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Taylor Morrison Home Corp. (NYSE:TMHC)

Q1 2014 Earnings Conference Call

May 7, 2014 8:30 AM ET

Executives

Erin Willis – Director of Investor Relations and Corporate Communications.

Sheryl Palmer – President and Chief Executive Officer

C. David Cone – Vice President and Chief Financial Officer

Analysts

Ivy L. Zelman – Zelman & Associates

Michael J. Rehaut – JPMorgan Securities LLC

Rob G. Hansen – Deutsche Bank Securities, Inc.

Patrick Murray – Credit Suisse

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Jim Krapfel – Morningstar

Paul Przybylski – ISI Group

Operator

Good morning and welcome to the Taylor Morrison’s First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to introduce your host Ms. Erin Willis, Director of Investor Relations and Corporate Communications.

Erin Willis

Thank you, and welcome to Taylor Morrison’s first quarter 2014 earnings conference call. With me today are Sheryl Palmer, President and Chief Executive Officer; and Dave Cone, Vice President and Chief Financial Officer.

Sheryl will begin the call with an overview of our first quarter 2014 results. Dave will take you through a detailed financial review, as well as our guidance for the first quarter. Then Sheryl will provide some detail around our land activity and outlook for the coming year after which we will be happy to take your questions.

Please note that some of our comments on today’s conference call refer to non-GAAP financial measures, which we believe provide useful information for evaluating our business performance. Reconciliations to the most directly comparable GAAP financial measures as well as a discussion of the limitations inherent in using non-GAAP financial measures are available on the Investor Relations portion of our website at taylormorrison.com and in our earnings release.

In addition, please keep in mind that today's conference call, including the question and answer session may include Forward-Looking Statements that are subject to risk and uncertainties. This may include statements about our current expectations or forecast of market and economic conditions, our business activities, prospects, liquidity, strategies and future business and financial performance. These forward-looking statements are not guarantees of future performance and actual results could differ materially from those suggested by our comments made during today’s conference call.

These factors include those described in our SEC filings, including under the caption Risk Factors and our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. please note that we assume no obligation to update any Forward-Looking Statements.

Now, let me turn the call over to Sheryl Palmer.

Sheryl Palmer

Thank you Erin and good morning, everyone. We appreciate you joining us today and we are quite pleased to share our first quarter 2014 results. We had an excellent start to the year, building upon the strong results in 2013.

Our first-quarter diluted earnings per share was $0.22 on net income $41.2 million, driven by an increase in home closings of approximately 15%. The quality of our locations, and our efficient cost structure, continue drive new order absorptions, home revenue and margin growth. Net sales orders totaled 1662 which were up 45% sequentially and slightly ahead of our expectations.

Community absorptions were 2.7 per month while our average selling price for the first quarter’s sales increased 17% relative to the sales in the first quarter of the prior year, as we continue sell a higher percentage of our home to move-up buyers. Average community count increased 21% over the prior-year quarter to 202. We continue to maintain a strategy of choosing price over volume, as we believe our land positions in core locations provide us that flexibility.

Cancellations have fallen to 10.6%, from 15.2% in the fourth quarter of 2013 which is also lower than 11.1% in the prior year quarter. We require each new homebuyer to pre-qualify to our mortgage unit, Taylor Morrison Home Funding. We believe that helps reduce the level of cancellations, as we are better able to assess the likelihood of the homebuyer's ability to close.

Although we were quite pleased with our sales, particularly in February and March, it's worth mentioning that weather did influence sales traffic and production primarily in our Texas and Canadian markets. We continued to work through these conditions over the last many weeks, and believe most of the impact to be temporary. Our first quarter net sales of 1662 were generally consistent year-over-year with just 19 fewer during the first quarter of 2013.

As you know, we saw a significant sales growth in the first quarter last year of 52% from the first quarter of 2012. This makes the growth in net sales orders a tough comparison. Most importantly, sales are in line or slightly better than our underwriting expectations. Over the last few months, we have heard a lot of questions and discussion around certain markets slowing down, with Phoenix as the example most often used. It is tough to characterize an entire market, as there are stronger pockets throughout Phoenix, as there are in any other market.

