Good morning, and welcome to the Beazer Homes Earnings Conference Call for the Second 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?

Thank you, Cathy. Good morning, and welcome to the Beazer Homes conference call discussing our results for the quarter ended March 31, 2012. 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 the 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 take -- 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. On our call this morning, we will recap our results for the second quarter, discuss the current homebuilding environment and update you on the progress we've made to date on our operational objectives and financial goals for the year. I was very pleased with our second quarter results. Compared to last year, we generated substantially higher new home orders and closings, with improvements in every geographic segment. At the same time, we were able to push up gross margins from last quarter. While these results leave us plenty of work left to do to reach our profitability objective, the across-the-board improvements were encouraging. The results this quarter were driven by 2 primary factors, improving conditions for new home sales, including a return of a more normal seasonal uptick and the progress we are making in our path to profitability strategy, as we make numerous operational enhancements intended to drive improved results in every one of our communities. There were several operational highlights of our second quarter results. Among them, we recorded 1,512 new home orders which was up 29% over the second quarter of fiscal 2011. This was driven by a substantial improvement in sales per community per month, which grew from 2.2 last year to about 2.7 this year, as our No Community Left Behind efforts showed results. We closed 844 new homes, up 50% over the second quarter of fiscal 2011. This month, we ended the quarter with a backlog that is 41% higher than the same time last year. We generated unlevered homebuilding gross margins of 17.5% or 15.8%, excluding warranty recoveries in bond reimbursements, up 1.5 points from last quarter. And importantly, we maintained substantial liquidity, ending the quarter with $257 million in unrestricted cash. In addition to…

Thanks, Allan. We reported a net loss from continuing operations for the quarter of $37.9 million or $0.48 per share, which included non-cash pretax charges of $1.2 million for inventory impairments, and a loss on debt extinguishment of $2.7 million. This compared to a loss from continuing operations of $53.8 million or $0.73 per share during the second quarter of fiscal 2011. Which included noncash pretax charges of $17.8 million for inventory impairments, and a cash benefit of approximately $6.8 million related to a return of compensation. Exchange orders we completed during the quarter resulted in the acceleration of the conversion of -- to common stock of 84% of our mandatory convertible notes and 94% of our tangible equity units. Given today's total outstanding share count of approximately 101 million shares following these transactions, the average share count expected for all of fiscal 2012 would be approximately 88 million. As Allan indicated earlier, we recorded another solid growth quarter, in both new home orders and closings, providing further evidence of stabilization in the market. Despite the continuing challenges our buyers face today due to the mortgage environment, our orders were up 29% for the quarter and closings were up 50%. During the quarter, our backlog conversion was 65%, which was within the expected range that we've provided in our last call. This slide shows the various moving parts that impact this conversion ratio. First, in every quarter, we have homes in backlog whose closings are scheduled for future quarters due to build times and product types. Second, cancellations occur in the normal course of business and it ranged between 10% and 15% of beginning backlog over the past 6 quarters. For the second quarter, the cancellation rate of our units in backlog was 12%, or just under what we saw…

Thanks, Bob. So as I said, I'm very pleased with the direction of our results so far. While we are clearly benefiting from improvements from the overall housing market, our operational strategies are also making some positive difference. Obviously, we have a long way to go in reaching our profitability objectives. But we now have momentum in both orders and closings, to help push us towards that goal in the quarters ahead. Turning to our expectations for the full year. Based on where we are today, all of the objectives we've communicated to you in the last quarters, remain in place. We continue to expect to sell and close more homes in fiscal 2012 than we did last year; generate positive EBITDA for the first time in years; preserve and protect our liquidity. Our results so far this year have improved our confidence that we will achieve these goals. And in fact, internally we are modestly increasing our expectations on all of these measures. With that, I'll turn the call over to the operator to lead us into Q&A.

[Operator Instructions] And our first question comes from David Goldberg of UBS.

The first question I wanted to ask was, on the slide where you talked about the conversion rates in the backlog, and you talked about the homes that are getting pushed that were scheduled to get closed in the current quarter and got pushed to future quarters, I had gotten the impression that, when we started to see that, that had more to do with the mortgage underwriting and complications around, getting people the right documentation and that, that was something that would -- the percentage of homes that were essentially getting pushed was going to come down. Am I wrong to think that? Is that kind of a normal historical average for you guys? Or would we expect to see that over time as the mortgage market at least becomes stabilized, if not getting more complicated? Is that something that would kind of stay where it is, in terms of percentages?

