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Standard Pacific Corp. (NYSE:SPF)

Q1 2014 Results Earnings Conference Call

May 2, 2014 12:00 PM ET

Executives

Scott Stowell - President and CEO

Jeff McCall - Chief Financial Officer

Analysts

Alan Ratner - Zelman & Associates

Adam Rudiger - Wells Fargo Securities

Michael Dahl - Credit Suisse

Jason Marcus - J.P. Morgan

David Goldberg - UBS

Susan Berliner - JPMorgan

Joel Locker - FBN Securities

Brendan Lynch - Sidoti Equity Research

Ivy Zelman - Zelman & Associates

Alex Barrón - Housing Research Center

Truman Patterson - ISI Group

Operator

Please standby. Good morning. And welcome to the Standard Pacific Homes 2014 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 statement. For additional information regarding factors that could cause actual results to differ materially from these contained in the forward-looking statements, please see the company's SEC filings, including reports on Forms 10-K and Forms 10-Q under the heading Risk Factors.

A question-and-answer will follow today's prepared remarks. A recording for today's presentation will be available for replay a few hours after the call ends and will continue to be available on the company's website for 30 days.

At this time, I would like to turn the call over to Scott Stowell, President and CEO. Please go ahead, sir.

Scott Stowell

Thank you, Ben, and good morning, everyone. I want to thank all of you for taking the time to join us today for the Standard Pacific Homes 2014 First Quarter update. The strong operating performance we achieved during the last two years has continued into the first quarter with pre-tax income, backlog value, home sale revenues and new order value up 74%, 39%, 26% and 16%, respectively.

These solid results are reflection of the strength of the company's positioning and the execution of its strategy. We are in the right markets with deep and well-located land position, held an attractive basis and a product portfolio that appeals to our primary customer move-up buyer.

During the first quarter we earned $38.2 million or $0.09 per diluted share, that’s compared to $21.8 million or $0.05 per diluted share in the prior year period. Pre-tax income for 2014 first quarter was $61.6 million, as compared to $35.4 million in prior year, a 74% increase.

Net new orders were up 49% as compared to the fourth quarter and accelerated throughout the quarter. Year-over-year, the dollar value of our net new orders was up by 16%, resulting in a 39% year-over-year increase in the dollar value of our backlog, which stood in access of $1 billion at the end of the quarter, representing a milestone achieved for the first time since the fourth -- third quarter of 2007.

New order deliveries were up 5% year-over-year to 995 homes, with home sales revenues up 26% to $447 million. The average selling price increased to $449,000, up 20% from the first quarter of last year. This increase in average selling price reflects both pricing power and the mix shift that has accrued from the execution of our move-up strategy. For the quarter, over 70% 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 26.6% quarter, up from 21% for the first quarter of 2013. The gross margin of our backlog at the end of the first quarter was 26.2%. This gross margin strength has helped to drive our industry leading operating margin, which stood at 13.4% for the fourth -- for the 2014 first quarter, a 550 basis point improvement over the prior year.

Our gross margin strength reflects our ongoing community by community and home by home evaluation of our value proposition to tactically rates prices and reduce incentives as demand warrants.

During the first quarter, we were able to raise base prices at over 70% of our communities and we are able to reduce the use of incentives in our orders by approximately 100 basis points as compared to the 2013 fourth quarter. While at the same time, increasing our quarter-over-quarter absorption rate by 40%, well above the average 35% increase we have historically experienced.

Our overarching objective is to create long-term economic value by maximizing every opportunity to improve return on invested capital. As we've been saying for several quarters now, at this stage in the cycle, we believe an emphasis on margin over sales pace will result in higher returns.

Well, there is always room for healthy debate on price versus pace, we believe that the reduction in price does not often translate into an increase in pace sufficient to justify the price reduction.

Generally speaking, based on our operating model at an average selling price of $425,000, a 3.5% increase in incentive or $15,000 would need to be matched with the 22% increase in sales space for us to be in different from a return perspective and we simply don't believe that current market conditions will produce this result.

We ended the first quarter with 173 active selling communities, up 7% when compared to the end of the first quarter of ’13. In the second quarter, we expect to open 33 communities, only to be up stage by the fourth quarter when we expect to open 36 new communities.

Over the full year, we anticipate opening a total of 94 new communities, resulting year end community count growth in the low double digits. Of course, the timing of new community openings can often vary from projections and with 11 new communities scheduled to open in December, some movement into 2015 could occur.

Turning now to land, we continue to target a total 2014 land spend, which includes both land acquisition and land development in the $900 million to $1.2 billion range. We spent approximately $224 million on land and land development in the first quarter after having spent $808 million in the full year 2013.

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 our strong land position, focusing our division management on creating value through longer term land opportunities that meet our future growth objectives and that leverage our master plan and development capabilities.

Given our current land position, our division leadership is now focused on sourcing and acquiring land that will result in new community openings in the second half of 2016 and beyond.

