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MDC Holdings (NYSE:MDC)

Q1 2014 Earnings Call

May 01, 2014 12:30 pm ET

Executives

Robert N. Martin - Vice President of Finance and Business Development

Larry A. Mizel - Executive Chairman and Chief Executive Officer

John M. Stephens - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

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

Ivy Lynne Zelman - Zelman & Associates, LLC

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

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

William Alexis

William Randow - Citigroup Inc, Research Division

James McCanless - Sterne Agee & Leach Inc., Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Operator

Good afternoon. We are ready to begin the M.D.C. Holdings, Inc. First Quarter Earnings Conference Call. I will now turn it over to Bob Martin, Vice President of Finance and Business Development. Sir, you may begin your call.

Robert N. Martin

Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2014 First Quarter Earnings Conference Call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer; and John Stephens, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2014 first quarter Form 10-Q, which will be filed with the SEC today.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

And now I will turn the call over to Mr. Mizel for his opening remarks. Larry?

Larry A. Mizel

Thank you, Bob. During the last half of 2013, we increased our supply of inventory homes available for sale as a strategy for capturing volume during the 2014 spring selling season. During 2014's first quarter, this strategy yielded positive results, helping us offset the impact of the lower backlog after tepid industry demand slowed sales during the last half of 2013. Combined with a higher average selling price and an increased gross profit margin, the additional volume we realized through this strategy allowed us to increase our overall first quarter operating pretax income, before debt extinguishment charges, to the highest level since 2006.

During the quarter, our net new homeowners declined slightly year-over-year, although the price increases we captured over the last year allowed us to increase the total dollar value of those orders compared to the first quarter of 2013. On a monthly basis, we saw continued volatility after a slow start in January. Other trends improved significantly throughout the quarter, culminating with the company achieving its highest level of March net new home orders in 6 years.

In coming quarters, our net order activity should benefit from our effort to open and drive sales to our new communities. As a result of that effort, our active community count reached 157 by the end of March, increasing the year-over-year for the first time since the second quarter of 2012. This increase should position us to grow our unit net orders in upcoming quarters, for the first time, since the first quarter of 2013.

For the benefit of longer-term growth objectives, we continue to solidify our land position in the first quarter, with our ending lots controlled up more than 25% over the prior year. We now have in place all the lots we need to drive growth in 2015 and have made significant progress on our supply for 2016 as well.

In light of our continued acquisition activity, our capital structures remain a major focus force. After securing a 5-year $450 million unsecured revolving credit facility in 2013 fourth quarter, we improved our debt maturity profile in the 2014 first quarter by issuing $250 million of 10-year senior notes and redeeming an equal amount of senior notes due in 2014, December 2014.

With overall liquidity at $1.1 billion at the end of the quarter, up 22% over the prior year, we believe that our financial position is among the best in the industry. And as the U.S. housing market continues to recover, our shareholders had the opportunity to participate in the industry's growth while enjoying the security of our investment-grade balance sheet.

In addition, we resumed our quarterly dividend in January, rewarding our shareholders with a dividend yield among the highest in the industry. This dividend evidences the confidence we have in our ability to generate solid risk-adjusted returns in the future.

Thank you for your interest and attention. I will now turn the call over to John Stephens for more specific financial highlights of our 2014 first quarter. John?

John M. Stephens

Thank you, Larry. We delivered 873 new homes during the quarter, a 14% year-over-year decline, which is primarily the result of a 23% decrease in our beginning backlog. Our backlog was lower to start the year, largely due to a lower community count in 2013 versus the prior year. However, by maintaining a higher level of speculative home inventory, we were able to partially offset the impact of the lower beginning backlog by increasing the number of spec deliveries during the quarter as compared to the year-ago period. In fact, 58% of our first quarter deliveries were homes that start as spec versus 43% for the 2013 first quarter. And 31% of our first quarter deliveries were both sold and delivered during the quarter as compared to 23% in the prior year period.

Our backlog conversion rate came in at 69%, which was above our historical average and was a direct result of our ability to convert more spec homes during the quarter. We continue to closely manage our spec inventory and sales, and expect to see elevated conversion rates as we move through the next couple of quarters as we sold a higher mix of spec homes versus dirt homes. In particular, 61% of our first quarter gross orders were spec homes as compared to 36% in the 2013 first quarter.

