WCI Communities' CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: WCI Communities, Inc. (WCIC)
by: SA Transcripts

WCI Communities (NYSE:WCIC)

Q2 2013 Earnings Call

August 20, 2013 8:30 am ET

Executives

Keith Bass – President, Chief Executive Officer

Russell Devendorf – Senior Vice President, Chief Financial Officer

Scott Bowles – Vice President, Finance

Analysts

Dan Oppenheim – Credit Suisse

Ivy Zelman – Zelman & Associates

Michael Rehaut – JP Morgan

Buck Horne – Raymond James

Alex Barron – Housing Research Center

Operator

Good morning and welcome to WCI Communities’ 2013 Second Quarter Earnings conference call. Today’s call is being recorded and we have allocated an hour for prepared remarks and Q&A. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad.

At this time, I would like to turn the conference call over to Scott Bowles, VP of Finance at WCI Communities. Thank you, sir. You may begin.

Scott Bowles

Thank you, Operator. I am joined on today’s call by Keith Bass, President and Chief Executive Officer, and Russell Devendorf, Chief Financial Officer. I’d like to start off by reading the disclosure statement.

During this call, the Company may make statements about its projections or expectations for the future. All such statements are forward-looking statements, and while they reflect current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review the Company’s filings with the Securities and Exchange Commission for more information regarding factors that could cause actual results to differ materially from these projections or expectations. The Company does not plan on updating or revising any forward-looking statements during the quarter. In addition, the Company also refers to non-GAAP financial measures such as EBITDA and adjusted EBITDA. You can find the reconciliations to the most directly comparable GAAP financial measures in the earnings release which has been posted at the Company’s website at wcicommunities.com. We will be referencing slides during this call which are also available on our website.

I would now like to turn the call over to Keith. Please go ahead.

Keith Bass

Thank you, Scott. I’d like to welcome everyone who dialed into today’s call and those of you who are viewing the webcast. I’ll begin today’s call by providing some background on WCI and talk about our strategy and what makes our company unique. I’ll discuss some highlights from the second quarter as well as some recent events, then Russ will come on and discuss our financial results in more detail. Finally, I’ll come back and wrap things up and we’ll be happy to take your questions.

Moving on to Slide 2, WCI is a lifestyle community developer and luxury homebuilder with a long history that spans more than 60 years. We’re a pure play on the attractive Florida coastal markets and as you can see from figures on Page 2 in our slide presentation, our communities are strategically located throughout the state in key coastal regions.

We ended the quarter with a portfolio of more than 8,200 home sites that we own or control. These home sites are mostly located within mature, well amenitized, master plan communities that really speak to the luxury lifestyle that WCI is known for. Customers choose our properties because they are located in some of the most desirable coastal regions in Florida and offer a range of targeted sought after amenities that make our properties unique. In most of our markets, we are the premier destination for our customers that we target.

We have a seasoned team of executive leaders at WCI with deep experience in Florida and throughout the southeast United States. Our team understands the needs of these customers and has the experience to develop and bring to market our unique properties, and we continue to invest in our organization to develop the next generation of leaders to support our rapid growth and the significant opportunities ahead of us.

We have a broad product portfolio that consists of 10 active master plan communities with 22 active neighborhoods. Our communities are purpose built to address the needs of our three key consumer segments: move up, which is the most discerning and upwardly mobile home buyers; second homes or the more affluent seasonal homebuyers; and active adult, buyers who are looking for age appropriate and amenity rich active retirement communities with homes that can be used as both primary and secondary residences.

I also want to take the opportunity to acknowledge two significant capital market events in our evolution as an organization. In July, we returned to the public market by completing our IPO on the New York Stock Exchange, and in August we completed a senior notes offering which helped to extend our debt maturities and lower our financing costs. Russ will provide more detail later in the call, but I wanted to highlight these transactions and know that they help solidify our capital structure and provide us with increased liquidity as we continue to capitalize on the improving Florida real estate market.

Slide 3 highlights a number of factors that separate us from our peers. Our focus on Florida provides investors with a unique way to gain exposure to this robust market through a luxury coastal home builder. We have sizeable and attractive land positions which provide us with a favorable pipeline to continue to bring our product to market. Our average selling price is more than $440,000, which ranks us above most of our peers, yet we have a diverse mix of buyers and offer multiple price points. The chart on the top of Page 3 depicts the price range of our home deliveries. As you can see, the mix of higher priced homes that sell for more than $450,000 has jumped from 25% in 2012 to nearly 40% in the second quarter this year, and represents just over 40% of our backlog. This speaks to the strength and receptivity of the market to our products as we introduce these neighborhoods for sale.

So how do our customers fund their home purchases? During the second quarter, 40% of our customers paid all cash while only 12% financed more than 80% of the value of their home. This buyer profile is particularly attractive in a rising interest rate environment as our customers are less reliant on mortgages and thus less impacted by fluctuations in interest rates. To be clear, we are paying extremely close attention to the rise in interest rates and any potential impact on our business, but the positive trends that we have seen in the second quarter are continuing into the third quarter with strong backlog, low cancellation rates, and healthy foot traffic from new and return guests. We experienced a year-over-year improvement in our cancellation rate during the second quarter to 4.5% from 6.6%, and we have very little cancellation activity so far in the third quarter. Moreover, the cost basis for the majority of our land was reset through fresh start accounting in 2009, which was at or near the top in the Florida housing market and contributes to our industry-leading gross margins.

In addition to our core homebuilding segment, we report our revenue through two other strategic value-added segments: our amenities business and our real estate services business. I mentioned the importance of our real estate business in our communities, yet we develop these products and services with a clear exit strategy. We do not intend to own or operate amenities on a long-term basis and generally are transitioned out of ownership at the completion of our sales effort. Our real estate services business is the third largest real estate broker in Florida, unique among our public peers and provides us with another line of business that can leverage the recovery in the Florida real estate market. This is a business that we intend to continue to grow, both organically and through targeted acquisitions.

Turning to Slide 4, I want to touch next on the recent trends in the Florida housing market. As I mentioned earlier, WCI is strategically focused on this market. Florida is the second largest real estate market in the nation. We have a long history here. We have a strong leadership team with significant operating experience in this market, and we’re excited about the growth that has taken hold and our ability to leverage the trends that we’re seeing. From a demographic standpoint, Florida continues to be the destination of choice with net migration a driving force of continued population growth in the state. In fact, Florida had the third largest increase in state population growth last year.

On the new home side, Florida ranks second in the nation in 2012 for permits issued, which represents a rebound of more than 50% versus 2011. 2013 is off to an even more impressive start with a 61% increase in permits issued year-to-date through June. Despite the growth off the bottom, you can see from the chart on Page 4 that permits in 2012 were still 77% off the peak and 75% off the trailing 12-month basis, so we think there is plenty of runway left as affordability remains at historically low levels and permits are forecasted to grow by nearly 25% on an annual basis through 2015.

Importantly for our business, we’re encouraged by the supply-demand dynamics in the resale marketplace and the improvement that we saw in the second quarter of 2013 versus the year ago period. On the demand side, resale single family closings were up nearly 15% while median prices improved by just over 14%. On the supply side, single family real estate inventory was down to five months, an improvement of more than 30%, and these properties averaged 51 days on the market, which was down just over 20%. We are also continuing to see improving trends in the clearing of the distressed markets with short sale closings dropping by 17.6% in the second quarter due to a reduction in inventory. The impact from the distressed market is less pronounced on the higher income coastal regions that we focus on but is a good indicator of the health of the overall Florida market.

Turning to Slide 5 for our second quarter 2013 highlights, I’d like to run through some of the highlights of the second quarter of 2013 compared to the second quarter of 2012. We really began to ramp up our homebuilding activities last year and you are seeing that flow through into our financial and operating results. Our new orders increased by 15% to 147 for the quarter while the contract value grew by 38% to over $70 million with ASPs rising 20% to $477,000. In addition, we delivered 122 homes, which was up 144%, and those homes had an average 11% increase in ASP to $441,000. Our industry-leading adjusted gross margins from homes delivered expanded by 140 basis points to 33.3% and reflected the impact of our attractive land cost basis and a favorable pricing environment.

