MDC Holdings Inc (MDC) 2013 Q4 法說會逐字稿

Good afternoon. We are ready to begin the MDC Holdings, Inc., fourth-quarter earnings conference call.

I will now turn the call over to Bob Martin, Vice President of Finance and Corporate Controller. Sir, you may begin your call.

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings' 2013 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 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 2013 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.

And now I will turn the call over to Mr. Mizel for his opening remarks.

Good afternoon. I'm pleased to announce the fourth-quarter net income of $0.62 per diluted share. Both our revenues and operating margin improved year over year, consistent with our experience in each quarter since we returned to profitability in the first quarter of 2012. For the full year, we have made significant progress as a Company.

On a pre-tax basis, our income more than doubled in 2013 on the strength of top-line growth exceeding 40%, and the 270-basis-point expansion of our operating margin. Pre-tax results for our core homebuilding segment alone more than tripled in 2013, and in the second quarter, stemming from a return to consistent profitability and an improving housing market, we benefited significantly from the reversal of most of our deferred tax asset valuation allowance. In combination, these accomplishments for 2013 drove an improvement in our net income of more than $250 million, as well as an increase in our book value of 38%.

The pace of our monthly net home orders in 2013 increased by 21% from 2012; however, the pace was volatile throughout the year, impacted both by seasonal trends and economic uncertainty created by the discussion surrounding tapering of federal stimulus in the later part of the year. We are optimistic that we will continue to make progress on this measure in 2014, assuming the underlying housing market continues to recover.

The progress we made in net order pace in 2013 was offset by a decrease in our active community count. This decrease was caused by the sell-out of certain communities faster than expected, and a delay in opening some of the new subdivisions. However, I'm pleased to report that we turned the corner in the fourth quarter with our active community count improvement sequentially by almost 10%. As of the end of January, our active community count exceeded the prior year for the first time since May 2012. These increases come just in time for the historically strong Spring selling season, which will be critical to our efforts to continue growth for our Company.

Also critical to our growth has been our access to capital. Since we last reported earnings, we made considerable progress in the capital market arena by finalizing a five-year, $450-million unsecured revolving credit facility, and issuing $250 million of 10-year senior notes, which complement our $350-million issuance of 30-year senior notes earlier in the year.

As a result of including our recent senior note issuance, we started 2014 with total liquidity exceeding $1.4 billion to address both our near-term debt maturities, which are in 2014 and 2015, and to invest in new and ongoing homebuilding projects. Our improved liquidity positioned us to solidly align with our philosophy of maintaining a strong financial position which is centered to our operating strategy.

In January, we announced we resumed our quarterly dividend after we paid all of our 2013 dividends on an accelerated basis at the end of 2012. We are pleased to reward our shareholders with this dividend with a yield among the highest in the industry, and believe that it evidences the confidence we have in our ability to generate solid risk-adjusted returns in the future.

Thank you for your interest and attention. I want to thank our dedicated employees, Board, and business partners for all their contributions to make 2013 a success for our Company.

I will now turn the call over to John Stephens for more specific financial information of our 2013 fourth quarter. John.

Thank you, Larry. We increased our closings by 3% to 1,252 new homes, despite having a 12% lower beginning backlog to start the quarter. The increase in deliveries was partially driven by an increase in spec-home deliveries, and a higher level of beginning backlog under construction. Geographically, both our mountain and east segments were up for the quarter, while our west segment was down after starting the quarter with backlog units about 30% lower than a year ago.

Our backlog conversion rate of 71% was higher than the past few quarters, and above our historical norm for the fourth quarter, and was aided by having more spec homes available to deliver. And with the high percentage of backlog and spec homes under construction at the end of the quarter, we believe we have the opportunity to maintain a relatively high conversion rate for the first quarter of 2014.

Our average selling price was up 16%, or nearly $50,000 per home, year over year to $368,000 due to price increases and lower incentives realized over the last year, combined with a shift in mix to higher-priced submarkets. For example, in southern California, we started delivering higher-price product in Los Angeles and Orange Counties. Sequentially, our average home price was up 7%, or $23,000 per home. And over the last year, pricing power has been the strongest in the west, which was up 22%, with Nevada and California experiencing the largest year-over-year price gains.

