Hovnanian Enterprises, Inc. (HOV) Q1 2019 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2019 First Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the first quarter results, and then open up the line for questions. The company will also be webcasting a slide presentation along with opening comments from management. The slides are available on the Investor page of the company's website at www.KHOV.com. Those listeners who would like to follow along should log on to the website at this time. Before we begin, I would now like to turn the call over to Jeff O'Keefe, Vice President Investor Relations. Jeff, please go ahead.

Thank you, Gigi, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2019. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a variety of factors. Such risks, uncertainties and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2018, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Joining me today on the call are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President Finance and Treasurer. I'll now turn the call over to Ara. Ara, go ahead.

Thanks, Jeff. I'm going to review our operating results for the first quarter and also talk about the current sales environment. As usual, Larry will follow me in more detail. Our overall first quarter results were in line with our guidance, met our expectations and exceeded consensus estimates for pre-tax profits. Because we realized sales are an issue that are on top of mind for the industry and for Hovnanian, I'd like to begin by talking about sales starting with Slide 4. At first blush, contracts per community for the quarter look weak, declining from 7.6 last year to 7 this year. However, as you look closer into the monthly data on Slide 5, you see a slightly different picture. The slide shows monthly contracts per community for each of the past 12 months. The most recent month is in blue and the same month a year ago is in grey. The quarter clearly began with a very weak November compared to last year. We reported that during our year-end call. Fortunately, you can also see that December and January reversed that trend with contracts per community similar to last year. While I'm happy to say that the most recent month of February, the first month of our second quarter, strengthened further. February sales results were slightly ahead of last year's strong results. Our February sales pace increased from 3.3 contracts per community last year to 3.4 this year. We're especially pleased to report that the absolute number of contracts in February were also slightly better than last year's February contracts at 503 contracts compared to 528 contracts a year ago. This is a combination of a good sales pace and slight year-over-year growth in community count. We're optimistic that the improved February results as well as the growing community count bode well for the rest of the Spring selling season. Anecdotally, I can tell you that I have toured several different geographies in the past weeks, in the Greater D.C. market, in Florida and in Southern California. There is definitely a reinvigorated sense of excitement and energy in the sales offices. While I'd like to say I only felt that energy in our sales offices, the reality is that there is a similar enthusiasm in our competitor's sales offices. That was not the case in the past fall. I will say that the higher price points, especially in California did not share that same enthusiasm. On the whole, however, we've been shifting our mix slightly to lower price points in general and have only two high-priced communities in California. Another anecdotal observation is that our sales associates report that mortgage rates returning to prior lower levels added momentum to our buyers' positive outlook. In general, while we used incentives a little more liberally during the past few months, our current backlog has margins similar to what we delivered in the first quarter, as lower lumber prices helped offset the use of these incentives. So that's the highlight of our leading indicator contracts. Let me get back to the full results for the quarter. Slide 6 begins with revenues. We show consolidated revenues in grey and joint venture revenues in blue. As you can see, consolidated revenues declined, but joint venture revenues increased by a similar amount. If you treated unconsolidated joint venture revenues as if wholly-owned, our 2019 first quarter revenues were virtually flat compared to last year. While we're certainly not happy with flat revenues, considering the lower community count that we had and the slower selling environment last fall, it was a reasonable achievement. The decline in consolidated revenues is primarily because we moved some wholly-owned communities to consolidated joint ventures in 2016. As we discussed many times, that was a period when the high-yield market was closed to us and we needed to raise liquidity to pay off maturing bond debt. This was the third quarter in a row where the combined level of JV and consolidated revenues has been close to or greater than it was for the same period a year ago. Again, this occurred despite the declines in community count during the prior year. As we increase our community count, as we did sequentially this quarter, the growth in store fronts should lead to future growth in revenues and ultimately to pre-tax profit. Now, turning to Slide 7, in the top left hand portion of the slide, you can see that our gross margin was 17.8% for the first quarter of 2019. In spite of some of the extra incentives we offered to sell spec homes in the slower fall and holiday period, it's essentially flat compared to last year. In the upper right hand portion of the slide, you can see that our total SG&A dollars were down 3% year over year from $62 million last year to $60 million in this year's first quarter. As is typical during our first quarter, our SG&A ratio remains high. It's even more challenging this year as we're growing our community count. There are costs associated with opening new communities, but there are initially no deliveries from these communities to help offset these extra costs. Once we start to get deliveries from these new communities, we would expect to be able to leverage our costs and get our SG&A ratio back to the normalized 10% range. On the bottom of the slide, we show that our interest expense was lower during the first quarter of 2019 at $33 million compared to $41 million last year. Interest was lower primarily due to the steps we took in fiscal 2018 to refinance our unsecured debt. Further, our inventories under development increased, resulting in more interest being capitalized into inventory. On Slide 8, we show that our income from joint ventures increased to $10 million profit in this year's first quarter compared to a loss of $5 million in last year's first quarter. Our income from joint ventures has been strong for the past three quarters. Turning to Slide 9, here we show that we reported a first quarter adjusted pretax loss before charges and impairments of $16 million, compared to a loss of $29 million last year. As we expected, the loss was significantly less than what we reported in the same quarter a year ago. Our first quarter is typically the slowest quarter of the year and as you can see on the right side of the slide, despite the loss in last year's first quarter, we were still profitable for the full year last year. While we're not satisfied with the loss in the quarter, the substantial improvement over last year gives us confidence in our 2019 full year's performance. As usual, the last half of the year should substantially outperform the first half. While we anticipate a weaker second quarter compared to last year, we expect the first half of this year will continue to show improvement over last year's first half. Turning to Slide 10, we believe we turned the corner with respect to the declines in our community count and then finally showing growth in communities. That was an important step forward toward our goal of ultimately growing our revenues and achieving higher levels of sustainable profitability. Our consolidated community count increased 11% sequentially during the first quarter. As you can see on this slide, we grew from 123 consolidated communities at the end of October to 137 at the end of January. Our total community count, which includes JVs also increased sequentially from 142 communities at the yearend to 153 communities at the end of the first quarter. We are pleased to report the sequential increase consistent with the previous guidance that sequential growth would occur in the first half of this year. We expect our community count will continue to grow in the second quarter of 2019. The increased community count should lead to increased sales in future quarters even if the housing market is a little sluggish. I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.

