Ryland Group's CEO Presents at Deutsche Bank Global Industrials and Basic Materials Conference (Transcript)

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Ryland Group, Inc. (NYSE:RYL)

Deutsche Bank Global Industrials and Basic Materials Conference Call

June 13, 2013 04:40 PM ET


Larry T. Nicholson - President and CEO


Nishu Sood - Deutsche Bank

Nishu Sood - Deutsche Bank

So let's get started here. Next session is Ryland. I think the notable characteristic of Ryland is the very strong growth trajectory that they are likely to generate, I think that's what -- and the capital efficiency of the balance sheet, which has always been a characteristic of Ryland in the 13 years I have been covering them. So excited to hear about that growth trajectory and other trends in the housing market. Larry Nicholson, CEO, and Drew Mackintosh, who works in IR, and with that I will turn it over to Larry.

Larry T. Nicholson

Thank you, sir. Well, good afternoon, and as Nishu said, we are excited to be here. Obviously, a lot of good things going on in the housing industry today, and much more favorable than a year ago when we were here, and all things continue to look extremely positive.

We will walk through the presentation; just want to give you an idea of the things we are going to talk about a little bit. First we’ll talk about first quarter, which was reported and very good results. Sales, house sales are progressing across the country. Talk a little bit about our geographic diversity, which we think is a strong point of our business model; our land and our community count, and last, our balance sheet.

So with that, we will talk about the first quarter. As you can see the results across all metrics were extremely strong. Extremely proud of what we did from a sales perspective, up 54% and a couple of key takeaways on the slide, what I would tell you to look at is, our unit backlog was up 57% in the first quarter, which gives us great visibility for the rest of the year, and so we can see what's going to happen, what margins look like, what earnings look like.

Homebuilding gross margins were 19.4, up 190 basis points year-over-year. We did give guidance on the first quarter conference call that margins would continue to improve sequentially throughout the year, and we still expect that to continue.

SG&A down 400 basis points, big takeaway here would be that -- our SG&A number was the same percentage as it was for the fourth quarter, on about $85 million less revenue. So again, you can see the leverage that we have created in the business. Then most importantly, we made $22.2 million, which is the first time we have been profitable in the first quarter in six years. Historically, first quarter is the toughest quarter to make money, so we did have a great quarter, and are extremely excited about that.

This chart just kind of gives you an idea of our year-over-year growth in comparison to the rest of the building industry, and as you can see, we have had great growth driven by our community count growth and execution of our plan that we started back in about 2010, when we started aggressively buying lots. But I am extremely proud of this, coming out of the downturn obviously; six years prior to this have been extremely difficult. But this sets the stage going forward for what we think would be a good year this year, and continue to grow throughout 2014.

Contracts from a sales perspective, you can see that year-over-year numbers were extremely strong. Great March, as you can see 876 units, huge number for us. Quality of traffic that comes into our stores today, it continues to be extremely strong, very good qualified candidates also. We did announce April numbers, which were up 54%, so the trend did continue out of the first quarter, and we are real happy with where we sit today, as far as unit count and sales and, you get into the rest of the year, and you can see that it does moderate a little bit, August being the slowest month, which is the summer time, kids out of school and -- but we expect with our community count growth, and the market as it is that we would have continued improved results throughout the rest of the year.

Now let's spend a couple of seconds on this geographic diversity, and I think this is one of the things that we’ve talked about, both before the downturn and through the downturn, and now coming out of the downturn. It just gives us a great opportunity to leverage our business, and manage our risk across the country, as no market responds the same way in a downturn or in an upturn. We saw in late 2005, we saw Washington starting to soften, which was first indication the market was going south.

But it triggered a chain of events that really helped us through the downturn. Obviously, coming out of the downturn, all the markets have responded differently. The last one being -- actually Chicago here was the last to respond positively, which we started seeing positive events here, fourth quarter of last year, which has continued through this year. Also Atlanta has turned the corner, which was one of the last markets [to lag] [ph].

But as you can see, we are in 18 of the top 20 markets in the country. The only two markets that we wouldn't be in, would be Seattle and Nashville today. Happy with our geographical footprint, and I am sure most of you saw, we announced the acquisition of LionsGate Homes in Dallas last week, and that will -- that closed actually at Wednesday last week. That will give us the ability to open up in Dallas, with 16 additional neighborhoods. Again, another part of our growth strategy. We had left that market about two years ago, and found an opportunity to re-enter. Great operator, all option lots, low risk model, so great opportunity for us to reenter the market that continues to be strong, and would expect that to have impact immediately.

