Good day, everyone and welcome to the KB Home second quarter earnings conference call. As a reminder, today’s conference is being recorded and the webcast on KB Home's website at kbhome.com. The recording will also be available via telephone replay until midnight on July 6, 2009. You can access this recording by dialing 719-457-0820, or 1-888-203-1112 and entering the replay pass code of 4252012. KB Home's discussion today may include certain predictions and other forward-looking statements that reflect management’s current expectations or forecasts of market and economic conditions and the company’s business activities, prospects, strategies, and financial and operational results. These statements are not guarantees of the future performance and due to the number of risks, uncertainties, and other factors outside its control, KB Home's actual results could be materially different from those expressed in or implied by the forward-looking statements. Many of these risk factors are identified in the company’s filings with the SEC, which the company urges you to read with care. For opening remarks and introductions, I would now like to turn the call over to KB Home's President and Chief Executive Officer, Mr. Jeffrey Mezger. Please go ahead, sir.

Thank you, Michelle. Good morning. Thank you for joining us today for a review of our 2009 second quarter results. With me this morning are Bill Hollinger, our Senior Vice President and Chief Accounting Officer, and Kelly Masuda, our Senior Vice President and Treasurer. During this call, I will discuss our performance for the quarter, share some observations on the current housing environment, and provide an update on the transformation of our business through the open series home designs. After Bill gives his review of our financial performance, I will have some closing comments and then we will open it up for your questions. Our second quarter results reflect the persistent challenges in today’s housing environment. While I am pleased with our steady progress, we are still short of our ultimate goal of restoring profitability. Through solid execution, however, we were able to significantly narrow our loss, compared with the second quarter a year ago. We are encouraged with our net orders of 2,910 homes which exceeded our internal expectations at the beginning of the quarter. This represents a 59% sequential improvement over the first quarter net orders. As we discussed on our last call, we faced a difficult year-over-year comparison in the second quarter. Compared to the prior year, our second quarter net orders fell 31%. Going forward, we believe we will have year-over-year net order growth in the third quarter, fourth quarter, and for the full year 2009, assuming economic conditions do not materially deteriorate. Because of the significant improvement in our net orders from the previous quarter, we have once again increased our backlog. At the end of the quarter, our backlog stood at approximately 3,800 homes, representing future housing revenues of close to $800 million. This is the first time since 2007 that we achieved two…

Thank you, Jeff. Good morning, everyone. As Jeff mentioned, we remain steadfast in executing on our key initiatives of maintaining a strong financial position, restoring profitability in our homebuilding operations, innovating new products, and positioning the company to capitalize on an eventual market recovery. During the second quarter, we continued to operate in a recessionary economy and a turbulent housing market with elevate home foreclosure rates and high unemployment prolong even downturns that began in 2006. Despite these challenging conditions, and our substantially lower revenues, we narrowed our net loss considerably from the year earlier quarter by remaining focused on our goals. For the quarter ended May 31, 2009, we reported a net loss of $78 million, or $1.03 per diluted share. That compared to a net loss of $256 million or $3.30 per diluted share a year ago. In addition to expanding our gross profit margin and lowering our overhead costs from the year earlier quarter, we realized improvement from a significant reduction in asset valuation charges. These charges consisting of pretax non-cash charges for inventory and joint venture impairments and abandonment of land option contracts totaled $50 million in the second quarter. That is down 72% from $177 million of similar charges a year ago. The decrease was principally due to our lower inventory base and the significant impairment charges we have incurred over the past several quarters, along with the favorable impact of our open series product transformation. At this point, we believe the majority of our impairments are behind us, although if market conditions appreciably worsen, we could incur additional charges in the future. Excluding inventory and joint venture related valuation charges and the $24 million goodwill impairment charge in the last year second quarter, our pretax losses would have been $34 million in the second…

