WCI Communities' (WCIC) CEO Keith Bass on Q2 2016 Results - Earnings Call Transcript

| About: WCI Communities, (WCIC)

Start Time: 08:30

End Time: 09:32

WCI Communities, Inc. (NYSE:WCIC)

Q2 2016 Earnings Conference Call

July 27, 2016, 08:30 AM ET

Executives

Keith Bass - President and CEO

Russell Devendorf - CFO

Scott Bowles - VP of Finance

Analysts

Ivy Zelman - Zelman & Associates

Mike Dahl - Credit Suisse

Will Randall - Citigroup

Michael Rea - JPMorgan

Buck Horne - Raymond James

Patrick Keeley - FBR

Daniel Jacome - Sidoti & Company

Alex Barron - Housing Research Center

Operator

Greetings, and welcome to the WCI Communities' Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Scott Bowles, Vice President of Finance for WCI Communities. Please go ahead, sir.

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, Senior Vice President and 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 that 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 certain non-GAAP financial measures for which you can find the reconciliations to the comparable GAAP financial measures in our earnings release, which has been posted at the company's Web site at wcicommunities.com. We will be referencing slides during this call, which are also available on our Web site.

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

Keith Bass

Thank you, Scott, and good morning to everyone joining us on today's call. I continue to be impressed with the progress that our company has made in recent years to expand the scale of our organization. Importantly, we continue to see a long runway of opportunities ahead in the Florida market, as we open new neighborhoods, expand into new markets and bring our current tower building on line.

I’ll start on Slide 3 with a quick review of our company. We acquire, design, sell, and build highly amenitized communities located throughout coastal Florida strategically targeting the primary move-up, second-home and active adult customer segments with homes ranging from the mid-100s to well over $1 million. These advantageous customer segments result in high average selling prices, a high proportion of buyers that pay all cash for their homes, and low cancellation rates relative to the industry.

We continue to underwrite new land investments to add to our already attractive portfolio and evaluate opportunities in our existing and adjacent Florida markets to fuel our growth. We ended the second quarter with approximately 14,200 owned or controlled home sites, an increase of 6% over last year with most of these home sites planned for or already within existing highly amenitized master plan communities.

We continue to remain focused on our strategy of being opportunistic with our land acquisitions while maintaining a conservative balance sheet. This strategy provides us the most flexibility to take advantage of the expected long-term growth in our markets and create long-term shareholder value.

Turning to Slide 4. While we’ve seen some recent moderation and demand which we believe is short term, Florida remains a leading growth state with healthy long-term economic and more importantly demographic trends supporting an attractive real estate market. Florida is well positioned as an ideal location for the wave of retiring baby boomers as projected U.S. population of those over age 65 is expected to rise by 18 million people over the next decade.

Florida's strong job creation, great weather, low taxes, and its reputation as a premier retirement destination are just some of the reasons people continue to be attracted to the state, and we expect these underlying drivers to remain in place for quite some time. In addition, Florida’s job growth has been broad-based with expansions across most sectors and continues to outpace the overall U.S. growth, while the unemployment rate continues to remain lower than the national average.

On the new housing market front, permit activity remains strong as year-to-date through May permits increased 4% ahead of the national rate, and Florida continues to rank as the second highest state in overall permit volume. Furthermore, as you can see from the chart on the lower right, while we saw good improvement in 2015 we see a long runway for permit growth as the current level of activity remains well below the 20-year average.

Looking at the Florida resale market in the quarter, total closings in the state were essentially flat. However, median year-over-year sales prices were again higher and have now increased in each of the past 55 months. Currently, our more focused markets in regard to open communities, the Naples, Fort Myers and Sarasota, Bradenton markets were among the metros reporting a year-over-year decline in closing volume during the quarter.

However, supply continues to remain constrained throughout the state, particularly in regard to single-family homes with only 4.3 months of supply at the end of June. Furthermore in June, the median days to contract was 41 days for single-family and 52 days for multifamily resale homes, meaning half of the homes listed on the resell market go to contract in less than two months.

While as I stated before the spring selling season was uneven, we remain very positive on the long-term prospects of both the Florida housing market and our differentiated position in the market supported by the favorable demographics and improving economy and the extended period of permit shortfalls.

Turning to Slide 5, I will discuss some of the second quarter highlights from our homebuilding business. Our homebuilding deliveries were up 26% to 307 compared to the second quarter of 2015 driving a 14% increase in homebuilding revenue to $132 million.

Our contract value of new orders, however, slightly decreased by 5% to 122 million on 268 new orders which was down by 32 orders from the prior year, offset by a 6% increase in the average selling price per new order to $454,000. Furthermore, the contract value of new orders for the first half of 2016 improved by $6 million or 2% over 2015.

The new order ASP was driven higher due to price increases over the past year, a higher percentage of new orders from second-home neighborhoods in the current quarter, and particular price strength from our primary move-up segment in the quarter. The second quarter new orders and current backlog mix contributed to an 11% increase in ASP to $520,000. While excluding the tower backlog, the backlog ASP was $485,000, up 3% over the prior year.

In the middle of the bottom of the slide, you can see that in the first half of 2015 was exceptionally strong and made for a tough comp, and when we look at the growth from 2014 to 2016 of nearly 45%, it still represents strong growth and a positive trajectory.

Sequentially, our neighborhood count was down by one net new neighborhood as we added two new neighborhoods and successfully sold out three in the quarter. The two new neighborhoods were without completed and furnished models during the quarter, and we expect a more normalized sales absorption from those new neighborhoods once their models are complete later in the year.

