Good morning, and welcome to the Meritage Homes' Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to, Brent Anderson. Please go ahead.

Thank you, Hillary. Good morning, everyone. I'd like to welcome you to the Meritage Homes' Fourth Quarter 2011 Earnings Call and Webcast. Our quarter ended December 31 and we issued a press release this morning with our results for the quarter and the full year. If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com, or by selecting the Investors link at the top of our home page. Let's go to Slide 2. Our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions. Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding those risk factors please see our press release and our most recent filings with the Securities and Exchange Commission, especially our 2010 annual report on Form 10-K and subsequent quarterly reports on Forms 10-Q. Today's presentation also contains certain non-GAAP financial measures as defined by the SEC. So to comply with SEC rules we've provided a reconciliation of those non-GAAP measures in our earnings release. With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, our Executive VP and Corporate CFO. We expect our call to run about an hour this morning and a replay will be available on our website within about an hour after we conclude the call. It'll remain active for 30 days. I'd now like to turn the call over to Steve Hilton. Steve?

Thank you, Brent. I'd like to welcome everyone to our call today. I'll begin by reviewing some highlights of our fourth quarter and the full year before turning it over to Larry for some additional financial results and color. 2011 marked the sixth year since the housing downturn began and we're finally seeing some positive trends begin to develop for housing and homebuilding markets over the last several months. We seem to be pointing towards a better 2012. We agree with the general view that 2012 will be better than 2011, and certainly believe that to be true for Meritage. But we also believe the recovery will be generally modest with varying results between markets and homebuilders, especially in year-over-year or quarter-to-quarter comparisons. Let's begin on Slide 4. We finished 2011 on a positive note, posting year-over-year gains in our fourth quarter closings, revenue, sales, backlog, home closing gross margins and our total number of active communities. Closings were up 7% and home closing revenue was up 14%. Sales were up 5% in units and 18% in total revenue. Backlog was up 18% and 23% in value. Home closing gross margins were up 70 basis points before impairments. Our net loss for the quarter was attributable to impairments primarily related to our decision to wind down our Las Vegas operations, which we announced on December 2. Excluding impairments, we made a little over $2 million for the quarter. Slide 5. This was our third consecutive quarter of year-over-year increases in sales. It was also our second year to achieve an increase in fourth quarter sales. As you will recall, we were the only public builder to report sales gains in the fourth quarter of 2010. We were up 15% over 2009 while the rest of the group was down an…

Thank you, Steve. I'll pick it up on Slide 10. Our total general and administrative expenses of $17.6 million for the fourth quarter were about $2 million higher than our average quarterly run rate of $16 million for 2011. The increase was not attributable to any one item, but the net effect of various normal expenses and accruals, which do not incur evenly throughout the year such as legal costs. The total adjustments wound up being positive in the fourth quarter of 2010 and negative in the fourth quarter of 2011 accounting for the $5 million swing in our fourth quarter G&A between 2010 and 2011. We are projecting our quarterly run rate for 2012 to remain in the $15 million to $16 million range. We reported a net loss of $11.8 million or $0.36 per diluted share in the fourth quarter of 2011, compared to a net loss of $0.9 million or $0.03 per diluted share in the fourth quarter of 2010. The loss in the fourth quarter of 2011 included a total of $13.9 million of impairments primarily due to the wind down of our operations in Las Vegas, which Steve explained. We also recorded a $857,000 loss from the sale of the only 2 golf courses we owned both in Arizona active adult communities. By comparison, our fourth quarter 2010 net loss of $0.9 million included $5.1 million of impairments, partially offset by a $4.5 million net tax benefit. Excluding those items, we generated pretax income of $2.3 million in 2011, compared to a pretax loss of $311,000 in the prior year. Moving to Slide 11. Our 2011 annual home closing revenue decreased $79.5 million or 8% from 2010 due to 12% fewer homes closed, partially offset by a 4% increase in average closing prices at $263,000…

