The New Home Company Inc.
Q2 2016 Earnings Call Transcript

Published: 29 Jul 2016

[Operator:]

Greetings and welcome to the New Home Company’s Second Quarter 2016 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Drew Mackintosh, Investor Relations. Thank you. You may now begin.

[Drew Mackintoshs:]

Good morning. Welcome to the New Home Company’s earnings conference call. Earlier today, the company released its financial results for the second quarter of 2016. Documents detailing these results are available in the Investor Relations section of the company’s website at NWHM.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call, which are not historical facts are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company’s filings made with the SEC, including in its most recent Annual Report on Form 10-K and in its Quarterly Reports on Form 10-Q. The company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures may be discussed on this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the New Home Company’s website and in its filings with the SEC. Hosting the call today is Larry Webb, Chief Executive Officer; and John Stephens, the company’s Chief Financial Officer. With that, I will now turn the call over to Larry.

[Lawrence Webb:]

Thank you, Drew, and good morning to everyone who has joined us today, as we review our second quarter results, and provide some color on the outlook for our business moving forward. The New Home Company made progress on a number of fronts in the second quarter of 2016, with a focus on three specific areas. First, we continue to grow the wholly-owned portion of our business at a significant pace, increasing homebuilding revenues by 311%. Second, we quadrupled our earnings per share. Thanks to revenue growth and SG&A operating leverage, and solid profit contributions from our Fee Building business and our joint ventures. Third, we laid the foundation for future growth in profits by increasing wholly-owned community count by 50%, and ending the period with the highest dollar value backlog in our company’s history. These accomplishments leave us well-positioned to achieve our goals in the second-half of the year and beyond. Despite with the performance of our stock would suggest, our strategic business foundation is poised for success. California boost some of the best housing fundamentals in the country. As of May 2016, the state has experienced job gains in 58 over the last 59 months, and the unemployment rate hit its lowest level in nine years. Existing home sales in California rose 10% in June on a sequential basis, despite inventory levels that are roughly 50% below normal. A strong employment picture and improving resale market and well inventory levels provide a very favorable backdrop for our business. Finally, our present and future land positions are in extremely strong locations to take advantage of these positive trends. Our company continues to be approached by developers to participate in some of the best masterplan communities in the Western United States. We have built a reputation for building award winning homes with an emphasis on design in architecture. And developers realize that having our company to be a part of their plans can enhance the overall appeal of the community. As a result, we are valuating an increased number of opportunities that fits our business model, which typically includes lot option agreement to our face takedowns, especially in Southern California. In short, I’m very optimistic about the future of the New Home Company, given the housing fundamentals in the markets in which we build, our stellar reputation and relationships within each markets. With that, here are some color on market conditions and our performance this quarter. Overall, our sales results this quarter suggest that while traffic and interest in our homes remain strong, buyers have become more selective. Communities within the same submarket can experience very different sales activities depending on price, location and a number of other variables. As a result, we have a number of communities that have done extremely well for us, and others that have seen slower absorption. One of the bright spots for us during the second quarter will be opening of our two Crystal Cove communities along the Newport Coast, which are opened to great fanfare. Those of you who attended our Investor Day in May got a chance to walk the models and see firsthand how unique these home sites are from an – the incredible views to the innovative architecture and spacious ultra living areas. We wrote a 11 new contracts between the two community century leasing, which translated into $59 million and sold backlog at the end of the quarter, posting especially strong interest in sales conversion at the higher price Coral Crest community, which carried an average sales price of $5.9 million before the inclusion of all option selections. With only 44 lots remaining in these exclusive communities, we are focused on making sure that we maximize value for each home that we sell. Homes sites at our Cressa community in the Portola Springs masterplan in Irvine continue to sell extremely well. Within an average sales price at just over a $1 million, the community has hit the sweet spot in the market as an affordable option for affluent homebuyers. By contrast, sales have been more moderate than we have previously experienced at our higher priced Amelia and Trevi communities in the nearby Orchard Hills masterplan. We have adjusted our efforts and strategy to disperse sales in these two communities and expect to see better results in the second-half of the year. We saw better sales and traffic trends in our communities in the Sacramento market. We sold a number of homes in our Cannery masterplan, as local competitor pressures eased during the quarter, and we have retooled some of our promotional efforts to be more competitive. We also wrote a number of contracts that are more affordably [price shape well] [ph] community in the southeast portion of the market. Finally, we will be launching our 336 lot McKinley Village masterplan in mid-September, and are receiving strong initial interest. This community will be the first new masterplan Sacramento in, at least, 20 years. Sales activity in the Bay Area were softer for us in the second quarter, which was mainly a function of selling out of our highly successful with Woodbury flats community during early part of the quarter and slower sales at Woodbury terraces. We have 22 more grand openings in the Bay Area during the fourth quarter, one of which is wholly-owned and another, which is a JV. Now, I’ll turn it over to John for more details on the numbers.

