Jill Peters - Senior Vice President, Investor Relations Jeff Mezger - President and Chief Executive Officer Jeff Kaminski - Executive Vice President and Chief Financial Officer Bill Hollinger - Senior Vice President and Chief Accounting Officer Thad Johnson - Senior Vice President and Corporate Treasurer.

Collin Verron - RBC Capital Markets Megan McGrath - MKM Partners Michael Rehaut - JPMorgan Susan Maklari - UBS Stephen Kim - Barclays Alan Ratner - Zelman & Associates Tim Daley - Deutsche Bank Anthony Trainor - Credit Suisse John Lovallo - Bank of America Merrill Lynch Jack Micenko - SIG Ryan Gilbert - Morgan Stanley Jade Rahmani - KBW.

Good morning. My name is Shay and I will be your conference operator today. I would like to welcome everybody to KB Home 2016 First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Following the Company's opening remarks, we will open the lines for questions.

Today's conference call is being recorded and will be available through a replay at the Company’s website kbhome.com through April 23rd. Now I would like to turn the conference over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin..

Thank you, Shay. Good afternoon everyone and thank you for joining us today to review our first quarter results.

With me are Jeff Mezger, President and Chief Executive Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Corporate Treasurer.

Before we begin, let me quickly note that during this call items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 the company’s control, including those detailed in today’s press release and in our filings with the Securities and Exchange Commission actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, a reconciliation of the non-GAAP measures referenced during today’s discussion to their most directly comparable GAAP measures can be found in today’s press release and/or on the Investor Relations page of our website at kbhome.com. With that, I will turn the call over to Jeff Mezger.

Thank you, Jill. Good afternoon everyone. Going to start with a brief overview of our first quarter performance, followed by a business update, then, Jeff Kaminski will take you through our financial results in greater detail, after which we will open the call for your questions.

We were well positioned entering 2016 with a sizable year-end backlog from which we delivered strong results in the first quarter. We generated $678 million in total revenues driven by substantial growth in deliveries, which were up 23% year-over-year. This in turn help fuel a 53% increase in pretax income to $16 million.

Our home building operating margins excluding the impact from land sales improved 140 basis points driven by healthy improvement in both our gross margin and SG&A. The value of our net orders increased 9% to $825 million against a strong comparison in last year’s first quarter which was up 25% over the prior year.

Our net order growth of 4% was basically inline with the 6% year-over-year increase in our average community count and we are now into our third year of producing quarterly net order growth on a year-over-year basis. Overall, we experienced solid traffic levels and favorable demand tends during the quarter.

The value of our backlog at the end of the first quarter was $1.4 billion, up 29% providing a solid foundation for continued revenue and profit growth as we enter the second quarter.

While it is still early in the spring selling season, we are encouraged by the traffic levels and steady demand we are seeing and are optimistic as we continue to build backlog in support of our delivery targets for the latter part of this year.

On a regional basis, California demand remained strong in the first quarter, particularly in the coastal regions where supply is very limited and with prices continuing to climb along the coast, we are once again seeing demand move to the inland areas as well.

While we did generate positive comparable sales for the quarter in the West Coast region, in the Bay area, our net orders actually decreased as we continue to transition out of many of our existing communities and work to open the replacement communities.

We successfully opened four communities late in the first quarter and have an additional six communities with grand openings scheduled for the second quarter. The Bay area continues to be one of the strongest housing markets in the country and our division there is also our most profitable per unit.

We expect these ten new community openings in the first half of the year to drive a favorable sales comparison for the division with the Bay area overall being a key contributor to our gross margin projections for the year.

In our Southwest region, Las Vegas continued to perform well, once again producing among the higherst sales per community in the company.

We did have a slight negative sales comp for the region primarily related to the timing and number of community openings in Phoenix as we had several very successful grand opening in Phoenix in the first quarter of last year.

In our Central region, our largest in terms of units, we are pleased to generate a positive order comparable in spite of the softer market conditions in Houston. As we have shared with you, we purposely began limiting our investment in Houston about a year ago given the severe contraction in the price of oil and its impact on the local economy.

As a result, our community count in the Houston is down about 20% year-over-year and sales in the first quarter were down about 18%, basically flat on a per community basis. Houston continues to be a price-sensitive market with weak demand in the price bands above 250,000, while price points below 250 continue to perform reasonably well.

We believe we are strategically well positioned in Houston, operating in the most desirable and active sub-markets with a first quarter ASP on deliveries of approximately 230,000. Our other markets within the region all continue to perform well with solid sales and steady demand in Austin, Dallas and San Antonio, as well as in Denver.

We also gained momentum in our Southeast region which had the highest order growth with sales solidly up across all divisions. Before I turn the call over to Jeff, I want to spend a few minutes on our capital allocation plans for 2016.

We have a balanced approach to prioritizing our use of capital in order to support our growth, strengthen our balance sheet, and improve shareholder value. During the first quarter, we repurchased approximately 8.4 million shares of our common stock representing about 9% of our shares then outstanding.

