Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 First Quarter Earnings Conference Call. [Operator Instructions] The conference call is being recorded, and a replay will be accessible on the KB Home website until April 24, 2026. And I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin as well as other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our quarter ended February 28, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here's Jeff Mezger.

Thank you, Jill. Good afternoon, everyone. We are pleased that our first quarter financial results were within our guidance ranges. Operationally, our divisions continue to execute well, and we achieved our highest community count in many years, contributing to year-over-year growth in net orders. Perhaps most importantly, we have returned to a mix of sales that are predominantly built-to-order, which we believe will enable us to achieve 70% built-to-order deliveries in the second half of this year. We have a renewed focus on this core strategy as a central component in strengthening our company going forward. With the lag between sale and delivery for built-to-order homes, we expect to continue growing our backlog. A larger backlog will provide many benefits, including greater predictability in our deliveries and higher gross margins than we achieved on inventory sales, typically in the range of 300 to 500 basis points. As to the details of our first quarter results, we produced total revenues of about $1.1 billion and diluted earnings per share of $0.52. We continue to have significant financial flexibility and remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 843,000 shares of our common stock at an average price below our current book value per share, which we believe is an excellent use of our cash, accretive to both our earnings and book value per share and a factor in improving our return on equity over time. Inclusive of dividends, we returned almost $70 million in capital to our shareholders in the first quarter. In addition, we continued to expand our book value per share compared to the year ago period to over $61. Consumers have been faced with a variety of challenges over the past 2 years, and the conflict in the…

Thank you, Jeff. I am honored to step into the role of CEO and excited about KB Home's future. With our distinguished brand, differentiated product offerings and industry-leading customer service, there are significant opportunities to create value for both our homebuyers and our shareholders. In addition, our strong financial position provides us with flexibility and the ability to support growth of our business over time. One of the traits that defined our operations in fiscal 2025 was consistency in our operational execution that led to meaningfully improving our build times and tightly managing our direct costs. We will continue to focus on these key areas in fiscal 2026 together with our renewed focus on our built-to-order strategy. We are confident the multiple advantages of our BTO model will ultimately result in a stronger company. We remain optimistic about the long-term housing market with favorable demographics supporting higher demand over time, together with the structural undersupply of homes. Near term, buyers continue to demonstrate the desire for homeownership and the ability to qualify, although tepid consumer confidence, elevated mortgage interest rates and affordability pressures have stifled underlying demand. More recently, the conflict in the Middle East has created more uncertainty for an already cautious consumer. In the first quarter, healthy traffic in our communities, a steady conversion of traffic to sales, the lowest cancellation rate we've experienced in the past 4 years and our higher community count drove a 3% year-over-year increase in net orders. While the growth in net orders is clearly a positive at 2,846, our sales were below what we needed to maintain our prior full year delivery guidance, as Jeff noted. The meaningful improvement in cancellations reflects high-quality committed buyers who are ready and able to purchase a home and also supported net orders at an average…

Thanks, Rob. We have a favorable lot position owning or controlling over 63,000 lots at the end of our first quarter, 41% of which were controlled. Our growth strategy remains primarily centered on expanding our share within our existing markets with the geographic footprint that we believe is positioned for long-term economic and demographic growth. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested about $560 million in land acquisition and development in the first quarter with roughly 60% of our investment going toward developing land we already own. In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward. Although market conditions remain challenging, we are focused on the appropriate levers to drive improved results, renewing our focus on built-to-order, reducing our build times, lowering our costs, opening new communities and staying balanced in our capital allocation. We plan to continue our share repurchase program in fiscal 2026 with between $50 million and $100 million of repurchases plan for our second quarter. Following the end of the spring selling season, we expect to have more clarity on our year. As a result, we anticipate providing margin guidance with our 2026 second quarter earnings announcement in June. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. Now I'll turn the call over to Rob Dillard for the financial review.

