KB Home (KBH) 2014 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. I would like to welcome everyone to the KB Home 2014 first-quarter earnings conference call.

At this time all participants will be in a listen-only mode. Today's conference is being recorded and a live webcast is available on KB Home's website at KBHome.com. (Operator Instructions)

KB Home's discussion today may include forward-looking statements that reflect management's current views and expectations of market conditions, future events, and the Company's business performance. These statements are not guarantees of future results and the Company does not undertake any obligation to update them.

Due to a number of factors outside of its control, including those identified in the SEC filings, the Company's actual results could be materially different from those expressed and/or implied by the forward-looking statements. A reconciliation of non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in the Company's earnings release issued earlier today and/or on the investor relations page of the Company's website.

I will now turn the conference call over to the Company's Chief Executive Officer, Mr. Jeff Mezger. Sir, you may begin.

Thank you, Michelle. Thank you, everyone, for joining us today for a review of our first-quarter results. With me this morning are Jeff Kaminski, our Executive Vice President and Chief Financial Officer; Bill Hollinger, our Senior Vice President and Chief Accounting Officer; and Thad Johnson, our Vice President and Treasurer.

I will start today's call by reviewing many of the highlights of our first-quarter results, which illustrate the substantial progress we continue to make in our business. We were particularly pleased with reporting a profit of $10.6 million, as this is the first time we generated a profit in the first quarter since 2007. I view this as a positive inflection point in our business, one that we intend to build on over the course of the year.

Following a review of the highlights, I will offer a few comments on the continued improvement we are seeing in housing market conditions before turning the call over to Jeff Kaminski, who will present a detailed look at our financial results. I will then provide a few closing comments before we open up the call to your questions.

To begin, our first-quarter results confirm that our strategy is working as we reported year-over-year improvements in nearly all key financial metrics. We reported revenues of over $450 million, an increase of 11%.

While our unit deliveries were down slightly, our average selling price rose by 12%, contributing to our positive revenue growth. This revenue growth is a direct result of the community positioning strategy that I have been sharing with you on prior calls, a strategy in which we have been focusing on acquiring land and developing communities in well located, land constrained, and highly desirable submarkets, and featuring homes designed to appeal to today's homebuyers.

We are targeting submarkets with higher household incomes and our communities now feature larger square footage and command higher prices. Our average selling price increase of 12%, our sixth consecutive quarter of double-digit percentage growth, is even more meaningful when you consider it comes on top of the 24% increase in ASP we achieved in the first quarter of 2013.

During the quarter we improved our housing gross margin to 17.7%, the highest first-quarter gross margin since 2006. We expect continued gross margin expansion over the balance of the year as we endeavor to close the gap on our stated goal of gross margins exceeding 20%. At the same time, we remain committed to containing overhead costs while positioning for future revenue growth.

This quarter's results reflect this strategy as we grew revenues year-over-year by $45 million while our total SG&A expenses increased by a nominal amount.

Through the combination of our revenue growth, higher gross margin, and cost discipline we achieved a profit of nearly $11 million for the quarter, or $0.12 per diluted share. This represents a bottom-line improvement of $23 million year over year. On a cumulative basis, we have now been profitable for the last two years and with our momentum we expect to continue to deliver year-over-year profit improvement going forward.

Moving on to sales, we generated net order value of $600 million, an 18% increase, on a net order unit increase of 6%, which further underscores the success of our community and product strategy. With this sales result, our quarter-end backlog value grew 21% over the prior year to $852 million, which sets up our business for revenue growth moving forward.

While our company backlog value was up significantly, as important is the fact that our quarter-end backlog value in California was the state's highest first-quarter level since 2008. As we continue bringing more communities online these new community openings are generating a predictable sales pace at higher sales values, resulting in our sales per community holding relatively steady for the quarter.

We will continue to balance the blend of absorption pace and price to optimize each asset and maximize our gross margin opportunity. With this dynamic in place, the key to unit sales growth now rests in growing our community count.

During the quarter we increased our average community count by 10%, our second quarter in a row of double-digit growth. While this community count growth has taken longer to occur than we anticipated, due in part to delays in municipal approvals and land development schedules, we now have momentum and this growth was a key contributor to our positive sales comp.

We continue to find compelling investment opportunities in our served markets that meet our underwriting standards and are aligned with our strategy. During the quarter, we invested $354 million in land and land development in support of our growth strategy.

Another critical accomplishment occurred this quarter at our Inspirada master-planned community in Henderson, a desirable suburb of Las Vegas. We successfully concluded negotiations and executed a new development agreement with the city and in turn distributed the land out of the Inspirada joint venture and back to the participating builders. In our case, this placed a valuable 550-acre asset, representing approximately 4,000 lots, into inventory on our balance sheet.

The Inspirada builders are now working together to fund and develop the infrastructure for future phases, including already having broken ground on 38 acres of parks, trails, and open spaces. We expect to open three new communities later this year with a fourth product line planned for early 2015.

Inspirada is a crown jewel in a very desirable location in an extremely land-constrained market. With this new development agreement in place and infrastructure improvements underway we are confident Inspirada will become the destination community it was envisioned to be. As we bring these new communities online, Inspirada will now be a significant source of growth and profits for us in Las Vegas for years to come.

