Meritage Homes Corp (MTH) 2015 Q4 法說會逐字稿

Good day and welcome to the Meritage Homes fourth-quarter 2015 analyst conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn me conference over to Brent Anderson, Vice President Investor Relations. Please go ahead.

Thank you, Andrew. Good morning and welcome to our analyst call to discuss our fourth-quarter and full-year 2015 results, which we issued in a press release before the market opened today. If you need a copy of the release or the slides that will accompany our webcast, you can find them on our website on our website at investors.meritagehomes.com or you can select the investor relations link at the bottom of our homepage.

I will refer you to slide 2, which has our Safe Harbor language and remind you that our statements during the call and the accompanying materials contain projections and forward-looking statements which reflect the current opinions of Management and are subject to change. We undertake no obligation to update these projections or opinions and our actual results may be materially different than our projections due to various risk factors, which are listed and explained in our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2014 annual report on Form 10K and our subsequent reports on Forms 10-Q.

Today's presentation also includes certain non-GAAP financial measures as defined by the SEC, so we have provided a reconciliation of these non-GAAP measures to the closest GAAP figures within our earnings press release.

Referring you to slide 3, with me today to discuss our results are Steve Hilton, our Chairman and CEO; Phillippe Lord, our Chief Operating Officer; Larry Seay, our Chief Financial Officer; and Hilla Sferruzza, our Chief Accounting Officer, who will be assuming the CFO role when Larry retires at the end of March. We expect our call to conclude in about one hour and a replay will be available on our website within approximately an hour after we conclude the call. It will remain effective until February 15.

I will now turn the call over to Mr. Hilton to review our fourth-quarter results. Steve?

Thank you, Brent. Welcome to everyone on this call and thank you for your continued interest in Meritage Homes. We ended the year with a good fourth-quarter results across our key performance metrics. Orders were up 23% over the fourth quarter of 2014 and our year-end backlog was 27% higher than a year ago.

Our home closing revenue and net earnings for the fourth quarter were up year over year and our pretax earnings for the fourth quarter were the highest we have generated in the last 37 quarters. Home closing margin improved sequentially from the third quarter of 2015, though it was lower than last year and our overhead leverage improved over the fourth quarter of 2014, resulting in a 15% increase in fourth-quarter free tax earnings.

Turning to slide 5, those improvements contributed significantly to our full-year 2015 results. It was our fifth consecutive year of order growth, with a 19% increase over 2014. We closed more than 6,500 homes in 2015 and generated more than $2.5 billion in closing revenue. That is the largest number of homes we delivered in eight years and the most revenue we have produced since the peak of the last home-building cycle.

Home (inaudible) revenue was up 18% over 2014. We reached several new heights for the Company in 2015. We ended the year with 254 actively selling communities, more than ever in our 30-year history. Our shareholders' equity set a new record at more than $1.25 billion at the end of 2015, and we reached a nine-year high in book value per share of $31.74, which is higher than where our stock is currently trading.

As impressive as those statistics are, we could have done even better if not for the challenges we faced last year. Severe weather delayed development and construction schedules in Dallas and in Denver, which translated into fewer closings than we would have expected. Tight labor supplies and increased costs negatively impacted our margins.

Falling oil prices caused greater buyer uncertainty within the Houston market, which was the best-selling home building market through most of 2014. And a few of our newer markets in the East ramped up slower than we expected. However, we managed through those issues to deliver good results in 2015 and I believe we can do even better in 2016.

Market conditions remain generally positive through all of 2015. Job growth was strong, household formations increased, and interest rates remain low. Rising rents continue to push more renters toward homeownership and demand continues to exceed the supply of homes for sale in many markets, so home prices were stable to positive. We believe the housing market can continue to grow at a modest pace and that Meritage Homes will grow with it while continuing to improve our performance.

Turning to slide 6. We generated moderate revenue growth year over year in the fourth quarter. We combined a 3% increase in home closings with an 8% increase in the average closing price to deliver an 11% increase in home closing revenue over the fourth quarter of 2014. Our West region drove most of that growth with a 27% increase in home closing revenue over last year.

Market conditions in California and Arizona improved in 2015 and we were well-positioned there with our communities. The decline in Colorado's closing revenue reflected the combination of delayed closings from spring weather disruptions and a slight decline in average sale price. We expect to catch up on closings there in the first few months of this year.

Closings in Texas were off 14% compared to a very strong fourth quarter of 2014 when all four of our markets there were among the nation's top housing markets. Several factors contributed to the decline. Weather in 2015 delayed starts and closings in Dallas-Fort Worth, which we expect to make up in the first half of 2016.

High home prices in Austin have led to more demand for lower- priced homes and to meet that demand of the first-time home buyer and the first move-up buyers, we are increasing our focus on that segment and expect more than half of our communities in Austin will address that segment by 2017. And, of course, the pullback in oil prices has impacted the Houston market.

