Standard Pacific Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: CalAtlantic Group, (CAA)

Standard Pacific (SPF) Q3 2013 Earnings Call November 1, 2013 12:00 PM ET

Executives

Scott D. Stowell - Chief Executive Officer, President, Director and Chairman of Executive Committee

Jeffrey J. McCall - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Ivy Lynne Zelman - Zelman & Associates, LLC

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

Michael Dahl - Crédit Suisse AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Freda Zhuo - Barclays Capital, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Brendan Lynch - Sidoti & Company, LLC

Michael A. Roxland - BofA Merrill Lynch, Research Division

David Neil Williams - Williams Financial Group, Inc., Research Division

Operator

Good morning, and welcome to the Standard Pacific Homes 2013 Third Quarter Conference Call. Today's conference is being recorded.

Before we begin, I would like to direct your attention to the company's Safe Harbor statement and remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading Risk Factors. A question-and-answer period will follow today's prepared remarks. A recording of today's presentation will be available for replay a few hours after this call ends, and will continue to be available on the company's website for 30 days.

At this time, I would like to turn the call over to Scott Stowell, President and CEO. Please go ahead.

Scott D. Stowell

Thank you, Justin, and good morning, everyone. Jeff and I want to thank you all for taking the time to join us today for the Standard Pacific Homes 2013 third quarter update.

Let me begin by providing you our view on the housing market. Rapid home price appreciation, increased interest rates, and economic and political uncertainty have all contributed to an environment that has impacted consumer confidence and tempered the robust demand we experienced during the first half of the year. For those of us focused on the move-up market, where purchasing a new home is often a discretionary choice rather than a necessity, these conditions have translated into a lack of urgency as many potential buyers appear tentative and are delaying making a new home purchase.

We have always maintained that the housing market recovery would likely be an uneven one, and that there would be bumps along the road to recovery. While we are certainly experiencing a few of those bumps now, when looking longer-term, we continue to maintain a cautious but positive outlook.

The fundamentals for housing still look good. Inventory is tight, with limited entitled and developed land in the A locations we target, which should result in continued pricing power and increased absorption over time. Affordability remains high as interest rates remain historically low and new households are projected to be formed at rates that exceed the number of new homes being built for the remainder of the decade, creating a supply-demand imbalance that should favor homebuilders.

With the discipline to execute our strategy and the strong land position we've acquired, I believe Standard Pacific remains well-positioned to take advantage of the long-term housing recovery. The benefit of our long-term strategy continued to unfold as disciplined land buying are up-market focus and new home designs all led to a solid third quarter performance.

Net income for the 2013 third quarter was $58.9 million or $0.15 per diluted share as compared to $21.7 million or $0.05 per diluted share for the 2012 third quarter on revenues of $511 million, which were up 61% year-over-year. Pretax income was $70.1 million, up 220% from the $21.9 million achieved during the prior-year period.

Net new orders were also up 12% as compared to the 2012 third quarter, resulting in a 55% increase in the number of homes and a 93% increase in the dollar value of our backlog as compared to the prior-year period. The 1,217 deliveries we generated during the quarter represented our highest level of quarterly delivery activities since the second quarter of 2008. Driving these solid financial results were increases in both our average selling price and our gross margin from home sales. Our average selling price of homes delivered for the quarter was $420,000, a 14% increase from the prior-year period. And our gross margin from home sales was 25.3%, a 510 basis-point increase when compared to the same period. This gross margin strength also helped to drive our industry-leading operating margin, which stood at 13.2% for the 2013 third quarter, a 660 basis-point improvement over the prior year.

The significant increase in our gross margin reflects the continued execution of our value proposition. The acquisition of well-located land, thoughtful community layouts and all new home designs that appeal to today's move-up homebuyer have all led to our ability to, community-by-community and lot-by-lot, tactically raise sales prices and reduce incentives as demand warrants.

During the third quarter, despite the headwinds I described earlier, we were able to raise base prices at over 68% of our communities, with same-store ASPs from home sales up 19% year-over-year and 1% quarter-over-quarter. As a result of this pricing discipline, we ended the quarter with an ASP and backlog of $445,000 and an estimated backlog gross margin of 26.7%. As we have said repeatedly, our objective is to maximize the value of every single homesite that we own. To that end, we will continue to set pricing in our market, emphasizing margin over sales pace, particularly in what we continue to believe are the early stages of this housing recovery.

