MDC (2019 - Q2)

Good afternoon, and welcome to M.D.C. Holdings 2019 Second Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note this event is being recorded. At this time, I would now like to turn the conference call over to Mr. Derek Kimmerle, Director of SEC Reporting. Please go ahead. Derek Ki

Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2019 second quarter earnings conference call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's second quarter 2019 Form 10-Q, which will be filed with the SEC later today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now, I will turn the call over to Mr. Mizel for his opening remarks.

Good morning, and thank you for joining us today for this call as we go over our results for the second quarter of 2019 to discuss current market trends and provide some insight into our company’s strategy and outlook. MDC turned in another strong performance in the second quarter of 2019, generating net income of $55 million or $0.86 per diluted share. We released selected financial results earlier this month, several of which were repeated. Net new orders for the quarter were up 32% as compared to last year, driven by an absorption pace of 4.1 homes per community per month. As a result, unit backlog increased 7% to the highest level in 13 years. Additionally our quarter end community count grew 14% to 187 active projects. Our homebuilding gross margins exceeded 19% as we anticipated in our pre-announcement coming in at 19.5% which is 40 basis points higher than last year. These highlights service further evidence that the investments we've made over the last several years in our strategic shift to more affordable product are producing great results today and have positioned us for the future. The order strength we experienced in the quarter was due in large part to our move down in price point where demand continues to outpace supply. This is a trend we expect to continue given the lower level of new home construction activity in this market segment and the increase in home prices we have seen for more traditional products. This is why we're committed to focus our land acquisition efforts on this market segment. In fact 65% of the lots we acquired in the second quarter are slated to become future Seasons communities or one of our other more affordable price collections. The favorable market dynamics in the more affordable housing segment has also given us a solid environment to manage pricing and incentives. This is evidenced by the margin improvement we’ve achieved over the last few years. Through careful planning and thoughtful design, we have created attractive and reasonably priced communities that appeal to a number of buyer segments and yield attractive gross margins. Our margins have further been enhanced by our build to order business model which allows us to capture additional higher margin revenues from the options and upgrades our buyers select at our home galleries. While the recent decline in mortgage rates slightly served as a tailwind for both demand and pricing in the second quarter, we believe our market positioning and the value proposition we offer, homebuyers were also important factors in driving our positive results. A third benefit to our shift to more affordable product has been the favorable impact it has on our construction cycle times which decreased 7% year-over-year in the second quarter. This important improvement in cycle time allows us to turn our projects more quickly, providing a lift to our return metrics. To sum up, I’m very pleased with our performance this quarter. We generated strong profits, sold homes at an elevated pace and ended the quarter with a backlog that sets us up nicely for a strong finish to the year. In addition, we grew our community count by double-digits versus last year giving us a platform for additional growth in the future. We have been able to achieve these successes while maintaining one of the strongest balance sheets in the industry. We have also consistently paid out a healthy dividend to our shareholders. In short, I believe we are hitting on all cylinders at MDC and I'm very excited about what the future holds. With that in mind, I’d like to turn it over to Bob for more in depth look at our results for this quarter.