Turning to Slide 6, our total revenue expanded by 72% during the second quarter with growth in all three of our reported segments: homebuilding, amenities, and real estate services, the real driver being our homebuilding segment which grew by 146% and represented 65% of our total revenue. Profitability also improved substantially on an adjusted EBITDA basis with a 214% increase to $11.7 million. Our net income improved to 8.2 million in the second quarter from a loss of 16.5 million in the second quarter of 2012. Our backlog value also grew by 17% to $160 million with ASP expanding by 12%, up $469,000.

We ended the quarter with nearly 8,200 owned home sites, which represents a 27% sequential increase over the first quarter of 2013. During the second quarter, we invested $66 million in the acquisition of approximately 1,900 lots which will continue to help us grow our business.

With that, I’d like to turn the call over to Russ to walk through the results in more detail. Thanks, Russ.

Russell Devendorf

Thanks. Turning to Slide 7, as Keith mentioned, our revenue for the second quarter jumped almost 72% to 83.3 million, primarily due to the significant improvement in our homebuilding operations. We delivered 72 more homes in the quarter, a 144% increase as we are starting to achieve more even flow in our production as we continue the ramp up of our communities. Additionally, average sales price increased 10.8% over the prior year to 441,000.

Homebuilding gross margin improved 155% to 16.8 million from 6.6 million in the prior year. Our adjusted gross margin, which excludes interest and cost of sales, was an industry-leading 33.3% for the quarter, an improvement of 140 basis points over the prior year. Our margin improvement during the quarter is the result of improving market conditions as we have chosen to raise prices across most of our communities over the last 12 months and closed more homes in higher priced communities compared to prior year.

On a same store basis, we saw average sales price on our delivered home rise approximately 11% from the same period a year ago. Additionally, a key contributor to our strong margins is the fact that a majority of our lots have an attractive cost basis due to the impact of fresh start accounting we applied in 2009. For the second quarter of 2013 and 2012, the land costs related to our home deliveries as a percentage of revenue was approximately 13%.

Our real estate services segment, which consists of our real estate brokerage business currently under the Prudential brand throughout our 39 offices in the state, and our title services business saw revenue increase approximately 10%. This increase was primarily due to a 9% increase on the closed home sale transactions in our brokerage business and a higher capture rate in our title business on our brokerage transactions and new home deliveries.

Our gross margin from real estate services, which represents the full loading net operating income for that segment, was 1.9 million for the quarter, a 58% increase over the prior year primarily attributable to the fact we were better able to leverage our fixed overhead as variable costs remained relatively consistent as a percentage of revenue.

Revenue from our amenity segment increased approximately 15% to 5.6 million over the prior year. The increase was primarily from the operating revenues at our clubs due to an increase in membership base and 6.5% more golf rounds played over the prior year. Gross margin in our amenity segment was a negative 600,000 for the period, an improvement of 300,000 over prior year as the increased revenues covered a greater portion of our fixed operating costs. Due to the seasonality of the amenities operations, our quarterly results are not necessarily representative of the results we expect for the full year.

Our SG&A as a percentage of homebuilding revenue dropped almost 1,600 basis points on a year-over-year basis to 17.8%, almost half of what it was in the second quarter of 2012. This substantial improvement was due to the rapid growth of our homebuilding revenue and our ability to better leverage our overhead. Total SG&A costs increased 2.3 million for the second quarter. Approximately half of this increase is due to commission expense which is inclusive of internal commissions to our sales associates and third party brokers on new home deliveries, increasing by 1.2 million as a result of our increased deliveries. Commission expense as a percentage of homebuilding revenue was 4.25% for the quarter, an approximate 77 basis point improvement over the prior year. General and administrative expenses increased approximately 1.1 million, primarily related to non-cash compensation expense for our long-term incentive plan and additional legal costs. As our revenues continue to grow, we expect to better leverage our SG&A as a percentage of revenue in the future.

During the second quarter, we recognized approximately 1 million of other income primarily related to one-time recoveries and reductions in certain accruals related to various legal settlements.

As Keith discussed, we are pleased to report positive net income for the second quarter of 8.2 million after a 700,000 preferred stock dividend related to the purchase and retirement of the Company’s preferred B shares. Our earnings per diluted share was $0.45 compared to a loss of $1.39 per diluted share for the prior quarter. It should be noted our second quarter of 2012 included a charge for the early repayment of debt of approximately 17 million. Excluding this charge, our net income would have been approximately 500,000 or $0.04 per diluted share.

In July, we issued approximately 900,000 shares of our common stock in exchange for the Company’s preferred A shares. We expect to incur a one-time non-cash preferred dividend of approximately 19 million in the third quarter related to this exchange. This transaction has no net impact on the Company’s equity balance.

Including the shares from the preferred A exchange and the 6.8 million shares from our initial public offering, we would have approximately 26.7 million shares outstanding as of June 30, 2013 when added to our 18.1 million shares already outstanding. Consequently, we would have earnings of $0.31 per diluted share for the quarter on a pro forma basis for this adjusted share count.

Now turning to our balance sheet discussion on Slide 8, at the end of our second quarter we had cash of 34.5 million, total debt of 122.9 million, and total equity of 168.6 million. Our net debt to net book capitalization was 33.7%. In July, we raised approximately 91 million in net proceeds from our successful IPO on the New York Stock Exchange. We followed that up in August with an unsecured senior notes offering which generated 196 million in net proceeds, a portion of which was used to fully repay our 125 million existing senior secured notes. With this debt transaction, we significantly lowered our annual interest rate from 10% to 6.875%, extended the maturity of our long-term debt, and went from secured to unsecured. We expect to incur an early repayment of debt charge of approximately $6 million in the third quarter as a result of this transaction.

As of June 30 on a pro forma basis for the aforementioned transactions, we would have had a cash balance of 195 million, total equity of 265 million, and total debt of 200 million. Our net debt to net book capitalization on a pro forma basis would have been a very low 1.9%. We are also excited to announce that we expect to enter into a 75 million unsecured revolving credit facility by the end of this month. Collectively, these transactions provide us with ample liquidity and a strong balance sheet to continue to capitalize on the growth opportunities we see for WCI. Lastly, we continue to maintain a fully reserved $204 million deferred tax asset. Although reserved, we still expect to be able to use a portion of these deferred tax assets in the future to reduce our tax payments over the next several years.

Now I’d like to turn it back over to Keith for some closing remarks.

Keith Bass

Thanks Russ. Turning to Slide 9, we’re going to continue to execute on our strategy. We’ll be maximizing profitability by being a fully integrated homebuilder and developer. We will acquire and develop multi-year master plan lifestyle communities augmented by smaller infill opportunities to leverage our operating capacity. We’ll continue to focus on serving the move-up, second home, and active adult buyers, continue to differentiate ourselves by our extensive amenity offerings, and we’ll work to harvest the value of our existing land portfolio. We’ll maintain production homebuilding disciplines and leverage our scalable operating platform as we continue to grow the business.

With that, I’d like to turn it back to the Operator and we can move on to questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question is coming from the line of Dan Oppenheim with Credit Suisse. Please proceed with your question.

Dan Oppenheim – Credit Suisse

Thanks very much. Just wondering if you can talk a little bit about the third quarter. You’ve mentioned that trends remain strong as you’ve entered into July, and the third quarter clearly is going to be seasonally slower, but if you can give a little clarification in terms of the trends that you’re seeing there and also how those were by price point given the comments about the different segments of buyers and such.

Russell Devendorf

Sure. Thanks, Dan. Yeah, the trends in the third quarter continue to remain pretty strong. We’re seeing traffic on a—you know, in July on a year-over-year basis up roughly 40% or so. We’re seeing a lot of strength, particularly in our active adult segments, certainly on the west coast. We’re also seeing it, as a matter of fact, on the east coast as well in our Heron Bay community over in Parkland, so traffic trends continue to remain relatively strong.

We’re actually seeing sales as well up on a year-over-year basis in the third quarter so far, so again the positive momentum is continuing from second quarter into third quarter. Even though you see some of the effects of seasonality, we feel pretty good about what we’re seeing.

Dan Oppenheim – Credit Suisse

Great. And then in terms of the balance sheet, certainly with regard to (inaudible) land, (inaudible), what do you think you’ve got in terms of opportunities? Are you starting to think about some of the larger master plan communities for a couple years out, or is that going to be a more gradual process here (inaudible)?

Keith Bass

You know, we have quite a bit of pipeline that we look at all the time, so I would say that we are looking at both longer term projects that we would be taking through the entitlement process that we may not close on for a year or two, other projects that we could bring to market much quicker, and then we’ve got smaller deals that we’re looking at too that we can just kind of roll in very quickly. So I would say that we’re really kind of looking at everything. The good thing is, given our land position, we don’t need to buy something to make our year in ’14 or, quite frankly ’15, but we’re going to take advantage of the opportunistic when we do find those deals.

Dan Oppenheim – Credit Suisse

Great, thank you.

Operator

Thank you. Our next question is coming from the line of Ivy Zelman with Zelman & Associates. Please proceed with your question.

Ivy Zelman – Zelman & Associates

Good morning, guys. Congratulations on the great quarter and the balance sheet achievements. Two questions – a lot of uncertainty in the market but a lot of skepticism that today’s cash buyer is actually a real cash buyer, and in fact they’re just investors and will bring those units back to market and dump them is what I hear a lot from clients. So maybe you can talk about those that are true second buyers or second home buyers versus traditional primary within the cash segment.

And then really for Russ or Keith, we talk a lot about your impressive record of gross margins within this sector, but you mentioned fresh start accounting a lot so a lot of the skeptics are saying, well, they’re going to run out of all this land and their margins are going to plummet because they’re buying land today at retail, just like everybody else, so 33 goes to 20. So maybe you can give us some perspective and some color around what our expectations should be with respect to not the benefit from fresh start accounting. Hopefully that’s not too much, but congratulations again.

Keith Bass

Thanks, Ivy. You know, here’s what I would tell you. We look at that very closely, and certainly we don’t want investor purchases inside of our communities. All it really is is a competition down when they decide to flip out. What I would say is where we have the highest percentage of finance purchases, it’s where you would expect it to be, which is in our primary home—you know, our move-up buyer profile. That’s where approximately 20 to 30% of those buyers will pay cash, but the balance finance, and that’s what you would expect in a move-up buyer profile community.

In our active adult communities, those really aren’t investor purchases. Those are people that are buying for their—you know, a second home or a retirement purchase, and that’s where we’ve got about 50% on average of those buyers are paying cash, and the ones that finance are financing a very small amount.

Our real second home, trophy second home buyer, that’s where we have the highest percentage of cash purchases, so you’re talking 600 to $1 million where they’re buying a trophy property in one of our real high-end communities. So you know, we watch where that mix is. I doubt an investor would pay cash for an $800,000 or $900,000 house on a flip, but certainly we’re trying to make sure that those people don’t enter into it. I think where we’re seeing most of the investor really through our resale business is in the very, very low end and primarily in the southeast U.S., so whether it’s an investor bringing money out of South America trying to basically do it, or it’s someone that is looking to do a flip on the lower end. So we really are watching it very closely, but we’re not seeing it in our buyer profile; and I would say historically just given the profile of the company, we’ve had a very high percentage of cash purchases. The other thing, obviously, we make sure that we’re not selling multiple houses to one individual, so we track it very closely.

With regard to the land, I would tell you that 6,400 of our lots went through that process of fresh start accounting, and while that’s the vast majority of our backlog today, that bleeds through our closings, in some instances up to six or seven years. So I wouldn’t anticipate any major changes as we continue to move forward. On new deals that we’re basically underwriting, to basically get those deals to work, they’re north of a 25% margin before inflation, so I wouldn’t anticipate some massive change; but you should see some tempering of the margin over the next couple years.

Russell Devendorf

Yeah, and the one thing I would just add—I was just going to say—the one thing I would just add on the margin is obviously as we get more scale in the business – you know, we closed about 360 homes last year. That was up quite a bit from the prior year. So as we get towards what we’ve stated to the investor community, you know, 1,000-plus units, you’ll obviously see a change in the mix between communities and obviously the lots and going through fresh start, not all fresh start accounting was applied equally. So you’ll start to see where we get some more volume, you know, potentially some compression in the margin just as we start to ramp up some of those communities. But again as Keith mentioned, right now the backlog is pretty strong – 6,400 lots that have gone through the fresh start process that clearly will take several years to work through, so we feel pretty good.

Ivy Zelman – Zelman & Associates

And Russ, just quickly as a follow-up on that, the land that you’re acquiring today – you mentioned the 1,900 lots – would you say that’s for ’16, ’17 production, or what year would that really go into the utilization?

Russell Devendorf

Some of that basically will come into closings in actually ’14. Sarasota National, where we bought that project, it’s got 400 lots on the ground we’ll be opening up for sales in the next probably 30 days, so we’ll have models open right before the first of the year. So we’ll get about a half year of closing out of that project next year. The other project that we picked up, it will take some development work so you’ll get maybe a quarter’s worth of closings at the end of ’14, and then it will start coming into ’15.

Ivy Zelman – Zelman & Associates

But you underwrote those a few years ago, right, when you (inaudible) those options contracts, correct?

Russell Devendorf

The deal in April, the 360-unit deal, we put that under contract and closed about 11 months after we put it under contract, so obviously we’ll be benefiting from some price inflation that we did not pro forma in. Sarasota National, we went under contract in the first part of the year; and again, I would tell you that that’s a life of job pro forma projection of north of 25% margin, plus any inflation that we received, and that market’s received some pretty healthy inflation since we underwrote that deal.

Ivy Zelman – Zelman & Associates

Great, thanks guys.

Operator

Thank you. Our next question is coming from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

Michael Rehaut – JP Morgan

Hi, thanks. Good morning everyone. First question, just on the gross margins for the quarter. A little bit ahead of what we were looking for, and as you mentioned due to the price increases and the mix in communities. Is this a level that we should expect for the rest of the year, which again I think was a little bit more than we were looking for in the second quarter itself? That’s my first question, thanks.

Keith Bass

What I would say is obviously it can fluctuate somewhat by mix, and volume will affect that to some extent. I will tell you that we feel really good about our backlog right now being north of 30, so it may fluctuate a couple points quarter-to-quarter based on what actually closes. There will be some variation, but the backlog as we sit today is north of 30% margin.

Russell Devendorf

Yeah, the one other thing I would add is we’ve been able to control costs in our backlog through the first half of the year, which has obviously helped us; and we’re also seeing on our sales as well, we’re not seeing as many third party brokers as we had anticipated as well. That’s not in the gross margin, but if you’re looking at just the net of the sales and commissions, we’re also able to control that a little bit as well, so from a bottom line perspective that’s helpful.

Michael Rehaut – JP Morgan

Okay, I appreciate that. And then on the sales commissions at 4.25%, down 77 BPs year-over-year, is that also a number that you would expect to continue, and longer term can that actually be a lower number? Where would you expect that to shake out on a long-term basis?

Keith Bass

As we continue to ramp up the volume inside of a community, the amount that we need to pay our internal people starts to moderate to some extent. So I would say that from the internal side, you could see some moderation. I don’t know that you’ll see that same type of pick-up that we had so far.

On the outside, again, as the projects get up and running and all the product line is there, we start getting more and more internal referral business from our existing residents and the use of outside brokers does drop off. I will say the flipside of that is obviously on the resale side of the business, there is very little inventory out there and so the realtors are certainly working new home buyers and converting resale buyers to new home buyers, so you will see some pressure on that side until we see more inventory show up on the resale side of the business. Those guys are just clamoring for inventory, so they’d rather sell a resale because it closes quicker but if there’s nothing out there for the buyer, they’re going to take them to us and bring them into the new home side.

Michael Rehaut – JP Morgan

Okay. And just lastly on the 66 million on the 1,900 lots, and that was in the—if you could just clarify, was that in the first quarter or the first half of the year?

Russell Devendorf

It was in the second quarter, so the first half of the year.

Michael Rehaut – JP Morgan

Okay, okay. How do you think about land purchases in the back half of the year and in 2014? Should we expect a similar pace or will it be a bit more kind of—I don’t know what the word would be, jumpy or a little bit more inconsistent? Not inconsistent, but it should be more this type of pace, or I know you’ve kind of mentioned that your approach is going to very opportunistic, very selective, but maybe if you could just give us a sense of your future plans for land spend in the back half and in ’14.

Keith Bass

Well, I would say that the second quarter was a little outside with the Sarasota National purchase at 47 million, so I do think it will be a little jumpy as we continue to move forward, and part of it is just the timing of those acquisitions. You know, we don’t look to close on a piece of property certainly until all the entitlements are in place, but we’d love to not close until we can break ground if it’s a situation of starting construction or we can put the lots immediately into production. So we’ll push out some closings to the extent that we can and move them out of the quarter, so I think that that was a little bit of an outside quarter so it will be a little bit jumpy as we look towards land spend from quarter to quarter.

Operator

Thank you. As a reminder, ladies and gentlemen, please restrict yourself to one question and one follow-up question. Our next question is coming from the line of Buck Horne with Raymond James. Please proceed with your question.

Buck Horne – Raymond James

Thanks, good morning. Can you give us a timeline for how you expect new community openings to ramp up over the next 12, 18 months, and have you accelerated that timeline at all or changed the plans? I guess can you help us define exactly how you characterize a new community and what a reasonable target absorption pace per community should be for you guys?

Keith Bass

You know, I would say that generally speaking we’re going to be—we always push hard to get our maximum community openings for the following year in the fourth quarter, because so many of our buyers are seasonal so it’s very important to get a community open in the fourth quarter to start having a full year or sales into the following year. So generally speaking, that’s our general push to go very hard, so if you look at our peak (inaudible) count in 2013 will be in the fourth quarter, and I would say that that would be the same situation for 2014. It will be peaking in the fourth quarter, and that will generally be the case.

For us, a community is basically a neighborhood. I would say that that’s similar to every other builder. It’s a segmented price point, it’s a differentiated product, and generally speaking we’re going to be looking at about two sales per month is what we look for in a master plan community where we may have three or four different types of product line. So that’s the way I would generally look at it. The ultra-high end sometimes is a little bit lower, but that’s not always the case.

Buck Horne – Raymond James

And when you say two sales per month, is that would you expect to target given current market conditions, or is that what you would expect on a fully normalized basis?

Keith Bass

Historical trends are higher than that.

Buck Horne – Raymond James

Okay, okay. Last one I had for you – the profit margins in the real estate brokerage business, how is that going to fluctuate kind of quarter to quarter? Can you give us a sense of the seasonality of the brokerage business?

Russell Devendorf

Yeah, second quarter historically has tended to be the most profitable, so you’ll see kind of second and third quarter probably your better quarters. Fourth and first are probably the slowest in terms of closings; so again, we had a pretty good quarter second quarter, but there is definitely seasonality in there.

Buck Horne – Raymond James

Thank you.

Operator

Thank you. Our next question is coming from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Alex Barron – Housing Research Center

Thank you and good morning. Strong start to your quarter. I wanted to ask you regarding the (inaudible) business. Is there any (inaudible)?

Keith Bass

We don’t have any immediate plans nor are we open in any one of the projects now on any one of those parcels, so we don’t have immediate plans to bring that on. We’re continuing to watch the markets where those pads are located and are very excited about how quickly those markets have turned around and the strength of that market. It think in most situations we’re going to watch it, this next season in ’14, and then make a decision whether we continue to sit on that land or whether we maybe bring a building on. But I think we’ve been very impressed at how quickly that’s cleared, that market, and we’re very impressed by who is buying those units, which are ultimately end users, which is what you want to see. So that market has recovered a lot quicker than we anticipated.

Alex Barron – Housing Research Center

And as far as the cost per home, you said that the cost was 13% of sales. I’m assuming that’s the finished value of the (inaudible), or is that (inaudible) of all the land that you own, finished (inaudible), et cetera?

Keith Bass

Yeah, that is the land component of the cost of sales for the quarter as a percentage of the homebuilding revenue, so that would be the finished lot costs for those closings that happened in the quarter as a percentage of revenue. So that’s a component of the cost of sales.

Alex Barron – Housing Research Center

Okay, great. I’ll get back in the queue. Thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Keith Bass for any concluding comments.

Keith Bass

All right, well thanks everyone for participating in today’s call and your interest in WCI, and I want to especially thank all the teams at WCI for all their hard work as we continue to move forward and grow the company. We look forward to updating everyone on our call next quarter, so thank you everyone.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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