M/I Homes, Inc. (MHO) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Second -- Third Quarter Conference Call. [Operator Instructions] Thank you. Mr. Creek, you may begin your conference.

Thank you for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, Vice President, Corporate Controller; and Kevin Hake, Senior VP. First to address regulation Fair Disclosure. We encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I 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 thanks for joining us. We are very pleased with our third quarter results, as they represent our best quarterly performance in 5 years and position us to solidly return to full year profitability. We are making noticeable and meaningful progress on a variety of important fronts as housing conditions throughout most of our markets have clearly improved. Net income improved by more than $13 million for the quarter and by nearly $40 million for the first 9 months. This was our sixth consecutive quarter of year-over-year improvement in new contracts as we continue to take steps to positively and firmly strengthen our market share in virtually every one of our housing markets. Our gross margin for the quarter equaled 19.8% representing 190 basis point improvement over last year’s third quarter and we continue to be pleased with the gains we're making in our operating leverage as our selling, general and administrative expense ratio has improved. We are also pleased with our 28% increase in closings as well as a 12% year-over-year improvement on our average closing price. As we look at the quarter and our improved results, there are several factors I would like to point out. First as noted, housing conditions have improved with virtually all markets seeing an increase in the rate of new home sales. Second, as we shared with you during prior quarters, we continue to be pleased with the success we’ve had with our new communities, both from a margin and sales pace standpoint. Over the past several years, we have deployed considerable capital by investing in new communities in our various markets. These investments are subject to strict internal underwriting standards, all geared towards achieving a minimum 20% internal rate of return based upon current market conditions. In other words, we do not assume or price in any project price appreciation. During the quarter, over 70% of our closings came from these new communities and our gross margins on these closings were slightly north of 20%. The performance of our new communities is indeed a major factor in our return to profitability. We seek to have a meaningful presence in each of our markets and have been growing and gaining market share in most of them as I mentioned, particularly our newer operations in Houston and San Antonio. During the third quarter, we also announced our entry into the Austin, Texas market, one of the nation’s most active and dynamic housing markets. In that regard, we were able to bring on an individual to lead that operation who has been in the home building business in Austin for nearly 20 years and brings with him very significant expertise and leadership. We are excited about our prospects for growth and success not just in Austin, but also in Houston and San Antonio as that our new Texas expansion further strengthens our geographic footprint and enhances our opportunity for profitable growth. Our balance sheet and liquidity remained strong. We took steps during the quarter to strengthen it further by issuing $58 million of subordinated convertible notes and $42 million of common equity. This helped build up our cash position to $169 million at quarter end and we have 0 outstanding borrowings under our $140 million credit facility. All resulting in the reduction of our ratio of net debt to cap to 36% at quarter’s end, down from 45% at the end of the June quarter. I would now like to take a moment to talk specifically about our 3 regional housing markets. I’ll begin with our Midwest region where we have home building operations in Columbus, Cincinnati, Indianapolis and Chicago. The Midwest continues to be our largest region with 370 deliveries in the quarter which represent 41% of our total. It’s very important to note that this ratio has declined significantly from 53% of deliveries just 3 years ago. That decline is all pursuant to our continued strategy to deploy greater and greater percentage of our assets and capital towards our Southern and Mid-Atlantic regions. We ended the quarter with 58 active communities in the Midwest. This represents a 3% decrease from the September quarter a year ago. Despite the decline in communities, our deliveries increased 21% in the Midwest for the third quarter compared with a year ago and our new contracts in this region were up 9% for the quarter. Total lots controlled in the Midwest increased 2% from a year ago. Our performance in Chicago continues to be very strong; this despite a difficult macro housing or -- difficult macro conditions within that market. We continue to grow our presence in Chicago as a top 5 builder. We are also performing quite well in Indianapolis and are very pleased that we have been to increase our lot position in that market. And Columbus continues to be steady and showing some moderate signs of improvement with closings up nearly 20% in the third quarter year-over-year. And that’s a total market situation for closings, not just M/I Homes. Cincinnati continues to be a difficult market overall and it has been challenging for us with respect to both sales and margins. That said, we do believe we are on the right path in that market to begin to show slow and steady improvement. Next is the Southern region where we operate in Tampa, in Orlando, Florida as well as Houston, San Antonio, and now also Austin Texas. We delivered 223 homes in the Southern region for the third quarter. This represents a 38% increase from a year ago and our new contracts increased an impressive 50% for the quarter in the Southern region. As noted, we have been expanding in Texas and our first expansion there was in 2010 when we opened in Houston, followed by our 2011 entrance into the San Antonio market. We have also experienced solid growth in the last 6 to 9 months in both Tampa and Orlando as these markets have improved and we continue to find good meaningful opportunities for investment in new communities in the 2 Florida markets. Both our new contracts and deliveries in Florida increased in the third quarter, compared with a year ago. At the end of the quarter we had 34 communities in the south representing a 36% increase from last year and our total controlled lot position in the Southern region is now up nearly 40% year-over-year. Lastly, the Mid-Atlantic region where we have operations in Greater DC, Charlotte and Raleigh, North Carolina. New contracts in the Mid-Atlantic region were up nearly 40% for the quarter, compared with 2011 and deliveries were up 30%. Our backlog value is up over 50% at quarter’s end from the prior year. In particular, our North Carolina markets are performing very well. Raleigh is one of our top divisions in terms of profitability and margins and Charlotte has experienced noticeable improvement both in margins and sales throughout this year. The Washington D.C. market continues to be healthy, but we have experienced, as we said during the last call, a tightening of demand with increased competitive pressures on margins. Notwithstanding that, we have been pleased with the opening of several new communities where we have seen an increase in sales. We ended the quarter with 36 active communities in the Mid-Atlantic region which is an increase of one community more than a year ago. Finally, before turning the call over to Phil, let me just close by saying that as we look ahead, we believe that M/I Homes is very well positioned in a number of respects. One, to continue expanding our community count; and two, to continue growing the company profitably. And with that I'll turn things over to Phil.

