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Standard Pacific Corp. (NYSE:SPF)

Q2 2013 Earnings Call

July 26, 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

Alan Ratner - 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

Michael S. Kim - CRT Capital Group LLC, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Michael A. Roxland - BofA Merrill Lynch, Research Division

Brendan Lynch - Sidoti & Company, LLC

Buck Horne - Raymond James & Associates, Inc., Research Division

Operator

Good morning, and welcome to the Standard Pacific Homes 2013 Second 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 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 would like turn the call over to Scott Stowell, President and CEO. Please go ahead, sir.

Scott D. Stowell

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

Our strong second quarter performance reflects a continuation of the first quarter's positive momentum, focused execution of our strategy and an improving housing market. The demand and pricing power we experienced in nearly all of our markets has resulted in a growing backlog with growing margins, which we believe are strong indicators of future performance.

Net income for the 2013 second quarter was $43.1 million or $0.11 per diluted share as compared to the $14.3 million or $0.04 per diluted share for the 2012 second quarter on revenues of $434 million, which were up 58% year-over-year. Pretax income was $51.1 million, up 254% from the $14.5 million achieved during the prior year period. Net new orders were also up 37% as compared to the 2012 second quarter, resulting in a 79% increase in the number of homes and 116% increase in the dollar value of our backlog as compared to the prior year. The 1,516 orders we generated during the quarter represented our highest level of quarterly activity since the second quarter of 2007.

Driving these solid financial results were significant increases in both our average selling price and our gross margins from home sales. Our average selling price of homes delivered for the quarter was $397,000, an 18% increase from the prior year period. And our gross margin from home sales was 23.7%, a 320 basis point increase when compared to the same period. This gross margin strength also helped to drive our industry-leading operating margin, which stood at 11.1% for the 2013 second quarter, a 590 basis point improvement over the prior year.

The significant increase in our gross margin reflects our ongoing community-by-community evaluation of our value proposition to tactically raise sales prices and reduce incentives as demand warrants. During the second quarter, we were able to raise base prices at over 87% of our communities with same-store ASP from home sales up 16% year-over-year and 6% quarter-over-quarter, while at the same time maintaining our targeted absorption rate for the quarter of plus or minus 3 homes per community per month. As a result of this pricing discipline, we're able to end the quarter with an ASP and backlog of $417,000 and a backlog gross margin of 25.2%.

As we have said repeatedly, our objective is to maximize the value of every homesite that we own. To that end, we will continue to set price in our market, emphasizing margin over sales pace, particularly in what we continue to believe are the early stages of this housing recovery.

Turning now to land. As we discussed last quarter, 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. During the quarter, we spent nearly $300 million on land and land development. Our second quarter activity included the acquisition of approximately 30 current and future communities, consisting of approximately 3,000 homesites from affiliates of Florida-based Centerline Homes. This exciting acquisition complements our existing operations, bolstering our target move-up position in a number of important markets, including South and Central Florida and Charlotte, North Carolina.

As we move forward, we will continue to strategically acquire land, including through the acquisition of builders and larger land portfolios when those opportunities meet our underwriting criteria. And as we noted last quarter, we intend to continue to capitalize on the early mover advantage we have earned in the land market, focusing our division operators on creating value through longer-term land opportunities that leverage our strong master plan and development capabilities.

Turning now to community count. We averaged 164 active selling communities for the quarter, up 4% from the 2013 first quarter despite several earlier-than-anticipated community closeouts. We ended the quarter with 169 active selling communities. We opened 40 new communities during the first half of the year and anticipate opening a total of 70 to 75 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 and a few active or soon-to-be active communities from our recent acquisition.

For the year, we anticipate an overall mid-single digit increase in our average community count. By quarter, while average community count was flat for Q1 and up 4% for Q2, we anticipate year-over-year average community count will continue to accelerate into 2014 and should be up high single digits in Q3 and low teens in Q4. Also looking a little further ahead, we're encouraged by the roughly 160 communities we already own or control and are scheduled to open in 2014 and beyond.

As I reflect back on our results over the first half of the year, I'm excited to see the execution of our strategy driving top line revenue and profitability. As we have for many quarters now, we plan to remain focused on execution of our clear and unwavering strategy, which includes acquiring strategically located homesites, designing and constructing desirable amenity-rich homes and communities and providing a customer experience that appeals to the move-up and luxury home buying segments that we target.

