Meritage Homes Corp (MTH) 2011 Q2 法說會逐字稿

Good morning. Welcome to the Meritage Homes second quarter 2011 conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

Please limit your initial question to 1 question and 1 follow-up. Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson. Please go ahead.

Thank you Maureen. Good morning everyone. I would like to welcome you to the Meritage Homes second quarter 2011 earnings call and webcast. Our quarter ended on June 30 and we issued a press release with our results for the quarter before the market opened today.

I f you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com or by selecting the investors link at the top of our home page.

If you turn to slide 2 of our presentation our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions.

Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding these risk factors please see our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2010 annual report and form 10K and our first quarter 10-Q.

We plan to file our 10-Q for the second quarter in just a few days. Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. To comply with SEC rules we have provided a reconciliation of these non-GAAP measures in our earnings press release.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes and Larry Seay, our Executive Vice President and CFO. We expect our call to run about an hour this morning and a replay of the call should be available on our website within an hour or so after we conclude the call. It will remain active for 30 days. I'll now turn it over to Mr. Hilton to review or first quarter results. Steve?

Thank you, Brent. I'd like to welcome everyone to our call today. Considering the number of home builders reporting in the last 2 days, we realize it's been a long week already, so we will be brief since our results are fairly straightforward.

This was the last quarter where year-over-year comparisons are still impacted by the federal home buyer tax credit that expired in the second quarter of 2010. While market conditions are still challenging, the demand we are seeing now is real, not influenced by artificial incentives.

I'll begin with a few highlights on slide 4. We were pleased to achieve a small profit in the second quarter despite lower closing and revenue compared to last year. We reported net income of $0.02 per diluted share for the second quarter of 2011 compared to $0.13 per share in the second quarter of 2010.

Our second quarter results showed improvements over the first quarter in nearly every significant metric that we use to measure our business, sales, closings, backlog revenue, and gross margins all increased. Since we entered the second quarter with approximately 30% fewer orders in the backlog than we had a year ago it follows that our closings were down 29% from last year.

Revenue contracted slightly less than that by 24% due to a 7% increase in the average price on closings compared to the second quarter of 2010. Consistent with previous quarters, this mainly reflects a shift back towards more move-up communities in closer-in locations rather than broad price increases across our communities.

Our home closing gross margin adjusted for a small amount of impairments, increased by approximately 80 basis points over the first quarter of this year, and were flat year-over-year at 18.3%. We reduced our overhead expenses by more than 10% from a year ago though our net earnings reflected negative leverage due to our lower revenue in the quarter.

While we're reducing costs where it makes sense, we're also tactically spending a little more on targeted marketing programs to drive traffic, sales, and revenue. Particularly, those designed to raise awareness and educate buyers about our differentiated energy efficient Meritage Homes green initiative. Those marketing programs should produce long-term benefits.

Our monthly sales were lower in April of 2011 than in 2010 due to the pull forward of demand to meet the April 30, 2010 expiration of the Federal Home Buyer Tax Credit. However our year-over-year sales comparison turned positive in May and June with May 2011 sales increasing 21% over 2010 followed by a 33% year-over-year increase in June.

These favorable comps in the last 2 months of the quarter helped offset t the negative comp in April. So, our total net sales for the quarter were up 1% over the prior year and 8% higher than the first quarter this year. Total order value increased 3% after a 2% increase in our average sales price over last year.

We opened 28 new communities during the second quarter and were successful at selling through several of our older communities sooner than we had expected. Consequently, our active community count at June 30 ended at 145, slightly lower than we had projected.

Our Colorado and Florida operations continue to outperform both our internal expectations and the local markets in general. Our sales in Colorado were up 84% over the second quarter of 2010, partially due to a 21% increase in actively selling communities combined with 52% increase in sales per community, which reached 8.2 for the second quarter compared to our 6.4 company average sales per community.

Florida sales increased by 16% despite having 15% fewer communities open and it lead the company with 10.7 sales per community in the second quarter this year. We have a robust pipeline of new properties in that market and we intend to continue to expand our business in Florida to meet the demand for our extreme energy efficient Meritage green homes.