Our gross margins improved 70 basis points over the prior year, and excluding impairments and interest, our gross margin increased 140 basis points. On a sequential basis, our gross margin was down 70 basis points. The decrease was attributable to fewer deliveries from our Nevada operations, where our gross margins are the highest in the Company, a higher concentration of deliveries from our Mid-Atlantic operations where gross margin percentages are lower than our Company-wide average, and more land charges recognized from closed-out communities during the fourth quarter as compared to the third quarter.

Despite the sequential decline we experienced during the fourth quarter, it's important to note that we have not seen a decline in our backlog gross margin through the end of 2013, and it has remained relatively stable since the end of the second quarter after rising in the first half of the year. Nonetheless, we are mindful of the moderation in pricing power we saw in the second half of 2013, as we moved into the slower selling season, combined with more volatility in interest rates.

And while it is a goal to increase our gross margin percentage on a sequential basis, perhaps more important is the actual gross margin dollars we are adding for each incremental closing. As shown on the graph on the right-hand side of this slide, the sequential trend on this measure is positive, with the dollar value of our gross margin per home closing increasing 21% year over year to $64,000 per home.

Our homebuilding SG&A expenses as a percentage of home sale revenues was down 60 basis points to 12%. The improvement in our SG&A rate was driven primarily by greater operating leverage and an 18% increase in home sale revenues. The year-over-year increase in our G&A expenses was largely attributable to an increase in incentive-based compensation expense resulting from a significant improvement in our pre-tax operating results, higher headcount due to increased volumes, and anticipated community growth. On a sequential basis, our G&A expenses were down $3.8 million from the third quarter due primarily to lower deferred compensation and stock-based compensation expense.

Our net new orders were down 13% year over year, largely due to an 8% decline in our average community count. The decrease in our orders on a sequential basis, both on an absolute and absorption-rate basis, was in line with normal seasonality. And consistent with our historical and seasonal trends, our orders stepped down sequentially for each month throughout the fourth quarter, and started to pick back up again in January.

Our monthly sales absorption rate was down marginally from the prior year, while the dollar value of our orders decreased by only 2%, mainly stemming from our ability to raise home prices over the last year, along with a mix shift to more higher-price submarkets. And although our monthly absorption rate was slightly lower than last year at 1.8 per community versus 1.9 last year, our absorption rates were higher in many of our markets, with California, Arizona, and Florida generating the highest rates.

As of the end of the quarter, our backlog stood at 1,262 homes with a backlog value of $506 million, both down year over year; however, our sales price in backlog increased by 14% year over year and eclipsed the $400,000 mark for the first time in Company history. The increase in our average home price in backlog was primarily the result of price increases, combined with the introduction of some higher-end communities in several markets during the last half of the year. And although our backlog was down to start the 2014 first quarter, we expect to offset some of the impact on our first-quarter closings with the higher conversion rate similar to what we did in the fourth quarter. Longer term, we believe that the key to future growth lies in our ability to open the communities that we have already acquired, which should help us continue to expand our community count throughout the Spring selling season.

Our active community count of 146 at the end of the fourth quarter was almost flat year over year; however, it rose by 12 communities, or 9%, from the end of the third quarter. Based on this progress, we appear to be on track for meeting our goal of approximately 155 active communities by the end of the 2014 first quarter. For assessing the potential for community count growth for the balance of 2014, the best data point we have is our soon-to-be active communities, which represents communities with construction activity under way, but have not yet sold five homes. The number of communities we have in this trajectory continues to build, and exceeded our soon-to-be inactive communities by 23 as of the end of the year, the largest positive spread we have seen since June of 2011.

As a result of the substantial increase in the absolute and relative number of soon-to-be active communities during the quarter, we believe that our active community count should continue to grow throughout 2014. However, as we stated last quarter, there's an element of volatility with the timing of the opening of new communities and close-out of existing communities, which could cause the direction of magnitude of the community count changes during the year to vary dramatically.

Finally, our land acquisition efforts continued at a solid pace during the fourth quarter, as we acquired 1,255 lots. Of these lots, approximately 70% were finished, up meaningfully from 45% finished in the third quarter of 2013; however, we expect a percentage of finished lots to decrease again as we move into 2014 due to the relatively small supply of finished lots in most of our markets.

