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MDC Holdings Inc. (NYSE:MDC)

Q4 2009 Earnings Call

February 5, 2010 12:30 pm ET

Executives

Rob Martin - Vice President of Finance and Business Development

Larry Mizel - Chairman & Chief Executive Officer

Chris Anderson - Senior Vice President & Chief Financial Officer

Analysts

Allen Zelman - Zelman & Associates

Nishu Sood - Deutsche Bank

Kenneth Zener - Macquarie Capital

Josh Levin - Citi

Dan Oppenheim - Credit Suisse

Michael Rehaut - JP Morgan

Buck Horne - Raymond James & Associates

Carl Reichardt - Wells Fargo

Jim Wilson - JMP Securities

Alex Baron - Housing Research

Eric Landry - Morningstar

Operator

Good morning, we ready to begin the MDC Holdings fourth quarter 2009, earnings call. I will now turn it over to Rob Martin, Vice President of Finance and Business Development. Sir, you may begin your call.

Rob Martin

Thank you. Good morning, ladies and gentlemen and welcome to MDC Holdings 2009 fourth quarter earnings conference all. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer, and Chris Anderson, Senior Vice President and Chief Financial Officer.

At this time, all participants are in a 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 www.mdcholdings.com.

Before turning the call over to Larry it should be noted that certain statements during this conference call, including those related to MDC’s business, financial condition, results of operation, cash flows, strategies and prospectus 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 2009 Form 10-K which was filed with the SEC earlier this morning.

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 will be posted on our website.

Now, I will turn the call over to Mr. Mizel for opening remarks.

Larry Mizel

Good morning and welcome. Although the home building industry continued to face significant obstacles to recover in the fourth quarter of 2009, we increased our home orders year-over-year for the third consecutive quarter, this helped us achieve that increase in our full year home orders for the first time in four years.

As a result we ended 2009 with 826 homes and backlog of 55% increase from the year ago. Throughout 2009 we have invested considerable effort into activities designed and help us achieve sustained profitability in the future with an emphasize on product and process. This effort showed in the fourth quarter as our offering of more affordable homes that we introduced earlier in the year accounted for more than 30% of our new home orders. Furthermore, we have enhanced the mix of the product we have available for sale.

Generally, we now stop construction on unsold units at the drywall stage. Once construction is restarted, these homes can typically close within 45 days in direct competition with finished homes on the market. However, by holding the units drywall, we offer our buyers the opportunity to personalize their homes at one of our Home Galleries. This operating strategy helped us to decrease our exposure to finish speculative homes by more than 90% in 2009, while we increased our supply of homes available for personalization by 35%.

We believe that this effort to shift the mix of our product away from speculative inventory was a key factor and improvement of our fourth quarter home gross margins. These are just two examples of our review of product and process. We have closely examined many other aspects of our business during 2009 and we intend to continue doing so in 2010. We expect to realize the benefits of streamline process and better information in the future allowing us to operate more efficiently.

During the fourth quarter, our owned and option lots supply increased for the first time in 17 quarters as we secured control of more than 2700 lots across 52 new communities. Even after spending $100 million on land acquisition during the quarter, we ended the year with $1.56 billion in cash and investments up 10% from the end of 2008.

Furthermore, shortly after the end of the year, we issued $250 million of 10 year notes at a low interest rate and we expect to receive $143 million tax refund before the end of the first quarter of 2010. Given these enhancements to our liquidity, we are well positioned to continue making investments in 2010, as we build our land pipeline to support future home closings.

We’ll now turn the call over to Chris Anderson, for more specific financial highlights of our 2009 fourth quarter.

Chris Anderson

Thanks Larry and good morning everyone. As Bob mentioned, we filed our 10-K earlier this morning, which should give you more information on our full year results. The slides that I’m going to go through here are more focused on our fourth quarter results. In the fourth quarter, we received 637 net home orders, which was an 82% improvement over the same period last year. Each of our segments showed improvement in orders year-over-year, but the most significant increase was in the Mountain segment.

The improvement is especially notable given that active subdivisions were down 30% year-over-year to 133% at year end. It’s important to note that we don’t consider a subdivision to be active until at least five sales and the start up of a new subdivision. So the total you see here at year end does not include most of the communities we took control off in the third and fourth quarters.

