David Goldberg - VP and Treasurer Allan Merrill - President and CFO Bob Salomon - EVP and CFO

Michael Rehaut - JPMorgan Jay McCanless - Wedbush Alan Ratner - Zelman & Associates Susan Maklari - Credit Suisse Sam McGovern - Credit Suisse Alex Barron - Housing Research Center

Good afternoon. And welcome to the Beazer Homes Earnings Conference Call for the Quarter Ended June 30, 2017. 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 investor relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Vice President and Treasurer. You may begin.

Thank you. Good afternoon and welcome to the Beazer Homes conference call discussing our results for the third quarter of fiscal year 2017. 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-Q 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 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. Allan will begin today's call by providing an overview of our third quarter results and the impact of our earnings levers. Bob will then discuss third quarter results in greater depth, where we stand relative to our 2B-10 goals and our expectations for the remainder of fiscal 2017. I will then come back to provide more details about our land spending this quarter and provide an update on our balance sheet and liquidity followed by a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Thanks David and thank you for joining us on our call this afternoon. We had a terrific third quarter, with results that we're at or above our expectations on every front. We generated revenue growth and a big increase in profitability, driven by higher gross margins and better overhead leverage. We also generated significant order growth as our sales pace increased year-over-year. This led to a nice jump in the dollar value of our backlog leaving us well positioned heading into the fourth quarter. Beyond this year, we're committed to our balanced growth strategy. We're in a solid path of earnings growth, which will be enhanced by our increased land spend and the rollout of our gatherings communities. As this unfolds, we will continue to improve the balance sheet by reducing debt by an additional $100 million through fiscal 2018. We generated 16% growth in adjusted EBITDA, which was very encouraging, but it actually understates our improvement in earnings this quarter. On a comparable basis, our earnings per share grew about 80% versus the same period last year. Now to understand these results, it's helpful to revisit the six levers for earnings growth that we outlined last quarter. We made demonstrable progress on each of these levers, five of which directly improved our third quarter results. First, our average selling price was up 3% year-over-year driven by mix and some price appreciation. Second, our absorption rate was 3.4 sales per community per month. Not only did this help generate a higher backlog but it also allowed us to sale and close more specs which contributed to our top-line growth. Third, our gross margin rose 60 basis points over the prior year. We benefitted from improved margins on our spec homes as well as lower than anticipated warranty costs in roughly equal amounts. Fourth, our SG&A as a percentage of total revenue was down 20 basis points from the same period last year as we closely controlled costs. And finally, our interest expense as a percentage of total revenue declined more than 40 basis points from our debt reduction efforts. The last lever, efficiently growing our community count will materialize in the quarters ahead as we increase our use of lot options, find smaller communities and activate land previously held for future development, will sustain our growth and mitigate risk. Our performance this quarter is indicative of the operating leverage inherent in our business, and it shows that incremental gains in each of these levers can drive major improvements in our overall results. That's why we're so excited about our balanced growth strategy. Before I turn the call over to Bob, I'd like to provide a gatherings update. We started vertical construction at our First Orlando community in Lake Nona, which will ultimately provide more than 200 homes. We also closed on sites in Dallas and Virginia representing more than 130 future sales. And our pipeline of communities under consideration includes over 2,000 homes. As we discussed in our May Investor meeting, gatherings will be a key part of our business in the coming years and we will be investing accordingly. With that, I'll turn the call over to Bob to discuss our results in more detail and to update on our 2B-10 progress.

