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MDC Holdings (NYSE:MDC)

Q1 2013 Earnings Call

May 02, 2013 12:30 pm ET

Executives

Robert N. Martin - Vice President of Finance and Business Development

Larry A. Mizel - Executive Chairman and Chief Executive Officer

John M. Stephens - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Ivy Lynne Zelman - Zelman & Associates, LLC

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Rob Hansen - Deutsche Bank AG, Research Division

Stephen F. East - ISI Group Inc., Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

James McCanless - Sterne Agee & Leach Inc., Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Operator

Good afternoon. We're ready to begin the M.D.C Holdings, Inc. first quarter earnings call. I will now turn it over to Bob Martin, Vice President of Finance and Corporate Controller. Sir, you may begin your call.

Robert N. Martin

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings' 2013 first 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. [Operator Instructions] 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 2013 first quarter Form 10-Q, which is expected to be 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?

Larry A. Mizel

Good morning. I'm pleased to announce the first quarter income of $22.5 million or $0.45 per share, marking our fifth consecutive quarter of profitability. The improvement was largely the result of our homebuilding operations, as our homebuilding pretax operating margin expanded by 600 basis points to 4.5% for the first quarter.

The strength of our operating margin is a result of significant topside growth for our company. In the first quarter, our home sales revenues grew by 80% year-over-year, reflecting increases in both unit volume and prices as the market has improved. Additionally, our gross margin continued to grow during the first quarter, increasing by 330 basis points year-over-year and 70 basis points sequentially. We are optimistic that we can continue to drive sequential improvements to our gross margin percentage for the balance of 2013. So increased land and building cost will continue to be a significant hurdle for us.

We achieved a 22% year-over-year increase in net home orders, driven by 60% growth in our sales pace even as we continue to increase pricing in the majority of our subdivisions. This increase was on top of the industry-leading increase in net homeowners that we achieved in the same period a year ago. The strength of our sales pace has resulted in several subdivisions selling out more quickly than expected, and the openings of some new communities have been delayed, causing our active subdivision count to decrease slightly during the quarter. However, the downward trend for our community count reversed in April. Based on what we have acquired to date, we expect our active communities to increase by approximately 10% from the end of the first quarter to the end of the year.

Our focus on growing community count is augmented by our entry into a new market. In the first quarter, we expanded our footprint in Florida by acquiring lots in our first 2 communities in Orlando. And we have several additional communities under control in this market at the end of the quarter.

Across the country, we have continued to acquire land at an accelerated pace. During the first quarter, we spent nearly $120 million in acquiring approximately 1,650 lots in 53 communities across our market. 27 were new. The addition of these lots drove an 11% increase in our lot supply during the first quarter alone to a total of more than 12,700. About 75% of the lots acquired were finished, with the potential to positively impact subdivision count and sales in 2013. We do expect to develop more land in the future and believe we have the resources and skills set in place to handle the additional workload.

With a 45% year-over-year increase in sales value of our backlog at the end of the quarter and our active community count poised to increase in the near term, we believe we are well-positioned to continuing our top and bottom line for the balance of the year.

Thank you for your interest and attention. I would like to now turn the call over to John Stephens for more specific financial highlights of our 2013 first quarter. John?

John M. Stephens

Thank you, Larry. We're moving to Slide 4. Our closings were up 64% to 1,018 new homes, with all of our markets experiencing year-over-year increases and particularly strong results from our Colorado, California and Arizona operations. The increases experienced in these markets were driven by favorable net new order trends in 2012 and 2013, coupled with a short supply of resale and new home inventories in many of these markets. Our backlog conversion rate was 62% for the 2013 first quarter, in line with our historical average and on par with 59% for the 2012 first quarter.

Our average selling price for the first quarter was up 9% year-over-year and 2% on a sequential basis, increasing in most of our markets due principally to price depreciation and reduced incentives. Average price growth was particularly strong in Arizona, Nevada and Washington, which all experienced a double-digit year-over-year improvement; while a shift in mix to more Colorado and California deliveries, where our average selling price has exceeded the company average, also contributed to the increase in our average home price. During the quarter, we increased home prices in each of our divisions on average by nearly 4% and about 80% of our communities. Our Nevada and California markets experienced the largest percentage increases of 8% and 10%, respectively. Also our largest division, Colorado, generated steady price increases throughout the quarter.

