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Standard Pacific (NYSE:SPF)

Q2 2012 Earnings Call

July 27, 2012 12:00 pm ET

Executives

Scott D. Stowell - Chief Executive Officer, President, Director and Chairman of Executive Committee

Jeffrey J. McCall - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Dennis McGill - Zelman & Associates, Research Division

David Goldberg - UBS Investment Bank, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Michael S. Kim - CRT Capital Group LLC, Research Division

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Joel Locker - FBN Securities, Inc., Research Division

Operator

Good morning, and welcome to the Standard Pacific Homes 2012 Second Quarter Conference Call. Today's conference is being recorded. Before we begin, I would like to direct your attention to the company's Safe Harbor statement to remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading, Risk Factors. A question-and-answer period will follow today's prepared remarks. A recording of today's presentation will be available for replay a few hours after this call ends and will continue to be available on the company's website for 30 days. At this time, I would like to turn the call over to Mr. Scott Stowell, CEO and President. Please go ahead, sir.

Scott D. Stowell

Thank you, David, and good morning, everyone. With me this morning are Jeff McCall, our Chief Financial Officer; and Mr. John Babel, our General Counsel. I want to thank all of you for taking the time to join us today for the Standard Pacific Homes second quarter update.

I'm pleased to report that the positive momentum we experienced during the first quarter of 2012 continued into the second. Our solid second quarter results reflect the execution of our strategy and continued improvement in housing market conditions during the quarter. There are still highly mixed signs regarding the relative strength of the economy. We were able to realize significant year-over-year improvement in our own financial performance during the quarter.

New housing starts and permits are up significantly from last year, albeit at levels that are still well below normal. Consumers remain cautious despite price increases in many markets. And while unemployment has improved since last year, month-over-month improvement has stalled recently. We have always maintained that the housing recovery would likely be an uneven one. And against this backdrop, we have been working diligently to proactively improve our businesses, with the goal of outpacing what we thought would be a slow and unsteady recovery. Based in large part on strategic land purchases we made early on and with new home design introductions company-wide, we are pleased to make progress in improving our business ahead of the uptick in market conditions. This has us positioned even better for the months and years ahead. Even though the recovery may be choppy, we do believe that we'll continue to move in the right direction going forward.

Our positive results demonstrate the progress we're making against our strategy. I'm pleased to report that we were able to achieve profitability for the third consecutive quarter. We earned $14.3 million or $0.04 per share, with orders up 45%, deliveries up 34%, revenues up 35% and backlog up 62% over the prior year. It's important to note that our 45% year-over-year increase in orders was achieved with only a 3% increase in community count, demonstrating the strength of our execution in our local markets. In addition to these significant improvements, I'm also pleased with our normalized gross margin from home sales, which rose from -- which rose to 20.5% as compared to the 20% gross margin that we achieved during the second quarter of 2011. In the constant balancing act between margin and sales pace, we continue to emphasize margin, with the community-by-community focus on tactically raising sales prices and reducing incentives as demand warrants.

During the second quarter, we were able to raise base prices at over 70 communities, and we're able to reduce incentives to the lowest levels in over 3 years. As we have done every quarter for quite some time now, I'd like to discuss our progress on our land strategy. We remain focused on obtaining land in A locations, and total land spend for the second quarter was $131 million. As we discussed during our last call, the market for finished homesites in A locations remains overheated, so we have had greater recent success acquiring larger partially developed and undeveloped land parcels.

Leveraging our long-held expertise in master-planned development, we acquired over 1,100 move-up homesites through the purchase of the Palisades, a bank-owned master-planned community in Charlotte, North Carolina. And 286 move-up homesites of the bankruptcy court purchase of the Cordoba Ranch in Tampa, Florida. The acquisition of these 2 highly desirable parcels is a great example of the powerful combination created when we match the deep local market knowledge of our division operators with the expertise of our national land group in navigating the complexities of large, distressed transactions.