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

Thank you, Scott. I'll begin on Slide 5 where we break down our Q2 performance across our 3 regions: California; Southwest, which includes Arizona, Colorado and Texas; and the Southeast, which includes our divisions in the Carolinas and in Florida.

As Scott noted, company-wide, our net new orders grew 37%. When you pro forma out the acquired backlog from the acquisition in the Southeast, our net new orders grew 26%. And as you can see, the order growth was pretty consistent across our 3 regions. Our average selling price and net new orders is up 26% across the company and ranges from the Southeast, up 28%, to the Southwest, up 36%. The change in ASP is heavily mix-dependent and reflects real pricing power and the impact of community mix.

To provide more color on the real pricing power, we provided a same plan ASP view on the bottom right-hand graph. While the data supporting this graph is much more limited and only represents the ASP changes for the 623 homes with the same model in the same community sold in both the second quarter of 2013 and the second quarter of 2012, we believe it provides a meaningful view on real price changes and is less impacted by mix.

California continues to lead the way with its ASP up 29% in total and up 26% on same-store basis. And while we're achieving same-store -- solid same-store ASP increases in the Southwest and Southeast, up 15% and 9%, respectively, the ASP growth in these regions is being positively impacted by our product mix shift to more high end move-up and luxury homes.

As you can see in the order absorption rate graph at the bottom center of the page, California's absorption rate of 3.7 per month increased 39% compared to the same period last year and remains relatively flat compared to the first quarter despite meaningful price increases. We will continue to aggressively manage price on a community-by-community, plan-by-plan basis, targeting an absorption rate of plus or minus 3 homes per community per month. And while there continues to be a significant variation in absorption rates across our regions and even greater variability across our communities, we will continue to aggressively push prices in communities over 3 per month, but expect less near-term pricing opportunities in our slower-absorbing communities.

Based on a trailing 10-year average, our historical seasonality typically results in an 18% reduction in sales absorption rate from the second quarter to the third quarter. So if historical seasonality holds, we would anticipate less opportunity to continue to push prices through the third and fourth quarters of the year. Now this may be accentuated by the recent increases in mortgage interest rates.

Our community count by region will continue to be lumpy due to the timing of community openings and closings. As Scott mentioned earlier, we expect our year-end community count to be up low double digits with every region ending the year with more communities than when they started the year. We have a particularly strong community opening schedule in California and Texas, with 13 and 9 new community openings scheduled during the second half of the year, respectively.

On Slide 6, we break down our deliveries in a little more detail. As we mentioned earlier, deliveries in the second quarter were up 34% versus the prior year. 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 79% versus prior year and at highest quarter-end levels since the third quarter of 2007, and it's up 116% in dollar value. Of the 2,272 homes in backlog as of June 30, 1,285 homes are currently scheduled to close in the third quarter. The estimated gross margin of our homes in backlog expected to close in the third quarter is 24.3%. We expect the 1,285 will get adjusted down due to cancellations and changes to the targeted closing date of homes currently in backlog. For the past 8 quarters, that downward adjustment has averaged about 15.5%. From that number, you add the number of specs sold and closed in the quarter to get your Q3 deliveries. On average, over the past 8 quarters, we have sold and closed about 250 specs in their respective quarter. While the number of specs sold and closed in the second quarter was 10% below the trailing 8-quarter average, largely due to limited availability, the gross margin on those homes closed in the quarter was 25.5%, representing the first quarter in the 3 years we've been tracking the statistic where our specs sold and closed in the quarter had an accretive effect on the reported gross margin for the quarter.