Turning now to our strategic initiatives, I would like to share with you the priorities we have set for the year ahead. In 2013, we achieved our primary goal of full-year profitability by delivering on last year's initiatives of growing community count, accelerating top-line growth, and enhancing profit per unit. Building on the success of 2013, we have established these same three strategic initiatives as our top priorities for this year and are focused on enhancing execution to deliver even better results.

Starting with community count, our pipeline of new community openings finally has us positioned to drive unit growth through community count growth. While our average community count was up 10% for the first quarter, we expect this growth to accelerate, especially in the second half of the year. During the first quarter, we continued to fuel future growth with land and land development investment of $354 million.

With our investments in land, we now own or control more than 57,000 lots, a year-over-year increase of 21%. We have the communities in place or scheduled for opening to fully support our 2014 delivery goals, as well as a significant majority of our deliveries for 2015. In our current operating footprint our peak annual deliveries reached 28,000 homes, so we believe we have significant upside in the markets we serve.

To help realize that upside, our local land teams continue to find new and attractive opportunities in all regions that are aligned with our investment strategy and adhere to our strict underwriting requirements. We will continue to seek out shorter-term opportunities to enhance our 2014 and 2015 deliveries, while at the same time we are excited to be working on our growth targets for 2016 and beyond.

Turning now to our ASP growth, as I have discussed on previous calls, we have not been relying on market lift to drive our increase in average selling price. Instead, we are driving our ASP higher through our targeted investment and product spread. In many of our markets pricing has moderated over the last six months, yet in these same markets our ASP gains are significant.

Our home state of California provides some of the most dramatic examples of how our repositioning strategy is resonating with consumers and enhancing our business. To illustrate, during the quarter our ASP in California deliveries was $525,000, a year-over-year increase of more than $120,000. This represents a price 30% higher than we generated in the first quarter of 2013 and 54% higher than for the first quarter of 2012.

While there is no question that the state has benefited from home price appreciation as the markets have recovered, the magnitude of our increase far outpaces the market. We have been diligently working on our strategy of transitioning our California footprint to stronger locations with more of a coastal orientation.

These areas are land-constrained with very few developed lots available. As a result, with the required entitlement and development work necessary to open a community, they typically take time before coming to market. While we have been working diligently over the last 18 months to open these new communities, we continue to build through many of our existing communities in locations that commanded lower price points but sold at our average sales pace.

This transition had a temporary impact on our net order and delivery comps in the first quarter. While unit deliveries were down 32%, with our higher ASP revenues were down substantially less and our California profits were meaningfully higher. Today we have a much stronger California business than we have had for many years.

Looking forward, based on the momentum we are gaining in California community count, we expect to see a crossover to positive unit sales comps at some point later this year. The combination of unit growth and our significantly higher ASP will result in very favorable future revenue growth and profits for the state.

While the impact of our strategy on ASP is most significant in California, this dynamic is playing out favorably in each of our regions. As an example, in our Bay Pines community in St. Petersburg, Florida, an infill location close to the beach, we grand opened and recorded 17 sales during the quarter at an ASP of $374,000, which is significantly higher than the market median.

At Alcantara Villas, an infill location in North Phoenix, we recorded 27 sales since grand opening in December at an ASP of $346,000. Just like Bay Pines in Florida, this pricing is significantly above the median price for the Phoenix market. These are just two examples and I could go on with more success stories from each of our markets.

As a result, we do expect continued growth in our ASP as our community and product rotation continues to evolve across the country. I would also note that we are using our locations and product mix to attract the higher income segments of our traditional buyer groups, primarily the first-time and first-move-up customer.

As we open new communities, we continue to be diligent in pursuing our strategic initiative of enhancing profit per unit. The consumers in these higher income areas are interested in larger homes and we have been featuring larger models to meet this demand. As a result, our average square footage increased 8% year over year in the first quarter.

Our build-to-order approach also creates multiple profit opportunities through the many levers we can pull to enhance revenue. So when you offer the buyer the opportunity to pick their lot with structural features that meet their tastes, such as an extra large kitchen island or a media room instead of an extra bedroom, they are willing to pay more to get exactly what they want. I will give you two specific illustrations of the positive impact we are now seeing from revenue opportunities we have available in our business model.

First, our studio revenue per home rose 27% year over year in the first quarter as these higher-income customers are spending more to customize the interior features and options in their home. At the same time, our average lot premium per unit has also been steadily growing, from $2,900 in the first quarter of 2011 to over $5,600 this year, a 91% increase in a revenue line item that drops straight to our bottom line.

We also enhanced our profit per unit through the cost efficiencies available in our business model. Because we offer standardized product series on a national scale and we offer the same options and features in all of our studios, we are able to leverage our relationships with national suppliers to realize cost savings. In addition, we share best practices from our sales and studio teams across the Company, which not only improves the buying experience for our customers, it helps us generate incremental revenue and profit with these learnings.

As we have successfully done in the last few quarters, we once again drove bottom-line improvement by leveraging the efficiencies of our growth platform to increase revenues while containing costs. As I mentioned earlier, we have significant upside potential in our served markets and we have the management teams in place to take on more capacity. While we are investing in overhead to support future growth, we expect to continue to see leverage going forward as we add to our top line while remaining committed to our cost discipline.

