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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Century Communities Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note, today's event is being recorded.
I would now like to turn the conference over to Scott Dixon, Vice President of Accounting. Mr. Dixon, please go ahead.
Good afternoon. We would like to thank you for joining us today for Century Communities’ second quarter 2018 earnings conference call. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements.
These statements are based on management's current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the Company's most recently filed Annual Report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our Web site at www.centurycommunities.com. The Company undertakes no duty to update any forward-looking statements that are made during this call.
Additionally, certain non-GAAP financial measures will be discussed on this earnings conference call. The Company's presentation of this information is not intended to be considered in isolation, or as a substitute, to the forward information presented in accordance with GAAP. Management will be available after the call should you have any questions that did not get answered. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer; and David Messenger, Chief Financial Officer.
With that, I will turn the call over to Dale.
Thank you, Scott. Today on the call I will review our operating highlights and business updates. Rob will then discuss our business and markets in more detail. Afterwards, Dave will follow up with further information on our financial results, balance sheet and increased outlook for the balance of the year. Following our prepared remarks, we'll open the lines for questions.
Our team executed well in the second quarter of 2018 and more than doubled adjusted earnings year-over-year to $36.5 million or $1.21 per diluted share. We expanded our financial flexibility through the upsizing and extension of our credit facility and completed the Wade Jurney Homes acquisition to become the 10th largest national U.S. homebuilder based on 2017 pro forma homes delivered. Additionally, we reached record levels across majority of our operating metrics during the quarter, including home sales revenue, net new home contracts, backlog dollars and backlog value in an overall healthy homebuilding environment. This significant improvement was driven in part by accelerating growth in our acquired operations, and also from strong demand throughout our legacy markets. Furthermore, we maintained tight cost controls and drove significant operational improvements, all while finalizing the full integration of our previous acquisitions.
In June 2018, we completed the purchase of the remaining 50% interest in Wade Jurney Homes, which we expect to be a solidly accretive transaction for many years to come. Wade Jurney Homes has a unique and scalable business model, which requires less capital investments and yields quicker asset terms. This has made possible by a streamlined and asset-like business model, including the sale of homes through retail outlets as opposed to model homes. This unique sales approach enhances the ability to scale and geographically expand the operations of Wade Jurney Homes in a cost effective manner.
I want to take a moment to touch on a few additional benefits that this transaction provides; this acquisition expand Century's investment into a proven and highly profitable operation; it expands Century's exposure to increasing demand from entry level buyers; it enhances our geographic and product diversification through additional exposure to new markets and price points; it drives additional growth opportunities for ancillary revenue streams, including Century's existing financial services operation; and finally, the improved access to capital and other resources will accelerate the growth of the business, which is already occurring.
The full acquisition of Wade Jurney Homes was the logical next step in our partnership particularly given there our share of income from the venture has exceeded our initial investments, reaching $20 million since the inception of the initial joint venture in November 2016, including $4.5 million of income for the pre-acquisition portion of the second quarter of 2018. For the trailing 12-month period ended June 30, 2018, Wade Jurney Homes closed 2,190 homes, generating $330 million in revenue. Additionally, as of June 30, 2018, Wade Jurney Homes owned or led 6,828 lots and have 1,262 homes in backlog, representing a value of $198 million.
For the Company, overall, we ended the quarter with nearly 3,200 homes in backlog with $1 billion value, representing considerable growth compared to 1,366 homes with a dollar value of a little but $500 million in the prior year period. We also grew home sale revenues to $522 million, an improvement of 82% from the prior year quarter, led by an 84% increase in homes delivered. Excluding the impact of one-time items related to our home builder acquisitions, adjusted net income was $36.5 million, an increase of approximately 135% from the prior year’s quarter.
The facets of our dynamic multi-market growth strategy that facilitate this continued success include; expansion of our dynamic and scalable national home building platform; a focus on situating operations in attractive markets with sound economic fundamentals; maintaining a strong capital position to support accretive, strategic investments; the acquisitions of attractive land parcels to capitalize on the robust demand in our markets; and a commitment to driving continual execution improvement in all aspects of our business.
Our financial services group, which provides mortgage entitled services to create a one-stop solution for our home buyers, continues to gain considerable momentum as shown by a more than three-fold increase in revenue year-over-year to $8 million for the second quarter of 2018. Its contribution of $2.6 million in pretax earnings compared to $298,000 in the prior year quarter validates this ancillary business line, which we expect to further scale in the quarters to come.
I am very encouraged by our consistent and profitable growth over the past five years, which has earned us a position among the top 10 largest U.S. home builders. Year-to-date, we have achieved record results and we are well on our way to delivering another consecutive year of record earnings. We maintain a positive view of the current U.S. home building environment, especially the entry level buyer segment where we have an ever growing presence. This favorable outlook combined with our healthy backlog, deep land position and strong balance sheet provide us with ample capacity to expand our consistent track record of generating attractive returns for our shareholders.
Into the second half of 2018, we are excited by our prospects to further leverage our national scale and improve profitability. We will continue to carefully evaluate potential investment opportunities to drive further returns for our shareholders. I’d now like to turn the call over to Rob to discuss our markets and business in greater detail.
Thank you, Dale, and good afternoon everyone. During the quarter, we continued to actively pursue additional growth avenues, while focusing on expanding and improving our existing operations. Our strong second quarter performance was driven by significant growth in net new home contracts deliveries and backlog. We ended the quarter with homes in backlog up 134% to a record 3,199 homes. This backlog represents a record dollar value that was up 89% to $1 billion. Additionally, our expanded and extended credit facility with borrowing capacity now at $640 million provides us with additional flexibility and capital to act on new and accretive growth opportunities in future quarters.
We continue to broaden our land positions during the quarter by sourcing well situated lots in healthy markets that meet our strict underwriting requirements. We ended the quarter with owned and controlled lots in excess of $38,000, of which approximately 50% of this land was controlled versus owned at the end of the second quarter. We believe this flexible land strategy gives us a visible pipeline for disciplined grow over the next several years. Furthermore, our diverse geographic footprint, balanced exposure to markets with solid fundamentals and various product offerings, continue to support a robust but increasingly stable growth profile for our Company.
The full acquisition of Wade Jurney Homes added approximately 6,800 more lots to our owned and controlled pipeline. We are extremely pleased to now have this unique entry level builder as a wholly-owned operation under the Century Umbrella, and that Wade himself with his exceptional operating experience will remain with us as we grow the business.
Wade Jurney Homes targets entry level home buyers in Florida, Georgia, Alabama, North Carolina and South Carolina with sales prices averaging $150,000. This asset like models, which offers a limited number of plans, helps this operation increase its returns while eliminate the needed capital investment dollars. Given the demonstrated success of the business coupled with the immense opportunity in the growing entry level market, we intend to continue expanding this brand into additional new markets. We now have a much broader position in the rapidly growing Southeast, as well as scalable exposure to entry level buyers in other areas of the country.
Looking at the trends across our regions. Net new home contracts increased 51% to 1,543 homes during the second quarter with legacy regions accounting for just under half of that increase led by our Texas and Southeast regions. Overall, economic indicators in our regions are healthy as inventory remains tight, employment growth remains strong, mortgage availability remains high and the industry outlook for home price appreciation is still positive moving into the back half of the year.
Average levels of supply across all of our markets are approximately 2.5 months, supporting continued new home sales growth on the hills of a sturdy demand backdrop. Industry expectations have improved notably in Texas where we increased our home sales revenues by 47% year-over-year and net new contracts by 73% year-over-year, primarily due to the market’s increasing demand for lower price point homes. In our robust Southeast market, home sales revenues were up over 50% year-over-year with backlog growing over 25%.
In summary, we are pleased with the significant strides we made in growing our business during the second quarter as we continue to focus on widening our growth channels and diversifying our reach across additional buyer segments, product types, and geographic areas. We continue to target markets with attributes such as job growth, growing household formations, constrained supply and favorable home price forecast. With our continued focus on reducing our price points in our existing markets plus the addition of the Wade Jurney Homes brand, looking at the second half of 2018 and going forward, we expect in excess of 75% of our homes to be considered entry level. We remain encouraged by positive macroeconomic factors, our deep land portfolio of more than 38,000 lots, our strong capital position and our talented and dedicated team members as we advance our position within the ranks of the top 10 largest U. S. home builders.
I will now turn the call over to Dave who will provide greater detail on our financial results and outlook.
Thank you, Rob. During the second quarter of 2018, we continue to experience strong demand trends in our legacy and acquired market, which helped grow home building revenue and adjusted gross margin to record levels. This led to net income of $33.2 million or $1.10 per diluted share, a 124% increase compared to the $14.8 million or $0.66 per diluted share in the prior year quarter.
Adjusted net income excluding one-time acquisition items and purchase price accounting was $36.5 million or $1.21 per diluted share. This compared to $15.5 million or $0.69 per share in the prior year quarter. For the second quarter of 2018, our pretax income doubled to $46.5 million compared to $23.1 million in the prior year quarter. Adjusted EBITDA more than doubled to $70.9 million compared to $32.5 million in the prior year quarter.
Home sales revenues increased 82% to $522.2 million compared to $287.6 million in the prior year quarter. This improvement in revenues was mainly driven by an 84% increase in home deliveries to 1,384 compared to 753 homes in the prior year quarter. Our average selling price was $377,300 compared to $381,900 in the prior year quarter. Adjusted homebuilding gross margin percentage increased to 22.3% compared to 21.1% in the prior year quarter. This 120 basis point improvement was mainly driven by operational efficiencies and favorable mix.
Similar to what we have experienced for more than three years, home input costs continue to climb. This includes labor and most materials. Everyone knows the story behind lumber and its fluctuations, which are currently on the decline. However, we are also seeing increase in concrete, roofing, flooring, paint, and most other major categories. We focus on mitigating these increases through home price appreciation, national purchasing agreements, process efficiencies and long-term supplier and trade relationships. As we start new homes and underwrite new land acquisitions, we factor in cost inflation and higher interest cost into our assumption.
Looking at our backlog of 3,199 homes, while some typical fluctuations due to product and geographical mix may occur from period-to-period, we expect our adjusted gross margins over the next couple of quarter to remain consistent in the 20% to 22% range. As a reminder, adjusted gross margin excludes capitalized interest and purchase accounting impact from cost of sales. On a GAAP basis, homebuilding gross margin was 18.2% as compared to 18.7% in the prior year quarter, largely attributable to 180 basis points impact from purchase accounting charges.
During the second quarter of 2018, we incurred $9.2 million of purchase accounting charges. Of which $6.2 million pertain to the UCP and Sundquist transaction and $3 million to the Wade Jurney Homes acquisition. We expect approximately $24 million of purchase price accounting adjustments to be incurred during the two remaining quarters of 2018. This includes $4 million related to our anticipated final purchase accounting for the UCP and Sundquist acquisitions, along with a preliminary estimate of $20 million for the complete acquisition of Wade Jurney Homes with more of the adjustments being incurred in the third quarter than the fourth quarter.
SG&A as a percent of homebuilding revenues was essentially stable at 12.2% in the second quarter compared to 11.9% in the prior year quarter with 30 basis point increase primarily due to investments to support our 2018 growth initiatives and costs incurred to complete the integration of the UCP and Sundquist acquisitions. On a sequential basis, compared to the first quarter of 2018, our SG&A improved 210 basis points and our fixed G&A as a percent of homebuilding revenues improved from 10.8% to 8.6%. We expect our total SG&A as a percent of revenue to continue trending down sequentially for the remainder of the year.
Our financial services subsidiary consisting of title and mortgage services contributed $2.6 million in pretax income with $8 million of revenue in the second quarter of 2018 compared to $298,000 and $1.7 million of revenue in the prior year quarter. Our JV income was $11.7 million for the second quarter, which included a onetime $7.2 million gain related to the Wade Jurney Homes acquisition and $4.5 million of operations, which was an increase of 167% compared to $2.7 million in the prior year. We use our credit facility to fund the purchase price of approximately $37.5 million and retire approximately $94 million of Wade Jurney Homes’ outstanding secured investment. Now as the acquisition is complete, we will no longer report any activity in this joint venture line item.
The definition we've been using to calculate community count is not applicable to the Wade Jurney Homes brand. Our historical communities are typically sold from decorated model homes located within that specific sub-division. Wade Jurney Homes employes a relatively centralized selling effort from retail store front in lieu of model homes, allowing sales to be generated from multiple sub-divisions of varying sizes or in certain cases even scattered lines. These two approaches to selling homes are obviously quite different and our historical concept of community count is not helpful in measuring absorptions or providing visibility into future sales and deliveries to Wade Jurney Homes. And since going forward we expect this brand to be a material part of our overall sales and delivery, we will no longer be providing guidance on a community count for any portion of our business.
Now turning to our balance sheet and liquidity. In June through two transactions, we expanded our senior unsecured credit facility to $590 million with an accordion feature that allows us to increase the borrowing capacity to $640 million. The new facility bears an interest rate of LIBOR plus a minimum spread of 2.6% and the term of the credit facility was extended to mature at April 2022. As of June 30, 2018, we had total long-term debt of $907 million with total liquidity of $523 million, including $53.4 million of cash and $460 million availability on revolver. In closing, we want to thank the entire Century team for their hard work in helping us achieve another quarter of substantial growth and improvement in our business. The expansion of Century into a premier top 10 U. S. homebuilder is a direct result of our team’s dedication and commitment to excellence.
Looking at the remainder of 2018, we are committed to deliver another year of record earnings as we take advantage of our expanded scale and geographic reach. As a result, we are increasing our 2018 outlook. We expect deliveries to be in the range of 6,000 to 6,500 homes and home sales revenues to be in the range of $2 billion to $2.3 billion. We continue to anticipate an income tax rate, excluding discrete items, of approximately 25% for the full year 2018. With our expanded geographic scale, entry level emphasis, strategic investments and sustained execution, we are firmly situated to deliver on our profitable growth objectives.
Operator, please open the lines for questions.
[Operator Instructions] The first question comes from Michael Raleigh with J.P. Morgan. Please go ahead.
First question I had was just the general demand environment. Obviously, if you -- some of the other builder result, you had broadly speaking positive but maybe strong as people are expecting, some builders pointed to intra-quarter miss, a couple points; May, in particular, being a little softer and rebounding in June, perhaps not as much enough to offset this top off the May. I was curious across your markets you witnessed or experienced any of these types of trends or if you saw more of a steady consistent backdrop throughout the last three month.
Mike, we really saw it. Well, it obviously ebbs and flows a bit during the quarter. There was no specific trend that we would look at and say one month or one period of time was slower than another. And I think as we look at -- we were very pleased that our sales numbers were up so significantly, both overall for the Company and then when we just look at our legacy region. So all of our markets, in general, did very well and we think that's really a reflection of the fact that we’ve hand chosen these markets over the last few years and they all seem to be performing very well.
And then I guess as a result, have you observed any material changes in incentive levels or pricing, I mean another big pricing that investors have out there, to the extent that volume is little softer and you're going into a softer period of the year that builders might act a little more aggressively. So just curious on not just across your markets, incentive level overall, but perhaps even as it relates to July as well, and getting into some of those softer second half?
Well, I think when you look at July every year, it’s -- from a sales perspective, it’s not the homebuilders’ favorite month. But we really haven't seen any significant change in incentives. We didn't incentivize houses beyond what we would normally do and we're not anticipating the need to do that going forward.
Then Dave I think you also said gross margins you expect for the back half at being 20% to 22%, excluding interest and purchase accounting. So I just want to make sure I heard that right, because I think in the first quarter, excluding purchase accounting, you were around 23%, this quarter ex-purchase accounting you’re around 22%. So just trying to understand that a little better, seems like it's a little bit of a lower range versus the first half. And I don’t know if Wade Jurney is impacting that or mix, or I don’t know maybe cost inflation of catching up a little bit?
I think there is several things that they go into that. Historically, for the past several quarters we have been forecasting a range of 20% to 21% and then our deliveries were coming in with margin in excess of -- better than 23% in the first quarter, better than 22% in the second quarter. As we look at backlog today, there is a lot of things we got to take into account. We do have price increases coming through there will be a certain level of mix that will be impacting those numbers. But we think over the next couple of quarters as we delivered today's backlog, a range of 20% to 22% for our adjusted gross margin is reasonable.