On Slide 7, we break out our change in our ASP of homes closed across 7 markets. In Southern California, where we have historically been the high end builder, ASP was basically flat. However, in Northern California, Arizona, Texas, Colorado, Florida and Carolinas, ASP trended up as a result of our focus on the move-up buyer and significant pricing opportunities. We expect these trends to continue as our 2013 projections show our ASP increasing in all of our markets other than Southern California where ASP is expected to remain relatively flat. Compared to the second quarter of 2013 to 2012, our ASP was up 60% in Northern California; 21% in Arizona; 33% in Texas; 17% in Colorado; 13% in Florida and 18% in the Carolinas. The average selling price of our 2013 third quarter beginning backlog expected to close in the quarter was $412,000, which we 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 into 4 categories: G&A, insurance, incentive compensation and selling expenses. Overall, our SG&A as a percent of revenue dropped 12.6%, improving 270 basis points over the prior year period, due primarily from the 58% increase in our home sales revenue. The main SG&A leverage came in our selling expense, down 80 basis points year-over-year as we are constantly fine-tuning our co-broker strategies on a market-specific basis; and the leverage inherent in our G&A structure, down 120 basis points. On a nominal dollar basis, our G&A increased $4.6 million on a revenue increase of almost $160 million.

For modeling purposes, insurance should remain variable at about 1.1% of revenue, and incentive compensation is expected to remain at about 6% to 7% of EBITDA.

On Slide 9, we highlight our land acquisition and development spend over the past several quarters. In Q2, we spent $236 million on land acquisition and $63 million on land development. We remain encouraged by the quality and volume of 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 with $200 million to $300 million of which relates to anticipated development spend for the year.

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

Scott D. Stowell

Thank you, Jeff. I'd like to wrap up by providing some commentary on market conditions. The potential impact of recent interest rate increases is clearly the pressing issue on everyone's mind during this earnings season. There's been a lot of discussion on this topic, knowing that interest rates were likely to rise, and as usual, viewpoints on the matter run the gamut. Within our own company, the subject of rising interest rates has been a topic of conversation during every land-buying discussion we've had over the past several quarters. There's no disputing that lower rates are better than higher rates for home buyers from a affordability and a housing cost standpoint. Some buyers are more sensitive to changes in interest rates than others, particularly buyer profiles who may be stretching their home buying expectations or on the bubble from a mortgage qualifying standpoint, which may be less so for the move-up buyer who we typically serve.

We should also keep in mind, however, that the recent run-up has simply returned rates to below 5%, which we all acknowledge is still a historically low level. We have always maintained that the housing market recovery would likely be an uneven one and recognize that a quick rise in interest rates has the potential to cause home buyers to pause as they adjust to a new interest rate reality. While it's difficult to know precisely what the actual impact of rising rates will be at this time during this particular point in the recovery, we can offer some anecdotal information that you may find helpful.

We opened 5 new communities in Southern California from June 1 to this past weekend and sold out the initial phase of each of the 4 communities at which we offered homes for sale. The fifth community located in Fullerton, California, had nearly 1,900 traffic units last weekend and we will release the first phase of homes for sale in that community tomorrow to an interest list that is over 800 strong.

Our traffic per community company-wide in June was higher than it was in May, reversing last year's trend. And our traffic in the first 3 weeks of July is up over 20% year-over-year. During the last 2 weeks of June, we experienced our strongest combined 2 weeks of sales for the quarter even when excluding the lift we received from the acquisition in the Southeast region. And finally, June's cancellation rate was the lowest monthly cancellation rate of the quarter and our second lowest monthly cancellation rate in the last 18 months.

Each of these metrics, traffic, sales and cancellation rates, are key leading indicators of demand trends and each held up fairly well in our business during May and June's rate increases. With steady gains continuing to be made on the employment front and interest rates still extraordinarily low when viewed from a historical perspective, we don't see this interest rate increase as the death knell of the housing recovery. We remain positively focused and are looking forward to the second half of the year.

As I close, please permit me to offer a shout out to our employees. Our company's success would not be possible except for the dedicated and passionate employees whom I'd like to acknowledge and thank for all of their efforts. Thanks, everyone, and well done this quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Alan Ratner with Zelman & Associates.

Alan Ratner - Zelman & Associates, LLC

Scott, I was hoping that you might be willing to provide some thoughts on the land market and kind of your intentions there given you've got pretty big increase in land acquisition this quarter. And we've heard from some other builders yesterday that maybe they're seeing a little bit more of an impact than you are as far as the higher rates are up to this point. And over the past few years, you've been very opportunistic and even contrary in some cases in the land market and getting aggressive when perhaps other builders were not or where maybe there was some concern over demand at various points in the cycle there. And your cash balance here at $80 million is the lowest we've seen in a while. And I know historically you've, or at least the few past years, you've had a nice buffer there to take advantages of those opportunities. So I guess my question is if demand were to slow here either on the home buying side or maybe on the land side from other builders as they take in these higher rates here, what would your intentions be on the land side? Would you get even more aggressive, or are you pretty comfortable with the pace you're sitting at?

