M.D.C. Holdings had a first quarter that was nearly exactly what analysts were expecting. During the quarter, management kept the company's per share loss of $0.43, or $19.9 million, relatively flat year over year; worked to grow its topline by increasing its community count by 23% from last year; and reduced its overhead costs by reducing its workforce by 5% during the quarter. However, analysts were still unimpressed by the company's margins, which were at 16% excluding warranty and interest costs, as they threatened to delay the company's return to profitability. (For full earnings results, click here.)

The issue is that M.D.C. has been one of the more aggressive players in the land market since 2009, buying up finished lots in new communities. In the first quarter alone, the company saw a 23% year-over-year jump in actively selling communities. It also has 60 more new communities waiting in the wings, about to transition to active status. Most of the company's peers have seen marked improvement in margins on their new communities versus legacy communities as they've been able to buy land at a lower cost base and build product more efficiently.

However, the same story line hasn't exactly held true at M.D.C. While the company has transitioned quickly to a higher mix of closings coming from their new communities--54% of the company's closings during the quarter were from new communities--its adjusted gross margins have declined significantly in the past year from 21.9% in 1Q2010. Moreover, management seemed to suggest that barring any significant declines in the housing market going forward, its margins were more or less going to stay put at their current levels.

Executives blamed the margin underperformance on two things: higher land costs and more spec sales. CEO Larry Mizel said the land market had gotten very competitive, as more potential buyers jockeyed for a dwindling number of finished lots in truly desirable locations. In fact, he noted that land costs as compared with revenue were up 400 basis points, which put lot costs roughly in line with the company's historical cost figures. He also said he didn't expect prices to begin to cave any time soon. "Land sellers of 'A' lots haven't read the news reports lately," he joked, referring to the industry's slow sales pace during the spring selling season.

At the same time that land costs were climbing, the company was getting most of its volume from less profitable spec sales. Overall unsold inventory was down 39% year over year, from 1,099 spec homes to 674, during the quarter, but specs were making up a bigger percentage of closings. Whereas specs accounted for 57% of closings in 1Q2010, they made up 73% of closings in 1Q2011.

However, analysts still struggled with this explanation, as they expected just an overall improvement in margins on new communities to offset much of the margin degradation attributed to the higher mix of spec sales. Rather, they suspected that perhaps the management team was underwriting its land purchases to lower margin levels than peers. Mizel was reluctant to provide additional detail on the company's underwriting, replying with, "You'll judge us better a year from now looking backward versus while we're in the middle of what we're doing."

Mizel did tell analysts the company was working on redesigning product again, after its most recently redesigned product from a few years back had missed the market in a number of respects. He said the company's new product had a 350 basis point pickup and offered buyers in today's market a competitive value. Rather than focus on absolute price, the company was selling to buyers on a per square foot basis, meaning it was positioning itself in the landscape to offer buyers more house for less cost per square foot. Although accessing mortgage financing was still proving to be a big challenge, he said the value proposition was striking a chord with more move-up buyers.

But given the company's weak margins, analysts pressed executives to provide some timeline of when the company could make it back into the black. Mizel refrained from doing so, saying, "We could get profitability quicker if were insensitive to the economic integrity of the enterprise," and assuring analysts that the company remained "on track and fully focused" on that goal.