Standard Pacific's (SPF) CEO Scott Stowell on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: CalAtlantic Group, (CAA)

Standard Pacific Corp. (SPF) Q2 2014 Earnings Conference Call August 1, 2014 12:00 PM ET

Executives

Scott D. Stowell – Chief Executive Officer and President

Jeff J. McCall – Executive Vice President and Chief Financial Officer

Analysts

Alan Ratner – Zelman & Associates

Michael Dahl – Credit Suisse

Stephen East – ISI Group

David Goldberg – UBS Securities

Adam Rudiger – Wells Fargo Securities

Michael A. Roxland – Bank of America Merrill Lynch

Joel Locker – FBN Securities

Jay McCanless – Sterne Agee

Alex Barrón – Housing Research Center

Operator

Good morning. And welcome to the Standard Pacific Homes 2014 Second 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 Statements and remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance.

Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading Risk Factors.

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

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

Scott D. Stowell

Thank you, Hanna, and good morning, everyone. I’m pleased to share with you Standard Pacific’s positive second quarter results, which reflect the continued execution of our strategy to profitably grow and ways to create real economic value for the company. The goal is sustain the profitability, the test as measured by superior return on our investments requires discipline and consistent execution. This focus continues to show up in our results.

For the 2014 second quarter pre-tax income was $92 million up 80% year-over-year as compared to $51 million in the prior year period. Net income was $57 million or $0.14 per diluted share as compared to $43 million or $0.11 per diluted in the 2013 second quarter.

Revenue from home sales for the 2014 second quarter increased 36% to nearly $592 million as compared to the prior year period. Resulting primarily from a 21% increase in our ASP to $479,000, the highest quarterly average home price in the company’s nearly 50 year history and a 13% increased in new home deliveries.

The increase in average home price was primarily driven by a continued reduction and the use sales of incentives, general price increases within the majority of our markets and our continued migration of market. For the quarter over 70% of our deliveries were from the move up in luxury categories.

Net new orders for 2014 second quarter were up slightly from the 2013 second quarter to 1,524 homes with the dollar value of these orders up 10%, sequentially our net new orders were up 16% and our order value was up 13%. The dollar value of homes in backlog increased 20% to $1.1 billon or 2,304 homes compared to $948 million or 2,272 homes for the 2013 second quarter, an increased 14% sequentially compared to the first quarter of 2014’s backlog.

The increase in year-over-year backlog values driven primarily by an 18% increase in the average selling price of the homes in backlog reflecting the continued execution of our move up strategy and pricing opportunities in select markets.

We were also able to make progress for the gross margin, which stood at 26.6 for the quarter up from 23.7 for the second quarter of 2013. The gross margin of our backlog at the end of the second quarter was 25.9%. This gross margin strength has helped to drive industry leading operating margin, which should at 15.2 for the 2014 second quarter, a 410 basis point improvement from our 11.1% operating margin for the 2013 second quarter.

The durability of our gross margin reflects the embedded value of our land inventory. The quality of our community locations, a continued focus to maximize net pricing wherever, possible and the strength of our value proposition.

During the second quarter we were able to raise base prices at over 70% of our communities. And we’re able to reduce the use to incentives on our orders by approximately 30 basis points as compared to the 2014 first quarter. These strong second quarter results reflect the strength of the company’s strategic positioning and the execution of our land strategy we’re in the right markets with a deep and well-located land position, have an attractive product portfolio with operating teams who are accountable and committed to execution in meeting the needs of our customers.

Turning now to community count in the second quarter we averaged a 183 active selling communities up 12% and then compared to the second quarter of 2013. We expect to open 16 new communities in the third quarter and 29 new communities in the fourth quarter resulting in year end community count growth in the high single-digits. Of course the timing of new community openings can often vary from projections and with 10 new community scheduled to open in December, some movement into 2015 could occur.

On the land front, we are targeting 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 $212 million on land and land development in the second quarter after having spent $224 million in the first quarter and $808 million in the full year 2013.

Our second quarter land spend includes our acquisition of Austin, Texas based Streetman homes, which added approximately 850 owned or controlled loss in ten current or future communities to our portfolio. Our land pipeline remains strong and we continue to find opportunities that meet our underwriting criteria.

Given our current land position our operating teams are focused on acquiring land that will result in new community openings in the second half of 2016 and beyond. And that leverage our master plan and development capabilities. As of the end of the quarter, we owned or controlled nearly all of our expected average selling communities for 2015 and over 93% of our expected selling communities anticipated for 2016.

In total, we owned or controlled roughly a 153 communities that are scheduled to open in 2015 and beyond. We have experienced and continue to manage through the largest boom-bust housing cycle in U.S. history. We have made significant progress to date, I believe the housing market is less volatile than perceptions about the housing market. While the housing data remains mixed the economic and demographic fundamentals remain strong and they will eventually prevail. The housing recovery is slow, uneven but it is real. We are still maintaining our cautious but positive outlook. I believe we remain well positioned to take advantage of the long-term housing recovery.

On slide 5, I would like to walk through some of the more detailed regional information on second quarter results. Here we breakdown our second quarter activity across our three regions, California, the Southwest which includes Arizona, Colorado and Texas and the Southeast which includes the Carolinas in Florida.

For comparison performances, we have adjusted the figures on this page to remove the impact of the acquired backlog from the Southeast builder we acquired in the second quarter of last year and the acquired backlog of the Texas builder we acquired in the second quarter of this year, has adjusted. Our net new orders increased 2% companywide and the value of these orders rose 12% ranging up 1% in the West to up 29% in the Southwest the change in order value was heavily mix dependent and particularly in the Southeast and Southwest was positively impacted by a product mix shift to more higher end move-up and luxury homes, to get a better picture of the order performance across the regions.

It’s important to factor in change and community account and focus on the order absorption rate across the company average community count was up 12% and the order absorption was down 9% over the prior year. For the absorption ranging from 2.3% in Southeast and Southwest to 3.5 in California, as we did last quarter we plan to continue to strategically increase prices in California in an attempt to bring the region within our targeted range of 2.3 to 3 sales per community per month.

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 645 homes for the same model in the same community sold in both the second quarter of 2014 and the second quarter of 2013.

We believe that provides a meaningful view of real price changes, as you can see the year-over-year same store pricing power continues to existing but the pace of the increase has slowed materially with California up 8% on a same planned basis this year, compared to up 26% last year, followed by the Southeast at 6% this year, compared to 9% last year and the Southwest of 4% this year compared to 15% last year.

Now before I turn the presentation over to Jeff. I wanted to provide everyone with a quick flash, what we are seeing through the first month of the quarter.

The third quarter has started out following our normal seasonal pattern, from an orders perspective our third quarter is typically down about 20%, when compared to the second quarter. Our July 14 net orders came in at 382 up 6% from the 360 net orders we took in July of 2013. Traffic also remains pretty strong, down seasonally, but on par with last year.

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 J. McCall

Thanks Scott. On slide 6, we dive a little deeper into our backlog. As Scott mentioned earlier, our backlog value at the end of the quarter exceeded $1.1 billion, and highest levels with the third quarter of 2007. Year-over-year, the dollar value in our backlog was up 20% through a combination of units up 1% and average selling price up 18%.

Our ASP and backlog was $494,000, $15,000 higher than the average selling price of our deliveries during this quarter. The gross margin in backlog was 25.9%, up 70 basis points from the prior year and down 30 basis points from the end of Q1. Of the 2,340 units in backlog, 1,201 are currently scheduled to close in the third quarter.

The units scheduled to close in the third quarter have an estimated average selling price of $491,000 that’s up $79,000 from the $412,000 at the end of the second quarter last year, and relatively flat to the $493,000 at the end of the first quarter.

Our gross margin expect in backlog expected to close in the third quarter is 26.0%. The homes sold and closed in the third 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 lower average selling prices than the homes in backlog. The homes sold and closed in the second quarter at an average selling price of $415,000 and as average $429,000 over the past four quarters.

On Slide 7, we break down our deliveries in a little more detail. As we mentioned earlier, deliveries in the second quarter were 1,236, up 13% versus the prior year. The key driver to deliveries on your beginning backlog in the amount of homes sold and closed in the quarter. Of the 2,304 homes in backlog as of June 30, 1,201 homes are currently scheduled to close in the third quarter.

We would expect that 1,201 will get adjusted down due to cancellations and changes to the targeted closing date homes currently in backlog. Over the past eight quarter that downward adjustment has averaged about 15.5%. From that number, you add the number of specs sold and closed in the quarter to get your Q3 deliveries.

On average, over the past eight quarters, we have sold and closed about 237 specs in the respective quarter. The number of specs sold and closed in the second quarter was 293 approximately 24% above the trailing eight quarter average.

On slide 8, we have incentive trends over the past nine quarters. The dark blue line represents the incentive levels of our deliveries which were approximately 3.2% down 40 basis points from last quarter and down 50 basis points from the same quarter prior year.

The incentive trend in our orders which is represented by the light blue line dropped 30 basis points from the first quarter to 2.7%, matching the incentives in our sales during the second quarter of 2013 overall our incentives remain pretty in check. At the end of the day it’s not the incentive level that’s important it’s the net pricing which is the combination of base prices, flexible lot premiums plus option revenue, last year incentives.

And we are constantly managing all four levers to maximize our returns. On slide nine, we provide a breakout of our SG&A in the four categories G&A insurance, incentive compensation and selling expenses, overall our SG&A as a percentage of revenue was a 11.5% down a 110 basis points compared to the prior year. As a percentage of revenue selling expenses were down 20 basis from prior year, increase was down 30 basis points and G&A was down 40 basis points.

We expect to see a relatively flat SG&A as a percentage of revenue in the third quarter and then additional improvement in the fourth quarter and with anticipated 20 to 50 basis point improvements and SG&A leverage when comparing the full year 2014 to 2013. On slide 10, we have our land acquisition and development spend over the past several quarters. In Q2 we spend a $113 million on land acquisition and $99 million on land development. We remain encouraged by the quality and the volume of a land transaction that we are working through our pipeline and as Scott mentioned earlier we continue to target a total 2014 land spend in the $900 billion to $1.2 billion range.

At the end of the quarter we had over $900 million scheduled to be spent in the 2014 fiscal year including approximately $375 million on land development. We ended the quarter with approximately 36,000 lots owned and controlled relatively flat compared to the second quarter of 2013, approximately 20% of our 36,000 owned and controlled lots are controlled under option contracts.

And with that I will turn the presentation back to Scott, for this final remarks, before we opened it up questions.

Scott D. Stowell

Thanks, Jeff. During the last several years we talked to you about our initiatives to secure large marketing making land acquisitions in each of our markets. As these projects now start to come on line, I wanted to share these positive results. Many of you have seen some of other market makers, such as the Palisades in Charlotte, Del Sur in San Diego or Watercress in South Florida just name a few. The photograph on this slide is from the Estancia at Wiregrass for most recent market maker in Tampa, Florida.

The Estancia is an approximately a 1,100 home side master plan targeting to move up in luxury buyer segments. At the grand opening of our first phase we had over 1,300 perspective home owners how to visit is first four communities. We execute more prospective home buyers during the Grand Opening weekend at Estancia and we had seen in and entire division and aggregate during the first four months of the year.

Since opening, we have sold over 40 homes across our four product lines with solid absorption rates, the ISP and strong gross margins.

In closing, I would like to recognize our Tampa team to spend a couple of hours to creating this premier master plan community and extend my appreciation to all of our team members across the country. We’ve also executed beautiful community openings this year and we have delivered such solid second quarter results. Thank you everybody.

And with that we’ll open it up for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Alan Ratner from Zelman & Associates.

Alan Ratner – Zelman & Associates

Hi, guys, good morning, nice quarter and thanks for always for all the info. Jeff, just on the margin and backlog I wanted to confirm that 26% include any repurchase counting impact from this treatment?

Jeff J. McCall

Yes, but it's pretty minimal, about 10 basis points.

Alan Ratner – Zelman & Associates

Okay, thanks. And as just far as Florida and that’s obviously an area where you build that you’re lost a bit by a quite bit and if you look at your backlog the prices there are significantly above what you delivering today, I think you’re kind of in the mid quarters versus call it 350 ASP in the last couple of quarters.

And at the same time your order pace is slowed a quite bit there and over the last quarter or so. And just trying to get a feel for whether that’s kind of what we expect going forward slower volume and higher price or whether any different commentary you gave on what you’ve seen in Florida?

Scott D. Stowell

Okay, Alan, this is Scott. The Florida results are probably lower than we expected for the quarter. Even when you considered the fact that we know that we are moving them up into higher ASP. So, the way I would kind of respond your question would be, we would expect slower absorptions as we move up market. Because we have lower absorptions across our entire product portfolio move up to slower than entry level and the luxury is slower than move up. But I think there is other factors in Florida today, at present that are – that heard us in the quarter, we have some communities that were delayed. There is a lack of urgency, but I think the lack of the entry-level buyers is hurting us there. But overall, we like our positions, if you just take the Estancia is an example, we sold at 3 homes per community per month, since we’re opening there. I think as the market improves in Florida, we should see our absorptions fall in what we would consider to be normal absorptions for our position in that market.

Alan Ratner – Zelman & Associates

Just to sneak one last in on the community count, because you mentioned it, it looks like you did lower the guidance little bit to high single versus low double previously. Is that primarily coming from the Florida or is that kind of across the board delay that you’re seeing and getting those projects open?

Scott D. Stowell

I think it’s the Southeast have the largest percentage of communities that we’re going to open in the company. So, it’s probably waited there. But, the two months of community delays or in some cases a little bit longer have impacted that low double-digit into a high single digit.

Alan Ratner – Zelman & Associates

Thank you.

Operator

And your next question comes from Mike Dahl from Credit Suisse.

Michael Dahl – Credit Suisse

Hi, thanks. Just to pickup on the community count delays, how would you characterize the main reasons for what you’re seeing as far as the delays right now? And then also, if you do own and control all the communities through 2015, do care to venture of ballpark range on what you think you can grow in 2015?

Scott D. Stowell

Yes, because of the delays Michael. Our range of normal issues, as we ramp up the business. We’ve got significant product development going on. It takes time for us to get those plans permitted at the cities and the cities are causing some delays. We’ve got – we had weather in the first quarter, which cause some delays and communities in the first quarter that impact us in the second quarter. There are some shortages being reported and land development underground contractors. Even the third-party developers that we’re buying lots from are experiencing delays and we’re gapping out some of our communities which is another reason to expand even maybe a little bit of the Florida slowdown is that we gapped out in some communities waiting for a developers to deliver us lots.

Jeff J. McCall

Mike, 2015, we are not giving much detail right now. Actually, we want our development schedule to firm up some more. We are clearly looking at in double digits, but we’ll refine that on a community count basis, we’ll refine that as we are close to 2015.

Michael Dahl – Credit Suisse

That’s helpful. And then second question on the margins, I guess, margins and backlog heading into 2Q or – but well where you ultimately came out and you mentioned some of the levels that can have an impact, which one specifically were driving – driving the delta getting you 266 this quarter and how should we think about that for the third quarter?

Jeff J. McCall

There is whole series of adjustments that kind of going from backlog is just pure home and adjustments whether indirect and other things that going to that. I would say that our adjustments for the quarter were probably 20 basis points to 30 basis points higher than they were – on average for 2013. So that give us a slight extra pickup, but they were 10 basis points less than they were in the first quarter. So, they are looking, I’m okay, something that benefits that as we have continue to sell our specs as very nice margins we’re not going out and blowing without the big discounts, which helps sustain that margin. And then also, some of the homes in backlog still have additional option revenue and design selections, which is typically pretty accretive to your margins.

Michael Dahl – Credit Suisse

And I guess, if I could the one last, is there anything geographically as far as mix that if you look at – comment of that you’re raising base prices and 70% of the community your incentive levels on both orders and deliveries are down. Haven’t seen necessarily the same pickup in backlog gross margin so is there a geographic issue or some sort of product mix?

Jeff J. McCall

No. Not really, a geographic issue to speak of. Just different communities contribute different, depending on different sales rates there.

Scott D. Stowell

Yeah Michael, this is Scott. It’s really hard to broad brush some of these questions when you think about all of our markets, in each of our markets we have communities selling very well at high gross margins and others that are going slightly lower – slower at lower gross margins that just keep that in mind.

Michael Dahl – Credit Suisse

Fair enough, thanks guys. Good luck.

Scott D. Stowell

Thanks Mike.

Operator

And your next question will come from Stephen East from ISI Group.

Stephen East – ISI Group

Thank you, good morning guys. Scott, if we look at – you will talk about you ramped up your product mix to the move up focus and at the same time you ramped up your spec levels. And as I look at that in conjunction with the pace are selling at now, the margin we are getting. If you ramp those together, are you comfortable right now with the phase you’ve got versus the margins or you willing to use your margin a little bit and more specs I guess, it will, to drive that pace a bit faster?

Jeff J. McCall

Steven, as we look at the business today I think and look at it macro level. We are selling at a pace right in the targeted range and seen some stability in our gross margins over the last couple of quarters. So we think that in the current conditions, which I would consider to be low or moderate demand conditions. I think were executing just as we would want to.

Now we are always trying to increase the pace and increase the margin in our communities and worked very hard to try do that where we can to optimize both margin and our absorptions which is highly we really generate the return. So it is a community-by-community issue it requires lot of attention by our local division presence and our regional presence, its managed locally everyday and I think, I think we are making good progress and were managing the way we want to manage the business so for.

Stephen East – ISI Group

Okay, go ahead. Joe.

Jeff J. McCall

I am sorry, Steve did you ask about our specs was another of the part of that question?

Stephen East – ISI Group

Yeah. I did just sort out of how, as you continue to move up or focus on the move up more but you are also putting more specs out I guess how do you reconcile those two and you expect sort there is a lever on that pace?

Jeff J. McCall

Yeah. We did increase our total specs they’re up 50% year-over-year but there were low last year at this time because the first and second quarters of 2013 were pretty strong quarters. So we’ve got our finished specs at above 1.8 which is right within our guidance or guidances is 1s to 2, specs there, and specs under construction is up a little bit two. But right within our guidance, so we are aligning our starts with our sales rates, we do you use specs starts in many of our markets, specs are valuable to many of our customers. And so we’re not using the specs to try to throttle a pace, we just want to make sure we have sufficient specs to meet the needs of customers who value, a need a home that’s ready to move in.

Stephen East – ISI Group

Okay, I got it. And then if you look at your land deals either the land deals you’re looking or some of the communities you have coming on in 2015 and 2016. And you look at what type of cost inflation you’re seeing in most elders have said this quarter that, they have seen meaningful cost inflation year-over-year on like product. I am just wondering, what type of margins are you performing in 215, 216 type of land deals are they at similar levels you’re seeing today.

Scott D. Stowell

I mean on the new land that is coming to committee that we’re looking to approve?

Stephen East – ISI Group

Yes, yes.

Scott D. Stowell

Yes, we have not adjusted our underwriting hurdles at all. We’re still looking at a non-inflated 20% gross margin and a 20% unlevered IRR?

Stephen East – ISI Group

Okay. Thank you.

Operator

And your next question comes from Michael Rehaut from JPMorgan.

Unidentified Analyst

Good morning. It’s actually Jason [indiscernible] for Mike.

Scott D. Stowell

Good morning, Jason.

Unidentified Analyst

The first question is just going back to land market for a minute. Can you just talk a little about some of the recent land deals, that you done and maybe the competition that you’ve seen. And I guess more generally if you could just talk about the some of the largest markets that you’re in and what type of competition that you’re saying in the land side.

Scott D. Stowell

Yeah. Most of our markets are still very active and we’re seeing strong land activity, I would say Phoenix and Sacramento perhaps are a little softer. The land activity is passing there a little bit, but the sellers are patient, we are not seeing land prices decline in those markets they are holding firm.

I think most of the builders given the current conditions or remain focused on A and B locations for now. We’re not seen a lot of guys push out in the territory markets. And so as a result of the current conditions land prices are rising but much, much slower than they have in the past and a couple of markets are actually approaching peak level prices.

In California, still a very tough market because it’s very competitive to underwrite deals to meet our hurdle rates.

Unidentified Analyst

Thanks. Next question about option revenue, can you talk a little about the amount of option revenue you are seeing just across, all of your buyers and if that changed at all over the last couple of quarters, in terms of a percentage of home price. And then just in terms of what margins on option revenue. Can you remind us what that is?

Scott D. Stowell

Yes, our option revenue has been very consistent plus or minus $50,000 and Jeff, do you have the option margin.

Jeff J. McCall

Yes, I mean that the margins can fluctuate but generally there are 30’s and 40’s. So, they are accretive for most of our divisions.

Unidentified Analyst

Great, thanks.

Operator

And your next question comes from David Goldberg with UBS.

David Goldberg – UBS Securities

Thanks. Good morning, everybody.

Scott D. Stowell

Good morning, David.

David Goldberg – UBS Securities

My first question is a bit conceptual. You talked about in the slides that the rate of home price appreciation’s going down a little bit as we are moving to the spec logic. I think that makes sense, just given the rapid rate we saw on 2013, can you talk about, how much when you talk to sales people, how much of that is spec logical barrier for the buyers versus an affordability buyers, its just happening because rates has come up a little bit and the buyer just can’t spend more or could they spend more, but they are just not comfortable spending more at this point.

Scott D. Stowell

So, as it relates to the sales rates that we’re seeing in the market today, we are just holding them back?

David Goldberg – UBS Securities

Home prices

Scott D. Stowell

Oh, home prices well, David, home prices moved very quickly early in the cycle. And if you step back and just look at where we are at the home building cycle given the fact that we are into the maybe the growth phase for say two years, prices went early and volumes are trailing. So I think price is a factor today, we’ve seen it hit the affordability, and thankfully interest rates have remained fairly low. And Steve stepping back even further we’ve got good affordability lower interest rates. And I think most of our buyers have the ability to buy houses they’re just – I think they are still constrained by very tight mortgage credit. And the absence of it, but first time but there is lots of things that are affecting some of the market to unleash its potential to get the recovery on track.

David Goldberg – UBS Securities

Thank you for that. And then just in terms of the treatment acquisition. Can you give us an idea what the competitive landscape is like for that acquisition where there are lot of builders you are bidding against? Just give us some more color on how that came to be and how you thought about the competitive environment bidding for that builder?

Scott D. Stowell

Yes, that was in a process for this treatment acquisition. Randy’s treatment had engaged with couple of private builders and it was engaged with us during this process came back to us after couple of stalls and then we engaged. So, it really wasn’t that competitive, I think he was looking for the right home for his people and he was looking for somebody that could execute.

David Goldberg – UBS Securities

Thank you. That’s it for me.

Operator

And your next question comes from Adam Rudiger with Wells Fargo.

Adam Rudiger – Wells Fargo Securities

Hi, thanks for taking my questions. Last quarter, you gave us that elasticity, the incentive versus pacing and we’ve gotten too discussion on pace throughout a cycle and land development through a cycle. Why it was noticing now that your land, your lot supply has four. I think five or six quarters in a row now decline and I recognized both the numerator and denominator to that. But how much of that is I am talking about on a year’s basis, how much that is intentional in terms of trying to manage the cycle versus just not finding as many opportunistic land deals?

Scott D. Stowell

Yes, Adam, we are not intentionally slowing down our land buying now, because we are managing the cycle, we still think that we’re in roughly the middle of the growth phase of the cycle and we see the cycle in four phases. So, we still think that we should be investing and there is opportunities to grow, particularly, as the cycle gains traction. So, what we are probably experiencing is, just its more and more difficult for us to meet our underwriting hurdles. We’ve got sufficient land inventory to meet the growth needs for the next three to four years or beyond maybe after five years at the trailing 12 months of our sales rates. So, land buying is discretionary. We are being disciplined and I think that’s showing up in some of these numbers.

Adam Rudiger – Wells Fargo Securities

Got it, that’s my only question. Thanks.

Operator

(Operator Instructions) And we’ll take our next question from Mike Roxland with Bank of America Merrill Lynch.

Michael A. Roxland – Bank of America Merrill Lynch

Thanks very much and congrats on a very good quarter. Just wanted to grab your thoughts on the margin trajectory and then really thoughts about the sustainability of margins at these levels, how much of the margin relates to just some of the small land purchases you made during 2009, 2011 versus the aggressive home price appreciation we’ve seen over the last couple of years versus option revenue and really I guess how sustainable do you think margins are were at 25%, 26%?

Jeff J. McCall

Yes, Mike we don’t give a lot of forward visibility other than our backlog margin, which is still maintaining on that 26% level. I would add that when we look at our gross margin by vintage actually in our 2012 gross margin, our vintage land buyers that are giving us our best gross margins. So, we are still pretty confident there is not a big variation amongst all of our vintages so. Scott mentioned earlier we stand pretty disciplined to our underwriting clearly everybody benefitted from the amount of home price appreciation that we saw in late 2012 and 2013. But we’re pretty comfortable where our backlog gross margins are still at around 26%.

Michael A. Roxland – Bank of America Merrill Lynch

How much what your saw in today is coming from 2012, as opposed to 2013.

Scott D. Stowell

There is a not lot coming from 2013 right now. Mike, I don't have that breakdown. I can follow up with you after the call.

Michael A. Roxland – Bank of America Merrill Lynch

No problem. Now just the one last question, obviously you’ve done a good job managing incentives your use of incentives have declined some of your competitors have recently indicated their increasing incentives to help to drive volumes. Can you talk about some of the regions and the different effects? Are you seeing any reasons when you felt to need to incentivize more to keep the sale pace what markets, if any, have been softer for you, and which have been better? And as you’ve seen increasing incentives maybe from some of your competitors do you see other builders trying to jump on the incentive Bandwagon?

Scott D. Stowell

Mike, this is Scott. I would say that the way we think about utilization of incentives would be if the community is falling below the minimum absorption rate that we’ve said up as guidance for divisions. Then they would start to consider very selective incentives to put out to the market, we don’t broadcast those publically into the market, but we’ll use them to negotiate to try to get a project into the range. And as I said earlier, there’s not a specific region where we are having to do something specific it really is a project-by-project view. And as you can see from the incentive trend and where the incentives are, we use them sparingly and we think we are very closed in a normal range. So, we don’t expect to see them dropping significantly from here.

Michael A. Roxland – Bank of America Merrill Lynch

Got you. Thanks and good luck in the quarter.

Jeff J. McCall

Thanks Mike.

Operator

And next question comes from Joel Locker with FBN Securities.

Joel Locker – FBN Securities

Hi guys, just a quick question on if you had any information from your mortgage division on what your backend DTI was either in backlog or in second quarter closing?

Jeff J. McCall

One second. In second quarter, it was 35% and it's been – it's 36 year –to-date.

Joel Locker – FBN Securities

Is there any variation between California and Texas? Regionally if you have, I don't know if you have mid-level…

Jeff J. McCall

We do not – not materially that we see obviously you have larger down payments in certain markets than others typically.

Joel Locker – FBN Securities

Right.

Jeff J. McCall

From a DTI ratio, not a huge swing across regions.

Joel Locker – FBN Securities

Right. And just a couple of simple ones, what was your gross margin differential between spec and retail. I know you touched on it just before, but just to quantify?

Jeff J. McCall

It was 130 basis points.

Scott D. Stowell

130 basis points that’s correct.

Joel Locker – FBN Securities

Specs being lower than…

Jeff J. McCall

Specs being lower, correct.

Joel Locker – FBN Securities

Right, and then just on your – you mentioned total specs before, but what was the number this year at the end of second quarter and second quarter 2013?

Jeff J. McCall

And the second quarter we have 1381, if the second quarter of 2014 and second quarter of 2013 we have 921.

Joel Locker – FBN Securities

921. All right, thanks I’ll get jump in the queue.

Jeff J. McCall

Thank you.

Operator

And our next question comes from Jay McCanless from Sterne Agee

Jay McCanless – Sterne Agee

Good morning, everyone. I got on little late but wanted to ask about Streetman, could you quantify the impact of Streetman to the closing gross margin for this quarter and then I think you also talked about how much impact it might have on 3Q.

Scott D. Stowell

Yes, Streetman this quarter we booked 12 closing that came from that acquisition so it had virtually no impact on the gross margin and then as it relates to 3Q it’s pretty marginal I might say 10 basis points.

Jay McCanless – Sterne Agee

And then the second question I wanted to ask if and you guys earlier said that you are in the middle of the cycle that you feel you need to continue to invest in land but if the deals dry up and you don’t see more stuff that pencils, can you walk us through what options you have with the capital structure whether it would be repurchasing some debt potentially repurchasing some shares, just walk us may through some of the hypotheticals of what you could do with your cash other than buying land.

Scott D. Stowell

Yes, we don’t have a lot of opportunities to repurchase our debt at reasonable pricing. And so, we’d have to consider other alternatives there, whether it’s some of the return to shareholders and building up cash.

Jay McCanless – Sterne Agee

Okay, all right thank you.

Operator

And we’ll take our final question from Alex Barrón with Housing Research Center.

Alex Barrón – Housing Research Center

Yes, hi good morning guys. I was wondering if you could maybe Jeff do you expect the interest that goes through cost of goods sold to be closer to what you are incurring as you move into next?

Jeff J. McCall

Yes, Alex, our interest in our cost sales has been declining I think in the second quarter of 2014 it was an even 5% that compares to 7% in the second quarter of 2013. The interest in our cost of sales and our backlog is currently at 4.6%. So we’re continuing to see a drop in that as we progress through the cycle.

Alex Barrón – Housing Research Center

Right but I’m saying in terms of total dollars for example this quarter you incurred $37 million and you only expensed, $29.8 million, so would those two numbers come closer together and that wasn’t looking and added so much of the percentage in actual dollars?

Jeff J. McCall

Those two numbers get, you get to about expensing the same month if you are incurring roughly at about $2.9 billion of revenue, so once the revenue reaches that, its rough numbers but that’s not you pointed which you are expensing more than you incurring.

Alex Barrón – Housing Research Center

Got it okay and thanks a lot.

Operator

That concludes today’s question-and-answer session Mr. Stowell at this time I would like to turn the conference back over to you for any additional closing remarks.

Scott D. Stowell

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

Operator

This concludes today’s conference. Thank you for your participation.

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Standard Pacific (NYSE:SPF): Q2 EPS of $0.14 misses by $0.01. Revenue of $592.5M (+35.1% Y/Y) beats by $29.15M.