D.R. Horton, Inc. (DHI) Management Discusses Q3 2013 Results - Earnings Call Transcript

Jul.25.13 | About: D. R. (DHI)

D.R. Horton, Inc. (NYSE:DHI)

Q3 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

Donald J. Tomnitz - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

Stacey H. Dwyer - Executive Vice President and Treasurer

Bill W. Wheat - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Mike Murray

Analysts

Rob Hansen - Deutsche Bank AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Will Randow - Citigroup Inc, Research Division

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

Stephen S. Kim - Barclays Capital, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Alex Barrón - Housing Research Center, LLC

James Krapfel - Morningstar Inc., Research Division

David Goldberg - UBS Investment Bank, Research Division

James McCanless - Sterne Agee & Leach Inc., Research Division

Michael A. Roxland - BofA Merrill Lynch, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Buck Horne - Raymond James & Associates, Inc., Research Division

Operator

Good morning, and welcome to the D.R. Horton, Americas Builder, the largest builder in the United States, Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, President and CEO, Don Tomnitz. Thank you, Mr. Tomnitz. You may begin.

Donald J. Tomnitz

Thank you, and good morning. Joining me this morning are Bill Wheat, Executive Vice President and Chief Financial Officer; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Senior Vice President. Before we get started, Stacey?

Stacey H. Dwyer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

Don?

Donald J. Tomnitz

Our homebuilding and financial services operations turned in another great quarter, highlighted by $205 million of pretax income and a 12.1% pretax operating margin. Contributing to our bottom line results were our home sales gross margins of 21.4%, a 340 basis point improvement from the prior year quarter. And our SG&A as a percentage of homebuilding revenues of 10.2%, a 200 basis point improvement.

The value of our net sales orders increased 30% from the year-ago quarter due to a 12% increase in homes sold and a 15% increase in our average selling price to $268,000. The cancellation rate for the third quarter was 24%. The value of our backlog increased 56% from a year ago to $2.6 billion with an average sales price per home of $260,700 and homes in backlog increased 36% to 9,911 homes. The increase in our average sales price reflects our continued ability to raise prices as well as a continued shift in our current buyer mix to more move-up buyers. D.R. Horton is well-known for offering homes for first-time and first-time move up buyers, with 63% of our homes closing at an average sales price of $250,000 or less this quarter.

About 2 years ago, we began to experience increased demand for larger homes with more upgrades. In response, we began adding new communities and expanding our product offerings for move-up buyers. We're also offering homes in some markets targeted to second time move-up and luxury buyers. 3.4% of our homes closed this quarter at a sales price greater than $500,000, up from 2.5% a year ago. The dollars associated with these closings increased to 9.4% of home sales revenues from 7% a year ago.

Bill?

Bill W. Wheat

Our net sales orders in the quarter reflect our increased mix of move-up buyers and our pricing power across most of our markets as the value net sales increased 30% on a 12% increase in net homes sold. The $268,000 average sales price was our highest since the second fiscal quarter of 2006. We experienced some moderation in our net sales pace in the back half of the quarter after mortgage rates began to increase sharply.

While each individual home buyer responds differently to changes in mortgage rates, we typically see some short-term moderation in buyer activity during periods of mortgage rate volatility as potential buyers adjust to the changing rate environment. We expect that most homebuyers who slow their purchase decision while rates are volatile will ultimately still buy a house since affordability remains strong and interest rates remain at historically low levels.

Over the long term, however, we believe the demand for new homes is tied more closely to economic indicators in our individual operating markets such as job growth, household incomes, household formations and consumer confidence. Additionally, we have been proactively adjusting our rate of sales while raising prices in many individual communities to ensure that our sales pace and backlog align with our construction cycles, which have been lengthened slightly. This activity ensures that our construction costs are certain before we establish the sale price of the home, which then enhances our gross margins and profitability. Through the first 3 weeks of July, we are experiencing normal summer seasonality in our sales pace.

Stacey?

Stacey H. Dwyer

In the third quarter, our consolidated pretax income increased 184% to $205.1 million from $72.2 million in the year-ago quarter. Our pretax income as a percentage of consolidated revenues was 12.1%, an increase of 580 basis points from 6.3% in the year-ago quarter. Homebuilding pretax income more than tripled to $185.4 million from $58.3 million and financial services pretax income increased to $19.7 million from $13.9 million. Net income for the third quarter was $146 million or $0.42 per diluted share compared to $787.8 million or $2.22 per diluted share in the year-ago quarter. The prior year quarter included a noncash tax benefit of $716.7 million from a reduction of the valuation allowance for our deferred tax asset.

Mike?

Mike Murray

Our third quarter home sales revenues increased 46% to $1.6 billion on 6,464 homes closed, up from $1.1 billion on 4,957 homes closed in the year-ago quarter. Our average closing price for the quarter was $252,300, up 12% compared to the prior year driven by pricing power and a larger average home size. Our backlog conversion rate for the quarter was 68% compared to 80% in the prior year quarter. For the fourth quarter, we expect our conversion rate to be around 70%, which would be consistent with historical seasonal trends and also reflects our mix shift to larger homes with longer construction cycles.

Stacey?

Stacey H. Dwyer

Our gross profit margin on home sales revenue in the third quarter was 21.4%, up 340 basis points from the year-ago period. 180 basis points of the margin increase was due to improving market conditions resulting in reduced incentives and higher average selling prices in excess of cost increases. 110 basis points was due to lower relative cost for warranty and construction defect claims as a percentage of home sales revenue, with approximately 80 basis points of the 110 due to an unusually large amount of cash reimbursement of previously incurred litigation cost.

The remaining 50 basis points of the margin increase was due to lower amortized interest and property taxes. For the fourth quarter, we expect a home sales gross margin of around 21%, which would represent further margin improvement from our 20.6% gross margin in the third quarter, excluding the 80 basis point benefit from the unusual cash reimbursement.

Mike?

