MDC Holdings Inc (MDC) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the MDC Holdings 2008 First Quarter Earnings Conference Call. If you should require assistance during this call, please press *, then 0. I would now like to turn the conference over Director of Investor Relations, Bob Martin.

Thank you. Good morning and welcome to our first quarter earnings conference call.

Joining me today on the call are Larry Mizel -- Chairman and Chief Executive Officer, Gary Reece -- Executive Vice President and Chief Financial Officer, Michael Touff -- Senior Vice President and General Counsel, and Joe Fretz -- Secretary and Corporate Counsel.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question.

Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at MDCHoldings.com.

I will now turn the call over to Joe Fretz for a disclaimer on forward-looking statements. Joe?

Before introducing Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call, including those related to MDC's anticipated home closings, home gross margins, backlog values, 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 achievement to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the Company's actual performance are set forth in the Company's 2007 Form 10K. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our website, MDCHoldings.com.

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

Good morning. Welcome to MDC's first quarter call and webcast.

At the start of 2008, the home-building environment in many ways resembled what we experienced in 2007, with a sluggish sales pace -- leading to substantial year-over-year decline in our first-quarter net home orders.

At the same time, key differences distinguished the 2008 first quarter. Signs of a recession have become more pronounced -- highlighted by 3 consecutive months of declining employment levels. And the country is now intensely focused on the issue in the housing market, with key media outlets, economists and politicians debating the ideal solution.

We are not confused about our place in this market. While encouraged by the decline in our impairment levels to their lowest level since the third quarter of 2006, we know that the market's return to growth will take time. In the meantime, we have focused on our balance sheet as we await a recovery for the homebuilding industry.

Perhaps the best measure of our progress during these difficult times is our generation of positive operating cash flow for seven consecutive quarters -- including over 230 million in this first quarter.

As a result, our cash-on-hand has grown to almost $1.2 billion at quarter end. With no borrowings on our outstanding homebuilding line of credit, this cash balance exceeds all of our outstanding debt by nearly 20%.

In addition, we have continued to be proactively managed -- our exposure to performance bonds and letters of credit related to various land development activities. Consequently, our estimated cost to complete these activities was less than $50 million at March 31st.

Our balance sheet is one of the strongest in our industry, uniquely positioning us to focus on continued business improvements in 2008. Having already taken steps to adjust our overhead structure, our general and administrative expense declined year-over-year by more than 40% in the 2008 first quarter.

Going forward, we believe that we can leverage our overhead and further reduce the cost of construction -- even when we return to growth -- while improving quality and customizing our homes through our unique home gallery concept.

In an effort to make this vision a reality, this quarter we launched a company-wide initiative to transform and streamline our processes and business practices for increased efficiency in our core homebuilding disciplines.

This project is intended to create a consistent way for us to conduct business nationwide, while retaining flexibility to meet the different needs of our various operating divisions. Through this effort, we hope to unite our operating divisions under a unified operating strategy, to drive increased profitability.

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

Thank you, Larry.

This quarter -- like it has over the last several -- has reflected a continued focus on our balance sheet, with an emphasis on generating cash. Clearly, as this next slide shows, we were successful in those efforts.

We generated operating cash flow in the quarter of $231 million, which is well above the 149 million we generated a year ago. This 231 includes approximately $90 million of income tax refunds that we received in early February.

Over the last 12 months, we've generated in excess of $675 million in operating cash flow. And as this slide reflects, we have had 7 consecutive quarters of positive operating cash flow, over which time we have generated almost $1.3 billion in cash flow.

This cash flow generation is really accomplished through true reductions in our inventory over the past 7 quarters. And of course, here in the first quarter, as you may have seen, we have an increased focus on selling certain parcels of land that no longer meet our strategic objectives.

We decreased -- as this slide shows very clearly -- the decline in our inventories, and what's behind it. Our inventories at the end of the second quarter of 2006 were just short of $3.3 billion. We now have dropped that to $1.250 billion at the end of the first quarter of '08. A decline of over $2 billion.

