Jason Lenderman - Vice President, IR Sheryl Palmer - President and CEO Dave Cone - Vice President and CFO.

Alan Ratner - Zelman & Associates Paul Przybylski - Evercore/ISI Anthony Trainor - Credit Suisse Jack Micenko - SIG Jay McCanless - Sterne, Agee CRT Alex Barron - Housing Research Center.

Welcome to the Taylor Morrison Home Corporation Q1 2015 Earnings Call. My name is Vanessa and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please not that this conference is being recorded.

And I will now turn the call over to Jason Lenderman, Vice President of Investor Relations and Treasury. Sir, you may begin..

Thank you Vanessa and welcome everyone to Taylor Morrison’s First Quarter 2015 Earnings Conference Call. With me today are Sheryl Palmer, President and Chief Executive Officer; and Dave Cone, Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities.

Dave will take you through a financial review of the first quarter as well as our guidance for 2015. Then, Sheryl will conclude with the outlook for the business after which we will be happy to take your questions.

Before I turn the call over to Sheryl, let me remind you that today’s call including the question-and-answer session includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today’s news release.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the Securities and Exchange Commission and we do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer..

Thank you Jason and good morning everyone. We appreciate you joining us today. Before we jump in, I would like to take a moment to acknowledge Jason Lenderman who has taken over Investor Relations after almost two years at Taylor Morrison and brings his vast financial experience to his new role as Vice President of Investor Relations and Treasury.

The beginning of the year is off to a good start and we have been active in executing our carefully crafted plans that allow us to continue to deliver on our four-pillar strategy.

Some highlights of that activity include, first, we divested out of our Canadian subsidiary, Monarch, at the right time and at an attractive valuation, delivering $490 million of cash to our business.

We paid off our $489 million 2020 bonds by using a $139 million of cash on hand and issued $350 million in new debt at an interest rate almost 200 basis points lower. We amended our corporate revolver including $100 million upside and at more favorable terms and we acquired the Atlanta based builder JEH that I’ll touch on in just a bit.

With that as a backdrop, I am pleased to announce our financial results for the first quarter of 2015. Today, we reported net income inclusive of discontinue operations of $96 million or 134% increase year-over-year. This equated to $0.79 per share.

With our recently strengthened balance sheet driven by the sale of our Canadian business, we have already started to execute on our planned expansion in the U.S. with the acquisition of JEH Homes in Atlanta. The 2,000-lot acquisition closed last week at a purchase of $65 million.

Consistent with the capital allocation strategy we communicated on our last earnings call, this enables us to enter into the high growth Atlanta market and provide the platform to expand within Atlanta’s highly desirable submarkets, diversify our current geographic portfolio.

JEH also provides Taylor Morrison increased diversity of consumer profile with a focus on entry level and first time move-up buyer product lines.

To that point, about 70% of JEH buyers in the last 12 months are within the age range of 20 to 35 and approximately 50% of their customers utilize FHA financing compared to about 14% of the Taylor Morrison universe. This age cohort has been a growing consumer growth for JEH with a 19% growth in the recent year.

During the first quarter, millennials accounted for 13% of our Taylor Morrison shoppers and 23% of our buyers. This consumer group continues to demonstrate the highest conversion rate at any of our consumer groups. In addition to JEH, our highest millennial penetrations came from the Bay Area with 41% of sales, Houston at 37% and Sacramento at 30%.

In wrapping up my comments on JEH, we are delighted to work with such a talented group of team members with a solid local reputation and well-positioned communities in what we believe to be the right core submarkets. With our acquisition and organic growth strategy, we are continuing to increase our share of the new home market.

We are reaffirming our full year 2015 land and development guidance pre-M&A of $1 billion.

We are very optimistic about the long-term prospects of our business, as we continue to take a disciplined, long-term view, consistently applying our four-pillar strategy centered on the right land in core locations, distinctive communities driven by consumer preferences, a culture of cost efficiency and a balanced pricing strategy.

Looking at our first quarter results, closings; community counts; and margins, all met or exceeded our first quarter guidance. In the first quarter, we increased community count by 22% year-over-year to an average of 228 communities.

