Good morning, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter of Fiscal Year 2012. Today's call is being recorded and will be hosted by Allan Merrill, the company's Chief Executive Officer. Joining him on the call today will be Bob Salomon, the company's Chief Financial Officer. Before he begins, Carey Phelps, Director of Investor Relations, will give instructions on accessing the company's slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Phelps?

Thanks, Jody. Good morning, and welcome to the Beazer Homes conference call discussing our results for the quarter ended December 31, 2011. During this call, we will webcast a synchronized presentation which can be found on the Investor page of beazer.com. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in our SEC filings including our annual report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made and except, as required by law, we do not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for management to predict all such factors. Joining me today are Allan Merrill, our President and Chief Executive Officer; and Bob Salomon, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan.

Thanks, Carey. And thank you for joining us this morning. On our call this morning, we will recap our results for the first quarter, discuss the current homebuilding environment and update you on our current operational objectives and goals for the year. I'm pleased with the results our team delivered to start off fiscal 2012. For the first quarter, we recorded 724 new home orders, which is up 36% over the first quarter of fiscal 2011. The sales increase reflected a growth in communities of under 10%, but more importantly, a better than 25% increase in sales per community or absorptions. This is a direct result of our efforts to be more competitive in every community through the No Community Left Behind initiative we adopted in the fourth quarter. We closed 867 new homes, up 67% over the first quarter of fiscal 2011 and we ended the quarter with a backlog that reflects a similar improvement over last year. We generated homebuilding gross margins of 20.2% compared with 17% a year ago. Excluding a significant warranty recovery, this quarter's margins were 14.3% as we made feature, pricing and incentive adjustments to ensure that our sales pace was both faster and more broad-based. We reported positive EBITDA and positive net income. The positive net income was a result of a noncash $36 million tax benefit and a warranty recovery. While this doesn't reflect the commencement of sustainable profitability, we aren’t going to apologize for making a bit of money in the quarter. And finally, we maintained substantial liquidity ending the quarter with $273 million in unrestricted cash. These results were achieved despite persistently difficult market conditions characterized by a lack of urgency in the part of buyers and extremely inefficient mortgage origination conditions. We are clearly seeing an increase in traffic in our communities, and we are confident that significant pent-up demand for new homes is forming in many of our markets. But this demand isn't broadly translating into new home sales despite record affordability, very low interest rates and steadily rising residential rental rates. At the risk of oversimplifying the psychology of prospective homebuyers, we think there are 3 dominant reasons for the disconnect between the positive indicators and new home orders: first, fear of home price is falling further; second, concern about the overall direction of the economy including job security, stock market volatility and with some buyers, concern about the impact of potential changes in national housing policies; and third, a dysfunctional mortgage origination environment. Let me show our views on each of these. On the issue of home prices, there is solid evidence of home price stability in most of our markets. In fact, even the most pessimistic housing experts now seem to believe that we are at or very near the bottom for home prices excluding the impact of distressed home transactions, which continue to overhang a handful of markets like the Sword of Damocles. For our part, prices have remained flat although we have tweaked incentives in certain of our communities to stimulate a more competitive posture in the market. On fears about the economy, there isn't a lot we can do for buyers other than to relentlessly point out the emergence of job growth and the truly historic levels of home prices and mortgage rates. The #1 thing that propels housing is jobs, so we draw encouragement from any and all signs of job growth. It is the third leg of the stool, mortgage originations, where we have recently come to believe we can make a small dent in the problem. The mortgage origination environment is afflicted by a host of complex issues including unprecedented, confusing and time-consuming underwriting processes created by changing and still-to-be-finalized regulations. Originators are acting in ways that I can only characterize as inconsistent, creating a significant customer service challenge for us and taxing our ability to convert today's increased level of traffic into increased sales and closings. So in an effort to better assist our homebuyers with this unwieldy process, we have eliminated the exclusivity provision from our long-standing marketing services agreement with a national lender. Effective this quarter, we are making it easy for our buyers to consider a small number of carefully selected lenders at the earliest stage of their home financing process. We want our prospective buyers to benefit from a level of competition among a short list of providers on the basis of program, service level and, of course, pricing. These lenders have been individually selected at the division level and include national, regional and local lenders who have already demonstrated their ability to provide value to our customers. Going forward, we are going to be extremely focused on our customers' feedback on the service level of these lenders and if they falter, we will replace them in a heartbeat. This new approach clearly isn't a magic bullet that will solve the mortgage mess. But it is a way that we can differentiate ourselves from many of the other builders. Since we have no financial interest, in which lender ultimately provides a loan, we are able to sit squarely on the customer's side of the table. We think offering choices to buyers with a feedback loop of customer experiences is one way we can add to the value proposition of choosing to purchase a new Beazer home. Now let me turn to our goal of driving our return to profitability. This is, by far, priority #1. As I outlined last quarter, we have a 4-point plan to reach this objective. I will comment on each of these in order. First, we are totally focused on increasing sales per community in all of our communities. During the first quarter, our sales per community per month improved from just over 1 during the first quarter of last year to about 1.3 this quarter. That's a big improvement. Continuing to make progress on this objective is a vital component to growing our top line and in time, driving margin improvements. Second, we need to gradually increase our community count. We've added 13 net new communities since the first quarter of fiscal 2011 which represent an order growth of under 10%. Even though some builders seem to be in a bit of a frenzy to add locations, we're going to be cautious in the market until we feel we have really nailed down our own operations in our existing communities. Third, we know we have to get our gross margins up. Of course, better sales per community and more new locations will help us over time but we aren't about to just sit still and hope things pick up in our underperforming communities. Instead, we have chosen to be reasonably aggressive in creating momentum for any underperforming communities and on any old completed specs. The consequence of this approach, which is clearly on me, is that our gross margin, excluding warranty recovery, was actually down about 150 basis points from last year. This is a price we're willing to pay right now to make all of our assets more competitive in their local marketplace. Over the balance of this year, we are committed to competing for buyers on the basis of things other than just price. So we are working on the other Ps in our 4-P plans: product, people and promotion, to allow us to pullback or reverse most, if not all, of these incentives. Finally, we are committed to holding down and hopefully reducing our fixed costs so that increased unit activity and improved margins flow through to the bottom line. These fixed costs include both our overheads and our larger-than-desirable interest costs. For the quarter, our G&A expenses were down 13% in dollar terms from the first quarter of last year despite a much larger number of closings, reflecting the success of the cost-cutting initiatives we initiated last spring. We intend to continue this tight watch on cost as we move forward. Accomplishing these 4 components should enable us to reach our goal of returning to profitability. It is admittedly hard work and not everything we try will work. But our level of liquidity, our debt maturity profile and the flexibility in our capital structure provides us with the ability to work through this plan for a number of years if necessary. With that, I'll turn over -- I'll turn the call to Bob.

Thanks, Allan. We reported net income from continuing operations for the quarter of $700,000 or $0.01 per share, which included an $11 million benefit from a warranty recovery, noncash pretax charges of $3.5 million related to inventory impairment and a benefit from income taxes of $35.7 million. This compared to a loss in continuing operations of $48.3 million or $0.65 per share during the first quarter of fiscal 2011. The $35.7 million noncash tax benefit recorded this quarter, which is higher than I have previously estimated due to the addition of accrued interest, is a result of tax planning that created clarity and the recognition of some of our prior year unrecognized tax benefits. Please note that this was expected to be a onetime event. As Allan indicated earlier, our first quarter sales and closings were quite strong despite an increase in our reported cancellation rate. This higher cancellation rate is attributable in large part to the challenges created by today's mortgage environment. Facing changing qualification standards as well as burdensome and time-consuming processes, many potential homebuyers are encountering loan qualification issues or having problems selling their existing homes. Yet despite these obstacles, our orders were up 36% and closings were up 67% for the quarter. During the quarter, our backlog conversion was 60% which was less than our conversion rate from the prior year of 67% but roughly equivalent to our expectations for this quarter. As we've shown in this slide, there are a number of moving parts that impact this conversion ratio. First, in every quarter, we have homes in backlog since closings are scheduled for future quarters due to build times and product types. Second, cancellations occur in the normal course of business and of range between 10% and 15% of beginning backlog over the past 5 quarters. Third, we pushed 11% of our September 30 backlog in the future quarters due to various reasons ranging from credit repair and mortgage financing issues to construction-related delay. Since the beginning of fiscal 2011, we have pushed an average of 12% of our beginning backlog each quarter into future period. And finally, we sell and close a number of spec homes within each quarter. During the quarter, the December quarter, we experienced stronger to-be-built sales than we did in the prior year, in part due to having fewer specs on the ground, but also due to the fact that an increasing number of our prospective buyers desire the flexibility of designing and choosing options for their own home. As a result, we experienced a smaller relative pickup from closings of homes that were sold and closed into the same quarter as compared with the first quarter of fiscal 2011. As I look towards the second quarter and the potential impact of the factors listed on this slide, I believe that our conversion will improve from this quarter 60% but not be as high as the 75% conversion experienced in our fourth quarter. Let's turn now to our end-of-quarter backlog. Our solid sales results in the back half of fiscal 2011 continue into our first quarter this year, generating a strong backlog as we enter January. At December 31, we had 1,307 homes in backlog, seasonally lower than we had at the end of September but up 66% in units as compared with the same time last year. The sales value of our backlog at December 31 is $315.8 million, up 59% in sales value of $198 million last year. The ASP in our backlog at the end of December was $242,000 which compares to an ASP in the first quarter's closings of $216,000 and a trailing 12-month average of $220,000. ASP in backlog is an aggregate of future closings at any given point in time that will in fact be spread over several quarters. Therefore, the ASP in backlog can vary greatly and compares to the ASP of closings that occurred within a specific quarter to the different mix of products and markets. On this slide, you can see that there are many quarter-to-quarter variations in the backlog in reported ASP. So we suggest you look at the longer-term trailing fourth quarter ASP shown on the right side of the page to see the trends more clearly. The trailing 4-quarter ASP reflects a fairly stable trend and is nearly unchanged from a year ago. For the first quarter, our homebuilding gross margin, excluding impairments and interest, was 20.2% compared to 17% last year. Included in this quarter's margin was a warranty recovery of $11 million. In comparison, last year's margin benefited from a $1.4 million warranty recovery. While the magnitude of the warranty recovery this quarter was notable, our results in 8 of the last 12 quarters were impacted to some extent by warranty recoveries. Without these warranty-related items, margins would have been 14.3% this quarter as compared with 15.8% for the same period last year. Two primary factors contributed to this variance. First, the home sales environment remains highly competitive and has resulted in some increases in incentives and discounts in several of our markets, primarily Houston, Las Vegas, Maryland and Virginia. Second, as part of our No Community Left Behind mindset, during the quarter, we targeted price incentives to drive some sales in our underperforming communities. As we gained momentum in these communities and further improve our sales per community metrics, we expect some gradual margin improvement. I'm confident that by the end of the year, our efforts will improve our sales per community performance, will have a positive impact on our margin but it's unclear whether this improvement will start as soon as next quarter. Let me now turn to our G&A expenses. As a reminder, beginning with the September quarter, we pulled commissions out as its own line item in our financial statement. Excluding any commissions, total general, administrative expenses for the quarter decreased $4.3 million from the first quarter of fiscal 2011. This includes $3.3 million decrease in compensation and benefits primarily related to reduced headcount, a $1.3 million reduction in legal and professional fees and a $1.6 million reduction in stock-based compensation, partially offset by $1 million increase in sales-and-marketing-related expenses. As we mentioned last quarter, legal fees may be elevated and unpredictable for the next few quarters as a result of post-trial motions and appeals in connection with the trial involving a former employee. Operating G&A which adjusts for items such as legal fees, severance and stock compensation among others, totaled $21.6 million, down from $23.5 million a year ago primarily due to the cost cutting initiatives that we've talked about. Importantly, our operating G&A totaled only 11.4% of revenues during the quarter compared with 21.6% in the same period of last year. We are clearly benefiting from our cost cutting initiatives implemented last year and gained additional leverage as our level of closings have increased. This has created a current trajectory in operating G&A costs that positions us for significant fixed cost leverage in future quarters as we drive toward increased sales per community. For a detail of reconciliation of our operating G&A totals, please refer to the schedule in the appendix of our presentation. Now let me turn to our inventory. We have the benefit of owning an ample supply of finished lots in most of our markets. At the end of the first quarter, we had over 6,800 finished lots with houses under construction or ready to begin construction. Another 7,800 lots were under development and could be ready for use in the near future. At the end of the first quarter, we had just over 660 lots held for sale and approximately 6,500 lots in lands held for future development. As we have said in previous quarters, because we have such an ample supply of lots in inventory, our level of additional land spending is largely discretionary in nature. For the first quarter, we spent $58.2 million compared with $62.6 million during the same period last year. As Allan said earlier, while we intend to gradually grow our community count in the coming years, in the near term, you could expect us to essentially replace the land we're using. To that end, we approved the acquisition of 2 new land deals during the quarter. We will remain cautious with our land spending as we focus on improving the results of our existing communities. As a reminder, although there may be seasonal or other timing variations, our use of land during the year will typically equate to approximately 20% to 25% of homebuilding revenues. At December 31, we had 729 unsold homes under construction or completed representing the decrease of 153 homes from a year ago. We were pleased to have reduced unsold homes significantly from this time last year. As we look forward, we intend to control the level of spec homes very carefully. Our plentiful land supply and the recapitalization efforts we took in 2009 and 2010 provides us with a flexible capital structure and a comfortable level of liquidity. We ended the quarter with $273 million in unrestricted cash and have no significant debt maturities until mid-2015. But reducing our interest expense and/or extending our maturities remains a priority. We are encouraged by the recent improvement in debt and equity valuations in the sector and anticipate future opportunities to enhance our liquidity and capital structure as market conditions evolve. As you know, during fiscal 2011, we launched an initiative to buy and rent previously owned homes. To date, we've nearly reached our self-imposed investment limit of $20 million. We continue to believe that it is both desirable and possible to scale this business with external capital. And I'm hopeful that we'll have a more detailed update on this effort prior to our next earnings call. With respect to our deferred tax assets, as we have previously discussed, the dollar value of deferred tax assets is significant and totaled $465.8 million at the end of December. While we are unlikely to be able to use the entire DTA due to some IRS change of ownership limitations, our current expectation is that upon the resumption of sustainable profitability, we will be able to utilize approximately $395.8 million to offset future taxes. The tax claim that resulted in this quarter's $35.7 million noncash tax benefit directly reduced our deferred tax assets. With that, I will turn the call back over to Allan.

Thanks, Bob. So I'd like to end our comments this morning by reiterating my confidence in our operational improvement plans. The positive order and closing trends in the first quarter confirm a clear pattern of recovery. After 3 solid quarters of new home order growth and 2 quarters of increases in closings, our trailing 12-month results are moving in the right direction. It's obvious that we have a lot of work in front of us but every one of my colleagues here at Beazer are committed to creating our own recovery, not simply waiting for a recovering economy to bail us out. We are going to try and provide line item guidance for this year but I can't confirm that our goals are unchanged. For fiscal 2012, we expect to sell and close more homes than we did last year, generate positive EBITDA for the first time in years and preserve and protect our liquidity. While our visibility into the economic conditions for the remainder of the year is limited, I believe that we will benefit from a gradually improving housing market. We are taking the steps necessary to drive improvement in our revenues while maintaining an efficient cost structure, looking for new opportunities to generate profits and investing in future growth, all with the objective of accelerating our return to profitability. I look forward to updating you during future calls on our progress as we work to implement these path-to-profitability strategies. With that, I will turn the call back to the operator to lead us into the Q&A.

[Operator Instructions] Jay McCanless.

Question I wanted to ask, with the discussions right now about bulk foreclosure sales starting up, have you guys given any thought to what that might do to appraisals and/or impairments in some of the areas like Arizona and Florida that you own?

It's a good question, Jay. I think the -- there's a lot we don't know about the -- with how these bulk foreclosures would take place. I mean, when you're in the portfolio sales, trying to assign value to individual homes becomes very challenging. But I can tell you that those homes that have already worked through the foreclosure process have clearly had an effect on appraised values. But I think that the investor demand for those properties is high enough that we're announcing increases in the prices for distressed homes. Even though they're priced below where the regular resale market is and clearly below where the new home market is, there is a lot of investor demand for those properties. So I think the bigger issue that we want to work with the industry on is making sure that when appraisals come in on new homes, that they take into account energy-efficiency features, that they either eliminate the distressed transactions because they're not comparable or at least the appraiser has done a physical inspection of that distressed property so that they can make an appropriate adjustment based on the condition. But I would tell you that the bulk sales, in and of itself, I don't think is going to prove to be a big issue on new home prices.

Okay. And then my second question, just with so many of your markets now focused on the East Coast and East of the Mississippi, do you believe that you had some benefit in Q1 from warmer weather? And do you think you may have stolen some demand that would normally show up in Q2 and Q3?

Well, as I look at the mix of businesses that we've got, our west businesses and our southeast businesses did pretty well in the quarter. Our -- what we call our E segment, which for us is New Jersey, Maryland, Virginia and Indianapolis, actually were down in orders year-over-year. So I don't think we got any benefit. I sure hope that didn't reflect stealing or pulling forward any demand. We really struggled in the period and I think a lot of it was self-imposed. But we have real issues with spec sales canning during the quarter in those markets which was one of the primary things that led us to make the changes in our mortgage program that we did.

Next question comes from David Goldberg.

My first question was about the new lender choice program that you're adding more lenders. And I'm just wondering with how that -- if it complicates the ability to be on top of the mortgage process, if you sell homes, and we've heard from other builders that have told us that, for their clients as an example, if they've used outside lenders, they might have to push closings because when they got to the closing table, everything wasn't together. Now clearly, you'll be more on top of it than that because it's not like pure outside lender. But I would just imagine as you add more lenders to your program and you give them more choice, it's going to be more complicated for you to be on top of the situation. So I was wondering if you could talk about your views on that and maybe how you -- what kind of controls you put in place to make sure that's not an issue?

It's a great question and I can't tell you definitively it's not an issue. But let me give you some more color around it because I think it's actually not quite as concerning as folks might think. First of all, we've limited the number of lenders in each division to 3 lenders that we're working with. So it's not an unruly number. Now that number can change. But we've worked with that number and larger in recent years, notwithstanding having an agreement with a particular lender where we created a specific incentive to use that lender, there were still outside lenders involved. What we found is that there was very little efficiency even with a relatively high capture rate to one lender. We found that on a loan-by-loan basis, the effort, the pain, the trials and tribulations of the lender collecting documents, giving us a read on credit and moving that through their respective process whether we have one loan with that lender or 35 loans with that lender, it didn't cut down the number of conversations we had. It didn't make it any more efficient for us. So I personally talked to our closing coordinators in our divisions. But this is a local thing. That's not a national thing. And I think their view is that when you get a match of the right lender to the right borrower, actually the process gets a whole lot simpler. Where we spin our wheels and spend a lot of time is we when you're trying to put a square peg in a round hole and you're trying to get a loan through a lender, it's really not a good fit. And that's really where our biggest inefficiency is. So while I'm very open into and accept the premise that more lenders does create a little different risk profile, I will tell you that trying to get everything to be kind of one size fits all through one program or through one lender had its own inefficiencies. And I like very much the position that we've got with buyers that we're on their side.