The softness we experienced in new orders in the quarter was somewhat consistent with Q1, in part because buyers are taking longer to make their purchase decision. As an example, at Sarasota National this quarter, we saw the purchase decision timeframe double from the second quarter of 2015. This slowing in urgency is consistent with the data and feedback we have seen from our Berkshire Hathaway HomeServices Brokerage business on the resale side.

In addition to the slowing urgency, as the supply deficit has decreased and price increases have moderated over time, seven of our active selling neighborhoods were without a completed furnished model and seven of our neighborhoods were selling their final 10 lots or less. In this more competitive environment, we have found that buyers want to see finished models and amenities that are at least under construction. This model construction status and limited lot supply in some of our neighborhoods certainly further impacted our absorption in the quarter.

In regard to our Altaira Tower project inside the colony master-planned community in Bonita Springs, sales remained at approximately 25% of the sellout value of the tower. While we did not receive any new orders during the quarter, we continue to remain confident in the future success of the building and garner significant interest in the project.

As a reminder, in the colony, we also continue to successfully sell out our Cielo mid-rise condo product with eight sales in the quarter, up from six sequentially and double last year's second quarter at an average sales price in excess of $800,000, all while being hampered with a colony clubhouse and golf course shutdown this summer due to planned extensive renovations and upgrades.

With the clubhouse expected to reopen in mid-September, the golf course playable in mid-November and the Altaira Tower model scheduled to be open and furnished in late Q3, we should be in excellent position to market and sell the remaining tower units beginning in late 2016 and through the 2017 prime selling season. This will allow for utilization of the units by the new residence for the 2018 winter season.

Thus far in July, traffic continues to be in line with seasonal expectations. The return traffic remains engaged, however, buyers continue to lack real urgency and are taking longer to commit to a purchase. As we have previously mentioned, the long-term growth driver still remain in place for Florida. Baby boomers will continue to age.

There will continue to be cold winters up north and low taxes in Florida making this an attractive destination. With that said, we will of course continue to actively monitor and refine our pricing and sales incentives on a community-by-community basis in order to achieve the appropriate balance of sales velocity and gross margin throughout the remainder of the year.

On Slide 6, we turn to our second quarter highlights from our Real Estate Services business which includes both our resale brokerage and title businesses. The Berkshire Hathaway HomeServices Florida Realty Brokerage business currently has 42 offices with approximately 1,800 independent agents in the state.

As we have continued to expand our Florida footprint through both organic expansion along with strategic acquisitions, including most recently our Melbourne purchase in Q1 and our Vero Beach purchase this quarter, we have further added exclusive and/or limited franchise territories in Sarasota, Manatee, Seminole, Orange, and Osceola counties along with a partial exclusive territory in Southern Brevard County which we believe adds value to the business long term.

In the second quarter, total Real Estate Services revenue increased by nearly 5% while gross margins declined by $500,000, primarily due to incremental costs associated with the two acquisitions recently mentioned. Russ will talk a little bit more about Real Estate Services business later in our prepared remarks.

Moving to Slide 7, I’d like to highlight our first half progress on some key P&L metrics over the past four years. Our homebuilding operation has been the primary driver of WCI's 23% increase in revenue in the first half of the year, more than offsetting a modest decline in our amenity segment while our Real Estate Services business was up slightly.

With a 31% compounded annual revenue growth since 2013, we continue to profitably scale the business while better leveraging our cost structure. This has resulted in continued improvement to our bottom line consistent with the strategy we have discussed since the IPO.

As expected, our adjusted gross margin of 27.6% contracted by approximately 180 basis points year-over-year as the shift of more deliveries come from non-legacy land is working through the model. During the first half of 2016, 48% of our deliveries were from legacy land as compared to 71% in the prior year period.

It is also interesting to note that looking back to the first half of 2014 when 95% of our deliveries were from legacy land and we achieved a 30% adjusted gross margin, the fact that margins are only down 250 basis points since 2014 given the significant shift in legacy deliveries to less than half is a testament to the quality of the new land inventory brought online and the team’s focus on maximizing gross margins at the community level.

Despite the gross margin percentage trending, SG&A leverage continues to improve declining to 15.1% as a percentage of homebuilding revenue in the first half of 2016 fueling a 15% increase in our adjusted EBITDA compared to a year-ago period.

Looking forward to the balance of the year, our goal for 2016 continues to be 1,200 plus deliveries, nearly double the unit volume of what we achieved in 2014. Based on our year-to-date results, current backlog, sales expectation and spec inventory that can deliver in 2016, we believe this remains an achievable goal.

We do, however, now expect our full year 2016 ASP will be closer to 440,000 at the higher end of our previous guidance range. We also believe our full year 2016 adjusted gross margin will be about 27%, slightly better than our prior guidance based on the strength of our backlog margin and year-to-date deliveries.

Additionally, we continue to expect to end the year between 55 and 60 active selling neighborhoods and we are well positioned given the 55 neighborhoods at the end of the second quarter. The trajectory of our neighborhood count may be uneven through the balance of the year, as we successfully closed out a number of neighborhoods with a limited lot supply and bring on our new neighborhood.

Slide 8 provides some additional perspective on our land position. As previously stated, we ended the quarter with approximately 14,200 owned or controlled home sites representing a 6% increase over the same period in 2015 and still maintained approximately 3,800 legacy home sites on our land portfolio that were subject to fresh start accounting in 2009.

We are excited to announce that during the quarter, we closed on approximately 400 acres in the top ranked Vera [ph] master-planned community just south of Melbourne on the coast an about an hour from Orlando where we will be creating our newest active adult community of Bridgewater consisting of 870 single-family homes with four different product lines. This acquisition will expand our geographic presence on the East Coast of Florida. We have begun the land development work and we would expect to begin soft-selling in mid-2017 with a model grand opening in time for the 2018 selling season.

