyers this quarter, but I'm wondering if you could talk about the FICO and loan-to-value characteristics on a like-to-like basis?

  • Do you think the buyers that are coming in today have similar or better maybe or worse credit quality than maybe buyers, let's say, three, six, nine months ago?

  • Stacey Dwyer - EVP & Treasurer

  • I don't know that we would be able to distinguish much between buyers three, six and nine months ago.

  • There's been some continued tightening of credit but nothing significant, and if you look at our FICO scores over the last three or four quarters I don't think you will see much differential and our accumulative loan to value has been relatively consistent in the low 90% range.

  • Don Tomnitz - President & CEO

  • Next question.

  • Operator

  • Thank you.

  • Our next question is from Alex Barron with Housing Research Center.

  • Please proceed with your question.

  • Alex Barron - Analyst

  • Hey, guys, good morning.

  • I think you guys have done a great job on the SG&A, so congrats on that.

  • Don Tomnitz - President & CEO

  • Thank you.

  • Alex Barron - Analyst

  • One of my big questions I keep wondering, especially for builders like yourself that have a large first-time exposure, I see a lot of what I could call headwinds coming now that tax credit has ended, USDA funding for 100% financing has ended, FHA is raising, from what I hear, the down payment requirements to 5% sometime this summer, and the contribution from sellers for closing costs is also going down, so I'm wondering how you guys are thinking about all of that and how much do you think it's going to affect your demand going forward?

  • Don Tomnitz - President & CEO

  • Alex, first of all I'd say to you we continually in this Company adapt to whatever the market conditions are and prior to this downturn, four years ago, five years ago, we had a bigger percentage or equal percentage of second-time home buyers versus first-time home buyers.

  • It was our decision three years ago to appeal to the first-time home buyers, and we reworked our product line and reworked our product, both size and finish-out, just simply because of the fact that we believed that this people who had existing homes second-time, third-time home buyers were going to have a difficult time selling their existing home to buy a first home, so we focused on the first-time home buyer.

  • I would also say to you this quarter clearly we had fewer first-time home buyers than we had in the first quarter, so we have the flexibility in this Company to adapt our business model, our product line, and our offerings to whatever the market is.

  • So please don't worry about our ability to meet the market because we have met the market for 20-some odd years and we'll continue to do so.

  • Alex Barron - Analyst

  • Okay.

  • And my second question, I've seen in the communities I visit you're obviously and through your numbers your specs are much higher than most other builders and clearly this quarter that helped.

  • I'm wondering if going forward you guys plan on maintaining a similar rate or you're going to pull back somewhat on the number of specs that you have per community?

  • Don Tomnitz - President & CEO

  • First of all, I would like to say our business model is very good.

  • We focused on having the spec inventory out there to appease to the first-time home buyer because those people were coming in our models,and they were qualified and they wanted to close very quickly.

  • As we move forward, we have set specific spec targets for each one of our regions, and as we move forth into the more uncertain market of when the tax credit goes away we're adjusting our spec levels as we speak.

  • So our specs have been are -- one of the real strengths of this Company, they've never been excessive, but we have specs out there to satisfy those first- time home buyers and also to appease and appeal the realtors who are bringing buyers into our models who want to close more quickly than a build job that's going to take anywhere from three to four months.

  • Operator

  • Thank you.

  • Our next question is from Joshua Pollard with Goldman Sachs & Company.

  • Please proceed with your question.

  • Joshua Pollard - Analyst

  • Good morning.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Joshua Pollard - Analyst

  • A question -- first question and then I have a follow up, is on specs.

  • Could you -- there was a point in 2007, 2008, where you were actually getting higher margins on spec than you were on your dirt sales, is that the case now?

  • And there seems to be a lot of concern out there amongst investors about whether or not specs need to be discounted after the tax credit expires.

  • I take the other side of the opinion, there isn't much of a need for a ton of cash flow by builders right now and not a to ton of inventory out there, but I'd love to hear your thoughts.

  • Bill Wheat - EVP & CFO

  • Yes, Josh, the key on operating a spec strategy is all in the execution.

  • To the extent that you are able to sell a spec home while it is under construction or shortly after it's completed, there's virtually no difference in the margin between a spec and a build-to-order home.

  • To the extent that a spec is completed and begins to age then there is some impact on the margins.

