Hovnanian Enterprises, Inc. (HOV) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2012 Fourth Quarter and Year End Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast [Operator Instructions] The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investors page of the company's website at www.khov.com. Those listeners who would like to follow along should log onto the website at this time. Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you. I'm going to read through our forward-looking statement very quickly. All statements during this conference that are not historical facts should be considered as forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such risks and uncertainties and other factors include, but are not limited to, changes in general and local economic and industry, business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters; changes in market conditions and seasonality of the company's business; changes in home prices and sales activities in the markets where the company builds homes; government regulations, including regulations concerning development of land, the homebuilding, sales and customer financing processes; tax laws and the environment; fluctuations in interest rates and the availability of mortgage financing; shortages in and price fluctuations of raw materials and labor; the availability and cost of suitable land and improved lots; levels of competition; availability of financing to the company; utility shortages and outages or rate fluctuations; levels of indebtedness and restrictions on the company's operations and activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of liquidity; changes in credit ratings; availability of net operating loss carryforwards; operations through joint ventures with third parties; product liability litigation, warranty claims and claims by mortgage investors; successful identification and integration of acquisitions; significant influence of the company's controlling stockholders; changes in tax laws affecting the after-tax cost of owning a home; geopolitical risks, terrorist acts and other acts of war; and other factors described in detail on the company's annual report on the Form 10-K for the year ended October 31, 2011, and the company's quarterly report on Form 10-Q for the quarterly period ended April 30, 2012. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Now I'd like to turn the call over to Ara Hovnanian, our Chairman, President and Chief Executive Officer. Ara, go ahead.