Thanks, Jeff. I'm pleased to report on the first quarter fiscal 2026 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market maintaining a healthy pace and delivering our built-to-order advantage. We expect that this strategy of providing a personalized home that the customer prefers will also benefit our financial performance as we shift the delivery mix towards higher-margin built-to-order homes in 2026 and beyond. In the first quarter of fiscal 2026, we were within our guidance range with total revenues of $1.08 billion and housing revenues of $1.07 billion, a 23% decrease on a year-over-year basis. We delivered 2,370 homes in the quarter. This result was near the midpoint of our guidance range as we continue to experience moderate demand from a cautious consumer. Deliveries benefited from a 22% reduction in build times for built-to-order homes to 108 days, a 9% sequential reduction. Lower build times increase capital efficiency and benefit volume, as Rob discussed. Average selling price declined 10% to $452,000 due to regional and product mix and general market conditions. Average selling price declined 3% sequentially due primarily to regional mix. Housing gross profit margin was 15.3% and adjusted housing gross profit margin, which excludes $2.2 million of inventory-related charges, was 15.5%. Adjusted housing gross profit margin was 480 basis points lower, primarily due to pricing pressure, higher relative land costs, regional mix and lower operating leverage. We continue to manage cost effectively and achieved an 8% reduction in total direct construction costs per unit. SG&A as a percent of housing revenue increased to 12.2% as lower costs were offset by a decrease in operating leverage. SG&A expense decreased 14% due to reduced selling expenses associated with lower unit volume and…

[Operator Instructions] And the first question comes from the line of Matthew Bouley with Barclays.

So first, I guess based on the numbers you gave around inventory homes, it seems like the built-to-order orders really improved kind of beyond what you get just from cutting spec starts. So my question is, obviously, we talk about the sort of gross margin benefit, that's pretty clear. But when you talk about mixing the business back to built-to-order, maybe this will be a preview of your Investor Day a little bit. But what does that kind of more full and visible backlog do for your sales folks, your operators, what changes around your thought process on production and starts? Just any more color on why the business overall runs better relative to spec production.

Sure. Matthew, thanks for the question. When we look at our built-to-order business, as I mentioned in my prepared remarks, it's really part of our DNA. It's how we set up things. It's how we look at the world, it's how we train our salespeople. So we're not surprised to see the shift to built-to-order. And part of it is just we haven't been starting the specs so we're not competing with ourselves in our own communities with both heavy spec load as well as build-to-order. But the benefits that it provides to the business in predictability. The first place I would go is that we've got this backlog of sold not started homes that we can leverage that gives us a cadence where we can operate on even flow production. That benefits all across the board, whether that's on our fixed cost or just managing to a consistent level of construction in our communities. Plus we can use that cash, if you will, of homes that we have sold not started because it also gives our trade partners visibility. And most of the markets that we're operating in right now, we're seeing starts are down pretty significantly year-over-year, and there are trade partners that are hungry for work. So that's the first place that we point to with this guaranteed sequence of starts that's coming up. You mentioned it, but one of the obvious ones is the big margin, incremental margin that we see within the same community, selling built-to-order versus the inventory. And from a customer's perspective, our view, my view is that we're creating something different. And it's not just treating a home like a commodity or a widget, where people take what's out there and available, but they're getting to create their own personal value by picking their lot, picking their floor plan, picking their elevation, going through the design studio process and really making that home their own and designing it to fit their needs and their lifestyle and fit their budget as well.

Okay. Got it. No, that's super helpful. Second one, just kind of jumping into the guide. So mean you talked about, I guess, removing roughly 1,000 deliveries from the full year guide. Q1 orders were up year-over-year. I know you mentioned that it wasn't the level you needed to hold on to the guide. What I'm trying to get at is, I guess, was that Q1 order number, the entire driver of the guidance change? Or is this -- should we also think you're trying to reflect any more recent shifts in the market in March or any other changes on kind of the progression towards built-to-order. Anything else that's kind of changed relative to when you gave this guidance in January?

Yes. It's really the combo of the things that you mentioned. Part of it is the orders. Our orders while was a positive year-over-year comp, and we're pleased with the transition to more BTO sales, they were below our internal expectations that we had and how we built the plan for the year. As we get into the early part of March, there's a lot of noise out there. And we mentioned in our prepared remarks, this conflict in the Middle East that started right at the end of February. And we saw pretty good sales results in the first week of March. But the last couple of weeks have been a little softer than what we would like to see or what we normally get this time of year. And we just don't have a lot of visibility right now as I don't think anybody does into how long this conflict may go on, and how it's going to impact consumer psyche and confidence. But we feel that right now, it's weighing on the consumer. So those are really the 2 reasons why we adjusted the guide and provided a little wider range than we normally would for full year deliveries and revenue because of the lack of visibility we got into the short-term kind of acute nature of the market right now.

And the next question will come from the line of John Lovallo with UBS.