Turning now to land, we are targeting a total 2013 land spend in the $700 million to $850 million range. During the quarter, we spent nearly $142 million on land and land development. As we move forward, we will continue to strategically acquire land, including through the acquisition of builders and larger land portfolios when those opportunities meet our underwriting criteria. And as we noted last quarter, we intend to continue to capitalize on the early mover advantage we have earned in the land market, focusing our division leadership on creating value through longer-term land opportunities that leverage our master plan and development capabilities.

We averaged 168 active selling communities for the quarter, up 8% from the 2012 third quarter and ended the quarter with 168 active selling communities. For the year, we remain on track with our anticipated overall mid-single digit increase in average community count. By quarter, year-over-year average community count was flat in the first quarter, up 4% in the second quarter, up 8% this quarter and is expected to be at low teens in the fourth quarter.

Looking a little further ahead, we are projecting average community count growth for 2014 to be in the low to mid-teens. We own or control 99% of our expected average selling communities for 2014 and over 95% for 2015. In total, we own or control roughly 189 communities that are scheduled to open in 2014 and beyond.

As we head into Q4, maintaining our view that land is our most valuable asset and recognizing typical seasonality and an expected continuation of the more tempered selling conditions we experienced in the third quarter, our division teams will be working to maintain a minimum sales rate at our slowest selling communities of between 1 and 2 homes per month. Our view continues to be that our land assets are too hard to replace and rather than using large margin-eroding incentives to capture homebuyers in the short term, we will remain patient, focusing on our long-term strategy of maintaining margin over sales pace. Additionally, October orders were more trick than treat and came in at 294, further evidence that the softer sales environment experienced in the third quarter carried over until October.

I'd like to walk you through some more detailed regional information on Q3 sales. On Slide 4, we break down our third quarter order activity across our 3 regions: California; the Southwest, which includes Arizona, Colorado and Texas; and the Southeast, which includes our divisions in the Carolinas and Florida. As noted earlier, our net new orders grew 12% company-wide. But as you can see in the upper left-hand graph, by region, the order growth varied quite dramatically.

To get a better picture of the order performance across the regions, it is important to factor in the change in community count and focus on the order absorption rate. Across the company, order absorption rate was up 4% year-over-year, but varied greatly by region, up 34% in the Southeast to down 17% in the Southwest. California remains our fastest-absorbing region at 2.7% despite being down 4% year-over-year. California is really a story of north versus south, with Southern California absorption rates up 28% to 3.3% and Northern California absorption rates down 44% to 1.7%.

Our average selling price of net new orders is up 23% across the company and ranges from the Southwest, up 17%, to the Southeast, up 42%. The change in ASP is heavily mix-dependent and reflects real pricing power and the impact of community mix. To provide more color on real pricing power, we provided a same plan ASP view at the bottom right-hand graph. While the data supporting this graph is much more limited and only represents the ASP changes for the 408 homes where the same model in the same community sold in both the third quarter of this year and the third quarter of last year, we believe it provides a meaningful view on real price changes and is less impacted by mix.

California continues to lead the way with its ASP up 28% in total and up 26% on a same-store basis. While we are achieving solid same-store ASP increases in the Southwest and the Southeast, up 12% and 9%, respectively, the ASP growth in these regions is being positively impacted by product mix shift to more higher-end, move-up and luxury homes. This is particularly evident in the Southeast, where the order ASP is up 42%, with same-store ASP up only 9%.

Now I'd like to turn the presentation over to Jeff, who will share a few more details about our financial performance before we turn to your questions.

Jeffrey J. McCall

On Slide 5, we break down our deliveries in a little more detail. As mentioned earlier, deliveries in the third quarter were up 41% versus the prior year. The key drivers to deliveries are beginning backlog and the amount of homes sold and closed in the quarter. Our backlog in terms of number of homes is up 55% versus prior year and up 93% in dollar value, its highest quarter-end value since the third quarter of 2007.

Of the 2,165 homes in backlog as of September 30, 1,314 homes are currently scheduled to close in the fourth quarter. As Scott mentioned earlier, the estimated gross margin of all of our homes in backlog at the end of the third quarter was 26.7%. For those homes in backlog expected to close in the fourth quarter, the estimated gross margin was 26.5%. We expect the 1,314 will be adjusted down due to cancellations and changes to the targeted closing dates of homes currently in backlog. Over the past 8 quarters, that downward adjustment has averaged about 15.5%. From that number, we add the number of specs sold and closed in the quarter to get to Q4 deliveries.

