MDC
#Thank you.
Good morning, ladies and gentlemen, and welcome to M.
D.
C.
Holdings' 2015 first quarter earnings conference call.
On the call with me today I have <UNK> <UNK>, Chairman and Chief Executive Officer, and <UNK> <UNK>, Chief Financial Officer.
At this time, all participants are in a listen-only mode.
After finishing our prepared remarks, 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.
Before turning to the call over to <UNK>, it should be noted that certain statements made during this conference call, including those related to M.
's business, financial condition, results of operation, cash flows, strategies, and prospects, 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 first quarter 2015 Form 10-Q, which is scheduled to be filed with the SEC today.
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 is posted on our website with our webcast slides.
And now, I will turn the call over to Mr.
<UNK> for his opening remarks.
<UNK>.
Thank you.
We were pleased to see a solid start in the Spring selling season in the first quarter of 2015.
We saw evidence of improving market conditions in our operating results, and as our net home orders increased 29% year-over-year.
Importantly, unlike the preceding three quarters, the increase was driven primary by a jump in the rate of orders per active subdivision, providing evidence of improved market demand to start the year.
The improvement appears to be supported by more consistently positive employment and consumer confidence data, which gives us some encouragement that the demand we have seen may be sustainable.
Thus far, we have not experienced a significant impact from issues we identified as potential headwinds on our last call, such as falling energy prices, global economic instability, or mortgage availability; however, we are also mindful of the potential for continued market volatility, given the unpredictable nature of the overall economy and the homebuilding market in recent years.
During the quarter, we generated net income of $8.4 million, or $0.17 per share, as was the case in 2014.
Increased land and construction costs negatively impacted our gross margin.
Additionally, our margins were adversely impacted by the elevated incentives used to decrease our inventory of aged specs.
However, largely by offering these additional incentives, we succeeded in reducing our spec inventory by almost 40% year-over-year, consistent with the spec reduction objective we outlined in prior quarters.
We believe that this action was an important step for us in driving future margin improvement.
We continued to generate operating leverage by managing our selling and overhead expenses and growing our top line results.
For the fourth consecutive quarter, our selling, general and administrative expense relative to home sales revenues decreased year-over-year, partially offset our decrease in gross margins.
This was largely a result of the 18% increase in our home sale revenues, which was our biggest year-over-year improvement since late 2013.
With the sales value of our backlog up 46% from a year ago, we have the opportunity for continued top line growth in 2015.
In addition, we have a strong supply of lots controlled, as well as a sizeable number of new projects under consideration in our pipeline, which can help us drive growth longer term.
At the end of the quarter, our financial position remains strong.
After making opportunistic adjustments to our capital structure in 2014, we continue to have one of the strongest balance sheets in the industry, with low leverage, a manageable lot supply and strong liquidity.
As the cycle evolves, we are eager to put these resources to use for the benefit of our shareholders.
Thank you for your interest and attention.
I will now turn the call over to <UNK> <UNK> for more specific financial highlights of 2015 first quarter.
Thank you, <UNK>.
We delivered 909 new homes during the quarter, versus 873 in the prior year.
The higher delivery level was driven primarily by a higher beginning backlog as compared to the prior year period.
Our spec deliveries for the first quarter were 58%; however, we expect our spec deliveries as a percentage of our total deliveries to transition down over the back half of the year, consistent with our strategy to reduce our speculative inventory levels.
Our first quarter backlog conversion rate came in at 60%, which was slightly higher than the guidance we provided last quarter.
Looking forward, we expect our second quarter backlog conversion rate to be in the low 50% range, as a result of the lower percentage of beginning backlog we had under construction to start the quarter, coupled with a lower level of available spec inventory.
This expected conversion rate is more in line with our historical long-term average and is influenced by our shift to a higher proportion of dirt sales.
Our first quarter home sale revenues were up 18% year-over-year, to $377 million, due to a 14% higher average selling price and a 4% increase in deliveries.
Our average home price was up nearly $50,000 per home, to $415,000, and was primarily the result of a mix shift to higher priced sub markets.
Year-over-year, all of our divisions experienced increases in our average home price, with the Mountain and West segments experiencing the most significant increases at 20% and 14%, respectively.
Our gross margin from home sales, excluding impairments, was 15.5%, down 100 basis points from the 2014 fourth quarter and down 300 basis points as compared to the 2014 first quarter.
The sequential decline in our gross margin was primarily driven by higher incentives utilized to reduce our speculative inventory, particularly our more aged units, combined with a higher proportion of specs delivered during the quarter as compared to the 2014 fourth quarter.
The year-over-year decline in gross margin was also impacted by the use of higher incentives to reduce our spec inventory, combined with higher land and construction costs.
Our estimated gross margin in backlog moved slightly higher on a sequential basis.
We believe that this slight improvement, along with the decrease in our spec inventory levels, are positive steps towards increasing our gross margins over time.
However, second quarter margins could be different from our backlog average, depending on the mix.
On the SG&A and operating leverage front, our homebuilding SG&A expense rate improved 180 basis points from the prior year, to 13.4%.