We also continue to have success here closer to home in Southern California. Just last week, following a very competitive RFP process, we were awarded the exclusive rights to negotiate with the City of Tustin to develop a 51-acre parcel at Tustin Legacy, located on the former -- on the site of the former Marine -- Tustin Marine Base in one of the most high-profile master-planned communities in Southern California. The City of Tustin cited the strength of our community designs and development plan, as well as our legacy of building move-up communities in the local market as major reasons for selecting Standard Pacific Homes over our competition.

We ended the second quarter with 160 active selling communities. And based on the inventory we currently own and control, we plan to open an additional 22 communities during the remainder of 2012, totaling around 50 new communities for the full year. And today, we already own and control 46 communities scheduled to open next year and over 45 communities which will open in 2014 and beyond. We continue to target a land and development spend for 2012 of between $400 million and $500 million, with more than $370 million already committed. Our growth strategy remains simple and clear: Focus on smart land acquisition to drive increased community count in the desirable move-up market segment.

While we continue to provide a diversified product mix to target opportunities in each of our key geographic markets, we believe that our greatest advantage continues to be among those we have historically served the best, the move-up homebuyer. These buyers typically have higher incomes, are more creditworthy, financially savvy, understand the homebuying process, are clear on what they want and demand the highest level of quality and service. We believe many of these move-up homebuyers are seeing the initial signs of economic recovery and have recognized the compelling homebuying opportunity presented by the combination of today's home values and historically low interest rates. Our value proposition, which includes beautiful and highly functional new home designs, the opportunity to personalize each home for structural and design options, premier homesites located in amenity rich communities, and our commitment to industry-leading quality construction and customer service, provides the differentiation that creates further urgency for these homebuyers to move off the sidelines and choose the Standard Pacific Home. Now I'd like to turn the time over to Jeff to share more details regarding our financial performance. Jeff?

Jeffrey J. McCall

Thanks, Scott. During the quarter, we reported home sales revenue of $275 million, up 35% from prior year, and up 25% from prior quarter. With only 3% community count growth and 1% ASP growth, the driver of our revenue growth was our deliveries per community, which were up 30%. Geographically, our deliveries remained pretty consistent with approximately 39% in California, 28% in the Southwest and 33% from the Southeast. Our ASP for the second quarter was $337,000, up 1% from prior year and down 2% from the first quarter.

We'll dig a little deeper into the sales and ASP trends in a few slides. Our gross margins, excluding the capitalized interest in our cost of sale was 29.4%, up 70 basis points from last quarter and up 150 basis points from the same period last year. Interest incurred in the second quarter was $35.2 million, of which $33.6 million was capitalized and $1.6 million was expensed directly through the P&L. Our Q2 cost of home sales included $24.5 million of capitalized interest, equal to 8.9% of home sales revenue. For the amount of capitalized interest including the cost of home sales for homes in our backlog expected to close in the third quarter is down 70 basis points from this elevated level of Q2 deliveries.

SG&A for the quarter was $42 million, representing 15.3% of home sale revenue, a 350-basis point improvement over the same period in the prior year and 180-basis point improvement over the last quarter. G&A expenses, excluding restructuring incentive compensation, increased $100,000 from the first quarter due to increased insurance charges as a result of higher revenue, partially offset by lower litigated claims expense and lower payroll taxes and benefits. In the quarter, the company achieved pretax earnings of $14.5 million from 157 average active selling communities.

On Slide 6, we break down our second quarter deliveries into a little more detail. The key drivers to deliveries are beginning backlog and the amount of homes sold and closed in the quarter. Our backlog is up 62% versus prior year and up 30% since Q1. In fact, our backlog in terms of number of homes is at highest quarter end level since the third quarter of 2008. Of our 1,266 homes in backlog, 791 homes are expected to close in the third quarter. We would expect that 791 will get adjusted down due to cancellations and changes to the targeted closing date of homes currently in backlog.

Over the past 8 quarters, that downward adjustment has averaged about 15%. From that number, you add the number of specs sold and closed in the quarter to get your Q3 deliveries. As a point of reference, we sold and closed 277 spec homes in the third quarter of 2011, on an average community count of 159. While the amount of spec homes sold and closed in a given quarter tends to range between 200 to 300 homes, we are starting to see a shift to more to-be-built homes. In our second quarter, to-be-built orders represented 39% of total orders versus 28% in the second quarter last year and 37% last quarter.