[John Stephens:]

Thank you, Larry, and good morning. As Larry indicated, we believe that the company has all the pieces in place to deliver strong results in the second-half of the year. For the second quarter of 2016, the company generated net income of $2.5 million, or $0.12 per diluted share compared to net income of $449,000, or $0.03 per diluted share in the prior year period. The year-over-year improvement in net income was largely due to a 139% increase in total revenues, a 1,880 basis point reduction in our SG&A rate due to better operating leverage from the growth in our wholly-owned operations, and a $700,000 increase in joint venture income. Home sales revenue for the quarter was up 311% to $79 million due to a 258% increase in deliveries and a 15% increase in average selling price. The increase in our average selling price was due to the delivery of seven homes from our Fiano project in Newport Beach, where our average selling price was $4 million, combined with a higher price point delivered in Northern California, mainly from our Woodbury flats community in Lafayette. Based on the homes in our backlog, coupled with the inventory we plan to sell and delivery in the back-half of the year, we expect our average selling price to remain relatively flat for the full-year 2016, as compared to the full-year 2015. Our gross margin from home sales for the 2016 second quarter rose 12.0% versus 13.6% in the prior year period. Excluding interest and cost of sales, our adjusted homebuilding gross margin percentage was 13.3% versus 14.2% in the prior year period. The year-over-year decline in margin was primarily the result of a mix shift in deliveries. However, based on the homes we currently have in our backlog or with the homes under construction that we anticipate delivery in the second-half of the year, we anticipate that our gross margin percentage will improve as compared to the 2016 second quarter. For the full-year 2016, we anticipate that our gross margins will be up in the range of 200 to 250 basis points as compared to the second quarter. Obviously, this estimate can vary significantly from quarter-to-quarter based on the mix of deliveries ultimately pull through, given the wide array of product and sales prices that we offer. Our SG&A rate as a percentage of home sale revenues for the second quarter was 13.8% versus 32.6% in the prior year period. The year-over-year improvement was largely driven by the strong operating leverage achieved from a 311% increase in home sales revenue due to the growth in our wholly-owned business. Based on our current revenue assumptions for 2016, we expect to see a continued improvement in our SG&A rate for each quarter sequentially as we move through the balance of the year. Our net new orders were up 60% to 64 homes compared to 40 last year. The increase was driven entirely by the growth in our active selling communities as our monthly sales absorption rate was flat with last year at 1.9 per average community. As a result of our increased order activity and beginning backlog, the dollar value of our backlog was up a 104% over the prior year to $278 million. Our fee building revenues for the quarter, which includes management fees earned from our joint ventures was up 40% to $30 million due to increased construction activity. The Fee Building business continues to be an attractive segment of our operating platform, as it provides incremental profits and returns, while leveraging our overhead with minimal invested capital. Our joint venture income for the second quarter was $3.9 million, up approximately 700,000 over the prior year period. The year-over-year increase was due to a 20% increase in total JV revenues, a 480 basis point improvement in homebuilding gross margins, and income associated with closing out one of our Southern California joint ventures. As of the end of the quarter, we owned and controlled approximately 5,600 lives, which included approximately 1,500 lots from our wholly-owned business, 3,100 to our joint ventures, and 1,000 in fee building lives. Moving to our balance sheet, we ended the quarter with $403 million in real estate inventories, of which $306 million, or 76% represented work in process, $61 million in land, and $36 million in land deposits. Of the nearly 1,500 lots that we owned and controlled through our wholly-owned operations, approximately a 1,000 lots, or 68% were controlled were under option, controlling a substantial portion of our lots through options and face takedown structure through a relatively modest amount of deposits enables us to turn our inventory quicker and be more efficient users of our capital. We ended the quarter with $243 million in debt to $51 million in liquidity, which included $3 million in cash and $21 million in availability under our revolving credit facility. Our net debt to cap ratio was 48.7%, and we expect our leverage to decline meaningfully by year-end due to the expected cash flow generation from operations in the second-half of the year, particularly in the fourth quarter. Now I’d like to update you on our full-year guidance for 2016, as we outlined in our earnings release. We are maintaining our home sales revenue of $450 million to $500 million. Due to increased construction activity, we are increasing our fee building revenue range to $130 million to $150 million, which represents a $30 million increase. We’re slightly adjusting our joint venture income range to $10 million to $11 million, and we are maintaining our wholly-owned community count of 13. In addition, we expect to have nine active homebuilding joint venture communities at year-end, including five at our McKinley Village project in Central Sacramento and two product types at our Mountain Shadows project in Paradise Valley, Arizona. Our delivery in revenue activity for 2016 is still expected to be heavily back-end loaded, with approximately 50% of our full-year revenues expected to deliver in the fourth quarter. I’ll now turn the call back to Larry for his concluding remarks.

