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Executives

Drew Mackintosh - Vice President, Investor Relations

Larry Nicholson - Chief Executive Officer

Gordon Milne - Executive Vice President and CFO

Dave Fristoe - Senior Vice President and Controller

Analysts

Ivy Zelman - Zelman & Associates

Nishu Sood - Deutsche Bank

Michael Rehaut - JP Morgan

Adam Rudiger - Wells Fargo Securities

Stephen Kim - Barclays

David Goldberg - UBS

Ken Zener - Key Bank

Dan Oppenheim - Credit Suisse

Buck Horne - Raymond James

Joel Locker - FBN Securities

Alex Barron - Housing Research

David Williams - Williams Financial

Jay McCanless - Sterne Agee

Ryland Group Inc. (RYL) Q1 2013 Results Earnings Call April 25, 2013 12:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Ryland Group First Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I’d now like to introduce our host for today, Mr. Drew Mackintosh, Vice President of Investor Relations. Sir, please go ahead.

Drew Mackintosh

Thanks. Good morning. And welcome to Ryland’s first quarter 2013 earnings conference call. Today’s call is being transmitted live over the Internet and can be accessed through the Investor Relations section of our website at ryland.com.

In a moment I’ll be turning over the conference call to Larry Nicholson, Ryland’s Chief Executive Officer. Also joining us today are Gordon Milne, Executive Vice President and Chief Financial Officer; Dave Fristoe, Senior Vice President and Controller.

Before I begin, please be aware that certain statements in this call are forward-looking statements based on assumptions and uncertainties that include general economics, business and competitive factors, as well as the factors set forth in the company’s press release. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way, I’ll now turn it over to Larry Nicholson.

Larry Nicholson

Thanks Drew. Good morning. And thank you for joining us today as we go over our results for the first quarter of 2013. For the first time in seven years, the Ryland Group recorded a profit in the first quarter of the year, with net earnings of $22 million or $0.43 per share. This is the significant milestone for our company as it not only underscores how we’ve come since the downturn but it also highlights the potential of even better results in the future.

In addition to strong profitability, there were several other positives during the quarter that bode well for future performance, including significant increases in orders, average selling price and homes and backlog.

We also reduced sales incentives and improved our cancellation rate, while growing our community count 20%. These positives are clear indication that Ryland is well-positioned to take full advantage of recovering housing market.

In short, our 2013 is off to a great start and based on our current backlog and the sales trends we’ve experienced, our profitability improved as a year progresses. With that, here are some highlights for the quarter.

The homebuilding segment generated $23.7 million in pre-tax earnings in the first quarter, compared to $1.1 million in the first quarter of 2012. Every region contributed to the total with the West and Southeast recording particularly healthy profits.

Homebuilding revenue came in at $364 million, a 74% increase over last year. Unit closings grew 60% to 1,307 homes and the average closing price rose 8% to $277,000. Our people in the field did an excellent job of handling significant increases in volume converting 55% of our backlog, a rate which is commensurate with last year’s first quarter.

The cancellation rate trended down to 15.4%, a level not seen in years, thanks to a combination of higher quality traffic and improved homebuyer sentiment. Buyers are less inclined to cancel a contract when home prices are on the rise, a condition that currently exists in the majority of our communities.

Homebuilding gross profit margins came in at 19.4%, 190 basis point increase over the first quarter of last year. This margin expansion was mainly attributed to our ability to raise prices in excess of labor and material cost increases, and a beneficial effect of higher volume on a fix portion of our cost to sales. We estimate that direct building cost per square foot increased 5.5% on a year-over-year basis.

Gross margins were 60 basis points lower as compared to the fourth quarter of 2012, mainly due to lower fixed costs leverage associated with 17% fewer closings and winter related costs incurred in some of our Northern markets. We expect gross margins to trend higher as the year progress.

SG&A as a percent of revenues improved 400 basis points to 13.8% in the quarter. While internal and external sales commissions grew in line with our increase in volume, every other component of SG&A decline as a percent of revenue. This dynamic should continue as volume increase, leading to further operating margin expansion going forward.

Net new orders came in at 2,051 for the period, an increase of 54% compared to last year. Excluding our recently acquired Phoenix division, unit sales were up 50%. We had a healthy distribution of sales among our four regions.

Our Houston, Indianapolis and Orlando divisions garnered the most sales in the quarter, while our Southern California Washington, D.C., Las Vegas and Charlotte divisions posted sales growth in excess of 100%.