Thanks, Jeff, and thank you, all, for participating in this morning's call to review the results of our fourth quarter and year end of October 2012. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Corporate Controller; David Valiaveedan, Vice President of Finance and Treasurer; and Jeff O'Keefe, Vice President of Investor Relations. On Slide 3, you can see a brief summary of our fourth quarter results and comparisons to the prior year. The homebuilding recovery continues to move forward. First, not necessarily in the order of the chart, we are reporting our first quarterly pretax profit before gains or losses from debt extinguishment in many years. This is a major milestone for us; hopefully, the first of many profitable quarters to come. Virtually every metric improved again except for community count, which I will discuss more fully in a moment. Throughout the year, we have made steady progress on our operating performance. We show the drivers of these improvements on Slide 4. In the top left quadrant of the slide, you can see that we reported steady growth in our total revenues in each of the 4 quarters of fiscal '12. At the same time, our top line was growing. We reported 180 basis point improvement in gross margin from the beginning of the year, which can be seen in the upper right-hand portion of the slide. In fact, it's our sixth sequential quarterly improvement in gross margin. On the bottom left-hand quadrant, we show quarterly SG&A percent in yellow bars and quarterly interest percentage in the red bars. The graph demonstrates the benefit of our operating leverage, which is the result of revenue growth while maintaining SG&A and interest dollars nearly constant. During the fourth quarter, our SG&A ratio to total revenues declined to historically normal levels; and our interest ratio, while not yet at normalized levels, has decreased significantly. Due to our recent $800 million debt refinancing, which reduced our annual cash interest cost by $17 million, our future interest expense should decline even further going forward. The net results of all of these positive trends is that for the fourth quarter of 2012, we reported the first profit before taxes and land and debt charges since the first quarter of 2007. In fact, the fourth quarter profit before taxes and losses on debt extinguishment, was a positive $2.8 million even after including land charges. As a reminder, Hurricane Sandy struck our Northeastern markets in the critical last closing days of our fiscal year end, delaying deliveries, affecting sales in that market and delaying cash from some homes that did close from being received until November. Fortunately, our delivery and net contract performance in markets less affected by the storm made up for some of the shortfall. Let me take a step back and talk about our most recent net contracts data. If you turn to Slide 5. As I mentioned earlier, starting on the upper left-hand quadrant, you can see our net contract dollars increased by 46% comparing the fourth quarter to the prior year. The number of net contracts, including unconsolidated joint ventures, increased 23% during the fourth quarter, while our community count actually dropped 12% year-over-year, resulting in a 38% increase in net contracts per community. The dollar amount of contract backlog at the end of fiscal '12 increased 34% compared to the end of the prior year. Assuming stable market conditions, these increases in net contracts and contract backlog should lead to quarterly revenue growth in each quarter of fiscal '13 compared to the same quarters of fiscal '12. The left-hand side of Slide 6 breaks this net contract data down on a monthly basis since the beginning of the fiscal year, with the left side showing absolute net monthly contracts and the right side showing average weekly sales per month. We do this by dividing the absolute number of net contracts in a month by the number of Sundays in the month. We use Sundays because the vast majority of our sales occur during the weekends and the number of weekends in a month will affect the monthly sales results. You can see that the absolute number and that weekly average number has held relatively steady during the quarter and held reasonably well in the normal seasonably slow month of November. Slide 7 shows the monthly net contracts per community with fiscal '12 shown in red and fiscal '11 shown in yellow. You can see that the monthly net contracts per community in fiscal '12 have been extremely constant since May. In November, the beginning of our new fiscal year and the beginning of the 3-month slow winter season, sales showed continued year-over-year improvements. Our net contracts per community in November of 2012 increased approximately 34% to 2.0 net contracts per community compared to 1.5 net contracts per community in November of 2011. The dollar amount of net contracts increased about 38%, and net contract units increased approximately 18% compared to November of 2011. Slide 8 shows our annual net contracts per community for the last 16 years through a variety of cycles. While 2012 shows a significant improvement at 28.1 net contracts per community, there is still a substantial amount of upside opportunity before we return to more normalized levels in the low to mid 40s per community. Although we're not yet back to our historical normal levels, our net contracts per community compares favorably to our peers as you could see on Slide #9, where we have the third highest net contracts per community for the last 12 months. Record low interest rates, attractive home prices, pent-up demand, a lower supply of existing homes for sale, improvement in the economy and employment, and greater optimism are all helping drive the housing recovery. This is occurring in spite of the restrictive mortgage lending environment and the number of underwater existing homebuyers. I'd like to show you a few sample markets that demonstrate the significant change in the balance of existing home supply to sales. On Slide 10, we show the counties where we operate in the D.C. suburbs of Northern Virginia. This slide shows MLS outstanding listings for each month in red and MLS sales for each month in yellow. The month's supply of used homes for sale, which is shown in blue, has gone from a high of 16.8 months back in February of '07 to 2.2 months supply in October of '12. We also circled in black the months of October of 2011 and the October of 2010, so you can see the steady long-term downward trend. Slide 11 shows a similar trend in Orlando where the months supply in blue reached a high of 31.6 months in January of 2008 and it's now down to 3.3 months supply. And finally, Phoenix is another market that we show on Slide 12 that reached a very high supply -- months supply, 24.5 in January of '08, and it's now down to a 3.1 months supply, which is quite low. In general, we have seen similar trends in MLS data in many of our markets across the country where months supply is now between 3 and 6 months, which is considered very healthy. This shift in supply and demand has created an environment where we can raise new home prices. We raised net home prices in approximately 58% of our communities during the last year. Some of these price increases were modest price increases of only $500 or $1,000, while others were much more substantial in magnitude. Part of the home price increases have been offset by construction cost increases. However, the gradual and steady nature of this recovery is helping to keep construction costs from going out of control. Our current costs are still significantly below our costs during the cyclical peak. Turning back to our operating metrics. We ended the year with 189 active selling communities, as you can see on Slide 13. As we have said on earlier conference calls, our sales increase has resulted in selling out of communities faster than we had planned. The land market remains challenging, but then again the land market is always challenging. There are more parcels of land for sale today at rational prices than there were 1 year ago. As sales paces and home prices have risen, the dollar amount that homebuilders can justifiably pay for land has also increased. The increase in land prices has caused many landowners who are unwilling to sell at lower prices to actively market their land at today's higher prices. It's almost unheard of to be the sole bidder on a land parcel today that if it's in a good location and readable price. If anything has changed, although we do see the better capitalized private homebuilders purchasing land, there are far fewer private homebuilders bidding on land today than there were during the more normal times. As far as finished lots go, other than Houston, it is definitely harder to find finished lots today than it was 1 year ago. However, when we underwrite raw or partially developed land, we are still able to find land that generates a 25% plus unlevered IRR based on the current home prices and absorption rates. When we have to perform the land development ourselves, it does take 5 to 9 more months to get a community up and running compared to buying finished lots, but we have the expertise to develop the land and the extra time is taken into account when we are underwriting the land purchase. While competition for land remains strong, there is no single builder that consistently beats our bid for land parcels in -- either in individual markets or in multiple markets across the country. That fact leads us to the conclusion that our peers are not consistently assuming home prices to be increasing or sales paces to be increasing on any widespread basis as they purchase land. An amusing anecdote is that it's not uncommon for one of our operating associates to complain that the builder we lost a land opportunity to must be assuming home price increases, otherwise they wouldn't have been able to offer so much money for our land parcel. I'm sure that when we win a land parcel that the other builders bidding on it must say the same thing about us, but the reality is we all use different assumptions on what type of home to build, what finishes to include, the price versus velocity trade-off, the mix of different size homes, et cetera. It's part art and part science, leading to slightly different views on land value on any given parcel. At the end of the day, everyone loses more land deals than they win, but that was also true during the bull market run of 2002 to 2005. We continue to win our fair share of land, and by remaining disciplined in our approach to underwriting, we feel very comfortable with the parcels that we have acquired. On Slide 14, we show quarterly net additions of newly acquired land in yellow, and quarterly deliveries in red. We've been very busy with net additions to our newly acquired land position. We start the year -- we started the year off slowly, but we have built momentum. During the first half of 2012, we weren't able to find enough land parcels that met our underwriting criteria to replace the land underneath the homes we delivered. During the second half, however, our net additions were in excess of our deliveries, which resulted in an increased lot count. We purchased or optioned approximately 5,000 lots throughout the entire year, but 84% of the net additions were in the second half of the year. There is a time lag before these new communities can come to market. While the lower number of actively selling communities may dampen our sales and deliveries early in the new fiscal year, we are very optimistic about our opportunities for stronger growth in the latter half of the year. As you will see in later slides, our cash position is significantly higher than our minimum cash target, meaning that we are under-invested right now. However, we are working hard to find additional land parcels that meet our 25% plus IRR hurdle rates, so we can put that money to good use in the coming quarters. Let me now focus on our operating performance, which has improved throughout the year. Slide 15 shows our quarterly gross margin for the past 7 quarters. Gross margin was 18.3% for the fourth quarter of '12, a 300 basis -- excuse me, a 350 basis point improvement over the second quarter of 2011, which is the first quarter we show in the slide. This is the sixth sequential increase in gross margin. During the fourth quarter of 2012, there were $20.7 million of impairment reversals related to deliveries, compared to $19.1 million in the fourth quarter of 2011. Much of the 350 basis point improvement in gross margin is attributable to more of our deliveries coming from newly identified land, which we show under the bars for each of these quarters. During the fourth quarter of '12, 71% of our wholly-owned deliveries were from newly identified land, compared with only 39% in the second quarter of 2011. Given the fact that 85% of our wholly-owned open for sale communities are from newly identified land parcels, gross margins should continue to edge up as we realize deliveries from these communities. There's been a lot of attention lately on construction cost pressure due to labor shortages and material shortages. Neither has impacted our ability to build or deliver homes in fiscal '12. However, we do worry about pressure on costs, particularly from our labor subcontractors as the market continues to improve. Historically, we've always been able to raise prices more than enough to cover our increasing costs, and we don't see any reason why it should be different at this point in the cycle. We continue to make progress in restoring our gross margin to normalized levels. If you look at Slide 16, you can see what we consider as normal gross margins of 20% to 21% in years 2000 and 2001, which were neither boom nor bust years. While we don't expect the sequential increase trajectory that we've experienced for the last 6 quarters to continue quite as steadily going forward, we do expect the gross margin to gradually improve and get back to the 20% to 21% range. As I mentioned earlier, we also made great strides in lowering our SG&A as a percentage of total revenues. This reduction came about as we held the absolute dollar level of total SG&A steady despite a large increase in the top line. On the left-hand side of Slide 17, the bars show total SG&A as a percentage of total revenues, which is trending lower each quarter, as the solid growth in our top line revenues has far outpaced the very modest increases in total SG&A dollars. Below the bars, we show the absolute dollars of total SG&A for the past 5 quarters. The right-hand side of the slide gives a historical perspective to what the relationship between total SG&A and total sales should be. Normal is somewhere around 10% and 11%. We got to the 10% level for the fourth quarter, and for the full year, we had an SG&A level of 12.8%, which is the best we have seen in this ratio since 2006. Once again, this illustrates the operating leverage we generate as we increase deliveries and revenues, while maintaining total SG&A dollars relatively constant. Assuming that home prices at least keep pace with any cost increases as we deliver an increasing percentage of our homes on newly identified land parcels, we expect continued improvements in our gross margins. As our revenues increase, we expect our interest expense as a percentage of revenues to decline further, and we expect to see additional improvement in our SG&A ratio as well. This powerful combination, which allows us to progress further down the path of returning to a sustainable profitability is upon us. Now I'll turn it over to Larry, who will discuss our inventory liquidity and mortgage operations, as well as a few other topics.

