Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

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

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

Ivy Lynne Zelman - Zelman & Associates, LLC

Paul Przybylski - ISI Group Inc., Research Division

Rob Hansen - Deutsche Bank AG, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

William Randow - Citigroup Inc, Research Division

Alex Barrón - Housing Research Center, LLC

Buck Horne - Raymond James & Associates, Inc., Research Division

Eli Hackel - Goldman Sachs Group Inc., Research Division

William W. Wong - JP Morgan Chase & Co, Research Division

MDC Holdings (MDC) Q4 2013 Earnings Call February 5, 2014 3:00 PM ET

Operator

Good afternoon. We are ready to begin the M.D.C. Holdings, Inc. Fourth Quarter Earnings Conference Call.

I will now turn the call 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 M.D.C. Holdings' 2013 Fourth 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 annual report on Form 10-K, which was filed with the SEC today.

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

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

Larry A. Mizel

Good afternoon. I'm pleased to announce the fourth quarter net income of $0.62 per diluted share. Both our revenues and operating margin improved year-over-year, consistent with our experience in each quarter since we returned to profitability in the first quarter of 2012.

For the full year, we have made significant progress as a company. On a pretax basis, our income more than doubled in 2013 on the strength of top line growth exceeding 40% and a 270-basis-point expansion of our operating margin. Pretax results for our core homebuilding segment alone more than tripled in 2013 and in the second quarter, stemming from a return to consistent profitability and an improving housing market, we benefited significantly from the reversal of our -- of most of our deferred tax asset valuation allowance. In combination, these accomplishments for 2013 drove an improvement in our net income of more than $250 million, as well as an increase in our book value of 38%.

The pace of our monthly net home orders in 2013 increased by 21% from 2012. However, the pace was volatile throughout the year, impacted both by seasonal trends and economic uncertainty created by the discussion surrounding tapering of federal stimulus in the later part of the year. We are optimistic that we will continue to make progress on this measure in 2014, assuming the underlying housing market continues to recover.

The progress we made in net order pace in 2013 was offset by decrease in our active community count. This business decrease was caused by the sellout of certain communities faster than expected and a delay in opening some of the new subdivisions. However, I'm pleased to report that we turned the corner in the fourth quarter with our active community count improvement sequentially by almost 10%. As of the end of January, our active community count exceeded the prior year for the first time since May 2012. These increases came just in time for the historic -- these increases come just in time for the historically strong spring selling season, which will be critical to our efforts to continue growth for our company.

The -- also critical to our growth has been our access to capital. Since we last reported earnings, we made considerable progress in the capital market arena by finalizing a 5-year $450 million unsecured revolving credit facility and issuing $250 million of 10-year senior notes, which complement our $350 million issuance of 30-year senior notes earlier in the year. As a result of including our recent senior note issuance, we started 2014 with total liquidity exceeding $1.4 billion to address both our near-term debt maturities, which are in '14 and '15, and to invest in new and ongoing homebuilding projects. Our improved liquidity positioned us to solidly align with our philosophy of maintaining a strong financial position, which is center to our operating strategy.

In January, we announced we resumed our quarterly dividend after we paid all of our 2013 dividends on an accelerated basis at the end of 2012. We are pleased to reward our shareholders with this dividend, with a yield among the highest in the industry and believe that it evidences the confidence we have in our ability to generate solid risk-adjusted returns in the future.

Thank you for your interest and attention. I want to thank our dedicated employees, board and business partners for all of their contributions to make 2013 a success for our company.

I will now turn the call over to John Stephens for more specific financial information of our 2013 fourth quarter. John?

John M. Stephens

Thank you, Larry. We increased our closings by 3% to 1,252 new homes despite having a 12% lower beginning backlog to start the quarter. The increase in deliveries was partially driven by an increase in spec home deliveries and a higher level of beginning backlog under construction. Geographically, both our Mountain and East segments were up for the quarter while our West segment was down after starting the quarter with backlog units about 30% lower than a year ago.

