MDC Holdings Inc (MDC) 2012 Q4 法說會逐字稿

We are ready to begin the MDC Holdings fourth quarter earnings call. I'll 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. Welcome to MDC Holdings 2012 fourth quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer and John Stephens, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time, we request that participants limit themselves to one question and one follow-up question. Please note that, this conference is being recorded and will be available for replay. For information 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 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 2012 annual report on Form 10K, which was filed with the SEC today.

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 is posted on our website with our webcast slides. Now, I will turn the call over to Mr Mizel for his opening remarks.

Good morning. I'm pleased to announce the fourth quarter income of $29.7 million or $0.59 per share, making our fourth consecutive quarter of profitability with both our Homebuilding and our financial service operations posting significant year-over-year improvements. Our fourth quarter completes a strong turnaround for our Company. For 2012, we reported a year-over-year improvement in our pretax income of nearly $170 million, resulting in our first annual pretax profit since 2006. On the strength of significant improvement in home deliveries, we grew home sales revenues by $158 million during the quarter. This strong increase in volume resulted in a 300 basis points decline of our SG&A rate to 12.6%, approaching a more normalized rate for our Company on a long-term basis. Also, we saw a meaningful improvement in our gross profit margin, which expanded by 120 basis points sequentially from the third quarter.

We are encouraged by the progress we have made in these areas, which allowed us to increase our fourth quarter core operating margin by nearly 500 basis points year-over-year. Looking at Financial Services, our $7.7 million in earnings for the fourth quarter was again a strong result achieved in part by capitalizing on favorable mortgage market conditions and increased loan volume, as well as reduced charges related to mortgage putbacks. For the full year, our Financial Services earned $28.5 million. It is our best result since 2006 and almost 50% higher than the total amount earned for the last three years combined. We achieved a 66% year-over-year increase in net home orders, driven by a 98% growth in our sales pace, even as we increased pricing in the majority of our subdivisions.

Given our recent sales activity, combined with the low supply of new and existing homes, we are optimistic about our prospects for the coming spring selling season. At the same time, we are applying even closer scrutiny to the balance between sales volume and price increases in an effort to maximize the margins we earn on each house. With the acceleration of our sales pace during 2012, we saw a decrease in our community count both sequentially and year-over-year, as certain communities sold out more quickly than originally anticipated. We have responded by significantly accelerating the pace of our new land acquisitions.

During the fourth quarter, we spent more than $150 million to acquire over 2,300 lots in 67 communities across our market. This represents more lots than we acquired in the previous four quarters combined. The addition of these lots drove our first year-over-year increase in lot supply since June 2011. In addition, nearly 90% of the lots acquired in the fourth quarter were finished, with the potential to positively impact subdivision count, sales and deliveries, in 2013. We start 2013 with an inventory of started homes that is 64% greater than a year ago, supported by a 58% year-over-year improvement in our unit backlog.

Combined with our recent finished lot purchases and our increased absorption pace, the increase in our supply of started homes positions us well for meaningful increases to our sales and closings in the future periods. As we look to buy more lots in the future, we bring a strong balance sheet with robust liquidity and an overall financial position ranked by the rating agencies as one of the industries best. Earlier this month, we added more muscle to our balance sheet by issuing $250 million of 30-year notes, which provide additional resources to help sustain the growth trajectory we established in 2012 for the long-term.

Thank you for your interest and attention. I would like to thank our dedicated employees for their hard work throughout the year, as they have made it possible for us to report such positive quarterly and annual results to date. I will now turn the call over to John Stephens for more specific financial highlights of our 2012 fourth quarter. John?

Thank you, Larry. We're on Slide 4. Our closings were up 54% to 1,221 new homes, with all of our markets experiencing year-over-year increases and particularly strong results in our West markets, specifically our California, Nevada and Arizona operations. The increase in deliveries was driven largely by a high number of homes in our beginning backlog as compared to the prior year, due to increased net new order activity in the first nine months of 2012. Our backlog conversion rate was 61% for the 2012 fourth quarter, in line with the 60% in the 2011 fourth quarter and our historical average of 64%. Our average selling price for the 2012 fourth quarter was up 9% year-over-year to $319,000, increasing in most of our markets, primarily due to price increases and reduced incentives and to a lesser extent from a mix shift to better located communities. Increases were particularly strong in each of our West region markets, as well as our Virginia market which all showed double-digit year-over-year improvement.