Thanks, Ara. We continue to look for new land in all of our markets. The left-hand side of Slide 18 shows that we have controlled 21,900 lots since January of 2009, including 2,400 net new lots during the fourth quarter of 2012. Bottom right-hand side shows that total gross additions during the fourth quarter were 2,800 lots. We also walked away from about 400 newly identified lots. Net results for the fourth quarter was that our total lots purchased or controlled since January 2009 increased about 2,400 lots sequentially from the third quarter of 2012. For the second quarter in a row, we are replenishing our land faster than we're using it. Our total owned and optioned lot position increased sequentially by 748 lots during the fourth quarter. Turning now to Slide 19. You'll see our owned and optioned land position broken out by our publicly reported segments. Based on our trailing 12-month deliveries, we owned 3.5 years worth of land. However, if you exclude the 6,823 mothballed lots, we only owned 2.1 years of land, based on the delivery rate of the past 4 quarters. At the end of the fourth quarter, 77% of our optioned lots are newly identified lots, and 29% of our owned lots were newly identified lots. If you exclude mothballed lots, 49% of our owned lots are newly identified. When you combine our optioned and owned land together, 49% of the total lots that we control today are newly identified lots. Excluding mothballed lots, 64% of our total lots are newly identified lots. Our investment in land option deposits was $57.5 million at October 31, 2012, with $56.3 million in cash deposits and the other $1.2 million of deposits being held by letters of credit. Additionally, we have another $5.2 million invested in predevelopment expenses. Turning now to Slide 20. We show our mothballed lots broken out by geographic segment. In total, we have 6,823 mothballed lots within 53 communities that were mothballed as of October 31, 2012. The book value at the end of the fourth quarter for these remaining mothballed lots was $124.2 million net of an impairment balance of $467.8 million. We are carrying these mothballed lots at 21% of the original value. Since 2009, we have unmothballed 3,400 lots within 59 communities. Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of about $891 million, net of $683 million of impairments, which we recorded on 105 of our communities. Of the properties that have been impaired, we're carrying them at 23% of their pre-impaired value. Now turning to Slide 21, the number of started unsold homes, excluding models and unconsolidated joint ventures, decreased from the third quarter. We ended the fourth quarter with 649 started unsold homes. This translates to 3.8 started unsold homes per active selling community, which is well below our long-term average of about 4.8 unsold homes per community. Another area of discussion for the quarter is related to our current and deferred tax asset valuation allowance. At the end of the fourth quarter, the valuation allowance in the aggregate was $937.9 million. Our valuation allowance is a very significant asset not currently reflected on our balance sheet, and we've taken steps to protect it. We expect to be able to reverse this allowance after we generate consecutive years of solid profitability and can continue to project solid profitability going forward. When the reversal does occur, we expect the remaining allowance to be added back to our shareholders equity, further strengthening our balance sheet. Today we could issue approximately 100 million additional shares of common HOV stock for cash without limiting our ability to utilize our NOLs. We ended the fourth quarter with total shareholders’ deficit of $486 million. If you add back the total valuation allowance, as we've done on Slide 22, then our shareholders' equity will be $452 million. Let me reiterate that the tax asset valuation allowance is for GAAP purposes only. For tax purposes, our tax assets may be carried forward for 20 years from occurrence, and we expect to utilize those tax loss carryforwards as we generate profits in the future. For the first $2 billion of pretax profits we generate, we will not have to pay federal income taxes. Now let me update you briefly on our mortgage operations. Turning to Slide 23, you can see that the credit quality of our mortgage customers continues to be strong, with an average FICO score of 741. For the fourth quarter of fiscal 2012, our mortgage company captured 76% of our noncash home-buying customers. Turning to Slide 24, we show a breakout of all the various loan types originated by our mortgage operations for the fourth quarter of fiscal 2012, compared to all of fiscal 2011. 24.4% of our originations were for FHA loans during our fiscal 2012 fourth quarter, compared to 34.1% we saw during all of fiscal 2011. We believe that this 9.7% decline in FHA business is primarily related to the increased mortgage insurance cost FHA adopted in April 2012. During that same time frame, we saw our conforming conventional originations increase by 10.7% to 57.8% during the fourth quarter of 2012, compared to 47.1% during all of fiscal 2011. As FHA mortgage insurance cost increased, our customers chose to obtain less expensive conventional loans even though private mortgage insurance is required on all conventional loans with loan devalues above 80%. If there were further increases to mortgage insurance cost for FHA borrowers, an additional shift towards conventional loans would likely occur. During all of fiscal 2012, 54% of our originations were conforming conventional loans. Of this amount, 27% of our conforming conventional loan originations had loan devalues above 80% and have to obtain private mortgage insurance in order to qualify for the loan. We have seen new private mortgage insurance companies formed in recent years that have taken market share from insurers that are no longer in business. Regarding the make-whole and repurchase requests received from various banks, we continue to believe that the majority of these requests that we receive are unjustified. On Slide 25, you'll see our payments for repurchase and make-whole requests from fiscal 2008 through fiscal 2012. During 2012, our repayments were only $1.6 million on 10 loans. During 2012, we received 66 repurchase inquiries, which was higher than the 39 repurchase inquiries for all of 2011, but lower than the 98 repurchase inquiries we received in 2010. We believe that any losses resulting from repurchase and make-whole requests have been adequately reserved for in previous periods. At the end of the fourth quarter, our reserve for loan repurchases and make-whole requests were $9.3 million, which we believe is adequate for our exposure. Today, mortgage repurchases have not been a significant problem, but we will continue to monitor this issue closely. Now turning to our debt maturity ladder, which can be found on Slide 26. During the fourth quarter, we issued new secured debt at a lower coupon, which reduced our annual cash interest expense by about $17 million, and extended the maturity of $577 million of the refinanced debt from 2016 until fiscal 2020, and extended the maturity of the remaining $220 million of the refinanced debt from 2016 until fiscal 2021. In order to cover the premium to call the previous debt and expenses related to the new debt issuance, we issued $100 million of senior unsecured exchangeable notes, which matured in fiscal 2018. We remain confident that we can deal with the unsecured notes maturing between 2014 and 2017, either through refinancing them prior to maturity or paying them off as they come due. Since the end of fiscal 2008, we've reduced our debt by more than $960 million. We were pleased to announce during the quarter that we increased our land banking arrangement with GSO by $125 million to $250 million. As an update on the initial portfolio, to date GSO has closed on approximately 1,000 lots, totaling $94 million in acquisition development cost. The additional properties to fully fund the initial $125 million have been identified, and GSO is going through its due diligence process. With respect to the additional $125 million agreement, we have already identified a few land parcels, and GSO has started its due diligence on them. We expect to fill the additional $125 million land banking agreement with GSO during fiscal 2013. As you can see on Slide 27, after spending $127.9 million on land and land development, we ended the fourth quarter of fiscal 2012 with approximately $289 million in homebuilding cash, including cash used to collateralize letters of credit. This is the third quarter in a row where we had sequential growth in our cash position. Keep in mind that our year-end cash balance would have been even higher if not for the impact of Hurricane Sandy, delaying some home deliveries, and delaying the receipt of cash on some homes that did deliver during the final few days of our fiscal year. We feel good about our current liquidity position. Our cash position at the end of the quarter exceeds our target range of $170 million to $245 million. When you combine our cash balance with the additional liquidity provided by our recently increased land banking arrangement with GSO, we believe that we are able to evaluate and actively pursue all of the land deals that are taking place in our markets. To date, we have not had to pass up on a land deal because of a lack of capital. If we find sufficient new land parcels that meet our underwriting criteria, we are comfortable managing our cash at the lower end of our $170 million to $245 million range. We continue to look for land deals in all of our markets, and we continue to put dollars to work in land deals that meet our 25-plus percent IRR hurdle rate. That concludes our prepared remarks, and we'll open up for any questions you might have.

