PulteGroup's (PHM) CEO Richard Dugas on Q4 2015 Results - Earnings Call Transcript

| About: PulteGroup, Inc. (PHM)

PulteGroup, Inc. (NYSE:PHM)

Q4 2015 Earnings Conference Call

January 28, 2016 8:30 AM ET

Executives

Jim Zeumer – Vice President-Investor Relations and Corporate Communications

Richard Dugas – Chairman, President and Chief Executive Officer

Bob O'Shaughnessy – Executive Vice President and Chief Financial Officer

Jim Ossowski – Vice President, Finance and Controller

Analysts

Bob Wetenhall – RBC Capital Markets

Stephen Kim – Barclays

Nishu Sood – Deutsche Bank

Michael Rehaut – JPMorgan

John Lovallo – Merrill Lynch

Alan Ratner – Zelman & Associates

Megan McGrath – MKM Partners

Mike Dahl – Credit Suisse

Stephen East – Evercore ISI

Will Randow – Citigroup

Susan Maklari – UBS Securities

Jay McCanless – Sterne Agee

Jack Micenko – SIG

Mark Weintraub – Buckingham Research

Ryan Gilbert – Morgan Stanley

Buck Horne – Raymond James

Operator

Good morning, my name is Sean. I’ll be your conference operator today. At this time, I would like to welcome everyone to the Q4 2015 PulteGroup Incorporated Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Mr. Jim Zeumer, you may begin your conference.

Jim Zeumer

Great. Thank you, Sean and good morning to everyone participating in the conference call to discuss PulteGroup’s fourth quarter financial results for the three months ended December 31, 2015. Joining me on today’s call are Richard Dugas, Chairman, President, and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; Jim Ossowski, Vice President, Finance and Controller.

A copy of this morning’s earnings release and the presentation slide that accompanies today’s discussion are posted to our corporate website at pultegroupinc.com. We will also post an audio replay of today’s call to the site later today.

Let me remind all the participants that today’s presentation may include forward-looking statements about PulteGroup’s future performance. Actual results could differ materially from those suggested by any comments made today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

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

Richard Dugas

Thanks, Jim and good morning, everyone. I’m extremely pleased to – with PulteGroup’s fourth quarter earnings which show significantly improved results across key business metrics. In addition to ending 2015 with very strong results, our fourth quarter operating and financial performance provide a foundation we can build on in 2016. As we capitalize on opportunities to accelerate the growth of our homebuilding business.

Bob, will go through a detailed review of our Q4 financials in a moment. But there are a couple of numbers and points that I’d like to highlight. Order rates in the fourth quarter were up 13%, which is the biggest year-over-year percentage jump we have realized since 2012.

As solid as this number is, what I view even more encouraging is the 9% gain in absorption pace that we realized in the quarter. We’ve always said the generating higher sales within our existing footprint is the most efficient way for us to grow volumes and ultimately earnings.

Pulte’s disciplined approach to acquiring the right land positions over the past several years is having a positive impact on our results. Along with order rates, the average sales price we’re able to realize for our homes continue to increase. In the fourth quarter closing ASPs were up 6% to $353,000, while backlog ASP is gained 10% to $365,000.

Between market opportunities, mix shifts and ongoing implementation of our strategic pricing programs, we expect ASPs will continue to move higher in 2016 versus comparable quarters in 2015. Our recently closed purchase of assets from John Wieland Homes and Neighborhoods will further our pricing gains given their higher price points.

I also want to highlight our gross margins, which at 23.5% is up 40 basis points over last year and remains arguably among the highest in the industry. As we have discussed for the past several years, we have implemented a number of programs from product and purchasing zones and commonly managed plans to – should costing and strategic pricing.

As an example, almost 60% of our fourth quarter closings were from commonly managed plans that have the benefit of increased consumer feedback and more efficient floor plan design. The goal of all this work has been to improve sales paces and gross margins in support of delivering higher returns on invested capital. A lot of time and effort has been invested in implementing these initiatives and the gains are evident in our results.

Given that the financial improvements we realized in the quarter were so broad based, I can highlight a number of other metrics in my comments. I purposely picked order rates, ASPs and gross margin because there is at least one common element which I believe is an important factor in all three metrics. That common element is land.

In 2011, we launched the value creation strategy, with its focus on delivering higher returns on invested capital over the housing cycle. By 2013, we had raised returns to the point where they exceeded our cost of capital. Since that time, we have purposely increased investment into the business, because it makes economic sense to do so. While we have raised investment, we have done so while adhering to the guidelines and disciplines we put in place back in 2011.

These disciplines include underwriting projects to a defined 13 point risk rating scorecard that helps ensure we select the highest returning projects, focusing in on land positions that are closer into job centers and located in the better markets and sub-markets, prudently using options which now account for 31% of all lots and 34% of our more traditional Pulte and Centex land positions to help enhance returns and/or mitigate land risk.

Even though, we are having to develop over 70% of the lots we use, we have systematically expanded the percentage of option lots we maintain. We continue to emphasize investing in shorter, faster turning projects with an average investment cycle of 36 to 48 months from acquisition to completion.

By focusing in on shorter duration projects, we help to minimize risk should a housing downturn emerge sooner than expected. As an example, we expect to recruit the capital we invested in the John Wieland assets in less than four years. And we expect the purchase to be accretive to company returns by year two.

By strategically investing in land over the past few years, we have assembled a robust land pipeline that should allow PulteGroup to grow at a rate consistent with or ideally ahead of the overall housing market. Our just completed Wieland transaction will certainly support this effort.

The John Wieland Homes and Neighborhoods brand is highly regarded in the Southeast particularly within the luxury buyer category. Beyond the opportunities we see to expand this position, we also see the potential to deploy our Pulte brand on to certain Wieland land positions as we work to increase volumes and accelerate future absorption of the acquired lots, again enhancing returns.

By focusing as intently on the quality, not just the quantity of the land assets we acquire. We put ourselves in the best position to maximize sales pace, pricing, margins and most importantly returns on invested capital while working to mitigate excess market risk.

Through our value creation strategy, we have now put the company in a position to grow. While continuing to generate better financial performance and consistently returning funds to our shareholders. And we have done all this while taking a more conservative lower risk approach to our business. Growth, stronger returns and properly managed risk. We think this is a great combination.

Now let me turn over the call to Bob, for a more thorough review of the quarter. Bob?

Bob O'Shaughnessy

Thanks, Richard and good morning. The gains demonstrated in PulteGroup’s Q4 financial results are direct reflection of the meaningful improvements we’ve continued to realize in our homebuilding operations.