Thanks, Bill. Our financial results from the second quarter demonstrate that we have moved closer toward restoring profitability, yet we still have more work to do. To reach profitability, not only will we have to continue achieving cost-savings in what we build and how we operate but we will also have to grow our top line. We recognize that you cannot simply save your way to profitability, which is why we have been careful to preserve our growth platform, even as we streamline our operations. Now, in large measure because of the work we have done with our product transformation, we have an opportunity to leverage our operations and grow our business. We believe we are in a good position to restart our deal flow and have begun rejuvenating our land acquisition activity. Where we have introduced the open series, sales results have yielded more predictable absorption rates, which gives us confidence in underwriting new land acquisitions. We have not had this level of predictability in our business since the downturn began more than three years ago. As a result, I am pleased to say that during the second quarter, we optioned five attractive finished lot deals with minimal deposits, touching every region we operate in and representing more than 600 lots. While we now see opportunities in every market, we will continue to be conservative with our cash and carefully choose only those deals that meet both our market strategy and financial hurdles. Because the open series product is already designed and the cost to build contracted, we can move quickly once we acquire new lots. In Florida, for example, we approved a lot option purchase in April and by May we were building our model complex and generating an interest list. We conducted a successful grand opening in June, less than 60 days after deal approval, and expect the first homes to be delivered by early November. That means we will be generating revenue less than seven months after making the investment decision while staying disciplined with our build-to-order model. We continue working to shape our own future and are not simply relying on the uncertain timing of the broader housing market recovery. Our responsibility is to continue executing with speed and discipline, identify and act on targeted new growth opportunities, and remain focused and committed to the strategic principles that have steadily produced positive results. Thank you and now, Michelle, let’s open up the line to questions.

(Operator Instructions) We’ll take our first question from Steven East with Pali Capital.

If you look at the orders, you talked about orders being up for the full year, 3Q, 4Q and the full year. I guess broadly speaking, that seems a little bit optimistic to me. Obviously it’s got to be more driven by open series. Can you sort of walk us through how you get there and also sort of blend in what happened in the Southeast? And can that be corrected very easily?

Sure. Steven, as I mentioned in the prepared comments, we actually exceeded our expectations in Q2 and that occurred because of the strength of the sales rates where we’ve rolled out the open series and we continue to introduce the product in more locations across the country, so we have good sales momentum and at the same time in Q3 and Q4 last year, we had poor sales results. That was the time when we decided to shut down communities and start retooling. So you have this inflection occurring where we have good momentum in all the markets where we’ve opened up and introduced the open series, it’s selling at historical sales rates so we have confidence in the sales pace going forward. At the same time, we now have a very soft comp in Q3 and Q4. As to the Southeast, a few things are going on. As you know, we pulled out of Atlanta. We’ve significantly reduced our footprint in Florida. We had a lot of sales last year in both Atlanta, parts of Fort Myers and the treasure coast that we no longer operate in, and the markets have remained a little difficult. Frankly, the Carolinas have turned soft from where they were last year at this time and our community count is down. So I think it will take some time to close the gap in the Southeast. While I say that, in every one of those markets where we’ve introduced the open series, it’s selling very well.

Okay, and along those lines, how many communities do you have now that are open series and what should we expect in Q3 and Q4?

Well, it’s starting to blur for us, Steven. I didn’t share the percentage because we now have -- I’ll call it a grey area of community where we have existing models and existing product and we’ve now introduced open series into the product line that’s selling well without building models. So to give you an exact count going forward, it’s going to get blurry and it’s going to get difficult, so what we would prefer to share again is that we are continuing to introduce it across the system. Any new acquisitions we do would be open series product and we continue to hold that coming out of the fourth quarter that 50% of our deliveries will be open series product.

Okay and just one other question, on the gross margin, you talked about the project that you bought in April, built in May, et cetera. Can you compare the gross margin you are getting there on that product versus the rest of your business? And when do you sequentially -- when do you see a step change in your gross margins?

Great question, Steven. I was hopeful that people got that message out what we shared in Florida. Part of the reason that we are going out on these soft options and moving quickly is we can raise our returns and our margins and if this community hits pro forma and the initial sales rate suggest it’s well on its way, the margins will be north of 20 and the IRR is north of 30, so it will help to lift margins over time. We haven’t done that many new deals at the higher margin yet and it’s going to take some time to broadly lift the margin back to the good old days. But in the meantime, as Bill shared in his comments, we expect a margin lift in the fourth quarter as we close out a lot of the older product lines that weren’t performing that well and a higher percentage is the new open series mix.

