WCI Communities' (WCIC) CEO Keith Bass on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: WCI Communities, (WCIC)

WCI Communities, Inc. (NYSE:WCIC)

Q2 2014 Earnings Conference Call

August 5, 2014 8:30 a.m. ET

Executives

Scott Bowles – IR

Keith Bass – President and CEO

Russ Devendorf – SVP and CFO

Analysts

Michael Rehaut – JPMorgan

Mike Dahl - Credit Suisse

Alan Ratner – Zelman and Associates

Buck Horne – Raymond James

Steve Stelmach – FBR

Brendan Lynch – Sidoti & Company

Alex Barron - Housing Research Center

Operator

Good morning and welcome to the WCI Communities’ 2014 Second Quarter Earnings Conference Call. Today’s call is being recorded and we have allocated an hour for prepared remarks and Q&A. (Operator Instructions)

At this time, I would like to turn the conference call over to Scott Bowles, Vice President of Finance at WCI Communities. Thank you, sir. You may now begin.

Scott Bowles

Thank you and good morning. I’m joined on today’s call by Keith Bass, President and Chief Executive Officer of WCI Communities, and Russ Devendorf, Chief Financial Officer.

During this call, the Company may make statements about its projections or expectations for the future. All such statements are forward-looking statements and while they reflect current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review the Company’s filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations.

The Company does not plan on updating or revising any forward-looking statements during the quarter. In addition, the Company also refers to non-GAAP financial measures such as EBITDA and adjusted EBITDA. You can find the reconciliations to the most directly comparable GAAP financial measures in the earnings release which has been posted at the Company’s website at wcicommunities.com. We will be referencing slides during this call which are also available on our website.

I would now like to turn the call over to Keith.

Keith Bass

Thank you, Scott. I’d like to welcome everyone who has dialed in for today’s call and those of you viewing the webcast.

On Slide 3 of the presentation is a high level overview of the company. WCI is focused on developing premier lifestyle communities and building luxury homes across most of Florida’s key coastal regions. Our amenity rich communities include unique properties targeted to move-up, second-home and active adult buyer segments.

We have a highly desirable buyer profile that is less reliant on mortgage financing and typically less impacted by mortgage rate volatility and the stringent lending standards that are prevalent today. To illustrate this point, 55% of our customers paid all cash for their homes during the second quarter while only 4% financed more than 80% of the purchase price of their new home.

On average, closing price of $426,000 in the second quarter ranked us above most of our peers yet we have a diverse mix of buyers and offer multiple price points throughout our communities. With the current range of homes in backlog from $175,000 to more than $1 million.

We’ve been active on the land acquisition front and during the second quarter we closed on approximately 1300 home sites while also contracting for an additional 1400. We ended the quarter with approximately 10,300 home sites that we own or control, primarily located within mature, highly amenitized master planned communities. Our strong land position will allow us to continue to significantly grow our business in the coming years.

Contributing to our strong gross margins is the fact that over 50% of our land positions has a cost basis that was reset to fair market value in 2009 through fresh start accounting as the Florida housing market was nearing the trough. Our legacy land has accounted for about 95% of our closings in 2014 but as we bring these new land acquisitions online every quarter we expect that proportion of legacy closings to decline.

We are well capitalized with a conservative balance sheet that includes more than $200 million in cash at the end of the quarter and $250 million of sub-7% long-term debt. Furthermore, this balance sheet along with our existing land portfolio allows us to be opportunistic and highly strategic in our land acquisitions.

We are a high growth company and have seen solid increases in most of our key operating metrics within our homebuilding segment over the last several quarters. We ended the quarter with 28 active selling neighborhoods representing growth of 27% over the prior year second quarter and are optimistic about our potential for continued growth.

In addition to our homebuilding segment, we also operate our amenities business segment, which includes resort amenities, country clubs and golf courses as well as marinas. These amenities help create a superior lifestyle experience that is sought out by our homeowners and helps to set us apart from our competition.

Our value added real estate services segment includes Berkshire Hathaway Home Services Florida Realty. It [ph] is the fourth largest general real estate brokerage company in Florida with over 40 offices throughout the state and almost 1600 independent sales professionals.

WCI is uniquely positioned among the public homebuilder community with our exclusive focus on the Florida market. This is a market that continues to perform well against the recent backdrop of even performance across many regions in the U.S. and has helped us deliver strong results over the past several quarters. We believe that Florida has favorable underlying demographics and economic trends that should make this an attractive market to operate in for years to come.

Slide 4 provides some statistics on the Florida real estate market and why we remain optimistic and excited about our market and how the state compares favorably to the rest of the country. Florida remains a high growth state with growth rates for households, jobs and median new home prices that exceed the national average by a wide margin. Florida's low state taxes and great year-round weather continue to make it an attractive destination for both businesses and new residents.

