KB Home - Shareholder/Analyst Call

May. 7.13 | About: KB Home (KBH)

KB Home (NYSE:KBH)

May 07, 2013 10:45 am ET

Executives

Jeff J. Kaminski - Chief Financial Officer and Executive Vice President

Jeffrey T. Mezger - Chief Executive Officer, President and Director

Rob McGibney - President of Las Vegas Operations

Dan Bridleman - Senior Vice President of Sustainability, Technology & Strategic Sourcing

Steve Ruffner - President of Southern California Operations

Albert Z. Praw - Executive Vice President of Real Estate and Business Development

Larry E. Oglesby - Regional President

Chris Apostolopoulos - President of Northern California Operations

Vince DePorre - Regional President

Analysts

Stephen Kim - Barclays Capital, Research Division

Alex Barrón - Housing Research Center, LLC

David Goldberg - UBS Investment Bank, Research Division

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Buck Horne - Raymond James & Associates, Inc., Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Aaron Hecht - JMP Securities LLC, Research Division

Jeff J. Kaminski

Okay. Good morning, everyone. We're going to get rolling. Welcome, again, to the conference, and a special welcome to everyone joining us via webcast this morning. I hope and trust everyone enjoyed dinner last night. We really appreciated Marc Bitzer, President of Whirlpool North America, being here to share some of his views in both the industry and his views on the relationship with KB Home. I think it was kind of insightful in what our suppliers think for our business model. Whirlpool has been a very long-time partner of the company and a very close partnership from a supply side.

We do have an ambitious agenda today. We're going to strive to stay on time as much as possible. Jeff is going to kick things off this morning with an overview on our accelerating profitable growth strategy. At the end of the day, Jeff and I are going to come back up here and we'll take Q&A at that time, so if you can hold your questions for Jeff till the end of the day.

For the rest of the presenters, we are going to try to save a few minutes at the end of each presentation to take some Q&A from the folks here in the room. We have a couple of mics, so if you just shoot your hand up, identify yourself, maybe identify your firm, again, for those listening via webcast, I think it will run a lot smoother.

Today -- the agenda today is really about KB Home. We're here to share our business strategies, particularly our accelerating profitable growth strategy and how our KBnxt business model is helping us implement that strategy. Undoubtedly, as we go through the day, there'll be some discussion about the industry, about what's happening in the overall housing market, probably even some discussion about local markets. But my view, frankly, is, many of you guys do industry-level conferences much better than we would, and we really want to focus on KB for the day.

I do think it's important for everyone to understand how our business model works, what kind of results we're achieving from it, what some of our current objectives and initiatives are, and I'll be up later today to talk a little bit about how that's manifesting itself in our financial results of the business.

In front of you, you guys have a couple of things. One is the small binder with the presentation, the hard copy of the presentations. There's also a flash drive with a little key attached to it. That flash drive is intended to hold our key messages for today, so there's a few key takeaway slides in there, there's our bios from the presenters today and there's also a full copy of our sustainability report on there, which is also available on our website. The presentation you see today, again,you have the hard copy in front of you. Those will also be up on our website for a couple of weeks, as will as the actual audio from today's presentations, so we'll have that on, on the website as well.

So if we could just move to the next slide. What would an interaction like this be without going through our cautionary statements to start the day. So these statements and the Safe Harbor statements that we make here really apply to every presentation, all the discussion for the remainder of the day. I'd like to refer everyone, either in the room or online, to Slide 2 for a review of those statements. Again, we are recording today. It is available and will be available, I think, for 2 weeks, Katoiya? 2 weeks on the website.

Now that we all have that out of the way, it's my extreme pleasure to introduce again and turn the conference over to Jeff Mezger, our President and Chief Executive Officer.

Jeffrey T. Mezger

Thanks, Jeff. Good morning, everyone. I really enjoyed dinner last night. It struck me some of you I've had relationships with for 15 to 20 years now, and a lot of them started at investor conferences, like this, over the years, so it's always great to talk about our business, your views on things, whether it's our company, the industry, the economy, in a casual setting. So I really enjoyed that and really looking forward to today as well. We're glad all of you are here, and I'm really glad that we're having this conference.

I shared last night that we're going to having a little different theme to this presentation, and that we want to walk you through our business model, the progress we've made, the success, the momentum we have, most importantly, the people that are getting it done. I'm very proud of our company and our results. And I could talk up here and Jeff can talk up here for quite some time, we'd rather have you hear from the people that are getting it done, day in and day out.

I mentioned last night, you may recall, when I was introducing Marc, that when I was a superintendent and we first got our national -- not superintendent, I just demoted myself. When I was a Division President back in Phoenix and we had our national agreement struck with Whirlpool, and the entrepreneurial builder in me reacted with, I can do that better on my own. I shared that because that's pretty typical in our industry. Everybody says its local, and it is. It's local tied to people, your ability to buy land, your ability to hire contractors. It doesn't have to be local when it comes to national partnerships, product design, a business model. And you'll see today one of the things I'm most proud of is our mantra is One Team. one Goal. One Way.

So as you hear from our presenters and you talk to these people individually, they all look at the business the same way, they all use the same terms, they all have the same focus, the same themes and what they're working on, and to me, that's an incredible, competitive advantage. We just had a Division President meeting in April, where Presidents present on a best practice. And it's one that's been vetted out, here's how we did it, here's what worked, here's what didn't work. We get to share our best practices on something that didn't work so well. There's no private ownership, there's no ego, people like it and they go. So inevitably, out of every President meeting, we'll get some kind of an idea from somebody that we can transport all the way across our system, in many cases, the same week. That's a President meeting.

Back when I was President in Phoenix and we wanted to go to a national account with Whirlpool, I probably didn't move quite that fast. And I think, again, that's typical of a lot of companies in our industry, and that's really one of the primary takeaways for me, hopefully, that you all see. And I say that, and that as we've gone through the last several years as a company, we have focused on the long term and the short term. A lot of parts and pieces of our business model are for the long-term, and they won't show up as a benefit in a frenzy like we have. They won't show up when you're going through the correction. They will show up as markets are normalizing, and we're now on the cusp of markets normalizing. So I think that what we've endeavored to retain as core principles and core strategies over the last few years is really going to start to pay off now and really going to differentiate KB Home. And you'll see it in not only the results today but what each of the presenters brings in their presentations.

To play -- was the cautionary statement up here again, okay. Key things. High-level, these are what we're going to reinforce today and, hopefully, you'll take away. A stockholder over the last 12 months has been the top performer in the peer group. We think we're still on the threshold of some great things and, hopefully, you'll see that today in what we talk through with you. So we're excited about the future. We think we have incredible upside sitting here today. We're going to review our disciplines and our highlights of where we're at, where we're headed. And on many of these, I'll give you a soundbite as we go through this, but the presenters will fully flesh it out, so I won't be up here that long.

First off, as we shared on our earnings call or in our year-end discussions, we expect to be profitable this year, in 2013. We have momentum in our margin improvement, our operating margin improvement, our top line, everything's going in the right way right now, and as a result, we're pursuing accelerated growth. The theme here is accelerating profitable growth. We think we can grow quickly, we think we can have quality growth and we think we can improve both the top line, our scale, the bottom line and our gross margins all the same time. Capital structure is in place to support our accelerated growth, so we don't have to do anything today but run our business.

I'm very proud of the seasoned management team that we have here at KB Home. Two data points that I can share with you: the presenters today have a combined 172 years with this company. The average for the region and division Presidents you'll hear from is 18 years. This is a very tenured team in an industry that's very nomadic. It's a great value for me in that many of these people I've known for 20 years. And when we talk, we know each other, we know what we're saying, we know what we're about, you can make a decision and you move quickly. There's a lot of speed and a lot of strength to that, and it gives me confidence in our ability to execute on our goals.

We have a spring coil from our existing growth platform. Not only do we have a team that managed a much larger business than we have today in -- for about 18-year period on average, we also have a geographic footprint today with significant upside, significant upside from where we are today, and I'll share that with you in a moment.

We're going to walk through why we're different in the business model, and many of the guys will be presenting on some of the functions. Our strategy is working, our business model is working. In the first quarter, we grew our average sales price 24%. There's no question part of it is the market lift. In fact, we quantified it on our call. We had about 8% tied to the market and 16% tied to what we're doing and how we're different. So that's a significant move, while at the same time, retaining one of the highest sales paces in the industry and growing our margins significantly on a year-over-year basis.

Last, we're in the right markets today. It's the right time. Here in California, the coastal markets, I, actually, when I'm asked, I believe these are the best markets in the country. It's our largest business, but it's also where we're the largest. So it's a great combination, and we have wind in our sails, and I'll walk through the geography here. But we're proud of all our markets. We think all of them have great upside and great opportunity today. Last summer, when we declared we're going on offense and then we pushed it even harder since then, it was tied to the fact that every market we were in was now recovering, and we could go invest with confidence, knowing that we didn't risk catching the falling knife. So we like where we're at.

In these markets, at the peak in '05, we delivered 28,500 homes. We're not there today. People will ask me, what markets are you looking at going to? I'm not looking at going anywhere right now. We've always made more money in our bigger divisions, we've always had better returns in our bigger divisions and with our momentum, we're finally positioned where we can get the scale back, and we can get it right here from this footprint.

Then as I walk from the West Coast to the East Coast, I'll give you my thoughts on our expectations, our investment strategy and I'll identify the guys on the team that are going to be presenting here today. California in 2012 was 49% of our revenue. In the first quarter, it was 51%. We shared for, I don't know, 6 calls now that 70% of our investments been in California. It was with intent. It's not an easy place to do business. It's our home office, it's our backyard. We have great teams that know how to navigate through the entitlement process, and we're sitting here today positioned for an incredible run in California. I would expect California to continue to be a real engine for this company over the next 12 months.

At the same time, Texas is our biggest market by unit sales. 8,500 back at the peak. Larry Oglesby's here. Today, Larry's going to talk about Texas. It's a great economy. It never saw the craziness that the Coast did. It didn't crash the way the Coast did, and it's plodded along. And when you're in Texas, you don't think there was ever an economic slowdown. It's a great economy right now and they have great jobs. So another bookend to offset California.

By the way, I skipped -- where's Steve? Steve Ruffner is here from South Cali. You might have met him on the tour. And Chris -- where's Chris Apostolopoulos? Chris' there in the back from North Cal. Both great leaders for us and great business partners for me.

Moving over to the Southwest. We've also had a very large business. I shared on the calls that for a while, we de-emphasized Arizona. We did that with intent because we saw the market spiraling. It's now going back the other direction. We're growing our management team, we're investing dollars, we see big things coming out of Arizona in the future. At the same time, Rob McGibney is here from Las Vegas -- where's Rob? To talk about the Southwest region. And Rob's our President over in Las Vegas, which at one time was our absolutely biggest business for a few years now. On earnings calls, I've shared that per community, Las Vegas has always been one of our top performers over the last few years, in large part because of this guy. He does a phenomenal job running the business, and we have great things going on in Vegas and in the Southwest that Rob will share.

The Southeast was the last region we entered in our expansion back in the middle part of the last decade, and we grew a very big business very quickly. It happened to be in many of the states that -- where the market adjusted just as quickly and we stayed in the markets. We're now back on offense growing throughout the region. At the peak in Southeast, we delivered 5,700 units. We're not there today. We don't have to go anywhere. Vince DePorre is here, been with the company for over 10 years now. Vince is the President of our Southeast region, and he'll talk through our business strategy there and his views on the many markets.

Across this country, we're in the right markets. They're all growing. Many of them are as far past the norm in their acceleration, in their recoveries, and it's a great place right now to have a large presence. So we like our footprint. We don't need to extend. We will at some point, but certainly not, it's not necessary today to hit our growth targets.

2013 strategic priorities, and we will discuss these a bit today as well, and I shared these on our first quarter earnings call. We intend to capitalize on the momentum we've established in our results by working on improving our profitability per unit and also accelerating our growth. I shared on the call many of the levers that we can pull to improve our profitability outside of just raising price because the market may give it to you, because I don't think that's sustainable.

I shared on the call a strategy of raising price because the market gives it to you is a strategy of hope. We have, with intent, actions that we're taking that we think will improve our margins. Some of them I've highlighted here, and the linkage is tied to our business model. These are things we can do because of our business model. We held Built to Order through a softer selling period. Built to Order is not as critical when you go through some of what the industry's dealt with. Now it's very critical. Why do we do it? Over time, Built to Order margins are 5 percentage points higher than inventory sales.

If you think about it for a moment, if you're buying your own custom home on a lot you pick with your elevation and your features, and you're getting it very quickly at a great value, you're going to pay more for the lot because it's your lot. You're going to pay a lot premium, because it's the lot your home is going on. You're going to pay for your elevation, you're going to pay for your options. And there's ways you can lever that through this, call it, benefits, that we offer, and it's another area where we can share what works and what doesn't around the system.

On top of that, we have a Studio, and I'm going to go in the Studio in a minute because it's there to sell homes, but it's also a profit center. It's a great profit center, and we'll talk about that in a little bit. And on top of that, in addition to the revenue things we're doing, we'll take what the market will give us, we're aggressive on pushing price where we can. But that's not the strategy. That's opportunistic. The strategy is to lift our revenue and our margins through our actions. We're relentless on cost. You can't get synergy and scale in your cost until you get to a certain size. And in our markets, we dropped below what we needed for the synergy we're used to. We're now back. And you can say a comment and we'll share that today.

There's economy of scale to a standardized system, you heard it from Marc last night. When you're getting rid of SKUs, you're helping purchasing, you're helping accounting. Whirlpool gets rid of SKUs because of their partnership with us. In turn, we can do the same thing. But there's a lot of opportunity and leverage to our business model, whether it's national accounts or just scale with labor in our marketplace.

In the first quarter, we invested $345 million in land and land development, and we've set our sights on spending over $1 billion for the year. That's a significant increase from where we are and, hopefully, you see it as a reflection of our confidence in the markets, our results and our business model. We've targeted aggressive community count growth. Albert Praw is here today. Albert's going to talk about our strategy. He oversees this process for us, and I'm cheering for him if he spends over $1 billion this year because we think we can get great returns on that investment. So the focus is capturing market share where we're at.

And with that comes higher margins, and the markets we're in are big. None of them are anywhere near where they once were. So as they recover, we can grab that share, and that's what we're after. Along the way, we'll keep pushing our sales pace, we've got one of the highest in the industry. We don't let communities run hot. I was sharing a joke at dinner last night about what I do, and when Chris A. sells more than 1 or 2 a week in a sales community, he gets an e-mail because we don't -- unless it's a 200 or 300 lot community, we're just going to hold out sales. So you won't see our sales run away, but we will maintain one of the highest in the industry because our business model gives to us. So Albert will talk about the community count growth, and the guys will share with you the extension per community and what it all means.

I want to just high level -- put on a graphic up -- that we've used for years. Our value proposition, and hopefully, this crystallizes what Built to Order means, and that it's a key differentiator in my view versus other homebuilders and certainly, versus resales, which at some point, will become our biggest competitor once again. A large share to our highest margins. In the long run, it's a more predictable business. When you start a home with a loan approval and you already know the margin and you know how long it takes you to build it, you know when it'll close and you know the margin when it'll close. That's coming back now. And as our backlog is bigger and Larry Oglesby, as I shared, is here for the Central Region, he's also the owner of our business process, and he'll be walking you through a little bit of what it means to have even flow, what it does for your business, how you project your deliveries going forward, how you get synergies out of your buildings to a pace. And Larry came to us from Rayco, who were the masters of this. So we have our own production engineering experts in-house that'll walk you through how you can do a customized home at a very quick pace.

Rob, in Vegas, I believe, your build time's 52, 53 days work with Rayco?

Rob McGibney

Yes, it's certainly [indiscernible].

Jeffrey T. Mezger

If you didn't get your own custom home built in 53 days, why would you buy a speck? It's coming back. And again, he's our best in that and he'll talk about that to you.

If you go on the left here, the convention, and this is the way KB was when I started and the way it was at Brand X when I was there for 15 years before KB, we were all spec builders. It's up to the local management to determine what that consumer wants, and we were all experts at it. So we would put whatever we thought the consumer wanted in the home. The closer it got to completion, you add more incentives to move your inventory and in essence, you're forcing your values in that marketplace, whatever your management team thinks Mr. and Mrs. Consumer want, you're forcing your values on them, and you'll keep discounting it until you get to a price where they say, "Okay, now I'm stealing it, I'll take it." And we refer to creating high-perceived value. You start with a low base price on a product that we use a database to design and to feature. We have millions now of surveys. In every market, we can tell you by price point what the buyer finds valuable in their home that's at a high take rate and high value, we make it standard. If it's not a high take rate, that's what the Studio is for. We don't care what they take. Knock yourself out. Just buy a house from us, please.

So we start with a home that's designed and featured based on our database, which also drives where we buy the lot set, by the way. They go to the Studio where they pick their lot; their floor plans; their elevations; structural options, which are a big deal right now; their decor selections, which is free options, they get to pick their colors when they're finished; their upgrades. You want a separate shower? You want skylights? I don't care, just buy a house from us, please. And it's a great way to leverage our energy program. We have a lot of options in energy, and we're a leader in energy because we have this consumer laboratory called a Studio. So we get to test what's important to the consumer in energy as well.

At the end of the day, you've created high-perceived value. And if any of you really want to understand our company, I would encourage you to go visit a Studio, because that's where you see the consumer in action. Buying a home is the tough part. Go in the Studio, they're a kid in a candy store, because they're creating their American dream and you can get paid for that. It's different. High production, semi-custom affordable product in every submarket that we're in. It's a real differentiator. It's also great for costumer satisfaction. We've been able to run the highest customer satisfaction in the history of the company because of this process. The buyer loves it.

Studio is a critical component. Dan is going to talk about that. First off, it's there to sell houses. People don't always grasp that. It's a vital component. If you think about it, you can go look at 10 resales and find a reason why you wouldn't buy every one of them: you don't like the granite, you don't like the color of the cabinets, you may not like the floor plan. In the Studio, if you say, "I don't like their cabinet color." Well, fine. How about these 12? "I don't like the granite." Fine, how about these 12? And it helps you overcome objections.

Many of our buyers go to the Studio before they buy the home so they can come up with their American dream. And it's a way to overcome objections, generates traffic leads, it's another store for us, just like a realtor office, people come in, we can generate sales that way. But on top of that, it's a great profit opportunity as we understand frequencies and we understand our costs. If we know what certain item is a national account item and we have a high frequency, Dan goes to the national supplier and we get a higher volume price, so we can lower our costs in those cases. We can also push the price in those cases around the whole system. So we can track the consumer on a national basis through our system. I shared on the call, I think, we have 1 to 2 points of margin just in the Studio over time. You won't see it tomorrow. This will come on little bites, but it's there to be had.

It also enables us to test not just energy, but all the options and the features that are in our homes. And last night at dinner, Marc actually talked about it, we work a lot with our national supplier partners. They use our Studio to test their product. It doesn't cost us anything. They come in, they help us with the displays, they'll put it up. If we sell things, great. So if you go to our Studios, we're always cutting edge on the finish and the features because the national accounts really like it. And Dan, in his comments, will talk about that a little bit.

Lastly, it educates the consumer. I shared at our dinner table, while we're a leader in energy efficiency, I'm always surprised at how little the consumer really understands about utility bills. And we'll set up in our Studios, not just a way to educate them on all of homeownership, but in particular, what it means when you have a different HERS rating on that ZeroHome (sic) [ZeroHouse]. You can get this option, it'll cost you this much in payment, you'll save this much on your utility bills, they don't understand it. It's pretty complex. Their eyes roll back when you talk HERS rating. When they're in the Studio and you say $12 payment, $20 savings, they get it. So we're able to do that as well. And as I've already shared, it's a lot of fun and it's a lot of excitement for the consumer, so it's a great asset for us.

Frankly, in many of our markets -- it's okay because I just thought of another comment. In many of our markets, when we were on defense, we reduced staff and we reduced the scale of the Studio. Why? To figure out how to make money. Now we're there. We're back on offense in our Studios. People that browse spend more. So we've opened up staffing levels to accommodate browse. We're opening up a little larger space in some cities where we got too small. When you're at 100 or 200 units in the city, a Studio doesn't make sense, so you run the business. When you're pushing it where we are today, the Studio makes a lot of sense. So I think you'll see the Studios become a bigger messaging point for us, and we'll share our progress and results going forward.

I love this slide, and I love the headline of this slide because it says, Our Strategy Is Working. When I say strategy and I talked about the database we have on product, we also have a database on where to invest. And when I say that, it's relative to, at this ZIP Code, we know the household incomes, we know what people can afford and we know what kind of product we can build and what we can pay for a lot to get to a price they can afford. And Albert is going to go through that.

The investment side of this is as critical as the revenue generation and the cost reduction. Between the 3, our average sales price was up 24% year-over-year in the first quarter. It's up 24% and we had the highest sales pace per community in the industry. It's a pretty powerful combination. It's something that we think based on our backlog is a trend that you'll continue to see as we move forward. It's not just pushing the price, I've shared that's about 8%; we've moved our regional mix around to states that are performing better; we're modeling larger homes and the buyers choosing the larger home, that same buyer is choosing more options than they were before. And while I say all that and our price is up 24% in the first quarter, 60% of our deliveries were to first-time buyers. It's just a different first-time buyer. They have a little higher income, they're in a little more desirable area of the town, they're closer to work, they're closer to infrastructure, they're closer to shopping, it's a desirable place to live. But it's a buyer that can get a mortgage today. And it was with intent that we made that move. I think, and when people ask me about housing, I think when the mortgage world settles and it unlocks the bottom half of the first-time buyer, there's incredible demand. But in the meantime, we've learned how to play, and we'll stay committed to the first-time buyer and the first move-up buyer.

Last night, somebody asks me at dinner, "How quickly can you move?" And we shared, in '06, we were 30% move -- first time, and 60% move-up. By '09, we would have flipped it. We were 65% first-time and 30% move-up. We can move quick. We've got the product in place. Takes a little time to get models built and find the economic formula that works on the lots, but we're going to keep pushing in this direction right now. It's working great. Markets change, demographics change, the environment changes, we'll move right back in another direction.

So first-time buyer, first move-up buyer, they're the biggest consumer segments in America today. We're going to stay focused on them and we have found a way to really push our ASPs, while at the same time, expand with our core.

In order to have a successful Built to Order business, you need a fixed -- predictable performing mortgage partner. I underestimated the impact to our business when we lost that a few years ago. We now have it back, and we shared it on the call. It's not just predictable closings. When you're Built to Order, you need to understand what people can afford because you're customizing their home for them. You need to understand they can qualify for it. We like to have the loan approval before we start the home. You can't get all of that if you don't have a predictable partner.

I shared on the first quarter call that Nationstar, from the day we got the city final to close, so they get a final appraisal, they document the final documents on the loan, they cut the loan docs, you fund the loan and you closed, Nationstar averaged 15 days. Our outside lenders averaged 24. And I share that because that's 9 additional business days to get closings. If that were to just roll, it's a significant number.

In the second quarter, in March and April, Nationstar is down to 13 days, so it's getting better. We're getting momentum on the mortgage side of the business, capture rate is improving, business is more predictable. We're getting higher customer satisfaction out of the mortgage process and we think it's something that we'll see continue going forward.

