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Beazer Homes USA (NYSE:BZH)

Q3 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

Carey Phelps - Director of Investor Relations & Corporate Communications

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

Robert L. Salomon - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Controller

Analysts

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

Ivy Lynne Zelman - Zelman & Associates, LLC

David Goldberg - UBS Investment Bank, Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Joey Matthews - Wells Fargo Securities, LLC, Research Division

Michael S. Kim - CRT Capital Group LLC, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Operator

Good morning, and welcome to the Beazer Homes earnings conference call for the quarter ended June 30, 2013. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available on the Investor Relations section of the company's website at www.beazer.com.

At this point, I will now turn the call over to Carey Phelps, Director of Investor Relations.

Carey Phelps

Thank you. Good morning, and welcome to the Beazer Homes conference call discussing our results for the third quarter of fiscal 2013. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors, which are described in our SEC filings, including our Form 10-K, which may cause actual results to differ materially. Any forward-looking statement speaks only as of the date on which such statement is made. And except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

New factors emerge from time to time, and it is not possible for management to predict all such factors.

Joining me today are Allan Merrill, our President and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions in the time remaining.

I will now turn the call over to Allan.

Allan P. Merrill

Thank you, Carey, and thank you for joining us. This morning, I'll highlight our results for the quarter and our progress in our path to profitability. After Bob's comments, which will focus on our land spending, I'll comment on the current selling environment, the impact of rising rates and our expectations for the fourth quarter and full year.

The third quarter represented more progress on our accelerating return to profitability. We did what we said we'd do, and in fact a bit better in a few areas. For our fiscal third quarter, adjusted EBITDA was $22 million, up $18 million from last year. Gross margins were 20.3%, with each closing contributing $50,000 in gross profit. Closings were up 11%. Average sales prices were 12% higher than a year ago. Sales per community grew to 3.2 sales per month from 2.9 last year. Our cancellation rate declined nearly 5 percentage points to 20%.

On the investment side, we spent $162 million in land and land development during the quarter, compared with only $40 million last year. And we activated a $13 million asset out of land held for future development. As expected, and reflective of a substantially lower community count, we sold fewer homes this quarter than the same quarter last year. But that was fully contemplated, and it won't impact our achievement of the profitability objectives I outlined back in May. Our path to profitability plan is built around 4 primary operational metrics, with performance targets assigned to each one. Let's go through the 4 metrics now.

First, taking a look at our sales per community. For the 4 quarters ended June 30, we averaged 2.7 sales per community per month, near the middle of our target range of 2.5 to 3, and 87% of our communities qualified as performing with at least 1 sale per month during that time period. Both metrics reflect improvement from this time last year when we recorded only 2.2 sales per community per month, with 77% of our communities performing.

Looking at our results for just the third quarter, we recorded 3.2 sales per community per month, which was slightly higher than we had anticipated due to more community closeouts. I'm especially pleased that 97% of our communities qualified as performing for the third quarter.

The second path to profitability strategy relates to leveraging our G&A costs. For the 12 months ended June 30, we improved G&A as a percentage of revenue by 240 basis points, from 11.6% last year to 9.2% this year. As we begin to increase our community count in the coming quarters, our G&A dollars are likely to rise. However, we expect to keep these costs within our target range of 9% to 10% of revenue on a trailing 12-month basis, which should allow us to enjoy substantial earnings leverage as we increase the size of our business.

Our third path to profitability strategy is to drive more gross profit dollars per closing by increasing our gross margin percentage and realizing higher ASPs. With substantial improvement in all 3 reporting segments, our gross margin percentage for the quarter was 20.3%, compared with 16.7% last year. I'm very pleased with this level of performance for the quarter and believe that our fourth quarter margin percentage should be a bit higher.

We are also seeing improvements in ASPs, which reflect both a better pricing environment and a gradual shift in mix, as our lowest ASP communities closeout. For the third quarter, our ASP grew to $254,000, up $26,000 or 12% over last year, and our ASP and backlog at the end of the quarter was $274,000, up 16% from last year.

Together, our improved margin percentage and rising ASPs are driving our gross profit dollars per closing higher. For the 12 months ended June 30, we recorded an average of nearly $45,000 of gross profit per closing, up 24% from a year ago and just about reaching the low end of our target range. The third quarter was even stronger with $50,000 of gross profit per closing.

Moving now to the fourth strategy in our path to profitability plan. With slightly more closeouts than expected, we ended June with 144 active communities. During the quarter, we closed out of 21 communities, but we also successfully opened 17. Our average active community count for the third quarter was also 144, below our longer term target range of 190 to 210.

As I discussed on our last call, we expect to return to profitability well before reaching the low end of our target. And in fact, expect to be profitable for our fiscal fourth quarter with roughly the same number of active communities as we have today. By the end of fiscal 2014, we expect to grow our active community count to approximately 170, give or take a few, as it is difficult to predict the timing of all community openings and closeouts.

Bob will now provide more color on land spending and our balance sheet, then I'll make some closing comments and update our expectations for the remainder of the year.

Robert L. Salomon

Thanks, Allan. The hard work of our land acquisition and development teams over the past several quarters has started to come to fruition. We spent $162 million on land and land development during the quarter. And year-to-date, we've spent $314 million or more than double the $141 million we had spent at this time last year.

In addition to the 144 active communities at June 30, we had 50 communities in various stages of development that were not yet opened and 21 communities that have been approved, but whose transactions had not yet closed. During July, we approved another 11 communities for acquisition, several of which should contribute their first sales in fiscal 2014.

