普爾特房屋 (PHM) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Pulte Group Inc.

financial results conference call.

My name is Katina and I'll be your coordinator for today.

At this time all participants are in a listen-only mode.

We will facilitate a question-and-answer session towards the end of the presentation.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Jim Zeumer, Vice President of Investor Relations and Corporate Communication.

Please proceed.

Thank you, Katina, and good morning.

I want to thank everyone for participating in today's call to discuss Pulte Group's fourth quarter financial results.

On the call today are Richard Dugas, Chairman, President, and CEO; Bob O’Shaughnessy, Executive Vice President and Chief Financial Officer; Mike Schweninger, Vice President and Controller.

Before we begin, copies of this morning's press release and the presentation slides that accompany today's call have been posted on our corporate website at PulteGroupInc.com.

Further, an audio replay of today's call will also be available on the site later today.

Please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, is reconciled to the US GAAP equivalent as part of the press release and as an appendix to this call's presentation slide deck.

Finally, today's presentation may include forward-looking statements about Pulte Group's future performance.

Actual results could differ materially from those suggested by our comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings including our annual and quarterly reports.

With all that said, let me turn the call over to Richard Dugas.

Richard?

Thanks, Jim, and good morning, everyone.

For the last couple of years, we have been on the record as saying that we thought demand for new homes was stable and at roughly the 300,000 level, the numbers support this position.

Looking ahead to 2012, our planning assumption is that we will experience a similar level of demand.

While there are signs this may prove conservative, we are not relying on higher demand to improve our results.

Instead, as we have discussed on prior calls, in late 2010, we undertook a comprehensive review of our business to identify those areas offering the greatest opportunity for improvement.

Executing on the findings of this review, we spent 2011 developing and implementing a series of actions to improve our fundamental operating and financial performance in key areas, including margins, overheads, and inventory turns with a view to improving our return on invested capital over time.

The underlying initiatives range from value engineering and should costing to overhead reductions, new pricing strategies, and reweighting some of our market positions.

Over the course of 2011, our efforts gained traction and have supported the steady improvement in the Company's results.

That trend continued and in some areas accelerated in the fourth quarter.

In a minute, Bob will review the details of the quarter, but there are a couple of numbers I would like to highlight, which demonstrate the meaningful progress we have made.

On a year-over-year basis, our Q4 adjusted gross margins expanded by 200 basis points to 18.6%.

Much of the gain in the quarter was driven by cycling through some older communities and bringing newer communities online, plus an increase in the number of move-up homes closed in the period.

What makes our results even more compelling is that we expect benefits associated with our 2011 work on house cost reductions and operating efficiency to become visible in 2012 and beyond, allowing us to build on the margin gains we have already realized.

While adjusted margins have been rising, our overhead costs have been falling as SG&A in the quarter dropped to 10% of revenues.

Through the combination of better gross margins and reduced overheads, our operating results improved dramatically in the period; and based on current expectations, we see opportunities for further margin progress in 2012.

Along with our improved operating results, we are making decisions that align with changes in how we want to allocate capital going forward.

As we discussed in our last call, we have made changes in how we evaluate assets and prioritize markets and projects and how we can move more efficiently -- more effectively risk-adjust project investments.

It takes time to meaningfully move the needle, but we are making different decisions.

For example in the fourth quarter, we completed $64 million in land sales, representing about 3,500 lots.

Most of these transactions involve projects that weren't coming online for several years and required significant additional development dollars.

We made the decision to exit these assets with a view towards redirecting our investments and development spend on more immediate projects that we feel will generate higher returns.

At the same time, we put approximately 2,800 lots under control, with most being finished lots to be taken down in the near term.

We are committed to bringing our land supply into better balance.

Over time, these types of transactions can help drive better returns while freeing up dollars for other uses.

Initially, we plan to use excess cash principally to reduce leverage.

On this front, we were able to repurchase almost $260 million of debt in the quarter.

For 2011, our total debt retirement was $324 million.

Within our organization, we have been and will remain focused on effectively managing margins, overheads, inventory, and capital investment with the goal of generating improved shareholder returns.

This focus is critical, given the current state of housing demand.

Having said that, I think it's fair to say that there is a growing sense of optimism about the US housing market.

We would agree that there are reasons to be positive about the potential for housing demand, including the following big themes, which are often raised.

First, after six years of decline, new home sales are simply due to improve.

Second, demographic drivers of population growth and household formations will begin to exert themselves.

Third, home prices and interest rates make today's homes such a clear and compelling value that home buyers will move off the fence.

There is also supporting data for optimism, including the increased cost of renting versus homeownership, the shrinking inventory of homes available for sale, as well as survey data, which demonstrate the belief among two-thirds of the population that now is a good time to buy a home.

Closer to home, there is even our Company-specific data, which shows signs of better traffic coming to our communities and anecdotal comments from our field regarding the improving level of buyer interest.

When we put these and other data points together, at a minimum, we grow increasingly confident that market demand is and should remain stable, however, as stability turns into more meaningful year-over-year growth, Pulte Group's land pipeline and access to capital help to put us in a strong competitive position.

It's still early, so we have to wait and see how 2012 ultimately develops.

The good news for Pulte Group is that we have opportunities to further improve our results, even without an uptick in demand.

We expect that continued margin expansion and overhead control will be the key drivers to Pulte Group achieving profitability for 2012.

Now, let me turn the call over to Bob to provide more details on Pulte Group's fourth quarter results.

Bob?

Thank you, Richard.

First, let me cover some specifics on the quarter.

Home sale revenues were $1.2 billion, an increase of 1% compared with last year.

