Meritage Homes' (MTH) CEO Steven Hilton on Q4 2015 Results - Earnings Call Transcript

| About: Meritage Homes (MTH)

Meritage Homes Corporation (NYSE:MTH)

Q4 2015 Earnings Conference Call

January 28, 2016, 01:00 PM ET

Executives

Brent Anderson - Vice President, Investor Relations

Steven Hilton - Chief Executive Officer

Phillippe Lord - Executive Vice President and Chief Operating Officer

Larry Seay - Executive Vice President and Chief Financial Officer

Hilla Sferruzza - Senior Vice President and Chief Accounting Officer

Analysts

Michael Rehaut - JPMorgan

Alan Ratner - Zelman & Associates

Stephen East - Evercore ISI

Stephen Kim - Barclays

Nishu Sood - Deutsche Bank

John Lovallo - Bank of America

Mike Dahl - Credit Suisse

Brian Jones - KBW

Will Randow - Citigroup

Jay McCanless - Sterne Agee

Susan Maklari - UBS

Operator

Good day, and welcome to the Meritage Homes fourth quarter 2015 analyst conference call. [Operator Instructions] I would now like to turn the conference over to Brent Anderson, Vice President, Investor Relations. Please go ahead.

Brent Anderson

Thank you, Andrew. Good morning, and welcome to our analyst call to discuss our fourth quarter and full year 2015 results, which we issued in a press release before the market open today. If you need a copy of the release or the slides that will accompany our webcast, you can find them on our website at investors.meritagehomes.com or you can select the Investor Relations link at the bottom of our homepage.

I'll refer you to Slide 2, which has our Safe Harbor language, and remind you that our statements during the call and the accompanying materials contain projections and forward-looking statements, which reflect the current opinions of management and are subject to change. We undertake no obligation to update these projections or opinions and our actual results may be materially different than our projections due to various risk factors, which are listed and explained in our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2014 Annual Report on Form 10-K and our subsequent reports on Forms 10-Q.

Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. So we have provided a reconciliation of those non-GAAP measures to the closest GAAP figures within our earnings press release.

Referring you to Slide 3. With me today to discuss our results are Steve Hilton, our Chairman and CEO; Phillippe Lord, our Chief Operating Officer; Larry Seay, our Chief Financial Officer; and Hilla Sferruzza, our Chief Accounting Officer, who will be assuming the CFO role, when Larry retires at the end of March.

We expect our call to conclude in about one hour and a replay will be available on our website within approximately an hour after we conclude the call. It will remain effective until February 15.

I'll now turn the call over to Mr. Hilton to review our fourth quarter results. Steve?

Steven Hilton

Thank you, Brent. Welcome to everyone on this call, and thank you for your continued interest in Meritage Homes. We ended the year with good fourth quarter results across our key performance metrics. Orders were up 23% over the fourth quarter of 2014 and our yearend backlog was 27% higher than a year ago.

Our home closing revenue and net earnings for the fourth quarter were up year-over-year and our pre-tax earnings for the fourth quarter were the highest we've generated in the last 37 quarters. Home closing margin improved sequentially from the third quarter of 2015, though it was lower than last year. And our overhead leverage improved over the fourth quarter of 2014, resulting in a 15% increase in fourth quarter pre-tax earnings.

Turning to Slide 5. Those improvements contributed significantly to our full year 2015 results. It was our fifth consecutive year of order growth, with 19% increase over 2014. We closed more than 6,500 homes in 2015 and generated more than $2.5 billion in closing revenue. That is the largest number of homes we delivered in eight years and the most revenue we've produced since the peak of the last homebuilding cycle. Home closing revenue was up 18% over 2014.

We reached several new heights for the company in 2015. We ended the year with 254 actively selling communities, more than ever in our 30-year history. Our shareholders equity set a new record at more than $1.25 billion at the end of 2015. And we reached a nine-year high in book value per share of $31.74, which is higher than where our stock is currently trading.

As impressive all those statistics are, we could have done even better, if not for the challenges we faced last year. Severe weather delayed development and construction schedules in Dallas and in Denver, which translate into fewer closing than we would have expected.

Tight labor supplies and increased cost, negatively impacted our margins. Falling oil prices caused greater buyer uncertainty within the Houston market, which was the best-selling homebuilding market through most of 2014. And a few of our newer markets in the east ramped up slower than we expected. However, we managed through those issues to deliver good results in 2015, and I believe we can do even better in 2016.

Market conditions remain generally positive through all of 2015, job growth was strong, household formations increased and interest rates remained low. Rise in rents continue to push more renters towards homeownership and demand continue to exceed the supply of homes for sale in many markets, so home prices were stable-to-positive. We believe the housing market continue to grow at a modest pace, and that Meritage Homes will grow with it, while continuing to improve our performance.

Turning to Slide 6. We generated moderate revenue growth year-over-year in the fourth quarter. We combined a 3% increase in home closing and home closings with an 8% increase in average closing price to deliver an 11% increase in home closing revenue over the fourth quarter of 2014.

