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Standard Pacific Corp. (NYSE:SPF)

Q4 2012 Earnings Call

February 01, 2013 12:00 PM ET

Executives

Scott Stowell - President and CEO

Jeff McCall - EVP and CFO

Analysts

Mike Dahl - Credit Suisse

Alan Ratner - Zelman & Associates

David Goldberg - UBS

Adam Rudiger -Wells Fargo Securities

Alex Barron - Housing Research Center

Michael Rehaut - JPMorgan

Michael Kim with CRT Capital Group

Joel Locker - FBN Securities

Buck Horne - Raymond James

Operator

Good morning and welcome to the Standard Pacific Homes 2012 Fourth Quarter and Full Year Results Conference Call. Today's conference is being recorded.

Before we begin, I would like to direct your attention to the Company's Safe Harbor statement and remind you that this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements.

For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the Company's SEC filings, including reports on Form 10-K and Form 10-Q under the heading, Risk Factors.

A question-and-answer period will follow today's prepared remarks. A recording of today's presentation will be available for replay a few hours after this call ends and will continue to be available on the company's website for 30 days.

At this time, I would like to turn the call over to Scott Stowell, CEO and President. Please go ahead sir.

Scott Stowell

Thank you Vicky and good morning everyone. With me this morning are Jeff McCall, our Chief Financial Officer and Mr. John Babel, our General Counsel. I want to thank you all for taking the time to join us today for the Standard Pacific Homes 2012 fourth quarter and full year update.

To begin, I would like to provide you with a few brief comments about the housing market and our overall results before turning it back over to Jeff who'll provide additional detail about our financial performance.

After navigating an unprecedented and what seems at times endless economic downturn, we saw significant market improvement during 2012. While the economic signs were mixed and our success are bit uneven, we saw meaningful increase in demand in nearly all of our markets translating into higher prices and higher sales volumes as the year progressed, with sales bucking the historical seasonal declines, we typically experienced during the third and fourth quarters.

As we head into 2013, these positive trends along with falling unemployment, historical low interest rates and high affordability should continue to bolster the confidence of the numerous home shoppers who are recognizing that it is a good time to buy a home.

We think this is especially true with our core consumer, the move up a home buyer who has the advantage of being more financially secure and possessing stronger credit than the typical home buyer.

While we are seeing many positive macroeconomic signs and significant improvement in our own performance, news on the economy remain mixed. On the positive side, in addition to extraordinarily low mortgage rate, strengthening housing demand in rising prices, the number of homes listed for sale in the U.S. has fallen by more than 50% from the peak in 2007 and nearly 20% in the past year alone and supply is particularly tight in the west, where we have invested over $1 billion in land since 2009.

Homes also remain extremely affordable, with home prices more than 20% below their July 2006 peak. Single family home building starts in 2012 where 535,000 up 23% from the prior year which represents the first meaningful increase in six years but still significantly below historical averages suggesting there is still significant room for the new home market to grow.

On the negative side, the U.S. and world economic picture remains uncertain, the final shoe in the fiscal cliff debate has still not dropped and the long term availability of mortgage credit remains uncertain.

In our view, the strength of the U.S. economy certainty surrounding U.S. economic policy and the availability of mortgage credit are few of the as of yet unknowns with potential to negatively impact the scope and pace of the housing market recovery.

Against this backdrop of uncertainty and conflicting viewpoints, we view the fundamentals of the housing recovery positively and continue to executive against our strategy, working diligently to proactively improve our business with the goal of outpacing the recovery.

Last year at this time, I reviewed with you our progress against the strategy we began to implement in 2008. I explained that we had successfully completed the first two prongs of the strategy, rightsizing our organization to align our cost structures with our revenue base and fixing our capital structure to create a stable platform for growth.

I noted that in 2012 and beyond, we would be focused on the third prong, leveraging our stable platform to grow revenue and position us for profitable growth. To that end, our focus has been on a simple and clear path for growth; allocate capital to attractive long-term housing markets and acquired land in locations that appeal to the move up market segment, design highly desirable amenity rich communities, construct well-built and innovatively designed homes and deliver an outstanding customer experience.

The disciplined land buying program that we launched in 2009 is beginning to pay dividends. As others have scrambled to find finished lots in good locations under market conditions that have been labeled a severe shortage by metro study, we have the land we need for the near term.

Consequently, we are able to focus on land buying on longer term opportunities during the early phase of the recover leveraging our strong land development capabilities to stay ahead of the curve and out of the fray.

