Allison Bober Stuart A. Miller - Chief Executive Officer, Director, Member of Executive Committee and Member of Independent Directors Committee Richard Beckwitt - President Jonathan M. Jaffe - Chief Operating Officer and Vice President Jeffrey P. Krasnoff - Former Chief Executive Officer, President, Director, Member of Executive Committee and Member of Stock Option Committee David M. Collins - Principal Accounting Officer and Controller Bruce E. Gross - Chief Financial Officer and Vice President

Stephen Kim - Barclays Capital, Research Division Joshua Pollard - Goldman Sachs Group Inc., Research Division David Goldberg - UBS Investment Bank, Research Division Michael Rehaut - JP Morgan Chase & Co, Research Division Alan Ratner - Zelman & Associates, Research Division Stephen F. East - ISI Group Inc., Research Division Desi DiPierro - RBC Capital Markets, LLC, Research Division Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division John R. Benda - Susquehanna Financial Group, LLLP, Research Division

Welcome to Lennar's Second Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Allison Bober for the reading of the forward-looking statement.

Good morning. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial conditions, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements. Thank you.

I would like to introduce your host, Mr. Stuart Miller, CEO. Sir, you may begin.

Good morning, everyone, and thank you for joining us for our second quarter 2012 update. We're very pleased to detail our results for you this morning, and we have a lot of ground to cover. As always, I'm joined this morning by Bruce Gross, our Chief Financial Officer; Diane Bessette, our Vice President and Treasurer; David Collins, our Controller. Additionally, Rick Beckwitt, our President; Jon Jaffe, our Chief Operating Officer; and Jeff Krasnoff, Chief Executive Officer of our Rialto segment are here to participate as well, and of course, you just heard from Allison Bober. I'm going to begin this morning with some brief opening remarks about the state of the current housing market in general and about our second quarter results, and then Rick and Jon will comment on specific aspects of Lennar's Homebuilding operations. And Jeff will update performance on our Rialto segment. David Collins is going to also give a 5-minute primer on our deferred tax asset reversal. And finally, Bruce will provide detail on our first quarter numbers. After Bruce, of course, we'll open the phone lines to your questions. [Operator Instructions] So as I sit here today, I couldn't be more pleased with the progress that our company has made and continues to make as we work through this historic downturn. The associates throughout our company have worked tirelessly to pull through the toughest of times to revamp our business from top to bottom and to move forward to stable profitability. The reversal of our deferred tax asset reserve this quarter is really a tacit recognition of a job well done, and it's symbolic of having accomplished a great deal to bring Lennar back to a strong go-forward position. And in that regard, I want to thank all of the associates of our company for…

Thanks, Stuart. We are really pleased with our operating results this quarter. These results were driven by both the well-executed land acquisition strategy and a fine-tuned homebuilding machine. I'm going to review our land activities and explain why Lennar is positioned to succeed in today's land market. Jon is then going to discuss our building activities and how we maximize our gross and operating margins. During the first quarter, we continued to focus on acquiring or auctioning new homesites that would have a positive impact on our bottom line. This quarter, we purchased 4,561 homesites for $206 million, and we spent $81 million on land development. Combined, our land acquisition and land development spend was up about 74% over the prior-year period. In addition, we signed option contracts to acquire 1,597 homesites. From a geographic standpoint, approximately 29% of our land purchases in the second quarter are located in the mid-Atlantic, 23% in the West, 22% in Texas, 14% in Florida, 7% in the Pacific Northwest, with the remaining 5% spread throughout our other markets. The lion's share of our new land deals were sourced outside of a competitive bid environment and were relationship-based deals. As in prior quarters, money was invested geographically in the markets where we saw the best opportunities. In Q2, we continue to acquire great deals in Florida and Texas but invested more heavily in some extremely high-margin opportunities in California and the mid-Atlantic. You will continue to see quarter-to-quarter changes in the geographic mix of our land purchases as we capitalize on the best opportunities out there. While the land market has heated up recently, our pipeline of land that we're actively negotiating is robust. More importantly, over the last several quarters, we put under contract or letter of intent over 24,000 homesites that have…