Thanks, Ara. Ara began with a granular monthly view of sales. If you turn to Slide 11, you can see another view of contracts per community with longer term trends. On the far left hand side of the slide, we show our annual contracts per community from 1997 to 2002. We average 44 contracts per community during a time period that was neither a boom, nor a bust for the housing industry. On the center portion of the slide, you can clearly see the steady growth in contracts per community for each of the past several years. On the far right hand portion of the slide, we show that net contracts per community for the trailing 12 months ended January 31, 2019 were 35.7 compared to 35.1 for the trailing 12 months ended January 2018. We are gradually migrating back to normal absorption levels. During the first quarter, our contract cancellation rate, including cancellations from joint venture communities increased to 23% from 20% in the same period last year. On Slide 12, you can see in gray, the 30 year mortgage rate trends over the past year, and in blue our monthly cancellation rate trends over that same period. In February of 2018, the 30 year mortgage rate was about 4.4%, an increase to around 4.6% by April of 2018. Mortgage rates then stayed relatively steady until September when they spiked up and peaked at close to 5% in November of 2018. By February 2019, rates had fallen back to about 4.35%, the lowest level in the past 12 months. During the past year, we believe there is a correlation between mortgage rate trends and our monthly cancellation rates. As mortgage rates started to increase in March last year, we saw our cancellation rates begin to modestly increase as well. When mortgage rates spiked up starting in September to November peak of almost 5%, our cancellation rate peaked in November at 26%. We believe that as mortgage rates rose last year it caused our cancellation rate to increase as some of our customers were unable to sell their existing homes, but were concerned about the impact of rising mortgage rates on their monthly payments. Since that 26% November peak, our cancellation rate declined to 24% in December and then to more normalized levels in January and February of 20% and 18% respectively. Mortgage rates over that same time period fell and today 30 year mortgage rates are back down to 4.35%, just a bit lower than the level they were at in February last year. Recently oil prices have once again trended downwards and we're getting more questions about how our Houston operations are performing. Turning to Slide 13. You can see that for the first quarter, our sales pace per community in Houston increased to 5.9 homes from 5.4 homes in the same period last year. Although our Houston pace improved year-over-year, we did spur activities slightly with more aggressive concessions. As a result, during the first quarter, our gross margin in Houston was slightly lower year-over-year. Although we expect Houston margins to get a small benefit from lower lumber cost in future periods, we believe margins will remain similar to the levels we achieved during the first quarter. Now I'm going to provide more detail on our continued efforts to grow our community count. Turning to Slide 14. We show our total consolidated lots controlled at the end of the first quarter increased 11% year-over-year. Our optioned lot position increased by 22%, while our owned lot position actually decreased by 1%. The increase in our lots controlled through option contracts gives us considerable flexibility. We are aware of the housing market choppiness in recent months and remain disciplined to our underwriting standards of using current home sales price, sales pace and construction cost when purchasing new land parcels. Specifically, we look at recent home sales prices net of incentives of our competitors in determining the correct - current pricing. Similarly, we look at our competitors most recent 13 week sales pace and seasonally adjust them for the full year. In the recent quarter, these metrics reflected well in the market. While land sellers were generally slow to adjust land prices down, they have been willing to make minor adjustments to terms that help returns. The result is that we've been able to find land acquisitions that underwrite our standards and we are pleased with the recent acquisitions we have made. Our proven ability to utilize options to grow our land holdings also provides us with a built-in market hedge. If you turn to Slide 15, you can see our years supply of total lots controlled, both owned and optioned compared to our peers. Our years supply of lots ranks just above median. However, we controlled a higher percentage of