Beazer Homes USA Inc (BZH) 2015 Q2 法說會逐字稿

Good morning. Welcome to the Beazer Homes earnings conference call for the quarter ended March 31, 2015. 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 in the Investors Relations section of the Company's website at www.Beazer.com. At this point I will now turn the call over to David Goldberg, Vice President and Treasurer.

Thank you. Good morning and welcome to the Beazer Homes conference call discussing our results for the second quarter of FY15. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which are described in our SEC filings, including our Form 10-K, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date on which such statement is made, and except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Joining me today are Allan Merrill, our President and Chief Executive Officer, and Bob Salomon, our Executive Vice President and Chief Financial Officer. Following the prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Good morning. Thank you for joining us. Before we start, I would like to welcome David Goldberg to our team. David joins us from UBS, where he covered the home builders for the past 10 years. Now, since David just started on Monday, let's agree not to hold him responsible for any of the mistakes that Bob or I may make on this call. We'll start that next quarter.

We had a very productive second quarter, headlined by better than expected new home orders. We were a bit surprised by how well January started, and given the monthly variability we've experienced in demand in the past few quarters, perhaps even more surprised by how that strength continued through the quarter. It is hard to identify a specific reason for why this spring selling season has been encouraging, but more jobs, continued affordability, and low inventory all helped. At the same time, it is important to remember that the entire new home industry is still only selling at levels that would have been considered severely depressed for most of the last 25 years.

Let's turn to the highlights for the quarter. Orders rose 22%, driven by increases in both community count and sales pace. Our average community count was up 14%, and sales per community per month increased sequentially and year over year, to a very strong 3.5 for the quarter. As expected, our average selling prices increased both on our closings, which grew to nearly $306,000, and in our backlog, which was $321,000 at March 31. More home sales and higher selling prices allowed us to end the quarter with $814 million of future closings in backlog, the highest value we have recorded since 2007.

On the profitability front, despite having fewer closings than last year, which was anticipated based on last quarter's backlog, we reported $20 million in adjusted EBITDA. This brought our LTM total to $129 million, up 25% compared with a year ago. We're in a good place at the midpoint in our fiscal year. While we can't be assured that demand or pricing will remain exactly where they were this quarter, based on our results so far this year, we are comfortable reiterating our full-year expectation that we can exceed last year's adjusted EBITDA by at least $20 million, excluding the unusual charges detailed in our presentation. As a reminder, FY14 adjusted EBITDA of $133 million included a one-time gain of $6.3 million from the sale of our pre-owned homes business.

Over the past several years, we've been able to substantially strengthen and improve our business. We've made big gains in sales pace, community counts, gross margins, overheads and profitability. Underlying these efforts, we focused on improving the efficiency of our capital allocation while limiting operational risk. Moving forward, we realize further improvements in our capital allocation can play a big role in creating shareholder value.

With that as a backdrop, we're excited to announce that we've activated one of our larger parcels from our land held for future development, which until now had been restricted by the water levee issue we've specifically discussed. We expect this parcel, in Sacramento's Natomas Basin, to start generating orders, revenue and profit in the second half of FY16. Activating this asset further reduces the portion of our inventory that is sitting idle, in turn increasing the percentage of our capital generating returns.

At the same time, and driven by this focus on maximizing capital efficiency, we've decided to stop reinvesting in our New Jersey division. We've talked about the challenges in this market on prior calls, and despite a lot of operational attention, conditions there have not improved enough to warrant further investment. Moving forward, we will honor all of our obligations, including building out the homes in our backlog and handling all warranty items, but we won't be taking down additional lots or adding new communities. Instead, we will gradually reinvest our capital in markets where we can achieve better margins and better returns with less operational risk.

While the decision to reallocate this capital may have a modest impact on the timing of the achievement of our 2B-10 objectives, it is appropriate for maximizing shareholder returns over the longer term. Underscoring this, we expect the change to be accretive to gross margins in FY16 and a return on capital by FY17.