[Lawrence Webb:]

Thanks, John. In conclusion, I’m very pleased with the progress we’ve made this quarter. We quadrupled our earnings per share and made further strides towards scaling our operations by growing our wholly-owned community count by 50%, and increasing the dollar value of our backlog by 104%. We believe that the substantial backlog growth will translate into material better results in the second-half of the year, while the increase in community count provides us with a platform upon which our company can continue to reach new heights. That concludes my prepared remarks, and we’d be happy to take your questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question is from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

[Alan Ratner:]

Hey, guys, good afternoon, and congrats on a good quarter.

[Lawrence Webb:]

Thanks, Alan.

[Alan Ratner:]

Larry, just a big picture question, obviously, you guys are tied to the high-end, and I think other builders, realtors we speak with, it definitely steals like the high-end of the market is slowing, at least, nationally. And I think even in some markets, we’re seeing price income under some year-over-year pressure. And I know you have several new community openings at the high-end and you’ve touted the uniqueness and obviously Crystal Cove is a one of a kind project. But I was hoping you could just talk a little bit about what you’re seeing from the consumer at the high-end specifically? What is – what are you hearing in terms of urgency competition with resale? What the spread looks like? And just in general, how demand from high-end buyers has progressed through the quarter, given all the macro volatility with Brexit, the upcoming election, et cetera. So just kind of a State of the Union, I guess, on the consumer, if you will?

[Lawrence Webb:]

Well, I do believe there is a lot of misconceptions within the industry on the high-end market, and so I’m glad, you asked me that. First of all, at the very high-end of the market and each markets definition that varies. But for us, coastal California, for example and by coastal, I mean, really seeing the ocean. That market is still very, very strong, and those buyers have tons of choices. Their urgency is – varies by number of lots and by their ability, they don’t want to compromise about anything. So at the very top of the market, we’re quite comfortable that that’s going to continue and be solid, and we’re seeing it in those Crystal Cove projects. It’s very clear. We also had a project called Fiano last year that we’re delivering this year. And we – this year, we’re delivering 28 of those homes and the cancellation rate is zero, it’s nil. And the demand continues to be really strong, where there are issues and it’s case-by-case when you’re really not at the top of the market, your second move up, maybe even third move up and you’re in a B location, not in A location. That’s what people are being more selective. And after that market, it varies from location-to-location. But big picture, anywhere you’re in a strong school system, anywhere you have unique quality, you’re fine. It’s where there’s some overbuilding that’s where there’s some softness or issues. But kind of big picture, if you do it right, you’re fine. If you compromise in some ways, then you do see problems.

[Alan Ratner:]

Thank you for that, Larry, it’s helpful. And I guess just – that’s interestingly that you kind of clarified that the move up that you’re in a Billion, if you will. But when you look at your land portfolio, obviously, you’ve got the active communities here on Crystal Cove. But 2017, 2018 and beyond, if you just look across your upcoming communities, how would you kind of stratify that between the A++ Crystal Cove type communities versus any exposure to – more of that – more problematic submarket that we see today.

