MDC Holdings Inc (MDC) 2010 Q2 法說會逐字稿

Good morning. We are ready to begin the MDC Holdings Inc second quarter 2010 earnings call. I will now turn it over to Bob Martin, Vice President of Finance and Business Development. Sir, you may begin your call.

Thank you. Good morning, ladies and gentlemen. Welcome to MDC Holdings 2010 second quarter earnings conference call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer, and Chris Anderson, Senior Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded, and will be available for replay. For information on how to access the replay please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions, may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the Company's actual performance, are set forth in the Company's 2010 second quarter Form 10-Q, which was filed with the SEC earlier this morning. It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by regulation G, will be posted on our website. And now, I will turn the call over to Mr. Mizel, for opening remarks.

Good morning. We're pleased to report strong top-line growth in the second quarter of 2010. With revenues up 67% year-over-year, on the strength of a 71% increase in home closings. In addition, despite a steep drop in sales activity for new homes across the industry in May and June, our home orders increased year-over-year for the fifth consecutive quarter. As a result, to start the second half of the year, we are well positioned with more than 1,100 homes in our backlog, which is an increase of 18% from a year ago. We attribute our accomplishments in the second quarter, in large part, to the successful execution of the strategy designed to capture home-buyer demand in advance of the expiration of the Federal Home Buyer's Tax Credit. Also, the improvement in both orders and closings, would not be possible without our effort to adapt to the changing needs of our customers. During the second quarter, our new and redesigned home plans, which generally are more affordable and more efficient to build than our older home plans, accounted for 55% of our home orders and 45% of our home closings.

Given our relatively short land supply, our ability to grow our operations is closely tied to our success in acquiring and opening new communities. To that end, over the past 12 months we have secured control of 157 new communities across the country, including 36 in the second quarter alone. Given these additions, for the first time in 13 quarters, we saw a sequential increase in our active communities during the second quarter. Furthermore, our supply of lots controlled has increased by 25% over the past year.

Our outlook remains cautious. Given the industrywide slowdown in the new home orders in the second quarter, immediately following the expiration of the Home Buyer Tax Credit, and the uncertainty surrounding our overall economic conditions. However, with more than $1.6 billion in cash and investments at the end of the quarter, we believe that we are well positioned to adapt to changing industry conditions. Even if home building activity remains subdued, we will continue to focus our attention on long-term share owner value, through the pursuit and implementation of improvements to our business processes, that we believe will enhance our performance in the future. I will now turn the call over to Chris Anderson for more specific financial highlights of our 2010 second quarter.

Thanks, Larry, and good morning, everyone. In the second quarter, we received 1,015 net home orders, which was a 4% improvement over the same period last year. We really did a fantastic job with the national sales promotion in April, that helped us capture demand from those home buyers looking to capitalize on the Federal Tax Credit. However, that effort was somewhat offset by an abrupt decline in sales in May and June, following the expiration of the Tax Credit. The pace of our average monthly net orders per active subdivision improved to 2.5 for the second quarter, as compared with 2 in the same quarter last year. With the biggest improvements coming from our Southern California and Las Vegas divisions. Sequentially, our pace also improved slightly from the 2.4 pace we saw in the first quarter. Our gross orders were up about 11% for the quarter and our cancellation rate of 25% was a little higher than the 20% in the second of 2009. However, cancellations as a percentage of beginning backlog, decreased to 28% as compared with 40% a year ago.

Looking at our store count. Overall for the Company, active communities declined 6% year-over-year to 134 at June 30. On a sequential basis, compared to the end of the first quarter, we are up 2%. That's a small increase, but it's the first sequential increase that we've had in over three years. As Larry mentioned, the smaller more affordable homes continue to have a definite impact on our results. They represented 55% of our gross homeowners during the quarter, with individual markets reaching as high as 90%. Finally, the average price of the net homeowners decreased approximately 6% year-over-year, to roughly 277,000. If you look at just the average price of gross homeowners, you see the same 6% decline. Which is consistent with our efforts to build smaller, more efficient homes in line with the preferences of today's consumer.