In addition in the quarter, we added approximately 200 home sites to our controlled count in a waterfront boating location in Bradenton, Florida similar to our Tidewater community which is now nearing sellout. Collectively, our strong land position provides us with an ample supply to bring to market in the coming years and gives us the luxury to continue to be highly strategic in our future land acquisitions.

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

Russell Devendorf

Thanks, Keith. Moving on to Slide 10, I’ll provide a few more details regarding our results for the second quarter. Total revenues were 167.4 million, an increase of 11.1% over Q2 of 2015 as homebuilding and Real Estate Services improved 14.2% and 4.5%, respectively, slightly offset by a 15% or $1 million reduction in our amenities segment. Our growth in the homebuilding segment was driven by a 26% increase in deliveries.

Second quarter net income was 9.4 million or $0.35 per diluted share, a decrease of 400,000 or $0.02 per share. The decrease can primarily be attributed to slightly lower Real Estate Services and amenities gross margins, as well as the anticipated compression in homebuilding gross margin percentage and higher SG&A expenses.

Adjusted EBITDA for the quarter totaled 20.1 million, a 2.9% decrease from the prior year. Our adjusted EBITDA margin in Q2 contracted by 170 basis points compared to 2Q of 2015. As mentioned earlier, revenue from our Real Estate Services business increased 4.5% to 30.4 million, primarily due to a 7% increase in our brokerage ASP as well as the revenues from two acquisitions we closed on earlier during the year in the Vera Beach and Melbourne markets.

Our gross margin decreased approximately 500,000 from prior year, largely due to the amortization of certain acquisition costs related to the aforementioned acquisitions and slightly higher commission splits to our agents mostly due to a shift in transaction mix between our regions from prior year.

Our amenities segment generated revenue of 5.1 million in Q2 of 2016, a decrease of 15% or 1 million from Q2 of 2015, mainly due to the deconsolidation of one of our amenity joint ventures. The gross loss of approximately 900,000 is about 150,000 lower than the prior year, primarily due to significant planned upgrades and renovations at two of our clubs that resulted in course closures and lost revenue opportunities.

As a reminder, our amenities segment should be viewed as an extension of our homebuilding operations as it helps drive the lifestyle within our communities and the premiums we expect to receive for our homes.

During the quarter, total SG&A expenses increased 2.6 million to 18.8 million. The sales and marketing component of SG&A, which includes commissions paid to our licensed in-house sales personnel and third-party real estate brokers increased by approximately 1.2 million, primarily due to our increased deliveries and higher marketing costs associated with the incremental neighborhood count. Commission expense as a percentage of revenue from homes delivered was 3.9% for the quarter, even with Q2 of '15.

General and administrative expenses increased 1.4 million in Q2 of '16, mostly due to additional compensation expense to support the growing operations and an increase in the stock-based compensation expense. The growth in total SG&A dollars is directly correlated to supporting our growing operation which is reflected by the 30% increase in homes under construction.

As a percentage of homebuilding revenue, SG&A increased 30 basis points compared to the year-ago period, mainly due to the fact that our ASP on delivered homes decreased by 10% for the comparable period.

Turning to our balance sheet discussion on Slide 10, we ended the quarter with cash and cash equivalents of 88 million, total debt obligations of 255 million, and total equity of 491 million, resulting in a net debt to net capital of 25.7%.

During the second quarter, we invested 28 million in land acquisitions and land development and ended the quarter with a real estate inventory balance of 646 million, which included 299 million of work-in progress and completed inventories.

As part of the acquisition of the Vera community during the quarter that Keith spoke of earlier, we were able to negotiate seller financing for a portion of the acquisition and have consequently added approximately 8 million of debt to the balance sheet in the form of purchase money mortgage, which is included in our total debt obligations of 255 million.

During the quarter, we amended and extended our secured revolving credit facility with Stonegate Bank, doubling the facility size to $20 million and pushing out the maturity date until 2019. We are currently undrawn on this credit facility with the exception of approximately 2 million of outstanding letters of credit. This facility is in addition to our unsecured $115 million syndicated revolver maturing in 2020, which we amended and increased during the first quarter and currently remains undrawn.

It should be noted that our 20 million revolver with Stonegate is secured by the amenity asset at our Pelican Preserve community which has a book value of just under $7 million. Based on the club documents and continued sales expectations for this community, we believe the fair value of the amenity will ultimately be well in excess of the revolver now as we approach the sellout of this community.

The ability to borrow at almost three times the book value of this asset is just one example of the significant embedded value we maintain in several of our assets on the balance sheet. Our strong balance sheet as evidenced by our low leverage and ending cash balance coupled with our undrawn revolving credit facilities continues to provide us with the flexibility to grow our business.

Now, I’ll turn it back to Keith for some closing remarks.

Keith Bass

Thanks, Russ. I'm pleased with the results that we continue to deliver, yet recognize some of the softness in new orders compared to an exceptionally strong 2015. While we believe the financial markets and global economic concerns among other things contributed to the uneven demand trends during the first half of the year, we will continue to monitor our markets closely, including leveraging real-time data obtained from our Berkshire Hathaway Brokerage relationship and we maintain the flexibility to adjust our product, pricing, and incentives to the evolving market.

Florida remains a very attractive market to operate in and we believe the key underlying macro and demographic drivers remain in place for the long term for which we are well positioned to capitalize on.