I was delighted to see the team’s execution on new community openings given industry challenges we have all seen over the last 12 months to 18 months. That being said, we have received some questions from the investment community regarding our community count growth relative to our closing guidance. So, let me provide some color.

As a community developer, we tend to create multiple product lines or selling efforts within our master plan communities. Each of these product lines count as an individual community and is entering based on expected demand for that home type and price.

When you have varying product lines within a single master plan, we do not expect for them all to sell at the same rate, given the diversity of price points.

For instance, in a master plan community where we have four or five product lines, it’s not uncommon for the entry price point to sell at a pace of three to five while the luxury products might sell at an average of one a month. While there’s difference amongst price points, it is a very efficient model as part of a larger master plan.

Although builders may deploy different methodologies in counting communities, we will continue to count each product line as an individual community. Net sales orders totaled 1,729 in the quarter, up just over 14%, led by our Houston market which had 20% growth year-over-year. Overall, Taylor Morrison sales per outlet came in at 2.5 per month.

Similar to last year, we would expect Q1 to be a big higher on absorptions with results moderating in the subsequent quarters. We will manage this range to an expected average of Q2 to Q3 per outlet which is consistent with our underwriting and support our balance pace and pricing strategy.

Sales as well as sales per outlet increased month by month throughout the quarter as the spring selling season matures. Cancellations dropped over 15.4% in the fourth quarter to below 12% in the first quarter. This is roughly in line with the prior year quarter.

We have seen cancellations decline in many divisions, most notably in our Taylor Morrison Houston operations with a slight decline in Darling Houston. Also in the company, we’ve seen cancellation rates decline in North Florida and Denver with a slight increase in Phoenix, Austin and Northern California.

These market-by-market fluctuations are consistent with prior year and are within our expectations from period-to-period. As we have discussed in prior quarters, conditions continue to vary across our markets, although all have shown continued positive trajectory in home buyer demand.

Our divisions in Houston, Sacramento and Denver posted the largest year-over-year increases in net sales, all in excess of 20% for the quarter. Our sales in Texas as a whole continued to be resilient in the face of oil price volatility.

We believe that our consumer and product positioning as well as careful diligence in maintaining our sub market strategy will continue to support our performance relative to the general market. I have heard on a couple of builder calls that their sales at higher points have slowed down.

I am very happy to report that we have not had the same experience to-date and we expect the quality of our locations continue to make a difference, similar to our Phoenix experience in 2014. In fact, our Taylor Morrison Houston Q1 sales were up 27% year-over-year while our Darling Houston sales were up about 10%.

We are pleased with the Darling Houston sales growth recognizing that the business is expected to have an average sales price over $500,000 this year, although given the projection volume continue to face some pressure on our build schedules as I mentioned earlier, specifically in Houston and Dallas with the heightened market activity over the last year and poor weather conditions this winter and early spring.

Of course we do continue to monitor the Houston market very closely. Approximately 75% of our expected 2015 closings were either closed or in backlog at quarter end followed by solid April sales activity. At the end of the quarter, we maintained a low inventory with only one completed spec and roughly half of our communities in the Houston market.

put another way, we had half of a completed spec per community across the markets. In addition to our cancellations decreasing, we still have over $30,000 on average per unit in backlog deposits. We believe that cancellations are often the first signs of market softness, so we’re very encouraged by the resilience of our backlog.

Looking at Taylor Morrison Home Funding business and our continued low denial and cancellation rate, mortgage continues to be a strong tool and differentiator for Taylor Morrison. We recognize that industry has its challenges but we have embraced the current state and have adapted to the new environment.

Our higher price points are benefiting from the nominal improvements we see in the general mortgage space and although credit conditions have and will continue to evolve for some time among our mortgage segments, we have seen that our consumers generally can provide the documentation required and make the credit for and debt to income requirements necessary for qualification.

Our first quarter closing’s average credit score was 740 and our average LTV was 76%. For our entry in first move-up purchaser especially we continue to provide benefit to borrowers that meet qualified improvement guidance throughout ARO department.

