MDC Holdings Inc (MDC) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the M.D.C. Holdings 2006 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Joe Fretz to read the forward-looking statements. Mr. Fretz, you may begin sir.

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 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 2005 Form 10-K.

It should also be noted that SEC Regulation G requires that certain information accompanies the use of non-GAAP financial measures. Should a non-GAAP financial measure be discussed, the information required by Regulation G will be posted on the investor relations section of our website, richmondamerican.com.

I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C. Holdings.

Good morning and welcome to M.D.C.’s 2006 First Quarter Conference Call and webcast. We are pleased to announce that we have built upon our record-setting performance in 2005 to produce another strong quarter of operating results to start 2006. Our net income and net earnings per share grew year over year for the 15th consecutive quarter and for 30th time in the last 31 quarters. And our total revenues rose for the 35th straight quarter on the strength of modestly higher home closings and a $60,000 increase in our average selling price.

We were also excited to report that our recent successes were recognized by several prominent sources during the quarter. For the second straight year, we appeared on the Fortune 500 list, advancing 29 spots to 437. And we again were ranked in the top ten of all Fortune 500 companies in ten-year returns to shareholders as well as 14th in ten-year earnings growth. We’re included in the S&P mid-cap 400 index for the first time and Forbes Magazine named us as one of America’s best big companies for the eighth consecutive year.

Even as we receive this recognition, we remain focused on positioning our company to succeed in the future. As an investment grade company, we continue to maintain one of the strongest balance sheets in the industry. Our leverage and interest coverage ratios rank among the best of our peers and our stockholders’ equity at March 31st approached $2.1 billion, up 36% from last year. And we improved our cash and available borrowing capacity to an all-time high of $1.27 billion at quarter end, in large part due to the March 2006 expansion of our five-year unsecured credit facility by almost 20% to $1.25 billion with the option of increasing to $1.75 billion with additional bank commitments.

The enhanced financial flexibility we realized though the expansion of our credit facility will help fuel our homebuilding operations as we continue to use our disciplined operating model and conservative capital structure as a tool to guide our investment decisions. As always, we are focused on allocating our capital to opportunities that we expect to produce the highest risk adjusted returns for our company.

We’re proud of our accomplishments in this 2006 first quarter. We recognize that the homebuilding environment has weakened in certain markets from the robust levels of demand experienced over the past few years. However, we believe that the fundamental economic drivers of a healthy homebuilding market remain strong. Interest rates are relatively low compared to historic levels. While the national unemployment rate stands at its lowest level in nearly five years. Most of our markets have shown positive job formation and continue to display economic growth.

We are optimistic that all of these factors will aid in the return to a steady, healthy demand for new homes, even in our more challenging markets. We remain confident that we have the right disciplines, the right strategy, the right balance sheet and sufficient financial flexibility to react quickly and effectively to opportunities created by a changing homebuilding environment to further our primary goal of maximizing long-term shareholder value.

I would now like to turn this call over to Gary Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2006 first quarter.

Thank you Larry. We do have these results displayed in our webcast today. As reflected in these slides, our net income for the first quarter of 2006 was a first quarter record for the company as we reported, $95.4 million in net income, up 13% from last year. This is recorded on revenues of $1.143 billion, which is up 22% from this time last year. Our earnings per share reached $2.08 a share, which is [$0.12] above the $1.86 that we realized a year ago.

Our homebuilding results were also a first quarter high at $173.8 million, up 7% from last year. This increase, this is on revenues, home sales revenues of $1.119 billion, up 22%. The increase in our profits here in the first quarter was driven by primarily by a $59,700 increase in our average selling price of our homes, which more than offset the impact of a decline in home gross margins. We did see in the quarter significant increase, year-over-year increases in profits in Arizona, Florida, and Maryland. And it’s interesting that average selling price increases and margin increases drove those improved results as none of those three markets actually saw increases in home closings. And their increase is more than offset declines in Nevada and California.

Our closing levels for the quarter were up just over 1% to 3,198 homes compared to 3,158 homes a year ago. Our conversion rate of our backlog for this quarter was consistent with a year ago at just under 50%.

As I mentioned, our average selling price increased close to $60,000 to an average of $350,000 this year. That’s compared to $290,000 a year ago. All of our markets really except Chicago, which is a new market for us, were up year over year. Chicago of course has not produced material results for the quarter. We saw the highest price increases occurring in our Maryland and Virginia market, which happens to be the highest-priced homes that we’re seeing right now in our company on average. But we also saw significant price improvements in Florida, Arizona, and Utah. And you might note that and on this slide that we also saw our average selling prices in Las Vegas increase by $34,000 a home to $323,000.

Our gross profit margins as we mentioned in the press release were 27.2%. This compares to margins of 28.4% in the first quarter of 2005 and 27.9% in the fourth quarter of 2005. We see in this quarter our margins improved in a number of our markets, Arizona, Florida, Maryland, Virginia, Utah. All of these markets that are seeing, that have seen significant price increases up until the last 90 days or so. These increases were more than offset however by the declines that began to occur in the second quarter of last year in Las Vegas as well as in California as we had some significant margin increases in the first quarter in California from some subdivisions that had closed out since that time.