In addition to our three strategic initiatives, key differentiators for consumers that we feel are driving results are our industry-leading energy efficiency and water conservation programs that can lower the total cost of homeownership while helping the environment. By utilizing our strong supplier relationships, we have been successful in offering many innovative features at minimal cost to our home buyers that have significantly advanced the efficiency in our homes.

Through our efforts, we have lowered the average energy consumption of our homes for seven consecutive years and our new homes today are 35% more energy efficient than a typical new home and 65% more efficient than a typical resale home. We build every home to exceed EPA's stringent ENERGY STAR Version 3 standards and we offer items, such as solar power, as a standard feature or option in many of the markets we serve. We have been recognized for our energy commitment by being named an ENERGY STAR Sustained Excellence Award winner for three consecutive years.

KB Home was also recently honored by RESNET, the Residential Energy Services Network that established and monitors HERS ratings for the ENERGY STAR program, with the President's Award for achieving the highest energy efficiency rating for standard production homes built in 2013. These accolades are important third-party endorsements that our sales teams use every day to reinforce the additional value of a KB Home. We also utilize our proprietary energy performance guide, an mpg-like certification of energy savings that we provide for every home, to help educate consumers on the importance of understanding monthly energy costs and the significant savings offered by our energy-efficient homes.

We are equally dedicated to driving innovation and savings in the area of water conservation. As you are all well aware, water shortages have become a national concern over the last year -- several years as drought conditions have spread across large parts of the country, including most of our served markets. We are committed to taking a leadership role in the industry and water savings are built into every KB home we deliver.

We exclusively install WaterSense certified plumbing features as well as water-efficient appliances and drought-tolerant landscaping that combined save homeowners 30,000 gallons of water per year over a typical resale home. The EPA has acknowledged our leadership in water efficiency by recognizing KB Home as a WaterSense Partner of the Year for three years in a row and we remain the only national homebuilder to receive this distinction.

As an example of our continued innovation in the area of sustainability, we recently introduced the first Double ZeroHouse in Southern California, a home which not only features net-zero energy usage, which means it produces as much energy as it uses, but also a first-of-its-kind water recycling system that results in zero freshwater usage for landscape irrigation. The California Energy Commissioner attended the grand opening and the event received tremendous positive coverage from the local media and TV networks.

With its advanced water-saving features, we estimate this home can reduce water usage by up to 70% per year compared to the water usage of an average resale home. The 70% reduction equates to 150,000 gallons. And while it helps the environment, it will also result in significant cost savings for the homeowner. I look forward to sharing additional innovations in energy and water efficiency with you in the months and years ahead.

Let me take a moment to give you a quick update regarding the launch of our mortgage joint venture with Nationstar, Home Community Mortgage. While the regulatory approvals have taken longer than we originally anticipated, we continue to clear hurdles and expect to complete the approval process within this quarter.

Meanwhile, we are fully staffed and positioned to make a rapid transition to the joint venture once everything is cleared. In the meantime, Nationstar continues to outperform the other lenders selected by our buyers, providing reliable loan approvals and contributing to more predictable deliveries.

Turning now to the national economy, the recovery continues at a measured rate. Job growth is slowly improving, which is an especially encouraging trend, and consumer confidence is near six-year highs. Consistent job growth and rising confidence are prerequisites that lead not only to an acceleration in the overall economy, they are also the fundamental drivers of a sustained recovery in the housing market.

Mirroring the national economy, the housing market also continues its recovery at a steady pace. Mortgage underwriting standards remain tight, which does limit the number of qualified buyers in the market. Meanwhile, Dodd-Frank continues to be clarified and adopted and proposals in Congress for GSE reform are creating additional uncertainty for the mortgage industry.

Despite these headwinds, the fundamentals supporting longer-term housing demand remain in place, such as population growth, increasing household formation, rising rents, low inventory levels, and attractive affordability of new homes. While it will take some time, the housing industry is continuing on the path back to normalized activity levels.

As I have often said, housing is a very localized business and each market is affected by its own unique factors. With the success we are seeing in our new communities and the response to our product offerings, I am very pleased with the opportunities we have created for ourselves in the local markets we serve.

In our communities, traffic and sales have clearly improved over the last few months. January and February sales and traffic were strong. In fact, our traffic was up dramatically in February over the prior year, a great indication that the spring selling season is well underway and also a precursor of our future sales.

In summary, with our expanding community count in attractive locations, we are solidly positioned with sales momentum and we expect to sustain profitable growth going forward. Now I will hand the call over to Jeff Kaminski, who will offer the specific details on our financial performance in the quarter. Jeff?

Thank you, Jeff, and good morning. Our targeted investment in locations desired by higher income homebuyers and the higher average selling prices generated from the products we offer to these buyers where the chief drivers of our improved performance for the quarter.

As Jeff highlighted in his remarks, by opening more new home communities in highly attractive areas we have been able to improve our net orders, revenues, and gross profit margins while establishing a healthy backlog of homes. We have also further enhanced our profitability by taking advantage of the many levers available in our business model to generate incremental revenues and margin from homes delivered.