Our East region delivered an 18% increase in home-closing revenue with better than 20% year-over-year growth in Florida, North Carolina, and Georgia's revenue. Unfortunately, North Carolina had continued to experience wet weather that is delaying development of communities. The increase in our total home-closing revenue offset a narrower home-closing gross margin, resulting in a 5% increase in total home- closing gross profit for the fourth quarter of 2015 over the prior year.

I would now like to turn it over to Phillippe to review our order trends, after which Larry will provide some additional details on our financial results. Phillippe?

Thank you, Steve. Slide 7. With few exceptions, we had broad-based success selling across our markets in the fourth quarter. Our fourth-quarter 2015 orders increased 23% in total with the most notable gains coming from the West and East regions, though Texas orders were also up.

The 23% increase was due to 11% more actively selling communities open in 2015 than we had last year, combined with an 11% increase in our absorption pace. Our average sales per community improved to 6.2% in the fourth quarter of 2015 from 5.6% in last year's fourth quarter.

I would attribute some of the improvement to market demand and some of it to the changes we made in our product positioning and our sales efforts. Our average sales prices were up in some markets and down in others, due primarily to product mix and to a lesser extent, price appreciation.

In the West, we had a significant rebound in the sales pace in Arizona, particularly in Phoenix. Since the second half of 2014, we sold 6.2 homes on average per community in the fourth quarter of 2015, compared to just 4.2 in 2014, resulting in a 46% increase in orders year over year.

California sales pace is still the highest across the Company. It was up 15% over the prior year at 8.6 orders per community on average. And we also had 9% more communities open there on average during that quarter. California's orders were up 24% year-over-year from 2014 to 2015, mainly driven by Southern California.

Our orders in Colorado were slightly lower than the fourth-quarter 2014, though our sales pace there was flat compared to the prior year and our order value was slightly higher. We are catching up on our backlog in Colorado and focusing on more even flow production. As in Austin, we're also planning to target first-time home buyers with new communities that have more affordable housing options in the coming years.

Texas orders were up 16% over last year during the fourth quarter. On top of that, our average sales price in Texas was up 11%. Our total order value increased 29% in Texas over last year's fourth quarter. Most of the increase was in Dallas, though Austin and San Antonio also had nice sales gains.

Even Houston was marginally higher than the fourth quarter of 2014 with particularly good sales in December. We have had more entry-level plus communities opening in Texas in 2016, which should improve our positioning even in a more challenging industry environment.

Moving to the East region. Orders were up 29% in units and 32% in total value. The largest increases came from Georgia and Tennessee, two of our newer markets, and were primarily the results of increased community count in both Atlanta and Nashville, though we also achieved a higher absorption pace in Atlanta. I would attribute the improved pace of sales in Atlanta to some repositioning and a highly energized new sales team. We are expecting to see better performance there in 2016 with the new team in place.

With that, I will turn it over to Larry to further discuss our results.

Thanks, Phillippe. Moving to slide 8. We gained some overhead leverage on higher volumes during the fourth quarter, improving our [SG&A] by approximately 100 basis points in total over the fourth quarter of 2014. General administrative expenses declined 8% in absolute terms, primarily due to compensation adjustments and other cost control measures, and fell to 3.4% of total closing revenue from 4.2% last year.

Commissions and other sales costs were also down 7% of home- closing revenue compared to 7.2% last year. Interest expense increased due to a higher debt balance in the fourth quarter of this year after we issued new senior notes in June. Our interest incurred was approximately $3.4 million higher than the fourth quarter of 2014.

Our effective tax rate was 30%, compared to 26% in the fourth quarter of last year. We had larger adjustments to our energy tax credits in 2014 than we did in 2015, related to homes closed in prior years. Those credits reduce our effective tax rate from the statutory rate due to the higher energy efficiency of Meritage's homes.

For the full year, our home-closing gross margin declined to 19%, compared to 2014's 21.2%, due to land and construction cost inflation, as well as an additional $2.9 million in impairments during 2015 over what we incurred in 2014. Excluding impairments, our fourth-quarter and full-year gross margins would have been 19.6% and 19.3% respectively.

We also incurred a $4.1 million litigation-related charge in the third quarter of 2015, compared to $4.6 million in favorable settlements last year, which accounted for an almost $9 million unfavorable swing in our full-year earnings. The combined effect of the additional interest, additional impairments, and swing in litigation-related expenses reduced our 2015 diluted earnings per share by approximately $0.35.

Moving to slide 9, we were more cautious in taking on new land positions due to choppiness in some markets during 2015. As a result, we didn't deploy as much capital for land and development as we otherwise may have in 2015. We spent $222 million in the fourth quarter of 2015 on land and development, including option deposits, bringing our total spend for 2015 to $709 million, approximately in line with 2014.

We also deferred approximately $115 million in contracted land and development through land banking, using only $19 million in cash for option deposits in 2015. We're currently projecting a higher level of land spend in 2016, but we will continue to monitor market conditions and adjust our plans accordingly.