Our west region drilled most of that growth with a 27% increase in home closing revenue over last year. Market conditions in California and Arizona improved in 2015, and we are well-positioned there with our communities. The decline in Colorado's closing revenue reflected a combination of delayed closings from spring weather disruptions and a slight decline in average sales price. We expect to catch up on closings there in the first few months of this year.

Closings in Texas were off 14% compared to a very strong fourth quarter of 2014, when all four of our markets there were among the nation's top housing markets. Several factors contributed to the decline. Weather in 2015 delayed starts and closings in Dallas-Fort Worth, which we expect to make up in the first half of 2016.

High home prices in Austin have led to more demand for lower price homes, and to meet that demand of first time homebuyer and the first move-up buyers, we are increasing our focus on that segment and expect more than half of our communities in Austin will address that segment by 2017. And of course, the pullback in oil prices has impacted the Houston market.

Our east region delivered an 18% increase in home closing revenue, with better than 20% year-over-year growth in Florida, North Carolina and Georgia's revenue. Unfortunately, North Carolina is continuing to experience wet weather, thus delay in development of communities. The increase in our total home closing revenue offset a narrower home closing gross margin, resulting in a 5% increase in total home closing gross profit for the fourth quarter of 2015 over the prior year.

I'd now like to turn it over to Phillippe to review our order trends, after which Larry will provide some additional details on our financial results. Phillippe?

Phillippe Lord

Thank you, Steve. Slide 7. With few exceptions, we had broad-based success selling across our markets in the fourth quarter. Our fourth quarter 2015 orders increased 23% in total with the most notable gains coming from the west and east regions, though Texas orders were also up.

The 23% increase was due to 11% more actively selling communities open in 2015 than we had last year, combined with an 11% increase in our absorption pace. Our average sales per community improved to 6.2 in the fourth quarter of 2015 from 5.6 in the last year's fourth quarter.

I would attribute some of the improvement to market demand and some of it to the changes we made in our product positioning and our sales efforts. Our average sales prices were up in some markets and down in others, due primarily to product mix and to a lesser extent price appreciation.

In the west, we had a significant rebound in the sales pace in Arizona, particularly in Phoenix. Since the second half of 2014, we sold 6.2 homes on average per community in the fourth quarter of 2015 compared to just 4.2 in 2014, resulting in a 46% increase in orders year-over-year.

California sales pace is still the highest across the company. It was up 15% over the prior year at 8.6 orders per community on average and we also had 9% more communities open there on average during that quarter. So California's orders were up 24% year-over-year from 2014 to 2015, mainly driven by Southern California.

Our orders in Colorado were slightly lower than the fourth quarter 2014, though our sales pace there was flat compared to the prior year and order value was slightly higher. We're catching up on our backlog in Colorado and focusing on more even-flow production. As in Austin, we're also planning to target first time homebuyers with new communities to have more affordable housing options in the coming years.

Texas orders were up 16% over the last year during the fourth quarter. On top of that, our average sales price in Texas was up 11%. So out total order value increased 29% in Texas over last year's fourth quarter. Most of the increase was in Dallas, though Austin and San Antonio also had nice sales gains. Even Huston was marginally higher than the fourth quarter of 2014, with particularly good sales in December. We have had more entry-level plus communities opening Texas in 2016, which should improve our positioning even in a more challenging energy industry environment.

Moving to the east region. Orders were up 29% in units and 32% in total value. The largest increases came from Georgia and Tennessee, two of our newer markets, and were primarily the results of increased community count in both Atlanta and Nashville, though we also achieved a higher absorption pace in Atlanta. I would attribute the improved pace of sales in Atlanta to some repositioning and a highly energized new sales team. We're expecting to see better performance there in 2016 with the new team in place.

With that, I'll turn it over to Larry to further discuss our results.

Larry Seay

Thanks, Phillippe. Moving to Slide 8. We gained some overhead leverage on higher volumes during the fourth quarter, improving our SG&A by approximately 100 basis points in total over the fourth quarter of 2014.

General and administrative expenses declined 8% in absolute terms, primarily due to compensation adjustments and other cost control measures and fell to 3.4% of total closing revenue from 4.2% last year. Commissions and other sales costs were also down 7.0% of home closing revenue compared to 7.2% last year.

Interest expenses increased due to a higher debt balance in the fourth quarter of this year, after we issued new senior notes in June. Our interest incurred was approximately $3.4 million higher than the fourth quarter of 2014.

Our effective tax rate was 30% compared to 26% in the fourth quarter of last year. We had larger adjustments to our energy tax credits in 2014 than we did in 2015, related to homes closed in prior years. Those credits reduced our effective tax rate from the statutory rate due to the higher energy efficiency of Meritage's homes.

For the full year, our home closing gross margin declined to 19% compared to 2014's 21.2%, due to land and construction cost inflation as well as an additional $2.9 million in impairment during 2015 over what we incurred in 2014. Excluding impairments, our fourth quarter and full year gross margins would have been 19.6% and 19.3%, respectively.

We also incurred a $4.1 million litigation-related charge in the third quarter of '15 compared to $4.6 million of favorable settlements last year, which accounted for almost $9 million unfavorable swing in our full year earnings. The combined effect of the additional interest, additional impairments and swing in litigation-related expenses, reduce our 2015 diluted earnings per share by approximately $0.35.