our lots via options compared to most of our peers. This becomes clear on Slide 16. Here you can see that we have the third highest percent of land controlled via options. As I pointed out earlier, all of our year-over-year growth in our land position was through increases in our optioned land position rather than owned. We continue to use options as much as possible in order to both achieve high inventory turns and reduce land risk. We have been getting a lot of questions recently about our spec strategy. We believe that it is prudent to have a few started unsold homes on hand in each of our communities to accommodate buyers who are looking to move in quickly. On Slide 17, we show we had 4.4 started unsold homes per community at the end of the first quarter of 2019. There really has been no change in our strategy with respect to started unsold homes. Since the third quarter of 2014, we have ranged between 3.7 and 4.6 started unsold homes per community. We have averaged 4.6 started unsold homes per community since 1997. We remain very comfortable with our spec home position. As is typical, we are more aggressive with the use of incentives on the started unsold homes or spec homes compared to our to-be-built homes. We were hoping the recent trend in lower lumber prices would have benefited margins, but in reality lower lumber cost have offset to slightly more aggressive incentives, we recently been offering on spec homes. Looking at all of our consolidated communities in the aggregate including mothball communities and the $113 million of inventory not owned, we have an inventory book value of $1.2 billion net of $235 million of impairments. We believe one of the key pure operating metrics for the home building industry is EBIT to inventory. This metric neutralizes the impact of debt. On Slide 18, we show the trailing 12 months EBIT to inventory for us and our peers. This ROI metric measures peer operating performance before interest expense. We remain in the top half when compared to our peers on this metric. This metric has been challenging for us recently as we returned our focus to growth and had made new investments in land parcels that are not yet generating revenues. As these new investments start generating profits, we expect our EBIT to inventory performance will bounce back to the higher levels we achieved a year or two ago. We and the entire industry are still not at normalized ROI levels, but we believe this will improve as we get further into the housing industry to recovery. One of the ways we are able to achieve this is by maintaining our focus on high inventory turns. Turning now to Slide 19. Compared to our peers, you see that we have the second highest inventory turnover rate over the trailing 12 months. Although, we lag NVR's industry leading turnover number, our turns were 42% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy. Another area for discussion is related to our deferred tax asset valuation allowance. Our deferred tax asset valuation allowance is very significant and not currently reflected on our balance sheet. We take numerous steps to protect it. As of January 31, 2019, our valuation allowance in the aggregate was $640 million. We will not have to pay federal cash income taxes on approximately $2 billion of future pretax earnings. On Slide 20, we show that we ended the first quarter with a total shareholders' deficit of $470 million. If you add back our valuation allowance as we've done on this slide, then our shareholders equity will be a positive $170 million. Over time we believe that we can repair our balance sheet and have no current intensions of issuing equity any time soon. As most of you are aware, our shareholders will be voting on the reverse stock split at our shareholders meeting on March 19. Both ISS and Glass Lewis have recommended a shareholders vote in favor of the reverse split. We expect the reverse split proposal will be approved. Now let me comment on our current liquidity position. As seen on Slide 21, after spending $141 million on land and land development, we ended the first quarter with liquidity of $215 million, which is well within our targeted liquidity range of between $170 million and $245 million. We continue to have sources of liquidity to further grow our land position, which ultimately should drive increases in our community count. On Slide 22, we show our maturity profile as it looked at January 31, 2019, the first of the larger maturities occurring about three years from now. We are confident that our performance will improve in the intervening years allowing for a smooth refinancing in the future. Let me turn it back to Ara for some brief closing remarks.

