MDC
#Thank you.
In 2017, we're celebrating 40 years in the homebuilding industry.
We have delivered more than 190,000 homes since we started in 1977.
As we recognize this anniversary, we are pleased to announced a strong start to the year with first quarter net income reaching $22.2 million or $0.43 per share, which was more than double the level from the same quarter a year ago.
The robust income growth was driven by a 43% improvement in the top line results of our homebuilding operations based on increased home deliveries.
This allowed us to achieve significant gains in operating leverage as well as 350 basis points of improvement to our last 12-month return on equity.
Throughout much of the past 3 years, we saw a downward trend in our backlog conversion rate because of our increased focus on build-to-order production model and decreased labor availability.
However, in the first quarter, we saw backlog conversions improve year-over-year for the first time in 11 quarters.
Though we continue to battle elevated cycle times in many markets, this achievement is a promising sign as we look forward to the rest of 2017.
As our company grows, our balance sheet remains a top priority.
We continue to operate with a unique combination of low leverage, carefully managed exposure to homebuilding assets and liquidity of nearly $1 billion.
Just last month, we were pleased to see the strength of our financial position publicly recognized by Standard & Poor's, which upgraded our rating outlook.
With both our operating results and our financial position showing signs of strength, we continue to have the confidence to reward shareholders with a strong dividend, unsurpassed in the industry in both yield and consistency of payment.
Our new affordable product offering continues to be well received by buyers.
The Seasons series is targeted towards a first-time homebuyer who has often been priced out of the current market and is steadily becoming a more significant part of our unit orders and closing volume.
We believe that part of the appeal of the Seasons series is that we provide the buyer with personalization opportunities that are often not available at this relatively low price.
Based in part on our more affordable offerings and a solid macroeconomic environment, the 2017 spring selling season has started off strong.
We continue to experience growth in our monthly sales absorption pace, which reached a 10-year high in the 2017 first quarter.
The improved demand across most of our markets has given us confidence to reinvest capital into new homebuilding projects.
This is evidenced by a sizable year-over-year increase in the number of new lots we acquired and approved in the first quarter.
We believe that the industry remains poised for continued market strength as the spring selling season draws to a close in the second quarter.
Some uncertainties remain, such as the impact of potential policy changes adopted by the new administration.
However, given our financial ---+ our strong financial performance in the first quarter, we remain optimistic for the top and bottom line growth for 2017's full year.
I want to thank our employees, board members, trades and financial partners, both past and present, for what they have done to make M.
D.
C.
a successful homebuilder over the past 40 years.
I will now turn the call over to Bob <UNK> for more specific financial highlights of the 2017 first quarter.
Bob.
Thank you, <UNK>.
Our home sale revenues increased 43% from the prior year to $563 million, primarily due to a 38% increase in closings.
We achieved our highest number of first quarter closings in 10 years, with the improvement mostly explained by a 24% increase in our beginning backlog.
Also, our first quarter backlog conversion rate was up year-over-year from 39% to 44%.
The increase was driven primarily by the stabilization of our overall construction cycle time, led by year-over-year improvements in Colorado and California, which together comprised half of our beginning backlog.
However, the improvements in these 2 markets were offset by higher construction cycle times in other markets.
The year-over-year increase in our conversion rate was the first we have seen in 11 quarters, and it exceeded our expectations.
While this is encouraging, cycle times continue to be at elevated levels in many of our large markets.
As a result, we believe there is risk for volatility in our backlog conversion rate.
So as we look forward to the second quarter, we believe a reasonable goal for our backlog conversion rate is 40%, just shy of the rate we experienced in the second quarter of 2016.
Our average selling price for the quarter of $449,000 was up a modest 3% year-over-year.
The increase would have been more significant with our Seasons product, which comprised about 5% of closings during the first quarter of 2017.
In the same quarter of last year, we did not close any Seasons homes.
Our gross margin from home sales percentage was down year-over-year from 16.3% to 15.9%.
The 2017 first quarter included $4.9 million of inventory impairment while our 2016 first quarter included $3 million of expense to adjust our warranty accrual.
The $4.9 million of impairment we took during the quarter related to 2 assets, one each in Southern California and South Florida.
We were pleased to see improved operating leverage for the quarter as our SG&A rate fell by 250 basis points from 14.3% to 11.8%, due in large part to our significant year-over-year increase in home sale revenues.