  • But overall -- since there are always a few specs like that, overall our spec differential and margin versus build to order is a little over 200-basis points on average, but in terms of the ability to execute the spec strategy there's really no difference on margin to the extent that you're selling them close to completion.

  • Given the improvement in our margin over the last year or so, I think that demonstrates that we have the ability to execute on that strategy and manage our specs effectively.

  • Don Tomnitz - President & CEO

  • We focus on our aged inventory, as clearly our specs that have been completed and unsold for a period greater than a year was flat with last quarter and is a minimal number, so -- as a percentage of our inventory, so we're focusing on the spec strategy and most importantly managing the aged spec inventory.

  • Bill Wheat - EVP & CFO

  • And we're focused on keeping our margin at a sustainable level in the range of where we are today.

  • Joshua Pollard - Analyst

  • Understood.

  • And could you also answer the question what percentage of your deliveries, as well as your sales, that were from spec?

  • And along that same line I'd love to hear your updated thoughts on conversion rates.

  • You talked about being able to deliver in excess of 100% this quarter and potentially next.

  • You did that, but can you talk about the rest of fiscal 2010?

  • And even if you have a few minutes love to hear what your longer-term thoughts are, whether it is in line with history since you've historically been a spec builder, or if it could be a little higher given the changes you've made within the business?

  • And thanks a lot.

  • Bill Wheat - EVP & CFO

  • In terms of our total closings that were originally specs, it's been around 80% here the last few quarters, and it was consistent this quarter.

  • In terms of our backlog conversion, we did achieve a record backlog conversion of 103% this quarter, so clearly that was an unprecedented performance.

  • We would certainly hope in the current market, with where our backlog is today with the dynamics in the market that we should be able to achieve a high backlog conversion in the coming quarter.

  • And then beyond that visibility's a little more clouded, so we'll have to just react to the market and adjust our strategy accordingly as we get later into 2010 and beyond.

  • Operator

  • Thank you.

  • Our next question is from Bose George with Keefe, Bruyette & Woods.

  • Please proceed with your question.

  • Jade Ramony - Analyst

  • This is [Jade Ramony] from KBW on for Bose George.

  • I was wondering if you could comment on your cancelation rate, which declined in the quarter, and driven the strong growth in orders we would've expected it to have be flat sequentially or even up and what this might suggest about whether your sales people could be more aggressive in generating potentially even higher order growth?

  • And a related question is what you would consider a normal can rate to be?

  • Don Tomnitz - President & CEO

  • Well, first of all, our can rate was down in the quarter because I believe we have compelling pricing in our subdivisions and clearly supplementing that was the expiration of the tax credit, so as a result people have an incentive, both from a compelling pricing scenario plus also the incentive on the tax credit to close, so I would anticipate we would have fewer cancellations this quarter.

  • Stacey Dwyer - EVP & Treasurer

  • Historical can rate for us during the normal times is typically in the 16% to 20% or 21% range, so we're actually very close to where we would've been historically.

  • During the downturn we had spikes during different quarters that were generally correlated with some economic happening, and during this quarter there wasn't really anything that caused a disruption in the mortgage markets or the housing markets.

  • Jade Ramony - Analyst

  • Great, thanks.

  • That's helpful.

  • And then secondly on your markets, can you provide any additional color on what contributed to most of the growth in the quarter?

  • For example, the East was up -- the East and Southeast were particularly strong, can you provide any detail on which states or markets were strongest there?

  • Don Tomnitz - President & CEO

  • I think we ' like to stick with the fact that all of our regions were up and all of our regions performed well.

  • I would also say in the East and the So -- or in the South Central and Southeast is basically we opened more communities in those markets, so as a result our sales and closings should've been up.

  • Operator

  • Thank you.

  • Our next question is from Dan Oppenheim with Credit Suisse.

  • Please proceed with your question.

  • Dan Oppenheim - Analyst

  • Thanks very much.

  • Don, I was wondering if you can elaborate a bit more.

  • You're talking about the specs how you're adapting and adjusting the spec levels as we speak based on expectations and also saying the orders were strong during the month of April.

  • Can you tell us, did your orders in April exceed the starts so that the spec level came down as the month went on or can you give us update at the end of April on that?

  • Stacey Dwyer - EVP & Treasurer

  • We probably don't have a specific number to give you, Dan, but we do expect our spec level at the end of April to be lower.

  • As we move through the quarter and deliver a lot of those homes, though, we don't -- we would expect our spec level to move back up from where it was at April.