The increase was driven by a 3% increase in average selling price of $271,000, partially offset by a 2% decrease in closings to 4,303 homes.

As you can see on page 7 of our webcast slide, our adjusted gross margin was 18.6%, an improvement of 200 basis points over the fourth quarter of last year, and up 10 basis points over the third quarter of this year.

For the quarter, our margin improvement over the prior year primarily reflects the closeout of some lower margin legacy land positions, which are being replaced with higher margin land positions, as well as the favorable mix of higher margin move-up homes closed in the period.

As noted in our press release, we recorded $24 million of land-related charges in the fourth quarter.

These charges include $11 million of impairments on existing communities, $3 million in preacquisition costs on assets we have elected not to pursue, and $10 million of impairments on properties we have approved for sale.

SG&A for the quarter was $117 million or 10% of home sales revenues.

Our SG&A for the period reflects the actions taken by the Company to reduce operating expenses in Q2 of this year and last year, as well as the $7 million benefit related to certain reserve adjustments.

Our SG&A was down from $151 million or 13% of revenues last year, and it was consistent with the third quarter of this year, if you exclude the Q4 benefit from the reserve adjustments.

We remain focused on our SG&A spend and are properly sizing our operations in alignment with current business conditions.

At present, we expect 2012 SG&A spend to be consistent with our earlier guidance in the range of $475 million.

As Richard mentioned, we sold 23 parcels, which included approximately 3,500 lots during the quarter.

Those sales generated $64 million in cash proceeds and approximately $16 million of pretax profits.

We were able to repurchase $257 million of our debt for $252 million during the quarter, including 11 million -- including $80 million of bonds that mature in 2014 and $177 million that mature in 2015.

Based on the valuations recorded in the acquisition of Centex, this resulted in a book loss of $2 million.

For the quarter, our mortgage and title operations reported a pretax loss of $27 million.

This represents income from current operations of $13 million, offset by a $40 million charge related to potential future loan repurchase obligations.

During the quarter, we originated $622 million of loans and our capture rate increased to 82% reflecting the challenging marketplace home buyers are facing when trying to secure mortgages from third party lenders.

I would like to address the mortgage repurchase reserve adjustment we recorded.

As we've discussed on our prior earnings call and as you can see on page 11 of our webcast slide, we experience a heightened level of repurchase requests in Q3, which continued throughout the fourth quarter.

We believe this is consistent with the experience of others involved in the mortgage origination business.

Based on this, we adjusted our current accounting to reflect an increase in the number of repurchased requests we expect to receive in the future, as well as a one-year extension of the period over which we expect to continue receiving such requests.

Our estimate now reflects that we'll continue to receive requests through the end of 2013.

We continue to aggressively challenge each of the exposures we face relating to our historical loan origination operations.

We're in continual dialogue with our counterparties and are working hard to refute or limit any exposure to repurchase requests we receive.

We will also continue to seek a comprehensive resolution of these issues, although this may take time for us to accomplish.

Our fourth quarter results also reflect an income tax benefit of $23 million, which resulted primarily from the favorable resolution of certain federal and state income tax matters.

In summary, PulteGroup reported net income for the quarter of $14 million or $0.04 per share.

This compares with a net loss of $165 million or $0.44 per share last year.

In total, our fourth quarter net income includes $27 million in significant net items.

Following is a summary of those items and where they are recorded in our income statement.

Land-related charges of $24 million of which $11 million is recorded in home sale cost of revenues, $10 million is in land sale cost of sales, and $3 million is other income and expenses.

Gains on land sales of $16 million is recorded in land cost of sales, the $40 million increase in mortgage repurchase reserves is in financial services expenses, the $2 million loss related to Q4 debt repurchase activity is in other income and expenses, and the $23 million income tax benefit is in income taxes.

Turning to our balance sheet, we ended the quarter with $1.2 billion of cash, which is consistent with September, even after taking into account our Q4 debt repurchase activity.

Our house and land inventory decreased $145 million from December of last year, in part reflecting the impact of our capital efficiency initiatives including land sales.

In total, we have $3.1 billion of senior debt, of which $96 million matures in 2012.

After the repurchase activity in the fourth quarter, our revised maturity profile includes the $96 million in 2012, $182 million in 2013, $575 million in 2014, $492 million in 2015, and $1.8 billion in 2016 and beyond.

Looking at other activity in the quarter, we generated 3,084 sign-ups from 700 communities.

This represents a 1% increase over the sign-ups we reported in Q4 of last year.

However, you may recall that we adjusted our processes for reporting sign-ups last year that resulted in a one-time cumulative catch-up of 200 sign-ups that related to earlier periods.

If you exclude those units, our sign-ups increased 8%.

It's important to note that this increase was generated from 11% fewer communities.

As of December 31st, we had 3,924 homes in backlog, valued at $1.1 billion, consistent with the 3,984 homes in backlog last year.

In the quarter, we also roughly put 2,800 lots under control through 21 different transactions.

The majority of these lots are finished and our structure is option take-down is available to us in the near-term.

We continue to review existing and potential new land transactions with an eye toward improving our long-term risk adjusted returns, and we'll continue to evaluate opportunities to enter or exit land positions as they present themselves.

Now, I'll cover a few final home builder data points.

We ended the quarter with 5,500 homes under construction.

The split between sold and spec is about 50/50.

Of the spec units, roughly 1,500 were finished, which is down 20% from the prior year.

Finally, you'll note that in the supporting schedules in our press release, that we have changed our recording to reflect six segments, which we hope will help in your analysis of PulteGroup's operations.