We ended the quarter with 27,785 total lots under control, of which 69% were owned and 31% controlled under option contracts, which represents an approximately 4.3 year supply based on trailing 12-months closings. That does not include our work-in-process inventory of approximately an additional [3,300] homes.

Our total spec home inventory at December 31, 2015, was 1,270 homes, approximately two-thirds of which were under construction and one-third were completed homes. That equates to an average of 5 specs per community compared to 5.4 a year ago. We are comfortable with our spec levels heading into the 2016 selling season.

Moving to slide 10. We ended the year with $262 million in cash and cash equivalents, $159 million more than at the end of 2014, primarily from our issuance of $200 million in new notes during the second quarter. We increased our total investment in real estate assets by approximately $220 million during 2015, mostly in work-in-process inventory to support increased sales and construction.

Our net debt-to-capital ratio fell to 40.7% in December 31, 2015, from 42.9% at the end of 2014. We had nothing drawn on our $500 million revolving credit facility as of the end of 2015.

Steve?

Thank you, Larry. We announced last month that Larry will be retiring at the end of March and Hilla Sferruzza will become our new Chief Financial Officer effective April 1. Larry and I have done about 76 of these quarterly calls together and this will be his last quarterly analyst call after 20 years with Meritage.

I would like to thank him for his service. He has been an exceptional contributor to our senior leadership team and instrumental to our growth. We will certainly miss him, but Hilla has proven herself to be very competent since she joined Meritage in 2006, and I have every confidence that she will also be a significant contributor to our leadership team and I expect it to be a seamless transition.

Thank you, Steve. If I could interject briefly, I have thoroughly enjoyed working with you and the Board, as well as our analysts, investors, bankers and others I have come to know over the last 20 years. I'm proud of the team we have assembled at Meritage and the great home-building Company we have built. I believe Meritage has a very bright future ahead of it.

Thank you, Larry. 2015 was a year of continued growth for Meritage and we achieved new highs in many areas. With that growth came some challenges that took us some time to work through, but we believe we put many of them behind us and at this point are poised for better times ahead. With the continued healthy market conditions as we have been experiencing in most of our divisions, we are confident in our prospects for 2016, especially considering that we entered the year with a backlog valued at $1.1 billion, 34% higher than it was one year ago.

We currently anticipate closing between 7,000 and 7,500 homes in 2016 with 5% to 10% community count growth by year-end. Due to a large number of orders that came in in late 2015, our backlog conversion rate is likely to be lower in the first quarter of 2016 than was in 2015, since those homes will take at least a couple quarters to close, so our first-quarter revenue may be flat to just marginally higher than last year. Considering the long-term growth prospects of our industry, we also believe that we can achieve our goal of delivering 10,000 homes in 2018.

Thank you for your attention. We will now open it up for questions and the operator will remind you of instructions. Operator?

(Operator Instructions)

Michael Rehaut, JPMorgan.

Good afternoon or good morning out in Phoenix. A couple questions. But first, just wanted to say, Larry, it's been a pleasure working with you and I'm sorry to see you go and I hope you enjoy your time away from the Company in retirement. And also congrats to Hilla.

Thanks, Mike.

Thanks, Mike.

First on the question on the gross margins, you had a down year in 2015 and we are all familiar with some of the reasons. A lot of disruption, particularly in the back half of the year. How should we think about 2016 as some things perhaps normalize like you had pointed to some improvement out of the Southeast? I don't know what impact that might have from a mix perspective or a cost perspective on margins, but as you close out the year, with a 19% even gross margin, it's perhaps a little bit lower than you would sometimes think about, a longer-term normalized 20% gross. Do you expect to get a little back towards that 20% number or, with the mix and the backlog? Maybe just some directional guidance there would be helpful.

That's a good question, Michael. Thank you. I certainly expect that some of our regions will improve their gross margins. I expect other regions, land is still expensive and there continues to be pressure on construction costs, so I think they will, for the most part, offset themselves. We could have a slightly better gross margin throughout this year than we had last year, but it's really too early for me to predict that. I don't really have enough visibility. I think it's probably safer to model a flatter gross margin. I don't think we have gross margin declines in front of us. I think we are more biased to the upside. But then again, I think it's better to just kind of say we expect it to be more flat.

Mike, I would also add to that, I usually make the qualifier of margins are somewhat seasonal, so as you build closing revenue going through the year, your margins improve because you do have some fixed costs in construction overhead, so I would expect that same trend to be occurring in 2016, so you would have a little lower number in the first quarter building throughout the year.

Yes, thanks for that, Larry. You anticipated that question. When you say lower in the first quarter, given that last two or three quarters you've been down year over year, would that trend continue as well? You did an 18.5% last quarter. I would think it could be closer to 18%, but just any thoughts around that.

I don't want to give a specific number, but I do think it will be lower than last year's first quarter gross margin.

