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Standard Pacific (NYSE:SPF)

Q4 2013 Earnings Call

February 06, 2014 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

Stephen F. East - ISI Group Inc., Research Division

Michael Dahl - Crédit Suisse AG, Research Division

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

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

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

Operator

Good morning, and welcome to the Standard Pacific Homes 2013 Full Year and Fourth Quarter Results 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'd like to turn the call over to Scott Stowell, President and CEO. Please go ahead.

Scott D. Stowell

Thank you, Tracy, and good morning, everyone. I'd like to thank all of you for taking the time to join us today for the Standard Pacific Homes 2013 full year and fourth quarter update.

I'm proud of our strong 2013 financial performance, which reflects the significant progress we've made executing our strategy. We achieved the fourth most profitable year in the nearly 50-year history of Standard Pacific Homes despite 2013 being the sixth worst year on record for new home sales. We also performed well when comparing progress from 2012 to 2013, more than doubling our net income per diluted share, excluding the reversal of our $454 million deferred tax asset valuation allowance in 2012, from $0.21 for the full year of 2012 to $0.47 for the full year 2013. Our pretax income increased to $285 million (sic) [ $257.7 million] in 2013, compared to $78 million in 2012. For the quarter, we earned $64.8 million, or $0.16 per diluted share, with pretax income up 205%, to $101 million from the $33.1 million, we earned in Q4 '12.

New home deliveries were up 40% year-over-year to 4,602 homes, and up 38%, compared to 2012 fourth quarter, with home sales revenue up 60% to $1.9 billion for the full year, and up 58% for the quarter. Our average selling price increased to $413,000 for the full year, up 14% from 2012, and $446,000 for the quarter, up 15% from Q4 of last year. This increase in average selling price reflects real pricing power and the mix shift that has occurred from the execution of our move-up strategy. For the full year, over 72% of our deliveries were from the move-up and luxury categories.

We were also able to make significant progress with our gross margin which was 24.6% for the full year, up from 20.5% for 2012, and 26.8% for the quarter, up from 20.8% in the fourth quarter of 2012. This gross margin strength helped to drive our industry-leading operating margin from home sales, which stood at 15.5% for the 2013 fourth quarter, a 780 basis point increase from the prior year period.

The gross margin in our backlog stood at 26.2% as of the end of the fourth quarter, reflecting both a mix shift and an approximately 1% increase in the use of incentives during the fourth quarter.

Net new orders were up 22% for the full year, leading to a 21% year-over-year increase in the number of homes in our backlog, and a 55% year-over-year increase in the dollar value of our backlog. And while net new orders were down 11% when comparing the fourth quarters of 2013 and 2012, the total dollar value of our 2013 fourth quarter orders was actually up 9% when compared to Q4 2012.

It is important to note that the 2012 fourth quarter was a tough comparison for us. Unusually strong, our 2012 fourth quarter absorption rate was up 3% quarter-over-quarter bucking typical seasonality, while our 2013 fourth quarter order absorption rate was slightly below what we expect from typical seasonality, and is reflective of the general slowdown the industry experienced during this period. Our absorption rate for the full year increased to 2.5 from 2.2 as compared to 2012 and decreased to 1.7 from 2.2 when comparing Q4 '13 to Q4 '12. This decrease in absorption rate for the quarter reflected the more tempered selling conditions we experienced during the quarter, as well as our continued emphasis on margin over sales pace.

As I indicated last quarter, reflecting our belief that land assets are too hard to replace and rather than using a margin-eroding incentives to capture home buyers in the short term. We instructed our operators to remain patient, incentivizing only enough to target a minimum sales rate at our slowest-selling communities, of approximately 1.5 homes per month for the quarter.

Turning now to land. We are targeting a total 2014 land spend, which includes both land acquisition and land development, in the $900 million to $2.1 billion range. We spent approximately $808 million on land and land development in 2013, and $720 million in 2012. Our land pipeline remains strong and, while difficult, we are continuing to find opportunities that meet our underwriting criteria. We intend to continue to capitalize on the early mover advantage we've earned in the land market, focusing our division leadership on creating value through land opportunities that leverage our master plan and development capabilities, with an eye on project sizes and durations as we continue to manage through the cycle.