In addition, we have reduced our SG&A expenses as a percentage of revenues. The success of our investment, product, and sales strategies are reflected in our first-quarter results and we remain focused on year-over-year community count growth and gross profit margin expansion for 2014.

For the first quarter of 2014, our net income increased to $10.6 million, or $0.12 per diluted share, as compared to a loss at $12.5 million for the prior-year period. The bottom-line improvement was primarily driven by a mix of revenue growth from higher selling prices, continued strong gross profit margin performance, and an improved SG&A expense ratio. We believe our reporting of first-quarter net income for the first time since 2007 marks a certain inflection point for our business and we expect to continue to generate profitable growth for the remainder of the year.

First-quarter total revenues of $451 million rose by over $45 million, or 11%, compared to the same period of 2013, with year-over-year growth ranging from 18% to 63% in the Southwest, Central, and Southeast regions, more than offsetting a decline in our West Coast region. The lower revenues in our West Coast region primarily reflected the impact of the strategic evolution of our community mix in California toward coastal submarkets.

As we discussed during our earnings call last quarter, this shift led to year-over-year decreases in our fourth-quarter 2013 regional community count and net orders, thereby impacting our year-end backlog value, which was down 17% from the prior year. The strong revenue growth in our other regions during the quarter reflected the conversion of higher relative backlog values at the start of the current quarter as compared to the year-earlier quarter.

Our overall average selling price of homes delivered in the first quarter increased by almost $34,000, or 12%, from the year-earlier quarter to approximately $305,000. This marks the sixth consecutive quarter of double-digit year-over-year percentage increases in our average selling price.

During the first quarter, all of our homebuilding regions had double-digit growth in average selling prices with increases ranging from 13% in our Central region to 30% in our West Coast region. The significant year-over-year improvement in the West Coast and Southwest regions of over $120,000 and $59,000 per home, respectively, and the consistent increases in each of our other regions illustrates the success of our targeted community and product positioning efforts and generally improved market conditions.

In the Southwest region alone, our average selling price has almost doubled from the first quarter of 2011. Also, we continue to see benefits from our KB Home Studios as our design option revenues per home for the first quarter of 2014 increased 27% year over year. The benefits of our increased average selling price can also be seen in the year-over-year growth in each region's first-quarter backlog value.

As we mentioned on last quarter's earnings call, we expect that our average selling price will continue to trend higher for the remainder of 2014, though the percentage growth is expected to moderate to the high single-digit to low double-digit range for the year as compared to the 18% increase generated in 2013. Our strategic moves have given us a more balanced mix of first-time and experienced buyers and contributed to the year-over-year increase in our ASP.

In addition, the average square footage of our homes delivered has steadily increased on a year-over-year basis for the past few years, with the average for the current quarter up 8% from the first quarter of 2013. The transition of our buyer profile is reflected in our first-quarter results, where approximately 52% of our deliveries were to first-time buyers.

Moving now to land investment and driving future growth, over the past 12 months we have invested almost $1.2 billion in land and land development. Reflecting these substantial investments, our inventory balance at February 28, 2014, increased to $2.6 billion. At the end of the first quarter we owned or controlled over 57,000 lots, representing a year-over-year increase of 21% as compared to approximately 47,000 at the end of the first quarter of 2013. We expect our healthy lot position to drive sustained growth in our community count and housing revenues for the balance of 2014 and beyond.

During the first quarter we opened 29 new communities, almost double the number of communities we opened in the first quarter of last year. The majority of the current quarter openings were in our West Coast and Central regions. We operated from an average of 190 active communities during the quarter, an increase of approximately 10%, from an average of 172 active communities in the year-earlier quarter.

We are pleased that the aggressive land investment and organic growth strategy that we launched in early 2012 is delivering results and we expect our community count to expand on both a sequential and year-over-year basis for the remainder of the year. We are refining our guidance in this area and expect to see an increase in our year-end community count in the range of 15% to 20% as compared to year-end 2013.

Our focus on enhancing profitability per unit continued in the first quarter as we realized an expansion of 290 basis points in housing gross profit margin as compared to Q1 2013, moving from 14.8% in the year-earlier quarter to 17.7% in the current quarter. We achieved this improvement despite the pressure of increased land, labor, and material costs.

Our adjusted gross profit margin improved to 17.8% in the first quarter of 2014 compared to 15.2% in the year-earlier quarter, representing an increase in adjusted gross profit per home of more than $13,000. This marked the fifth consecutive quarter of year-over-year improvements in our adjusted housing gross profit margin.

As we have emphasized during prior earnings calls, controlling and limiting overhead expense is a critical component of our profitability initiatives and a major focus area for our operations. In the first quarter our selling, general, and administrative expenses were 13.9% of housing revenues compared to 14.7% for the same period in 2013. This result represents our lowest first-quarter SG&A expense ratio since 2007, when we had revenues of over $1.4 billion.

We are pleased with the efficiencies that we have driven into the business and are committed to maintaining this focus, along with generating additional operating leverage through revenue expansion driven by increasing community count and improvements in housing market conditions. For the full year we expect to continue to realize year-over-year improvement in our SG&A expense ratio as we work to control costs and leverage revenue growth.