On average, over the past 8 quarters, we have sold and closed about 230 specs in their respective quarter. The number of specs sold and closed in the third quarter was 42% below the trailing 8-quarter average. This was partially due to the limited amount of completed specs to choose from when we started the third quarter and also reflective of the general slowdown in orders seen across the industry.

With the slowdown in order growth throughout the industry in the third quarter, there has been a lot of discussion on incentive trends and what various builders are doing to capture their share of the shrinking buyer pool. On Slide 6, we highlight our incentive trends over the past 8 quarters. The dark blue line represents the incentive levels baked into our deliveries and is the incentive level often quoted by the builders. This incentive in our deliveries for the third quarter of 2013 were approximately 3.0%, down 250 basis points from the same quarter prior year.

It is important to note that the incentive trend in deliveries most often reflects the impact of orders placed 3 to 6 months ago. In our opinion, this trend is less telling than the incentive trend in orders, which is represented by the light blue line. After 10 consecutive orders (sic) [quarters] of declining incentives, we did see a 30 basis-point increase in incentives in the third quarter of '13 versus the second quarter of '13. But this was still down 210 basis points from the third quarter last year.

Scott touched on it earlier, and on Slide 7 I provide additional color around our pricing and incentive strategy. While our pricing is truly done on a community-by-community, homesite-by-homesite basis, we have also asked our division managers to abide by the Goldilocks rule regarding absorptions. Push price when absorption rate exceeds 3; carefully examine price when absorption falls below 1.5; and stay the course with moderate price increases when absorbed rates are just right between 1.5 and 3. To illustrate the Goldilocks rule for you, we divided our communities into 3 general categories on the right-hand side of Slide 7. The too fast communities, the too slow communities and, of course, the just right communities.

As the market was taking off over the past few quarters, we spent a lot of time talking about the communities that were absorbing too fast. If a community fell into the too fast category, absorbing at a rate above 3 per month, we pushed price aggressively. Now when we talk about pushing price, what we are really interested in is net pricing. Net pricing is base price plus premiums and option upgrades less all incentives. The first opportunity to push price is to reduce incentives. As shown on Slide 6, we have generally done a good job with this.

Next, maximizing lot premium and option revenue, this requires the community-by-community, homesite-by-homesite focus we always talk about as being so important. And then last, you push the base prices. During the first quarter, we raised base prices on 94% of our communities, 87% in the second quarter and 68% in the third quarter. As illustrated on Slide 7, 19% of our communities fell within the too fast category in the third quarter. We plan to continue to push net price at these communities.

You will note that California continues to occupy the majority of this category. While California represents about 29% of our community count, it represents over 43% of the too fast category. Our aggressive pricing, combined with increases in interest rates, typical seasonality and a general market uncertainty has reduced the size of this category. In the first quarter of this year, 35% of our communities fell into this category compared to only 19% in the third quarter. The markets with the highest percent of the communities in the too fast category are Southern California and Arizona.

On the other side of the spectrum, we have the too slow category. When a community falls into this category, our goal is to find the price at which the absorption rate can be increased to at least 1.5 per month. The price analysis is the same as in the too fast category. Start with buyer and broker incentives, then consider lot premiums and, at last resort, consider adjusting base prices.

In the third quarter, we decreased base prices on all plans in 2 communities, and on 6 select plans within an additional 4 communities. In all cases, the adjustments to base prices gave back recent price increases that may have been too aggressive. In no case did we decrease the result. Excuse me, in no case does it decrease the results in base pricing lower than where we started the second quarter.

The population of communities in the too slow category has grown over the past few quarters, with 43% of our communities in the third quarter compared to 28% in the first quarter. The markets with the highest percentage of communities in this category are Northern California and Colorado. The strategy for communities in the just right category is pretty straightforward. Stay the course, modestly adjust net pricing as appropriate, and make sure you are establishing appropriate lot premiums for each site.

On Slide 8 we provide a breakout of our SG&A in the 4 categories, G&A, insurance, incentive compensation and selling expenses. Overall our SG&A as a percentage of revenue dropped to 12.1%, improving 150 basis points over the prior-year period due primarily from the 61% increase in our home sales revenue. The main SG&A leverage came at our selling expense, down 60 basis points year-over-year as we are constantly fine-tuning our co-broker strategy on a market-specific basis and the leverage inherent in our G&A structure down 67 basis points. On a nominal dollar basis, our G&A increased $7.1 million on a revenue increase of almost $194 million. Insurance should remain variable at about 1% to 1.2% of revenue and incentive compensation is expected to remain at about 7% to 8% of EBITDA.

