KB Home (NYSE: KBH) Q4 2019 Earnings Call Transcript

KB Home  (KBH) Q4 2019 earnings call dated Jan. 09, 2020

Corporate Participants:

Jill Peters — Senior Vice President, Investor Relations

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Analysts:

Alan Ratner — Zelman & Associates — Analyst

Truman Patterson — Wells Fargo — Analyst

Stephen Kim — Evercore ISI Institutional Equities — Analyst

Mike Dahl — RBC Capital Markets — Analyst

Christina Chiu — Barclays — Analyst

Michael Jason Rehaut — JP Morgan Chase & Co — Analyst

Susan Maklari — Goldman Sachs — Analyst

Jay McCanless — Wedbush Securities — Analyst

Presentation:

Operator

Good afternoon. My name is Devon, and I’ll be your conference operator today. I would like to welcome everyone to the KB Home 2019 Fourth Quarter Earnings Conference Call. [Operator Instructions] Following the company’s opening remarks, we will open the lines for questions. Today’s conference call is being recorded and will be available for replay at the company’s website, kbhome.com, through February 9th.

Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Jill Peters — Senior Vice President, Investor Relations

Thank you, Devon. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter of fiscal 2019. With me are Jeff Mezger, Chairman, President, and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

Before we begin, let me note that during this call items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them.

Due to factors outside of the company’s control, including those detailed in today’s press release and in filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measures referenced during today’s discussion to their most directly comparable GAAP measures can be found in today’s press release and/or on the Investor Relations page of our website at kbhome.com.

And with that, I will turn the call over to Jeff Mezger.

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Thank you, Jill. Good afternoon, everyone, and Happy New Year. We finished 2019 strong with fourth quarter results that reflected solid demand for our product as homebuyers continued to prioritize choice and personalization in their home buying decisions. In addition, our performance under our Returns-Focused Growth Plan produced measurable results, most notably in the year-over-year expansion of our housing gross profit margin.

With the conclusion of the third year of this plan, there are several achievements to highlight. First, at roughly $270 million, our net income in 2019 is up by over 150% relative to 2016 when we launched the plan. This helped drive our return on equity to 12.2%, nearly doubling its 2016 level to a point that was solidly within the plan’s target range.

Next, the significant cash from operations that we generated in the past three years enabled us to invest over $5 billion in land acquisition and development, as well as return $73 million in capital to shareholders through dividends and share repurchases, while also repaying about $850 million in debt. As a result, we worked our debt-to-capital ratio down considerably to 42.3% from 60.5%, also achieving our tightened target goal and reduced our interest incurred meaningfully, benefiting our gross margin. With the success of our plan, we are a larger, higher margin, more profitable and less leveraged company. Going forward, our strategy will remain consistent with a continued focus on profitably expanding our scale, while increasing returns.

Specific to the quarter, we produced total revenues of $1.6 billion and diluted earnings per share of $1.31. Housing revenues were up 15% year-over-year, despite falling a bit short of our anticipated range as some of our deliveries in the Bay Area were delayed due to the fires and power shutdowns, which impacted our ability to get utilities installed. Nonetheless, we leveraged the higher revenue base to meaningfully expand our operating income margin, which was up a full percentage point year-over-year to 10.7%, excluding inventory-related charges. This translated to an increase in profitability per unit of approximately 10% to over $42,000 in operating income per home.

The key driver of our operating margin growth was our robust gross margin, which we expanded 120 basis points as compared to the prior year to just shy of 20%. We opened 23 new communities during the quarter, contributing to 9% growth in our average community count. In 2020, we continue to anticipate another step-up in our average community count with nearly all of the openings coming from higher margin core communities. The composition of our portfolio continues to strengthen with core communities expected to represent more than 90% of our average count this year.

From a macro perspective, mortgage interest rates remain low, continuing to support favorable market conditions characterized by steady economic expansion, solid job growth, high consumer confidence, and positive demographic trends. While these factors fueled strong demand, supply continued to be insufficient to meet homebuyers needs, with resale inventory declining to 3.7 months’ supply in November and even lower at the affordable price points where we operate.

In the quarter, our absorption pace accelerated to 3.7 monthly net orders per community. This was our highest fourth quarter pace in more than a decade in spite of increasing prices in about 65% of our communities during the quarter, a seasonally significant level of pricing power. Taken together, our community count growth and increased absorption pace as well as a soft comparison in last year’s fourth quarter all contributed to producing a 38% gain in our net orders.

Net order value expanded by 43% in the fourth quarter to $1.1 billion, contributing to a 26% rise in our year-end backlog value to $1.8 billion. In terms of units, our backlog grew to over 5,000 homes, our highest fourth quarter level in a number of years.

We continue to strategically invest in land and position our product offerings to be attainable for the median household income in each submarket. As a result, we cater primarily to first-time as well as first move-up buyers. In the fourth quarter, our deliveries to the first-time buyers rose to 56% of our total, the highest share of this segment that we have generated in many years.

Our ability to increase our profitability at the lower first-time buyer price points is both a core competency and competitive strength that has been the foundation of our more than six decades in homebuilding. We’ve been consistent in our approach, and as housing markets continue their measured recovery fueled by first-time buyer demand, we believe we are solidly positioned in the sweet spot of the market.

While we continue to capitalize on this demand, underlying the progression in our financial metrics is a stronger and more efficient business. Our build times were down 12 days year-over-year in the fourth quarter, an 8% improvement to 131 days. Our implementation of our built-to-order model is highly efficient as working from a large backlog of homes enables cost synergies and an even flow production process.

We also like the flexibility that built-to-order provides. A year ago, as interest rates and home prices were rising challenging affordability, we rotated lower-end square footage in most cases using standard plans from our product series. We enhanced our product lineup, thereby expanding the choices available to buyers by offering smaller homes with similar livability and room count, and reposition our model parks to reflect these changes where possible.

While the subsequent fall in interest rates moderated affordability pressures, we believe we are well positioned for the future regardless of the rate environment. Moreover, we found that the steps we took were aligned with consumers’ preferences as our square footage on built-to-order homes was down about 100 feet year-over-year in the fourth quarter. At the same time, our studio revenue per home was higher as buyers opted for less square footage without compromising the features they value. Our initiative was successful in widening our demand pool without sacrificing gross margin.

In addition to the efficiency in our homebuilding operations, our mortgage banking joint venture, KBHS, continues to mature. With the capture rate growing sequentially throughout each quarter of 2019 ending at 74% in the fourth quarter, KBHS originated 70% of our homebuyers’ mortgages for the full year. As a result, our deliveries are more predictable with higher customer satisfaction, and the JV produced a 67% increase in income versus the prior year. We expect the capture rate to improve further in 2020, which should result in greater customer satisfaction and an increase in our JV income.

With respect to the market updates, I will now highlight a couple of regions beginning with the West Coast. This region continued to demonstrate momentum in the fourth quarter producing a 54% increase in net orders with a positive comparison in FFD California division. Growth on both community count and absorption pace contributed to the region’s results as market conditions were generally favorable across the state.

Our Bay Area communities delivered a particularly robust comparison, reflecting in part the softness in the prior year’s quarter as well as our ongoing and intentional shift to more affordable price points. Looking ahead, we expect our West Coast region to further expand its community count in 2020.

Our Central region produced its highest fourth quarter net orders in more than a decade at over 1,000, a year-over-year increase of 41%. Market conditions in Austin were especially strong, fueled by significant in-migration in response to job growth and home price affordability. We opened five new communities in the second half of 2019 in our Austin division in premier locations accessible to key employers, transportation routes and lifestyle amenities in the area. These openings contributed to the division’s near doubling of its net orders year-over-year.

One community in particular, Willow Trace, produced outstanding net order results at well above company average margin. The success of this community rests in providing an appealing product in the prime North Austin tech corridor that is affordably priced with respect to the area’s median household income, in alignment with our company strategy. Of note, many of our buyers already rented in the area and the opening of this community allowed them to remain in their preferred location while now becoming homeowners. With an ASP in Austin of $295,000, we are competitively well-positioned relative to the $315,000 median price of a resale home.

Strong market conditions have continued in December and early January, sustaining solid demand for our product. While we typically provide an update on quarter-to-date net orders on this call, the comparison is skewed during this period due to the softer market condition across our industry during the same period a year ago. As a result, we will instead provide our net order outlook for our first quarter of 2020. We believe a reasonable range is net order growth between 15% and 25% on community count growth of roughly 5%.

In closing, we ended 2019 strong and are off to a productive start in this new year. With a $1.8 billion backlog and an improving community mix, we are poised for double-digit growth in our revenue this year. Also, in anticipating higher profitability, we see further opportunity for expansion of our return on equity, which we expect to grow meaningfully in 2020. Given our favorable positioning and healthy market conditions, we are anticipating a solid year ahead, and we look forward to updating you as the year unfolds.

With that, I’ll now turn the call over to Jeff for the financial review. Jeff?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our financial and operational performance for the 2019 fourth quarter as well as provide our outlook for the 2020 first quarter and full year.

We are very pleased with our strong fourth quarter performance. We generated improvements in virtually all of our key profitability measures and achieved solid absorptions and community count growth, which contributed to a significant year-over-year increase in backlog value. During the quarter, we also increased the borrowing capacity of our unsecured revolving credit facility and successfully refinanced our March 2020 senior note maturity.

