M.D.C. Holdings, Inc.
Q4 2007 Earnings Call Transcript

Published: 7 Feb 2008

[Operator:]

Good morning. I would like to introduce to you, Mr. Bob Martin, Director of Investor Relations for MDC Holdings Inc. Sir, we are ready to begin.

[Bob Martin:]

Thank you. Good morning ladies and gentlemen and welcome MDC Holdings 2007 fourth quarter and full year Earnings Call. Joining me today on the call are Larry Mizel, Chairman and Chief Executive Officer; Gary Reece, Executive Vice President and Chief Financial Officer; Michael Touff, Senior Vice President and General Counsel; and Joe Fretz, Secretary and Corporate Counsel. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at www.mdcholdings.com. I will now turn the call over to Joe Fretz for a disclaimer on forward-looking statements. Joe?

[Joe Fretz:]

Before introducing Larry, Michael and Gary Reece, it should be noted that certain statements made during this conference call, including those related to MDC's anticipated home closings, home gross margins, backlog value, revenues and profits, 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 2007 Form 10-K. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our website, mdcholdings.com. I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings.

[Larry Mizel:]

Thank you, Joe. Good morning and welcome to MDC's 2007 fourth quarter conference call and webcast. The difficult homebuilding environment we experienced during the first nine months of 2007 continued through the fourth quarter, as we saw no indication of an emerging rebound of our industry. The impact of the sluggish housing market has been increasingly evident in overall economic conditions and consumer confidence declining. GDP growth is slowing and employment levels falling for the first time in several years. The Federal Reserve has taken notice having lowered the Fed fund rate by 125 basis points in just the last few weeks. Despite the aggressive actions taken by the Fed, the outlook for homebuilding remains uncertain. For this reason, our primary focus continues to be generating cash flow and enhancing our investment grade balance sheet while increasing the efficiencies of our business processes in preparation for an eventual homebuilding recovery. We were successful in each of these areas in 2007. First and foremost we generated over $590 million in cash flow from operations, including almost $260 million in the fourth quarter alone. As a result, our cash on hand at the end of the year rose to $1 billion which is almost double the beginning of year balances, and roughly equivalent to our current outstanding debt. We achieved this substantial cash increase primarily by reducing our lot inventories which were down more than 40% over the past year, including a 20% reduction in the fourth quarter. In addition, we further increased our cash balances earlier this week when we received a $90 million tax refund from the IRS on a carry back of our 2007 net operating loss. Furthermore, we conserved our cash by tightening controls on land development expenditures, working with our suppliers and subcontractors to lower direct cost of home construction and shrinking our overhead in recognition of reduced levels of demand for homes. With no borrowings outstanding in our $1.25 billion line of credit, we increased our cash in available capacity year-over-year by 30% to $2.25 billion. Throughout 2007, we took advantage of the decline in the homebuilding activity to work on improving the operating efficiencies of our business. We made significant adjustments to our organizational structure allowing us to eliminate our regional offices and reduce by half the number of our operating divisions from peak levels. These right sizing efforts enabled us to realize a 36% year-over-year reduction in G&A expenses in the fourth quarter, and they should have a significant abstract on 2008 expenses as we'll realize the full year impact of the changes we have made. We focus on making key improvements to our core business practices, many of our efforts centered on our customers as we design new product that better meet current buyer preferences at a lower cost. In addition, we ramped up our nationwide customer experience initiative with the objective of continued improvement in every aspect of the homebuilding process, and we aggressively attacked the cost side of our business working diligently with our sub-contractors and suppliers to un-bundle our hard costs while tightening our process for managing each phase of construction. While we are unsure of the challenges of 2008 will provide for the homebuilding industry, we believe that the strength of our balance sheet, coupled with our efforts to streamline our operations and increase inefficiencies, will position us to capitalize on opportunities created in this environment. Our preparation for these times is far from coincidental. A carefully planned operational strategy, almost a century of collective senior management experience and disciplined approach to business are the keys behind the financial strength and flexibility we enjoy today. We are confident that these attributes will provide us with the competitive advantage when the demand for new homes rebounds. I would now like to turn the call over to Gary Reece, our Chief Financial Officer who will describe more specific financial highlights of our 2007 fourth quarter.

[Gary Reece:]

