Jeffrey Mezger - Chief Executive Officer, President and Director Jeff Kaminski - Chief Financial Officer and Executive Vice President

Daniel Oppenheim - Crédit Suisse AG Nishu Sood - Deutsche Bank AG Stephen East - Ticonderoga Securities LLC David Goldberg - UBS Investment Bank Tom Austin - RBC Capital Markets, LLC Josh Levin - Citigroup Inc Kenneth Zener - KeyBanc Capital Markets Inc. Michael Rehaut - JP Morgan Chase & Co Buck Horne - Raymond James & Associates, Inc. Michael Widner - Stifel, Nicolaus & Co., Inc. Adam Rudiger - Wells Fargo Securities, LLC James McCanless - Guggenheim Securities, LLC Ivy Zelman - Zelman & Associates Michael Kim - CRT Capital Group LLC Michael Smith - JMP Securities LLC

Well, good day, everyone, and welcome to KB Home 2011 Second Quarter Earnings Conference Call. Today's conference call is being recorded and webcast on the KB Home website at kbhome.com. The recording will be available via telephone replay until midnight Eastern Time on July 7, 2011 by calling (719) 457-0820 or (888) 203-1112 and using the replay passcode of 3625696. A replay will also be available through the KB Home website for 30 days. KB Home's discussion today may include certain predictions and other forward-looking statements that reflect management's current expectations or forecasts of market and economic conditions and of the company's business activities, prospects, strategies and financial and operational results. These statements are not guarantees of future performance and due to a number of risks, uncertainties and other factors outside of its control, KB Home's actual results could be materially different from those expressed in or implied by the forward-looking statements. Many of these risk factors are identified in KB Home's filings with the SEC, which the company urges you to read with care. The discussion today may also include references to non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and other Regulation G required information is provided in the company's earnings release issued earlier today, which is posted on the Investor Relations page of the company's website under Recent Releases and through the financial information news release link on the right-hand side of the page. And now I would like to turn the conference over to Mr. Jeff Mezger. Please go ahead, sir.

