M/I Homes Inc (MHO) 2013 Q3 法說會逐字稿

Good afternoon. My name is Susan and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Mr. Phil Creek. Please go ahead, sir.

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; and Marie Hunker, our VP, Corporate Controller; and Kevin Hake, Senior VP. First to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant nonpublic items with you directly.

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

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

Thanks, Phil. Good afternoon everyone and thank you for joining us today. We are very pleased with our results for the third quarter. Our results reflect strong performance on many fronts, including revenue, closings, income, sales, margins, and backlog. As reported this morning, during the quarter we achieved the following. 32% growth in revenue, 26% improvement in homes delivered, closing 937 homes in the quarter, compared to 746 homes a year ago. Pre-tax income of $13.8 million, 63% better than a year ago. It should be noted that the $13.8 million of income is net of $2.1 million of asset impairments and $1.7 million in charges we incurred that are non-cash relating to the early extinguishment of debt. Other highlights include a 15% increase in new contracts, selling 869 homes during the quarter, compared to 757 homes a year ago. This marks our 10th consecutive quarter of positive sales comps. I will talk more about sales in a few minutes.

Gross margins for the quarter improved to 20% representing a 30 basis point increase over the 19.7% gross margins that we reported during the second quarter of this year. At the end of the quarter, our backlog had a sales value of $488 million, 46% better than a year ago and our units in backlog equaled 1,607 homes, 36% better than a year ago. Our average sales price in backlog has increased from $284,000 a house a year ago to $304,000 a house at the end of the third quarter. Our strong operating results have contributed to our continued improvement in operating leverage. Specifically, our selling general and administrative expense ratio declined to 13.2% of revenue, which is our lowest level since the fourth quarter of 2007.

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

With respect to our balance sheet, we ended the quarter with a substantial cash balance of $158 million, no borrowings under our $200 million unsecured revolving credit facility and a very healthy ratio of net debt to capital of 37%, which keeps us in a very good position for continued growth. In that regard, during the quarter, we successfully opened 17 new communities, further enhancing our geographic diversification and increasing our community count to 147 communities at quarter's end, which is 15% better than the community count of one year ago. We remain on track to increase our community count by approximately 25% by the end of 2013. We're very pleased with the performance of our new communities.

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

Additionally, the effects of the government shutdown and the negative noise coming out of Washington have impacted consumer confidence and also contributed to uncertainty. The net effect of all this is that sales has slowed. Traffic, both in remodels and on the Internet remains very good. But many consumers are clearly more cautious and not moving as quickly when it comes to making a decision to buy. That said, we continue to believe that overall demand and the fundamentals for improving housing conditions remain in place. The pace of recovery, maybe more moderate than at first thought and at times, it may appear a bit uneven. But we remain optimistic about our ability to grow our business and continue to improve our profitability.

Now I'll take a few moments to talk more about our three regional housing markets and their performance. Beginning with the Midwest region, where we have homebuilding operations in Columbus and Cincinnati, Ohio, Indianapolis, Indiana and Chicago, Illinois. Our closings in our Midwest region were flat for the third quarter, compared with last year, while new contracts were up 16% for the quarter. Out of the 937 homes that we closed during the quarter, the Midwest region accounted for 307 homes or one-third of the total. This ratio has continued to decline, down from 53% of closings in 2009 to one-third today, as we have strategically and intentionally expanded and shifted our geographic footprint towards the mid-Atlantic and South regions.

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

Next, the Southern region, which consists of Tampa and Orlando, Florida and our Texas operating divisions in Houston, San Antonio, and Austin. We have also announced that we're opening in Dallas, but we've yet to officially open for sale there and we'll do so next year. We continue to be very pleased with all of our Texas operations and our expansion into Texas, as it is clearly contributing to our growth. We have also seen significant improvement in our Florida markets during the past 12 months and we are achieving solid results in both Orlando and Tampa. We have been growing our position in all of these markets.

We delivered 354 homes in the Southern region for the quarter, a 59% increase from last year and 38% of our total volume, making the Southern region our biggest region in terms of closings. Our new contracts increased 29% for the quarter. The dollar value of our sales backlog at quarter end was up 78% from a year ago in our Southern markets. We increased our controlled lot position in our Southern region by 4,200 lots, more than doubling our lot position from a year ago and we had 46 communities in the Southern region at the end of the quarter, which represented a 35% year-over-year increase.