Looking at backlog, on the strength of our closing levels, we saw our backlog fall by 10% during the quarter to 1,114 homes. However, this is still an increase of 18% from the same time last year and 35% from the beginning of this year. Our average price in backlog of $315,000 at June 30, is roughly the same as the $314,000 average price in backlog last year.

Turning to our income statement, total revenue for the second increased 67% year-over-year to $326 million. Primarily due to a 71% increase in home closings. Partially offset by a 2% decline in average selling price. This increase in revenue, was the primary driver behind the $10.7 million improvement in our loss from operations. I'll discuss margins in SG&A in more detail in a couple of slides.

Looking at the rest of the P&L, other expense, which is generally net interest expense, also showed a significant improvement. This improvement is primarily related to the increased interest rate we're earning on our cash and investments. Overall, our pre-tax loss for the second quarter was $3.7 million. Better than the $19 million pre-tax loss during the same quarter last year.

Looking at the income tax line and the income tax benefit you might expect to see for the second of 2010, was almost completely offset by and increase in our deferred tax valuation allowance. The same applies to the second quarter of '09, but that period also was impacted by the recording of a $9.7 million alternative minimum tax liability. So, on a net basis, we ended up with a net loss of $3.7 million, or $0.08 per share. Which is significantly better than our loss of $29.6 million, or $0.64 per share, from a year ago.

Moving on to the next slide, we closed 1,135 homes during the third quarter. Which was up 71% from the 665 closings we had during the same quarter last year. To put that in perspective, albeit on a smaller volume, that is the single biggest year-over-year increase in quarterly closings that we've seen in at least 15 years. The increase was primarily due to the increase in backlog to begin the quarter. We started this quarter with 1,234 units in backlog, 96% more than the 629 units we had to start the second of last year. Closings increased for all of our active markets. With the largest increases coming in Utah, Colorado, Nevada and Maryland, all of which increased more than 90%. The average selling price for closings decreased 2% year-over-year, to roughly $274,000. The decrease was driven by a decline in the average size of the homes we delivered during the quarter. Partially offset by a year-over-year increase in net option revenue, relative to home sales revenue.

Now, coming back to home gross margin. This slide shows our trend from the second quarter of '09 to the second quarter of '10. Looking at our margins, as reported, the graph on the upper left, 18.1% in the second quarter of '09(Sic-see presentation slides) is even with the 18.0% we experienced in the second quarter of '09, and 430 basis points lower than the 22.4% in the first quarter of '10. However, these percentages include two items that have been somewhat volatile over the last five quarters. Interest and cost of sales, and warranty adjustments. If you remove these two items, the graph on the lower left, adjusted gross margin of 20.2% for the second quarter of 2010, is up 340 basis points, compared with the second quarter of 2009. But it is down 170 basis points from 21.9% in the first quarter of 2010.

The year-over-year improvement in the adjusted gross margin, was largely the result of an increase in net option revenue, relative to home sales revenue. Combined with a reduction in construction cost relative to home sales revenue. Both the increase in net option revenue, and the decrease in construction costs were driven by the Company's efforts to build smaller, more efficient homes that can be personalized, based on home buyer preference. As and indicator of how far we've come, in making sure that our customers have the ability to personalize their homes, you can see on the webcast slides that only 7% of the homes we closed during the quarter, were sold when the house was finished. Meaning, that the vast majority of our buyers were able to select at least the interior finishes for their homes. In contrast, a year ago in the second quarter of '09, 57% of the homes we closed, were sold when the home was finished.

One offset to the improvements we've made, was an increase in the land cost, relative to home sales revenue. From 12.3% in the second quarter of '09, to 20.6% in this most recent quarter. The increase in land costs also explains the sequential decline we saw in home gross margins, as land costs relative to revenue, were only at 18.2% in the first quarter of 2010.