Here is our inventory as it breaks up across the country, and you can see very well spread out. California being the smallest part of it at 6%, a year ago that was 2%. We will continue to grow that percentage over the next six months. But you can see, we are really spread out throughout the country, and no concerns that we are overweighed in any one market. When you look at Texas that does not include the Dallas acquisition that we just did, but Florida 13%, which is just Tampa and Orlando today. The Southeast, which consists of Atlanta, Charlotte, Charleston, Raleigh and Myrtle Beach; Midwest would be Chicago, the Twin Cities and Indiana; Mid-Atlantic, just Baltimore, Washington and SoCal, and then Phoenix, Vegas and Denver.

So again, very well spread out in all the major homebuilding markets. We will continue to look at opportunities elsewhere around the country, and see if there are any other markets that we could enter. But as of today, we are happy with our footprint and see an opportunity to really push growth in these markets.

If we look at these markets today, they are about half what they were at the peak, so we see a lot of opportunities to continue to take market share within the individual markets.

This is how our inventories broke down today, and what I would urge you to look at is the yellow portion of, which is the inactive inventory at 5%. This is the smallest inactive inventory of any public builder out there today, which means, this land is mothballed today and not -- we can't bring it to market at the moment. So it has been slowly shrinking. We will continue to bring communities out. We would be bringing another one out this quarter, and another one in the fourth quarter. But what that means is that we could -- all of our inventory, we can sell, we can turn that revenue and put bottom line profits to the balance sheet.

So huge difference from a lot of our competitors, I think it’s one thing that gives us a great opportunity to grow the business faster also, and you can see land under development is about 48% of it. We do have quite a bit of land under development. We have given guidance this year of about $500 million on land spent in development and we are on target to meet that. So finding plenty of opportunities in the market by land, and continue to grow the business.

Product diversity, this kind of gives you an idea of what we are building. You can see about 50% of the businesses for us move up, that's a little bit of a shift from probably, prior to the downturn where we were about a third, a third and a third. But obviously this market languished during the downturn, and we have seen a resurgence of it.

26% in the entry level and balancing the second move up. So happy with where our footprint is from a product perspective, would expect to see the entry level grow over the next couple of years. For a couple of reasons, one is we think that some of that entry level demand was pulled forward through the downturn, because people couldn't sell their houses, so that was the majority of the market. Secondly, the size of the buying segment that's coming into the market is huge, and so we would expect to see that continue.

Second time move up market, we are seeing a lot of move downs, active adults in that makeup than we did in the previous upturn. So good product diversity everywhere. The first time move up market is extremely strong. The inventory in the existing markets is very shallow, and in some markets it’s down to two months, and a lot of that inventory is, what we would consider old inventory, which needs renovation, not energy efficient. So we think we have a huge opportunity, because our operating costs are probably a couple of hundred dollars less expensive than that existing house, which gives people more buying power, they can buy a bigger house, so they can put more options in the house. So we think we have a definite product advantage today, versus the resale market.

Lot count, we control 30,000 plus or minus lots, and you can see 40% of those are options, that's the largest option percentage again of any public builder, and we have worked extremely hard through the downturn to increase our option percentage, and continue to find option lot deals today. While difficult, they are still out there. I think one of the reasons we have been able to grow is, we had a lot of good relationships going into the downturn, maintain those through the downturn, and I think those have benefitted us now, that the market has picked back up and we have the ability to deal with developers who will sell us lots on an option.

We are currently buying lots in all markets. There is no market that is not active today, which is another good sign. So right now at the current rate, this is about five to six years of lots. But as you see, at 30,000, that could turn into three or four years real quick with a little bit more uptick in the market. So happy with our lot counts, happy with our positions, and continue to actively be a buyer in that market.

Community Count, Nishu mentioned this. We gave guidance for 25% community count growth, which was 298 at the end of the year. Again, I think this is one of the things that has separated us currently from the rest of the builders. We became very focused on this in 2010, when we saw signs that the market was starting to improve. Spent a lot of time and effort, making sure we were buying lots in the right locations across the country. Focused on some markets early, some a little bit later, but in general have had great success around the country, being able to open new communities at high margins, and good absorptions.