This will obviously be incorporated into our annual report and all future filings.

Now, let me turn the call back to Richard.

Thanks, Bob.

Before opening the call to questions, let me offer the following thoughts about market conditions.

In the east, demand in our New England markets remained challenging, but we have a number of well positioned communities open and to be open, so we feel pretty comfortable heading into 2012.

Overall economic conditions in the Washington, DC-Northern Virginia market have slowed, but PulteGroup's business continued to benefit from a number of well-placed communities that experienced strong buyer demand and good pricing.

Heading south, we continued to experience some demand softness in the Carolinas and Georgia, but this was more than offset with continued strong performance by our Florida operations.

As we have talked about throughout the year, Florida was a big upside surprise for us in 2011.

In the middle third of the country, the Midwest continued to grind through tough economic conditions.

Consistent with most of the year, Michigan continued to deliver much-improved unit volumes, while Chicago remained one of the more challenging markets in the country.

After a strong first half, Texas slowed in the back half of the year, including the fourth quarter.

Assuming the local energy-oriented economies of the state hold steady, we would expect these markets to improve over time, especially as these markets lead the country in job growth.

Out west, we are pleased that our large investment in Arizona continued to outperform relative to expectations.

There is still supply in the market, but the inventory of homes has dropped and remains the target of sophisticated investors, so buyers are seeing quality and value within new home communities.

Our operations in the Pacific Northwest experienced improved demand, although much smaller volumes driven by the land positions we acquired late in 2010.

In general, California remains choppy.

Well-positioned communities with the right product offerings are doing okay.

But buyers can afford to be very selective, which is slowing sales paces in some markets.

As for 2012, while we won't provide any specific data, we will say that we were very pleased with business activity in January, which was consistent with our expectations heading into the year.

I have been out in the markets extensively over the past several weeks and while it's still too early to get a read on the selling season, I am pleased with what I saw and the comments I heard from our operations.

As I said earlier, demand for new homes has been relatively stable, although at historically low levels for much of the past couple of years.

There are reasons to be optimistic about medium and long-term demand, but it will be interesting to see how 2012 develops.

Over the near term, our strategy is to focus on increasing absorption pace in existing communities as it is the most efficient way to grow earnings while demand sorts itself out.

We will continue to allocate capital appropriately and to invest selectively in high returning projects.

Before opening the call to questions, let me thank all of the employees of PulteGroup who have done a great job delivering a superior home buying experience to our customers and significant gains in the operating and financial performance of PulteGroup.

Now, let me turn the call back to Jim Zeumer.

Jim?

Thank you, Richard.

At this time, we'll open the call for questions.

So that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up.

So, Katina, if you'll explain the process, we'll get started.

Thank you.

(Operator Instructions) Your first question comes from the line of Michael Rehaut representing JPMorgan.

Please proceed.

Hi.

Thanks.

Good morning, everyone.

Good morning, Mike.

Good morning, Mike.

First thing I was hoping to get a little bit more detail on is the mortgage putback situation and in particular, kind of I guess understand the addition to the reserve and the continued high requests.

But I was hoping also to get an update on some of the Centex legacy-related lawsuits that you mentioned in the third quarter, and also, I think just more broadly, why the higher level of putback requests have persisted in your view in the last three to six months?

Sure, Mike, it's Bob.

I'll deal with the lawsuit issue first.

We have not had any update to that, so again, we were never named as a party to that suit.

We were made aware that it exists.

I'm not aware of any progress on it.

So I would say we're in the same position we were three months ago.

With respect to the mortgage putback request, I think it's hard to say, I think you would see in the marketplace that everybody has said we are seeing an increase in these sorts of things.

I think we're not an outlier, and that obviously, as you can see on the chart, they spiked up sort of post June of this year and they have been trending in a range a little bit above 100.

Trends down towards the end of the year.

We're not getting any feedback from the folks that are asking us for these to say, A, that they are close to the end.

It's just we've identified more and here you go.

We don't see a change in the pattern of them.

We've talked about before that the vast majority related to 2006, 2007, that continues to be true.

We continue to be able to identify things that we can refute or cure these with at rates that are consistent.

We haven't seen a significant change in the severity.

So really, it's just more of the same.

And so when you look at the accounting we did, it really reflects two things.

One is because we've seen this continue on, if you remember back in June when we talked about this, we said, look, we've dialed it out another year, because we don't see anything suggesting that it might stop in the terms that we thought it would.

Six months later, we're looking at it and again, at a slightly higher level, we don't see it slowing down, so we thought it prudent to take it out another year.

And then again, while we were doing that, we adjusted for the different variables, again, incident rate, our ability to refute it, the severity of the claim.

So if you look at where we are today, I think absent changes in the amount of requests that we get or the severity of them, if we just went out another year, we think it would be about $20 million to $25 million.

And that compares to an increase for a year back in June, which we said we thought was about $19 million.

So again, we're not seeing a huge change in the behavior, just a little bit more of it and more time.

Your next question comes from the line of Nishu Sood representing Deutsche Bank.

Please proceed.

Thanks.

I wanted to ask about the land strategy.

The changes to your land purchase methodology that you mentioned last quarter leading to some reshuffling of the land portfolio.

So a material difference here and I wanted to understand, is this related to basically a change in the financial framework you have been using, or is it related to changes in expectations of how long you think the recovery's going to happen, the kind of trajectory?

So is it a change relative to a few years ago of your operating outlook, or is it the financial metrics you're using?

Nishu, it doesn't have a lot to do with our change in the outlook for the market.

It has to do with us thinking we need to be more rigorous on how we manage the overall portfolio for the Company.