Thanks, Bob. New contracts for the quarter increased 29% to 757, with the net absorption rate of 2 sales per community per month. Our traffic for the quarter increased 29%. Our sales were up 47% in July and traffic was up 33%. Sales were up 40% in August and traffic was up 25%; and our sales were up 4% in September and traffic was up 27%. Last year, September was a very strong sales month for us, up 43% from the prior year. Our active communities increased 7% from 120 last year to 128 this year. The breakdown by region is 58 in the Midwest, 34 in the South and 36 in the Mid-Atlantic. During the quarter we opened 12 new communities while closing 8, and at September 30 74% of the communities that we are selling out of are new, and we define new communities as those opened since January of ’09. Our current estimate is to end the year with about 10% higher community count than we began 2012 and for this year we expect to open about 45 new communities. We delivered 746 homes in the third quarter of 28% when compared to 2011’s 582 deliveries. And 71% of our third quarter deliveries were from new communities compared to 60% in the third quarter last year. We delivered 64% of our backlog this quarter, compared to 70% a year ago. Our gross margin, exclusive of the impact of impairments in drywall, was 19.8 for the quarter, up 190 basis points year-over-year. Our margins were 20% in our new communities and 15% in our older legacy communities. Third party land sales revenue was $4.1 million in the quarter resulting in $800,000 of income, and in the third quarter we recorded pretax charges of $1.3 million for impairments. These third quarter charges were for legacy land assets in our Midwest markets. We also reported in cost of sales a $3 million drywall settlement that we received in the quarter. Our third quarter SG&A expenses increased $5.6 million compared to last year. However, as a percentage of revenue, SG&A decreased to 14.7 from 17.7 a year ago. Our G&A expenses for the quarter were $16 million, increasing 15% from last year, and our selling expenses for the quarter increased $3.4 million, up 31% from a year ago. These expenses were up primarily as a result of the increase in homes delivered, an increase in our active communities and increase in personnel to support our growth. And our third quarter revenue increased 48%. Interest expense increased 600,000 for the quarter and $1.2 million for the first 9 months of this year, compared to last year. Interest incurred was $5.9 million in the third quarter of this year, compared to last year’s $5.6 million. We had $6.8 million of pretax income from operations for the third quarter compared to a $3 million operating loss during the third quarter of last year, and this improvement was the result of more deliveries, gross margin improvement and land sales profits. We generated $20 million of EBITDA and covered interest 2.1x for a trailing 4 quarters. We have $17 million in capitalized interest on our balance sheet compared to $20 million a year ago, which is about 2% of our assets. And we reported a non-cash after-tax benefit of $3.6 million in the third quarter for a valuation allowance related to our deferred tax assets. Currently, our gross deferred tax asset is $141 million and it is fully reserved. Now Paul Rosen will address our mortgage company results.