Finally, the Mid-Atlantic region, where we have operations in Charlotte, Raleigh, and Washington DC. New contracts in the Mid-Atlantic were up 1% for the quarter. That's 1%, compared with 2012. Backlog value is up 23% at quarter's end. We delivered 276 homes in the Mid-Atlantic region during the third quarter, representing a 28% increase from a year ago. We are very pleased with our DC, Charlotte, and Raleigh operations as they have all been performing well and we continue to look for good land and lot opportunities there in order to further grow our positions in these markets.

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

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

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

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

Our active communities increased 15% from 128 at the end of September last year to 147 this year. The breakdown by region is 66 in the Midwest, 46 in the South and 35 in the Mid-Atlantic. During the quarter, we opened 17 new communities, while closing 10. Our current estimate is to end the year with about 25% higher count than we began 2013. We delivered 937 homes in 2013 third quarter, delivering 56% of our backlog this year, compared to 64% a year ago. Our cycle times have increased slightly due primarily to [sub-supplier] issues and slower local permitting processes. Our average closing price for the third quarter was $284,000, a 7% increase over last year's [$266,000] and our backlog average sale price is $304,000.

Revenue increased 32% in the third quarter compared to last year, as a result of both the increase in deliveries and the average closing price, along with strong results from our financial services operations. In the third quarter, we recorded pre-tax charges of $2.1 million for impairments. These third quarter charges were for older Atlanta assets in our Midwest markets. We continue to work through these older assets. We are currently down to less than 10 older Midwest communities. Our gross margin was 20% for the quarter, improved sequentially from 2013 second quarter at 19.7%. Excluding impairments our third quarter GPs were 20.7%, compared to 19.8% in 2012 third quarter. Land gross profit was $669,000 this quarter. For the nine months ended September 30, 2013, land sale profit was $3.2 million. We sell land as part of our land management strategy.

Our SG&A expenses decreased to 13.2% of revenue for the quarter, compared to 14.7% a year ago, a 150 basis points drop. Our SG&A expense increased 18%, reflecting our 32% revenue increase and also our significant community count growth.

Interest expense decreased $550,000 for the quarter, compared to the same period in 2012 and increased $120,000 for the first nine months of this year. While interest incurred increased by $657,000, our rate of capitalization increased due to higher land development activity when compared to a year ago.

Pre-tax income for the quarter was $13.7 million and included $2.1 million for asset impairments and a $1.7 million non-cash charge related to a loss on early extinguishment of debt. Excluding these charges, pre-tax income for the quarter from our operations was $17.5 million. We generated $27 million of EBITDA for the quarter and covered interest at 3.1 times for the trailing four quarters. We have $14 million in capitalized interest on our balance sheet, compared to $15 million at year-end 2012, about 1% of our total assets.

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

During the quarter, we concluded that it is now more likely than not that we will realize a majority of our deferred tax assets. Accordingly, the Company reversed $111.6 million of its deferred tax asset valuation allowance during the third quarter and retained a $4.7 million valuation allowance for estimated utilization pertaining to fourth quarter 2013 earnings. In addition, we retained an additional $10.2 million valuation allowance for certain state jurisdictions.

Our earnings per diluted share for the quarter, exclusive of the $3.75 per share benefit related to the deferred tax valuation allowance reversal, was $0.47 per share. This per share amount also reflects a $1.2million reduction from net income related to dividends paid to our preferred shareholders during the quarter. In addition, our diluted share count assumes the conversion of both of our outstanding convertible debt issuances, adding about 5 million shares to our diluted outstanding shares, but also eliminating $1.4 million of interest expense in the third quarter associated with the convertible notes from our diluted EPS calculation.

Paul Rosen, will now address our Mortgage Company results.

Thanks, Phil. Our mortgage and title operations' pre-tax income for the third quarter was $3.5 million, which is the same as 2012's third quarter. Our third quarter results includes an increase in loans originated from 606 to 689 and higher average loan amounts, but were offset by lower margins on loans sold and a continued shift in product mix from FHA the conventional.

We continue to benefit from increased revenue on the servicing value of our loans on which we have retained servicing. The loan to value on our first mortgages for the third quarter was 86% in 2013, compared to 88% in 2012's third quarter. We continue to see a shift towards conventional financing. 66% of the loans closed were conventional and 34% were FHA, VA. This compares to 58% and 42% respectively for 2012 same period.

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

At September 30, 2013, we had $48 million outstanding under the M/I Financial credit agreement, which expires March 28, 2014 and $8 million outstanding under our separate $15 million repo facility, which expires November 12, 2013. We are currently in discussions with the lender to increase and extend the repo facility.

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

Now I'll turn the call back over to Phil.

Thanks, Paul. As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing in new communities, as well also managing our capital structure. Total homebuilding inventory at 9/30/2013 was $676 million, an increase of $132 million above September 2012 levels, primarily due to higher investment in our backlog and our increased land spend.

Our land investment at 9/30/2013 is $296 million, a 32% increase compared to $224 million a year ago. And at 9/30, we had $176 million of raw land and land under development and $120 million of finished unsold lots. We owned 2,450 unsold finished lots with an average cost of $49,000 per lot and this average lot cost is 16% of our $304,000 backlog average sale price. And the market breakdown of our $296 million of unsold land is $101 million in the Midwest, $108 million in the South and $87 million in the Mid-Atlantic. Lots owned and controlled as of 9/30/2013 totaled 18,100 lots, about half of these lots were owned and half under contract.

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

During 2013's third quarter, we spent $56 million on land purchases and $31 million on land development for a total of $87 million. Year-to-date we have spent $224 million on land purchases or land development. And as to our 2013 land purchases, year-to-date, about 47% of the purchase amount was raw land and 53% were finished lot pickups under option contracts and bulk finished lot purchases. Our estimate today for total 2013 land purchased and land development spending is $300 million to $350 million, which includes the $224 million we've spent year-to-date.

At the end of the quarter, we had $110 million invested in specs, 249 that were completed and 573 specs under construction. This translates into about 5.6 specs per community. And of the 822 total specs, 301 are in the Midwest, 285 are in the Southern region and 236 are in the Mid-Atlantic. At September 30, 2012, we had 673 specs with an investment of $82 million.

Our financial condition continues to be strong with $158 million of cash, $418 million in equity and a net debt to cap ratio of 37% and the Company had no borrowings under our unsecured credit facility. This completes our presentation. We will now open the call for any questions or comments.

(Operator Instructions) Ivy Zelman, Zelman & Associates.

Thank you. Good afternoon guys, congratulations on a great quarter. I have several questions, but I'll go back in the queue to make sure everybody else gets a turn. But just to start with, Bob, can you talk about the sustainability of the gross margins at 20%, if you think those margins are sustainable and how would you compare the new community gross margin to the existing community, just for comparison purposes, in light of the idea that sales trends are slowing and there is some investor -- some competitors using incentives and want to get your thoughts on incentives? So, lot to chew on for a second.

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

In terms of future margins, we do think that there is still some opportunity for our margins to improve. With the uncertainty right now in terms of sales, and we're starting to see some incentivizing occurring in select subdivisions, frankly by all builders in the various markets that we're in, there will no doubt be some margin pressure. I think it would be unwise to assume that there won't be some, but we think that as I said before, the long-term fundamentals are good, demand is good. We think this pause will eventually unlock itself and buyers will come back. Will we see the same level of price appreciation that we saw during the first four, five months of this year, don't know if it'll be that much, but we would expect our margins to continue to go up. Exactly how much remains to be seen. And I wouldn't feel comfortable forecasting that, but I don't feel as if our margins have leveled off. We would expect them to go up.

That's very helpful. Let me just ask one more question. As it relates to interest rates, you said that the impact from rising rates clearly were felt throughout your portfolio of operations. Now with interest rates retreating back the other way, would you expect that to be a benefit? And of the total operations of these first-time buyers, did you feel it more [disproportionately] on the affordable product and less so on the move up, maybe (inaudible) breaking down where the impact will be greatest and what you think with rates coming lower if that will be a catalyst?

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

Mostly increasing rates had a very marginal effect on the ability of our buyers to qualify, both the first time buyers and move-up buyers. And so with the movement down in rates, I don't know that we'll really see much of a difference. Our buyers have not had a hard time qualifying for mortgages.

But, Paul, the impact that Bob spoke of on the slowing sales pace was attributed to rates rising and if so rates were rising and it didn't have an impact on affordability, then why do we see a slowdown in sales pace, I'm a little bit confused?

I think you get into buyer confidence. I think that with some of the issues that -- us close to the business, when rates were so low historically, we didn't think much about it. But for people close to it, to see that big of a jump, it just caused them to pause a little bit. Then I think there was also built in there, just at the time of the year, the summer months and they have some seasonality as far slower sales. Then you got into some of the other issues as far as the issues in Congress, in DC and some of those things. I also think that if you look at us in particular, I mean our sales, the first two quarters of this year were up 30% plus. We had a lot stronger sales in the first two quarters than we thought we would have. Maybe we also put a little bit of demand forward, who knows. But we still feel very good about -- we know what our sales pace has been this year. And still having sales up 15% a quarter, I mean we felt okay about that.

And so, lastly on the community growth that you guys have had, you mentioned the progression of the orders during the quarter. Of the 17 communities that you opened was it disproportionately weighted in September, because that's where you saw the greatest level of year-over-year change in orders?

When you look at community count increase, you kind of always tend to have more open kind of at the end of the quarter. Therefore, with us, the way we count community is when we get a community open, we count it. It doesn't matter if the models open or whatever we still count it. We do anticipate opening 20 plus communities in the fourth quarter and for the year we'll have the most increase in communities in the South region. Some people today have asked about sales pace. If you look at our sales in July, August, and September, Ivy, they were really pretty consistent. Our sales were between like to 275 and 300 each month, July, August and September.

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

Because our pace was about the same all three months.

Okay, great. I'll get back in queue, guys. Congratulations again. Thank you.

Thanks.

Michael Rehaut, JPMorgan.

Hi. This is actually Jason Marcus in for Mike. My first question, really to the land market, I was just wondering if you could provide us some perspective around what you've been seeing recently in the land market in terms of the competition and the pricing and especially, what you've seen following the rise in interest rates and if it had a material impact?

These are all really great questions. First of all, our objective on any land deal is to try to secure what we consider to be a premier location that meets our minimum underwriting and the interest in those deals in the market that we're in remains very competitive. I think that there has been some inflation in the minds of sellers, prices on land have gone up. We're actually, when you look at the lots that we own and we control and what we believe to be the reasonable ability for our Company to grow over the next several years, we're in very good shape today. And the lot of the stuff we're looking at right now would be things that would generate, for the most part, sales and closings not in 2014, but really mid 2015 and beyond. We feel -- Phil made this point, we only control over 19,000 lots. We've improved our lot and land position by over 62% from a year ago. We believe we can continue to grow our community count and our market share all based upon the underlying notion that home building from a macro standpoint will continue to improve and that we can capture at least our fair share of that growth. Whether it's in the 10% or 20% growth range remains to be seen, but we think that there's that opportunity and what we have out in front of us that we own and control today will allow us to do that.

And I'll give you a couple more pieces of information. We talked about overall today owning and controlling over 18,000 lots, which is about 60% higher than a year ago. If you look at the owned lots, a year ago we owned 6,200 lots, today we own 9,100. So our owned lots are up 47%. And again, about 2,500 of those are finished. So we feel pretty good about that. We are seeing more of what we call A location opportunities, be in the raw land side, and again, we talked about year-to-date raw land deals being 47% of our purchase amounts. So that's been a little bit of a change for us, but again --

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

Okay. And then next question regarding pricing, in terms of true price versus kind of a mix shift, maybe just to higher-end homes, how much of the increase in ASP during the quarter would you quantify that's kind of a true price increase?

You know that's always hard to say. If you look at our backlog today being $304,000 that's the highest backlog average sale price we've had since 2007. If you also look at our prices across the board, in backlog, the Midwest is up from 267 to 296, the Southern regions from to 263 to 287, the Mid-Atlantics from 330 to 340. So we feel good that we have been able to hitch our prices up. Are we going to be faced with -- as some other people have talked about some higher land cost going down the road, probably a little. But again, our sweet spot tends to be more first, second, move-up anyway, so we definitely try to pay attention to that, release fewer number of lots as we open communities, try to be very careful where we place our specs in our communities. The cost increases have not been in the last quarter what they have been. That's been slowing down some, there are some certain challenges. There's labor issues in Texas, trying to keep subs on the jobs and some of those things, but overall we feel pretty good about, we've been able to raise prices where it does make sense.

Okay. And then lastly, now that most of the DTA valuation allowance has been reversed, how should we think about tax rate in the fourth quarter and then kind of on a run rate basis for the next year?

This is Ann Marie. The tax rate in the fourth quarter will probably be around zero percent effective tax rate, is that how GAAP works. You have to do inter-period tax allocation when you reverse these things. Going into 2014, you can expect kind of a statutory rate of around 38%, be able to take a few percentage, depending on how operations work.

Okay, great. Thanks.

Thank you.

Alex Barron, Housing Research Center.

Hello. Hi, guys.

Hey, Alex.

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

I think that -- I'm not sure that I heard us say that we're raising prices, but because where that is occurring is on a very select community-by-community basis across the board. We would not make that statement. Certainly the pullback in demand and this recent slowdown in sales, I think is going to result in a moderation of price increases. The comment that we made relative to, we think we can continue to grow margins is more borne out of the fact that we continue to be opening more and more new communities, where we just simply believe that those communities can sustain the margins that we've underwritten them at, which will help lift our overall margins.

I think also, Alex, you have to pay attention to what markets the builders are in. I mean some builders are operating today in the Californias and the Arizonas and some of those things where the markets are probably harder, seem to be having more significant price increases than we are. Our average sale price is up 7% year-to-date.

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

The short answer is yes. And it's a combination and it's not across the board, it's market-by-market, and even within each market, it depends upon the community. Some communities there's been no incentive, but incentivizing in others there has been and it's subdivision and communities in tandem.

Got it. And then you also mentioned something about a charge for extinguishment of debt, but I was looking at your balance sheet and I couldn't figure out what debt, because I don't [see] the end levels of last quarter. So maybe I missed it.

Yeah, Alex, this is Kevin. We put in place a new three-year unsecured revolving credit facility for $200 million in the quarter. And in conjunction with that replaced the prior credit facility, which still had about a year and a half to go to maturity. So we had expensed the remaining unamortized fees. When you book these facilities you amortize them over the life.

Okay, got it. Okay that make sense. Thanks.

Thank you.

(Operator Instructions) Joel Locker, FBN Securities.

Hi guys.

Hey, Joel.

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

Let me make one comment about it, then I'm going to ask Phil to maybe provide a little more color. We've said this during the last couple of calls. We're currently operating in 12 divisions and more than two or three of them are still relative start-ups where you don't have on a division basis the kind of operating leverage that you like to have once you achieve a more meaningful level of volume. So that has been a drag on SG&A. And then the other thing is just getting our volume back up to where we would expect it to be. Opening up 25% year-over-year -- increasing, rather, new communities 25% year-over-year is at additional -- at least current year expense, which slightly drags it. As our business continues to grow, we expect it too, we will expect to get more operating leverage and certainly as we enter into our second, third and fourth years then of operating in the Texas markets, Dallas will be brand new next year too, but we won't have two or three "new markets". So we would expect all that to contribute to what should be better operating leverage. Phil, I don't know if you have anything you want add to that.

Just, Joel, I mean we were pretty pleased to improve by 150 basis points, down from 14.7% to 13.2%. You're right, last year in the fourth quarter, we were over 15%. As Bob said, we continue to work very hard on that. Don't give any specific projections on those numbers, but we do expect to continue over time to get continued improvement in SG&A leverage.

Right. And what about the Texas market overall? Just I know you're expanding there on the land side of it. Are you seeing any private builder competition. You said it was competitive overall into the company, but just what you're seeing in Texas and the trajectory of land prices there over the last three months?

We opened up in Houston in 2010, San Antonio in 2011, Austin within the last 90 days. We'll open in Dallas next year. So we're still a relative newcomer, but the one thing we have seen is a greater need for us, and I think this is shared by other builders, but I know we've seen in order to secure the premier locations there is less third-party developers out there developing lots that we would be developing lots that we would find suitable and there's been a greater need to take on raw land and development risk associated with growing the operation there. And particularly some of the larger master plan communities start to wind down. So that's what we've seen and the competition comes from the fact that the markets that we're in are -- they're very competitive, then virtually all the publics and some fairly large privates are there.

Right. I guess last question on -- say on your communities that were open for the whole quarter from June 30 to September 30, what percentage would you say you raised prices or lowered incentives versus any that actually you increased incentives or lowered prices?

I would say with the new communities that we opened, as Bob said earlier, we're really pleased with their performance from a margin standpoint and a pace standpoint. So, there is not very many of those where we've had do incentives or things like that to any degree.

Well, say in the existing communities, not the new ones, but the existing that say were -- have been opened June 30 to September 30, like what percentage of those that you increase prices or ---?

In the last 90 days, very few.

Very few. All right. Thanks a lot guys.

Alex Barron, Housing Research Center.

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

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

Yeah, because I guess I had thought given that orders we saw in the last couple of quarters that the deliveries would have been somewhere in that ballpark. So I'm kind of wondering if they're just going to show up come fourth quarter or this is just more of a --?

Well, we obviously hope to close a lot of houses in the fourth quarter. Usually that is our biggest quarter or whatever and again we're hoping to get more of that backlog delivered and so forth.

And then in terms of the remaining DTA that you were unable to reverse this quarter, is that something we should expect for next quarter, or are you seeing more like into the next years?

Well, we made the comment in the call that we reversed $112 million and we retained $5 million for estimated utilization for the fourth quarter of 2013 and then the other $10 million of DTA is out there for certain state issues. So hopefully we'll be getting additional pieces of that next few quarters.

Okay, great, thanks. Thanks, Phil.

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

Thank you very much for joining us.

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