MDC Holdings Inc (MDC) 2013 Q2 法說會逐字稿

Good afternoon. We are ready to begin the MDC Holdings, Inc. Q2 earnings conference call. I will now turn it over to Bob Martin, Vice President of Finance, and Corporate Controller. Sir, you may begin your call.

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings 2013 second-quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer, and John Stephens, 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 2013 second-quarter Form 10-Q, which was filed with the SEC today.

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 is posted on our website, with our webcast slides.

And now, I will turn the call over to Mr. Mizel for his opening remarks.

I'm pleased to announce second-quarter income of $224.9 million, or $4.56 per share, marking our sixth consecutive quarter of profitability. Our results include the positive impact of $187.6 million tax benefit related to the reversal of most of our deferred tax asset valuation allowance. We believe that the reversal of our deferred tax asset valuation allowance is a significant milestone, as it recognizes our return to more consistent levels of profitability. Excluding the impact of this tax benefit, our earnings per share would have been $0.76. Still, far greater than the $0.22 per share we earned a year ago. The improvement was largely the results of our home-building operations, as our home-building pretax operating margin expanded more than 600 basis points to 7.4 for the second quarter. The strength of our operating margin is again, largely the result of significant top-side growth of our Company.

In the second quarter, our home sales revenues grew by 56% year over year, reflecting increases in both unit volume and prices, as the housing market has improved. Additionally, our gross margin continued to grow during the second quarter, increasing by 390 basis points year over year, and 70 basis points sequentially, to 18.1%. We are optimistic that we can meet our goal of driving sequential improvements to our gross margin percentage for the balance of 2013, though we continue to monitor the impact of increasing land and building costs on our business.

Our total net orders for the second quarter declined slightly year over year, based on a decrease in our active community count, and our focus on balancing price increases with pace. However, our monthly rate of net orders increased by 23% year over year, and 7% from the first quarter, even as we increased prices by 2.5%, in more than 60% of our active subdivisions during the quarter. We are encouraged by these improvements, especially in light of recent increases in interest rates we have seen. We believe that the impact of rising rates can be offset by the benefits of an improving economy, especially improvements in consumer confidence that stem from growth in employment and income levels. After five consecutive quarters of sequential declines, our active community count steadied during the second quarter, rising slightly to 140. We still believe that we can increase our active communities by approximately 10% during the last half of the year.

Our focus on growing community count is augmented by our entry into new markets. In the second quarter, we expanded our footprint into South Florida by acquiring lots in a high-end community in Boca Raton. We also closed on lots in Orange County area of Southern California, a submarket we had temporarily exited during the downturn. Across the country, we have continued to acquire land at an accelerated pace. During the second quarter, we spent approximately $185 million to acquire nearly 2,800 lots, in 69 communities across our markets, 32 of which were new. This level of land acquisition activity reflects our highest level since 2006, driving a 16% increase in our lot supply during the second quarter alone to a total of more than 14,700 lots.

Given our strong acquisition activity in the first half of the year, we believe that we have the lots we need to drive significant volume gains in 2014. And we are on track with the lot supply we need for 2015 volume improvement, as well.

Thank you for your interest and attention. I would like to now turn the call over to John Stephens, for more specific financial highlights to our 2013 second quarter. John?

Thank you, Larry. Our closings were up 37% to 1,183 new homes, with all of our markets experiencing year-over-year increases, much of which were driven by favorable order trends experienced over the past several quarters due in part to a short supply of resale and new home inventories. The strongest volume contributors during the quarter were Colorado, California, Nevada, and Arizona. Our backlog conversion rate remains steady, with the past few quarters at 61%, and in line with our historical average. We continue to generate higher average selling prices by raising prices and maintaining low incentives in most of our markets over the past several quarters, as evidenced by the 14%, or more than $40,000 per home, year-over-year increase in our average selling price, to $338,000. On a sequential basis, our average home price was up 4%, or $12,000 per home. We experienced particularly strong price appreciation in Nevada, California, and Arizona, which contributed to higher selling prices. And also delivered a greater distribution of homes from Colorado and Maryland, which favorably impacted our average selling price, as their average price is higher than our Company-wide average.