The year-over-year improvement in our SG&A rate was driven by an 18% increase in home sale revenues, coupled with lower compensation and legal expenses.
The year-over-year absolute decrease in G&A expenses was more than offset by increased marketing spend related to supporting a higher average active community count during the quarter and higher absolute commissions expense due to increased revenues.
As a percentage of home sale revenues, our commissions were down slightly to 3.3%, versus 3.4% in the prior year.
Our net new orders were up 29% over the prior year, which represented our fourth consecutive quarter of year-over-year order growth and our highest first quarter order level since 2007.
Our order growth was driven by stronger demand in most of our markets as compared to the prior year, which resulted in an 18% increase in our monthly sales absorption pace to 3.2 sales per community, versus 2.7 per community in the year-ago period.
Our unit growth was also aided by a 10% increase in our average active community count.
Our orders improved with each month throughout the quarter, and on a sequential basis, our net new orders were up 80%, which was more than the Company's 15-year historical average of 69%.
With respect to the dollar value of our orders, it was up 43% year-over-year, to $667 million, which was aided by the unit increase combined with an 11% increase in our average order price, to $418,000.
The higher average order home price was largely due to a mix shift to higher priced communities and sub markets and, to a lesser extent, price increases.
From a regional perspective, we experienced the most strength in our Nevada, Colorado and California operations, with monthly sales absorption rates of 5.3, 3.8 and 3.8, respectively, for the quarter.
These also were the divisions where we had the most pricing power during the quarter.
As a result of the higher order activity achieved over the last several quarters, our homes in backlog were up 36% on a unit basis, to 2,203 homes with a backlog value of $953 million, up 46% year-over-year.
We believe the higher community count and backlog levels position us well for improved results for the remainder of 2015.
With respect to our spec inventory, we have made significant progress in reducing our speculative homes over the last several quarters.
Our specs were down 479 units, or 39% year-over-year, to 745 units.
And on a per community basis, our specs were down 42% year-over-year, to 4.5 specs per community versus 7.8 a year ago.
We believe that carrying lower spec levels at each of our communities will assist us in improving our gross margins going forward, as spec homes currently produce lower gross margins than our dirt starts.
Our ending active community count was up 6% over the prior year, at 166 communities.
And while new community openings and project close outs can be somewhat volatile, we expect to see our year-end community count to be up somewhere in the range of 5% to 10% as compared to the end of 2014.
During the quarter, we acquired 867 lots and spent approximately $110 million on land and development costs.
At the end of the quarter, we owned or controlled approximately 14,600 lots, which represented about a 3.3 year supply in a trailing 12 month delivery basis.
And with respect to our liquidity and balance sheet, we ended the quarter with approximately $825 million in liquidity, which consisted primarily of $290 million in cash and marketable securities and approximately $525 million in availability under our revolving credit facility.
And our homebuilding net debt-to-capital ratio was 31.7%, one of the lowest in the industry, and it provides us with flexibility with respect to future land acquisition opportunities.
And at this time, we'd like to open up the call for questions.
Well, I think that what we're doing is subdivision market specific, taking our older inventory, kind of like the retail business, you've got to get rid of the old stuff to make room for the new stuff.
And the dirt starts have more gross profit potential than some of the older inventory, and so we're very focused in culling out seasoned product.
And as I said at the beginning, it's subdivision by subdivision and market by market.
In the markets that are more robust, like Colorado, Nevada, and California, we're taking advantage of that; and those that are less, such as Phoenix and the Mid Atlantic and Jacksonville and Utah, they give us more of an opportunity to work through a product with any seasoning.
So we've done it carefully, and that's your answer.
What it was, <UNK> ---+ I get it.
It's really relative to where we were last quarter.
End of the fourth quarter, our margins in backlog did move up and.
As we referenced last quarter, it was comparable to what we delivered in the fourth quarter last year, when we made that comment ---+ last quarter, I should say.
Does that make sense.
You're excluding interest, correct.
Without giving the number, which we really aren't going to do.
But what I did say last quarter was it was comparable, <UNK>, to what we delivered in the fourth quarter.
And what I've said this quarter is it's up sequentially slightly from where we ended the fourth quarter.
So again, I think with the clearing out of some of this spec inventory, it really has provided an opportunity for us to improve our margins as we move forward.
Now having said that, from a Q2 perspective, <UNK>, the mix, depending on the mix of what we deliver in Q2, including the number of specs we sell and close within the quarter, along with any geographic influences will ultimately impact what we realize on a more immediate term basis.
I said comparable.
Well, I think you're kind of heading down the right path.
I think one of the things that we have made some significant progress in clearing out some of these specs, but we still will have some of them flow through over the next couple of quarters.
One of the other things, too, is we expect the differential on the specs versus the dirt to kind of tighten up here, as we have reduced the number we have in each of our communities, because there's obviously fewer and fewer out at each community.
So again, over time we would expect our margins to improve relative to what we delivered in the first quarter.
Yes.
In the fourth quarter, it was about 51%, Mike.
And again, with the higher percentage of our orders more recently being dirts, we would expect that to migrate down over really the back half of the year.