As of the end of the quarter, we owned or controlled nearly 95% of our expected average selling communities for 2015 and in total, we own or control roughly 132 communities that are scheduled to open in 2015 and beyond.

The fundamentals underpinning the housing recovery still look good. Inventory is tight, the number of distressed homes sales and homes entering for closure are declining and substantial pent-up demand for housing still appears to exist. U.S. home prices continue to rise and 8.8 million jobs have been recovered, excluding this morning's job report adding to 288,000 jobs.

Job is reaching an important threshold where each new job will drive greater household growth. On the other side of this equation, households are forming a rate much lower than historical norms. Jobs are being created at a slower than hoped for pace.

Mortgage credit remains tight, consumer confidence is not yet returned to pre-recession levels and the recent housing data points have been mixed, all dampening the rate of this recovery.

Given both sides of this housing equation, we continue to believe that the housing recovery will be an uneven one. Against this backdrop, I'm encouraged by our strong 40% quarter-over-quarter improvement in absorption rate, the acceleration in orders we experienced as the quarter progressed and the 446 new net orders we have recorded in April.

As the spring selling season unfolds, we continue to maintain a cautious but positive outlook. If we follow normal seasonal patterns our second quarter absorption rate would improve by approximately 9% to 2.7%. As a reference point, our second quarter 2013 absorption rate was 2.8% when you perform out the backlog we acquired from our 2013 second quarter acquisition in the Southeast.

While we can’t control economic conditions, with the discipline to stick to our strategy and our ability to execute it and the strong land position we've amassed, I believe we remained well-positioned to take advantage of the long-term housing recovery.

With limited, entitled and developed land in A locations we target and with new households projected to be formed at rates that exceed the number of new homes being built for the remainder of the decade, over time there will be a supply/demand imbalance that should translate into continued pricing power and increased absorptions over time favoring homebuilders.

Now before I turn the presentation over to Jeff, I would like to walk you through some more detailed regional information on the first quarter results. On slide five, we breakdown our Q1 order activity across our three 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 6% companywide on a tough year-over-year comparison, with the decline in orders fairly evenly distributed across our regions. Despite the decline in -- in absolute orders the value of these orders was up 16%, driven by the significant increase in our average selling price which was up 23% across the company, ranging from up 27% in the Southeast to up 18% in the Southwest.

The change in ASP is heavily mix dependent. And particularly in the Southeast and Southwest, it was positively impacted by product mix shifts to more higher end and move up the luxury homes.

To get a better picture of the order performance across the regions, it is important to factor in the change in community count and focus on the order absorption rate. Across the company, average community count was up 10%. And the order absorption rate was down 15% over the prior year with absorptions within the targeted rate of two to three sales per community per month in all of our regions.

In fact, despite being down 6%, California, our fastest absorbing region, continue to absorb at a rate of 3.4 above our targeted range. We plan to continue to strategically increase prices in this region in an attempt to moderate this sales pace. To provide additional color on pricing power, the bottom right hand graph provides a same plan ASP view.

While the data supporting this graph is limited and only represents ASP changes for the 690 homes with the same model and the same community sold in both the first quarter of ‘14 and the first quarter of ‘13. We believe it provides a meaningful view on real price changes. As you can see, real pricing power continues to exist with California, up 15% on the same-store, same-plan basis, followed by the Southwest at 10% and the Southeast at 7%.

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

Jeff McCall

On Slide 6, we dive a little deep into our backlog. As Scott mentioned earlier, our backlog value at the end of the quarter exceeded $1 billion for the first time in 6.5 years. The dollar value in backlog was up 39% to a combination of units, up 9% and ASP up 28%.

Our ASP and backlog was $497,000, $48,000 higher than our ASP of our Q1 deliveries. The gross margin in backlog was 26.2%, up 310 basis points from the prior year and flat with the backlog at the end of 2013. Of the 2,016 units in backlog, 1,087 are currently scheduled to close in the second quarter.

The units scheduled to close in the second quarter have an estimated average selling price of $493,000 in a gross margin of 25.7%. The homes sold and closed in the second quarter will impact the reported results, up or down from the backlog figures.

Typically, the homes sold and closed in the quarter are more concentrated in our communities with a lower ASP than the homes in backlog. Over the past four quarters, the ASP of homes sold and closed in the quarter averaged $421,000.

On Slide 7, we break down our deliveries in a little more detail. As we mentioned earlier, deliveries in the first quarter were 995, up 5% from the prior year. The key drivers to deliveries would be our beginning backlog in the amount of homes sold and closed in the quarter.

Out of 2,016 homes in backlog at the end of the quarter, 1,087 homes are currently scheduled to close in the second quarter. We expect the 1,087 will get adjusted down due to cancellations and changes to the targeted closing date of homes currently in backlog. Over the past eight quarter that downward adjustment has averaged about 15.3%.