While the land buying market in general became more and more competitive as 2012 progressed, we were able to leverage our experience and connected local management teams, spending $711 million on land in 2012, acquiring over 9300 home sites. All in strong locations our 2012 acquisitions included four market making positions consisting of nearly 4800 home sites.

In the last two and half years we have acquired a total of 10 market making positions in desirable locations, in markets including Austin, Charlotte, Dallas, Orlando, Southern California, South Florida, and Tampa, and we have increased our overall owned and controlled lot position by 60% since 2009.

As we look to 2013 our appetite for land that meets our underwriting criteria remains strong. We are encouraged by the quality and the volume of the land transactions we are working through our pipeline and are targeting a total 2013 land spend in the $600 million to $900 million range.

This strategic decision to buy larger deals early in the recovery has slowed our community count growth in the near term, but positions us to control high quality land in communities in attractive housing markets with stronger community count growth in 2014 and 2015, when we believe this housing market recovery will hit its stride.

In 2012, we opened 50 communities with all new home designs and ended the year with a 156 active selling communities. In 2013, we anticipate opening an additional 60 communities with opening spread relatively unevenly throughout the year. We expect year-over-year average community growth to be in the mid-single digits for 2013, with growth accelerating in 2014 as our longer term acquisitions come online. As of the end of 2012, we already owned or controlled 109 communities that will open in 2014 and beyond.

As we look forward, we continue to believe that our greatest opportunity remains among the move up home buyers we have historically served best. As a result of our company wide focus on this important consumer group, we were able to drive increased revenue in 2012 evidenced by the year-over-year ASP growth in all of our markets other than Southern California, where the move up home buyer has been our focus for nearly 50 years.

Comparing the fourth quarter of 2012 to 2011, our average sales price was up 44% in Northern California, 27% in Colorado, 19% in Texas, 17% in Arizona, 13% in Florida, and 7% in the Carolinas.

Turning now to our results. I am proud of our strong 2012 financial performance which is proof of both the significant progress we've made executing our strategy and the lift we have experienced from the beginning of a real market recovery.

While I prefer the headline number of $487 million of net income and I am pleased that we have the majority of our tax deferred asset back on our books, I am equally pleased with the underlying performance of the business.

Excluding the $454 million tax benefit, we earned $77 million during 2012, or $24 million (ph) or $0.05 per share in 2011. Including the tax benefit we earned $531 million or $1.44 per diluted share during 2012.

For the quarter excluding the tax benefit we earned $33 million or $0.08 per diluted share. Net new orders were up 44% for the full year and 60% during the quarter, despite a difficult comparison to the 44% increase in year-over-year order growth we experienced during the fourth quarter of 2011.

The 44% growth in orders we experienced during the full year of 2012, led to an impressive 106% increase in the number of homes in our backlog to 1404 homes and a 122% increase of $515 million in dollar value. Our absorption rate for the quarter was up 70% year-over-year and 3% compared to the third quarter.

Bucking seasonal trends it was only the second time in the last 15 years that we've experienced a quarter-over-quarter increase in absorption rates from third to the fourth quarter. Fourth quarter absorption rates were particularly strong in our California, Florida and Carolina markets.

Home building revenues were up 40% for the full year and 43% for the quarter with an average selling price of $362,000 for the full year, and $388,000 for the quarter, each up 4% from the prior period.

We were also able to make significant year-over-year and quarter-over-quarter progress with our gross margin, which was 20.5% for the full year, up from 19.6% for 2011, and 20.8 % for the quarter, up from 19.4% in the fourth quarter of 2011.

In the constant balancing act between margin and sales pace we plan to continue to emphasize margin in 2013 with an ongoing community by community evaluation of our value proposition to tactically raise prices and reduce incentives as demand warrants.

During the fourth quarter we were able to raise base prices at a 112 communities. We were able to reduce incentives to their lowest levels in over three years, while at the same time increasing our absorption rate to 2.2 homes per community per month, up from 1.3 per community per month for the 2011 fourth quarter.

With our strong backlog and solid demand evidenced by the 435 new orders we took during the first month of this year, we're off to a good start in what we expect to be a strong 2013.

Now I'd like to turn it over to Jeff to share more detail regarding our financial performance.

Jeff McCall

Thank you, Scott. During the quarter we reported home building revenue of 420 million, which included $42 million of land sales, attributable to closings of land sale contracts we acquired as part of few of our large 2012 land transactions.

While, like the 43% year-over-year growth comparison, we're now in the business of land sales, so we're going to focus our discussion as we typically do on home sales revenue. All references to revenue like gross margin percentage and SG&A percentage are being calculated as a percentage of home sales revenue which excludes land sale revenue.

Our home sales revenue of $378 million, up 29% from the prior year, and up 19% from the prior quarter driving the revenue growth was a 24% increase in number of home delivered coupled with the 4% growth in our average selling price. Geographically, our deliveries remain pretty consistent with approximately 41% from California, 22% from the southwest, and 37% from the southeast.

Our gross margin in the fourth quarter is 20.8%, up 140 basis points from the same period last year after backing up the warranty accrual reduction we took in the fourth quarter of ‘11.

Excluding capitalized interest and the adjustments of warranty accrual, our gross margin was 28.9% up 140 basis points from last year and up 20 basis points from last quarter.

Interest incurred in the fourth quarter was $35.1 million, of which $34.5 million was capitalized and $600,000 was expensed directly to the P&L. Our Q4 cost of home sales included $30.6 million of capitalized interest, equal to 8.1% of home sales revenue down 40 basis points from 8.5% last quarter.

The amount of capitalized interest included in the cost of home sales for homes in our backlog expected to close in the fourth quarter is 7.5%. For comparison purposes the 7.5% compares to 7.6% at the beginning of backlog entering the fourth quarter.

SG&A for the quarter was $49.4 million, representing 13.1% of home sales revenue, a 210 basis point improvement on the same period prior year and a 50 basis point improvement over the last quarter.

As Scott mentioned earlier, during the quarter we reversed the majority of our differed tax valuation allowance resulting in a benefit from income taxes of $454 million. We retained a valuation allowance of approximately $23 million related to the estimated reliable value of our DTA in certain states and a potential future disallowed (inaudible).

In the quarter, the company achieved consolidated pretax earnings of $33.1 million from a 150 average active selling communities and our diluted earnings per share excluded the DTA adjustments of $0.08 per share on a fully diluted share counts of approximately 398 million shares.

Slide six highlights our order growth over the past few years. Solid year and year increases in our order trend began in the third quarter of 2011. The fourth quarter 2012 represented the sixth consecutive quarter of year-on-year order growth in excess of 29%.

In 2011, our fourth quarter orders were up 44% versus the prior year aided by a 19% community count growth. Our 2012 fourth quarter growth rate is up 60% year over year despite community count shrinking 6% and has resulted in a 70% increase in our absorption rate.

On slide seven, we breakdown our fourth quarter deliveries in a little more detail. As we mentioned earlier, deliveries in the fourth quarter were up 24% versus prior year and up 13% from the third quarter. The key drivers to deliveries are beginning backlog and the amount of homes sold and closed in the quarter. Our backlog in terms of number of homes is up 106% versus prior year, at a highest quarter end level since the second quarter of 2008 and up 122% in dollar value.

Of the 1404 homes in backlog, 786 homes are currently scheduled to close in the first quarter. We expect the 786 will be adjusted down due to cancellations and changes to the targeted closing date of homes currently in backlog. Over the past eight quarters that downward adjustment has averaged about 16%.

From that number you add the number of specs sold and closed in the quarter to get your Q1 deliveries. Going into the fourth quarter, we have 212 completed specs and 339 specs under construction for a total Q4 spec sales opportunity of 551.

We were able to sell and close 44% of this spec opportunity, consistent with our third quarter conversion rate of 41%. This elevated conversion rate was attributable both to the lower total number of spec homes available during the quarter and the generally low level of resell inventory available in the market place.

As we enter the first quarter, we have a spec sells opportunity of 684, comprised of 215 completed specs and 469 specs under construction expected to be completed by the end of the quarter.

On page eight, we highlight our ASP in a little more detail. The headline 4% year-over-year change may look a little pedestrian but as always the devil is in the details.

On this slide, we break out a change in our ASP across seven markets. In Southern California where we have historically been a high end builder, ASP is down largely because of the difficult comparison to the fourth quarter 2011, when we delivered two $6 million plus homes and $21.4 million plus homes from two communities that are now closed out.

However in Arizona, Taxes, Colorado, Florida, and the Carolinas ASP trended up largely due to a focus on a move up buyer. These trends should continue as our 2013 projections show ASP increasing in all of our markets other than California where ASP is expected to remain relatively flat.