On Page 7, we highlight our ASP in a little more detail. We talk a lot about our move-up focus, and our land buying continues to support this strategy, and yet our ASP is up only 1% versus prior year and has bounced around over the past 2 years from the height of $374,000 in the fourth quarter of '11, to a low of $327,000 in the first quarter of '11, to the $337,000 in our most recent quarter.

And I speak with a variety of analysts and investors throughout the year and many are trying to get their head around what to expect from ASP going forward. And while we continue to make good progress pushing base prices and reducing incentives, community mix has a much bigger impact than same-store price increases.

Over the past year, our ASP in Colorado and Florida is up 23% and 18%, respectively, in markets where we have had only modest base price increases. Whereas in Phoenix, our ASP is generally flat on a consolidated basis, when the year-to-date per community price increases are up anywhere between 4% on the low end and 26% on the high end.

During the second quarter, we raised prices in over 70 communities and lowered our average incentives to 6.1% versus 7.0% in the first quarter of '12 and 9.7% in the second quarter of '11. Our same plan ASP on homes closed was up 3% from prior year and up 1% from the first quarter, and we are focused on increasing prices in submarkets where we are seeing increased demand for our products.

The average selling price of our 2012 third quarter beginning backlog expected to close in the quarter was $352,000. This will be impacted up or down based on the timing of new community openings and the mix of specs sold and closed in the third quarter. Our cancellation rate during the quarter was 11%, down 350 basis points from the same period last year.

Slide 8 presents our adjusted gross margin trends with and without capitalized interest. As noted earlier, our gross margin, excluding capitalized interest, improved 70 basis points versus Q1 and 150 basis points from the prior year. The 70-basis point improvement since last quarter is largely attributable to lower incentives and an increase in same plan ASP's from rate in prices at some of our fastest selling communities, partially offset by lower project close-out adjustments over higher revenue. Our delivered gross margin is a mix of our gross margin of our home to beginning backlog with the gross margin for specs sold and closed in the current quarter. The gross margin of our beginning backlog expected to close in the third quarter is approximately 27.8%, which is down from the beginning backlog margin expected to close in the second quarter of 28.5%, and up from the first quarter of 26.9%. In the past quarter, the margins on specs sold and closed in the quarter have had a negative impact on gross margin, as these deliveries have typically generated lower gross margins of about 200 to 300 basis points than our to-be-built homes or spec homes sold in the prior quarter. However, this quarter, specs sold and closed in the quarter had similar margins to homes presold. We believe this change is directly related to our ability to raise prices or decrease incentives, as well as a tight level of resale inventory available in many of our markets.

On Slide 9, we provide breakout of our SG&A into 5 main categories: G&A, insurance, incentive comp, selling expenses and severance and other charges. Overall, our adjusted SG&A, as a percentage of revenue, dropped to 15.3%, down 250 basis points year-on-year, primarily due to the 35% increase in home sale revenue. Our selling expense of $16.3 million, represented in dark blue, was approximately 5.9% of home sales revenue this quarter, versus 5.5% in the second quarter of last year. The increase from last year is largely attributable to the increase in co-broker activities we are seeing across virtually all of our markets. While the percent commission paid to co-brokers has been flat to slightly down, the co-broker participation was 75% in the second quarter. Yet another sign of the positive impact of low level of resale homes are having on the new home market.

Our incentive compensation is variable and fluctuates with profitability. The actual formula is a little more complex but for modeling purposes, if you use approximately 10% of adjusted EBITDA, you should be in the ballpark.

