MDC Holdings Inc (MDC) 2002 Q1 法說會逐字稿

Good morning and welcome to the M.D.C. Holdings first quarter 2002 earnings release.

All participants will be able to listen only until the question and answer session of the call. This call is being recorded as a request of M.D.C. Holdings. If anyone has any objections, you may disconnect at this time.

I would like to now turn it over to Mr. Dan Japha, who will read the statement concerning forward-looking statements. Mr. Japha, you may begin.

Thank you. Good morning. Before introducing Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call - including those related to M.D.C.'s anticipated home closings, home gross margins, backlog values, revenues and profits, as well as 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. The Company's actual results, performance and achievements may be impacted by various factors, including among others, changes in general economic conditions, changes in interest rates or labor and material costs, weather, government regulations, consumer confidence, actual or threatened terrorists acts and other acts of war and the results thereof, and competition. Additional factors that could impact the company's actual performance are set forth in the company's 2001 form 10K and third quarter 2001 form 10Q. I'd like to now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C. Holdings. Larry.

Good morning. We'd like to welcome each of you, and thank you for participating in M.D.C.'s first quarter 2002 conference call and web cast. 2001 was the most profitable of M.D.C.'s 30 years in business with fourth quarter operating results that were the highest for any quarter in our history despite the challenges brought about by a national recession and the events of September 11th.

We are proud to report another quarter filled with significant accomplishments by your company. We achieved the highest first quarter levels of revenues, net income, and earnings-per-share that the company has every recorded. And our new home orders, which were down earlier in the quarter, recovered in a fashion in March, contributing to the most home orders received in any single quarter in the company's history.

Our first quarter net income of $32.3 million or $1.16 per share was the highest level of first quarter net income in the company's history, and ten percent greater than 2001 first quarter net income of $29.3 million or $1.09 per share. These outstanding operating results were achieved on the strength of record performances from both our home building and mortgage lending operations.

Our home building segment produced operating profits of $57.8 million, up seven percent from the 2001 first quarter. A $33,000 increase in average selling prices, which more than offset the impact of reduced year-over-year home closings, contributed to these strong results. Earnings from our mortgage lending operations increased 20 percent over the first three months of 2001 primarily due to higher gains on sales of mortgage loans.

In this year's first quarter we continued to realize year-over-year improvements in several key measures of our financial strength and liquidity. Our operating returns of revenues and assets, our EBID return on capital increased to 7.1 percent, 13.2 and 30.9 percent respectively, and our leverage and interest coverage ratios improved from industry-leading levels of a year ago.

In addition, we ended the first quarter with 434 million in available liquidity, up almost 100 million from this time last year. We are pleased that the rating agencies have continued to acknowledge the strength of our financial performance and the soundness of our operating strategy. As we have previously stated, we have a goal to achieve an investment-grade rating from all three agencies.

In the 2001 first quarter, we received our first investment-grade rating from Fitch Ratings, followed by an upgrade to BA-1 from Moody's in December. In March of this year, Moody's increased our outlook from stable to positive, and Standard & Poor's followed with an upgrade of our senior credit rating to DD plus, moving us even closer to our goal.

I will now turn the call over to Gary Reese, our Chief Financial Officer, who will describe more specific financial highlights of our 2002 first quarter.

Thank you, Larry. Our total revenues for this quarter, $456 million, was up nine percent from $420 million in the first quarter of last year. Our home sale revenues were 445 million, up nine percent for the same period.

Larry talked about our operating profits from home building, in terms of leading the way to these record results for this quarter. This was, as Larry mentioned also, the average selling price was a primary contributor to this. We are up to 265,000, almost $266,000 per home on average, compared with 233,000 of a year ago. All of our divisions were up in excess of $30,000, with the exception of Colorado, Tucson and Phoenix.

Our closing levels, which were down slightly from - down from last year approximately five percent to 1,674 units compared with 1,759 units of a year ago. We were up significantly in southern California and Tucson, while being down in Colorado, Virginia and Phoenix. Even though we were down, I mean, this is a function of lower orders we received throughout the second half of last year. As we mentioned in the press release, these closing level were about 100 units higher than anticipated due to better conditions for construction from a weather standpoint during - or in Northern California, Virginia, Colorado.

Our gross profit margins were very comparable to where they were in the first quarter of a year ago at 23.4 percent. Before interest, our margins were 24.4 percent compared with 24.6 of a year ago.

On the mortgage lending side, we also realized record profitability at $5 million compared with $4.2 million in the first quarter of last year. Primary reasons for these higher profits is higher level of gains in sales and mortgage loans resulting from record levels of mortgage originations in the fourth quarter giving us higher levels of loans per sale during the first quarter of this year. With higher origination volume, higher levels of - we actually had higher origination fees in the first quarter as well, and an improvement in our interest income in the first quarter also. This was offset partially by reduced gains on sales of servicing. As you may recall, we did pretty much liquidate our salable servicing portfolio during the first and second quarters of last year. And this year is more normalized level of servicing sales.

Our EBITDA increased as well in this quarter, compared with first quarter of '01, to $63.7 million compared with $60 million of a year ago. With declining levels of interest, as we've seen with our continued deleveraging, our ratio of EBITDA to interest incurred continued to rise. In the fourth quarter, you may recall, we had a 14 times interest coverage. During the first quarter of this year, we're at just short of 16 times coverage compared with 10 times a year ago. And our interest in cost of sales also continues to decline. Interest as a percentage of revenues was one percent here in the first quarter of this year compared with 1.4 percent a year ago. And interest in inventory also declined to 1.7 percent of our total inventory - this is capitalized interest as a percentage of inventories - as compared to 2.3 percent from a year ago.

Balance sheet continues to - continue to make progress in strengthening our balance sheet. Our equity levels approached $700 million and we ended the quarter at $693.5 million, up 33 percent from where we were in March 31 of 2001. That's $25.81 per share compared to $20 a share on March 31st of last year.

Our debt levels, while we had some borrowings outstanding on our line of credit, our debt-to-cap ratio continues to be an industry leader at .24 compared with .35 on March 31st of 2001, and our debt-to-EBITDA is at .7 compared with 1.07 a year ago.

As we've said we also, this balance sheet strength represents "what you see is what you get". We had no off balance sheet financing, no partnerships, and essentially no good will represented on our balance sheet.

Our inventory levels continue to be maintained in a controlled fashion. You may see our work-in-process levels actually declined from a year ago due to lower levels of backlog. Our specs are extremely low. We had just a little over a week's supply in total specs, and only 50 finished specs in the entire company. But we do maintain an inventory of land sufficient to meet our needs over the next couple of years, as you know.

Those of you who know our strategy know we look - we seek to maintain about a two and half year supply of lots, and that's pretty much where we are right now. We own 14,300 lots approximately, and we control 5600 lots under options, with just short of $2 million in cash deposits, a phenomenal amount to control a significant number of lots. This does not include, of course, the lots that we are looking to acquire from in Las Vegas and Salt Lake City later this month, which represent another 2400 lots of which about 1,000 of those lots will be options.

In addition to this however, we do have a supply of lots that we are looking at that we don't have anything committed other than our time and evaluating. So we have about 15,000 lots in various stages of consideration, so we have a lot of, a large lot supply and lots under consideration to meet our needs in filling our pipeline for the future.

Our returns also continue to increase. Our return on revenues stood at 7.1 percent here in the first quarter. Return on assets up to 13.2 percent in our return on capital at just short of 31 percent.

Looking forward to the future and kind of some of the indications for the future, our orders, very strong in the first quarter. Came back strong in March, and we were actually up to the highest level of orders in our history at 2,776 units. March was up 24 percent, strongest months we've had in about a year at 1,095 units compared with 884 a year ago, led by southern California, which was up 100 percent. Northern Cal up 60 percent, Virginia was up 40 and Colorado was up 20.

We were also aided by a cancellation rate which had declined below 20 percent in March, compared with 28 percent a year ago. Also contributing, our active subdivisions are up 10 percent to 150 active subdivisions and, as we also mentioned in the Press Release, we have - we were able to continue to open model homes in Colorado, which contributed to their strong orders during the month of March and the entire first quarter.

Now, as we head into the second quarter, we are facing the implications of a softer second half for 2001, particularly in the fourth quarter. Our orders were down in the second half of the year about 15 percent, which contributed to a lower backlog level, which was down about 350 units, despite our strong orders in the first quarter, down 350 units. About eight percent at March 31st.

During the second half of last year, we saw very little pricing power in many of our markets, particularly in Nevada, Tucson and the mid-Atlantic. We were - our incentives were actually higher in Colorado, Virginia, northern Cal and southern Cal. And our land, as a component and a percentage of revenues continues to rise. It's up about 300 basis points from where it was a year ago. As we mentioned in the Press Release, we're also gonna face the implications of pulling about 100 closings out of the second quarter into the first quarter, coming out of markets which are fairly high margin markets: Virginia, Colorado, southern Cal and northern Cal, with an impact of approximately 10 cents a share.

On the positive side, however, we look forward to the second half of this year and 2003 with great anticipation, having come off a record first quarter in orders. We have seen the ability to increase prices in virtually all of our markets, particularly a comeback in Colorado, Virginia, northern Cal and Phoenix. In those same markets, we're seeing incentives lower than what we saw in the fourth quarter.

Our community count's on the rise, as we mentioned. We stated at the end year that we planned to increase our community count by 20 percent. We're well on our way to that goal - 20 percent by June 30th by the way - we're up 10 percent and we're on track to meet that 20 percent goal. And of course with the acquisition of the assets of John Laing Homes, while it will not be contributing significantly to the second quarter or third, starting in the fourth quarter of next year we should begin to see the implications of that acquisition. So those give us reason to be - to anticipate good results for the balance of the year following the second quarter.

I'll now turn it back to Larry.

In addition to our financial successes, we've made some significant strides in the 2002 first quarter in furthering our objectives for growth and geographic diversification as we pursue our goal of doubling the size of our Company within five years. In February, we announced that we are reentering the Texas market with our initial focus in the Dallas-Fort Worth area, one of the largest markets for new homes in the country. In addition, we announced late last week that we have reached an agreement to acquire most of the assets of and hire most of the employees of John Laing Homes in Utah and Las Vegas. When completed, these acquisitions will continue our strategy of expanding our presence in our existing markets, establishing us as one of the top five builders in the dynamic Las Vegas market. This transaction also gives us entry into the Salt Lake City, as a significant player in that market, where almost 6,000 single-family permits were issued in 2001.

With respect to our existing markets, we're pleased to report that we are on track with our previously disclosed plan to increase active communities to 160 by the middle of this year with our active community count already up 10 percent from the 2001 year end. As we have implemented our plans for growth, we have continued to maintain our disciplined approached to backlog and inventory management, as well as the continued effort to develop and implement cost savings and efficiency initiatives.

These disciplines, combined with our increased new communities in our existing markets and our expansion activities in Texas, Salt Lake City and Las Vegas, should position us to take advantage of the continued strong demand for new homes in our markets and contribute to improving our operating performances in the second half of 2002 and 2003. We'll now open the call to questions.

Thank you. At this time we are ready to begin the formal question and answer session. If you would like to ask a question you may press "*1". You will be announced prior to asking your question. To withdraw your question you may press "*2". Once again, to ask a question please press "*1".

Our first question comes from of Maryland. You may ask your question.

Hello. Good morning gentlemen. Very good quarter. I wanted to ask you about, you mentioned weather being one of the important reasons as why the backlog was able to turn faster. Were there any other reasons that would also have increased the efficiency?

We continued to work toward reducing our construction times, but that, and we were successful in doing some of that, but the major contributor really was the weather.

enginido OK. With 100 homes coming out of the second quarter, and you mentioned ten cents affecting possibly on EPS, would you also maybe see some of that trickling into the third and fourth quarters?

The, oh you mean pulling in? No, no, no, it really is pulling closings that would have otherwise occurred in April into March.

enginido OK.

So there really wouldn't be an affect. What we are seeing though for the strong orders that we received, most of them in March. We're going to see that most of those closings occur in the third and fourth quarters of this year. Many of those being dirt starts, and by the time we get the houses started our average construction time is about four and a half months on average. So that really pushes most of those orders into the back half of the year.

enginido OK, and then one last question on community count. Do you have a number of communities that the acquisition is going to contribute? And can you give us maybe some regional color on the community count?

The number of communities that they will contribute are, you know, somewhere between, and it's, we are going to have several communities under option. In terms of active communities right out of the box, there's about five active.

OK.

And we'll probably have another five or so that are under option, that will come on stream later in the year and early next year.

From the acquisition?

In terms of low color, I'm not sure ...

Usually, you're very good at giving a separated count of communities in the different regions. I was just wondering if you had that available. I didn't see it in the release.

Yeah. We - you know, we - community count goes very much along with the closings. I don't know that we've ever really given a specific community count. We did see - we have talked about where some of our growth has come since year-end, and that's - we've really seen a number of additions from year-end in Virginia and Phoenix. Virginia and Phoenix really are the two largest additions, and we've talked about that in our prior releases as we release monthly orders, that we're really looking for these new communities to be coming online, and we've been successful in getting those up and running. We had added a number of communities in Colorado at the - in the fourth quarter of last year. But, we just couldn't get the models open.

In the first quarter of this year, we did open model complexes in 10 of those active communities. So, the - what we have - we said we're working on, we're making progress, we're getting there and, really, the - we're bringing on communities in virtually all the markets. But, Phoenix and Virginia, also Maryland we're looking forward to, and Las Vegas. We have a number of communities that will be coming onstream, other than the acquisition in the next couple three months.

OK, great. Thank you very much.

You bet.

Mr. of , you may ask your question.

Given the comments that you've made about the nature of the surprise, in terms of the mix and the weather, and also your comments on orders in March, it would seem that you're gonna have a dip in price - average price on homes closed in the second quarter. But, given the renewed strength in some of your higher price markets and the order volume, you should recover, I would think, most of that by year-end.

Well, Larry, that - on its face, that makes a lot of sense. I mean, certainly your observation for the second quarter. The - what we are doing, however, is we are seeing a movement in many of the markets away from some higher priced homes in these higher priced markets. A lot of the higher pricing, as we discussed in the last conference call, as well, in the fourth quarter and the first quarter of this year were from some of these high priced subdivisions in southern California, in northern California, and even higher than normal in Las Vegas.

But where we were closing out of a subdivision in the project, those homes are going to pretty much be behind us, and we're going to be really increasing our focus in each of these three markets more on a lower-priced home.

SO even in some of these markets that historically - even in the recent history have contributed higher closings, we're probably going to see a greater focus on more affordable housing.

So that would tend to - you know, it wouldn't necessarily recover to the level we've seen in the last couple quarters because of that.

Can you give us some color on - you said you've been able to increase prices in virtually all of your markets. Can you give us a sense of the order of magnitude, and maybe since the order volume in March was as strong as it was, you know, was there some acceleration during the quarter?

Acceleration...

In your ability to raise prices.

There certainly was as sales picked up in March. The order of magnitude probably ranges from anywhere from 1 percent for the quarter to 1 percent a month, depending on the markets.

And even in Northern California we were able to see about a 1 percent increase pretty much across the board in both Sacramento and the Bay Area in March.

So some of the increases that we've - in some of these markets the increases we saw for the quarter, most of them occurred in March, such as the Bay Area.

OK, thank you very much.

This is of .

You may ask your questions.

Thanks. First I wanted to complement you on the amount of disclosure that you guys are putting out, particularly on the order front every month as contrast to some of the larger builders. If you want higher multiples, we should have more disclosure, not less. But that's an editorial comment.

Thank you, .

The question that I have for you is can you give us a little bit of background on the Laing acquisition, you know, why they were willing to sell now and what kind of prices you're paying for that? And also, I missed the number of additional active subdivisions you expect to bring on with Laing other than the five that are currently active.

There are perhaps another five is what I was saying.

OK.

We've got - in some cases we may offer some additional product lines in some of these subdivisions where we have more lots. So, it may be five to seven over and above what's active today.

OK. And kind of what the dynamics of the ...

... And I'm sorry what was your other question? Oh, just regarding just the Laing acquisition ...

Yes, the purchase price, what's your, you know, how much you're paying for this in general? And why they would sell now? And is senior management staying, or is this someone who wants to retire? Or what's going on?

What we're doing, , as you may know, has divisions in other states other than Utah and Las Vegas. We were, I can't speak really to their motivation for selling, because I'm not privy to that other than they were willing to give us the opportunity to acquire these assets, which we were very happy about.

The purchase price we have not disclosed, but what we did mention in the press release is that - and the reason we really didn't get into the price is it's a situation where we're buying some active sub-divisions, we're buying sticks and bricks in the air, we're buying some lots, and then we're optioning about 1,000 lots that we'll be acquiring later this year, so what we paid today is really not very relevant.

What we did mention in the release is that, which should give you some comfort, is that the impact on our debt-to-cap ratio is going to be less than five percent when it's all said and done. Because we do have homes under construction, we'll be closings these homes and generating some cash flow fairly immediately following the acquisition. So there's a lot of in and outs there, and so that's really why we did not get into the price specifically. But we are acquiring the assets of these divisions, substantially all, not all of the assets, but we're buying assets at fair market value. We're not paying any good will, and so it's, we're paying the market value for these assets.

We do have, as you know, a significant operation in Las Vegas, but most of the people who work for in Las Vegas will be offered an opportunity to come to work for us. They do have an office there. And this will put us on the map in a big way in that city, as we also mentioned, we would be the third largest builder in that market, if on a pro-forma basis last year. We may look for ways to our operations maybe by geographically or by product type. We haven't really determined that, but we intend to maintain a presence in the office that they're in now for a period of time, and maybe for the long-term. That's something that we'll continue to evaluate. But most of their management team will come to work for us there. We're going to need the help to maintain our position as a top five builder.

In Utah we don't have a presence today. So their division manager and most of their management team also will come to work for us and help us maintain a top five position in that market, as well.

So, the thousand lots that you're optioning, are those prices already set, or is that still under negotiation? How is that gonna work?

It is set. The price is set, and these lots that are optioned are lots that we'll need to develop, and so it'll be some time before we get them on. It'll be some time next year before we get these lots online. But, the price is set and the conditions preceding are set, and all the terms are in place.

And in the Dallas-Forth Worth market, what is the senior managers that you put there, what is he or she supposed to be doing, and what's the progress there/

Well, it's - he is actually doing what he's supposed to be doing, and that's finding lots and hiring people. He is - he's - we've hired a VP Finance and we're looking for the other Managers for the various disciplines in that market. He - his primary focus right now is finding land, and there's a lot of things to consider there, and a lot of opportunities. And we have - while we haven't closed on our first deal, we have some deals tied up. Certainly looking at a lot of opportunity. So, that's his focus, and we expect to have sticks in the air and sales in these new communities by the end of the year, with closings contributed next year.

So, he could also be looking for acquisitions, but he's just essentially doing a start-up for you?

Yes, he is.

OK. Thanks very much.

Once again, to ask a question, please press star, one.

of Goldman Sachs, you may ask your question.

Yeah, good morning, everybody.

Morning.

I was wondering if you could just fill in some other details as relates to the acquisition, namely the pricing. At the price point for , you know, their margins in comparison to yours. You know, does this help you round out your product portfolio, or does this more help you with critical mass of the market?

OK. The price point is very much in our . They have product offerings to the first time, first time move up buyer. Their average selling price in these markets is in the 150 to 170 range, which is right where we like to be. The product that they offer is also conventional, single family detached housing, which is also what we like. They do a great job with their houses, and have some real good plans that we hope to be able to use, particularly in Las Vegas in some of our existing communities, in some of the lots that we have coming online, particularly some of the lower-end housing on smaller lots.

Salt Lake also has - their average selling price is actually lower than it is in Las Vegas, down below 150. And they have a good product there, but, you know, we have some product that we think from some of our other will work very well there. So we think we can help them from a product and merchandising standpoint to improve their operations there. From a margin standpoint, it's - the houses coming out of the box, it's going to be a little bit of a mixed bag. Those houses, obviously, will have much lower margin because we're buying them at market value, and there's very little risk associated with those ...

But on an historical basis, has this operation typically been higher margin than what you guys have been able to realize out there or, you know, should we see some erosion in margins as a result, not just in the near term but going forward?

In the - from a margin standpoint, historically they have - first of all, I'm not sure it's relevant because they - we're paying market value for these assets today - they - their margins have been comparable to what ours have been historically.

OK. Yeah, you might just talk about the land and also their production techniques relative to yours in the Lake.

They do a great job, but we do as well, and we think we have some things to bring to the party to improve their results.

And is this the type of acquisition we should see from you guys going forward, you know, in areas where there is a high degree of competition, and you're not afraid you attack that competition, I guess, in size?

It's something that we've done in the past - and since the mid-'90s, we've done a number of acquisitions in these markets. And we are not afraid of situations where other builders have not been successful. We've attacked markets like Tucson and Colorado Springs and other markets that size - the same size as Salt Lake - and done very well. And our Las Vegas market is highly competitive, but we have a great manager and a great team, and they're doing a terrific job in providing high-level performance.

I appreciate it. Best of luck to you guys.

Thank you.

It's of . You may ask your question.

Just a follow-up. I've forgotten. What is your guidance in terms of deliveries for the full year, and what proportion of those deliveries would be first timers exclusively - to the best of your guesswork? I know it's not perfect, but just in the general range.

, we have not provided guidance for closings.

Well, that's why I don't remember it then, right? OK.

That's true. And about - between 35 and 40 percent of our buyers are first time.

And is that going to - is that up from the year before or two years ago, and should we expect it to rise further?

A couple of years ago it rose to that level, and it's been pretty steady. The first time, it's hard to distinguish first time, first time move up ...

Right.

... between the markets. We're close to 80 percent of first time, first time move up and we've been in that range for the last couple of years.

OK, thanks very much.

You bet.

At this time there are no further questions.

We'd like to thank you again for joining our call and web cast today. We look forward to speaking with you again in July following the announcement of our second quarter 2002 results. Thank you.