Total single-family permits in Florida have grown for four consecutive years, yet remain well below the 20-year average and approximately 70% below the 2005 peak. Further, Florida ranks second nationally in year-to-date building permits trailing only Texas. Permit growth in Florida has increased by almost 12% on an LTM basis compared to a contraction nationally suggesting strong demand and continued outperformance.

The second quarter of 2014 marked another period of growth for the resale home market in Florida. Single-family and condominium transactions were up 8% in the quarter compared to a 4.6% decrease nationally in existing home sales. In addition, prices in June were up 5.2% and 8.5% respectively and inventories remained at healthy levels.

In fact, according to the Florida realtors, June marked the 31st month in a row more than 2.5 years that median sales prices rose on a year-over-year for both single-family and townhome condominium properties. Housing and real estate is local and we continue to feel good about all the markets in Florida where we operate.

Moving to Slide 5, you can see that we again experienced strong growth in new orders which were up 33% to 195 in the quarter and 39% year to date. This marked our 10th consecutive quarter of year-over-year order growth. Our new orders were driven by continued strength within our active adult and second-home buyer segments. We also had an increase in the number of active adult and second-home neighborhoods when compared to last year.

Within our primary home buyer segment, same-store orders and overall neighborhood counts were largely unchanged from last year. Throughout the year we’ve been particularly encouraged by the order contribution from our new neighborhoods across all three customer segments.

The average selling price of new orders rose to $480,000 in the quarter, representing a modest increase over the second quarter of 2013, which combined with the increase in orders resulted in a 34% increase in the contract value of new orders. While delivering these impressive increases, we were able to maintain new order incentives at a low rate of 3.1% of base price which was flat when compared to year ago levels.

Further, during the second quarter we increased base prices an approximately 70% of our active selling neighborhoods. All in all, we’re very pleased with the new order performance that we’ve delivered so far this year.

Slide 6 highlights the growth of our deliveries and backlog. Similar to the story on new orders, the momentum continued in the second quarter with deliveries and backlogs. Deliveries were up 17% yet the average closing price was down 3% from the second quarter of 2013 due to mix. Mix plays big part in our average closing prices and our active adult neighborhoods accounted for just over half of all deliveries in the second quarter.

In general, due to the product offering and customer preferences, our active adult communities achieved a somewhat lower average closing price than our move-up or second-home luxury markets. Overall ASPs on deliveries were up slightly for the first half of the year. For the full year we expect our average selling price to be in the mid 400s as our delivery mix shifts to include more higher ASP second and primary home deliveries in the second half of 2014.

Our backlog continued to grow on the strength of new orders with 27% unit growth and a 44% value growth as the average selling price in backlog at quarter end was $530,000, up 13%.

On Slide 7, you can see homebuilding and real estate services continued to drive the increase in revenues for both the quarter and year to date. For the quarter, the homebuilding adjusted gross margin was a solid 30.1%. However as we have discussed on previous calls, we expect it to continue to trend down due to a shift in product mix and driving more volume out of certain communities. As the business continues to grow, we will continue to increase our overhead efficiencies and drive down the SG&A rate, which includes our sales commissions paid.

Our year-to-date adjusted EBITDA is up over 10% from the prior year, yet it is down slightly as a percentage of revenue. While we fully expect to gain efficiency in our net margin in the future, it should be anticipated that our quarter-over-quarter comparisons may be a bit uneven as we drive more scale into the operation. We continue to invest in the business and are building the infrastructure at the organization to support a significantly larger company in the next 12 to 24 months.

Slide 8 provides some additional color on our recent land acquisition activities. During the quarter we took advantage of some attractive opportunities to expand our presence in the marketplace and closed on approximately 1300 home-sites for $70 million for future master planned communities located at Naples, Fort Myers and Bradenton Sarasota markets. These transactions include approximately 200 finished lots and an additional 230 substantially developed allowing us to quickly establish a presence and initiate sales activities.

We also contracted for approximately 1400 additional home sites, including a potential large master-planned community in Jacksonville making our initial entry into this market and a large master planned community in Fort Myers. Our contracts typically call for a due diligence period and there is no guarantee that we will ultimately close but we remain optimistic about the opportunities. Collectively these efforts helped propel our land portfolio by 21% since year-end 2013 to 10,300 home sites owned or controlled at the end of the quarter.

With that, I’d like to turn the call over to Russ to walk you through the future results in more detail.

Russ Devendorf

Thanks, Keith. Turning to Slide 9, as Keith previously mentioned, the main driver of our topline revenue growth is our homebuilding segment which accounted for 66% of our total revenue this quarter and increased 13% year-over-year.