Before I turn it over to the operator for questions, I would once again like to acknowledge the hard work and dedication of all of the WCI team members as we continue to grow and improve the company.

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

Question-and-Answer Session

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Ivy Zelman from Zelman & Associates. Please proceed with your question.

Ivy Zelman

Thank you. Good morning, guys. I look back, Keith, and the performance that you show I believe on Slide 7 and it’s been a very impressive performance especially in line with your guidance since the IPO as you suggested, our gross margins and the performance has actually been better considering the amount of legacy that you’ve absorbed. When I think about the market, maybe it would be fair to say that it’s somewhat normalizing as we’re starting to see less urgency and just maybe not the frenzy pace that we have been at. One concern is strategically, are you going after more margin versus volume and are you utilizing incentive to maybe move forward a little bit more to push for that volume, or has that not been the case which maybe suggest why orders might be a little bit more modest? And I think about your tower, for example, with 25% sold, it sounds like there’s a lot going on there. The golf course is not opened and despite that, you’re selling the mid-rise. There’s been a lot of discussion in the Florida market about just moderation and more weakening especially at this ultra-luxury price points. So just strategically how do you anticipate with the strength of our balance sheet and recognizing that this isn’t as much as you’d like to control, even with strong employment, it does seem as if the market is moderating? And it would have been the next question and then maybe even come back. Berkshire Hathaway, you provided some good stats on overall the performance. Can you tell us what pending contracts were for the quarter please?

Keith Bass

Let me look up and get you the pending inside the business. I’ll have to pull it up real quick. With regard to the market, we have had a pretty hard focus on gross margin to be honest with you and really if you look back on the last quarter, it was pretty interesting. The first quarter we probably saw the softness a little bit more in the Naples, Fort Myers market on a year-over-year basis and that really corrected itself in Q2 where we got to more of an even keel compared to last year, although I would say that our margins are up and ASPs are up quite a bit on a year-over-year basis – on same-store basis. Sarasota National is probably and Venetian are probably the two locations which were more in the Manatee and Sarasota county markets that were strong in the first quarter and soft in the second quarter. So as we look through it, certainly we're very interested in gross margin certainly where we feel like we've got a project that is as tough to replace and the competition is really providing a lesser quality product, we're looking to get paid for that. But I think we're certainly mindful of the fact that we’ve got a – each one of the projects on their own has to hit an absorption that really makes sense for the project itself. So I would say on a year-over-year basis, we probably increased in the second quarter incentives maybe 1% which I would tell you isn’t in the grand scheme of things for where we are, isn’t really that big of an issue. Interesting to note where we did see the volume, even when Sarasota was down a little bit last quarter, the ASP was up I think 15%. We had another project that was down in sales, slightly up in the north, but the ASP was up $124,000 primarily just because we’re selling on a product line. So we’re mindful of both. We certainly like gross margin, but we understand that there is a number at which we have to hit from an absorption perspective but we don't want to chase it in a particular month and kind of lose credibility in our pricing inside of our communities.

Ivy Zelman

And going forward in terms of the – I’m sorry, I was just going to ask on the year-over-year strength that you referred to, you were referring to closings or orders? I assume it was orders you were referring to.

Keith Bass

Orders, yes.

Ivy Zelman

Okay.

Keith Bass

So what we did see in some of the communities that were softer this quarter, they were selling at the higher end inside their communities and the lower end was probably a little bit softer, and that’s pretty similar to what we saw in the first quarter in Pelican Preserve too where it was soft, then came back. And then second quarter was pretty much flat. So I’ve got pending for June, and I would tell you that pending for single-family only throughout the whole state is down about 7%. It was down 2% in May and 4% in April. I would say that our side is probably not quite that dramatic.

Ivy Zelman

And then lastly – I’m sorry, go ahead. I apologize.

Russell Devendorf

Yes, we saw on pending actually throughout the quarter sequentially it actually improved a little bit in the Berkshire business, so it did sequentially through the quarter get a little bit stronger for us.

Ivy Zelman

And then just lastly on the condo – the tower, with 25% sold, what will be strategically how you move forward to sell that? I know that developers have different strategies. What’s your strategy on how to get that unit sold? Will it be patient? How you think about it?

Keith Bass

Well, I think we feel like we got to have everything out there to the best of our ability. And certainly having the club and having the golf course renovated I think will help us quite a bit, and having the model – there just has been no new product in the tower business that we can really show people. Certainly, what we've done, our mid-rise product is close but it's not quite the same. And I think the amenities that are available on the building are easy to see for us in the business as far as looking at the drawings and looking at the plans. I think it's a little bit tougher for the buyer. What we're seeing probably as the biggest pushback in that segment and I think why we’re so successful in the mid-rise is people have been putting off their decision for so long that they want a unit that they can have immediate occupancy in. It's interesting I think this quarter we were running at about 30% of our sales for six quarters I think in a row of spec inventory and this last quarter I think it was close to 60% of our sales were inventory for people who kind of put off their decision, but now they want to buy and they want it for next year. And that’s the one thing that hampers the tower business. And we’re seeing on the resale competition inside the colony, there’s very few units available. They’ve burned through all of that and their prices have increased close to what we’re offering a brand new product for, which is a much different floor plan and a much different feel. So I think when we can get them up in there – I was there last week and went up to the first floor down from the penthouse, so all the way up to virtually the top of the building, the views are incredible, the units are incredible but we really can’t bring prospects up into that yet. So the model is getting flooring put in. We should be able to get it furnished sometime this quarter and then we can start bringing prospects through that and slowly maturely then put them in the service elevator and bring them up to their unit. I think once we can show what we’re selling and they can understand that if they buy it now or in the season of '17 that they can live in it before and use it for season '18, I think that’s the biggest pushback that people just don’t want to – they were putting it off so long, they don’t want to wait. So I think the club will be refreshed, the golf course will be in excellent condition, so we’ll have all of our ammo out there and I think we’ll do pretty well. With regard to discounting the building to sell it, that’s not going to be our strategy at all.

Ivy Zelman

Great. Well good luck. Thank you.

Keith Bass

Okay. Thanks, Ivy.

Operator

Thank you. Our next question today is coming from Mike Dahl from Credit Suisse. Please proceed with your question.

Mike Dahl

Hi. Thanks for taking my questions and helpful color so far, Keith.

Keith Bass

Thanks, Mike.

Mike Dahl

Just a follow up on some of the sales environment. I think a lot of detail around some of the markets and specific communities. It sounds like what you were seeing in the quarter as it relates to buyer segmentation is that maybe the primary move-up was where you were still seeing relatively stronger trends. Could you just give a little more color on relative strength or weakness across your buyer segments?

Keith Bass

I think the primary buyer – all things being equal, the primary buyer was definitely steady through the marketplace and certainly interested in finished inventory. I think what we talked about first quarter, active adult was a little spottier and inconsistent in Sarasota – I’m sorry, in Naples and that kind of flopped in the second quarter where Sarasota was a little softer. And it’s interesting, Mike, it isn’t a situation where it’s consistently soft through a quarter, it’s just spotty where one month you’re selling seven and the next month 15 and the next month seven again with really not making many changes in your pricing. So it’s not that anyone was soft through a quarter or anything like that, it’s just the spottiness of it. And so we make little tweaks and changes but we’re not seeing a whole sale drop in any part of our business.

Mike Dahl

Got it. And if we think about absorption, I think you provided some of the details around, okay, seven communities are selling without model complexes, seven are selling final 10 lots or less, can you give us a sense of how that would have looked a year ago? So if we want to kind of normalize for some of those issues or at least get a better idea of how you might be thinking about what a true underlying absorption trend would be?

Keith Bass

Yes, we’re going have to – it will take us some time to get it to you and we can get you that offline. What I would tell you is it feels a little bit like 2014. So 2014 preselling was a lot tougher for us in the marketplace but if you were open with models and amenities, you were doing great. '15 I think particularly in both – really all on the West Coast, buyers were a little bit more apt to buy earlier. And so we didn’t have any problem really preselling into communities that weren’t complete. And now we’re back to a cycle of, okay, wait, they want to see it. And their issue is, let me come back in a month, let me come back in a month. And they do come back and now we’re seeing them buy inventory. But it’s really more that, Mike. But we’ll get you the number on a year-over-year basis. If you think about the fact we closed out three communities in the quarter, you’re really saying that through the quarter we had really almost 10 that were in a closeout stage last quarter, so it makes it a little tougher.

Mike Dahl

Right, understood.

Keith Bass

We’ll get you the percentages.

Mike Dahl

Okay, thanks. And then the last question is around gross margins and Russ as we think about some of the puts and takes for the balance of the year between some of these community mixes and product mixes and slight uptick incentives, how should we be thinking about gross margins?

Russell Devendorf

Yes, I think as Keith mentioned on the call and we were guiding on the last call, down about 200 basis points for the full year for gross margins, which would have put you in kind of the high-26% area on an adjusted gross margin basis. We see that coming in right around 27% for the full year. And I’d say – let me just look for the quarters going forward --

Mike Dahl

I think it jumps up in Q4.

Russell Devendorf

Yes, Q3 and Q4 I’d say it’s going to be roughly flat. It should be right at that 27% for the couple of remaining quarters.

Mike Dahl

Okay, great. Thank you.

Russell Devendorf

Yes.

Operator

Thank you. Our next question today is coming from Will Randall from Citigroup. Please proceed with your question.

Will Randall

Hi. Good morning, guys, and thanks for taking my questions.

Keith Bass

Thanks, Will.

Will Randall

I guess my first question dovetails onto what I asked, I believe in the prior quarter, and that was we’ve had one of the warmest Marchs, Aprils and one of the hottest Junes at least nationally speaking depending on what style you choose to pick in the last two plus decades. How do you think that’s impacted sales activity given your general second homebuyer, vacation buyer, et cetera, is probably less apt to enter the Florida market and how do you think that impacts you going forward, meaning is there some pent-up demand driven by a lack of sales, I’ll call in the first half of '16, because of that incrementally warm weather?

Keith Bass

It’s interesting. I told the guys that we don’t pay – I mean when they try to use the weather as an excuse, we try to tell them they’re not weathermen, we don’t want them to be. What’s interesting if you look at our sequential sales, I would tell you that February was a great month for us, March was down on a year-over-year basis, then April was down. So I’m just tracking what you wrote down. May was up on a year-over-year basis and then June was down. So maybe we can put it a little bit on the weather. Certainly, in the first quarter and early I think second quarter, the weather was certainly mild in the northeast and that appeared to affect certainly the transient traffic that came down into southwest Florida. I’d hate to use that specifically as our excuse, but I do think colder winters certainly help our business long term – both in the short term but certainly long term on motivating people to retire to the south. So it probably has had some effect on us but even with June being hot and certainly was hot here, we sold 86 homes. So it’s not like we didn’t sell houses.

Will Randall

And then in terms of Altaira, with the grown progress you have made, how has that kind of impacted your thought process on core demand? This is a follow up on Ivy and Mike’s question, if you will. Are you still targeting one or two towers or you kind of want to see what Altaira does first?

Keith Bass

We’d like to keep the cadence at one or two, but we have to kind of take what the market gives us. We certainly are in the pretty far along design stage for a tower in Tampa which is a completely different buyer profile than the colony in Altaira Tower. That’s a location that we successfully for the last year have sold out of mid-rise condos on the water, similar actually to the colony where we’re building Cielo. But mid-rise condos I think we sold the last ones over $1 million and we have two tower pads there. They’re smaller building than Altaira. They’re not as tall. But we are in the final stages of the planning there and we’ll be going into pricing shortly. And I think it’s likely that we could go into marketing certainly by the first part of next year to test the market there. So we are moving forward to that one. I would tell you that certainly we did open up our project in the Panhandle this past quarter at Lost Key, so we’re selling duplex stilted houses around $400,000. We’re opening the townhouse product and certainly that’s in a little bit lower price point. But we have an excellent tower pad there. And the existing towers that are around us are reselling quite well. So we’re in the beginning design stages there. So we’re certainly backing that one up. And then depending on Altaira success, if you start doing the sequencing, we’ve got two more tower pads in the colony, so you’d be thinking about here shortly, are you bringing on a similar building or smaller units or what are you going to try to do. So you have to really kind of plan those out pretty front advance and we certainly are looking at our other pads. Having sequence is really more of a function of the market and how long it takes to presell and when you decide to pull the trigger on starting construction. And in addition, a building like Altaira takes a lot longer to build and maybe a building in Westshore, which is a little shorter building. So we are sequencing those out. We’d love to have the cadence of one to two a year but it’s going to depend on the market somewhat. But we’re getting ready to continue to push that business forward.

Will Randall

All right, thanks for the color and congrats on the progress.

Keith Bass

Thanks, Will. We appreciate it.

Operator

Thank you. Our next question today is coming from Michael Rea from JPMorgan. Please proceed with your question.

Michael Rea

Hi. Good morning. Thanks for taking my question. First, I’d like to try and delve in a little bit more – I know there’s been a lot of questions on demand and orders and similar to a previous question about buyer segment. I was hoping to get perhaps a little bit more detail, if possible, Keith and Russ; sales pace down a little over 30% if you take it against average community count. And so when you say primary buyers being steady in the quarter and active adults spottier, I don’t know if there’s any way if you could give us some more detail around what does that mean relative to sales pace by segment? And if possible to kind of break it out by again I guess the primary buyer you were referring to first time move-up and your more traditional product, and active adult which I guess would also – I don’t know if that also includes kind of the i.e. second homes in luxury product. But any more kind of granularity there in terms of sales pace would be helpful.

Keith Bass

What I would say is it’s tough to really give you that, Mike, only because you had was in the first quarter, Sarasota National, which was in the northern part of – it’s Manatee, Sarasota county just south of Tampa, the active adult sales per month per product line there was on a year-over-year basis almost exactly the same. And where our softness was, was in active adult communities really primarily two in the Naples, Fort Myers market although we had two other in fact adult communities that were well over a year-over-year basis for sales. So for me to say in first quarter – and in second quarter it completed flip-flopped where Sarasota National and Tidewater were down on a year-over-year basis and the south was equal on a year-over-year basis. If you took same-store, same-store, same-store, which is the best way for us to look at it and it takes us the noise of selling out communities or new communities. So what I would say is in the second quarter active adult buyer profile in the Naples market was fine, there really wasn’t any issue. It was a geographic issue. So I guess that’s what I would say. The active adult was a little spottier this season and kind of just one month very good in a community and one month a little softer and the next month’s very good. So it was kind of more that, Mike. Then specifically active adult was down across the board or any geography was down across the board. I’d like to say that the active adult high end was out, but then you look at a community like the colony where we doubled our sales in the quarter for units of 800 to $1 million in mid-rise product. So I can’t pinpoint one thing other than to say that the overall active adult luxury second-home market was spotty this season more than anything else. We saw the trend soft in Sarasota in the second quarter but it was good in the first quarter and so far actually in July, Sarasota National has bounced back again. So it’s just spotty, Mike, it’s not – I wish I could give you a trend. Primary has been fairly flat and benign if you just look on a community-by-community basis. It’s probably been the steadiest seller.

Michael Rea

Okay. So it seems like then what you’re saying is primary buyer sales pace flat, as you just said, even though there’s a lot of inconsistency in active adult, that’s where the bulk of the weakness, if you just sum it all up, even though some are flat and some are weak on a total basis, that’s where you’re effectively getting most of the decline in sales pace, is that fair?

Keith Bass

Yes.

Michael Rea

Okay. And then just secondly on gross margins, so you’re slightly raising the guidance for this year. At the same time, we’ve seen that come down over the last couple of years due to just the mechanics of fresh start and other elements. To the extent that you increase your spec levels to satisfy some of that type of demand, understanding that just because it might be out there you’re not – as you said before, you’re not going to be too aggressive on price relative to some of the towers or other elements in your portfolio. Should the basic idea that perhaps you’re going to increase models or spec a little bit, would that contribute at all to your pre-interest gross margin coming down further in '17 or do you think just from a mix standpoint, we’ll still see maybe a little bit of contraction? Any thoughts around your approach to spec and even aside from that, how to think about the gross margin trajectory for next year?

Keith Bass

I would say our spec thoughts haven’t really changed. Obviously, when we start the new communities we kind of ramp up a little bit and certainly the multifamily has a tendency and certainly new communities to raise the spec count. And we always try to probably hit our peak spec number in Q4, so that we’ve got the units ready for the selling season with our active adult and retirement buyer. So I don’t think that really changes. As far as margin is concerned, it’s kind of mixed bag. I think this quarter we actually had higher margins on our spec closings than we did in our two rebuilds. Now a lot of that is mix but some of it too is selling at today’s price and yesterday’s cost. So I would tell you that we don’t build inventory to discount it, like some of the other builders. We build it to make money and satisfy somebody who needs a property right away, or we have four units sold in a building and it’s a six unit building, we go ahead and start it from a cadence perspective and the inventory will be there. But we don’t see inventory as a liability in the way that maybe others do. But in a rising cost environment when you have the ability to at least cover more than your cost and price increases, your spec inventory unless it’s around for a while shouldn’t be putting you in a bad space for margins unless you’re cutting it. So I don’t think that really affects next year’s margins other than we’ve been able to so far this year outperform on a margin basis given our price increases. I think last month or last quarter, we increased prices in 21% of the communities. So we’re still raising prices but – and cost, which I’m surprised nobody’s asked about, cost so far for the first half of the year across the board for us are up 1.2% for the first six months, so pretty benign cost environment right now.

Michael Rea

That’s helpful. Thanks, guys.

Keith Bass

Thanks, Mike.

Operator

Thank you. Our next question today is coming from Buck Horne from Raymond James. Please proceed with your question.

Buck Horne

Hi. Thanks. Good morning. I got a couple of cash flow items. Just wondering how much cash do you have budgeted for additional land acquisition and land development through year-end, or thoughts around what you’d like to budget for '17? And kind of a corollary to that, I’m just wondering would it start to make sense to dial back the land acquisitions incrementally and really maybe implement a new stock buyback trading near book value? What are the thoughts right now around share repurchases?

Russell Devendorf

Let me pull up the cash flow and give you some specifics, because we actually have some details that we’ll be putting – a little more detail that we’ll be putting in the Q. But I think there is some solid financing with some of the acquisitions that we’re looking at for the back half of the year. Let me just pull up – I want to say it’s like --

Keith Bass

I’ll take the share buyback while Russ is looking that up. It’s something that we continue to talk about. Certainly we think given the strong gross margins that we have in the business, some of the book value of a lot of our embedded assets we think trading below book is a ridiculous position. But here before we’ve kind of focused on using our cash to grow the business but to get ourselves to the size where the overhead makes the most sense. So we’re really focused on that. If you look at the acquisitions that we did this quarter, these are projects particularly like the Vera [ph] project, we’ve been chasing going into that community for over two years and put that property under contract quite some time ago. So generally speaking what we’re closing on is projects that we put under contract with values that go back quite some time and so we’re pretty excited about those acquisitions. So we certainly do talk about share buybacks but to this point we’ve kind of focused on putting our money going forward. But it’s something we think about. Russ?

Russell Devendorf

Yes. So the land acquisition for the balance of the year should be right around 50 million and then land development I think we spent roughly about 45 for the first half and we expect that to be about the same for the back half, so probably another 45. So we’ll be spending a little bit of cash through the back half of the year.

Buck Horne

Thank you. And just quickly, how do you think the community count outlook will shape up for 2017? What’s a reasonable expectation at this point for active selling communities next year?

Keith Bass

We haven’t put that out and generally wouldn’t put it out until sometime either at the end of – probably closer to the end of the third quarter, Buck. A lot of it is going to depend on the sellout of some of our existing communities. So I’d hate to give you a number there, but certainly our intent is not to stop growing. And I think given the land that we have under contract and the communities that we’re bringing on show that we want to continue to grow the business as we even move forward. We need to get to a much higher volume to really get our overhead number where we want it to be, and we think the opportunity – and particularly if you look at the geographic expansion that we’re doing, when you start talking about going into the Melbourne and kind of Orlando market and then also the traditions project that we have on the East Coast, we’re kind of growing through that process and we continue to be focused on the West Coast of Florida. So now that we’re going to be expanding over more to the East Coast, putting more of our assets over there too, splitting ourselves up, we think that gives us a lot of runway to continue to grow the business. And we’ve talked before about really working hard for an Orlando active adult community and certainly looking hard in Tampa. We’ve got the project under contract in Jacksonville that we’re working on, plus we have some assets up there in Palm Coast but we’ve also just opened up our Panhandle project, which is a multi-unit product. We got the towns, we got those duplex products, we’ve got some mid-rise and high-rise that we can put inside there too. So I think you’re going to continue to see us grow but we’d hate to give you that forecast a little bit further along in the planning process, particularly on these new communities as to when they’ll actually open up.

Buck Horne

Thanks.

Operator

Thank you. Our next question is coming from Patrick Keeley from FBR. Please proceed with your question.

Patrick Keeley

Good morning, everyone. Thanks for taking my questions.

Keith Bass

Hi, Patrick.

Patrick Keeley

Just maybe to dig into kind of the choppiness you talked about within 2Q, do you happen to have order trends by month within the quarter? I guess just trying to think about how that looks maybe versus the prior year?

Keith Bass

Yes, I would say April was 82, which was down 25% on a year-over-year basis; May was 100, which was up 6% year-over-year; and June was 86, which was down 10% on a year-over-year basis.

Patrick Keeley

Okay, great. That's helpful. And then obviously as we're coming to the close here of kind of the first month of the third quarter, do you get the feeling that those trends have kind of continued into this year or how have maybe kind of the first few weeks here trended versus last year, as we're kind of trying to think of how 3Q plays out on the order front?

