Beazer Homes USA Inc (BZH) 2013 Q3 法說會逐字稿

Good morning and welcome to the Beazer Homes 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 atwww. Beazer.com. At this point, I will now turn the call over to Carey Phelps, Director of Investor Relations. Do you have your phone on mute?

Yes we did. I apologize, we had the phone on mute. Thank you. Good morning and welcome to the Beazer Homes conference call discussing our results for third quarter of fiscal 2013. Before we begin, you should aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which described in our SEC filings , including our Form 10-K, which may cause actually results to differ materially.

Any forward-looking statements 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 statements, 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.

Thank you, Carey. And thank you for joining us. This morningI'll highlight our results of the quarter and our progress on our past 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 would 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% 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 won't impact our achievement of the profitability objectives I outlined back in May. Our path to profitability plan is built around four primary operational metrics with performance targets assigned to each one. Let's go through the four metrics now.

First, taking a look at our sales per community. For the four quarters ended June 30 we averaged 2.7 per community per month,near the middle of our target range of 2.5 to three. And 87% of our communities qualified as performing, with at least one 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 anticipated due to more community close outs. 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 improve G&A as 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 three reporting segments, our gross margin percentage for the quarter was 20.3% compared to 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 reflects both a better pricing environment and gradual shift in mix as our lowest ASP communities close out. 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 close outs 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 close outs.

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.

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 in land and land development during the quarter, and year to date we 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 of June 30, we had 50 communities in various stages of development that were not yet open, and 21 communities that have been approved but whose transactions had not yet closed. During July we approved another 11 communities for acquisition,some of which should contribute their first sales in 2014.

With the 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'd 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 havesecured key land positions across the country. Recently, we highlighted two 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 sub market of Dallas. The Wincopia community contains 220 lots and is centrally located between Washington DC 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 the land banking range that we have with GSO. Since that time, we've closed one transaction with GSO and targeted other transactions for land bank financing, representing commitments of $100 million. Several of these transactions are expected to close by the end of September. Land bankingcommitments from third parties are not included in our full year projected land and land development spend of around $500 million.

At June 30 we control nearly 27,000 lots, an increase of over 2,200 lots since the end of Marchand 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.

The last 12 months we have activated $44 million of land held 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 $454 million, or $13 a share. This asset is subject to valuation allowance, meaning it is not on our balance sheet until we return to sustainable profitability. Regardless of when we are 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, we're 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 return the call back over to Allan.

Thanks, Bob. Our teams have made significant progress over the past couple of years, implementing numerous operational changes which I believe has contributed to steadily improving performance. Two years ago we were last or nearly last among of 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 costs 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?

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 with 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. 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 six 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 six 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 2014 and beyond, full year fiscal year 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 2014 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 two 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.

(Operator Instructions). The first comes from Michael Rehaut of JPMC.

Thanks. Good morning, everyone, and nice quarter.

Thanks, Mike.

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

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 Q four pace will be below theQ3 pace.

But what I was really indicating was that in Q3 -- or during Q3, particularly in June and carrying over a little bit into July. Traffic to our communities has been up 50% in each month so far each year. And that has not changed. It has not had a chilling affect on traffic. It has had -- and it's just -- 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 upward. We're continuing to find ways to increase base price, to increase included features, which allow increases in base price and reduced incentives. But I just think the speed with which that has occurred in the last 12 months is unlikely to be sustained, and certainly in the last 60 days or so it hasn't been.

It's still positive. I still feel confident about increases of sales prices, and I think we'll have an improvement of pace in Q4 versus last year. It's just a little bit softer. And it's because, I think -- again, my theory is I think we pulled forward a little bit into May perhaps the mortar activity because of the increase in rates. But by the time the dust had settled, and we had a 100 basis point-plus move, I think folks said, okay,it's happened. Now we can go about a process of looking at the different offerings out there and trying to find the right home, as opposed to feeling externally motivated of what some fear of what might happen to rates in the future.

Great. That was a great review. I appreciate that. And second question on gross margins. There has been great progress there, and I know obviously it's been a huge focus. I know we're not into guidance yet for 2014, but certainly with the newer communities coming on, can you give us any sense -- I mean, I would expect with all else equal and the fact that the new communities have a little bit of development elemental to it, is it safe to say we should be expecting a higher gross margins for 2014.

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 better sequential gross margin in Q4 than Q3. It will be up a little bit. I don't know that it is going to necessary 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 we'll have a full year gross margin in the high 19s, which up two full points from where we were last year. And at this point I think while another two points may be awfully tough to do in fiscal 2014, I'm pretty confident that fiscal 2014 margins will be higher than fiscal 2013.

Thanks very much.

