PulteGroup, Inc.
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Operator:]

Good morning, and welcome to the PulteGroup, Inc. Fourth Quarter 2013 Financial Results Conference Call. My name is Sarah, and I'll be facilitating the audio portion of today's interactive broadcast. [Operator Instructions] At this time, I'd like to turn the call over to our host. Mr. Jim Zeumer, you may begin your conference.

[James P. Zeumer:]

Okay. Thank you, Sarah, and good morning, everyone. I want to welcome you to the PulteGroup's earnings call to discuss our fourth quarter financial results for the 3 months ended December 31, 2013. On the call today to discuss our results are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; Jim Ossowski, Vice President, Finance and Controller. Before we begin, I want to remind everyone that copies of this morning's earnings release, along with the presentation slides that accompanies today's call, have been posted to our corporate website at pultegroupinc.com. Further, an audio replay of today's call will also be available on the site later today. I also want to alert participants that any non-GAAP financial measures discussed on this call, including references to gross margins after certain adjustments, are reconciled to the U.S. GAAP equivalent as part of this morning's earnings release. And finally, today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested on our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me call -- turn the call over to Richard Dugas. Richard?

[Richard J. Dugas:]

Thanks, Jim, and good morning, everyone. I want to start this call by saying thank you to our employees for their incredible accomplishments over the past 3 years. It is only through their efforts that we get to speak with you today about the significant gains in PulteGroup's fourth quarter and full year operating and financial performance. Their willingness to embrace our Value Creation strategy and implement needed changes have been critical to improving our fundamental business performance. The realization of their hard work is again showcased in the outstanding quarterly earnings we released this morning. We have been consistent over the past 36 months in explaining our Value Creation strategy and initiatives to improve gross margins, overhead leverage, inventory turns and ultimately return on invested capital over the housing cycle. As I will highlight and Bob will detail, we have been successful in delivering gains in each of these key metrics and more broadly, across the business. Our financial results clearly show the progress we continue to make. For the quarter, we were able to drive a 610 basis point improvement in gross margin to 23.2%. Our adjusted margin of 27.7% represents the 12th consecutive quarter of margin expansion and is a full 190 basis points above our previous high recorded in the first quarter of 2005. We are very proud of this accomplishment that has taken our margins from the bottom quartile in the industry just 3 years ago to among the industry leaders today. The significant gains in fourth quarter results helped to lift full year 2013 margins to 20.5%, up from 15.8% just 1 year ago. 2013 margins are also more than double our gross margins for full year 2010, which is when we started laying the groundwork for what ultimately became our Value Creation strategy, a strategy that is clearly working. Consistent with our overall focus on operating efficiency, we were also able to improve our overhead leverage. For the full year, overhead leverage gained 80 basis points to 10.5% of revenues. On a dollar basis, SG&A for 2013 was up $54 million from last year, but this is against a year-over-year increase in homebuilding revenue exceeding $870 million. We are simply running a more efficient business and certainly, a more profitable one as we reported pretax income of $528 million for 2013, almost triple our prior year pretax income of $184 million. In prior periods, we had discussed the potential offered by our Value Creation strategy, and I think now it's clearly evident the positive impact our actions are having on PulteGroup's operating and financial performance. What should also be increasingly clear are the opportunities we now have to capitalize on PulteGroup's improved business platform going forward. With a more efficient operating model than we had in the past, with a more supportive capital structure and with more disciplined investment processes, we can be more effective putting additional capital to work. To that end, as part of our 2014 budgeting process, we authorized $2 billion for land-related investment. This is up from $1.3 billion invested in acquisition and development in 2013. Our decision to increase investment into the business is consistent with our view that U.S. housing continues to advance to a sustained multiyear recovery. While there are many estimates on what and when the peak of this current cycle will be reached, consensus numbers point toward the industry having several years of increasing demand ahead, a view that we share. The fundamental market dynamics that launched and have supported the recovery in housing remain in place. Interest rates are near historic lows, although we certainly appreciate the rise in mortgage rates experienced in 2013 had an impact in the back half of the year. The inventory of homes available for sale, particularly as it relates to new homes, remains low. And home prices continue to appreciate in most markets, which helps to create a sense of urgency and confidence among buyers. With all that being said, we still believe that the ultimate shape of the housing demand curve going forward will be impacted by broader economic conditions. More jobs and ideally better-paying jobs will be critical in driving housing demand to peak levels. Home buyer demand would also benefit from better mortgage availability, particularly for first-time buyers who have been underrepresented in the recovery so far. With major changes rolling through the system, including the recent implementation of QM rules and new leadership at the Fed and FHFA, it is difficult to assess how mortgage availability will develop in the next few quarters. We do believe, however, that our government officials appreciate just how important housing is to a sustained economic recovery in this country. Now with our fourth quarter earnings reported, we close out an exceptional 2013 on a very high note and enter 2014 in a strong market position and with tremendous financial flexibility. Now let me turn the call over to Bob for more details on PulteGroup's fourth quarter results.