This is actually Matt Johnson on for John. I appreciate the time. I guess, first, if we could just talk about gross margin a little bit. If I recall, I think last quarter, you guys had expected 1Q to be the low point for the year on gross margin. Now it looks like at the midpoint of your outlook, you're expecting 2Q to be down from 1Q. So can you guys just give us some more color on what's driving that kind of -- what's giving you guys confidence that margin will, in fact, ramp from 2Q to 3Q? And then just if you guys could give us some numbers, I think you gave some numbers on the mix of BTO versus spec orders, but if you give some numbers around the mix of BTO for spec deliveries in 1Q versus 2Q, that would be great.

Yes. As we thought about the sequential mix on where gross profit is going to go, I think that we think it's actually relatively flat as we're guiding to a range, we're putting a range out there that we feel comfortable with. I think that if you think about the drivers individually between quarters sequentially, we don't expect meaningful changes in price, but we do expect to continue to get some delivery cost reductions. So I think there should also be some mix factor in there that's going to be driving it down before we see the ramp. As you think about the second half of the year, it's something that we've been talking about in the past, the shift of ETO should accumulate to an increase in gross profit margin. We do expect some seasonal unit uplift that we would -- that we've kind of -- that's implicit in the guide, that should have some uplift in margins. And then also further cost reduction should have a benefit as well. So it's really those 3 factors that we think are going to benefit the margins as we go through the year. We have pretty confidence in that because we're selling the houses now and marketing the houses now. And that's one of the benefits of the model is that we know the margins of the BTO house before we build it, whereas with the spec, you kind of never know until it's done.

I'd add to that as we look out towards the back half of the year, I mentioned it in my prepared remarks, that we have a lot of things that are just structurally different that we see that are going to lift margins. And Rob mentioned the shift to BTO, leverage on fixed with greater scale. But a big one that I mentioned is the shift or the transition back to a bigger, better business in Northern California. So as we look to the back half of the year, we're getting deliveries from communities, from stores that are open in Northern California today that have a much higher ASP and have very healthy margins. And as those become deliveries, some of these average selling prices are between $1.2 million to over $2 million. So it has a big impact on the overall company margins, and we see that happening today. If you think about Northern California, we've gone through a little bit of a trough here with communities over the last couple of years. It used to be one of our biggest, most profitable businesses. And in that area of the country, it takes a really long time to bring lots to market. So we've been working on these things for years. They're finally here, we're delivering, and we like what we see, and it's going to provide a real tailwind for margins on the back half of this year.

Yes. That all makes a lot of sense. I appreciate all the color there. I guess then if I could just follow up on the direct costs, specifically, I think you guys said they were down 8% year-over-year, which is really strong, obviously, although it sounded like there are some puts and takes within that. So I guess if you guys could just talk a little bit more about the impact from materials versus labor within that? And then just any -- obviously, it's early days here, but any disruption from what's going on in the Middle East, just broader supply chain kind of what you're hearing from your suppliers in terms of potential price or availability impacts there?

Yes. Overall, you noted the number year-over-year. We've made good progress with the things that we can control and value engineering our products and rebidding and renegotiating, reworking our national contracts. So that's all structural and will stand. Lumber has started to tick up here recently, and we've got various locks in a lumber strategy where we have different lock periods for different divisions. And there's potentially some tailwind or headwind coming from that as we relock some of these depending on what happens with lumber. But we think that our strategy is sound there, and I don't think that it's going to be a significant impact and likely it may just be an offset to further direct cost reductions that we'd otherwise be able to go out and get and achieve. As far as the impact from the situation in the Middle East, it's just really difficult to tell. With oil prices being higher, certainly, that can bleed into land development and vertical construction. And then a lot of the products that go into a home, there's petroleum that's involved in those products at some point. So potential cost increases there, we're hopeful that we can continue to offset that with some of the proactive things that we're doing, but it really is a total unknown at this point. We haven't seen it yet. It hasn't showed up yet in our cost.

And the next question comes from the line of Stephen Kim with Evercore ISI.

Yes, the move to BTO is very clear. It's obvious that there's some margin benefits there. With it, though, you're probably also going to see, you would think, slower backlog turns and maybe a temporary drag on cash flow. I'm trying to get a sense for what we should be thinking in terms of a going forward backlog turnover ratio in 2017 to 2019, pre-COVID, you were kind of running at like your exit rate of the year, your fourth quarter, which usually was your highest, was like kind of in the low 60s. I'm wondering, is that like kind of a reasonable level that we should be thinking about for the business to kind of return back to that kind of a level? Or do you think you can do better than that? I noticed you said your build time was like 3.5 months, that would imply a backlog turnover ratio of like 86%. So I mean just some guidance here or some color would be really helpful.