I think that makes sense. My follow-up question, I just want to make sure I understood in the commentary. Bob, I think you mentioned, and Allan, as you mentioned before about some of these No Communities Left Behind and maybe some more price incentives in these communities to drive some volumes. Is the view that that's going to be kind of a consistent theme as you work through some of these underperforming communities? Or is it more, and I think this is what you guys were trying to say was that as you get the sales pace to start to ramp up through some of these targeted price incentives, that eventually will kind of wean off of them as just sales volumes go up and maybe that looks better to new buyers that are coming in. So if you could just comment on that, I think that it'd be helpful.

Okay. Yes, it's a good point. And the latter of what you said is what we were trying to say. There's no question that when I look at with our teams a community that wasn't working, we needed a framework to have a discussion about that. What's not right about it? I can't move it, I can't make it someplace else. Well, is our price right? Is our product right? Do we have the right sales person there? And are we promoting it correctly? Which leads to both do you have enough traffic in the community and is it the right kind of traffic? Is it the right buyer profile? Well, other than price, which you can stamp your fingers and make a change on or including features which is typically what we do rather than changing the base price, will typically include a feature. Maybe it's a granite countertop. That's a margin hit but it's not really a price change. That's easy, that's quick, that helps create immediate competitiveness. The other 3: changing out new home counselors or changing product, different structural options or a more efficient building so that we could take direct costs out, or tweaking the marketing locally so we're getting more of the right people in the community, those aren't quick fixes. Those aren't 30-, 60-day flip-the-switch and it happens. So that the discipline is really around analyzing all 4 of those parameters and having detailed written plans, and I look at weekly, what are we doing in these communities? And it's lazy and it's simple but it's to some extent necessary to stimulate this with a little bit of price. But as I talked last quarter, we've created incentive plans at the division level that manages both velocity and margin. So I promise, there's a high degree of alignment of interest between what our investors want, what I want and what our divisions are striving for to use those other aspects of repositioning a community than just price to grow into the kind of volumes we want to do in each community.

Our next question comes from Ivy Zelman.

If I can start with 2 questions and then assuming I get any color or further questions, but first on cancellation rates, you talked about the challenges there. And your cancellation rates at over 30% are much higher than your peers. So is it possible that maybe there's some, when the person's in the door and applying that needs to be tighter or some more levels of scrutiny? Because certainly you're significantly higher than the industry. And then secondly, when you think about gross margin today at 14.3%, you're also significantly below the industry and let's call it 400-plus basis points on average. Assuming that's the case and you talk about, Allan, 20%, 25% of your average selling prices, your lot costs, is that what you're buying today as opposed to what's running through the P&L? Because with incentives that -- you didn't disclose what percent of your ASP is incentive today. There's some big factor that's causing your margins to be so substantially below everybody else. So how do you close that gap? And maybe if you walked through the COGs and explained it to us, I think we'd be more, at least, clear on what the drivers going forward are going to be.

All right. Well, how about this, we'll have a division of labor. Let me talk about the can rates. I'll let Bob talk a little bit about the gross margins and the components to that. And then we'll see if there's a follow-up. On the can rates, I do think, Ivy, you're -- is that the premise of your question is right. I think in terms of people coming in the door and getting prequalified, that needs to be tighter. But part of that was in a mono lender kind of environment, we were getting, I think, some false positives. We were getting, hey, we're entitled to this business and yes, we can make this work and then when push came to shove and we're working through a deeper credit analysis, it was challenging. These weren't decisions made by our folks, these were reliances that we had. And I think, again, competition, we're going to have a better read on that buyer. The other thing, though, and I made this point in relation to one of the other questions, our can rate was either flat or down in the west and southeast, year-over-year. It was way up in the east. And within the east, it was particularly up on specs. It was basically flat on dirt. So what we've really isolated in the 3 divisions, the product type, where the can rate really got away from us. And I can put my finger on some very specific loan lending origination process improvements that I think will allow us to pull that back down. So I don't know that, and I've always believed, that comparing can rates across builders is a little bit tricky because the real risk in a high can rate is just you've got a ton of houses that you start. If you've got some discipline about when you release a home for construction, plus or minus a few 100 basis points in the can rate doesn't make that big a difference. We definitely want to capture that buyer. And if we're prudent about how we outlay capital against that, I'm okay with it. So I'm not going to try and chase some mythical can rate down to a low number. But in this quarter, we can tell you very clearly where the can rate blip came from and what we've done about it. And I think next quarter, we'll have a different story on both dirt and spec sales and where our can rates were by division. So that's a little bit more on that. I think, Bob, I'll flip the gross margin question to you.

Sure. Ivy, when you think about gross margins, you think about 20% to 25% component of the land. That's a blended consolidated number. That every market's not created equal, so some markets have a little bit higher and some markets have a little bit lower. And I think when you look at the mix of closings and where they're generated and that impact on that margin has a big impact. So it's not so much of the land cost but it's -- I think if you go back to the 50% of our communities previously creating 20% of the sales or so and trying to improve those, improving some incentives to get some of those communities moving has really been, probably the bigger driver than the land cost. Our land cost in our new pro-formas are in that same range, of 20% to 25%. Again, we operate and underwrite those deals, not so much on a land cost as a percentage but what's the return characteristics going to be for that new land deal.

I think the other piece of this -- and this isn't really the right form to try and deconstruct the entire income statement. But when we think about cost of goods sold, the land market is one that we don't control the pricing. Obviously, it's very competitive out there but I don't feel badly about our purchases in that 20% to 25% range. On the building products side and on the labor side, I think we're very competitive. I think having pushed purchasing back into the field last quarter allows us to be a little bit more competitive. And I think we can find some nickels and dimes in that. But I'll tell you, the area where we've killed ourselves is we don't get good leverage on our -- the fixed portions of cost at the community level that you really can leverage with better sales per community. And having a bunch of laggard communities that are selling less than one per month in that community, that's a margin killer. That's an absolute margin killer. So the area for us for greatest improvement in gross margin actually is job #1 on our path to profitability, increased sales per community. Because I mean, you could extend your point about our gross margins relative to the peer group. You need to say also, our sales per community have been lower than the peer group. And I think that's really the relationship that I'm focused on.

That's all very helpful. Just one quick follow-up on the price incentives. Can you say what they were as a percent of sales and what they were the last few quarters and what the trend is going forward in your view?

I tell you what. How about if we get back to you? I don't have it right in front of me. I mean, Bob, I don't know if you got it off the top of your head.

I don't have it off the top of my head, but [indiscernible].

Our next question comes from Mr. Mike Rehaut.

First question on absorption pace, I believe you said earlier in the call it was up about 25% year-over-year.

Yes.

I was curious if you could give us, just for reference, the last couple of quarters, 4Q year-over-year and 3Q year-over-year. And if you've seen any change in that pace as we've entered into January.

Well, I would tell you for sure, it was not up 25% as much as that in our fourth quarter. I mean, we really got on this bandwagon hard in the July, August time period. So it had a limited ability to affect us in the fourth quarter. It was clearly up, I think -- my recollection, around a low double-digit kind of percentage in terms of sales per community. I know on a trailing 12-month basis on that metric, we're just under 1.9, which is better. A year ago, on a trailing 12-month basis, we were at 1.55. So there is improvement that we've made during the year and more improvement this last quarter. Bob?

No, I think those numbers are accurate. I think you definitely have seasonality in the numbers and the trailing 12-months is the way to look at it.

And look, I think clear...

And any further improvement into January or...

January is going to be an interesting comparator, I think, for a lot of folks. I mean, we finished December very strong. We're very pleased with how we did in our first quarter. In our second quarter, we have traditionally run a fairly significant promotion. That promotion is really less about price than it is about interest and trying to create a velocity of interest and prospects, leads, traffic in our communities. It is pulled forward this year. We launched it actually yesterday. It's the first 2 weeks of February rather than where it's been the last 2 years which is the last 2 weeks of February. And I will tell you, I think it had a little bit of an effect. I don't have our January sales numbers yet, but I'll bet that our January was a little softer than some others will be because I have no doubt that, that is a lead into our promo. So I try and be a little careful about reading a January comp against last year just because of what we did with the timing of our promo.

Great. Just a second question, just to try and better understand the challenges you've had with the mortgage origination. Was there a particular profile of buyer that -- you were kind of mentioning, Allan, that you're trying to fit a round peg in a square hole. Was there a typical profile of buyer that really wasn't cutting it with the provider that you had in terms of either FICO scores or LTV? And you'd also said it was maybe limited to some geographies.

Well, unfortunately, it is very hard to generalize. But I will use the opportunity to give you an example because it's something I've actually talked in D.C. about -- tried to paint this picture for regulators and others that are interested in what's happening in housing finance. We had a 750-plus FICO borrower that was working with our preferred lender that was $50,000 plus in cash liquidity, better than 10% down. We were 2 days away from a closing and there was a requirement in a re-audit of an audit of the loan file to document a deposit that had occurred 6 months previously in the amount of $400 or $500. And initially, it wasn't -- it was sort of ambiguous what the $400 was. And yet you've had to say, in a common sense way, the reason people want to document sources of income and deposits is you want to be careful about where the deposit or where the downpayment for the home is coming from. And I think we all get that. That's important. But I'm talking about $400 against a $15,000 or a $20,000 downpayment. But many of that -- the borrower confessed that he won the NCAA basketball pool in his office. Well, that flagged the file, check marked known gambler, loan denied, missed closing, unhappy customer. That's not really a credit issue. It's not really a FICO score issue. It's an issue of everybody is so fearful about putback risk on their originations that there can't be any blemish or any question or any doubt because who knows, if you're a lender, whether 1, 2, 3, 4, 5 years down the road, somebody's going to come back and say, so you had active knowledge, you shouldn't have originated that loan. Now I am happy to say, some number of weeks later, we were able to get that buyer approved with a different lender and closed, but those kinds of things is not as simple as the FICO wasn't there or the income history wasn't there. It's little nits and nats. And I can't fault any lender for their specific processes, but it's why I think consumers are well served to have a couple of lenders working their file and working with them because these are very personal and entity-specific overlays.

Our next question comes from Dan Oppenheim.

I was wondering about the sales promotion that you're talking about, just it's being started now. With -- it seems that you're talking about less of an emphasis on incentives with this. Are you basically going into sort of, call it, the spring season with less of those out there so we are thinking that you'll be able to get the sales with what's going on but not using the incentives to get that as we go through fiscal 2Q?

Yes, Dan, I don't think that in year-over-year, the incentives are going to be particularly different. I really don't. They may be a little lower. They're certainly not. There's no consorted strategy that they need to be higher. Traffic is up materially, November, December and January. And our communities' interest is pretty high. I think we had a self-created bottleneck on the originations side that we weren't as good as we needed to be with that. I think we've addressed that. I'm sure it's not perfect. But I think we just need to use the things that we talked about, low rates, good affordability, tremendous energy efficiency which continues to be a big push for us to get people to commit. And candidly, I hope we jump the market a little bit by being a bit earlier in our promo to pull those buyers, even pre-Super Bowl, out of the market.

Got it. And then in terms of -- you talked about the mortgage issues on the specs and such. How much of it was an issue with the buyers versus an issue in terms of homes at all? Or was there too much finish in the appraisal issues then? Is there anything that, aside from having more lenders know that you're doing different in terms of how you're proceeding with specs?

Yes. I think on the specification levels, there are a couple of markets. Florida is really challenging on appraisals. We've got to be unbelievably careful putting anything in a home in Florida because of the appraisal problems. That's still true in Phoenix. It's a little less true than it was a year ago. But I would say that broadly, the appraisal issues are diminishing in both frequency and in severity. So the issue really is more at the loan file level than it is at the house level.

Our next question comes from Susan Berliner.

I was wondering if we could focus a little bit, I guess, on the unrestricted cash. And I know you guys have a lot of coupon payments this quarter. But I guess I was trying to figure out where all the cash went. I didn't know if some went to the rental program or if there is anything notable that you guys could address.

Sure, Susan. I think we can talk about it in big buckets. I mean, we had about $50 million of interest payments this quarter. We paid our portion of our South Edge payment. It was about $16 million. We had about $8 million in CapEx, of which I think $6 million was related to the preowned. So when you look at that, that's -- those are pretty much the lion's share of the cash decrease.

Okay, got it. And I guess going forward, I know -- I think a year ago, you guys had kind of articulated where you expected on restricted cash to end the year, which would obviously also kind of tie in to land spend. Are you guys going to provide those numbers?

We haven't talked about providing specific numbers but if you remember, we've talked about our interest borrowing is about $120 million a year. We're going to have positive EBITDA, and we're going to run our land on a basic replacement level for what we use. So I think when you think about those, it kind of gives you some indications to where cash will end up.

And if I could sneak one more, I guess, just with regards to the balance sheet, the new issue market is quite strong. Any comments on what you guys see in terms of raising additional debt going forward?

I think we were pretty encouraged with what's been happening with the recent issuances in the market and we keep pretty close tabs on what's going on. And as you know, in the past, we've been pretty creative with our willingness to issue debt as well as equity in the past. And I think going forward, we're going to be continued to be flexible. We're going to watch the market, and I think we will just continue to monitor.

Our next question comes from Kristen McDuffy.

Just following on Susan's question, could you talk a little bit about how you think about what part of the structure you would issue debt out? Would you consider secured debt or would you even consider a convertible? And then also, could you talk a little bit about revolvers? It sounded like from some prior builder calls that things were becoming more amenable to revolvers.

Okay. That was a mouthful. In the -- when we talk about -- let's talk about the revolver first. I think if we see the markets really improve and we start leaning into our land acquisition and with buildup, we would look towards putting a revolver in place. We feel pretty comfortable right now. But when we think about debt, there are circumstances that might make some sense as we move forward. We have no specific plans in place today. But there could come a time where the opportunities would make sense for us.

