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Allan P. Merrill - Chief Executive Officer, President and Director


Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Beazer Homes USA, Inc. (BZH) 6th Annual J.P. Morgan Homebuilding and Building Products Conference May 21, 2013 1:25 PM ET

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay, we're going to continue with the next presentation, if people want to find their seats. All right. Thanks very much. Good afternoon, everyone. I'll introduce myself probably one last time today, just in case there's some people walking in. My name is Mike Rehaut, continue to be Mike Rehaut for better or worse. I cover the Home Building and Building Products sector for JPMorgan. We've had a great day so far, and it's going to continue with Beazer Homes. We're pleased to have with us, Allan Merrill, CEO; and also, Carey Phelps from the IR team.

Beazer, really going through a turnaround and a company that, for many, many years, kind of had the low-end of many different operating metrics, and we upgraded Beazer last year and I was -- a very interesting conversation I had with Allen and Bob and I said I'm pleased to do this. I man, it's the first time in 10 years that I've had anything other than underweight, and I think there's real change afoot at this company and we are currently overweight, the stock at this time and think that as the company gets back to profitability, there's a great relative value here. And I look forward to hearing the different initiatives that Allan's been putting in place. Somewhere, in past presentations, hopefully roughly 20 minutes prepared remarks, so plenty of time for Q&A. And with that, I'll turn it over to Allen.

Allan P. Merrill

Thank you, Mike. As he said, he continues to be Mike Rehaut, and I continue to be Allan Merrill. So thank you for joining us. I'm actually going to have my prepared remarks to be even shorter than the 20 minutes so we can have even more fun with Q&A. I would be remiss if I didn't make you look at the FD chart.

So let's get into it. We recently had an earnings release and most of this information, in fact, all of this information is in that. So that's one of the reasons I'll go through it quickly. I'll make the assumption that you have availed yourself of the slides in our presentation from a second.

But there are a few highlights. I think that weren't mentioning, and then I think that may stimulate some good Q&A afterwards.

As Mike said, we're a national builder. We operate out of the 3 segments: Southeast, West and in the East. Our biggest footprint, from an asset perspective, is in the West, which is for us, is really Texas, Arizona, Nevada and California. Our eastern business is really big in the mid-Atlantic, Virginia and Maryland, and in Indianapolis, and we have smaller businesses in Nashville and in New Jersey. In our Southeast business, we're headquartered in Atlanta, but our biggest Southeast businesses are actually in South Carolina and in Florida, in Orlando in particular.

In terms of the company overall, probably our biggest delivery markets more as this fair bid are Houston, Maryland and Indianapolis. We're seeing the greatest growth, which is really a function of our investment strategy, as well as the improvement in the markets in Dallas, Orlando, Raleigh and Las Vegas. I can't say something good about all of our markets at this point, but those kind of standout as markets where we are definitely benefiting from our investments and from rising consumer sentiment.

In terms of the quarter, we had a great quarter by our standards, and we hope to have higher standards but we had EBITDA of $15 million in the quarter. We had operational improvements on many key metrics. And in fact, I'm going to go through that at some detail.

So I won't go through all of the data points on here. We did benefit from a lower cancellation rate in the quarter and if somebody asks, I'll be happy to talk about our mortgage choice program that I think is related to that lower can rate. And we entered into a land banking relationship with GSO, which I anticipate, someone will also want to ask a question about.

Let me set up the context, though, for my remarks this way, which is 2 years ago, when I was fortunate enough to be given this opportunity, I made it very clear that our overriding strategic and financial objective was to accelerate our return to profitability. And in fact, though it's somewhat boring, I've been the using the same chart, with the same 4 bars and the same words for 2 years.

I think the good news this quarter is that we've got a lot of progress to report against our explicit metrics and objectives in all 4 categories.

So I'll sort of run through these one at the time. We'll talk a little bit about the land position in the balance sheet and there will be plenty of time for Q&A.

So 2 years ago, it is an observable fact that we had the lowest sales per month per community of any public homebuilder in the country. In my recollection, the number was about 1.3 sales per month per community. The industry was at 2.

We have a lot of debt, more debt than we had assets working. So the idea of having as much debt as we had and then having 1/3 of our communities not performing at all and 2/3 of our communities performing at an appallingly bad level of sales pace, was a clear problem. But it was also something that I believe was fixable. Now, there was a suspicion that maybe our communities were in the wrong places and therefore, they were destined to suck forever, and in fact, that's not true.