In January, we announced a JV with Nationstar. This will further align our interest between the 2. We expect to have the licensing and approvals from all the agencies by the end of the year. In the meantime, it's seamless, business as usual. We'll convert to a JV. Then going forward, in 2013, in addition to a far more predictable backlog and a great partner, we'll get more earnings because we'll share in the success of the mutually-owned business, so we're looking forward to that. It's going to be another continued tailwind for the company.

I talked about our focus on being a low-cost producer. And I mentioned even floor production, Larry's going to talk about that. You have to have backlog. And when you're in communities that are selling at 1 a month, 2 a month, you don't get to a point where you have enough backlog to meter out your starts and get to the benefits that you can get from Evenflow. We now have backlog. With that backlog and that scale, we can now get back to our Evenflow production and recognize all of those synergies along the way. At the end of our first quarter, I shared on the call, our distribution of production was the best it's been in years, where it was fairly even, spread across the whole system. We haven't had that for awhile. Now that we have that and we have backlog and we have predictable sales, we can start metering and go back and get what's there for us.

Value engineering, is a constant, we have our own architecture shop in-house, we design plans quickly. Most importantly for me, we design plans that are focused on value engineering and cost and they're designed to a survey and all of our data. You can't get that when you go outside in every city and we think it's another competitive advantage we have. And along the way, when you build the same plan in more than one city, you can start comparing notes on where you've saved. And we just had our President meeting we talked about this. And there's always opportunity. As much as we did over the last 2 years, there's always opportunity in this area through best practice sharing, SKU management, synergy on the product, and we have found that the same plan that works in Orlando works in Sacramento, Denver or Texas. The exterior has to be different.

If you go around -- I used to say this when I was a President, hey, you don't understand it, this market, I got to have this. No you don't, a survey says, the buyer doesn't care, you care. And as we've rolled this out of and the teams have experienced success, it gains momentum. But then on top of that, you can now lower your cost. Cycle times, big savings, we're focused on that, leveraging our SG&A through the spring coil, we think we can significantly grow the top line with only incremental overhead because the teams are there. Have to hire a superintendent salesperson not a land person, the teams are there, the infrastructure is there, a lot of upside on our SG&A leverage.

So on the ground, I refer to this as a KBnxt difference. How we're different on the ground in the markets as opposed to the financial outcome that you would -- you'll see and Jeff will share that at the end of it.

As a result of back to Going on Offense, growing our scale, having backlog, pushing price, lowering cost, we're pushing the top line. We can do that because of our business model, our land teams have facts, they know what they can pay, they'll go out and find lots that meet our strategy as opposed to react to whatever deal comes over the trance. And when you have that, you end up in better locations. So you're in a highly desirable areas, you've got the right product and you can see from our average selling price and our sales pace that it's working. BPO works. I think we're the only builder at scale in most of our markets that has a wholesome studio and the customized process we have.

Over the years as I shared, we've always made more money and better returns in bigger business. We're going for scale. We're going to go grab market share in our served markets, the 33 that we're in now. Our goal is to be big or not be there. We don't have to be the biggest, we have to be the best and we want to have a large business that supports it. We have the capacity and we have the tools today, so we're going after it.

We're also a leader in sustainability and we've been there for a few years now. Dan's going to talk about that. It means a lot to a customer when they can save $200 or $300 on their utility bills. And we're learning along the way and Dan will share some of it what we found is important. Steve's a poster child for solar, I don't know if we're going to talk about that today, but we've got great success with solar here in SoCal. We're going to go a little deeper.

So these are the highlights, this is the strategy. Tom Silk is going to talk at lunch about our brand. Most of our markets we have the best brand in that marketplace, we've tested it. You can't let that go, it's worth a lot of money and a lot of sales and Tom's done a great job coming in and elevating it to the next level and he'll share that with you. We'll close the day with Jeff going over financials and then in turn, Jeff and I will open it up for Q&A at the end.

So I think you'll find it an interesting day, hopefully insightful. And again, the takeaways that I think you will hear while we're differentiated in the marketplace, the key investment strategy and the financial outcome is on this page. This is what it means to the Street. So we're going to be profitable. We're in the right markets, we're accelerating growth, we're the largest builder in this state, incredible opportunity for us, the strategy is working, our business execution is improving and it's going right to the bottom line. We're committed to the first-time buyer and the first move-up buyer, 2 largest consumer segments. We don't need to go anywhere. We have significant upside where we're at. Nationstar is a great wind at our back, they're a great business partner and we think there's a lot of opportunity there. The spring coil is in place. We've got the markets, we've got the people. And I didn't touch on the macro too much, I think you all do your own studies and know what's pretty good out there right now in housing, so I didn't think I had to say much about it other than, as good as it is, we're in the early stages of this recovery. The pent-up demand, the demographics, the lack of inventory. I think the last number I saw on new home sales were at 420,000 or something like that. An average here is 900,000, so we're not even halfway back and we're all saying it's pretty good.

So early stages, I think that's -- there's a lot of opportunity there. So look forward to it today, discussing all these topics, hopefully, you have a lot of questions, we'll welcome interactions and at the end, we'll have a Q&A, answer anything that wasn't answered.

And I'd like to bring Dan Bridleman up now to talk about studio, sustainability, IT. Dan you've been with us -- you'll talk about in your slide. But I hired Dan, was that '01?

Dan Bridleman

10 years ago.

Jeffrey T. Mezger

10 years ago? We brought Dan in from a satellite company that worked with the government, a little company called Boeing. You may have heard of them. Had nothing to do with homebuilding. Before Boeing, he was at Case Farm Implement in purchasing and IT. I loved it because they know in both of those, it's a different way to -- I tried to explain to him our house, it's far more complex than a satellite that's going to go orbit around Mars, he didn't buy that one. But he spent multi-multimillion dollar purchases on satellite parts. Kind of how where he helped us buy a house for $100,000. But he's done a great job, he's the leader of our company in the studio, he's head of our IT, and he's head of national accounts where I think last night's dinner, was a testimony to the relationships he forged.

So come on up, Dan.

Dan Bridleman

Thanks, Jeff. I never did get a satellite to go around Mars, by the way. But that wouldn't have been fun. Left too early. Good morning, everybody. That was a nice intro and one would have thought that making houses would be easier than making satellites. But I thought it was going to be easier, but I'm not so sure anymore.

How many of you guys -- everybody here travels quite a bit, right? How many of you travel a lot, right. On planes a lot? Lately, when you get on the plane, what's the first thing you look for? I look for that little Wi-Fi sign, right? Because I get on a plane today, and I don't see the Wi-Fi sign, I'm a little bit miffed. So I'm a little miffed at United because they got crap planes, they don't have Wi-Fi. When I pull it up, and it said it's $25, I'm glad I have Wi-Fi, but I might not take it. But at least I have the choice. And I think that's really opportunistic when I start to talk about the Studio today, because you want to give people choice, they want choice, alright?

How many went to, how many went on the tour yesterday? Yes, about half. I mean, really interesting, that had a beautiful community, but you didn't see all the little things that were there probably because you're just in awe of the community, but it wasn't by happenstance that, that community is where it's supposed to be. We knew the market profile, we did a market survey. We knew what the customers are going to want. We knew what kind of options they were going to take long before we built that community, long before we put up a studio. So what drives us is data and we use that data to offer choice. So today, what I want to talk about is 3 things. I'm going to talk a little bit about the Studio, I'm going to talk a little bit about our national contracts and then I want to talk some about our sustainability strategy.

So, I design studios. I mean, you've heard it from Jeff. I don't know if you guys can get my screen in front of me to work, I have to look backwards and I can walk, but the screen in front is not giving me the slide.

I design studios, beautiful, big, plenty of square foot. It drives home sales first and foremost, right? So they're -- I want to talk about consumer sector, like how we're differentiated and how it's a profit center. So let's go ahead and talk a little bit about consumer centric.

When you walk into one of our studios, you feel good. They look nice, they're big, they have our products in there, but more importantly, it's the person when you walk in that you talk to. They're trained, they're excellent in what they do. When you walk in, they're going to greet you. They're going to talk a little bit about you. You may have already been to one of our communities, you may not have been in one of our communities, but as you walk in, one of the first things they might ask you is, what's your lifestyle first? 2 parents with kids, a single mom, a single person. So they're going to get your lifestyle, they're going to help walk you through some of the choices you want to make when you're buying a new home. So a retail like, it's in a retail area, it's a showcase, you're just going to feel good about being in there.

Very convenient. People go to a studio not where the community is, but they want to go to a Studio where they're coming from. So where you put your Studio is very important. But we just don't put the Studio here because we thought it would work. We get a market survey, so we know where people are coming from to go to our divisions. So we put the Studio in a place where people are coming from that they can stop in. Studio. We got the Studio open just from -- it's open from 8:00 to 4:00 during the day. How many of you work? Everybody works. Who can get to a Studio at 8:00 in the morning? No. The Studio needs to be opened when you're selling houses. So you've gone to that beautiful community yesterday, you think you want to buy a house, why don’t you drop by the community on your way home and check it out. And when you walk through that Studio you're going holy cow. Look what I can get at Katy home. That's what convenient hours and a good location will do for you.

But also, look at the choice I have got. Maybe you're the kind of person that wants a gourmet kitchen, maybe you love to cook. Maybe the best tool in your kitchen is a telephone, because you like to order. So you're going to get choices about what you want to do in the Studio based on your values and your options. But we probably pretty much figured that out because we've got good data, we knew you're coming, we get the options you're going to want, okay?

How we're different from other builders? I would say we're different because we have 1 business model, It's easy for us to do this. It's in our DNA, we understand how to do Studios. I think Henry Ford probably said it best, okay? You can have whatever color you want, as long as it's black. All right? Things have changed quite a bit since then, people don't want to walk in and just get -- I'm going to get that floor, you're going to get that cabinet, and you're going to just color a wall. It's not going to work.

If we didn't offer choice, how about this? How many times do you run to a grocery store? Lots, right? If you walk into a grocery store, walk to the front door and there's the sales clerk with 2 bags -- they've already gone through a certain grocery store, I picked what I think you want for today, here's your 2 bags of groceries, take them home, be happy and be successful. It's not how you go through a grocery store. It shouldn't be how you buy a house. You want to go through that produce line, you want to pick what you want for the week, you want to check it out and you want to buy what you want. You need choice. That's why we're giving you a Studio, overcome objections.

At the same time, it's a profit center. It should be there to be successful. It supplements the house. And the good thing we can do in our Studio is we're a data driven company. So if I'm selling 25 options of kitchen takeoffs and 90% of the time, we're only selling these 2 or 3, then we need to make you reevaluate where we are carrying the other 5 and focus on the ones that are selling, so daily, we've taken figure with the take rates. It's an awesome business model.

All right. Choice is for everyone. I like to use this. I mean, new homes designed and built just the way you want it. So you're in our -- if you haven't been to the tour, tomorrow go to the tour. If you're in one particular model and you want to get a third car garage, you want to add a fifth bedroom upstairs in the loft area. You want to add a nook in the kitchen. You want to do something else. That's a structural option, you want to do that? We'll let you do it. We've already figured it out, we've already designed it, we know what the cost is going to be, you can design it beautifully. But at the same time, so you didn't want that, you're more on budget, you want to go to that same house, but you can go to the Studio now and pick out 7 or 8 different no-cost options on what my floors are going to look like.

So no-cost options on wall color, so you've given them choice that they can use to customize their house. But these are quality brands. I'm going to talk more about brands when I get to the national contracts part, but we just don't put anything in the Studios, we've got some really, really high-quality brands you heard from Whirlpool last night. And I'll talk a little bit more about that.

Cabinets, countertops, kitchens, I would say if you go into a Studio, I think most people would walk to the kitchen and spend a lot of time in the kitchen. And to me, that's where you can add some real beauty as well. But we have a full spectrum of customers, alright? First-time homebuyers might have a different view than, maybe somebody who's moving down. When I think about even the move-down customer. You might be 60 years old, just getting ready to buy your next house. You're thinking in 10 years from today, you might want some features in that house, so you're going to buy a bathroom. If you like the guy on TV who took a drink of water, I don't know who that guy was, Watergate? So forgive me. I think you reached on national TV.

AARP. What if you didn't really want the handrail in your shower right now? You don't want to put that handrail in to help you get out of the bath tub. But maybe in 10 years, you might. Wouldn't have it been nice, if you were to put the structural option behind the wall, so that when you screwed it into the stud, it stays there and it sticks. We're thinking about that kind of stuff and you can buy those kind of options if you're in that age group.

Millennials, the baby boomers, who really understand what they want. As you saw in those houses, you'll see some really cool things. And so we work at AARP, we work with a lot of people to make sure that the choices we offer are easy to get, they're beautiful, and you can do your house just the way you want it.

Let's talk a little bit about the value of partnership. And I think we heard from Mark Pitzer last night, that's just one example. I think Jeff brought up the idea of taking away the cardboard at the site. But just think about it. There's a lot of dunnage that comes with the products, that sit on the job site. We want that job site crisp, clean, don't want anything left behind. Cardboard, wood, drywall, it has to be perfect, it has to be pristine, it has to be clean, so when you walk through that house that's being built, you get a great feeling of quality.

And all of the partnerships we have, Whirlpool, we talked about last night, Shaw carpets, you guys [indiscernible], Kohler, The Bold Look of Kohler, Sea Gull Lighting, MOEN faucets, Carrier, Armstrong, Kwikset. We have about 9 partnerships that are exclusive because we can talk to them on a very transparent basis, we've had some of these relationships that are 20 years. We like their branding. We hold a national conference in October. We bring, I would say, our top 45 suppliers in. When do this, we sit them and talk to them about our strategy and what's important for them to maintain their partnership. And a lot of it evolves around brand, one. Two, quality and three, cost. But if I bring a supplier in and one of the things I like to do is bring in their supply chain person. Because if they're not thinking strategically, I'm pretty sure we're going to be arguing over price for a very long time. Because we don't sling hammers, we don't saw, but we buy people's products and we subcontract, so they've got to be thinking innovatively. So we're going to be as good as they are, but they got to be on top of their game, so we work that really hard.

If they're not very good at forecasting and they're going to miss one of our deliveries because they can't get something there, I probably don't want you as a partner. If you're not going to give us a contract, because we have the right to first material, I mean, when this gets tough, this starts going up, we're going to make dang sure that we have installation, because we got a partnership that guarantees it. But you got to be innovative too. You saw some things you have to, I think, if you were at the house I demonstrated the MOEN faucet.

A lot of people will have a faucet that are hands-free, you put your hands under it and it comes on and goes away, not too many people thought about just going over the top of it, turning it on, letting it run until you're ready to turn it off. That's innovation. Whirlpool, we're the only builder they put their new, smart appliances with. Now not everybody is going to take a smart appliance, but it demonstrates the power we have with those relationships. Very innovative. Not for everybody, but it's very innovative.

And then, man, I can get them ready, you got to be ready. This market is going to go -- you have to take full advantage of the condition that's in front of us. Otherwise, you're not going to be a partner of KB Home.

Going on Offense. You heard Jeff talk about this. It's a great opportunity to use our Studio. These are partnerships to enhance our profitability. Option sales are strong and option pricing is additive on top of the base and it fits with our growth strategy. And I'll just put a few things up here, just choose what's hot,you walk this, choose what's hot. Appliances, cabinets, countertops, get some refreshing accents, take a look at maybe some finishes you want to put on your faucet.

Maybe you don't want chrome, the house came with chrome. It was there. I don't want chrome, I want brushed satin. And a lot of little uplifting details like paint, window castings, crown molding, stairs and rails, you can buy those in the Studio if you want them.

Okay. Talked about partnerships, talked a little bit about Studios, let's talk a little bit about sustainability. A lot of people think, oh, got to be green. We're the greenest builder out there, not true. When we look at sustainability, it's the right thing to do, but when we talk about how we approach this, it's really about how do you take sustainability, and I like to use internally turning green into gold, right? Unless you're turning green into gold as a consumer, if you were at that house yesterday, the most important thing to you is, how much is it going to cost me to own this house? To heat and cool the house, right? So we put an APG up on the wall, so you can see the cost to heat and cool that house. But you couldn't have gotten there without having a good sustainability strategy on how you put that envelope together. So for us, the idea of sustainability at a high level, drives our innovation, creates value, and gives us a competitive advantage.

If you went into a resell home and you ask, what does it cost to heat and cool this house, I mean, deer in the headlights, right? I don't know, have to get the previous owner's bill. To me, this is money. And it's doing the right way, you're not picking a big green land inside a house, you're demonstrating that with real choices for the consumer.

It has been one of our key components, it's one of our characters, I mean we believe in being sustainable because we can do it and we can do it without raising the cost of the house.

We're the only national homebuilder to publishe a sustainability report for, I don't know, 6 years in a row since 2007. We're very transparent. Our goals are lofty. We don't hit every one of our goals. They should be big, they should be bold. I talked about this, it drives down to how much does it cost to own a house. Get rid of waste. We're green, because we get rid of waste.

Guess what. 14 divisions, I challenge each purchasing guy to say, if you have -- go look at your dumpsters. If you've got stuff in a dumpster and you're recycling it, that's fantastic, you're recycling it. Bad news is you got stuff in a dumpster, right? It costs you money. So if you want to be sustainable and get rid of any waste, reality is, that you're doing your business right, I shouldn't have any leftover pieces of lumber, I shouldn't have any leftover pieces of drywall. I shouldn't have any plastic on the site. So it's a natural part of just being smart. In the office, paper. So give everybody a challenge in the office to get rid of paper. I'm producing paper, why? Why do you produce paper? Everything should be electronic. Get rid of waste as a corporate culture is an important thing to do as well. Just some high-level key accomplishments, I'll point out a couple of things. We're ENERGY STAR Version 3, why? Because the markets thrive when it's there, we want to be ready, there's some costs associated with it, it's just the right thing to do. ENERGY START Version 3 means we are 15% better than any market being quoted. We've done 75,000 ENERGY STAR homes. We know how to do it. That has saved our customers $33 million annually by being with ENERGY STAR.

One would say, why stay with ENERGY STAR? It's a brand people recognize, they trust it. So when I say it's an ENERGY STAR qualified home, it means something to the consumer. Do they know what went into that? No, but the brand meant something.

Rolling Thunder. This is kind of a term we use internally, but it's something that Jeff has asked us all to think about. Rolling Thunder to me is at least twice a quarter, I should be doing an announcement about a product that were given to a consumer at no cost.

So for example, we wanted to put in low VLC paints with our partner Sherwin-Williams. Sherwin Williams came to us, it's a great idea, Dan, but it's going to cost you $65 a house to do low VLC paints. I said, guess what, it's not going to cost us $65, I want your paint at the price I'm paying for the current paint. You can't do that. I said, well, how many different colors of white today, do we buy from you as a base color? You see, we've got -- you're probably buying maybe 18 different colors of white. Well, what if I bought 1 color of white and we've maximized it? And we did a cobranding with you? Can you give it to me for the same price as the other paint? But I'm just buying 1 color. So you increase your throughput, it's easy to do business with us, they went, great idea. So we did that with Sherwin-Williams. We've got the low VLC paint, put out an announcement, it's Rolling Thunder, didn't cost us any money. The consumer got it because of our strategic size in mind, and because we're thinking differently. You're going to hear more about solar from Steve and you saw a little bit about it yesterday, but we've done over 1,400 solar homes, mostly in Southern California, it's fantastic. And the one thing that's going to be coming even larger as it get feature is water, water -- although water from a cost perspective of a house isn't as significant as energy, but water as a resource that's going to get scarce and if you're not got at managing water in the house today, you're not going to be good at managing it 5 years years from today. Everyone of our houses has WaterSense faucets, toilets, showerheads and guess what, I went to MOEN and KOHLER I did the same thing. One type of faucet, one type of thing, I don't want to pay another dime for it. That's what the consumer gets when they buy a base KB Home.

So you see we saved, I mean, lots of water, it's been a fantastic for us and it's great. EPG. If you haven't been to the -- we felt like, like -- just like where you buy a car, you know how the miles per gallon is going to be. We should be able to tell you, this house will cost about $125 to heat and cool. And by the way, the minute we did this, everybody started following us. So you can go to any one of our models, find out what you think the average cost of heating and cooling the house is going to be.

This is like one of my favorite slides here. Okay, this is a house in California, it costs $117 to heat and cool. You go to our website, how much do I save -- this is for 1 month, how much do I save annually? I'm going to save $1,400 a month. You go to 10 years, it's $14,000. I go up 30 years, that's $42,000. That house, over a 30-year period, with that technology, will save that consumer $42,000 in heating and cooling expenses over a 30-year period. That's cost of ownership. That will turn a couple of heads. That's a lot of power to put back in the mortgage.

Our solar program? I'll just go through one example here, but this just gives you a pretty good perspective. If you take a look at that first line, you've got a 1,700 square foot Solar House, and you have $126 with no solars in your bill, you throw solar on it, it goes to $42. That saves you $204 against a resale home. I mean, that's a value proposition that's hard not to include, especially in Southern California where you get plenty of help.

Just a quick slide here, these are just anecdotal data from some of our people who bought our houses. I'm not going through each one, but Dan, I average around $60 to $75 this summer in my house. 2,600 square feet, run the AC at night at times. Totally amazing, I paid the same in a 900 square-foot condominium prior to moving here. Denise, I live in a 3,000 square-foot KB Home in Lancaster, this summer, was record heat. I ran my air conditioner all day, all night, constant, 70 degrees, I was amazed that my monthly bill for this summer averaged $87 a month. You just get that with every KB Home, those are great affirmations.

Our ZeroHouse, somebody saw it yet yesterday, it drives traffic, it's innovative, we bring schoolkids over to the community the day we opened it. And you can see those little red bars at the bottom demonstrate how much traffic we get during the week that comes. We've just opened up a ZeroHouse, so if you were there yesterday, you get a chance to go tomorrow, go and visit it, they're awesome.

Key takeaways, okay? Design Studio. It's our choice model, it sells homes. Power partnership. Going on Offense. On sustainability, it's leadership driven, lowers the total cost of ownership, solar's impact on buying power, and talk a little bit about our Zerohouses.

So that was 20 minutes right on the money. Mr. Kaminski. Talking fast. So I have a few minutes here, right? If you guys want to fire away a few questions and don't ask me anything too tough, I'll start right here. Steve?

Unknown Executive

[indiscernible]

Stephen Kim - Barclays Capital, Research Division

Steve Kim, Barclays. Dan, quick question, I guess, on the model -- the design centers. We've heard a lot of builders talk about design centers over the last decade or so and some of your peers have moved in a different direction as of late, claiming to have learned some lessons and so forth about the way the design centers don't really deliver. And I was curious as to -- if you could not just extol the virtues of your program, which I think you've done a very good job of, but also, to contrast what you think some of the mistakes that have been made by others were, that didn't allow them to monetize the design studio the way you've been able to do it?

Dan Bridleman

I think it's -- again, I have a difficult time talking about why others weren't successful. I can talk about why we are successful. I would think that if you're not -- if you don't have a common business model with common systems, it's difficult to maintain the price relationship to cost. So you've got to be really good centrally. You've got to have a common theme, a common model and it has to be consistent. So I think Steve, if you don't do that, then you're going to find that you've got runaway design studios that don't look the same, you're going to have runaway costs you can't match up back in your databases. So for me, the things that make ours successful is the single model, our ability to look at a single set of data and make good decisions quickly. So I think that's why it works for us. Does it help? Yes, Alex?