Moving to Slide 9. We were more cautious in taking on new land positions due to choppiness in some markets during 2015. As a result, we did not deploy as much capital for land and development, as we otherwise may have in 2015. We spent $222 million in the fourth quarter of 2015 on land and development, including option deposits, bringing our total spent for 2015 to $709 million, approximately in line with 2014.

We also deferred approximately $115 million in contracted land and development through land banking, using only $19 million in cash for option deposits in 2015. We are currently projecting a higher level of land spent in 2016, but we will continue to monitor marketing conditions and adjust our plans accordingly.

We ended the quarter with 27,785 total lots under control, of which 69% were owned and 31% controlled under option contracts, which represents an approximately 4.3 year supply based on trailing 12 months closings. That does not include our work-in-process inventory of approximately an additional 300 homes.

Our total spec home inventory at December 31, 2015, was 1,270 homes, approximately two-thirds of which were under construction and one-third were completed homes. That equates to an average of 5 specs per community compared to 5.4 a year ago. We are comfortable with our spec levels heading into 2016 selling season.

Moving to Slide 10. We ended the year with $262 million in cash and cash equivalent, $159 million more than at the end of 2014, primarily from our issuance of $200 million in new notes during the second quarter. We increased our total investment in real estate assets by approximately $220 million during 2015, mostly in work-in-process inventory to support increased sales and construction.

Our net debt to capital ratio fell to 40.7% at December 31, 2015, from 42.9% at the end of 2014. We had nothing drawn on our $500 million revolving credit facility as of the end of 2015. Steve?

Steven Hilton

Thank you, Larry. We announced last month that Larry will be retiring at the end of March, and Hilla Sferruzza will become our new Chief Financial Officer, effective April 1.

Larry and I have done about 76 of these quarterly calls together, and this will be his last quarterly analyst call after 20 years with Meritage. I'd like to thank him for his service. He's been an exceptional contributor to our senior leadership team and instrumental to our growth. We will certainly miss him.

But Hilla has proven herself to be very confident, since she joined Meritage in 2006. And I have every confidence that she will also be a significant contributor to our leadership team and I expect it to be a seamless transition.

Larry Seay

Thank you, Steve. If I could interject briefly, I have thoroughly enjoyed working with you and the Board as well as our analysts, investors, bankers and others I've come to know over the last 20 years. I am proud of the team we've assembled at Meritage and the great homebuilding company we have built. I believe Meritage has a very bright future ahead of it.

Steven Hilton

Thank you, Larry. 2015 was a year of continued growth for Meritage, and we achieved new highs in many areas. With that growth came some challenges that took us some time to work through. But we believe we put many of them behind us, and at this point are poised for better times ahead.

With the continued healthy market conditions, as we've been experiencing in most of our divisions, we are confident in our prospects for 2016, especially considering that we entered the year with a backlog valued at $1.1 billion, 34% higher than it was one year ago. We currently anticipate closing between 7,000 and 7,500 homes in 2016 with 5% to 10% community count growth by yearend.

Due to large number of orders that came in, in late 2015, our backlog conversion rate is likely to be lower in the first quarter of 2016 than it was in 2015, since those homes will take at least a couple of quarters to close. So our first quarter revenue maybe flat to just marginally higher than last year. Considering the long-term growth prospects of our industry, we also believe that we can achieve our goal of delivering 10,000 homes in 2018.

Thank you for your attention. We'll now open it up for questions, and the operator will remind you of instructions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Michael Rehaut of JPMorgan.

Michael Rehaut

A couple questions. But first, just wanted to say, Larry, it's been a pleasure working with you. And I'm sorry to see you go. And I hope you enjoy your time away from I guess the company in retirement. And also congrats to Hilla.

Larry Seay

Thanks Mike.

Hilla Sferruzza

Thanks Mike.

Michael Rehaut

First on the question, I guess, on the gross margins. You had a down year in '15 and we're all familiar with some of the reasons and a lot of disruption, particularly in the back half of the year. How should we think about 2016, as some things perhaps normalize like you had pointed to some improvement out of the southeast? I don't know what impact that might have from a mix perspective or a cost perspective on margins. But as you close out the year with 19% even gross margin, it's perhaps a little bit lower than you would sometimes think about a longer-term normalized 20% gross. Do you expect to get a little back towards that 20% number or with the mix and the backlog, maybe just some directional guidance there would be helpful?

Steven Hilton

I certainly expect that some of our regions will improve the gross margins. I expect other regions, land is still expensive and there are continues to be pressure on construction cost, so I think they will for the most part offset themselves. And we could have a slightly better gross margin throughout this year than we had last year. But it's really too early for me to predict that. And I don't have really enough visibility.

So I think it's probably safer to model out a flatter gross margin. I don't think we have gross margin declines in front of us. I think we're more biased to the upside. But then, again, I think it's better to just kind of say that we expect it to be more flat.

Larry Seay

Mike, I'd also add to that, I usually make the qualifier of margins are somewhat seasonal. So as you build closing revenue going through the year, your margins improve, because you do have some fixed costs and construction overhead. So I would expect that same trend to be occurring in '16, so you'd have a little lower number in the first quarter building throughout the year.

