Good afternoon. My name is Devin and I will be your conference operator today. I would like to welcome everyone to KB Home’s 2021 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's opening remarks, we will open the line for questions. Today's conference call is being recorded and will be available for replay at the Company's website at kbhome.com through April 24th. Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Devin. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2021. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating 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 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 filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. 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, everyone. We’re off to a strong start in 2021 with solid execution in our first quarter that highlights our ability to strike an effective balance between capturing demand in this robust housing market and measurably increasing our margins. We are poised for profitable returns-focused growth this year, based on a number of factors, most notably our backlog, both its composition and size, the success of our newly opened communities and a compelling lineup of planned openings for the remainder of the year. As to the details of the quarter, we generated total revenues of 1.14 billion and diluted earnings per share of a $1.02, up 62% year-over-year. Our housing revenues were at the low end of our guidance range due to the weather disruption in Texas, which shifted some deliveries from our first quarter into our second quarter. Texas is our largest market by units and the severe weather shut down our operations for roughly 10 days in mid-February. We resumed activity in our communities by the last week of the month and nearly all of the impacted homes have already been delivered. Our profitability was substantially higher year-over-year with a more than 400 basis-point increase in our operating income margin to 10.4%, excluding inventory-related charges. This result was driven by several key factors: First, strong demand for our personalized products at affordable price points and our success in balancing pace and price; second operating leverage from increasing our community absorption rate and the resulting higher revenues; third, the ongoing benefit from the cost containment efforts we put in place last spring; and finally, the continuing tailwind from lower interest amortization. Our profitability per unit grew meaningfully to over $41,000 in the first quarter, 73% higher than in the prior year period. These results are…

Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our 2021 first quarter financial performance as well as provide our second quarter and full year outlook. We are very pleased with our first quarter results, with higher housing revenues and considerable expansion in our operating margin, driving a 62% increase in our diluted earnings per share. In addition, strong net orders in the quarter combined with our substantial beginning backlog resulted in a 74% year-over-year increase in our quarter-end backlog value, supporting our raised revenue and margin outlook for 2021. In the first quarter, our housing revenues of $1.14 billion rose 6% from a year ago, reflecting increases in both homes delivered and the overall average selling price of those homes. Looking ahead to the 2021 second quarter, we expect to generate housing revenues in the range of $1.42 billion to $1.5 billion. For the full year, we are forecasting housing revenues in the range of $5.7 billion to $6.1 billion, up $150 million at the midpoint as compared to our prior guidance. We believe we are well positioned to achieve this top line performance, supported by our first quarter ending backlog value of approximately $3.7 billion and our expectation of continued strong housing market conditions. In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $397,000, reflecting variances ranging from a 5% decline in our West Coast region to an 11% increase in our Southwest region. The West Coast decline was mainly attributable to product and geographic mix shifts of homes delivered. For the 2021 second quarter, we’re projecting an average selling price of approximately $405,000. We believe our overall average selling price for the full year will be in the range of $405,000 to $415,000, a relatively…

[Operator Instructions] Our first question comes from line of Truman Patterson with Wolfe Research. Please proceed with your question.

Hey. Good afternoon, everyone. Thanks for taking my questions. I appreciate it. First, Jeff, orders in first quarter, I believe you all said were up about 44% in the first six weeks. It looks like they were basically flattish in the final six weeks. Could you just really walk us through what's driving this? It sounds like internal initiatives driving pricing or maybe capping production and limiting lot sales. But on the flip side, if I heard you correctly, it doesn't sound like interest rates have had any real negative impact to demand yet. So, if you could just walk me through what's really driving that. And, I don't think I heard a March-to-date order update.

Truman, I can talk to this. And Jeff, pile on. A couple of things going on with order comp. As we shared back in January with our year end call, our January and February last year were very good. And yes, our comp was up 40 some percent at that point in the quarter, but we knew it would come down, because last year, frankly February demand was as good as it is today and our orders were very strong. So, we had a much tougher comp. We had favorable numbers through the quarter. Demand remained strong through the quarter. No signs of slowing up. So, you had this mass on the comp while at the same time, we did take some steps in February in particular to slow down sales a bit and capture the price opportunity that's out there. We have a large backlog. We're balancing starts with our sales and our backlog. And we elected to go for more price and more margin opportunity, and still generated a pretty significant orders per community for the quarter at 6.4. So, I think that answered your question on the comp. Actually, the comp ended up about where we guided in the first quarter call, because we thought it would come down. We didn't talk specifically to March and that as everyone on the call knows, we had a very disrupted Q2 last year, and for the quarter the comp’s going to be very large. But, it isn't really a reflection on what we're doing now. It's a reflection on the speed bump we had in orders last year. So, rather than give a distorted number, I just share that demand trends remain very strong right now. We're not seeing any impact from interest rates. Affordability is still favorable. And as you'll look at our Q2 from last year, the comp is going to be incredible.

Okay. And maybe asked another way, you all did a little bit under 4,300 orders, and you're matching starts for orders. Is that a level that you're comfortable with?

Yes. Our starts were up 40% in the first quarter, and we'll continue to keep our starts and our sales in line. If we can keep starts at pace, we will keep selling at the pace, right.

Okay. And on your community count, I believe you said at the year end of '21 up low to mid- single digits, and then in 2022, you're comfortable with 10% gross. Could you just run through what absorptions is included in that guidance? And could you just talk a little bit or characterize the health of the horizontal land developers and the municipalities’ regulatory process? Are you seeing any incremental tightness that might delay some community openings?

Right. I could talk a little bit about the community count and maybe Jeff, if you want to comment on the land development. But, as far as community numbers go, their largest variable, like always has been, are close-outs. Our focus right now is on getting our openings up and running and driving count based on that. If we get to the end of the year and we have some variance in count up or down, it's just going to be a tradeoff between the community count and our backlog numbers, frankly. So, if the pace continues at the current levels or even goes higher than what we've seen, we may close out a few more communities that those sales would obviously end up in backlog and not really impact either current year revenues or next year revenues. We think will still be around the same number. So, we're just driving towards that. As far as cadence goes, we do expect to see sequential improvement, and not only sequential improvement through the end of the year, but out into 2022 as well. And as we're getting deeper into '21, we're starting to really shore up our plans for next year. We have a large number of grand openings on the docket again. And we do expect next year to see the close-outs moderate a little bit as we have some larger lot counts to start the year in some of those communities than we did in this year which we'll see -- I thought an abnormal number or level of close-outs in the current year. So as we try to forecast that and I guess get back to your original question, we try to consider current absorption pace in the numbers and take into account seasonality a bit in that and do the best job we can on forecasting those close-outs but actually the grand openings are much more impactful on the future of the business and the growth in the community count and the close-outs, those will just be timing.

Our next question comes from line of Matthew Bouley with Barclays. Please proceed with your question.

Hey. Good afternoon. Congrats on the quarter. Thanks for taking the questions. Let's go back, I guess to the sales pace of 6.4. You talked about, obviously, the 10 days in Texas is impacting the deliveries. Did it have an impact on the sales pace as well? And overall just, Jeff you're talking going forward about matching starts and in order to continue to keep this pace elevated is -- and you have the 40% in the quarter. So, has the capacity to get those starts in the ground, has that changed at all versus how you guys were thinking a couple of months ago, given everything we're seeing around labor and materials and all that? Kind of a two-parter on sales pace in Texas and starts space? Thank you.

All right. Thanks, Matt. I'll make a few comments and refer to Matt to give you the color on the capacity. But, in Texas in February, it impacted deliveries more than it would impact sales. Sales are in the queue for a while and it's more of a paper process, you can do it virtually, people can do it from their apartment, and we can do it remotely as well. On the delivery side, where we got pinched was the last group of city finals, the last group of appraisals that you need when the home is completed, those types of things. So, I would say that there was a slight speed bump in deliveries. And I shared that we've already closed the vast majority here in March. Whether it's land developments that Truman asked about or here on the operational side, in general, I can say that the industry and the municipalities and everyone has responded in ways to navigate through this post-COVID environment that we're in and the hits that we took and the delays actually were last summer and fall. And we've now got a much more predictable business. We're continuing to work on ways to compress things, whether it's on the land development side, whether it's on the permit side, where the cities are doing far better, and in turn on the construction side, as well. So, it's not -- we're not feeling stress on our capacity right now. It’s making sure things just go in the normal rhythm. And we're more predictable business right now. But Matt, do you want to give him some color on build times and what we're doing?

Sure. As Jeff touched on, all of our divisions are very focused on expanding our overall capacity. That’s simply recruiting additional trades, getting them on board. And Matt, I think, as we progress through the year, we're going to see a reduction in cycle time as we can take advantage of that additional capacity. On the municipality side, as the economy starts to open up and staffing with the cities improves, we'll see a reduction there. So, I think, there are -- while there are certainly some challenges still in front of us in this environment, there are many things coming that as we progress that our cycle time, which has been running around seven months, can get back to our norm of six months. We're not assuming that improvement within the guidance we’ve provided, but we've got enough things in place that we're optimistic that we can start to get back to our norm.

Perfect. No, thanks for the details, for hitting both parts of my question there. Second one on the gross margin, just thinking a little more near term. The guide suggests a step lower in the second quarter. I'm just curious, to the extent that you're guiding deliveries higher sequentially, so perhaps some greater fixed leverage, clearly the pricing trends have been on the favorable side. Is the expectation that just cost has gotten that much worse, such that the price versus cost is a little less favorable in Q2 or is it more just mix? Any more color on that? Thank you.

Right. Yes, the dynamic between Q1 and Q2 is mainly mix. We ended up beating the first quarter guide in our first quarter forecast by quite a bit. And a lot of that was just the units that were closed. So, we closed higher margin units in the first quarter. Obviously, those will not be closed now in the second quarter and some of the lower margin units will be. So, it's mainly mix. If you really look at the guide for the full year, the second half margin is going to be closer to 22% margin and the first half margin all together for the first six months would be closer to the 21%. And we are seeing improvements sequentially as we go from Q2 to Q3 to Q4. So, actually, the outlook is quite positive and quite favorable, as far as continued strength in the margin side. And we were quite pleased to be able to lift that guidance by 70 basis points this quarter, based on our backlog, what we’re seeing in the backlog, success of our new communities and very importantly the pricing versus construction cost, inflation dynamic that we've been experiencing and able to control quite effectively up to now.

Our next question comes from the line of Stephen Kim with Evercore. Please proceed with your question.

Yes. Thanks guys. Strong results, obviously. Jeff, I guess, it’d be fair to say that the pricing environment and the sales environment is about as strong as we've ever seen in history. You go back a long way obviously. But, my guess is you could probably sell every home you can build. But, you made a comment that I thought was very interesting about the existing home market, pricing being up little more or very aggressively. And in general, my thought is that in the existing market, every home that sells is effectively an auction, whereas builders generally have an asking price and they generally don't sell over the asking price. But recently, we heard that some major builders or at least in some communities actually having -- the communities down for additional sales. But, if you are willing to pay a surcharge of tens of thousands of dollars, they will go ahead and actually sell it to you. And I'm curious as to whether you're doing that or whether you are -- would consider doing auctions or not. And if not, why not?

Stephen, that's a good question. For starters, what you're describing is not very customer centric, and you can get more price on that sale, but you're going to lose brand over time. I'm very sensitive to that because we've got a great brand. What we will do is part of what I touched on with our metered sales releases. What we'll do is drop back to reservations where we can gauge the interest level at different price ranges and do some whisper pricing, if you will. And if we get strong enough interest, we open up for sale at a much higher price. And people are on our waiting list and they go through the waiting list right now. But, I'd rather keep the good relationships with the customer base and the realtor community and go through our process to capture our prices. It's not that we’re -- we're taking a lot of price right now. But it's in a controlled way to make sure we retain those relationships with the customers.

Okay. Have you heard of what I'm describing happening and is this something that you are actually competing against, or is this something that you have not heard of yet?

To me it's more of a one-off that was covered on another builder’s analyst coverage. But it's certainly not something we're seeing broad based or that we would entertain.