[Robert T. O'shaughnessy:]

Thank you, Richard, and good morning. Our fourth quarter and full year 2013 results build on prior gains and continue a trend of operating and financial improvements that began more than 2 years ago. We've benefited from an industry tailwind, but I think our relative performance demonstrates the incremental gains we're generating from our Value Creation initiatives. Let me provide some details on our financial results for the fourth quarter. Fourth quarter home sale revenues increased 9% over the prior year to $1.6 billion. Higher revenues for the period were the result of a 13% increase in average selling price to $325,000, partially offset by a 4% decrease in closings to 4,964 homes. The higher average selling price in the quarter was driven by price increases and the continuing shift in our business towards move-up and active adult homes. For the fourth quarter, our closings break down as follows

[Richard J. Dugas:]

Thanks, Bob. Let me provide a few high-level comments on market conditions during the quarter. Recognizing that the fourth quarter is historically the seasonal low point in demand, so trends can be hard to discern. That said, volumes were relatively stable across the quarter, and in fact, we sold virtually the same number of homes in December as November, which is a slightly better pattern than we normally experience. While I would say that the East Coast is in generally good shape, the Northeast down through Washington saw buyers pull back, we believe, largely due to lingering effects of the government shutdown. As you go further south into the Carolinas, Georgia and South Florida, consumers were certainly more active. With the volume of rhetoric around budget deals and government shutdowns much lower now, we are optimistic about the spring selling season in the D.C. area and very confident about markets in the Southeast and Florida. Moving into the middle of the country, pace has held up reasonably well in the Midwest, with considerable strength in Michigan and an ongoing rebound in Chicago and St. Louis. On a year-over-year basis, Texas was a little slower. As we talked about last quarter, Texas has a greater percentage of Centex buyers, so higher interest rates and the closeout of some communities impacted our numbers. And finally, out West, demand conditions really didn't change much from what we saw in the third quarter. We had pushed prices aggressively in the first half of 2013, so the spike in rates generally caused buyers to be more cautious. On a relative basis, Arizona and the Pacific Northwest held up a little better than California and New Mexico. Looking beyond market conditions in Q4, an area that we are watching carefully as any impact that January's extreme weather in the Midwest and East Coast may have on housing production in the first half of 2014. With regard to recent sales trends, let me add that we are very pleased with the traffic and sales activity we have seen thus far in the -- in January. Our sales results for 2014 will be impacted by lower year-over-year community count. But buyers are showing up in our communities, and seasonal momentum is beginning to build nicely. Based on the trends we have seen since December and extending into January, we are optimistic about the spring selling season ahead. Before opening the call to questions, I will finish by saying that we are extremely gratified by the results we delivered in the fourth quarter and for all of 2013. It was a year of tremendous progress for our company and further confirmation of the gains our Value Creation strategy is helping to drive. In just a couple of years, we have gone from the middle or even bottom of the industry to among the top performers in the critical areas of margin, pretax profit growth, returns and strength of balance sheet. We now enter the important spring selling season with very positive expectations, especially given our expanding library of innovative life-tested home designs, and a number of new communities to serve consumers. I'll complete my comments as they began by thanking our employees for their hard work on behalf of the company and our home buyers. Thanks for your time this morning, and I'll now turn the call back to Jim Zeumer. Jim?

[James P. Zeumer:]

Thank you, Richard. At this time, we will open the call for questions. [Operator Instructions] Sarah, if you'll explain the process, we'll get started.

[Operator:]

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

[David Goldberg:]

My first question is about the incremental land spend. And understanding the commentary about how the changes in your model and your operating strategy are enabling you to be able to buy more land and buy land more effectively or efficiently. I'm wondering if you can talk about how much of this is push and how much of this is pull? In other words, are you finding more opportunities in the market now maybe because of some of the slowdown in the back half of '13 that you're saying, "Hey, we really want to go out there and pursue those opportunities?" Or is this just the model has gotten efficient enough now that you can go out there and compete more aggressively with some of your peers for new land acquisitions?

[Richard J. Dugas:]

David, it's Richard. I'd say it's some of both. Primarily as our model continues to get more efficient, we have a lot of confidence that we can drive excellent returns as we have with our land investment. And frankly, we've been increasing our appetite for land acquisition steadily over the past 18 to 24 months. So it's a little bit of both. Some additional opportunities, but primarily, I would say the confidence we have in our ability to find excellent transactions. And I'll just point out that we are absolutely not wavering from our disciplined criteria that we've had now for 3 years to generate the best returns on the land spend that we put out there.

[David Goldberg:]

That's great. And then just as a follow-up, the price increases at Centex -- and Richard, in the commentary about how higher rates are impacting the business in Texas and the Centex business in Texas. Were you surprised by the higher prices at Centex? And is this more of a mix shift in terms of product? And I know you guys have kind of worked to get out there and be able to compete with the existing home market at Centex, and maybe that brought prices down. But it's just a little bit surprising on our end to hear Centex prices up. Can you talk about that a little bit, what's going on and what's driving that phenomenon?

[Richard J. Dugas:]

No, listen, we've been reasonably pleased with what's happening in the entry level. And frankly, we're pleased with our sales results and our pricing across the board. With regard to Centex specifically, I think that brand, along with our others, are benefiting from the combination of pushing options, pushing lot premiums. All the components, obviously, that buyer doesn't have as much money as the move-up or Del Webb buyer to drive price. But overall, yes, we saw some impact from the rate change that we saw during the year. But I'll highlight, David, that things seemed to really begin to shift in December. I referenced in my remarks that December was equivalent to November, and we like what we're seeing so far in January. So we're optimistic about Centex and the rest of our portfolio heading into '14.

[Operator:]

Your next question comes from Eli Hackel of Goldman Sachs.

[Eli Hackel:]

Just have a question on margins. Clearly, very impressive in the quarter. Just wondering if you could help us dissect that a little bit. How much was mix price, maybe move to the more commonly managed plans. And then you said -- looks like you may be able to improve margin -- gross margins further in 2014. Is that on a full year-over-year basis or starting from the end of the year?

[Robert T. O'shaughnessy:]

All right. So margins in 2014, we believe year-over-year, we have room to improve obviously from the margin that we had for full year of '13. As we look at our backlog, we've got visibility into -- essentially the first 2 quarters and think we've got room there. We benefit from not only improved efficiency and construction but also from a reduction in our capitalized interest because of the deleveraging we've done. In terms of breaking down the margin specifically between mix, it is a challenge for us to do that because there's a lot of moving pieces. Obviously, the change in our business towards our higher-margin -- sorry, Pulte and Del Webb is the benefit. The good news is that consistent with recent quarters, the margin improvement we've seen has been across all 3 brands. So it really is underlying improvement in the operations, not just mix shift, that's increasing our margin.

[Richard J. Dugas:]

Eli, Richard here. One additional add-on, as Bob indicated, it's a lot of things. And one thing I'd reference, in his prepared remarks, Bob indicated that lot premiums and option margins were up, both sequentially and year-over-year. So we continue to be able to eke out gains in several different areas, the Common Plan Management, the pricing strategies, all of it is benefiting an exceptional margin performance in Q4.

[Eli Hackel:]

Great. And then just one quick follow-up. Just wondered if you could maybe help me understand a little bit more about what optimistic means for spring selling. Does that mean absorptions could get to the point where they're flat year-over-year? Or maybe a little bit more color there would be helpful.

[Richard J. Dugas:]

Listen, I can't give you predictions in terms of details. I'll tell you this. It feels like in December, buyers started to get more comfortable with the increased rate environment. And we were very pleased that December was flat with November, which historically doesn't happen in this business. And January has gotten off to a good start. I'll leave it at that.

[Operator:]

Your next question comes from Ivy Zelman of Zelman & Associates.

[Ivy Lynne Zelman:]

Congratulations on a great quarter and a phenomenal year. The question is can you surpass it? You got a high bar now. But it sounds like you have confidence that you can. One question related to the gross margins. When you're underwriting the new land that you're acquiring, are you assuming the gross margins are going to be at the same run rate? And is there expectations for any pricing in your underwriting? Or are you assuming prices currently at the level it is today? First question.

[Robert T. O'shaughnessy:]

Yes. So as to underwriting standards, we do not assume price appreciation in our underwriting. So we do use current pricing but don't project forward. And I forgot the first question.

[Richard J. Dugas:]

Gross margin or something. [indiscernible] more kind of question.

[Robert T. O'shaughnessy:]

Yes. Sorry...

[Richard J. Dugas:]

I can help with that. Ivy, this is Richard. With regard to margins, something that you might be interested in is margins on transactions that we have underwritten over the past couple of years continue to exceed margins on our legacy land bank. And we continue to be pleased with that. We believe this is a result of a lot of the efficiency that we're driving in the business through Common Plan Management and our pricing strategies that is causing that. In terms of where margin sort of go from here, as Bob indicated, we believe we have room to go in 2014. We'll have to see how it all plays out. But given the visibility we have for the first couple of quarters, we're optimistic.

[Ivy Lynne Zelman:]

So it sounds like it's not contingent on price, which is, when I finish the next question, you can confirm. But that's good news. The active adult market, we have heard, has gotten better, really starting in December and seen some traction there. Given you guys are the largest builder that services that market, can you go into a little bit more detail what you're seeing there? And certainly, that consumer is much more affected about what happens in Washington and the confidence in the country and the economy. I'd love to hear your thoughts around that, please.

[Richard J. Dugas:]

Yes, Ivy, on the active adult side, we have noted some strength in active adult particularly in January in the markets that we have quite a bit of active adult activity. It's been an area of strength, maybe notable strength for the company thus far. I believe that, that buyer group continues to slowly but surely improve, which is typically what we'd see in a housing recovery. They tend to be a lagger. But starting last year and certainly into the first few weeks of this year, we've definitely seen some strength in Del Webb.

[Operator:]

Your next question comes from Dan Oppenheim with Crédit Suisse.

[Daniel Oppenheim:]

I was wondering if you can talk a little bit about the sort of different products there in terms of Pulte, Centex and Del Webb. You talked about Centex being 22% from 27%. Wondering if you can sort of talk about absorption across the brands and how that was over the course of the fourth quarter, and sort of what are you expecting here?

[Robert T. O'shaughnessy:]

Sure. So what we saw during the quarter in terms of absorptions was off 12% for Pulte and, like we said, roughly flat for Centex and Del Webb. So I'm not sure if there's more you wanted.

[Daniel Oppenheim:]

Okay. And then in -- you talked about the -- sort of the best returns in terms of the -- best returns on capital in terms of the move-up, and so some of the investment is going there. Presumably, with some of those projects taking -- being more time-intensive in terms of the holding period for that land, then it would also -- in terms of getting that return, you would need a higher margin. So a mix shift towards Pulte and Del Webb would presumably also be positive from a margin standpoint, correct?

[Robert T. O'shaughnessy:]

Well, I think it depends. Interestingly for -- even the entry-level land that we see today, a lot of it is raw. So the hold period isn't distinctly different. The Del Webb is a little bit different because typically, they are longer-lived communities, whether it's 1,000 or 2,000 lots, so it takes longer. So typically, we'll have more development profit in that, and so yes, you would expect to see higher gross margins. And historically, that has certainly been the case. The Del Webb brand does represent our highest margin in the mix.

[Operator:]

Your next question comes from Stephen East, ISI Group.

[Stephen F. East:]

Richard, if you look at your big land spend for next year, you're not really moving your community count. So even though you're opening a lot, you've got a lot that are closing out, too. When you look at that, is there a mix impact? Because I assume most of these would have the common floor plan approach to it. Should all else being equal, do we have a mix shift up on your gross margins just from that? And if you looked at the CFP, just holding everything else static, I know there's a lot of moving parts, but holding everything else static, what type of margin differential do you have in that versus your older product?

[Richard J. Dugas:]

Yes. So, Stephen, a couple -- to clarify a couple of things. The $2 billion in authorized land spend is going to impact 2015 and 2016, not '14, in terms of deliveries. We expect that our common plans will represent about 40% of closings this year, building toward our long-term goal of 70-plus percent, as Bob indicated. Having said all that, we are going to have a continued mix shift during the year toward Pulte away from Centex. And Bob had indicated that's as a result of the underwriting and investment that we made over the past 12 to 18 months. So yes, there'll be a continued mix shift this year into Pulte, but the incremental land spend will benefit volumes and community count and all that in later periods beyond '14.

[Robert T. O'shaughnessy:]

And one point of clarity on that. In terms of the land spend, if you remember last year, we've told you that roughly 2/3 of our spend was development and a 1/3 third was land acquisition. What we saw in the fourth quarter, on the $360-ish million, there's roughly 40% land, 60% development. Out into '14, we think that, that actually moves even closer, so it's about 45% on land and 55% on development. So you've got a little bit -- you need to understand what's happening in the cash spend. It's not all on dirt. It is also the development dollars that we'll spend on the things that we have acquired over the last 12 to 18 months.

[Stephen F. East:]

Okay, fair enough. And then if we look at -- you had been metering sales and some, and I realize the demand has slowed down a lot. But do you have any areas where you have to meter sales as you make these transitions? And then just differently, on your SG&A, your expectations for operational leverage in 2014.

[Richard J. Dugas:]

Yes. So, Stephen, I'll handle the first one, and Bob can answer your SG&A question. We have been metering sales in several communities in several areas of the country, very consistent with the strategy that we've had for a while. And yes, I would expect that to continue this year, depending on our lot supply in a given community when the replacement parcel is coming online. And it's all about returns. Our operators are very well disciplined on looking at pace versus price. And if we have a large land bank, like we may have in a Del Webb community with lots and lots in front of us, we'll let it run and drive pace. But in some of the Pulte communities where we may only have 50 lots left or 25 lots left, we're going to be driving price as hard as we can. So that's on the sales metering. Bob?

[Robert T. O'shaughnessy:]

Yes. And on leverage, we had approximately $570 million in SG&A this year, what is that 10.3% of revenue. We've talked in the past about a lot of that spend being relatively fixed -- our commissions are in SG&A. So going forward, we highlighted for you in the fourth quarter that some of our spend was related to people and processes we're putting in for the Common Plan Management. We'll see that in '14 as well. So I think you would expect us to probably put a little bit of cost in to try and continue that effort. Then leverage would be depending on what you think volume is going to be.

[Operator:]

Your next question comes from Michael Rehaut of JPMorgan.

[Michael Jason Rehaut:]

Congrats on the quarter and the gross margins. And maybe just hitting on that topic for the first question. You've seen, obviously, a great acceleration in the pre-interest gross margin and, as you said, I believe beating the record back in '05. So as you think about that, I mean, certainly, I guess on a full year basis for '14, you're looking at to be above '13. If I understand that correct, Bob, you were saying that you expect that to be both pre- and post-interest. Correct me if I'm wrong. But how would you view...

[Robert T. O'shaughnessy:]

No, Mike, just to clarify, that was post-interest that we were saying that.

[Michael Jason Rehaut:]

Okay. So in that -- that really speaks for the question. Given the results in the back half of the year, particularly in 4Q '13. I mean, how do you view the sustainability of that? And if there might have been some amount of, let's say, excess price appreciation, among other things, that maybe it's not the right number to model sustainably going forward.

[Robert T. O'shaughnessy:]

Well, I think, obviously, as we look at fiscal '14, we see an absolute ability to see margin improvement because of the scaling up that we saw during the year. Our margins grew quarter-by-quarter in '13, and our backlog is relatively consistent with the business environment that we saw during the back half of '13. Obviously, there was a little bit of relative weakness in the fourth quarter given all the noise around interest rates, et cetera. But again, looking at it, we think that we can continue to drive margins on a core basis, consistent with what we saw in the back half of this year, especially as we roll out the commonly managed plan. And then obviously, we get the benefit of lower interest amortization. For perspective, roughly $50 million, if you look at fiscal '13 volumes, that's about a point of margin.

[Michael Jason Rehaut:]

So I guess maybe excluding the benefit from the interest expense and if you just look at the pre-interest gross margin, you did about 25%, I think, a little over 25% for full year '13. Given the positive momentum that you saw in the back half of this year, would you expect '14 to be above back half of '13?

[Richard J. Dugas:]

Mike, I think Bob indicated that we thought that it could be consistent with in that range based on the backlog that we see. He also mentioned quarter-to-quarter variation. Margins are not certainly going to move in a straight line all the time, but we like our overall position. And frankly, the deleveraging that we've done, all the work we've done on common plans, all the work we've done on pricing, we expect to continue to benefit us collectively. And that's the way we're looking at it, is what's the actual margin we deliver.

[Operator:]

Your next question comes from Ken Zener of KeyBanc.

[Kenneth R. Zener:]

Obviously, your margins are progressing, so I'd like to focus on orders, which are more difficult to control and predict. Our view is seasonal, not cyclical growth right now. And, Richard, your comments around 1Q trend -- historically, 1Q absorptions increased about 38% from 4Q. That's back to 1999, and 4Q this quarter decelerated 11% from the third quarter, which is actually right what history would suggest. So could you comment on your optimism around spring being above the historical absorption change, which another builder has commented on that? Or are you just realizing the normal seasonal absorption improvements? Just trying to see if seasonality is a good benchmark for your comments.

[Richard J. Dugas:]

Yes. Ken, I'll just point out that we're 4 weeks into the year. What I will tell you, though, is that there was a noticeable shift in the market in December. Normally, you wouldn't see seasonal momentum begin building until late January, and we saw it building a little bit earlier this year. And I believe it's because buyers became a little bit more comfortable with the rate environment that kind of shocked them in the third and early parts of the fourth quarter and realized that the housing market is still very attractive. So it's hard to predict exactly what the spring selling season is going to bring. But at this point, we believe it's going to be a good one.

[Kenneth R. Zener:]

Okay. And then looking at Del Webb, given that you are servicing a select age group. We had done a piece showing that, the older people are working, contributing to the labor force more than they had in the past. Can you comment on the buyers? I mean, do they tend to -- are you seeing more working buyers in your Del Webb communities?

[Richard J. Dugas:]

Ken, you're exactly right. The buyer profile is changing. We're seeing more and more working buyers in Del Webb, and we're pleased with the activity that we're seeing in Del Webb. And part of our strategy as a result of the trends we're seeing is to decrease the size of our future investment in Del Webb communities. We'd love the demographic, and we actually are in the middle of a significant study right now on how to really capitalize even further on that changing demographic. We'll have more to say about that as our plans evolve over time. But yes, the Del Webb buyer is changing, and we're keeping up with them. And we like what we see because we believe a combination of smaller Del Webb communities going forward that, frankly, don't provide as much land risk over time is a good thing. And they can be very return-friendly communities from what we've seen. So we like the position we have, and we're optimistic about that category.

[Operator:]

Your next question comes from Nishu Sood of Deutsche Bank.

[Nishu Sood:]

The 190 communities that are going to be new openings, of the 570 that you're going to have total for 2014. Just wanted to get a sense of what that ratio looked like for 2013. And also, I think -- I'm not sure you -- I don't think you talked about this. But of the 190, how many of those are newly acquired and how many would be from your lot inventories?

[Richard J. Dugas:]

Go ahead, Bob.

[Robert T. O'shaughnessy:]

I was going to say not a dramatically different number of openings. We had probably more closings in fiscal '13. And we do not have a significant number of previously unopened communities opening. So no -- not a big mothballed community count.

[Richard J. Dugas:]

Yes, the vast majority of that, Nishu, would be new dirt.

[Robert T. O'shaughnessy:]

Correct.

[Nishu Sood:]

Got it, acquired since the recovery. Okay, great. And second question. Now obviously, the benefits -- the dividends of your Value Creation strategy and the margins are pretty apparent, very, very strong trend there, as many have noted. A part of your Value Creation strategy has been to shift away from focusing on volumes. So the sorts of analysis that investors and other builders do where they're saying, we did x number of closings in 2005. We're in some new markets so we can do that many again. I know that you have very much shifted away from that. But I wanted to ask you to just think about, in the housing recovery, given your Value Creation strategy, can you grow as fast as the market? So if housing starts -- single-family housing starts after double from here, can, under the Value Creation strategy, Pulte keep up with that growth? Can Pulte double as well in that kind of setup?

[Richard J. Dugas:]

Nishu, there's absolutely no restriction on our ability to grow. It's going to be a function of the investment that we put into the business. What I will tell you is that the $1.3 billion we invested this year was a 30% improvement over prior year, and the $2 billion that we are targeting to invest this year is almost a 50% improvement on that $1.3 billion. Any way you slice it, that's a lot of growth that we're anticipating going forward. Having said that, our focus is on return. And every single community, we're going to do the best we can to maximize return, whether that's driving pace or price. And frankly, all the return on invested capital metrics that I look at, we are now right around second place in the industry, behind NVR who obviously has a lot lower overall capital base in terms of land than anybody else. So we're extremely pleased, and we believe investors over the long run are going to benefit from that strategy over the cycle. So we are interested in growing. We want to grow based on the market opportunity that we see. We just don't want to be exclusively focused on growth like we were in the past and make the mistakes that we made in the past. And we're not going to do that.

[Operator:]

Your next question comes from Adam Rudiger of Wells Fargo Securities.

[Adam Rudiger:]

In light of the kind of metering and the discipline you talked about and the community count trajectory, when you look at the full year 2014, is your expectation for positive order growth?

[Richard J. Dugas:]

Adam, we're not going to get into commentary on that. I will say that volume will ultimately follow the investment to some degree, and then the rest of it, of course, is up to the macro environment and then our individual strategy by community. So we'll let you model what your model will produce, but we're not going to comment on specifics there.

[Adam Rudiger:]

Okay. Second question goes to capital allocation. You mentioned in your prepared remarks you had tremendous financial flexibility. You have big cash balance, and the buyback has been, I would say, somewhat minor relative to the cash balance. Can you provide any kind of range in the order of magnitude of stock you think you might like to repurchase? And then can you also discuss if acquiring any small private builders is on your radar screen or not?

[Richard J. Dugas:]

Yes. Adam, we haven't given any color or commentary around our buying patterns and will not be on our stock. As it relates to smaller builders, we've certainly see everything that's out in the market. We've got contacts, and people recognize we have the balance sheet to do it. We haven't seen any to this point that were attractive to us for a variety of reasons. But certainly, nothing stopping us from doing it.

[Operator:]

Your next question comes from Stephen Kim of Barclays.

[Stephen S. Kim:]

I just wanted to clarify what I thought you said. First, so I guess with your gross margins, you had mentioned, I thought, Bob, about a $50 million reduction in capitalized interest would equal 100 basis points. So I want to make sure, did you imply that -- from that comment that your capitalized interest that you're going to expense in 2014 would be $50 million less than it was in 2013? And if that isn't what you meant, if you could be a little bit more precise about what you think it will be and how it will flow over the year, that would be really helpful.

[Robert T. O'shaughnessy:]

Yes, Steven, that is exactly what I said. Our capitalized interest expense will be in the neighborhood of $50 million lower in 2014 than it was in 2013. The point I was making about the 100 basis points is if you applied that $50 million reduction to our '13 business, it was about 100 basis points. Obviously, what it would mean in '14 would be dependent on what you think our volume will be.

[Stephen S. Kim:]

Okay, great. That's helpful. And then if I could ask you a question about your inventory. Could you give us a sense for what your inventory breakout figures were? I'm looking for the homes under construction, and then also, if you have like a sticks-and-bricks type figure, that would be great.

[Robert T. O'shaughnessy:]

Okay. Total homes under construction were 4,874 at the end of the quarter. 1,151 of those were spec, so 24%. And total sticks and bricks were $525 million at the end of the quarter.

[Operator:]

Your next question comes from Bob Wetenhall of RBC Capital Markets.

[Robert C. Wetenhall:]

I just wanted to ask your average order price. In the last quarter, it was $336,000, up 13% year-over-year, and good sequential growth as well. Would you be happy if for the full year 2014, it was up mid-single digits? And what do you view as the outlook for continued price increases this year?

[Richard J. Dugas:]

Listen, we'd be happy with pricing growth, of course. Some of that's going to be mix shift-driven, and we haven't sort of commented on specifically exactly what we expect there. And I'm sorry, what was the second part of your question, Bob?

[Robert C. Wetenhall:]

I was just looking for a general range. Like would mid-single-digit ASP growth for new orders be something that you would say, "Hey, that's realistic and achievable, and we'll be happy with that"? I'm not looking for a specific number.

[Richard J. Dugas:]

I'll answer it this way. The total price lift that we had in the market in 2013, I think, was unique and special. Yes, I would say the range that you mentioned would be a realistic macro forecast. But listen, who knows exactly what's going to unfold here. We'll have to see.

[Robert C. Wetenhall:]

Got it. And you're doing a lot to control costs and SG&A, too. And I was just thinking, how should we think about the trajectory of SG&A dollar spending levels as volume increases? Obviously, you got a lot of new communities opening up. You had a great year in terms of cost control. I just wanted to get your view on how achievable it is to stay at the current level. Is it sustainable? Or should we look for dollar spend to rise pretty substantially with new community openings?

[Robert T. O'shaughnessy:]

Yes. As we talked about, obviously, our spend is relatively fixed because we don't have the commission and SG&A. We did highlight that we will likely continue to spend a little bit of money to do the Common Plan Management. And consistent with what we've said in the past, the growth of SG&A spend will be dependent on how we grow the business. And so if we do it through a huge increase in community count, you have costs associated with opening new communities versus if you get pace increases inside the business. So if the Del Webb brand were to expand dramatically, we don't need to spend much of any overhead to make that happen because it's really just hiring 1 or 2 more people to manage the process. So again, we're pretty comfortable with the spend. We're investing a little bit in the improvement processes. If we were to rapidly expand our footprint, you might see us spend some more money.

[Operator:]

Your next question comes from Mike Roxland of Bank of America Merrill Lynch.

[Michael A. Roxland:]

When I -- just following up on SG&A. When I look at SG&A, it came with -- on a percentage basis, it came with -- came in somewhat higher than we were expecting. Were there any surprises in the quarter from your vantage point?

[Robert T. O'shaughnessy:]

No.

[Richard J. Dugas:]

No, there weren't. No, we were happy with our spend levels, and our closing volumes came in where we expected.

[Michael A. Roxland:]

Just because when I look at SG&A -- if we look back historically, typically, on a percentage of sales basis, you typically see a decline. And I think it was a little bit higher, if I'm not mistaken, versus 3Q. Is that just more like the comp spending that you're over the -- the SG&A higher this quarter relative to historical patterns?

[Richard J. Dugas:]

Mike, there was some of that clearly in the gross number. But I think more of it, frankly, is we don't have a spec model anymore, and our ability to convert a lot of spec units to drop to the bottom line is a lot less than it was in the past, and the consistency with which we're running the business year-over-year is a whole lot different. So I'd suspect it might have been as much the revenue conversion as the absolute SG&A levels. But in terms of actual spend, your compensation expense was up a little bit based on a good year. And Bob had indicated we did some investment for our Common Plan Management work, some IT investment, things like that. But my guess is most of it was the change in conversion based on the fact that we're a presale builder today.

[Michael A. Roxland:]

Got it. And then just quickly following up on your comments regarding how constructive you are in sales in January, would it be fair to say that January has been better than December? Certainly, your tone has indicated that. And have you seen improvement in January accelerate on a weekly basis? And is there any one area that you would cite as showing more notable improvement than others?

[Richard J. Dugas:]

Listen, with regard to January trends, we're not going to comment on the detail there. The seasonal build is sort of what we referenced, and we'll kind of leave it at that.

[Operator:]

Your next question comes from Jay McCanless of Sterne Agee.

[James McCanless:]

First question on the mortgage put-back issue. Was that just a function of declining put-back requests? Or is it more related to the guidance that the FHFA gave out late in 2012 -- or 2013, sorry?

[Robert T. O'shaughnessy:]

Well, certainly we take everything into consideration. If you look at what we prepared in the webcast slides, the volume came down during the fourth quarter, but it was still at a relatively high level consistent with earlier in the year. We look at payments that we have made. You can see or you will be able to see in our filings that our reserve balance went down by virtue of making some payments. Those payments were consistent with what we had accrued. We certainly pay attention to what the FHFA is saying about when they think they'll be done with their review of files. So on balance, when we look at it, and we do every quarter, we didn't see anything that would tell us that the accrual we have is incorrect.

[James McCanless:]

Okay. And then just want to shift gears to Del Webb. Just want to find out if you're having to dial up incentives to drive that buyer in or if they're coming in willing to pay full boat. Just a little more commentary about what you're seeing in the field from those active adult buyers.

[Robert T. O'shaughnessy:]

Yes, we're not dialing up incentives for active adult. That buyer is, frankly, not very price-sensitive. We like that category, and as I indicated, we like the trends we see building so far this year there.

[Operator:]

Your next question comes from Will Randow of Citi.

[William Randow:]

Just a couple of bookkeeping items. In regards to the on balance sheet DTA, can you remind me of the pace of the cash realization and any limitations on such?

[Robert T. O'shaughnessy:]

No limitations that we're aware of, so that -- which is the reason we reversed essentially all of the reserve. The cash utilization of that will be predicated on earnings.

[William Randow:]

Got it. And in regards to -- I can't remember if you mentioned it, but what's the number of developed lots ready the go? And if you could provide a qualitative split between Pulte, Del Webb and Centex.

[Robert T. O'shaughnessy:]

The developed lots ready to go that we own are 23,245. And then we also have developed lots optioned, 5,124.

[Operator:]

Your next question comes from Joel Locker of FBN Securities.

[Joel Locker:]

I just wanted to ask you about your SG&A. You guys touched on -- with the $570 million run rate in '13. Do you expect to be flattish from there? Or do you expect that, with the back end being up 5%, 6%, kind of the same year-over-year increase in '14 as you -- over '13?

[Richard J. Dugas:]

Yes, as we've talked about, not a significant change in spend other than the fact we will continue to invest. We obviously have cost pressures on wages. We have normal merit increases. So you're probably there plus some.

[Joel Locker:]

And I guess just your tax valuation allowance, what's remaining off balance sheet?

[Robert T. O'shaughnessy:]

$157 million.

[Operator:]

And your next question comes from Buck Horne of Raymond James.

[Buck Horne:]

Quick housekeeping item. Can you quantify what the commissions' numbers was as a percentage of revenue that was in the cost of goods sold?

[Robert T. O'shaughnessy:]

Yes, I don't have an exact number on that, but it typically runs at about the 4.5% range.

[Buck Horne:]

Typically 4.5% total? Okay, correct. One other strategic question, would you guys consider looking at private builder acquisitions to accelerate your community count growth? How do you guys evaluate buying another builder out there as opposed to just open-market land acquisitions?

[Richard J. Dugas:]

Buck, we definitely would consider that and continue to look at the opportunities that get presented to us. As Bob indicated, with the firepower that we have, we get to look at everything. And we would underwrite it very similarly to a raw land transaction. We'd look at the IRR characteristics, the risk involved and the number of lots undertaken, et cetera. And we'll continue to look at those very opportunistically just like we would raw land.

[Operator:]

And your next question comes from Alex Barrón of Housing Research.

[Alex Barrón:]

I was wondering if you guys have done any kind of analysis on the qualified mortgage and what impact that would have had on -- and how many buyers maybe wouldn't have made it last year?

[Richard J. Dugas:]

Yes, I think we've commented on this in -- when it got asked in the past, and it's a very small percentage, certainly under 5%, maybe 3% or 2%. So I would tell you that to this point, that has proven to be true.

[Alex Barrón:]

Got it. And as far as the DTA, I think you guys had a small balance left over last quarter of, like, $231 million. Do you have that -- an update on that? Or did you guys reverse any more this quarter of that?

[Richard J. Dugas:]

Yes, I think that question just got asked but a little differently. So essentially, we did have a reserve last quarter. The way the accounting works is we were -- the GAAP tells you that when we book the adjustment in the third quarter, we projected what we would utilize in the fourth quarter. So we used about $73 million during the fourth quarter for fourth quarter earnings, and we have about $157 million left on the books at the end of the year.

[Operator:]

And I have no further questions queued up at this time. I'll turn the call back over to the presenter for closing remarks.

[James P. Zeumer:]

Thank you very much. I want to thank everybody for joining us on the call today. We'll certainly be around for any additional questions and look forward to talking to you as part of Q1. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.