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MDC Holdings Inc (MDC) Q2 2019 Earnings Call Transcript

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MDC Holdings Inc (NYSE: MDC)
Q2 2019 Earnings Call
Jul 31, 2019, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to MDC Holdings 2019 Second Quarter Conference Call. [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 Kimmerle -- Director of SEC Reporting

Thank you. Good morning, ladies and gentlemen, and welcome to MDC 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.

Larry A. Mizel -- Chairman and Chief Executive Officer

Good morning and thank you for joining us today's call as we go over our results for the second quarter of 2019, 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 repeating.

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 home building 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 serve as further evidence that the investments we 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 are 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 season's communities or one of our other more affordable price collections.

The favorable market dynamics in the more affordable housing segment have 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 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 or buyers select at our home galleries.

Where the recent decline in mortgage rates likely 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 pay down 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 a more in-depth look at our results for this quarter.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

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 so, our consolidated pre-tax income for the second quarter decreased by 3% year-over-year to $74.3 million. Homebuilding pre-tax income for the 2018 second quarter was down only slightly year-over-year to $61.6 million as a decrease in homebuilding gross profit and an increase in selling, general and administrative costs were mostly offset by an increase in 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 a 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 sales revenues for the 2019 second quarter were down 2% year-over-year to $732.8 million due to a 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 characterized as our more affordable product offerings as compared to 40% a year ago. Backlog conversion for the quarter was also helped by a year-over-year increase in the number of spec homes we sold in close during the quarter.

Furthermore, last year, cycle times in the Mountain region were negatively impacted by a product defect issue involving IHRS [Phonetic 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 to the third quarter, we are targeting a backlog conversion rate in the 39% to 41% range compared to the 40% backlog conversion rate we achieved in the third quarter of 2018. The potential for our 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 of 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 expected a temporary spike in the percentage of closings coming from Nevada. This is the result of the delay that 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 for 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 of capitalized interest in cost of sales as a percentage of home sales revenues. Our gross margin in backlog to end the quarter remained healthy, though at a level slightly below the 2019 second quarter gross margin of 19.5%. Note that the $1.4 million positive warranty adjustment I just mentioned at a 20 basis points of 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 future periods 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 is mostly due to a $2.3 million increase in marketing expenses caused by additional cost incurred to open advertising staff or 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 to slightly exceed the $42.6 million we experienced in Q1. However, 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. Demand for our more affordable product lines remains strong during the second quarter of 2018, accounting for 63% of our net new orders compared to 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 2019 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 and was our highest 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 to 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 during 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 had a larger difference. This indicates a strong possibility 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 2018 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 of spend on development costs. Approximately 47% of the lots acquired in the second quarter were finished lots and about 65% were lots intended from more affordable homes. 2019 second quarter land acquisition spend was notably higher than the first quarter of 2019 as we began to reaccelerate our land acquisition activities following our positive start to the spring selling season in the first quarter. We expect this trend 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 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 are pleased that Standard & Poor's revised our outlook on MDC's rating, the 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 our question-and-answer session.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from John Lovallo from Bank of America. Please go ahead with your question.

Spencer Kaufman -- Bank of America -- Analyst

Hi. This is actually Spencer Kaufman 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 been about 19.3% for 2Q, and I guess just looking at historically we've seen kind of 3Q, the gross margin increased sequentially. And I guess my understanding of slightly lower would be roughly 19.3% as well. So, I guess, is there anything else to call out there, anything else to kind of help bridge the gap there? Thanks.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

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

Spencer Kaufman -- Bank of America -- Analyst

Okay, thanks. 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?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I think there is variance accruals that come into play for a lot of different reasons, could be stock comp, could be a 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 a little bit about 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.

Spencer Kaufman -- Bank of America -- Analyst

Very helpful. Thanks guys and good luck.

Operator

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

Stephen Kim -- Evercore ISI -- Analyst

Hey, guys. Yeah, thanks, and good quarter. 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 pickup 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 effects on your SG&A, at the Investor Day, you talked about an SG&A rate of 11% or lower for the year, a lot has changed since then, but your gross margin certainly coming in line with what you had talked about then, and a lot of your other strategic initiatives are firing on all cylinders. And so, I'm wondering how you would characterize at 11% SG&A and whether or not 4Q may play a role in allowing you to hit it?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yeah. 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. Said in another way, I think there is the potential for closings to be very heavily weighted toward Q4. And of course that's a risk when you have so much rating weighting toward Q4, given the strength that we've seen in sales recently in Q2. So that does have the 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 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 other reason why we've seen the G&A rate be a little bit higher is simply because we're successful, and therefore there is some compensation accruals that come along with it.

Stephen Kim -- Evercore ISI -- Analyst

Got it. That being said, I imagine you contemplate those things when you sort of talk about long-term planning around SG&A, right. I mean, you did us make an assumption for a stock-based comp within that 11% when you gave it, right?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

You do at some level, but not necessarily, for example, the maximum level.