With a number of additional transactions in the works, I expect us to spend between $170 million and $190 million on land and land development during the fourth quarter, bringing our full year expected land and land development spend to around $500 million.

Last summer, we told investors that we plan to use the equity we raised at that time to acquire land parcels to expand our community count beginning in fiscal 2014. We have been aggressively fulfilling this promise and have secured key land positions across the country. Recently, we highlighted 2 such transactions on our website, Miramonte in Texas and Wincopia in Maryland. Miramonte is a large master planned community with over 600 lots located in the desirable Frisco submarket at Dallas. The Wincopia community contains 220 lots and is centrally located between Washington, D.C. and Baltimore, just off of I-95 in Howard County. Both of these acquisitions share the characteristics that we strive for in all of our land purchases. They're in prime locations near major job centers. They provide easy access to crucial transportation corridors, and they're in outstanding, highly sought-after school districts.

Due to the large size of these transactions, we have received numerous unsolicited indications of interest from other builders to buy a portion of lots at both Miramonte and Wincopia. While we haven't finalized our plans yet, we expect to sell some of these new lots to other builders to enable us to redeploy capital to further expand our community count.

Finally, last quarter I mentioned a land banking arrangement we have with GSO. Since that time, we have closed 1 transaction with GSO and targeted other transactions for land bank financing, representing commitments of approximately $100 million. Several of these transactions are expected to close by the end of September. Land banking commitments from third parties are not included in our full-year projected land and land development spend of around $500 million.

At June 30, we controlled nearly 27,000 lots, an increase of over 2,200 lots since the end of March, and 1,800 lots since that time last year. Nearly 21,000 lots or 77% of our total controlled lots at June 30 were available for near-term use, compared with only 71% a year ago. In the last 12 months, we have activated $44 million of land held for future development, including a $13 million asset in Southern California that we activated this quarter. This community, which contains 225 lots, should generate its first sales and closings during fiscal 2014.

Turning now to our balance sheet. We ended the quarter with $298 million of unrestricted cash and an undrawn $150 million revolver. With these available resources and no significant debt maturities until 2016, we continue to feel very good about our liquidity position, capital structure and ability to meet our path to profitability objectives.

Similar to most of our competitors, we have a very large deferred tax asset, which will allow us to avoid paying taxes on a significant amount of our income in the future. We currently estimate the realizable savings to be on the order of $454 million or $13 a share. This asset is subject to a valuation allowance, meaning it is not on our balance sheet until we return to sustainable profitability. Regardless of when we're able to remove the valuation allowance, the ability to avoid cash taxes represents an important financial attribute for the company. Overall, with substantial margin improvement, increased absorptions and significant cost leverage this quarter, I'm extremely pleased with our results. I'm confident that the land investments we are making today will help us continue the success as we return to profitability.

With that, I'll turn the call back over to Allan.

Allan P. Merrill

Thanks, Bob. Our teams have made significant progress over the past couple of years implementing numerous operational changes, which I believe have contributed to steadily improving performance. Two years ago, we were last or nearly last among our peers in absorption rates, gross margins and G&A leverage. Today, this is not the case. In addition to these significant operational strides, our entire industry has enjoyed a recovering housing market this year, highlighted by higher traffic levels, solid demand and increasing home prices, all of which make sense given the gradual improvements in the labor market, the extreme affordability of home ownership in most markets and the cumulative increases in rental cost in recent years. But there is an elephant in the room, and that's rising mortgage rates. Ordinarily, an uptick in mortgage rates acts as a bit of an accelerant, pulling demand forward as buyers worry about getting hurt by future rate increases. And when rates started moving in May, that's what we anticipated.

But it's turned out a little differently, at least in our communities. While traffic levels are still up year-over-year, our sales pace, particularly in June and July, has been a little bit softer than we expected. The question that I think is, unfortunately, nearly impossible to answer is this, are lower traffic conversion rates due to higher rates? Or higher home prices? Or is it some other factor? Well, here's what I think is happening. I think the sheer magnitude of the rate increase was large enough to convince buyers that the much anticipated increase in mortgage rates had finally occurred, reducing the likelihood of another big increase in rates in the near term. As such, instead of pulling forward next quarter's demand, we've seen a little bit of the opposite, a lack of urgency has crept back into some buyers' minds.

The change in rates has also likely crowded out some of the upward momentum in home prices. A 100-basis-point move costs a buyer about $150 a month for our average home. That's the equivalent of a 10% price increase in terms of monthly payment. Now make no mistake, home ownership is still cheap in relation to incomes and rent in all of our markets. But it isn't as cheap as it was 6 months ago, and it has moved quickly enough that I think we're experiencing a bit of softness in demand and resistance to further rapid price increases. So has the cycle peaked? Are we about to reenter 2008? I don't think so. Supply is highly constrained. Ownership looks awfully good compared to renting and employment continues to improve. Remember, we're still only delivering about half the number of single-family homes that our economy requires for our growing population. So I believe we all need to have a bit of patience. While we may not be in the first inning of the housing recovery, we're still a long ways from the seventh-inning stretch.

All right. I'm done pontificating about rates and macro housing topics. Let me finish with an update on our expectations for the fourth quarter and the full fiscal year. First, we continue to expect positive net income for our fiscal fourth quarter, allowing us to be profitable for the 6 months ending September 30.

Second, for the full year, we expect adjusted EBITDA of at least $75 million, significantly improved from the $22 million we reported last year and a bit higher than we indicated in May.

Third, consistent with our decision more than a year ago to forfeit order growth in fiscal 2013 to focus on improving our margins and growing community count in fiscal '14 and beyond, full year fiscal 2013 orders are expected to be essentially flat with last year despite a much lower community count.

And finally, looking a bit further ahead, we are increasingly confident regarding fiscal year '14 profitability. Last quarter, we said making money next year was attainable. At this point, we think it is likely. All of us at Beazer are anxious to report a full year profit next year, and I don't think the recent reset of the pace of price and volume improvements is likely to prevent us from reaching that goal.

Before turning the call over to the operator, I would like to acknowledge the tremendous accomplishments and contributions made by the employees here at Beazer and thank them for their efforts. In 2 short years, this team has substantially changed the performance characteristics of this company for the better.

With that, operator, please take us into Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mike Rehaut of JPMC.

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

The first question I was hoping that you could elaborate, Allan, on some of the comments you had towards the end regarding rates, the elephant in the room, I guess as you said. But in particular, to elaborate on the comment around sales pace softening and also around pricing power. For the quarter overall, sales pace was up roughly 10% year-over-year, a little more than you had, I guess, expected, but at the same time, a deceleration. Was the sales pace positive year-over-year in June and July? And also in terms of price increases, have those kind of come to a halt? Is that kind of the base of your comments? Or if you could give us any sense around pricing momentum.

Allan P. Merrill

Sure. Well, let's take the pace first. As you pointed out, we were up in pace year-over-year, and I think in the fourth quarter, we'll be up in pace as well. Now the Q4 pace will be below the Q3 pace. But what I was really indicating is that in Q -- during Q3, particularly in June and carrying over a little bit in July, it feels a bit softer. Traffic to our communities has been up about 50% in each month so far this year, and that hasn't changed. So it has not had a chilling effect on traffic. It has had -- and it's marginal, it's a very small move. But it just feels a little bit different, and I think what we're really seeing is the rate of change in price is also being affected. So I think the direction of pricing is upward. We're continuing to find ways to increase base price, to increase included features, which allow increases in base price and to reduce incentives, but I just think the speed with which that has occurred in the last 12 months is unlikely to be sustained. And then certainly in the last 60 days or so, it hasn't been. It's still positive. I still feel confident about increases of home prices. And I do think we're going to have an improvement in pace in Q4 versus last year, it's a little bit softer. And it's because, I think -- and again my theory is, that I think we pulled forward a little bit into May perhaps some order activity because of the increase in rates. But by the time the dust had settled, we had a 100-basis-point-plus move. I think folks said, okay, it's happened. Now we can sort of go about a process of looking at the different offerings that are out there and trying to find the right home as opposed to feeling externally motivated by some fear of what might happen to rates in the future.

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

Great. That was a great review. I appreciate that. And second question on gross margins, there's been great progress there. And I know, obviously, it's been a huge focus. I know we're not into guidance yet for '14, but certainly with the newer communities coming on, can you give us any sense -- I mean, I would expect that with all else equal and the fact that the new communities have a little bit more of a development element to it, is it safe to say that we should be expecting higher gross margins for '14?

Allan P. Merrill

Yes. I think -- I'm anticipating, and I'm going to go ahead and lean into Q4 a little bit here. I think, and I said this in the prepared remarks, I think that we'll see a little better sequential gross margin in Q4 than we had in Q3. It will be up a little bit. I don't know that it's going to necessarily sustain the 360-basis-point improvement over last year, but I think it will be up a little bit from where it was in Q3. What that means is, we're going to have a full year gross margin in the high-19s, which is up 2 full points from where we were last year. And at this point, I think while another 2 points may be awfully tough to do in fiscal '14, I'm pretty confident that fiscal '14 margins will be higher than fiscal '13.

Operator

Our next question comes from Ivy Zelman of Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

I think Michael indicated that your comments were really helpful, and I guess the question would be, with pricing momentum showing some deceleration with slower sales pace, are you finding that there's risk going into sort of a sustained period of slower pace that you'll actually have to use concessions or discounting? And with private builders that are not as well capitalized that might be trying to get their working capital back out of the homes that they've built, do you anticipate that there could be some weakness or pressure because of your competitors that are going to steal [ph] It a little bit more than you? And from a geography standpoint, where were you feeling the slowing? Is it more pronounced in your entry-level product in Texas and in the Carolinas where it's more competitive? Or are you seeing the same slowing everywhere throughout the company? If you can help us, is it demographic? Is it geography? What's the price point? Just a little bit more color. Because yet, you're buying land and you're continuing to believe in the long term of the cycle. I think that people are pausing because they're worried that rates are going to keep going up higher from here, but you guys keep building and buying land and assuming that you're going to get gross margin expansion. So help us understand this pause and the risks associated with the pause continuing and what your competitors, who are not as well positioned, what they may do?

Allan P. Merrill

Okay. Thanks, Ivy. That's a...

Ivy Lynne Zelman - Zelman & Associates, LLC

It's a small question.

Allan P. Merrill

Yes, just a modest issue. So let me try and chip away at some parts of it. And then the parts I miss, you can give me a second shot at. In terms of the environment, I think that it starts with affordability, and where are monthly payments in relationship to incomes? And the basis of my confidence 1 quarter out, 4 quarters out, 8 quarters out, is that housing and new homes in particular remain very affordable. Now I do think that the combination of a 100-basis-point move and better than 10% price action on a year-over-year basis has caused a step up in that monthly payment. There's still a gap, I believe, to affordability and to some of the longer-term trends of the relationship between shelter costs and incomes. So I feel very confident that we can still build into that. The pace of that narrowing, to the long term kind of affordability levels, I think has slowed a little bit this spring -- or I guess, summer -- because of the rate move, but I really don't worry about having to lean on incentives in order to sustain pace. We had already -- and I know most of our peers had as well said, "Boy, things started running kind of hot this spring, let's slow pace to capture margin." We did that a little bit. I mean 3.2 isn't a lot down from 3.4, but it's down a little bit. And I think Q4 will be down sequentially, though it will be up a little bit year-over-year. So I just don't feel like we're having to chase the activity with incentives. We're talking about a change in the rate of improvement as opposed to a directional change. Now let me sort of pivot to your question about geographies. There's no question in it for us, Florida and Texas have been and have remained kind of consistently very strong. And it's not been because of community count growth. We've had negative comps in terms of community counts in those market, but our paces have been very, very strong, and the price action has been pretty good. Where we saw a little bit of weakness -- I saw some weakness in Phoenix. We saw a little bit of softening in Las Vegas, in particularly that June time period where traffic remained healthy, activity levels are strong in the market, but it was just a bit less frothy. Now we've got so few active communities in California right now, I find it hard to extrapolate and make bold statements about California. Others are better positioned to do that. Looking at other markets, our Atlantic markets continue to be pretty strong. Now I will say, we have got an awful lot of business fixing happening in our east segment and in particular in our Maryland and Virginia businesses. So as much as there are macro factors that influence us, I feel very good about what we're doing to reset the communities, to reset our product, to reset our management teams. So I'm pretty optimistic about our prospects in that important region, notwithstanding whatever regional commentary others may have because that's for us been an area of kind of low-hanging fruit for business improvement. So let me pause there and let you sort gather how much of that was responsive and then focus me on what else you want me to address.

Ivy Lynne Zelman - Zelman & Associates, LLC

No, that was helpful. I guess just going back to the question on price point, with the diversified portfolio that you offer, where did you feel in Vegas and Phoenix that slowing more pronounced? Was it somewhat a nonevent for the move-up product and more felt at the entry-level?

Allan P. Merrill

So in Vegas, we are pretty firmly in the entry-level. And so I don't really have a perspective on the move-up in Vegas. In Phoenix, I saw it at price points that ranged from the low-2s to the mid-4s. So depending on how people characterize what a move-up buyer is versus a first-time buyer, I'm not sure that price point is the best indicator of it. I think there is just a little stickiness in the accelerating environment that we experienced all summer. And honestly, I think it's across demographics. I don't think it's just a first-time buyer issue. I mean, one of the bigger factors in the market, obviously, is mortgage availability. We talk a lot about rates, and I think one of the most positive things that I saw, and I was with the CEO of one of our preferred lenders last week at a mortgage company, and he was pretty direct about it. He said, "They got a hole on their income statement from a lack of refi business, and they've adjusted their overlays to try and drive more purchase business." So I felt very confident. I was optimistic when I heard that. So I don't think this -- I am hard-pressed based on what I see to try and single out a buyer profile and say, "They're the ones." That's not been our experience.

Ivy Lynne Zelman - Zelman & Associates, LLC

Okay, and if I can ask one more, Allan, and then move on. A lot of people are concerned about builders buying land given that land inflation has been significantly stronger than home price inflation and I try to explain about the leverage, assuming finished lots go up 20% that home prices only have to go up 5%. But maybe you can help explain sort of the math and the timing and why you have confidence buying lots today that you can actually still see margin expansion, because I think a lot of people struggle with that, recognizing that there's been tremendous land inflation in the market.

Allan P. Merrill

Yes, that is absolutely right. A year ago, one of the things that we said when we did the equity raise, when we had this call in August, we were maybe a little out of tune with what others were saying. But I was trying to make the point then, and I'd make the same point now, and I'll be a little bit more refined with it, and that is, it depends on what kind of land you're trying to buy. Now typically, when we talk about types of land, everybody has A locations, but I want to focus on something different, which is the development status. Finished lots, the bid for finished lots is extraordinarily high. And in fact, there is margin compression likely if you depend on a finished lot supply in the so-called A locations. And I'd argued in fact, finished lots in A locations are kind of a myth. There may be some finished lots in B and C locations, but because -- and you mentioned the private builders and the need to try and get some activity, we're seeing some activity in that area, where they don't have the capacity to do land development or get the financing for a larger parcel. And as a result, there's really been a separation between the finished lots and land development deals. Where we've seen the greatest opportunity has been in larger transactions where we will lay off some of the risk for sure in our biggest deals, but by the way, I think we're going to lay off that risk at a price higher per lot than what we just paid because of our capacity to make a bigger decision, write a bigger check and absorb the development obligation -- it will be a 2 or a 3-year proposition. And so, I do think that you have to look at the quality and the development status when we talk about inflation in land markets because it has not been perfectly symmetrical. We've seen clearly far smaller moves in land prices, for example, in Dallas. This Miramonte deal that we did 600 [indiscernible] lots, the per lot value there didn't move by anything like the order of magnitude that finished lots have moved in Dallas. And I know that our fully developed cost on a front foot basis is several hundred dollars below where today's bid for finished lots is.

Ivy Lynne Zelman - Zelman & Associates, LLC

But what about addressing margin expansion as you are seeing whatever -- maybe you're getting better if some of the risk is laid off, but what do you have to see in home prices to continue to justify margin expansion with the current lots that you have that are going to go vertical over the next 2 years?

Allan P. Merrill

Yes, honestly, we're not baking price appreciation into our underwriting. And I know that's hard for people to believe, but we just don't have an input sell for people to crank in price appreciation. So when we're underwriting deals, we're looking at what margins are on current prices, we're looking at what our modified internal rate of return is on current prices and current cost. And honestly, I think we can see margin progression off of today's prices with where we've been able to acquire land. Now part of it is, when we talk about margin progression, we're at 20.3%, and I'm very proud that we're at that level because we used to be a whole lot lower. If we were at 27%, I'd have a different answer for you, I think. But the difference from where we are to where we want to be, we can still achieve that with where land prices are.

Operator

Our next question comes from David Goldberg of UBS.

David Goldberg - UBS Investment Bank, Research Division

Just get a quick -- just a quick clarification, Allan, on your comments about talking to the CEO of one of your preferred lenders. Are you seeing any reduction in the fees, the correspondent lending fees that you're seeing from the reduction from the preferred lenders just given the competition for the business? Just to make sure I kind of understand how competitive that's getting and whether there's been a big influx from the lenders?

Allan P. Merrill

Well, we suffer and I mean, I'm not trying to be falsely modest, but we had this different business model in the mortgage space, and so it's a little bit hard. And I just want to warn people who listen, if they're not paying close attention, we're not like everybody else. And you could say it's a good or a bad thing, but we're in the mortgage choice business, which is to say, we've got a small number of preferred lenders that have agreed to a service level and have agreed to compete for our buyer's business in every community. And that list of preferred lenders differs by community, based on buyer profile and programs the different lenders have available. When we pre-qual somebody at the community level, there is no assurance. And in fact, there's the opposite. We tell the buyer. It's terrific that brand X has given you a pre-qual. We're happy to write you. You've been pre-qualed. We recommend that you talk to 2 or 3 of these other preferred lenders to make sure that there is significant competition on service, on fees, on rate, on program fit. So I think we are seeing a significant benefit as a company from that proposition. And I think our buyers see a benefit from that because there's no line item on our P&L for mortgage profit. My goal has been to put that line item in our customer's pocket. So it's hard for me to extrapolate to how competition is affecting the market broadly. I know that, that dynamic is very healthy for buyers in our communities.

David Goldberg - UBS Investment Bank, Research Division

That actually leads to the second question I wanted to ask, and that was about the backlog. And it's kind of a bigger picture question. I think one thing that we always try to get an idea of is, and given the relationship you have with your mortgage lenders, maybe this is a little bit different for you guys, how do you get comfortable that the backlog -- how the backlog is going to react to the change in mortgage rates? If you have your own mortgage business, you can go, you can scrub your backlog. You can get proactive and go out and visit your customers and rerun credit and talk to people about it. Is it more challenging for you? And how do you guys think about doing that given the kind of volatility we're seeing in rates?

Allan P. Merrill

It's an awesome question. And I'll tell you what David, I mean, if you were sitting in a management meeting with our division presidents, I mean, that's an awesome operational real-world issue for us. The good news is, that we actually are dealing today with fewer lenders than we were when we had a captive mortgage company or when we had a single preferred relationship. And let me explain why that could possibly be the case. If somebody tells you they've got a 60% or a 70% capture rate on their internal business, that's one part of the business. But there's another 30% or 40% of the business that goes what we call OSL, or outside lender. If you end up with 40 OSLs or 30 OSLs, think of how many lenders you're trying to deal with and how unimportant you are to every single one of them when you're trying to scrub your backlog, to use your expression. We have the great advantage now of having a finite number of lenders who have competed for and won our customer's business, in part through service. So part of the service level we hold them to is a level of communication on the milestones in the mortgage approval process that they are on no less frequently than weekly dialed into our closing coordinators so that we're tracking it. So one of the job functions at our company I worried most about when we went to this mortgage choice was our closing coordinators. Were we going to inundate them with what was an unmanageable, ungovernable process of managing backlog? And I will tell you, our closing coordinators are thrilled. We have got fewer issues in backlog, more transparency, more clarity because we're important to every one of those lenders. So I would tell you, we have to do it a little bit differently. I mean, we have to talk to those preferred lenders instead of calling Bob down in the corner at the mortgage company for that business. But the fact is, they want this business. They don't feel entitled to it. And in our service level, if they lose pace with that buyer, we have an agreement with them that they'll -- if it's an FHA, for example, they'll give up that case number within 24 hours, and we will get that buyer on another one of the preferred lenders ASAP. I think if you can eliminate entitlement from your lenders in your mortgage backlog, in your mortgage -- in backlog management, then you're in a much better place. So I actually think, and I'm a little bullish about this. I know it's different, but I think it's a very big advantage for us.

David Goldberg - UBS Investment Bank, Research Division

I think that's a great answer. And then if I could just sneak one more in. I think you're in a unique position given that Beazer Homes for rent business and the company's historical involvement, for the [ph] ownership position in it to kind of get an idea of how rental rates and rental prices are really reacting to the change in the housing market and the impact of higher rates, but also the price increases that we've seen prior to that, the pace of price increases. Can you talk about how much you think in the single-family detached rental business that's a price taker relative to the housing market and prices in the housing market? And how much is kind of a price leader to some extent?

Allan P. Merrill

Yes, so we have some interesting data about this. Now it relates to Phoenix and Las Vegas, then Florida markets that we're in and just a little bit in California. So it's not national in scope, and remember also that in our pre-owned rental home company, which by the way, we own a minority stake in. We're about a 15% shareholder. And while I'm on the board of it, it has independent management, and independent board for those who haven't sort of tracked our involvement in this space. But we've only bought recent vintage homes. We have not been, what some of our competitors have called pie eaters. We haven't been out trying to buy, tapes [ph] of homes a thousand at a time. These have been individually selected homes, in particular homeowner associations in certain neighborhoods, school districts, commute patterns, et cetera. So I want to warn you, our portfolio is definitively not representative of all single-family rentals because there are -- as there is in anything in life, there are gradations, there are shades, there are degrees. But in the high-quality portfolio that we've got, we are seeing strong rent growth year-over-year and high levels of interest in signing 2-year leases to protect against further rate increases during that time period. And we're accommodating that, but with a bump in that in-between period because we don't intend in our company to be flipping assets. It's a long term, growing, durable income stream proposition. What we're seeing in terms of rates or rents in particular is kind of interesting. And again, this is a little bit of kind of a direction as oppose to precision. But if you looked at a Class A multi-family apartment, you'd be in a rent range of about $1.20 to $1.40 a square foot. Our single-family rentals are $0.50 to $0.60 a square foot. Now the resident is renting more square feet in a single-family home than they typically were in a 2- or a 3-bedroom apartment, and so the rent in dollar terms may be roughly comparable, but on a per foot basis -- or think about it in terms of quality of life, that feels a lot better. And we are seeing rental rates sustain themselves at levels that are at or above where monthly payments are on a pretax basis for homebuyers of comparable homes. So I still think that that dynamic of rentership, pushing people towards ownership is in place, but I'm also confident that there is a large portion of the population that is interested in and will continue to want to rent in a single-family context. And we just happen to think that they'd rather rent a newer home than an older home, and particularly one that we've gone through and done the level of improvements that our rental company does. But I still feel like that the dynamics there are very favorable. There's a lot of headline risk about this, and I know that some of our competitors in the rental business have bought totally different portfolios running at very low occupancy rates and may start to pull the rent lever in order to fill them up. I really don't see that as a big problem. The neighborhoods and the homes that they're dealing with are completely different.

Operator

Our next question is from Susan Berliner of JPMC.

Susan Berliner - JP Morgan Chase & Co, Research Division

A couple of questions. I guess starting with the GSO relationship. Since most of that is already allocated for commitments, what are your thoughts on I guess re-upping that or doing other banking relationships?

Allan P. Merrill

I think we'll be, as Bob said, about $100 million committed by the end of the fourth quarter. So we've got some time. In fact, we did do a deal with another land bank -- or we're close to. I think we'll close in the fourth quarter with a one-off with somebody else. So we're definitely interested in that being a portion of our business. I think I said last quarter that I didn't anticipate it exceeding over time 1/3 of our business. My estimate of that hasn't changed. I think that the early returns in that structure are still very positive, and I'm hopeful that we will expand and continue that relationship with GSO. But honestly, there are other participants as well. And of course, we would take advantage of the set of relationships that offered us the best overall economic opportunity.

Susan Berliner - JP Morgan Chase & Co, Research Division

Great. And then, I guess, Bob a question for you with regards to the balance sheet. You obviously have a lot of high-coupon debt that's callable next year, can you just comment on what you're thinking ahead. Obviously, nothing too specific, but any kind of guidance you can give us with regards to your debt structure would be helpful.

Robert L. Salomon

Sure Susan. We don't have any maturities until 2016. And you're right, we do have a couple series that have their first calls next year. We're gratified by the improvement in our bonds in the past year for trading, and we're traded above par, somewhere between 5 and 10 points on most of our issues. We always watch the market. We'll keep an eye on it as we look towards our path to profitability, but really what we have to do today is to try to convince equity holders about our prospects as we seemed to have done with our bond holders.

Operator

Our next question comes from Dan Oppenheim of Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I just wonder if you can talk a little bit about the recent land transaction in Frisco, Texas, and then in Howard County, where you talked about that in terms of the -- selling off some of the parcels to other builders. And in the great position where you are now, that you can take on those land positions, what's the timing that you're thinking about in terms of when you tell those builders as you offhandedly said you think you'll sell those for more. Presumably, there is some benefits to buying in larger, what's the confidence in terms of the price you have for that in terms of then being able to generate a profit selling it to others?

Allan P. Merrill

Well, Dan, it's an ongoing discussion. I mean, our finance team, Bob and I, our division president, in both cases, it would be an exaggeration to say inundated, but not by much in terms of the inbound phone calls for those 2 assets in particular. By the way, there have been calls on other assets. But those 2, since we've talked about them. The dilemma -- and it's a good place to be -- the dilemma is, we could sell some acreage and enter into a joint development agreement with someone that would lessen both the capital we have employed and some of the incremental development dollars, and that may happen. We could do the primary infrastructure, but not the on sites and sell, what you would call a partially improved lot with a recorded plot. I think the price for that would be higher, by the way, but there's also time and risk. And in one case, we have been offered really extraordinary pricing to feed finished lots to a builder. Now I don't really want to be in the land banking business for some of our competitors selling them finished lots, but it's given us the capacity to kind of pick where along the price and risk sharing continuum we want to play. And each asset's going to be a little different dynamic. One of the things that's going to factor into that is, if you think about our market position, how many other stores or communities have we got in that market? And is the prospective partner or buyer of our lots able to sell us something? Because this is about growing community count for us. So someone who's got the capacity to sell us some lots that are consistent with our product strategy in that market, that allow us to put a second store open, that would be a factor in deciding with whom we should do the transaction. So that it's got this other dimension to it. But I do think you will see us do things from the raw land and joint development side -- which is different than the joint venture by the way, but where we're sharing development costs on a portion of the infrastructure. You will see us sell some pads. I doubt you will see us in the long term selling finished lots to builders business, because I've got a higher and better use for our capital than that.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Great. And I guess the second question. I was wondering, you talked about activating some of the land, especially one parcel in Southern California, how much more do you think as you think about the land that you'll be looking at in fiscal '14, how much do you think will end up coming from opportunities that will be an activated?

Allan P. Merrill

Well, I'm confident we will have additional assets that come active during fiscal '14. I'm very confident in that, given that on the order of half of it's in California -- that's a good place to be. And I've got to stay away from making a specific prediction, but we've had a good trajectory over the last year. I think it is accelerating in terms of the rate at which we will be able to bring it in. But trying to make a particular quarter-to-quarter assessment is tough.

Operator

Our next question is from Adam Rudiger of Wells Fargo.

Joey Matthews - Wells Fargo Securities, LLC, Research Division

This is Joey Matthews on from Adam. My question is on your product mix as it stands now and where you see it going from here? And then specifically on the resetting of product in the east, any more detail on that would be helpful.

Allan P. Merrill

Well, let me take the east first. And there's been, I think, a fair bit of buzz about what we've been doing in Maryland and Virginia in particular over the last 6 months. Pretty major factors in the land market there. We had not reinvested aggressively in that market in the 2 or 3 prior years. And with new management in place in both of those markets, our confidence in the underlying markets and in our management teams is extraordinarily high. And that's really given us the opportunity to see some opportunities that had been gestating through entitlement processes for 5 and 10 years. And so, instead of kind of being in closeout communities, I think we are positioning ourselves for '14 and beyond to be in some excellent locations with a range of product that includes 2-over-2 condos, 27-unit building that we do that's kind of a special product that we've got that customers like, particularly in an active adult context, as well as in that market, our traditional position, which has been more in the move-up. It's not the highest price points, but we're frequently in the $400,000 or $500,000 range in that market. So it's just a refreshing of the positions that we've got and a pretty significant expansion in community count. In terms of product overall, one of the factors going on in our business, and we're often asked, are you abandoning the first-time buyer and moving to the move-up buyer? It's a hard thing to say, and I alluded to this before, price is easy for us to point at. Defining who the buyer is, is a little bit tougher. It may, in fact, be a the first-time buyer. But if they're 34 and have a 740 FICO and $100,000 in the bank, and it's the first home they've bought, it sort of feels like a move-up transaction. They're first-time buyers, but they want granite and 42-inch cabinets and hardwood floor. So I would tell you, we are trying to, in every market, be dialed into the buyer profile that is consistent with our land position as opposed to using some theory of buyers that we want to serve and making customers just accept the value proposition or the product proposition that we have. Now we'll give you one interesting anecdote, and this is a directional thing that is not a reliable predictor, but I think it will make a point. If you looked at the 21 communities that we closed out of in the fourth -- or in the third quarter, the ASP in those 21 communities was $240,000. The ASP in the 17 communities that we opened was $346,000. Now what's really going on there is a geography shift because you've got California and Mid-Atlantic featuring fairly heavily in that, but there is also an inability to for us to replace the very lowest entry-level product lot. And so, as we build through those communities, they're not being replaced. So you've got an in-market mix occurring and then a between-markets mix occurring, both of which are going to drive our ASPs higher in the coming years.

Joey Matthews - Wells Fargo Securities, LLC, Research Division

Okay, and then switching over to the income statement, SG&A, where do you see the greatest source of further leverage of SG&A? It seems like you're running at the low end of your kind of target range at 9.2% on an LTM basis and with 97% of your communities performing, I guess where is the extra opportunity coming from?

Allan P. Merrill

Well, I think we'll have -- even as I said, we'll have a little more velocity per community in the fourth quarter than we did a year ago. Prices are moving substantially more than the components within G&A and heavier closings on the corporate portion and the regional portion of our overheads kind of flows straight through. But we're going to make some investments, and you can't take on land development jobs without having engineers and accountants watching that very closely. So as I said, and I was trying to be very clear about this, I think the dollars of G&A are likely higher from here, but I'm very confident we can sustain that 9% to 10% range even against the community growth and even as we've taken on a little bit more development activity.

Joey Matthews - Wells Fargo Securities, LLC, Research Division

And a final question on gross margin this quarter, any nonrecurring items in there or warranty adjustments that we should know about?

Robert L. Salomon

There were some minor things in the corporate line, which is roughly comparable to last year, but nothing that warranted any specific call out.

Operator

Our next question comes from Michael Kim of CRT Capital.

Michael S. Kim - CRT Capital Group LLC, Research Division

My first question just on land. Last quarter, you had guided for land spend to be in excess of $120 million and it came in at $160 million plus, was this pretty anticipated or were you looking at more attractive deals during the quarter and in any particular region?

Allan P. Merrill

The pipeline of prospective deals is a really big number, and it should be. The pipeline of deals that actually gets approved is a smaller number. The ability to predict in advance the exact timing and success ratio of deals in the prospect pipeline versus deals done is pretty hard. Now the fact is that the Wincopia deal that we're talking about happened in the quarter. There was some concern or consideration that it may happen in the fourth quarter instead of the third quarter. So you get an asset like that, that can move the numbers a little bit. But I think were trying to kind of solve against an annual expenditure as opposed to be certain that we guess right each month or each quarter because we just don't have the ability to influence all of the factors that determine when a deal is going to be available to be closed.

Michael S. Kim - CRT Capital Group LLC, Research Division

Right. I guess as you think about the pipeline replenishing the land book, how should we think about community count growth into 2014 on a geographic basis? I mean, is this going to be concentrated in any particular region or do you -- obviously, they'll be affected by closeouts, but are there any regions where you see more closeouts or anticipated closeouts over the next few quarters that might influence that?

Allan P. Merrill

It's a great question, and I'm glad you asked. I will tell you, we're going to have more communities, I believe, in every division at the end of next year than we have at the end of this year. So we like our footprint very much. Having said that, I said a year ago, and I want to reiterate, California, Florida, Texas and the Mid-Atlantic are likely to disproportionately benefit from our land spending, and I do expect to have community count in those regions be higher than in the company as a whole.

Michael S. Kim - CRT Capital Group LLC, Research Division

Okay, great. That's helpful. And I guess with the west region, and I appreciate the color on the gross margins, what was really the driver for the west to outperform the other regions in terms of gross margin expansion?

Allan P. Merrill

I just think they were on the bandwagon earlier in January and February in terms of price, frankly end of last year. I think we were able to start to move. And I talked about this in another quarter. We got out of position in Phoenix from a feature level perspective. I think we had too low a feature level, and it was -- and we were struggling a little bit with price because we didn't have -- it didn't feel right for the home buyer. So we put $3,000 or $4,000 of cost back in the house and immediately we're able to take prices up $5,000 or more. And so getting that feature level right, in Phoenix in particular, has been very constructive for our margins out there.

Operator

Our next question is from Joel Locker of FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just on your amortized interest, it's down about 300 basis points year-over-year, it's 3.2% versus 6.2% a year ago and was just wondering what you thought about, say, in a year where it would be? Will it stabilize around this 320 basis point level or would it drop further?

Robert L. Salomon

I think Joel, it's a good question and predicting interest is, how it flows, is difficult when you're growing the balance sheet. I think you'll definitely see continued reductions in direct interest expense. But I think on a go-forward basis, you'll see it in the range where we've been this year for next year.

Joel Locker - FBN Securities, Inc., Research Division

Right. And then just on your community count in the west, what was it down year-over-year? I know the company was down 18% but...

Allan P. Merrill

It was down by about 25%.

Joel Locker - FBN Securities, Inc., Research Division

About 25%. So that was the reason for orders being worse than -- or year-over-year or decline.

Allan P. Merrill

Yes, in fact, I'm excited about where community count is going to be, but yes, we were down significantly in a couple of markets out west, and that definitely made the orders in the quarter tougher. But it was one of those things, we knew it 6 or 9 months ago, which is why we were guiding to kind of having a flat year against a reduced community count this year.

Operator

Our final question comes from Alex Barron of Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to ask you in terms of -- since the rates -- if the rates don't come back down, would you guys consider at some point buying down your rates to help buyers kind of get what they were getting before, would that be possible?

Allan P. Merrill

It would be possible Alex, but that is not a contemplation right now. Not being in the mortgage business, I like the position that we have. I think having our preferred lenders in each community competing for the buyer's business is a great place to be. If we get to a totally different interest rate environment, my guess is, we'd see those lenders offering those kinds of programs in order to outcompete each other for the buyer's business, but I think it's pretty unlikely that we are going to use our capital to get into the market to kind of speculate in the direction of rates to try and capture some advantage. I'd rather the banks compete with each other to do that.

Alex Barrón - Housing Research Center, LLC

Got it. And then with regards to your REO rental business or I guess maybe [indiscernible] wasn't REO, it seems like the other guys that have gone public they haven't kind of turned a profit, and I'm not sure what your situation is, but I think it's pretty clear that home prices have gone up probably since you guys started because you guys were one of the early ones to get started in that business, so would you guys consider potentially selling your stake in that business or do you think you'll stay in it kind of for the longer haul?

Allan P. Merrill

It's a great question. We have no current intention to sell our stake. We like the portfolio very, very much. And I think they are running a nice business, and their operational metrics just continue to improve. Longer term, that business I expect goes public. I don't know when and then we'll have to evaluate what to do with our stake. But at this point, we're in the "just run the business and ignore the headlines." There's a quality business to be had owning recent vintage, newly built homes and renting them to families. And so we're sort of ignoring, and I don't mean to sound ignorant, but we're sort of ignoring some of the headline stuff and just running the business there.

Alex Barrón - Housing Research Center, LLC

Okay. And if I could ask one last one, you guys have like how many -- what percentage of your communities raised prices this quarter versus last quarter?

Allan P. Merrill

I don't have a percentage, but I would say, it is a substantial majority that either had base price increases or base price increases linked to feature changes or reductions in offered incentives, and we may play on any one or on all 3 of those levers. But I would tell you, I think it would be a very, very high percentage that did one or more of those 3 things.

Well, I want to thank everybody for joining the call. We're going to try and stay here right at an hour. Appreciate your interest, and we'll talk to you in about 90 days. Thank you.

Operator

Thank you for joining today's conference call. You may disconnect your phones at this time.

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