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MDC Holdings Inc. Message Board

  • oldschoolbuilder oldschoolbuilder Apr 24, 2006 4:42 PM Flag

    Value of MDC's assets

    Let's examine the underlying value of MDC's assets:

    As of 12/31/05:

    Cash and cash equivalents $ 214,531
    Housing completed/under construct. $1,266,901
    Land and land under development $1,656,198
    Total assets $ 3,784,895

    Debt and Lines of Credit
    Senior notes $ 996,297
    Notes payable �
    Homebuilding line of credit �
    Financial services line of credit 156,532

    Total debt and lines of credit $1,152,829

    Stockholders� Equity $1,952,109

    Stockholders� Equity per Out. Sh. $43.74

    OK, let's start with liquid assets:

    Cash and assets that will be converted to cash within 12 months (homes completed and under construction) were $1,481,432.

    But this number understates the true cash value because homes finished or under construction will be sold at a profit--let's say 10%. So the real cash + cash equivalent number is $1,608,122.

    Next, let's look at raw land.

    Carrying value of land and land development costs by market as of 12/31/2005:

    Arizona $ 260,968
    California 493,101
    Colorado 153,844
    Delaware Valley 46,561
    Florida 68,831
    Illinois 33,421
    Maryland 89,245
    Nevada 336,982
    Texas 15,511
    Utah 62,191
    Virginia 95,543

    Total $ 1,656,198

    Lots Owned:
    Arizona 7,385
    California 3,367
    Colorado 3,639
    Delaware Valley 471
    Florida 1,201
    Illinois 430
    Maryland 679
    Nevada 4,055
    Texas 471
    Utah 964
    Virginia 783

    Total 23,445

    Avg carrying value per lot (excludes value of options):

    Arizona $35.3K
    California $146.5K
    Colorado $42.3K
    Delaware Valley $98.9K
    Florida $57.3K
    Illinois $77.7K
    Maryland $131.3K
    Nevada $83.1K
    Texas $32.9K
    Utah $64.5K
    Virginia $122.0K

    Total $70.6K

    I don't know exactly where these lots are located within each region but it strikes me that the current market value of this land is significantly higher than MDC's carrying value. For some perspective, MDC's avg selling price is around $350k, or 5X its avg. lot cost. As labor, material and other costs account for around 50% of the cost of a house, it seems to me there is a pretty decent profit margin built in to this land inventory. Let's assume land assets are worth at least 20% more than MDC's carrying value. This gets us to $1,987,438.

    MDC's options on land are being carried at only $3k per lot. MDC controlled 18.9K lots through options. The market value of these options is likely to be significantly higher than the carrying value as well. But I will conservatively leave that out of the analysis.
    I will also assume the value of this and all other assets to be equivalent to the carrying value (although there IS clearly meaningful franchise value here). This amounts to $647,265.

    Let's add things up:

    Cash/near cash assets (incl. finished homes and homes under construction)




    Other Assets


    All Debt


    True Market Value (or Liquidation Value) as of 12/31/05:

    $1,608,122 + 1,987,438 + 647,265 - 1,152,829

    = 3,089,996


    $69.28 per share

    Yes, this analysis excludes the time value of money (as some assets may take more time to be converted to cash), but then again an investor can view this as a target price perhaps 6-12 months out. This conservatively represents an 18% return from current levels and assumes zero franchise value for MDC's top 5 position in several attractive markets.

    Too much analysis?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • On the other hand, 1.34 price to book and 50% equity looks pretty impressive.

    • First of all, where has MDC shown a 20% profit margin. I don't see that on the income statement. If you want to round up to the nearest 10%, sure, it's 20%.

      Second, housing can drop 20% overnight. I had bunches of unsolicited offers for my house in Raleigh, NC in 1979. When I listed it one year later, it took 3 years to sell at about a 25% discount. And I wasn't alone. John Adams, the largest single family guy in Raleigh, took his $50M line of credit (then a lot of money) loan from the centerpiece of good credit straight to Chapter 13 in less than 1 year. Everybody's got a story.

      Discounting houses is a funny thing. Economists call them sticky assets-people think they have something worth something and don't want to part with it. Huge denial. When the selling stops, it stops. Sellers are intractible about getting what they 'think' a house is worth and buyers just aren't buying. A 20% discount won't budge the buyers...they just aren't there.

      FWIW, real estate lost >90% of its value from 1929 to 1936. I'm sure we're far more stable now than in 1929.

      **Carrying value of assets are still dramatically below current market value.**

      Obviously, carrying value of inventory is AT LEAST 80% of market last quarter or profit margins would have exceeded 20%. I think an interest rate hickup, and the HBs 20% is gone plus plety more.