All right, thanks a lot, guys.

We’ll take our next question from Ivy Zelman with Zelman & Associates. Ivy Zelman - Zelman & Associates: Good morning. Great quarter, guys. Happy to see your progress. Just a few things just to continue on the questions Steve was asking -- if we look at the open series margins, it sounds very promising about your community there but realizing that’s also on land you just locked up at what would clearly be better returns and the legacy asset, so just kind of thinking about your gross margins I the second half of the year. If I understand you correctly, they are definitely going to be obviously higher than the 14.3 and the 18.7 that you reported in the last year and two quarters respectively. Should we assume that this roughly 19.7 you did this quarter is a sustainable margin going forward sequentially or would you expect that normal discounting, mortgage rate buy-downs, closing costs -- whatever you are doing, which I would love to know the percent of the total discounting as a percent of ASP you are averaging right now, kind of help us understand what our though projections look like for the second half?

The numbers that you shared on margin, I believe you model it a little different than us in that you take out cap interest and some other things. But if you look at our track for the year here, it was roughly 13 in Q1, it was 12.7 in Q2, basically flat. We expect it to be flat in Q3 and then there will be a lift from there in Q4. Along the way, our allowances and incentives have all held at historical levels, as you know in our business model we focus on the best price for the consumer and don’t rely too much on incentives. And when we don’t have any inventory to sell, you don’t have to take steps to flush inventory. So our incentives will remain low and we feel that our margins with our backlog are now fairly predictable again. Ivy Zelman - Zelman & Associates: So is that -- I guess my number then would assume that you can hold margins sequentially from 2Q to 3Q and you are saying up from there?

Yes. Ivy Zelman - Zelman & Associates: Okay. Also, just realizing that you did no longer have the mortgage company but did you have any loans that you were required to repurchase?

No. Again, sometimes you are lucky but part of the move to sell our mortgage company back in ’05 and create debenture significantly lowered any go-forward risk for us, so we have not had to do some of the things you are hearing where there’s major loan purchases coming back at the builders. Ivy Zelman - Zelman & Associates: Great. And if I can keep going, cut me off, but SG&A obviously seeing some improvement as a percent of revenue. Assuming you actually benefit from the strength of the orders that you took this quarter and that your more predictability in terms of the ability to sell, what would SG&A kind of look like under the closings that these orders would bring in eventually? Are you going to see a material improvement or do you expect that SG&A is still going to be even on a higher revenue base still challenged?

It won’t be back to historical levels but it will be below the 19 or 20 we’ve run for the last few quarters. Definitely if you help the top line, it helps your percentage and we are continuing to pursue actions and initiatives to reduce our overhead, our fixed costs, but they are somewhat limited because we are retaining a growth platform now. So you will see the cost side go down and the top line go up and hopefully a much better percentage result.

Your next question comes from the line of Daniel Oppenheim with Credit Suisse.

Thanks very much. Jeff, just wondering, with your comments in terms of the order trend here, the positive trend continuing into the third and fourth quarter and the start of next year, I heard a lot of optimism there, which is good with the open series. What is it that you are more worried about these days? We’ve certainly heard from others about appraisal issues, foreclosures -- do you think that you’ve solved the issues of appraisals now? I guess looking at the Southeast and Southwest, have some concern that some of those markets were still very foreclosure heavy that it might still be challenging for some time.

Well, let me make a few comments, Dan. We are more confident in our sales pace in that we’ve been introducing the product in some markets that are pretty challenged, frankly, on inventory levels and foreclosure levels and we are still seeing good sales pace. And the sales pace is achieved because we’ve dropped our prices down where they are above foreclosure and resale but they are close enough where there’s a compelling value when you throw in all the other attributes of new homes. While I say that we’re confident, I also am concerned, I’ll say, in that interest rates have gone up a little bit. We don’t think that’s going to continue but if it does, it will put pressure on affordability. You have unemployment going up, which always impacts consumer demand, so that’s somewhat uncertain. You have consumer confidence that’s improved, yet is still at low levels. And you just have this cloud over the general economy. So we’re I’d say cautiously optimistic in that our sales results on the ground are reinforcing that we’re doing the right thing but you have all these variables that we don’t control and that are independent that will impact consumer demand going forward. Relative to appraisals, every appraisal has its own story and I’ve read a lot about the change in the appraisal process. Within our business, and our JV with Banc of America, the protocol and procedures that were raised with this change in May were already in place with Banc of America, so that didn’t really impact our business at all. If you get to a specific value on a specific home, you always have the push and pull of what are the comps that are used around it and is the foreclosure an appropriate comp to a brand new home or not? And we just deal with those one at a time. But there’s nothing that’s happened on the appraisal side that would impact our confidence on the ability to sell homes today.