Mike Murray

Homebuilding SG&A expense for the quarter was $167.5 million compared to $136.4 million in the prior year quarter. As a percentage of home building revenues, SG&A improved 200 basis points to 10.2% from 12.2%. We are leveraging our fixed cost structure while at the same time building our sales and production capabilities where necessary. Our SG&A also improved 100 basis points sequentially, of which, 40 basis points related to a reduction in the component of our executive compensation expense that is tied to our stock price.

We expect our SG&A as a percentage of homebuilding revenues to be around 10% in the fourth quarter. We recorded no direct interest expense this quarter since our active inventory exceeded our debt level. In the year-ago quarter, we expensed $6.2 million of homebuilding interest. The improvements in our gross profit and SG&A percentages and a decrease in our direct interest expense expanded our homebuilding pretax margin to 11.3% in the current quarter, an increase of 610 basis points from 5.2% in the year-ago quarter.

Bill?

Bill W. Wheat

Financial services pretax income for the quarter was $19.7 million compared to $13.9 million in the year-ago quarter. 86% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations. Our mortgage company handled the financing for 55% of our homebuyers this quarter with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac or Ginnie Mae.

FHA and VA loans accounted for 47% of our mortgage company's volume this quarter, down from 55% in the year-ago quarter. Our mortgage company's new borrowers during the quarter had an average FICO score of 723 and an average loan-to-value ratio of 90%. First-time homebuyers represented 44% of the closings handled by our mortgage company this quarter compared to 56% in the year-ago quarter.

Mike?

Mike Murray

Since March, our construction in progress and in finished homes inventory increased by approximately $259 million. We had 17,500 homes in inventory at the end of June, up 1,700 homes from last quarter and up 5,300 homes from a year ago. As of June 30, 1,300 of our homes were models, 8,300 were speculative homes and 2,500 of the specs were completed.

This quarter, our average community count increased 19% from a year ago. And we expect our average community count for the fourth quarter to be 15% to 20% higher than last year.

Don?

Donald J. Tomnitz

In our third fiscal quarter, our investments in lots, land and development cost totaled $710 million. As we continue to find new communities and build our lot supply. Of the $710 million, $280 million was to purchase land, $263 million was to purchase finished lots and $167 million was for land development cost. At June 30, 2013, we control approximately 190,000 lots, of which 124,000 are owned and 66,000 are option. 31,000 of our owned lots and 32,000 of our option lots are finished. The 63,000 total finished lots we control at quarter and are up 31% from a year ago.

Stacey?

Stacey H. Dwyer

Our total available homebuilding liquidity at June 30 was $1.2 billion, which included unrestricted cash of $608 million and available capacity on our revolving credit facility of $549 million. The balance of our public notes outstanding at June 30 was $2.9 billion and we had no cash borrowings on our revolver. At June 30, our homebuilding leverage ratio net of cash was 36.6% and our gross homebuilding leverage was 42.3%.

Don?

Donald J. Tomnitz

In closing, this quarter was D.R. Horton's most profitable third quarter since 2006 with $205 million of pretax income. All of our operating metrics improved on a year-over-year basis this quarter. The value of our sales, closings and backlog increased by 30%, 46% and 56%, respectively. Our pretax income increased 184%. Our pretax income margin increased 580 basis points to 12.1%. Our gross margin on home sales revenues increased 340 basis points. Our SG&A as a percentage of homebuilding revenues improved 200 basis points. And we are continuing to experience pricing power in many of our markets as evidenced by a 15% increase in average sales price.

D.R. and I would like to personally thank all of our D.R. Horton team. You are executing our business plan superbly. We continue to be in a preeminent position in the industry as a company. So keep taking good care of our customers and finish strong in fiscal 2013.

This concludes our prepared remarks. We will now host any questions you have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Nishu Sood from Deutsche Bank.

Rob Hansen - Deutsche Bank AG, Research Division

This is actually Rob Hansen on for Nishu. I wondered if you could kind of clarify some of your comments regarding the increase in mortgage rates and then what you saw with demand kind of slowing in the back half of the quarter? Ultimately, what were the kind of inter-quarter trends and how that kind of relates to what you've seen in July so far?

Bill W. Wheat

As we stated, we did see just some moderation in our sales pace in the back half of the quarter. Each of the months of our quarter were up year-over-year. But we did see the pace decline a bit in the latter half of the quarter really beginning and during the month of May. In terms of the demand trends, that's really, really all we have to say about that. Clearly, we know that mortgage rates were rising during that time. As we stated, there is some -- we typically see some short-term impact from rates on the timing of purchase decision by some buyers and that's something that we're -- each of our communities are working with our buyers on a case-by-case basis.

Donald J. Tomnitz

I think also impacting it was the fact that rates moved up rather dramatically in a very short period of time, they've come down some since then. And as rates moderate, I believe that the buyers will come back in the market. They're just trying to assess their situation. Frankly, a lot of the buyers were counting on trying to pick the low in the pricing and the low in the interest rates, and they're a little bit shocked or disturbed by the fact that rates have moved up from where they were. But clearly, demand over the long term is driven more by the economic indicators and, clearly, those trends still tend to be positive in most of our markets.

Rob Hansen - Deutsche Bank AG, Research Division

And then, on the luxury builder that you started with the closings being -- and I think it was a very small number, 3.5% of closings greater than $500,000 this quarter. Where do you see this in the future? How's the kind of backlog trending in that group there?

Donald J. Tomnitz

Actually, we're just at the beginning of our Emerald product, and we are rolling that across the country. We believe that we have an excellent opportunity to increase that to a significant portion of our business over the next 3 to 5 years and believe we're in a very competitive environment, both cost-wise and price-wise to compete with the small and medium-sized undercapitalized custom builders who really aren't in the market. So we feel very optimistic about that. It's a part of the market that we identified a couple of years ago that we thought would be coming on strong and it is, and we're well-positioned to continue to capitalize on it.

Operator

Our next question is coming from Adam Rudiger from Wells Fargo.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Don, this question falls under the category of trying to interpret your body language over the phone. You don't sound as quite as enthusiastic as you did last quarter. I didn't hear a lot of commentary as to your outlook. So can you update us on what your thoughts are in light of the moderate slowdown that you've seen?