Specifically, as you I think are aware, we used to have a 21% IRR hurdle for all land projects.

We've now adjusted that and made it risk-based.

So a longer land project with more risk is going to have to meet a much higher return threshold, and one that's a finished lot purchase that's significantly less risk would be closer to 21% versus maybe 30% plus in threshold.

All of that is with a view toward driving better ROIC.

I don't think it's news to anyone that we have too much land given the market today, so we're looking to enhance our portfolio by ensuring that future land takedowns are met with a more rigorous hurdle assessment, like I just mentioned.

In addition to that, we're taking some action on existing land, parcels that we can't get to for five, six, seven years and choosing to sell some of those and redeploy that capital into better areas.

So overall, we want to bring our land supply into better balance and we're pleased with the progress we've made.

Bob, I don't know if you would like to add anything to that.

No, agreed.

Got it.

And then just a follow-up also on that topic, if we consider the implications of this change in land strategy division by division, which division is it having most impact on?

So for example, were land sales concentrated more in Centex or Del Webb, let's say, or the Pulte side of things?

And so how is it -- how is it -- how would you think it would shape the strategy in the divisions going forward?

I don't think the strategy in terms of rebalancing would have a whole lot to do with the mix by brand, which I think is what you're referring to.

It's more specific by geography, Nishu.

So as an example, if we have a very long land position in a given market such as Florida, that might be an area where if we have projects that have a 10-year life, we might be willing to sell off pieces that are in years 6, 7, and 8; whereas in a market that we're fairly light on land and need investment, such as say, Charlotte, we might be in the market to purchase.

So that's an example of kind of the rebalancing overall.

But it's not specific to one brand for our business.

Your next question comes from the line of Ivy Zelman representing Zelman & Associates.

Please proceed.

Thank you.

Good morning, everybody, and strong results.

Happy to see the progress.

If we think about the gross margin improvement and recognize that you've been acquiring finished lots, I think you said 2,800 for the quarter, how should we think about the margins in the new acquired lots?

Are they equal to or better than that?

And then recognizing that your profitability has improved so much and your very impressive SG&A leverage, how should we be thinking about the deferred tax asset and expectations on when you might put that back on balance sheet?

So, Ivy, I'll take the first piece and then throw it to Bob on the DTA.

On the margin side, we are seeing better margins from new communities that are beginning to flow through.

And that's in the range I would say of a couple of hundred basis points, in general better than some of the legacy positions that we're closing out of.

It's also helpful, frankly, that some of the legacy positions we're closing out of were not our strongest performers.

In some cases, the delta can be greater than that.

Also, the excitement for us internally, and I don't know if everybody caught this on the call, is that we don't feel that a lot of the margin improvement we saw in 2011 was really a result of the operating efficiency things that we've been working on, such as pricing strategies and value engineering, and should costing; but that should begin to flow through in 2012.

So we expect better margin performance from here, not just as a result of mix or a new land portfolio, which is primarily driving in '11, but more from the things we've been working on that take a little time to flow through.

So with that, Bob, maybe you can handle DTA.

Sure.

The DTA, I think I'm right about this, nobody has reversed any yet and some people are further along in the profit profile than we are.

We've had some dialogue and there are competing views, can you record it when you've got two years of profitability and a view towards profitability in the third year?

Do you need profitability for three years?

I think that will work itself out, and I think as we mentioned in the past, we won't be the first person online on that and typically on an issue this significant, there will be a cadence that gets set up, so I think we'll have to see how that plays out.

The other thing, again, just to make sure everybody remembers this, the significance of our deferred tax asset puts us in a position that when we are able to reverse some of the reserves, it is unlikely that we'll be able to reverse all of the reserves.

So we'll have to look forward and understand what view towards profitability in the future do we have and how much of it can be realized.

So I think for us, rather than an all at one time we'll get the entire deferred tax asset reserve reversed, it will be in pieces.

Your next question comes from the line of Dan Oppenheim representing Credit Suisse.

Please proceed.

Thanks very much.

I was wondering about your comments on Florida where you talked about that being a big upside surprise.

Do you have any concerns about that being a bit more challenging as more supply comes to market given solid delays and working through the distress there?

Dan, it's Richard, frankly, no.

And I candidly think this primarily has to do with the strength of our land positions in Florida, particularly as you look at our south Florida business, which is pretty large.

We've got some terrific communities, in particularly southwest Florida and we're doing extremely well in that market.

We're also seeing some strength in Orlando, couple of communities in Tampa as well.

But I don't get the sense in talking to our operators and I've been out quite a bit lately, that that's a real concern.

I do think some of it has to do with company-specific positions, though.

As an example, we don't seem to be competing a lot with the entry level market in Florida, a lot of it's move-up and active adult, which are seeing strength today.

Okay, great.

And then in terms of the comments about looking for just improving results to be the increased sales per community and also just want you want to do in terms of the IRRs and such, it would suggest definitely moving to closer-in communities, we're definitely seeing the trends from other builders doing that.

When you look at land opportunities, how do you see that right now given the desire from others to look at land?

Well, I guess I just want to be clear.

I think our margin improvement in 2011, we certainly benefited from an improving mix, particularly toward move-up.

We benefited from new communities coming online, things like that.

In '12, we think it's going to be more specifically the results that we've been working on so hard around new pricing strategies.

Frankly, a lot of value engineering and should costing.

We're opening new communities or redoing existing communities with product that's more efficient, should be driving better margins, et cetera.

As it relates to land purchases going forward, we are being very disciplined and candidly not extending ourselves into land positions that we're concerned or could be concerned about.

