M.D.C. Holdings' (MDC) CEO Larry Mizel on Q4 2015 Results - Earnings Call Transcript

| About: M.D.C. Holdings, (MDC)

M.D.C. Holdings, Inc. (NYSE:MDC)

Q4 2015 Earnings Conference Call

February 3, 2016 12:30 PM ET

Executives

Kevin McCarty - Vice President of Finance and Corporate Controller

Larry Mizel - Chairman and Chief Executive Officer

Robert Martin - Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Analysts

John Lovallo - Bank of America Merrill Lynch

Stephen Kim - Barclays Capital

Michael Rehaut - JPMorgan

Truman Patterson - Evercore ISI

Alan Ratner - Zelman & Associates, LLC

Nishu Sood - Deutsche Bank

Jay McCanless - Sterne, Agee & Leach, Inc

Andrew Berg - Post Advisory Group, LLC

Alex Barron - Housing Research Center

Kenneth Zener - KeyBanc Capital Markets Inc.

Operator

Good afternoon. My name is Jonathan and I will be your conference operator today. At this time, I would like to welcome everyone to the M.D.C. Holdings 2015 Full-Year and Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Kevin McCarty, VP and Corporate Controller you may begin your conference.

Kevin McCarty

Thank you. Good morning, ladies and gentlemen and welcome to the M.D.C. Holdings 2015 fourth quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, 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 will 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 this 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 M.D.C.’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 2015 Form 10-K, which is scheduled to be filed with the SEC today.

It should also be noted that the 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 Mizel

Thank you. This morning we announced 2015 fourth quarter net income of $22.6 million or $0.46 per share. Our industry continues to be positively impacted by improvements in various macroeconomic drivers including personal income levels, unemployment rates and consumer confidence. Evidence of these positive impacts can be seen in year-over-year improvements for every quarter during 2015, in our monthly sales pace.

Our 2015 fourth quarter sales pace was the highest we have seen in 10 years although overall new home sales activity remains significantly below its historical average. Our improved sales pace has helped to drive robust year-over-year growth in our backlog. However, limited subcontractor availability coupled with our renewed focus on a build to order strategy has increased the time necessary to convert the backlog into closings.

At the same time, these factors have also constrained overall supply of new homes on the market permitting us to increase prices and expand our gross profit margins. As a result for the 2015 fourth quarter, our pre-impairment gross margin for home closed rose to its highest level since 2006.

Looking forward, gross margin improvement will continue to be a priority for us, though we likely will continue to face headwinds in the form of higher construction and land costs. During the quarter, we invested more than $150 million in acquiring almost 1,400 lots, in 27 communities. After two consecutive quarters of strong acquisition activity, our total controlled lot supply exceeded 15,300 at the end of the year.

Our appetite for new land acquisitions and active subdivision expansion will be influenced by the results of 2016 spring selling season. Although, we are encouraged by the strong sales results we saw in the fourth quarter, our optimism is tempered somewhat by domestic and global events that have recently unfolded, such as the slowdown of economic growth in China, the significant drop in oil prices, and the Federal Reserve's action to increase the Fed funds rate for the first time in almost a decade.

These events have led to significant volatility in security markets around the globe and reinforce our commitment to maintaining operating policies that keep our balance sheet strong. With a goal of advancing the long-term interest of our shareholders by appropriately balancing risk and return, a central objective for 2016 is to drive our returns higher by improving the performance of the assets we already own.

Key to this effort will be accelerating our inventory turnover, through a focus on the conversion of our backlog. Additionally we are focused on timely execution and opening new subdivisions already in our owned pipeline. This effort includes a renewed focus on product, including the introduction of more affordable homes that can help drive increased absorption rates.

Thank you for your interest and attention. I’ll now turn the call over to Bob Martin for more specific financial highlights of our 2015 fourth quarter. Bob?

Robert Martin

Thank you, Larry. We delivered 1,275 new homes during the quarter, a slight increase from 1,242 in the prior year. Our fourth quarter backlog conversion rate came in at 49% down from 66% from the same quarter last year, but in line with our expectations. The decrease is largely due to the intentional reduction of our unsold home inventory over the past year, which has increased the average time from sale to close for our homes.

