Meritage Homes Corp (MTH) 2015 Q2 法說會逐字稿

Hello. Welcome to the Meritage Homes second-quarter 2015 earnings conference call.

(Operator Instructions)

Now I'd like to turn the conference call over to Brent Anderson. Mr. Anderson, please go ahead.

Thank you, Keith. Good morning, everyone. Welcome to our analyst call to discuss our second-quarter results, which we released in a press release before the market opened today. If you need a copy of the release or the slides that accompany this webcast, you can find them on our website at investors.meritagehomes.com, or by selecting the investor relations link at the bottom left of our home page.

Refer to slide 2 of our presentation. I'll go through the customary cautionary language. 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 those projections or opinions. Our actual results may be materially different than those expectations due to various risk factors, which were listed and explained in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2014 annual report on form 10-K and subsequent reports on form 10-Q. Today's presentation also includes certain non-GAAP financial measures as defined by the SEC, and we've provided a reconciliation of those non-GAAP measures to the closest GAAP figures within our earnings press release.

Referring to slide 3, with me to discuss our results are Steve Hilton, Chairman and CEO; Philippe Lord, our Chief Operating Officer; and Larry Seay, Chief Financial Officer. We expect the call to run about an hour and a replay will be available on the website approximately one hour after we conclude. It will remain active for 30 days.

I'll now turn over the call to Mr. Hilton to review our second-quarter results. Steve?

Thank you, Brent. I would like to welcome everyone to our call this morning and thank you for your interest in Meritage Homes.

Demand remained strong through the second half of the spring selling season and sales continued at a healthy pace through June. Market conditions are favorable across our entire footprint. Job growth is driving increased [outflow] formation, interest rates remain low, and affordability is high. Consumer confidence has improved. The supply of homes available for sale is low, and home values are appreciating. We have a positive outlook for the future based on continued growth in the economy, modest increases in interest rates, and the return of the first-time home buyer to the market.

Turning to slide 4, our second quarter 2015 highlights included strong top-line growth, with an 18% increase in home closing revenue over the second quarter of 2014, including a 14% increase in home closings and a 3% increase in average price. Even stronger [order] growth included 20 [bone]% increase in units and a 25% increase in total order value. And ending backlog value that was 36% higher than it was a year ago. Net earnings for the quarter were 17% lower than last year's second quarter, due to anticipated declines in our gross margin, which Larry will review in more detail.

We've grown our Company-wide community count by 60% since the first quarter of 2012, primarily due to our eastern expansion. While our legacy markets are performing well, we've more than doubled our active selling communities in the East region, resulting in a 37% increase in our total community count from June 30, 2014 to June 30 of this year. We're getting our operations dialed in within our new markets in the East, and have made some adjustments to improve their performance. I commend Philippe Lord, our new Chief Operating Officer, for his leadership in making those changes, which should enhance our future profitability. We remain committed to all of our markets and firmly believe the strategic investments we've made over the last few years will pay dividends in the future.

I would like to turn it over to Philippe to review our order trends by market. Philippe?

Thank you, Steve, and good morning.

Slide 5. Our consolidated orders for the second quarter of 2015 increased by 21% over 2014, primarily due to a 29% increase in our average active selling communities during the quarter and a 4% increase in our average sales price. Driven by strong sales growth throughout the spring selling season, our ending backlog value at June 30 was 36% higher than it was at the end of the second quarter last year. While average sales prices were up over the year, we began to see them plateau this quarter. After reaching an all-time high of $396,000 last quarter, our ASP on second-quarter orders was $391,000. This was due to shifts in the mix of orders between geographies and at community-level price points rather than any discounting of our prices.

Order trends were positive in all our markets except Texas and Tennessee, which were down from last year due to fewer communities. In the West, our sales continue to improve in Phoenix this quarter. After demand turned the corner of the first quarter of this year, Arizona orders were up 34% in the second quarter 2015 compared to 2014. Buyer confidence has improved the spring selling season, and is a welcome change after the weak demand we experienced last year.

California continues to remain our strongest market in the West, as measured by sales pace, with an 11.6 average sales per community in the second quarter of 2015, well above our Company average of 8.5 orders per community in the second quarter this year. California's orders grew 16% over the second quarter of 2014. As I noted last quarter, most of the improvement has been driven by our communities in Northern California, where we are very well positioned close to the Bay Area job quarters. We have some great new communities opening up in Southern California as well, so expect improving trends there also.