At the time of the repurchases, our stock was trading between 55% and 60% of book value providing a significant opportunity to drive shareholder value. As a result of these repurchases, we increased our book value per share by nearly $1 to $19.22.

We have about 1.6 million shares remaining in our existing authorization and we will evaluate future repurchases relative to market conditions and our overall capital allocation plans.

Even with this measured investment in share repurchases, we have the capacity to allocate up to $1.3 billion towards land acquisition and development in 2016 and remain cash flow neutral for the year. We will continue to be thoughtful about investment opportunities based on local market conditions and the return potential of each individual projects.

For the year, we anticipated that about one half of our land spend will be in development cost and fees as we continue to drive revenue growth and profitability from our existing assets.

While we own all the lots necessary to achieve our 2016 delivery targets, as well as the majority of the lots we need for 2017, we are working to identify additional investment opportunities in support of our community count growth targets for 2017 and beyond. In closing, we made meaningful progress with our results in the first quarter.

The early indications for the spring selling season are favorable as we continue to see steady job growth and household formation creating demand, while inventory levels remain low and new home affordability remains compelling.

We are well positioned entering our second quarter with a backlog value of $1.4 billion and we are committed to driving continued improvements in our performance. We look forward to sharing our results with you as the year unfolds. With that, I’ll now turn the call over to Jeff for the financial review.

Jeff?.

Thank you, Jeff and good afternoon everyone. Our solid results for the first quarter that Jeff covered in his opening remarks reflected strong operational execution which generated improvement in all of our key financial metrics.

I will now provide some additional detail on our first quarter performance as well as our outlook for the second quarter and full year. In the first quarter, housing revenues grew 28% from a year ago to $673 million. This growth was driven by a 23% incresae in homes delivered and a 5% rise in our overall average selling price.

Each of our four regions reported double-digit increases in deliveries, as well as higher ASPs. We were particularly pleased with the delivery execution in the quarter given ongoing challenges with labor constraints in our trade base and the fact that the majority of the closings were subject to the new trade regulations.

The strong year-over-year revenue increase was the primary catalyst for the improvements in both our operating income and bottom-line. For the second quarter, we expect to generate housing revenues in the range of $710 million to $770 million and for the full year we are maintaining our housing revenue guidance of $3.35 billion to $3.65 billion.

We expect housing revenue growth for both the second quarter and the full year to be driven by the conversion of our robust backlog in the homes delivered as well as continued year-over-year improvement in our overall average selling price.

The 5% year-over-year increase in our average selling price of homes delivered to $344,400 for the quarter reflected increases in all four of our homebuilding regions. For the second quarter 2016, we expect an ASP of approximately $360,000, which would represent a 6% increase on a year-over-year basis.

We expect community mix and a shifted deliveries towards the West Coast region to drive our average selling price even higher during the second half of the year resulting in a full year increase of between 6% and 8% as compared to 2015.

Our housing gross profit is 16% for the first quarter was up 90 basis points year-over-year with each of our four regions generating improvement. The first quarter gross margin included $1.2 million of inventory impairment and land option contract abandonment charges which had a roughly 20 basis point impact.

Excluding inventory-related charges and the amortization of previously capitalized interest, our adjusted housing gross profit margin was 20.7% representing an increase of 120 basis points from the first quarter of 2015.

For the second quarter, we believe our gross margin will be relatively flat on a sequential basis before expanding during the second half of the year. We have a number of higher margin communities with first deliveries scheduled for the third and fourth quarters, particularly in our West Coast region.

In light of this, and the favorable leverage impact from higher housing revenues expected in the second half of the year, we are maintaining our outlook for full year gross margin improvement.

Therefore assuming no further inventory impairment or land option contract abandonment charges, we continue to expect to generate a housing gross profit margin above 17% for the full year. Our selling, general and administrative expense ratio of 13.1% for the first quarter improved 40 basis points versus the year earlier quarter.

This was our lowest first quarter ratio in ten years, despite an unfavorable impact of approximately 50 basis points from a legal approval during the quarter. We believe we will continue to produce sequential and year-over-year improvements in our SG&A expense ratio throughout 2016 through our cost containment efforts and improved operating leverage.

We still expect our full year SG&A expense ratio to be in the low 11% range as discussed during our previous earnings call. Our first quarter homebuilding operating income margin improved by 140 basis points from the year earlier quarter to 3% after excluding land sales results from both periods.

On an unadjusted basis, our operating margin increased 30 basis points. For the second quarter, we expect to generate year-over-year homebuilding operating income margin improvement in the range of 50 to 100 basis points.

Income tax expense for the quarter was favorably impacted by $3.3 million of federal energy tax credits we earned from building energy efficient homes resulting in an effective tax rate of 18.1%. We recognized $1.4 million of such credits in the same quarter 2015.

The favorable impact from these energy credits reflects a significant financial benefit directly related to our sustainability and energy efficiency initiatives.

