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William Lyon Homes (NYSE:WLH)

Q4 2013 Earnings Conference Call

February14, 2014 12:00 PM ET

Executives

Larry Clark - IR

Bill Lyon - CEO

Matt Zaist - President and COO

Colin Severn - VP and CFO

Analysts

Michael Blewitt - JPMorgan

Will Randow - Citigroup Global Markets Inc.

Ivy Feldman - Feldman Associates

Dan Oppenheim - Credit Suisse

Joel Locker - FBN Securities

Alex Barron - Housing Research

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2013 William Lyon Homes earnings conference call. My name is Whitney (Ph) and I will be your operator for today. At this time, all participants are in listen-only mode. This call is being recorded and will be available for replay through March 14, 2014, starting this afternoon, approximately one hour after the completion of this call. Now I'd like to turn the call over to Mr. Larry Clark, Investor Relations for the Company. Please go ahead, Mr. Clark.

Larry Clark

Good morning and thank you for joining us today to discuss William Lyon Homes, financial results for the three months and year ended December 31, 2013.

By now you should have received a copy of today’s press release. If not, it is available on the company’s website at www.lyonhomes.com. The press release also includes a reconciliation of any non-GAAP financial measures used in. In addition, we are including an accompanying slide presentation that you can refer to during the call. You can access these slides in the Investor Relations section of the website.

With us today from management are Bill H. Lyon, Chief Executive Officer; Matt Zaist, President and Chief Operating Officer; and Colin Severn, Vice President and Chief Financial Officer. Following their comments we will open the call for your questions.

Before I continue, I’d like to take a moment to read the company’s Safe Harbor statement. Certain statements contained in this conference call that are not historical information contain forward-looking statements. The forward-looking statements involve risks and uncertainties, and actual results may differ materially from those projected or implied. Further, certain forward-looking statements are based on assumptions of future events, which may not prove to be accurate.

Factors that may impact such forward-looking statements include among others, changes in general economic conditions in the markets in which the company competes; limitations on the company’s ability to neutralize its tax attributes, limitations on the company’s ability to reverse the remaining portion of its valuation allowance with respect to its deferred tax assets, change in mortgage or other interest rates; changes in prices of homebuilding materials; weather conditions; the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable; not economically insurable or subject to effective indemnification agreements; the availability of labor and homebuilding materials; changes in governmental laws or regulations; the timing of receipt of regulatory approvals and the opening of projects; and the availability and cost of land for future development, as well as the other factors discussed in the company’s reports filed with the SEC.

Now I’d like to turn the call over to William Lyon Homes’ CEO, Bill H. Lyon.

Bill Lyon

Thank you Larry and welcome ladies and gentlemen. I’ll begin today’s call with an overview of 2013. Matt Zaist our President and Chief Operating Officer will then discuss our operational highlights followed by Colin Severn, our Chief Financial Officer who will review our financial results. After our prepared remarks we will open the call for your questions.

As we look back on 2013, we’re proud of our accomplishments. Our $250 million IPO in May made us one of the largest home builder IPOs completed in 2013. With net proceeds the company of $164 million and we strengthened our balance sheet and enhanced our financial flexibility. We further improved our liquidity in October rising over $100 million in the bond market as an add-on to our existing $325 million senior note offering which was completed in November of 2012. Both of these capital market events have enabled us to lay the foundation for our growth plans, in 2014, 2015 and beyond.

Today we have a well established operating platform in place with an experienced management team and excellent reputation for delivering high quality homes and a strong land supply and attractive real estate markets in the western region of the country. These western states are characterized by attractive long-term fundamentals with a favorable outlook and projected population growth rates above the U.S. average. With these markets we have carefully selected the location of our communities being close proximity to job centers that offer highly sought after lifestyle characteristics and strong school systems.

In 2013 all of our markets were strong, experiencing increased new home sales and healthy home price appreciation. This strength was driven by large pent up demand historically low mortgage rates and attractive affordability, improving job markets and low new home inventory. We firmly believe that the fundamentals remain strong for the industry and there continues to be sustainable underlying demand for our homes.

Our strong financial operating results for 2013 are further validation that our strategy is working. We doubled our home sales revenue to over $520 million, delivered $1,360 homes, increased our active new home community account by 39%, improved operating income more than 28 times to $56 million and generated $128 million of net income or $4.95 per diluted share, which includes reversal of the deferred tax asset valuation allowance of $95.6 million.

Now I am turning to some of the fourth quarter highlights. In the fourth quarter of 2013 we delivered our eight consecutive quarter of year-over-year growth in deliveries and orders. Home sales revenue was up 85% year-over-year, deliveries improved 21%, new home orders were up 28% and gross margin percentage grew 700 basis points to 24.8%. These strong metrics translated in a significantly improved profitability and strong returns to the shareholders as our operating income for the quarter increased more than 11 times to $29.4 million and our net income was $116.7 million or $3.64 per diluted share. Net income for the fourth quarter excluding the reversal of valuation allowance was $21.1 million or $0.66 per diluted share. On the expense side of our operation, we experienced meaningful improvement in our operating leverage. Our combined SG&A expense for the fourth quarter was 11.7% of home sales. This compares favorably with 17.5% in the year ago quarter and 11.9% in the third quarter of 2013 and is its lowest level since 2007.

Our fourth quarter results reflect a continued favorable industry dynamics taking place in our core markets. We remain confident in our ability to deliver on our growth plans particularly as we entered the strong spring selling season. With that I will now turn the call over to our President and Chief Operating Officer Matt Zaist to discuss our fourth quarter operating results. Matt.

Matt Zaist

Thanks, Bill. I will now provide an overview of our operational highlights for the full year and fourth quarter. New home deliveries were up 43% for the full year to 1,360 homes and higher by 21% for the fourth quarter to 391 homes. The fourth quarter’s year-over-year increase was driven by 13% increase in the number of new homes in backlog at the beginning of the quarter compared to the prior year and a backlog conversion rate of 84%. Our average sales price for homes closed increased 39% to $383,300 for the year and increased 53% to $467,700 during the fourth quarter. As 2013 progressed, we saw a steady upward trend in average sales price reflecting a healthy demand for new homes and resulting in pricing power as well as a greater mix of sales from our higher price communities geared more towards the move-up buyer.

We experienced this pricing power across all of our markets. On a same store basis which represents projects that were opened during both periods, average sales prices increased 35% year-over-year to $357,400 in the fourth quarter of 2013. Demand was strong across all of our key markets. Our net new home orders for the year grew 17% to 1,322 homes. In the fourth quarter of 2013 net new home orders increased 28% to 292 while gross new home orders increased 38% to 378 homes. We realized the substantial increase in California where net new home orders were up almost threefold from a year ago and 10% higher than the third quarter. December was also especially strong month where we recorded more new home orders companywide than in each of October and November.

We are very encouraged by the sequential order growth throughout the fourth quarter which gives us an increasing level of confidence about the all important spring selling season that lies ahead. The dollar value of our orders in the fourth quarter was up 165% year-over-year to 170.5 million which equates to $584,000 per home, slightly more than double the average selling price of $281,000 for orders during the year ago quarter. Our monthly sales pace was 3.1 homes per community in the fourth quarter this is generally in line with our expectations as the fourth quarter is our slowest selling season of the year. California led the way with an absorption rate of 4.3 homes per community during that period of time. This strong sales pace confirms the success of our California strategy of primarily focusing on the costal markets which have been experienced robust demand over the last two years.

Backlog continue to grow in the fourth quarter and being at 368 homes sold but not yet closed with the value of approximately $200 million which represent the 73% increase over the prior year. Our average sales price of homes in backlog at December 31, 2013 was approximately $542,000 which is 16% higher than the average sales price of homes that we closed in the recent fourth quarter. Our operating strategy includes analyzing land for product-to-buyer segmentation. Our goals this year were to deliver approximately a third of our projects at entry level markets with remaining two-thirds put evenly between the first and second time move-up markets. During the fourth quarter of 2013, 31% of our deliveries worth entry-level buyers, 34% to first-time move-up buyers and 35% to second-time move-up buyers.

In 2013, we opened 21 new home communities and at the end of the year we were selling at a 32 new home communities, a 39% increase over the prior year. The bulk of our new community openings were in California, where we opened 13 communities and closed out a four and in Nevada where we opened six new communities and closed out four. For 2014, we are focused on continuing our plan of opening new communities across all of our markets, particular emphasis in Northern California and Colorado where we’ve closed out of a number of communities over the last 12 months. Due in part to the adverse weather conditions impacting development in our Colorado division over the past couple of months we expect active community count to remain relatively flat during the first quarter of 2014, and rapidly elevate to approximately 40 to 43 active selling communities by the end of the second quarter.

Consolidated land spend was approximately $255 million for the full year and $56 million for the fourth quarter. We ended the year with 13,747 owned and controlled lots, an increase of 16% over 2012. In California, our lot count grew 77% over 2012, and in Colorado where we’re rapidly growing platform, our total owned and controlled lots increased by 72% from the prior year. For additional discussion of our financial results I’ll turn the call over to Colin.

Colin Severn

Thank you, Matt. As both Bill and Matt has discussed we had a very successful 2013 which was capped out with a strong finish in the fourth quarter. Home sales revenue increased 85% to $182.9 million in the fourth quarter of 2013, as compared to $98.6 million in the year ago period. For the year ended December 31, 2013 home sales revenue doubled to $521.3 million as compared to $261.3 million in the prior year. The increase in home sales revenue for the fourth quarter and full year were driven by increase in deliveries 21% and 43% respectively combined with a 53% increase in the average sales price of homes delivered for the fourth quarter and 39% increase in the average sales price of the homes delivered for the full-year.

Our homebuilding gross margin for the fourth quarter and full-year more than doubled to $45.3 million and $115.8 million respectively. For the fourth quarter of homebuilding gross margin percentage improved 700 basis points to 24.8% from 17.8% for the fourth quarter of 2012. For the year our homebuilding gross margin percentage improved 560 basis points to 22.2% from 16.6% for 2012. These higher margins were due to the strong pricing power that we experienced across all of our markets as well as attractive basis that we have in many of communities as a result of the Fresh Start accounting that we applied in 2012.

Of our active communities, approximately 51% still have the benefit of Fresh Start accounting. We reported an improved adjusted homebuilding gross margin percentage of 30.9% during the fourth quarter of 2012, up 140 basis points as compared to 29.5% in the year ago period. For the full year our adjusted homebuilding gross margin percentage improved by 240 basis points as compared to 25.9% in 2012. In addition, our fourth quarter adjusted gross margin percentage improved by 190 basis points on a sequential basis from the third quarter of 2013. In addition to our strong gross profits, we continue to strength meaningful improvement in our operating leverage.

Our combined SG&A expense for the quarter was $21.4 million or 11.7% of home sales. This compares favorably with last year’s fourth quarter percentage of 17.5% and this year’s third quarter percentage of 11.9%. Sales and marketing expense improved by 50 basis points to 4.7% of home sales, down from 5.2% in the fourth quarter of 2012, primarily due to a decrease in our advertising and direct selling expense as a percentage of sales.

While our absolute G&A expense increased over last year’s fourth quarter as we continue to strategically invest in our corporate infrastructure to support growth plans, it decreased as a percentage of home sales to 7% from 12.3% in the fourth quarter of 2012.

Operating income for the fourth quarter of 2013 was $29.4 million, as compared to $2.5 million in the year ago period and $17 million in the third quarter of this year. Operating income for the full-year was $55.9 million as compared to $2 million for 2012.

Net income for the fourth quarter was $116.7 million or $3.64 per diluted share, as compared to a net loss of $2.2 or a loss of $0.15 per diluted share in the fourth quarter of 2012. The company recorded a current period income tax benefit of $88.7 million in the fourth quarter which included a $95.6 million reversal of a substantial portion of the deferred tax asset valuation allowance. Net income for the fourth quarter was $21.1 million or $0.66 per diluted share excluding the valuation allowance reversal.

Net income for the year was $127.6 million or 4.95 per diluted share as compared to a net income of $216.8 million in 2012 which included a $233 million gain resulting from our reorganization in 2012. Our adjusted EBITDA increased 121% to $42.4 million for the fourth quarter of 2013, compared to $19.1 million in the year ago period, resulting in an interest coverage ratio of 4.5 times in the quarter compared to 2.3 times in last year’s fourth quarter.

Now turning to our balance sheet. Our total debt to book capitalization at the end of the year was 51% down from 70.2% at December 31, 2012 driven by total equity of $450.8 million and total debt of $469.4 million as of December 31, 2013. Our net debt to net book capitalization was 39.7% at the end of the year down from 65% at December 31, 2012 with cash of $172.5 million. Our total liquidity including our own drawn revolver is $269 million.

Now I’ll turn it back to Bill.

Bill Lyon

Thanks Colin. Before we take your questions I would like to make a few closing comments about our roadmap for the future. We have a well established foundation in place in terms of our land supply, market position and strong and experienced management team. Our mission is to be the premier western regional home builder by pairing innovative new homes with a high quality purchase and ownership experience for our customers. By leveraging our extensive operating expertise in entrepreneurial approach to each of our local markets, we will continue our focus on driving revenue growth and increase profitability enabling us to drive attractive shareholder returns.

Thank you again for joining us today, I would now like to open the call to your questions. Operator we’re ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Michael Blewitt with JPMorgan. Please proceed.

Michael Blewitt - JPMorgan

Congrats on the quarter. First, I have a few questions, I guess, primarily related around modeling but obviously kind of incorporates your view on ‘14 in general, to the extent you are willing to share that. The community count just to start. If I heard you right, you said that you expect it to be flattish sequentially in the first quarter due to timing or delays with Colorado. Then, to get up to 40 to 43 in the second quarter, by second quarter end. Number one, can you give us a sense of how the community count you are expecting roughly to play out in the back half of the year? Where the fiscal year you would expect to end? And also, given that the flat community count outlook in the first quarter would you also be expecting a similar type of year-over-year decline in absorption that you saw in the last quarter or two?

Matt Zaist

Sure, Mike this is Matt. I think relative to Q1 we ended the fourth quarter at 32 after selling communities we would anticipate that that would be the average run rate for the first quarter. And then popping up pretty rapidly to that low 40s number by the end of the second quarter with some incremental community camp gains towards the end of the year. I think we mentioned on the prior call that the latter half of this year we got our Church Farms project which we've renamed Meridian, in Phoenix open at the end of this year. So we’ll see an incremental pop in community count as we get towards the end of 2014.

Relative to orders, we gave a little bit of color to gross orders numbers for the fourth quarter, we’re taking those into account in the fourth quarter we actually saw growth orders in Q4 actually exceed gross orders in Q3 of last year. So we would expect that Q1 would start to benefit from the back half of this quarter having the benefit of the spring selling season. And we have kind of guided in the past that for a run rate for the year we expect to see between 1 and 1.5 net sales per community per week. And obviously with a heavier absorption rate during the spring selling season and then tapering through the third and fourth quarters. Does that help answer your question?

Michael Blewitt - JPMorgan

Yes, it's very helpful. I appreciate that, Matt. I guess what I'm trying to get to is in the first half of ‘13, when you guys were doing -- what is it -- closer to four sales per month, and then it kind of slowed more in the two to three in the back half. Just wondering if you would expect to match that stronger sales pace that you saw in 2014 in the first half of the year, again, relative to 2013?

Matt Zaist

We would expect a similar absorption rate to what we saw in last year Mike.

Michael Blewitt - JPMorgan

Okay. I appreciate that. Then on the gross margins, obviously you had great improvement throughout the year; and you are ending the year before interest in the 29 to 31 range. Just trying to get a sense of how you are thinking about ‘14 on that metric the pre-interest number and would you expect the interest to amortization to stay relatively constant or would there be on a percentage basis should there be additional leverage just thoughts around the interest amortization?

Colin Severn

Thanks Mike it’s Colin, couple of things first just on looking at Q1 2014 certainly expecting sometimes we see a little bit of a shift with a bit of seasonality downward but predominantly we’re looking at Q1 being flat and consistent with Q4 of 2013. And in terms of our interest rate we’re starting to see the benefits of our declining cost of capital coming to that difference so the difference between margins with and without interest we’d expect to have that same delta throughout 2014 that we saw in Q4 of 2013.

Michael Blewitt - JPMorgan

So just to be clear, thanks Colin for that. Just to be clear on the interest, you’re saying that throughout the year it was around 6% of revenues. Are you saying you’d expect the similar percentage in ’14 versus ’13 or similar dollar amount?

Colin Severn

Thank you. Percentage, so that 5.5% to 6% range is what we’re expecting.

Michael Blewitt - JPMorgan

Okay. And then just lastly tax rate now with the reversal of the DTA how should we think about the effective tax rate for 2014?

Colin Severn

Good question. So, our statutory rate is at 35% federal and 4% for states, but we do have some permanent items introductions that lower that. So we’ll be modeling somewhere between 36% and 38% for 2014.

Michael Blewitt - JPMorgan

Great, thank you.

Operator

Your next question comes from the line of Will Randow, Citi. Please proceed.

Will Randow - Citigroup Global Markets Inc.

Hey, good morning in the West Coast and great quarter.

Matt Zaist

Thanks Will appreciate it. Thanks.

Will Randow - Citigroup Global Markets Inc.

You guys mentioned roughly about 51% of your communities benefit from Fresh Start accounting which I think was on December 2011 prices. I guess based on your timing how long do you think those lots will remain on the books. Is it the next couple of years or I’m just trying to get a sense of where they are in terms of stage of development?

Matt Zaist

Will, its Matt. I mean it’s a little bit harder to answer and just a straight line a number of year basis but we still have a significant number of lots in Arizona and Nevada that will continue to benefit from price start. Total lots on the books alone about 75% of those lots still benefit from Fresh Start accounting. And so obviously we’re deeper in lots in Arizona and Nevada that have that benefit than California but we’ll continue to provide you guys with some update and guidance relative to that in terms of what actively selling that benefits from that.

Will Randow - Citigroup Global Markets Inc.

And it seems like your absorption rate in California was extremely impressive given what we’re seeing from some of the other builders. But in terms of Arizona and Nevada can you talk about sort of the factors that maybe driving little bit of softening there?

Matt Zaist

Sure its Matt I think as relative to Nevada I think we’re extremely pleased with our sales especially when you look at the average sales prices in Nevada probably the biggest change for us relative to make shift and something we’ve talked about over some of the prior quarters is really focusing on the second time luxury move up markets in Las Vegas so we’re seeing ASPs there especially in backlog increase significant. We do model slightly lower absorption rates on second time move up and luxury product versus some of the entry level and first time. So we feel very bullish about what we’re seeing in the Las Vegas market place.

Arizona it slowdown from the absorption pace probably more than our other markets and at the similar from what you probably heard from some of the other builders who operate in that marketplace. That being said the actual sales place that we saw in Phoenix was almost spot on our bit of this planned through the year and we felt like after the substantial increase in ASP in same store basis in Phoenix at the end of ’11 and through 2012 and first quarter of ’13 we felt like we will get back into some normalized seasonality in that market. And I think that we’re happy with the results that we’ve seen thus far in the spring in Phoenix that give us a sense of what we saw was seasonality. But we certainly saw slowing in the fourth quarter but that wasn’t overly unexpected from our standpoint.

Will Randow - Citigroup Global Markets Inc.

Great. Thanks for that and congrats again guys.

Matt Zaist

Thanks Will appreciate that.

Operator

Our next question comes from the line of Ivy Zelman with Zelman & Associates. Please proceed.

Ivy Zelman - Zelman & Associates

Hey guys I want to wish you my congratulations as well and great quarter.

Matt Zaist

Thanks Ivy.

Ivy Zelman - Zelman & Associates

Wanted to drill in a little bit on the backlog conversion I think you said it was 84, Colin? I'm not sure if that was the number. It was pretty high and recognizing that you guys are probably doing a little bit more specs and maybe just what your strategy is related to spec. Matt, as we heard about Phoenix being soft, it's nice to hear that you're not really seeing other than what you expected. Maybe just talk about incentives and what your strategy would be if there is softness as a result of more competitive community openings, et cetera, and just generally the spec strategy incentives and what you're seeing from a competitive perspective.

Matt Zaist

Sure. I think relative to our spec strategy I think that that on average throughout the company we’ve got approximately 3 to 4 specs for community and kind of our active pipeline at any point in time I think relative to the spring selling season we like to have some products available for folks who are ready to buy and ready to move. So, that’s kind of what are run rate on spec basis is it was ramping up that spec and going into the fourth quarter and kind of continuing that through the spring selling season. Relative to your questions about phi Phoenix, I think Phoenix is the obviously the broad MSA, we’ve talked about this in the past, you’ve got a combination of Maricopa County which is kind of prime Phoenix market as well as Pinal County. All of our active selling price in Phoenix obviously land that we had bought in the previous cycle, we developed in front of our operating strategy in Phoenix really master plan communities where we control, our entire marketing window, our supply of lots at a very attractive cost basis and so, we feel like, we’re located entirely right now actively selling in the Southeast Valley of Mesa and the Chandler/Queen Creek area. So, we like where we’re at I think relative to incentives we have not seen the increase use of itself of our projects in Phoenix, I think everybody is little bit different in their makeup we haven’t had survived land in Phoenix through the recent run up and land prices. So, we’ve got at a attractive basis, we try to put houses in the market that we think are priced right that are going to absorb for our business plan targets I think what you’d probably have seen in the market place is certainly there have been builders how have bid up the price of finished lots in Phoenix and to make margin we have try to price those houses at a certain level And they've bid the buying public to basically dictate what absorption rates are going to be. But we certainly would like to keep a healthy pace of sales but I think we feel good about the fact that in that particular market we’ve not had a buyer land really since the life cycle. That helped?

Ivy Zelman - Zelman & Associates

Yes. Just a quick follow-up on the backlog conversion being so high was that because of the specs that you had that you sold during the quarter, and what is the sustainable or a better way to think about backlog conversion on a full-year basis -- if it was up normally high for whatever reason on spec? But then just incentives, do you disclose, Matt, the incentives as a percent of ASP and what it's been trending?

Matt Zaist

I’ll let Colin answer the conversation rate, we have not given a specifics relative to incentive relative to ASP but it’s something that we’ll consider on future calls.

Colin Severn

It’s Colin. Follow up on your backlog conversion question, I mean generally out Q4 is the highest conversion quarter of the year part of that is because of the slightly higher spec levels but heading into the first parts of 2014 would expect it be consistent with last year which was a lot in 60s.

Ivy Zelman - Zelman & Associates

Colin, that's really helpful. Another question if I can, and then I will get back in queue. With respect to your entry-level product, you mentioned the numbers and you broke it out for us. Can you talk about what you are seeing, if any, changes in mortgage liquidity and whether or not that entry-level buyer is more moving back towards what would be a normal entry-level buyer as opposed to what has been in the cycle entry-level but seems to be more of a first time move-up buyer? Yes, first time move-up as opposed to true entry-level a lot of concern that that buyer is being priced out. Kind of double question, if I could. Thank you.

Matt Zaist

Yes. It’s Matt. I think for us entry-level means different things in different markets. And really for California again we’re coastally based so our entry-level product in California is either in San Diego County, in Phoenix in Vegas its more been typical first time buyer market, the first time buyer market is a coastal counties of California has been extremely robust in large part because just a pure lack of product in Orange, San Diego and LA Counties. So, that buyer has performed extremely well and it’s still coming in fairly well qualified and in sometimes with family assistance because of desire to live in a particular geographic area.

I think we’ve seen the first time buyers and Phoenix and Vegas certainly see a run-up in price. I think we certainly see a slight uptick in the mortgage providers offering, some arms and things of that to get painted to a place where it makes it easier for those buyers to step in. I think it's something though that we've continued throughout the year to really make sure we don’t have an overexposure to that buyer and large subset of that first-time buyer for us is going to be extremely land constraints markets which gives us a high level of confidence. So, we probably don’t have as much exposure to it as some of our other peers who might be able to provide you a little bit broader dataset on that. For us too in Colorado, we are exclusively first or second-time move-up and so we are not exposed in that market to that buyer profile.

Operator

Your next question comes from the line of Dan Oppenheim with Credit Suisse. Please proceed.

Dan Oppenheim - Credit Suisse

Thanks very much. I was wondering if you can talk a little bit more about the recent activity, you talked about strength in December being better than both October and November. Now that we are in the middle of February, can you talk a bit about January and what you're seeing sort of February given the common slot absorption being flat year-over-year for the first quarter?

Matt Zaist

Dan, its Matt. I think we are seeing what we would expect to see going to into the first quarter I would that all of our sales teams are extremely optimistic. I have spent time with each of our different sales teams. I think we are seeing definite upticks in not only physical traffic but also extremely large upticks in our web traffic. And the qualifications of the people walking through the door are outstanding. I think we are seeing people coming out who are ready to buy a home. So, I think fundamentally, we feel like spring selling season is going to be a good one. I think that for us, we are seeing increases that we saw last year; I think obviously we have got stronger community count heading into this year to last year. But generally speaking that’s something that we feel like we are going to continue to see improvement throughout the back half of this quarter and into the second quarter.

Dan Oppenheim - Credit Suisse

Great, and then I guess a follow-up. Just wondering about the land sale revenue in the fourth quarter, where was that and do you have any expectations in terms of land sales in 2014?

Matt Zaist

Sure Dan, Matt again. Those lot sales were to some folks in Phoenix as we have talked about in the past with our large lot supply, as well as being effectively a master plan developer as well as home builder in Phoenix. We periodically sale lots to other builders. We sold some lots to other public home builders in the fourth quarter in that market. We thought that the offers were extremely accretive to us. We liked the basis where they put those builders at relatively to our basis in the same community and so we felt like it was a good opportunity for us. Relative to this year nothing planned but we will certainly take a look at opportunities as they present themselves and we think is in the best interest of our shareholders.

Operator

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

Joel Locker - FBN Securities

Good morning guys. Just had a few questions I guess on construction service income that popped up a little bit. Just wondering what you guys were looking for in 2014?

Matt Zaist

Hey Joel, it’s Matt. I think those construction services forecast really are done on a percentage of completion basis and we have a little bit of a pop in the fourth quarter of last year due to hitting some performance targets that we have with our partner on that project. But I think going into 2014, we guide somewhere in that 1.25 million range per quarter throughout the balance of this year.

Joel Locker - FBN Securities

Thanks. And I guess you guys mentioned the start of spring that do you guys have a number of unit orders you took in January and versus a year ago?

Matt Zaist

We haven’t made that public.

Joel Locker - FBN Securities

Don’t disclose that one. And just on I guess commission expense as a percentage of home revenues. I think it was running 2.9% in the third quarter. I was wondering what it was in the fourth quarter?

Matt Zaist

I would say it’s about slightly down from 2.9% about 2.7% slightly down.

Joel Locker - FBN Securities

About 2.7%. All right, thanks. I will jump back in the queue.

Matt Zaist

All right. Thanks Joel.

Operator

Our next question comes from the line of Alex Barron, Housing Research. Please proceed.

Alex Barron - Housing Research

I wanted to ask maybe about what you've seen so far in the year in a slightly different way. Can you maybe walk us through different markets and whether you are seeing a difference say between your Orange County communities versus Inland or versus Phoenix versus Denver, any more color around what you've seen so far into the year as far as how the spring selling season is going so far.

Matt Zaist

Alex its Matt. I think we’re seeing good activity in all of our markets. Relative to California we’re not in the England Empire actively selling right now we do have some plans openings and what we tend to call the western those portions of the England Empire which really are kind of the call the Corona Eastvale area which are community corridors into Orange County. But really we’re exclusive through the first quarter in San Diego Orange and LA County. And so I think that we’re seeing activity improving quarter over quarter in each of our market. So from that standpoint obviously we’ve had the most community openings in California over the past year or so. So California on a pure gross number of sales persons it’s going to be a bigger piece of our orders for the first quarter.

Alex Barron - Housing Research

Okay, got it. What about any comments on the trajectory of margins that we should expect this year? Last year in the first quarter, you guys had a big sequential drop off and I'm guessing that had something to do with the leverage and stuff and maybe mix. What about this year? I think, obviously, your revenues are going to be higher than probably what you posted in first quarter, most for the quarter. So what are your thoughts on trajectory of margin that you can see?

Colin Severn

Its Colin mentioned previously that we’re expecting just kind of focused on Q1 of 2014 expecting them to be balanced relative to Q4 of ’13.

Operator

(Operator Instructions) We have a follow up from Michael Blewitt with JPMorgan. Please proceed.

Michael Blewitt - JPMorgan

Thanks a lot. Just wanted to circle back to some thoughts around ‘14 and focus a couple questions first on the average closing price. Obviously, throughout the year, and particularly in the third and more so fourth quarter, you've had a pretty big move in your average backlog price. And I think part of this was obviously planned in terms of rollout of the different communities and mix. Going back to our discussions over the last few quarters, we had been looking for a 460 average closings price for 2014, obviously based off of some of the backlog trends and order trends is that in the right ballpark and I guess with the price appreciation that you've seen in 2013, is there any upside potentially to that?

Matt Zaist

Mike its Matt. I mean I think certainly we’ve seen some very good increases as well as kind of a mix of our product going out. Certainly it’s going to get balanced with some of the roll out of some of the other communities that we’re opening throughout the year. But I think from a modeling standpoint for 2014 on a revenue basis somewhere in the high 4s to 5s is about the right place to model.

Michael Blewitt - JPMorgan

That’s great and I appreciate that. And then on the SG&A obviously you had a huge type of year this past year in terms of leverage with the revenue essentially doubling. We’d expected continued leverage in ’14 but obviously through a much lesser extent and more primarily coming out of the G&A bucket dollars going up but still getting a 100-150 type of incremental leverage there. Does that sound reasonable Colin, would it be anymore, any less?

Colin Severn

Well I think that’s around the ballpark I mean for 2014 we’re targeting sub-11 I think we’ve got 11.7 in Q4 we’ve talked about our objectives that we’ve thrown on the wall if you will of about 10 I am sure if we can quite get there in ’14 like we said but certainly our goal in terms of leveraging our headcount.

Michael Blewitt - JPMorgan

Okay, so just to make sure I heard that right, you are saying you hope to get below 11% in the SG&A mark?

Colin Severn

Yes.

Operator

We have another follow up from Joel Locker with FBN Securities. Please proceed.

Joel Locker - FBN Securities

Hi guys. Just following up on the G&A, just on a dollar basis, what do you guys expect for 2014?

Colin Severn

We don’t usually give guidance on specific dollar amount Joe we just try to keep it to the percentage of revenue.

Joel Locker - FBN Securities

But I guess on a selling expense or selling marketing, do expect that to continue around 4.7?

Matt Zaist

This is Matt. I think we’ve tend to target 5% or lower relative to the extra sales and marketing component of that. And so as Colin said we’re looking to drive some 11 this year and some 10-15 so keeping net sales and marketing components flat as possible throughout that period of time and the real leverage benefit’s going to come from the true G&A number.

Colin Severn

Right, and what about I guess as the lots cost of the percentage of the actual home price you know, you had a 24.8% margin and just wondering how the other, the makeup between direct construction costs, the land costs was to make up the other 75.2.

Matt Zaist

Joel, it varies pretty substantially between our different markets, so it’s something that fixed lots costs in California are almost double where they are in places like Colorado and Arizona, where stick and brick costs are much bigger percentage of variable costs, and so obviously we also have a mix of, you talked about previously land that previously had benefited from Fresh Start accounting, there’s a lot of variables that go into that so, something that we’re not going to give specific guidance on. When you’re looking at new buys and what’s the market in those areas like I said, finished lot cost in the coastal markets, typically range from 40-45% in California, and substantially lower than that in our other markets.

Joel Locker - FBN Securities

Right, right, understandable, but do you have a fourth quarter number for that, not anything to do with guidance but just actual fourth quarter number.

Matt Zaist

Not something that we’ve got, not handy.

Joel Locker - FBN Securities

Right, maybe I’ll follow up with you guys, but thanks a lot for answering questions.

Matt Zaist

You got it.

Operator

Our final question is a follow up from Alex Barron, Housing Research Center, please proceed.

Alex Barron - Housing Research Center

Thanks, I was hoping you could comment on, you said you sold some land to other builders this quarter is that something you think that would be more recurring or part of a strategy for 2014, especially like in Phoenix.

Matt Zaist

You know Alex, its Matt. I think as we said we don’t have anything planned for this year I think we’ve mentioned previously as we’re actively developing our next series of master plan communities and we’ll continue to evaluate the potential benefits to our shareholders in doing so but we are a home builder we believe in home building and we believe in a continued multiyear recovery in all of our markets and so I think it’s going to be the right opportunity for us, certainly having close to 6000 lots in that market in very well located positions, we can increase on a regular basis and we’ll evaluate each and every one of them for what the right thing is to do for the company. There’s nothing specifically that we think you should model for this year.

Alex Barron - Housing Research Center

Okay, and what about the remaining portion of the DTA is that close to around 20 million and is fair to assume you’ll get it back in 2014.

Matt Zaist

I’m sorry Alex, I didn’t hear your question, I apologize, can you repeat that.

Alex Barron - Housing Research Center

Yes, you had a 170 million of DTA evaluation at the onset of the previous quarter and I guess you reversed most of it this quarter, so I’m assuming the balance is about 20 million, so do you expect to get that back in 2014.

Matt Zaist

Not at this point, if we believe that we can get it back we would have able to bring that on, so what we have to do is continue to reserve that DTA until we know that we can use it. But it is something that we can update and analyze each quarter, so once we have that benefit we will be able to bring that on.

Alex Barron - Housing Research Center

Okay, and I guess my last question on the G&A portion, I’m assuming the sequential jump was some type of incentive compensation or bonus, is that fair.

Matt Zaist

Alex, this is Matt, it’s a combination obviously of, -- we had some good performance targets and that’s a piece of it but also you know this year is another year of significant growth for the company and so there’s incremental headcount in that as well, and so there’s a number of factors that point into that but certainly that’s a part of it.

Operator

That concludes our question and answer session.

Matt Zaist

All right, well thank you everybody, we appreciate your time today and look forward to talking to you in the future, thank you.

Operator

Thank you for your participation on today’s call, you may now disconnect, have a great day.

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