Thank you, Phil. Our mortgage and title operations pretax income increased from $800,000 in 2011’s third quarter to $3.5 million in the same period of 2012. As we stated last year, 2011’s third quarter was negatively impacted by lower servicing release premiums and increased reserves for investor put back issues. The main component of our 2012 income is that loans originated increased 39% from 435 in 2011 to 606 in 2012. Our third quarter results included increased income attributable to higher loan amounts and increased margins on loan sold. We continue to see a small shift towards conventional financing. 58% of our loans closed were conventional and 42% were FHAVA. This compares to 57% and 43% respectively for 2011 same period. The loan to value on our first mortgages for the third quarter was 88% in 2012 compared to 86% in 2011’s third quarter. Overall, our average mortgage amount was $229,000 in 2012, an 8% increase compared to $213,000 in 2011’s third quarter. The average borrower credits score on mortgages originated by M/I Financial was 731 in the third quarter of 2012 compared to 737 in 2012’s second quarter. Our mortgage operations captured approximately 85% of our business in the third quarter compared to 2011’s 84%. At September 30, 2012 M/I Financial had $55 million outstanding under our credit agreement. The credit agreement expires March 30, 2013 and provides for $70 million in borrowing ability. In the normal course of business, we receive inquiries concerning underwriting managed on specific loans our investors have purchased from us. We thoroughly review and respond to each inquiry and even though we are not required to do so, we routinely engage an independent third party to review the files and information related to the origination of each mortgage. Our reserve at September 30, 2012 with respect to these matters was $2.2 million compared to $2.3 million at December 31, 2011. M/I Financial has not purchased any loans this year. Now I will 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 carefully in new communities while also managing our capital structure. Total home building inventory at 9/30/12 was $544 million, an increase of $53 million above the prior year levels, primarily due to higher investment in our sold backlog. Our unsold land investment at September 30 of ‘12 is $224 million, a 7% decrease compared to $242 million a year ago. Compared to a year ago, raw land and land under development decreased 5% and finished unsold lots decreased 9%. At September 30, we had $95 million of raw land and land under development and $129 million of finished unsold lots. Our unsold finished lots totaled 2,550 lots with an average cost of $51,000 per lot. And this $51,000 average lot cost is 18% of our $284,000 backlog average sales price. And the market breakdown of our $224 million of unsold land is $88 million in the Midwest, $45 million in the south and $91 million in the Mid-Atlantic. Lots owned and controlled as of 9/30 totaled 11,200 lots, 55% of which were owned and 45% under contract. We own 6,200 lots of which 50% are in the Midwest, 24% in the South and 26% in the Mid-Atlantic. During the third quarter we spent $23 million on land and $18 million on land development for a total of $41 million. Year-to-date, we have spent $118 million on land purchases and land development. About 26% of our land purchases were in the Midwest, 56% in the South and 18% in the Mid-Atlantic. And as to the type of our 2012 land purchases year-to-date, about 80% were finished lot pick-ups, 12% had been bulk finished lot purchases and 8% were raw land deals. For the full year 2011, we spent $117 million on land purchases and land development. Our current estimate for 2012 land spend is $180 million to $210 million. At the end of the quarter, we had $82 million invested in specs, 203 units that were completed and 470 specs under construction. This translates into about 5.3 specs per community and of the 673 total specs, 251 are in the Midwest, 218 are in the Southern region and 204 in the Mid-Atlantic. At 9/30/11, we had 638 specs with an investment of $81 million. We continually focus on cash and liquidity. During the quarter, we enhanced our capital structure by issuing 57.5 million of convertible senior subordinated notes through 2017. Concurrent with this, we also issued 2.4 million common shares which yielded $42 million in net proceeds. We ended the quarter with $169 million of cash which includes $160 million of unrestricted cash. At 9/30, the company had no borrowings under our $140 million credit facility which matures December 2014. Our borrowing availability under this facility, net of outstanding letters of credit was $55 million at quarter end, based on the value of pledged assets. Our financial condition is stronger now with our capital rate and profitability. Based on this, our restricted payments basket under our 2018 senior notes is now positive and we are no longer prohibited from paying dividends under our senior note indenture. The payment of dividends in the future will be discussed at our quarterly board meetings. Dividends will be considered based on a number of factors including our company performance, economic conditions, our liquidity, our leverage and our business outlook. This completes our presentation. We will now open the call for any questions or comments.