We don't really think about the business that way. But I think somewhere between that 60% number and the 80% number is probably where we'll fall. The backlog turn that we've had has kind of been a false read versus what our typical business is because we're going into a quarter, and we may have 500, 600, 700 sales -- same-quarter sales and closings of inventory turn that weren't in that beginning backlog number. So it's pumping up that ratio. With our build times where we've got them, and we build the plan from the ground up when we do our quarterly and full year plans. And we're banking on the cycle time improvements, the build time improvements that we've gotten so far. But I think 70% -- 60% to 70% is probably a good target. Yes.

Steve, just to clarify one other thing. Our built-to-order approach is actually better with cash. If you think about carrying a couple of thousand spec homes that you have to sell and close, they're fully loaded and all the cash is out, and we're setting this up where it's real-time deliveries, the home gets completed, the loan is approved and the buyer goes and close. So it's actually better cash management. If you can just roll through the WIP sold at the percentage we're targeting.

Got you, okay. That's really helpful. Then another side effect of moving to more BTO is that it potentially exposes you to higher cancellation rates. I know cancellation rates are super low this quarter. And it's -- one of the things I've been thinking about is that your customer deposits as a percentage of ASP are about 2%, which is pretty low even relative to other built-to-order builders, and I know you've traditionally run with some lower customer deposits than other builders. And I'm curious if you could sort of talk about why that is, why you adopt that as part of your strategy? And is that something that you might change going forward?

Steve, I'd say it's something that we always evaluate, and we might change going forward depending on market conditions. When market conditions are really strong, it's easier to command a higher deposit. But today, with the way things stand, we don't want to let that deposit upfront be a major obstacle to somebody purchasing their home. And my view on it is that when somebody comes in and buys the personalized home and they go through that process that I described earlier, and they're creating their own personal value that's unique to them. That's as much of a hook is getting them to stay in the deal as the deposit is. So we don't anticipate that we're going to have real issue of cancellations. The backlog quality that we've got, the buyer profile is very healthy. They're creating their own value in their home. And we feel good about how we're positioned with that.

And the next question comes from the line of Michael Rehaut with JPMorgan.

I wanted to first just revisit kind of the first quarter and March to date sales trends, which was obviously behind the guidance reduction? And also just better understand, if possible, how the year-over-year sales pace trended throughout the first quarter in terms of December, January, February? And if there's any incremental color in terms of at least on a year-over-year basis, how that kind of played into March.

Sure. Our sales cadence or the order cadence progressed generally as we would expect seasonally, really improving each week as the quarter unfolded. And so we mentioned we delivered 3.5 sales per community for the quarter. And December was a slower start for us and put us behind on our year-over-year comp. Then we saw solid momentum through January and February and ultimately finished the quarter up 3% year-over-year. As to March, as I said, the last couple of weeks of March have been a little softer than we would have liked. And this conflict in the Middle East, I think, which kicked off right at the end of February, beginning of March, there's clearly some near-term pressure on the consumer psyche from that. And that's one of the things that's limiting some of the visibility in the short term. But as I mentioned before, we just -- we don't know how long that's going to go, or how long this will weigh on the consumer, but we've reflected that in, I think, appropriately in our guidance by taking a more measured approach with that, including a wider full year revenue and delivery range than we normally provide at this point.

Okay. That's helpful. I appreciate that. And I guess, secondly, with regards to the gross margin outlook for the back half. I know you talked about ASPs and the mix benefiting from California, more California in the back half of the year. I think it would be extremely helpful if there's any way to kind of size or give any type of rough degree of magnitude or range, 50 bps, 100 bps, 200 bps, however you want to characterize it, but any way to quantify perhaps the degree of magnitude of improvement that you're expecting in 3Q and 4Q gross margins relative to your 2Q guide. I think it would be very, very helpful for people to try and get their arms around, modeling and trying to anticipate what level of improvement you're thinking of at this point?

Yes, Michael, there's a couple of key factors that we're thinking about that have been driving that second half margin uplift that are giving us a lot of confidence. The first one that we've talked about in the past is the BTO shift. And if you can just do the rough math around increasing BTO mix from where it is today to around 70% and then the 300 to 500 basis point differential in the margin there that equates to about 50 basis points of margin uplift as you get to that BTO mix and where we're targeting. Further, we've got regional mix in there, which is relatively meaningful. The difference in gross profit and some of those higher-margin communities can be as much as 1,000 basis points, and it's something that will have a meaningful impact just on that with the price. So things that you should consider there is that there will be a shift in the ASP that's just associated with mix, and there will be a shift in the profitability that's just associated with mix as well. Other factors are the reducing cost and then the uplift in units, which could have -- we're not really calling that, and that's the component that we're still thinking about, but that's anywhere historically in the range of 0 to 100 basis points.

