Standard Pacific Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: CalAtlantic Group, (CAA)

Standard Pacific (SPF) Q1 2013 Earnings Call May 3, 2013 12:00 PM ET

Executives

Scott D. Stowell - Chief Executive Officer, President, Director and Chairman of Executive Committee

Jeffrey J. McCall - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Ivy Lynne Zelman - Zelman & Associates, LLC

Michael Dahl - Crédit Suisse AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Alex Barrón - Housing Research Center, LLC

David Neil Williams - Williams Financial Group, Inc., Research Division

Operator

Good afternoon, and welcome to the Standard Pacific Homes 2013 First Quarter Conference Call. Today's conference is being recorded.

Before we begin, I would like to direct your attention to the company's Safe Harbor statement and remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading Risk Factors.

A question-and-answer period will follow today's prepared remarks. A recording of today's presentation will be available for a replay a few hours after this call ends and will continue to be available on the company's website for 30 days.

At this time, I'd like to turn the call over to Scott Stowell, President and CEO. Please go ahead, sir.

Scott D. Stowell

Thank you, Melissa, and good morning, everyone. With me today are Jeff McCall, our Chief Financial Officer; and John Babel, our General Counsel. I'd like to thank all of you for taking the time to join us today for the Standard Pacific Homes 2013 First Quarter Update.

Our first quarter performance reflects the significant progress we've made as we continue to execute our strategy and the benefit we're receiving from the second quarter -- second consecutive year of a strong spring selling season.

In addition to strong pretax income and profitability, the demand and pricing power we are experiencing in nearly all of our markets is leading to a growing backlog with growing margins, which we believe bodes well for our future performance.

During the first quarter, we earned $21.8 million or $0.05 per diluted share as compared to $8.5 million or $0.02 per diluted share in the prior year period. Pretax income for 2013 first quarter was $35.4 million as compared to $8.7 million in the prior year.

Deliveries were up 48% as compared to the 2012 first quarter, resulting in a 61% increase in home sale revenues on an average selling price of $375,000 which was up 9%.

Net new orders were also up 49% as compared to the prior year period, resulting in a 90% increase in the number of homes and 117% increase in the dollar value of our backlog as compared to the prior year period. The 1,394 orders we generated during the quarter represented our highest level of quarterly order activity since the third quarter of 2007.

Our absorption rate was up 49% year-over-year and up 35% compared to the 2012 fourth quarter. First quarter absorption rates were particularly strong in our home State of California where we have invested over $1 billion during the past few years that we believe leaves us particularly well-positioned to take advantage of the strong demand and pricing power we are currently experiencing in the state.

We were also able to make significant progress with our gross margin which was 21% for the quarter, up from 20.3% for the first quarter of 2012 and up 20.8% from the 2012 fourth quarter. More importantly, gross margin of our beginning backlog expected to close in the second quarter is approximately 22.4% and the gross margin of our entire backlog as of the end of the first quarter was 23.1%. This gross margin strength has helped to drive our operating margin which stood at 7.9% for the 2013 first quarter, a 470 basis-point improvement over the prior year. This significant increase in gross margin reflects our ongoing community-by-community evaluation of our value proposition to tactically rates sales prices and reduce incentives as demand warrants.

During the first quarter, we were able to raise base prices at over 95% of our communities and were able to reduce incentives to their lowest levels in almost 3 years, while at the same time increasing our absorption rate to 2.9 sales per community per month, the highest quarterly absorption rate we have experienced since the first quarter of 2007.

As we have said repeatedly, we will continue to emphasize margin over sales pace, particularly in what we believe are the early stages of this housing recovery, targeting an absorption rate of, plus or minus, 3 homes per community per month with the objective of maximizing the value of every single homesite that we own.

Turning now to land, we recognized early on that having a strategic supply of land at an attractive basis would be essential to our future success. Our early mover advantage of acquiring land at favorable prices in the right locations, first going after finished lots and then leveraging our strong master plan and development capabilities to pursue raw land, has allowed us to stay ahead of the demand curve, avoiding the worst of the hypercompetitive fray that land buyers are experiencing in most of our markets. While others are fighting for near-term for finished lot deals, our operators are positioned to be able to think longer term and are currently spending their time focused on securing land opportunities that will benefit us in 2015 and beyond.

