Meritage Homes Corp (MTH) 2010 Q4 法說會逐字稿

Greetings and welcome to the Meritage Homes Fourth Quarter 2010 conference call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Mr. Brent Anderson, Vice President of Investor Relations for Meritage Homes. Thank you sir, you may begin.

Thank you, Diego.Good morning, everyone. I'd like to welcome you to the Meritage Homes fourth quarter 2010 earnings call and webcast. Our quarter ended on December 31, and we issued a press release with our results for the quarter and full year of 2010 after the market closed yesterday. If you need a copy of the release or the slides that accompany our web cast, you can find them on our web site at investors.meritagehomes.com, or by selecting the Investors link at the top of our home page.

Please refer to slide two of our presentation. Our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions. Our actual results may be materially different than our expectations due to various risk factors.

For information regarding these risk factors, please see our press release and our most recent filings with the Securitys and Exchange Commission, specifically our 2009 annual report on Form 10-K and our most recent quarterly report on form 10-Q. We plan to file our 10-K for 2010 within a few weeks.

Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. To comply with SEC rules, we have provided a reconciliation of these non-GAAP financial measures in our earnings press release.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, our Executive Vice President and CFO. We expect our call to run about an hour this morning and a replay of this call should be available on our web site within an hour or so after we conclude the call. It will remain active for 30 days.

I'll now turn it over for Mr. Hilton to review our fourth quarter results. Steve.

Thank you, Brent. I'd like to welcome everyone to our call today, and begin with a few highlights of our fourth quarter and full-year results, on slide four.

First and foremost, I'm pleased that we achieved our number one goal for 2010, which was to be profitable for the year. We returned a profitability in the first quarter of 2010 and generated net income of $7 million, or $0.22 per diluted share for the year, compared to a net loss of $66 million, or $2.12 per diluted share in 2009, despite the fact that our closing revenue was slightly lower in 2010. Our profitability was primarily driven by lower impairments, improved margins and continuing to hold down overhead expenses. Gross profit, pre-tax profit and net income all increased significantly over 2009, excluding impairments and even more dramatically including impairments which reduced profits by $7 million in 2010, compared to $129 million in 2009.

Our adjusted gross margin for the full year excluding impairments improved by more than 500 basis points from 13.4% in 2009 to 18.5% in 2010. Even though market conditions were weak and competition was intense, our fourth quarter gross margin increased to 18.1% in 2010 from 14.6% in 2009, once again, excluding impairments in both years.

We achieved those gains by reducing both our lot and construction cost, while our average prices were up 7%. The increase in our ASPs reflected a shift in our mix of communities, rather than price increases on our homes. More of our closings in 2010 were in higher priced communities. The margin improvement was especially evident in our new communities open since 2009, which Larry will address in more detail later.

Now let's review our fourth quarter results, on slide six. Our fourth quarter home closing revenue declined 23% year over year. We closed 30% fewer homes than in 2009, partially offset by a 10% higher average closing price. The average price increased to approximately $256,000 in the fourth quarter of 2010 from approximately $233,000 in the fourth quarter of 2009, reflecting a greater percentage of closings from move-up communities, and a mix shift from Texas to Meritage's higher-priced markets like California, Colorado, and Florida.

Due mainly to improved margins and reduced overhead expenses, we reduced our pre-tax loss, excluding impairments and losses or gains on extinguisher of debt, to $311,000 in the fourth quarter of 2010, from $8.3 million in 2009. We report a net loss of $895,000, or $0.3 per diluted share in the fourth quarter of 2010 which included a net tax benefit of $5 million. By comparison, our net income in the fourth quarter of 2009 was $43 million, or a $1.35 per diluted share which included a net tax benefit of $90 million, or $2.82 per diluted share.

Turning to slide eight, We sold 713 homes in the fourth quarter of 2010, 15% more than we did in the prior year. Fourth quarter sales were also up sequentially over our third quarter of 2010, which is contrary to normal seasonality for the industry and may bode well for the spring selling season. The largest increases were in Texas, with a 20% year over year growth, and Colorado with a 73% growth. In addition, we increased total sales despite having fewer active communities in 2010, than we had a year ago.

