Below is the KB Home (NYSE:KBH)’s Q4 2014 earnings call transcript. KB Home (NYSE:KBH) reported earnings for their 4th Quarter and Year-End 2014, ended November 30, 2014, after the financial markets closed in New York on Tuesday, January 13th, 2015 at 11:30 a.m. ET.
KB Home (NYSE:KBH) is one of the largest and most recognized home building companies in the United States. Since 1957, the company has built more than half a million quality homes. Based in Los Angeles, KB Home (NYSE:KBH) is a Fortune 1,000 company and is the first home builder listed on the NYSE.
Participants:
Company Representatives:
Jeff Mezger, President, Chief Executive Officer and Director.
Jeff Kaminski, Executive Vice President and Chief Financial Officer.
Bill Hollinger, Senior Vice President and Chief Accounting Officer.
Thad Johnson, Vice President and Treasurer.
Analysts:
Michael Reinhardt, JP Morgan
David Goldberg, UBS
Megan McGrath, MKM
Robert Whitnall, RBC
Stephen Kim, Barclays
Stephen East, Evercore
Michael Dahl, Credit-Suisse Group
Ivy Zelman, Zelman Associates.
Susan Berliner, JP Morgan
Nishu Sood, Deutsche Bank
Operator
Good Morning. My name is Rob and I will be your conference operator today. I would like to welcome everyone to the KB Home 2014, 4th Quarter and year-end earning conference call. At this time all participants will be in the listen-only mode. Today’s conference is being recorded and a live webcast is available on KB Home’s website at kbhome.com. Following the company’s opening remarks; we will open the lines for questions. If you would like to ask your question at that time, please press star, 1 on your telephone keypad.
KB Home’s discussion today may include forward-looking statements that reflect management’s current views and expectations of market conditions, future events and the company’s business performance. These statements do not guarantee the future results and the company did not undertake any obligations to update them. Due to a number of factors outside of its control including those identified in the SEC filings, the company’s actual results could be materially different from those expressed and/or implied by the forward-looking statements. A reconciliation of non-GAAP measures referenced during today’s discussion to the most directly comfortable GAAP measures can be found in the company’s earnings release issued earlier today and/or on the Investor Relations page of the company’s website.
It is now my pleasure to introduce your host, Chief Executive Officer for KB Home, Mr. Jeff Mezger. Mr. Mezger, you may begin.
Jeff Mezger, President, Chief Executive Officer and Director
Thank you Rob, Good Morning everyone. Thank you for joining us today for our review of our 4th Quarter and full-year 2014 results. With me today, are Jeff Kaminski, Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer and Thad Johnson, Vice President and Treasurer.
I will begin with a summary of our 4th Quarter performance and provide some color on our accomplishments and some challenges we encountered during the period. Then, I will share our key areas of focus for 2015 as we continue to pursue top line growth and improvement and profitability while also now working to enhance our returns through improving our capital efficiency. Following this, Jeff Kaminski will provide greater detail on our financial results after which I will offer some concluding remarks before opening the call up to your questions.
During the 4th Quarter we achieved continued progress across many of our core financial matrix. We reported $796 million in revenues, an increase of 29% over the prior year and 2,229 deliveries. Our average selling price was up $351,500, which increased by 17% year over year, was a key contributor to our top line growth as our investment and product strategies continue to drive results. Our adjusted growth margin was 18.7%. I am disappointed with this result as we expected to perform better, and I would provide additional details around this topic in a moment.
During the quarter our SG&A ratio continued to improve, coming in at 10.5% as we work to contain overhead costs while growing our revenue. The income for the quarter rose to $853 million or $8.36 per diluted share, reflecting both our operational result and the positive impact of our DTA reversal. With this result we now have $1.6 billion in book equity, nearly three times our equity at the prior year-end. While we continued to make progress in many areas of our business during the quarter, we also recognize there is still much work to be done to achieve our financial goals going forward.
Now I would like to address our 4th Quarter housing gross margin performance. At the time of our last earnings call, with our expectation that the housing market would continue its slow yet steady recovery, we indicated that we believed our housing gross profit margin for the 4th Quarter would improve sequentially from the 3rd Quarter. Unfortunately, we experienced a soft end in demand in some of our served markets as the quarter progressed, with increased pricing pressure; while at the same time, we continued to face cost pressure among other things. As a result, we generated a disappointing 4th Quarter adjusted housing gross margin of 18.7% which was down 30 basis points from the 3rd Quarter.
While regionally, results in the Inland markets of our west coast operations had the most significant effect, several factors contributed to the difference between our actual and projected growth margin results. First, we were impacted as a result of delivering fewer homes than we had previously expected. Consequently, we lost some operating leverage on our indirect construction costs. These costs have been increasing ahead of deliveries as we continued to staff our operations in support of our current and future community count growth. Second, against the backdrop of tighter market conditions, we had an increased use of sales incentives and price reductions on spec home deliveries in the quarter. Third, we continued to experience cost pressure with our construction labor and material costs. We believe that all of these factors taken together had about an 80 basis point impact on our gross profit margin for the quarter.
Looking to 2015 with this lower 4th Quarter gross margin comparable to the prior year as a starting point, we know that our gross margin will continue to lag the prior year count for some time. As a result, we are projecting our 1st Quarter 2015 gross margin to drop significantly from the 1st Quarter of 2014, hitting the low point for the year before improving sequentially for the remaining three quarters of 2014. As we often observe, there is no one item that will drive an improvement in gross margin as a menu of many actions in both revenue and cost when you are aggressively addressing all of that. Although at this time we do not expect to reach our housing gross profit margin goal of 20% in 2015 as we had hoped, this remains the target level we are working towards for the near future.