Colorado demand remained strong, with 11.3 average sales per community and a 29% increase in orders over last year's second quarter. Texas orders were down 12% due to 13% fewer actively selling communities in the second quarter of 2015 than we had a year ago. However, our average sales pace per community in Texas increased to 10 this quarter from 9.8 in the prior year, and our average sales price was up 5%, so our total order value in Texas for the second quarter was down just 7% from 2014. We expect to increase our Texas community count in the second half of this year. Houston was healthy throughout the second quarter and our second-quarter sales per average community count there was as high as last year. We have seen increased confidence in activity among home buyers there, and our other Texas markets are also doing well.

After years of drought in Colorado and Texas, the rains came this spring and didn't stop, with April and May rainfalls being especially heavy. Although the rainy days had some impact on our sales, our communities were not directly impacted by flooding. However, the consistent rain pattern kept the ground saturated, resulting in development delays and reducing our ability to start homes during the quarter. We're working hard to catch up now as we're in the summer months, but contractors are in high demand and short supply, as every builder and developer is trying to do the same. We expect it will take some time to catch up, pushing out our production schedule the next couple of quarters. Our revised forecast estimate 250 to 300 fewer closings in the third quarter due to delays. We expect that we can make up 50 to 100 of those in the fourth quarter this year and the remainder next year.

In the East, our East region's orders increased 78% in the second quarter compared to last year. The strongest growth was in North Carolina, where orders increased 77% year over year due to a 55% increase in their average community count, and a 14% increase in average sales per community compared to 2014. Florida grew orders by 21% and order volumes by 36%, with APS up 13% over last year. Tennessee's orders decreased slightly due to lower community count, so Tennessee's average sales per community led the Company at 13.8 for the quarter; and a 23% increase in Tennessee's orders ASP resulted in a 21% increase in total order value over last year's second quarter.

We have grown orders year over year in 17 of the last 19 quarters, and we're pleased with the growth we achieved again this quarter, though we don't take it for granted. In addition to keeping our eye on the ball for sales, we will be intensely focused on getting homes in backlog started and completed as soon as we are able.

I'll now turn it over to Larry for some additional details on our results.

Thanks, Philippe.

Turning to slide 6, we produced net earnings for diluted share of $0.70 for the second quarter 2015, compared to $0.85 in the second quarter of 2014, primarily reflecting lower gross margins on higher home closing revenue, partially offset by the benefit of the lower tax rate this year. Our second-quarter 2015 home closing gross margin was 19.3%, an increase of 80 basis points from our first quarter, though down from 21.9% in the second quarter of 2014. As we've discussed before, margins in 2013 and 2014 were inflated by a rapid appreciation in home prices and low-cost land. The year-over-year declines since then reflect more modest home price appreciation and higher-cost land.

Additionally, we have the temporary negative impact due to purchase accounting adjustments from our acquisitions. We believe our home-closing gross margins are normalizing back to our normal 20% underwriting target and will approximate that for the full year of 2015. Purchase accounting adjustments from our acquisition of Legendary Communities last August reduced our second-quarter consolidated home closing gross margin by 28 basis points. That's much lower than it was in the previous two quarters and should be less of a drag on future quarters' margins. Additionally, we took a $1.6 million impairment on one community in Tucson during the quarter.

As we explained last quarter, our margins in the east region also reflect the fact that the newer divisions there are still ramping up and growing their community count rapidly from a low base. That rapid growth is good, but upfront costs reduce our margins in those divisions until they reach closing volumes that cover overhead costs and begin to provide positive leverage for the region in our consolidated margins. We expect margins in the East region to improve over time as those newer divisions get fully up to speed, helping to drive our overall gross margins higher. Our outlook for the full-year consolidated gross margins remains largely unchanged except for the delays in closings in Texas and Colorado, which will dampen our expectations somewhat, because our margins in Texas are higher than our East region margins and will make up a smaller percentage of our total closings than had we originally projected.

The increase in the percentage of commissions and other sales costs to 7.6% of home closing revenue, compared to 7.2% a year ago, was due to higher co-broking commissions and national marketing initiatives. That increase was almost fully offset by a 30-basis-point improvement in G&A leverage from 4.9% in the second quarter of 2014 compared to 4.6% in this year's second quarter. Over the next several quarters, we expect to gain additional overhead leverage due to top-line home closing revenue growth.

Our tax rate for the second quarter this year was 30%, which was primarily due to an increase in our estimated federal energy tax credits from homes delivered in prior years, along with a reduction in tax rates in Texas. We expect our consolidated tax rate to be about 32% for the full year, assuming the energy tax credit provisions are renewed for this year.

Moving to slide 7, we ended the second quarter of 2015 with $217 million in cash and cash equivalents, mainly due to the issuance of $200 million of senior notes in the second quarter; and we had nothing drawn on our $500 million revolving facility as of June 30, 2015. Our net debt-to-capital ratio was 44.1% at June 30, 2015, compared to 42.9% a year ago, as we have built up inventory during the first half of the year and we expect our net leverage to decrease as we generate additional cash from closings in the back half of the year.