The conversion rate was also negatively impacted by continued limitations on subcontractor availability, particularly in our Denver market. On a positive note we did not see a significant impact on closings from the implementation of trade mortgage rules during the quarter.

Looking into the future, our backlog conversion rates is expected to again decrease year-over-year for the first quarter of 2016 due to the same factors that impacted the fourth quarter. Also although TRID did not have a significant impact on Q4 it will apply to a greater percentage of closings in Q1. So it remains a risk to closings. My current expectation is that the first quarter backlog conversion rate will be approximately at 40%.

Our average sales price increased by 10% or $38,000 per home to $435,000 primarily the results of a mix shift to higher price submarkets combined with some price increases that were implemented earlier in the year. The increase in average price combined with 3% increase in closings resulted in a 12% increase in home sales revenues to $554 million.

Our gross margin for home sales decreased slightly year-over-year primarily due to a $4.4 million increase in inventory impairments coupled with higher land and construction costs. However, our gross margin from home sales, excluding impairments was 17.1%, which was 60 basis points higher than the 2014 fourth quarter.

The year-over-year increase in our pre-impairment gross margin was primarily driven by the increased percentage of our deliveries coming from build-to-order homes, which typically have higher margins than the sale of inventory already under construction. For the fourth quarter of 2015 74% of our deliveries were build-to-order versus 49% for the fourth quarter of 2014.

Additionally, our interest and cost of sales as a percentage of home sale revenues decreased. Our margins continued to be hampered somewhat by an increase in both land and construction costs, but we have minimized the impact of these factors by increasing home prices.

On a sequential basis gross margins move slightly lower due to some additional incentives given on specs to close older units before the end of the year. Margins on build to order sales actually increased sequentially. The impairments we saw during the quarter mostly came from one community in the Mid-Atlantic which has been one of the weaker geographic areas for us over the past year.

Our estimated gross margin and backlog at the end of the fourth quarter moved slightly lower on a sequential basis. Q1 margins will depend on among other things, the mix of units that pulled through and the impact of unsold homes that sell and close during the quarter.

On the SG&A front, our homebuilding SG&A expense rate of 11.5% for the 2015 fourth quarter was up 40 basis points year-over-year. Looking at individual categories general and administrative expense increased by $5.1 million year-over-year, which is partly due to additional stock option expense resulting from a grant to senior executives earlier this year. We also have higher salaries and benefits expense as our G&A headcount increased by about 11% year-over-year.

Marketing expense was up $1.3 million primarily as a result of higher costs incurred for model home. The $2.6 million year-over-year increase in commissions was attributable directly to our increase in home sales revenue. Our net new orders for the quarter were up 15% over the prior year, which represented our seventh consecutive quarter of year-over-year order growth and our highest fourth quarter order level in nine years.

Our monthly absorption rate of 2.1 was up 18% from the prior year period, a solid result given that we have increased prices in most of our communities during the year. I also think it’s notable that we achieved this increase despite a more than 50% decrease in the number of unsold homes in our inventories to start the fourth quarter. In other words, it does not seem that we are losing a significant number of buyers as a result for our strategy to reduce the number of homes we start before sale.

The dollar value of our orders increased 26% year-over-year to $450 million. The increase in dollar value was due to a 15% increase in sales and 10% increase in our average order price to $442,000 due to the price increases I mentioned in most of our active subdivision during the year coupled with a shift in the mix of net new orders to higher price communities.

From a regional perspective, we experienced the most strength in our Washington operations with a 70% year-over-year increase in home sold driven by a 40% increase in average active subdivisions and a 26% increase in absorption rate. California and Nevada continue to perform well with year-over-year increases in absorption rates of 28% and 30% respectively.

Our homes in backlog to end the fourth quarter were up 54% year-over-year on a unit basis to 2,332 homes with a value just under $1.1 billion, which was up 59% year-over-year. As I alluded to in my discussion on conversion rate, we don't expect that the increase in backlog will translate to commensurate year-over-year increase in revenues for the first quarter of 2016 given that sale to close cycle is longer with more build to order homes in backlog and we will likely still have some lingering issues with subcontractor availability.