Moving on to the sales and traffic transferred for quarter our net order value increased for $587 million up 22% on a yearly increase of 10%. This increase in the orders is consistent with our average community count growth for the quarter of 13%. As we shared, we will continue to balance price and pace to optimize each asset and expect our sales rate per community will not increase until we achieve our targeted growth margins. In the meantime, we do expect that our future order growth will coincide within the range of our community count growth. Our traffic levels per community remained strong; up 15% over the prior year. This data point reinforces that there continues to be strong interest in home ownership. Our year-end backlog value rose to $914 million, a 34% increase over the prior year, and our highest year in backlog value since 2007. Between our backlog position, our growing community count and our product mix continuing to generate a higher ASP. We are well positioned to drive unit and revenue growth entering 2015.
Before I review our key priorities looking forward, I would like to re-visit the journey we have been on over the past few years. As we entered 2012, we knew that we would need to further accelerate revenue growth in order to achieve and sustain profitability. We announced at that time that we were going on an offence and it was a rowing cry within our organization. We made significant investments in land and lots to grow community count and repositioned our locations and products within our current business footprints, while, at the same time minimizing overhead increases as we supported this growth strategy. Our 2014 resolves reflect a combination of these actions. With these profits we achieved our short term goal of recognizing the DTA reversal. Now that we have established the larger scale and sustained profitability, we will be expanding our focus to not only growing our revenues and enhancing profitability but also to improving our returns. Due to the investments we have made we own and control all the lots needed for our 2015 business and substantially all the lots needed for 2016.
Having now made significant progress with our land pipeline and in profitability, in May 2014 we began augmenting this focus with a greater emphasis on enhancing our asset efficiency and improving our returns on investing capital. As part of these efforts we have been evaluating potential opportunities to more quickly monetize certain long term development assets in order to re-deploy the capital in the more productive assets that have a shorter life cycle. In that regard, in October, we sold our last remaining land position in Atlanta, a market where we no longer have ongoing operations.
In addition, we have increased our efforts to reactivate properties previously held for future development in various markets where we continue to operate. Reflecting this change in our corporate strategy to more quickly monetize certain long held development assets we recorded inventory impairment charges of $34 million in Q-4 related to 7 properties. The majority, or $23 million, of these impairment charges related to an 80 acre land parcel located in the Coachella Valley area of Southern California, a sub market that has not recovered as quickly as we had anticipated. Similar to Atlanta, this is a market where we no longer actively participate. This particular property which was earmarked as an active adult community is not aligned with our core business and will require significant additional investment dollars in land development and infrastructure for an extended period of time to be built out.
Taking all of this into account we decided to better optimize this non-strategic asset by monetizing it in the short term through a planned future land sale and re-deploying the cash to generate healthier returns rather than building and selling homes on the property as we had previously intended. The remainder, or $11 million, of the 4th Quarter impairment charges are related to 6 communities primarily located in Inland, California and Arizona. Based on our evaluation of the markets where these assets are located we decided to monetize these land positions sooner by opening for sales more quickly than anticipated, and accelerating our overall timing and pace for building and delivering homes. In addition, some of the Q-4 impairment charges related to certain active communities where housing market conditions have softened. In 2015, as we plan to continue to work to improve our asset efficiency and generate a greater return on investing capital, we may identify and evaluate other opportunities to more quickly monetize assets particularly those with longer term horizons or that would require a significant additional cash outlay for development and infrastructure before the first home would be delivered.
It is important to know that in the two year period prior to this quarter, we have activated 34 communities. Of these, only 3 communities had impairment charges at the time of their activation or at a subsequent period, to the extent we changed our strategy on any given asset. It is possible that we may have additional impairments in the future. As a result of our growing profitability, and our actions to enhance our capital efficiency, we believe that we can support our current growth strategy without having to access capital markets for equity. I would also like to briefly comment on the status of Home Community Mortgage, our mortgage joint venture. In its first full quarter of operations, after the roll out in July, this thing continued to elevate their execution, but still not optimal, we are pleased with the steady progress being demonstrated each month, and look forward to the increasingly positive impact it would eventually have on the predictability of our business as 2015 unfolds. As service levels continue to improve, and our capture rate increases, we are also looking forward to add benefits of the additional income strength.
Closing, while many of our served markets remain sluggish in their pace of recovery –with our larger scale and expectation for continued community count growth – we believe we have momentum. We will continue to drive our topline growth while taking every action possible to enhance our profitability, while also now working diligently to improve our return on investing capital. With that, I will hand the call over to Jeff Kaminski for a more detailed discussion of our financial results. Jeff.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Thank you Jeff, and good morning. We continued our profitable growth trajectory in the 4th Quarter largely through the successful execution of our three strategic initiatives. Perhaps, most notably, during the quarter we reversed $825 million of our deferred tax asset valuation allowance. The said operational improvements and expected future performance that supported the reversal also set the stage for the introduction of our fourth strategic initiatives – improving asset efficiency and increasing our return on investing capital. Since Jeff has just covered the headline results for the quarter, I will focus on providing more details surrounding some of our key financial matrix for the period and our expectations heading into 2015. Certainly one highlight for the quarter was the increase in our overall average selling price to $351,500, representing a 17% rise from a year ago. Double digit increases in three of our four home building leasings combined with the expected favorable makeshift toward higher price sub market within our northern California division were the main drivers of this improvement.
For the 1st Quarter of 2015, we currently expect to experience a sequential decline in our average selling price due to the changing mix of deliveries within our home building regions as well as a relative shift of deliveries away from our higher priced west coast region to our other home building regions. We also anticipate selling price growth to moderate in 2015, given the higher price levels we have reached after 18 consecutive quarters of year over year increases. We expect the 1st Quarter ASP to be in the range of $325,000 which is close to what we reported in the 2nd and 3rd quarters of 2014. Our housing gross profit margin for the 4th Quarter was 17.3% versus 17.9% for the same quarter of 2013. The current quarter included $34.2 million of inventory impairment charges of which $11 million were housing inventory related. The 2013, 4th Quarter included $8.5 million of warranty related charges and $3.3 million of housing inventory impairment and land auction contract abandonment charges. Excluding these housing impairment and warranty charges, our 4th Quarter adjusted housing gross profit margin decreased to 18.7% in 2014 from 19.8% in 2013.
While our goal of achieving a minimum 20% housing growth profit margin remains intact, we believe our timing to achieve this goal would be extended largely due to the current [inaudible 16:22] discussed earlier. During the 4th quarter our selling, general & administrative expense ratio increased by 20 basis points from the year ago to 10.5%. This slightly higher ratio was mainly due to the reversal of an $8.2 million accrual in the 2013, 4th Quarter, following a favorable court decision. Excluding this reversal, our ratio would have improved by 110 basis points year over year. Sequentially the 4th Quarter ratio improved by 190 basis points as compared to Q-3 of 2014, reflecting the continued success of our cost containment efforts and a favorable leverage impact of increasing revenues. We ended the 4th Quarter with 227 communities open for sale, up 19% from 191 communities a year earlier. During the 4th Quarter we opened 40 new communities and closed out 13.
Our 4th Quarter average community count of 214 was up 13% as compared to the same period of last year. During the quarter we invested $272 million in land, bringing the total of owned and controlled lot count at year end to 520,198. We expect further community count growth in 2015, with the full year average projected to increase in a range of 15% to 20% – this is 2014 – depending, of course, on sale absorption rates and the resulting timing of community close outs. Our net order performance during the quarter was consistent with our stated strategy of maintaining pace on a per community basis, roughly in line with the year earlier quarter and an increase in overall net orders in line with community count growth. 4th Quarter, 2014, net orders increased 10% to 1,706 or 2.7 orders per average community per month, approximately the same rate that we experienced in Q-4 of 2013. Our net order value for the quarter increased 22% from the year ago to $587.4 million due to higher net orders and the average selling prices.
Turning now to our balance sheet and capital structure, we are able to achieve our goal of reversing a significant portion of our deferred tax asset valuation allowance during the 4th Quarter and we ended the year with a net debt-to-capital ratio of 57.9%. At year-end we have over $550 million of liquidity and our strategic prioritization of asset efficiency will play additional focus on asset monetization opportunities as well as balancing land investment and managing growth within our capital structure goals. We are targeting a lower rate of land investment in 2015, in a range of $1.1 billion to 1.4 billion, which we believe will support our revenue growth objectives. Other than in connection with the planned refinancing of our [inaudible 19:10] due in June of this year, we now anticipate capital raises for the foreseeable future and have no plans to issue equity. In addition our target net debt-to-capital ratio in the 40% to 50% range remains consistent with past comments. We are pleased with the progress we have made in the 2014 fiscal year.
Our focused operational and investment strategies yielded broad improvements across most of our core financial matrix demonstrating the success of our strategic initiatives. However, we believe the [inaudible 19:41] will likely create a pause in this progress and we have moderated our expectations for the 1st quarter of 2015. We currently expect our housing revenues would be between $440 million and $490 million in Q-1. With this anticipated significant decrease in the housing gross profit margin mentioned earlier and an inclusion of a projected land sale gain of approximately $7 million, we believe our 1st Quarter bottom line will be approximately break-even. Now I would like to turn the call back over to Jeff for his final remarks.
Jeff Mezger, President, Chief Executive Officer and Director
Thanks Jeff. In closing, I would like to review some highlights of our full-year results. Revenue has increased to $2.4 billion or 14% year over year. Most of this revenue growth can be attributed to our higher average selling price as the geographic and product mix of our investments over the last few years continues to gain cash, drawing our top line, and improving our profitability allowed us to achieve our goal of reversing a DTA valuation allowance. As a result of both, our operational earnings, and this reversal, our net income for the year was $918 million or $9.25 per diluted share. Our reported book equity at year-end was $1.6 billion, up substantially over the prior year, and is now at a value of approximately $16 per fully diluted share. We enter the year with a strong backlog in place and with the year ending community count that is up 19% over last year.
This leaves us in a much better position to capitalize on this year’s spring selling season. Looking ahead, we expect to sustain our community count growth, which combined with an increase in ASP year over year, will continue to drive real top line growth. At the same time we will be diligently working to enhance profitability with a particular focus on improving gross margins. With our increasing revenue and improving profitability, we believe we are positioned to support our growth targets by placing a greater emphasis and also improving our return on investing capital. Thank you all for joining us this morning. Rob, let’s open up the call to questions.
Operator
Thank you. We will now be conducting a questions-and-answers session. If you like to ask a question, please press star, 1, on your telephone keypad. The confirmation tone will indicate your line is in the questions queue. We ask in the interest of all, [inaudible 22:08] one question and one follow up. If you like to remove your question from the queue, you may press star, 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, I will hold for questions. Thank you. Our first question is from the line of Michael Reinhardt with JP Morgan. Please proceed with your question.
Michael Reinhardt, JP Morgan
Thanks. Good Morning everyone. The first question I had was on, I guess, the gross margins, obviously an area of concern, and you’ve talked about it a bit already but just wanted to clarify. When you talk about your expectation for 1st Quarter gross margins to be down materially, sequentially, it would appear that given the outlook for break-even, net income would also be down materially on a year over year basis. Is that correct? And also for the outlook for the full year – are you expecting gross margins to, on a full year basis, improve, be flat, or even be down, year over year?