Our gross margins continue to improve with our focus on balancing home pricing increases with sales pace and measured lot releases. As a result, our gross margin from home sales, including capitalized interest, increased 390 basis points year over year to 18.1%. And was up 70 basis points over the 2013 first quarter, which marked our fifth consecutive quarter of sequential gross margin improvement. Excluding interest and cost of sales, our gross margin from home sales was 21.3%, up 440 basis points over last year.

In addition, our gross margin from spec homes exceeded our dirt sale gross margins by more than 100 basis points for the second consecutive quarter, which has given us confidence to build more specs. Also, as mentioned last quarter, all of our projects are either actively selling or currently under development. And as a result, substantially all of the interest we incurred was capitalized, and therefore included in our gross margin, with very little expense below the gross margin line item. And as we continue to deploy our capital, we will have more assets to leverage these fixed interest costs over.

Our home building SG&A expenses as a percentage of home sale revenues were down 230 basis points, to 13.0% versus 15.3% a year ago. The improvement in our SG&A rate was driven by greater operating leverage from a 56% increase in home sale revenues. The year-over-year increase in our G&A expenses was largely attributable to an increase in incentive-based compensation expense, resulting from a significant improvement in our pretax operating results, and higher legal-related expenses in 2013. In particular, the 2012 second quarter benefited from a $3.8 million legal recovery, whereas the 2013 second quarter included a $2 million legal accrual charge. Our commissions expense increased 52% year over year, which was consistent with the increase in our revenue and delivery volume. While our marketing expenses declined slightly year over year, in part due to delays experienced in opening new communities.

As Larry mentioned, our monthly sales absorption rate was up 23% over the prior year to 3.2 sales per community per month. However, the absolute level of our net new orders declined 4% year over year, mostly due to a 21% decrease in our average active community count. Whereas the dollar value of our orders was up 12% to $485 million, primarily from our ability to capture price increases over the last several quarters. In addition, on a sequential basis, our net new orders were up 4%, which bucked our 18-year historical sequential trend, where orders are generally down 1% in Q2 as compared to Q1. The increase in our absorption rate was driven largely by strong increases in California, Nevada, Colorado, Washington, and Florida, due to stronger demand in these markets, including less competition from resales and lower inventory levels. And California and Nevada generated our highest absorption pace, each garnering about five net sales per community per month.

In the West, our absolute order activity was down from the prior year, due in part to the success we had in the Arizona, California, and Nevada markets, over the last 12 months, with many communities selling out more quickly than anticipated, which caused a decrease in our beginning community count. However, as a result of the robust land acquisition activity that occurred in these markets over the last few quarters, we expect to meaningfully grow our community count in this region over the second half of 2013. As of the end of the quarter, our backlog stood at nearly 2,100 homes, with a backlog value of $784 million, which represented a 19% year-over-year increase. The increase in our backlog value was primarily the result of pricing increases generated over the last few quarters, combined with a greater mix of Colorado and Mid-Atlantic homes in backlog, and fewer Arizona and Nevada homes. In addition, our average home price and backlog was up 15% year over year, and 4% sequentially, to $374,000.

Our active community count increased slightly during the quarter to 140, breaking a streak of five consecutive quarters of community count decreases. Our soon-to-be active communities, which represents communities with construction activity that have not yet sold five homes, exceeded our soon-to-be inactive communities for the second quarter in a row. And in addition, this does not include another 81 communities that we own or have under option, where we haven't yet begun vertical construction. Also, as stated last quarter, there is an element of volatility with opening new communities. The challenges we encounter in opening new communities include obtaining all necessary governmental approvals and permits, and other construction issues. That said, the acceleration of our land acquisition activities, and the change in our community count trend during the second quarter, should bode well for us to grow our community count by the end of 2013. We will also continue to expect our community count to be up about 10% from the current levels by the end of the year, with most of the net growth expected to be in the West, where our absorption pace has been the strongest, and in Florida, where we are expanding into new markets.