Our G&A, we do have a slide here to reflect how that shows our corporate G&A actually was flat year over year. Largely because our G&A increases were allocated to our homebuilding divisions, which is why you can see the percentage of revenues of homebuilding G&A is actually up slightly from where it was last year. Overall, G&A expenses were up primarily due to the expensing of stock options under Section, under FAS 123(R) which produced an expense in this quarter of just short of $4 million. And I think as we’ve disclosed in our 10-K, we are expecting an expense in this area for the year of right around $18 million.

In addition, given the fact that we had been more selective on the basis of evaluating our land acquisition opportunities, we did see an increase in write-offs of deposits and due diligence costs during this quarter relative to last year as we became, took a more critical eye in evaluating our land acquisition opportunities.

Financial Services is a bright, another bright spot for this quarter. They had a, they had a great quarter, recognizing earnings of $8.3 million, which is almost three times what they recognized a year ago at $2.8 million. This increase really was driven by increased gains on sales of mortgage loans, which were up significantly due to a higher level of mortgage loan originations and higher loan sales volumes.

I know a lot of you are interested in some of the, some of the statistics in this area. So I’ll throw out a few things for your information. First of all, in terms of the loans that we originated this quarter, just under 50% were fixed-rate loans. So we actually saw our ARMs exceed the level of fixed rate. ARM product was 51% as compared to 43% a year ago. Of our ARM product, 86% were interest-only’s. So that means approximately 44% of the total loans originated by our company were interest-only loans. However, most of our ARM product has a fixed period of five years or more. In fact, close to 95% of all of our loans that we originated during this quarter had a fixed rate for at least five years.

FICO scores continued to trend up actually slightly exceeding 730 on average with fixed-rate loans being slightly high on the FICO side than ARMs. And our loan-to-value ratio including second mortgages is up slightly from where it was in the third quarter at 87%. And this time last year it was right around 85%.

As Larry mentioned in his comments, our balance sheet continues to be a bright spot for our company. Equity continuing to move up and the book value per share as you see in this slide has grown significantly year over year on a 29% compound annual rate, our, we’re up $11 from where we were last year, ending the quarter at $45.76. We had significant cash and available borrowing capacity, actually the highest in our history at $1.268 billion, that’s up from $1.2 billion at this time last year. And with our debt levels low, our equity continuing to rise, our debt-to-capital net of cash at the end of the quarter was 31%, which is up slightly from where it was last year but well below in fact 25% below where the rest of our peers are in this area.

Now I’d like to talk a few minutes about an area I know a lot of you are interested in and that is the orders for the quarter. Our order levels for this quarter were lower than they were on a net basis. We received orders net of cancellations of 3,800, for 3,800 homes. This compares to 4,546 orders net of cancellations a year ago. It’s down 16%.

The story here is really one that you know in trying to understand the demand side of the equation. The orders being down is one side of the story. However, we did provide some additional information in this release on gross contracts written. Because you know many times if you don’t get the traffic, you don’t get the contracts, it’s one thing. We in fact saw our traffic levels higher this quarter. So there’s a lot of buyers out. They seem to be taking longer to make their decisions. And we did see a significant increase in cancellations due to a number of factors including the speculator effect of them putting houses on the market or speculators not being in the market buying houses today. Or the fact that the markets have changed and people who are in backlog at higher prices are renegotiating or canceling and buying elsewhere.

So there’s a lot of things going on affecting the cancellation rate. But the real positive that we see and we wanted to make very visible to you is that the number of contracts written this year are still very high. We have also offset the impact of some of the declines in absorption rates per community with an increase in active subdivisions. So our active subdivisions hit an all-time high this quarter as well.

So there’s a lot of things going on. Our sales value of orders continues to rise with our average selling price of the orders actually being in excess of $350,000, up from somewhere around $320,000 a year ago. So, that side of the equation continues to be very positive.

We did provide some information as well as you know that we have decided not to buy additional lots in Texas. And therefore our lot supply’s declining. Our community accounts declining. And so our orders are declining in that, in that market, which has an effect on our overall orders.

We provided the gross orders for our company excluding Texas. And as you can see in total, we are actually up on that basis. So every one of our markets actually experienced higher levels of contracts written with the exception of Colorado, which has been more a challenging market for some time now. Virginia, partially because the fact that we do have a decline in active subdivisions and in Texas as well.

So of course the other side of the equation is cancellations in every market except Texas, actually showed an increase in absolute cancellations. The number of cancellations is actually up almost 50% from where it was a year ago. Thus, the increase in our cancellation rate from 20% to 31%.

The lower level of orders with a consistent level of closings obviously resulted in a lower level of backlog in terms of units. Our unit backlog was down just under 10%, 7,134 homes compared to 7,893 last year. The average selling price of our backlogged units however rose more than $70,000 to almost $380,000 per home. As a result, the dollar value of our backlogs is actually up 11% over where it was last year at $2.7 billion in value.

