M.D.C. Holdings, Inc.
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Good afternoon. We are ready to begin the M.D.C. Holdings Incorporated Third Quarter Earnings Conference Call. I will now turn the call 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 the M.D.C. Holdings 2015 third 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. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we will request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to 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 third quarter 2015 Form 10-Q, which is scheduled to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now, I will turn the call over to Mr. Mizel for his opening remarks.

[Larry Mizel:]

Good morning. This morning we announced our 2015 third quarter net income of $14,800,000 or $0.30 per share. The industry demand continues to be supported by improving or already strong readings for many key economic indicators, such as employment levels, consumer confidence, household formation and income growth. In addition, anticipated interest rate increases have not yet materialized, supporting affordability for homebuyers even as prices rise. From a supply standpoint, both new and existing single-family home inventories have remained at historic lows. While the favorable supply demand dynamics are encouraging for long-term growth prospects, they also have hindered our ability to convert backlog into deliveries in the short-term. With builders across the industry continuing to ramp up production during the quarter, we saw closings delayed because of limited subcontractor availability, plus we are delivering more dirt homes now than a year ago, which has increased our overall sales to close cycle time. While the pressure in our subcontractor brace should decrease overtime, we expect that this dynamic will have the continued impact on our conversion rate at least for the next few quarters. However, I am pleased to see that operational improvements in several of our key performance indicators for our business. Our pre-impairment gross margin percentage has continued in a positive direction, increasing notably both year-over-year and from the 2015 second quarter. Furthermore, when coupled with a robust increase in the average sales price of our homes delivered, our pre-impairment gross margin per home closed for the quarter was just over $70,000 per home, our highest level since 2006. From a sales standpoint, we experienced an 8% year-over-year increase in our monthly sales absorption rate. Despite the price increases, we have implemented many of our communities throughout 2015. Our ending active community count improved only slightly from the 2015 second quarter, but further improvement is expected by the end of the year. The pace of our land acquisitions quicken during the quarter, as we spent our $145 million in acquiring more than 1,800 lots and 45 communities. As a result, our lots under control at the end of the quarter increased 6% from the end of the second quarter in support of our long-term growth objectives. Our backlog at the end of the quarter reached nearly $1.2 billion, up 49% year-over-year, even with the slowdown in our conversion rate, this level of backlog gives us good visibility to continue year-over-year revenue improvements for the upcoming quarters. Thank you for your interest and attention, I will now turn the call over to Bob Martin for specific financial highlights.

[Bob Martin:]