Interestingly enough, our sales are about the same as last year, while we find traffic is up and our average sales price has increased 35% to $357,000. Buyers have more choices today, given the significant number of community openings in the Phoenix market in the last year. Specifically, the number of active new home communities in Phoenix have increased by nearly 30% year-over-year.

Despite the increase in overall Phoenix community count, we have seen a substantial benefit from our premier locations, which we believe make our offerings highly competitive. We have been pleased with our achieved sales in our Phoenix communities. However, we do recognize that each builder has a different community pipeline, and are likely expanding in non-core locations, with more competition causing different dynamics than what we are experiencing.

That all being said, staying true to our strategy of careful positioning of community locations and home designs that reflect what consumers are seeking, has rewarded us with significantly increased market share, as we were ranked first in single-family permits and third in new home closings for the first quarter in our Phoenix business. In addition, the monthly absorptions in Phoenix continue to exceed our Company's consolidated monthly absorptions even considering our increased average selling price. We are also seeing strength in our other markets, as well.

For example, in Naples, Florida, we opened Esplanade, an age-targeted golf course community in March. We have had more than 30 sales so far. This quarter in Houston, we opened new outlets in our Riverstone community, which ranked as the sixth top selling master plan community in 2013, and we have had 85 sales this year-to-date among our seven product lines. I believe the success we have had in our communities is in large part due to the disciplined processes and research we implement in our site selection and our underwriting process.

Before I leave the U.S., it is worth spending a moment discussing the continued challenges in the labor and construction infrastructure, stemming from what we believe to be both a shortage and aging of skilled labor. With younger generations migrating toward higher education and baby boomers entering retirement, the industry is finding that there are not enough skilled workers to fill the positions available to meet the demand.

Obviously, replacing the labor gap did not happen overnight. And in 2014, we are expecting a measured recovery as the infrastructure in the housing market continues to rebuild. We understand that municipalities also continue to add headcount to support building activity, but at a rate that appears slower than the construction industry needs. A shortage in labor only reinforces our current desire to focus on price over volume. In the US, we were able to increase prices in just over 50% of our communities in the first quarter.

Moving to our Monarch operations, net sales were 148, up 12% from the same quarter last year. Monthly absorptions were 3.4 for the quarter, compared to 3 in the prior year. The Canadian market has continued on a relatively steady course. The number of starts in Ontario was down 4%, while in Toronto, it was up 6% in the first quarter year-over-year. Although they have also experienced some weather-related delays this winter, as I mentioned earlier February new home sales were up 3.3%.

In addition, prices have increased, with the Toronto market reporting a 5.8% increase year-over-year in March. We continue to expect 2014, to be another big year for our high-rise business, with three tower deliveries, two of which are wholly-owned. In total, we have only 13 of 757 units left to sell between the three towers. Also, our next tower deliveries in 2016 are already 91% pre-sold.

As reminder, in Canada, high-rises generally commence construction once over 70% of the units are pre-sold with full recourse contracts, which provide what we believe to be a lower risk profile in the high-rise sales and construction environment, that’s compare to what would be available in a U.S. high-rise business. This combined with the other Canadian mortgage difference and limited land inventory; continue to generally providing more stable and low-risk business environment.

In Canada, mortgage is a full recourse to the borrower with more stringent deposits and underwriting standards than those we have historically seen in the U.S.. Therefore, we continue to value the diversity of that Monarch provides. And because it is a self-funding operation, we are able to run the Canadian business without diverting capital from the U.S. In fact, we often use Monarch's excess cash flow to temporarily fund capital needs in the U.S.

Before I turn the call over to Dave, I would like to reiterate that the excellent results achieved again this quarter, we believe, are due to our strategic focus on the move-up buyer, our land acquisition and development strategy, which enables greater flexibility, and our ability to execute efficiently in both our U.S. and Canadian operations.

Now, I will turn the call over to Dave for the financial overview.

Dave Cone

Thanks, Sheryl, and hello everyone. I'm pleased to share with you our results from our first quarter. As Sheryl mentioned, we had diluted earnings per share of $0.33 on net income of $41.2 million in the first quarter of 2014. Total revenue for the quarter was $519 million, an increase of 36% compared to $382 million in the first quarter of last year.

Home closings revenue was $501 million for the quarter, a 37% increase year-over-year. Homes closed increased approximately 15% to 1,160 during the quarter, coupled with a 19% increase in average selling price to $432,000. In the U.S. home closings revenue increased 42%, while closed units increased 16%, and the average sales price increased $78,000 or 22% year-over-year to $432,000.