With that, let me turn the call over to Bob to take you through some of the more detailed results for the quarter.

Thanks, Allan. We continue to focus on the metrics to drive the achievement of our 2B-10 plan objectives. While we will likely reach certain target metrics before reaching others, the expectation that we will reach $2 billion in revenue with a 10% EBITDA margin has not changed.

So looking at our progress to date, our LTM total revenue at March 31 was $1.47 billion, which is up almost $150 million, or 11%, compared to this time last year, and our LTM-adjusted EBITDA of $129 million is up 25% versus the same time last year, excluding certain unusual charges, which are detailed in our presentation. With improved demand this year, we recorded 3.5 sales per community per month for the quarter and 2.83 for the trailing 12 months. This compares with 3.3 sales per community per month during the second quarter last year, and an LTM pace of 2.91. Importantly, this has positioned us nicely with a backlog that is significantly higher than last year. Given the current sales momentum, but also acknowledging normal seasonal patterns, we do hope to report a sales pace in the third quarter that is comparable to last year.

Turning now to average selling prices, our ASP rose 12% this quarter to $306,000, marking the first time in the Company's history that it exceeded $300,000. Helping to drive this improvement were our east and southeast segments, which grew as a percentage of total closings, and increased their ASPs 12% and 18.5%, respectively. On an LTM basis, ASPs rose to almost $295,000, compared with $266,000 a year ago. And ASP in backlog at March 31 was $321,000, providing an expectation of further increases in our ASP, driven by a changing mix of communities.

We ended March with 2,533 units in backlog, of which almost 1,300 are scheduled to close during the third quarter. While some of these will be pushed into future quarters, and others will cancel, we anticipate selling and closing some spec homes, as we do every quarter. Taken together, that should get us to a backlog conversion in the third quarter that is very similar to the second quarter.

Extensive development efforts continued, as we prepare to open more new communities in the quarters ahead. We ended March with 163 active communities, 18% higher than a year ago, and our average active community count during the quarter was 160, or 14% higher than last year. At March 31, we had 39 communities under development and 34 that were nearing closeout. As a result, we remain confident that the average third quarter community count will be higher than we had for Q2.

Turning now to our gross margins, we recorded 21.7% gross margins for the quarter, close to our 22% 2B-10 target. Stable gross margins, coupled with continued growth in ASP, resulted in continued progress toward our implied 2B-10 target of $71,500 gross profit per closing. Gross profit dollars relate to profitability better than just the margin percentage, and we continue to make real progress with this metric.

In the second quarter last year, we generated $61,300 per closing. This quarter, that was up to $66,400 per closing, or half of the improvement needed to achieve the 2B-10 target. In the third quarter, we expect higher ASPs and similar gross margins, both heavily influenced by an increasing mix of closings from our east segment. While the east segment margins remained below our other two segments, in part due to the land banking activity in this region, we expect them to improve in the quarters ahead.

Our G&A for the quarter came in better than expected at $32.7 million, benefiting in part from some litigation recoveries. SG&A was 14.9% of total revenue for the quarter and 13.5% for the last 12 months. Absent any other unexpected recoveries, we still expect that our G&A in Q3 and Q4 will exceed the prior year's quarter by approximately $4 million to $5 million, enabling us to make continued progress toward our 2B-10 target.

Moving now to our land investments, shown on slide 14, in total we spent $102 million on land and land development during the quarter, bringing our total for the first six months of this fiscal year to $248 million, or about half of what we expect to spend for the full year. Revenue from land sales during the quarter was $13 million. We continue to expect to record in excess of $50 million in land sale revenue, and between $2 million and $3 million of related gross profits. Essentially, all of the land sales we expect to occur this year are under contract at this point. Please note that revenue related to land sales is included in our SG&A ratio.

At the end of March, we had almost 28,000 owned and controlled lots, and nearly $1.8 billion of total inventory, up $269 million or 18% from last year. As Allan mentioned earlier, we brought $41 million of land held for future development back into active status. As a result, our March 31 land held for future development balance dropped to $271 million, representing only 15% of total inventory.