Thank you, Larry. Considering that 2011 turned out to be another tough year for the overall economy and homebuilding, we are pleased to have completed the year with positive trends in most of our operating metrics, while posting only a modest loss for the year before impairments. I'm also pleased with the strategic progress we made in 2011 including our expansion into the Raleigh market, which is off to a good start, and our decision to wind down operations in the struggling Las Vegas market. While that decision was difficult, we believe it was the right one considering the prolonged economic issues facing that market. We continue to lead the industry by incorporating advanced building technologies into the design of our homes delivering better value to our homebuyers through greater energy efficiency and comfort. And we made strategic investments in marketing and operations including a new centralized call center, enhanced internet marketing and continued innovation of our extreme energy efficient homes, which I am confident will pay dividends for years to come. As we begin 2012, we are focused on growing both our top line and our bottom line and are particularly focused on a few areas of opportunity in addition to our strategic initiatives. One of those areas of opportunity is Texas, where we are opening new communities in better locations than the ones we closed out during 2011, essentially upgrading our stores in our largest market. In California, we have identified several opportunities for improvements that should improve our sales and our margins in communities we've opened within the last year to take better advantage of these good locations. In addition to those specific opportunities we expect to grow community count with our expansion into new markets within the southeastern United States. We see additional growth potential as we get our sales per community back up to where it should be, at 3 sales per month or better, compared to the approximately 2 per month we experienced in 2011. At the same time we are continuing to work toward achieving our target, 20% gross margins while keeping our overhead costs in check as we grow. Considering that we are entering the year with a larger backlog than we had last year with opportunities I just discussed, I'm confident we can grow our sales, revenue and earnings in 2012. Thank you for your attention. We'll now open it up for questions. And the operator will remind you of our instructions. Thank you. Operator?

[Operator Instructions] Our first question comes from Dan Oppenheim of Credit Suisse.

Over time, you guys have done a very good job in terms of shifting your investment from area to area and in terms of community count. How much do we think about in terms of the shift away from Texas but also I guess when you've done this in the past, it's been looking for opportunities where other builders aren't doing as much. What you're talking about now in terms of the better locations and some of the higher ASP seems like what we're hearing from a lot of other builders. How are you looking for the land opportunities now?

Well, first of all, we're not consciously shifting away from Texas. Texas is obviously our biggest state and we expect it to continue to be that way. We just saw better opportunities earlier in the cycle to buy distressed lots in other markets outside of Texas. So we focused on more of our earlier buys to rebuild our land position in those other markets. That said we're seeing some very interesting opportunities now in Texas and I expect our community count there to go up. As I said earlier, we're doing extremely well considering the circumstances in Orlando. We're off to a roaring start in Raleigh. We've got 3 communities open. We have 5 or 6 other ones in the queue coming in behind those that should be opening in the next couple of quarters. We've previously announced that we're going into Tampa. We have lot positions already under control there that we expect to be building homes on this year. And we're scouting out additional markets in the southeast and we expect to announce entry into another market in the southeast sometime later this year. So that's kind of how we see the land opportunities coming and we also see opportunities to grow our positions in California, Arizona and Colorado. So I hope that answers your question, Dan.

Yes. That’s great. Just a quick follow-up. You talked about improving the operations in California. Wondering if that's on the cost side or if it's sales and marketing, what you're doing there. And if we'll see it in terms of margins there. If that's something that you're going to be doing more nationally as well.

It's both. It's really both. We really could have executed better in both disciplines and we're putting a lot more energy and attention into our operations there and I expect to see significant improvements in both those areas this year.

The next question comes from Ivy Zelman of Zelman and Associates.

Steve, you talked about yourselves. If you can talk a little bit about the progression through the quarter and maybe in looking at the individual months and talk about the momentum going into 2012. I know that you said that things were definitely picking up. Are you also -- if you could break out, maybe Larry can provide us what your current selling incentives are as a percent of your average selling price and have you seen that decrease with the sense of the market picking up. And do you actually even see some markets where you're seeing some firming of price or price ability to actually realize some price improvement because margins certainly reflect it from prior quarters' orders that you had taken as opposed to what we see going into backlog. So maybe you can talk about what you're seeing on all those fronts please.

