Management at M.D.C Holdings likes to think that August was it, the absolute lowest point for the housing market.
"If it's the low point of the cycle, then over the next few years, there will be rewards for those companies that are able to execute in what we hope will be an expanding market, CEO Larry Mizel told analysts Friday during the company's third-quarter earnings call.
The idea that the worst is over might help absolve a bit of the pain of the company's $0.22 a share loss for its third quarter which beat analyst consensus of a $0.31 a share loss. It's also a significant improvement from the $0.69 a share it lost in the same quarter last year.
Unlike many of the public builders who have reported third quarter results so far, M.D.C., which builds under the Richmond American name, was able to increase closings by 10%, to 722 homes from 659 in the third quarter of '09. Revenue, too, was up by 11%.
The route to recovery lies in increasing revenue and growing community count rather than cutting more costs, management said during the call.
The company's orders for the quarter, which were 796 compared to 1,114 last year's same quarter, might have been worse had it not been for a major sales promotion it ran in September after both July and August provided sales that were lackluster at best. That sale doubled September orders compared with July and August. It featured an interest rate just north of 3% that the company had bought down for buyers and came at the expense of higher Realtor commissions and some pricing concessions.
"That is what allowed us to have a 20% decline in orders compared to nearly 40, said Christopher Anderson, the company's CFO.
Other builders who have reported third-quarter earnings have said they were holding the line on price concessions saying they didn't think lowering prices would increase demand.
Other builders have also been reporting significantly higher margins in the new communities they are opening compared to their legacy land. M.D.C.'s Anderson, however, said that company's new communities' margins are similar to that of its older ones.
M.D.C. managed to increase its community count for the first time since the third quarter of '07. Its active community count grew to 142, up from 137. It now has secured control of 184 communities total, including 27 in the third quarter alone. The company's lot supply increased 39% year-over-year to nearly 12,000 and most of that growth was made by optioning rather than buying the lots outright.
Mizel said there are option opportunities available now because the land market has softened a bit more, making the practice of value to the land seller as well as the buyer.
"The options really are a value to the land holder," Mizel said. "The builder is able to reduce exposure on each of these individual assets and the seller is able to get someone in there to start creating velocity. We all know that velocity is the secret to making something profitable. So I would say that the land option opportunity has come into the market because of the weakness out there.
Staffing the new communities have started to cost M.D.C. extra. The company spent $5 million more for increased head count to create and staff the new communities.
With $1.6 million in cash and investments on hand, exceeding company debt by more than $350 million, Mizel expects to continue looking for search for more land opportunities. "I think you should expect us to be in the market every day he said. "There are opportunities every day in different parts of the country and we have active deal flow and we will continue to go through those opportunities that are presented to us and hope to see everything that is out there in order to transact at those levels that we think are appropriate for market conditions."