They are A-plus positions.

They typically have low risk.

Since we instituted this new risk adjusted profile back in the early to middle part of last year, we've seen a shift in the way projects are coming in for approval and they are typically lighter take-downs, they're typically higher returns with a little -- a little better adjustment, frankly, versus the longer land positions that we've had.

So as it relates to whether that's infill or not, specifically, I can't comment on that as much as I would say, I believe we're buying A properties or A+ properties and not going out to marginal areas.

Your next question comes from the line of David Goldberg representing UBS.

Please proceed.

Thanks.

Good morning, everybody.

Good morning, David.

Good morning, David.

This question was actually on the community count.

And I want to get an idea given the decline that you have seen kind of year-over-year at this point, if you think that rate of change is kind of leveled off as we go forward.

And then what would you have to see from the macro environment from the broader housing market to think that it made sense to kind of go in and start accelerating community count growth as you look forward?

David, this is Richard, let me start on this and then I'll go to Bob.

I just want to be clear with everyone, right now at the state this Company is in, margin expansion is more important than pace in driving improved returns.

And we have been very, very disciplined and continue to remain disciplined for the near term on that before we begin to expand dramatically.

So with that backdrop, I just want to be clear about that.

Maybe Bob can speak a little more toward count.

Yes, so we are at 700 for the end of the year.

Our expectation is that it will actually decline between 5% and 10% during 2012.

Again, what we are focused on is operational efficiency.

So trying to make sure that the initiatives we have underway we've talk about should costing, value engineering, running common plan management through the business.

We're trying to get that -- a foot hold of that in the business rather than expanding footprint.

So again, as Richard said, margin versus pace.

But we are still obviously active in the markets, as we talked about, 2,800 lots, 80% of those or thereabouts are finished lots.

As Richard mentioned, predominantly light, so they are option takes.

So these are the things we'll be able to get our hands on relatively quickly and then vertical pretty quickly after that.

So again, we will be -- we are an acquirer of land; but for 2012, again, about a 5% to 10% decline in community count.

Got it.

And then just as a follow-up, I was wondering if you could talk about the different segments in terms of absorption rates and kind of overall margin performance.

How did active adults fare relative to the traditional home building business?

And with this pickup that you've seen recently and some of the more positive vibes you're getting from looking at traffic and looking at buyer comments and comments from traffic, has it extended into the active adult business?

Yes -- go ahead.

Yes, sorry.

David, Richard here, the pickup in traffic and what we've seen to start the year is fairly across the board.

Most markets, most segments across.

So I would say kind of everybody seems to be benefiting a little bit from a little bit of optimism here as it relates to more specifics.

I don't know, Bob, if you have any detail.

Yes.

Paces are up in our communities about 11% versus the third quarter.

They are up about 9% versus the fourth quarter of last year.

We are seeing pace increases really across the board in all the communities.

Our closings are relatively consistent in terms of relative contributions for brand.

We talked about the fact that other than the shift from first time to move up to first time buyer has been a little bit challenged.

So our Centex community count is down a little bit.

Those are some of the older communities they are closing, but I don't see a dramatic shift other than that.

Your next question comes as a follow-up from the line of Michael Rehaut representing JPMorgan.

Please proceed.

Hi, thanks.

Just wanted to understand better in terms of 2012, and I recognize you're trying to not get too much into the weeds of granular guidance; but with the community count expected to be down 5% to 10%, I was just curious if you're expecting also a similar type of move for orders or if the shift to better absorbing communities would allow orders to still be up in 2012.

And I guess as a follow-on to that if you would expect SG&A to hold to current levels that you reached in 2011 or have further reductions.

Yes.

Mike, this is Richard.

As one of the things as Bob commented on community count, I was thinking we need to be careful everyone understands that community count is only one metric, and we do have a large proportion of large communities, particularly relative to many of our peers, and I hope everybody recognizes adding a five or ten-lot community, which is easy to do, can increase your community count, but not do a lot for your business.

So we are expecting better paces per community, and I think Bob just indicated we saw some pretty healthy improvements in paces per community in Q4 versus Q3 and prior year.

So we're not going give specific guidance on the numbers but we're expecting a profitable year, and we believe that we have the right strategy in that regard.

Bob, you want to add anything.

And as to SG&A, again, we had given guidance back after we had announced the restructures that we had done in the neighborhood of $475 million, we continue to feel comfortable in that range.

So again, we've talked about obviously people and marketing as a lot of our cost.

It's adjustable over time, but we don't have any initiatives underway.

We are pretty comfortable if we saw a change in the business, we would obviously rebalance the SG&A expense to reflect that.

Your next question comes as a follow-up from the line of Ivy Zelman representing Zelman & Associates.

Please proceed.

Thank you.

With respect to your operations being focused both on entry level and move-up, there's been a lot of concern about underwriting and ability for people to get a mortgage.

And I know that it's more stringent than it's been historically, but I wonder if you think that that has been or will be a limiting factor and you'll be able to grow as the cycle commences, assuming no change or would you say it's been more a function of confidence and that the mortgage liquidity, although stringent, assuming confidence improves that there's definitely ample number of borrowers that can in fact purchase today under today's more stringent environment.

And maybe you can break out for us, I'm not sure if jim Zeumer has the numbers, but what percent of your borrowers are actually below 700 in FICO score, because the general conventional wisdom is that you have to have a 750 or better FICO score, as well as the perception that you have to put 20% down.

So maybe you could help understand the dynamics of the underwriting for us please.

Yes, Ivy, this is Richard, I'll start and then Bob's got some detail.