Thank you, Larry, and welcome to everyone on the call. Turning to slide four, we delivered 1,080 new homes during the quarter versus 1,093 in the prior year. Our third quarter backlog conversion rate came in at 42%, which was lower than the 58% for the same quarter last year. As Larry already mentioned, the decrease is largely due to the intentional reduction of our spec inventory over the past year, which has increase the average time from sale to close for our homes. The conversion rate was also negatively impacted by limited subcontractor availability, which had a bigger impact on third quarter closings than we originally expected. The contractor issue is having a significant impact on our Colorado market. As we discussed on our last earnings call, higher than average rainfall totals throughout the first half of the year in Colorado has pushed more construction activity to the back half of the year, placing more pressure on already strained contractor base. Other markets have also been impacted but to a lesser degree. In some cases, competition for qualified labor is coming from both single-family and multifamily construction projects. Looking forward, our fourth quarter backlog conversion rate should increase sequentially, which is our normal seasonal trend. However, the magnitude of the increase is difficult to gauge, given the subcontractor issues we have highlighted. Additionally, this will be the first quarter that will be impacted by the TILA-RESPA Integrated Disclosure rule, which could cause additional delays that impact closings that may otherwise be completed by the end of the quarter. Recognizing those risks, I currently do not expect our fourth quarter backlog conversion rate any higher than 50%. Our average price increased by 14% or $51,000 per home to $421,000, primarily the result of a mix shift to higher priced submarkets, combined with some pricing increases that were implemented earlier in the year. The increase in average price more than offset our 1% decline in closings and as a result our third quarter home sale revenues were up 12% year-over-year to $455 million. Next slide, due to the $4.4 million impairment during the quarter, our gross margin from home sales decreased slightly both sequentially and year-over-year. However, our gross margin from home sales, excluding impairments was 17.3%, which was 80 basis points higher than the 2014 third quarter and 70 basis points higher than the 2015 second quarter. Both year-over-year and sequential increases in our gross margin were primarily driven by the increase percentage of our deliveries coming from dirt homes, which typically have a higher margin than spec sales, combined with improved margins on the spec homes we did deliver. Additionally, our interest in cost of sales as a percent of home sale revenues decreased for both periods. Our margin progression continues to be hampered somewhat by an increase in both land and construction cost, but we have minimized the impact of these factors by increasing home prices. The impairments we saw during the quarter mostly came from a few communities in the mid-Atlantic which has been one of our weaker geographic areas over the past year. Our estimated gross margin in backlog at the end of the quarter moved slightly lower on a sequential basis. Q4 margins will depend on among other things, the mix of units that pulled through and the impact of specs that sell and close during the quarter. Turning to slide six. On the SG&A front, our homebuilding SG&A expense rate of 12.6% for the 2015 third quarter was almost unchanged year-over-year. Looking at individual categories, general and administrative expense increased by $5.4 million year-over-year, which is partly due to additional stock option expense resulting from a grant to senior executives earlier this year. Also due to a downward adjustment to potential payout amounts under our executive incentive plan last year, there was no accrual for this program in the third quarter of 2014 where as we had a more typical accrual in the third quarter of 2015. Marketing expense did not change year-over-year but commissions were up by $1.4 million. That entire increase is attributable to our increase in home sale revenues as our sales commissions rate of 3.3% was actually down slightly from 3.4% the same quarter a year ago. Even though, we did not achieve improvement in our SG&A expense ratio this quarter due to closing delays, our core homebuilding operating margins improved by about 70 basis points year-over-year to 4.7% on the strength of improvement in our pre-impairment gross profit percentage. Turning now to orders. Our net new orders for the quarter were up 3% over the prior year, which represented our sixth consecutive quarter of year-over-year order growth in our highest third-quarter order level since 2007. Our monthly absorption rate of 2.37 was up 8% from the prior year period, a solid results given that we have increased prices in most of our communities during the year. However, the increased absorption rate was partially offset by a slight decline in our active community count. The dollar value of our orders increased 13% year-over-year to $489 million. The increase in dollar value was mostly the results of a 10% increase in our average order price to $441,000 due to the price increases I mentioned to most of our active subdivisions during the year coupled with the shift in the mix of net new orders to higher price communities. From regional perspective, we experienced the most strength in our California and Nevada operations with monthly sales absorption rates of 3.1% and 3.0% respectively for the quarter. California and Washington showed some of our largest average price movement with increases of 35% and 21% respectively. Our homes in backlog to end the quarter were up 38% year-over-year on a unit basis to 2,587 homes with a value just under $1.2 billion, which was up 49% year-over-year. Even with the potential for continued closing delays due to limited subcontractor availability, the magnitude of the backlog increase provide some visibility to revenue growth in coming quarters. We’ve not seen an increase in our cancellations for the quarter despite a much larger number of units in backlog, which is encouraging giving the closing delays that we've seen. As a percentage of gross orders, our cancellation rate was down slightly year-over-year to 25% in the third quarter. As a percentage of beginning backlog, our cancellation rate for the same period was down 600 basis points year-over-year to 14%. Turning to slide eight. Our ending active community count was at 157, up slightly from where we were at, at the end of the second quarter. On the chart to the right, know that our soon-to-be active subdivision still exceed our soon-to-be-inactive subdivisions by ‘17. We still expect to see our year-end community count to be up compared to the 159 count that we had at the end of 2014. And moving now to slide nine. During the quarter, we acquired 1806 slots for approximately $145 million. We spend additional $61 million on development cost bringing our total spend for the quarter to $206 million. At the end of the quarter, we owned or controlled 15,777 lots which represented about a 3.6 years supply on a trailing 12 month delivery basis. This level of land acquisition was our highest since the third quarter of 2013 and it moved our total supply of lots owned and controlled, up on a sequential basis for the first time in five quarters. We did not reduce our underwriting standards to achieve this increase in land acquisition activity. Rather it’s a culmination of several quarters of sourcing and due diligence from our land teams across the country. The bulk of the activity for the third quarter came in markets where sales velocity and returns have been among the company’s highest, specifically, California, Nevada and Colorado. We continue to see a good pipeline of deals coming in for review. And we're carefully evaluating each one of the appropriate balance between risk and return. That concludes our prepared remarks. At this time, we would like to open up the call for questions.