As the boomerang population that we mentioned on our last earnings call, re-enters the marketplace, we are prepared to assist them with the right tools to help them improve by understanding today’s market requirement as well as assist them in matching the best market products to their financial needs.

While the industry continues in its struggle to find balance in regulatory and risk mitigation yet improved credit access, Taylor Morrison is well positioned with our strong mortgage pipeline and with 92% of our purchasers pre-qualifying the Taylor Morrison Home Funding prior to entering into a purchase agreement.

Last year’s announcement around pre-foreclosures short sale requirements, 97% LTV program and FHA’s reduction at MIP premiums has helped to make homeownership more available for the first time in moderately priced home buyers.

With new rules that integrate borrowers’ disclosures coming August 1st, we believe the industry is working very hard to be ready. Taylor Morrison Home Funding began preparing last year to meet the disclosure requirements and has begun self-testing and is well prepared. Now I will turn the call over to Dave for the financial overview..

Thanks Sheryl and hello everyone. For the first quarter, earnings per share was $0.79. Revenue for the quarter increased 8% to over $509 million. Home closings revenue increased to $494 million driven by increases in average closing price. Adjusted home closings gross margin excluding capitalized interest was 21.2% for the quarter.

As discussed previously, the rate has moderated due to maturing market conditions and we faced delays due to inclement weather and the supplier labor unable to meet the demand in Texas. This resulted in fewer closings out of some of our higher margin markets, partially offset by closings from other geographies. Moving to mortgage services.

We generated $7.6 million of revenue during the quarter, representing a 22% increase over the prior year. Gross profit was $2.6 million while our capture rate was generally consistent year-over-year. We maintained our SG&A leverage as a percentage of home closings revenue which was 11.5% compared to 11.6% over the same quarter last year.

Our company culture is cost and efficiency focused. We continue to monitor cost and look for opportunities to drive efficiencies in areas that we can control; this includes driving leverage on the SG&A line.

In connection with the sale of Monarch, in order to mitigate the potential currency exchange risk on the total transaction proceeds of $570 million, we entered into a foreign currency hedge in mid-December, when we signed a definitive sale agreement which ultimately resulted in a gain of nearly U.S. $30 million.

In the period between entering into the hedge and closing the transaction, the U.S. dollar appreciated significantly relative to the Canadian dollar. Our earnings before income taxes totaled $62 million or 12.2% of total revenue. Income taxes totaled $22 million for the quarter, representing an effective rate of 35.4%.

Our former Canadian operations are included in their entirety within discontinued operations. As part of the structure of the sale which closed on late January of 2015, we did not recognize any home closings revenue after December 31st. We recognized an $80 million U.S. gain on the Monarch disposition, representing a 1.45 multiple on the sale.

The sale of Monarch is largely complete other than a few post closing adjustments which should be finalized in the second quarter. During the quarter, we spent $255 million in land purchases and development and as Sheryl mentioned, we are on track to spend our expected $1 billion for the year.

Our total land bank at year end was approximately 39,000 lots owned and controlled. The percentage of lots owned was approximately 77% with the remainder under control. On average, our land bank had seven years of supply at quarter-end based on a trailing 12 months of U.S. closings. We ended the quarter with more than $400 million of cash.

We had no outstanding borrowings under our $400 million unsecured revolving credit facility. And at March 31st, our net debt to cap ratio was 38%. On April 16th, we issued $350 million of senior unsecured notes due 2023 at a rate of 5.875.

The net proceeds of the offering together with cash on hand were used to fully redeem our 7.75% senior notes due in 2020. This timely refinancing in a favorable debt market environment allows us to generate interest savings of approximately 17 million on an annualized basis. This savings will begin to flow through our P&L in the back half of 2015.

In addition, we amended our revolving credit facility on April 24th to upsize the capacity from $400 million to $500 million, extended the term two years to 2019 and obtained improved borrowing rates which helps maintain our overall liquidity position.

A critical component of our long-term success has been responsible stewards of capital by optimizing our capital allocation strategy and recognizing current market conditions while advancing the strength of our balance sheet. We continue to assess our capital allocation strategy based on what we believe drives the best long-term shareholder return.