I think again, this gives us an indication that we do have the ability to run a little faster than our competition. Also with the pickup of Dallas last week, those numbers aren't included in these numbers, so we picked up 16 neighborhoods in Dallas, so that again will help us out of the box. So great opportunity for us, continue to get them open. We opened about 100 net communities this year, which is a lot of work. But again, it's very widespread across the country. So if you figure, really 20 markets, it's not that many communities per market, and we will see great activity in both California and Washington this year, where we invested a fair amount of capital early, and are just getting those communities to the finish line. So excited about this, and see no reason that this can't be achieved throughout the rest of the year.

Debt maturity; obviously we are real proud of our balance sheet. We worked hard through the downturn to set ourselves up, so we’d have the ability to buy lots when the time came. Generated a ton of cash early in the downturn, and had about $850 million in cash and have since done a couple of deals. We just did a convertible deal a couple of weeks ago at 25 basis points, and stock price the day we did it was $50.05, which meant the convert price was $75.

Huge opportunity for us to borrow money at a very-very low rate. Then we also did a convert a year ago, it was 1.5 and the conversion price was 32 and change. So obviously, that converts into money today. But as you can see, we have no near term debt. We have $126 million due in 2014, average cost of capital 4.6%. So we are in a very good position from a cost of capital.

We would expect at some point to put a revolver in place. We have not done so yet, because we have had plenty of cash to run the business. At some point, we would put a revolver in line, probably later this year or next year, and we kind of target about $300 million cash limit before we would want to put a revolver, and then just use that revolver for construction, for the ups and downs in the construction process, not for anything else, but that.

Mortgage company; huge part of our business, and I know obviously there is a lot of discussion in the group about interest rates. What I will tell you, it has been a great part of our business, very profitable part of our business. You can see the FHA portion of our business continues to shrink, which is a good thing. I know that the government hopes that that will continue to shrink. But quality of the buyer is extremely good, with a 731 credit score, and actually I wish that credit score would start to go down a little bit, because I'd like to see some relief in the lending side of the business because I think there is a huge opportunity for demand that’s sitting on the sidelines, they can't buy a house today because they have something under credit; and it's not like the days of the subprime, but this have a small event that happened, and they can't buy a house today. And I think if we could get through that that would help the market that much more.

But as far as the mortgage company and interest rates, I guess, I will address the question that seem to be asked a lot in one-on-ones is, what effect will interest rates have on the business? Short-term, seen no difference in anything today, have not seen it slow down, not seen it pick up. We would believe it might move a few people off the fence, but don’t see it as a big part, think that it's a minimal number. At what point does it start to have effect, I would tell you, my own opinion is it could get to 7% before we see an effect. I think as long as the economy continues to move in the right direction, and unemployment stays where it is or moves forwards, and the economy is moving forward, then interest rates won't play a big part in our business in the near term.

But as I said, right now rates are still extremely competitive under 4%. Easy -- as far as getting people approved, we had about a 15% cancellation rate last quarter. So we are not having a problem getting people underwritten. It's extremely strict and extremely difficult, but there is a lot of good quality people out there. And people have done a great job fixing their credit through the downturn, because they knew they couldn't buy a house if they didn't have their credit repaired. So they have gone out and done a great job.

Talk about the acquisitions real quick; Timberstone which was acquired in July of 2012. It was really more of a land transaction in Charlotte and Raleigh, where we bought lots. Didn't buy the entity, didn't buy most of their people. We bought their salespeople and their superintendents. Just added it to our current Charlotte division, which we had a full team. So great opportunity, took us from being the ninth largest builder in the market to being the fifth largest builder overnight; very-very good acquisition for us.

Trend Homes is a little bit different. We had left the Phoenix market through the downturn, and we are able to pick up 900 lots with a very seasoned management team that had been in business for a long time, and we closed that acquisition in December of 2012. Been a very good acquisition for us, they have been very aggressive in the lot purchasing process over the last couple of months. So we see great things there, for this year. We should have a very good year though.

And then LionsGate, the one we did last week. Same kind of deal as Trend, bought the management team. Larry Craven who's the President there has been in Dallas since 1989. Very well run business, nice business, low risk business, and all the right neighborhoods and again, day one it will be accretive to us. So that's a great thing. This is just a way to supplement what we are doing, got us back in the two markets that we had left through the downturn, and probably that saved us 18 or 24 months, because it would have taken us a while to get up to the size there, and we should do mid-300s in Phoenix this year, same thing in Dallas. So good launch platform to grow the business quickly, with not a major investment.

We were honored at the Builder 100, Builder, I guess Builder 100 event a couple of weeks ago, as the fastest growing public homebuilder. We don't like to [totter] [ph], but I think it just goes to what we were trying to do in the path we set out on a couple of years ago, and for us it's a great event, and it's really a testament to our employees and what they have done through the downturn and what they have been able to achieve. So we are proud of that.