Thank you, Rick, and good morning. As Stuart noted, we're very pleased with our second quarter results of a post impairment 22.5% gross margins and 9.2% operating margin. I will speak to how we continue to drive bottom line profitability through our management of pricing, product, direct costs and operating structure leverage. Our operational focus of balancing sales, price and pace starts by, first, stabilizing pricing, community by community. Then we focus on increasing the pace of sales, creating positive momentum. It is this momentum that enabled us to lower incentives and/or raise prices this quarter. This resulted in new orders of 4,481, improvement of 40% year-over-year and 48% sequentially over Q1. For the prior 4 quarters, sales were stabilized at 2.4 sales per community per month. This quarter, we increased our sales pace to 3.5 sales per month. Incentives were down to 10.7%, a year-over-year 140-basis-point improvement. This was primarily due to the improved rate of sales and a higher percentage of the homes sold prior to starting construction. Our backlog grew to 3,970 homes, up 61% year-over-year and 46% sequentially. With this rapid increase in our backlog, sold homes now represent 48% of total homes under construction. That, combined with a material increase in the number of pre-sold homes, we expect that our backlog conversion ratio will dip below 100% in Q3. Our newer communities with higher gross margins and absorption continue to capture a greater share of our deliveries and sales. However, one of the keys for our margin and absorption success this quarter was our focus on communities where the rate of sales was below the company average. We have a process in place where our divisions review detailed plans with senior management on strategies and tactics to improve the performance of these communities. Our product…

Thanks, Jon, and good morning, everyone. Rialto now has a focused team of over 200 professionals acquiring, resolving and adding value to distressed and advantageously priced real estate assets. We continue on the path to build a first-class investment and asset management company, which over the long haul, we expect will generate significant shareholder value. This quarter's earnings of $4.3 million for the Rialto segment are still not where we'd like to see them. This is mainly due to the timing of recoveries and higher expenses resulting from a number of borrowers and guarantors in our earlier distressed debt portfolios, taking obstinate positions about repaying their loans and bucking historical norms. More recently, we have seen this turn into an increased effort by a number of investor and developer obligors to alter existing laws to frustrate the original contractual terms of the underlying loan agreements, specifically to limit our ability to collect what is due. While we continue to be successful with our approach, including the use of the judicial process when necessary, the related higher costs must be expensed upfront, while revenue recognition is being delayed until later in the process. Nonetheless, operationally and from a cash flow perspective, we've made substantial progress on these portfolios, collecting over $650 million to date. And we've already repositioned almost $2 billion of loans into owned real estate. Of the original $627 million of FDIC seller financing, net of all cash on hand, it's now effectively down to approximately $240 million. All of our distressed debt investments since early 2011 have been made through our fund business where we had already recalibrated our thinking about the timing and cost of resolution. And we continue to materially exceed our original expectations on timing and amount of cash resolution. Our first $700 million real…

Thanks, Jeff, and good morning, everyone. As Stuart mentioned, we reversed $403 million of our deferred tax asset valuation allowance in the second quarter of 2012. We came to this conclusion because the company determined that it was more likely than not that the majority of its valuation allowance against its deferred tax assets would be utilized. The reversal of $403 million of our valuation allowance is presented as a benefit from income taxes in our income statement. The conclusion to reverse this amount was based on a detailed evaluation of all relevant evidence, both positive and negative, including such factors as our nonconsecutive quarters of earnings, the expectation of continued profitability, as well as the housing recovery we are experiencing in our markets. I will take a few minutes to explain the process we undertook to reach our conclusion. Historically each quarter, we have evaluated the relevant evidence regarding the DTA. Our analysis each quarter included a review of the overall housing market conditions, local market conditions and the company's actual results and financial projections. As of May 31, we concluded that there was sufficient, objectively, verifiable, positive evidence that outweighed the negative evidence and deemed that it was more likely than not that we would utilize our DTA in future periods. And as such, we reversed $403 million of the allowance. Among the factors we considered in our analysis were the following. We have had 9 consecutive quarters of profits with an expectation of continued profits. We were profitable across all of our businesses. Our operating leverage has improved significantly. Our year-to-date deliveries increased 24% year-over-year. Our year-to-date new orders increased 37% year-over-year. Our backlog increased 61% year-over-year. Housing starts have increased, and new home inventory is at an all-time low. We project to use our NOLs in…