Okay, thanks and then just follow-up, wondering about California, you talked about not advertising the credit there, the tax credit in May. As it’s continued and there’s been more talk in the press there about that running out, what have you seen in terms of the trends there in California into June?

Well, we don’t comment intra-quarter, Dan, but through May as we shared, we stopped emphasizing the California credit because we knew the build-to-order consumer won’t be able to take advantage of it and I think what happened here is as this credit was rolled out, the government, the state government was making a statement to the consumer that it’s a good time to buy a home and there’s a little financial benefit and it got some people off the fence to come in to our sales offices that were contemplating a home purchase and once they looked into it, whether it’s the resales and foreclosures or our product, they are discovering incredible opportunity and incredible affordability. So we think the prices are driving it as much as, or more than the credit. Credit definitely had an impact because it stirred some activity but we saw our activity levels hold through May. I think in addition to that, if you’ve seen the data in California, resale prices have now ticked up for at least two months in a row and with our sales success, we’ve actually been able to raise our prices some in California. So you have the get-them-off-the-fence-because-prices-are-going-up phenomenon, which again we haven’t seen in years.

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

Thanks. Good morning, everyone. On the open series, appreciate the detail and the improvement that you expect on the gross margins. I just wanted to get a sense, you said that 50% of deliveries you expect in 4Q to be open series, I just wanted to make sure when you talk about further improvement in gross margins from 3Q, which you expect to be flattish, relative to 3Q, would the 4Q margin actually be up year-over-year versus 4Q08 or when you kind of said that in the second half it will be up, was that more on a second half blended basis?

Fourth quarter will be up sequentially and year over year.

And year over year -- okay, and looking forward into 2010, could you give us an idea in terms of mix of communities and deliveries that would be open series? Would it be higher than the 4Q number or would it be around 50% throughout the year?

We think it will continue to have an upward trajectory, Michael. It depends on how much reload we do with options like I shared. We are also using the series now to open up some communities like the Texas story I shared, where we would shut it down and preserve cash and now it’s tensing again because of our new product line, and that will help the percentage. On the other hand, we have communities where you can’t change the product. We have town home communities where you can’t really do it as well, which is a percentage of our business. We don’t think we would get to a pure open series business for a few years but it will be higher than 50 and we won’t -- we can give you more guidance later in the year, depending on all the things I just shared.

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

Thanks. Good morning, everybody. First question is about the land deals that you talked about, Jeff. I’m just wondering, how many deals did you guys bid on to -- I think you said you completed six of them. I’m just trying to get an idea of how many -- what that fixed hit rate is against and how much you think the land market has really adjusted versus kind of being one-off deals here?

I could not tell you how many the team has bid on. We always encourage our land teams in each division to -- I call it the hang around the rim strategy. You always -- you have to be out in the market. You have to know what’s going on and you can throw an offer out to pencils and it may stick or it may not but the response will tell you what’s going on in the marketplace. What the phenomenon that’s happening now, there are -- we are starting to see some opening up of term deals at favorable pricing, which is certainly encouraging and also an opportunity for us. We are mindful of the fact it has to be product that is aligned with our strategy, so we wouldn’t go do second move-up lots in an expensive location, and it has to hit our returns. We think that what we saw in the second quarter will probably grow going forward, in part because the open series is allowing us to under-write transactions on lots that in the past wouldn’t have penciled for us and are in a higher price than these bottom-feeding investment funds are willing to pay. So there is an opportunity there for us and we’ll see how it goes over the rest of the year.

Got it. The follow-up question is just on the open series product, I’m wondering how the open series product works with the design studios and really to understand better what kind of options people who are buying the open series are taking magnitude wise. Are they taking as much as your traditional buyer? And margin wise, are they taking things that yield similar margins?

With the open series, Dave, we have not see a big drop-off in our studio sales at all. In fact, one of the things I do like to share, since the peak in ’06, our per unit revenue hasn’t moved significantly. Our overall sales prices are down a bunch but the studio revenue has held very well. What we have seen, however, is a shift to more practical things. People aren’t buying Jacuzzi tubs and the more exotic things that they may have bought in ’06. They are buying flex options to move walls around, convert a bedroom to an office or a den or visa versa. And kitchen options to make the kitchen a little bigger or -- they are not going to granite, they are going to more cabinet and counter space. So I’d say it’s more functional items as opposed to some of the sizzle we saw a few years ago.

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

Good morning. I just wonder if you could put a little housekeeping detail around your community count -- what your average active communities were in the quarter, what you project that to be at for year-end and just how many other communities you currently have either mothballed or still in development?

Do you want to handle that, Kelly?

Buck, we had 134 communities in Q2. We expect that to be relatively flat in Q3 and the average for the year will be somewhere around 140.

Okay, great. And I just -- just circling back to the appraisal issues. I’m just wondering, how are you guys instructing your sales force to act when an appraisal comes back on a contract and it’s below the buyer’s original contract price or below a level where a lender is willing to finance it? How aggressively are you continuing to pursue that sale?

Well, the sales people aren’t involved at all, Buck, so we don’t control the process. So it’s between the lender and the consumer and they may contact us to get more data in the market place but we are out of that discussion. So the sales people aren’t instructed to do anything other than to hold the consumer’s hand through the process from sale to close.

Okay. All right, thank you.

Your next question comes from the line of Michael Smith with JMP Securities.

Just a quick question about the impairments. I wonder if you could give some color on where you took them regionally and if you want to break it down maybe by -- just by region and where you took them, that would be really helpful. Thanks.

Yeah, if you just give me a second.

Sure.

All right, for the quarter, we -- and this will obviously all be disclosed in greater detail in the Q that we’ll file here in the first part of July but basically impairments we had was about $5.7 million and it was spread across the -- basically all our regions -- $1.4 million in the West Coast; $1.3 million in Southwest region; our Central had $1.6 million; and the Southeast had $1.4 million. Inventory abandonments basically were in two regions -- about $27 million in the West Coast region and $9 million in the Southeast region. And on our joint ventures, the impairments of $7 million was all in our West Coast region.

Can you give some color on specifically where on the West Coast that $27 million inventory abandonment was? That seems -- that’s the one that sticks out to me.

It’s California, Michael.

Thanks.

Your next question comes from the line of Josh Levin with Citi.

I wanted to ask, you said that you think the majority of our impairments are behind us unless market conditions are appreciably worse. Can you sort of quantify that? How much would they have to worsen, maybe in terms of the price drops or absorptions before we saw our impairments really start to kick up again?

Josh, that’s a hard question to answer because every asset has a different story and it’s in a different sub-market of a different market. We like the move we’ve made with the open series and that has provided more cushion for impairments, whether it’s the margin side or the fact we now have a run-rate. As you know, impairments are driven by an internal rate of return and you are not selling houses, it can trigger an impairment just like if you have no margins. So as we shared on the last few calls, the open series has provided a cushion for impairments and we review it every quarter and we are comfortable with where we are at today and if prices drop severely in any given city, it may trigger more impairments.

Okay. I wanted to ask more of a high level strategy question -- you know, you said [inaudible] that we may be approaching a point of relative stability. [inaudible] in a few quarters, you really believe we have achieved stability? What do you think about M&A and what do you think KB’s role might be in M&A in the industry?

I don’t know if I said we are approaching economic stability, Josh. I told you in many of our markets, we are seeing a bottom form on price and we are seeing typical sales rates. So it’s encouraging but I’m not calling stability yet. If you look at the growth platform we have, the markets we are in today in the peak delivered 28,000 houses. We are obviously nowhere near that level today in any city that we are in, so we can grow our business a significant amount just by opportunistic land purchases. If our stock currency created an opportunity or there was some distress out there and we could use our balance sheet to take advantage of an opportunity that way, we’d be open to it but our view right now is let’s just go rebuild the lot pipeline while we continue to manage our current assets and do it organically.

Your next question comes from the line of Megan Talbott McGrath with Barclays Capital.

I wanted to follow-up on a couple of comments that you made. First in regard to open series, you mentioned at one point that you had raised prices in California. I don’t know if that was the open series there. And just generally, now that you are about half-a-year into the opening of those communities, how have they faired versus your original expectations in terms of pricing, or have there been any other surprises, either positive or negative around the open series, things that you’ve had to tweak?

A good question, Megan. The price increases are open series related and it was frankly throughout California, not just the Southern California. We’ve been pleased and encouraged with the sales response. If I had a surprise, it’s that we’ve actually been able to move our prices up above not just foreclosures but actual resales that aren’t foreclosure sales in many of the sub-markets, so the old traditional value equation from foreclosure up to resale up to our product has started to emerge in many of the sub-markets, so it’s a -- I call it a pleasant surprise. And sales rates have -- after we opened the first year, we had confidence so we are no longer surprised. We expect it and it’s continuing to deliver on that expectation.

Great, thanks. And then I just wanted to get a little bit more general color -- you talked about your operating margins and improving SG&A but keeping a certain level of folks on board to be efficient. How do you think about that generally in a -- let’s say by community by community basis? Is there a point where at a certain velocity, you need to start hiring more? Are you at that point already with the open series? If you could give us any sort of thought or numbers around that, that would be great.

Well, as we manage each community, Megan, we look at the P&L and the cash flow after overhead, so it’s definitely part of the equation. It would be a nice problem to have to hire more people because of growth in the business. Our current view is we’ll continue to try to find more efficiencies and off the bottom like this, we want to lever this overhead structure and grow as much as we can before we load any additional overhead back in. But if the volume supports it, obviously we’d go hire a couple of superintendents and ramp it up from there. But we’re not at that point right now.

Your next question comes from the line of Kenneth Zener with Macquarie Research.

Realizing you are positioning yourself with unique product, open series, which we are all talking about here, can you highlight perhaps how much just market share gains have been assisting higher absorption rates? Because we saw higher absorption rates from a builder yesterday as well.

I think the fact that we are selling at the pace we are where we are open is telling us that we are growing market share, Ken. The numbers are so volatile on sales and closings and starts that it’s hard to try to pin down market share. We do know that this thing has continued, the economic cycle. A lot of the competitors have fallen to the wayside so naturally we’re growing market share. But we don’t -- we’re not really at this time -- we’re not looking at it from a market share point of view as much as we are how do we get returns out of that asset and that community?

Right, and I guess given your confidence in what sounds to be 10 to 12 orders per community, you know, more traditional levels, is that what really gives you the confidence when you are going to bid on land and do you see that as obviously a relative advantage? Could you quantify that relative to other builders that might be using six orders a quarter?

Every city has a different assumption in run-rate, Ken and depending on the price point in the sub-market, we’re not up at 10 or 12. It’s more like six, seven, or eight. If we were running 10 or 12, we’d push prices and bring it down.

Oh, you would? Okay. And what was your -- last question, what was the FHA share this quarter at your closing?

Kelly has that.

Government loans increased year over year from 57% in Q208 to 75% in Q209.

Your next question comes from the line of Timothy Jones with Wasserman & Associates. Timothy Jones - Wasserman & Associates: A couple of questions -- on the open series, I don’t know if I got it -- can you give me the percentage -- I think you track it by deliveries but it was -- there were of your deliveries or sales in the first quarter, the second quarter? The estimated third and then you had the 50% for the fourth, right?

We really haven’t shared it, Tim, per quarter. I can tell you that it wasn’t much at all in Q1, it was more in Q2 and it will ramp up -- and we’re still holding to the 50% in Q4. Timothy Jones - Wasserman & Associates: Okay and related to that question, you said you had a bunch of certain areas that are already over 50%. Would you like to share that with us?

Well, there’s divisions within every region that -- Timothy Jones - Wasserman & Associates: Yeah, could you just name a couple of the larger ones, or areas where it -- just kind of flavor [of the area where it’s been successful].

Southern Cal would be one, Houston is one, Orlando -- I mean, it’s across the system. It’s not just in one sub-market. Timothy Jones - Wasserman & Associates: Okay, and the second -- I know you still I’m sure market your product just to compare with rentals. What -- how does your average or however you track it, how does your average monthly payment for your average house related to the average rental or how do you market now, or maybe if it’s more of a by-market area, but can you give me some flavor on that?

It is by market, Tim, and if you look at the statistic where in our backlog 78% of our backlog is first-time buyers, we’re pulling people out of apartments. If I just gave you an example, in Southern Cal, there are many sub-markets we are in where the PITI payment is lower than rent today. So we have again reached this inflection where ignore the benefits of home ownership and interest deductions and whether you build equity over time, the out-of-pocket every month is lower for the ownership than it is for the rental.

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

Thanks. First question, headed into the second quarter you had a pretty lean inventory, spec inventory position. Also the spring selling season, your order momentum has picked up a little bit, so I would have thought you would have come out of the quarter with a closing -- you know, a modest percentage of your backlog but the number was actually pretty strong, you know, I think 66% or so above your historical average, you know, better than last quarter and last year. So I was wondering, was that -- did you close more specs than you might have expected or planned or was that related to perhaps the lower construction times you were citing for your new products? What explains that?

Good question. We actually closed 66% of our backlog I think was the number in the quarter, which was the highest second quarter number we’ve had in years. And I would attribute it to a high quality backlog, so people are -- there’s a higher degree that close when it’s time to close and also the fact that our cycle times have dropped significantly from a year ago. You know, I shared the Las Vegas story where in the month of May, they were a little over four months from contract to close, so we are able to turn our inventory much faster than we were previously, so it’s encouraging.

Yeah, but --

We didn’t have a lot of inventory at the start of the quarter. We only had -- I think the number was 300-and some standing unsold, and now we’re at 140-some, so it’s come down significantly but it’s not a big contributor to deliveries. Our go-forward revenue stream will come from delivering our backlog.

Okay, so second question I wanted to ask was about your central division. During the years of the boom, your central division typically ran at about 25% of your orders. In the last couple of quarters, its out performance meant it’s headed back up to 35% or so, which is where it was before the boom years. So I just wanted to get your sense of whether, you know, considering your strategic direction, the new products you are introducing, the places you are making land investments, is that a temporary trend or is that something you think might persist?

I think it’s temporary, Nishu. You have to wait for the markets to really settle down before we’d have a clear investment and growth strategy. When you are in opportunistic mode like we are today, you manage your current holdings and you go find opportunities where you can. The central region -- Houston -- actually, all the cities in Texas are doing pretty well in sales, so that’s encouraging but compare that to the comment I shared, okay, we’re out of Atlanta, we pulled back in Florida so you might have an aberration for a while but we are comfortable with all the cities we are in today and we want to be opportunistic in all the cities we are in. So the market shares will play out as they do once everything settles.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

I hope everyone is doing well. I am trying to mirror a couple of comments that you made -- first, you have lowered your land spend projections for the year and you’ve also lowered your expected year-end community count. I am trying to marry that with your very positive comments on order growth. Are you expecting even better absorption basis for the rest of the year, and if so, why?

I wouldn’t say that we are expecting better absorption pace where we’ve opened up the open series. We shared that it’s selling at typical levels. If the sales pace were to go up, we would raise prices and go capture margin. We are continuing to introduce more product which we think will increase our overall sales as a company but as I shared, in every market we’ve rolled out the open series, its hit the sales pace we would expect. So we have some confidence there that we didn’t have before.

So when you think about lowering your land spend, at least the top-end of the range and also lowering the expected year-end community count, if things are hitting your ranges, why wouldn’t you guys actually spend a little bit more on land or keep the same pace on a year-end community count?

If opportunities were out there where we can tie up lots that are aligned with our strategy and hit our hurdles and we’ve got reduced risk where it’s an easy term deal, we would absolutely chase them. But we’d have to hit all those. But we don’t feel the pressure to go do deals now. We have plenty of lots on our books to manage through.

Okay, and then --

We’ll be opportunistic.

Okay, a quick follow-up, and this probably goes back to a question that hasn’t been asked since Bruce was running the company but do you guys know what percentage of your buyers are investors today versus actual owners, specifically in the California market?

Josh, it’s such a small number, we don’t pay much attention to it. We shared that 78% or 79% of our backlog is first-time, so there’s not a lot left for investors and we do have a buyer group that’s the move-down buyer in the sun-belt cities where the open series product is perfect for them as well. I don’t think it’s much of a factor right now at all.

Your next question comes from the line of Alex Barron with Agency Trading Group. Mr. Barron.

Hello?

Your next question comes from the line of Joel Locker with FTN Midwest Securities.

Just I was curious on the amount of customer deposits you have versus your backlog currently.

Give us a minute. We need to look that up.

All right, I can follow-up with that. And the other thing, on the SG&A, I guess it went up sequentially on a dollar basis and I was wondering if there were any one-time charges like severance or divisions close downs or something that affected the second quarter SG&A versus the first quarter?

Not really, Joel. It didn’t go up significantly and you have the timing of things, when we shut down our division and consolidate and you walk on a lease and you have one-time costs but I wouldn’t take that as a trend. We expect it to go down a little bit in Q3.

All right, and the --

To answer your customer deposits, we only had about $8 million worth at the end of May.

$8 million or so -- all right, guys. Thanks a lot.

Your next question comes from the line of Susan Berliner with J.P. Morgan.

Thanks. Just a couple of quick questions -- one was on your total debt. It looked like it went down sequentially by about $26 million and I was wondering if that was any bond repurchases or just maturity of non-recourse mortgages?

No, Susan, it was tied to a couple of JVs we unwound and the debt came on our books and we are closing through the -- it’s a condo project or two and we’re closing through those so as units close, your debt comes down.

Okay, and then secondly, I was wondering if you could comment on your comfort with your leverage ratio and how you are looking to get that down over the next, you know, foreseeable period?

It’s an interesting mix right now in that we are holding to our cash position but every time you book a little bit of loss, it hits your equity so it affects our debt-to-equity ratio and we keep sharing that we are absolutely focused on restoring profitability and if we are not there yet, we can see it. We are very close to getting the profits. When we get to profits, we start to unlock our deferred tax allowance, which today is --

$911 million, Susan, almost $12 a share.

So that’s one way to restore book, plus profits restore book.

Okay, great. Thanks so much.

We’ll take our final question from Eric Landry with The Morning Star.

Great, thanks. A question about land [inaudible] -- I assume that the five option deals that you did in the quarter were from someone other than banks, is that correct?

A mix of everything, Eric.

Okay. Is it true that the stuff from the banks is finally starting to come to market?

It’s coming very slowly. There is a lot of land that these banks own and control in their portfolios that they haven’t really put to market and you’ve heard the noise on the street about some of the portfolios but a lot of what’s been shopped is C-minus locations where you just wouldn’t go build today if the lot was free. They have yet to unlock a lot of the A and the B locations and I think they are still trying to get their arms around it. I do know anecdotally that the banks are starting to get more aggressive on taking property back from developers and builders where it’s just not performing today and over time, it’s naturally got to flow back out into the market. We view that as a real opportunity at some point in the future.

Jeff, real quick -- how much aid do you think is out there in these bank portfolios? I mean, relative to the junk that’s been dribbled out over the past, is there a significant amount of A-stuff out there so that the big builders can go rebuild their land banks?

Well, there’s probably not as much -- there’s definitely not as much A as there is B. There’s a lot of B and Bs when markets settle are As. What you don’t want is the C-minus that when the market settles is still a C. And when we come across that, we’ll talk to the banks about them in very good locations, in very solid sub-markets and they are just not ready to put them on the market yet or to recognize the value. So we’ll keep working on that.

And at this point, there are no further questions and I would like to turn the call back over to Mr. Mezger.

Thanks, Michelle. Thanks again, everyone, for joining us and we look forward to seeing you over the next few months. Have a great day.

That does conclude today’s conference. Have a wonderful day.