Thank you, Larry. I would like to start out by saying that, as of this morning, MDC's 2007 Form-10K has been filed and received by the SEC and is available for review. This provides as all of you know tremendous amount of visibility and transparency on the results of our company for this quarter and this year to supplement the information we're providing to you in our press release and this conference call this morning. We'll try to keep our comments at a fairly high level, and then we'll have sufficient time for you to ask questions about what the information you've been provided. To start off with, the first slide that you see here relates to operating cash flow. As Larry mentioned, we generated in this quarter in excess of $250 million in cash flow from operations, bringing our total for the year to $593 million or compared to $363 million a year ago. This quarter was the sixth consecutive quarter in which we have generated positive cash flow. You can see each one of these quarters on this graph. And over this period of time, we generated just short of $1.1 billion in operating cash flow, resulting primarily from reductions in our inventories. If you turn to the next slide, you will see where our inventories stood at June 30th of 2006, before this six quarter period began. You'll see that we stood with inventories of $3.272 billion, of which $1.8 million was land and $1.5 billion was work-in-process. We ended this last quarter with a significant reduction in inventories $1.8 billion, down to $1.456 billion, of which only $554 million has land. Obviously, we've taken some impairments over this period of time, what we tried to show here in this middle bar is where these reductions actually came from, and you can see that when you've taken that impairments into account, we've taken since this period started, some $836 million in impairments, $219 million of which been realized through sales of lots or assets or homes, leaving $617 million remaining in our M&A and the inventories. So when you take that out of the difference, we've actually generated a cash flow of $1.2 billion from reductions in inventories. This is a very powerful story. The next slide shows really where this stems from. Our number of lots controlled, have dropped substantially over the period of time as Larry alluded to. We ended the quarter with 15,130 lots under control, which is down 45% from where we were just a year ago. Looking at the lots that we owned, we ended the quarter with 11,500 lots, down 40% from where we were a year ago. And our lots under auction, which began the year at over to 8,000 lots, we ended the year with only 3,600 lots under auction, and we have under $13 million at risk. And in terms of non-refundable auction deposits and less than a million and a half of dollars capitalized with respect with those auction deposits. We’ve also seen our work-in-process drop. We ended the year with under 3,500 units, which is down 25% from where we were. This time last year is we continue to successfully control our home starts in terms of backlog, managing backlog which has seen some significant cancellations, as well as keeping tight controls on our supplier spec inventory, which is down slightly from where it was this time last year. On the next slide, you will see our cash position which Larry also alluded to. We ended the year with just over $1 billion in cash, which is up 98% from the $508 million we had last year. This essentially puts us in a debt neutral position relative to our corporate homebuilding debt. From the standpoint of cash at available bond capacity, we had $2.247 billion of available cash and borrowing capacity which is up almost 30% where we were this time last year. From an operation standpoint, it's been a difficult quarter as the continuation of what we've seen throughout the year as a whole. From an order standpoint, you can see on this slide that our orders for the quarter on a net basis were down 52% from this time last year. We received net orders for 748 homes during the quarter. The sales value of these orders is down approximately 60%. Year-to-date, we received for the entire year just over 6500 orders, which is down 36% for the year. Gross sales actually for the quarter were down only 40%, but we did continue to see some fairly high levels of cancellations as we saw an increasing number of our buyers have difficulty obtaining their financing for their home purchase or an indirect impact from the buyers of their homes not being able to obtain financing. Our cancellation rate for the quarter rose to 65%, which is up from 56% this time last year. As we look at this rate relative to our beginning backlog, this rate is just about 40% which is only slightly above where it was sequentially from the third quarter and up from 36% where it was last year. Orders were down for the quarter in virtually every market, although we did see an uptick in our Florida markets. Our Vegas market was only down some 10%, and so we did some pick up in orders there at the end of the quarter, but we also had a major focus there, added some additional incentives and moved some inventory late in the quarter. These lower orders contributed to a backlog which is down 46% from this time last year. We ended the year with 1,947 homes in backlog with an average price of $333,000, which is down $23,000 from backlog of a year ago. The operating results for the quarter and for the year are reflected on the next slide. And you will see our net loss for the quarter at $281 million or $6.14 a share of $785 million in revenues. For the year, we saw a loss of $637 million, $13.94 a share on revenues just over $2.9 billion in revenues. These losses were attributable really to lower homebuilding profits or mortgage lending profits, a big contributor to the net loss this quarter with a valuation allowance which we took against our deferred tax assets, that valuation allowance being $160 million. On a pretax basis, you'll see that for the quarter we had $190.4 million and $756 million for the year. This is largely attributable to impairments. We also had some write-offs of project cost and impairment cost for the quarter and for the year, as well as some losses on land sales. I think what this slide shows, is when you remove those items, non-recurring and in most cases non-cash items from our pretax losses, we are in fact in an operating profit position for both the quarter and for the year. As we look at our homebuilding profits being down for the quarter in the year, attributable to the impairments and I will come back to the impairments and discuss that in a greater detail here in a moment. We saw in the quarter, losses on land sales of $13.8 million. During the quarter, we did sell approximately 1,800 lots for approximately $37 million in cash proceeds, recognizing the loss of $13.8 million. The loss to the year was a net $9.4 million. Our closings were down 38%, our average selling price dropped $3,500 and our margins dropped for the quarter and the year as well. These declines were offset by lower SG&A cost, our homebuilding G&A were actually down 35%, as we saw our company continue to take steps right size our business. We eliminated essentially our regional operating structure and cut our operating divisions pretty much in half. Our marketing costs were also down right around 20% and the corporate G&A was down 18%. If you look at the next slide in terms of G&A, this represents a summary our right sizing efforts as the G&A costs are down, if you look at our mortgage company, our corporate overhead as well as our homebuilding company, we encourage G&A of just over $60 million which is down over 35% from the cost we incurred in this category a year ago. On the mortgage side, the mortgage business, while profits are down, it continues to operate profitably, which can’t be said by all companies. I think this environment; contribute to their efforts, to continue to right size their business so they can be profitable in producing loans on a per loan basis, while continuing to provide competitive products for our buyers, while our capture rate is down, it's still relatively high in historical terms. At the same time, we continue to bring risk profile of our portfolio down. We continue to originate higher quality loans, primarily prime government related, our loan-to-values are declining, our average loan amounts are down significantly, much higher percentage of fixed rate loans. During the quarter, we were in excess of 95% of our loans for fixed rate. FICO scores continue to be high. And we have also deployed as we stated in our releases, a strategy of selling these loans faster. So, we're getting them off our books and we're turning them into cash much faster as well. So, in addition to operating profit, I believe this business continues to operate with a lower risk profile. And then finally, just to touch on impairments. We have a couple of slides here to give you a little more color into what occurred from an impairment standpoint. We did recognize impairment of our assets during the quarter of $175 million. We impaired during the quarter right around 4,900 lots and some 153 active communities and 153 subdivisions, some of which were active, some which were not. Of this 153, 91 had been impaired previously. And most as it's been the case throughout the year, most of these impairments occurred in our west segment of California, Nevada and Arizona, with close to 80% of the impairments occurring in that market. For the year, we realized impairments of $727 million, and again 80% of it being in the west segment, which brings our cumulative total for '06 and '07 during this latest six quarter period to $838 million in terms of impairments, of which 80% again has been in our west segment. The next slide gives you an indication you can see in the previous slide the bar graphs that we did see sequential increases in our impairments through the third quarter of '07, followed by a sequential drop here in the fourth quarter. And what the next slide is intended to show is just to indicate what has happened to the levels of assets that have been impaired. Obviously, we are very proud of the fact that our land balances have dropped dramatically down to $554 million. After beginning the year $1.575 billion, so our land balances which is where our most of our impairments have been incurred this year are down 65% from where began the year. You can see from this slide that of our $726 million in impairments we claimed during the year, $556 million were taken with respect to land. 80% of which was taken with respect to our west segments. If you look at the land balances that had been impaired in previous quarters or throughout 2007, we started the year with almost $1 billion in land and we ended the year with just over $220 million in land. So this is down 80% in the area which has been impaired the most. California really has seen the greatest level of impairment and their assets from a land standpoint are down to next to nothing. In fact, they are down to $35 million which most of which is being held for sale to third parties in its current condition. So, we don’t know what the future holds in this area, but as you can see the assets to which impairments might apply have dropped dramatically just over the last four quarters. That concludes my prepared remarks. So we'd now like to open the floor for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. We ask that everyone limit themselves to one question and one follow-up question to allow us others the opportunity to speak. (Operator Instructions) Our first question will come from Dan Oppenheim from Banc of America Securities. Please go ahead.

[Mike Donald:]

Hi, this is Mike Donald on for Dan. I am just wondering if you could comment on what you are hearing from land sellers. What’s the gap between of their expectations and what you would be willing to pay, and have you seen any transactions that would be at attractive values for you at this point?

[Gary Reece:]

Well, I think what I would say is, it very significantly market-by-market, so you can’t make a blanket statement other than the fact that generally there is still a gap, because you haven’t seen our start to buy yet. So obviously, they bid vs. ask are still some ways apart. It has come closer and there are number of deals that, not only us but many others are talking about. We are going to continue to watch it, and keep our eyes and ears open, and stay in front of the land sellers, and when they become realistic, then we'll be there to start buying.

[Mike Donald:]

Great. And would there be any markets in particular that you are looking to either exit from, or enter into if the price was right?

[Gary Reece:]

The only one that right now we are looking to exit is the Tampa market. We do have some lots there. All of the lots that we hold there are being held for sale in their current condition. We have about just under 250 lots in that condition in that market. That's really the only market that we've identified as one that we would exit. As far as new markets, that's not the mode we are in right now. We are right sizing to the markets that we are in and we're just looking for opportunities, and we have infrastructure and the ability to grow in the markets that we are in.

[Mike Donald:]

Great. Thanks.

[Operator:]

Our next question will come from Michael Rehaut with JPMorgan. Please go ahead.

[Michael Rehaut:]

Hi, good morning. First question, you mentioned, the can rate and the order decline, and I think in some ways it sounds like it certainly continues to comp, and fall short from perhaps your expectations. At the same time, your average order price is falling dramatically, and it doesn't seem to have the desired effect of getting some volumes through. So, I was wondering how you are approaching that going forward in terms of ultimately trying to get some volume back, and if you could give us some color in terms of where the difficulties are more pronounced and if there is any changes that you might be thinking that in terms of how you go about pricing or going to market over the next quarter or two?

[Gary Reece:]

Mike, first of all I want to make sure you don't misunderstand the pricing of our net orders, it could be very misleading, and I'm sure you are referring to the fact, if you do the math you end up with an average price of net orders of around 250.

[Michael Rehaut:]

Right.

