Meritage Homes Corp (MTH) 2011 Q4 法說會逐字稿

Good morning, and welcome to the Meritage Homes fourth quarter 2011 earnings conference call. All participants will be in listen only mode. (Operator instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson, please go ahead.

Thank you, Valerie. Good morning, everyone. I would like to welcome you to the Meritage Homes fourth quarter 2011 earnings call and webcast. Our quarter ended December 31, and we issued a press release this morning with our results for the quarter and the full year. If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com or by selecting the Investor's link at the top of our home page.

Let's go it slide 2. 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. Additionally, our actual results may be materially different than our expectations, due to various risk factors. For information regarding those risk factors, please see our press release and our most recent filings with the Securities and Exchange Commission, specifically, our 2010 annual report on Form 10-K and subsequent quarterly reports on Forms 10-Q. Today's presentation also contains certain non-GAAP financial measures as defined by the SEC. So, to comply with SEC rules, we have provide a reconciliation of those non-GAAP measures in our earnings release.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, our Executive VP and Corporate CFO. We expect our call to run about an hour this morning, and a replay will be available on our website within about an hour after we conclude the call. It will remain active for 30 days. I would now like to turn the call over to Steve Hilton. Steve?

Thank you, Brent. I'd like to welcome everyone to our call today. I'll begin by reviewing some highlights of our fourth quarter and the full year before turning it over to Larry for some additional financial results and color. 2011 marked the sixth year since the housing downturn began, and we have finally seen some positive trends begin to develop for housing and home building markets over the last several months which seem to be pointing towards a better 2012. We agree with the general view that 2012 will be better than 2011, and certainly believe that to be true for Meritage. Though we also believe the recovery will be generally modest with varying results between markets and home builders, especially in year over year or quarter to quarter comparisons.

Let's begin on slide 4. We finished 2011 on a positive note, posting year over year gains in our fourth quarter closings, revenue, sales, backlog, home closing gross margins and our total number of active communities. Closings were up 7% and home closing revenue was up 14%. Sales were up 5% in units and 18% in total revenue. Backlog was up 18% and 23% in value. Home closing gross margins were up 70 basis points before impairments. Our net loss for the quarter was attributable to impairments primarily related to our decision to wind down our Las Vegas operations which we announced on December 2. Excluding impairments, we made a little over $2 million for the quarter.

Slide 5. This was our third consecutive quarter of year over year increases in sales. It was also our second year to achieve an increase in fourth quarter sales. As you will recall, we were the only public builder to report sales gains in the fourth quarter of 2010. We were up 15% over 2009 while the rest of the group was down an average of 19%. That made for a tougher year over year comparison for us in the fourth quarter of 2011, but our two year increase is still at the top of the group. Our sales increased 21% from fourth quarter of 2009 to the fourth quarter of 2011. The average of the other five builders have reported fourth quarter 2011 sales so far is at 3% increase in sales from fourth quarter 2009 to fourth quarter 2011. Our fourth quarter 2011 total order value increased 18% over 2010 as a result of 5% more homes sold, combined with a 13% increase in average selling prices. We ended the year with 157 actively selling communities, up from 151 at the end of 2010. We also achieved a modest increase in our average sales per community for the quarter.

Slide 6. Part of the increase in our community count included our first three communities in Raleigh which we opened in the fourth quarter of 2011. Those three communities produced 24 home sales in the fourth quarter, supporting our decision to redeploy assets from struggling markets like Las Vegas into promising new growth markets in the southeast like Raleigh and Tampa. We plan to open several new communities in Raleigh this year and to continue to explore expansion opportunities in the southeastern states.

We also -- I also review our fourth quarter performance in each of our markets from top to bottom. Beginning with Florida, orders were up 80%, and average active communities were up 55%. When combined with a 4% increase in ASP, total order value increased 87%. Florida has been one of our top two markets all year long and has been leading in sales per community for the last four quarters. We are leveraging our management team here to expand our presence in new markets in the southeast.

California. Orders were up 62% on a 56% community growth. ASPs were also up 4%, so total order value in California increased 69% over 2010. Since our results in California haven't lived up to our internal expectations for the year, these positive fourth quarter results were more encouraging, and we expect more improvements there in 2012.

Arizona posted an 8% increase in sales on a 16% increase in communities, a 10% increase in ASPs yielded a 19% increase in Arizona's total order value. We have been taking market share in Arizona and are now the third largest builder in the state. Our sales in Texas were 15% lower than the previous year due to 20% fewer active communities. ASPs in Texas also increased 8%, offsetting some of the decline in unit volume, so total order value there was off only 8%. We worked a great deal on repositioning our communities and product offerings in Texas during 2011and are confident in our new land positions and some new additions to our management team there. Colorado has been one of the best markets all year and posted the strongest growth for the year in 2011 over 2010. While their fourth quarter sales were relatively flat year over year, average sales prices were up 9%. So, total order values were up 5% for the quarter in Colorado.