Okay. For the quarter I think October was a pretty strong month. We had a fall-off in November and sales rebounded in December. December being the strongest month of the quarter. January is shaping up to be a little better than last year. I don't want to give any specifics because we haven't completed the month yet and really aren't prepared to announce those. But the trend is certainly positive for January. Regarding pricing, I'll let Larry answer the incentives but I can tell you that probably in about a third of our communities across the country we're actually raising prices although very modestly, $2,000 to $3,000 per community. But on the other hand we've also had some pressure on cost particularly in the drywall area that's going to mitigate a little bit of those price increases. Larry, why don't you hit the incentives?

Sure. Our general target incentives range around 5% to 6%. That's something that we would factor into our pricing on a regular basis. Obviously if things got real hot we would reduce that. Or if things were slower we might bump it up. We've been running about 2 or 3 percentage points above that in general and we have been running that pretty consistently. Although as Steve said as we are starting to bump pricing a little bit that's generally done through a reduction in incentives. So most of that price increase is being done by reducing incentives rather than bumping base prices. Although we are doing that a little bit too.

Could you, guys, just as a follow-up, talk a little bit about what your sales people are telling you about buyers today, where your confidence comes about an improvement in 2012 over 2011 and what you're getting from feedback to give you that boost in increased activity?

I think we're hearing that there is a renewed sense of urgency. Certainly not to the levels we've seen in the earlier part of the 2000 decade but the urgency has picked up a little bit in the last several months. Every community is different. It's become such a localized business we have communities just as every builder has that are doing 4 or 5 sales a month and we have communities that struggle to do one sale a month. But as we rotate into newer communities they tend to perform better and are much more aligned with the market. And we are hearing much more positive feedback from our customers. A little more confidence in the economy and the news headlines and I think that's all going to transpose to a better 2012.

Our next question comes from Michael Rehaut of JPMorgan.

First question, I was hoping just to expand a little bit on some of the comments you made regarding I guess just now January being a little bit better than last year and also your outlook for modest improvement in 2012, which seems to be a little bit maybe less or more conservative than I think some of the excitement in the space over the last month. Just wanted to get a sense of why you only think it should be modest and also as you look at full year orders for 2012, you'd also pointed to an expectation for communities to grow. I was wondering if you could give us a sense of for the full year what the average -- what you think maybe even in just a range, what the average community count growth could be in 2012 versus 2011.

First, I take a little bit exception how you characterized my comments, Michael. Because I didn't say that -- I think I might have said and I have to go back and look at the transcript, but we really kind of agree with what the other builders have said. I don't think we think the recovery this year is going to be any less than what most other builders have said. And I think it's been somewhat mixed, although everybody's been positive and I think our view of 2012 is pretty much in line with everybody else's.

Steve, I wasn't comparing it to what other builders said. I'm sorry if I was unclear. I was comparing it more to the, I think, general investor and stocks are representing may be a little more optimistic. But more just to focus on your comments, I was just more interested in why you felt the improvement would be at a modest rate in 2012.

Well, I think we still have a lot of the same issues that we had in 2011. We still have high unemployment. We still have tight credit. We still have -- we're still working off excess supply. Everything we've been talking about for the last couple of years. Now, certainly it's improving. Every one of those metrics is going in the right direction. But I don't see a huge spike in activity so therefore I say it's modest. And I think people have been talking in the 10%, 15%, 20% improvement in 2012 and I consider those numbers kind of modest. Maybe you have a different view of that. Certainly I think 2012 is going to be better than 2011 but it's only January and it's pretty hard to have a crystal ball to look at how the year's going to progress.

Okay. I appreciate that. Second question just on the gross margins. You did have some nice improvement sequentially excluding the charges and kind of actually at the high end of the range for the full year. How should we think about 2012? Do you think you could continue to expand from 4Q levels or maybe you could also give us -- and Larry if you can weigh in also maybe about the incremental impact from a greater mix of newer communities, what that might help as well.

