MDC Holdings Inc (MDC) 2010 Q4 法說會逐字稿

Good morning, we are now ready to begin the MDC Holdings Inc. fourth-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 fourth-quarter earnings conference call.

On the call with me today, I have Larry Mizel, Chairman and Chief Executive 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 on 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 operation, 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 Form 10-K 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.

Good morning. During the fourth quarter of 2010 we continued to feel the effects of the expiration of the homebuyers tax credit earlier in the year. We achieved year-over-year increase of both traffic count and gross orders for the period.

However, we also experienced a significant increase in the number of cancellations we received resulting in an overall decline in net home orders for the fourth quarter. While difficult conditions persisted for the home building industry during most of 2010, we used our strong balance sheets and operational expertise to achieve a number of positive results.

After securing control of 130 new communities across the country, including 26 in the fourth quarter alone, we increased our active subdivision count for the first time in four years. Over the past 12 months, we have grown our lot supply by 36% year over year to more than 12,000 lots with each of our ongoing markets showing an increase.

Roughly half the increase was achieved using option contracts where we put only $4 million of additional capital at risk to control the land consistent with our conservative operating model. In addition, on the strength of the increase in home closings, our revenues increased for the first time in five years.

We also reduced our loss before taxes for the third consecutive year. Since the downturn began, we have been proactive in making improvements to our operations which we believe will provide long-term benefits to our Company. During 2010, our most significant project, a new enterprise resource planning system, was successfully implemented in both our corporate office and two division offices.

When fully implemented, this technology platform is expected to drive consistency to core processes across divisions, reduce operating costs and provide management with better accessibility to real-time operating data. While the implementation of the system has caused us to incur a higher overhead costs for the short term, we believe that it will allow us to achieve improved operating leverage in the long term.

While we are proud of what we have achieved in the fourth quarter and over the past year, we also know that we will ultimately be judged on our ability to generate profits. In the fourth quarter of 2010, we eliminated more than 100 full-time and contract positions from our staff which should result in significant savings for our Company.

While we'll continue to evaluate our expenses in light of market conditions, we will not dismantle our operating structure or jeopardize key ongoing initiatives to achieve short-term results. We believe that this balanced approach to right-sizing our overhead is the appropriate way to generate long-term value for our shareholders while recognizing that industry conditions remain difficult.

In addition, while we start 2011, we are focused on maximizing gross margins. We will continue to deploy our new product across the country and increase our focus on inventory management.

Coupled with our increasing community count and expense reduction, these business improvements form the foundation for our goal of returning to profitability. I would now like to turn this over to Bob Martin.

Thanks, Larry. Because we already filed our 10-K this morning which is just about everything you'd want to know about the 2010 full year, I will focus mostly on fourth quarter during my prepared remarks, starting with the income statement.

Total revenue for the 4th quarter decreased 20% year over year to $260 million. The decrease was primarily driven by a 15% decrease in home sales revenue due to a 22% decrease in home closings that was partially offset by a 9% increase in our average selling price.

In addition, our land sales revenue dropped by $17 million year over year. You may recall that the fourth quarter of 2009 was a big land sales for us and the industry. But in the fourth quarter of 2010, we didn't have significant transaction volume on that front. And with that loss in revenue came a decrease in land profits of about $4 million.

The decrease in home and land sales volume combined with a 180 basis point decrease in home gross profit margins and a $4 million increase in asset impairments drove the $24 million decline in our loss from operations. I will dive into specifics in a few slides.

Looking at the rest of the P&L, other expense which is generally net interest expense, showed a $4 million improvement. Through our investment strategy which seeks to achieve an appropriate return while preserving principal and managing risk, we have increased the overall interest rate that we are earning.

Overall, our pretax loss for the fourth quarter was $35.1 million compared to a $15.4 million loss during the same period last year. Looking at the income tax line, we had a $5.1 million income tax benefit in the fourth quarter of 2010 primarily due to the settlement of income tax audit in Virginia.

Looking back to the fourth quarter of 2009, we had a large income tax benefit of $142.5 million due to new tax legislation that allowed the Company to extend the carryback period of its 2009 net operating losses from two to five years. So, on a net basis, we ended up with a loss of $30 million or $0.65 per share compared with net income of $127.2 million or $2.68 per share a year ago.

Before I move onto further details for the fourth quarter, I wanted to provide a quick look at the full-year income statement which shows a slightly different story than the fourth quarter. For the full year, total revenue increased 7% year over year to $959 million primarily due to an 8% increase in home closings and a 2% increase in average selling price partially offset by a $25 million drop in revenue related to land sales.

As Larry mentioned earlier, our increase in closings and revenue for the full year was our first increase since 2005. We increased our 2010 gross profit margin by 120 basis points year over year and asset impairments fell by roughly $9 million.

These improvements were partially offset by an increase in SG&A for the year of $12 million. But our overall loss from operations improved by $22 million to $59 million.

Looking at the other expense line, the story is really much the same as what I provided for the fourth quarter. Overall, our pretax loss for 2010 was $70.6 million, better than the $107.3 million loss in 2009.

And again, the story on the income tax line is largely the same as what I described for the fourth quarter. So 2010 ended at a net loss of $65 million or $1.40 per share compared with net income of $25 million or $0.52 per share in 2009.

Moving back to the fourth quarter, we closed 865 homes during the fourth quarter which was down 22% from the 1109 closings we had during the same quarter last year. This decrease was the result of an 8% decrease in our beginning backlog combined with a much higher percent of cancellations during the quarter as a percentage of our beginning backlog.

Also, keep in mind that there was a higher level of urgency for buyers to close a homes in the fourth quarter of 2009 as the homebuyer tax credit was originally set to expire in November of 2009. Closings were flat or down for most of our markets, however, on the plus side, we did see a significant year-over-year increase for home closings in California, Colorado and Utah.

The average selling price of our closings increased 9% year over year to roughly $292,000. The increase was driven largely by a change in the mix of homes we delivered during the quarter to higher priced markets.

Two of the three markets I mentioned that had significant year-over-year closings increases, Colorado and California, have an average selling price that exceeds the Company average. Plus the two markets that had the biggest decreases in closings for the quarter, Arizona and Nevada, are also our lowest price markets.

If you look at the individual markets in detail we provide in our public disclosures, you will see that about half are going up and half are going down in average selling prices versus last year. Much of the variation is the result of the size of the product we are building.

For example, California which shows the largest year-over-year decline in average selling price also experienced the largest decrease in home square footage. Colorado and Jacksonville which have the two biggest average selling price increases also have the two biggest increases in home square footage. Two other points on this slide.

First, closings from our new or redesigned product reached about 60% in Q4, well above the 25% from a year ago. Second, new subdivisions defined as those acquired or rather approved in 2009 or beyond accounted for 45% of our closings. Again, this is a significant increase from 5% a year ago when we really had just started to ramp up our acquisition activity.

Moving on to home gross margin. This slide shows the quarterly trend from the fourth quarter of 2009 to the fourth quarter of 2010.

Looking at our margins as reported, the graph on the upper left, 17% in the fourth quarter of 2010 is lower than the 18.8% we experienced in the fourth quarter of 2009 and the 20.9% in the third quarter of 2010. As we've done in the past few quarters, we have provided gross margin information which excludes the impact of two items, interest in cost of sales and warranty adjustments.

This is the graph on the lower left. The adjusted gross margin of 16.5% for the fourth quarter of 2010 is down by more than 350 basis points compared with both the fourth quarter of 2009 and the third quarter of 2010.

The year-over-year decrease in adjusted gross margin was largely the result of higher incentives related to home sales revenue that were used to drive volume especially on older unsold inventory. In addition, land cost increased relative to home sales revenue.

From 18.3% in the 2009 fourth quarter to 22.8% in the 2010 fourth quarter. Offsetting the margin pressure caused by the increase in incentives in land costs was an uptick in spending on upgrades and a reduction in construction costs which were largely driven by the Company's efforts to build smaller, more efficient homes that can be personalized based upon homebuyer preference.

Looking at the change that occurred sequentially from Q3 to Q4, the story really is simply the increase in incentives. Most of the other factors I mentioned, land costs, construction costs and option revenue were relatively consistent between Q3 and Q4.

And one final note on this slide. our estimated gross profit margin and backlog to end the fourth quarter was flat compared to where we were at to start the quarter. This reflects our ongoing use of elevated incentives with a continued focus on selling older homes in our inventory.

Turning now to selling expenses. Overall we are flat year over year. Commissions expense was $9.4 million for the quarter, down 13% from a year ago.

This decrease is roughly in line with our 15% decline in home sales revenue. Marketing expenses increased by 16% from $10 million in the fourth quarter of 2009 to $11.6 million in the fourth quarter of 2010.

The increase reflects the costs related to opening new communities and to replace signage at some of our existing communities. Also, we saw an increase in deferred marketing per home closed.

This is the cost related to our models that is initially capitalized and then amortized as homes close. It went up in part due to a higher concentration of closings in California where we incur a significantly higher deferred marketing cost per home than for the Company as a whole.

Also in many cases, the size of new communities is smaller than in the past, being there are fewer homes to which we can apply the cost and therefore the expense per closing increases. However, we worked to offset that somewhat by building fewer models per community or even not building a model at all in certain locations.

Moving onto G&A expenses, the $43 million we incurred in the 2010 fourth quarter is up from both the $42 million we incurred a year ago and the $39 million we incurred in the third quarter. During the fourth quarter of 2010, we increased our insurance reserve by roughly $4 million, resulting in a $4 million expense.

During the fourth quarter of 2009, we decreased the insurance reserve by $3 million resulting in a $3 million credit. So the difference between the two effectively gives you a $7 million increase in expense year over year.

The insurance reserve is primarily based on third-party actuarial analysis performed at least annually, the results of which are highly influenced by claims experienced. Because of the long tail on our insurance coverage period, the reserve amount certainly can very year over year and that's a lot of what you are seeing here.

We have a lot of additional disclosure at your disposal in our Form 10-K. We also experienced a $4.5 million decrease in legal expenses.

Our expenses on legal matters fluctuate based upon the caseload at any given time and primarily relate to construction defects, product liability and personal injury claims. They vary based on a number of different factors, so we are not surprised when we see volatility in this expense especially if we are looking at just one quarter versus a year ago. Again, there's a lot more information available on current legal expenses and legal accrual in our Form 10-K.

Larry mentioned in his commentary that we worked to reduce our workforce in the fourth quarter. I wanted to supply you with a few additional details on that.

In total, throughout our Company and operating divisions, we eliminated 113 positions. We estimate that the total annual expense related to these employees is about $7 million. About 90% of that is expense that runs through general and administrative expense whereas the rest runs through construction overhead through our cost of sales or through selling expenses.

It's a little bit tricky to figure out how that factors into overhead going forward since we added some positions at the start of the year and then did the reduction towards the end. So I'll give you one additional data point.

Our average headcount charged to general and administrative during 2010 was about 760 employees whereas at the end of the year, we were at about 700. So we are currently down about 8% from our average G&A headcount during the year.

While we will continue to regularly evaluate our overhead structure as market conditions change, we won't put the success of ongoing projects in danger such as the ERP implementation Larry mentioned earlier nor will we dismantle the operating structure we have spent years developing.

Turning to impairments, during the fourth quarter we took an $18 million inventory impairment, up from $12 million a year ago and about $4 million in the third quarter. The impairment primarily impacted our West segment specifically Arizona and Nevada.

964 lots in about 35 communities were affected. The impairments were primarily the result of management's decision to lower selling prices in the communities we operate to stimulate sales activity in a highly competitive market.

Moving onto orders. In the fourth quarter we received 519 net home orders which was a 19% decrease from the same period last year. To give you a sense for the monthly trend, we had about 260 in October, in large part to the tail end of a sales promotion, and then in November and December, it dropped off significantly with about 130 net orders in each month.

On the plus side, our registered traffic actually increased by 17% year over year for the 2010 fourth quarter mostly due to an increase in the number of subdivisions open for sale. And we also increased gross orders by 6%. However our cancellation rate increased significantly to 46%, much higher than the 30% rate we experienced in the fourth quarter of 2009.

Cancellations as a percentage of [getting] backlog increased by a similar magnitude to 37% as compared with only 21% a year ago. Financing issues and failure to sell an existing home were the biggest reasons for the increase in cancellation.

With a little more color for you on the cancellation rates, first I want to point out there was no change in our overall policy or anything of that nature. But there were a few different factors involved.

First of all, the significant sales promotion I mentioned earlier occurred primarily in the third quarter, most notably in the last half of September, and that generated roughly 520 sales in that short period. Our subsequent cancellation rate on those 520 gross orders has been nothing extraordinary, about 25%.

However those cancellations have all occurred really in the fourth quarter, so there's a greater mismatch than you would normally expect between the number of cancellations we received during the fourth quarter and our gross sales. Also, the fact that the fourth quarter is a seasonally slow sales period historically amplifies that effect.

Our average monthly net orders per active subdivision declined to 1.2 for the 2010 fourth quarter compared with 1.6 in the same quarter a year ago and two in the third quarter. The decrease year over year and sequentially was widespread, occurring in each of our markets.

The average price of the net home orders increased 1% year over year to roughly $289,000. If you look at just the average price of gross home orders, you see a slightly larger increase, about 3%. And that increase is really due to an increase in orders as a percentage of our total in our California and mid-Atlantic divisions.

We ended the quarter with 842 homes in backlog, up only 2% from the same time last year. Our average price in backlog of $319,500 at December 31 is about even with the $320,800 average price in backlog last year.

In spite of a tough sales market in Q4, we continued to focus on adding new land to our inventory during the fourth quarter and were able to put on an additional 1448 lots under control with a fairly even split between lots purchased directly and lots that we controlled via option.

The majority of these lots are in 26 new communities. We also acquired about 630 lots under existing option contracts during the quarter.

In total we spent $75 million in land acquisition during the quarter. Most of our acquisition activity in the quarter occurred in Colorado, California, Nevada and Maryland.

One additional note. After closing our last home in Northern California during the first quarter of 2010, we put our first new deal in a long time under contract in the Bay Area during the fourth quarter. So that will serve as somewhat of a new opportunity for us going forward.

Turning to active subdivisions, this slide gives a little more detail on our subdivision count. For each period shown here, the light blue bar represents active subdivisions which are defined as projects that have sold at least five homes and still have at least five remaining to sell.

The brown bar gives you a sense for the subdivisions we have that will likely become active soon. They have started construction or sales activity but do not yet have the five sales necessary to reach an active status, and the gray bars shows the number of subdivisions that are currently active but are close to reaching inactive status.

You can see that our active subdivision count continued to increase this quarter, up 11% year over year and 4% sequentially. In addition, the number of subdivisions that are likely to become active soon have increased significantly over the past year and at a faster pace than the subdivisions that are close to reaching inactive status.

The spread between the two is 37 more nearing active status than nearing inactive status at the end of the year which is a bullish indicator for our subdivision count going forward. Another way to look at it, if we take any subdivision that has sold at least one one and has at least one left to sell, we are up 30% on that measure over the past year which is a key distinguishing quality for MDC as we move forward with the goal of returning to profitability.

While Q4 was certainly a tough quarter by many measures, we are still excited about our prospects going into 2011, especially given the increases we've seen to our community count and the changes we have implemented to our operating structure. Thanks to our MDC team from across the country for the work they do every day to put our Company a trajectory to return to profitability. I would also like to thank everybody on the call for their continued support and interest at this time, we will open the line for any questions you may have.

(Operator Instructions) Dan Oppenheim, Credit Suisse.

I was wondering if you could talk a little bit more about the cancellations.

You indicated that there wasn't really a change in terms of the policy and such but just a timing issue. But it seems that based on what you commented in terms of the orders that came in in October from that sale still going on that the cancellations probably impacted the net orders more in November and December.

So it seems they're more call it late-stage cancellations, not early. And I guess wondering what the policy is in terms of the -- making sure that the buyers have financing and also an ability to sell their home. That is certainly a concern that's been going on for several years.

How are you thinking about that? Is there a difference in terms of what your strategy will be going into 2011?

There really has been no change in policy, Dan. When we got into the promotion, first of all, the majority of the sales occurred within the third quarter. I wanted to make that clear, even though we did have a couple of days that the promotion continued into October.

So really you did have most of the gross sales in the third quarter. With respect to the policy, we do take down preliminary information on our buyers at the time of contract. They do not go through the full underwriting process at that time, and that is a consistent policy as we have had in the past. Furthermore with regard to our contingencies, for example, where a buyer will a contract for one of our homes while still having to sell their existing home, we do accept contingencies in many circumstances, again consistent with the way that we have done it in the past.

Okay, I guess thinking about than the specs that you're left, and do you think about changing that at all going forward? Or doing something to minimize that risk?

The number of specs?

No, in terms of just as you (inaudible) these specs in terms of contingencies and such, are you going to continue with that through 2011?

Yes, right now, there is no change to the policy.

Okay and then second question, just wondering about the gross margins. You talked about a lot of the land that's being controlled as of late. Where do you see the impact in terms of gross margins of those versus the existing communities?

We have seen that it's better. It's on the magnitude of 400 basis points better in our newer communities versus the ones that are older. Again the definition that we use for that is -- for the newer communities is those that we have put under contract in 2009 or 2010.

Joel Locker, FBN Securities.

Just a follow-up on the gross margins. So 45% of your closings were from new communities with the 400 basis point spread. And if you take out the warranty reversal, you get to around 14.3% if you include the amortized interest.

So that would indicate about a 16.5% margin on new communities and a 12.5% margin on old communities to get to the 14.3% excluding the warranty reversal in the fourth quarter. Just want to see if I am looking at that right.

Yes, that is roughly the math.

Right. So and then I guess just a follow-up question on that, is the new land that you bought in 2009 and mostly 2010 meeting your underwriting hurdles that you originally purchased it for?

Well in a quarter like the fourth quarter, it is tough to say that anything is meeting the hurdle. We continue to believe that the underwriting assumptions we made at the time we underwrote them were very reasonable and based upon market conditions. But certainly in the fourth quarter, a very tough quarter, it would be below expectations. And what we do with impairments reflects that.

Right, and I guess just a follow-up, I mean based on that, it seems like a lot of the other builders who were saying 20% plus gross margins, I don't think you're doing much different than them. Maybe that is just they're reaching for that and that's not the actual reality of what is going on on land bought a year ago or so.

And I don't know what their assumptions are when they are evaluating a deal. For us, we do not assume appreciation in the market going forward. So it's really when we are underwriting a transaction based upon the conditions of the market at that time.

Michael Rehaut, JPMorgan.

First question just on some of the cost actions. Bob, when you kind of gave that average headcount to 2010 and the decline, are we just to think that if you -- on an average basis let's say you'll be down 60 heads which is about a little over half of the 113 positions that you eliminated, is it fair then to kind of extrapolate and say okay, the total annualized savings might be $7 million but in terms of average 2011 over average 2010, the savings realized would be only a little over half or like $3.7 million I guess the math works?

That's not a bad way to think about it, Mike. With the caveat that we have not disclosed what we are going to do in 2011. If we deem it necessary if things improve significantly, you can think of any number of different scenarios in which we may increase or reduce headcount. So, you have got to factor that in going forward.

Right, but as far as to what you have announced today irrespective of what you may do in addition, but that math is then kind of what we are talking about.

I think that is a fair way to look at it.

Right, and then also the ERP costs rolling off, is that kind of a 1 or 2 or a $3 million type of benefit? That type of range?

Well, we are going to continue to incur ERP costs going forward. Note that in our commentary, we indicated we have implemented that in corporate and in two of our homebuilding divisions. The implementation with respect to the remainder of our divisions will continue into 2011. So there's not going to be a decrease there.

Nishu Sood, Deutsche Bank.

This is (inaudible) on for Nishu. Regarding the impairments, what was the kind of the average vintage of the land? Was any of it purchased in 2009 or 2010 or was this all pre-2009 land?

It was about half and half.

Okay and you know, I'm not sure if you have seen the report, but we just wanted to get your guy's thoughts on the Treasury report this morning and the future of the housing finance system and whether you would prefer a hybrid model or just simply fully private or kind of a combination?

I really haven't had a chance to review that report. I don't think Larry has either. So I probably need a little bit more information.

Okay, yes, that's about all I have, thanks.

Jonathan Ellis, Bank of America Merrill Lynch.

The first question I just wanted to ask -- and, Bob, if I caught this correctly, you said that incentives did pick up during the quarter, yet your gross margins on backlog remain relatively flat. Is that just to suggest that all the incentive increases concentrated in spec sales you had in the quarter? Can you just help us sort of understand the spec incentive increase vis-a-vis the flat gross margins? Thank you.

I guess we have since -- for the last half of the year, we have been offering some increased incentives especially on that older spec inventory and that would include when we did our big sales promotion. And again, that volume was mostly in the third quarter.

So our backlog would have already reflected a lot of that incentive increase as of the end of the third quarter. So in the fourth quarter, we continue to offer a lot of those same sort of incentives especially related to the older inventory.

So you end up with kind of the same impact looking at your end of the fourth quarter backlog. So again, you already had a lot of that increase in incentives factored into your backlog to start the quarter.

Okay, great. And then just on the cancellations, if my math is correct, about 30% of your cancellations in the quarter came from that sales promotion end of September. Is that to suggest that the remaining 70% of the cancellations were more driven by the contingencies and ability of people to sell their existing homes or more the remaining 70% driven by underwriting standards?

I think we had both. If you look at cancellations received in the 4th quarter and compared to cancellations received in the fourth quarter of 2009, clearly we had a pretty big increase. And if you were to say how many units account for that increase, the biggest categories are the contingencies with respect to a home remaining to sell and you have got a slightly larger amount related to the financing issue. So it's both of those when you're looking at it year over year.

Ivy Zelman, Zelman and Associates.

Thank you. Good afternoon. I guess I would like to try to better understand your plans for the next several years as it relates to your cost structure.

For the full year 2010, you had 24% of sales where your SG&A compared to the group at 15%. And certainly your fourth quarter at 22% of sales which showed that that run rate is likely at least in the fourth quarter at a still very high level.

And you mentioned in your opening comments that you don't want to sacrifice or change your operating platform at the risk of not being successful longer term. So I guess, we're looking at what is clearly a significant underperformance versus your peers in reducing cost structure and recently we had [pulte] come out and do a significant restructuring. [Rilan] came out and did a restructuring.

I guess you must have some pretty bullish growth rate assumptions in order to keep your cost structure at such a high level and not to take more definitive action to deal with such low volumes of housing that you are experiencing. So I kind of want to understand what do you think revenue can do that would maintain and keep shareholders happy with such a blow to cost structure where you continue to lose money on a year-to-year basis?

I think that what we hopefully saw last year was kind of the inflection point. It is certainly our view that the -- all the elements that came together last year that probably were negative all came together and the work that we have done in preparing for the future has not been transparent and some of it has not been implemented because of market conditions.

We are very aware of the high level of G&A in relationship to others. And as I go back over the decades, sometimes we've been a little out of sync in the sense a little bit too far, a little bit behind, a little bit too conservative and a little bit too aggressive. And probably we've been in a very, very conservative mode. After all, the world only decided to survive less than two years ago.

And as far as going through 2008 and 2009 with a change of consumer confidence rapidly came upon us last year, the activities of new subdivisions that we've set forth more in the K and also in Bob's comments are coming onstream and those things that we are doing in our land acquisition pipeline are very active and until they become reality, of course they're only words. But I know you will judge us on where we were and where were going after we deliver the appropriate level of growth and profitability. We are focused on every G&A item that does not impair what the plan is and we will continue to reduce G&A in every point that we believe is appropriate. And most important, we expect 2011 to be a substantial growth period and over the next short time, we -- our number one business goal is to return to profitability ASAP.

And there is no lack of concentration on that, and it will take a little bit longer than we hoped, but we do know what the plan is and what our commitment is to our shareholders and we will achieve that.

Do you think, Larry, recognizing SG&A was actually up year over year nearly $12 million from 2009 to 2010, is there any point throughout 2011 where the Company would have to seriously reconsider depending upon revenue growth to get back to profitability and have to consider cost reductions? Is there any point in the next 12 to 24 months where you would capitulate that maybe a cost significant restructuring is part of the Company's strategy?

I think, Ivy, we are actually restructuring every day in a more subtle way. There isn't anything that we are not focused on and there is no strategy that we are locked into that will take us down a road of not being realistic and realizing where the market is and where we are.

And I know that this next period of time whether it's 12 or 24 months, I know the obligations we have upon ourselves, and your words are appropriate. We are adjusting, we will adjust and the results will -- I'm highly confident that the results over that period of time will be ones that we can be proud of.

Stephen East, Ticonderoga Securities.

If I can follow on Ivy's train of thought, asking it a little bit differently, Larry. Your normalized SG&A is probably in the 12 to 13% range. Right now you're doing a little over $900 million in home building revenues. What type of revenue run rate would you need to do to get back to that 12 to 13%?

Well, I won't comment on the 12 to 13 because I've got six accountants here that have five different numbers, so I'll have to let you deal with Bob Martin on that exactly. By recollection, I think it's a little higher in prior years.

But when you look at a sales rate of 3200, 3300 homes and 3000 plus or minus closings, this is the -- I think it's the lowest level we have had in a decade or in at least 10 years or more. And I look at the public figures when I see that sales are running below 300,000 and then I think someone said in November or December, it was one month it was 20,000 new homes sales.

And what we will do -- I believe last year was the inflection point and we will aggressively expand by way of recollection. And the facts are whatever they may be, I'm going by recollection.

But in 2005 we had between 15,000 and 16,000 closings, and so you have seen a reduction for us and for the industry of about 80%. And coming off that point, as the economy we believe will continue to improve, consumer confidence coming back, the housing overhang being depleted, the new home sales -- the new home product being the low level of standing inventory throughout the market, there is every reason for us to believe that market conditions and the actions that we are taking in every market, we will see a substantial growth of our top line this year.

We know that to rebalance between G&A and gross revenues takes a combination of both top line and control of expenses and balancing it out in light of where we are and we are committed to doing that.

If I could turn to a different subject, on the gross margin, earlier in the call, you all talked about roughly where the old communities' gross margins are, about 12.5% or so. If you look at that level and then look at 23, 24% SG&A on top of that, I really struggle to understand how these aren't being impaired further given just from the outside looking in, that dynamic implies that there is meaningful negative cash flow even before using the present value of that.

Yes, Stephen, it's kind of two completely different analyses. You can't apply the full 24% SG&A load to your impairment analysis.

So when we are doing the impairment analysis, we are applying certain elements of that. So you wouldn't see that -- I get that entire percentage just kind of speaking at a high level applied against the 15 or 16%. And I guess I'd offer up in addition to that, it's a subdivision by subdivision analysis based upon really current market conditions. So I would argue that we are very much impairing to the current conditions that are out there.

Carl Reichardt, Wells Fargo Securities.

Can you tell me of your specs, a little over 1500 ex the models this quarter, what percentage of those were effectively self-created as part of the build the drywall and hold versus a result of cancellations? And is that ratio changing much or has it over the last few quarters?

You know what, Carl? I have a schedule on that if you give me a second to pull that up, I will.

Okay, why don't I ask my second question of Larry then? Larry, the sense I think we're hearing from a lot of folks on the call is this issue of volume relative to fixed cost coverage.

And let me ask about the volume for a second. You guys have relatively light dirt supply compared to some of your peers and historically you have been focused on buying finished lots, not going backwards into vertical development.

At the same time, we don't see a lot of companies so far at least that have impaired land that they bought in the last couple of years. So given that there is likely to be a lot of competition (inaudible) what kind of confidence can we have that you're going to be prudent in the dirt that you buy given that you need I think a reasonable amount to get back to profitability? And would you consider going backwards into vertical development even though that's been historically against your philosophy?

Our year-end numbers, I believe we control 12,000 lots. So we're not without inventory. We are very aggressive in each of the markets that we believe are appropriate.

And as those finished lots are absorbed, we have developed tens of thousands of lots over the years, land developments. Now we don't do master planned communities. We don't do big subdivisions.

But over the years, we have certainly done land and lot development and that is a business that we are already back into. In many of the markets, we have already geared up to have the internal ability to do that which we have really done over the almost 40 years.

And we will do whatever we need to do to create the lots at a price that we are able to be profitable. Each market is a little bit different, but your observation is appropriate in the sense of going forward, we will be back into the mode of maybe 50% or 60%.

We will be finished or semi-finished or kind of close, and 40% will be developing ourselves just like everyone else does and did. And we got out of it early four, five years ago which served us well.

And to the extent we can, we will do finished lots but as the competition will increase in good markets, we will be developing land but not the large parcels, but the small parcels as we have done over all these years. And here's Bob to answer your question on specs.

Yes, you know, Carl, I think the way that you are looking for it, I don't have that exact calculation, so I may need to circle back around with you. If you look at all the cancellations that we had during the quarter, about 445, you had about 326 -- about 75% of them that ended up creating a spec, meaning the home had already been started. But I don't think that was quite what you had in mind, so I'll circle back with you.

Buck Horne, Raymond James.

I want to go back to the cancellations in the quarter and kind of the mortgage underwriting standards, that they were increased. I'm just really specifically wondering if you saw any specific lenders that you partner with that seemed to tighten their standards more than others or was it kind of across-the-board? I guess I'm specifically thinking of your primary lenders like wells or BofA or JPMorgan, if you saw something specific with them that led to the high cancellations you saw in the quarter.

Not really. I mean I think the financing mortgage industry remains very tough, but nothing specifically isolated to any one of them.

Secondly, just going back to the -- I know you guys haven't had a chance to review it, but the Treasury department's proposals regarding what to do with Fannie and Freddie and the FHA. And included in that this morning, they basically proposed taking the FHA loan limit back down or letting the expanded limits expire effective October 1 of this year.

You guys have a pretty high exposure to FHA, and I imagine a number of your buyers are using those expanded loan limits. I'm kind of wondering what you're thinking about in terms of the impact that might have on your sales and if there's any things you can do to minimize any fallout. How do you transition away from the FHA product?

Again, it's tough to come up with a completely comprehensive answer without having to really look to purport and thinking through it. I think the short answer is clearly having the FHA financing is a good thing for us, but if it becomes not available, we'll have to deal with it at that time including as we go through than underwriting of new deals, considering it as a part of the evaluation and whether or not there's a market for the product that we're offering.

I will also say that with regard to existing subdivisions, in many cases we would have potentially an opportunity to change plans on land that maybe we were originally planning to do a different product on. So we might be able to do some things there to adjust.

But I guess overall, our philosophy of having a relatively short supply of land should help us out with that equation because we are not locked in long term to an assumption that was made assuming the ongoing nature of the FHA. So, Larry, I don't if there's anything you wanted to add?

No, I think that just because there is a suggestion of what might be a good idea to change the law, I don't think it's going to happen overnight. It's like doing away with Fannie and Freddie, everyone would like to do away with it except no one knows how. So we'll just wait and see what thing -- whatever it is, we will adjust to it and act accordingly.

Alex Barron, Housing Research.

I guess I wanted to touch back on the -- well my first question is with the promotion -- I know the the vast majority of that promotion was [bringing] down the rate to 3.75% for 30 years. So I was wondering, how much does that particular piece lower gross margins on average?

I guess if I'm speaking about kind of financing and closing costs as a whole as a percentage of home sales revenue, it is up about 150 basis points year over year.

Got it. Okay. My second question -- thanks. My second question is related to I guess the strategy or the philosophy of building the specs to the framing stage. I'm trying to understand that relative to what you guys are saying that you have to discount older specs. So does that mean older specs that we're taking to the framing stage and nobody had bought them or does that mean older specs that were completed somehow?

I think you have somewhat a combination. But with homes that are cancelled at a late stage because of financing, you're really down the process of having made a higher level of improvements. And as you can see by the schedule, there is only a nominal amount, I think it's a little over 100 homes that were finished.

And what our goal is is to keep that in a de minimis level. And with the way market conditions were at the end of last year, then the business objective is to be aggressive to the point necessary to make sure that that does not grow beyond what you wish.

The better profitability is homes that are sold earlier in the cycle. We have had the added advantage of going to a drywall hold and the drywall hold allows you to do the personalization.

And with our design galleries, that has given us a real opportunity to distinguish ourselves. And as we look over the next couple quarters and we will be able to evaluate backwards two quarters from now and look at the various categories of inventory. And I feel confident that it will serve us well by being able to have product that the market is receptive to.

Timothy Jones, Maloney Securities.

Hi, Larry, long time since I've talked to you down here in South Florida.

Where have you been, Tim?

I moved from Boca, I'm over in Naples now.

You know what? I just want to follow you where the sun is. We had 25 below zero one night last week here.

Come down, the weather is fine. I looked real quickly at your release. You have a schedule there of both years of your homes under construction, the finished specs and the total specs?

We do have that information.

I don't know if it was released or not.

The homes completed, under construction, the speculative inventory year over year? We have that?

Yes, yes, that's in the schedule?

It is, it's in the press release.

Okay, I looked at it real quickly. Tell me, these incentives that you are taking, were you pretty aggressive on not taking incentives in the first half?

You talked about -- perhaps you were looking at the beginning of the year a better market and you said you increased your headcount, then you decreased it. Is part of that that you were more aggressive on pricing in the first half? Because most builders are not increasing their incentives right now.

Well, I think we certainly have the wind at our backs for the first half of the year with respect to the tax credit. That was a benefit to our homebuyers. So we didn't really need to offer as many incentives.

Now after that finished, we have seen an environment where it's been increasingly necessary to use the incentives to drive volume. And our number one priority when we are looking forward is we want to make sure that we're driving appropriate volume through our subdivisions.

And naturally that's on a subdivision by subdivision decision for our management to decide. But I would say in a lot of cases, our management team is going to choose to increase incentives to drive that additional volume. And it's a concept that you also see running through our impairments is that assumption when we look going forward.

Secondly, the 46% cancellation rate, the highest I've seen by a long shot, how much of those (inaudible) percentage (inaudible) are those cancellations related to aggressive marketing related to the 520 homes that you sold under your big sales program that almost sold as much as you did in the fourth quarter?

It was 136.

(Operator Instructions) Michael Rehaut, JPMorgan.

Just so I understand the cancellation rate appropriately, excluding the 136 that was more I guess from a timing issue with the promotions, can you just give us a sense -- and I know I haven't really run the math myself. I'm asking if you have what that can rate would've been to kind of make that adjustment.

In terms of the kind of remaining cancellations, you said that the financing requirements were slightly higher. So if you net out again that promo effect, what type of can rate do you think you would've posted and do you think we can get back to kind of more of a normal -- or not normal but a number that you did in the last couple of quarters?

If I'm doing just a pure mechanical calculation where I backed out that 136 from the cancellations that we received in the fourth quarter, the cancellation rate would be more in the neighborhood of 32%. So that would be consistent with last year.

And your second comment, I just want to be clear, year over year it's not I guess an increase in financing requirements necessarily. That's the reason that the buyer was unable to close as well as the increase in cancellations due to the inability of our buyers to sell an existing home in what has been a very difficult sales environment whether it be for new or existing homes. So there's that dynamic at play. As to what it is going forward, it's really the market that's going to tell us that.

Ken Zener, KeyBanc.

Larry, I appreciate your comments. I wonder if you can make -- maybe think about some alternative paths here given our view that the recovery will be quite slow given your high level of liquidity which I think is very understandable how you got there and the market has not yet afforded you the option to deploy that capital.

In a slow recovery, is there a point where if we were to stay let's say -- I know you are opening up communities -- but for you to consider an alternative to our transformational investment of your capital, if the market we were in were to persist for three, four, five more quarters where you just didn't see the opportunity to deploy your capital into a traditional homebuilding environment?

Well, I would say since we are running liquidity of about $1.5 billion, we have a lot of flexibility and it would just be speculating as to what we would do or not do. We have taken a very conservative approach. I assume we will continue to take a conservative approach.

But none of us know what the world is going to look like and we are just going to stay in between the white lines unless there's a compelling reason to do something different. And I don't see that at this moment.

But since you are trying to question what we might look forward to down the road in a future period of time, I think you know that management has a 100% alignment with all of our shareholders. Since senior management owns 25% of the Company, dealing with the equity and the viability of what MDC does, there is only one path which is good for the shareholders, all the shareholders. And we're very focused on that and you can be sure that we will continue to be.

Have you -- if I could follow up -- have you seen or have you seen or looked at a deal that would have brought you outside of a staying between the white line comment and you just passed on it? Or has there been anything that's kind of interested you to the extent that you think it could?

I know you haven't acted on anything, but given the distress we have been in for the last number of years and it's just recently kind of been coming to market, has there been things that you guys have considered? I know you say your door is always open, so I imagine you might have seen something that would have brought you towards those white lines.

Not at this point.

Joel Locker, FBN Securities.

I wanted to see what your customer deposits were at the end of the fourth quarter.

In dollars?

In dollars, yes.

The overall just gross figure, not per unit?

Just gross figure, I'll figure it out per unit.

Let me look for that real quick.

Or if you have it per unit, either way. The other question on what -- just ballpark figure on what you think your community count is going to be the end of 2011.

Well, that is certainly dependent on what land acquisition activity we expect amongst other things. But given what we already have in our pipeline, we certainly believe it's going to be higher than it is at this point.

We provided you a lot of detail within the context of the webcast related to the active subdivisions. That should give you some idea of where that will end up. We're not giving out any specific number at this time.

We're looking for the dollar amount on deposits. Thought I read that in (inaudible)

Just one second. You know what? I'll get back to you on that one. It's just not at the top of my mind here.

There are no further questions at this time.

We appreciate you all being on the call and look forward to meeting with you all again following the reporting of our first-quarter earnings later on. Thanks very much and good bye.

Thank you. This concludes today's conference call. You may now disconnect.