During the quarter, we increased home prices on average by about 2% in over half of our communities. This was on top of the increases in each of the previous three quarters. We continue to make progress with our gross margins during the quarter. Our gross margin from home sales was up 180 basis points year-over-year to 16.7%. Excluding the $1.1 million of inventory impairments recorded during the 2012 fourth quarter, our gross margin from home sales was up 17%, up 150 basis points over the 2012 third quarter and up 280 basis points in the last six months. It should be noted that, the 2011 fourth quarter included a $2.3 million warranty benefit, whereas the 2012 fourth quarter had no such benefit. The improvement in our gross margin percentage was driven primarily by price increases and incentive reductions in many of our communities.

In addition, our spec homes have seen significant margin improvement, due to increased demand for these homes in many of our markets, based in part on a low supply of existing resale inventory. Consequently, the margin between our dirt and spec homes was virtually non-existent for the 2012 fourth quarter. As previously noted, we continue to remain focused on balancing home sale rates with reducing incentives and maximizing the value of each home we sell. As a result of these efforts and improved market conditions, our margins and backlog have continued to improve; however, in the short-term we may see some margin pressure from an increase in interest and cost of sales related to our recent debt offerings, as well as higher land and building costs. But we also have the opportunity to offset these items by increasing pricing, accelerating inventory turns and continuing to invest in homebuilding assets.

Our homebuilding SG&A expenses, as a percentage of home sale revenues, was down 300 basis points to 12.6% versus 15.6% for the 2011 fourth quarter. The improvement in our SG&A rate was driven by greater operating leverage, resulting from a 69% increase in our home sale revenues. The year-over-year increase in our G&A expenses to $26.1 million was largely driven by an increase in incentive based compensation. In the 2011 fourth quarter, we significantly reduced our bonus accrual resulting in a meaningful credit to our prior income statement, whereas our 2012 fourth quarter included higher incentive based compensation expense associated with significantly higher profitability. The 2011 fourth quarter also benefited from a $2.9 million reduction in our legal accrual that did not recur in the 2012 fourth quarter. On a sequential basis, our G&A expenses were higher, primarily due to a $2.2 million legal recovery that benefited our 2012 third quarter. Based on what we know, our Q4 G&A of $26 million is our current quarterly run rate.

Our commissions expense, which is a variable cost, increased $4.9 million or 59% on a year-over-year basis, which was directionally in line with the 69% increase in our home sale revenues. Our marketing expenses also increased on both a sequential and year-over-year basis, due to increased volume and revenues. Our net new orders for the quarter were up 66% on a year-over-year basis. The increase in orders reflected the overall improvement in most of our markets, better execution and changes in our sales process and a greatly reduced cancellation rate, which fell to 24% in the 2012 fourth quarter from 45% in the 2011 fourth quarter and 27% in the 2012 third quarter. On a per community basis, our sales rates were up 98% year-over-year to 1.86 sales per community per month compared to 0.94 per community in the 2011 fourth quarter. On a sequential basis, our orders were down 14% from the 2012 third quarter, which was less than our normal seasonal decline. The decrease was driven more by selling out of communities than a seasonal drop in demand. As our fourth quarter monthly absorption rate, as compared to the third quarter, was down only slightly.

Our active community count declined by 10% during the quarter from 166 at September 30 to 148 at year-end. The decline in our subdivision count was the by-product of higher than anticipated sales rates experienced throughout 2012, as compared to low demand levels experienced in 2011. We believe we have the opportunity to grow our community count in the first half of 2013, based on the accelerated pace of land acquisition that occurred during the fourth quarter.

As you can see from this slide, our land acquisition efforts have continued to accelerate significantly in the second half of the year, with the fourth quarter resulting in the purchase of over 2,300 lots, almost doubling what we purchased in the third quarter. In addition, of the lots purchased during the fourth quarter, roughly 70% were in the more important -- were the important West markets of Arizona, Nevada and California. With respect to our lot supply, we currently own or control nearly 11,500 lots, which consistent with our strategy and past operating experience represented a 3.1-year supply, based on our 12-month delivery pace and a 2.6-year supply based on the last 12-month order pace. The fourth quarter lot supply represented a 10% increase in total lots from the 2012 third quarter and was our first year-over-year increase in lot supply since June of 2011. In addition, we continue to see active deal flow with our current land pipeline.

