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M.D.C. Holdings, Inc. (NYSE:MDC)

Q4 2012 Earnings Call

January 31, 2013 12:30 PM ET

Executives

Robert Martin - Vice President, Finance and Business Development

Larry Mizel - Chairman and Chief Executive Officer

John Stephens - Senior Vice President and Chief Financial Officer

Analysts

Michael Rehaut - JPMorgan

Ivy Zelman - Zelman & Associates

Nishu Sood - Deutsche Bank

Adam Rudiger - Wells Fargo Securities

Dan Oppenheim - Credit Suisse

Ken Zener - KeyBanc Capital Markets

Joel Locker - FBN

Alex Barron - Housing Research Center

Stephen East - ISI Group

Operator

Good afternoon, we are ready to begin the MDC Holdings' fourth quarter earnings call. I'll now turn it over to Bob Martin, Vice President of Finance and Business Development.

Robert Martin

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings' 2012 four quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and John Stephens, Chief Financial Officer.

At this time, all participants are in the listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2012 annual report on Form 10-K, which was filed with the SEC today.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

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

Larry Mizel

Good morning. I'm pleased to announce the fourth quarter income of $29.7 million or $0.59 per share, making our fourth consecutive quarter of profitability with both, our Homebuilding and our Financial Service Operations posting significant year-over-year improvements. Our fourth quarter completes a strong turnaround for our company.

For 2012, we reported a year-over-year improvement in our pre-tax income of nearly $170 million, resulting in our first annual pre-tax profit since 2006. On the strength of significant improvement in home deliveries, we grew home sales revenues by $158 million during the quarter. This strong increase in volume resulted in a 300 basis points decline of our SG&A rate to 12.6%, approaching a more normalized rate for our company on a long-term basis.

Also we saw a meaningful improvement in our gross profit margin, which expanded by 120 basis points sequentially from the third quarter. We are encouraged by the progress we have made in these areas, which allowed us to increase our fourth quarter core operating margin by nearly 500 basis points year-over-year.

Looking at financial services, a $7.7 million in earnings for the fourth quarter was again a strong result achieved in part by capitalizing on favorable mortgage market conditions, and increased loan volume as well as reduced charges related to mortgage's pre-tax. For the full year, our financial services earned $28.5 million. It is our best result since 2006 and almost 50% higher than the total amount earned for the last three years combined.

We achieved a 66% year-over-year increase in net home orders, driven by a 98% growth in our sales pace, even as we increased pricing in the majority of our subdivisions. Given our recent sales activity combined with a low supply of new and existing homes, we are optimistic about our prospects for the coming spring selling season. At the same time, we are applying even closer scrutiny to the balance between sales volume and price increases, in an effort to maximize the margins we earn on each house.

With the acceleration of our sales pace during 2012, we saw a decrease in our community count both sequentially and year-over-year, as certain communities sold out more quickly than originally anticipated. We have responded by significantly accelerating the pace of our new land acquisitions.

During the fourth quarter, we spent more than $150 million to acquire over 2,300 lots in 67 communities across our market. This represents more lots than we acquired in the previous four quarters combined. The addition of these lots drove our first year-over-year increase in lots supply since June 2011.

In addition, nearly 90% of the lots acquired in the fourth quarter were finished with the potential to positively impact subdivision count, sales and deliveries in 2013. We start 2013 with an inventory of started homes that is 64% greater than a year ago, supported by 58% year-over-year improvement in our unit backlog.

Combined with our recent finished lot purchases and our increased absorption pace, the increase in our supply of started homes positions us well for meaningful increases to our sales and closings in the future periods. As we look to buy more lots in the future, we bring a strong balance sheet with robust liquidity and an overall financial position ranked by the rating agencies as one of the industries best.

Earlier this month, we added more muscle to our balance sheet by issuing $250 million of 30 year notes, which provide additional resources to help sustain the growth trajectory we established in 2012 for the long-term.

Thank you for your interest and attention. I would like to thank our dedicated employees for their hard work throughout the year, as they have made it possible for us to report such positive quarterly and annual results today.

I will now turn the call over to John Stephens for more specific financial highlights of our 2012 fourth quarter.