I’m to report that we are starting to see signs of improvement in Atlanta and Chicago where sales were up 88% and 76%, respectively. These two cities have been slower to recover than the rest of the country. A rebound in these markets could provide a real boost to our results given the size of these MSA and our strong positions within them.

The average sales pace for the quarter was 2.8 homes per community per month, a 33% increase over last year. We took advantage of this accelerated sales pace with periodic price increases throughout the quarter.

These increases are evident in our first quarter results given our higher average closing price of $277,000, our increase average price in backlog of $289,000 and our higher average price of new orders of $294,000.

While mix can have an impact on this average, it is clear that prices in general are moving higher. All of our divisions understand the importance of maximize the value of every lot we own and they continue to raise prices whenever the demand allows.

Turning to the balance sheet, we ended the quarter with $615 million in cash, $1.1 billion in debt and $540 million in stockholders equity for net debt to total capital ratio of 49%. We spend $92 million on land purchases and $46 million on site development during the quarter. Despite the increasingly competitive nature of the land market, we continue to find land deals that meet or exceed our internal hurdle rates.

Today lots under control at the end of the quarter stood at 30,292 lots, a 30% increase over the first quarter of 2012, equally important, option lots accounted for 40% of the total or 11,979 lots. Our ability to tie up land via option agreement is a key component of our strategy, as it allows us to use our capital more efficiently and boost our returns.

Another aspect of our strategy is to increase our local market share by growing community count. We made great strides on that front in this quarter, opening 34 new communities while closing 22, bringing our total active community count to 250, an increase of 20% over the first quarter of 2012.

We currently have 117 communities in the pipeline and new land deals are being presented by our divisions every month. Based on our current internal projections, we now believe that we can achieve year-over-year community count growth in excess of 25% in 2013.

Our financial services segment reported a pre-tax profit of $4.3 million in the quarter, compared to $645,000 in a year ago period. This increase was largely due to a 38% higher level of loan origination volume and a 66% increase in loan loss volume.

For the buyers that use our mortgage company, a little over 50% shows a prime loan, while 30% opted for an FHA loan and 18% took advantage of VA loan. The average FICO score was 728 and the average down payment was 9%.

We held $58 million of mortgage loans at the end of period, which represents loans that have been closed but not yet sold in the secondary market. Our financial services segment continues to be a good source of profit and a nice compliment to our homebuilding business.

In summary, we are extremely pleased with our results for the first quarter of 2013. We achieved a profitable quarter for the first time since 2006, improved our sale pace, raise prices and grew our community count by 20%. We had a great start to the spring selling season and so far the momentum has carried to the first few weeks of April.

There were some debates following our fourth quarter results as to whether the homebuilders would focus on sales growth or price increases going forward. As evidenced by our results this quarter, we can deliver on both fronts.

While our sales pace of 2.8 homes per community per month is better than we've had near, it’s still well below the historical norm before. Coupled that with continued community count growth and still greater affordability picture, we would expect to see further sales growth and price appreciation as a housing recovery continues.

Given the strength of our balance sheet, the quality of our people and the depth of our local market knowledge we are well-positioned to take full advantage of the upturn in housing.

Finally, I want to thank all of our employees for great start to 2013. We have set ambitious goals for our company and you have turned these goals into reality. There is still much more work to be done, but I’m confident that we have right people in place to grow our business and get the job done. I look forward to you sharing in our future success.

That concludes our prepared remarks. We will be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ivy Zelman from Zelman & Associates.

Ivy Zelman - Zelman & Associates

Thank you, Operator. Well, good afternoon and congratulation guys, it’s just a great quarter Larry. I think that you did a good job in also outlining some of the questions that we have but one, if you can elaborate for us. The margin performance recognizing you talked about future margins likely going higher, you did a good job of outlining the cost being up 5.5% with respect to you building overall costs?

Do you feel like the pricing power in the markets could continue to offset those costs and that maybe we’ll start to see sequentially the benefits of higher volume and the pricing? Or you think it’s going to be get tough a battle and you probably are going to be limited margin expansion, because the last peak of margins I think for the company was 28%, so you’ve got a long way to go to get back to peak. But how should we be thinking the rate of change on relative to I guess expectations for gross margin expansion?

Gordon Milne

Ivy, maybe I’ll take that, on margins, we should be expanding margins this year, we’ve been able, I guess, in the backlog we can see that, we got stronger margins going forward than we had in the last quarter. So to challenge there is some cost increases going on, but we are seeing more pricing power on sales prices than we on cost. So cost…

Ivy Zelman - Zelman & Associates

As long as that the case then you should be margins continue expanding as long as you get that pricing power.