Thank you, Larry, and good morning, everyone. As you can tell from Larry's comments, our Q2 results exceeded the expectations set forth at the start of the quarter, even though our consolidated pre-tax income for the second quarter decreased by 3% year-over-year to $74.3 million. Homebuilding pre-tax income for 2019 second quarter was down only slightly year-over-year to $61.6 million as the decrease in homebuilding gross profit and an increase in selling, general and administrative costs were mostly offset by an increase in the interest and other income. Financial services pre-tax income decreased by 11% year-over-year to $12.7 million. The decrease was due mostly to $1.4 million of gains recognized in the same period in the prior year on the sale of conventional mortgage servicing rights as well as the year-over-year decrease in the servicing income related to those loans. These decreases in financial services pre-tax income were partially offset by $2.3 million of net gains on equity securities in the second quarter of 2019, compared to $1.3 million for the second quarter of 2018. Net income for the 2019 second quarter decreased by 15% to $54.6 million or $0.86 per diluted share. Our tax rate increased from 16.6% for the 2018 second quarter to 26.6% for the 2019 second quarter. The year-over-year increase was mostly attributable to energy tax credits, which provided a benefit to us last year, but not this year. The 26.6% rate was above the estimated 24% to 26% range we had provided during our last call, primarily due to additional tax expense on stock options that were exercised during the quarter. Our home sale revenues for the 2019 second quarter were down 2% year-over-year to $732.8 million, due to 2% decrease in the average selling price of homes delivered. Our backlog conversion rate was 43%, which was at the top end of the expected range for Q2 that we discussed on our previous call and higher than the 40% achieved a year ago. The improvement in backlog conversion was aided by better cycle times, which were achieved in part due to a higher mix of more affordable product. For the second quarter of 2019, 52% of our closings came from product lines we characterize as our more affordable product offerings, as compared to 40% a year ago. Backlog conversion for the quarter was also helped by year-over-year increase in the number of spec homes we sold and closed during the quarter. Furthermore, last year, cycle times in the North region were negatively impacted by a product defect issue involving ISOs in Colorado but that issue has since been resolved, it did not impact current year closings. On the other hand, backlog conversion in our West segment was negatively impacted in the current year by our Nevada market, due to utility company delays that pushed a number of closings out of the second quarter of 2019. Looking forward the third quarter, we are targeting a backlog conversion rate in the 39% to 41% range compared to 40% backlog conversion rate we achieved in the third quarter 2018. The potential for a lower conversion rate is primarily a result of the strong sales we experienced throughout the 2019 second quarter, as these homes are in our quarter end backlog, but most are unlikely to close in the third quarter. Also we anticipate a decrease between 5% and 10% in average selling price from Q2 2019 to Q3 2019. This is due largely to mix including the continued increase in the percentage of our closings coming from more affordable product lines. Geographically we expect temporary spike in the percentage of closings coming from Nevada. This is the result of the delays I mentioned earlier which shifted the expected closing date for a number of more affordable units in Nevada from Q2 to Q3. We also expect an unusually low number of closings from our more expensive subdivisions in Southern California during Q3. However, our Q4 average selling price should rebound somewhat as the mix of closings in Southern California and Nevada shifts back to a more typical level. Our gross margin from home sales was up 40 basis points year-over-year to 19.5%. This increase was driven by a $1.4 million positive warranty adjustment and a decrease in the amount capitalized interest in cost of sales as a percent of homes sales revenues. Our gross margin and backlog at the end of quarter remained healthy, although at the level slightly below 2018 second quarter gross margin of 19.5%. Note that the $1.4 million positive warranty adjustment I just mentioned added 20 basis points gross margin for the second quarter closings, which helps explain why backlog gross margin is slightly lower than the closings. As always, remember that the gross margin level we actually realize in the future period could be impacted by cost increases, cancellations, price or incentive changes, impairments, reserve adjustments and other factors. Our total dollar SG&A expense for the 2019 second quarter was up $1.1 million from the 2018 second quarter. The increase was mostly due to a $2.3 million increase in marketing expenses caused by additional