Our net income for the quarter was $4.3 million or $0.17 per diluted share compared to $8.2 million or $0.45 per share in the second quarter of 2013. Our year ago results did not include any income tax expense. However our second quarter 2014 results included an income tax expense of $2.97 million or $0.11 per share as a result of reversing a significant portion of the valuation allowance on our net deferred tax assets at the end of last year. We maintained $121 million deferred tax asset on our balance sheet at the end of the quarter and do not expect to pay significant cash taxes in the near future.

Our adjusted EBITDA was $10.2 million in the second quarter, a 4.4% decrease from prior year. This decrease was primarily driven by the reduction in the homebuilding gross margin percentage. Additionally the average sales price of our delivered homes decreased 3% to 426,000 versus the prior year quarter which was driven by a shift in product mix.

Revenue from our real estate services business grew by 10.4% to 26.5 million in Q2 of 2014, representing 28.5% of the company’s total revenue. Our gross margin was 1.5 million for the quarter, a decrease of 400,000 from prior year primarily due to certain costs associated with our acquisitions, slightly higher commission splits in the brokerage business, lower revenue and margin from our title business and various additional overhead and marketing costs to improve and enhance the infrastructure of the business for future growth. These incremental costs were partially offset by a 10% increase in the average selling price on the closed brokerage transactions.

The performance of our amenity segment was largely consistent with the year ago results. Amenities revenue of 5.5 million was slightly below the prior year period while the gross profit improved by 45,000 over Q2 of 2013 as a result of an overall improvement in our variable expenses.

Sales and marketing expenses, which include commissions paid to our license in-house sales personnel and third-party real estate brokers increased by approximately $300,000. Commission expense as a percentage of revenue for homes delivered was 3.8% for the quarter, an approximate 50 basis point improvement over the prior year period as we had lower third-party brokerage participation involved in our deliveries and lower internal sales commissions.

General and administrative expenses increased 800,000 primarily due to incremental public company expenses, stock-based and non-cash long-term compensation expense and additional staffing to support the growing business. While we fully expect to leverage our SG&A as a percentage of revenue going forward, as Keith mentioned, certain quarter versus quarter comparisons may be uneven in the near future as we continue to drive scale through the business ramp up operations and experience a shift in product mix.

Turning to our balance sheet discussion on Slide 10. We ended the second quarter of 2014 with cash and cash equivalents of $201.5 million, total debt of $250 million and total equity of $417 million, resulting in net debt to net capital of 10.4%. We ramped up our land activities and invested $83 million in land acquisitions and land development in the quarter and expect to see further activity throughout the year.

Our ending cash balance plus our 75 million unsecured revolving credit facility provides us with ample liquidity to pursue our growth strategy. In June, we completed the issuance of an additional 50 million of our senior notes due 2021 generating net proceeds of approximately 50.2 million for general corporate purposes, including the acquisition and development of land and construction.

In addition, as we mentioned last quarter we sold CDD bonds in April that we acquired through our acquisition of the Sarasota National community in 2013. The sale of these bonds was contemplated when we acquired the property and as a result, we received net proceeds of 22.7 million from this transaction.

Now I would like to turn it back to Keith for some closing remarks.

Keith Bass

To wrap things up, we continue to execute our strategy to position the company, to maximize our profitability by being a fully integrated luxury homebuilder and community developer focused exclusively on the coastal Florida markets. Coupled with our complementary and strategic amenities and real estate services business, leveraging our 60 plus year history in Florida and our strong consumer brand recognition, we will continue to strategically target move-up, luxury second home and active adult customer segments.

The Florida market remains strong allowing us to continue to grow our neighbourhood count, orders and deliveries. This is translating into strong revenue growth and profitability as our operations continue to scale. We were an active acquirer of land during the quarter closing on approximately 1300 new home sites and gaining control of an additional 1400 home sites across Florida which will position us well for future growth opportunities.

Furthermore our existing land portfolio with our conservative and well-capitalized balance sheet allows us to be opportunistic and highly strategic in our land plan acquisitions. We're building the company for long-term sustained growth and are pleased with our results compared to our internal projections. I'm happy with our progression over the last two years and even more excited about our growth prospects over the next 12 to 24 months.

Last but certainly not least, I would like to recognize and thank all the team members of WCI for their dedication, hard work and achievement in the continued growth of our company.

With that, we’re ready to take your questions. I’d like to turn the call back over to the operator to open up the lines.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut – JPMorgan

The first question I had was just on – you mentioned that how you’re positioning yourself for growth and certainly everything points in that direction, and had solid numbers in orders and closings growth this quarter, although just a touch less than what we were looking for on both counts and obviously there can be timing and other issues that drive that. I was trying to get a sense of how you’re thinking about the back half of the year from a community count growth perspective and even into 2015 as I think myself and many others are still projecting a pretty solid ramp up in volume over the next 24, even 36 months.

Keith Bass

I think we gave out some guidance last quarter for community count end of the year at 35 to 40 and we still feel good with that number. So I think that it’s certainly going to be backend loaded, like we've always said our community count growth is really being pushed for the first half of the year, that's generally when two of our primary buyers are going to be most active. So we’re putting communities in place right now that will get us in great shape for 2015. So that’s really what we’re pushing for. So we still feel good with the guidance of 35 to 40.

Russ Devendorf

Yeah, I would add that as we look at the back half of the year, third quarter will be somewhat consistent with what you're seeing in second quarter and will be a little bit more backend loaded in terms of the deliveries and I think you’ll even see sales should be stronger in Q4 just because of seasonality than what you'll see again in Q3. So again I’d say roughly it's probably going to be a little more consistent with what we saw back in ’12, 2013 from a delivery standpoint. We were little more even slow, I think it’s stacking up a little bit to Q4 just because of the product mix, and we have a lot more midrise multifamily that takes a little bit longer to build and a lot of that stuff closes at the same time. So you’ll see probably close to 30, 35% of deliveries for the full-year that happened in Q4.

And then as it relates to next year, we’re not prepared to give any guidance on ‘15 yet in terms of community, maybe something in Q3.

Michael Rehaut – JPMorgan

So just to clarify before my second question. When you’re saying about, Russ, 3Q being consistent with 2Q, you're referring to the community count?

Russ Devendorf

Community count will be a little bit up but just in terms of what you're seeing from a P&L standpoint, like I was saying, Q4 is going to be where we stack up a little bit more to deliveries, it won't be as even flow as it was in 2013.

Keith Bass

Well, you will also start to see the backlog ASP at 5/31 you will start to see that really show up more in Q4 closings than Q3 closings.

Michael Rehaut – JPMorgan

And I guess just a second question, Keith, you'd mentioned I guess in talking about the order growth for the quarter, the primary buyer or orders being unchanged versus a year ago if I heard that right. I was just trying to get a sense for what that was -- what the primary buyers represented as a percentage of the overall total orders for the quarter and what the other segments – how the other segments grew I mean across move-up and active adult?

Keith Bass

Give me a second and I'll get that to you. Primary is about 31. I mean right now we’re more heavily weighted to active adult, so you’re probably seeing around 50% active adult, probably 30 primary, and the balance in the luxury high end. But that's really a function of community -- where the community counts are stacking up and actually your primary buyer – their most active quarter is generally not first and second quarter, they’re probably a little more – anyway they’re little bit more even.

Michael Rehaut – JPMorgan

Right, so then I guess active adult, we could extrapolate that maybe that that growth would be in the 40%, 45% range or something of that in that ballparks?

Keith Bass

Yeah, same store is up 23%.

Michael Rehaut – JPMorgan

You mean sales pace?

Keith Bass

Yes.

Operator

Our next question comes from the line of Mike Dahl with Credit Suisse. Mike, your line is live.

Russ Devendorf

Operator, we can go to the next question. Mike can get back in the queue hopefully.

Operator

Our next question comes from the line of Will Ranjo [ph] with Citi.

Unidentified Analyst

As it relates to home deliveries, related to new lot positions versus legacy land positions, how should we think about housing gross margin kind of progressing over the next 12 months or so? As you know we’ve seen a lot of the competitors who don't have the same buyer profile or land positions, talk margins down a bit.

Keith Bass

I think that the percentage of closings that will happen from legacy to the new communities will still be fairly strong through obviously all of this year and probably the majority of next year too. I mean it’s not going to stay at 95% next year but it'll still be that the vast majority of our closings will come from legacy projects even into next year. And I think what we've kind of said all along is the legacy staff has been producing 30% margins and anything new that we’re looking at on average to get the IRRs that we’re looking for is about a 25% LIFO [ph] job pro forma gross margin. So luckily we’ve been doing a little bit better than that and that helped us produce a pretty decent margin this quarter, in spite of low deliveries.

So we just want to get everybody ready for the fact that over time that gross margin is going to come down some but we can't emphasize enough that the gross margin can be very lumpy within even the backlog that we have today. So you could see a swing in gross margin from quarter to quarter just by what closes and when it closes. So although I think we’ve got a very consistent backlog margin today, similar to the first of the half year, it may not close all like that, so you could see some swings.

Russ Devendorf

Yeah, so the quick thing I would add is that I wouldn’t be surprised just given the way our backlog looks is that you could actually see, like Keith mentioned earlier, there will be some unevenness definitely in the short-term when you look at the back half of the year, you could see gross margins be actually little bit lower in Q3 than they are in Q4. So Q4 actually you may get a bump up, again it’s just – it’s based on what happens to closing and where the backlog shakes out. So it will be like Keith said lumpy and somewhat uneven.