However, we still believe the backlog increase should have a very positive impact on year-over-year revenue comparisons for the 2016 full-year with our conversion rate showing signs of recovery as early as the second quarter. Our cancellation rate was down 110 basis points year-over-year to 26.9% for the fourth quarter and as a percentage of beginning backlog, our cancellation rate for the same period was down 390 basis points to 14.5%. The most common reason for cancellations in Q4 was financing issues.

Active community count at year-end was up both sequentially and year-over-year with acreages of 6% to 5% respectively. On the chart to the right, note that our soon-to-be active subdivision still exceed our soon-to-be-inactive subdivisions by 2016, which is a positive indicator for our subdivision count in the short-term especially as we move into our spring selling season.

For the fourth quarter, we acquired 1,361 lots for $156 million. We spent an additional $66 on development costs bringing our total spend for the quarter to $222 million. At the end of the quarter, we owned or controlled 15,301 lots which represented about a 3.5 year supply on a trailing 12-month delivery basis. The majority of our land spend was related to lots acquired in California and Nevada, which were our highest absorbing divisions for both the fourth quarter and full-year.

We’ve been pleased with quality of new deals coming through our pipeline for review. Our land acquisitions early in 2016 will heavily influence the extent to which we will be able to increase our active subdivision count for the full-year, and our appetite to take on new projects will depend on the strength of sales activity we see during the spring selling season.

Given the momentum of our sales activity in Q4 we are optimistic that the spring will give us the confidence we need to pursue the continued expansion of our subdivision count. However, a more important focus for us will be the portfolio of assets we currently own. Accelerating and improving our returns on these assets is the best path we have towards growing our earnings in 2016, we’ve already taken steps in several key areas to make this a reality.

That concludes our prepared remarks. At this time, we would like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from John Lovallo with Bank of America. Please go ahead.

John Lovallo

Hi, guys thanks for taking my call. First question is on Denver pricing, Case Shiller reported 10% year-over-year increase. How are you thinking about pricing in Denver heading into 2016? Do you see this as being sustainable?

Robert Martin

I think in Denver expecting double-digit price increases every year is not realistic. The prices we’ve seen in Denver is higher than pretty much anytime we’ve seen in Denver’s history. And that’s one reason why we’re focused on introducing more affordable product into the market. So that’s our strategy focus for Denver.

John Lovallo

Okay. And then as a follow-up, looking at your east region, it looks like it's been generating below corporate average pretax returns. Can you give any color on how it performed in the quarter and maybe any actions you might be taking to boost margin?

Robert Martin

Yes, well I think the first step is try to make sure that we’re comfortable with the market and the process. As we commented that the market has been a little bit weak for us. So we have to push against that backdrop and really the first thing is to make sure that we're getting a reasonable absorption pace. And I think we’ve seen that. We’ve seen velocity. Short-term I think that in some cases comes at the expense of margin, but really it’s important to drive the velocity first. So that’s the primary focus at this time.

John Lovallo

Okay. Thanks guys.

Operator

Your next question comes from Stephen Kim with Barclays. Please go ahead.

Stephen Kim

Yes, thanks very much guys. You made an interesting comment about wanting to increase your focus on the entry level, and you also, I think, talked about looking to increase your backlog turnover as you go forward, or I would say, your active asset turnover.

So I wanted to focus on that. First, can you talk a little bit about why you are looking to increase your focus on the entry level? Is that because you are seeing, as we are, some data that would suggest that there's more action there, or more demand at that price point? And can you talk about how, in light of labor shortages, what you're assuming about the persistence of labor shortages, as you target that more volume-oriented segment of the market?

Robert Martin

Yes, I guess there’s a few questions in there, so hopefully I can hit them all. First of all, I guess with regard to targeting a more affordable product. I would say that the first thing is just we’ve seen much higher average price for the company overall. So we’ve seen prices increase we’ve shifted a lot of focus to the first time move up and second time move up consumer.