John Stephens

Thank you, Larry. We're on to Slide number 4. Our closing dropped 54% to 1,221 new homes, with all our market experiencing year-over-year increases and particularly strong results in our west markets, specifically our California, Nevada and Arizona operations.

The increase in deliveries was driven largely by a high number of homes in our beginning backlog as compared to the prior year due to increased net new order activity in the first nine months of 2012. Our backlog conversion rate was 61% for the 2012 fourth quarter, in line with 60% in the 2011 fourth quarter and our historical average of 64%.

Our average selling price for the 2012 fourth quarter was up 9% year-over-year to $319,000, increasing in most of our markets, primarily due to price increases and reduced incentives, and to a lesser extent from a mix shift to better located communities. Increases were particularly strong in each of our west region markets as well as our Virginia market, which all showed double-digit year-over-year improvement.

During the quarter, we increased home prices on average by about 2% in over half of our communities. This was on top of the increases in each of the previous three quarters.

We continued to make progress with our gross margins during the quarter. Our gross margin from home sales was up 180 basis points year-over-year to 16.7%. Excluding the $1.1 million of inventory impairments recorded during 2012 fourth quarter, our gross margin from home sales was up 17%, a 150 basis points over the 2012 third quarter and up 280 basis points in the last six months.

It should be noted that the 2011 fourth quarter included a $2.3 million warranty benefit, whereas the 2012 fourth quarter had no such benefit. The improvement on our gross margin percentage was driven primarily by price increases and incentive reductions in many of our communities. In addition, our spec homes have seen significant margin improvement due to increased demand for these homes in many of our markets, faced in part on a low supply of existing resale inventory.

Consequently, the margin between our dirt and spec homes was virtually non-existent for the 2012 fourth quarter. And as previously noted, we continue to remain focused on balancing home sale rates with reducing incentives and maximizing the value of each home we sell. As a result of these efforts and improved market conditions, our margins and backlog have continued to improve.

However, in the short term we may see some margin pressure from an increase in interest and cost of sales related to our recent debt offerings as well as higher land and building cost. But we also have the opportunity to offset these items by increasing prices, accelerating inventory turns and continuing to invest in home building assets.

Our homebuilding SG&A expenses as a percentage of home sale revenues was down 300 basis points to 12.6% versus 15.6% for the 2011 fourth quarter. The improvement in our SG&A rate was driven by greater operating leverage, resulting from a 69% increase in our home sale revenues.

The year-over-year increase in our G&A expenses to $26.1 million was largely driven by an increase in incentive-based compensation. In the 2011 fourth quarter, we significantly reduced our bonus accrual resulting in a meaningful credit to our prior year income statement, whereas our 2012 fourth quarter included higher incentive-based compensation expense associated with significantly higher profitability.

The 2011 fourth quarter also benefited from a $2.9 million reduction in our legal accrual that did not recur in the 2012 fourth quarter. And on a sequential basis, our G&A expenses were higher, primarily due to a $2.2 million legal recovery that benefited our 2012 third quarter. Based on what we know, our Q4 G&A of $26 million is our current quarterly run rate.

Our commissions expense, which is a variable cost, increased $4.9 million or 59% on a year-over-year basis, which was directionally in line with the 69% increase in our home sale revenues. Our marketing expenses also increased on both a sequential and year-over-year basis due to increased volumes and revenues.

Our net new orders for the quarter were up 66% on a year-over-year basis. The increase in orders reflected the overall improvement in most of our markets, better execution and changes in our sales process, and a greatly reduced cancellation rate, which fell to 24% in the 2012 fourth quarter from 45% in the 2011 fourth quarter, and 27% in the 2012 third quarter.

And on a per community basis, our sales rates were up 98% year-over-year to 1.86 sales per community per month compared to 0.94 per community in the 2011 fourth quarter. On a sequential basis, our orders were down 14% from the 2012 third quarter, which was less than our normal seasonal decline. The decrease was driven more by selling out of communities than a seasonal drop in demand, as our fourth quarter monthly absorption rate as compared to the third quarter was down only slightly.

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

As you can see from this slide, our land acquisition efforts have continued to accelerate significantly in the second half of the year, with the fourth quarter resulting in the purchase of over 2,300 lots, almost doubling what we purchased in the third quarter.