In Canada, home closings revenue, home closings and average sales price were generally flat relative to last year. Breaking down the mix of closed homes this quarter, 58% were from the East region, 33% were from the West, and 9% were from Canada. Consolidated adjusted home closings gross margin, excluding capitalized interest, was 23.6%, representing a 20 basis points increase over the first quarter of 2013.

Our U.S. adjusted home closings gross margin increased 200 basis points to 23.8%, as compared to 21.8% in the first quarter of the prior year, driven by average sales price increases ahead of costs. Canadian adjusted home closings gross margins were 21.4%, as compared to 34.3% in the same quarter last year.

As we detailed on our fourth quarter call, Canadian margins have a tough compare through 2014, as we work through a mix shift. However, as anticipated growth in the U.S. operations outpaces the Canadian business, we expect the overall impact on Canadian margins to diminish.

As for financial services, we generated $6.3 million of revenue during the quarter on 608 closings, with an average loan amount of $317,000 representing a 17% increase in volume and a 14% increase in loan value over the prior-year quarter. Gross profit was $2.3 million.

SG&A expense on a company-wide basis was $57.5 million, or 11.5% of home closings revenue for the quarter, compared to 12.6% in the same quarter of last year. This represents 110 basis points of improvement for the quarter as we drove top line leverage.

As a reminder, SG&A is typically higher in Q1 due to seasonality, and is anticipated to trend down over the course of the year. We continue to focus on maximizing overhead efficiency, as this is one of our key strengths in driving higher operating profit. Equity income from our joint ventures was $2.6 million, as compared to $3.2 million in the same period last year.

Our income before taxes increased 36% to $54.4 million, or 10.5% of revenue, compared to $39.9 million and 10.5% for the same period last year. Income taxes totaled $13 million, representing an effective rate of 24.1%. During the quarter, we recognized two tax benefits. The first was due to the reversal of a previously established deferred tax liability totaling $4.2 million. The second benefit relates to the reversal of a portion of the valuation allowance on a deferred tax assets of $1.5 million.

As the strength of our business continues to grow we gain more confidence in our ability to recognize these deferred tax assets, permitting us to reduce the valuation allowance. At the end of the first quarter, we had $38.4 million of deferred tax assets that remains fully reserved.

The U.S. backlog value was up 27% year-over-year to over $1.2 billion, with a 21% increase in average selling price to $481,000. Our Canadian backlog was $273 million representing a 36% decline, while the backlog ASP was essentially flat, at $315,000. Last year’s first quarter backlog included a wholly-owned high-rise tower of 421 units which closed later in 2013. Consolidated backlog at quarter end was valued at over $1.5 billion, compared to $1.4 billion at the end of the first quarter last year.

Turning to the balance sheet, we ended the quarter with $433 million of cash, exclusive of $18 million of restricted cash. During the quarter, we issued $350 million in and five and five-eight percent senior unsecured notes due in 2024. The proceeds from the notes would be used for general corporate purposes including land acquisitions and development.

Our net debt to cap ratio was 43.8% at the end of the quarter and we had no borrowings under our 400 million unsecured revolving credit facility. We ended the quarter with home building inventories of $2.5 billion, we had 3,765 homes in inventory compared to [3,578] (ph) at the end of the prior year quarter. Home in inventory at the end of the quarter consisted of 2529 sold units, 301 model homes and 9035 inventory units of which only 231 were finished.

Now turning to our guidance. For fiscal year 2014 which remains unchanged, we anticipate community count to increase 25% to 30% with a 15% to 20% increase in closing, we anticipate home closings margin to be flat relative to 2013, with accretion expected in the U.S. operations offset by the decline in the Canadian home closing margin.

We anticipate continued leverage in SG&A, and to be under 10% as a percentage of home-building revenue for the year. Income from unconsolidated joint ventures is anticipated to be between $16 million to $20 million. For the second quarter of 2014 we anticipate we anticipate community count growth to increase by 20% to 25%, and closings to be flat year over year. Income from unconsolidated joint ventures is anticipated to be between $5 million and $6 million.

Thanks and I’ll now turn the call back to Sheryl.