costs incurred to open advertise and staff our significant year-over-year increase in active subdivision count. In contrast, our general and administrative expense decreased by $1.1 million resulting from year-over-year decreases in the amount of bonus and stock-based compensation expense recognized during the second quarter. These decreases were partially offset by an increase in salaries and benefits due to higher average headcount. Relative to Q1 2019, our general and administrative expense decreased by $3.3 million. I believe that this decrease is likely temporary as I expect Q3 2019 general and administrative expense slightly exceeded the $42.6 million we experienced in Q1. However, the amount we ultimately recognize in general and administrative expense for Q3 will depend on the timing and magnitude of various accruals and other factors. The dollar value of our net orders increased 25% year-over-year to $967.9 million driven by a 32% increase in unit net orders that was slightly offset by a 6% decrease in average selling price. The demand for our more affordable product lines remained strong during the second quarter 2019 accounting for 63% of net new orders compared to 40% -- or 52% a year ago. The increase was largely attributable to the continued success of our Seasons collection which alone accounted for 41% of our net new orders in the 2018 second quarter. The increased prominence of our more affordable product lines across most of our markets contributed to the year-over-year decrease in the average price of our net orders. Additionally, we saw a shift in the mix of our net orders to Florida, which has our lowest average selling price. Our monthly absorption rate of 4.1 was a 12% increase from the 2018 second quarter which was our second quarter absorption pace since 2005. This increase was driven by our Mountain and East segments. While our West segment experienced a small year-over-year decrease in its absorption rate, it continues have the highest absolute rate overall. Our second quarter 2019 unit net orders further benefited from a 19% year-over-year increase in average active subdivisions. We ended the quarter with an estimated sales value for our homes in backlog of $1.93 billion, which was down 1% year-over-year. This decrease was driven by a lower average selling price of homes in backlog that was mostly offset by an increase in the number of homes in backlog to its highest level since 2006. Active subdivision count was at 187 to end the 2019 second quarter, up 14% from 164 a year ago. We saw an increased number of active subdivisions in both the Mountain and West segments with the West segment experiencing the largest increase. Active subdivisions in the East segment were flat year-over-year. Oregon, our newest market finished the quarter with three active communities compared with none a year ago. Looking at the graph on the right, the number of soon to be active communities only exceeded the number of soon to be inactive communities by two at June 30th, whereas the prior three quarters has a larger difference. This indicates a strong possibility of that any increase in subdivision count from the end of Q2 to the end of Q3 will be smaller than the increases we saw in the first two quarters of the year. Nonetheless, based on the progress we have already made, we are on track to end 2019 with community count growth of 10% or greater from where we started the year. For the 2019 second quarter, we acquired 2,138 lots for roughly $141 million with an additional $87 million that’s spent on development costs. Approximately 47% of the lots acquired in the second quarter were finished lots and about 65% were lots intended for our more affordable homes. 2019 second quarter land acquisition spend was notably higher than the first quarter of 2019, as we began to re-accelerate our land acquisition activities following our positive start to the spring selling season in the first quarter. We expect this strength to continue into the third quarter, given the level of demand we have seen. For now, we are pleased to see that the total number of lots we control is again rising, with our balance at the end of the second quarter of 2019 modestly higher than where we started the quarter. Net homebuilding debt-to-capital was only 23.4% at the end of the second quarter, down 290 basis points from a year ago and clearly demonstrating our firm commitment to maintaining a strong balance sheet. Furthermore, our liquidity to end the 2019 second quarter was up 29% year-over-year to $1.47 billion, providing us with significant resources to fund the continued growth. Our debt ratings are important to us and we run our company in a way that we believe is consistent with investment grade principles. To that end, we're pleased that Standard & Poor's revised our outlook on MDC's rating to positive during the quarter, recognizing the significant progress we have made in growing our company and improving our credit metrics. With that, I will now turn the call back to the operator for a question-and-answer session.