In the fourth quarter, our housing revenues were up 15% from a year ago to $1.5 billion due to a 16% increase in homes delivered that was partially offset by a slight decline in our overall average selling price. Looking to the 2020 first quarter, we expect to generate housing revenues in the range of $910 million to $970 million, up 18% at the midpoint over the same period of 2019. For the 2020 full year, we still anticipate housing revenues in the range of $4.9 billion to $5.3 billion. Having ended our 2019 fiscal year with a backlog value of approximately $1.8 billion, up 26% from a year ago, we believe we are well-positioned to achieve these expectations.

In the fourth quarter, our overall average selling price of homes delivered declined slightly to $392,500, primarily due to a shift in mix in our West Coast region towards lower-priced communities within our Bay Area operations. For the 2020 first quarter, we are projecting an overall average selling price of approximately $375,000. We believe our overall average selling price for the 2020 full year will be in the range of $380,000 to $400,000.

Homebuilding operating income for the fourth quarter increased 33% to $162.5 million compared to $121.9 million for the year earlier quarter, including total inventory-related charges of $4.1 million in the 2019 quarter and $9.1 million a year ago. Our homebuilding operating income margin was 10.5%, up 140 basis points from the 2018 fourth quarter. Excluding inventory-related charges from both periods, our operating margin was 10.7% for the current quarter and 9.7% for the year-earlier quarter.

For the 2020 first quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory-related charges, will be in the range of 4.9% to 5.3%, up 80 basis points at the midpoint over the same period of the prior year. For the 2020 full year, we expect this metric to be in the range of 7.9% to 8.5%, an improvement of 50 basis points at the midpoint over the prior year.

Our 2019 fourth quarter housing gross profit margin improved 150 basis points to 19.6%, including inventory-related charges. Excluding the impact of these charges, our gross margin for the quarter increased by 120 basis points to 19.9% compared to 18.7% for the prior year quarter. This improvement reflected the continued reduction in our outstanding debt, along with growth in our unit deliveries, enabling us to further lower our incurred interest per delivery in the fourth quarter to under 3% of housing revenues.

With the lower levels of prior period incurred interest and the widening value spread between our active inventory and total debt, we’ve measurably reduced our amortization of previously capitalized interest, which favorably impacted our housing gross profit margin by 90 basis points for the 2019 fourth quarter. In addition to the year-over-year improvement generated from the lower amortization of interest, our housing gross margin was favorably impacted by both our adoption of ASC 606 and the reduced headwind of deliveries from reactivated communities, partially offset by a mix shift of homes delivered from certain West Coast region communities with relatively high average selling prices and gross margins.

Assuming no inventory-related charges, we are forecasting a housing gross profit margin for the 2020 first quarter in the range of 17.8% to 18.2%, up 40 basis points at the midpoint over the same period of the prior year. Compared to our fourth quarter result, this range reflects the anticipated seasonal first quarter decrease in operating leverage from lower revenues. We expect our 2020 full year gross margin, excluding inventory-related charges, to be in a range of 18.7% to 19.3%, an improvement of 30 basis points at the midpoint over the prior year.

Our selling, general and administrative expense ratio of 9.1% for the fourth quarter was up 10 basis points from last year’s fourth quarter ratio, mainly as a result of the unfavorable impact of the adoption of ASC 606, partly offset by improved operating leverage from higher housing revenues. We are forecasting our 2020 first quarter SG&A expense ratio to be in the range of 12.7% to 13.1% as we continue to prioritize containment of overhead costs and expect to realize favorable leverage impacts from higher housing revenues in the current year period. We also anticipate that our 2020 full year SG&A expense ratio will be in the range of 10.5% to 11.1%.

Our income tax expense of $41.8 million for the fourth quarter was essentially a non-cash expense due to our deferred tax assets and represented an effective tax rate of approximately 25%. Our deferred tax asset balance of $364 million at year-end was down more than $77 million from the prior year. We currently expect our effective tax rate for the 2020 first quarter to be approximately 20% and for the full year to be approximately 23%. Due to our remaining deferred tax assets, we anticipate that for both periods, this will continue to represent a non-cash expense.

In December, federal legislation was enacted, which, among other things, extended the availability of energy tax credits for building energy-efficient homes through December 31, 2020. Reflective of our industry leadership in sustainable homebuilding and energy efficiency, the extension of the tax credits will favorably impact our 2020 effective tax rate. The estimated favorable impacts from this recently enacted legislation is included in the first quarter and full year tax rate estimates.

Including a charge for the early extinguishment of debt, our net income for the quarter was up 27% year-over-year to $123 million and diluted earnings per share increased to $1.31, up 36% as compared to the year-earlier quarter. This strong level of fourth quarter net income contributed to a 12.2% return on equity for the full year. We expect to realize an improvement in excess of 100 basis points in this metric in 2020. We ended the year with stockholders’ equity of $2.38 billion as compared to $2.09 billion at the end of the prior year and our book value per share increased by 11% to $26.60.