Thanks Allan and good afternoon everyone. In the third quarter, our sales absorption rate was 3.4, up more than 14% and leading to a 7% increase in orders. We generated sizable year-over-year growth in a number of our markets especially in Las Vegas, Phoenix and Southern California. Notably our new communities in San Diego are showing strong performance helping to boost our growth. Homebuilding revenue rose about 5% versus the prior year to $472 million. Our average selling price of $341,000 was 3% higher than the same period last year. Each of our regions experienced year-over-year price improvements led by the Southeast where prices rose more than 6%. We generated a backlog conversion ratio of 62%, almost 300 basis points higher than the prior year. This improvement related to slightly higher spec sales and better cycle times. In line with our expectations, average community count for the quarter was 155, and we ended the quarter with a 154 communities. Our third quarter gross margin, excluding impairments, abandonments and amortized interest was 21.3% up 60 basis points versus the prior year. Even without the benefit from lower warranty costs this marks the third straight quarter where we posted year-over-year increases in gross margin. We successfully offset the impact of labor and material costs pressures and absorbed higher percentage of our closings coming from land bank and previously land held assets. SG&A as a percent of the total revenue, including both homebuilding revenue on land sales was 12.4%, down 20 basis points year-over-year. The decline was attributable to the stronger top line growth we generated and our overhead costs discipline. This led to our third quarter adjusted EBITDA of $44.3 million, up $6 million or 16% versus the same period last year. Total GAAP interest expense, which includes both direct interest expense and interest amortized to cost of goods sold was $24.8 million in the quarter, down a little more than a $1 million versus the prior year. Going forward our total GAAP interest expense should approximate our interest incurred. As a result future growth in EBITDA should drive pretax income. Our net income from continuing operations was $7.1 million, which was up about a $1 million versus the same period last year. Our net income was up $3.4 million on a comparable basis after adjusting for non-recurring benefits and charges realized last year. Our tax expense in the quarter was $5.7 million, which is little higher than we expected, primarily driven by adjustments to prior period state tax expenses. We continue to expect our effective annual tax rate to be approximately 38% going forward. Together this led to earnings per share of $0.22, up dramatically from the prior year on a comparable basis. We continue to make progress towards achieving 2B-10 our multi-year goal to get to $2 billion in revenue and a 10% operating margin. On slide eight we have provided details on our performance relative to our 2B-10 metrics. At a high level with the trailing 12 months our total revenue was over $1.9 billion, up nearly 50% from when we first introduced our 2B-10 plan at the end of fiscal 2013. Over the same period our adjusted EBITDA has nearly doubled to a $168 million. Our efforts to-date has positioned us to achieve and then surpass our 2B-10 target. Moving on to our expectations for the fourth quarter of fiscal 2017, we expect orders to be relatively flat versus the same period last year, with a community account that is down year-over-year but up slightly from the end of the third quarter. Our backlog conversion ratio should be in the high 70% range, our ASP is expected to be in the high 340s, up significantly from the fourth quarter of last year. We expect fourth quarter gross margin to be flat to up 10 basis points year-over-year, marking the fourth consecutive quarter of year-over-year stability or improvement in gross margin. Our SG&A as a percentage of total revenue should be down slightly year-over-year. Our land sales revenue should be relatively flat sequentially. And finally the cash component of our land spend is expected to be over a $125 million significantly higher than last year. At this point I'll turn it over to David to discuss our land spending and balance sheet.

Thanks Bob. In the quarter we spent $104 million on land and land development. Year-to-date our land spend including activations of land held for future development was $371 million, up 16% year-over-year. Since the peak in 2009, our total land held for future development has declined from $420 million to less than a $153 million, a reduction of 64%. In turn, our active assets now represent 90% of our total inventory. We remain committed to further reducing our land held assets allowing us to continue to improve our capital efficiency. While predicting future quarterly community account is difficult, you can see that we have 43 communities scheduled to open in the next six months and a pipeline of 33 communities that have been approved and are currently under contract offset by 41 near term closeouts. We expect gradual growth in community account in the coming quarters. The last few quarters we have discussed the expansion of our Southern California division at San Diego. In the March quarter we opened our first two communities in Imperial Beach and this last weekend we opened two new communities in Ocean Side. We're excited by the momentum we have generated to date and look forward to our continued expansion. Demonstrating the progress we have made in improving our profitability and our more efficient use of capital. Our trailing 12 months EBITDA to inventory ratio was 10.1%, representing dramatic improvement relative to prior years. While we have great strides today, we are confident that there are significant upside to our returns still ahead of us. With the improvement in profitability and our reduction of debt, our net debt to EBITDA has declined to 6.9 times, down from over 20 times just four years ago. We expect further reductions moving forward. Reflecting the benefits of the refinancings we've completed and our efforts to reduce leverage, our balance sheet is well positioned to support our growth ambitions with nearly a $170 million in unrestricted cash and almost $310 million in total liquidity at the end of June. With that, let me turn the call back over to Allan for his conclusion.

