M.D.C. Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good morning. We are ready to begin the M.D.C. Holdings Inc. First Quarter Earnings Conference Call. I will now turn it over to Kevin McCarty, Vice President of Finance and Corporate Controller. Sir, you may begin your call.

[Kevin McCarty:]

Thank you. Good morning, ladies and gentlemen and welcome to M.D.C. Holdings 2016 first quarter earnings conference call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer and Bob Martin, Chief Financial Officer. [Operator 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 M.D.C.’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 first quarter 2016 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 turn the call over to Mr. Mizel for his opening remarks.

[Larry Mizel:]

Good morning. I am pleased to announce the 2016 first quarter net income of $9.6 billion or $0.20 per share. With revenues reaching nearly $400 million, both our top and bottom line results showed year-over-year improvement based on growth in our average selling price and gross margin percentage. Furthermore, on the foundation of healthy demand drivers for the homebuilding industry, our 2016 spring selling season has started off well. We experienced a year-over-year increase in our net new home orders for the eighth consecutive quarter, with an absorption rate that matches the best we have seen any quarter since 2006. We previously announced that we are working to further improve our sales velocity by expanding the footprint of our new, more affordable product line, which is already available in our Colorado and Arizona markets. We believe this new product will appeal to an expanding consumer segment that has been previously priced out of the market. The new home designs will help us reduce cycle time through a more streamlined and efficient design. It also allows homebuyers to personalize their homes with fixtures and finishes like our other Richmond American home products. Already, we have seen a very positive consumer response. With a strong rate of sales for this product, we are initially releasing it during the first quarter. We also had introduced a new product that offers a more temporary design and low maintenance lifestyle, which we believe can be successful in both urban infill and more traditional suburban settings. We believe that these new plans may appeal both to the younger first-time buyers and those moving down from larger homes. As with our new more affordable offering, the initial consumer response to our limited releases of this product has been strong. As I mentioned during our call last quarter, the central objective for 2016 is to drive our returns higher by improving the performance of assets we already own. Already in the first quarter, we are pleased to report that our returns have shown improvement as we increased earnings year-over-year without a significant increase in homebuilding assets. Improving our inventory turn to a focus on backlog conversion will be a key to our success in improving our returns during 2016. To that end, we have accelerated production as evidenced by the increase in our first quarter home starts by more than 25% over the prior year. These starts were almost entirely from units already sold consistent with our renewed focus on build-to-order homes. As a result, the percentage of our work-in-process inventories attributable to sold homes has increased significantly over the past year. This increase in our sold homes inventories improves the overall quality of the balance sheet and should help us to drive higher backlog conversions later in the year. We appreciate the support of our board and our many other stakeholders as we continue to take steps to improve our returns. And as always, we are grateful to our employees for what they do everyday to make MDC a more successful company. I will now turn the call over to Bob Martin for more specific financial highlights.

[Bob Martin:]

Thank you, Larry. We delivered 907 new homes during the quarter, which was nearly unchanged from 909 in the prior year. Our first quarter backlog conversion rate came in at 39%, down from 60% for the same quarter last year, but roughly in line with our expectations. The decrease is largely due to our having a high percentage for our work-in-process homes that were earlier in their phases of construction, along with some issues with subcontractor availability in certain markets. Looking to the second quarter, I don’t expect our backlog conversion rate to be any higher than the 39% that we experienced in the first quarter. Our average selling price increased by 5% to $435,000, primarily the result of a mix shift to higher priced submarkets and to a lesser extent price increases implemented during 2015. The increase in average price resulted in a 5% increase in home sales revenue to $394.4 million. Our gross margin from home sales increased by 90 basis points year-over-year as a result of the significantly higher percentage of our total deliveries coming from build-to-order homes. In addition, interest in cost of sales as a percentage of home sales revenues decreased year-over-year. Our Q1 2016 gross margin was negatively impacted by $3 million adjustment to our warranty accrual due to higher than expected warranty expenditures. Excluding this adjustment, our gross profit margin would have been 17.1%. For the first quarter of 2016, 67% of our deliveries were build-to-order versus 42% for the first quarter of 2015. On a sequential basis, gross margins were fairly flat after adding back impairments and warranty adjustments. Our estimated gross margin in backlog at the end of the first quarter moved slightly higher on a sequential basis. Although we consider that to be a positive, future margins will depend on among other things, the mix of units that pull-through and the impact of unsold homes that’s still unclosed during the quarter. On the SG&A front, our homebuilding SG&A expense rate of 14.3% for the 2016 first quarter was up 90 basis points year-over-year. The increase was driven by general and administrative expenses, which increased by $5.6 million year-over-year. This is partly due to an additional stock option expense resulting from the grant to senior executives during the 2015 second quarter. We also had higher salaries and benefits expense, as our G&A headcount increased by about 15% year-over-year. Our net new orders for the quarter were up 3% over the prior year, which represented our eighth consecutive quarter of year-over-year order growth and our highest first quarter order level since 2007. Our monthly absorption rate for subdivision of 3.26 was just slightly improved from the prior year. But keep in mind that last year, we had a much higher inventory of homes available for quick sale and delivery than we do this year. We are also offering higher incentives for the sale of those homes last year. Given those factors, I consider our Q1 performance to be better than the flat year-over-year comparisons shows. The dollar value of our orders increased 10% year-over-year to $731.3 million. The increase in dollar value was due to the 3% increase in sales I already mentioned, together with a 6% increase in our average order price to roughly $444,000. This in turn was the result of price increases and a shift to higher priced communities. From a regional perspective, our East segment experienced a 16% increase in homes sold, the largest percentage increase of our homebuilding segments. The increase in our East segment was driven by improved demand in our Virginia market as well as an increase in community count in Maryland. Across our markets – our other markets, the other standout from a units perspective was Washington, with orders increasing 11% on a sizable increase in average selling price as that market continues to have solid fundamentals that are driving strong demand. Most of our other divisions were fairly flat year-over-year in terms of the number of units sold. Our homes in backlog at the end of the first quarter were up 39% year-over-year on a unit basis to 3071 homes with a value of $1.43 billion, which was up 50% year-over-year. As discussed earlier, we expect the increase in backlog to drive a year-over-year increase in home sales revenue for the full year 2016, despite a lower backlog conversion rate. Our cancellation rate increased slightly from 17% to 18% year-over-year, but as a percentage of beginning backlog, our cancellation rate for the same period was down 700 basis points to 15%. For the 2016 first quarter, cancellations were mostly driven by the potential buyers’ inability to obtain financing or simply buyers’ remorse. Active subdivisions increased modestly year-over-year to 169 at the end of the 2016 first quarter. Based upon the communities we currently have scheduled to open during the remainder of 2016, I do not expect to see much growth in our active subdivision count through the rest of the year. For the first quarter, we acquired 460 lots for $62 million, with a majority of this been occurring in California, Washington and Nevada. We spent additionally $48 million on development expenditures, bringing our total spend for the quarter to $110 million. At the end of the quarter, we owned or controlled 14,601 lots, which represented a 3.3 year supply on a trailing 12-month delivery basis. This is virtually unchanged from a year ago. However, we believe they supplies more than sufficient to drive significant top and bottom line growth for the company. We continue to see a healthy pipeline of land deals across our markets. Based on some of our key balance sheet metrics, we have the resources to take advantage of the opportunities we identify in the land market with our quarter end net debt to capital at 33% and our liquidity exceeding $750 million. We will continue to work on accelerating and improving our returns on the assets already in our portfolio, as the best path we have towards growing our earnings for the full year 2016. My final slide is a new one. This gives you some information on the status of production for the company in the first quarter. The graph on the left shows our new home starts. As Larry alluded to earlier, we are up 27% year-over-year in the first quarter, driving higher starts volume early is critical in driving our overall closings volume higher for the year. So we are pleased with this result. Looking at the graph on the right, you can see that we have 13% more homes completed or under construction, excluding models at the end of the quarter versus a year ago. This increase is important, as these units make up a big part of what we can close for the remainder of the year. At the beginning of the first quarter, you would have seen different picture with our work in process units flat year-over-year. In addition, consistent with our build-to-order strategy, 85% of the work in process units you see here on this graph at the end of the first quarter already sold compared to 67% a year ago. Bottom line, we think our outlook for closings growth in 2016 is good, given that, we not only have more homes already in production, that should be available to close during the year, but also a greater percentage that have already been sold. That concludes our prepared remarks. And at this time, we would like to open up the call for questions.

[Operator:]

[Operator Instructions] Your first question is from Alan Ratner with Zelman & Associates.

[Alan Ratner:]

Hi guys. Good afternoon and thanks for taking my questions. My first question on the corporate G&A, it’s been on a pretty steady ramp higher, and Bob I know you mentioned that the stock option grant last year as well as the headcount increase, but I am just curious with headcount up about 15%, community count is flattish, up very slightly, what exactly are the new hires devoted for, is it ramping for future community count growth in ‘17, and ‘18, is it anything else that would be contributing to that. And I guess, just going forward, is that $31 million, $32 million quarterly run rate, is that how we should think about that going forward or is there still the potential for additional increases here? Thank you.

[Bob Martin:]

Yes. So 31.5% or a $31.5 million rather was the number I believe in Q1. First of all, I think that’s a reasonable run rate for Q2. One thing we have talked about the quite a bit in our Q, we have mentioned in our prior calls is that equity component that we called out is about $2.5 million a quarter. And that will fall off after the second quarter. So you should certainly keep that in mind. As for where at the 15% growth is coming from, really I would characterize it certainly being prepared for growth for the company, whether that comes from new active subdivisions or just increased volume in our existing subdivisions, either way. We are trying to make sure that we have enough people it’s both in corporate, also even in our financial services part of our business making sure we have got enough people to really drive the cycle times forward to make sure that we have everything we possibly can to improve our process in that area because I know that that’s one thing that we have been focused on is the backlog conversion rate.

[Alan Ratner:]

Got it, that’s helpful. And then on that topic is I guess my second question. On the backlog conversion, I know you signaled that it’s improving in the back half of the year, but this quarter was I think the lowest level you guys have seen on record and doesn’t sound like you expect any improvement next quarter, I was hoping you can just give a little bit more color on what you are seeing in the labor side of things. It feels like from other builders, it’s definitely an issue, I think everybody appreciates that, but this quarter at least the numbers I think have shown some modest improvements from where we were in the back half of the year for other builders. What is your cycle time on average in days today, how does that compare to a couple of years ago. And then just when you think about the labor market, are you struggling to compete with labor with other builders, are you having other builders outbid your subs for work and which is might be extending your cycle times relative to other builders or is there any other factor there that might cause some difference between your results and others? Thank you.

[Larry Mizel:]

Well, I guess first of all, in large part, the decrease in our backlog conversion rate is by design, given that we have switched to a more of a build-to-order strategy. And I think you should take that to account. We think that’s a better way to run our business. We think there is too often the temptation to add leverage to drive a return on equity. And we would rather de-risk our balance sheet and focus on improving our homebuilding process. On a number of fronts, including sales velocity, cycle times, consumer experience, all those things with the ultimate goal of improving return. So, I think that is one differentiating factor as we are doing a little bit differently than our average peer. In terms of the current environment, I would describe it as we still – the units of course that we are closing in Q1 and Q2 were under construction in large part during the last half of 2015 when we started to see those issues with our subcontractors. I would say to start the year, we are seeing those issues abate, but it still carries over into the cycle time of those units that had already been started before the year began. So because of that, that’s part of the reason we have some optimism that it will get a little bit better towards the back half of the year, but much of what we are seeing right now is just a little bit of a hangover for what was the last half of 2015. And I do think it’s a little bit more concentrated in Denver. And of course, we just happen to have a larger percentage of our homes in Denver. I mean, it’s a great thing and that Denver is a really good housing market. It’s a bad thing and that it’s probably been disproportionately impacted by labor issues. So, we certainly are complaining by any means being a big part of this market. Overall, our cycle times most recently I think on average for the company, we are right around 160 days, that’s start to finish. And couple of years ago, it’s probably about 15%, 10% to 15% higher than it was a year ago. And we think we can make some improvements from there.

[Operator:]

Your next question is from Jay McCanless from Sterne, Agee.

[Jay McCanless:]

Hi. First question I had, what shall we use for tax rate for the rest of the year?

[Bob Martin:]

We had 33% effective rate I believe in the first quarter. And we calculate that by figuring out what we think the full year is going to be. So, I think that’s probably the best guess at this point is that 33%.

[Jay McCanless:]

Okay. And then the second question I had in response to Alan’s question you were discussing about how the increased headcount was – it sounds like for both production and for the financial services business. Could you maybe split that out and then discuss why you are having to add more headcount on the financial services side? Is it TRID compliant, is it trying to offer more product to existing homeowners, what’s going on there?

[Bob Martin:]

I mean, in the mortgage part of the business, it’s obviously a complex process. It’s potentially a risky process. We have a captive mortgage company. And really, it’s nothing other than taking a look inside our company and trying to figure out areas where we can do better. And it’s not intended to focus just on the mortgage company, the financial services side, I think there is things that we can do better on the homebuilding side too. So, really over the past couple of quarters, as we have confronted some of these issues, we have simply taken a look and said, you know what, there are some areas that we can add some headcount to and really make the efficient more process. It’s pretty much as simple as that.

[Operator:]

Your next question is from Ken Zener from KeyBanc.

[Ken Zener:]

Good morning, gentlemen.

[Larry Mizel:]

Good morning.

[Ken Zener:]

On Denver, bit of strong job market, you cited it from labor, it’s a place where I am not sure exactly where your market share is today, but the data we have put you in the high-teens in the leader there. What type of dynamic is it that given your leadership position that you weren’t perhaps able to pull in more trade? I mean, is it tied to a particular area of Denver or could you kind of highlight that, why I think the largest builder in the area, it was more difficult for you, oftentimes, we hear builders citing that as being a positive factor?

[Bob Martin:]

No, I think, it certainly is. I think we get some of the best contractors in the business here in Denver, because we do have scale. And there is some subcontractors that we would rather not work with, because we don’t think they are up to our quality standards. It’s merely a function of the overall pool being smaller. And I think you have seen some of the other builders come back into the market with designs of growing their business quite a bit. So, there is only so much labor to pull from in the short-term. In the longer term, I think you will see that labor supply continued to expand overall, which will help alleviate some of those concerns.

[Ken Zener:]

And then I guess for demand, I mean with your community count the way it is. Would you expect historically it seems your second quarter order pace is pretty much in line with maybe a smidge down from your first quarter. Is there anything that would affect what you would expect to be normal seasonal trends within your order pace sequentially?

[Bob Martin:]

No, I don’t think there is anything really out there at this point.

[Operator:]

Your next question is from Stephen Kim from Barclays.

[Trey Morrish:]

Hey, Bob and Larry. This is Trey on for Steve. Thanks for taking my questions. So first I want to focus a little bit on your backlog turns, but take a slightly different angle. It was down about 20% year-over-year in the first quarter and it’s looking to be down a bit more than that in the second quarter. I was wondering if you could break out, how much you think this change in backlog turnover pace is related to your focus on the build-to-order strategy relative to a more constrained labor base?

[Bob Martin:]

Yes, I don’t know if I have an exact breakdown of the exact percentage, I would say it’s more related to the build-to-order strategy, with the production issues just adding some additional fuel to the fire.

[Trey Morrish:]

Got it. Thanks for that. And talking about this new lower-priced product, you mentioned that in your press release and in the call that you are looking to expand this out beyond Colorado and Arizona, what types of markets or what market specifically are you looking to expand it to in terms of areas within a market? Is this going to be farther out or is there going to be some that’s a little bit closer in, but on a smaller lot, so effectively the prices are little bit lower?

[Bob Martin:]

I think we are looking at most of our markets for deployment of that entry level, more entry level type of product, more affordable type of product, I should say. We want this to not be the bare bones entry level product kind of the stripped down model. We do want this to be a nice product, and in fact, it is a nice product. I think if you visited the limited models, we have open right now, you would see that it’s actually a pretty nice product. So certainly, we would prefer to have it in closer in areas, you can only do that to a certain degree. So, it will pop up in other areas that are little bit more outlined depending upon what your definition of outline goes. So, we are going to look at each pro forma that we have come across our desks and evaluate whether or not it works in each of those situations.

[Operator:]

Your next question is from Michael Rehaut from JPMorgan.

[Michael Rehaut:]

Thanks. Good morning, everyone. First question, just going back to the growing impact or the spreading impact of the affordable product, if you look at your sales pace price by state, you have Colorado and Arizona being two of your only major states where you have sales base up year-over-year. And just wanted to get a sense of number one, how much of that is due to this more affordable product being introduced in these areas? And if that’s the case, as you look to expand to other states when might that have a similar type of impact on those other regions as well?

[Bob Martin:]

Well, first of all, I don’t know that you are really seeing a significant impact for an overall division, I mean overall for the company, I think for sales, it’s probably only about 2% of overall company sales, even a little less than that. So, it’s really just on the front-edge. We just introduced in Q1 and we really didn’t even have models if this product built until the end of Q1. So I think there is a lot more to come in terms of data on that product in Q2 and beyond. I don’t want to necessarily pinpoint the other states at this point. I think we are evaluating deals across the country that we think would work with this product, but just because of the complexities of how you get involved with or get approved by the various municipalities and other complications in bringing the product to market, I don’t want to pinpoint a quarter for that deployment to the rest of the markets.

[Michael Rehaut:]

So then Bob, it will be fair to say that this is still kind of in the infancy stage at least for 2016?

[Bob Martin:]

Yes.

[Operator:]

Your next question is from John Lovallo from Bank of America.

[Larry Mizel:]

Hi John.

[John Lovallo:]

I am sorry about that guys, I was on mute. First question is on the backlog conversion, just to start, I don’t want to beat this too much, but thinking about it in the second half of the year and the improvement that you guys are talking about, I mean should we be thinking just sequential improvement or is it just something that, there could be year-over-year improvement in the conversion rate?

[Bob Martin:]

Well, I already talked about Q2, which we said wasn’t going to be any higher than Q1. So that means it’s going to be down, year-over-year. I think it’s probably better as you look towards the back half of the year to think about in terms of sequential improvement. I think there is a chance you could get year-over-year improvement, but there is a lot that goes on in the last half of the year. I mean how many sales you get and therefore how much in backlog you have, influences of that backlog conversion rate. So I don’t want to put too many predictions out there about the back half of the year. We are really more focused on just looking at where our production levels are, are we starting enough homes, we think we certainly are selling enough homes that you are starting to selling enough homes you have got a great shot at closing, the number of homes that we want to close. And in addition, as you saw on that last slide of my presentation, we are really focused just on the overall number of units sold or unsold that we have in production as somewhat of an indicator to where we think we might be going from a closing standpoint. So we think that’s a good thing to focus on as well.

[John Lovallo:]

Okay, that’s helpful. And then as a follow-up, you guys mentioned the increase in warranty reserves in the first quarter, given the recent step up in warranty expense, can you maybe just talk about, was this focused in a particular region on a particular product, or is it more broad based. And then I guess just as a dove tail to that, the gross margin that you guys are talking about in the backlog being higher sequentially, is that off the 17.1 or off of the 16.3? Thanks.

[Bob Martin:]

In terms of the warranty, when we do our warranty analysis, we are first and foremost looking at the warranty expense for the entire company. We don’t really talk about it so much by regions. So the warranty model, it’s a bit complex, but we saw a little bit of an acceleration in the spend and that’s really what drove the adjustment. As much as we saw the higher adjustment this time, we have had a number of cases in the past, where we have seen it drive lower. So it’s a give and take based upon the spend in any given quarter and our analysis of the spend over the past number of years. On the backlog, backlog gross profit, I was talking about sequentially. So from 12/31/2015 to 3/31/2015 or 2016, our backlog gross profit margin increased sequentially, you can kind of comp that more of the pre-warranty adjustment number. So it’s a little bit higher at 3/31 than our pre-warranty expenditure number of 17.1% in Q1.

[Operator:]

Your next question is from Nishu Sood from Deutsche Bank.

[Larry Mizel:]

Hi Nishu.

[Nishu Sood:]

So the gross margins, Bob you mentioned that backlog gross margins are slightly higher, I just wanted to dig into that a little bit, is that higher against your current, the 1Q gross margins including or excluding that warranty adjustments, so if you can just kind of give us some details on what exactly what the comparison is there?

[Bob Martin:]

Yes. So it’s really a point in time, so it’s what was in backlog at 12/31 versus what is in backlog at 3/31. But I will tell you, it’s higher than the 17.1%, when you add back the expense from the warranty.

[Nishu Sood:]

Got it. Well, if it’s at a point in time on the backlog, I mean the warranty adjustment happens, I am sure after, so it’s effectively excluding it sounds like?

[Bob Martin:]

Yes.

[Operator:]

Your next question comes from Will Randow from Citigroup.

[Will Randow:]

Hi, good morning and thanks for taking my questions. Just curious in terms of inflation, what are you seeing in terms of lumber and labor given the softer backlog conversion on the latter, also lumber prices coming up a bit year-to-date?

[Bob Martin:]

We talked a lot about increases in land prices, increases in commodity prices and paper prices during 2015, I would say at this point in 2016, we are not really continuing to see significant increases year-over-year. At this point, I get what you are talking about, you gave got ebbs and flows in terms of what you see out there in commodity prices, but I don’t think it’s having any huge impact right now.

[Will Randow:]

Got it. And then just to follow-up, one of your peers mentioned that some of the land buys in 2013 in front of the FHA loan limit reductions for California or Arizona didn’t work out so well, you guys were active during that period as well, do we have to worry about a similar issue at M.D.C.?

[Bob Martin:]

Well, I think a good thing about us is, it’s already been run through our income statement for quite some time. So you probably already have some good data on how it’s impacted our margins.

[Operator:]

Your next question is from Alex Barron from Housing Research Center.

[Alex Barron:]

Hi Bob and Larry. Can you talk a little bit about these new communities, the more affordable ones like, how many have you guys rolled out, what kind of order – orders to get out of them so far and what are your expectations I guess longer term of what percentage of the business this will represent?

[Bob Martin:]

Yes. Well, first of all, in terms of what it means to current results. Really we are not closing any of the homes yet. We have had orders for the homes, but it’s really 2% less than 2% of what our total order count was for the first quarter. So if you do the math on that one, less than 30 units. Now, that’s coming out of just a couple really to maybe three communities that we have it in right now that we had introduced it in. And for each of those communities, we didn’t have the models open at the start of the quarter. So you really only have a very slight impact to the first quarter. But when we have offer those homes up for sale, as Larry mentioned, I think we have seen a very strong initial response in the form of a pretty quick absorption for something you have to model. In terms of expectations going forward, we haven’t set out a firm percentage of our total sales or closings or part of the business, I think that will really just depend on the number of opportunities we see to build the product based upon the kind of land deals that we see coming across for it. I will say if you look at our exposure to the first time buyer, first quarter is probably down to about 20% of our closings. And we have seen our backlog – our backlog average selling price rather increased $466,000. And the design of the product is to try to tap in a little bit more to that entry level buyer, we think has really been underserved by virtue of the fact that those average selling prices have climbed up and up and up for our more traditional plan. So that’s kind of the trajectory we are going along.

[Alex Barron:]

It sounds good. And then in terms I guess improving your returns going forward, do you see that more coming from an increase in the operating margin or more from increase in the sales pace in the backlog, the cycle turns, capital turns?

[Bob Martin:]

Yes. I mean, I think if we are successful in increasing our cycle times. That translates a little bit more into the turnover, turning over the inventory a little bit quicker. On the other hand, if we are successful in that, I think you start to see positive things happening to your operating margin, because you are running higher volume across the same overhead base. So that creates operating leverage. Then there are certain good things that can happen to your gross profit margin, because you have less interest and less construction overhead spread among more units that are coming through the pipeline. So, I think you got the opportunity for both the initial focus is on turning the inventory.

[Operator:]

Your next question is from Buck Horne from Raymond James.

[Buck Horne:]

Hey, thanks for taking the question. I wanted to ask if you all will be willing to respond to the recent proxy votes that you guys put in the filing. And just what your response is, again, shareholders voted against the executive comp plan on the say on pay proposal. And what’s the message you all have taken away from that vote and maybe how will that affect, how you are going to structure executive comp going forward?

[Bob Martin:]

Well, from where I sit, I certainly I am not going to speak for our Compensation Committee. We do take the input from our shareholders very seriously and we will continue to take it seriously going forward. So, that dialogue will be ongoing.

[Buck Horne:]

Okay, that’s all. Okay. Second question maybe just back to the entry level product, what’s the margin profile you guys are expecting out of that product and should we think about the margins being higher or lower than the traditional product, how will that blend in with the rest of the business?

[Bob Martin:]

Well, I think initially what we have seen is the margin ends up a little bit the margin percentage ends up a little bit higher, in cases where you have introduced it in areas that we are already building the traditional product, it has been a little bit higher. That said, of course, it’s on a lower ASP. So that the absolute dollars is a little bit lower. The benefits you get is really turn the inventory quicker.

[Operator:]

Your next question is from Michael Rehaut from JPMorgan.

[Michael Rehaut:]

Thanks. I guess I got cut off there earlier with my second question being lost, so thanks for getting back to me. On the – just wanted to revisit on the kind of gross margin direction, you mentioned that the gross margins in backlog were up sequentially and up versus the 17.1% that you posted in the first quarter. Just trying to get a sense directionally if you think as you get towards the end of the year and in particular I am thinking of 4Q here. Could the gross margins essentially break 18%? I know that you guys obviously are very reluctant to give any type of guidance, but just trying to get a sense of the historically, you have always had a two 300 or more basis point GAAP between build-to-order and spec and now is build-to-order is becoming that much more prominent of your mix. Just wanted to get a sense of, if gross margins could break 18% by the end of the year, or would it still be in the 17s?

[Bob Martin:]

Well, it’s hard to answer that question. And I don’t think I can give you a definitive answer at this point. One thing I will say though is, we intentionally we don’t want to focus so intensely just on gross profit margin, because ultimately the return part of the equation is more important, what kind of returns we are generating. So if that means keeping the same margin by driving additional volume, we see that as the best path, then that would be the road potentially we would go down. And we do have some things in process potentially to make that happen whether it be the new product that we mentioned, increasing your turns or simply gains in our cycle times. So, I don’t want to be evasive to the question, but really we are focused more on returns, not the gross profit margin on any given quarter.

[Michael Rehaut:]

Okay. Appreciate that. I guess, just secondly, more of a modeling question if I may, below the operating line, you have the other line item, which was a $2 million expense this quarter. I think it was a combination of couple of odd items, $1.5 million and $430,000. So, we kind of put that together into that other category. Is that a good run-rate for the rest of the year? We had about $8 million of that expense in 2015 granted and included some couple of million of impairment of marketable securities, but how should we think about that line item going forward?

[Bob Martin:]

Yes, it’s a tough one to model, because things that go into some of our other categories that you see down below, you have got times when we write-off the deposit or you might have gains or losses on a certain security. So, it’s a little bit volatile. So, I don’t think I can necessarily give you any better information than what you see in the financials right now.

[Operator:]

Your next question is from Joel Locker from FBN Securities.

[Joel Locker:]

Hi, guys. Just had a few questions on SG&A. The marketing and the commission came in a little better than expected or at least I expected. And I was curious to see if with marketing down just a smidge or 1% year-over-year, that was going to continue or if there was any one-time differences between last year’s first quarter?

[Bob Martin:]

Yes, there is nothing that’s jumping out of me as what I would view as a one-time event in those numbers.

[Joel Locker:]

I mean, you will be able to sell more with the same amount of, I guess staff or is it what would you attribute that to?

[Bob Martin:]

I guess when I looked at it, I am not sure exactly what you modeled out, it didn’t necessarily jump out of me. The overall marketing expense on the same volume was about the same year-over-year. So, I am not necessarily seeing any reason why that couldn’t continue at this point.

[Joel Locker:]

And just on the commission, it looks like it always ran 3.3% or 3.4%, it dipped down about 3.2% in the first quarter. And I was wondering if there was anything there that changed or lowered commission structure internally or if there is any difference that should run at 3.3% to 3.4% like the usual going forward?

[Bob Martin:]

Yes, I think 3.3% to 3.4% is a good number. If you look at each of the past five quarters, that’s where it’s run until this quarter. Our broker rate was slightly lower this quarter both sequentially and versus a year ago. So, that might have a little bit to do with it, but I wouldn’t necessarily deviate from your roughly 3.3% estimate at this juncture.

[Operator:]

Your next question is from Andrew Berg from Post Advisory Group.

[Andrew Berg:]

Can you comment on what’s your anticipated land spend will be as we think over the next three quarters, you are $110 million this year almost evenly split, a little bit more on the acquisition versus the development side, but if we think about that number for the full year, how should we think about that?

[Bob Martin:]

It’s not a number that we have given out at this point when we go into each quarter and really each land transaction we are looking at them independently and we don’t give out a full year guidance amount.

[Andrew Berg:]

Okay, thank you.

[Operator:]

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

[Bob Martin:]

Great. Well, we appreciate you joining us for the call today and look forward to speaking with you again for our second quarter earnings call.

[Operator:]

This concludes today’s conference call. You may now disconnect.