We expect to recognize more of these tax credits during the second half of 2016, and project an effective tax rate of approximately 37% for the second quarter and in the range of 34% to 35% for the full year.

The expansion of our housing gross profits and improved SG&A expense ratio, together with the favorable tax credit impact drove a 68% year-over-year increase in our first quarter net income to $13 million or $0.14 per diluted share. The per diluted share result includes less than a $0.01 benefit from our lower share count.

Our first quarter average community count rose 6% year-over-year to 244 which drove the increases in our net orders and net order value that Jeff mentioned earlier. During the quarter, we opened 15 new communities and closed out of 21. We ended the quarter with 241 communities, up 3% from a year ago.

Included in the 15 community openings for the quarter were four communities that were previously classified as land held for future development.

Our balance of land held for future development at the end of the quarter decreased by approximately $40 million from year end as we activated land parcels and continued our efforts to monetize these properties and redeploy the capital into assets with higher income producing potential.

We expect our average community count to be relatively flat in the second quarter 2016 as compared to the same quarter 2015, which had increased 30% from the previous year. For the full year of 2016, we still expect our average community count to be relatively flat compared to 2015, which have expanded 22% from 2014.

Looking out past the current year, we believe our planned community openings will drive increased community count beginning in the first quarter of 2017.

During the first quarter, we invested approximately $386 million in land and land development with $230 million or 60% of the total representing new land acquisitions and the remainder spent on development to convert own parcels into new communities.

As Jeff mentioned, we are taking a measured approach in our capital investment and allocation planning.

We are focused on growing the business in a balanced manner and we will remain flexible as to land-related investments as the year progresses assessing among other things, general housing market conditions, the return potential and risk profile as specifics land acquisition opportunities and our operating cash flow available to fund the investments.

Even if we decide to use the full land investment capacity that Jeff noted, we expect to be at least cash flow neutral for the year. We ended the quarter with unrestricted cash of $323 million and total liquidity of approximately $570 million including the unused capacity under our unsecured revolving credit facility.

Our fully diluted share count at the end of the first quarter of 99.4 million shares reflected the impact of the 8.4 million shares that were repurchased pursuant to our Board authorized plan that was announced earlier in the quarter.

Considering the share repurchases to-date, we anticipate that our fully diluted share count will approximate 94.5 million for the remaining quarters of 2016 and roughly 96 million for the full year diluted earnings per share calculation.

In conclusion, we feel good about our first quarter performance and we are optimistic our ability to deliver continued improvements over the course of the year. With that said, we will now take your questions.

Shay?.

Thank you. [Operator Instructions] Our first question comes from Bob Wetenhall from RBC Capital Markets. .

It’s actually Collin filling in for Bob. Thank you for taking my question.

In terms of new order growth, in the quarter that was skewed towards the Southeast region, it sounds like there was a lot of community count, but can you talk about what you are seeing in terms of organic growth in the different markets? And how you expect this mix shift towards that Southeast region to impact profitability and pricing going forward?.

Collin, I can say a few comments for that. Yes, the Southeast was our largest in terms of growth. It’s still a small segment relative to the business we have in the Central region or certainly the West Coast.

So, I don’t know whether it has a meaningful impact on our margins one way or the other, it’s good to see the momentum in the sales in that segment.

As we go from quarter-to-quarter any given quarter, we can be up a little or down a little, but I think if you listen to the comments, what we are trying to communicate is Central and West which are our largest regions in profits and units, there were some things going on and overall we still had a positive comp.

To me, with the softness in Houston and the fact the region continues to have a favorable sales comp each quarter, it speaks to the strength of the overall region and we are actually encouraged with the sales in Houston.

If you go to the West, we had a positive comp even with a negative sales for the quarter in the Bay area and as we shared, we have a lot of community openings that are hitting right now in the Bay area and expect that to come back very strongly with deliveries in the second half of the year.

So it will all sync together and on a blended basis, we will continue to improve our margins. .

Great, and then just in terms of the tightness that you are seeing in the labor market, what trades are you specifically seeing that in and how is that impacting your costs going forward in profitability?.

The pressure is more on the cost side, the pressure is more on labor than it is material, right now and there definitely still is a shortage of labor and it varies around the system, there is different shortages in each city.

But, it starts on the left with land development subs, we’re short a year ago and then it works through the framing and concrete and into the finished sub through the year. I think the worst of it’s over.

It was pretty tight and we had a lot of cost pressures in the fourth quarter, there is still out there but they don’t seem as impactful as they were in the fourth quarter. So we will continue to sort through things and we think it’s getting better right now in the labor front. .

Thank you. Our next question comes from Megan McGrath from MKM Partners..

Good afternoon. Couple of questions here.

One, I was interested to hear your commentary on a couple of markets that we heard from others are getting kind of harder investment because of land, you mentioned the Bay area San Francisco, I know you have some coming online, but thinking about future investment we’d love to hear your thoughts on, is it possible anymore to underwrite land in that market? And I’d love to hear your comments on Dallas as well, lot of talk there about land bases have gone up very significantly the past year, so?.