[Operator Instructions] Your first question comes from the line of Dennis McGill with Zelman & Associates.

First question, I'm not sure if Bob you want to take it or maybe Phil for you but if we think about gross margins and we tend to look at it before impairments and also before the capitalized interest. Even if we exclude sort of the 2003, ’04, ’05 period; historical margins would be somewhere around 19% and yet you guys are already about that, closer to maybe 21% for this year, even though the cycle is just now starting to turn. Can you maybe just talk about how you think about that comparison? The cycle parity [ph] may be above a normalized level even though the cycle is still near the bottom and just how you think about margins could look over the course of this recovery versus what you’ve reported in the past.

This is a tough question. No, that’s -- and so I think I will let Phil answer it. I think that -- and then others can chime in. I do think that as we look ahead somewhere between 19% and 21% is where the range is likely to settle. We have invested, as you well know, and as we've said throughout this call and previous calls, considerable sums in new communities. And we look for minimum margins in that 19% to 21% range, which by the time you factor in sales pace and another expenses that we fully load into that underwriting analysis. It's essential to be around that point if you expect to yield the rate of return that we need to get in order to make sense of the investment. That said, there is going to be isolated instances from quarter-to-quarter or from market-to-market where perhaps a piece, a good piece of ground is purchased and distressed at some discount that might result in greater than more so called normalized margins and that could affect a certain quarter in a somewhat distorted way. I think the way we look at it going forward and we're pleased that it appears to have gotten to this point as quickly as it has because if you’d have asked that question a year ago, I would have thought we're still a ways away. We're pleased that we seem to be in that 19%, 20%, maybe 21% range. And frankly, if we manage our expenses properly, and we believe we are, and if we're able to secure our fair share of solid locations, and we’ve clearly been able to do that over the last couple of years and believe we will continue to, we could have a very profitable company. So I mean that’s sort of the way I see it.

And just to make sure we are talking the same numbers, when you say 19% to 21%, does that compare to the roughly 19% this quarter where it includes interest?

Yes.

Okay.

Since Phil and Ann Marie are nodding affirmatively, I am saying yes.

We are doing all we can, Dennis, to drive those margins up, obviously. There is cost pressures on the stick and brick side. Hopefully, we are investing in markets where the economic information or data is better and the demand is better. We are also trying to work through our legacy remaining assets in the Midwest but like Bob said we feel pretty good where we are. We are trying to drive those up every day, but again demand is still not as strong as anybody would like it.

Right. The other question I guess somewhat intertwines with just the land market. You hear so much for builders of builders being back in the market now and looking for these raw land parcels or developed plan parcels plan and strategy and there is enough capital that there is more than enough competition in most of the markets that you guys are in, particularly in some of the new markets you have entered. So can you just help us understand how many dealers you have go after before you get one that fits all your hurdles and how laborious of a process is it to fulfill the land commitments that you need to hit these targets or grow targets as you go out 2 years or 3 years?