From that number, you add the number of specs sold and closed in the quarter to get your Q2 deliveries. On average, over the past eight quarters, we have sold and closed about 236 specs in their respective quarter. The number of specs sold and closed in the first quarter was 279, approximately 18% above the trailing eight quarter average.

On Slide 8, we have our incentive trends over the past nine quarters. The dark blue line represents the incentive levels baked into our deliveries and is the incentive level often quoted. The incentives in our deliveries for the first quarter of 2014 were approximately 3.6%, down 30 basis points from last quarter and down 70 basis points from the same quarter prior year.

It is important to note that the incentive trend in deliveries, most often reflects the impact of orders placed three to six 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. After two quarters of increasing level of incentives in our orders, our incentives dropped 100 basis points from the fourth quarter to 3.0%, matching the incentives in our orders during the third quarter of 2013 and down 40 basis points from the first quarter last year.

On Slide 9, we’ve drawn a break out of our SG&A in to four categories, G&A, insurance, incentive compensation and selling expenses. Overall our SG&A as a percentage of revenue was 13.1% relatively flat compared to prior year.

As a percentage of revenue, selling expenses were down 10 basis points from prior year. Incentive count was down 30 basis points, offset by a 30 basis points increase in marketing and a 10 basis point increase in people and facilities as we continue to support our growing business. We expect to see improving SG&A leverage as we progress for 2014 and would anticipate about 10 to 40 basis point improvement in SG&A leverage when comparing to full year 2014 to the full year 2013.

On Slide 10, we highlight our land acquisition and development spend over the past several quarters. In Q1, we spent $145 million on land acquisition and $79 million on land development.

We remain encouraged by the quality and volume of land transactions we’re working through our pipeline. And as Scott mentioned earlier, we’re targeting a total 2014 land spend in 900 to 1.2 billion range. Roughly 400 million of which relates to anticipated development spends. And we have an additional almost $400 million of committed land spend already scheduled for 2014.

Our land acquisition spend continues to be heavily skewed to raw land with approximately 66% of our Q1 spend related to raw lots, 10% related to partially developed lots and 24% related to finished lots. We ended the quarter with 36,000 lots owned and controlled and 11% with first quarter of 2013. Approximately 20% of the 36,000 owned and controlled blocks are controlled under option contracts.

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

Scott Stowell

All right. Thank you, Jeff. In closing, I’d like to let all of our team members know how much I enjoyed visiting with them at our town hall meetings earlier this year. I returned home energized by enthusiasm and commitment. And I left confident that all of us are aligned around the company's vision and strategy for 2014. I truly appreciate everything you do for our company. Thank you very much.

And with that, we will now open it up for questions and we’ll start with the Q1 winner of the StanPac, (indiscernible) order number contest. Operator, first question please.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Ivy Zelman, Zelman & Associates. Go ahead.

Alan Ratner - Zelman & Associates

Hey, guys. It's actually Alan on for Ivy. And I don't use Twitter, but I assume that means we're the winner of that contest.

Scott Stowell

You’re the winner. Congratulations, Al.

Jeff McCall

We’ll send you a useless prize after the call.

Alan Ratner - Zelman & Associates

Excellent. I'll be sure to retweet it. I thought your commentary on incentives was really interesting. It seems to be a little bit different than what some of your peers are saying. They either cited stable or maybe even a little bit of an increase in incentives in the quarter. I think if we look at your regional results, obviously the California absorptions are very positive. But the Southwest and Southeast look like they're at the lower end of your range there.

And while the disclosure you gave about what the necessary increase in absorptions would have to be there to really offset the increase in incentives, that's interesting. But I wonder if, in fact, if your competitors are either lowering price or increasing incentives that causes your absorption rate to move lower? At what point, do you have to pretty much respond to what the market is doing and just kind of resign yourself to the fact that maybe you're just not going to get the absorption improvement to compensate for that margin hit?

Scott Stowell

We understand that as the market changes that we have to compete in the marketplace and we were prepared to do that. And we’ve been clear that we are targeting a specific range. And as long as our -- and this is a community-by-community answer to your question. As long as the projects and community is within that range, we’ll maintain a price orientation to the extent it falls below that range.

And for us when the project fall below one and a half sales than we’re looking at incentives and matching the market and evaluating our value proposition versus our competitors. So we will face that and we managed that and track that on a project level basis to get inside these stated ranges of absorptions. Because we think given the demand environment we’re operating today, that’s where we can maximize returns in about that two to three range.

Alan Ratner - Zelman & Associates

Got it. And then in terms of the April disclosure on orders, I think that implies a year-over-year decline. But as I look at kind of how your 2Q played out a year ago, April was kind of a monster month for you guys. And it looks like the comps got much easier as the quarter progressed. So just curious if you might care to elaborate on what you saw in April and then kind of going forward, what you would expect over the course of the quarter?