Thanks, David, and good morning. I'll provide a little more color to the results, starting with Homebuilding. Revenues from home sales increased 23% to $796 million, driven by a 20% increase in wholly owned deliveries and a 2% increase in average sales price to $250,000. The breakdown by region is as follows. The East region had an average sale price of $231,000, up 4%; Southeast Florida, $266,000, up 1%; Central Florida, $229,000, up 9%; Houston, $229,000, down 1%; the West region, $304,000, down 1%; and the other category, $321,000, down 17% due to product mix. Jon already highlighted the drivers of our strong gross margin performance and significant operating leverage during the quarter. The gross margins were strong in all of our regions this quarter, but they were strongest in the East and Southeast Florida regions. During the quarter, we had asset sales that were recognized in both the equity and earnings from unconsolidated subsidiary and other income lines. Although the joint venture asset sales resulted in a loss, the asset sales on the other income line had a profit. And combined, these 2 line items totaled $3.4 million of income in Q2, and that compares to $11.9 million in the prior year. Our Financial Services business segment generated operating earnings of $18 million versus $2.5 million last year. These are the strongest quarterly operating earnings for Financial Services since 2006. Mortgage pretax income increased to $17.2 million from $5.3 million in the prior year. This quarter's mortgage originations increased by 50% to $976 million. Our in-house mortgage capture rate of Lennar homebuyers was 77% this quarter. Originations with non-Lennar homebuyers increased 89% this quarter primarily due to an increase in the number of refinanced transactions as interest rates were under 4% for the quarter. Our title company had a…

[Operator Instructions] Our first question comes from Stephen Kim of Barclays.

I wanted to talk to you a little bit about your ability to raise prices as tempered by the appraisal process. We've been hearing ongoing concerns about appraisals, and yet, it does seem that just as buyers are able to get their financials in order in a better way than they were a year ago, builders are also finding ways to deal with a difficult appraisal process. I was wondering if you could share with us what you're seeing in the marketplace. Are you seeing any positive trends there? And what do you think it will take for the appraisals to take a significant step back in being a headwind for you?

Steve, we've discussed this topic, certainly, at our presidents' meeting. And look, here's the good news. The good news is that the appraisal process, appraisals in general, have really gotten in line with the market. And the pendulum has kind of swung closer to normal than it was 6 months ago. Six months ago, appraisals just at market prices were really driving prices lower. And I don't -- we don't get the sense that, that's as much the case out in the field today. Now with prices starting to move up, there's clearly some stickiness, and there's going to be a process of kind of finding equilibrium and the appraisers getting a sense. They'll probably lag the market and be a little bit more conservative in their approach, and we're hearing instances of this. But over time, we think it's going to find its way to a realistic setting. And I think on average, I'd say I feel pretty optimistic about the appraisal side of things, finding equilibrium maybe a little bit ahead of the mortgage side.

Yes. One thing I'd add to that, Steve, is that procedurally in the field, we raise it in small increments so it's easier to get the appraisal to get there. So it's tough to goose things by $5,000 or $10,000 in a month period. So you break it up into $1,000 to $2,500 increments. And we haven't seen a lot of resistance to that in the field.

Yes, nor have I. And that's a great change of pace from where we were a year ago. Second question is, again, sort of a general question with respect to the issue of expectations. You all were fairly early in identifying a turn in the housing market at least in your communities. And we've seen increasingly people getting on board with that and echoing that. I was curious, though, if there were any pockets of the industry where you felt that expectations are perhaps getting a little ahead of where the market really is right now and where you think it is reasonable to expect it to be in the next 2 -- let's say, 1 to 2 quarters. So areas where people, you sense, may be being overly optimistic at this point maybe after having been a little bit slow to make that initial move, whether it be in the land side, in other areas of dealmaking, the mortgage side or anything that you're seeing in the marketplace.

Well, look, you highlight that we might have been a little bit earlier in reporting. I think that we're just, as a management group, very, very tightly connected with the field on a regular basis. And we're really just reporting very candidly the things that we're seeing, hearing and feeling as trends from the field. I think that it feels to us that right now, as I've said, it feels very much like we've hit a bottom and we're starting to come off of that bottom. I'm a little nervous about saying the word recovery. We'll see how things evolve over the next couple of quarters. And it will be easy for people to get a little bit ahead of the market. I don't think that there's reason for exuberance right now except for the fact that the beatings have stopped. But I think that we do have headwinds in the market, whether it's mortgage approvals, whether it's kind of remnant limitations from appraisals and prices moving up. I think that it would be easy for people to kind of get ahead of themselves in terms of the high point of home prices and where they can go quickly. I think that we're in for a steady recovery as one takes hold that is going to be slower than the V shape that people are used to. But at the same time, given the limitations on land, access to land and land availability, we are going to see, as the recovery does start to take hold, a move up in prices. So it's hard to say where people are getting ahead of themselves. I think it's a little bit too fresh. But I think that as in all recoveries, we are prone, as a group, to get a little ahead of ourselves. We're trying to keep things in check and stay very closely tied to the field.

Our next question is from Joshua Pollard of Goldman Sachs.

My first question was actually for Jon. Can you walk through the progression of incentives per home, by month, over the course of the quarter and talk about where those incentive levels are in your backlog, ultimately trying to understand even if you guys can't push prices because of appraisal issues, how much further you guys have to cut on the incentive structure.

Josh, first, we don't break out our incentives and backlog to that level of detail. What we are seeing in the field is, I mean, this recovery is very localized. The downturn was very national, but as conditions improve in the field, it improves at different levels in different markets. So in some markets, we've been able to both reduce incentives fairly aggressively and even raise prices. In other markets, it's relatively flat and stabilized. But we are seeing that trend come down. Where a year ago we were about 12.5%. A year ago, we were at 12.5% in average sales price and incentives, and now we're down to 10.7%. We're seeing that steady decline, and I'd say that -- and it varies by area, but in the West, we'll probably see about 85% of our communities are able to achieve price or incentive improvement. And the Central is a little bit better than that, and on the East Coast, it's a little bit behind that.

The next question comes from David Goldberg of UBS.

My first question, Stuart, you talked about in the opening comments your feeling that there was someone in the government that kind of understood the issues around mortgage underwriting. And I'm wondering if you could just give us an idea of the political landscape in your mind now between the forces that are kind of pushing for tighter underwriting, especially for FHA/VA loans and the forces that say we need to kind of find a way to stimulate housing more through -- at a minimum kind of -- at a minimum don't tighten any more but maybe even loosen a little bit and kind of how your thoughts on how that's playing out, especially as it relates to the QM standard and underwriting as we go forward.

Okay. David, I'm not going to name names, but I will say that certainly within the government there has been over the past year a recognition and awareness that housing, really, is a central issue and key to a recovery within the economy. And I think you see that really on both sides of the aisle. It doesn't mean that there aren't some people that feel that more and more tightening is required, and you hear some of those sentiments come out. But the more people have come to understand that housing is a very important key to driving employment and driving psychology improvements or sentiment improvements among the consumer, who, by and large, own homes, the feeling among many legislators is that the pendulum has swung too far and that the mortgage process has become overly cumbersome and been driven past the point of being safe and secure. And there is beginning to be some pushback. I think that if you were to speak to the people within Fannie, Freddie, FHA/VA, there's kind of a balancing point, let's say, that kind of goes like, "Hey, let's keep things conservative enough. Let's not get back to 0-down mortgages. Let's have a healthy downpayment. But let's also recognize that we've probably made the paperwork overly cumbersome." The credit scores were probably that requiring too high of a credit score for what's reasonable. And in order to get banks lending again, I think that there's a sentiment that we have to ease up a little bit. The last thing I want to say is, as I remember, last week it was that I saw an article that noted that the FHFA is starting to reconsider the putback requirements relative to some of the banks as it relates to Fannie and Freddie loans. And that is a really good indicator that political currents are kind of moving in the direction of saying, "Hey, if we can resolve or create safe harbors relative to putback risk, then we're going to define the landscape for banks and enable them to make a more comfortable lending decision as they go forward." And I think that's as good of an indicator as I can point to that the political world is really starting to get an understanding that we've probably swung too far to the conservative side.

Got it. And then just a follow-up. I think you guys did a great job on outlining what differentiates Lennar on the land front, the land acquisition front. And I was wondering if we could follow up and just think about the peer group that's also trying to pursue the same land opportunities. And if we kind of put Rialto to the side because clearly, that's a competitive advantage and very, very hard to replicate, I'm wondering about the other factors that you guys listed. How replicable are they and how much do you think you're going to see competitors trying to become, as an example, more nimble in the way that they're underwriting land to try to compete better with the likes of Lennar in the land market now? In other words, how high are the barriers to entry right now? How long will it take your competitors to try to do some of these things more efficiently?

Well, let's just be clear that it is a very competitive land environment. And as you highlight Rialto as a distinguishing factor, keep in mind that Rialto has taught a lot of our homebuilding divisions out here how to do these things in local markets. So it's really Rialto almost on steroids right now in the markets across the country. The things you need to think about is the DNA in Lennar has always been land oriented. And we look at things in a different way than many of the other builders. We're not averse to developing our own land or working with landowners to work on entitlements. And as a result, we don't have a need to just go in there and buy finished homesites because that's what our metrics are with regard to how we operate. So from a process standpoint, we are very nimble. We're fast. We don't have an enormous book-building process to get things reviewed at a local then a regional then a corporate level that takes 3 or 4 weeks or sometimes months. We can make those decisions relatively quickly. And with all of that in mind, I think that speed is a huge differentiator, as well as the ability to do things that are extraordinarily complex.

Let me add to that. There are 2 components of land acquisition. Number one is finding the things to negotiate on, and number two is the way that you go about negotiating. I think it's very hard to just hire someone and to replicate. I think that what you've seen in our management team, whether it's Jon and Rick on the Homebuilding side, whether it's Jeff and Jay Mantz on the Rialto side, or Eric Feder as the bridge, so much of what we're able to identify is being driven by relationships, relationships that have been put in place over these past couple of years through the toughest of times. And there's a certain thickness to those relationships that is sticky and is really positioning us well. But a lot of what Rick highlighted as well is beyond just access to the deals. It's the way that our group has reacted to those deals that augments the relationship and basically feeds back to it. It's the speed at which we operate. It's the completeness with which we deal with people. It's the integrity that we bring to the table and the decision to do the homework in advance and not end up retrading and walking away from a whole bunch of deals that is really holding us in good stead as people look for certainty of close. So my personal view is that it's not easily replicatable [ph], and we're in an awfully good position right now.

Our next question is from Michael Rehaut of JPMorgan. Michael Rehaut - JP Morgan Chase & Co, Research Division: First question on Rialto. I know it's been -- obviously, it's a segment that will not necessarily go in a straight line, but you did mention you're not necessarily where you want to be in terms of the earnings out of there. And I was just wondering if you can kind of walk through maybe where you're -- kind of reiterate -- maybe get a little bit more granular in terms of the different buckets that you break out, where you're maybe having the most challenges, what you might be doing if there's anything to do differently over the next couple of quarters to maybe get that back on track ultimately to where you think it should be at this point.

Yes. I think the way that I look at it, Mike, is, first of all, as we kind of segregate out or think through the component parts of Rialto, PPIP is performing very well. Our private equity or private investment fund is performing extremely well. The area where we probably had the most kind of letdown is in some of our earlier portfolios where I think Jeff highlighted well the fact that because -- really what you're seeing is moral hazard at work. What we're seeing -- and we have a long history of dealing with borrowers and distressed debt. What we've been seeing is that the borrowers have taken a more adamant, obstinate position in dealing with the workout team and have almost just blocked the doors without any legal basis in coming or not coming to the resolution table. In many instances, they've been hiding behind pending legislation from either friends or legislative friends who they've engaged to try to get legislation to bail them out of what might be a bad contractual relationship or a bad personal guarantee. And so the resolution process has been somewhat frustrated and stymied by a longer resolution period and some additional legal cost in getting to where we had expected to be in our initial diligence. So timing is proving to be somewhat elusive. At the end of the day, what we're finding is that the legislative attempts and the attempts of borrowers to subvert their notes and personal obligations is ultimately falling by the wayside. And over time, we think that we're going to end up in the place that we thought we would end up, but those initial deals are not performing timing-wise the way that we had hoped that they would. Michael Rehaut - JP Morgan Chase & Co, Research Division: Okay. Just to take Rialto from the other side, because I believe you did mention that it is contributing to the core homebuilding operations in a competitive -- almost as a competitive -- as a competitive advantage, very much beneficial to the gross margin levels. So on the flipside, I was hoping perhaps over the -- this past quarter, the last couple of quarters, if you could give any insight in terms of, I think you've done this before, what proportion of the land deals that you've entered into recently are through those more, through the Rialto relationships where you have a less competitive or noncompetitive bidding process. And when you look at the gross margin expansion that you've had, it would appear that most of it is just from less -- lower incentive levels, but any insight around the contribution to the gross margins would also be helpful in understanding the other elements of Rialto.

Well, look, I think that as I've noted, we've had some mild disappointments on timing relative to some of our earlier deals. But Rialto has been a grand slam home run for this company in terms of what it has done, in terms of positioning us to be able to grow and enhance our primary Homebuilding business, not just from the standpoint of access to deals because frankly, that's gone both ways. The relationships on the Lennar side have sometimes found new business for Rialto and sometimes very much in the opposite direction. But the knowledge base that our Rialto team has enhanced our homebuilding operations with in terms of the breadth of kinds of deals that we can undertake to purchase in order to get to land, whether it's CDD bonds, as Rick points out, or purchasing notes on assets or just having relationships with borrowers or people in the real estate business, we have leveraged the Rialto franchise as a very, very strong driver of Lennar business. Now this disentangling and getting to percentages of deals that derive from the Rialto side, the Lennar side and what percentage has the Rialto relationship actually played, we just can't break it out that way because it's kind of too organic. It's intertwined. And I've highlighted the work of Eric, Eric Feder, as the bridge between the 2 operating divisions. I mean, we have a very smooth and compatible relationship between both sides that's kind of amplifying the performance on both sides. As it relates to the performance of Rialto going forward, we have absolutely put together a blue-chip team of loan workout professionals that will be a platform for our business going forward, but we will recalibrate and get those operations working more in line with the way we expected in the beginning. Michael Rehaut - JP Morgan Chase & Co, Research Division: Okay. Can I squeeze one more in? It looked like community count, given your sales pace community count was down roughly 5% year-over-year, can you give us a guidance of where you might end up for the year end or what you think about 2013?

Community count?

I think as we said in prior calls, from the beginning of the year we thought we'd be up about 5% to 10% from the community count we started in the year.

On a net basis.

Our next question is from Alan Ratner of Zelman & Associates. Alan Ratner - Zelman & Associates, Research Division: I was hoping to ask about your gross margin guidance. I believe the high end of your range, 22.5%, is equal to what you guys reported this quarter. And obviously, this quarter's results were much stronger than your prior guidance range. And it seems -- based on your commentary, I know you're having some success raising prices or reducing incentives. And from Jon's comments, you've been pretty successful in mitigating the cost inflation you're seeing on the materials side. So just curious why you wouldn't make, maybe, a range a little bit higher than where you're currently at today and whether there's any other issues I'm missing here, either mix or something along those lines, that would offset some of those price increases.