First of all, you're right, mortgage availability is tight.

Frankly, it's been tight for a while, and it doesn't appear to have had a significant change, say, over the last six months or so.

Having said that, I would suggest there's significant opportunity for business to improve even without underwriting getting better as confidence comes back and buyers step into the market overall.

It would certainly help things if conditions weren't quite this tight in terms of underwriting standards.

But it does not appear that the efforts of the industry or others have made much of a dent in underwriting or appraisal standards yet.

So having said that, our belief is that business could improve and should be able to improve with confidence coming back without underwriting getting better.

Bob's got some detail for you on FICOs.

Yes, on the FICO scores, as we've talked about that in our mortgage operation, FICO scores have been hovering right around 750 for the better part of two years.

Again, our buyer is a little bit different maybe than the general population, because with the active adult, they typically have better credit scores.

But even with that in the last year, our mortgage operations, roughly 20% of the people who have been approved for mortgage are below 700, fully 40% are below the 750.

And interestingly, if you think about the FHA market, which is roughly 30% of our origination, they don't have a requirement to increase their down payment above the 3.5% unless their credit score is actually below 580.

So there is obviously some availability and it's not that they have to write a much bigger equity check until they get a little bit lower on the credit profile.

Your next question comes from the line of Stephen Kim representing Barclays Capital.

Please proceed.

Thanks a lot.

I have a few questions regarding your land buying.

So maybe I'll just start with that.

I was wondering if you could comment on the fact that you were able to book a $16 million gain on a $64 million revenue on your land sales.

That was kind of interesting.

I was wondering if you could tell us, do you think that's indicative in any way of what you see more broadly in terms of your land holdings if you were to put them out on the market, that there are opportunities for you to record a profit on a lot of those land parcels.

And then secondly, related to your land, you said you bought 2,800 lots.

I was wondering what you spent in terms of land and land development costs in the quarter.

And then finally, I guess if you could give us a sense for what your land profile looks like in terms of what you bought.

You talked about this new methodology for evaluating or doing feasibility analyses, you said that 21% was sort of your historical hurdle.

What is your current blended IRR in terms of the 2,800 that you bought?

What was the average IRR?

Okay.

Well, there's a lot there, first off.

I'll take all of it and then turn it over to you.

Okay.

So to your first question in terms of land and the profit on it, I don't think that's an indicator as to anything prospectively.

A couple of things to consider, again, these are some properties that have been around for a while.

They are pretty far out in the future.

They may have been acquired in the Centex acquisition, so there may have been some purchase accounting around them, and so I would suggest that that's not indicative of future transactions.

The other thing is, the process we follow is when we approve a transaction for sale, if there is a loss, we book it at the time of approval.

And so when we actually close the transactions, we're not going to book losses.

But if we have a gain on a transaction that we approve, we have to defer that until we close.

So at the -- by the time we actually close a transaction, we're actually going to only book gains.

So if you look at what happened in the fourth quarter, we had $16 million on the transactions that closed.

But we mentioned that there were $10 million in losses on properties that we had proved for sale.

So these things, depending on when closings take place, you get kind of lumpy income statements versus the cash that happens.

With respect to the 2,800 lots, we put those -- we put 2,800 under control, so we've approved those.

We haven't bought all of them yet.

And so in terms of the returns on those, I would -- we don't give particulars on that, but I would tell you they are north of the 21% threshold that we had used in the past.

I don't know, Richard, if you want to add anything.

No, I just also wanted to say that on the first question, Steve, regarding the land sales, the primary reason for selling land is not necessarily to drive a gain overall.

It's to drive our land balance to a more appropriate mix, particularly in a given market, as we look to deploy any cash into better returning communities.

So we may have some gains, may have some losses, as Bob indicated, it kind of netted out to about a $6 million positive this quarter and that's just the way the numbers fell.

The next question comes from the line of Joshua Pollard representing Goldman Sachs.

Please proceed.

Hey, thanks for taking my question.

Could you talk about the cadence of margins throughout the year.

Typically you've seen margins go down in the first quarter, and I want to understand if there's enough strength embedded from the 2011 actions that you've taken for that not to be the case and whether or not we should expect profit every quarter.

Is that what you're implying in your guidance?

Yes, Joshua, this is Richard.

It's going to be difficult for us to make money in Q1 given the seasonality of the business overall.

We certainly would expect to be profitable for the year.

And with regard to margins, we're not going to give quarter by quarter guidance.

Just to reemphasize that for the year, we would expect to see margin grow from 2011.

Okay, and if I could ask another question on your land, I'm trying to understand what portion of your land falls on the fringe of your newer returns profile.

In other words, what portion of your inventory would you sell if you could?

I think it's a relatively small percentage.

Again, this won't be a seismic shift in the land position in the short-term.

Again, $64 million in this quarter.

As I mentioned, we have approved other transactions that will close over the next in some cases 18 months depending on development requirements.

So it's really I would call it pruning rather than chopping.

Yes, Joshua, just to add to that, I think it's kind of summarized in a number of the comments we've heard from people.

The goal for us is better returns.

It's not kind of growth at all costs.

So that's our view with regard to all of these capital-related actions.

Your next question comes from the line of Adam Rudiger representing Wells Fargo Security.

Please proceed.

Hi, thank you.

I was wondering if you could -- I was a little confused on the gross margin and impairments in the back of the table in your release.

I think you have $8 million that flowed through cost of goods and you highlighted I think $24 million in your earlier remarks.

Can you just detail where all of those charges were in the income statement?

