Good afternoon. My name is Daryn, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2017 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions]. Today's conference call is being recorded and will be available for replay at the company's website, kbhome.com, through February 10th. Now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Daryn. Good afternoon, everyone, and thank you for joining us today to review our fourth quarter and full year results. With me are, Jeff Mezger, Chairman, President and Chief Executive Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Corporate Treasurer. Before we begin, let me note that during this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to factors outside of the company's control, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statement. In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, I will turn the call over to Jeff Mezger.

Thank you, Jill. Good afternoon, and happy new year to all of you. We had an excellent finish to 2017, which was the first year of our 3-year Returns-Focused Growth Plan. We increased our scale, growing revenues 22% to $4.4 billion. We also significantly improved our profitability, with operating margin expansion of 140 basis points, excluding inventory-related charges, driving substantial growth in earnings and an increase in our stockholders' equity of over $200 million. At the heart of our Returns-Focused Growth Plan is the ability to generate substantial levels of cash flow and to redeploy this cash in a balanced way to fuel profitable growth and reduce our debt. In executing our plan, we enhanced our profitability, improved our asset efficiency and accelerated the utilization of our deferred tax assets. The cash produced by our operations in 2017 enabled investments of $1.5 billion in land acquisition and development and a reduction in our debt balance of $315 million. Even with these sizable allocations of capital, we still ended the year with over $700 million in cash, decreased our net debt-to-capital ratio to 45% and drove our return on equity higher by 370 basis points. Our strategy is producing solid results, and we feel very good about the progress we are making on our goals. Moving on to a review of the fourth quarter. Overall, our results were quite strong across the board, and I will highlight a few specific areas. We increased total revenues by 18% to $1.4 billion. We are realizing the benefits of consistent multiyear land investments we have made in our West Coast, Southwest and Central regions, areas that are demonstrating some of the strongest demand for housing nationally. As a result, we saw a broad-based growth in deliveries from these regions as we continue to expand…

Thank you, Jeff, and good afternoon, everyone. I will now review highlights of our financial and operational performance for the 2017 fourth quarter and full year as well as provide our outlook for 2018. As Jeff mentioned, we are pleased with the strong finish to our 2017 fiscal year, with improvement in virtually all key financial metrics and considerable top line growth. In the fourth quarter, our housing revenues grew 17% from a year ago to nearly $1.4 billion, reflecting a 9% increase in homes delivered and an 8% rise in average selling price. This stellar performance contributed to full year housing revenues of $4.3 billion, up 21% year-over-year. Looking to the 2018 first quarter, we expect to generate housing revenues in the range of $840 million to $880 million. For the 2018 full year, we anticipate producing housing revenues in the range of $4.5 billion to $4.9 billion, in line with the guidance we provided during our investor call in November. Having ended our 2017 fiscal year with a backlog value of approximately $1.7 billion, up 9% from a year ago, we believe we are well positioned to achieve these expectations. In the fourth quarter, our overall average selling price of homes delivered increased 8% to $416,500. This improvement was mainly driven by the 10% increase in average selling price in our West Coast region. For the 2018 first quarter, we are projecting our overall average selling price to be in the range of $387,000 to $392,000. We believe our average selling price for 2018 will be in the range of $395,000 to $405,000. Homebuilding operating income for the fourth quarter grew to $131.9 million from $56 million for the year earlier quarter, including total inventory-related charges of $7.1 million compared to charges of $36.1 million a year ago.…

[Operator Instructions]. Our first question comes from Ivy Zelman of Zelman & Associates.

It's actually Thomas on for Ivy. Great quarter. Just good to see the land investment and the community count expected to hold flat. Can you just talk about, a little bit about the allocation of those dollars and the price points you're focusing on there? Clearly, a lot of success in the lower priced entry-level communities. So I was thinking to skew even further into that price point, or is kind of indexing in the various segments where you want it to be, and it's kind of a go-forward run rate from here?

Our strategy, Thomas, really hasn't changed in the last couple of years. We refer to it as bracketing the income. We target products and price points that are attainable by the median income and at submarket, and therefore can tap the biggest demand segments in that submarket. And as a result of that, we've been averaging 50%, 52%, 54% first time for many years now, and I expect it will continue in that range. If demand moves more to first time, you may see our product shift a little bit downward, but today it's working well, and we've been pretty consistent.

Got it. And then just quickly to touch on tax reform. There's a little bit of concern out there around some of the higher state tax, California and potential for consumers to be negatively impacted, just a really subset of high income individuals and recognizing that, that's not the everyday consumer, in terms of taxes going up. But are you guys seeing any indication of that in some of your communities at all, around tax reform or any commentary from the field, relative to the consumer specific in California?

I haven't seen anything whatsoever, Thomas. A couple of points to ponder, I'll say, on the tax. First off, people are buying homes because of life-changing events. They get married, they have families, they retire, they move down, they graduate from college, they relocate. Those are the types of things that are driving demand. And I think you'll continue to see that, coupled with a real desire to be a homeowner. But past that, if you look in the state, the interest deduction is now up to $750,000 on mortgage, our average selling price is $600,000.

In the $600,000.

Yes, in the $600,000. So the majority of our products under the $750,000, and you have to get well above $750,000 because of the down payments that our customers are making. You'd have to get well above $750,000 in price to get above that $750,000 hurdle. So we don't think, certainly in our business, it's had an impact at all.

Our next question comes from Michael Rehaut of JPMorgan.

This is Neal BasuMullick on for Mike. So I guess, starting on gross margins. What do you think were the big drivers of differential versus guidance for the quarter? Were there maybe costs coming in little lighter, so if you could give us the puts and takes there.

Well, we were at the upside or higher portion of the range of guidance on revenues, so that helped us a little bit on fixed cost leverage, so that certainly was a positive. We did have a slightly different mix as we always do in the quarter of where those deliveries were coming from, so that was a bit of a positive. Saw very nice cost-containment, basically brought our closings in or deliveries in at above budget as far as costs go, and revenues, as you know, are pretty well locked for us because a lot of that is delivering out of our backlog on a Built to Order basis. But I think probably the final factor is just any of the spec sales that we did have in the quarter, we always run 70%, 30%, 65%, 35%, sort of in that range. And some of the spec sales that actually sold and closed in the quarter were at pretty good margins. So overall, we were pleased. As you pointed out, we were a little bit above our guidance. I don't think too far outside of the range, but we just had the number of small, favorable factors that helped us out there.

Okay. That's good to hear. And then I guess you had touched on this earlier, but what are the kind of the base assumption, baked into the full year guidance? Maybe cost, land, labor and materials...

Right, yes. Typically, we don't bake in either price increase or cost inflation in. We've been seeing cost run about 5% for the past couple of years. As we look forward into 2018, that's easily recoverable I'd say, 3% or so price increase, kind of keeps it flat, even at a 5% cost increase. So we're pretty comfortable from that point of view. We'll see how the spring selling season goes and then update everyone again. We did lift our full year margin guidance a little bit on this call, just based on what we saw for the sales in the back half of the fourth quarter and the first few weeks of the first quarter coming through. And typically, those sales we deliver out in our second half of the fiscal year. So we're seeing a little upside right now, and depending on how spring goes, we'll bubble back up and give you guys an update at the end of the first quarter.

Our next question comes from Nishu Sood of Deutsche Bank.

This is actually Tim on for Nishu. So I guess my first question, it's for Jeff M. You mentioned that the Southeast expects to see some improvement in '18 as you burn off some of that reactivated community mix. So just curious as to what was the differential between the southeast gross margins compared to the overall mix? And what do you expect that to get to by the end of the '18? Is there any recoupling expected, or you think they'll still lag for a bit?

Well, Tim, we really don't get into regional gross margins on the call. And the region is no different than our other regions, in that we have communities performing very well, and then we have things like deactivation. You touched on where the margins are below average, but still profitable and generating cash. So on a blended basis, what we like about the region is, we have spent years reactivating, repositioning, working on our execution. The execution has been improving, and we started opening up the spigot on more investment as the year played out last year, and you'll see the Southeast be more of a contributor, both to top line and profits going forward.

Got it. No, that's helpful. And then, from a, the prior question, it seems, I guess from a -- the answer to the prior question seemed that it wasn't really the mix, rather I guess, the price appreciation and the cost containment that helps you get to the higher end of that gross margin range. So just curious to, I guess the incremental increase in the guidance for the full year, is that due to West Coast performance getting in a -- a bit better than expected in the first couple of weeks of the year?

No, not just West Coast. I mean, it was really what we're seeing coming through in sales and what we're seeing happening with our backlog, variable contribution margin and we have to do a fair amount of work to convert from the variable contribution margin that we track internally to the gross margin GAAP number that we had externally. But basically, we're seeing that shore up and we’re seeing just some nice trends throughout the business. Some of the new communities that we've opened recently, performing pretty well in accordance with our expectations, and we just gained a little bit more confidence on the back half of the year.

Our next question comes from Stephen Kim of Evercore ISI.

Hi, this is actually Chris Shook on for Steve. Congratulations on the quarter. So we were just driving around in Florida, ahead of the builder show, and some low, some entry-level communities were basically saying that, sort of, rates are becoming much more of a conversation among potential buyers. And I was just wondering if that's anything you've seen in your communities and also how you'd mitigate any rise in rates in the near future.

Yes. Chris, we really aren't hearing much. And rates are still very compelling. They're just under 4%, at 4%. So rates are attractive. And if you visit any of our communities, you'd see that we're heavily tilted to Built to Order and people want homes. So if rates were to tick up a little, and they can't afford the larger plan, they just rotate to a different plan and still become a homebuyer. I think rates would have to move a lot before you'd see a significant impact on our buyer.

And then another question on your ASP. So in 4Q, you revised down your guidance twice, and still kind of just fell short of the lower end of that range. Is there any sort of a specific area responsible for that, or kind of what is [indiscernible] a shortfall?

Right. You're right, I mean we revised it down and then we came in 30 basis points below the guidance. There were really three main factors that contributed to the beat this quarter on the SG&A. The first one was, again on our revenues, we came in at the higher end of our range, so we were up at the $1.4 billion mark as opposed to $1.35 billion midpoint than we usually, typically calculate our SG&A and our gross margins at the midpoints of our revenue range, so that was a help. We saw strong cost containment efforts again this quarter, and saw some various decreases across certain line items, but nothing that really stood out. And then finally, I would point out one item that was favorable for us, that it's hard to always count on, but the market, the market performed really well in general, and we do have a couple of legacy benefit plans that are priced based on -- or expenses are based partially on market performance, and that contributed a little bit as well. So probably about 10 basis points from each of those factors is the reason for the deep.

Our next question comes from James McCanless of Wedbush Securities.

The first one I had is on the community count. Just wanted to make sure you guys are expecting a flat community count with the year ending number at the end of fiscal '18, is that correct?

We're expecting a flat average account for the full year 2018. So a little bit down the first quarter, and hopefully, some favorability as we travel through the year. But flat for the total year.

And then, just wanted to ask, any updates to the '19 guidance, or should we still be using the same numbers [indiscernible] put out back in November?

Yes, I think we're -- just as we did in 2017, as we traveled through the year, we laid out the 3-year plan. We've laid out our targets. We focused very much on hitting or exceeding our 2017 targets, and I think we'll go down the same path this year. We'll update guidance on '19 when we get closer to the end of the year. But I think as you're probably thinking, I mean, we're trailing quite well. '17 came in a bit above of where our expectations were, and we've lifted a little bit on '18, but we're still pretty firmly focused on those '19 goals. There were 3-year targets, and we'll continue to focus on one year at a time as we go, and now we're into the 2018 targets.

Our next question comes from Michael Eisen of RBC Capital Markets.

You guys continue to really outperform and shine in your reduction in SG&A ratio. Are there any key things you guys are doing that's really driving this? And kind of, how can we think about the guidance you guys have put out for next year, and the potential for continued improvement ahead of what you guys are talking about? Are there, were there any specifics in our -- of driving that?

Well, I think if you flashback, as you pointed out over the last few years, we've had tremendous success in driving down the ratio, and it's come from really a couple of things. One is overall cost containment. We've been very, very careful with fixed cost and adding to structure, right in line with Jeff's strategy of growing in our existing markets. It's a very efficient way and profitable way to grow the business. So to the extent you can grow with your current infrastructure and grow significantly, it adds a lot to the bottom line. So we've been really successful, I think, in implementing that based on that strategy. So two really important factors. I think as you -- as I think everyone's aware with SG&A, there is a limit. I mean, unlike other things, the limit, I guess, is a little bit above zero at some point. But the lower it gets, the tougher it gets. Sub-10% are some pretty good numbers for us. And like I pointed out during in the scripted portion of this call, we set a record, quarterly record every single quarter in 2017 on revenues that were much lower than this company achieved when we were last this -- last time this low in SG&A. So it's been, in my opinion, a very, very solid performance along those factors, and we'll continue to try to push it, but I think it's a little bit a law of diminishing returns. We're looking to see operating margin improvement coming from, more from the gross margin side of the equation in 2018 as opposed to the SG&A side. But look, as always, we'll take it from both, and we'll drive from both and we'll see where we end up with. But as of right now, the guidance range that we threw out there for next year, for SG&A, I think that's, that those are pretty good numbers based on what we're currently seeing.

Okay, that's very helpful. And then, thinking a little more kind of longer term and your guys '19 target have gone to 8% to 9% operating margins. If I'm just using the midpoint of the guidance range as you put out, it looks like there's a slight step down in improvement next year and then a reacceleration in '19. Is there anything to read into that? Or is there just more, kind of conservatism in some of the numbers for next year and will continue to update as the year unfolds?

Yes, I wouldn't say right now there's conservatism. It's just, as we see it today, those are the numbers. We haven't sold, really any, very few, if any, deliveries for the second half next year right now, and we'll start selling those -- we've started, I guess, in the first quarter, beginning part of the first quarter. But as we get through the spring selling season, we'll have better visibility. But based on what we're seeing now and the estimates for our new communities and deliveries in the third and fourth quarter, I think the numbers are pretty solid. We've continued to maintain our 2019 targets to the original targets that we set when we laid the plan out. We just thought that was, in some -- many respects, the fairest way to show it and I think a good way to judge a company and the company's progress. We've been executing very well against those targets with an operating margin this year that was approaching our -- the bottom end of our range for next year as we talked about during that conference call, we were pleased with that. In fact, a little bit above the bottom end of the range that we gave for '18 or the 17.1% operating margin. And we'll continue to progress. So that 8% to 9%, I think, is looking more and more doable, I think, for everyone, and I think we're starting to grasp that and we're very pleased with it.

Our next question comes from Susan Maklari of Crédit Suisse.

You guys noted that Las Vegas continues to be really strong for you in there. Can you just talk a little bit about maybe what you're seeing? Give us a little bit more color on that. And then as we do think about, maybe on a broader level, some of the changes that are coming from a tax perspective, how do you think about this market, just given the relative affordability and maybe your positioning within that?

Susan, on your first question, Vegas is and has for many years now, been a top performer for us. I think it's in part because of the brand and the scale and the reputation we have in the market because we've been a top three builder for many years, number one many years. Inspirada's a very nice community to have as your aircraft carrier continues to perform very well, was just identified it as one of the top-selling master plans in the country and we own a sizable chunk of the Inspirada business. But the sales are pretty broad-based geographically. It's affordable product, not necessarily just first time, first time, first move up product. If you think of it this way, Vegas, as well as it's doing, it's still less than half of normal volumes on the new home side and sales prices are still well below the previous peak. So this is nothing but a good market with job growth and a strengthening economy, and we have some really good positions there. So Vegas is a very good homebuilding opportunity for us right now. On the tax side, I don't know that we've really thought much that this would do anything but improve consumption for the buyers. And when we looked at it, over 80%, the reports we're reading, 80% to 85% of taxpayers are going to see a lower tax rate and more money in their pocket. So if it doesn't help them with their buying power on a house, it definitely puts more cash into the economy, it creates more jobs and lifts the overall economy. So I don't know the tax shift here is going to change buyer profiles much. I just think in general, you'll see stronger consumer confidence and stronger demand across the different buyer segments.

Okay, that's helpful. And then just, you noted that you've got a tough comp coming up in the first quarter here. Can you just remind us maybe of the quarterly cadence of those comps as we think about moving through the time or the monthly -- I'm sorry, the monthly comps that are coming up for the first quarter?

Well, what I can tell you and you could do the math. I mean, we had 798 net sales this year and 700 net sales last year during the first five weeks. So that should give you a good idea on how the quarter plays out. As Jeff mentioned, the first five weeks of the quarter, seasonally the slowest five weeks. So it's sort of the low point of the quarter. But we like the trend, and we had really nice sales results for those five weeks, and gives us some flexibility for the rest of the quarter. So let's see how it goes from here, but they were -- numbers definitely racks it up as we get further into the spring selling season in late January and into February.

Our next question comes from John Lovallo of Bank of America.

It's actually Pete [indiscernible] on for John. Jeff, I just wanted to get some clarification on the tax rate for 2018. If we do strip out the $115 million noncash charge, at least in the first quarter, there's still a month that was under the old tax regime. So should we be thinking about the first quarter tax rate that's higher than the rest of the year, above that 27% on 2Q or 4Q was kind of below that, or am I thinking about that the wrong way?

It's a very good question. We spent a fair amount of time grappling with that ourselves. The way it will work out for the accounting is, it will just be a flat rate for the full year. In fact, the same way to work out for the tax side as well, where we actually file the returns. So the 27% is basically more or less a flat rate for full year, and it excludes the one month as you point out at 35%, and then 11 months at the lower rate.

Got it. No, that's helpful. And you guys mentioned, kind of, the I'm realizing it's the low point of the quarter, but the 14% improvement for the first 5 weeks, I mean, absorption rates, if things carry out, even at a fraction of that, start pushing up closer to four homes a month. Is there a point, maybe in terms of homes per month, there's something where you guys kind of pull back a little bit, and say we're in too quick of a pace, and we want to take more price, or is that not how you're thinking about it?

Pete, in our prepared comments, I refer to it as optimizing the asset. And there's a balance of absorption and price or margin that gets you to the highest return per asset. And typically for us, it's optimal around four a month. And it depends on how many lots are in the community and whether the lots are easily replaceable in that submarket or not, and if it's in Coastal California, you're going to push hard for price because you can't necessarily replace it with these. If you're in inland California or Texas, where lots are easier to replace, you may go for a higher volume as well. And in part, as you look at our order comp quarter-to-date, if it were to run at 14% -- if it was heading towards that kind of a comp for the whole quarter, we'd probably push harder on taking some price.

Our next question comes from Mike Dahl of Barclays.

A couple of quick ones from me. On the community count side, I was hoping you could provide a little bit more detail on California or West Coast specifically, just given the trends you were pointing out in some of your opening comments about tougher comps, but thinking that you'll get a large number of openings in the West Coast, starting in 1Q. Could you give us a little more flavor for how to think about the growth trajectory and communities on the West Coast and also within California, where those are coming from?

I don't know that we'll get into within the region, as where they're coming from, there's a lot of detail in that question. But as Jeff pointed out, we do hope to grow and to open a lot of communities in California, particularly in the early part of the year. We'll update more on that as we get through the year. We typically don't provide a lot of regional color, go forward, on community count. It's a very tough metric. I think you hear this from most homebuilders. It's a very tough metric to predict, just due to the variability maniac close out. You just don't know where the closeouts are coming from. And in some cases, the openings can vary by quarter. So as some things bleed into the next quarter, some things get pulled ahead into the current quarter, so I think we'd probably just leave it with, we're pretty optimistic and very happy with what we're seeing trend-wise in the state, and hope to continue to push the openings here as we do across the business. But it's half our business. So in revenue terms, so it's an important component for us, and something we always remain focused on. We don't see -- with all that said, we don't see a major regional shift in delivery percentages for next year. So we're looking to more or less maintain that. The answer your questions coming from whether you see more shift toward California regional deliveries, higher ASPs, margins, et cetera. We think it's going to be relatively stable, relative to, or as compared to 2017.

Okay, yes, that is part of where I was going and also the other part where you touched on, is trying to get out of your comment was, kind of gross opens or net opens, in terms of thinking about how many net communities we could really be adding there.

Yes, the commentary is more on grand openings, new openings.

And then, sticking with California for a second. Is there anything you're seeing, either positive or negative, in terms of people who've been displaced by the wildfires and in terms of potential boost to demand, or conversely, there were a couple locations that were, or at least, in the vicinity of some of these fires? And anything you're seeing in terms of impact to whether it's your communities directly or more of an indirect, negative impact from just the people being displaced and also the diversion of resources to those areas?

Mike, it's [indiscernible], the things that you touched on a lot of different influences. And if you think about it, most of the fires were in areas that aren't heavily inhabited. But the fire over -- the Thomas fire was mostly up in the hills. And where it's creating damage to homes, it's typically land constrained areas, higher priced goods, and there's no question, up in the Santa Rosa, for instance, there was few thousand homes that were demolished or burned down, but it's in an area, that's no growth without a lot of developable land where you can quickly address it. So in Santa Rosa, we do have one community in the general area, and there's a very strong demand in that community, but it's not a big part of our business. And for the state, this is a real issue. You have always people that were displaced, trying to find somewhere to go. I've seen articles in the media about landlords really taking advantage of this and getting criticized for opportunistically pushing their rent. We've continued to run our ad site and are managing our price and pace, but it's one community, it's not a big mover for us. On the business side, I don't know. Because it's going to be such a slow recovery, I also don't think it's a major impact on our subbase for the suppliers, other than it has been a real hit to utility companies. We had difficulties in the fourth quarter getting meters set in Southern Cal, because all the utility crews have been shifted up to the Santa Rosa area to help them rebuild the utility infrastructure. And we did -- some of the communities that didn't open yet, were in part because we couldn't get the utility infrastructure completed in order to energize the model parts. And that's why they're open now in Q1. But again, that's a very short term hit to us. And I think we're actually, for the most part, are past it now. So big state, a lot going on with demographics in the market. And I don't know that the fires are going to be a significant impact, really, up or down.

Our next question comes from Will Randow of Citi.

I guess I just wanted to delve into the tax piece a bit more, kind of the positives and potential negatives. It sounds like states of California, New York and 1 or 2 others are trying to sidestep the state and local tax deduction. And in California, your average is, if I remember correctly, about $20,000 per home, per SALT, which obviously would be a $3,000 impact. I guess, from that perspective, do you have any insight in terms of sidestepping the SALT deduction, if that's actually plausible in terms of the news headlines we're seeing. And then, on a slightly more negative note, obviously, the more stretched first-time homebuyer takes a hit. So how do you think about that from a pricing perspective and portfolio perspective, for how you're going to build out in California going forward, if you can sidestep SALT?

Your crystal ball is as good as mine on whether the high tax rate states come up with a way to get around this new federal tax law. I do think it puts pressure on these states where people have been paying taxes, and we're able to write it off and no longer can. I think there's going to be some challenge to the state governments for how do you support your programs and fund them, when people may push back on the taxes, but that's all political and speculation. I -- we haven't spent a lot of time thinking they're okay for a first time buyer. What does this really mean in that, the first time buyer incomes, where they've upped the standard deduction, probably is as much of a help as the fact that they can't deduct it on a federal level. So I don't know. We're not hearing anything here, where first time buyers just got hammered, or they were out of pocket now, compared to what they were before. I think for the most part, first time buyer's going to have a little more money in their pocket.

And then, as a follow-up. In terms of mortgage overlays, given your experience there, nothing's been adjusted regarding SALT. And I apologize for dovetailing this in, but can you go through the DTA math in terms of the write-down?

On the mortgage overlays, if you're referring to changes in underwriting because of changes in the tax law, I haven't heard anything on that. I don't know if that -- either they qualify or they don't. What is good news, that FHA lifted the loan limits in many of the higher priced suburbs, I'll say, inland California. So I think that will actually help demand a little, that's good, but haven't heard anything on the tax and underwriting side.