      And I don't think the industry's consolidation makes the problem any less managable...probably worse because there are so many unoccupied properties. The larger the builder, the bigger the problem. And don't forget, new homes compete against used homes and I'm not aware that there's been any consolidation in used homes. And new homes compete againist lender's firesaling their newly acquired stable of foreclosures at far deeper discounts than 20%. Good luck.

    • <<When previous RE cycles turned, at what stage did publicly traded HBs have to re-price their inventory.>>

      << Negative earnings have happened in every other RE down cycle -- why not this one? >>

      By reprice you mean take impairments, right? Last time this happened on a mass scale was 15 years ago. Can it happen again? Maybe, but I doubt it. Carrying value of assets are still dramatically below current market value. Losses are also very unlikely this time around. You seem to forget that the public builders look NOTHING like they did back then and the industry is a lot more consolidated. More diversified, better capitalized, leaner inventory positions, higher margins and returns, etc.

      <<30 year rates increase to 7%.

      Housing sales drop from record pace to 70% of current levels -- a mere 30% drop.

      New construction drops by 20% from current levels, and maintains this for 3 years to wash out excees inventory built for speculators.

      Housing prices that have increased 30% annually for 5 years, retract 20% annually for 2 years -- and then stay flat for an extended period of time.

      By my calcs:
      Profit margin of 20% is totally eliminated in first 12 months. Subsequent sales for the indefinite future are then a break-even proposition. HBs are saddeled with an extra 18 month inventory they can't unload without a loss, and high fixed costs going forward (due to all those wonderful land deals).

      Want Armageddon?>>

      Ok let's examine your scenario:

      Housing starts of 1.5 million units--OK, a bit on the low side--but I bet the public builders represent 35% or more of this number up from 25% currently. That's only a 5% decline in unit volume for the publics (here is the math: 2.2 million units * 25% = 550K; 1.5 million units * 35% = 525K units; hence a 5% decline in units for the publics). But LOTS of little builders will get put out of business in that scenario.

      2 years of 20% declines in average selling prices? VERY doubtful unless we are in a dark economic depression with lots of job losses. Interest rates will plummet in this scenario--mortgage rates would not be at 7%. What do you think will happen to builders' cost inputs such land, materials, labor--shouldn't they plunge too? Remember entitled land is still pretty scarce in places like California, Florida, DC, and the Northeast (it takes 5 years to move raw land through the entitlement process). In Vegas, the government auctions land only once a year. In Arizona, land is plentiful but infrastructure is getting stretched and the entitlement process is lengthening. Supply of new homes is not endless. An inventory correction does not change this fact.

      I'm not sure how you get to your financial calcs--20% profit margins eliminated? Huh? Boy, you must think land, labor and material costs will stay high while sales prices plunge. This is HIGHLY unlikely.

      An extra 18-months of inventory? Do you mean finished home inventory??? These guys are more discplined than that--they employ a build-to-order model, remember?! Land inventory? If the sales pace slows, builders will stop buying land to keep the balance sheet lean. The builders are already backtracking on land deals. Man, you give these guys very little credit!

      Yes, I guess it does appear that I have a lot of free time. But I am OLDschool, remember?!

    • Two quick questions for an accountant in the house:

      Do home builders carry their inventory on the balance sheet at cost or at list?

      What are the Generallly Accepted guidelines for when incentive based discounting of inventory should require a re-statement of inventory?

      I remember back in 2001 when Cisco had to take multi-billion dollar inventory write-downs, but at that point, I think they junked the inventory.

      • 1 Reply to elrayem
      • << Two quick questions for an accountant in the house:

        Do home builders carry their inventory on the balance sheet at cost or at list?

        What are the Generallly Accepted guidelines for when incentive based discounting of inventory should require a re-statement of inventory?

        I remember back in 2001 when Cisco had to take multi-billion dollar inventory write-downs, but at that point, I think they junked the inventory. >>

        Land and home inventory is carried at COST. Mkt value may be higher or lower than that. Builders CANNOT generally write UP assets but they MUST write DOWN assets if an impairment is determined to exist.

        There is no obsolescence risk here as there is with tech companies. Land is a scarce resource. Entitled land even more so.

        Incentives given to home buyers are either a contra-revenue items (if they are pure reductions to the price of a home) or cost of sales items (if they are free upgrades to the home). Thus the impact of incentives is typically felt either in revenues or margins (or both). There is typically no impact on carrying value of the land/home inventory unless the company determines its carrying value is permanently impaired.

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