It hasn't been easy but the fact is that concerted effort on product, on personnel, on promotion and on price, this had a dramatic effect on our sales per month per community.

In the March quarter, our sales per month per community was 3.4.

It's a little hotter, a little higher than we had anticipated. But from where we came, which was absolutely last place, to where we got to, which was absolutely first place, I'm incredibly proud of the team and the effort that they've put forward over 2 years to demonstrate that we can make our assets work.

Same assets by and large, but now they're working. The percentage of our communities that I deem to be performing, and I've got the simple metric which is if they're not selling one a month for 3 months in a row at any point during the year, that's a nonperforming community. And we've gone from about 67% performing to nearly 90% performing.

So I think we've broadened the base, to use kind of a cliché. We've got a larger percentage of our communities performing on an average, they're performing much, much better.

This allowed us to take the guided range or our target range for sales per month per community up a little bit. I will warn you that in our business and in others like ours, there's a seasonality. And so 3.4 is a spring selling season kind of number. Our target for a 12-month period has been 2.5 to 2.75, and I've raised that range to 2.5 up to 3, and really hope to sustain sales per month per community in that 2.75 to 3 range on a trailing 12-month basis. Now, there will be quarters above and quarters below because that is the functional effect of the seasonality in our business but we're now selling at a very competitive pace with our peers. And we'll make plan by plan, lot by lot decisions to maximize profitability. So I don't see large odds in going beyond this, but I think it demonstrates that we don't live in a deterministic world where your outcome is dictated to you, you can't control what happens, and we have. And I'm hopeful that you recognize the improvement that this really represents in the underlying fundamentals in our business.

The second part of our path to profitability strategy was to leverage our overheads, which was initially to reduce our overheads but importantly, not to let them creep up at a rate anywhere near our revenue growth, and we've made clear progress. This is, again, a number I think that benefits from looking at on an annual basis as opposed to a quarterly basis. Although year-over-year, the quarterly improvement is also impressive. We targeted to be in a 9% to 10% range, this is our G&A. Our selling cost, which we break out, which include external and internal commissions, are a further 4 or 4.25, which is a mix of, as I say, realtor commissions and what we pay our sales staff. So in an aggregate basis, others report SG&A, it puts us in that 13.5 to 14 range, which is frankly, very competitive. I'd call it middle of the pack, maybe a little bit better. We've have a bit of upside here, but I want to be very careful seeking out what I'll call false positives, because I think as we have added and expect to continue to add risk to the business through our land acquisition and land development efforts, we want to be very careful that we keep the resources in place, and in particular, the land development resources in place, to protect those investments. So I think it's possible we'll have further leverage in G&A. We've been a bit cautious about changing our outlook.

So with that progress, let's turn to gross margins. And this is another category where, 2 years ago, we were last by a lot and we're not anymore. We're not where we want to be, we are better. But I realize that one of the things that we needed to do in improving our communication with our investors was to make it clear that the margin as a percentage is part of the story, but the margin in dollar terms is really what moves the needle. And so we've targeted a gross margin dollar or gross profit dollar per closing number and I'll come back to that in a minute, but that number is really a function of the percentage which you can see here in the ASP, and I want to talk about both of those for just a minute.

In terms of the percentage, I make no bones about it, we need to do better. We have gotten our gross margin percentage in the last quarter up to just above 19%. We had improvements in all of our segments, and I think, on a go-forward basis, we will do better. We are targeting full-year gross margins above 20% and I think we can get there. I don't think we'll bleed the peer group in this metric because we're not prepared to take the risk or do we have the market concentration that is likely correlated with the highest margins, but we can clearly do better.

Now I'm often asked what is it about the business that has kept you from having the gross margins that you aspired to have. And I want to talk about that for a second. But I think first, let me point out that during the period of time that we have been dramatically improving sales per month per community, gross margin's been going up. So one of the false premises that is often discussed in our business internally and maybe externally, is that you got a trade-off between volume and margin. I reject that. I don't believe it. It's not true in our business and I don't think it has to be true. We've actually expanded gross margin as we've increased pace, not just because we have leveraged the modest amount of interacts that we have at the community level but more importantly, when you give customers what they want, they'll buy more of it and you can sell it for more.