Insurance expense in G&A is fairly predictable and fluctuates directly with home sales revenue from 1.2% to 1.4%. We experienced a $700,000 decrease in our fixed unit compared to the first quarter. The decrease is due to the reduced amount of payroll tax and benefits, which are associated with the start of the new year, and a decrease in litigated claims expense compared to Q1. And we continually -- we continue to tightly control expenditures and are relying on process improvement and enabling technologies to further streamline our business, as an alteration of the operating leverage inherent in our business. In the second quarter of 2012, we delivered 34% more homes, and we were able to keep our company-wide G&A flat compared to the second quarter of last year.

On Slide 10, we highlight our land acquisition and development spend over the past several quarters. In Q2, we spent $97 million on land acquisition and $35 million on land development. The combined $131 million represents the highest quarterly spend since the first quarter of 2008. During the quarter, we acquired 2,238 homesites, raising our homesites owned to 21,369, up 1,434 from last quarter and raising our homesites owned and controlled to 27,757, up 1,640 from last quarter.

From the graph on the right, you will see that our year-to-date land spend in terms of number of homesites was heavily weighted to the Southeast, resulting from the acquisition of the 2 large master-planned communities that Scott referenced earlier. While we are generally targeting a lot acquisition across our geographies with 1/3, 1/3, 1/3, these 2 large master-planned developments represent a unique opportunity to establish a market-making position in A locations for years to come. The timing of land acquisitions can vary significantly from quarter-to-quarter, but we are still targeting land and development spending of between $400 million and $500 million in 2012, which over $370 million is already committed. And with that, I'll turn the presentation back to Scott for some final remarks.

Scott D. Stowell

Thanks, Jeff. Before we close, I just wanted to mention that we were featured this quarter on HGTV's hit reality show, Design Star. The show was filmed at our Beach Collection at Latitude 33 in Marina del Rey, California. If you'd like to view the show, just visit our website where you'll find a link to the full episode.

In closing, I'd like to take this opportunity to thank the entire team at Standard Pacific Homes. Our success is a direct result of their talent and dedication. During the last several weeks, Jeff and I have held face-to-face reviews with our regional and division presidents to discuss progress to date, and our plans for the remainder of 2012 and beyond. I'm pleased with the progress we're making across the country in executing our strategy, and I'm impressed by the commitment to our Vision displayed by these operators. All of us at the corporate management team recognize the critical roles each of these individuals and teams play in executing on our strategy each and every day. I believe Standard Pacific Homes' success during the first and second quarters is a reflection of our theme of Better Together. It was a determined team effort that allowed us to achieve what we set out to do during the first half of the year, and it is that same level of effort that we'll be required to drive our future accomplishments. I remain excited about our future. Now I'd like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Dennis McGill first.

Dennis McGill - Zelman & Associates, Research Division

Scott, just I think a couple of quarters ago, you give us a stat around how many of your buyers were previously renters, and I was just wondering if you had anything updated on that for the quarter. And if so, if you could maybe talk about what you're seeing across price points and then maybe across markets as well sort of understand from a demographic side where you're seeing some of this demand come from.

Scott D. Stowell

Okay. So Jeff will give you the rental stat, you've got that.

Jeffrey J. McCall

Dennis, based on coming through at Standard Pacific Mortgage in the deals closed in the second quarter, 32% of them are moving from an existing home that they own. And so out of the 68% that are currently renters, 53% of those 68% have previously owned homes in the past 3 years.

Dennis McGill - Zelman & Associates, Research Division

So where does that take us as far as that buyer pool of 53%? Is that prior foreclosure victims or short-sale victims? How are you sort of thinking about that pool of rental participants especially thinking about you being a move-up buyer, maybe have less tied to the rental market.

Jeffrey J. McCall

That number was a surprise. When we looked into the details of the credits of these individuals, 3% of them had foreclosures in their past and 5% of them had bankruptcies. So really, the credit is not as bad as a lot of these buyers are -- I think, often taking the opportunity to take advantage of the attractive pricing that's out there and realizing that today's mortgage rates -- this is really a pretty solid time to buy.

Dennis McGill - Zelman & Associates, Research Division

You said that they were prior owners at some point in their past?

Jeffrey J. McCall

Of the 68% of our buyers that were just briefly renters? Yes, 53% of them did own a home in the past 3 years.

Dennis McGill - Zelman & Associates, Research Division

Okay. Interesting. And then, I guess, anything you can put around the sensitivity analysis that you guys run internally between price and absorption pace. I think you -- if I heard you correctly, you said you would skew towards the side of price and slow down absorptions. What's the metrics that you would think about internally in high production market, and then also, I guess, in some of your high-quality assets since it's probably different.

Scott D. Stowell

This is done locally, and it's a little artful because it is a function of what the local competitive environment is like. It's also influenced a little bit by production capacity if, for example, in Phoenix, we're concerned that selling at too high a rate, you really can't -- there's not production capacity to build of the houses, but that's actually, we don't want to exceed that capacity. But as a general rule, Dennis, any sales rate that approaches 3 sales a month or higher, we start focusing on raising our prices. So we're focused on -- I just want to reiterate that we are focused on our return on inventory, so we're balancing both the velocity and margin. We tend to tip to the margin because we think that suits our positioning best, and it suits our cost structures best.

Jeffrey J. McCall

I'd also add that our experience, obviously when raising prices, we're very cognizant of what we're doing to that demand. And we've been pleased with our ability to raise prices without really truncating a lot of that demand. So we haven't seen as much sensitivity to those price increases as we have in the past.

Dennis McGill - Zelman & Associates, Research Division

Yes, I guess that was going to be my last follow up. Just, Scott, with your experience in the market, have you been surprised by that level of pricing power at this stage in the recovery?

Scott D. Stowell

What we're seeing at the highest levels, Dennis, is occurring in the markets where we have the greatest distress. And over the last 3 cycles that I participated in, when you get the conditions that existed in those markets like very tight inventories, very favorable housing valuations in terms of house price and historically low interest rates, it doesn't surprise me. And then, of course, you need some positive job growth and other factors. So while we're seeing it in Phoenix, we're not necessarily seeing it in the same kind of pricing power in California, because the conditions to start leading to it. In Southern California, in particular, we're not seeing it.

Operator

We'll take our next question from David Goldberg with UBS.

David Goldberg - UBS Investment Bank, Research Division

My first question is on the co-broker participation and the increasing co-broker participation. And while that's obviously a positive, because it helps drive traffic in these sales, I'm wondering how you guys think about, is there a way to have your sales people generating more of the leads, kind of bring down the amount of commissions that you're paying externally, or do you kind of think you're close to where the market is and there's not much you can do?

Scott D. Stowell

My view on this is, that we've made a decision to actively engage with brokers because they're such a great procuring source for our sales. In most of our markets, particularly outside of California, they've always been a really important procuring agent for our sales. I think this is mostly driven by the fact that they're just bringing their clients to us because there's so little opportunities in the resell inventory. So I think we're getting some additional benefit coming from that. And I think we're kind of focused on it as a strategy, that's contributing as well.

David Goldberg - UBS Investment Bank, Research Division

Got it. And then just as a follow-up question. When you guys think about the business and you're counting on what's going on the macro backdrop, are you concerned at all that some of the weakness in the macro backdrops has been kind of lag to the housing market, maybe if things got a little slower in the broader economy in May and June, you might not see that until maybe August, July, late July, August. Are you concerned about that at all? And do you think it's more of an issue given the kind of move-up focus and a little bit higher price focus relative to the rest of the builders?

Scott D. Stowell

Well, we're watching it very carefully. We're prudently managing our business assuming that there is some fragility to not only the local economy but globally as well. We're maintaining our discipline in our costs, so that in the event that the emerging housing recovery starts to slow down because of those headwinds, we think we're in a position where our cost structure allow us to remain profitably -- profitable, and our community count levels allow us to remain profitable given our current cost structures.

Jeffrey J. McCall

David, I'd add to that that really traffic levels, may be the forward indicator that we have there. And our traffic levels are still up year-on-year 4% and up quarter-on-quarter 7%. That's our best forward indicator. That's something that we could watch pretty carefully.

David Goldberg - UBS Investment Bank, Research Division

Not to take up too much time, but when you give that specific, that's through second quarter. Do you guys have any kind of thought on other than normal seasonality in July, nothing suggesting this slowdown beyond normal seasonality for the July traffic?

Scott D. Stowell

No. Not seeing that.

Operator

An we'll take our next question from Michael Rehaut with JPMorgan.

Michael Rehaut - JP Morgan Chase & Co, Research Division

First question, I guess -- and I'm sorry to jump off quickly before. I apologize that this is something you would address. But some builders have started -- talked about community count growth in 2013. Given the different levels of brand acquisitions that you've been talking about, reviewing some of the strategy on the land side, can you give us thoughts on community count -- net community count growth for next year?

Scott D. Stowell

Yes. We -- let me provide a caveat first. It's difficult -- we provided the number of communities we're going to open next year based on what we currently own or control in our inventory. So you've got that information. What's been surprising for us is because of the increase in absorption rates, we've sold out communities faster than we had planned. So that is -- it's difficult to give you something that's meaningful. But we would peg our community count growth in 2013 somewhere between the mid- to high-single-digit increase.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Great. Actually, that's very helpful. I appreciate that. Second question, if you could review regionally, which areas in terms of the markets that you're in are you seeing the greatest degree of net effective price appreciation? That being between both nominal -- combining both nominal price increases and lowering of incentives and discounts?

Jeffrey J. McCall

I think the leading candidates net-wise -- I mean, really it's tough regionally because it is hyperlocal. We get down to individual communities, and we have some markets where we're raising prices that expand pretty significantly. And then 10 miles down the road, we have segment pricing. The most price opportunities we have are clearly -- Sacramento has been tracking very well. Inland Empire, we've had a lot of price opportunity there. Clearly I think the headline, everyone's talking about Phoenix. Phoenix has had some pretty amazing opportunities to increase price.

Scott D. Stowell

I think the other surprise for us, Michael, is Sacramento. In the last quarter started to show some pretty good opportunity to increase prices there, largely because their inventory is extremely tight, so we're pleased to see that. We're also seeing a correlation between the fastest selling markets and price, and there's definitely a correlation there. Phoenix, selling at the fastest rate, Inland Empire is second. South Florida, third, and Austin, Texas. Each of those markets would probably show better pricing power than our slowing -- slower selling submarkets, which would be Jacksonville, Charlotte and Orlando.

Operator

We'll take our next question from Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

I was wondering if you had any sense of the gross margin difference on maybe some of the loss that you secured the last 2 or 3 years versus some of the deals that look a little frothy to that come over your desk right now. And really, what the chances [indiscernible] I'm trying to get a sense on what your advantage is, if any, versus peers that are a little later to the game to reload some of their lot supplies?

Scott D. Stowell

I think Jeff has got some detail on the gross margin question, and I will turn it over to Jeff.

Jeffrey J. McCall

When we break down our gross margin by vintage, from the lots that we've bought, we actually have about a 300-basis point benefit from lots we bought in 2010 and 2011 compared to the homes -- the lots we bought in 2009. So some good buys lately having to -- any of the lots in 2012. too early to tell. But we are expecting solid gross margins there. And our underwriting, we've been able to secure a lot of good deals. Our underwriting -- we haven't had to budge it all up of our underwriting standards, and we've been able to find a fair amount of communities that meet and, in many cases, exceed our underwriting standards. So I think one of the benefits of a reasonably solid land supply is we don't have to be aggressive in any market, because we have lots that are ahead of us, so we can be opportunistic and only take the -- we can be pretty picky on which deals we're approving.

Scott D. Stowell

I think the other thing that we learned and we're kind of analyzing this question is, we are also benefiting from higher gross margins in the projects that we're self-developing, which is consistent with our strategy. And I think we're still able to underwrite those deals to achieve higher margins, and we're focused there. We've got capability to do that. We think that's an important element to our strategy.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then going back to some of the discussion on price versus pace. In some of those really hot communities where you're selling more than 3 homes per month and you're trying to raise prices, what's been the general response, pick maybe your highest performing markets, your highest performing communities to those higher prices. Has it actually slowed demand or is it just leading to more urgency?

