M.D.C. Holdings may be known for its high quality disclosures and the simplicity of its business model, but company executives were rather reserved during an earnings call this morning, leaving analysts with lingering questions about how the Colorado-based company will change its m.o. in the year ahead. In fact, most of the call's dialogue was more focused on 2009 than on the company's $89.0 million, or $1.92 per diluted share, loss for the quarter
Analysts' curiosity was piqued right out of the gate as company chairman and CEO Larry Mizel suggested in his opening remarks that all bets are off in terms of what business philosophy management will follow going forward.
"It's not reasonable to assume we will conduct our business as we have historically," Mizel told analysts, echoing a similar comment made during the previous quarter's earnings call.
During the question and answer period, JPMorgan analyst Michael Rehaut pressed Mizel to elaborate on the statement, asking if the company had plans to partner in some form or fashion with banks looking to maximize the value of some of their distressed assets. His question subtly hinted at a possible partnership with a financial player similar to The Ryland Group's recently formed joint venture with Oaktree Capital to acquire and develop residential properties.
Mizel replied: "Our key focus is on our skill sets, and we have the advantage on a domestic basis to deal with some of the largest financial institutions who have assets that are substantially impaired that at some point will have value. But it takes skill sets. There's a multitude of aggregators of capital who have started entities to acquire distressed assets, finished/unfinished lots, loans, securities--all of them to create ultimate liquidity. They will need someone with the skill sets we have to develop residential assets."
The insinuation that the conservatively managed company could begin to act opportunistically if not aggressively on land, moving it away from its traditional merchant builder model, sparked a flurry of questions regarding the company's acquisition of lots in the Las Vegas market--despite an overall 8% sequential reduction and a 39% year-over-year reduction in lots owned at quarter-end.
"We made a few nominal purchases [in Las Vegas]. Nominal is nominal. One should assume they were compelling as to valuation," Mizel said. Senior vice president and CFO Christopher Anderson added that the company was focused on finished lots.
This reference to low valuations on land prompted FBN Securities analyst Joel Locker to ask Mizel if bid-ask spreads on assets ready for trade had narrowed or if the banks controlling the assets were holding out on pricing in hopes of government assistance.
"I think the banks don't know what the rules are going to be. Everyone is waiting got see how TARP [Troubled Asset Relief Program] works," Mizel said. "If one was a potential recipient, if you sold an asset at $0.40 [on the dollar] and the government would've given you $0.80, someone would be unhappy with you for not waiting."
However, he noted: "There's a clearing price that will take place. ... No one is going to pay more than what they can make a profit at."
The other big question mark from the call was whether the company would remain cash flow positive in 2009. Anderson's response was short and sweet: "No comment."
Despite the lack of color on the subject, it's unlikely that the company will be able to keep up the impressive cash generation it experienced in 2009--unless Congress moves to extend the net operating loss tax carryback look-back period from two years to five.
In the meantime, despite ending its fiscal year with more than $1.4 billion in cash on its balance sheet, the company's cash generation slowed significantly to roughly $51 million during the quarter, down from $106 million during the previous quarter and $257 million during 4Q2007. To blame were a steep 57% fall-off in closings and a slowdown in land sales.
Moreover, although executives expected a $165 million tax refund to hit the company's balance sheet in 1Q2009, the company's new orders and backlog were down significantly. The company netted 350 new home orders and ended the year with 533 homes under contract, compared to 748 new orders and 1,947 units in backlog a year ago.
One bright spot was that the company's home building gross margins were 12.9%, up from 11.7% a year ago. However, Anderson was quick to note that impairments have improved margins. "There's not price appreciation that's driving any margin improvement," he said. But impairments also slowed during the quarter. The company took $59.7 million in asset impairments--the bulk of which was attributed to charges on 2,177 lots in 132 subdivisions--which was down 67% from a year ago.
The rather drastic fall-off in impairments led Citi Investment Research analyst Josh Levin to ask M.D.C. executives whether that was an indication that the company was nearing the end of the impairment cycle. The company still had $220 million in land inventory on its books, so more impairments could happen because land could be written down to zero or even a negative value, in some cases, Mizel said. However, he also noted that roughly 70% of company's impairments to date have been on land.
Given its need to generate new orders to replenish a shrinking backlog, Mizel said the company expected to roll out some new product in the back half of 2009, was shifting away from traditional print advertising in favor of online marketing, and had a plan in place to market the heck out of whatever housing-specific stimulus would come out of Congress.
For more detail on the company's fourth quarter performance, please click here.