Our total dollar SG&A expense was up for the quarter, driven by a $6 million increase in commissions and a $3.1 million increase in marketing.
These increases were primarily due to the growth in our closings unit volume and home sale revenues.
The dollar value of our orders increased 3% year-over-year to $750 million.
The increase was almost entirely due to a 3% increase year-over-year in the number of units, which was driven by an 8% increase in our absorption rate to 3.5.
This was our highest first quarter absorption rate since 2006.
Our Seasons collection accounted for roughly 8% of total orders for the quarter, up 300 basis points sequentially and 600 basis points year-over-year.
The rollout of this product continues to be a key focus for the company.
However, as I noted last quarter, the increase in unit volume will be gradual as many of the communities we have recently purchased for the Seasons product need to be completed through development activities and community setup procedures during the coming quarters.
We ended the year with an estimated sales value for our homes in backlog of $1.59 billion, which was up 11% year-over-year.
The increase was mostly the result of an 8% increase in the number of units in backlog to 3,324 homes.
While we are optimistic about the backlog driving a year-over-year increase in closings for the second quarter, our optimism is somewhat tempered by risks with regard to our cycle times, which remained elevated in many of our markets across the country.
Our cancellation rate was flat year-over-year at 18% for both the 2017 and 2016 first quarters.
As a percentage of beginning backlog, our cancellation rate was down 200 basis points year-over-year to 13%.
Active subdivision count decreased to 160 at the end of the 2017 first quarter from 169 a year ago.
To end the quarter, we had roughly 14 fewer subdivisions in the category we call "soon to be active" than in the "soon to be inactive" category.
In other words, we continue to be a little heavier on subdivisions that are on the verge of sellout relative to those that are just opening.
That tells us that our active subdivisions\
Yes.
The East Coast and particularly in the Mid-Atlantic, that's one area we talked about as not having seen as good returns as we would have liked to have seen over the past couple of years, and that's really the reason why we haven't invested as much in that particular area.
It's still ---+ the Mid-Atlantic region is still an area that we're committed to, and we continue to look for opportunities in that market to invest in.
Well, we always try to look for communities that have finished lots.
We do that across product spectrums, and to the extent that we find those, that might accelerate what we're able to do.
But development inherently is a tricky thing.
We try to predict how it's going to go.
It doesn't always work out as we want it to.
So that's why we don't put too fine a point on exactly where the level of Seasons activity will be in the future.
I think what I would say for our gross margins is we've seen stability over the last 8 quarters.
There's really only been 70 basis points separating the high from the low.
I made a similar type of disclosure last quarter.
I think what you saw in the first quarter, we don't really have much kind of expense, if you will, sitting in ---+ rolling through our gross profit margins.
In other words, there are some other builders who run expense through their cost of goods sold regardless of what closings are rolling through.
Most of our expenses is directly tied to the closings.
So I don't know that you get as much of kind of a seasonal bump for us, as you referred to.
So for us, when we look at 20 basis points sequentially or 10 basis points year-over-year, it's really a nonevent, and really the name of the game for us is stable gross profit margins.
It was 2 assets actually.
The smaller impairment was an asset in South Florida, and the other asset was in our Southern California market.
And those assets, both of them, I don't know if I know the exact year.
But I think the Florida one was probably right around 2012.
The California one was probably right around 2013.
So it's a couple of years old.
And of course, for us, being a shorter land supply builder, we're always buying land at somewhat real time.
The first question, I guess, on community count.
I know that you'd indicated last quarter that you expected it to be down slightly year-over-year in the first half of '17.
And if I heard you correctly, it may be down a little bit more in the second quarter than you had previously thought.
But can you give us any thoughts on the back half of the year and how we should be thinking kind of, of an exit rate.
Yes.
I mean, it's tough to predict what's going to happen in the second half of the year, so we're always cautious about what we say on it.
But given where we've talked about being for the first half of the year, I think it's reasonable for us to have a goal to get back to where we were to start the year by the end of the year.
So that's where we're focused on.
Certainly, if we see, as we did in the first quarter, increased absorption rates, you can still do more with less, and that was the case in the first quarter.
And that's really what's most important to us, is the efficiency of the subdivisions that we do have.
Okay.