Scott D. Stowell

Well, we're certainly comfortable at the pace we're sitting at. We've got 6 -- nearly 6 years of lot inventory that we own. Assuming that the market were to slow, we're in a strong position to build out our current inventories. We're still seeing attractive opportunities that meet our strict underwriting criteria. So as long as we're able to do that and as long as our outlook for the industry remains positive, we will prudently grow our business. And it will be strictly a function of our view on where we're at in the cycle, our view on the strength of the recovery, and if our view changes, we will run a strong position not to have to buy land. So that remains discretionary for us and we like that position. It's one of the advantages of going out early.

Alan Ratner - Zelman & Associates, LLC

So is it safe to say when you're taking a view on the cycle, you're obviously taking a much bigger picture view on demographics as opposed to having this recent increase in rates here? This wouldn't derail your bigger picture view at all?

Scott D. Stowell

As we have for many quarters now, every land buying opportunity, we look at pricing and absorption rates with the assumption of 4.5%, 5.5% and 6.5% interest rates to understand that impact. So a move up to below 5% is something that was clearly anticipated and not something that materially changes our view on our land buying, particularly on what we've done and what we'll continue to do.

Alan Ratner - Zelman & Associates, LLC

That's helpful. And given that sensitivity that you look at then, is there any perhaps even anecdotal commentary you could provide on maybe what those sensitivities would look like in a higher rate environment? So how the returns on your land might look a little bit differently if rates do go to that 5.5%, 6% level?

Jeffrey J. McCall

It's tough to look at interest rates going up and going to the 6.5% without some other fundamental drivers. And hopefully, if rates are up at 6.5%, there is some employment growth out there and the economy should be under better footing so that should help supplement demands to help offset the negative demand from the affordability changes. So it really is market-by-market specific, but no real macro count there.

Operator

And we'll take our second question from Michael Dahl with Crédit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

If I could just follow up on Alan's first question on the land side. If you are seeing the same pace of opportunities and you're looking at the balance sheet being a bit lower on cash here, how would you look at the finance, understanding there's some seasonality of the cash flow here. Would you look to the revolver first, or how would you think about the capital structure at this point?

Jeffrey J. McCall

Yes. From a liquidity perspective, at the end of the quarter, we had, including the restricted cash, about $90 million of cash; and untapped, it's $350 million revolver, which has a $200 million accordion feature. At the end of the quarter, the availability under the current revolver is about $318 million. So I think there is some ample liquidity. But we continually evaluate the conditions in the capital market and while keeping a careful line on short-term and long-term liquidity position, just making sure that we've got adequate capital to support the needs of the business. And as you did mention, we do have what is traditionally a pretty strong net delivery basis in the second half of the year compared to the first, that should be cash generative.

Michael Dahl - Crédit Suisse AG, Research Division

Okay. And then Scott, appreciate the color on the rates environment. But it sounds like there was a bit of a difference and then what Jeff was saying as far as fewer pricing opportunities going forward in the second half of the year. So could you help us kind of reconcile, is there something geographically going on? Or if there really isn't an impact with your buyer base, why are you seeing fewer opportunities on the pricing side in the second half?

Scott D. Stowell

I think what Jeff was highlighting was as rates -- sales rates slow because of seasonality and they're falling below what we would consider the thresholds where we would look to push pricing, you might see pricing moderate. We understand that rising rates will affect affordability and has the potential to slow the rate of home price appreciation that we've seen so far this year. That's not to say that we don't view pricing on a community by community basis, and we're very careful to look at this each week, and we will raise prices in communities that are selling above targeted interest rates. We believe that in many of our markets, housing is still affordable. And when you've got the high demand in many of our competitive market areas with favorable supply conditions, there's still opportunities for us to raise prices and if it's done on a community-by-community basis. So I don't think anything that Jeff said would be contrary to anything that I've said.