[Gary Reece:]

That is versus last year of 327. That's really not indicative of what we are selling houses for. That's a combination of the effective gross orders and cancellations. We are seeing some cancellations and some high dollar numbers that -- high dollar homes that are bringing that net effect way down. I think more indicative of where the average price is going, is the average price in our backlog, which is a just above where we are from a closing standpoint, which is usually the way it works at 333,000. It is down, and the direction is down in most of our markets, but not as dramatically as reflected in the net orders. I would say that in terms of where things are more pronounced, it's pretty pronounced in most markets. I think that we've seen some movement in the Jacksonville market recently, as just why relative to last year is very positive. The Las Vegas market is showing some signs of life as well, as reflected in our orders also. But the can rates are still pretty high, and we believe that we are very active in staying top of our backlog, and making sure that we take buyers who can't qualify and get them out, and make sure that our cancellations are properly reflected. And all those things that improve the quality of the backlog, that we have tend to have a negative impact on the net order trends. But, we are out there competing in every subdivision for every house, for every sale. And we are in some markets that are more competitive than others, Nevada, and California, and Arizona. If you know, Phoenix and Tucson are very competitive. And so, these are markets that we have high exposure to, and we think they'll be great markets for the long run, but they are very tough to operate in right now.

[Michael Rehaut:]

So, do you take a more aggressive approach on pricing, or what you do in terms of ultimately getting some volumes through the door?

[Gary Reece:]

Mike, we are in an enviable position, I guess you could say, of not having to give houses away and not having to drive our inventories down, because we are in a very low inventory position. What we do need to do, is stay abreast of where the market is, what the traffic is, what the market absorptions are, and compete at those levels, we don’t have to try to drive four or five per month, per subdivision in a market that is only selling two. So what we want to do is sell at the market rate, price accordingly and keep a decent pace going. There is nothing drastic or dramatic that we have to do from this point now, just keep our eyes and ears open and stay conscious of what our competition is doing and compete in every subdivision.

[Michael Rehaut:]

Last question, Gary and perhaps Larry, you can give us your thoughts as well. You've been obviously increasing your cash position consistently, over time, and you really haven't obviously gone into the market yet, and that's been the right move as prices continue to fall. What's your sense of when the right time might be? I mean we just heard from D.R. Horton that, they believe that it will be another 12 to 18 months in their opinion, before California affirms in terms of pricing. Do you feel that the land sellers out there, possibly including other public builders are just holding on to, and ask that is just unrealistic or is it just that you are actually getting closer to an appropriate good ask spread? What would drive better activity in terms of taking advantages of those opportunities on your part?

[Larry Mizel:]

I think the answer is really on the ground. Every seller is unique and different and special, and we stand prepared to transact. And as the market comes at the levels that seem appropriate, we will. And I don't think I can give you any better color, other than everyday somebody sends us a piece of paper with a new idea, it's just like the stock market when should you start expensing your position in any security. I think our skill set is, we adjust how we ran our business starting in '05, and we are adjusting how we are running our business everyday. And we expect to be a very active and very aggressive on terms and conditions that are risk adjusted and make sense for us in the future, and you will probably have the clearest signal of what we are doing, when you read our quarterly reports, and you see the land positions going up instead of down.

[Michael Rehaut:]

Fair enough. Thank you.

[Operator:]

And our next question will come from Joel Locker with SBM Securities. Your line is open.

[Joel Locker:]

Hi guys. I just wanted to get a number for prior impairments that were reversed in the fourth quarter?

[Gary Reece:]

Yeah hold on. Joel, we had in terms of the homes.

[Joel Locker:]

Right.

[Gary Reece:]

We closed during the three months. We had $65 million reversed.

[Joel Locker:]

$65 million. And did you have additional in the land sales also?

[Gary Reece:]

We did. We had substantial amounts in the land sales. And I believe that was around $90 million approximately.

[Joel Locker:]

Around $90 million…

[Gary Reece:]

Very early in reversals.

[Joel Locker:]

In reversals so the comp basis originally was much higher

[Gary Reece:]

Much higher yeah

[Joel Locker:]

Okay thanks. And you give accumulated of about $845 million which you reversed, now on $200 million, So you still had left $645 million on prior impairments how, do you have any kind of ballpark figure of what you expect to be reversed in 2008?

[Larry Mizel:]

Yeah, I do, Joe but I am not sure how relevant it is. It's nothing that we have disclosed which obviously is a component of our determination of what our deferred tax asset valuation allowance is and until it's, because we have such a short land supply you would expect that most of this would reverse over the next couple of years.

[Joel Locker:]

Right.

[Larry Mizel:]

And in terms what of actually, when it actually falls I don’t have that number for you.

[Joel Locker:]

All right thanks a lot. I’ll jump back in the queue.

[Operator:]

And our next question will come from Steven Kim, a Private Investor, please go ahead.

[Steven Kim:]

Hi guys.

[Joe Fretz:]

You sound just like, that sounds like my friend Steve Kim.

[Steven Kim:]

I think we may have a lot in common. I had a question for you that was a little bit more conceptual, maybe you could help me with this. One of the things that has been bandied about among investors over the last several years, has been what the added-value of a public Home Builder really is, and obviously there's an element of public Home Builder advantage in the way of their strong balance sheet, we certainly know that. I am curious though if the magnitude of the decline or the diminishment in your's and other public builders businesses, has been very dramatic, I mean the number of orders that your runnings or closings that you're operating at, has shrunk by so much that given thought to what the opportunity is, or your ability to sort of reconstitute those orders back up into a sort of a more normalized basis might be. And what it is going to require I would think would be that you would go back to a lot of trades that you are now walking from. That you would be looking rehire folks in markets that you have since recently let go. And basically in many ways it's sort of growing your homebuilding business much like somebody who might be looking to be a new entrant in the market might be trying to grow their business. And so what I am trying to figure out is to what extent it's going to be easier for MDC to grow significantly over the next three years or four years or something versus another non-public builder which may have some reasonably strong financial backing? Is it just the finance? Is it just the balance sheet that you bring to the table that allows you to grow versus your peers or is there something more than that? Is there something that we can look to, to sort of say herein lies some significant value for a public builder like MDC beyond just the balance sheet?

[Joe Fretz:]

Well, Steve I think it's everything we are as an enterprise. You heard my comments that we are focusing on the future. We are working on the customer initiative. We are developing new product. I consider this period of time a great opportunity because most people that are in this business are busy working with only negatives and we are concurrently focusing and working on positives on a perspective basis and I expect that we'll spend some money that others wouldn't spend in getting ready to reposition ourselves for the future. We don't know when the markets is going to turn but we do know one thing we have people, we have product, we have a positive attitude, we know what to do, how to do it and where to do it and the non -- and I'll just make comment on the non-public builders. Their availability of capital would be geometrically reduced, their ability to take losses, so they can liquefy, is almost nonexistent because they are not in a position to take losses. You don't read much about it yet in the banking world. But, their appetite for residential real estate, especially land with construction, that appetite has been diminished to as low as possible. The regulators will help adjust it, the auditors will adjust it. The board will adjust it. We are in a traditional cycle, and those persons that work through this period of time will be the big winners. The public companies that right size their balance sheet will do very well, and one of the things that one should look at is that I believe that the capacity to produce new homes will be dramatically reduced during this period of time, maybe to the extent of 500,000 to 600,000 new homes a year, or lower. And the ability to replace that infrastructure will take a period of years, and during that period of years, those enterprises that are in business aggressively will do extremely well. That’s my answer, Steve.

[Operator:]

And our next question will come from the line of Alex Barron with Agency Trading Group. Please go ahead.

[Alex Barron:]

Yeah, hi. Good morning guys.

[Gary Reece:]

Hey Alex.

[Alex Barron:]

I wanted to, I guess you guys have touched on this a little bit, but other builders are cutting prices pretty aggressively, and from my surveys, it seems like every single month, they seem to be getting some traction with sales, just kind of wondering how you think ’08 is playing out, and are you guys going to try to get in front of that curve to try to boost your sales base?

[Gary Reece:]

As I've said before, we are going to try to stay with the market. There may be certain circumstances where you are at the end of the subdivision. There may be some things that from an overhead standpoint, would make you move out of it quickly, but beyond that, we aren’t compelled to lower inventory as some of our peers are, and so we want to sell at a market pace. So, we still believe the subdivisions we have which are declining, were down to 278 active communities at the end of the quarter, down from over, I think it was 308 at this time last year. So, the number of communities is declining, but as our lot suppliers decline, but we are in great locations, and we have great product of high quality. We have a wonderful home gallery that our buyers can take advantage of to construct a home that is very special for them. And we are going to try to make the most we can for every house. Having said, we are going to sell at a pace that is reflective of the demand in that particular submarket.

[Alex Barron:]

Okay. My other question has to do with California in particular. Just kind of looking at how low your inventory values have come down in that market? And I thought I heard you mention that a lot of those lots are for sale. Just kind of wondering if you are also thinking of exiting or severely reducing your position in California?

[Gary Reece:]

Well Alex, it's already significantly reduced. We have gone from six operating divisions in that market down to one, because of the change in our size. We are still covering a lot of geographic area. We are still in the northern part of the state, and the southern part of the state. And in the long haul, it's still a market that we want to participate in, but we've been right sizing and reducing our inventory, because the values have come down significantly. So we have a substantial number of lots that we are hoping to sell right now in that market, and we still continue to have a number of subdivisions open there, and we keep our eyes and ears open for opportunities to add to that business. But it's not a market that we are looking to exit now.

[Alex Barron:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Carl Reichardt from Wachovia Securities. Please go ahead.

[Carl Reichardt:]

Good morning guys. How are you? You've indicated something interesting and I had been surprised as well that given some of the transactions we've heard about, that MDC hasn't appeared to participate in. In effect as your expectation that there is going to be a very large increase in bank-owned portfolios, REO, coming back into the market this year and that might be a place that looks more attractive to you as a place to reinvest?

[Larry Mizel:]

Well, usually the price point of the bank has already eliminated whatever equities that existed and this is certainly more attractive than any other basis. So I'm agreeing with the direction of your question.

[Carl Reichardt:]

Okay, appreciate that. And then Gary, I pressed too hard on the order issue, but again especially given the cancellation rate. Would you say that the underlying rationale for your customers canceling has changed in a meaningful way relative to earlier this year? It seems to me again, the order price issue that perhaps given that you are relatively like on lots, you don't need to press to move units. I'm just trying to say if that’s the case, then should I start to see some margin enhancement on a year-over-year basis more aggressive than some of the other builders, because you are holding price more aggressively. It's not shown up in the numbers, I just want to be sure I anticipate that in the next couple of quarters?