Gordon Milne

That’s right.

Ivy Zelman - Zelman & Associates

Okay. And then more specific and then I’ll let (inaudible) next person on California, where there is a bit of volatility with respect to the closing price and order price, I don’t know if this, so that you can elaborate on? Certainly mix has been an impact but how much to the apples-to-apples pricing versus mix and what should we really be using as a solid base going forward.

Gordon Milne

We are opening some high price communities in California, we get some opening this spring and summer around Irvine and Mission Viejo. So, you’re going to see quite changes. We move more coastal from more inland but just part of what happens out there, I don’t.

Ivy Zelman - Zelman & Associates

No, I realized those mix but how much are you raising prices on the same house apples-to-apples, give us an idea of what your percentage increase in overall order pricing was. How much is apples-to-apples versus mix?

Gordon Milne

I don’t have that right here. I’ll get that back to you later.

Ivy Zelman - Zelman & Associates

Okay. Assuming there is very sharp pricing there.

Larry Nicholson

Yeah. Absolutely, no doubt there is pricing movement forward. The dirt that we currently own that will be open, we’re really excited about what we see from margin performance going forward. So I mean, all things look very bright. So no concerns at all but I’ll get you the specifics after the call.

Ivy Zelman - Zelman & Associates

Okay. Well, thanks. Congrats again -- congratulations again.

Larry Nicholson

Thank you.

Operator

Thank you. And our next question comes from the line of Nishu Sood from Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. So I wanted to ask you question about the volume growth, community cap growth. You folks, if I think back over the last few years had a very well timed push to kind of increase community accounts to reestablish your growth strategy, probably as far back as, I don’t want -- maybe early 2011, you want to call that so.

Great timings in terms of that and obviously that has continued into 2012 with the acquisitions and all. So just looking forward, I mean, I just wanted to get your high level of thoughts on how hard you’re going to keep your foot on the accelerator here.

With your land spend dropped off a little bit might have been seasonal in the first quarter but how hard you are going to continue to push in terms of volumes and community cap growth?

Larry Nicholson

Well, we’re actively involved in buying dirt on a regular basis. We had a big meeting last month. We have another big meeting coming this month. So we still have our foot on the gas as long as we can find opportunities and meet the hurdle rates which we have not had a problem dealing.

So we would expect to continue to buy things. Now, that being said there are places in certain things where lot pricings get pretty steep. And we need to be disciplined in how we approach that but we still see plenty opportunities in the market right now for growing the business.

Gordon Milne

Yeah. I won’t take the first quarter spend as to be indicative of how the years are going to go. I think we see quite a bit more money going out in the second quarter than we spend in the first quarter on that.

Nishu Sood - Deutsche Bank

Got it. In the balance sheet, is that a constraint here at net-net debt cap of close to 50%?

Gordon Milne

We got the tax asset that’s going to triple sometime this year. So that gives us over a couple of $100 million of equity coming sometime this year. So that kind of offsets some of that increased spend.

Nishu Sood - Deutsche Bank

Got it. Just real quick, was there any gross margin effect, negative effect related to the acquisitions in the first quarter?

Larry Nicholson

Not material but yeah, the early backlog in any purchases little less margin than the long-term.

Nishu Sood - Deutsche Bank

Okay. Great. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Michael Rehaut from JP Morgan.

Michael Rehaut - JP Morgan

Hi. Thanks. Good morning and nice quarter.

Larry Nicholson

Thanks Mike.

Michael Rehaut - JP Morgan

First question on the gross margins, I appreciate your comments around that and certainly there is no reason not to think that you’d continue to have expansion throughout the year. But with -- looking at the year-over-year improvement this quarter about a 100 bps. Is that a decent yardstick to think about in terms of keeping that year-over-year pace, kind of similar throughout the year or given how pricing has come along in the last six to nine months? Could that even expand as we get through towards the -- into the third and fourth quarter?

Gordon Milne

I think you’re referring to the second half of the year, we had 20% margins. Obviously, this quarter is down a little bit because some of the issues we mentioned. But going from here, we see margins are getting better and as the quarters go on this year, it’s really hard to give you an exact number of what those are. We just know they are better in backlog than we had in the first quarter.

To give you a precise number, it’s going to be exactly 1% of where we were last year. This is more precise than probably we can be at this point.

