Lennar Corporation (LEN) Q1 2012 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to Lennar's First Quarter Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mr. David Collins for the reading of the forward-looking statement.

Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your host, Mr. Stuart Miller, CEO. Sir, you may begin.

Okay, good. Thank you, and good morning, everyone. Welcome to our First Quarter 2012 Update. I'm joined here as always by Bruce Gross, our Chief Financial Officer; Diane Bessette, our Vice President and Treasurer; Dave Collins, our Controller. We also have Rick Beckwitt, our President; Jon Jaffe, Chief Operating Officer; and Jeff Krasnoff, CEO of Rialto. I'm going to give some overview remarks both on the economy and the housing market and on Lennar in particular, and then I'm going to turn it over to the management team to give additional background in detail. After we open the phone lines, as always, we'd like to ask that you limit your question to just one question, one follow-up please, so that we can be as fair as possible to all. So as I sit here today, I'm really pleased with our solid first quarter 2012 operating results, and what they represent relative to the housing market in general and to Lennar in particular. Our first quarter results reflect another quarter of confirmation that both the housing market and the overall economy are stabilizing, and that a very real trend is beginning to take shape. They also demonstrate that our operating team is executing extremely well in a complicated environment. I previewed in our third and fourth quarter conference calls that we were beginning to see evidence of a genuine turn in the residential housing market, and this could be a harbinger of market stability. Last quarter, I was feeling somewhat more confident that the market was, in fact, changing, and this quarter marks further evidence that stabilization is really taking hold. The consistent message is that the general environment is different now than it's been in the past many years. There are discernible fundamental shifts appearing in the home market, and there are empirical data points that are, to-date, confirming that the market is showing real signs of stability. With that said, and as we saw from last week's reported national sales starts and permits numbers, yesterday's pending home sales numbers and today's Case-Shiller Index, that the housing market is not yet in full recovery. In fact, the stabilization process after a full 7-year decline in housing is rocky and erratic and is certainly not yet broad based. Let me tell you a little bit about how we are thinking about the things that we're seeing in the field versus the national numbers that are being reported. Four important themes are driving housing stabilization; 3 are demand-related and 1 is supply-related. First, today's consumer is looking at the home purchase differently than in the past years. The home purchase is no longer a place to invest savings in order to ride a wave of price increases. Instead, today's buyers are looking for real value. They are finding real value in for-sale housing. We know that home prices and volumes are low and interest rates are at historical lows and affordability is extremely high today. Today's consumers are beginning to realize that housing presents an undeniable value proposition, and we're hearing this from them in the field. Accordingly, we're experiencing more traffic in our welcome home centers and customers are actively discussing their desire to find a way to purchase and capitalize on this moment in time. They're starting to feel pressure not to miss this moment, and that's being reinforced by discussion with family and friends, buying and owning a home is no longer taboo at the dining room table. And in the field, we're witnessing instances where customers returning for a second visit are finding that the home that they wanted is sold. Second trend, today's housing consumers also seeking to avoid the rental market. The fully loaded cost of ownership is lower in most desirable markets than comparable rental rates. We've carefully studied this trend and have found that while this might not show up in national statistics, in local competitive markets, principal, interest, taxes, insurance, community association, lawn care are all together lower than the competitive rental market. Today, for-sale housing represents an excellent value proposition on a pure monthly payment basis versus renting. Additionally, consumers are looking for an alternative to the annual repricing inherent in the rental market. Rental prices are high, and they've been moving up. Today's consumer is looking for living cost stability, as well as a safe and stable place to raise a family. They're looking to reconsider the rental lifestyle, where rental rates have been rising and are likely to continue to rise for the foreseeable future. Third trend, improvement in employment and consumer confidence has translated into the end of negative household formation. The trend of children moving home and elderly parents moving in with children is at least slowing and may be reversing. Over time, this trend will be an even more powerful driver of demand increases. Now some have suggested that the gains in the first part of the year might be weather-related, since it's been abnormally warm in the North. We, however, see strength across our platform, including warmer markets where weather is not a factor, and where warmth in the North might even be a negative to sales in the South. It seems that the improvements derive from fundamental shifts. On the supply side, concerns remain about the overhang of REO and foreclosure inventory. As I noted earlier, market improvement is uneven across cities, states and the country. In the field, we are seeing pockets of activity develop across the country, not region- or state-specific. These pockets are developing in many areas that are starting to recover. These are geographic pockets that are defined by their desirable location, driving the absorption of REO, foreclosure and defaulted loan inventory. Supply is running short in these areas and demand is pushing prices higher in some instances or is pushing the boundaries of desirability outward in other instances. The broader market, outside these pockets of activity, remain weak. While at present, these pockets are isolated, they are growing in both size and number. It's likely that national numbers are not reflecting these themes because they incorporate and average in their data the secondary and tertiary markets that are not yet in recovery and do not affect our competitive landscape. But the more desirable housing markets are experiencing a fundamental change as foreclosure inventories have been absorbed, fewer distressed investor sales are being made and consumers recognize the value proposition. Overall, we've seen that demand is growing, and in carefully selected markets, supply is limited. Nevertheless, demand still remains constrained or is being held back by the mortgage qualification standards and processes that have been overcorrected by the severity of the downturn, but demand is growing and customers are looking to find ways to qualify for loan and waiting for some loosening of credit standards. Turning now to Lennar specifically. In our first quarter, we saw a fundamental improvement in all of the building blocks that define our homebuilding and Financial Services operations, while Rialto continued to build and augment its blue-chip operating platform. Our management team is executing on all fronts. On the homebuilding front, sales continued a significant pattern of improvement, growing 33% over first quarter 2011, and that compares trend-wise to a 20% year-over-year improvement in the fourth quarter of last year. Our improved sales year-over-year and sequentially come from a fairly flat community count, which means that our sales per community are improving. Perhaps most notably, these sales improvements are not the result of unusual sales promotions or discounts as reflected by our improved gross and net margins. Post-impairment gross margins improved from 20% to 20.9%, while post-impairment net margin improved 3.6% to 6%. We are maintaining and even growing margins while expanding sales. These margin gains are reflective of a fundamentally sound sales program that is not compromising margin to gain sales, but instead is maintaining price stability, reducing incentives and beginning to show overhead leverage as volume improves. Additionally, we're not pushing to grow the quantity of active communities, but are more focused on the quality of our active communities. Accordingly, we have invested cash aggressively to position our company with high-quality communities in A locations that enable us to produce solid margins and leverage overhead. This affords us the position to be able to manage our business with carefully designed value-oriented product and efficient production and marketing program under our Everything's Included branding and a rightsized overhead structure. As we look ahead to future quarters, our strategy of focusing on high margins in well-positioned communities will prove to be the engine that drives SG&A operating leverage that will produce strong bottom line earnings. Rick and Jon will describe our homebuilding operations strategy in greater detail in just a minute. Our Financial Services segment also performed very well in our first quarter. It generated operating earnings of $8.3 million versus $1.2 million last year. Earnings here derive from a consistent mortgage and title program that reports through our Chief Financial Officer, Bruce Gross, who will further describe how this important segment is not only profitable, but is providing consistency and dependability in a difficult mortgage environment. Finally, our Rialto segment has also produced profits in the first quarter as it continued to grow its underlying business. While Rialto earnings have declined year-over-year, from $11 million last year to $9.4 million this year, we have noted that Rialto profits have the general tendency to be less predictable on a quarter-by-quarter basis as we carefully manage the sale and resolution of assets to maximize value. We remain very enthusiastic about the earnings power in the assets we've already purchased, and we're certain that future quarters will demonstrate the investment and earnings power of the overall Rialto machine. As I noted last quarter, Rialto completed its money raise for its first fund and ended with a $700-million pool of capital to invest in core assets to drive its future. To date, about 70% of that fund is invested and the pipeline for new investments is very strong. This fund will likely be fully invested by year end, and we will soon begin working on the capital raise for fund #2. As we look ahead, Rialto will continue to be a solid earnings contributor for Lennar and will begin to return cash to corporate as it is now investing self-generated funds. Jeff Krasnoff will give additional detail on Rialto's operations in just a few minutes as well. All in all, our first quarter has been an excellent start for 2012 for Lennar as we've navigated the turbulent waters of the housing market in the U.S. economy seeking a bottom and stability. Our strategy has been to refine and position our company for recovery and remain profitable while we stay patient. This strategy has worked well for us. All of the segments of our company are now extremely well positioned, as you will now hear from our operating team. As I look ahead to the future quarters, I remain cautiously optimistic that we are seeing a real bottom form, and that we will begin to see a real recovery. National statistics and news will give us mixed signals as we move through the year as they represent a compendium of all of the best and the worst markets around the country. But I feel that stabilization and recovery will emanate from the most desirable markets and spread slowly outward over the next years. Lennar is positioned with a strong balance sheet in the right markets, with an exceptional management team and a well-constructed strategy to perform solidly as market conditions continue to improve. Now I'd like to turn over to Rick.