In addition of the lots purchased during the fourth quarter, roughly 70% were the important west markets of Arizona, Nevada and California. With respect to our lot supply, we currently own or control nearly 11,500 lots, which consistent with our strategy and past operating experience, represented a 3.1 year supply based on our 12 months delivery pace and a 2.6 year supply based on the last 12 months order pace.

The fourth quarter lot supply represented a 10% increase in total lots from the 2012 third quarter, and was our first year-over-year increase in lot supply since June of 2011. In addition, we continue to see active deal flow with our current land pipeline.

With our strong balance sheet that included over $700 million of cash and marketable securities at the end of the year, and an equity balance of over $880 million, before realizing any portion of our $248 million net deferred tax asset, we believe we are well positioned to take advantage of land opportunities in the future.

In addition to further bolster our liquidity and financial position, we issued $250 million of 30-year senior unsecured notes earlier this month. One other item to note on the balance sheet, the company accelerated the payment of its 2013 dividend of $1 per share into December of 2012.

On this next slide, you can see that our profits from our financial services operations have improved meaningfully compared to last year, with our pre-tax profit of $7.7 million in the 2012 fourth quarter versus a loss of $1.3 million a year ago, with our mortgage company being the primary contributor by generating $7.3 million of pre-tax income.

On a sequential basis, our financial services income declined $1.6 million due to increase in insurance reserve at our captive insurance companies. Much of the improvement in our mortgage operations income was attributable to an increase in the volume of loans lot and originated, related to the increase we've seen in the overall homebuilding market, combined with favorable overall mortgage market conditions.

In addition, the 2011 fourth quarter included a significant charge related to increasing loan loss reserves, as we settled claims with the key financial purchaser of our loans. While our margins for this line of business may moderate in future quarters, we still believe it can remain reliable quality earning stream for us in the future.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Rehaut with JPMorgan.

Michael Rehaut - JPMorgan

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

Larry Mizel

I think what you have to look at is, we have been able to demonstrate our goal of sequentially increasing our gross profit margins, while acquiring land in line with the market. The land in line with the market means that there is good pricing power for the product. And there is always a timing differential, but the timing differential is usually mitigated by the construction period, of which it takes you to build and to open the new communities.

And even though one could say it's not a perfect alignment, I go back to the history of what we have done in prior years, maybe even several decades that we buy land in line with the market. We do not speculate in land. We're not a large developer of land. And we've been able to create reasonable gross profit margins and also a very good return on equity, which is ultimately the driving point of what we're doing.

So as we look at our goal of expanding gross profit margins, we work with the fact that land values have gone up. But as everyone has reported in the market conditions is home sales prices have gone up rather substantially, even in the last 30, 60 days, which has generally been a slow period on the fourth quarter. But this year it has only been nominally slower, so we're optimistic of obtaining our goal of continuing to improve our gross profit margins and considering the local conditions that we're dealing with.

Michael Rehaut - JPMorgan

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

John Stephens

I mean I think the way we're looking at it is, Mike, we're going to see increased community count as we kind of work through the first six months of the year. As we indicated earlier, most of the lots we purchased I think it was nearly 90% were finished. So I think it's probably more in Q2, where we see more openings. But of the 67 communities that we acquired lots out of during quarter, 42 were new.

So that gives you a sense, a magnitude of what's new, and obviously we're going to burn some communities off to as we continue to sell-through. But we're not really giving a number out, but I would expect it to increase as we move through the year.

Operator

Your next question comes from Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Larry, you built an incredible machine, and I think that everyone appreciate your strategy on buying finished lots at retail and benefiting from good markets with home price inflation. As you continue to think about your future, maybe you can talk to us a little bit about your thoughts at M&A succession plans, recognizing you're still vibrant and active, but we need to think about the future. Is M&A something that the company has considered in buying a strategic company that is also a finished lot purchaser or just in terms of growth organic, how do you view the long-term thought forum that you've so successfully built?

Larry Mizel

Well, we built a long-term platform for the benefit of the shareholders, that's why when things were more unsettled, we had a substantial amount of liquidity, an extra billion dollars. We are building the foundation for the next cycle. And one has asked me about the next cycle, and I would guess that we have subject to Washington not confusing it.