Scott D. Stowell

It really hasn't slowed demand. We're -- you've seen us again as the case study. We didn't raise prices and take our absorption rates down significantly. We're just raising prices frequently to maintain that essentially on average 4 sales per community per month when many builders in that market, at least, last quarter and still even into the second quarter are selling 10 or more a month. So I think it's -- people -- it's interesting and consumers are noticing that prices are moving up. We hear that often from shoppers. And I think that, that may be contributing partially to a very low cancellation rate as well that we're seeing now on 11% cancellation, which is low generally, but that's really a historically low. I think as people start to believe they're making home purchase and then maybe they're in the market that is moving up, those tend to lock demand. So I think there's some positive urgency that results from prices.

Operator

Our next question is Michael Kim with CRT Capital Group.

Michael S. Kim - CRT Capital Group LLC, Research Division

Jeff, just on the deferred tax asset, just curious, what sort of guidance has Ernst & Young provided to you guys on DTA reversals and in terms timing, requirements, et cetera?

Jeffrey J. McCall

Yes. It's been pretty consistent. Our DTA at the end of the quarter was roughly $500 million. As we look at that, we're rapidly approaching that 3-year change of positive earning look back. So I think we're basically right there just about now. And so the DTA reversal and sizing that is a big focus on what we're doing, and we'd expect some pretty positive results coming out of there in the reasonably near future.

Michael S. Kim - CRT Capital Group LLC, Research Division

Okay. And I guess next on just more of a modeling question, but did mix impact with backlog conversion ratio for the Carolinas? I guess, how should we think about the backlog conversion there? Is there going to be more kind of to-be-built products or can we expect a little bit more spec out of it?

Scott D. Stowell

That's a good question. Charlotte did have a fairly strong increase in mix of to-be-builts in the first and second quarter relative to the kind of the last 3 or 4 years. So I think that's probably contributing to lower -- should contribute to a lower backlog conversion.

Jeffrey J. McCall

And I think also especially in the Carolinas where our price point is moving up in a lot of our newer communities, you will see more of the to-be-builts on that move-up, because those buyers want to really design and option exactly what they want.

Operator

Our next question comes from Kristen McDuffy with Goldman Sachs.

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

Yes. Other industry participants have characterized that California market is overheated, and I just wanted to understand, it seems like you guys are finding some pretty good deals, because you guys are more focused on partially developed as opposed to finished lots, and can you just give us your sense for what you're seeing there?

Scott D. Stowell

Well, we've got a 50-year history in California so that's certainly an advantage. We've got strong, tenured managers here who are highly recognized in their local markets with credible reputations as land buyers and as builders. So we certainly think that is a benefit. We do leverage our land development and master-planned development capability, which does produce better returns for us, that have historically. We still believe in that. Obviously, we're -- we've got significant -- not only significant history here but strong commitments to the stake as we know it well, we're headquartered here. I'm not seeing -- I don't know, you're characterizing California as being overheated. I don't know specifically what -- if you're talking about just finished lots, yes, there's just -- there's virtually very few finished lots in the markets that we are targeting. So you really do need to leverage your development capabilities.

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

Okay. And then my second question, your revolver, do you guys have any plans to drop on that to fund land purchase or do you view it like it's just a sort of a liquidity buffer?

Jeffrey J. McCall

Yes. Right now, our revolver is more than a liquidity buffer. We have cash in excess of $300 million, and I think we've got ample access to capital to fund our growth plans.

Operator

[Operator Instructions] And we'll go next to Alex Barrón with Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to ask you with regards to your ability to raise prices in some of the more stronger markets like Phoenix. I know costs are also going up. So I'm just kind of wondering, I guess, it's a 2-part question. One, are you still guessing that you have the ability to raise prices given how much they've already moved so far year? Or are buyers kind of starting to push back a little bit? That will be Part 1. Part 2 is, how much of those price increases are going to just cover increase in cost of land and labor versus how much of it is dropping to the bottom line? And then if I could I have a follow up.

Jeffrey J. McCall

So we're using Phoenix as the example to your question, Alex. We have not seen nor have we heard that consumers are pushing back on price increases. But we're measured in how we're doing this, so we're thoughtful about consumer reactions. We're thoughtful about appraisal issues, but we're mindful of maximizing revenues and growing our margins. And we think we've got a thoughtful good approach. It's so far, it's working well. And as that relates to your cost question, our direct costs have been flat for the last 5 or 6 quarters. And that would include all the homes in our backlog. We still haven't seen our direct cost increasing. We expect cost increases to come later in the year. We're managing those as best we can. So all those price increases that we're seeing are going to be bottom line.

Alex Barrón - Housing Research Center, LLC

Okay. That's fair. The second, I guess, somewhat related question is, we kind of heard that some of the land prices -- I think, you guys also characterize it as overheated in some of these markets for finished lots. So is your thought process more to stay in the A locations and try to find undeveloped land deals or is it more to move out further out to the B and C locations and try to find particular finished lot deals over there?

Scott D. Stowell

All right. Yes. Alex, first of all, land is generally always competitive, in ups and down cycles. It's where do you find the land that doesn't have some kind of competition associated with it. But we are laser, sharply focused on land in A locations, and as we said on the script, our recent success has been in partially developed or undeveloped land, and we continue to see attractive opportunities there. And we're going to stay focused there. We would -- given our strategic positioning as a move-up buyer pushing out to the secondary markets right now is not a priority or being contemplated in our strategy at all.

Operator

[Operator Instructions] We'll go to our next question, Joel Locker with FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just -- I was looking at your, I guess, amortized interest, I guess, it's creeping up to 8.9% in gross margins. Where do you expect that going forward? I mean in the high 8% range for the foreseeable future, say, next 1.5 years or...

Jeffrey J. McCall

Joe, it crept up to the 8.9%. When we analyze that in detail, we really can attribute it a lot -- a lot have happened to be with mix that came through quarter, and our backlog has that interest back down to about 8.2%. As we're looking over the medium term, that seems to be a positive level. That will come down over time, but I think it's going to stay up that - in that 8%-ish range for the next few quarters at least.

Joel Locker - FBN Securities, Inc., Research Division

Right. And on your community count, how many did you open in the second quarter and how much did you close?

Scott D. Stowell

We opened -- in the second quarter, we opened 14, and we sold out of 13.

Jeffrey J. McCall

And then also -- 14 new, also we mothballed one project, so total net openings was 15.

Joel Locker - FBN Securities, Inc., Research Division

Right. That's it. And if you're looking at -- you mentioned the traffic counts for July were up 4% year-over-year and they were 7% year-over-year in the second quarter. Is that -- did I get those...

Jeffrey J. McCall

No, that was -- And they're both second quarter, so up year-over-year 4% and quarter-over-quarter 7%.

Joel Locker - FBN Securities, Inc., Research Division

And what is -- I mean, July, if you're going to ballpark orders up year-over-year, I know you have a few days left but what kind of range would you say July is running in?

Jeffrey J. McCall

I know it sounds strange but we're close to the end of the month and just keep -- to have some laser focus on that. I think it's a little dangerous to guesstimate. The last week of the month is very, very strong and can swing that several percent. So I -- to say so far and after the first 3 weeks, it's up double digits.

Joel Locker - FBN Securities, Inc., Research Division

Right. And then just to get your opinion, I guess last question on where you view California home prices, say, 5 years out. If you look out to 2017, you don't model much price appreciation or whatnot. Just, I mean where do you -- after being in the market for 40, 50 years, where do you see home price in California, just internal gut feeling out 5 years from now?

Jeffrey J. McCall

Joel, we don't want to try to speculate on where we think California housing prices are going. I think they're going up in the next 5 years, but not in a position to give you any range.

Operator

And that does conclude our question-and-answer session for today. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Scott D. Stowell

All right. Well, thank you, everyone, for joining us today. We look forward to sharing our results with you again in a few months.

Operator

Thank you. And that does conclude today's conference. We thank you for your participation.

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