You can see that the largest decline in our inventories -- as this slide is split between work-in-process and land -- is in our land account. We did see some part of this decline related to impairments. On a net basis, $550 million is related to impairments, as we have impaired our assets since the beginning of the third quarter of '06 by almost $900 million. And we have essentially turned or sold lots for which we had recognized previous impairments of about 340 million. So the net effect is 550. But what that leaves is a true conversion to cash, just short of $1.5 billion.

In this first quarter of 2008, we did sell a significant number of lots -- just over 800 lots -- which we sold for $29 million. Most of these lots were in our Arizona and California markets, which had a book value of just short of $30 million. The importance of this, you can see from our P&L. There's very little P&L effect from a GAAP standpoint. But we did generate a tax loss in excess of $70 million through these sales.

This will also be important to us in the future, as we've identified close to 1,700 lots at the end of the first quarter of '08, with a book value of very close to $60 million, which we are holding for sale in the future. Most of these lots are in California, Arizona and Nevada.

Our lots controlled continue to decline -- both our owned and optioned -- with continued limited risk on our option lots. The lots that we control, as reflected in this slide, come down from already one of the lowest lot supplies in the industry. But we've dropped our lots controlled, excluding work-in-process, by almost 50% from this time last year, to just over 13,000 lots. We're down 13% from where we were at year end.

On the option lots side, we have just over 3,000 lots, which is down 56% from where we were last year. And on these 3,000 lots, we have just short of $13 million at risk, with respect to those lots. Even our work in process is down over 30%. We have around 3,100 lots in process of construction of homes, and we ended the quarter with fewer than 450 finished specs.

Of course, all lots are not created equal. The lots that we do own, most of them are finished -- or there's limited development needed to complete them. Larry had mentioned, and as we said in our press release, with respect to the performance bonds we have related to remaining development -- we estimate we have less than $50 million remaining to spend, to finish up all the work that's required under those performance bonds.

With our lots coming down, our active communities are also declining. We ended the quarter with 260 active communities, which is down almost 20% from where we were a year ago.

This increased cash and inventory reduction have continued to strengthen our financial position, as it relates to cash in particular. As Larry mentioned, we did end the quarter with $1.2 billion -- or just short of $1.2 billion in cash, which is up 90% from where it was a year ago.

Also, this cash position exceeds our public debt -- which is all the debt that we have outstanding -- by almost 20%. And this cash raises our available borrowing capacity and cash position to in excess of $2.4 billion, which is up 30% from where we were last year.

As it relates to operations, we continue to try to drive sales -- but demand is still limited, as evidenced by the continued large declines in our orders and backlog. This slide reflects the decline in orders, which dropped 57% from this time last year. Of course, part of that obviously has to do with the reduction in the number of active communities out of which we are selling homes.

But we received orders during the quarter for 1,098 homes. Gross orders being down right around 50%. Our can rate is up to 43% for the quarter, from 35% last year -- but down substantially from the cancellation rate we experienced in the fourth quarter -- which was 65%.

If we look at the can rate as it relates to our beginning backlog position, it's very consistent with where we were in the fourth quarter. Right around 42%.

In terms of our orders, there's really no single market that stands out too much, because every market was down fairly significantly -- ranging from a 36% decline in Florida to a 79% decline in Utah. These declines contributed to a backlog level that was down 54% from this time last year, at 1,900 units.

The average price on our backlog dropped 9%, from 358,000 to 326,000, which is reflecting the trend that we're seeing in the homes that we're closing, as well.

As we look at the P&L for the Company here for the quarter, we see that the limited demand for units has driven unit volume down, prices down -- which is translated into continued losses. And while we've reduced G&A and impairments, it's not caught up with a steep decline in revenues.

Really, focusing on -- the real focus -- is pretax. It's a little easier to understand -- as this slide shows -- a pretax loss of $77.2 million for the quarter, is down substantially from the 143.7 million that we realized a year ago. Revenues are down to $406 million -- from 745, down 45%.

This improvement in the loss relative to last year is largely attributable to a $40 million decline in G&A. We've got a $20 million decline in selling expenses, and almost a $90 million decline in impairments and write-offs from where we were a year ago.