Thanks, David. Our third quarter results clearly demonstrated the operating leverage inherent in our business, with incremental gains across multiple levels driving substantial growth in our profitability. Our path for continued earnings growth will be driven by more of the same plus with reductions in our leverage. I want to thank our team for their continued efforts. With their talents I am confident we have the people, the strategy and the resources to reach our objectives. And with that I will turn the call to the operator to take us in to Q&A.

Thank you, speakers. Now I will begin the question-and-answer session of today's conference. [Operator Instructions] Our first question comes from Michael Rehaut from JPMorgan. Your line is now open.

Thanks. Good afternoon everyone and nice quarter.

Thanks Mike.

My question I guess has to do with the community count. It's one area that it seems like you are kind of stabilizing. You expect 4Q to be up slightly, and I think David in your results, your comments, you also mentioned you expect a gradual growth. As you see the recovery continuing to play out and you are of course executing on the gatherings project - product as well, what could be the lever potentially to accelerate that and you know at what point do you think we might be able to get to the 2b-10 goals you have discussed?

Well, Mike, it's Dave. I would start off by saying, obviously we are not giving fiscal year '18 guidance yet. We are kind of focus on gradual growth in Community count. The one thing that I note in your question, I think which is interesting, which is our focus on the efficient use of our balance sheet and our capital, I think the concept is what we want to do to be able to grow our community count and use our capital efficiently, not only to help grow the community count but also to mitigate risk. So, in terms of growth and the growth pattern I think we are certainly going to see gradual growth as we move through '18. You are going to see more gatherings communities over time but the key is to efficiently use the balance sheet and to use our capital to grow the community account faster than we would otherwise, while we are mitigating risk.

That's helpful. I appreciate that. And I guess following on with the momentum in gatherings, maybe you could just remind us about your current demographic mix, as it stands, let's say in '16, '17 and where you might think it may wind up in a year or two, as you continue to roll out this new product.

So Mike, it's little bit challenging. There are certainly first time buyers and first time move up buyers, are by far the largest part of our business and I would say empty nester [ph] and active adult buyers are the second largest part. The first time component has always been, at least in my history with the company the largest single piece and I am sure that's still the case, that those first time buyers comprise the majority or at least the largest single component. Where you get in to, first time move-up and empty nester, those distinctions are little bit tough because you don't always have exactly the age breakdowns. Our mortgage strategy is to have banks compete on behalf of our customers. So I am in a little different position on having that personal identifying information that, those with the mortgage companies they have. But I can tell you that we like our position. First time buyers, active adult buyers and that is the vast majority of our business, when we get out to '19 and '20. That is who we are. It's all about value. We don't want to be the price leaders in either segment, we want to about value at prices that are affordable.

Fair enough. Thank you.

Thank you. The next question comes from Jay McCanless from Wedbush. Your line is now open.

Hi, good afternoon guys. The first questions, I had orders in the Southeast were down year-over-year. Could you talk about what's going on in that segment, please?

Yeah, we were down in community count a fair bit, Jay. I can tell you that the one nice thing about this quarter, a lot of nice things about this quarter. But all three of our reporting segments had sales per month per community at three or better. So very healthy levels in all three reporting segments is a big part it. A reduction in community count that was slightly disproportionate there, and as I recall and I'm bid off script here, but as I recall, one of our markets last year ran particularly hot. I think Charleston may have been 4.5 kind of a sales pace. Charleston is a terrific market for us. It didn't run at that pace this year. So I would say, really pretty pleased with the results in the Southeast.

Sounds good. The second question I had, a multi-part question on price. I guess number one, could you talk about pricing power, where you guys feel like you're getting better pricing power maybe on a regional or geographic basis. But then also without asking for '18 guidance, just trying to think about as the gatherings products starts to roll in and you've got the higher ASP product coming online in California, what range should we be thinking about for average closing prices in '18?