We spent a total of approximately $159 million on land and land development, including option deposits during the second quarter of 2015, compared to $146 million in the last year's second quarter. Our total real estate inventory increased to $2 billion at June 30, 2015, compared to $1.8 billion at December 30, 2014. While our inventory of homes under construction has grown, we have successfully reduced our inventory of spec homes this year, bringing that inventory balance down by $51 million year to date.

Moving to slide 8, we ended the quarter with approximately 29,100 lots, down slightly from the end of the first quarter. 65% were owned and 35% controlled under option contracts. We currently control approximately 95% of the total lots required to meet our 2016 plan for closings. The distribution of lots by market is relatively consistent with our business volumes and outlook for growth. While land prices have risen in all of our markets, we're sticking closely to our underwriting discipline and rely heavily on our strategic operations group to work with the divisions in seeking and evaluating new community positions, product, and prices.

Now I'll provide a few customary details. Our quarterly cancellation rate declined to 11% in the second quarter of 2015 compared to 13% a year ago, an indication of improved buyer confidence. 40% of our second-quarter 2015 closings were from spec inventory, compared to about one-third of our second-quarter 2014 closings from specs. And we had approximately 1,140 specs June 30, 2015, down from our recent peak of 1,311 specs at the end of the third quarter last year. Approximately 35% of our spec total spec this quarter were completed.

With that, I'll turn it back over to Steve for some summary and guidance before we begin Q&A.

Thank you, Larry.

In summary, we are pleased with our operating results for the second quarter of 2015. We achieved strong growth in sales, closings, and backlog, with greater increases in closing revenue, order value, and backlog value, due to more actively selling communities and higher average sales prices. Our strategic expansion and positioning in the right markets is driving top-line growth and providing a solid basis for earnings growth in the coming years. We expect to achieve continued improvement in our margins as newer divisions contribute positive leverage on a consolidated basis.

Philippe discussed the impact of the abnormally heavy rainfall across Texas and Colorado during most of the second quarter. As he said, we estimate that approximately 250 to 300 closings that we had projected for the third quarter this year will be pushed out, which could impact our earnings for the quarter by $0.25 to $0.30 per share. While we expect to make up some of those in the fourth quarter, capacity constraints will push most of them into next year. Because of that, we are reducing our projected home-closing revenue guidance to $2.65 billion to $2.75 billion for the year, translating to 24% to 28% growth over 2014 compared to our previous guidance of 25% to 30% revenue growth.

Considering that Texas has higher margins, the incremental contribution to earnings from those delayed closings is greater than the unit decline would otherwise indicate. We are therefore reducing our earnings estimates for the year to approximately $3.60 to $3.90 per diluted share for 2015, compared to our guidance last quarter of $3.75 to $4. We still expect to achieve significant increases over last year in our fourth-quarter revenue and earnings as a result of our strong order growth in the first half of 2015.

Thank you for your support and your time today. We'll now open it up for questions and the operator will remind you of the instructions. Operator?

Thank you.

(Operator Instructions)

The first question comes from Stephen Kim with Barclays.

Thanks very much. Good quarter.

Thank you.

My first question relates to your margin story. What we're hearing here is the east region, which you've ramped up, obviously is going to bear the burden of start up always having a little bit lower profitability initially. What I'm really interested in is, what do you think the margins in the east generally will look like relative to your corporate average today once you have ramped them up and once you are firing on all cylinders there? And maybe if you could put it into some context relative to the margins in Texas, which are higher than the Company average.

I look at things like that in the west, margins are generally a little higher than 20%. Inflation, appreciation is stronger because you have less competition, certainly, in certain markets in the West, like California. Texas is generally right around 20% and then I think some of the markets in the East will be a little bit under 20%. But on a whole, I think our entire margins will average around 20%. It might be a point or so less in the East.

Got it. Okay, great. Second question relates to your land spend, which we've been observing has been trending down a little bit. I think you indicated you spent $159 million, if I heard you correctly this quarter, Larry. Just wanted -- a couple of things. One, I wanted to understand how much of that do you think was development work versus acquisition and whether you think that, that kind of a run rate relative to revenues is what we can expect from you going forward, or if there's -- there would be any reason why we might see maybe a deceleration or an acceleration in your land spend going forward for the remainder of the year?

Well, first of all, last quarter we spent about $154 million, so we're just a little bit higher this year. I don't see us necessarily slowing down. On the other hand we will continue to buy land and continue to grow our land positions. I don't think you should expect to see that decrease. If anything, as we get bigger, you'll see that gradually increase.