Donald J. Tomnitz

Well, moderate slowdown. If I don't sound optimistic enough for you, I guess I didn't drink my Red Bull this morning. But the bottom line is I think that we're on a wonderful position as a company. Our balance sheet has never been stronger. Our land and lot position across the country has never been stronger. Our sales, improving 12% in units, we were proud of, largely because of the fact that we have done a fantastic job increasing prices and taking advantage of pricing opportunities in a number of our markets. We didn't have that pricing power back a year ago. We do today. And we are focused on profitability in this company. We clearly have been the largest builder for 11 years. We want to continue to be the largest builder. But our bottom line goal is, the bottom line. And we are focused on that very well and produce very well.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then my second question is, if that back half of the quarter moderation becomes a more permanent moderation, what would be the first or the sequential steps you take or decisions you make or changes you'd make in managing your business?

Bill W. Wheat

We manage our business community-by-community and we adjust our business every single day. You adjust pricing, you adjust your spec levels of your homes and inventory, you adjust the next take of lots that you may be looking at. So it's just ordinary course of business based on sales pace. You adjust your inventory levels and your sales efforts. But from the standpoint of moderation in sales pace, when we're still up 12% in units and 30% in dollars, we still feel like we're still generating a very good, strong growth through our sales line with our community count being up, double-digit with expectations for it to remain there. We feel like we're still very good and positioned to continue to grow the top line as well.

Donald J. Tomnitz

And frankly, Adam, maybe you are reading a little bit of my body language because I am disappointed that over the course of the 30- or 60-day period post Chairman Bernanke's speech that rates went up so violently so quickly because the homebuilding industry had made a lot of progress in the last 12 to 24 months, and it seems like one speech had a major impact on the industry and our sales, which was really ridiculous reaction by the marketplace. But secondly, what we've always focused on in the [indiscernible] CFO who preceded Bill Wheat, what we're focusing on is that we've never made a coupon payment or we've never put a dollar, or we never put a home in the bank. We always have to put dollars in the bank, and that's we're focusing on, is putting dollars in the bank and rebuilding our equity.

Operator

Our next question is coming from Dan Oppenheim from Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering if you could just talk a little bit more in terms of the margin. You've talked a lot about the pricing power but in terms of the impact from higher prices and lower incentives, it seems somewhat modest in terms of that. Can you speak a little bit more to that is materials, [indiscernible] some of the impact, how do you think about that overall in terms of margins?

Bill W. Wheat

Margins were up 340 basis points, so year-over-year, it's very strong, of which, a little over half, 180 basis points, came strictly from improving market conditions, which is a combination of our raising sales prices more than our cost increased. So I think we're still seeing very good leverage within our margins and we do have -- we're optimistic that we can continue with more positive momentum on our margins.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Great. And then I guess wondering in terms of the comments there in terms of trends as the quarter went on, did you see -- you talked about some of the moderation. Was that from some of the new traffic? Do you have any issue in terms of can't [ph] that came in late in the quarter based on the mortgages? Or how do you classify that in terms of mortgage environment?

Bill W. Wheat

I think our traffic count is slower post the interest rate changes. And frankly, we've got good demand in all of our communities. It's just a slower demand, and it's also coupled with the fact that clearly this is a slow time of the year for the homebuilders in terms of being in -- starting in June. Typically sales start the slow down until Super Bowl Sunday. So I think it's all very normal other than the overreaction on the interest rates. And what we've typically seen is it's a short-term phenomenon. When rates are moving significantly during that timeframe, we see that moderation. But then, when things stabilize, it typically recovers. We don't see a long-term impact.

Donald J. Tomnitz

I can assure you that people who are sitting on the sidelines because interest rates are 5% versus 4.5%. We know one thing, rates are going to continue to increase, hopefully more moderately than what they did over the last 30- to 60-day period. But today, with the pricing on our products in our company in the industry as well as interest rates, it's still a wonderful time to buy a home. One of the highest affordability indexes yet.

Operator

Our next question is coming from Jade Rahmani with KBW.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Have you seen any changes of note in the land markets since rates first started to increase whether it be volume of deals coming to market or competition from land buyers, or any players starting to adopt more conservative underwriting assumptions?

Donald J. Tomnitz

Not really. Land prices don't really react that quickly to interest rates and, typically, they don't react very much to interest rates at all. But land prices have worked their way up, and that's one of the reasons that we have focused on our margins versus our volume because, especially in the West, we have irreplaceable land positions out there at irreplaceable cost. And as a result, what we've been doing, I know people are questioning what's happening in our West. Well, our West, basically had increased our average sales price out there by 29.5% year-over-year. And we've had -- we earned 4x as much money out there in terms of pretax income over the same period year-over-year. So bottom line is, we're focusing on increasing our margins.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

And just focusing on the Southwest and West segments, did those segments also have community count -- positive community count growth year-over-year?

Donald J. Tomnitz

Yes, they did. Community count in west was up 8%.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

And what about the Southwest?

Donald J. Tomnitz

Yes, slightly up, low single digits up.

Operator

Our next question is coming from Bob Wetenhall from RBC Capital Markets.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

It looks like you guys have done a lot to drive better gross margin performance. Do you think there's additional upside given the strong ASP performance in the back part of the year?

Donald J. Tomnitz

I'll tell you one factor that's really a strong indicator of our ability to do that. To answer your question directly, yes. I read recently that new home inventory is less than 4 months supply. So anytime you have less than 6 months supply, I'd say that inventory is constrained. So in most of our markets out there, coupled with the land and lot positions that we have and the construction cycles lengthening slightly, there is going to be good demand for housing going on a go-forward basis. And that's coupled with the fact that there's such a low inventory. But we got it. Okay?

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

And just one final question. On the SG&A line, you've -- obviously you've done a really good job of leveraging those costs. Is there other opportunities to make that work more in your favor given your expectations for better revenue?