As I mentioned our active community count is up about 17% at 311, compared to 265. You can see where the active communities are. You can see significant increases in active communities in Arizona and in Las Vegas where we actually have twice as many active communities today as we had a year ago. We’ve seen rises in active communities in virtually every market except for Colorado, which is down slightly as well as Texas which will decline further.

And we continue to be in very good position from a lot count standpoint. We have approximately the same amount of lots that we had a year ago with approximately the same amount under option. The good news is we have over 17,000 lots tied up under option with about $63 million in cash and letters of credit. So our position of maintaining true options where we had the ability to make decisions about how we proceed in the future as we only have $3,600 per lot at risk for those option lots.

That concludes my prepared remarks. I’d like to open it up for questions at this time.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] The first question is from Margaret Whelan from UBS. Please go ahead.

Good morning guys.

Morning Margaret.

And I’d love to get some color on the rate of change in your orders and your cancellation rates through the quarter and into April please? Do you got a sense that the business has plateaued or if it’s still deteriorating?

Of the, you know, I can tell you that April was probably the slowest and March was actually very close to being flat. So you know the results, you know April is not available yet.

But just depending, in terms of your cancellation rate in the sense for the tone of the business into April, it’s deteriorating since March? Is that it?

I’m sorry.

Is what you’re saying that March was better than February but April so far is worse than March?

Well we really in terms of April we are not in a position really, I mean it’s very, still early in April. And it’s hard to tell where it, where it comes out. We’ve had multiple holidays here early in that, early in the month, so it’s hard to measure just what it means. But it is a, it’s kind of following a seasonal trend. You tend to see your lowest orders in January. And then see it pick up throughout the quarter.

Okay, so you did feel that acceleration?

Well it was, it was kind of a seasonal, seasonal buildup, nothing out of the ordinary.

Okay and then in terms of the cancellation rate, I know that you were, as well as your gross orders in the period, but was it improving or deteriorating?

I would not say that there was a material difference. The cancellation rate is, the way we calculate the cancellation rate just Margaret you probably know this, but I know there’s some confusion about it, is the number of gross cancellations over the number of gross orders taken during the, during the, whatever period you’re measuring.

Yes.

And so your backlog was high at the end of the year. Your orders were lower in January and February and vice, and continuing throughout the quarter. And so you, you tend to have a, the seasonal trend would be a lower can rate in March, just because you have higher gross orders.

I understand. And the second question I have is just about you mentioned in your prepared comments that the traffic has been so good, has been pretty good. What can you actually do to lower your can rate or to improve the conversion ratio of the traffic to real orders?

Well I think that we are doing a multitude of things. It is, it’s something that we are, which we’re trying to doing everything we can be it from not only increasing our advertising in some cases, maintaining pricing, increasing incentives, where necessary, moving spec homes. And there’s a significant focus on backlog and maintaining the backlog. And in some cases, it may involve offering some additional concessions to keep the buyers in backlog. So it’s kind of a, we’re working it on two fronts, looking for the new buyers and then also looking to maintain the buyers that we have. And get them to the closing table.

Okay, thank you.

Thank you. The next question is from Stephen Kim from Citigroup. Please go ahead.

Thanks. Can you guys hear me okay?

Sure can Steve. You’re on the (inaudible).

Okay. My question I guess just wanted to clarify one thing here with what Margaret asked you. I don’t know maybe if you misspoke Gary but in response to her question, her first one about the tone of business progressing over the last several months, your response to her was that April was the worst and March was actually flat. And I didn’t know if you meant to say something else because after that it started it getting confusing. Could you just repeat what you meant to say?

Yes, okay. Thank you. I didn’t know I even mentioned April.

Yes that’s what I thought.

What I meant to say was January was the, actually, actually for all involved I’d prefer to retract any comments involving April at all, because we don’t have anything to say about it. January was actually the lowest, as you would expect. And then March was better.

And you said basically March was flat in terms of net orders booked year over year? Is that correct?

It’s very close, yes.

Well that, I think that changes, yes I think that wasn’t really clear. I think that changes the picture considerably. My question relates to cancellation rates and not so much the rate but just the phenomenon of cancellations. You had identified in your release two major drivers to cancellations which seemed fairly straight forward. One of them was speculative buyers now deciding to renege. And number two was earnest buyers who had a contingency, a mortgage contingency, contingent upon selling their home and being unable to sell their home in the allotted time and therefore canceling. My question was that second component versus the first, how significant is that second component versus the speculative driver? And how are you handling the deposits put down under those two circumstances?

Steve I would say that it’s, first of all it’s very hard to distinguish some of these in some cases. But we are, you know certainly if there’s contingency for them to sell their house, then we are and I believe we are in most cases returning the deposits.

Okay.

Because it is contingent under the contract. In cases where the speculative impact is, in many cases, not direct. It is because we have gone to great lengths to minimize the amount of speculators that are in our backlog. And sometimes people lie to us and we find out about it. And I believe we are generally pretty aggressive with them in keeping their deposits when we, when we find that that is the case. But there are, the speculator effect is part of the impact that is causing in some of these markets the, just the, the number of resell homes on the market to expand here recently. And it needs to work its way through. It just creates additional competition. And that competition creates opportunities for buyers in our backlog to renegotiate or rethink their purchases. And so in those particular cases, if it’s pure buyer’s remorse for that reason, it’s kind of a mixed bag. I would say in many cases we are returning the deposits.