First, we look at investing back in our current markets as well as expanding our business through M&A. Next, as I just mentioned, we opportunistically evaluate de-levering our balance sheet. From there, we assess our options on returning excess cash to shareholders.

As you know, we have funds available from the Canadian sale which we plan to continue to invest where we believe we can generate returns to drive a long-term shareholders value, much like Atlanta based JEH acquisition and improving our overall debt profile.

Over the last few years, we have generated negative cash flow from operations as we have focused on growing our overall business. We feel our current land position is strong and we will continue to monetize our communities leading to positive operating cash flow for the 2015 year.

We do expect to access our revolver in the second and third quarter as we manage through short-term cash needs. We believe we have solid liquidity that will enable us to capitalize on other future opportunities over the next several quarters.

We continue to believe that this will be a pivotal year for Taylor Morrison with the sale of our Canadian operations as we fully focus our growth opportunities in the U.S. Atlanta was the first step as we look towards additional opportunities to expand in other high growth markets in the future.

In 2015, we expect to continue to grow gross margin dollars despite the overall pressure to margin rate relative to last year. As new land comes through the pipeline and we burn off some of our legacy communities with a lower land basis, our margin should continue to normalize each quarter relative to the prior year.

We expect our incentive strategy to remain relatively unchanged on an annual basis, which should result in incentives generally flat to slightly down in many markets. Our pricing strategy is based on our belief in the long-term quality of our land positions.

We will continue to use incentives as a sales tool to drive urgency but have not needed to use incentives to drive our overall sales goal given the healthy demand we continue to see. It’s important to note that incentives in our Houston division declined in terms of both dollars and percentage of home closings revenue in the first quarter.

We will continue to see higher capitalized interest per unit given what we believe is a short-term reduction in our inventory from the sale of our Canadian business. This will moderate over the next year due to the debt refinancing as well as anticipated closings growth in our U.S. businesses. Now, let’s turn to our guidance which includes JEH.

For the full year 2015, we expect to have an average community count between 235 and 245 in the U.S., leading to a maintained monthly absorption pace between Q2 and Q3. We anticipate U.S. closings to grow approximately 10% to 15% year-over-year. Adjusted home building margin is expected to be around 22%.

SG&A as a percentage of home building revenue is expected to be similar to last year in the mid 9% range. JV income is expected to be between 2 million and 4 million and we anticipate an effective tax rate between 32% and 35%. For the second quarter, we anticipate community counts to be up about 10 communities over Q1.

Closings are planned to be between 1,375 and 1,475 with an adjusted home building margin that will generally be consistent with the first quarter of 2015. Thanks and I will now turn the call back over to Sheryl..

Thanks Dave. Before I wrap things up, I wanted to spend just a minute to follow-up on our comments last quarter, on the growth and success in our 55+ business. In the quarter, we opened three new communities Esplanade in Tampa, Esplanade in Orlando and Vizcaya in Austin.

All three openings were tremendously successful with 1,000 of new visitors and greater sales success than anticipated. But most importantly, we continue to find ways to improve how we sell lifestyle to these buyers.

We appreciate this buyer has a variety of life experiences and certain new expectations around lifestyle communities, including a desire to participate in a community that is part something larger, something more inclusive and vibrant.

Our strategy around core location proved to be as or more important with this buyer group but for a host of different reasons than you would see with family buyers. Local amenities and services are such a critical component today even more than historically required in the traditional age restricted communities.

In addition, given the core locations, we are able to deliver these 55+ targeted communities with the package that is more capital efficient as we leverage the local amenities in place. Finally, I continue to be pleased with the company’s performance.

Looking ahead for the rest of 2015, we intend to continue executing against our four-pillar strategy while conscientiously evaluating opportunities to expand into other high growth markets in order drive the best long-term returns for our shareholders with the strength of our team who by the way create our Taylor Morrison difference and have my unwavering respect.

The quality and diversity of our communities, our strong balance sheet and the support of overall macroeconomic trends like household formation, unemployment and income growth, we believe we are well positioned for the future. Thank you and we will now open the call to questions. Operator, please provide instructions to our callers..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Alan Ratner with Zelman & Associates..

Hey guys, good morning and congrats on the expansion into Atlanta. .