Alex Barrón - Housing Research Center, LLC

Alex Barron, Housing Research Center. Can you talk about the solar panel program, since you guys seem to charge for everything through the design Studio, is that something you're also charging? Roughly, what do they cost? And how does the rebate programs work? In other words, who gets the money, the consumer or KB Home? And how much -- can you elaborate on that?

Dan Bridleman

Yes, I'll elaborate a little bit, but I'm going to help -- maybe Steve, can help me out a little bit too with the cost side. But first of all, we stepped back from that for a second and said listen, who's the best solar panel provider in the world? And it's SunPower. Well, why don't we do a national team with SunPower first of all and promise not to sort of do this sort of haphazardly, but commit to some volume and get the best price we can in the solar panel in the first place. It starts there. Secondly, have SunPower do all the work in terms of working with the states to get the rebates, so you give to us a very, very affordable net price, and you put a lower kilowatt system on every roof and then you let people do the upgrades. Steve, why don't you give us some specific examples?

Steve Ruffner

Yes. What was really key is, we had to teach the solar industry how to be big and how to really get the scale to work for the price reduction we needed. So we started out with 10 communities to pilot it if there was a lot of scientific thought that went into it, a lot of meetings on how to get it as affordable as possible. And then once we dialed it in and we figured out how to do it in a production sense, so that we could really get a huge discount compared to what a resell person can put solar on the roof for, then we rolled it out really division-wide in Southern California. And we have now experimented with it for 24 months and we know the base system that should go in to give the consumer the easiest possibility to upgrade their system, and then how that relates to their cost benefit ratio with tax credits they get. As far as the credits we get from the state of California, we have a deal with SunPower and we just pay a net amount, we don't do any of that processing for the credit.

Dan Bridleman

Plus, I think, when you're all done, you get the retail credit at the national level for a tax credit with your -- so you'll get a one-time 30%. So you'll get a good price upfront, and then you can claim it with 30% at the end. So it's really a fantastic deal, and it's very affordable.

Yes?

David Goldberg - UBS Investment Bank, Research Division

Dave Goldberg from UBS. My question was about changes that are going on from a green perspective. I mean, this is Net-Zero 2.0. There was Net-Zero 1.0. Presumably, there will be Net-Zero 3.0. And so, if you're going to buy a house today, how do customers think about, "Well, what if the technology changes tomorrow? How can I retrofit my house?" And how do you guys think about being able to drive that value to consumers? Because presumably, the technology is only going to get better.

Dan Bridleman

I think that's a great question. It's one we think about a lot. Think about today's buyers, baby boomers, think about that age group, millenials that are in their 25- to 35-year-old range. They've lived with the Internet. They use craiglist. I mean, they go to Internet for everything. Do you think they want to walk into a house where you hadn't thought through about, "How do I hook my Internet up? And is it Internet ready? And what's going to happen in 5 years when it changes?" Well, a good thing about that ZeroHouse is that we've now put a platform in place, from a technology perspective, where that house can grow with how the technology will change. And that's why we do things with Whirlpool. That's why we do things with Carrier. So we can start to be ready for that kind of a perspective. And it's not so much about being green, I think it's as much about thinking about the technological parts of it. And so, that's where you got to be really savvy, and we're going to do some good things there. And I think we're in touch with that fire. So it's just going to be part of the DNA. You're going to have to be good at it.

Yes?

Unknown Analyst

Yes, just following up on Dave's question there, the ZeroHouse, how -- I wanted to understand how far that's come along in the evolution? And obviously, it drives traffic, it helps support the brand. How far has it come in terms of being an actual feature that's being selected by customers in the communities that it's in? What percentage of customers are going that route?

Dan Bridleman

We're pretty sure that when we put a ZeroHouse up that we weren't going to get many buyers that were going to buy the ZeroHouse. What we want to do is demonstrate how easy it is to take any one of our floor plans and convert it to Net-Zero. It doesn't take that much. But also, let's say you don't want to get to Net-Zero, say you want to get to half Net-Zero. You can then start to choose options, how far you want -- maybe you don’t want the low E3 argon gas-filled windows, but you're happy with the low E2 windows that you get in the base. So instead of putting a 6-kilowatt system on it, maybe I'll only have to put 3.5, and I cut my thing from 112 to 60. So I think you can demonstrate that with, you can buy pieces of it. Maybe you don't want the very sophisticated hot water relapse system on your house. You're okay with instant hot. And so, I think you offer your customers choices. The thing is, is that it is not Jetson house time, you can do this today. But I say that you have to be ready at the base with any house, you can add those options on to get you there. So to me, it's an evolution of choice. And it's really up to the consumer. If you are really a green person and you want your house as green as you can be and you want Net-Zero, no problem. We can do it, but there's just a cost to it. So -- but you got to be ready for it. I think, in the state of California -- by the year 2020, I think every house has to be Net-Zero. So if you're not thinking about it today, if you're not doing all of these things and you'll wait until it gets there, you're going to be lost. And so, we're on that evolutionary path to make sure we're there in front of it. We figured out the cost, and we figured how to do it, so -- I think we had 2 or 3 people take a Net-Zero option. But we've had a lot of folks take part of it. "I just want the low E3 windows. I don't want the advanced building package. I don't really want more than 1.8 kilowatts." All right? "Well, I want the advanced building packages, but I want -- I don't want the argon gas stove window." So it's consumer choice. But every time you make a decision, your EPG comes down, so -- total cost of ownership.

Jeffrey T. Mezger

Let's take one more.

Dan Bridleman

One more. Yes, sir?

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

It's Mike Rehaut, JPMorgan. I appreciate all the comments on the energy efforts. And certainly, it's something that's a hallmark of a lot of new home builders and differentiates within and also against the resale. I was wondering if you have done any work in terms of measuring communities that are, kind of, let's say, have the leading-edge energy package in offerings in terms of either versus within your company, those kinds of more cutting-edge communities or product offerings in terms of their absorption or returns or margins or pricing power that, kind of, from a financial perspective, kind of gives you that added incentive to push the whole company going forward and maybe within the company and also if you have any comparative metrics versus other builder communities?

Dan Bridleman

It's a good question. Very detailed. I would say just that I think there is an expectation by the consumer where -- not necessarily people are out there looking to pay the most for the green, they're looking like you normally would, location, where it's at and price. And they expect the house to perform. But I think, Steve, Steve, you have some very good examples of when we were at the deepest, darkest part of this recovery. Let's give Steve a mic. We decided to put solar at standard in some communities in Southern California. Steve, I think you had a good example of exactly what we're talking about. How much quicker, how much faster and how much more they were selling in terms of their speed than we were doing in other locations. So it would be a good model for you to...

Steve Ruffner

Yes, when we test marketed this, the whole idea was to get the total cost of ownership down, so we could compete with resale that was cheaper than we were. So when we looked at total cost of ownership with solar, we got in line with the resale total payment because their utility costs were higher. And it exhibited, during the market, when we first put it out there, about a 30% increase in sales on the projects we added solar to from what -- from that point forward than before in about the same market. So it was about 30%.

Dan Bridleman

30%. Also too, you walk into the house, you see the EPG. You're thinking about buying a brand X down here that doesn't have any EPG, I have no idea how much houses cost when I'm buying that resale home. I have no idea. Coming to this -- coming to the modeling you can see on the wall, what's this -- what does it going to cost you to heat and cool. And I think that probably helps people with the sort of like comfort level or feeling to, "I feel very good about buying this house." So I think that's where our effort has been would be to demonstrate to the consumer the value you get in any house. So that would be my best answer, but I can talk to you later too.

Okay, I was supposed to -- that was it. I'll catch you later. Hit me up at the break. All right. Mr. Kaminski, I'm going to introduce Albert. I've been here 10 years at KB Home, and I worked for -- with Albert a lot. And I can tell you, there is not a more business-savvy guy that I've ever met. Albert is our Executive Vice President of Real Estate and Business Development. And, man, he's just the right person to talk to you about land and assets. So Albert, take it away.

Albert Z. Praw

Thank you, Dan. It's tough following you in any context, but following up technology with dirt is particularly a tough call. But I like dirt. My life is dirt, and I'm here to talk to you and walk you through how our business model drives our land acquisition process and how that leads us to achieve our growth goals.

We start that process with our homebuyer survey. Our homebuyer survey is not a new tool, it's something that we acquired, in effect, when we bought Rayco in 1996. We've taken it to a different level. That homebuyer survey, I think, back in '96, Larry was about 5, 6 pages. It's substantially larger now. And the idea is to and the goal is to assess buyer preferences. You heard Dan, you heard Jeff talk about how those buyer preferences are expressed in terms of, what goes into the home? What does the buyer want? What is the buyer prepared to pay for it? What tradeoffs will the buyer make with respect to products and specifications within the home?

From a land perspective, the homebuyer survey, which goes out to homebuyers, not home lookers, homebuyers, homebuyers of new and used homes. And the question is, where do you want to buy a home? And where, in fact, did you buy a home? Those are 2 very different questions, and understanding the differences between those and what motivates the seller, what motivates the buyer, is critical to the analysis of where do you want to look to buy land to satisfy the preferences of that buyer.

The survey is something that we use and update repeatedly. We take the information from that survey, and we rank the preferred submarkets. You can see here -- this is just a slice of the Denver market. This is the synthesis of that information, and we'll rank the submarkets one through how many there are, and that becomes the focus of the land search rules. Where do you look for land? The fact that something doesn't rank as high as another submarket doesn't mean we dismiss it. What the buyer is telling us, by ranking a submarket lower and where there, in fact, is activity, is that the buyer is making a tradeoff. The buyer is saying, "I want to buy here. I had to buy here. I'm prepared to make a commute" Or, "I'm prepared to do some other kind of compromise to buy a home." And that is what we have to understand because that is what we have to provide to our buyer.

We take that information, and we add to it the household median income within the areas identified as preferred submarkets and other demographic patterns in order to, again, understand who that buyer is, what that buyer is prepared to pay, what that buyer can, in fact, pay. And again, we distill it by submarket, by price point and by product.

This is a slice of only 1 -- this is just 1 little submarket here in Southern California. That is not really our market strategy. Southern California's market strategy is this. And no, Jeff, I'm not going to go through all of these, okay? But this is what it looks like, not this. This is just one slice. And what this demonstrates, based upon the surveys that we have done, is in fact -- this here is an example. This is a market that you can see is predominated by buyer preference in detached housing. You don't see any attached. There is no expressed preference in this submarket for attached because this is, in effect, a commuter market. If somebody is going to commute to these areas, they want a home, they want a backyard, they want a front yard, they want a place for the kids to play and the family to expand. So anybody who sets these land search rules, attached housing is wasting their time. We don't want to waste our time. We want to be effective in how we manage our time, and we want to be effective with our sellers. And I'm going to come back to that repeatedly.

At the same time, we can buy these surveys, tell what should the price points be. Again, that's determined by the survey in effect and understanding the income bracketing, the median household income bracketing for the buyers who bought in this submarket. So we have price, we have product and the next thing we do is we say, "Okay. What's the transaction? How many transactions occur in these submarkets? And what share of that submarket do we think we can achieve by opening up new communities?" So if, in fact, there's a submarket, in which there are 2,000 transactions, new and used, it's no big deal for us to say, "Hey, we want 10% of that. We want 15% of that." And therefore, we can open up 2 or 3 stores in that submarket. And the only constraint is not scale, it's just competing with ourselves. And that's what we have to be careful about, but that's why we segment it by price point and by product. In fact, we like scale. We like being large for a number of reasons. One is that we become a buyer of choice for land sellers in that market, as well as the other things that come economically with scale.

By the way, this strategy, these surveys are done for every division and for every submarket within that division. We didn't take those targets for each submarket, and we put it into -- and this is really very difficult to read. But this is called an ant tracks. Actually, it's how it demonstrates why we call it ant tracks. If you look at it, it looks like a bunch of ant tracks across the page. The way we use words, and there's numbers on this page. What this tool does, again, refined, picked up from Reiko, refined over the years since 1996, this will tell us what communities are open, when they sell out, when we need to replace them and if we're going to replace them, just look over here, when do we have to get a contract done? Given the particular vagaries of that market, either it's an entitlement or a development deal that we have to get it under contract. We got to do the due diligence. We got to get land committee approval. And then, we got to close and do whatever we need to do in order to get a store opened. But this tells us what we have, when we're running out and when it is that we have to replace them. So combined with the survey, the market strategy that I just talked about and these tools like the ant tracks, those become our land search rules. And as I tried to reduce it to its most elementary, I use an image -- we use the image at our -- in our land groups, of a student, first year out of a business graduate school. I went to Cal so I use [indiscernible] all the time. Is that it's my first day on the job. How do I find success? How do I define success? What will make me successful? And the formula can be very simple. If you -- if this is my territory, if this is my geography, go find a hundred lots in Murrieta, California where we can put our 35-wide product on to support a $300,000 house. That means you can pay $120,000 for the finished lot. You do that, you're successful. Very simple. All the function of our land search rules.

What's our competitive advantage in doing that? We know what we're looking for. We know what we can afford to pay, and we can act and transact quickly. That's very important for sellers. Not just acting quickly, but reliably. We're not simply responding to broker packages or deals that come in over the transom, we are pitching deals, not necessarily just catching opportunities. And when you know what you're looking for and you can contract with a seller on that basis, you're going to close and that creates a much better reputation.

I also want to point out -- and you heard about our open series. That's a critical piece. That's a very critical piece for the whole land acquisition because, one, you know what you're building. When you repeatedly build the house, you understand what its costs are, which helps you understand your residual. You know your build time. If Robin is building a house in 52 days, what's my carry on that house? My carry on that house is going to be substantially less than if I build that house in 80 days, which means what? I can pay more for the land if I have to. I don't want to, but if I have to. So understanding the product having the open series is indispensable to our land acquisition strategy. As I said, moving quickly and reliably is important and critical to our success in the land acquisition business.

One point of illustration on this, and that is our relationship with sellers. Within the last 12 months, there are over 40 deals that have either closed or in our pipeline today with sellers with whom we have done repeat business, 40 deals. You can't do that if you're acting opportunistically. You can't do that if you're only catching deals versus pitching deals. So speed and reliability has really made a difference in our efforts.

Land committee. You can see who are members of that land committee. You might ask yourself, "Well, every public builder has a land committee, so what's the big deal." And they probably do. To me -- and what I've been able to discern over the years, is that what distinguishes us from most is that we act speedily, we act decisively. A package comes in by the Wednesday deadline. The next Monday, we have a meeting with the division, and we make a decision on that package. The reason we're doing that is not because it's simple, because it's not. In today's day and age, it's very difficult. But the reason we're able to do that is that when the package comes to the land committee, it's not the first time we've seen it. Either Jeff has stood on the property, I have stood on the property, the opportunity has come up in a operations -- regular operations call with Jeff and Jeff or weekly calls that I have with the divisions. So that's why I like to think that land committee is a process and not simply an event on Monday. That's why we're able to act decisively.

I just want to touch really quickly on our underwriting standards. Now clearly, there are gross margin standards. There are internal rate of return standards. We try to keep a 2- to 3-years owned supply -- supply of owned lots. We target 12 to 15 months of getting cash in from closing.

Somebody last night asked, and I wanted to just address it. I mean, last night, at the dinner and outside, addressed the question of, "Escalating land costs, are you baking in inflation?" The answer is no. We are not baking in our inflation in our underwriting standards. Our land teams in the divisions bring us the deal based on current pricing and current costs. The margin will be what it will be. The internal rate of return will be what it will be. It's then coupled with -- and the challenge back to the division is if it, in fact, does not meet the hurdle rate, what's the road map? How are you going to get it to a better margin, a better internal rate of return? And you can't simply bet on inflations to make it work because that's just passive. We don't want to be passive. All that means is you can do the same thing tomorrow as you did yesterday, relying on inflation and hope it works. The issue was, "What are you going to do different today than you did yesterday in order to make the margin work?" Whether that's a faster build time, as in Rob, whether that's reducing the directs, whether that's relying on the studio, lot premiums, all the tools that we have in our tool shed. In other words, relying on our business model to make it work. It takes a team to make all of this work. We've increased our land teams by about 30% over the last -- since last July. More importantly, however, these new hires that we have augment fees and teams. Jeff talked about the seasoned teams that we have generally. On average, the senior leadership in our land acquisition teams is 17 years. On the land development side, it's 19 years. These are seasoned veterans. Why does it make a difference? When it comes to acquisitions, again, it's a relationship, and having successful relationships, what's the definition of a successful relationship? Somebody asked me last night, "Are you getting any deals?" No, we're not getting deals if you define deals as making a bargain buy. In the markets where we want to play, it's pretty efficient out there. We don't pretend to say, "If we get one, terrific." But we don't define the relationship, saying, "I'm going to get something off of the price." Successful means I get first call or last whisper on a deal. That, to me, is the definition of a successful relationship, and that's where we thrive. And you can see this is only a partial list of the sellers with whom we have done repeated business and with whom I think we have fantastic relationships that feed our land pipeline.

From a development standpoint, that seasoned team allows us to self develop our lots. In a world of diminishing finished lots, you have to be able to develop your own. And you can see, some of the times that we're able to achieve in developing, it's all dependent on the divisions and everything is fact-specific. But in terms of our development expertise, it is very good. And in fact, we had a situation last week, where we found a vacant -- we found a finished lot deal down the street from another deal. But the premium that the seller wanted for the finished lot deal, because of the speed with which we are able to develop, we can be into the lots cheaper than having bought the finished lot deal even though it would cost us maybe 2 to 3 months of time because we actually have to develop, but the margin we get from the developed deal made that much worthwhile.

So we have the strategy. We have the capital. We have the people, and we've raised the bar. And we've translated all of this into action. As you can see, we have spent about $800 million for land, land development and fees in the last 12 months. But more importantly, we spent almost as much in the first quarter of this year as we did combined for the previous 2 quarters, and we are on track to spend about $1 billion during 2013. And as Jeff said, he has given me at least $1 billion to spend, and I like spending.

And it's paying off in our community count. The downward trajectory here that you see in a number of our communities have flattened out in the last 2 quarters, and we're on track to hit our 15% year-over-year increase in the average community count in the fourth quarter. So that trajectory is going to go the other way. So when you add it all up, it's a formula for success, our business model plus our disciplined fact-based approach plus our financial and human capital, puts us on track to deliver on our growth goals. Thank you.

Question-and-Answer Session

Albert Z. Praw

[indiscernible] Questions. Yes sir?

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

My name is Bob Wetenhall from RBC. Just externally, if we're trying to track the inflation that you're experiencing on your portfolio to make incremental land acquisitions, should we just think that, if ASP is going up 8% on the organic side -- it was up 24% in the first quarter but it sounded like 8% was the organic. Can we make the assumption with confidence that your land cost also rose by 8% and what's that kind of correlation?

Albert Z. Praw

Well, it's always, of course, geographic, right? It depends on where it is. But in some of our markets, I would say it's growing by 8% and in some maybe by 15% and some, a little less. But that's a fair range in many of the markets. In some markets, I was sharing this last night with dinner. Phoenix is back to $1,200, $1,300 a front foot back to some of the pricing back in '05 and '06 -- early '06, at the heat of the market. Sacramento has come back with -- a lot of it depends on the geography and whether you're selling finished lots or just dirt to develop. There's clearly a big premium in preferred markets on finished lots that may make that 8% look small.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

And just on -- just one quick follow-up. How do you risk adjust your land investment to account for the fact that unentitled dirt is a lot riskier than finished lots? Is it done through IRR? How do you show that?

Albert Z. Praw

First of all, we don't buy unentitled dirt. That's the one -- we don't do that. We'll tie up unentitled dirt. So we'll tie something up, put up a deposit with -- looking at Chris, because that's part of his business up in the South Bay. Steve's got a feel, but we won't close all the time. So that's out of the equation. So we'll at least have a map. In California terms, we'll have a map. So the discretionary approvals are behind us. Nobody can say that you can't build the density and the residences that you want.

Steve?

Stephen Kim - Barclays Capital, Research Division

Yes, Steve Kim from Barclays again. Albert, I guess, what I was intrigued by was your land strategy mix matrix was very data-driven, based on historical -- observed results, which by definition means it's somewhat lagging. And land, by it's very nature, because you're not going to build on it today, is inherently forward-looking. And so, it strikes me that at certain points in the cycle, when you -- particularly when you have rapidly accelerating prices, that there is a degree to which companies, that are very diligent about sticking to data, will tend to underperform companies that will be a little bit more fast and loose and go on gut instinct. First of all, I was curious as to whether you agree with that general statement. And secondly, if it's been made clear from the management team that you're willing to make that tradeoff?

Albert Z. Praw

Generally, I'll agree with the comment that if you're always looking backwards, you'll run into a wall, right? I mean, I sort of understand that. But I do have to say that if we had played that out the way we did, we'd still be chasing the foreclosure homes and the pricing on the foreclosure homes, and that's not the case. So we're not doing that. Our data is updated. This is -- it's never going to be realtime. But again, part of the premium that comes with the seasoned veterans, not only just in the land teams, but in our division management have a very good feel. The idea of being -- when you're in the business 17, 18 years just on average, you've seen this movie before. You have. If you believe there are no new ideas in life, you just sort of go back and pull out some of the old ones and see which applies, that's what comes with experience. So I do agree with you that if all you're going to do is look backwards, you'll never get to a point in the future. But I think we're pretty on top of it.

Buck Horne - Raymond James & Associates, Inc., Research Division

It's Buck Horne. It's Raymond James. Based on what your data is telling you, if you had to rank order some of the criteria -- or the characteristics of the land that you're looking at today, based on what the buyers are finding most important, what you're emphasizing is the most important characteristic, is it school quality? Is it proximity to employment? Is it access to public transportation or square footage for the dollars or something. What's the most important defining characteristic on what you're looking for that brings absorption in margins right now?

Albert Z. Praw

Why don't I ask -- can I -- do you mind if I ask a couple of different -- because markets differ, okay? So in Houston, in Houston, for example, the first question, second question, third question might be schools, okay? And no count. [indiscernible] Rob?

Rob McGibney

I think they're all big. [indiscernible]

Albert Z. Praw

Vinney?

Unknown Executive

[indiscernible]

Albert Z. Praw

Transportation is big in it. Quite right. Jobs also.

Larry?

Larry E. Oglesby

[indiscernible]

Albert Z. Praw

Mike?

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Mike Rehaut, JPMorgan. You've mentioned before on pricing of land and certain markets getting back to peak and, particularly, on the finished lots side. So how does that influence the mix of land purchases in terms of finished versus partially or undeveloped lots over the last 12 months, and -- maybe you could kind of give us a perspective where you were 12 months ago, what you think the mix will be going forward.

Albert Z. Praw

I'd say that if we're looking -- we have some divisions that are self developing close to 60% and 70% of their lot today, up big time. I mean, if you go back a year ago, finish -- you can get finished lots. I mean, that -- and if you play the music -- I was sharing this last night. If I -- the benefit of hindsight, I wish I was back a year ago, buying Apple when it was at $200. That's -- it's the same idea what I'd like to have bought more lots in Phoenix than we have today. Yes, of course. But -- So to me, yes, I just look at the percentages of what -- where we self develop. And in most of our divisions, I think we're increasing the self-developed from anywhere from as low as perhaps 20% to 30% to close to 80% today in some of our divisions. Last one.

