In a market where every major home builder is struggling with harsh economic realities, M.D.C. Holdings CFO Gary Reece yesterday described his company as well positioned to take advantage of the market recovery, when it arrives. M.D.C. builds homes as Richmond American and also runs a mortgage finance company (HomeAmerican) and a company to supply escrow services, title insurance, and homeowners insurance (American Home). Reece, who is scheduled to step down at the end of June after 18 years with the company, told analysts and investors at the J.P. Morgan third annual Basics and Industrials Conference in New York that M.D.C. has maintained a strong cash position and a relatively short land position through the current downturn, while aggressively cutting general expenses by shrinking its employee head count from more than 4,000 to around 1,800. "We run our company as an investment-grade company," said Reece, "and we are proud of the fact that we have that investment-grade rating with all three rating agencies today."
Keeping a handle on land commitments is a primary focus of that effort, said Reece. From a high of 300 active communities, said Reece, M.D.C is now down to just 260 active communities in 13 states and has kept its land investments lean, helping to rein in the kind of impairment charges that have plagued many builders in the current downturn. "We consider land as a raw material in our home building process," explained Reece. "So we like to buy it like a raw material. We buy it just in time, as much as we can." The cautious approach to land acquisition is a key reason for the strong condition of the company's balance sheet presently, said Reece: "We try to keep our land supply very low. We have a rule of keeping our land at about a two-year supply-not only broadly speaking as a company, but when we look at individual divisions or even individual communities. We like to, from the first closing to the last, be in and out in two years or less." The company has bought very little land since 2005, he reported, and all land purchases-even individual lot take-downs-go through a rigorous process of management review. The roughly 10,000 lots the company currently owns, he said, are mostly fully developed and don't represent a future expense for developing before building can happen. "And our land has dropped to just about a third of our equity, where most of our competitors, on average, their land is roughly equal to their equity."
And although M.D.C. has posted losses in recent quarters, Reece noted, the company has been able to generate positive cash flow at the same time. "We have had seven consecutive quarters of positive cash flow," he reported, including in the first quarter of 2008. "Over the last 12 months we have generated almost $700 million of positive cash flow," leading to a balance at the end of the last quarter of nearly $1.2 billion, he said. Combined with the company's $1.2 billion unsecured line of credit, that gives M.D.C. access to $2.4 billion of ready liquidity. And the company's cash amounts to 120 percent of its debt, compared to an average among competitors of just 54 percent, he said. "We are cash positive today, with our cash being 20 percent higher than our outstanding debt." (M.D.C.'s strong cash position impressed J.P. Morgan analyst Mike Rehaut, who commented, "They're the only name in my universe who can boast that.")
On the operating side, Reece emphasized several strategies, including a sales effort focused around the company's innovative "Home Gallery," which allows potential buyers to customize units to their personal preferences and a push for a high-quality "customer experience," in which community manager bonuses are tied to third-party rating surveys of customer satisfaction. In addition, said Reece, the company is working to "un-bundle" labor and materials costs in order to gain more control over home construction costs.
And with land and inventory issues under firm control, Reece argued, Richmond American is well poised to concentrate on those production values, without the distraction of overcoming balance-sheet difficulties. "We don't have any sideshows to be concerned about, so we are able to focus our efforts on building a better company for the turnaround," he said. "We are in a better position to grow faster and more efficiently when the market starts to turn. And we have a team of people that are focused on looking at operating efficiencies, looking at our processes, looking at best practices, to build a platform from which we can grow our company when the market starts to turn around."