These declines were offset partially by a 43% decline in home closings, where we closed 1,136 homes in the quarter -- with significant decline in most markets except for Maryland and Virginia, primarily. Our average selling prices are down 12%, to 313,000 from 356 a year ago. All of our markets are down in terms of average price -- except for Chicago, which is up 30%. And Colorado, which is very close -- up, slightly.

Our margins are also down to an 11.4% level. I want to talk about this a little bit more here in a second. This is a level that's fairly consistent on a net basis, with what we experienced in the fourth quarter. Also contributing to the improvement versus last year, is a reduced net corporate loss. We had $4.1 million in net expenses this quarter versus 12.3 a year ago -- due primarily to higher-interest income on our larger cash balances, and lower compensation and travel costs relative to a year ago.

On the other side, our financial services and other segments is down slightly, primarily due to lower gains on sales of mortgage loans due to the lower closing volumes. And also, lower insurance revenues from our subcontractors, due to the lower level of construction activity.

Turning to the net loss -- we saw an improvement, but it's significantly less favorable looking, at least on its face. $72.8 million net loss relative to 94.4 million a year ago. The reason for this difference -- you can see that comparing the net loss to the pretax loss for the quarter -- we really only were able to realize a $4.4 million tax benefit, with respect to this loss. That is largely attributable to the effective tax rate for the quarter -- which is down to 5.7% -- which is a projection of our effective tax rate for the full calendar year -- relative to a tax rate applicable a year ago of over 34%.

This reduction is largely the result of an increased deferred tax valuation allowance of $10.6 million. And also, as we plan to carry back losses from this year to 2006, the impact of losing the benefit of a manufacturing deduction in that year also impacts the effective tax rate. So those are the two main components behind that difference.

On an earnings-per-share basis, we're also favorable relative to last year -- showing a per-share loss of $1.58 versus 2.07 a year ago.

Coming back to our home gross margin. I think this is an important slide. The blue bars in this slide show the reported home gross margin. Of course, interest costs are a component of that calculation.

What's happening with us is -- you've seen our inventory levels drop substantially over the last six quarters, as we've talked previously. All of our interest that we incur is capitalized into that inventory. And we have the same level of debt essentially today as we had six quarters ago. But much less, as you can see -- much less inventory to capitalize that inventory against.

So what's happening is, we're taking the cash generated from an inventory reduction, and investing it in earning interest income in one bucket. And we're incurring the same amount of interest -- capitalizing it against a lower level of inventory. And therefore, it's driving up the interest component in our margins.

So what we tried to do is break that out here in this slide, and show you that interest as a component of margins -- as a percentage of revenues -- was 4.5% in this quarter. This compares to 1.9% a year ago, and just 2.1% in the 4th quarter, alone.

So if you look at our margins exclusive of interest -- and even some of our peers report margins in that fashion -- you'll see that not only are we 210 basis points higher sequentially from the 4th quarter, but we're very comparable to where we were for the last 3 quarters. And only 100 basis points lower than where we were in the 1st quarter of last year.

Looking at our G&A. As we mentioned, our G&A expenses have declined substantially from where they were last year. Down almost $40 million in absolute terms. Down 42%, relative to where we were last year. Primarily related to the significant downsizing that we've seen, and the reduction in our operating divisions.

A year ago we had 21 active divisions. Today, we have 12. That has aided in the decline in our G&A. Our marketing expenses are down, but not as much as our revenues. We continue in this very difficult and challenging environment to incur costs to sell homes. And nevertheless, our marketing expenses are down 34% from where they were last year. Permissions being down 42%.

And then finally, before we take some questions, I wanted to touch briefly on impairments. We saw in this quarter our impairments decline to just under $55 million. It's the lowest level that we've seen since the first quarter of impairments in the third quarter of '06. It's the second consecutive sequential decline that we've seen in impairments. And of course, it kind of goes hand-in-hand with the significant reduction in our inventories over this period.

The West segment continues to have the majority of the impairments. We did impair just over 2,600 lots this quarter, in 94 subdivisions. 24 million of it applicable to land-under-development, and 24 million to work-in-process -- 6 to land held for sale, and $1 million related to other assets.

That completes our prepared remarks. We'd like to open the floor for questions.