[Gary Reece:]

Well, there are so many factors, Carl, that are coming into play. The impact of impairments, what's going on in each of the individual market; what's happened that the only area that we've seen a dramatic change and the reasoning behind the cans in the financing side, and the offset is then we've had fewer buyers that have failed to comply with the terms of the agreement. It's really financing the financing contingency and failure of it that has seen a dramatic rise, and that as the reason for it.

[Carl Reichardt:]

Okay, okay thanks so much.

[Operator:]

Our next question comes from the line of Dennis McGill from Zelman & Associates. Please go ahead

[Dennis McGill:]

Hi guys, how are you?

[Gary Reece:]

Hi Dennis.

[Dennis McGill:]

My first question just has to do with, again on focusing on when you may reenter the market on the land side. Do you think even there is a lot of capital falling around and willingness to do both deals as some of your competitors are extremely long in some markets? Would you envision potentially pursuing something that could be a very large transaction to lighten the burden of another competitor maybe take advantage of the their liquidity in the near-term or will you be more likely to do smaller deals, piece-meal deals in or your markets that end up adding up to a larger portfolio?

[Joe Fretz:]

I think our best position is to always be open for business and that could be broadly defined, and we are willing to do small transactions and in today's market, I don't want to address it necessarily any more other than the fact that there are some financial institutions, that probably will have some assets that might be attractively priced, and on certain terms and conditions we might facilitate a transaction.

[Dennis McGill:]

Then I guess you are referring to banks potentially selling that kind of the market. Whether the bid and the ads put in the right spot or not, have you been approached with any sizeable land deals that you would take a look at?

[Joe Fretz:]

There is always a lot of conversation in the marketplace, so I don't think I can answer it any other way.

[Dennis McGill:]

Okay. And then just one other question, Gary realizing January is in the books, can you talk about now just trend wise versus December and November, whether you saw a typical seasonal up tick, whether you want to talk traffic, orders, et cetera and whether they -- how do they kind of compare to your expectations I mean at end of the year?

[Gary Reece:]

Dennis I really can't. We have not -- having filed the K that is not in there nor is it in our press release and we just don't like to talk about orders on a monthly basis because things can change so dramatically.

[Dennis McGill:]

I guess, even if you want to stay away from orders and the top level picture, are you seeing the same type of seasonal pick up in traffic that you would normally see?

[Gary Reece:]

You really can't judge it till last of the Super Bowl and we just had that pass and we are going to keep our eyes open here over the next few weeks, Dennis and then we'll see where it leads us, but nothing to report at this time.

[Dennis McGill:]

Okay. Well, thanks again for the time guys.

[Gary Reece:]

You bet it Dennis.

[Operator:]

We'll go to the line of Eric Landry from Morningstar. Please go ahead.

[Eric Landry:]

Hey, thank you for taking my call. Gary, first of all I would like to say good work on getting that refund back in such short time. I don't suppose that you or your teams have had much sleep in the last few months.

[Gary Reece:]

Well, thank you for recognizing that. Between the tax refund and getting the 10-K filed and few other challenges along the way it's been an interesting few weeks.

[Eric Landry:]

Been kind of busy out there?

[Gary Reece:]

That was quite a coup. We had some help from some of our friends and to get it solved in the bank I think even before statutorily had to be given to us as a real bonus for us, so put that behind us.

[Eric Landry:]

Right, good work. My question is kind of longer term in nature here and you folks joined I think with three other builders with over a $1 billion or about a $1 billion in cash sitting on the balance sheet which indicates to me that the emergence from this downturn whenever that does happen is going to look significantly different than it did in the late '80s early '90s. My question is first of all am I correct on that. And then Larry second one, could you maybe give a little color as to how you think that this may play out with such a bifurcation of prepared builders and then you've got both the unprepared public builders and the smaller builders which and to me look even less prepared. How would that look going forward?

[Gary Reece:]

This cycle came upon us a lot quicker than prior ones and is this a V or is it a U or is it an L, so everybody gets to guess on what the shape of it is and if general economy of our country stays reasonably okay and that has nothing to do with designating, it is a slowdown a real slow or a recession. Those are kind of descriptions that some people apply, but if you segregate housing and the basic need in our country for housing historically, if there is a baseline demand, and baseline demand has been there through many cycles, and I believe that baseline demand still exist and you have the new construction build, has probably will have dropped more than 50% from the high. The existing leftover unoccupied re-sales, occupied re-sales coming forward foreclosure etcetera, etcetera, it will take a period of time to eat through that product, but the reality of it is, the basic business is a good business, and I believe you will see a stronger concentration of market share in those gross markets by larger builders of that have their business in proper order, and I think that will be great opportunities at some point.

[Eric Landry:]

In your years in the business, have your seen it such that you've got a handful of such well prepared builders relative to rest?

[Larry Mizel:]

No.

[Eric Landry:]

Okay.

[Larry Mizel:]

In my years of being in the business, I didn’t know any homebuilders that had $1 billion in cash.

[Eric Landry:]

And now we got four of them. Last question, Gary you mentioned that I believe it was Denver, California, Arizona were very, very competitive. What markets are not competitive right now?

[Gary Reece:]

Well, Bermuda is very non-competitive.

[Eric Landry:]

Or less competitive?

[Gary Reece:]

I think that as I mentioned, we have seen some signs of life in Jacksonville, some signs of life in Vegas, some signs of life in Tucson, and they are juts signs of life. It's still very competitive in those markets.

[Eric Landry:]

Okay. Well, great. Thanks a lot.

[Operator:]

Our next question comes from the line of James McCanless from FTN Midwest. Please go ahead.

[James McCanless:]

Hi good morning. Two questions for you. The first one to keep pushing on the land issue, potential land acquisitions; right now as I understand it, according to the slides that you put out this morning, your distribution of land is still heavily weighted to the mountain in west region, so I think it's approximately 78%. Over the next couple of quarters, next couple of years, what are your thoughts in terms of expanding back east to maybe moving into lower price point areas?

[Larry Mizel:]

I think that our growth would be where the demand is. And the demand will lead us to where we should be, and it will be self-evident at the time. And at this point there is a greater probability that where the growth was, probably is where it will be, but it will be pretty apparent over a period of time of what's going on. It won't be hard to figure out, and we are not going to go and create demand we are going to have the demand pull us. And I think that's a better way to approach it.

[James McCanless:]

Okay. And then my second question is, if you look at the neighborhoods that you have opened right now and that you are planning on opening during 2008, what percentage of those neighborhoods or what percentage of the homes offered in those neighborhoods would qualified for conforming or FHA financing, depending on their MSA?

[Larry Mizel:]

Well, I'm assuming that the proposed new regs and dollar limits are going to be implemented in that would probably be this weeks part of the market is to make most of which you do of conforming the product.

[James McCanless:]

All right. So at this point, but if you assume that it does impact actually senate, shot at down this morning, what would we be looking at, assuming that we don't get new regs?

[Larry Mizel:]

Well, as you can see our average sales price were in the low 3s, so we still covered fewer than 417,000.

[James McCanless:]

Okay. Thank you.

[Larry Mizel:]

You're welcome. Thank you.

[Operator:]

Our next question comes from the line of Dave Tim from Wellington Management. Please go ahead.

[Dave Tim:]

Hi guys. I just wanted to ask you about the $90 million on the land, the reversal. Is that the first quarter where that's been a meaningfully positive number?

[Gary Reece:]

Well, it's certainly the first quarter that we've had a significant amount. It's not the only quarter, we've had small amounts in previous quarters, but this was by far the most significant, Dave.

[Dave Tim:]

And should I assume that $90 million is flowing through, where are those reversals happening relative to geographies, less mountain east other?

[Gary Reece:]

Okay. Well, it's heavily weighted to California although I don't think that we have broken it out.

[Dave Tim:]

Okay, so sort of inline with the impairment mix for '07?

[Larry Mizel:]

Yeah it's primarily in the west, where we had most of our sales.

[Dave Tim:]

Okay, that's all. Thanks guys.

[Larry Mizel:]

Okay.

[Operator:]

Our next question comes from the line of Jim Wilson from JMP Securities. Please go ahead. Jim your line is open please check the mute key.

[Jim Wilson:]

It's okay now.

[Gary Reece:]

Hi, Jim.

[Jim Wilson:]

Hello, sorry Gary juggling calls. I just had one more question on, describing the detail on the expense level, but you had a pretty material drop in Q4 to me your presentation minutes sounded like, you thought there was a lot future to go or that the full impact wouldn't be felt until we start to get into '08 and I am just wondering can you put your dollar perspective out just even on a sequential base even for $53 million and of 39 in G&A and I assume that there is some meaningful improvement that might be seen on the marketing and other expense side too?

[Gary Reece:]

We have concentrated efforts to make even more progress on the marketing side either that really didn't fall in relation to the level of revenues necessarily. So these are some things that we are doing there. Like one of the things that you will see that is reflected in and you will see it when you review the 10-K and I know you will look at it in detail. Where we show the quarterly numbers there is an impact to G&A that involves the reversal of some accruals we had earlier in the year. And so that tends to bring down that impact a little bit, as you are looking at relative impact but we still have continued to downsize. We have continued to cut back on offices and our locations throughout the country. We had several millions dollars of pure restructuring costs that we incurred this quarter that relate to our office that we will not be in the future. So those are the types of things that we are talking about when we say there are two things that are not fully matured that will be reflecting next year. But we haven't really put a dollar number around it.

[Jim Wilson:]

Okay. All right. Well, that's good. All right, thanks.

[Operator:]

Our next question comes from the line of David Einhorn from Greenlight Capital. Please go ahead.

[David Einhorn:]

Hey, good morning guys. Can you talk about sort of what's going on with the taxes in a more detail just to the extent that if there is profit at some later time what would the tax rate look like, and second if there are further losses what will the tax rate look?