Sheryl Palmer

Thanks Dave. Overall, I’m happy to report that our communities have performed as expected so far in the spring selling season and as I mentioned our sales picked up each month in the first quarter and are on track with our acquisition underwriting. In April, net sales orders were slightly down year-over-year, although we didn’t have unit improvement from last year, our peers had saw unique pent-up demand in sales volumes, suggesting it may not be the most relevant comparison.

We are delighted to have a high quality backlog with higher average sales prices, lower cancelation rates and higher deposits than 12 months ago. building activity is not expected to meet the pace of household growth for another few years, when we look at the big picture, I believe the silver lining is a more measured and sustainable trajectory, as we continue to build up infrastructure needed to meet the needs of the industry.

Now I would like to turn the focus to the future and discuss our land operations. In order to continue to position ourselves for future needs, we’ve spent $335 million in land purchases and development during the first quarter after spending nearly $1 billion in fiscal year 2013. As, as always been our strategy, we will continue to be opportunistic and add quality land positions in premier locations where consumers want to live.

In addition, what continues to differentiate Taylor Morrison from other home builders is how we view land development and acquisition opportunities. Recognizing we are both home builder and developer, our land inventory reflects our balanced approach to investments, which in turn provides us with both finished lots available for near-term home-building operations and strategic and title land positions in the right locations to support our future growth.

The North American total land bank as of March 31 was nearly 45,000 lots, owned and controlled, excluding lots held in unconsolidated joint ventures which are predominantly held in Canada and Austin. The distribution of lots acquired year to date includes 10% in Florida, 22% in Texas, 40% California, 27% in Phoenix, Arizona and finally 1% in Denver, Colorado.

The percentage of lots owned was approximately 75% with the remainder control. Our land bank had approximately 7.5 years of supply at March 31 based on a trailing 12 months of wholly owned home closing. We continue to view the home-building environment as favorable, and believe now is still the time to invest opportunistically in future community growth.

As we look to 2014, we are increasing our anticipated spend to over $1.2 billion in land acquisition and development and approximately one-third of that continues to be planned development spend. To meet the capital requirements, we conducted the recent offering of $350 million in senior notes. Our anticipated spend in the second quarter will increase our net debt to capital ratio to just under 50%.

As you heard me say before our key planned inventory allows us to be selective and identifying new land acquisition opportunities, and importantly, it protects us from current land supply constraints. Our just-in-time development philosophy mitigates some of the risk seen in developing large parcels, and allows us the flexibility to adjust with changing consumer preferences. We can therefore ensure that adequate lots are available to meet future demand, while also maximizing returns throughout the home building cycle.

One example of our approach is the recently joint venture with our two equity partners, Oak Tree and TPG, to acquire and develop Marblehead, a prestigious coastal residential development in San Clemente, California. It is one of the last undeveloped tracts of residential coastal land in Southern California.

Taylor Morrison is the partner responsible for land development and home building on the site, which consists of 195 coastal acres and will offer just over 300 luxury home sites. We are currently planning a variety of product lines, varying between detached courtyard-style homes to larger homes on ocean view lots. The acquisition closed in April, and home construction is expected to begin in early 2015.

It goes without saying that we are extremely excited about this opportunity. And we are very pleased to have been able to secure this project with two partners with whom we have a proud relationship, and who have been long-term supporters of our Company as loyal shareholders. Most importantly, this partnership is in complete alignment with our strategy of opportunistically acquiring land in well located, high growth markets, while growing our portfolio utilizing our strong balance sheet to improve shareholder return and in this instance, minimizing our capital outlay.

As we look further ahead to 2015 and beyond we believe we are well-positioned to be a leadership in the homebuilding sector through the recovery with our attractive land position, lean cost structure and ability to remain opportunistic with our land acquisition. As I mentioned, in February we own or control most of what we need in order to execute in 2015 and are focusing primarily on 2016 and 2017.

As expected in this stage of the recovery we have seen a slightly reduction in the average community size of our acquisition and continue to pursue creative deal structures to optimize shareholder returns. I believe 2014 will show ongoing strength in the business was strong traffic orders and moderating pricing power as we continue to move through the year.