While we are largely out of this hypercompetitive fight for finished lots, our appetite for land has not diminished. We expect land acquisition and development to remain a significant focus for us in 2013 and continue to target a total 2013 land spend in the $600 million to $900 million range.

Good land buying, of course, translates into new communities. As further evidence of the success of our early land buying efforts, we averaged 158 active selling communities for the quarter, up 5% from the 2012 fourth quarter despite the 35% quarter-over-quarter increase in our absorption rates that led to the closeout of 11 communities versus our anticipated closeout of 8 communities. We opened 18 new communities during the first quarter and anticipate opening a total of 65 to 70 communities during the entirety of 2013. This total represents a 5 to 10 community increase in anticipated 2013 openings since last quarter, due largely to the completion of development work on several communities ahead of our original schedule.

For the year, we anticipate an overall mid-single digit increase in our average community count. By quarter, while average community count was flat in the first quarter, we anticipate year-over-year average community count will be up low single digits in Q2, mid-single digits in Q3 and upper single digits to low teens in Q4.

Also looking a little further ahead, we're encouraged by the roughly 130 communities we already own or control that are scheduled to open in 2014 and beyond.

As I reflect back on our results over the past year and this first quarter, it's gratifying to see the growth strategy we put into place to drive top line revenue profitability beginning to bear fruit. As we move through 2013, we plan to remain focused on executing this clear and simple strategy, continuing to acquire strategically placed and well-priced land to increase community count and continuing to design and build a highly desirable, amenity-rich communities and homes that appeal to the move-up and luxury home buying segment that we believe will afford us the best opportunity to maximize margin while obtaining an appropriate return on our inventory.

To conclude, I would like to give you a preview of our early second quarter performance. I'm pleased to report that the strong spring selling season has continued into the month of April. In April, we recorded 527 net new orders, raising our April 30 ending backlog to 2,096 units, which was up 89% from last year, with an average selling price of $396,000 and gross margin and backlog of 23.8%.

Now I'd like to turn the presentation over to Jeff, who will share a few more details about our financial performance before we turn to your questions.

Jeffrey J. McCall

Thanks, Scott. I'll begin on Slide 5, where we break down our Q1 performance across our 3 regions: California; the southwest, which was Arizona Colorado and Texas; and the southeast, which includes our divisions in the Carolinas and in Florida.

As Scott noted, company-wide, our net orders grew 49%. And as you can see, the order growth is pretty consistent across our 3 regions.

Our average selling price of net new orders is up approximately 17% across the company, but it varies greatly from California, up 8%; to the southwest, up 34%. The change in ASP is heavily mix-dependent and reflects real pricing power and the impact of community mix.

To provide more color on real pricing power, we provided a same-plan ASP view on the bottom rate and graph. While the data supporting this graph is much more limited and only represents the ASP changes for the 611 homes, where the same model and the same community sold in both the first quarter of 2013 and the first quarter of 2012, we believe it does provide a meaningful view of real price changes and is less impacted by mix. The one caveat is that we don't adjust this specification differences or lot premium differences.

The real story in Q1 in California. As you can see in the order absorption rate graph, California's absorption rate of 3.7 per month increased 71% compared to the same period last year. Earlier you heard Scott mention that we're targeting an absorption rate of plus or minus 3 orders per community per month. And we used the price throttle to slow absorptions when we see the opportunity to do so.

Despite the year-over-year 15% same-store ASP increase in the first quarter, we were not successful in driving the absorption rate down to around 3. If I was a betting man, it sounds like more price increase may be in the cards.