On Slide 9 we highlight our land acquisition and development spend over the past several quarters. In Q3, we spent $69 million on land acquisition and $73 million on land development. As Scott mentioned earlier, we continue to target a total 2013 land spend in the $700 million to $850 million range, $225 million to $275 million of which relates to anticipated development spend in the year. We ended the quarter with approximately 36,000 lots owned and controlled, an 18% increase over the third quarter of last year. Approximately 23% of the 36,000 lots are controlled under option contracts.

With that, I will turn the presentation back to Scott for his final remarks before we open up the call for questions.

Scott D. Stowell

Thank you, Jeff. In closing, we believe we're moving into the next phase of the housing recovery, which will be characterized by a more modest pace of growth and home price appreciation. As we transition into this next phase, execution will matter more than ever, especially during periods of uncertainty and waning confidence like we're experiencing now. It is in the slide that I'd like to recognize our Standard Pacific team who continues to meet the challenges of this recovery and consistently deliver great results. I appreciate everything you do for our company. Well, done everybody. Thank you.

And with that, we will now open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ivy Zelman from Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

If you can help us Scott talk a little bit about what you've seen throughout the third quarter, and into October with respect to traffic levels, and then I'll come up with the second question.

Scott D. Stowell

Yes, our traffic levels actually are strong year-over-year. They're up over 40% and, quarter-over-quarter, over 11%. So we see that as a positive, notwithstanding the current market conditions and some of this tentativeness and lack of confidence that exists in the market. So we see that as a good sign. Buyers are still in the market. They're taking their time and the quality is still good and, most recently, actually improving is the color we're hearing back from our field.

Ivy Lynne Zelman - Zelman & Associates, LLC

And when you talk about the weakness specifically in Northern Cal, is there anything specific to that market that you can attribute the weakness to? Is there a weakness in jobs there? Something -- obviously Sacramento being government, but I don't think that's really your market. So maybe you can speak to some of what you see there.

Scott D. Stowell

Certainly. In both the East Bay and Sacramento, the market overall is down significantly year-over-year. So we're kind of following the general market trend. And I think also given our strategy to set pricing and try to position as a premium in our market, we quite frankly, early on in the year, we asked our divisions to slow their absorptions in Northern California, and they did. So I think part of this is a reflection of aggressive pricing in the market.

Ivy Lynne Zelman - Zelman & Associates, LLC

And thinking about your sales people as they provide you feedback with the traffic level still strong, what's the conversations like with the consumer? Are they worried they're buying into a bubble? What is the news line? I know that the slowing in the quarter wasn't just in October. Sorry, the slowing wasn't just related to the government shutdown, it was actually occurring well before that. So maybe if you can give us any qualitative feedback of what consumers are actually saying to your sales people would be very helpful, I think.

Scott D. Stowell

Yes, consumers -- the things that are contributing to some of our cancellations and some of the slowness are -- and it varies by market, certainly. So this is a difficult question to ask -- to answer generally. There are some qualifying issues. As we've raised our prices, qualifying issues are becoming a bigger issue. But mostly the big shift is in buyer's remorse where people got caught up in a frenzy. In the first half of the year, in many of our markets we were selling very fast and people get caught up in that. And then things settle down and they start to have some cognitive dissonance, and they start kind of second-guessing their decision. And they pull back. And some of these people have canceled and they're in the market, reprocessing the higher rates, higher prices, resetting their expectations. Of course, we're getting continuing new traffic and new buyers coming in that have a different perception, and I think they're just waiting for some of the uncertainty to clear so they can restore a little bit of confidence in themselves. They're saying that they want to buy but not just right now.

Operator

And we'll take our next question from Michael Rehaut from JPMorgan.

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

First question, I just appreciate the detail on October trends. I'm just trying to get a sense of what the year-ago number was just to put that in perspective. And if that had a -- what the growth comps were perhaps on a month-by-month basis, just to get a sense of if it's going to get more difficult or less difficult as we go further into 4Q.

Scott D. Stowell

Yes, Jeff will provide you that, he's got that data.