Right. I mean, in underwriting, they never gave breaks for deduction, so I don't think they're taking anything away now, so. I think, look, overall, my view is, more income in the market, better economy, a strong stock market, higher consumer confidence. It's a net benefit, real positive for us. And we're really excited about the strength [indiscernible]. And I don't have any hesitation saying that whatsoever on the tax side. I think it's going to be, across the board, positive, but that's again, my opinion. On the DTA math, it's very complicated. So I'm not going to walk through line by line, but I can give you the high level on it. If you look at our total deferred tax assets, number one, it's not just pure deferred tax assets. There are some deferred tax liabilities in there that are netted out. So it is a net number to start with. Out of the net number, you would then pull out the portion relating to tax credits, which is, I mentioned, is roughly $210 million, as having no impact on an adjustment due to lower rate, so $210 million then comes out. Then you would also pull out, the portion of our DTA relating to state taxes because, obviously, at this point, state taxes have not been affected by lower rates, and there's been no rate adjustment on that, so there's no recalculation on that piece. What you're then left with is basically the portion of our DTA that relates to federal net operating losses, and a portion of our DTA that relates to federal book to tax, temporary differences and you grow source amounts up to 35%, you then recalculate those amounts at the 21%, and you come up with a difference. And the difference that we believe we'll be booking during the first quarter is about $115 million. And it's, pretty much sums up. I mean, there's a lot of complications, a lot of calculations that go into it, but at a high level, that's how it works.

We'll take our last question from Carl Reichardt of BTIG.

You were talking about this idea that folks will trade down within a community to smaller homes, if rates move up aggressively. I'm curious, with two things on that regard. One, when rates were falling during the course of the year, were folks trading up to larger homes or was there a move towards larger homes within the community offering? And then, can you talk a little bit about options and upgrades and what percentage they are of your selling price and what your sense is, and what would happen if rates went up to those elements of the business?

Carl, I don't know that our footage moved much at all, as the year rolls along with interest rates ticking up. I'll say it wasn't a major move, it was a slight uptick, and you've followed our business. We have communities where we'll operate 10 floor plans, and the incremental footage in price can be 100 square feet and the price goes down five grand. Then it's the same bedroom count, a little different living configuration in the kitchen and living room and dining room. And people want a home, and they want a home in that area, and they want the biggest home they can afford. So if all they can afford is 2,400 square feet instead of 2,550, they're still going to buy that house, and that's what we've seen over the years as rates go up and down and the economy goes up and down. People -- we call it moving with demand. People will tell you what they want and you accommodate what they can afford at the time, and the same thing on the studio. Every buyer's unique. Some buyers want to really load up the granite counters and a lot of upgrades into a smaller footage, and others want not much upgrades at all, and the biggest footage they can get. And we flex with that. But as the year unfolded here in '17, I don't know if you have any specifics, but my impression is, the studio sales held pretty [indiscernible]

Yes, the studio sales, yes, it's been trending, sort of 9, 10, 11 [indiscernible] for several years now, and then a following right around the [indiscernible] that it changes and goes up and down a little bit based on mix, I mean it's depending on product mix and where the sales are coming from, relative West Coast versus other parts of the country, even specifically certain communities where maybe there's less choice because of detached products or whatever. But outside of that, they've been kind of within those ranges for quite some time.

Okay. Thanks, Jeff. And then, talking about a different kind of option. Can you guys comment at all about the availability of option lots, and whether or not that's changed over the course of the last couple of quarters? We have a little information that says to us, lot availability's getting a little better into some markets. I'm just kind of curious to what you were seeing.

Carl, I'd agree with the comment that it's getting better in some markets, and it's getting better in that, for years, nothing really got entitled, and so we had to churn through all of the entitled land first, and then there was a shortage of developable lots, and now the entitlement process has caught up again. So in some of the cities, we are seeing it free up some. In the land constrained areas, the states we're in, the most desirable areas it's still a, pretty much a cash transaction. As you get to areas where there's more supply, you can go and get options. So it's pretty typical of what we've seen for the last several years.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.