On Slide 6, a breakdown our first quarter deliveries in a little more detail. As we mentioned earlier, deliveries in the first quarter were up 48% versus prior year and down 3% from the fourth quarter. The key drivers to deliveries are beginning backlog, and the amount of homes sold and closed in the quarter. Our backlog in terms of number of homes is up 90% versus prior year, at its highest quarter end level since the third quarter of 2007 and up 117% in dollar value.

Of the 1,851 homes in backlog as of March 31, 1,024 homes are currently scheduled to close in the second quarter. We expect the 1,024 will be adjusted down to the cancellations and changes to the targeted closing days of homes currently in backlog.

Over the past 8 quarters, that downward adjustment has averaged about 15%. From that number, you add the number of specs sold and closed in the quarter to get your Q2 deliveries. On average, over the past 8 quarters, we have sold and closed about 250 specs in the respective quarter. In the first quarter of 2013, specs sold and closed represented 18% of orders compared to 28% of orders in the first quarter of 2012.

On Slide 7, we break out the change in our ASP of homes closed across 7 markets. In Southern California, where we have historically been a high-end builder, our ASP declined 13% largely attributable to a mix shift as 2 luxury communities, which had 23 closings in the first quarter of 2012 with an ASP in excess of $1.3 million and are now in closeout phase and contributed only 5 closings to the first quarter of 2013.

However, in all of our other markets, ASP trended up because of both our focus on the move-up buyer and the price increases. We expect these trends to continue as our 2013 projections show ASP increasing in all of our markets, other than Southern California, where ASP is expected to remain relatively flat. To date [ph], the first quarter of 2013 to 2012, our ASP was up 43% in Northern California, 20% in Arizona, 17% in Texas, 6% in Colorado, 5% Florida and 12% in the Carolinas.

The average selling price of our 2013 second quarter beginning backlog, expected to close in the quarter, was $394,000. This will be impacted up or down based on the mix of specs sold and closed in the quarter.

On Slide 8 we provide a breakout of our SG&A in the 4 categories: G&A, insurance, incentive comp and selling expenses. Overall, our SG&A as a percentage of revenue dropped to 13%, improving 410 basis points over the prior year period due primarily from the 61% increase in home sales revenue and the operating leverage inherent in our business.

On Slide 9, we highlight our land acquisition and development spend over the past several quarters. In Q1, we spent $72 million on land acquisition and $47 million on land development. We remain encouraged by the quality and volume of the land transactions we're working through our pipeline, and as Scott mentioned earlier, we continue to target a total 2013 land spend in the $600 million to $900 million range, $200 million or $300 million of which led to anticipated development spend in the year.

With that, I'll turn the presentation back to Scott for his final remarks before we open up the call for questions.

Scott D. Stowell

Thank you, Jeff. Following our call last quarter, Jeff and I hit the road for nearly 2 months visiting every market, touring existing communities and previewing new communities in our pipeline, and more importantly, meeting with each member of the Standard Pacific team.

While I'm certainly pleased with the strong first quarter results, I'm equally excited by the enthusiasm and confidence that I saw in our teams during these visits. Through division-wide town hall meetings and the additional time we've spent with local management teams, I met an engaged an energized workforce that is into our vision and is demonstrating the commitment necessary to execute it.

I would also like to take a minute to recognize our Charlotte and Dallas divisions who are recently named Builders of the Year by their local homebuilders associations. In addition to Builder of the Year, our Dallas division team collected almost 2 dozen other awards. The home picture in this slide garnered several awards, including Best Architectural Design and Best Interior Merchandising for Homes over $800,000 and Custom Home of the Year. This achievement and recognition was especially meaningful, given our tremendous effort over the past 12 months to introduce All-new move-up and luxury product throughout the Dallas market. I continue to believe that it is our people that provide us with the most significant competitive advantage, and I remain excited to see the results of their hard work for the remainder of this year. Well done, everybody. I appreciate your efforts.