Turning now to our deferred tax asset, which represents another significant potential upside for the Company and is currently fully offset by a reserve, we are now able to provide more guidance as to our expectations relating to the reversal of our DTA valuation allowance. As a result of the improvements in our financial performance combined with our expectations of a continued housing market recovery, we currently expect to reverse a significant portion of our deferred tax asset valuation allowance by the end of the year.

While we still have to complete the specific detail calculations to determine the precise amount, the anticipated reverse of the valuation allowance is expected to more than double our book value prior to year-end, in addition to significantly reducing our leverage ratios. As of the end of the first quarter our deferred tax asset valuation allowance was $855 million.

We look forward to realizing further improvements in our financial performance during the coming year as we continue to focus on generating profitable growth, driven by expanding community count and top-line revenues, enhanced gross margins, and increased operating leverage. Now I will turn the call back over to Jeff Mezger for some closing remarks.

Thanks, Jeff. Before sharing my concluding comments, I would like to take a moment and recognize the dedication and commitment of all KB Home employees, who continue to do the hard work that delivers our profitable results, satisfies our customers, and builds our momentum for the future.

The combination of our strategic investments, new product offerings, and improved execution now coupled with sustained community count growth has us extremely well positioned for accelerated profits and growth. The significant number of grand openings on the horizon across our footprint gives us confidence that we will deliver meaningful increases in revenue and profit throughout the remainder of 2014.

We remain committed to restoring our gross margin to over 20%, as well as leveraging our existing growth platform to contain SG&A. We are building on a foundation of a profitable 2013 and we have momentum in our business. Our dedication to our business model and the insight and opportunities it provides has enabled us to find success in today's housing market and we are excited about the incredible opportunities we have created for our company.

We are off to a solid start to the year and I know the best is yet to come. With that, Michelle, we will be happy to take questions.

(Operator Instructions) Michael Rehaut, JPMorgan.

First question I had was on sales pace. You had a nice or a better-than-expected result relative to our estimates and I think most expectations, down 4% year over year, and that certainly is a lower decline than the previous two quarters or a lesser decline.

Just wanted to get a sense of where you saw some of the -- maybe from a regional perspective, which regions showed a greater decline than that 4% or if there were any regions that were up year over year? And what maybe perhaps drove the sequential improvement given that you are still kind of facing a relatively tough comp in the first half of the year?

Michael, what are you referring to when you say the 4% decline?

That would be sales per community on a year-over-year basis.

Okay. And you are talking sequential or year over year?

Year over year. So your orders were up 6%. Your community count was up about 10%, 11%, and so the offset was the decline in the sales base on a year-over-year basis.

Okay, I got it, I got it. I don't recall the specific three-point-whatever it was last year versus three-point-whatever it was this year, but they are within range of each other. I think it was down slightly.

In any given month, Mike, there's seasonal things and you've got a community opening or another one closing. If you look at our business, we are at a scale now where we are profitable and we are focused on continuing to improve our gross margins, so we are not going to let communities run away with sales. We could've sold more homes in the quarter, but as I said in my comments, we are going to balance the optimal sales pace and the best price to give us the best returns and hopefully the highest gross margins.

A lot of communities opened later in the quarter; it's part of the average. As we shared, we think that with our community count momentum we will continue to see expanding sales going forward.

I would say in general that all of our regions were good in January and February. I can't think of a single region that was struggling. Coastal California in particular remains very strong and we are very pleased with that, but as I go around the various markets, they are all -- because of where we are open they are all performing quite nicely for us today.

To add to it just a little bit, Jeff, our focus remains on sales value and driving sales value, especially with our community repositioning efforts across our business. We saw double-digit increases in order values in all of our regions; low of 11%, a high of 27% in the Central region which was particularly strong, and an overall increase in sales value of 18% for the quarter, which was pleasing given the environment.

Okay, great. I guess that kind of leads me to the second question. Given the improvement in sales value and ASPs and you continue to execute well in terms of the gross margin improvement and it was helpful that you stated that you expected continued improvement in gross margins for the balance of the year.

You reiterated a couple times, Jeff, the commitment to get to 20% or better. Obviously, again, you still have that positive momentum at your -- the tailwind. Can you give us any sense if you would expect to hit that number by the end of this year or would that be more of a 2015 event? I guess particularly as you look at your backlogs today.

Mike, we would love to wave a wand and be there today obviously. There's a lot of moving parts the play into it, whether it's cost or price, and all the things that we have shared. Frankly, a lot of it will depend on how strong the spring selling season is for us as to when we would get there.

We are not going to commit that we will get there this year, but we are going to commit that we will continue to expand as the year unfolds.

Okay, just one last one for modeling purposes; helpful in terms of the expected tax rate or a DTA reversal. Jeff Kaminski, do you have any sense of as that were to occur what and -- for modeling purposes, what an ongoing fully-loaded tax rate would be, effective tax rate?

Yes, we believe once we have the reversal and the full DTA back on balance sheet and we're back in the normalized tax rate we think it will probably be in the range of 35% to 38% going forward.

Great, thank you.

Ivy Zelman, Zelman & Associates.

Good morning. Thanks, Jeffs, for telling the world that spring is not a bust. Congratulations on a good quarter and nice to see such strong activity.

I guess one of the things, if you can clarify just for everyone's understanding given your success you talked about in North Phoenix, Scottsdale and lots of concern over Phoenix. It sounds like you guys are outperforming the general market. Is it your price point that you're doing so well? Is it your location? That's an easy one and I hope.

And then the second one, more specific to the reduction in loan limits for FHA. There's been some concern in some markets where there's been an outsized decrease in the loan limits that those markets are really being negatively impacted.

So I know you have indicated, Jeff, in your opening comments that mortgage is still tight. We've heard some modest easing, so if you can help us on broader understanding the FHA loan limit impact to your, especially newer communities, as you go up into some of those affected markets and whether (technical difficulty) near-term headwind that will continue. But congratulations, great results.

Thanks, Ivy. As to the Phoenix community, it's Northeast Phoenix, not Scottsdale. It's very close, obviously, to Scottsdale and Paradise Valley, so it is a -- I used it as an example of a land-constrained play where we came in with a higher density detached product that is well under the price points of traditional lot size product in the area.

The closest volume builder is five, six, seven miles away, so you have no real new home competition. And in this example we actually talked with the seller and targeted this community almost 15 years ago and through our relationships we were finally able to nail it and then bring it to the market. So in this case you have incredible demand, incredible traffic, and visibility. A lot of people want to live there, so conventional FHA, cash; we are seeing all the buyers there and demand is so strong you don't worry about it.

I would say the same of other desirable land constrained, high demand, low inventory locations across the country. Again, similar to the St. Petersburg story we shared over in Florida.

If you look at the FHA loan limits, we are monitoring it and we haven't seen a significant impact on our business. I do think in some of the markets that it's going to have an impact in lower demand submarkets, where if prices are above loan limits and FHA was the vehicle for that consumer, it could have some pressure there. So it will be an overall market pressure in what I will call the B- submarkets and the As and Bs, the B+ will continue to perform.

At the time the limits went down, as I recall, our FHA business was 30%, 35%, whatever, so it was less than half of our business. And in most of our markets the change still leaves the loan limit above our pricing.

Where it came below our pricing is in parts of inland California, which is an area that's recovering and it's following the wave that's coming out from the coast. Where we are playing closer to the coast, it's not an impact. In order for the more inland regions to recover, I think you will have to see a loan product that can accommodate that buyer. But, again, we are not that large there.

The other two markets that we have heard FHA impacts in are Las Vegas and Phoenix. If you look at the Phoenix story I shared or many of our communities in Las Vegas, demand is so strong because there's no supply that the buyer doesn't need the FHA products today. So it will be interesting to see how it plays out.

As you know, there's a lot of moving parts right now in the mortgage business. Underwriting does seem to be loosening up some. FICO scores are coming down and many of the large lenders have announced that. It's still early in that process, though, so we haven't seen a material impact with our consumers.

Just lastly, Jeff, in terms of community openings, you mentioned there's timing delays, etc. Within the footprint you said you were up 10%. Would you say that you've pushed out the annual expectation or you're still on track for the full year with your guidance?

No, actually we increased our guidance a bit. I think last quarter we had a pretty wide range of 10% to 20%. We have tightened that up now to be between 15% and 20%, and that's end of year versus end of year. We were up 10% on average in the quarter. We are obviously pleased with that and we will continue to push that ahead.

The other pleasing piece was we opened 29 communities during the quarter and that's off a comp in the prior year of only 15, so we more than doubled. And that's about half the communities that we opened in the full fiscal year of 2012, so it's on a good pace. The land development and acquisition work that we've been doing and working really hard at the last couple of years is starting to pay off with the community count expansion and we're pleased to see the trend continue this quarter.

Jeff, just to sneak one more in on incentives, there's a lot of concern about the markets and a pickup in incentives. It sounds like not only are you not seeing a pickup of incentives, but you are getting pricing.

Can you talk about the markets sort of percentage-wise? How many of your communities you actually raised prices during the quarter or held prices, and maybe just a commentary on incentives generally?

Ivy, I couldn't even tell you what the percentage is where we raised prices. It's selective. We do have communities where we are raising prices, some significantly, due to demand. Then there's others where we are not raising prices at all to ensure we keep the sales pace.

As you know, in our business model we are not incentive heavy. We always go for offering the consumer the best value out of the gate, so it will be an attractive price and you build up from there at the studios. If you look at our financials over the years, incentives have never been a big number and right now our incentives are no different than they were a year ago or two years ago. So we are not seeing a big spike in incentives around our business.

If you think about the type of communities that I have shared we are opening, your biggest competitor is resale. We are not faced with a competitor that's out there offering heavier incentives to go get sales in most of our locations. And overall, based on the anecdotes I'm hearing from the field, people are being pretty disciplined and going after the spring markets, so we are not hearing of big incentives coming out there.

Great. Thanks, guys.

Dan Oppenheim, Credit Suisse.

Could you elaborate a bit more in terms of talking about the start to the spring and the severe traffic up dramatically versus prior year? Was that coming based on the -- I think that was across the board; you are seeing that specifically in the new communities that were opening up? I'll start there I guess.