  • Don Tomnitz - President & CEO

  • Dan, I would tell you overall our spec inventory we're very comfortable with where it is, it's in line with where we had planned to operate this spring.

  • We've continued to sell strong on those specs through the month of April, so we're very comfortable where we are, and then depending on what we see in the sales environment as we move through the summer then we'll adjust.

  • If we see strong sales we will probably put some more specs out there to meet that demand.

  • If sales are weaker, then we won't.

  • Dan Oppenheim - Analyst

  • Okay.

  • And then you talked about during the quarter the closings 58% being first-time buyers, any sense if that increased slightly in April here at the end of the credit in terms of the order size?

  • Don Tomnitz - President & CEO

  • We don't have that information for April yet.

  • Dan Oppenheim - Analyst

  • Okay, thanks very much.

  • Operator

  • Thank you.

  • Our next question is from Jim Wilson with JMP Securities.

  • Please proceed with your question.

  • Jim Wilson - Analyst

  • Thanks, good morning.

  • Don Tomnitz - President & CEO

  • Good morning, Jim.

  • Jim Wilson - Analyst

  • Was wondering on -- you discuss new deals having 220, 300-basis point higher margins, I would guess -- and given you also said that 35% of sales came from those new communities, are we talking apples to apples there, and are new deals the same one that you're talking about anything in 2009 or 2010?

  • Bill Wheat - EVP & CFO

  • Yes, we are.

  • Jim Wilson - Analyst

  • Okay.

  • So the 200, 300-basis points a third of it so sounds like most or basically the margin improvement you saw, the 100-basis points, is really from that mix of new communities in the total, is that fair to say as opposed to anything else, incentives or anything else rolling off materially?

  • Bill Wheat - EVP & CFO

  • No.

  • I would say the only other big component in there is really the continued improvement that we see in our construction costs on a per-square-foot basis in our homes relative to the sales price per square foot.

  • We've obviously sales price stabilization over the last year and we've continued to work on the costs of our homes, so that is a major contributing factor along with the improvement and the increase in our new communities.

  • Don Tomnitz - President & CEO

  • Yes, we certainly want to give our purchasing managers and our construction managers in the field the same credit we gave our sales team because they've done a tremendous job driving down our costs across the board.

  • Jim Wilson - Analyst

  • Great, okay.

  • And then I guess just in the $200 million that you spent in Q1, would you characterize i, the best you can tell, as likely having similar margins to the deals you've picked up prior to this?

  • Don Tomnitz - President & CEO

  • Yes.

  • Jim Wilson - Analyst

  • Okay.

  • All right, very good.

  • Thanks.

  • Bill Wheat - EVP & CFO

  • You're welcome.

  • Operator

  • Thank you.

  • (Operator Instructions).

  • Our next question is from Ken Leon with Standard & Poor's.

  • Please proceed with your question.

  • Ken Leon - Analyst

  • Thank you.

  • My first question is in any of your markets where you're concerned either about the impact of rising foreclosed homes or the banks, which shadow inventory?

  • I'm sure you have comments on those.

  • Don Tomnitz - President & CEO

  • Well, we're dealing with foreclosures in every market.

  • Some markets have more than others clearly.

  • Our goal as a Company has been to price our new homes competitively with the foreclosure prices in each respective market so as a result we can give the buyer a compelling purchase with a new home for essentially the same price that they can buy a foreclosure and furthermore a smooth and more-transparent process because as you know, on the short sales on the foreclosures just because you want to buy one of them doesn't mean you're going to be able to in a short period of time.

  • Ken Leon - Analyst

  • Also with a rising market and rising demand, this question probably hasn't come up in some sometime, just about your supply chain and any issues related to either labor or material costs?

  • Don Tomnitz - President & CEO

  • Well, clearly with volume that we're doing on each one of our markets our labor is not an issue at all.

  • As a matter of fact, we still have plenty of excess labor in most of our markets and our subs are really appreciating the opportunity to be able to grow their businesses again and to build homes for us as opposed to the other builders who are not building much inventory out there.

  • So we've got not only plenty of labor out there, but we've labor at a very compelling price simply because we are the most active builder in virtually every one of my markets.

  • Ken Leon - Analyst

  • And my last question.

  • The velocity of the business as it ramps up, what are you doing in sales and marketing in terms of personnel?