As of the end of the quarter, we owned or controlled approximately 15,800 lots, which represented a 3.4-year supply based on our last 12-month delivery pace, and a 38% year-over-year increase. And after the purchase of nearly 8,000 lots over the last 12 months totaling approximately $630 million, combined with $145 million of land development spend, the Company continues to maintain a strong balance sheet with liquidity of approximately $1.2 billion in cash, marketable securities, and availability under our new revolving credit facility.

With book equity now exceeding $1.2 billion, and a net homebuilding debt-to-cap ratio of 20%, we believe that the balance we have achieved between growth and financial discipline gives us a unique ability to succeed in our industry even in an uneven housing market recovery.

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

(Operator Instructions)

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

Thanks. Good morning, everyone, or good afternoon. First question just on the gross margins. Obviously, you had some nice improvement year-over-year but sequentially down a little bit due to mix. You also mentioned that in backlog I believe, correct me if I'm wrong, if I heard you right that gross margins in backlog are somewhat similar to current levels, so do I understand that right or is it more closer to the mid point of the year where you were a little over 18%, and how should we think about 2014?

Mike, what I said was that the backlog margins really haven't deteriorated and they've remained relatively stable over the last couple quarters and through the end of the year, so I think the point we were trying to make here was that really the sequential decline we experienced in the fourth quarter, it was primarily related to geographic mix. Nevada was about 9% of our closings in the quarter versus 15% in Q3 and then the Mid Atlantic flipped the other way, where they were more of the deliveries in Q4 versus Q3.

And so that obviously had an impact on the sequential change in margin. And really the decrease in our mix in Nevada closings was partly due to some issues with getting power in some of our communities which pushed some of the closings really into the first quarter. And we had a lower kind of beginning backlog to start the quarter.

But going forward if you look at the mix of our backlog in Nevada and where it was at the end of the fourth quarter relative to where it was at the beginning of the quarter, you can see that it's a higher percentage of our total backlog. So, that should help to increase our mix of Nevada closing to start 2014.

However, one caveat I'd make is that the mix where we end up at the end of Q1 was obviously going to be impacted by how many specs we deliver and so forth. But I think that was really what was driving the change on a sequential basis. I think the other thing that I alluded to briefly was we did have a charge for some close out projects that impacted our margin by about 20 bps, as well, on a sequential basis.

That's helpful. I appreciate that. And second question, if I could squeeze a couple in, the first just the absorption pace that you had in the first half of 2013 was fairly robust, obviously a huge improvement over 2012. Do you expect to match that going forward and, number two, you mentioned that you expect the conversion backlog in the first quarter to also be elevated relative to a year ago, would it be similar to the type of -- you had about a 10-point improvement in 4Q, would it be some type of similar improvement there? So those are the two questions?

I think on the backlog conversion rate, Mike, I think the fact that we have more specs available to deliver, as well as we're further along in the construction process with some of our homes and backlog. That was the comment, that we think that we could have a higher conversion rate in Q1 as well. And I think you're right. It was about a 10-point change from Q4 to Q3 in the earlier quarters.

As far as absorption pace goes in the next year, I think we're just on the precipice of the spring selling season. We're not quite there yet, but it's hard to say whether our absorption pace will be the same as last year at this point so early in the season.

Okay, but the backlog conversion similar range to Q4 is what we're thinking?

Yes, I think that we have the ability to do better there than we have historically because of the fact we have more homes under construction, they are further along.

Okay, thank you.

You're welcome.

Our next question comes from Ivy Zelman of Zelman & Associates. Your line is now open.

Thank you, good afternoon, guys. You have a lot of new communities coming online and you have strong trajectory for 2014. Maybe you can give us some color on with respect to being confident that the supply will be met with strong demand. Is there interest lists, or anything that you can speak to, and maybe talk about some market specifics that you're excited about. And then I'll have a follow-up question, please?

Well, hi, Ivy. We have, obviously, been very active on the community front, and really where we've been investing is where we've seen better demand in primarily the West, Colorado, and we've been investing in Florida, too. I think traffic actually for the fourth quarter, traffic was the first year-over-year increase we had in traffic for all four quarters in the year of last year and I think as we move into January it's been pretty solid as well. I think if traffic is an indication of how things are going or headed, I think that's a positive sign.

