MDC Holdings Inc (MDC) 2011 Q1 法說會逐字稿

Good afternoon. We are ready to begin the MDC Holdings, Inc. Q1 2011 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' 2011 first-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 1 question and 1 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 www.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 first-quarter 2011 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 over the call to Mr. Mizel for opening remarks.

During the first quarter of 2011, our spring selling season started off on a slow pace. Difficult market conditions, coupled with an absence of federal home buyers' tax credit, resulted in a 24% year-over-year reduction in net home orders, despite a year-over-year increase in traffic of 35%.

However, we have seen sequential improvement in home orders during each month in 2011 through April, consistent with a seasonal trend. The key to a successful effort to return to profitability will be -- return to profitability will be our top-line growth. We showed our commitment to that growth strategy by entering the Seattle market in April of 2011, through the purchase of substantially all the homebuilding assets of SDC Homes, which ranked as Seattle's third largest builder.

We have also dedicated substantial resources towards increasing market share in our current footprint, as shown by a 23% year-over-year increase in our active subdivision count at the end of 2011 first quarter. Furthermore, we approved additional subdivisions for purchase during the first quarter, including more than 900 lots and 15 new communities. However, this was a slower pace than each of the previous first 4 quarters, as we were more cautious about exposing new capital to homebuilding assets, in light of the relatively slow start to our spring selling season and continued pricing pressures in the homebuilding market.

Our home gross margins have come under pressure over the past few quarters, for several reasons. First, our land costs have increased significantly, as the market for acquiring finished residential land in prime locations has been very competitive, despite the weakness in the market for new homes. However, our current land cost is still consistent with our historical average. Furthermore, first-quarter home gross margins in our newer projects, which accounted for more than 50% of our closings, exceeded the home gross margins we achieved in older projects.

Second, we accepted lower home gross margins in many subdivisions to reduce our excess supply of unsold units under construction, which has decreased by 39% from a year ago. Given that our land costs have returned to their historical average, and we have substantially reduced our unsold inventory, we believe that if demand for housing does not deteriorate further, we have the opportunity to stabilize our home gross margins near current levels.

Looking at our other key focuses for our Company during the first quarter of 2011, our new enterprise resource planning system was successfully implemented in 2 additional division offices. For those of you that know our story, this technological platform, when fully implemented, is expected to drive consistency in core processes across divisions, reduce operating costs, and provide Management with better accessibility to real-time operating data. While the implementation of this system has caused us to incur higher overhead costs, we believe that it will allow us to achieve improved operating leverage in the long-term.

We also continue to evaluate our overhead and opportunities to reduce it. Our headcount is down 5% from the beginning of the year, and we intend to take further action if we believe market conditions will prevent us from being -- from achieving profitability. Thank you for your interest. I will now turn the call back to Bob Martin for more specific financial highlights of our 2011 first quarter.

Thanks, Larry. Total revenue for the first quarter increased 15% year over year to $170 million. The increase was driven almost entirely by home sales revenue, due to a 6% growth in home closings and a 9% increase in our average selling price. Land sales revenue was insignificant in both the first quarter of 2011 - 2010, and other revenue was virtually unchanged over the same period.

However, home gross margins deteriorated by 870 basis points year over year, more than offsetting the revenue increase and resulting in a $22.3 million loss from operations, compared to a loss of $15.4 million a year ago. I will dive into some more specifics in just a few slides.

Looking at the rest of the P&L, other expense, which is generally net interest expense, showed a $4.5 million improvement. Through the careful management of our cash and investments, we have increased the overall interest rate we earned.

In addition, given the increase in our inventories over the past year, we have been able to capitalize more interest, instead of expensing it immediately to the other expense line. Overall, our pretax loss for the first quarter was $23.7 million, slightly worse than the $21.2 million loss during the same period last year.

Looking at the income tax line, we had a $3.8 million income tax benefit for the first quarter of 2011, primarily due to the settlement of an IRS audit relating to 2004 - 2005 returns. So, overall, we ended up with a net loss of $19.9 million, or $0.43 per share, slightly better than the net loss of $20.9 million, or $0.45 per share, a year ago.

