MDC Holdings Inc (MDC) 2010 Q3 法說會逐字稿

Good morning. We are ready to begin the MDC Holdings Incorporated third quarter 2010 earnings call. I will now turn it over to Bob Martin, Vice President of Finance and Business Development. Sir, you may begin your call.

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings' 2010 third quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer, and Chris Anderson, Senior Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information about how to access the replay, please visit our website at MDCholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operations, cash flows, strategies, and prospects, 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 2010 third quarter Form 10-Q which was filed with the SEC earlier this morning. It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by regulation G will be posted on our website. And now, I will turn the call over to Mr. Mizel for opening remarks.

We're pleased to report a second consecutive quarter of top-line growth in the third quarter of 2010. Revenue was up 11% year-over-year on the strength of a 10% increase in home closings. This improvement helped us to narrow our loss for the quarter by nearly $22 million over the prior year. Over the past 12 months, we have increased our lot supply by 39% year-over-year to nearly 12,000 lots. This is our highest level since March, 2008. The majority of the increase was achieved using option contracts where we put limited capital at risk to control the land, consistent with our conservative operating model. In total, we first resumed significant land acquisition activity in the second half of 2009. We have secured control of 184 new communities across the country, including 27 in the third quarter alone.

This acquisition activity is beginning to become apparent in our active subdivision count, which increased year-over-year for the first time since September 2007. In addition, we have started home construction or sales in 64 communities that have not yet reached the active subdivision status. However, our sales pace slowed during the third quarter, reflecting a continued low-level of demand following expiration of the Federal Home Buyers Tax Credit in the second quarter. In addition, overall economic conditions remain weak, and therefore our outlook remains cautious as we approach the end of the year.

However, we believe that our success and increasing community count, combined with our focus on improving business processes and procedures across the Company, provide us with a unique opportunity to drive future growth. Additionally, at the end of the quarter, our $1.6 billion in cash and investments exceeded total debt by more than $350 million, giving us the flexibility to continue to pursue other opportunities, including the acquisition of additional properties that should ultimately drive long-term shareholders value. I will now turn the call over to Chris Anderson for more specific financial highlights on our 2010 third quarter.

Thanks, Larry, and good morning, everyone. As Larry mentioned, we closed 722 homes during the quarter, which was up 10% from the 659 closings we had last year. This increase makes sense, given that our backlog to start the quarter was 19% higher than the year-ago. Closings increased for each of our markets, except for Florida, Arizona and California. In each of these markets, we started the quarter with beginning backlog that was lower than the year-ago. We consider Florida and Arizona to be among the toughest market we operate in from a sales standpoint, which explains why we have seen the backlog fall over the past year.

California is a different story, though. It has been one of our best markets. However, a year-ago we were still closing homes in a few legacy products in northern California, whereas our closings here in the third quarter of 2010, are exclusively from southern California. So really we're just facing a tough comparison there. On the plus side, we saw significant year-over-year increases for home closings in Colorado, Utah, Maryland and Virginia. We've included an additional data point for you this quarter on the slide, and that's our backlog conversion ratio, defined by closing by beginning backlog. Although the 65% rate we experienced in Q3 is significantly below the 92% we saw in Q2, it isn't far off from the 70% from a year-ago. And it is in line with our historical average.

Keep in mind, that to start the year the expectation was that homes had to close by the end of the second quarter, which drove that high number in Q2, to be eligible for the tax credit. Although that deadline was ultimately extended. That's part of the reason why we saw the 92% in Q2. The average selling price for our closings increased 6% year-over-year to roughly $300,000. The increase was driven by a change in the mix of homes we delivered during the quarter to a higher priced markets. Three of the four markets I mentioned that had significant year-over-year closings, Colorado, Maryland and Virginia, where they have an average selling price that exceeds the Company average. If you look at the individual market detail, we provide in our public disclosures, you will actually see that more markets are down, than up in average selling price versus last year.

Two other points on the slide. First, closings from our new or redesigned product reached 53% in Q3, well above the 17% from a year-ago. Second, new subdivisions, defined as those acquired in 2009 or beyond, accounted for 31% of all of our closings. Again, a significant increase from 1% a year-ago, when we had just started to ramp up our acquisition activity. Turning to the next slide, this is a new slide that we're giving you, and it gives a little bit more detail on our subdivision count. For each period shown here, the blue bar represents active subdivisions, which is defined as projects that have sold at least five homes, and still have at least five remaining to sell.

The green bar gives you a sense for the subdivisions that we have that will likely become active soon. And they start -- where they have started construction or sales activity, but do not yet have the five sales necessary to reach active status by our definition. And the red bar shows the number of subdivisions that are currently active, but are close to reaching inactive status. So you can see that our active subdivision count increased only modestly this quarter, up 4% year-over-year, and 6% sequentially. However, the number of subdivision that are likely to become active soon have increased significantly over the past year, and at faster pace than the subdivisions that are close to reaching an inactive status.

Moving on to net orders, or homeowners -- in the third quarter we received 796 net home orders, which was a 22% decrease from the same period last year. To give you a sense for the monthly trend, both July and August were very slow for us, as we continue to feel the impact of the expiration of the Home Buyer Tax Credit during a period during that is already seasonably slow for us. However, we were able to double our sales in September compared to August, in large part due to a successful sales promotion.

Now contrary to what you might expect, given the decline of home orders, our registered traffic increased by about 6% year-over-year for the third quarter, mostly due to an increased in the number of subdivisions open for sale. Our average monthly net orders per active subdivision, declined to two for the third -- 2010 third quarter, compared with 2.4 in the same quarter last year. California was the only division that experienced a notable year-over-year increase in sales per active subdivision. Sequentially, our pace also declined from the 2.5 pace we saw in the second quarter.