Great. Secondly, if I could. Steve, you kind of threw out, and I believe on the press release as well, talking about 10,000 closings by 2018, which you caveated it with continued industry improvement. At the same time, your lot count is down, I believe, roughly 10% year-over-year and I think you talked about some delays on some of the land banking. To get to a 10,000 number, it certainly would show a bit more of an acceleration in closings growth, more like at least 20% year-over-year for the next couple years.

Are there things you are planning to do in 2016, either from a land banking perspective or perhaps M&A or a greater organic investment to get towards that 10K goal, or is that more of a broader -- if markets normalize, if we get to 1.5 million starts and you apply a 30%, 40% growth that you would do on a total starts number? Just trying to get a sense around how to achieve that, again, practically, given where the lot count is and what you might need to do for an investment or land banking standpoint.

First of all, I wouldn't read a lot into the declining total lot count number. About half of those lots were lots that we sold, and they were either lots that we had carried on our books from the prior cycle or for a long time that we had intended to sell when the market price came back. So those were in locations we didn't choose to build in or they were lots we had always planned to sell as part of a bigger purchase. When we go in and buy some lot positions, we might buy more lots than we need with the intention of selling them off to other builders. That's really what those sales were made up of.

It's really more a focus of quality over quantity. And I think the number one challenge for us and for our industry is that we need to increase our absorptions. Our absorptions are still far below historical averages for our Company and for our industry and certainly if our absorptions pick up, we will need to buy more land. We are clearly aware of that. But that's as big an opportunity for growth as it is to increase our store count. Land prices are pretty expensive in a lot of places, but we do think there's opportunities, particularly in the South, we have talked about quite a bit. I'm really bullish about the opportunity for growth in that region in particular.

Great, thanks so much.

Alan Ratner, Zelman & Associates.

Good afternoon, everyone. Congrats on the good quarter, and congrats to Larry and Hilla as well. Steve, just thinking about the strength in the quarter on the order side and the entry-level-plus segment you guys have been talking about the last few quarters, I was just hoping you could talk a little about that piece of the business, what you're seeing there, which markets you have expanded that product into, what the uptake has been among consumers?

And generally as you think about the outlook over the next few years, to get to that 10,000 number or whatever the right number is, how do you see the business evolving from a price-point perspective, from a geographic perspective? Are there any areas where you see the business evolving significantly from where you sit today?

The entry-level-plus segment and the entry-level segment has been a little less than 20% of our total sales in 2015. It's a relatively new strategy for us that we started embarking upon earlier last year. And as you know, there's sort of a lag in the homebuilding business to be able to get land and new communities online. We certainly haven't achieved any results from that yet specifically. But I expect it's going to be sort of a three-year evolution to get us from 20% into that 35% to 40% number, which is where we want to ultimately end up. Maybe, by the end of this year, we will be at 25% entry-level, entry-level-plus. Then 30% by the end of 2017 and maybe 35% by the end of 2018.

That is how we are looking at it. We're trying to be very choosy about where we select those locations. We are not going to go out to the C- minus and D markets. We really want to do that product in the B, B-minus- and C-plus locations. We don't see ourselves as a shelter builder. We see ourselves as more of an entry-level-plus builder. We're going to try to execute that strategy carefully.

Great, that's very helpful. Second, you brought up your stock price trading below book value. We have seen some other builders either introduce buyback authorizations or expand existing ones. Just curious how you weigh the buyback possibility versus investing in the business, either organically or through M&A at this point at the cycle?

That is a topic we have heard a lot about lately. We have gotten a lot of calls on it, of course. That is something we talk about with our Board on a regular basis. It's something we're giving careful consideration to. We haven't made any decisions yet to move forward with a stock buyback. We still believe we have good land opportunities in front of us to be able to deploy our capital and get a solid return. But certainly our minds could change on that and we could go in that direction, but we just haven't made any decisions around that yet.

Okay, great. Good luck.

Thank you.

Stephen East, Evercore ISI.

Larry, I will add my congratulations. I'm sure there's going to be a parade, but I think you have been a great asset, not only to Meritage but the industry, so I hope you enjoy your retirement.

Thank you, Steve.

You're welcome. Steve, I guess -- you talked a little bit about the orders. If we could delve in a little bit more, you made the comment that the biggest thing the industry needs to do is ramp up absorption pace. Is that what was really driving the strong performance in the fourth quarter?

I mean, you surprised us in nearly every market, and I'm trying to understand if that was your goal, how do you get there? Was it through incentives, different mix than what we were expecting? Sort of along those lines, where would the gross margin in the backlog be versus what you finished the fourth quarter in?

First, I would say it definitely wasn't incentives. We didn't increase our incentives in the fourth quarter. I think we had some high-quality new communities open. As ironic as this may sound, we had some new communities actually open in Houston that performed exceptionally well. We actually had our best month in Houston of the quarter in December, so we had good strength going into the end of the year.

But we got good sales out of Arizona; we got good sales out of California. Our sales in Colorado picked up. It was an across-the-board victory. And I can't really put my finger on anything other than the market.