Thanks Alan..

My first question actually is related to the impact that we should expect from JEH. You maintained the margin guidance of 22% and it sounds like 2Q is going to be flat, so that seems to imply a healthy ramp in the back half of the year.

Will there be any purchase accounting headwinds from JEH and if so, it seems like maybe pricing power is expanding at a faster pace than you might have expected heading into the year? So I was hoping you can comment on that first?.

First on the JEH impact. So, we will see some purchase price accounting; it’s going to put probably a 10 basis-point drag in our Q2 margin, keeping in mind that Q2 will only have two or three months since the acquisition started in May. And we anticipate that impact to be about 10 basis points also for the remainder of the year.

As far as our full year forecast, so when we look at the backlog, we see sequential improvement as we move through the year. Our backlog margin for Q3 and Q4 currently exceeds to 22% which gives us confidence for the year.

And then, we also anticipate more favorable geographic mix helping to increase the rate based on the timing of deliveries really in our three highest margin divisions, Phoenix, Houston and West Florida.

And then as Sheryl mentioned in prepared marks, we have some new active adult communities coming on that are recently opened and these typically generate a higher margin as well and these deliveries are coming more in the back half.

So, when we look at what we have in the back log, we think we’re going to be able to overcome some of the purchase price accounting that JEH is going to bring..

And second question, just on the order trends you’re seeing. If we look at the progressions through the quarter, it looks like the growth rate decelerated. I think you said January was up about 30% and it was up 17% through February. It sounds like it’s not Houston that’s driving that based on your comments, Sheryl.

So, I was just curious to see what was really going on throughout the quarter. Was it a comp story? And then, if you can talk about April and then what you saw there as well that would be helpful. Thanks..

Yes, I think when we had our last quarter call, we talked about our 30% year-over-year improvement in January. And I think we also said that we had a pretty light January 2014 and then we really saw a ramp up in the quarter. So, we didn’t anticipate to hold that; we thought it would moderate and that’s exactly what happened.

So, the 2.5 [ph] was at the high end of our guidance; it’s exactly what we kind of managed to the business to. We did see sequential improvement, as I said, each month in the quarter. So, I would tell you that takes you to a more typical seasonal trend, which is what we saw; April was encouraging, once again.

We had pretty tough comps, so it was up year-over-year, pretty similar but with a very low double-digit increase year-over-year for April. May, I’d even tell you has I think we actually had our strongest week of the year last week. So, May has started off well also..

Our next question comes from Stephen East with Evercore/ISI..

Actually this is Paul Przybylski on for Stephen East. It sounds like acquisitions are going to become a major use of the Monarch cash. I was wondering if you could give us any color on markets you may be interested in or update us on what the pipeline looks like and how pricing trends for acquisitions have been moving..

You bet Paul. We continue to be active in the markets. And I would tell you that there are ample opportunities out there. We go through I guess a two-prong approach, one is we get a lot of calls; and we get a lot of packages that we make our way through.

The two acquisitions we’ve done over the last couple of years actually neither of them came through the pipeline. They were actually our team members reaching out, really taking a look at the markets that we think are going to be accretive to our overall geographic footprint.

And what are the businesses out there that we really admire that have kind of the core attributes that we’re looking for within product profile, the management teams most importantly, in the land inventory. And then we actually kind of reach out and make those contacts. And so that’s how we acquired both Darling and JEH. So, it’s a mix bag.

We are looking at a number of different projects or opportunities as we always are. It’s a little hard for me to comment on where those are without really having an impact on our negotiating to be quite honest. But I think you can look at our map and I think you can kind of pull some of the comments we’ve made in the past.

Our interest would be in areas that generally represent many of the key macro characteristics, top 20 markets. We’re not interested in kind of going in and out of markets. we would be most intrigue in markets that we think will perform over a full cycle. But there is a lot of activity out there is what I’d share with you..

And then following on Alan’s question, what was the monthly progression of orders in Houston during the quarter? And then are you seeing anything with regards to different submarkets and their performance or master plans versus your own communities?.

