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The Ryland Group, Inc. (NYSE:RYL)

Q2 2014 Earnings Conference Call

July 31, 2014 12:00 PM ET

Executives

Drew Mackintosh - IR

Larry Nicholson - President and CEO

Gordon Milne - EVP and CFO

Analysts

Michael Rehaut - JPMorgan

Alan Ratner - Zelman & Associates

Stephen East - ISI Group

David Goldberg - UBS

Nishu Sood - Deutsche Bank

Kenneth Zener - KeyBanc

Dan Oppenheim - Credit Suisse

Stephen Kim - Barclays

Eli Hackel - Goldman Sachs

Jay McCandless - Sterne Agee

Alex Barron - Housing Research

Buck Horne - Raymond James

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ryland Group Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I will now introduce your host for today’s conference, Mr. Drew Mackintosh. You may begin, sir.

Drew Mackintosh

Thank you. Good morning and welcome to Ryland's second quarter 2014 earnings conference call. Today's call is being transmitted live over the Internet and can be accessed through the Investor Relations section of the website at ryland.com. Participating in this call are Larry Nicholson, Ryland's Chief Executive Officer; Gordon Milne, Executive Vice President and Chief Financial Officer; and Dave Fristoe, Senior Vice President and Controller.

Before we begin, please be aware that certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include general economic, business and competitive factors, as well as the factors set forth in the Company's press release. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way, I'll now turn it over to Larry Nicholson.

Larry Nicholson

Thanks you, Drew. Good morning and thank you for joining us today as we go over our results for the second quarter of 2014. In addition to our prepared remarks, we have posted a slide deck in the Investor Relations portion of our website, in the Events & Presentation section that provides an overview of our Company's performance.

For the second quarter, Ryland reported net income of $32 million or $0.57 per share on a fully diluted basis. In addition to posting another quarter of solid profitability, Ryland continues to investment in the future by opening more new communities, lowering total lots under control and allocating more capital to acquiring and developing land.

We made these investments while staying focused on the bottom line, achieving another quarter of year-over-year improvement to average homebuilding gross margins and SG&A leverage. We also kept our balance sheet in solid condition with enough liquidity and financial flexibility to pursue future opportunities as they may arise. This combination of community comp growth, margin expansion and balance sheet strength has been the focus of Ryland’s strategy for several quarters now.

It has left the Company well positioned as the housing market continues a steady level of improvement. We are optimistic about the future of the homebuilding and the cities in which we build, thanks to a strengthening employment picture, a favorable affordability dynamic and a low level of housing inventory. Given our excellent position within these cities, you can continue to take market share and improve our results, provided the macro factors that influence housing remain stable. And here are the highlights for the quarter.

The Homebuilding segment generated pre-tax income of $60 million in the second quarter, a 38% improvement over the last year. Once again each of our homebuilding regions were profitable with the West region generating the highest profits followed by the Southeast, North and Texas regions.

Homebuilding revenues were 19% higher than the second quarter of 2013, thanks to a 2% increase in closings and a 16% increase in the average closing price. Average price increases were widespread across our regions, resulting from a shift to higher priced homes together with a reduction in sales incentives and market driven price increases. Our beginning backlog conversion rate was 51% in the quarter, compared to 53% in the year ago period. This slight decline was largely attributable to a relatively young age of our beginning backlog since a large percentage of the homes under contract at the start of the quarter were sold in March.

Backlog conversion for the third quarter should be closer to 54% as we convert these contracts into closings.

Average housing gross profit margins for the second quarter were 21.3% compared to 20.4% last year. The improvement in gross margin was primarily driven by a decline in direct construction costs as a percent of housing revenues.

Land as a percent of housing revenues ticked slight higher, coming in at 25.9% versus 25.7% in the second quarter of 2013. Our divisions in Charleston, Orlando and Las Vegas made particularly strong contributions to our overall margin profile, posting gross margins, well in excess with the company average.

Based on what we see in backlog and our current community profile, we believe that gross margins man be higher in the second half of 2014 than they were in the first half. SG&A as a percent of revenues also improved year-over-year, coming in at 11.8% compared to 12.4% last year.

SG&A cost increased 14% while homebuilding revenues increased 19%, resulting in additional leverage. We expect to realize further SG&A leverage in the next few quarters as closings and revenue increased from current levels.

Ryland generated 2,228 new orders in the quarter, our best quarterly sales results in the last seven years. Excluding the backlog associated LionsGate Home acquisition, which closed last June, net orders were up 9%. Our West region posted the best sales growth with quarters up 38% over last year driven by an increase in community count of the same magnitude. Orders were up 12% in the North Region, and up 6% in Texas, excluding the LionsGate backlog. Orders were down 4% in our Southeast region. However it should be noted that this region also experienced the biggest year-over-year increase in ASPs, with closing prices up 19%.

Sales activity was relatively consistent throughout the quarter as we wrote 713 new contracts in April, 801 in May and 714 in June. As a result sales were up 4% year-over-year in April, up 10% in May and up 15% in June, excluding the LionsGate acquired backlog.

Turning to the balance sheet, we ended the quarter with $958 million in stockholders' equity $1.4 billion in debt and $524 million in cash and marketable securities with net-debt-to-capital ratio of 37%. Our interest coverage ratio was 4.1 and the average interest rate on our senior notes was 4.6%. Total inventories reached $1.9 billion, a 40% increase over the second quarter of last year. We spent 139 million on land purchases and $98 million on site development for a total of $237 million in land related expenditures. Year-to-date we have invested $470 million land acquisition and development.

Lots under control increased 12% compared to last year to 40,333. 64% of these lots were owned and 36 were controlled vie option agreements. We do a community count on both the year-over-year on a sequential basis closing out 27 communities and opening 37 during the quarter, bringing our active community count to 307. We continue to be active on the land acquisition front. However prices for finished lots in several cities have risen significantly over the last few quarters, making it more difficult to find deals that meet or exceed our underwriting criteria. Fortunately, our existing pipeline of new communities remains robust, with a total of 217 communities in various stages of development.

Our financial services segment recorded a pretax loss of $1.9 million for the second quarter, compared to $7.6 million profit in a year ago period. Included in this quarter’s loss was a $5.8 million charge associated with the settlement of repurchased and indemnity claims associated with the loan purchase agreements between country wide home loans and Ryland Mortgage Company. Excluding this charge, our financial services segment would have recorded a $3.9 million gain.

Despite the recent reports of easing credit standards, the credit statistics of our buyers this quarter remained consistent with what we’ve seen in the past few quarters. 65% of the buyers opted for a prime loan, 18% opted for FHA loan and the remainder qualified for even VA or a rural housing loan. The average FICO score for the buyers that financed their purchase through our mortgage company was 733 and the average loan to value amount was 88%.

In conclusion, we are happy with our Company’s performance in the second quarter of 2014. The 2,228 new orders we generated this quarter represent the highest quarterly order total in seven years. We also posted another quarter of operating margin improvement and community count growth. For the second half of 2014 we anticipate further operating margin improvement and additional community count growth. The growth rate in comparative new orders should continue in the third quarter and fourth quarter thanks to easier year-over-year comparisons, providing our housing market continues its current level of performance. In short, we remain confident about the future of housing in the markets in which we operate and our strategic positioning within those markets.

Finally I would like to thank all of our employees for their hard work. Earlier this year Ryland received an A+ grade from Builder Magazine in its Annual Public Builder report card. This recognition validates the way we conduct our business and run our company and affirms the quality of our people. I'm truly appreciative of your efforts. That concludes our prepared marks and we may now take questions.

Question-And-Answer Session

Operator

(Operator Instructions). And I'm showing we have a question coming from the line of Michael Rehaut. Your line is now open.

Michael Rehaut - JPMorgan

I appreciate all the color. First just on the community count, I see you gave the guidance of about 348 by the end of the year. Just wanted to clarify a bit average or yearend and how to think about the third quarter, given the LionsGate -- the recent additions.

Larry Nicholson

What was the question regarding LionsGate?

Michael Rehaut - JPMorgan

Not LionsGate, but I guess just how to think about 3Q because it’s a nice ramp from 2Q and to 2014. And I guess adding on to that how would you think about or expect the growth to shape up, if there is any initial views on 2015.