As a percentage of -- just to clarify, Larry, I'm talking as a percentage of revenues, because obviously quarter to quarter there will be variations and as you said, you're going to grow. I'm talking relative to the size of our business or your revenues, you've been accelerating three straight quarters. It's not a bad thing. It's pretty normal, I would say right now, but just as a percentage of revenues, what do you think your land spend will do?

Again, I think we will keep up our land spend and try to maintain our approximately five-year of lot supply out in front of us.

Stephen, that's not a metric that we're tracking, so I don't think Larry or I could tell you off the top of our head what our land spend is as percentage of revenue. I would tell you that we won't spend any more on land this year than we did last year, even though we have a bigger base and stronger community count. There's a probability we'll spend less on land this year than we did last year. So we're trying to generate a little bit more free cash flow and bring our debt-to-cap back down closer to 40% and the land market is pretty tight, so we're be pretty choosey.

Great. That's exactly what I needed. Thanks very much.

Okay.

Thank you. And the next question comes from Nishu Sood with Deutsche Bank.

Thanks. First question I wanted to ask about the momentum of demand through the quarter. Steve, you mentioned that across all regions, and I really appreciated the color that Philippe gave, and through the months and into June. The year-over-year order pace slowing from 30 to 21, how should we put that in context?

Was some of that due to the weather effects maybe on demand in Texas or is it that the East Coast absorptions, East region absorptions being a little bit less than the West and Central? How should we think about that? It sounded like the momentum maintained in the second quarter relative to the first quarter, but I'm just trying to put that drop in the year-over-year gain in context.

I can give you the monthly numbers. We were up 12% in April, 36% in May, but only 15% in June. May was our best month. We sold 712 homes in May. We did dip down in April from what we sold in March. And I think that had -- it was primarily due to the weather. We had tremendous amount of rain in Colorado and in Texas. And I think we had some holidays that fell on some weekends in there.

It was a little up and down in the quarter but, overall it was a good quarter. I think one of the things that people are missing, and Larry might speak about it, is that our absorption rate in our new divisions in the south, particularly in Atlanta and in Greenville and the legendary communities is lower -- by design, is lower than it is in most of our other markets. So although we grew up community count faster than sales, some of that was expected. It wasn't as much a surprise to us as it was maybe to others.

Got it. And then thinking about the weather effect, the deferral of 200 closings from 2015 into 2016. So the decrease in the guidance is basically just a direct reflection of that, if you kind of run the numbers on the 200 closings. Is that the right way to think about it?

Then on the gross margin, Larry, you had mentioned that you still expect to achieve the gross margins even though the closings that are being deferred are higher than fleet averaged. Does that mean gross margins, pricing trends have been coming up a little bit better than expected? I'm sorry, that was two questions.

It's okay. No, we still think it's something that we can hit. Probably a little bit tougher putt because we're missing those 200 closings coming a lot from Texas. But it's still something we are expecting to do. The other thing you've got to factor in is we have this very small impairment permit from Tucson which is a little bit of a -- decreases the margins a little bit, too. So those two factors are going to make it a little more difficult to hit the 20% exactly, but I think we can get there.

Got it. And the drop in the guidance is just directly those 200 closings? There isn't any movement in the--

Exactly.

Okay. Great. Thanks for the color.

Thank you. And the next question comes from Ivy Zelman with Zelman & Associates.

Good morning.

It's actually Alan on for Ivy. Thank you very much for all the detail. Steve and Philippe, adding on the comments about the south and legendary, the absorption rate in Georgia right now is running just over one a month. You mentioned you're doing some things strategically to improve, presumably, about the sales pace on the margin but then, Steve, you made that comment it's lower absorption by design. I was hoping you could just kind of expand a little bit upon what you're doing in Atlanta to improve those operations, and how we should think about that business longer term from a sales pace perspective.

Maybe lower by design wasn't the right terminology. Lower by expectation.

When we bought the business there, we looked at their absorptions and they were significantly lower than ours, and they have a lot smaller communities that they coupled together with 20, 30, 40 lots versus 100-lot communities and they may share a model between communities. Their business strategy was a little bit different than ours.

It's going to take us a little bit of time to set it up the Meritage way and combing out some of the really low absorption communities that don't really make great economic sense and focusing our land acquisitions on more higher volume, stronger absorbing communities. So that and some things that we're doing on the sales front, together with our land strategy over time should increase their absorptions to a higher number, but I still think traditionally that part of the country, the absorptions are going to be less than we're going to see like in the West and even in Texas.

