MDC Holdings Inc (MDC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to M.D.C Holdings' 2006 fourth quarter and full year earnings conference call. (OPERATOR INSTRUCTIONS). Please note that this conference is being recorded. I will now turn the call over to Mr. Joseph Fritz who will read the statement concerning forward-looking statements.

Before introducing Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call, including those related to MDC's anticipated home closings, home gross margins, backlog value, revenues and profits, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the Company's actual performance are set forth in the Company's 2005 Form 10-K and 2006 third quarter Form 10-Q.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Should a non-GAAP financial measure be discussed, the information required by Regulation G will be posted on the Investor Relations section of our website, RichmondAmerican.com.

I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C Holdings.

Good morning. And welcome MDC's 2006 fourth quarter conference call and webcast. As you have heard from a number of our peers, 2006 proved to be the most difficult year for the home-building industry in well over a decade. Reduced demand for new homes resulted in lower traffic levels, substantially higher home order cancellations, and an excess supply of unsold new and existing homes on the market. Builders have significantly increased incentives to sell homes in this environment.

In our 2006 fourth quarter we saw very little relief from these conditions. Fierce competition for new home sales kept order cancellations at a high level and prompted further increase in our incentives. The corresponding decline in home gross margins and anticipated projected absorption rates resulted in an after-tax assessment -- asset impairment and project cost write-off of $61 million in the quarter. This contributed heavily to our $0.14 per-share loss. Without these charges, our fourth quarter earnings per share would have exceeded the current First Call consensus estimate of $0.99, still down from $4.29 last year.

Notwithstanding our current operating results, we're very proud of our accomplishments during the 2006 fourth quarter and full year, positioning our Company for renewed growth when market conditions permit. These accomplishments emanate from our commitment to a risk adverse disciplined business strategy, which is focused on strengthening our balance sheet and promoting operational and financial flexibility.

There is much progress to report. We generated more than $400 million in operating cash flow during the fourth quarter alone, in large part due to a substantial reduction in our home-building inventories. This enabled us to end the year with more than $500 million in cash and nothing outstanding under our $1.25 billion home line of credit.

In addition, both our stockholders equity and book value per share grew by approximately 10% from the previous year, despite the impact of $88 million in after-tax charges associated with asset impairments and project cost write-offs incurred during 2006. As a result, our year-end ratio of debt to capital, net of cash, declined year-over-year by 1,000 basis points to 0.18, which continues to be one of the lowest in the industry.

We continued to renegotiate or terminate land purchase contracts that do not meet our high underwriting standards. These efforts resulted in the cancellation of contracts for almost 7,000 lots in 2006. And as a result, our loss under option declined by 57% to 8,100, for which we have less than $35 million at risk.

Furthermore, we reduced our total lots owned and controlled since the beginning of the year by 35%, leaving us with one of the lowest lot supplies in the industry, relative to current home closing levels.

We have stepped up our efforts to reduce construction and development cost, improve construction cycle times, and generally increase the efficiency of our home-building operations. And we have continued to right size our operating and administrative infrastructure in view of current market conditions, which contributed to a $24 million year-over-year reduction in total G&A expense in the fourth quarter.

We remain optimistic with regard to long-term prospects for large builders. The underlying favorable demand and supply forces that we have talked about over the past several years remain intact. However, because the duration and intensity of the current correction remains uncertain, we don't know what the short-term holds for home-building. What we do know is that as a Company we have never been in a financial position to not only survive, but to capitalize on difficult times for our industry. Our relatively short supply of lots limits our risk with respect to current market conditions. And at the same time, our investment-grade balance sheet and $1.7 billion in available cash and borrowing capacity positions us to react quickly to profitable growth opportunities.

I would now like to turn this call over to Gary Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2006 fourth quarter.

Starting with net income. As Larry mentioned, we saw a loss of $6.4 million in the quarter, or $0.14 a share, on $1,343,000,000 in revenues. This compares to earnings of $197 million, or $4.29 a share, on $1.7 billion in revenues last year.

We saw as contributors to this lower home-building profits, which were partially offset by lower corporate expenses, and a onetime tax benefit. Those of you who make the calculations can see that with respect to this loss we reflected a tax benefit at a rate of around 65%.

The general effective tax rate for the Company is 37.2%, or it has been throughout this year. The big differences were a couple of items that are non-recurring. One being the impact of reserve reversals of approximately $3 million, and the fact that the Section 199 manufacturing deduction that is reflected in the provision is not impacted by the amount of impairments, because it is based on cash taxes saved. Therefore there was a $2 million benefit relative to book income with respect to that.