I believe you can see a nice 10-year run. And that the company with its substantial balance sheet, and you should note the high level of liquidity. And the fact that we did 30 year debt, you can see that we're planning to position ourselves for the re-inflation and the growth of the economy in the United States independent of last weeks report or today's or last quarter.

The country is growing. The homebuilding industry, the opportunities have never been greater for the large builders. The capital markets are open and I would say in all the years I've been in business, this is probably the clearest period of time that I have seen as to the future of the housing industry for those who would have excess to capital. And so we are positioning for the future.

We are looking at all opportunities and you will see us continue to be a very competitive company that has always delivered for the benefit of the shareholders, something that is of true value. The question on the future, I am very excited that's why issued 30-year debt. So you can see I'm highly optimistic.

Ivy Zelman - Zelman & Associates

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

Larry Mizel

Well, I think the future, it evolves everyday. And we have a very strong team here, and we even let some younger guys in, of course, younger as a matter of relationship as to age, as some might call him a little older versus younger. And I think the succession plan is the evolution of the company, we have a lot of experience. And I don't have one doubt that, we will evolve into even a more mature sophisticated enterprise that one can feel comfortable that future management will continue the integrity of the present.

Operator

Your next question comes from Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Why don't you just talk about the debt raise? And in the context of the significant land purchase you made in the fourth quarter, obviously you've kept your cash level heading into the New Year. So as you look ahead here, clearly as you're saying Larry, you expect the growth trajectory and lands plan to continue. So just maybe if you can talk how you would think about financing that? Or are you planning to run your cash down or should we expect further offerings as we go forward here?

Larry Mizel

Well, I'd say two things. One, I would assume that we will accelerate our land purchases during 2013 that one could expect them to be substantially increased over 2012. We are also aware of the fact that at the end of 2014 we have the maturity of a 10-year piece of paper. So we have that in mind.

So we are balancing, to call it the short-term, which is the land that we will be buying this year and next year and going forward with future maturities and we think that the longer we can put, the long-term debt swapping out some short-term. And we'll probably add a little bank line into it. We expect to accelerate what we're doing, subject to market conditions and do it in a meaningful way.

Nishu Sood - Deutsche Bank

And second question, Mike already asked you with this little bit. But on the gross margins I just wanted to revisit what you said last quarter since it was very unusual to hear, such forward-looking guidance from you. In terms of you were committed to increasing gross margins overtime, so having bought several thousand lots here in the fourth quarter, lots that are going to turn into communities, in fairly short order in a kind three to six months, if you're talking of first half of '13, from what you see in the land market and from what you're buying, you have the confidence that what you talked about last time, the rising gross margin trajectory can continue with the land buying cycle that you're following?

John Stephens

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

Operator

Your next question comes from Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities

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

John Stephens

Our thoughts are that there is a push and pull of greater sales and greater gross profit margins. Right now we're coming into the spring selling seasons. And we are very, very sensitive to making sure that we maximize the gross profit margin on every home we sell. And unit sales are part of making net income for the company, but maximizing those gross profit dollars to benefit that is the balancing point between the sales velocity and gross profit margins. And we are looking at enhancing gross profit margins and there is an inflexion point where pushing them will have a tendency that could slow down sales.

But we believe that the spectrum that is open in the market today, and today is only today, is that you have the ability to more likely than not as we come into the spring selling season, probably increase the sales velocity, and I have a little bit of pricing power. And we hope to bring those two elements together. Obviously, subject to consumer confidence and the world in which we live in, but we're definitely focused on a management strategy of maximizing the profit on the homes that we sell.

Adam Rudiger - Wells Fargo Securities

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

Larry Mizel

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

Operator

Your next question comes from Dan Oppenheim with Credit Suisse.

Dan Oppenheim - Credit Suisse

I was wondering in terms of really to some extent to the potential of the margins, but you're going with a strategy opposite of what many others do in terms of specs rates now, with an increase in spec count at this time. Is that in effort to wait as home prices are rising and sell the home later in the process? What's your thought on that? Is that something we should expect to continue over the course of this year?

Larry Mizel

We believe that when there was open to increase our spec count and we did. We believe that if you look back, not too many quarters, we were getting a substantially lower gross profit margin on the specs than we did on the dirt start. And the last quarter, I believe they were close to being equal.