Michael Rehaut - JP Morgan

Okay. Yeah. I mean, I was just more even just talking about the broader range. But certainly, I don’t think it’s unreasonable. I think that you guys shouldn’t be able to have solid kind of -- the year-over-year improvement that you’ve already begun to see, I wouldn’t necessarily expect that to change dramatically as we go forward. But understand it’s tough to give perhaps even a range.

But -- next on the community count, you set up 25%, over 25% for the year. Is that an average or like you would see 4Q end versus 4Q end ‘12?

Larry Nicholson

4Q.

Michael Rehaut - JP Morgan

4Q.

Larry Nicholson

Yeah. But steady growth throughout the year we see.

Gordon Milne

We always report end of quarter, not average quarter. So I know there is -- some people do it one way than the other we do. 250 is over whatever the number was last year’s 20%. If you do an average, it’s may quite be that. So at the end of the year, we expect to get 25% at least when we started the year.

Michael Rehaut - JP Morgan

Right. Also, just if I could sneak another one in, Atlanta and Chicago you mentioned solid growth there. Can you give us a sense of what that is right now, those two markets combined as a percent of your business and maybe what it was or what it could be in the next two or three years given your law positions?

Larry Nicholson

Well, we can get you the year accounts. What I would tell you is both of those markets were big contributors through the previous upturn. Chicago was actually one of our most profitable markets through the peak, which -- and it fell probably as harder than anything but -- so we great opportunity there. You got a city of 9 million people with 4,000 permits. So we see a great opportunity there going forward.

Atlanta has really turned the corner on the job growth side. And again at the peak, Atlanta was a very strong performer for us. So we got a good land pipeline. We bought lot of lots over the last 18 months there. So we feel real good about that. And margins and sales space have definitely picked up. So everything looks good. And yeah number?

Gordon Milne

They are both about 5% to 7% of our volume in each of those markets.

Michael Rehaut - JP Morgan

Right. Thanks very much.

Operator

Thank you. And our next question comes from the line of Adam Rudiger from Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities

Thank you. You highlighted some markets, some increased land pressure in order to buy. I was wondering if there were more opportunities like the Trend and Timberstone that might be an alternative route for you, if you were looking at other geographies, still?

Larry Nicholson

I think we continue to evaluate all those opportunities, Adam, and you look at a lot of them before you get anything to the finish line. So there are markets, we’re not even in the top -- if you look at the top 20 markets around the country, there is a couple we’re not in.

So we’ll continue to explore opportunities. But as you can see, we’re really focused on growing our lot count with the communities we have because obviously the leverage is tremendous there.

Adam Rudiger - Wells Fargo Securities

And can you just comment on Texas. There's been some reported slower growth there and not trying to stay it’s an underperforming market. Just wanted to make sure we understood what’s transpiring there?

Larry Nicholson

Well, Texas is still extremely healthy. Let’s make sure that everybody understands that. But I think all the builders, I mean, you have to remember that Texas was the big part of the business for all of us in the downturn. There is a lot opportunities elsewhere. And I think we look at moving our capital around where we see good growth opportunities.

We continue to buy a lot of lots in Texas but we sell a lot of houses in Texas. So I think you’ll see Texas grow through the year. And we think they are all great markets.

Adam Rudiger - Wells Fargo Securities

That’s all I had. Thanks very much.

Operator

Thank you. And our next question comes from the line of Stephen Kim from Barclays.

Stephen Kim - Barclays

Thanks very much guys. One of the things you alluded to was increase in mix shift to more of a -- there was a move up -- move to a move up buyer that’s a component of your average sales price. You won’t show much of it but there was some positive mix shift. I was curious as to whether or not you felt that there was an opportunity to see over the next couple of years an improvement in the entry level segment of the market. And if that was something that you’re positioning the company for today?

Gordon Milne

Well, I think the entry level markets been a little slower because the move up market finally picked up. The move-up market was non-existent for such a long period of time. So today, I would tell you there are probably 50% of our business is the move-up market, 30% of it’s probably the entry-level market, and the balance is the second move up to move down in the active.

I think that the other thing that happens to the downturn was, I think we pulled demand forward a little bit on the entry level market. I think as we get through the next couple of years, I think the entry level market will expand a little bit.

The big question is going to be you got a lot of younger people, lot of student depth, what’s the opportunity there. But I think it continues to be a strong market. And to say that we’re positioned in the company for that, I wouldn’t say that. But as always we’ve always had a good position in the entry-level market.

Stephen Kim - Barclays

Okay. So, okay, that’s fine. I guess, my second question relates to the company’s longer term strategy. I mean, obviously in the past, this was the company that made a real mark, I would say on investors minds in terms of being able to -- at the midpoint to the latter part of the cycle, alter the way once you deploy capital and make that very different from the rest of your peers by allocating a certain amount, like share repurchases for example.

Larry Nicholson

I’m curious as to how in this rather peculiar up cycle, you would monitor and thereby -- what next you would monitor to help you access when we’ve reached the appropriate points with return to some strategy like that. Would you be looking for momentum in terms of sales per community? Would it be when your margin on growth side gets add to some kind of historical level that you felt is near peak? What exactly is it? Is it volume? What metrics are you looking at to sort of gauge where we are in the cycle?

Gordon Milne

Yeah. I think there is a couple of things on that. When we were buying shares back, a significant amount in 2004, ‘05, ‘06, even in early 2007, it was accretive to earnings to buyback. So when we looked at on the margin, more land deals or buying shares back, I think we spent two-thirds of our money buying more land and one-third buying shares back because at some point, it was more accretive to buy the shares than to buy the land. And it kind of stopped us from being really aggressive and paying really high prices for land at some point.

I think in early part of the recovery here, we are finding what we think are fantastic opportunities to grow the business on the land side. And I don’t see the same ability to make earnings accretive at this point but buying shares back more than buying land. And so, I think it’s certainly something we think about but I think right now the focus is really on growing the business than to buying shares back.

Stephen Kim - Barclays

Great. Thanks very much.

Operator

Thank you. And our next question comes from the David Goldberg from UBS.

David Goldberg - UBS

Thanks. Good morning, everybody. Nice quarter.

Larry Nicholson

Thanks, Dave.

David Goldberg - UBS

My first question, Larry, in the prepared remarks you indicated a greater percentage of land position was being controlled through options. And it sounded almost as though were kind of signaling that it was getting easier to buy options that you were finding more opportunities to buy options. Am I misreading that, is that not the kind of take we are supposed to have?

Larry Nicholson

No. I think the point we are trying to make is because I don’t think it’s getting easier to buy options and I’m sure you’ve heard, most of the builders talk about it. I just think -- I think our people have done a tremendous job based on relationships and their negotiating skills to get deals that might have not been there as option deal. Two options deals, we are not paying for them because I know everybody says, well done, you paid more. No, we are not paying more to meet the hurdle rates. I just think we’ve got a better job than we are more focused on it.

David Goldberg - UBS

So, it’s fair to think that that you guys are doing a better job but there is not more options deals. You guys are just doing a better job negotiating toward options deals that we would look at it.

Larry Nicholson

Yeah.

David Goldberg - UBS

Okay. Great. And then my second question is a follow-up, I wanted to kind of ask the question that Adam asked earlier, but maybe in a little bit different way. He asked about the M&A and your guys’ attitude towards M&A. And I guess the way that I wanted to think about little bit was private builders and how they are thinking about selling up at this point.

Obviously, we are in running market. Everybody has some great confidence that there's nothing that can stop the housing markets or at least, there isn’t much you can stop the housing market for the next 9 to 12 months. And I’m trying to get an idea if you're seeing that influence the behavior of private builders that are coming to table looking to sell?

Larry Nicholson

So, I think the biggest opportunity with an acquisition of private builders is their limited ability to get capital and where that can’t grow. So they hit a point where they got to go out and the cost of that gets extremely expensive. So, I mean I think the publics just have such a huge advantage today against the private guys. But I think there's a lot of room out there that are interested in doing something and don't see that. They can get construction, for instance. They can’t get acquisition financing and development financing.

And there's just -- when you think about the business, we control is the public, really I mean a fairly sizable but there are so many private guys in the world. And I just think there is going to be -- I do think they'll be other opportunities there. And I think we will be the only one looking at them. I think it will be across the board because it’s a good way to control lots. And we look at it more as a land deal than we do as buying a company.

David Goldberg - UBS

That makes sense. So, again, so there is change in their willingness given the financing.

Larry Nicholson

No.

David Goldberg - UBS

Okay. Great. Thanks very much.

Operator

Thank you. And our next question comes from the line of Ken Zener with Key Bank.

Ken Zener - Key Bank

Good morning. With your strong community count growth, as you exit 2013, could you give in which -- a lot of them in a very fresh positions. Could you comment on how much visibility that kind of gives you in terms of your internal estimates on 2014 and I ask because land, which in the past you guys have described at 22% to 24% of sales cost?