[Operator:]

[Operator Instructions] Thank you. Our first question comes from the line of Michael Rehaut with J.P. Morgan. Your line is open.

[Michael Rehaut:]

Thanks, and good morning, everyone. The first question I had was just going back to community count for a moment. We understand that your comments included an expectation for 4Q to be up sequentially -- average community count to be up sequentially versus 3Q. But I think earlier you had talked about a year-end community count goal up 5% to 10%. Is that something that you still expect to achieve, or given some of the delays, we should be thinking something a little more modest relative to that number?

[Bob Martin:]

Mike, it’s Bob. It’s a good question and you are right on the prior statement. Yeah, I would say at this point, we saw an opportunity to get this somewhere around that 5% increase level. 10% seems a little bit too optimistic at this point so closer to 5% appears more reasonable.

[Michael Rehaut:]

Okay. That's helpful, Bob. Appreciate that. And also on the interest amortization and COGS, obviously, this quarter on a year-over-year basis driving really, I guess, the improvement in terms of the reported gross profit margin, ex-impairment. So just trying to get a sense, given your current debt levels and inventory and perhaps we are looking a little bit into the future here, but how should we think about that trend into next year? I mean, would you expect that impairment, I'm sorry the interest amortization, to continue to come down and drive some of the improvement or would you expect improvement -- if you expect improvement at all, would that be driven more through a pre-interest improvement around either mix or pricing or better land purchases?

[Bob Martin:]

Well, I guess, on the interest and cost of sales for the third quarter, we’re about 280 basis points. On a historical basis, we’ve seen it lot lower than that. So I think there is potentially room for improvement in that number. But it does depend on velocity, both what we’re experiencing currently and what we expect to experience. So that one comes with the caveat. In terms of other gross margin improvements, we really don’t forecast a number out there. Certainly, we’ve been very focused on balancing price increases with an absorption pace to try to see if there is additional room to improve the gross profit margin and we will continue that focus as we move forward. As for the land purchases as I indicated in my prepared remarks and we’ve been very cognizant, we do not believe we have reduced our underwriting standard for the new stuff that we bought. So we’ll see how those ones turn out.

[Operator:]

Thank you. Your next question comes from the line of Stephen Kim with Barclays. Your line is open.

[Stephen Kim:]

Thanks very much guys. First question related to a comment, I think Bob that you made regarding your backlog in the -- sorry, your margin in backlog being a little lower sequentially. I guess I was curious if you could shed a little more light into that specifically, because I would have thought that your backlog maybe would have had a bigger mix of Colorado units that you mentioned that as the area where you had a lot of labor constraints and you had also indicated that Colorado margins are or returns in that market are very good I think when you’re talking about your land spend. So just trying to reconcile those two factors, why do you think your margin in backlog is trending down when you have that favorable tailwind?

[Bob Martin:]

Yeah. That’s a good question, Steve. There is a couple things. First of all, the comment was with respect to the margins in backlog at 6/30 versus margins in backlog at 9/30, September 30, just to be clear.

[Stephen Kim:]

Yes.

[Bob Martin:]

And it’s not a dramatic decrease disrupted as slight, Steve. There is a little bit of mix going on, you’ve got Colorado in there, but we've got fairly decent margins in Las Vegas and that moved down a little bit. So, that's part of it. We also saw spec margins down just a little bit in backlog as well. So those are two other factors.

[Stephen Kim:]

Okay. That’s helpful. And then I guess second question would be related to the pace of sales in light of labor constraints. It seems that your absorptions were pretty good, improved and it was just that you didn't have as many communities open. But I was curious if the longer cycle times are encouraging you in any noticeable way to reduce the level or intentionally slow the pace of sales essentially, either through raising prices or what not, if you can just shed a little light on that?

[Bob Martin:]

We commented in the second quarter specific to Colorado that we actually limited lot releases to slow down sales to a certain degree in that quarter. Third and fourth quarter, the activity is not as robust any ways, so it’s a subdivision by subdivision, look at things, certainly production levels, and how many years we have in backlog coming to account as we are talking about that. And I think as we get into the fourth quarter, but especially as we get to Q1 and Q2 we will continue to see how that story plays out and how aggressively we want to increase prices. But it is a part of the equation, the level of backlog, no doubt about it along with just our overall absorption pace, it’s certainly a bouncing act.

[Operator:]

Thank you. Our next question comes from the line of Ivy Zelman with Zelman & Associates. Your line is open.

[Ivy Zelman:]

Thank you. Good afternoon, guys. If we could just take a bigger picture view of the world and recognize, there seems to be a lot of panic in housing-related equities right now and some of that is related to misses on revenue can obviously constraint around labor delivering backlog, we saw [indiscernible], now we saw you guys. And kind of curious just with respect to the installation that you’re going to see as a result of these labor constraints and really looking out and not putting a definitive number, but is this going to result in contraction in growth enough that or moderation in growth that was one of the key growth? I think having some of your perspective Larry to allow for some of that optimism that you spoke of it getting in the call with all the metrics whether you cited they are pointing in the right direction, half information, employment, affordability I think people are running to the exits on the presumption that close is actually not only going to moderate, but we’re going to see contraction in housing. And I think some of your views as it relates to the constraints and what it will do to growth, is it something that is a structural change now because we have unfortunately no longer illegal immigrants working for the homebuilding industry and therefore can’t be fixed? Give us some of your perspective on what we can see for growth with these constraints or some perspective that will frame it for us because I think a lot of people are panicking based on how we actually traded.

[Larry Mizel:]

I think we’re in a period of time that all the factors are coming together that I believe will signal a strong housing market as to the numbers of whether you're going to do 600,000 sales or 800,000 or 540,000, it’s not fully clear, but one thing is clear the market has a good tone that the majority of builders have a good demand that the mortgage market is certainly opening more and more every month. There's a new lender coming in, so we’re able to expand the perspective of the mortgage supply to the buyers. We see the aggregate unemployment rate in our country continuing to contract. I think the building business is going to -- as an industry is going to improve on a very solid basis. There is not a lot of speculation going on. The markets that we’re in are we’re very focused when you look at the West Coast. You look at the salient places whether they are Colorado, Arizona improving, Nevada continuing to perform; Utah, you look at the unemployment rate, I think it's like three in change and we’re expanding there; Washington, everyone kind of knows what's happening there; California is a pretty robust. We're very pleased with our absorption rate. We’re pleased that we’ve continued to expand our land acquisition in light of the fact that we have controls that take us in the level of 3 to 4 years of the land supply and we’re expecting to be able to meet those objectives. I think this is a unique time for the industry. Usually, it’s not always where you have plenty of money, you have a good demand. There is no drama going on per se in the United States other than maybe a Presidential election which will be interesting. So I would say individually and as a person in the industry, this is pretty good, and you give it time for execution over the next couple years, I think people will be very pleased with the performance that this industry is it regains its traction from a decade ago.

[Ivy Zelman:]

Well, that’s helpful, Larry. But let me just follow up with more question just to drill in a little bit further because of the labor constraints. And Denver, that’s only a market where we appreciate the labor constraints to the greatest. Does this work itself out over time and do you see the industry figuring out how to bring in more labor? Is it about rotating out of where jobs have been lost into construction related jobs? Is it something that will be impediment for growth, or is it labor issue something that work itself out? And to the labor inflationary costs, are they going to negatively impact margins or are they offset with commodity deflation and home price appreciation?

[Larry Mizel:]

I think that the home price appreciation will mitigate the labor supply in all the years that we've been in the business. It's only natural that we have a labor shortage when we haven't demand issue. We have too much labor when there is no demand. So does it work itself out? The one thing about labor in this country even though there is a shortage in our industry, it follows pricing. And when you aren't able to get adequate labor at $18 an hour, maybe at $25 an hour, there is migration from other parts of the country to those parts of the country where there's demand factor. And this is in several of the traits but I think it's all good. It’s better to have a labor shortage with a strong demand than to have something that was different that we previously experienced over the recession. So these are all good problems and like everyone, we will solve them because that's what our job is.

[Operator:]

And thank you. Your next question comes from the line of John Lovallo with Merrill Lynch. Your line is open.

[John Lovallo:]

Hey guys. Thanks very much for taking my call. First question is can you quantify to what degree build times have extended on a year-over-year basis?

[Larry Mizel:]

Gosh -- on dirt builds, you're probably talking in the neighborhood of about 5% to 10%, just very roughly.

[John Lovallo:]

Got you. Okay. And then if we think -- I guess my second question is, if we think about just the progression of the quarter, just given the September print in new home sales, was there any decline in demand that you guys saw kind of throughout the quarter, or how is the cadence throughout the quarter?

[Larry Mizel:]

We really saw the opposite. We saw more activity towards the end of the quarter, both sequentially and year-over-year.

[Operator:]

Thank you. Your next question comes from the line of Will Randow with Citigroup. Your line is open.

[Will Randow:]

Hi, guys and thanks for taking my question. I guess in terms of when you think about potential for constraints and growth and waiting for proactively, I guess waiting for the labor issues to work themselves out, how do you think about the balance sheet in the lower growth environment, maybe a level off the balance sheet, think about potential stock buyback, increasing the dividend? Just what are your thoughts there in terms of how can you be proactive while labor issue kind of sorts itself out?

[Larry Mizel:]

We expect to be proactive on an active basis. So, all the elements that one should be doing we are doing. We have from a decade ago authorization for buying back stock. I think it’s been -- what year was the -- year that we bought back stock?

[Bob Martin:]

2003.

[Larry Mizel:]

2003. So it’s something that was thought of. But anyway, it's a factor of the dividend. We are proud that we were able to maintain the dividend through a difficult period. And we are sensitive to making a return for our shareholders and we are focused very diligently on the growth of the company and the profitability. And all the options are always on the table and we will always evaluate it for whatever is the best for the shareholders.

[Will Randow:]

And I guess just as a follow-up on the land market as well as some of the other building materials outside of the lumber, which is pretty visible. What are you seeing -- are prices backing off for good lots and good locations given the constraints, or are there any other derivative effects to think about?

[Larry Mizel:]

Well, one of the effects that no one really has articulated is the banks, the regional banks have opened the credit market to land developers and where for many years all they had was problems. You're now seeing the development of land, beginning to open up and to come to market. And I think it's really positive because it’s demand fold. It isn’t supply driven. So, we are able to see that this is an area that I believe will be properly supplied and there's a reasonable amount of transparency. There is reports available from different of public sources of availability of lots, finished lots, land, land and development. So over the next 30 years, I expect to see the supply of land priced appropriately and the reason why it has to be priced appropriately because if there's not a reasonable rate of return, the builders just won't buy it. And these are factors for those people that are in the business everyday are pretty easily attainable as far as the information and the metrics of how one should transact.

[Operator:]

And thank you. Your question comes from the line of Steven East with ISI. Your line is open.

[Paul Przybylski:]

Thank you. Actually, this is Paul Przybylski on for Stephen. The first question I had was, it relates to your marketing expense. It was flat on a dollar basis but last year I believe your community count was up nearly 27% and in this quarter, it was down 8%. Can you add any color on that? Is that an indicative of your community growth, I mean the 5% didn’t sound like it’s too robust or what was driving that number this quarter?

[Larry Mizel:]

The only thing I can really think of is deferred marketing dollars per home has trended up over the course of past few quarters. But it’s not something we really focused on as a major driver.

[Paul Przybylski:]

Okay. And then Denver orders were a little bit softer than what we were expecting. It doesn’t sound like you were putting a governor on them like you did last quarter. Is there something -- has the market overall slowed or is that a community count issue, anything you could addo to that?

[Larry Mizel:]

Well, I think for Denver, there is lot of factors that come into play. I think we are managing on our community by community basis. And depending on where they are at, they do some things that might slowdown orders a little bit depending on circumstances but it didn't strike us as really anything in particular that’s an issue in Denver. Obviously, prices have moved up quite a bit, that’s always going to have some impact. But given that’s the third quarter it's really not the time period that we hang our hat on. We are really just focused on the build cycle at this point.

[Operator:]

And thank you. Our next question comes from the line of Jay McCanless with Sterne, Agee. Your line is open.

[Jay McCanless:]

Thanks. Good morning, everyone. First question I had, could you discuss how cancellation rates have trended at the beginning of the fourth quarter and how they compared to last year’s 28%?

[Larry Mizel:]

I don't think I will comment on the fourth quarter at this point, especially given we haven’t even been through a full month at this point. As indicated, we were actually down slightly for the third quarter. I think that’s a really good sign because you had such an increase in your backlog, in backlog over the same period, in backlog or cancellations as a percent of any backlog were down 600 basis points.

[Jay McCanless:]

Got it. The second question I had, could you discuss in percentage terms or day terms how much longer the cycle times are now versus where they were last year? And is NDC having to payout incentives to keep people in the backlog and keep the cancellation rate from spiking hard?

[Larry Mizel:]

Yeah. I think I had answered the first one earlier. It’s about 5% to 10% increase in cycle times and the answer on giving extra incentives is no. We are not seeing that. We really don't need that to keep people in backlog.

[Operator:]

And thank you. Our next question comes from line of Nishu Sood with Deutsche Bank. Your line is open.

[Nishu Sood:]

Thanks. First question, I wanted to ask. There is some reports from the field that you folks are planning to reintroduce a first-time buyer product specific way. So just wanted to get your thoughts on that, what you're seeing that is driving that efficient? How is demand been amongst your current existing products that might be focused more towards the first-time buyer and also was that part of the increase in the lot count in the third quarter?

[Larry Mizel:]

I think first of all, one of the big factors that we look at is just the overall increase in sales price and it has gone up. For us, it’s gone up quite substantially across most of our markets. And that’s partly a shift to a higher end mix. And that consumer segment has been pretty good to us, so we can't complain about that. At the same time, we do think it’s wise to also have product available for more of that first-time buyer. And specifically, we are also aware that there is a millennial generation that’s been delayed in coming to market, if they’re getting married later and having kids later. And I think the development of that kind of product is in response to that potential demographic becoming more active in the home buying process as well. It's too early to say at this point how it's doing. We really haven't rolled it out broadly anywhere at this juncture, but it will go into production here in the next couple of quarters. But certainly, we are looking for a land position that supports those kind of projects.

[Nishu Sood:]

Got it. Great. Appreciate the color. And the second question, you mentioned the impairments being focused on the Mid-Atlantic market. And so a significant impairment, I was wondering if you could give us a little bit more color on what sort of communities and whether there are any further in-buy from the mid-Atlantic area? And also against the absorption increase, if I remember correctly from Alan was quite strong. So did the impairment allow or pricing to drive absorption, were those two correlated because the absorption kind of stands at odds with -- obviously, as you folks described the relative weakness of that market compared to others?

[Larry Mizel:]

Yeah. There’s a lot of questions in there. But I guess, first of all, I’d be happy to give you a little bit more color. With regard to any future impairments, we did a really thorough analysis for Q3 and that’s how we came up with the $4.4 million of impairments. Any impairment in future periods will depend on the facts that are in place when we update our analysis at that time. So, I want to make that clear. As far as the impairments go, again, most of it was on three assets in mid-Atlantic. And it has been a weaker segment of the country for us over the last few quarters. There was a few other assets that were impaired, three more. But the bulk of the remaining impairment was just a couple assets that we had designated for sale, for a couple different reasons, nothing very significant. We heard your comment on absorption pace, getting a little bit stronger in the mid-Atlantic. I think Maryland, you said specifically. I don’t think that’s necessarily contrary to the story. First of all, it was coming off of a fairly low base but second of all, certainly in those markets, in certain subdivisions including the once that we impaired, we recognized the need to decrease prices to drive absorption pace. So, to a certain degree it was hand in hand in this case.

[Operator:]

Thank you. Our next question comes from the line of Michael Rehaut with J.P. Morgan. Your line is open.

[Michael Rehaut:]

Thanks. Thanks for taking my follow-up. Just wanted to kind of focus on the ASP for a second in your demographic exposures? Obviously, in the 400 or mid-400, depending on how you look at, ASP or pricing backlog, probably a bit higher than I would assume you guys ever thought you'd get to given that -- given your legacy in terms of more -- having a pretty strong focus on the first time. So I just want to get a sense of -- as you look at your demographic mix today, what's your percent of first time versus first time move-up and second time move up and maybe other, you can put luxury or active adult in there? But and within first time, is it really more of that kind of better financed or higher qualified millennial that’s waited 10 years or obviously, doesn’t seems there’s like a lot of first time traditional, which you would think would be one the entry-level side?

[Larry Mizel:]

Yeah. That’s -- I get the question there, Mike. I think first time in the quarter that was about 25% of what we did. And I would characterize that first-time buyer as maybe a little bit more on the higher end, there’s another category of starter home, I would call it and we don’t focus on that as much. We have about 50%, that’s in that first time move up category then the balance about 25% would be in that second move category.

[Michael Rehaut:]

Okay. So within the first time then of that 25%, not much of that is really the -- that entry-level product that like a D.R. Horton is going after or that, perhaps, in the past that was more of a typical product for your portfolio?

[Larry Mizel:]

I wouldn’t say that’s been typical in the past. I think we’ve always been try to do a little bit of a nicer house then kind of the comparison that you brought kind of that express type of house. We’ve done, I think, a little bit better product than that throughout. But certainly our mix has shifted towards a little bit more of a move up type of house as we indicated based upon the increase in our ASP for closings and sales.

[Operator:]

Thank you. Our next question comes from the line of Alex Barrón with Housing Research Center. Your line is open. Alex Barrón with Housing Research Center. Your line is open.

[Alex Barrón:]

Yes. Thank you. Hey, guys. Sorry about that. This is more of, I guess, a higher level type question. I was kind of looking back almost 14, 15 years ago, what last time you guys had similar type revenues? And looks like the delivery were roughly half of -- I’m sorry, price where they are today, prices were half of what they are today. But I was more interested in looking at the margin, so the margins before the housing bubble were in the 19% to 23% range and today they’re absolutely 15%, 16%, 17% range? And I’m just trying to understand, what is the difference, I guess, in the environment today or is the land that’s higher, is the labor higher or is everything just higher, what -- I guess, what I’m trying to get that is, where do you guys think normalize operating margins are going to be and what’s you going to take to get there?

[Larry Mizel:]

Well, I think, that it looks -- first of all, it’s tough to compare the analytics of 15 years ago just off the top of my head. But to give a little tone of where we've seen the sales momentum is building, the price, of course, of everything over 15 years is certainly changed, I think the ratio of land to the sales price has increased as things have become more complicated in development. So as everything, the governments influence starting from the local city for zoning and cap fees and all these various costs and the regulatory world, its just like many industries, its changed a lot but so have the incomes, the affordability factor, I think is one of the higher affordability factors in many, many years. So these things are all balancing now. As you see where gross profit margins, we are improving ours and others are adjusting as to the balance between land that had not been previously -- or land that had been previously impaired and large parcels of land that have speculative factor. We’re very focused on executing a plan and the plan deals with the appropriate absorptions, which I think the market is moving in that direction. And the rate of return to the shareholders is in line. Our objectives are in line with -- that is reasonable within our industry and we expect to do a little bit better and we are on track for doing that. We've got more than adequate liquidity at this time for what we're doing. We are very pleased with the absorption rate. And when you look at Colorado, Nevada and California, we’re able to attract maybe third of the lots are finished, two-thirds required development. And you put all those factors together and you add to it ever be sensitive that our net debt to cap is around 34% which is very healthy, which shows that we have an adequate balance sheet for growth. And that is what our desire and our objective is.

[Alex Barrón:]

Right. And I agree your balance sheet is very strong. But regarding the absorption rate, seems to me there are roughly half of where I think most builders would like to be, which roughly four for a month and right now we are closer to two a month. So you mentioned affordability, do you foresee that in the coming years, the volumes are going to go back up higher or do you think because where ASPs are today that a lot of people doing that and stuff like that are prevented from qualifying. Somebody was just telling me the other day that the FHA just has some new regulations that are making it more difficult for people with student’s loans to qualify. Any comments on that?

[Larry Mizel:]

Well, I think just -- I think the absorption that we are doing is moving towards three. I think the industry is not much greater acceptance certain markets. The affordability is it that all time attractive level and the mortgage market is improving. I believe if you have a job, you have a good credit, and you have a down payment, and you have a full set of documents. You're going to find the loan for the person and the variable in some cases maybe a down payment. But the mortgage market is opening up and it is opening up on the sequentially improving basis. More people are changing their credit requirements. And even the government in some form is trying to help and the underwriting requirements, there is some new rigs that have gone into effect. But every one of us that are in the industry will comply and that’s just part of the government world that we live in. We are in a regulated mortgage market for certain products and all of those are obligated to conform to whatever it might be we will follow.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ken Zener, KeyBanc. Your line is open.

[Ken Zener:]

Good afternoon, gentlemen.

[Larry Mizel:]

Good afternoon.

[Ken Zener:]

What I have started to do is look at the builders' margins by region. Ad I wonder, if you -- obviously you talked about the collective gross margin, I wonder if you could give a little flavor to your EBIT segment margin? I kind of just did it out here, I am saying you’re basically reading like 7% EBIT in the West and Mountain and maybe about 1% in the East. Could you kind of talk about how those regions, the EBIT that you guys reported in a Q is different based upon gross margin and/or SG&A, which can obviously be impacted by price points? I’d appreciate that. Thank you.

[Bob Martin:]

We don't comment on individual market, gross profit that we start at an absolute level. Our 10-Q will become an out little bit later today. And I think you’ll see the dynamics in play in there and R&D instructions.

[Ken Zener:]

Okay. And then Larry you had mentioned how land prices ultimately need to move to point that is why their customer’s ability to be profitable and sustained themselves? How do you think you guys got impacted perhaps, does that imply 20% margin, I guess, for you all collectively? Would that be an assumption that we could make? And then second, how do you think builders that are forced or have made choices to go after the land kind of distort that market given that pricing is strong so there is including yourself and some of them reported last week have pointed to the labor issue. It doesn't really -- I’m not sure how the land guys care about the labor issue if they have the limited land supply relative to what the builders might need to do given other inflationary elements.

[Larry Mizel:]

Well, I think first of all, on the land front we don’t know what will happen with the land prices generally speaking. But it is going to be dependent upon what demand is out there. And if we do have more limited production capacity, I think you will see builders who have bought land in the past maybe anticipating higher levels of turnover, higher levels of overall volume. In the short-term we will no longer necessarily be as hungry for that land going forward. So I think that affects the balance on the land front. As for us, we continue to try to move our margin equation from our land acquisition standpoint asset by asset. And we are going to continue to be very careful about the underwriting.

[Operator:]

Thank you. There are no further questions at this time. Presenters, I’d like to turn the call back to you.

[Larry Mizel:]

Great. Thank you very much for being on the call today. And we look forward to being with you again for our fourth quarter earnings call.

[Operator:]

And this concludes today's conference call. You may now disconnect.