We expect to take steps over the next several years to strengthen our balance sheet and reduce our cost of capital. Since we believe that our stock price does not reflect our long-term opportunity, we currently have no appetite to issue equity to pay down debt. Instead, we expect to delever the Company's balance sheet over the next several years in other ways. The first big change will occur when are able to remove the valuation allowance on a deferred tax asset. That will reduce our leverage ratio by about 17 points, from 84% to 67%, which we think could be a positive catalyst for a ratings upgrade.

In addition, we also expect to increase profitability over the next several years. This will add to retained earnings, increase book value, and provide more opportunities to refinance some of our debt, as we will look to reduce interest expense, extend maturities, and eliminate secured financing. As our balance sheet improves, not only will we benefit from better credit ratings and lower interest costs, we should also chip away at the risk premium embedded in our current stock price.

We currently estimate that we will be able to use approximately $426 million, or about $13 per share, in deferred tax assets to offset our future tax liabilities. We hope to bring these assets back onto our balance sheet when we report our full year results, which will immediately improve our book value and, as I indicated earlier, our debt-to-equity ratio.

With that, let me turn the call back over to Allan for his conclusion.

Overall, I'm very pleased with our results this quarter. Very strong sales combined with an ASP in backlog of $321,000 gives us a great start on the second half of the year. With additional communities scheduled to open, and improving fixed cost leverage, we're positioned to continue our progress toward 2B-10.

With that, I will turn the call over to the Operator to take us to Q&A.

Thank you.

(Operator Instructions)

Our first question comes from Ms. Susan Maklari with UBS.

Good morning, everyone.

Good morning, Susan. I first of all want to say, you're welcome. We were happy to take David off of your hands, so now you can get some work done.

There you go. He did a great job reading that introduction.

Yes, he was spectacular.

Very good. Excellent.

In terms of the quarter, your order growth was very impressive this quarter. Can you help us understand, was some of that driven by perhaps some of the moves that you guys made over the last few years that have allowed you to maybe sort of leverage the underlying strength that you're seeing?

Thank you for the comment.

I do think that there are a layer of issues at play in the order growth in the quarter. We said -- I have said it in the press release as well as in the script, we know that the environment is better. More jobs, attractive affordability, low inventory, those are all positives, and rent is going up actually quite rapidly. Those things are helping.

But I think inside the Company, we have been aggressively rebuilding the community count in the Company, so we have a better mix of communities than we've had in prior years. I think some of the things that, I know, bore investors a little bit, we talk about CMAs, doing comparative market analyses, every week in every community, to fine-tune our offering. Our mortgage two-way strategy, our choice plan strategy. I think there are things that we're doing operationally that help.

So it's a sum of -- and I would like to be able to say it was the one thing, because if it were, we would just do more and more of that. But I think it's a mix of just an attitude that with better communities and better processes, and some better consumer offerings, we expect to do better, and we did.

Okay.

And then looking a bit longer, you know, given this progress that you're making on ASPs and the profitability of the business, yet you're keeping the 2B-10 target where it was. Can you help us understand what would maybe get you more excited to accelerate that or to change that at all?

Well, 2B-10, when it was initially introduced, I want to say 1.5 years ago, was a multi-year objective of that's where we want to get to, because that was in an environment or at a point that we had gotten to the point where it was clear we could get to break-even, so it was kind of a building block. And we've always said, it is not the destination, 2B-10 is not the final destination. We will have ambitions that exceed that.

It is clearly premature for us right now to start talking about what will come after that, because we are not there yet. We still have work to do. And without in any way walking back from our commitment to get to 2B-10, we're not going to let poor capital allocation supersede a desire to get to that objective. And so what we did in New Jersey is an example.

There is a bunch of revenue that we're not going to have next year that we might have otherwise had, and some profitability, but my view was the return on capital and the risk profile didn't match up, and we can do better with that money. So I -- again, in trying to be fine-tuned about 2B-10 timing, it can't get in the way of making intelligent decisions about how to run the business.