Yes, okay but it sounds like you’re not really able to parse out for us the relative size of those two major parties?

No sir. I’m not.

Okay, would you be comfortable in, well okay that’s fine on that line of questioning. My last question relates to SG&A. Your SG&A rate, I know that you had identified a couple of pieces to it. You had said there was some reallocation of corporate to I guess G&A. You had talked about options expensing and I was just wondering whether or not you could kind of go through and explain on the year-over-year increase in the relative components of SG&A. And I would call that marketing. I would call it G&A and your corporate together, the combined total. If you can talk about, break that down for us, where the increases on a basis point basis or in terms of dollars came from. That would be helpful.

Well Steve I believe that the, there is, there is a, there’s been a slight increase in marketing costs. If, on a basis point basis, they might, might be 10 to 20% on the marketing side. In general, that’s pretty much in line with the increase in revenues. On the G&A side, year over year, we expected that increase. It’s not dramatically different from what it was in the fourth quarter with the exception of a couple of items. And we have, we’ve talked about the number of additional divisions that we’ve added, some additional regional offices that we’ve added in order to deal with the level of volume that we are experiencing and are anticipating in the future for our expanded operations. The difference really is the additional abandonment costs which are about 30 basis points, maybe between 30 and 40 basis points for, related to those abandonment’s. And of course the FAS 123(R) stock option expense is about 40 basis points.

Great. Okay. Thanks very much guys.

You bet.

Thank you. The next question is from Joel Locker from Carlin Financial. Please go ahead.

Hi guys. Just wanted to talk about the inventory levels, the finished and under construction notice was up 49% versus backlog only up 11%. And just wondering with this discrepancy if you’re going to start just increasing discounts to move those homes, just so they, they’re more in line?

I’m sorry Joel, you’re talking about--?

Just the finished housing, complete and under construction was $1.3 billion versus $900 million last year, so that was up 49% versus dollar backlog’s only up 11%. So it just seems like there’s a big discrepancy there and was wondering if you’re going to try to push through some just sales and orders just to get that more in line?

Well Joel first of all there is a, well there’s, part of this is related to unsold homes.

Right.

A big part of this is not. In fact, our, most of this increase is the fact that we have more than 200, more houses in backlog then we had a year ago, that are under construction.

Right.

And last year we had a lot of homes in backlog that were not under construction. And this year we’re a little further along. We’ve added active communities, which all have model homes. We actually have 92 more models under construction today then we had a year ago.

Right.

So--

All right, I understand that and then is part of that is the newer, the newer communities that are opening up. But in essence, if the rate of sales doesn’t pick up in the second quarter and absorption levels are still low, I mean when, would you in essence pick up discounting to make sure that backlog and finished or unsold homes were more correlated?

I can, I can tell you Joel that we believe, we actively manage our spec inventory on a daily basis by community, by home.

Right.

And this is something, we’re not, we’re not going to keep spec houses around, so we will do what we need to do to make sure that that inventory level is under control.

Right. And then what is your community count expected by year end? I mean is that going to be up much from the 311 at the end of the quarter? I mean--?

It is, it’s hard to say at this point. We have, we know this that we have some new communities coming on in most of our markets. However, and of course we’ve got our Central Valley communities in Northern California. We’ve got the new communities in Salt Lake City that we just acquired. However, we know that we’re going to drop 18 communities in Texas between now and the end of the third quarter.

Right.

It’s possible, I mean I would expect us to be increasing communities excluding Texas from beginning and ending. But--

But just ballpark figure, maybe 320 or something like that by year end, including the drop off in Texas?

It is, it’s hard to say Joel at this time whether we will get to that level or not.

Right. All right. Thanks a lot.

Thank you. The next question is from Ivy Zelman from Credit Suisse. Please go ahead.

Good morning. This is actually Justin sitting on for Ivy. Had a few questions. One with regard to your capital allocation comments. And you mentioned that you’re going to allocate it towards the highest risk adjusted return alternatives. Can you speak to that a little bit, maybe describe how you measure risk adjusted returns and what factors are included in that?

Well Justin we, it is, it’s something that we evaluate. It’s highly both subjective and objective as we are, we have to make our own internal evaluations of the level of risk inherent. And that could be market risk. It could be legal risk. It could be development risk, any number of things. Those are all things that we evaluate on a project-by-project basis. And we are doing, taking steps to upgrade and tighten our underwriting criteria as we evaluate these planned acquisition opportunities. But we are, we’re really every week we have three committees that meet to review land acquisition opportunities. And the discussion is lively. It’s detailed. It’s focused. And this is not a rubber stamp process that involves a full financial analysis, legal analysis and market analysis of what’s going on in these various markets.

So in those markets where maybe you can give us an example of where you walked away from a deal and maybe returned a deposit and how that affects your relationships with other land sellers?