Our focus continues to be on a community execution and managing a quality customer experience to insure that our buyers have the information and support necessary to navigate both the ever-changing mortgage environment and construction delivery schedules given the constrained labor resources. I cannot wrap up my comments without a shout out to our Taylor Morrison team members. Our first quarter presented some unique challenges, impacted by difficult weather conditions and trade availability. The perseverance to deliver quality homes for our customers was second to none.

Thank you and we will now open the call to questions. Operator, please provide instructions to our callers.

Question-and-Answer Session

Operator

Thank you and now beginning the question-and-answer session. (Operator Instructions) And our first question is from Ivy Zelman from Zelman & Associates. Please go ahead.

Ivy L. Zelman – Zelman & Associates

Thank you, and good morning. Congratulations on the strong performance, Sheryl, with your big picture view, obviously very constructive, and also realistic about the near-term challenges with labor et cetera. Can you give us a little sense, just what you're seeing in the mortgage markets, with your customer more towards the higher and maybe credit availability has not been as big a factor for you as others. But maybe just commenting on what you're seeing near-term trends as it relates to any easing?

And then just bigger picture, today, with there is so much negative sentiment in the market about demands. Maybe you could just give us a perspective on where your markets are exceeding expectations, with respect to demand? And where there maybe other Phoenixes, if you are worried about other markets, that people are suggesting Phoenix is the beginning of the end, and more markets will follow suit. If you would comment on that, it would be very helpful?

Sheryl Palmer

Okay, we can do that Ivy, good morning. So, first step I think is the mortgage environment. And as you know, we’re seeing significant change – overall dynamic changes in the refi environment creating an increasingly more environment. And I think the industry is dealing with those increased pressures. I think Taylor Morrison Home Funding has funding is generally been able to retain our profitability, but as the banks struggle to continue to feed their engines and originations continue to fall.

I think we are going to see more pressures. In fact I understand that total mortgage volume has dropped to probably a 10-year low. In this past quarter. Obviously, we look at our business a little bit differently and benefited of TMHF from a big picture standpoint for us is about protecting backlog, understanding pre-quals for customers going into contract, making sure we get timely closings. So our focus is to service the customer to get them into their new home and have that one-stop shopping experience.

Having said that, the depository banks can afford I think to continue to slash and burn their cost structure, because of the other products they have. Once a customer gets into the pipeline. So, long story short Ivy, I think we are going to continue to see some pressures from the banks. I think with respect specifically to credit easing, we are seeing that the banks are easing some of the requirements, but I think it’s important to understand that doesn’t mean that we are going to return to what I would call those reckless time, but, finally we’re getting back to place of responsible lending.

I think we’ve seen some recent developments I think last week a bank announced that they were using to credit scores from 660 to 620. I think we’re seeing down payment assistance coming back on the conventional borrower, but, I think we’ve always said the greatest challenge with QM was the uncertainty and now that people understand that a little bit better. I think that banks have the appropriate guardrails and we’re getting back to what I think is a constructive place.

So that would probably be my views on the mortgage with respect to how our markets are dealing or what we're seeing, obviously I spent some timing in my prepared comments talking about Phoenix. When I look around rest of the country, our particular markets Ivy. I can’t tell that there is any significant pockets of challenges that we’re seeing. I mean California, we’re seeing very strong traffic generally consistent in March and April, we thought a lot of pricing powers in Northern California, limited releases, landmark is tough, continues to be more and more competitive.

Texas continues very strong overarching a healthy expanding economy. And we are seeing all of that across our consumer group. Florida, the demand continues to pick up and we had a great good winter visitor season, we’re seeing outlet growth, we’re seeing ASP growth. Colorado our smallest business, it had our second highest per outlet sales in the company. We did see a reduction based on our own business and our land acquisition strategy year-over-year in outlets, but, it’s a small business that’s growing well. So generally good about all of our markets.

Ivy L. Zelman – Zelman & Associates

Just to follow-up on that Sheryl, and that is really helpful for everyone, is realizing that Phoenix obviously is the market where we are seeing weakness. Do see any of the – can you correlate anything that you have seen in Phoenix that might become concerning in other markets? Or is that really, from your perspective, a bit more of an anomaly, because of the significant investor presence that cleared inventory? And now many of those, whether small time investors or institutional investors, I doubt are trying to monetize, but as people try to monetize more listings, and at the same time, the influx of the significant amount of new competition from the builders that have added a significant amount of communities. Are there any other markets where you see the warning signals as significant? Or would you say that that was really somewhat of an anomaly?

Sheryl Palmer

Okay, it’s an interesting question Ivy, and obviously Phoenix was first up in the recovery. So in part of what we’re seeing is timing. I actually, believe, as you heard me say in my comments that part of this starts with our own expectations as an industry and year-over-year, yes we’ve seen some softness, the industry has seen some softness in phoenix, but last year was the anomaly, not this year. And when you look at the volumes that people did last year, certainly I think expectations need to be reset from a – balance of the country when we look around the country, we feel equally as confident, because we deployed the same strategy of quality locations.

And we’ve always said that we believe its important to state [corp] (ph) and even pay a little bit more for land, because if you do get some softness in the market, those core locations are going to continue to perform and probably the greatest example of that when we continue to hear some discussion around what's happened in the Phoenix market, if you know year-over-year permits were down about 11% in Q1, but it varied so dramatically based on locations, for example, the town of Maricopa which everyone flood to two year ago from an acquisition strategy is down 59% year-over-year, where Peoria is actually up 64%.

I’m proud that we have no positions in Maricopa and a lot of new opening in Peoria. So I really think it’s a very difficult kind of paint to brush across any of the markets that comes down to some market specifics and the quality of the locations.

Ivy L. Zelman – Zelman & Associates

Excellent, thank you, Sheryl.

Sheryl Palmer

Thank you.

Operator

Our next question is from Michael Rehaut from JPMorgan.

Michael J. Rehaut – JPMorgan Securities LLC

Hi, good morning and congrats on the quarter.

Sheryl Palmer

Thanks Michael.

Michael J. Rehaut – JPMorgan Securities LLC

First question, just to follow on some of the regional commentary. Would love to get a sense for – you mentioned that Phoenix sales were flat, and also alluded to the fact that sales pace is still above the corporate average in that market. Was just trying to get a sense of, if you break down the orders in Phoenix, I assume community count was up somewhat, and sales pace still above the corporate average, but down somewhat.

I was hoping to get a little more granularity there, in terms of degree of magnitude. And also in terms of – you mentioned Florida still being pretty solid, but we have heard differing accounts on Tampa. And you have a big presence there and just wanted your thoughts on the health of the market in Tampa?

Sheryl Palmer

Okay. So starting with Phoenix Michael. As I said when you look at kind of the trajectory through the first four months of the year, we continue to climb and April is slightly down. We did have some interesting things going on in April. We lost a weekend compared to March. You have Easter, Passover, but I think for us, even more than those kind of more global dynamics, you know our average sales price as I mentioned in my comments is up about 35%.

So when we look year-over-year it’s really not an appropriate comparison, because our business has changed so much, we are going from a very high production kind of Middle America product to a much more luxury product there in North Scottsdale. And so our underwriting and our paces are actually quite different than they were from the product we had on the market a year ago. So we saw a little softness as you have heard from everybody year-over-year, but once again we are inline with our underwriting. So for us the communities are performing, just as we anticipate.

As I look at Florida, and I would have to as far as when I look at my West Florida business, it’s all combined. I would tell you a little bit of the same once again we saw the normal April trajectory where sales generally drop off a little bit from March, we had a very strong winter season primarily in Sarasota, but I would say our communities Tampa are doing fine, so nothing specific really there at all.

Michael J. Rehaut – JPMorgan Securities LLC

Okay. All right. Appreciate that. Secondly, just – also a little bit more granularity, if possible. You mentioned that your pricing trends continue to be solid, raised prices at over 50% of your communities, which is good to hear. Was hoping to get maybe if you had a sense of the rough percentage increase, if it was low single digits, mid single digits, something on that order? And also just a last modeling one for you, Dave. What you expect the full-year tax rate to be this year?

Sheryl Palmer

Okay, on your pricing question, if you would expect Michael as I look literarily across every single community in our portfolio. There is a pretty significant range. We had communities that were same year-over-year we had communities that were 0.5% all the way up to on average 4%, 5% in some market.

So it really is different across the business that is I look across all the communities, candidly I was quite delighted at the spread of some that had very moderate movement, some newer communities where we came into the market with the low entry point we had more pricing power to move up give to those priors equity. So generally a pretty good range, but quite different than what we saw a year ago.

C. David Cone

And Michael from a tax rate perspective, I would say first on a normalize basis, in our rate should be somewhere around 38%, but have you seen over the last several quarters, we about a lot of volatility from our deferred tax assets, and also some from the IPO. As I look over the next three quarter, I would put the effective rate somewhere between 36% to 38%, but that make come in a bit lower if we can continue to reduce some of that valuation allowance on our DTAs, but outside that I think its about 36% to 38%.

Michael J. Rehaut – JPMorgan Securities LLC

Great, thanks very much guys.

Sheryl Palmer

Thank you, Michael.

C. David Cone

Thank you, Michael.

Operator

Our next question is from Nishu Sood from Deutsche Bank.

Rob G. Hansen – Deutsche Bank Securities, Inc.

Thanks, this is Rob Hansen on for Nishu. So the first question that we had was just, in the past, you have talked a lot about your absorptions being in the 2 to 2.5 range this year. But I wanted to get your thoughts on what you consider kind of normalized in a longer-term environment. If we see starts at that normalized $1.5 million at some point, would you still expect to have your absorptions? Given the change in the business over the past few years, would you still expect it to be in this kind of 2 to 2.5 range or would you expect it to move to more like the three to four range?

Sheryl Palmer

That’s a hard one, and the reason it's hard is what I have no is visibility of the communities that were opening. So when I look across the business for the next you know 24 months. I think the absorptions you are seeing with our higher price point and 75% of our business being that first-time, second-time move-up buyer, the 2 to 2.5 is exactly what were trying to do, over time as you introduce new communities and potentially new consumer segment and that could change the way the numbers roll off, but in the foreseeable I think that 2 to 2.5 make a lot of sense for us.

Rob G. Hansen – Deutsche Bank Securities, Inc.

Okay, thanks. And then you mentioned that your average community size is shrinking at this stage in the recovery. We would have thought that this would increase as buyers are willing to take on more land risk and buy bigger communities. So I wanted to get your thoughts on that? And what the kind of difference in size is compared previously versus now?

Sheryl Palmer

Yes, it’s a great question and I like where our land bank give at this point in the recovery and we were very aggressive a couple of years back, but I would argue was the bottom of the land market and when we look at large master plan signature communities that was the time to go long. And those will carry us through a number of years and now what you see as you know our land bank as move from approximately nine years of supply a couple of years ago to somewhere around 7.5 years and that feels about light at this stage of the cycle.

And when I talked about the size coming down that both in kind of duration of deals, so maybe as we look at land that we acquire back in a 11 and 12 the average was 30 months to 32 months and the land that we acquired in 2013 was closer to about 25 months of supply. And that would obviously mire self in the number of loss. So that make sense for us and that was really the intent of the comment.

Rob G. Hansen – Deutsche Bank Securities, Inc.

Okay, appreciate the clarity, thanks.

Sheryl Palmer

Thank you.

Operator

Our next question is from Dan Oppenheim from Credit Suisse. Please go ahead.

Patrick Murray – Credit Suisse

Good morning, this is Patrick Murray actually on for Dan. First question I had was on the Marblehead venture. Will that come through in the consolidated results, when those communities start to come on line and we get some deliveries? Or will that be equity income?

C. David Cone

Patrick that will be equity income. That is a joint venture for us.

Patrick Murray – Credit Suisse

Okay.

C. David Cone

All the activity will flow through that one line on the P&L.

Patrick Murray – Credit Suisse

Okay, thanks. And then also on Marblehead. Can you talk about any of your expectations, in terms of when will some of the orders – we will start to see them? And then also, any pace and margin expectations there?

Sheryl Palmer

What I would tell you is that we are still in planning stages. And it is our – we anticipate going – starting construction early in the year. And based on the construction of those models, we would start sales sometime in 2015. I think it’s a little premature too specific about product lines, margins. We still have a little work to do.

Patrick Murray – Credit Suisse

Okay. And then just one quick one, if I could sneak it in there. I believe that there are some deliveries expected for some of the towers in 4Q of this year. Just curious if there's any change to that?

Sheryl Palmer

No, no, not at all. In fact we are right on track with our deliveries for 2014 and the balance of the year.

Patrick Murray – Credit Suisse

Okay, thanks very much.