Our sales pace in Arizona and California, primarily due to continued difficult marketing conditions in the, sorry -- our sales pace slowed in Arizona in California primarily due to continued difficult marketing conditions in the active adult and Tucson markets within Arizona and the Northern California market which has pulled back somewhat from a year ago.

We believe our positive year-over-year total sales comparisons are likely to continue for the remainder of 2011 for 2 reasons. Number 1, sales were pulled forward in the first 4 months of 2010 to take advantage of the home buyer tax credit which caused sales to be lower after April 1, 2010.

And Number 2, our newer communities which accounted for more than 60% of our second quarter sales are selling at a slightly higher pace than our older communities. Coupling that increase in sales pace with our plan to increase community count in the second half of 2011, our sales for the next 2 quarters should compare favorably to last year. I'll now turn it over to Larry Seay, our Chief Financial Officer, for some additional details and come back for a few closing thoughts before Q&A. Larry?

Thanks Steve. I will pick it up on slide 6. Following up on Steve's discussion of sales, our cancellation rate this quarter was lower than our historical average at just 15%, compared to 20% in the second quarter of 2010. We converted 91% of beginning backlog into closings in the second quarter, compared to 89% in the previous year.

Approximately 45% of closings were from sales of spec homes. Our ending backlog at June 30 increased 6% from March 31 and was only 5% under the June 30, 2010 total. Approximately 70% of our sales during the quarter were classified as move-up homes. That' s back to almost where we were historically.

Guided by our strategic market research that identified the best areas of demand, we adjusted our market strategy a couple of years ago to capture more entry level buyers who had grown to represent a disproportionately large share of total home sales.

That was because prices were falling and existing homeowners were having a difficult time selling their homes in order to move up. When our market research later began to identify pockets of strength in the move-up market, we focused on those opportunities and have been very successful there.

Many of our best communities today are in closer-in, higher-priced areas where buyers see a unique opportunity to move up while prices and interest rates are so attractive.

Slide 7, We contracted for about 1200 new lots in 24 communities during the second quarter of 2011, which brought our total lot supply to approximately 15,800 at June 30, our 4.9 year supply based on trailing 12 months closings. That's an increase of almost 1400 lots over the 14,458 lots we controlled at June 30, 2010, which was 3.4 years supply at that time.

We're reinvesting capital with plans to grow our community count which should increase our revenue and better leverage our fixed overhead expenses. Another reason for this absolute increase in lots is that we've been acquiring more undeveloped or partially developed lots.

There's less competition for undeveloped lots and therefore we can find better values than are available on completed lots. Since it takes more time to bring those lots online, our pipeline needs to be a bit longer. However our capital investment is limited during that time as we are carrying those lots at a lower raw cost basis than completed lots.

Our lot supply in terms of trailing 12 month closings is also skewed by a few larger active adult projects which has been a slow market segment for quite a while. Excluding active adult projects from the calculation, we have about 4.2 years of land supply. Still among the lowest in the industry. We owned 83% of our total lots in our control as of June 30.

Slide 8. We ended the second quarter with $377 million in cash, cash equivalents, restricted cash, and securities after entering the quarter with $388 million. We spent approximately $38 million to purchase approximately 870 lots during the second quarter of 2011 and spent an additional $15 million on land development.

We had 474 unsold homes in inventory at June 30, 2011 or 3.3 per active community with roughly half of those under construction. That's down from 518 coming into the quarter and compares to 579 specs at June 30, 2010.

Our net debt to total capital ratio remains below our historic average and well within our comfort range at 31.5% on June 30, 2011, compared to 24.8% on June 30, 2010. I'll now turn it back over to Steve.

Thank you Larry. We were generally pleased with our results this quarter considering that the market is still challenging and we have to work hard for every sale. I commend our people for achieving these results we reported this quarter and continually striving for further improvements.

Our goal is to be profitable in 2011 1 for the second consecutive year coming out of this recession and we believe that we are well positioned to accomplish that goal based on the performance we are achieving in our newer communities and the success we are having in other areas. Tank you for your attention and we'll now open it up for questions. The operator will remind you of the instructions. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Please limit your initial questions to 1 question and 1 follow-up. You may rejoin the queue. At this time, we will pause momentarily to assemble our roster. Michael Rehaut, JP Morgan. Please go ahead.