End of the day, what makes us different, why are we better than our competitors? I mean, obviously, we are growing at a faster pace. Sales continue to grow in pace, home prices are trending higher. Our community account growth is going to continue to grow. Large lot option count, which is a good investment and our capital allows us to turn our inventory over one times a year, which is at the higher end of the spectrum again. We have a low cost of debt, and we do have a deferred tax asset, that we would expect to turn it over on the balance sheet this year, which will obviously help our ratios.

But at the end of the day, we run a very decentralized model, which is different to some of our competition, and what I mean by that is our local operators pretty much run their business, and they make decisions, real estate for local business, it's not the same everywhere; and we give them the latitude to buy land, build the kind of product they need to and give them support where they need it; and I think what that allows us to do is, we have guys on the entrepreneurial end of markets. They have very good local contacts, and they have a lot of credibility in the market. So we provide them the capital to do that. Obviously, they have hurdle rates they have to meet. We approve all their land deals. But it's just a little bit different model, than a lot of our competition, and I think that it has allowed us to grow faster, because we can react quicker than a lot of our competition.

So that's really it, I know it’s the end of the day, so just trying to be quick. But questions, I know you have some though.

Question-and-Answer Session

Nishu Sood - Deutsche Bank

No great. Thanks for your comments on the mortgage rates, that's one of our survey topic. I can just add one other aspect to the question, if there were a payment shock impact, because rate has risen too fast and too far, do you think the impact will end up being more on pricing or on volumes? How do you think it would be felt first?

Larry T. Nicholson

Well that's a good question. I think it would probably be -- I think it would be on volume. I think people will buy less house, honestly. I think if rates go up and people start to get [constrained] what they can buy, I think that you may see a pause in the market, where they decide what they want to do. But I think ultimately, they have made a decision to buy a house, and they will buy a house. So instead of buying the 2,400 square foot house, maybe they buy the 2,300 square foot house, or they buy the 2,400 square foot house, and they put less options in the house.

I mean, people would buy in a payment, let's be real. They would look at the payment, and what can I afford. The good thing that we see is, most of the people that are buying our houses today can afford more houses. So they are not -- if you go back the crazy times, people were buying the biggest house they could, and qualify and they were barely getting by. Today, we see people that are buying a house; they are using a little bit more discipline. It's a long term decision to buy a house, instead of a short term decision. So I think it's a give and take. But I wouldn't be overly concerned that it's going to bring everything to a screeching halt.

Nishu Sood - Deutsche Bank

Got it. So there would be a short term hit to volumes, maybe in the longer term it would depress what they'd be able to afford? Okay. Second part of the survey, and we have talked about this recently, which is for the benefit of the audience, a lot of folks at this conference seeing other sectors, where margins are at all time highs. It's a phenomenon for the broader market as well, is the earnings that we are doing to peel off of appropriate, because the margins are so high. So people think about homebuilders, and whether that will apply to homebuilders.

Now your gross margins, call them 20 recently and your peak in 2005 was 25%. Your SG&A, call it -- it was 13.8, but obviously that's the high mark for the year, and so call it -- let's say 13% and the low point in 2005 was 11%. So give us some sense of your thoughts on what is possible on a longer term basis for Ryland?

Larry T. Nicholson

Well, I would tell you that 25% margin was driven by a mortgage market that allowed you to achieve margins that are achievable yet today; because you could sell houses, people are lined up. I think we would look at more a 23% to 24% is where you could potentially get.

On the overhead side, I think you can get to 12, maybe 11, with no problem. So I mean, I think you get back to 10% to 11% and that kind of deal.

Nishu Sood - Deutsche Bank

Got it. Great. Thank you. Options; your folks obviously have been leading the sector in terms of optioning. Let's divide options into four types for the sakes of discussion. Number one, farmer options, as I call them, you are optioning the land, as you take it through the entitlement process. Number two, a developer option, the master plan community. Number three, a land -- or you have a lot banker coming to do a deal with you; then number four from a JV, call it. And if I have missed anything, please bear with me.

As you have increased your percentage of your lots that are optioned, which of those four categories has driven your increased ability to option?

Larry T. Nicholson

Let me work backwards. I will deal with JVs first. Our JV count is negligible, and they are old JVs, and there is no debt in any of those JVs, and there is very few lots in them. So JVs are, A, we didn't do a lot in the peak and really not interested in doing those today.

Farmer options, where we are entitling stuff and moving it through the process. We do a fair amount of that in certain markets, but we wouldn't say it's a big change from the past. The lot options, where the master plan side, I would say probably a little bit more the last, I will say 90 to 120 days, it has been with [divestment] developers we have never done business with, which is a good sign; because for a long time, there were no developers. So we are starting to see a resurgence of some of those guys show up in the market, because they can get some financing. So that's a positive thing, and third one was, I am sorry?

Nishu Sood - Deutsche Bank

Lot bankers.

Larry T. Nicholson

Lot bankers; we have no deals with the lot bankers today.

Nishu Sood - Deutsche Bank

Got it. Great. I wanted to ask you a question about, we have a -- we call it a keeping it simple and [stupid] sheet, but builders trade off and price a book, so you grow your price a book multiple. If anyone could tell me what those would be, that would be appreciative. But book value growth is obviously what we can model. You folks look terrific on a book value growth basis because of your growth. So earnings are beginning to matter again, the bottom line. When would you be comfortable giving earnings guidance again?

Larry T. Nicholson

I think if we can get through the year, this year, and feel comfortable, I think next year we'd probably give some. I think it's going to be required. I mean, some of the guys have already given some, I mean it's in tidbits, it's not big one, but probably next year.

Nishu Sood - Deutsche Bank

Let's see here, the acquisitions. You folks have laid out the three and relative to your peers and what you have been able to accomplish through acquisitions, you have been more successful so far than your peers. What has enabled you in terms of your approach to be more successful? Is it the decentralization, the idea that these management teams, you are bringing them on? I know Timberstone was mostly lots, but the other two deals that said, well, you can see how we run this business, and you will still have a lot of autonomy. Is that the main factor, what has driven your success there?

Larry T. Nicholson

I think that is the main factor. I mean, most of these guys are used to run their business for a long time, and we bring an opportunity for them to continue to do that, and I think that always interests them, versus somebody coming in day one. The other thing is, when you go into a market you are not in, and some of the other guys that you are talking to are in those markets, so they figure they are going to be out of the job at some point, so most of these guys want to keep working, so I think that's the other thing. And they are extremely talented people.

Nishu Sood - Deutsche Bank

Got it. Your stock price -- the convert deal that you did, I never thought you could do a convert deal that would make the prior one look expensive. But I was floored, when you announced the deal, $75 convert price. I was actually the ULI, I told the private builders about it and they were not happy about that, they fell out of their chairs too. But it makes it a little bit more difficult for investors to, from a price to book perspective, when they are looking at your stock, if they don't properly include it in your book value. You have done two of them now. Last time we were with Gordon, he said I have never issued equity in the 13 years I have been at Ryland. So how do you suggest investors look at the $75 run? Should we be including an equity or what, how should we be looking at it, when we are trying to value Ryland stock?

Larry T. Nicholson

Well I mean, I guess it's tough today. I mean, we issued it at $50 and the stock closed today at $42 and changing. I think if -- we'd all be happy if that stock was $75. The dilution on it, 7% I think, not a big number and so, I think we looked at it as that -- it was an extremely positive event from a lot of different perspectives, and we looked at that versus a straight debt deal, and just couldn't find any reason not to take the opportunity. I mean, I know 99% of our shareholders we talk to are extremely happy with the deal.

Nishu Sood - Deutsche Bank

So since Gordon's not in the room, let me ask you about the equity deal and 49% debt-to-capital is the number right now. Tremendous growth trajectory with the LionsGate acquisition, I think your community account growth is 16, you mentioned it might be up 30% or plus now. And as we have talked in the past, Ryland is still very-very interested in growth. So how would you look to finance that thing going forward, concerning the 49%? Is it the higher end of what many people might consider to be the normalized range for a builder?

Larry T. Nicholson

Yeah, I think what we would tell you is, at short term we expect it will probably eclipse that 50 mark, where we are comfortable with. The deferred tax will come back over some time this year, which is a huge jump. So I think short term will exceed it, but I think it's the right thing today to look at growth and take the opportunities for growth. But ultimately, we want to get back below that 50%, that's in the plan and I think we can execute it.

Nishu Sood - Deutsche Bank

Any questions from the audience?

Unidentified Analyst

I actually have four. I'd like you to comment on any changes in Freddie and Fannie, and what that would do? I would like you to comment on the shadow inventory that still exists, it was talked about long time ago? I would like you to comment about, I think in Phoenix, sort of the deals were done all cash, Canadian investors, things like that, and how do you see that working out in the future, whether they are going to have the patience to wait, or whether that will put pressure on prices further down? And any risks you see in the next year or two?