And the best example, and I think this was indicative of a product challenge across our portfolio, we did a very good job in the downturn, stripping cost out of our house. We valued-engineered mirrors out of bathrooms, we engineered moldings out of hallways, we shrunk cabinets from 42 to 36 inches, we took every piece of granite out of every surface in the home. And to get direct cost out, that was the right thing to do. But as the markets started to turn, first in Phoenix and then subsequently, in most of our other markets, it was clear that we were having to compete with price because our feature level wasn't right. In fact, $3,400 of increased cost could be offset by a $5,000 price increase to better position us. Add margin and have us in a less defensive posture to sell homes. And so across our portfolio, community by community, feature by feature, we have dialed ourselves I think, much closer to where the consumer is, and that has helped both margin and pace.

On the ASP side, this has kind of been hiding in plain sight. Our backlog average sales price has been larger and has been indicating higher ASPs from our closings, we've tried to be very clear about that. Again, we're asked, well, what's caused the price to go up? Are you chasing somebody else's customers, have you changed your strategy? And the answer is we have not changed our strategy. Our buyers are wealthier and older, but they're still a majority first-time home buyers. They happen to be in their '30s and have FICOs in the 700s but they're still first-time home buyers.

So how do I describe what's happened in our price? I think there are at least 4 drivers and I wish I could give you absolute statistical precision on the composition of each of the 4, but let me just run through them. There's no question that we've benefited from an environment of rising house prices. In our portfolio, in our markets, in our communities, my best guess, emphasis on the word guess, is that's a 4% or 5% part of what has been a 12% increase in our ASP over the last year. But there's 3 other legs to the stool. One of them is that the mix of communities delivering homes has changed for us. We have built through and closed out of some of our very lowest-priced communities. And while I would like to serve those buyers, we can't find land to do so, so our mix has shifted a bit.

We've also had a geographic shift where 2 of our lower price point markets, Indianapolis and Houston, represent a slightly smaller percentage of our total deliveries, so that's a second reason.

The third reason is, within our communities, we have seen a migration of plan selection by buyers. Where we might have sold the Madison model that was 2,100 square feet, we're now selling the Sheridan model which is 2,300 square feet. Well, that obviously has an effect on the reported average sales price at the community level.

And fourth, and not least important, the change in the feature level in the homes, as we've added granite and bigger cabinets and hardwood floors and solid corridors in some models, that's had the effect of improving and increasing our pricing.

So I think all 4 of those continue to work in our favor in the next couple of years.

So you take an improvement in sales price and an improvement in margin and what you see is what I think is very important, a dramatic improvement in gross profit dollars per transaction.

In March, or rather in November, when we outlined a target range of $45,000 to $50,000, you can see that our trailing 12-month number was under $40,000. It seemed very optimistic that we'd ever get anywhere near these numbers. The power of compounding, 2 good things happening, margin and sales price manifested itself in the second quarter with the gross profit dollar per closing of $48,000, which is going to clearly pull up our trailing 12-month number and it's why we have raised our own expectations. And our aspiration now is to push closer to $55,000, and this is a metric that I hope with continued in our business, we can continue to raise our expectations on.

Last but not least, the long pole on the tent, is community count. For us, this is the fourth leg of our path to profitability strategy. We knew a year ago, and we tried in my -- somewhat an artful way to tell people that our community count was going to be real headwind in 2013. We had not spent 2012 buying new land.

We spent 2012 trying to fix the business. Increased sales per month per community, leverage our overheads, improve gross margins. My view is very simple. Until we prove we could run what we had better, we had no right asking people for money to go buy more. So we got to July last year, and I think the early proof in our improvement in our metrics was sufficient, that we did go to the market and we did a very significant equity transaction with the first -- for the first time in a long time, a purely offensive strategy in mind, which was to grow the community count. But we told investors then we had no intention of chasing 2013 closings. So we weren't pursuing finished lot deals but we're going to generate community count growth or order growth in 2013.

I had some investors say, well, you're dead money next year. To which I said, that may be true but the fact is, pursuing the empty calories of short-term closings against a longer-term and a bigger opportunity to position the company for 2014 and 2015, it didn't make sense to us.

So we set about rebuilding the community count in the company last summer, and we have been working tirelessly to do that. I think we will trough out in our community count in the fourth quarter of this year, below 150, maybe as low as 140, depending on how well we sell through the summer. And we have said that we believe our community count will reach at least 170 at some point next year. It's very difficult to predict the exact timing of the opening of the new communities, but I will tell that there isn't a particular objective to open communities in November and December, for obvious seasonal reasons. So the community count growth will likely be in the spring of next year. But we've made the investments. I think we've said this on the earnings call, we've got 33 communities that are under development, not yet open. We have a further 24 as of March 31 that we had acquired or had committed to acquire, but hadn't yet purchased. And just in the month of April, we committed to buy 11 more. So there is a significant pipeline of prospective communities that will be available for us in 2014 and beyond, allowing us to reach a reduced target of 170 communities.

Now in reducing the target, I want to make a point that our ambition to grow community count hasn't changed by a single unit. What's changed is that our path to profitability, which is what all of these metrics relate to, has changed with the improvement in pace and margin and the leveraging of our overhead, we now believe we can attain profitability in 2014 on the basis of a much smaller community count, than we thought was the case 6 to 12 months ago, which is why we have reduced the low-end of our target range here to 170.

If I put the community count growth in dollar terms, we've estimated that for the full year, we'll spend about $450 million of our money on land and land development, and we anticipate being able to spend about $100 million of the $150 million that has been committed to us in our land banking relationship, bringing our total land and land development spend north of $0.5 billion, which is pretty heady growth for a company that did $188 million in all of last year.

If you look at the position we have today with just under 25,000 lots as of March 31, on a backward looking year supply basis, we've got about 4 years active and about 5 years, including our land held for future development. That's lower than I'd like it to be, in relation to the closings. And that's why the land spend is as aggressive as it is. I think later in the cycle and there inevitably will be a cycle, we'll aspire to have that number shortened again.

Let me turn quickly to the balance sheet. The good news is we don't have a need to do anything with the balance sheet in the near-term. Our CFO and team have done, I think, an excellent job managing the liability side of the balance sheet and biting the bullet and doing the equity raise last summer when we needed to. So we've got a lot of liquidity. We have no major debt maturities until 2016. So we've got the runway to reposition the business for profit ability, and I think it will make manageable, the liabilities that we will then be required to refinance.

So the last point before I guess, just summarizing our expectations is I'll just spend a minute on the DTA.

I think all of the builders generated fairly large deferred tax assets. Ours is still fully reserved for, so you don't see it on the balance sheet. I'm a little bit less worried about the accounting than I am the share price, and my view is that at a point that it's clear to investors, that we will be able to utilize this asset, and I think it will be reflected in our share price. At this point, my view is it really isn't and I understand that, we haven't earned that yet. From an accounting standpoint, it will show up on the balance sheet upon evidence of sustainable profit ability. I can't tell you exactly what that means, but I can look at our peer group and see that sustainable profitability is not the first quarter you make a dollar. It is something more stringent than that. But I'm not -- it's not obvious that they're bright line tests in terms of numbers of years that one has to look back. So I think that there's both a value implication to this deferred tax assets and an accounting implication to this that will play out here in the next year or two.

So my last slide is really just to remind you what we've said. We expect that we're going to be profitable in the back half of the year. We will lose money in Q3, but we're going to make money in Q4. We have upped our expectation for EBITDA to at least $70 million for the year for the reasons, the metrics that I've talked about. The store count or the community count is still a heck of a headwind for us. So I do expect that Q3 orders will be down year-over-year. I think Q4 will be up and I think on balance, we're going to end the year up about 5% on orders. Given that our community count is down about 20%, that's excellent performance on a sales per community basis.

And maybe the most important thing is I think the team has done a great job repositioning the business to put us in a position where we can say that we believe getting back to profitability next year is attainable. It is not a layup and it will require us to successfully open the new communities that we're developing and that we have committed to acquire. I have confidence we'll be able to do that. So with that, Mike, I'll throw it to you and the audience and see what questions we've got.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Thanks, Allan. I'm just going to start up with one or two quickly, and then turn it over to the floor.

You referred to the land banking arrangement that you have, the relationship that you have, and I was wondering if you could just kind of quickly remind us of some of the key details of that? And also, as you grow, as you return to profitability, as the capital availability becomes as a result, greater for your company, how do you see that as playing a role within the overall mix of financing alternatives?

Allan P. Merrill

Well, I successfully anticipated that there would be a question about the land bank, so thank you for that. Now I'm going to warn you all, the answer is going to take more than 30 seconds because there are a couple of elements to it. First of all, I want to just put in context, our expectations and that is that our business would be comprised of a mix of owned and optioned assets. And in a historical context, we would have been as much as 50% or 60% owned and 40% or 50% optioned. I don't know that that's ideal, but it certainly is not inconsistent to have a business that's growth is in part, dependent on rolling lot options. The problem is that the financing markets don't support rolling lot options by the land developers, Basel III, Dodd-Frank, pick your regulatory excuse, but the fact is the money is not there.

So for us, our view was we need to synthetically re-create access to land above and beyond the land, that we can develop on our own balance sheet. And that's really what this GSO relationship represents for us. Now, I think there are a couple of very significant improvements in that relationship relative to just doing rolling lot options. In the first case, when we do rolling lot options, we can only auction lots that are available in certain locations. In the GSO relationship, we identify the sites. We don't have to buy anything we don't want to buy.

The second thing is that we control the development. And I will tell you that our full tolerances on land development are a whole lot lower than the tolerances that we have to put up with, with third party developers. Our lots are graded properly, compacted properly, the utilities are in the right place. So I like being responsible for the land development. It gives us more confidence in the product that we can deliver to customers.

Now the fact is that in that transaction, it's GSOs money that buys the land and develops the land. We put up a deposit of approximately 15% and we have takedown obligations. The lot prices, which we take down lots, allow them to earn a mid-teens kind of return. I'm okay with that. That's in the context of our weighted average cost of capital. It clearly puts a margin drag on land that we buy through them rather than on balance sheet, but the risk profile is different. And here's the key thing, and I think it's crucial: the margin drag is less than the margin drag that would be present on a typical rolling lot option, because it's cost, our cost plus their cost of funds. In a rolling lot option, we're paying a retail price with an escalator that has a developer's profit built into it. So in addition to controlling our fate from a location perspective, controlling our fate from a development perspective, we've actually improved the model of from a rolling lot perspective.

Now the last part of your question is, what part of our business do I hope it grows to? At this point, the availability of that kind of capital and the right kinds of partners, it's still pretty tight. So it's hard to -- have to be overly ambitious about how big it might be, but I would like to see it be 20% to 30% of our business. And that would clearly require a follow-on to we're with GSO, and our ambition is to put that in place with MO, with others, in future quarters.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Great. Thank you. Let's turn it over to the floor. Question right here.

Unknown Analyst

Sorry. I wanted to ask you a question about investments you're making in land and the potential growth trajectory of the company. Obviously, you're more than doubling, close to tripling your land spend. You're coming off sort of lower levels of investment in the last -- prior to the last cycle, you were doing about $6 a share of earnings. How fast do you think you can grow your top line and can you give us a sense for a more normalized margin and earnings level a couple of years out?

Allan P. Merrill

I wish I could see the future with that level of precision. I'll tell you that we've answered the question this way, I absolutely expect and demand that our gross margins get back into the low '20s. I think that our G&A costs can be in that 9% to 10% range. There's no reason why our selling cost will go up as a percentage of revenue from where they are today. So I think with that, you can start to get to a margin profile of what the business should look like. In terms of how big the top line can be, I would just suggest just to some extrapolation, we expect to grow back into the 200s in terms of community count. We have targeted 3 sales per month per community and you can do guidance or math on your own in terms of what you think our ASP may be, but I've described 4 distinct drivers of growth in ASP. So if you take a growth in ASP, a growth in community counts, and some sustaining of the sales pace, you can get to some big revenue numbers in several years, but that's about as far as I'm comfortable trying to guesstimate today.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Any other questions? I'm going to throw another one in and maybe let a question or two percolate out there. Going back to your geographic footprint, probably more on certainly, your smaller build or relative to some to your larger public peers, but more concentrated market exposures as well. Over the next 3, 4 years, would you expect to just go deeper in your current markets or focus on some further geographic diversifications, some other attractive areas?

Allan P. Merrill

We have no plans to expand geographically. I love our footprint. California, Florida, Texas and Mid-Atlantic are where about 40% of the total growth in housing starts are going to occur. Arizona and Nevada and North Carolina are excellent markets. Indianapolis and Philadelphia are strong businesses for us, that's an excellent footprint. We can grow the business a huge amount right there, and that's our focus. Any other questions or have we succeeded in boring you into submission?