Operator

We'll take our next question from Adam Rudiger with Wells Fargo.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Thanks for the gross margin and backlog and gross margin expected to close. That's helpful for us to understand the trajectory. But I was curious what the longer-term trajectory was. What do you think the ceiling on that as you keep -- it seems like a sandbag last quarter, beat that number. And I was wondering also on that front when you look at what's been driving that, I know there's a composition of home price appreciation or home price increases plus the mix from your recent land purchases. I was wondering if you look at those 2 buckets, what was the bigger driver of it?

Scott D. Stowell

You want to handle that one, Jeff?

Jeffrey J. McCall

Sure. But as far as long-term guidance on gross margin, again we're going to stick to -- we do provide you with our gross margin and backlog and you can continue to see that escalating. So that's moving definitely in the positive direction. What's driving that? It is home price appreciation. It is mix shift as some of our older communities, which have been delivering about a 300 basis point gross margin deficit to our newer communities. When those roll off, that has the mix impact of benefiting us and actually some of our land buys. In fact, our 2012 vintage has some of the highest gross margins that we're experiencing when we look by vintage. So I mean, I think it's home price appreciation and some pretty solid land buying that is really contributing to the gross margin.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then one other question on the balance sheet liquidity cash flow stuff. I'm just thinking about this, if your dollar backlog keeps growing as it is and backlog conversions keep coming down, what does that do to the normal seasonal cash flow trends? I was just wondering if that might negate that a little bit.

Jeffrey J. McCall

On the pace of that growth, but in the near term, we think that more normal seasonal trends with greater deliveries in the second half compared to the first half should maintain.

Operator

[Operator Instructions] And we'll take our next question from David Goldberg with UBS.

David Goldberg - UBS Investment Bank, Research Division

My first question, I kind of think it was really interesting -- I don't know if you remember Jeff was talking about the spec homes and the margins on the spec homes this quarter for the first time exceeding the margins. The overall average, I believe, is how you put it. And I'm just wondering, I assume that scarcity issue and it's an issue of people wanting to get delivery right away, does it make sense to think about meeting out a couple more specs given that there is that demand and so little inventory on the ground right now?

Scott D. Stowell

Certainly. We've got very specific spec guidance out there, David. We're very comfortable with that spec guidance. Some of our divisions, quite frankly, have a hard time getting there because they're selling so fast. So notwithstanding some constraints in our business to get through jurisdictions and get our starts out of the ground, we think there's opportunity to increase our spec opportunities. We've given divisions targets. Not everybody's there. They're making progress against that. So there is an opportunity and we are focused on that. Just one comment I'd like to make regarding the gross margin and the specs. It's a terrific number. There's probably a couple of things driving that. We've been focused on this just to try to change the whole paradigm of the industry and our own paradigm on how we view those things. We believe specs are really valuable. So I think just the focus by our people and shifting our own views on specs has contributed to this. Oftentimes, it's crazy. In this rising price environment, cancellations are really valuable to us as well because we reset pricing to the higher price points, and in some cases, that could be up tens of thousands of dollars.

David Goldberg - UBS Investment Bank, Research Division

That makes sense. And then just my other question. You guys mentioned in the commentary about fine-tuning the co-brokerage policy and I seem to remember about 75% of your sales, somewhere on that number, go through outside realtors or were involved with outside realtors. Can you just talk about what you were referring to with the fine-tuning and if that number is still accurate, or if you're finding it less relevant in your markets to be using the outside realtors to help drive traffic?

Jeffrey J. McCall

David, great, great memory. Yes, if we go back a year ago, our co-broker participation was about 74%. That's dropped down, I think, for this year it was right at 70%. But that reference -- so there's a slightly less co-brokerage participation. But that reference really is not related to jobs and market. You have to be market competitive and when there was a lack of sales going out in the market, builders got more aggressive on those brokerage centers offering bonuses and other things. And as the market tightens, us along with, I would assume, most other builders haven't been able to bring that back into more normal range. And so it's just a natural progression as we -- as the market improves, particularly given the really limited level of resale inventory out there gives us a little bit more power.

Scott D. Stowell

And David, our operators, too, are focused incrementally on trying to improve -- make some incremental improvement on selling expense by instead of, for example, offering a 3% broker participation commission on ASPs that are rising really fast, they'll just pick a flat fee, which may be instead of 3% may be 2.5%. So we're getting some incremental benefit from that as well.

Operator

And we'll take our next question from Michael Rehaut with JPMorgan.