Ladies and gentlemen, if you wish to ask a question, please press *, then 1, on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the # key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press *1 at this time.

We do have a question from the line of Michael Rehaut of JP Morgan. Please go ahead.

Hey, guys. This is actually Ray Huang on for Mike. A couple questions on the order pricing. It looks like it actually increased sequentially to about 295,000 from 250,000. Was that primarily due to mix? Or is there something else going on there?

Ray, that is mix. The amount reflected in the previous quarter was no reflective of orders that we had taken. When we make this calculation, it's a combination of removing orders that have canceled, and bringing in orders that have been taken during the quarter. And that's the result of pulling out high-priced homes that were in backlog, and replacing them with lower-priced homes.

So we had a little less of an effect this quarter, and it's really mix. I think what's more reflective is what you see in our backlog. There's a fairly consistent relationship, if you look back over the last period of years -- quarter-by-quarter -- you'll see there's a range of relationship between what the price is in our backlog and what you see come through the P&L in future periods.

Okay. So I'm seeing the backlog price down about 9%, year-over-year. Can you give any anecdotal evidence of various markets that you're seeing that are maybe seeing more of some pricing pressure in this quarter versus last quarter?

Well, Ray -- that's really where the impairments come into play. And I think that I would have to say that every market continued to experience some level of pressure. But because we are so close to the line in terms of profitability in these Western markets, they felt it the most. That's why we saw most of our impairments come through in those markets.

And then just hitting on the impairments. They're well below our estimate, and I think of what other people are expecting. But if pricing were to fall another 10 to 15% from here, where do you think the impairment in terms of magnitude could reach? Do you think it could reach the '07 levels again? Or where do you think we are in terms of impairments you had in terms of what you're seeing in your own inventory, right now?

Well, Ray, I think that if we look at our slide, that shows where the inventories have come down. There is just not the level to impair that we had at the middle of last year. So even if pricing were to decline at the same levels, we don't have the same amount at risk. I think that that's a key point to understand, here.

We're down $2 billion from where we were when this all started. We're down almost a full 2/3 in inventory levels. So you can do the math. I know that seeing some of the comments that Mike made this morning, and I think that we continue to be appropriately conservative in our valuation of our inventories every quarter. And that we applied the same methodology every single quarter. I think that's reflective of what we're seeing in each one of our markets.

Right. Okay, and then just lastly. What was the benefit from prior period impairments, in terms of the gross margins in this quarter?

In terms of absolutes, the amount of impairments that we took on lots that we closed this quarter -- with homes -- was about $50 million. This is for homes. That compares to about $9 million a year ago. And we did not disclose in the press release the amount related to the land sales. But you can extrapolate that from the information.

Obviously you saw very little book gain or loss. But I mentioned a $70 million-plus tax loss. That's essentially the impairments.

I meant the benefit from prior-period impairments.

That's what I'm talking about.

Okay.

Had we not taken the impairments on the land that was sold, it would've been a $70 million loss.

Okay. Thank you.

We have a question from the line of Timothy Jones -- Wasserman & Associates. Please go ahead.

Hi, Gary. Hi, Larry.

Hey, Tim.

Hey, Tim.

Hi, Larry. How are you? Okay.

First of all, could you give me -- I know your SG&A is pretty high -- but could you give me what your headcount is today versus last year in the peak? The employees. Total employees.

Yes.

There are huge differences among builders. That's why I'm wanting to get this.

Our peak, Tim, was about 4,300.

Okay. And that was what? Two years ago?

That was two years ago. Yes.

And where is it?

And we're down, as of the end of the year. I believe our 10K disclosed 2,000. And of course, we continue to right-size as we go. So you could assume that there've been further reductions from there. But 4,300 to 2,000 with respect to where we are.

Okay. Secondly, did you say you had 3,100 homes under construction? Was that the number?

Yes, sir.

And what is working under that trend. But you gave the finished specs. What about the unfinished specs?

Hold on, one second.

And also, I'd like to have that compared to last year, if you've got it.

Yes. We had 1,340 unsold homes in total.

Is that including the finished or not?

I'm sorry. Hold on. Let me back up. I've got the wrong number. It's actually in the press release. 1,099 homes under construction -- of which 449 are finished. A year ago, we had 1,212 -- of which 422 were finished.