Thank you, Kelsey, and good morning, everyone. I'd like to thank you all for joining us today for a review of our results for the second quarter 2011. With me this morning are Jeff Kaminski, our Executive Vice President and Chief Financial Officer; and Bill Hollinger, our Senior Vice President and Chief Accounting Officer. I will begin with some commentary on housing and the economy, and then I will talk about our Q2 results and how we are operating within the broader market. Next I will turn it over to Jeff, who will provide a financial overview and after a few closing comments, we will then open it up to your questions. The second quarter was a difficult one for us, especially given our low backlog levels coming into the quarter and a prior year comparison that included the positive impact of last year's federal tax credit. However, these reported results match the progress we have made and continue to make in our business. When you look closer at the numbers and take out the one-time charges, financially, we were roughly flat year-over-year despite approximately 500 fewer unit deliveries than a year ago. More importantly, we believe we have reached a turning point in many aspects of our business. We are growing our community count through opening communities in more desirable and stable areas, improving our gross margins, lowering our cost to operate and generating sales momentum that should result in positive order comps in the second half. All of these actions are aimed at restoring our profitability, and we expect to achieve this goal in the fourth quarter of 2011. Many of the recent national reports on housing activity reflect today's soft housing environment and illustrate that we have a way to go on the road toward a housing recovery. On the resale front in May, sales were down 3.8% from April, the fourth consecutive monthly decline, and inventory levels now stand at a 9.3-month supply. On the new home front, May sales were down sequentially 2.1% while new home inventory is at an all-time record low of 167,000 units. Just yesterday, the S&P/Case-Shiller Home Price and Conference Board Consumer Confidence Indices reinforced the continued weakness in economic and housing conditions. However, it is important to remember that when it comes to housing, the national data presents a picture that often blurs the reality of what is going on at the local level. When you focus on the individual markets and submarkets that make up the larger picture, there is indeed more positive news to be found. As I have said before and as we continued to see in the second quarter, there are markets in many cities located in desirable areas close to employment centers and good schools that are demonstrating stability. In these locations, inventories are at manageable levels with supply and demand in balance and prices that have been steady or even rising for many months. These are the areas in which KB Home is focusing its investment in new community openings, particularly in coastal California and Texas. There are 3 distinct market categories with their own price bands that we are now seeing emerge in housing: distressed sales, traditional resales and new homes, and KB Home can compete quite effectively in the latter 2. Reported pricing pressures are largely the result of cash foreclosure buyers and investors in the distressed category. We are seeing an increase in traditional buyers who are not interested in a foreclosure and are willing to pay a premium for a well-maintained resale or the benefits of owning a Built to Order energy-efficient KB Home. In most markets, monthly payments to own are lower than rent. Indeed, at the same time that home prices and low interest rates are making homeownership more affordable, rents are rising. The increase in rental rates is not because the American dream has lost its appeal. In fact, many public surveys have recently reported on the continued desire of the majority of renters to become homeowners in the future, and with an increase in consumer confidence, this demand can quickly become unlocked. The housing downturn has been deeper and more protracted than most of us imagined it would be a few years ago and as a result, many are wary of calling a bottom. Tighter mortgage lending standards and even a looming reduction on conforming loan limits are serving to further dampen overall housing demand. Most importantly, jobs and consumer confidence have not recovered, and both are critical in order to return to a more normalized housing market. In the meantime, we are staying focused on the desirable submarkets that have demonstrated stability, improving our product offerings to meet the needs of today's homebuyers and doing what we do best to differentiate our company in the marketplace and capitalize on opportunities. Turning now to our results, KB Home reported a net loss of $68.5 million in the second quarter or $0.89 per diluted share. Major contributors to the loss included an additional $14.6 million charge related to our South Edge joint venture and $20.6 million of abandonments and impairments. While we are not happy with these results, as I mentioned, there is meaningful progress behind these numbers. Our deliveries, gross margin and SG&A percentages all improved sequentially from the first quarter and based on our current momentum, we expect to see continued sequential improvement in these metrics throughout the second half of the year. We are also pleased to report that many of the positive trends we discussed in our last call with regard to sales and traffic continued in the second quarter. Net orders of 1,998 were down 11% in the second quarter compared to the prior year, a considerable improvement over the 32% year-over-year decline we experienced in the first quarter of 2011. We anticipate positive quarterly year-over-year order comps for the remainder of 2011. Moreover, when comparing the sequential increase in net orders from the first quarter to the second quarter of 2011, we saw an increase of 53% compared to an increase of just 17% in 2010. On a regional basis, orders in our Central region were up 5% year-over-year, and we were pleased to see the strength in the more stable Texas and Colorado markets. Our West Coast region was down 11%. However, we expect this comp to improve dramatically as our new community openings gain traction over the second half of the year. Orders in our Southwest and Southeast regions were down 23% and 29%, respectively. The majority of the shortfall in these 2 regions was related to decreased orders in Arizona and the Carolinas, where we have significantly reduced our market presence. In the absence of the extra earning tax credit influence on demand that we experienced in the first half of 2010, overall 2011 has shown a more typical pattern of gradual increases in home buying interest and activity through the spring selling season, albeit a pattern at low levels. At the same time, traffic remains strong. In fact, the second quarter of this year was our highest traffic quarter since 2008. Even though sales remain historically weak and the consumer continues to require a longer timeframe to make the home purchase decision, it is encouraging to see this more normalized pattern emerge. Serious buyers are returning to the market, and they are recognizing that affordability has never been better. As we open new communities in more desirable locations, we are seeing a larger share of higher-income first time, move up and active adult buyers reflected in our buyer profile and product mix. Our Built to Order approach, which gives buyers control over the size and structure layout of their floor plan, in addition to their home's design features, has allowed for this seamless and fluid shift. We opened over 60 communities in the first half of the year and expect to open an additional 45 to 50 in the second half. These openings are heavily weighted to California and Texas. As I mentioned, our customers are cautious in today's environment, and we are seeing that phenomenon reflected in our grand openings as well. Some of our new communities have been taking longer to achieve our anticipated sales rate once opened, but we do see this momentum build over the 90-day timeframe post-opening. In the second quarter, over 320 of our reported net sales came from first quarter grand openings, and we expect a favorable trajectory going forward as our recently opened communities gain traction and we continue to open additional communities in the second half. Today, we announced that we have acquired a sizable land and lot position in San Antonio from a private builder who is leaving the market. It was an ideal transaction for us as we were able to acquire the land position of a major builder in a market that has reasonable land cost and good housing fundamentals, without having to acquire a business enterprise and the liabilities that come with it. This transaction did not require a lot of capital and comprises approximately 1,900 lots, over 600 of which are fully developed in 11 communities. It is a great example of our focused growth strategy in which we can move quickly to be opportunistic and leverage a strong performing management team and our KBnxt business model in a targeted city. In fact, we expect to have our first Open Series model homes completed and merchandised in several communities by the end of August. This acquisition bolsters our already strong market position in San Antonio and is expected to provide incremental sales in the fourth quarter, an additional 300 to 400 deliveries in fiscal '12. In order to continue to fuel our community count growth, we have been investing in select markets and submarkets that we believe are positioned for positive housing growth, primarily in California and Texas. We have spent a total of approximately $300 million on land and land development in the first half of 2011, roughly 80% of which was in those 2 states. We are pleased with the investments we've been making and continue to commit our capital to high-quality assets in performing submarkets where we can begin to convert into revenue in less than 12 months. As we remain diligent in applying our investment hurdles and strategic criteria, we expect our land and land development expenditures for the full year to be approximately the same as 2010, around $560 million. Turning now to other recent developments. As we mentioned in our earnings release this morning, KB Home has selected MetLife Home Loans as our new preferred lender. MetLife is a strong consumer-friendly company with an outstanding reputation for customer service. We chose to sign a marketing services agreement with MetLife because we are confident that they will provide exceptional mortgage services to our homebuyers, allowing us to focus on what we do best: building high quality, energy-efficient, Built to Order homes. MetLife Home Loans recently ranked #2 in overall customer satisfaction and #1 in the category of loan officer performance based on an industry study of 14 mortgage originators by J.D. Power and Associates. There are companies, including MetLife, who are interested in forming a mortgage banking joint venture with us, and we are continuing to explore these options. In the meantime, we do not anticipate that this transition will result in any disruption for our customers or our delivery cycle. I also wanted to discuss our recent announcement related to the South Edge joint venture. We are pleased to have reached an agreement with the lenders in this matter, which was described in detail in our 8-K filing of June 16. This agreement provides a roadmap for selling our liability and eventually gaining ownership of the land. It also gives us more clarity on timing, which allows us the ability to start planning more aggressively for the future. Our business in the land-constrained Metro Las Vegas area continues to perform well for us despite the challenges in that market overall, and we believe the highly desirable Inspirada community has tremendous value for our business in both the near and long term. Now I'll turn the call over to Jeff Kaminski, who will provide more detail on our financials. Jeff?

Thank you. As Jeff mentioned and as we commented during the Q1 call, we knew our financial results in the second quarter would be difficult. If you look at the sequential trends, however, the improvement can be seen in many of our financial metrics. We expect this positive momentum to continue into the second half, which speaks to the improvement of our underlying operations and should significantly enhance our financial results. Our pretax loss in the second quarter of 2011 was $68.8 million compared to a loss of $30.6 million in the prior year. The current year quarter included $14.6 million of charges relating to the South Edge joint venture and $20.6 million of abandonments and impairments taken in the quarter. Excluding the South Edge impact as well as the inventory-related charges, our pretax results were essentially flat to the prior year in spite of a reduction of over 500 unit deliveries, primarily related to last year's federal tax credit. KB Home delivered 1,265 homes in the second quarter at an average selling price of $213,400, representing a conversion ratio of 75% of our first quarter backlog. This compared to 1,782 deliveries in the second quarter of 2010 at an average selling price of $207,900. We continue to improve our business efficiency, setting a company record in the second quarter for our average Built to Order cycle time of just 129 days between signing a contract and closing on the home. Our construction cycle time also hit a new low of 71 days. These compressed timeframes help us to effectively compete with resales in the market as we remain committed to our Built to Order business model. Our backlog at the end of the second quarter stood at 2,422 homes, representing potential housing revenues of approximately $502 million. This represents a 43% unit improvement from the 1,689 homes we had in backlog at the end of February 2011. Housing gross margin, excluding impairments and land option abandonments, was 14.9% of housing revenues in the second quarter of 2011 compared to 17.7% in the same period the prior year. On a sequential basis, our margins improved by 150 basis points as compared to the first quarter. Higher deliveries in Q2 provided a benefit of approximately 250 basis points, which was partially offset by other miscellaneous impacts. I would note that we have also closed the year-over-year gap in our margin performance significantly from a 5.4 percentage point difference year-over-year in the first quarter compared to just 2.8 percentage points in the second quarter. For the third and fourth quarters, we expect to see continued sequential improvement in our gross margins. Our selling, general and administrative expenses in the quarter were $62.5 million versus $83 million in the prior year and $49.6 million in the prior quarter. As a percent of housing revenues, SG&A expenses improved on a sequential basis by 2.2 percentage points from the first quarter of 2011, and we expect this trend as well to continue for the remainder of the year. We continued our consistent cost-reduction efforts during the quarter, further consolidating resources amongst our division offices and corporate functions and as difficult as they are, continuing our work force reductions. Since year end, there have been approximately 100 net positions eliminated across the company, with about half of the reductions occurring during the second quarter. These actions represent over $8 million of annualized savings in compensation and benefits. Offsetting the cost improvements were increased marketing and advertising expenses of over $3 million during the second quarter to support our new community openings, as well as higher variable expenses due to the increased order and delivery activity. Consistent with the terms of our agreement with the South Edge lenders, we took an additional charge of $14.6 million to address our accrual estimate relating to this issue to approximately $226 million. We maintain our valuation of the underlying land at approximately $75 million, consistent with what we reported in the first quarter and resulting in a net obligation of approximately $151 million. We expect the cash flow relating to these transactions to occur in the fourth quarter 2011 or potentially early in the first quarter of 2012, coinciding with the emergence of the joint venture from bankruptcy and our recording of the land as an asset on our books. In addition to reducing uncertainty surrounding this issue for KB Home, this settlement is the next important step in moving forward with our monetization and development plans for this valuable asset. Turning now to liquidity, our cash position at quarter end was approximately $735 million. As we look to the remainder of the year, there are 2 major events that will negatively impact this cash balance: a $100 million outflow relating to the bond maturity in August and the previously discussed South Edge obligation. The potential offset to the South Edge-related outflow are monetization strategies that may be implemented once we gain control of the land. A combination of operational factors are also expected to positively impact our liquidity, including higher unit deliveries, improving margins, lower SG&A expenses and a disciplined land and development investment strategy. Excluding South Edge, we do expect positive operating cash flow for the second half of the year. In addition, we continue to evaluate the capital markets and may opportunistically access them to further augment liquidity. We remain mindful of our balance sheet and liquidity position, and we'll take the necessary steps to ensure we have enough liquidity to take advantage of opportunities in the market in support of our operating strategy. Now I will turn the call back over to Jeff Mezger for some final remarks.

Thanks, Jeff. Before I move on to our longer-term outlook, I want to highlight some of our actions and accomplishments in the quarter that relate to the many ways we are differentiating our company and our homes from both resale and new home competition. The energy-efficient features we are building into our homes make them a superior value over other available homes in the market. A great tool that helps to illustrate this point with consumers is our new KB Home Energy Performance Guide or EPG, which projects typical gas and electric costs for every home we build, similar to an MPG [miles per gallon] sticker projecting gas mileage on a car. Consumers are responding positively, as they are now empowered with vital information about their expected energy costs. Homebuyers have always calculated and considered the PITI [Principal, Interest, Taxes & Insurance] in any home purchased; the monthly principal interest, taxes and insurance costs associated with homeownership. We are now encouraging buyers to consider that the PITI plus E for energy costs. Energy costs are another monthly cost that buyers should be aware of before they make the home purchase decision because it can vary greatly depending on the home they choose, and it's truly part of the total cost of home ownership. Our company also continues to receive third-party recognition for its commitment to building high quality, energy-efficient homes. We recently earned 12 ENERGY STAR Leadership and Housing awards from the U.S. Environmental Protection Agency, a company record for our contributions to energy-efficient construction, environmental protection. We're also proud to release our Fourth Annual Sustainability Report on Earth Day, April 22 and remain the only national builder to publish such a document. I encourage you to take a look at this report posted on our website in that it truly represents the cutting edge and sustainable production homebuilding. In addition, during the quarter, we reaffirmed our position as the first and only national homebuilder to receive National Housing Quality Certification of our operations nationwide by the NAHB Research Center. This means that both our divisions and our subcontractors have been trained and certified in quality assurance systems that set the standard for excellence in our industry and is a key driver in our high levels of customer satisfaction. I would like to thank our talented and dedicated employees for making all of these accomplishments possible and for their continued commitment to our customers. This is a commitment that lies at the core of our business strategy and long-term success. We expect that the overall housing market will remain relatively stable at current levels, at least through the end of this year, with local pockets of stronger performance. The housing recovery will be a slow and steady process, but along the way, KB Home remains very well positioned to capitalize on opportunities. As we look ahead in our business, we expect that the positive momentum we have achieved in increasing deliveries and improving our operating margins will continue in the second half of 2011. We have in many ways hit an inflection point within our company, a point in which our new community openings are progressing well, our backlog is growing, our costs to operate are coming down and matters that were once uncertain in outcome, such as South Edge, are now being resolved. We are also pleased to have MetLife available to service the mortgage needs of our customers. All of our actions are positioning our company for a return to profitability and assuming continued stability in our markets, we expect to achieve profitability in the fourth quarter of this year. We will continue to plan and strategically invest for our future while maintaining a strong capital structure and ample liquidity. Moreover, we have the team, the business strategy and the market positioning in place to achieve our profit goal, and we will continue to work diligently to make it happen. And with that, we will open it up to your questions.

[Operator Instructions] We'll go first to Michael Rehaut with JPMorgan. Michael Rehaut - JP Morgan Chase & Co: First question, I was hoping you can give a little bit more detail on the order trends during the quarter. Coming out of last quarter, you mentioned that March was down only 6% so we were looking for something a little bit better than down 11% for the overall quarter. And I was hoping just to get a feel or numbers on month-to-month, year-over-year changes, as well as some better clarity in terms of the sales pace that you're seeing in the new communities. I think you mentioned that maybe it's, initially, you're not getting the traction that you would have hoped, but things improve as the community continues to operate.

Okay, Mike. Yes, we'll start with talking a little bit about the quarter trends. As we talked about last quarter, March was down about 6% year-over-year, and we started -- we felt that was a pretty strong trend going into the quarter, given that the sales we liked what we saw in March and given it was coming off of a tough tax comp in the prior year with the tax credit, we'd like to start. April, as we had anticipated, I think we actually even talked in the call, was down fairly big compared to last year as we had just an unbelievable month in April as the final month of the tax credit. And then May for us bounced back in a big way, offsetting a lot of the percentage decline that we saw in April. So overall the 3 months, March, April, May, we're, I guess, improving. May was actually better than April. April was down from March and down big on a comp basis. When you swing into June, we're right now, we're looking to be moderately up versus the prior year. So I think I'd say overall, this seasonal trend has been more or less a normal seasonal trend that we're seeing, except that we're seeing, I think, even a stronger Q2 bounce off Q1 than we've seen historically. I mean, we were up over 50% in the quarter versus Q1 which we don't normally see, and we're pleased with that and pleased with some of the indications. And on the new communities, Jeff?

Mike, I can talk to community count. We shared this on previous calls as well, but the consumer remains cautious. And in normal times, a grand opening event will pop a month or 2 months of sales on the opening weekend. And we're seeing the traffic we typically get in an opening weekend, and it's not unusual to get 300, 400, 500 people to a community. We do a great job of promoting the new product in the new location. But they're not making the purchase decision as quickly as they did previously. And many of the analysts and investors have been asking us, "Well, how are the sales in your new communities?" And it's not like we can flip the switch and we get instant sales. What we are seeing is as people reflect and visit and compare and contrast, they're coming back and making the investment decision in their new home 60 days later, 90 days later, not that very next week, because they're exploring all options and they're nervous. And so that's why I shared that our Q1 openings generated over 320 sales in Q2. I can't remember what the opening count was in Q1, but it's a pretty healthy sales pace once they got opened. And that's what we expect to see going forward is our -- we'll gain traction in these openings from Q2 where we'll see more sales out of those, and then we'll continue to open the community count that we shared in our prepared comments. Michael Rehaut - JP Morgan Chase & Co: The second question kind of hits on gross margin side, and we saw a little bit of improvement from first quarter. And I believe part of the first quarter disappointment was due to some higher costs that you let in to support the community openings at that point. And at the same time, you had said that you would expect back half fiscal '11 margins to be more in the neighborhood of what we saw for most of 2010. So I was wondering if you could kind of walk through the second quarter margins, if there were still some incremental costs to support the new community openings. And how -- give an update on how you're thinking about the back half of the year.

Yes, Mike. On the quarter, starting with the quarter, when you compare the second quarter to the first, we actually got some benefit on the additional absorptions. And that was really the primary driver, if you recall from the first quarter, not so much additional expenses related to community openings but more so the down volume by quarter that we had in the impact on that, I think we talked about 410 basis points of negative impact in the first quarter. We called back about 250 basis points this quarter due to that same issue, as we had an improving delivery quarter and some more volumes coming through where we can absorb some of those costs that we have on the margin side, so that was helpful. Yes, there was a couple of other smaller factors affecting it: small miscellaneous price in certain markets and a few other net items that offset the absorption but still right around 15%, which is pretty close to our expectations, and I think we indicated last quarter that we'd sequentially improve, but not see margins returning to close to 2010 levels until the back half. As I made a statement in the prepared remarks, we still do expect sequential improvement in the third and then again in the fourth quarter. And I'd say by the fourth quarter the running rate, given the new communities that we have up and running and the deliveries that we expect from the new communities, as well as the additional delivery volume that we're looking at in the second half of the year, should keep us in that range of last year.

Our next question will come from Stephen East with Ticonderoga Securities. Stephen East - Ticonderoga Securities LLC: First question, Jeff Kaminski, you talked about accessing the capital markets for liquidity, potentially at least evaluating that. Is that on the debt side or are you looking on the equity side as well?

Right, as we said, we're looking at evaluating the capital market situation and making some decisions. Our opportunities are open right now. We're not specific on which side of the market we may access or even whether that transaction gets done. We're not using this call to announce the transaction but to announce the indication that we're strongly looking at it. We're obviously well aware of the liquidity and carefully managing the business along those lines, so we'll explore all options as we move forward. Stephen East - Ticonderoga Securities LLC: Okay. And then if you look at your SG&A, last quarter, you said 90%, 95% of it was fixed. But this quarter, it moved up 25% sequentially as revenues moved up close to 40%. So it sounds like there's a lot more variable than what we thought. Could you talk what's going on there regarding that? And then also the impairment charges, not the South Edge but the $20 million, what that was driven by and when that land was purchased, whether this is some old legacy or some new stuff?

Sure. Starting with the SG&A, we talked -- there was some incremental marketing expenses in the current quarter relating to new community openings, and we generally classified marketing as more or less a fixed cost. We did invest in money to support the new openings. As Jeff indicated, pretty accurate progress from the first quarter openings where we've now seen a full quarter of sales activity and expect to see more progress from those communities as we go through the year, so there was an investment made there. We did see on the variable side an uptick of about 70 basis points, really on the commission side, and that's really more come from a mix of our business and in certain regions, we carried a slightly higher percent commission rate, more due to the selling prices of homes and lower commissions in other markets where the prices are higher. But we saw a bit of an impact coming from that side. Again the SG&A, from an internal point of view, looking at our forecast and where we were expecting it to go, we did expect sequential improvement. We saw that. We did expect to see the increased marketing. We made that investment cautiously and we saw that. So again, from an internal point of view, we're pretty much on. I guess I'll go ahead and answer your third question, Steven because we like you so much, but abandonments and impairments. I'll start with a few comments just talking about our process overall, and then I can give a little bit of detail on the charges in the quarter and some reasons and drivers behind it. But I think as most of you guys know, at KB, we have a very disciplined process for evaluating our land parcels and communities. We look at our inventory first. We determine whether we see indicators of potential impairment and whether they exist. Then if they do exist, we identify, we take that identified inventory and we evaluate it for recoverability in accordance with GAAP. In the case of our company, the process is performed very consistently each and every quarter as performed in our national accounting center in Phoenix. We don't leave it up to division finance operations management and we feel -- we really feel the centralized approach provides us a greater level of consistency, definitely a greater level of accuracy and objectivity as we move through it. Now as you know during the current quarter, we reported almost $21 million of abandonments and impairments. That represented charges associated with 7 communities. Obviously, the quarter did represent a spike as compared to our recent history and if you go back pretty much all the way to the beginning of 2010, it's definitely a bit of an outlier. And while we don't disclose community-level specifics on our inventory valuations and we don't intend to do that going forward, I will say that we took an $18 million charge this quarter relating to an adjustment to fair value which we recorded after we took back the collateral on a note receivable in the second quarter. The remaining charges on the other 6 communities were less significant and more or less in line with what we've seen over the past 5 quarters. So basically while pricing, cost, margin, et cetera, while those are always factors driving impairments, really the elevated level this quarter was more related to a relatively unique event.

Moving onto Ivy Zelman with Zelman & Associates. Ivy Zelman - Zelman & Associates: Just to clarify, when you talk about your capital market options, I think what I'd like to understand when you look at them, recognizing that your equity is trading below book value right now, why you would even consider equity or why don't you eliminate that as part of your options and at least explain to investors why you would have to do equity right now and if it's even being considered? Because obviously, that's what's weighing on your stock right now.

While we understand that, we also need to run a company and the forces involved in capital market decisions so we don't want to get ahead of our board, number one. Number two, there are a number of options available to us and the markets change as they go. We're under no urgency or pressure and we don't feel urgency or pressure on liquidity at this point in time, number one. The cash flow, especially relating to South Edge is still 2 quarters out or nearly 2 quarters out for us. We're not constraining our business operations with their liquidity levels at this point, and we have some time to evaluate options. And while we don't like certain things about the capital markets right now, as we all know, capital markets change rather quickly and we want to be in a position to react to it. So there's a range of options available from simple debt or equity issuances to other options that are relating to bank lines, et cetera. So we're evaluating it all right now, and we'll be more public with this as decisions get made and it could happen over the next 6 or 7 months. Relating specifically to South Edge, we're also still exploring options on monetization with that situation as well. So until we really have all those pieces of puzzle pulled together, we're going to stay open on it. And ideally, we'll earn some cash back and like I said earlier, we do expect the second half to be positive operating cash flow, so that will help us as well in liquidity and that's sort of our position right now. Ivy Zelman - Zelman & Associates: Again just as a follow-up, I would expect that if you were looking at your revolver, it would be a lot cheaper than selling stock at below book value if you include the DTA.

That's true. Ivy Zelman - Zelman & Associates: So you can't eliminate that as a choice for -- than appeasing anyone today, but you would admit that as an option, it would be on the lower end of the options?

Right. And one of the issues we look at is the offsets between dilution and interest expense with no tax shield, so that's a consideration as well. But yes, at this point, we won't give any more detail other than to say we'll keep our options open as we move forward and announce it at a time that's appropriate.

And Bob Wetenhall with RBC Capital Markets has the next question. Tom Austin - RBC Capital Markets, LLC: Hi, this is actually Tom Austin on for Bob Wetenhall. I noticed that your conversions' rates actually ticked up in the quarter. And I was wondering if you had any expectations for that going forward through the rest of the year, if you thought that would come down as a backlog gross?

You're talking about backlog conversions? Tom Austin - RBC Capital Markets, LLC: Correct.

Yes. The backlog conversion in the quarter, as we talked about 75%. First quarter, we had 71%, fourth quarter last year 88%, third quarter last quarter is 73%. We had to go all the way back to the second quarter of last year to get it below 70%. So we've been doing quite well on the backlog conversion. Part of that was in relation to the comments I made on our build cycle time, where we brought that down significantly and we're able to convert a lot more of our quarter end backlog the following quarter. There's -- I see that as a real positive for the business. I mean, it's something we've focused on. We've driven down the cycle times quite significantly and for me, for planning purposes in that 70s range, I think it's a pretty good range for the company, maybe slightly higher in the fourth quarter as we really put a push on it that's going to be closing prior to year end. When the market returns to normalcy and perhaps when volumes tick up, you may see it go the other way. But right now, we think those numbers are pretty much average for us.

We'll move on to Dan Oppenheim with Credit Suisse. Daniel Oppenheim - Crédit Suisse AG: Was wondering if you could talk about the discipline in terms of investing in land. You're saying before that -- just talking about that. Anything about community openings over the course of 2011, how much of that has already been spent? And if you're thinking about 2012, how are you looking at that in terms of being aggressive on land versus being fairly cautious and see how the environment has evolved there?

Dan, I can answer the first part of that, and then Jeff can walk through what's been spent. I think it's a vast majority, if not all of it, for '11. But we continue to remain very disciplined in our return hurdles and we underwrite to an IRR first, we don't bank on inflation. The divisions have to support it with current sales rates in that market. So it's, I would say, it's an opportunistically cautious approach, in that if we see any opportunity that's compelling we'll go, but there's no urgency to do a lot of acquisitions. And it's worked well for us. It's like a built-in governor when we're holding our IRRs up in the mid-20s. And as we go forward, I think you'll continue to see us in that mode as things come to market that are aligned with where we want to be strategically, we have the ability to make the investment. But it's not like we're investing much heavier than the number of deliveries we're reporting in the quarter in terms of unit count build. You can see our lot count didn't move much, and that's in part because we're staying pretty diligent on the better performing submarkets which happen to be land-constrained. But it's not like there's lots on every corner so we have these built-in governors and we'll remain diligent.

Relating to second half openings, as Jeff mentioned, we currently have planned 45 to 50 additional openings. That includes the deal that we just announced in Texas. I would say the majority of that, if not almost all of it, actually, the cash flow is out on that. We have some development spending in the second half of the year that's included obviously in our land numbers that we always disclose. But we're really looking to invest now for future periods and looking to start bringing revenues in within a 12-month period after investing. Daniel Oppenheim - Crédit Suisse AG: And then the follow-up. Just wondering about the new community you talked about being a bit sluggish starting off but are you doing anything -- do you need to do anything pricewise or are you finding it's more hesitation of buyers, and then if you're not doing anything to adjust the mix in terms of incentives or price, it should take a little bit longer?

But Dan, I wouldn't use the word sluggish. It's just taking a little longer for people to make the decision. We're not aggressively cutting price and doing incentives to the traffic we're generating and the interest we're generating and our new openings is working well, it's just taking a little longer for the consumer to make the decision. So we're letting that play. And I think on average, in the second quarter, we averaged under 4 a week, or a month, I'm sorry, under 4 a month in the communities that were open, which is about our company run rate. It's just taking a month or 2 to get there.

Our next question will come from Michael Smith with JMP Securities. Michael Smith - JMP Securities LLC: Most of my questions have been answered but real quick, just to following up on what you said, Jeff, you said the company run rate was a little under 4 a month, and that's after a little bit of a lag time where the new communities are hitting. Is that right? And should I interpret that as meaning that your new communities are selling about at what the average is for the whole company?

We're not happy at 3.5, 4 a month, Mike, but that's pretty much what we're running around the system, maybe a little higher. What we're hopeful that we'll get the run rates up a little more as the community seasons and you get people living within the subdivision and you gain more momentum. That's what typically happens. My message is it's not like we're opening these communities and getting instant sales. The sales are coming and they're performing to expectations, there's just this little lag between opening the model and when you get to your run rate. Michael Smith - JMP Securities LLC: I'm sorry. What I'm trying to figure out is -- let me be more explicit. Can you put a number or even qualitatively kind of tell us what the difference is between your newer and older communities on sales pace? I mean, is there a big difference there or not?

There's not a big difference. I think we're seeing on average the new communities doing slightly better than some of the more legacy, but there's such a mix in both regions and where we're opening as well as what you get in the total community count, where you have a community, for example, going in the closeout phase that's having the pace impacted by that. Moving into Phase 2, you have the option communities that we made, people can come out of the option where we have a slightly lower pace. So it's really difficult to draw a lot of generalities around the question.

The other thing, Mike, that I'd offer is many of these communities that we're opening are not real large lot counts because they're in land-constrained areas. An example would be the opening that we have in Playa Vista out here in LA back in May, end of May. When it's a 52-unit condo that you cannot replace and you wish you had 1,000 of them, you're not going to push your sales pace. You're going to push your price. So part of our discipline here is to continue to balance the sales rate to the optimal price and margin without running as hot, because you can't replace these.

Moving on to Ken Zener with KeyBanc. [Technical Difficulty] Kenneth Zener - KeyBanc Capital Markets Inc.: Can you walk us through a modest recovery relative to your balance sheet equity and capital? If cash is going to fall 300-ish in the year end, that's the $100 million debt, maybe $200 million for the JV if I'm correct, when the recovery occurs, by our estimates, you can correct me obviously, I figure you'll need $150 million in working capital for each incremental 1,000 units. So do you think you're basically going to be going to the capital markets for your working capital needs? Or is it your view over the next 2 or 3 quarters that there will be large land purchases that will motivate you even when your cash is in that $300 million to $400 million range?

Ken, I'll ask Jeff to speak to it. I can tell you that we don't track capital to capital needed per unit because it depends on whether it's a rolling option lot that you close in 10 weeks in Houston or a major cash purchase in California that may take 9 or 10 months to get to the revenue. So it depends on mix and we don't look at it that way, and I can tell you that we're going to ensure that we have the firepower to be opportunistic. The reason that we've shared the general comments we have is to let the investor world know that we're cognizant of our balance sheet in some of these cash demands that we're going to have. But in part, even on the South Edge situation, everybody's assumed we're just writing a check and that's the way we underwrote the thing, but we have options there. So there's a lot of decisions that go into your cash burn and your cash need, and it would start with getting our arms around what we're actually going to do with South Edge. And then from there, we'll evaluate it and move on. I don't know if you have any other color.

Yes, I mean the only other comments I'd make, your estimate, I'm not sure if you're including or not including or the amount you're including for second half positive cash flow, which we do anticipate that will offset some of the negatives that you mentioned. And on recovery, when we look at recovery and normalization in the market, one of the things that happens once the housing market stabilizes and starts getting back on its feet, I believe capital access for companies like KB will be much more open and available and our options will be much wider. So planning out into that market recovery period, we have a level of confidence on both internally generated cash, availability of revolvers, et cetera, in the marketplace, as well as there's a whole different capital market situation. So to us, it's a different animal at that point in time. Kenneth Zener - KeyBanc Capital Markets Inc.: Okay, I appreciate that. And I guess on a sequential basis, looking at gross margin, I think you guys did a great job at least explaining the gross margin issues or the fixed cost and gross margins last quarter. When you look at it, it appears to me that most of the decline in or increase in gross margins occurred because of the fixed cost absorption which means the direct, whether that's land or your vertical actually went down. So could you comment on that if it's wood, land, labor? And when you talk about rising gross margins in the back half, it also appears, the way we look at it, that that's driven simply by the absorption of that fixed cost. Do you actually see -- the fixed cost in gross margin, that is. Do you see your direct labor land costs or margins also increasing?

Yes. Just addressing the cost issue first, I'd say the costs are relatively stable in the quarter, and you're correct in saying the majority of the margin improvement came from the leverage side. The costs were relatively stable, and the pricing is relatively stable. So the improvements, like coming from the incremental deliveries was wealth and obviously, and I think expected to continue into the second half. I think a couple of the other drivers in the margin side in the second half, one certainly will be new community openings. We'll start deliveries in a more significant manner coming from those communities starting in Q3 and Q4. And we have obviously higher margin projections coming out of new communities, and that mix will help us as well as regional mix within the business.

Our next question will come from Michael Kim with CRT Capital Group. Michael Kim - CRT Capital Group LLC: I have a quick question on construction costs. What are your direct construction costs right now? And how has that changed over the past few years? And any metrics on the per-square-foot basis would be helpful.

We really don't disclose square foot construction costs. Michael Kim - CRT Capital Group LLC: Okay, great. And I guess follow-up just on South Edge, are there any potential uses of cash that could exceed what's been accrued for? Maybe thinking about the potential debt facility, assumption of JV interest, your pro rata share of accrued interests, et cetera? And maybe the timing of executing your monetization strategy post the merger?

The overall of the accrual right now includes -- it's an all-in accrual. I mean, there's not a separate accrual on accrued interest or a separate risk on accrued interest or anything like that. The settlement agreement right now running through November with a possible extension in December is more or less a non-inclusive agreement. We did range the potential in the 8-K, and obviously for the quarter reporting, we had to pick up the most probable point within that range, which we've done with our $226 million accrual on the gross obligation. So there's always a range in these things, but it's not from the fact that it's outside what we're currently contemplating. As far as the debt facility goes, I think there was a little bit of confusion on that, and there was a couple of press reports that came out right after the agreement went public and we did again disclose in the 8-K that we have a $21 million escrow deposit in that debt effectively providing some cash for the estate to administer the bankruptcy, but it is in escrow on our final settlement. So there is I think maybe a little confusion on that issue which is maybe what you're referring to. Michael Kim - CRT Capital Group LLC: Understood. And the timing of executing a potential monetization strategy, is that...