With our strong balance sheet, that included over $700 million of cash and marketable securities at the end of the year, and an equity balance of over $880 million before realizing any portion of our $248 million net deferred tax asset, we believe we are well positioned to take advantage of land opportunities in the future. In addition, to further bolster our liquidity and financial position, we issued $250 million of 30-year, senior unsecured notes earlier this month. One other item to note on the balance sheet, the Company accelerated the payment of its 2013 dividend of $1 per share into December of 2012.

On this next slide, you can see that our profits from our financial services operations have improved meaningfully compared to last year, with our pre-tax profit of $7.7 million in the 2012 fourth quarter versus a loss of $1.3 million a year ago with our mortgage company being the primary contributor by generating $7.3 million of pre-tax income. On a sequential basis, our financial services income declined $1.6 million, due to an increase in insurance reserve at our captive insurance companies. Much of the improvement in our mortgage operations income was attributable to an increase in the volume of loans locked and originated related to the increase we've seen in the overall homebuilding market combined with favorable overall mortgage market conditions. In addition, the 2011 fourth quarter included a significant charge related to increasing loan loss reserves, as we settle claims with a key financial purchaser of our loans. While our margins for this line of business may moderate in future quarters, we still believe it can remain a reliable, quality earnings stream for us in the future.

At this point, we would like to open up the call for questions.

(Operator Instructions)

Michael Rehaut, JPMorgan.

Nice quarter. First question I had was on the gross margins, particularly as you've really materially stepped up the land investment in the last quarter. I think maybe part of the reason the stock is down today is perhaps concerns around that. If you could just comment if possible on -- the land that you've tied up, you said a lot of it's finished lots, which would imply a fuller price, obviously faster turnaround, but how the gross margins in these land purchases compare to your current 4Q gross margin.

I think what you have to look at is, we have been able to demonstrate our goal of sequentially increasing our gross profit margins while acquiring land in line with the market. The land in line with the market means that there is a good pricing power for the product. There's always a timing differential, but the timing differential is usually mitigated by the construction period of which it takes you to build and to open the new communities. Even though one could say it's not a perfect alignment, I go back to the history of what we have done in prior years for -- maybe even several decades, that we buy land in line with the market. We do not speculate in land.

We're not a large developer of land. We've been able to create reasonable gross profit margins and also a very good return on equity, which is ultimately the driving point of what we're doing. So as we look at our goal of expanding gross profit margins, we work with the fact that land values have gone up. But as everyone has reported in the market conditions is home sales prices have gone up rather substantially, even in the last 30, 60 days, which has generally been a slow period, on the fourth quarter. But this year, it has only been nominally slower. So we're optimistic of obtaining our goal of continuing to improve our gross profit margins and considering the local conditions that we're dealing with.

All right. I appreciate that. Just in terms of comments around expecting community count growth in the first half, I think resulting from these land purchases. Can you just give any further granularity in terms of degree of magnitude? Certainly, at this point, your community count is still -- it's down solidly year over year, should we just expect some sequential improvement from here? Certainly, it would take a little bit to get to year over year improvement, I think, perhaps at the earliest in 3Q or 4Q. Is that the right way to think about it?

Yes. I think the way we're looking at it is -- Mike, we're going to see increased community count as we work through the first six months of the year. As we indicated earlier, most of the lots we purchased, I think it was nearly 90%, were finished. So I think it's probably more in Q2 where we're see more openings. But of the 67 communities that we acquired lots out of during the quarter, 42 were new. So that gives you a sense -- a magnitude of what's new. Obviously, we're going to burn some communities off too, as we continue to sell-through. But in terms of -- we're not really giving a number up, but I would expect it to increase as we move through the year.

Ivy Zelman, Zelman & Associates.

Congratulations guys. I'm sure it's an exciting time for you and the industry. Larry, you've built an incredible machine. I think that everyone appreciates your strategy on buying finished lots at retail and benefiting from good markets with home price inflation. As you continue to think about your future, maybe you could talk to us a little bit about your thoughts on M&A, succession plans. Recognizing you're still vibrant and active, but we need to think about the future. Is M&A something that the Company has considered in buying a strategic company that is also a finished lot purchaser? Or just in terms of growth organic, how do you view the long-term platform that you've so successfully built?

Well, we've built a long-term platform for the benefit of the shareholders. That's why when things were more unsettled, we had a substantial amount of liquidity, an extra $1 billion. We are building the foundation for the next cycle. One has asked me about the next cycle, I would guess that we have -- subject to Washington not confusing it, I believe you can see a nice 10-year run. The Company with its substantial balance sheet -- you should note the high level of liquidity. The fact that we did 30-year debt -- you can see that we're planning to position ourselves for the re-inflation and the growth of the economy in the United States independent of last week's report or today's or last quarter. The country is growing.

The homebuilding industry -- the opportunities have never been greater for the large builders. The capital markets are open. I would say in all the years I've been in business, this is probably the clearest period of time that I've seen as to the future of the housing industry for those that have access to capital. So we are positioning for the future. We are looking at all opportunities. You will see us continue to be a very competitive Company that has always delivered for the benefit of the shareholders, something that is of true value. The question on the future? The future, I'm very excited. That's why I issued 30-year debt, so you can see I'm highly optimistic.

Well, Larry, I appreciate that. I say this respectfully. I think you've built an incredible Company with decades of experience. You've been around and some of your competitors alongside you -- Bob Toll; rest his sole, Leonard Miller, who gave his son Stuart an incredible platform. He's done a tremendous job. Can you help us on the succession? Is there a Doug Yearly in your Company that we don't know yet and that you're getting him ready? We're going to get an opportunity to see him run the Company? I think that's what we're trying to all appreciate. You've done such a great job. So we just want to see where the future brings with succession.

Well, I think the future is -- evolves every day. We have a very strong team here. We even let some younger guys in. Of course, younger is a matter of relationship as to age. Some might call them a little bit older versus younger. I think the succession plan is the evolution of the Company. We have a lot of experience. I don't have one doubt that we will evolve into even a more mature, sophisticated enterprise that one can feel comfortable that future Management will continue the integrity of the present.

Nishu Sood, Deutsche Bank.

I wanted to just talk about the debt raise. In the context of, the significant land purchase you made in the fourth quarter. Obviously, it kept your cash level heading into the New Year. So as you look ahead here, clearly, as you're saying Larry, you expect this growth trajectory and land spend to continue. So, just maybe if you can talk through how you would think about financing that? Are you planning to run your cash down? Or should we expect further offerings as we go forward here?

Well, I'd say two things. One, I would assume that we will accelerate our land purchases during 2013. That one could expect them to be substantially increased over 2012. We are also aware of the fact that at the end of 2014, we have the maturity of a 10-year piece of paper. So we have that in mind. So we are balancing the -- call it the short-term, which is the land that we will be buying this year and next year and going forward with future maturities. We think that the longer we can put the long-term debt and swapping out some short-term -- we'll probably add a little bank line into it. We expect to accelerate what we're doing, subject to market conditions and do it in a meaningful way.

Got it. Great, thanks. Second question, Mike already asked you about this a little bit. But on the gross margins, I just wanted to revisit what you said last quarter, since it was very unusual to hear such forward-looking guidance from you, in terms of you were committed to increasing gross margins over time. So having bought several thousand lots here in the fourth quarter, lots that are going to turn into communities in fairly short order, kind of three to six months if we're talking the first half of 2013. So you -- from what you see in the land market and from what you're buying, you have the confidence that what you talked about last time, the rising gross margin trajectory can continue with the land buying cycle that you're following?

As you know, we don't make forward-looking statements that are as broad as your question. My comment is that, our goal is to continue to increase gross profit margins. That's pretty much my answer to your question.

Adam Rudiger, Wells Fargo Securities.

You mentioned managing pace versus incentives and margins. If I look at your 2012 sales per community, it looks like the average was just over 2. I would have guessed that you would want to push that a bit more before slowing pace so to speak. So what are your thoughts on that?

Our thoughts are that, there's a push and pull of greater sales and greater gross profit margins. Right now, we're coming into the spring selling seasons. We are very, very sensitive to making sure that we maximize the gross profit margin on every home we sell. Unit sales are part of making net income for the Company. But maximizing those gross profit dollars to benefit that, is a balancing point between the sales velocity and gross profit margins. We are looking at enhancing gross profit margins. There is a inflection point where pushing them will have a tendency that could slowdown sales, but we believe that the spectrum that is open in the market today -- today is only today -- is that you have the ability to more likely than not as we come into the spring selling season, probably increase the sales velocity and have a little bit of pricing power. We hope to bring those two elements together. Obviously, subject to consumer confidence and the world in which we live in, but we're definitely focused on a management strategy of maximizing the profit on the homes that we sell.

Okay. Then on -- combining, I guess, gross margin and land and the high degree of visibility you talked about before and the 30-year money that you have and the plans on substantially increasing land spending in the back half of the year, are there plans to move into more aggressive land spending from the perspective of less developed land and take on a little more risk there, given the high degree of visibility?

Yes, I would say that we will be doing more development going forward than we have in the past. But we have developed 30,000, 40,000 lots. So the land development in, I believe, probably every market we're in, is a skill that we have. We will take advantage of whatever opportunities are out there. They continue to change around. We have the internal ability through many years of history of being able to maximize both conditions. I think having the capital and the history of execution will lay a good foundation for doing just those things.

Dan Oppenheim, Credit Suisse.

I was wondering, I guess, in terms of -- related to some extent to the -- potentially the margins. But you're going with a strategy opposite what many others are doing in terms of specs right now, with an increased spec count at this time. Is that in an effort to wait as home prices are rising and sell the homes later in the process? What's your thought on that? Is that something we should expect to continue over the course of this year?

We believe that the window was open to increase our spec count and we did. We believe that -- if you look back not too many quarters, we were getting a substantially lower gross profit margin on the specs than we did on the dirt start. In the last quarter, I believe, they were approximately -- they were close to being equal. So you're now moving into a market that you probably -- there was a prior history and maybe it was in 2004 or the first part of 2005, where you could actually get a higher price for an immediate delivery than a dirt start. So taking what we believe is the facts on the ground in the market, we believe will have a greater opportunity being able to give delivery and be able to reflect a better pricing for quicker delivery because of the shortage in the market. The other thing you gain a little bit from a quicker delivery -- as we all know, the construction costs are going up in different categories that we have more transparency. On the cost of the house -- if the home is under way and generally bought out, then a dirt start which might be something that you don't buyout as far as the purchasing for three or four months. So we believe that this is a well thought out strategy and one that we feel very good about. We will continue in that mode of expanding that opportunity.

So just -- trying to clarify -- so, when you talk about expanding, is there a goal in terms of what you'd have in terms of specs per community there as you sort of grow this through the course of the year?

I would say, it will be a direct line of the transparency of the sales velocity. If sales velocity increases, we'll be able to increase our specs. It will be a balancing act. I have seen some public information from a few other of the large builders. I think they're also on the same track of increasing their spec count, because there will be a premium to the ability to deliver a finished home to the home buyer this spring and especially this summer. So this is something that I think is happening quickly in the market.

Dan, just to tack on to that point too. In terms of our orders for the quarter, it was still about two-thirds dirt and about one-third spec. So that's kind of been consistent for the last few quarters.

Ken Zener, KeyBanc Capital Markets.

Can you talk about perhaps the leverage rate that you're looking at, given that you're obviously deploying land or capital into land. But land's going up, you're going to buy it at the market, but it seems that you're going to have to somehow get ahead. Are you guys comfortable running in general at a lower leverage ratio going forward? Or is the normal 30%, 40% going to be attained in the near-term?

I think our net debt is almost flat. Maybe you ought to re-look at that aspect of the liquidity versus the total debt. As you add to what was the year-end numbers, the transaction we did the first week of January, the $250 million, we have a material amount of latitude to leverage up.

Correct, okay. I guess this is a little different take, but just on the debt that you did lock in for 30 years, which is -- given where rates are -- I do believe in time, they will go higher versus lower, you are absorbing a bit higher debt cost into your gross margin versus others, as opposed to just laddering out the 10-year. Are you in some way making a long-term call there? I know you like having the capital liquidity. I'm just trying to think about how you're balancing by taking that security versus what's going to obviously bleed through just as a higher interest cost.

I'm willing to absorb the higher interest cost for having 30-year fixed rate debt. I think we'll -- a few years from now, we'll say, wow, great opportunity. As the economy in this country improves, which it will. We see pricing moving up around our industry. We see it actually creating jobs -- that United States will be -- the program that the Fed has currently -- I see they've renewed it for another short period of time -- of adding liquidity, at some point it will slip. When it does, these interest rates will move quickly. We believe the unique opportunity to have long-term fixed rate debt -- it's worth absorbing the cost, which you have commented on, which is accurate, is an additional interest cost, is well worthwhile in exchange for what we're going to have on a perspective basis.

Joel Locker, FBN.

Nice quarter. Just was curious on the material prices going forward. Do you see a steady increase in that, say through the first and second quarter? Or do you see an acceleration, say maybe, in the second quarter because once the lumber prices really start going through the COGS?

It's -- I think many of the suppliers are all attempting to push and pull. There's excess capacity that they're trying to utilize. They are trying to push pricing ahead of really utilizing all their facilities, because it will obviously improve their bottom line. I think we're entering into a period in the housing industry of inflation of cost and inflation of the end product. I expect that the compelling values will be in new homes and that the large builders will have an advantage, because they will, to the extent possible, mitigate the construction cost. But it's coming through, not on a unsettling basis, but it's something that we're dealing with every day. You have not only material cost, but you have labor cost. I think the labor cost is good for our country. We're putting a lot of people to work that had to find something else to do. These things will improve consumer confidence.

Being able to get a brand new home at a highly competitive price and a great mortgage is something at least that we can see out in the next short period of time as a compelling value for the consumer. The apartment rents for new apartments, in most cases -- I'm speaking of in the West and even in the South. You can buy a brand new home for less than a brand new apartment cost. So that gives us an added advantage for all the guys that are building new apartments, that they're pushing people and the existing apartments by raising rents into new homes. I think that's a good place to have them. By the way, the workout of the distressed homes that are being rented as they come off the rental pool over the next five years, I believe will also be healthy for both markets.

Right. Then just a follow-up question on land prices on an apples-to-apples, say, finished lot basis. How much are they up percentage-wise say in California and Nevada?

Our prior closings in the fourth quarter of land versus sales price, is that what you're looking for? Because that's the only thing we can comment on. We have -- what's our aggregate land cost to sales price approximately?

Probably around 25%.

So you're looking at about 25%. So you can see the ratio of land cost to sales -- cost or sales price?

Sales price.

Sales price. So you take the sales price, 25% of it is land. So you can do your own model, if land goes up 10% -- what is it offset by the home value pricing? You can see from public information that I believe that they felt that new home price increases were running in the 6% to 10%, depending on which market it was.

Alex Barron, Housing Research Center.

Good job. I wanted to, I guess, focus a little bit more, Larry, on going back over the land comment you made at the beginning about the $150 million and acquiring 2,300 lots. I was trying to reconcile that against the 10K, because I don't see a big increase in your sequential number of lots. It looks like it's about 900 or so. Was that basically just exercising options on existing communities that you're talking about?

Alex, what period are you looking at? Are you looking at sequential or year over year?

I'm looking at just the sequential increase.

I think that's total lot supply. 930 versus 1,231.

Yes, I'm looking at it, I see here you had 8,978 owned lots and now you've got 9,903.

Lots closed. Alex, maybe you ought to --

Maybe we can take that offline. But I think the sequential increase, as we mentioned, was about 10%.

I guess more -- really what I'm trying to understand is, how to think about -- John, because for the last few years you guys had a lot of cash, just kind of sitting there and earning -- or costing a lot of interest expense. So should we expect that cash to basically be deployed into land and watch your community counts maybe double in the next couple years, something like that?

I'm not going to answer your full comment. But you should expect a part of that cash to be deployed into the growth of the Company, not only land, but also construction. We are pointed in a direction of growth. We will utilize part of that liquidity for the growth, for not only land, but development and also the construction of homes. I think this is a very good opportunity to be active.

Stephen East, ISI Group.

Just quickly, John, maybe this is directed at you. If you look at the finished lots that you all bought in the fourth quarter -- looking at the pricing that's running today, will they increase the gross margin versus the fourth quarter gross margin? Or is it more a steady-state on those particular finished lots?

Well, I think what we've been buying, Stephen, is it's been consistent with what we're looking at now. I think there's a range. Obviously, it depends on each market, but it kind of meets our hurdles. We would expect it to at least be similar to what we're booking today, if not better.

Okay. All right. I appreciate that. Larry, I haven't always been kind on some of the earnings, but I think you all turned in an excellent earnings this quarter. That's all I've got.

Thank you very much for the nice words. (laughter)

With that, I think, that's our last question. Thank you all for joining us. We look forward to seeing you again for our first quarter of 2013.

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