Thanks, Stuart. We are really pleased with our operating results this quarter. These results were driven by both a well-executed land acquisition strategy and a fine-tuned homebuilding machine. I'm going to review our land activities and highlight what differentiates Lennar from our competition. Jon is then going to discuss our building activities and how we maximize the value of our land assets. There's no question in my mind that profitability in this business starts with land. You need to be in the right location at the right cost, at the right time, and with the right product to generate above market returns and sales. This takes great relationships with banks and land sellers, and it requires meticulous underwriting and market research. It also requires a team of land acquisition professionals that know how to scour the markets for unique opportunities. During the first quarter, we continued to focus on acquiring and optioning new homesites that would have a positive impact on our bottom line. Our primary focus was pursuing distressed opportunities with banks and other extremely motivated sellers through off-market deals in a noncompetitive process. Our new acquisitions were located in markets where we saw the greatest strength and value proposition. As in the past, our focus has been on highly desirable communities located in micro-markets where people really want to live and where foreclosed homes have already been absorbed by the market. We invested in A-plus areas and stayed away from the fringe or tertiary markets, where price was the only driver. This micro-market investment focus has significantly enhanced our gross margins and our new sales orders. This quarter, we purchased 4,225 homesites for $200 million -- $212 million, and we spent $61 million on land development. Combined, our land acquisition and land development spend was up about 34% over the prior-year period. In the first quarter, we also gained title to an additional 3,400 homesites through negotiated settlements. In addition, we signed option contracts to acquire approximately 1,340 homesites. As you can see, this was a very busy and highly productive quarter for Lennar on the land acquisition side. From a geographic standpoint, approximately 39% of our land purchases in the first quarter were located in Florida, 22% in Texas, 14% in the Pacific Northwest, 11% in the mid-Atlantic, 10% in the West, with the remaining 4% spread throughout our other markets. As in prior quarters, the lion's share of our new land deals were sourced outside of a competitive bid environment. We stayed away from the typical broker to bid type of deals and directly sourced a large percentage of our land transaction. This is a clear differentiating factor for Lennar. Another key difference is our willingness to engage in highly complicated transactions that requires significant planning and take months, if not years, to reach the end result. These deals are not for the faint of heart and require an intricate knowledge of vested entitlements and creditor rights. But when carefully executed, these opportunities can be incredibly profitable and generate outsized returns. To give you a sense of what I'm talking about, I would like to highlight 2 transactions that came together last quarter. Negotiations on these 2 transaction began almost 2 years ago, and we subsequently purchased the debt at deep discounts in fiscal 2011 and took title to the land in the first quarter of 2012. We are now the proud owner of a crown jewel position in Doral, Florida, one of the hottest submarkets in the United States. Representing more than half a square mile, this property has approximately 2,400 homesites and will be an extremely profitable multiyear position for the company. This deal involved the purchase of more than $218 million of debt instruments, including CDD bonds, community development district bonds, loans held by multiple banks, delinquent taxes and was subject to a litigation between the prior land developer and owner and various creditors. In addition, the CDD and the bank debt had competing first lien positions on the collateral, creating the perfect storm. For us, this represented an incredible opportunity in our backyard, a 3-dimensional chess game with no other viable buyer. So we mapped out a detailed plan to resolve the dispute and gain control of the first lien positions. What we needed to do was bring everyone to the table to create a workable solution. Fortunately, we had a great relationship with the banks, the bondholders and the original land developer, so we were able to work with each group individually to create a win-win for everyone involved. After months of intense negotiation, we acquired the CDD bonds and the first lien bank debt in 2011 and then settled with the original developer and a second position bank in 2012. This new Doral community, which is a stone's throw from our corporate office, will drive margins for years to come because of its extremely attractive land bases. We should deliver our first homes in this community by year end. The second transaction involved a property in Naples, Florida. In the first quarter of this year, we took ownership of a high-end, substantially developed master-planned community with a fully operation TPC golf course. This community has the only TPC-branded golf course in Southwest Florida. The property, just located 5 miles from downtown Naples, included more than 1,000 acres and 1,050 homesites, 32% of which were fully developed. Similar to the Doral opportunity I described earlier, this deal involved approximately $158 million in debt instruments, including CDD bonds, traditional bank debt held by multiple banks and delinquent taxes. We began our diligence on this opportunity in early 2010 and created a strategy to harness the enormous potential value of this asset. During our diligence, we uncovered that the encumbered collateral also included a 10-acre commercial property fronting a major Naples thoroughfare and a 1.5-acre marina in downtown Naples, which in addition to the golf course community, made this investment a no-brainer if we could put the pieces together. We started negotiations with the various lenders and bondholders in 2010, acquired the bank debt and tax certificates in entirely 2011 and restructured and purchased the CDD in the first quarter of 2012. Through a lot of hard work and tenacity, we acquired at a significant discount one of the finest golf course communities in Florida, and we'll have a multiyear highly profitable building program going forward. I hope these 2 deals give you a sense of some of the unique investments we've been making. While the land market has heated up recently, we continue to see great opportunities out there. We are still underwriting our new deals to exceed a 20% gross margin and a 20% IRR with no inflation. To date, we've been extremely pleased with the performance of our new land acquisitions. During the first quarter, approximately 45% of our deliveries came from communities purchased or put under control in the last 3 years. Our gross margin on the closings in these deals continue to be 200 basis points higher than the overall company average. Before I turn it over to Jon, let me give you some final stats. On a year-over-year basis, our inventory increased about $428 million to approximately $4.3 billion and this excludes consolidated inventory not owned. Our inventory during the first quarter increased about $317 million from the end of 2011. At February 29, 2012, we owned and controlled 117,086 homesites and had 426 active communities. While our community count is down on a year-over-year basis, it increased slightly during the first quarter. As Stuart said, we are focused more on community quality and not quantity. This should be very clear from our operating results. Nonetheless, you should see our community count increase by about 5% to 10% by year end based on our land acquisition activity. Finally, I'd like to think our land acquisition staff across the country and in particular, our team in Florida. I have no doubt that we have the best team in the business. Like to turn it over to Jon now.

Thank you, Rick, and good morning. As Stuart noted, we're very pleased with our first quarter results of a post-impairment 20.9% gross margin and 6% operating margin, respectively 90- and 240-basis-point improvements. This achievement was the result of continued intense focus by our management team on each of the component parts of our business. I will speak to how once the land is in place, we derive profitability by our management of product, pricing, direct cost and leveraging our operating structure. To ensure that the homes we build are a great value to the homebuyer, each land acquisition is underwritten with the strategy of executing our Everything's Included platform. This means that what we have – that we have done the research to know exactly what we'll be offering in home designs, square footages and included features that together present a great value to the homebuyer. Lennar's Everything's Included approach not only continues to compete effectively against resales, but also presents a great value to renters who are looking at the opportunity to buy a home. This process, combined with an improving sales environment, enabled us to achieve a 33% year-over-year improvement in new orders without the aid of increased community count and while maintaining healthy gross margins. Much of our sales strength in the first quarter continued to be driven by the strong performance of our well-located new communities, where we achieved a higher sales pace compared to our legacy communities. However, we did begin to see improvement in these legacy communities midway and through the quarter in most of our markets. New orders from our new communities increased to 48% of our Q1 orders, up from 35% last year. This quarter we experienced increase in higher quality traffic levels in our communities, up from what we saw in the fourth quarter. In the first quarter, we saw a sequential improvement in new orders month-over-month, and so far in March, we are seeing continued strength similar to the absorption rates we saw at the end of the first quarter. We are actively working with potential homebuyers on credit repair and reaching out to existing renters to educate them on the benefits of homeownership. A good example of this is an event we recently held in Las Vegas. To market our credit repair program and home purchase opportunities to renters, we had a gourmet food truck challenge. I don't know if the gourmet food truck craze has hit where you live yet, but it is very strong in Vegas. Our division held the event at a shopping center parking lot that is central to multiple rental communities. In other words, we went to where the potential customers live rather than spending advertising dollars trying to bring them to us. Between our own social media efforts, along with flyers, postcards and door hangers, the social media efforts of the food truck companies and drive-by traffic, we had a tremendous turnout. This led to hundreds of people registering with us, many starting a credit repair process and visiting our communities. Our mortgage company, Universal American Mortgage Company, was at the event working to help educate these potential buyers. This was a great success, an example of how we benefit from our strong and consistent relationship with UAMC. As the market continues to recover, and we begin to see sales prices improve, we are also seeing adjustment on the cost side of our business. We are optimistic that these cost pressures will be offset by sales price improvements, as well as by some cost savings that are structural and long term. It is for these reasons that we expect gross margins to remain level, but we expect net operating margins to improve from our operating leverage. We see this in the year-over-year first quarter comparisons of gross margin improvement from 20% to 20.9%, while net margins improved from 3.6% to 6%. As in the prior 5 quarters, our current average direct cost of homes remains in the range of $40 to $42 per square foot. We have a very thorough process of breaking down detailed cost in each of the items that make up a cost category onto an item master. This allows us to negotiate price protection on specific items and to value engineer lasting improvements. An example of this is with engineered wood products. This would primarily be I-Joist and beams. We've engineered more efficient home designs, where the needs and values for engineered wood products are less. This has allowed us to save $500 per home at the same time that the cost of engineered lumber has increased. We are also focused intently on managing extras. Extras are items charged to the builder beyond the contract amount. With the benefit of greater detail provided by the unbundling process and Item Master, we are able to create more accountability in managing extras. This allows us to quickly adjust contracts scopes of work, to eliminate these costs from the system. As I said, as sales prices increase -- sales prices improve, there will be various fluctuations in some materials, commodities and labor. But our purchasing systems and processes, combined with improving sales pricing, will have us well positioned to maintain our gross margins. This quarter, we saw the ability to leverage our operating structure as the year-over-year 30% improvement in deliveries helped us achieve an SG&A percentage of 14.9%, a year-over-year 150-basis-point improvement. We continue to maintain our intense management of SG&A cost. Similar to direct cost, I believe that we have made structural changes that allow us to affect long-lasting savings as our volume increases. We have in place a very strong management team that is organized in a simplified regional and divisional structure that will allow for growth with few additions to the structure. I do want to note that in the first quarter we expensed overhead associated with our new Seattle and Portland operations, but as I previously stated, we will see deliveries from those operations in the back half of the year. Across our divisions we are actively and intensely managing each of the components that make up our net operating margin. I want to thank our associates for their focus and execution of each of these components of our business and achieving our ninth straight quarter of positive post-impairment operating margin. Thank you. And I would now like to turn it over to Jeff.

Thanks, Jon, and good morning, everyone. Before Bruce reviews the details behind Rialto's $9.4 million of operating earnings for the quarter, along with the results for the rest of the company, there were a few areas that might be helpful to touch on to give a little bit more perspective on what's going on at Rialto. As an integral part of the Lennar story, our focused Rialto team that now includes over 200 strong, continues to push forward the resolution and value add of distressed and advantageously priced real estate assets. Being able to integrate the unique talents and well-coordinated resources of the entire Lennar team has been and continues to be a unique advantage that has positioned Rialto extremely well. Rialto currently has 3 areas from which it derives its revenue and earnings: PPIP, our balance sheet portfolio investments and our fund business. If you recall, Rialto's first investment opportunity was our PPIP fund with AllianceBernstein and the U.S. Treasury. From inception, this $4.6 billion funds mortgage-backed securities portfolio has produced a steady stream of interest income and fees on our $68 million investment that it's been at or above our expectations. And during this past quarter, as the capital markets gained new optimism about the fundamentals behind the home mortgage securities that back the lion's share of our investment portfolio, we saw the mark-to-market on our investment regain about $8.4 million of value that had been marked down in prior quarters. During the quarter, we continued to create value from our second income generator, our balance sheet distressed real estate portfolios. These include our 2 FDIC transactions and our initial bank portfolio investments. In addition to collecting $560 million in cash to date on these portfolios, we have now repositioned over $1.6 billion of loans into owned real estate, which includes developer homes, land and all varieties of commercial properties across the country. Our activities in these investments include adding property improvements, paying legal fees, in some cases, the payment of several years of past-due property taxes, the majority of which are nonrecurring. Because most of these costs are expensed as incurred and revenue is recognized as properties are sold or collections are made from guarantors, in the short run, earnings from this portion of the business will have the tendency to be less predictable. In this area, while our revenues and earnings were less than prior quarters, we remain comfortable we will produce the results we sought when we initially invested in these assets as we carefully manage their dispositions to maximize value. In our third area, our fund business, as we mentioned last quarter, and Stuart mentioned earlier, our current exclusive investment vehicle is the Rialto real estate fund, which now has $700 million of equity commitments from over 2 dozen different investor groups, including $75 million from us. The fund has been able to acquire or tie up over 30 different transactions, and our pipeline of new investments continues to be strong. We've already invested approximately $520 million of fund equity to acquire about $1.5 billion of assets based on unpaid principal balance for about $0.38 on the dollar. About 3/4 of our fund investments so far have been distressed portfolios from regional and community banks, CMBS special servicers and nonbank financial institutions. The bulk of the remaining investments are in new issue CMBS securities with strong current cash flows, where we found attractive pricing unlike any we have seen since the 1990s. And through the end of the quarter, the fund has already collected $65 million from interest, principal and asset resolutions at levels significantly higher and sooner than originally anticipated. Even with the most recent improvements in the capital markets, lenders still remain under both internal and external pressure to dispose of distressed real estate assets as they try to get back into the lending business. In addition, with over $1 trillion of commercial real estate debt coming due in the next 3 years, we expect to continue to see an abundance of opportunities that fit perfectly with our skill set and deep relationships that we have developed with a number of key sellers. As a result, we're currently focusing on bringing out our next investment vehicle. We believe that these and future funds will not only help to enhance the company's returns and add consistent cash flow and earnings, but will also be important building blocks for us to develop a first-class investment management business. These are just a few of the reasons we remain excited about the continued progress of our Rialto franchise, our current position in the marketplace and the synergies with the rest of the Lennar team. And with that, I'm going to turn it over to Bruce. Thank you.

Thanks, Jeff, and good morning. Before I provide more details on our numbers, I'd like to comment on our Financial Services segment, which is always reported to our corporate office and has been run distinctly separate from our sales and homebuilding operations. Our Financial Services business segment generated operating earnings of $8.3 million versus $1.2 million last year, and this is the strongest first quarter operating earnings for our Financial Services in 5 years. Our mortgage pretax income increased to $8.9 million from $3.4 million in the prior year. And this quarter's mortgage originations increased by 33% to $743 million. With the significant operating leverage in our mortgage operations, this resulted in a 160% increase in pretax earnings. Our in-house mortgage company had a capture rate of Lennar homebuyers of 78% in the first quarter. The mortgage company's home loan advisors communicate with prospective Lennar homebuyers very early in the buying process and by understanding the homebuyer's ability to qualify for a mortgage, this has helped Lennar's cancellation rate remain at very low levels. This quarter's cancellation rate was 18%. Having an effective mortgage company working with the homebuilder has led to consistency and dependability for homebuilding deliveries as noted by our consistent backlog conversion ratio that's been over 100% consistently. The first quarter is historically the lowest volume quarter for the title company. Our title company had a $100,000 loss in the first quarter, but that improved compared to the $1.7 million loss in the prior year, and this was a result of additional cost saving initiatives that were successfully implemented. Approximately 10% of our title company transactions were with Lennar homebuyers, and the remainder were with third parties. The hard-working associates in our Financial Services segment have consolidated operations, refined processes and are well positioned to see continued operating leverage as the housing market recovers. Turning back to our overall results, starting with homebuilding, revenues from home sales increased 33% at $611 million, driven by a 30% increase in wholly owned deliveries and a 3% increase in average sales price to $246,000. The average sales price by region is as follows: the East region was $222,000, and that was up 3%; Southeast Florida region was $265,000, that was up 1%; Central was $220,000, that was up 4%; Houston was $230,000, up 3%; West was $317,000, up 5%; and other was $361,000, down 6%. The gross margin on home sales that was reported at 20.9% in the first quarter was up 90 basis points to the prior year. And as you remember in our last conference call, we did provide a gross margin percentage range for 2012 of 19.5% to 21.5% before impairments. We came in at the higher end of the range due to delivering a more favorable product mix of higher gross margin percent homes, which includes an increasing percentage of deliveries from new communities, which Rick touched on. The gross margins were strongest in the East and Southeast Florida regions this quarter, and sales incentives as a percentage of home sale revenue was consistent with our fourth quarter at 12.2% and up just slightly from last year's first quarter at 12.1% as a percentage of home sale revenue. As a result of the strong gross margins and improvements in SG&A that Jon talked about, our homebuilding operating margins improved 240 basis points from the prior year to 6%. This was the highest first quarter operating margin in 6 years. Equity in earnings from unconsolidated subsidiaries was $1.1 million versus $8.7 million in the prior year. The large gain in the prior year was due to the company booking its share of a gain on debt extinguishment at one of the company's joint ventures, partially offset by valuation adjustments. Other income was $4.1 million versus $30 million in the prior year, and the large gain in the prior year was due to $29.5 million of the $37.5 million litigation settlement, which was included in the other income line. Impairments declined significantly in this year's first quarter to only $2 million versus $22 million in the prior year's quarter. Turning to our Rialto business segment, they generated operating earnings of $9.4 million, and this number is after adding back $4.3 million of net losses attributable to noncontrolling interest versus $11 million in the prior year. The composition of Rialto's $9.4 million of operating earnings by type of investment is as follows: The FDIC portfolios had a $1.5 million loss, non-FDIC portfolios had a $1.2 million loss, PPIP contributed $11 million of earnings and the Rialto real estate fund contributed $7.6 million of earnings. Then subtracting out $6.5 million of general and administration expenses and other, which is net of management fees and reimbursements of $5.9 million, you will get to the $9.4 million of operating earnings. The negative $2.7 million contribution from the FDIC and non-FDIC portfolios this quarter are primarily due to 2 items: First, as Jeff touched on, revenue was impacted by the timing of deficiency collections and REO activity. Second, as REO inventory increased, there is an acceleration of expenses relating to catching up on prior year's unpaid property taxes and legal expenses incurred to collect on deficiency judgments. These results will vary from quarter to quarter due to the uneven timing of deficiency collections and REO activity. Additionally, we're in the process of petitioning to reduce property taxes on the REO properties going forward. The $11 million of earnings this quarter from our investment in PPIP is reported as equity in earnings from unconsolidated entities, the equity in earnings included net gains in the PPIP fund of $8.4 million, which relates primarily to unrealized gains as a result of mark-to-market adjustments, plus $2.6 million of interest income. Our interest in the Rialto real estate fund is also reported as equity in earnings of unconsolidated entities and generated approximately $7.6 million of profits for the quarter in addition to the management fees highlighted above. Rialto continues to generate strong cash flow, and at quarter end, the FDIC debt was paid down by $157 million, reducing the outstanding FDIC debt to $470 million. Additionally, there was $185 million in the defeasance account and in Rialto's cash account combined to further retire debt. The add back in calculating diluted earnings per share for our convertible securities was $2.9 million for this quarter. And during the quarter, our balance sheet remained strong. We continued to have ample liquidity, and our leverage remained low as our homebuilding debt to total capital, net of the $800 million of cash, was 49.6%. During the quarter, we raised an additional $50 million relating to the closing of the over-allotment portion of the 3.25% convertible senior notes. Let me provide some more detail on our $4.3 billion of inventory. Finished homesites during the quarter amounted to $576 million, and our construction-in-progress account was $854 million, totaling a combined $1.4 billion in that category. Land and land under development was $2.9 billion. We carefully managed our inventory during the quarter, and we ended the quarter averaging 1.5 completed unsold homes per community. There were 1,523 homes under construction that were sold and 2,293 unsold. Active community count during the quarter ended at 426 versus 422 sequentially in our fourth quarter. We opened 54 communities during the quarter and closed out of 50. In conclusion, we ended the quarter with our strongest quarterly backlog growth in about 10 years, up 39%. As this backlog converts to deliveries, and we continue through 2012, we expect to see the significant operating leverage in our business translate into improving operating margins and profitability. And with that, let me turn it over for questions.

[Operator Instructions] The first question is coming from Ivy Zelman, Zelman & Associates. Ivy Lynne Zelman - Zelman & Associates, Research Division: My question relates to your comment, Bruce, on significant operating leverage, and understanding if there's opportunity to elaborate on that. And then just secondly, as it relates to your cost structure, a lot of people feel that Lennar's better than their peer average gross margins is related to their low lot cost basis, and yet, really the focus is on your strategy to provide Everything's Included versus homebuilders with design studios, and I was wondering if you can quantify some of the cost savings that are attainable [ph] because of your strategy on providing Everything's Included and maybe differentiate the company in that respect from an operating perspective?

Let me take the first part, Ivy, and then I'll turn it over to the operators to talk about your second part of the question. When we talk about significant operating leverage, when we have additional absorption per community, the incremental operating margin goes up considerably. So as you look at our gross margin, if it was flat at 21%, and with our SG&A where it is today at 14.9%, one more sale per community has an incremental SG&A expense of about 4.5%. So the incremental operating margin is approximately 16% as our absorption increases per community. That's where the significant operating leverage is coming from, and that's why we believe our operating margins will continue to grow as volume picks up.

Yes, we really highlighted in our remarks that we focused on the quality of communities rather than quantity because that's where we pick up the greatest operating leverage. If we can increase the number of sales per community as a first round of improvement, we're going to start to see some real earnings strength out of that. As to your second question... Ivy Lynne Zelman - Zelman & Associates, Research Division: That was not limited to just the SG&A though, correct? It's gross margin is benefiting as well?

Well, we're not commenting as aggressively on that. We recognize that as prices go up, some of the cost will go up as well. We do think that there will be gross margin improvement as well. But I think that we're going to wait and see how the market evolves for that. But certainly, the net margin benefits more dramatically. As it relates to Everything's Included, we've long believed that our EI platform is an efficient operating platform. But even more so, at the beginning of recovery and as the market remains a more value-oriented market at other times in a market cycle, where there's pricing power and there's the ability to pass on the greater margins in options and extras, I think the 2 platforms compete more favorably. But at this point in the cycle, we think that the Everything's Included platform really affords us the opportunity to keep our overhead carefully in line, to keep our construction costs really at low levels, to deliver the options and upgrades that people are looking for and that they place value on and to keep our pricing structure very value oriented so that it appeals to the greatest number of consumers. And I think that operating strategy is an important component of what's driving our margins right now.

The next question is coming from Stephen Kim of Barclays.

My first question relates to your commentary about pricing. I was particularly intrigued by that because it's something that we've observed in the marketplace as well, the willingness and the ability of builders to put through price increases with an increase in volume. Can you give us a sense for your strategy for implementing price increases? And can you provide a little bit more color as to how isolated the opportunities are to raise prices in the marketplace? And by price increases, by the way, I should specify I'm not just talking about nominal price increases, I'm also talking about reduced incentives and increased lot premiums.

Stephen, it's Jon. That's a good point. It comes in both forms, the ability to increase prices, as well as to reduce incentives. It really varies at this point in the market recovery market by market. We're seeing in some of our markets the ability to have perhaps over 50% of the community to be able achieve one of those advantages and then in other markets they're still in the 10% to 15% range. But strategically, we're trying to implement at least some level of price improvement so that we deliver that message of confidence both internally and externally.

From a strategy standpoint, Steve, we look at each community as a separate profit center, and we know from looking at the market demand, where the lines cross with regard to pushing absorption versus raising prices. In communities where we have a longer land position, we benefit more by increasing the prices, getting the appraisals up because our margins will be better on a long-term basis. So we look at each one individually. Across the board, we have instituted price increases in probably most of the communities or taken incentives down. There's a handful of ones that are still a little bit challenged from a price standpoint, but we will be aggressively moving prices, particularly because it allows us to pull people off of the fence.

And additionally, land is harder and harder to replace. We don't want to leave opportunity on the table by selling through quickly land positions that are particularly well located.

Yes, all of that makes a tremendous amount of sense. Follow-up question relates to your commentary about incremental margin. I think you said somewhere in the vicinity of 16.5% incremental operating margin. You were talking primarily there on the power of leveraging of SG&A it seems like. I was curious as to whether you could comment on your -- the degree to which that incremental margin may actually be higher as you migrate into communities, which are not Everything's Included or if, in fact, it would have a negative impact on your contribution margin. What is your view on how an Everything's Included strategy and the extremely high backlog conversion ratio that comes with that would contrast with a more standard kind of option-type package as we go forward?

Well, let's see if I can break that down. The 16% incremental margin derives from additional deliveries in existing communities. And so it's where we're growing from 2 sales per month to 3 sales per month, the incremental overhead is very, very small relative to the 15-ish percent that we're running right now. And so we see a tremendous amount of leverage in the growth of sales per community. So certainly, within the community, there wouldn't be an introduction of a different operating platform. But right now, all of our communities in at least some modified way are operating under an EI, Everything's Included platform. And so we wouldn't have a sense of -- or a good sense of what the differentiation or the differential in overhead would be for a design studio or option-based program. And I wouldn't venture that guess. I would also highlight, I don't mean to strike a competitive note here, I think that there are operators out there that can operate a design studio approach. In our world, we think that EI is more efficient.

The main benefit, Steve, from an EI platform really comes through the cost side. We can negotiate better costs on the materials. There's increased cycle time with regarding delivery. There's less mistakes from the trade standpoint in putting the options or upgrades in the wrong location in the home. So it's speed of delivery and the cost of having that asset for the time period that it's on your books.

But just to add to that, the EI program also does not necessitate a design studio facility. And sometimes, the people overhead associated with that. So it's both on the cost side and the G&A side.

The next question is coming from Michael Rehaut of JPMorgan Chase. Michael Rehaut - JP Morgan Chase & Co, Research Division: First question I just had was on the sales pace, a lot of success there, and it looks like roughly about 40% up year-over-year. You had mentioned in your prepared remarks that referring to March that you see continued strength and similar to the sales pace at the end of the quarter. Was just curious if the sales pace improved throughout the quarter, and we should be looking for even, we're talking about March being higher than the quarter average and if it's possible to kind of give us a degree of magnitude and regionally, what's driving that?

Well, I think if you look at the first quarter, starts off in December, which is impacted by the holidays. And so as I said, we did see that improvement sequentially through the quarter, and so far, March is evidencing consistency with what we saw in February which was... Michael Rehaut - JP Morgan Chase & Co, Research Division: But I guess, I'm talking about a year-over-year, not -- sorry to interrupt, but not just sequentially I'm thinking.

Yes, both sequentially and year-over-year on a month-to-month basis, we saw improvement throughout the quarter with February being the strongest month of the quarter. And I think what Jon was trying to highlight is we're seeing similar strength in the stub period so far in March with the strength of the quarter that we had. Michael Rehaut - JP Morgan Chase & Co, Research Division: Great. Second question on the DTA, Bruce, just trying to get an update on that. I believe last quarter, you said it's, and correct me if I'm wrong, but something that you might be looking at on a quarter-to-quarter basis and doesn't necessarily have to be reversed at the end of your fiscal year. Is that still the case? And can you give us any updated thinking about that in terms of maybe what hurdles you need to cross to get that back on the balance sheet?

Sure. As we came out of the end of the year, the feeling was that we needed more discernible evidence that housing was recovering and the feeling was that we needed to give some time to go through the spring to see if that's the case. That was the biggest item. So if the company keeps its performance up and housing recovers through the spring, similar to what we're seeing here in February and March, I think there's a good chance that we'll be able to reverse the DTA as early as the second quarter, but certainly, we believe it will happen within this year.

Just as a kind of reminder, what we said is that the reversal of the DTA was more a question of the macro market than it was focused just on Lennar specific in our case. We've been able to demonstrate profitability for an extended period of time now. The question that still has been an overhang has been that of where is the macro market going? And I think as there is more evidence of stability in the marketplace, the reversal of the DTA will become more certain.

The next question is coming from Stephen East of ISI Group.

The overview in your prepared comments was really helpful. It answered a lot of the questions I think. So on the land side, beyond what you talked about right now, is the profitability that you're seeing in the deals today similar to what you saw, what you had, at least pro forma over the last 3 years that are part of the 48% of your sales right now?

It depends on the deal. Clearly, the deals that are option oriented, finished home site, the margins are less in those opportunities. To the extent that we're doing transactions that incorporate bond purchases and things that are more complicated, we're still seeing great margins in those opportunities.

Okay. And then if we look at the cash, you all did spend a lot on development. You've got some debt due in coming in '13 and '14. Your equity is run a lot. You still, it sounds like, have a lot of opportunities to buy more land. Where do you think you wind up this year in cash and how do you envision either retiring or rolling your debt that you got coming in '13 and '14?

Stephen, this is Bruce. We feel very comfortable with our cash position today. The ending cash balance at the end of the year is going to be dependent on the additional opportunities we see with respect to land purchases through the year, what we decide to go forward with or not, as well as whether or not we have a revolving credit facility in place, which we do expect is likely to come soon. So we feel pretty comfortable on the liquidity side and on the debt maturity ladder side, you can expect that we'll continue to push out debt maturities or we'll use cash to pay down upcoming maturities.

Additionally, I just want to highlight that I've noted in my comments this morning and before that as we get towards the end of this year, we expect that some of the earlier investments that were made on balance sheet through Rialto will begin to cash flow more consistently. That's beyond the earnings statement, pure cash flow, that cash will start return to corporate. So that really helps our cash position as well.

Okay, I've got you. If you look at the earnings power for Rialto in '12 or '13, can you put any type of framework around that?

Well, Rialto, as we've noted so many times before, is very difficult to put a number on. It's in large part because it is an opportunistic business where we focus on maximizing profitability from the assets that we've purchased. And as markets start to recover, the assets that we currently have accumulate greater value, and we want to carefully manage to maximize the return. So it's a lot of a timing issue, Stephen, and we're just – we're going to avoid giving guidance, but say that we're continuing to be very comfortable with the underwriting that we began with and where Rialto is going.

The next question is coming from Bob Wetenhall of RBC.

Question, massive increase in sales, I was hoping maybe Bruce could give us some insight into what your thinking would be a normalized level of SG&A spending if orders remain in the current trajectory?

Well, let me just say, Bob, that if you go back over the last decade before the peak, we were used to running our SG&A expenses as a percent of home sales in the 10% range. So once you get back to a normalized, let's say, around 4 per community per month, that's where we would expect to get to as far as our SG&A levels. Now we're not currently at the 4 per month, but that's where we expect to get to.

Is that something that's realistic to expect by end of year?

It depends on the market. It's hard to tell. The trend is going in the right direction, whether or not we get to a normalized pace by the end of the year, we'll have to wait and see.

Okay, that's helpful. And I think in the prepared remarks, it was noted that 45% of unit count that's being sold was purchased on land that was acquired in 2009 or afterwards. I wanted to understand, what do you think by year end that mix shift will be, will it be 50% or 60% or do you have an idea that you could provide us?

It'll be probably just shy of 50%.

The next question is coming from David Goldberg of UBS.

My first question, Stuart, in past conversations and I think on the last call, you talked about mortgage market liquidity. You talked about underwriting standards, and there seemed to be some optimism that underwriting standards might loosen as we look forward. Now it doesn't feel to us like we've seen much change in underwriting in the past 3 months. I'm wondering if you're more optimistic than you've been before that you're going to start to see maybe looser underwriting as we move through the year?

Well, that's a tricky question, David. You've seen FHA come out with new standards that are really going in the opposite direction where we think there's going to be some tightening down. So it's going to be a mixed picture. I do think we're going to see some reversion to normalized underwriting standards. It wasn't too long ago that someone that didn't have a 700 FICO score just wasn't going to get an approval. And in today's world, we are seeing approvals with lower FICO scores. Now there are a lot more details that go into all of that. But the movement has been in the direction towards a more normalized underwriting standard. With that said, there will be some tightening at the margin. The market will adjust. I think that the driver today relative to mortgages and demand in general is the fact that the appetite for people to move back into for-sale housing is very strong. And customers are starting to alter their credit landscape, their personal credit landscape and whether it means getting some additional savings for additional down payment, getting a gift from parents to afford additional down payment, cleaning up their credit card balances, improving their credit scores, getting past the 2-year window for a short sale or 3-year for a foreclosure. Whatever it is, people are pushing hard today, harder today to fit within the windows of credit standards and credit standards are getting more towards normal. So it's hard to really say that there's going to be loosening or how it's going to loosen. But it seems that the pressure from the market, together with the lending world's moderation is going to get us to a better demand picture.

Got it. My follow-up, and maybe this is for Rick, and realize this is kind of a -- maybe a vague question or difficult question to ask, but a lot of folks are looking at the new land acquisitions and talking about margin trends on new land acquisitions and pricing. I was hoping we could think about bit a different way, of the land that you kind of put under contract of either option or you've bought outright in the last say, x quarters, whatever you want to say, I'm wondering what percentage of it do you think is deemed bought below replacement cost? In other words, the 200 basis point of additional gross margin you're getting on new lots versus old lots, how much of that is just because the market is giving you enough distressed opportunities to buy land below replacement cost? And at some point in the future possibly if we ever saw land prices go back to replacement cost without home price appreciation, that would just come from land prices going up essentially would cut down some of that margin?

Well, it's a very interesting question because at some point in the cycle, we're going to come across some of the communities where you can buy the asset, still at a price that's lower than what the infrastructure cost is on that's put into that community. But they just don't pencil out yet today. The thing to keep in mind as you look at our land purchases, and this may be different for some of the competitors out there, is the pipeline of activity that we've had, as I highlighted today, these deals that came on in the first quarter were really priced and brought on 2 years ago. So this 3,500, 4,500 homesites of things that really came on in Q1 were priced a long time ago. So were going to get the benefit of that gross margin differential for a while. As we look forward, depending on what is happening in the sales environment and price appreciation, which will come as there's more and more activity and homebuyers are out there, we think it'll get to be more of a normalized land environment where you can make a good building margin and you make your margin, extra margin when you do some development.

The next question is coming from Jade Rahmani, KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask a broader market question. Do you believe new home sales could start to evidence the potential to eventually outperform resales as evidenced either through your results or other major builders? Do you think this is a function of communities that you're able to open in better markets? Because over the past 2 years, we've seen the share of new home sales fall to below historic normal levels, just how do you view this market developing?

Well, look, we're going to have to let the market unfold a little bit to see how it actually works out, but there are a lot of existing homes on the market right now in secondary locations that are trading at very low prices. There's still a tremendous amount of investor activity in the inner-city and outer city locations that is driving volume of existing home sales. I think that as new homes are developed in and around the pockets of real activity where supply is constrained, new homes will start to regain their footing relative to existing homes. You're right in terms of number, both in terms of number and in terms of pricing, new homes have kind of lagged position relative to existing homes or their historic position relative to existing homes. We think, it feels like that trend is starting to turn a little bit, but we're going to have to give it a little bit of time to see. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just on raw materials, a clarification, does your gross margin guidance account for potential price increases you're seeing? And what kind of visibility do have into construction costs a couple of quarters from now?

As I noted, we believe that with price improvement, our sales price, combined with our purchasing program where we've built in long-lasting value engineered opportunities, that we'll be able to offset that pricing pressure. So we see margins relatively staying in a range as we look forward, 19.5% to 21%, and being able to offset that pressure that you talked about.

The next question is coming from Jack Micenko of SIG.

Most have been asked and answered. Just wanted to revisit the Rialto REO expense line for a minute. I know it's lumpy. I know it's hard to predict, I know it's -- you don't know what's coming in and it's part of the strategy. But the $12 million number, is that -- I'm trying to figure out how much of that is maybe some catch up or was there an accrual in there? Or should we think about that number being a real number, a real part of the cost structure going forward at least until you begin to slow down and do more restructuring versus REO?

Well, there clearly is a -- this is Jeff. There clearly is a catch-up component to that because when you take title to some of these assets, you do have your prior year taxes that you're going to pay and then there's also improvement cost that you might put in, in order to get the assets ready for sale. So some of that is upfront. Some of that is upfront expense.

There's no way to quantify what maybe percentage of the mix that would have been in the quarter or anything like that?

No, not really. But the property tax component, the majority of that does relate to prior year's taxes. So clearly, that's not a recurring piece. But it's a little hard to try to quantify what a run rate is if that's what you're trying to get to.

Yes, that's what we were looking at. And then just real quick as a follow-up, can you compare average down payment and FICO in this quarter on the orders versus maybe a year ago?

Versus a year ago, there hasn't been much change. It's remained in the low 700s. It's been very consistent over the last year, not much change, and down payment hasn't changed overall for the company average either. It's been very consistent over the last year.

The next question is coming from Adam Rudiger of Wells Fargo Securities.

I just want to get a better understanding of gross margin. Bruce, was the $2 million of impairments you've mentioned, was that in cost of goods?

That's all in cost of goods this year. That's correct.

And so if I were to adjust last year's gross margin and this year's gross margin to reflect those and just look at a pre-impairment gross margin year-over-year, looks like it was pretty flat, yet you had some real solid revenue growth and incentives were flat. So I was wondering if you could just address what some of the negative offsets were year-over-year within cost of goods?

So if you were to strip out the $2 million, the gross margin was 21.3% versus prior year's pre-impairment was 21.1%. So it was at the high end of the range that we've given, and it's up about 20 basis points over last year, if you were to strip out impairments.

Okay. What I was getting at -- I would have expected, given the revenue increase, maybe a little bit more expansion, so I was just wondering what the negative offsets were to the operating leverage on the revenue side?

So first quarter did increase as far as revenue goes, but I think that's at the high end of the expectations that we had. So I wouldn't really view that there were any negatives that came through this quarter.

Okay. Can I ask you on backlog, it's the highest it's been really in -- since 2008, and so I would think your ability now to cover your fixed costs out of backlog is going to be a lot improved, and in some ways, that could negate a bit the need to build spec home and do the even floor production a little bit. So I was wondering if, as the backlog stays at this level or continues to grow, should we expect any decline in spec building or decline in backlog turnover?

Actually, if you look at the statistics I gave this quarter, you did see a decline in terms of the number of homes under construction that are unsold. So we are starting to see that, which is very helpful, because incentives tend to be a little bit lower on homes that are sold before they're started. So this quarter again, there were 1,523 homes under construction that were sold and 2,293 that were unsold. That's a higher percentage of sold homes than we've seen in quite a while.

This is Jon. If the trend continues and we're able to continue to build backlog and what you're saying, we'll start to see more evidence of we'll be able to grow our margins more effectively, greater backlog and less pressure on moving spec inventory quickly.

The next question is coming from Megan McGrath, MKM Partners.

Just a couple of quick follow-up questions. I wanted to ask you a little bit on appraisals, we're hearing from some builders that it does feel like appraisals are moving in your direction, recently maybe because of lower REO inventory. So I'd love to hear your take on that and if that's one of the reasons you feel like you're getting some pricing power back into the market?

I think in most markets, we are seeing a lessening of the issue with appraisals coming in. There tends to be some differences in markets or in type of appraisal. A VA appraisal is different than some of the other ones. But generally speaking, we are seeing an improvement and less issues at the closing.

It's kind of a natural phenomenon in the better markets. There are fewer distressed sales to be found nearby, so you're going to have better comps included in the appraisal, and we're definitely seeing less issue with appraisals.

Great. And then just sort of a bigger picture question. We've heard probably over the past 6 or 9 months about builders sort of shifting away from the first-time buyer and more to the move-up buyer, but some of the comments you make about household formation improving and getting better make me -- and about the anecdotal story about someone moving out of their parent's basement makes me think that the incremental buyer really is the first-time buyer. Is that true? And do you want to stay more focused on the first-time buyer? Or how do you see your product mix changing over the next year?

Well, we feel that a well-balanced program between both buyer groups is the way to really be because there's going to be constant movement from first to second, and what we're really focused on is finding the right communities for the people that are buying homes, whether it's first or second. There's no question that there is pent-up demand on the first-time buyer program. But you got to be really careful to make sure that you're positioning your product in the right locations and have it priced at a point where they can qualify for those loans.

And I just want to highlight that we didn't say that they were living in the basement.

And our last question is coming from Dan Oppenheim, Crédit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: Was wondering if you can talk a bit about the opportunity for Rialto as you see it. You had the business for several years now. Environment's getting a bit better, credit's more available and more competition out there, how much more do you see in terms of the opportunity for that business and the capital that you have, if you can describe that, start with that?

Yes, I think I -- this is Jeff. I mentioned, I touched on it a little bit in the prepared remarks and the fact that in terms of the pressure, a lot of these lenders want to get back into the lending business, and they still have a lot of these assets that are still overhanging. So we see the distressed side of the business on the opportunistic side continuing for some period of time. But while saying that, we also see sort of a reformation of the capital markets and a lot of the skills that Rialto has developed just is very similar to what we did back in the days of LNR. A lot of those skills apply as the markets come out, and as capital market reform in terms of being a liquidity provider and using those same skill sets in terms of making nonperforming loans perform again or dealing with the underlying real estate. So we see it as a growing opportunity. There's still 3 -- there's still, over the next 3 years, $1 trillion of commercial real estate debt that's going to be coming due. And something's got to be done with all of it.

But with that said, Dan, I think you properly highlight that distress is a depleting opportunity base. And we've recognized that from the beginning. Rialto and its distressed program is a terrific platform on which to build a management team and an operating group that is well prepared to pivot into very different lines of business. You're already seeing that with our entry back into the CMBS business. Within the opportunity fund, we're buying B pieces as we did in the old LNR days. And we're starting to grow new business lines that will take the place of the existing distressed business, but build on the strength of the management team that has been put together in that context. Daniel Oppenheim - Crédit Suisse AG, Research Division: Great. And I guess one final thing, was wondering in terms of the focus, in terms of the homebuilding operations, when you think about the potential for incremental margins by improvement in absorption versus working to lift pricing in some of these communities, how are you balancing that in terms of just where would you like to get that in terms of the sales per community? Or is it now shifting in terms of, at this level you're pushing more in terms of price versus the absorption?

This is Jon. It will – as we've said, it will vary community by community. Where land positions are tight, we'll look to obviously maximize price as much as possible and find that balance of a norm absorption of one a week. To having pricing pressure, I think you'll see as the markets continue to recover, we'll have the ability to both improve pricing and absorptions, but we will look at it on a community-by-community basis to be able to maximize our profitability.

Okay. So listen, thanks, everyone, for joining us for our first quarter review. I know we took a little bit more time, but we felt that given the way that the national debt is being reported and some of the questions that you all have voiced, it was worth spending a little bit of extra time. If there are additional questions, of course, you can give us a call. We appreciate your attention. Thank you.

This will conclude today's conference. All parties may disconnect at this time.