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

Thank you. Good morning, and good quarter, guys. I think [Larry] and Michael indicated that your comments are really helpful. And I guess the question would be, withpricing momentum showing acceleration, with slower sales pace, and you finding that there is risk going into the 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 keep their working capital back out of the homes that they built, do you anticipate there could be some weakness or pressure because of your competitors that are going to steal it a little bit more than you?

And from a geography standpoint where were you feeling the slowing? Was it more pronounced in your entry level product in Texas, the Carolinas where it's more competitive? Are you seeing the same slowing anywhere throughout the country? If you can help us, is it demographic, is it geography?

What is the price point? Just a little more color, because yet you're buying land, and you're continue to believe in long term of the cycle. I think that people are pausing because they're worried that rates are going to keep going higher from here. You guys keep building and buying land, assuming you're going to get gross margin expansion. So help us to 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.

Okay, thanks, Ivy.

It's a small question.

Yes, just a modest issue. Let me chip away at parts of it, and the parts that 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. The basis of my confidence, one quarter out, four quarters out eight quarters out, is that housing and new homes in particular remain very affordable. Now I do think that the combination of 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 is 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 affordability levels I think has slowed 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 little hot, 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 is down a little bit. And I think Q4 will be down sequentially, although it will be up a little bit year over year.

So I just don't feel like we have to chase the activity with incentives. We're talking about the change of rate improvement as opposed to a directional change.

Now, let me pivot to your question about geographies. There is no question that for us Florida and Texas have been and have remained 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 remains healthy,activity levels are strong in the market, but it was just less frothy. Now we have communities in California right now I find it a hard to extrapolate and make bold statements about California. Others are better positioned to do that.

Looking at other markets, our Mid-Atlantic markets continue to be pretty strong. I will say we've got an awful lot of business fixing happening in our East segment, and in particular Maryland and Virginia businesses. So as much as there are macro factors that influence us, I feel very good what we're doing to reset communities, reset our product, reset our management teams.

So I'm optimistic about our prospects in that important region, notwithstanding whatever regional commentary others may have. That for us that has been an area of low-hanging fruit for business improvement.

Let me pause and let you gather how much of that was responsive, and then focus me on what you want me to address.

That was helpful. I guess, going back to the question on price point. With the diversified portfolio that you offer, where did you feel in Vegas and Phoenix that slowly more pronounced? Was it somewhat anon-event for the move-up product and more help at the entry level?

Well, 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 a best indicator of it.

I think there is just a little stickiness in those -- 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.

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 said he was direct. He said they have a hole in their income statement from the lack of re-fi business, and they've adjusted their overlays to try to drive more purchase business.

So I felt very confident, and I was optimistic when I heard that. So I don't think that this -- I'm hard press based on what I see to try to single out a buyer profile and say they're the ones. That's not been our experience.

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. I try to explain about the leverage, assuming finished lots go up 20%, that home prices only have to go up 5%. Maybe you can explain the math and timing of why you have confidence buying lots today that you can actually still see margin expansion. Because I think lot of people struggle with that, recognizing that there has been tremendous land inflation in the market.

That's 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 bit out of tune with what others were saying. But I was trying to make the point then, and I'll make the same point now, and I'll be refined with it. And that is it depends on what kind of land you want to buy.

Now typically when we talk about types of land, everybody has a location. 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 would argue that finished lots in A-locations are kind of an a myth. There may be 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 activity in the area where they don't have capacity to do land development or get the financing for a larger parcel. And as a result there really has been a separation between the finished lots and the land development deals.

Where we've seen the greatest opportunity has been in larger transactions. Where we willlayoff some of the risk for sure in our bigger deals -- but by the way, I think we're going to layoff that risk at a price of higher per lot than what we just paid, because of our the capacity to make a bigger decision, write a bigger check, and absorb the development obligation, it will be a two-year or a three-year proposition.

And so I do think you have to look at the quality and 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-plus lots, the per lot value there didn't move by anything like the order of magnitude that finished lots have moved in Dallas. AndI know that our fully developed cost on the front foot basis is several hundreds dollars below where today's bid from where finished lots are.

But what about addressing margin expansion? [Or seeing] whatever? Maybe you're getting better, 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 loss that you have that are going to go vertical over the next several years?

Honestly, we're not faking appreciation into our underwriting. And I know that's hard for people to believe, but we just don't have the input sale for people that crank in price appreciation. So when we're underwriting deals, we'relooking at what margins are at current prices, we're looking at what are modified internal rate of return is on current prices and current costs. 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 would have a different answer for you I think. But the difference from where we are and where we want to be, we can still achieve that with where land prices are.

Great. Thanks a lot, Allan.

Yes.

Our next question comes from David Goldberg of UBS.

