MDC Holdings Inc (MDC) 2014 Q2 法說會逐字稿

Good afternoon, we are ready to begin the MDC Holdings, Inc. second-quarter 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' 2014 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.

(Caller Instructions)

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 2014 second-quarter Form 10-Q, which is scheduled to be 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.

Thank you, Bob. I'm pleased to announce the second quarter income of $21.5 million, or $0.44 per share, continuing our record of consistent profitability since the homebuilding market recovery began in early 2012. The strategies we implemented in prior periods continue to yield positive results for our Company in the second quarter of 2014, despite the volatility we have seen in the homebuilding industry. In particular, our inventory strategy bolstered our operating results for the quarter. By increasing our supply of speculative homes available for quick delivery to our customers, we were able to almost completely offset a year-over-year decrease in our beginning backlog with a quicker conversion of that backlog and an increase in the number of units that both sold and closed during the quarter.

We also benefited from our careful management of pricing in our projects across the country. Although the price increases thus far in 2014 have been modest compared to 2013, we still increased our 2014 second quarter average closing price by 10% year over year, which helped to offset the impact of higher land, material, and labor costs. In combination our inventory strategy and our careful management of pricing allowed us to increase not only home sales revenue year over year, but also the amount of gross margin earned per home closed. The higher revenues also helped us achieve better leverage on our overhead, as our SG&A rate dropped meaningfully year over year for the 2014 second quarter.

The spring selling season overall for 2014 was not as robust as we had originally anticipated. Some potential buyers remained on the sidelines, especially in the first time segment, following a significant run-up in home prices in 2013 and uninspiring economic trends that have persisted for much of the past year. However, we saw steady demand throughout the 2014 second quarter, which allowed us to increase our net new home orders year over year for the first time in five quarters. Our orders also benefited from the strength of our year-over-year increase in our average active community count, which has been another strategy -- strategic focus for us.

We continue to be optimistic about the future of our industry, despite the volatility we have seen over the past year. Recent acceleration in the improvement of employment levels and consumer confidence supports our long-term view that the homebuilding industry is poised for continued growth in the coming years. Our success in growing our business alongside the industry is highly dependent on the expansion of our operating platform.

To that end, we have made considerable progress by significantly increasing active subdivision count, controlled lots supply, and available liquidity year over year. We believe that our land holdings are sufficient to drive growth for our Company, with all of our inventory assets currently selling or actively under development. Thank you for your interest. I will now turn the call over to John Stephens for more specific financial highlights of our 2014 second quarter. John?

Thank you, Larry. We delivered 1,158 new homes during the quarter, a 2% year-over-year decline. The decrease in deliveries was impacted by a 16% lower beginning backlog due to a lower community count during all of 2013 as compared to the prior year. However, we were able to largely mitigate the impact of having a lower backlog by converting a higher percentage of spec homes during the quarter into deliveries. In fact, 67% of our second quarter deliveries represented homes that were sold as a spec versus 51% in the prior-year period. Our backlog conversion rate came in at 71%, which was above our historical average, and was a direct result of our ability to convert more spec homes during the quarter. And based on the level of our spec inventory and the percentage of our backlog that is under construction, we expect to see elevated backlog conversion rates as we move through the balance of the year.

Our average selling price was up 10% year over year, or $34,000 per home to $372,000. This increase was primarily the result of price increases taken during 2013, along with a mix shift to higher priced sub-markets. Year over year, all of our regions experienced increases in average home price, with the West experiencing the most significant increase at 17%. Our California division generated the largest home price increase at 35%, which was due in large part to a higher percentage of deliveries from Orange and Los Angeles counties as compared to the prior-year period.

Our gross margin from home sales was 17.1% for the second quarter, down 100 basis points year over year and 140 basis points sequentially. Excluding inventory impairments of $850,000, our gross margin was 17.3% for the quarter. The year-over-year decline in our gross margin was largely due to higher capitalized interest costs, higher direct construction and land costs combined with additional incentives offered in certain markets where demand was a bit slower. However, our gross margin for home closing was up 5% over the prior year to $64,000 as a result of our higher average selling price driven by year-over-year price increases and a shift to higher-priced communities in certain sub-markets. Excluding interest and cost of sales and impairments, our gross margin was down 20 basis points to 21.1% for the second quarter versus 21.3% for the year-earlier period.