Now with that, I'd like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Ivy Zelman at Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

I'm just trying to figure out, Scott, maybe you could start with, is appreciating what incremental margins look like with home prices depreciating and the benefit to the bottom line. And certainly in your markets where you were contrarian in buying coastal properties when no one else wanted it at the prime time of the downturn, we should see an outsize benefit. But some are concerned that there's a governor on your margin. So guess if you can help us if there's any way to appreciate for every 10% increase in home prices, what does it translate into margin expansion? And certainly your gross margins and backlog, give us some indication of the opportunity. And then the follow-up would just be, within the portfolio, we had imagined that there are some margins that are probably significantly below other margins within the various communities, how much of your portfolio would you say are subpar margins that will roll off and, therefore, also benefit margins?

Scott D. Stowell

Well, I appreciate that question. It clearly must be the question of this earnings season, given the positive results that the group is sharing. And it's a bit of a complicated question and we're not giving gross margin guidance. But Jeff and I have thought a lot about this and we appreciate how important it is for you as an analyst. So I think we'd like to try to answer it and I think Jeff's best prepared to do that and then I could probably wrap up with a comment as well.

Jeffrey J. McCall

So listen, I think most of what we think about home price appreciation, you got to break it down to the community-specific level. And on a community specific basis, it's pretty straightforward. So the gross margin at the community level is -- will benefit 100% for home price appreciation, less the cost depreciations that are occurring in that market. I think if we take our first quarter, for example, our same-plan increase was somewhere in the 3% to 4% range versus the fourth quarter. So to keep math easy, let's go with the 4%. Our same-plan direct costs during the quarter increased 2.4%. And again this 2.4% only applies to direct costs. Direct costs for us, excluding interests, indirect and taxes, run at about 40% of revenue. So I take the 2.4 times 40%, that gives me about 1% of revenue. So in this example, 4% price increase should translate into about a 300 basis points bump in your margin. Below gross margin, your variable cost and overhead associated with price increase are very minimal. For us, I would use sales of 5%, 5.5%. Insurance is also variable, runs kind of 1.3%, 1.4%. So our variable G&A rate associated with just purely with home price appreciation is about 7%. From the outside perspective, where I it gets really difficult is you understand the mix impact of projects starting and ending. Because we have some projects with gross margins well in excess of 40% and we've got several other projects with gross margins in the teens. So when these communities roll off, will have a big impact on the blended gross margin. I think probably the best bet since we don't provide specific-forward guidance is to just look at our gross margin in backlogs and as an indication where our margins are trending. So as the end of the quarter, our backlog gross margin, I think Scott mentioned this, is expected to close in the second quarter was 22.4%. Our total backlog gross margin ending the quarter was 23.1% and we also provided, I guess, one of the benefits during the earnings call after the month end, we also provided the April update and our backlog at the end of April had a total gross margin of 23.8%. That's probably the best indication of the direction that margins are going.

Ivy Lynne Zelman - Zelman & Associates, LLC

Well, that's the best explanation we've heard so far, Jeff, from any company. And certainly I think everyone on the call will greatly appreciate being able to have those relationships. The portfolio you mentioned, 40% and then some in teens, how much do you anticipate the lower margins contribute to the total right now or will going forward?

Jeffrey J. McCall

We don't like to -- we don't reference it much anymore. But this is -- I think a lot of this question gets back to the new versus old communities. Well, the old communities or pre-2009 communities represented -- they only represent 16% in our backlog. Those are -- and the backlog at 3/31, that was 340 basis points, lower gross margin than our newer projects. So as those roll out, that will be definitely a positive impact. And I'm looking for another spot here so I can answer your other question. The growth -- the percentage of our projects that have gross margin is kind of below in that low teens, it's somewhere in the 10% to 15%, I don't have the exact number in front of me.

Operator

Our next question will come from Michael Dahl with Credit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

I wanted to drill down into margins a bit more. Could you guys talk about just how you go about analyzing and providing that backlog margin, understanding that there's still kind of a lot of moving parts on the cost side between when a home may go into backlog and ultimately, close. Can you give us some level of comfort around kind of how you forecast that out?

