M.D.C.'s Northwest Passage: Purchase of SDC Homes in Seattle for Cash and Stock

SDC went from zero to Seattle's No. 3 home builder in a little more than three years.

Consolidation in home building capacity begins a new era as M.D.C. Holdings announces its acquisition of Seattle-area private builder, SDC Homes for an undisclosed amount of cash and restricted stock.

Word is, the timeline on the acquisition was a lightning-speed seven weeks, and involved more than one public home building company suitor at the dance. It's a new market for M.D.C., which has been on a strategic mission to open new communities with newly reset land-base prices as part of a topline revenue push. For SDC, which went from zero to Seattle's No. 3 home builder in a period of a little over three years, it's an opportunity to access capital as it never could have under its bank finance capital plan.

Big picture, M.D.C.'s move likely foretells a rush by a well-capitalized few for immediate and sustainable volume and share gains in a national new-home sales market treading water in the 300,000 range. In this context, new home building's enterprise organizations have but two choices to manage business optimally for stakeholders, vested and invested. One, cut costs, which is what we've witnessed in varying measures for four-plus years.

Two, and perhaps more daringly, grow topline revenue. This means open store fronts—new communities—as fast as a company's infrastructure and current expense base can. At current absorption rates, practically the only way to get more is to have more active neighborhoods.

In Seattle, bolstered by one of the nation's more robust jobs environments, M.D.C.'s Richmond American gets volume in a higher-price-point market—prices in Q4 2010 averaged over $300,000—which meshes with the Richmond American's first-time, and first-move-up product lines. Corporations like Costco, Microsoft, and a significant joint Lewis-McChord military base represent drivers for household formation and income growth in the area, and a stream of buyer demand.

With the Seattle incursion, M.D.C. enters a high-barrier-to-entry market as a fast-growing No. 3 player—second to leader D.R. Horton and a relatively non-aggressive PulteGroup. As the press release mentions, SDC becomes Richmond American Homes Washington, with SDC principal Robert Trent as division president. What the release doesn't mention is that recently, before the M.D.C. deal, Trent hired former Quadrant Homes land acquisition wizard Michael Lorenz as vp of land acquisition.

This is important because Seattle is one of the more land-constrained residential real estate markets, with five-and-a-half to six-year application to approval periods for lot entitlements, and highly restrictive zoning and urban growth boundaries. Having an expert on the ground in the market, with relationships not only with potential land sellers and developers, but with municipal planning and zoning officials is essential.

We'll be talking with M.D.C. officials about this in a couple of hours. Here's the press release, including press statements from principals in the deal, SDC founder Robert Trent and M.D.C.'s president and chief operating officer David Mandarich.

M.D.C. Holdings Acquires Assets of SDC Homes in Seattle

DENVER, April 29, 2011 /PRNewswire/ -- M.D.C. Holdings, Inc. (NYSE: MDC), whose subsidiaries build homes under the name "Richmond American Homes," today announced that it has acquired substantially all of the assets of SDC Homes, LLC and certain affiliated entities for an undisclosed purchase price paid in cash and restricted stock. The acquisition marks MDC's entry into the Seattle market.
Assets acquired include vacant residential lots and homes in various stages of construction, spread throughout 11 communities. Approximately 80 employees from SDC Homes have joined MDC's Seattle-based homebuilding subsidiary, Richmond American Homes of Washington, Inc., including employees working in construction, purchasing, sales, marketing and finance.
SDC Homes, which closed over 250 homes in 2010, was founded in 2007 by Robert Trent, who has joined Richmond American Homes of Washington as division president. "I am excited to have the opportunity to join the team," said Trent. "The combination of my local-market experience with Richmond American's extensive expertise and resources should drive considerable success and growth for us in Seattle."
"Given SDC's position as the third largest homebuilder in Seattle, this acquisition puts us in a strong position in this market," said David D. Mandarich, MDC's president and chief operating officer. We expect this acquisition to begin providing home closings and revenues immediately, and to be accretive to net operating results starting in 2012. The former SDC Homes employees who have joined Richmond American Homes have many years of experience in Seattle and will contribute much to achieving our vision of being a homebuilding leader in this market. We are very pleased to welcome such a successful group of new employees to Richmond American."
NYSE Required Disclosure Regarding Issuance of Equity
In conjunction with the acquisition, MDC will issue 176,716 shares of its common stock, valued at $5 million, to Mr. Trent, the principal owner of the seller entities. The shares issued to Mr. Trent will be unregistered, having been issued in a private placement, and will be subject to the terms of a Restricted Stock Agreement.
The Agreement provides for 25%, 25% and 10% of the shares, respectively, to vest after each of the first three anniversaries of the effective date of the Agreement, conditioned on Mr. Trent remaining employed. The final 40% of the stock will vest on December 31, 2015, conditioned on Mr. Trent remaining employed. MDC may use any unvested shares to apply against guaranty obligations that Mr. Trent has undertaken.
About M.D.C. Holdings, Inc.
Since 1972, MDC's subsidiary companies have built and financed the American dream for more than 165,000 families. MDC's commitment to customer satisfaction, quality and value is reflected in each home its subsidiaries build. MDC is one of the largest homebuilders in the United States. Its subsidiaries have homebuilding divisions across the country, including Denver, Colorado Springs, Salt Lake City, Las Vegas, Phoenix, Tucson, California, Northern Virginia, Maryland, Philadelphia/Delaware Valley, Jacksonville and Seattle. The Company's subsidiaries also provide mortgage financing, insurance and title services, primarily for Richmond American homebuyers, through HomeAmerican Mortgage Corporation, American Home Insurance Agency, Inc. and American Home Title and Escrow Company, respectively. M.D.C. Holdings, Inc. is traded on the New York Stock Exchange under the symbol "MDC." For more information, visit www.mdcholdings.com