Got it, great. And then secondly, Jeff Kaminski, you had given the guide for Q2 gross margins. And obviously gross margins have been like a balloon that's -- like you're trying to catch. I mean, it keeps going up and up here a little faster than you can expect. And I'm curious as to whether maybe part of the reason for that is because there are increased sales going on in the design studio perhaps or other sorts of things, which happen after the home has been sold that you're maybe not quite capturing in your methodology. And whether that dynamic, which drove nearly a 100 basis-point better gross margin in the first quarter than you thought three months ago, could possibly play a role again in 2Q or there's some reason why you don't think the outside surprise we saw on 1Q is repeatable?

Right. Look, I'd never say doing better than what we say is not repeatable. There is always potential, which we kind of call on how we see it. We have a large backlog and a pretty consistent backlog that closes. Again, we did see some mix shift in quarter and the total units came in a little lower than what we had expected. So, that certainly had an impact. The other impact that we see every quarter is we do have a certain number of units that sell and close within the quarter. So, as you know, we're a built-to-order builder, but typically we'll have 70% built-to-order, about 30% inventory, and of the inventory, about a third of that sells and closes in the same quarter. So, we'll see some variability there. And typically, we’ll forecast slightly lower margins on that. And frankly, in the first quarter, the environment was so strong. We didn't really take a haircut on those sales and closing. So, there's potential for that. But again, we call it like we see and we only cushion that. We're showing up 70 basis points for the full year reflecting the strong sales that we saw in the quarter and the cost containment, everything else all together. So, we stand by our guidance for the second quarter and full year and join the more favorable outlook and more favorable forecast. It's driving not only margins, but returns up quite significantly as well for the full year. So, we're happy about that.

Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys. Good afternoon, and congrats on the very strong results. Jeff, maybe first question kind of similar to the last one on margin. I was just curious, a few other builders have kind of talked to this idea that as communities close out, they generally generate the strongest gross margins over the life of that project for a multitude of reasons. You've got obviously price appreciation, but also kind of some true-ups of accruals over the course of the life of the project. And you guys are churning your communities quite a bit this year. You're closing out of a lot, and you're also opening up quite a bit. And obviously, a lot of new openings probably won't be deliveries until next year. But, I was just hoping you could kind of talk through what impact, if any, that turnover in community count is potentially going to have on your gross margin over the next, call it 12 to 18 months?

Sure. Yes, one of the deposits is really about the communities we're opening today. The time when they were -- went through our underwriting, it was pre-pandemic and pre-market run-up. So, they had fairly, I’d say, modest ASPs involved. Obviously, we've seen cost inflation since that time, but more so on the price. So, they're a little bit better than how we underwrote. And, quite frankly, in our base community portfolio is in the same boat. With improving market conditions, we're seeing more strength in those margins as well. So, as far as the trade-off goes, I'm optimistic about the new communities are performing very well, the vast majority of them are performing above the land book, and really contributing to that low-20s gross margin that we're now enjoying. And I don't see any real risk of that, like, coming off the rails just because they opened a bunch of new communities. And it's been so far, so good. We've caused quite a few communities over the last two or three quarters and closed out, and the replacements that have come in have been -- have earliness, we've been right there on the margin side. So, as far as the portfolio itself goes, it's solid, and it's improving. I like what I'm seeing. And from the point of those new openings and the fact that most of our deliveries next year will still be generated off what I’ll call pre-pandemic land prices is another real positive, I think, for the overall health of the community portfolio.

Right. That's very helpful. I appreciate that. Second question, maybe for Jeff, and just, obviously, your built-to-order model, your buyers are sitting in your backlog for a while, and rates have moved. I know you don't seem overly concerned about that. But, I'm curious your can rate right now is probably at all time lows, if not pretty close to it. So, have you seen any increased chatter or call volume from buyers and backlogs that are asking questions about locking in rates or what they could do to lock in rates to prevent further increases going forward or anything that would be a potential warning sign about -- that there's some skittishness unfolding there?

I wouldn't call it a skittishness necessarily, Alan. They are coming in now and asking to lock their rates, which when rates are sliding, they don't like to do. And as soon as the rates are going up, they’ll lock. And the lock program we have covers the time to build the home. So, if they think rates are going up, and they want to come in and lock, we accommodate that. Matt, any other color you want to give on that?

Yes. Alan, taking a look at our pipeline of what we have currently, the percentage of buyers who have elected to lock is 10% to 15%. And that's very comparable to where we were a year ago. So, even with the headlines on the rates and rate potentially moving up has not triggered our buyers to make an additional step. But, the good thing is we have a program in place, the buyer elects to do that. We can put them in that lot, but have not seen that happen yet Alan.

Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Good afternoon, everyone. My first question is, can you talk a little bit about the construction cost that you're seeing? How inflation kind of came through in the quarter? And how you're thinking about that as we look through the next couple of quarters?

Do you want to talk to based on…

Sure. So, as far as construction cost goes, the percentage of overall average selling price, it's remained incredibly steady and constant for quite some time now. So, what we've been saying and doing we continue to see, which is offsetting inflation on the construction cost side with selling prices, and that's working quite effectively. There are concerns, obviously, in a tight market and a hot market like we're seeing now. There's a lot of pressure on the supply chain, both in materials and certain commodity categories as well as in labor. And our pursing folks are very, very busy right now trying to manage that. And they're doing a really good job. It's very challenging. It's a challenging environment, but they get paid to solve problems and they're solving the problem. So, I think what we're really seeing now is just our ability to just continue to align our long-term relationships, and whether they’re with some of the large national suppliers that we've had in partnership or that we've been in partnership with for a long time or some of the large local labor providers and subcontractors, we've just really gotten tight with the supply base and providing a lot of visibility. We have a big backlog built. So, it's a huge advantage for us. We know exactly what we're building, where we're building it. We share those backlog details with our suppliers so that they can plan accordingly. And it's a tough environment, but so far, so good. And it's a high-class problem. I might rather be facing this than trying to go out and get sales or anything else you could think of. And so far, the operations have been doing, I would say, an outstanding job managing through it, not only getting their deliveries and trying to compress their cycle times, but also controlling as much as possible the inflation on that side of it.

Okay. That's very helpful color. And then, my next question is, going back to the question around higher rate. One of the things that we have heard is that with the savings rate having risen pretty significantly last year, stimulus money coming through, and the fact that just home prices overall have risen, some people that are either doing a move up or some -- moving from the existing home to a new home are putting more down payment down to help offset the -- or to help mitigate the impact of the higher rates. And I know you mentioned that your average down payment is around 13% or so. Have you seen that change at all? Are you seeing that people are able to put more down? And is that to any extent kind of helping in terms of the rate environment and their ability to get in there and get all the options and the upgrades and all those kinds of things that they still want?

Susan, I don't know that -- the 13% has changed much in the last couple of years, maybe a percentage point, no more. But, if you put it in the context of 65% of the buyers were first-time buyers in the quarter, and our average selling price about 400. So, they're putting $50,000 down on their home purchase. And in the traditional lens, a first-time buyer is going FHA, putting down the minimum because that's all they have. This is a well healed first-time buyer. And it's what we've been catering to for the last couple of years. So, FICO score is 724. They can borrow more. They're not stressed in qualifying. And I don't think they're draining the bank at closing either. I think, they have a liquidity left over. Matt, do you have any other color on that relative to studio or...

Just as you think about the loan product that they're selecting, a year ago, they were 55% conventional, and we're still seeing that. So, there just has not been a significant movement over the last six quarters, the loan that they're selecting. And as Jeff touched on in his comments, this is a high credit score. This is a buyer in a very strong position and ready to move forward. And is this the millennial who waited and has now been able to accumulate a very strong deposit good credit score? That's what we're seeing.

And our next question comes from the line of John Lovallo with Bank of America. Please proceed with your question.

Hey guys. Thank you for taking my questions tonight. Obviously, you're performing at a very high level, which is encouraging. I just have a question, just rounding out the affordability conversation here. If we think back to 2018, the economy was improving, home building demand was solid and also improving. Fiscal stimulus was expected to put more money in buyers' pockets and offset the effect of higher rates and ASPs. Everything felt pretty good from a homebuilding standpoint and then the music sort of stopped in the fall. So, I guess, the question is, what were some of the early signs, if you can recall, that things were kind of coming to ahead and getting ready to pause, any thoughts around that?

As we look back on it, John, there's a couple of things that are different. Back then interest rates ticked up more than they have right now and builders were pushing price. There's a couple of other things going on. One, there is literally no inventory. And back in '18 and '19, inventory was more plentiful and in balance. And I think the maturing of the millennials and the -- starting the family and saving the money, there's significantly more demographic demand today than there was back in '18 and '19. And we've shared the story when we saw the slowdown, I would say our traffic probably ticked down a little or people took a little longer to buy, you'll see things like that. But we quickly move to reposition our model parks to smaller homes that were lower priced, more affordable, where we would go from a 2,200 foot model down to 1,700 or 1,800 foot model, put it into a model park, it would have a similar room count, albeit a little smaller rooms, but would live the same, and we were ready for this affordability crunch, and the buyer came back after about 120 days. I think, it was more the adjustment to the rate at the time because rates didn't come back down when our sales picked up again. And so, we were positioned for a tougher affordability environment. And the buyer came right back, rates then did come down, and we didn't need to take advantage of what we have done and our average home size today is similar to what it was back in '18 and '19. But, we're well positioned if it were to happen again, because we still have the product out there and can move just as quickly. And we've actually done a lot of look back research right now because this is so topical. And if you look at many of our markets, we took same communities where we've moved price, but rates are lower. And in some cases, the payment right now year-over-year is up $30. I think, the worst one I saw was up $180 in that community. So, this move with interest rates, while it's come up a little bit, it's still pretty compelling out there, and affordability is still, as I said in my comments, still very favorable.

Okay. That's helpful, Jeff. And then, maybe one other one. I think you mentioned that your land purchases are pretty consistent with recent history at sort of one to two-year supply per community. One of the things that we've heard from folks in the field is that other builders may not be being quite as disciplined and are buying lots and greater size, and paying up quite a bit for some of these lots. Are you seeing any of this kind of land grab in any of the markets that you're competing in?

Well, we are seeing larger purchases occur, and somebody wants to do that that's their strategy. Hopefully, it works out for them. We like our approach. We like to be in the community, make your money being a homebuilder, turn the asset, move on. And we think over time, that's part of why our return on equity is increasing so well, where we're now up north of 18%, and we call it returns-focused growth. And if you can keep turn your assets, generate your profits, generate your cash, move on to the next one, like we've effectively done, you can get to very nice returns along the way. And we think our approach is the right one.

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

Just a couple of questions here, maybe more clarifications. On the guidance, I was just curious on the raising of the revenues, which is obviously encouraging, given some of the timing issues in first quarter, second quarter. But, at the same time, I found it interesting that you did not lower SG&A, which typically all else equal would have some operating leverage against that higher revenue. So, any comments around that would be helpful.

Right. Yes, the leverage impact on the $150 million raise is not terribly significant. We are trying to prepare the Company and moving the company to a larger scale. So, we're pushing that pretty hard. And as we're scaling up the business, we're trying to scale up the resources at the same time. So, you're seeing a little bit of SG&A, like dollar build as you go through the year. We also have a lot of new communities opening. As Jeff mentioned, we're looking to open about 150 communities this year. That's about 50% up on what we've seen last year. And in fact, over the last two or three years, it’s a pretty large step-up. And you end up -- you put in a little more expense upfront on that. But, we're seeing pretty nice leverage. We're going to see a nice step-down in SG&A second quarter as compared to second quarter of last year. And for the full year, we'll see some progress on the SG&A side as well. So, we're pleased with that. And it's driving a very strong operating margin for us as well as we build through the year. We'll continue to look for opportunities and continue to cost contain on the SG&A side. But first and foremost for us is to get this operating model scaled up. And we'll continue to invest to get it scaled up, and we're seeing a lot of success, obviously, on the order side and the construction side now with our starts basically matching our sales pace. So, we want to continue to support it with company resources as we move forward.

That's great, Jeff. Thank you for that. Secondly, I just wanted to zero in a little bit on current demand trends. And I know obviously, been discussed a lot so far this call and you've noted that. You basically haven't seen much of an impact or any of an impact from rates so far. Demand trends remain strong. So, are we to take that -- look, you did that 6.4 orders per month, per community in the first quarter. Should we be expecting something similar or even slightly stronger as you typically get some improvement as you go through the spring selling season? Is that a fair expectation? And again, obviously, you're trying to match sales pace with starts. So, maybe the answer is we're seeing a capacity limit on starts and expect a similar sales pace. But just trying to get a sense for how we should think about 2Q on that regard because, again, you've said demand does remain strong. You are looking to maintain this starts pace. So, just trying to -- I mean, logic would say perhaps that you would be able to get a similar sales pace, if not a little bit stronger, just given the general seasonal improvement.

Michael, there's a couple of things to qualify that. If market conditions remain as they are today, we'll continue to be opportunistic and frankly take pace in price like we did in the first quarter. If you think of our business model and our stated blended absorption is 5 a month, and the spring is a stronger time a year, but average 5 a month for a year, you're going to be 6, 6.5 in our second quarter. So, I think, it's fair to assume similar absorption to what we saw in Q1. And at that level, we hit the starts everywhere, and we're in a nice balance and a nice rhythm to deliver on the year and set up a growth for '22. I think, that's a reasonable assumption.

And our final question comes from the line of Mike Dahl with RBC Capital Markets.

Hey. Thanks for squeezing me in. And I appreciate the color so far. I guess, Jeff, just a quick follow-up on that. I wanted to ask about just how the kind of phasing of lot releases plays into the pace? And maybe if you could give any quantification around what percentage of your communities you've shifted to a phased release model? And anything around kind of what those phases or timing of those phases actually look like compared to, say, three or six months ago, if they're either shorter or longer periods in between when you release the next set of lots?

Matt, do you want to take that?

Sure. As we look at our business, we just -- we think about each community and how we underwrote that deal? And what was that under -- what was that pace that we used to underwrite it? We will toggle as we move forward and occasionally tap the break, so to speak, and restrict some of the releases within a given week. But, it does vary by community, and it's fluid. And I don't mean to be vague because in some cases, we will elect to continue to run it at an accelerated pace if we secured an additional community that could be in the same submarket. If that community is progressing and is going to be in place, we will take that current community and run it at a slightly accelerated pace. So, it is a weekly community-by-community-type analysis and review that I do with all of our division presidents in trying to meter it out, but also make sure that we're positioning ourselves for growth as we're moving through the year. So, Mike, I don't know if that hit what you were looking for. If not, feel free to clarification question.

That helps, Matt. Thank you. My second question, I know you guys have spoken numerous times throughout the call around kind of your -- on the cost side and the price cost side and matching price with cost, so clearly exceeding cost with your pricing based on the margin guide. I was wondering if I could get a little more color on your overall ASP expected to be up 5% for the year. Clearly, there's some mix impact there. Any quantification that you could provide on what your underlying price per square foot trends would be doing, or any other way that you would kind of normalize that and help us understand a bit better what kind of the true core pricing power is?

Sure. Yes. The number one driver on the cost side has been lumber, as we all know. When you look outside of that, across all the other commodity categories, there's been ups and downs, including labor costs. But, it really hasn't moved the needle much. So, the whole gain, the whole story on cost has been on lumber, and it's pretty -- it's a commodity, and it's a market where there's future pricing and everything else, and they're expected to come down as we go through the year, but who knows. What I can tell you is when you look at our forecast, we're fairly consistent in our total cost percentage of ASP relative to the quarterly cadence as we go through the year, Q1 through Q4. So, it's about matching on a percentage basis, what you're seeing on the selling price side of what we're currently forecasting. But, I just caution, a lot of variability on the lumber. I think at a point in time, the total lumber issue is going to become more of a tailwind for the industry and for everyone than what we've seen. I think there is a limit to how high it can go. I'm not sure what that limit is just yet. I'm not sure the timing of it. But, I do believe that's going to come back into a range we're more accustomed to. And I think there's going to actually be some upside coming off of that. But, for now, it's been satisfying, and we're very thankful that we've been able to manage the costs as well as we have, given the big pressures on lumber and continuing to keep the construction machine going. And the cost and fairly, I'd say, a good state of control, given the margin expansion that we're seeing and being able to take advantage of what we're seeing in the market and offsetting the cost inflation. So no, I'm not overly concerned at this point. And in fact, we've been confident enough and thought about the year favorably enough to lift the margin guidance as we go. So, we're actually even feeling a little bit better about profitability than we were three months ago.

And with that, this concludes today's question-and-answer session as well as today's conference call. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.