One other thing. US FHA loans are only about 47% right now. Why aren't you utilizing more FHA loans?

That is something that is growing significantly. A year ago, it was 5%.

I understand.

So it's something that has been building. It doesn't replace overnight, but we can clearly see an upward trend in that loans vehicle.

Roughly, you still have a fairly high cancellation rate. You had a very high one in the fourth quarter. Are you addressing that by cutting prices? Or with your strong balance sheet, are you just not selling anything -- just holding some things -- rather than selling them at a loss?

Tim, we're not holding anything. We are out there competing as best we can. If we have to reprice, we reprice. We believe we're as competitive as anyone. There are no artificial steps being taken here. It's just a function of our level of competition.

Okay. Thank you so much.

You bet.

We have a question from the line of Alex Barron, Agency Trading Group. Please go ahead.

Yes. Hi, Gary. Hi, Larry.

Hey, Alex.

I wanted to clarify something, just to make sure I heard you correctly. You said that there was a $50 million benefit to gross margins this quarter.

$50 million dollar -- well.

From previous impairments?

We don't really refer to it that way. What we're just stating a fact is that we, in our gross margins -- as a component of our gross margins, we have sold homes on lots for which we had previously taken $50 million of impairments.

Whether you refer to that of benefit or not, it's hard to say it's a benefit. Because the selling price that's dropped significantly is a function of the impairment itself. The impairment's only one side of it.

I guess what I'm trying to figure out is, if you hadn't taken those impairments, another way to say it -- would your gross income have been roughly minus $10 million this quarter, then?

You mean our gross profit margins?

Yes.

I suppose. Yes. The way you're stating it. But then you can make all kinds of assumptions, Alex. You don't have one without the other.

The impairments are -- if you remove completely the effect of impairments in the past -- with prices going down, yes. They would have been 10 million to the negative.

Okay. Got it.

I guess one question I kind of wanted to ask, though, is -- we've seen I guess the number of homes that are going into foreclosure rising significantly. And up until recently, it seemed like the banks weren't very willing to lower their prices. But it seems like now they are.

So I'm just kind of wondering how that's affecting you guys, and whether that's in some ways forcing you to lower your prices a little bit more aggressively.

It's things that our neighborhoods where we build -- and the quality of our products. We don't have as much of the foreclosure issue that you might have elsewhere. Most of our competition only deals with other builders versus the foreclosure markets. I think that's in different geographic locations, and many terms in different price points. It's obviously a factor. But it's not a driving factor, at this time.

Okay. And if I could, one last one.

I noticed your community count went up very slightly sequentially this quarter in a few markets. Does that just mean you guys are opening a few less projects? Or are you finding new opportunities where you maybe bought some cheaper land or something like that? How should I interpret that?

There are several communities, Alex, here in Colorado that we have opened, that have been on the drawing board for some time. They're in great locations, and they make sense to go forward.

We did, and I think we disclosed in our last conference call, that we bought a community in Las Vegas -- at a very favorable price. And so we get one-off opportunities like that here and there.

Obviously, we haven't spent a great deal on acquisitions with our land balances continuing to drop. But there are small opportunities that we have been able to take advantage of. You can see what you're referring to is something that's relatively small, I think. And so there are no earth shattering events taking place.

Got it. Okay. Thanks.

I have a question from the line of Jim Wilson, JMP Securities. Please go ahead.

Thanks. Good morning, guys.

Good morning, Jim.

I guess my question's just really on -- it's great that you discussed land sales. But one of the things here you were pretty tight on inventory to begin with -- obviously high cash balances. What are you seeing in land buy opportunities or anything you've executed on? And I guess I'd even add -- anywhere or any market you particularly feel in effect you're just outright short on inventory?

I think there are probably two sides to the equation. Where we could buy, and at the price point we could buy at, reflects today's market pricing and incentives. So that's something that we are actively looking at.

I think that our inventory balance is exceptionally good. As you can see. If one assumes that new inventory is really good and existing inventory is properly valued, we're doing just what we should do -- which is to continuously cycle through the pre-existing assets, and on a prospective basis, look for those opportunities to acquire new assets in line with today's price points.