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Ok. Yes Mike. I will. I think I will reply to the first. Yeah, on a year over year basis, we do expect the 1st Quarter margins to be down. There is really two, I would say, maybe two or three main impacts affecting the margins in the 1st Quarter. First one is what we typically see every year in the 1st Quarter versus the leverage impact, with the loss of leverage impact on the fixed costs that we have included in our construction costs. We think that could be up to 2 to 4 percentage points of margin impact [inaudible 22:08]. We have the conditions in the items discussed during the script, on the market – pricing, higher incentives that we are seeing the market place, price, the ability to increase price not equal to some of the cost increases that we are seeing that we can [inaudible 24:04] affected.
We also have a couple of, very high value, very high margin communities in our west coast region that are closed out now on the 4th Quarter and we want to enjoy the benefits from those coming in the 1st Quarter. I think it is important to note that we do believe that the 1st Quarter will be a low point for the year, and that we will have sequential improvement going further into that. As far as the full-year estimate on the gross margin, right now, I would say it really depends on market conditions through the spring and our ability to raise price and offset some of the cost increases that we have been experiencing. But I would say that 20% target is not likely in 2015.
Operator
Thank you. The next question is from the line of David Goldberg with UBS. Please ask your question.
David Goldberg, UBS
Thanks. I was wondering if you guys could give some more clarity on the return on capital focus and specifically what does that translate to. I mean, I assume, it means greater free cash load generation. If it is just the way that you invest capital on the market basis or is it thinking, may be, a little bit, paying down some debt, or, may be, set buy backs. I was wondering if you could give us some focus on, kind of, how you are thinking about maximizing return on capital, if it is going to become more efficient within the business.
Jeff Mezger, President, Chief Executive Officer and Director
David, I shared in my look back on history, we had to get to a higher scale to be able to sustain profits and we have done that. So, your first priority is to create a return and we have now done that and we are going to pull every [inaudible 25:33] to continue to improve profitability, so improve the return. On the other side of the equation, we think we can drive our growth with our own cash generation, whether it is from the things we talked about, monetizing all the assets, whether it’s selling some lots where we not have [inaudible 25:54] location. It is a general review every month of our balance sheet: where our assets are, what the status is, and what can we do to monetize things while continuing to grow our business. We know that overtime we want to get to an inventory turnover to wax, we are not there today. But, I think where you started with the comment on generating more cash – that’s where we’re starting. We want to drive or business with our balance sheet and not have to go access the markets anymore.
Operator
The next question is from the line of Megan McGrath from MKM. Please proceed with your question.
Megan McGrath, MKM
Good Morning. Thanks. I want to ask a little bit about your expectations for community count growth. Among what sounds like a relatively cautious outlook for the year, in terms of the soft demand continuing. And if you can comment specifically – you talked a little bit about Inland, California – could you talk a little bit about, if you are seeing anything in Texas now, specifically in Houston, as we started to see some [inaudible 25:54]. And also, has the expectation that Houston could be soft this year impacted your gross plans in that region? That was my question.
Jeff Mezger, President, Chief Executive Officer and Director
Ok. Megan, let me cover as many of as I can recall from your question. Let me start up top with a couple of comments. We entered the year with a community count of 19%. We normally don’t like talking about trends within a quarter but in this case because we are halfway through our 1st Quarter, we can share that our sales are tracking within range this quarter of our community count growth. Traffic levels remained solid. Sales per community are pretty consistent with what we saw in Q-4. So, we like how we are positioned; my comments on the gross are more relative to, in some locations we are seeing some pressure on pricing, while we are also seeing some pressure on cost. So, we are selling homes but in some cases we have to do some things to alter the sales rate strategy in that community. If you go specific to Texas, our trends there are very similar to what we are seeing around the rest of the system.
Our sales per community are holding fine. Traffic is up. It is tracking with the community counts. We are seeing no indication of any pull back by the consumer at this time. We are sensitive to the Houston situation. We are very watchful right now. In fact we have actually pulled out of a couple of land transactions in the 4th quarter because of our sensitivity there. So, we are going to keep an eye on it and see how things develop, as there is more clarity on the economy there. Having said all that, I would like to kick it to Jeff to give some clarity to what our Houston business really mean to our Texas business relative to the whole company. There has been a lot of different numbers spinning out there.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Thank Jeff. I guess first before start there. Rob, if you could please allow a follow up question as people are dialing in. I’m not sure the first two, if they had a follow up question or not but two questions per person is fine. Relating to Houston, I want to clarify few defects that we see. We have seen some [inaudible 29:11] reports trying to estimate the percentage of our business etc. etc. associated with it. For 2014, as the percentage of our total housing revenues, Houston represented about 8.5% of the total company’s revenue. So again, you know, like many things with the company – because of the higher ASP in our west coast operations – although the delivery and the community count in the Houston market were higher, it was really only an 8.5% total mix revenue. In terms of deliveries it was about 14%, in terms of year-end community count it was about 16%. That’s one thing we wanted to clarify, I think, in relation to that business. Megan, did you have a follow up question?
Megan McGrath, MKM
I do. I just wanted to ask a little bit about your one cue guidance on revenues $440 to $490. That also sounds like you might have a lower backlog conversion rate in the quarter. And you talked a little bit about, sort of, closings coming in lower than expected this quarter. So is it the same issues impacting you next quarter that did this quarter, could you talk a little bit about that?
Jeff Mezger, President, Chief Executive Officer and Director
Well, Megan, our backlog rotation right now as we looked at it entering the year. Our backlog is up. It has waited a little more through early stage construction or homes that have now been started but won’t be completed till the 2nd Quarter. So, we do expect our backlog conversion to go down relatively to the prior year. It’s the way the backlog is positioned; over time you will see it get into a better balance.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
I will just add to that a little bit. On the built times – we have also seen a slight expansion of built times, which is due, what I would say, due primarily to the higher price point products that we are building right now today, and to tighter labor market conditions. So, I think the combination of the two factors has impacted our expectation on 1st Quarter backlog conversion.