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

First question -- and congrats on all the success with the gross margins. And I'm sure you get this question often, but I think would love to hear your updated views given what's happened over the last few months. But relative to history, obviously, your gross margins are approaching or you can even argue at all-time highs. I mean, I guess, you had a little bit higher in 2005; certainly, what's in backlog today. So over the next couple of years, I mean, just wanted to get your thoughts on the sustainability of where you are right now. Do you expect at all the margins that you're achieving right now to return perhaps over time over the next 2, 3 years to more normalized levels as if you put together a scenario of price increases, maybe more moderate -- moderating higher land prices and perhaps more credit available to competition?

Scott D. Stowell

Michael, while we're not giving specific guidance on the future of our gross margin, we do have the benefit of early land buys that are sitting in our inventory, which we think will support our gross margins for some time going forward. And then as home price depreciation at whatever level it's available to us in our markets, just based on our strategy and our positioning, we're going to aggressively go out and try to capture all of it. So that will support gross margin in the future, offsetting by all the cost increases and then -- and mix effects, as you know. And then as we add in new communities, we're not lowering our underwriting hurdles at this point to buy land. So incrementally, we're going to add new communities at a 20% gross margin and while it's very difficult even for us to try to accurately predict the calculus of all of those variables, we think we're in a pretty solid position relative to gross margin.

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

I appreciate that, Scott. And I guess just maybe drawing on that thinking a little bit, to your last point, if you're underwriting today at 20% or better and you're -- given the rapid price appreciation in a lot of your markets that you could certainly argue -- it's not going to go up 10% every year or 10% or 15%. As those price increases, maybe a couple of years from now, become more in line with history, which would be more 3% to 5%, let's say, could you envision again, and I know I'm not necessarily asking for guidance, but just if you're doing margins today at 25%, you're underwriting at 20% and you have more of that normalized environment that would have impact that land that you're buying today, certainly the land the you're selling today is benefiting from, you can argue, an unusually robust price appreciation period, I mean is it possible that perhaps margins would kind of on -- to some level kind of return to closer to what you've seen in the mid-cycle and the past cycle?

Scott D. Stowell

Yes. The answer to the question's yes. They will, over time, return to this normalized market. The question really is when, over what time period and that's the hardest questions for us and we're just not giving guidance on that.

Operator

We'll take our next question from Michael Kim with CRT Capital Group.

Michael S. Kim - CRT Capital Group LLC, Research Division

My first question -- a question on the community count guidance. I guess, did prior guidance that you've provided include the 5 active communities from Centerline? I'm just kind of curious as to the increase in guidance and how much was that due to the 5 communities from Centerline versus earlier-than-expected community closeouts versus more community openings?

Jeffrey J. McCall

Yes -- no, previous guidance would not have included that. On the community count guidance, we only include things that we have under contract, so -- and we didn't have Centerline under contract at that time.

Michael S. Kim - CRT Capital Group LLC, Research Division

Got you. Okay.

Jeffrey J. McCall

So the answer to your question is we brought communities online earlier, Michael, than originally planned.

Michael S. Kim - CRT Capital Group LLC, Research Division

Right. And some of the community closeouts, though, I mean, how much of that was derived from just lower gross margin communities? I think last quarter, you had mentioned somewhere in the 10% to 15% area for gross margins in the teens. Just kind of curious where that stands today.

Jeffrey J. McCall

Yes, I think that entire pool has shifted up with the price appreciation. But on the lower performing is still in that 5%, 10%, 15%.

Michael S. Kim - CRT Capital Group LLC, Research Division

Understood, okay. And in terms of the year-over-year improvement in gross margins, how much of that was tied to the roll-off of projects with lower margins versus kind of accretive contribution by specs?

Jeffrey J. McCall

It's tough to break out that specific mix. So we did benefit a bit by that price appreciation, which effects both these -- the specs sold but also the homes sold at that dirt. So it's pretty difficult to break that out.

Operator

[Operator Instructions] And we'll take our next question from Joel Locker with FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just was curious on -- if you had a order breakdown just between the months, I guess, you mentioned 529 I think back in April and then what they were for May and June.

Scott D. Stowell

Yes, Jeff, do you want to...