Jeff McCall

Yeah. Our April orders came in at 446 as I mentioned. And that was down 15% year-over-year and as you said it was a challenging comp for us and it was kind of a favorable quarter. But from our perspective, April came in about where we expected it, following a very strong March. And as we worked on building up our order book during the second quarter, we expect to see a similar pattern that we saw in the first quarter where we build and worked the traffic hard and then close sales as we progress through the quarter, so kind of met our expectations.

Alan Ratner - Zelman & Associates

Great. Thanks a lot, guys.

Jeff McCall

And last year, the April number was our highest orders of any month during the year last year.

Operator

And our next question comes from Adam Rudiger from Wells Fargo Securities. Go ahead.

Adam Rudiger - Wells Fargo Securities

Hi. Thanks for taking my question. I too don't use Twitter, so I don’t know, does that mean I'm number two or I just got lucky here? I must have gotten lucky. I had a pretty basic but a big picture question for you, Scott. Just kind of how the next couple years look for you guys. You and some of your others in the industry have gotten to margins well ahead -- strong margins, well ahead of where -- ahead of unit volume recovering. And so I was just wondering, what's left here? Is it just going to be a unit growth story, with the market supporting that? Or what other changes or initiatives or things should we expect and plan for the next couple years?

Scott Stowell

Well, we believe we are still in the early phases of the housing recovery. We like the fact that we've got an early pricing power in this recovery because we’ve worked hard to position our communities at the prices we are at today and at the margins we are at. We believe that as the recovery gets more traction, demand will come and we will pick up the volume and we will pick up at our current prices in margins, which we think is positive. And we really believe that that will occur. And so I don’t expect to see significant margin improvement and we are always balancing the margin and our inventory turns as we’ve tried to enhance and optimize our returns.

In terms of other big initiatives, for us, it's really focusing always on improving our capability and our ability to execute it in our markets, building our people and our teams so that we can create best-in-class home building company. And then of course, we are always evaluating our customer value proposition to make sure that we’ve got the right offering in the marketplace and it's meeting the expectations and demands of our customer.

Adam Rudiger - Wells Fargo Securities

Okay. And then my second question, similar to what Alan was focusing on, your comments about the tradeoffs between incentives and volume. Given the math that you expressed, I would guess that in most parts of the cycle it wouldn't make sense to chase volume. So I was wondering, when in your view, actually it does make sense to chase the volume? Is that just really in a period when cash flow is the focus and when kind of the market is in distress?

Scott Stowell

Yeah. Our view would be later in the cycles, at peak or just before peak. Our bias might shift from margin to turn and to velocity. We want to do that when it’s available and we would do it when we think that it's time to start generating more cash flow, reduce our leverage, start to lower the years of land that we own and control to strengthen the balance sheet and put ourselves in a stronger position to navigate the cycle. So that will definitely be a cycle decision that we will make and we are evaluating and checking that constantly. I guess that’s how we would work, look at that.

Adam Rudiger - Wells Fargo Securities

Makes sense. Thanks for taking my questions.

Operator

And our next question comes from Michael Dahl from Credit Suisse. Go ahead.

Michael Dahl - Credit Suisse

Hi. Thanks. So lot of helpful and interesting comments as always here, so thank you for that. Wanted to start with the 1Q margin performance. The gross margins were a good bit ahead of where you had commented that backlog was scheduled to close heading into the quarter. So just wondering what was really the driver? Should we think about that as options that came in ahead of closing, or should we think about it as the spec margins were still above average for the quarter?

Jeff McCall

Yeah, great question, Mike. I think when we look at that Q1 reported margin of 26.6%, along with the home closing margins, there is adjustment that go in there, downward adjustments for warranty sellers and things of that and upward adjustments or other adjustments for community closeouts. Our net adjustments this quarter were about 40 basis points higher than the average quarterly adjustments last year, right. So that benefited our gross margins a bit. We did have pretty solid gross margin performance from our spec sales as well. They were almost in line with our dirt sale gross margins which is really -- we like to see those, 1%, maybe 2% lower and we are better than that this quarter.

Scott Stowell

60 basis points.

Jeff McCall

60 basis points, so that’s what we are seeing and we had a pretty solid overall performance across the board.

Michael Dahl - Credit Suisse

All right. Thanks. That's helpful. And then shifting gears on the land side given that you're now kind of 90% owned or controlled for 2015. Can you talk about whether you're shifting focus a lot heavier towards 2016 and potentially even beyond and whether there's any plan on and any regional differences as you look out to 2016? Thanks.

Scott Stowell

Our focus, as we mentioned in the prepared remarks is on second half of ‘16, that's where we start to see the community count falling off and our plans show that we should still be growing during that period and we have plans to grow. So, I don’t think there is any shift in our land strategy or focus. We are still targeting raw opportunities to leverage our development capabilities. As we’ve mentioned in the past, depending on the size of projects, if they have significant durations, we are carefully evaluating those.