Jeffrey J. McCall

294 were our orders this October. Last October, they were 346, so they're down 15%. In the fourth quarter last year, which is a very strong quarter, actually materially bumped normal seasonality. We went 346, 350, 287 last year. So within the third quarter, the month-by-month they are a little interesting, but within third quarter, July was 360; August, 355; September, 395, and those are all up kind of low single -- low double digits versus the prior year.

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

Great, that's very helpful. And, I guess, just before I move on to my second one, just to get also a little bit of perspective here, was there any perhaps pause in new community openings that maybe accentuated that sequential decline from September to October? Because thinking about the pause in the consumer, that's something that we've heard about for the last 3 or 4 months. So don't know if there's anything perhaps additional as more company-specific that drove that type of sequential decline.

Scott D. Stowell

Not community delay-related in our business, Michael. We delivered the communities in the third quarter that we expected to.

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

Okay. I guess just a second question on gross margins, continues to obviously support a very strong positive trajectory. And that's versus 2012 where you're pretty stable between 20% and 21%. Just trying to get a sense over the next couple of years if your underwriting standards have changed that much in terms of what type of gross margin you look for. I know it's also a return type of not just margins but a return approach as well. But to the extent that price inflation does slow, and it does appear that that's occurring obviously, where we might see some type of inflection point in margins as you think about 2014 or late '14 or '15.

Jeffrey J. McCall

Yes, a couple of points there. Underwriting criteria has not changed. So we still maintain a very disciplined approach on both the gross margin and IRR. Obviously, we can't forget either one of those components. But as far as trajectory, it's hard to tell. We are still pretty optimistic on what's to come. We've got a really strong land base that has benefited from a lot of the home price appreciation over the last -- first half of '13. So that should still be flowing through. As far as forward-looking guidance, we really don't provide anything other than our backlog gross margin, which is I think was 20...

Scott D. Stowell

26.7.

Jeffrey J. McCall

26.7. So that's still up about 140 basis points from our reported margin. And we did give -- the backlog margin expected to close in the fourth quarter was 20 basis points below that at 26.5. So you can see that trajectory should continue to grow.

Scott D. Stowell

So Michael, we think we're providing you the data that you need to have some visibility for 2 quarters with this. And that's probably as much of a forward-looking guidance as we're comfortable giving you.

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

I appreciate it. I mean just to clarify though on the underwriting criteria, and then I'll get back into queue, the deals that you've closed this year, understanding that it can vary in terms of looking at IRRs as well, can you give us a sense of typically what type of gross margin you've been underwriting towards for the deals that you've closed in 2013?

Jeffrey J. McCall

Sure, generally, it's an uninflated 20, but if we're doing development or higher risk development, we expect a higher return on those. So on the more challenging and developing ones, we have to risk-adjust those requirements for uninflated north of 20.

Operator

And we'll take our next question from Michael Dahl from Crédit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

First question I have is really on the land acquisition side. Definitely you saw -- you guys dialed down the purchase side relative to what we were seeing. Could you characterize how much of that was maybe a corporate directive given what you were seeing on the ground, versus how much was just reflective of not as attractive deal flow?

Scott D. Stowell

Yes, Michael, there was no corporate directive to slow down our land acquisition. We -- notwithstanding a pause that we're experiencing now, we believe that's just a season. We have a general positive outlook in the future, and we still think there's good opportunities to grow our company. Land buying is lumpy however. So we either have deals that get pushed out of the third quarter into the fourth or get pushed to the first quarter of the following year. So that's part of it. And land buying remains discretionary for us, so we're still very careful and holding some rigorous underwriting standards up to our division operators. And I think that's probably the best way to characterize it for you.

Michael Dahl - Crédit Suisse AG, Research Division

Okay, it's fair to say there's still a healthy pipeline then?

Scott D. Stowell

Yes, our pipeline hasn't changed quarter-over-quarter. We -- it's roughly -- our LOI pipeline has got about 100 projects in it. It gets turned over every month as we review it each month, and it's being backfilled with new opportunities.

Michael Dahl - Crédit Suisse AG, Research Division

And then us follow-up, on the -- if we're thinking about the same-store pricing and up 19% year-over-year, even up sequentially 1%, very impressive there, how should we think about the cost side of the equation on the directs and also on what type of land basis will flow through the next couple of quarters?