Unknown Attendee

Albert, you talked about the market's being efficient now. Is that requiring you all -- and you've talked about some overheated markets, is it requiring you all to change product or try to push more move-up product? And that's the first part. And the second part, on the gross margins, are you seeing the pricing today to be accretive to gross margins, or just keeping them static?

Albert Z. Praw

Well, Jeff talked about where the margins go, and I think you'll -- they're going to touch that again. But in terms of -- Jeff made a, I think, a very strategic move when we started addressing a different component of that first-time homebuyer. And that is a -- that's a homebuyer who has greater buying power in all of our markets and is allowing us to get the additional margins, let alone be able to get through the credit process a lot better and faster and more reliably than maybe we were focusing in on back a couple of years ago when we were chasing the foreclosure market. So I think that has -- and I think that has been a big part of where our success has been in this last year.

Oh, there is a break, and the break is for how long?

Jeffrey T. Mezger

10, 15 minutes. Let's try to be back here in quarter to 2.

Albert Z. Praw

Quarter to 2. Okay. Great. Thank you, guys.

[Break]

Jeff J. Kaminski

Okay, we're going to start the next session here. We have 3 of our division presidents with us, 2 from the West Coast region and one from the Southwest region. We're going to start with some introductions, each at once is going to go through sort of their regions and give you a very high-level overview, very quick overview. And we're going to focus most of this on panel discussion and then some open Q&A at the conclusion of that. But we thought it would be best to really bring in some of our senior executives from the field that are actually running our homebuilding operations and to go through some of the business issues and some of the operating strategies that they're employing actually at the ground level, to give you maybe a little different and deeper perspective on our company and what we're doing out in the field where it makes a difference where we're making our money. So with that, I'm going to turn it over to Steve Ruffner. He's our division president of Southern California. And I'll start with a quick overview on SoCal, and then we'll move through the group, and then I'll get to the panel. So, Steve?

Steve Ruffner

Good morning. Part of our business is really convincing land sellers and people at cities and counties that we do business that we're experts. I've spent half of my life with KB Home trying to become an expert at homebuilding, and we do a lot of things outside that you don't know about. We go and speak at the Building Industry Association meetings. We speak at University of California meetings. We speak constantly as an expert in the market. And we speak in front of cities, counties, elected officials, land sellers, and you ask about what gives you an advantage? Well, these folks like scoreboard and performance. And when we leave a community or when we enter it, we want to leave a fingerprint of expertise and we want to leave a fingerprint of we care, I'm a part of your community. And this is what we sell the land sellers. And we tell them, "You're going to hear all of this stuff from these guys, but we've been building this city for 30 years. And if you want your community to get approved at the best value with a low-cost producer, I'm your guy. I know how to do it." And this is where I spend a lot of time trying to PR out. And it's a lot of nights, it's a lot of grumpy time in my life at home because I'm late. But that even today, we do a lot of things that you guys don't hear about which separates us from the chaff or separates us from people that haven't been working in this environment for the last 25 years, like I've been in SoCal.

Our business is large. We've been bigger. We know how to be big. What gives us the authority to be big, as we have been in the market for a long time and every asset in these markets, we know about.

Now we have folks on our land departments that have as much or more experience than even I do. But at the end of the day, we know with Southern California, we have senior leaders in every major market that live there, that go to school there, that understand the market. This gives us an edge over people that are coming new to the environment, and we think all public builders in California are new. We have been here longer in Southern California than anybody else. We know these markets, we know the cities, and we're big. Our scale gives us permission to be aggressive with sellers. We tell them, yes, we might be in second place but that guy will never close.

Look, we did the most units in Southern California last year. Our revenue is almost $400 million. Our average selling price is heading for $400,000. We built inner city -- hey, look, land developer. And then there's relationships to play out. The Lewis Corporation. We bought their company. We were a part of that. We know the people. They're like a member of our family. They're going to produce lots, and we're going for be part of that.

The airline companies. It took us 5 years to get into a position where the airline company, where they have 100% confidence in us because we proved to them during the downturn that we are the low-cost producer and we deliver on our promise and we always open on time.

We showed them our product. We toured these developers over the last 3 years of all our product from urban down to detached home. We can build every type of residential products in SoCal. Many people have never done that, many people don't know how to do it. We have the team to do it.

Our footprint. We have 27 open communities soon to be open. We have 20 active right now. Our footprint gives us a look at the market that other builders do not know. So when you talk about, hey, people are inflating land value. The guy that's shooting from the hip is going to be more successful. All we got to do is know what the demand is in that market from existing communities and our pricing power and we know we're not writing inflation in that deal. We are comfortable with that asset at that revenue, and we go sell to developer or the homebuilder or the person delivering the lots on there or the city because we say, we're already there. We know what our price points are. These guys, they've never worked here before. Do you want to spend 6 months doing a deal with them when you know they won't close?

Diversity of products. Touring land developers. Touring cities, touring politicians, touring customers, reading our surveys, our market strategy. All of that is important, and showing the diversity of our team's skill sets really helps us win. And you ask how we do it, we've been 4,000 units a year. We know how to do it. We have all of our senior leadership that was here at the 4,000 units are still in place on our land teams, and we know how to expand just by denotably adding boots on the ground to build more houses. But our operations team, our customer service team, all of those folks are in place and they're the same people that were here when we were gigantic. Now we're just the [indiscernible].

Playa Vista. Our relationship with the Irvine company on the Brookfield Home. We were able to buy Playa Vista, probably the premiere asset in Southern California. We got 2 communities in there. That community took 22 years to just entitle. There is no more new housing going on in the West Side of L.A. any time soon by Marina del Rey. And because of those relationships we developed, we were on that team. We were in a bid. We knew how to get there. The Irvine company helped carry a major weight with our apartment bid. And at the end of the day, it really paid off. Rancho Santalina, the net-zero homes. We are cutting edge on technology, the same consumers money, San Diego Gas & Electric helped sponsor that. Edison knows us. We've been working with Edison for 50 years. We have relationships with top-level excellent people in all the major utilities, from water department to pretty much any municipality you could think of. So what gives us an advantage over the other guys? We have a scoreboard. We've been in this market for 25 to 30 years, just our existing team. And with that, I'll turn it over to Chris.

Chris Apostolopoulos

Thanks, Steve. I'm Chris Apostolopoulos. I oversee the Bay Area division in Northern California. I've been with KB Home for 14 years, been in the industry for 25 in Second Generation Homebuilder, and grew up in the Bay Area and that's where my roots are to this day.

In my capacity as the Division President in Northern California, responsible for and oversee everything from land acquisition on the front side all the way to customer service on the back. We operate in 14 diverse markets in Northern California, some of the most expensive real estate that's out there. Last 12 months or last 4 quarters, I should say, through Q1, we delivered over 500 homes with an average selling price of $552,000. Total revenues of $284,000. Typically, our business is the most capital-intensive in the company and operates at the highest selling prices. As Steve talked about in terms of where we are today for our division versus where we've been, in the peak, our market did about 16,000 new homes. Last year, it did about 5,500. So we're really excited about the opportunities for growth heading forward.

Looking at where the market has dropped in terms of new and resale, we're about 20% to 25% off of the peak. So again, ample opportunity to grow, ample opportunity to take an existing platform as the largest builder in our market for the second consecutive year and 4 out of the last 5 to continue to expand our KBnxt platform and grow into other markets.

As I said, most of our current communities are located in some very primary counties. Silicon Valley is a big foothold for us in Santa Clara. So San Jose, Contra Costa, Alameda counties, all the way down to Santa Cruz and then up through Sonoma is typically our footprint.

We do a variety of products and at the variety of price points, servicing a number of consumers. We do everything from a traditional single-family detached home in some of our suburban markets to our sort of staple, which is our attached product townhomes that has densities between 20 and 25 units to the acre, all the way up to our 4-story [indiscernible] condo buildings, which typically get up to 50, 60 and 70 units to the acre. Currently, in our portfolio, we have product that ranges from $300,000 all the way up to $1 million. So very diverse based on the submarket that we operate in.

The product diversification gives us a competitive advantage. Our ability to utilize each of our product offerings for the highest and best use on the land application enables us to do things that some of our other competitors won't do in our marketplace, which is why we've continued to be successful since 1986 when we first incorporated into the Bay Area. We've been there for 27 consecutive years, never left the market and have continued to be a dominant market leader there.

And with that, I'll turn it over to Rob.

Rob McGibney

So my name is Rob McGibney. I'm the Division President for our Las Vegas operation. I have been with KB for 14 years, which is the same number of years that I've been in the industry, so my entire career at KB. I started off as a financial analyst, and my main job there was to analyze land deals and put together the pro formas for land deals that we wanted to do. And I didn't realize at the time it was a really good foundation for me because I got to see a little bit of every piece of the business as we put that into the pro forma. After doing that for a couple of years, the management at KB decided that it'd be a good idea to get me some more exposure to the nuts and bolts of the actual building operations, so they put me out in the field as a land development superintendent. So I went from sitting behind the spreadsheet all day to out trying to manage contractors with big heavy equipment. So that was quite the transition for me, but it was good experience. I got to see a lot of different pieces of the business that way.

From there, I went back into the office. I held various management positions, as you can see here on the screen. And ultimately, right now, I'm the Division President.

Just a little bit about our business at a very high level. For the 12 months ended in Q1 of '13, we had just under 500 deliveries, average selling price of $205,000 and total revenue of $102 million.

For some perspective on the market, you can see that the peak in 2005 was 39,000 homes. Last year, 5,600 homes. So a big change, I think, and I hope that, that means we've got a lot of runway in front of us to grow the business and grow the market.

Total new and resale home closings were $64,000, so the entire market was still very, very active. It's just that the lion's share of those -- the vast majority of those homes were resales.

In 2012, we were the #2 builder based on units delivered. Obviously, I'd like to change that number back to 1.

This is the footprint of where we're building in Las Vegas right now. We've got 10 open communities. We've actually got 6 new communities opening between now and the end of the year. We have a centrally located studio. It takes, from any of our community's maximum, maybe 25 minutes to get to our studio. So it's one of the advantages of being a fairly small geographical area in Las Vegas.

We also operate in all 4 of the jurisdictions that make up the Las Vegas valley, which is Henderson, North Las Vegas, City of Las Vegas and Clark County.

Just quickly on the product. This product in the upper left-hand corner, this is our Landings at Talavera product. And this is kind of the heart of our series, the KBnxt series. We've got this -- this is a 25-foot wide product that typically fits on the 35x100-foot lot. But our strategy with this and the other series like this is to really offer the buyer the most square footage that we can for the money and give them the best value and then let them customize the home the way that they want through the studio.

The picture on the lower right, we use this more selectively. It's probably less than 10% of our business. But where our market survey dictates it and the statistics we're looking at dictate it, buyers are looking for a little more. We'll build this type of product. And you can see from the elevations, it's a little higher level of detail.

A couple of interior photos. These are the same houses that I just showed you before. The one on the upper left is from our Talavera product, the Landings product. And the one on the right is from Hillcrest. Again, you kind of see the same trend there with the level of interior appointment.

So I'll turn it back over to Jeff.

Jeff J. Kaminski

Okay, we're going to spend some time now just in kind of like I said, a panel discussion. I wrote some questions to ask to the guys. At the end, we'll open up to general questions from the floor. I thought it would be interesting to share a bit of how we're implementing or accelerating profitable growth strategies down at the division level. And again, letting some of the senior executives at the division level share with you guys a little bit of what's been happening on the ground.

The first question, I'm going to address to Chris, and then Rob, maybe you could fill in with a little follow-up. But we've been putting a tremendous amount of effort at KB on improving our gross margins and in turn, our operating margins. And we talk about it at Presidents' meetings, we talk about it monthly during our financial reviews, I think top to bottom in the company, there's a pretty good understanding of where we're going with this. And I think it'd be interesting for the group, Chris, if you could share a little bit about what you're seeing and how you're leading your business and basically consistent with that strategy?

Chris Apostolopoulos

Sure. As I mentioned earlier, and we discussed a little bit yesterday throughout dinner, in the Bay Area, it's obviously a very capital-intensive market for the company. And so margin and returns on that investment is critically important. So it's always been something that we had been very focused in on, even more so in the last, what I'd call 12 months.

We typically view our communities, and you guys have heard it on the earnings call where Jeff refers to them as these jewel boxes, where we definitely look at optimizing each individual asset for price and pace. For us, we look at these as irreplaceable assets, and we look to maximize the margins in a controlled environment by looking to either manage our releases, consistent price increases, where the market will allow us to do it. Our size and the revenues that we're able to produce allows us to leverage our SG&A, which is some of the lowest in the company, which really enhances our operating income line. And as the market continues to get better and we continue to control our costs in this expansion, we're seeing some nice improvement both on the ASP side, as well as the operating income side.

One of the other things that is critical for us is our studio. Our KBnxt business model and the Built to Order is something that resonates with the consumer throughout our entire product offering. Whether it's a single-family detached home in Morgan Hill or a townhouse outside of Santana Row, our buyers enjoy the ability and the flexibility to personalize their home, pick their home site, whether it's an end unit in a townhome or a large lot at the end of a cul-de-sac. We maximize our lot premiums accordingly, and we also look at the studio where we're able to offer a number of options for them to truly personalize our house, increase our revenues and also improve our operating income and bottom line.

Jeff J. Kaminski

Rob, can you add to that a little bit?

Rob McGibney

Yes, I mean I think Chris covered a lot of the same things that we do in Vegas too, with just a couple of specifics. You mentioned lot premiums. Premiums, whether it was lot premiums or plan-specific premiums or elevation premiums, those really went away to -- for the most part, in the darkest days of the market. I mean, that was the first thing that buyers wanted to negotiate out of their deal with any kind of lot premium. And now, we're getting back into a market, we're creating that value and we're able to charge for it again. So we've got a really intense focus on making sure that we're getting the premiums where we are adding the value where there's still a lot or a elevation premium.

The other thing I think I would mention is we're grand opening a lot of new communities. As we open those communities, it's really important to open up at the right price. If we -- with the market moving up quickly, it's hard to pinpoint. And by the time you pinpoint a price and you're opening up 2 weeks or a month later, that may not be the right price anymore. So we go through a pretty strict intense process where we're gauging interest in plans in the community, finding out at what price points buyers are willing to purchase, it helped us open up at the right price and not leave any money on the table coming out of the gate because we're really kind of setting the stage for the whole community with our opening prices.

On the cost side, I think one of the important things for us is our standardized value-engineered product. I think you've heard us talk about that a few times last night at dinner and then again today at the presentations. But doing that, we know exactly what our costs should be before we go into this community. It's not like we're just bidding this out and going to see what the cost comes back like. So we know the product. We know what our costs should be. Our trades know the product because they built it before, and they're not putting any kind of extra contingency in there or cushion in there because they don't know what they're getting into.

Jeff J. Kaminski

Right, thank you. I think we're going to turn now a little bit to sustainability. Dan had a slide earlier where he was talking about turning green into gold. And he talked a lot about what that means to the consumer as far as monthly savings and what it means on the sales front. Green to gold also means green to gold to KB, and I'm going to ask Steve to comment a little bit about some of our sustainability initiatives and things like our net-zero homes, our solar program, our WaterSense certification, what it means to our customers, our suppliers, the municipalities -- excuse me, where you operate, what that means to those cities and how it helps your business.

Steve Ruffner

Yes, in California, we're well coached by most of the municipalities on how we impact the environment. So it's not just a greenwash here in California, it's reality. You have to prove off that your community environmentally is impacting less than the prior use or no work. And so what we used and the tools in our toolbox that -- are consistently our sustainability efforts that we do for the company. But that's really -- it gets down to -- those efforts save us money. When Dan said, "Oh, well, the dumpster's not full of stuff." Well, yes, we don't want a way so we can keep our costs down, and the 2 are a good marriage on managing the costs. The second part of it is, the solar initiatives in the net-zero. Solar let us get to the net-zero. We knew we have a goal here in California where all new housing has to be net-zero by 2020. And so how do you make that affordable to your consumer and get a competitive advantage against your competitors in resale? And so we decided to put our effort into it now, knowing that the technology will continue to get more and more affordable, kind of like a flat screen TV did over the last 10 years. We believe solar is going to get more and more affordable. We picked a solar partner who wasn't relying on government financing to run their company. It's a well-financed company that's really structured to continue on and sustain. And not only that, it's not a foreign country. It is a company that's based in California, and they're a California business which actually means a lot to a lot of municipalities that we work with. But to our customer, really, the sales and the advantage we get is really cost of ownership, which, hopefully, I can explain to you guys that while I was -- they're going on tour today how that works. And then I think yesterday, you got a glimpse of exactly what the customers' buying power improves with our -- all of our solar initiatives. As far as net-zero, someone brought up "Well, no one takes net-zero." Well, really lifestyle and the way someone uses a house, which is what we vet out in our studio, really helps us guide them to the energy-efficiency level they should get to get close to net-zero. If you and your wife work and your kids are in school, you probably don't need all the menu items of net-zero to get close to net-zero. So we will coach them, "Maybe you only need this and this", and the cost gets down and your benefits are quick. The other thing that we think it does and where there's been studies by Real Estate Economics here in Orange County, as well as Cal, Berkeley, we feel value improves between 10% and 15% on homes with energy efficiency and solar built into them. And we think that matters to the customers since they typically live in our homes 7 to 10 years. We can actually say that our product is going to hold up long-term and is going to have a higher resale value for you than a house in the streets that doesn't have any.

Jeff J. Kaminski

Okay. In -- around the country, we operate, obviously, in 33 different markets. Some are more land-constrained than others. The 3 guys up here today, all 3 of them operate in very land-constrained markets. A lot of people don't think of Vegas as land-constrained. And I'm just going to start with Rob on this question to have him respond, but it is a land-constrained market for us. And what I'd like you to comment on, Rob, and maybe follow up with Chris, is comment on what that means to you as you're running the business, what it means as you're searching for land. We all know there's pros and cons from being in a market like that from the point of view of barriers to entry as a pro and difficulty to find land as a con. But what does that mean in how you run the business, how you're looking for land and the processes that you implement to be successful?

Rob McGibney

Okay. First of all, when I tell people that Vegas is a land-constrained market, I feel like I've got to justify that or prove it because people fly in and you see a lot of open desert everywhere and think, well, this is unlimited opportunities to build houses out here. But it's really not because the lion's share of what you see is either owned by the BLM or has some other kind of restriction on it, which makes it not suitable or open for residential development.

So it is very land-constrained and it makes the market -- the land market very competitive. Like I said earlier, we're opening 6 new communities between now and the end of the year, so we're doing well with getting land in a land-constrained market. Our land search function that Albert mentioned earlier is a key to that. I mean, we have a dedicated team that's looking for deals. They're on the computer, they're looking through GIS exhibits trying to find those deals that may not have hit the market yet and get those tied up before they're -- they go out to a broker and just get market into the whole free world. So that's one of the things that we do to operate and kind of get a leg up on our competition in a very land-constrained market.

While it makes that process tough and prices move up quickly when the market's improving because there's not a lot of land out there, that side of the coin, it's kind of tough. But on the flip side of that, for a position like we have in Inspirada, it's a great thing. I mean we have a lot of land in front of us there. We have a basis in that land of around $120,000 an acre, and there's plenty of land in Las Vegas right now. In inferior submarkets that's trading in the mid-3s, approaching $400,000 an acre now. So where it's challenging for us on one hand, it's also a very good thing for us on the other.

Jeff J. Kaminski

And, Chris, can you comment to the Bay Area?

Chris Apostolopoulos

Yes. Many of you, we have some conversations about land in the Bay Area. And one of the benefits and one of our strengths there, as I mentioned in my opening comments, is the fact that the consistency of how long we've been in that marketplace. We've been there since '86 for 27 years. We've got a very seasoned team on the front end of the business. And for us, it's something that we've earned a reputation in, a consistent buyer of lots, but more so, we do a lot of repurposing of sites where we'll do our own entitlement work. So our view on the land buying site is typically a little longer horizon where we'll buy short-term, medium and longer-term opportunities. As Jeff mentioned earlier and Albert was referencing in his comments, we'll do a lot of deals where we'll put up deposits, begin the entitlement process, control the asset. And it could be anything from a complete rezone of a site to completing something as simple as a final map. So we buy everything from entitlement deals, and by that I mean we'll own and control it and close them once the entitlements are completed to ensure that we've got a nice consistent pipeline of lots. The -- our business there, that's not something that a lot of our competitors do. They have left the market and reentered when the times were good. And for us, that stability in that location, the credibility that gives us with the municipalities that Steve was talking about earlier, that when we come to town, they understand that we understand how to get deals done, how to get the entitlements through and how to get our communities open. And it is a specialty that our group has mastered over the years, and they do an absolutely fantastic job in bringing communities to life.

Jeff J. Kaminski

Great, thanks. I think everyone's aware, and if you weren't at the start of the day, you're definitely aware now, half of our business is here in the state. We're a huge builder in California, #1 ranking for both these guys in the markets where we're at. We're #1 in units for the whole state and we have been for quite some time, and we believe we're very much competitively advantaged in the state of California. One of the things that comes with that are, I think, tremendous benefits. And Steve, I'd like to direct this one to you. There's a challenge in maintaining and growing that, but at the same time, there's a lot of benefits from being there today, from the scale point of view, et cetera. But can you comment on that and how you see it as the President of SoCal?

Steve Ruffner

Yes, like I said earlier, we get a view of the market that's much more macro than other builders since we're in all of the markets right now. We know where we have pricing power. Our market strategy tells us where we want to be. Our data supports our price points. We know where the ceiling lies. So if someone came in and bid against us on a project and we knew that buyer couldn't afford outside the FHA limit, we would probably not chase that through the cloud like somebody else would and we would hang around the rim for that deal to drop back, because one thing we've learned is most of the public builders have people that want data-driven decisions, but a lot of them don't have the data. And so when we sit with the sellers, we actually can get them to believe in our process. We have a full-time data group in our division. So we actually employ 2 full-time people that track market data, as well as trends and as well as all the competitors and all the resale. So our data is real. It is real-time, and we update it every single week. And we talk about it when we do our pricing, balance our absorption rates with our margins and our ASPs and we know what we're doing because we know what's going on in the market in real-time. Many of these other builders just don't have the scale to afford to do that and they don't have the footprint to do it, and so they don't really know what's going on. Many times, the county supervisors or a city council member or some congressman will reach out to us, actually asking us what's going on because they see us as the market leader and the most knowledgeable person in their community.

Jeff J. Kaminski

There's been a lot of talk, especially from the analyst community, on what's happening with these ramp-ups, both industry volumes in general and more specifically for KB. And there's been some -- a lot of press on it. There's been a lot of discussion during earnings calls. What it's doing on the supply side, labor constraints, pricing on labor materials, what it's doing for land scarcity, et cetera. Build time impacts is another one. So on the sort of the flip side of what's -- what we've been able to do with market pricing, we have some of the negative effects that we're trying to deal with as well in our business. And while all these guys are dealing with them, when in fact, we're dealing with it across our footprint, I think I'll ask Rob to comment on some of the specific things you're doing in Vegas, how you've seen that from an operating point of view and what kind of strategies you're employing to guarantee success there.