Bill W. Wheat

Absolutely. We expect to continue to leverage that further. Our long-term goal is to have our SG&A at 10% consistently for the entire fiscal year. We're not quite there yet, so we definitely feel that there's opportunity there. And any time that we're able to raise our average selling prices, that helps significantly with leveraging our SG&A dollars.

Stacey H. Dwyer

And just in terms of expectations for next quarter, our normal seasonal deliveries are typically higher in Q4 than in Q3, which would typically help us improve our SG&A from quarter-to-quarter. And then we'd expect that to trend back up in Q1 and Q2 and then re-lever back down in Q3 and Q4 next year.

Operator

Our next question is coming from Will Randow from Citigroup.

Will Randow - Citigroup Inc, Research Division

In terms of -- one thing I'm trying to understand is when I'm thinking about home price to income, there are certain regions where they're more expensive than others, particularly when I think about California versus Texas. Can you kind of talk about what's happening in terms of activity in the last month of the second quarter there? As well as is there a greater impact in the higher price markets where affordability suffer? For first-time homebuyers, rather sorry.

Donald J. Tomnitz

Certainly, as we increased our prices especially in California, there is an issue associated with people being able to qualify for those homes. But again, there is -- in the West in particular, there is a shortage of finished homes, new homes in that market. And with -- even though we are losing buyers out of the pool who can afford our homes, nevertheless, the supply is constrained. So we're going to continue to press our pricing in that market as much as we can and let the chips fall where they're going to fall in terms of who can afford and who can't. There's still pricing power in California. There's still issues associated with getting entitlements in California. So again, we look at our land and lot inventory in California and we feel like that we're in a preeminent position and we're going to capitalize on that preeminent position and drop the money into the bottom line. In Texas, generally speaking, homes continue to be affordable here. One of the most affordable places to live in country. And house -- there's no real barriers to entry. There's no, really, constraints to being able to build our units here like there are in a lot of states. So Texas will continue to be one of our leading states in our company just simply because of the fact that there's good demand here and there are very few barriers to entry here, and our costs are better here than most markets.

Will Randow - Citigroup Inc, Research Division

And as a follow-up, you've been sitting on those assets in Hawaii, in Oahu, if I remember correctly, for a while. It's about 10% of lot count. How is that progressing?

Donald J. Tomnitz

It's progressing very well. We're getting closer. But there are a lot of political issues that always are associated with a piece of land this size. And so therefore, we don't comment on anything other than the fact that we're making nice progress over there and we're getting cooperation. And I believe the project is in the next 12 to 18 months going to make a lot of progress.

Operator

Our next question is coming from Michael Rehaut from JPMorgan.

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

First question on the -- sorry to go back to the subject of the day. But I think the clarity is helpful and I appreciate all your comments so far. With the community count growth continuing to be double digits, number one, I just want to understand if what was the community count average community count growth during the quarter? And it would seem to imply a plus or minus flattish growth on-sales pace, and I was wondering if the sales pace kind of went negative on a year-over-year basis as you went through the quarter and if that's still the case for July.

Mike Murray

We looked at -- community counts went up 19% for the quarter as we talked about, and it would imply a bit of a drop in sales per community on pace because sales were up 12%. But opening new communities, you tend to hit a ramp-up period early on in the community life as you grow that community up. So that's not initially unexpected for us to have a slight lag between opening a community and then getting the full velocity of sales you expect in that community.

Bill W. Wheat

And what's still most important to us is our dollar value of sales, which was up 30% relative to our community counts up 19%. So we are generating still more dollars through our sales line per community than we were a year ago.

Stacey H. Dwyer

And Bill had mentioned that our sales in each of the months in the June quarter were positive compared to the prior year...

Bill W. Wheat

Both units and dollars.

Stacey H. Dwyer

Right. We're not done this July yet, but July is showing what we would expect in terms of normal seasonality compared to what we saw in June.

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

I appreciate that and sorry that I missed the 19% number. On the pricing trends, though, also if you could give us some sense, I think part of the concern here is certainly that not only would pace slow to some degree, and of course, it's hard to parse out seasonality versus the rate impact, although clearly, there's some impact. But that also the rate of price increases would slow. Have you seen that in any of your markets? And Bill, you had mentioned one of the things you typically would do also is maybe adjust incentives. Have you begun to see any adjustments in that area? And how would that necessarily affect gross margins down the line?

Donald J. Tomnitz

Let me be very clear, Michael. We have seen no lack of ability to increase our prices. There's still, as I said, there's what 3.9 months supply of new homes available in the marketplace, and that would indicate to you that there's a shortage of new homes out there. The construction cycles are lengthening. I think our pricing power continues to increase certainly over the next 12 to 18 months.

Bill W. Wheat

No changes in incentives. If anything, our incentives are still being reduced. And as I we've mentioned, there are a number of communities particularly in the West where we have been proactively slowing our sales in order to align it with our construction cycles. And so in those cases, we're raising prices.

Donald J. Tomnitz

I don't think there's any question that interest rates adversely affected our sales increase, which was 12% on a unit basis and 30% on a dollar basis. But nevertheless, we're in a great position right now to continue to raise prices and there's a shortage of homes out there. I just don't see any negative associated with that our industry or, certainly, our company for the next 12 to 18 months.

Operator

Our next question is coming from Stephen Kim with Barclays.

Stephen S. Kim - Barclays Capital, Research Division

Yes, I know there's been a lot of conversation here about the rates. And I think that you've been very clear about the fact that you are seeing some impact on the volume, but you still believe that your pricing power is very much intact due to affordability levels, et cetera. Yet, it's also pretty clear that in the minds of most investors, that the impact of rates usually or is expected to be felt more on price actually than volume, because volumes industry-wide are so depressed. And so your comments, first of all, are interesting in that regard. And then secondly, I think that pretty much you're the first builder so far to talk openly about the fact that rates are having an impact on demand. So I wanted to touch a little bit, if I could, do you have in any way an estimate of what amount of volume impact the rates you think had? And if you said that already, I apologize that I missed it. And I guess, what I'm thinking about here is, in markets, can you talk about traffic or something like that, like traffic came down or something like that, to help us frame the conversation?

Donald J. Tomnitz

I think you can take a look -- what I look at is the cancellation rate. And I think when rates went up, I think we had cans associated with interest rates going up. Our can rate last quarter was 19%, this quarter was 24%. Year-over-year, it was 23% versus 24%. So if you look at just the time period when interest rates went up, Steve, which was this quarter, and compare it to the previous quarter, I would say, the way I would measure it is the difference between 19% and 24% in terms of our can rate.

Stephen S. Kim - Barclays Capital, Research Division

Interesting. Okay, yes. Because I usually think of cancellation rates as a seasonal event or a seasonally influenced metric because it's a -- but in any case, it is interesting you mentioned you think those cans relate to the previous quarter and there's are seasonal aspect to your sales. So I usually think of cans year-on-year. So I guess to help us understand then the can rate, did your cancellation in actual units accelerate through the quarter? I'm assuming it did. And if you were to sort of maintain that level that you -- of cancellations you've seen as you go forward, what would that imply in terms of the drag on order growth into the, let's say, the -- your fourth quarter, which is a September quarter?

Bill W. Wheat

In terms of the rate, 5% differential from quarter-to-quarter, we did see the rates higher in the back half of the quarter from that standpoint. So yes, I think Don's statements are definitely right on target in terms of the -- a way to measure the impact.

Stacey H. Dwyer

In terms of projecting that one, that one's a little harder to answer. But again, we don't think this takes long to absorb in the market. People who start shopping today are going to start shopping with a 4.5% interest rate in mind, and it won't be a difference in their expectations from when they first began looking at a home. So this is -- this will be a short-term moderation.

Bill W. Wheat

The other thing we have not talked about here is the home doesn't necessarily stay the same. What we typically see is buyers, they take a step back, they evaluate their choices and they may choose to buy a different home, they may choose to buy a 2,200 square foot home rather than 24 square foot home. They may make adjustments to the choice and that just takes time, which is why we say it typically as a short-term impact.

Donald J. Tomnitz

I think everybody's just going to have to get accustomed to the fact that we're in a slightly rising interest rate environment and as like Don Horton said, who was his first salesman, this first cleanup guy and this first homebuilder, when he got started in the business. When he was sitting in this sales office, interest rates tick up 0.8%, you're not going to see anybody for a while because people are frankly a little freaked about, "well, I missed the low." And, "Why didn't I buy a home when rates were 0.8% lower." But those people come back and they're ultimately, most of them, going to buy. So as we work through all this, this is a normal part of our business. People are overreacting to a little run-up in interest rates here. And say, well, geez, the homebuilding industry is going to a crater just because interest rates went up. You're missing the point. We have the highest affordability index, perhaps ever in the industry. We've got pricing power and interest rates are not going to deter people from buying homes to any large extent. It may delay those purchases, but it's not going to be a permanent effect.

Operator

Our next question is coming from Ken Zener with KeyBanc.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Don, I'm glad to see your enthusiasm is increasing here for defending. And I think you laid out a case -- I think, I'm not sure if that's what you're missing. And I think if we look at the West where you're -- myself being based out of San Francisco, I see the price, I see the limited supply. But you're balancing the margins against the ability of people to buy. And obviously, rising interest rates is what we're going to have, historically good for home prices, which is a demand generator. But if all the builders including yourself, and this is what's really surprising, are managing pace and margin, why not -- first, if gross margins are at 21%, why not shoot for 20% and go for more volume? And well -- okay, go ahead.

Donald J. Tomnitz

Clearly, we will. We feel like we've got a wonderful window here where we can continue to drop dollars into the bank as opposed to units into the bank, and we're going to maximize our opportunity. I like to say I will never forget in my 30 years in the industry, '07, '08 and '09, those are pathetic years. And the buyer had the advantage on us during those time periods simply because there was excess inventory. Now, there's not as much inventory out there. So as a result, now we have a slight advantage simply because of the limited inventory that's out there. We're still offering our buyers a wonderful metric in terms of affordability and a wonderful house at a wonderful price, the prices -- it's time for prices to go up simply because land prices are going up, cost of building a house are going up. So if you're in a home -- if you look out there waiting to buy a home for 6 months from now because you think rates are going to be better or costs are going to be better, you're missing the boat.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

True, I understand that perspective. But it seems to me, if you look at the '04, '05 period, you have decelerating orders, people care a lot about that, A. B, you're focusing at the industry and I thought correctly amidst sustained absorption, but I mean we're seeing decelerating absorption and they -- you guys can build these homes. You have the land, the industry that is. But it seems to me if the industry is -- the public builders are focused on price and pace, it points to a lower cyclical component. I mean I know the demand's out there, but you're letting some of the demand go to focus on the margin and price. Maybe it means that we're mid-cycle already. It's hard to believe at 1 million. Or there's as much slower recovery rate, which means it takes longer to monetize the volume. Can you just kind of talk about that? Because it seems like at a lower volume, it might be more profitable, but people still need that volume, the companies.

Donald J. Tomnitz

Well, I look at our volume, and I think our volume, based upon year-over-year and sequentially, our volume is improving very nicely. There's nothing wrong with a double-digit increase in sales, units and there's nothing with our 30-plus percent increase in sales dollars. So I'm not freaking out because they're not 40% or 50%. I mean 12% and 30% are fine numbers. Now clearly, we've been in this business long enough to know that when the volume begins to decline too much, then we're going to adjust our incentives and move forward. But right now, I have no desire to do that because, like I say, we're in the heart of the market right now. We've got lack of supply. We've got wonderful pricing power that we haven't had for 5 or 6 years. And it would be a bad decision for us and for our shareholders to go out there and look for excessive volume today just so we can say, well, we had a 25% increase in units versus a 12%, because we're increasing our profit so much more dramatically.

Stacey H. Dwyer

And Ken, I'm going to answer it from a slightly different direction. We're taking different approaches in different communities. We're taking different approaches in different markets. If you look at our regional breakdown, 3 of our regions had unit increases of 25% plus. And those are markets where we've been successful in tying up a lot of land. We can replace land at prices that are similar to what we currently own, and we have a good supply in front of us. There are other regions where land prices have moved more significantly and we're going to take longer to work through the positions that we have and maximize the profits because we can't replace them. So it's a blended approach. It's not one approach or another, but it's trying to maximize the returns with the positions that we currently have.

Donald J. Tomnitz

And furthermore, I've been with Horton for 30 years. We have the strongest balance sheet in the history of our company. And why would we want to go out and just chase volume and have to basically end up with a less-strong balance sheet just simply because we're having to replace the land at a much higher price than what we can slowly work through these assets, or our margin -- or work through these assets [indiscernible] drop below.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

I understand. Was the cancellation rate different by product and by region?

Donald J. Tomnitz

Yes.

Stacey H. Dwyer

There was some variation on cancellation rate by region. It ranged from 13% to 25%. But I don't have really any visibility into the breakdown of the product behind that. The difference in the cancellation rate, just to take that one step further, was actually pretty similar compared to the prior year. So there was just some difference in the cancellation rate in the region last year as well.

Operator

Our next question is coming from Alex Barrón from the Housing Research Center.

Alex Barrón - Housing Research Center, LLC

As far as I'm concerned, I think you should be feeling pretty good because your results were a lot better than everybody else's.

Donald J. Tomnitz

We feel very good and obviously, somebody got me cranked up with my Type A personality. We feel very good here, thank you.

Alex Barrón - Housing Research Center, LLC

I guess my question is, it seems like the overall sentiment is that as interest rates rise, the guys who get hurt the most is entry-level buyers and you guys probably cater more to the entry-level buyers and other builders. Especially as the cycle has unfolded, I think you've taken advantage of land positions that maybe other people have overlooked. So my question is do you think that ultimately if rates stay here, you'll end up benefiting from kind of like a substitution effect where maybe they can't afford somebody else's home and they'll come buy yours? Or is it you think that entry-level buyers do have more challenges than which just ultimately prices them out?

Donald J. Tomnitz

I just think, generally speaking, entry-level buyers obviously are more challenged from a credit perspective in terms of qualifying for our homes. But I would also say that our focus on entry-level is certainly not a weakness, it's a strength because we've been the leader of entry-level homes for years and years and years. And just like Don Horton said back when Chairman Paul Volcker and President Ronald Reagan were President, and mortgage rates were 18% and prime rate was 21.5%, we were still selling homes. And if you listen -- what's interesting to me, I even listen to business commentators on television talk about, "Well, geez, the first time I bought my home, I had a 12% mortgage rate, but that didn't deter me from buying a home." So I believe that for us and our perspective and our experience, that entry-level buyers will always be welcome at Horton and will always be a large component of our business, and we'll always work with them in terms of trying to figure out how we get them qualified for a home. And frankly, we have our Home Buyers Club, which is a part of our mortgage company, which is really a very efficient process and a very successful process that most people, most other builders don't have of getting those first-time homebuyers familiar with the credit system in this country and helping them understand what it takes for them to buy a home.

Alex Barrón - Housing Research Center, LLC

And in terms of I guess adjusting to if the sales rate stays lower than perhaps where they were, where you want them to be, is the progression to basically just increase incentives again or to just stop raising prices? Or how does that work in your mind?

Bill W. Wheat

Well, first, our sales are not lower than we want them to be. Our sales are according to plan, and -- but it's community-by-community. Depending on what we're seeing in a community, we will adjust. Right now, we're raising prices in many more communities than we're not. So right now, it's on plan. But it is a constant day-to-day adjustment process, community-by-community.

Donald J. Tomnitz

And don't get confused, and I know you're not, Alex. For our industry to continue to grow, we absolutely must-have job growth in this country. And to date, the job growth in this country has been very minimal. And the industry cannot continue to grow at the rates that we all want to grow without effective job creation in this country.

Operator

Our next question is coming from Jim Krapfel for Morningstar.

James Krapfel - Morningstar Inc., Research Division

I'm just wondering what your mix of land acquisition is? In terms of raw land versus finished lots? And then to what extent are you using options on finished lots?

Bill W. Wheat

During the quarter, we invested $263 million in purchases of finished lots. We invested $280 million in land purchases, and we invested $167 million in land development.

James Krapfel - Morningstar Inc., Research Division

Okay. And then I don't know if I missed this, but your ASP per square foot, your cost per square foot, was that -- did you say that before?

Bill W. Wheat

I don't believe we have yet. We still have positive gap in terms of ASP per square foot versus cost. Our ASP per square-foot was up 7.9% and our cost per square foot, I believe, was up 7.2%.

James Krapfel - Morningstar Inc., Research Division

Okay. And then, finally, I know in the prior quarter, you talked about looking at M&A opportunities. Are you still looking at that?

Donald J. Tomnitz

We're always engaged in M&A opportunities, and that's really all we can say about it. We've been one of the more prolific acquirers in the industry, and we will continue to be in that segment of the business.

Operator

Our next question is coming from David Goldberg from UBS.

David Goldberg - UBS Investment Bank, Research Division

My first question, and I think I don't want to beat a dead horse here, and I think you guys have done a very good job talking about affordability and buyers and everything. But I wanted to ask the question from a little bit different perspective. So accept my apologies in advance that we're beating this horse. But I think the question is really about variable mortgages and whether you're seeing a shift from a fixed-rate, 30-year fixed-rate product to adjustable-rate mortgages in the mortgage business? And is that something that you guys use to try to work with buyers that are having affordability issues especially in the club and trying to get folks able to qualify for loans. Have you seen a shift there? And is it something you guys would kind of push towards a buyer? You go to a 7-1 arm if the 30-year fixed-rate wasn't working?

Stacey H. Dwyer

First of all, we have not seen any significant shift at all from fixed-rate mortgages. Even at a 4.5% rate, I think everyone's happy to pretty much lock that in. And second, we will present the product alternatives that are available, but we do not try to help anyone make their mortgage decision in terms of a product.

David Goldberg - UBS Investment Bank, Research Division

Maybe I said that the wrong way. So I apologize. It wasn't meant to be inferred. It just seemed like that's an option for somebody.

Stacey H. Dwyer

That's fine. Adjustable rates are out there, but there's not a big-enough spread right now between the fixed-rate mortgage and adjustable-rate mortgage to make it a truly attractive alternative. And so again, with rates where they are, even though they've moved up -- with rates where they are, if people can lock in for 30 years I think everyone feels pretty good with that for a 30-year fixed-rate mortgage.

David Goldberg - UBS Investment Bank, Research Division

No, I agree. I was thinking hypothetically as we move forward, I guess was the point of the question. But totally understood.

Stacey H. Dwyer

Hypothetically, moving forward, if the spread increases, that may be more appealing to people. But right now, we're not seeing that.

Donald J. Tomnitz

And I think that's one of the things people are missing about our entry-level segment of our businesses is as interest rates do work their up and the pool of affordable buyers decreases, you increase that pool by basically different types of financial instruments and different types of mortgages. And certainly fixed-rate are great today, variable rate are going to be better and help buyers get a house in 12 to 18 months. So we'll use whatever instruments are out there to help them.

David Goldberg - UBS Investment Bank, Research Division

Well said. And not everyone's missing it [ph], so that's the good thing. My second question was on cycle times. And I think there was -- in the commentary, I think, Stacey, you might have mentioned about cycle times extending, and trying to match sales pace with cycle times and not getting too far out ahead of yourself in terms of the cost side and the price side. I was wondering if you guys could give us some color kind of some more color around cycle times, and if that's something that's actually easing a little bit? It seems like a lot of builders are actually metering our pace at this point, and it seems like maybe some of the subcontractors have kind of increased the size of their labor force just to try to adjust to this some increased demand in the market.

Donald J. Tomnitz

Well, the cycle times are increasing. And of course, that's one of the things that we -- that's reflective on our sales, because we concluded that that doesn't make a lot of sense to pre-sell way ahead of ourselves and be subject to variances and changes in our cost structure. We'd rather sell the home closer to the point in time where we absolutely know for certain the vast majority of our cost before we proceed. So as a result, a number of our subcontractors are increasing the size of their operations. But I also will tell you that there's a big percentage of subcontractors out there who don't want to grow their businesses back to the size that they were in '03, '04 and '05. So I think there is some constrained supply of contractors out there. And as a result, one of the reasons that we are pacing our sales with our construction cycle is to make sure that we're maximizing our margins as we close those out.

Stacey H. Dwyer

I think another thing that's impacting our cycle times a little bit is the move towards the larger houses. They're just going to take a little bit longer to build than the smaller square footage houses that may not have as much interior finish out work to do.

Donald J. Tomnitz

And clearly, those homes are more profitable. And as a result, if the cycle time is longer to build a home, we expect to get paid more for the home.

Operator

Our next question is coming from James McCanless from Sterne Agee.

James McCanless - Sterne Agee & Leach Inc., Research Division

First question I had was the detail that you gave from Horton's mortgage operations that only 44% of buyers this quarter were first-time. Was that a function of the sample set or is that related to interest rates and people having to try and requalify or bring more down payment to the table?

Bill W. Wheat

No I think it's reflective of the shift that we've seeing really over the last 1.5 years, gradually getting back to a more normal mix for us. Historically, first-time homebuyers were around 40%, and we've been much higher than that, but it's been moving down. We did see a step down this quarter to 44%, still above the long-term average. But I think we're just continuing to move back to that more normal mix.

James McCanless - Sterne Agee & Leach Inc., Research Division

The second question I had is, to beat the rate horse another way, is if rates continue to move higher from here, how does that affect Horton's spec strategy? Do you become a little more conservative? Just would love to get your take on that?

Donald J. Tomnitz

Well, I don't know that rates have anything to do with our spec strategy. What has to do with our spec strategy is having the proper number of specs in each one of our communities and based upon the absorption level and what we look at is how many homes are we selling over a construction cycle and how many do we need to have at any one point of time to make sure that we're able to attract the buyer who is relocating. Or most importantly, since realtors are a very instrumental portion of our sales across the country, we want to make sure that when a realtor brings a buyer to our subdivision that we have something that we can move someone into within 30 days. So as a result of the spec strategy, they're really not impacted by interest rates. It's impacted by demand and also being able to have the product for our realtors who are very instrumental in selling a lot of our homes.

Operator

Our next question is coming from Mike Roxland from Bank of America Merrill Lynch.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Given the rise in rates, have you seen any particular markets that were particularly adversely affected by the rising rates and by the short-term jumps? Rates went up 100 bps, and in the 30- or 60-day period, you pointed out -- but just anything that -- any particular markets that really retrenched and how you adjusted?

Donald J. Tomnitz

No, sir. It's pretty much even across the board. No significance other than if you back into what the cancellation rate like Stacey said, there were some that had some of our markets had higher cancellation rates than others. But generally speaking, there was no shift in the cancellation rates that was really different across our regions.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got it. Are there any markets that you're considering, let's say, pulling back from yourself as you deem it to be more susceptible to rates? I know you haven't seen anything, any shift thus far. But if rates continue on this trajectory, how do you think about land investment? Are you looking to really focus in particular regions more given the fact they may be more defensive or more -- or less susceptible to widening spreads?

Donald J. Tomnitz

Not really. We're very happy with the markets that we're in and we're well diversified in most in every one of our markets from entry-level to mid-priced homes to high-priced homes. As I said, we're rolling out Emerald in most of our divisions. So we're well-positioned product-wise and pricing-wise in every one of our markets. We're looking at our investment strategy. We're not focused on rates. What we're focused on is the economy in each of our markets. That's really the driver of housing demand. If we're seeing a strong economy with good indicators, job growth, income growth in a market, then that would be an attractive environment for investment regardless of where rates are.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got it. And just last quick question. I know the Emerald product, obviously, is something that is new to you. Obviously, you've analyzed it over the last couple of years. But it's a new product for you. Can you remind us of the strategy that you're pursuing to target that end buyer and how that strategy differs, let's say, than the entry level?