[Lawrence Webb:]

Well, in the past I mentioned this and I’d like to reiterate it. There is only a few really unique sites anywhere in any marketplace. We’re going to always be looking at those. But big picture where we think that sweet spot is in the high quality masterplans, and those are primarily in Southern California and then we’re creating two in Sacramento. The Bay Area hedged very few master plans. In these masterplans that are well done and for Southern California, it would be Irvine, it would to be Great Park, it would be Rancho Mission Viejo, those markets are still very solid. And because the master developers have done a good job of market segmentation and our price point actually will be coming down, because we’re – in each of these marketplaces, our pipeline – we’re looking for ways – the deepest part in each of these areas. And when we move forward, we’re going to have more projects probably in the $600,000 to $1.2 million range in the future. And what that will mean is our absorption will go up, our turn will go up, and it will be safer longer-term play for us. We’ll see that more in 2017 and obviously a bigger part in 2018.

[Alan Ratner:]

On the flip side, did that – does that mean you’re – you’ll be going to tell more with some of the other large republics, because that $602 million range, I think, is where a lot of the larger public space as well, especially in California?

[Lawrence Webb:]

Well, the real answer is, it could happen. It wasn’t for the masterplans having really good segmentation. Every community that we’re going in and we’re going in all of them, we’re positioned to have quite a competitive advantage. I’ll give you a perfect example. First quarter, we opened Cressa, $1 million first move-up home in the Portola Springs area of Irvine, were surrounded by many, many competitors, and I believe we have the fastest-selling community in the entire area. So as long as our segmentation, remember, one of our strengths everybody is that, we do incredible consumer research and architectural design in understanding our buyers is where we feel we have a competitive advantage. So, to competitive industry bring it in on.

[John Stephens:]

I think the other thing too Alan is, if you look at what we do further Irvine Pacific on the fee business, most of what we’re building there is $500,000, $600,000, up to $1 million. So we’re delivering probably close to 600 homes this year on their behalf. So I think in terms of trades and relationships and the ability to move through those projects that have good pace, I think we have that know-how.

[Alan Ratner:]

Great. Thanks and good luck.

[Lawrence Webb:]

Thank you.

[Operator:]

Our next question is from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

[Michael Rehaut:]

Hi, good morning, guys.

[Lawrence Webb:]

Good morning.

[Michael Rehaut:]

First question I had was on some of the comments, Larry, that you made earlier regarding, kind of, giving some differentiated commentary on some communities versus others along the lines of buyers being coming more selective. And you mentioned specifically, if I have this right that $1 million Trevi, you’ve adjusted some of your sales efforts for – to get a little bit better pace in the second-half, and also in the Cannery project in Sacramento, you retooled some promotional efforts. So I’m just curious if – what those adjustments mean from a gross margin standpoint, if there was any adjustments there, if there is – or if this was just more kind of moving the bag of efforts that you have kind of shaking it up a little bit, but on a net basis it remains the same from a profitability standpoint?

[Lawrence Webb:]

Well, the reason I explained that in and I would say even one – everyone to know that everything is in a big success is that, I believe that one thing investors want to know is the straight scope. And those two projects Trevi and Amelia have been very solid force from our inception. We did have some slowdown, but I think John would reiterate that we were – because those are proper participation deals with the Irvine Company, we can cut back. We can give people some design center credits. We can do some landscaping, and it really doesn’t impact our margins too much, because the majority of that we were weigh in the proper participation with Irvine Company. And so it really – we can continue to push our absorption where we wanted to be, which is about two a month, without really impacting our margins. In Cannery, in the City of Davis, it was much less about impacting our margins and much more about refocusing and making sure that not just The New Home Company, but all builders were being successful. And I think we’ve done that and we’re seeing the results for, not just us, but Shea and Standard Pacific as well – our Cannery, excuse me. But John, do you want to…?

[John Stephens:]

Yes, Mike, I would just add to Larry’s point. I think the point on a million Trevi, we were – we’ve had a pretty strong price appreciation since opening a couple years ago there. And so like Larry said, we’re able to do some things to try to make a few more sales and again it’s not really impacting our net gross margin on those, because we’re so far into the profit participation. And then on the Cannery projects, Mike, those are well above our companywide gross margin. So having purchased of that of a land development joint venture that we produced, it provides a little more margin there. So, again, you have the ability to adjust it if necessary, I think with some of the communities that opened earlier in the year, just absorbed some of sort of total demand. Having said that, like Larry said, the community seems like, it’s gaining traction, parts are getting finished there, lot more activity in buys sort of in that Davis around that project.