We opened 73 new communities during 2013, including 24 in the fourth quarter. We ended the fourth quarter with 180 active selling communities, up 15% when compared to the end of Q4 '12. Looking out over the full year, we anticipate opening approximately 100 new communities, resulting in a year end community count growth in the low-double digits. With our strong land position, we own or control nearly 95% of our expected annual -- excuse me, expected average selling communities for 2015. In total, we own or control roughly 100 communities that are scheduled to open in 2015 and beyond.

Now turning to our outlook. We have always maintained that the housing market recovery would likely be an uneven one, and that there would be bumps along the road to recovery. We experienced a few of those bumps during the slowdown in the second half of 2013 and continue to experience them in January although they have seemed to moderate somewhat as the month has progressed. While we're always reluctant to talk about 1 month's worth of orders, believing it is hard to draw any meaningful conclusions from such a short period of time, but recognizing that January results are an early indicator of what to expect in the spring selling season, and of great interest to you, we will provide detail of our January orders.

We recorded 366 net sales in January, slightly exceeding our expectations. While January volume was down 16% year-over-year, the January order value was essentially flat. Our sales activity accelerated throughout the month. Traffic per community was up 10% over a strong January last year and cancellations ticked down to 17% versus 21% in the fourth quarter of 2013.

When looking longer term, we continue to maintain a cautious but positive outlook. The fundamentals for housing still look good. Inventory is tight, with limted entitled and developed land in the A locations we target, which should result in continued pricing power and increased absorptions over time. And new households are projected to be formed at rates that exceed the number of new homes being built for the remainder of the decade, creating a supply demand imbalance that should favor homebuilders. With the discipline to stick to our strategy, our ability to execute and the strong land position we've amassed, I believe we remain well positioned to take advantage of the long-term housing recovery.

Now before I turn the presentation over to Jeff, I would like to walk you through some more detailed regional information on Q4 sales. On Slide 5, we break down our Q4 order activity across our 3 regions: California; the Southwest, which includes Arizona, Colorado and Texas; and the Southeast, which includes the Carolinas and Florida. As noted earlier, our net new orders decreased 11% company-wide. But as you can see in the upper left-hand graph, vary greatly by region, from up 28% in the Southwest to down 22% in the Southeast.

To get a better picture of the order performance across the regions, it's important to factor in the change in community count and focus on order absorption rate. Across the company, our order absorption rate was down 23% over the prior year, but varied significantly by region. Despite being down 23%, California remained our fastest absorbing region at 2.3.

Our average selling price of net new orders was up 22% across the company and ranges from the Southeast up 29%, to the Southwest, up 17%. The change in ASP is heavily mix-dependent and reflects real pricing power and the impact of community mix. To provide more color on real pricing power, we provided a same plan ASP view on the bottom right-hand graph. While the data supporting this graph is much more limited and only represents the ASP changes for the 433 homes where the same model in the same community sold in both the fourth quarter of 2013 and the fourth quarter of 2012, we believe it does provide a meaningful view on real price changes and is less impacted by mix.

California continues to lead the way with its ASP up 20% in total, and up 18% on a same plan basis. While we are achieving solid same plan ASP increases in the Southwest and the Southeast, up 10% and 7%, respectively, the ASP growth in these regions is being positively impacted by product mix shift to more higher-end, move-up and luxury homes. This is particularly evident in the Southeast, where the order ASP is up 29%, with the same plan ASP up only 8%.

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

Jeffrey J. McCall

Thanks, Scott.

On Slide 6, we break down our deliveries in a little more detail. Many of you may recognize the homes in the background of the slides from your visit to Montserrat, our community in the Blackstone master-planned in Brea, California. You'll need to act fast if you're still interested in any of the remaining homesites here, but no need to worry as we're opening up our highest-end product in Blackstone master-planned community in a few months. I have had the chance to review the brand new 4 plans and elevations, and it's definitely worth another trip the next time you're out here. So enough of the commercial, let's get back to the numbers.

Now as we mentioned earlier, deliveries in the fourth quarter, were up 38% versus prior year. The key driver 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 21% versus prior year, and up 55% in dollar value. Of the 1,700 homes in backlog as of December 31, 862 homes are currently scheduled to close in the first quarter. As Scott mentioned earlier, the estimated gross margin of all of our homes in backlog at the end of the fourth quarter was 26.2%. For those homes in backlog expected to close in the first quarter, the estimated gross margin is 25.6%.

For the 838 homes currently in backlog expected to close after the first quarter, the backlog gross margin is 26.8%. We expect the 862 will get adjusted down due to cancellations and changes to the target closing date of homes currently in backlog. Over the past 8 quarters, that downward adjustment has averaged about 8 -- about 15.4%. From that number, you add the number of specs sold and closed in the quarter to get your Q1 deliveries.

On average, over the past 8 quarters, we have sold and closed about 230 specs in the respective quarter. The number of spec homes sold and closed in the fourth quarter was 260, approximately 11% above the trailing 8-quarter average.

On Slide 7, we highlight our incentive trend over the past 9 quarters. The midnight blue line represents the incentive levels baked into our deliveries and is the incentive level often quoted. The incentive in our deliveries in the fourth quarter of 2013 were approximately 3.9%, up 90 basis points from last quarter, but down 120 basis points from the same quarter prior year. It's important to note that the incentive trend of deliveries most often reflects the impact of orders placed 3 to 6 months ago. And in our opinion, this trend is less telling than the incentive trend in orders, which is represented by the light blue line. For the second consecutive quarter, we saw our incentives increase, up 100 basis points compared to the third quarter, but down 50 basis points from the same period last year.

On Slide 8, we break out our SG&A into 4 categories: G&A, insurance, incentive compensation and selling expense. Overall, our SG&A as a percentage of revenue dropped to 11.3%, improving 180 basis points from the prior year period due to our continued focus on cost containment and the 58% increase in our home sale revenue. The main SG&A leverage came at our selling expense, down 40 basis points year-over-year as we're constantly fine-tuning our co-broker strategies on a market-specific basis and the leverage inherent in our G&A structure, down 80 basis points. On a nominal basis, our G&A increased $6 million on a revenue increase of over $220 million. Insurance should remain variable at about 1.2% of revenue and incentive compensation is expected to remain at about 6% to 8% of EBITDA.

On Slide 9, we highlight our land acquisition and development spend over the past several quarters. In Q4, we spent $117 million on land acquisition and $99 million on land development. We remain encouraged by the quality and the volume of land transactions that we're working through our pipeline and, as Scott mentioned earlier, we're targeting at 2014 land spend in the $900 million to $1.2 billion range. I believe Scott actually said $2.1 billion but it's $1.2 billion is top into that range. Roughly $400 million of which is for anticipated development spend and we have over $300 million of committed land acquisition spend already scheduled for 2014.

We ended the quarter with approximately 35,000 lots owned and controlled, a 14% increase over the fourth quarter of 2012. Approximately 20% of our 35,000 lots owned and controlled are controlled under option contracts.

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

Scott D. Stowell

Thanks, Jeff, and thanks for covering up my $2.1 billion forecast on land spend. That would have been pretty aggressive. In closing, I'd like to recognize all of our Standard Pacific Homes team for the hard work that led to the success we enjoyed in 2013. I look forward to seeing every one of our team members over the coming weeks at our upcoming town hall meetings, where Jeff, Wendy and I will be celebrating with each of you the accomplishments of 2013 and aligning us all around the company's vision and strategy for 2014, and beyond. I appreciate everything you guys do for our company. Well done, everyone. Thanks.

And with that, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Ivy Zelman with Zelman & Associates.

Alan Ratner - Zelman & Associates, LLC

It's actually Alan on for Ivy, nice quarter. Scott, I was hoping you might just give a little bit of color on what your strategy is on for specs, as the selling season approaches because we've heard from some of your competitors that are optimistic about the spring and it built up some spec ahead of the selling season. I know you traditionally have not been very aggressive on the specs side, but if can give us an update on where your inventory position is and maybe what you're seeing in the market as well kind of thoughts on how that's going to play out over the spring?

Scott D. Stowell

Sure. We like our current spec position. We have always adopted a spec strategy. The strategy of targets a sales rate and then we match up our sales rate with our start rates to put the specs out there. Right now, our finished specs are in the 1 to 2 per community range and our specs under construction are in the 4 to 6 range and we're comfortable with that, and looking forward to the spring selling season to support that strategy.

Alan Ratner - Zelman & Associates, LLC

Is that similar to where you were at 1 year ago?

Scott D. Stowell

Yes.

Alan Ratner - Zelman & Associates, LLC

Okay. And then second...

Jeffrey J. McCall

Actually, our finished specs at the end of '12 were at 219 (sic) [215] and end of '13 is at 327. So on a finished spec basis, we're better positioned for the spring selling season.

Scott D. Stowell

With more communities.

Alan Ratner - Zelman & Associates, LLC

Got it. Right. And then on your January order results, could you just talk a little bit about how last year progressed through the quarter, because if I remember correctly, January was, obviously, a very strong comp for you, but I know you and other builders began pushing price hard through the spring to intentionally slow the sales pace down. So was January the hardest comp for the quarter for you? Or was it pretty similar through the quarter?

Jeffrey J. McCall

Yes. Last year, it was -- January was 437, I believe, as Scott mentioned. February was 510 and March was 456, so January was relatively very strong for the quarter. Normally January is a much larger discount for your full quarter sales, but last year, January was pretty strong.

Operator

Our next question comes from Stephen East with ISI Group.

Stephen F. East - ISI Group Inc., Research Division

Scott, you talked about the gross margin incentives and, Jeff, you talked about the incentives, where they are moving. Can you talk more about where you think the pricing power is today as you move into the spring selling season and what that means for your incentives? And maybe do a little compare, contrast regionally on it. And what that implies for your gross margins as you start to move forward beyond what's already in your backlog?

Scott D. Stowell

Sure. In the fourth quarter, we raised base prices in 64 of our projects, which was 40 -- 41%, which is a bit of a surprise to me. It was better than I expected. And we did note that our -- the incentive in our orders was trending up. The early indication in our January orders is, is that's trending back down. It's -- if I'm -- if I have that right, Jeff, it's down 70 basis points from December?

Jeffrey J. McCall

From the full quarter.

Scott D. Stowell

From the full quarter, yes, so we're seeing a nice positive trend in the incentive and the color that I get back from our operators, when they are -- they're seeing the demand in their communities, their outlook is also a cautiously positive that we will see a pullback in incentives. So we think that will support our gross margins. And then, of course, the pricing power in each of our markets is a function of so many local dynamics and conditions. But, generally, we still think that we're in great locations, we've got a strong offering in the marketplace, and over time, we expect moderate home price appreciation in our markets.

Stephen F. East - ISI Group Inc., Research Division

Okay. And then, if we look at the land spend that you talked about, you gave a lot of good information. You made a comment about the size and duration. Could you talk about of the 100 communities that you're opening, one, generally where they are? And what do you mean by size and duration as you look out? Are these getting bigger? Are you trying to turn a bit faster? Just what's going on there?

Scott D. Stowell

Yes. I'll address the size and duration, Jeff, and you will gather up some of the information on where the communities obviously [ph] are going. We have a general view, Stephen, that as we manage the home building cycle, generally, we will go longer on land, early in the cycle and then we want to make sure that as we progress through the cycle, we're adjusting the size of our projects and the duration of those projects' life cycles, so that we don't get to expose later in the cycle. And while our '11 and '12 market-making large master-planned communities are positioned really well when we start to seeing opportunities in '14 and later in '15, we're reviewing this very carefully with our operators. We have a view as to where we -- where our leverage should be, where our years of land owned should be as we progress through the cycle. So we're focused on that.

Stephen F. East - ISI Group Inc., Research Division

Okay. What would be your ideal size of the land deal today?

Scott D. Stowell

Well. I don't know we have an ideal size. Our average size is around 100 lots in a community. We will do them smaller than that, of course, and we'll do them larger than that. It's the very large communities. Those are the ones we are most concerned with, 100 lot community today is not a concern, but if somebody were going to bring in a master-planned with 5,000 lots, we would look at that very carefully.