Okay, good questions, Megan, and you know our business pretty well. We have a unique advantage in the Bay area and that we have a very tenured seasoned land team that fin together for quite some time. Most of the deals that we bring to market up there never get into the bidding wars or the broker shopping.

There are parcels that we tie up due to relationships and we are actually the ones that are creating the entitlement value. So we’ll tie the deal up, spend the dollars on the entitlements and then close once we get it fully entitled.

Some of the communities that we are bringing to market right now, we’ve actually had control for five, six, seven years, which takes that long to bring them to market.

If we were to enter the Bay area today and try to buy land just through the open market, I think it would be tough to get it to underwrite and frankly, we don’t like to play in that, because you don’t make margin. We’d rather create the value with the confidence we have in our team up there.

In terms of Dallas, I would agree that the land market is pretty friendly still. We don’t have a large business in Dallas. I think we have two comminutes open for sale today.

We are trying to grow our business, but we are being patient with it and we have not jumped in and chase these prices up, because there is a disconnect right now between home price and land with the land source. So I would agree with that on Dallas. .

Thank you. That’s really helpful. And then, just if you could give us some commentary on the peak throughout the quarter, my sense was that February, at least - should have been a nice month for the four region but I am not sure weather can always be an issue in February.

So, if you could talk us through the cadence through the quarter and if you have any commentary on how markets are looking?.

We try to understand the – get through the noise of how many days in the months and where the weekend falls, which is also a big driver since most of the sales activity occurs on weekends.

This year in February you actually had an extra day, so we probably picked up a few sales as there were 29 days, not 28, but if you just look at the high level trend, we were experiencing good sales coming out of the quarter, February was a good month for us. So, it’s very early here in the spring selling season.

So it’s hard to call after a couple weeks of March, but we are encouraged with the trends we are seeing right now in traffic and demand. .

Thank you. Our next question comes from Michael Rehaut from JPMorgan..

Thanks. Good afternoon everyone. First question I had was on the balance sheet.

Obviously, great to see you took advantage of some of the low prices attractive valuation from the share repurchase standpoint, but I was hoping you could also remind that’s what your goals are in terms of leverage which during the volatility in the markets year-to-date some of the highly levered builders got hurt that much more.

So, maybe, Jeff Kaminski, you can kind of talk to how you are thinking about leverage target ratios, target ratios for leverage over the next year or two? And to the extent that share repurchase may or may not be able to continue to be a part of those plans?.

Right, sure Mike. I guess, to start with, I am just looking at our ratios; our debt-to-capital ratio was actually a little bit lower than it was after the first quarter of last year. We ended at about 62% versus 64% last year. On a net basis it was about the same.

So, over the last year, we kind of maintained the leverage that we had experienced in 2015 at the end of the quarter. As far as forward targets go, our targets remain in tact. We talked about time being in that 40% to 50% range on a net basis and the target is still in tact for us.

The share repurchase we thought it was actually a home run from the point of view of the value created for the company’s shareholders.

We clearly bought at the right time and I think it had a really nice impact, you don’t see very often we are able to take a company with liquidity, buyback shares and actually increase the book value per share as a result of the buyback. So, we are very pleased with that but it was opportunistic. We remain focused on the leverage targets.

It’s got a medium-term goal. I think as we look out for the year, what we did with the share repurchase in the first quarter basically just brought forward basically the net income and to retain earnings that we are going to see for the full year.

So it really didn’t impact the full year as far as moving us backward and it was a really nice opportunity for us. .

No, no, no, I certainly agree with that.

I guess, the second question, shifting to community count growth, I think you reiterated your outlook for fiscal 2016 in terms of being roughly flat and anticipating some growth beginning in the first quarter of 2017, but just hoping for a little more detail around that from the standpoint that, I guess the way that – correct me if I am wrong, I am away from my desk in and calling from the road, but, you had some growth year-over-year this quarter, it would seem to imply maybe a little bit of year-over-year decline in the back half and so, when you talk about growth in the first – coming out of the back half of this year, maybe down a little bit year-over-year and you are seeing growth in the first – beginning in the first quarter, would that be sequential or would it be year-over-year and if you can give us any sense of should we be thinking about 2017 overall as a kind of a mid single-digit community count growth or would it be above more in the little double-digits of that?.

Right, I guess, I’ll start with the last part of your question in 2017. We are basically indicating right now, we are looking to start growing community count early part of the year that would be coming off the fourth quarter.

I believe there is good potential will be higher than the first quarter of this year although it’s quite weighs out at this point.

We are really not guiding full year either single-digit, double-digit or whatever as we go, because a lot of it will depend on market conditions and what we see as far as land acquisition opportunities this year as well as development timing.

So, our intention is to obviously get that back on a growth trajectory as we get into 2017 and as we talked about last call, it’s a little bit of a stair step on community count growth. We had outsize growth in 2015, 22% for the full year which we are pretty happy about.

We’ve maintained and intend to maintain that community count as we go through this year and hopefully see another step-up next year subject to market conditions on the land side.

If you are looking at kind of just overall math, if you look at the second quarter is being flattish on an average basis versus last year, it means we’ll have to kind of more or less maintain our quarter end community count and grow it slightly in order to have that average be about level with last year because we had a pretty large acceleration between Q1 and Q2 in 2015.

We had 261 communities at the end of the quarter of the second quarter last year versus 235 to start the quarter. So, we’ll have to have a little bit of growth in absolute terms sequentially in Q2 to basically hit that average. .

Thank you. Our next question comes from Susan Maklari from UBS. .

Hello, good afternoon. .

Good afternoon..

You’ve talked a lot about sort of the pricing power that you saw in the quarter that you expect to see as we continue to go through 2016.

In some of your markets, specifically, California, you’ve already realized a lot of pricing power in general as market has, how much further do you think that can go and how you are thinking about how that could trend in terms of volume versus price per house?.

Susan, let me take a crack at it and qualify some of your comments, because lot of the pricing power we are seeing, I guess, you say it’s pricing power, but it’s really mix and if we close out of a community in inland California and replace it with a higher priced City of San Francisco condo at a $1.5 million, it will look like we are getting a lot of price, but it’s really just a relocation of the product where you are at a higher priced sub-market with still an attractive price for that place.

So, I think, we are seeing some price, we will take price where the market will give it to us, but most of the pricing is still due to the product shifts that are going on within our business. And in terms of that if you look in the Bay area it’s so underserved as an example. There is such good demand and so little supply.

I don’t think you are anywhere near a bubble price, certainly not at the price points we are playing out. Had stay, but $1.5 million is an affordable in Bay area right now or the City of San Francisco, I’d say. So, I think you’ll see the price come here due to mix this year not that the market is letting us raise prices 6% to 8%.

I don’t think we are seeing that right now. .

Okay, okay.

And then, you mentioned in your comments to that, obviously that there is something that’s get closing in the quarter despite the issues of the trades and treaties well; can you just talk a little bit about trade? Are you seeing that become any kind of significant impediment; obviously it’s still paying this quarter but anything that’s changing out there?.

I certainly haven’t heard much. I think there was a few speed bumps as the process rolled out that are continuing to refine us to make it as consumer-friendly as possible.

So, I think as things settle, you’ll see it be less of an issue or we are hopeful that it is, but I don’t think it was a material impact that all this quarter, just kind of powered through it. It was actually powered better than we were expecting the worse than it came up pretty well. .

Yes, okay, thank you..

Thank you. Our next question comes from Stephen Kim from Barclays..

Yes, thanks very much guys. I guess, my first question related to your land spend in the quarter. It was fairly robust and particularly on the acquisition side. It looks like your development spend was running sort of in the low 20s of revs which is about consistent with what it kind of was running at last year.

It looks like you’ve kind of guided to a figure that’s around high 30% of revenues for total spend and if I am trying to figure out , if you are going to continue for the year to have development spend kind of running around that low 20% of revenues, if that kind of seems reasonable, kind of like what you did last year, because that number seems a little high, actually relative to peers and so I wanted to know, it’s maybe upon overestimating what your development spend might be this year and then if not, I can have it correct, maybe what’s driving your development spend to run a little higher than maybe what we see for other builders, if you had a guess?.

Yes, I’ll take a shot at it and give you few facts. First of all, typically for us, we spend a little bit less on the development side earlier in the year in more in later quarters. So I think the percentage being 60 - 40 in the first quarter is not all that unusual.

It also – you have a lot of ups and downs in acquisition and timing of acquisitions as well as development. So it tends to blend and even as you travel through the year. We are seeing a lot of opportunities right now that require development.

Frankly, you are not seeing a lot of A lot or A location, finished lot deals right now where you can just pick up and start building out and a lot of the land that we are seeing is requiring development. So I think those are two factors that we are looking at.

The other thing I think I just mentioned is, we are really, in many respects trying to stay away from a point guidance on land spend or even land development spend for the year and instead, really wanted to indicate for everyone where we saw our capacity.

So that’s why Jeff talked about a $1.3 billion capacity to spend and we are watching market conditions as we go and we’ll guide the land investment in as we go through the year base on it.

So, I really don’t want to look at it as a guidance number although it’s an indication of what we think we had a capacity for and if the opportunities are out there and they make sense and they hit our hurdle rates, and if they are good opportunities, we’d like to be able to invest at that level. .

Stephen, if you are asking what maybe a little different in our dev number and fees, as you know, in California, when you start development, you pay a lot of impact fees and in the higher price market that can be 7500,000 a lot that you pay in fees when you start grading.

So if any quarter, we pull the trigger on a couple of communities in California, it looks like a big number, but it’s on 75 lots as opposed to a finished lot in Houston that would be a third to price of those fees. So we can get skewed in any given quarter depending on the timing of the type of development or acquisition we are doing. .

Got it. Yes, that’s very helpful. Thanks for that Jeff. That may be the answer I was looking for.

Okay, and then, with respect to these higher margin communities that you are opening up in the back half of the year, which I guess, you were just alluding to, I guess, many of these are going to be sort of in the West Coast area, I was curious if you could share with us what the roughly the vintage of those lots was, like when they were sort of purchased, negotiated, because I know that you all were fairly active in 2013 and for parts of 2014 as you were looking to sort of reposition your portfolio with it.

I am curious is that what we are starting to see here in the back of this year or do they reflect perhaps earlier acquisitions or even later acquisitions? If you could just sort of talk about the age of those deals?.

What we are constantly rolling through, Stephen, my hunt would be the things we are opening now in the Bay area were probably acquired in 2013 to 2014, because it’s taking us over a year to bring the market that we may have tied them up much earlier than that at a lower basis and entitle them, but these aren’t parcels that for the most part that we are buying in late 2014 or early 2015 and that were opened.

We don’t get open that quickly in the Bay area. .

Thank you. Our next question comes from Alan Ratner from Zelman & Associates..

Hi guys, good afternoon. Nice quarter and nice job on the buybacks. Jeff, I was hoping to get your kind of updated thinking, just in terms of what you are seeing across your price points? You’ve made a mix shift up towards more move up over the last few years.

Historically, you guys have done a good job at the entry level and I know, in certain markets you still have a fair amount of entry-level exposure.

So just curious how you are thinking about really on current land buys and really where you see the strength in the market and if there is any notable geographic differences to talk about that? And I guess just in general how you see the mix of the business evolving over the next few years? Thanks. .

So, good question, Alan, you follow us long time.

So you’ve seen our movement back and forth and the difference by segments, we like to call moving with demand, we will go where the demand is, demand is not just in common activity levels, it’s ability to get a mortgage and if you look back over the last few years in 2008, 2009, even in the 2010 I think our first-time buyer business was 60% even 70%.

Over the last three years, it’s kind of interesting, our first-time buyer mix has ranged right around 50% for the last three years and if you put that in the context of how much our average selling price has lifted, I think it’s over 100,000 in that period, it shows you how we’ve been able to flex and find a first-time buyer in these higher income more desirable sub-markets where they have an easier time getting the mortgage and underwriting is getting easier, but it’s not easy yet.

And, our choice right now is to continue to target t hose areas that are more land constrained, so it’s harder to bring things to market, but it’s also where the higher income more likely to get a mortgage first-time buyer is today.

And depending on the market as they reach recovered at their own pace, you’ll see us go a little further out from the job core, because demand is stronger out in the ring around the jobs and a good example would be the Texas cities where the economy has recovered pretty nicely and you have a fairly typical housing recovery where our first-time buyer percentage is higher.

It’s easier to get land, because you are out in the B locations and you can run your normal business, because many cities we are in, where the recovery is still restricted to only a few select sub-markets and we are encouraged with the inland areas of California but there is still nowhere near as strong as the coast.

So our tilt will be to stay as close as we can to the coast until you are really comfortable that the more peripheral areas have firmly recovered and there is real demand and real capability for that buyer to get a mortgage. So I think you’ll see us over time slowly migrate out. We are not pushing out right now.

We are continuing to stay in high-quality locations and moving with that demand for now. .

Thanks. That’s very helpful. So, I guess, just if you think about where the B and C locations if you will, that a lot of people are talking about some other builders have had success there.

And you wouldn’t expect that, it sounds like from your comments, you wouldn’t expect that to represent a much greater share of your land purchases this year than it has over the last year or two?.

Yes, definitely would not. We have ample opportunities closer in and as I said, at some point, you’ll see us start to migrate a little more further out and go after the lower priced products, but it will be an evolution in each market and it will be incremental business not a replacement business.

We are going to hold – we like this business we are developing in the urban course and near the employment centers. So, whatever we do would be accretive to the current business. .

Thank you. Our next question comes from Nishu Sood from Deutsche Bank..

Hello, this is actually Tim Daley on for Nishu. Great quarter guys. .

Thanks..

So, my first question is in regards to land spend guidance. I understand you know you obviously gave a caveat that this wasn’t particularly guidance, but you have – of the $3 billion – it came down from $1.5 billion to $1.3 billion.

Just curious if this is due to the share repurchases? And then, if so, what does that mean for volume going forward in the out years? Especially thins kind of noting the fact that when you, so that you are going to focus more on development than acquisition obviously little more intensive there and time dependence. .

Right, I think if you look to our 10-K that was filed after we announced the share repurchase plan, we did revise and refine some of the capital allocation decisions that we had made for the year and disclosed them in the 10-K and we talked about probably on a maximum about $1.3 billion for the year and it didn’t reflect anticipating $100 million or so of investment and reinvestment and back into the company in the form of repurchasing shares.

So, it is dynamic, our land spend and investment decisions are dynamic and we made that decision early part of the year. As far as impacting future years, I mean, we are very well covered 2016 as a non-issue.

The communities we have opened and we are selling out of and delivering out of really will have absolutely no impact on our delivery or revenue forecast for the current year. I would say the – relatively modest amount that we’ve invested to-date in the share repurchases will have very little impact on future years as well.

So, we are gaining more comfort and the coverage for 2017 deliveries and actually starting to work out beyond that, and we’ll continue to search for those opportunities and try to grow the business in a balanced fashion as we talked about during the prepared comments. .

Understood. All right. Great, thank you..

Thank you. Our next question comes from Michael Dahl from Credit Suisse..

Hi, this is Anthony Trainor filling in for Mike this afternoon. So my question today is, I want to try and understand the cadence of gross margin excluding some of these regional mix shifts, so it seems like the mix is definitely driving some of the margin growth expectations.

So what about the trends within the regions? Is it the same West Coast is lifting the overall or are margins going to be up, down, or flat in California?.

We really haven’t guided and don’t intend to guide at this point on regional margins. The margins move predominantly. The number one movement on our margin as a company is community mix and it’s openings and close out communities that we are seeing and that just really on the delivery side as opposed to the selling community side.

And that can move the margins quite significantly even within a region. So, the number one determining factor for us is community mix and then the second one is level revenues.

We do typically earn higher margins in the back half of the year when we have a higher revenue number and greater leverage on our fixed cost that’s included in our cost of sales and those are the two primary factors on our margin. .

Great, thanks. And then shifting to Houston real quick.

Any comments on recent trends there both pricing and margins?.

As we shared in the prepared comments, we like our position in Houston. I don’t know what the new home medium prices today. Last when I saw was around 310, 320 for Houston. So it was literally 80,000 to 90,000 under the medium price.

So we are well positioned at a price point where there is still steady demand in the market and we are watchful because of the ripple with the price of oil. What does it really means to the economy. I think that’s still playing out.

What is the major oil companies that were creating all those campuses there, what does they do with their staff and their team and I would say that things – if any thing is probably stabilized, I don’t hear anecdotally anything that tells us that’s getting any softer than it was in the fall.

So I’d say it stabilized and it’s a large market with a lot more diversification in the economy than it had in the last oil crisis frankly. So, we’ll see how it goes. But, we like where prices are and we are seeing good demand at those price points. .

Thank you. Our next question comes from John Lovallo from Merrill Lynch..

Hi guys. Thanks for taking my call as well.

First question on the guide for the second quarter gross margin being flat sequentially and Jeff, I think you mentioned that the two biggest drivers of the margin would be higher revenue and mix and it looks like you are calling for higher revenue and the ASP looks like it’s going to be higher as well which I am assuming is better mix.

Can you maybe just help flush out why the margin would be flattish sequentially?.

It’s really just what we are seeing coming out of the backlog and where the deliveries we see delivering out in the second quarter at. I mean, it’s the communities are coming from and right now, most of the deliveries we have are scheduled for Q2 are known to us.

So we would do a bottoms-up rollup of it and look at it house-by-house and community-by-community and that’s where it’s coming out at this point..

Okay and then….

And John, as we….

Yes..

As we shared in our comments, we are going through a trough in community count in the Bay area and we talked about it on our last call that the delays that we’ve experienced in getting these things open also delay deliveries.

And we have some – I’ll call it dilution to margin because the Bay area has been less of our business than it typically is and that’s why we were sharing the number of communities that are opening pretty significant that it keeps us right back on track second half of the year. .

Okay. And then, I guess, the next question would be, by our calculations absorptions were down about 2% year-over-year.

It looks like that order growth is really driven kind of by community count growth that’s around 6% call it, so if you are thinking – if you are calling community count growth to be kind of flattish for the full year, what are you implying in terms of absorptions?.

No, I mean, we’ve been talking pretty consistently for the past couple of years on looking at absorbing communities or absorbing sales at about equal to our community count rates.

One of the reasons for it is, we have one of the highest absorption paces in the industry and we are certainly in the top quartile with our current profile and what we’ve been seeing. So we are not interested in artificially pushing absorptions at the expense of margin as we move forward and for guidance purposes.

We don’t have a crystal ball any more than any of we do. We basically look at what’s happening with the community count and we think that’s a good proxy for what will happen with our net sales rate. I would also say, in my opinion, if you are plus or minus 5% on absorption, it’s a relatively flat number year-over-year.

There is a lot of ins and outs in the community count, that’s number one, it’s only a two point average beginning at quarter and the quarter doesn’t take into account timing of close outs, timing of openings. And it’s not an exact science.

So, I haven’t scientifically calculated what’s statistically significant, but I don’t think anything within that band is terribly significant as far as the change year-over-year. So, that’s just the way we look at it. We are optimistic about the spring.

We are well positioned with comminutes on the ground right now going into and as we just started the spring selling season and we’ll see what the second quarter will look for us. .

Thank you. Our next question comes from Jack Micenko from SIG. .

Hi, good afternoon. Jeff, K, you talked about bringing the leverage numbers down or getting closer to the target is somewhat of a near-term focus. Looking at your own versus options mix, some of your peers have moved little more towards option in the last four to six quarters, and you guys sort of stayed at that 80, 20.

I guess, the question is, are you focusing on the owned more still because you are really trying to push on that margin side? Or is it more a function hey, the land market is going to give you what it gives you and sellers are going to determine terms and where we operate that’s just the way, the way it is?.

Right, I’d certainly say it’s more the latter. We’d love to see more option land on the balance sheet and control land.

The opportunities dictate it and we are heavily into obviously the West Coast region for us which is California with probably less opportunities here than perhaps the other parts of the country that that you might maybe seeing with other builders. So, that’s the primary driver.

It’s not like, we don’t have a preference as a company to put out a lot of cash and own all of our land. It’s just really coming down to the opportunities, the rates of return that we are seeing on the various opportunities and the margin potential associated with them. .

Jack, I would actually, reiterate that even stronger. We love the option every month it helps your returns but, when you are trying to focus on a location land constrained markets like the Bay area or Orange County or San Diego, it’s very, very difficult to see any option activity, because the demand is still strong for the lots..

That’s helpful. .

We’ll get options wherever we can, it’s hard to come by in a location. .

And then your take rate, sorry cancellation rate, it showed some nice improvement year-over-year, is the mortgage company partnership start hitting on all cylinders, is it maybe mix up, maybe a more experienced home buyer, what do you think drove that year-over-year improvement in the cancellation rate?.

I’d say our mortgage company is an eight cylinder engine that sounds five or six and a year ago it was on two or three. So we are making progress. They are a nice business partner and they definitely continue to elevate their execution. So it’s part of the reason our deliveries were better during Q1 was the conversion rates through ACM.

I also – I know it’s an interesting tit bit I don’t know what it means, but within our closings in the quarter the government won’t tick up. There was more FHAs VA business than we’ve seen in the previous quarters. Their FICO scores held high and our first-time buyer with the same ratio.

So, it could suggest that there is a little loosening in FHA underwriting, I don’t know. The FHA did lower their mortgage insurance premium about six months ago. That may have brought some FHA business back, but our buyer mix is about the same. The FICO scores are about the same and the income levels are about the same.

So I’d say, it’s a fairly typical – out there, I think they want to be a home owner and we are seeing our can rate come down. .

Thank you. Our next question comes from Ryan Gilbert from Morgan Stanley. .

Hi, thanks guys. Just a quick question on the California community that it opened in the second quarter of 2015.

What’s the average selling price on the project and then I guess, also you are just including now the comminutes in the West Coast?.

Ryan, the communities we referenced were all in the Bay area and the Bay area is higher priced than any of the other areas we operate and frankly in the state.

I don’t know we have the pricing with us, but it will be above the average for the region and that’s we are reloading in the Bay area where they shared we went through a trough in community count, now we are quickly going to get it right back.

I think overall for the state we are still on track to continue to grow community count, but it’s a much bigger impact in the Bay area right now..

And just to clarify, Ryan, just say – you have a good understanding, Jeff’s comments were really focused on Northern California and the Bay area, not the whole state or the whole region. .

Got it and are you anticipating – I guess, what level of close outs are you anticipating in the second quarter?.

On an overall basis, like I said earlier, we are anticipating a flat community on an average basis year-over-year. So these grand openings will inch the ending count up a bit from the end of the first quarter relative to the 2016 trade and that should line-up about the same on an average basis with the prior year.

So, a little bit of bounce, but I think on balance we’ll have more openings and we do close outs in total..

Thank you. Our last question comes from Jade Rahmani from KBW..

Thanks for taking my questions.

Can you just provide some additional color on how you think about long-term capital structure and weighing the trade-offs between stock repurchases and potential debt repayment?.

Jade, as we shared, it’s a balanced approach, we wanted to walk through with the share repurchase and the land ac capability that we shared, we’d be cash neutral for the year. We are mindful of future debt and if we are cash neutral we are positioned to take care of that as the maturity and we’ll see what our strategy is at that time.

But, over time, what we are looking to support the growth of the company, and improve shareholder value like we did with the share buyback and continue to strengthen our balance sheet and we think we have the capacity right now to do all three..

Regarding the spring selling season, have you detected any change in sentiments or softening in sentiment from buyers as a result of recent market volatility?.

We didn’t see that at all, as I shared, we ended February with some good momentum and that’s the month that there was all the volatility in the marketplace. And I think if you look at a couple we are both gainfully employed and you now a child and you have the need to get out of your apartment and move into a home.

You are not worried about Wall Street volatility you are worried about the second bedroom or third bedroom that you need and on the street, out on main street the consumer right now is favorably looking at home ownership. .

Thank you. I will now turn the floor back over to management for closing comments..

Okay everyone, thanks for joining us on the call this afternoon and we look forward to sharing our results with you in the future. .

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..