Our backlog conversion rate of 71% was higher than the past few quarters and above our historical norm for the fourth quarter and was aided by having more spec homes available to deliver. And with the high percentage of backlog in spec homes under construction at the end of the quarter, we believe we have the opportunity to maintain a relatively high conversion rate for the first quarter of 2014.

Our average selling price was up 16% or nearly $50,000 per home year-over-year to $368,000 due to price increases and lower incentives realized over the last year combined with a shift in mix to higher-priced submarkets. For example, in southern California, we started delivering higher-priced product in Los Angeles and Orange counties. Sequentially, our average home price was up 7% or $23,000 per home. And over the last year, pricing power has been the strongest in the West, which was up 22%, with Nevada and California experiencing the largest year-over-year price gains.

Our gross margins improved 70 basis points over the prior year, and excluding impairments and interest, our gross margin increased 140 basis points. On a sequential basis, our gross margin was down 70 basis points. The decrease was attributable to fewer deliveries from our Nevada operations, where our gross margins are the highest in the company; a higher concentration of deliveries from our mid-Atlantic operations, where gross margin percentages are lower than our company-wide average; and more land charges recognized from closed-out communities during the fourth quarter as compared to the third quarter.

Despite the sequential decline we experienced during the fourth quarter, it's important to note we have not seen a decline in our backlog gross margin for the end of 2013, and it has remained relatively stable since the end of the second quarter after rising in the first half of the year. Nonetheless, we are mindful of the moderation in pricing power we saw in the second half of 2013 as we moved into the slower selling season, combined with more volatility in interest rates.

And while it is a goal to increase our gross margin percentage on a sequential basis, perhaps more important is the actual gross margin dollars we are adding for each incremental closing. As shown in the graph on the right-hand side of this slide, the sequential trend on this measure is positive, with the dollar value of our gross margin per home closing increasing 21% year-over-year to $64,000 per home.

Our homebuilding SG&A expenses as a percentage of home sale revenues was down 60 basis points to 12%. The improvement in our SG&A rate was driven primarily by greater operating leverage and an 18% increase in home sale revenues. The year-over-year increase 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, higher headcount due to increased volumes and anticipated community growth. On a sequential basis, our G&A expenses were down $3.8 million from the third quarter due primarily to lower deferred compensation and stock-based compensation expense.

Our net new orders were down 13% year-over-year largely due to an 8% decline in our average community count. The decrease in our orders on a sequential basis, both on an absolute and absorption rate basis, was in line with normal seasonality. And consistent with our historical and seasonal trends, our orders stepped down sequentially for each month throughout the fourth quarter and started to pick back up again in January.

Our monthly sales absorption rate was down marginally from the prior year while the dollar value of our orders decreased by only 2%, mainly stemming from our ability to raise home prices over the last year, along with a mix shift to more higher-priced submarkets. And although our monthly absorption rate was slightly lower than last year at 1.8 per community versus 1.9 last year, our absorption rates were higher in many of our markets, with California, Arizona and Florida generating the highest rates.

As of the end of the quarter, our backlog stood at 1,262 homes, with a backlog value of $506 million, both down year-over-year. However, our sales price in backlog increased by 14% year-over-year and eclipsed the $400,000 mark for the first time in the company history. The increase in our average home price in backlog was primarily the result of price increases, combined with the introduction of some higher-end communities in several markets during the last half of the year.

And although our backlog was down to start the 2014 first quarter, we expect to offset some of the impact on our first quarter closings with a higher conversion rate, similar to what we did in the fourth quarter. Longer term, we believe that the key to future growth lies in our ability to open the communities that we have already acquired, which should help us to -- help us continue to expand our community count throughout the spring selling season.

Our active community count of 146 at the end of the fourth quarter was almost flat year-over-year. However, it rose by 12 communities or 9% from the end of the third quarter. Based on this progress, we appear to be on track for meeting our goal of approximately 155 active communities by the end of the 2014 first quarter.

For assessing the potential for community count growth for the balance of 2014, the best data point we have is our soon-to-be-active communities, which represents communities with construction activity underway but have not yet sold 5 homes. The number of communities we have in this trajectory continues to build and exceeded our soon-to-be-inactive communities by 23 as of the end of the year, the largest positive spread we have seen since June of 2011.

As a result of the substantial increase in the absolute and relative number of soon-to-be-active communities during the quarter, we believe that our active community count should continue to grow throughout 2014. However, as stated -- as we stated last quarter, there is an element of volatility with the timing of the opening of new communities and closeout of existing communities, which could cause the direction and magnitude of the community count changes during the year to vary dramatically.

Finally, our land acquisition efforts continued at a solid pace during the fourth quarter as we acquired 1,255 lots. Of these lots, approximately 70% were finished, up meaningfully from 45% finished in the third quarter of 2013. However, we expect the percentage of finished lots to decrease again as we move into 2014 due to the relatively small supply of finished lots in most of our markets. As of the end of the quarter, we owned or controlled approximately 15,800 lots, which represented a 3.4-year supply based on our last 12-month delivery pace and a 38% year-over-year increase.

And after the purchase of nearly 8,000 lots over the last 12 months, totaling approximately $630 million, combined with $145 million of land development spend, the company continues to maintain a strong balance sheet, with liquidity of approximately $1.2 billion in cash, marketable securities and availability under our new revolving credit facility. With book equity now exceeding $1.2 billion and a net homebuilding debt-to-cap ratio of 20%, we believe that the balance we have achieved between growth and financial discipline gives us a unique ability to succeed in our industry even in an uneven housing market recovery.

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 Michael Rehaut of JPMorgan.

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

First question just on the gross margins. You obviously had some nice improvement year-over-year, but sequentially down a little bit due to mix. You also mentioned that in backlog, I believe, correct me if I'm wrong, if I heard you right, that gross margins in backlog are somewhat similar to current levels. So do I understand that right? Or is it more closer to the midpoint of the year where you were a little over 18%? And how should we think about 2014?

John M. Stephens

Mike, what I said was that the backlog margins really haven't deteriorated, and they've remained relatively stable over the last couple of quarters and through the end of the year. So I think the point we were trying to make here was that, really, the sequential decline we experienced in the fourth quarter, it was primarily related to geographic mix. I mean, Nevada was about 9% of our closings in the quarter versus 15% in Q3. And then the mid-Atlantic flipped the other way, where they were more of the deliveries in Q4 versus Q3. And so that obviously had an impact on the sequential change in margin. And really, the decrease in our mix of Nevada closings was partly due to some issues with getting power at some of our communities, which pushed some of the closings really into the first quarter and -- with a lower kind of beginning backlog to start the quarter. But going forward, if you look at the mix of our backlog in Nevada, where it was at the end of the fourth quarter relative to where it was at the beginning of the quarter, you can see that it's a higher percentage of our total backlog. And so that should help to increase our mix of Nevada closings to start 2014. However, one caveat I'd make is that the mix, where we end up at the end of Q1 is obviously going to be impacted by how many specs we deliver and so forth. But I think that was really what was driving the change on a sequential basis. I think the other thing that I alluded to briefly was we did have a charge for some closeout projects that impacted our margin by about 20 bps as well on a sequential basis.

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

That's helpful. I appreciate that. And I guess, second question, if I could squeeze a couple in. The first, just the absorption pace that you had in the first half of '13 was fairly robust, obviously, a huge improvement over 2012. Do you expect to match that, I guess, going forward? And number two, you mentioned that you expect the conversion backlog in the first quarter to also be elevated relative to a year ago. Would it be similar to the type of -- you had about a 10-point improvement in 4Q. Would it be some type of similar improvement there? So those are the 2 questions.

John M. Stephens

I think on the backlog conversion rate, Mike, I think the fact that we have more specs available to deliver, as well as we're further along in the construction process with some of our homes in backlog, we think that, that was the comment that we think that we could have a higher conversion rate in Q1 as well. On -- I think you're right, I think it was about a 10-point change from Q4 to Q3 in the earlier quarters. As far as absorption pace goes, in the next year, I mean, I think we're just on the precipice of the spring selling season. We're not quite there yet. But it's hard to kind of say whether our absorption pace will be the same as last year at this point, so early in the season.

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

Okay. But the backlog conversion -- similar range to 4Q is kind of what we're thinking?

John M. Stephens

Yes. I think that we have the ability to do better there than we have maybe historically because of the fact we have more homes under construction that are further along.

Operator

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

Ivy Lynne Zelman - Zelman & Associates, LLC

You have a lot of new communities coming online, and you have had strong trajectory for '14. Maybe you can give us some color with respect to being confident that the supply will be met with strong demand. Is there interest lists or anything that you can speak to? And maybe talk about some market specifics that you're excited about. And then I have a follow-up question, please.

John M. Stephens

Well, Ivy, we've obviously been very active on the community front. And really, where we've been investing is where we've seen better demand in, primarily the West, Colorado. We've been investing in Florida, too. I think traffic, traffic -- actually for the fourth quarter, traffic was the first year-over-year increase we had in traffic for the -- for all 4 quarters in the year of last year. And I think as we move into January, it's been pretty solid as well. So I think of traffic as an indication of how things are going or headed. I think that's a positive sign. In terms of markets, we've been very, very comfortable, obviously, and excited about what we've done here in our home state of Colorado. Demand was very strong earlier in the year, obviously tapered off a little bit as we got into the fourth quarter. California has been a very good market for us there, as I mentioned. We've kind of entered into some new areas there in terms of maybe more coastal type areas, whether it be LA or Orange County. So we see -- and in northern California, we've seen pretty good absorption pace there. And the fact that we did over 3 absorption per community per month in the fourth quarter, I think is pretty, pretty positive there in California. And then in Arizona, we just -- go ahead.

Ivy Lynne Zelman - Zelman & Associates, LLC

No, you first, sorry.

John M. Stephens

Yes. And I think in Arizona, we also saw things pick up there a little bit in terms of we've been adding communities there, and we saw our absorption pace pick up on a year-over-year basis there. And also, in Florida, we've seen a little bit better pace there kind of on a year-over-year basis, if you look at our pace in those markets.

Ivy Lynne Zelman - Zelman & Associates, LLC

That is very helpful. I guess my second question would be just to think about the longer-term opportunity with the growth that you expect on the top line. And recognizing what you have in margin right now in the backlog, you can't really make a margin prediction. But if you were to assume theoretically that you are getting top line growth in volume and you are seeing pricing, do you think margin, gross margin, should benefit and continue to increase? Or is it that you're hitting a wall because lot prices are rising at a fast clip -- fast pace that would be mitigating any margin expansion even if you get pricing?

Larry A. Mizel

I think the -- I sense the underlying question is about costs and how do we expect them to affect gross profit margins. And we've seen in pretty much every market the sellers are not quite as challenging. The fact that we have the ability to have an opportunistic view as some of the land sellers found that the other builders or some of them have kind of the plate full. And we found our own niche, Ivy, in the fact that we're looking for subdivisions that we can work through over a 3-year period, and some of them take 1.5 years to get opened as we get into more development requirements. We feel comfortable that the prices we're paying are competitive. We feel comfortable that we're able to focus on the gross profit margins and the market will drive it for us and others, more than anything. And we're looking forward to a robust spring market and for us to be able to deliver the expectations and requirements we've put on ourselves to continuously improve execution.

Operator

Your next question comes from Paul Przybylski of ICS (sic) [ISI] Group.

Paul Przybylski - ISI Group Inc., Research Division

This is Paul Przybylski on for Stephen East. I noticed you talked about your spec count being up rather usefully year-over-year. I was wondering if you could elaborate, if that -- you're going to continue to grow specs moving forward and if there is any margin differential between specs and built to order.

Larry A. Mizel

The -- if you look out over the last year, 1.5 years, we went through a period of time maybe taking 24 months, where dirt starts, you had a higher gross profit than standing specs. And then you go through last -- the first part of last year, where specs had better gross profit margins than dirt starts. Then you look at the back half of '13 and that's somewhat evened out. And we see that as we move to close out some of the subdivisions, then we're more aggressive in wrapping up many subdivisions that we were trying to get closed. As we start the beginning of the year, it's premature. And if the first half of '14 has any degree of being robust, then I think you can see that there'll be opportunities in the specs to be a little bit more aggressive on the pricing. On the other hand, if the first half of '14 is like the back part of '13, you'll see that dirt starts will probably have better a gross profit than the specs. The specs, as you can see, we have increased them. We managed the spec count on an active-aggressive basis, and we believe that it will be a balanced program with us between specs and dirt starts. And each of us, we commented a couple of words about volatility. Those of you that are in the securities world understand volatility perhaps better than we do. But we saw, over the last 18 months, we had volatility in sales. Where we had cycles and seasons, we have now cycles, seasons and volatility. So if I had the insight to know about the volatility, I could speak more comfortably. But since all of us are the product or the results of volatility that takes place around us versus within our own enterprise, we take that all into account on how we run our company. And I think the facts, as John spoke earlier, in the press release, that we have positioned our liquidity to deal with volatility. We have cash on hand and equivalent to handle our debt obligations at the end of '14 and our debt obligations for '15 and have liquidity available to grow the company as the market allows, so taking a very conservative approach. Also as you might recall, last year, we were able to execute on $350 million of 30-year debt. We've positioned, we believe, the company for a long-term unique strength within the industry by not having any short-term financial obligations that could be untimely depending on the financial volatility of the capital markets themselves. So we've tried to take that risk out of how we run our company and continue on a conservative basis, which has served us well over the last 4 decades.

Paul Przybylski - ISI Group Inc., Research Division

Okay. And I was wondering if you had any commentary as far as January demand trends and what you're also seeing from your competitors, if they are being behaved from an incentive standpoint.

Larry A. Mizel

I think we're all waiting for February.

Operator

Your next question comes from Nishu Sood of Deutsche Bank.

Rob Hansen - Deutsche Bank AG, Research Division

This is Rob Hansen on for Nishu. I just wanted to ask about the capitalized interest coming through COGS. And if you kind of look this past year, in 2013, it was over -- a little bit over 3%. The past few years, it was around 2.6%. Where should this level be? And where do you think it's going to be for '14? And what are going to be the kind of driving factors here? Should it be more elevated because you're going to have more land development here? How will this kind of play out?

John M. Stephens

Well, I think it's going to depend, Rob, on how quickly we kind of invest our capital. As Larry just alluded to, we've kind of set ourselves up from a liquidity standpoint, and we issued some more debt in January here. So there will be a period of time where we're carrying a little bit more debt. So that could kind of hover in the current range, where it was in Q4, perhaps a little higher. But I think, over time, as we invest more money in inventory and get better absorption pace and better demand, I think you could see more leverage there in the future. And over time, I think as -- again, if we retire the debt and our upcoming maturities, that number could come down.

Rob Hansen - Deutsche Bank AG, Research Division

Okay. And then kind of on the cash front. You've got plenty of cash now. You have like some -- around $800 million. And then you added this quarter the pretty large revolver line of credit there. So I just wanted to see what the rationale was in terms of putting that in place, especially given that you have so much cash already.

Larry A. Mizel

We've put the revolver in place last year in the fourth quarter, I believe, last year.

John M. Stephens

Back in December.

Larry A. Mizel

So we added that. And then the $250 million 10-year, that 5.5%, we did that the first week of January. So again, we repositioned -- we positioned ourselves that the obligations of the next 18 months, which was the only near-term maturities that the company has, we have that -- those funds available. And we have an adequate amount of funds to grow the company into what we hope will be a robust market, which will then allow us to leverage our G&A and do those things that all of us are looking forward to.

Rob Hansen - Deutsche Bank AG, Research Division

Okay. Just one quick last one. On your margins, what's the kind of delta between your higher-margin communities in, say, Nevada and then the lower-margin ones out East?

John M. Stephens

We're not going to disclose our divisional gross margins, Rob.

Operator

Your next question comes from Ken Zener of KeyBanc.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Looking at your absorption pace in the fourth quarter. It was kind of -- absorptions per community. Historically, we estimate you've been down around 26%. That's 4Q from 3Q, and you guys came in a little better than that. I don't know if it's worth commenting on. However, when you look forward, your first quarter absorption pace changed. It's historically about a mid-50%. Is that a reasonable benchmark for how you guys measure what spring demand should be in terms -- in the quarter in terms of sequential gains?

John M. Stephens

Absorptions, I think that's in the ballpark.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

And then, Larry, you talked about -- in terms of the question about pricing, incentives, et cetera, waiting for February. Is it reasonable to assume -- or could you perhaps tell us your forward thinking about how your pricing -- or perhaps inclination to do incentives or raise prices is predicated upon that kind of benchmark coming -- being met or not met, given that your communities, the ones that you're opening up, are newer? And how do you think about absorption and your willingness to change your pricing policy, if that benchmark is not met?

Larry A. Mizel

I think that we try -- we believe we run our business very opportunistic. When there's pricing power, we don't mind being aggressive. And when things slow down, we adjust to that market. It's -- I made the comment earlier on volatility. We don't live in isolation. I almost want to tell you that we do take the temperature every day, and we do. We do review the performance on more of a structured basis every single week, every subdivision. And so we have a lot of data, and we try to use that data and our experience to be responsive to the market demand. It would be great for all of us to set benchmarks and then not adjust up or down if the market changes. The markets have been volatile. They do change. We might be a little bit quicker on raising prices than we are on adjusting incentives, but that's just human nature.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

I appreciate those comments. If you could just clarify, perhaps -- if I missed it I apologize. Just kind of a forward tax rate or a normalized tax and then the benefit you expect to get this year from interest income.

John M. Stephens

Yes. I think on the tax rate, probably, it's been probably 38.5%, 39%. Probably that range gets you there for next year. I mean, obviously, there's things that will be adjusted for different state items. But for next year, we will have a normal tax provision rate and I think -- yes. So I think that helps you on the tax.

Operator

Your next question comes from Dan Oppenheim of Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering about some of the comments you made on the spec homes. You talked about how you've managed those very aggressively. And if we look at the sort of 1,400 specs at the end of the year compared to the 800 [ph] in the first quarter of last year, it looks as though it's relatively high level at 9.5 specs per community there. How much of that is that you were expecting more in terms of the orders at the end of last year and just didn't quite come through or sort of a real confidence and bet on demand in the spring season?

Larry A. Mizel

I think that we couldn't build enough specs last year for that part of the year, and you're positioning yourself in the second part. And you'll have the inventory available here for delivery in first half of the year, and that would be a very good positioning. Since our backlog was down, we can mitigate the reduction of the backlog by the inventory, the spec inventory, and delivering it into what we believe will be the spring selling season.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Okay. So that's -- but I guess, you'd expect -- and you talked about how the shift in margins over the course of the year were -- first half of the year, the specs had better margins than the dirt sales, then sort of balancing over the course of the year. At this level, would you expect to see specs with a slightly lower margin? And with the focus on sales, has it been -- through January and start of February here, been on selling some of the specs rather than dirt sales?

Larry A. Mizel

I think I can give a better answer on the next call. Too soon to talk about it.

Operator

Your next question comes from Will Randow of Citi.

William Randow - Citigroup Inc, Research Division

In regards to the soon-to-be-added communities, can you give us a sense of the average number of lots for those communities, if possible? And is that representative, in any way, of how many communities you could possibly add on a gross or net basis by year-end?

John M. Stephens

Yes. I mean, I think the number of lots per community has been growing over the last couple of years. As we've enjoyed better absorption pace, we're willing to buy more lots in a given community. So it varies by market and location and could be anywhere from 50, 60 lots community up to 100 lots community, depending on where it's at and what the price point is. In terms of a community count, we talked about 155 by the end of the first quarter, and we've got 23 soon-to-be-active, exceeding our soon-to-be-inactive. So without kind of giving full year guidance for 2014, there's volatility as we've discussed a number of times, we potentially could be a double-digit increase by the end of the year in terms of our community count. But the caveat there is that the subdivision count can obviously be influenced by how quickly we sell these communities and other kind of governmental approvals and things of that nature.

William Randow - Citigroup Inc, Research Division

And then in regards to the specs that was asked about earlier. I guess, 2 points I'd love if you could touch on. The first is if you look at the trailing 12 months in terms of closings, what percentage were specs? And then in regards to the specs, what percentage are foundation versus framing for the under construction?

John M. Stephens

In terms of the deliveries that were specs versus dirts, it's about 50-50 for the fourth quarter. I don't know that I have that trailing 12 months handy here. But to kind of give you a sense of where we were in the fourth quarter in that, that is more specs than we had in the prior year. In the prior year, the spec delivery count was lower by about [ph] 5%.

William Randow - Citigroup Inc, Research Division

Great. And then the breakout between foundations and framing?

John M. Stephens

I don't think we disclose that. We don't disclose that data.

William Randow - Citigroup Inc, Research Division

Qualitatively, is it more skewed towards foundations?

John M. Stephens

I don't have that data in front of me.

Operator

Your next question comes from Alex Barrón of Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I guess I was hoping you could address what you would consider a robust spring selling season. I guess what do you think would be elements that would cause that? Because a year ago, it seemed pretty robust because of 3.5% mortgages. So I'm kind of wondering, given that we don't have that, how do you think we can get to the same or better sales this year.

Larry A. Mizel

I think we could start off of consumer confidence and if you could help deal with the volatility in the stock market, that would be helpful. If the views of Washington, of our political leadership were stabilized, hopefully, that political system will work together this year to resolve some of the problems from last year. I don't know the fallout on the emerging markets and some of the Asian markets of what's been going on and how it will really affect the United States. We need job creation. We need stability and rules and regulations out of -- in the mortgage market. They announced a whole new group of rules to apply in January, and then the new guy -- the new sheriff comes in and he says, "We're going to delay those rules." So I think our industry, as well as many industries -- and I know the commercial banks and I believe, the investment banks, too, are -- a lot of anguish on the rules that are being created and the regulations evolved. I think that we have a couple of elements in the housing market that really puts us down the road in a positive basis. And that is that the standing inventory of homes is very low, that the actual sales from last year of new homes was just slightly off the bottom for less than 24 months. If base demand is even 60% of where it used to be, maybe the new normal is going to be 600,000 sales a year instead of 1 million or some other number. I'm optimistic because I see, as a general statement, that as homes are being completed, new homes, generally, they don't stay on the market very long. So with the resales, with distressed debt and with new homes, I think we have -- it might be the new normal. But the new normal is an environment that we expect to do very well in and to prosper relative to market conditions. So even though these items are not discernible, we certainly have a high level of confidence that our skills are very much in line with where the market is and where we believe it's going, which is in a positive direction.

Alex Barrón - Housing Research Center, LLC

Okay. And in terms of the pricing power, a year ago, I guess, it was pretty easy to raise prices because rates were still kind of in a declining mode. And then things kind of slowed at the end of the year. So do you think the industry would have pricing power this spring selling season if the first half looks like the back half of 2013? Or does it need to look more like a year ago?

Larry A. Mizel

I think probably, pricing power is too soon to evaluate. Last year, we had more pricing power than I think anyone expected. And I hate to mention it, but the Super Bowl is over. Everyone will now get back out and start buying homes again. And so we'll see how things work out, especially in Colorado.

Operator

Your next question comes from Buck Horne of Raymond James.

Buck Horne - Raymond James & Associates, Inc., Research Division

Can we talk a little bit about your finished lot position at year-end? If you could give us the numbers on where that stood in -- particularly, I guess, in terms of just the owned finished lots in the land category on the balance sheet.

John M. Stephens

Yes. Our finished lots, Buck were about 60% of our total lots owned and controlled, and that would be pretty similar on the owned versus the owned and controlled as well.

Buck Horne - Raymond James & Associates, Inc., Research Division

Okay. Does that include the work in process? Would that be inclusive in that 60%?

John M. Stephens

Yes, it does.

Buck Horne - Raymond James & Associates, Inc., Research Division

All right. And I guess I'm just curious, in terms of your land underwriting recently, you had some pretty strong ASP increases similar to other builders. I mean, the price you have in backlog is kind of now at a company high. But it seems like the gross margins you've been putting up just haven't really been keeping pace with the improvements that peers have seen recently. Is that related to how you guys are going out and buying land? Are there any positions that you feel like you may have overpaid for in hindsight? And have you made any changes to how you underwrite land more recently?

John M. Stephens

No, we really haven't made changes. I mean, obviously, the market has moved and home pricing has moved, as have land prices as well. I think Larry alluded to that earlier. But in terms of our performance for new versus old communities, albeit that the new communities are still a lower percentage of our total deliveries, they have in fact, done better, slightly better than our existing communities. So I don't think that's an issue. I think it's just the gross margin improvement we made over the year, I think, has been pretty significant. And if you look at where we're at kind of on a year-over-year basis, we did just have a little bit of a sequential decline in Q4, but I think we explained that. And our backlog margins have remained relatively stable.

Buck Horne - Raymond James & Associates, Inc., Research Division

Well, maybe just had another. What do you think is a normalized gross margin for what a typical MDC community should produce?

John M. Stephens

I think it depends on whether is it a finished lot, is it development, what market it's in, who's the competition. I think there's a lot of factors that go in there, so I don't know that there's "a typical gross margin" that you might expect. I think every deal kind of stands on its own in each market.

Operator

Your next question comes from Eli Hackel of Goldman Sachs.

Eli Hackel - Goldman Sachs Group Inc., Research Division

Just 1 question. It seems like you have turned the corner in terms of getting these communities open. I just wondered if that's a risk to your community count plan for 2014. Just going back to last quarter, you mentioned you had a fitter in municipal offices. Do you still have those? And are you seeing delays for approvals become lessened?

Larry A. Mizel

I think each of the markets is a little different. Some of the municipalities have ramped up a little. Most of them, I don't think they really have the extra revenue that they've been able to expand. If anything, some of them have contracted their processing time, where it takes a longer period to get processed. And we've seen this before in prior cycles. You need a longer cycle than 24 months for the city to rebuild their internal people because they just let them go, and so they're slow with hiring back. And so we'll do what we need to do to get through the process, which is each city is different. Some places they're more receptive and some places you wonder who they work for.

Operator

Your next question comes from Michael Rehaut of JPMorgan.

William W. Wong - JP Morgan Chase & Co, Research Division

It's actually Will Wong on for Mike. Just a quick follow-up. In prior quarters, you guys have disclosed the percentage of communities where you are able to raise price. On third quarter, I think it was 40%. I was just wondering if you have the comparable figure for the fourth quarter.

John M. Stephens

Yes. It's pretty similar, actually, with Q3 and Q4 in terms of the number of communities where we had some pricing power and raised our prices there. And the dollar amount is -- percentage-wise, it's about the same. Dollar amount, actually a little bit more just because we have a higher average selling price.

William W. Wong - JP Morgan Chase & Co, Research Division

You mean the percentage increase is pretty similar to the third quarter?

John M. Stephens

Yes, yes.

Operator

And we have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Robert N. Martin

Thank you very much for being on the call with us today, and we look forward to talking with you again after we report our first quarter earnings. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MDC Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts