KBH
#Good question, <UNK>.
You've followed us a long time, so you've seen our movement back and forth in the different buyer segments.
We like to call it moving with demand, we'll go where the demand is.
Demand is not just income and activity levels, it's ability to get a mortgage.
And if you look back over the last few years, in 2008, 2009, even into 2010, I think our first time buyer business was 60%, even 70%.
Over the last three years, it's kind of interesting, our first time buyer mix has ranged right around 50% for the last three years.
And if you put that in the context of how much our average selling price has lifted ---+ I think it is over $100,000 in that period, it shows you how we have been able to flex, and find a first-time buyer in these higher income, more desirable submarkets, where they have an easier time getting a mortgage.
And underwriting is getting easier, but it is not easy yet.
And our choice right now is to continue to target those areas that are more land-constrained.
So it's harder to bring things to market, but it's also where the higher income, more likely to get a mortgage first-time buyer is today.
And depending on the market, as they've each recovered at their own pace, you'll see us go a little further out from the job core, because demand is stronger out in the ring around the jobs.
A good example would be the Texas cities, where the economy has recovered pretty nicely, and you have a fairly typical housing recovery, where our first-time buyer percentage is higher.
It's easier to get land, because you're out in the B locations, and you can run your normal business.
Because many cities we are in, where the recovery is still restricted to only a few select submarkets, and we're encouraged with the inland areas of California, but they're is still nowhere near as strong as the coast.
So our tilt will be to stay as close as we can to the coast, until you're really comfortable that the more peripheral areas have firmly recovered.
And there is real demand and a real capability for that buyer to get a mortgage.
So I think you'll see us over time slowly migrate out.
We're not pushing out right now.
We're continuing to stay in high quality locations, and moving with that demand for now.
Yes, definitely would not.
We have ample opportunities closer in.
As I said, at some point you will see a start to migrate a little more further out, and go after the lower price products.
But it will be an evolution in each market, and it will be incremental business, not a replacement business.
We're going to hold ---+ we like this business we're developing in the urban cores, and near the employment centers.
So whatever we do, would be accretive to the current business.
Thanks.
Right.
I think if you look to our 10-K that was filed after we announced the share repurchase plan, we did revise and refine some of the capital allocation decisions that we had made for the year, and disclosed them in the 10-K, and we talked about, probably be at a maximum about $1.3 billion for the year.
And it did reflect anticipating $100 million or so of investment and reinvestment back into the Company in the form of repurchasing shares.
So it is dynamic.
Our land spend and investment decisions are dynamic, and we made that decision early part of the year.
As far as impacting future years, I mean, we're very well-covered.
2016 is a non-issue.
The communities we have open and we're selling out of, and delivering out of, really will have absolutely no impact on our delivery or revenue forecast for the current year.
I would say, the relatively modest amount that we've invested to date in the share repurchases, would have very little impact on future years as well.
So we're gaining more comfort in the coverage for 2017 deliveries, and actually starting to work out beyond that.
And we'll continue to search for those opportunities, and try to grow to business in a balanced fashion, as we talked about during the prepared comments.
We really haven't guided, and don't intend to guide at this point on regional margins.
The margins move ---+ predominantly, the number one movement in our margin as a company is community mix.
And it's openings and close out communities that we're seeing, and not just on really on the delivery side, as opposed to the selling community side, and that can move the margins quite significantly, even within a region.
So the number one determining factor for us is community mix, and then the second one is level of revenues.
We do typically earn higher margins in the back half of the year, when we have a higher revenue number and greater leverage on our fixed costs, that's included in our cost of sales.
And those are the two primary determining factors on our margin.
As we shared in the prepared comments, we like our position in Houston.
I don't know what the new home median price is today.
Last one I saw was around $310,000, $320,000 for Houston.
So we are literally $80,000 to $90,000 under the median price.
So we are well-positioned at a price point where there is still steady demand in the market.
We're watchful, because of the ripple with the price of oil, what does it really mean to the economy.
I think that's still playing out.
What are the major oil companies that were creating all those campuses there, what do they do with their staff and their teams.
And I would say that things, if anything, have probably stabilized.
I don't hear anecdotally anything that tells us it's getting any softer than it was in the fall.
So I'd say it's stabilized, and it's a large market, with a lot more diversification in the economy, than it had in the last oil crisis, frankly.
So we'll see how it goes.
But we like what where are prices are, and we're seeing good demand at those price points.
It's really just what we're seeing coming out of the backlog, and where the deliveries we see, delivering out in the second quarter are at.
I mean, it's ---+ the communities of coming from ---+ and right now most of the deliveries we have scheduled for Q2 are known to us.
So we do a bottoms-up roll-up of it, and look at it house by house, and community by community, and that's where is coming out of at this point.
As we shared in our comments, we're going through a trough in community count in the Bay area.
And we talked about it on our last call, that the delays that we've experienced in getting these things opened, also delay deliveries.
And we've had some ---+ I'll call it dilution to margin, because the Bay area has been less of our business than it typically is.
And that's why we were sharing the number of communities that are opening, pretty significant, and it gets us right back on track, second half of the year.
Want to give him the numbers on the ---+.
No, I mean, we've been talking pretty consistently for the past couple of years on ---+ looking at absorbing communities, or absorbing sales at about equal to our community count rate.
One of the reasons for that is, we have one of the highest absorption paces in the industry, and we're certainly in the top quartile with our current profile, and what we have been seeing.
So we're not interested in artificially pushing absorptions at the expense of margin, as we move forward.
And for guidance purposes, we don't have a crystal ball anymore than any of you do.
We basically look at, what's happening with the community count, and we think that's a good proxy for what will happen with our net sales rate.
I would also say in my opinion, if you are plus or minus 5% on absorption, it's a relatively flat number year-over-year.
There's a lot of ins and outs in the community count.
It's ---+ number one, it's only a 2 point average, beginning of quarter, end of quarter, it doesn't take into account timing of close outs, timing of openings.
And it's not an exact science.
So I haven't scientifically calculated what's statistically significant, but I don't think anything within that band is terribly significant, as far as the change year-over-year.
So that's just the way we look at it.
We're optimistic about the spring.
We're well-positioned with communities on the ground right now, going into, and as we just started the spring selling season.
And we'll see what the second quarter holds for us.
Right.
I'd certainly say, it's more the latter.
We love to see more option land on the balance sheet, and control land.
The opportunities dictates it, and we're heavily into, obviously the West Coast region for us, which is California, probably less opportunities here, than perhaps other parts of the country, that you might may be seeing with other builders.
So that's the primary driver.
It's not like we don't have a preference as a Company to put out a lot of cash and own all of our land.
It's just really coming down to the opportunities, the rates of return that we're seeing on the various opportunities, and the margin potential associated with them.
<UNK>, I would actually reiterate that even stronger.
We'd love to option every lot, because it helps your returns.
But when you're trying to focus on A location land-constrained markets, like the Bay area or Orange County or San Diego, it's very, very difficult to see any option activity, because the demand is still strong for the lots.
We'll get options wherever we can.
They're just hard to come by in A locations.
I'd say our mortgage company is an eight cylinder engine that's on five or six, and a year ago, it was on two or three, so we're making progress.
They're a nice business partner, and they definitely continue to elevate their execution.
So it's part of the reason our deliveries were better during Q1, was the conversion rate through HCM.
I also ---+ I noticed an interesting tidbit ---+ and I don't know what it means ---+ but within our closings in the quarter, the government loans ticked up.
There was more FHA and VA business than we've seen in the previous quarters, yet FICO scores held high, and first-time buyer was the same ratio.
So it could suggest that there's a little loosening in FHA underwriting ---+ I don't know.
The FHA did lower their mortgage insurance premium about six months ago, and that may have brought some FHA business back.
But our buyer mix is about the same.
The FICO scores are about the same.
The income levels are about the same.
So I'd say, it's a fairly typical buyer out there.
I think they want to be a homeowner, and we're seeing our can rate come down.
<UNK>, the communities we referenced are all in the Bay area.
And the Bay area is higher priced than any of the other areas we operate in frankly, in the state.
I don't know that we have the pricing with us, but it will be above the average for the region.
And that's ---+ we're reloading in the Bay area.
As I've shared, we've been through a trough in community count, and now we're quickly going to get it right back.
I think, overall for the state, we're still on track to continue grow community count, but it's a much bigger impact in the Bay area right now.
And I think to clarify ---+ just to clarify, <UNK>, just so you have a good understanding.
<UNK>'s comments were really focused on northern California and the Bay Area, and not the whole state, or the whole region.
On an overall basis, like I said earlier, we're anticipating a flat community count on an average basis, year-over-year.
So the grand openings will inch the ending count up a bit, from the end of the first quarter, relative to 2016 period.
And that should line up about the same, on an average basis with the prior year.
So little bit of balance, but I think on balance, we'll have more openings than we do close outs in total.
What <UNK>, as we shared, it's a balanced approach.
And we wanted to walk through with the share repurchase, and the land act capability that we shared, we'd be cash neutral for the year.
We are mindful of future debt.
And if we are cash neutral, we're positioned to take care of that debt at maturity, and we'll see what our strategy is at that time.
But over time, what we're looking to support the growth of the Company, and improve shareholder value like we did with the share buyback, and continue to strengthen our balance sheet.
And we think we have the capacity right now to do all three.
We didn't see that at all.
As I shared, we ended February with some good momentum.
And that's the month that there was all the volatility in the marketplace.
And I think if you look at a couple, who are both gainfully employed, and you now have a child, and you have the need to get out of your apartment, and move into a home, you're not worried about Wall Street volatility, you're worried about the second bedroom, or third bedroom that you need.
And on the street, out on Main Street, the consumer right now is favorably looking at home ownership.
Okay, everyone.
Thanks for joining us on the call this afternoon, and we look forward to sharing our results with you in the future.
Thanks.