This next slide summarizes our land acquisition efforts over the last five quarters. The 2013 second quarter reached a level not seen since 2006, as we acquired nearly 2,800 lots. And of these lots, 50% were finished, a sharp decline from 75% finished in the first quarter of the year, and about 90% finished in the fourth quarter of 2012. As of the end of the year, we owned or controlled over 14,700 lots, which represented a 3.3-year supply based on our last 12-month delivery pace, and a 44% year-over-year increase. Looking forward, we believe that our lot supply is more than adequate to allow for significant top-line expansion in 2014. And we have secured a meaningful portion of what we need to continue our growth into 2015, as well.

And after the purchase of nearly 8,000 lots, over the last 12 months, the Company continues to maintain a strong balance sheet with liquidity of over $880 million, and cash and marketable securities. And book equity of over $1.1 billion, after the reversal of a significant portion of the Company's deferred tax asset valuation allowance. Which we believe puts us in a position of strength to grow our operations further in the future.

At this time, we would like to open up the call for questions.

(Operator Instructions)

Amy (sic -- Ivy) Zelman from Zelman & Associates.

Good afternoon. Congratulations, guys. Great quarter. Larry, I'm sure you're excited about the DTA reversal. And appreciate your comments about the macro outlook and the impact of higher rates, and some of the variables you talked about that can offset those higher rates. Maybe if you can elaborate just on your thoughts as it relates to appreciating the sensitivity with rates where they are today. I know that many of the analysts that are listening were somewhat surprised by some of the other builders that said they did see an impact from mortgage rates spiking. And you've been around many cycles. Maybe you can give us perspective on where you would get nervous. Or is rates alone an isolation not enough to rattle you? And appreciating your longer-term perspective on where we are in the cycle. Are we in early innings in a baseball analogy? Can you give us some of your thoughts, please?

Looking at baseball, I think we're about in the third inning. This is my fourth cycle. Last time I got nervous on interest rates, I think the long-term rates had hit 16% and prime was at 22%-plus. I recall when I bought my own first house in 19 -- I don't know -- '73, '74, I was excited to get an 8.5% loan. So these last period of years, I think people are less sensitive to the fact that the history of housing really has taken place during an interest rate period that was much higher than we've enjoyed these last few years. So even though I am sure there is a degree of effect caused by lower interest rates, I don't believe that that's the driving force in really what creates the housing market that we have today. The market today, I would list number one as consumer confidence. And the affordability index is at all-time highs in most markets. And I think that our business strategy is, both on a relative basis and an absolute basis, to grow the Company in the markets we're in first, and then in opportune markets sequentially. This is a great opportunity for all the builders, whether they are public or private, to fulfill a pent-up demand that is in the marketplace and we see being transparent every day. So I would say, Ivy, I am fully bullish. And I believe the facts not only for our Company but for other companies, both public and private, substantiate that view.

Very helpful, Larry. And your decision to go into South Florida, when you think about those markets, you've gone into, like Seattle, through acquisition. Can you distinguish why you would enter that market organically? And maybe what some of the characteristics you were looking for in that new entry?

We believe that we have an opportunity to grow in a market that seems to be very robust. And, really, the demand in where we're going is greater than the ability of the developers, builders/developers, to deliver product. And I see pricing in some of these markets substantially higher than you see nationwide. So these are opportunities we look forward in exploiting.

Michael Rehaut from JPMorgan.

Thanks very much. Good afternoon, everyone. First question, just to get a little more granularity, hopefully, on the community count growth. If you could give us a sense, the 10% expected increase in the back half from current levels, is that expected to be more 4Q-weighted? Or is it going to be more of an even increase throughout the next six months? And should we think about a similar type of continued increase into '14?

Mike, it's John. We're just saying we're going to be up 10% by the end of the year. I think, as you can see, with getting communities open, there are things that come up from time to time, and are challenging. So I think what we would like to say is that we're going to be up 10% by the end of the year. And we're going to be up in the markets where we've had, as I mentioned, stronger absorption, and where we've had more activity -- IE, the West and Florida.

Okay. Also, just in terms of the impact of rates -- and I appreciate all the commentary in terms of your bigger picture thoughts -- but in terms of what occurred throughout the quarter, I presume that there was some, at least on a year-over-year basis, some slowdown in absorption growth or sales pace growth, again, on a year-over-year basis throughout the quarter. Has that stabilized at all into July? And did you have any adjustments to make in terms of incentives? I know you mentioned that pricing was up throughout the quarter in at least 60% of your communities. Did that change, or did that rate of change differ as you got into June?

I think that we've been in a seasonally slow period. We were very pleased that the effects of the seasonality were very nominal. And I'm sure there's some effect of slightly higher interest rates. But with the demand factor offset by our increased pricing power, we did not notice it to be material.

I think the other thing, too, Mike, just to add to that, is our June was actually slightly higher than our May orders. And that was really on a flat community count. So we did not see a decline in June.

Eli Hackel from Goldman Sachs.

Sure, just one question. It seems so far a lot of the recovery is driven by the supply side of the equation. I wonder if you could comment a little bit on the demand side, and if you're seeing demand really start to pick up. Or how much of the current housing environment is driven by just still continued shortages on the supply side? Thank you.

I think we see demand as being steady. And I believe we're optimistic as we come into the fall and you continued to see consumer confidence growing, that the acceleration in the back part of the year, we're optimistic about.

Okay. Thank you very much.

Nishu Sood from Deutsche Bank.

Thanks. I wanted to ask about the change in the composition of the land you're buying. You mentioned that in 4Q, it was about, I think, 80% or 90% finished lots, and now it's only about 50% finished lots. And you also mentioned that you're looking out into '15. So Just want to understand what is behind that, what's the main factor? Is it an availability of what's out there, so if it's more developed deals available, that's what you're going to be looking at? Is it because your pipeline is already full for '14 in terms of your growth plan? Is it cyclical play that, since we're in the early stages of the recovery, that that's the sort of deals you want to look at? What's been the main driver of that change?

The main driver has been availability. We have an open buy order for both categories. And right now the availability of finished lots continues to, I believe, contract, as the market is robust in those that are developing new lots, such as ourselves. The lead time will roll into '14, and we're looking for the growth in '15. As I commented in my comments, we believe that our objectives for '14 are transparent to us. And '15 are evolving. Since we have an active acquisition program, we expect to add on to those projections as the weeks and months go by, and what I believe will be the continued strength in the housing market for everyone.

Okay, great. Thanks. That's helpful. Second question I wanted to ask was on price versus pace and mortgage rates. Pretty clearly this quarter, as you indicated, you were prioritizing raising prices, even if it's obviously crimped volume a little bit, maximizing the returns on those assets. How did that evolve as the quarter went on and rates were rising? And what's your view, or how do you expect to handle it, let's say if the mortgage rate trajectory continues in the next quarter or two?

I think the market will pretty well predict -- not predict, but the market will pretty well regulate how we go about it. As you heard from John, we have a pricing meeting once a week. And what we do is adjust the momentum and the pricing power. And every subdivision in every market is different. So it's not just -- okay, we're going to have a $1,000 increase across the board. It deals with each subdivision being analyzed as to traffic and sales and costs. And all of those factors need to be considered in order to be sensitive to a very competitive market. And we are not alone out there. The opportunities -- we have done what we believe is a very good job on being focused intensely to maximize the opportunities for the Company on not only a current basis, but on a future basis, positioning ourselves for what we believe was a robust period for the industry going forward.

Adam Rudiger from Wells Fargo Securities.

Hi, thanks for taking my call. My question is, I think you mentioned you bought about 8,000 lots over the last 12 months. Recognizing there are some inflationary pressures on land, I was wondering what the gross margins on the newer land was, and what that says for the trajectory for 2014.

Adam, it's John. How are you doing? We look at our land deals. We look at every deal based on our evaluation of today's market conditions and on a risk-adjusted basis. And we're not going to give out what our current underwriting standards are, because that will vary from project to project and by asset by asset.

Okay. And then my other question was on Utah. The community count declined there. And, unlike some other markets, like maybe Nevada where you saw a lot of increases, you didn't see a lot of increases there. So I was wondering what your plans were for Utah.

Utah, I looked at that, also. We actually had a lot of close-out communities last year at this time, Adam. It was probably a lot of communities that we had that were soon to be closing out. And we are restocking there. We're looking at new opportunities there now, as well. We like the Utah market and we continue to look for new opportunities there.

Ken Zener from KeyBanc Capital Markets.

Good afternoon, gentlemen. Larry, I wonder if you can talk about the West absorption, which you guys talked about. And obviously it's in your filings, at about 4.2 versus 3.2. Given the concept of pace and price within that region by many other builders, can you talk about if it was a product mix dynamic that was driving that?

I think in all these subdivisions, they are different, since each and every one in the same city, in the same market, even in the same part of town sits differently. And we were fortunate that we were able to have both pricing power and accelerated absorptions in those markets. And I think they are recognized as being robust markets. We executed in line with what we believed was the market.

Thank you. And then given your comments on community growth end-to-year-end, I wonder if there's any potential elements you might be able to highlight. You highlighted the West and Florida are going to get the preponderance. But does that have any concept on price and gross margin that you would like to highlight? As well as the land in the West, was that purchased, let's say, if it was more finished on a two- or three-quarter-ago basis? Thank you.

I think we're really in line with where the market is. And going forward should be on a relatively balanced basis. And as I commented earlier, it is our goal to expand both on an absolute basis and a relative basis, relative as to the market, and absolute as to our position in the market. So that will be highly opportunistic of what we bring to the market at those future periods of time.

Dan Oppenheim from Credit Suisse.

Thanks very much. I was wondering if you'd comment about having more confidence in building more specs at this point. How much of that is where you're talking about June being stronger than May? Is some of that also, do you think it's better for buyers where they have a shorter time in terms of contract to closing, and no worries about rates moving during that time? What's driving that? And should we continue to expect that to increase when we look at third-quarter numbers, just even higher level there?

We believe that the market, if we go back a couple years, we tried to reduce our specs and increase our land count. Our land starts because the market was discounting through incentives and price reductions of standing inventory. Today, I believe we're in a market that in many circumstances, a standing home, we will receive a higher gross profit margin than a dirt start that might take us four to six months to deliver. And, therefore, we believe that the correct business strategy at this time is to continue with a higher spec level. And there are some markets with some builders that they are not releasing prices until either the foundation or the framing is done. They do that as both a matter from protecting themselves from price increases, and also in order to maximize the current value of the home prior to your delivery, versus speculating on a dirt start that, as I said, might be four to six months out. So I would say our best strategy, and probably the evolving strategy in the industry, will be go to a higher spec count, which is a pretty good business. It's like going in and ordering a car off the floor. You want the one you can take delivery, not the one they are going to tell you will be in in a couple months. So that's the market we're in. And we expect and will manage to whatever the market conditions are at the time.

Great. Thanks. And then I was wondering about some of the comments in terms of the communities opening up in the West. I think if we look at what's happened, there's been a significant drop in terms of the presence that you've had in some western states, whether it's Nevada or California, and now you talk clearly a lot of closeouts just this past quarter. But just how do you think about that from a margin perspective? We've generally seen that builders often do better when they have a more significant presence within either metro areas or within states. Are you going to have some efforts here in the future to have a more consistent presence in some of these areas?

I think you should expect that we will expand in all markets we're in.

Stephen East from ISI Group.

Thank you. Good morning, guys. If we could switch subjects for a minute. If you look, Larry and John, at your pricing that you're getting, and talk about how much of that is true price versus mix, and what you're seeing on the cost side and the labor side. Other builders have been giving us how much the price per square foot has gone up versus the cost per square foot has gone up. If you all have those numbers, that would be great to see.

Stephen, it's John. In terms of our price change, our increase in ASP, it's primarily related to an increases we've seen in each of our markets, by moving up our prices, as Larry mentioned, this weekly meeting we have to really review every single subdivision. So it's really the vast majority of the increase in average selling price is not a mix issue. It's more of a price increase issue. And we have been able to offset our increases we've seen on the hard cost side, as well as on the land side thus far. In terms of giving out a dollar per square foot, probably not going to do that. But I think the point is that you need a pretty substantial increase in your hard costs to offset some of the price increases that we've seen over the last several quarters. Okay. Thanks. That's helpful. And then if you look at your 2013 land spend, one, how much do you want to spend this year? And if you look out a couple of years, your net debt to total cap is in great shape. Where would you like to push that as you reinvest in the markets?

I would say the market will determine the pace that we'll travel, keeping in mind that we're a conservative company. Also, we have commented that we are going to grow. And we're going to grow as aggressively as the market allows us to continue, with the standards that we have when we underwrite and execute. The land buy rate, I believe over the next period of time, should be able to possibly expand. And it will depend, of course, of what's going on in the back end, which deals with absorptions. But we have the balance sheet and the resources to do substantially more than where we're at, subject to market conditions. Which I believe will support the growth that the industry is enjoying. And we expect to participate in line with that.

Joel Locker from FBN Securities.

Thanks for taking the question, guys. Just was curious, on the existing side, we've seen inventory up in the last few weeks around San Diego, where I live. And just was wondering if you're seeing a little more competition from the existing home market.

I think, Joel, as we mentioned earlier, we really haven't. Our order trends remain pretty consistent throughout the quarter. There's always competition out there, but nothing unusual or material, as Larry mentioned earlier.

Right. Just a follow-up question. How many communities did you open and close in the second quarter? And how many do you have slated to open in 2014?

We have not given out any information, Joel, for 2014. But in terms of open and closed, I think it was about -- Bob, do you have that number?

Yes, we can get it in just one second.

Okay. So we'll get back to you on that one.

Jay McCanless from Sterne Agee.

Good morning, everyone. First question, Larry, in previous cycles have you ever seen spec homes have this kind of scarcity premium like you're seeing now? And if so, how long in terms of months did that scarcity premium usually last?

I think in prior cycles, we didn't have the robust growth in previously distressed assets that we have now. The first home buyer, really the price point of those homes generally now seem to be a resale of distressed product. So you have new home average sales prices, I think, substantially higher than the prior cycle. And I think the intensity will last for a period of years, considering that we have a substantial accumulation of demand that has not been satisfied because of the economy and the market circumstances, and the economy for a period of maybe two or three years. That is something that will take a period of years to adjust. The new sales of single-family detached home, I don't know is -- we'll be fortunate to exceed 50% of the base demand rate next year. So you have some runway in front of you. And that will all be affected on the speed in which the builders are able to deliver to the demand that the market is demonstrating.

Okay. Thank you. My second question is what do you all estimate is your mix of move-up versus first-time buyers now? And with the land that you're buying, where do you anticipate that mix going over the next two to three quarters?

I think it's -- I hate to use the answer -- we're at where we're at. But the industry and the average sales price of where we are is probably a base point of what we see for the next year. I think it's clear that the public builders are really trending to a higher average sales price, which is in line with market demand. And I am confident that the price points will continue to stay in the affordability factor for a period of years, until the affordability index reverses itself. And you can track that, which will give you an indication of when there begins to be a slowdown in the demand because you've pushed prices too far.

But you have the benefit now of an expanding mortgage market. Previously, everyone had commented on how difficult it is to get a mortgage. The requirements are pretty simple. You need a job. You need good credit. You need a full set of documents. And you need a reasonable down payment. I think those are pretty good underwriting criteria. And as the mortgage market goes in a more private direction, away from the government programs, that may take 5 years, it may take 10 years. The mortgage industry is rebuilding itself, even though it is slowly rebuilding itself. There will be more product available, which will be able to capture a larger segment of the buyers than we've seen for the last year or two. So that's a positive factor, even though people seem to focus on higher interest rates and the difficulty in getting a loan. If you have good credit and a down payment and a job, I don't think those are difficult requirements for buying a new home.

Ivy Zelman from Zelman & Associates.

Thanks for taking the question again. Larry, just as you elaborated on the underwriting versus what should be the case, or it's not that you're needing a job and some of the simplistic ways that you described it, has it changed at all relative to last quarter, in your opinion, where you've seen a modest easing? Or would you say it's been pretty steady? And then, secondly, there's been some concern that large PE firms are no longer buying as much distressed REO in the market. And, for that reason, they have been the incremental buyer of the distressed asset. And that would cause pressure on new home prices. I certainly can't draw that line to the concern, but can you address it, because I know many clients have suggested that that's a risk to the new home market.

I think the opportunity for the market in general is those individuals that were fortunate enough to buy distressed product are able to reenter that product into the market at a very substantial price increase. As you see rentals going up, then those that are in the business of renting homes have a greater incentive for holding that home for a longer period of time because their cash flow is increased. And I think it's proven to be a very successful business model, those that were able to take advantage of it. The availability in mortgages, we continue to see the banks moving into -- very conservative, but moving back into jumbos and non-conforming for both their own balance sheet and to securitize it. So I think we're on trend. The banks in the United States continue to get stronger. And one of the few places you can put money out at low risk and get a reasonable return happens to be housing. And so I see a lot of that happening, and more so in the future.

I do not expect that, as some of the homes that we're taking off the market by investors are reentered into the market, that it will have an affect, or material affect on new home sales. Because, after all, a new home is the 2013 version, and the prior homes aren't fresh, even if they are painted fresh. They don't have the feeling and the look of a new home. And many consumers want to be the first owner of a home, not the second owner of a home. And I think that there will be a substantial amount of those persons that moved into the rental of those homes will end up being the buyer, because they will have a unique opportunity. As their credit has been rehabilitated, they are able to buy.

And so these are really a combination of converting, for our country, more renters into homeowners, because their option is to step up and buy versus to look at a rental. Where the rental rates, as we see, are becoming -- continue to be under pressure of higher rents, not lower rents, which creates a greater value for those that bought the distressed asset. In the new home market, I don't see that product being competition to what we're building and what the other builders are building, except on a very limited basis.

Michael Rehaut from JPMorgan.

Thanks. Thanks for letting me squeeze one last one in here. John, I just want to go back to your comment, I think at the end of my question earlier, about June being slightly higher than May. And that's despite, or with, community count being flattish month to month. Any thoughts around what drove that, if it was particular regions or maybe new communities replacing older ones in certain areas, that maybe had a positive impact on sales pace?

No, I just think it was we just did a little better in June. There was really nothing that was in particular, Mike, that -- a bunch of new communities that opened. In fact, one of the questions earlier was how many we activated and how many we closed. We activated 31 communities during the quarter and we deactivated 30. So in terms of anything unusual there, nothing in particular.

And have you seen that consistency continue into July?

I think at this point, Mike, our practice has been not to really to comment on the interim month, when the month is not complete. So really nothing to report there at this point in time.

Eric (sic -- Alex) Barron from Housing Research Center.

Hi, guys. I just wanted to get your take on what you think would be the direction of margins as we go into next year. I know the back half of 2013, it's pretty clear that margins should continue to expand because of what's in backlog. But if the mortgage rates stay where they're at, do you anticipate that pricing power would flatten out and therefore margins might be under pressure next year? Or what are your thoughts?

Our thoughts are that we'll report as it occurs versus guess on projections.

Okay. Thanks.

And there are no further questions in queue at this time. I would turn the call back over to Mr. Martin.

Thank you. One housekeeping item. The question was asked about the subdivisions that became active versus became inactive. There was 31 that became active and 30 that became inactive. And with that, we are done for today. And we look forward to seeing you after the release of our third-quarter earnings. Thank you.

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