It’s something that Justin I think we have really talked to land sellers in every market involving land acquisitions before we take them down. And so it’s really this amount of abandonment costs or write-offs that we take into this quarter, I’d say are spread across every market that we operate in. And we, it’s not cavalier. It’s not short and sweet. They understand what’s happening in the market and it’s part of their learning process as well. So it’s not something that’s, that we are by ourselves in doing so either. So they can see what’s happening in the market. So I would not say that we’re, we’re certainly trying to preserve these relationships as much as we can. And I think we’ve been pretty good at it.

Now another question in regard to your margins, obviously in California and Las Vegas, those have been coming under pressure but can you tell us at what levels they are? Are they comparable to 2004, 2003 levels? And how much more downside do you see in those markets? And then also in your markets where you’re experiencing upside in Florida, Arizona, do you think that will continue given the current conditions?

Justin is this your follow-up question?

Yes, I’m done after this. Thank you.

Okay. You know what the margins are, it’s hard to say what they’re comparable to because since we haven’t talked to anybody about what they used to be, we have, we’ve seen the Vegas margins at extraordinary levels. They peaked probably in the first quarter last year and they’ve been coming down steadily since then. They’re still, they’re still good margins. And California I think as we’ve discussed before in general have not generally been our best margins, but they have, they were unusually high a year ago. And so they’re back down more to where they historically have been. But beyond that I don’t know that I could get a lot more specific.

Thank you guys.

Thank you. The next question is from Dan Oppenheim from Banc of America Securities. Please go ahead.

Thank you. Wondering if you can talk about the trends in margins and how much the impact has been coming from higher costs with materials and land versus the impact of incentives? And I guess that’s to start.

Well Dan I would say that incentives are playing a bigger role. They, the cost side of the equation certainly is, it’s a factor. And it’s something that we’ve probably seen be more of a factor over the last year than in prior periods. But the whole impact of cost increases in terms of margins might be, it might be a few thousand dollars a house. Incentives in some of these markets are, had more of an impact than that. And so I would say that that we do have a greater impact from incentives, impacting our margins today than the impact of hard costs.

Okay and are there markets or communities where you proactively approaching your backlog at this point to cancellations?

Every community we’re doing that. In fact our approach with our sales people is that as I mentioned, we’re really going at this on two fronts. And their best sale may be keeping that person in backlog and doing what it takes to, you have a, you have a willing buyer there who has gone to the trouble of going to the design center and are applying for a mortgage. And has been through the psychological process of wanting to buy that house. So it’s a much easier sale than trying to bring in a new person. But on the other hand, you have to, have to approach it aggressively and do what it takes. So Dan that’s something we’re doing across the company in every community.

Okay but is proactively going to the customers with increased incentives to avoid that? Or is it more just trying to maintain, trying to keep those sales?

You know it’s more trying to keep them. It, we’re not, we’re not reselling our backlog.

Okay, thank you.

Thank you. The next question is from Michael Rehaut from J.P. Morgan. Please go ahead.

Hey guys, this is actually Ray on for Mike.

Hi Ray.

Hi, it looks like your order ASPs are up 10%. How much was that due to mix and how much was that due to continued price depreciation in some of your markets?

It is a, a big part of it is, I mean it’s hard to, it’s hard for me to tell you specifically what it is. I know it’s a little bit of both. Price increases have played a very little part of it for the last couple of quarters as you well know. There really hasn’t been a great deal of pricing power in the market. So we have seen a, in markets, you can see the price increases as we’ve reflected in the press release. And those price increases in markets like Las Vegas and Phoenix are probably related to increases that we saw in the second quarter last year as much as anything in terms of price increases. There hasn’t been a lot of changes in the way of mix in those markets. The same thing in Virginia and Maryland where we’ve seen the largest level of increases. A part of that probably occurred in the second and third quarter of last year. And beyond that, it’s probably mix.

Okay, what about the, I’m talking about like the orders, like the order ASPs were up 10% though like, you’re referring to like the closings, which happened a couple quarters ago. What about the new orders that you guys had fall in the first quarter?

The orders are really, I’d say the average prices are up primarily, it’s going to be primarily mix.

Okay. Okay and also have you guys seen any concessions from any your suppliers at all?

We are, we are proactively approaching our subcontractors as business partners. The, we, it’s something that is done actively on the upside as the market is moving in a positive direction. We do the same thing on the downside. And we have had discussions with virtually every subcontractor that we deal with in terms of the level of their costs that are appropriate in this market. And we have been reasonably successful at helping and having them share in the, this changing market condition.

Okay, good. Thanks.

Thank you. The next question is from Alex Baron from JMP Securities. Please go ahead.

Yes thanks. Can you guys talk a little bit about your land? I think you said you were doing some write-offs there. Can you specify which markets and what’s causing you to do that?

Well Alex first of all I don’t want to be misunderstand, we have not written off any land or lots that we own. What we have done is we have and as you know and we discussed, we have, we have in excess of 20,000 lots that we’re looking at in any point in time that we’re evaluating to actually put under contract. And in some cases that’s as many as 30,000 lots. We do incur costs to look at those lots. And when we do not put them under contract, we write the costs off. We’ve been writing more of those costs off. In addition, in some markets we have, we’ve actually had some situations where we had lots under contract with deposits in place and we decided not to pursue them. And one of the best examples is probably Texas. We have as part of our efforts to diminish our presence there, we have in fact written off some deposits in that market.

Okay I guess I wanted to follow that up with, I was looking at your lot position and it seems that where it’s changed more is in Nevada. It seems that the number of lots you guys own and control there has gone from 5,500 to 4,800. Wondering what that was related to?

It is related to the fact that lots there are difficult to come by. You know it is, it’s still a very challenging market with a limited lot supply. We have a very strong group of land people in that market that are pursuing opportunities. And so it, there’s no, there’s no message there other then we do have a lot of, a lot of opportunities we’re looking at. But it’s a market that we also are very, are going to be very careful with as we, as we move forward. And we have imposed I think as we talked on our last conference call some limits on the level of investment that we will make in those markets and the lots’ costs have gone up, which has bumped them up against some of those limits. So they do have a pipeline of lots that we are continuing to look at to replace these. But they’re, we’re not sending a signal of doing anything in Vegas other than we’re being very disciplined and prudent in our investment in that market.

Okay and have you guys quantified how much the average incentive is as a percentage of your home price that you guys are offering?

No we haven’t. It is, it is, the range is very wide. There’s, in various forms. So it’s something that would be very hard to quantify Alex, because it is, it’s a very wide range depending on the community, the home, the market and the week involved.

But can you give us any sense, maybe just an average number or--?

Well in general I think we’d talked that our incentives in a normalized market have run around 3 to 3.5% of revenues. And it’s up in some cases, well I don’t want to give a range because the range is, it can be pretty wide depending on whether you’re dealing with a spec or not. But it’s, it’s up more then 100 basis points.

Okay. All right, great. Thanks.

Thank you. The next question is from Timothy Jones from Wasserman & Associates. Please go ahead.

Hi Gary.

Hey Tim.

A couple, that first two questions were I think the most important questions. So I’d just like to go back to that and clarify something, if you’d be so kind?

Absolutely.

Okay now you when you said January was the slowest. First of all are and March was relatively flat, you’re talking versus a year before, because March sales are usually about double those of January on a seasonal basis? You’re talking year to year right?

Yes sir, yes sir I am.

So they were sharply obviously. Now when you said that March was flat, you said that was on a net basis not a gross basis, right?

That’s correct.

So now what kind of, you had 11., did you see a dramatic shrinking of the cancellations during this time or was it just a pickup in the volume on the top line?

It was, it was more a volume impact Tim. We saw a lot more contracts written in March.

Okay and I’m right that March is about double the size of January historically, in absolute units?

No, it’s, it is significantly higher.

Yes, okay. It’s I think I’m right. Anyways, the first question is you, you’re down 10% in orders ex Texas, is part of this that you, since your average price was up, selling price was up $30,000, that you are actually taking less, doing less discounts then maybe some of your competitors and maybe losing some orders that way, and protecting margins?

Well it’s hard to say. I know, I can, I can tell you that some of our competitors were offering more incentives and it was pretty obvious in the, in the papers.

And you weren’t, and you weren’t matching them?

We were not.

Are these public companies or private companies?

Yes.

Yes, but what public? Public?

Yes public.

We won’t go into which ones will we?

No.

Okay. And lastly I noticed that you’re, you’re one of the few that breaks out commissions. They’re roughly about, they were probably roughly about 3% of sales. Whether they’re up a little bit from last year. Does that, that 3% does that include the commissions to brokers and to your internal people, which is?

Yes it does.

So it’s, it’s roughly, it runs about 1% for your internal people and 3% for the brokers, is that right?

It’s, it varies. It’s a little higher then 1% internally and it varies depending on whether we have a broker involved or not in most cases.

Have you seen a big increase in the broker sales this year versus last year? The percentages, the percentage went up probably 50 basis points or something?

It is, it has not gone up. In fact, it’s pretty flat.

The amount, that’s interesting. Is this the, the amount of outside realtors has stayed flat?

The and from a percentage standpoint, they--

From a percentage point--

They cooperate.

So then from, okay and so with it’s, you haven’t seen any real, I would have thought you’d seen a big surge in outside realtors but you haven’t?

We have not, not on the homes that are, that closed this quarter.

Thank, thank you Gary.

You bet Tim.

Thank you. The next question is from Larry Horan from Janney Montgomery Scott. Please go ahead.

Thank you. All my questions have been answered.

Hey Larry. Thanks for calling.

Okay.

We’ll move on to the next question. The next question is from Carl Reichardt from Wachovia. Please go ahead.

Morning guys. How are you?

Hey Carl.

Gary, the 31% cancellation rate for this quarter, recognizing that there is seasonal cancellation rate in Q1, compare that to say the mid-90’s or the late-90’s, how does that 31% look relative to sort of history?

It’s about 50% higher.