And the next question comes from the line of Alan Ratner with Zelman & Associates.

Thanks for all the details so far. First, just on the pricing side and the strategy. Obviously, with the shift to BTO, I know you've also been focused on more of a base price model as opposed to a heavy incentive model. I'm just curious, as you look at your portfolio, obviously, there's uncertainty in the market and maybe there might need to be adjustments on the pricing side. What have you seen over the last month or 2 in terms of pricing at your communities? Do you feel like you've hit that point of where pricing has stabilized. I know you mentioned orders were a little bit below your expectations for the quarter. So are you still seeing a meaningful percentage of your communities where pricing is still drifting lower?

Alan, as I always say, it's really a community-by-community story. Overall, pretty stable. About 70% of our communities during Q1 either had no change, or they had some level of small price increases. They were outpacing what our optimal projections are. We did have still about 30% of our communities where we've moved price down further and different degrees, depending on the community as we just work to find the market and optimize that asset. So changes from quarter-to-quarter. But again, that is a community-by-community focus, it changes, not just on a metro level, but a submarket level and then down to within the community, and degree of change, it can be anywhere from -- it might be a $2,000 change, or it might be $10,000 change. But we're making these incremental movements to try to hit the optimal pace to get the best return result out of each community.

Got it. Okay. That's helpful. And then second, on your backlog, which is obviously growing here. I'm curious how you're thinking about the risk of higher rates now that rates are beginning to creep up again. And I guess what I'm trying to get at is, if you go back a couple of years ago, obviously, when rates surged, people that enter the contract expecting to close at a certain mortgage rate. You either had difficulty qualifying at that higher rate, or simply didn't want to move forward at that higher rate. And I know you're trying to get away from incentives and rate buydowns, but how are you thinking about the folks that might have written contracts over the last month or 2 when rates were 25, 30, 40, even 50 basis points lower than they are today. Is there a risk there? Are you working with those buyers to lock in a rate or a buy down a rate if necessary to get them to qualify. Just curious how you're thinking about that if rates do continue to move higher here?

Yes, it's a good question. I'd say if you go back to what you were drawing the comparison to before in different markets, one of the things that was challenging for us there is the way that build times had expanded. And when you're getting up to 8 or 9 months from sale to close, you're exposed to a lot of rate volatility in that time period. And now that we're building in 108 days, we've got less time exposure there. Certainly, with rates being as volatile as they have been over the last couple of weeks, there's some exposure to a limited number of the homes that we've got in backlog. But generally, we're trying to get the buyers locked in with a loan before that home starts at least, if not before. So it's limited exposure to a subset of houses that we have in backlog, mostly in our sold not started yet universe. And if we need to and find that we have to, we're not so rigid on the no incentive approach that we're not willing to help out and do something to buy that rate down to keep that buyer basically in the same position. But it's something that we'll evaluate as we go. And rates have been bouncing around wildly from day to day. So when we hit the low spots, we're going to work to lock as many buyers as we can.

And the next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is on the SG&A. You mentioned that you did some head count reductions. Can you talk about how comfortable you are with where the business is running today, and how we should think about that potential benefit and the flow-through of that coming in over the upcoming quarters?

Well, Susan, I would say that the adjustments that we made were to adjust to the new reality of what our deliveries and our revenue and our production levels are. So as we look ahead, if the market were to improve and volumes go back up, I think there's some structural change in there that we'll be able to get the benefit of. But the moves that we've really made on headcount and other fixed cost changes are to rebalance and reposition things with where we now think revenues are headed for the year.

Okay. All right. And then turning to land, can you just talk a bit about what you're seeing there? Has there been any adjustment on the land market? And what you're watching for to potentially start to ramp up some of your spend on that side?