Thanks. Good morning, everybody.

Good morning, David.

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 reduction of the fees -- the corresponding lending fees that you're seeing from your preferred lenders, just given the competition for the business? Just to make sure you understand how competitive that is getting and whether there has been a big influx [from the] lenders.

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 it's a little bit hard. AndI want to warn people to listen, if you're not paying attention, we're not like anybody else. And you can say it's a good or a bad thing.

But we're in the mortgage choice business, which is to say we'vegot a small number of preferred lenders who have agreed to a service level and have agreed to compete for our you buyers' 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 is given you a pre-qual. We're happy to write you. You've been pre-qual. We recommend that you talk to two or three of these other preferred lenders to make sure 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, andI think our buyers see a benefit from that. Because there is 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 dynamic is very healthy for buyers in our communities.

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. One thing 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 that given the kind of volatility we're seeing in rates?

It is an awesome question, and I'll tell you what, David, if you were sittingin our management meeting with our Division Presidents, I mean, it's awesome operational real world issue for us. The good news is that we actually are dealing 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 70% capture rate on internal business, that's one part of the business. But there is 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 a great advantage of having a finite numbers of lenders who have competed for our and won customers' business, in part through service. So partof 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.

One of the job functions I worried most about when we went to this mortgage choice was our closing coordinators. Were we going to inundate them with unmanageable, ungovernable process of managing backlog. And 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 on the corner of the mortgage company for that business. 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 or in your mortgage manage and backlog management, you're in a much better place. So I actually think -- andI'm bullish about this, I know it's different, but I think it's a very big advantage for us.

That's a great answer. And then if I could just speak sneak one more in, I think you're in an unique position that Beazer Homes for rent business and the Company's historic involvement [for] full ownership position in it to kind of get an idea of how rental rates and rental prices are reacting to the change in the housing market, and the impact of high rates but 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 detach rental business that's a price taker relative to the housing market and prices in the housing market, and how much [of it] kind of a price lead to some extend?

Yes, we have interesting data about this. Now, it relates to Phoenix and Las Vegas, the Florida markets we're in, and just 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, and we're about 15% shareholder, and while I'm on the Board of it, it has independent management and independent Board for those who haven't tracked our involvement in the space.

But we've only bought recent vintage homes. We have not been what some of our competitors are pie eaters. We haven't been out not trying to buy [tapes] 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 -- as in everything 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 of signing two-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 rents is interesting. And again, this is a a little bit of kind of a direction as opposed to precision. But if you looked at a Class A multifamily argument, 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 two- or a three-bedroom apartment, so the rent in dollars terms may be roughly comparable, but on a per foot basis, we'll 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 pre-tax basis for home buyers of comparable homes.

So I still think that dynamic of rentership pushing people toward 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 the single family context. Now, we just happen to think that they would rather rent a newer home than an older home, and particularly one we've gone through and done the level of improvements that our rental company does.

But I still feel like the dynamics are very favorable. There is a lot of headline risk, and I know 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 homes that they're dealing with are completely different.

That's great color. Thanks so much.

Our next question is from Susan Berliner of JPMC.

Hi, good morning. 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 reuping that or doing other land banking relationships?

I think we'll be, as Bob said, $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 close in the fourth quarter with a one-off with somebody else. So we're interested in that portion of the business.

I think I said last quarter that I didn't anticipate it exceeding over time a third of our business? My estimate of that has not changed. I think 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.

Great, and then I guess, Bob, a question for you with regard to the balance sheet. You obviously have a lot of high coupon debt that is 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 regard to your debt structure would be helpful.

Sure, Susan. Well, we don't have any maturities until 2016. And you're right, we have a couple series that have their first calls next year. We're gratified by the improvement of our bonds in the past year for trading. We're trading 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 of profitability. But really what we have to do today is to try to convince equity holders about our prospects, as we seem to have done with our bondholders.

Great. Thanks very much.

Our next question comes from Dan Oppenheim of Credit Suisse.

Thanks very much. I 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? I think it is a great position where you are now where you are now, so you can take on those land positions. What is the timing that you're thinking about in terms of when you sell to those builders if you off-handedly said you think you'll sell those for more? Presumably there is some benefit to buying larger. What is the confidence of the price you have for that in terms of then being able to generate a profit selling to others?

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 inbounded phone calls for those two assets in particular. By the way there have been calls on other assets, but those two since we 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 somebody that would lessen the capital employed and some of the developmental dollars, and that could happen. We could do the primary infrastructure but not the on-site, and sell what you would call a partially improved lot with a recorded plat. I think the price for that would be higher, but there is also time and risk. And in one case we've been offered really extraordinary pricing to [fief] in a slot to a builder.