Keith Bass

I would say so far continued choppy. Sarasota National is doing really well. Pelican Preserve’s soft so far. So it’s kind of that same kind of choppiness. And when the people do come in, particularly on this choppiness when we’re short one month and then strong the next, it’s really a surge for inventory. All of a sudden, their house is sold which may be the reason they didn’t purchase it. They weren’t sure they could sell it or they didn’t know how much they were going to get, but all of a sudden they’re walking in and they want inventory that they can close on fairly quickly. So, again, I think it’s just buyers holding back as long as they possibly can to make a decision and then they get kind of – something changes or what they were waiting on changes and they got to buy something pretty quickly.

Patrick Keeley

Okay, great. Thank you.

Keith Bass

Thanks, Pat.

Operator

Thank you. Our next question today is coming from Dan Jacome from Sidoti. Please proceed with your question.

Daniel Jacome

Hi. Good morning. How are you doing?

Keith Bass

Good morning, Dan.

Daniel Jacome

Just back to the tower, sorry if I missed it, do you guys still expect a fully furnished floor model to be available this quarter, in the third quarter?

Keith Bass

That’s our plan right now is to get it open. Again, we are opening a model unit in a partially constructed high-rise building, which isn’t often done. So we may run into some snags but I walked the building last week and flooring is all going in, cabinets are done, so our intention is to furnish that model by the end of the third quarter. And then we will have the ability to bring prospects into that fully furnished model, which we really need to do to show them how much different and open that floor plan is, which is really consistent with where the single-family market has gone and where the towers go when someone buys one and then guts it and spends a $250,000 to redo it. Just opening up those floor plans, we’ve got to be able to show them how open those floor plans are, how much glass there is and that will be great once we can get them in there. But that is the intent barring any kind of major snags.

Daniel Jacome

Okay, got you. And then not to beat a dead horse, but just one more tower question. With the building, I guess sellout level is a little bit below where we were expecting. Do you think a 30% gross margin is still realistic longer term?

Keith Bass

Yes. In fact, I think we had a price increase in the community during the quarter. We talked about the building, which is on a sequential price increase and it’s well within the marketplace. So yes, we do.

Daniel Jacome

Okay, great. And then I think someone asked about acquisitions, but has anything of other homebuilders – has anything incrementally opened up through the quarter? It sounds like you're just going to continue to hunker down on Florida.

Keith Bass

We get packages all the time on builders. I’m sure we’re on the same list that all the other builders are on, and so there have been some opportunities that have come along. They’re primarily – in fact I don’t think any of them are in Florida. We certainly look at them but I don’t know that it’s something that really makes sense for us or something that we can add a tremendous amount of value to it too. So we haven’t really – we look at them, we spent time on them but we don’t spend that much time on them.

Daniel Jacome

Okay. Thanks a lot.

Operator

Thank you. Our final question today is coming from Alex Barron from Housing Research Center. Please proceed with your question.

Alex Barron

Good morning. Thanks.

Keith Bass

Hi, Alex. How are you?

Alex Barron

Good. How are you?

Keith Bass

Good.

Alex Barron

I just wanted to go back to your – I don't know if you set a goal of 1,200 if that I guess is equal to guidance or to just kind of what you guys are hoping for? But I guess given the low orders this quarter, I'm just kind of trying to get a sense of has your spec strategy changed or is there any reason why the number couldn't come in a little bit lower given the lower order number this quarter?

Keith Bass

Spec strategy hasn’t changed other than given the percentage of sales that are happening in specs, we’re going to need to replace what we’re selling. So it’s certainly happening at a higher rate as a percentage of sales than we had anticipated. But no, I think – yes, the 1,200 is guidance, so it’s approximately 1,200 closings. And I think given the backlog, where we are and what percentage of booking terms that we need to get, we feel pretty good about it. And I think early indication is certainly what we saw last quarter as the percentage. If you look at our backlog conversion last quarter, it was up. I suspect it will be up again this quarter and primarily because so many of the sales that we’re having are gravitating towards the spec inventory for immediate occupancy. So, yes, we still feel good about approximately 1,200 closings, so we haven’t moved on that.

Alex Barron

Okay. Now as far as – I know last year other builders were complaining a lot about labor issues. I don’t think Florida was probably hit as much as other markets, but I'm just kind of wondering what you guys are seeing there this year. Are you having any trouble attracting sufficient labor to build the homes or experiencing any delays from that front?

Keith Bass

Well, I would say over the last couple of years we certainly had labor shortages for sure. If you look at Fort Myers from 2012 to 2015, permits grew on average 45% year-over-year. So we certainly had that same type of pressure that others had. I would say as permits now have kind of flattened out and settled out in certainly Fort Myers and Naples, I think permits are still growing in Sarasota, so we’ll have a little bit pressure there. I think the subs have had more time to kind of grow their businesses, put a little money in the bank, train some people. So we do see shortages of some of the skilled labor sets and some pressure on some of those, but you get that pressure and then somebody who’s an entrepreneur decides that, hey, I can make money doing that and they go out and get some people and train them and open up the business. So you see it kind of come back a little bit when the prices get a little outsized. So if you talk to our people in the field, they’re feeling it. I would say as you sit back here, it certainly appears as though we’re managing it very well. So I think the team’s doing a great job working with the subcontractors, bringing in the right people and managing our job site so that the subs want to show up at our site versus somebody else who may not be prepared. And we’re managing through it the process which is homebuilding 101.

Alex Barron

Got it, okay. Well, best of luck and thanks.

Keith Bass

Thanks, Alex.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Keith Bass

Thanks everyone for participating on today’s call and for your interest in WCI Communities. We look forward to updating you on our next quarterly conference call. Have a great day.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!