Okay. Thanks for the color.

Thank you. Next question is from Mr. Ivy Zelman with Zelman & Associates.

It's actually Alan on for Ivy, so I guess the Mister applies here.

Allan, I think you were starting to touch on this a little bit on the 2B-10, but dropping the -- by the end of 2016, it sounds like you're hedging a little bit based on the impact of the exiting New Jersey. I was hoping that you could walk us through exactly the mechanics of that?

You had roughly, what, 5 or 10 communities in New Jersey that will -- I assume will no longer show up in your active community count going forward? I don't know if it was in there in 2Q. But is it really the revenue target that is the one that's a little bit more up in the air at this point? Because you said margins, it's going to be accretive in 2016. SG&A, it looks like you're on track here.

So I was hoping that you could go along -- what exactly the impact is from New Jersey?

Well, so the impact is related to both New Jersey on the one hand, and what we do with the money on the other, right? The second part is harder to answer than the first. Let's talk about New Jersey a little bit.

When we laid out 2B-10, that is a sum of the parts analysis that is aggregated up from our 16 divisions. We had at that time, again almost two years ago, a run rate in New Jersey, and a set of expectations for where that could go from a revenue and a profitability standpoint.

On a look-back basis, that revenue has been above $50 million and under $100 million in the business. But our real expectation was that we could drive increased profitability to contribute to the 2B-10 target in New Jersey.

The conclusion that I have reached in this most recent quarter is, notwithstanding the hit to revenue associated with it, the probability of getting the level of contribution of incremental profitability out of New Jersey just isn't there. So we're going to take the capital and we will start to reinvest it.

If I look backwards, the impact of New Jersey is pretty modest on an EBITDA basis. It has got a, as I said, a $50 million to $100 million, depending on the time period, impact on revenue.

But if I look forward, what has happened over the last 6 or 12 months is we've just reached the conclusion that the ability to squeeze EBITDA percentages and dollars out of the capital and out of the revenue in New Jersey just wasn't there. So I've got to redeploy that capital in ways where we have a higher probability of getting to an even better result.

Look, there are opportunities that we have in front of us. We have talked about bringing active our Natomas asset. So I haven't given up, and we haven't set an arbitrary deadline for 2B-10.

We have a clear objective with 2B-10, which is as soon as possible. But it would be just -- I guess confusing or not comprehensive to not acknowledge that when you withdraw from a market and you give up that revenue, it could have some effect on the timing.

I will tell you, we are very focused on the other opportunities we have in front of us to try to get to 2B-10, as we always have, as soon as possible.

That's helpful.

So the 163 communities you had at quarter end, to clarify, does that include your New Jersey assets that effectively will wind down?

Yes it's a low single-digit number, and it's going to go to zero by the end of the year.

Okay. But yet you still think community count goes higher, I think you mentioned, next quarter despite that, right?

Yes, the average community count in the second quarter was 160, the average community count in the third quarter will be higher than that.

Got it. That's helpful.

If I could get one more in. In Texas I think you've had some big land buys there recently or over the last couple years, some of which I believe you were selling land in, so was curious if you can give us an update of what you're seeing there, given the oil concerns. I know some of it's in Dallas as well, but any color would be helpful?

We have got two big businesses, both on the order of 10% of our business, one in Houston and one in Dallas, and so they're roughly equivalent in size. I have to say as it relates to Houston, it continues to perform very well for us.

I have, I have had, will continue to have, some concerns about future difficulties that may arise in that market, but I think the location of our communities are slightly less levered to oil than maybe other communities. And I think we bought well and have developed well, so I think our communities compete effectively. It's a little bit of a concern out into the future, but the current results and the current environment have stayed pretty robust.

You know, Dallas has -- I wouldn't say shrugged it off, but there are so many other things going on in Dallas, and we have so dramatically repositioned our business there north from south, and more northeast, that we're in great spots. With what is happening with Toyota, what is happening with other major corporate employment and transportation improvement dynamics, that's a very dynamic market, and I would tell you that we have had good experience there and I expect to continue to have good experience there.