Sales per community increased 21% in the fourth quarter to 4.7%, from 3.9% in 2009. Our cancellation rate fell to 23% in the fourth quarter from 30% in 2009. Since the first half of 2010 benefited from the home buyer tax credit, our year over year sales comparisons were more difficult for the first quarter 2011.

Slide eight. Our conversion rate reached a record high 93% in the fourth quarter of 2010, as we started the quarter with 902 homes in backlog and closed a total of 837 homes during the quarter. Half of the homes we closed were not in our beginning backlog, but sold from spec inventory. Our conversion rates have been running higher in the last several quarters reflecting the success of our strategy to have spec homes available for those buyers who want to move in quickly, which helps us to compete better with re-sales, and due to the fact we've shortened cycle times in support of our 99-day guarantee delivery program, offered in the majority of our communities.

As a result of the higher conversion rate, our backlog was reduced to 201 million, which will make it more difficult to generate enough revenue to be profitable in the first quarter of 2011. We expect to see continued improvement in the general economy, job growth and consumer confidence as the year progresses, and therefore expect the back half of 2011 to be generally better than the first half. Taking all of that into consideration, we expect to be more profitable in 2011 than we were in 2010, but our earnings may be more back-end loaded.

Slide nine. Larry will cover some other financial details in a few minutes. Before I turn it over to him, I want to update you on the progress of our Meritage Green, our strategic initiative to lead the industry by building and marketing every home to much higher standards of energy efficiency than required by today's residential construction code. The reason this is so important to us, strategically and financially, is because it differentiates us from used and other new homes by offering buyers a way to save significantly on their energy bills, without paying extra for energy efficient features.

Home buyers simply won't find these features in a used home or most new homes, nor be able to retrofit for any reasonable cost of an existing home. Our high energy efficient homes are selling well, and in most cases are out-pacing our older communities, as well as our competitors and neighboring communities. We believe this is right way to build homes; better for the homeowner, better for our country and better for our environment.

We've taken a unique approach by incorporating many of the most advanced, proven energy-saving technologies available today in every home we build, rather than offering them as optional features that cost extra for the home buyer. We exceeded Energy Star standards in all home started after January 1, 2010. Those homes achieved at least a 15% to 20% energy savings over a typical new home built at code, and 40% better than the average used home. All of our communities incorporate this first generation of Meritage Green features at a minimum.

We've gone well beyond that in our enhanced generations of Meritage Green homes, which include all the feature in our Energy Star homes, plus some significant additional features. Our second generation of Meritage Green, which we currently are building in the majority of our markets, includes foam insulation in all walls and the roof, plus an advanced water-sense irrigation system. The spray foam insulation seals the entire envelope of the home from fluctuating outside temperatures, dirt, dust, allergens and noise, and is the most significant component to achieving that additional level of energy savings. These homes are 50% more energy efficient than a new code-built home, consuming 60% to 70% less energy, water, natural gas, than an average used home. We expect to be building homes to this standard in 75 to 100 communities by year end 2011.

Our most advanced generation of Meritage Green homes includes the state of the art, thermal electric solar system which we offer in 17 of our communities today. We refer to them as Extreme Energy Efficient homes as they consume only 30% as much energy as most new homes, or 20% as much as typical existing homes. It can save our homeowners hundreds of thousands, hundreds or even thousands of dollars, in energy used per year.

We're also working with other home builders, our partners and legislatures to ensure that appraisals reflect the higher value of our Green Homes, and also the lenders take energy savings into account and their calculations for mortgage qualifications.

I encourage you to visit our web site, or one of our new communities, to see them for yourself. We'll be showcasing one of our extreme energy efficient communities in Phoenix later this month during our analyst day event. In addition to our Meritage Green initiative, we've continued to achieve success with our Simply Smart series of homes for the value-conscious buyer, and our 99-day guarantee completion in many of our communities. Both of those will help us compete most effectively with other new and existing homes, and contribute significantly to our overall results in 2010.

Now I'll turn it over to Larry to review some of our additional details with you. Larry.

Thanks, Steve. Turn to slide ten, please.

Our gross profit margins improved significantly year over year for the fourth quarter as Steve noted. They have been relatively flat over the last three quarters, running in the 18 to 18.5% range due to market conditions, and our strategy to push on selling out of our older communities, as we opened new communities in those markets. In addition, market conditions have continued to be challenging, following the expiration of the home buyer tax credit in second quarter of 2010, which has put pressure on home prices and margins, particularly in some of our older communities.