[Operator instructions]. Our first question today comes from John Lovallo from Bank of America. Please go ahead with your question.

Hi, this is actually [Spencer Cochran] on for John. Thanks for the question. I wanted to start with the gross margin. I understand that you guys are saying that excluding the warranty it would have about 19.3% for 2Q. And I guess just looking at historically we’ve seen kind of 3Q gross margin increase sequentially. And I guess my understanding of slightly lower would be roughly that 19.2% as well. So I guess is there anything else to call out there, anything else to kind of help bridge the gap there? Thanks.

Hey, Spencer. I really don’t think there is anything else to call out. I think given where demand has been it’s a great environment for pricing and incentives which is it’s helpful overall to the margin picture. So I think your characterization is a good one.

And then with regards to SG&A, it was relatively flat on a quarter-over-quarter basis -- on a dollar basis excuse me, despite maybe another 85 million in revenue. Is there anything else like to call out there as to why it was so good?

I think there is various accruals that come into play, for a lot of different reasons it could be stock comp, could be bonus comp. So I think probably the biggest point is that if I’m looking at the G&A piece, I think our run rate is probably closer to what we experienced in Q1, which was 42.6, maybe even little above that as we look forward into Q3, whereas commissions obviously varies pretty directly with the revenue part, and then the marketing piece probably will be up year-over-year, continue to be up year-over-year because we have more communities and we're opening new communities.

Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.

I wanted to start off by asking you a little bit about the cadence moving from 3Q actually into 4Q, you didn’t specifically give guidance on 4Q and I understand that. My question is the comments you made about the turnover rate in 3Q would seem to imply that we could expect a pretty significant pick up in the turnover rate in 4Q or certainly some nice deliveries potentially in 4Q. I was wondering if first of all that is consistent with the way you see things and then secondly if that could have knock on effect on your SG&A? At the Investor Day you talked about SG&A rate of 11% or lower for the year, lots changed since then but your gross margin certainly come in line with what you had talked about then and a lot of your other strategic initiatives are firing on all cylinders. And so wondering how you would characterize that 11% SG&A and whether or not 4Q may play a role in allowing you to hit it?

Yes, and you’re right. We didn’t say specifically on Q4, what we thought was going to happen. But I think your points are valid. Set another way I think there is the potential for closings to be very heavily weighted towards Q4 and of course that's a risk when you have so much weighting towards Q4 given the strength that we've seen in sales recently in Q2. So, that does have a potential to significantly drive down the SG&A rate in Q4. But again, I would caution that, with that much volume in Q4 we're certainly keeping up a very close eye on it. We know that there is some risk there. So, the other thing I guess to note about the SG&A front, as much as we think that 11% is a good target for us, generally speaking, sometimes you get punished by your own success. For example, the better we do from a revenue standpoint, we have certain amounts of stock-based comp that reach elevated levels and contribute more heavily to G&A. So, some of the reason why we have seen the G&A rate be a little bit higher is simply because we're successful and therefore others in compensation accruals that come along with it.

Got it. That being said, I imagine you contemplate those things, when you sort of talk about long-term planning on SG&A, right, I mean you’re just making assumptions for share-based comp within that 11% when you gave it, right?

To some level but not necessarily, for example, the maximum level.

Sure. Okay, great. And then next question relates to land spend. Could you give us the actual numbers for land spend acquisition and development in the quarter? And then just to put into some sort of context for us, you have been undergoing the strategic initiative, buy a lot of land appropriate for your move down strategy that obviously has yielded a lot of fruit and it seems like you might be getting to the point in time where your land spend could generally decline as a percentage of revenues. But wanted see if you could give us some handle on whether we generally should be expecting land spend to be a little less as we go forward from what it had been as you've been starting to make this shift in the new products?

Yes. So, I guess first of all, we did give a number for the land spend this quarter. So, it was $141 million of acquisition and on top of that we had $87 million of development costs. A year ago those same numbers were $188 million and $78 million, so about too far off from what we had this year. In Q3 I do expect it to continue to pick up a little bit. Q3 of last year was about $245 million in total. So, I don't think it's unreasonable to think that we could actually be above what our land spend was a year ago in Q3. So, I think stay tuned on that one. I think we are still looking very much to grow considering what we've already seen occur in the market. And as long as we continue to see strong demand, we're going to be thinking about buying subdivisions in all our markets.

Our next question comes from Truman Patterson from Wells Fargo. Please go ahead with your question.

Just wanted to see if you guys have updated your kind of target for the Seasons and Cityscapes your entry level product. In the second quarter, you guys bought 65% of your lots before the more affordable product. Previously, I think you guys have broken out a 40% to 50% target. Just seeing if you guys have updated that at all?

I think just to clarify for our overall more affordable offerings I think 50% to 60% is the range, so that would include Seasons, Landmarks, Cityscapes, our Urban Collection. So that’s the range were targeting. Our recent land acquisition has been at 65%. So if anything I could see as being a little bit higher than that. Most recently for orders it’s been 63% in the most recent quarter. So I would think that anything would be slightly above that.

Okay. And then just following up on that. Your affordable rollout by region, I guess which region has the most leverage to the Seasons and the Cityscapes product and how should we think about the penetration moving forward? Any regions going to see outsized growth in affordable product?

I mean once again, for example, in our Orlando market we're almost 100% Seasons and in other markets where like Colorado for example is a lesser percentage and that’s because we have a deeper penetration overall. I don’t know if I would highlight one region over the other. I think overall continues to be a focus for our company. I think you should continue to expect that overall for the company it’s going to be majority of what we do from a land acquisition standpoint is the more affordable product. And then finally I would note that it’s not that we’re looking to necessarily reduce the number of units that we're doing on some of the move up product that’s been very successful for us in the past, it’s just that we expect a lower rate of growth for that product and a greater rate of growth for our more affordable segments. So we're not looking to lose share of other products that’s been more traditional for us.

Okay, and if I could sneak one more in. Could you discuss the margin profile on some of your newer entry-level or affordable communities that opened recently in the past quarter relative to once that are opened a year ago, embedded in that is land competition heating up where you can't find an attractive product et cetera or land?

I don’t know that I would say that. You will have to look at it market-by-market because one market can be a much different margin profile than another market. I would still say it's been a good margin profile for us overall. I don’t think we're losing margin because of it. I think your point is good one. I think there is more competition in the space and that’s something that we have to keep an eye on just like all of our costs, we have to keep an eye on land costs. And therefore we have to be very focused on making sure we are taking advantage of price increases when appropriate.

Our next question comes from Michael Rehaut from JP Morgan. Please go ahead with your question.

First question just want to make sure I have some of the details right here. So for the full year you're looking for an SG&A of roughly 11% is that right Bob?

Well, we didn’t reiterate that guidance, I think the question was just more about if that’s what the target was when we talked about during Investor Day, and it would take to get there. So I think what it would take to get there is seeing to this point a significant increase in our backlog conversion rate in Q4 of 2019 and just be determined whether or not that will happen or not. Obviously, we have not provided official guidance on that.

Okay. So, in other words, all else equal given your expected backlog conversion in the third quarter, should we be expecting the SG&A as a percent revenue to continue to be a little bit higher year-over-year, as we have seen in the first two quarters of this year?

Yes, I think it’s -- of course, depending upon what our revenue assumptions are, in Q3 will put that 39% to 41% of backlog conversion guidance with our ASP coming down. The rate of G&A should be about closer to that $42.6 million number that we had in Q1, just for the G&A number. So that's going to pop it up a little bit in Q3 relative to where we were in Q2.

Okay. And the ASP you said you expect to be down 5% to 10% from 2Q ‘19 is that right? And then rebound to a degree in 4Q?

Correct. That's right.

Okay. And can you give us any sense of, in terms of the rebound in 4Q should it get back to about 480-ish type range that we saw on average in the first half of the year or would it not fully get back all that way?

I don't think you would fully get back to it, because remember I think some of the decreases is more permanent because we are increasingly being more mixed toward more affordable products. And we are seeing markets like Florida and Arizona getting a lot of orders and I think we'll see a little bit of shift in mix to those markets. So going all the way back to 480 I don't think is what I would expect, somewhere in the middle. It's hard to tell because of those different things coming in.

Right. Right. Just lastly one more detail question and then kind of a big picture question. The tax rate for 3Q or the full year, how should we think about that?

That 24% to 26% that we've talked about and that excludes discrete items. So, I think it's still good overall, maybe a little bit on the higher side of that. It's always tricky to tell exactly what discrete items will come through the quarter by definition or not something you can predict because of where the stock rates goes or the timing of the exercise of certain options which was the case in the prior quarters. So, kind of using that at the higher end of 24% to 26%, I think is the most appropriate.

For this last two quarters?

I just of think it in terms of those individual quarters, and then you layer in into the first half of the year.

Okay. One last one if I could, just kind of bigger picture, and this might be more question for Larry. Larry, in the last couple of years, you have shown a willingness to get out of a smaller market or two that you weren't just achieving scale or hitting profitability. When I take a step back and looking at your three different reasons, the East region seems to just to be lagging materially in terms of pre-tax income as reported on a segment level, maybe just a touch over breakeven. Can you just give us a feeling as to why you need to be in that region? What are the benefit and if that’s an area that you could evaluate from a strategic perspective over the next -- in the near to medium term as to whether or not you need to continue to be operating there?

I think that the deals with opportunity and growth, Florida you can look at the industry and you can look at us specifically, we are growing very quickly and we are committing capital to it if fits the affordable model and it’s interesting because we compete with other large builders and our product personalization has a great niche there where the larger competitors are pretty much doing the standard home kind of stress down and we're in some cases in the same subdivisions doing -- providing personalization and meeting that same competitor and the consumers paying the very nominal incremental cost for personalization. So I would say Florida is a very, very robust market and we’re very pleased with it. The Virginia, Maryland area we are focused very much on increasing our community counts there. It’s a little bit slower in the sense that the demand is robust. But our underwriting is very, very tight. As you know all over the country we’ve advocated the most conservative land strategy for decades, and sometimes people appreciate it and sometimes they don't. But since many of our major competitors now advocated, I think it's pretty clear builders shouldn’t be speculating and they should buy land for inventory to be built. And so I would say that it’s exciting to see growth virtually in all markets and it's our intent and our desire and our execution for growth in all segments of the markets that we serve. The biggest growth as you know is in the affordable. But Bob made an important comment, we do expect growth in our more traditional product because we build a very, very fine and that product is well received and we're growing that product also. So, the opportunity to be at the right time, at the right place, with the right product and with a balance sheet that is pretty spectacular, I think we're achieving the aspirations that only took us 40, 50 years to get to.

Our next question comes from Alan Ratner with Zelman & Associates. Please go ahead with your question.

What I wanted to focusing on a little bit is just the volume growth and the trajectory and some of the drivers there because you guys did a great job getting back a couple years ago to tying up a lot of land obviously geared towards the lower price points. And we kind of saw the writing on the wall when your lot count was accelerating double-digits year-over-year and now we're seeing that of course filter through on the community count side. And with orders up over 30% I mean that's not a sustainable growth rate long-term but what we're seeing now if I look at kind of the forward-looking indicators is, your community count, the slide you showed, it looks like that that might start to slow this year, your lot count, the growth there is roughly flat year-over-year. So I guess my question is, is that when you look out beyond the next quarter or two which is the next several years, do you feel like your portfolio right now is positioned where you could drive continued double-digit volume growth even without necessarily the same type of growth you’ve enjoyed on the community count, is the product, the price point positioning is that supportive of continued strong growth or do you need to see that lot count growth re-accelerate in order to drive that type of growth?

I think, the real good thing about that we saw on Q2 is that the absorption rate came up year-over-year for the first time in a couple of quarters, so certainly that's helpful. And I think that is indicative of hitting the affordable segment. I mean I think that's helpful in terms of ultimately driving that double-digit year-over-year growth for next year. But I do think there is also a lot to be done in Q3 and Q4, whether it's getting the deals under contract or actually acquiring them and putting them on balance sheet. So I do think it’s a mix of both, part of what we've already done, adjusting our mix but it will also be dependent on what we do in Q3 and Q4.

Got it. That's helpful. But it sounds like there’s still a hope or expectation that absorptions can continue to move higher given the focus on the lower price points. And then just on a similar vein, 30% order growth I think it’s always a little bit dangerous when a builder puts up such strong results that's over extrapolated. And I guess my question is, now that you've rebuilt the backlog it was under pressure and how you are positive year-over-year, how are you thinking about the price versus volume interplay there? Are there any constraints that you see that on the volume side, whether it’s labor, whether it's running lower on lots in open communities, is there anything that would cause you to throttle back that growth meaningfully? The comps are pretty easing in the back half of the year. So, on the surface it would seem like to your poised for some continued strong growth. But maybe you’re thinking about that differently, maybe prioritizing price and margin just given the fact that the backlog has rebuilt?