This is Jon. As I said in my comments, we do feel that we've got cost control measures in place that will help offset what's happening in the field with pressure on labor and materials. We are very focused on incentives and sales prices. But as you look forward, those factors are going to -- those pressures in the field starts -- increase will continue to ramp up. And very hard to predict what the mix is, how that will affect what that gross margin is. And as we look to the different mix of deliveries from the markets changing in the 4 quarters, we feel pretty comfortable with the range that we gave. Alan Ratner - Zelman & Associates, Research Division: Okay. Appreciate that. And then on the corporate line, it looks think there's a little bit of a sequential increase there to about $29 million, and that's a bit higher than you had been running at. Just curious if that's a function of the new markets you're entering or whether there were some one-timers in there and where can we think about a run rate going forward?

Sure. Alan, this is Bruce. As you look at last year, the number was below normal. I think we're averaging close to $24 million a quarter last year. This year is $29 million. It's primarily due to stock-based compensation expense, as the stock has gone up. And some of the variable compensation expense also added to the G&A this quarter. Alan Ratner - Zelman & Associates, Research Division: So that's something you expect to be recurring going forward or dependent somewhat on the performance?

We haven't given exact guidance, but I would expect as our profits go up, variable compensation expense will as well. And as the stock prices increase, the stock compensation expense will also. So I would expect that it's likely to be higher than what you've seen in the past year for those reasons.

Our next question is from Stephen East of ISI Group.

Stuart, if we could go back to demand just for a minute. As we walk [ph] communities [indiscernible], will we see where it looks like a lot of the new home sales are being helped quite a bit by lack of competing inventory. And I'm just wondering, from your standpoint, whether you think that's true or not. And then also, if that is true, are you starting to see it slide into, call it, the B-, C+ locations or any particular segment demand out there?

Let me give that over to Rick and Jon. They're a little bit closer to it.

As far as the B, B-, I think with the improving market, all communities are starting to perform a little bit better. But clearly, the better-located A locations are capturing the lion's share of the activity. We're seeing increased demand out there. A lot of it has to do with the lack of availability of competing product, and that's given us the ability to raise prices and decrease incentives. And as Jon said earlier, our sales pace per community pretty much across the company has improved regionally and by each market.

Steve, this is Jon. I think as you're aware, Phoenix is a good example of the answer to your question where MLS listings dropped pretty dramatically. That, in turn, helped the pace of sales and pricing for the new home product. But as you get to the B- and C locations around Phoenix, those are not doing as well. So if you're down on Buckeye or Goodyear, they're not doing as well as Chandler and Scottsdale and the closer-in markets. I think we can pretty much see that kind of scenario playing out across the country and in the various markets.

Okay. That's helpful. And then if we look at -- you gave breakout of land spend, et cetera, and talked about community growth. Are you demothballing the communities to any degree? And you've got a new revolver in place, so at what level are you comfortable with your cash balance? So in other words, how do you look at land spend, et cetera, moving forward?

It's interesting that in our division presidents' meeting we went through each of our divisions. Each division president gives the presentation, and we're very carefully monitoring the progress of mothballed communities. And the answer is, yes, there are some that are starting to come online. And we actually have some pretty good examples of some that are really starting to contribute to our gross margin and bottom line.

Okay. That's helpful. And then one last quick question, are you seeing any shortages of labor in any of your markets or anything along those lines that are pushing out your delivery date?

Just a little bit, and it involves the trades either [ph]. But certainly, as is typical in market recoveries, sales go first, then starts, and then labor has to catch up to that.

Our next question comes from Robert Wetenhall of RBC Capital Markets.

This is Desi filling in for Bob. So regarding gross margins, you guys discussed sales incentives as a percentage of revenues were lower for the quarter. The lowering of incentives -- is that something you're seeing competitors do as well in the markets that you operate?