Rob McGibney

Sure. There's no doubt, as the markets ramped up, it's put pressure both on pricing and on the schedule. I mean as far as getting labor, labor availability, getting crews to show up to the job site in order to manage the level of production that we've got going on. I think the -- probably the worst that we saw was last summer, and it was mainly related to framing labor and framing material. We saw some delays, we saw some extensions of our cycle time during that period. But I think one of the keys for us is we've got some really long standing relationships with key trade partners in our market. For example, our top 2 framers, I think our relationship is -- goes back 14 and 15 years respectively. Our lumber suppliers, about 11, maybe -- probably 12 now, actually. So it's not a short-term deal with these -- with them or us. We're both looking to make each other successful, and they're not looking to hit a home run on us when the market gets tight by jacking up prices or hurting us on the material deliveries or that type of thing.

We talked a little bit earlier about our cycle time in Las Vegas. We're building houses right now from 53 days from the time we start the home until we get the city building final. And that's pretty fast. So a lot of the labor's come back into the market, and just due to our processes and efficiencies that we talked about earlier through having standardized value-engineered products that we know, that our trades know, we're able to still build very quickly and efficiently.

Jeff J. Kaminski

Okay. I think as you guys could see from some of the photos the guys brought on the product that we're building throughout our footprint, where, I'd say, masters at a variety of different product types, and each of those product types stand within our KBnxt business model and our approach on Built to Order. And we have to make certain refinements, for example, on attached product, where you had to build buildings, how do you still a lot of choice when you're building buildings with 4 or 5 or 6 units in the attached buildings. So I'm going to direct this one to Steve, and then maybe, Chris, you could follow up with a bit of an enhancement. But maybe you could talk a little bit, Steve, about the multiple product types you offer in Southern California, reasons why you do it and then, once you're building these different product types, how you fit that in to the Built to Order model offering consumer choice and staying with the concepts of KBnxt.

Steve Ruffner

Yes, we have several different consumer choice strategies. In the urban strategies, where we have built some podiums, like Chris, and a lot of what we do is basically slab on [indiscernible] products which means 15 and 25 to the anchor. The challenge is you have to build a group of houses at one time, it's just the way you have to do it in the municipality. So then how do you allow the customer to still have their choice? Chris introduced this to me about 5, 6 years ago. We call it the whitebox. So what we'll do is we'll build the unit and finish the outside that would not change structurally from one pod of townhomes or condos to another or even detached units, and we will presell those units but we will also allow the consumer to choose what goes into their house or their studio. As the process goes, because the build cycle time could be just a little bit longer than typically we would have with the SFD products. And what that helps us do is keep their cycle time short but allow them the choice model that we really think gives us a significant advantage against the resale that we're up against in the new home communities. So we do a lot of that.

In the inland areas, we really drive -- we use the studio to help sell our home. So we have this -- a browse process, where we'll recommend our customer to go to the studio to really get the experience to understand it. And the studio really emotionally bonds -- that process emotionally bonds the consumer to that home because it's their custom home that they are building for themself. And then we tell them, why would you want to go down and buy resale, that process can take 3 or 4 months when we can really build your house in 3 months? And so you get everything you want and you don't have to compromise.

And that's really, I think, our advantage to our business plan. I mean, just one more thing to touch on where Rob touched on, is that also helped our trade base. They know that we have a consistent start, finishes, even flow of production that allows them to plan their business for the entire year. Mike Gartlan, our finance guy, is here. He spends a lot of time on our sups, telling them what we're going to do and help them to manage their business, to help us grow and help them grow, and don’t forget that's the best value at the best cost.

Jeff J. Kaminski

And Chris, with you having probably the most diversity in the business, from the Bay Area and where you're building some unique products, you think you can add a little to that?

Chris Apostolopoulos

Yes, it is. We do have quite a bit. But as Steve alluded to, I'm kind of touched on, our product, even in the Bay Area, our town homes with the -- [indiscernible] and our in-house architecture group, years ago, we developed a more -- what we deemed our own open series sort of town home was a concept that Steve started down in Southern California with the single-family side. And we standardized our townhome that we now replicate to understand our costs, work with our trade base, to value engineer, to ensure that we're bringing our product to market in a very efficient manner on a cost basis and on a cycle time basis. The exteriors typically will change from municipality to municipality through design review, and that's something that we continue to work with them on with our relationships but the product in and of itself is one where we continue to allow buyer choice on your home site, whether it's an end unit, a townhome in San Jose, as I alluded to, or a cul-de-sac in Morgan Hill or in Dublin. In terms of the white box concept, where we'll finish the exterior of a building in a townhome or a condominium environment, the buyer still has the ability to come in and select their finishes; cabinet colors, granite countertops or tile, and really maximize the studio experience for all of our buyers, just as you would have if they were buying a single-family house. And the efficiency that, that creates on an even-flow basis to our trade base is predictability for everyone in terms of what's coming down the pipe, how to staff the jobs appropriately and I think it enables us to control costs as well.

Jeff J. Kaminski

Okay, just shifting gears a little bit but staying on the theme on California. So Chris, I'll come right back to you with this question and then maybe end with Steve. On the urban infill side of things, it's been really important, especially as the markets deteriorated, where people were able to afford to live closer in. And land availability is obviously very scarce, it's very difficult to do it. You had to get creative with deals, you had to have a unique viewpoint on it and really a nimble team to be able to implement it, but can you talk a little bit about your urban infill strategy? And how you've been successful, why you've been successful and maybe even supplement us with some examples of [indiscernible]

Chris Apostolopoulos

For us, there's typically not a deal that we do in our core Bay Area market that doesn't have some complexity to it, whether it is an entitlement that we still need to do, and/or a product type that we need to get approval on. But primarily, all the characteristics of our urban infill strategy fall on the same line of, we're looking for A locations, near job centers, close to transit for the commuters, that perhaps work in one location and drive to San Jose for work, as an example. And we're looking for smart growth that maximizes the highest and best use for each of the sites that we're looking at with our diverse product type. So we were having a little bit of a discussion, Albert and I earlier in the day, about at what point do you look at a townhome application versus a higher-density single-family detached, and we go through that analysis on each and every site as we are planning out our communities and determining what's the highest and best use would get us our best returns. And as I mentioned earlier, we do a lot of re-purposing of sites. We've got a community in Lafayette that was essentially an overflow parking lot for BART. It's toward downtown Lafayette, it's directly adjacent to the BART trains. So for many of you that are familiar with the Bay Area, that's the commuter train that will take you throughout the Bay Area and it's within walking distance to schools, to shopping, to everything, and it's in a market where there's an absence of new housing. And it is -- it was used to be a zone for office that was being used as a parking lot. And for us, we came in, worked with the city, we initially looked at the piece in 2005 and we closed on it and in the first quarter of 2013 and did a lot of work in between. But ultimately, that sort of perseverance and that sort of strategy and that location gives us a great advantage because we'll be the only game in town.

Jeff J. Kaminski

Can you describe that product type a little bit?

Chris Apostolopoulos

Yes, so actually, it's one of our condo projects, it's 4 storeys over Podium. There'll be 2 parking levels for the garage and its directly adjacent to shopping, directly adjacent to the BART train, it will be walking distance down a parkway that will be landscaping, adjacent to a creek in a beautiful setting in a market that the median sales price is well over $1 million.

And so it's something that we're really excited about. Another opportunity where we recently closed on was a site in San Jose. It was a retail overflow parking lot for retail that we're going to turn into multiple product lines of 243 units. They'll be coming to market here at the end of the fourth quarter. So something along those lines is typically what we'll do, not to mention that we'll always look at the finished lot deals at the end of the year in our fourth quarter -- our first quarter at the end of Decembe. We closed on a large transaction in Dublin that was finished lots on a relationship on a seller that we've been buying land from for 20 years. So it's a short-term, midterm, long-term view on all of our land in the Bay.

Jeff J. Kaminski

Thanks, Chris. And Steve, could you touch on just a little bit there in the urban infill strategy? And then we'll open it up for questions.

Steve Ruffner

Yes, one of the things about KB is having a centralized architecture apartments. So we actually used a lot of Chris's products that he's already tested or done in the Bay Area. They'll fit well in some of our communities that are higher income. Our strategy really is simply, to be big by being a little bit smaller in the infill built out communities. So in San Diego, we'll be a 30- to 50-unit, 2- to 3-acre deals, and we have a research team looking for those opportunities and then we can get an option going on in that property and convert its current use. It may be industrial or commercial use that's had its day, and it will always be in the high-income area so that those folks that are getting squeezed out of the SFD market because the price was so high, we can get them closer to work at an affordable price. So we do that along the coast, and we do use a lot of Chris's ideas and products that you saw up in the Bay Area. And it also helps us on cost and we can move quick. I think one of the things that came to light in the last quarter in Q4 and I think it helps for Chris too, is our relationship has helped us, we got calls from developers trying to make year-end deals because of some tax credit or whatever they were worried about. They called us, so we did do a lot of deals in Q4 and some spilled over to Q1, but that just kind of tells you that people know who their forward closer is in every area and that a lot of times the call comes to us.

Jeff J. Kaminski

You want to maybe reference a specific community or 2? And on the urban side, there's...

Steve Ruffner

Yes. We have a very long-standing relationship there with the former owners, we built 2 podium products there, the most recent was Primera Tierra, and one of the cool things about the whitebox effect on the Primera Tierra product where we allowed the customer choice, is once the building was done, I got to sit in each unit and we put together a way to maximize our margins by actually putting a lot premium for view, for light, for livability off the balcony, and for really the feel of each unit, and then we are able to put it on the market, knowing what the third floor may have a premium over second and first, and then our costumers got to come in and still customize the look inside to get exactly what they wanted. So it was a good marriage of maximizing the value there. We ended up selling those units for substantially more than resale of life size. And basically, because we could sell the energy efficiency of that building, which was the first lead platinum-certified building in Southern California, which, in the West side of L.A. meant something. The Irvine Company walked that product, the Brookfield Group, their development side walked that product. And so when Playa Vista decided to sell the rest of the community, they came to us as an expert in that market to tell them what the values were, how we got to where we were, and then we were able to team up with them in the bid process and secure probably the best asset in West Los Angeles. And that team, working together over 6 months, bought the assets and we ended up getting 2 really, I think, are going to be some of the best communities we've ever built. And a lot of what we learned in our podium and high density will come to fruition in our next series of products and we really think it's going to be outstanding.

Jeff J. Kaminski

Great. Okay, I think now would be a good time to open it up to questions from the room, and Susan, if I could get a mic to Susan here.

Susan Berliner - JP Morgan Chase & Co, Research Division

Susan Berliner with JPMorgan. Two questions, one, I guess starting with Rob. Can you give us an overview on Inspirada, where it stands today? Kind of feature and now you gave an interesting statistic before on the land value or the price. And also, I was wondering if you guys could talk about in your individual markets, what percentage of the homes are now upgrades and what are the -- what are customers looking for in terms of upgrade?

Chris Apostolopoulos

Okay. With Inspirada, it's a very good-sized master plan in Las Vegas, I think most of you are familiar with it. It was originally set up as a new urbanist concept, it had a lot of alley loaded product, front-loaded architecture, narrower streets, kind of a throwback to communities of old, I guess, going back to the '50s.

We found that while people like that, it's not necessarily the best use of the land and people aren't necessarily willing to pay a whole lot more for that. So while keeping the ability to build that type of product for working with the city on the entitlements to allow us to build more traditional product to getting back to building bigger homes for families with a yard. We're also keeping a lot of the core concepts of the master plan, as far as walkability. A lot of parks, I mean this place is loaded up with parks, so that we have a lot of outdoor recreation possibilities, pools, playgrounds, fields, that type of thing. So that's where we are. I assume that's what you meant as far as where we were taking the community.

Jeff J. Kaminski

I think a little bit on timing maybe.

Chris Apostolopoulos

Yes, timing. I'm not going to put a date out there for when we're going to be done, but we're basically very near the end of our discussions with the city. I would expect to have something, I would say, very soon, and I'll leave it up to you to determine what they say.

Jeff J. Kaminski

The second part of your question?

Susan Berliner - JP Morgan Chase & Co, Research Division

About the upgrades?

Jeff J. Kaminski

Oh yes. Steve, you want to comment on that?

Steve Ruffner

Yes, we don't comment upgrades, okay? That's not what the studio is really about. It's really about the customization process they can do to their homes. The most popular thing that we see right now is the studio, really varied by the market. In the coastal communities in Orange County, San Diego in the higher end Los Angeles, people are very into really options that will increase the livability, square footage or usability of their homes. So a lot of bedroom downs, a lot of den options, a lot of square footage options when they stay in their house. The other thing they're interested in is things that reduce the cost of ownership, so the water rise options that we have, the forward options, the Net-Zero options that you're going to see today are very impactful and very affordable. We call those a no-brainer pick, I mean, because if you buy it, you save money, so that's a pretty easy thing. And then I would say that in some of our markets, people like to show their wealth off. So in our move up market, they like to wear their wealth in their homes and a lot of cultures that we deal with wear their wealth through the kitchen and the appliances and named brands. That's why Dan is constantly working with Whirlpool, who has some really, really big name recognition with, Jenn-Air, with Kitchenaid, with MayTag, with Whirlpool, with -- I mean, what's great about that is that we can really stay with our national contract but get really high-end features of ours that want to basically show off their home more in an executive fashion.

Other buyers are just really interested in whatever is their fancy. So we don't try to guess what they want. We try to guide them and rudder them into things that will match their lifestyle. But typically, we spend a lot of time trying to understand how they're going to live in the house, what other goal is in their life, are they a first-time buyer and help them move to a bigger house in 3 years and we try to coach them in things that will help them do that so they can move into a move-up KB Home. But we do spend a lot of time with the consumer and we are somewhat of a marriage counselor. Typically, in the studio, there can be some debate as to what's more important and typically, the better half wins. And so we like to try and tell them what is the most economically used. And we coach them, coddle them and tell them they're doing the right thing. And really, the studio is a way to reinforce that they have customized their home and they have made the emotional choice that's the right choice to buy their home, and it's worked for us in the downturn and into the worst grade in the upturn.

Jeff J. Kaminski

Alex?

Alex Barrón - Housing Research Center, LLC

Alex Barron, Housing Research Center. I guess in the last year, and especially in the last 3 to 6 months, we have seen the home price appreciation go up pretty significantly in your markets, which is, I think, exciting, because it speaks to more profitability in the near term. I guess the flip side is, what's happening to the land cost? I'm wondering how you guys are thinking of how to handle what you paid for it and how aggressive you get? And what the margin outlook you think is for the, I don't know, 2015 and beyond?

Jeff J. Kaminski

Chris, why don't you take the [indiscernible]?

Chris Apostolopoulos

Yes, the market in the Bay Area, just like many of the markets, has moved pretty dramatically. In the peak, the median sales price of the 9 County Bay Area was almost $700,000. At it's lowest point, it was $290,000. And currently, it's, through last month, it's about $435,000. So you're looking at how we're going to talking about where the prices have gone and how they've bounced and there's 30% up year-over-year. You're still probably talking of a very, very low basis, that's nowhere near where the peak of that market was. So I think that there's going forward on the sales pricing. I think there's certainly some pricing power, at least that's what the data would illustrate. And I think that the land prices will continue to move as sales prices continue to move. The better locations will command the premium, then your B&C locations. For us in the Bay Area, as I mentioned earlier, we continue to look at opportunities, short, mid and long-term, to ensure that we have a consistent supply of a nice pipeline ahead of us. So we're very happy with the deals that we made a year ago, the ones that we made 2 years ago before the runup, that we'll be bringing to the market, and we're very pleased with the improvement that we see not only in ASP over the last 12 months but the operating income too in our business.

Unknown Attendee

Joe Locker [ph] with [indiscernible]. On the land purchasing that you're doing right now, what percentage of that do you have a profit sharing agreement with the land seller and what was it a year ago?

Chris Apostolopoulos

That varies deal to deal. Most of our deals do not have a profit participation, which is I think, what you're referring to. The deals that were clearly made a year ago or so that were competitive in terms of the pricing, those were deals that we just bought outright. In the past, I would say probably more, 4, or 5 years ago where people were hoping that there'd still be a bounce and some lift, we were doing more profit participation deals then than we are today. In our market, what we're seeing, if someone is playing on the appreciation side and waiting for that, they're just going to hold the land. A lot of times, what we find in our market is, that sellers do not want to do a lot of profit participation deals because they don't want to deal with the accounting number. And that process, it becomes very, very intensive. There are certain ones that do, but it's a minority.

Unknown Attendee

[indiscernible]

Jeff J. Kaminski

Steve?

Steve Ruffner

Yes, well I'll say this. As the master plan developers have always had profit participation during bad times, so it's typical. That ratio of participations changed a little bit as the markets improve. But the Irvine company, the relationship we have with them is a special one, and they really eliminate all your risks as far as off tracks, development, market risk, because they do such a great job in the community so you're really truly a merchant builder there, where you show up, they give you terms that are really great and then you are a homebuilder. You're willing to participate with those kind of partners, but what Chris said is very true. I haven't seen any big uptick in profit participation from land sellers that aren't the [indiscernible] as a new home ranch is or the Lewis Group. It's mostly because they don't have teams in place to really audit that process, and so they're more interested in just, are you a closer? So we hear that a lot. I mean they say, well show us your track record on closing, we want to make sure that you're a closer, and so we spend more time on that than we do talking about profit participation. And that doesn't seem to be a big bugger right now.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

It's Bob Wetenhall from RBC. Great color on your local markets. Just pointing out places like Vegas can be land constrained too. Trying to understand from a day today, it sounds like the biggest challenge is trying to optimize the trade-off between selling lots and building versus maximizing and pushing price. I'm just trying to understand how do you see this evolving? We obviously have some great tailwinds for the first time in a number of years. In terms of better demand, you got tight resale market developments, so the supply dynamics definitely helping you out. What do you do on a daily basis at this point, and how does this feed back to Jeff and Jeff in L.A. in terms of, hey, these guys did a great job. How did they coach you or guide you in terms of managing the inventory you have to optimize the return you get?

Steve Ruffner

I'm more of a carer than a stockholder. I don't need much coaching to trying to maximize our marketing. At the end of the day, I'm very focused on margin, having been with the company for 25 years. One of the things that we did is Jeff and Jeff and all of us know from prior experience, you have to reset the market yourself. You cannot rely on your competition to reset the market. I mean I was driving around last week and I went to some public builders that still have some large incentives, that sold 37 houses in 6 weeks on assets that were unreplaceable. So that's not a good guideline for what you want to do. So what we did in January and December, we shut down most of our communities for about 2 weeks. And we went back from intent process with a new price, we built a new intent group and we dramatically shifted the revenue. We wanted to be the pricing leader in most of our markets and we are able to achieve that. And even our own salespeople, at first, the reason we did it was we wanted to emotionally get them to believe the market was that strong. Rather than just chase units, we wanted to chase margins. So we slowed everything down on purpose, we reset the bar, and we got a whole new crew of folks in that really wanted a house. And then we really reached out to our realtor partnerships to help us drive the price up because there was no resale. So they had no option but to bring their customer to us. And in good and bad times, we'd coopted realtors and so it's been a good experience for them. And our realtor coop's gone up and they have real buyers and that realtors know the market better than the buyers, so they'll say, look, this is a great value, and you're not going to get a house, so you got to make a move. And all in, it was a great process. I would do it again if I had to. And that's why when we opened our models, we talked about our intent process, which when you guys go to [indiscernible] sale, you get a good feel for. You'll see our intent trailer. We deliberately kept it in place, where while we were building the models in the community, we were gathering interest, and we were testing the market with revenue pricing to see what the interest was. Once we built up that interest, we built the models and then we came out with our price, but we already knew from the process that, that price was going to maximize our value and our margins. And we didn't have to rely on a CMA because we bought that at a great price 12 months earlier. So you can't get caught up in "Well, it's an acceptable margin, so let's just run it hot at 20 a week." I mean that's not what we're going to do. We're always going to balance pace with margins. But sometimes you have to stop, you have to take a deep breath, you have to get your whole team back in order and you have to get everybody else to believe in it emotionally and that's what we did with the reset. And it was a great idea by Jeff and I'll tell you, it had a dramatic effect on our pricing power.

Unknown Executive

Well, you'll also have to remember too that we compete for capital. Meaning, we have a land committee that we go to and we make a recommendation on the acquisition of an asset and we're only as good as our last deal that we've done and the underwriting of the current proposal that's in hand. And when we're generating rate returns in our business, the capital tends to flow a little more freely. So there is that metric of why we are so focused in on margin improvement because we know that, that is going to be a key driver of the next deal and the next deal to continue to grow our businesses.

Jeff J. Kaminski

Okay. I think we have time for one last one. David?

David Goldberg - UBS Investment Bank, Research Division

It's Dave Goldberg from UBS. I'd like to get an idea and it's kind of a multiple part question. How you guys, your relationship with the folks, with the salespeople in the design studio, where you tend to find people who work there, training, coordination, how do you make sure they're maximizing the options that are going in the homes, how do you coordinate between the communities, what people are seeing in the model, what they want and the design studio, and then how do you kind of track performance of your salespeople and how involved are you with them?.

Jeff J. Kaminski

Rob, you want to take that one?

Rob McGibney

Sure. That was a multiple part question.

David Goldberg - UBS Investment Bank, Research Division

Take the ones you want, leave out the other parts.

Rob McGibney

All right. So I'll start with the sales piece of that first, and I think the first thing for us is you have to have a really good sales leader in place. We have one of those in Las Vegas as these guys do too, but he's been there a long time and he understands the business and he understands what it takes to motivate sales people and really, at the end of the day, they're getting judged on their performance, and it's not just the number of sales but it's also things like customer satisfaction, that plays a big part in the type of job that they're doing. So whether it's a salesperson or a studio representative, I mean there's a financial aspect of how we judge the work that they're doing, and there's also a softer aspect, which is are they making their customers happy? because that's something that's key to us as part of getting repeat business and bringing people back more than one time. Anybody else want to pick up?

Chris Apostolopoulos

Yes, I mean, we're all very fortunate here to have very seasoned sales teams that have been with us for a long time, understand the Built to Order model and sell it very, very well. We monitor the progress to your point with very defined metrics and measurements that we look at weekly. We have what we call mystery shop scores that are done quarterly and then we have weekly sales meetings and sales calls on the Western region and locally, to go through our performance. Where we're ahead or behind in sales, what the trends are in the marketplace, and we tie that also into the studio side. Our studio and the models, which I believe was one of your questions, is based on the survey results that we do. Who's the buyer, what are they interested in, and we merchandise our models accordingly to make sure that we're not only maximizing the product that we're demonstrating as we rotated to larger products in more affluent markets but we want to make sure that the merchandising in that model represents who the consumer is, how they live and really features what we can offer them in a Built to Order KBnxt business model through the studio to help maximize the margins as well as the revenue enhancement that we get out of that. Buyers tend to purchase what they see, feel and touch. And for us, our models are our showroom, it is our showcase and it really demonstrates the power of what our business model is all about. And then the consumer takes that experience into the studio where we have a great group of consultants that are designers at heart, walking them through a very structured process of how to go ahead and make sure they can put their home together in a manner that is consistent with how they live where it's not overwhelming for them. And it's a process that I think works very, very well.

Chris Apostolopoulos

We have a full-time sales trainer in our division that's regional that goes through Nevada, through Northern Cal and through SoCal. And her one job is to train our new people on KBU, which is an internet based training program, as well as follow up in the field with those people on a daily basis to reinforce the sales techniques and training, and it's a really intense process and she does that full time.

Jeff J. Kaminski

Okay. I think we're pretty much out of our time allotment in this one. We're going to bring the regional Presidents up, and I really want to tell you guys, Chris, Steve, Rob, thank you very much for carving time out of your busy schedules and running your businesses and coming here and sharing with our analyst group. I hope it is insightful to you guys and we'll move now into the central and southeast regions.

[Break]

We'll roll right into it. Very similar session right now that we have planned, slightly different questions and focus, the same thing at the end we'll open it up for you guys to drill on to more detail. The 2 individuals we have here actually run regional businesses. Larry Oglesby is going to start. He's not only an international role from the point of your operations in our business model, but also responsible for the bulk of the Central region and then Vince DePorre is going to talk a bit about his operations within the Southeast region. So Larry?

Larry E. Oglesby

Thank you, Jeff. I've had the opportunity to [indiscernible] the same job since been out of college for 6 months with the same group. I worked for Reiko my first 10 years in the San Antonio market and the last 17 with KBH. And I think what we shared is the business model. You've heard it all morning long, choice, value, speed, accuracy, all the pieces and parts that roll into what we do the best.

This is a roll-up of the current Central regions. And you can see it's far from where it was 10 years ago.

Austin, Texas is a business I started. Put it together and you can see the centralized location of the studio. We've been very aggressive there and really didn't have what you would consider a downturn in Austin. Our market has remained steady. The prices have begun to move up in the last, really the end of last year and we have a very, very solid and stable business. The President of the Austin business is another near 20-year veteran and many of the Texas staff that we have throughout San Antonio, some of them are 30 years within our business. So we've been very fortunate to have a stable team, a team that understands the business model without question and has excelled throughout this time in the cycle.

San Antonio, very much the same, if you went into our purchasing department today, and you would meet a lady named Emily B, and she's been doing purchase orders in San Antonio, Texas for 32 years. So the business, very stable, very capable and growing. As you can see, we circle the city well, we are a dominant builder, both Austin and San Antonio, we're currently #2 in the overall market and gaining market share. Through the downturn, we gained more market share than any other builders within the area. Houston is currently 28 communities. We like to say it's 28 with a bullet. Houston's growing fast. We've reconfigured, we've broadened our market capability and our offerings. For many years, we were very affordable and now you can see us actually expand into some of the nice, higher, price point more premium master plans.

Dallas today is really what we would call a satellite business. We're looking for opportunities, there's 7 operative communities, 5 that have legs left but we're looking for the right opportunities to continue to press that forward and grow, and we have a ton of room to grow there if we can find the right recipe.

Switching over to Colorado, great business here. Very solid leadership group, we have a solid core business. Is everyone familiar with the Stapleton community? We've been there really since the outset. It is the reuse of the old airport in Colorado and it's been fantastic for us. We've been there for the last 3 or 4 years in a, what we call, our parent community, which I'll show you photos of, highly successful. Now we have an additional community in the new Stapleton side who are also in Meridian, a very premium master plan for Colorado. So we have not only good growth aspects, we have the right team and a capability.

Here are some of the diversity that's represented in Austin. On your left, Parkside, is Harris Branch. It would be Central East to Austin. That's a 30-wide product that goes from 1,300 feet up to approximately 2,900. On the right is Circle Fee fairways, where we're in the half-million in up and we've actually done a couple of 3 homes over $1 million there. So as you can see from the Austin piece, our primary place, are 30, 35-wide, 40-wide, with some 50 sprinkled in.

If you looked at Austin and San Antonio, the products are effectively identical. We have some municipal differences for how we would elevate the products or how we would bring them to market, but what we have in common and you've heard it from Jeff and others all morning long, they all share the KBnxt view. One of the things we'd like to say is you can walk in, you enter the home and you can pick up 2 to 3 functions visibly. So it's not compartmentalized, very open, and whether it is at 125 or up to 500, you're going to see most of those same features.

Here's the Houston, Dallas, Texas, mostly same. A little bit of difference here on your left is our paired product from Stapleton in Colorado. And the paired is simply 2 put together and we have multiple combinations and we can assemble them any way we'd like, very, very hot and it has opened up a lot of avenues for us in Colorado. We currently have 4 paired locations and we have more coming on and it's something that land sellers have actively reached out to us to go after and bring this product. Meridian village is the very nice master plan that I was mentioning where it's allowing us to not only upgrade our ability in Colorado but really show our wares. So I would say the Colorado business is maturing and moving into a very, very nice spot. Vince?

Vince DePorre

All right. Thanks, Larry. One of the things that struck me when I was sitting out here is, I only have 10 years of experience with KB Home. I'm the white guy in the room. Everyone else in front of me had a lot of experience. A little bit about myself, is I don't know how to use a switcher. So like I said, I've been here for 10 years. Previous to that, homebuilding is really in my blood, it was in our family in the Detroit market where I grew up. I got my building management degree from Michigan State and then started right in field operations, building apartments. I went to night school to get my masters in finance and I promise you, I was the only one in class with muddy boots that left a trail from being out in the field all day long. But it served me well and gave me a good rounding out of the business. I was then a divisional leader for another company in Detroit for a lot of years. And then 10 years ago, I had this tremendous opportunity to join KB Homes.

This is the Southeast region, which I'm over and we have divisional president and full teams in each one of these locations starting up in D.C., in Raleigh and Jacksonville, Orlando, Tampa. I think the highlight of the roll up of the region here is, if you look at the new home closings in the peak, 163,000 and in 2012, 28,000. So really last year, you did 17% of what we were at the peak on the new home closing. So there's tremendous upside. Jeff kind of alluded to that before, just within these markets for us to grow and we are taking advantage of that growth.

This is our division that I say the D.C. Metro is most, most like a California division, like NorCal. The median household income is much higher than the other divisions that we're in, in the Southeast. The land market is much more capital intensive like Chris A. was speaking to in NorCal. So what we've done since we don't have that great length of experience like we do at NorCal, we have hired and have a very experienced team. So between my divisional president in this market and my land acquisition leader, we have over 50 years of experience. So it's -- that, of course, with being in here and being active in the market has really opened up a lot of opportunities for us and the other opportunity that's very nice is with our in-house architectural team. A lot of the communities in here, you have to be pretty specific, as judged by the municipality on products so we're able to be very responsive and it really helps the land sellers to want to deal with us.

The Raleigh market, I'm going to just kind of head south through the region. So the Raleigh market has been a very steady market for us. It didn't have the fluctuations that we had in the Florida markets, for instance. This one held a little bit more like one of the Texas markets. We've had a steady business here and we're continuing to gain community count. You can see we have a good concentric circle around the marketplace. Okay.

Okay, so go from D.C. The Jacksonville market has been a very steady market for us as well. We're one of the larger builders here and as you go down -- I just wanted to highlight, as you go down, we run the Gulf Coast from the Jacksonville market as well. And that's really, you think of it as a Daytona market. And that's been a couple of years ago as we saw the markets starting to come back from where they were at, we had the courage, really, to go back into Daytona, because you know where it was coming and where the lot costs were at and start to do land acquisition again. And it's really been a -- it's paid off in spades for us as we've really seen the market recovery down there and we have 4 communities and we're by far, the largest builder in that submarket. So that's been a nice opportunity for us. And then in Orlando, I think what I'd like to highlight here, this is really -- has had the most revenue lift over the last year in the Southeast for the markets we're in. So we're seeing -- we're enjoying a nice run up on the revenue side. It, of course, is very specific to locations that you're at, like all the submarkets. So when you look on this map, we stuck to our knitting and being very much in the core, which is the Orange County submarket, and that's been very successful for us.

The Tampa submarket is also probably second to that in margin lift where we're having a real good experience. And again, here, we're focused on Tampa but also down the West Coast along the I-75 corridor. Market's strong and we're having a good opportunity with land acquisition through this corridor.

As far as the product diversification. If you look, we put on here on the left side, this is Victoria Preserve, and this is a community that's in Jacksonville, actually, but you can see the price point is very attractive for very first-time buyers. This is a community that we do a lot of pace out of so we're able to -- we have a lot of traffic in these communities because that's such a big part of the market and we work through the buyers and we end up able to pace a lot. On the right side is Phillips Place, which is in Cary, which is really the best submarket in the Raleigh market. It's interesting because even at this price point, at the -- starting basically in the 350s, we do have a lot of first-time home buyers that have lived in this submarket in a rental home or in an apartment that still do buying here. So even at this price point, we do see a lot of first homebuyers and second -- or first-time move up.

This is -- I wanted to just highlight this for D.C. because it shows some diversification that we have up here. On the left, D.C. is very much a traditional market, as is a very traditional home that's well received up there, bricks, front brick is standard and with the hip roof and gable in that. And then on the right-hand side, that's a Crown Farm community that's in Gaithersburg. So it's the #1 community within Maryland and you can see, this is what I was talking about California pricing. You're at 2,200 square feet for $750,000. It's a beautiful community that's being very well received.

These are just some more pictures of what Larry referenced before where they -- you can see they're different price points and different communities but they are open series products and they look open and we allow the -- of course, with our model, they go to our studio to do their interior upgrades or select their options.

Jeff J. Kaminski

Thanks, Vince. You can have this. I think one of the things that's interesting, I just wanted to point out, when you were looking at the product photos that the guys are showing off [indiscernible], a lot of diversity from the point of view of exteriors, elevations, regional differences, but a lot of those designs are based off standard architecture that we do centrally in Los Angeles. So we have a centralized architecture department, it works very closely with all the divisions, they work with local market surveys of what buyer preferences are and then they design product. And if you were looking at the interiors, we have a very consistent look to our homes, whether it would be attached product or a large detached home, the style and the way we're building is very consistent because what we're seeing is consistency in buyer preferences on the interiors across the country. People want openness, they want multi-uses in large areas, they want the big kitchens, they want the kitchen islands, and it's really the power of a business model that you're seeing implemented even through our architecture and the way we designed that site, so I want to point it out. I think, starting the panel discussion, I think an interesting place to start and again, covering some different questions. Last year, we launched the Going on Offense strategy, where we decided, and Jeff made a key strategic decision for the company, early part of '12 that we wanted to start ramping the land investment, he was seeing strength in a lot of the submarkets, we started feeling much more bullish about the housing market recovery. And at first we went into it a bit cautiously, but we ramped up our spending pretty aggressively towards the end of the year. And I wanted to just get some comments from the 2 of the guys up here about what that meant to the divisions within their regions, how you were looking at land deals, what kind of deals you were sending the land committee that might have been a little bit different from the constraints that you had on you just 1 or 2 quarters earlier than that. And why don't we start with you, Larry, on the Central region on that one.

Larry E. Oglesby

I think for, specifically for Texas and Colorado, the Going on Offense was a huge shift. Neither of those markets had extraordinary deterioration, so we were consistently buying. I would say, the difference is, we started adding more passing plays to our offense. We began to look at bigger, a little more aggressive multiproduct lines but all in, in really, really fantastic locations. Case in point, Mason Ranch in Austin Texas is at where Lakeline Drive today currently, dead end, is arguably in the #1 new home selling market in the city. It's 1,000 lots. We started development there, it's moving, it's in play. That's probably a really strong example of something we may not have done in '08 or '09. A big play in Round Rock, Texas. In the San Antonio market, Bandera, Northwest, we just recently picked up a 600-lot position there in a fantastic location. Colorado, where we have multiple new deals to open. So I'd say, the Going on Offense strategy was maybe picking up the pace a step or 2, but it wasn't coming out of the shell. We have been offensive there. We had consistently kept the business fed, but it allowed us to maybe throw the ball a little bit deeper and expand.

Vince DePorre

Yes. I would say this in the Southeast as the markets contract, and I'll use a couple of markets as examples, like in Jacksonville, as the market contracted, we became very mandarin, which is a specific -- that's like the best submarket in Jacksonville. Very Mandarin-centric where we would not do deals outside of Mandarin in the downturn because you couldn't -- it was a falling knife on the price and you couldn't prove up the pace so we were focused only on basically that submarket. Raleigh would be another example with the Cary submarket. That was really the place to be. As the markets have improved, we've been able to expand out because we can prove up the -- obviously, we can prove up the price and we can prove up the pace in submarkets outside of the #1 submarkets. So we're still very focused, obviously on location in the better submarkets but we're able to do deals. So you have bets on, one part of it, how we've expanded our geography. The other part is for a while, there was an availability of vacant developed lots in the markets and really throughout the Florida markets, not so much in D.C., but in Raleigh, to an extent. As you've heard and as you've seen in the markets, a lot of the vacant developed inventory lots are gone in the stronger locations. So over the last year, we have taken on deals where they need to be developed and of course, we don't take entitlement risk but we tie up the A locations and work through them until they're entitled and then we close. So we become more aggressive on that. I think they had an interesting deal up. As Albert mentioned, a week ago, Wednesday, we send our land package up and we had talked about the deal but then yesterday was the land committee for it. It was 300 to -- it's a 300-lot, fully entitled deal, but none developed in Jacksonville. And it's from the Heinz group, whom we have a long-standing relationship with. And we figured out using a relationship, Albert has to do some -- to purchase some of the bonds on it and the relationship we have locally with the team, we figured out how to put the deal together and get it approved. So that would be a deal that a year ago, we wouldn't have done. Simply, we wouldn't have done, but the markets have improved so much now that, that makes sense again for us.

Larry E. Oglesby

We also have examples, Jeff, of markets that would have been on the periphery 2 years ago where we've taken reasonable bites in place, which is a Bastrop, Texas, or San Marcos, between Austin and San Antonio. Those are absolute examples of being on offense, something you wouldn't have done 2 years ago.

Jeff J. Kaminski

Right. Great. Yes, another component would be Going on Offense strategy and as we're trying to rebuild our community count was having a good solid review of our inactive assets. As we talked about, I think, in a couple of conference calls ago, we activated about 21 communities in the third and fourth quarter and we're in various stages of activating those communities right now. Some are opened, selling, delivering products, some are still in the later phases of development but for the most part, we've made that commitment. We've been looking at inactive assets across the company and Vince, maybe you could comment a little bit about your experience within your region and maybe provide some specific examples in communities.

Vince DePorre

Okay, good. So as the downturn was upon us and we had parked certain assets that we had, we didn't park our activity on them. We looked at them and said, we bought these for a reason, in this location for a reason, they're going to be good someday and so what we did, I would kind of call it a clean slate approach. So during the downturn we'd look at the asset, we'd look at what are the current entitlements, what's the municipality willing to do? Because how they're working with you today was different than maybe in '05. They have a little nicer year than they had.

We looked at the product site and we looked at the site engineering and we looked at everything to do, really a clean slate with, okay, here's a piece of dirt we have here's the wetlands, now what do we do? And we really redesigned and redeveloped, we took a tremendous amount of cost in a lot of cases, out of the infrastructure to develop it, so a lot of different things we did. And then we get those on go status, so they're on go status, we have them all set. And then as soon as the market dynamics are proper for them, we can bring them online with -- and then they're ready to go. So I have communities like that, that are very close, we're going to hit the go button and start development on, some that are in development now. Mabel Bridge, is a community in Orange County in -- or in Orlando that we brought out of the ground probably a year ago, and it was that exact thing. Great location, we ended up adjusting product and various things, and we actually have -- it's a 2-product line community, which is our Martha Stewart product and then our traditional product. And that's a fun example because it's not only are we receiving back our cash but as the market is increasing and we increase prices, our margins are very good in there as well now. So as you get the market lift, we're seeing multiple assets that we're looking at and saying, wow, these were under water, feeling before and now they're -- that lock up is very good in the submarkets today, we're very happy to have them.

Jeff J. Kaminski

Okay. Now shifting gears a bit on another aspect of our business. A couple of years ago, we had our mortgage relationship with Bank of America kind of blow up on us. They decided to exit the business. We struggled a little bit to get some traction going back on that side of the business and since that time, we've been very happy with what we've achieved, particularly with Nationstar. I think most of you guys know in May of last year, Nationstar started the first of accepting applications from our customers for loans. That developed as we went through 2012, we had a very tight relationship with what company, their service levels are improving very consistently throughout our footprint, and we made the election late last year to enter into JV negotiations with Nationstar and we now have a JV agreement as Jeff mentioned earlier. I think it'd be interesting for the group to hear what that meant to the field operations? And as I go to Larry on this question, what that meant to the people in the field? What that means to our operating guys to have that type of a mortgage provider standing behind our business, what you're seeing as we've gone through the transition, maybe a little bit about your expectations as we eventually morph it into a JV arrangement?

Larry E. Oglesby

If you study our business model, as soon as you cleared the land function and at its most basic, it's a customer, a loan, in a home. And for our model, it's imperative that we're able to do the loan work accurately and expeditiously upfront. We went through a period where we really had to battle that, whether it's with an external lender that was pulled in or someone that we're trying to get certain sureties from. Think about the customer in our process, if they're buying a Built to Order, the first thing that they want to understand is how much they could spend. And based on the cost of their product, the second piece is how much they could spend in studio if they chose to do it. And if you cannot establish that upfront, it really cripples your model. What we're getting today with Nationstar is a team that's interlinked with ours, they participate in our daily meetings, they also have daily accountabilities for loan authorizations and closing docs, so not only is it far better in the predictability of our backlog and our capability to have vison of what we're going to do over the next 5 to 6 months, it's enabling our consumer to truly participate in the business model of Built to Order. So I would say that is the largest piece and it's early, and it's already seeing improvement. Now Jeff mentioned this morning, we're also seeing improvement in cycle time. And part of that is, this final to close piece is having a packaged loan, it's ready to go when the home is complete. That's another piece of our business that's absolutely critical. But in our world, the way we've set up Built to Order, if the customer's loan is not set solid, they struggle in joining the process. If the year is set, they've picked their home, they've picked their lot, then they go choose all their personal options to have them installed, and they can thoroughly enjoy the construction of their home all the way through. That's how critical having a mortgage partner is to us, and that's what we have today in a very positive relationship.

Jeff J. Kaminski

Great. Thanks, Larry. On a separate note, as we went through the downturn of the company, one of the strategies that were employed as we went through that was to obviously, really batten down on the SG&A cost, really focus on our infrastructure and how we're supporting our markets. And my belief, I think we went about it in a very smart way. We contracted our operations, we closed division offices, we consolidated those division offices into central locations and we covered very large geographies in that process. So Southern California is a great example. At the depth of the market, not too long ago, I might add, we were down to one division office covering from this area of San Diego all the way up to the Antelope Valley, north of Los Angeles. We did similar things in many markets around the country and I think the smart part about it, what we did, was we didn't pull out of those markets entirely. We covered them with a thinner staff, our guys are spread more thin, they're putting a lot more miles on their vehicles, but we still maintained presence in a lot of those markets. So when we talk a lot in our company about we want to penetrate markets that we're in today, there's tremendous upside in that because a lot of those markets, while we remained present in them and still had some resources and some people deployed, we weren't big players in them and it was a function of us really pulling back in some of those resources. So I think it was a really insightful way of running the business. I think Jeff put that strategy in place years ago, as the markets were shrinking. And early part of last year, he started reversing course with the operation. And it's always a little bit of a push/pull of adding some resource and adding some expense to expand and grow your business. You're always concerned on the expense side but on the other side of it, you know the growth will come back and pay off big dividends. And we started doing that as we launched the Going on Offense strategy. So what I'd like to ask, I think starting with Vince, is what that meant in the Southeast regions and maybe specifically, talking about some of the divisions and how you went about it and what you're seeing today as a result of that strategy of reenergizing those market areas?

Vince DePorre

Okay, good. Florida really is the best market to talk about with this specific strategy. We had 6 divisions. So I had 6 separate divisions with offices and studios and everything before the downturn. During the downturn, as a focus to our SG&A, we went down to running the whole state out of Central Florida division and the North Florida division. And like Jeff said, we still have communities spread throughout, so we still had a head construction, superintendents, the local teams that you need, the sales team and the service team were there. Where all the back office, everything else was out of the 2 divisional offices instead of 6, so it was a good strategy. As we go the other way, like in Tampa, we've added now a division president, so someone who has P&L responsibility and then really, a land acquisition team there. So the rest of the team is already there, it's a minimal overhead, it's a few people there and then as you go down the coast, we've done this, doing the same on the Southwest coast and then as well as from down from Jacksonville to Daytona and South towards -- into Brevard County and that. So really, the result is it's minimal overhead that we have to add to have more P&L focus and land focus throughout the state, but it really is the spring coil that we talked about on revenue growth, so we'll get a lot of revenue growth out of it, more acquisition in that for a limited overhead, additional overhead load.

Jeff J. Kaminski

Larry, do you want to comment on the Central region?

Larry E. Oglesby

Yes, in the same vein, we contracted the San Antonio and Austin business into what we call Central Texas, split them out last year so that if we get very definitive, coverage-city specific, Colorado, we have beefed up not only the management staff, but the land teams in what was kind of a satellite business 2 or 3 years ago. So we've expanded and repositioned San Antonio and Austin the way they would have been prior to the downturn.

Vince DePorre

Right. And I would say, with what's happened at the divisional level as opposed to having that enter new markets and pay what is this -- the so-called dumb tax, that you have to pay when you do that, we're able to expand our footprint back into areas where we really never exited. We became smaller, we became more efficient, but we can now expand back and profitably expand in a very short amount of time and in some of those markets, so I think it's a great strategy.

Albert Z. Praw

No, that's a good point. We remained very, very familiar like Tampa, as an example. We just weren't doing as much acquisition there, but we stayed very current with the market and very familiar with it. So it's an easy roll back in.

Jeff J. Kaminski

Right, right. With our business model, again, we talked a lot about it today, it's a Built to Order model, KBnxt concepts we implemented throughout the company. There are customers out there that want quick move-in product. There is no doubt there is some need for that. You have -- whether it be executive relocations or life circumstances or whatever where someone needs to be in a house in 3 weeks. There's no time to build from the ground up. I'd be interested to know your guys' thoughts of how you deal with that and maybe starting with Vince for your region. What are some of the strategies you deploy within the region to be able to satisfy that segment of the consumer market yet still stay as true as possible to the Built to Order model as you go on through it?

Vince DePorre

Okay. There's a couple of things that we do. We're very report-driven and looking at our backlog. In other words, we monitor our business all the time. And it's really -- it's a community by community effort, it's a community by community as it rolls up into the company. So as we look at each community, we look at where we have strong wants, so there's a strong need. We have a lot of traffic and we're pacing. And those are the communities that we feel very confident with that will add in inventory. So typically, we'll run maybe 15% to 20% of our starts with the inventory in those selected communities, so that we have inventory available and the realtors like it to have it. It's very interacting, a little sidenote, but we have the inventory, the homebuyer comes in, they look at it, they're excited about it, they spend time with our sales team, they walk away buying Built to Order because they see what they -- they see the house and it's beautiful and they love it. But they don't really like the granite-colored top and they don't like this model, maybe this cabinet or whatever. So we have a lot of buyers that come in for the inventory that convert over. We say they get religion. They get religion, and they go over to -- go to build [indiscernible] model and have a custom home built for themselves.

Jeff J. Kaminski

Okay, I'm going to ask one final question of Larry, and then we'll open it up for the group here in the room. We've seen a nice growth in our backlog quarter-over-quarter, pretty consistently for the past year or so. The first quarter, we're up 53% in value and about 25% in unit terms. And that's very meaningful, I know, for the guys out on the field and for the operations and the efficiency of model. And, Larry, maybe you could comment -- for the Central Region and across the operations, he's responsible nationally for operations. What that means for our businesses? What impact do you think it'll have on the future? And just what the reaction has been in the field to the build in backlog?

Larry E. Oglesby

The key to our operating model is backlog. And so we've fought and struggled and scraped to create it. Now that we have it in place, our scalability really begins to wake up. We're able to have a larger width that's placed very specifically. It's split out today better than it's been in 5 years. And ultimately, that gets us to a bigger yet more predictable business. So on the other side, is what it's allowed us to do with our subs and tenders, wherein you have a backlog. That's really the lever that you can talk with. When you go to a big contractor and give them 6 months worth of visibility, they can see it. You're not speculating on where the market may or may not be. You have the backlog built and you can assign those communities. It's allowing us to leverage not only to control costs, but to build up our labor capability. And one of the struggles we saw, probably mid-last year, I think was the toughest phase in going into Q3 more on the labor side than anything else, our cycle time really began to expand. And in most of the businesses today, we're seeing that again to equalize and actually draw down something. Now, to some extent, the labor base is refitting itself and beginning to build. But we are not herky-jerky in our motions as it relates to starts. And all the pieces and parts of our business, we're operating from a backlog. And when you have that, we always call it surge protection for our production. And it allows us to do a lot of things, all of which are good for the business. So we keep building that, and it just continues to work better in our model.

Jeff J. Kaminski

That's great.

Vince DePorre

And the other thing I'd add, Jeff, just to bolt on is when we have pace, we can buy more land. I mean if you don't have pace in the existing community and you don't have that backlog built up, it's very difficult to underwrite new product. When we have it, it becomes much easier.

Jeff J. Kaminski

Good point there. Okay, we'll take some questions from the room and let's include the panel right there.

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Jack Micenko from SIG. A question not only for the guys up on the stage now, but maybe some of the prior presenters on the regional side. One of the things we're hearing is that factors outside of your control have been pushing back sort of cycle times, things like finding utility connections, some of the county offices have really downsized their staffing for final approvals. So I guess through the regions, a couple-part question. One, are you seeing that? Two, is it something that you have some control over managing? And then maybe third, given the tenure of everybody on the regional side is, how does this movie sort of play out and how does it resolve itself over time given it's a cyclical business?

Larry E. Oglesby

There's 2 legs. If we're talking about the utility piece, it could be from a development side or a land side. So that is leg 1, is being able to see that upfront. A lot of the utilities also are offering third-party capability, if in fact you get out in front of it and you can recognize the shortfall. The other flip on shortages becomes to whether it's permitting or the oversized staff and waiting longer, and that's another reason for our previous topic. Nothing solves that better than a backlog. If we have the ability to have that backlog on the shelf and we can have a fair weighting as if maturing with all the permits and necessary paperwork, then we can press forward. So that's one of the cures, but there are growing pains around.

Jeff J. Kaminski

Vince, you want to add, or...?

Vince DePorre

Well, I would say there are growing pains but 1/100 or 1/10 of what it was in the true run up. So it's nowhere near that big of an issue. I -- actually, most of my municipalities are like embracing that there's building operating going on again. I mean, seriously, so they're working with us much more than what we saw in the run-up. So not an issue yet, basically.

Jeff J. Kaminski

Okay. You have a question?

Unknown Analyst

We -- the open series that we used in SoCal, we -- it actually helps us on our cycle time because of permits. Like in Lancaster and Farmdale, we can have a series of homes and then we can build them in any part of the city. And in parts of Riverside, we're able to do that also, so it really improves that fast -- and then California is a lot different. In the United States, how long it takes to actually get permits. So it does work out really well and help...

Jeff J. Kaminski

The scale of standardization.

Unknown Analyst

The scale, it comes through the standardization, kind of like the FTE thing that was talked about last time?

Jeff J. Kaminski

Right, right. Perfect.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Bob Wetenhall from RBC. I know you guys are really big in Texas. It's really a core part of the strategy. I know you're heavily tilted towards the West San Antonio, big footprint in Houston, tilling and growing, and light on Dallas. What's it going to take for you guys to be the #1 builder in Texas? And real quickly on Florida, you guys have a smaller presence, obviously, in [indiscernible] Orange County. How committed are you to the state and where do you think the long-term upside is? Because it sounds like it's not rolling out as an aggressive of a pace. And where do you see that going in the next 2 to 3 years?

Larry E. Oglesby

Starting in Texas, what does it take to be #1 if we continue on the track. We've gained market share net of Dallas in every market we're in. So through the downturn, we've picked up. We're #2, 2 and 5. With Austin, San Antonio at 2; 5 in Houston. It's a matter of continuing, being positioned correctly. But again, we're going to have a really good business. If #1 is a part of that, that's great. But if it's #2 and it's a fabulous profitable business, we can do that, too.

Jeffrey T. Mezger

As far as the Florida markets go, we, as we put on the slide before, in a lot of years, had a tremendous business in Florida, both units and profits, more important profitable business. So our strategy right now has been with over the last -- it's really been maybe the last 18 months that we've become much more aggressive on the land acquisition and growing our community count. So we have a lot of -- a large percentage growth in each of our divisions, so we're very committed to the state and see it as a great balance for the -- for our overall portfolio. And it's really neat to see for us, the immigration that's happening again in Florida and the activity that's going up and down the coast. But it's coming back and it's growing, but it's not what you have on the West Coast, where the West Coast is already, I'd say it's back for the most part.

Jeff J. Kaminski

Yes, I think on a national basis, Bob, from the point of view of the company and the corporate researchers as we look at how we're deployed, we like all the markets we're at right now. We think we're in the best housing markets in the state. Florida is no exception to that, and I think it's going to come back strong. We're not allocating down resources for any of these guys, we're -- which is different than it was a couple of years back. I mean we talked a little bit earlier about what we were doing with land. Vince add, all the room we wanted is wanting to lose in Mandarin, and that was an option deal. No, I mean that was the reality of it for awhile. Those constraints have been taken off, and we're really targeting growth across the footprint. Just target each and every division President with growth objectives going out 2, 3 years, where you expect those businesses to be in terms of units and their very aggressive targets across the footprint. So we're not in a mode right now where, hey, we like the West Coast, we don't like the East Coast, or Florida is going to grow slower than anywhere else. It's going to be really up to division management, the type of land deals we find, making sure we hit return and profit targets. And our individual performance, we look at that division performance quite seriously. And I think one of the guys mentioned earlier, you're as good as your last deal that launched and your delivery profits and your profit margins and in hitting your absorption rates that were committed. And as long as these guys keep producing those kind of results, they're going to keep getting funding to build on their land position.

Aaron Hecht - JMP Securities LLC, Research Division

This question might be more for Jeff. Aaron Hecht of JMP Securities. The captive mortgage business has been significant income generators for some of your peers. So could you talk about the JV structure with Morgan's -- Nationstar and how that will roll through to your bottom line? And the efficiencies that you could gain at the local level with that JV?

Jeff J. Kaminski

Right. I think, first of all, it is a matter of finding the right partner. And we all know it's a good bit of time to really find that partnership, and we think we found it now with Nationstar. So we're really, really excited about the relationship moving forward and what we can do. And I look at it from 2 points of view: what it's doing for the operations and what it's doing for our customers. And I'll talk about that for a minute, then I'll talk about the bottom line side of it. Larry touched on it earlier, we talk all the time about consistency and being able to build -- we have a Built to Order model. We need that consistency from our mortgage provider as well. They can help us on cycle times. They can help us from the point of view of when we start a home, we know when we're going to close it because we have assurance of close, reliable partner that's going to basically approve a customer and close on that customer. And so for a whole variety of reasons, we really like that model. On the other side of it, we consider ourselves, as it's quite obvious, as a homebuilder. We're not a financial services company. We think there's other people that do that better, quite frankly, where it's their core business. It's a very risky industry to be in from the point of regulatory and all the rules and regulations you have to follow. And we like having a business that we're -- eventually, will be partnered with in a JV that has that sort of DNA and has that expertise, that as a homebuilder we don't believe we possess. There are a number of peers that have taken different approaches to it. Some have taken no business partnership at all in the mortgage side. A lot of them have the captive. We like what we call the hybrid model. What we think it provides us is, as we go through this transition on the JV getting to the second part of it, we are going to have a tailwind on the profitability side next year. Right now, we're in an arrangement, which is called a marketing service arrangement. We provide certain services where we market and promote Nationstar as a potential provider for our customers. If they want to do business, then they go independently to Nationstar, that morphs into a JV relationship with our company called Home Community Mortgage, LLC, and with that company we'll share pretty much equally or almost equally in the profit with Nationstar. And I think you'll see, from a P&L point of view, our relationship between when we had a, for example, the BFA [ph] joint venture, a relationship between the units that we were delivering and the profit on the P&L. I think you'll see a similar relationship develop as we get Nationstar up and running and pass the startup phase. So there'll certainly be a tailwind in '14. It's always a startup operation when you get it going and there's some additional expenses. And incrementally, I think it's going to be good things for the business next year and going forward.

So, okay. I think you get probably a bit hungry right now, so we'll break this. Thanks to Larry and Vince for your discussion about your region.

[Break]

Jeff J. Kaminski

On the cautionary statements we've talked about it this morning. I want to reference everyone on the webcast and certainly in the room to the second slide. Lot of fine print, a lot of statements in there, but it's important for us.

So moving ahead, real quick on the KB Home overview. I think there's just a couple of key takeaways in this slide. Obviously by now, going through the whole day and all you guys have been following us for a long time, you know we're a California-centric company. We have half our business here. We have larger operations in the other parts of the country as well. We are pushing growth throughout our footprint. And I think that's important takeaway for the 2 days here that, although we're California-centric and we've seen a percentage right around half of our revenues and that's very similar to what we saw for full year 2012, we are pushing the envelope in all of our markets as we've seen some tremendous market improvement.

First quarter highlights really quick. I know this is kind of old news, but there's a few view things I just want to reemphasize. That bottom left graph on this chart, 990 basis points of operating margin improvement in 1 year. Very strong bounce back, really indicating a strong turnaround in financial results for the company. That came from a combination not only of volume leverage, which certainly helped the company with 570 bps of improvement in just SG&A leverage, but we also had 420 basis points of improvement in gross margins. And I think some of the things that you've heard throughout the day today, some of the focus areas, some of the things we're doing on the ground operationally to gain those improvements, is really finally starting to manifest itself in the numbers. And we're quite proud of the achievements that we had in the first quarter. But at the same time, I know we have a long way to go and a lot of opportunity ahead of us.

On the backlog chart in the lower right hand corner, that 53% improvement in dollar backlog, now over $700 million at the end of the first quarter, huge indications for where we're going in the future. And Larry and Vince both talked a little bit about what that backlog does for our business. Building that type of sales backlog in value terms in the first quarter of the year was a big achievement for us and that really gave us the strongest start to our fiscal year. And I think we've seen it 6 or 7 years at least.

Accelerating profitable growth. Definitely a theme of today, certainly a theme of the strategy of the company and certainly something that we have people from the top of the company all the way to the people out in the field, making sales and building homes, very focused on right now.

We're looking at every single lever we have on the P&L statement from increasing revenues and increasing margins, to controlling not only SG&A expenses, to controlling our cost to build as levers in this process. More specifically, we spent a lot of time earlier today, and over the last few conference calls, explaining our strategic repositioning of both our communities and our product. And I felt at times, as we were doing it, we've been working on this for 5 or 6 quarters, in some cases, there's only so much you can really get across to people in 25 or 30 minutes of prepared remarks once a quarter. So we're very pleased to have you guys kind of a captive audience here, especially through the presentations this morning, and including the community tour yesterday and the one that some of you will attend today to really drive home this point and how the strategy has had a significant difference on this company and where things are going into the future.

You've heard us talk repeatedly about maximizing the value of every asset, and we're very serious about that. And particularly now, as we're trying to bridge through this period of a slowing community count and a leveling off, about to continue on the uptick as our land investments start manifesting in the communities, there's been some very important things we've been doing on the balancing side that's helped our business.

On the purchasing side, Dan's responsible nationally for it, all of the presidents are responsible in their divisions for what we're doing with input costs. We have launched a number of what we call pathfinder projects in every single division throughout the company. We're tracking those projects in a detailed basis. And while it's going to be very difficult to actually get a reduction in input costs, we know what's happening in some of the markets on an overview basis that we have to do things to offset it. I have a bit of a purchasing background from a prior company, and like I used to say, I mean, we bought a lot of these precious metals and standard commodities, things like copper, steel, and everything else. When copper goes up as a commodity basis, a ton of copper is a ton of copper. I mean, that's the price you pay. But there's a lot of other leverage you could pull on the purchasing side with value engineering, substitution of products, rebidding jobs, working with your vendor base on improvements that are mutually beneficial and all those things are things we're doing right now.

And then finally, we have tremendous operating leverage embedded in the business. We spent a lot of hard work for many, many years. KB, with a business, it took over $900 million out of SG&A expenses during the downturn. It was a very, very painful process, and we've spent a lot of time everyday reminding ourselves of how painful that was and knowing right now that now's the time to reap the benefits from it, so we're staying very disciplined on the SG&A side. We're making reinvestments in the business where it can get growth, where we can expand our -- and then back into some of our old markets with more resources. We're investing in land resources, for example, things that are really going to help the business going forward. But on the back office side, it's time to squeeze productivity out of what we have today. And in the manufacturing environment, it's always easier, much, much easier to get productivity gains or buying increases than to reduce expenses when your volume's going down, and that's the game we're playing right now.

This is the first slide, as far as the 9-quarter historical look at what's been happening with some of our metrics. On this first slide, it's our housing gross profit margin and we've labeled it as reported. I think it's always a good practice, obviously, to start with GAAP numbers. These are numbers right off the statements. The only exception is we have reclassed all prior periods for the homebuyer -- for the closing cost we classed, that we talked about during the first quarter, so it's all apples-to-apples on this slide. And basically, this is a reference side or a starting point.

We're going to talk about the next slide in more detail. And this slide is a slide where we've made adjustments for the items that we typically point out each and every quarter to the Street and to our conference calls or media press releases, where we've taken out impairments, abandonments, warranty adjustments and basically any insurance recoveries to clean the gross margin number and give us a more view -- or a view of what it looks like on a quarter-over-quarter basis as far as improvement.

Starting about midyear last year, we started seeing pretty significant year-over-year improvements, and it's accelerating. Our third quarter gross margin was up about 120 basis points from the prior year. The fourth quarter was up almost 200 basis points, and we were up over 400 basis points in the first quarter of this year on the margin side. Again, reflecting the actions we talked about today, so I thought it was important to make a link between a lot of words and a lot of strategies and a lot of actions that we discussed today to how that's flown through and how that flows through our financial results as we've seen it.

We're also seeing on the gross margin side a significant improvement in our backlog. And that's a number we track every single week. We see the sales, we see the deliveries going out, and we can see the average margin in the backlog, and that gives us a confidence in some of the guidance that we've provided as far as sequential improvement in margins as we go through the year. Obviously, a sequential improvement coming off our first quarter with the gain that we saw is going to provide us nice year-over-year improvement as we travel through 2013.

On the SG&A slide, same type thing, the as-reported number right off the financials, includes the same reclass.

Moving to the next slide. The as-adjusted shows excellent progress on this metric as well. Again, includes the items that we typically break out every quarter, so we've actually made those adjustments for you and show you what the net numbers are. And again, it's the typical things that we talk about on a quarterly basis. Very nice progression, especially over the last 5 quarters as we've been seeing some accelerated revenues. And we've been holding our costs very constant, in some cases declining, to realize some of the operating leverage that we talked about.

There is still more room for improvement here. This is another one where we're guiding continuous improvement on our SG&A side. For the full year in 2012, as an example, we actually reduced our expenses by $10 million and we had a revenue increase of over $240 million. First quarter alone, the SG&A increase was less than $8 million, and we had a $150 million improvement in our first quarter revenues. So it's signs and, I think, tangible results that are important. And it's showing you the seriousness we're taking this profit improvement initiative and how that's really generating a strong contribution to our accelerating profitable growth strategy.

Finally, on operating income. This slide's in dollar terms. Again, as reported, and then moving ahead to the as-adjusted slide. Although it's small and just slightly above breakeven, pretty meaningful to at least have an operating profit in our seasonally -- typically seasonally worst quarter of the year, which is the first quarter. Not nearly enough, not anywhere where we need to be, but $25 million of improvement year-over-year in dollar terms in operating income showed nice progress. This basically reflects all of the initiatives that I talked about in some of the prior slides. Obviously, a combination of what we've been doing on the margin side, as well as the SG&A leverage side and SG&A control. So that's a quick recap of where we've been through the last 9 quarters or so on the P&L side.

Moving ahead to the second phase of the accelerating profitable growth strategy. What are we doing about the top line? How are we accelerating top line performance? Where do we see this thing going? What are some of the strategies the company is putting in place? Again, a lot of recap from what we've been talking about pretty consistently for the entire day. First and foremost, increasing our land and land development expenditures and investments. Albert did, I think, a really nice job of explaining our process, how we go about investing in land, what kind of returns we're looking for, what kind of controls we have in place. The presidents gave you a view from the field of what they're seeing in their local markets and why we've been successful in this process. We're serious about our investment levels. An acceleration to over $1 billion this year will provide us very nice tailwind going into 2014 and beyond as far as community count growth. And that's the end game here that we're looking for. We're in our current footprint. We're looking for a pretty aggressive expansion of our communities. And at this point in time, we're tracking very well to these targets.

Our goal at the same time is to remain a leader in the space in sales per community. And there's been a lot of talk, and I know people have different views, for example, on our studios. KB should get rid of their studios or we don't see how those are adding value, we don't see the margin impact. The studio is a very integral part of our business model. And I think it was pretty clearly explained earlier what kind of benefits we get out of it. And it's no accident that we lead in the space in sales per community. We have great studios. We offer customers choice; it's what people want. We combine that with great marketing programs. We combine that with great land positions and great products. The combination of those things gets us that community velocity that we have. You'd start carving pieces out of that. I don't think we're as successful. So it's a "the parts are greater than the whole" type thing, and I'm very proud of some of the achievements we've had there. So we definitely want to maintain that pace. And at the same time, as we've had a flattening in our community count, and in fact the decline through most of 2012, we've been pushing the top line through average selling price increases. Again, it was the result of the strategy of the repositioning with communities, the repositioning of the product, emphasizing larger models, modeling larger plans, all those things have added up to very, very strong performance in that side. And in fact, in the ASP side, we've led the space 3 out of the last 4 quarters. And I'd just give you some numbers here real quick. In the first quarter, we're up 24%; the average in the space was 11%; the #2 company was at 17%. In the fourth quarter last year, we led the space at 13% up; average for the group was 7%; #2 was 10%. Third quarter of last year, we tied for second at 8%; the leader had 10%; the average was 6%. And then back in the second quarter, we were at 9%, tie up at the first place spot; 4% average; and 8% for the #2. So we've really seen a lot of success here. It has really bridged the gap for us between rebuilding the community count and really provided a nice strong revenue driver for us as we're getting our stores open again.

On the capital structure side, we have to align that piece of the company up as well to our Going on Offense strategy. We have now, I believe, completely aligned that piece of it. We provided additional liquidity to the company, and we've now engaged in 6 capital market deals over the last 5 quarters. You guys have all followed the company pretty closely, so I'm not going to bore you with all the details. But you know we did a couple of bond and tender offers. And then in the first quarter, we did the common stock and convertible notes offering. And that has provided us some tremendous strength on a go-forward basis. Not only have we really flattened up the bond maturity [indiscernible] as you can see on this page. And on the left side of the page, it's sort of the before picture of the company that's as of November, 2011, the end of our fiscal year '11. The right side of the page is at the end of the first quarter.

We now have over -- and at the end of the quarter, we had over $800 million of liquidity on the balance sheet. That was an improvement of $500 million from where we ended the year with the combination of the offerings and the $200 million revolving credit line. And with that cash and with the knowledge that we only have a $76 million maturity through 2014 provides us ample liquidity to drive the business and drive the growth.

On the revenue side, we've experienced nice increases in our topline, again, coming from mainly 2 sources, increasing absorption rates per community and increasing average selling prices. This has come without the benefit of what we're going to see in the future as we start expanding our store count. The various strategies we aimed at improving our selling prices, like I said, really helped us bridge this gap. And I won't spend a lot of time on this chart because it's more or less historical numbers, but we're very optimistic about what this is going to bring in the future. So maintaining that industry-leading position and adding store count, and with still some tailwind on the average selling prices, we like what that means for future revenues.

Net order value. This is a big slide for me. In many cases, I think the analyst community is kind of obsessed with unit orders. I mean, it was always the big headline, where are the unit orders going and how is the company progressing as a result of it. It makes sense, obviously. I mean, ultimately, you need unit growth to drive your top line revenue, but there are other levers to pull. And as we're right now pushing on both sides as far as community count, we have average selling price increases and we have the absorption levels that we want, I believe net order values are really key area of focus for us.

We are controlling our pace versus price decisions. You heard it really throughout the day. All of our division presidents know it. We're controlling at the corporate level. It's not an across-the-board peanut butter type approach. It's very, very specific by community, communities where we have a ton of lots behind our current positions in phases 2 and phases 3 to open down the road. We can afford to let absorptions go a little quicker, and some of our smaller community count or near end of life, we'll call it, communities, we're being very careful with how they're -- we're selling those units. You can only sell a piece of land at one time, and we're making sure we're getting maximum value out of that. I will show what this -- the significance of these net order value increases has done to our backlog in a couple of slides.

Moving on to community count and sales. Again, the main objective of what we're doing on the investment side is to grow this. Albert talked about it earlier, we are reconfirming guidance on a 15% year-over-year increase in average fourth quarter communities. We are expecting to see it very back-end weighted. We do expect to see small increases as we go through the year. A lot of it will depend on our sell-outs and closed out communities. It's a very difficult number to predict, because you're trying to predict sales rates. Delivery rates, we have more control over. The sales rates are a little more uncertain as you go through the year. And the higher you sell, the lower your community count is, so it's almost a little bit counter-intuitive. But the 15%, we still believe that we could get there.

Our ultimate goal is to continue this drive on community count increase. We're pushing it in all of our divisions, in all 4 of our regions, and dependent on local market conditions or what they're finding as far as how land's penciling, as well as how, frankly, our teams are performing will determine where we make those investments.

When we start talking about the balancing that we do, the sales pace versus the price, or the sales pace versus the profit per unit, why do we do that and how do we look at it? We have 2 primary objectives right now.

The first one is improving our gross margin performance. We're very, very focused on gross margin improvement. We've seen results of it as we've gone through fiscal '12 and now into early '13, and we're going to remain focused on that piece.

But the second piece is equally important to us, and that is driving enough unit growth to meet our short and medium-term revenue requirements. So we know where we want our deliveries to be. We know what top line we're forecasting out several quarters out in the future, in fact, into early next year. And we drive our sales based on that. With our business model and Built to Order model, we have a lot of visibility going into the future. So we know this quarter, our sales rates need to be x to hit our revenue objectives down the line, and we control that on a real-time basis. So those 2 objectives are very, very important to us.