We always have higher traffic counts in openings and many of our communities where we are opening, especially in coastal California, the traffic numbers are very, very strong. So that lifts it.

But we did open communities in the first quarter last year in coastal California as well, so it's some of it, but overall we are seeing traffic lift across the system. I think it was system wide through January and February. February in particular it accelerated. To me, it's the start of a fairly normal kickoff to the spring selling season.

Great. I guess wondering about -- in terms of the trends over the course of the three months, did you see, on a year-over-year basis do you see February much stronger in terms of the orders relative to December or January?

Sure. The trend in the quarter is a typical seasonal trend. We had strengthening sales and higher numbers in February than we did in January and January outpaced December. Year over year I think we were flattish actually in February and had a very, very strong January, but last year it was more a component of what happened last year I'd say than this year in the trending during the quarter and the opening of new communities and things like that.

It gets very specific for us and when we look at it and review it we like to look more at the division level and even more specifically at the community level to see where the strength is coming from. We were pleased with the openings we had during the quarter and we were pleased with the performance.

Like I said earlier, we opened 29 new communities and that certainly helps out to have some fresh land on the books and some fresh communities opened during the quarter. We were pleased with and we are going to continue to drive community openings for the remainder of the year.

Great. Then last question just you talked about the accelerated community growth in the second half of the year. Will a lot of that be focused on the West as it was here in the first quarter?

Right, on a percentage basis we expect the West and the Southwest regions to be the highest increases on a percentage basis in net community count by the end of the year. Central and Southwest were both also expecting double-digit increases in their averages, but really focused mostly on the West and Southwest as far as count, just pure numbers and as well as percentage increase.

Great, thank you.

Robert Wetenhall, RBC Capital Markets.

This is actually (inaudible) filling in for Bob. Thanks for taking my question.

Touching back on what was just discussed there about the West region having some of the biggest increases in community count and then just looking at deliveries also, is there reason to believe that once that turns around and you start to have a pickup in the West that it could be a big driver of gross margin improvement? So are margins in the West higher than they would be elsewhere given your focus on the higher income out of there?

Over time certainly the California margins have been higher, certainly in dollars if not also in percent, and a lot of it has to do with what the mix is at that point in time. How many California communities come online and how many in Texas. It will be the blend of the book at that time, but typically our California communities do carry a higher margin.

I refer to my comments to an inflection point. If you think about it, we have been battling through for the last few quarters this dynamic where we were, quote, out with the old and in with the new. We sold through and delivered through many communities in inland California while the coastal communities were taking longer to bring online and then when they come online, you are not going to let them run fast. You meter out your sales.

So it was a unit comp that dropped and also a revenue comp that would be (technical difficulty). What is now occurring is this inflection point where we have powered through that bridge. We've bridged the gap of the trough here and now you will see our trajectory go up in California in community count growth, unit growth, and the significant ASP growth. So we have a nice combo going forward that will bring a lot of gross margin with it.

That's helpful, thank you. Then last question here on -- with the increase in community count and the rise in prices it looks like you are well positioned for the spring selling season. Looking at pace, sales pace then, are you comfortable with the current sales pace across the portfolio or are you going to try to drive that higher?

Yes and yes. We call it optimizing the asset and if it's a location that has a high lot count that you can replace, we will run a higher unit sales pace. Typically those are in less land-constrained areas. If it's a Playa Vista in SoCal or a Berryessa up in San Jose, were going to meter the sales out because it's what I call a jewel box. You can't replace it, so you are going to mine it for all the margin that you can get.

Historically, you typically run much higher sales paces than you've seen from us in the last few years and in part we had to get back to confidence. We've done that. We are at a scale that can sustain profits. Right now it's about improving our profitability per unit and our top line, so we will stay focused on the balance of best price for best pace in each community.

Thank you.

Steven Kim, Barclays.

This is actually [Freda Zhou] on for Steve. Thanks for taking my question. The first question I had was on land spend, which was pretty high in the quarter at about $354 million.

I mean, that's about 80% of revenues. Just noticing the cadence of land spend that you had in 2013 when it was similar, like an 80% type of home building revenues in the first quarter; kind of moderating throughout the year. How can we read into what land spend is likely going to look like in 2014? Are you going to spend less or more than the $1.2 billion you've done?

Right, I think when you look at it we were about $10 million higher than last year in the first quarter and a lot of it just comes down to opportunities and the pace of development. So as we are pacing it out and we are looking at new land acquisition opportunities, we don't specifically look to spend a higher percentage in one quarter over the other. Obviously we have full-year budgets that we work to.

But as far as a quarter-over-quarter look, it's more about opportunities. Once we have the land on the books, we look to aggressively develop it. During the quarter we had over $130 million of development investment contained in that number, which outpaced last year. And I guess that was a significant difference between 2014 first quarter and 2013 first quarter, where we actually had higher development spend than last year and a lower acquisition spend.

As far as pegging it for the full year, we are going to continue to see how markets develop for us and what it looks like out there in the external environment. The land spend that we did put in place last year, as you noted over $1.1 billion, was more than double what we had spent on 2012. And that was done with intent as we wanted to get our community count growth back on track and as we saw the rate opportunities in the marketplace.