Yes, the competition, they're doing all sorts of things. I think everybody in the industry is trying to raise prices and trying to reduce incentives. And the success of our peers out there, I think you'll have to ask them with regard to what they're doing and how effective they are.

Okay. And then for Financial Services, obviously, there was a big jump there in operating income. And then in terms of the operating leverage in that segment, with the increase in spend, new orders and deliveries, is that something you would expect going forward how the operating income could increase that greatly.

Well, the operating leverage is there in Financial Services, just like we're seeing with Homebuilding. I think the one thing to note is that there was a significant increase in volume, a lot of that attributable to refinance activity. So the refinance activity will be certainly lumpy depending on what happens with interest rates.

Our next question comes from Jade Rahmani of KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: In looking at your operating margins, I wanted to find out how your incremental margin performance compared with the 16% guidance you gave last quarter. We estimated roughly 30% because you had gross margin expansion, as well as the SG&A leverage. Is that accurate? And what do you think is achievable going forward in terms of incremental margins?

So again, just to go back to last quarter, what we said is in an existing community, when we go from 2 sales a month to 3 sales a month per community, the incremental operating margin is about 16%. And that was assuming the 21% gross margin and then the incremental SG&A expense of about 4.5% or so. So that type of incremental leverage was a little bit higher this quarter as the gross margin was a little higher than the 21%. So we still believe the incremental operating leverage in existing communities to be at about that level or possibly a little bit higher. In new communities, it's a little bit less because the SG&A expense is a little higher. You have to hire sales and construction people, bring on new models. And there, we typically say that the SG&A incrementally is 7% or 8%, so your incremental operating margin will be a little bit less. So we do expect that incremental operating leverage to continue. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So margins, as your volume increases, margins should still expand. Secondly, just on the backlog conversion guidance, the lower spec -- is the lower spec mix a function of the market or a change in your strategy? And then secondly, are you intentionally constraining delivery pace in order to both manage your margins, as well as control construction and labor costs?

No. First of all, I don't think that we're managing our deliveries. And I think that we've highlighted that we're very focused on generating strong margins, and so we've had a very measured approach to both sales and starts. I highlighted in my remarks that looking, watching our gross margins, you're seeing that we have a very carefully programmed approach to pricing our product, making sure that we're maintaining margins. So this has been something that's been consistent over the past years. In terms of what is affecting our backlog delivery ratio is the fact then we are -- we've seen a fairly aggressive strong move in sales. We are probably selling a higher percentage right now of unstarted homes, of homes that will take -- that will have more cycle time remaining in them. So as we face the third quarter deliveries, we recognize that we're simply not going to be able to deliver as high a percentage of the backlog, and this is just what we're seeing as we sit here today.

Our next question comes from Jack Micenko of Susquehanna International Group.

This is John Benda on for Jack. I just had a couple of quick questions for you. First is that with our regional bank coverage we're seeing increased mortgage repurchase reserving, I just wonder if you guys saw any of those trends in your Financial Services unit in the quarter?

No, we did not see any significant trend there, no.

So there are no new [indiscernible]. And then as a follow-up with the DTA reversal, I know you listed about 8 factors. Was Lennar's cumulative loss position a big consideration in the valuation allowance reversal? Or was that not looked at or just not given much weight?

The cumulative loss is something that is evaluated, but we're still in a cumulative loss position. So there has to be a significant positive [indiscernible] that comes into place, and it has to be significant while you're still in that cumulative loss position. So that was taken into account, but there was enough positive evidence that allowed us to reverse the DTA.

Great. And was there a PPIP mark in the quarter?

It was negligible. It was a couple [indiscernible] thousand dollars.

All right. Very good. We'll wrap it up here. I know that we took a little bit long with our opening remarks, but we wanted to cover a lot of ground. We certainly appreciate everybody joining us for our second quarter update and look forward to reporting our quarter -- on the third quarter. Thank you.

This concludes today's presentation. Thank you for your participation. You may now disconnect.