I'd say Q3 and Q4 would be more pronounced.
I'm not sure it would be as elevated as Q1.
But again, it will take a little time to deliver some more of these specs that we did sell during the first quarter, as well.
Because on the orders front, about 64% of what we took in orders during the first quarter were dirts this year, versus like Q4 was 55%, Q3 was 49%, and Q2 of last year was 54%.
So it gives you an idea that we did obviously sell a lot more dirts.
So over time, as we transition through the specs, there's an opportunity to see that improve.
I think during the first quarter, we did get a little bit more leverage there.
Again, it's more market by market.
And obviously, the markets where we've had, as <UNK> alluded to, more demand and higher pace, we've had the ability to layer in some price increases to offset some of those higher land costs, as well as incremental construction cost increases.
But obviously, you look at certain markets where you've seen more demand, obviously there's going to be more pressure on labor and pricing, from that standpoint.
But we think that we've seen a little more leverage during the first quarter here, and we'll see as we move through the Spring and the Summer how that plays out.
Yes, <UNK>, you're correct.
It does come a little bit later in the year, Q3, Q4.
Obviously, we have a lot of communities that we control that we haven't quite started.
So it doesn't fall into this category as soon to be active, but it will be more back half in terms of the community count increases.
I would say first of all, our incentives on a sequential basis were up about 70 basis points.
And like we've mentioned a number of times on this call, they were utilized to move more of the older spec inventory.
So that was probably the biggest driver on a sequential basis.
On a year-over-year basis, we had higher land costs, as well as construction costs.
But I'd say the largest, it was probably split between incentives and direct and land costs equally on a year-over-year basis, <UNK>.
We haven't really changed our underwriting standards in terms of what we're doing.
I think it's just more opportunities.
Our divisions are obviously out there on a continuous basis looking at opportunities.
And we think we have a pretty nice pipeline of deals we're evaluating currently and we will continue to evaluate.
So nothing big changing on the underwriting front.
Sure.
For the quarter just ended, <UNK>, 64% dirt.
And if we go back to Q4 of 2014, it was 55%, Q3 was 49%, and Q2 of last year was 54%.
We're not building homes to cover overhead.
We're building homes to make a profit.
And the market, I'd think, is stable and we'll manage accordingly.
Hello, <UNK>.
It's <UNK>.
We did talk about what we spent during the quarter.
It was $110 million.
And we did not give a projection for the full year.
About $40 million of it's development and about $70 million of it's land.
I think we're getting a healthy mix of both.
The stronger markets have fewer finished lots.
But with the adequate liquidity we have in running a tight mix between land and sales, as you can see, we're staying in that 3 to 3.5 range, and we'll adjust, according to the sales rate, our land spend.
And that's how we operate and have for decades, and that's how we'll continue to operate.
Yes, Mike, this is <UNK>.
In the first quarter, it was probably about 75% of our communities, our active communities, were able to increase our prices.
And it was probably in the neighborhood of 2% range.
And obviously, as I indicated earlier, it was a lot of those markets, we talked about Colorado, Nevada and California, those were markets where we've seen more robust absorption pace and where we had opportunities to increase pricing.
Our last quarter was probably about a third, and maybe 1% on the increase on those third of those communities.
And I would say if you go back a year ago, it was probably in that same level, about a third of the communities, so we've clearly seen a little more demand as we started the year off.
You're welcome.
The biggest change is the market's better.
No, the end product market is better and the availability of land is still challenging.
For every quality piece of land, there's multiple buyers.
But we believe that over the years, our ability to make a profit off of building and selling the homes versus a land profit has been demonstrated.
And as the builders and some of them have announced that they're going to a shorter land strategy than a longer land, and as the land component equalizes, then the opportunity for execution, the construction and the marketing phase focuses a little bit more in our strengths versus land speculation, which we try not to do.
Well, I think normal in homebuilding is a definition that I'm not sure any of us know.
What we're trying to do is deal with the market as it exists today.
You know, it wasn't too long ago there was a period of time that you could sell a spec for more money than a dirt start.
And then it went back to you could get more for a dirt start than a standing spec.
And as the market turns, and if there's a continued improvement, then you will see the dirt and the specs maybe equalize.
And our guidelines really are market specific, subdivision specific.
And in markets that are robust, you can have more specs because you're able to price them in line or at a premium of a dirt start.
In markets that might continue to be weak, or certainly are underperforming as to other opportunities in the country, then your specs would diminish there, because you don't have an opportunity to get an appropriate gross profit margin.
I wish I could give you a magic number.
What is in the way we've run our business, we tried to change with changing times.
And the times have changed over the last, certainly, I look back to 10 years ago and it's been an interesting period of time.
But I think we're also entering a long period of time that there will be a degree of stability.
And as to how to best leverage our resources into the stability, the advantage of having strong liquidity is we're able to move really in multiple directions at the same time, which ultimately will bring to our shareholders the best results.
And that's what we're focused on.
Great.
Thank you very much.
We appreciate everyone being on the call today and we look forward to speaking with you again following our Q2 results.