Jeffrey J. McCall

Yes, on the directs, our cost kind of same-store basis were up about 2.2% and, generically speaking, that's about -- maybe you slip that to the half year revenue. So net base, about 1.1%. So we continue to be able to raise pricing to cover and then generally exceed any cost increases. So pretty good there. As far as land basis, moving forward, it's really a big mix question. We've got some communities with extremely high margins that have a lot of lots to come. We've got some with lower margin with a lot lots to come. So it's really a mix. I don't see on a percentage of revenue net changing too dramatically.

Operator

And we'll take our next question from Adam Rudiger from Wells Fargo.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

I'm sticking with that last topic on land basis, and then asking the other multi-year gross margin trajectory question again, if I may. If you're talking about current underwriting, below margins, below where you're delivering at right now, if we don't see meaningful home price appreciation that would get those current underwriting margins back up into the mid-20s, at what point does this land you bought this year really flow through and start to lead to that, maybe a flattening or decline from a mix perspective?

Scott D. Stowell

Adam, it's just really difficult for us to give you reliable and accurate information on that because it's hard for us to even analyze that. What we will say is that much of our margin today is a reflection of our land buying efforts early. And I think the depth of our land book, and how much of that's controlled at an attractive basis and how long we'll continue to deliver houses with that land book, is really -- gets to your question. We just got to figure out a good way to demonstrate that for you. But we can't do it right now.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. Second question I want to ask is when you talk about that Goldilocks range, I agree with your earlier comments. It's very helpful. Were you going to incorporate seasonality into that? I mean, if you think about the 294 orders in October, there's a chance you dip below that if normal seasonality hits you in December, you could dip below 1.5 maybe. So when you think about seasonality or would that lead you to start ramping up incentives more?

Jeffrey J. McCall

No, you definitely factor in the seasonality and we're careful about our comment on that, that when it dips below that, we look to determine what the price is that we need to get to, to drive absorptions above that 1.5. But that still is a decision as they get to a slower period. Like in the fourth quarter, as Scott mentioned earlier, our approach is going to be one of a lot of patience. And fortunately, from what we're seeing, we're not seeing any of the other public builders taking any real dramatic steps. I think most people are taking a very similar approach, say, "Okay, third quarter is moving slower. We'll see what fourth quarter holds." And we'll make sure that we're well-positioned for the spring selling season of '14.

Scott D. Stowell

And Adam, we stated in our prepared remarks that for our slowest selling communities, we're given guidance to sell between 1 and 2, which is well below what we would normally expect and does reflect seasonality.

Operator

And we'll take our next question from David Goldberg from UBS.

David Goldberg - UBS Investment Bank, Research Division

First question I had was about cancellations and really where they're happening in the building process. And Scott, you mentioned people that got caught up in some of the euphoria in the first half of the year and now kind of having some buyer's remorse, I think, to Ivy's question before. Does that mean the homes are further along in the building process, i.e., you guys will see more specs? And with that, are you having any troubles finding buyers? When you have a cancellation are you finding it fairly easy or is it something we should expect maybe might sit a little bit longer or you might have to discount pricing a little bit more to get them out?

Jeffrey J. McCall

David, well, the cancellations were higher in total. I think one interesting statistic there is the cancellation rate of the homes in backlog scheduled to close in the quarter was almost dead-consistent with the trailing 8 and 12 quarters. So what that would tell you is that the cancellations that are happening are happening very early in the process and we're not really getting far down the road. Once we get in, they get that new car smell, they are easily coming to that finish line.

David Goldberg - UBS Investment Bank, Research Division

And so they're not personalized, they're not customized to your customer at that point but they're still pretty easy to be able to go out and resell into someone else? There's no kind of discount that comes from that?

Scott D. Stowell

That's right. This buyer's remorse happens fairly early in the selling process, David. That's what we are seeing.

David Goldberg - UBS Investment Bank, Research Division

My second question, and you guys commented, I think, was on Adam's question before about the public builders generally kind of being fairly patient with this pause to see what happens. Can you talk about the market more broadly? Because clearly I think, yes, you compete against some of the publics. But you also compete against private, larger private. Has there been a good deal of kind of caution and not over-aggression from the market more broadly that you feel like this is going to kind of hold as long as the market comes back a little bit? Or do you feel like your peers are -- not just the publics, the large publics, but also the privates you compete against, maybe in the existing home market. Are you concerned that you can get this kind of trigger of incentives and lower prices getting more incentives and lower prices to try to drive volume again?