Yes. That’s a fair question. As I look across the markets, I don’t know that I would equate any of the strength or not specifically to other’s master plans or our master plans. For example, Phoenix has really picked up. And we’ve seen nice average paces. We’ve seen good community count growth.

And that stand both in our developed communities, standalone communities as well as master plans. I think I would articulate across the board obviously as we go into Texas that tends to be more of a master plan business and as we quoted in our numbers as some of our strongest sales success.

So, really across the business, we saw some pretty nice movement..

Our next question is from Mike Dahl with Credit Suisse..

Hi, this is Anthony on for Mike. My first question has to do with we talked about the margin impact from JEH. I was wondering if you could -- on guidance, I was wondering if you could talk about the closings and community contribution JEH has also had to the guidance both for the second quarter and the full-year..

Obviously we just acquired the business about five days ago.

And so when you look at our projections and you saw some increases in our full year guidance from a unit standpoint, we’re probably assuming somewhere in the 2 and 2.25 range as far as units as part of our total and then two months of guidance -- two months of closings within our Q2 which led to our overall 1,375 to 1,475..

And then my second question, following up on Alan’s comments about the improvement into the second half with margins.

I was wondering if you could -- if you had any comments to make on the different cost buckets, what type of inflation you’re seeing as far as labor, land or material costs and how that can incorporate into your margin guidance?.

I guess a couple of things. We are seeing higher input costs overall flow through the P&L as most builders have. From a cost perspective, I would say overall we’ve seen a slight increase to costs around 1% for the quarter. We kind of see that at least carrying on into Q2.

I think the biggest thing is labor, labor continues to be a challenge but it’s definitely more of a market-by-market issue. We have seen some market show signs of labor availability easing while others continue to see kind of a labor supply shortage. So, from a labor cost perspective, we are seeing some modest increases there as well..

And then, I think on the land side, once again that’s a very market-by-market specific. We have seen in some markets overall pressure on the margin as expected as we bring new land into the pipeline. But as you look across the business, it’s really a combination. And I think I would just add on to Dave’s comments the overall labor pressures.

It is quite interesting that as the different markets pick up, there is different places kind of in the schedule that we start to see that. There are some markets that we are back to schedules that we saw a couple of years ago and there are other markets, specifically in Texas where we are still feeling that pressure from a labor standpoint.

And I think as everybody kind of shifts closings into their third and fourth quarter, it will be interesting to see how the market is able to service that as we are seeing some significant permit increases in some markets in the country..

And thank you. Our next question is from Jack Micenko with SIG..

I wanted to Sheryl revisit your opening comments on JEH and the entry level.

I guess my question is, is the JEH acquisition and moving more entry, is that more of a market specific strategy or you’re looking at floor plans and mortgage processes at JEH and saying we can bring those across the broader platform and really build a more robust entry business there nationally?.

I would say a little bit of both Jack, if I were to be quite candid.

I mean JEH was definitely a market specific strategy and our investment thesis in Atlanta I think was very much around the overall market; the size of the market kind of one of the largest markets we have in the country; kind of the expansion on employment and permits; the affordability and certainly around the portfolio of product and the attractiveness with their land supply in the first time buyer segment.

We are seeing expansion into that market that’s why I spent a few minutes on the call talking about the millennials and the fact that they were 13% of our shoppers in the first quarter and that’s without JEH and 23% of our buyers.

So, we are seeing expansion into that first time buyer group that’s been very intentional on ours -- very intentional on our part. But as I have articulated in the past, our first time buyer, I won’t necessary qualify as the most affordable first time buyer.

In fact, if I look at the median income for millennials in our first quarter, it was about a $116,000. And as I compare that across to our non- millennials, it was about $144,000, actually a pretty interesting relationship. And when I look at what they spent, they spent on average about $340,000 compared to our non- millennials $380,000.

So, it’s interesting as we look across the business. But I think more specific to your question, it was a combination of the overall market expectation, the product portfolio, you look at even my comments about FHA and kind of opening up that box for us. It’s actually a pretty exciting opportunity..

I think the way that we always approach M&A as well as we think that things can be learned kind of from both sides. So, we look at the way JEH does some things and we’ll see if it’s good to incorporate across the Taylor Morrison side and Darling side, very similar to what we did with Darling.