While the strong increase in ASP in many of our markets was attributable to our focus on the move up buyer, we were also able to raise prices at a 112 communities in the fourth quarter, while lowering our average incentive to 5.1% versus 5.3% in the third quarter 2012 and 7.4% in the fourth quarter ‘11. Our same plan ASP on homes closed was up 7% from the prior year and up 2% from Q3 and we're focused on increase in prices where demand warrants.

The average selling price in 2013 first quarter beginning backlog expected to close in the quarter was 368,000, which would be impacted up or down based on a mix of specs sold and closed in the quarter. Our cancellation rate during the quarter was 15%, which is down from 19% last year.

Slide nine represents our gross margin trends with and without capitalized interest. As noted earlier, our gross margin from home sales including capitalized interest improved 140 basis points versus the prior year and 60 basis point versus Q3.

The 140 basis point improvement since last year is largely attributable to lower incentives and base house price increases at some of our faster selling communities and is partially offset by house cost increases, project mix in Southern California discussed earlier and a geographic mix to less revenue from Southern California, historically our highest gross margin region.

Southern Cal represented 35 % of our revenue in the fourth quarter 2012, compared to 48% of our revenue in the same quarter last year. Our delivered gross margin is mixed of the gross margin of our homes and beginning backlog with the gross margin from specs sold and closed in the quarter.

The gross margin of our beginning backlog expected to close in Q1 is 20.2% which has trended down to the beginning backlog margin of 20.4% for the fourth quarter and up from Q3 beginning backlog of 19.6%.

The margin on specs sold and closed in the quarter may have a negative impact on gross margins as these deliveries have typically generated lower gross margins of about 150 to 300 basis points than the bigger homes or speced homes sold in prior quarters.

Specs sold and closed in the quarter represented 25% of our fourth quarter 2012 deliveries, compared to 34% in the fourth quarter of '11. While our gross margin of homes and backlog expected to close in the first quarter is 20.2%,the gross margin of our entire backlog yearend was a little over 21%.

On slide 10, we provide a breakout of our SG&A into five categories; G&A, insurance, incentive comp, selling expenses, and severance and other charges. Overall, our adjusted SG&A as a percentage of home sale revenue dropped to 13.1%, up 210 basis points year-over-year improvement due primarily to the 29% increase in home sales revenue.

Our selling expense of $19.4 million represented in midnight blue was approximately 5.1% of home sales revenue this quarter, which is down 20 basis points from the fourth quarter of last year and down 30 basis points from last quarter. The decrease from last quarter and the prior year is largely attributable to fixed salaries spread over higher revenue.

Our incentive comp is variable and fluctuates with profitability. The actual formula is a little more complex but for modeling purposes if you assume approximately 10% of adjusted EBITDA, it should be in the ballpark. Insurance expense and G&A is fairly predictable and fluctuates directly with home sales revenue from about 1.2% to about 1.4%.

As an illustration of the operating leverage inherent in our business in the fourth quarter of 2012, we generated 29% more revenue than the prior year while fixed G&A dollars increased $700,000 or 4%. That's an $84 million improvement in revenue with fixed G&A of $700,000.

On slide 11, we highlight our land acquisition and developments spend over the past several quarters. In Q4, we spent $205 million on land acquisition and $63 million on land development.

Our 2012 purchases in terms of number of lots are distributed 39% California, 19% southwest, and 42% southeast. Given the price differences across the given markets, dollars invested continue to be heavily weighted towards California, which accounted for 54% of our 2012 investment.

As Scott mentioned earlier, we remain encouraged by the quality and the volume of land transactions we're working through our pipeline and a targeting a total 2013 land spend in the $600 million to $900 million range.

On slide 12, we try to take a different cut at quantifying growth land spend. Additional land buying is the most important thing we do and it's the biggest contributor to strong future gross margins.

On this slide, we have highlighted our land acquisition spend over the past three years in terms of number of home sites. The sky blue portion represents the number of home sites we acquired that were necessary to replace our deliveries from that given year and the midnight blue portion represents home sites acquired for future growth.

Over the past three years, we have acquired over 11,000 well located growth home sites which adds to our strategic lot supply and helps to position us well for the coming years.

And with that I will turn the presentation back to Scott for his final remarks before we open the call up for questions.

Scott Stowell

Thank you, Jeff. As we shared with you, in addition to our solid company results we are encouraged by the improvements in the economy and the housing market. As I travel throughout the company there is a definite excitement and energy that's been missing over the past few years.

More than ever I'm seeing our people putting their best talents to use, aggressively driving our growth strategy with an eye to upholding our long standing legacy as a quality home builder.

Following this call, Jeff and I will hit the road for the next two months visiting every market, touring existing communities and walking some incredible dirt. Most importantly, we get to meet in person with every single Standard Pacific employee in our town hall meetings to celebrate the success of 2012 and ensure that everyone is focused and aligned on our growth plans for the future.

In preparation for our meetings, I asked all of our employees what quality means to them and for examples of how Standard Pacific symbolizes quality. One of our employees sent me a listing from Redfin that he recently came across. The listing is from a home that we built in Tustin, California in 1967.

The Redfin description of the home references sturdy construction by Standard Pacific as a selling point. What an impactful remainder of the importance of enduring quality and reputation since 1967.

I would like to take this moment to thank our entire team for their tireless contributions, their talent, dedication, sense of pride and commitment to each other, that truly makes our company great. My thanks go out to all of them.

And with that, Vicky, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question today from Mike Dahl with Credit Suisse. Please go ahead.

Mike Dahl - Credit Suisse

I have a couple of questions on margins. If we look at the margin performance for the quarter 20.8, you said, coming into the quarter at 20.4 in backlog; now you're saying 20.2. What was the driver in 4Q going from that 20.4 to 20.8 and how should we think about that into 1Q?

Jeff McCall

When we reference our gross margin and backlog, that's directly just of the homes and so it doesn't include the typical close out adjustments. It varies a little bit quarter-to-quarter but close out adjustments typically add about 50 basis points. So that would be the adjustment up and obviously that gets offset a little bit by the impact of spec margins.

Mike Dahl - Credit Suisse

And then if we think longer term trajectory here, if I do the math, total backlog margin; 21%. That implies that things that are currently expected close in 2Q or later are at an average margin of around 22%. You guys have done a great job on the land getting positioned for 14, 15; prices seem particularly strong in those core markets. Is there anything to suggest that we wouldn't get back to kind of that 25% to 27 % that you guys saw over several years during the better years between now and 2015?

Scott Stowell

Well, Mike, you know we're operating today at normalized margins and we would expect overtime that some price appreciation will contribute to any gross margin expansion offset by cost increases. And while we like our positions, we have been positioned in really strong attractive markets, some of the gross margin, and we're not giving specific guidance on this issue, but some of this gross margin will move slowly and we're kind of viewing it conservatively.

But as you suggest, as we add in, communities where we're developing and creating value and we generally get higher gross margins in those communities by about 300 basis points and then we are also achieving pretty strong gross margins at higher selling prices and we're moving into those categories. So could we expect to get back to 25% gross margins later in the cycle, that is possible but it's going to be really a function of how much home price appreciation there is going forward.

Mike Dahl - Credit Suisse

And just if I could squeeze one last one in Jeff; the option revenue as a percent of closings for this quarter and how that compared quarter-over-quarter, year-over-year and what's normal?

Jeff McCall

I want to say, I'm going to grab that really quick. Our option revenue remained pretty consistent. We're somewhere in that 35,000 to 45,000 per home and its range got in that 10% to 12%. We haven't seen a material change one way or the other in the past five quarters.

Operator

And we'll take the next question from Ivy Zelman with Zelman & Associates. Please go ahead.

Alan Ratner - Zelman & Associates

It's actually Alan on for Ivy. Jeff first just on the DTA, I want to clarify or confirm, so now that you've reserved that, is it safe to assume that given the change to control you guys had this entire piece is safe and there is no possibility of losing any more due to that change of control back in '08?

Jeff McCall

Yes, the remaining portion of DTA that's at risk on that changing control related to the (inaudible) bill that I referenced and that's only about $10 million. So, when we reversed its fully usable.

Alan Ratner - Zelman & Associates

And second on Nevada and Las Vegas, I don't think you've kind of given an update there in a while but you still own over 1000 lots there and I know if you kind of closed up shop there but given the improvement we've seen, are there any plans to either un-mothball those lots or perhaps sell them and bring in some cash; any guidance you can give on that front?

Scott Stowell

Yeah, we just recently kind of did a market update for Nevada and given the location that we have and our assessment of the market, we're not ready to bring communities out in '13 but we're constantly assessing that and evaluating whether or not we will sell those assets or determine that there is attractive market for us to build in.

Alan Ratner - Zelman & Associates

And I guess if I could segue that into more question; so you gave the guidance for mid-single digit increase in community count next year, but knowing that a lot of purchases you made are geared more towards ‘14, ‘15, can you share any kind of directional guidance on what type of increases you guys are thinking about internally for maybe '14 and even beyond if you really want to share that?

Scott Stowell

We're not willing to give you that information at this time, Alan.

Operator

And we will now go to David Goldberg with UBS.

David Goldberg - UBS

I wanted to ask, the first question; Scott, last time we were together in New York, we talked about controls and internal infrastructure and I think one comment you made on the single (ph) we were hosting was that while Standard Pacific could grow very rapidly for a short period of time, eventually the growth rate would start to slow down a little bit and may be 20% to 25% would be a healthy growth rate, when you think about the risk that you create by growing too quickly.

Now, when I look at kind of what's coming online in terms of the community count growth and what not in the potential for rising absorption rates, it feels like you can grow much, much faster than may be that kind of long term run rate for an extended period time. Then when I am trying to get an idea of this, what you guys have to do in the next couple of years in terms of infrastructure and control to make sure that you are not taking on a lot of risk as you continue to grow, and to make sure that its very controlled so we don't get into some of the problems we had in the last upturn.

Scott Stowell

Are you talking about community count growth concerns?

David Goldberg - UBS

No, it's the overall company growth. I mean obviously if there is a lot of community count growth, a lot of land purchasing, not taking too much risk on in terms of the balance sheet and getting over extended.

Scott Stowell

We certainly are trying to balance our SG&A with the demands of growth and we are kind of prudently hiring in the areas that support the community development and the opening of communities. So, we're pretty confident David, that we will be able to grow at the rates that we have in our plan and execute well and we know that, given our reputation in the markets and access to the people that we know, we think we can bring the people on that we need to.

David Goldberg - UBS

My second question is about how private builders are doing. We have been hearing more and more about AD&C financing kind of come in and available, more financing out there for land acquisition for privates, just trying to get an idea if you are seeing the privates get more competitive and what the environment looks like now in your mind?

Scott Stowell

From time to time, we'll compete on a specific land buy with the private but generally the land markets that we're looking at or dominated by the pubic builders are the larger privates and I think that over time we'll see private activity picking up. I think mostly they're constrained with capital still. At least that's what we're hearing; and/or the capital that is available to them is fairly expensive capital and they just have a hard time underwriting competitively with public builders.

Operator

And now we'll take the next question from Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities

I guess somewhat falling on the heels of David's question; in terms of growth and growth plans and ability to grow, given the size of the dollar backlog now, and your accruing cash positions in the likely you need to further ramp your working capital into the spring. How do you feel about your ability now to keep the pedal on the land spend and development, how do you assess the current capital you have for that?

Jeff McCall

It's Jeff. I'll take a shot at that one. Obviously liquidity is critical and then spend a lot of time making sure that we got adequate liquidity for what we need. The way we approach that, we generally look and make sure that we got some sufficient liquidity and we define that, it obviously varies by the size of the company and as we continue to grow that requirement will go up but as we said right now, we're pretty comfortable making sure that we maintain at least say $300 million to $400 million of liquidity as we look forward a few several quarters and that liquidity we divide both cash and share available under your revolver.

So where we're siting right now we got cash in mid-$300 million. We've got untapped $350 million revolver. So from where we sit right now, looking forward we project that out and we think we have got adequate equity and also little bit room on the other balance sheet if we needed additional liquidity.

Scott Stowell

And Adam, a part of your question was how do we view the opportunities that might exist for us to continue to spend at these rates. Just for the context, we spent just over $200 million this quarter on land acquisition and during the same period increased the value of the land in our pipeline. So we still are seeing attractive opportunities up there.

Adam Rudiger - Wells Fargo Securities

Scott, curious to you opinion on this; more so than the other builders I think that reported this week, your orders I think really surprised on the upside and particularly strong in light of the fact that you are doing from fewer communities. So I was wondering if you could share with us some more thoughts on really what you, if you can get more granular on what you really are seeing on the trends and what you think really drove that kind of performance?

Scott Stowell

Yes, Adam the performance on the sales will vary by market. It's a very hyper local as you know and I want to make sure that we're clear that we didn't change our business model to try to throttle the velocity and we're still trying to maximize prices on every home sold.

What I think is occurring is that as we open up communities and we open in really good locations and we offer really good compelling value proposition to our customers, they are recognizing that and we're signing them up on contracts. I think that's where we starting to see.

Operator

And we'll now take the next question from Alex Barron with Housing Research Center.

Alex Barron - Housing Research Center

I was just wondering, I don't know if I missed it, have you commented on January what you saw in terms of orders?

Scott Stowell

Yes Alex, we sold 435 homes in January and there is a low comp here. Si I want to clarify this. Last year we sold 250 homes in January but we averaged 311 per month during the quarter. So that's probably the context you would have. We're off to a good start at least following the first month of the year.

Alex Barron - Housing Research Center

And you've been able to keep prices moving or had it kind of stabilized?

Scott Stowell

No prices are still moving.

Alex Barron - Housing Research Center

Okay. And also I'm not sure if I missed it, did you give your outlook on the community count growth for next year or this year I guess?

Scott Stowell

We did, we're opening 60 communities next year and we expect our average community count to grow in the mid-single digits next year.

Alex Barron - Housing Research Center

Okay. Now just one last one; obviously your margins are highest I guess in the industry if you back out the interest expense. Is that quietly a function of I guess impaired values and you expect at some point that's going to start to come down?

Scott Stowell

Yeah. Actually our gross margin is pretty consistent. If we break it down just giving an old analogy but bringing about new versus old, our newer communities which you can assume are non-imperative and some of the old ones are imperative, our new team is actually contributing a slightly gross margin. So I don't think that's really a big function of impairment.

Operator

And we will now take the next question from Mike Rehaut with JPMorgan.

Mike Rehaut - JPMorgan

First question, on the community count I know a question was asked earlier about 2014 acceleration from ‘13, but if you look at '13 and you're talking about kind of expecting some acceleration as you entered the out year, given where community count is right now on a year-over-year basis and where it's ending the quarter; is it fair to assume that you have more low-single digit, flat or low-single digit growth in the first half of the year accelerating into the back half and then further accelerating into 2014?

Scott Stowell

Yeah. Our communities will open fairly evenly throughout the year and accelerating into '14. We would probably put that in the kind of the low double digit expectation, if you are trying to give some expectation.

Mike Rehaut - JPMorgan

So you mean like low-single digit in the first half of the year, low-double digit in the back half of the year?

Scott Stowell

For '13.

Mike Rehaut - JPMorgan

Yes.

Scott Stowell

No, no, no. The average community count will be mid-single digits this year. And then the '14 community count average community would be low-double digit.

Jeff McCall

But if you looking quarter-on-quarter growth rate for '13, we would expect to have a higher growth rate in the fourth quarter of '13 than in the first quarter of '13.

Mike Rehaut - JPMorgan

Okay. So I guess Jeff kind of what I was saying that it would accelerate throughout the year then.

Jeff McCall

Right.

Mike Rehaut - JPMorgan

Also, I mean, we talked about gross margins a bit. You have done a great job there. Can we be expecting, I guess you are talking about a gradual improvement over the next year or so. Is that fair to say, as effectively you are having pricing coming in ahead of cost inflation and achieving the benefits from mix? Is that the right way to think about it?

Scott Stowell

Yes.

Jeff McCall

Yes, that's pretty right and we are giving, there is some cost pressures but we were able to generally offset that plus a little bit, on the price increases.

Mike Rehaut - JPMorgan

All right. And I guess just last one, on the orders, thanks for the year ago comp. It certainly points to a pretty continued really white hot pace if you will. Obviously, the comps get tougher in February and January but would we be looking at stronger volume this year as well from a spring selling season. What's really driving, you are talking about absorption, improvement at pretty striking levels, I mean, 70% in 4Q and it would seem that you're pacing around something like that for one 1Q13, how should we think about that going forward. Obviously it's kind of leading the industry in effect or at the high end of the builder universe. How do you think about that relative to your peers in terms of that type of really striking absorption pace improvement and would that eventually moderate as we get through 2013?

Scott Stowell

Our view of the general market improvement is that we will see market improvement similar to what we saw in ‘12, specifically in terms of what happened for us during the quarter.

Southern California had a relatively strong quarter and the Carolinas looked that they had a little sign of life and had a very strong fourth quarter and that market has actually trailed. Florida for example and two years we would have thought it would have been the reverse of that.

So as we introduce new communities and as markets start to improve, we're expecting to kind of maintain that pace and hopefully execute against our strategies and maintain our share.

Operator

And we'll now take Michael Kim with CRT Capital Group, please go ahead.

Michael Kim - CRT Capital Group

You talked about lands spend guidance of $600 million to $900 million for this year. I'm just kind of curious, what you need to see to take land spend to the high end of its range. Would the additional spend be concentrated by any particular geography?

Scott Stowell

I think, just the continued ability to fund a deal that meet our underwriting in the markets where we're allocating the capital, that's really, we've got the appetite, we're just going to make sure we get those deals.

Michael Kim - CRT Capital Group

I see, okay, and for 2014 would you expect your lands spend budget, I know it might be a little bit too early but would it be comparable to what you're looking at for this year?

Scott Stowell

I'd say, yes, comparable to up. Generically speaking we need to spend 25% of our revenue on land just to replace land that we sold. So with that, anything above that ratio is generally, we tend to look at that as growth land spend. So we are expecting to continue to spend a pretty significant dollar on land.

Michael Kim - CRT Capital Group

Understood, and just a couple of housekeeping items. What sort of effective tax rate should we expect for 2013?

Scott Stowell

I'll tell you better at the end of the year, but from my way, we can go across 38%.

Michael Kim - CRT Capital Group

38%, okay great. And just lastly, out of curiosity, under the calculation of the restricted payments, basket under the bonds, do you know off hand, does the definition net income include or exclude the benefit of the reversal of the DTA?

Scott Stowell

I believe we get credit for half of it. But, I'll follow up with you on that to make sure.

Operator

Next is Joel Locker with FBN Securities.

Joel Locker - FBN Securities

Just curious on your absorptions on your internal kind of target. You had about 26 last year in 2012. What do you expect for 2013?

Scott Stowell

We're not giving any guidance on that, Joel. As I said we're expecting the markets to improve about plus or minus 20% like it did last year. So that should show up in our sales rates.

Joel Locker - FBN Securities

And then I guess looking at backlog conversation, I guess not near term but say in 2014, do you except that to get down to more normalized level like you had say back in 2003 where it was high 40% range?

Scott Stowell

I think it will start trending there, I don't think we'll get there late this year.

Joel Locker - FBN Securities

But, what about 2014?

Scott Stowell

'14, I think it will be approaching 50. Hard to tell, but…

Joel Locker - FBN Securities

Right. And then the last question on corporate expense, it rose I guess 8% sequentially to $23.1 million, so a little higher than I expect at least. What's a good run rate for that going forward? Is that a onetime bump or was there any charges in there or is that just kind of ongoing?

Scott Stowell

It's pretty clean. So use it kind of ongoing.

Joel Locker - FBN Securities

And it might increase along with community count going forward?

Scott Stowell

Yeah. It will rise slightly but we should get the operating leverage flowing through.

Operator

And we'll now go to Buck Horne with Raymond James & Associates.

Buck Horne - Raymond James & Associates

Quick question on the $600 million to $000 million on the projected land spend, how much of that is slated for developing which you've already bought so far versus acquiring new lots?

Scott Stowell

Based on what we already own, this should be about in the mid-200 to 250 for development base that we already own and are currently developing up.

Buck Horne - Raymond James

When do you flip the switch or how do you decide when to flip the switch in terms of spending more on development than acquiring new lots?

Jeff McCall

I don't know if we have a specific time. We plan on keep growing as long as we see this market and we find the right deals.

Scott Stowell

Yeah. And I think we just assess the market and we try to get our committees out to the market as quickly as we can.

Buck Horne - Raymond James

Okay and last one on skilled labor, you have encountered any skilled labor shortages in your communities and your markets? Has there been any effect on your average cycle times and anything you are doing to try to keep your labor happy?

Scott Stowell

There is some pressure on the labor side in many markets. During these periods builders rely heavily on their relationships with subcontractors. We're in discussions with them. I have met with owners of various subcontractors here in Southern California. We expect to manage though this like we have in every other cycle with them, working with them and I would say that the cycle time impact has been days, not weeks.

Buck Horne - Raymond James

And what is your average cycle time these days by the way, just for contacts.

Jeff McCall

It varies pretty dramatically by market. So it's a dangerous number.

Operator

And that concludes our question-and-answer session for today. So I'd like to turn the call back to Scott Stowell for any additional or closing remarks.

Scott Stowell

Thank you Vicky and thank you everyone for joining us today. We look forward to sharing our results with you next quarter.

Operator

Thank you very much. That does conclude our conference for today. I would like to thank everyone for your participation and you may now disconnect.

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