Jeffrey J. McCall

I think the -- when any home closes or whenever a sale closes, we get a detailed gross margin on that exact home. And our gross margin reported there is taken at the higher of actual costs or cost currently in the system. So for example take lumber, for example, lumber's been going up pretty rapidly. Our gross margin would report -- in backlog, the gross margin would include lumber at the higher rate, in a rising price environment. So we take a slightly conservative approach to make sure that we don't understate, I'm sorry, we don't overstate our gross margins in backlog. And yes, from the time a house sells, there can be some slight changes in direct cost if there was a change in the contract or a framer walked off. But remember, almost 60-plus percent of our homes are sold at some point in the construction process. So we're already pretty far down the line. There's not a long lag between when our homes are sold really and when they deliver.

Scott D. Stowell

And we know the costs of our homes before we release them to the market for sale. So if there's any changes, they're very minor changes.

Michael Dahl - Crédit Suisse AG, Research Division

And then just shifting gears to the new land purchases. I think 2015 and beyond, still most other or many other builders aren't quite there yet. Can you talk about the competition you're seeing for deals like that? What type of returns you're able to underwrite on those deals? And if there's any change in composition of where you may be targeting, either geographically or kind of master-planned versus traditional?

Scott D. Stowell

That's a good question, Michael. It's still very competitive in all of our markets for land, including the deals that we're looking at. I think it might be marginally less competitive, but it's still very competitive. And then we're still targeting a move-up buyer in locations that would match up with that positioning strategy. And there's probably slightly less competition at that segment as well. With regard to our returns, we haven't adjusted our returns. We're still underwriting an uninflated deal at a 20% gross margin and a 20% IRR. If it's a development deal, it might get risk-adjusted up and we make those decisions based on the deal that are coming into committee. Relative to our -- where we're allocating the capital, I don't think you should expect any strategic shift out of any market. We'll continue to match our historical inventory levels, 55-ish percent to California with the balance equally to the southwest and the southeast.

Operator

And now we'll go to Adam Rudiger from Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Jeff, in response to one of your comments earlier about raising prices and not having a negative kind of elastic impact on demand, is there-- are there plans? Or have you yet started just rationing the on amount of lots of available and just simply not accepting orders? And particularly, if I look at your segment data in a place like Florida, if I were to use last year's closings, it looks like you already have 9 months worth of backlog, in those kind of places would you be more likely to that?

Jeffrey J. McCall

I think across the board, we said we're definitely favoring price over velocity and we're pushing, we're pushing prices as much as we can. Florida, with the exception maybe of South Florida, it doesn't quite have the absorption rates up where we want. So there's less price opportunity until we get those absorption rates up a little bit. But I don't think Florida is any different on pricing. We're just a little bit behind, where it was Arizona's story last year, it's California's story this year.

Scott D. Stowell

And Adam, we're not intentionally slowing the pace of our sales releases. We're trying to meter them out at that roughly 3 sales per community per month, that would match up with our production levels as well. We're just trying to use -- we monitor price weekly and check it against our pace to throttle absorption back if we're selling above 3%. To the extent we can and the California example just shows you how difficult that is, we're pushing prices very significantly there. The average California increase for the quarter was 10% and we made a little bit of progress.

Jeffrey J. McCall

Just to be clear, that 10% was our base price as of 12/31, compared to our base price as of 3/31, was that 10%. Now some of that will come through the next quarter.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Scott, the second question is, I'm recognizing your comments earlier about buying land. Perhaps in years later, there's some competitors in a little bit less competitive area. As we move on into the cycle, how will you think about that? What will the metrics you watch, what will you watch in order to manage that risk so you don't get overextended? Because in order to maintain that advantage, you're going to be always be buying farther out, and at some point, that will expose you to some risks.

Jeffrey J. McCall

One thing is we're working on land that will turn into a 2015 or 2016 community, but we're not necessarily closing on that now. We're not closing on it several years in advance. We're working out. So a lot of the land that we're buying that we'll be closing on this year, we've been working on that for several quarters. Right. So we do have a little bit of flexibility, we're not really going out as long as that may sound.

Scott D. Stowell

And the metrics that we're looking to, Adam, are generally those macroeconomic drivers that have such significant impact on our business. We certainly believe today, and it's our view, that we're in the early innings of the recovery. And we think investment capital and land is the right way to grow the company today. But we are very aware, we structure our deals, as Jeff mentioned, to make sure that we're prudent managers to capital. And we'll watch absorption rates, we will watch margins to make sure that we are kind of assessing where we're at in the cycle.

Jeffrey J. McCall

We're very conscious not to be fooled by the tremendous affordability that's out there just because of the extremely low interest rates. That will change, we watch that closely.

Operator

[Operator Instructions] And our next question will come from David Goldberg with UBS.

David Goldberg - UBS Investment Bank, Research Division

I want to actually follow-up on the comments Jeff just made in response to Adam's question about not getting fooled by the affordability because of rates. And really the question that I guess I want to ask is, it might seem crazy now with a 3.5%, 30-year fixed mortgage out there. But do you guys worry about price appreciation actually may be coming too fast? And that at some point, if rates do go up, we might bump into some sort of affordability gap for your buyers?

Jeffrey J. McCall

Yes, David we do look at that and it's one of the many things that kind of keeps us up at night. With the low interest rates, obviously, affordability's at a record high. And at today's low interest rates, prices can rise pretty materially, 25% to 30% to reach historical affordability. 25% to 30% drops to 15% to 20%. If rates are up at 4.5, according to our calculation, and we're basically at affordability with interest rates at 6.5. So that's an area that we are focused on. Obviously incomes will continue to rise, we believe, hopefully, a reasonably positive job report today. So incomes should rise, we shouldn't allow for continued price appreciation even in the face of some rising interest rates.

Scott D. Stowell

A couple of other comments too, David. If incomes were to rise 4% and home price appreciation rose at an annualized rate of 8%, housing wouldn't return to fair value until 2018. That was a piece that Capital Economics did. So we're watching this very carefully. In fact, when our land deals are coming into committee now, we specifically, are talking to our operators about this issue, understanding where price is relative to incomes up from a historical perspective. And then price payment to income, rather, and how do we view that risk in every land buy.

David Goldberg - UBS Investment Bank, Research Division

Got it. That's helpful. And actually Scott, I want to follow-up on that a little bit. When I think about Standard Pacific historically, I've always thought about it being a very decentralized business model. And so can you kind of talk about how much power is out with your operators in the field? How much are you guys kind of controlling? And how do you make sure you're not too far out in front of your SKUs, especially because a lot of your land deals are probably a little bit longer term and you have to think a little bit more long-term when you're doing acquisitions and maybe a little bit on the risk control side?

Scott D. Stowell

Well, David, there's significantly more discipline around land buying in the company today than there was 10 years ago. We have culturally shifted the company to a more disciplined, balanced culture. There's not -- there's much autonomy as perhaps you would have seen it 8 to 10 years ago. We're in this together. And having said that, however, we relied heavily on our local operators to understand the local market. So we've got capital allocation discipline and strong underwriting. And there's a lot of strong debate and dialogue at investment committee in order to manage those risks.

David Goldberg - UBS Investment Bank, Research Division

But would you say that as the recovery continues that you get a little bit more decentralized versus centralized, that kind of a normal cyclical pattern? Not that you'd lose control, but that you have to put more power in the hands of your operators?

Scott D. Stowell

Well, we think we've got the balance right today. We allow the local operators to manage and have control over the things that they should, which -- where they can add value. And then we've got regional present infrastructure and kind of good dialogue here at corporate with our investment committee to manage that. I don't think that you'll see a shift back towards more autonomy as we get longer into the cycle.

Operator

And next we'll go to Michael Rehaut with JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Nice quarter. I appreciate also the detail on the gross margins and kind of the math around the incremental. And I guess, what it would lead to is -- and I know you're very helpful with the backlogs and the homes expected to close. But just to extrapolate further, particularly with the pricing that you're seeing right now, it would suggest something on the order of mid-20s type gross margins being achieved as soon as at the end of this year. Is there any reason not to expect that due to things like mix? Or how should we think about that given what you're seeing right now in terms of price appreciation today?

