After strategically shifting operations into neutral during 2010, valuing margins over units, executives at Standard Pacific Homes have changed gears in 1Q2011 and are moving to accelerate the company's volumes. (Click here for full quarterly results.)
The company opened 18 new communities during the quarter, boosting its overall community count by 10% year over year. At quarter-end, the company had 142 communities on its roster. Although sales were down 14% year over year, 22% of first quarter orders came from new communities.
Moreover, executives expected to continue to add new communities, opening an additional 22 communities next quarter to put net community count at 155 communities. That number should grow to 160 communities by the end of the year, with the goal of having 35% to 40% of orders coming from new communities.
Driving the community growth is the company's land buying activity. The company spent a collective $121 million during 1Q2011 on land acquisition and development, which puts it on track to make good of its goal of spending $600 million to restock its land pipeline during 2011. In terms of lot count, the company took control of 1,066 new lots during the quarter to the tune of $87 million.
When it came to evaluating land deals, executives said they were focused on option deals, raw land, and California lots. Roughly 40% of the land deals approved during the quarter were option contracts while 56% of the lots under approval were classified as raw land. Nearly 50% of the approvals were for lots in California, with an emphasis on Southern California.
Company president Scott Stowell said geographic preference for California land reflected what executives were seeing in terms of regional performance. He said Southern California as well as Colorado, Texas, and the Carolinas were showing more price stability and better sales pace compared with operations in Northern California, Florida, and Arizona, where conditions were weaker.
But with all the focus on getting new communities open to stoke sales volumes, executives told analysts that unlike some of Standard Pacific's public builder peers, they were not seeing significant performance differences, both in terms of margins and absorptions, between the company's new communities and its legacy communities.
CEO Ken Campbell said, "The margins we're earning on new communities are 50 basis points above old communities. And there's a small amount of upward pressure on that. ... On the volumes, there are higher absorption rates, but then again, there are some communities that do better and some that don't. Maybe it's 10% to 15% higher absorption rate. It's not a huge gap with some other builders. It's not night and day, just marginally better."
Gross margins for the quarter, excluding impairments, declined both sequentially and year over year, to 20.5%. Executives attributed the margin slide to lower volumes, pricing pressures, and a shift in mix. Because there were fewer deliveries coming out of California during the quarter, a greater percentage of closings came from lower-priced markets like Texas and the Carolinas.
But for all the discussion of the company's community growth strategy, there was little talk of how the company's product has evolved after executives noted that management strategically slowed down the business to allow time for product redesign. Stowell said changes in the homes content and product were largely reflective of specific market research, which offered detailed information about what buyers in those markets preferred, valued, and would pay for. However, more generally, he said the company was continuing to work on cohesive branding and strategic positioning.
"We're trying to position ourselves up market, even in the first-time buyer segment," he said.