From M.D.C. Holdings CEO Larry Mizel's perspective, the expiration of the federal home buyer tax credit on April 30 is expected to amount to little more than a minor setback for housing's recovery at large. However, he was careful to note that his outlook reflected the current tone in the economy, which is, as many things are, subject to change.
"I think the tax credit will have pulled a few sales forward," he said during the company's 1Q2010 earnings call on April 23. " ... [But] it's really stimulated consumers to refocus on new housing."
And as long as the economy maintains status quo, Mizel appeared confident that the Colorado-based company was in a position to capitalize on the housing demand in the market to move the company further along its path to profitability.
"Things seem to feel good," he noted.
In the first quarter, the company slashed its losses nearly in half from the prior year, from $40.9 million, or $0.88 a share, to $20.9 million, or $0.45 a share.
Primarily driving both the earnings improvement and Mizel's outlook were three items:
* Continued order improvement. Net new orders jumped 38% during the first quarter to 931 homes, resulting in part from a surge in orders on a per-community basis. Absorptions ticked up to roughly 2.4 sales-per-community per month, from a level of 1.6 sales-per-community per month in the fourth quarter, despite fewer actively selling communities. "Our new plans continue to be well received," Mizel said, noting that 40% of the company's orders for the quarter were for the new product, which is generally smaller and more efficient to build.
* New communities set to open. The company is continuing its aggressive lot acquisition strategy, spending $88 million on land during the quarter. All told, in the past nine months, M.D.C.'s lot acquisition activity has added 121 new communities to its portfolio, the bulk of which management says it has yet to classify as "actively selling." However, as these communities officially come online, management expects more sales, higher revenues, and better margins.
* Shift in inventory management. While the company's drywall-hold spec strategy may have initially evolved out of the need to have ample quick-close inventory on hand to meet tax credit-spurred demand before program expiration, management indicated that the shift was going to be a permanent one. Not only were margins better than on traditional finished spec inventory but the strategy also resulted in better inventory turn and backlog conversion. Consequently, the company saw the number of unsold homes in inventory that were either in foundation or framing shoot up 200% while the number of finished inventory homes dropped 84% from a year ago.
However, with so much of the company's set-up for success tomorrow riding on the company's ability to play it smart in restocking its pipeline today, the big question on analysts' minds during the call was: How does management make sure it's not overpaying for lots?
To which, Mizel replied, "This is what we do every day. ... the judgment that goes into analysis and underwriting--not everyone sees it the same."