Scott D. Stowell

Michael, we're not going to give you any guidance on what gross margins will be at the end of the year. We are giving you the information, the visibility that we think we can. And you can do -- you can do the extrapolations.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay. I guess looking out the next 2 or 3 years, just so we have a good idea of mix, how would you expect your geographies to be in terms of California, Texas, Florida, et cetera, some of your major markets, would that change at all dramatically? And would there be any kind of similar impact on -- if that mix changes with regards to margins?

Scott D. Stowell

Michael, as I said earlier, we don't expect to strategically shift in or out of any of the markets that we're in. We think we've got the allocation right in terms of the capital. We're targeting a certain market share in each of our markets, based on our view of the long-term attractiveness of every market. And it matches up pretty closely to where we're at today.

Jeffrey J. McCall

From a gross margin perspective, for example, in backlog, every state we have is in the 20s. So some states are lower 20s, others are higher 20s. But every state is performing to a reasonably acceptable level.

Operator

And Alex Barrón from Housing Research Center has our next question.

Alex Barrón - Housing Research Center, LLC

Sorry if I missed it, but I was hoping you could comment on the types of land that you're buying? Is it more raw land or development land? Or what percentage are of finished lots?

Scott D. Stowell

Alex, we're purchasing about 80% of our land is raw or partially developed, and 20% of it is finished lot. That's probably the mix that you'd see throughout the year. And roughly 65% of our current purchases are cash purchases well.

Alex Barrón - Housing Research Center, LLC

Okay. And in terms of where you guys are seeing the opportunities, is it more the same current mix? Or is it trending more towards, I don't know, luxury or high move up? Or are you guys starting to see the opportunities in the lower price points, like more towards entry level. How would you say the mix is changing?

Scott D. Stowell

The mix is going to be the same. We like the mix where it is today and you won't see any major shifts.

Operator

And our next question will come from David Williams with Williams Financial Group.

David Neil Williams - Williams Financial Group, Inc., Research Division

I wanted to ask real quick about your SG&A leverage. And if I look at the percent increase maybe versus the revenue increase, it trended up a bit from what we saw in the back half of the year, granted it was much lower on a year-over-year basis. But going forward and thinking about the community openings that we have ahead of us, where should we maybe think about that SG&A leverage as we get into the back half of this year?

Jeffrey J. McCall

Good question, David. There's clearly significant operating leverage in our business. And SG&A did improve 410 basis points year-over-year to 13% in the first quarter. As far as specific guidance, we're focused on trying to drive that SG&A down below 10%, but it will definitely take awhile to accomplish that type of goal. So we expect continued operating leverage and gross margin -- I'm sorry, the SG&A percentage moving down particularly as we move into the latter half of the year with higher level of deliveries. But as far as specific guidance and where that's going to be, we're working hard on it and hopefully we'll have good numbers to show you.

David Neil Williams - Williams Financial Group, Inc., Research Division

And what -- I guess in the first quarter, what impact was there for cost and maybe flow into that first quarter as opposed to the back half of the year? And what can we expect maybe that won't transfer going into the last 3 quarters here?

Jeffrey J. McCall

There was nothing, no major kind of one timers in that first quarter. We continue to invest in our -- overhead infrastructure to stay ahead of our growth curve and we expect to do that. But there's nothing really unusual about the first quarter. So I'd expect some modest growth on the fixed G&A level. Obviously, selling is going to be pretty close in that 5%, 5.5% of revenue. Insurance runs in that 1 2% to 1 4% of revenue. And incentive comp I think for modeling purpose I'd use basically -- about 8% of EBITDA is a reasonable plus/minus assumption there for modeling.

Operator

And at this time, we have no further questions in the queue. And I'd like to turn the call back over to our speakers for any additional or closing remarks.

Scott D. Stowell

Thank you, Melissa. And we appreciate everybody listening in today and look forward to sharing results with you next quarter. Thank you.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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