[Operator Instructions] And your first question today comes from the line of Nishu Sood with Deutsche Bank.

I wanted to ask first about the order pricing. Your order number was up 23%. Your total order volumes, dollar volumes were up 46%. That's a trend that's been going on, but that was a pretty marked jump in that, and it was across a lot of your -- basically, across all of your regions. So I just want to understand what was driving that and whether we could expect that to continue.

Yes, I'd like to say that it was just that we raised home prices that much in every market. But in fact, it was just really a matter of 2 different mixes combined with some home prices. The 2 different mixes are just the mix of communities that delivered homes had higher prices. And we have seen a bit of a shift toward larger homes by some of our customers combined with some higher option dollars bringing the average price up. So it's really been a mix of many factors.

Got it. Okay, and in terms of your land acquisitions. The pace obviously picked up a lot in the second half of the year. If I look at it on a whole year basis, you still added less lots, around 5,000 versus how many you closed, so 5,300 or so. As you look at it, I mean, does the pace of the second half need to continue to fuel growth into the housing recovery? Or are we going to see some seasonality? Obviously, you're generating more cash flows in the second half of the year, and so you might see a slowdown in the pace in the first half of the year.

No, our goal is to continue that current pace. And so far, we feel pretty good about the opportunities that are out there. Early in the year, it's really -- if you think about it, that's when we experienced a pretty marked improvement in sales pace, and prices began to go up. And that made it easier to justify land residuals that the land sellers wanted. So early in the year when the pricing was just coming up, we just didn't have opportunities that met the criteria, but as the pricing and paces of homes jumped, we were able to find more opportunities, and we continue to find them right now.

Yes, Nishu, I think it's a false conclusion to draw that the first half of the year we were reluctant to purchase land because of our liquidity position. The reason that we had less land purchased in the first half of the year is there were less sellers willing to sell at prices where we could underwrite it at our 25-plus percent unlevered IRR. It was not a capital limitation. Having said that, going forward, although we need, in order to grow, to replenish at a faster rate than we're delivering homes, we're going to stay disciplined on our underwriting criteria and not overpay for land just to make sure we have more lots.

And how much development is required on the lots that you were picking up in the second half of the year?

It's really a whole mix. I think I mentioned that in general we're definitely finding fewer developed lot opportunities. A lot of those that are in good locations got picked over. But they still exist. We just bought a couple of hundred fully developed lots in Orlando just a few weeks ago. So the opportunities exist. But I'd say more often than not lately, we're seeing the better opportunities where we have to develop lots. Luckily -- and obviously, that changes by market, by the way. In Houston, we definitely still see more finished lot opportunities, and we see them scattered around. But in general, I think we can plan on more development opportunities. The good thing is that we're quite used to land development. I think we're good at it, and that's not something that concerns us. Generally speaking, we have to have higher margins in those cases to overcome the slower inventory turns in order to get our IRRs to meet our hurdle rates of 25% plus, but we've been able to find those opportunities.

Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question on the GSO relationship. I was wondering if you could describe how it works in terms of returns, if there are profit participation above a certain level and what that level might be in terms of either margins or returns. And also how do you distinguish between taking land on through your own balance sheet or through the GSO relationship?

Okay, let me address the terms that are not disclosed. But safe to say, as we said in the past, that they're very similar to a typical land banking deal that we did in the last cycle and our peers did in the last cycle. There's a, basically a return on dollars deployed that GSO receives, and we put down a deposit. It's truly an option. We can walk away from it and all that we're at risk for is our option deposit. There is no participation of any kind. All GSO gets is the agreed upon return. That does not change, it's a fixed return. In terms of determining whether it goes to the GSO or whether we do it on a wholly-owned basis, I mean, if it's a fixed lot option that we're purchasing on some kind of flow basis, it certainly doesn't make any sense to put it into GSO. If it's a smaller parcel and less dollars that's going to be completed in 12, 18, 24 months, it probably doesn't make sense to put it in a GSO. So we kind of focus on communities that have higher cost per lot and may have some development work and had a little longer life. So larger deals would be looked at more seriously to go into GSO and smaller deals, we would favor doing on our own as a general rule. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: I appreciate that, that's helpful. Secondly, I just had a question actually on the accounting side. I noticed that you're reporting a lot, and I think you kind of break it out afterwards in the way we're more used to. But at least on the press release and the presentation reporting a lot of numbers, most numbers units, including JVs on a regional level and on a consolidated level. I think that's largely in contrast to most of your peers. And in addition, the commissions, both internal and external, are in your cost of sales. And I think only 2 other builders out of the 12 we cover do that. So I was just wondering if there's any thoughts around perhaps trying to align those 2 areas of accounting more towards the vast majority of the peer group, just would be very helpful for a comparability standpoint.