Yes, so there's $24 million, $11 million of that is recorded in home sale cost of revenues, $10 million is in land sale cost of sales, and $3 million is in other income and expenses.

Okay.

So again, in the table, you have -- in the back you have $7.885 million in impairments in home sales costs and you just said $11 million; is there -- am I missing something?

It's the cap interest, which -- so it's the $11 million that I -- go ahead, Mike.

So there's $3 million of cap interest in that $11 million number.

So if you just take a look at non-cap interest, that's the number you're seeing on the table.

Okay, got it.

Thank you.

And then just on housekeeping, if I missed it, I apologize, what was the cancellation rate and what's the total lot count now?

It's 19.8% with the cancellation rate and total lots under control was 131,000.

Your next question comes from the line of Bob Wetenhall representing RBC.

Please proceed.

Hey.

Nice quarter.

Thank you.

I was hoping you could shed a little light on the 200 basis points of gross margin improvement.

What -- if you want to break that down, what is the contribution from more favorable mix towards a shift towards your buyer, towards move-up product, away from first time?

And on the other side of that, what percentage of the improvement or how many basis points is this shift towards more profitable communities, newer land purchases as opposed to legacy closeout?

We typically haven't broken it down.

Mix is a hard thing to really look at, because -- and I know this is going to sound like a non-answer.

But part of this is, again, we've talked about the fact that there's more move-up business.

So that's part of the margin equation.

We've talked about the fact that some of the older communities are closing out, new ones coming on.

That's actually part of the shift from first time to move-up.

So, again, we've not tried to narrow it down, say how much of it specifically is community-based versus how much is segment-based.

The one thing I might -- maybe to help you a little bit, is just to entertain what that mix shift means.

If you take a look at our mix this quarter, about 40% of our closings were kind of move-up oriented.

That compares to 30% last year and that's just strictly coming from the Centex side.

So we had about 30% in this quarter versus 40% in last year's quarter.

That's actually exactly what I was looking for.

And I think Richard was talking earlier about the benefits of process engineering will start to show up this year.

Can we get a ball park in terms of gross margin basis points?

Is this 50 or 100 basis points of improvement to expect?

Because it's difficult to understand how material this will be in the big picture.

You've obviously mentioned you're going to be profitable this year.

Obviously a lot of this will stem from the cost initiatives on the cost line.

Can we just get a framework for thinking about this?

Yes, Bob, I'm sorry.

We can't give you specifics on that at this point.

I would just suggest to go back to a point we made earlier that the gains you saw in '11 were primarily a result of kind of the capital decisions we had made and the way that mix and new investments flow through.

Not a lot of that was driven by the value engineering, should costing, new pricing strategies, et cetera.

So stay tuned on that.

We'd prefer it to be a show me world versus prediction at this point.

Your next question comes from the line of Jay McCanless representing Guggenheim.

Please proceed.

Hey, good morning.

First question I had, it appears if I just back out impairments from 3Q to 4Q, looks like gross margins went down about 90 BIPs sequentially.

Could you all discuss that and what you did with incentives sequentially?

Incentives sequentially were consistent, right around 6%.

I'm not sure what you've done with capped interest.

There was a pretty good increase on a relative basis Q3 versus Q4 this year in what ramped through the income statement for cap interest, so my guess is that's what you're seeing.

That's why when we give you the adjusted gross margin number, we were up sequentially from Q3 to Q4, the 10 basis points.

But that takes out any cap interest impact.

Okay.

Yes, I'll go double-check that.

Just going strictly off of what looked like land and lot impairments and then adding that back to what you showed for gross profit.

So want to double-check on that.

And then wanted to ask also, with the talk out there about bulk, OREO and bulk foreclosure sales, I believe the pilot program starting for that is going to be ramping up.

What are you all thinking about the impact that those bulk sales could have either on appraisals or potentially on impairments down the road?

Could you discuss that a little bit?

Yes, Jay, we have not counted on a whole lot of add in terms of our thinking, because candidly since it's out of our control.

And kind of the same thing goes for what the President's discussing right now, including expanding the HARP program, et cetera.

So don't have a whole lot there.

My guess is while a number of those things are going to be nice attempts, it appears that they are going to take a little time to have an impact.

So we don't know at this point.

Your next question comes from the line of Alex Barron representing Housing.

Please proceed.

Thank you.

Good morning.

I guess I wanted to ask you something I've been asking other builders, which is it's been six years since the downturn began and I guess a number of people have gone through foreclosure and short sale.

And they have been locked out of the mortgage market.

I'm wondering if you're starting to see some of those people come back into your sales offices and whether they are starting to qualify to buy homes again.

Yes, Alex, this is Richard.

It's hard to quantify specifically the impact of that, because I think there's perhaps a little bit of that phenomenon, but also you've got people who have not had qualification problems, who have just chosen for quite a long time to rent or to live with a sibling or friend and with the preponderance of press out there now about how good a time it is to buy, how low rates are, the increasing cost of rent; you're pushing people toward the ownership side of the equation a little more than you were.

So very difficult to give a specific answer to what you're saying.

I think it's a little bit of all of that, that is beginning to show some seeds of improvement.

Okay.

My -- okay, thanks.

My follow-up question was one of the things we do is we track all your communities that you have on the website and we've noticed year-over-year the Centex community count has gone down pretty significantly and I guess the Pulte one has gone down as well a little bit.

So I'm trying to understand on the Centex side, what's happening there or what your future thoughts are on that segment.

Well, we certainly built out a lot of smaller Centex communities, frankly, at a rate faster than the replacements have been coming online.

But we're very excited about the entry level brand.