Turning to the next slide, we closed 554 homes during the quarter, which is up 6% from the 523 closings we had during the same quarter last year. Our most significant increases year over year came from Colorado and Maryland, partially offset by sizable declines in Arizona and Nevada.

The average selling price of our closings increased 9% year over year, to roughly $295,000. The increase was driven largely by the change in mix of homes I just mentioned, with closing decreasing in our lower-priced Arizona and Nevada markets, and increasing in Maryland and Colorado, where prices exceed our Company average.

If you look at the individual market detail we provide in our public disclosures, the most significant increase was Colorado, primarily due to an increase in the average size of homes closed during the quarter. Three markets showed sizable decreases for Q1 in average selling price -- California, Virginia, and Arizona.

In California, the decrease was attributable to a decrease in the average size of homes closed. In Virginia, the decrease was the result of a change of the mix of homes to lower-priced submarkets. And in Arizona, the decrease stemmed from both a decreasing average home size and significant increases in incentives.

Two other points on the slide -- first, closings from our new or redesigned products were about 60% in Q1, well above the 30% from a year ago. Second, new subdivisions, defined as those acquired in 2009 or beyond, accounted for 54% of our closings. Again, this is a significant increase from 11% a year ago, when we had just started to bring new subdivisions online.

Moving on to home gross margin. This slide shows a quarterly trend from the first quarter of 2010 to the first quarter of 2011. Looking at our margin as reported, the top graph, we showed 13.7% in the first quarter of 2011, compared to 22.4% in the first quarter of 2010 and 17% in the fourth quarter of 2010.

As we have done in the past few quarters, we've also provided gross margin information that excludes interest and cost of sales and warranty adjustments. This is the bottom graph. The adjusted gross margin up 16% for the first quarter of 2011 is down by 590 basis points compared with the first quarter of 2010; but is down only 50 basis points from the fourth quarter of 2010.

The year-over-year decrease in the adjusted gross margin, as Larry mentioned, was largely the result of accepting lower margins to drive volume, especially on older, unsold inventory. In addition, land costs increased, due to strong competition for finished lots and desirable locations. However, we do believe that our land costs are consistent with our historical average.

Looking at the sequential trend, margins were only down 50 basis points from Q4 to Q1, as both periods were influenced similarly by higher land costs and spec closings. One final note on this slide, our estimated gross profit margin in backlog to end the first quarter was relatively flat, compared to where we were at the start of the quarter.

The next slide is new, and is intended to give a little more color on margin -- specifically, the impact that spec homes have on our margin. Larry previously referenced the information you see in the top chart, which shows we have worked hard to reduce our spec inventory count by 39% year over year and 29% in the first quarter alone. Those specs sales have changed the mix of our closings over the past couple of quarters, as you can see in the lower chart.

73% of homes that we closed in the first quarter of 2011 were sold as spec homes, versus 57% a year ago. Generally, spec homes generate anywhere from 200 - 400 basis points less margin than to-be-built homes, so the higher percentage put pressure on our margins. However, given that our total spec count has now fallen significantly, we should see the number of closings from specs decline towards the latter half of the year.

Keep in mind that the decrease in specs during the quarter reflects the fact that a significant number of specs were sold during the quarter. The actual closing of these specs will continue to occur in the second quarter. I want to make it clear that the reduction in our spec count does not mean that we are abandoning our approach of maintaining a supply of drywall help specs; we are simply rightsizing the excess we had following the end of the tax credit last year.

Going to selling expenses, overall, we are up year over year. Commissions expense was $5.8 million for the quarter, up 12% from a year ago. This increase is roughly in line with our 16% improvement in home sales revenue. Marketing expenses increased by 39%, from $7.1 million in the first quarter of 2010 to $9.8 million in the first quarter of 2011.

The increase largely represents an investment in opening and marketing new communities, as our active subdivision count grew 23% year over year. We also invested in online advertising during the quarter, which we believe helped drive our 35% year-over-year increase in traffic.

In addition, we saw an increase in deferred marketing expenses. 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 higher closings during the quarter, but also due to a higher cost per home closed.

In many cases, the size of new communities is smaller than in the past, meaning there are fewer homes to which we can apply the cost; and therefore, the expense per closing increases. To help offset these costs, we are building fewer models in newer communities and, in certain locations, not building a model at all.

Moving on to G&A expenses, the $36.8 million we incurred in the 2011 first quarter is down from both the $40.2 million we incurred a year ago and the $42.9 million we incurred in the fourth quarter. The primary reason behind the year-over-year improvement was a $2.7 million reduction in legal expense. We also saw an overall reduction in employee compensation of $1.5 million, with stock compensation expense accounting for about 2/3 of this decline.

Taking a look at employee headcount, given the reductions we announced last quarter, we are now down about 7% year over year, and 5% in the quarter. Our employee headcount of 1,067 at the end of the first quarter was our lowest level since June of 2009.

And just isolating those employees charged to general and administrative expense, the headcount was down 13% year over year, and 5% for the quarter. The next slide is inventory impairments, and the story on this 1 is pretty simple. During the first quarter of 2011, we only had $300,000 impairments; not much different than the first quarter of 2010, when we had no impairments.

So then, moving quickly on to net home orders. We received 705 net orders in the first quarter, which was a 24% decrease from the same period last year. As Larry mentioned, we were up against tough comparisons, since the federal homebuyer tax credit was still available in the first quarter of 2010. Looking at individual markets, we were down double digits in most. The exceptions were Maryland and Virginia, which were close to unchanged year over year; and California, which experienced tremendous active subdivisions growth.

To give you a sense for our monthly experience during the quarter, we had 196 net orders in January, 221 in February, and 288 in March. As Larry mentioned, April was better than March. Our traffic increased by about 35% year over year for the quarter, mostly due to an increase in the number of subdivisions open for sale; and gross orders fell by 13%.

Our cancellation rate increased to 32% for the quarter, higher than the 22% rate we experienced in the first quarter of 2010. Cancellations as a percentage of beginning backlog increased by a similar magnitude -- to 40%, as compared with 32% a year ago.

Financing issues and inability to sell an existing home were 2 of the most common reasons for the increase in cancellations. The average price of net home orders increased 5% year over year, to roughly $290,600. We ended the quarter with 993 homes in backlog, down 20% from the same time last year. Our average price in backlog of $314,000 at March 31, 2011 is slightly up from a $309,000 average price in backlog at the end of the first quarter last year.

One more slide for you on net orders -- this 1 focuses on our absorption pace, which was 1.5 net monthly orders per active community in the first quarter of 2011. You can see that it's a 35% year-over-year decline; but it comes after a robust 88% increase for the first quarter of 2010 -- that, again, was fueled by the tax credit. So, while we don't like to see the decrease, we are 24% above where we were 2 years ago.

We continue to put new projects under control in the first quarter of 2011, but we did so at a much slower pace. In total, we put 937 lots under control, with more lots controlled via option contract than purchased directly. The majority of these lots are in 15 new communities.

We also acquired 567 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, Virginia, and Maryland.

In April, we were excited to announce that we acquired the assets of Seattle-based SDC Homes. Given SDC's number-3 market share in Seattle, the acquisition gives us an immediate presence in the market, which is consistent with our efforts to grow our top line as a means to return to profitability. Assets acquired include approximately 280 vacant residential lots and homes in various stages of construction. In addition, we took over option contracts for the purchase of an additional 230 lots.

And finally, moving on to active subdivisions, this slide is 1 we have given you for the past couple quarters, and gives a little bit more detail on our subdivision count. For each period shown here, the light blue bar represents active subdivisions, defined as projects that have sold at least 5 homes and still have at least 5 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 5 sales necessary to reach active status.

And the gray bar shows the number of subdivisions that are currently active, but are close to reaching an inactive status. You can see that our active subdivision count contains an increase this quarter, up 23% year over year and 9% sequentially.

In addition, the number of subdivisions that are likely to become active soon significantly exceeds the subdivisions that are close to reaching an active status. The spread between the 2 is 25 subdivisions, 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 1 home and has at least 1 left to sell, we are up about 40% on that measure over the past year, which is a key distinguishing quality for MDC. And with that -- that concludes my prepared remarks.

Thanks to our team across the country for the work they do every day to move our Company forward during these tough times. And I'd also like to thank everybody on the call for their continued support and interest. And at this time, we will open the line for any questions you have.

(Operator Instructions) Michael Rehaut, JPMorgan.

Hi, guys. This is actually Will Long on for Mike. How are you?

Good. How are you doing, Will?

Good. Just a quick question regarding the gross margins in backlog. At the end of the quarter, it was roughly equal to gross margins at the beginning. But does that mean the sequential decline in gross margin was due to the selling of excess spec? And also, were there any other drivers [for] the decline in the gross margin sequentially?

Well, sequentially, I think you have to look at it before the adjustment that was made for warranty and before interest. And on that basis, in the fourth quarter of 2010, we were at about 16.5%. And the first quarter of 2011, we are at 16.0%. So, that's only 50-basis-point decline. And it's not what we would view as a significant decline, sequentially.

Okay, great. And then, in terms of incentives and pricing trends during the quarter, were they stable, or did they get better, or did they get worse?

Other than what we mentioned, with the specs and putting the additional incentives on the specs, I think we were relatively even on that front.

Mike Widner, Stifel Nicolaus.

I just wanted to follow up with a couple questions on the SDC acquisition, if you could elaborate a little bit. And specifically, the things I had in mind, you talked about current headcount at the G&A level, overall Company level; and obviously, you added some bodies with the SDC acquisition. So, when you talked about the 1,067 number I think you had in there at the end of the quarter, should we plan on additions to that through SDC? And then, a related question, we wondered if you could talk about the price for -- that you guys paid, effectively, for SDC as well?

On the headcount front, they are not included in the 1,067; so you will see an increase because of that -- right around 65 employees. I think the more important part of that discussion, though, is we do believe that it's a profitable enterprise. So, we are looking forward to that piece. And obviously, the market will dictate what happens on that front, going forward. As far as the price, unfortunately, I cannot share that information with you.

Okay. So, basically, what we got in the press release is pretty much all you're willing to share on the effective price paid for it -- which is -- well, basically, you didn't really give us much information. Is that -- I mean -- ?

Yes, we are subject to a confidentiality agreement on the transaction, so we are prohibited by that from disclosing that to you.

Ivy Zelman, Zelman and Associates.

I'm trying to understand the strategy a little bit better, recognizing that your spec count is down. The percent of your closings that are coming from new communities would imply, if I understand correctly, that margins should be higher, not down 590 basis points year over year, or 50 basis points, even, just because you should be generating higher margin on new communities. And it sounds like your new communities, you are [specking], and when you are specking you are obviously taking in lower margins. So, when you are starting your underwriting process and you talk about a normal growth margin, I would think that your underwriting -- you would have a higher gross margin that you're underwriting to than 17%.

So, it feels like either you are willing to go at a lower gross margin when you underwrite these land deals; and you are pushing out volume, via spec, but your spec is lower margin, and these are in the new communities? So, it's very confusing, Larry, to understand why your margins wouldn't be better, given the percent of closings from new communities, unless you're just willing to take a lower gross margin on the land deals that you guys underwrote.

I think one of the key elements, Ivy, in this last -- the fourth quarter, first quarter this year has been very slippery, for not only us, but for the whole industry. As market conditions, subdivision by subdivision, move around, you have to move with the competition. And you have some real good strategies, but you can't get stuck in the fact that we've dealt with a very, very weak market. And I know that you are always perfect on the figures. I think the sales rates for the last two or three months have been some of the lowest sales rates since 1963. And what we are doing is what you would expect us to do, is, we're adjusting as aggressively as we can, as frequently as possible, to maintain the momentum and to move forward.

We are not standing still, waiting to be a victim. We are moving forward with a strong conviction that the future is brighter than the present. And I think in seeing a little bit better tone in some of the elements that are helpful, such as -- it's good for us that rents went -- are going up, because that's a potential purchaser; when they get squeezed on the rents, then you're looking for someone who is going to be needing a home. Mortgage rates, everyone was worried that they were going to go up, and now the 10-year has some very attractive levels and the last week or so.

So, I think we are entering, it may not be the spring selling season, but is this spring stabilization season. And we hope that for the industry, that things stabilize. And as you know, we have maintained an extremely conservative stance with the acquisition of the Seattle home builders asset, I think, is the first acquisition of this kind in certainly in five or six years by us. As you recall in 2009, we started buying land again. Maybe we started early. We bought -- and we are buying more and we can't hit the top and we can't hit the bottom, that I think we were good enough to demonstrate that we exited in time to end up with a net surplus liquidity, and maybe we have come back a little bit slower and very cautious.

But I believe our book of business is getting balanced, and the differential between the drywall hold, and the specs, and the dislocation of the earnings credit from last year all made a very interesting chopped salad that we had to digest; and it's taken us six months to digest it. But nevertheless, if you can sense the tone and the feel, I believe that we are clearly focused on overhead, profitability, and growth. And we have now demonstrated, we've started to utilize our substantial liquidity on a very careful, cautious basis that we are committed to the growth that we've previously stated.

Well, Larry, I appreciate all your comments. I guess part of it is, recognizing everything you just said, your lack of information on what you paid for the company -- I respect the confidentiality. I think what people -- really, what they struggle with is the management team good stewards of capital, in terms of their acquisitions of land? And the land that you're buying, but if you're willing to accept only a 17% gross margin -- and whatever the margin is right now, there are builders that are doing well north of that, to try and understand why you would underwrite land, and then you said you make adjustments, and you are specking, and cancellation rate is well above everyone else in the industry, it's just kind of hard to marry it.

You said the industry is tough, but you're significantly underperforming the industry. So, the strategy has to come under question and scrutiny -- and to understand your balance sheet, no question. But what kind of return are you getting on your investment in the new acquisitions of land? Maybe you can differentiate for us how the current communities, the new communities are performing, or the margin differential that you are seeing on the new communities, to understand really what you are deploying and how you are deploying shareholder capital.

Well, I have a couple of comments. First of all, you will judge us better a year from now, looking back, than you do in the middle, because -- and as the comments are -- well, some of your competitors are doing A, B, and C. I choose not to comment on what they are doing, how they are doing it, and by what measurements. I think that will all become self-evident as time plays itself out. The new subdivisions that we are moving into, we are probably paying a little bit more aggressive price because we are looking for, A, locations, we are looking for the least amount of development work that needs to be done. And the new subdivisions, I believe, and the new product is about a 350-basis-point pickup. On top of that, as you might have recalled a year or so ago, I said -- listen, we're redesigning all of our product.

Well, Ivy, we're now redesigning all the redesigned product, because whatever we thought, isn't; and whatever we see, we're moving towards. And it'll -- you'll have to -- not you -- one will have to have confidence that we actually know how to do this. And we go about it, as always, different than everyone else in timing and optics. But like I said at the beginning, judge us a year from now, looking backwards versus why we are in the middle of what we're doing.

Steven East, Ticonderoga Securities.

Larry, you talked about land being up significantly year over year. If we look at apples to apples, how much is your land up, that you are acquiring?

It's up about 400 basis points, versus revenue.

Okay. Is that -- just a follow on Ivy's question about gross margin, it that the biggest reason we're not -- I expected to see a bump in gross margin, ignoring interest expense et cetera, if you move from 11% of closings to 54%, is that the biggest reason, even after you factor out specs?

It is.

Daniel Oppenheim, Credit Suisse.

Was wondering if you can talk a little bit more -- you talked about the focus on returning to profitability and such. I'm trying to get a sense of the urgency for that. You said -- if it doesn't improve, you see more cuts. But definitely, the expectation that what we will see in the future is better than what we are seeing currently. When you talk about the future, what is the expectation right now, in terms of when we will see an improvement? How you are you looking at this, in terms of getting back to profitability?

We are looking at getting back to profitability every single day by every level of the Company, from the very top throughout the people in the field. Everybody is appreciative of having a job, and everyone knows how tough it is out there. And since many of our competitors in the markets that we dominate have been impaired, the more important -- our industry -- throughout the industry, the private builders and whatnot have been substantially diminished. There is no lack of focus that getting to profitability as soon as possible, doing it properly -- we could get to profitability pretty quickly if we were insensitive to the economic integrity of the enterprise. But since our economic integrity is recognized, the responsibilities we have to shepherd our balance sheet are very important.

So, we have to do everything in an aggressive but a measured manner. You know, today, no one asked questions about balance sheets and viability and whatnot. It's like it doesn't matter. But 36 months ago, it was life and death; and now, it's -- hey, how quick are you going to get to profitability? And we are on track, we are fully focused, we have made the steps necessary, and we will continue to do whatever we need to do to reach that goal.

Thank you. And then, wondering --

Keep in mind, Dan -- Dan, just real quick, keep in mind that what we've done over the past couple of quarters is no small amount; it amounts to 15% of our workforce over the last just two quarters. So, we have taken some substantial moves on that front, but we are balancing it with the prospects for growth that Larry describes. But go ahead, Dan.

Great. And I'm just wondering, in terms of what are you instructing those in the field to do, in terms of looking at a high rate of cancellations that's persisting here? Are you taking steps to work on that, to either better qualify the buyers, or just to work to lower the cancellation rate?

Well, there's different ways of measuring cancellation rates. We encourage, and we are aggressive, in getting our salespeople to write every contract. Let them write it, and then let the credit side determine whether or not they are bankable. And we are conservative in our underwritings; where maybe someone else would put the loan on the books, we have our own mortgage operation. So, we have the added burden of doing it right every time in the mortgage business. But we encourage our salespeople to write as aggressively as possible, and then we will scrub it equally aggressively to make sure the credits that we do close on are ones that are done properly.

I think probably the big thing we have focused on, to make sure the impact of those cancellations are minimal, is to make sure that we're not starting a home for a buyer who is at high risk for cancellation, as defined by not having been approved for a loan yet or having a home that they still have to sell. In those cases, we are very, very careful about starting the home, so that we don't get into a position where our specs start to inflate again.

Jonathan Ellis, Bank of America Merrill Lynch

Hi, this is Jay [Chaperone] for Jonathan Ellis. First question, can you break down SDC's communities, what percent of the communities are geared towards entry-level versus move-up buyers?

I would say it's primarily entry-level, what we actually purchased.

Okay. And another question on acquisitions, if banks aren't leasing as much land, would you go after -- would you make acquisitions in existing markets to access land?

Yes. We would make an acquisition of assets, as is our Company policy. We might acquire all of the assets that someone owns, but we have not previously acquired the corpus because of the contingent liabilities from prior construction.

Josh Levin, Citigroup.

In terms of getting your perspective buyers qualified for mortgages, how has that changed over the past few months? Has it gotten easier? More difficult? Unchanged?

I think it's -- every time Citi, Wells Fargo, BofA, FHA, Freddie, Fannie, some congressional man, or whoever it is has a new idea, it continues to get tougher and tougher to get people qualified. And so that just means we have to work a little bit harder. But the interesting thing is housing, which I think the downside risk in the market has pretty well mitigated itself, has the least amount of credit flowing into it.

But the general liquidity in the marketplace for all sorts of investment opportunities is wide open, and the credit markets are cooking again in all sorts of areas. And I think you will see residential mortgages by -- and I am speaking of prime mortgages, conforming, are going to be picked up by the local banks all over the country, as they go through looking for credits that they can put on the books that have a reasonable return and an expected life that is something that they can deal with.

Okay. And separately, as you think about your Management structure, Larry, how are you thinking about filling the CFO position?

Well, we have two people that are double-clutching it sitting right here, and they are doing a great job. So, I got two for the price of one.

Rob Hansen, Deutsche Bank.

Your community count has grown at a pretty rapid pace recently, but this quarter your land buying actually slowed a little bit. So, does this mean that we should expect slower community count, going forward? And how much of a lag is there between slowing the land buying and then slowing community count growth?

I think you still have a number that have not yet hit the active status. It was 60 at March 31 and only 25 that are about to go off. So, you still have a bunch that are going to come on over the next year. And even if we didn't acquire almost anything for the rest of the year, you would probably see the community count go up through the end of the year. Beyond that, it really depends on what we do over the next few quarters, in terms of acquisition. And for that, we are really looking at a real-time basis, on what's happening in our current communities and the market overall. So, I think you are going to see that subdivision increase continue to happen here in the short-term; and then longer-term, it will just depend on the acquisition activity.

Okay. And then, from some of the other builders, we saw that the move-up buyers seemed to work pretty well, recently; and was this the case for you guys, over the course of the quarter? And what's the current breakdown, in terms of move up and first-time, et cetera?

We have seen that trend. We have heard it a lot from a lot of different analysts, we've seen it internally to a certain degree. So, it's manifesting itself when we meet on individual assets -- talking about that aspect, whether or not it makes sense to build a larger home. We have certainly seen some success in some of our communities at a little bit higher price and catered to that move- up buyer. And actually, I don't have the split right now on Q1, but I can certainly get that for you.

Alex Barron, Housing Research Center.

I wanted to get your big-picture thoughts. When we started this downturn, you guys did probably better than almost any other builder, in terms of seeing what was coming, and like you said, you didn't raise a lot of liquidity, you exited a bunch of communities, you've stopped buying land et cetera. And then, about two years ago, you got to the point where you almost had very little communities, very little lots. And I think you recognized that it was time to start buying the finished lots, and that started to work for you.

And as we've kind of discussed on this call, the gross margins have been going down over time, and yet your SG&A is still almost at the high 20% range, and your interest is at almost double digits. So, I'm trying to figure out -- and then, combined with that, I saw that your land options are going down sequentially. So, I'm trying to understand -- are you guys delevering again? Or how do you see the path back to profitability?

I think the market, as you see from the public information, the last two or three months, the monthly sales for new homes have been all-time record lows. And we obviously see that. The land sellers of A-level finished lots haven't read the news reports yet. So, they're -- everybody got excited last year during the tax credit before it, and then of course the excitement diminished afterwards. We see sales just like the industry slowing down, and we see land sales where the A-level developed lots, they're competitive, but the builders are going to take a more reserved view towards that.

So, as always, whatever you thought, it will be a little bit different. But we are very, very focused, as you can see. We have an adequate inventory of finished lots ready to go, and we've positioned ourselves for the market to accelerate. And we have also positioned ourselves for the market to stay at this very low level; and we will continue to adjust as necessary, with the market being what it is. However, the elements in the larger economy would give one a view that housing might be the last industry to recover in the country. But it is imminent with the standing inventory of brand-new finished homes low.

And with -- it's hard for anyone to believe there's a theory of a pent-up demand, because there's so much old, ugly stuff that's in foreclosure going through impaired, overleveraged. But there's actually a baseline of some number that has a requirement and a desire for new homes, and those lines eventually will cross. Until the velocity in the new home market improves, we will continue to grow our top line and our active subdivisions, as Bob has described, as we bring on to the market that which we already have under control.

There's no magic to buying more land, more lots, option more, buy more. I think the view is, as long as you have money, you can get everything you need. We are balanced with what we need, and we are continuing to enhance the leverage of our existing G&A and the adjustments that may be necessary, predicated on actual conditions of the market.

Well, it seems to me the reason the land guys are probably holding you guys hostage is because they probably realize that there's very few finished lots out there. So, I mean, are you going to keep competing for the land, no matter what the price is? Or are you going to start developing land at some point?

We're going to not do something that doesn't have good business judgment. And you know, we've developed over 30,000 lots, and we are in certain markets developing land, and we are prepared and willing to be back in the development business, as long as it makes sense. I have -- I do not begrudge the land seller. They would be doing the same thing we would do -- that's look for the high bid and continue to move your offer up until people quit bidding. So, I think you will see that there will be some adjustment, but your view is accurate that we will do that which is necessary in order to have the right lot component price, as it relates to the ultimate product that I can put on the lot itself

Joel Locker, FBN Securities

I had a question on the 11 communities you acquired from SDC -- are those all active right now, or are some of them in development or [involved in] (inaudible)?

The 11 are active.

So, they're all active. So, instantaneously, your community count is 173 or so?

That's right. I guess that, between now and the end of the quarter, I don't know if any of those will hit the inactive mark or anything like that. But you are right -- as of the time of acquisition, they are active.

Jay McCanless, Guggenheim.

All my questions have been answered, thank you.

(Operator Instructions) Stephen East, Ticonderoga Securities.

A couple of follow-ups. On the Seattle market, I'm interested in your thought process of how you look at new markets to go into. Was this preemptive, where you looked at it and say -- hey, the market may not have stabilized yet, but we think it's close enough to the bottom that it's worth going in now? Or was this a case of -- we do think it's stabilized, and let's go here and we put very little at risk, from a downside perspective?

I think it's tough for us to sit here and say that we know for certain when a market has stabilized. So, I guess, the former statement that you had, which is -- we don't know exactly, probably applies. But we do believe, looking at each asset individually, I went on every single asset, that it was the right transaction, and that the Seattle market has a lot of strength for the long-term, given a strong employment base and relatively limited land supply.

Okay. And then, the mountain region was weaker than I expected in orders, especially when it looks like all of our research is showing that Denver is one of the better markets in the US right now. What was going on in that region?

I think part of it is, just such an extraordinary performance last year, to be quite honest with you. If you look at Q1 of '09 versus Q1 of 2010 for Colorado, it was up 100%. If you look at Utah, it was up 200% for that period of time. So, it was up even more extraordinarily than the other markets, by virtue of the tax credit. We certainly do have a very large market share in the Colorado market, and we took a bunch on and jumped up to just about a 20% market share; and now, have come down a little bit more off of that. But I think it's really a result of that extraordinary jump that we saw.

Okay, thanks.

Joel Locker, FBN Securities.

It's just -- your other operating expense was a -- you boasted a $1.5 million profit in that. What caused that? Because usually it's a small loss.

Yes, there was actually $2.7 million of income, I guess, that's a result of that tax -- the settlement of the IRS audit, that's flowing through there. And then, that was offset to a certain degree by the costs related to the SDC acquisition, as well as just -- what we normally see is some option deposits we've walked away from, and things of that nature.

Right. All right, thanks a lot, guys.

Ben Atkinson, Gagnon Securities.

I was wondering if you could talk about the spread between new homes and existing homes? How you are thinking about your pricing, and making adjustments for new and existing homes? And I know there's a lot of noise with the existing homes, with some of the existing home sales being distressed and some not. But could you help us understand that a little bit, in the context of some comments that have been made, that perhaps new homes are being priced -- and particularly, you guys, but in general, the industry -- that too high of a premium to existing homes? Thank you.

Well, you -- you have a -- as you know, different dimensions of the question. I hope you can hear us, because we are now getting feedback, Operator. The new subdivisions (technical difficulty) Can you hear us okay now? Operator?

Yes, I can hear you.

The new subdivisions and the pricing and taking a look at the prices of the existing homes, whether they are just resale or distressed or usually a combination, we do our best to distinguish the difference between a brand-new home and a home that has been through foreclosure, short sales -- both as to location, in some regards; but also in distinguishing that it is a different product. And one could look at it, in some cases.

In the old days in the auto industry, you had a new car and a used car, and the new car had a new product every year. And if you heard my earlier comment, we developed a new product line a couple of years ago, coming in to what we hope will be a recovery that will be sustainable, and of some magnitude. And we found that the product that we developed wasn't quite the right product. And so, one is adjusting, not necessarily to the absolute price of the existing home, but sensitive to the value factor of a price per square foot. You are getting a little bit better value emerging in the new homes, from where they were a year or a year and a half ago, on price per square foot.

So, I think what you will see is square footage of some new homes are going up, as people have reflected in the fact that the first home market has probably been under more stress, where the first-time move-up is beginning to get a little bit of traction. And in order to meet that, you need to add some square footage to the products you are marketing; and at the same time, you are able to utilize the efficiency of the incremental square footage cost is substantially less than the core cost of the basic home.

There are no further questions at this time.

Thank you for joining us on the call today. And we'll look forward to speaking with you on our next call, following the announcement of our second-quarter results.

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