Steve, if I could add, too, almost all of their divisions were controlled through very soft options, very low take-down rates. As Steve said, they didn't necessarily have full model presentation so it was low overhead, too. That allowed them to operate at a lower absorption pace and still make good money, because it was of this low risk strategy. As we continue to grow the business there, we will take better positions and better parts of the market where we have to invest a little bit more. Maybe we can't get the soft options strategy. And that will gradually transition from a slower absorption kind of structure to a higher absorption structure.

Got it. That's helpful. And second, on the EPS guidance, I may have missed it, but I was hoping you could give us a little bit of color on how you expect that trajectory to play out between 3Q and 4Q. You mentioned the 250 to 300 closings that gets slipped into 4Q, but I don't believe you had previously had given any base there. So just to frame expectations, I think that would be helpful.

Steve, you want me to cover that? I think in Steve's comments, the last parts of his comments, he mentioned that we are expecting our per-share impact from 250 to 300 closings getting pushed out in the third quarter to impact EPS by about $0.25 or $0.30. We haven't given specific guidance for the third quarter and aren't doing so, but I think people can take their own models and adjust their own models downward for something in that range.

Great. That's helpful. If I could sneak in one more, just on Florida. The sales pace there is healthy but it was down quite a bit year over year. I was hoping you could give a little bit of color on what you're seeing from a sales trend perspective in Florida.

Nothing really specific or unique. Our struggles have been more in Tampa. We just haven't gotten the momentum that we are looking for yet in Tampa, but we're working hard on it. But Orlando held up very well and we're quite pleased with our sales there.

Great. Thanks and good luck.

Thank you. And the next question comes from Mike Rehaut with JPMorgan.

Thanks, good morning, everyone. Also wanted to hit on sales pace a little bit and hoping you could give a little color around California. The sales pace there was down about 10% year over year. Still, like you said, one of the best -- on an absolute basis, one of the best numbers in the Company, but if you look at first quarter, you were up a little over 10% on its sales pace. This quarter you're down about 10%.

So just curious if there are any drivers to that, if it's timing with communities. You mentioned that you're set to open up some new communities in Southern California. And also if you could go in a little more detail of the Texas markets. I believe you said that Houston was still solid, but if you can give any additional granularity there in terms of different price points, that would be helpful, as well.

I think in California we slowed down the pace a little bit in a few Northern California communities to try to capture more price lift. And then maybe a few communities in Southern California haven't come on as fast as we had hoped for. So I don't read too much into that 10% decline in California in general.

In Texas, we're really pleased with the performance there. Other than the rain that we experienced in April and May that hurt some sales and certainly hit us on the start side, which resulted in closing delays, the market was very healthy and very strong.

And we still have not seen hardly any impact from the lower oil prices in Houston. Actually, our sales per community in Houston were better this year than they were last year. Our Business in San Antonio is as strong as it's ever been. And the Dallas market's also very strong. And we had a lot of communities coming online in the coming quarters in Austin, so we're really bullish about our future in that market. We're very satisfied and very pleased with the direction our Texas business is going right now.

Great. Thank you. Thanks, Steve. That's helpful.

The other question, just going back to the gross margins for a moment. Obviously glad to see you able to reiterate the full-year guidance. Obviously, a lot of people are starting to think about 2016 at this point. And with the back half -- with the full-year guidance of 20%, obviously this points to a back half above 20%, how should -- Larry, I was hoping maybe get a little bit of directional guidance, in terms of how to think 2016. Is that back-half 20%-plus number something that's reasonable, particularly, as you mentioned the east region, perhaps gross margins in that region starting to improve, or is a plus or minus 20% the right way to think about the business over the next couple of years?

Yes. As we said we underwrite to 20%. Obviously, though, you do have the seasonality in the business where you just close fewer units the first quarter or two and the overhead leverage in construction overhead isn't as well leveraged. I always guide people to have a little bit lower gross margin expectation the first quarter or two and see it ramp up through the year.

It's possible, too, that with improvements we'll see in the East business, you could have a little bit of overall elevated margin from this year. But again, it's not something we guide people to precisely because it's not what we underwrite to. We are hopeful that that will happen and will buoy margins in 2016 a small amount.

Great. Thanks. Then one last one.

Technically, on the income statement tax rate, how should we be thinking about this for the back half and for next year, if possible?

Sure.

Well, it depends on Congress renewing the green -- federal green tax credits each year. They haven't done that in 2015. You never know when Congress is going to act, but our sources tell us that, that's going to happen. You never know with Congress, but that's what we are being told.

From a modeling standpoint, just to be conservative, I would factor that hit or the improvement in tax rate all in the fourth quarter, because Congress usually defers things until the very end. But as we've said it, that full-year impact for all of the green credits of the houses we sold in 2015 is factored into our guidance. It's about a 2% improvement in margins. Without that, it would be around 34%. With that it's around 32% overall tax rate.

Great. Thanks.

Thank you. And the next question comes from Stephen East with Evercore ISI.

Thank you. Good morning. Steve, sort of combined orders in gross margin here, but as you think about your pace versus price on orders, where incentives are in your spec strategy, which was pretty heavy in the first quarter versus what you typically do, as we look out, call it over the next year or so, how do you envision that pace versus price and where the spec strategy fits in? Is the 40% something that you'll start to lean on a bit more, or will you work that down as you move through time?

I think we'd rather have our specs be more 30% to 35% area. That's where we feel a little more comfortable. We've been pushing that down a little bit. There's been a little bit of margin dilution between the specs and the build-to-order homes. We prefer to sell more homes on a build-to-order basis than by building specs.

And as we always said before, we aspire to sell at least three homes a month in every one of our communities. Once we get to that level, we can start pushing price more. It's a store-by-store initiative. It's not a one size one-size-fits-all. In some parts of the country, we're pushing price pretty hard right now and others we're not.

Okay.

Hopefully that answers your question to some degree.

Yes, it does. So you're pretty close. You're right on that borderline for the overall Company.

If you get a little bit better volume, we know what to expect from there. If you look at your costs, both your construction costs and your land costs, what are they doing on a year-over-year basis that's flowing through right now?

They're rising. I don't have the percentages. Larry, would you help with that a little bit?

Yes, we have said the last couple of calls that we aren't seeing as much cost pressure this year as we were in previous years and that more of the cost pressures come from land. I don't want to give you exact percentage as it does vary from market to market. But at this point in time, we're seeing demand be strong enough so it's offsetting those cost pressures and we're able to maintain our underwriting singers. As we said before we don't underwrite home appreciation into our model, but we don't underwrite cost inflation either.

And of course as we've said, too, the land cost is fixed. That's not going to change, but development construction costs could. So we see that being fairly much in balance today. Again, we're -- we like to hope that as the market continues to improve, that we could improve margins a bit. But that's not something we're factoring into our thinking today.

Sure. And just one last question. Last quarter, you all talked a lot about spending in Texas on land.

Looking out again over the next two to four quarters, is that where you're still going to see a lot of your land spend? Be rotating some toward California it sounds like. What's going on there?

No, I don't think there's a disproportionate amount dollars being spent in Texas. We do have a lot of communities opening over the next several quarters in Texas that we already spent the money for, or continue to spend money on development costs. I think we're going to maintain the same balance that we've been hitting across the Company. I don't think our land spend is really going to change from one market to another.

We haven't spent much money in Arizona. I don't see us spending a lot of money on land in Arizona the next few quarters. We're pretty well stocked here. As we said, California is an area we've been focusing on and to the extent we can find deals there, we're going to spend money in that state. So hopefully that answers your question.

Okay. Thanks. I appreciate it.

Thanks.

Thank you. And the next question comes from Susan Mathari of UBS.

Thank you. Good morning.

Good morning.

You have done a lot of work in the first half of this year in terms of adjusting your spec counts, thinking about that strategy. Can you talk a little bit about, are you happy with where you are now and is there anything that could change as we look to the future?

I think we're pretty happy with where we are now. It's a little more balanced and no, I don't expect much change in that area.

Okay. And then in terms of your capital allocation, we've been hearing from builders increasingly about them taking a more balanced approach in this cycle. Can you talk about how you think about your capital as the cycle comes through and maybe what the priorities for cash are?

Well, as I said earlier, we want to reduce our debt-to-cap closer to 40%. And we do want to keep some cash on the balance sheet, for potential opportunities that may arise over time. So I think in this cycle, we're going to be maybe less leveraged than we were in previous cycles and our capital structure will be more long-term oriented. And we'll probably have a more fine-tuned capital allocation model amongst our markets on how we allocate capital to individual markets based upon the strength of the market, the long-term prospects for the market, the management team, our ability to find land that meets our underwriting margins and so forth. It certainly is an area of the business that we're paying closer attention to than in previous cycles and we're getting better at it every year.

That's helpful, thanks.

Thank you. And the next question comes from Mike Dahl with Credit Suisse.

Thanks for taking my questions. I wanted to ask a question about Phoenix and the market seeing a little bit of a resurgence here. Over the past couple of years we've seen these many boom/busts and a lot of builders are reporting some nice growth there and seeing it in permits, but wanted to get your sense, especially since you're not focused on incremental spend there, how you're thinking about that market and what you're seeing on the ground in terms of inventory and pricing trends on the new home side?

Philippe, you want to take this one?

Yes, sure. The market's definitely better than it was last year. I would say demand is much stronger. Pricing power is still very spotty in certain locations we have and in other locations we don't, so we're really trying to find the price volume optimization for each community.

The entry level part of the market seems stronger for sure, below $200,000, $225,000, has definitely picked up. The buyer confidence is good. We've seen the resale market balance out. So it feels a little bit more balanced than it did in 2013 this time. A little more level.

Yes, I was thinking 2013 we had a good year. 2014 we kind of took a step back. This feels a little more steady. We're not seeing all this investor demand pushing the market forward. It's more real household driven demand. So this sort of feels a little bit more balanced, which is why you're not seeing the big pricing power that we did in 2013.

Got it. Okay. Thanks. And then, Larry, you made a comment that, the increase in some of the sales and commissions to 7.6% was driven by higher co-broke. Has that been anything intentional on your side in terms of marketing to outside agents, or is this just more a function of tightness in some of the existing home markets leading agents to take more buyers to your communities?

Yes, I wouldn't read anything into that. We obviously have a strong outreach program to realtors because if people are buying a move-up house, they more typically go through a broker, so it's important for us to do that.

On the other hand, we have a very strong online presence and a presence through other marketing efforts, so we're pushing on all of the above. And just because that went up a little bit this quarter, I wouldn't read into that, that's a big push for us. It's always a push for us to make sure we're appealing to brokers, as well as people who come to us directly.

Okay. If I could sneak one quick one in. The tax guidance, the 32% in the current guidance, what was in it the prior guidance?

The prior guidance had that in it, too, but -- so that's not a change.

Okay, great.

But I wanted to make sure people understood that that was in it and we hadn't done that before. So I wanted to be clear this quarter.

Got it. Thanks.

Thank you. And the next question comes from Jaden Rahmani with KBW.

This is actually Ryan Tomasello on for Jaden. I know we had a few questions on the land market, but I was wondering if you could give more after sense of the amount of deal flow you're seeing and if that's concentrated in certain markets and where the current level of competition stands?

You know, it hasn't changed over the last several quarters. We're seeing quite a few deals. There's pretty good deal flow, but land is expensive in most markets so we're having to be choosey and we're having to work hard to find deals that meet our underwriting criteria. We have great land acquisition people and great land development people and we have that most confidence that we're going to find what we need to meet our growth expectations. But it certainly is not easy.

Thanks. Has the current environment changed the way you view the duration of what you are willing to put on the balance sheet for the types of deals you're doing in the land market?

It hasn't changed that much over the last several quarters. This is not 2010 or 2011 where there was a sea of cheap lots out there to buy. As I have been saying for quite a while, prices are stronger.

House prices are up, too. It's been tracking together. That's why the margins are more around 20% and not 23%, 24%, because we're not able to find that lower-priced land.

Great. Thanks.

Thank you. And the next question comes from Joel Locker with FBN Securities.

Hello. Quick question on community count. I didn't hear anything in the call but where do you expect it to end in 2015? Any early indications of what growth you expect for 2016?

I think we said, Larry, correct me if I'm wrong, that year-end community count is going to be in the 250 to 260 range and we haven't really given any guidance or community count for next year. I think we'll probably do that on the next quarter conference call, but we're not really prepared to do that today.

Okay. And just a follow-up question on G&A.

It was hovering between $29 million and $30 million the last [two] quarters and took a dip down to $27.7 million. Was there any one-time benefit in the second quarter? What do you expect the run rate going forward?

What's causing that dip from the first quarter to the second quarter is that, if you recall, last quarter we had a change in vesting for some of our restricted stock that accelerated vesting. That's why that quarter was a bit elevated.

This quarter, as we discussed, had the past COO departure number in there, but then that was mostly offset by some true-ups of accruals which offset that. So the number that you're seeing for this quarter is a pretty good number, although I would say as we grow the business and particularly as we get into the back half of the year where we're making most of our profit, there are some bonus accruals that will cause that number to go up some.

So I would expect it to go up some but as a base level, that's a pretty good number that you're looking at for the second quarter.

Sure. Just last one on interest expense. Where do you see that going forward?

Sure. Obviously, it's a little more elevated this quarter. We issued $200 million in bonds and put more cash on our balance sheet, so that's causing a little bit more of the interest expense to break directly to expensed instead of being capitalized. Also, we are in a position where a lot of our land inventory is nearly finished or finished, which means it's not subject to interest capitalization. That's also causing a little bit more interest to be expensed.

So those two factors are going to cause the number that you're seeing this quarter to continue on through. A few quarters ago, I thought that would be closer to zero, but it's wound up being a bit higher because of those factors. I think that's a pretty good number going forward. It could even be a tad higher.

Thanks a lot.

Thank you.

Thank you. And the next question comes from Will Randow with Citigroup.

Good morning. Thanks for taking my questions.

Particularly -- I apologize if I missed it but on the Tuscan impairment, as well as sales pace in the Phoenix metro area, have you seen any deceleration in July relative to June or June relative to prior months? What drove the impairment?

The impairment was a one-off community that we had in Tucson. It's a legacy community from the old days, from the previous cycle, that we just weren't getting the sales that we needed to get there. So we lowered the prices, which drove an impairment.

Certainly the sales pace in Phoenix in July is going to be less than it is in June. It's pretty quiet here in July and August. The temperature was 108 yesterday. Anyways, I wouldn't use it as a basis of comparison to anything. The market in Phoenix is still significantly better than it was a year ago and continues to trend that direction.

Thanks for that. And then just one follow-up on your Texas active community count. It's now representing about a quarter of total communities. That's down pretty substantially. Are you tactically doing that, or are there other drivers?

No. Like we've been saying previously, we have a lot of communities coming online in Texas that are in the development cycle right now. And we expect our community count in that state to increase over the next several quarters. And that should probably put us back closer to that 30% area where we have traditionally been.

Thanks again. Appreciate it.

Thank you. And the next question comes from Alex Barron with Housing Resource Center.

Alex, you there?

Yes, can you hear me?

We can hear you now.

Okay. Sorry about that. I was hoping you could clarify the EPS change that you mentioned, because what I heard and what I saw in the transcript were two different amounts. Was it $0.25 or $0.30, something like that?

The impact on EPS of those 250 to 300 closings moving out of the third quarter, some into the fourth quarter, most into next year, that's affecting the third quarter, we believe, by about $0.25 to $0.30.

Okay. I thought that's what I heard. Thanks, Larry. My question was on labor. Have you experienced any kind of labor issues where there's shortages or something along those lines? And if so, what trades are the ones that are pitched toward demand right now?

Labor has been challenging in some markets, but not all markets. We had some challenges in Denver. We had a little bit of challenges in Dallas. Concrete and framing seem to be an area that's been the most difficult. So I couldn't tell you too much more than that but it's certainly much more of an issue this cycle than it was last cycle.

Okay. And as far as incentives, how do incentives track this year versus last year?

Again it's market by market, but probably a bit less, Larry, would you say?

I agree. The market has gotten a little bit stronger, so the incentives are a little bit less.

Okay. Thanks.

And we have time for two more questions. The next question comes from Jay McCanless of Sterne, Agee CRT.

Morning. First question on the community openings you're doing in Texas in the back half of this year, could you talk about what price points you expect to target and maybe which geographies we're going to see those openings?

I'm sorry, ask that again?

Sure. For the openings that you're doing in Texas in the back half of this year, could you talk about, are these going to be mostly move-up communities and which -- are you going to be focusing on one city or two cities versus other cities?

We have quite a few communities opening in Austin and Houston. Mostly move-up, but some entry level-plus. And then have community count increasing, certainly in the south and in the east, also in the move-up and the entry level-plus area.

Okay. And then the second question. I just want to find out how orders have trended in July. Any other commentary you would be willing to give us on 3Q?

The month is not over yet, but it is seasonally were slower in July than other months, but it's trending along the lines of our expectations. Nothing really news worthy to report on July sales.

Okay. Thank you.

Thank you. And our last question today is a followup from Steven East with Evercore ISI.

Thanks. Steve, just a follow on. The entry level-plus you mentioned, what part of that -- what part of your business now is entry level-plus, and where do you want to take it as you move forward? I know you and I have talked some about the infill and attached you're trying to do, so maybe what's happening with that?

Today, depending on how you define it, it's really more in the 20% to 25% area, and we'd really like to get it closer to 35%. So we'd like to increase that area substantively. We think that's where growing demand is going to be and we have quite a few new communities that meet that target coming online in some of our Southern markets and in our Austin market and some other areas, as well.

Okay. Is the infill type product, is that a meaningful piece of the puzzle with that?

Certainly in the West it is. And to some degree in the South but probably more so in the West. And we just opened an infill community in Scottsdale and Phoenix. Doing pretty well. It's a strategy that we're continuing to pursue.

Okay. Thanks.

Thank you. As that was the last question, I would like to turn the call over to Management for any closing comments.

Thank you very much for participating in our call this quarter. We look forward to talking to you all next quarter. Thank you. Have a good day.

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