Larry Nicholson

Well we really haven’t given any guidance for ’15 we would expect to see growth. I don’t think we’re at a point today where we feel comfortable saying that. But I do expect to see continued growth through '15. Right now we're focused on getting it open in ’14 and making sure we actually do what we set up for this year but there is plenty of stuff in the pipeline for ’15.

Michael Rehaut - JPMorgan

And then just on the gross margins. It’s good to hear that you expect some improvement in the back half versus the first half. I think that’s -- your kind of one of the key issues that people are worried about today, given some of the other builders, the comments around incentives, that incentive trends. What do you think is going on right now on the ground? Certainly as a percent of revenue, your incentive levels have ticked up slightly in terms of what you've closed this quarter versus the first quarter, but what’s going on, on the ground right now in terms of pricing and incentives over the last two - three months, because certainly do you still expect a little further improvement gross margins would run counter to some of the concerns around incentives and margins going into the back half or even into 2015?

Larry Nicholson

I think we continue to have certain markets just a little softer and I think everybody has talked about Phoenix being one. We would agree with -- the mid-Atlantic has been a little bit softer than we would have anticipated. So I think you’ve got isolated discount going on Mike, get out of communities, closeouts, want to move out, take that overheard and move it somewhere else to higher margin community.

So there is a lot of variables in that. And I think as we look out over the headlights, I think a lot of it depends on the age of the dirt you are putting into the place. So if it's stuff you bought recently maybe there is a little bit more margin pressure. But a lot of the stuff we're bringing out, stuff that we bought at the right time, we bought at the right price and we continue to raise prices in certain markets.

We are controlling absorptions in certain places where we have lots where we can continue to raise prices. I think we talked about three of them in our prepared remarks, Charleston, Orlando, Las Vegas, where we have opportunities to continue to raise prices and not in wholesale lots, because we can’t replace them.

So I mean every city is a little bit different but there is not mass discounting going on anywhere and I know some of our competitors have talked a little bit different about it that -- everything we see right now is we see the markets continue to move forward. We have good traffic, we’re making sales, we’re making margin and we're pretty upbeat on what we see for the rest of the year.

Gordon Milne

And to be accurate, concessions really tick down. We would consider them essentially flat and it’s down a 30 basis points or something in there down. But I mean primarily -- and they're down 70 basis points to 80 basis points versus last year.

Michael Rehaut - JPMorgan

So aside from Phoenix where it’s pretty well documented that’s a bit of a softer market, you had characterized most of your other market, pricing and incentive trends flattish or even up a little bit?

Gordon Milne

Yes, I’m, sure.

Operator

And our next question comes from the line of Mr. Alan Ratner with Zelman & Associates. Your line is now open.

Alan Ratner - Zelman & Associates

Larry, it’s nice to hear some optimism on a gloomy week here, but I was hoping you could give a little bit more detail about what you're seeing in Texas right now. We were a little bit surprised due to the order pace slowed down as much as it did versus the growth you saw in 1Q and even after adjusting for the LionsGate numbers from a year ago. And I see on your Slide 9 that your community count in Texas is actually down 5% year-over-year, which is well below the other region. So curious if you are metering sales there. I don’t think that was one of the places you specifically mentioned. But also just on the community count side is a situation where you’ve been closing out faster than expected and what does the pipeline look like over the next few quarters.

Larry Nicholson

Yes, it would be a couple of things, Alan. The first would be Texas is an extremely competitive market today and every public builder is in every market there and we're all fighting for lots. So some lots in our opinion don’t make sense to do. Second would be we’ve had some delays in the development cycle and Dallas in particular as one of our some over developers are a little bit high. So they're just a slower to get stuff opened for this. And as we look around where we deploy our capital, and if you look at the regions, there is other places where we are getting a better return on our capital. So as we’ve always done, we move our capital around based on the return we can get.

The South East has given us a great return in multiple cities. So we’ve invested and moved some of that money around. Texas is still a great market and we will continue to push to grow in Texas but there are opportunities elsewhere. Keep in mind LionsGate was in the last prior year number as well.

Alan Ratner - Zelman & Associates

Yes, I know. I was just in the 140 some odd homes and backlog you acquired. So even you adjust for that, I think for 4% versus 30% or so in the first quarter. But I appreciate those comments. And then just on the margin as well, when you think about the margins going up in the back half of the year, I assume that’s based on kind of what you see in backlog but do you envision a scenario where you do start to incentivize more heavily to match what you're seeing in the marketplace or given the choice, are going to look to maintain that current level of margin versus pushing volume if push came to shove?

Larry Nicholson

Well I think that we believe we can continue to maintain margins and I don’t see -- I know there has been commentary about discounting going on but we have not seen what I would consider mass discounting. I think most guys are being fairly disciplined and there is some spec discounting going on and we’ll get the year end for guys but that stuff doesn’t have a major impact on your margin, it’s a small number of sales. But I mean right now we’re full speed ahead maintaining price, trying to raise price where we can get new communities open. We’ll kind of be a victim. If everybody else starts doing it at some point we’ll have to do it. But right now we don’t see that.

Alan Ratner - Zelman & Associates

One last one, any comments on July so far?

Larry Nicholson

Normal seasonal.

Operator

And our next question or comment comes from the line of Mr. Stephen East with ISI Group. Your line is now open.

Stephen East - ISI Group

Larry you talked a little bit about the land market and your appetites on it. Can you just talk a little bit more? You said you're devoting more capital to the southeast. Where are you seeing the opportunities and how aggressive do you get now versus what you were this time last year?

Larry Nicholson

Two things, one is we have 40,000 lots. So we don’t have to go out and be overly aggressive. I think we’re well positioned in most of the markets. But we do see opportunities in Atlanta, Orlando Charleston, Charlotte going forward that we’ll continue to pursue. And there's opportunities in lot of places. That's a good thing because we're still seeing deals with penciled around the country. It’s tough to get a deal to pencil in Phoenix right now, tough to get a deal to pencil in Baltimore right now. So we continue to see it but we do see opportunities and obviously we’re focused on things we can turnaround pretty quickly and get on and get closings out of in ’15.

Stephen East - ISI Group

And then the only other two questions, I've got is one if you can give a little insight on what you're seeing on M&A. We hear over and over from builders that they're saying there's much M&A potential as they seen in a long, long time. And then also on the mortgage put back. Was that a comprehensive agreement or was it just with Countrywide? Do have more exposure out there?

Gordon Milne

Just on the Countrywide, they were our sole buyer of mortgages for years and year essentially and certainly during all the 2004, 2005, 2006 kind of the difficult years. So this is a comprehensive settlement in Countrywide, which pretty much cleans up that whole unit for us.

Larry Nicholson

What was the first part of your Steve?

Stephen East - ISI Group

Just M&A, what you’re seeing? We hear just so much potentially floating around and what’s your appetite for it?

Larry Nicholson

I think our appetite continues to be we're open minded. I think that you’re seeing some expectations on that side of the market that are unrealistic. Obviously there's been a couple of big deals announced. And I think that big deals for the individuals. I just think it’s getting harder and harder to get those deals to the finish line, because I think that with the market the way it is and it's growing at a reasonable pace, I think we can still go by lots instead of paying somebody a premium.

Operator

And our question or comment comes from the line of Mr. David Goldberg with UBS. Your line is now open sir.

David Goldberg - UBS

My first question, when you look at the communities that you have -- 217 communities at various stages of development and I'm wondering if you can give some color, not much on a geographical base by city or by region. But when you think about them within the city, would you say those communities are located fairly close to or in similar kind of sub-markets where your footprint is now? Are they a little bit more on the periphery? Is there any change in to geographic mix that's in a city?

Larry Nicholson

No I still think we’re still focused on A and B locations Dave. Lot of products -- different products maybe that we haven’t done where there is a little bit more expensive product, it's a patio home, a move down product. So as you look out overall the markets and what do we have product wise where we don’t supply something in the market where those opportunity.

So I think there is plenty of opportunity for us in every market we’re in to grow our market share on without cannibalizing ourselves. And then I think that’s one thing we’ve very sensitive to but just don’t want to go buy lots on top of lots and open a bunch of stuff. So I think we’ve been sensitive of that and we think there's plenty opportunities to continue to grow in all the markets we're in.

David Goldberg - UBS

And then I was wondering and kind of following the comments but the markets where you’re finding opportunities, the Atlantas, the Orlandos versus the markets you’re not; what do you think differentiates those markets? Because clearly a market like Atlantic for instance, there was a lot of builder demand and spend in that markets and with Orlando. It is your competitive positioning with land sellers? Is something different about the way your position there maybe versus somewhere else versus for an open market that makes it that you’re finding the opportunities because presumably everyone is underwriting land fairly similarly markets. So just wondering what kind of differentiates the value proposition that Ryland has in Orlando relative to other markets. Or in some of the markets where you’re finding opportunities, not just Orlando.

Larry Nicholson

I think in Orlando and Charleston, we took some bigger bets early on some bigger communities with multiple price points and that paid off. In Atlanta, we just were on the North end the town for the most part and we covered the full product gamut and the market has been healthy. We've got great product and we’ve got a great organization there. While some places are a little slower, we are still buying lots. I used Baltimore. We bought lots last month and in a land meeting in Baltimore. There are still opportunities here. You just got to be more selective.

Operator

And our next question or comment comes from the line of Mr. Nishu Sood with Deutsche Bank. Your line is now open, sir.

Nishu Sood - Deutsche Bank

I wanted to follow up on the gross margins. Larry I think you did a good job of describing what’s going on, on the ground in terms of incentives. I was wondering and obviously clearly that comment, the encouraging comment about gross margins rising into the back half of the year coming out of your backlog. So just mechanically, I was wondering what the main driver you are seeing. Is it the new communities you roll on, lower land basis? Is it you're expecting the pricing trend to continue? What mechanically are you seeing in your backlog that’s going to drive the gross margins higher?

Larry Nicholson

First part of its mix. Certain cities have higher margins than other cities. So if you're getting more deliveries as a percentage in some cities than others it brings you overall margins up, Even if they all stayed the same, it’s just -- that’s part of the [indiscernible] do it with. Even the better markets have increased prices since the start of the year and they have more of those coming through closings.

Nishu Sood - Deutsche Bank

Got it. And the increase in gross margins in the back half, is that pre or post interest?

Larry Nicholson

We all do our numbers since SEC related [indiscernible].

Nishu Sood - Deutsche Bank

And your thoughts Larry or your observations on the first time buyer. What have you seen as the year has progressed. What did you see in the second quarter and do they give you cause for encouragement or is it still pretty tepid?

Larry Nicholson

Well we saw our mortgage metrics pretty much stay the same. We did see a tick up in our entry level business. It went from 29% to 32% and our first time moved down from 41% to 39% and then the balance was in the second move up. So we did see that entry level pickup about 3 percentage points. And again some of that's mix. But we are seeing in some markets there is opportunities and while the credit boxes are wide open, there are few more opportunities. So I think over the next couple of quarters, you'll see our FICO score probably come down in here. I’d like to see it come down faster, but it’s still tough to get these folks financed.

Operator

And our next question or comment comes from the line of Mr. Kenneth Zener with KeyBanc. Your line is now open.

Kenneth Zener - KeyBanc

I wonder given the strong community count you’re going to have into the back half, would that impact or is it your expectations that that would impact the normal seasonal pace that you guys have quarter-to-quarter for the overall company?

Larry Nicholson

Should we get more sales if we open more communities? The answer would be yes. There's still seasonality, but we got seasonality last year. But the communities we were planning on opening opened and certainly is wind to our back on sale.

Kenneth Zener - KeyBanc

And then that opening, is that going to be of equal then averaging from where we are now to that the yearend count that you gave us or is there more of a weighting towards the third quarter?

Larry Nicholson

So it’s pretty even this month through the end of the year.

Kenneth Zener - KeyBanc

Great. And then I guess if you could expand on the comments, Phoenix obviously everyone talked about it. But I mean the places where land is tougher or in a place like that, is it really that price ran up or is it the underwriting standard more related to the pace. I try to think about the two drivers of return on capital? Thank you.

Larry Nicholson

I’d say that it’s both. Some markets its pace, some markets its price. In some it’s both. Phoenix I would say its price. At a certain price you can make sales but the land market hasn’t adjusted yet. So it’s a little bit of both and a little different end market.

Kenneth Zener - KeyBanc

Do you sense that the option contracts are going to get redone perhaps on the price that a sellers can actually get their capital and they're recognize that? Have you been rewriting any options or we're not at that point yet?

Larry Nicholson

We see the market will reset. It takes a little bit of time because that would obviously do, they'll shop it to everybody and when everybody says no, then they go back around and they re-price it. So you will see it make some adjustments.

Gordon Milne

We're long way for marking some options.

Larry Nicholson

And everything we buy is -- we bought in the money. We're not concerned with that at all. It's just when you start looking out over the headlights and like I said, we've got 20,000 lots, we don’t need to go be aggressive on buying lots, when you can have good disciplined approach to it. So that’s what we are doing.

Operator

And our next question comes from the line of Mr. Dan Oppenheim with Credit Suisse. Your line is now open, sir.

Dan Oppenheim - Credit Suisse

In terms of the -- comment on margins and such, where you said they are -- it's still very positive on overall but if everyone else starts to do more within incentives, obviously you have to to respond there. Just trying to understand; are you at this point not feeling the impact from what some of the others are doing at this time?

Larry Nicholson

No. I think that that’s been blown out of the portion; I think everybody took a small comment and ran with it. We don’t see a whole lot of discounting in a lot of markets.

Dan Oppenheim - Credit Suisse

And if you see some weakness in absorption and may respond but at this point, no issues there.

Larry Nicholson

No.

Operator

And our question or comment comes from the line of Mr. Stephen Kim with Barclays. Your line is now open sir.

Stephen Kim - Barclays

I would like to follow up on that comment you just made. First of all I totally with what you said that there was a small comment on the side that blown way out of proportion. But I was curious if you could talk a little bit about absorption rates which are down year-on-year. And what you anticipate going forward in terms of absorption rates? And whether we can look at that as some sort of threshold level there as being a marker where you get below that and you might actually be more aggressive on incentives.

Larry Nicholson

I mean I think as we look out over the next couple of quarters, we see that number maybe improving here. Again it’s a community by community deal stream, how many lots you got left? What you got to replace it? What’s the competition across the street next door? But I just think right now we’re not seeing that pressure. And I think it’s evidenced in our incentives. They've ticked up a hair. But most of that would be a couple of markets and if you look at the second half of last year, absorptions were 1.8 something like that, 1.7. We’ve done better than that first half of this year. Hopefully there's some upside in the numbers we had last year in community count growth. I think those two things together kind of bode well for sales in the second half. Certainly that’s main reason [ph] comps are floating [ph] from the second half of the year.

Stephen Kim - Barclays

So your comment there about absorption rates probably increasing a bit, you meant on year-over-year, not sequential? Right?

Larry Nicholson

Yes.

Stephen Kim - Barclays

Okay. You gave an interesting statistic earlier on about land costing about 25.9% of revs versus 25.7% last year. Was curious if you could talk a little about whether what you see in that in your backlog. You talked about gross margins maybe going up a little bit. Is that going to because the land cost dropped a little bit from 25.9? And longer-term as you see your business within in a year or so and what your positioning in your community count? What are you sort of thinking as a reasonable expectation for land costs as a percentage of revenue?

Larry Nicholson

It's been in the 25 range forever. We're going up little bit, partly to do with, we’re doing more in California now. California is at 150%, and so depends. If we do more product in California, that number just keeps going up. But generally that 25 number holds pretty strongly in the rest of the country. So I don’t see any reason its going change a lot. I think its certain land sellers are selling a house, they will increase home price, they want more for the land. And so I think they have continued the home prices but I don’t think it’s gone up a lot. I think if we took California out of that it wouldn’t be going up much at all as a percentage.

Stephen Kim - Barclays

One last just housekeeping question. In terms of your inventory, I was wondering if you had the number yet for homes under construction.

Larry Nicholson

Homes under construction 867.

Stephen Kim - Barclays

Versus 643 at the end of the year, right?

Larry Nicholson

Right.

Operator

Our next question or comment comes from the line of Mr. Eli Hackel with Goldman Sachs. Your line is now open sir.

Eli Hackel - Goldman Sachs

Just first question, just on Southern California. What have you seen in that market specifically as it relates to the Chinese buyer given there has been some maybe turbulence in that home economy. Have you seen any impact from that going into real-estate assets in Southern California?

Larry Nicholson

It continues to be a healthy market. Still a large majority of the buyers in certain parts of Orange County, probably still 70% of the buyer. The absorption is growing in Southern California.

Eli Hackel - Goldman Sachs

And then just a quick follow up. Just the cancellation rate in the quarter was a little up. Is there anything behind that?

Larry Nicholson

No. Normalized we’d say 20% is a normal can rate if you're looking historically. So we’re not worried about it.

Operator

Our next question or comment comes from the line of Jay McCandless with Sterne Agee. Your line is now open sir.

Jay McCandless - Sterne Agee

First question, what was the spec count at the end of the quarter?

Larry Nicholson

Spec count 1,100, 366 finished, 734 unfinished.

Jay McCandless - Sterne Agee

And then just a question on the unit closing this year versus last year. Is the slower growth there a function of what you are selling now, bigger house bigger amenities et cetera or is it taking longer to build the house or is it taking longer to get people closing. Just trying to get a sense of why we are seeing the slowdown in that unit closing on a quarterly basis.

Larry Nicholson

I mean I think this quarter was impacted by as we said what we saw it was big in March. And I don’t want to whine about weather but we had a hard time getting self-started in certain markets. So we'll catch up on that get back to what we consider more of a normalized pace for the rest of the year.

'

Operator

And our next question or comment comes from the line of Mr. Alex Barron with Housing Research. Your line is now open sir.

Alex Barron - Housing Research

I wanted to ask you I guess your thoughts on the quality of traffic that you are seeing? And I guess this is more of a micro question. Do you guys think that the people walking in the door are better qualified or less qualified than a year ago? And I guess part B of that question would be as we move forward, in order to see higher volumes, do we need to see the FICO score come down of what’s acceptable to the lenders to see higher volumes?

Larry Nicholson

Yes. The quality of traffic I would say is still good and the level of traffic continues to be good. So I would tell you I don’t think it’s any different that it was a year ago. I do think that credit scores would help reduce the absorption rate. Because I do think there is still a lot of people out there that have a small ding on their credit that are struggling to get a loan. So I think there is a lot of things being talked about in Washington that are positive, that had good impacts. It's a question of how quickly you can get those through the pipeline and get them introduced. But I think as we move through and the economy continues to do better, we will see that get better. So I don’t see that going backwards. I always see it as an upside for us.

Alex Barron - Housing Research

And then I guess last year you guys were pretty active in the M&A market. What do you think is your appetite today, has it changed any or what you looking for to do, any more acquisitions there?

Larry Nicholson

I think we've said publically that we're in most of the better markets and the top twenty markets in the country. So it get a little bit harder when you're not going into new market but we actively are evolved in the M&A market. We haven’t bought anything this year, but it doesn’t mean we’re not looking. If the right opportunity is there, we would be happy to take it.

Operator

(Operator Instructions). And our next question our comment comes from the line of Collin Mings with Raymond James. Your line is now open.

Buck Horne - Raymond James

This is actually Buck Horne of Raymond James. Hey guys, question on the specs again, 1,100 specs, if I heard that right. That seems like one of the highest numbers you guys have operated with in a while. Is there a change to spec strategy at this point or is that a little bit more unsold inventory than you thought you'd have at this point of the year and what are you seeing in terms of the margin spread between spec sales versus dirt sales right now?

Larry Nicholson

We always ramp up specs about this time for year end. So usually you see it jump a little bit. So we have a plenty of specs for year end. So we're just over three communities. So I don’t -- and again a third of them are finished. So we don’t have a much inventory sitting there on the ground if we would have to discount to get rid of. That’s the big thing right, if you are aging down. So that would be the first thing.

What was the second thing?

Buck Horne - Raymond James

Margins.

Larry Nicholson

Margin on specs are lower. We're just working on the three what we sold on specs and non-specs and some cities actually get a little bit of a premium, but in general they're 1 to points [indiscernible].

Buck Horne - Raymond James

So like a 100 basis points lower?

Larry Nicholson

Yes. A 100 to 200 basis points.

Buck Horne - Raymond James

200 basis points.

Operator

I am not showing any further questions at this time. So I would like to turn the conference back over to management for any closing remarks.

Larry Nicholson

We appreciate you being a part of time. We look forward to seeing you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect.

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Source: The Ryland Group's (DDD) CEO Larry Nicholson on Q2 2014 Results - Earnings Call Transcript

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