Thanks, good morning, everyone. First question I was hoping just to get a sense -- Steve, appreciate the color on how the orders progressed throughout the quarter. I was wondering if you can also kind of talk to pricing trends, and if particular, even by region. We've been hearing that there's been, effectively, a decent amount of stability, but I was wondering if you could just give us your take and if any regions kind of stood out, either with a little bit of positive traction or other regions that maybe have continued to slip a little bit?

Well, as you can see from our results that we're having the best success in Denver and Orlando. A lot of that is because of the new land positions we have in those markets and our effective execution of our strategy, albeit the Denver market is probably improving amongst the top tier of all of our markets. Texas is firming up. I would say, California, the last quarter has been more difficult -- in the second quarter. Although I'd say the last few weeks we are seeing pretty good momentum everywhere and I expect to smooth out some of the seasonality over the summer here and stay on an upwardly positive sequential trajectory. I wouldn't say we're able to really significantly raise prices anywhere, other than a few exceptional communities, but I feel like we are able to kind of hold the line on incentives right now in a lot of places.

Michael, if I could add. I think we think we can offset some of the normal seasonality because we do continue to have more new projects coming online that do have better per community sales rates and a little bit stronger margins. So, those 2 things would offset the normal seasonality where you might see a little bit slowing during the summer or the fall. At least that's what we believe is going to happen for our sales.

Great, thanks for that. I guess a second question, you had a nice sequential improvement on the gross margin line, but effectively kind of getting you back into that 18% to 19% range that you've largely been in since the beginning of 2010. And you have, already, a very strong mix in terms of contribution from maybe a little bit better margin on the move-up segment as well as the newer communities. What would you have to see to kind of get above, let's say that, the 19% type of range and do you see further expansion from the current quarter in the back half?

We might see some small expansion. I mean, gradual improvement from here. If you would have asked me a year or 2 ago I would've thought the margins would be better by now, but the market took a step back over the last year and prices contracted. So, we're kind of starting over again on our margin improvement quest. I think, really, from here to have meaningful increases in margins, we're going to need to have a firming up of the economy. We are going to have to really get some tail wind, which, obviously, we don't have right now. I think it's probably unrealistic to expect significant increases without an improvement in the entire macro economy.

Great, appreciate it.

Joshua Pollard, Goldman Sachs. Please go ahead.

Hey, good morning. Steve, your team has done a great job navigating the housing market over the last 5 years, shifting out of California and Nevada during the recession, moving back into those markets selectively and earlier than your peers. Now, you guys are driving a pretty real force in the green home-building area. I'm interested in your thoughts on the rental markets. Specifically, I'd like to understand what types of businesses you would view as complementary and/or leverageable to your current business.

You know we've studied a lot of things, particularly over the last several quarters. Looking at the foreclosure business, buying foreclosure homes, doing rent-to-own, just looking at things in a variety of different areas and we haven't really found anything that really makes sense for us and that we could execute effectively, and within the rules and regulations that are out there today. So, we're really putting our energy behind our green strategy. We think that's the best way to grow our business and to be able to compete with the resale market in today's housing market, and we're really focused on that. And we think that strategy is going to build momentum over the long term and it's going to help differentiate us, not only from our competitors, but certainly from the resale housing market.

And then, your thoughts on getting your deferred tax assets back on the balance sheet. You guys are on pace for a number of years of profitability at this point. I'm wondering what your conversations with your auditors have been like over the last couple of months.

Well, we can't go into too much detail on that. But, they want to see consistent profitability, of course; and, hopefully, later in this year or early next year we can ratchet up that conversation. I don't expect that, in the next quarter or 2, we're going to be able to get that back on. Larry, do you want to add on that?

It's something that we have conversations about that, but we haven't pushed heavily. It's just an accounting entry and most people are taking that into account already in some way or fashion. But, I would think it would be more of a next-year event than a this-year event at this point in time.

Okay, and if I could just sneak one last one in. One thing I've been exploring with, which each of the builders reporting this week and with a number of our contacts is -- California, we're continuing to hear that there is weakness. You guys commented on it just a few moments ago. What do you view as the driving force there and do you feel like it's something that could continue for some time? Not necessarily for yourselves, because I know you guys have some interesting growth strategies, but I'm talking about the California market.

I wish I had the answer to that. I was there all day yesterday and I asked that question about 8 times and no one could really answer it. Why California more so than anywhere else? Because California was performing probably better than other markets last year. Why has it fallen behind this year? I don't really know. And, particularly, the second quarter versus the first quarter.

The only thing I could think of, but I couldn't find any anecdotal evidence of this, is that there's been more foreclosures that have come to the market in the last few months and maybe the banks in California have been a little bit more aggressive about pushing them through the pipeline. But, on the other hand, we couldn't find specific evidence of that, but that would be the only theory that I could come up with. We have seen over the last few weeks a little bit of improvement. But, certainly, the second quarter in California was disappointing for us.

All right, thanks a lot and great job guys.

Okay, thanks.

Thank you.

Dan Oppenheim, Credit Suisse. Please go ahead.

Thanks very much. I'm just wondering if you can talk a little bit more in terms of the energy-efficient communities. I know you've, in the past, been hesitant to talk about it in terms of what costs are going there. If you can just give some perspective in terms of what the absorption is on those relative to the more traditional communities or what you're seeing in terms of margins on those.

Well, without giving really detailed specific numbers, I can tell you that the absorption in those communities is better. And the margins are better. Because, again, those are our new communities. We haven't retrofit all of our older communities to the green standard that we are using in the newer communities; and, as we roll out of those and move into new ones, we will upgrade to our extreme energy-efficient program. So, those margins are better.

It' s hard to put your finger on it and how much of it is because of the green and how much of it is because it's a new community and a better location at a better price point. But, we feel internally that the green strategy does make a difference and does help close the deal when you are sitting at the table with a customer talking about their other alternatives, whether they be from another builder or from a resale. We can show them how much money they can save on their utility bill. That really propels the conversation in the right direction.

Sure, and second question, I'm wondering about just the geographic diversification, if we look over the past couple years having a Texas presence certainly was helpful, and now you look at this quarter, and Florida's helpful. If you think about the balance where Texas is still in a large majority, or certainly overweighted relative to other markets, how do you think you would like to see your balance over time progressing, what does that mean you're doing in terms of land at this point?

Well, we announced last quarter that we are entering the Raleigh market and we have multiple deals under contract there or we're already closed on. We are ready to begin construction in several communities. We actually expect to deliver a few homes there this year. We're very bullish on that market. We think we're going to have a deep pipeline of lots available to us.

I would expect that, later this year or next year, we will probably find another Southeast market. We are looking at a lot of them. I really want to grow our business in that region of the country. There really isn't that many markets in the West that we're interested in that we're not already in, and we're in all 4 major markets in Texas. I think the natural progression for us is the Southeast United States.

Okay, thanks very much.

Josh Levin, Citigroup. Please go ahead.

Good morning. I wanted to ask about when you look at your first-time home buyers versus your move-up home buyers, how is the difference in terms of being able to get a mortgage? Is it t more difficult for one group than another? Or is it sort of equally the same?

The move-up buyers just seem to have a little better credit and are a little more mature and kind of get it a little bit more. We're just finding a lot of the entry-level buyers are what I call chronically credit challenged, and people that maybe should be renters versus owners, and I don't really believe that the credit is so tight, it's more that they just don't have very good credit. That's just what were seeing in the market.

Okay, and on the land you bought in '09, I think you talked about you get 400 to 600 basis points of incremental gross margin on that land.

Right.

The land you're looking at now, the stuff you've been taking down in the last quarter, what kind of incremental gross margin do you think you'll get on that?

I'm going to let Larry kind of come back and follow up on that. But, I would say prices have come down in a lot of places so the margin has narrowed and we've gotten rid of, or sold through, a lot of our weaker, older communities, and what we have left is more of our better ones where the margins are higher. So, the gap has narrowed considerably between the new and the old. Larry, do you want to give any specifics on that?

Sure. That gap has narrowed to around 300 or so basis points and it's because those really, really great buys we got in '09 are selling out. So, that's lowering the average of the new a bit. We're still underwriting the new to our normal underwriting standards of about a 20% gross margin. But then, as Steve said, the old, ultimately worst old stuff sold out, so the 2 are converging and we would hope over time, and as the economy improves, as Steve said earlier, to converge towards that 20% standard. As Steve said, until the economy really gets better overall we don't think we'll get the 20%, but we would like to think that, over time, we would creep back there through a combination of getting rid of the rest of the old communities we have and the economy improving.

Thank you very much.

David Goldberg, UBS. Please go ahead.

Thanks, good morning guys. The first question, I wanted to talk a little about the sales pace and the fact that it feels like you guys are achieving a higher sales pace than most of the competition. What I'm trying to get an idea of -- if you kind of thought about a higher sales pace being driven by your locations, your prices, or your products, how would you rank order that terms of importance of that out performance?

I think it's a lot of the above. It's hard to differentiate. But, certainly, these newer locations that we've opened that really found the sweet spot of the market. I mean we've got a dozen or so communities that we've opened over the last 6 months that have had tremendous absorptions -- in Orlando, in Dallas, and in Denver, even in Phoenix, and that's really helped drive the overall sales pace.

On the other hand, across the board, I believe that our green initiative has really helped us turn some tougher communities or more challenging situations into positives. It's helping us make sales where others are struggling. I think it's not just one of those factors, it's all of them, and it's hard to really tell you specifically which one's having the most impact. But, if I had to choose, I'd say the locations are the biggest driver.

Got it. My second question, I want to talk a little bit about the geographic expansion efforts. You just mentioned in the Q&A that, looking at other markets, or another market in the Southeast, I understand how you guys think about demand. I think I do. And the potential demand in these markets and them being better areas in terms of where buyers might be. I want to talk a little bit more about supply and how you think about not just the supply that's on the market today in these areas, but also the supply that's coming online. If you look at the Carolinas, you're not the only builder that is trying to expand there or trying to go there in the first place, right?

Right.

It feels like it's better market. How do you get confident that when you're looking at these markets, even though there might be demand, you don't just kind of all the builders end up flocking in and putting money in them same place and end up cannibalizing each other and really causing more price decline and pressure on margins in areas that have once been better markets?

Well, we look at a lot of very detailed information at the household level in every market and we're very much focused on job growth and the demographics and on supply. Supply is an important issue. We're looking at the quantity of houses for sale, the resale market, we're looking at new home competitors in the area, we're looking at lots that are in the proximity of where we're buying lots. I mean, is brand X going to be bringing on a bunch of lots at a lower basis down the street from us that's going to impact our ability to drive prices?

You know, yes, there's a lot of builders that are entering Raleigh and everybody wants to get bigger there, but it's probably one of the few markets in the country that has the potential to double its permit activity in the next year or 2. Home building is a very local, local, local, local endeavor, and it's really what's happening on your block or on your street more so than in the entire market. So, every community is a separate battlefield and we have to distill things to the micro level. That's what were doing in that market and in every other market that we're in. I just don't spend too much time worrying about the macro headlines of the market and really look at every store on a standalone basis.

Just to make sure I understand, is it fair to say that in the markets you're expanding into, you're confident that the demand is strong enough that even if there is more supply, there's plenty of demand to effectively absorb that supply and not --

Yes, because across the board demand is at historically low levels right now. The supply is going to shrink dramatically once demand comes back to more normal levels in a lot of places. I don't get that hung up on the supply numbers in a lot of places because demand is just so low. That's where were going to get margin growth from.

Got it, thank you.

Okay, thank you.

Nishu Sood, Deutsche Bank. Please go ahead.

This is Rob Hansen on for Nishu, actually. I wanted to see if you could talk a little bit more about your decision to buy undeveloped land. Things like where you're buying it, if these are raw parcels of land, who you're buying them from, and how much is this going to be a part of your strategy going forward?

Well it's a big part of our strategy going forward because the low hanging fruit on finished lots has been picked. We can't find a lot of finished lots in a lot of places where we can get really great buys. The real opportunity we see to expand margins is by buying raw land at pretty attractive prices in a lot of markets. We are buying this land from developers, from families and farmers that have owned it for a long time, we're buying it from banks, we're buying it from a variety of people and we are doing it in almost all of our markets. I really see that being probably about half of our land or lot acquisitions going forward.

Okay. And then, in terms of your sense on profitability, do you think you could say that you're going to be more profitable in 2011 than in 2010? Assuming that you are profitable both quarters and that we don't have another serious lag down in the macro environment.

No, we're not saying that. We're not saying that we're going to be more profitable, we're just saying that we are feeling that we can be profitable, that we will be profitable, but we're not saying we're going to be more profitable.

All right, thank you.

Alan Ratner, Zelman Associates. Please go ahead.

Good morning, and nice quarter. Steve, I was hoping you might be able to comment in just kind of what some of the downside risks are to, whether it's profitability for the year or order growth? It seems like every day now the macro headlines get more negative, and there's obviously a lot of concerns over the debt ceiling and you being a move-up builder, perhaps you might be, or there's a thought you might be, more impacted than some other builders once the FHA and GSE loan limits come down in October. So, I'd be curious, A, what are you hearing from your guys in the field over the past week or 2 whether that's begun to creep into the home buyer psyche yet? And, B, whether you've done any analysis on what percentage of your closings or communities are going to be impacted by the lower loan limits, assuming they do get lowered?

Well, come back and ask me that question in a week and I'll give you better answers. Let's see what happens in the next few days in Washington. I do think the macro economic issues are the biggest worry for us, the biggest barrier to improvement and I hope they get their act together in Washington quickly, because I think these negative headlines and this constant stuff that we're seeing in the news is not helping consumer confidence in any way, shape, or form. So, I worry a lot about that. I don't worry as much about the loan limits coming down, because we've planned accordingly for that; and, although I think we will have a minor impact in some communities, I think, for the most part, it's going to be a small event for us. Although we've moved into the move-up market, we've consciously designed our business to stay within those pre-2008 limits and I am not too worried about it.

Okay, thanks a lot.

Stephen East, Ticonderoga Securities. Please go ahead.

Thank you. Good morning, guys. Steve, if you look at -- first looking at the margins, if you look at 2 different issues, your spec strategy, 45% or so of sales, what type of delta do you have on the gross margin and what do you think your spec strategy is going to be moving forward? And then, on your overhead, you've had some really nice take-outs over the last year. Is that basically done and now it's a volume story, or do you think you've got significant room on that side of the margin equation too?

Number one, I don't think we have a lot of overhead left to cut. We're always looking to try to be more efficient, but anything that we do going forward is going to be pretty minimal. I don't expect it to have a big impact. Volume is going to be the way that we are going to bring our overhead as a percent of our revenues down. Just by leveraging that overhead.

As far as our spec strategy, I think it's going to be more of the same. I think you are going to see about 50% of our sales come from specs for the foreseeable future. That seems to be a strategy that is working and that we're comfortable with. And, I'm kind of hesitant to say what the delta is between building and spec homes, because it's such a big part of what we're doing today. But, certainly, there is a little bit of a difference. But, we are working all the time to try to close that gap and there really isn't a legitimate reason why you should pay less for a home that's ready to go than you would for one that we would be building for you. It's just a perception that's in the consumer's mind that they can drive a better deal on a spec home than they can a build-to-suit, so we have to work to overcome that.

Okay, that's helpful. And then, on your land spend in your cash balance, that was some good detail around your land strategy, et cetera. The $377 million, are you comfortable with that level? Are you willing to take it lower? Do you want it higher? And what does that imply for your land spend over, say, the next 18 months or so?

We are willing to take it a little bit lower. But, we have pretty high underwriting standards and we are not going to sacrifice our margins just to put money out the door. To the extent that we can find good land deals in good locations that meet our standards, we will spend some of that. Not all of it, of course, but we will bring it down somewhat. I don't want to give a specific number, but our goal is to grow community count and to continue to build our business. In order to do that we're going to have to spend a little bit of that money.

Okay, thank you.

Michael Smith, JMP Securities. Please go ahead.

Good morning, guys. I was wondering if you could just give some color on what you're finding in the land market. We've been hearing that the deals are maybe a little bit harder to come by. Banks and developers are being a little bit more -- are holding out a bit more, and I'm wondering if that's been your experience, if you could give some regional color on that, if that's behind any of your decisions to put some more dollars into raw land, that kind of thing.

Certainly a lot of low hanging fruit has been picked. I don't know a lot of banks that are holding a lot of residential assets that are interesting to public home builders. So, I think the game is moving to more raw lots that need to be developed. That's not to say that we can't still find deals out there, because we are still finding them, but it's getting more challenging, particularly because prices of houses haven't increased. I think if house prices start to move up more land deals will make sense, but the people that have needed to sell lots or land because of external pressures have been selling and those landholders that are more well capitalized and have more staying power are holding out for higher prices. We still think there's enough out there for us to grow our business, but it's not the buffet that we would like to see.

I'd also add that, on the development side, when we're buying raw land we are making sure that the property is entitled so we're not taking development or entitlement risks; and we're also buying properties that have basically just on-site development, so we're not doing a lot of off-site or infrastructure where there's more development overrun risk. So were managing that risk appropriately.

Do you guys think, just a follow-up, is it that the banks for the most part have sort of run through what they're going to run through as far as bringing it to market, or do you think it's more that there's less urgency to do so in what's not a great land market right now from their standpoint, and so they're holding stuff. So there could be, if you get some price appreciation in housing and then in land over the next 2 or 3 years, there could be some more stuff that comes into the market, or do you think for the most part it's actually been run through?

I think it's been run through. For example, I know Bank of America was banking like 1500 builders across the country, and from what they are telling me, they don't have that many single-family land assets around the country to sell. They've moved through it. I think other major banks, the story is the same. I think there is probably some smaller banks out there that have things here and there that we are continuing to pursue and negotiate on, but I just don't think banks have a lot of good quality residential lots or land left. They might have a lot of stuff out in the hinterlands, but we're just not buyers of that today. I'm not paying a lot of attention to what they have 40 miles out of town.

Okay, great. Thanks guys, I appreciate it.

We do have a few questions remaining in the queue. Would you like to take a few more or conclude the Q&A session?

I think we'll take 2 more, Operator.

2 more, okay. Michael Kim, CRT Capital Group. Please go ahead, sir.

Good morning, thanks for taking my question. Thinking about your entry into the Raleigh-Durham market, could you describe the average size of the communities that you're looking at? And, I guess, also talk about your direct construction costs in this region, and are you finding this to be any different from your core markets?

I think we're looking at deals between 50 and 100 lots. Probably 60 or 70 lots is our typical deal that we are pursuing there. We have purchased several already. I don't think the construction costs there are radically different than other markets we're in, either in Texas or in Florida. Architectural styles, a slight bit different; but, overall, I think the costs are pretty much what we expected them to be.

Understood. Just real quickly on your community count. Do you still expect to end the year with about 160 active selling communities?

Yes, right around there.

Right around there?

Right around there, give or take a little bit either direction, but that's kind of our goal where we'd like to be.

All right, great. I appreciate that. Nice quarter.

Okay, thank you.

Jay McCanless, Guggenheim. Please go ahead.

Morning, everyone. First question, the legacy communities that you sold through faster this quarter than you expected, where were those communities located?

I think they were everywhere. Probably more in Texas than other markets, but here, there, and everywhere. Not in any one particular place. Just all of our markets.

Okay. To follow onto that, with the improvement that you're seeing in the legacy sales pace, is your decision-making software now suggesting that you do more current market expansion and leverage your SG&A a little bit more, or is it pointing you more towards new market expansion?

Well, certainly we've only announced entry into 1 new market. We have got to grow in the markets that we're in. I think that's our biggest opportunity.

We have some dominant positions in a few markets like Phoenix, and Dallas, and Houston. But we have a lot of opportunity in other places. Particularly like these ones that are doing really well, like Denver and Orlando, we're going to grow our market share in those markets really significantly. We've got a big opportunity in California, we're relatively small there. Certainly we expect to be a force to be reckoned with in Raleigh. And then beyond that we need to find some additional markets in the Southeast as I've said.

Okay, great. Thank you.

I think that wraps it up. We thank you very much for your attention and participation in our call this morning. We appreciate your support and we'll speak with you again next quarter. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.