Yes, that's helpful, Bob.
And then, I guess, the second question would be on order ASP.
It looks like it was down a little bit sequentially and year-over-year.
Just curious how much of that maybe is attributable to mix from the Seasons brand.
Yes.
I think, given that 8% of our orders were attributable to Seasons, I believe that was up 300 basis points sequentially and 600 basis points year-over-year, so there certainly was an impact.
I don't know if I have the exact number, but I think it could have been as much as, say, $10,000, the difference between the 2, if you didn't have Seasons in the equation.
I mean, there's always a risk.
I think we like the position that we're in right now simply because we do have new product that we've put online.
We've got to focus on that new product that seems to be performing well.
So that works in our favor, but it's really hard for us to predict exactly what happens in the second quarter or really any period of time with regard to orders.
Absorptions.
Absorptions were flat year-over-year.
1.
5, that sounds like a pretty low figure.
But we talked about a 2- to 3-year supply of land, so 2.8 is well within that range and something we're very comfortable with.
I think the impact of the state NOLs was roughly 420 basis points, somewhere right in there, and the impact of the lack of energy credits was about 85 basis points.
So collectively, you've got 400 ---+ or 500 basis points worth of downward pressure there, kind of rising ---+ increasing it from what was 30% to over 38%.
So I think you would expect that delta to come out to some degree for the state NOLs.
We're still, of course, not going to have ---+ well, it remains to be seen what happens with the energy credit.
Unless the federal government does something about that, we're not going to see that benefit come back online for us.
Yes.
I think we had a couple of things that happened during the first quarter.
First of all, the increases that we do ---+ the annual increases in salaries come across in part in the first quarter, so you've got some of that rolling through there.
We also had a contribution to our foundation that rolled through that number as well.
I think what you saw in the first quarter, that's ---+ it's probably as good a run rate as any going forward that you could look at right now.
There is risk to that obviously.
To the extent that we have to change accruals, you could see that number increase or decrease.
And we also have ---+ you mentioned the stock option expense.
We do have something called performance share units.
And the way we expense those, without getting too technical, it's really a quarter-by-quarter assessment as to where you're at and the probability of those actually vesting, and that could cause some volatility in the number as well.
But I can't peg you to a number because it's really something that depends on where we're at, at the end of each quarter.
Yes.
That's a lot of questions.
I'll try to make sure I get them all.
First of all, we're not really tweaking our build-to-order policy for Seasons.
In fact, we think it's one of the distinguishing characteristics in our first-time product versus some of our competition, is the fact that we do still allow customization to some degree in our Seasons product.
So we think that's something that's special and something that we're going to continue to have.
So that's one.
In terms of gross profit margins, I think we're seeing roughly the same gross profit margins on Seasons versus other product.
It kind of depends where it is.
In cases where you're building it where previously you built larger product, that might be different because the lots weren't actually purchased for the Seasons, but the benefit you get is increased velocity.
So there's that factor.
As far as the cycle times go, it is significantly better, as you might expect, especially in Colorado.
In Colorado, you typically build a basement, but for Seasons, you don't build a basement.
So looking at ---+ and order of magnitude, you're probably talking about 30% lower cycle times for Seasons versus more traditional product in Colorado.
In other markets, it's not quite as dramatic of an improvement, but Colorado is one of the bigger places where we've built it thus far.
Of the 160 that we had at the end of the quarter, roughly 6% was Seasons.
Yes.
I think we don't always think about working capital the same way other companies might think about it.
Really, kind of capital and cash flow surrounds inventory levels.
We did purchase a little bit more inventory this quarter than we did a year ago, in fact, quite a bit more this quarter than a year ago.
And we would expect, if business remains strong, that we'll continue to increase our inventories so that we can make possible growth, top line, for our company in the future.
So that's really what's going to hinge on our capital concerns, is the inventories.
It's really not ---+ it's hard to predict exactly when the timing of the cash flows occur because you have delays in developments or you have delays in ---+ even if we're not doing the development, we may see that one of our sellers is delayed in delivering lots because they haven't been able to do the development as quickly as they would like to.
So there ---+ it's really a timing game, but we see the trajectory overall of investment in inventory going up, unless we see a substantial change in the market.
Great.
Thank you very much to everyone for being on the call, and we look forward to having you again on our second quarter earnings conference call.