So we're still in the land market. We're searching every day for the right deals that fit our profile and that fit the return hurdles that we believe that we need to drive profitable growth over time. It's been a little more challenging on the land front to drive a lot of deal flow because the market has been pretty sticky with price. And there's patient land sellers that generally have not adjusted to the new reality of what's happened with sales prices and demand over the last year or so. As we look at our existing portfolio of deals or deals that we have under contract to purchase, we're having success with landowners in renegotiating terms. That's generally been the easiest thing to renegotiate, which is helpful on the financial side of things, too, because often, that means we're doing a structured takedown instead of a bulk purchase, or we're able to kick out the closing to tie back close of escrow on the land much closer to when we can start turning dirt in development of the lots or in some cases, actually going vertical on the houses. But overall, I think there's still some adjustment that's got to happen in the land market, to reduce the gap between the bid and the ask. At the same time, there are still sellers out there that have adjusted. And that's what we're really focused on is building up our portfolio with new deals that fit our return hurdles today based on current conditions and current pricing and costs.

And the next question comes from the line of Mike Dahl with RBC Capital Markets.

You've actually got Stephen Mea on for Mike Dahl today. I was hoping to dive more into the BTO versus inventory dynamic. The messaging of BTO typically being like 300 to 500 bps above inventory isn't really helpful. But I was hoping you could impact how this dynamic has been rolling through your most recent orders given all the adjustments to the base price you've had to make in all directions given the choppiness of the market but are you trending on like higher end, lower end, or is there any sort of potential expansion or shrinking of this delta like embedded within your outlook?

Are you referring to the margin difference or the percentage of sales?

The margin difference.

I would say that, that stayed pretty consistent. We're able to -- we've got visibility on that on both the closing side as well as the sales side and haven't seen much of a change there. It's been pretty consistent in that we've got that 300 to 500 basis point delta where built-to-order margins are better than inventory. One of the things that I think we're starting to see now is as we have cleared out some of the inventory, and you don't have as much in a community, and there's buyers for that community that may want or need that quick move in because they've got an apartment lease or something that's coming up. So in communities where we've only got a handful of inventory, and we're primarily selling BTO, there's a little bit less of a reduction in the margin on those inventory sales versus where in the past, we've had quite a few to choose from, both in inventory that's completed as well as build to order. So as we're making this transition to the build-to-order, I think we're definitely getting higher margins on the build-to-order sales, and it will probably help somewhat on the inventory that we do have as well.

Got it. That's so helpful. And then lastly, just a very broad question, just what you're seeing in your markets at a regional level, if you could speak to any notable pockets of strength and potential areas that are lagging just would be helpful to get a heat check considering all of the choppiness that's out there.

Sure. Every market's got its own story. And there's places in each metro that are still doing just fine and selling very well, and there's places within the metros that are challenged. But from a regional perspective, we're seeing relative strength on the West Coast, including most of California, Seattle and Boise, Las Vegas continues to perform very well. Texas remains more competitive. Houston has held better with Austin and San Antonio, both grappling with higher inventory and just a very competitive market to secure those customers who are ready to transact. Florida is a little more mixed. Orlando and Jacksonville, I'd say are seeing better demand than Tampa right at the moment. But overall, pricing in Florida, I think, still has stabilized. It's just that the level of demand isn't quite producing the volume that we'd like to see. But every market's got its own story, and each metro has got those communities that are performing well and those that aren't. It appears to be maybe a little bit of a flight to quality with the top submarkets performing better than maybe some of the drive to qualify -- drive to qualified type communities, but that's not the bulk of our business anyway.

And our final question comes from the line of Sam Reid with Wells Fargo.

Actually, I just wanted to confirm your start pace in the first quarter. I can back into that based on your homes in production, but maybe just wanting to confirm the number because I believe the math would imply something less than 1,000 units versus, say, the 1,800 that you started in Q4. And then maybe just piggybacking off of that, how start pace versus sales pace should look as we move through Q2, Q3 and Q4.

Yes. So we've -- as we've mentioned, we've intentionally been pulling back on the spec starts and matching our starts to our built-to-order sales. So our starts were down, but it was right around 1,800. I believe it was 1,805 in the first quarter. So as we look ahead into Q2, we expect to generate more BTO sales and generate our starts from those sales. And right now, we've got a healthy backlog of homes that haven't started yet that are at the sold not started stage. And that's going to feed our starts over the next couple of months.

That's helpful. And then if it was already covered, I apologize. But maybe could you just give me the final expectation for Q2 on spec versus built-to-order. And any context on what spec versus build-to-order look like on orders for the first quarter?

I walked through the cadence on that earlier. So I don't know, Rob, if you have the overall average. But we exited February at about 68% BTO. And January and December were slightly below that. But kind of looking at that as the rearview mirror. So as we go forward, we know we left -- we exited February 68%. Early March, we're tracking above 70%, and we think we'll maintain that or get at least 75% as we move through Q2.

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