I'll now turn to slide 7. Sales comparisons to 2010 improved in the last half of the year when we didn't have the 2010 home buyer tax credit to compete with after the second quarter. Our total sales in the last two quarters of 2011 were up 17% over the last half of 2010, more than offsetting the negative 11% comparison for sales if the first half of the year. Our full year 2011 orders increased 1% and our average selling price increased 6% to drive a 6% increase in total order value for 2011 over 2010. We were also encouraged that December was Meritage's strongest month of the quarter as our monthly comparisons to 2010 got progressively better throughout the fourth quarter.

Our cancellation rate remains low, at 19% for the fourth quarter and 17% for the year, below our long-term average in the low 20%s as a percent of sales. The total value of orders and backlog at year end increased by 23% in 2011 over 2010, which should benefit our first quarter 2012 results. We have more than 15 grand openings planned for the first quarter of this year and plan to open a total of 70 to 80 new communities during 2012. Most of those will replace other communities as we sell through our lot positions, but we expect we will continue to grow our community count in 2012. With that, let's review our operating statement for the fourth quarter.

Slide 8. Our fourth quarter 2011 home closing revenue increased 14%, over 2010 due to a 7% increase in both closing volume and average prices. Our average closing price increased to $275,000 in the fourth quarter of 2011 from $256,000 in 2010. The higher average prices in 2011 primarily reflected a shift in geographic mix for markets with lower average prices to markets with higher prices. We are taking selective increases in prices within certain communities, but this accounts for only a small portion of the ASP growth to date. California and Colorado had the highest ASPs, together they represented 23% of our closings in the fourth quarter, up from 17% in the fourth quarter 2010. Arizona and Florida also had higher than average ASPs and accounted for 32% of our closings in the fourth quarter compared to 27% last year.

Slide 9. We improved our home closing gross profit margins both before and after impairments. Home closing gross profit increased 16% to $39.4 million in the fourth quarter of 2011, up from $34 million in the prior year. Home closing gross margins improved to 16% in 2011 from 15.8% in 2010, including impairments, or 18.8% from 18.1% respectively, excluding impairments. A total of $6.7 million in impairments ran through our fourth quarter 2011 home closing cost of sales compared to $4.9 million in the previous year. We incurred $9.2 million of impairments related to Las Vegas. $3.3 million of this ran through cost of sales on home closings, part of the $6.7 million I just mentioned to impair the remaining lots in our two active communities in Las Vegas, while the other $5.9 million ran through cost of sales on land closings for lots and land we plan to sell.

We are continuing to focus on top line growth with an emphasis on quality over quantity in our community selection, which should result in higher absorptions and better margins. At the same time, we are controlling our overhead expenses to drive greater profitability and improve returns for our shareholders. Now I'll turn it over to Larry Seay to discuss some additional details of our financial results for the quarter and the year. Larry?

Thank you, Steve. I'll pick it up on slide 10. Our total general and administrative expenses of $17.6 million for the fourth quarter were about $2 million higher than our average quarterly run rate of $16 million for 2011. The increase was not attributable for any one item, but the net effect of various normal expenses and accruals which do not incur evenly throughout the year, such as legal costs. The total adjustments wound up being positive in the fourth quarter of 2010 and negative in the fourth quarter of 2011, accounting for the $5 million swing in our fourth quarter G&A between 2010 and 2011. We are projecting our quarterly run rate for 2012 to remain in the $15 million to $16 million range.

We reported a net loss of $11.8 million, or $0.36 per diluted share in the fourth quarter of 2011 compared to a net loss of $0.9 million, or $0.03 per diluted share in the fourth quarter of 2010. The loss in the fourth quarter of 2011 included a total of $13.9 million of impairment, primarily due to the wind down of our operations in Las Vegas, which Steve explained. We also recorded an $850,000 loss from the sale of the only two golf courses we owned, both in Arizona active adult communities. By comparison, our fourth quarter 2010 net loss of $0.9 million included $5.1 million of impairments, partially offset by a $4.5 million net tax benefit. Excluding those items, we generated pretax income of $2.3 million in 2011, compared to a pretax loss of $311,000 in the prior year.

Moving to slide 11. Our 2011 annual home closing revenue decreased $79.5 million, or 8% from 2010, due to 12% fewer homes closed, partially offset by a 4% increase in average closing prices at $263,000 in 2011 compared to $254,000 in 2010. Lower closings in the first half of 2011 compared to the first half of 2010 when the home buyer tax credit was in effect made up the full year decline in closings. The increase in our average closing prices reflected a greater percentage of closings in move up communities and a mixed shift from Texas markets to higher priced Colorado and Florida markets, similar to what Steve explained for the Q4.

Home closing gross margins were 17.1% in 2011 and 17.8% in 2010, including $8.9 million and $6.4 million of impairments, respectively, or $8.2 million in 2011 and 18.2% in 2011 and 18.5% in 2010, excluding impairments. In addition to larger impairments in 2011, the lower margins in 2011 were reflective of relatively weaker market conditions earlier in the year as compared to 2010. Home closing gross profit of $147.4 million was 12% lower than 2010 gross profit of $167.5 million. We reported a net loss of $21.1 million, or $0.65 per share for 2011 which included $16.2 million of asset impairments compared to net income of $7.2 million, or $0.22 per diluted share in 2010, which included $6.7 million in real estate related impairment charges and a $3.5 million loss and extinguishment of debt, partially offset by $4.7 million net tax benefit.

Slide 12. We maintained our strong balance sheet ending the year with $333.2 million in all forms of cash and investment securities, no near term debt maturities and a net debt to capital ratio of 35.8% at December 31, 2011, compared to 27.9% at December 31, 2010, and still well within our comfort zone. The $79.5 million decrease in total cash and securities during 2011 was primarily converted into real estate inventory, which increased $76.5 million during 2011, including a $32.4 million increase in lot inventory and a $27.5 million increase in home under construction or completed. We acquired control of approximately 5,500 new lots in 94 communities during 2011 and spent a total of $192.9 million on lot purchases plus an additional $53.7 million on land development during 2011. At December 31, 2011, we controlled a total of 16,722 lots, representing approximately 5.1 years supply, compared to 15,224 lots, or 4.1 years lot supply at December 31, 2010. Approximately 83% of our lots are owned and 17% option, which is consistent with last year. We ended the quarter with 564 total specs, an average of 3.6 per community, of which 270 were completed. That is consistent with last year in terms of respect levels as a percentage of total units and whip. We generated 39% of our closings in the fourth quarter from spec inventory. Now I'll turn it back over to Steve. Steve?

Thank you, Larry. Considering that 2011 turned out to be another tough year for the overall economy and home building, we are pleased to have completed the year with positive trends in most of our operating metrics while posting only a modest loss for the year before impairments. I'm also pleased with the strategic progress we made in 2011, including our expansion into the Raleigh market which is off to a good start and our decision to wind down operations in the struggling Las Vegas market. While that decision was difficult, we believe it was the right one considering the prolonged economic issues facing that market. We continue to lead the industry by incorporating advanced building technologies into the design of our homes, delivering better value to our home buyers through greater energy efficiency and comfort. We made strategic investments in marketing and operations, including a new centralized call center, enhanced internet marketing and continued innovation of our extreme energy efficient homes, which I am confident will pay dividends for years to come.

As we begin 2012, we are focused on growing both our top line and our bottom line and are particularly focused on a few areas of opportunity in addition to our strategic initiatives. One of those areas of opportunity is Texas. We are opening new communities and better locations than the ones we closed out during 2011, essentially upgrading our stores in our largest market. In California, we have identified several opportunities for improvements that should improve our sales and our margins in communities we've opened within the last year to take better advantage of these good locations. In addition to those specific opportunities, we expect to grow community count with our expansion to new markets within the southeastern United States. We see additional growth potential as we get our sales per community back up to where it should be, at three sales per month or better, compared to the approximately two per month we experienced in 2011. At the same time, we are continuing to work toward achieving our target 20% gross margins, while keeping our overhead costs in check as we grow.

Considering that we are entering the year with a larger backlog than we had last year with opportunities I just discussed, I'm confident we can grow our sales, revenue and earnings in 2012. Thank you for your attention. We'll now open it up for questions, and the operator will remind you of our instructions. Thank you. Operator?

(Operator instructions). Our first question comes from Dan Oppenheim of Credit Suisse.

Thanks very much. Over time, you guys have done a very good job in terms of shifting your investment from area to area and in terms of community count. How much should we think about in terms of the shift away from Texas? But also, I guess, when you have done this in the past, it has been looking for opportunities where other builders aren't doing as much. What you are talking about now in terms of the better locations and some of the higher ASPs, seems like what we are hearing from a lot of other builders. How are you looking for the land opportunities now?

Well, first of all, we are not consciously shifting away from Texas. Texas is obviously our biggest state, and we expect it to continue to be that way. We just saw better opportunities earlier in the cycle to buy distressed lots in other markets outside of Texas. You know, so we focused on more of our earlier buys to rebuild our land position in those other markets. That said, we are seeing some very interesting opportunities now in Texas, and I expect our community count there to go up.

As I said earlier, we are doing extremely well, considering the circumstances in Orlando. We are off to a roaring start in Raleigh; we've got three communities open. We have five or six other ones in the queue coming in behind those that should be opening in the next couple of quarters. We've previously announced that we are going into Tampa, we have lot positions already under control there that we expect to be building homes on this year. And we are scouting out additional markets in the southeast, and we expect to announce entry into another market in the southeast sometime later this year. So, that's kind of how we see the land opportunities coming, and we also see opportunities to grow our positions in California, Arizona and Colorado. So, hope that answers your question, Dan.

Yes, great. Quick follow-up, you talked about improving the operations in California. Wondering if that is on the cost side or if it's sales and marketing. What you are doing there and if we'll see it in terms of margins there. Is that something that you are going to be doing more nationally as well?

It is both. It is really both. We really could have executed better in both disciplines, and we are putting a lot more energy and attention into our operations there, and I expect to see significant improvements in both those areas this year.

Okay. Thanks.

The next question comes from Ivy Zelman of Zelman & Associates.