[Michael Rehaut:]

That’s very helpful. Thanks, John and Larry. I guess, second question just on bigger picture around footprint, obviously it’s been couple quarters or so, since the announcement on the Phoenix expansion. So I was just trying to get a sense of how that’s coming along when you might expect to see deliveries and contributions from that market and if you’re all looking at either further expansion within the Phoenix market, or if there any other markets that are closer to becoming part of The New Home footprint?

[Lawrence Webb:]

That’s a great question. Let me give you a quick update on Phoenix and really Scottsdale Paradise Valley, it’s all positive. We will begin initial sales on our two Paradise Valley projects at Mountain Shadows at – in the fourth quarter of this year. We expect deliveries late 2017, beginning there. So far the initial – our initial indicators are, this would be a very visible and very successful project. We are in the Scottsdale Paradise Valley area. We are looking at a series of other communities, primarily and began infill within that area. We have one other very exciting project under contract right now. But we’re not quite ready to make all our announcements, but we are seeing a lot of opportunities there. Regarding expansion into other marketplaces, it’s something that we are continuing to look at. We will – but that said, we also have a lot of opportunity to continue to expand within our three existing markets. So I would say that big picture, its likely will expand into a new market every year, Phoenix was this year, maybe 12 months ago. There will be other opportunities, the Western United States space. There will be markets with land constraints with good demographics, we are seeing these opportunities.

[Michael Rehaut:]

And thank you Larry and I guess just – finally just to clarify the one that that’s under contract I mean the two communities in Mountain Shadows, Paradise Valley that’s JV communities, if I have the right. Just curious about the one under contract, if that would be wholly-owned under JV, if you feel comfortable giving that type of detail? And as you’re thinking about Phoenix and I think in general, you kind of talking about wholly-owned perhaps becoming a bigger and bigger part of the business. How to think about the growth more broadly?

[Lawrence Webb:]

Well, we’re going to look – Phoenix first of all, we think there’s great opportunity in infill there. We will – we have strategically been doing more and more wholly-owned. But our primary focus is always on return on equity, return on our investments. And for some of the larger projects like the Mountain Shadows project, it made a lot of sense to venture it. The newer community that we’re looking at, the jury is still out on that, but there’s a very good chance. That would be a venture two. But we haven’t made a final decision on that yet. What we want to do with every investment we make is maximize our return on our capital. And to take what we have and get the quickest returns the best way. In Phoenix, we’ll do wholly-owned projects, but the first one was it – we thought it was wiser to venture.

[John Stephens:]

Yes, so Mike at the end of the day it’s probably depend on the size of the investment and a return of capital relative to that. So again larger deals that have a longer tail larger upfront capital requirements, and we have been leading to put those in JVs.

[Michael Rehaut:]

Right, great, thanks guys.

[Lawrence Webb:]

Sure.

[Operator:]

Our next question is from the line of Michael Dahl with Credit Suisse. Please proceed with your question.

[Michael Dahl:]

Hi, thanks for taking my questions. Larry thanks for all the helpful color around the markets and submarkets. One more question around this, I think just trying to understand a little more about how you’re combating some of the environment in terms of just more selective buyers in certain locations. It sounds like in Irvine you’re little more willing to adjust given the profit participation. If you could just give us kind of a breakdown of how many of your communities are you – having to make either upward adjustments to incentives or downward adjustments on price versus how many are you holding, and how many are you still raising price at that would be helpful?

[John Stephens:]

Yes, hey Mike, I’m just going to comment real quick again on the margins and Larry can kind of fill in some blanks as well. Again our margins are expected to improve over the next couple of quarters like I said on the call to 200 and 250 basis points. And just kind of reiterate the point that Larry made earlier on Cressa that’s a project in Irvine, while we’ve actually been raising prices there. There’s a price over $1 million, I think you saw it on the tour when you were out. But I think to Larry’s point when you get up to some of the higher end spots where there’s more competition prices have gone up for example on our million Trevi since we opened it. And again that’s just being prudent about what sort of design options were include in the homes and not, what’s going to be purchases an extra or not, so Larry I don’t know if you want to do.