Now, I really don't want to be in the land banking business for some of our competitors, selling them finished lots, but it's given us the capacity kind of pick where along the price and risk-sharing continuum we want to play. And each asset is going to be different dynamic.

One of the things that is 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 perspective partner or buyer of our lots able to sell us something? Because this is about growing community count for us. So someone who has 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 it's got this other dimension to it.

But I do think that you will see us do things from the raw land joint development side, which is different than a joint venture by the way, but where we're sharing development costs on the 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.

Great, thanks. And then I guess the second question, just 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 2014, and how much do you think will end up coming from [things] that will be activated.

Well, I'm confident that we will have additional assets that become active during 2014. I'm confident of that. Given on the order that half is in California, thatis 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.

Thank you.

Our next question is from Adam Rudiger of Wells Fargo.

Hi, this is Joey Matthews on for Adam. My question is on your product mix as it stands now and where you see it from here, and then specifically on the resetting of product in the East? Any more detail, that would be helpful.

Okay, 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 six months. We've been pretty major factors in the land market there. We had not reinvested aggressively in that markets in the two or three 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 five and ten years. And so instead of kind of being in close out communities,I think we're positioning ourselves for 2014 and beyond to be in some excellent locations with a range of product that includes two-over-two condos, a 27-unit building that we do that is kind of a special product that we've got that customers like, particularly in active adult context, as well as in that market our traditional position, which has been more in the move up. Not the highest price points, but we're frequently in the $400,000, $500,000 range in that market. So it's just a refreshing of the positions 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, well, are you abandoning the first-time buyer and moving to the move-up buyer? It's a hard thing to say, andI alluded to this before, price is easy for us to point at. And defining who the buyer is can be tougher.

It may in fact be a 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 feels like a move-up transaction. They're a first-time buyers, but they want Granite and 42 inch cabinets and hardwood floor. So I would tell you that we are trying in every market to 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 in making customers just accept the value proposition or the product proposition that we have.

Now I will 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 third quarter, the [ASP] was $221,000. 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 for us to replace the very lowest entry level product lots, and so we're -- as we go through those communities, they're not being replaced. You have an in-market mix occurring, and then a between-market mix occurring, both of which are going to drive our ASPs higher in the coming years.

Okay, and 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 of 9.2% on an [LTM]. And with 97% of your communities performing, I guess where is the extra opportunity coming from.

Well, I think we'll have -- even as I said we'll have a little more velocity in the community in the fourth quarter than 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 investments, and you can't do land development jobs without engineers and accountants watching that very closely. So as I said, and I was striving to be very clear about this, I think the dollars of G&A are likely higher than here, but I'm confident that we can sustain that 9% to 10% range in the community growth, even as we've taken on a little bit more development activity.

And a final question on gross margin this quarter. Any non-recurring items in there or warranty adjustments that we should think about?

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

All right. Thank you.

Our next question comes from Michael Kim of CRT Capital.

Hi, good morning. Nice quarter. My first question just on land. Last quarter you 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 in any particular region?

The pipeline of prospected deals is a big number, and it should be. The pipeline of deals that actually get 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 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 we're 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.

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

It's a great question, and I'm glad used asked. I will tell you we are 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 Mid-Atlantic are likely to have disproportionate 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.

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

I just think they were on the bandwagon earlier in January, February in terms of price. Frankly, end the last year I think we were able to start to move. And I talked about this another quarter.

We got out of position in Phoenix from a feature level perspective. I think we had too low a feature level, 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 were able to take prices up $5,000 or more. So getting that feature level right, in Phoenix in particular, has been very constructive for our margins out there.

Interesting. Great, thank you very much.

The next question is from Joel Locker of FBN Securities.

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

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

Right, and on your community count in the West, what was it down year-over-year? I know the Company was down 18%.

It was down by about 25%.

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

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 six or nine months ago, which is why we were guiding to kind having a flat year against a reduced community count this year.

Right. All right. Thanks good, guys.

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

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

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 into a totally different interest rate environment, my guess is we would see those lenders offering those kinds of programs in order to out-compete each other for the buyers' business, but I think it's unlikely that we are going to use our capital to get into the market to kind of speculate in the direction of rate to try to capture some advantage. I rather the banks compete with each other to do that.

Got it. And then with regards to your REO rental business -- or I guess maybe for you guys it wasn't REO -- it seems like the other guys who have gone public, they haven't kind of turned a profit. 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 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 for the longer haul?

That'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, thereis a quality business to be had owning recent vintage, newly built homes and renting them to families. So we're sort of ignoring -- and I don't mean to sound ignorant, but we're sort of ignoring the headline stuff and just running the business.

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

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 all three 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 three things.

Got it, thanks a lot.

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

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