So we will continue to monitor that as we go. At this point, obviously based on our first-quarter spend, we were very successful in identifying opportunities and very optimistic about the growth that that will provide to us in the future.

Okay, great. Just turning attention towards sort of ASPs, the average square footage increased about 8% year over year, so you could say that maybe pure price was in the range of 5%. Looking through where ASPs can go throughout the balance of the year, how much do you think is going to be more on the size and more on the mix versus the price?

Right, it's a difficult metric to compare on that terms because what we're talking about doing is opening a significant amount of new communities this year, which will be delivering out into the third and fourth quarters, as well as some of the new communities that we had opened last year that are really determining the ASP. So a lot of it is just mix related.

As I mentioned during the prepared remarks, we do believe that we will still have a high single digit or a low double-digit year-over-year increase in our ASP by the time it wraps up for the full year. And we are off to a really good start with a 12% increase in the first quarter. But as we continue to emphasize, we do believe a majority of our increase is really coming from our community positioning.

And where we are placing communities, getting at higher income buyers, they are selecting more options in our studios. The land -- the underlying land is obviously more expensive. They are paying higher price points for the product and it is helping to generate better margins and obviously continuing to enhance and accelerate our ASP. So that's how we really see the rest of the year shaping up.

Okay, great. Thanks.

Jack Micenko, SIG.

Thanks for the update on the mortgage JV. Thinking about that going forward, as that JV closes is it right to think that structurally there may be a different profit model for that business on your income statement going forward or will it be more of the traditional sort of caps rate gain-on-sale margin adjustment? Or should we think about maybe more financial service revenue as that JV comes through later in the year?

Jack, we definitely have shared that in the past. It's our expectation that it's a revenue and profit driver. It's been a little frustrating to try to get through the regulatory maze and it reminded me of how difficult it is to be a mortgage company as Nationstar has been working on it. But once it's fully deployed and capture rates are up, it will be a profit and revenue driver.

Probably more importantly for me, as the operator, it will give us a better delivery stream because they perform well in the venture. We expect capture rates to go up and they are far more predictable than many of the other lenders that our buyers have selected. I don't know if you want to add any other color on the financial impact.

I think, as we talked about modeling on that, we used to have a joint venture obviously, 50/50, very similar to how this one will be structured. As Jeff mentioned, it's very much related closings. If you look back at when we had a joint venture model that we were employing in our business, it will be very similar to that.

Okay, great. Then just to clarify, you definitely think you're going to be able to reverse all the DTA valuation allowance this year, that's how we should think about it?

We said a significant portion of it between utilization for the remainder of the year. So obviously were offsetting some of the DTAs having profitable quarters for the remainder of the year and then we believe we will have a very significant reversal in the fourth quarter. I think that's probably the proper way to look at it.

There may be another piece that we will take back in 2015 as we continue to evaluate it, but we're not done with all the precise calculations. But we are very confident in a significant reversal by year-end.

Okay, thank you.

Adam Rudiger, Wells Fargo.

Thanks for taking my question. There has been so much focus on weather. And given your footprint, I'm guessing you were less adversely impacted by weather than your peers so the question is do you think your quarter was relatively clean of weather, if that is the right word to use?

Adam, there was some weather impact in a few of our businesses, but not much at all. Our Colorado business was hurt a little and DC. Other than that, maybe to some extent Raleigh, but those are a lesser percentage. And I think it reinforced, due to the majority of our business being in the Sun Belt, we are less exposed to weather.

I think it did rain three days in the quarter in SoCal, so we may have lost an hour or two of production, but it's a nice footprint to have when it comes to the winter time of year.

Okay. My second question is more of a theoretical one as it relates to the first-time buyer. I know that you said about half your business was first-time buyers, but it was a higher-priced first-time buyer so maybe not the traditional first-time buyer that everyone's talking about that's absent from the market.

The question is -- relates to the availability of product for the more lower income first-time buyer. Is all the discussion about the assets of that buyer related to a supply; is there just no product? Or do you think it's demand driven?

And how do you think that plays out in terms of driving the recovery for the next couple of years?

One of the things that we've demonstrated in our business model is the ability to move to where demand is. With the mortgage headwinds and the lack of job growth and everything else that we dealt with through this housing cycle and now into recovery, the typical first-time buyer got kneecapped. They were out of the market, so there's no demand there.

We found a way to go flex up and change product and move as quickly as we could to where the demand was. In my view, in order to have a full, sustained, typical housing recovery, we have to get the traditional first-time buyer back. It will take job growth and it will take fulsome mortgage underwriting.

When that occurs, if their demand is there and things pencil, we can quickly go back to meeting the demands of that buyer while at the same time sustaining the business that we are now putting together that's working so well. We will flex and go where the demand is.

So you think that you -- because some of your other competitors have also moved up price a bit. So do you think, though, that when and if those jobs and that demand comes back at that price point that the industry can quickly offer that kind of supply that's needed?

Yes. Yes, absolutely.

Thanks for taking my question.

This concludes today's question-and-answer session. I would now like to turn the call over to Mr. Mezger for closing remarks.

Okay. Thanks again, everyone, for joining us on the call. We are excited about our momentum and where our year is heading and we look forward to sharing progress as the year unfolds. Thank you and have a great day.

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