Certainly, our people worked hard to finish the year strong and we had some success on the sales side, but it's nothing that we did to increase incentives. We had some lot releases in certain markets. That certainly helped. And then the weather cooperated with us. Certainly I think we outperformed the industry, but it was nothing unusual that we did.

Okay. And then just to follow up on that, do you have an absorption target that you all would like to get to for 2016? And then could you give us an update on -- you all talked a lot about really revamping your Atlanta and Nashville divisions and talked some about where you are at this point and how much further you have to go, et cetera?

We don't have a specific absorption target for 2016 that I want to put out there. But I can tell you 2.5 sales per month is not good enough and it needs to be better than that. So we aspire for higher absorptions than that across-the-board.

I can tell you I am here in Atlanta as we speak, and I'm very bullish about the opportunity here from a market perspective, but also with our new leadership team and our new sales team and I could say the exact same thing about Nashville. I was there the other day. We're doing a tour of our South region this week. So all eyes at Meritage are on this region and this is a part of the business that we expect to grow the fastest going forward.

All right, thank you.

Thank you.

Stephen Kim, Barclays.

Thanks very much, guys. Again, congratulations, Larry. We're going to miss you.

Thanks.

I had a philosophical question, I guess. Steve, you laid out this very intriguing 10,000-unit figure and I understand that it's caveated and so forth. And in many ways, it sounds reasonable, provided market conditions hold, but that's kind of the -- the question I would say certainly so far in January, the market has been wrestling with. How predictable is the next couple of years' outlook, is the potential for recession? That's clearly what's coming to the market broadly, not just builders.

In that vein, as I look at the market out there right now, we see a couple of things, and I know you see them as well, that would maybe make it look like this is a time period we could look back on and say, well, gee, this was actually the beginning of some signs of some softness in the industry. And yet at the same time, it's not clear. So we could be looking at a period over the next 12 months, 18 months, where you could actually see a downturn in the industry. Or it could be like 2000 where you saw a lot of weakness external to the industry but the industry itself was fine.

What I find different from the 2005 time period or the 2000 period is that you have a lot more land than you used to back then. You have about, call it, three and change years of land owned. Back then, you guys owned about 1.2 to 1.7 years of land, depending on what you were talking about. I guess as you think about incremental investments in land, how do you balance the need to be flexible, which is ultimately what allowed Meritage to perform so well following the last downturn with the fact that your land holdings is higher than it has historically been?

Let me see the right way to answer that. First of all, I'd say I'm not seeing any signs of recession from the housing perspective. December was a very good month for us. January we are off to a good start. We're getting good vibes from our sales floor. I'm not seeing anything on the horizon, outside of Houston, that leads us to believe there is a recession and to connect with what's happening on Wall Street and what's particularly happening to the housing stocks and to our own stock over the last 45 days or so.

From the flexibility perspective, as it relates to land, there isn't a lot of flexibility today, because there isn't a lot of land banking capacity, as I've already talked about on previous calls. We can't land bank 80% percent of our loss, there's just not enough land bankers to do that. Most land bankers that are in business don't have the capacity to do that, and it's a little more expensive than it was last cycle.

To that end, we can't buy lots from developers on a finish basis or on a rolling-option basis like we could in the early 2000s and the 1990s. Yes, we want to be more flexible, but there's not a lot of levers we can pull to increase our lot supply without stretching our balance sheet. We're going to continue to be choosy about what land we buy and what locations we buy and what product niche. And we are watching every week, every month, every quarter, those macroeconomic indicators out there and looking for what cracks there might be that could affect our business. And we want to be flexible with our strategy. But right now, absent looking at the Wall Street Journal every day, from what I hear from my people on the ground, I'm pretty positive about the business.

Great, that's very helpful. Thanks a lot for that, Steve. I guess my second question is a little more specific to Texas. You've talked about, in Texas, opening up more of the entry-level-plus-type communities in 2016. And I imagine this is something you have already kind of started, but I would imagine that the entry-level-plus is still probably lower than your overall average price, but we have been seeing pricing trending higher in your Texas region in your orders. And actually seemingly the rate of growth accelerating in 4Q in terms of your average price.

I was wondering if you could reconcile what we're seeing in Texas there. Are we seeing maybe more of a mix shift with Dallas or something in these order numbers in the price specifically?

This is Phillippe. I'll answer that question. It was a big part was Dallas. We had a much stronger Q4 in Dallas this quarter -- or, sorry, 2015 versus 2014. Dallas, we haven't shifted completely to entry-level-plus. Most of that land will be coming on in the later years, as Steve mentioned earlier. Dallas was a big part of our ASP increase.

But also we still continue to see strength in some particular locations in Houston. Sugarland, Houston area, we opened some new communities in that area at a higher ASP and saw strong demand. The impact of entry-level-plus in Texas won't be felt until later on this year and into 2017 where we really shifted our portfolio in Austin and starting to shift it in Texas -- Dallas and Houston towards that back half of this year.

Okay, great. That's clear. Thanks, Phillippe, and thanks, guys.

Nishu Sood, Deutsche Bank.

Thanks. And best wishes to Larry and Hilla. Let me start off by asking about the weather and labor issues that, Steve, as you mentioned, really impacted the middle of last year for you folks. From your comments, it sounds like in Denver you mentioned, in Dallas, that a lot of those closings should be made up in the first half of the year.

Given that a lot of people are talking about how these issues might linger for some time, that seems pretty favorable and it speaks to your managing through those issues. So I was wondering if you could dig through that a little bit and just describe -- we heard earlier, another builder talking about managing through specs a little bit more.

What are you putting into place on the ground? And how much is it going to affect the numbers, because at the same time, Larry, you mentioned your turnover rates will be lower, although I think you're saying that's because of orders coming in pretty late. Just wondering if you could dig into that for us, please?

I'm not sure what you are looking for specifically. Certainly, we caught some of those deliveries up in December. We had a huge December for deliveries in those markets and our other markets. We think we're going to make up the rest of them here in the first quarter of the year.

But there's no real specific strategies around closings, other than what we're doing on the construction side to expand our trade base, to build better relationships with trades, to get more labor onto our jobs, and to do things that allow us to build houses more in an even-flow method. We want to get houses started earlier in the month. We want to balance out our starts with our specs. But it's a market-by-market, community-by-community strategy. Phillippe, maybe you want to add a little to that?

Yes. I think it's important to understand that when you have as disruptive weather, as we did in Dallas and Colorado last year, it's not just one builder that feels that. It's all of us as an industry that feel it, so then we are all coming out at the same time trying to catch up at the same time. So it creates a real acute pressure on trade capacity that you work through. And we're starting to see us work through that. Now, barring another terrible weather event, I think the trade capacity can handle more, but it's not completely resolved. But that weather created a major disruption in those two markets.

Got it. So it's not necessarily that the labor issue is resolving itself faster than you might have expected earlier, but with some normalization of the weather pattern, it seems to be righting itself at least.

Yes, that's correct. The labor issue is certainly not completely resolved. I think we have taken some steps as a Company to better address it, but it's still a challenge out there that we're going to deal with in 2016. And if we don't have weather to compound the problem, we will certainly be able to manage to it.

Great, the second question I wanted to ask was about the entry-level-plus product. As you mentioned, as you get to that 10,000 closings over the next couple of years, it will be an increasing percentage of your overall deliveries. One concern that some folks express is that the dilutive effect on pricing might cause ASPs to be negative as we go out a year or two, if the entry-level is picking up. Clearly, there's a lot of moving parts, what markets are delivering.

You have been in Texas mainly with it, so as you go outside of Texas, that will have an influence as well, but how do you think about that? Will your ASPs at some stage face some pretty significant headwinds from entry-level becoming a -- entry-level-plus becoming a much larger part of your business?

I hope they do, because I would like to see our ASPs over the long term come down. I don't want to see them continue to expand. I feel better at a higher rate environment that we may see years down the line with a lower ASP. So that's the whole strategy and that's the goal.

Lower ASP doesn't mean lower EPS. I think we can have lower ASP and higher EPS, because we will be driving more units and more volume. And I don't believe we have to take a lower margin on lower-priced homes. At least, that's not our strategy for sure.

I do hope over time that our ASPs, at the minimum, stop climbing. Again, this is mix driven. I'm not talking about appreciation, I'm talking about mix. But as our mix moves more to entry-level-plus, our ASPs will definitely flatten or decline.

Okay, great. Thanks.

Thank you.

[John Lovallo], Bank of America.

Thanks very much for taking my call. The first question I had for you was on the land sales in the quarter. It looks like there was a little over $20 million, which was a pretty big number. And on top of that, the margin on it of around 27%, by our calculations, was a lot higher than usual and it contributed about, call it, $0.09, at least, in EPS. So maybe you can help us understand what that land sale was and why the margin was so high and if you do anticipate more of this going forward?

John, thanks. As I said earlier, it's kind of an anomaly. This was land that we either held for quite a while from the downturn that we wanted to clean up the books at the end of the year and get rid of, that we didn't plan to build on, and we saw an interest from other builders, or land that we had always intended to sell as part of a bigger picture and a bigger strategy.

We went in and bought land for maybe multiple positions, and maybe there were some positions on either smaller or larger lots that we didn't have a product for that was always part of the plan to sell. I wouldn't expect that, going forward, to happen on a regular basis. It was a one-time situation and I wouldn't read too much into it.

Okay, great. I might be mistaken on this, but I thought generally in the first quarter, you guys provided a little bit more of an outlook, including the first quarter EPS and full-year EPS. Is there any reason why you guys haven't done that today? Or is this something we can expect next quarter?

No, it's never been our strategy to provide quarterly EPS guidance. I think we had to do that last year, because the analyst community got quite a ways ahead of us, and we wanted to get in more alignment. So going forward, it will be our strategy to update our unit guidance for the year as we go through the year every quarter and our community-count guidance and that's what we plan to give going forward. We think that's in line with our peers and that's what we feel most comfortable with.

Okay, thank you very much.

Thank you.

Mike Dahl, Credit Suisse.

Thanks for taking my questions, and congrats, Larry and Hilla. Steve, if I go back to some of your previous comments about absorption and you mentioned that you're not happy where you are today. And obviously the shift towards entry-level-plus can help some of that, but it sounds like, just on a broader basis, the current portfolio is kind of underperforming on an absorption relative to where you would like it, but at the same time, you don't have an interest in doing anything on the pricing or incentives front to drive that absorption.

I'm just curious how you're thinking about that developing over the next six, 12, 18 months from here. Is it just waiting for the market to come back on some of the existing communities or is there a point in time where you have in your mind, okay, if the buyer's not there in greater numbers by X, we will start to shift a little more aggressively on the sales side?

I don't think we're underperforming relative to our peers on the absorption side. I think we're right in there with most of our move-up homebuilder peers, but I think we are underperforming as an industry. There just isn't the volume in the industry in many markets. Look at Phoenix, for example. It's 40% to 50% below its historical 30-year average.

The volume is just not there. And we're not going to force the market by discounting our prices and taking a lower margin. I actually wish our margins were stronger. I think we're going to get those absorptions back over a longer period of time by shifting our product to the more entry-level-plus, as I've already articulated.

We are also going to be doing more attached product on the East Coast and Florida and in the South region -- or in the southeast region and in the East. I think that's going to help our absorptions, because those communities tend to have a little higher volume and be at a little lower price point. I'm not losing sleep, staying up at night thinking about our absorptions, but certainly, I would hope that as a Company in this industry, we can improve them.

Okay, that's helpful. Just so we're clear on the entry-plus as it relates to Houston and what it may have contributed to the sales, I don't know if the comment on the Sugarland, if that was an entry-plus community, but any sense of within Houston specifically, what percentage of your portfolio is now entry-plus? How does that compare year-on-year? And can you give us like a guideline for are those turning at three to four sales a month, is it four to five, compared to your move up, that might be two to three?

I would say that comment got a little jumbled there. We're not saying we are a big entry-level-plus builder in Houston. I think Phillippe was just trying to say we had some strength in Houston in the fourth quarter, particularly in that Sugarland location.

I would tell you we had a very good December. December was our best month of the quarter in Houston, but it was because we had more communities. We had 31 communities at the end of the year in Houston, versus 23 communities the year before. The communities count was higher.

Our sales for the fourth quarter in Houston were slightly above what they were a year ago, but, again, that was because we had more communities, not because of the sales per store increased. The sales per store actually decreased in the fourth quarter. And our ASP in Houston is about $336,000, so it's below the Company average, but it's not because we have a big entry-level-plus percentage. We're more of a first and second move-up builder there.

Okay, then stepping back as a general guideline, are you targeting four to five? Is it three to four? What type of absorption are you looking to get as you roll out the entry-level-plus across your platform?

Entry-level-plus is more around four. Our move-up businesses we target closer to three. In some situations, we will take two to two and a half. As a Company average, we are really striving to get to three, but for entry-level, entry-level-plus, it's going to be higher than that.

Great, thank you.

Jade Rahmani, KBW.

This is actually Brian Jones on for Jade. My first question was regarding the improvement in the G&A expense for the quarter. Was there any specific actions that were taken to achieve those improvements?

Larry, do you want to take that one?

Sure. What we're seeing there is the impact of us just cutting back on some of the compensation in the quarter, particularly the bonuses. The year ended up pretty good, but it still wasn't up to our internal expectations, so some of people's bonuses were cut back because of that. I think you're seeing that reflected there.

And I think you've got to be careful reading in the fourth quarter of this year and extrapolating it out into the future, because I do think that's a little lower than what the run rate will be going forward. And if you look back at what the run rate was a couple quarters -- it was going to bounce back up closer to that rather than remaining at that low level.

Okay, that's very helpful. My next question is revolving around the land markets. Are you guys seeing any pricing weaken or does that make land more attractive for you guys? Or are you guys maybe underwriting more conservatively, given the capital markets volatility? Along those same lines, where are you seeing the strongest demand at? And maybe any markets that the demand is softening?

I'm not sure I quite understand the question.

Yes, throw the question again. We were fumbling with some things here. You were asking about the land market.

Yes, the land market. Are you guys seeing pricing weakening at all? If so, does that make the land more attractive, by any chance? And along those same lines, are there any markets where you are seeing stronger demand, maybe any markets where demand is softening?

No, not really seeing the price of land come down at all. The best of the markets, we are seeing sort of it stabilize and not see the rapid inflation we were seeing in 2013, 2014, and most of 2015. Like Phoenix, for example, is a good market where we have seen them sort of flatten, I would say. But absolutely not down.

The strongest markets we see as it relates to our competitors buying land, we talked about the South region. There seems to be a lot of investment going on there. California continues to be the place that people invest, especially Northern California. In that particular example, I will tell you the price of land continues to go up. Denver, as well. The price of land continues to go up in Denver. Definitely not down. More flat at best and up in some of the stronger markets.

Okay, thank you. I appreciate you taking the questions.

Thanks.

Will Randow, Citigroup.

Thank you, and congrats to Larry and Hilla. In regards to -- it's been touched on a few times, but your 10K closings numbers. Let's say the market does get us there in the next couple years. Should we assume that you will be thinking about taking up leverage to get there or is it more you think land banking will be there, or a combination of both?

I don't think we're going to take up leverage significantly. I think we're going to stay in that 40% to 43% debt-to-cap range, and I think the retained earnings that we have, in combination with the modest amount of land banking we're doing will get us there.

I would reiterate that I don't think it means leveraging up the balance sheet at all.

Okay, thanks for that. On two bookkeeping items, you mentioned SG&A, it sounds like, a little bit lower year-over-year, but don't expect it to have a [ten handle.] And then on taxes, you guys have been running a little bit lower than we would have anticipated, I assume due to credits. Could you talk about how we should think about that for 2016?

The 2016 is going to be a little bit more easy to understand because they extended the law to include 2016. So we are able to book the green tax credits every quarter and not wait until they re-up the law each year. You should be looking at about a 32%, maybe a little bit more tax rate every quarter.

There is a possibility we may pick up some true-ups from prior years that would even lower it beyond that, because we start out with a little bit of a conservative assumption on how many houses will qualify for the tax credit. And then as we do the specific work, it usually comes up to be a little bit larger number, but I think 32% is a pretty good number to use throughout the year.

And then on SG&A? I know you just mentioned it in the prior question. Sorry.

I would reiterate what I -- would repeat what I said before about it, so --

Got it. Got it. All right. Thanks again and congrats on the progress.

Thank you.

Excuse me, Mr. Hilton. I see that we are coming up on the one-hour mark. Are you able to take one more questioner or two more questioners?

Operator, I think we will take two more questions and then we will adjourn. I think Jay and Susan are probably the next two up, right?

Okay, thank you. We will take a question first from Jay McCanless from Sterne Agee.

Good morning, everyone. First question I had is going back to what Nishu was talking about earlier. You guys have done a great job at taking in orders over the last couple quarters, but it doesn't look like you have been closing homes as fast as we may have expected. Is there anything we need to be worried about with the backlog or is this just strictly a function of timing of when you've taken those orders.

Yes, this is Phillippe. It's really a timing issue. Again, we were stalled out in a couple of our markets due to the weather and trades catching up with the business. We expect to close those houses in the next two quarters and tighten up our backlog conversion throughout the year as long as we don't have any disruptions, being more predictable with our business. It really is a timing thing.

Okay. The second question I had is on the cancellation rate. Great job at getting that down there. Is that something we need to be worried about in terms of the gross margin? And I think you guys said incentives were flat or maybe slightly up this quarter. Are you guys foregoing something in terms of profitability to drive that can rate lower or was that just good work on your part?

It's too low. I wish it was a little higher. Not a lot higher, but a little higher. 7% to 8% is just too low. We need to try to put more people through the system. I wouldn't think too much about that. It's not really a factor, per se.

It is more of an indication of the market being stronger than maybe some of the perceptions that are out there then.

I agree with Larry on that.

And credit too. Getting people prequalified in the beginning is tighter.

All right. Thanks for taking my questions.

Susan Maklari, UBS.

Thank you, good afternoon. Thanks for taking the question. In terms of your efforts to try and even-flow your production a bit more, along with that, should we expect your spec levels to rise? And can you talk about the kind of margins you have seen on your specs relative to your to-be-built projects?

Yes. This is Phillippe again. I think we did a good job in 2015 tightening up the spread between dirt and spec. In the first quarter we had some issue there, but I think we were a lot smarter about the specs we were starting throughout the year and we were able to tighten it up. I would say we operate somewhere between -- right around 200 basis point kind of difference between spec and dirt.

As far as even-flow, absolutely specs play a role in that, but it's more about managing the specs that you want to start and the dirt and how you prioritize it versus actually increasing our spec count. We're pretty comfortable with the way our spec count is per community, and I wouldn't expect for you guys to see that go up very much.

Okay, good. That's helpful. One last question. As you think about that 10,000 target that you have out there for 2018, how do you think about your growth rate relative to the broader industry to get there?

I expect it to be equal to or better than the industry. Throughout our 30-year career in homebuilding, we have grown at a faster rate than most of our competitors, so I don't expect that to change. We are a growth story and we're going to continue to make that happen.

Okay, thank you.

Okay. Well, thank you very much for your participation in today's call. That concludes our remarks. I'll look forward to talking to you again next quarter. Thank you very much.

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