You're right. There is a lot in that question. So let me pull certain parts of that, tell me if I got it all. The first thing, and maybe the easiest one is the gatherings will really be pretty impactful in 2019. But what I would frame gatherings is around our 2B-10 price bracket. I don't think that you should assume the gatherings is going to be substantially higher or lower. There will be situations where it's both. But that mid-300 is a good place for gatherings. So it's not going to exert by itself a significant influence on ASP. And it is the case, that both in our Maryland markets, Virginia markets and in our California markets, those are higher, but our Houston markets, our Indianapolis markets, our Arizona and Southeastern markets are lower. And I don't really see over the next year that the mix across our communities is going to differ substantially. I would simply point you to the backlog. Backlog is in the 350 range. And I think that has provided a pretty good roadmap for future quarters ASP achievements. But that's kind of - I think as much as I can intelligently say about price. And you have to remind the rest of your question? Did I lose you Jay, Jay, you're still there? And that's the [indiscernible]. Jay if you want re-queue, we can answer any of the parts of the question that we didn't get to. Ash you want to move to the question?

Thank you. The next question comes from Alan Ratner from Zelman & Associates. Your line is now open.

Hey, guys. Good afternoon, nice quarter. So gross margin and orders both came in above the your guidance for the third quarter. I was just curious if you can kind of pinpoint what drove that upside, is it as simple as demand was good through the quarter or were there other things that we should consider there? And then just looking at the 4Q guide, it would imply both gross margin pulling back a little bit sequentially as well as the pace of order growth pulling back as well. So is that just some conservatism following a strong 3Q or similarly is there something else we should be aware of? Thank you.

I'll tell you what, let me take the sales pace part, and maybe Bob talk a little bit about margin. What I will tell you is that the demand was solid through the quarter. And it was pretty broad based. Bob mentioned Vegas and Southern California, and those were clearly stand outs. But I got to tell you our Maryland and Virginia business showed great improvement as well. So we really did see a strength. As it relates to the fourth quarter I think what you're seeing is we think that our pace will be up enough to offset the year-over-year change in community count. But there is a seasonal pattern there that is pretty well established with our fourth quarter coming in at lower sales paces than our third quarter in any period of time than I can recall. So I don't think there is much to see there other than just a little seasonality. On that gross margin side Bob, you want to…?

Yeah sure Alan, we talked about the increase in our margins this quarter were split roughly evenly between higher spec sales margins. And then some lower than anticipated warranty costs. I think as you look forward, while we have done a lot of things to improve the delivery of our homes and our warranty program, I don't think that we are starting to trend at least not yet. But I feel comfortable projecting that lower warranty spend on a go forward basis. Hopefully we get there but as we stand right now we're not projecting now, which is why we guided to where we guided for next year - or next quarter.

And I think the key thing Alan, to take away is we are pretty confident and flat to up gross margin again in the fourth quarter. So that will have been a run of the table this year which was one of our goals at the beginning of the year, and against mix and product and all of the issues that are well known to folks covering the space, we're pretty pleased with that performance. All right, well I guess you have a follow up question there. All right, Ash we take the next question.

Thank you, we have an additional question coming from Jay McCanless. Your line is now open.

Yes, can you hear me now?

Yeah, hey, sorry about that Jay, I think I forgot half your question and it's - I don't have any good excuse.

No problem. I guess somehow I got muted. The pricing power was what I wanted to ask you about in terms of either geographic strength or by-product line, what kind of pricing power you are seeing to offset some of the rise in costs that we are seeing in the lumber, concrete, et cetera?

Yeah, there is definitely some pricing power because the supply situation both for new and used homes is pretty tight. I think one of the things that we're focused on is the health of the community over the life of the community, and going lights out [ph] in one month only to set yourself up for difficulties in subsequent months is something to be considered. So we have been consistent and intentional about price, but we are also really focused on feature level because one of the things that is key to us is affordability for our buyer profile and I want to be careful that is we are absorbing those cost pressures that you mentioned, that we're not just lazily shoving it into price and expecting the customer to pick-up the tab. There are lot of other thing that we want to be doing so that we can continue to be exceptional value or extraordinary value for our buyers and an affordable price. And I am pretty mindful of the fact that while there has been some wage growth we have got to be careful about house prices running through that. So I would tell you it's not just a matter of passing on cost increases.

Got it. And then just the other question that I had, could you talk about what type of improvement you have seen in spectrum gross margins versus last year and maybe what the spread is to 2B build?

Well I can tell you that as we talk about it year-over-year we were up about 60 basis points and we described it as being roughly equal between lower warranty costs and improved margins on spec and stability in the rest of the business which was terrific given the pressures. And so with specs being in there, 30% to 40% range of our business you can kind of workout about what the lift was. At this point the differential is varied. There are still a couple of markets where spec margins on homes to be delivered within 45 days or above 2B built, that's a super healthy condition and that's one that we were really glad we had some specs available to sell into that. That doesn't happen very often and it doesn't happen in a lot of markets. But that was certainly one of the factors this spring.

Got it, thanks guys. Appreciate it.

Thanks Jay.

We have an addition question coming from Alan Ratner from Zelman and Associates. Your line is now open.

Hey guys. Thanks for taking my follow up. I think I might have had the same technical issue that Jay had there. Appreciate your response to my first question. Second question, David I think you made some interesting comments about just the overall strategy as far as kind of balanced growth on the land side and maybe if I interpret it correctly maybe finding ways to be able to more capital efficient on the land acquisition strategy. One of the things that's kind of struck me a little bit this earnings season from other builders results several companies that had quite a bit of success actually expanding their option lot pipelines, some in some pretty significant magnitude and I look at your pipeline and you have an a nice supply of land at about four years. But the option piece has been pretty flat for really the last couple of years. So I am curious you know maybe compared to what we have seen out of some other builders what you are guys seeing in the land market as far as the availability of options. And maybe what's preventing you from being more aggressive in terms of tying up more lots on the option side. Is it just the terms that are available not to your liking or not within your specific markets or price points, or anything you could add there would be helpful.

So Alan I'll jump on it and then David will help with what I leave that. I think one of the things for us is that we've activated an enormous amount of land held for future development. And part of that is let's generate both incremental profitability, let's return that capital to more efficient long-term uses. So with that, and options the combination of those two have really grown in terms of our deliveries. So that's a little part of a Beazer specific story in a bigger context, as you're talking about other builders. I think we are finding opportunities for option deals, but just because you can doesn't mean you should. And I can tell you that it's partly location and price. We've been selective about that. We've been on a pretty good trajectory of pace and margin improvement. And I think if you get caught up in community count growth as a builder it's pretty easy to do, develop what I like to call unititis [ph]. You can tie up additional communities, you can deal with the low down payment or a low deposit and you can have a store. And then you spend the next three years figuring out why you got that store. And look, that isn't to say that options don't play a role, they do. But I would tell you just because they're there they're not all great. And I think with our initiatives to buy slightly smaller communities, do some land banking, some rolling lot options and activate land held, that's really driven a significant improvement in return on capital. And I think all of those tools remain available to us.

Yeah Alan, I would echo what Allan said in that. Having an efficient balance sheet structure is not just about lot options. It's about finding the most efficient way to grow our business using our capital as efficiently as we can. So part of it's smaller communities, part of it lot options, a lot that goes into, part of its land held but it's really the concept of trying to use your balance sheet more efficiently, not just relying on options to control more land. And I think the fact that we haven't strayed from our underwriting discipline, we haven't really changed our product, that might be a differentiator versus some of the other builders that might be focusing on maybe some price sensitive buyers that might be able to find more option deals.

Should I read between the lines there in that a lot of the option deals that might be available today are more in the tertiary markets where you've made it pretty clear you're not necessarily looking to expand into right now?

Yes.

Great. Okay. Thanks for the color guys. Good luck.

Thanks Alan.

Thank you. Our next question comes from Susan Maklari from Credit Suisse. Your line is now open.

Thank you, good afternoon guys.

Hey Susan.

Allan, I want to go back to the discussion around specs and margins. And it seems like with you driving a better sales pace and perhaps a bit more velocity in the market, that along with the fact that you are getting better margins on some of these units, is it changing the way that you think about specs and the number of specs you want on the ground? And within that is it giving you perhaps incrementally better control over some of those fixed levers that you've outlined?

That's a sophisticated question, and I'm not, I think patronizing. There is a lot going on there. Look, we're not going to radically change our approach to specs. So I should say at the outset that there have been a meaningful but not a majority of our business and I expect that to continue. When market conditions are set up in a particular way, that we see demand building, we've evaluated the supply characteristics, we have the capacity at the community level, because Bob still controls every single start of a spec. We have the ability to go get a little bit more active. And one the things we're watch really closely is at what stage are the homes selling and of course what profitability do the homes have when they sell. And what we saw this spring, is there were a number of markets where mid-stage specs were very valuable to have and we were glad that we were well positioned with those. I can tell you there have been other years where that wouldn't have been the same situation. So I wouldn't say that this is really a significant pivot towards more specs. In a year ago, we used specs as a very intentional strategy to manage our liquidity. This year, we used specs to a slightly greater extent, but we used them because they served our market need where the buyers were telling us there is the real demand for that. So I would say they're an integral part of our toolkit, of our go-to-market strategy. And they will clearly factor into our gatherings buildings when we are launching 27 unit building. So you'll see and we'll clearly be breaking out some data about those gathering buildings. So I think you will see maybe in that one area a little different composition of specs possibly but for sure they are a valuable part of a meeting the market. And right now it has been I think we have called that pretty much right on.

Okay, thanks, I appreciate that color. And then hopefully this will be a little bit easier, but it sounds like you are - the communities that you have opened in Southern California have really gone well so far. Can you just give us a little bit more color on what's going on down there and maybe how we should be thinking about your potential in that market going forward?

So we'll eventually have at least seven communities in San Diego just from the existing assets that we have got. We activated two of them, or we opened two of them in the March quarter in Imperial Beach which if you don't know is South of Downtown but it's on the estuary it's on the bay. It's a pretty unique asset and it is an asset where we have been successful in essentially selling everything that we have released to the market and making appropriate upwards adjustments in price between releases and I expect that position to continue to exist for the foreseeable future. Just Saturday we opened our first two communities in Oceanside and we will have a couple more there as a part of the same community that's immediately adjacent to the Oceanside mission. It's an historic site, it's a beautiful site and I can tell you that and we were really pleased with the sales activity. In terms of what else is coming we have got an inland and slightly differently priced community, right, where 56 connects to 15 in Palo Mesa, and that's going to give us I think a great drive factor. We are on the water, we are in Oceanside and we are inland. I think we have that market pretty well surrounded and I think it's going to be important for us in 2018 and 2019 as a result.

Okay, great. Thank you very much.

Thank you. The next question comes from the Sam McGovern from Credit Suisse. Your line is now open.

Hey guys. Thanks for taking my questions. Just could you guys give us a reminder in terms of what's left in terms of debt reduction and your guys' thoughts in terms of what kind of debt metrics you guys want going forward?

Sam it's Dave. In terms of what's left, we've outlined a $100 million in debt reduction through fiscal 2018. So about 18 months left, $100 million. In terms of what debt metrics we like I think the best thing to point you to is if you look at our compensation plan, you can see how we get compensated for our net debt to EBITDA and where we're targeting to get to. Certainly a number in the five would be great and we would expect to get there overtime. So that's kind of where we're headed. And in terms of the $100 million, we're still kind of continuing to all the debt complex essentially everything that's outstanding at this point and of course balancing the cost to repurchase against our maturities. So still an open field for us and still often time to make that consideration.

Great, thanks so much. I'll pass it on.

Thanks, Sam.

Thank you. The next question comes from Lee Brading from Wells Fargo. Your line is now open.

Yeah hi. This is Marissa Davis [ph] on for Lee. Wanted to ask a little more about land spend particularly as it relates to the gatherings product. Is there a percentage of quarterly spend that's target on that product and then is the ramp up in spend expected in Q4 kind of a reflection of the opportunities as it relates to that product towards the balance sheet improvement or some combination in - any thoughts without giving guidance I know if you see this sort of elevated spend, something if you look for more than the $100 million kind of run rate you have been running at?

Marissa, thank you for the question. I would tell you that, the land spend process at Beazer, it's very bottoms up. We don't have the categorization that we're going to go spend X dollars on gatherings or X dollars on so and so market, it's really based on deal flow. So the projections we are giving you certainly the fourth quarter projection is a function of what's in the pipeline and again it's driven very bottoms up. So it's a question the deal flow our divisions are seeing, the quality of deal flow our divisions are seeing and keeping a very similar underwriting methodology in place, as oppose to trying to get more or less aggressive quarter to quarter to put dollars to work, it's very bottoms up.

I think the one other things to keep in mind is that the sites for the gatherings overtime are pretty small, we can put three building on four acres and put five building on seven acres, so as a result in addition our use of property tends to be the highest in best years. So they're little less competitive. I don't think that gatherings land spend is going to actually be as large as the gatherings contribution to our total unit activity. And that's something to kind a keep in mind that that's not really a significant part of our capital allocation consideration. And I think we'll have plenty of opportunities and it's not going - gatherings by itself is not going to distort the land spend.

Got you. That's helpful thanks.

Thank you. Our last question comes from Alex Barron from Housing Research Center. Your line is now open.

Thank you. Good job guys on the quarter. My questions were on two subjects, one was on gatherings the other one was on orders. I was wondering if you guys had any comment on how orders went in July and how they went through the quarter. And then I'll now jump through the gatherings after that.

Yeah, I think we don't typically give monthly guidance or updates, Alex. I'll just tell you that July put us in a position where we feel comfortable with what we said today, which is we think orders will be pretty flat with last year's fourth quarter despite being down in community count.

Okay. And with regards to gatherings I was wondering if you could kind of tell us how many markets are you in at the moment? How many markets you think you'll be in I don't know a year from now three years from now? Just to kind a get a sense of where you think this will go over the next three years based on your land spend on that business?

So, I don't want to single out a particular division. But I will tell you that 15 of our 16 divisions are very likely going to be locations for gatherings product overtime. Not necessarily in the next three years but the demographics and land availability and our competitive position I think will support that. And I may be wrong it may end being all '16. Right now we're actively selling in mid-Atlantic which we've talked about. We showed you having broken ground and gone vertical in Orlando. We own sites and will soon be vertical in Texas in both markets and in Atlanta. And I think that's just 2018 that we know of today. You will see more markets by the end of 2018 and more markets by the end of 2019. But I want to key on something that David said that it will seem a little bit counter intuitive which is gathering is demographically favorable and as a product proposition it is really well met our customer demand. We've got to be a little bit careful which is that we don't start saying things about unit activity that forces us to go do deals to prove that we were right about the unit activity. And so our divisions understand the economics of the building the economics of the land transaction. And we will do those deals and we have no shortage of them in the near term, but we will do those deals that underwrite. So I'll just tell you that I'm not going to let us get caught up in trying to chase a unit number or market count number and lose the discipline on allocating capital where we have done the work and can earn the returns.

The other thing that I would add to that, we kind of showed a three phase rollout of gatherings at the Investor Day. I would refer to that in terms of the geographic rollout in the timing. We did talk about them, I know that you attended the investor day I'd prefer back to that phase rollout.

Okay. Sounds good, thanks.

Thanks Alex.

Thank you. Speakers we have another question comes from James [indiscernible] from Citi. Your line is now open.

Thank you. Just to follow up on the debt reduction and balance sheet optimization. Should I take away from that that land spend in 2018 will be similar to 2017? Or is there some sort of guidance you can give with regards to land spend in '18?

I think it can be higher and we can still easily achieve our debt reduction efforts. I'm not going to promise higher but it could easily be higher. And we'll still payback the $100 million.

Okay, great. Thank you.

Thanks.

Thank you. So speakers we show no further questions in queue. I'll turn the call back to you.

All right, well thank you all for joining us on our third quarter earnings call. We look forward to talking to you in a couple of months at the end of our fiscal year.

That concludes today's conference. Thank you for your participation. You may disconnect at this time.