Stephen Kim -- Evercore ISI -- Analyst

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 it into some sort of context for us, you've been undergoing the strategic initiative to buy a lot of land appropriate for your move down strategy, that obviously has yielded a lot of fruit. And it seems like we might be getting to the point in time, where your land spend could generally decline as a percentage of revenues, but wanted to achieve, 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.

Larry A. Mizel -- Chairman and Chief Executive Officer

Yeah. So, I guess, first of all, we did give a number for the land spend this quarter. So it was $141 million of acquisition. Then on top of that, we had $87 million of development costs. A year ago, those same numbers were $188 million and $78 million, so not too far off from what we had this year.

The other comment is, 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 of our markets.

Operator

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

Truman Patterson -- Wells Fargo Securities -- Analyst

Hey. Good morning, guys. Nice quarter. Just wanted to see if you guys have updated your kind of target for the seasons in Cityscape, your entry-level product. This second quarter, you guys bought 65% of your lots for the more affordable product. Previously I think you guys have broken out of 40% to 50% target, just seeing if you guys have updated that at all.

Larry A. Mizel -- Chairman and Chief Executive Officer

I think, just to clarify, for our overall more affordable offerings, I think 50% to 60% is the range, so that would include seasons, landmark, Cityscapes, our urban collection. So that's the range we're targeting our recent land acquisition. It's been at 65%. So if anything I could see it 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 you'd be slightly above that.

Truman Patterson -- Wells Fargo Securities -- Analyst

Okay. 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 Cityscape product and how should we think about the penetration moving forward? Any regions going to see outsized growth in the affordable product?

Larry A. Mizel -- Chairman and Chief Executive Officer

Yeah, I mean it runs the gamut. For example in our Orlando market, we're almost 100% Seasons. In other markets, we're -- like a Colorado for example, it's a lesser percentage, and that's because we have a deeper market penetration overall.

I don't know if I would highlight one region over the other. I think overall it 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 the majority of what we do from a land acquisition standpoint is that 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 out product that's been very successful for us in the past. It's just that we expect the lower rate of growth for that product and in a greater rate of growth for our more affordable segments. So we're not looking to lose share of other product that's more traditional for us.

Truman Patterson -- Wells Fargo Securities -- Analyst

Okay. 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 ones that opened a year ago? Embedded in that is, when the competition is heating up or you can't find this attractive product etc or land?

Larry A. Mizel -- Chairman and Chief Executive Officer

I don't know that I would say that. You have to -- you always 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 a 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 the land costs. And therefore, we have to be very focused on making sure we are taking advantage of price increases when appropriate.

Truman Patterson -- Wells Fargo Securities -- Analyst

Okay, thank you.

Larry A. Mizel -- Chairman and Chief Executive Officer

Sure.

Operator

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

Michael Rehaut -- JPMorgan -- Analyst

Thanks. Good afternoon, everyone and good morning in Colorado. 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?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Well, we didn't reiterate that guidance.I think that the question was just more about, hey, that's what the target was when we talked about it during Investor Day and what 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 get to be determined whether or not that will happen or not. Obviously we've not provided official guidance on that.

Michael Rehaut -- JPMorgan -- Analyst

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 of revenue to continue to be a little bit higher year-over-year as we've seen in the first two quarters of this year?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yeah, I think if -- of course, depending upon what your revenue assumptions are in Q3, we 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.

Michael Rehaut -- JPMorgan -- Analyst

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?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Right. That's right.

Michael Rehaut -- JPMorgan -- Analyst

Okay. And can you give us any sense of -- in terms of the rebound in 4Q, should it get back to that 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?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I don't think you would fully get back there because remember, I think some of the decreases is more permanent because we are increasingly seeing more mix toward the 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 a shift in mix to those markets. So going all the way back to 480, I don't think is what I would expect, just somewhere in the middle. It's hard to tell because of those mix and where you see different things coming in.

Michael Rehaut -- JPMorgan -- Analyst

Right, right. Just lastly, I just have one more detail question and a kind of a big picture question. The tax rate for 3Q or the full yearhow should we think about that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yeah. That 24% to 26% that we've talked about, and that excludes discrete items. 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, they're not something you can predict because of where the stock price goes or the timing of the exercise of certain options which was the case in prior quarters. So, kind of using that at the higher end of 24% to 26% I think is the most appropriate.

Michael Rehaut -- JPMorgan -- Analyst

For the full year or for just the last two quarters?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I just think of it in terms of those individual quarters. And then you'd layer in what happened at the first half of the year.