Yes, let me first address the with and without JVs. I think, as I think you alluded to, we provide it both ways, and we'll continue to provide it both ways. But we have more JVs than most of our peers. A lot of our peers did JVs in the past that perhaps had hidden recourse or had more recourse and they decided to get out of the JV business. We always structured ours to where we didn't have any recourse. And the proof was kind of in the pudding that we didn't have to reach into our pockets and subsidize the JVs in any way, shape or form. We still could lose money, just as we did it on our wholly-owned stuff with JVs, but at least we didn't have to put additional funds in. So we have probably more JVs than our peers. So that when we think in terms of our performance, in terms of how much did our contracts go up, we worked just as hard to get a JV contract sold to a homebuyer as we do on a wholly-owned basis. So that's the reason we do it, and we're really not contemplating changing that, but we will tell you we'll continue to provide you the data both ways so that you can slice and dice it any way you see fit. And I think the other one had to do with the SG&A being in gross margin, and there's just 3 of -- or commissions. I think there's 3 of us that do it that way, and I wish all builders did it on an apples-to-apples basis. But I've been in this business a long time, and it's never been apples-to-apples. As you know, we've attempted to show the comparison, making that adjustment for everyone. I think, we did that for 2 or 3 quarters in a row, we didn't do it this quarter, just to explain to people that it's not always apples-to-apples. But there's never been a consistent way that homebuilders have done it, and I don't think there's any movement out there to attempt to get everybody to do it exactly the same. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: All right. Yes, I think one other builder might've switched over, but hopefully we can get everyone on the same line. One other question on the gross margins. Nice improvement there sequentially if you exclude the interest costs. I think up roughly -- let me see, up about 90 bps sequentially, including cost of -- interest and cost of sales. Just wanted to know on a sequential basis what you thought the driver was of doing some incremental leverage from a fixed cost or if you had better pricing coming through in the quarter, and thoughts in terms of potential for continued improvement in 2013, perhaps even off of the base that you've achieved in the back half of '12.

I'll try to take a crack at that, if I can remember all parts of it. First of all, gross margin improvement generally is not that affected by velocity of sales, although we did get a little pickup from velocity, because construction overhead is one of the items in gross margin. And we pick up a little more efficiency as we deliver more homes per community, so that benefits us. Most of the other areas are not velocity-dependent. The margin benefit came a little bit from lots of places, part of which we touched on in the prepared comments. We certainly did have some price increases, home price increases, offset a little bit by construction costs. We also had a more favorable mix of our deliveries coming from newly acquired land parcels. And those generally have better margins than deliveries from some of our older legacy properties. And there's just been a little bit more purchasing in the larger models than there were in the last couple of years. I think interest rates are helping that, and people are able to bump up to a larger home without a huge effect on monthly payments. So that's giving a little extra boost as well.

[Operator Instructions] Your next question does come from the line of Alan Ratner with Zelman & Associates. Alan Ratner - Zelman & Associates, LLC: Ara, my first question was just on your community count guidance. It sounds like you are expecting to see some growth to occur at least on a year-over-year basis in the back half of next year. I was wondering if you might be able to provide a target on year-end, either on a net basis or in terms of kind of gross that you expect to open through the year, and then maybe a rough guess on close outs.

Alan, as you well recognize probably better than most, that's just a difficult, difficult number for any homebuilder to project. I mean, internally, obviously, we have a pretty good handle on what we think the divisions are going to do assuming that nothing changes in terms of sales pace and that the timing of the opening of the communities happen precisely when we expect it to occur. But if timing changes in terms of when we get the final approvals to open a community or if sales paces a little faster, a little slower, it can significantly impact the number. So we're just not comfortable putting out a projection that gives you any real clarity other than the big message, which is we think we have a good shot and stable market environment of growing the community count this year. Alan Ratner - Zelman & Associates, LLC: Okay, great. Okay, that's helpful. And I certainly understand the challenges provided in that guidance. The second question is on the corporate G&A line. You've actually done a great job at managing that despite the 30% plus increase in revenue you saw this year. And I was just curious, you're exiting the year at a quarterly run rate close to about $11 million. I think you're close to about $13 million coming into the year. What's the right target to think about that going forward? Is the fourth quarter run rate a pretty clean number for us to use? Or would you expect that to show some lift as you open more communities?

I apologize, I didn't understand the question. Can you give it to me succinctly? Alan Ratner - Zelman & Associates, LLC: Just the corporate G&A, which is $11.3 million this quarter. That's been down, I think, 3 straight quarters. So just curious what the -- if that's a clean run rate, and what the growth looks like as you open communities.

If you're talking corporate SG&A, I would say you should assume what our current run rate has been in the future terms of your model. I mean, it's not something we provide any clear guidance on. But if I was sitting in your chair, that's what I would use.

We don't anticipate any big changes at the moment there. But -- and by the way, one additional point of clarity on the community count that makes it so challenging. In our case, when a community gets to fewer than 10 homes, we don't count it in community count, which is why -- I mean, there are many reasons why it's difficult to project the number. But if you're teetering around 10 or 12 homes in a community, all it takes is one sale early or a cancellation of one to make the community count bob up and down from month to month. So it's a challenging number, but we feel pretty good about the land acquisition opportunities and about our ability to continue to grow the top line growth in 2013.

Your next question comes from the line of Dan Oppenheim with Crédit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: It's Mike on for Dan. Just 2 quick follow-ups on the GSO arrangement. First, just curious what your sense is on timing of community openings from the initial land put into the land bank.

Yes, I mean, some of them were open when we sold it to them, or just about to be opened. So much of the initial batch is probably an active selling community or soon to be an active selling community. Michael Dahl - Crédit Suisse AG, Research Division: And then the next batch could still come online in 2013 [indiscernible] ?

Yes, I mean, there can be some delay if you have to do land development. If you're buying a raw piece of land, there'll be the same delay that we'd have if we were buying a raw piece of land on a wholly-owned basis. We have to do the land development, so it might be 5 to 9 months before you could have it opened. But there's nothing unusual about the GSO relationship that would cause the communities to come on slower or faster than if we had purchased them on a wholly-owned basis, with the one exception that the very, very first tranche that we did with them, the entire tranche was stuff that we had previously purchased.

Generally speaking, I'd expect even the second level, the second $125 million, that most of those will be open by the end of the year. Michael Dahl - Crédit Suisse AG, Research Division: Got it. And then just a quick clarification. On the fixed return, is that regardless of the type of community purchased? Or is there any sort of scale?

Yes.

Yes. Michael Dahl - Crédit Suisse AG, Research Division: Regardless?

Yes.

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

Just a little bit of a follow-up on the land issue. We've been talking to some folks who talk about the value of -- given that you're seeing subcontractors be a little tight on adding labor, that there's a value to keeping sort of a straighter time line in terms of construction. So when you think about what you're buying and what's in the pipeline, is there a value to maybe buying something with a lower IRR but that will allow you to keep a straighter line in terms of your construction? And would you be willing to take maybe something sub-20% just in order to keep that -- your subcontractors happy and your pace sort of more even?

I wouldn't say -- I mean, while there might be times when we'd look at an opportunity that's sub-25% for unique circumstances, it's not often and it's not driven by subcontractor concerns. Having said that, we're always looking to keep a strong relationship with our subcontractors and really focus on being a good partner with them, giving them good construction schedule information, which we do electronically on our computerized scheduling system, and it's updated nightly. We try to make sure we keep our payment process very smooth and effortless, and they can look up payables also online on their own private web portals that they have access to, to see the status of outstanding payments. And we try to make sure we pay timely. We have a very good variance purchase order system that doesn't leave them in the dark with construction. If there are valid reasons and there often are, for cost overruns, we have a good system to process that throughout our company. So there are a variety of things we do to build a strong relationship with our subcontractors. But I wouldn't say we'd be buying land to keep their workforces happy.

I mean, frankly, what's happening now is we're in a growth mode as an industry, certainly as a company, and more is coming, and we're keeping them abreast of that, but it isn't that we're kind of having peaks and valleys in most of the markets. It's kind of all of our markets are gradually increasing along with the market.

Okay, great. And just a quick follow-up on Hurricane Sandy from the -- from a cost side. Are you seeing any tightness in East Coast labor or construction supplies after Sandy?

It's interesting, and I think we mentioned this before in our last call, most of our markets have shown a real marked improvement during the year, including the very close in locations in New Jersey. But some of the further out suburbs of New Jersey has been a little slower than other parts of the country. So they haven't had, prior to Hurricane Sandy, the normal cost pressures that we've seen in some of the other markets where housing permits and starts are way up. Having said that, recognizing that it's a slower period of starts in the winter in the Northeast, I wouldn't be surprised if there's little costing pressure. But it might come out to be overall similar to what we are experiencing in other markets but for different reasons.

Your next question is from the line of Joel Locker with FBN Securities.

Just on your share count, it's a little lower than I thought. And just what would it be going forward with -- on a diluted and a basic?

Brad, I'll let you handle that one.

Well, if you're looking at the annual versus the quarterly, you can see that...

Just the quarterly going forward.

Quarterly, it should not move much from where it is unless we were to do something new. I mean we do have the tangible equity units that were issued 1 year ago. Those are already counted in the calculation. So as those convert, we have already counted those. So there really isn't anything that I would anticipate to make that share count grow in the future other than kind of normal things that you'd seen in prior years, if there was any stock option exercises or stock grants that vest an issue. But those are not large numbers. So I mean, we also have the convertible notes we issued in October out there as the possibility of being converted, but I wouldn't anticipate that happening in any great events for a while. So...

But the convertible notes are not going to be included.

They are not included, that's correct.

All right. Just to I guess base the last question on interest expense going forward. If you drop to $17 million in interest payments a year, it's $4 million in a quarter, per quarter. I mean is the new base rate for interest expense barring its inventory moves around, around $21 million?

You probably can't do it as easy as that, Joel, because of the way we capitalize interests. So it'll take a little -- there'll be a lag before that comes through in the expense side.

But barring anything if your inventory stays around $9 billion or $8 billion in total, or if that doesn't move much, obviously it's going to move if the inventory numbers move but.

Yes, but I would say it's just we capitalize based on what the expense was at the time that's still and capitalize interest in that inventory as we close a house. It will be higher because of what was higher at that point in time. It just takes a while for us to kind of work through. And there's just a lag before that cash interest savings comes through in terms of interest expense on the P&L. Some of it will come through right away. Others, it just won't be as clean as you described it, that's all I'm trying to say.

Your next question is from the line of David Goldberg with UBS.

I want to ask a question. I know people have kind of been hitting on this pricing cost question. But Ara in the opening remarks you mentioned that a lot of the year-over-year gross margin improvement you saw was really driven more by the fact that you're more on delivering more homes on newly acquired lots. And you also mentioned that as you get good price appreciation, you're seeing cost pressure. And so I'm wondering if you guys have looked at what kind of captured you -- rate you kind of get on price appreciation. In other words, if prices go up $1, how much do think goes up -- did you lose in higher cost, versus how much do you think you capture? And is that something we're just not seeing yet in the margin, that's why it's not more impactful?

It's not something we track that way. There's just so many moving parts on margins, where the mix from deliveries coming from. If we are buying finished lots on a quarterly takedown, those tend to have lower margins, but they have higher inventory turns, so we still get to our IRR. But if you have a higher percentage delivering at any given point in time from that type of land arrangement versus situations where we develop land, that can affect it, the mix of model types, the mix of -- in a given quarter, how many come from legacy position. So there can be -- there are just a lot of ups and downs there. We've been making great progress, as we said, on our gross margins, 350 basis points, I believe, over the last 6 quarters. We anticipate, barring some unforeseen circumstances, that we're going to continue to improve our gross margins and, hopefully, including this year coming up. But we just don't calc how much of it is directly from each factor. There are just so many moving parts.

Okay. Maybe I could try to ask the question a little bit differently, and maybe this is too vague too, so I apologize if it is. But when you look out at how you negotiate your pricing for labor and materials and with your subcontractors, how long can you effectively fix those costs relative to the home price? In other words, you say, hey, we're going to build this home. It's a 3-month build cycle. Here's the cost and it's [indiscernible], and then you have to renegotiate. I mean, how long when you kind of think about your different subcontractor bases, do you fix your labor and your material costs as you look forward?

It varies quite a bit. So let me try to give some instances. Appliance -- branded items, appliances, kitchen cabinets, carpeting, certain other materials, we tend to have a longer fixed pricing. Typically, it's, on average, I'd say about 2 years. So there, we use the power of our buying volume to -- and we typically single-source our branded items so that -- and we trade that for a good pricing and a locked position. And like I said, appliances is probably the classic one. Lighting fixtures are another one; and, to some extent, windows. Other materials were really much, much shorter term and were subject to commodity prices. Concrete is an example of that, where the fluctuations are every couple of months. Lumber, we vary by geography. It can be 2 months to 6 months tops typically, and that will vary quite a bit. On the labor front, sometimes the price is tied to a community, if it's a short community life. Other times it's tied to just pure timing. Having said that, if the subcontractor uses piece workers, and that's not uncommon, and their pricing goes up, they may have a problem delivering the velocity we need, and sometimes we may have to reluctantly reconsider the pricing partway through their contract to be able to keep up with an accelerated pace. So I'd say the answer is it's all over the place. In general, though, it's definitely a linked relationship. Pricing -- subcontractor pricing is typically going up as velocity is increasing. And as velocity goes up, home prices -- homebuilders check their velocity by increasing the home prices. So they generally go hand-in-hand, and that's why, while we are concerned, and we don't want to sell too far out in advance, we don't lose too much sleep over it because we -- the construction cost increases typically come in an environment where we're able to get home price increases too.

Your next question comes from the line of Jeremy Pinchot with Gilford Securities.

One quick question and maybe a quick follow-up. Any thoughts or color you can give us on potential plans for the preferred shares?

Yes. I mean, we're prohibited by covenant from paying the dividend on the preferred until such time as our coverage ratio is vastly improved from where we are now. Once we get to that level, I think it's 2x, then it's up to the Board of Directors to make a determination as when it would be appropriate to turn the dividend back on. Beyond that, I mean we're not considering doing anything with the preferreds.

Got it. And clearly no line of sight yet on when that 2x would occur?

None.

Okay. And then just more specifically, regionally, any color or more detail on order and traffic trends in California and Texas?

I'd say both of those have been pretty solid and steady. The only place where I could say we've seen a little change in order trends might be in the immediate D.C. suburbs just in the last 2 months, as often when you have the debt ceiling battles, and now with the fiscal cliff battles. There's just a little bit more hesitancy there. But putting that aside -- that market aside, I'd say overall has been pretty steady everywhere.

Your next question is from the line of Alex Barrón with Housing Research Center. Alex Barrón - Housing Research Center, LLC: I wanted to focus a little bit on the SG&A, and I guess look back over the last couple of years. Looks like you guys went from $238 million 2 years ago to $211 million last year to $190 million this year, and yet your revenues have been better than the last 2 years. So can you kind of walk us back through what has changed? Is it headcount or what else is going on there?

I mean, headcount is the biggest component of it. And then anything else, we've just scrubbed every line item that is in SG&A and tried to appropriately reduce it. Some instances in the past, we had contracts that we couldn't get out of. I'll use an unusual example, an HR contract for a particular tracking of performance reviews, that was $100,000 a year, or whatever the number was that we said, "Boy, I wish we didn't pay the $100,000, because we could do it a different way cheaper." Because we don't have 6,500 associates anymore, we couldn't get out of it contractually. It's now kind of gone away, so it's not in SG&A. That's just a example, Alex?

Office leases would be similar things, where we would've liked to have reduced it even sooner, but we are contractually obligated for a certain period. And then when that period is up, we move to smaller spaces or renegotiate.

I mean, we just tightly manage cost. And clearly, it was painful for us and the entire industry in this downturn. But we took the appropriate steps to manage costs as tightly as we can, or could, and it's paying off dividend. We've been saying for quite some time that, as revenues increase, we're going to have a lot of operating leverage. And now you're actually seeing that demonstrated with actual results.

I'll add one other point, and that's using an old cliché, necessity is the mother of invention. We certainly have learned to be more efficient in this downturn. And hopefully, efficiency is that we're going to keep in place even as the market picks up, and we've been demonstrating it so far as our volume goes up. Examples of that, we had service call centers throughout every division. So if somebody had a leaky toilet in the Galloping Hills neighborhood in Northern California, they'd call that local office, and there would be an operator there to take the notes in terms of their complaint and send out a purchase order -- or a service order to our staff. Now that is all done -- almost every location in the country is handled centrally in one call center, far more efficient. It's here in the states, it's not overseas, but it's a far, far more efficient way to operate. We are regionalizing accounts payable entry in many more geographies, which is more efficient. We are regionalizing the purchase order setup, coordinating with the purchasing departments, which is far more efficient. So there are a number of efficiencies we've implemented, and that helps our SG&A, especially as we are growing.

Your next question is from the line of Susan Berliner with JPMorgan. Susan Berliner - JP Morgan Chase & Co, Research Division: Just a couple questions from me. Ara, I was wondering if you could comment on what you're hearing regarding the mortgage interest tax deduction potentially changing, and if there -- as you see what's going on in Congress, what you think could be the potential from any of your homebuyers? I'm assuming it's pretty small. Just want to know if you guys could quantify it.

Sure. Well, it's anybody's call as to what's finally going to happen, but there has certainly been a lot of talk about eliminating the deduction on second homes. And there has been a lot of talk on reducing the ceiling further on deductible mortgages from the current $1 million dollar level to something lower, the $500,000 market has been bantered about. Neither of those concern us too much. While we don't think it's an appropriate time to deal with anything that can derail the housing recovery, because we think it's just so critical to the overall economy, we recognize the fiscal imbalance. And generally, we're part of the leading builders of America, and we endorse, somehow, getting to a better budget situation and avoiding getting into the fiscal cliff. So we recognize something is going to happen. Generally speaking, the over $500,000 mortgage level is not a big part of our market. Our average price is in the low $300,000 range. So we're not overly concerned about that. And while we do sell some second homes, it's not a huge part of our market. And thirdly, we do have a little niche in our business, the active adult business. Our customers today in that niche are taking financing. Most of them, a greater percentage anyway, about -- I think about 2/3 are taking financing. Most would qualify for an all cash, and I think they are just taking advantage of the opportunity of low rates right now to get financing. I don't think it would affect them very dramatically. So as I said, we're concerned about any legislation that affects housing in any negative way. And certainly mortgage interest deductibility is on our radar screen. But if it's in balance with a better budget overall, and they're not too severe, I think it's something that the homebuilders are prepared to deal with. Susan Berliner - JP Morgan Chase & Co, Research Division: Great. My other question, I apologize if I missed this. Your orders for November being up about 18.5%, can you talk about -- I mean, with Sandy, an impact for that? Or is that a good run rate, or how should we think about that?

I wouldn't say Sandy was a much of a factor at all. I mean, frankly, it occurred in the last few days of October. And while there's a little pickup in traffic in that market, I think most customers are trying to figure out what they're going to do, they're still talking to their insurance companies, and I don't think that most are in a position to go out and buy a new house because there's flooded.

I'd say, if anything it may have slowed modestly, but it's only affected kind of New Jersey in a material way. So I don't think it affected the number overall. But I think it actually -- it reduced some sales we probably would have otherwise had in the New Jersey marketplace and maybe Delaware to a lesser degree. But I don't think it's a material number. But there weren't a lot of people out looking for houses for a few weeks, as you can imagine.

Your next question is from the line of Michael Kim with CRT Capital Group.

First on gross margins, just wondering if you could describe the gross margin variance between your newly identified lots versus legacy lots? And do you think we're going to see the differential widen over the course of the next year? Or would you expect any movements to be in tandem?

It's a difficult question to answer, but if you go to Slide 15 in our presentation. We tried to -- I think there's a correlation, but I can't tell you exactly what the impact is. In general, our legacy lots have lower margins on average than our newly identified lots do. So we think we're going to continue to march towards that 20% or 21%. But if you look on Slide 15, you can see that on the second quarter of '11, 39% of our deliveries were from newly identified, and the margin was 14.8%. I'm not going to do every quarter here. But in the fourth quarter of '11, it was 58% newly identified, and our margins had increased to 15.5%. By the second quarter of '12, that 43% of newly identified had increased to 61%, and our margins increased from 15.3% to 17.4% and so on. So it's closely related. In general, margins are higher probably closer to the normalized level, the 20% and 21% on the newly identified, and they're less than that on our legacy. Obviously, average can be misapplied when you look at an individual house sale or an individual community. But I think, on average, that's the correlation.

Understood. And on -- when you're buying finished lots on a quarterly takedown basis, what is the gross margin differential, and what do the gross margins look for the GSO land banking arrangement relative to the company average?

Well, gross margins on finished lot acquisitions, depending on which division and what their overhead structure is, can certainly be 16% or so and still drive a good IRR. And in some cases where we have to develop the land, if it's a large-enough parcels, the gross margins may need to be 27% or 28%. So that's kind of the different range that we can see. And as Larry mentioned, just in terms of general guidance, the GSO transactions don't really occur with finished lots. Just doesn't make economic sense to if we already have a finished lot arrangement. So I think you can draw the conclusion that the GSO transactions have probably a higher gross margin than our overall company average.

Do you have -- could you provide a sense of magnitude in terms of the benefit on the GSO land banking skills?

The sense of magnitude in terms of what?

Relative to the average right now?

In terms of the margin?

Yes.

Yes, I think, again, $250 million sounds like a huge number, but it is not going to be $250 million in a quarter or $250 million even 1 year. The average length of time these communities are going to be outstanding is probably around 3 years. So if you divided that up and then divided it by quarter -- you divide it by annual, and then divide it by quarters, yes, it will have some incremental negative impact on margin to the extent that they've bought parcels that we didn't previously own. On the ones we've previously owned it has no impact on margin, comes through on the interest. But I think in terms of you try to model it, I wouldn't get overly obsessed with it. I think it is an incremental negative but not material.

Yes, I wouldn't -- I think the effect on the GSO transaction will be far, far less on gross margin. I think the effect will be more on our top line. It just allows us to do that many more transactions and to be able to grow our top line all the more since it -- our ideal scenario is to buy every single lot on a finished-lot basis. And then we can do far more volume than we're doing now. It's hard to do every single lot, but with the GSO transaction, it allows us to do more homebuilding; that synthesizes the effect of buying from a developer on a finished-lot takedown. So I think it has more to do with volume than gross margin effect.

Understood. And just lastly, when will you be posting the fourth quarter supplemental contract data summary, is the website just similar to last quarter?

Yes, we will put it out so that you can do it x JVs by market segment. I think that's what you're talking about. Yes, we will be putting that out.

Your next question is a follow-up question from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Just wanted to circle back to the order ASPs. I know you mentioned before, Ara, that it's driven by mix of communities and mix of product to larger homes. But just trying to get a sense of, given that earlier in the year, certainly there's a discernible trend here, but the jump in 4Q. I mean, I would think that perhaps you wouldn't necessarily be able to hold on to all of that type of jump near term, although perhaps longer term, it's something that we could see. Is that fair to -- a fair way to think about it?

To be honest, I just haven't focused on what that average sales price projection or mix looks like, not that we give out projections anyway. But I just don't think we're -- we've got a discernible trend or strategy change right now. I think it's just going to depend on mixes, both product and geography and community, more than a strategy change. We are continuing to see an environment where we're able to pass on home price increases, I mean, just even in the last month or 2 as well. So that part is not changing, and hopefully that environment will continue.

Yes, Mike, we did not make a conscious decision across the country to go to higher-priced homes. I mean, some of it was driven by what the land was that we were able to find that made sense for us to purchase. And some of it could actually be within a business unit, what kind of land they found, and the other could be that there's more land in a higher-priced business unit, and less land in a lower-priced business unit so that it's geographic mix. So there was not a conscious decision for us to say "Let's raise our average sales price by doing a different kind of product." Having said that, in each of our individual markets, if consumers want the bigger model that we offer in that community rather than the smaller model that we offer in that community, you were seeing some of that happen. They are just saying with these low interest rates, we can buy a bigger house, or we're loading it up with options because it's affordable, because of the lower interest rates as well. So those are just things that are occurring in the marketplace rather than a very specific strategy on our part to have it occur. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Right. That's fine. I appreciate that. And just lastly, on the community count, you mentioned that you expect things to maybe turn up a bit in the second half of next year. And I'm sorry if you hit this before, but should we expect a further or continued decline in -- over the next couple of quarters? I noticed that with your November order growth of 18%, it looks like that was primarily, versus 27% in the fourth quarter. I mean, it looks like that was primarily driven by perhaps community count continuing to shrink because your sales per community was still solid.

Yes, it's not something we'll give you more specific guidance on, but I think by us saying growth in the second half of the year, you can infer from that pretty accurately that it's just a lag of when these communities come on stream that we've purchased in the last half of 2012. But there's a lag effect, and we're not expecting growth in communities. Could it go down a few? Sure, it could happen. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: So just to be sure I understand, growth in the second half of next year is off of current levels?

Yes.

[Operator Instructions] Your next question is from the line of Alex Barrón with Housing Research Center. Alex Barrón - Housing Research Center, LLC: Just kind of wanted to follow-up on the SG&A question. Is it fair to assume that you guys hit the 10% rate -- your revenues are almost close to $500 million. Is it fair to assume that you could stay close to these SG&A levels as you ramp up towards $2 billion.

You mean, by basically annualizing the fourth quarter? Yes, I think that's fair to say.

Yes, I think our target is 10% on an annual basis, so we hit it for the quarter. We think that's a sustainable level if we could keep the volumes smoothly there every quarter.

Yes, and we achieved that in the last cycle. Alex Barrón - Housing Research Center, LLC: Okay, that's great. My other question was in the Phoenix market, I guess we saw probably the highest price appreciation this year, and we heard land prices were going up pretty significantly. How do you guys work around maintaining, I guess, discipline to make sure you're still hitting your targets there for underwriting?

Again, we underwrite every single piece with the information for that piece. We look at surrounding comparables, we look at what they're selling for currently, what prices are, we adjust for finishes. If they have granite countertops, if they've got tile flooring and so forth, so we get an apples-to-apples comparison. We look at their pace. And if we can pencil back to make a land acquisition work and hit our hurdles, we do it. And thus far, we've been pretty successful. I will say, interestingly in Phoenix, we've had more success in that market in particular on the larger product, and that's been a trend for a couple of years now. And we've got some very good cost-efficient, larger product that has been working very nicely for us and it's penciled on our new land acquisition. So every market is challenging. They always are. In general, while this market is challenging, it feels like while we have the same competition from publics that we always do, got a little less from privates, so we feel pretty good about the outlook on land acquisition in all of our markets, including even a hot market like Phoenix.

And we're staying -- I think the main point, Alex, is that even in a hot market like Phoenix, we are not assuming any home price appreciation or base improvement. We're staying disciplined to our current home prices, current home paces, current construction costs. If it gets to a 25% unlevered IRR, we'll do it. If it doesn't, we don't win the bid.

Well, thank you all very much. We're pleased with the results we are able to report this quarter, and we look forward to some great calls in 2013 as well. Thank you.

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating, and have a nice day. All parties may now disconnect.