But our divisions are finding plenty of opportunities to meet our underwriting. They are spending their allocation for the most part. Some divisions were having a little bit more challenged in highly supply constrained markets. But we are making great progress as we turn opportunities over in our LOI pipeline. We are replacing them with really positive deals that we like, that still meet our underwriting. So, I would say it’s you should assume that it’s pretty much business as usual with regard to how we are viewing land right now.

Michael Dahl - Credit Suisse

Okay. Thanks. Good luck in the quarter.

Scott Stowell

Thanks Mike.

Operator

And our next call comes from Michael Rehaut from J.P. Morgan. Go ahead.

Jason Marcus - J.P. Morgan

Good morning. It's actually Jason Marcus in for Mike.

Scott Stowell

Good morning, Jason.

Jason Marcus - J.P. Morgan

Another question on the land market. I was wondering if you could comment on the trends that you've seen in terms of the competition and the pricing, maybe over the last quarter or so? And then just I guess in terms of overall land inflation, how much of that do you expect to run through the P&L in 2014 versus 2013?

Scott Stowell

So the land market remains still very competitive, particularly in markets that we're targeting, the core markets where they tend to be supply constrained. I would say that I’m not seeing builder activity slow at all. We are seeing, generally speaking, a flattening of pricing in the last quarter or two. But on a year-over-year basis, prices are up anywhere from 10% to 20% I would say and again these are kind of general numbers. And sellers are still remaining patient. They are willing to wait deeper and longer into the spring selling season to see what happens. As I mentioned, there has been some mixed data results and the market is softening, clearly, when there is temporary weaker period of demand. So we are not seeing sellers panic at all. We are not seeing a ton of builders dropping their deals. They are negotiating in closing. So, I think that’s probably the context I would give you and then, Jeff, the second half of that running through the P&L.

Jeff McCall

Yeah. From a finished lot perspective, it’s been relatively consistent. The past quarter was 25.6% of our revenue. And our backlog, it’s up higher at 27%. But we would expect it to be up higher in a higher ASP. So if the higher ASPs, your land allocation, it generally goes little bit higher. I think it all falls down to gross margin. Our gross margin backlog has been pretty consistent at 26.2.

Jason Marcus - J.P. Morgan

Great. And then next question about cycle times and labor availability. What are you seeing across your markets, and maybe have there been any changes that you want to comment on?

Jeff McCall

It’s still -- it's always a challenge. I mean, it’s market specific and trade specific and we are seeing a lit bit more stress on some of the framing cruise than we have in the past. But overall we are trying to manage that. The challenges often come more so with the municipalities than just the trades on their own. But it happens every time in an up cycle and we are managing through it.

Scott Stowell

We are seeing some trade capacity coming back to the market and markets that have slowed down and where the subcontracting basis build up their business. So there was a little window perhaps for us to take advantage of some pricing leverage that we might have, but that's probably just roughly half of our markets, otherwise the labor side of market still is fairly constrained. Randy, you are there?

Operator

Yes. And now we have David Goldberg from UBS. Go ahead, David.

David Goldberg - UBS

Thanks. Good morning and great quarter.

Scott Stowell

Thanks, David.

David Goldberg - UBS

My first question, Scott, was that in the opening remarks, you mentioned about supply being below demand through the cycle and the ability to raise pricing and getting some price increases as we continue and obviously great prices last year. And what I'm trying to get an idea of is, to me price increases really kind of come from two places, or the ability to raise prices. There's the buyer psychology and when they're willing to pay more, and then there is their ability to afford more payments. And as you kind of think about this cycle and your buyer, I want to get an idea how you gauge kind of those two factors. In other words, how do you get an idea where you say look we think we can increase prices, but this is the point where the buyers really can't pay more or won't pay more, other than kind of maybe trial and error, which maybe that's all it is. But then also, how do you get comfortable that we're not getting close to that point given limited wage inflation in the country?

Scott Stowell

Well, as you know, our primary customers are move-up buyers so they generally have more discretionary income and more ability to buy homes and purchase homes. And we are talking to them everyday in our sales offices. So we generally have a pretty good feel for the price ranges that they are targeting within their own ability to pay their loans and afford housing. And so that’s just local knowledge helps and then we have our mortgage company which is looking pre-qualifying buyers and evaluating buyers constantly, so we get pretty good sense on where they are relative to their ability to take on mortgages. We look to maximize pricing based upon all those inputs.

David Goldberg - UBS

Maybe you don't feel that you're hitting any kind of ceiling at this point with your buyers at this point in the cycle, that there's room to grow still?

Scott Stowell

That is a project by project evaluation. I really do believe that there is room to grow in many of our markets, but that’s generally a function of a local competitive dynamics in a competitive market area. And this is just the strength of our value proposition and what we’re offering in the marketplace.

David Goldberg - UBS

Got it. And then just a quick follow-up. The SG&A kind of guidance for the rest of the year and kind of thinking about an SG&A level going forward. Clearly, SG&A is a little bit elevated just given where leverage is right now. Is there any reason as we move forward that we shouldn't kind of see the levels as the percentage of revenue that we saw historically? Do you think we're going to move back to those levels, or is there some reason it's going to be higher in the cycle relative to kind of historical levels?

Scott Stowell

Yes. We’re definitely focused on driving this back down below 10% that there is still a little ways up before we can get there. Nothing has changed too dramatically for us. We are seeing a higher level of broker participation and that is driving SG&A up a little bit, and we will see as the recovery continues and resale homes become more available that may drive that broker participation site down a little bit, but we are still targeting getting back to or below historical levels.

David Goldberg - UBS

Thank you for taking the questions.

Operator

(Operator Instructions) And our next question comes from Susan Berliner from JPMorgan. Go ahead.

Susan Berliner - JPMorgan

Hi, good afternoon or good morning for you guys.

Scott Stowell

Hi, Susan.

Susan Berliner - JPMorgan

I just want to talk I guess first about liquidity and not that I am remotely concerned in a market like this. But your cash is shrinking Jeff, and I just thought I would ask you with regards to your land spend, what you were thinking with regards to cash going forward?

Jeff McCall

When we think about liquidity, we look at both the cash balance, which you said is down in the $200 million in the quarter, but also combined with the available revolving credit facility, and right now we got the untapped $440 million availability there. So from a liquidity side, we still think we are okay. We’d like to keep. We’ve got liquidity targets based upon our forward 12 and 24 months delivery objectives and where we stand right now, we want to keep that liquidity at least in that 400 to 500 range is a comfortable level. So where we think we are okay there.

Susan Berliner - JPMorgan

Okay. And just can you give any more I guess additional color with regards to your markets, either noting some of the weakness, and I guess what you are seeing in those markets with regards to your competitors? Is it an increase in incentives, a reduction in price, or anything else you can provide?

Scott Stowell

Certainly the markets that are showing the biggest decline, so if we are going to use that as the way to determine weakness would be the Carolinas, Colorado and Arizona for us, and Arizona has been widely discussed with what’s happening after that market is down significantly 40% year-over-year and our performance is down, but probably a little bit better than the overall market. We had a tough comp there as well. The first quarter of ’13 was really strong for us, but sort of big factors there are just consumer sentiment. Arizona has got probably a little negative equity issue in that marketplace. Supply is increasing in all of our markets, and there is some financing challenges in Arizona, not a big factor for us, but that’s out t there.

But our incentives actually are trending down in those markets. Actually, it’s interesting in even the markets where we’ve had some decline in our orders. We still are reducing incentives with the exception of Colorado and improving our backlog gross margin in those markets. The Carolinas, Raleigh actually showing some improvement year-over-year and Charlotte some declines. Their absorption rate for example was 1.8 and last year it was 2.7.

So they had a very difficult comp as well as speaking to Charlotte. There is clearly softer demand there. And then, we were aggressive pricing last year which I think probably contributes to a little bit of slowdown in our absorptions. And their backlog gross margin is up 370 basis points and their incentives are trending down nicely. And then I think the other market, Colorado, we are -- that market is down about 20% overall. We are probably underperforming that market slightly as we continue to work on our repositioning in that market. California has been very strong, Texas is strong and Florida performing about as we had expected it.

Susan Berliner - JPMorgan

That’s really helpful. Thanks so much.

Operator

And our next question comes from Joel Locker from FBN Securities.

Joel Locker - FBN Securities

Good morning, guys.

Scott Stowell

Hey, Joel.

Joel Locker - FBN Securities

I guess on your SG&A, the breakdown of it, just it's kind of like stock comp being about 5.6% of EBITDA this quarter versus it’s kind of running 7% or 8%, or maybe even as high as 9% a year or two ago. And just wanted to see if there was any change in structure on that or incentive plans versus the previous, or it was just a one-off kind of number?

Jeff McCall

No change. As we -- stock comp people will get amortized over the vesting life of it, so you are starting to see that come through. And as our EBITDA continues to grow that stock comp as a percentage will be trending down.

Joel Locker - FBN Securities

So it should be maybe in that 5% to 6% range going forward if you're trying to model?

Jeff McCall

Yes.

Joel Locker - FBN Securities

As long as certain things continue. And also, on the selling expense, that was -- that actually bounced up.

Jeff McCall

Yes, there is a little bit of fixed components in the way that we compensate majority of our sales team. So that usually jumps up a little bit as percentage of revenue on the first quarter, then trails backs down. Selling, I think in the first quarter was roughly 5.1% and we expect to see that at least in the second half of the year when our deliveries pick up that should be below 5.

Joel Locker - FBN Securities

Below 5%. And then just what about the corporate, the last line of the G&A, that was -- it got up to close to I guess $31 million or so. Is that a good run rate, where I thought it might drop a little bit from the fourth quarter, but it actually increased $600,000?