I think we always have to be focused on price to a degree. We want to take advantage if we are hitting our plan, if we are growing year-over-year already from a growth rate standpoint to have that discussion as to whether or not that makes sense due to increased price or reduced incentives. In terms of whether or not there is anything really active out there that’s telling us that we shouldn’t be favoring that, the labor constraints that you mentioned, I don’t know if there is anything out there that I would cite. And we talked a little bit about Vegas and how we have some issues with the power company, hoping up a couple of subdivisions during the quarter but outside of that there is nothing that stands out. That said, obviously we're going to keep a very close watch on that as we go through Q3 because we know that other builders have reported pretty strong orders as well and there is the potential for the competition for the labor and another resources to continue to increase.

That’s where I was getting at, so that’s helpful, Bob. And then final one if I could sneak one in. Any thoughts on July that you could share with us, how that shaped up?

I think July has been very strong for us, it’s not over yet but we're seeing that continued strength.

[Operator instructions]. Our next question comes from Buck Horne from Raymond James. Please go ahead with your question.

A slightly different way of asking questions that have been asked here a little bit. But just given the strength of demand that you have seen in places like Arizona and Florida, how do you think about the potential for M&A activity or how you're evaluating the opportunities that are out there to add land more quickly or maybe build some operating scale more rapidly? Is that something that you guys -- you would consider at this stage of cycle?

Yes, we prefer to buy one subdivision at a time. I think that’s what our history has shown. The last acquisition we did was in 2011. So well we always look and see if there is opportunities out there. I don’t think it’s anymore likely today than it’s been over the past eight years since we lasted one.

And just has -- the inventory that’s out there for the affordable product continues to be so constrained and the demand seems to exceed the supply in a lot of respect, everyone is saying much of the same things. But have you considered taking the Seasons concept and maybe even going further down price points or even more lower to your entry level and maybe operating on a more spec heavy construction model?

Not necessarily spec heavy construction but we have considered doing a different series. In fact we have one in production in several markets now it’s called our Urban Collection. That’s more in that say 1,200 to 1,400 square feet type of range. There’s two units in the building, as part of all agreement. And the initial response has been that it’s been very successful because it does achieve better affordability even than what we’ve already achieved with Seasons.

Our next question comes from Jay McCanless from Wedbush. Please go ahead with your question.

I jumped on late so apologies if you have already touched on these items. The first one, one of your competitors this morning discussed improving demand for move-up housing, both first and second move-up. What did you guys see during the quarter? And I know you all talked about having an overweight towards find more affordable land. But are you seeing anything in first or second move up that says maybe you need to buy a little bit more of that over the next couple of quarters?

Yes. Well, first of all, I will kind of tell you, one of statements we have made earlier maybe before you got on the call, we don't see that we want to decrease our move-up units. We just see it as a slower growth rate relative to the affordable part of our business. So we want to make sure we're maintaining a strong presence there. As for the improvement in activity, I think our consumer group certainly benefits from lower interest rates as well. So, I think that could be a part of reason why there is improved demand there. But we are focused on making sure we're maintaining share in that segment as well as increasing the share of what we're doing in the affordable segment.

Got it. And then in terms of pricing power, I mean do you may be have a percentage of communities where you are able to raise price during the quarter or/and do you see any opportunities now especially rates considering to move may be inch prices up a little bit?

Yes. I don't know if I have this specific percentage of how many communities we increased. Spring selling season, yes, is a better opportunity to do that typically but in the back half of the year. We did see incentives come down, certainly versus where they were in Q4 and then in the first part of the year. So, I think that was a positive and is reflective of the better pricing environment.

And ladies and gentleman at this point, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

We appreciate everyone joining on the call today and we look forward to speaking with you again following the report of our Q3 2019 earnings.

Ladies and gentleman that does conclude today's conference call. Thank you for joining today's presentation. You may now disconnect your lines.