These factors could temper the margin improvement we would otherwise expect to see as more of our closings come from our new, higher-margin communities. Margins in our new communities are running 500 to 600 basis points higher on average than those in our older communities. Their superior performance is due generally to better locations with higher demand, less inventory for sale, fewer foreclosures and more stable prices. The new communities that we opened since the beginning of 2009 accounted for 38% of our closings and sales in the fourth quarter of 2010, and we are projecting our new communities will account for approximately 60% of our total closings by the end of 2011.

Slide 11. Our general administrative expenses for the fourth quarter were 28% lower for the same quarter 2009, representing 5.9% of 2010 fourth quarter revenue, compared to 6.1% of revenue in 2009. The decline from last year's fourth quarter was largely due to certain accruals for lease abandonment charges and discretionary awards, that did not re-occur in the fourth quarter of 2010. Excluding those items, G&A was flat year over year.

Commissions on our sales cost were down 20% year over year, generally in line with a decrease in our closing revenue. We've been diligent in controlling our overhead costs as our sales and revenues have declined, and our goal is to get general administrative expenses back down to a more normalized 5% of revenue.

Slide 12. Turning to the balance sheet, we entered the year with $413 million in total cash and securities, an increase of $21 million from December 31, 2009. Our book value increased from $485 million at the end of 2009 to $500 million at the end of 2010. As a result of both these factors, we reduced our net debt to capital ratio to 28%, from 31% year over year. I'll also note that we have no debt maturities until 2015.

Slide 13. We were successful in finding and acquiring well-located lots at good prices during the year. We increased our lot position in 2010, investing in new communities and extending some existing communities. We entered into 81 contracts to purchase our option approximately 6800 lots including 63 new communities during 2010. That brings our total for the last two years to over 10,700 lots from 132 contracts.

At December 31, 2010 we controlled the lots for 38 new communities that have not yet been opened. We may see a short term decline in our community count in the first quarter or two of 2010 as we continue to proactively close out of older communities with lower margins a bit faster than newer communities with more normal margins come on line. We plan to buy lots for at least 80 new communities this year which will replace communities has a close-out, and should add to our total community count later in 2011 and more so in 2012.

Slide 14. We use $236 million of cash to close on approximately 5800 lots, either new or existing purchase contracts and option contracts, during 2010. At year-end, we had 15,224 total lots representing approximately 4.1 years, lots under control based on trailing 12 months of closings. Of that total, 85% were owned and 15% were optioned. 56% of our total lots in inventory have been purchased or put under contract since the beginning of 2009. We had a total of 12,906 lots, or 3.2 years lot supply, at December 31, 2009.

I'll now turn it back over to Steve.

Thank you, Larry. 2010 was another challenging year for home builders and new home sales reached new low points for the country in many decades. Considering that difficult environment, I feel energized by the significant objectives we accomplished over the last year. It was gratifying to return to profitability in 2010 which I believe was a direct result of successfully executing our strategies.

We drastically reduced our lot and construction cost over the last few years, carefully controlled our overhead costs, repositioned our communities to address each of our markets opportunistically, redesigned our homes to be more efficient and appealing, and emerged as a leader in the profitable energy efficient home building sector. I believe Meritage is in the best shape it's ever been in; stronger, leaner, faster and even more nimble than ever before, and we're poised to take advantage of the opportunities to grow and increase our profitability as the market recovers. I'm confident in our strategies and our organization, and optimistic about our prospects for the coming year.

Thank you for your attention and we'll now open it up for questions. Operator will remind you of the instructions. Thank you.

Thank you. We will now be conducting the question-and-answer session.(Operator Instructions)Our first question comes from Ivy Zelman with Zelman and Associates. Please state your question.

Thank you. Good morning. Congratulations on the quarter. You are the only builder that has surprised us with positive order trend so far, which is a nice change and I can ask you lots of questions about that.

But I just wanted the more impressive things you're able to do this quarter as well is improve your G&A expenses with sequential decline at 12.7 versus the 15.7 and just kind of maybe, Larry, just talk about the run rate, I know you said you'd like to get G&A to 5% vs 5.6%, but for modeling purposes, should we be assuming that's the new run rate?

And then just secondly, if you wanted to talk about the success you're having with orders and some of the new communities that you bring online.I know in Orlando you had a really great community that our group got to see. With respect to what's happening with the premium of that product relative to the competition, pricing wise, is it premium let's say within 10% to 15% versus existing homes, and what is the price differential that will enable you to still sell successively.

And then just lastly, what's happening with traffic in January and this concern about higher interest rates? So lots of questions. I have more but I'm trying to constrain myself.

Ivy, I'll quickly answer the first one and let Steve try to take the second two. As we said that last year's fourth quarter had some kind of non-recurring items in it, so I think this year's fourth quarter is more of a good number to extrapolate from.

All right. Thanks.

I'll take the second question, last question first, regarding January.Actually we're quite pleased with our January results for two reasons; number one, they slightly exceeded our own internal estimates for the month, and number two, it was our best selling month since the tax credit expired, excepting for one month last year which was October. So on a net orders basis, we exceeded every month last year except for October and albeit not by a wide margin, but sales have steadily increased for us the last three months and we're pretty excited about that. It bodes well for a better Spring selling season than maybe some of us expected a few months ago.

That's good.

With respect to our new communities and positioning of those, we've had a lot of success buying really well located, desirable lots at deeply discounted prices. We've coupled that, those lots, with a very value-oriented product, even at larger square footages that you may have seen in Orlando, where we're offering tremendous value to customers. And we believe if we can be within the 10% to 15% of resale housing prices in those great areas, we're going to have great success, on the sales front and Orlando happens to be one of our best examples of great execution of that strategy.

So, we're going to continue to do that, although it's going to get tougher and tougher to find high quality lots in a location that are finished, but we believe we can develop property now in some central locations and achieve some of the same results.

Steve, that's great news. I guess lastly, a lot of concern with interest rates moving up and what the impact could be on your sales.What are the consumers that are buying or not buying saying about the fear of rates rising?

I don't think the rates rising has sent a negative impact on us yet, actually it may, in the short term, have a positive impact and may get some people off the fence. I think there's a lot of people out there that don't want to lose the opportunity to buy homes at record low prices with record low rates. Rates are still, you know, very low. And so I can't say that the rates have really hurt us negatively yet.

Great.Well, congratulations on the quarter, guys.Thank you.

Our next question comes from Michael Rienhart with JP Morgan. Please state your question.

Thanks. Good morning, everyone. First question just on your comments around 2011, hopefully being a more profitable year than 2010. I just wanted to drive down a little bit into what you think -- how you think about that in terms of driving that. Do you think that over all, it will be a little bit from either gross margin expansion or top line driven, G&A also or is that kind of just a combination of all three?

I think, really think it's going to be a combination of all three. As we get into new communities, obviously the margins are better, obviously the absorption rates are going to be better, so we're going to be able to leverage our overhead, and so grow our revenues somewhat and grow our margins and leverage the overhead should all result, a better bottom line for 2011.

If I could add, I would say, probably the more significant is marketing expansion through the year. I think we'll have some of the other two occur, but I think, it will be more for margin improvement.

Great. Appreciate that, Larry.

Second question, on the community count, you said you expect it to dip a little bit in the first quarter as some older ones to close out. Can you review with us where you think communities will end roughly speaking for 2011 and also, you know, perhaps even 2012.

I don't want to give a forecast for 2012, but maybe up around 10% for 11.

Okay. And just following on that in terms of the -- and then I'll get back in queue, you know, the gross margins looking for some expansion there, you talked about getting closings from new communities up to 60% by the end of the year. I assume given that you did 38% for fiscal 10, 60% of that year end so maybe you're talking about an average for 2011 around the 50% mark. Is that fair, or -- ?

Larry.

What was that question. I didn't quite understand it.

Well, you said that closings from new communities would be about 60% of closings from new communities by year end 2011. I was just trying to get a sense for the average of 2011 if you ended fiscal 10 around 38-40% I assume, so, you know --

I don't have a specific average but I would think it's around 50%. I haven't taken an average of the four quarter projection, but it's around that.

Okay. Great, thanks.

Thanks, Michael.

Thank you, our next question comes from Jade Rahmani with KBW. Please state your question.

Yes, hi. Thanks for taking the question and good morning.

I wanted to ask about the order trend mix in new versus old communities. I think you said new communes were 38% of orders, which I think was down from 44% last quarter. Can you give any color on community close outs in the quarter and if more spec sales are coming from older communities, and how you expect -- ?

That's a good point you make and, you know, observant on your part. We are -- one of the reasons why our community count is not growing like maybe some other builders are, is because we're making an effort to rotate out of the old and get into the new. So we are probably a little more aggressive with our pricing on our older communities which is to some degree impacting our margins.

We did close out quite a few older communities in the quarter. I can't give you a specific number but I can tell you we have a real effort in that area, particularly in Texas to -- because the downturn of the market hit Texas later. We've got a real effort to rotate out of those older, less performing assets in that market and some of our impairments were specifically in those communities as well. And we've also been able to reduce our spec count at year end by rotating out of some of those older communities.

And our percentage of sales of new communities has been running ahead of closings from new communities because of the lag effect, and those two numbers wound up being the same percentage this quarter again because we were pushing sales from older communities. So we had a little bit of a an evening out there, but over the next couple of quarters we would think that that's going to pick back up and start to continue to grow as a percentage, so our new community count by the end of the fourth quarter will be in that 60% range, we believe.

Okay. Thanks, that's very helpful. And then a follow up just on Texas, can you talk about underlying trends you're seeing, given the year over year growth you noted in your sales pace and just how you expect your 2011 mix geographically to play out. Thanks very much.

I think our 2011 mix will probably be somewhat in line with what we did in the fourth quarter and we expect Texas to continue to perform well and improve as we rotate into more newer communities. We had a very good month in Texas in January and we expect to be able to continue with that. You want to add anything on to that, Larry.

I will say that our community count in Texas has decreased over the last several quarters, but the last two quarters it's kind of stabilized around 80. So, I think that you may see some modest decrease in that. But again we're kind of at the bottom of the community count trend in Texas and we would start to see improvement in community count growth over the next few quarters.

Next question operator.

Thank you. Our next question comes from Josh Levin with Citi.Please state your question.

Good morning.

Good morning.

You said that you're getting 500 to 600 basis points of incremental margin on your new communities. How much incremental margin do you think you can get on land that you can buy in today's market?

Well, that's what we're -- that's what's going to generate the 500 to 600 basis point is the land, that we're buying in today's market.

Oh, so it's not legacy land, it's stuff you can buy today?

Yes, well new community is defined for us something we bought since the beginning of 2009 through today. So, certainly prices, lot prices have increased somewhat since the beginning of 2009, but on average all of those acquisitions have resulted in communities delivering 500 to 600 bases points higher gross margins than -- or net margins, than our legacy communities.

Okay. And how do you think raw material costs are going to impact gross margin in the near term.

I do think raw materials are going to go up. But I think -- I expect they're going to track with house prices and I'm not buying into the fact that raw materials are going to out-price home prices at this low volume levels.

Thank you, very much.

Thanks.

Our next question comes from David Goldberg with UBS. Please state your question.

Thanks, 'morning, everybody.First question, it was on -- as you look forward to the target of trying to be more profitable in 11 versus 10. I just want to get an idea of what the assumption is either, I guess from a pricing perspective or an incentive perspective, for homes that you deliver in the coming year.

I would assume it's probably flat from where we are now, but I just want to get an idea if there's any kind of way that you are going to lower incentives in the back half of the year, because we do have a little easier comps and maybe even commands can a little bit stronger .

Maybe I don't quite get your question, but I don't believe we have in our plan that we're going to, or we're thinking that we are going to lower incentives throughout the year. We just think that as more of our new communities come online, that's going to drive our top line and our bottom line and we, see the economy getting better. The first month of the year, although it doesn't make a trend, it gives us confidence that we're going to see some positive momentum in 2011, although it's nothing extraordinary, it's going in the right direction.

Yeah, I would say it's primarily the new subdivisions that are coming on or the old subdivisions going away. Obviously we think the first quarter is going to be a little more difficult because of the lower backlog and working through some of the older inventory. But as that happens, we should see margins improve, and on top of that, we do expect the comps and business to get better throughout the year, although that's not the primary driver of our improvement.

Got it. And then just my second question, was on the cancellations that you saw in the quarter, can you just talk about, you know, what were the most common reasons cited for cancellation. Was it an inability to qualify for mortgages, was that kind of one of the big reasons which compares to a lot of builders, and where were the homes?Have they canceled relative to bill cycle, were they, was it stuff that was spec homes that you had built that had someone cancel or was it kind of (audio difficulties), just trying to get an idea?

Most of our cancellations, as always, happen within the first 30 days, whether they're -- it's on a to be built home or whether it's on a spec home. Obviously, about half the homes we're selling are specs. You know, we're getting cancellations on specs that we sold just as much as we are on to be built homes. I don't think there was any significant change this quarter as to why people were cancelling.They cancel for a lot of reasons; can't qualify, didn't give us all the information when they originally qualified, new information came out, they get buyer's remorse, they lose their job, they find something better that they like, for all of the above, but I don't think anything really changed in this last quarter at least for us than in previous quarters.

Just to make sure I understand, what's the average time between the sell of the spec and the closing, in other words where is the spec in the process when you sale?Is it a finished home, is it relatively short?

About half our homes are either finished or near finish and the other half are somewhere in the construction process. So generally if we sell a spec, we can deliver it within 45 days, in some cases as low as 30, in some cases might be 60. Generally people that are buying a spec home want to move in within one to two months.

Got it. Perfect. Thank you.

Next question, operator.

Next we have Steven East with Ticonderoga Securities. Please state your question.

Thank you. Good morning, guys. Just to follow up a little bit on David's question on specs. Is the spec strategy that you had in the quarter, is that something that you want to keep in place as you move through 2011 or should we expect your spec strategy to really drop back to where it used to be?

I think it's going to be this way for the foreseeable future. We've been selling 40% to 50% of our -- 40% to [58%] of our sales for the last several quarters have been specs. That's just the environment that we're in today. People don't want to commit to buying the new home until they sell their existing home, and a lot of our buyers today are renters, even at higher price points.

So we need to have inventory available for them and that's just part of the new market paradigm. Is it going to be that way in 12 or 13? I don't know, but I think for 11 we're going to continue to see that type of environment.

Okay . And then talking a little bit back on Texas, you went through several reasons why you thought it was up, etc. How sustainable do you think that is? I mean, you were trying to get out of some communities etc., and aggressively selling specs. Is this a rate that you think you can sustain and accelerate as we go into the spring selling season, and then your pricing also went down in the quarter, is that just a product mix or is that a conscious effort to move product a little bit

Well, I think Texas is sustainable because we've done several things internally to better execute on our strategy, and we believe those internal initiatives are going to pay dividends, and we expect Texas to have a much better year in 2011 than they did in 2010, and what was the second part of your question, Steve?

Just on the pricing, it did go down both sequentially and year over year. Is that just a, you know, is that a mix shift with product or are you all consciously making a decision to lower the pricing to move more volume?

I think across the board pricing of all product declined in the fourth quarter, in the third into the fourth quarter, 2 or 3%. But I believe that we put the gas pedal down a little bit harder to move out some older inventory and to rotate from some older communities into some newer communities, and people recognized that and that's, to some degree, is why our sales are maybe a little bit better than some of our competitors in the fourth quarter and -- but we expect to be able to maintain margin, improve margin, and have a positive trend in our sales curve into 11.

Sure. If I can sneak in one more. Are you changing your mix, you know, you went heavily to entry level during the downturn. Are you moving back up and then, also, if you look at your energy efficient homes, you talked about the absorption rate's faster. Can you give us some type of magnitude of that?

I think the bottom line is we're just trying to be opportunistic. If we find opportunities we can create tremendous values for customers, even at higher price points, we're going to seize the day on that and on the flip side we're going to be mindful of trying to keep product available for entry level home buyers who want to get in the house today and have been renting for quite some time. So, I think we're just going to continue to be opportunistic and try to execute on both fronts.

Okay. And then on the absorption rates on the energy efficient versus your traditional?

Well, no doubt about the energy efficient homes have a higher absorption rate than the non-energy efficient homes. As we open more of our next generation, foam insulation homes throughout the remainder of the year, we think those will out perform the conventional communities, and we're going to put a lot of energy and effort behind the whole energy efficient movement strategy in our company this year, and we expect it to pay dividends.

All right. Thanks.

Okay . Next question,

Thank you. Next we have Nishu Sood with Deutsche Bank. Please state your question.

Thanks, I wanted to return to the topic of community count. You've done a good job of explaining how you're being more active in closing our your older communities, in terms of your aggression and in terms of opening new communities. I mean, I look at the situation you have, you obviously, you delivered on your goal of being profitable in 2010, you know, you took out costs in 2010 as well.

You have obviously had stronger order trends, and it appears a good January and now we're heading into the spring selling season. So I'm a bit -- I would think in that type of situation would dictate you'd be a little more aggressive on opening new communities and maybe even net, net having community growth.

I wanted to dig into, what's the limiter there? Are you waiting for demand to pick up more substantially? Is it the lack of availability of the source of opportunities? What's limiting you, perhaps, from growing communities faster.

I don't think there's a limiter. I think we're projecting to find 80 to 100 new communities this year. We're only in 12 markets, and obviously our active adult in Las Vegas business is not growing. Those markets are very slow, so we're really only buying in 10 markets.

So, a lot of the buys that we made earlier on in 2009 were relatively small in size. The community, the lot counts are 30, 40, 50, 60, 70 lot communities and we've burned through some of those. We've rotated out of them already and there's, nothings really holding us back other than our ability to source new deals that meet our margin requirements. We may enter a new market or two some time this year that will help us push that community count number forward, but I don't think there's a conscious effort here to slow down community count growth.

Got it. So, would you in terms of -- kind of being able to pick up the pace when we talked about expanding into new markets. I mean, would you staff up on the land purchase side?What are some of the other things you could consider?

Just new markets and I don't think we need a step up on the land side. I think we've got great land acquisition and development people in all of our markets, and we're a top five builder now in most markets that we're in. We're seeing the best deals and we're just going to be disciplined in our underwriting standards and be focused on quality as much as quantity. I think we have a tremendous opportunity on the absorption rates as much as we do on the absorption per community as we do on community count growth itself.

Got it. Second question I wanted to ask was your 99-day delivery cycle has obviously served you very well through this kind of low period, you know, this low point for the housing cycle. How is that going to hold up as the market begins to recover and there begins to be some more demand generally on the, you know, the kind of insulation, base out there and materials as well?

I think there's tremendous excess capacity in the residential construction industry. I think the unemployment rate has got to be somewhere around 30% for residential construction, so I think we have a long way to go before we have to worry about significant price increases, labor shortages.I think we've done a lot internally to be smarter and better about how we build our homes and execute, so I don't expect it as the market improves that we're going to have to abandon our quick delivery program, and I think it needs to be a big part of our strategy going forward for a long period of time.

Okay. Thanks a lot.

Thank you.

Our next question comes from Carl Reichardt with Wells Fargo Securities. Please state your question.

Good morning it's actually Adam Rudiger, on for Carl. Most of my questions have been answered but I have a couple follow ups on some of the others that have been asked. On the mix, I think last quarter you said that you saw an increase in move up and that explained some of the higher closing price last quarter. I was wondering how that trended this quarter and how you expect that to look in 2011 and what potential impact that would have on closing price?

Larry, why don't you take that one.

I do think you'll see us continue to focus on our new communities in areas where it's more of an infill. Our market research has led us there thinking that there's less competition, less foreclosures, better price stability. So, I do think you'll continue to see some price increases throughout 2011. We obviously last quarter, too, had a couple of larger jumps in the average price. I don't think you'll see large jumps. I think you'll see gradual jumps over the next few quarters.

Okay. And then follow up on that 99-day guarantee. Can you quantify the success you've had there in terms of, you know, what percentage of say guarantees you make you have been able to satisfy.

Very high, probably higher than 95%.

Great. Thank you. That's all I had.

Mr. Hilton would you like to take a few additional questions.

Yes, we'll take two more.

Thank you.Next we have Dan Oppenheim with Credit Suisse.Please state your question.

Morning, it's actually [Mike Dahl], on for Dan.I have a follow-up question on margins, looking for some clarification. It sounds like, given the pricing pressure you've talked about and the unfavorable mix near-term, that we could actually see margins lower a bit sequentially at least in the first quarter or two. It seems like it would make it tough to see us get a full year 2011 margin so much higher than the 18.5% we saw this year. Can you give us any color on that?

Larry, go ahead.

Sure, I don't know if I'll sign on for lower margins in the first quarter. Certainly our backlog has some of those older communities or greater percentage of older communities with lower margins in it. So it's possible it could be a bit lower.

But on the other hand, we do expect to see more new communities come online, the 38 we talked about, and that should start to drive our closing percentage of new communities up. So by the time we get to the end of the 2011, we should be seeing pretty darn good improvements in margin. So we do think for the full year we will see pretty good increases in margins on average.

Okay. Great. And that leads into the next question where -- appreciate the color on the land purchases and you guys have certainly done a great job in refreshing the pipeline over the past year or two. Can you talk about what you're looking at in terms of kind of the mix between developed and undeveloped as you look out to your 2011 purchases and start to think about building a pipeline for a couple of years out here?

I can't give you a percentage between finish lots and developed lots but I can tell you, we're still buying majority of our lots finished. I'd say a year ago it was almost all finished lots that we were buying, but today we are buying some lots to develop an that percentage is increasing. So the time to bring new communities on-line is taking longer because we're having to improve and develop the lots in some cases so, I see the percentage of lots that we're going to have to develop increasing over time and finding fewer and fewer finished lot opportunities.

Great, thanks.

Last question, operator.

Thank you, our final question comes from Joshua Pollard with Goldman Sachs. Please state your question.

Thanks for sneaking me in. First question. At what point or is there any point in 2011 where you'd see the difference between your margins on new and old community converge, either because your margins on older communities get better with some of the better absorptions you guys are talking about, or possibly because you see margins come in as availability of some of the underwriting lots that you guys are seeing so far comes in. Is there any point at which you would expect to a convergance?

Josh, I don't think that ever happens. I don't think there's actually a way for that to happen because lot prices aren't going to go up or at least we're not going to pay more for lot prices that we'll bring them up to what we have older lots on our books for. And, you know, prices go up across the board, they're going to go up for new communities just as much they're going to go up for old communities. I just don't see where those two are ever going to intersect, especially not in 2011 but even beyond. I don't see it happening.

Josh, what I would think, we've been tracking this for four or five quarters now, five or six quarters, and that 500 to 600 spread has remained very consistent, and I think what will happen is the percentage of old communities, at least for us, will become so small over the next year or two, the topic will just, we'll just cease to talk about it because it will become irrelevant. So, I think that's the more relevant question is, in the next year or year and a half, the deliveries will be so great from our new communities, we'll just forget about talking about the old ones.

Got it. And then could you talk just, with a little bit more detail about your Texas strategy? Did you guys drop prices in order to move those homes very quickly, or did you take write downs and lift them off all those communities?

Well, we did the combination of things. Number one, we had some specs that, you know, that we wanted to get rid of so we wanted to shrink our spec counts so we reduce some prices, which affected our margins there.Didn't necessarily boost our sales that much, but it increased our mix between new built and specs, and we exited a few old options that we just could not get to perform to the standards that we wanted to, and we took some write downs, part of those $5 million of write downs in the fourth quarter, to better position ourself for 2011.

And then I guess the last question, you know, folks have stopped talking about differentiated business models or ancillary businesses to home building since the chatter had died down a little bit. But what are your most recent thoughts on things like buying some of the commercial mortgage space, the rental space, just some of the different ideas that were tossed around a year, maybe year and a half ago, when housing looked at its bleakest. Are any of those still on the table for Meritage?

No, they never were and they never probably never will be. We really see ourself as a pure merchant home builder. We still think we have a lot of opportunity to grow in our business that we're in and that's where our strength is, that's where our skill set and knowledge is. We want to continue to grow in the markets that we're in and enter new markets in 2011 and beyond.

So, some of those other businesses look interesting, but really, we don't know that much about them and I'm not confident that we can become experts on other businesses. I've been in this business for 25 years and I'm still learning things every day, so, we'll just keep building houses.

Well Steve, Larry and Brent, I appreciate it. Take care guys.

Okay, thank you, Josh.

I want to thank everybody for participating on the call today. I want to encourage you to participate in or analyst day, our first ever analyst day, on February 23rd. We're going to give people a deep dive into our strategic market research, what we're doing in that area, and in our Meritage Green initiative, and tour some exciting extreme energy efficient homes here in the Phoenix area. So, I encourage you to contact our VP of Investor Relations, Brent Anderson, in that regards. Thank you, we look forward talking to you next quarter. Good day.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.