In terms of markets, we've been very comfortable obviously and excited about what we've done here in our home state of Colorado. Demand was very strong earlier in the year, obviously tapered off a little bit as we got into the fourth quarter.

California has been a very market for us there. As I've mentioned, we entered some new areas in terms of maybe more coastal type areas, whether it be LA or Orange County. In Northern California we've seen pretty good absorption pace there, and the fact we did over three absorptions per community per month in the fourth quarter is pretty positive there in California. And then in Arizona we did -- go ahead.

No, you first sorry.

Yes, and I think in Arizona we also saw things pick up a little bit in terms of we've been adding communities there, and we saw our absorption pace pick up on a year-over-year basis there. And also in Florida we've seen a better pace there on a year-over-year basis if you look at our pace in those markets.

That was very helpful. I guess my second question would be just to think about the longer term opportunity with the growth that you expect on the top line, and recognizing what you have in margin right now in the backlog. You can't make a margin prediction, but if you were to assume theoretically that you were getting top-line growth and volume and you were seeing pricing, do you think margin -- gross margin should benefit and continue to increase, or is it that you're hitting a wall because lot prices are rising at a fast pace that would be mitigating any margin expansion even if you get pricing?

I think my sense of the underlying question is cost and how do we expect them to affect gross profit margins. And we've seen in pretty much every market the sellers are not quite as challenging, and the fact that we have the ability to have a opportunist view as some of the land sellers found that the other builders, some of them have a plate full and we found our own niche, Ivy, in the fact that we're looking for subdivisions that we can work through over a three-year period, and some of them take a year and a half to get open as we get into more development requirements.

We feel comfortable that the prices we're paying are competitive. We feel comfortable that we're able to focus on the gross profit margins and the market will drive it for us and others more than anything. And we're looking forward to a robust spring market and for us to be able to deliver the expectations and requirements we've put on ourselves to continuously improve execution.

Well, that's very helpful, Larry. Thank you and best wishes. Good luck.

Thank you.

Your next question comes from [Paul Freverlusky] of [ICS] Group.

Yes, this is Paul (inaudible) for Stephen East. I notice you talked about your spec count being up rather useful year-over-year. I was wondering if you could elaborate if you're going to continue to grow specs moving forward, and if there is any margin differential between specs and build-to-order?

If you look out over the last year, year and a half, we went through a period of time, maybe taking 24 months, where dirt starts you had a higher gross profit than standing specs. Then you go through the first part of last year where specs had better gross profit margins than dirt starts.

Then you look at the back half of 2013 and it's somewhat evened out, and we see that as we move to close out some of the subdivisions, then we're more aggressive in wrapping up many subdivisions that we were trying to get closed. As we start the beginning of the year, it's premature and if the first half of 2014 has any degree of being robust, then I think you can see that there will be opportunities in the specs to be a little bit more aggressive on the pricing.

On the other hand, if the first half of 2014 is like the back part of 2013, you'll see that dirt starts will probably have a better gross profit than the specs. Specs, as you can see, we have increased them. We managed the spec count on an active aggressive basis and we believe that it will be a balanced program with us between specs and dirt starts. And each of us we commented a couple words about volatility.

Those of you that are in the securities world understand volatility perhaps better than we do, but we saw over the last 18 months we had volatility in sales where we had cycles and seasons. We have now cycle seasons and volatility, so if I had insight to know about the volatility I could speak more comfortably, but since all of us -- the product or the results of volatility that takes place around us versus within our own enterprise, we take that all into account on how we run our Company. And I think that facts, as John spoke earlier in the press release, that we have positioned our liquidity to deal with volatility.

We have cash on hand and equivalent to handle our debt obligations at the end of 2014 and our debt obligations for 2015 and have liquidity available to grow the Company as the market allows. So, taking a very conservative approach. Also, as you might recall last year we were able to execute on $350 million of 30-year debt.

We've positioned, we believe, the Company for long-term unique strength within the industry by not having any short-term financial obligations that could be untimely depending on the financial volatility of the capital markets themselves, so we've tried to take that risk out of how we run our Company and continue on a conservative basis, which has served us well over the last four decades.