Sheryl Palmer

Okay, thank you.

Operator

Our next question is from Jay McCanless from Sterne, Agee. Please go ahead.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Good morning. Wanted to ask first on the backlog price. Pretty nice growth there. With the communities you have coming online, how sustainable is that 440 number through the rest of the year?

Sheryl Palmer

I think it's pretty sustainable. When we look at the business and the new products that we’re bringing to market, that's – you're going to get some ebb and flow by market, but I think in the whole it's not far off.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Okay. And then also wanted to ask on the absorption pace. Based on the guidance that you have given for 2Q and for fiscal 2014, it looks like there's going to be a pretty substantial pickup in absorptions. Is that going to be spread across all the business segments? Or is it going to be primarily in the West? How should we think about modeling that absorption in the year ahead?

Sheryl Palmer

Yes, I don’t think that’s exactly the way it should play out. I think it’s really more about community counts than it is absorption pace per community We have, with the growth that we have articulated of community count year-over-year, what you're seeing is a lot of new openings continue. The first half, significant strength in new openings, but from an absorption standpoint even though they might now contribute closings this year, we also have a number of new communities coming on in the second half.

C. David Cone

And the guidance for the community count is 25% to 30%. To Sheryl's point, you're seeing a lot of that come through the second quarter, and then a little bit more into the third. So, is that community growth that is going to drive total units.

Sheryl Palmer

The total units, yes.

Jay C. McCanless – Sterne, Agee & Leach, Inc.

Thank you.

Sheryl Palmer

You bet.

Operator

Our next question is from Jim Krapfel from Morningstar. Please go ahead.

Jim Krapfel – Morningstar

Good morning. So you had made some comments about labor being a challenge. When – how long do think it will take before the situation resolves itself? Do you think it will be a few years yet?

Sheryl Palmer

I wish my crystal ball shared that with me, but I think it is going to ebb and flow. In the first quarter, we saw some softness in starts across the country and people got back to kind of normal construction schedules again.

In the fourth quarter it was tough, as everybody was racing to the finish line. I think, given the starts that we’re starting to see across the industry in April and May, as people start to plan for the year-end I think you’re going to feel some more pressure. I think in – big picture, I don't think this solves itself overnight. As I talked about in my comments with the kind of aging workforce and immigration issues, we have a number of different things. We will – it will solve itself, but it's going to take some time.

Jim Krapfel – Morningstar

And with rising costs, to sustain these margins, you're going to have to do the -- to push price, and I guess I'm wondering how much further do you think you can, on a community level?

Sheryl Palmer

I anticipate that cost – price should continue to stay ahead cost increases, having said that I don’t believe that we’re going to – nor do I think we should see the kind of price movement that we saw in 2013. We saw some remarkable price movement, and I don't expect that will continue. I am very hopeful that we will have a more normalized pricing trajectory that will allow us to once again I think keep price ahead of cost.

C. David Cone

I think – we’re going to continue to raise prices obviously where the demand exists, and where those price increases can be absorbed. And we still have definitely communities across the country that are still an opportunity for us.

Sheryl Palmer

Yes.

Jim Krapfel – Morningstar

Okay, great, thank you.

Sheryl Palmer

Thank you.

Operator

Our next question is from Paul Przybylski from ISI Group. Please go ahead.

Paul Przybylski – ISI Group

This is Paul Przybylski on for Stephen East. Earlier in the call, you mentioned that you had pricing power in Northern California. I was wondering if you could give us any color on the dynamics in Southern California? And also if you have seen any change in the buyer profile in that geography, with the international buyer being such a strong part of the market?

Sheryl Palmer

It continues – I will answer your second question first, it continues to be very strong, and I personally believe I think it’s tighten in China, we're going to continue to see that money flow over to the U.S. So it continues to be a very important part of our sales in both Northern and Southern California. Southern California also doing quite well, when I look at pricing across Southern Cal, we raise prices and probably if the same ratio in both Southern Cal and Northern Cal as a percentage of communities. So pretty much a similar dynamic although I would say Northern California tends to be little bit hotter right now.

Paul Przybylski – ISI Group

Okay, thank you.

Sheryl Palmer

Thank you. I think that all of questions. So thank you very much for joining us today. We appreciate everyone attending the call.

C. David Cone

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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