Our average monthly net orders in active subdivisions improved to 1.3 for the 2009 fourth quarter, compared with 0.4 in the quarter a year go. With improvements in every market, sequentially our phase declined, but we attribute this to the expiration of the original tax credit combined with the typical seasonality we see in the fourth quarter.

Our gross orders were up about 25% for the quarter, and our cancellation rate of 30% was much less from the 52% in the fourth quarter of ‘08. The rate also decreased if you look at the cancellation as a percentage of beginning backlog is 21% compared with 34% a year ago.

As I mentioned earlier, the smaller, more affordable homes, we started selling earlier this year, continue to have a definite impact on our results. It represented just over 30% of gross home orders during the quarter with some individual markets reaching almost 70%.

Finally, the average price of the net home orders increased approximately 1% year-over-year roughly 287,000.

Turning to backlog, I’m not going to spend a lot of time on this one, but I wanted to show where we stand on backlog going into 2010, compared to where we were a year ago. As you can see though our backlog declined sequentially, we are up year-over-year by about 55%. Our average price in backlog is down 1% from 325,000 at December of ‘08 to 320,000 at December of ‘09.

Turning to our income statement, total revenue for the fourth quarter increased 9% to $324 million, partly due to a $14 million increase in our home sales revenue, but also due to a $13 million increase in land sales revenue as we sold about 1,200 lots during the quarter, compared with about 500 a year ago.

Improvement in revenue combined with the significant year-over-year decline in impairments and SG&A and an increase in our gross margin percentage allowed to us narrow our loss from operations by $78 million. We have further detail and drivers behind the changing loss from operations for you on upcoming slides.

Looking at the full year, you can see a $319 million improvement in a loss from operations. Again, SG&A and impairment declines coupled with an improved gross margin percentage for the keys of this improvement. Unlike the fourth quarter, for the full year revenues declined significantly by almost 40%, because home sales revenue was down year-over-year for the first nine months of the year.

Looking at the other loss line item, where we have a charge of nearly $7 million for the fourth quarter and $26 million for the year. This is mostly interest expense we couldn’t capitalize during the quarter. Net of interest income, we earned on our cash. This figure gives you a sense of what the cost is to maintain the auction value of our liquidity. It’s important to note that we’re one of just a couple of homebuilders in a net cash position. So if we really wanted to do so, we’ve got enough cash payoff our entire balance of debt obligations.

Overall, our pre-tax loss for the fourth quarter was $15 million better than the $86 million loss during the same period last year. However, our net income jumps to $127 million in the fourth quarter, compared with the net loss of $89 million in the fourth quarter of ‘08 largely due to a $143 million tax benefit that we recognized because of recently enacted tax legislation that extended to carryback of net operating losses from two to five years.

Moving onto closings, we were excited to finally turn the corner as we switch to 17% year-over-year increase in closings for the fourth quarter. The increase came after two consecutive quarters of year-over-year order growth, which give us a good backlog to work with going into the fourth quarter.

The average selling price for closing decreased by 11% year-over-year to roughly $268,000, this was the result of a decrease in the average base price and average upgrades for the homes we closed during the quarter, consistent with our strategy to improve the affordability of our homes coupled with the continued year-over-year decrease and market values in most markets across the country.

Moving onto gross margin, this slide shows our trends since the fourth quarter of ‘08, looking at the margins as reported. The graph on the upper left, 18.8% in the fourth quarter of ‘09 is 590 basis points higher than the 12.9% we experienced in the fourth quarter of ‘08 and roughly even with the 18.9% in the third quarter of ‘09. However, these percentages include two items that have been somewhat volatile over the last five quarters.

Interest and cost of sales and warranty adjustments, if you remove these two items, the graph on the lower left, the story is a bit different. Adjusted gross margin of 20.3% for the fourth quarter of 2009 is significantly improved compared with both the fourth quarter of 2008 and the third quarter of 2009 by 408 basis points and 340 basis points respectively.

We provided reconciliation in the webcast presentation for your reference the improvement in margin is related largely to a decline in hard cost and interest cost for the fourth quarter of 2008 as compared with the third quarter of 2009 and the fourth quarter of 2008 both on a per unit basis and as percentage revenue.

Also note in all three periods, lot costs were relatively stable at roughly $50,000 per home, meaning that the improvement in gross profit is not simply related to a decline in lot price. We believe the improving trend is closely related to our efforts to reduce our exposure to finish speculative inventory. Both the fourth quarter of 2008 and the third quarter of 2009 home sold as finished specs, accounted for more than 30% of home closings.

For the fourth quarter of 2009 this percentage dropped only 11% this analysis gives us comfort the one on the right track with regard to our current inventory policy, which as you heard from Larry earlier promotes the strategic use of unsold homes available for personalization.

Turning now to selling expenses, we have reduced these expenses by nearly a 10% year-over-year reduction in marketing expenses and is related largely to the reduction of both active subdivisions and model homes. Over the past year our model home count declined 45% outpacing our 30% decline in active subdivisions.

As a result we have experienced decrease in cost related operation, staffing and advertising these model homes and communities. The decrease in marketing expenses was partly offset by an increase in commissions which increased inline with our house sales revenue.

Moving on to G&A expense were down 11% just compared with last year’s fourth quarter. We’ve done this primarily through significant adjustments to our employee headcount, which is down by approximately 15% from last year. We also had a $2 million decrease in bank fees after reducing our homebuilding line of credit in the third quarter of 2009 and our restructuring expenses also fell year-over-year by approximately $2 million.

Here is our update on impairments. This shows the history of our impairments since the starting in the third quarter of 2006. Although we increased a little bit in the fourth quarter to $14 million, we are still down 77% year-over-year. Most of the fourth quarter impairments occurred in our mountain segment which represents our large stone building segment in terms of total assets. We anticipate that our impairments levels will remain low going forward given our low exposure to land inventory.

This next slide gives you a picture of our unsold home inventory which tell a compelling story about our strategy. As we have mentioned earlier on our calls for the last two quarters, we believe that the use of unsold inventory can be a very effective strategy if managed property.

Our experience tells us, that it’s been personalized for its ultimate buyer at one of our Home Galleries or design centers and is much more profitable than a home that is sold after it is finished. So we’ve concentrated on building the supply of unsold homes to fit with the strategy, while reducing our exposure to unsold finished homes.

On the slides, you can see that a combined number of unsold homes in the foundation and frame categories, which recall unsold homes available for personalization has increased by 35% since the end of ‘08, while we decreased our finished unsold inventory 90%.

As Larry mentioned earlier, we believe that this strategy is a great thing for our buyers. We typically stop an unsold home at drywall, and at that point they can close in about 45 days once we restart, which competes nicely against finished homes on the market.

However, by stopping construction of drywall, we gave our buyers the opportunity to personalize their homes in one of our Home Galleries or design centers, which is a fantastic selling point. Also as you saw earlier in our presentation, the shift from finished speculative inventory at homes available for personalization has had a very positive impact on our gross margin.

Related to land acquisition, we’re proud to report that we put more than 2,700 lots under control in 52 new communities during the fourth quarter of 2009, which is more than twice 1,300 lots we secured in the third quarter. We acquired roughly two-thirds of the lots directly and the remaining one-third through option contracts. In addition, we acquired about 230 lots through auction contracts that were already in place at the beginning of the quarter.

In total, we spent approximately $100 million on land acquisition on during the quarter. In contrast, we sold approximately 1,200 lots during the fourth quarter, which added roughly $17 million in revenue and $4 million in come. Despite the impact of land sales, our supply of owned and option lots increased sequentially for the first time in 17 quarters.

We’re pleased with what we’ve accomplished in the fourth quarter including the increase in our home orders, gross margin and land acquisition activity. As we move into 2010, we’re focused on continuing to make progress on the strategic initiatives that we believe will allow us to progress towards sustained profitability and our ultimate goal of creating long term value for our shareholders.

As always I want to thank our MDC team from across the country for the work they do every day to put our company at the top of the home building industry. I’d also like to thank everyone on the call for their continued support and interest.

At this time, we’ll open the line for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Allen Zelman - Zelman & Associates.

Allen Zelman - Zelman & Associates

Hi guys it’s actually Allen on for Ivy. Next step on the order and margin improvement in the quarter, Larry I was hoping you can perhaps provide a little bit more detail on the land acquisition in the quarter and I know the 52 communities you quantified there can you give us any indication on kind of when those are going to start to come online and, thinking about 2010 and your total community count should we expect that to increase, throughout the year or you expect close outs to kind of equal roughly would you bring it online.

Larry Mizel

The 53 communities that we have acquired I believe almost all of them will come online this year at some level or another and the close out of the existing ones I can give you better color after the completion of the first quarter we are all waiting to see the seasonal selling season if it comes back to seasonally showing up since it was missing for couple of years we are you should assume that we will continue the aggressive acquisition of lots and subdivision opportunities going forward.

Allen Zelman - Zelman & Associates

Then just in terms of the underwriting on these deals what type of return threshold are you underwriting it to I mean are you kind of targeting that 20% gross margin you are at right now or you are thinking about it differently.

Larry Mizel

I think market conditions really adjust with our gross profit margins can be if concessions reduce we wouldn’t have an opportunity to expand gross profit margins and it seems to have a more firm tone now than a year ago and again let’s see over the next couple of months and we will have a lot easier transparency after the end of first quarter it really will depend on market availability of new homes.

I do expect that new home starts will probably go along generally at this level and those builders that are able to transact will have an opportunity for a substantial increase in market share without single-family new home starts increasing to any important degree, but I think the public builders are positioned to substantially increase market share and that’s what where we’re expecting to take place.

Operator

Your next question comes from Nishu Sood - Deutsche Bank.

Nishu Sood - Deutsche Bank

I wanted to ask about a very interesting filing you had on December 30 Form 40 APP to the SEC to get I suppose an exception in call to the 40% Investment Company Act. I was wondering, if you could just kind of briefly talk us through that; any implications for the balance sheet, as well as what sort of extra interest income you could generate, because I don’t understand exactly how that 40% really works, but if you are applying it to total assets that would imply that you might be able to shift something like up to $1 billion into these higher yielding securities. I’m probably not doing it correct, but may be if you could help me out there as well.

Larry Mizel

I would say that, one could write a introits on the interpretation and application of the 40 Act and being very conservative on how we do everything. We thought that most conservative approach was to file an exception and to go forward. I won’t take everyone’s time up today on the technical new ounces of 40 Act and how it works. Perhaps you can talk to Chris, when he has sometime, and we can send you to some printed material that’s in the public domain in order for you to interpret it as you see fit.

It’s not as simple as that calculation. So I think we just want to be conservative and cautious and expert with as much cash as we have. What’s happened as we’ve increased our cash so much, our land and the rest of our assets have comedown so much, than the portion and the mix that gets used in that calculation. We just want to make sure that we’re not going to end up with some unintended consequence.

Nishu Sood - Deutsche Bank

I guess a broader question, then on your cash and your investment strategy. I mean on the one hand as you describe on that application, there’s the concern about this cash balance and violating that rule because it will take few years to allocate this amount of cash. I think you mentioned $400 million to $500 million a year. Even if I add in some healthy land spend like you have this quarter, it would still take a while to deploy it.

So, on the one hand in that situation, but on the other hand you’re getting the windfall from the five year look back. You’re out there opportunistically raising another $250 million. So those seem kind of at odd.

If I were just interpreting the opportunistic raising and the amount of cash you have, I might say that maybe you’re keeping your options open in terms of more transformative allocations of these cash as oppose to the incremental community, community type acquisitions that you’ve been making the last two quarters. I’m not asking you to tip your hand, Larry, but just what should we be expecting here? I mean is it more going to be like what we’ve had in the last two quarters or is there possibility open there?

Larry Mizel

Now anticipating, I’d get that question. I found a quote that may or may not apply, but it was quote from Jon Wood and it’s that the failure to prepare is to prepare for failure. You can interpret that a lot of ways, but I think MDC has a track record of being very prepared and with reasonably good insight on what opportunities might come our way.

I believe that the adequacy of our liquidity will be a compelling circumstance that will allow us to take advantage of market conditions on activities that may not be currently transparent, but I have a high degree of confidence will take place over the next period of time.

Operator

Your next question comes from Kenneth Zener - Macquarie Capital.

Kenneth Zener - Macquarie Capital

So I pick up obviously, that the gross margin trends are improving based on your selling prices as well as the land that you’re bringing in. I wonder if you could talk about the fixed G&A cost my concern is that seemed to be diluting the success you are very likely to have on gross margin. So what do you expect the dollar spend to be in homebuilding G&A as well as your corporate G&A for 2010?

Larry Mizel

We do not give a forward guidance and so, I can’t give you 2010 number. I think from the presentation, you can look at what our trend looks like form an SG&A stand point, or for the G&A chart and kind of get a feeling for where we’re at right now.

I think, we’ve said before, that we want to maintain an operation and we’re focused on growing our business, which you can see in our land acquisition activity for Q3 and Q4 that our focus certainly is to make sure that we’re efficient in our spend, but we’re not taking a defensive posture and just cutting the operation where we can’t grow. So we’re going to keep an operation, keep the platform and our focus is really on growing and leveraging that G&A base.

Kenneth Zener - Macquarie Capital

When I look at the lot that you picked up in the quarter, simply looking at where you were last quarter relative to this quarter, less the closing for seems like you picked up substantial lots in Nevada and you sold substantial lots out of the Philadelphia type market. Could you just go into perhaps a little more color there, if there’s something regional or just opportunistic in terms of the focus?

Chris Anderson

Yes, I actually looked at the same numbers thinking from your prospective and it’s a little bit hard to draw the whole story together on just the numbers that you have at one table. Most of our sales were focused in California and Arizona. The acquisition activity really happened across the Board and there wasn’t anyone that was particularly dominant from a spend stand point.

Operator

Your next question comes from Josh Levin - Citi.

Josh Levin - Citi

Larry you said, we should assume continued aggressive acquisition of lots going forward by MDC. I was wondering about your aggressive acquisition of lots in the past quarter, are you being more aggressive, because you’re seeing more opportunities in the land market, or because you’re become more optimistic about the level of home sales going forward?

Larry Mizel

Both.

Josh Levin - Citi

Okay and one more predominant than the other?

Larry Mizel

No their kind of come into together at the same time.

Josh Levin - Citi

Okay, and with regard to the 2,500 lots you secured control of did you use any unusual or creative financing arrangements that you for example partner with banks to build in their land inventory?

Larry Mizel

No not really the land that we want is at least in our perception is a locations and like in all markets the better the location the better the price the worse the terms.

Josh Levin - Citi

I am going to sneak one more than when you sold your lots who did you sell them to what kind of parties?

Larry Mizel

Those that, were willing to transact quickly.

Operator

Your next question comes from Dan Oppenheim - Credit Suisse

Dan Oppenheim - Credit Suisse

Thanks very much I was wondering if can just talk about some of the land purchases and how much the land came from other builders that might have been trying to sell land to their tax refund and just to our rate in terms of the optimism that the transaction levels will continue in next several quarters of the year?

Larry Mizel

We saw opportunities from across the board other builders, banks, funds, I think I don’t have the final count but it was a multitude of different entities, which I felt was really better than acquiring it from one or two sources I don’t know if there is 20 or 30 sources

Chris Anderson

I think you gripped them right you know there is between 20 and 30 different sellers and what we have is an open buy order in every market on some term and some price and we want to encourage whether it’s our competitors the banks the regulators whoever needs to get something done they know that the probability of us closing the transaction is great.

We are willing to do something on a tighter timeline than many and so we are geared up as I have discussed over the last year or so we have been building our infrastructure and our resources to be able to be scalable and I said after the third quarter, I said back acquiring lots when we did 1,270 lots in the third quarter and now we’ve gone to 2,700 in the fourth quarter.

We hope they have a very aggressive approach to it, but more important to everyone, we’re open to business from anyone that brings a transaction in whether it’s a broker, or principal we’re looking for business.

Dan Oppenheim - Credit Suisse

Can I just you had made a comment about having confidence in transactions that may not be currently apparent right now. Just wondering, is that I mean that you would consider in the past you had nor really looked at company acquisitions, but more in terms of assets. Is there any change in thinking on that one or we would look at a large transaction now?

Larry Mizel

We look at large assets, if they fit exactly in our business model and I don’t know this moment what might come in the door later today.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

My question is, first on the gross margins, I was wondering given that you said it was over 30% at the home orders from the new plans and the new products that you’ve rolled out. You could give us a sense of the differential in gross margins of that product versus the rest of the sales?

Larry Mizel

Yes I think Michael, when we look at the margin the bigger driver on margin and the improvement in margin is really on the homes we sell, as far as finished speculative homes versus like a dirt sale or homes that are available for personalization, where we get the benefit on.

Our new home product is really on velocity and the price point in square footage where the markets at right now. The new product is the bigger driver for the volume and kind of our inventory strategy is the biggest driver on the gross margin percent.

Michael Rehaut - JP Morgan

So in other words, with the finished spec kind of now getting down to 11% pretty relatively low number in other words, you’ve gained a lot of the benefit there the future benefit would more be through volume leverage even in the gross margin side and perhaps as incentives continue to abate.

Larry Mizel

Right.

Michael Rehaut - JP Morgan

Where are you in terms of incentives as a percent of home price relative to last quarter and a year ago and what’s normal for you guys?

Larry Mizel

Yes, we don’t include that disclosure and haven’t, but I’ve seen and you’ve published what’s happening generally is that there’s a general trend that the incentives are tightening up. For us for as we’ve moved to inventory from finished unsold specs, we’ve seen some benefits from that, because we just left negotiation on a finished, there’s more on a finished unsold home than there is on a home available for personalization.

Operator

Your next question comes from Buck Horne - Raymond James & Associates.

Buck Horne - Raymond James & Associates

Seeing much of your spec home strategy a little bit further, going into this spring, how many additional drywall hold specs do you think you’d like to have relative to your current position as you approach kind of the March, April timeframe? What’s the right number for this spring? Also can you care to share any January traffic patterns or indications on how January went?

Chris Anderson

We want to have as many as we can sell and we want to maximize the market opportunity, but so we definitely have our eye focused on that to make sure we capture the urgency and the buying opportunity that people have.

Buck Horne - Raymond James & Associates

Any comment on January?

Chris Anderson

No, we don’t have any comment on January. I’m happy to give that to you in couple of months.

Operator

Your next question comes from Carl Reichardt - Wells Fargo.

Carl Reichardt - Wells Fargo

I’ve question about when you’re moving home up to drywall and holding it a drywall how long does it set a drywall typically on average? I’m not sure it varies seasonally, but how long typically does it set a drywall before you’ve got personalized and then move down the process?

Chris Anderson

Our experience so far Carl it does not sit there yet long. We had a great opportunity, through kind of September, October with the tax credit and they were lot of these homes were sold before they hit the drywall you know the whole status so, we are not holding a lot of homes just you know stopped at that level our sales pace and our people are focused on selling those and restarting, construction on a new home.

Carl Reichardt - Wells Fargo

The better the ones they get there Chris how long do they stay?

Chris Anderson

I don’t have the specific days here with me Carl, but it’s not like 90 days not 45 but I don’t have the specific days with me.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

Thanks try a couple of more here with the comments around land acquisition and it appears that your community Kansas has began to stabilize any type of guidance in terms of where you might be in terms of year end by the time you get the year end 2010 year-over-year growth

Chris Anderson

Well you are asking us that I have not provided guidance before so I won’t give you number, but certainly from you know we don’t have a chart to project out what communities come off that our focus is been on adding new communities you can see that you know with the spend we did in Q3 and Q4 Mike, and you know our intent is to continue to grow that. We think that we had the opportunity, and we certainly have the balance sheet inline to capture the opportunity.

Michael Rehaut - JP Morgan

What potential amount of communities could close our over the next 12 months?

Chris Anderson

There are pretty fair amount of communities that will be closing out, as we move through 2010 you know some of these are from you know few years ago and you know we are going to probably have a pretty large number of communities at close out.

Operator

Your next question comes from Jim Wilson - JMP Securities.

Jim Wilson - JMP Securities

We’re just wondering on, if you could give a low color on the land deals done for the quarter even cooperating what you’re seeing that you’re currently looking at our analyzing as to, where you’re finding deals and I assume returns are driving of course where you’re picking deals that held returns to you might look like they vary by locale?

Larry Mizel

Generally, the better the locations and lower the returns and say you have to have an expectation of continued tightening of the markets and the availability in the mid Atlantic is tighter than the availability elsewhere. However, we’re seeing and transacting in every market that we’re involved with and I expect that to continue.

Jim Wilson - JMP Securities

So it was pretty balanced geographically in what you purchased during Q4?

Larry Mizel

Correct.

Operator

Your next question comes from Alex Baron - Housing Research.

Alex Baron - Housing Research

I wanted to ask you, so over the last just a couple of years or so, you’ve expressed that you’ve been investing into the company and that’s why the SG&A has been remain pretty high. Relatively speaking, and as I look at I guess here SG&A in absolute dollars versus other some more type of companies, it seems to me there’s still an opportunity for that amount to come down.

Sometime I’m wondering, if you guys are done with those investments and if we can expect that as the absolute dollar should come down, or are you basically saying that the absolute dollars are going stay at similar level than you just expect the leverage to come from higher revenues?

Larry Mizel

I’d say that we’re aggressively implementing our plan and I expect that it will be a work-in-process and we will receive both leverage from our growth more likely the not concurrently at a time that we’ll have a reduction in those expenses that we’re currently incurring for the development aspects of what we’re doing and they will probably come together, which should materialize in better leveraging the overhead.

Chris Anderson

I’ll just add one point to that, keep in mind that we’ve said this before, we are making investments in changing our business and so we’re in the middle of doing that pretty significant change with our internal systems and those in dollars in that G&A that are just through investment dollars that were occurring right now to put us in a position where we are just more scalable and more efficient.

Alex Baron - Housing Research

I guess my other question, somebody asked a similar one, but my count you guys already have about $1.7 billion of cash investments, tax refund etc., so liquidity, I am really struggling to understand why you need another 250? You mentioned that you had some opportunities, you’re looking at, but you guys are never done an acquisition of another company. So are you only talking about buying land or this some house?

Chris Anderson

This is a circumstances happening in the world economy that is different and in my four decades of being in this business, I’ve never found that you can have too much money and found that if you have adequate resources opportunity does not come to you and since there’s fewer people with the degree of liquidity then there normally is, I would expect that we will have some of those unique opportunities over the next period of time.

Operator

Your next question comes from Eric Landry - Morningstar.

Eric Landry - Morningstar

I want to approach land thing again. It looks like land you put on the controls roughly doubled, is that a function of relatively static bit activity in your hit rate has gone up or has your bidding activity increased substantially fourth quarter relative to third quarter?

Larry Mizel

I’d say we have more deal flow. Many entities who were holding off exposing their assets for transactions whether was regulatory or pricing or facing reality or end of tax period, every aspect of the business that motivates the seller probably other than being profitable, because most of their basis I am sure were substantially greater than what we pay them and as the banks across the country and other developers have a necessity to create a liquidity event. We do believe and we are continuing to see deal flow and just like your business, the greater deal flow of greater opportunities we will have and staffs accordingly.

Eric Landry - Morningstar

If I hear you quickly you are implying that the environment got easier due to maybe not an introduction of more sellers, but more selling on behalf of current sellers is that sound accurate?

Larry Mizel

I would not say it got easier because every transaction is seems to be really hard, but there are more transactions available and we are getting at least our share of opportunities and know we are in a position to transact as they come in at the levels that we think are attractive.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

Just going back to couple of quick things, talking before about the incentives Chris, is it safe to say that you guys are still a ways away from a normal level of incentives.

Chris Anderson

It’s hard to think about what’s normal over the last four five years. Mike going back multiple years, I think we are still in such a change which we stabilize across the markets and there was a lot of activity, that I guess were normalized at this point. I think about where we are at; we have certainly seen some improvement in that, and we think that one way for us to help manage that is our inventory strategy.

Michael Rehaut - JP Morgan

Lastly, just want to still go back to the community camp question I know I am trying to tell you to an answer here, but again you have a lot coming on you said you also have a lot coming off from where you are today I mean is it fair to assume you are going to end the year higher than where you are right now on a net basis?

Chris Anderson

From an activity standpoint we certainly that bringing many communities on and you can kind of extrapolate that activity, but I think it’s precise there.

Operator

There are no further questions at this time.

Robert Martin

Yes, thank you for joining us on the call today and we look forward to speaking with you on our next call for the announcement of our first quarter earnings result in April.

Larry Mizel

Thanks everybody.

Operator

This concludes today’s conference call you may now disconnect.

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Source: MDC Holdings Inc. Q4 2009 Earnings Call Transcript
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