Turning now to community count, our fourth quarter average of 253 was up 9% from 232 in the corresponding 2018 quarter, primarily reflecting a 28% increase in our West Coast region. We ended the year with 251 communities, up 5% from a year ago. Of the 251 communities, 25 communities, or 10%, were previously classified as land held for future development compared to 34, or 14%, at the end of 2018.

On a year-over-year basis, we anticipate our 2020 first quarter average community count will be up in the mid-single-digit range. For the 2020 full year, we expect growth in our average community count in the low-to-mid single-digit range. More importantly, in addition to this positive trajectory, we anticipate continued improvement in the quality of our community portfolio in 2020.

We expect growth in our core community count to drive a lower percentage mix of communities previously classified as land held for future development, which we believe will provide a tailwind for future gross margin improvement. During the fourth quarter, to drive future community openings, we invested $399 million in land and land development with $147 million or 37% of the total representing land acquisitions.

Moving on to our balance sheet, there are several areas of continued improvement that clearly reflect the successful implementation of our Returns-Focused Growth Plan in achieving our capital allocation and efficiency objectives. These include measurably growing our total inventory investment, while reducing our inactive inventory, substantially deleveraging our capital structure, and meaningfully expanding the borrowing capacity under our revolving credit facility. I will now cover these achievements in more detail.

In 2019, we invested $1.6 billion in land acquisitions and development and generated $251 million of net operating cash flow. We also reduced our inactive inventory to $150 million at year-end, or just 4% of our total inventory. Starting this quarter, we have elected to include lots under contract with refundable deposits in our total lot count. As of year-end, 59% of the approximately 65,000 lots in our pipeline were owned and 41% were under contract, including about 9,200 lots under contract with refundable deposits.

Our own lots at the end of the year represented about a 3.2-year supply based on homes delivered in 2019. During the quarter, we raised approximately $300 million from a public offering of 4.8% senior notes maturing in 2029 and used the net proceeds along with available cash to retire all $350 million of our 8% senior notes that were scheduled to mature on March 15th, 2020. This early extinguishment of debt resulted in a fourth quarter charge of $6.8 million. Due to the impacts of the lower interest rate and decreased amount of debt outstanding, the successful fourth quarter completion of these transactions will lower interest incurred in 2020 by nearly $14 million. In addition, these transactions extended the weighted average life of our senior notes from 2.2 to 4.9 years.

Earlier in the year, we repaid all $230 million of convertible senior notes at the maturity in February, resulting in an $8.4 million reduction in our diluted share count and contributing to a reduction of more than $300 million in our total outstanding debt at year-end as compared to the prior year.

Our deleveraging activities over the past 12 months, combined with the increase in our equity from strong 2019 earnings, drove a 740 basis point improvement in our year-end debt-to-capital ratio to 42.3%. We expect further improvement resulting from stockholders’ equity accretion in 2020 and forecast our debt-to-capital ratio to be below 40% by the end of the year.

During the quarter, as part of our efforts to improve our capital efficiency and enhance liquidity, we completed an amendment to our unsecured revolving credit facility, increasing its borrowing capacity to $800 million from $500 million and extending its maturity by more than two years to October 2023. We ended the year with $454 million of cash and total liquidity of over $1.2 billion, including availability under our unsecured revolving credit facility. We had no outstanding borrowings under our revolver at the end of the year.

In 2020, we plan to further execute on the principles of our Returns-Focused Growth strategy. Our priorities remain expanding our revenues within our served markets, improving our operating margin, monetizing our deferred tax assets, reducing our leverage, increasing returns and enhancing long-term stockholder value.

We will now take your questions. Please open the lines.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Alan Ratner — Zelman & Associates — Analyst

Hey, guys. Good afternoon. Congrats on another very strong quarter and good end to the year. I think, obviously the order number very impressive. We’ve been seeing some big numbers recently out of the other builders as well. I’m just curious, as we head here into the spring selling season, how does the supply side of the business seem right now? Just thinking about all the various things that have been constrained to various points in the cycle, labor, land, it doesn’t seem like there’s too much concern out there as far as an ability to get these homes built and delivered and kind of maintain a strong absorption pace for 2020. But I’m just curious what you guys are seeing on the ground related to all of those various inputs.

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Alan, a few things. We already own and control all the lots for 2020, and we’re very deep into 2021 and working on that. As Jeff just guided, we expect revenue growth this year. So we own the lots to support a nice growth trajectory in ’20, and we’re working on ’21. In terms of input cost, the land is — it’s tight out there, but it’s rational, and we’re able to invest, just like we did in the fourth quarter, to support our goals.

On the direct side, it’s pretty flat right now for us. Lumber came way down, labor is fairly rational, we’re working on growing our scale in our markets to retain all the great relationships we have with our trade partners on the ground. So, direct cost flat, land’s tight, but we’re finding it and we’re pretty comfortable with being able to support our growth goals.

Alan Ratner — Zelman & Associates — Analyst

Great. No, that’s really good to hear and helpful. Second, thank you for providing the order guide for 1Q. Obviously that helps with the modeling off of a tough comp period from a year ago. As you move past the first quarter and just thinking about the interplay between community count and absorption right now, right now, it seems like everything is kind of clicking on all cylinders. You’ve got margin lift, you’ve got absorption growth, but how much from here is it reasonable to expect your ability to drive absorption higher?

I mean, right now, you guys are probably the highest in the industry from an absolute standpoint. So, is there an expectation that maybe absorptions flat-line a little bit once you get past the easy comps and maybe more of the upside might be on price and margin, or should I think about that more even in terms of where that upside might come from if the market stays strong?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Good question. And it’s one we spend time on every week in here, Alan. As we shared in our comments, our fourth quarter pace was the highest we’ve seen for fourth quarter in over a decade. So, our sales pace is strong and demand is strong. We continue to toggle it in every community every week, where we’re optimizing the pace versus the price to get the highest return on the asset.

It wouldn’t surprise me if sales ticked up incrementally because of the strong market conditions. But our focus is going to be more on getting margin as opposed to pushing a higher sales pace in the short run until we get to our margin goals. If we get to our margin goals, then you’d see us go back for more pace. But for now, it’d be hold rate to maybe go up a little and focus more on lifting our margin.

Operator

Our next question comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question.

Truman Patterson — Wells Fargo — Analyst

Hi. Good evening, guys. Nice results. First, just wanted to talk about your capital structure and the potential tailwinds of the lower interest expense. Your net debt to total capital has declined nicely the past couple years. It’s at net kind of 35%. How do you think about your correct capital structure going into kind of 2020-2021? Any chance that you actually work that down kind of below 30%?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Well, we have a target out there relating to our gross debt-to-capital of 35% to 45%. And I would say that that target remains relevant for us and something we’re focused on. We were — had forecasted at the end of the third quarter that we’d be down within that range by the end of this year, which we have accomplished. We do believe that we’ll be able to be below 40% by the end of 2020 and comfortably within that range. And I’d say, our capital priorities remain the same as they have been.

With the only slight difference is, in 2020, we believe more of that improvement on the leverage ratio will come from equity accretion as opposed to debt reduction. But we’re really focused on growing the business and reinvesting in the business as a primary use of capital. We’ll continue to maintain our now higher level of dividend, and we’ll opportunistically work that leverage ratios we have chances to do so.

Truman Patterson — Wells Fargo — Analyst

Okay. Okay. And then a couple questions on California, very strong demand. But have you actually seen the higher price point coastal areas really start to heal or improve at all? And then, California’s 2020 solar mandate, could you give us an update on that whether you’ll eat some of the cost and it possibly impacts margins? Do you see this possibly stalling the construction cycle, given potential installation labor constraints? Anything you can really discuss about the solar initiative.

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Sure. Truman, first on the markets, we’re seeing minor improvement, I’ll say, at the higher price points along the coast. The lower price points are showing strong demand. Higher up you get in price, the softer it gets. It’s better than it was in the fall, but it’s still not back. If you go to the OC, houses in $2.5 million, $3 million are still a little soft out there. But overall, at the more affordable price points, the demand is very strong right now in the state, which is in part why we rotated down again in our product positioning to cater to where the demand is.

Relative to solar, it’s a good question. It’s still playing out and the industry is trying to get its arms around it. As a company, I’m not sure if this group’s aware of it, but we’ve been the largest provider of solar homes in the state. We’ve now delivered over 10,000 solar homes. So we get it, and we know how to do it. And there’s a different story in every community. In some communities, we’re grandfathered, other communities we have permits we’ve already had in place to avoid the solar mandate. Where you get past those types of nuances though, the consumer has a choice, you can either lease the system or we can include it in the price. Order of magnitude, if they lease it, the payment is around $50 a month. It’s not a crazy number.

You can’t say with certainty it’s not going to affect demand in some way, because it is $50, you could otherwise put toward a house payment. But as we get our arms around it, we think it’s more of an incremental thing than some significant shift in demand or supply out there. No concerns right now on our ability to install the solar, because we’ve been doing it for so long and we have great partners out there.

Operator

Our next question comes from the line of Stephen Kim with Evercore ISI. Proceed with your question.

Stephen Kim — Evercore ISI Institutional Equities — Analyst

Yeah. Thanks very much, guys. And again, let me add my congratulations for the quarter. I wanted to ask you about the land spend in the quarter, if I could. This quarter your land spend was pretty modest and your yearly spend declined, I believe, on a year-over-year basis. And so I was curious as to, given the growth outlook that you’ve laid out for 2020, what kind of land spend do you think we should expect in 2020? Do you think you could see yet another decline or do you think that you’re going to see — in order to sort of maintain the growth that you’ve outlined here, you’re going to need to see your land spend pick up in dollars?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Stephen, the good news is, we have the dry powder to do whatever we want to pursue our growth. We were down a little bit in ’19 versus ’18. But if you get into the numbers, the down can be one or two deals in California. It’s not — it’s not a broad-based decline in land spend, and some of it’s timing, some of it’s structure. We’re working toward controlling more owning less, that influenced the number a little bit, but our plan right now and our hope is that for ’20, we’d spend more than we did in ’19, because we want to fuel the growth trajectory. And that’s the way our plan is laid out right now.

Stephen Kim — Evercore ISI Institutional Equities — Analyst

Got it. Okay. That’s helpful. And last quarter, I believe you said two things, and I wanted to sort of see whether or not your thoughts had changed or if things had changed at all in the last three months. Last quarter I believe you said you raised prices in 90% of your communities. How did that look this quarter? And then, I think you also mentioned that you really weren’t interested in the build-to-rent model, and that’s one of those themes that seems to be continuing to attract a lot of folks. So, curious to see whether or not your thoughts have evolved there.

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Stephen, I shared in the prepared comments that we raised prices in about 65% of our communities, which for a fourth quarter is pretty good.

Stephen Kim — Evercore ISI Institutional Equities — Analyst

Yeah. Did you say 65%?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

It shows there was pricing power in the quarter. Six-five.

Stephen Kim — Evercore ISI Institutional Equities — Analyst

Okay. Got it.

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

And then, on the — for rent, our view right now is, we’re homebuilders. Anytime we’ve analyzed this, we get a better return on the asset as a homebuilder than we would as a landlord. And until we get to a growth trajectory that we’re struggling with, I think we’ll stay focused on what we do well. It doesn’t mean we don’t look at it. And there could be an opportunity if we have a multi-product asset we want to acquire, where a portion of it could be for rent and we’d figure it out, but it’s not a primary initiative for us at this time.

Operator

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Proceed with your question.

Mike Dahl — RBC Capital Markets — Analyst

Hi. Thanks for taking my questions. I had a two-part question related to gross margins first. And just, Jeff K, just on the amortized interest and also the percentage of deliveries expected from reactivated communities in ’20 versus ’19, could you provide us an update on how you’re looking at those two metrics with respect to the 2020 numbers?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Sure, Mike. We believe both of those will remain tailwinds to our gross margin next year, perhaps at a slightly reduced level. I mean, in 2019, we had 90 basis points of improvement coming from interest amortization. I do believe it will be less than that next year. And the same thing with the reactivated headwind, that should reduce, but probably not by as much as what we’ve been seeing in — for example, in the fourth quarter, we were down 50 basis points year-over-year in the reactivated, but we’re kind of getting to the end of the story on that.

I think we still have some upside coming from continuing to sell out and close out of those communities, but there’s probably less opportunity. But still both nice tailwinds for us on gross margin next year, both are included in our guidance metrics, in addition to all the change in mix, etc, in our community portfolio for next year, and I think more good news to come from both those areas.

Mike Dahl — RBC Capital Markets — Analyst

Okay, that’s helpful. Thank you. And then the second question is then related as well, which is those seem to be tailwinds and your margin guide on the midpoint is up 30 basis points. With those as tailwinds on the market conditions that you’re speaking to, it seems like that’s a kind of conservative number to be up 30 basis points at the midpoint on gross margin. So, maybe you could give us some of the other puts and takes that you’re thinking about, whether it’s mix related or labor inflation or directs? Any additional color would be helpful. Thanks.

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Sure. The largest impact and the largest factor for us in 2020 would just be the community mix change. We closed over 100 communities out in 2019. It was over 40% of our beginning community count. So, the community portfolio is quite a bit different as we go into next year. We’re trying to forecast gross margins coming off those communities, many of which have not been opened yet. So we have a lot of openings to occur still in the first half of 2020 that will generate revenues and margins in the back half of the year. So we’re trying to do the best job we can, anticipating and forecasting where those margins would be.

At this point, we have pretty good visibility, as I think most people are aware, with our large backlog to the first half of the year and very critical spring selling season that’s coming up, where we’ll be refining our estimates and expectations for the full year. And speaking of the spring, I mean, we’re pretty excited about it. We think we’re really well-positioned as a company, probably best positioning we’ve had in quite some time relative to the market. And combined with very strong market conditions right now, we’re really optimistic about the spring. And we’ll be updating those gross margin metrics and expectations as we go through the year, like we always do every quarter. But right now, right at the midpoint, we’re at about 19% for the year, up — and our operating margin were up about 50 basis points year-over-year at the midpoint of our operating margin guidance. So, pretty nice improvement on a base of right around $5 billion of top line revenue. So, we’re excited about what that will do to the bottom line.

Operator

Our next question comes from the line of Matthew Bouley with Barclays. Proceed with your question.

Christina Chiu — Barclays — Analyst

Hi. This is actually Christina Chiu on for Matt. My first question is just on your community count growth expectations for 2020, specifically geographically. Are there any markets or price points that you’re specifically focused on in 2020?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

What we try to do with community count is, we try to grow the business throughout. We don’t constrain our divisions, we don’t constrain our regions at all with budgets and saying you can only spend so much on land. If they’re hitting our hurdles and they’re bringing good land deals to the table, that’s how we go forward with it.

What we saw in 2019, which will impact 2020 revenues, is we saw an outsized increase in our West Coast region with our community count growth as well as our Southwest region, which has been a very strong market for us. And a little more modest improvement, flattish actually in Central, a little more modest improvement in the Southeast. So those factors will impact 2020 top line a lot more than what we do with the 2020 count.

But as always, we’re trying to focus on opening as many communities as we can that are hitting our hurdle rates. We’re staying very disciplined on the hurdle rate side. We’ll continue with the company’s strategy of focus on first-time and first move-up buyers. It also happens to be really quite a bit of a strength of the market in that area right now, so right in the sweet spot, and intend to continue to manage the business in that fashion.

Christina Chiu — Barclays — Analyst

Okay. Got it. And then, can you quantify or maybe give a timing update of how you’re expecting SG&A leverage in 2020 in light of accelerating revenue growth and coupled with moderating community count growth?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

Right. Basically, on the SG&A side, I mean, we always hit kind of a high point — it is a negative, but high SG&A ratio in the first quarter as our revenues are typically lowest in the first quarter and it progresses as we go through the year usually hitting out a low point in the fourth quarter, and we expect pretty much the same trend that we’ve seen in prior years in 2020.

Christina Chiu — Barclays — Analyst

Great. Thank you.

Operator

Our next question comes from the line of Michael Rehaut with JPMorgan. Proceed with your question.

Michael Jason Rehaut — JP Morgan Chase & Co — Analyst

Yes, hi. Thanks very much. I wanted to spend the first question just on the gross margin just trying to dig in a little better and maybe kind of rephrase or ask around some of Mike’s earlier questions in terms of fiscal 2020 guidance. You had, as you said, 90 bps of interest expense amortization improvement in ’19. You expect further improvement in ’20, although at a lesser rate. So even if it’s half of that amount, you could still be looking at your core gross margins excluding interest flat to down a little bit. So, just want to understand why you would think that if — I think you kind of pointed earlier towards actually a continued improvement of mix of your communities from a gross margin standpoint. You’re coming off of an easier comp, at least in the first half, from perhaps higher incentives in the marketplace from the back half of 2018.

And by contrast also, I mean, you’ve — and I think what people are just trying to understand is, is there just a basic level of cushion or conservatism that you’re baking in given you’re four quarters now averaging 50, 60, 70 bps higher gross margin than at least our estimates., and I’m sure many on the Street in terms of what you’ve been able to beat. So just trying to — we’re just trying to also reconcile and connect the dots or the drivers for next year.

Jeff Kaminski — Executive Vice President and Chief Financial Officer

The basis of our guidance is really a roll-up right from the community level to the division level, from the division level to the region, and region to the company. So, it’s very much a detailed forecast. The mix impact is huge. Like I mentioned earlier, over 40% of our communities are changing on a year-over-year basis. You don’t have the same communities that you’re selling out of. You’re dealing with things like land cost inflation and trying to offset that with some of the new land parcels, and we basically forecast based on what we know today. So, we base our forecast on our backlog gross margins as well as our selling gross margins, and anticipating what those line gross margins would be later in the year.

As I mentioned earlier, we’re not even to this critical spring selling season yet, so we don’t have anything on the books really for the third and fourth quarters, so it’s all on paper right now. And it’s our best estimate as we see it. And I think what’s underappreciated generally by folks outside of the industry are trying to — folks like you guys trying to come up with your own guidance or your own estimates for companies is the impact that mix can have and how much community changeover can impact the numbers. And it’s not just simple math of price up, cost down and certainly [Phonetic] other. It’s different store count, it’s different stores, it’s different markets, and the mix has a big piece of it.

So, at this point in time, we’re — that midpoint guidance number of 19% is kind of what we’re seeing. We do believe with the right market conditions in the spring that we could potentially do better than that. That’s why we have a range around it. And right now, we’ll stick to the guidance numbers and update you as we go through the year.

Michael Jason Rehaut — JP Morgan Chase & Co — Analyst

Yeah. Thanks, Jeff. I appreciate that. And obviously, as you said, to your point, mix can be a pretty big driver in terms of variation. Maybe just flipping to this past fourth quarter in an effort maybe to better understand guidance versus actual results, your gross margin for the fourth quarter came in 40 bps above the high end of your guidance range, 70 bps above the midpoint. So, just curious if you had a sense of what drove that difference relative to your expectations or relative to the guidance range?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

The two largest items were really — we did a little bit better in the amortization than we thought. We were expecting something more similar to the third quarter. We were about 20 basis points ahead of the third quarter in our amortization. And really one of the largest drivers was the reactivated headwind was much lower than it’s been, pretty much in for years. I think we picked up 50 basis points relative to the third quarter and reduced headwind from our reactivated communities.

And that was a function of two things. One, the revenues were a lower percentage of the total, but also I think, importantly, the reactivated communities actually had a pretty strong gross margin performance in the quarter and lifted the gross margins. As Jeff had mentioned, we increased prices in about two-thirds of our communities during the quarter. And the other thing that’s usually outside of our guidance is, we have a certain percentage of spec sales and deliveries within the quarter, which obviously don’t start off in our backlog and we end up forecasting those. And to the extent you could take price in the quarter and you have to take less of a discount on those spec sales, that was also a positive. So those three factors are probably the main things behind the margin beat.

Operator

Our next question comes from the line of Susan Maklari with Goldman Sachs. Proceed with your question.

Susan Maklari — Goldman Sachs — Analyst

Thank you. Good afternoon. My first question is just on, you noted in your commentary that you’ve seen buyers increase their spend in the design centers even as the size of the home has come down modestly. I guess, can you just give us a little more color on what you’re seeing there, and maybe how you’re thinking about that coming through, and especially maybe in the margin and in some of that mix as we think about 2020?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

Susan, understand that you’d have to look at what each buyer is picking. One buyer will pick up higher level of upgrade cabinet, a different buyer will pick some more cabinet option or a den option or a structural option. It really — when you look at the data, it really reinforces how personalized the homes are that we produce, because there are no two that are the same. What’s interesting for me is, the studio spend goes up while the home goes down, and a lot of the cost in the studio are tied to the size of the home. So it tells you the — even the buyer that was buying a larger home had the ability to put things in their house and chose not to and with a little bit smaller home, apparently they’re choosing to put more in the studio.

So we priced in the studio, it’s accretive to margin to a degree. It’s not a big lift to margin, it’s just more revenue at our normalized margin for the most part. So, as we model, we have a margin analysis per community that includes studio revenue based on our experience at that community or with that price point in that city. So it’s all baked into our guidance. We don’t look to the studio right now as another upside for the year. It’s just part of the ASP and the revenue that we guided.

Susan Maklari — Goldman Sachs — Analyst

Yeah, no. Sure. I was just trying to get a sense of, are you seeing more of a lift as the size of the house has shrunk. And should — is that something that generally could kind of continue as you get this move to more smaller homes?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

It could. It could. Literally — and you’ve been to our studios, every buyer is different, and some want a big home with nothing in it, and others want a smaller home and load everything in it and everything in between, and that’s part of why we sell so well, because we can cater to everybody.

Operator

Our next question comes from the line of Jade Rahmani with KBW. Proceed with your question. Our next question comes from the line of Jay McCanless, and he will be our final question, from Wedbush. Proceed with your question.

Jay McCanless — Wedbush Securities — Analyst

Hey, good afternoon. Thank you for fitting me in. The first question I had, a small decline in orders in the Southeast this quarter. Could you talk about what was going on there because that part of the world has had a pretty good run in the past few quarters in terms of order growth. Hello?

Jeffrey T. Mezger — President, Chief Executive Officer and Chairman

No, no. We’re looking at the notes, Jay. One of the thing that happened last year, in the fourth quarter, we had acquired that builder in Jacksonville, Landon, and had a bunch of inventory that we sold through. So there was a spike in sales in Jacksonville that didn’t replicate, because it’s getting out of old product that we weren’t going forward with. So that’s probably some of it. The numbers are not that big. Our business in the major cities is very good. The Orlando, Jacks, Tampa, and Raleigh we’re seeing good demand in all of them. So I think it was just the timing of that acquisition.

Jay McCanless — Wedbush Securities — Analyst

And then, the other question I had, could you all quantify how many closings were pushed because of the fire? And I’m sorry to hear that you were affected by the fire, but how many closings were pushed? And are those pushed closings having any impact on your assumptions for the 1Q ’20 gross margin?

Jeff Kaminski — Executive Vice President and Chief Financial Officer

No, it’s a pretty modest impact. It was well under 100 units, but they’re high ASP. So it had a bit more of an impact on the revenues, but it wasn’t terribly significant. And it held our full year revenues in about the same range as we were at, at the end of last quarter, so not a huge impact.

Operator

[Operator Closing Remarks]