Our average selling price was up 12% year-over-year or nearly $39,000 per home to $365,000, primarily due to price increases taken during 2013, along with a shift in mix to higher-priced submarkets. Year-over-year, all of our regions experienced increases in average home price, with California and Nevada experiencing the most significant increases at 31% and 35%, respectively. In the case of California, we delivered more higher-priced product in Orange and Los Angeles Counties. And in Nevada, we experienced significant price depreciation in many of our communities during the first half of 2013, much of which carried over into 2014.

We saw our gross margins from home sales rebound 110 basis points from the 2013 fourth quarter and were up 110 basis points over the prior year as well. The sequential increase in gross margin percentage was driven by a shift in the mix of homes closed, including a higher percentage of deliveries from our West segment in the 2014 first quarter as compared to the 2013 fourth quarter. And in particular, our Nevada division, whose gross margins are higher than the company-wide average.

In addition, our margins were positively impacted by project closeout adjustments, as well as a positive warranty accrual adjustment. The year-over-year increase in our gross margin percentage was largely -- was up largely due to our ability to raise prices in many of our markets during much of 2013. And importantly, our absolute per unit gross margin per home closing continue to increase with a 19%, or $11,000 per unit year-over-year increase, to $68,000 per home. Our ability to increase our gross margin per home closing has been due to our ability to capitalize on markets with rising home prices, as well as a shift in certain markets to higher-priced submarkets and communities.

Our total homebuilding SG&A expenses were relatively flat year-over-year at $48.3 million for the quarter. Our marketing expenses were up about $1 million over the prior year, namely due to increases in advertising and related model setup costs associated with opening our new communities. Our G&A expenses were down slightly year-over-year and down $2.1 million from the 2013 fourth quarter. The sequential decline in G&A spend was largely due to lower incentive-based compensation expenses. As a percentage of home sale revenues, our SG&A rate was up 70 basis points year-over-year to 15.2%. The nominal increase in rate was due to a slight decline in home sale revenues due mostly to a decrease in unit volume.

Our net new orders were down 5% year-over-year to 1,236 homes versus 1,300 homes in the prior year, while the dollar value of our orders was up 6% to $466 million resulting from our ability to raise prices during much of 2013, combined with a mix shift to higher-price product in certain of our markets. The decrease in unit orders resulted from a 10% decline in our monthly sales absorption rate as demand slowed across most of our markets as compared to the prior year period, especially early in the quarter. Having said that, monthly sales momentum improved sequentially throughout the quarter with March representing our highest monthly sales level since April 2010, and the highest March in 6 years. In addition, our net orders were up 64% sequentially in the 2014 first quarter versus a 50% sequential increase in the year-earlier period.

Our monthly sales absorption rate for the quarter was 2.7 homes per community as compared to 3.0 sales per community in the same period a year ago. Nevada experienced a large drop in monthly absorption rate from a very strong 5.2 sales per month in the prior year quarter as compared to a very healthy 3.2 sales per month for the 2014 first quarter. California experienced the highest absorption rate at 4.1 sales per month. And Colorado, our largest division, generated a very solid absorption pace of 3.5 sales per month. In the mid-Atlantic, orders, absorption pace and traffic were negatively impacted by the severe weather conditions experienced during the quarter, where absorption rates declined 19% and 26%, respectively, in Maryland and Virginia.

We ended the quarter with a backlog dollar value of $651 million, which was down 6% from the prior year, primarily due to a 16% decline in the number of homes in backlog. However, our average home price in backlog was up 11% to $401,000 per home, which offset a large portion of the unit decline.

Our active community count of 157 at the end of the first quarter represented a year-over-year increase of 13%, or 18 communities, which surpassed our goal of having 155 communities by the end of the quarter and represented the first year-over-year increase since the second quarter of 2012. In addition, our soon-to-be-active communities exceeded our soon-to-be-inactive communities by 12, as of the end of the 2014 first quarter, which is a good indication that we expect to grow our community count over the next few quarters. Our current year-end community count target is approximately 170, which would represent full year net projected growth of about 15%. However, as we have stated in the past, and as we have seen in recent periods, there's an element of volatility inherent with the timing of opening new communities and the closeout of existing communities, which could cause the direction and magnitude of the community count changes during the balance of the year to vary significantly.