  • Don Tomnitz - President & CEO

  • Well, we'll continue to hire sales people, and as one of our strengths in this Company clearly is the quality of our salesforce but we continue to top grade our salesforce.

  • We believe because we do have inventory in our subdivisions that our sales people should be out performing the competition, so as a result we're constantly looking for those people who are not out performing or performing up to our expectations so we constantly top grade our salesforce.

  • But currently I think we have the preeminent salesforce in the industry.

  • Operator

  • Thank you.

  • Our next question is from Buck Horne with Raymond James.

  • Please proceed with your question.

  • Buck Horne - Analyst

  • Good morning.

  • I was wondering if you could talk a little about the land acquisitions or the lots you're putting under option geographically and just wondering if you could give us some color on -- are these lots weighted more towards the typical sunbelt homebuilding markets where you've got other public peers in there, or are these lots maybe more weighted towards the secondary and tertiary markets where you may be the only public builder in town?

  • Don Tomnitz - President & CEO

  • No, clearly we're entering into -- most of our contracts are in the East, Southeast and South Central divisions -- or parts of the country.

  • As to where we're entering into those contracts, our division presidents know that they need to enter into rolling option contracts in order for them to have a sustainable business model in their respective markets.

  • So our focus has been across the country, whether you're in Chicago or whether you're in Miami or whether you're in Seattle, that your focus as a division president is how do you secure option contracts so we that can continue to increase our market share in each one of our markets.

  • Buck Horne - Analyst

  • Okay.

  • Also, are you seeing any increase in potential deal flow from banks or is the land available still mostly from developers and other stipes of sellers?

  • Don Tomnitz - President & CEO

  • It's a combination of both and we're beginning to see more deals from banks.

  • It depends on the part of the country.

  • It seems like most of our deals we're seeing from smaller or medium-sized banks as opposed to the larger institutions and we expect the larger institutions to begin to free up some of their REO assets on a go-forward basis because certainly there are a number of banks who would like to sell the assets.

  • But mostly it's the small and medium-sized regional banks that are attracted to us.

  • They know us well, and we're a proven entity in their backyard and we're doing more construction than any other builder in the marketplace, so we are a sought-after builder to help them work ways through the REO assets.

  • Buck Horne - Analyst

  • Great, thank you.

  • Operator

  • Our final question is from Michael Rehaut with JPMorgan Securities.

  • Please proceed with your question.

  • Michael Rehaut - Analyst

  • Hi, thanks.

  • Just a follow up with regard to your last comments about where you're more active in land contracts and your thinking about that and also the fact that you said you're seeing pricing across the country at this point more being led by California and in the quarter California kind of lagged some of the other regions in terms of order growth.

  • So I was just wondering if you could talk about your level of activity in California right now in terms of land deals and if that's lagging, as well, and what are your thoughts in terms of possibly stepping it up there or is it just that the pricing on the land is getting a little bit away from you?

  • Don Tomnitz - President & CEO

  • Well, I think California has been and always will be a difficult market to operate in as characterized by expensive lots and typically all cash transactions are certainly higher earnest money deposits than most other parts of the country.

  • Clearly we think California is a very important state to us.

  • Currently we're still operating -- they are operating, we're operating California under the same criteria as we are the rest of the divisions in the country.

  • So the to the extent the California is more difficult to do business for us with our current operating parameters we may relax those some, but we're certainly focusing on work and we put our capital get the best return and the quickest return on our capital.

  • Bill Wheat - EVP & CFO

  • Despite that we feel like our operations in California are performing very well.

  • Our West region net homes sold this quarter increased 17% in our West region, so while they might not be in line with our overall increase that's still a very solid increase in a challenging market.

  • Michael Rehaut - Analyst

  • Great, thanks.

  • Bill Wheat - EVP & CFO

  • Thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, that's all the time we have for questions and answers at this time.

  • I'd like to turn the floor over to Mr.

  • Tomnitz for any closing comments.

  • Don Tomnitz - President & CEO

  • Thank you for joining us today and once again I want to thank all the DHI team members who once again we out performed everyone else in the industry and I want to make sure our purchasing managers and our construction managers, our superintendents and our sales people are all equally to be really thanked for outstanding performance.

  • But we look forward to a great third quarter and continuing to lead the homebuilding industry into the recovery and with this business model we think is superior in the industry.

  • Thank you.

  • Operator

  • This concludes today's teleconference.

  • You may disconnect your lines at this time.

  • Thank you for your participation.