Okay. Let me just jump in. I also think, Bob's exactly right, we've got to be quite opportunistic. But we worked hard a couple of years ago to be in a position where we had a nicely laddered maturity profile. We had a lot of dry powder in the secured basket. And I think we liked the flexibility that those things present. We've got plenty of cash to run the business right now, so we don't feel a particular urgency by any pressing matter. On the convertibles market, it's clear we've got a couple of converts out there already. I think we've got as complex a capital structure probably as a company our size needs to have, so I think we'd be a bit cautious about that right now.

Our next question comes from Alex Barrón. Alex Barrón: I guess I was listening to all of your comments and strategies on the profitability or getting back to it. And I mean, I think you guys are making progress in the right direction. But the one thing that I continue to struggle with is the level of debt and therefore, the level of interest incurred. And I'm just kind of wondering how do you overcome that? Do you have any plans to maybe raise some equity or try to start paying down some debt or what you -- how are you thinking about that?

Well, I've talked about the path to profitability, Alex. And if we do the first, if we just execute our list, if we increased sales per community against a gradually increasing community count number and we keep our fixed costs under control, and I've defined fixed costs to include the interest burden and the overhead expenses, we can get back to profitability. If there is a way to accelerate that on any one of those levers, we would certainly look at it, have looked at it, we'll continue to look at it. But I don't think there's a silver bullet that's going to get us there. We're going to have to do all 4 of those things. Alex Barrón: Okay. And then my second question is something I've asked other builders. I mean, it's been about 6 years since the market turned down. It looks like it's finally bottomed. And obviously, there's been several million people who've lost their home to foreclosure and short sales and have been out of the market for a while renting houses. Are you starting to see any of those people qualified to be able to buy homes again? Are they coming back to your communities yet?

We have. In fact, some of the markets that went in early, Phoenix and Las Vegas are among those, we are seeing people who had short sales or foreclosures in '07 or '08 who are back to a point with their FICO scores where they're prospective and eligible homebuyers. We're on the very earliest wave of that, and I think we still have a year or 2 to go before we see a significant number of those folks. But we're starting to see the early signs of it, yes.

Our next question comes from Andrew Casella.

Just firstly on your revolver, that matures I believe later this year. Have you entered in negotiations with your lenders yet on that? And as far as when we talk about your liquidity and whatnot, would it be under management's consideration to, I guess, expand the current revolver to, I believe it's $150 million basket, and possibly tap incremental cash from that aspect?

We do have a basket of $150 million for first lane revolver. The revolver that's in place right now, it's primarily for letters of credit, which right now we have cash secured those letters of credit. We have not entered into any discussions at this point to extend that particular term. I'm sure that we will at the appropriate time. But we do have plenty of liquidity today and no maturity. So at the moment, we're not very stressed about entering into a brand new revolver.

So if you were to tap that $150 million basket, would that be under the same lenders or would you have to go to different banks on that?

I have no idea. I can't predict who would be interested in playing into a new revolver.

All right, great. And just one follow-up, regarding the warranty reversal, is that a cash inflow or is that just the reversal of an accrual?

It was a cash inflow. The accrual was put in place, I think, in 2004 and moneys were spent over the years. But this was a cash recovery.

Okay. And as far as including that or excluding it from EBITDA, just to get a clean number, would you consider that to be a deduction? Or do you think it's good to include that as far as just getting a cash EBITDA number?

I think it's good to include it in EBITDA. Again, in the past, the cost related to those reserves were deducted from EBITDA. So I think just because the timing of the recovery is several years in the future, I still think it belonged to EBITDA.

Our last question comes from Joel Locker.

Just on your community count, you mentioned it was up 13 year-over-year. What would it have been if you included the discontinued operation communities?

Well, I don't have that because from a discontinued -- actually, I don't even have that calculation.

I think the delta is like 10.

Maybe.

But it would have been in both camps. I mean disco ops a year ago and disco ops this year would be in both cases a number under 10. The differential is pretty insignificant.

But wasn't there -- I mean, do you have any communities open now that are discontinued or are all those closed? I didn't see any orders.

To be honest, we have less than 5 homes remaining in disco ops that are for sale. So I don't think you can call that a community.

Right, right. And then your interest expense of $19 million running through that line, I mean, is that just going to be there for a while just based on inventories being relatively flat?

I think it was based on a couple of things: inventories being flat, level of closings for where you relieve that interest expense. But I think given the incurreds level in relation to the inventory level for a period of time, that is going to stay. It's going to be geography, on the balance -- in the income statement as to whether it's in COGS or below. But I think you could expect that to happen.

Right. Just the last question on your -- what -- did you have a finished spec count and just a total amount of dollars in customer deposits?

I don't have -- well, the customer deposit number, I don't have off the top of my head but the finished spec number is about $380 million, which is on Slide 16.

Thank you for participating. This concludes today's conference call. You may disconnect at this time.