Well, I think margins throughout the year should continue to increase and I expect that we're going to end this year with a higher gross margin than we have today. I think there are -- we have certain initiatives in place that we're working through to improve our pricing model and improve our margins and continue to work on our direct construction cost. Although I don’t think you're going to see a straight trajectory of improvement every single quarter throughout this year. But from start to finish I do see improvement. Larry, do you want to add on to that?

Sure. As we've said before and other builders have said, there are a little bit of fixed costs and cost of sales relating to construction overhead. And because of that towards the end of the year as you have higher closing rates you tend to get a little bit better margins, and in the earlier year we have lower closing rates. It's a little bit lower. So I do think you might see a little bit of a drop in the first quarter and then have it gradually build back and as Steve said, for the overall year we would expect it to be than 2011.

Our next question comes from David Goldberg of UBS.

I wanted to dig in a little bit on Dan's question earlier about California. And, Steve, correct me if I'm wrong but in the comments I thought part of what you said was you guys have done some work to readjust not just the operation side of business but also the product that you're offering in some of your newer communities in California to get closer to meet the market and get to where the market demand is. And I'm just trying to get an idea, I think one of the strengths that Meritage has, has always been the ability to forecast demand and kind of see what's in the market. You guys have obviously put together some models and proprietary work that you've done to be able to forecast demand. And so I guess what I'm wondering is when you look back at the process and maybe where some things might have not gone right, was it the market that changed? Was it your analysis that changed? What was really different relative to kind of where you were with product and where you're going and what do you think changes as you kind of look forward? Is there anything that changes in your model in terms of the way you forecast?

I think there are several things we're looking at differently in our model. For example when we went into certain markets in Northern California we thought we saw pricing stabilize. We didn't see a lot of foreclosure in these submarkets. We saw great value and affordability. But the overall macro markets continued to get worse and they got much worse over time where we bought these lots. And I think we kind of missed it a little bit. That said, I think we understand it better now and we're doing a better job and I think our model's going to work better going forward. And we had some challenges operationally in California on the direct cost side, which we're fixing and we expect to record some pretty good gains from that. So it's been a little bit of a learning experience but I'm pretty confident we have it under control.

Clearly, it's been in everyone's market [ph] and everyone's going through the same thing so totally understood. Right.

Right.

My follow-up question was actually on the comments about traffic through the quarter and sales through the quarter and how October was a little better and maybe November kind of fell off a little bit and then December kind of re-emerged. And if I think about that with the comments that there's some increased urgency among buyers, it just seems kind of on and off. Like I mean, October maybe there's more then November there's not as much, and December it's back on again. I'm just trying to get like when you talk to your salespeople, when you talk to your local people what's driving the urgency? Why is it so sporadic month to month like that? And it's not like there's kind of a consistent flow it seems like.

I wish I could tell you. I wish I had the answer to that. I really don't. From what we hear it's just psychology. And it has a lot to do with the headlines and different metrics that are announced about jobs and housing prices and foreclosure statistics. And I think the headlines are starting to turn more positive, which are starting to create more urgency and I do believe there's some pent up demand out there that are just waiting for the right signal. And those signals are starting to turn green. So our traffic in December was better and our traffic in January has been even better than December. So I'm hoping the sort of traditional start of the selling season, which is Super Bowl weekend, which is this weekend, is going to bode well for the next several months.

The next question comes from Joel Locker of FBN Securities.

I was looking at your debt maturities and you don't have anything until 2015 but just was wondering with maybe doing a convertible or just taking advantage of the lower rates and issuing some longer-term debt.

We're always looking at that. Keeping our eye on it but we don't have any plans to do any kind of capital financing right now.

Right. And I guess the follow-up question is on interest expense. It's kind of hovering around $7.5 million that’s just getting expensed. And I was wondering if -- when do you think that's going to actually come down meaningful through that line item?

Larry?

Yes. There's no science to this. It is a calculation and it's based upon how much WIP we have under construction and how many lots we have under construction. And I do think as we do more land development you'll see the expense number come down and the capitalized number go up. But to predict that at this point, it's very hard to do. But I do think you'll gradually see a trend where that will go down. I think it's going to be a while before it goes to zero but it will gradually go down over the next couple of years.

The next question comes from Nishu Sood of Deutsche Bank.

This is actually Rob Hansen on for Nishu. I just wanted to see if you could talk about your closings in new communities and orders in new communities versus the old communities and what the percentages have been in terms of the split and kind of refresh us on the gross margin spread between the 2.

Larry?

Yes. The question was gross margin split between specs and presold, was that the question?

No, new and old communities.

New and old, excuse me. It's around 400 basis points. We are currently closing and selling around 65% to 70% of our communities are coming -- deliveries and sales are coming from new. And the basis point spread on the margin is around 400. The increase that we've been seeing is going to moderate a little bit as we are getting to the point where we have some longer-tailed communities like active adult and some bigger communities are going to hang on for a while. So I don't expect to see that increase as much throughout 2012, the percentage of new community deliveries and sales. But that gives you a pretty good idea of where we are now.

Okay. And then what are you guys looking at in terms of kind of a base case for land spend in 2012 and I guess maybe a minimum cash balance as well?

Well, in 2011 we spent right at $250 million. About $200 million of that in round numbers was land purchases and about $50 million of land development. I would expect to see us stay in that range. Maybe increase it modestly. The percent split between acquisitions and development is going to change a little bit as we are buying more communities that require development so I would expect the development number to go up whereas the actual dollars to purchase land will go down. But the total will stay about the same or maybe as I said increase a bit.

The next question comes from Adam Rudiger of Wells Fargo.

Most of my questions have been asked but I wanted to just follow-up. Steve, when you mentioned a question or 2 ago about pent-up demand, I was curious to know -- I agree with you, there's pent-up demand. I'm just curious what segment of the market you think that pent up demand is the strongest? Whether is it first time renters that are sick of renting or families growing too big for their current residence? I'm just curious where you think that was going to be the strongest.

We're primarily in the move up market so I'm not going to have the best data on the entry-level market because we don't have that many entry-level communities. But I do think there are families that need to move up. Need a bigger home. Growing families. They've been postponing the decision for a variety of reasons. Psychological about the economy or maybe they've had trouble selling their house. Maybe their house is going to be easier for them to sell now versus a year or 2 ago. So I think there's a variety of factors. I also think our active adult business hasn't been very good for quite a while and I think there's a lot of active adults that want to move and want to come down to sunny Arizona but have been afraid to do so because of the economy and because of the negative headlines they've been reading. So as the headlines turn more positive I think those buyers might gain more confidence and they may start to move in 2012 and beyond.

What percentage of the business now is active adult?

It's very small. It's very small. I think it's less than 10 -- 7% or 8%. Right, Larry? Does that sound right?

Yes. It's probably a little less than 5% at this point.

Yes. So we'd like it to -- we have the positions for it to be a little bit bigger. But those positions have been absorbing at a very anemic pace, and as most of our competitors have in Arizona as well. So I think there's a real opportunity for improvement there.

The next question comes from Stephen Kim of Barclays.

I had a couple of questions that are sort of housekeeping and then sort of a general one. First one is can you just clarify about your comment, Larry, I guess this is probably for you, about how there's a seasonality aspect at gross margins with some leveraging of fixed costs. I was wondering if you were commenting on interest that's previously capitalized interest that's running through that line or if you meant operationally excluding any interest in the gross margin?

Well, all of our reported gross margins include interest and they also can include construction overhead. And construction overhead makes up around roughly 2%, 3%, 4% depending upon what division it is. And that's really the amount I'm talking about that is kind of fixed and it isn't variable. So we're going to incur that each month. Now, we do go through a capitalization of a portion of that. But there's a portion of it that’s more overhead that isn't completely captured. So that’s the leverage you get in gross margin from seasonality in closings.

Okay. Great. And then I was wondering if you could give us the info on specs, total finished and total under construction. And then I had just sort of a general conceptual question if I could ask, Steve. In the past there has been a view that housing typically recovers from the bottom up and you guys being in a position sort of a little bit above the bottom, I've heard some conjecture that perhaps you might be slower to see a recovery as most of your homebuyers typically have something to sell. However, I was wondering whether you'd begun to see that change because some of the communities that I had seen, I was very surprised at the number of sort of higher end buyers that didn't have anything to sell because they had already sold it in the past. And I was curious if you could talk about that kind of trend, if you're seeing the same thing that I was seeing.

Well, I think this cycle we're seeing something different because I think if I look around at my peers and competitors, the guys that are doing the move up business are doing the best and the entry-level builders are struggling more. And I think that's because of the tightness of credit. I think entry level buyers are overall are more credit challenged and even though credit is available through the government entities, they're requiring higher credit scores and it's more automated underwriting. And I think the move up buyers generally fit in better with those credit standards and they have more equity in their homes and particularly the white-collar employees are taking advantage of these kind of market conditions -- doctors, lawyers, those that may be less affected by the overall economy. So some of our higher priced communities that offer tremendous value on larger lots with larger square footages, they're selling for a deep discount to what they were at the peak of the market are doing really well right now. And so we're not trying to move up the ladder into the luxury business but we do see real good opportunities in the move up market. Larry, I think you have the spec numbers right?

Sure. The spec units under construction at the end of the year was 294. The completed specs is 270. So that's roughly -- they're both roughly about 25% of total WIP and the other half is presold. And that tends to be a little higher at the end of the year because we closed a lot of units and during the middle of the year the spec units will drop a little bit and the presold will increase as a percent of total WIP.

The next question is from Joshua Pollard of Goldman Sachs.

Just a follow-up on the previous question. Chronically credit challenged at the low end was something that you mentioned on the last call, Steve. I'm just wondering have you seen things get a little easier there or are things unchanged at this point?

I think it's pretty much the same. I mean, again, we don't build that many entry-level communities so we're probably not the best barometer for that market. But our average credit score across the board is like 729 I think.

Yes.

Pretty high. And certainly in the entry-level communities it's much lower than that. And in our higher priced communities it could be higher than that. So there really is a difference in the different segments in the credit quality, as it always has been. But I think the move up market is performing better right now.

The other question I had was on -- is on land. Land developers have been quick to raise prices in anticipation of demand pickups. We can simply look back to '09 and '10 tax credits to see this. Are you already seeing the land guys be a little tougher with the negotiations? If they have and is that something that you guys expect and if so, are you planning for it taking things into options early or changing the way you guys are approaching the land market for '12?

We saw land prices spike up in the beginning of '10 and then they softened in the second half of '10 and we saw land prices spike up in the beginning of '11 and they softened in the second half of '11. I think we might see some of the same this year. We're just going to have to be disciplined and only buy land and lots that meet our underwriting criteria. Do I see this massive increase in prices? No. It's on a case-by-case basis and generally prices will firm up a little bit in the beginning of this year and then which direction they head from there will depend upon what happens in the sales office.

The next question comes from Susan Berliner of JPMorgan.

Larry, just wanted to follow-up on the balance sheet just with regards to your appetite for a revolver at some point this year and what's going on with the banks in the revolver market.

Yes. It seems like from all the conversations I've had we could easily get a revolver done if we wanted to do one. If we wanted to incur the extra costs in mainly non-use fees. As we continue to grow our balance sheet and increase our real estate and spend our cash down we would at some point go back and reinstitute a facility. We said before we're kind of comfortable in the cash range of $250 million to $300 million. I think as we would start approaching $250 million we would probably think that it'd be a good idea to go do something on a revolver. I think there's several other builders out there that are kind of thinking the same way from what I've heard. And as we spend our cash down it's going to drive our net debt to capital ratio up a little bit and we've said before that we're kind of comfortable in the low 40-ish range. And we would probably spend our cash up to that kind of ratio and then from there grow our business based upon what our earnings is going to allow us to grow internally.

Got you. And I guess just with regards to your markets getting out some and entering new ones. What are you seeing from your peers in terms of kind of the competitive dynamics with regards to them entering your markets such as Texas or getting out of markets? Anything [indiscernible] on that front?

Well, we've only -- we're only exiting or winding down one market. And I think because our footprint is smaller than a lot of the other builders we didn't have a lot of markets that we needed to exit. We exited the Fort Myers market quite a while ago, many years ago now. So from the height of the boom to today, we've only really retreated from 2 markets. And we're going to open -- and a lot of builders have retreated from a lot more markets in answer to your question, but I see us growing into a lot of new markets in the southeast and potentially other geographies over the next several years. And that being in one of the ways that we're going to be able to grow certainly the top line and the bottom line of our business because we do have very significant positions today in Arizona, in Texas, a growing position in Colorado, in Denver and we have a very dominant position now in Orlando. So the way we're going to grow our business is to continue to expand in California and to grow into new markets in the southeast.

And I'm sorry to interrupt but Mr. Seay and Mr. Hilton, we do have a few more questions. Would you be able to take more questions or would you like to do your closing remarks

Sure. We could take a few more.

Okay. The next question is from Jade Rahmani of KBW.

Can you provide any color on what drove the non-Vegas impairments in the quarter? For example, what's the vintage of those assets and where were they located?

It was a variety of different things. No one particular item. We sold a couple of golf courses in Arizona. I think we took a $900,000 impairment with some legal settlements. I think we had one option that we walked away from in Texas. Larry, do you have any…

Yes. I would say that the Texas was kind of what I would hope is the finishing, cleaning up of some of the older communities there. Florida was one last old community that we had been hoping would improve but didn't. It was about $400,000 in Florida. That made up the great majority of that. And in California it was option walk-away.

Okay. Secondly, would you care to provide any comments on profitability going forward, both for the year and on a quarterly basis. Do you think impairments are the key swing factor? Or is there anything else you want to call attention to? For example you earlier mentioned raw materials.

Well, we're not forecasting any impairments for '12. Hopefully we got them all in '11. As the market improves we certainly shouldn't be experiencing impairments. Regarding profitability I think we talked a lot about gross margin earlier. We're expecting gross margin to improve year-to-year but maybe a little bit choppy quarter-to-quarter. And then overall volume will drive increased profitability. We need to be able to leverage our overhead by making more sales and improving our margins by increasing prices and managing direct costs. So I don't know that I could say too much more about profitability going forward in 2012.

The next question comes from Alex Barron of Housing Research Center. Alex Barrón: I wanted to ask you are you starting to see any of the people that may be went through foreclosure or short sale in the last several years and have been renting, are they starting to qualify? Are they starting to come back to your sales offices? And if so, do you have any specific strategy to take advantage and convert those buyers?

Well, I'd say first those a lot of those people that surprisingly want to buy a house, want to buy a new home and coming through our communities. But unfortunately most of them are still within the period of time in the penalty box and they're not able to purchase yet. But there are a few that lost their home early and have saved up a down payment and are hoping to take advantage of the lower prices and get back into the housing market and are able to get loans because they've gone through the time period already. But I'd say we're still in the early innings of that it's still going to be a little while before most of those people can buy.

Alex, I would add that people still want to live in a single family house that they own and we see a lot of people who are renters who did own who are wanting to own again. And they are aware of when they get out of the penalty box. And we have people come in and go, well, 3 years are going to be up in May. I want to buy a house in May. And I think they look at their house buying experience as just being bad timing. That they think, gee, if they can get in now at the bottom it's better timing. So there's a lot of people out there who want to get in who are kind of watching the clock.

Or they kind of see it as averaging down. So they can mitigate their losses by getting back in. Alex Barrón: Right. No. That’s interesting. It's probably -- the main impediments are going to be the credit score and their ability to have saved for a down payment.

It's not even that it's the penalty. Some of these people have pretty good credit scores if you exclude the foreclosure. And they have the down payment. They just can't buy because they're in the 3 or 5 year penalty box. Alex Barrón: Right. Well, it will be interesting to see how that unfolds and whether you guys will be able to sort of keep track of that as it unfolds. My second question was as it regards to the land market, you did mention that you believe that you'll spend more money on land development rather than land purchases. So I was hoping you could expand on that comment. How are you seeing the economics out there in the land market for buying lots, either outright or on option versus developing land?

Well, there's less and less finished lots available in almost all markets. A lot of the stressed lots have been purchased so there's fewer and fewer available to purchase. There's also fewer land developers that are developing lots for builders than we saw in years past. So we have less lots to choose from that we could buy developed. Therefore in order to continue to fill our pipeline and to find the best opportunities both in distressed and the non-distressed market we're going to have to develop more lots. And we're equipped and capable of doing that and we will as we see it necessary to do so.

The next question comes from James McCanless of Guggenheim Securities.

First question is on average selling prices and I wanted to see how we should think about those and how you guys are thinking about them for 2012. Is the 275 that we saw in the fourth quarter going to be the run rate for next year? Or is it going to be closer to the 260 approximately that we saw for the first 3 quarters of '11?

Let me start on this, Larry, and you maybe jump in.

Sure.

I think we might be at the high water mark. I don't know that it will continue to increase. I think it could decrease. It's a lot to do with geography. As our sales get built back up in Texas and as we enter more markets in the southeast, I think those numbers might come down a little bit. Larry, have we done any more forecasting on that?

Well, I guess I would say too that sometimes you have a particularly successful group of communities that are higher priced and we had one particularly in Arizona, which is making Arizona's prices right now a bit higher than they probably will be going forward. But it really is just very mix dependent. And if we are successful in getting California really jump-started and selling more, it could continue to increase. So it's hard to make a hard and fast prediction. I would say, yes, we may not quite be at the high water mark but it's not going to continue to go up the way it's gone up in the last year. It would tend to level off and maybe go up a bit and maybe come down a bit. But not any wild swings, large swings I should say.

Okay. And then my second question, the expectation of a $15 million to $16 million quarterly run rate for G&A for '12. I believe in dollars, that basically you guys are looking for the same amount of G&A in '12 as you saw in '11. How long can you sustain that with growing communities? Is it going to be a function of when you hit a certain number of communities then the G&A's got to move up? How should we think about that for '12?

Larry?

You are right that we are projecting G&A to be relatively flat from '11 to '12. We can certainly continue to grow our income statement in a relevant range without increasing G&A much. The additional G&A we would be incurring is really field G&A, which is really more up in cost of sales and then selling cost, which are not part of G&A. So I would say that the base G&A line that really is just G&A could stay relatively flat over a pretty good increase in sales. So that's where the real bottom line margin expansion comes is from levering that relatively fixed G&A number.

The next question is a follow-up from Michael Rehaut of JPMorgan.

I just had a question. I guess to finish it off with, going back to some of the different geographies but specifically when you look at the absorption rate on a year-over-year basis in 3 of your bigger markets, Texas, Arizona, California, Arizona was actually down a little bit if you use average communities, down 6%. California up 4% after several quarters of negative comps on a sales base. So I was wondering if you could just give us a little bit of color in terms of how you're thinking about the demand trends and were both of those markets up year-over-year in December and any type of additional thoughts there would be helpful.

Larry, what numbers do we have for December for…

We don't compute that on a monthly basis. But I guess I would say that you're seeing California resurge from having a few quarters of being off and we certainly are hopeful that that's going to continue. Our average [indiscernible] for the whole company was around 2 sales per month and we would hope that in 2012 with a little bit of tailwind that we can see that gradually get -- start to increase and notch back up to a 3 numbers. We're not going to get there in '12 but we are hopeful that that would happen.

And Arizona was down a little bit in the fourth quarter versus a year ago in terms of sales pace. Any thoughts there?

I think it's just relative to which communities are open at which times and we're projecting Arizona to be a little bit better in 2012 based upon some of the stores we have coming on line and I think -- I just wouldn't read too much into those numbers. There's not a negative trend developing in Arizona. I think it's quite to the contrary. The market is improving here.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Hilton for any closing remarks.

Okay. Well, thank you very much. We appreciate your support and participation in our call and we'll look forward to talking to you again next quarter. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.