Jeffrey J. McCall

Sure, yes. Orders by month, 527 in April, 408 in May and 581 in June. Keep in mind June did include 119 acquired -- the backlog acquired with the acquisition. So if you want normalize it, back out the 119.

Joel Locker - FBN Securities, Inc., Research Division

And you mentioned a normal 18% decline in absorptions in the third quarter from the second quarter. Is that what you're seeing so far in July, I mean, with July almost being over?

Jeffrey J. McCall

I know we're almost near the end of July, but mid-month, trying to count our sales rate is extremely dangerous. So we'll have to wait and see.

Joel Locker - FBN Securities, Inc., Research Division

Right. Just on the communities in general, how many -- you said you're going to open 35 for the third and fourth quarters. Is there any breakdown or is it 17, 18 each quarter? And how that does that look for 2014 also, just the openings?

Scott D. Stowell

It's actually heavily oriented to the fourth quarter. Roughly 10 of those will be in the third quarter and the balance in the fourth quarter.

Joel Locker - FBN Securities, Inc., Research Division

Got you. And then just for 2014, do you have an initial of how many you're slated? I know you can add to that obviously with new land buys, but just what it is now?

Jeffrey J. McCall

We have a little over 100 so far. And it is remarkably...

Scott D. Stowell

Stable.

Jeffrey J. McCall

Remarkably flat across the quarters. That little change in timing could change as well.

Operator

And we'll take our next question from Alex Barrón with Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to inquire a little bit more about the backlog conversion rate this quarter. It seems like the -- I guess, a big drop both from last quarter versus last year. Can you guys kind of elaborate on what prevented you from closing a little bit more homes this quarter?

Jeffrey J. McCall

Yes, Alex, as you know, and I think many people have found out, I can't stand that backlog conversion concept. I would ask that you follow our earnings call on the deliveries. We kind of walk you right through what is expected. So deliveries was plus or minus right what should have been expected if you looked at the math. So I would direct you back to that script and the slides.

Scott D. Stowell

But Alex, based on how you view backlog conversion and why is it trending down, it's because we're selling earlier in the construction process and more to be builts. That's impacting perhaps some of your modeling.

Alex Barrón - Housing Research Center, LLC

Got it. And then, I guess, you guys talked about -- a little bit about your strategy to push price to maximize margin over volume. But assuming that these interest rates stay where they're at or maybe they even continue to go higher, then is there a change in thought process or at what sales pace -- you said you'd be able to raise price above 3, but is there any sales pace at which you -- maybe you start to change the strategy the other way where you don't have the ability raise prices?

Scott D. Stowell

Absolutely. If the sales rates were to start falling below 2, then basically in order for us to deliver our plans, we would have to start thinking about how we might manage the business to deliver a certain sales pace. So the strategies go both ways. Just part of that cycle that we're getting the benefit of the recovery and that's just not having to do that very often.

Operator

And we'll take our next question from Michael Roxland with Bank of America Merrill Lynch.

Michael A. Roxland - BofA Merrill Lynch, Research Division

A lot of them already have been answered, but just really wanted to get a sense from you. Of the land you acquired during the downturn, how much are you currently developing and when should we expect to see the benefit of gross margins of that land you purchased in 2009, 2010 reflect in your results? You're probably seeing some of it now, but I mean what are you seeing now and how much do you have left to go?

Scott D. Stowell

So Jeff, do you have a handle on the vintage of land and how it's contributing?

Jeffrey J. McCall

I don't have that at my fingertips, but if you follow up off-line, I can dig that out for you.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you. Last question, I guess. I know you can't -- I think, Scott, you mentioned the interest rates. I certainly appreciate all the color that you afforded. I mean, is there a point -- if interest rates rise to 5%, 5.5% and you mentioned that you run sensitivities, is there a point at which you start to become nervous or you start to see that your buyers are not really transacting? I mean, what gives you a cause for concern? What level of rates?

Scott D. Stowell

Well, in planning our business, Michael, we've never made the assumption that interest rates would remain this low. So internally, we're-- as Jeff said earlier, we're constantly discussing the impact of varying mortgage rates from 4.5% to 6.5% in every land buying decision that we're making. So affordability varies dramatically on a market-by-market basis and modeling various interest rate assumptions is part of prudent land buying and capital allocation process. And we're looking at that. And we assume that rates will rise if the economy improves and incomes will rise as well. So I can't tell you what's the rate that I think makes the biggest difference. It's just something we will manage as we manage through the recovery.

