Blue Sky Scenario

IT'S A 480-MILE DRIVE ACROSS INTERstate-70 and south on Utah state routes 24 and 276 from MDC Holdings' South Yosemite Street headquarters in Denver to the marinas at Lake Powell, on the Arizona-Utah border. There, you can rent a luxury houseboat with staterooms, digital entertainment and communications devices galore, gas grills, a hot tub, and, oh yes, an icemaker, should the occasion call for a bit of bubbly. Lake Powell's storybook canyons eternally grace the likes of movies such as Planet of the Apes, Superman III, Flintstones II, and the classic, The Man Who Would Be King. Its deep currents teem with striped, smallmouth, and largemouth bass, with Walleye Pike, and with catfish, not to mention 170 species of birds and more than a dozen reptile species, all living off the bounty of the five big rivers that feed into the lake, including Utah's the Dirty Devil.

On one of Lake Powell's houseboats these days, you can kick back, relax, and take in the breathtaking majesty of the natural formations, or you can do what MDC executive triumvirate Larry Mizel, David Mandarich, and Paris G. “Gary” Reece do there for one day each year, which is to hatch ideas and devise plans to make their Denver-based home building company bigger and better over the next twelve months. And, perhaps, celebrate what happened over the past twelve.

Although a daily call starting at 6:30 a.m. among the three may be how chairman and CEO Mizel, president and COO Mandarich, and executive vice president and CFO Reece keep the ball moving forward, Lake Powell is where they come up with the playbook. “It is there where we determine to move into new markets, which markets, discuss if we would do it by acquisition or through start-ups, and talk about the bench players we want to lead the new operations,” says Reece. While the company has a variety of scheduled monthly meetings with top management, on the placid waters of Lake Powell they turn off their cell phones and decide MDC's course and velocity.

JUST LIKE A STORE: An 11,000-square-foot “Home Gallery” flagship prototype in Denver's Centennial Promenade. Industry leading returns per share, strong growth in number of homes sold annually, rising revenues, consistent increases in average profit per unit, and a host of other indicators that bear out MDC's investment-grade rating is no accident of nature. Today's record of performance is what it is, but the executive team won't let it rest at that, nor, if they're aiming to stay in the game over the next five years as consolidation inevitably shrinks the number of key players, can they afford to. What makes a public big builder worth watching is its ability to identify and address future challenges in an effort to manage the potential pitfalls.

Whether they're on Lake Powell, or in the home office in one of the nation's chronically difficult home building markets, or on the road among their various outposts nationally, they'll never forget the verge of oblivion that threatened them in the early 1980s. Never again will they leave the company so exposed to economic bad times. So they've chosen a conservative land position strategy (see “Land Options in Perspective”), and ridden operational excellence to present and future viability.

“We believe that our internal infrastructure and our ability to execute have been demonstrated on a regular basis and is shown in our performance,” Mizel says. “The risks we have are those that face the housing industry in general.”

These risks include increasing staff to meet a rapid rate of expansion, obtaining the proper land positions at the risk level their aversion to risk can tolerate, making ongoing technology improvements to reduce process costs, transitioning management, and preparing for a potential down cycle in housing demand. MDC's strategies to meet all of these issues, and others, provide exemplary approaches for private builders—as well as public concerns.

It All Starts With Land MDC, which sells homes under the name Richmond American Homes, closed 13,876 homes in 2004, an increase of more than 2,600 over 2003. To meet its demand for land, MDC only buys entitled lots and maintains no more than 2.5 years worth of lot inventory. MDC along with McLean, Va.-based NVR are home building's poster children for conservative land-holdings philosophies, tracing to financial crises both companies barely survived during the 1980s real estate and housing bust.

PROFIT SHELTER: Fairway Crest in Southern California has helped MDC post significant returns on revenue in the past few years. Robert Curran, senior analyst with Fitch Ratings in New York, sites MDC Holdings' policy of not developing any land as a potential advantage if there is an economic downturn that impacts housing. “They are willing to forgo some of the land entitlement profit in order to be a more liquid company,” Curran says. “This conscious effort to be short on land, from a bond holder point of view, is not a bad position if something goes wrong on a macro level.” In addition to only buying entitled lots, MDC has disciplined itself to obtain options on lots. In 2004, more than 50 percent of its inventoried lots were optioned, which further improves its equity position.

Despite the willingness to pass on potential land development profits and expose itself to fluctuating lot costs, MDC has availed of real estate market buoyancy to boost its average home gross margin from 24.1 percent in 2003 to 27.7 percent in 2004. Average home prices increased from $254,300 to $283,400 during that same time.