It's a great question David. I think that number will come down over time. I think in this quarter in particular, we changed our mortgage process radically, during the quarter. We went from having a single sourced exclusive relationship due in February 1, opening it up. And while that formerly exclusive provider is still important to us, we have a much larger percentage of our business now with other lenders that are within our list that we provide to each community, to borrowers. And I think that has imposed on us a little bit more work to make sure that we're tracking the borrower through their various processes at those different lenders. And I think it's going to mean that we can't today tighten very much the predictive ability we've got in calling for when the closing can occur from a mortgage process perspective. I do think we'll refine that. The level that it's at right now isn't alarming. It isn't dramatically up as you can see in percentage terms. But I think we can operationally drive that down which will effectively drive up the backlog conversion rate, over time.

Got it. My follow-up question, we didn't talk about it much kind of in the prepared remarks, but the buy-to-rent business, and what I'm trying to think about now is with the housing market improving, that maybe prices are going to start to go up at some point, did your strategy relative to that business change. In other words, if you've invested in foreclosures to fix them up, you rent them out now, prices start to go up, what kind of returns do you look for before you start maybe looking to monetize some of those investments, maybe reinvestment capital versus holding it as a rental unit for a period of time. And so I'm just trying to get kind of an update in that business, and kind of how you're thinking about it, in an improving housing market?

Okay that's a good question. And there are some constraints on what I can say. But let me try to fill in some basic facts. At March 31, we owned just under 200 homes. We concentrated in Phoenix and Las Vegas. We have reached our self-imposed $20 million investment limit, with respect to that business. I'm happy to say that the homes are 98% leased, and I'm happy to say that we have experienced great success in the initial renewals of the tenants that we had in place last year, in the first purchased homes. So at an operational level, there's a lot of good things going on. Now we have said in the past and I need to say again, we fully expect to scale this business with external capital. And as soon as I can say more than that, I promise to say a lot more than that. But today, that's as far as I can go.

Our next question comes from Alan Ratner of Zelman & Associates.

Nice work on the improvement in executing your strategy there. I had 2 quick housekeeping questions and then I was just hoping just to ask a follow up to that afterwards. Bob, on the gross margin guidance to be roughly on par with the '11 -- 2011 levels, just wanted to confirm that, that includes the one-time benefits you guys have seen in the first half of this year, the warranty adjustments and the bond reimbursements this quarter?

Yes, that's right, Alan.

And then on the share count, that $101 million, is that a basic number or is that fully diluted?

Yes, that's a basic fully-diluted number.

That's a fully diluted number?

That's right. It's a fully diluted number.

Fully diluted. So what would the basic number be? Is that closer to 98%?

I don't have that right at my fingertips, Alan. I think we're going to have -- our disclosure to be filed later today. So there'll be more information there.

Got it. And then Allan, I was just hoping for an update on the No Community Left Behind strategy. And I know last quarter, you had some comments that there was a pretty meaningful percentage of your total communities that were underperforming, I believe is the way you put it. And those were the ones that either weren't hitting their absorption targets or your margin targets. So I was just curious if you can give an update there, and maybe there and maybe kind of tell us how that's progressed through the quarter, and whether you've seen a reduction in your total number of communities that are not meeting your threshold?

Sure, I'll be happy to. I think the -- just for people listening, I think one of the things to realize when we talked about No Community Left Behind, there are really are kind of 2 components to that. One of the components is, there are better performing and worst-performing communities, and we want the worst-performing communities to get going and that's where we talked about the 4P plans. Let's look at the product. Let's look at the pricing. Let's look at the promotion and let's look at the new home counselor that we have or the people side and make sure we are making every possible refinement to the market to help those communities perform. The second part of -- that kind of falls under the umbrella is with respect to both sets of communities. Those that were better performing, and those that were worst performing. We want to drive sales per community up in all of them. So what goes on when we see the 2.2 sales per community per month jump up to 2.7, is we've got both sides of that improving. We do have a larger share of our communities and I would have said half of our communities, I would have put in the category of not meeting threshold levels a year ago. I would put that ratio at a quarter or so, today. So I feel like we have moved a meaningful number back into kind of the middle of the fairway, in terms of the kinds of performance that we want. And at the same time, we have seen improvements in sales per community even in the better-selling communities. It's not like we're putting a restrictor plate on the best-selling communities. It's just that, we didn't want to be solely reliant on milking if you will, those very, very best-selling communities, and then sort of wake up in a year with those sold out, and a bunch of underperforming communities left behind.