But the first-time consumer has been a much smaller percentage of our business. And I think you are right Steve we have seen data out there that would suggest that maybe that first consumer is going to be coming back in a more significant way. We’ve seen increase in household formation. We’ve even seen an increase in birth rates coming back for the first time in a while.

And I think all those things point to the notion that we may have resurgence of that first time consumer. So I think on that front we are seeing a lot of the same things that you are. And what was the second part of your question, Steve?

Stephen Kim

It was about the fact that when you target, in order to target the entry level product, you're going to need more velocity, it's more of a volume-oriented approach, and you had acknowledged there were going to be labor constraints, that there are labor constraints and so forth. So I was wondering whether you were assuming that those labor constraints dissipate as early as the second quarter, which would enable you to go after this entry-level product, or do you think you can go after this entry-level product a little bit more despite labor constraints?

Larry Mizel

Got it. Yes, I think the subcontractor base is what is it. We don’t assume that it will expand. Really, we assume that our process needs to get a little bit better. And as you might expect, the product that we have for the first time consumers is a little bit more efficient to build, so we think that will produce some positive results for us as well.

Stephen Kim

Got it. Okay. And then I guess my second question, again, similarly you talked – talking about the efficiency of your – the assets you already own, one of the obvious ways in which analysts would look to interpret those remarks is in their community count forecasts. So I was wondering, it looks like your community count was down low single digits or so, on average for this past year. In general, should we be thinking that may reverse and go positive in 2016, or would there be some reason why that would not be the case?

Robert Martin

Well, obviously our land acquisitions that we do early in the year will influence that equation. Our appetite to take on new projects is going to depend on what we see in terms of sales activity, early here in the spring selling season. So certainly we would like to see a trajectory where we’re increasing our active subdivision count, and certainly we’ve got the liquidity to do it, [$800 million] worth of liquidity. We have the resources, but some of its going to depend upon what we see in the first quarter.

Stephen Kim

Okay. Great. Fair enough. Thanks very much.

Larry Mizel

Thank you.

Operator

Your next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Michael Rehaut

Thanks. Good morning or good afternoon. Mike Rehaut, JPMorgan. Just wanted to hopefully drive down a little bit, if possible, on what some of those comments around the 2016 goals might mean from, at least directionally, from an income statement perspective, and appreciate your sometimes reluctance to give hard guidance.

But when you talk about trying to get better velocity out of your assets, and also perhaps through a more affordable product, it would seem that we should expect a decent year from a closings growth standpoint, and perhaps that reflecting on better SG&A leverage, while at the same time, gross margins have kind of stabilized here, it appears in the low 17% range and it would seem like all else equal, that might continue to be the case. Is that the right way to think about things, Bob, for the upcoming year?

Robert Martin

I think it’s a reasonable way to think about things. I’ll focus on one aspect. I mean you are really focusing on increasing our revenue year-over-year by increasing our terms and other things. And I think if we are able to achieve an increase in our revenue, absolutely you have the opportunity to potentially leverage your SG&A expense a little bit more and see that come down.

It could even have a positive impact upon your gross profit margins even though as I’ve said earlier the backlog gross profit margin is down just a smidge here sequentially in the last quarter. So I think your comments are good ones and captures what we are trying to do.

Michael Rehaut

Thanks for that. And then on the ASP also obviously with the comments around more affordable homes that something that obviously you can’t necessarily change your mix on a dime and at the same time your average price in backlog and your average order price are both above where your average closings price is in the most recent quarter. So I mean all else equal, is it also fair to expect the ASP for 2016 to be above 2015?

Robert Martin

Yes. Well, I think those two indicators are probably the best information you have that would lead you to that conclusion I mean to the extent that we get additional velocity on that first time product, it might influence the equation to some degree. I would think that you might see a slowing at a minimum of that year-over-year acceleration in selling price.

Michael Rehaut

Right. And then just one last one the tax rate I think came in a little bit lower than we expected for the quarter and for the full-year came in at roughly 35%, what's a good number or is that something that 35% is a good number to use for 2016 or any guidance there would be helpful as well?

Robert Martin

Yes. I think there will be some different factors that influence it going into the next year. We have fully utilized our federal NOLs at this point, which means things like Section 199 reductions come into play for us. And we haven't fully work through all the machinations of how that’s going to work, but rather than being 38% I could certainly see in it being a bit lower than that and it might get us to more that kind of 35%, 36% range.

Michael Rehaut

Great. Thanks so much.

Operator

Your next question comes from Truman Patterson with Evercore ISI. Please go ahead.

Truman Patterson

Hi guys, good morning. I was hoping first you could just give us what the vintage of land of your impairments in the Mid-Atlantic region were, and then also just jumping over your entry level effort, The Seasons, where exactly are you introducing it? Which regions or metros are you targeting, and what inning are you in on the rollout of this? What do you think this can grow to as a percentage of your Company? What do you have targeted?

And finally on the entry-level, just what's your targeted gross margin spread between your overall Company margins? And then price points within those metros are you looking to target a 10% discount to what your overall selling prices are?

Robert Martin

Yes. That’s – I’m getting old so I don’t know I can remember all the things that you just rattled off there, but if I missed some, we could certainly catch up on some of them…

Truman Patterson

No, fair enough.

Robert Martin

But I guess first of all with regards to some of this new product I think it’s still on the early innings. If you look at our website, we announced the opening of what we call our seasons products in Phoenix in three communities just a week or two ago and then we’ve also got to going into communities here in Colorado now.

The idea is whether it’s seasons product specifically or other product that’s more affordable that we are going to start to roll that out in additional markets across the country throughout the year. So from a rollout perspective, we are fairly early in the process. In terms of what the target is I don’t know that we set a specific target at this point.

What I can tell you is if you look at – if you look at our first-time consumer it’s about 20% of our closings in Q4. Historically I think we’ve been more in the 30% to 40% range on that first-time consumer. So you could see it driving us back up closer to that range over time provided that our first-time consumer actually comes back into the picture in the magnitude that we think they might. So that’s going to be a part of equation as well.

On the return – from a return standpoint when you say what do we target, I don’t think our return criteria is any different on this product versus other product. It has to work from a financial standpoint. In some cases when you are putting it into communities that already exist you might able to take out some hard costs and have a better dynamic there and you might be able to increase margins at communities that you already in but we are still at the front end of that part of the discussion. So we’ll have more information on that certainly as we progress throughout the year.

With regard to the asset in Mid-Atlantic that was impaired, I’m not sure of the exact date but it was a development asset. So I think you are probably talking about 2013 acquisition for that asset, might be slightly off on that, but I would imagine it’s about 2, 2.5 years old.

Truman Patterson

Okay. And then on your gross margins, just what do you guys underwriting your land to currently? And then just thinking out over 2016, how do you think the land costs are going to be flowing through into your newer communities that are coming online? And the changing in the spec strategy, think you could net those out for us, and just tell us your thoughts on that going forward?

Robert Martin

Well, targeted returns, we always shy away from that question, so it really depends on risk profile of the deal the individual market and risks we see in individual markets. But I think we look at land deals much as the same way as a lot of our peers do that were a little bit more conservative when we look at transactions. As I look at the kind of margin trajectory going forward again it’s really dependent upon what we see coming through what we pull through on a market-by-market basis. And then also which specs sell and close in any given period.

For the fourth quarter only about 26% of our units were from spec units. So that’s getting to be a pretty small percentage I wouldn’t expect that percentage is necessarily going to decrease a ton from there. We are always going to have some of those unsold homes out there because we do have cancellations things happen on that front. So you always have some of those to sell. It won’t go to zero. So I don’t know if there is anything really to add to the discussion on the margin front other than what we’ve already been out there.

Truman Patterson

Okay thanks guys.

Operator

Your next question comes from Alan Ratner with Zelman & Associates. Please go ahead.

Alan Ratner

Hey, guys good afternoon. Thanks for taking my question. I think the spec debate is a pretty interesting one. We've seen you about a year ago made the decision to reduce your spec count. You were seeing some margin pressure from having to incentivize unfinished specs.

More recently, we've actually seen some other builders moving in the opposite direction, starting to put a few more specs on the ground. The rationale we've heard is given the current level of labor constraints out there, the subcontractor base really encourages and appreciates the predictability of a fairly even flow production model.

So on one hand you have reduced the specs, but on the other hand, you haven't had the improvement in the margin that maybe some would have expected, given more of a mix from dirt sales.

So my question to you is, A, would you agree with other builders that you would be at a disadvantage today in sourcing labor because you're not specking as much? And B, on the margin side, would you have hoped for a little bit more of a mix benefit there, or is that maybe yet to come, and we haven't seen that in the numbers yet?

Robert Martin

Well, I guess first of all with regard to production, when you are talking about a market like Denver, I think we can really drive almost even flow, through just the backlog that we have. We’ve got plenty of units in backlog for our subcontractors to work on. So in a market like Denver, I don’t think it’s a disadvantage for us, as well as most of our other major markets that we have a good presence.

And so the backlog is really the primary concern at this point and making sure that we’re being efficient about converting the backlog. As far the mix benefits of spec versus dirt, I mean if you look on a pre-impairment basis, we are up Q1 to Q4 by about a 160 basis points by reducing the number of specs in our closing. So I would say we’ve realized a pretty significant benefit over a fairly short period of time by shifting the mix.

Operator

Your next question comes from Nishu Sood with Deutsche Bank. Please go ahead.

Nishu Sood

Thanks. Larry, in your opening comments you cited concern around some of the broader domestic and global issues that are going on, China, and energy prices, and market volatility, and the central bank policy, et cetera. So clearly that's on the minds of a lot of folks, so my question was, are you bringing those issues up just as a cautionary, or as a potential risk for this year? Or are you seeing things on the ground right now that in your experience are a direct result of some of those risks that you mentioned?

Larry Mizel

I think I mentioned them specifically because it’s pretty obvious the oil prices, the volatility of the capital markets, our Fed’s interest rate policy or non-policy, but the facts on the ground for homebuilding for the industry are good. And as we commented, we have several metrics that I spoke about that are the best they’ve been for 10 years.

So I feel that the housing industry is an industry has a good tone. There are some places in the country that might be a little slow like Texas, but basically the housing industry I think not everybody that buys a home, watches the market all day, every day. But I think the caution is – the world we live in is very volatile, but basic housing is something that most people strive for and as Bob commented, as you have more people having children, and the family unit almost always heads towards a home because that's the goal and desire of most people in some places you end up with something other than a single-family detached home.

But that's our business and it’s been our business for decades. And we watch our balance sheet, we play it very tight on our land and we’re as aggressive as one can be in the markets where there is a demand pulling. It's not a supply push, it’s a demand pull, kind of basic economics. And the facts are very good on the ground and as you can see from our press release, they’ve converted to hard numbers that are transparent and that’s what we are focused on.

Nishu Sood

Got it. That’s very helpful. And second question I had was about I wanted to understand better the levers that you're going to pull to drive the greater return on your existing assets, if we kind of breakdown some of the different things you mentioned there is a volume headwind from the reduction in spec and Bob, you laid that out very well, obviously it’s going to dramatically impact the first quarter, but could begin to improve, but that’s not, it certainly not going to be a tailwind it just maybe less of a headwind from the second quarter onwards.

Larry, you mentioned that you will maintain your focus on gross margins and so the other thing you mentioned was absorption. So typically absorption would be driven through price so I’m just trying to understand specifically because those two are obviously at odds maintaining gross margins or driving the better absorptions if it’s within the same community. So I just want to understand what specific levers are you going to pull to drive the better return on your investment?

Larry Mizel

I think that you’ve analyzed it perfectly. You have the challenge of the inventory turns against gross profit margins and I think for us and for all the builders focusing on inventory turns by increasing the or decreasing the construction time is a big factor you can do very simple analytics and if you can increase your RONA just a little bit it comes down to a nice improvement of income.

And I think as simple as that statement is that's what our focus is and to every element that applies in our industry that means doing a better job than what you're doing and the market I believe that the market is going to stay reasonable this year and we expect to use our skills and execute to the extent the market will allow us.

Nishu Sood

Got it. Okay, thanks. I appreciate the thoughts.

Operator

Your next question comes from Jay McCanless with Sterne, Agee. Please go ahead.

Jay McCanless

My questions have been answered. Thank you.

Operator

Your next question comes from Andrew Berg with Post Advisory Group. Please go ahead.

Andrew Berg

Yes. You talked a little bit about land spend development in the aggregate, but if you can drill down a little bit more can you or would you be willing to provide an estimate for which the actual dollar amount of the spend will be this year. And then as housekeeping question, what was interesting occurred?

Robert Martin

Hi, in terms of the land spend for 2016, we’ve not have provided an estimate for that as I indicated in my prepared remarks and follow-on Q&A I think that’s going to depend on what we see in the spring selling season, kind of our less confidence there. As far as the interest incurred for the year, we were about $53 million in the homebuilding operation, [corporate come down].

Andrew Berg

Got it. Thank you.

Operator

Your next question comes from Alex Barron with Housing Research. Please go ahead.

Alex Barron

Yes, thanks. I had a question I guess regarding the expectation for the low backlog conversion rate, is that kind of geared towards all your markets where you are expecting much lower or is that more focused on like Colorado where the some of the issues have been?

Robert Martin

I think it’s a bit more focused on Colorado, if you look at the conversion rates for Colorado which we spend fairly low below 40% in the past couple of quarters. Most of the other markets that we're in saw more of a pop in Q4. So I would say that's where the primary focuses.

Alex Barron

Okay. And then you also said that the land that got impaired was in the Mid-Atlantic but you also said you saw an improvement in the orders and the sales pace. I'm trying to reconcile those two. Are they in very different areas of the Mid-Atlantic, or what drove the impact?

Robert Martin

I think it actually goes hand in hand because to improve the sales pace you have to decrease price in some cases and when you decrease price that’s really what ends up tripping the impairment ultimately is that you’ve got fewer dollars to match up to the asset that you’ve recorded on your books. So it's really by virtue the fact that we’re doing what we need to do from a business standpoint to make sure it's getting back to a level that's acceptable for our Company that triggers some of the impairments.

Alex Barron

Got it. Okay. And one last one. Any thoughts on share buyback at where the stock is at, Larry?

Larry Mizel

The only thoughts that I have always given you for a period of years is we have a $4 million share buyback it's been approved and public, it’s been approved and if and when we exercise it, we’ll announce it in a proper timely way.

Alex Barron

Got it. Thank you.

Operator

[Operator Instructions] Your next question comes from Ken Zener with Key. Please go ahead.

Kenneth Zener

Hello, gentlemen.

Larry Mizel

Hi.

Kenneth Zener

So, I realize it's toward the end of the call. I mean this in the most respectful way, but with your community count and fiscal year guidance, what keeps you from perhaps taking a stake and putting it in the ground? Sales pace more or less has been seasonal year-over-year, you have a flat pace generally. You know your land spend for communities, and I realize margins can swing around, Bob, quarter to quarter.

But generally, is it the fact that you're smaller than let's say some of the larger builders, that you think there's more volatility, and you just don't want to put a stake in the ground. I ask that because with the gross margins kind of hitting the ceiling here and us seeing other builders having downward pressure, it just gives me concern about the visibility that you have. Perhaps just the philosophical bias that you don't want to put a number out there. Could you clarify that? Thank you very much..

Robert Martin

Well, it's been our practice historically that we really don't give out a lot of guidance. And we try to give a few points to be helpful I think really there are risks out there, Larry, has highlighted them earlier. We’d be remiss if we didn't acknowledge that a consumer looking at is 401(k) or stock portfolio that could have an impact on our consumer.

I don’t think we have seen that yet. Really at the end of the day for M.D.C., I think the messages – we’re going to look on the returns on assets here for 2016 and that can be accomplished by pulling a number of different levers. But we don’t really have any other guidance to offer for you at this time. But right now we’re feeling pretty good about the market.

Kenneth Zener

Thank you.

End of Q&A

Operator

There are no further questions at this time. I will now turn the call back over to the presenters.

Larry Mizel

Thank you very much. I appreciate everyone joining the call today. And we look forward to speaking with you again after our first quarter earnings conference call.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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