[Lawrence Webb:]

Sure I can add a little something, if we add between 20 and 25 communities both wholly-owned and JVs today, I would say about a third of our communities we are continuing to significantly raise prices within our release. We have another third where we’re moderately raising prices within every release and we have about a third that we’re holding the line. And of those third, what we’re holding the line maybe half of those, we’re doing some sort of in that and incentives or other approaches to continuing to keep our absorption up, or even improve absorptions. Overall, we always – our goal always is to be raising prices, because for a million reasons. One is we always want to maximize our returns. Second, we want to always have our homes in backlog and our buyers in backlog would be comfortable. If you want to see some real results of that I would say that our cancellation rate has always been one of the lowest in the industry and continues to be that. We – when someone buys a home from us, we really are comfortable that they stay in the deal. So big picture most of our communities are doing quite well. We have a few would like to do a little better, but overall our margins are heading up okay and they’re heading up as John said in the 200, 250 basis point rate.

[Michael Dahl:]

Okay, that is helpful. And then on the Cannery specifically I’m sorry if I missed this. But the adjustments you made there, I guess you have two product lines townhomes and single that detached which side of – which product line we have into make adjustments with it?

[John Stephens:]

It was primarily on the lower price products and there was another product line that came in from another builder that they had sort of I’d say priced a little more aggressively. And but we were getting good absorption there again and like I said earlier this is a project Mike that we bought out of one of our land development JV, so a pretty good margins there.

[Lawrence Webb:]

And in addition in the Cannery, we feel still strongly about the market that we’re recently made a decision to buy another parcel there that will be condominiums that are priced at the low-end of the market. So the Cannery, it’s really a great community. And if any of you haven’t seen it I’d highly encourage you to go see it it’s one national community of the year by both the Pacific Coast Builders Conference in the National Association of Home Builders. It’s pretty unique and we’re very proud of it.

[Michael Dahl:]

On the – on that last part Larry could you give us sense of how many condo units you’re going to build and…

[Lawrence Webb:]

Yes, it’s about a roughly 110.

[Michael Dahl:]

Okay.

[Lawrence Webb:]

And we’ll be starting in the fall maybe right at the end of the year, we’re working on. We have everything in place. But we and our goal we probably won’t be seeing significant deliveries until 2018 there, because of the construction schedule will probably get one phase in the fourth quarter of 2017, but probably in 18 deliveries.

[John Stephens:]

Yes, most of that – that’s I’m pushing both. It’s mostly 18, but we feel very strong we’re positive we’ve done a bunch of research there and it’s clearly an area that both empty nesters and young couples are interested in.

[Michael Dahl:]

Okay, great. Thank you.

[Operator:]

Our next question is from the line of Alex Barron of Housing Research Center. Please proceed with your questions. Mr. Barron your line is open for question today.

[Alex Barron:]

Hey, good morning guys sorry about that.

[Lawrence Webb:]

Good morning.

[Alex Barron:]

Well it’s good to see the progress on the wholly-owned. John, I was hoping you could maybe shed some light on the SG&A on the selling and marketing components. So the percentage seems to jump around quite a bit quarter-to-quarter. So maybe I’m not modeling correct that correct. Yes, I was assuming most of that would’ve been broker commissions is there anything else it’s more of a fixed nature in there or what else is in there?

[John Stephens:]

Well I think on a year-over-year basis Alex obviously last year that the revenue number was very small in the wholly-owned side. So just the G&A, not itself was quite large as the percentage. In terms of the costs that are more variable you’re right the commissions and we are amortizing our capitalized marketing costs as we made that change at the beginning of the year. So even as a percentage that run, I think at 3.6% as percentage of revenues during the quarter, which was down from the prior year quarter. But again last year first quarter – second quarter we just didn’t have much in the way of revenue. So we do expect that the SG&A run rate to come down as move to the balance of the year, obviously our revenues are going to increase in the next two sequential quarters. And expect to see SG&A improvement sort of in that 125 to 150 basis points on a full-year year-over-year basis. So it’s really a function of the timing when we go through those deliveries and the revenues flow through.

[Alex Barron:]

Got it, and then I was hoping you guys can comment on some of the timing of the opening and some of your newer communities, seems like you got a few I guess in the Hopper. So can you just kind of talk to that if that’s I mean NorCal I guess I’m expecting that if…

[Lawrence Webb:]

We have two communities in Northern Cal, one in Fremont and one in Santa Clara that we’ll be opening in the fourth quarter. We – and then we have a major master plan in Sacramento that is JV, but its five housing programs in great neighborhood in Sacramento that’s going to open in September. So those are our primary openings and they’re all in Northern California. Everything else we have in the Hopper we’ll be opening in 2017, I think,. John, do you have anything else?

[John Stephens:]

Yes, the one he rested, we have one and just sort of opened late at the end of the quarter in Fremont and we have another kind of follow on Fremont, actually that pushes over to next year. But fourth quarter we have a project in Santa Clara and like Larry said the – we’re going to be grand opening in our Titan’s [ph] JV and then we have the McKinley Village.

[Alex Barron:]

Okay.

[John Stephens:]

That has five communities opening and then we have one small project that opened in the third quarter Alex it’s in Sherman Oaks, but it’s very small.

[Alex Barron:]

Got it, okay. As far as the price that are in McKinley Village what’s the price ranges that those things are going to be those five communities that expand?

[Lawrence Webb:]

Yes, sure. Alex, they called homes, they not called things, okay. These home sites are between $350 and about $700,000 maybe even a little higher. So and we have a wide range from condominiums to camp houses to zero lot line houses to detached traditional detached in homes. It’s going to be a very unique project and it’s called McKinley Village.

[Alex Barron:]

Okay, thanks a lot. Thanks.

[Lawrence Webb:]

Thank you.

[Operator:]

Our next question is from the line of Barry Haimes with Sage Asset Management. Please proceed with your questions.

[Barry Haimes:]

Thanks very much. Just had a question on gross margins, you talked about the stronger gross margin that you’re looking for in the second-half. But if you look at over the next couple of years, I wonder if you could just kind of talk through where you think you’re targeting gross margins on a normalized basis? Thanks so much.

[John Stephens:]

Yes, I think it’s – first we’re not going to give guidance on 2017, but I think at the end of the day it’s really going to be a function of where we’re building and whether these are on option programs, or they sort of programs where you’re sort of doing a bulk take out. The reason our margins are little bit lower relative to the JV properties that we have is because there are typically on option – in master plan communities were taking lots over a period of time. And in return for that there’s much profit participation as well and those master plan communities. So having said that, I think that again for doing those master plan communities, we’re more focused on our asset turn or return on equity on those deals, so margin – is it necessarily the number one thing we’re looking for it’s really half of it, we can deploy our capital turn that asset.

[Barry Haimes:]

That makes sense, if you were to kind of just breakout where you do have a full takedown in the land as opposed to options, what would be the gross margins look in that part of your business versus the overall?

[John Stephens:]

Yes, I mean, typically again, it depends on the risk of the site and what sort of, if there’s a significant land development or you’re buying finished lots. But if you’re doing a lot of land development, you would expect a little higher gross margin probably in the 20% range. You can see our joint ventures have been above 20% for the last several quarters. And again, those are more complicated larger deals with more land development and obviously you just expect a higher margin on this. But again, if you’re buying finished lots on a rolling option basis or some sort of face tickdown from large masterplan developers and large – in very A locations, you’re not going to typically see a 20% of growth in that.

[Barry Haimes:]

Great. I appreciate the color. Thanks so much.

[John Stephens:]

Sure, no problem.

[Operator:]

Thank you. At this time, I’ll turn the floor back to management for closing remarks.

[Lawrence Webb:]

Okay. Thank you. I think that most of you have seen that we – and heard our story, many of you on the line have been to our Investor Day. We recognize that we’re a little different than everyone else, but we like that difference. We feel like we are laying the right foundation to continue to grow the business. Our fee business is improving. Our JV businesses is being reduced, but it’s very solid, and our wholly-owned opportunities continue to grow. Second quarter is the beginning of something that’s very positive in The New Home Company. We’re optimistic about the future, and we appreciate your support. Thank you.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may now disconnect your lines at this time.