Good morning, thank you. You talked about your sales. If you can talk a little bit about the progression through the quarter and maybe in looking at the individual months and talk about the momentum going into 2012. I know that you said things were definitely picking up. Are you also -- if you could break out, maybe Larry could provide to us what your current selling incentives are as a percent of your average selling price, and are you seeing that decrease can the strength of the market picking up? And do you actually even see some markets where you are seeing some firming of price or price ability to actually realize some price improvement? Because margin, certainly reflected from prior quarters, orders that you had taken as opposed to what we see going into backlog. So, maybe you can talk about what you're seeing on all those fronts please?

Okay, for quarter, I think October was a pretty strong month. We had a fall off in November and sales rebounded in December, December being the strongest month of the quarter. January is shaping up to be a little better than last year, I don't want to give any specifics, because we haven't completed the month yet and really aren't prepared to announce those. But the trend is certainly positive for January. Regarding pricing, I'll let Larry answer the incentives, but I can tell you that probably in about a third of our communities across the country, we are actually raising prices, although very modestly, $2,000 to $3,000 per community. But on the other hand, we've also had some pressure on costs, particularly in the drywall area, that's going to mitigate a little bit of those price increases. Larry, why don't you hit the incentives?

Sure. Our general target incentives range around 5% to 6%. That is something that we would factor into our pricing on a regular basis. Obviously, if things got real hot, we would reduce that, or if things were slower, we might bump it up. We have been running about 2 or 3 percentage points above that in general, and we have been running that pretty consistently. Although as Steve said, as we are starting to bump pricing a little bit, that's generally done through a reduction in incentives. So, most of that price increase is being done by reducing incentives rather than bumping base prices, although we are doing that a little bit too.

Can you guys, just as a follow-up, talk a little bit about what your sales people are telling you about buyers today? Where your confidence comes about improvement in 2012 over '11 and what you are getting from feedback to give you that boost and increase activity?

I think we are -- we're hearing that there is a renewed sense of urgency. Certainly not to the levels we've seen in the earlier part of the 2000 decade. But the urgency has picked up a little bit in the last several months. You know, it is -- every community's different. It has become such a localized business, we have communities, just as every builder has, that are doing four or five sales a month, and we have communities that struggle to do one sale a month. But as we rotate into more -- into newer communities, they tend to perform better, and are much more aligned with the market. And we are hearing much more positive feedback from our customers, much more -- a little more confidence in the economy and the news headlines, and I think that's all going to transpose to a better 2012.

Our next question comes from Michael Rehaut of JPMorgan.

Thanks, good morning, everyone. First question, I was hoping just to expound a little bit on some of the comments you made regarding, I guess, just now January being a little bit better than last year and also your outlook for modest improvement in 2012, which seems to be a little bit maybe less or more conservative than I think some of the excitement in the space over the last month. And, just wanted to get a sense of, why you only think it should be modest and also, as you look at full year orders for 2012, you'd also pointed to an expectation for communities to grow. I was wondering if you could give us a sense of for the full year what the average -- what you think, maybe even in just a range, what the average community count growth could be in 2012, versus 2011. Thanks.

First, I take a little bit of exception with how you characterized my comments, Michael, because I didn't say that -- I think I might have said, I'll have to go back and look at the transcript, but we really kind of agree with what the other builders have said. I don't think -- we think the recovery this year is going to be any less than what most other builders have said, and I think it's been some what mixed, although everybody has been positive. And I think our view of 2012 is pretty much in line with everybody else's

Steve, I wasn't comparing it to what other builders said. I'm sorry if I was unclear. I was comparing it more to the, I think the general investor, and stocks are representing maybe a little more optimistic. But more just to focus on your comments. I was just more interested in why you felt the improvement would be at a modest rate in 2012.

Well, I think we still have a lot of the same issues that we had in 2011. We still have high unemployment. We still have tight credit, we still have -- we are still working off excess supply. You know, everything we have been talking about for the last couple of years. Now, certainly it's improving. Every one of those metrics is going in the right direction. But, I don't see a huge spike in activity, so, therefore, I say it is modest. And I think people have been talking the 10%, 15%, 20% improvement in 2012, and I consider those numbers kind of modest. Maybe you have a different view of that. Certainly, I think 2012 is going to be better than 2011. But it is only January, and it is pretty hard to have a crystal ball to look at how the year's going to progress.

Okay. No, I appreciate that. Second question, just on the gross margins. You did have some nice improvement sequentially, excluding the charges, and kind of actually at the high-end of the range for the full year. How should we think about 2012? Do you think you could continue to expand from 4Q levels? Or, maybe you could also give us, and Larry, if you can weigh in also, maybe about the incremental impact from a greater mix of newer communities, what that might help as well?

I think margins throughout the year should continue to increase, and I expect to that we are going to end this year with the higher gross margin than we have today. I think there are -- we have certain initiatives in place that we are working through to improve our pricing model and improve our margins and continue to work on our direct construction costs, although I don't think you are going to see a straight trajectory of improvement every single quarter throughout this year. But from start to finish, I do see improvement. Larry, do you want to add on to that?