Larry T. Nicholson

Okay. Fannie and Freddie, which is a great question, and I guess how I will answer it is, I am not concerned about any near term effects. I think that, based on what I know in the meetings I have been in Washington, and talking with our administration that -- we are comfortable that there won't be anything that will happen in the near term. I think long term, we all agree there has to be a change. But I don't think anybody is ready to pull that band aid off today. So I think that's a slow process. I think we can see private capital come back in, and I think we have a fairly smooth transition.

Shadow inventory is something I never believed in, and I think that we talked about it, we made it into a monster. It never became the monster, and I think that the influx of the Blackstones, the Colony Capitals, those guys did a great thing by taking a lot of that inventory and buying it up and stabilize that resale market. But what I would tell you also at that point is -- early in the downturn, we fought with foreclosures on a sale against the foreclosure. As the market started to move, really they became less and less of an issue to us. So while they were an issue, they weren't a big issue.

The bigger question is, how does that inventory come back into the market, over time, and I think what you will see is, most of those houses were two year leases. So I think you will those all staggered. They will come back in over time, and again, I don't think they will have a major impact on any market. The other thing you have to remember, is a lot of those houses are not major housing markets. So where we do business, like Phoenix is the perfect example. And a lot of that's done in Casa Grande and Pinal County, where nobody has -- none of the builders are building small houses today.

So I mean, you got to really -- you got to ratchet down on the market and look at that. The other question was --?

Unidentified Analyst

[Question Inaudible].

Larry T. Nicholson

Let me answer your other Phoenix question first, which I would say the cash part. We don't see that in Phoenix, we see it's a primary. But I think what we did see was a influx of a lot of -- obviously the Canadians, buying up -- a lot of it was in the less desirable areas. So not overly concerned with that, and Phoenix job growth has been very robust, and again, it's still an extremely affordable market. So pretty comfortable with the debt market to the equilibrium now.

Last and not least, what keeps me up at night, I mean, not a lot has been keeping me up at night. The interest rate thing is some of the things above, but as I said earlier, as long as the economy continues to move forward on solid ground, I think we are fine. A year ago I was worried about Fannie and Freddie, but today I am not. There is mortgage availability. So I am not real concerned with a whole lot right now. I think that pricing will continue to move up. If you look at peak to trough pricing and you look at where we are today, we still got room to move. So I think there is a lot of things still playing to our favor today.

Nishu Sood - Deutsche Bank

Let me ask a follow-up to that. We have been hearing that there are some of those single family, already out to rent. Investors have started buying back in phases from builders.

Larry T. Nicholson

Not for months.

Nishu Sood - Deutsche Bank

So I just wanted to -- that was one part of the question.

Larry T. Nicholson

We have heard the same thing. We keep a pretty close channel check with all of our people, to see if anybody is coming in, to try to buy investors. Our backlog today, I can tell you, less than one half of 1% of it is -- what would qualify as an investor. And some of that -- most of that in Florida, where people live in the North, and they are buying the house. We have not seen that. I have heard it in different markets. All of our guys say, we haven't seen any of these people coming in and buying, so I don't know where it's happening, or who its happening to.

Nishu Sood - Deutsche Bank

It could be like those seven houses that got razed in California, and 4 million people saw the YouTube video and certainly, that's happening everywhere.

Unidentified Analyst

One other question, what's happening to material costs? Lumber, (inaudible).

Larry T. Nicholson

Lumber was at its peak at about 90 days ago. It has come off its peak. So we have seen that moderate, which is huge, because that's a large portion of the cost in-house. Early in the year, we took increases on drywall concrete, lumber. Those, I would say were the majority of it. Lumber, we should see some -- hopefully some pickup from that in the latter part of the year. Everything else is really kind of nickels and dimes, but we have been outpaced in all that with price increases. So I think in the first quarter we said we had 7% of price appreciation on a square feet, we had 5.5 on the cost.

Unidentified Analyst

[Question Inaudible].

Larry T. Nicholson

Yeah, some markets, it's a little different by city, but that has been a problem. But I think that will solve itself also; because if you think it's a multifamily market today, it's kind of at the peak, and I think that will slow down, and starts will slow down for the rest of the year, so I think a lot of that labor comes back into our industry.

Nishu Sood - Deutsche Bank

All right. Great. That brings us to the close of the session. Thanks to Larry and Drew and thanks to all of you for attending.

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