Okay, thank you. And I was wondering if you had any commentary as far as January demand trends and what you're also seeing from your competitors, if they are being behaved from an incentive standpoint?

I think we're all waiting for February.

Okay, thank you.

Your next question comes from Nishu Sood of Deutsche Bank. Your line is now open.

Thanks. This is Rob Hansen on for Nishu. I just wanted to ask about the capitalized interest coming through COGS and if you look this past year in 2013 it was over, a little bit over 3%. The past few years, it was around 2.6%. Where should this level be and where do you think it's going to be for 2014 and what are going to be kind of the driving factors here? Should it be more elevated because you're going to have more land development here? How will this play out?

Well, I think it's going to depend, Rob, on how quickly we invest our capital. As Larry just alluded to, we've set ourselves up from our liquidity standpoint, and we issued some more debt in January here, so there will be a period of time where we'll be carrying a little bit more debt. So that could hover in the current range where it was in Q4, perhaps a little higher.

But I think over time as we invest more money in inventory and get better absorption pace and better demand, I think you could see more leverage there in the future. And over time I think is, again, if we retire the debt and our upcoming maturities, that number could come down.

Okay, and then on the cash front. You've got plenty of cash now. You have like around $800 million and then you added this quarter the pretty large revolver or the line of credit there. So, I just wanted to see what the rationale was in terms of putting that in place, especially given that you have so much cash already?

We put the revolver in place last year.

Oh, okay.

In the fourth quarter, I believe, last year.

Right, December.

Oh, got it. Okay.

So, we added that and then the 250 10-year at 5.5%, we did that the first week of January. So, again, we repositioned -- we positioned ourselves that the obligations of the next 18 months which were the only near-term maturities that the Company has, we have those funds available and we have an adequate amount of funds to grow the Company into what we hope will be a robust market, which will then allow us to leverage our G&A and do those things that all of us are looking forward to.

Okay, thanks. And just one quick last one. On your margins, what's the delta between your higher margin communities in, say, Nevada and the lower margin ones out east?

We're not going to disclose our divisional gross margins, Rob.

Okay, thank you.

Your next question comes from Ken Zener of KeyBanc. Your line is now open.

Afternoon. Looking at your absorption pace in the fourth quarter it was absorptions per community. Historically, we estimate you've been down around 26%, that's 4Q from 3Q and you guys came in a little better than that. I don't know if it's worth commenting on.

However, when you look forward your first quarter absorption pace changed. It's historically about a mid 50%. Is that a reasonable benchmark for how you guys measure what spring demand should be in the quarter in terms of sequential gains?

Yes, I think that's in the ballpark.

And then, Larry, you talked about in terms of the question about pricing, incentives, et cetera, waiting for February. Is it reasonable to assume, or could you perhaps tell us your forward thinking about how your pricing, or perhaps inclination to do incentives, or raise prices is predicated upon that benchmark being met or not met, given that your communities, the ones that you're opening up, are newer and how you think about absorption and your willingness to change your pricing policy if that benchmark is not met?

I think that we believe we run our business very opportunistic. When there's pricing power, we don't mind being aggressive and when things slowdown, we adjust to that market. I made the comment earlier on volatility. We don't live in isolation. I almost want to tell you that we do take the temperature every day and we do. We do review the performance on more of a structured basis every single week, every subdivision.

And so we have a lot of data, and we try to use that data and our experience to be responsive to the market demand. It would be great for all of us to set benchmarks and then not adjust up or down if the market changes. And the markets have been volatile, they do change. We might be a little bit quicker on raising prices than we are adjusting incentives, but that's just human nature.

I appreciate those comments. If you could just clarify perhaps -- if I missed it, I apologize, just a forward tax rate or normalized tax rate and then the benefit you expect to get this year from interest income? Thank you.

Yes, I think on the tax rate probably it's been 38.5% - 39% probably that range gets you there for next year. Obviously there's things that will be adjusted for different state items, but for next year we will have a normal tax provision and rate. So, I think that helps you on the tax.

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

Thanks very much.

Was wondering about some of the comments you made on the spec homes. You talked about how you managed those very aggressively. And if we look at the 1400 specs at the end of the year compared to the (audio distorted) first quarter of last year, it looks as though it's relatively high level at 9.5 specs per community there.

How much of that is that you were expecting more in terms of the orders the end of last year and just didn't quite come through or sort of a real confidence and bet on demand the spring season?

I think that you couldn't build enough specs last year in the front part of the year and you're positioning yourself in the second part and you'll have the inventory available here for delivery in the first half of the year, and that would be a very good positioning. Since our backlog was down, we can mitigate the reduction of the backlog by the inventory, the spec inventory, and delivering it into what we believe will be the spring selling season.

Okay, but so I guess you'd expect and you talked about how the shift in margins over the course of the year, where first half of the year the specs had better margins than the dirt sales, and balancing over the course of the year. At this level, would you expect to see specs with a slightly lower margin and will the focus on sales -- has it been through January and the start of February here, been on selling some of the specs rather than dirt sales?

I think that I can give a better answer on the next call. Too soon to talk about it.

Thank you.

Thank you.

Your next question comes from Will Randall of Citi. Your line is now open.

Hi. Good afternoon and thank you for taking my question.

Sure.

In regards to the soon-to-be added communities, can you give us a sense of the average number of lots for those communities if possible, and is that representative of any way of how many communities you could possibly add on a gross or net basis by year end?

Yes, I think the number of lots per community has been growing over the last couple years. As we've enjoyed better absorption pace we're willing to buy more lots in a given community. So, it varies by market and location and could be anywhere from 50-60 lots a community up to 100 lots a community depending on where it's at and what the price point is.

In terms of a community count, we talked about the 155 by the end of the first quarter and we've got 23 soon to be active exceeding our soon to be inactive. So without giving full-year guidance for 2014, and there's volatility as we've discussed a number of times, we potentially could be a double digit increase by the end of the year in terms of our community count. But the caveat there is that the subdivision count can obviously be influenced by how quickly we sell these communities and other governmental approvals and things of that nature.

Thanks for that. And then in regards to the specs that was asked about earlier, I guess two points I'd love it if you could touch on. The first is if you look at the trailing 12 months in terms of closings, what percentage were specs and then with regards to the specs, what percentage are foundation versus framing for the under construction?

In terms of the deliveries that were specs versus dirts, it's about 50/50 for the fourth quarter. I don't know that I have the trailing 12 months handy here.

Oh, that's perfect.

But it gives you a sense of where we were in the fourth quarter and that is more specs than we had in the prior year. I mean the prior year the spec delivery count was (inaudible -background noise) [5%].

Great. And then the breakup between the foundations and framing?

I don't think we disclose that. We don't disclose that data, Will.

Qualitatively, is it more skewed towards foundations?

I don't have that data in front of me.

Okay, thank you very much and good luck in the spring selling season.

Thanks a lot, Will.

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

Thank you. I guess I was hoping you could address what you would consider a robust spring selling season. I guess what do you think would be the elements that would cause that because a year ago it seemed pretty robust because of 3.5% mortgages, so I'm wondering given that we don't have that, how do you think we could get to the same or better sales this year?

I think we could start off with consumer confidence and if you could help deal with the volatility in the stock market that would be helpful. If the views of Washington, of our political leadership were stabilized, hopefully the political system will work together this year to resolve some of the problems from last year.

I don't know the fall out on the emerging markets in some of the Asian markets of what's been going on and how it will really affect the United States. We need job creation. We need stability and rules and regulations in the mortgage market.

They announced a whole new group of rules to apply in January, then the new guy, the new Sheriff comes in and he says we're going to delay those rules. So, I think our industry as well as many industries, and I know the commercial banks and I believe the investment banks too, are a lot of anguish on the rules that are being created and regulations evolved. I think that we have a couple elements in the housing market that really puts us down the road in a positive basis, and that is that the standing inventory of homes is very low, that the actual sales for last year of new homes was just slightly off the bottom for less than 24 months.

If base demand is even 60% of where it used to be, maybe the new normal is going to be 600,000 sales a year instead of a million or some other number. I'm optimistic because I see as a general statement that as homes are being completed, new homes, generally they don't stay on the market very long.

So, with resales, with distressed debt, and with new homes, I think it might be the new normal, but the new normal is an environment that we expect to do very well in and to prosper and relative to market conditions. So, even though these items are not discernible, we certainly have a high level of confidence that our skills are very much in line with where the market is and where we believe it's going, which is in a positive direction.

And in terms of pricing power, a year ago it was pretty easy to raise prices because rates were still in a declining mode and then things slowed at the end of the year. So do you think the industry would have pricing power this spring selling season if the first half looks like the back half of 2013, or does it need to look more like a year ago?

I think probably pricing power is too soon to evaluate. Last year, we had more pricing power than I think anyone expected and I hate to mention it, but the Super Bowl is over. Everyone will now get back out and start buying homes again, so we'll see how things work out, especially in Colorado.

Okay, thanks.

Thank you.

Your next question comes from Buck Horne of Raymond James.

Thanks. Good afternoon. Can we talk a little bit about your finished lot position at year-end? If you could give us the numbers on where that stood and particularly in terms of just the owned finished lots in the land category on the balance sheet.

Yes, our finished lots, Buck, were about 60% of our total lots owned and controlled and that would be pretty similar on the owned versus the owned and controlled.

Okay. Does that include the work in process, would that be inclusive in that 60%?

Yes, it does.

Okay, and I guess I'm curious in terms of your land underwriting recently, you've had pretty strong ASP increases similar to other builders. The price you have in backlog is now at a Company high, but it seems like the gross margins you've been putting up just haven't really been keeping pace with the improvements the peers have seen recently.

Is that related to how you are going out and buying land? Or are there any positions that you feel like you may have overpaid for in hindsight and have you made any changes to how you under write land more recently?

No, we really haven't made changes. I mean obviously the markets moved and home pricing moved as have land prices as well. I think Larry alluded to that earlier. But in terms of our performance for new versus old communities, albeit that the new communities are still a lower percentage of our total deliveries, they've in fact done slightly better than our existing communities, so I don't think that's an issue.

I think it's just the gross margin improvement we've made over the year I think has been pretty significant. And if you look at where we're at on a year-over-year basis, and we did just have a little bit of a sequential decline in Q4, but I think we explained that. And that our backlog margins have remained relatively stable.

Well maybe said another way, what do you think is a normalized gross margin for a typical MDC community should produce?

I think it depends on whether is it a finished lot, is it development, what market is it in, whose the competition. I think there's a lot of factors that go in there, so I don't know that there's, quote unquote, a typical gross margin that you might expect. I think every deal kind of stands on its own and in each market.

Alright. Thank you.

Thank you.

Your text question comes from Eli Hackel of Goldman Sachs. Your line is now open.

Thank you, good afternoon. Just one question. It seems like you have turned the corner in terms of getting these communities open. I just want to assess the risk to your community count plan for 2014. Just going back to last quarter you mentioned you had a fitter in municipal offices. Do you still have those and are you seeing delays for approvals become lessened? Thank you.

I think each of the markets is a little different. Some of the municipalities have ramped up a little. Most of them, I don't think they really have the extra revenue that they've been able to expand. If anything, some of them have contracted their processing time, which takes a longer period to get processed. And we've seen this before in prior cycles. You need a longer cycle than 24 months for the city to rebuild their internal people, because they just let them go. And so they're slow in hiring back and so we'll do what we need to do to get to through the process. Which is, each city is different. Some places they're more receptive and some places you wonder who they work for.

Great, thank you very much.

Thank you.

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

Hi. It's actually Will Long on for Mike. Just a quick follow-up. In prior quarters you guys had disclosed a percentage of communities where you are able to raise price. In third quarter I think was 40%. I just wonder if you have comparable figure for the fourth quarter?

Yes, it's pretty similar actually with what Q3 and Q4 in terms of the number of communities where we had some pricing power and raised our prices there, and the dollar amount is, on a percentage wise, is about the same, dollar amount actually a little bit more, just because we have a higher average selling price.

You mean the percentage increase is pretty similar to the third quarter?

Yes. Yes.

Okay, great. Thank you guys.

You're welcome.

Thanks.

And we have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Thank you very much for being on the call with us today. We look forward to talking with you again after we report our first quarter earnings. Thank you.

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