Michael Rehaut -- JPMorgan -- Analyst

Okay. One last one if I could just kind of bigger picture, and this might be more for -- 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 look at your three different regions, the East region seems to just be lagging materially in terms of pre-tax income as you 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 benefits 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?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think that it deals with opportunity and growth. Florida, you can look at the industry and you can look at us. Specifically, we're growing very quickly and we're committing capital to it. It fits the affordable model and it's interesting because we compete with the other large builders and our product personalization has a great niche there where the larger competitors are pretty much doing standard home kind of stripped down, and we're in some cases in the same subdivisions doing providing personalization and meeting that same competitor. And the consumer is 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 advocate it, I think it's pretty clear builders shouldn't be speculating in land, 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 product, 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.

Michael Rehaut -- JPMorgan -- Analyst

Thank you.

Operator

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

Alan Ratner -- Zelman & Associates -- Analyst

Hey, guys. Good afternoon. Congrats on the great quarter. What I wanted to focus in on a little bit is just the volume growth and the trajectory in some of the drivers there because you guys did a great job dating back a couple of years ago to tying up a lot of land obviously geared toward 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 up, of course, filter through on the community count side. A and with orders up over 30%. I mean, obviously 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 that the slide you showed, it looks like that growth might start to slow a bit here. Your lot count, the growth there, it's roughly flat year-over-year.

So, I guess, my question is that when you look out beyond the next quarter or two, but just 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 reaccelerate in order to drive that type of growth?

Larry A. Mizel -- Chairman and Chief Executive Officer

I think that the real good thing about that we saw in 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 us hitting the affordable segment. And 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 -- part of what we've already done is shifting our mix, but it will also be dependent on what we do in Q3 and Q4.

Alan Ratner -- Zelman & Associates -- Analyst

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, the 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 now you're 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 kind of cause you to throttle back that growth meaningfully? The comps are pretty easy in the back half of the year. So, on the surface, it would seem like you're poised for some continued strong growth. But maybe you're thinking about that differently and maybe prioritizing price and margin, just given the fact that the backlog has rebuilt?

Larry A. Mizel -- Chairman and Chief Executive Officer

Yeah. I mean, I think we always have to be focused on price to a degree. We want to take advantage if we're 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 it makes sense to increase price or reduce incentives.

In terms of whether or not there's anything really active out there that's telling us that we should be favoring that, the labor constraints that you mentioned, I don't know that there's anything out there that I would cite. And we talked a little bit about Vegas and how we had some issues with the power company hooking 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's the potential for the competition for the labor and other resources to continue to increase.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. That's what 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's shaped up?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

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

Alan Ratner -- Zelman & Associates -- Analyst

Great. Thanks, guys.

Operator

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

Buck Horne -- Raymond James -- Analyst

Hey. Thanks. Good afternoon. I guess, in 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 opportunity set out there to add land more quickly or maybe build some operating scale more rapidly? Is that something that you would consider at this stage of the cycle?

Larry A. Mizel -- Chairman and Chief Executive Officer

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's opportunities out there. I don't think it's any more likely today than it's been over the past eight years since we last did one.

Buck Horne -- Raymond James -- Analyst

Okay. I guess, 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's saying much of the same things. But have you considered taking the Seasons concept and maybe even going further down price points to an even more lower-tier entry level and maybe operating on a more spec-heavy construction model?

Larry A. Mizel -- Chairman and Chief Executive Officer

Not necessarily spec-heavy construction, but we have considered doing a different series. And in fact, we have one in production in several markets now, it's called our urban collection. That's more on that, say, 1,200 to 1,400 square feet type of range. There's two units in the building, a party wall agreement. And the initial response has been that it's been very successful because it does achieve better affordability even then we've already achieved with seasons.

Buck Horne -- Raymond James -- Analyst

Okay. All right. Great, thanks.

Larry A. Mizel -- Chairman and Chief Executive Officer

Good day.

Operator

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

Jay McCanless -- Wedbush Securities -- Analyst

Hey. Good afternoon, everyone. I jumped on late, so apologies if you have already touched on these items. The first one, your competitors this morning discussed the 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 toward buying 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?

Larry A. Mizel -- Chairman and Chief Executive Officer

Yeah, well, first of all, I will kind of tell you -- one of the statements we 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 that consumer group certainly benefits from lower interest rates as well. So, I think that could be part of the reason why there's 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.

Jay McCanless -- Wedbush Securities -- Analyst

Got it. And then, in terms of pricing power, I mean, how -- do you maybe have a percentage of communities where you're able to raise price during the quarter or -- and do you see any opportunities now, especially as rates continuing to move lower or maybe enter prices up a little bit?

Larry A. Mizel -- Chairman and Chief Executive Officer

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

Jay McCanless -- Wedbush Securities -- Analyst

Got it. Thanks for taking my questions.

Larry A. Mizel -- Chairman and Chief Executive Officer

Sure thing.

Operator

And ladies and gentlemen, 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.

Larry A. Mizel -- Chairman and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Derek Kimmerle -- Director of SEC Reporting

Larry A. Mizel -- Chairman and Chief Executive Officer

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Spencer Kaufman -- Bank of America -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Truman Patterson -- Wells Fargo Securities -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Buck Horne -- Raymond James -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

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