Thanks, Larry. On our call last quarter I spoke about our efforts to increase our first time product through offering Aspire communities. We are glad that we've increased our presence with this low priced offering because that end of the market seems to be holding up better in most geographies. We continue to believe that offering a broad product offering is the right path for us, but throughout the cycles of course, there are times when you wish you had more of one product type than another. Right now our Aspire communities are good place to have a little more exposure. We've had good success in our active adult communities as well, which is another strategic focus I've discussed on prior calls. The early stages of the spring selling season are off to a good start. We're pleased with our positioning and we look forward to getting more communities open, and soon after, delivering more homes. We're confident that top-line growth will leverage our SG&A and interest costs and improve our bottom-line performance in the future. That concludes our formal remarks and we're happy to open it up for questions now.

The company will now answer questions. [Operator Instructions] At this time, we will open the call to questions. [Operator Instructions] And our first question comes from Thomas Maguire from Zelman. Your line is now open.

Hey guys, nice job on the quarter. Just wanted to quickly touch-base on the order trend, you talked about the relative improvement through the quarter and then absorption activity up year-over-year in February. I guess just in your view, what's driving that? Is it just mortgage rates, is that the only piece, and just more broadly, can you talk a little bit more about today's sales environment relative to a few months ago?

Sure. I think mortgage rates clearly are a big driver. I'd also say there is with a little less fear about big trade wars coming up, that gives a little more confidence, and in spite of this morning's drop in the Dow, in general, there's been just a little less volatility in the stock market. So I think when you combine all of those together, that's been helpful overall environment. And, in general, obviously we just ended February, so that's pretty current. We are 7 days into March, and I'd say, we continue to feel encouraged with the result so far. It's very early, but so far so good.

Okay. That's really good to hear. And then, you just talked about the higher-end activity in California still being weak. I mean, have you seen any improvement there at all on a relative basis, understanding it's still more depressed? And then, maybe if we just move out of California, would you say those comments hold for the high-end in other markets or how would you think about high-end trends outside of California?

Sure. I'd say Southern California we have one higher-end community. And that has improved a bit. But it's improved because there have been more concessions and incentives. In Northern California, it's improving a little bit, but we only have one community really of the higher-end in Northern. But we haven't been as aggressive with incentives. In Northern New Jersey, we have some higher-end communities. And interestingly, there it's held quite well. So it's without doing much in incentives. And in fact, in some of them, we've actually been able to adjust prices upward a little bit. So it's definitely been a mixed bag. But in general, I'd say, the performance of our lower priced communities and active adults have done a little better than the higher-priced communities.

Got it. Thanks. Have a good day.

Okay.

Thank you. Our next question is from Arjun Chandar from JP Morgan. Your line is now open.

Good morning, thank you. Can you talk a little bit more on a consolidated basis about the evolution of incentives in the quarter? You just mentioned that in Southern California you had to increase concessions and incentives a little bit during the quarter. But I wanted to get a sense from November versus December, January, February, how that incentive offering has evolved over the course of the last four months?

Yeah, so I'd say we were less aggressive in November. And I think you saw the corresponding slow sales in November. And then, I'd say we got a little more aggressive after that. There hasn't been a big change between January, December and February anecdotally. I don't have the exact numbers, but really it hasn't changed dramatically. It just feels like the combination of some of the incentives we did adjust and many in the market adjusted in December, combined with lower rates and just a little more enthusiasm in the market and confidence is what really spurred sales after November.

Yeah, Arjun, I would also add that, I mean, I don't want anybody getting off this call and thinking that we are across the board doing incentives and concessions. It's a very community specific and market specific, where we have communities that are fallen behind our expected sales pace and the problem isn't presentation or sales associates. We just think it's market driven. We will add incentives. We also closely monitor what our peers are doing. And as I mentioned on the call, the incentives, the extra incentives have been more focused on started and unsold homes rather than to-be-built.