Jeffrey J. McCall

A little color on it, Stephen. In 2010 and 2011, 35% and 36%, respectively, of our land purchases had a life greater than 5 years. We compare that to '13, that percentage is down to 15%, all right. So really brought it in really willing to go long in -- with our market makers earlier in the cycle.

Stephen F. East - ISI Group Inc., Research Division

Okay. Big switch there. And then what at your -- where are you really spending your money? And you look to open these 100 communities?

Scott D. Stowell

I would say, Stephen, generally the communities in California and Southwest are netting out about even. The real change in our growth -- community count growth is in the Southeast.

Operator

Our next question comes from Michael Dahl with Credit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

I just wanted to touch on first the incentive trends and the margins and backlog that you highlighted. If you look at that differential between what scheduled to close in 1Q and beyond 1Q, it would suggest that a lot of the incentive, the increased incentives in 4Q may have been targeted on specs. So the question is, is that a fair rate to characterize it? Or is there some other mix shift there?

Jeffrey J. McCall

Yes, no, you're spot on. Over the second and third quarter of '13, we had that strange phenomenon where our specs were selling higher than our to-be-built on a gross margin basis. In the fourth quarter, that was back to a more normal level where the specs that closed in the fourth quarter due to some of that incentive use was 90 basis points below the non-spec closings in the quarter.

Michael Dahl - Crédit Suisse AG, Research Division

Got it. Okay. And then, secondly, recognizing that the January orders came in a bit better than you just expected, it is also, obviously heading into the strong part of the year. And I was wondering if you could help to outline what your instructions are to your sales teams today relative to the minimum sales levels that you were happy with in slower periods in 4Q.

Scott D. Stowell

Yes. We are asking our divisions to target a 2 to 3 sales rate per community, and then continuing a focus on any slower-selling community that falls below 1.5, where we would look carefully to incentivize sales to get them in line with that cadence. And then any community that's selling faster than 3, we're going to be pushing prices. So strategically and tactically, there's no change. We still view that we're in the right part of the cycle, to be pushing on margin, we'll wait for the volume momentum to come and then we will ride volume when you don't have to incentivize to get it.

Michael Dahl - Crédit Suisse AG, Research Division

At what point -- if we were to go through the selling season and not see an improvement in demand, at what point would you think about changing that?

Scott D. Stowell

Well. If we were to get through the first 2 quarters and we weren't seeing the sales rates that we've just outlined for you, we would start tactically thinking about -- first, where we are in the cycle and what's happening, and then we would adjust the strategy to execute our business.

Operator

[Operator Instructions] And our next question comes from Michael Rehaut with JPMorgan.

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

First question on the incentives, I appreciate the detail, of course, as always, and the breakout of the gross margins and backlog, I think, is very illustrative of what's really occurring. Where would you think, given perhaps last cycle and the strength of 2013 and maybe we're kind of normalizing right now? Where would you expect ultimately incentives to level off over the upcoming year with the minds eye on history in last cycle?

Scott D. Stowell

Yes. Michael, I think, for our business, the second quarter of '13, when our order incentives was below 3, is -- I would consider that a normalized market condition. So we got there mid-year '13 and then pushed up from there, and we'll trend back to that number.

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

Okay. I guess second question. SG&A and I don't know if this is a question more for Jeff, but SG&A for 2013 was right around 12%. Historically, you've been able to achieve more in that 10% range. At the same time over the next year or 2, obviously the -- or particularly over the next year, you're still expecting a lot of community growth. Do you see that 10% as achievable in the next couple of years? Are there any structural differences to the business that maybe might make that a little bit more of a further out goal? Any thoughts around the SG&A over the next 2 or 3 years would be helpful.

Jeffrey J. McCall

Yes. We do have that kind of 10% number sketched on our walls here as a target, and trying to get -- drive below that. You called it -- given the community count growth, we're not going to -- unlikely we get there in '14 and that would be a tough call for '15 as well. But that is a market that -- mark that we're aiming for. In longer-term, I -- we think we can manage the business to that.

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

Great. And one last one if I could squeeze in, the gross margins, again appreciate all the detail there. Understanding that, I guess, at this point, perhaps you're underwriting deals that have a little bit of a lower or shorter duration, which might reduce certain hurdle requirements, given the lower risk level potentially. Can you give us a sense of where you're underwriting to from an IRR and, particularly a gross margin standpoint over the last 2, 3 quarters?

Scott D. Stowell

Yes. We -- just to your comment about because the projects might be smaller than we might consider lowering our thresholds, we're not doing that, we're still underwriting uninflated base case to a 20% gross margin, and a 20% IRR. And we're still finding opportunities that meet that -- those hurdles.

Operator

Our next question comes from Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Scott, going back to your -- Jeff, going back to your questions, your comment on land that you were buying in '10 and '11 that was older than 5 years life span. What does that say when you think about that for the next couple of years in terms of the trajectory of gross margins? I'm just trying to get a general idea of what might be the normal range or the appropriate 2 years out.

Jeffrey J. McCall

I think, when we go back and analyze our land spend, we went heavy early into California, Texas and then later it shifts a little bit more to Carolinas and Florida. I think from a longer-term perspective, we liked the way that lays out. The large land purchases and the large master or market-making transactions that we got accomplished in '10, '11, '12 will benefit from all that home price appreciation that did occur. So we think it actually set us up quite well for some healthy margins going forward.

Scott D. Stowell

Yes. And what I like about the Southeast focus now shifting later is that, it's our most affordable market today and has the greatest potential for home price appreciation relative to the other markets, and so that -- the timing of the allocation and the land buying matches up nicely.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

And then when you look at your cancellation rate, were you able to discern any patterns or trends that told you little bit more about what was going on with the homebuyer?

Jeffrey J. McCall

Yes. Not, not, not -- really not much change. The categories that we track kind of all remained proportionate. I did -- I think fourth quarter was right around 21%. Normal fourth quarter for us was a little bit above 21%. We're coming off of -- late '12 and early '13 were extraordinarily low cancellations. And then, so far this quarter cancellations are back down to mid-17s, low-17s. So no real discernible trend. We did not see a big spike in ability to qualify or anything like that made us really concerned.

Operator

Our next question comes from David Goldberg with UBS.

David Goldberg - UBS Investment Bank, Research Division

My first question was actually, Scott, on your comment about traffic in January versus orders, and I -- with the understanding that absorption rates in the first quarter of '13 kind of in the high end of that 2 to 3 range that you've talked about and that losing a little bit of absorption is probably reasonable given kind of the strategy, I just want to get an idea what buyers in the community, with traffic up 10% and sales down, what buyers in the community are really looking for? Is it they're just taking longer in decision? Is it something there? Is it a confidence issue? And maybe what your salespeople can do to help close that gap in terms of timing?

Scott D. Stowell

Yes. David, coming off the second half of '13 where buyers were taking a deep breath and were paused sorting through some uncertainty in the economic data and some political discord and, clearly their confidence was waning. Now, as we see them emerging in January and then into the spring selling season, we are seeing not only the traffic unit volume up but the quality of the traffic is improved. There's an uptick there. In some of the pre-marketing that we're doing on communities that are opening in the fourth quarter, we're getting very good traction and response from people. The interests lists are pretty robust. So I really do believe it's just a confidence issue, and what we're doing is working really hard on making sure that our offering is compelling and differentiated in the marketplace, that our sales teams have all the tools that they need. We've equipped them with new product, we've given them the training support that they needed, we just have to win customer preference and start selling. I think that we're in a good position to do that.

David Goldberg - UBS Investment Bank, Research Division

That's great. And then just, as a follow-up, I think the concept of trying to go shorter in duration as you get a little bit further into the cycle, anything about the length of the communities you're buying makes a lot of sense, but I would also think that the competitive nature of those land bidding processes is or whatever would be more significant. In other words, there's a lot of builders today who would like to be in communities that are a little bit shorter that, especially as we get into the cycle a little bit, that don't want to take that risk, and is that fair that maybe the opportunity set changes as you look at maybe longer communities that kind of sets you up and then switching to kind of shorter communities at the -- in competitive environment for that land is different? Or is it pretty similar that you're finding plenty of opportunities and it's not more competitive?

Scott D. Stowell

Yes. I don't think that's a -- it's more competitive for us. It would be if we were looking for a community that would open late this year or in '15 and we're not doing that. So the fact that we've got sufficient community count growth baked into our land supply today and that we're looking at opportunities late '15 and '16 does mitigate the competitive structure in the land that we're buying, and we leverage our relationships like many of the builders we have relationships. And so, I'm not concerned about it. We're seeing sufficient opportunities coming into our LOI pipeline that are meeting our underwriting and are still sit within our view of the cycle in terms of when they would complete their life cycles.

Jeffrey J. McCall

I think, given our land position, we really do view land purchase as a discretionary exercise, right, making sure that we're maintaining our discipline. I think Scott mentioned earlier we have roughly 95% of our anticipated 2015 closings already owned and controlled. We have 80% of our 2016 targeted numbers owned and controlled. So we are at a solid position there to make sure that we can stay very disciplined.

David Goldberg - UBS Investment Bank, Research Division

Can I throw one more in and this is kind of just a big picture question. But given the desire to be -- to focus on, again kind of shorter-duration land purchases, does this say anything about the size of the overall business through the cycle? In other words, last cycle, you guys in 2005, 11,000 closings, you had a total owned and controlled land position of about 75,000 lots. Does this tell us anything about where you're going to be? Is it going to be a smaller company, but a higher -- a more profitable company? Or can you get to those kind of volumes by focusing on the shorter communities? Just to give us some frame of reference in terms of where you're thinking strategically.

Scott D. Stowell

Yes. It's our view that we can get to those historic prior delivery peaks with this current land strategy. Well, we don't need large market-making, large master plans to do that. There's plenty of opportunity to grow community count in a normalized size and duration of communities and still get back to those numbers.

Jeffrey J. McCall

Just to reiterate, we are a builder developer, and so, while we are not -- we have much lower percentage of communities that are lasting greater than 5 years. We still have the vast majority of our communities lasting 4 to 5 years. So it's not -- we're not doing, they've got this 1 year in and out merchant lot building that you may see [indiscernible] .

Operator

Our next question comes from Joel Locker with FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just looking at your SG&A and, basically, your stock comp as a percentage of EBITDA was 10% a couple of years ago, dropped down to like 8%, now it's I think it was 6.9% or 7% this quarter. I was wondering if that's going to be a leverage issue? Or is it going to revert back to 8% if there's any onetime things in there in the fourth quarter?

Jeffrey J. McCall

Yes. No, no onetime things in there. Fourth quarter was -- has strongest EBITDA performance. So -- but our comp plan has shifted from previous years to being more long-term equity based, but 2013 is pretty normal and there should be some continued leverage over time.

Joel Locker - FBN Securities, Inc., Research Division

And also, on your selling expense, what percentage of realtors are using on your -- outside realtors are using on your closings?

Jeffrey J. McCall

I'll elevated right now. It's in the 70% or 80% of our closings what currently are coming with co-broker arrangements.

Joel Locker - FBN Securities, Inc., Research Division

Right. But you did get -- is it lowering the percentage because your selling expense was 4.7% of revenues versus, I think, it was 5.13%, 1 year ago?

Jeffrey J. McCall

Yes. We do have some leverage on there, it is a fixed component on sales salaries but also a very concentrated sort of [ph] effort to make sure we have those that co-broker percentage correct. So in areas where we can reduce that we can, and areas where we don't, we don't.

Joel Locker - FBN Securities, Inc., Research Division

Right. And just one last one on specs, how many do you have just total specs? I know you mentioned the finished number.

Scott D. Stowell

At the end of the year, we had 327 finished and 871 under construction, total 1198, if I did my math right.

Operator

[Operator Instructions] And our next question comes from Alex Barrón with Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to ask you, if you could comment a little bit on Florida. I was just kind of looking at the pattern of orders throughout each quarter this year, and it seems you had a pretty good quarter in second quarter, and then was trying to understand what happened this quarter?

Jeffrey J. McCall

A part of the issue in Florida was we did the acquisition in Florida, and so in the second quarter we picked up their backlog, which I believe is 119, we should be right around there. So I think, that was 1 of the issues that helped have Florida look so strong in the second quarter.

Alex Barrón - Housing Research Center, LLC

Okay. So you included them as part of orders instead of just adding them to backlog?

Jeffrey J. McCall

Correct.

Alex Barrón - Housing Research Center, LLC

Okay. All right. And then, in terms of disqualified mortgage and, I guess, now that we've got ObamaCare, have you guys seen any impact or have you quantified what the impact would have been versus 1 year ago?

Jeffrey J. McCall

Yes. We have looked -- the bigger impact for us is the FHA loan limits more so than the QRM rules. We went back and look at all of our closings -- keep in mind, because we are targeting that move-up buyer, virtually all of our markets our average selling price is well above the lower FHA limits and was above the previous FHA limits. But when we went back and looked at all of the closings that came though our mortgage company, 5% of the loans that we made in 2013, if nothing else changed, notice our down payment would not have qualified under the lower FHA loan limits.

Alex Barrón - Housing Research Center, LLC

Got it. And if I could ask one more on your current margin and, I guess, your outlook for this year. So if you theoretically couldn't get any more price increases out of any community, would your margins be able to kind of hold today's levels? Or do you necessarily need prices to keep moving a little higher to kind of sustain margins?

Jeffrey J. McCall

If you make the assumption that there's no home price appreciation and there's no cost inflation, so we can't even cover cost inflation, assuming they're both flat, I think the best indicator would be our backlog gross margin.

Operator

And our next question comes from Buck Horne with Raymond James & Associates.

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

I'd like to go back to Florida and follow-up to Alex's question, in particular. I guess where -- I'm a little confused. I'm just wondering, you had such a sharp deceleration in the absorption rates per community in Florida. So I'm just wondering anything specific going on there that you're seeing in the market trends and noting that a good chunk of your land spend this quarter seem to be allocated to Florida as well, so I'm just wondering where you're seeing opportunities? And where there may be a divergence in market trends right now and what specific markets in Florida are you most enthusiastic about?

Scott D. Stowell

Okay, Buck. So this is an important point to be made here. While we would target the use of incentives to try to get communities to 1.5 sales rate, there is a limit to the amount of incentives that we're going to use. If we think that the demand is inelastic, we can't get the right absorption response from an incentive, we just don't want to go too deep to erode our margins and kind of negatively impact our return on inventory. So in the case in Florida, that's what happened. The required incentives to move the absorption rates were too great in our opinion, and so we decided that patience would be rewarded and we accepted lower absorptions in Florida. As a general rule, I think, that's an important point that we'd like to make on the call to anybody that's listening. Now when we look at each of the markets, South Florida, very strong demand, and our absorption rates were metering those down with price increases even during the fourth quarter. It was a little bit slower in Tampa, in Orlando and Jacksonville.

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

And is the land spend then being allocated more to South Florida?

Scott D. Stowell

We're willing to allocate as much land to South Florida as they can identify. It's a very supply-constrained market. It's hard to find opportunities but we -- they've had a great allocation and they are producing great new communities and having terrific success. So, yes, we're very strong there and, quite frankly, the communities that we're opening this year in Florida, we're very optimistic about. So we're just, generally -- while we're watching this carefully. We're generally not concerned about fourth quarter absorption rates in Florida.

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

Okay. Good point. Thanks for clarifying. And can I just ask one quick one in California. Is the drought in California something you guys are concerned about? Could it affect home sales or buyers' willingness to buy? You talked about the FHA loan limits, that's an impact. But I'm just wondering if the drought in California may be another impact you're watching in California?

Scott D. Stowell

Well. We're always concerned about drought in California when it occurs, generally. But as to its impact to our business, I don't think it affects consumer demand. Local government in the state will impose conditions on us in terms of how much water we can use on our grading operations or our homebuyers may have limited landscape usage but that's just normal course and shouldn't negatively impact demand for us going forward in California.

Operator

And that was the last question for the day. Please continue, Mr. Stowell and Mr. McCall.

Scott D. Stowell

Thank you, Tracy. And thanks to everyone for joining us today. We look forward to sharing our results with you again, next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day.

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