Scott D. Stowell

Yes, my view is that -- and I believe it, I'm seeing it with our public competitors, that everybody's very rational. We all understand the constraints that exist -- production constraints that exist in the market. Nobody wants to sell at a fast pace that you can't support with production. I think everybody's got a positive longer-term view. And I think everyone is behaving like they should, and we expect in the spring selling season that we'll see the market start to show some recovery.

Operator

[Operator Instructions] We'll take our next question from Stephen Kim from Barclays.

Freda Zhuo - Barclays Capital, Research Division

This is actually Freda Zhuo on for Stephen. So the first question kind of relates to the potential M&A opportunities that you have mentioned with the potential vehicle for growth. What are you seeing out there in the market? Where would you guys be focused in?

Scott D. Stowell

We look at M&A as a very attractive opportunity to grow our company in our existing markets, as well as opportunities to enter into new markets. The activity from the private builder side is generally pretty good. We see opportunities from time to time, when we look at those. But other than that there's really no specific information I can give you, and we have no plans to enter a new market.

Freda Zhuo - Barclays Capital, Research Division

Okay, sure, I mean, are you seeing the potential number of opportunities increase throughout the year?

Scott D. Stowell

Yes, I think the activity levels increasing not at a real rapid rate, but I think many of the private builders are considering that as a real viable option right now.

Freda Zhuo - Barclays Capital, Research Division

Okay, sure, And then just turning to gross margins, I mean, this is a little bit of a type of question. But obviously, you guys are pretty much close to peak levels of where you have been running. Obviously, there's a good impact from that just due to a mix shift between where you were running in early 2000 versus today, where you're focusing on a higher price buyer. So just to get some kind of clarification or qualitative input into, for example, like how the gross margin in some of the California communities or California regions was from the peak or from the early 2000s versus today. And what kind of are the puts and takes into that.

Jeffrey J. McCall

Like every market, California is no different. There's a wide spectrum of gross margin across, across -- you've got some extremely high gross margin. You've got some well below average gross margins, even in California. How that has compared to history, I think that's one thing that doesn't change too much. We've always had a couple projects that really proved some very strong gross margins. And then there's a lot of structure in California that will generally keep margins in check. So I think -- I don't think it's changed too dramatically.

Scott D. Stowell

Yes, I would say in California, our margins today probably reflect historical highs today based on great land buying. What's different for us is the strategy to move our markets outside of California. And we highlighted that this morning with the Southeast. You could see that the big change in their order average selling price. And that I think will start to enhance the margins that we historically would've gotten out of those markets.

Operator

And we'll take our next question from Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just curious on your amortization of interest, it actually dropped 106 basis points sequentially. And what do you expect for the fourth quarter as -- and then also -- maybe end 2014 with?

Jeffrey J. McCall

Yes, there was a specific contract that expired on the amortization. So I think the Q3 is more normal.

Joel Locker - FBN Securities, Inc., Research Division

So you're thinking it will hang around 600 basis points or will it drop further or much further, say about end of 2014?

Jeffrey J. McCall

Oh, I'm sorry. I mis-answered the question. Yes, that continues to progress down. In backlog scheduled to close in the quarter, there's 510 basis points and closing after the fourth quarter is 460 basis points. So that will continue to trend down. Sorry, Joel, I misunderstood the first question.

Joel Locker - FBN Securities, Inc., Research Division

And then also on the corporate expense going forward, it -- I mean, that was one thing, it's a little higher than what I was expecting at $29.6 million. What would you expect a good run rate for that is going forward? I mean, 30 and above, just with the community count growth? Or...

Jeffrey J. McCall

Yes, we obviously have invested a fair amount in the growth that's to come in '14. But when we give kind of specific guidance to break down a little bit more detail. And I think the one -- everything is somewhat variable on the G&A. It's kind of normal inflation. 3% to 5% growth should be coming.

Operator

[Operator Instructions] We'll take our next question from Brendan Lynch from Sidoti.

Brendan Lynch - Sidoti & Company, LLC

My question is regarding your land on the balance sheet. We're starting to see a shift from raw land to more developed sites. In terms of timing, how much of this process is within your control? I imagine they're -- it's somewhat dependent on zoning approval and labor constraints, and I just wanted to see, get a sense of how quickly you could accelerate that process to meet an acceleration in demand.

Scott D. Stowell

Are you referring to the raw land that we're buying, how quickly can we get it to market and can we accelerate it if the demand's there?

Brendan Lynch - Sidoti & Company, LLC

Yes, essentially.

Scott D. Stowell

Yes. Typically, raw and partially developed land would take us, plus or minus, 15 months to get to market on average. And I would say the question is can we -- will some jurisdictions work with the builder/developer to accelerate their process? Some do and some don't. Right now, there are staffing constraints in many of the jurisdictions that are -- and permitting constraints that are slowing that process down somewhat. And we're experiencing that in some jurisdictions.

Brendan Lynch - Sidoti & Company, LLC

Okay, great. And my second question is on your focus on acquiring more land versus developing the land you have on your balance sheet now. Has there been any shift in that priority?

Scott D. Stowell

No.

Operator

And we'll take our next question from Mike Roxland from Bank of America.

Michael A. Roxland - BofA Merrill Lynch, Research Division

How much of the land that you bought early on do you have remaining that is now flowing through the P&L? So the land you bought like 2009, 2010 or so, how much of that is remaining?

Scott D. Stowell

Let's see. We got to search for that to see if we have it available.

Jeffrey J. McCall

Yes, right now, we've got lots from basically all vintages rolling through. In our backlog, it's -- 85-ish percent are from newer lands that we acquired post-2009, but it depends on the community and the specific absorption by community. And it's rolling through. Right now we're in a much more of a current -- of a newer land rolling through which is helping our gross margins.

Michael A. Roxland - BofA Merrill Lynch, Research Division

But Jeff just in terms of the land itself, is 2009, 2010 that's flowing through? Or is it more like 2011, 2012 that are flowing through the P&L as we see right now?

Jeffrey J. McCall

Right now you're seeing more '10, '11, '12. '13 has been pretty minimal so far.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you, appreciate that. Last question, you guys have done a great job leveraging SG&A. I mean, how much further opportunity do you think there is on SG&A, especially as you grow community count in 2014 and if order sales remain somewhat challenging?

Jeffrey J. McCall

There's still opportunity. We've got several initiatives internally that we're pushing pretty hard that will up [ph] to continue leverage and improve the leverage on that SG&A. Internally, the question is how quickly can we drive that below 10%? That's the goal we've been working on.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Can you just elaborate on some of those initiatives that you're working on?

Jeffrey J. McCall

I can walk you through hundreds of flowcharts that can give you the detail. But really, it's around operational excellence, something that we strive for every day.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you. And the goal would be -- just last question, the goal would be 10%? Is that the...

Scott D. Stowell

[indiscernible]

Michael A. Roxland - BofA Merrill Lynch, Research Division

Below 10% okay, got it.

Operator

And we'll take our last question from David Williams from Williams Financial.

David Neil Williams - Williams Financial Group, Inc., Research Division

I know in the prior quarter, you guys talked a little bit about the margin accretion on some of the spec units which was definitely different than we have seen in the past. I'm just wondering if you can kind of give us a little information on what you saw in terms of gross margin on specs this quarter.

Scott D. Stowell

Yes, a great question. Surprising to us again, our gross margin on specs that we sold and closed in the quarter were higher by 30 basis points, I believe. Is that correct, Jeff? Yes, 30 basis points higher, which is an anomaly if you look back historically. And I think it's a reflection of the commitment we made to ourselves to stop believing that we had to discount our specs, because they're pretty valuable to a lot of buyers.

David Neil Williams - Williams Financial Group, Inc., Research Division

Sure, well in this environment, we're seeing today a little bit, seems like a softening. Would expect that trend to continue or maybe trend down over the next couple of quarters?

Scott D. Stowell

I wouldn't be surprised if it trends down a little bit. Historically, they've been slightly under and that could happen again. Our objective is to fight that trend.

Jeffrey J. McCall

As the resale levels come back, then you may get back to more of a normal difference between your to-be-builts, your fully-customized, to the spec buys.

David Neil Williams - Williams Financial Group, Inc., Research Division

And last one, if I could. Can you give us a number of communities closed out and then opened during the quarter?

Scott D. Stowell

Yes, I think Jeff can turn to that information just give him a second.

Jeffrey J. McCall

All right. In the third quarter, we opened 9 throughout the quarter. We closed 10 throughout the quarter.

Operator

And at this time, I would like to like to turn the program back to over to our presenters. Please go ahead.

Scott D. Stowell

Thank you, Justin. And thank you, everyone, for joining us today. We appreciate your time and look forward to sharing our results with you again in a few months.

Operator

And this does conclude today's program. You may now disconnect, and have a good day.

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