Michael Rehaut

You anticipated that question. I mean, when you say lower in the first quarter, given that last two or three quarters you've been down year-over-year, would that trend continue as well? You did an 18.5% last quarter. I mean, I would think it could be closer to 18%, but just any thoughts around that?

Larry Seay

I don't want to give a specific number, but I do think it will be a lower than last year's first quarter gross margin.

Michael Rehaut

And just secondly, if I could, Steve, you kind of threw out, and I believe on the press release as well, talking about 10,000 closings by 2018, which I mean you kind of caveated it with continued industry improvement. At the same time your lot count is down, I believe, roughly 10% year-over-year. And I think you talked about some delays on some of the land banking. To get to a 10,000 number, it certainly would show a bit more of an acceleration in closings growth more like at least 20% year-over-year for the next couple of years.

Are there things that you're planning to do in 2016, either from a land banking perspective or perhaps M&A or greater organic investment to kind of get towards that 10K goal or is that more of just a broader, if markets normalize, we get to 1.5 million starts and you apply a 30% 40% growth, like that you would do on a total starts number. Just trying to get a sense around how to achieve that, again, practically, given where the lot count is and what you might need to do from investment or land banking standpoint?

Steven Hilton

Well, first of all, I wouldn't read a lot into the declining total lot count number. About half of those lots were lots that we sold and they were either lots that we had carried on our books from the prior cycle or for a long time that we had intended to sell, when the market price came back.

So those were in locations. We didn't choose to build in. Or they were lots that we had always planned to sell as part of a bigger purchase, when we go in and buy some lot positions, we may buy more lots than we need, with the intention of selling them off to other builders. So that's really what those sales were made up of.

It's really more a focus of quality over quantity. And I think the number one challenge for us and for our industry is that we need to increase our absorptions. Our absorptions are still far below historical averages for our company and for our industry. And certainly, if our absorptions pick up, we'll need to buy more land. We're clearly aware of that. But it's big opportunity for growth, as it is to increase our store count.

So land prices are pretty expensive in a lot of places, but we do think there is opportunities, particularly in the south, we've talked about quite a bit. And I am really bullish about the opportunity for growth in that region in particular.

Operator

The next question comes from Alan Ratner of Zelman & Associates.

Alan Ratner

Steve, just thinking about the strength in the quarter on the order side and the entry-level plus segment that you guys have been talking about the last few quarters. I was hoping you could just talk a little about that piece of the business, what you're seeing there, which markets you've expanded that product into, what the uptake has been among consumers? And generally as you think about the outlook over the next few years to get to that 10,000 number or whatever the right number is, how do you see the business evolving from a price point perspective, from a geographic perspective? Are there any areas where you see the business evolving significantly from where you sit today?

Steven Hilton

So the entry-level plus segment and the entry-level segment has been a little less than 20% of our total sales in 2015. It's a relatively new strategy for us that we start embarking upon earlier last year. And as you know, there is sort of a lag in the homebuilding business to build to get land and new communities online. So we certainly haven't achieved any results from that yet specifically.

But I suspect this is going to be sort of a three-year evolution to get us from 20% into that 35% to 40% number, which is where we want to ultimately end up. So maybe by the end of this year, we'll be a 25% entry-level, entry-level plus; and then 30% by the end of '17 and maybe 35% by the end of '18. That's kind of how we're looking at it.

We're trying to be very choosy about where we select those locations. We're not going to go out to the C-minus and D markets. We really want to do that product in the B, B-minus and C-plus locations. And we don't see ourselves as a shelter builder, we see ourselves more of an entry-level plus builder. So we're going to try to execute that strategy carefully.

Alan Ratner

And then, second, you brought up your stock price trending below book value. We've seen some other builders either introduce buyback authorizations or expand existing ones. Just curious how you weigh the buyback possibility versus investing in the business either organically or through M&A at this point in the cycle?

Steven Hilton

That's a topic we've heard a lot about lately. We've got a lot of calls on it, of course. It's something that we talk about with our Board on a regular basis. And it's something that we're giving careful consideration to. We haven't made any decisions yet to move forward with the stock buyback. We still believe that we have good land opportunities in front of us to be able to deploy our capital and get a solid return. But certainly, our minds could change on that and we could go in that direction. But we just haven't made any decisions around that yet.

Operator

The next question comes from Stephen East of Evercore ISI.

Stephen East

Larry, I'll add my congratulations. I'm sure there's going to be a parade. But I think you have been a great asset, not only two Meritage, but the industry. So I hope you enjoy your retirement.

Larry Seay

Thank you, Stephen

Stephen East

Steve, I guess, you talked a little bit about the orders. I guess, if we could delve in a little bit more. You made the comment that the biggest thing the industry needs to do is ramp up absorption pace. Is that what was really driving the strong performance in the fourth quarter? I mean, you surprised us in nearly every market. And I'm trying to understand if that was your goal, how do you get there, was it through incentives, different mix than what we were expecting? And sort of along those lines, where would the gross margin in the backlog be versus what you finished the fourth quarter in?

Steven Hilton

First, I'd say, it definitely wasn't incentives. We didn't increase our incentives in the fourth quarter. I think we had some high-quality new communities open. As ironic as this may sound, we had some new communities actually open in Houston that performed exceptionally well.

We actually had our best month in Houston of the quarter in December. So we had good strength going into the end of the year. But we got good sales out of Arizona. We got good sales out of California. Our sales in Colorado picked up. It was sort of an across-the-board victory. And I can't really put my finger on anything other than the market.

Certainly, our people worked hard to finish the year strong, and we had some success on the sales side. But it's nothing that we did to increase incentives. So we had some lot releases in certain markets that certainly helped and the weather cooperated with us. So certainly, I think we outperformed the industry, but it was nothing unusual that we did.

Stephen East

And then just to follow-up on that. Do you have any absorption target that you all would like to get to for 2016? And then could you give us an update on, you all talked a lot about really revamping your Atlanta and Nashville divisions, and talk some about where you are at this point and how much further you have to go, et cetera?

Steven Hilton

We don't have a specific absorption target for 2016 that I want to put out there. But I can tell you 2.5 sales per month is not good enough and it needs to be better than that. So we aspire for higher absorptions than that across-the-board.

I can tell you, I'm calling you -- I'm here in Atlanta right now as we speak. And I'm very bullish about the opportunity here from a market perspective, but also with our new leadership team and our new sales team. And I could say the exact same thing about Nashville. I was there the other day. We're doing a tour of our south region this week. And all eyes at Meritage are on this region and this is a part of the business that we expect to grow the fastest going forward.

Operator

The next question comes from Stephen Kim of Barclays.

Stephen Kim

I had sort of a philosophical question, I guess. Steve, you laid out this very intriguing 10,000 unit figure, and I understand that it's caveated and so forth. And in many ways it sounds reasonable, provided market conditions hold. But that's kind of the question that I would say, certainly, so far in January the market's been sort of wrestling with. How predictable is the next couple of year's outlook, is the potential for recession. So that's clearly what's kind of coming to the market broadly, not just builders.

And in that vein, as I look at the market out there right now, we see a couple of things and I know you see them as well. But maybe make it look like this is a time to look back on and say, well, this was actually the beginning of some signs of some softness in the industry, and yet at the same time it's not clear. So we could be looking at a period over the next 12 months, 18 months, where you could actually see a downturn in the industry or it could be like 2000, where you saw a lot of weakness external to the industry, but the industry itself was fine.

What I find different from the 2005 time period or the 2000 period is that you have a lot more land in use to back then. You have about, call it, three unchanged years of land owned back then. You guys are owned about 1.2 to 1.7 years of land dependent, what you were talking about. And so I guess as you think about incremental investments in land, how do you balance the need to be flexible, which is ultimately what allowed Meritage perform so well following last downturn, with the fact that your land holdings is higher than it has historically been?

Steven Hilton

Well, I mean, let me see the right way to answer that. Well, first of all, I'd say, I am not seeing any signs of recession from the housing perspective. December was a very good month for us. January we're off to a good start. We're getting good vibes from our sales floor. I'm not seeing anything on the horizon outside of Houston that leads us to believe there is a recession and to connect with what's happening on Wall Street and what's particularly happening to the housing stocks and to our own stock over the last 45 days or so.

From the flexibility perspective, as it relates to land, there isn't a lot of flexibility today, because there is not a lot of land banking capacity, as I've already talked about on previous calls. We can't land bank 80% of our loss. There are just not enough land bankers to do that. And those land bankers that are in business, don't have the capacity to do, and it's a little more expensive than it was last cycle.

And to that end, we can't buy lots from developers on a finished basis or on a rolling option basis, like we could in the early 2000s and 1990s. So, yes, we want to be more flexible. But there's not a lot of levers we can pull to increase our lot supply without stretching our balance sheet.

So we're going to continue to be choosy about what land we buy and what locations we buy and in what product niche. And we're watching every week, every month, every quarter to those macroeconomic indicators out there, and looking for what cracks there might be that could affect our business, and we want to be flexible with our strategy. But right now, absent looking at the Wall Street Journal everyday, from what I hear from my people on the ground, I'm pretty positive about the business.

Stephen Kim

I guess my second question is a little more specific to Texas. I think you've talked about in Texas opening up more of the entry-level plus type communities in 2016, and I imagine this is something you've already kind of started. But I would imagine that the entry-level plus is still probably lower than your overall average price, but we've been seeing pricing trending higher in your Texas region, in your orders. I mean, actually seemingly the rate of growth accelerating in 4Q in terms of your average price. So I was wondering, if you could reconcile sort of what we're seeing in Texas there? Are we seeing maybe more of a mix shift with, I don't know, Dallas or something in these order numbers in the price specifically?

Phillippe Lord

So it was a big part, it was Dallas. We had a much stronger Q4 in Dallas this quarter or, sorry, 2015 versus 2014. And Dallas, we haven't shifted completely to entry-level plus, most of that land will be coming on in the later years, as Steve mentioned earlier. So Dallas was a big part of our ASP increase.

But also we still continue to see strength in some particular locations in Houston. Sugar land, Houston area, we opened some new communities in that area at a higher ASP and saw strong demand. So the impact of entry-level plus in Texas won't be felt until later on this year and into 2017, but we really shifted our portfolio in Austin and starting to shift it in Texas, Dallas and Houston, towards that back half of this year.

Operator

The next question comes from Nishu Sood of Deutsche Bank.

Nishu Sood

Let me start off by asking about the weather and labor issues that, Steve, as you mentioned, really impacted kind of the middle of last year for you folks. From your comments, it sounds like, I think in Denver you mentioned and Dallas, that a lot of those closings should be made up in the first half of the year. So given that a lot of people are talking about how these issues might linger for some time, that seems pretty favorable and it speaks to your managing through those issues.

So I was wondering, if you could dig through that a little bit and just describe, we heard earlier another builder talking about managing through specs a little bit more. How have you or what are you putting into place on the ground? And how much is it going to affect the numbers, because at the same time, Larry, you mentioned that your turnover rates will be lower, although I think you were saying that was because of orders coming in pretty late. So I was just wondering if you could dig into that for us, please?

Steven Hilton

Well, I'm not really sure what you're looking for, I mean, specifically. Certainly, we caught some of those deliveries up in December. We had a huge December for deliveries in those markets and our other markets. And we think we're going to make up the rest of them here in the first quarter of the year.

But there is no real specific strategies around closings, other than what we're doing on the construction site to expand our trade base, to build better relationships with trades, to get more labor on to our jobs, and to do things that allow us to build houses more in an even-flow method.

We want to get houses started earlier in the month. We want to balance out our starts with our specs. But it's market-by-market, community-by-community strategy. Phillippe, maybe you want to add a little to that?

Phillippe Lord

And I think it's important to understand that when you have a disruptive weather, as we had in Dallas and Colorado last year, it's not just one builder that feels that, it's all of us as an industry that feel it. So then we all are coming out at the same time trying to catch up at the same time. So it creates a real acute pressure on trade capacity that your work through. And we're starting to see, as we're through that, now bearing another terrible weather event, I think the trade capacity can handle more, but it's not completely resolved. But that weather created a major disruption in those two markets.

Nishu Sood

So it's not necessarily that the labor issue is resolving itself faster than you might have expected earlier, but with some normalization of the weather pattern, it seems to be righting itself at least.

Steven Hilton

Yes, that's correct. I mean the labors issue is certainly not completely resolved. I think we have taken some steps as a company to better address it. But it's still a challenge out there that we're going to deal with in 2016. And if we don't have weather to compound the problem, we'll certainly be able to manage to it.

Nishu Sood

And the second question I wanted to ask was about the entry-level plus product. As you mentioned, as you get to that 10,000 closings over the next couple of years, it will be an increasing percentage of your overall deliveries. One concern that some folks express is that, the dilutive effect on pricing might cause ASPs to be negative as we go out a year or two, if the entry-level is picking up.

Now, clearly there is a lot of moving parts, what markets are delivering. You've been in Texas mainly with it, so as you go outside of Texas, that will have an influence as well. But how do you think about that? Will your ASPs at some stage face some pretty significant headwinds from entry-level plus becoming a much larger part of your business?

Steven Hilton

Well, I hope they do, because I'd like to see our ASPs over the long-term come down. I don't want to see them continue to expand. I feel better in a higher rate environment that we may see years down the line with the lower ASP. So that's the whole strategy and that's goal. Lower ASP doesn't mean lower EPS. I think we can have lower ASP and higher EPS, because we'll be driving more units and more volume.

And I don't believe we have to take a lower margin on lower-priced homes, at least that's not our strategy for sure. So I do hope over time that our ASPs at the minimum stop climbing. Again, this is mix driven. I'm not talking about appreciation, I'm talking about mix. But as our mix moves more to entry-level plus, our ASPs will definitely flatten or decline.

Operator

The next question comes from John Lovallo of Bank of America.

John Lovallo

The first question I had for you was on the land sales in the quarter. It looks like there was a little over $20 million, which was a pretty big number. And on top of that the margin on it of around 27%, by our calculations, was a lot higher than usual and it contributed about, call it, $0.09 at least in EPS. So maybe you can help us understand what that land sale was and why the margin was so high, and if you do anticipate more of this going forward?

Steven Hilton

As I said earlier, it's kind of an anomaly. This was land that we either held it for quite a while from the downturn that we wanted to kind of clean up the books at the end of the year and get rid of. But we didn't plan to build on and we saw an interest from other builders or land that we had always intended to sell as part of a bigger picture and bigger strategy.

We went in and bought land for maybe multiple positions and maybe there were some positions on either smaller or larger lots that we didn't have a product for that was always part of the plan to sell. So I wouldn't expect that going forward to happen on a regular basis. It was just sort of a one-time situation and I wouldn't read too much into it.

John Lovallo

And then I might be mistaken on this, but I thought generally in the first quarter you guys provided a little bit more of an outlook, including the first quarter EPS and full year EPS. Is there any reason why you guys haven't done that today or is this something we can expect next quarter?

Steven Hilton

No, it's never been our strategy to provide quarterly EPS guidance. I think we had to do that last year, because the analyst community got quite a ways ahead of us and we wanted to kind of get in more alignment. So going forward, it will be our strategy to update our unit guidance for the year, as we go through the year, every quarter and our community count guidance, and that's what we plan to give going forward. We think that's in line with our peers and that's what we feel most comfortable with.

Operator

The next question comes from Mike Dahl of Credit Suisse.

Mike Dahl

Steve, if I go back to some of your previous comments about absorption, and you mentioned that you're not happy where you are today. And obviously the shift towards entry-level plus can help some of that. But it sounds like, just on a broader basis, the current portfolio is kind of underperforming on an absorption relative to where you'd like it. But at the same time, you don't have an interest in doing anything on the pricing or incentives front to drive that absorption.

So I'm just curious kind of how you're thinking about that developing over the next six, 12, 18 months from here? Is it just waiting for the market to come back on some of the existing communities or is there a point in time where you have in your mind, okay, if the buyer is not there in greater numbers, by X we'll start to shift a little more aggressively on the sales side?

Steven Hilton

No, I don't think we're underperforming relative to our peers on the absorption side. I think we're right in there with most of our move-up homebuilder peers. I think we are underperforming as an industry. There just isn't the volume in the industry in many markets.

Look at Phoenix, for example, its 40% to 50% below its historical 30-year average. The volume is just not there and we're not going to force the market by discounting our prices and taking a lower margin. I'd actually wish our margins were stronger. So I think we're going to get those absorptions back over a longer period of time by shifting our product to the more entry-level plus.

As I've already articulated, we're also going to be doing more attach product on the East Coast, in Florida and in the south region or in the southeast region and in the east. And I think that's going to help our absorptions, because those communities tend to have a little higher volume and be at a little lower price point. So I'm not losing sleep, staying up at night, thinking about our absorptions, but certainly I would hope that as a company, as industry, we could improve them.

Mike Dahl

And then just so we're clear on the kind of entry-plus as it relates to Houston and what it may have contributed to the sales. I don't know if the comment on the Sugar Land, if that was an entry-plus community. But just any sense of within Houston, specifically, what percentage of your portfolio is now entry-plus? How does that compare year-on-year? And can you give us just kind of like a guideline for are those turning at three to four sales a month, is it four to five compared to your move-up that might be two to three?

Steven Hilton

So I would say, I mean, that comment got a little bit jumbled there. We're not saying we're a big entry-level plus builder in Houston. I think Phillippe was just trying to say that we had some strength in Houston in the fourth quarter, particularly in that Sugar Land location.

I would tell you that we had a very good December. December was our best month of the quarter in Houston, but it was because we have more communities. So we had 31 communities at the end of the year in Houston versus 23 communities the year before. So the communities count was higher.

Our sales for the fourth quarter in Houston were slightly above what they were a year ago. But again, that was because we had more communities, not because of the sales per store increase. The sales per store actually decreased in the fourth quarter. And our ASP in Houston is about 336, so it's below the company average. But it's not because we have a big entry-level plus percentage, we're more of a first and second move-up builder there.

Mike Dahl

I guess, stepping back as a general guideline is, are you targeting four to five, is it three to four? What type of absorption are you looking to get as you rollout entry-level plus just across your platform?

Steven Hilton

Entry-level plus is more around 4. Our move up business is we target closer to 3. In some situations we'll take 2 to 2.5. But as a company average, we always try to get to 3. But for entry-level, entry-level plus, it's going to be higher than that.

Operator

The next question comes from Jade Rahmani of KBW.

Brian Jones

This is actually Brian Jones on for Jade. My first question was regarding the improvement in the G&A expense for the quarter. Was there any specific actions that were taken to achieve those improvements?

Steven Hilton

Larry, do you want to take that one?

Larry Seay

Sure. What we are seeing there is the impact of us, just cutting back on some of the compensation in the quarter, particularly bonuses. The year ended up pretty good, but it still wasn't up to our internal expectation. So some peoples' bonuses were cut back because of that. I think you're seeing that reflected there.

And I think, you got to be careful reading in, the forth quarter of this year and extrapolating it out into the future, because I do think that's a little lower than what the run rate will be going forward. And if you look back at what the run rate was a couple of quarters, it was going to bounce back up closer to that rather than remaining at that low level.

Brian Jones

And then my next question is revolving around the land market. Are you guys seeing any pricing weaken or does that make land more attractive for you guys or are you guys maybe underwriting more conservatively, given the capital markets volatility? And kind of along those same lines, where are you guys seeing the strongest demand at? And maybe any market that the demand is softening?

Larry Seay

I'm not sure, I quite understand the question.

Steven Hilton

Your third question, again, we were kind of fumbling some things here. You were asking about the land market.

Brian Jones

Yes, the land market. Are you guys seeing pricing weakening at all? And if so, does that make the land more attractive by any chance? And kind of along those same lines, are there any markets where you guys are seeing stronger demand, maybe any markets where demand is softening?

Steven Hilton

No, not really seeing the price of land come down at all. The best of the markets we're seeing sort of it stabilized, and not see the rapid inflation that we were seeing in '13, '14 and most of '15. Like Phoenix, for example, is a good market where we've them sort of flattened, I would say, but absolutely not down.

The strongest markets we see, as it relates to our competitors' buying land, we talk about the south region and there seems to be a lot of investment going on there. California continue to be place that people invest, especially Northern California. In that particular example, I'll tell you the price of land continues to go up. Denver as well, the price of land continues to go up in Denver. So definitely not down, more flat at best and up in some of the stronger markets.

Operator

The next question comes from Will Randow of Citigroup.

Will Randow

In regards to, I guess, it's been touched on a few times, but your 10K closings numbers. Let's say the market does get us there in the next couple years. Should we assume that you'll be thinking about taking up leverage to get there or is it more you think land banking will be there or a combination of both?

Steven Hilton

I don't think we're going to take up leverage significantly. I think we're going to stay in that 40% to 43% debt to cap range. And I think the retained earnings that we have, a combination with the modest amount of land banking that we're doing will get us there. Larry, do you want to add on there?

Larry Seay

I would reiterate that I don't think it means leveraging up the balance sheet at all.

Will Randow

And then, just on two bookkeeping items, you mentioned SG&A, it sounds like a little bit lower year-over-year, but don't expect it to have a ten handle. And then on taxes, you guys have been running a little bit lower than we would have anticipated, I assume due to credits. Could you talk about how we should think about that for 2016?

Larry Seay

2016 is going to be a little bit more easy to understand, because they extended the law to include 2016. So we're able to book the green tax credits every quarter and not wait until they re-up the law each year. So you should be looking at about 32%, maybe a little bit more, tax rate every quarter.

Now, there's a possibility we may pick up some true-ups from prior years that would even lower beyond that, because we start out with a little bit of a conservative assumption on how many houses will qualify for the tax credit. And then, as we do the specific work, it usually comes up to be a little larger number. But I think 32%, it's a pretty good number to use throughout the year.

Will Randow

And then on the SG&A? I know you just mentioned in the prior question, sorry.

Larry Seay

Yes, I would reiterate, what -- I just would repeat, what I said before about it.

Operator

Excuse me, Mr. Hilton, I see that we're coming up on the one hour mark. Are you able to take one more questioner or two more questioners?

Steven Hilton

Operator, I think we'll take two more questions, and then we'll adjourn. And I think Jay and Susan are probably next two up right?

Operator

Then we'll take a question first from Jay McCanless from Sterne Agee.

Jay McCanless

First question I had is going back to what Nishu was talking about earlier. You guys have done a great job at taking in orders over the last couple quarters, but it doesn't look like you've been closing homes as fast as we may have expected. Is there anything we need to be worried about with the backlog or is this just strictly a function of timing of when you've taken those orders?

Phillippe Lord

It's really a timing issue. Again, we were stalled out in a couple of our markets, due to weather and trades catching up with the business. So we expect to close those houses in the next two quarters, and tightened up our backlog conversion throughout the year as long as we don't have any disruptions being more predictable with our business. So it really is a timing thing.

Jay McCanless

The second question I had is on the cancellation rate, great job at getting that down there. Is that something we need to be worried about in terms of the gross margin? And I think you guys have incentives were flat or maybe slightly up this quarter. Are you guys foregoing something in terms of profitability to drive that CAM rate lower or was that just good work on your part?

Steven Hilton

You know what, it's too low. I wish it was a little higher. I mean, not a lot higher, but a little higher. 7% to 8% is just too low and we need to try to put more people through the system. So I wouldn't think too much about that. It's not really a factor per se.

Larry Seay

It is more of an indication of the market being stronger than maybe some of the perceptions that are out there.

Steven Hilton

Yes, I agree with Larry on that.

Phillippe Lord

Yes, and credit too. I mean, getting people prequalified in the beginning is tighter.

Operator

And we have question from Susan Maklari of UBS.

Susan Maklari

In terms of your efforts to try and even-flow your production a bit more, along with that should we expect your spec levels to rise? And can you talk about the kind of margins that you've seen on your specs relative to your to-be built projects?

Phillippe Lord

So I think we did a good job in '15, tightening up the spread between dirt and spec. In the first quarter, we had some issues there, but I think we were a lot smarter about the specs we were starting throughout the year. And then we were able to tighten it up and I would say, we operate somewhere between right around 200 basis point kind of difference between spec and dirt.

And as far as even-flow, absolutely specs play a role in that. But it's more about just managing the specs that you want to start and the dirt, and how you prioritize it versus actually increasing our spec count. We're pretty comfortable with where our spec count is per community, and I wouldn't expect that to go up for guys to see that to go up very much.

Susan Maklari

And then just one last question, as you think about that 10,000 target that you have out there for 2018, how do you think about your growth rate relative to the broader industry to get there?

Steven Hilton

Well, actually it could be equal to or better than the industry. I mean, throughout our 30-year carrier in homebuilding, we have grown at a faster rate than most of our competitors. So I don't expect that to change. We're a growth story. And we're going to continue to make that happen.

Well, thank you very much for your participation in today's call. That concludes our remarks. And I look forward to talking to you again next quarter. Thank you very much.

End of Q&A

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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