There is no answer to that question other than it’s about leadership and the quality of the team that you assemble in a particular market. I’ll use an example that makes us look good. The Chicago market is probably one of the toughest housing markets in the United States right now and we are having a -- we’re ringing the bell there. We are having a superior year there and it’s because we think we have got a very strong team on the ground and the leadership which consists of your division leader, the sales leader, the land acquisition leader, the construction leader, each one of those people play an integral role and the leadership matters and that has a big factor. I mean and there is no question that there is a lot of builders with a check book and there is a lot of builders they have very, very significant deep pockets in order to pursue the good deals. No builder’s going to get all of them and so far, we have been very fortunate to at least get our fair share. We feel really good about our efforts on the land acq side for 2012 and knowing what we know today, we are excited about the way things look for us next year as well.

Okay. I appreciate that, and then just one quick one. The 5-community net increase in the Midwest, what markets did that occur in?

Where we’re actually growing in the Midwest, Dennis, is Indianapolis and also Chicago, Cinci and Indie, as Bob talked about.

Cinci and Columbus.

Cinci and Columbus, I’m sorry, not quite that strong, so the growth will be in Indianapolis and Chicago.

Your next question comes from the line of Alex Barron with The Housing Research Center. Alex Barrón: I wanted to ask you about, I missed something you said really quick, Phil, on the margins of the new versus the legacy communities. Can you repeat that again, please?

Yes, when you look at the closings for the quarter, the margins on the new communities were about 20% and the margins on the legacy communities were about 15%; and overall we were like 19.8%.

And 70% of the closings in the quarter, actually just a little above 70% came from the new communities; that number a year ago would have been around 60%. As we go forward in the quarter, we continue to see more and more closings coming from new communities for all the obvious reasons. Alex Barrón: And then if you can help me understand the stated prices were up about 12% year-over-year both in the orders as well as the closings. How much of that would you guys guess is pure price increases versus some sort of mix change?

I knew that someone was going to ask that question and that's a really tough one to answer. My guess is that during the year we've, from quarter-to-quarter, sometimes maybe a little more frequently, probably raised prices, question is how much obviously, in about half of our communities. Even with some of the legacy communities, we've had a little bit of pricing power and it’s probably more than half where we've raised prices. The other side of that coin is, and someone may ask this too and I don't know what the answer is, that once you did it, did you maintain your sales pace, because that's always a very delicate dance. And it’s one thing to say we’re raising prices in every community, but on the other hand sales have dropped, but you know we are trying to maintain an appropriate sales pace with margin and we think we are doing the right things and clearly we've seen a whole lot more pricing power this year than we have in the last 5 years. And that's a welcome sign.

The good thing, Alex, was the average sale price in backlog bottomed out for us March of ’11 at $252,000 and then if you look at the last like 7 or 8 quarters, it’s gone like $252,000 to $257,000 to $266,000 to $267,000, all the way up to $284,000, Every quarter’s gone up some. So we do feel good about that. Alex Barrón: Yes, because I was just trying to I guess isolate how much of that might be geographic mix or product mix, or maybe people are buying bigger homes versus like how much you guys had actually kind of raised prices?

Yes, and again that's hard to come at. I mean, we think we are making progress in every region. If you look at average sale price and backlog compared to a year ago you know the Midwest is up $15,000, the Southern region is up $30,000. The Mid-Atlantic is only up $10,000, but again some of that has been a little more focused product, et cetera, the land deals we are finding. But we are also trying to offset cost increases in addition to that to try to move our margins up some. So that's a real hard question. Alex Barrón: Well, how about if we focus on your gross margins, obviously they are up quite a bit. Do you have some sense or some breakdown of how much of that is coming from the new communities being a larger percentage versus maybe like your incentives coming down? Like how much are incentives today versus a year ago and then also I guess counteracting that, how much would you estimate your costs have gone up from a year ago?

Well, I guess the first part of that is if you look from a delivery standpoint, about 71% of our third quarter deliveries were from new communities and that compares to 60% a year ago. So that has continued to move up. As far as sticks and bricks increases, that really depends on the local market. We have seen some increases. We’ve all seen a little bit of a stretching out of our building times due to that; again, trying to deal with that as best we can. It’s not unusual for those things to be happening as business picks up and we've dealt with this before. So we're trying to offset that with price increases. As far as incentives, have incentives in general come down a little bit? The answer is yes but again that’s a community-by-community deal as we try to work through some of our legacy stuff. We still are incenting some, but the bottom line is we do feel good that our margins have moved up quite a bit that we're approaching that 20% level for the second consecutive quarter. So again, we feel like we've made quite a bit of progress there. Alex Barrón: That’s great and the last one if I can ask one more. On the SG&A, the corporate side, they went up by about $2 million. Was that due to the hiring that you talked about or something else?

It's primarily that. Our headcount’s up, Alex, about 11%. That's one of the biggest pieces there but again the good news was our revenue was up almost 50% for the quarter. Alex Barrón: 11% year-over-year, Phil?

11% headcount increase year-over-year, that’s right.

[Operator Instructions] Your next question comes from the line of Stephen Kim with Barclays.

I have a couple of detailed questions, I apologize. Let me start. Interest incurred; you may have given it, but I didn’t catch it.

The interest incurred number was $5.9 million for the quarter compared to last year’s third quarter of $5.6, Steve.

The number I have from last year’s in the third quarter, $6.157. So I assume that may be including some other interest.

Includes amortized; the number that’s in the press release is after excluding amortized interest.

Yes, I was just wondering about the straight interest incurred.

That’s the number that Phil just gave you, that’s cash interest incurred.

Okay, $5.9 million, great. And then my next question is your $46 million – sorry, your $53 million in other inventory, how much of that is a consolidated inventory not owned?

We would have to look that up, Steve. You got another question.

I do, got lots of them. So my next question relates to your actual land spend. Again you gave the number, I know, but did you give the number that was for the actual spend and then how much of it was for development?

No, what I actually gave for, if you actually look year-to-date, we have spent $118 million on land purchases and land development. Last year for the full year we spent $117 million on land purchases and land development. Our current estimate for the full year this year is $180 million to $210 million.

I got that; okay that’s fine. So can you break down -- because I think in your other quarters you had given the amount between the 2 categories. Do you know what that breakdown was for the third quarter?

For the third quarter? $23 million on land and $18 million for land development for a total of $41 million.

Perfect, that’s what I was looking for. Your spec count went up a bunch and I was curious as you head into what normally wouldn’t be considered to be a stronger time of the year. I know things are real good, but is there something else to understand about your specs? Is there a strategy here that you are pursuing?

If you look at the number, Steve, at 9/30 of this year we had $673 million specs; 9/30 a year ago we had $638 million so it’s up slightly, and from an investment standpoint 9/30 of this year it’s $82 million, last year was $81 million. So it really has gone up very little.

Well, okay, got it.

When you factor and take in to account that we have more communities it’s actually gone down.

We have about 7% more communities. Obviously we are growing in Taxes, so it hasn’t moved much bottom line.

Yes, no it hasn’t moved. I was confused when you gave the finished and under construction and I added those 2 and I shouldn’t have. Okay, that's fine. And then your – let’s see, I had asked you about -- let me ask you about your interest capitalization policy. Well, looking at your interest capitalization relative to other builders and it looks like you guys could be capitalizing a lot more interest then you have been, if you were to sort of look at this on a comparable basis to other builders. The impact it booked to your margins was pretty meaningful. I think you guys have -- all the 13 builders I’ve looked at, it looked like you could be understating your margins on a relative basis by over 200 basis points. I was curious if you could -- have you ever looked at that relative to other builders? Can you just talk about what you decide to consider active for the purposes of capitalization?

Well, first thing, Steve, as far as what’s on the balance sheet, we think it is one of the lowest in the industry. We have about $17 million of capitalized interest on our books which is only about 2% of our assets. I think if you compare us to the industry, you will see other builders with a lot more cap interest on their books. As far as what we do every day and how it hits the P&L, I’ll let Ann Marie answer that.

If you follow GAAP, which we take on weighted average borrowing rate for the quarter and we apply it on any inventory that’s under production is when we capitalize. So land that sits there raw, we don't capitalize interest on. When we put land under development, we capitalize interest on that value until it stops development. Lots that sit raw don't get – or sit finished, don't get capitalized and when we start a house, we start capitalizing interest.

We think we have a pretty conservative policy.

Yes.

And we've always had a conservative one and where I suppose there is some subjective wiggle room is defining when a piece of ground, which is a big asset and potentially a big amount of dollars, is under development and when it isn't and we've always tended to define that in what we think is a very transparent appropriate way.

It wouldn’t change our cash flow over a period of 2 years to 4 years.

And we haven’t changed our policy or anything. And back to your question as far as…

It’s $6.5 million was inventory not owned.

Great. Yes, as an analyst who sort of looked at these things, when I see you guys having a much more conservative policy on capitalization than everybody else, that's certainly a good thing and it’s a good sign. So I appreciate that.

The biggest thing, Steve, is look what's on the balance sheet. I mean that's the big thing to me and again we only have $17 million capitalized.

[Operator Instructions] Your next question is a follow-up from Alex Barron with The Housing Research Center. Alex Barrón: I wanted to focus in a little bit on the land spend. So this guidance that you are giving implies you are going to spend about $60 million to $90 million in the fourth quarter. Is that correct?

We do think that the land spend could increase quite a bit in the fourth quarter. Obviously, business has improved. Some deals have pushed from the second and third quarter to the fourth quarter. Again, the range we are given is $180 million to $210 million. That obviously can be adjusted based on market conditions and a lot of different things but yes, at this stage we are thinking for the right reasons our land spend will go up quite a bit in the fourth quarter. Alex Barrón: Okay, so it sounds like you had a bunch of deals in the hopper.

We always have a lot of deals in the hopper, Alex. Alex Barrón: Is the -- would you say that that's kind of the primary use of the cash you guys raised this quarter to help fund those deals and continue the growth?

Well, we obviously hope to deploy that money as soon as it makes sense in our business, try to run a very conservative company. We also were able to get the leverage down below 40%. We have announced that we are going into Austin so we think there's different ways we can hopefully deploy that money that makes a lot of sense for our company and produces better returns. But again we want to invest that money very wisely.

We also deliver a lot of our houses in the fourth quarter. So we’re typically cash flow positive in the fourth quarter. So I wouldn’t want to give you impression that we raised that money and that money goes to buying land. We do have a bit of a clumping of our land spend in our fourth quarter this year. That will actually line up with our normal clumping of our deliveries and the cash from those deliveries. So the capital raised was oriented towards our long-term view and need for that capital not just like a fourth quarter lands bank. Alex Barrón: Got it and are those land deals that you guys are finding penciling to this 19% to 21% that you talked about without any assumption of price increases?

That’s right. It’s 20% minimum hurdle rate, which obviously you look at that hurdle rate in the context of whether it's finished lot deal, raw deal, how much is it really a risk and so on and so forth, but yes, we don’t assume inflation on this home sale price. Alex Barrón: That’s good. Can you talk about your expectation for the BTA, given that you’re kind of in a ramp up mode on profitability? Do you expect that, that could maybe get reversed in next year?

That’s something we obviously look at every quarter, talk to our auditors about.

We are looking forward to that debate.

I mean, we've just return to profitability so it’s something we work on but as far as do we have an expectation that a large amount will reverse next year? Not really. I think it will be a little longer than that, Alex. But again that’s something that we look at every quarter.

[Operator Instructions] At this time, there are no additional questions.

Thank you very much for joining us. Look forward to talking to you next quarter.

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