Great. Thanks a lot.

Thank you. Our next question is from the line of Mr. Michael Rehaut with JPMorgan.

Thanks. Good morning, everyone.

Good morning, Mike.

First question I just had on the sales pace, and you had 7% improvement against average community count this quarter, and I believe you said that you expected sales pace to be flattish year over year. Was it year over year or sequentially in the third quarter, perhaps you could just clarify that?

Yes, I think we did [3.1%] in pace in the third quarter last year, and what we've said is, we expect to do about that in the same quarter this year, so year over year.

Okay. So I guess the question then is, I guess we're talking very -- relatively small numbers that create these year-over-year, flat or up 5% or down 5%, but was there anything that, you know, perhaps gave you a little bit of extra lift in 2Q to have that positive 7% going to flat in 3Q, or is it more of a broader statement, and maybe it's a plus or minus around that flattish type of sales pace?

We clearly certainly would try to do better than even being flat year over year, and we acknowledge that we did do better than flat in the second quarter. There's a different mix of communities. That is one of the things that's been something underneath the covers here the last 1.5 years. And so as you introduce new communities, so it's not a perfect same store sales comp, it makes it a little tough.

I don't know, that doesn't really answer the question, but I don't really know how else to answer the question. There is normally a little downtick in absorption rates between Q3 and Q2, we've seen that in each of the last several years. We have guided to that.

We will clearly try and do better. I think with the mix of new communities, if we're at [3.1%], we will feel pretty good.

Okay. And then you also mentioned, I think, Bob, that there was a little bit of a reversal that helped out the G&A a little bit. I was wondering if you could quantify that?

We just had a little bit of -- from litigation recoveries. It was not extremely significant. It was less than $2 million.

Okay.

And then just lastly, and I will get back in queue, the New Jersey division, I know you said it depends over time, $50 million to $100 million, I believe, in revenue. But I was hoping if you could give us a sense of what you expect the division to contribute in FY15 and how materially below were they on a gross margin basis?

So I don't have the New Jersey division annual number, and of course we don't give a revenue number for the full year for the Company. So I'm hamstrung a little bit on answering part of the question.

In terms of how far below, they were more than 5 points below on their portion of gross margins. And the dynamic in the locations where we were, despite [4B] plans and other efforts, we just didn't have a path to improve those to a level where that market could compete for capital.

Great. Thanks very much.

Thank you. Our next question is from the line of Mr. Will Randow with Citigroup.

Good morning, Will.

Good morning.

Curious, in terms of your ASP trajectory, it seems like you might be 10% higher exiting the year. Can you give me some background on that?

The mix in communities has been a huge driver for us over the last 1.5 years, in terms of the ASP. And we have, said since the beginning of this fiscal year, that we expected for the full year to get to an ASP that was approaching or nearing, or in the range of, 320.

So -- and that's not because we think prices are going up, it's because the mix of communities that will be contributing to sales, to backlog, and ultimately to closings, is changing. It's more communities in California. It's more communities in the Mid-Atlantic, playing a big role in that.

So in terms of the trajectory, we're not backing away from having full-year ASP that's quite a bit higher than where we are right now, and again maybe the right turn of phrase is nearing 320,000 for the full year, and so that creates some implications for Q3 and Q4. The good news is, you can look at the backlog ASP and see some evidence that we have some tools to get there.

Thanks for that.

And then in terms of strategic acquisitions, you have some strong private builders within 50 miles of you. Would you consider acquiring a strategic competitor in your market where you have a lot of overlap, a good team? And you get a lot of land et cetera, can you talk about that?

Sure. The short answer is yes, we would and have, repeatedly. And there are some very well run private builders, and some entities that have terrific land positions that would be hard to replicate, if not impossible, and we've looked at them. The one thing that we're mindful of is, when you pay somebody else a big premium for their business, which they're savvy sellers, that premium's got to go somewhere.