Operator
Thank you. Our next question is coming from the line of Robert Whitnall with RBC. Please ask your question.
Robert Whitnall, RBC
Ok guys. This is actually Colin, filling in for Bob. So a quick question on your long term target of 20% gross margin. You said, this is not going to be achievable in 2015, but what would you think your time and expectation for achieving this goal would be?
Jeff Mezger, President, Chief Executive Officer and Director
A lot of it, Colin, will be impacted by market conditions. From time to time we will review all the different things that we are addressing to improve our gross margin and the message we want to make sure everyone heard is: we are starting out of the gate lower than we did a year ago, and with that it makes 20% a much higher hurdle to get to. If your first half is well under, that means, you have to be well over it second half to average 20, and we don’t think we can do that today. We are sure that we would continue to have sequential improvement and it remains our new term goal which I don’t think we can get to in 2015.
Robert Whitnall, RBC
Thank you.
Operator
Our next question comes from the line of Stephen Kim with Barclays. Please start with your question.
Stephen Kim, Barclays
Thanks very much guys. I was wondering first if you could talk a little bit about your comment of reactivating some previously mothball communities and bringing them online. Around the same time, you were saying that, you were talking about, possibly taking additional impairments and… I just wanted to understand a little bit. Are those two things related in your mind: as you reactivate some of these, parts of it sitting idle for a while, may be, require some longer term investments? Are you looking, sort of, to reactivate them and sell them, or, are these completely different parcels that you are referring to, for the impairments?
Jeff Mezger, President, Chief Executive Officer and Director
Stephen, in my prepared comments, I walked through why we decided to sell the community out in the Palm Springs area. It would be very cash intensive to develop. The market out there is extremely volatile and we could not see ourselves in the near future. Based on where we are at today, and our strategy to utilize our own cash to grow our business, we would not want to put the kind of dollars that one would have required in the ground. In the long term, it would take to get it back. So it was not consistent with improving our capital efficiencies. As we look at each asset, some could be sold, though typically that’s a harder financial hit. It would create more value through building things but we may sell some thing, we may build some thing. It’s one phase, two phase – every asset has its own strategy and each quarter we look at the timing, and the potential and the market conditions and how much cash would it take to activate this – we would not want to keep wedel [inaudible 33:56] and this thing down so we take those dollars and grow our business with higher returns elsewhere.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Right, I think that strategy, Stephen, is most closely associated with our new initiative of really focusing on asset efficiency as we go into 2015. And I think as Jeff mentioned in the prepared remarks, you know, we have been activating communities over the last couple of years and haven’t had very huge impairments relating to those activations. And we will continue to review our balance sheet for monetization opportunities, whether they be in billed out or in sales – as we move forward.
Stephen Kim, Barclays
Great. Yeah, no, that’s great. I guess, my next question relates to anything you might be seeing in terms of the entry level of the market. Anything you might be seeing in terms of the entry level of the market and, sort of, what’s you are telling your folks there. You know, obviously, we have seen the FHA fee action which will be in effect, I guess, at the end of the month. What are you telling your folks in the field with respect to how to position around that or how to react to any move in demand that would happen? Do you expect something to happen? Just, could we talk a little bit about that, and the entry level? And then one house-keeping thing: can I get the homes-under-construction number for the quarter?
Jeff Mezger, President, Chief Executive Officer and Director
Stephen, within the quarter, our first time buyer percentage ticked up a point, I think. It was basically consistent with what we had seen. It’s higher in Texas than it is in most of our other regions, because there has been job growth there, there is population growth and all the things that unlock the first time buyer. The FHA insurance premium reduction, sure you have seen in reports, they are estimating it would unlock another 250,000 buyers, both new and used, that otherwise wouldn’t have qualified. So, it’s a meaningful boost to the overall housing market – it said it will have a different impact. Our current FHA backlog does get the benefit of this reduction and so we have some communication out to the field on how to manage that because that goes in effect in the end of January so it helps your current backlog and it clearly changes the payments to qualify on future sales. So, you know, time will tell, how big an impact it has. Today, our FHA business is bunched up to 30% or so. It’s much slower than it used to be and, I think, as you see the first time buyer unlocked, it would probably go up again but right now it’s less than the third.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
And on the house-keeping item, Stephen, total in production, at the end of the quarter is 3,002.
Operator
Thank you. The next question comes from the line of Stephen East with Evercore. Please go ahead with your question.
Stephen East, Evercore
Thank you. Good Morning guys. Jeff, I appreciate you walking through, you know, what’s sort of driving it and how you all think this plays out. If you look at the one queue where you say, you think this would be the bottom. I guess, what gives you the confidence there that one queue is the bottom and then you grind off of that level?
Jeff Mezger, President, Chief Executive Officer and Director
Well, for the start Stephen, you have the leverage side, and our 1st quarters always are lowest revenue quarters, so we have the biggest leverage impact on the fixed portion of our gross margin. And as I shared in my comments, we have been growing in this area. So, you have a double hit – that your revenue is down while your cost is up. If you go back to our community count guidance, your community count is going to be up year over year – 40 or 50 communities, whatever the number is – and there is a cost associated with that – in many cases without the revenue tied to it until the 2nd, 3rd or 4th Quarter. So, that is some flexion point, where our costs are being hit by overhead and we don’t have the revenue pull through yet. So, you’ll see that coming through as the quarters play out over the year. And after that, the other side that we know, as we look at it is the mix of our business – communities opening and communities closing. That’s how we see it today and we are hopeful of finding upside in the cost areas and revenue areas going forward, but those two certainly are driving the support for our comment.
Stephen East, Evercore
Okay, and that makes sense. The second question is sort of a combined question. If you look at your market, you know, let’s take leverage out of the picture for a minute, when you look at your pricing and incentives versus your cost, which would be the bigger driver of reducing gross margins or putting pressure on gross margins? And then, historically, if you have just looked between your California margins and the rest of your regions, what type of magnitude did you historically see there?
Jeff Mezger, President, Chief Executive Officer and Director
I think it’s hard to differentiate between price and cost because we have both going on at any given location. It’s hard to say it’s just one or the other. If you are in the Bay Area, the prices are continuing to move up quickly, costs are [inaudible 39:] , hopefully they are not, but they are probably going up right with it. Then we have other areas where you have this crossover, where costs have increased while pricing in the short run has softened. So you have that component going on with this as well. If you go back to my prepared comments where we did see in the Quarter, the Inland areas of California required a bit softer than they have been while the coastal areas held very well. So you have this dislocation that built up within the same reporting region for us. You have areas at the bay area where it is as good as it has ever been, while the Inland regions have softened quite a bit.
Operator
Thank you. The next question is from the line of Michael Dahl from the Credit-Suisse Group. Please go ahead with your question.
Michael Dahl, Credit-Suisse Group
Hi, thanks for taking my questions. Jeff, I guess, what we expect, margins, it’s an environment you have acknowledged is increasingly difficult. 20% gross margin, you have introduced a new focus on return on capital, which is not necessarily gross margin dependent. So, what makes 20% the right long term target for KBH? I guess what I am getting at is that if you were able to hit your two times inventory turn with 80% margin, how do you view that trade off rate now?
Jeff Kaminski, Executive Vice President and Chief Financial Officer
It’s a balance certainly, Mike. We refer to our bottom line and all the components as a property equation and if you can hit an 18% gross but your SG&A is 8 or 9, that’s the same thing as a 20% gross and a higher SG&A. So, at any city where we have a balance of those two, and we continue to chase the leverage we can pull on all of those areas, not just one or the other. Typically, in the past, in order to achieve our return on investing capital targets we had to have a bottom line around 8% to 10%. How do you get to the bottom line and then, say, in to the returns? Our [inaudible 41:23] to back and think of the components I walked through. We had to get to a scale because of our cost structure, debt structure, everything. We had to get to a higher scale in order to achieve profitability. And now that we have done that and we can mine the cash out of this scale, our message is that we can drive our growth through cash generation in our current business. And therefore, we think we can grow our returns while at the same time improving our profitability, going forward.
Michael Dahl, Credit-Suisse Group
Okay. Thanks. And second question, I think Jeff K has mentioned that Texas is 16% of communities today, and you think about growth plans for Houston, 16%. If you think about growth plans for 2015, would that number, that percentage be expected to increase? If so, I guess, would some of those communities where you have reported to have seen issues, how many of them are early on enough [inaudible 41:27 – 30] that you could turn it off quickly in response? Thank you.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Right, on the community count growth expectations for 2015, Jeff mentioned earlier that we have been pretty measured with continued investment in Texas and while we intend to continue investing up in communities, I think on a net basis, we would see a route [inaudible 42:52] community count in Texas in total and Houston in particular, in 2015. So, we are taking a measured approach. We will see what happens and develops in market. I certainly would not expect our exposure there to increase in 2015, and hold right around that 8% or 9% of our total company revenues as we are going to the year.
Operator
Thank you. The next question is coming from the line of Ivy Zelman with Zelman Associates. Please proceed with your question.
Ivy Zelman, Zelman Associates.
Thank you. Good afternoon guys. I think it would be helpful that, if you can, may be, have a deep rooted talk about some of the market differentiations, with Inland slowing. There has been some discussion that, you know, the Phoenix market is improving, and they remained really red hot, may be, with respect to the trend. Do you expect home prices on an apple to apple basis to still show increases? Are you concerned about Coastal California, Southern California, we are hearing that Asian buyers are starting to pull back as a target to pull money out of China. Are you hearing anything that would confirm that? I mean, how do we think about the trajectory is in the markets like Southern California, Northern California that did so strong and the coastal areas? Just the overall, kind of, sense of the markets, Pacific, that would be helpful for everyone.
Jeff Mezger, President, Chief Executive Officer and Director
One of the things that we have seen that we have seen that picked up is relative to Orange County. There has been a pull back on the new home side with the Chinese buyers. These people are heavily controlled by realtors that they are comfortable doing business with. Where the realtors are taking them today is the re-sale side. The new home pricing in 2014 increased pretty significantly in those areas and re-sale became a more attractive opportunity in the eyes of the realtor and the consumer. I don’t know if that’s the typical push pull in a market until the re-sale pricing goes up, which it has, now in the last 60 days, in Orange County, it has been moving up – so, it could be just the comparative push pull and at some time they would come back to the new home side. It’s hard to say whether it’s a short term move or the competitive pressure from other builders, but in the Inland Empire or central valley, up north in California, we saw a big increase in incentives and price pressures.
I don’t know if these people were closing out their year or closing out communities but we are watchful and we will see how the new year unfolds here. Relative to Phoenix, we are seeing improved demand in Phoenix. We are not that large there but we are seeing improved demand there. I think you will see activity levels go up before you will see a lot of price in Phoenix because people work through their assets. Vegas, I would say, is okay. Demand is good. We don’t see prices moving but there is demand there. So, it is a mixed bag. Interestingly, in Texas our pricing is favorable right now. We are not seeing any price pressures in our Texas business. If you go around the country, it is a mixed bag, and the good areas are still good and the bad areas are a little tougher.
Ivy Zelman, Zelman Associates.
Helpful Jeff. A follow up on depreciating the dynamics of what’s happening in certain Texas areas is [inaudible 46:19]. Your sales per community were down in the central region just [inaudible 46:28], and you indicated that you expected your gross to be just really driven by the new stores and new communities you are opening. So, when you are thinking about the level of same store being where it is right now, how much gross would you need to see in same store in order to resume margin expansion, or, you said that you are not strategically trying to increase same store if it means negatively impacting the margin. So, that relationship, strategically, how should we think about it?
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Right, yeah. I think, as we look at it, as always we look at it on a community bases across the business and we currently have certain communities, that are running very well and running above pace or above forecasts of pace for those communities and we are taking pricing actions within those communities and we have communities on the other side of that spectrum as well. So, I think it is important to understand how we are running the business and it’s really done at the division level and even more detailed, at the community level, beyond that. The pace of our 1st Quarter, we are pretty happy with, as Jeff mentioned, it’s tracking very close, in fact a little bit above, our community count growth expectation for the quarter. So, you know, there is this science for the spring and we would continue to monitor spring selling conditions and hopefully start capturing back some of those margin improvements as we go.
Operator
Thank you, the next question is from the line of Susan Berliner of JP Morgan. Please proceed with your question.
Susan Berliner, JP Morgan
Hi, good morning. Just wanted to… I could speak about the spec strategy with the market place, if you are contemplating changing, and, I guess, in Houston, since it is such a big relocation market, if you can, I guess, just discuss where your specs are in the Houston market and where you see that trending over the year?
Jeff Mezger, President, Chief Executive Officer and Director
Susan when you remain committed to our build to order model and we are heavily [inaudible 48:23 – 27]. We always have some inventory that’s hanging around whether it’s a cancellation after start, a multi-family community or if we [inaudible 48:37] except for three lots we made. We started those three just to clean it up. So, there is always some level of inventory in our business and as we go through the year, our inventory sales are our most difficult sales. Our sales teams, our management teams, everybody – we take the view that building a home of the customer’s choice is the way to go. There is a lot of value to that. And if it’s in Houston, you can build a home there pretty quickly; it’s one of our faster build times, we will retain the value of build to order over the risk of a spec every time. In our 4th Quarter, I shared that, we did have some margin compression on inventory sales that we had achieved in order to deliver what we did but it’s not a large component of our business, we are going to stick to our strategy of build to order.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Regarding your question on specs, Susan, we are maintaining right now our two [inaudible 49:39] per community across the business. I don’t think the Houston division varies significantly from that. I don’t have the information in front of me but I think we are on the same matrix.
Susan Berliner, JP Morgan
Great. And I just had a follow up, I guess, on the Inland Empire. I guess, what was the change? Was it the Chinese buyer? Was there anything else you could discern from the slow down there?
Jeff Mezger, President, Chief Executive Officer and Director
There is a ripple that occurs when Orange County softens a little, and it did, and I do think it was in part the Chinese buyer’s demand that softened. It ripples Inland, and the further Inland you go, the more the ripple is felt. There are some areas in the far eastern end, I’ll say, of the Inland Empire, not the Palm Springs, but say, 60, 70 miles from the coast, where the price pressure between new and used was on the magnitude of 8% or 10% in the last six months, where prices went down that much. So, it did pretty hard out there. It’s not where you have a big business. It’s not where you are investing today. Because you have communities opened that you are working through, it had an impact. It’s the typical urban flow. As Orange County settles, it will slowly settle back Inland. I don’t know that it’s a fundamental structural [inaudible 51:00], it’s just a short term market dynamics that we are facing.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
Coming back to your question, we did just check the number; we are actually a little bit below. The company average in Houston, company average being two per community; we are below that in the Houston market which [inaudible 51:14].
Operator
Thank you, the next question is coming from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Nishu Sood, Deutsche Bank
Thanks. On the impairments, you know, I think, investors, you know, think of it as normal. A few call it fine tuning – impairments – you know, may be, $1 million to $3 million per quarter. Obviously, this quarter you mentioned the drivers of the more significant impairments but you also mentioned that with the return on capital strategy, there could be future impairments. So, saying that in a quarter of drawing that, I don’t know, the quarter where the impairments rose to more than $30 million, I think, probably has some people thinking that there could be large amounts, like we have this quarter, in future quarters as well. I know it’s difficult to tell, obviously, you know, you do the project evaluation and you figure out as you go. But maybe if you could just give us some sense of what you meant by that. Do you mean that there will be significant impairments, you know, in the ballpark, as we saw in this quarter, in future quarters? What exactly did you mean by that?
Jeff Kaminski, Executive Vice President and Chief Financial Officer
What we meant, Steven, is that we evaluated on a community by community basis and we want to put proper, I guess, framework around for the streak. We are very serious about improving our return on investing capital. We will be looking at monetization of various assets on the balance sheet. As Jeff mentioned, we activated over 30 communities over the past couple of years at a very low level of impairment. We did have a higher impairment quarter, this quarter, but we did not mean to imply that, that would be normal on a go-for basis. I think it was just a cautionary statement that other could be additional impairments in the future. We would pursue that strategy but we are not necessarily saying you should model. You should certainly not model impairment levels that we saw in the most recent quarter.
Nishu Sood, Deutsche Bank
Ok thanks. That’s very helpful. The second question. There have been a lot of questions regarding Texas already. I wanted to dig in – in a little more detail. I am, you know, sure you are keeping a very close pulse on it. Forward-looking indicators – so, you know, you would not have expected just because oil prices fell on the headlines, that, you would have seen demands fall apart already. But, maybe, forward-looking indicators – as you talked to your folks on ground in Houston and in other parts of Texas as well – traffic, you know, anecdotally; sentiment, you know, maybe in the move up segment, which might be expected to see more of a headline awareness; anything forward-looking, you know, that you have gathered in terms of pulse you are keeping on the market, that, you know, leads you to lean one way or the other for the next couple of quarters.
Jeff Mezger, President, Chief Executive Officer and Director
We are always watchful on the issue of traffic trends and if some company has a lay-off, we hear about that pretty quickly, and, that’s a data point, you do not want to ignore. As I looked at our book of business in preparation of the call, I would say, that our first time buyer communities, that are lower priced, are more value oriented products, and are selling better in Houston today. That could be that the higher price buyer has softened a little bit, I don’t know. But as we shared, right now the consumer performance is pretty typical. We are not seeing any signs that they are pulling back.
Jeff Kaminski, Executive Vice President and Chief Financial Officer
I think the best quarter indicators that we have right now is, sort of, quarter-to-date sales performance in Houston, and in Texas, and in the Central region in general. It has been pretty strong. I mean, it’s tracking right along our community count growth. And the traffic in the 4th Quarter in the Central region was up nicely versus prior year, both on a per community basis and on an overall basis. So, we’re not seeing the indications right now, although, you know, with all the news and the concerns, that have been, economically, on the state, I’d like to say, that we’re facing, looking at it and evaluating it on a measured basis. So, you know, we are not overly bullish on it but up to this point we really haven’t seen much impact from all the headline news that you have been seeing.
Operator
The next question comes from the line of Michael Reinhardt with JP Morgan. Please go ahead with your question.
Michael Reinhardt, JP Morgan
Thanks. Most of my questions have been answered, I guess. Just wanted to, you know, circle back to some comments that, you know, you have made over the last twelve, eighteen months, about, you know, some of the asset purchases and overall portfolio-ship that you have, kind of, referred to, in terms of the land investment strategy that you have done. And, in particular, I am thinking about some of the asset purchases, you know, that you have highlighted in California – Palm Creek, for example. Also the reactivation of the Ins Prada and, you know, some of the Vegas properties there, which, you know, you have referred to as good cost bases.
What I am trying to get to is, you know, with this kind of pushing out of the 20% of gross margin goal – it would have seen that before, and you kind of walked through what the drivers were in terms of the gross margin outlook for the next few quarters. The fact is that you have been caught right now by a little bit softer pricing relative to cost, but you would have seen that at the same time that you had positive momentum in this portfolio-ship from some of the purchases, again, that I mentioned. I guess, the question here is, you know, were those assets generating a 20% gross margin or better? Had things changed? Was the goal of achieving 20% in some ways dependent on, you know, the price inflation? Because it appears that there is something a little bit off relative to the expectations 12 months ago.
Jeff Mezger, President, Chief Executive Officer and Director
Mike, as we are always sure with this group. We don’t underwrite with inflation. We don’t. I always take the view, if your price goes up, your cost goes up with it, and if you link this to the comments we have made on the pressure under axe. If we acquired a community, we underwrite a community about the lots opening for sale – and the western side of the Inland Empire as an example – and you get a point of price pressure and a point or two of cost pressure, you are not at a 20% margin. It’s not that you under grow it; you had some changes in the input data, I’ll say, from when you acquired it.
The other thing that goes on and Jeff touched on it – we had a couple of communities close out in the 4th Quarter, that were acquisitions in California that we made back in 2012, where in some cases they were finished lots and we built through those. In the typical life cycle of a quarter it would open up at or below the 20% as you get momentum in the community and it would close out well above 20%. That’s what happened with those that closed out in the 4th Quarter and we have this turn over going on where a lot of communities are closing out and the new ones are opening up at lower margins, and we expect as they mature, and we get into the year, and they are opened longer, then you see the margin left.
Michael Reinhardt, JP Morgan
I appreciate that. I guess, you know, with some of those, you know, the Plum Creek and the others that you highlighted at the last analyst day, you know, are the margin expectations intact as we sit here today, in terms of, I would assume, being above 20% , you know? Perhaps if you can also talk about Las Vegas and what the contribution might be there, over the next couple of years? Is that business perhaps close relative to the overall mix of closings? Would that also be a positive contributor to your margin mix?
Jeff Mezger, President, Chief Executive Officer and Director
Mike, when you touched on Plum Creek and you said, is it over 20% – we just opened it in the 4th Quarter. We never said when we bought it, it was over 20%, so, I can tell you it’s not over 20% today. But for the most part, our new acquisitions are performing within a range. Some are better, some are not as good as when we underwrote them and that’s the part of your portfolio of business. You keep flogging things where you are below, and capitalize on where you are above. When it comes to Las Vegas, as I mentioned in a comment before, the market is holding well for us; Ins Prada, in particular is selling very well right now. If you think of Vegas, relative to my comment on the seasoning of communities and how they would open a little under but that they would exceed over time – that happened with some that closed out in the 4th Quarter.
If you go to Vegas, we closed out a lot of communities in the 1st Quarter of last year – where we had previously had a lot of price run up on assets that we had purchased opportunistically below cost of replacement – and we had some very very strong margins in Vegas, Q-1 of last year, well above 20%. As you watch Ins Prada, which is now open, and I think we are now just getting into deliveries out there. It would become a big part of that business; we will see it lift our margins in Las Vegas, if not for the company.
Operator
Thank you. At this time I will turn the floor back to the management for closing comments.
Jeff Mezger, President, Chief Executive Officer and Director
Ok. I would again like to thank everyone for joining us on the call today. We look forward to sharing our success in the future as the year unfolds. Thank you.
Operator
Thank you. This concludes today’s teleconference. You may now disconnect your mic this time. Let me thank you for your participation.