Unidentified Analyst

And just as a follow up to an earlier question, you’re running kind of mid-2s for your first half absorption pace. Should we expect that to slow down to kind of what we saw in the second half of last year of, call it, mid ones and is this is sustainable trend do you think?

Keith Bass

Yeah, I think we’ve always tried to guide to kind of a 2 per month per community on average, and I think that's where we feel most comfortable, it will be higher in the first half of the year and lower -- generally speaking third quarter is the lowest, and particularly with the amount of active adult that we have as a percentage, that we would expect that to hold true.

Operator

Our next question comes from the line of Alan Ratner with Zelman.

Alan Ratner – Zelman and Associates

Keith or Russ, just on the 10,000 lots that you have, just given the acquisition pace has accelerated here. I was hoping if you could just give us an update on in terms of what’s currently under development, meaning communities you expect to open at some point beyond 2014 – can you give us a rough idea -- how many communities those lots represent and kind of roughly how many you expect to open up in 2015 and beyond or anyway you can kind of frame just the duration or the tail of those lots and the size of communities would be helpful?

Keith Bass

Well, what I would say is the ones we’ve closed on are a little bit easier to give you that background, because they are in title projects and some of them are partially developed. So I would say and -- the other thing we have to do a little bit more work to answer your question because some of those projects where we’ve got developed – buying developed lots they come on very quickly, some as soon as this year, and others – where they’re partially developed will come on very very quickly. But one community may have 150 lots and one may have 50, so they’re going to come on and off fairly quick. So I need to give that to you.

Of the ones that are under contract that we’ve not closed, the Jacksonville deal is a long lead deal, so that could be year and a half before we close on the property, just depends on the entitlements. The other project has underlying entitlements and we could close on it by the end of this year and expect to -- by the end of this year and bring something on arguably three, or four, five product lines on by the end of next year. So each one is different, I’d have to –

Alan Ratner – Zelman and Associates

Do you have a total number of communities that are currently under development that are not actively open for sale?

Keith Bass

Yeah, but we haven't given that out yet. I mean I do think that we gave out the lots that we just closed on this quarter, produced over time 17 neighborhoods.

Alan Ratner – Zelman and Associates

And then just any update on the tower lots – your thoughts on timing on when that might be rolled out?

Keith Bass

We spoke a little bit about it last quarter. We are actively in the planning stages of a tower, we’re pretty close with the floor planning and finishing up some focus group work, and some market work. So we do intend to premarket a building this season in the colony.

Alan Ratner – Zelman and Associates

So it will be in the fourth quarter?

Keith Bass

I mean arguably yes, but I mean you’d be pre-selling it through next season. It would really be the first quarter of ’15, assuming that’s successful you convert the contract sometime in probably the second quarter. So you got your reservation first, you take deposits, you make sure you have the visibility that when you convert the contract over 50% of those would go hard contracts, so that you could then start the building right after you got the contract and then you’re talking about an 18 month delivery from contract conversion, about where you would be sitting.

Alan Ratner – Zelman and Associates

So deliveries late ’16, early ‘17 most likely?

Keith Bass

Yes, I think that's -- I like ’16 better than ’17.

Alan Ratner – Zelman and Associates

And how many units would that building be?

Keith Bass

74. We will reserve one for you if you want it.

Operator

Our next question comes from the line of Mike Dahl with Credit Suisse.

Mike Dahl - Credit Suisse

I guess I was wondering, if you just touched on the ramp of that Jacksonville deal, so I guess I just wanted to touch on just the land acquisition, and kind of outlook for the year what you're seeing as far as competitiveness and is it things like your willingness to take on more complex deals like the Jacksonville deal that you think are giving you a leg up on competitors?

Keith Bass

I think that it’s our positioning probably and -- as we get our feet underneath us and feel very comfortable with our execution within our core markets, our pushing out to the next ring of markets I think is probably more what it is. Lot of what we closed on was all within our wheelhouse of our current footprint. And we feel most -- the ability to be most successful and bring the projects on in a timely manner there. Once we get that, now this is the first push in the Jacksonville, it’s a market I have worked in before. There is definitely a shortage of the higher-end, second, third move up communities, Toll will be our primary competitor up there. But it’s a market I have worked in for many many years. It's a good second third move-up buyer market for us. So I think it's really just more that, we needed to make sure we could get everything that we owned up and open and planned out and now it’s -- go to the next year and so I think you'll see us look at some markets that we’re currently not in to expand our business. It’s what we’re doing that right now.

Mike Dahl - Credit Suisse

And as a follow up there, any other markets that you would highlight as ones that you're likely to enter in the near term and also just to clarify, I think you mentioned earlier that you’re still able to underwrite to 25% and do that to hold through [indiscernible] entering the second rank?

Keith Bass

Your second question, yes, we’re just not going to do deals that don't produce a 20% project level IRR, whether that’s a 22% margin or 30% margin, it really depends on the tail of the deal. As far as other markets in Florida, yes, we are looking at other markets outside of our core markets in Florida, both East Coast, certainly West Coast, there is a few other places where we could deepen our market. I mean we’re certainly acquiring projects inside of our core market too. I don't want anyone to think that we’re not. There is an opportunity for retirement type product in the center of the state primarily in the Orlando metro area. So that could be a market for us but there is a lot of opportunity on the East Coast and we’re working pretty hard over there to pick a few things up.

As far as outside of the state, we look at opportunities that come to us. I would say we’re not actively looking outside of the state at this point. We want to grow this thing successfully for the long-term. We want to make sure that we can execute properly and I think the more we do that in a organized fashion, in a controlled fashion, the more successful we will ultimately be but we are looking at companies that come our way outside of the state. But if they are not a really good fit, I don't think you’re going to see us do.

Operator

Our next question comes from the line of Buck Horne with Raymond James.

Buck Horne – Raymond James

Just wondering if you could offer maybe any update on how July looked and if you can comment on July trends in sales. And also just with the – we’ve seen more resale inventories starting to come into the Florida markets. It still appears like it’s historically at very healthy levels but is the emergence of similar resale inventory putting any sort of pressure on pricing either at the active community level or is it affecting your plans to roll out new communities at certain price point?

Keith Bass

As far as the resale inventory, I would say no, it really to this day has not affected us. If anything I think it adds some credibility to some pricing, because you're seeing some of that resale inventory come out at very nearly the same price as new. And when it’s five or six or seven years old and someone buys it, I think that adds credibility to what we’re doing, if anything helps us feel more comfortable about pushing price. If you look at our general brokerage side, generally speaking good inventory is what's missing in the marketplace. There is inventory and there is saleable inventory and then there is good inventory and the good inventory if it's priced right moves very very quickly. So most every markets you’re below six months and the good stuff trades really quickly less than 60 days. So I think it helps to have some good inventory out there. If anything I think it brings some buyers back into the market when there is stuff they would be willing to buy in the marketplace priced appropriately.

July trends, I mean again I don't want to go too far into it. What I would tell you is our community count is up 33%, our traffic is up 51%, so obviously in excess of our community count, web traffic is up about 17%. So we feel good about July, although we pushed pretty hard into June, and July, August is generally kind of our slowest time of the year. So sales were good, they weren’t great. But they were pretty good.

Operator

Our next question comes from the line of Steve Stelmach with FBR.

Steve Stelmach – FBR

You mentioned that the SG&A leverage may be a little bit lumpy. You saw – I mean this quarter -- we saw this quarter a little bit improvement on a year-over-year basis. Last quarter you saw a lot more improvement. When it comes to the pace of the SG&A leverage, how should we think about that? Is it going to be more like a 2Q pace in terms of improvement, more of a 1Q pace of improvement, if that makes sense?

Keith Bass

It’s going to be – a couple of factors that are going to go into it, it's all about closings at that point, it’s just what we leverage that over. So as Russ said, Q3 won’t be our best closing month. So you’re not going to see a lot of improvement in Q4, not only should we be closing more units, we’re going to be closing them at a much higher ASP. So you should see more of an improvement. The other -- a lot of that SG&A is commissions, so that’s not going to move to any one direction although we’ve been a little bit more efficient on our co-broke percentage and our internal commission rates. But the other thing that moves it is as you start new communities, the amount of marketing that you don't capitalize can get lumpy and so you may see a big expense hit in a quarter because we’ve opened up four communities and put all that marketing expense in the quarter and if you don't get closings, that’s where you’re going to see that lumpiness.

Steve Stelmach – FBR

So based on your community count growth in the back half of the year, should we assume most of the SG&A leverages falls in ’15?

Russ Devendorf

You'll see -- obviously with Q4 as I mentioned earlier because of the way the delivery timing is shaping up, clearly you will see some pretty good SG&A leverage for that quarter and even when you look at it on a year-over-year basis and then absolutely in ‘15 you will see even improved SG&A leverage given what we think in terms of growth over the next 12 to 24 months. I’d definitely say the comp for Q2 this quarter and even Q3 next quarter will be a little difficult for us just because of some of -- where the ASP is winding up versus last year and even we’ve had some margin compression in the quarters, Q4 should start to look a little bit better and then obviously into 2015, we should see improvement. But our stated goal over the next 24 months or so is to get the SG&A back into a low teens 10% to 12% and look like a lot of the public peers. But when you’re in growth mode and building the infrastructure, this is kind of what happens but as the top line continues to grow we should start seeing the benefits of that.

Steve Stelmach – FBR

And then just real quick on the ASP. You mentioned that’s also a lumpy number which we understand based on mix. You gave some decent guidance on the back half of the year but based on planned communities opening for back half of the year and into ’15, how should we think about that ASP mix shifting around in ’15, higher, lower?

Keith Bass

I think the only guidance that we've given is mid 450s is a good number to think about when you think about the company in the midterm. On an annualized basis but it can definitely be a number that swings dramatically. I mean the easiest thing to look at is the backlog. That’s the easiest way to look at it. But if we bring on a tower 74 units at a 1.2 million to 1.5 million, [it’s going to move] number around and that will close in one quarter. So it’s not going to make it easy.

Operator

Our next question comes from the line of Brendan Lynch with Sidoti.

Brendan Lynch – Sidoti & Company

My question is on the use of incentives, you’ve had very strong order growth in the second quarter at a time where many peers were struggling to even meet what they had last year. So could you just give us some color on -- your thoughts on the use of incentive as we progress through the third quarter which you described as seasonally weakest?

Keith Bass

We for a year now I think, we’ve averaged between like 2.6 and 3.1 for margins -- for incentives. So we’ve been pretty flat now for over a year and we’ve been raising prices. So I would say that you can use incentive -- there are some communities where we use incentives just because of what we're doing, where we build into our model that where – if you buy we’re going to give you $20,000 and options, that maybe cost us 10, and that's our marketing pitch that we use all through the process and you move around a little bit to just play games from one month to the next. That’s a game that we – it’s just part of our marketing process for some of our buyer profile. Other buyer profiles, we always give away $2500 and it just doesn’t change. So you may see communities where that number moves around a little bit but luckily for the most part what we sell is not a commodity house, and we don't have a competitor right next door that offers the same product and we have a buyer that says I can get exactly what you have here and exactly what you have here and it’s a $450,000 house and unless you give me $4500 off, I am not going to buy it. We don't really have that.

In the summertime we do some fly and buy [ph] promotions, we’re generally going to be a little bit more aggressive with amenities to try to get people to fly back down and buy and two of our buyer profiles, that just plays out through the year. So if we’re in a commodity situation and the market starts to do a little bit more aggressive, things we’re going to have to make sure that we get our fair share of sales. But luckily for us that’s not where the vast majority of our sales come from and we just haven't had to play that game. So we know that we have to grow the business, we know we have new communities coming online, we know we have to be competitive. But I don't think that we’re in the commodity home business where a buyer really does make a decision over $2000.

Operator

Our next question comes from the line of Alex Barron with Housing Research Center.

Alex Barron - Housing Research Center

I was hoping you could expand on the pricing change from last quarter to this quarter. it seems like it went down little bit on the orders, was that more product driven or just the location of communities or what –

Keith Bass

Product driven, we just had more active adult communities -- and the sales price in the active adult communities because we offer anything from a 150,000 to maybe 500,000 in that, you’re going to end up with a little bit different spread. So at that time of the year where that buyer profile is more active plus we had a higher percentage of active adult communities.

Alex Barron - Housing Research Center

And then your other comments about the number of lots, or the margins being influenced by the legacy land versus the new land, how much – how many legacy land or legacy lots do you guys still have or when do you anticipate those would – I guess fair lots be less than 50% of what you guys are doing?

Keith Bass

Well, we continue to buy property, we’re forcing it to be lower but it's -- I think it’s 5500 right now that are our legacy lots, is our current projection number of lots that – or homes we will build on those lots. So again we own -- we control 10,000, so it takes some time. Some of the trail on that legacy stuff can go out seven or eight years, so it's not like it’s just one day fall apart, so some of it will be influencing our margin for a long, long period of time.

Russ Devendorf

If you go to Slide 8, you will see we broke down the legacy lots versus the new acquisitions, and as Keith mentioned it’s about 5500 legacy out of the 10,300 at the end of second quarter.

Operator

Our next question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut – JPMorgan

Hi, thanks for taking my follow-up. Keith, I just wanted to circle back to something you mentioned earlier about sales pace and you said that if I heard you right that third quarter is typically the softest of the year. I was just surprised to hear that given that last couple of years it’s actually been your fourth quarter that's been a little bit of a softer sales pace particularly last year versus the third quarter. And I would've expected that trend to continue to. Just wondering to make sure that I heard you right on that and if that’s what we should indeed be modeling 3Q being a bit softer and maybe little bit of a lift in 4Q relative to 3Q?

Keith Bass

You had -- part of it has to do with last years when the communities came on last year in Q4. But you’re generally going to be looking at, if you go back to 2012 it was 1.7, roughly a little less 1.7 in Q3 and 1.7 in Q4. If you go back into ’11, it’s 1.1 and 1.5. So a lot of it’s going to be the exact timing of the community itself and it's going to be the stage of the community when we bring it on to market. What we’re working on now more and more is to get when we open the community, there’s certain criteria that community has to make, plus it actually has to sell houses. And so what we’re doing now is trying to get those communities to open up with the entryways on and amenities either done or closed, just so we can be more successful. So a lot of it is just going to depend on what the community looks like when you open it but generally speaking for active adult buyer it’s going to be better in Q4, you have a lot of buyers that come down in the early part of Q4 that are looking for inventory that they can close on the end of the year, so they can use it for the next season. So you can be fairly successful in Q4 in active adult, somewhat in luxury second home too, but they are looking for inventory when they come down in Q4.

Michael Rehaut – JPMorgan

And just going back, Russ, to your commentary on SG&A which are very helpful. Obviously it’s tough quarter to quarter to model but at the same time it helps us and maybe prevent some variances versus our estimates that of course we write about. So just thinking in terms of 3Q you’d mentioned you expect the P&L – I assume from a revenue standpoint to be similar but given the expected ramp in community count into 4Q, would the SG&A ratio potentially be higher as a percent of revenues in 3Q over the year ago and then you’re trying to get some leverage on a ratio basis in 4Q, and is that the right way to think about it, or –

Russ Devendorf

Yeah, I think when you look at Q3 right now the way it shapes up is it'll be fairly – I am just looking at a couple numbers -- it will be fairly consistent I think with what we're seeing – what the year-over-year was last year from an SG&A -- as a percentage of homebuilding revenue. But then there will be a significant improvement in SG&A leverage going into Q4.

Michael Rehaut – JPMorgan

And just one last one on ASPs, Keith, I know you mentioned that in the medium-term, think in terms of mid 400, but maybe in 4Q that might pop up a little bit just given the mix and if you look at backlog ASPs -- but just taking that a step further, I guess when you look at the average price and backlog, not just this quarter but the last couple of quarters, as well as the average price of orders being in the high 400s, why couldn’t 2015 list a bit more to like -- I don't 475 or some type in that neighborhood just given how that the backlog ASPs are tracking the last two quarters again, over 500,000?

Keith Bass

It could.

Michael Rehaut – JPMorgan

Any thoughts around that, Russ or –

Russ Devendorf

I think it could. I mean we do have a higher percentage of active adult opening and it could – I mean I'm not going to disagree with you.

Michael Rehaut – JPMorgan

I mean I just – I am not trying to push something that’s not there. I just wanted to get a – just try and thinking about it reasonably or correctly so.

Russ Devendorf

Yeah, and just going back to Q3, again one thing I'd like to add is as you mentioned just in terms of what we’re thinking about, you mentioned on the SG&A leverage. I also want to reiterate just on the gross margin standpoint that the difference that you saw in Q2 I think which was about 300 basis points year-over-year, don't be surprised if you see something like that again in Q3. But then like we had mentioned earlier I think Q4 you can actually see some improvement and this is just based on where the backlog is shaking out just in terms of the gross margin and as Keith just mentioned even in terms of the ASP, it could be substantially higher in Q4 as well.

Michael Rehaut – JPMorgan

Up gross margins year-over-year in Q4 and – is that – I am hearing that right?

Russ Devendorf

Not necessarily up year-over-year but sequentially, you could see that from Q4 to Q3 this year.

Michael Rehaut – JPMorgan

Okay, because you are saying Q3 could be a similar year-over-year delta?

Russ Devendorf

Yes, Q3 could be similar year-over-year to what you saw in Q2 but then Q4 you could actually see a sequential improvement in gross margin Q4 to Q3 this year.

Michael Rehaut – JPMorgan

And interest amortized to COGS as percent of revenue, I mean it’s been holding steady around plus or minus 2%, 2.1%. Is that something -- that can be modeled on a similar ratio going forward?

Russ Devendorf

Yeah, I don't see that changing much, if anything it might tick up 0.1% to 0.2% but I don't see any material change unless -- again we’re not contemplating any big change in the capital structure. So that should be fairly consistent.

Operator

Mr. Bass, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Keith Bass

All right. Wells thanks everyone for participating on today's call and for your interest in WCI Communities. We look forward to updating on our next quarterly conference call. Have a great day.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.

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WCI Communities (NYSE:WCIC): Q2 EPS of $0.17 misses by $0.04. Revenue of $93M (+11.6% Y/Y) misses by $8.89M.