As I will detail, these gains can be seen throughout our fourth quarter financial savings. Fourth quarter homebuilding revenues totaled $2 billion, which is up 12% from prior year revenues of $1.8 billion. The increase in Q4 revenue is driven by a 7% increase in closings to 5,662 homes, combined with a 6% increase in average sales price $353,000. Although not a metric, we managed against, the 5,662 homes closed in the fourth quarter, equates to a backlog conversion rate of 65%. As we addressed in our most recent calls, we are working to close the year-over-year performance gap we’ve experienced with regard to getting homes delivered.

We are pleased with the progress we made in the fourth quarter. Having said that, the challenges we and the industry face with regard to labor resources and extended land development timelines are not likely to improve in the near-term. We believe however, there are decision to prudently increase spec production, should help us to maintain a more consistent build cadence going forward.

In the quarter, closings by brands were as follows: 19% of homes were from Centex communities. 55% were from Pulte communities and 26% were from Del Webb. In the fourth quarter of last year closing from Centex, Pulte and Del Webb were 24%, 46% and 30% respectively.

Given the profile of projects we are investing in, coupled with the projected impact of assets acquired in the Wieland transaction, we believe that describing our customers by buyer group, rather than by brand will better represent the makeup of our business. As a result beginning in Q1, we will address buyer groups rather than brands.

In the fourth quarter, closings by buyer group were as follows: 31% were first time buyers, 40% were move-up buyers and 29% were active adult buyers. In 2014, closings by buyer group were 34% first time, 33% move-up and 33% active adult.

The company reported gross margins of 23.5% in the fourth quarter, which is up 40 basis points over the prior year. As it’s been an ongoing trend, fourth quarter margins were enhanced by higher option and lot premium revenues. In fact, option revenues in the quarter increased 10% or $4,976 per closing, while lot premiums gained 16% or $1,868 per closing.

Sales discounts remained modest, it just 2.2% or $8,026 per home, compared with 2.1% or $7,040 per home last year. This implementing our strategic pricing programs and 2011 as part of our value creation strategy, option revenues per home have increased by $19,800 or 58%, while lot premiums per home have increased by approximately $7,100 or 107%.

We believe our more strategic approach to pricing has been a key contributor to the high gross margins we continue to maintain. Reported fourth quarter SG&A expense of $139 million or 7% of home sale revenues, included the benefit of a $30 million reversal of construction related insurance reserves. Reported prior year SG&A expense of $146 million or 8.2% of home sale revenues, reflected at $15 million reversal of construction related insurance reserves.

Looking at the full-year, our reported SG&A of $590 million, which was 10.2% of homebuilding revenues, includes the benefit of $62 million or 110 basis points, associated with certain legal settlements and reserve reversals.

PulteGroup’s financial services segment reported fourth quarter pre-tax income of $29 million, which includes the reversal of $12 million in mortgage repurchase reserves. The decision to reduce reserves is based on probable settlement of various repurchase requests and current conditions. Mortgage capture rate in Q4 was 83%, up from 81% in the prior year. I would like to take a moment to highlight the efforts of our financial services team, including Pulte Mortgage and PGP title and meeting the challenges in the new regulatory environment under TRID. Our teams did a tremendous job closing Pulte Mortgage loans, without missing a beat and supporting our customers under the new rules.

Deb Still, our President and CEO of Financial Services and her team are recognized leaders in the industry and did a fantastic job, implementing the changes needed to operate within the new TRID guidelines. Looking at net income for the fourth quarter, we reported $228 million or $0.64 per share, which includes $0.07 per share of benefit from insurance and mortgage reserve reversals taken in the quarter. Our per share earnings were calculated using approximately 352 million shares outstanding for the quarter, which is down 6% from last year, largely as a result of our share repurchase activities.

As part of our income statement review, we wanted to provide some thoughts about 2016, given our backlog in anticipated land, labor and material costs. We expect 2016 homebuilding margins, inclusive of the diluted effect of the Wieland transaction to remain high and be in the range of 21.5% to 22%. This annual margin guidance includes a negative impact of the Wieland transaction of approximately 100 basis points, in the first quarter 80 basis points in the second quarter and 50 basis points, in each of the third and fourth quarters.

Looking at our projected SG&A, we expect our full year spend will be approximately 10% of homebuilding revenues. Consistent with prior years, this will be impacted on a quarterly basis, by the seasonality of our closings. Based on the margin and overhead guidance we just provided, the calculated operating margin we expect to generate in 2016 is between 11.5% and 12%. The operating margin we reported for 2015 was 13.2% but this was enhanced by the 110 basis points impact from the construction related insurance reserve reversals we recorded during the year.

When you consider that our 2016 operating margin guidance of 11.5% to 12% is being negatively impacted by roughly 70 basis points from the Wieland transaction and factoring the 110 basis point enhancement to 2015 operating margins. You can see that operating margins will actually flat to slightly improved in 2016 compared to 2015.

Given headwinds the industry is facing on land and labor costs, we’re very proud to be able to maintain our strong operating margins. Putting all this together, the combination of expected higher closing volumes, higher ASPs and overhead leverage have us positioned for strong earnings growth in 2016.

Moving past the income statement and reviewing our homebuilding operations, we ended the fourth quarter with a total of 6,494 homes under construction. Spec units accounted for 30% of the homes under production, which is up from 26% at this time last year.

As discussed, we have purposely increased the amount of spec homes we have in the pipeline to help maintain a more even construction cadence. In the fourth quarter, we approved approximately 7,000 lots for purchase excluding the Wieland assets, as that deal close to mid-January.

We ended the year with 138,000 lots under control, of which approximately 42,000 lots or 31% were controlled via option. We continue to seek out opportunities to increase our use of land options in an effort to enhance returns and/or lower our overall risk profile.

Of our controlled lots, approximately 23% are finished and 18% are currently under development. As Richard discussed, we continue to use the defined and disciplined approach to our land investment. Consistent with our land acquisition guidelines, we invested $485 million in land acquisition in Q4, and an additional $304 million for development of previously acquired lots.

These investments brought our full year land related spend to $2.3 billion. For the year, we invested approximately $1.2 billion to acquire new land. Looking ahead to 2016, including the money invested to acquire the Wieland assets, we have authorized $1.6 billion for land acquisitions. As always, this level of investment is predicated on our continuing assessment of the market, and on our ability to identify suitable high returning projects.

Looking at our capital allocated to shareholders in the fourth quarter. We distributed $28 million in dividends and did not repurchase any of our stock. The lack of share repurchase activity was due to trading limitations resulting from work to close our previously disclosed term loans and to acquire the Wieland assets. We expect our share repurchase program to become active again beginning in the first quarter of 2016. Based on our fourth quarter activity, we ended the year with $775 million of cash and the debt to capital ratio of 30%.

As Richard noted at the start of this call, we realized strong new order growth in the fourth quarter as orders were up 13% over the last year to 3,659 homes. Higher orders for the period were driven by 9% increase in absorption paces, as all three buyer groups realized higher prices.

It should be noted that we expect absorption paces in the first half of 2016 to be lower as we integrate the Wieland communities with their typical operating model, of higher ASPs, and slower absorption paces relative to Pulte averages.

Breaking down orders by buyer group, on a year-over-year basis, our first time buyer business was flat, while move-up an active adult orders increased 35%, 3% respectively. Adjusting for community count, our absorption paces were up 16% from first time buyers, 11% from move-up buyers and 9% for active adult buyers.

On a dollars basis, orders for the fourth quarter gained 24% to $1.4 billion, helping to raise the average sales price and backlog to $365,000. It’s important to remember the normal business seasonality and its impact on the mix of closings will typically result in lower delivered ASPs in the first quarter of each year.

The company operated out of 620 communities during the fourth quarter, which is up 4% over the prior year. Looking ahead, we currently expect community count growth versus comparable prior year period to be in the range of 8% to 10% in the first two quarters of the year, increasing to 10% to 15% growth in the back half of the year.

This will be our largest year-over-year increase in community count since the housing recovery began. Supported by our strong orders in the fourth quarter, we ended 2015 with a backlog of 6,731 homes, valued at $2.5 billion. The growth in our year-end backlog up 15% in units and 26% in dollars compared to last year, gives us great momentum heading into 2016.

Now let me turn the call back to Richard.

Richard Dugas

Thanks, Bob. As Bob, detailed the company realized meaningful improvement in our operating and financial results for the quarter. Given the strength of our operating metrics and the expansion of our land pipeline, we are in an excellent position to grow earnings in 2016 and beyond.

As has been our practice, let me provide a few comments on the market conditions which drove our fourth quarter results. Consistent with our Q4 increases in orders and absorption pace, we experienced generally higher buyer traffic to our communities, a pattern we realized throughout 2015.

Further, many of the trends we experienced earlier in 2015 continued through Q4, with stronger demand in the better located and on average closer end communities. Specific to the fourth quarter, buyer demand remain positive up and down the East Coast with notable strength in the Southeast from the Carolinas down to Florida. We’ve talked about positive demand trends in the Southeast for a number of years. It is this trend and our expectations for long-term growth in the Southeast markets, particularly the bigger markets of Atlanta, Charleston, Charlotte and Raleigh, which made the transaction with John Wieland so compelling.

Looking to the center of the country, demand conditions remain favorable, although we continue to experience volatility in the performance of underlying markets. Demand in the Midwest showed some positive gains, as we benefitted from an expanded community count in several markets.

Our Texas business in Q4 was slowed by having roughly 10% fewer open communities, available for sale versus the prior year. In addition, our Texas numbers were impacted by ongoing demand softness in the higher price communities in Houston, resulting from the prolonged weakness in the energy markets. Given current conditions, we are being very thoughtful about deploying additional capital in the region and we’ll continue to carefully monitor demand throughout the state.

The Western third of the country continue to realize excellent demand from Washington through California and through our markets in Arizona, Nevada and New Mexico. Overall, we were pleased with our demand conditions developed in the fourth quarter. We have seen a continuation of good traffic and demand trends through the first few weeks of January.

So we have every reason to be optimistic heading into the spring selling season. Consistent with our long held expectations for a gradual but sustained recovery, 2015 new home sales of approximately 500,000 units for the country were up 15% over last year. Given the favorable market dynamics of strong job growth, accelerating household formations, supported demographic trends and continued low interest rates, we expect new home sales will continue their slow and steady path higher for the next several years.

All that being said, we are well aware of the volatility in the world today. From concerns of our global economic conditions to the swoon in oil prices, to gyrations in the stock market, the day-to-day swings can be violent. The reality is however that we can’t control any of these factors, what we can do is focus on running our business, consistent with the goals we have established and disciplines we’ve demonstrated. This means acquiring well-located communities that we believe can deliver high returns on investment. It also means hedging our bets by using more land options, where possible and focusing in on smaller, shorter duration projects, where we can get our capital back quickly.

It also means, not over leveraging the balance sheet and keeping one hand on the lever to slow investment if housing demand begins to change. And finally, it means having the discipline to systematically give excess funds back to shareholders, rather than trying to force investments in the system. We ended 2015 with a strong fourth quarter performance. I’m confident that we can build on these results in 2016 and further capitalize on the excellent market position, I believe PulteGroup maintains today. Our market position has been built by our exceptional group of employees, who work hard every day to build great homes and deliver an unmatched home buying experience to our customers.

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

Jim Zeumer

Great. Thank you, Richard. We’ll open the call for questions. So, that we can speak with as many participants as possible during the remaining time of this call, we ask that you limit yourselves to one question and one follow-up.

Sean, if you’ll explain the process, we’ll get started.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Your first question comes from the line of Bob Wetenhall from RBC Capital Markets. Your line is open.

Bob Wetenhall

Interesting year, I just wanted to touch on – you guys have really robust order growth and you also noted 7.5% decline in deliveries in Texas and orders were also soft. Can you give us a view on what you’re seeing in the Texas market and specifically, is it broad based or is it and what’s going on with price points there?

Richard Dugas

Bob, this is Richard. Good morning. Overall the higher price points in Houston continue to exhibit softness as we’ve discussed. Outside of Houston, I would say that we have a mix performance with some notable strength in Dallas. That seems to be the one market that continues to hold up better than the rest of the markets. So overall it’s a decent housing market with the exception of the higher price points in Houston and we’re being thoughtful with our investments going forward keeping an eye on things.

Bob Wetenhall

Got it. That’s helpful. As a follow-up, great execution it seems like you’re on track with deliveries and surmounting some of the labor bottlenecks. Trying to understand the setup for 2016, when we’re thinking about pacing and absorption and your expectations for ASP performance, you said that there is some volatility, but then you look at some of your trends and they seem very strong. How should we be thinking about pricing trends versus cost? You touched on that gross margin 21.5% to 22%. What gives the confidence on the ASP growth you can get there? Thanks and good luck.

Richard Dugas

There’s a lot of stuff in that question, Bob. I think in terms of ASP growth, we don’t factor that into our expectations. But we’ve got – a third of the year in backlog, we’ve got an expectation that we’ve got relatively benign input costs this year. So lumber is trending positively, basically all the other input costs, we see about 2% increase, maybe in our house costs construction that’s largely labor. We’re obviously working through that in all the different markets. So we have visibility into a good part of the year, and at least in terms of input costs, we think that we’re in relatively good shape coming into the year.

Operator

Your next question comes from the line of Stephen Kim from Barclays. Your line is open.

Stephen Kim

Thanks very much, guys. Yes, strong quarter and impressive results.

Richard Dugas

Thanks, Steve.

Stephen Kim

I wanted to ask you a little bit about your break-out of the first time move up in active adult. Just one, two clarifying questions on that. So first of all you said that, in 4Q, I think it was 31% first-time, 40% move-up and then you gave – some numbers about a third, third, third for 2014. I just want to make sure that was full year 2014 versus fourth quarter of 2014. If you could remind me again, the definition of first-time versus move-up. I mean are you actually just asking them? Is it the first time you’ve ever owned a home or you just sort of – putting that sort of a demarcation based on price point or what you think a typical first-time buyer would be buying?

Bob O'Shaughnessy

Yes, Stephen. To the first question is – that is Q4 data, not full-year. And to the second question, we actually have, what we call targeted consumer groups and so it’s based on the type of product we’re building and the location of it, that tells us who the buyer groups are. And so, the first time designation is just an aggregation of the targeted consumer groups that serve people that are buying, their homes first time as opposed to move up.

Stephen Kim

Yes. That’s what I thought. And what’s interesting is that we’ve been sitting…

Richard Dugas

Stephen, just to clarify, I think we had talked about this on a couple of calls. The flagging of those differs somewhat. So there are – for that millennial buyer that’s closer in typically higher price point, we flagged them Pulte, but they are really first-time buyers. So that’s the primary difference there and then there are certain active adult penetrations that we have historically and will continue to flag Pulte not Del Webb that will get caught in the active adult categorization as opposed to, again being a Pulte flagged.

Stephen Kim

Right. And I think that’s – that’s obviously an important distinction to make because, obviously we’ve been – will not obviously, but we’ve been seeing a pickup in first-time buying activity that doesn’t seem to really have manifested in entry-level product per se. But – if that would be consistent with an idea that the guy who let’s say, was a 26, 27-year-old, six years ago, is now older and probably in the market maybe buying a slightly different product than he would have six years ago.

I guess my question generally would be, as you lay out your community count growth, as you think about how you’re going to be utilizing the Wieland land with some of your product. And just generally as you position your business in 2016 and 2017, how specifically or discreetly are you targeting a first-time buyer who may be looking to sort of buy a product which historically might have been considered a little bit more of a move-up, the first-time move-up kind of a product? Like, how much are you actually positioning yourself for the emergence of that kind of a buyer into the marketplace an increase in that demand?

Richard Dugas

Yes, Steve. This is Richard. That’s exactly what we’re doing. As an organization, I think we’ve talked about the millennial study that we completed in 2015 which showed what we believe to be significant opportunity for a buyer that is probably in their early to mid 30s who hasn’t owned a home before. So they’re called a first-time buyer, but they’re spending $300,000 to $400,000 on urban townhome product.

So, overall our categorization that Bob described, we think more accurately depicts how we’re attempting to serve the business, because those buyers will be captured in that first time category. And we are investing in several of our major cities in that buyer category, and that’s part of the contributing change in ASP that you see in our backlog and in our continued guidance going forward. That’s a part of the Pulte story here.

Jim Zeumer

Just to follow on that to add, Steve point, Richard, the average selling price of the first time home is about $264,000, and when you compare that to the historical pricing that we've disclosed for Centex that entry-level business that roughly $200,000, there is a definite difference in the product we are offering, the location we're offering in it.

Operator

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

Nishu Sood

Thanks and, yes, let me add strong results in the fourth quarter. So congratulations on that.

Bob O'Shaughnessy

Thank you.

Richard Dugas

Thank you.

Nishu Sood

First question I wanted to ask was – the absorption trend was very nice in the fourth quarter and counter to what we’ve seen generally I think from the industry. 9% absorption growth, now that was on a lower level of community count growth. You’re expecting quite strong community count growth 10% to 15%, I believe you said year-over-year by the end of the year. So typically with new community openings that might dampen absorptions at first. How would that trend then carry through or how would you anticipate that strength carrying through into 2016? Is it going to be diluted by a lot of these new communities are going to be coming on or do you think there is enough momentum that you might be able to sustain that?

Richard Dugas

Nishu, this is Richard. Just a couple of comments. To be clear, our 13% sign-up growth was driven by 4% community count growth and 9% improvement in absorption rates on like stores. So we are very pleased with that and before I answer to your question, I just want to point out that we believe that underlying strength and absorption rate is primarily driven by excellent land positions, and we’ve been talking for several years how we believe we’re doing an excellent job of positioning our communities, not just growing for growth sake.

Having said that, with regard to our 2016, two things, number one, we’re going to have nice community count growth this year, but it will be a little less in Q1 and Q2 as Bob indicated and then more in Q3 and Q4, although strong, really all four quarters. So that factor, we would expect absorption rates in Q1 to be impacted there. But probably more notably, as we work to integrate the Wieland business, that business is typically a higher price point, slower absorption model, and that as we integrate, it will impact our results, particularly earlier in the year. So just try to make sure that everyone’s expectations factor that into their overall model. So we’re very pleased with the way the trends are playing out for 2016, particularly as it relates to earnings growth overall, but those factors will play in.

Nishu Sood

Got it. That’s helpful. And then second question, on the margin outlook which Bob, I think you laid out pretty well. The capitalized interest that is flowing through the gross margin line, has been an important tailwind for the overall gross margins, that’s certainly the case in 4Q as well as for overall 2015. How do you expect that to trend in 2016? Should we take the percentage of revenues that are represented in 4Q and maybe carry that forward? Could you give us some – your thoughts on that?

Richard Dugas

Yes, that’s a great question. And essentially if you think about it, we’ve got a lag between when we incur cost and expense it. And we’ve had the benefit over the last few years of the debt paydown. That obviously is mitigated in most recent year, if you look at our current full year 2015 our cash interest expense was about $128 million, the expense that we’ve recognize through the income statement was $138 million. So they’re getting closer together. So there will be a much smaller Delta, I think in absolute terms we were $57 million benefit for interest in 2015. That number will be smaller in 2016. And again reflective of the fact that basically where costing off what we’re expensing.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

Michael Rehaut

Thanks. Good morning, everyone.

Richard Dugas

Good morning, Mike.

Bob O'Shaughnessy

Good morning, Mike.

Michael Rehaut

First question I wanted to delve in a little bit around the gross margins as well. And appreciate the insights there, and I think if I understand you correctly Bob, you’re saying that the amortized interest for 2016 will trend closer to that $128 million, is that fair?

Bob O'Shaughnessy

Yes, we haven’t given any detail. But it’s going to be a much smaller delta than it has been.

Michael Rehaut

Right, right. So you’re just trying to get into the components then, of the pre-interest gross margin. And get some of your sense of the puts and takes there 4Q 2015 down about 100 or 90 basis points year-over-year. What were the key drivers of that, and it was also down sequentially I just wanted to get your sense if, labor was a big part, if there was a mix shift, if there was land cost, what were the kind of drivers. And also as we think about 2016, I know you highlighted the Wieland acquisition being about a 70 basis point drag, but what would the other components of that – of the year-over-year change be?

Richard Dugas

Yes, Mike, I think you summarized it well. There is about 70 basis points of detriment that we expect in 2016 from the Wieland acquisition. And then if you look at it, the margin profiles business thinking about it from consumer groups is, as has been the case for years, the most, the highest margin is going to be our active adult. Interestingly when you look at it, the first time business actually enjoys very high margins for two reasons. One, that millennial business that we talked about is a very strong margin business for us. And for the historical Centex business, since we haven’t been investing many of the lots that were running through now are older so they enjoyed strong margins. And then that move up business which is where we’ve done most of our investment over the last three or four years, still enjoying very good margins, but because of the higher land cost and labor costs that we are seeing, is today of the three, although still strong, the lower margin business. And so the mix shift towards that has implications to our composite margin. So 70 basis points from Wieland, mix shift and labor cost, probably the biggest driver of margin otherwise in 2015.

Operator

Your next question comes from the line of John Lovallo from Merrill Lynch. Your line is open.

John Lovallo

Hey, guys. Thanks for taking my call. First question I had is, you gave a lot of detail on the purchase accounting effect from the Wieland acquisition on gross margin. Just curious about how you are expecting kind of SG&A to trend through 2016 given some of the integration costs and then moving past that, once it’s fully integrated, is the $165 million kind of quarterly run rate still a good number or do you think that will actually go up a bit?

Richard Dugas

We actually are – instead of targeting dollars, we are putting trying to get things more aligned with industry and say, okay relative to sales this is what we think. So we think 10%. Obviously the seasonality of the business with lower closings in the first half of the year, higher closings you can and should expect to see be a richer number being higher than 10% in the first couple of quarters and lower much like we did in the fourth quarter of this year. You know, certainly there will be some integration cost associated with Wieland that we would expect overtime to be able to narrow out of the business. But the 10% that we had projected for 2016 is inclusive of that.

Richard Dugas

John. This is Richard. And little color also. The 10% guidance Bob provided, when you factor in the construction reversal impact in the 2015 number, you can see that we’re getting substantial leverage in 2016 as we expect to grow.

John Lovallo

Okay, that’s helpful. And then, in terms of, maybe can you just give us an update on kind of your spec strategy and how that progressed in the quarter. I think you ended the third quarter with something like 340 finish spec homes and we did you close of the year?

Richard Dugas

So finished spec at the end of the year was 471 units which is actually down about 2% from prior year. We started that spec really in the third quarter, so they weren’t finished at the end of year. So you’ll see that come through in our first quarter and second quarter results. But totals spec we talked about, at about 30% of our starts compared to 24% historically. So it’s not a big change, and I think what you can and should expect to do is manage against not letting finished specs get really heavy.

Bob O'Shaughnessy

And John and everyone else, just to remind everyone, the reason that we’re increasing our spec production a little bit is to help us with the quarterly cadence of closing, not trying to run quite as tight as we were with pre-sold inventory, and we think that’s going to help us moving forward.

Operator

Your next question comes from the line of Alan Ratner from Zelman & Associates. Your line is open.

Alan Ratner

Hi, guys. Good morning and nice quarter. Congrats.

Richard Dugas

Thanks, Alan.

Alan Ratner

Richard, just on your comment on January, it seems like it’s holding up pretty well. Curious if you’re – what you’re hearing underground from your active adult buyers given all the stock market volatility? Has there been any – have you noticed any discernible trends there versus more of the first time or maybe first time move-up product. Because it is a very discretionary buyer I imagine, they’re looking at 401(k) portfolios, as they might be a little bit skittish. So just curious what you’re seeing from that subset of buyers currently?

Richard Dugas

Alan, it’s a great question we’ve been paying attention and so far we’ve not seen a change.

Alan Ratner

Great, that’s good to hear. Second, on the spec strategy, is there any contemplation within the gross margin guidance next year for specs to represent a greater percentage of your sales? Assuming that is the case, what’s the margin differential are running at currently between your spec and to be built sales?

Bob O'Shaughnessy

Certainly, Alan, we factored that into our guidance. As we put together our plans for the year, people knew what they were going to try and start in terms of spec. In terms of actual performance, I would tell you that, recent activity we would tell you that there is a very consistent with historical trend where you are, your dirt sales have the higher margins, we’ve actually seen that people are contracting before framing that the margins hold up and stay consistent, and then we have a couple of 100 basis points of degradation on spec that is finished. So again, I think one of the things we’re really focused on is, let’s not get that finished spec to be a big drag on our margins going forward.

Operator

Your next question comes from the line of Megan McGrath from MKM Partners. Your line is open.

Megan McGrath

Good morning.

Richard Dugas

Good morning.

Megan McGrath

I just wanted to follow-up a little bit on the absorption pace. The nice improvement you had in the quarter, in your commentary you stated that you feel like that driver is primarily because of – the location of your communities. But I assume that location didn’t change too much quarter-to-quarter. So was there anything specific in the fourth quarter that you think drove that sort of incremental increase? It doesn’t feel like overall new home sales accelerated, in fact, maybe decelerated a little bit. So what specific do you guys changed, let’s say third quarter and fourth quarter, which help that absorption pace in your view?

Bob O'Shaughnessy

Megan, there is volatility typically quarter-to-quarter. But I would point out, this is a third or fourth quarter out of the last maybe four or five that we had improved absorption paces. So I believe that’s a factor. I would also say that as our commonly managed floor plans continue to grow as a component of our total, those are very well designed and frankly sell better than the non-commonly managed floor plans, so that’s a factor. But I would continue to highlight that well place land, we’re focused on quality of land, not just quantity of land is the primary driver in my opinion. These will – maybe what some others in the industry have talked about.

Megan McGrath

Okay. Thanks. And I wanted to follow-up on SG&A a little bit too as well. I apologize if I missed part of your answer before. But I know there’s a lot of moving parts here and some of the numbers. So it looks like you’re looking for, if we ex-out the benefits this year, a pretty meaningful year-over-year improvement in SG&A, it looks like about 100 plus basis points. If I have that right. But also looking for a pretty good increase in gross and community count, which I would usually associate with maybe some accelerating SG&A levels. So if you could maybe talk us through your confidence and being able to sort of growth SG&A the slower rate even though you are accelerating your community count growth that would be great, thanks.

Bob O'Shaughnessy

Well, it’s interesting, Megan, a big driver of the community count growth is Wieland. And so we opened 200 communities this year and will open some number similar to that next year. So there really isn’t a significant driver there. It’s in terms of community count growth a lot of it is going to be Wieland that we get one big chunk.

Richard Dugas

And Megan I think you highlighted – this is Richard, I think you highlighted it inappropriately. We are anticipating growth in earnings and certainly in volume this year and that provides leverage overall. So we’re not giving any SG&A dollar number but we do expect to leverage our overheads and you are right with your guidance or your commentary if you will on that.

Operator

Your next question comes from the line of Mike Dahl from Credit Suisse. Your line is open.

Mike Dahl

Hi, thanks for taking my questions. Why don’t you go back to the margin discussion and I think you addressed it with both Mike Rehaut’s question and Alan, but in terms of some of the mix shift, you’ve got two things going on. You’ve got selling through some of the legacy Centex stuff that was higher margin and transitioning both to move up product and the recent vintage, so just wanted to get your sense of this margin erosion that you’re seeing in 2016. Do you think you are fully run rating what the kind of go-forward mix will be or is there still some to kind of transition out this is still being lifted a little bit by 20% or so of the communities that are still legacy Centex? Any additional detail you could give there?

Bob O'Shaughnessy

Well, honestly, we will as the year goes on share what the breakdown is by consumer group. I don’t know that we would want to give quarterly forward guidance that would be community specific Mike. So I think there certainly continues to be a mix shift we’ve invested largely in that move up category. So you will see that continue to play out.

Richard Dugas

And Mike this is Richard. I think it’s worth noting that we are extremely pleased with our margin projection for 2016. When you factor in the known headwinds from a new acquisition. We are pretty pleased with how margins are holding up when you combine that with what we expect to be good SG&A leverage and strong growth. Our operating margins we continue to be very pleased with. So yes there are certainly some anticipated core declines from higher input cost that Bob mentioned, but our relative basis we like our margin position a lot.

Mike Dahl

Right, I mean, clearly coming from a point of strength. I guess then Richard on that last point on the acquisition, once we get through the – I mean this is for Bob, once we get to the purchase accounting headwinds which I believe you said 70 basis points drag for, the full year, how should we think about that margin relative to what your legacy business has been producing? I think that was understanding was that may have been a competitive deal so as this once we get through the purchase accounting of 20% margin business or is it really closer to what we’ve seen out of your legacy business the past year or so?

Richard Dugas

Yes, Mike, we haven’t given anything beyond 2016. I would tell you, we see opportunities to reduce costs and enhance cases to drive higher returns and that's what we're going to work towards. When we get to 2017, we’ll share what our total margins are and to the extent that, it's relevant we’ll share what the impact of Wieland this season.

Operator

Your next question comes from the line of Stephen East from Evercore ISI. Your line is open.

Stephen East

Thank you. Good morning, guys. Richard, maybe, the first one. With John Wieland, could you talk a little bit about what drove your decision process here? I know you all are always looking at acquisition this land buys, but more extensively, what was the attraction and how specific was it to John Wieland versus, are you all still actively engaged in looking for more acquisition opportunities that type of thing?

Richard Dugas

Steve it’s a great question. Let me first confirm your comment that all acquisitions are looked at through the lands and we’re pleased with the economics of the deal overall and as Bob mentioned the ability to put some Pulte efficiency if you will and to what we saw there. And a part of that, you might have noted in our script, we’re intending to take some Wieland assets and put Pulte product on it to help accelerate absorptions and drive returns.

So we feel really great about that. Beyond that, this particular transaction had significant brand value in our mind. For buyers in the Southeast, the John Wieland named commands a premium. And when you factor that into the strategic pricing programs, the focus on option revenue and lot premium revenue, it's a really nice fit into the way we've been driving margins in the business. And we feel like it's a real consistent approach toward driving high returns.

So the brand value there is exciting, and candidly, even the value of the Wieland name from an entitlement standpoint, we feel very good about going forward. We want to grow our business in the Southeast, and the Wieland reputation is excited and allowing us to get into some of these core infill locations, millennial locations. So a very, very strong recognized consumer brand in the Southeast that gives us opportunity along with the strong land positions. And then potentially, lastly, I’ll mention the Southeast, Steve, we like vis-a-vis some other markets, we think the Southeast is not overheated. We think the Southeast has got a lot of runway in front of it. And complimentary assets that are not cannibalizing anything else we felt good about. And then just on your last point, we continue to stay actively looking at any transaction come that our way. We’ve been very, very disciplined to make sure the economics work.

Stephen East

Okay. Thank you. And then Bob did I hear you right, did you say land spend in 2016 would be $1.6 billion or were you just talking about acquisition side of it? Can you give me a little clarity there? And where you would be, are you reallocating more toward this first time buyer I know not active adult but first time buyer away from the move-up buyer? And just maybe a bit broader on your net debt targets comfortable where your debt is now or do you want to take it lower versus repo that type of thing?

Bob O’Shaughnessy

Yes, so to your first question that $1.6 billion that we highlighted was just land acquisition. We will obviously have development spend on top of that. In terms of where we are spending that money, we are still agnostic. Over time we’ve told folks go find the best deals, what that has yielded over the last few years is mostly move-up and that millennial core business that we’ve talked about. I don’t see anything at the moment that tells me it’s going to be anything different in the future, but certainly as and when for instance if that true entry level buyer becomes more robust in terms of paces and the returns make sense we’ve always talked about a willingness and desire to do that.

And then to your last point on net debt, 30% to 30.5% at the end of the year. We are very comfortable with that. We have laid out a target range of 30% to 40%. So, yes, very comfortable with our balance sheet position and liquidity. So we’ve got plenty of choice candidly we’ve increased the dividend starting here in the first quarter. We didn’t get to do any share repurchases during the quarter, but you can expect to see us do some of that going forward, and obviously we think we can do that all in the context of the land spend that we outlined.

Operator

Your next question comes from the line of Will Randow from Citigroup. Your line is open.

Will Randow

Hey, good morning guys and congrats on the progress.

Bob O’Shaughnessy

Thanks, Will

Richard Dugas

Thanks Will.

Will Randow

I just had a question on the mortgage business in regards to how are you thinking about normalizing underwriting standards if possible what levers can pull, and if you could talk about the difficulties and implementing to know before you owe, in terms of more mortgage closings are elongated et cetera.

Richard Dugas

So I’ll take the first one, Will, in terms of overall underwriting standards, if they remain fairly consistent. They continue to be tight, and we are governed by the same rules that everyone else is. So no real change in outlook there, may be on the margin it continues to ease just very, very slightly, but overall not much change and then Bob maybe on the TRID rules?

Bob O’Shaughnessy

And with respect to all the rules, again I think we’ve got the best team in the business. They think about change long in advance sort of problematically, systematically. So I don’t see it being an impediment and I know they’ll say, gosh, a lot of hard work behind that, but they’ve got a very clear calendar of the things that are coming at us. Think about strategically so again, I don’t want to make it sound easy, but the TRID, that affected this fourth quarter, it really did not impact our closings and that’s testaments of the work they do that from…

Operator

Your next question comes from the line of Susan Maklari from UBS Securities. Your line is open.

Susan Maklari

Thank you. Good morning.

Bob O'Shaughnessy

Hi, Susan.

Richard Dugas

Hi, Susan.

Susan Maklari

In terms of the labor side, can you talk a little bit about what you’re seeing there? It seems like with the progress you made in closing homes and the talk around your spec strategy, are you seeing any incremental using there? Perhaps some of the contractors are gaining a bit more confidence and what’s going on in the market?

Richard Dugas

Susan, I don’t think we’re seeing a real easing. I think we’re getting a little bit better at managing through it by not being quite as tight with our spec inventory change if you will. We give ourselves a few more targets to shoot at each quarter to account for any up and downs that may occur in the market. But labor continues to be tight. There’s not a lot of new labor that’s flowing into the space. So I do think the industry and that’s particularly we are getting a little better at managing through it. But it’s going to be with us for a while.

Susan Maklari

Okay.

Bob O'Shaughnessy

But the ability to give that to labor markets, the cadence and a consistent view that says – we’ve got the following work, we’re going to keep our crews busy, we’re not pulled off – on off the sites. We think we’ll have real benefit in terms of our ability to produce timely.

Susan Maklari

Okay. And then, as we look to your, obviously the improvements in the option revenues that we’ve seen and we think 2016, the continuation of the value creation efforts there. Can we see that continue to come up or how should we think about the trends with this?

Richard Dugas

Susan, this is Richard. I would never say we’re done in that regard. We certainly taken a lot of price in the last few years, and I would say, the low hanging fruits have been picked overall, but that’s a big focus for us as an organization. And every new job, we open we tend to push, it’s actually been extremely pleasing to us that we’ve been able to continue to make progress quarter-over-quarter there. So, no specific guidance there, clearly there is headwinds from higher cost land and labor pressure as Bob talked about influencing but that helps us to mitigate it. I can’t really give you much more detail though in terms of what we expect there. We’ll have to see how the quarters play out.

Operator

Your next question comes from the line of Jay McCanless from Sterne Agee. Your line is open.

Jay McCanless

Good morning. First question, what was the can rate in the quarter and what was last year?

Bob O'Shaughnessy

Can rate was 18.1 that's about 100 basis points over the last year.

Jay McCanless

Okay, and then the second question I had is just with Richard’s commentary earlier about maybe shifting some of the Wieland land to the Pulte nameplate, we had expected an ASP growth of roughly high single-digits for this year as you guys were Wieland in, is that what you’re expecting internally or should we be a little more muted and what you expect for average price growth, if you are going to shift some of that land to lower price Pulte product?

Bob O'Shaughnessy

Jay, we’re not given specific guidance on ASP, overall you can kind of see what’s happening in our backlog and project out the next quarter or two in terms of what’s happening with overall ASP. I would point out that Wieland in total will make a modest percentage of the company’s total. So when you factor a portion of that, only a portion of that being Pulte, that specific impact is probably not significant on our overall ASPs. And later in the year can [indiscernible] by the time you actually launch the new product, get the community open, start building houses, that doesn’t happen overnight Jay.

Operator

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

Jack Micenko

Hey, good morning. I’m curious about how to think about your lands strategy, obviously the option components correct up to about a third of the inventory now. But then I think in the prepared comments you had said, around 70% of the land spend was for undeveloped. Can we think is that the option percentage is going to continue to creep up or is this a signal that maybe to maintain those margins going to be go out give more on the development side.

Bob O’Shaughnessy

Yes Jack what we really are trying to say is we are really paying attention to managing the risk side of the land component. The fact that we’re having to develop 70% plus is just a factor of the way the land comes to us in the market, but that doesn’t mean we can’t break those takes into two or three or four takes with options to mitigate risk. And we want to highlight that on Wieland candidly because some of the reports I saw showed people talking about buying eight years, or ten years or 12 years worth of land and we expect to recoup all of our capital in less than four years on that deal. So we’re very, very focused on mitigating risk from that perspective.

So in terms of option percentage, I would hope that we can continue to drive that forward the market will take that but agnostic to options or development or not the key is we’re managing risk very differently than we did in the past. Buying 10 or 12 years worth of land at one time is very, very rare event today for the company and will continue to be going forward.

Jack Micenko

Okay, so consistent strategy of sort of more efficient balance sheet around the land piece.

Richard Dugas

I think that’s right.

Jack Micenko

Okay.

Bob O’Shaughnessy

Yes and just to clear, it’s really not a margin management exercise, to Richard’s point it’s what comes to us in the market and we underwrite transactions against returns not against margins. So they may drive higher margins, at some point in time, but we are really focused on what the characteristics of the return obviously we have to hold the land for too long that doesn’t seems much good.

Jack Micenko

Okay. And then, adding on to the Alan’s earlier question about the marketplace I mean the risk between what, I guess, the equity markets are pricing and around the domestic picture and what companies across many industries are now spring selling season, I mean, and you had some bullish commentary on January. I mean does anything absent Houston is there anything you are seeing a broad footprint that would suggest that there's any kind of creep in [indiscernible] from what’s happening in the broader markets to traffic or demand based?

Richard Dugas

Jack, we are watching it very carefully, candidly we haven’t seen the impact yet. And it is interesting to kind of understand that, but I would say it’s really too early for 2016. Now spring selling season kicks off, typically Super Bowl will get a good read on it. But look we can only say we like what we see so far. So we are optimistic, you factor in the combination of low supply in the space in general still five months supply plus or minus, low rates, a jobs picture that I would say is good not great, yes, there is some macro volatility, but so far we like what we are seeing.

Operator

Your next question comes from the line of Mark Weintraub from Buckingham Research. Your line is open.

Mark Weintraub

Thank you, first could you let us know how many active communities are at Wieland?

Richard Dugas

Approximately 40.

Mark Weintraub

40, great. And then I think the original expectation was going to be earnings and cash flow accretive in year right from the back. I think today you indicated by next year, is that – can you just clarify that first?

Richard Dugas

Yes, we still believe its earnings and cash flow accretive the year one. It is return accretive year two. That was the comment that we made today. So, yes, we’ve laid out significant cash position and we’ve talked about. We need to start up some of these activities that we think drive higher paces and margin and it will take us some time. So we think it becomes accretive in year two.

Mark Weintraub

Great. Then lastly, can you bracket expected land development spend for 2016?

Bob O'Shaughnessy

I think you have seen from us over the last two years that it is roughly 50/50. And that is probably not out of the range of reasonable.

Operator

Your next question comes from the line of Ryan Gilbert from Morgan Stanley. Your line is open.

Ryan Gilbert

Hi, good morning, thanks for taking my questions, most of them have been answered. But just really quickly on the backlog conversion year-over-year improving the gap, in the year-over-year decline. Can you talk, I guess, specifically about the processes or specific steps that you took in the quarter to generate that improvement? And then how you expect that to trend in 2016? I think, just given that, it seems like your growth rate is going to accelerate. Interested in hearing how you think that you can continue to close the gap? Thanks.

Richard Dugas

Yes Bob go ahead with that.

Bob O’Shaughnessy

I’m sorry, just the first and the only comment I wanted to make to that is our spec strategy is going to help there. We shifted starting in late Q3 into Q4 building a few more homes on spec, in order to give us an opportunity sort of mitigate some of that decline. Having said that, it’s going to be a gradual process of as Bob indicated on one of the questions earlier, more even production cadence giving the contractors better visibility into what’s coming at them. Overall we think that’s the primary vehicle that we are going to use to help.

Clearly, we are paying market rate, Bob indicated that we’re going to expect a little bit of cost inflation this year on the labor side and that’s to be expected. So those are the primary areas, Ryan.

Ryan Gilbert

Okay great and you are seeing positive feedback from your sub-contractors on the increased spec levels?

Bob O’Shaughnessy

Well, what they like, we already have quite a few lots in front of them, they like visibility into the production side. So, yes, to the extent that we can build on a more even cadence sprinkling and specking inventory as we have, that’s more predictable for them allowing then to keep the cruise dedicated to our jobs.

Operator

Your next question comes from the line of Michael Rehaut from JP Morgan. Your line is open.

Michael Rehaut

Alright, thanks for taking my follow-up. I just wanted to get drill down, I think you kind of addressed it a little bit with Wieland, about 40 communities, which would kind of suggest that at least in the first half for the year will be the bulk of the community count growth, but maybe you are expecting a little bit on an organic basis, is that fair? And then the organic growth ex-Wieland would check in a little bit more in the second half. Is that the right way to think about it?

Richard Dugas

I think it is Mike, yes.

Michael Rehaut

Okay. And then in terms of the absorption impact of Wieland in the first half, obviously you had a nice acceleration into this most recent quarter, in terms of sales pace. Are you talking about maybe expecting overall company-wide absorption to be down low single-digits or would it be a greater type of number than that?

Bob O’Shaughnessy

Mike, we didn’t give any specific commentary on that. We just wanted people to appreciate the fact that absorption rates are going to be slowed by the impact of all these new Wieland communities and their typical model of, say selling one or two a month in each community versus three or four in typical Pulte community. How many – exactly what that impact is overall on absorption rates is hard to tell. We just wanted people to factor that in. We don’t forecast overall sales as you know. We just wanted you to keep that in mind in your models.

Michael Rehaut

Okay, all right great thanks.

Bob O’Shaughnessy

Thank you.

Operator

Your next question comes from the line of Buck Horne from Raymond James. Your line is open.

Buck Horne

Sorry guys, I know the call is going long right now, but I wanted to talk just minute about Del Webb and just the active adult business. I think the absorption rates in active adult seem to be improving, but still lagging some of the other buyer groups. And just wondering if you noticed any performance differentials between say, newer Del Webb communities versus kind of the flagship communities and what else you can do to improve or accelerate active adult absorption?

Richard Dugas

That is a good question, this is Richard. The flagship communities if you will, we have really maximized the opportunity there some time ago. So those are kind of our steady run rate basis. The newer Del Webbs that we bring on though, typically are closer to the core center 500 to 1,000 lots, I would say overall better locations and we are really pleased with the results there. So the way I look at it Buck would be as active adult communities cycle over time for us to be concentrating on opportunities that are closer to city core vis-à-vis the larger kind of big cruise ship Del Webb operations of the past. Those are probably not going to happen again.

Having said that, we are pleased with the absorption rates we continue to see. You are right, they are typically lagging the others, but not by much. And we love the financial performance of those communities with strong margins and good returns.

Buck Horne

Okay thanks, and on the West Coast, you see in the strength in the west. I mean is there any noticeable differences between maybe California versus some of the other West Coast markets. Any granularity you can give on just the west region will be helpful.

Richard Dugas

Buck it was pretty broad based, strong, candidly some of that’s given community count changes, for us overall. But we like our position, our northern California operation, as an example has fantastic land positions, we are continuing to show strength. We’ve got a relatively small business up in Washington, but it’s getting better. And Phoenix is doing quite well for us. So we have a big position in Phoenix and we have an excellent team in Phoenix and they do a great job. We’re driving quite a bit of volume at very good margins there.

Operator

This concludes today’s Q&A portion of the call. Mr. Zeumer I will turn the call back to you.

Jim Zeumer

Thanks John, thanks everybody for your time this morning. We are certainly around all day, if you have any follow-up questions and we look forward to talking to you on our next quarterly call.

Operator

And this concludes today’s conference call. You may now disconnect.

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