Our homebuilding SG&A expense rate was down 140 basis points from the prior-year second quarter and down 360 basis points from the first quarter. The year-over-year sequential improvements on our SG&A rate were driven by increased operating leverage from higher home sale revenues, lower incentive-based and stock-based compensation expenses, and lower legal costs, including a $1.4 million net recovery in our East segment.

Our net new orders were up 5% year-over-year to 1,419 homes, while the dollar value of our orders was up 12% to $545 million due to increased orders and the impact of a 10% higher average selling price. The increase in our net new orders represented our first quarterly year-over-year increase in five quarters and was aided by an 11% increase in our average active communities. Within the quarter, our orders were up in each month as compared to the prior year, with June marking our fourth consecutive month of year-over-year increases. In addition, our orders were up 15% sequentially compared to our longer-term historical average of a 2% increase.

Our monthly sales absorption rate for the quarter was 3.0 homes per community compared to 3.2 sales per community in the same quarter a year ago, as certain markets experienced lower demand. While our overall monthly sales rate declined 6% year over year, we nonetheless experienced solid absorption pace in some of our larger markets, particularly in California, Nevada, and Colorado where we generated monthly sales rates of 4.1%, 3.8%, 3.7% respectively for the quarter.

We ended the quarter with a backlog dollar value of $761 million, a 3% decrease, while our average price per home in backlog was approximately $404,000, which represented an 8% increase. With the second quarter increase in net new orders and the higher average selling price of homes in our backlog, we continue to close the gap on our lower beginning backlog value that we started the year with.

Our active community count was up 14% over the prior year to 159 communities, and represented our third consecutive quarter of community growth. Community count increased most in the West, with California and Arizona experienced the highest growth. In addition, our soon-to-be active communities exceeded our soon-to-be inactive communities by 20, which was up by 8 from the prior quarter. With this positive bias in our soon-to-be active communities, we expect our community count to grow through the balance of the year. Our year-end community count target is still 170, representing a 7% increase from our current active community count and a 15% increase for the full year. However, as we have stated in the past, there is an element of volatility inherent in the timing of opening new communities and closing out of existing communities, and the year-end number may differ.

During the quarter we acquired over 1,100 lots and spent approximately $145 million in land acquisition and development. As of the end of the quarter we owned or controlled over 16,700 lots, which represented a 13% year-over-year increase, and approximately a 3.7 year supply of lots on a trailing 12-month delivery basis.

We ended the quarter with over $1 billion in liquidity, which included over $600 million in cash and marketable securities, and had approximately $425 million in availability under our revolving credit facility. In addition, our net homebuilding debt to capital ratio was 27.8%, one of the lowest in the industry. At this time, we would like to open up the call for questions.

(Operator Instructions)

Alan Ratner, Zelman and Associates.

Nice quarter, and congrats on the SG&A leverage. My first question is related to that. John on Slide 6 where you showed the SG&A breakout, which is very helpful, the G&A run rate was significantly less than you've been operating at in recent quarters. I think it was probably about $26.5 million ex the legal settlement. And that's about $2 million to $3 million less than prior quarters. So is that a sustainable number in your opinion? And if not, were there any one-timers in there in addition to that legal settlement?

No, I think that's a good point you raised. And we look at it similar to what you just described, Alan. Would have been $26.5 million without that net legal recovery. And probably for the next couple quarters, it's probably in the $26 million to $27 million run rate range, barring any one-time items. But we have seen tighter cost control on a few items, as I mentioned, including some of the stock-based compensation expense and lower incentive-type costs.

Great. Thanks. And second on a margin, just given the increased shift towards spec product as a percentage of your total closings, I was curious if you could break out the incentives that you offered during the quarter. Were those focused primarily on spec product? And if so, what does the margin differential look like right now between your spec and to-be-built homes?

Typically your incentives might be a little bit higher on your specs. And we've seen that margin in the 150, 160 basis point range differential between a dirt and a spec delivery, Alan. And we did see a slight increase in our incentives during the quarter. So obviously that had an impact on our margins. But again, hope that helps.

It does. And so with the specs running at about two-thirds of your deliveries right now, do you think that that's reached a peak here, or should we expect the deliveries to -- I know you mentioned the backlog conversion rate will be high, but should that tend to, or start to drift a little bit lower now that you've reduced your completed spec number a bit?

Yes. I think our spec number's down, our total specs is down about 19% from the beginning of the year and about 7% since last quarter. And we've continued to eat into our completed specs about 2.6 per community. We did have, in terms of our order mix for the quarter, we had more spec orders in Q1 than we did in Q2, which would make sense with our spec number coming down. So I would anticipate a meaningful spec delivery as a percentage, but it might come down as a total percentage.

Great. Thanks a lot.

Michael Rehaut, JPMorgan.

First question I had, just going back to gross margins. Appreciate the color in terms of what you're seeing on a difference year over year, but perhaps on a pre-interest basis, if you could just give us a sense, I guess on a pre-interest basis, 2Q was roughly flat with a year ago but down about 100 bps sequentially. And so you had mentioned a bunch of puts and takes, but if you could review. There's certainly, I guess, there were some positives and negatives that offset for this on a year-over-year basis, but what was the real driver of the sequential decline on a sequential basis?

Mike, I think the primary driver there was just higher input costs, whether it be direct construction costs, and I think that was the primary driver. Land costs a little bit, but we've seen our land costs kind of remain as a percentage of average selling price, pretty consistent in a pretty tight range. So primarily direct input costs, and then a little bit more on the incentive side, if you take out the interest component. The interest component was about 60 basis points higher on a year-over-year basis. But if you look on a pre-interest basis, it's more the direct costs.

Okay. And so incentives, then, were not the bigger role of the sequential decline?

No. I think, like I said, it's more of the direct input costs. The incentives did have an impact on bringing the margin down, but more the input costs.

Okay.

And I think with home pricing, as Larry talked about in his opening remarks, we've seen more of a leveling off of price appreciation. And I think the subcontractor costs and trade costs (technical difficulties) increasing. I think that will level off over time, but with home price appreciation leveling off a little sooner than I think the cost side.

Okay. And in terms of the incentives, obviously everyone's heard about Phoenix. And I presume that that impacted, was a driver there. Were there any other geographies that contributed to that bump-up in incentives sequentially?

Well, you mentioned Arizona. You mentioned Phoenix, but I'd say Arizona for the whole. Maryland, we have some closeout communities in the Delaware Valley, New Jersey, and Pennsylvania where we are no longer adding new subdivisions there and we're looking to close out of a few communities there. So it's an incremental items there. And then also Nevada, a little bit higher but that's a market where we've seen the most significant price increases over the last 1.5 years or so. So slight increase there. But still very positive gross margins in that market.

And then just lastly, John, on the interest expense, you mentioned that it was up 60 bps year over year. And I guess it appears that if you go back to the beginning of 2013 it was in the low 3%s. And now it's kind of come back steadily to the high 3%s. How should we think about that going forward, and could that once again come back down in 2015? And perhaps how could you think about this in terms of a steady-state as you get to a more robust level of inventory and sales?

I think you've hit it on the head there, Mike. It's going to be a function of how quickly we deploy the capital and how quick we turn our inventory. I do think it has crept up over the last couple of quarters. We've had a little more capital, and we are capitalizing all of our interest. There's nothing running through below the line. It's all included in our gross profit margin. And I think your analysis is correct, that over time as we continue to invest in inventories, that has the potential of coming down, along with our absorption pace into 2015.

Okay. So this might be within the next few quarters more of the high water mark, do you think?

I think based on current absorption pace and what we're seeing now, I would say yes, that's in the ballpark. And I think it would be more of a 2015 event if we saw demand continue to pick up there.

Great. Thank you.

Dan Oppenheim, Credit Suisse.

Was wondering if you can talk a little bit in terms of the comments about really wanting to have more operating leverage to it, going out, opening the communities, and then working on the absorption through the specs and such. Seems there's much less of a focus on margin. Wondering as you're acquiring land if you're then thinking about lower margins on what you might -- lower than what you might have accepted in the past, how are you viewing that, and what you'd want in terms of longer-term margins?

I think longer-term margins we would like to believe that margins, there's room for opportunity to improve in the future as you get better absorption pace. In terms of going out and acquiring new land, we're looking at our current gross profit margin hurdles, and I don't think we're going out looking for lower gross margins on new deals. I just think that with the leveling off of pricing, that we've seen a little bit of a compression there. But going forward --

You're saying you look at 17%, 18% would be a hurdle that you'd be using off of gross margins in terms of underwriting?

Yes. I think it really depends on the location. The sub-market, is it in a master plan, what market is it in? Are they finished lots, are they lots we're going to be developing? I think one size does not fit all.

Okay. Thank you.

Joel Locker, FBN Securities.

Nice quarter. Just had a question on your customer deposits. Just what were they at the end of second quarter?

Let's see, Joe. See if we can pull that up for you. Looks like it was $14 million, Joel.

$14 million or so. Just going forward as you look into 2015, what do you expect your average specs per community to be? You continue to be around seven, or is that kind of the target?

I think we'll adjust based on what the market is showing. I think as we go into the latter half of the year we would expect the specs to perhaps come down a little bit, and in the early part of the year we're more comfortable carrying a few more.

Right. Got you. All right. Thanks a lot, guys.

Adam Rudiger, Wells Fargo Securities.

Pretty aggressive, or pretty strong community count growth in some of the Western markets. At the same time, absorptions have been coming down. So can you talk about when those communities that are the newer open communities, when those were underwritten maybe, and how they're performing now relative to what you initially expected?

Yes. A lot of what we're seeing now in terms of order activity relates to land we bought really in the back half of 2012 and early part of 2013. I think in some markets, it's as good as what we underwrote, and certain subdivisions it's maybe not as good. I think that Arizona, Phoenix has been a little bit softer. But we have seen a little bit of a pickup in order activity during the second quarter in Phoenix, just relative to where we were earlier in the year. So I would say that a market's a little bit softer. I think in California, Nevada, and Colorado, those are three markets where we continue to generate pretty healthy absorption pace there. We're over four in California per month. Nevada's close to four and Colorado is about 3.7. So we've seen pretty good strength in those markets relative to what we underwrote those projects to.

Okay. Thank you. And in your earlier comments you mentioned some closeout communities in Maryland. Is there a strategic shift to get out of that market or reduce your presence there?

No. I think what it is, Adam, is we had a larger footprint within that region and we've been shrinking that down over time. We still have our Maryland office there and we continue to add subdivisions there. It's just really kind of getting out of the Delaware Valley area, Pennsylvania and New Jersey.

Got it. Thanks for taking my questions.

Nishu Sood, Deutsche Bank.

Larry, I think mentioned that there were steady trends in demand through the quarter. I just wanted to dig in on that a little bit more. There were some concerns raised by the new home sales report that demand fell off towards the end of the quarter. So I just wanted to get your thoughts. If you took seasonality into account on a normal slowdown, perhaps post-Memorial Day, did trends stay level or increase? And if you have any comments about July as well, that would be great.

I think I continue to find the statistics that are reported by the Homebuilders Association, some analysts, other databases to be a little confusing, whether it's sales, starts, rolling into expectations. I find that we run our business predicated on the business that's coming in the door. And I think what I sense is, not just us, but I'd say the larger builders in general continue to do a better job in executing sales with a market, and I used the term over a year ago, and I think maybe everyone gets it now. It's called New Normal. And if the New Normal is 400,000 or 406,000 or 520,000, the point being is new home sales, everyone by every analytical number should be better, but it's not. So I think that you'll see that the public builders will ultimately increase their market share in the important markets that are having growth. There is a degree of growth in the economy.

However, I think the, as we comment, the starter market is substantially slowed down. But I'm not real clear what a starter home is anymore. You have to go to some places other than the markets we're in if you think a starter home is $300,000. It used to be substantially less. So we have categories of first time, first time move-up, but first time has become expensive in most markets of the country. The resale market seems to kind of be moving along reasonably. And I don't see consumer confidence really increasing much, predicated on the leadership broadly defined out of our government that seem to have trouble with most issues.

So what we're doing as a Company is we're doing what we said we were going to do. As the market looked like it was getting better a couple years ago, we continued to expose more capital into projects that we believe are risk-adjusted in line with our view of what's reasonable. As you can see, we've continued a high level of liquidity and a low net leverage. And we're going about building, I hope and I believe, a better home. We're doing a better job in sales and marketing. And we are improving our systems and our technology.

And we're building a Company that I believe will continue to add value to the shareholders and long-term value to the shareholders is what MDC's about, since 25% of the Company is owned by management. We care about not only where we are, but where we're going. And that's kind of my view on the market as it exists today.

Thanks. I appreciate the thoughts. The other thing I wanted to ask you about was in terms of your land acquisitions. You continue to build up your supply of land as we progress in the housing recovery. Earlier in the recovery, you had begun to find some shortages of finished lots, and therefore stepped up your development pace. I wanted to ask you, are those deals beginning to now flow through in terms of your active communities and your closings? And also, are you going to continue to be focusing a little bit more on doing your own development?

I think we have always tried to do a managed approach. As you know, we do a substantial amount of development in almost every market in the country that we're involved with. But ourselves, just like every builder, we'd like fully finished lots with a building permit before we have to pay for it. But that's not always achievable. The hot pace of demand for land, I think has slowed down because most of the builders have a reasonable asset base for their current needs. And you could look that all of our land is active, that we don't have inactive land. And we're finding that, from time to time, there's a few opportunities. But there's no shortage of competition for, really, the best land.

So there's multiple buyers with cash for the best land. And we compete in that market. So we're focused throughout the country on what we believe are A locations, which is as defined by local circumstances. And we find that it's a balanced approach. And we will continue to develop. And if you look at where most of the builders will be five years from now as an industry, unless there's an expansion of land developers that come back into the market and subcontractors willing to do it on that basis, I think most of the builders will be pretty active in the development world, and we're progressing in the same manner that we think is prudent.

Okay. Great. Thanks. I appreciate the thoughts.

Stephen East, ISI Group.

I don't know if this is for John or Larry, but you bought a little bit less land this quarter than you burn through, at least on the closing side. I guess as you look at your strategy, even though it's tough to get land, are you happy shrinking your land base a little bit as we move forward? And also, could you sort of rank order where you're buying the most land?

You can see the land lot, I think we have a schedule on that.

Yes. It's on Slide 9, and actually, Stephen --

Yes, I'm sorry.

Stephen, I see your point that we acquired 1,139 lots and we delivered a little bit more than that, but in terms of our year supply, we're sitting about 3.7 years on a trailing look-back period. So I think we kind of want to stay kind of in that range. You never get it perfect. It does kind of ebb and flow around that, but I think we will continue to look at land opportunities as they become available. And as to market, we feel better about certain sub-markets, then we'll be more active in those markets.

As you look at it right now, is there any area, you talked about both Nevada and California having absorptions up over four a month, that type thing. Is there a need to replenish there?

You'd always like to grow where there's sales.

(Laughter) I hear you on that one.

Yes. There's more land available where the market's weak. And where the market is robust, there's no shortage of competition. And we expect to compete aggressively where the market's better.

I think just to add regionally to your question, Stephen, we continue to be a big consumer of lots here in Colorado, because this is our largest market. I think to your point like in California, I think it's lumpy, too. I don't think the sales come in at the same rate every single quarter. And they do ebb and flow between the quarters. I think you have to look at what we do over a period of time in those respective markets. So we do have a lot of things we're working on that we will continue to work through the balance of the year on including, like Larry said, some of those markets where we've had higher absorption pace. Clearly we need to continue to add lots where we're selling really well.

Okay. All right. And then just a couple questions on the gross margin. One of your competitors talked about construction costs on a square footage basis being up about 8% or so year over year. And you talked about costs, construction costs being one of the issues on the margin. How much do you think your construction costs are up on a square foot basis year over year?

You're kind of in the ballpark with what they described. Clearly it is going to vary, again I hate to keep saying this, but by market. Markets where we see more robust activity, like Colorado's a market where the trade base is probably a little more strained. So you might see a little bit more there. But we feel like we have good relationships with our trades. We want to stay in very close communication with them and give them very good visibility as to what's coming down the pike, whether it be we're going to start a few more homes, or what's around the corner so they can plan accordingly. We want to make sure we keep them on our jobs, and any event -- but there has been, I think, on the square footage basis, you're in the ballpark.

Okay. And last question, credit availability. I know it gets asked every call, but what is your all's experience? Is it loosening up any?

I think that we have probably a few more lenders coming into the market, which is helpful. The regs continue to evolve from Washington, and the interpretation thereof. But other than the fact that you have to add more back-office in the mortgage operation, we seem to be working through it. So it's an issue throughout the mortgage industry, that it takes more overhead to create $1 of revenue. And that's just the rules that there are. But some of the banks, and we read about them, and they call upon us, are lending for their own portfolio. And I think that will be helpful over -- in the future.

And we don't consider it an issue at this time. We just consider part of being in the housing business, which means everything is really, really, really hard. And that's why there's not a lot of people in it making a lot of money, which is to the advantage, if you heard my earlier comments, I really see that the larger builders will continue to take market share on an incremental basis because those are the operating entities that are able to deal with the complexities of what used to be a pretty simple business which is very complicated now.

Okay. Thank you.

You're welcome.

Eli Hackel, Goldman Sachs.

Just first question. Larry, you mentioned that the buying a first-time home is expensive these days. Do you think the first-time buyer will benefit if there's -- do you think there's a lack of supply at a more affordable price, or do you think the much bigger issue is jobs and credit availability?

Well, the easy answer is jobs and availability. The real point is, is the compensation level necessary to qualify for a home that's substantially more expensive now than it used to be. So the first-time buyer, maybe the home's 25% higher than it was five years ago. Unfortunately, the income is not nearly adequate to offset the housing costs. And I think that's a permanent problem, not a temporary problem. So the housing availability, that's why I believe apartments are doing so well and homes for rent have done well, is that you have a consumer group that is buying later in life, and not necessarily starting at the first home, the starter home, but they're starting at the first move-up, which might be their first residence where they move from a rental facility to a first move-up home. And that will be, in many parts of the country, the new home market. And sure, there's exceptions in some of this lesser expensive states, but even the places where they are highly competitive in volume, they still have the issue of affordability. And they turned huge volume with low spreads. So Eli, it's just kind of where life is today.

Great. And then just one follow-up. Just on the materials, labor increase and pricing power. Is this something that, as you go into 2015, you're having conversations with your contractors, that you're going to push back a little bit more on some of these increases that happened in 2014, given maybe a lesser amount of pricing power now? Do you think you'll be able to price with inflation in a more medium term? Thank you.

I'm not sure what the term inflation means anymore. You only have inflation where you have demand. We talk about inflation in our economy. And when you go across the economy, it's not very much. But in certain areas, it is. And John made a comment, is labor supply is tight. Of course, it's only tight where there's a lot of demand for it. And where there's not much demand, there's no shortage, or it's competitive.

I think the subs have gotten the easy wins. That means raising prices from the builders over the last year or 18 months. As the value of the product appreciated quickly, the subs and the land sellers were able to adjust almost as quick as the builder was in selling the homes. And now that there is less robust appreciation in value, I believe that the suppliers and subcontractors realize that this is not going to be easy to push through price increases because the builders will now push back appropriately in light of a market that doesn't have the appreciation as much as it previously did.

Great. Thank you very much.

Kenneth Zener, KeyBanc.

I wonder if you could address, since you are pursuing a higher spec strategy, which I think is fine. It obviously is very beneficial to your fixed SG&A. But could you perhaps talk about what processes are in place, or that you're putting in place to avoid excess margin compression? You talked about the spread between spec homes and the backlog, and how you might balance the margin risk if pricing does moderate like it did in the past? Thank you very much.

We always -- homebuilding is always an interactive sport. If you have a good two weeks, you become more optimistic. And like your salespeople, if their sales slow down, everybody needs to be pumped up. Our spec inventory is a push/pull, just like everything. When you need to stimulate it, you add some. When sales are robust, you add some. And then in the middle you wish you had fewer of them. So you go from needing them to kick start something, needing them when it's robust, and you would like to have fewer in those locations that is slower.

However, overall we run a very, very conservative shop. In order to start a new spec, it's approved by the home office one spec at a time. So whatever we do that turns out good or bad, you can only blame the home office. But we pay attention subdivision at a time, not just by a general rule. And sometimes it works and sometimes it doesn't. But having done this for about five decades, we're pretty close.

Thank you.

Alex Barron, Housing Research Center.

I was hoping you could comment on the dividend policy, and I guess how that applies to your growth outlook for the Company?

Our dividend policy is, we hope to report and grant one every quarter like we have for quite a few years. And as you know, that it's a judgment of all the elements to make sure that what you're doing is prudent. But we believe that our dividend is something that we've worked to achieve. We continued it through very, very difficult times. And I think where we are is where we are for the time being. And that's probably all I can speak about on what I'm supposed to say. That which has been declared, has been declared.

Right. I guess I was just more thinking about if you thought that the Company could grow a lot faster. It didn't seem like at rate you could -- you were retaining a lot of equity capital, but anyway. My other question was, given your comments about the New Normal, I'm wondering if you think that the industry as a whole is growing the community count maybe faster than what the industry itself is growing?

First of all, I cannot comment on my competitors' strategy on growing community counts. I can tell you MDC is intent on growing community count in those markets that justify it. We expect to continue to grow, and it's our business strategy to grow as quickly as is prudent. And we do have both the human resources and the financial resources to continue to expand and grow in an appropriate way.

Got it. Thanks.

Buck Horne, Raymond James & Associates.

Quickly, could you quantify, or maybe I missed it, could you help me quantify the average levels of incentives that you're offering now versus what you were offering per home last year?

Yes. We're up about 70 basis points from where we were in the first quarter. And it's about 130 basis points from where we were a year ago. But keep in mind that our incentives, our average selling price, we net that against our gross revenues. And our average selling price is up 10% year over year. So the impact is somewhat de minimus, the increase, that is.

So all the incentives are counted against gross revenue, or is there some that's in cost of sales?

No. We include everything up in the gross revenues.

Okay. And SG&A, as you're growing community count, in the year-end should we expect a step-up in dollars for the homebuilding SG&A going into the back half of the year?

No. I think I mentioned earlier that we're probably looking at the $26 million to $27 million G&A run rate. Our commissions are obviously tied directly to variable on our revenues. And our marketing dollars could increase a little bit as we add more communities, but we have been in the opening new communities, getting them ready to open. So we've added a lot of that overhead already. Now, if you step it up incrementally beyond what we're projecting, then you could spend some additional dollars.

Okay. Last one real quick. If demand were to stay near current levels, absorption per community going into next year. If you look at your spec homes strategy, maybe demand's a little bit better going into next year, but would you expect to carry the same level of spec inventory that you entered this year with, going into 2015?

I think our adjustment will be predicated on market conditions. I can't give you a view of where I'm going to be six months from now, except to say that we think that what we did was reasonable. And we believe that where we are at is reasonable. And you should -- in that range of reasonableness in two different times, which were of course substantially two different numbers, I think that I feel comfortable that that's where we should be.

Okay. Thank you very much.

There are no further questions in queue at this time. I turn the call back over to the presenters.

Thank you everyone for joining the call. We will look forward to seeing you again on our third quarter conference call.

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.