Just a quick word to about the second quarter. Right now, what we're expecting to see in the second quarter is a single-digit increase in unit sales and a value increase in the 30%-or-so range. We obviously hope to have that north of 30% by the end of the quarter. There's still 4 more weeks of selling to go. We've seen a lot of nice favorable price movements and kind of continuations of the trend that we saw early in the year, and we do believe that's going to continue to drive our delivered average selling price that you'll see in the third and fourth quarters. And that's kind of where we stand right now, just as a quick update.

And finally, despite the balancing that we're doing, we do continue to be a high velocity company. We see better IRR rates coming off that. We like being able to churn through our land at good margins and good return rates and allow us to reinvest in other landholdings as we move forward.

Open community. This is very similar to Albert's slide. The only thing I did for you guys here, when we measure our absorption rates, we use a 2-point average on open communities. I mean mathematically, we should be using a 90-day average, but it's a little too complicated and a little too much work involved. But by using a 2-point average, it does tend to smooth out. Whether you're increasing or declining your community count, I think it gives you a much better metric over time and a more comparable figure that you can use and rely on when you're looking at it on an overall basis. Again, the reality and what happens at our company is that division guys are looking at this on a community by community basis. And it's very precise at that level. They look at it as a per community, per week sales rates, and they can guide it up or down on that basis. At the corporate level, we look at it like this. And for strategic planning purposes, we look at it on an average basis.

That leads to the next slide, where it shows how our net orders per community have been progressing. So again, using those average community counts and our sales rates, our net order rates, you can see where we've been going. On the bottom of the slide, it shows some year-over-year variances. First couple of quarters of 2011, we're against the tax credit quarters of Q1 and Q2 2010. We all know what we went through in 2010 with those tax credits, so I'd probably leave it at that.

First quarter, we had some issues with -- the first quarter of 2012, we had some issues with our mortgage provider. We had a very high can rate. And other than that, we've seen some nice progress in this number, from the third quarter of 2011 all the way through the first quarter of 2013, strong double-digit increases and orders per community driving up at the peak of the selling season last year of a little over 11 homes per community in each of those quarters. We are looking to continue to drive that number, we are looking to continue to lead the group, but we don't want to lead it to the point of being ridiculous and leaving money on the table on the profit side. So we're trying to control that, and again, it's a point of balance right now.

From the net orders per community, especially the value per community, it's done a nice job of driving our backlog. And the backlog value, you can see on this slide, has increased very significantly. 53% up in the first quarter, up over $700 million. And on a year-over-year basis, every single quarter, you could see the progression that we've had. And in some of those quarters, I just want to remind you guys, we have pretty modest unit sales increases. And every quarter in 2012, up at least 30% in backlog value at the end of the quarter, it's really helping us drive that top line revenue. And again, we balanced that approach, improving margins, improving revenues, hitting our revenue targets based on what we're seeing coming in on our sales value.

And finally, I'm going to just wrap up with a slide that you saw very early this morning. This was more or less a wrap-up slide of Jeff's. I just added one little finance bullet point to this, which is the third one, about the priorities for the company and the key takeaways. This is one of the things that's on that flash drive that you guys have with you as a slide, enhancing profitability, accelerating top line growth, very, very important to us. Continuing our aggressive land investment and land development investment over $1 billion this year. This is the point I added, the additional $500 million of incremental liquidity that was added through capital markets transactions, as well as our now $200 million revolving line of credit. It gives us a lot of strength going forward.

Our land and product strategy, as Jeff said, is working. We're finally seeing the results from it. It's hitting the numbers. We're continuing to enjoy one of the highest industry sales rates per community. And with that and with our land strategy, we believe we can really start driving our top line revenues.

We're seeing tangible results in the P&L, as I showed you in the first few slides of my presentation. Nationstar has become a real tailwind for us. We're very pleased with the relationship with Nationstar. We're very excited to get this joint venture up and running. We have a number of people who are very focused on getting their licensing requirements done, working with Nationstar on systems issues, et cetera, and in order to get that going -- and for me, one of the best parts of it, that transition is going to be more or less seamless and transparent for operations. The people that we have working with us from Nationstar right now are going to become JV employees. So for those individuals, their only change is going to be the name on their paycheck. The structure's in place, the people are in place. Once those operations are up and running, we'll be able to transfer those people over into the JV and continue on a seamless basis from the point of view of operations. But financially, for the company, another tailwind for us in 2014 as we start sharing nearly 50-50 in the profit stream coming off that joint venture.

And finally, the spring coil that we talked about and the industry rebound is certainly welcome. And as good as everyone feels right now about the industry being less than half normalized levels, for me, personally, is a very exciting prospect. And it's a much nicer place to be and a much nicer feeling in the office everyday and talk in the operations than we've seen in quite some time. So we're quite excited about the future. I hope you guys take that away from the conference as well. And I think right now, we're going to just pause. I really hope Jeff comes back up on stage with me and can field some Q&A. And so we'll have Jeff up here, and you guys will have a bit of time to have some Q&A before the breakout. And I'll come back on the closing remarks. Thanks.

Jeff J. Kaminski

Mike?

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

But as you might imagine, you're going to get some questions about the 2Q order guidance so I'll just start it off. The up single digits, I think, is a little bit less than people were looking for. My immediate thought was you had a bit in the bullets before that and trying to balance price and pace. And I was wondering if you could just kind of talk about that a little bit, if you were just reaching a sales pace that you just didn't necessarily want to go that much more past. And as you're kind of managing through communities and trying to not to sell out too quickly, the thoughts around maximizing price and margin would be helpful in terms of giving us some context around that, the order guidance for 2Q.

Jeffrey T. Mezger

I can walk you through the process, Jeff, those numbers and can share that with you. But I've been referring to it for a couple of years now as optimizing the asset. And every asset has an optimal run rate margin, gets you the highest returns. And on average, if we need to have a certain absorption rate to run the community, so you're going to do what it takes to get it 2 or 3 a month. If it gets 4 a month, you're going to push margin until you get to normalized margins. Once you're at normalized margins, you'll push it to 6 a month. Once you get to 6 a month, you'll go back and go for higher margin again. That's kind of a general term. But as Jeff said, if it's got 200 lots to go, we'll calculate the best return. That's a combination of run rate margin, how many dollars you got invested to develop the next phase, when do you do it and what's the highest return. When I say return, it's not just IRR, it's not just the bottom line profit. It's both, and what's the best financial outcome for that asset. So if you look at Chris' and Steve's business, if you have a community in Orange County or up in San Jose that's got 60 lots and you cannot replace it, you literally cannot replace it, you are not going to let it run hot no matter what. So you'll push your price, and we've had some very successful outcomes on a margin basis, an incredible business and have for a couple of years, frankly. If you're out in a more suburban setting, with 150 lots to go, you'll do both. And every asset gets reviewed every week. So you can do the math on what we've been doing per community, how many communities we have. The average -- as Jeff said, the average point, you can do the math and get to wherever our unit sales are projected to be. Revenue growth can be very solid. And as the months go by, we're actually more confident in where we're headed for the balance of the year. And underneath it, our sales pace is used and built to project the financial outcome that happens to default back to a unit sales comp, but it's all about what's the backlog we need, what's the pace, what's optimal and where do you go from there. So every week, there's an optimizing asset call with the divisions, every week. But -- are you going through the math?

Jeff J. Kaminski

Yes, I think if you look at it, we'll be driving the per community sales rate up versus last year. We're comfortable with where it's going to be. We think we're still going to be industry-leading on that metric. We know where our revenues need to be. We know obviously the expectation for revenues, and we have internal expectations that we're going to hit as well, and we're comfortable with that rate. And we're very, very happy about what we're seeing with our gross margins. And from that point of view, it is a balance as we're investing and reinvesting in our land assets and development and growing that store count. We're very cognizant and very aware of trying to maintain our sales rate, improve on our sales rate, stay at that industry-leading position, rebuild our community count and bridge it through our average selling price increases. And I think it's all going to work. It's -- to this point in time, it's really holding together well for us.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

So the increase -- if sales per community were up a little bit, I guess, let's say, arguably, it was a year ago, and the 2Q was at 11. And let's say it was up a little bit to 12, that would be 4 a month. And that kind of gets back to your comments as well in terms of, okay, we're at a good pace, let's get that price.

Jeffrey T. Mezger

That's exactly right. And I can add one other data point that kind of flavors it for the people here. I'll go back to what Steve was talking about before. We have a process we use called the intent process, where we will whisper a price range and see how the consumer is responding. We'll do that for a few weeks and then open for sales. And it -- one, it assures you'll have a successful opening. You never want to bust an opening because it is very hard to get momentum if it busts because you just throw out a number that's too high, at the same time, you hate to leave money on the table in this environment and in this process. Steve shared one where we had a trailer out at San Marcos today. In his presentation, he shared that we had a trailer there for a few months. Once -- you can't really -- you can whisper, you can't get the real read till the models are done and merchandise them. And we call it having the store open. And what -- we're famous around the system. All these guys would tell you they build models in less than a month because we're not selling until we get the stores open. Once the store is done and decorated, we'll do the intent process and not necessarily San Marcos but around SoCal. There's been examples where Steve has been able to lift his prices, $20,000 $30,000, $40,000 per unit by taking the time to let the intent process and play out. And his original price range would have been ahead of pro forma when it came in for the investment decision. And his comment was I could just run it and feel okay because I exceeded the pro forma that I had set, but I'm going to take my time to optimize the asset. It warmed my heart to hear him say that. And literally, if we were just chasing units, we could go get you 300 sales, but I'm not going to leave that kind of money on the table, especially where these things are opening and you can't replace them right away. So $50,000, I don't -- I think I actually said you left $50,000 on the table one, and you raised prices and got the $50,000 just to prove I was right.

Unknown Executive

[indiscernible]

Jeffrey T. Mezger

So that's part of it, too. As these communities are opening, that's part of why Jeff said they're second-half weighted because the intent process is another 2 to 3 week process that we think has a significant impact on our business this year.

Buck Horne - Raymond James & Associates, Inc., Research Division

Buck Horne with Raymond James. Let's shift gears to SG&A a little bit. And I think, I mean we're all pretty excited about what you talked about the possibility of getting back to, say, 900,000 new home sales, less than half that right now. But one thing we're -- I'm trying to wrestle with is how quickly does the fixed component of your SG&A need to grow as we progress back towards that normalized rate of new home sales as you -- if you're trying to protect your market share to maintain or grow your market share, over time, that fixed component and your smart investments will need to grow. How quickly should we think about that expanding? And based on all the changes you've made to your business model in the past few years, would a normalized SG&A be below, say, what we saw in 2003 to 2005 or about the same as?

Jeff J. Kaminski

Yes, what we've been saying is low double digits on a normalized SG&A. I'm not amiss -- I mean what we've seen, we've seen some tremendous project -- progress on that piece of the equation, the profit equation at this point. I'm optimistic that, hey, maybe we could push that thing down even further. At this point, we're doing -- I would say, we're putting a lot of stress on the system. We know when the revenue is coming back and when the units coming back. We're holding our back offices pretty tight to that and looking for productivity improvements. Our guys are reengineering processes throughout the company to try to cope with it. We're being very strategic, I believe, on where we're reinvesting. Like I said earlier, I think a great decision that Jeff made last year was putting some aggressive land resources back in the ground early part of last year. The expansion of the divisions into -- back into close to the market with presidents with bottom line responsibilities is another good one. But it's paying off in big time dividends because if you add the expense and it's 5% of your potential revenue, you're still decreasing your average SG&A rate. So like we've been guiding, we were guiding 6% to 7% variable. We're now guiding more in the 5% to 6% variable range, especially after the reclass, some of those are closing costs. It's a rate that we hope to continue to maintain for as long as possible. I mean it's difficult to predict the future and how quick do we get it back to 900,000 or 1 million units, but I think there's a couple of key things here. One is, as we're expanding our footprint, we're not expanding into new markets. We're reexpanding and redeploying resources in the markets that we never really abandoned. Much, much more efficient way and much more profitable way to grow the top line when you do that. We're very centralized and efficient in many of our processes. Bill's here, who runs our national accounting center and that reports to him, will tell you as those divisions are growing in size, he's been able to hold a staff size relatively constant, in fact, decreasing in some cases, due to efficiencies in the national accounting center. So we're looking for those productivity improvement areas throughout the business. We'll continue to manage to it. At some point, we're going to hit some walls. And like you always do, these fixed costs are a little bit lumpy and you might have to add in a set of resources here and there. But up to this point, we've seen tremendous progress. And I think it's just the beginning now on that piece.

Jeffrey T. Mezger

He's more conservative than me. I think we'll be below where we were, and I'll tell you why. From '02 to '05, we went from 17 cities to 39. There was a little overhead in those last 22 to grow that we were covering with our -- frankly, our dues and our big businesses that were performing well, $7,500,000,000 of overhead that won't come back as we grow. We've talked about the fact we can probably double our units. And your only overhead, that's going to be the incremental community specific. So there's a -- that's why we keep calling it a lot of leverage on the spring coil. It's pretty significant right now. If you think about it, if you're in 33 cities, you can grow 40% by adding 100 deliveries of a city. These guys can do it in their sleep. That's not -- they're bored at that levels. So we'll make sure that they're excited. David?

Unknown Analyst

I'm going to assume standard rules, so one question, one follow-up, is that fair? My first question is, you guys mentioned, and I think it's good to keep in mind that in the communities that you're in today, the cities that you're in today, I think it was 25,000 or 28,000 closest...

Jeffrey T. Mezger

28,527.

Unknown Analyst

Yes, see? Much better memory than me. The question I wanted to ask was when you think about some of the changes that are kind of going on in the business, you're kind of targeting a higher priced entry-level buyer or kind of better quality. If we didn't see that kind of marginal buyer, that real entry-level buyer come back as quickly in the next couple of years, how big do you think you can get? What's the trajectory relative to that 28,527 number?

Jeffrey T. Mezger

If you look at the numbers that the divisional presentations put up, we view the total housing market as the market. So it -- just take SoCal, because I think I have the numbers ranged. There's 270,000 housing transactions in the last 12 months. Resales were 258,000 of them or whatever it was. The buyers are out there. It's a different buyer today because of how conservative lending is. And I want to correct you, because you said they're challenged lower end buyers. They're real buyers right now. FHA, FICOs are so high, half of this room couldn't get along. I probably couldn't, based on whatever my wife did while I'm down here. But people lose sight of that. Underwriting is so conservative today that the first-time buyer coming out of college, good incomes, good credit and have their own home. These are great buyers. And they can't get a loan today. So I think, as I said this morning, that's what it'll take to get the whole food chain reset to get a fulsome housing recovery. And the interim will be in this slow grind, and we'll continue to elevate. And we'd have to do the math to see where the markets are today. But could Steve double in SoCal in today's environment? You bet. Could Arizona be significantly higher? You bet. There's a lot of upside, so we -- are we going to get to 28,000? No, but we don't have to. We don't have to. Could we double? Absolutely, in today's environment. So managed it today. At some point in time, that will all reset. And when it does, you'll see an incredible run.

Unknown Analyst

So my second question was about financial leverage and really more in the operating side of the business. Options, the kind of inherent leverage that was in the business in the last cycle, right? A lot of options can grow a lot faster when you're using options. How do you guys think about the ability to control land with less capital and more capital this time around? And where is that going to head in the next kind of 12 to 18 months as you kind of look forward? Can you grow as quickly if there's less leverage in the business from an option, land ownership perspective?

Jeffrey T. Mezger

Well, I believe we can. I mean with our current capital structure and with the prospect, especially you're bringing the DTA back on the balance sheet at some point in time, which fixes a lot of what I call the ratio side of things. And with the capital markets where they're at today, I think there's plenty of ability to grow the business. Despite a lot of criticism, concern, whatever you want to call it from the Street, we never really had a cash pinch internal to the company. And where it constrained our growth, it constrained our operation. We put some funding in place in the first quarter to give us a nice clean runway well into 2014. Like I said earlier, we have $76 million due February next year. It's a drop in the bucket compared to the size of the company now. And as the conditions improve and as we start cycling through the land, we're kicking off some nice cash flow. And I think one of the few things people maybe misunderstand and miscalculate, the company is complicated because of our mix of business. And with so much of our company on high-priced land deals in California, I think a lot of time people -- a lot of times people miss how much cash comes off of those deals as we're delivering homes and how much that provides us with additional financing to move forward. I mean the first quarter this year, we spent almost $350 million on land, and we had a cash usage of about $100 million in operating terms. And that's -- and our lowest [indiscernible] quarter of the year. So the engine right now that we have can really help us finance the business going forward. And I do believe as the results continue to improve as the capital markets -- they're fickle, we all know, I mean they open, they close, they open, they close. But every indication for me is that we'll be in a really good shape financing the growth and financing the business. And I think the limiter -- as the finance guy, what I'd like to limit is the operation, saying, look, we're bringing every single land deal we can get and we can't fill your bucket. And that would be great from my point of view, and that's my objective as the finance guy.

Jeff J. Kaminski

Let me go specific to the land environment. We're doing a lot of options today, and Albert can give you more color. Places like Texas, a lot of our deals are option deals. And if you think about what's been going on with the opportunistic finished lot plays, they're typically cash because they're very land-constrained. They're A location, that's a high-priced area and the sellers doing a quick flip and get out. So that's your bookends. You've got the easy rollers, as I call them, and then you've got the quick cash. Many of these large institutional portfolio buyers don't need the cash. They want to make as much money as they can. So we're seeing some of the large hedgings, as I call them, actually do rollers because they'd rather do that and push the lot price than do profit participation and fight with you over the -- how much money was actually made. So we've done some rollers out here in California as of late, and we're certainly doing them around the system. So that's kind of the pendulum tilt that you'll see go on, and our preference is always options. But right now, because we can move quickly and pay cash, we're getting finished lots that we may not otherwise get. Every city's got a different strategy. But it's not -- the balance sheet right now is set up to absolutely push wherever we want to get to.

Unknown Analyst

Can you talk a little bit about the drivers of your gross margin? I mean I think you've talked about raising prices and options and stuff like that, but can you talk about other stuff that also affect it like labor increases and material increases. Are you concerned at all? And how much are you able to control those through growing the sales pace and your scale?

Jeffrey T. Mezger

Well, I'll just give you some color on the markets and you heard some of it today. But that's actually starting to ebb a little bit. You saw in the news today, lumber came way down. And it's kind of interesting because we have one business model. Dan actually has weekly or monthly calls on lumber, where everybody gets on the phone and talks through this is how I locked it, this is how long I'd protect it, this is where I think it's headed. We have corporate lumber experts that give them insights, and they may lock today or they may say it's going to come down tomorrow. And we don't hedge it. We don't pay any money for locks. We are not lumber experts. But you have a lot of brainpower on that call from around the country that all gets together and works on lumber locks as an example. And in some cases, while you were hearing in the news about lumber spiking, we had strategically locked through the spike and avoided it. And there's others, we weren't so good and we called it wrong and take the hit. Right now, lumber is actually coming down a bit. Jeff talked about copper: up, down, up, down. How much is China buying? And that's something you really can't control. With some of the other things, we've been able to absorb a commodity increase, like sheet rock or concrete, because of a better labor bid or a better distribution process in our business model where we've learned something in one city and we'll take it to other areas. So we're constantly pushing cost down through all these things. Is there pressure today? Absolutely. Did it affect our progress last year? You bet. And I don't know -- I can't recall what we shared, and that's why we didn't get into the numbers.

Jeff J. Kaminski

Yes, I mean if you look at it, I mean the short answer is, I think Jeff just said it just exactly right, yes, we are concerned about it but we're not passive -- we're not a passive management team. We're doing a lot of things about it to offset. I think, on a net basis, we're still going to see increases, which is reflective of, I think, strength coming back to the market. Dan charged with the division presidents to do everything we can to offset it. We're doing a lot of work again in the architectural side, at our value engineering side, Jeff talked a lot about what we're doing with premiums as -- not only lot premiums, elevation premiums, plan premiums, making sure we're priced right on that. If not for us just a method of let's see if we could raise price enough to offset it. I mean we're looking at every single lever on that side to improve it. And frankly, the studio process is a big contributor as well. And one of the nice benefits we're seeing from our average selling price increases, and as -- again, as we've repositioned our communities and repositioned our product, as their average selling prices have gone up and certainly a part of that has been through market lift, 2/3 of it has been through strategic actions, that percentage, if we just sold the same percentage in the studios before, those are incremental dollars to the bottom line at higher average margins. So the studio is accretive to our gross margin. And now as people are spending up a little bit more on homes again, we're seeing some very nice studio revenues coming through and very nice margins as a result. So it's multifaceted. We talked a lot about the various drivers as we went through the day-to-day, and we're seeing progress from the numbers, so that's good.

Jeffrey T. Mezger

Okay. But from my perspective, I thought it was a good day. It actually -- I enjoyed hearing all of the KB people present and reinforce for me what a quality management team we have. I was going to share a Tom Silk story real quick. I was sharing with Tom before he made me go sit down. When I was interviewing Tom, I'm thinking, okay, we're a process company. We measure everything. We've got to report, to track our reports. And I have to find a marketing mind that's creative but can fit in to this kind of an environment. And I was interviewing Tom, and one of his claims to fame was having to turn a destroyer without really having a guidebook to tell them how, so he just went and turned his destroyer. And I said, okay, that's like buying lots and maybe you missed it and you hit a rock. So that wasn't a good story, but it was a successful one. So then I went, okay, tell me how -- what you did at some point in your career to go find out what your consumer liked or didn't like, because that's what we do in our survey processing. He told me the story he was at Pine-Sol and their sales were down 30% or 40%. They're going out of business. They had lost their way and they're done. And he went out and started interviewing people in their homes in the Southeast. And he showed that in the Southeast, it was Pine-Sol's biggest market, and people would literally mop their old porch, the wood porch out in front, and sit on their porch and it had to smell clean. And as he was doing his own survey process, he found out, lo and behold, that they had changed the chemical content of Pine-Sol where it was better at cleaning but didn't smell the same. And he went back, said you guys lost it. You got to get the old Pine-Sol smell back because that's what tells people that it's clean. And they sit on their porch and they have to smell their Pine-Sol, and they worked it out where they kept the better cleaning agents but got back their old smell. And he had some fairly graphic stories on where he went with people to test the Pine-Sol, and there was -- but consumer research, that's what won me over. And now we have a guidance, very creative on the Internet side, you can tell that, and pushing the envelope for a bunch of homebuilders that built houses with a legal pad and a pencil. And it's another way that, as a company, we're elevating ourselves. I appreciated your presentation this morning. And they still build them one home at a time. They still buy one lot at a time, I'm going to hold on to that for my career. But I enjoyed the presentation and our quality group of guys. I was sitting there thinking, okay, there are skeptics in the room wondering where is the beef. If you guys are so good at all this, where is the beef? Why are you lagging? Why are you this? Why are you that? I just showed you where the beef is. The beef is coming. And you can't just flip a switch and go from this company to this company. It takes time, and there's a lot of effort involved. And for the last 1.5 years, we'd been telling you it's coming. And people are saying, well, yes. But until it's here, I don't believe you. And now, it's here and you can see it in the momentum we have and the numbers that Jeff outlined. And I can tell you the best is yet to come. All the presentations I heard up here from these guys confirmed it for me. And hopefully, you picked up also that it's only one team with one goal and doing it one way, and that's the power that we're going to leverage going forward. So I look forward to spending more time with all of you. If you haven't been to the house yet, it's a great story out there. And we'll be heading out there from here and just thanks for coming. Thanks for supporting the company.

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