So you’ve effectively locked a third of your COGS this year, but I suspect in 2014 as well, which should give you substantial operating leverage, which is what everyone's alluding to. Can you comment on if that logic is right and how much of ‘14 you already have locked up? Thank you?

Larry Nicholson

Well, I would say that we have all of ‘14 locked up at this point based on what we’ve been buying. I’m not -- ’14 is -- you are really trying to be two years in front I guess is the general rule of thumb that we are trying to stay out two years. So ’14, we are in good shape. We feel real good about the stuff. The other thing is, we get a lot of stuff coming on. As Gordon said earlier in Southern California, Washington, where some of that stuff took a long time to get to the finish line.

So we brought it 18 or 24 months ago and that stuff starts coming out, we should have -- we would perform very well I guess is the best way putting it. So we don’t see any issue in ’14 with lots. We would expect to continue to grow the community count. I don’t think we want to give you guidance. But I think we are comfortable saying we will continue to grow our community count.

Ken Zener - Key Bank

Could you maybe comment or refresh us two things? First, to your path, land COGS, sales or COGS are either one a, and then do you disagree with the logic that I just laid out, which a third of your COGS is pretty much locked if home prices go up 6%. Roughly a third, assuming your labor and vertical cost scale up in line with that, roughly a third of the home price would drop through to margins?

Gordon Milne

If you look at history, our land costs are about 25% of our sales price. And as sales prices go up, land sellers want more and so generally that goes up over time. But obviously you’ve got the benefit. If you bought land a year ago, you fixed the price of that land and you deliver for few years, it will give you better margins. So you are correct on that. It’s just -- Hick says it’s not an exact since but you are clear and certainly right that margins should get better as home prices go up on land that you bought sometime in the past.

Ken Zener - Key Bank

Thank you.

Operator

Thank you. And our next question comes from the line of Dan Oppenheim from Credit Suisse.

Dan Oppenheim - Credit Suisse

Much. I was wondering you talked about the improving margins over the course of the year based on pricing trends and such. If we look at the -- and you talked about 2.8 sales per month, per community and certainly varies by a region and by market, if you look at, it’s on the west than it would have been part of trends.

Certainly, we would be seeing some better numbers there. If you were to think about that in terms of just, what portion of communities where you are really seeing the pricing power at this point? Just trying to think about that versus how much is still to come on that, based on the improvements seen in some of the other markets now.

Larry Nicholson

Well, I think we see pricing power pretty much across the board. I don’t think there's one more that I could say that we are not raising prices on some sets standard, whether it’s a numbers of sales or it’s an other phase or so, I think the opportunity like I said earlier in Southern California that that the stuff that we will open in Southern California will be much higher priced than what we’ve had in the past and again, a good margins. So it will be a big contributor to the bottom line going forward.

Dan Oppenheim - Credit Suisse

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Buck Horne from Raymond James.

Buck Horne - Raymond James

Hey. Good morning, guys. You guys broke out the contribution of the contract and closings from trend, I believe. Do you have the numbers for what Timberstone contributed to contract and closings in the quarter?

Gordon Milne

Well, we can’t give you an exact number because we don’t track at their way. We just see, if we gave all the credit to Timberstone for any upside from last year in Charlotte where we didn’t have it before, it would add about 3% if we gave all the upside to Timberstone, about 3% of the volume.

Buck Horne - Raymond James

Okay. And do you have the spec count, either your finished spec count and/or total spec count at quarter end? And second to that, have you thought about your spec strategy, this spring given how tight inventory conditions are this year?

Larry Nicholson

First question, Buck, specs 687 total, 249 finished, $428 unfinished. No, I don’t think we look at our spec strategy much different. Obviously, there are some markets that are moving a little bit quicker than we would move our spec, liming up a little bit. But nothing outside of what we’ve historically done with the two to three per community.

Buck Horne - Raymond James

Okay. Thanks.

Operator

And our next question comes from the line of Joel Locker from FBN Securities.

Joel Locker - FBN Securities

Hi, guys. Nice job on the SG&A front. I was trying to get a little bit behind that. And it came a little more than what I expected, I think what street expected. And just wanted to see what the breakdown was between fixed and then if corporate got a bump because the stock market was up, sometimes happens and what your percentage commission that ran through there also?

Gordon Milne

Well, the percentage commission for the quarter as total in and out, 4.2.

Joel Locker - FBN Securities

4.2.

Gordon Milne

Wait a minute. Yeah, 4.3.

Joel Locker - FBN Securities

4.3. And then, I mean did the corporate come down, I know if sometimes the stock market rally has eased up on you.

Gordon Milne

As a percentage, it came down but it was up slightly.

Joel Locker - FBN Securities

Was up slightly.

Gordon Milne

Yeah. If you look year-over-year, last year was about just over $5 million. This year is about $6.5 million.

Joel Locker - FBN Securities

Right. Right. And just getting a little bit behind the community count, how many communities do you expect to open in the last nine months? And if you have anything for 2014 just, I know you will add on to that probably but what’s related for 2014 also?

Gordon Milne

We like to give up the net because we got a lot of closings, lot of openings. I think we’ll just stick with our, up 25% for the year, but we’ve got a lot. I think we gave the number that we got 117. And we’re working on right now. In the prepared remarks, you’ll just get the number.

Joel Locker - FBN Securities

It’s 117.

Gordon Milne

117 and they’re working on right now. So there is a lot of communities come and get opened.

Joel Locker - FBN Securities

Right.

Larry Nicholson

And far as ‘14 goes, again I think we would expect to have continued community account. We’ve not really given guidance at this point.

Joel Locker - FBN Securities

Right. I was just trying to get, maybe I had something...

Larry Nicholson

But I mean, I think as I said earlier one of the pervious questions is we feel real good about ‘14 and we have ‘14 bought so.

Joel Locker - FBN Securities

Right. And then the stock comp is involved is SG&A. Do you have that number?

Gordon Milne

We don’t give that number out specifically, but it’s up because of the price of course.

Joel Locker - FBN Securities

Right. All right. Thanks a lot guys.

Operator

Thank you. And our next question comes from the line of Alex Barron from Housing Research.

Alex Barron - Housing Research

Hey, good morning and great job guys. It’s afternoon now.

Gordon Milne

Thanks.

Alex Barron - Housing Research

I wanted to, I guess get your thoughts on a couple of things, the first being I guess SG&A and the potential for leverage. How should I think about what percent of your SG&A is roughly fixed versus variable?

Gordon Milne

Well, if you take the number and take out the commissions, that’s where you get leverage on. So I mean, most of the rest of it is more or less fixed. The rest -- so we get leverage on the rest. We don’t get leverage on the commissions.

Alex Barron - Housing Research

The commission is roughly what percent like 3% to 4% something like that?

Gordon Milne

4.3%

Alex Barron - Housing Research

Sorry, how much

Gordon Milne

4.3%

Alex Barron - Housing Research

Got it. Okay. And as far as the sales pace that you guys are getting, kind of, wanted to get your that’s on that as well. I mean, you had 2.8 and while that’s a huge improvement, I always thought this business is more like 4 is kind of normalized level. So do you think -- I know you’re getting all this community cap growth but do you think that will also continue to see more expansion that’s over the next couple years in that front?

Larry Nicholson

We would expect to continue to see improvement. We would agreed with your 4, kind of, what we were back in the early 2000. So we got a long way to go, gives us a lot upside

Alex Barron - Housing Research

Okay. Thanks. I’ll give back in the queue.

Operator

Thank you. And our next question comes from the line of David Williams from Williams Financial.

David Williams - Williams Financial

Hey, good morning guys. Thanks for taking my question. I wanted to ask quick. We’ve heard from several other operators about the intentionally slowing sales pace to kind of control your land assets to really drive prices. I wanted to see are there any markets out there that say that you’re intentionally maybe slowing the pace of sale to help drive. And then are there other markets that you see that you have a lot of runway in front of you that could use a substantial amount of increased absorption before you would ever see it need to meter that pace?

Larry Nicholson

Well, I think what we do this is we limit sales for our perspective of -- maybe we sell two houses and we raise prices. So we keep activity moving through the community because activity breeds activity. You know, where you have a longer runway, you just kind of look at -- we look at it on a weekly basis and see how many houses we sold for the week, for the month, for the quarter and you make your changes based on that but in the high volume markets right now, where there is a lot of activity, I mean it’s ranging from every sale to every couple of sales, prices are going up.

But we’re not just stopping sales or saying we’re only going to sell two month or three month. I mean there is probably a few neighborhoods that are the expectation where you don’t have a lot of lots left and you absolutely can’t replaced those lots.

David Williams - Williams Financial

Yeah.

Larry Nicholson

Then maybe we slower down a little bit more but we keep raising prices. We were happy with absorption pace. We’ve not seen it slow down. We’re seeing great activity in our stores. Our sales people do a tremendous job of converting the sale. So, -- I mean we see just lots of bright spots out there today.

David Williams - Williams Financial

Thanks. And secondly, if we kind of think about the 5.5% cost increase you guys mentioned earlier. Can you kind of break that down as far as what you’re seeing in the material cost? And is there any moderation in that yet? And then maybe how you’re thinking about labor going forward in some of these markets, such as California or maybe even Phoenix where demands been very strong. We know there is some labor restraints there. How are you seeing that, I guess, in your markets and what you’re doing maybe to break from those issues?

Larry Nicholson

Well, I think on the cost increases, the majority of it’s been on the material side, more so than the labor side now, because material moves before labor does usually. And so we would expect to see some additional pressure. I mean, we’re doing everything we can to sign in longer-term contracts given guys more work, rebidding, bringing vendors from one city to another city.

So you do all those things to try and control it. The real key there is, we’ve had the ability to outpace the costs and I think that we hope that continues. We’re all suffering from it, I mean all the builders were having the same issues and we are all trying to take each others trades. And it’s pretty tough out there right now, but I’d rather have that problem than what we had in the last six years so.

David Williams - Williams Financial

So one more if I could do a quick, what are you seeing maybe on the lending front? It appears that maybe your FICOs came down just of bit and as well as the down payments. But we’ve been hearing, maybe anecdotally that lending standards are expected to maybe lack a little bit as we get some more competition coming in. Are you seeing that now or any trends there that you can look out and say, that you could point to maybe?

Gordon Milne

No. I don’t think we’ve seen any changes yet. I mean, 728 is still a very strong number. So, I think credit scores are still very high. I think people with low credit scores are still challenged on getting to mortgage and I read about, maybe things getting easier. I don’t think it’s happened yet.

David Williams - Williams Financial

Got it. Thank so much.

Operator

Thank you. (Operator instructions) Our next question is follow-up from the line of Alex Barron from Housing Research.

Alex Barron - Housing Research

Thanks, guys. I don’t know if I missed it or have you commented at all on your DCA and when you think you are going to get that back?

Gordon Milne

Yeah. I mentioned, that I expect sometime this year. So we don’t like to give a quarter but about sometime this year, we expect to do it. So, I hope that’s helps but before the end of the year.

Alex Barron - Housing Research

Okay. And I also wanted to ask, I guess another question on the SG&A. Are you guys expecting that you will need to increase your headcount a lot this year to achieve the increase in deliveries and stuff?

Larry Nicholson

So, every time we opened a community, obviously you have a field supervisor and a sales person is obviously variable when they sell. But the good thing is if you think about in the communities, we have before 2.8. And kind of to your earlier question, if you can ramp that up to four, that person can build the same before that they get that 2.8. So there is a lot of leverage there going forward.

Alex Barron - Housing Research

Got it. Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Jay McCanless from Sterne Agee.

Jay McCanless - Sterne Agee

Hey. Good afternoon, everyone. Wanted to ask one more time, I jumped on late. The weather issues that you discussed in this quarter and what impact those had on gross margins. Could you go over that again, please?

Gordon Milne

Well, we’ve got five winter markets, Chicago, Twin Cities, Indianapolis, Baltimore and Washington. It was a long cold winter this year. So we are not saying it’s a big deal, but it’s -- certainly we had winter costs but we didn’t have the year before. It does pick margins slightly.

Jay McCanless - Sterne Agee

Okay. I was trying to reconcile that with the 20% gross margin you put up in the third quarter last year on roughly the same amount of closings. Is it a difference now and those winter costs and the costs for their underlying land, or is there something else going on?

Gordon Milne

Volume is a big component. The winter costs are a smaller component, but the volume is bigger component third versus first quarter.

Jay McCanless - Sterne Agee

Okay.

Gordon Milne

Same as volume.

Larry Nicholson

It’s relative through the year. In another words, a higher volume quarter in the same year it does matter.

Jay McCanless - Sterne Agee

Okay. Okay. And then the other question I was going to ask on the land side. Where -- I believe you sold a little bit of land this quarter, where are we just selling land?

Larry Nicholson

Yeah. Most of the dirt was -- we sold, we had some lots in the neighborhood in Denver that we had shared with the builders. So it was the final parcel there, sold some lots in Houston to another builder. There was three or four small deals and nothing substantial. I would say the deal in Denver was probably the biggest amount of the dollars

Jay McCanless - Sterne Agee

Okay. Great. Thank you

Operator

And I have no further question at this time.

Larry Nicholson

Okay. Great. Well, thanks for joining us and we look forward to seeing you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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