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division


Unknown Analyst

When you talk about gross margins in the low '20s, are you excluding interest?

Allan P. Merrill

Yes. Excluding interest and impairments. Just trying it apples-to-apples.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division


Unknown Analyst

On the same topic of gross margin. As you are sort of calling the underperforming communities and investing in new, higher-margin communities, when do you think the -- you'll actually hit those numbers in terms of the low '20s gross margin?

Allan P. Merrill

That would fall into the category of forward-looking statements, which we try hard notwithstanding on the small print, not to do. I'll tell you this, I think it's a lot sooner than we thought 6 months ago. The trajectory to 19% has been steeper than we had hoped for, but I'm going to stop short of trying to give you the quarter and the hour of the day that it's going to occur. But make no mistake, it's in the relatively near-term that we'll be back there.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Maybe I'm going to throw it out, a kind of a completely different topic and lever some of your experience in the past cycle as different roles that you've had in the industry. Still early today, as part of the upcoming emerging cycle, people say second, third innings. I think I'd be in agreement with somewhere in the third inning. Don't hold me to the first half or the second half of the inning but...

Allan P. Merrill

Yes he's on base, and the pitcher.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

But one topic that comes up occasionally is M&A. And during the last cycle, publics -- there's even public-to-public transactions, goodwill creation, things that by and large today, most CFOs would say, I don't want to touch the goodwill, it's not worth it. But in a rapidly expanding market, that goodwill or the benefits that would come along with a negative goodwill, book value growth, further growth of the business et cetera, have the times over, more than offset that? So how do you think about that going forward in terms of the industry? So I don't necessarily need to ask how Beazer would be as part of that, but maybe just on an industry level, thoughts around how that may or may not play out, particularly on the public-to-public side.

Allan P. Merrill

Well, I think the biggest issue on the public-to-public are the DTAS. With or without valuation allowances, the 382, Section 382 Ownership Changes Act is a significant impediment to public-to-public deals, particularly where those DTAs are large in relation to market gap. To the extent that they've been absorbed and utilized, it kind of goes away with time. So I think that in the near-term, that plays a role in the mix of issues. As a prospective seller, adviser, you would say you've got to get paid for it. It's a material asset, it has a high present value. As a buyer, you would say with your tax advisor, I can't use it, I can't pay for it. And I think that acts as a significant impediment to public-to-public right now. I also think that the industry is in a little different position from an overhead perspective. One of the ways you can rationalize synergies or premiums is the payback through cost savings. I don't think we're sitting on a fat and happy state in any of the bigger builders, in terms of overheads so I don't think you're going to pay back premium with a lot of overhead savings, either at the division or at the corporate level.

You've seen a trend towards more private acquisitions by publics and I think for market entry, there's some logic to that. Speaking for Beazer, we're not intending to enter new markets. We have looked and will look at in-market acquisitions that are complementary. We haven't found one that made sense but we certainly wouldn't shy away from it. Our primary focus would be to look at that as an alternative way to accumulate the land position that we would like to have and there's a finite value that we would place on that. Somebody looking at it from an outside the market perspective may aspire to -- or may have a model that allows for more premium for that market entry and so we may get outbid. But I think the public-to-public is troublesome for a while.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

All right. Thank you. Yes?

Unknown Analyst

So as you -- you're pushing back your land purchases. As you do that, are you being left with secondary or tertiary land that will generate lower ASPs and lower margins going out into the future?

Allan P. Merrill

When you say we're pushing it back, we're tripling our land spend this year versus last year. We didn't buy as much last year as I would have liked to. We both didn't have the balance sheet and frankly, we weren't a good enough operator to do it. I wish a lot of things. I'd like to be 6'2 and play quarterback for the 49ers, but I don't think that's going to happen. And I can't go back to last year and buy land. The land we're buying right now, we didn't fall into the hole of trying to chase 2013 closing, so I think that's how we could have ended up with C lots. By focusing and taking our medicine in 2013, saying we're not going to win the Olympics in order growth this year, we're going to focus on '14, '15, and '16. I think the land positions we've got and the markets where we've concentrated are the equal of any of our peers' land positions.

So the short answer is, no. We're not buying secondary positions.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

We have time for one question. All right. If not, we'll close it here. And thanks again, Allan for all the comments and the participation in the conference of course.

Allan P. Merrill

All right, thank you. I appreciate. See you later. Yes.

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