We looked at how both businesses were running, really look to see where we found best-in-class that we could share..

Then with the stronger balance sheet, and I think you said 77% of your lot inventory is owned today.

How does that 77% trends prospectively over the next couple of years with the $1 billion obviously target in land spend and development this year? Do you stay more weighted towards owned versus optioned or how should we think about that?.

We’re always going to look for opportunities Jack to -- first look terms. Generally, I would tell you somewhere between the 70% and 80% on a long term run rate is probably about right. To the extent, we can get more terms, we obviously will. But our first priority is going to make sure that the locations are right that the underwriting makes sense.

And generally, when you’re looking at opportunities that are core, sometimes it’s more difficult because it can be more competitive to get kind of options terms on that stuff..

[Operator Instructions]. And our next question is from Jay McCanless with Sterne, Agee CRT..

First question I had on the currency hedge, is there going to be a mark-to-market adjustment for that each quarter and what’s the duration of that hedge?.

No, Jay the currency hedge is done. So, what you saw flow through around the 30 million that’s just the finalization of it, so you won’t see anything else for the rest of the year..

Then my second question on JEH, could you disclose how many specs you bought as part of this transaction? And also talk about how JEH’s spec strategy compares to your strategy?.

We can talk about it globally. I’ll be honest; I don’t have in front of me the actual number of specs at closing. But I would tell you that their spec strategy is probably pretty similar to ours, pretty similar I think they generally will operate with more specs than we do.

We tend to run about four total specs and probably one completed spec, 1.25 completed spec on average. I would tell you it’s probably pretty similar in total quantum. What I can’t tell you for sure is the completed average a little bit longer..

And if I could sneak one more in, it looks like from your website that JEH has about 19 communities; I think a couple of those may be closing out.

With the guidance only moving up slightly on community count for the full-year, are you maybe forgoing investment in some other markets and adding in the JEH numbers or were there some closeouts, faster closeouts in legacy neighborhoods versus what you expected?.

I think it’s a bit of both. I mean I shouldn’t say a bit of both. We’re not foregoing investment in other markets. Our M&A capital allocation is quite separate from the $1 billion we shared.

But I do think when you look at the way we count communities and how many active units there have to still be available for sale, that’s probably a little bit of the disconnect in the JEH what’s posted on their website and then what would actively get counted within our community count.

If there is only a handful of units or those units have moved off to kind of MLS, those won’t get counted in our community counts..

And also keep in mind, we guide the average community counts, so you’re looking at the whole number. So it’s -- you got to start with kind of half that number..

Our next question is from Alex Barron with Housing Research Center..

I have a couple of questions on the JEH acquisition and then one on margins.

On JEH, are you guys going to book any goodwill and do you have any what the units was that was added to backlog?.

From a goodwill perspective, Alex, it’s probably going to be something in the neighborhood or slightly below 10% of the purchase price.

And then the second question was on backlog?.

Yes..

Yes, like I said, we have a number of units that we plan on closing. I mean, the nice thing about acquisition like this, is you start closing units kind of the day after you’re close. So, we have a handful of closings that will happen in the first week. But in total, I would expect that 2.25 to come evenly over the balance of the year..

And then on margins, I was curious, I mean your guidance implies that margins are going to go up in the back half.

So what are the drivers of that? Are you guys seeing improved incentive trends in the last couple of months or what do you guys see as driving the higher margins in the back half?.

It’s kind of what we’ve touched on. Really it’s more favorable geographic mix relative to what we saw in Q1 and to some extent what we expect to see in Q2. So, we have a lot of closings coming out of our some of our highest margin divisions that are more back half weighted and those were Phoenix, Houston and West Florida.

From an incentive perspective, as we look through the year, we actually, on a year-over-year basis, anticipate a slight decline in incentives relative to 2014 and that’s based on what we’re seeing in recent trends..

And thank you. We have no further questions at this time. I will now turn the call back over to Sheryl Palmer for closings remarks..

Well, thank you so much for joining us today. I hope you have a wonderful rest of the day. Take care..

And thank you ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect..