M/I Homes' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: M/I Homes, (MHO)

M/I Homes, Inc. (NYSE:MHO)

Q3 2013 Results Earnings Call

October 24, 2013 4:00 PM ET

Executives

Phil Creek - Chief Financial Officer

Bob Schottenstein - President and CEO

Tom Mason - Executive Vice President

Paul Rosen - President, Mortgage Company

Marie Hunker - VP, Corporate Controller

Kevin Hake - Senior VP

Analysts

Ivy Zelman - Zelman & Associates

Jason Marcus - JPMorgan

Alex Barron - Housing Research Center

Joel Locker - FBN Security

Operator

Good afternoon. My name is [Suzan], and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Mr. Phil Creek. Please go ahead, sir.

Phil Creek

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; and Marie Hunker, our VP, Corporate Controller; and Kevin Hake, Senior VP.

First, to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public items with you directly.

And as to forward-looking statements, we want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

With that, I'll now turn the call over to Bob.

Bob Schottenstein

Thanks, Phil. Good afternoon, everyone, and thank you for joining us today. We are very pleased with our results for the third quarter. Our results reflect strong performance on many fronts, including revenue, closings, income, sales, margins and backlog.

As reported this morning during the quarter, we achieved the following. 32% growth in revenue, 26% improvement in homes delivered, closing 937 homes in the quarter compared to 746 homes a year ago.

Pre-tax income of $13.8 million, 63% better than a year ago, it should be noted that the $13.8 million of income is net of $2.1 million of asset impairments and $1.7 million of charges we incurred that are non-cash relating to the early extinguishment of debt.

Other highlights include a 15% increase in new contracts, selling 869 homes during the quarter, compared to 757 homes a year ago. This marks our 10th consecutive quarter of positive sales comps. I will talk more about sales in a few minutes.

Gross margins for the quarter improved to 20% representing a 30-basis point increase over the 19.7% gross margins that we reported during the second quarter this year. At the end of the quarter, our backlog had a sales value of $488 million, 46% better than year ago and our units in backlog equaled 1,607 homes, 36% better than a year ago.

Our average sales price in backlog has increased from $284,000 a house a year ago to $304,000 a house at the end of the third quarter. Our strong operating results have contributed to our continued improvement in operating leverage. Specifically, our selling, general and administrative expense ratio declined to 13.2% of revenue, which is our lowest level since the fourth quarter of 2007.

Clearly this was a very solid quarter M/I Homes, allowing us to record the reversal of approximately $112 million of our deferred tax asset valuation allowance. This reversal resulted in net income for the quarter of $125 million, boosting our net worth to $480 million and thereby further strengthening our balance sheet.

With respect to our balance sheet, we ended the quarter with a substantial cash balance of $158 million, no borrowing under our $200 million unsecured revolving credit facility and a very healthy ratio of net debt-to-capital of 37%, which keeps us in a very good position for continued growth.

In that regard, during the quarter we successfully opened 17 new communities further enhancing our geographic diversification and increasing our community count to 147 communities at quarter’s end, which is 15% better than the community count one year ago. We remain on track to increase our community count by approximately 25% by the end of 2013. We are very pleased with the performance of our new communities.

Before I discuss the performance of our three housing regions, I do want to make some comments about sales and sales trends. There is no question that M/I Homes like other builders began to experience a slowdown in the rate of sales growth late in the second quarter. But fairly certain and meaningful increase in interest rates have began in May and June definitely impacted sales. And some of the slowdown was also attributable to seasonal factors, as well as select pricing increases in various communities.

Additionally, the effects of the government shutdown and the negative noise coming out of Washington have impacted consumer confidence and also contributed to uncertainty. The net effect of all of this is that sales have slowed.

Traffic both in our models and on the Internet remains very good. Many consumers are clearly more cautious and not moving as quickly when it comes to making a decision to buy. That said, we continue to believe that overall demand and the fundamentals for improving housing conditions remain in place.

The pace of recovery may be more moderate at first thought and at times, it may appear a bit uneven. But we remain optimistic about our ability to grow our business and continue to improve our profitability.

Now, I’ll take a few moments to talk more about our three regional housing markets and their performance. Beginning with the Midwest region, where we have homebuilding operations in Columbus; and Cincinnati, Ohio; Indianapolis, Indiana; and Chicago, Illinois.