I guess just lastly your comment about not providing community talent going forward. Obviously, it's a metric that people find helpful, not really any count itself, but also understanding the sales pace component of the equation. Just wanted to understand, I mean, obviously the definition doesn't fit for Wade Jurney relative to your other homes, but I presume that Wade Jurney does have, unless I am not -- obviously I'm not as familiar with their model. But I assume they do operate out of communities in and of themselves. So I just wanted little bit more color around that and also future discussions around sales pace, obviously, again, very important for the community?
Just to follow up on that a couple things. Wade Jurney is not signed out of community as well, there may be communities listed on a Web site that -- you can see on Wade Jurney’s Web site. When you actually think about how that model works, there is something out of store -- retail storefront primarily, it was a centralized selling effort and he could be selling a lot, one lot that is in one community and it could have 10 lots overtime community. And so it really doesn't work the same way that Century’s definition of a selling community works.
And in terms of in order to providing guidance around that metric, we think that in future quarters we’ll provide you enough narrative around what our sales pace is and where we see the rest of the business going.
The next question comes from Jay McCanless with Wedbush. Please go ahead.
The first question I had, and to the extent you're comfortable talking about it. If we take the business 12 months forward from now, what should an average price for Century with Wade Jurney and all the other price points you have in there. What should we be thinking about for an average price for the Company -- average selling price?
I think probably without getting into 2019 guidance probably the best metric for you to be using for 12 months from now and what our ASP is in backlog today. We've got 3,199 homes for almost $1 billion of an ASP of just over $300,000 that’s probably a best metric from a modeling perspective.
And then could you repeat what you said about the purchase accounting margin expecting for 3Q and 4Q and then also what you have in 3Q?
So in 2Q we had about $9 million that was $6 million from the UCP Sundquist transaction and $3 million related to Wade Jurney. And then looking forward to Q3 and Q4, we're expecting approximately $24 million of which there will be $4 million for the UCP Sundquist transaction. That will round out those two and would round out the guidance I provided on the first quarter. And then we have roughly $20 million from Wade Jurney over quarters three and four with more of that being heavily weighted towards third quarter.
And then the next question I had. Looking at the mountain and looking at the order comp being flat year-over-year there. Could you talk about the different markets inside of that Vegas, Salt Lake and Denver, and just let us know how those performed during the quarter?
Jay, all the markets are performing well in the Mountain region. If you look at Las Vegas, that's performing as well as we've seen it in many years. Same thing Colorado is performing very well, low inventory in this market. And Utah was an excellent market. It's really more of a timing difference why that was flat on the orders. And we were closing out various communities, because the markets have been so good there. And so now we're just in that timing difference. So as an example, in Q3, we're opening up 13 new communities in the Mountain region comprised of seven in Colorado, four in Utah and two in Las Vegas. So that was just the timing situation but the markets are very healthy in all three.
And then the last question I have. We've heard a couple of your competitors discuss Seattle market and talk about how things maybe catching up a little bit or slowing down a little bit there. Just wanted to see if you guys could talk about what's your thinking for spending and such that way, and also as you expand the UCP lots into California next year. What is that growth going to look like and what type of price points you're going to be focused on?
So generally speaking, as you've seen us do over the last two years, we're getting our price points down in all of our markets and those markets are no different. We're still bullish on Seattle and California. If you look at Seattle, in the North and Pearson Thurston Counties and then King and Snohomish, we still have been experiencing great margins in those areas, very little sales concessions and strong demand. Candidly, the trade base there is a little choppier than some of the other areas. And so cycle times are a little bit elongated but generally speaking, the market is healthy. We’re continuing to invest in that market and again at the lower price points.
Same thing in California and we have some new projects coming on throughout California that will hit both the latter half of this year as well as the early part of 2019, again at either first time buyers or first time move-up. And we think that that market is still going to remain relatively good for the foreseeable future.
The next question comes from Nishu Sood with Deutsche Bank. Please go ahead.
So thinking about the 1,400 increase in closing is expected for ’18. How many of those are coming from the Wade Jurney being including in your results?