Jeff McCall

That increased a little bit and those are -- there was nothing really one-off. There our marketing expense and really timing related was little bit higher than normal there, but overall that’s pretty -- that’s kind of a newer run rate.

Joel Locker - FBN Securities

And just a one question, and I'll jump in the queue. The price increases on the 70% of the communities you mentioned, what were they from December 31st to say March 31st?

Scott Stowell

So the price increases for the first quarter is up on 72% of our communities and they were modest generally on average kind of 2% to 3% where the price increases there. There were some communities obviously with we had an opportunity to go bigger. I think we had a community up 60,000 would be an extreme example, but generally speaking 2% to 3%.

Joel Locker - FBN Securities

And that was 2% to 3% on all homes in that community or just on the homes that you raised prices or did you…

Scott Stowell

That was on all homes in the community, in the 72% of our communities, yes.

Joel Locker - FBN Securities

All right. I will jump again. Thanks.

Operator

And we have Brendan Lynch from Sidoti Equity Research.

Brendan Lynch - Sidoti Equity Research

Good morning, Jeff. Good morning, Scott.

Scott Stowell

Good morning, Brendan.

Brendan Lynch - Sidoti Equity Research

My question is on the continuing shift in product. I believe you said you're targeting about 80% move-up, and 20% entry level. Can you give us some color on how close you are to this target, and what regions still have some adjustments to be made?

Scott Stowell

Yes, we are at 70% move-up right now which is where we roughly want to be with the move-up. In addition to that, we want to grow our luxury product segment to 15%. We are not there yet in the market, but I think we’ve got the land pipeline to get there that we are working on today to bring to market. And then the remaining 15% will be divided between age qualified, active adult and first-time buyer entry level.

Brendan Lynch - Sidoti Equity Research

Okay, great. And then in terms of regions, can you give us some color on where you currently stand and where you need some adjustment to get to those levels?

Scott Stowell

Pretty much, everyone of our markets we’ve got the same targets and they’re working to that. I think there is opportunities to do that with regards specifically to the age qualified and active adult. Currently we’re building the couple projects. In California, we’ve got history here and a brand for that. So they’ve probably got a bigger show. There maybe some of other markets that everyone is targeting those opportunities and some of those are coming in the pipeline as well. And then of course, there is just some markets that are more attractive for that type of an opportunity, Arizona and Florida for example. So there is probably a higher likelihood that we will get maybe more share in those markets.

Brendan Lynch - Sidoti Equity Research

Okay, great. Thank you very much.

Scott Stowell

Is there another question, Ben?

Operator

And our next question comes from Ivy Zelman from Zelman & Associates.

Ivy Zelman - Zelman & Associates

Thank you. By the way I was tweeting so -- it's all Alan actually who's the modeler, so he is the expert there. But I thought, Scott, I would come back on and ask a question as it relates to your perspective. I think all the listeners will benefit from your perspective on existing housing. With resales, there's a perception in the market that turnover is weak because demand is weak, and clearly the people that are buying a Standard Pacific home most likely are selling a home. So it would really be interesting to hear your perspective. I heard from some realtors recently that there has been less contingencies, and they are seeing people sell their homes more quickly and they are still saying demand is really constrained because of supply being so constrained. So what's your perspective? And maybe even a little market by market, if you could, it would be very helpful for everybody listening. Thanks, Scott. Congrats on the quarter to both you guys, and your whole team.

Scott Stowell

Yes. Thanks, Ivy. I would say the supply levels are loosening in the resale market, which is a net positive, I think to the marketplace. We will moderate pricing and stay stabilize the market. Depending on the market, I touched on a little bit. Arizona has got slightly more negative equity in that market. There’s some apprehension that hasn’t seen in that market. The resale and existing home sales are improving but not probably to the same extent they are in other market. Supply in California is very constrained. Even in the existing home market supply levels are constrained. There’s still pricing power in California.

And again, most of the people that we are dealing with, not all of them, because you’ll be surprised how many renters are buying our houses. I think, is like was 38%, so Jeff can check that number, it was a higher number than I expected.

So and I think, those are just general comments. All the markets are getting to more equilibrium, supply levels in the existing home market, days on the market are shrinking, they’re selling faster and generally, I’m not hearing that there is significant concern about qualifying for people that are trying to trade up. They’re just want to make sure they’re confident in their jobs and ready to make that commitment.

Ivy Zelman - Zelman & Associates

So from your perspective, Scott, do you see the maybe turnover in existing home sales because of weak demand in existing home sales or do you think as your people can’t find something to buy and they’re frustrated on the trading or any commentary around your thoughts, what you see in the market?

Scott Stowell

I think it’s partly financing, I think its partly negative equity and I think, it’s a little of both of those things that you’re citing, limited supply and weaker demand.