Finally, our land acquisition efforts continued at a solid pace during the first quarter as we acquired nearly 1,300 lots. Of these lots, approximately 60% were finished and about 40% represented lots that required land development improvements. As at the end of the quarter, we experienced -- excuse me, at the end of the quarter, we owned or controlled over 16,000 lots, which represented a 3.5-year supply based on our last 12-month delivery pace and a 26% year-over-year increase.

During the quarter, we spent approximately $150 million in land acquisition and development and ended the quarter with over $1 billion in liquidity, which included over $600 million in cash and marketable securities and $435 million in availability under our revolving credit facility. Our net homebuilding debt-to-capital ratio was 28%, one of the lowest in the industry, and we believe that our strong financial position and liquidity give us the flexibility to capitalize on opportunities as they arise in the future.

And before we open up for questions, I just wanted to point out on our next slide, our new model home that we have in South Florida is called The Oaks. And we're proud of it and we thought we'd share that as part of the presentation. But with that, we wanted to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Michael Rehaut, JPMorgan.

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

I guess, the first question around gross margins, appreciate some of the detail there with the mix. As you see pricing trend, so far, unfold this year, what are your thoughts on how you think prices have kind of unfolded in the first quarter, if incentives and overall effective prices have been stable or if they've ticked up or ticked down a little bit? I know it's kind of a market-by-market issue, but maybe on aggregated average basis, you can give us your thoughts directionally and how that might affect gross margins for the rest of the year?

John M. Stephens

It's John. A lot of questions there, but I think I understand the tone of what you're looking for. I think, at the end of the day, as Larry mentioned, the quarter started off a little bit slower in January. Weather, obviously, had an impact. But we did -- we are able to raise prices in select communities. It was not as heavy as it was in terms of a year ago where we were, but about 35%, 40% of the communities that we were currently operating had some sort of price increase. I'd say on the incentive front, not a material move there. I think, obviously, we want to manage that closely. And with the momentum we've seen in March and kind of moving forward, I think that prices were not as robust, but still not significant declines.

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

Okay. And that is how that relates to your thoughts around gross margins from here on in for the rest of the year?

John M. Stephens

Well, we don't give guidance per se on the margins, but what I will say is that we have not seen a significant uptick in our incentives.

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

Okay. And just, secondly, you noticed the financial services margin, it's held in pretty well during the quarter over the last couple of quarters, as opposed to some of your peers that have gotten more hurt by some of the more competitive, I guess, backdrop in that market. Is that something that is sustainable? Is there anything that maybe helped this quarter in terms of any type of onetime gains and -- just thoughts around that?

John M. Stephens

Yes. Mike, our profitability at the financial services was down on a year-over-year basis. Obviously, part of that is volume. We have seen competitive pressure on the margins of the mortgages that we're locking, but there's also -- we have other items in our financial services. We have our insurance operations, as well our title company and whatnot. So I know we've provided some additional description, but nothing kind of from a onetime pickup perspective that's really kind of meaningful on there.

Operator

Your next question is from Ivy Zelman with Zelman and Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

I appreciate the detail, John, on the absorptions within each of the markets. You mentioned the mid-Atlantic down, I think, 19% to 20%. Can you tell us on a per community basis what that was? And then, I can't help but ask because of the attention, people act as if many of our builders, including you guys, that you're only in Phoenix and that's the only market in the country and it's the poster child of what's to come. It seems as if your results prove otherwise, and I'd love for you to give some perspective on that market given that it's about 20% of your communities and you've added a significant amount there. And then putting it in perspective, in comparison, just maybe, Larry, your thoughts on all the concern that Phoenix is the beginning of the end, maybe we are a bigger picture view fundamentally on the housing market, and if you're still constructive and bullish?

John M. Stephens

Okay. In terms of the mid-Atlantic, we did provide some detailed information, Ivy, on our absorption. And we did see in per community, in Maryland, it was like 1.35 per community; and Virginia, it was like 1.87 per month. So that was down from the prior year levels. In terms of Phoenix, we did see a little bit of decline there. But you're right, we -- that's one of the many markets that we operate in and that's not our entire strategy. Colorado is our largest market, and we've done very well here and some of the other markets in the West. We've seen some pretty healthy absorption. I just want to make one comment about Nevada. I mean, I think, last year, we sold over 5 homes per community per month in the first quarter. And it was probably running a little bit hot, but still haven't -- we had a very solid, I think, first quarter there, selling over 3 homes per community there. But with that, I'll let Larry comment on some of your other questions.

Larry A. Mizel

I think, just your comment on Phoenix. I don't know how many different cycles we've been through on Phoenix over the last decades. But usually the high is, really, that big high and the low is -- since it's very low, and Phoenix is a great place to live. It has been historically a good housing market in between the highs and the lows. I was just there a week ago and everything is busy. And the housing, whether it's the resales, the distressed debt, distressed homes, but the new homes are moving forward. And over the next period of time, whether it's 6 months or 1 year, Phoenix is a great place to live and we're going to see growth there going forward. It may be a little slow, but a couple of years from now, you'll look back and say, well, I don't know why we were picking on you in Phoenix, that's one of your better markets. I remember when they used to do to pick on us about Denver, how could you be a homebuilder in Denver, that's like the edge of the Earth. And now Denver looks pretty hot.

Ivy Lynne Zelman - Zelman & Associates, LLC

Well, I think that's very helpful. And bigger picture, Larry, is there anything in the sort of pillars of the housing fundamentals that you see that would concern you? Or generally, are you still bullish on the early innings of the cycle and continuing to expect strong solid growth?

Larry A. Mizel

Well, I think over the next period of years, housing is going to be a solid industry. As you know, there used to be cycles and whether it was 7 years or 10 years. And during the cycles, there were seasons. I think they called this spring season, where we want to make sure it shows up. And this last period of time, we had volatility. And home sales have been kind of like stocks, they go up and down. It's not supposed to be that way, but it is. So we now have volatility. Now we have secular trends. I'm not sure what that means, but I think it means kind of is housing going to be okay. And the housing demand, by the analysis of those of you that put out the pent-up demand, I think, it's very accurate, enlightening, encouraging. And the perspective demand in the industry over the next decade is a pretty compelling argument. And so we look forward to executing our conservative growth plan and conservative balance sheet in order to make sure we take advantage of what's in front of us.

Operator

Your next question is from Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

I wanted to ask a question on Phoenix and -- or Arizona and Nevada as well, but from a little different perspective. In recognizing bulk of your community count growth in those 2 states, and the bulk of your increase in the losses of those 2 states. I was wondering what the land costs was as a percentage of sales in those markets and how that's changed?

John M. Stephens

Adam, it's John. We're not going to give out kind of the average land as a percentage of revenue kind of market by market. But for -- as a percentage of the entire company, it's kind of remained pretty consistent about 24%, 25%. And then in terms of the community count, we have added communities in those markets. And those markets have done well for us historically. And Nevada has actually been a market we continue to drive some pretty good results. So in terms of moving forward, we would love to add communities in those markets, as well as Colorado, being our home state here with the largest presence. And California, we feel good about that. We have more communities that should be coming inline there too.

Larry A. Mizel

I think I saw an article, either yesterday or today, that Las Vegas reported the best March of current history for their business activities. So I believe the transparency of Las Vegas is doing much better than everyone expected. It will be pretty clear by the end of the year, and it's an area of real opportunity.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then turning to specs for a second. If I look at it relative to your backlog, understanding how you began your conversation about building upon specs out of the spring selling season. But right now, it's pretty significant relative to your backlog, as high as it's been, I think, since the 2010 federal tax credits. So I was wondering if there had been any margin change yet on specs versus the dirt sales, and if there was any urgency yet to try to start moving some of those?

John M. Stephens

I think we have seen some compression. I think we talked about it a little bit a quarter ago in terms of the dirts versus the specs. I think early part of last year, Adam, we saw probably a little bit of an anomaly where the specs were exceeding our dirts, and now they kind of flattened back out and come back down, probably, what's more normal. In terms of our specs per community, if you look at where we were in December, we were just under 10 per community in aggregate. And that number's come down about 20% per community, with our ability to be able to sell these specs that we have available. And we see it is a positive for us that, that number has come down from December by nearly 200 units.

Operator

Your next question is from Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank AG, Research Division

I wanted to ask about community count. You have had a pretty significant increase in the last few quarters, obviously, dividends of the land investments you have made earlier. The 170 community count target for the end of the year, I appreciate that color. It implies some slowdown in the pace of community count growth. And I wanted to ask you what was -- what is guiding that? Was that the intent or trajectory to kind of to get back to growth in a robust way and then to have the growth level out a bit? Or is there some reflection of the slowdown in the housing market and maybe a more curtailed pace of land investment as a result?

Larry A. Mizel

I think we've had a philosophy for a long time that our inventory of land should be 3 to 3.5 years of supply. We're right on the money. And as sales may accelerate, then we'll accelerate a little bit more on our land purchases. But we believe that we have a very solid balance book of the 3- to 3.5-year land supply. As you know, with the volatility, that can change every quarter. And it does. But that's our strategy, and it served us well over the years. We're going to continue in that manner. So you'll see acceleration in land continue where there is acceleration in sales.

Nishu Sood - Deutsche Bank AG, Research Division

Got it. I appreciate that color. And then on the land purchases, Larry, you had described in the last, call it, 12 to 18 months, a shift in your land purchases to projects that require somewhat more development, reflecting the availability of better opportunities on that side rather than the finished lots side. I wanted your thoughts on where or how you've been seeing things so far this year? Does it remain the case that development activity is worth it in this market context or has some easing in the land market brought more finished lot opportunities back before you?

Larry A. Mizel

Well, there may be some slight easing in the land market, a tiny little bit. But finished lots in A location in good markets are highly competitive. And I'd rather develop in an A location than buy a finished lot in a B location. So our focal point is being closed in to the right place at the right time. And since we have done and do, do a substantial amount of development around the country, we do not do master-planned communities. We don't buy 500 acres or 300 acres. When we do land development, it's -- it might be 50 or 100 units. Maybe it will be a little bit more, but it's not massive land development. It's really lot development within someone else's infrastructure or with a plat or preliminary plat or California blue tops. So it's -- you might call it low-tech land development versus massive movement, which is not what we do. We pretty well stick to exactly what our skill set is and expect to execute in line with the market and take advantage of our focal point in unique housing markets. If you look at each of the markets we're in, they're in the right location, meaning the right cities and the right markets. They have volatility, like everything, but there's a lot of places we're not, but we feel really good where we are. And we're going to continue in the same strategy that has served us so well over the years.

Nishu Sood - Deutsche Bank AG, Research Division

Do you have the latest -- do you folks have the latest data on the percentage of lots that you're controlling in this most recent quarter to developed versus finished?

John M. Stephens

I think our finished lot count is around 60%, Nishu. It's kind of hovered there for several quarters now.

Operator

The next question is from Stephen East with ISI Group.

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

You all have -- your gross margin, excluding capitalized interest, rose pretty sharply. And it sounds like listening to you talk, you think that's sustainable if you continue on this track. And at the same time, your absorption pace dropped quite a bit. So I'm just wondering what your thought process is here? Do you prefer to run your gross margin a bit higher and continue along with the slower absorption rate? Or would you prefer to ramp that absorption rate a little bit, maybe through greater incentives and get a little bit of operating leverage on your SG&A and give back some of the gross margin?

Larry A. Mizel

I think what we do is we really operate on how we see the market on a current basis. And as I've spoken about volatility of the markets, we might have volatility of our strategy also. We're not stuck with any philosophy that, okay, we're going to concede volume for gross profits or we're going to increase incentives to increase volume and reduce gross profits. What we try to do is make ongoing business judgment predicated on the best information we have available that really deals with down to the individual home and the individual subdivision. And I know it might sound a little anal, but that's how we do it. And we really do it and review it weekly or biweekly 1 house at a time. And it's great when there's easy momentum and you don't have to fine tune anything. But on the other hand, our information systems and our people realize that not only do we measure the performance of the subdivision, but we equally measure the performance of the salespeople because their performance has a lot to do with what happens overall.

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

Okay. And then we're seeing out on the field the credit availability starting to loosen a little bit, and we're starting to see some builders switch the focus somewhat back down toward that buyer. As you look at the communities that you brought on, the communities that you have in the pipeline, are any of those shifting toward that first-time buyer or does the strategy remain the same?

Larry A. Mizel

I think the strategy remains the same. I know at least 1 or several of the very large builders have announced an interest in building a $120,000 to $150,000 home and are looking forward to servicing the first-time buyer. And I guess, the definition of a first-time buyer depends on whether you're in Orange County or you're in Pueblo, Colorado. There's a slight difference in price point, but we're at where we're at. Our land inventory drives us to the market that we feel that we could execute the best in. There's a reasonable amount of financing available for our buyers. They do, as everyone, require a unique documentation and credit requirements. But we're adjusting to the mortgage market. And as all of us, both hear about and see, the mortgage market is adjusting to the lower demand on their end, and they're becoming more flexible as to their underwriting standards. We own our own mortgage company. We have not been in the subprime financing world. We -- I doubt that we will go in that direction and figuring out what a qualified mortgage is, and how do you get through that hurdle. Once you get through that hurdle, then there is the various options available. And that's pretty much the situation as I see it at this time.

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

Okay. That's helpful. John, if I can sneak in 1 more. Could you just quantify your monthly progressions of orders from maybe what April look like?

John M. Stephens

Sure. I think in terms of the progression, obviously, improved throughout the quarter. It was 303 in January, 396 in February and 537 in March. And we're not going to give out an April number. But I think April, we continue to see momentum into April, and it's up year-over-year for the second consecutive month.

Operator

Your next question is from Dan Oppenheimer with Crédit Suisse.

William Alexis

This is actually Will Alexis, on for Dan. Just had a question on the margin. I was wondering if you could maybe quantify the impacts of the closeouts and the warranty accruals that you mentioned earlier.

John M. Stephens

Yes. The warranty accrual is about 25 bps. In terms of the closeout adjustment, that does kind of vary from quarter-to-quarter. And there's -- it's probably not worth trying to go through that exercise, quite frankly, because it gets a little sticky. But we have -- it's part of our normal process. We do have closeouts, it's just a matter of when the timing is. It wasn't overly material.

William Alexis

Okay. That's helpful. And then just a follow-up. Wondering if -- is there -- I guess, I'm thinking about specs per community. Is there a level that you guys are targeting? And if there is a level that you guys feel more comfortable with, kind of what's the time line behind reaching that number?

Larry A. Mizel

I think, we look at the specs every week. And the specs are part of our business model. This is how we run the business, and we find that it is -- we think on a risk-adjusted basis, it's in line. We were a little bit higher at the end of last year, they have inventory to carry us through at the beginning of this year. And the consumers, really, the one that tells us what to do. If they will pay up for quicker delivery and the market requires it because they'll pay for it, then we'll increase the spec count. And in some markets, it's not as profitable. But on balance, as you can see where we're at and that we continue to adjust. We -- for us, we think we're at the right place, and we'll operate at this level, unless there's a reason to either increase or decrease it. But it's made internally, 1 subdivision at a time. It's not just a policy across the company.

Operator

Your next question is from Will Randow with Citigroup.

William Randow - Citigroup Inc, Research Division

The one thing, Larry, you highlighted the security of having an investment-grade balance sheet, which I just had a follow-up on. How do you think about the kind of trade-off in financing cost differentials between investment grade and high yield? And importantly, the trade-off of leveraging earnings and assets? So what are kind of the pros and cons in your mind?

Larry A. Mizel

Well, investment grade allowed us to -- last year, you might recall that we did $350 million of 30-year financing. And I think that really demonstrates you would not have been able to do that transaction in some other credit form. We work hard to get the investment-grade rating. We're working probably harder to keep it. And the homebuilding industry, as you know, is down to 2 investment-grade builders. And currently, the high-yield market has become so robust. There is a pricing differential for money, but not much. But maybe the high-yield market is at the peak of the margin compression, of the spread compression. So the normal advantage that you would have is less now because of the robustness in the high yield where you could finance anything, some kind of cheap with no covenants is not normal. So it's just like everything else. It continues to change. And this may be not as critical as it was, but it certainly has served us well. And it's continued the focus that we have on the credit quality that we execute and how we run our business. It's been a good discipline.

William Randow - Citigroup Inc, Research Division

And then John, just a follow-up on some of your regional absorption paces. For Colorado, you guys held on pretty well in spite of weather. And then with Nevada and Arizona declining, I think about 39% on absorption and 18%, what are kind of the key drivers that you mentioned a few during the call so far?

John M. Stephens

Yes. I think, as I mentioned earlier, Nevada was running really hot last year. Again, over 5 per community. So that was probably a little bit elevated. I think what we did -- really, what we saw as the quarter developed, we saw a nice momentum in Nevada. And I think back to a probably more normal number, I think, in Arizona, we touched on earlier. I think, Phoenix, was a little bit softer than the prior year. And Tucson still did pretty well, they seemed to be pretty steady. So again, I think that's really what was driving some of that. I think the prior year was probably just running a little bit richer per se.

William Randow - Citigroup Inc, Research Division

Got it. And with Colorado, what were you seeing there? I guess, it looked pretty healthy.

John M. Stephens

Yes. I think, in Colorado, we've got good locations, we've opened some nice new communities, we're seeing good momentum out of the chute with these new openings, which has helped. I think, January was a little slower, I think, for a lot of folks. And it was a little bit colder here, and the Broncos were a little bit further in the playoffs. So I think maybe that kept people back. But I think we continue to be in good locations here in Denver and have a very good pulse on the market. And I think that, coupled with opening some new communities, has helped as well.

Operator

Your next question comes from James McCanless with Sterne Agee.

James McCanless - Sterne Agee & Leach Inc., Research Division

I want to find out what you think your mix of entry-level versus move up and luxury buyers or neighborhoods are at this point?

John M. Stephens

Jay, it's probably running about 40% first time and then 60% move up plus or minus in that range. And I think, to Larry's point, was a very good one, how you define first time or move up and what price point. So I think there's some subjectivity around that as well.

James McCanless - Sterne Agee & Leach Inc., Research Division

Sure. What -- when you look at the land deals that are coming to you, are you seeing more land that would be suited for first time versus move up? And could you also maybe talk about what deal flow you're seeing in terms of private builders wanting to sell?

Larry A. Mizel

Well, we don't see much of private builders wanting to sell. I think those that were around, most of them have already sold. You see, 1 or 2 years ago, the financial person maybe has acquired it. And what we look in deal flow is really kind of a balance of what you see and what we're doing. In the markets where we find traction is we look for more opportunities. But there is not a specific ratio in any 1 market. It really is market driven and opportunity driven.

Operator

Your next question comes from Joel Locker with FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

I just was looking at your corporate expense, and you turned a couple of million sequentially. I just wanted to -- if there's any one timers in there and what to expect going forward just on the corporate line.

John M. Stephens

No, no, there really wasn't anything from a one timer perspective that's really kind of driving that goal. I think it's just -- and I mentioned incentive-based compensation was down a little bit year-over-year.

Joel Locker - FBN Securities, Inc., Research Division

Right. But just going forward, that $28 million is a good number or do you expect that to grow with community count?

John M. Stephens

I mean, I think we've got -- we've kind of built up our headcount really over the last year or so, or go back a year ago, because in anticipation of the at community count growth. Obviously, we needed more land people, we needed more folks to get the communities open. So I think a lot of that has already been put into place, so we don't really anticipate adding a lot there from that perspective, unless you were to see volumes jump up significantly. I think that's probably more in the superintendent kind of sales folks area, kind of more in the field positions.

Joel Locker - FBN Securities, Inc., Research Division

Right. Are there any particular markets where it's hard to find land potential? Or just based on unrealistic land sellers at the moment or some markets that are just -- if you try to hit your hurdle rates you're just kind of banging your head against the wall?

Larry A. Mizel

I think every market that has good land, you beat your head against the wall. Sellers are only flexible when the market is soft.

Joel Locker - FBN Securities, Inc., Research Division

Right. And just last one on amortized interest. Do you -- what was that in the first quarter, is it -- in the homebuilding revenue?

John M. Stephens

In the first quarter of last year, it was 3%, 3.0%, $9.9 million, I believe, interest and cost of sales.

Joel Locker - FBN Securities, Inc., Research Division

And what about this quarter?

John M. Stephens

This quarter it was $11.7 million, interest and costs sales about 3.7%.

Operator

Your next question is from Alex Barrón with Housing Research.

Alex Barrón - Housing Research Center, LLC

I guess I just wanted to get your thoughts on margins, I guess, as we look over the next year or 2. Do you guys think it's necessary to be a price appreciation in the homes to sustain the margins, or not necessarily?

John M. Stephens

I mean, we're not putting price appreciation when we're doing our underwriting, Alex. In terms of where margins go, I think, a lot of us can be worst than that and where the demand levels in. As we talked about earlier, if you have better absorption, you're going to see more pricing power and obviously, more efficiencies. And whether it's leveraging your interest and cost of sales or your field construction cost. So I think that's really going to drive a lot of which direction it goes down the road.

Operator

There are no further questions at this time. I turn the call back over to Mr. Martin.

Robert N. Martin

Thank you, all, for being on the call with us today, and we look forward to talking with you again following our second quarter earnings release.

Operator

Thank you for joining. This concludes today's conference call. You may now disconnect.

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