We look at it on a consolidated basis that joined for -- low end of 6,500 for the business. Obviously, some of the 1,400 closing delta is from Wade Jurney. We haven’t provided a break out in terms of what regions are making up all of that change.
So just any sense of -- we only got a small, maybe a few weeks in 2Q. So anything you can help us just to understand the cadence of how that might -- how that new division might deliver?
I think you can look at some historical numbers that we have on the Web site to see how they’ve been providing deliveries and see some coloration there. But right now in terms of the business, we think that we’ll be able to expand it, be able to grow it and it should be accretive and positive to Century’s overall business.
And then thinking about that growth, so you got four states you’re pretty well established in, North Carolina, I think the best most established. And then obviously the entry into Texas seems like the most fertile ground of what you’ve done recently as I think Alabama as well. What the direction of the expansion for the remainder of this year. Is it filling out some of the Texas markets? And any sense of how many states or MSAs Wade Jurney could be in, let’s say two to three years out?
Nishu, we really believe that the basic business model is viable in most parts of the country and we think it’s very scalable. And we're currently in the process of prioritizing markets for expansion.
And now that Wade is fully owned by Century obviously, it’s very strong partnership when it was 50-50. What is going to be the greatest change now that as of a month ago, it’s a fully consolidated entity?
Really it’s the resources that we can provide. So we become extremely comfortable with the business and the operation over the last 18 months. And it was becoming more and more clear that notwithstanding the significant growth that the operation had experienced over the last few years that it could continue to be accelerated if the business had full access to all of Century’s financial and operational resources. And so that's what we're in the process of doing. And with that we think that as viable as the business was before, it becomes even more viable on a go forward scalable basis.
And one other one, if I could, gross margin, Dave as you were walking through the gross margin drivers, a lot of other folks have mentioned price acceleration as a driver of strong gross margin trends. You folks had a very strong gross margin here as well. But you focused more on cost management and mix. What are the pricing trends you're seeing and did those help your folks’ gross margins as well?
It's something that we're continually evaluating, but it's really for us, it's on a subdivision by subdivision level. There's -- depending on the subdivision, there may be more or less pricing power. And so we're really down to that level where we decide how we price the homes. And I think everybody in the industry has some concerns about affordability and that's why we've made a concerted effort over the last period of time to get our price points down, offer a more attractively priced home. And we think our new wholly owned Wade Jurney Homes business fits perfectly into that effort.
The next question comes from Thomas Maguire with Zelman and Associates. Please go ahead.
Just wanted to quickly dig in there, obviously, pretty strong volume growth but would love to get thoughts on the margin piece of that business. And just how do we think about it relative to core Century on the gross margin side and any high level thoughts on the profitability of the Wade Jurney business?
Looking at the margin of Wade Jurney versus Century, it's not too dissimilar to where we operate our business.
And then just separately, is Wade Jurney expands in the new markets, Arizona, the Midwest or even Florida, where they already have a presence. Is there an opportunity to bring the core Century product there in I guess semi-greenfield manner as well or it’s just Wade Jurney something we should think about in isolation?
No actually, we're looking at those opportunities as well. And obviously, the Wade Jurney brand operates at a significantly lower price point even than our Century complete series within the Century communities brand so we think there's opportunities to coexist in the same markets. And so that's something that we think we can leverage both sides of that where the Wade Jurney brand can come into markets where the Century brand already is and vice versa. So we see definite synergies in that area.
The next question comes from Alex Barron with Housing Research Center. Please go ahead.
I wanted to ask about the -- obviously a lot of questions on Way Journey here. But you said their margins are comparable, would their SG&A be comparable as well and would it be higher or lower than your standalone operations?
They're operationally relatively comparable to ours.
Now in terms of the -- obviously those forms are simpler, they’re standardized designs. So in terms of actual construction site whether we looking at or maybe another way to ask it is that block conversion. How quickly does a home go from some person ordering to a delivery time?
I would say that really looking at construction time going from sales to delivery, you're looking three to four months for of these houses.
And in terms of strategy, obviously, the goal of those homes is to keep them affordable and nobody else comes close to you guys being in the mid-150s. Is the goal to -- we got cost pressure and all of that. But is the goal to try to maintain them as affordable or is the goal to raise prices. What's the main emphasis to maintain the high sales pace or to try to maximize margins on those types of homes?
It's really so. But to the extent that we can raise prices, we intend to raise prices but we also intend to remain the most affordable new home option that a home buyer can have. And that's not something that's going to change going forward.
And in terms of end markets for them, I think you guys have set factors at which market specifically, or are you guys centering all sectors markets and is Phoenix one of them as well?
We've looked at a verity of opportunities in Texas as well as certain parts of Arizona. And so we're in the process now -- I mean, this is relatively new in terms of our 100% ownership and just the ability to deploy additional capital beyond what the venture had on its own. So we're in the process of prioritizing the entry into which markets right now.
And the next question is a follow up from Michael Raleigh with J.P. Morgan. Please go ahead.
So I guess couple of follow ups to maybe just circling back to the gross margins and then actually on the SG&A, asking about gross margin from another perspective. Dave, I think it was helpful when you recognized that going into the year for the first couple of quarters, you were looking for 20% to 21%, you came in above 22 -- above 23 in the first quarter, above 22 in the second quarter, and so in effect the forward guidance for the next few quarters of raising the higher end of that range if anything recognizing some of the better strengths. But I just wanted to make sure that perhaps it's more that way to think about it rather than still being perhaps at least for conservatism or upside as opposed to anything in the backlog say that 20 is down from 2Q levels it would be little over 100 basis points drop to the midpoint. Just trying to understand if there is anything either from a mix or price cost standpoint that would push those margins down, or is it more being conservative but not just -- not as conservative as what ultimately played out in the first half?
Mike, I think looking at range at 20% to 22% and given our history, we do see some strength in our numbers. But we’re not using a range of 20% to 22% -- we’re not seeing anything negative or alarming in the backlog numbers, its mortgage now trying to prepare for whether it’s mix issues or pricing issues that come through in that backlog in order to make sure we’re giving you an appropriate rate. But we’re getting anything negative that that should be seen as an alarm in our backlog.
And I guess this on the SG&A for the second quarter you’re up 30 bp year-over-year. In the first quarter you said that Wade Jurney has similar margin, something that’s more like an operating margin. But in the terms of the SG&A going forward given that much greater higher degree of scale. How should we think about the ability to get some leverage out of that over the next couple years? Or should we expect a still just 12% type of margin, SG&A margin for to continue to build out the footprint, invest, et cetera.
I would say that as I said in my prepared remarks, we expect our SG&A as a percent of homebuilding revenue to begin trending down. During the second quarter, we incurred a variety of -- hopefully final cost related to the completion and the integration of UCP, whether related to final 2.06 stay bonuses current employees, closing of offices, final integration of software and we incurred a verity of those costs. As we book our fixed component of SG&A compared to home building revenue, we saw that decline sequentially from 10.8% in the first quarter to 8.6% in the second quarter. And we expect our overall SG&A percent to continue declining as we get into third and fourth quarter and we begin to get leveraged out of the platform we built.
So something perhaps like in the 11% for the second half is obviously directionally sounds like how we should be thinking about things?
Directionally it should be less than 12.2% and we don’t have guidance number out there, but we do expect it to be trending down into the next two quarters.
We have a follow-up question from Alex Barron with Housing Research Center. Please go ahead.
Can you guys talk a little bit about the Texas region, what lead to the tremendous growth there this quarter?
So as we’ve talked on previous calls, Alex, we've shifted our price points in Texas to go into a more affordable offering at lower price point. And so that’s starting to bear fruit and that's what we saw in the second quarter. And we see that continuing on a go forward basis as we continue to bring on new communities at those lower price points. So at that price point, we do not see any market issues right now in Texas.
Now when you talk about lower price point for your brand in sectors how lower are you starting prices?
Well, in Houston we have some sub-200,000 and that’s on the Century side…
And in Austin?
Austin, we have very low 200,000 and San Antonio again, sub-200,000.
Okay, I am seeing no further questions in the queue. This concludes our question-and-answer session. I would like the conference back over to Mr. Dale Francescon for any closing remarks.
Thank you, Operator. And thank you again to everyone for joining us today. We look forward to speaking with you again next quarter.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.