Well, we'd like to. Obviously, we'd like to get as close as possible to the outflow. And as Jeff said, I mean, we're looking at different options and we're planning. We may or may not have and may or may not pursue a strategy along those lines. But at this point, it's as close that we can get it there.

Hearing no response, we'll move on to James McCanless of Guggenheim. James McCanless - Guggenheim Securities, LLC: First question, what was your spec count at the end of the quarter?

The spec count at the end of the quarter remained pretty consistent with the last couple of quarters, right around 500. And that includes finished and under construction. James McCanless - Guggenheim Securities, LLC: Okay. And then on the capital raising that you discussed earlier, if you did decide to do an equity offering, is there a functional way that you can protect the entire value of the DTA and not have to run into things like IRS Section 382 rules where you would potentially lose some of the value of the DTAs or a functional way to do that? Or are you putting it, or a portion of it at risk if you all do an equity issuance?

Number one, that's a very valuable asset for our company, the DTA, and we would not take any strategies to put that at risk. We have plenty of room on the equity side if we chose to go down that path and again, this is speculation and a what-if answer. If we did choose to go down that path, we'd have plenty of room without putting any of that at risk. James McCanless - Guggenheim Securities, LLC: Okay, great.

Moving on to Josh Levin with Citi. Josh Levin - Citigroup Inc: You talked about the possibility of a near-term monetization for the South Edge land that you might want to ideally maybe match up with the cash flow out. You're carrying that land at $75 million. So if we're trying to think about potential cash flow in for monetizing that land in the near term, is $75 million in? Is that sort of a reasonable -- are we in the right ballpark?

Yes. I mean, you're thinking of it the right way. I mean, when you're thinking about some monetization coming off the South Edge situation, you compare more to the land value than to the obligation. Josh Levin - Citigroup Inc: Okay. And you said you expected to return to profitability in the fourth quarter. Can you sort of share what assumptions you're making about your ability to get to that prediction or that forecast?

It's just improvements in all financial metrics. I mean increased deliveries, increased margin and more SG&A are the primary drivers. It also supposes better capitalized interest is up a bit this quarter as we have it on our inventory and our active inventory. So I think a combination of all the factors gives us some confidence in talking about the fourth quarter.

And the next question will come from Adam Rudiger with Wells Fargo Securities. Adam Rudiger - Wells Fargo Securities, LLC: I don't want to beat a dead horse here, but I wanted to go back to the gross margin, if I could. I'm a little bit confused because you said that costs have basically remained flat, and you've attributed a lot of the decline to volume. But if I look at, for example, your first quarter of last year when you had almost a 19% gross margin, you actually had lower home sales revenue than you had this quarter. So I'm just curious to know really what's changed versus last year and what's really driving that? Because last year you were humming along pretty well with a 18%, 19% gross margin and then first 3 quarters of this year, it's really low plummeted. So if could you just shed any light on that, that would be helpful.

Sure. Yes, there was a -- on a year-over-year basis, we talked a lot about quarter-to-quarter in the prepared remarks. In the press release, we did compare the year-over-year. We did see some competitive pricing pressure on a year-over-year basis, and if you think about the first 2 quarters of last year with the tax credit incentive out in the marketplace, pricing held up very well and in some cases, it was actually up. So that moved backwards as we went through 2010. We didn't really see much decline Q1 to Q2 sequentially but if you start looking at it year-over-year, you have a different dynamic. We also had mix shifts that impacted the margin on a year-over-year basis as well. So those 2 things are more significant factors in the 2011 versus 2010 comparison as opposed to the sequential. Adam Rudiger - Wells Fargo Securities, LLC: Can you elaborate on what the mix shift was?

It's really, for us, it's a mix between, not only between regions, but between communities, and we'll have a higher-performing communities with higher margins, and as those close out, we close out a lot of those communities in the fourth quarter. We talked about that during the first quarter call, and you have a shift in relative community profitability and what you have in your sales mix and delivery mix.

We'll move on to Mike Widner with Stifel, Nicolaus. Michael Widner - Stifel, Nicolaus & Co., Inc.: I don't want to beat the South Edge horse to death either, but just wondering if you could talk a little bit about the assumptions there. So the land is presumably at a $75 million valuation is what you're assuming. As I understand it, you're assuming you'll bring on about 650 additional acres there. Just wondering if you could talk about how that implied valuation compares to what you're already carrying land in the active Inspirada community, if that's sort of an apples-to-apples comparison if the carrying values are the same? And then second, if you could talk about sort of the profitability of that, you mentioned the sales pace was solid, but you haven't really mentioned anything about the profitability there.

Yes. In our valuation model on the South Edge land, we did a valuation model very consistent with how we value other parcels in our portfolio, and the margins contained within that valuation model are very solid compared to the company average. So on a go-forward basis, we think we have that about right. On the land valuation itself, they're not really comparable to carrying values versus the land at South Edge because most of the land in front of us in South Edge is to be developed land. The land that we have in the portfolio obviously is we were buying finished lots from the joint venture as part of KB Home, so they're not comparable directly between the 2. Michael Widner - Stifel, Nicolaus & Co., Inc.: Certainly not directly comparable but, I mean, you have plenty of experience there over the past number of years in what the actual development costs are, and so I mean, I wouldn't think that it would be terribly difficult to do a conversion between raw land and existing land just by using your historic cost experience in developing that land.

Right. I apologize, I don't have those numbers in front of me on the current carrying value of the lots there in South Edge, but we did analyze the land, including the number of factors on the settlement. The valuation, you're right in what you're saying, it's around 600 acres that we have out there in front of us and we did a very comprehensive valuation model on it.

Nishu Sood from Deutsche Bank has the next question. Nishu Sood - Deutsche Bank AG: Just wanted to get some clarity on the statement you were making earlier about operational cash flow being positive in the second half of the year. Just to be clear, that's after the $560 million you have budgeted for land spend for the year. Is that correct?

Yes, that's correct. We include land spread as part of the operation of cash flow. I did specifically exclude the South Edge out of that number... Nishu Sood - Deutsche Bank AG: Of course, of course. And the restricted cash, how did the covenants develop as the year goes on, supposing that things begin to get a little bit better? So does that kind of ease as well as things go along here?

I'm not sure what you mean by covenants. Nishu Sood - Deutsche Bank AG: Just the -- I imagine that the restrictions on the cash or from the debt side are...

The restrictions, that's basically collateral on either land LCs [ph] or maturity bonds. I mean, that's the bulk of it.

Moving onto David Goldberg with UBS. David Goldberg - UBS Investment Bank: I wanted to ask a question if I can about the purchase in San Antonio. And Jeff, it seems to me, you talked in the kind of opening commentary about the different markets that are developing between new homes, non-distressed existing homes and distressed existing homes. And it seems to me the key to kind of keeping some pricing on the new home market relative to rest of the broader housing market is being able to identify and find these lots in better areas that people want to live where there's less foreclosure inventory and everything, right? So what I'm trying to get an idea of is in the San Antonio deal, how many other builders were bidding for this company's assets? What do you think you paid for land relative to replacement costs? And how difficult just more generally is it to find land in these areas where there's not huge bidding wars going on right now?

Good questions, David. As I said in the prepared comments, we really like this acquisition. It complements very nicely with our business in San Antonio. And these 3 markets that I touched on, if you go back a couple of years ago, a lot of the foreclosure sales were more weighted to owner-occupied buyers, and we had to come up with ways to compete with foreclosures, not just what we call traditional resales. And what we're now seeing emerge is the desire to own the foreclosure if the owner occupied has waned, and we don't have to get our pricing down competitive with this what I call the foreclosure churn, because we don't care if we cater to the investor. In fact, we don't want to. So let them keep cleaning out the inventory on the foreclosure side, and we've been able to position our product where it's competitively priced with the traditional resales and typically a great opportunity versus the other new homebuilders. So that there's this niche that's developed where you can hover above the foreclosure churn and do just fine. In the case of the acquisition in San Antonio, I don't know what the percentage would be of replacement value. I do believe we add a discount to that. I know that there were other builders that looked at it. I don't know how many. I don't think it was a full frenzy public auction approach. They talked to a few that they knew could perform. And in our case, with the franchise we have in San Antonio where we are extremely efficient and build at very solid cost per foot because of the network we have with the contractors and the product series, the Open Series, we were able to underwrite this, and it's a great combination of solid lot position, instant revenue almost, because it will hit early in '12. But it's a nice deal for us. I don't think there's a lot of them out there, but it's an example of when one falls in front of you, you can move. David Goldberg - UBS Investment Bank: Got it. And then just one quick follow-up here. Obviously, with the FHA approval, lenders have the ability to overlay obviously more restrictive covenants than what's mandated by HUD, and I think we all know they've been doing that for a while, maybe 640, 650 FICO scores now. And I'm wondering if you could talk about, with your experience in the market, are you seeing that any kind of movement from FHA-approved lenders to do stuff at lower FICOS, maybe closer to 580 that the HUD's mandating now?

Yes. I think the underwriting standards are still much more difficult than they were in '06 or '05, and those really haven't changed. I do think there was a pendulum swing where the banks last fall were nervous and were -- the pendulum swung to really tightening down on the documentation and the papering far more than we had seen in some time. I think we've seen a slight easing from how rigorous it became. It's still very rigorous so it's a relative thing, and I think you'll see that stay around for a while. But we've learned how to operate within those confinements. It's just my concern would be whether they tighten the underwriting further on FHA or Fannie or Freddie and that's up to the government. But where it's at today, it's difficult but you can navigate within it.

Ladies and gentlemen, we have time for one additional question which will come from Buck Horne with Raymond James. Buck Horne - Raymond James & Associates, Inc.: I just wanted to maybe go back to the high level again here, Jeff. You made several statements recently, just indicating that you think the biggest reason buyers are still on the sidelines is the lack of confidence or uncertainty in the economy. And I'm just wondering if you could kind of articulate more specifically what you're seeing that tells you that confidence is really the key issue as opposed to some of these other more tangible factors like inability to sell their existing house or these new more stringent mortgage underwriting rules or lack of adequate downpayment or some other factor like that?

Sure. The inability to sell a home is an issue but we're still 65% first time, so it's not the biggest part of our business. I do think until prices firm up more and go in the other direction, that you'll have this built-in cap on those people that may be underwater on their mortgage. But what we're seeing is a lack of urgency to do anything. I've shared on a couple of presentations or panels that I participated on. We did a survey in Vegas of people who had been to our models, had the downpayment in the bank and were prequalified to purchase a home and didn't own at this time. And 35% of them were waiting for the next tax credit so there's no urgency there, and 30% of them were waiting for prices to come down further. So 65% of them had absolutely no urgency to make a home buying decision at this time. It's offset by people that are confident in their jobs or their personal situation and see the incredible opportunities that are out there on the affordability side. So I think if you can get a little consumer confidence back, and the numbers yesterday went down, so it's a concern. If you get consumer confidence back, it's typically tied to the employment environment out there and between jobs and consumer confidence, you'll see demand come back. Buck Horne - Raymond James & Associates, Inc.: And have you made any decisions on disclosing active community counts or how you want to define that going forward? Or can we expect any supplemental data on that front?

Yes. I think what we're doing, we'll continue the practice that we've been giving you guys which is the pluses and the expectations for the remainder of the year. Like Jeff talked about, the 45 to 50 range is a pretty good number for us in the second half. There's enough sources out there, I think, from whatever website counts and everything else that some of you guys publish where at this point in time, we're going to continue with our current practice. It's very unpredictable on the closeouts, and that's the part that as we forecast going forward, trying to forecast closeouts for communities is one issue, and the second one is just trying to get back and having a consistent history. But certainly, the methodology where we looked at it and it was tied to volume is an issue that you probably won't see us continue on.

Mr. Mezger, that concludes our Q&A session. I'll turn things back to you for closing or additional remarks.

All right, thanks Kelsey. Thank you very much everyone for your participation on today's call. While the recovery may not always be smooth or predictable, we believe KB Home is on a right path to leverage our leadership position in our markets, harness the talent of our team and steadily improve our financial results going forward. Thank you, again. Everyone, have a great day and also have a great Fourth of July weekend. Hope to talk to you all soon.

Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.