One should assume that we have a reasonable amount of deal flow, since we are as highly liquid as we currently are. Those persons wishing to sell land know that we have the desire and the ability to transact.

I think as we see the year continue, those opportunities probably -- the difference between the bid and the ask -- will come together a little bit more. Meanwhile, we are very patient and will continue to grow our cash balances.

Maybe I would just add one to be specific. Any incremental lot purchases or new lot purchases made? Or the count thereof in the first quarter?

Not material.

Nothing material. Okay. Just staying patient. All right. Great. Thanks.

We have a question from the line of Carl Reichardt, Wachovia Securities. Please go ahead.

Good morning, guys. Actually, Jim asked one of my questions. So I'll ask the other one.

I'm still struggling a little bit with -- I hate to use this word, but -- "vagueness," around the concept of business procedures and practices, and transforming them. Can you give me something a little more concrete as to specifically what you're working on? That you think over the next 3 to 5 years will improve some aspect of the income statement that we can bank on and model?

No.

Okay. Thanks.

As I say -- you can watch it. It'll come through the financials on a perspective basis, if we do a good job.

We do have a question from the line of Randy Reisman, Durham Asset Management. Please go ahead.

Hey. Just a little curious about the kind of shift in sentiment. It seems like when we met with a bunch of builders back in February at an industry conference, I didn't get the sense that things were stable, but that they were stabilizing. From going through some of the results, it seems like that's not the case. I just wanted to get your take on that.

And then also, just kind of what you think happens with home prices from here, as we get deeper into the cycle.

I think that the market is extremely transparent. With all the information that comes out between the analysts, the reporting of the public companies, the government and every other source -- it seems as though the market is kind of continuing at this level. All of us will have better input as we go through the second quarter, I think. We'll have a lot more transparency on telling the direction. The first quarter pretty much is history.

What's going to happen on a prospective basis? I think each company is approaching it to whatever way and to the extent of their own capacity. The markets continue to be difficult. They continue to be very, very competitive. And we are very focused on executing the most efficient structure in light of today's market.

I think we will have better transparency here in a couple of months. But right now, we're all waiting for spring selling season. Notice I said, "Waiting."

We do have a question from the line of Alan Rettner -- Gellmann & Associates.

Good morning, guys. I have a quick question about your reduction in inventory, as it relates to community count. If I look back at your community count versus the peak, it's down about 15% or so -- whereas your lot count is down roughly 70% from the peak.

I'm wondering, is there a period -- looking forward maybe at the end of '08 or '09 -- when that decline in community count catches up, and you're basically faced with a number of communities coming offline? And not enough projects in the pipeline to replace them?

I think that there is going to come a period when the community count will start to decline at an accelerated pace. With the lower levels of orders that we've experienced and the lower levels of closings, it has I think prolonged the lives of a number of communities. We're not adding a lot of new communities right now, because we aren't buying a lot of new lots.

Now the presumption that that means that we don't have enough to replace them -- I think that's not really the objective right now. Our objective is to bring the community count down. And to look for opportunities at the right time and place to grow it. Which is not now.

But we will do that. We will handle that growth strategically. You'll see it come through. And it will lag a bit behind what you will see, probably first in our public filings -- since we do disclose a great deal of information.

You'll see, "Lots under Option," growth. You'll see "Lots Owned," growth. Followed by that, you'll see community count move up.

Gotcha. I can certainly understand the patience with regard to entering the land market. Are you prepared basically to wait a period of time, looking forward, where probably your market share in certain markets dips below where you've historically run at, as you kind of replenish? Talking about that lag, do you expect that share to dip down, temporarily?

I expect our market share probably to dip up -- not down.

Okay. All right. Thank you.

I have a question from the line of Jay McCandless, FTN Midwest. Please go ahead.

Hi. Good morning. I wanted to follow up on the market share question. One of your competitors calls just finished. They discussed how they were seeing smaller competitors in their markets begin to disappear. They felt like that should increase their share, going forward. Are you seeing the same things in your markets?

I think it's pretty much across the country. When builders' construction loans are higher than their net proceeds, as they liquidate their inventories, whether it's standing inventory of completed homes -- or even land -- they're faced with the situation of either coming with cash to pay off the construction loan, or the bank agreeing to a short payoff -- even for the builder.

Everyone thinks of short payoffs on foreclosed homes, but we're now entering a period of time when there are short payoffs for just regular construction loans for just regular builders.

One of the things that the financial markets are just now focusing on -- this massive number of losses that the banking industry has taken has really been on securities versus the actual loss incurred on real estate lending. And as that begins to percolate up from the land cost -- by foreclosures and deficiencies and other problems not only in the residential market, but in the commercial market -- you're going to see a complete change. I will get to the answer. That change effects a lender's broadly defined attitude toward real estate lending.

So if they happen to have a few clients that get away on a reasonable basis as a general statement -- whether it's the largest banks in the country or the regionals or the local banks -- we read a lot about the need for capitalization. The one thing I think is clear -- they're not going to put new liquidity back into the real estate lending for some period of time. Which is a normal cycle, which has happened many times in the past.

So if another builder has commented that they expect their market share to increase, I think that is probably reasonable. Because a substantial number of the private builders -- and maybe even some of the public builders -- it will be a complete adjustment period that will, substantially -- especially at the beginning of the turn -- reduce the availability of competition to be in the marketplace.

That will be something special for those that have been able to navigate through these difficult times.

Okay. And then if I could take it a step further. Has the situation that you've described that's occurring right now -- has it increased or decreased MDC's buying power and bargaining ability when you go to your lumber suppliers -- your shingle suppliers -- your subs? How is that relationship developing? And are things improving for you on that front?

Yes. They are.

Okay. And then my final question is if we should expect declining impairments going forward, should we also expect fewer or new deferred tax-asset valuation allowances going forward as well? Or do those two not have that relationship?

It's not necessarily a direct relationship. What you're seeing is the effect of maximizing the carry-back benefit, with respect to 2006. That's what's creating the additional impairment. Or the valuation allowance this year.

And by the way -- we did not say that impairments will continue to decline. All we're saying is that the assets to which impairments were applied are on a substantial declining curve.

Whether it's impairments in the future, or whether it is operating losses, the net effect of what you're seeing is that there is no further carry-back capacity for that. And therefore, the tax benefits associated with those losses -- whether they're related to impairments or operating losses -- will have a valuation allowance against it. Against the tax benefit.

Thank you.

We have a question from the line of Alex Barron, Agency Trading Group. Please go ahead.

Yes. Thanks for taking my follow-up.

I guess I've noticed that -- it seems like the bulk of your impairments have come from the West Division. I'm just kind of curious as to how we explain why there haven't been greater impairments in Florida and mid-Atlantic, given that those markets seem to be under similar pressure?

Well, I think a couple of things. Our investments and assets. If you look at it, we do lay this out in the 10K pretty explicitly. Our investment in land in those markets. You'll see that our investment in Florida is relatively nominal. Our investment in mid-Atlantic, while it's been substantial, we've also seen the level of price declines have not been as dramatic in that market as we've seen in the West. We had not necessarily seen the level of run-up as dramatic.

But still, the level of investments are heavily weighted to Nevada, Arizona and California. That's why we've seen the greatest number of impairments there.

All right. Thanks.

The final question comes from the line of Timothy Jones, Wasserman & Associates. Please go ahead. One moment.

The recent -- or let's say you had a question about the difference of earlier this year and now. One, I think the freezing up of mortgages by the banks. And they're really tightening up everybody. Retailers and everybody.

How much of an effect is that having on your business?

Tim, it's hard to tell what the direct line would be.

Secondly, have you gotten any benefit from the recent raising of the limits for government borrowing? Or have you taken advantage of that in some of your higher-priced markets?

Yes. We have.

We have, Tim. We've seen an increase in loans. Not only lots top-line, but closings -- where we've had mortgages for people who would not have previously qualified under the old limits.

Other than California and Washington, DC, any other markets you're doing it in?

It's been prevalent in -- those are the two big ones, obviously. But I think it's affected positively most of our markets.

Okay. Thank you.

There are no further questions at this time.

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