There was a prior history, and maybe, was in '04 or first part of '05, where you could actually get a higher price for an immediate delivery than the dirt start. So taking what we believe is the facts on the ground and the market, we believe we'll have a greater opportunity being able to give delivery and be able to reflect a better pricing for quicker delivery because of the shortage in the market.

The other thing you gain a little bit from a quicker delivery as we all know that construction costs are going up in different categories that we have more transparency on the cost of the house, if their home is underway and generally bought out than a dirt start, which might be something that you don't buy out as far as the purchasing for three or four months. So we believe that this is a well thought out strategy, and one that we feel very good about and we will continue in that mode of expanding that opportunity.

Dan Oppenheim - Credit Suisse

And so just trying to clarify, when you're talking about expanding, is there a goal in terms of what you have in terms of specs per community there, as you grow this over the course of the year?

Larry Mizel

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

John Stephens

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

Operator

Your next question comes from Ken Zener with KeyBanc Capital Markets.

Ken Zener - KeyBanc Capital Markets

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

John Stephens

I think our net debt is almost flat, and maybe you have to re-look at that aspect of the liquidity versus the total debt. And as you add to what was yearend numbers, the transactions we did the first week of January, the $250 million. We have a material amount of latitude to leverage up?

Ken Zener - KeyBanc Capital Markets

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

Larry Mizel

I'm willing absorb the higher interest cost for having 30 year fixed rate debt. I think a few years from now we'll say, wow, great opportunity. As the economy in this country improves, which it will, and we see a pricing moving up around our industry. And we see it actually creating jobs. The program that the fed has currently is, and I see they've renewed it for another short period of time of adding liquidity.

At some point, it will slip and when it does these interest rates will move quickly. And we believe the unique opportunity to have long-term fixed rate debt, it's worth absorbing the cost, which you've commented on which is accurate is an additional interest cost is well worthwhile than exchange for what we're going to have on a perspective basis.

Operator

Your next question comes from Joel Locker with FBN.

Joel Locker - FBN

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

Larry Mizel

I think many of the suppliers are all attempting to push and pull and there is excess capacity that they're trying to utilize or trying to push pricing ahead of really utilizing all there facilities, because it will obviously improve their bottomline. I think we're entering into a period in the housing industry of inflation of cost and inflation of the end product.

I expect that the compelling values will be in new homes, and that the large builders will have an advantage because they will to the extent possibly mitigate the construction cost but it's coming through not on an unsettling basis, but it's something that we're dealing with every day. And you have not only material cost but you have labor cost and I think the labor cost is good for our country.

We're putting a lot of people to work that had to find something else to do and these things will improve consumer confidence, and being able to get a brand new home at a highly competitive price and a great mortgages, something at least that we can see out in the next short period of time because it's a compelling value for the consumer, the apartment rents for new apartments in most cases. And I am speaking of in the west and even in the south you can buy a brand new home for less than a brand new apartment cost.

So that gives us an added advantage for all the guys that are building new apartments, that they're pushing people and the existing apartments by raising rents into new homes, and I think that's a good place to have them. And by the way, the work out of the distressed homes that are being rented as they come off the rental approval over the next five years, I believe it will also be healthy for both markets.

Joel Locker - FBN

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

Larry Mizel

The prior closings in the fourth quarter of land versus sales prices, is that what you're looking for, because that's the only thing we can comment on. What's our aggregate land cost to sales price?

John Stephens

25%.

Larry Mizel

So you're looking at about 25%, so you can see the ratio of land cost to sales price. So you take the sales price and 25% of it is land. So you can do your own model, if land goes up 10%, what does it offset by the home value pricing? And you can see from public information that I believe that they felt that new home price increases were running in the 6% to 10% depending on which market it was.

Operator

Your last question comes from running Alex Barron with Housing Research Center.

Alex Barron - Housing Research Center

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

Larry Mizel

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

Alex Barron - Housing Research Center

I'm looking at just the sequential increase.

Larry Mizel

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

Alex Barron - Housing Research Center

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

John Stephens

Alex, maybe we can take that offline. But I think the sequential increases as we mentioned was about 10%.

Alex Barron - Housing Research Center

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

Larry Mizel

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

Operator

You have one more question from Stephen East with ISI Group.

Stephen East - ISI Group

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

John Stephens

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

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

Operator

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

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