So if you write up their assets, all of a sudden the margin pickup (technical difficulty) or you end up with a bunch of goodwill and goodwill, particularly if your strategic rationale was synergies and overlap and you may or may not be protecting a brand, that goodwill ends up, in my experience, kind of going away, having to be written off. So that has made me a little cautious.

The other part of the answer, though, is if we -- and we try and hold ourselves accountable on everything. If we look at transactions that we were interested in, and really did some work on and where we didn't win, and so far that's been all of them, one of the common themes has been folks that are out of town, coming into a particular town and being able to rationalize that premium in a way that as an incumbent in that market, we haven't been able to.

And so that's one of the dynamics at play, as we look at in-market acquisitions.

Thanks for that, Allan. I always appreciate the insight and good progress.

Thank you, Will.

Thank you. Our next question is from the line of Mr. Jay McCanless with Sterne.

Good morning.

First question I had on the guidance for absorptions to be, I think you guys said flat, on a year-over-year basis. With the order growth this quarter, I would have maybe expected a little bit more there. Is that a function of New Jersey rolling off, or is it the product mix that you're delivering more move up versus entry level?

Well, I guess New Jersey is a little thing I will tell you, that in the math that, when I look at -- that's not an overwhelming or particular or material issue. I think there is a mix issue, you got new communities coming on, have had, it's not so much that they're move up.

I think we do do move up in many of our markets, but what's really happened is the allocation of capital has shifted into some places that just endemically have higher ASPs. So I want to be a little careful about the narrative that we've gone move up.

When you go to California, you're not going to California under $300,000. So almost by definition, anything that we do there is going to kind of pull up ASPs.

But as I look at the mix of communities that we've got and the new ones that will be rolling on, and some of the ones, frankly, that we will have worked through that were great communities that we don't have any more, and there are some of those. There are some communities where we might have done a [4] in the prior year, and it's not around this year to do a 4 again.

So it's really kind of you sift through all of that, given the strength that we've seen, we see with some confidence the ability to do the [3.1] again. And as I said, that's not a cap, we will try and do better. But I think if we're trying to set expectations against the community count, and the mix that we've got, I think that's a good place to start.

And then on the cancellation rate, I think that's the lowest can rate you guys have put up in several years. Can you talk a little bit about what you're seeing from mortgage availability, and is it easier to get higher risk credits financed than maybe a quarter ago or a year ago?

It's a great question, something I spend a lot of time on.

I do think it is modestly easier for more challenging credits to get access to mortgage finance, but I would underline and probably bold, modestly, it's a very, very small improvement at this point. The credit boxes are still very tight.

I think for us, and I can't prove it but I believe it, I think having a mortgage choice program where we have multiple lenders working with a perspective buyer to get them qualified, we've increased the odds of getting those buyers qualified, because the overlays and underwriting criteria do differ between institutions, and I think that's one of the things that helps with the pace, and it also helps with the can rate.

Okay. Great. Thanks, guys.

Thank you. Our next question is from the line of Mr. Stephen Kim.

Thanks very much, guys. Steve Kim, Barclays. A few questions for you.

First of all, I think you mentioned that your land spend was $102 million. How much of that was for development?

Well, I think it's shown on the slide here.

Bob, $57 million.

Okay, sorry, I don't have your slides in front of me, sorry about that.

Now I think you've said that you expect to spend a similar amount in the back half, but I would imagine also with higher revenues? Generally speaking, I've been curious about your ability to maintain the land spend at that -- at the first half rate.

I mean I guess I'm wondering, does this imply that pretty much all of the two half -- the second half land spend is going to be to develop existing parcels you already have, as opposed to buying new ones? Or do you continue to sort of think you're only going to need to spend about $55 million, $60 million on development in the back half?

I think what we said, Stephen, was that we expect to spend roughly $250 million in total in land spend in the back half. And I think as --

Oh, in the back half, $250 million in the back half?

Yes, in total land spend, which is inclusive of land development and land acquisition.

Okay. Got it. That answers my question. That takes care of it, thanks.

And that matches the $250 million that we spent in the first half.

Right.

Okay. Got it. Now I get it.

The second question relates to your comment about higher ASPs. One of the things you mentioned was that, look, we're not necessarily moving higher end, we're moving to territory that have naturally a higher ASP. I wanted to press on that a little bit: are there any functional differences between how you compete, or succeed in markets that have generally higher ASPs?

One of the things that would come to mind, maybe, is that the land market might be a little tighter. And I'm wondering about -- so can you talk about what, if any, functional differences there are in general with markets that have higher ASPs than others? And how do those differences maybe align with Beazer's strengths, as you see them?

So I think -- it's a complicated question and every market's different, every land parcel's different. So I'll try and give you something that I think would hold together across multiple markets, but as even as I'm saying it or thinking it, I could kind of nit-pick it.

But let's think about Maryland and let's think about California, because these are markets that are not new to us. We've been in both markets for 20 years or more, and so this isn't some explorative adventure by us into the frontier, these are markets that we have -- been in place for a long time.

But the mix of what we're doing in those markets, or the locations within those markets, or the weighted average of what's happening in those markets, changes a little bit. So there's a within markets, not just a between markets, dynamic. And I think that's kind of important.

But the answer is, when you start selling in Howard County in Maryland at $500,000 plus, yes, the finish levels have to be different, yes, the model home presentation has to be a little bit different, yes, the paces in that community are a little different than we would expect in a town home community. So those are some of the things that are different.

And by the way, yes, we use different trades than we might use in another part of town on a different product type. So there -- those things are absolutely in place, and it's why we're not very adventuresome in wandering off into new sub-markets, new buyer profiles, new trades, new realtor cohorts, because there are a lot of dumb taxes you've got to pay to get there.

We've made investments in markets where we've had a presence, and so we won't get it all right, don't get me wrong, but we've tried to overlap with our existing footprint and our existing capabilities very strongly

Got it.

And so you are going to contrast, I guess, with California. So you're saying doing a $500,000 product in California doesn't require as many adjustments, is that what you were --

I was just thinking about two places where higher ASPs will play a big role for us over the next six or so months. In California, we're in some markets that do have pretty good price activity, in Orange County and -- or price characteristics, in Santa Clarita.

But what we're having to do isn't materially different there, because it's more similar. I think we just have more communities in California, is probably the issue there that is helping us.

Okay. That's great.

And then last one for me is capitalized interest I noticed has been -- your balance has been continuing to grow. I was curious if you could talk a little bit about what you see for capitalized interest running through your income statement and then -- sorry, running through cost of goods sold and interest expense directly for the year?

Sure, Steven. This is Bob Salomon.

What we think is going to happen this year is, basically total interest expense in the income statement will probably be similar to what it was last year, just the geography will change a little bit. The direct interest expense, which is the interest expense related to where our assets are below our debt, will trend down towards about $35 million for the year, and then the remainder to get to that total will be in COGS.

So COGS will have a little bit higher interest this year than last year, and the direct expense will be lower. But in total, it will be about the same.

Got it. Okay. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Ms. Susan Berliner with JPMorgan.

Hi. Good morning.

Good morning, Susan.

So I wanted to start with Sacramento. I was wondering if you could tell us what happened that you were able to bring that parcel or those parcels back?

And then when do you expect the remaining assets to become active there? What needs to happen?

So Sacramento is a really interesting case study for our industry, not just for Beazer. Most of the folks on the call will be bored with the next minute, but I just want to give a bit of background.

Sacramento, and well-located land in close proximity to downtown, and including downtown, by the way, is within an area protected by a series of flood levees. And after hurricane Katrina, the core of engineers did a fairly thorough, I think, national assessment of the levees around the country and determined the levees in Sacramento were in need of substantial repair. At the point that determination was reached, the ability to pull building permits stopped, the ability to get mortgage insurance stopped. And so there's really been a cessation in activity in I don't know what the number of square miles, but a very significant part of that market.

Unfortunately, we owned an awful lot of land in that location. That's not a good fact, but what's happened in the last year is - and I'll get my dates wrong, but there was something, the word -- I'll get the euphemism wrong. The Water Act, it's got a slightly different -- WRRDA Act was signed by the President, I want to say last June, approximately, which made it possible for a process to commence that would result in building permits being issued within this zone sometime this coming summer.

Now it has to do with both the completion of much of the levee work, the appropriations and the approvals of the remainder of the levee work, but kind of the thing to take away from this is 100%, and entirely outside of our control. So, the city of Sacramento right now, and other authorities in that region are a little overwhelmed, because we and others do have land in this area, and we have backed -- actually both finished and finished lots and raw ground. And so what we and other builders are doing is going through the process in reactivating these assets, looking at land plans, looking at building permits, and getting queued up to restart the engine.

And so the activation of this asset within that Natomas Flood Basin or Basin, is really just the organic and evolutionary conclusion of this levee improvement project, as opposed to some philosophical view maybe that we had at the Company. This is when we can do it. There are a lot of unknowns, still, in terms of the exact timing, because as I said the city, they're doing their best but there are a lot of builders that want to get a lot of permits, and they don't really have the staff and the resources to manage all of that in place yet. And so it's been very interactive and very cooperative, but that process is very much underway.

So by activating the asset, we are acknowledging that we are back working specifically on that asset, we're going to spend money to proceed with the entitlements to process building permits, and those are the things that when you do those things, that's kind of at the epicenter of changing its characterization, from future development to active.

I think we want to get that asset up and running, and we do have some other Northern California assets, including another major one in that broad Natomas area. I can't predict right now when that will also go active, but things are certainly looking up in terms of being able to take what's essentially been dead capital into an earning asset, that's a big positive for us.

Great. That's helpful.

I was wondering if you could discuss some of your markets. I know you discussed markets in Texas and New Jersey. Anything else in the quarter that stood out from a really strong or somewhat weak basis?

Well, yes, I think in terms of pockets of strength, one thing to remember is that for any builder, the position that you have this year versus the position you had last year, you may say, hey, this market's doing great, but hey, you doubled your community count, so of course it's doing better than it otherwise would have. And there are some markets where we had a pretty big increase in community count.

Atlanta would be one of those markets, and as a result Atlanta is doing a lot better. It's a community count thing driving that.

I'd point at South Carolina, both Myrtle Beach and Charleston for us as being markets that are performing exceptionally well. We've got a deep management team, great assets, slight increase in community count, but really strong conditions. There's been a procession of national builders to Nashville. We're happy to have been there since prior to our IPO in 1994. It's a strong market, and we're doing very well there and enjoy our position.

So those are some of the places that I would point out in addition to Texas, where things have gone pretty well.

Great.

Two other questions for me. I guess, Bob, with regards to the DTA, is that something that you're anticipating that you will get fully back after year end or mostly back?

Well, we're driving and working with our auditors pretty intently, as you might imagine. At this point, it's pretty hard to quantify, but I believe it is going to be all, or substantially all, by the end of the year.

Okay. Great.

And my last question was, I was wondering if you could comment at all on April?

What I would say about April -- by the way, I have got three week of sales results. The end of the month hasn't happened, so I'm eight days or seven days behind right now, but the first three weeks of April exhibited trends that were pretty similar to what we experienced in the second quarter.

Great. Thanks very much.

Thank you. Our last question is from the line of Mr. Alex Barron with Housing Research Center.

Thanks.

Just to clarify on the DTA, when you say end of the year, do you mean you expect to get it back in the September fiscal year quarter or do you mean calendar year, December quarter?

I mean the fiscal year end in September.

Okay. Got it.

And then what would you expect to be the tax rate for next year then, if that happens?

It's probably about 37%, 38%.

Got it. Okay. Thanks, guys.

Thank you. And that concludes today's conference call. Thank you all for joining.