As we look at the full year, we saw our earnings of $214.3 million, or $4.66 a share, on $4.8 billion in revenues compared with $505 million of net income, or just short of $11 a share on $4.9 million -- of $4.9 billion of revenues. And that there is a tax benefit. The same reasons apply, lower home-building profits. The tax benefit is slightly lower because it is spread over four quarters.

Turning to home-building profits, our pretax income in the fourth quarter was a $14.3 million loss. This compared -- this was on home-building revenues of $1.3 billion. This compares to a $333.2 million profit in the fourth quarter last year on $1.7 billion of revenues. A year ago -- or for the year we saw $371.4 million in profit on $4.7 billion in revenues compared to $892 million in profit in 2005 on comparable level of revenues.

As we look at impairments as being the primary driver for -- one of the primary drivers for these lower profits, we saw in the fourth quarter -- we recognized $91.3 million in impairments pretax. This -- we had no impairments a year ago. These impairments for the year were $112 million, no impairments a year ago.

Project abandonment costs also played a part in the loss for the quarter, as well as for the year. We saw a project abandonment cost pretax of $6.7 million in the quarter. We had $5 million a year ago. For the year we had just short of $30 million in project abandonment costs compared to $10.4 million a year ago.

The impairments, I think a lot of you have had some training on how these calculations are made, but our impairment actually involves some 52 subdivisions, which were spread throughout all the segments in which we operate. A big part of it, in fact, 83% of it was in our Western home-building segment, which is comprised of California, Nevada and Arizona. And 50% of the entire impairment was actually in the state of California. Most of these projects that were impaired relate to assets that were acquired in 2005 and 2006. And the impairment involved the write-down of some 2,300 lots.

For the year the breakdown -- we have a slide there showing the breakdown of the impairments, by segment as well. As you can see most of this -- the impairment for the year was in the West, some 81%.

Turning to closings, we saw our closing levels drop some 27% relative to last year to 3,594 closings. This is a level that is somewhat comparable to what we saw in 2003. For the year we saw our closings at 13,123 compared to 15,307 a year ago.

As far as our closings are concerned, really the reason why our closings are down is our beginning backlog coming into the quarter was down close to 40%. We did see increased closings in the Delaware Valley and Utah. We saw the biggest declines in California, Nevada and Colorado where our backlog levels coming into the quarter were anywhere from 45 to 60% lower than they were at the same time the previous year.

As far as average selling prices, we have seen our average selling price continue to trend up, $360,000 on average in the quarter, which is up some 5% from $344,000 a year ago. For the year we saw $354,000 in average price, up 13% from $313,000 a year ago.

As far as the quarter is concerned, all of our markets were up on average price, except for Virginia, Nevada, Florida and Maryland. The largest increases actually occurred on a percentage basis in Utah. We saw some strong increases in Colorado and California as well. For the year all of our markets were up in average price except for Chicago.

We have a graph here that shows pricing trends. And starting with orders, our order pricing has generally trended down. You see in the fourth quarter that due to mix we see a slight uptick in the average price of our net orders. Our backlog average price continues to trend down from $379,000 a year ago to $357,000 here in the fourth quarter. And our closing, as I mentioned, our average closing prices continue to trend up to $360,000.

Gross profit margins for the quarter were at 16.6%. This compares to 27.8% a year ago, and 22.5% in the third quarter of '06. As it relates to a year ago period, all of our markets are down some 400 basis points plus, except for Delaware, Utah and Colorado. On a sequential basis the largest declines from the third quarter actually occurred in Arizona. But all of our markets are down as much as 400 basis points, except for Delaware, Utah and Colorado, all of which actually showed sequential increases in home gross margins. Then for the year, our margins were 22.2% compared to 28.3% a year ago.

G&A is an area that Larry touched on, and is one that we've made some significant progress in. We are starting to see the fruits of those efforts. Our home-building and corporate SG&A declined from the fourth quarter last year to $156.5 million. And for the year we actually saw an increase at $645 million versus $593 million.

We saw reduced G&A expenses for the quarter that were partially offset by higher advertising costs. Our advertising costs really dominated our SG&A for the year, with higher advertising offsetting lower G&A, as well as the fact that our project cost write-offs are reflected in G&A expenses and significantly exceeded the level of a year ago for the year.

Our corporate G&A. This is where we have made some substantial improvement. And we have included a graph here to show you the sequential trends over the last year. Clearly we are down significantly from the fourth quarter of last year, down over 50% -- from $33.8 million down to $14.8 million here this year. But you see the steady decline as we continue to right size our business to the size of our operations. The same thing really is happening on the home-building side. We show quarterly trends there as well. And despite the fact that we had the project cost write-offs, we were down on a G&A basis from the fourth quarter a year ago.

Financial services and other for the quarter was $10.1 million, down $6 million from a year ago. This decline primarily resulted from an increase in actuarially determined losses for our insurance operations, which more than offset increased profits from our mortgage lending business. We earned $11.6 million from the mortgage lending business, which is up 10% from a year ago, thanks to higher gains on sales and mortgage loans and lower G&A expenses.

For the year our financial services and other is up close to 30% at $45.2 million, primarily due to a 62% increase in mortgage lending profits at $36 million. The same reasons, higher gains on sales and mortgage loans. And even with the higher level of activity, we were able to maintain our G&A at a consistent level. These profits more than offset declines in profitability in our title business and insurance business, which resulted from the reduced level of home-building activity.

Just a couple of statistics we refer to on the financial services side. We have seen a continued turn in the mix of our mortgage loans that we are originating away from ARM loans. It has virtually flip-flopped from where it was last year at this time. We are now originating -- approximately 60% of our loans originated are fixed-rate, with 40% being ARMs. And of the total we are seeing around 32% interest only versus close to 45% in the fourth quarter a year ago. Our FICO scores continue to be in the range of the 715 range. And our loan to value has not changed much either in the mid 80%.

The real meat to what we have accomplished here in the quarter is reflected in our financial position and our balance sheet. Starting with our equity, which grew to $2,162,000,000, or $47.87 a share, up close to 10% despite the impact of the write-offs and the loss here in the quarter.

We did say our cash position increase to $510.6 billion -- $510.6 million, excuse me -- with nothing outstanding on our line of credit. This contributed to a significant increase in our cash and unused borrowing capacity. We ended the quarter and the year with $1,736,000,000. This is up 39% from where we were a year ago.

Finally, something in which we are very proud of, our debt to cap ratio continues to fall as we accumulate cash and lower our asset levels. We are now down to 0.18 compared to 0.28 a year ago. And our peer average, with the information we have available to us, is 0.43. We are a leader of the pack in that category.

Looking at the next slide is a summary of our free cash flow, which generated these high cash balances. As Larry mentioned, we did generate $413 million in cash from operating activities, primarily due to a $400 million decline in our inventory balances. Take that and reduce it by dividends and a few equipment purchases, we generated free cash flow just short of $400 million in the fourth quarter alone, compared to $116 million a year ago. And for the year we generated $316 million in free cash flow on net cash from operating activities of $371 million resulting from our profitability and reduced home-building inventory. This compares to a use of cash of just short of $500 million a year ago. So an $800 million swing in free cash flow for the Company in 2006.

A lot of this stems from our control of our inventory levels, as I mentioned. And the control of our lots and our inventory balances is the foundation of our operating model. It is really the cornerstone of the operating flexibility that we seek to obtain in this market to create a limited supply, which gives us flexibility to react to opportunities.

And as we look at our lot supply, we see from the slide there that our lots owned have declined over the last year, declined some 17% from 23,000 lots to 19,000 lots. Of these 19,000 lots, even our lots owned are fairly liquid. Two-thirds of these lots are actually finished. So we are in a very good position to be able to convert these lots to cash fairly quickly.

The largest change came in our lots under option, which we reduced from 18,800 to just over 8,000 lots, a 57% decline due in large degree to a termination of some 7,000 contracts that we had under option at some point in the year. That brings our total lots controlled to 27,500, down from 42,300 a year ago, which is down 35%. Of course, as Larry mentioned, the lots that we have under option we only have $35 million at risk.

Turning to sales and what is going on in that category. This is somewhat of a mixed bag. We have a very good story from a gross order standpoint. Our gross orders actually in the quarter were flat. In fact, all of our markets were up in terms of gross orders except Colorado, Nevada, and Utah and Texas, of course, on our way out. We generated 3,615 gross orders in the quarter compared to 3,632 a year ago.

The offset to that is that we saw our can rate increase, saw a higher level of cancellations, significantly higher. Our cancellation rate in the quarter was 56.5% compared to 33.8% a year ago. We actually saw absolute cancellations rise to 2,044 from 1,227 a year ago. The highest cancellations coming in the areas where we saw the highest level of gross orders. It is very encouraging to see the traffic and the order flow, but because of the competitive nature of some of these markets, we are seeing some churning to some degree of these buyers.

The highest cancellation rates actually occurred in Arizona and Florida. On the other side of the equation, we actually saw our cancellation rates decline in Colorado, Nevada and -- or absolute cancellations decline in Colorado, Nevada and Texas.

The net effect of this is a reduction in our net orders received during the quarter by some 35%, down to 1,571 compared to 2,405 a year ago. The sales value of these orders is $515 million, with an average price of $327,000 on these orders. This compares to $831 million a year ago at an average price of $345,000.

Of course, these reduced orders resulted in a lower level of backlog to end the year and to begin 2007. We ended the year with 3,638 orders in backlog, and that compares to 6,532 from a year ago. And as I mentioned before the average price of this backlog is $357,000, which gives us a sales value of our backlog of $1.3 billion versus $2.4 billion of a year ago.

Finally, as we look to the future, the layout of our active communities, active subdivisions actually increased slightly from where they were a year ago. We ended the year with 306 active communities compared to 292 a year ago. The largest declines being in Colorado and Texas, while we saw increases due to lots that we had purchased in communities opened earlier in the year in markets that were fairly hot late last year, that being Arizona, Florida, California and Maryland.

This concludes my prepared remarks. We would now like to open the floor for questions.

(OPERATOR INSTRUCTIONS). [Joel Lacker], FDN Securities.

I just wanted to commend you on a good job with the balance sheet. You're one of the few that actually had a decline in dollar inventory versus just a decline in lot count. I just want to say congrats on that. Also, just your gross margin in backlog, how much different are they than the fourth quarter closings?

That is -- because we do not give guidance or really talk about margins in the future. The margins in backlog are -- to a certain degree, they are not all that relevant, because we do see a lot of that backlog cancel. So I think that --.

I am just trying to get a picture if they have been reset at a more market price rather than to factor in cancellations or more downward revisions for margins.

A lot of our backlog is, keep in mind, has been acquired during the last half of the year, and very much of it during the fourth quarter. And during the fourth quarter we -- while we had a number of concessions related to selling spec homes and closing by the ended the year, it still was a period of time that was very competitive. And so incentives were, as we mentioned earlier in the call, were very prevalent during that period. Those are the homes that are in backlog today.

What is your average percentage that you're demanding from home buyers say in the fourth quarter on your orders, as a percentage of the purchase price?

In terms of a deposit?

Yes, a deposit.

On average it runs between 2 and 3%.

2 and 3. And has that changed any over the last 12 months or so?

It actually hasn't changed a whole lot. There are certain circumstances where we have changed our approach to some of our buyers in terms of timing and amounts that we will require, and depending on what the status is, and whether a contingent buyer or not. There are some things that we have been doing here of late to try to require the buyer to have more skin in the game up front.

Stephen Kim, Citigroup.

My first question relates more towards long-term strategy. I know the Company's position has over the years been to make certain that you didn't fall victim to what happened following the 1980s downturn where you almost went bankrupt. And the emphasis is really it seems to be sort of a trifecta of low leverage, very conservative land policy, and -- I guess to make sure that you don't have over reliance to one market. You have done a really great job at particularly the first two, and we are seeing evidence of that here.

But the third one, geographic diversification, if one were to complain about your results in any way relative to your peers, it would be that while you certainly have been conservative on land and the debt, you sort of made up for it a little bit by having a lot of exposure to particularly the D.C., the Las Vegas, and the Phoenix markets.

My question is sitting here in a position where you are certainly going to survive this downturn, no matter how bad or long it is, and you look ahead to the beginning of the next cycle, where management's priorities lie, do you feel that it would be particularly over the next couple of years advantageous to perhaps take your leverage up a little higher, maybe not extremely high, but a little higher, in an effort to expand your geographic diversification at this time in the cycle in a much more meaningful fashion than you have over the last couple of years? Or do you think you've got the balance right and the geographic diversification, that is just the way the cookie crumbles?

First of all, I think we have run our leverage generally in the 30s when things were going reasonably well, which was still one of the most conservative in the industry. And of course now I think we might even be either one or two as far as the highest degree of liquidity and the least amount of leverage.

We are pleased with the markets we are in. I have no lack of confidence in Arizona, Nevada, Colorado. I think the mid-Atlantic has continued job creations. California may be one of the weakest, but we have seen that once or twice over the last 30 years, and I don't have any lack of confidence.

It is not our intent to be spread out all over the country. We found we made the highest returns and ran the best business by being significant players in large markets that have good growth prospects. And I would say as a general statement, the markets that we are in today have continuation of growth in job creations. And I believe they will be leaders in the return of the housing market as the adjustments take place. And I'm not going to leverage up.

Right. Okay, well great, I appreciate that. My second question relates to the phenomenon we witnessed this quarter of relatively high gross order trends, relatively high, but also a relatively high backlog cancellation rate this quarter. I think you're one of the few or only thus far that has seen anything close to the kind of increase in the backlog cancellation rates that you saw going from the third quarter to the fourth quarter. At the same time, of course, you had the good gross orders.

My question is, is management's view that salespeople need to be getting out there and selling and treating every up, if you will, as a serious opportunity to sell, and not have them focus so much on the quality of the buyer that they may be seeing or signing up? Or is it the view of management that this is actually something that needs to be fixed, and perhaps there's going to be a concerted effort on the part of management to drill home to salespeople that a contract that has a very low level of likelihood that it is actually going to stay a contract, really probably isn't the kind of business that you want to be signing up, because it wastes everybody's time and it makes it difficult to manage a business by using traditional metrics. Which is your view?

Our view is, is we want to sign up every person that comes in period. It is not up to the salesperson to figure out if the person qualifies. We are working hard at training our salespeople to sell and to sell to everyone. It is not their job to discriminate on who may or may not be able to afford a home. And we believe that is the correct way to run a business is sell every up, and we will sort through it appropriately. That is the way we do it.

Michael Rehaut, JP Morgan.

Just a couple of quick questions. First, the can rates, as Steve had alluded to, rose this past quarter, and some builders have seen an improvement in the 4Q. Some have seen it -- it got a little bit worse. I was wondering if you could give us a sense for trends within the quarter, and if you feel that at this point over the last several months, perhaps even in the last quarter, some builders alluded to trying to just flush out the backlog, so to speak. So is that to some degree what was happening here, as perhaps you got more competitive, or trying to clean it up? And what you saw throughout the quarter and thoughts about entering -- or so far in January? That is the first.

We did spend a tremendous effort to try to clean up the backlog. It is our intent to do that on an ongoing basis, but we -- there was some cleanup going on in the quarter. At the same time we had a number of special promotions going on which brought in a lot of traffic and created a lot of momentum, and we wrote a lot of buyers contracts for that.

We had a number of -- we had a significant number of sales during the quarter that actually canceled in the quarter as well, so it had nothing to do with our beginning backlog. We also -- we tend to -- we actually, as a matter of policy, treat our transfers -- when we have a buyer that we move from one house to another -- we actually cancel that contract and show a sale of a new home. That is just the way we account for it.

And so when you're looking at absolute cancellations, the can rate, that tends to increase a little bit relative to everybody else as well. It is just -- it was a very competitive environment, a lot of positive momentum on the gross sales side. And we had some fallout and some cleanup on the other side of the equation. But all in all, it was a very healthy exercise for us to start the year.

Right. Then on the -- looking at the sales on the gross side, it certainly had a nice improvement from last quarter. I think last quarter it was -14%. This quarter is nearly flat. Which markets, if you could give us a feel for which markets actually had positive gross order trends and which had negative, and which maybe showed the most amount of improvement, even if they were still negative?

As we mentioned earlier, every market was up. Every market showed positive gross orders year-over-year, with the exception of Colorado, Nevada and Utah. So the fact is, is that Colorado -- Colorado is also one that we mentioned had lower cancellations, Colorado and Nevada. While they had lower gross orders, they also had lower cancellations. And so that is -- there really wasn't a significant standout trend as far as one market or another during this period.

Alex Barron, JMP Securities.

I wanted to find out -- you guys mentioned you impaired 52 communities this quarter. I was wondering how many you have impaired year-to-date, or if you could give a breakout for previous quarters?

We only had impairments in one other quarter, and I think it was about 11 or 12 communities in the third quarter.

Okay. Can you give me what the value of the communities was before you impaired it? I'm just trying to get a sense for the percentage that those assets fell.

I really can't. I don't have that. It would be confusing anyway because the amount of impairment relative to your investment varies significantly depending on whether you're dealing with work in process or finished lots or land held for development. It is really not necessarily a relevant item, I don't think.

Can you also give me some breakdown of -- I think you said you canceled 7,000 lots in all of '06?

Yes.

You had 2,300 in this quarter, right? So what were for the other quarters?

I don't have that handy. I think it was more heavily weighted to the first half of the year than the back half, but I don't -- I don't have that handy. But I can circle back with you when we talk later.

Okay, it sounds good. I guess I'm just trying to get a sense -- obviously you guys have one of the shortest land positions, and so you've probably had to build on a number of what could be considered expensive lots. And you have written down some others. I'm just trying to get a sense as to have far along you guys feel you are through what you might consider expensive land, like what percentage of that land have you guys gone through, if you will?

That's a tough one because we did mention that most of the lots that we wrote down were acquired in '05 and '06. But at the same time we can't say that '05 and '06 lots are expensive lots, because we renegotiated a lot of these lots and we repriced them. And so some of the lots we acquired in '06, and even in '05, are at very favorable prices.

At this point what I would say to you is that we have been through a very difficult period here in the fourth quarter with a lot of incentives, a very competitive environment. You can see the effect in the cancellations. And we have calculated and reflected an impairment that we believe is reflective of the values that exist as the market is today. And without any further deterioration in the market, we think that we have reflected the impairments that are appropriate at this point in time.

One last one, if I could. You just gave a count there of your homes I guess under construction. I wanted to figure out what percent, or what amount, is sold versus unsold. And of the ones that are unsold, how many of those are finished spec?

That isn't an item that we do not disclose, being the spec component specifically. But it is clearly -- obviously if we only have 4,000 plus houses in work in process, we can't have too many specs with the backlog that we have. We have made a lot of progress in keeping that under control. And so it is -- while it is a level that is above where we were a year ago, it is still well within a manageable level.

Maybe another way to ask it is what percentage of your backlog is under construction?

I would say 70%.

Rashid Dahod, Argus Research.

I wanted to know what are your plans for free cash flow for the year? Do you see yourself entering into any new land deals or any share repurchases?

We have a -- hold on one second, Larry will answer that question.

You know, land has been an interesting component for us, because it has both problems and opportunities. And as you have commented, we have got about $1.7 billion of liquidity, which really enables us to be very opportunistic in the acquisition of lots that represent real true value.

We believe that the opportunity to capture this value exists in today's market. Really to this end we have been communicating with many potential land sellers across the country regarding our desire to purchase these lots. Our interaction with the sellers not only helps us to look for opportunities, but also gives us real-time data.

I'm sure you can appreciate the fact that we are open to do business, that our underwriting criteria is probably being the most stringent in the industry has continued at that level. And that what we do is evaluate current and future market conditions and general competitive factors, including the incentives and current sales. So when you load up an expected internal rate of return with the market conditions that exist today, and with the incentives and the absorptions, it makes some very interesting numbers. And I would say that we are open for business.

And you ask about use of capital. I think maybe the best use of capital is when times are difficult, confusing, that this is maybe one of those times to see if we are able to make unique selective purchases of really, really top-quality land on a very competitive basis. We have both closed and contracted lots described as -- with those elements that I just went through. And that is what we're working on now.

How about are you considering any share repurchases?

That has generally been low on our list for quite a while. And our general answer is if we buy any back, we will let you know at the end of the quarter, but don't hold your breath.

If I may ask one more question. You mentioned some increasing closings I believe in your Delaware Valley and Utah markets. Are you -- as far as the segments that you cater to the first time, the first time move up, are you seeing an increase in one or the other?

Are you speaking in terms of those particular markets?

Just any of the markets that you have seen an increase in closings?

Really the increases are not necessarily related to the price points. Utah is the standout market for 2006 in terms of growth. It has stood as a strong market throughout the year. And it is following a path not unlike, while not as steep, what we experienced in California, and Virginia and Nevada and Phoenix.

Delaware Valley on the other hand is really a start up market for us. And we're starting to see some real traction out of that market. And it is more related to growth in the level of our operations than to the level of activity in that market.

I guess what I'm trying to determine is are the people that are coming to the table, are they generally the first-time buyers, are they the first-time move up buyers? I don't know if that is something that you're looking at or not?

It is something that -- we generally cater to first-time, first-time move up. In fact, close to 80% of what we build is for first-time, first-time move up. Those are the ones that we are generally dealing with, and that is -- that mix has not changed significantly here.

Carl Reichardt, Wachovia Securities.

Two of my questions just got asked. Let me ask this. On the impairments you have taken to date, and realizing you don't give guidance Gary, do you have a sense of the percentage of those or the dollar amount -- did I say Larry, Gary? -- the percentage or dollar amount of those that you would expect to reverse out in 2007?

I don't have a specific percentage. But all our lots are -- we have a two-year duration. So generally these things are going to turn in '07 and '08. There are a number of -- there's a mix of houses and land that is impaired. And clearly the houses will turn in '07. You will probably see more turn in '07, but I couldn't tell you exactly how much.

That's fine, that's helpful. What discount rate did you use on the impairments?

It varies depending on the level of risk. We use a discount rate that ranges from 12% to 18%, depending on the status of the project or the property and various attributes of those particular parcels.

Last, more for Larry, and this is an odd question, I know. But if I look at the national metro markets, Denver has really over the last five years been the one market that hasn't seemed to have seen any kind of resurgence or fall back from '01. I guess the question is, what is wrong with Denver? What is preventing that marketplace from recovering more meaningfully? I would just like your perspective, given your long experience in the market.

Is it a political or a business answer?

I want the honest answer.

I think the most factual answer is, Denver is a cyclical market like most markets in the country. And when it is good, it is really, really good, and we make a tremendous amount of money. Then it goes back to normal. And after the .com bubble of around 2000, 2001, the market has significantly deteriorated.

But the nice thing about it, it is our home turf. We're one of the last guys standing. And it has been bad, or slow, long enough it is starting to get good. I think that on a perspective basis, as the rest of the country is going through very difficult times, Colorado I believe will be a good example of an improving market.

Dan Oppenheim, Banc of America Securities.

I was wondering if you can talk a little bit about the mortgages that your buyers are taking right now. You talked about the average LTV. Could you talk about what percentage of buyers are getting mortgages with LTVs greater than 95%? I am just trying to get a sense of that, given what is happening in the subprime mortgage market now.

It is -- a high percentage are taking seconds. We do have probably more than half of our originations that have second loans, second mortgages, associated with them, so those would be in general high loan to value loans.

If there is any more color, if you would have a -- just if it's greater than 50% or so. But then secondly, the real question, I'm wondering about the land environment and how you see land prices right now. And your view on when you will need -- when you will look for opportunities on the land side and increase your exposure?

We have seen land prices in different markets go flat, which is probably good, and slightly up in a couple limited cases. But mostly I would say down from 15 to 30%. And I would guess that land prices, of those that are wishing to transact, it doesn't do any good to mark it down 20 and get no bids. So we're trying to actively set the new low levels in the opportunities we're looking for ourselves.

Stephen Kim, Citigroup.

I just have a follow-up question. Thinking about your landholdings and how lean they have been through the peak, and even you have taken some write-offs, I was wondering about when your average land cost might realistically be expected to go down, or maybe flatten at worst. A lot of your peers, I think, when you're looking out to '08, you still probably have to factor in higher land cost. But I was thinking that for you, you probably don't.

So am I thinking about that right? Do you think it is realistic to imagine that your land cost on an average basis may actually be lower in '08 that it is here in the early part of '07? And do you think that that therefore your margins may by virtue of your strategy expand more quickly coming out of the bottom than your peers?

I think a lot -- it is kind of interesting looking at this quarter as an example. I think we have been able to show over the years that our land purchase capabilities put us in a position to achieve some of the highest margins in the industry when things are going well. And yet the land percentage, as a percentage of revenues, has stayed fairly constant, somewhere in the 22 to 25% of revenue range. We have seen this quarter that percentage rise, primarily due to the level of incentives that were embedded in the selling prices of the homes that we sold. Because as a percentage of costs, our land costs have not changed much. They generally run around 30%.

I think as we see the markets improve, and the levels of incentives come down to more normalized levels, that would tend to mean that our margins would be favorably impacted as it relates to the land cost. Certainly we are in a position where our goal is to be able to capitalize on opportunities to capture values that are in the marketplace out there so that we can -- I mean, we are in a position now to replace our lot inventories at some very favorable prices, which should -- we would expect would have a favorable impact on margins going forward.

Another question I had relates also to land, and it relates also to your longer-term strategy. As you look ahead to these opportunities that you have been alluding to on the land side, I was wondering whether you might be interested in increasing your mix between owned and optioned? One of the things that was also sort of a hallmark of a MDC's conservative land policy was the fact that you really didn't do a whole lot of either. You have really kept lean on both fronts.

Do you feel that there may be an opportunity, and would it be a worthwhile thing to do to try to negotiate, let's say, a larger percentage of your overall landholdings in the option category at this stage of the cycle? Or do you sort of feel that that is sort of a cycle timing game you want don't want to get involved in?

I don't think any of us know exactly the timing of the market improvement. I would assume that what we will do is be very aggressive on structure, which might entail more use of options, or it might entail more use -- or expanded use of land purchases. But when you say land purchase, land purchases doesn't mean you write a check for the entire parcel. It might very well mean that you buy a part of an asset, as you know what a rolling option is.

So there is some people that view option as that is the beginning. And we try to structure our transactions where even those that we might be considered buying are structured in sequential option decision points.

If we had all the answers on the timing, it would be great. I was looking at the University of Michigan had a survey. They said it is a good time to buy a house. So I think that is a good policy to educate the public, because looking backwards a couple of years forward from now, I think everyone will be very pleased with what they transacted in buying a quality home.

I agree. Okay, thanks a lot.

Alex Barron, JMP Securities.

I guess it seemed like your Utah market was going pretty well for awhile, and things I guess started going downhill this quarter. I was hoping you could help me understand what is happening in that market.

Going downhill in terms of orders? I think that market has experienced a very strong run-up, and the acceleration of orders in that market has been fairly dramatic. We have just seen things -- it is hard to really measure the health of the market based on what we see in the fourth quarter. Different things happen.

We have had some pretty tough weather during this period, and that has, I'm sure, had an effect. But that market is starting to -- it is not increasing at the same rate. And while it is still a market that we continue to experience some pricing power in, that has slowed. It could be seasonal. Who knows what it is.

Right now we're going to -- we're coming out strong with some new communities and some new product. And we're looking forward to the selling season. And then we will take a look at where things are for that market. But right now it is still a very healthy market.

Can you talk about what you guys are seeing in Florida in terms of your gross sales and just the overall pricing trends there?

Florida is very hard. I don't know what else to say. It is just a very tough market. We are not exempt from that. Our gross orders were up a little bit in Florida in the fourth quarter, but cans were as well. So you saw the effect of that in their net orders.

I guess going back to a previous question, are you guys basically -- is the reason that you guys are getting higher cancellations do you think that you're being somewhat aggressive with the discounts, and that is what is generating the gross orders? But at the same time that is causing people and backlog to cancel, or what do you think is happening there?

No, I don't think that -- we're using incentives where we need to to generate traffic and to sell houses. I wouldn't say we're being overly aggressive. And that is not -- I wouldn't say that that is impacting our backlog.

The backlog impact, the cancellations are really a result of us writing, as Larry mentioned when he spoke, that we have instructed our salespeople to write as many contracts as they can. And to let us to the culling and the underwriting and to evaluate the quality on that buyer. We're writing as many contracts as we can.

I guess my last question on the Texas market. I noticed your lot count decreased pretty meaningfully. Was that just basically a lot sale to somebody else?

We did sell some lots, and we also closed a lot of houses. Our hope was we would be out of that market by the end of the year. We still have two active communities in Texas, because we have five to sell and one, and six to sell in another. And that is the only reason. We're almost out of Texas.

If I could ask one more. What was the combined LTV for the quarter?

85%.

Timothy Jones, Wasserman & Associates.

I'm sorry, I missed the first half of your conference call because I had a meeting. I just couldn't get back. I will listen to it off-line. But I don't think anybody may have asked this question.

Yesterday I asked Chad Dreier, why he only took $56 million of write-offs versus substantially less than most of the competition. And his answer was, our land position was a lot lower. I think you have probably had the lowest land position in two years of any of the builders. And I'm wondering why yours was $92 million -- $91 million when his was $56 million? Because if that is the reason, if it was good for him, it should have been good for you.

First of all, ours is relatively low compared to most of the others. But ours is really reflective of what is going on. I don't know if you heard this part, but a large part of our write-offs are in California and Arizona and Nevada. In excess of 80% of the impairments that we took are in those markets, and that is where we have a lot of our business. I don't know --.

That was the other answer is that he had a smaller portion in California. All right. I'm sorry if I missed -- the part of it. But I will talk to you off-line.

Joel Lacker, FDN Securities

You mentioned the 22 to 25% of revenues were land expenses. Do you have an exact breakdown for the fourth quarter of the just percentage of revenues of land, labor and material?

I do not have that. For the land side it is -- land component ran up above the 25%. It is because to 30%. The other components I do not have.

As of like a year ago that was between the 22 or 22, 23% range?

It was 25%. It has been right in that range for the last several years.

So just the sequential decline of 700 basis points are so on gross margins. Most of that was just due to a run-up in land, or was it above 25% in the third quarter?

The land -- that is why I pointed out land as a percentage of costs really hasn't changed. It is really the effect of incentives.

We have no further questions at this time.

We would like to thank you again for joining our conference call today. We look forward to having the opportunity to speak with you in April following the announcement of our 2007 first quarter results. Have a great day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.