Turning now to selling expense -- or to SG&A and specifically, selling expenses. We're up by about 55% year-over-year. Marketing expenses increased by 45%. From $7.9 million in the second quarter of '09, to $11.5 million in the second quarter of '10. Even though our overall marketing expenses are up year-over-year, our expense per closing has dropped 15%. Or in other words, we gained some leverage in our marketing costs, with our increased volume. Our commission expense increased by 67% in the second quarter, versus a year ago, which is in line with our 68% increase in home sales revenue.

Moving onto G&A expenses, the $45 million we incurred in the second quarter of 2010, is up from the $38 million we incurred a year ago. The year-over-year increase is largely the result of an increase in employee head count. Keep in mind, that most of the people that we've brought on board, are directly involved with getting new communities under control and operating. They're in departments such as land acquisition, architecture and merchandising. In other words, they're critical to our ability to increase store count and ultimately, revenue. That said, we're constantly evaluating our G&A spend and ways to reduce our costs. If we can do so, without disrupting our business.

Looking briefly at impairments, we're pleased to report that we didn't have a single inventory impairment during the quarter, for the second consecutive quarter. We're continuing to evaluate for impairments on a periodic basis. But for the time being, the trend is clearly a positive for us.

Now, looking at our land acquisition activity. We're pleased to report that we put 2,160 lots under control during the second quarter. About 200 of those lots are in our existing communities. But, the rest are in 36 new communities. Roughly 60% of the lots we acquired, were in bulk transactions. And 40% were secured through option contracts. In addition, we acquired 614 lots through option contracts, that were already in place at the beginning of the quarter. In total, we spent $123 million on land acquisition during the quarter. On top of that, we had roughly $11 million in land development spend. Also, we did just -- we did sell just over 100 lots during the quarter. Most recently, from one of our subdivisions in Nevada. So, over the last four quarters, since we really started ramping up our land acquisition activities, we've put over 8,400 lots under control. in 157 new communities. Which puts us on a path for growth. As a result of this activity, we've increased our investment in land and land under development, by about $175 million over the past year.

$370 million on our balance sheet today encompasses about 7,300 lots owned, and in addition to that, we have 3,600 lots under option, which brings our total number of lots controlled, excluding WIP, to nearly 11,000. That's a year-over-year increase of 25%. It puts us in a great position as we look forward, especially given that we still have $1.6 billion available to take advantage of other opportunities that may arise.

While economic conditions for our industry remain challenging, we are excited about our prospects for the remainder of 2010, especially given what we were able to accomplish in the second quarter with respect to homeowners, home closings, land acquisitions and many other areas of our business. Ramping up our closing levels as quickly as we did requires an incredible effort from our employees, so as always, I want to thank our MDC team from across the country for the work they do every day in putting our Company in a position for success. I'd also like to thank everyone on the call for their continued support and interest and at this time, we will open the line up for any questions you may have.

(Operator Instructions) We ask that you please limit your question to one question and one follow-up only. Thank you. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nishu Sood with Deutsche Bank. Your line is open.

Thanks, good morning, everyone.

Good morning.

First question I wanted to ask was about cancellation trends within the quarter. You mentioned obviously there was an improvement in terms of relative to backlog, but a slight pickup in relative to gross orders. What I wanted to ask was, given the disruption of the tax credit expiring within the quarter, how did cancellations trend in the quarter and what was the driver of those? Was it -- was it some tax credit sales perhaps, or was it more the kind of ordinary run-of-the-mill type cancellations?

Yes. We don't give the cancellation rate month by month, obviously, but there wasn't a substantial change in the nature of those cancellations, Nishu.

Got it. So in other words, there weren't -- there weren't a lot of folks who had bought because of the tax credit canceling later in the quarter?

No. And certainly the push-out of that closing date certainly helped.

Your next question comes from the line of Dennis McGill with Zelman & Associates. Your line is open.

Hello, everybody, and thank you. The first question, just wanted to, Chris, understand a little bit more how we should think about the lot cost going up as a percentage of the sales price. Just thinking through the moving parts, we think that, as you get better deals on land and you rebuild that pipeline that hopefully we can see some benefit from lower lot cost. So is that mix, or is that a reflection of lot costs going up on the finish side as you look to rebuild?

Well, I think if you looked -- if you're tying to look backwards, and we've give you disclosure on this every quarter, but the number of impairments rolling through prior quarters, we're certainly, kind of suppressing some of that land cost as a percent of revenue, and that today is probably more reflective of what we're transacting now.

Okay. And then just as a quick follow-up on the accounting, in the disclosures on the lot option takedown, I think this quarter it says, it's about $620 million. Last quarter was somewhere around, I think, $200 million. Is that and apples-to-apples comparison, or what's -- what's changing with that disclosure?

I'm not sure which one you're referring to on that, so maybe you'll have to help me with which numbers you're looking at.

Your next question comes from the line of --

Dennis, we'll come -- you can come back into the queue, and we'll work -- we'll answer that for you.

Your next question comes from the line of Joshua Pollard with Goldman Sachs. Your line is open.

Hi. That 600 number, I think, is actually the number that your options -- the ultimate value of your option takedown portfolio, going from 600 to 200. I had a question on that, but I'll let some other folks ask that. My first question was on your orders in the quarter. Do you -- you had a pretty interesting sequential improvement, unlike any of your competitors. Do you feel like it was in April where you guys were out selling your competitors? Do you feel like it was May-June, where you guys have performed better, or are we starting to see something with the active community count, where you are starting to get a fair amount of sells from some of your younger communities that haven't yet made it into the community count?

Yes, it's probably a mixed answer back to you, Josh, because we do have the benefit of those new communities coming on. And, not having April, May and June for us against each one of our competitors, it's hard to answer on did we outperform the competitors or not. Certainly on our overall results for the quarter, we're pretty pleased to show a 4% increase year-over-year on those orders.

Okay. One of the other questions is, do you have the number of communities that don't quite count as active communities because they haven't sold enough homes, but they will become communities as they hit that five or 10 threshold that you guys have?

Josh, we don't disclose that number.

Your next question comes from the line of Carl Reichardt with Wells Fargo Securities. Your line is open.

(Inaudible) -- the 12% versus 20%. If we go back last year and add the impairments back, I'm trying to get what the cash -- what the real cash is you payed for the lots last year compared to this year. I assume the 20% cost is all cash, no impairments in there. So, how does that compare so I can add that back?

Actually there's still impairments rolling through some of those numbers, Carl. In the footnotes on page eight of the earnings release, we break that out for you guys.

And then I had a question, maybe for Larry, on Nevada in particular. You guys have -- I think are five times the lots you had there on the control versus last year. I'm curious in what you're seeing in that market in particular. So many builders have talked about it being weak, Larry. Are you seeing less competition for finished lots in that market and some type of turnaround there that's measurable?

I think our measurement comes from -- we've had reasonable sales, reasonable traffic, and we're cautiously optimistic that the product we're building in the market that we're addressing is going to be something worthwhile for us.

Your next question comes from the line of Josh Levin with Citi. Your line is open.

Hi, good afternoon. Larry, relative to what you personally were expecting, has the drop-off in demand, following the expiration of the tax credit, been in line with what you expected or worse than you expected? How do you size it up?

I size up that the issues -- home building is just a piece of it. We really have had a substantial drop in consumer confidence, certainly in the United States, and also probably in other parts of the world, and especially Europe. We already forgot we had a sovereign debt crises a month ago. It's like what's new today, right after the tax credit, we've had plenty of turmoil of consumer confidence. I think the November elections between now and then will bring out the -- an aggravation of lack of confidence by political rhetoric on everybody's side. And when someone is buying a home, they need to, a, know they're having a job, and, b, the value is going to be there.

History had it where housing led the economy into a slowdown, and usually housing led it into a recovery, and here it's a little bit different. Other segments feel like they've turned around, and housing is a lagger; and as we get to the sales levels on an annualized basis as low as they are now, one could take the term, which isn't my term. It's someone else's term, that it's the darkest before the dawn. Someone said, "well, what time is it?" I said, "I don't know. I don't have a watch."

Okay . On another note, Toll and Lennar are venturing beyond traditional home building to look at stressed portfolios, work outs. Is this something you're

I think that we've always had an open mind.

Your next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Thanks. Good morning, everyone. First question I was hoping to get, a little bit of color during the quarter in terms of the absorption trends. Because certainly, for the overall quarter you had a great lift year-over-year, but I was hoping if you could give a little bit of color how the absorption rate fared, particularly if you ended the quarter down year-over-year given the lower level of activity.

Well, I'll reiterate what I said at the beginning in my prepared remarks, Michael, and I'll just stick with those. We had a great sales promotion in April. And as I said, that effort was somewhat offset by an abrupt decline in sales in May and June.

All right. I think, though, I'm just going to try to hit on this another way. I know you are trying to stick to the prepared stuff. But I think pretty important right now, in terms of understanding how the second half might play out is, if at this point in the game, your absorption is up or down year-over-year, can you help us out there at all?

Our absorption pace, when I think about what we've done, we've seen a pretty significant decline in the May and June sales, and I think, as far as what's the projection, and how is that going to project out in the second half of the year. It's difficult to project out exactly what the second half impact is going to be. We, along with others, saw a pretty significant decline in May and June. And, we're also in the middle of summer, which traditionally is not a strong indicator of natural demand level. So I think we're going to have to see how things play out as we move through the rest of this quarter.

Your next question comes from the line of Dan Oppenheim with Credit Suisse. Your line is open.

Thanks very much. I was wondering if you could talk about what you're doing on the overhead side, given this abrupt change in terms of the -- I guess two parts to this, given the abrupt change in sales you talked about in May and June. How does it impact your thoughts on overhead, and secondly how does it impact your thoughts on the land purchases?

It certainly makes us more cautious, and I think Larry said that in his remarks. We do remain cautious on the outlook. But, as we've shared with you before, we need to continue to build for our future, and we think with the balance sheet we have, we are going to take advantage of the opportunities that are before us, and if that causes some pause then, in some cases, that will be to our advantage.

And on the overhead side?

Same kind of thing. It's going to be -- we're pretty cautious. I was just having that discussion about two and half hours ago with our executive team, as we look at going forward, and this quarter, Q3 and the rest of this year, and that we're going to have to be careful and cautious and prudent and look for additional ways to gain efficiencies out of our cost structure.

Your next question comes from the line of Jonathan Ellis with Bank of America, Merrill Lynch. Your line is open.

Thank you. First question, just regarding the unsold homes that are at framing stage, I noticed that there was a quarter-over-quarter increase. And just given the timing of the tax credit expiration, I guess how long would you be willing to sit on those units before possibly needing to offer discounts to use that inventory?

We don't have a set time other than the direction to our sales and operations team, which is to sell them and close them. That we put ourselves in a position to -- with backlog and the inventory position we have, to continue to push. There's not a metric necessarily that we're focused on that could drive those other than we want to take those and close them. And, we have opportunities in front of us.

My second question, just in the mountain region, obviously a very strong result from a deliveries perspective, a little bit weaker on the pricing side, and I know some other builders have talked about a lack of elasticity in the market, that even if pricing was discounted, it may not necessarily create more demand for homes right now. From your perspective, did you see better elasticity in the mountain regions than other regions? How would you characterize the movement in deliveries versus pricing in that region relative to the rest of the country?

One thing just to keep in mind. We've been talking about our new smaller product that hits an affordability level for probably five quarters or six quarters now, and the mountain region actually let out in the amount and impact that that had, and when I said certain markets -- that new product has actually hit 90% of all of the products sold, the mountain region is in that category. And so that's been a benefit to us, and to me and to us, it just kind of reiterates the strategy and success of that strategy we adopted at the beginning of '09.

Your next question comes from the line of Mike Widner with Stifel Nicolaus. Your line is open.

Hi. Thanks guys. I just wanted to follow up a little bit on the spec level and really two things related to that. Your spec level, going into the quarter, ended up being more or less right in line with the orders you closed, or the new orders you took in the quarter. The first time we've seen it that high, and generally your spec level has been a lot lower going into quarters than the number of homes you actually sold in that quarter, and where we stand today. Just if trends continue the way they are, your current spec level looks like it's probably about a full quarter's worth of orders. I'm just wondering if that's kind of your comfort level, if that feels a little high to you guys, if it's a little low, if you think it should be higher than that. And secondly, if that has any impact on pricing and if it also had any impact on pricing and incentives in the quarter?

It didn't have much of an impact on our pricing or incentives, necessarily for the quarter. On the qualification of is it high or low, I think we shared with you before that our target is to have about three months of inventory or available for sale inventory, quick-moving inventory for our customers. So, we look at that on a very detailed basis, once a month, and then do weekly checks with our divisions on that; and we're -- we feel fine about where we're at, and we will manage that given the conditions that we're in.

Great. So, just a quick follow-up, then -- the margin compression, the gross margin compression we saw in the quarter, would you attribute that to sort of mix or just trying to get things in before the tax credit? I'm talking kind of sequential Q-over-Q? I know it was up year-over-year?

Yes. If we compared just Q1 to Q2, we did things to make sure that we achieved the sales that we needed out of that opportunity with the tax credit expiration, but as we talked about, as I shared with you going through the margins, the biggest driver for that sequential change was the land as a percent of revenue.

Your next question comes from the line of Joel Locker with FBN Securities. Your line is open.

Hi. Just wanted to talk to you a little bit about your cash balance, and was wondering if the price got to where it had gotten a month ago or so close to book value if you would start considering a buyback?

I think that we've had an approved buyback for quite a few years, and I really -- there's nothing that would indicate anything other than we would continue to maintain a prudent conservative position and market conditions, I think dictate that what we have been doing for the last period of years, there's no reason to indicate that we're going to do something different. However, we do have an approved buyback that has been announced, but that is not something that I would put in a high priority.

Also wondering on your community count growth, it ticked up 1% sequentially, but just when is that going to improve substantially or start increasing to maybe 5%, 10% sequentially?

I think you will see that what we have announced that we've acquired doesn't go on to the active list until there's been a degree of activity, and that is in front of us.

Your next question comes from the line of Alex Barron with Housing Research. Your line is open.

Hi guys. Thanks. I guess I wanted to focus a little more on the issue you mentioned about the change in the gross margins, relative to the land. I'm assuming that basically implies that you don't have that much legacy impaired land left, so is it reasonable to expect the gross margins to continue to trend a little lower over the next couple quarters?

I think, as I shared with you last quarter, that we're sensitive to that. I'm not going to guide you necessarily on what your model should or shouldn't be. I think you should take that information and what has happened year-over-year and sequentially into account.

Okay. The other thing I wanted to ask was, any thoughts as far as your -- you guys have a lot of cash, which is great. You have more cash than debt, which is great. But it seems from a shareholder's perspective, a lot of that money is just going to pay debt holders unnecessary interest. Any thoughts about reducing the level of debts, and it seems, by the size of your operations, you don't really need all that excess cash?

We expect to utilize the resources we have in our business, and this is a very on or opportunistic time in our industry, and we will not miss any opportunity.

Your next question comes from the line of Jay McCanless with Guggenheim Partners. Your line is open.

My question has been answered. Thanks.

Your next question comes from the line of Michael Smith with JMP Securities. Your line is open.

Hi. Good morning. Just real quick -- and if I missed this earlier, I apologize. Could you give us a percentage of specs that -- or a percentage of orders that were specs on the quarter?

We don't give that, but what I did say is that only 7% of all of our closings were from homes that were finished specs.

When you say finished -- Sorry.

So that the rest of all of our closings were from either specs that were at drywall hold, which has been our strategy, or they were sales, we'll call them dirt sales, people that bought the lot and carried through all the way to a finish on the sale.

Sure. Can you give us the percentage that was at the drywall stage even in deliveries?

We have not given that out.

Your next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Thanks. Just a couple of follow-up questions if I could. With the increase in land costs that you saw in the second quarter that you've mentioned had the bigger influence on the sequential decline, is that something that we should expect to continue in terms of the land costs continuing to creep up here?

I think if you look at a long term trend of where land costs have been as a percentage of revenue, generally, we're pretty much in line with that long term trend, and I don't have a projection because we don't give you any guidance on a go-forward basis on exactly what that number is. But, as I said before, that's more in line with what we're transacting now today.

Okay. Also you gave out at the beginning of the call that, was it 55% of your orders and 45% of your closings are from new communities, so, also looking forward, given that you remain pretty active on the acquisition front, the land acquisition front, should we be expecting that number to continue to rise over the next two, four, six quarters?

Yes. Those numbers, Michael, were for new product, not new communities.

Your next question comes form the line of Alex Barron with Housing Research. Your line is open.

Thanks for taking my follow-up. I wanted to ask, in terms of profitability, I would have expected, given the sharp rise in revenues, we would have seen, at least this quarter to be profitable. So, I'm just wondering from an SG&A perspective, what do you think it's going to take to get the SG&A level more in line with what other builders are seeing, or do you think there's just some difference in the way you classify certain costs into SG&A?

Well certainly, our focus is on a profitable, sustainable business, and we're going to continue to evaluate and make changes to our G&A structure to put us in a position for success. We're going to continue to invest in land and new subdivisions. We're going to continue to make changes in our sales approach to make sure that we have communities that are high-performing communities. There's lots of pieces that are all drivers for improvement in the business, and when you look overall and see the improvement in our business, if you go look at '08 and '09 and '10, we continue to see improvement in our business model.

We've also heard on the land side, that a lot of builders have pulled back and dropped contracts ahead in place to buy land. Are you doing the same, or are you kind of stepping on the accelerator, because maybe you see it as opportunities? Do you see land prices coming down?

We see plenty of opportunities, and as others are not in a position to do something, we certainly have the deal flow to look at it and to make a judgment predicated on what's happening, and I think that's a good environment for us. It gives us the option of doing something, and the more deal flow that we see is just like order flow. It brings us opportunities that we might not normally see and we are active in our evaluation of what's happening in the market.

Your next question comes from Michael Rehaut with JPMorgan. Your line is open.

Hi, thanks again. Let's take another shot at this. New product contribution, do you think it's going to rise going forward, and also if you could try and give, if possible, percent contribution from new communities?

We do expect the new products to take up a bigger portion of our sales and closings, as you've see in each quarter. And then, related to contribution from each of the new communities, we don't disclose that and we are not going to give that, Michael. The biggest indicator will be on our active community count as you see that change.

Okay. And the new product, does that have a better gross margin than the older product and can you give a rough sense of the differential and basis points?

It is a more efficient product for us, and as you've seen in our results, when we talk about two things. One, our drywall health spec inventory. I made the comment that net option revenue as a percentage of home sales revenue has improved and increased for us, and as we've talked about before, that has higher margins for us, and helps our margin. So that piece of managing our sales and our inventory that way is helping us, as well as what I said, that the cost of construction have been a benefit for us when we talked about our year-over-year change, and we attribute that primarily to these more efficient newer products.

There are no further questions at this time. I will now turn the call back over to our presenters.

Thanks for joining us on the call today, we look forward to speaking with you on our next call following the announcement of our third quarter results.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.