During the quarter, we experienced a cancelation rate of 30%, higher than a rate of 23% in the third quarter of 2009. However, cancellations as a percentage of beginning backlog actually declined to 31%, as compared with 33% a year-ago. Financing issues were the most common reason for cancelation in both periods. The average price of the net home orders increased 8% year-over-year to roughly $290,000. If you look at just the average price of gross home orders, you see a similar 7% increase. This increase is due to an increase in orders as a percentage of total, from our California and mid Atlantic divisions. We ended the quarter with 1,188 homes in backlog, a decrease of 8% from this same time last year. Our average price and backlog of $310,000 as of September 30 is up 5%, to $295,000 average price in backlog last year.

If you turn to the income statement, revenue for the third quarter increased 11% year-over-year to $226 million, primarily due to a 10% increase in home closings, and a 6% increase in average selling price, partially offset by a decline in revenue related to land sales. The increase in revenue, combined with an increase in gross profit margins, and a decrease in SG&A and other operating expense drove our $15 million improvement in our loss from operations. I will discuss margins and SG&A in more detail in a couple of slides.

Looking at the rest of the P&L, other expense which is generally net interest expense, also shows significant improvement. Through the careful management of our cash and investments, we have increased the overall interest rate we're earning. Overall, our pretax loss for the second quarter(Sic-see presentation slides) was $10.6 million, better than the $31.8 million lost during the same period last year. Looking at the income tax line, the income tax benefit you might expect to see for the third quarter of 2009 or 2010, was offset by a increase in our deferred tax evaluation allowance. So on a net basis, we end up with a net loss $10.2 million or $0.22 per share, which significantly better than our loss of $32 million or $0.69 per share from the year-ago.

Moving on to home gross margin. This slide shows our trend from the third quarter of 2009 to the third quarter of 2010. Looking at our margins as reported, the graph on the upper left, 20.9% in the third quarter of 2010, is significantly higher than the 18.9% we experienced in the third quarter of 2009, and the 18.1% in the second quarter of 2010. As we have done in the past few quarters, we have also provided gross margin information which excludes two items that have been somewhat volatile over the last five quarters, interest in costs of sales, and warranty adjustments.

This is the graph on the lower left. The adjusted gross margin of 20.2% for the third quarter of 2010 is up 330 basis points compared to the third quarter of 2009, but is even with the adjusted figure from the second quarter of 2010. The year-over-year improvement in the adjusted gross margin was largely the result of an increase in net option revenue relative to home sales revenue, combined with a reduction in construction costs relative to home sales revenue. Both increase and net option revenue, and the decrease in construction costs were driven by the Company's efforts to build smaller, more efficient homes that can be personalized based on home buyer preference.

As an indicator of how far we have come in, making sure that our customers have the ability to personalize their homes, you can see on the webcast slides that only 10% of the homes we closed during the quarter were sold when the house was finished. Meaning that the vast majority of our buyers were able to select at least the interior finishes for their homes. A year ago in the third quarter of 2009, 30% of the homes we closed were sold when the home was finished. One offset to the improvements we've made, was an increase in land costs relative to home sales revenue, from 16.8% in the third quarter last year to 21.8% in the third quarter this year. The second quarter of 2010, the percentage was about 20.6%. One final note on this slide, while the adjusted gross margins are fairly stable over the last fourth quarters, we have used sizable incentives to drive sales velocity, including during our September sales promotion, which may result in margin pressure going forward.

Turning now to selling expenses, we're up by about 17% year-over-year. Marketing expenses increased by 16%, from $9.6 million in the third quarter of 2009 to $11.2 million in the third quarter of 2010, and the increase in closings was the primary driver. We also saw an increase in costs related to opening new communities, and to replace signage at some of our existing communities. Our commission expense increased by 19% in the third quarter versus the year-ago, roughly in line with our 16% increase in homes sales revenue.

Moving on to G&A expense. The $39 million we incurred in the 2010 third quarter is down from both the $46 million we incurred a year-ago, and the $45 million we incurred in the second quarter. The year-over-year decrease is primarily the result of a $7 million decrease in expense, related to a loan charge we took in the prior year, a loan loss reserve charge we took in the prior year.

And I know that mortgage loan losses have been a big topic of conversation recently, so I'm going to take a moment to discuss our situation. During 2009, our mortgage subsidiary, Home American Mortgage Corporation experienced an increase in the number and magnitude of claims to repurchase previously sold mortgage loans. Accordingly, Home American increased it's estimated mortgage loan loss reserve by $7.3 million during that quarter. Over the subsequent four quarters, including the third quarter of 2010, Home American has not recognized any significant increases to the loan loss reserve, because our internal experience, assumptions, and analysis regarding loan losses have not materially changed over that time. But we will continue to conduct our analysis periodically, as part of our normal financial review process.

One thing I will point out for you in our 10-Q, if you look at footnote 11 in the financial statement, you will get a little a little more visibility to the reserve and the payments that we have made. For example, nine months year-to-date we have paid about $2.1 million in settlements. And you can see where activity was in 2009 in that same footnote. During the quarter, we also benefited from a $3 million reduction in fees, associated with our home-building line of credit which was terminated during the second quarter of 2010, and a $2 million reduction in legal-related costs. These decreases were partially offset by a $5 million increase in employee compensation and other employee-related benefits.

The increase is partially related to an increase in head count. And keep in mind that most of our new hires are directly involved with getting new communities under control and operating. They are in departments such as land acquisition, architecture and merchandising. In other words, they are critical to our ability to increase store count and ultimately revenue. With that said, we're constant evaluating our G&A spend in ways to reduce our costs, if we can do so without disrupting our business.

Now, turning to impairments. During the third quarter, we took a $3.6 million inventory impairment in our WIP segment, which primarily impacted three subdivisions in Arizona. The impairments were the result of our decision to significantly lower selling prices in the communities, to stimulate sales activity in a highly competitive market. Turning to land acquisition, we continue to focus on rebuilding our inventory during the third quarter, and we're able to put an additional 2,044 lots under control. The majority of these lots, 1,362 are in 27 new communities. Approximately 97% of the lots placed under control during the third quarter were secured through option contracts. We also acquired 566 lots under existing option contracts during the quarter. In total, we spent $44 million in land acquisition during the quarter. The additional lots added during the third quarter were relatively evenly spread across all of our home building segments.

Looking at the impact our land acquisition activities had on our lot inventory, we have increased our investment in land and land under development by about $187 million over the past year to $365 million as of September 30. The $365 million encompasses 7,194 lots owned. And in addition to that, we have 4,745 lots under option, which brings our total number of lots controlled, excluding WIP to nearly 12,000, a year-over-year increase of 39% which puts us in a great position as we look forward. Especially given that we still have $1.6 billion to take advantage of other opportunities that may arise. We ended the quarter with $12 million in nonrefundable option deposits which is only a $4 million increase from September 30, 2009 to increase our option lots by more than 100% .

One final note on our lot supply. Even though we significantly increased our lot supply over the past few quarters, we currently have only a 3.4 year supply of lots based on our last 12 months closings, which is one of the lowest levels in our peer group. If you further broke down our lot inventories, and based on our acquisitions that we have done over the last several quarters, you would see that 80% of our land supply has been acquired in the last roughly two years.

Though we continue to face volatile industry and overall economic conditions, we're excited about our prospects for the remainer of 2010 and 2011, especially given our efforts in land acquisitions have now yielded a return to growth in our active community count. We will work to make these new communities successful, in order to create the operating leverage we need to be profitable, as we continue to look for additional communities to add to our pipeline. As always, I want to thank our MDC team from across the country for the work they do, every day, across the country they do every day to put our Company at the top of the home building industry. And I would also like to thank everyone on the call for their continued support and interest. At this time, we will open the line for any questions, you

(Operator Instructions).

Your first question is from the line of Buck Horn with Raymond James. Your line is now open.

Good afternoon. I was curious about your land purchases, and just given what you know now about the sales environment after the tax credit, I was wondering if you went back to some of those purchases you made earlier this year, and late last year, just in hindsight, would you still have made that decision to buy at those prices? I guess maybe said another way, how many of the purchases that you made would have still cleared your current underwriting standards and hurdles based on your outlook today?

The answer would probably be fewer, Buck. What is difficult is that sales pace that we're experiencing really pushes out the cash flows on these deals. So certainly it makes it tighter. And to the extent we have had option contracts, we have been able to talk to some of those options holders to stretch out some of those options. So it has impacted what we think and how we're executing on those.

Okay. And I guess maybe just more specifically I was thinking about just looking at the Las Vegas and Phoenix markets, and just, if you have any additional color in terms of what is going on in those markets? How your sales and pricing is holding up there, relative to your competition, and kind of how you would characterize the land market in those two areas right now?

Phoenix is tougher than Vegas, at least for us -- competition is higher, the sales activity and demand seems softer in Phoenix for us, than it has in Vegas. And accordingly we have made adjustments in the pursuit of opportunities, because you can't, to your point earlier it is tough to make some of these things work in today's environment. So, Larry you have something?

Yes, I have a couple comments on it. One should never count Las Vegas out. It is a market that over the next several years, you will see I believe more activity, especially for those that control quality lots. The Phoenix market, if you go back over the last 20 years or so, and you take the last downturn. And I think it went -- it went at least as deep as this if not deeper. And it is a great place to live and when you look at a long-term basis, and I'm not speaking decades, I'm speaking years, these markets that have had tremendous growth, they had overbuilding.

The overbuilding is still being adjusted. But the replacement of new quality housing that has the 2011 elevation and product. And with Phoenix absorbing finished lots, and the establishment of really two different kinds of markets. I think everyone now sees that the resale market created through foreclosures and short-sales, is a different product than a brand-new clean, fresh home. And the market is adjusting to that. Additionally, the foreclosure process in some of these markets like Phoenix, as you drill down into it, there are multiple buyers on bids on the foreclosure market, where there is a -- the latest hot thing in Phoenix is buying -- getting in a buying syndicate to buy foreclosures.

So these markets are -- are clearing themselves, slowly. But there is actually bids out there for product that is at a level that is a compelling value. And as this works through the system, and with new home building hitting almost an all-time low on sales rate throughout the country, I think that hopefully we're hitting an inflection point. And we would like to think of August as the low point of the cycle and of the season. And if it is the low point of the cycle, then over the next several years, I think there will be rewards for those companies that are able to properly execute, in what we hope will be an expanding market.

Great, thank you.

Your next question comes from the line of Carl Reichardt from Wells Fargo Securities. Your line is now open.

Chris, I liked your slide on page five. And I was curious, once a community goes into your green bucket of not yet active, how long does it take typically before it becomes active. And can you give me a sense of the sort of incremental G&A or marketing spend to get 64 stores open that you would see over the next -- however long it will take to get those into the pipe.

Yes, in a good market, it might happen in a couple months, Carl. In today's market, we have this hurdle of five sales before it reaches that. So, I mean, if you roughly used 1.5 sales per month then you might -- you can expect that those 64 will turn active sometime over the next three or four months. But we're also turning in -- heading into a seasonally slow period of November, December. So -- that's why we kind of gave you these both of these buckets, so you have a little more visibility in what is coming on and off. You can look at, for example the June 30 numbers of 58 that were to come on, and 43 to drop off. That would have implied, if they all came through in the next 90 days, that we would have seen an increase of 15. And we saw an increase of 8. So, it will be -- it is not like we're going to see these kind of net 26 immediately show up this next quarter, a couple of those, some of those, maybe a little bit slower.

And I was interested in the G&A spend. And just as a follow-up I'm just curious on Larry's take on the Denver market. You guys are still the big gorilla there, the largest portion of your lot supply. And we know some builders have exited that market. I'm just curious if conditions -- if your margins are better there, and if conditions have improved meaningfully for you guys there?

Well, having competitors exit never hurts. And Colorado is a great place to live. And I expect we will have some interesting dynamic leadership after Tuesday. And I could give you a lot more color 90 days from now, than where we are. I expect a nice tone. And, hopefully, the tone will convert to reality, and an improved market throughout the country, with consumer confidence I believe building. And so that would probably be a better color. Denver has received all sorts of national and international recognition over the last 24 months, and continues to. And I think that all effects the fact that -- affects the fact that we have very few major competitors left. And we have continued to expand our assets in this market, because we know them very, very well. And there is a lead time between transaction opportunity, and the ability to really see the results. And there is a view that when you can see the value, it is already into the price of the product. And so, we believe that in a future period of time, over the guidelines of our goals, which is to own between a two-and three-year land supply, that our judgments will be proven up, by the numbers we will deliver in the future.

Carl, you asked about the G&A. Let me come back to that for a minute. There is not really a lot of incremental G&A to go open these up. The biggest piece of that is going to be our model home, and that just gets amortized and deferred over the closings that will come from that community. So there isn't I guess a substantial step up in G&A related to those.

Okay, thanks a bunch, guys.

Your next question comes from the line before Nishu Sood from Deutsche bank. Your line is now open.

I wanted to ask first, Chris, you mentioned promotions in September, and the depressive effect those might have on margins. I was wondering if you could just describe for us what sorts of promotions, what form that took to get a sense of whether it is just one quarter kind of thing, or whether to like price reductions that might linger for awhile in terms of their effect. And also if you could be a little more specific in terms of quantifying for us what the gross margin impact might be.

You want me to get more specific than what I already gave you on that they are lower. (Laughter). The incentive, up front, the primary driver of that was related to special financing, and getting people into an interest rate that was about 3.57%, so buying down that rate, getting that payment level to a point where they could get in. In that case, waiving an origination fee. We did some other things with some of our realtors, and increase in some of the commissions in certain markets. Then for any inventory homes that had aged, those are their own, non event, but they had their own pricing adjustments to move that inventory. I do want to say that is what generated or caused us to have about a 20%, only a 20% decline in orders versus what you seen in that kind of across the industry of closer to 40%. So when we evaluated that Nishu, we were pretty conscious about volume, and what that means for us, and the trade off in balance in achieving the volume we need to maximize the profit and leverage for our business.

Okay. And second question, I wanted to ask was you gave the disclosure again in your slides, the lot cost. And you were talking about as a percentage of your homes sales revenue. It is very, very interesting disclosure, so I appreciate that. But, now, the number having gone up from 16.8 I believe to about 21.8. Now, obviously relative to a lot of skeptics concerns out there, land prices were increasing, so naturally your lot cost as a percentage of your sales price was going to increase as well. However the counterpoint to that, would seem to be that your gross margins have held in there. So that kind of provides some kind of counterpoint to that. I was just wondering if you could help folks maybe frame a different way of thinking of that. One thing I had thought of was, that perhaps since you're building smaller more efficient homes, that at this time is naturally going to lead to a higher lost cost relative to your sales price. I was just wondering if you could help us to frame that?

Well, let me -- your last point is right. As that home sales price drops, you're going to see that. I just want to give you one example, because this has been in our disclosures before. If you kind of went back several quarters, and you looked at the value that we had of our land, for example, in California, okay, now, from an impaired standpoint. Those lots that we had were pared down to a very, very low level. Same thing for Phoenix.

And, it stuck out to me because we just some 2011 business plans and reviews. And what you see is a substantial change like in Phoenix where it went from, say, I don't remember the exact number, but say it went from 5% to 15%. So really, the biggest drivers is we are moving off of non-impaired land. And it is not that what we're seeing today -- we give you that disclosure because we're just saying hey, just be aware that that has some compression on margin. But when we have actually done the analysis, and looked at new projects versus our legacy project, the margin today is about the same. So even though we're seeing that increase per -- for year-to-date in 2010, we actually experienced similar margin performance in our new projects versus old legacy projects.

Okay, thanks a lot.

Okay.

Your next question comes from the line of Ivy Zelman, from Zelman and Associates. Your line is now open.

Hey, guys it is actually Alan on for Ivy. Chris, I was hoping just on the community count disclosure you gave on the inflows and outflows over the next few quarters, I was hoping you might be able to give a little bit of geographic color, there in terms of there are any states that is skewed towards?

I have been through this a few times, Allen. We're actually kind of showing across the board increases. You can look at the one disclosure we have just on our lot count, for owned and option, and really it is across the board. We probably got out in front earliest in Florida. So, you will actually, the number of subdivisions in Florida that we have control over has grown substantially. And California has actually grown substantially, so you will actually see those active communities showing up as active earlier. Denver has been pretty heavy. It is our backyard. Maryland is actually shown some good. We're a little further behind than where we would want to be for ourselves and Virginia. So, hopefully, that gives you a little bit of color on the distribution of those.

Yes.

As far as the growing our footprint.

Got it, appreciate that. That is very helpful. The second question kind of touching on the incentive and promotion question. You mentioned that that's more related to some older inventory, you have. I was curious when you say older inventory, is that the spec homes that you have kind of built up to the drywall stage? Or are you referring communities that you're maybe closer to the end and looking to get out of?

It is actually probably more some of the inventory we have left over from the tax credit is where we took some price adjustments. The promotion and incentives really were applicable to --kind of across the board. And it was really to get out this special financing out to our buyers, so they could achieve a payment number, and it worked. We saw substantial growth September versus the prior months.

Got you. (Multiple speakers). Just out of curiosity, what were your September sales like on a year-over-year basis versus July and August?

September, was up slightly ones, but they are about double what they were in August, and August and July were about the same.

Perfect. Thanks a lot.

Your next question comes from the line of Jonathan Ellis from Bank of America Merrill Lynch. Your line is now open.

Great, thank you. My -- the first question I -- on the slide you gave some detail about percentage of deliveries from finished -- finished spec. I'm wondering do you have a number for deliveries from all specs from the -- the foundation level up to the -- up to finish this quarter? And then also the related question is, I noticed the total spec count remained pretty flat quarter-over-quarter. Is that function of bringing on some inventory in newer communities, or trying to close out older communities and putting product out there to do that quickly?

I don't have a breakdown for your first question, Jonathan on the spec piece. But give me a minute, and maybe I can do that for you. Do your second question again, and that --

Sure, the second question is just looking at the total spec count which is relatively flat quarter-over-quarter.

Yes, I looked at this. And one thing, when you take the 850 or so specs that we show, divided across just an active community count, you end up with a number of six per. When you actually take that spec count of 850 across -- our selling communities, which includes some of the number we had in slide five which is closer to 250. Then you end one about three. And then you go to the specific subdivisions, and then it is a combination of what you said, is that where we have a few lots left, we are going to spec out those few remaining lots, and close out that community.

Where we have what new subdivision not showing up as active, we're going to seed that subdivision with our model, and a few specs. So that is what is happening. And that is why that number looks a little high, if you're just looking at it on an active community basis.

Did you happen to know whether it is more tilted towards the older community closeout versus newer communities?

It's more tilted to new.

Okay. All right. The other question I wanted to just ask, on lot purchases. So obviously had been quarter much more skewed towards options versus past quarters. I also noticed a pretty significant pick up in option lots in Florida and Nevada. I'm wondering that is a function of perhaps some other builders walking away from deals, so you're able to get more advantageous terms right now, and therefore able to engage in more option contracts? Any insight you can provide as to why you were able to get such a higher proportion of option deals this quarter?

Slurry, I think that with the slowdown we have seen starting in May, everybody was all excited going into spring, that we have seen a new market turn. And as the market continues to move away sideways and down, to some extent as it has, the opportunities in the land market are continue to grow, because there is now a realization that we are in a difficult market. It is going to stay hard for a period of time. And consequently, the land developers, land sellers, lenders, hedge funds, whoever owns these assets, have evolved into recognizing that owning land is only part of the equation. The other part is selling it.

And selling it, you have to have someone that has the ability not only to buy it, but to work through it. And I think that there has been more opportunities recently, as these markets have gotten softer. And I believe one of the opportunities, the public builders have, since most of all of them have liquidity to one level of another, is they are able to position land for the future. And it is really a tell, kind of like on Texas Hold 'Em. You can see where people are going. And the options really are value to a land owner, because if he can't sell it at one level for cash, and he can get a builder that will build a model, start the subdivision, and seed it, just like Chris commented on seeding it will really create value for the land seller. So this is really a win-win situation.

The builder is able to reduce their exposure to each of these individual assets. And the seller is able to get someone in there to start creating velocity. We all know velocity is the secret of making something profitable. So I would say that the land option opportunity has come to the market because of the perceived weaknesses that are out there.

If I may just one quick follow-up. Is mix before finished lots you bought this year materially different than past quarters.

No.

Okay. Great, thanks, guys.

Thanks. Your next question comes from the line of Joshua Pollard from Goldman Sachs. Your line is now open.

Hi, this is Andrew on for Josh. Can you talk to us about distance (inaudible) you're seeing between dirt sales, drywall build sales,and pure specs? And also, if you could break to us how home costs break down between sticks and bricks,labor and sales incentive as well. That would be very helpful.

I think we have done the margin difference, and said that those drywall hold specs are 200 to 400 basis points better than our finished specs. And our dirt has a margin advantage over those drywall hold specs as well. On the cost breakdown, I don't think I'm going to go through all the cost break down for you. I don't think that makes sense for all of us as builders to go through all the basic pieces. Labor, I am -- trying to give the -- if I can give you the right percentage of our home cost. We're not seeing a substantial change. We actually have gone to break those things out, so that we can monitor those better, but we're focused on reducing those. The other positive piece we gave you in our commentary, is what happened with our incentives. We have actually and the home is close, we're able to see a substantial reduction and that is what helped our margin go up.

Okay. One quick follow-up. Can you tell us what you percentage of the lot options that you bought over the past 12 months, you have been able to be go back and rework?

Every one that we can. (Laughter). How is that?

Thank you. One quick -- one quick follow-up if we may. Of the communities that are kind of nearing active status, or inactive status, how do you kind of characterize that rolling out?

Well, I think I gave that answer to somebody else earlier but if you think about kind of in today's environment selling 1.5 per month, if we were able to do that. Although that may be challenging in the November, December time. Our hurdle is about five sales before they become active. So if you said we needed to go from zero to five on those soon to be active sometime in the next three to four months, you'd see the majority of those will become active.

Thank you so much.

Okay?

Your next question comes from the line of Josh Levin from Citi. Your line is now open.

Hi, Josh.

You said -- your competitors are saying they are going to get 400 to 600 basis points of incremental margin from their new communities compared to their existing communities. If I heard you correctly, I thought you said there is really no difference in margin between legacy and new communities? If I heard you correctly, why is that the case?

I think you may want to ask somebody -- another builder why they are experiencing that much of a difference. We're targeting to be in the market with our old subdivisions as well as our new. I can't answer on their's why today's are so much better than their legacy product.

Okay, on a separate note, Larry, you said foreclosed homes were a different animal compared to new homes, and now more and more people are starting to realize that. A lot of investors are very focused on foreclosed homes and shadow inventory. I guess in particular in the way the homes are will come to market out of the foreclosure pipeline. Would you say you're not particularly worried? There are a lot of things to worry about in the housing market, but are you saying you're not particularly worried about having to compete with a flood of foreclosed homes?

Well, the difference is -- those of you who have looked at closed homes. especially with the new legal entanglements, people living there don't really take very good care of these homes. And then they finally leave after six months or a year or year-and-a-half, without paying, some of the lenders today and you can inquire, are actually paying people to leave, so they can get possession. And some of these homes are being trashed, and the buying groups that are buying these foreclosed homes that are coming through, are having to spend money in order to clean them up. In order to put them back on the market. So they just don't roll out as something nice and sweet.

And what seems to be a good business proposition, is they are renting these homes, the buying groups, and they are pull putting them in a position to hold for several years to get a capital condition gain and to have a reestablishment of value. But when you see a group of foreclosed homes, it is a different buyer. Now, someone that can only afford $120,000, versus $180,000, that's -- that's two different economic levels.

But, I really think the market on foreclosures is -- is clearing itself. And if the process would continue without legislative interference, and without these new legal nuances whether a robo wash -- a robo signatory was created -- I think it's enough that the guy hasn't paid you for six months or a year, you ought to be able to get your house back. It would clear the market sooner. But we're really, in our thinking, the builders are really competing kind of with each other on new product. And that's kind of a split market. And so you're going to see a -- that's maybe why new sales are down to plus or minus $300,000. But, I see it sorting itself out here over the next period of time. And I am optimistic that with a minimal amount of new government intervention, to be helpful, things will look much better sooner.

Thank you very much.

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is now open.

Thanks, good morning to you guys over in Denver. Good afternoon here. First question, on the -- sorry, getting my notes crossed here. On the promotions -- just to go back to that for a moment. I know, Chris, you kind of didn't want to go into too much detail. But just trying to get a sense, I mean since mid last year, you guys have been in a -- let's say 18% to 22% plus or minus margin. Last quarter, again last two quarters seeing that range. Just trying to get a sense of the magnitude of the promotions that did you in September. Should we see you going back down to the lower end of that range or were the buydowns on the rates, et cetera, the higher commissions, could that put you below an 18% number?

It is not an insignificant number, which is why we put that paragraph in our release, Mike. And I'm hesitant to just say a specific number for you. But the guidance really was to just say -- look, it is a -- because of -- it's not just the promotion, but even just the pricing, and what we needed to do through the quarter. But it's put pressure on the margins. You guys have been anticipating that, with the slower traffic so.

Right. And -- well, I appreciate that.

It would be pushing to the lower end of your range.

But at this point you don't think it could fall below that?

It might, I don't have an exact prediction on that margin for you on the call. But again, the purpose was to say look, we have done that, and we have had a lot of pressure to drive the sales velocity.

Right, so with the comments, also combining that in terms of center of the new projects, gross margin wise equaling the legacy, as we were to look into 2011, and is it still your view that you can be doing about 40% of deliveries from newer projects, or has that number gone a little higher?

That will actually be higher, because we're already at 31%.

And so, let's say you're getting to 50% or better, certainly to the extent that there is volume growth, you should get SG&A leverage. But should we be a bit more conservative in terms of -- in terms of margin expansion, gross margin expansion.

Yes, we are because our view of 2011, isn't that we're going to see a substantial increasing demand.

Okay. Lastly, as you position these new communities, and there are a lot of builders obviously looking at community growth in the first half of 2011. Do you think that the -- you're fighting over the same amount of buyers? Or do you see some share shift -- some share shift as private builders continue to exit the market? Or should we think about somewhere in between those two points of those spectrum?

Yes, I think that for the most part, the majority of that is going to be a share shift, some privates are not able to get the financing. Some of them are just closing out.. We, along with our peter public builders have been able, with the capital been able to go put on a lot of additional communities. So put it more on the share shift piece of it, Mike.

Okay. One last one if I could. The put backs, we appreciate some of the information there. And I guess I haven't seen if your 10-K 10-Q came out yet, or is it later today?

It was out early this morning.

The -- can you -- some builders have described as well, not just the payments, but requests for information, and requests of put backs, sort of activity level from that standpoint. Can you give us any commentary in terms of how those trends have gone for you year-to-date? Have you seen things trail off or remain more steady, as we have gone through 2010.

Yes, they have been kind of flat to down, is what the trend has been over the last four quarters. And some people use that request for information, demands those are -- the numbers that have come to us have kind of been on the flat to slightly down.

Great, thanks very much.

Okay, great.

Your next question comes from the line of Dan Oppenheim from Credit Suisse. Your line is now open.

What is the outlook in terms of the margins, if we think about it, and you offered more in the way of incentives in September, and saw the corresponding impact on the sales activity. Lots of your competitors are out there saying, that they have been disciplined on price, that there is not any elasticity of demand. Clearly there your September numbers show there is some of that. If they learn a lesson from your numbers, do you worry that we'll see more incentives coming out, so basically trading some share here and there, and seeing lower margins for all the builders, and just taking a little bit of time as we go through that.

Dan, yes, that certainly can happen. But, I have listened and read and talked to our peers as well on that. So, I don't think anybody -- I think we're all trying to hit certain absorptions in our communities, and want to meet the market. And we're going to price to the market. And we're going to deliver value to our buyers. So we're going to do whatever that takes. We're not going to price the cost. We're going to price it what the market is.

Okay, and then a second question. Just looking at the spec counts, still a fairly elevated spec level there overall. I know you talked about how it is in terms of across all the communities right now. Is that is where you want the spec levels to be, in terms of buyers wanting homes that are relatively quick, in terms move-in times or there is there an effort to bring that down further?

Well, I would expect that number to continue to come down, biased on our start levels, and kind of where we want to be. But as I said earlier, when we look at it across all of our communities, those that are closing out, and those that are soon to come on, we're managing each one of those to have sufficient, inventory to meet he demand. And in many cases, it is market dependent. But in many cases, half of our buyers want to have that quick move-in home.

Great, thanks very much.

Okay, great.

Your next question comes from the line of Joel Locker from FBN Securities. Your line is now open.

Hi, guys. Just more of a theoretical question on -- if your land deals aren't as available to pencil out right now, and with your share prices at a 52 week low, and central papers around the world having printing contests -- why not take your net cash and do a dutch auction or something, along ten to 15 million shares?

Well,

I'll let our largest shareholder speak up here. (Laughter). Larry?

There is always good ideas on how to use capital, and over 40 years, we have used a little of everything.

But it just seems like the situation right now. But just on a note keeping issue on customer deposits what were they at the end of the quarter.

Customer deposits, I'm thinking were right around $10 million.

Right around, $10 million? All right, thanks a lot.

Your next question is from the line of Michael Widner from Stifel Nicolaus. Your line is now open.

All right, thanks. Good morning, good afternoon, guys. Just wanted to follow-up on two topics. You talked about it a fair bit already, but first, on the margins, I mean, if I understand you correctly you're basically indicating that we should expect that this isn't just a transient event that is going to happen in 4Q. It's currently in the 3Q backlog. But it's probably ongoing pressure in 2011, assuming a weak environment. Is that basically correct?

Yes, that is what I was trying to say.

So the follow-up on that is, just looking at the impairment charge. And so I know it was isolated to basically Phoenix area. But assuming we do see the pressure to continue on taking prices down, or providing financial incentives or, et cetera, I mean is there an implication there, that we should take for impairment charges perhaps in other areas of the country, and just wondering if you could elaborate a little on that?

Certainly there is potential for that to happen. When I look at 185 subdivision decisions that we have made over the last 18 months, think about portfolio of decisions that you might make. Some of those you're going to hit. Some of those you might miss a little bit. Those three are things that I would put on the edge, things that we had an expectation for a certain level of activity, and it didn't happen. For what may come forward over the next 6 to 12 months. I hope it is zero, and I hope that we see increased demand. I think that it will be challenging to see that. And so there is potential that -- there maybe -- there may be some others. You look at it, we are making adjustments, with all the levers that we have, that we make sure that we maximize the value out of each one of those projects.

Great. Appreciate that color. And then just one other follow-up. You talked a bit about land. And you guys made some pretty substantial, mostly on the option side, but commitments and locked up some more land there. I mean how do you feel right now, and where are the deals you're seeing out there right now? Should we continue to expect you to sign additional deals, and, there is a level you're shooting for? Are you kind of comfortable given where we are, and the number of years supply and that sort of thing? I think you should expect us to be in the market every day with a bid, adjusted to market conditions.

So that being said, how do the bids look today, relative to what you have seen in the past? And we have heard from some other builders that the opportunity to buy cheap land, where you expect 30% IRR and quick cash flow turn, and given the slowdown in sales that you have alluded to, and you expected going forward, it certainly changes the expectations. And again you talked about the -- you might have done things a little differently last year, knowing what you know now, or earlier quarters this year, And so just really just thinking about the prices. I mean are prices of land continuing to come down? Or are you seeing opportunities slow, or do you still see a lot of good opportunities out there?

There are opportunities every day in different parts of the country. And we have an active deal flow. And we will continue to go through those opportunities that are presented to us, and hope to see everything that is out there, in order to transact at those levels that we believe are appropriate in light of market conditions. It's kind of like picking a stock, when is it good, and when it is bad? And we believe this is a good time to be looking at exposing capital, because it seems to be difficult, and when it is difficult, it is usually a good time to buy because no one else wants to.

Generally it has been slow, and the adjustments that we felt and seen selling homes, from a seller's standpoint, land sellers standpoint, there is gaps still that we have to work through.

All right great, thanks guys, appreciate the comments.

Your next question comes from the line of Kevin Zener from Keybanc Capital Markets.

Afternoon. I wonder if you could address the rise in ASP. I know you talked about regional mix, but on a corporate basis it does obviously help you absorb those fixed corporate costs. So is that the kind of 300 number we saw in 3Q? This that kind of a steady rate, or something we should expect to fall towards the 275 number that we had in the second quarter?

Yes, one of the things that is happening. That is a great question. California which you can see in our disclosures, has a higher average selling price of close to 375, I think in this last quarter. That will take on a bigger proportion of our closing in 2011 of our activity there, as well as Maryland, Virginia, and Colorado, all have higher than average ASPs so.

Right.

Those -- the divisional mix actually is what is accounting for the change in the ASP quarter-over-quarter. That is the number one driver.

Right, but you -- it sounds like the -- given the I think 20% growth in communities quarter-over-quarter in California as well as your future active communities, you're saying that that is a number that we could expect to hold prospectively, or would it actually be rising? (Multiple speakers).

It is because of the mix of our volumes is going to be higher proportionate to these higher ASP markets, where you get Phoenix and Vegas that will take on a smaller proportional mix.

Okay. Okay. Thank you very much.

Okay.

Your next question comes from the line of Jay McCanless from Guggenheim Partners. Your line is now open.

Hey, good morning. First question, I know that you're moving to areas that are going to have higher starting ASPs. But are you changing the mix of neighbors that you're selling from entry-level versus move-up going forward, or are you all going to keep the same mix you have now? And if you could give us a little color on what that mix is.

We expect that that mix will be very similar as we move forward. And it is dependent market by market. Phoenix, Vegas, Florida, are probably 75/25, 75% first time versus move-up. Some of what we have done in Maryland is a more move-up product that we're offering. But one thing we have been doing, and we have been talking to you about it for the last year-and-a-half, is we want to hit that affordable home that people can get into. And so we reduced the size of our homes. We invested to make sure we have quick move-ins for those first time home buyers. And that's where we have seen velocity over the last year-and-a-half or two years.

What -- for the areas that you're wanting to expand your move-up presence, do the drywalled speck homes sell as well? Or do you think they are going to sell as well? Or do you think they are going to sell as well, in those move-up neighborhoods, or does the timing on those work out better for first time buyers?

Well, the drywall hold and quick move- in work better for a first time buyer. If you're a move-up buyer, typically you have a house to sell which takes its time, and they are more inclined to buy a dirt home -- a dirt start.

Okay. I know in the press release you all talked about how there was more revenue on the drywall specs, from more options about being purchased. Could you all actually attach a number to that? And is that trend continuing in the fourth quarter?

That trend is continuing, and it is part of our strategy and we're going to continue to drive that to be more and more efficient, in making sure that we offer to our buyers what they want. And certainly that's why we went to drywall hold strategy to allow them to choose, so we're going to keep driving that.

Okay. Thank you.

Your next question comes from the line of Michael Smith from JMP Securities. Your line is now open.

Morning, guys. Still morning, where I am. Just real quick, can you give some guidance, or talk a little bit about what you're thinking about community cap, going into say the back half of 2011? And has that changed at all in your mind over the past three to six months, given the sales mix you guys battling back (Inaudible)

You're kind of breaking up, there at the end of your --

I'm just saying, anything specific you can give on where your thinking community count might end up in 2011 would be very helpful?

The expectation -- we tried to give you the best visibility on where we're headed. I think what you can do, is you can take the spot quarter trending chart of our communities we put under control. And what we said is it takes six to nine months to get those things from the time you kind of put them under control, until the time they become active. And you can use that to kind of model out -- under your own assumptions on what you think we are going to be for that. And then on the other chart like slide five, we gave you some visibility on what is soon to come off. You can see kind of where that trend is going. Okay?

And just to follow-up, any differences or changes from where you were six months ago, as far as what you're thinking kind of looked like? Are you guys planning on backing off -- before you thought you would be -- just because of the sales pace? Suns you guys --

Are you talking about on land acquisitions, because you're breaking up again.

No, talking specifically on community. I mean, are you -- community count. Will you slow down opening anything, or is that kind of the wheels are in motion, and that's just going to keep going the same as where it was six months ago.

If you look at what we have done over the last few decades, we're not a Company that to go buy and hold. We buy to go build homes and generate cash. So that's what we're going to do. And we have underwritten these things with that assumption, is to turn these things. And we don't buy a long term position in any one land deal. As you can see over the last five quarters most of these are on average 50 lot communities.

Okay, great, thanks guys.

Okay, great.

Your next question comes from the line of Alex Barron from Housing Research Center.

How are you doing, guys. Just wanted to I guess focus in a little bit on the SG&A. You have touched on it, but as I look at it and I add up the different line items you got, your SG&A as a percentage of revenues is pretty close to 25%. Other builders are closer to 15%, 16%. I'm just kind of wondering if you said your outlook for 2011 is basically going to be, I guess similar to this year. Is there is any specific plan or something to reduce the SG&A component?

Our biggest driver for reducing SG&A is a percent of revenue, okay, is grow our revenue. And to grow our community count. So that is what you have seen us do for last several quarters, and we are going to continue to drive that. Within the actual dollar spend, Alex, there are a lot of things we have done, and we continue to do. So we're going to focus on all the things that we have some control over. And we're taking the actions that we need to size ourselves the right way.

Okay.

The other thing --

Okay.

Go ahead.

No, I was just going to ask, well, if you were done, I could ask my second question.

Go ahead.

Okay. I guess you mentioned that the sales pace has slowed down I guess relative true expectations six months ago, et cetera,. So as you look at new deals, has your underwriting criteria changed? Like what is the lowest sales price you're willing to underwrite to now.

Well, the correct -- the underwriting criteria has not changed. But with that kind of criteria, it makes it harder for some of these things to pencil out.

Okay. All right, thanks.

And,what will happen with that if it doesn't pencil out then you get into price discussions with seller, and make the adjustments to the point where you can actually make the deal work.

At the lower sales price, okay, thanks.

Your next question comes from the line of Barry Haimes from Sage Asset Management. Your line is now open.

Thank you, I had a question with the recent mortgage situation being much more in the press. Have you seen any change in consumer behavior, either in traffic, the ratio of order conversion versus traffic, or does it seem like it is largely been ignored, and it is kind of business as usual? Thanks.

Yes, we haven't really noticed any substantial change in the buyers that are coming in or the traffic pattern as a result of that.

Okay thank you.

Okay.

Your last question comes from the line of Jim Wilson from JMP Securities Your line is now open.

Oh, thanks, yes,guys all my questions have been answered. It's been a long call. I think have you had plenty of questions. Thanks.

All right. (Laughter).

Thanks, Jim.

There are no further questions at this time. I will turn the call back over to you for any closing remarks.

We thank you for joining us on the call today, and we look forward to speaking with you on our call next year, following our announcement of fourth quarter results.

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