Donald J. Tomnitz

Well, let's not get confused. We've been building expensive homes in this company for quite some time all the way back in '02, '03, '04 and '05 and what we've done is more formalized and identified the product line and come up with the product name so that we could maximize that exposure across the country. But in terms of Emerald in particular, basically, the people that we're competing directly with are, as I said before, the small and medium-sized undercapitalized semi-custom builder. And certainly, we're not trying to build custom homes with our Emerald product, but yes, we're offering luxury homes that are more well-defined floor plans which permit the buyer to choose more options. And clearly, we have a different group of subcontractors who are building those. So it's a different quality of home because a luxury buyer demands a different level of quality in the home and, basically, has a slightly longer construction cycle than our other homes. But generally speaking, we're just appealing to that luxury buyer who basically is looking for a larger home with more amenities in a better location.

Operator

Our next question is coming from Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just wondering if you have the order breakdown per month in the third quarter to come up with the 68 22.

Bill W. Wheat

We said we were up year-over-year in each of the months, I don't believe we've given the month-to-month increases. We typically do not. We don't typically comment on individual percentages per month. We talk about the quarter and we talk but the trends for the quarter.

Joel Locker - FBN Securities, Inc., Research Division

Right. I was just wondering if you guys had a unit number for each. But on community count, how much did that increase from the end of the second quarter to the end of the third quarter?

Bill W. Wheat

The actual -- 19%. 5%. 5% sequentially.

Joel Locker - FBN Securities, Inc., Research Division

5%. So was that the average or the actually ending count?

Bill W. Wheat

That's the average.

Joel Locker - FBN Securities, Inc., Research Division

Yes, I'm just thinking, if you look at absorptions based on those numbers down about 18% per community from the March quarter to the June quarter, I mean that's -- what is usually flattish kind that scenario. At what point does it come to where you say, "Okay, we did pricing and let's increase incentives just to get absorption rate back up." Because that is a pretty dramatic fall on a community count basis.

Bill W. Wheat

Seasonally, we would normally see a decline this time of the year. Yes, 18%, maybe a little bit higher drop than what would normally be. But yes, we're going to take this community-by-community. And depending on what we're seeing in each community, we'll make adjustments. You really cannot generalize what we will do across our country when we're in as many markets and communities that we're in.

Donald J. Tomnitz

Again, I'm going to go back to my original statement. We're not apologizing for a 12% increase in sales and a 30% increase in dollars. And with the kind of margins that we've increased this quarter, we're very proud of those numbers. If anybody's confused, call me.

Operator

Our next question is coming from Buck Horne from Raymond James.

Buck Horne - Raymond James & Associates, Inc., Research Division

I'll leave the rate horse alone for now. But I do want to ask about just the mix of capital being deployed in terms of the land spend. And it still seems like a large amount of the land spend is going to buy new lots, finished or unfinished relative to the amount of land being developed. You guys already have quite a large bank of land to work on. So I'm guessing I'm wondering why not reallocate more into developing what you've already got given the shortage of finished lots in the industry that's out there. Or do you feel like -- is this indicative that you feel like some of the land that you have just maybe isn't positioned quite correctly for where the target buyers are in terms of the move up or the luxury buyer?

Donald J. Tomnitz

Simply a timing issue. We've acquired the land over the course of the last 3 quarters, and we're now -- you're going to see us over the course of the next 3 quarters. We're going to have a lot more development spend than we are going to have land spend. So it's just a timing issue.

Bill W. Wheat

And you're already seeing the trend. Development spending is about double what it was last year. So it's been steadily growing as we've been bringing our new projects into line, and we're doing the development through phases.

Donald J. Tomnitz

It takes a while after we buy the land, frankly, to get it engineered and get it designed. And so if even though we want to start moving dirt as quickly as possible, there's a gap between the time we buy and the time we start moving dirt.

Buck Horne - Raymond James & Associates, Inc., Research Division

Can you give us sort of any quantification on what you'd be targeting to spend for land development versus new land acquisition over the next 12 months or so?

Bill W. Wheat

I think if you look at the quarter-to-quarter trends, they've been steadily stepping up and we expect them to continue to steadily step up each quarter as we go into fiscal '14. But we're not in a position to necessarily quantify the specific dollar amounts. But I think you will see steady increases in the level of development.

Donald J. Tomnitz

Frankly, right now, we're well-positioned with our land inventory as you pointed out. So now the focus is on not buying as much land as we have in the last 3 or 4 quarters but more in terms of developing what we have.

Buck Horne - Raymond James & Associates, Inc., Research Division

And lastly, I just was wondering if you could provide maybe some context or maybe just some perspective on what's going on in Washington the past few days regarding the bill that is circulating about the house, about GSE reform, whether or not there's going to be a government backstop for the mortgage market or not. It seems to be having an impact already on mortgage rates. What's D.R. Horton's position? What do you think -- how does that affect your thinking? And are you maybe risk-adjusting your capital spend based on what's happening in Washington and where do you think that shakes out?

Donald J. Tomnitz

Well, frankly, we are trying to stay out of politics. And who knows what they're ultimately going to come up with in Washington. But I feel very comfortable that we'll be able to adapt to whatever they come up with on mortgages, GSEs, or whatever it is, just like we have for the last 30 years. So I want to stay out of politics because it's...

Bill W. Wheat

No upside.

Donald J. Tomnitz

Yes, no upside.

Operator

We have reached the end of our Q&A session. I'd like to turn the floor back to management for any further or closing comments.

Donald J. Tomnitz

Just want to say thank you. We're very proud of our quarter. As like I said before, if you're confused, call us because we're very proud of our quarter. We're focusing on profitability and, again, to quote our ex-CFO, we never can make a coupon payment or we can't make a deposit in the bank on a unit. We're making it on dollars. We're going to continue to focus on growing our company conservatively as we have, keeping our strong balance sheet and focusing on profitability. And again, D.R. and I want to thank all of our employees. You're doing an extraordinary job of competing in a good, new environment that we have out there. So let's continue to do that, and we're outperform everyone else in the industry. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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