Thanks. And just a follow up on the balance sheet, you had a nice sequential improvement in owned inventory from the October quarter to the January quarter. You clearly deployed some of your cash to spend on land in the quarter, but when I look at the old secured groups adjust to collateral ratio, it was down sequentially. How can we reconcile the two, two numbers both the consolidated inventory number with what we see in the adjusted collateral ratio for the old secured group?

So a few things that impact the collateral ratio you are seeing is in the quarter, we pay - the first and third quarters are the larger quarters for our interest payments. So you see the cash go down as a result of interest payments as opposed to being spent into inventory. The other big item is some of the inventory spend in the quarter as we talked about our optioned lots going up, we put down deposits and there are some predevelopment dollars that are spent on lots that are under option. That property can't be mortgage and is not in the inventory numbers and collateral. It will eventually become collateral when we take down those properties, but in the interim it's not. So there was about - an increase of about $21 million in that spend so you don't see that yet reflected in the collateral, but it will be in the future. And then the last item is if you look at the liabilities, accounts payable on our liabilities are down $38 million from October and that comes out of cash without a corresponding increase in inventory, it would already been in the inventory at the time that the accounts payable was created. In the first quarter, we typically have a lot of account payable spend because we build up accounts payable in the fourth. The other big item is that the annual bonuses are accrued at year end and they are paid during the first quarter so you see the cash go out there. So those are the items that you are seeing decrease in the collateral ratio in the first quarter.

It's very helpful. Thank you.

Thank you. Our next question is from Megan McGrath from Buckingham Research. Your line is now open.

Great, thank you. Good morning. Just wanted to follow up a little bit on your February comments and looking out over the next couple of months. How are you feeling about that compares in March and April looking at your monthly chart, they look pretty tough, but maybe given some historical perspective there?

I'm not so sure I heard how our margins, is that what you asked, I'm not sure.

No, no. The order compare, it looks like the compare in March and April looks pretty difficult this year.

Yeah, well - all indications from my perspective at this point when we start with February being above last year's difficult comparison, so we are very encouraged, the spring selling season is off to a strong start and time will tell, but we're hopeful that will be around the same level we were in March and April of last year based on our recent February results.

Okay

Megan, I understand where the comment is coming from. We certainly had a great March last year. It was at 3.8 sales per community, but February of this year was 3.4 and March is typically a little bit better than February, so hopefully we will see a similar seasonal climb that we see every year in March. So it's a big number, but it's usually is a big number, March and April and May are big months in the season.

Okay, thanks. That's helpful. And Larry, a little follow up on your commentary on the lumber prices versus incentives. Obviously, hard to call with all the volatility in lumber, but the reason move down in lumber, do you think that's fully incorporated into your margin or should there be continued incremental benefit going forward as those lumber prices gets passed along to you?

I mean, clearly there is going to be incremental lower cost of lumber reflected in our margins, we just think that that lower cost rather than having a net increase in margins is just going to offset some of the incentives that we've offered up there. So we are just not expecting - what we would have hoped was that it would accrue to a benefit in margins, but because we tweak incentives upward, I think it's going to push from a margin perspective.

Got you. And then if I could take one more. In terms of the West Coast, you talked about the high end in the West Coast, but can you give us any commentary on the general California market?

Yes, I'd say the low end on the West Coast, both northern and Southern California is doing quite nicely, particularly our Aspire lines are doing very nicely in California.

Better than they have been in 4Q?

Well, it's hard to say because we've been growing our Aspire line, but I can't say I honestly looked specifically at the 4Q, but I would guess, but just my gut feeling is yes. I'd say the pace is a little bit better now than it was in general in the 4Q in California.

Okay, let me answer it this way Megan. I would say that we saw some of our Northern California communities get behind their expected pace in November and December. And we saw them call that negative budget variance to a positive variance by the end of February. So it just feels like it's bouncing back overall pretty nicely.

Great, thanks so much.

Thank you. Our next question is from Mary Gilbert from Imperial Capital. Your line is now open.

Yes, good morning. Thank you. So I have a question with regard to the time line to achieve your targets, for example, $275 million of EBITDA. What kind of time horizon can it take to get there? And then number two following up on the question regarding the collateral coverage with regard to the old group. Is there an idea of how we could - given that there is seasonality negatively impacting that coverage ratio in the first quarter, how we can look at it on an average basis, kind of going forward just so that we're kind of evening out the seasonality impact, especially since the Q1 is lower and with the draw down first in purchases that you made in the accounts payable et cetera. That would be super helpful. Thank you.

So let me start. I think what you're referring to is our key metric targets that we talked about last summer. I think at that point in time, we said it would be a few years to achieve them. We didn't get uber specific. I think that as we're seeing the market bounce back, that we still think we are on target to achieve that over the next few years. Maybe just a few months of set back with the market level we had, but assuming the market is returning, which certainly our results seem to indicate that it is, I think we're still on target to achieving those key metric targets in the future. With respect to the collateral coverage, I may differ to Brad O'Connor who was speaking earlier, but I think it's very difficult number for us to project. As we look at individual communities, it depends on whether we put them in the new group or the old group that's determined by which group has more excess liquidity. We don't make a determination to put one type of product into one group and another type of product into the other group. We do have seasonal interest rates. I don't think there's an interest payment on the old group this next quarter so there shouldn't be a deterioration from an interest rate perspective, but if you compare it to the new group, I mean, it's just more leverage in the old group and there is new group and it does have an impact over time. I don't know, Brad whether you have...

The recommendation to try to adjust for the seasonality or the quarterly impact, my recommendation will be to look at last year and the trends that occur within there each quarter, that would be the best marker, because the debt payments I talked about the accounts payables. I talked about our seasonal type thing that should reflect themselves the same way in fiscal 2019. That would be my best recommendation.

Okay, that's very helpful. And then, also as you weigh the opportunities in continuing to increase your control of land and making those investments and achieving your ROI, I just wondered how you weigh any potential opportunity in looking at the debt, particularly in the Old Group that has traded off to a fairly low level with the big coupon if that kind of weighs into how you're looking at any source of capitalizing on that sales return? Thank you.

Yeah, I mean historically, we've certainly from time to time when the yields start getting attractive as compared to new land purchase, we've demonstrated historically that we do look at buying back debt and actually do buy some debt back. Certainly the yields on the old group are approaching those kinds of levels. We have to balance that with - when we by a new land parcel it absorbs some overheads. So that's another thing that goes into our decision making factor, but safe to say if yields continue to fall, we will - or excuse me - rise, it will be a more interesting alternative investment for us to give serious thought to it.

Great. Thank you very much.

Thank you. [Operator Instructions] And our next question is from Alex Barron from Housing Research Center. Your line is now open.

Yes, good morning. Thank you. I'm not sure if I heard it or wondering if you can provide any comments or guidance on where you think the margins are going to go next quarter and the remainder of the year?

I don't think we gave anything specific as a projection there. But I think our comments that the margins were similar in the first quarter, we don't expect any real benefit from the lower lumber cost, the thing that offset incentives, so kind of put that into your calculus as you try to run your model. But we just didn't give any specific guidance. I don't think it's going to move a lot one way or the other. I'll put it that way.

Got it. And with regards to the SG&A, so you guys had a kind of lower numbers towards the end of the back half of last year, do you think this year is going to be closer to what this quarter look like or more…

No, no. We often, we almost always have lower SG&A percentages at the end of the year and it's not so much of the spend, it varies dramatically, but our revenues typically go up in the last half of the year. So when you apply more consistent SG&A dollars with higher top-line revenues in the later quarters, that brings our ratios down at the later parts of the year. So we'd absolutely intend on having lower SG&A than what we just reported as a percent.

Right. But I'm saying you think the dollars will be similar closer to what this quarter was or closer to the dollars reported in the back half of last year?

Yeah, there was a onetime event or an unusual event in the fourth quarter. In terms of the dollars, we had a benefit from reversing our lowering our reserves on insurance. So if you look at our fourth quarter call, on the slide we show exactly how much it is. I don't remember; it's $10 million, $12 million. I don't remember exactly what it was. But you should not assume that that is a benefit that we're going to get every quarter or even for the year, next year that the $10 million or $12 million benefit that we got from lowering our insurance reserves for construction defects.

Got it, okay. That's helpful. Thank you so much and best of luck.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Ara for closing remarks.

Thanks very much. We feel very good about a number of things in our call, but certainly, first and foremost, the uptick in sales and the better pretax performance compared to last year. We look forward to giving you more positive results as the year unfolds. Thank you.

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.