Operator

We'll take our next question from Brendan Lynch with Sidoti.

Brendan Lynch - Sidoti & Company, LLC

My question is on your inventory and I know you're looking to grow it over the next couple of years. But is there anything or any level of inventory where you might start to shift to a more maintenance level or anything that could give you pause while considering growing it further?

Jeffrey J. McCall

Sure, there's always pause when considering growing forward. We take every decision like that very carefully. But I think maybe the main objective there is, A, making sure we have the capital structure to support growth; and then, B, is really making sure that we're not wavering from our strict underwriting. And if we're able to find the opportunities that are meeting those returns, I think everyone, shareholders and all constituents of the company, should support that continued growth.

Scott D. Stowell

I was just going to add to Jeff's comment that later cycle strategies start to consider maintenance. Early innings of a recovery really are, in our view, should be focused on growth.

Brendan Lynch - Sidoti & Company, LLC

Okay, great. And my other question was just on the lower tax rate in the quarter and what we might be able to expect going forward.

Jeffrey J. McCall

Yes, the tax rate in the quarter, we did benefit from a partial reversal of deferred tax assets. Going into the quarter, we had the tax -- DTA valuation allowance of about $23 million. Half of that related to state NOLs, half of that related to a 382 limitation associated with change of control from about 5 years ago. That limitation expired in late June and we managed our deliveries deliberately to preserve as much of that DTA as possible. We were able to preserve 100% of what we still had a valuation allowance on. So that reversed in the quarter. As far as other -- the remaining valuation allowances out there in the states, that will get better visibility in the next kind of 3 to 5 years. That's where we're at right now on DTA and valuation allowance guidance there.

Operator

[Operator Instructions] And we'll take our next question from Buck Horne with Raymond James.

Buck Horne - Raymond James & Associates, Inc., Research Division

I guess, we all understand California has been red hot for quite some time, but I was kind of surprised at how strong Florida turned out to be for you guys. Can you give us some context and color on what you're seeing in Florida? Obviously, you made the acquisition with Centerline. But what are you seeing or what signs of strength, what segments of that market seem to be the strongest right now? What kind of buyers are you seeing coming out and what's happening on the ground in Florida?

Scott D. Stowell

I think the strong results in Florida start first with opening new communities in really good locations and we're doing that. We're getting the benefit of good locations. Our strongest markets are certainly South Florida, the most supply-constrained, strong pricing power there, strong demand. Tampa has been a very consistent performer for us and continues to be. They're opening good communities. I think a lot of the success, too, for us is that we're moving upmarket and are capturing opportunity there with less competition. And Orlando is about to emerge. We're viewing Orlando as our top prospect for next year. They've got tons of communities that we've been working on plus we're adding several communities from the Centerline acquisition. Jacksonville is probably lagging. The rest of the state for us, but we've got -- we're very optimistic in terms of what's in our pipeline there.

Buck Horne - Raymond James & Associates, Inc., Research Division

Are you seeing more of a cash buyer emerge in Florida or is it an older buyer or is it more of a first-time move-up buyer that's out there? And what percentage of your land spend would you expect to allocate to Florida versus California going forward?

Scott D. Stowell

Yes, with regard to the capital allocation plus or minus 55% would be the allocation of our capital to California. It's historically been that and we're not shifting that allocation. And then the balance would be equally weighted to the Southeast and to the Southwest. So we're not going to shift out of that allocation mix. With regard to the buyer profile, most of our buyers in Florida right now are first and second time move-up buyers. We're adding some luxury communities in '14, so we'll get a little bit of that mix. And then in South Florida, our current community mix there tends to be more attached, so we're getting younger buyers there and some entry-level, first-time buyers.

Operator

It appears there are no further questions at this time. Mr. Stowell, I'd like to turn the conference back over to you for any additional or closing remarks.

Scott D. Stowell

Thank you, Janine. Well, thanks, everybody, for joining the call. We want to wish you a wonderful weekend following a very busy week. So we'll talk to you next quarter.

Operator

And again, this does conclude today's Standard Pacific Homes 2013 Second Quarter Conference Call. We thank you for your participation.

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