Improved market conditions and our focus on community-by-community home pricing, coupled with measured lot releases, drove home price gains and lower incentives during the first quarter. These efforts resulted in a 330-basis-point year-over-year improvement in our gross margin from home sales to 17.4% and a 70 basis points sequential increase over the 2012 fourth quarter, which marked our fourth consecutive quarter of sequential gross margin increases. In addition, our spec home gross margins continued to improve. In fact our gross margins exceeded our dirt sale gross margins for the first time in a number of years.

One other item that I think is worth noting on the gross margins is that almost all of our inventory is either actively selling or under development, and as a result, substantially, all the interest that we incur is reflected in our gross margins, as very little interest is being expensed directly to our income statement outside of cost of sales.

Our homebuilding SG&A expenses, as a percentage of home sale revenues, was down 400 basis points to 14.5% versus 18.5% for the 2012 first quarter. The improvement in our SG&A rate was driven by an 80%

increase in home sale revenues, which resulted in greater operating leverage. The year-over-year and sequential increases in our G&A expenses was largely attributable to an increase in incentive-based compensation expense, resulting from a significant improvement in our pretax operating results. The 2012 first quarter also benefited from a $3.8 million reduction in our legal accrual that did not recur in the 2013 first quarter. Our commissions expense increased $4.8 million or 75% on a year-over-year basis, which was in line with the increase in our revenue and delivery volume.

Our active subdivision count declined by 6% during the quarter due to improved absorption and delivery pace in most of our markets. However, our "soon to be active" communities, which represents communities with construction activity that have not yet sold 5 homes, exceeded our "soon to be inactive" communities for the first time in 6 quarters.

The shift to more "soon to be active" communities and the acceleration of our land-acquisition activities should bode well for us to grow our community count through the balance of 2013. In fact, our community count as of the end of April was up by a handful of communities since the end of the quarter. And as Larry indicated, we expect our community count to be up about 10% by the end of 2013. That said, there's an element of volatility and a whole host of challenges in connection with opening new communities, including obtaining all necessary governmental approvals and permits and other construction challenges, which can impact the timing of getting new communities open for sale.

As mentioned earlier, our net new orders were up 22% year-over-year, while our monthly sales absorption rate was up 60% over the prior year period to 3.0 sales per community per month, the highest quarterly absorption pace since the first quarter of 2006. The increase in our net orders was driven largely by strong activity in Colorado and to a lesser extent, in California and Florida. Absorption pace was led by our Nevada, California and Colorado operations due to strong demand and less competition from the resale market. On a dollar-value basis, our net orders were up 37% over the prior year, due largely to increased order activity from our Colorado and California operations, which have higher average selling prices than our company average, and also from price increases captured over the last year. Our average order home price and home prices and backlog were each up 12% year-over-year. Order activity in Arizona was down from the prior year period due in part to the success we have had in the Phoenix market over the last 12 months. However, as a result of the healthy land acquisition activities that occurred over the last few quarters, we expect to meaningfully grow our community count in the state over the next few quarters.

Consistent with the last 2 quarters, our land acquisition efforts for the 2013 quarter have continued at a healthy clip with the purchase of approximately 1,650 lots, of which approximately 75% were finished, which is down from the fourth quarter where about 90% of the lots purchased were finished. As we move forward, we expect that we will continue to see more transactions that will require land development. For instance, of the lots that were approved for purchase during the 2013 first quarter, more than half will require some form of development. As of the end of the quarter, we owned or controlled nearly 13,000 lots, which represented over a 3-year supply based on our last 12 months of delivery pace. And we believe that with over $875 million of cash and marketable securities and our strong balance sheet that we are well-positioned to grow our lot and community count in the future.

Lastly, our financial services segment continue to generate meaningful contributions to our bottom line with a pretax profit of $7.7 million in the 2013 first quarter versus a profit of $4.9 million a year ago. Our mortgage operation was the primary contributor of our financial services segment by generating $6 million of pretax income, with most of the improvement attributable to an increase in the volume of loans locked and originated, which was in line with the increase in activity from our homebuilding operations.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ivy Zelman from Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

It's very exciting to see your results. And I think your overall presentation gave a lot of information. And I guess one area that you can help us understand is on mortgage availability. And remind us of your entry level exposure, and how much FHA is driving overall growth in order activity? And maybe some of the trends that you are seeing in mortgages, please.

John M. Stephens

Yes. Thanks, Ivy. I appreciate it. In terms of our mortgages, we -- FHA buyer has been an important buyer for us. But we have seen it, and we also have a lot of VA buyers as well. But we've also seen FHA number of loans originated has been kind of creeping down a little bit over the last few quarters, over the last year, so still an important part of our business. And in terms of kind of the mix between the first-time and the move-up buyer, historically, we've been for last 12 to 15 months, we've been kind of in that 50-50 range. But now, we've kind of shifted a little bit more towards the move-up buyer, and it's probably 60% move-up or move-down and then another 40% of our first-time buyers.

Ivy Lynne Zelman - Zelman & Associates, LLC

Would that first-time buyer though be generally using FHA financing? Or because it's more expensive than conventional, and maybe people have the ability to get conventional through better credit scores, just give us some idea of that percentage that might be moving down a bit on FHA, but what it absolutely is? I mean, on an absolute basis.

John M. Stephens

Well, I think it depends. I think if they can qualify to get the conventional loan, I think they'll go that route because as you said, it is a little cheaper to do that. But if they can't, they probably end in an FHA loan.

Ivy Lynne Zelman - Zelman & Associates, LLC

So the size of FHA, is it 40% roughly equivalent to the entry level?

John M. Stephens

In terms of our entry-level buyers?

Ivy Lynne Zelman - Zelman & Associates, LLC

Yes, it's about the same correlation to the number of people that are considered entry-level. And I was wondering if you acquire the improvement and the quality of your borrowers as they're coming in, or are they having more success versus having proved their credit over the last 5 years they've been waiting? Are they an older first-time buyer? Are they still the 25-year-old that's maybe married without kids? Or do they have kids? Just sort of understanding that entry-level buyer a little more, of who they are and those who are getting financed.

John M. Stephens

Yes, so of the mortgages we originated during the quarter, about 56% of our mortgages were government loans. And of that, about 28% were FHA. And so compared to let's say, go back a year ago, about 63% of our buyers were government and 34% were FHA. So we've got -- I don't know if that gives a little more color.

Ivy Lynne Zelman - Zelman & Associates, LLC

Yes, absolutely. That's perfect. And just in terms of maybe Larry or if you could maybe just chat about -- is it the profile or the first-time buyer, what they -- what the trends have been, if they have been changing at all, from what they've been historically?

Larry A. Mizel

Well, I think there's a lot of interest in buying homes that people have been on the sideline. And I'd say the best description that I could give is a profile of buyers is they're excited and interested and they want to buy a home like right now. And our industry's doing our best to meet the needs and the requirements of the market.

Ivy Lynne Zelman - Zelman & Associates, LLC

Would you say that the pent-up demand, Larry, has been strongest in your 10-year experience that you see right now in the market?

Larry A. Mizel

Well, I think pent-up demand is kind of an interesting theory. What I see is that capital is flowing, and one of the things that -- I guess a couple of things that are playing in the favor of the housing industry is it's one of the places you can put your capital as a mortal person. It -- the consumer confidence in housing, the psychology has changed. In some markets like in California, there are some subdivisions that a material amount of the buyers are non-U.S. citizens. And so I think that the United States is in a unique place where it's a safe haven for capital. As we look around the world, there's not a lot of safe havens. And so housing benefits from the pent-up demand. It benefits from the low interest rates. And the home value and the affordability, as you know that the affordability is well imbalanced, and there seems to be room to run between the cost and what the affordability index would anticipate. And so I think the industry is working hard to expand to meet the demand and the needs of the buyer. We're creating jobs, which is great for our country. We're helping the GDP, which is certainly lacking in many areas. So I think the aggregate impact of providing housing and value is working out very well for everyone.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

First question, I appreciate the guidance in terms of or directional guidance in terms of gross margins. And, I guess, in the tradition of Wall Street of always wanting more, if you look back, you are able to do 20% plus for a number of years even before the boom years of '03 to '05. If you could just give us a sense of I guess as the new communities come on and you've bought a lot of land, I would assume you're probably underwriting that around a 20% gross margin. John, as you kind of model this forward, is there any sense you can give us in terms of when you might be able to get back to a 20% for the overall company? Would it be next year, the following year? And obviously, kind of maybe taking price appreciation out of the equation, just how that -- what you have in the kitty, what you have in the backlog, how that's going to impact.

Larry A. Mizel

Well, I think -- it's Larry. I really think the, just like the stock market, confidence in market conditions really dictate gross profit margins. And I think a year ago, we would have been considered overly aggressive if we told you prices were going up and business is as good as it is now. We're not making any public comments other than the ones we've made, which I think should be very encouraging as to what we did in 2003, '04 and '05. And where we are now, where we are now is where we're at. And we have commented that our expectation is sequentially to do better, and that's our commitment.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

I appreciate that, Larry. I guess just switching to the SG&A. Is it fair to assume that at this point, that there should be, aside from the variable expense of the commissions as you expect to increase your community count, will there be any type of increase in other fixed costs? Or do you think the commissions would be the only real silo to move, and the other elements could be fairly fixed?

John M. Stephens

Hey, Mike. It's John. I think generally, that's probably a fair statement. Our commissions as you know, they do move variably with our revenues. And then there's a small piece of what we call our deferred marketing that we amortize, certain cost of sales that's run through marketing section there. As we add communities, as we grow the company, we could add some incremental headcount here and there. But I think as I mentioned in my prepared remarks was that, really what could drive the G&A a little bit more is just how profitable we are as a company. So if that moves, you could have some variability there from incentive-based comp perspective. But again, we're trying to maintain our headcount, but we need to make sure we address our growth appropriately too, so.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

All right, great. Any -- lastly, just any view on the DTA coming back? Is that something you would expect in the next 12 months?

John M. Stephens

Well, yes. We've had 5 consecutive quarters of profitability. And as you know, our results have improved quite a bit. But we need to continue to review if the company continues to be profitable and the industry continues to improve, we believe there is sufficient positive evidence to support, at some point, reversing a large portion of valuation allowance by the end of the year. But at this point, it's an ongoing analysis, and we continue to discuss it with our outside auditors.

Operator

Your next question comes from the line of Nishu Sood from Deutsche Bank.

Rob Hansen - Deutsche Bank AG, Research Division

This is Rob Hansen on for Nishu. That was an interesting comment you made about how your spec margins being a little bit higher than some of your dirt sales there, your prebuilt homes. So what was the approximated variance between the 2? And was this just in a few specific markets or was this across the board?

John M. Stephens

Well, we've actually been -- I think we've commented on the last few quarters that we've seen it progressing, tightening the bandwidth between the specs and the dirt, and this was kind of the quarter we crossed. It's probably in the 100 basis points range. And obviously, it's stronger in markets where we have had stronger order activity. I think as a general statement, it's moved up from all of our divisions, but again, I think we've seen most of the increases and I'd call it the West and Colorado.

Rob Hansen - Deutsche Bank AG, Research Division

Okay. I know you're going to be doing a little more specs as a result of this?

John M. Stephens

Yes. I mean, I think we put a few more specs on the ground. I think we feel like if you start a few more homes and you haven't quite sold the home yet, but maybe some of these cost increases you potentially offset some of that, because you can set the price the little later in the process. I mean, we obviously don't want to go too far before we sell the home. But I think with the market improvement that we've seen that we've been more comfortable having a few more specs in our communities.

Operator

Your next question comes from the line of Stephen East from ISI Group.

Stephen F. East - ISI Group Inc., Research Division

You gave a lot of good information on pricing versus mix. If we look at your true pricing versus what you all are seeing in your land and construction cost trends, what type of delta would we have there right now?

John M. Stephens

I don't know that we've quantified the exact delta Steve, but I think that kind of a sense of the margin improvement price that I gave you, we've obviously been more than able to offset the price increases. But as we mentioned earlier, that will be a continual challenge for us, as the market continues to rebound. But a lot of it is price appreciation in terms of our increase in our ASP.

Stephen F. East - ISI Group Inc., Research Division

Okay. And then last year was all about pace, and this quarter is, it looks much more balanced. As you all look at your strategy moving forward, Larry, what takes greater precedent now? Is it are you much more focused on price than driving pace now?

Larry A. Mizel

I would say first of all, that's probably a reasonable view. The opportunity for pricing will tend to slow down your sales pace. So we're going to maximize the opportunity on every sale. However, as you can see from our acquisition of new lots and our opening of new subdivisions, I would say that you could assume that over the next couple of years, we will be as aggressive as the market allows, knowing that we're kind of competitive.

Stephen F. East - ISI Group Inc., Research Division

Okay, that's helpful. If I could squeeze in one more. Regionally, when you look at your community growth, what should we expect over the next year or so?

John M. Stephens

Well, I think obviously, it's going to be more weighted to where we've had more order activity, more delivery activity, Stephen. It's more weighted, I'd say, to Arizona and Nevada, Colorado and California. That's where we've obviously had higher absorption pace. And that's where most of the newer communities that we tied up are actually weighted more of that, to those regions.

Operator

Your next question comes from the line of Dan Oppenheim from Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering in terms of the specs you talked about in terms of the margin perspective, but I'm just wondering in terms of the absorption where we saw a nice increase here, how -- given that over half of the mortgages are either FHA or VA, USDA, to some extent, that came to be a lot of the first-time buyer there, and I know you're saying it's 40%. Just how much are you finding those kind of the specs are really helping with the first-time buyers in the market?

John M. Stephens

I'm not sure I understand the question, Dan.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Just wondering about the positive impact in terms of the specs with first-time buyers. You're saying that you're talking about the specs helping the margins right now. But I was wondering if it's also helping the absorption with some of the first-time buyers who are moving out of rentals there.

John M. Stephens

I'm not really sure the answer to that, quite frankly. I don't have a good response for that.

Operator

Your next question comes from the line of Adam Rudiger from Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

If you look at the land that you're looking at now for new communities, how does that relate to the kind of cost basis of the land you're selling from now?

John M. Stephens

It's higher.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Can you quantify it?

John M. Stephens

Yes. I mean, Adam, it obviously it varies by market. And obviously, in some markets, it's moved up quicker than others. I think California and Arizona, we've seen -- where we're seeing more price appreciation, we've seen land prices go up, accordingly. But, we're underwriting these projects to make sure that, hey, we can make a margin, we can kind of return, that we can live with. So we're not going to buy it just to buy it. We want to make sure it meets our return levels as well. But obviously, understanding which markets have maybe a little more demand or when they'll be back, will go into to our thought process when we're looking at those return models.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. How many -- are you guys get at 100% of your deliveries from communities opened since 2009? I think the last time I saw you released that figure was the end of '11, and it was like over 70%.

Larry A. Mizel

I think pretty much, Adam, we're just at 100%. There's just a handful that come from before some long-tailed assets.

Operator

Your next question comes from the line of J McCanless from Sterne Agee.

James McCanless - Sterne Agee & Leach Inc., Research Division

My questions have been answered.

Operator

Your next question comes from the line of Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just curious on your financial service income. Basically, it's running -- the revenues been running around 3.8% of homebuilding revenues. And do you see that continuing going forward, and then second, third or fourth quarter, just coming back to more normalized level?

John M. Stephens

Well, we're not giving a projection on that, James -- Joel, I'm sorry. It has been running a little bit rich. And we've been taking advantage of that opportunity as we were able to capture our -- as long as we can. But again I'm not sure where it ends down the road.

Joel Locker - FBN Securities, Inc., Research Division

Right. And I guess on your backlog conversion, you've been doing a nice job on that with the 3 quarters year-over-year in a row. I wonder if you could likely continue that based on you are building more specs, so those specs are keeping up with the increase in backlog also, and what's your view on that?

John M. Stephens

It's interesting. Our backlog conversions, it's been steady over last 4 or 5 quarters. I mean, it's bumping around 60% plus or minus a percentage point or 2. So I mean, that's pretty consistent with our specs and dirt sales have been running at a fairly similar rate too. So I'm not sure it would vary too much.

Operator

Your next question comes from the line of Alex Barron from Housing Research.

Alex Barrón - Housing Research Center, LLC

I wanted to ask you, Larry, if you could comment on your land position. I know in previous years, typically, it seemed to me like your option land was kind of a forward-looking indicator. It seemed like this quarter, we didn't see much of a sequential change other than in Colorado. So can you comment on what the strategy is there, or why that's not moving up a little bit more?

Larry A. Mizel

Well, I think the easiest answer is a lot of competition, and what we're interested in, so is everyone else. This is a market that is very competitive. And the land sellers, why sell an option if you can get paid upfront cash? And so I would say we have a more sophisticated land seller. And since the majority of the publics, even from the privates are all looking through, fully finished, affordable properties at A locations that they can get in the ground quick, the ability to option is more limited. Now we've expanded a little bit in California, and we're entering a few new submarkets. And this is after we had exited only a couple of years ago. And in Southern California, we're looking at approving a few new communities outside of our core inland presence even in Denver, where we are reentering quality submarkets that we haven't focused on over the past few years. I think one of the advantages and opportunities we have is we have the ability to have adequate capital to transact. We're able to work relatively quickly. And we have a product that if you have a subdivision, you feel really good having this built in your subdivision because it adds a added level of marketability for the balance of it. And so these are factors that we bring to the table. But the good thing is the market's active, and it would be nice to have options. But when the pricing of an option lot, as a general statement, they don't have quite as much juice as you would think just because the term option, it flies -- really deals with the risk-reward evaluation. We have a little less capital tied up, and you can walk away. But if you are able to get a limited amount of lots that are ready to go, the risks in today's market is very nominal. And as you know, we are very risk-reward oriented since the largest shareholders, holders of our company are represented by management with almost 25% of the company. So our agility is very balanced. And we feel really good at how we are approaching those not only the existing markets, but the expansion of what we're doing in moving in some other markets that we've previously been in. And we're comfortable, and we expect to be highly profitable in those markets subject to market conditions.

Alex Barrón - Housing Research Center, LLC

Okay. So is that -- does that maybe argue that your -- what you see like a 2-year own land position is likely to extend a little bit more from here or do you think you might see the same conservative stance? Because I'm trying to also figure out how you think about the impact on margins by maybe not being a little bit more aggressive on how much land you own a year or 2 down the road?

Larry A. Mizel

Well, I think that in light of today's market conditions, you want to price or homes with the maximum amount of margin. As you make acquisitions, you have to determine what their absorption rate is. You have to determine what your rate of your return, all these are moving factors. And as if you go back in history, you can see by simple analytics that we have in the past operated the company at an appropriate rate of return on our ROE. And since ROE is a key element that we're looking for, we expect to take advantage of market conditions that are very good. And we're going to leverage into it as I said on a risk-adjusted basis, reiterating that if you look at our prior performance in a robust market, we were able to make very, very good returns.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Just a couple points for clarification, actually. In your prepared comments you mentioned comments around pricing up 4% on average. That 4% was across 80% of your communities, was that right?

John M. Stephens

That's correct.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

And so that's current pricing, not prices that you realized, do your average selling -- your closing price, but orders that you are taking today.

John M. Stephens

That's right, Mike.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay. And also the -- I believe when Larry was discussing in his opening remarks the 1,600 lots that, and if you could just correct if I'm wrong here, that 70% are finished. But I believe later on, you discussed those same lots as being over 50% would require some form of development. So I don't know if I heard that one of those 2 incorrectly or you could help me there?

John M. Stephens

I can clarify that for you. So of the lots we purchased, about 75% were finished. And then what I was referring to also was in terms of what the company approved to purchase during the first quarter, some purchased, some not, about half of it or over half of it would require some sort of development. So that the point was that it -- it has shifted a little bit to some more development type activities for those particular lots.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay. So that over 50% doesn't really tie then to the 1,600?

John M. Stephens

That's correct.

Operator

There are no further questions at this time. I'll turn the call back over to Mr. Martin.

Robert N. Martin

Thank you so much for being on the call today. We look forward to speaking with you again, following our second quarter 2013 earnings release.

John M. Stephens

Thank you.

Operator

This ends today's conference call. You may now disconnect.

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Source: MDC Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript
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