It's very helpful and if I can just make one more in there. Just on the land spend, I know you guys are guiding for community count to grow. But you've seen a decline now on your land spend. And at some point, if the market keeps chugging the way it is, you'll probably see it become a little bit more difficult for you to grow, community count. So I was just curious, when you expect that might flatline? And if you're at all concerned about the ability to continue growing as you look out over the next couple of years?

Just on the land spend, I know you guys are guiding for community count to grow. But you've seen a decline now on your land spend. And at some point, if the market keeps chugging the way it is, I know you're probably see it become a little more difficult for you to grow community counts. So was just curious when you expect that might flatline? And if you're at all concerned about the ability to continue growing as you look out over the next couple of years?

Well, I think we start with 14,000 lots that are active and under development. It represents several years of supply that we already have. And as market conditions improve dramatically, we start to put in place a significant number of the 6,600 lots that are in the land held for future development. But we're not starting with a bare cupboard. We did say -- Bob in fact said, that we now think -- and this is a slight change, we now think that our land spending this year will be probably just above the level of land that we use during the year. We've been on the harvest mode in land, relative to what we've used with the reinvestment rates been below what we've used, and I think, the last 6 years. This is going to be a year where we said, it likely was targeted at the beginning of the year to be roughly flat. It could go either way based on sales momentum and market trends. And I think, what you've heard us say today, is that's going to tip a little bit into a more of an investment mode. Not dramatic, but I can definitely see that. Taking a step back, we've got a decent capital structure. Is it ideal? Clearly not. We've got a lot of liquidity. We have no near-term debt maturities. And so the simple answer is we don't feel overly constrained in terms of being able to grow the community count to reach our objectives.

Our next question comes from Susan Berliner of JP Morgan.

I guess I want to start with your markets, I was wondering if you could kind of go through the various regions and just touch upon the markets that are, I guess doing a lot better on the markets that are still lagging?

Sure. So we had kind of a role reversal this quarter, Sue. I mean for years, the East has been just an engine for us. Indiana and Maryland, Virginia have been very, very strong, and what we saw this quarter was really the West led. And that was Phoenix. That was Las Vegas. That was Houston. And the Southeast contributed quite a bit as well. And for us, that was really Orlando and Rawling. So I feel very good about the fact that some places that have not been contributors to growth kicked in, in a big way. In terms of market that didn't perform as well, in terms of percentage growth, we actually were pretty pleased in Nashville which is part of our east business. But were -- we're pretty flat in Indiana and Maryland and Virginia. We found it going a little bit tougher in this and so we didn't see the big pop. But again, it's off of a higher base and so maybe that's to be expected. The biggest factor though in the East segment for us, and I actually meant to mention at some point this morning is, we really took New Jersey off the rails and retooled that business really down to the studs if you will. I mean, we ripped that apart. We changed management and we took a significant number of cans in the quarter as we really scrubbed that backlog and looked at house-to-sell contingencies and other things and decided that we wanted a much more reliable and rigorous process. And so that impeded what have otherwise been I think that better growth in our East segment. Because on a net sale basis, we really hurt ourselves in New Jersey with what we did to cleaning up the backlog. So that's a little commentary, touching on most of our markets.

Great and I was wondering if you could talk at all about, what you've seen mostly other builders have talked about what they have seen in April? And also if you can touch on the direction of incentives?

Sure. So for the quarter, we were up 29%. And I think, within the quarter, it's interesting. January was up a little bit. It wasn't super exciting. February was up a little bit more, it wasn't super exciting. February is always a bit of a tricky month for us because we do run a very big promo every year in February and so that comp is intentionally kind of always a tough comp for us. But March was spectacular. I mean, March really was a very, very big month. So you add that all together and you get to 29%. Again, it would have been a little bit better, but for the retool that we did in New Jersey. In April, I would say I feel like we're in a range that is similar to what the quarter as a whole was, as opposed to necessarily being just a follow-on or a repeat of March. I don't see that. I don't have this morning yet, our April final sales numbers. Obviously, that was Monday. So I'll have those at the end of the day today. But I'm guessing I sort of look through and talk to our team, our April will feel good -- will feel very good in fact, but it's not going to be like March.

Our -- the next question comes from Dan Oppenheim from Credit Suisse.

I was wondering if you can talk a little bit about -- you talked to -- some about adding communities and sales per community. What about the communities per market? In the sense that, you still have a lot of very special in the West, where you have roughly few open communities, which can be a real drag in terms of overhead and such? How do you look at that in terms of the overall efforts to bring down the overhead and get margins up?

First of all, I agree with you. I think that the density of community count at the market level is critical. And we've had to take a view, as we've looked at the overheads, is it a market where we're likely to see significant growth in community count? Or is it one where we expect to make our incremental profitability off of a smaller base. And obviously, you take a very different approach to the overheads and the structure of the division based on that. What I would tell you about community count growth is it will not be proportional across our markets. And I will say it clearly, I expect that we will see disproportionate growth in Florida, Texas, California, and probably some continued growth in the mid-Atlantic market for -- mid-Atlantic markets for us. And for those folks in our company who listen to this call, we're going to grow on all of our markets. But I definitely think you will see over the next couple of years, a greater emphasis in those 3 primary Southern markets: California, Florida and Texas, that I mentioned.

Our next question comes from Michael Rehaut, JP Morgan.

First question, I was hoping to get a little better detail on pricing during the quarter. You mentioned that it was stabilizing or picking up slightly across most markets, I was hoping to get a sense of -- is that just generally, you're looking at maybe up 1% on average, or 1% or 2% on average company-wide? Or is it maybe a little less than that, it's half flat and half up slightly? And if that's also inclusive of decline in the incentive levels as well?

Yes so it's a good question, Michael. One of the things I want to be real cautious about is, we did find ourselves in a spring-selling season. And that gave us some levers to pull. That allowed us to take prices up and remove incentives, particularly in those markets that I highlighted have really excellent sales results. I mean, into that rising tide, you've got the ability to tweak incentives and adjust price. I think one of the core questions, and it's the caution that we continue to have about the magnitude of the recovery is, as we get into this, our fiscal third, and then in to our fiscal fourth quarter, does that settle back a little bit? Or those levels sustainable? And I don't know the answer to that. So I think that's why we haven't tried to be too buoyant about pricing. I can tell you that there are markets in the West where we took more than 3 price increases at the community level during the quarter. And it didn't seem to impede selling activity. If anything, it might have added to selling activity. But I think that's an exciting anecdote. It's truthful, but is it scalable? Is it durable? I don't know yet. But I -- if I look across the business, there's no market in which our incentives were higher at the end of the quarter than they were at the beginning of the quarter, which is a very positive sign. I couldn't have said that. I don't think at any time in the last number of years. And in almost all of our markets, at least one and usually many more of our communities did get at least some level of price increase. It may have been $500. It may have been $1,000. But actually those price increases are a little bit like tick ups in interest rates, that have the effect of stimulating buyer demand.

Great, just a couple of additional quick questions. You mentioned New Jersey, the re-org hurt orders in the March quarter. Can you give us a sense of the degree of magnitude there?

Sure. We took enough cans and our can rate in New Jersey in the quarter was 50%. We've never had a can rate in New Jersey above about 20%. And it really was, new management really taken a part down to the studs and say, "Okay, how much risk do we want to have in our backlog, relative to house-to-sales? How real are these buyers, in terms of setting prices correctly on their homes, and in terms of credit process?" One of the advantages frankly of changing the way we did mortgage is, instead of having an exclusive partner and you sit in the backlog meeting and they say, "Oh, it's good, it's good, it's good." But then you put the screws to them and say, "Well, when was it good? What day can I close?" We frankly lost confidence in our ability to just sort of, take to the bank that, it's good. So having opening -- having opened up that mortgage process of having multiple lenders competing, I actually feel a lot better as I look at the business broadly and say, "If I've got a borrower who was doubled lapped, and we are tracking where they are with both." We're going to have a much better read on which ones actually you're going to get to the finish line and get them out of backlog quickly, if they're not going to get to the finish line. And I think that, in terms of magnitude, in New Jersey, for whatever reason, and it -- it's our fault. It's a local management issue. We did not do that very well. And we stripped the thing down, changed management and I have looked closely on our other markets. I don't feel like there's any parallel dynamic going on. It's a bad egg. We had to fix it.

Well Allan, I guess I appreciate that detail. I guess I was just -- when I said degree of magnitude, I mean the impact on the overall order numbers. Was it 20 orders, 40 orders in terms of the cans?

25 to 50, that kind of order of magnitude.

Okay and just lastly, community count, you kind of mentioned the progress you're making there, can you give us a sense of where you expect year-over-year -- where you expect to be 4Q '12 over 4Q '11? And any thoughts on potential growth for fiscal '13?

Yes, I think the community count will be up a little bit. I think we're up 6% this quarter. I don't know that we're going to be up as much as 6% at the end of the year, honestly. One of the good news -- features of increasing sales per community, is it's possible we'll chase ourselves down in the sense that we'll have more communities dropping off than we're able to add. I don't feel governed by trying to hit a community count number, because that makes you a bad land buyer. We’ll be up a little bit. I think we'll be up somewhat less than 6%.

And that's on a year-over-year?

And that's on a year-over-year basis.

Kristen McDuffy of Goldman Sachs.

You indicated that you wanted to further reduce interest cost. I know you have a little stub piece of your convertible left. But outside of that, what actions could you guys take to reduce your interest cost further?

Kristen, I think you are -- if you remember -- when you think about the flexibility we have in our cap structure. We've shown over the years we've been creative. We've been diligent in dealing with it. I think we'll continue to do that in the future. We have considerable ability and no constraints to repurchase debt. We have a significant secured debt capacity as well. We have seen significant appreciation in the high-yield markets. And we don't have any immediate plans, but we are going to continue to watch the market and I believe that it will be open to us, when we see that there'll be some opportunistic for us to do.

Do you -- would you guys consider refinancing some of your unsecured notes that are possibly the second priority level? And possibly looking at those 12s as well?

The 12s have a big premium associated with them in October at the call price. And I'm pretty reluctant to blow a hole of intangible net worth. So that is a challenge. It's interesting on the one hand. It's challenging on the other. I think we've been reluctant to use all of the basket available to us in the second lane. It's like having bullets in the chamber that you don't have to fire. And I think our view has been, Kristin, let's get our operations performing, as well as we can. Let's show progress in orders and closings and margins and overheads and see how the market rates this, as opposed to letting the balance sheet drive the company and just taking what the market will give us at the moment in time, before we've had a chance to prove what we can do as operators.

Okay and just one last quick one. Could you give us a sense for time horizon on the No Community Left Behind initiative? At what point do you think you could get through those underperforming communities and start to see some return to normalcy in your gross margin?

Well, this may strike you as strange. But I don't intend for No Community Left Behind to ever end. I want to constantly have the focus on the performance of every single community. One of the lazy habits that we can get into as a company, as an industry, is the best-performing stores or communities sort of carry the underperformers. I have a sales call every week with every Sales VP, and every Division President, and we talk about all of those communities that are underperforming. That's not a call you want to get called out on. And I don't have any plans to change that. So go up the hurdle bar -- for what performance means is going to change overtime. So we have -- we had before, 1.5 was a threshold, we wanted to get 2, we're now on a trailing 12-month basis over 2. We're going to move the hurdle. But there's going to be somebody at the back of the pack, and we're going to focus on what do we need to do to make that one perform better. So I think that is an ongoing initiative. Now the startup process of that, where as I said last quarter, the first lever to go grab is price. That's the first lever. Because changing your promotion strategy, changing the product, and even changing out your sales counselors, I mean, those things, will need to be done deliberately, thoughtfully and there are timelines associated with them. So I know that the first thing we did to go find out how to make a community work was grab a price lever. I could tell you, our teams are not reaching for that price lever as we're sort of 6 months to 9 months into it. We've changed our sales counselors. We've tweaked the product, and we clearly changed the way we're promoting individual communities. You'll see much less division-level marketing out of us, and much, much more community-level marketing out of us. That has taken time. But it's taken some of the pressure off of the pricing fee. So I feel like even though, No Community Left Behind is likely to be a permanent condition in our company, the impact that it has on margins because of changes in price to stimulate activity, are nearly played out.

Our next question comes from Jay McCanless of Guggenheim.

First question on shifting from your preferred mortgage lender to local lenders, is that part of the reason that the ex impairment gross margin was down year-over-year?

I don't think I'd like to make that linkage, no. No, we had a number of things, Bob talked about a bunch of them. But frankly, we had a much bigger basic of closings in the quarter and the mix was not quite as favorable, in terms of the ratio from our higher-margin markets. That is a little bit of it and the No Community Left Behind that we've talked a lot about. And then Bob also mentioned selling H specs, was a little bit of it. But I don't think the mortgage thing, really had much to do with it.

Okay and then, that leads to my second question with, it looks like the West has a higher percentage of the backlog going into 3Q than it was last year. Should we take any negative perceptions on gross margin away from that shift?

I think Bob gave you a pretty good...

Yes, I think if you look -- if you back to our script when we talked about the fact that margins will be variable, and I think if you look at it historically, our margins on the third quarter have been lower than in the second quarter. So I think, mix will play a part in it. But I think it'll be variable and it's not something that, when you look at conversion rates that is, as easily maybe to tag it as you would like.

Okay.

We're planning to take away is, we're going to get...

We're planning to take away is -- no at the year though, we are going to be comparable to the last year.

In terms of, I think it was what, 10.7% ex impairment for fiscal 2011?

If you look at the unlevered margin, prior to interest and impairments and abandonment, the margin will be comparable at the end of the full year to last year's same number. I think that, that slide is #12.

The next question comes from Adam Rudiger of Wells Fargo.

I wanted to ask 2 questions on No Community Left Behind. You've kind of answered some of them already, but the first was on the move from half the communities underperforming to a quarter. What was been the most common -- and I think you just talked about price, but what's been the most common success story or theme that, maybe excluding New Jersey too, that's enabled you to make -- to take 0.5 to 0.25? And then conversely the supporting, the really strong communities, how much are you thinking about if at all, really just slowing the sales pace there in trying to focus more on price appreciation and grow the margins there?

Well, so I'll take the second part first. In terms of growing the margins, since as I said, there's not a restrictor plate on those best-selling communities. But that's clearly where we're feeling a little bit more confident, and where you'll see us taking price increases, and/or removing incentives. As I mentioned, in one of our Western markets, I mean, we had more than 3 price increases during the quarter in communities that we're selling at a very rapid pace. And so we're not at all embarrassed to do that and we'll do that. That may mean that the improvement trajectory of those best-selling communities on a sales per community per month basis, will flatten out a little bit. That's okay. We're -- you're right, we do want to try and profit optimize. In terms of the first part of your question, moving underperforming communities into performing status. I mean it really is. Sometimes, we have the wrong product. I mean, there's one of our market. We're competing on a 2-story context with no master on the main. All of our competitors have a master on main plan, then why don't we have one? So you get that in the market, and all of a sudden we're competing more effectively. We've had other cases, and in fact -- and probably the most common is when we stopped holding ourselves accountable for traffic, from our marketing efforts at the division level, and started looking at traffic at the individual community level. Well I -- that's, I mentioned to Kristen, that's a big deal. When you stop doing display advertising, online or otherwise at the division level, and you start holding people accountable for how much traffic did we get to that neighborhood in a period of time. I think the biggest success we've had is micro-targeting to drive traffic to those underperforming communities. That there's a direct correlation. If we get more people over the threshold into the community, we're going to generate more sales. And so, if your focus is sales per community, your marketing focus has to be traffic per community.

Our next question comes from Joel Locker of FBN Securities.

Just talking about your balance sheet, just capitalization, have you reached out to some of your debt holders and look for maybe debt for equity exchanges? Does the lower interest rates and obviously, get more towards profitability?

Joe, I don't know that reaching out is maybe a fair statement. We look at all different types of transactions throughout every month and every quarter and when something is interesting down the road, we certainly may do something.

Joe, I'll just tag on to that. I think if you look at the relationship between depreciation and our fixed income complex, and appreciation in the equity, you have to look at both sides of it for something like that to make sense. And I'm pleased that the market has taken a view, as to our viability that is reflected pretty clearly in our cap structure on the debt side. It's not as clear that our operational acumen has been recognized, and we haven't heard it yet on the equity side. We got to keep working at that. And that's why, I say before you see really dramatic things happen on the balance sheet, we want a chance to prove that we can improve the operations. Because I think that helps with the equity side and then that frankly makes any type of transaction. And the one you mentioned, and others more interesting.

Right. Just follow-up on gross margin ex onetime items, they look like they're 9.2% or so. And it just seemed like some of the bottom-performing communities would have to be, I guess, in line for some kind of impairment, just base in -- if do a mid-singles or that's before in -- or after interest amortizised but just kind of, I just wanted to get your take on, why we're not seeing at least some more impairments with gross margins still hanging around 9%, I guess on a -- without any one-time items?

Well I think Joe, we've got pretty fulsome disclosure on what our impairment process is, on our 10-K and our 10-Qs, and it a community-level analysis. We have a watch list that we disclosed how many communities are on that watch list, and that the margins and predicted margins that those characteristics with those communities will appear on that watch list. We have been very, very diligent over the years in how we run that process. We retooled the entire process during the restatement. And I think that, that's not something that we're really concerned about from a long-term perspective. Our communities continue to have the rigor every quarter. And as margins continue to improve as we've seen, and then the No Community Left Behind thing continues to improve as we sell more communities. I think that's going to become, less and less of an issue. And then the other thing, Jay -- or Joe, excuse me, when you analyze community issues, there's a permanence to a pricing situation or a margin situation in a temporary conditions. You have to analyze which one is permanent, and which one is temporary. And I think in many cases, we've seen temporary issues with older specs, we reduced them significantly, over the last several quarters. And obviously with those, you'll have a little bit lower margins, and I think, on a go forward basis, at the controller specs, you will see improvements.

Right and just the last question on net community count growth, sequentially. What did you say, it was up 10 year-over-year? Or what was it?

6%.

6%

Just up from the third quarter is -- I mean, up from the first quarter, is it up 6%?

Year-over-year, it was up 6%.

Yes, but I'm saying from the December quarter?

No, it was up a couple of communities.

A couple of communities.

Our last question comes from Alex Barron of Housing Research Center. Alex Barrón: In terms of your interest incurred and interest expense, either through cost of goods sold or below the operating line, should we expect that number for this year to be -- those 2 things to be roughly the same? And also going in to next year?

Well if you remember, Alex, we continued or completed the successful exchange of the mandatory convertibles of a significant portion, and the TEUs. So from an annualized perspective, we have taken about $4 million out of that number so if you compare year-to-year, I think that would be the way to look at it. Alex Barrón: Right but I'm saying is the -- I'm guessing the absolute number is going to be closer to $125 million, $126 million, interest incurred. So is that roughly the ballpark of what we should expect for interest that flows through the cost of goods sold, plus interest below the operating line?

Yes, I think the total interest incurred were roughly equal the interest expense with the addition of the amortization of capitalized cost in OID from the 2017s. Alex Barrón: Okay, and my second question has to do with, I guess kind of what you're seeing on the land front. I guess given sort of the increase in sales activity. We heard at least in the Phoenix market, that land sellers are starting to kind of raise their asking prices. Are you starting to see something like that in other markets? And what -- how are you guys approaching your land acquisition from that perspective?

Clearly, the land sellers pay attention to all these earnings conference calls, and they can see these ticks in the years. So they're not immune to trying to raise prices. That's clearly the case. I think, a couple of things. There are -- in all of these markets, there are a lots of different kinds of land available. And so finished lots, if somebody prices themselves out of the market, we'll take a look at something that needs still, some development activity. It's not as if your constrained unless you don't have some development capability, and we do in all of our markets. So I think that helps mitigate that a bit. We're continuing to be very patient, focused on our MRR hurdles that we require for new deals. I am confident that we can find them. Again, sort of, and I know I'm a broken record but I want to come back operational improvements. We're saying improvements in sales prices and increases in sales per community that gives us a capacity to be more competitive in buying land. It is awfully tough to buy land if you can't operate your communities at a market or better level. So part of the answer of being able to buy land is make sure you are good operator. I think that was the last question, I want thank everyone for participating in this quarter's call, talk to you in a couple months.