[Gary Reece:]

I think David in general terms because of the existence of this valuation allowance, the tax rate is going to look a little bit screwy for a while until it reverses. If any event that incurred additional losses, we have to look at all the evidence. What's going on in terms of whether those losses would occur in years where we would have to pass through to carry them back, and if, the loss is result -- as a result of temporary differences and things of that nature. Things that occurred during 2008 will be able for the most part to be carried back to 2006 because we do have carry back capacity. So those losses are not necessarily likely in of themselves to a extent they will realize this year to impact the tax rate. But, I'll say that we were doing currently some significantly impairments in the current year, and holding everything else equal. If those impairments were to reverse in some future period, that could result in an additional valuation allowance relative to that benefit, if there weren't other items that would offset it. If we may make profits in the future, those profits beyond 2008 would create potentially capacity they use some of these deferred tax assets and we've taken the valuation allowance again. So that might be in some future period, a positive impact on our tax rates. So there were a lot of things David that influence it. I think because we do have our 10-K out there I think that would be very helpful to you and we've been pretty explicit in our MD&A and in the footnote disclosure as to how this is calculated and how the amount should be determined and I think that will be very helpful to you on both of these categories and to the extent of further questions you know how to find me.

[David Einhorn:]

Fantastic thanks.

[Operator:]

We have a follow-up from the line of Michael Rehaut from JPMorgan. Please go ahead.

[Michael Rehaut:]

Hi thanks. A couple of quick ones and what do you expect for land spend in '08 versus '07, and what was it actually in '07 and '06 if we have that?

[Gary Reece:]

The land spend, is that something that we disclosed. Mike, we haven't disclosed that number. All I can tell you is, relative to you, you can obviously see from the stock reduction in our land balances that we have spent very little on land and share in terms of acquisition or development, and that the number in ’06 was substantially higher than that. In ’08, most of the lots that we own are fully developed, and therefore we don’t have to put a lot of dollars into them to bring them to the point where we can start to build the house on them. So that’s another positive we have relative to the assets we do own. In terms of what we spend for acquisition going forward, I can tell you that with only 3,000 lots under options or 3,600 under option, all of which have being highly securitized before we take any steps, without absent changes in market conditions, it's possible we would not buy very many lots, but there are always opportunities here and there. We even bought a few lots in one market at the end of the year. And so, because it was opportunistic, and so those things will be out there for us, but it would be impossible to predict what we would spend.

[Michael Rehaut:]

And one of the option deposits in pre-act costs associated with the 3,600?

[Gary Reece:]

The option deposits are just short of $13 million and $1.3 million in capitalized costs.

[Michael Rehaut:]

Great. And one last question. You kind of started the call by coining SG&A as one of the prime areas of reacting and right sizing of the cost base. You certainly had good dollar decline year-over-year in this most recent quarter, I mean still on a leverage basis it went up, but I was wondering if you could give us an idea, what you think, obviously there is a variable component, but looking at the size of the business today, is there a certain dollar number you could share with us in terms of what you think, additionally you can right size the cost structure to by a certain amount?

[Gary Reece:]

Mike, I couldn't give you an exact number. But I think what I would tell you is that every cost in our company is a variable cost to a certain degree. Nothing is fixed, and we will continue to look at every category. I guess, the only fixed item is my salary, but other than that -- no, I am just kidding. Everything is variable.

[Michael Rehaut:]

I mean, part of the question is you that just mentioned that you had consolidated six California divisions into one. I guess, not saying that obviously you still have opportunities, but it seems that perhaps the opportunities are less if you've already done some of those types of major moves, I mean on what you completely close up shop in California. Doesn't seem like there is a lot of incremental change you can do there. In terms of consolidations, would it be fair to say you are closer to the end of that or?

[Gary Reece:]

Well, really at this point there are still some things that when I think back to where we were in the early 90s, there's a couple of steps we haven't taken that are still available to us. But one of the things that kind of gets back to what Jim was asking, as well about what we've realized, well we have taken six divisions down to one in California, that's something that occurred fairly late in the year. A lot of the cuts that we took were not reflected in the numbers that you see here. So, a lot of these moves have yet to flow through the income statement.

[Michael Rehaut:]

Okay.

[Gary Reece:]

Termination costs and lease termination costs and things of that nature. So, I think that once we get past 2008, a lot of the low hanging fruit will be gone and we just have to look and see, it may come to point where we've downsized to more of a satellite operation as opposed to a full fledged operation. We still, Mike, we have a few tricks of our sleeve.

[Michael Rehaut:]

And I guess you want to be willing to share that with us right now?

[Gary Reece:]

Well, no.

[Michael Rehaut:]

Okay. One last thing, the restructuring costs in the quarter, can you share with us what that was this quarter versus the last?

[Gary Reece:]

I'm sorry, but what cost?

[Michael Rehaut:]

You had mentioned that there were some restructuring charges embedded in the numbers this quarter. I was wondering if you could give us an idea what that was versus last quarter?

[Gary Reece:]

Relatively speaking, Mike, it's not a material number, it's not something that we disclose separately.

[Michael Rehaut:]

Okay. So I should think of it in like to $0 million to $5 million range or something like that?

[Gary Reece:]

That's a reasonable estimate.

[Michael Rehaut:]

Okay. Very good, thanks a lot.

[Gary Reece:]

Sure, Mike.

[Operator:]

And we have no further questions at this time.

[Bob Martin:]

We'd like to thank you again for joining our call today, and we look forward to having the opportunity to speak with you again in a few months following the announcement of our 2008 first quarter results.

[Operator:]

And that concludes our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.