Ivy Zelman - Zelman & Associates

Thanks Scott. Very helpful.

Operator

And our next question comes from Alex Barrón from Housing Research Center. Go ahead.

Alex Barrón - Housing Research Center

Hey guys. Nice job on the quarter.

Scott Stowell

Thanks Alex.

Alex Barrón - Housing Research Center

I wanted to see if I heard you correctly about the margin and backlog being pretty much steady? But you also said that your incentives on the -- for orders went down 100 basis points. So did I hear you correctly, I guess, the reason they’re flat is because land costs are going up and I guess, how are you guys thinking about the remainder of the year?

Jeff McCall

Yeah. You did hear correct. Our margins and backlog were flat at 26.2% for the full backlog. And yes, incentives in our orders did to go down 100 basis points. So those points are correct.

There is always mix factor in there, I think, what's critical for us is, best forward-looking metric we have is that backlog gross margin as far as where things are going. But it is something we will always watch. Home prices and land prices go up, but there is mix and we think, so far pricing has been able to outpace any other costs increases.

Alex Barrón - Housing Research Center

Okay. Thanks.

Operator

And our next question will be from Joel Locker from FBN Securities. Go ahead, Joel.

Joel Locker - FBN Securities

Hi, guys. Do you have total spec number, I saw the finished on the release but?

Scott Stowell

Yes.

Joel Locker - FBN Securities

How that relates to conversion rates going forward, if you look at back in ‘02, say ‘03 or ’04,things got really heated, your conversion rate in the first three quarters was in the 40’s or mid 40’s kind of scenario and then popped in the fourth quarter. Do you think, once your conversion -- your backlog outpaces your spec units by a large amount that you'll get back there and maybe a couple years out, is that kind of the long-term plan or has the model switched from where it was 10 years ago?

Scott Stowell

Yeah. We’ll say, a lot of parts to that question. We’ll say would be definitive one. So spec, yeah, we had 368 finished specs at the end of the quarter and we had, there was 906 specs under construction, gives you 12.74 and we are 7.3, if we add both of those together per active selling community.

Joel Locker - FBN Securities

All right.

Jeff McCall

That's around target where we want about two per community finished and we have some options and then just really, just starting homes equivalent to that sales pace to make sure we maintain the right balance and that all to be available when you need them. As far as there is isn’t really materially changed in the market as far as spec conversion, nothing so.

Scott Stowell

I don’t think so.

Joel Locker - FBN Securities

All right. So you continue to stay in the mid-50s and then in the 60s in the fourth quarter going forward for the next few years, you think you can attain that pace?

Scott Stowell

Yeah. I don’t know but it really depends on the schedule and that’s why we give so much detail on that. Delivery is expected in the next quarter, so that will be a forecast that a little bit better. I’m not a huge fan of the overall backlog conversion. It’s really based on schedule.

Jeff McCall

We don’t have a basis to assume. It will be any different than it has been for the last 10 year average.

Joel Locker - FBN Securities

Right. Right. And then just on the land sale, where was that located?

Jeff McCall

Yeah. There were two land sales. One was in Southern California, down in San Diego. One was in the Carolinas. Both were land sales that were already contracted when we bought the lands, so we bought the land and we just had it fall through with the civil contracts.

Joel Locker - FBN Securities

And how long were those on a contract for a long time?

Scott Stowell

A year (Indiscernible) for as that.

Joel Locker - FBN Securities

A year.

Scott Stowell

A year and (indiscernible).

Joel Locker - FBN Securities

A year, it’s going to last. All right. Thanks a lot guys.

Operator

And our final question comes from Truman Patterson from ISI Group. Go ahead, Truman.

Truman Patterson - ISI Group

Hey guys, congrats on the quarter.

Scott Stowell

Thanks Truce.

Truman Patterson - ISI Group

I was just wondering, we know that coastal California is pretty heavily dependent on the international homebuyer. I was just wondering kind of how you guys track that and your thoughts on a going forward, how sustainable that international buyers is?

Scott Stowell

Well, we’ve seen this type of buyer for probably 20 years now fairly consistently. Our outlook would be that it will continue to be sustainable for the next period of time and I’m not expecting any change there at all.

Truman Patterson - ISI Group

Okay. Thanks for that. And then also just as you look at your land pipeline over the next year, year and a half, I mean, kind of community openings. Where do you see kind of the outside growth occurring?

Jeff McCall

The growth and I mean, community count over the next couple of years, it’s generally consistent with our current -- a little heavier skewed toward the Southeast than what we have been historically, but kind of on the margin.

Scott Stowell

Yeah. In this year, the growth will come out of the Southeast but we’re not going to change our overall inventory mix and community mix very much.

Truman Patterson - ISI Group

All right. Thank you.

Operator

And that concludes our Q&A portion. I’ll turn it back over to our speakers.

Scott Stowell

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

Operator

And that concludes today’s call. Thank you for your participation and have a great day.

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