50% higher. Okay. And can you, do you have an idea if we told, if we can quantify the total costs to exit Texas if we think about what you may be writing off and any additional costs related to leaving that market?

It is not material Carl. We have been, I guess the good news is that the lots that we have, have value. And the costs that we’re able to receive at least our book value in most cases for these lots. And what the amounts, to the extent that we perceive that there is, that we would not realize our book value, those losses have already been taken.

Okay. Terrific. Thanks very much Gary.

Thank you. The next question is from Mark [Yocalson] with J. Goldman and Company. Please go ahead.

I just had one question for you guys. Just in inter key markets, I mean your communities accounts are up, can you just talk about what you’re seeing from your competitors? I mean are seeing, are you seeing any of your competitors cut back on their community accounts or are you mostly seeing kind of increases as well?

We aren’t seeing aggressive increases in most markets. I’m trying to think through the markets. No not a lot of significant pullbacks. I think everyone is trying to maintain or move their market share in a positive direction. I think most of the people that we’re seeing are most of the builders that, the public builders at least are being a little more selective about their purchases. And some that have been long on lots and markets have been given a directive to hold back on lots and in some cases sell lots. But I don’t think, I don’t know that it’s necessarily related to that I’m aware of a builder diminishing or leaving a market.

Okay and just actually one more question, just when you talk about you at some point you expect to return to kind of normalized levels, can you just talk about (A) kind of what you see as being a normal, healthy market. I mean is it more like 2003 or ’04 or ’05? And then just, and how, I mean do you have any sense for how much time you think it will take till we see that? And could it be this summer or could it, could it be next year? Can you just provide some color on that please?

It would, it would really be just a guess as to what, each, what’s interesting is that I don’t know if I could look to a year and say that that was a normal year for all of our markets because every market has experienced different highs and lows at different times. Probably I mean 2002, 2003 is something that we look at as being, we were kind of steady there for two or three years as a company. But at the same time, we were coming and going in certain markets in terms of highs and lows. So it is, it’s probably somewhere in that 2000-2003 range, if you look at all the markets in terms of what might be more normal. And as to when it, when it happens it’s very much a question mark for, that all of us are trying to answer. I think our hope would be that it’s six months or nine months. But we really don’t know.

Okay, great. Thank you very much guys.

The next question is from Susan Berliner from Bear Stearns. Please go ahead.

Good morning. Thank you. I have two questions. One it didn’t look like you repurchased any shares in the quarter and I was wondering if you could just update us on your thoughts for share repurchase this year? Then I have a follow-up to that.

Sure Susan. I’m surprised it took this long to get to that question. But actually no we did not, we did not purchase any shares during this quarter. And as you know, we had four million shares authorized to repurchase. It’s something that we have done in the past. And it’s something we consider on an active basis. It is, it’s part of our efforts as we, as we consider how to allocate our capital. And so it’s, while we have no announced plan, we aren’t specifically allocating a certain part of our free cash flow to do this. We’ve, we have our eyes and ears open. And if the time is right and it’s the right alternative, we will act on it just as we have in the past.

Okay thank you. And then I just wanted to touch on page two of the press release where you talk about your revenues and earnings for the year. You’re not in a position to predict if it will exceed 2005. Can you elaborate on exactly what you mean there?

We made a statement at year end that we expected to exceed our revenues and earnings in 2006 relative to 2005.

Okay.

And in response to that statement, given the fact that our orders are lower than anticipated, our backlog is lower. And not knowing what the next 90 to 120 days will bring or for that matter the balance of the year, we are holding back on that statement.

Okay great. Thanks very much Gary. I appreciate it.

Stephen Kim from Citigroup is back on line with a follow-up question. Please go ahead.

Yes thanks. Actually I was going to ask that question about the buybacks. I guess touching on, touching on that, when you guys, I mean certainly the alternatives for use of cash or for buybacks seems to have become a little less attractive as evidenced by what you’ve been doing on your land, on the land front being much more picky and choosy and actually, you know, more costs there. Can you talk about sort of what particularly you would need to see in terms of your stock action for you guys to get involved if given that you didn’t get involved here when your business was in January and February down substantially double digits in orders? Just can you help us, help the market understand a little bit more clearly what is it you’re waiting for?

Hi Steve, this is Larry.

Hi Larry.

You know Gary just turns over and looks at me, and says okay, might as well, you know you can do on this one. As most of you know, we run a very conservative balance sheet. We’ve, we don’t speculate in land. We don’t have any joint ventures. We don’t have any goodwill. We don’t have any off-balance sheet financing. So I would say we’re probably in the high end of a very conservative.

We think during changing times we will keep all of our options open. And we expect to be very opportunistic during this changing market. And we’re going to evaluate every day in running our business and that’s whether we’re buying land, selling land, dropping old options, acquiring new ones, re-trading for better terms and conditions, receiving reduction of prices from some of our trading partners.

We have positioned ourselves to move in all directions concurrently. If we believe that it will increase the shareholder value on a long-term basis. And consequently, we don’t have a magic formula that we announce to the street. We just look at all the risk and rewards daily and we’ll transact when we think that it’s in the best interest on a long-term basis with our shareholders. But during these changing market conditions, we think it fits our style very well because that’s how we run our company that move where we’re not bogged down with large land positions and a high level of inventory of any kind. So our flexibility and our discipline over the last decade I believe will serve us well during these changing times. And that’s probably the only way I can answer the question.

I guess my response to that would be that all of those things that you just said have been hallmarks of M.D.C.’s approach for quite a number of years, which is part of the reason why you’ve been able to accomplish what you’ve been able to accomplish. But it also appears very clear that while many in the market place would think that the alternative to buying land and I guess making acquisitions or doing a variety of other things would seem to tilt the balance towards actually repurchasing shares. And that was probably at a stock price that was even higher than where it is today. You all haven’t reached that conclusion.

In your remarks here today, it seems pretty clear that your view of the opportunity here in the land side is, has diminished considerably. So, if, I’m just trying to figure out if there’s something that you’re considering that you may be, I don’t know what particular debt to equity ratio or a certain price-to-book valuation on your shares or something on that, on that line of thinking that may be the market hasn’t really been thinking about the same way you have. Can you give us a sense for maybe which of the metrics that one might use in making those decisions? You know has gained more importance or prominence in your eyes recently?

Well I think the most recent thing that has gained opportunity in our eyes is looking at (A) maybe a opportunity on a perspective basis of buying land more favorable then it has been in the past because of very active markets in the last couple years have run up the land values. And they’re moderating themselves and the terms are moderating. So I don’t think it’s a full conclusion to believe that we’re not looking for land transactions if and when they come in a manner that we think justifies it and we’re not in a hurry to come to any conclusion doing anything.

Our obligation is the long-term shareholder value. And that is to look at the market every day, make our judgment where we think the markets are going and transact if and when we deem it appropriate. And so far we’ve done a good job in creating shareholder value. And we’re not in a rush to do one thing or another. And if there’s a compelling reason to do something we will. And until then we’ll observe.

Well that sounds, that’s actually very interesting. Yes, I hope that some of these land opportunities do emerge that’ll be, that’ll be positive. Can I ask another question Gary about Texas?

Sure.

One of the areas that really has separated M.D.C. from all of your peers has been the way you guys have approached Texas. Most other builders are sort of pointing to Texas and saying look, here’s a market that’s going to help offset some of the things that we’re seeing in some of the slower, markets that are slowing. You all are taking a completely opposite tack. And I guess I’m just trying to, I’d like to revisit that again and how does, how you walk through, what it is that you specifically see in the Texas market that you don’t like? You indicated that their landholdings are still going for prices above book value. So it doesn’t sound like you’re under water there. I can’t imagine personnel would be too hard to find in that kind of a market. Can you just help us understand why it is that M.D.C. wouldn’t just hang out there and sort of reap the rewards here over the next, over the next coupled of years instead of, instead of getting out now?

Steve, this is Larry again. We’re not hanging out any place. We’re interested in proactive, aggressive management, hands-on. We respect our senior people and mid-level people. And you can make more money in one California subdivision than you can in selling 1,000 homes in Texas. The average sales price in Texas was about $165,000. Our average sales price for the company was not quite double. And we’d rather focus our business on those markets where we already have a dominant presence.

As you know, many of the large markets, we’re one of the top five builders. And in some markets, we’re number two or three. And we’re making good money there. And we want to take our human resources and continue to do not only a good job, but a better job because we believe that the opportunities will come to us where we are paying very close attention.

And Texas, the economy seems to be getting better and people are selling more units. That’s a business decision that we made that we’re not going just have a unit count at 50% of the average sales price just for optics. And so our decision is, is to take what we’re doing and focus it where we are during these changing markets to really do a superior job. And that was the decision made. And we have a nominal amount of capital left in Texas. And we expect to be finished there by the end of the year.

And I’d feel very good as you heard earlier in Gary’s comments gross sales have a degree of, a nice tone. Net sales are adjusted by prior period contracts. And as you work through your backlog that was created in a different timeframe, which might have been the third quarter or the fourth quarter of last year, and as the market and I’m speaking of the entire new home market not M.D.C., as the market works through the prior backlog, I believe that you will see a reduction of cancellations that’s at this point, it’s only speculation because we won’t know until it happens.

You also have to work through the resale market that probably has a bigger backup then the new market does. The public builders will be aggressive in working through whatever challenges they have. And I think when we look back in history, we will see that ’06 was a transitional period of an adjustment. And I think all of us hope that it’s an adjustment that comes through over a period of time that is not extended. But all of this will be predicated on the underlying economy of the United States and specifically of the markets. And none of us know what that might be today since we can’t even figure out what the ten-year bond should trade at.

Well I certainly agree with your comment on the cancellations and I certainly hope that that diminishes as we expect. But appreciate your responses. And thanks very much guys.

Nice talking to you.

Gentlemen, we have no further questions at this time.

Good.

We’d like to thank you again for joining our call today. We look forward to have the opportunity to speak with you again in July, following the announcement of our 2006 second quarter results. Have a great day everyone.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. Thank you for participating. You may all disconnect.