As a matter of fact, one of the value engineering initiatives we have underway right now represents some new product alternatives for that first time buyer that we're going to be opening up in a number of markets early this year overall.

So you're right, the community count for Centex has fallen.

That's just as a result of kind of the run-off of a lot of smaller Centex communities, faster than their replacement.

Because the majority of our recent investments has been for the move-up brand.

But we're excited about the future for the entry level and we'll look forward to commenting on that in the future.

Your next question comes from the line of Buck Horne representing Raymond James & Associates.

Please proceed.

Quick question on the balance sheet.

I just want to look at a quick line item here.

Just noticed that the residential mortgage loans that you have available for sale, that line item on the balance sheet seemed to tick up quite substantially.

Just wondering if that's more of a timing issue in terms of -- or seasonal issue related to processing those loans, or is there some issue in terms of more difficulty placing that paper back into the mortgage markets that's occurring these days?

Yes.

No issues there.

That is actually seasonal and just the process that they are using.

We've actually seen that clear already.

Okay, all right, thanks.

And lastly, on the interest expense, I just noticed interest expense flowing through the cost of sales ticked up quite a bit, I guess even on a per delivery basis.

Just wondering if that's the kind of sustainable run rate in terms of your delivery schedule or interest amortized per deliveries, the numbers we should be looking for going forward?

Yes.

We talked about this, I think it was in Q2.

We are today expensing 2011, we expensed about $185 million against cash spend of about $220 million.

Our expectation is that for 2012, that expense will move up to about $220 million.

At the time, we said that would be consistent with our cash spend.

Based on the repurchases of the debt that we got through in the fourth quarter, our cash spend will be a little bit less now, it's down about $16 million; so closer to $200 million.

But again, next year you'll see relative to 2011, about a $35 million, $37 million increase through our cost of sale line for cap interest amortization.

Perfect.

Thank you.

The next question comes from the line of Ken Zener representing KeyBanc.

Please proceed.

Good morning.

Good morning.

The increase that you're having on what you just spoke about, it's obviously -- I think a portion of that is related to the Centex debt, is that correct?

It is related to Centex accounting, yes.

Now, that increase that we're having this year, is that -- in 2012, as you look out into '13, does that continue increasing?

Are we going to finally start seeing that abate so you can get that interest expense?

I think it will go down or stay even.

So it depends on our debt level at that point, it's how much is actually being capitalized each year.

Again, the $16 million-ish decrease in cash spend next year, some of it will benefit next year and the amortization off.

The rest of it would impact '13 and '14.

So again, it will -- it's not linear, so we don't get a dollar for dollar reduction if we reduce cash interest expense, the income statement follows on a lagging basis.

But again, based on where we, it should go down.

Okay.

Good.

And that will obviously -- won't be a headwind in '13.

Now, I find it interesting, with your community count as relates to G&A, when you said 5 to 10 per year, was that a year end, or was that an average community count for the year?

Year over year.

Yes, that's to the end of the year.

So fourth quarter down 5 or 10.

Okay, and then the decline that you've had, how much of that would you actually tie over to the success you've been having in your fixed G&A?

Well, I think--

I don't think--

I would say marginal at best.

Yes, these are -- this community count, we're not talking large communities with significant amount of fixed costs related to them, so most of our SG&A is for other reasons.

Yes, the G&A improvement is largely, as I think Bob indicated in his script, the result of some actions we took in Q2 of '11, and we're getting the flow-through benefits of that now and expect it to continue.

Your next question comes from the line of Jack Micenko representing SIG.

Please proceed.

Hi.

Most of my questions have been asked and answered.

Just wanted to touch on Florida for a minute.

Seems like most of the builders have been reporting pretty good order trends in Florida.

Active adult and trade up in your space, I think you had mentioned and better land position.

Can you talk about the composition maybe of the buyers you've seen, maybe anecdotally?

Are we getting snow bird or retirees off the fence because the window there is maybe narrower and they don't want to wait another year?

Is there a Canadian component with the dollar exchange?

Can you talk about the composition of Florida?

Yes, Jack, for us a good bit of it is active adult.

As an example, our Southwest Florida business is largely active adult purchases and a lot of it is snow birds, some Canadian buyers, some foreign buyers from Germany and other places; and frankly, it appears the seasonal trade, if you will there, the second home purchases and the move -- move down or retiree purchases really started last winter, a year ago.

And it's continued through 2011 and we're seeing a pretty strong season so far there this year.

So that's the anecdotal comments I would provide overall.

Okay, and I don't want to overstate it, I mean you've got $1.2 billion and $148 million and change in reserve on the rep and warranty side.

One of the things that our checks have been pretty clear about is I guess to be politically correct, the technicality of some of these putback issues moving from the individual GSEs to the FHFA, you've seen that and you've also seen more technical putbacks, if you will.

Can you talk about maybe your experience since August, September and the tick up and what that piece of the elevated volume maybe is behind that?

Well, again, I think we commented on that.

We don't see a change necessarily in the types of things that are coming to us nor for the periods that they relate to.

So I wouldn't -- I wouldn't necessarily agree with that there's some technical aspect to this.

I think the counterparties are reviewing loan documents and if they believe there was an error or omission in the rep and warranty, they ask us to repurchase or make whole.

Obviously we do everything we can to either cure what they think the issue is or refute it for a variety of reasons.

But I don't -- I don't think that there is a change in sort of the way they are behaving.

Just to add on, it's always really been a technical issue, so this is a strict rep and warranty type contractual item.

So not sure what you mean by technical, but I would tell you it's always been technical.

Ladies and gentlemen, this concludes the time we have for questions.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.