Sure. As we have said before and other builders have said, there are a little bit of fixed costs and costs of sales relating to construction overhead. And because of that, toward the end of the year as you have higher closing rates, you tend to get a little bit better margins. In the earlier year, we have lower closing rates, it's a little bit lower. So, I do think you might see a little bit of a drop in the first quarter and then have it gradually build back. And as Steve said, for the overall year, we would expect it to be better than '11.

Our next question comes from David Goldberg of UBS.

Thanks, good morning, everybody.

Good morning.

I wanted to dig in a little bit on Dan's question earlier about California. And Steve, correct me if I'm wrong. In the comments, I thought part of what you said was you guys have done some work to readjust, not just the operations side of the business, but also the product that you're offering in some of your newer communities in California to get closer to meet the market and get to where market demand is. And I'm just trying to get an idea, I think one of the strengths at Meritage has always been the ability to forecast demand and see what is in the market. You guys have obviously put together some models and proprietary work that you have done to be able to forecast demand. And so I guess what I'm wondering is when you look back at the process and maybe where some things might have not gone right, was it the market that changed? Was it your analysis that changed? What was really different relative to where you were with product and where you are going, and what do you think changes as you look forward? Is there anything that changes in your model in terms of the way you forecast?

I think there are several things we are looking at differently in our model. For example, when we went into certain markets in northern California, we thought we saw pricing stabilize. We didn't see a lot of foreclosure in these submarkets. We saw great value and affordability. But the overall macro markets continue to get worse, and they got much worse over time where we bought these lots, and I think we kind of missed it a little bit. That said, I think we understand it better now and we are doing a better job, and I think our model's going to work better, going forward. And we had some challenges operationally in California on the direct cost side, which we are fixing and we expect to record some pretty good gains from that. So, it has been a little bit of a learning experience, but I'm pretty confident we have it under control.

Clearly, it is a dynamic market, and everyone is going through the same thing, so totally understood.

Right.

My follow-up question was actually on the comments about traffic through the quarter and sales through the quarter and how October was a little better, November fell off a little bit and December kind of reemerged. And if I think about that with the comments that there is some increased urgency among buyers, it just seems kind of on and off. October maybe there's more, then November there's not as much, and December it's back on again. I'm trying to get, when you talk to your sales people, when you talk to your local people, what is driving the urgency? And why is it so sporadic month to month like that? It is not like there is a consistent slow, it seems like.

I wish I could tell you. I wish I had the answer to that. I really don't. Just from what we hear, it is just psychology and has a lot to do with the headlines and different metrics announced about jobs and housing prices and foreclosure statistics. And I think the headlines are starting to turn more positive, which are starting to create more urgency. And I do believe there is some pent-up demand out there that are just waiting for the right signal, and those signals are starting to turn green. Our traffic in December was better, and our traffic in January has been even better than December. So, I'm hoping the sort of traditional start of the selling season, which is Super Bowl weekend, which is this weekend, is going to bode well for the next several months.

The next question comes from Joel Locker of FBN Securities.

Hi, guys. I was looking at your 2000 -- your debt maturities, and you don't have anything until 2015. But just was wondering with maybe doing a convertible or just taking advantage of the lower rates and issuance of longer term debt.

We are always looking at that, keeping our eye on it. But we don't have any plans to do any kind of capital financing right now.

Right. And I guess the follow-up question is on interest expense. It's kind of hovering around $7.5 million that is just getting expensed. Was wondering if -- when do you think that's going to actually come down meaningfully on through that line item?

Larry?

Yes, there is no science to this. It is a calculation, and it's based upon how much WIP we have under construction and how many lots we have under construction. And I do think as we do more land development, you'll see the expense number come down and the capitalized number go up. But to predict that at this point, it is very hard to do. But I do think you will gradually see a trend where that will go down. I think it is going to be awhile before it goes to zero, but it will gradually go down over the next couple of years.

The next question from Nishu Sood of Deutsche Bank.

Hey, this is actually Rob Hansen on for Nishu. I wanted to see if you could talk about -- you're closing the new communities -- orders in new communities versus the old communities. What the percentages have been in terms of the split and kind of refresh us on the gross margin spread between the two.

Larry?

Yes, this is the -- the question was gross margin split between specs and pre sold? Was that the question?

New and old communities.

Oh, new and old, excuse me. It is around 400 basis points. You know, we are currently closing and selling around 65% to 70% of our communities are coming -- deliveries and sales are coming from new and the basis point spread on the margins around 400. The increase that we have been seeing is going to moderate a little bit as we are getting into the point where we have some longer tail communities like active adult, and some bigger communities are going to hang on for awhile. I don't expect to see that increase as much throughout 2012, the percentage of new community deliveries and sales. But that gives you a pretty good idea of where we are now.

Okay. And then what are you guys looking at in terms of a base case for land spend in 2012? And I guess maybe a minimum cash balance as well?

Yes. Well in 2011, we spent right at $250 million. You know, about $200 million of that in round numbers was land purchases and about $50 million of land development. I would expect us to see us stay in that range, maybe increase it modestly. The percent split between acquisitions and development is going to change a little bit as we are buying more communities that require development, so I would expect the development number to go up, whereas the actual dollars to purchase land will go down. But the total will stay about the same or maybe, as I said, increase a bit.

The next question comes from Adam Rudiger of Wells Fargo.

Good morning, thank you. Most of my questions have been asked. But I want to just follow-up, Steve, on when you mentioned a question or two about pent-up demand. I was curious to know -- I agree with you, there's pent-up demand. I'm just curious what segment of the market you think that pent-up demand is the strongest. Whether it -- is it first time renters that are sick of renting or families growing too big for their current residence? I was just curious where you think that would be the strongest.

You know, we are primarily in the move up market. So, I'm not going to have the best data on the entry level market because we don't have that many entry level communities. But I do think there are families that need to move up and get a bigger home. Growing families, they have been postponing the decision for a variety of reasons. Psychological, about the economy or maybe they have had trouble selling their house. Maybe their house is going to be easier for them to sell now versus a year or two ago. So, I think there is a variety of factors.

Also think -- our active adult business hasn't been very good for quite awhile, and I think there is a lot of active adults that want to move and want to come down to sunny Arizona but have been afraid to do so, because of the economy and because of the negative headlines they have been reading. So, as the headlines turn more positive, I think those buyers might gain more confidence and they may start to move in 2012 and beyond.

What percentage of the business now is active adult?

Well it is very small. Very small. I think it's less than 10%, 7% or 8% right, Larry? Does that sound right?

Yes, it's probably a little less than 5% at this point.

Yes, so we'd like it to -- we have the position for it to be a little bit bigger. But those positions have been absorbing at a very anemic pace. And as most of our competitors have in Arizona as well, I think there is a real opportunity for improvement there.

Great. Thanks, that's all I had.

The next question comes from Steven Kim of Barclays.

Thanks, guys. Yes, I had a couple of questions that are sort of housekeeping and then sort of a general one. First one is, can you just clarify about your comment, Larry, I guess is probably for you, about how there is a seasonality aspect at gross margins with some leveraging of fixed costs. I was wondering if you were commenting on interest that's previously capitalized, interest that's running through that line, or if you meant operationally, excluding any interest in the gross margin.

All of our reported gross margins include interest and they also include construction overhead. And construction overhead makes up around roughly 2%, 3%, 4%, depending on what division it is, and that is really the amount I'm talking about that is kind of fixed and isn't variable. We are going to incur that each month. Now, we do go through a capitalization of a portion of that, but there is a portion of it that is more overhead that isn't completely captured. So, that is the leverage you get in gross margin from seasonality in closings.

Okay, great. And then I was wondering if you could give us the info on specs total finished and total under construction? And then I had just sort of a general conceptual question if I could ask, Steve. In the past, there has been a view that housing typically recovers from the bottom up. And you guys being positioned sort of a little bit above the bottom, I have heard some conjecture that perhaps you might be slower to see a recovery as most of your home buyers typically have something to sell. However, I was wondering whether you had begun to see that change because some of the communities that I had seen, I was very surprised at the number of higher end buyers that didn't have anything to sell because they had already sold it in the past. And I was curious if you could talk about that kind of trend, if you are seeing the same thing that I was seeing?

Well, I think this cycle we are seeing something different because I think if I look around at my peers and competitors, the guys that are doing the move up business are doing the best, and the entry level builders are struggling more, and I think that is because of the tightness of credit. I think entry level buyers, overall, are more credit challenged. And even though credit is available through the government entities, they are requiring higher credit scores, and it's more automated underwriting. And I think that the move up buyers generally fit in better with those credit standards, and they have more equity in their homes, and particularly the white collar employees are taking advantage of these kind of market conditions. Doctors, lawyers, those that may be less affected by the overall economy.

So, some of our higher priced communities that offer tremendous value on larger lots with larger square footages that are selling for deep discount to what they were at the peak of the market, are doing really well right now. And so, I mean, we are not trying to move up the ladder into the luxury business, but we do see real good opportunities in the move up market. Larry, I think you have the spec numbers, right?

Sure. The spec units under construction at the end of the year was 294. The completed specs is 270. So, that's roughly -- they are both roughly about 25% of total WIP and the other half is pre-sold. And that tends to be a little bit higher at the end of the year because we closed a lot of units. And during the middle of the year, the spec units will drop a little bit and the pre-sold will increase as a percent of total WIP.

The next question is from Joshua Pollard of Goldman Sachs.

Hey, thanks for taking my question. Just a follow-up on the previous question. Chronically credit challenged at the low end was something that you mentioned on the last call, Steve. I'm just wondering, have you seen things get a little easier there, or are things unchanged at this point?

I think it is pretty much the same. I mean, again, we don't build that many entry level communities, so we are probably not the best barometer for that market. But our average credit score, across-the-board, is 729, I think, pretty high, and certainly in the entry level communities, it is much lower than that. And in our higher priced communities, it could be higher than that. So, there really is a difference in the different segments in the credit quality, as there always has been. But, I think the move up market is performing better right now.

The other question I had was on -- it's on land. Land developers have been quick to raise prices in anticipation of demand pickups. We can simply look back to the '09 and '10 tax credits to see this. Are you already seeing the land guys be a little tougher with the negotiations? If they haven't, is that something that you guys expect? And if so, are you planning for it? Taking things under option thoroughly or changing the way you guys are approaching the land market for '12?

We saw land prices spike up in the beginning of '10, and then they softened in the second half of '10, and we saw land prices spike up in the beginning of '11, and they softened in the second half of '11, and I think we might see some of the same this year. We are just going to have to be disciplined and only buy land in lots that meet our underwriting criteria. Do I see this massive increase in prices? No. It is on a case by case basis. And yes, generally, prices will firm up a little bit the beginning of this year, and then which direction they head from there will depend upon what happens in the sales office. So.

The next question comes from Susan Berliner of JPMorgan.

Hi, good morning. Larry, just wanted to follow-up on the balance sheet, just with regards to your appetite for a revolver at some point this year and what's going on with the banks and the revolver market.

It seems like from all the conversations I've had, we could easily get a revolver done if we wanted to do one, if we wanted to incur the extra costs and mainly non-use fees. As we continue to grow our balance sheet and increase our real estate and spend our cash down, we would, at some point, go back and reinstitute a facility. You know, we said before we are kind of comfortable in the cash range of $250 million to $300 million. I think as we would start approaching $250 million, we would probably think that it would be a good idea to go do something on a revolver. I think there is several other builders out there that are kind of thinking the same way, from what I've heard. And, as we spend our cash down, it is going to drive our net debt-to-capital ratio up a little bit, and we've said before that we are kind of comfortable in the low 40-ish range, and we would probably spend our cash up to that kind of ratio. And then from there grow our business based upon what our earnings is going to allow us to grow internally.

Got you. And I guess just with regards to your markets getting out of some and entering new ones, what are you seeing from your peers in terms of, kind of the competitive dynamics with regards to them entering new markets such as Texas or getting out of markets? Anything interesting on that front?

We are only exiting or winding down one market. And I think because of our footprint is smaller than a lot of the other builders, we didn't have a lot of markets that we needed to exit. We exited the Fort Myers market quite awhile ago, many years ago now. So, from the height of the boom to today, we have only really retreated from two markets. And we are going to open -- and a lot of builders have retreated from a lot more markets, in answer to your question. But I see us growing into a lot of new markets in the southeast and potentially other geographies over the next several years, and that being one of the ways we are going to be able to grow certainly the top line and the bottom line of our business. Because we do have very significant positions today in Arizona, in Texas, a growing position in Colorado, in Denver, and we have a very dominant position now in Orlando. So, the way we are going to grow our business is continue to expand in California and to grow into new markets in the southeast.

And I'm sorry to interrupt, but Mr. Seay and Mr. Hilton, we do have a few more questions. Would you be able to take more questions or would you like to do your closing remarks?

Sure, we can take a few more.

Okay, the next question is from Jade Rahmani of KBW.

Thanks for taking the question. Can you provide any color on what drove the non Vegas impairments in the quarter? For example, what's the vintage of those assets and where were they located?

It was a variety of different things, no one particular item. We sold a couple of golf courses in Arizona, I think we took a $900,000 impairment, we have some legal settlements, I think we had one option that we walked away from in Texas. Larry, do you have any?

Yes, I would say Texas was kind of the, what I would hope is the finishing cleaning up of some of the older communities there. Florida was one last old community that we had been hoping would improve. But then it was about $400,000 in Florida that made up the great majority of that, and in California was an option to walk away.

Okay. Thanks for that. Secondly, would you care to provide any comments on profitability going forward, both for the year and on a quarterly basis? Do you think impairments are the key swing factors, is there anything else you want to call attention to? For example, you earlier mentioned raw materials.

Well, we're not forecasting any impairments for '12, we don't -- hopefully we got them all in '11. As the market improves, we certainly shouldn't be experiencing impairments. Regarding profitability, I think we talked a lot about gross margin earlier. We are expecting gross margin to improve year to year, but maybe a little bit choppy quarter to quarter. And then, overall, volume will drive increased profitability. We need to be able to leverage our overhead by making more sales and improving our margins by increasing prices and managing direct costs. So, normally I don't think I could say too much more about profitability going forward in 2012.

The next question from Alex Barron of Housing Research Center.

Yes, thanks. Good morning guys.

Hey, Alex.

I wanted to ask you, are you starting to see any of the people that maybe went through foreclosure or short sale in the last several years and have been renting? Are they starting to qualify, and are they starting to come back to your sales offices? And if so, do you have any specific strategy to take advantage and convert those buyers?

Well, I would say, first, there is a lot of those people that surprisingly want to buy a house, want to buy a new home and have been coming through our communities. But unfortunately, most of them are still within the period of time in the penalty box, and they are not able to purchase yet. But there are a few that lost their home early and have saved up a down payment and are hoping to take advantage of the lower prices and get back into the housing market and are able to get loans because they have gone through the time period already. But I would say we are still in the early innings of that, and it's still going to be a little while before most of those people can buy.

Yes, Alex, I would add that people still want to live in a single family house that they own, and we see a lot of people who are renters who did own, who are wanting to own again and they are aware of when they get out of the penalty box. We have people come in and go, well, you know, three years are going to be up in May, I want to buy a house in May, and I think they look at their house buying experience as just being bad timing. That they think, gee, if I can get in now at the bottom, it is better timing. So, there's a lot of people out there want to get in who are kind of watching the clock.

Are they kind of see it as averaging down so they mitigate their losses by getting back in.

Right. That is interesting. I guess probably the main impediments are going to be the credit score and their ability to have saved for a down payment.

It is not even that, it is the penalty. I mean, some of these have pretty good credit scores if you exclude the foreclosure and they have the down payment. They just can't buy because they are in the three or five year penalty box.

Right. Well, it will be interesting to see how that unfolds and whether you guys will be able to sort of keep track of that as it unfolds. My second question was, as it regards the land market, you did mention that you believe that you'll spend more money on land development rather than land purchases. I was hoping you could expand on that comment. How are you seeing the economics out there and the land market for buying lots either outright or on option versus developing land.

Well, there is less and less finished lots available in almost all markets. A lot of the distressed lots have now already -- have been purchased. So, there is fewer and fewer available to purchase. There is also fewer land developers that are developing lots for builders than we saw in years past. So, we have less lots to choose from that we could buy developed. Therefore, in order to continue to fill our pipeline and to find the best opportunities, both in distressed and non distressed market, we are going to have to develop more lots. And we are equipped and capable of doing that and, we will as we see it necessary to do so.

The next question comes from Jay McCanless of Guggenheim Securities.

Good morning, everyone. First question is on average selling prices, and wanted to see how we should think about those and how you guys are thinking about them for 2012. Is the $275 million that we saw in the fourth quarter going to be the run rate for next year? Is it going to be closer to the $260 million approximately that we saw for the first three quarters of '11?

Let me start on this, and Larry, you could maybe jump in.

Sure.

I think we might be at the high water mark. I don't know that it will continue to increase. I think it could decrease. It is a lot to do with geography. As our sales get built back up in Texas and as we enter more markets in the southeast, I think those numbers might come down a little bit. Larry, have we done any more forecasting on that?

Well, the -- I guess I would say, too, that sometimes you have a particularly successful group of communities that are higher priced, and we had one, particularly, in Arizona which is making Arizona's prices right now a bit higher than they probably will be going forward. But it really is just very mix dependent. And if we are successful in getting California really jump started and selling more, it could continue to increase. It is hard to make a hard and fast prediction. I would say yes, we may not quite be at the high water mark, but it is not going to continue to go up the way it has gone up in the last year. It would tend to level off and maybe go up a bit and maybe come down a bit. But not any wild swings -- large swings, I should say.

Okay, thank you. And then my second question, the expectation of a $15 million to $16 million quarterly run rate for G&A for '12, I believe in dollars, basically, you guys are looking for the same amount of G&A in '12 as you saw in '11. How long can you sustain that with growing communities? Is it going to be a function of when you hit a certain number of communities, then the G&A has got to move up? How should we think about that for '12?

Larry?

You are right that we are projecting G&A to be relatively flat from '11 to '12. We can certainly continue to grow our income statement in a relevant range without increasing G&A much. The additional G&A we would be incurring is really filled G&A, which is really more up in cost of sales and then selling costs, which are not part of G&A. So, I would say the base G&A line that really is just G&A could stay relatively flat over a pretty good increase in sales. So, that is where the real bottom line margin expansion comes, is from levering that relatively fixed G&A number.

The next question is a follow-up from Michael Rehaut of JPMorgan.

Hi, thanks for letting me follow-up. I just had a question, I guess to finish it off, with going back to some of the different geographies. But specifically, when you look at the absorption rate on a year-over-year basis in three of your bigger markets -- Texas, Arizona, California. Arizona was actually down a little bit if you use average communities, down 6%. California up 4% after several quarters of negative comps on a sales base. So, I was wondering if you could just give us a little bit of color in terms of how you are thinking about the demand trends. Were both of those markets up year-over-year in December? Any type of additional thoughts there would be helpful.

Larry what numbers do we have for December for --?

Yes, we don't compute that on a monthly basis. But, I guess I would say that you are seeing California resurge from having a few quarters of being off, and we certainly are hopeful that that's going to continue. You know, our average [throughput] for the whole Company was around two sales per month. And we would hope that in 2012 with a little bit of tailwind, that we can see that gradually get -- start to increase and notch back up to a three numbers. We are not going to get in there in '12, but we are hopeful that that would happen.

And Arizona is down a little bit in the fourth quarter versus a year ago in terms of sales pace. Any thoughts there?

You know, I think it is just relative to which communities are open at which times. We are projecting Arizona to be a little bit better in 2012, based upon some of the stores we have coming online. And I think -- I wouldn't read too much into those numbers. It is not a -- there is not a negative trend developing in Arizona. I think it's quite to the contrary. The market is improving here.

This concludes our question and answer session. I would like to turn the conference back over to Steve Hilton for any closing remarks.

Okay, well, thank you very much, we appreciate your support and participation in our call, and we'll look forward to talking to you again next quarter. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.