Our closings on Midwest region were flat for the third quarter compared to the last year while new contracts were up 16% for the quarter. Out of the 937 homes that we closed during the quarter, the Midwest region accounted for 307 homes or one third of the total. This ratio has continued to decline, down from 53% of closings in 2009 to one third today as we have strategically and intentionally expanded and shifted our geographic footprint towards the Mid-Atlantic and south regions.

Our sales backlog in the Midwest was up 46% from the end of the last year’s third quarter and dollar value. And we increased our controlled lot position in the Midwest by about 900 lot or roughly 19% from one-year ago. We ended the quarter with 66 active communities in the Midwest, which is 14% year-over-year increase.

Next, the southern region which consists of Tampa and Orlando, Florida and our Texas operating divisions in Houston, San Antonio and Austin. We have also announced that we’re opening in Dallas but we’ve yet to crystally open for sale there and we’ll do so next year.

We continue to be very pleased with all of our Texas operations and our expansion into Texas as it is clearly contributing to our growth. We've also seen significant improvement in our Florida markets during the past 12 months and we are achieving solid results in both Orlando and Tampa.

We have been growing our position in all of these markets. We delivered 354 homes in the southern region for the quarter, a 59% increase from last year and 38% of our total volume, making the southern region our biggest region in terms of closings.

Our new contract increased 29% for the quarter. The dollar value of our sales backlog at quarter end was up 78% from a year ago in our southern markets. We increased our controlled lot position in our southern region by 4,200 lots, more than doubling our lot position from a year ago. And we have 46 communities in the southern region at the end of the quarter, which represented 35% year-over-year increase.

Finally, the mid-Atlantic region where we have operations in Charlotte, Raleigh and Washington DC, new contracts at mid-Atlantic were up 1% for the quarter, that’s 1% compared with 2012. Backlog value is up 23% at quarters end.

We delivered 276 homes in the mid-Atlantic region during the third quarter, representing a 28% increase from a year ago. We are very pleased with our DC, Charlotte and Raleigh operations as they have all been performing well. And we continue to look for good land and lot opportunities there in order to further grow our positions in these markets.

At the end of the quarter, we had 35 active communities in the mid-Atlantic region, down slightly from last year, approximately 3%. And despite the slight drop in community count, our total control lots of the Mid-Atlantic region at quarter end still increased by 62% from a year ago.

In closing, let me just say that we are poised to have a very solid 2013, as we remain focused on increasing our profitability, improving our returns, growing our market share, expanding our community count and carefully and thoughtfully investing in attractive land opportunities.

And with that, I'll turn things over to Phil.

Phil Creek

Thanks, Bob. New contracts for the third quarter increased 15% to 869, with the net absorption rate of 2.0 sales per community per month. Our traffic for the quarter was up 14%. Our sales were up 10% in July, up 12% in August and up 25% in September, as to our market profile, 41% of our third quarter sales were the first time buyers compared to 38% in the second quarter, and 45% of our third quarter sales were specs, the same percentage as the first and second quarter.

Our active communities increased 15% from 128 at the end of September last year to 147 this year. The breakdown by region is 66 in the Midwest, 46 in the South and 35 in the Mid-Atlantic. During the quarter, we opened 17 new communities while closing 10. Our current estimate is to end the year with about 25% higher count when we begin 2013.

We delivered 937 homes in 2013 third quarter, delivering 56% of our backlog this year compared to 64% a year ago. Our cycle times have increased slightly, due primarily to sub-supplier issues and slower local permitting processes. Our average closing price for the third quarter was $284,000, a 7% increase over last year's $266,000 and our backlog average sale price is $304,000.

Revenue increased 32% in the third quarter compared to last year, as a result of both the increase in deliveries and the average closing price along with strong results from our financial services operations. In the third quarter, we recorded pretax charges of $2.1 million for impairments. These third quarter charges were for older land assets in our Midwest markets.

We continued to work through these older assets. We are currently down to less than 10 older Midwest communities. Our gross margin was 20% for the quarter, improved sequentially from 2013 second quarter of 19.7%. Excluding impairments, our third quarter GPs were 20.7% compared to 19.8% in 2012 third quarter.

Land gross profit was $669,000 this quarter for the nine months ended September 30, ’13. Land sale profit was $3.2 million. We sell land as part of our land management strategy. Our SG&A expenses decreased to 13.2% of revenue for the quarter, compared to 14.7% a year ago, 150 basis points drop.

Our SG&A expense increased 18%, reflecting our 32% revenue increase and also our significant community count growth. Interest expense decreased $550,000 for the quarter, compared to the same period in 2012, an increase of $120,000 for the first nine months of this year. While interest incurred, increased by $657,000, our rate of capitalization increased due to higher land development activity when compared to a year ago.

Pretax income for the quarter was $13.7 million and included $2.1 million for asset impairments and $1.7 million non-cash charge related to a loss on early extinguishment of debt. Excluding these charges, pretax income for the quarter from our operations was $17.5 million.

We generated $27 million of EBITDA for the quarter and covered interest at 3.1 times for the trailing four quarters. We have $14 million in capitalized interest on our balance sheet compared to $15 million at year end 2012, about 1% of our total assets.

Net income for the quarter was $125.3 million and included a $111.6 million accounting benefit related to the reversal of a majority of our deferred tax asset valuation allowance. Excluding the reversal of our deferred tax asset valuation allowance, our net income totaled $13.7 million and this compares to a net income of $8.3 million for the third quarter last year.

During the quarter, we concluded that it is now more likely than not that we would realize the majority of our deferred tax assets. Accordingly, the company reversed a $111.6 million of this deferred tax asset evaluation allowance during the third quarter and retained a $4.7 million valuation allowance for estimated utilization pertaining to fourth quarter 2013 earnings.

In addition, we retained an additional $10.2 million valuation allowance for certain state jurisdictions. Our earnings per diluted share for the quarter exclusive of the $3.75 per share benefit related to the deferred tax evaluation allowance reversal, was $0.47 per share. This per share amount also reflects a $1.2 million reduction from net income related to dividends paid to our preferred shareholders during the quarter.

In addition, our diluted share count assumes the conversion to both of our outstanding convertible debt issuances, adding about 5 million shares to our diluted outstanding shares but also eliminating $1.4 million of interest expense in the third quarter, associated with the convertible notes from our diluted EPS calculations.

Paul Rosen will now address our mortgage company results.

Paul Rosen

Thanks, Phil. Our mortgage and title operations pretax income for the third quarter was $3.5 million which is the same as 2012’s third quarter. Our third quarter results includes an increase in loans originated from 606 to 689 in higher average loan amounts, but were offset by lower margins on loans sold and the continued shift in product mix from FHA to conventional. We continue to benefit from increased revenue on the servicing value of our loans on which we have retained servicing.

The loan-to-value on our first mortgages for the third quarter was 86% in 2013, compared to 88% in 2012s third quarter. We continue to see a shift towards conventional financing, 66% of the loans closed were conventional and 34% were FHA, VA. This compares to 58% and 42%, respectively for 2012’s same period.

Overall, our average mortgage amount increased 5% from $240,000 in 2013’s third quarter, compared to $229,000 in 2012’s third quarter. The average borrower credit score on mortgages originated by M/I Financial was 734 in the third quarter of 2013, compared to 738 in 2013 second quarter. Our mortgage operation captured 81% of our business in the third quarter, compared to 2012’s, 85%.

At September 30, 2013, we had $28 million outstanding under the M/I Financial credit agreement, which expires March 28, 2014 and $8 million outstanding under our separate $15 million repo facility which expires November 12, 2013. We are currently in discussions with the lender to increase and extend the repo facility.

In the normal course of business, we receive inquires from investors concerning underwriting matters on specific mortgage they have purchased from us. We thoroughly review and respond to each inquiry and in some situations we engage in independent third party to review the files and information related to the origination of the mortgage in question. Our reserve at September 30, 2013 with respect to these matters was $2.6 million compared to $2.3 million at December 31, 2012. M/I Financial has not repurchased any loans this year.

Now, I’ll turn the call back over to Phil.

Phil Creek

Thanks, Paul. As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing in new communities while also managing our capital structure. Total homebuilding inventory at 9/30/13 was $676 million, an increase of $132 million above September 8, 2012 levels, primarily due to higher investment in our backlog and our increased land spend.

Our land investment at 9/30/13 is $296 million, a 32% increase compared to $224 million a year ago. And at 9/30, we had a $176 million of raw land and land under development and a $120 million of finished unsold lots. We owned 2,450 unsold finished lots with an average cost of $49,000 per lot and this average lot cost is 16% of our 304,000 backlog average sale price. And the market breakdown of our $296 million of unsold land is a $101 million in the Midwest, a $108 million in the South and $87 million in the Mid-Atlantic.

Lots owned and controlled as of 9/30/13 totaled 18,100 lots, about half of these lots were owned and half under contract. Our owned and controlled lots of 18,100, is an increase of 62% versus a year ago. We own 9,100 lots of which 37% are in the Midwest, 40% are in the South and 23% are in the Mid-Atlantic. We believe we have a very good solid land position. 32% of our owned and controlled lots are in the Midwest, 42% of our land is in Southern region and 26% is in the Mid-Atlantic.

During 2013’s third quarter, we spent $56 million on land purchases and $31 million on land development for a total of $87 million. Year-to-date, we have spent $224 million on land purchases and land development. And as to our 2013 land purchases year-to-date, about 47% of the purchased amount was raw land and 53% were finished lot pickups under option contracts and bulk finished lot purchases.

Our estimate today for total 2013 land purchase and land development spending is $300 million to $350 million, which includes the $224 million we have spent year-to-date. At the end of the quarter, we had a $110 million invested in specs, 249 that were completed and 573 specs under construction. This translates into about 5.6 specs per community.

And of the 822 total specs, 301 are in the Midwest, 285 are in the Southern region and 236 are in the Mid-Atlantic. At September 30, 2012 we had 673 specs with an investment of 82 million. Our financial condition continues to be strong with a $158 million of cash, $480 million of equity and a net debt to cap ratio of 37% and the company had no borrowings under our unsecured credit facility.

This completes our presentation. We will now open the call for any questions or comments.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Thank you. Good afternoon, guys. Congratulations on a great quarter. I have several questions but how we go back in the queue to make sure that everybody else gets the turn. But just a thought, Bob, can you talk about the sustainability of the gross margins at 20%, if you think those margins aren’t sustainable and how do you compare the new community gross margins to the existing communities just for comparison purposes in light of the idea that sales trends are slowing and there is some investor or some competitors using incentives and want to get your thoughts on incentives? A lot to chew on if I guess.

Phil Creek

First of all, thanks for your comments and really good question. Our new communities typically have performed from a margin standpoint anywhere from 200 to 400 basis points better then what we used to call our legacy communities, we used to provide a little more detail on that, perhaps, two quarters, three quarters ago and certainly in the calls from last year. We don’t provide as much detail on that anymore because we gradually worked our way through most of the legacy communities.

In terms of future margins, we do think that there is still some opportunity for our margins to improve, with the uncertainty right now, in terms of sales and we’re starting to see some incentivizing occurring in select sub-divisions, frankly, by all builders in the various markets that we’re in.

There will no doubt be some margin pressure. I think it would be unwise to assume that there won’t be some. But we think that, as I said before, the long-term fundamentals are good, demand is good. We think this cause will eventually unlock itself and buyers will come back.

Well, we see the same level of price appreciation that we saw during the first four, five months of this year, don’t know if it will be that much. But we would expect our margins to continue to go up, exactly how much remains to be seen and I wouldn’t feel comfortable forecasting that. But I don’t feel if our margins have leveled off, we would expect them to go up.

Ivy Zelman - Zelman & Associates

That’s very helpful. And let me just ask one more question. As it relates to interest rate, you said that, the impact from rising rates, clearly were felt throughout your portfolio of operations? Now with interest rates achieving back the other way, we do expect that to be a benefit and of the further operations of the first time buyer, did you feel more disproportionately on the affordable products unless they want to move up, maybe in terms just help on breaking down where the impact was the greatest and what do you think with rates coming lower if that will be a catalyst?

Bob Schottenstein

The short answer is, when rates fall it’s always a good thing and I am sure, they’ll help a little bit. In terms of impact on buyers, Paul Rosen who is sitting here, he is maybe a little bit closer to the mix than me, I’m going to -- I am looking at Paul to answer that question. I think he can answer more accurately.

Paul Rosen

At most the increased in rates have a very marginal affect on the ability of our buyers to qualify both first time buyers and move up buyers. So the movement down in rates, I don’t know that we’ll really see much of the difference. Our buyers have not had a hard time qualifying for mortgages.

Ivy Zelman - Zelman & Associates

Great. But, Paul, the impact that Bob focused on the slowing sales pace have attributed to rate rising and so we wait for rising and if didn’t have an impact on affordability all of us confused?

Bob Schottenstein

I think you get in to buyer confidence, I think that was some of the issues that us closer the business when rates were so low historically, we didn’t think much about it, but for people close to it to see that big of a jump, it just cost them to pause a little bit. And I think there was also built in there just at the time of the year, the summer months, and they have some seasonality as far as slower sales, then you get into some of the other issues as far as the issues in Congress and D.C. and some of those things.

I also think that if you look at us in particular, I mean our sales, the first two quarters of this year were up 30% plus. We have a lot stronger sales in the first two quarters than we thought we would have -- may be we also put a little bit of demand forward, who knows. But we still feel very good about, what our sales pace has been this year and still having sales up 15% a quarter, I mean, we feel okay about that.

Ivy Zelman - Zelman & Associates

And so lastly on the community counts also you guys have had, you mentioned the progression of the orders during the quarter of the 17 communities that you open where they disproportionably waited in September because where you saw the greatest level year-over-year change in orders?

Bob Schottenstein

When you look at community count increase you kind of always tend to have more opened [kind of that] end of the quarter. Therefore, with us to where we count community this, when we get a community open, we count it. It does have matter. It’s a model open or whatever, we still count it.

We do anticipate opening 20 plus communities in the fourth quarter and for the year, we’ll have the most increase in communities in the south region. Some people today have asked about sales pace, if you look at our sales in July, August and September, they were really pretty consistent. Our sales were between like 275 and 300 each month July, August and September…

Phil Creek

The growth percentage in September was higher because we were dealing with little bit better comp, I don’t know if there is anything to be glean from the fact that their percentage growth rate was higher in September than August and July.

Bob Schottenstein

But our pace was about the same all three months.

Ivy Zelman - Zelman & Associates

Okay. Great. I will get back in queue guys. Congratulation again. Thank you.

Bob Schottenstein

Thanks.

Operator

And your next question comes from Michael Rehaut.

Jason Marcus - JPMorgan

Hi. This is actually Jason Marcus in for Mike.

Bob Schottenstein

Hi, Jason.

Jason Marcus - JPMorgan

My first question relates to the land market. I was just wondering if you could provide some perspective around what you have been seeing recently in land market in terms of the competition and the pricing and especially what kind of what you’ve seen following the rise in interest rates and if it had a material impact?

Bob Schottenstein

These are all really great questions. First of all, our objective on any land deal is to try to secure, what we consider to be a premier location that meets our minimum underwriting. And the interest in those deals and the market that we’re in remains very competitive.

I think that there has been some inflation in the minds of sellers. Prices on land have gone up. We’re actually, when you look at the lots that we own and we control and what we believe to be the reasonable ability for our company to grow over the next several years, we’re in very good shape today. And the longer stuff we’re looking at right now would be things that will generate for the most part sales and closings not in 2014 but really mid 2015 and beyond.

We feel, Phil, made this point, we only control over 19,000 lots. We’ve improved our lot land position by over 62% from a year ago. We believe we can continue to grow our community count in our market share. All based upon the underlying notion that homebuilding from a macro standpoint will continue to improve and that we can capture at least our fair share that growth, whether its in the 10% or 20% growth range, remains to be seen. But we think that that there is that opportunity and what we have out in front of us that we own and control today will allow us to do that

Paul Rosen

And I’ll give you a couple more pieces of information, we talked about overall today owning and controlling over 18,000 lots, which is about 60% higher than a year ago. If you look at the owned lots, a year ago we own 62,000 lots, today we own 9,100.

So our own lots are up 47% and again about 2,500 of those are finished. So we feel pretty good about that. We are seeing more what we call a location opportunities be in the all end side and again we talked about year to date all end deals being 47% of our purchase amounts.

So, that’s been a little bit of a change for us, but again…

Bob Schottenstein

It also varies, Jason, very much market to market. As we look at where we sit and where we can grow. In some markets there has been much greater opportunity for us to secure the pieces that allow for perhaps more robust divisional growth than this is all it, I mean, you already know this, but just can’t look at all the markets for same.

Jason Marcus - JPMorgan

Okay. And then next question regarding pricing, in terms of true price versus kind of a mix shift maybe this to higher end homes? How much of the increase in ASP during the quarter, would you quantify it kind of a true price increase?

Phil Creek

That’s always hard to say, if you look at, our backlog today being $304,000, that’s the highest backlog, average sales price we’ve had since 2007. If you also look at our prices across the Board in backlog in Mid-West is up from $267 to $296, the southern region from $263 to $287, the Mid-Atlantic from $330 to $340.

So we feel good that we have been able to answer our prices up. Are we going to be faced with some other people have talked about some higher land cost going down to road probably a little.

But again our sweet spot tends to be more first, second move up anyway. So we definitely try to pay attention to that, release fewer number of lots as we open communities, try to be very careful, where we place our specs in our communities.

The cost increases have not been in the last quarter what they have been that’s been slowing down some and there are some certain challenges, there is labor issues and taxes trying to keep some jobs and some of those things. But, overall, we feel pretty good about. We've been able to raise prices where it does make sense.

Jason Marcus - JPMorgan

Okay. Then lastly, now that most of the DDA valuation allowances has been reversed? How should we think about tax rate in the fourth quarter and then kind of on run rate basis for the next year?

Marie Hunker

This is Ann Marie. The tax rate in the fourth quarter will probably be around zero percent effective tax rate because that’s how GAAP work, you will have to do inter period tax allocation when you reverse these things. Going into 2014 you can expect kind of a statutory rate of around 38%, give or take 2% just depending on how operations work.

Jason Marcus - JPMorgan

Okay. Great. Thanks.

Bob Schottenstein

Thank you.

Operator

Thank you. Your next question comes from Alex Barron with Housing Research Center.

Alex Barron - Housing Research Center

Hello. Hi, guys.

Phil Creek

Hey, Alex. How are you?

Alex Barron - Housing Research Center

I wanted to just kick your bigger thoughts on the direction of home prices? I mean if the market has kind of slowdown, what give you guys confidence to keep raising prices or do you think we’re going to see prices flatten out, or do you actually see the potential that prices may have to pull back a little bit to make up for the increase in rates as, especially as you have noted that most other builders have become very prompt to give incentives?

Bob Schottenstein

I think that, I’m not sure that I here to say that we are raising prices. But, because that, where that is occurring is on the very select community -- by community basis, across the Board we would not make that statement.

Certainly, the pull back in demand and this recent slowdown in sales, I think it’s going to result in the moderation of price increases. The comment that we made relative so we think we can continue to grow margins, is more borne out of the fact that we continue to be opening more and more new communities where we just simply believe that those communities can sustain the margins that we have underwritten the math which will help lift our overall margins.

Paul Rosen

I think, after all you have to pay attention that what markets the builder there in, I mean, some builders are operating then they, today in the California, in the Arizona and some of those things where the markets are probably hotter, seem to be having more signficnat price increases than we are, our average sales price is up 7% year-to-date.

Alex Barron - Housing Research Center

Okay. Great. And in terms of, have you guys rolled out any incentives and if so, what form, is it options or closing cost or rate by downs or what?

Bob Schottenstein

The short answer is, yes, and it’s a combination and it’s not across the board, it’s market by market and even within each market. It depends upon the community. Some community says they no incentivizing and other there has been and it’s something there is in the community center.

Alex Barron - Housing Research Center

Got it. And then you also mentioned something about charge for extinguishment of debt, but I was looking at your balance sheet and I couldn’t figure out what debt, because I don’t seem any levels of last quarter, so may be I missed it?

Kevin Hake

Yeah. Alex, this is Kevin. We put in place a new three-year unsecured revolving credit facility for $200 million in the board and in conjunction with that replace the prior credit facility we still had about a year and half to go to maturity. So we had expense the remaining unamortized piece when we booked these facilities amortizing over the life.

Alex Barron - Housing Research Center

Okay. Got it. Okay. That makes sense. Thanks.

Bob Schottenstein

Thank you.

Operator

Thank you, gain. (Operator Instructions) And your next question comes from Joel Locker with FBN Security.

Joel Locker - FBN Security

Hi guys.

Bob Schottenstein

Hey Joel.

Joel Locker - FBN Security

Just on the G&A was better than I expected at least just kind of holding steady there and I was wondering, how you looking at that going forward, I know you had a lot of the tax expansion expenses in there and I guess, number one the fourth quarter you had a bump last year. I think that might have been because of stock comp. And do you expect a similar increase in the fourth quarter and then what do you expect for 2014?

Bob Schottenstein

Let me make one comment about it. And then I’m going to ask Phil to may be provide a little more color. We’ve said this during the last couple of calls. We’re currently operating in 12 divisions and more than two or three of them are still relative startups where you don’t have on a division basis for kind of operating leverage that you’d like to have once you achieve a more meaningful level of volume. So that has been a drag on -- on SG&A.

And then the other thing is just getting our volume backup to where we would expect it to be, opening up 25% year-over-year -- increasing rather new communities 25% year-over-year is at additional -- at least current year expense, which slightly drags it. As our business continues to grow, we expect it to.

We will expect to get more operating leverage and certainly, as we enter into our second, third and fourth years in operating in the Texas market. Dallas would be brand new next year too. But we won’t have two or three core new market. So we would expect all that to contribute to what should be better operating leverage. Phil, I don’t know if you have anything you want to add that.

Phil Creek

Yes gentlemen. We were pretty pleased to imprint 150 basis points down from 14.7 to 13.2. You are right last year in the fourth quarter, we were over 15%. As Bob said, we know we continue to work very hard on that. We don’t give any specific projections on those numbers but we do expect to -- to continue overtime to get continued improvement in SG&A leverage.

Joel Locker - FBN Security

Okay. And what about the Texas market overall, just -- I know you’re expanding there on the land side of it. Have you seen any private builder competition or you said it was competitive overall into the company but just -- just what you’re seeing in Texas and the trajectory of land prices here over the last three months?

Bob Schottenstein

We opened up in Houston in 2010, San Antonio in 2011, Austin within the last 90 days. We’ll open in Dallas next year. So we’re still a relative new comer but the one thing we have seen is a greater need for us. And I think this is shared by other builders. So I know we’ve seen an order to secure the premier locations.

There’s less third party developers out there developing lots that we would find suitable. And there’s been a greater need to take on raw land and development risk associated with growing the operation there. And particularly some of the larger master plan communities start to wind down. So that’s what we’ve seen and the competition comes from the fact that the markets that we’re in are -- they are very competitive than virtually all the publics and some fairly large privates are there.

Joel Locker - FBN Security

Right. I guess last question on, let’s say, on your communities that were opened for the whole quarter from June 30 to September 30. What percentage would you say you raise prices or lowered incentives versus any -- actually you increased incentives or lowered prices?

Phil Creek

I would say with the new community that we opened, as Bob said earlier, we are really pleased with their performance from a margin standpoint and a pay stand point. So there is not very few -- many battles where we’ve had to do incentives or playing quite bet to any degree.

Joel Locker - FBN Security

Well, certainly, it’d be the existing community, not the new ones but existing that -- say have been open June 30 to September 30 like, what percentage of those did you increase prices or…?

Phil Creek

In the last 90 days, very few.

Joel Locker - FBN Security

All right. Thanks a lot guys.

Operator

Thank you. We have a follow-up question from Alex Barron.

Alex Barron - Housing Research Center

Thanks. I was hoping you guys could maybe elaborate a little bit more on your backlog conversion or I guess you talked about in terms of cycle time but I m just trying to figure out there is more of a temporary thing you think or more of a permanent structure that fewer homes are coming up from backlog into delivery within the timeframe that you used to take before?

Phil Creek

I said something, we work on everyday. We have been historically worked harder than we are now. Of course, also historically we haven’t seen more specs also. So the short answer is we keep thinking this is going to go up a little bit. Our conversion rate we are working very hard on our cycle time but in certain markets, Texas for instance, there is an issue with supply of this subcontractors. So don’t have any projection for you but it something we definitely are working on and trying to improve.

Alex Barron - Housing Research Center

Yes. I guess, I had -- given that orders, we saw in the last couple quarters that the deliveries would have been somewhere in that ballpark. So I am kind of wondering if they are just going to shop in the fourth quarter or is this just more …

Phil Creek

Well, we obviously hope to close the line out within the fourth quarter using that if there are big hits quarter whatever. And again, we’re hoping to get more of that backlog delivered and so forth.

Alex Barron - Housing Research Center

And in terms of the remaining detail, you weren’t unable to reverse this quarter. Is that something we should expect for next quarter or you think more like into the next year?

Phil Creek

Well, we made the comment in the call that we reversed to $112 million and we retain $5 million for estimated utilization for the fourth quarter of ‘13. And then the other $10 million at DTA is out there for certain state this year. So hopefully, we’ll be getting traditional pieces out there in next few quarters.

Alex Barron - Housing Research Center

Okay. Great. Thanks Phil.

Operator

Thank you. There are no further questions in queue. Please proceed.

Bob Schottenstein

Thank you very much for joining us.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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