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Edited Transcript of MDC earnings conference call or presentation 30-Jan-20 5:30pm GMT

·35 min read

Q4 2019 MDC Holdings Inc Earnings Call Denver Jun 8, 2020 (Thomson StreetEvents) -- Edited Transcript of MDC Holdings Inc earnings conference call or presentation Thursday, January 30, 2020 at 5:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Derek Kimmerle M.D.C. Holdings, Inc. - Director of SEC Reporting * Larry A. Mizel M.D.C. Holdings, Inc. - Chairman & CEO * Robert Nathaniel Martin M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer ================================================================================ Conference Call Participants ================================================================================ * Alan S. Ratner Zelman & Associates LLC - MD * Alex Barrón Housing Research Center, LLC - Founder and Senior Research Analyst * Buck Horne Raymond James & Associates, Inc., Research Division - SVP of Equity Research * Jay McCanless Wedbush Securities Inc., Research Division - SVP of Equity Research * John Lovallo BofA Merrill Lynch, Research Division - VP * Margaret Jane Wellborn JP Morgan Chase & Co, Research Division - Analyst * Paul Allen Przybylski Wells Fargo Securities, LLC, Research Division - Associate Analyst * Stephen Kim Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to M.D.C. Holdings 2019 Fourth Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Derek Kimmerle, Director of SEC reporting. Please go ahead. -------------------------------------------------------------------------------- Derek Kimmerle, M.D.C. Holdings, Inc. - Director of SEC Reporting [2] -------------------------------------------------------------------------------- Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2019 Fourth Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, Chief Financial Officer. (Operator Instructions) Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2019 Form 10-K, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompanying the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. And now I will turn the call over to Mr. Mizel for his opening comments. -------------------------------------------------------------------------------- Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Good morning, and thank you for joining us today as we go over our results for the fourth quarter and full year of 2019, update you on current market conditions and provide some insight into our strategy moving forward. MDC ended the year on a strong note, generating fully diluted earnings per share of $1.42 for the fourth quarter, representing a 61% increase over the prior year period. Net new orders in the quarter increased 49% per year-over-year as demand remained elevated to what is typically a less active selling season. We have seen this momentum carry into the new year, and believe that home shoppers are showing a noticeable interest in starting the home-buying process now rather than waiting until spring. This, obviously, bodes well for our industry as a whole and for our company. We continue to see the strongest demand for home priced at or below the median level in our markets, which is where we have been positioning our company for several years. The demand drivers of our business remained favorable as we head into the new year. December marked the sixth straight month of year-over-year declines in existing home inventory in the United States, and the 1.4 million homes for sale was the lowest inventory figure since the National Association of Realtors began tracking this data in 1999. This equates to a 3-month supply of homes at the current sales rate, which is well below the typical 6-month supply. The lack of the existing home supply should help reinforce the demand for our new homes as we entered 2020. The health of the domestic economy, strong employment and optimism for the future continues to be reflected the elevated consumer confidence readings to the end of the year. The consumers are also increasingly confident in the housing market, according to Fannie Mae's home purchase sentiment index, which rose considerably on a year-over-year basis in December and remains near all-time highs. Lot of approvals in the fourth quarter reached their highest level in over a decade, reflecting our optimism regarding the housing market and our confidence in our operating strategy. The bulk of these approvals were for more affordable price communities as we believe the demand for outlets for the millennials, empty nesters and first-time buyers of all ages will remain favorable for some time to come. While I realize that investors are more focused on what's going to happen rather than what's already happened, I think it's important to emphasize how far we've come in the last 5 years. Since 2015, we have seen a 59% increase in home deliveries, a 270 basis points improvement in gross margins and 880 basis point increase in return on equity and over 200% growth in pretax income. We also improved our SG&A leverage and reduced our cycle time over that period. We accomplished this while maintaining one of the strongest balance sheets in the industry and delivering the highest dividend payout among our public homebuilding trading peers -- traded peers. We are proud of these accomplishments. Based on our outlook for the industry, we believe that we can continue to grow our operations in a profitable manner and deliver further improvements to our cost structure and return on capital. While trajectory will not always follow in a lineal path, we believe the outlook for MDC is positive and presenting a compelling opportunity for investors with a long-term approach. With that, I'd like to turn it over to Bob, who will provide more details on our results from the quarter and the full year. -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Thanks, Larry, and good morning, everyone. As predicted on our last call, during the fourth quarter, we began to see a significant benefit from the recent surge in our orders and backlog as home sale revenues increased by 25% to more than $1 billion, and net income increased by 69% to $92.6 million or $1.42 per diluted share. Our tax rate dropped from 21% to 17.5% for the 2019 fourth quarter. The decrease in rate was mostly the result of 45L energy-efficient tax credits, which were extended to cover the 2018, 2019 and 2020 tax years during December of 2019. During the fourth quarter, we recorded an estimate for the benefit we expect to receive from these credits of $6.5 million related to qualifying 2018 and 2019 home closings. Our increased home sale revenues were the result of a 31% year-over-year increase in the number of homes delivered, driven by a 25% increase in the number of homes we had in backlog to start the quarter as well as an increase in backlog conversion rates due to improved cycle times. Our backlog conversion rate was 52%, exceeding the estimate of 50% for the fourth quarter that we discussed in our previous call and higher than the 49% achieved a year ago. The increase in units delivered was slightly offset by a 4% decrease on our average selling price to about $450,000. This decrease was in line with our strategic focus, as 62% of our closings came from product lines we characterized as more affordable offerings as compared with 49% a year ago. Geographic mix also contributed to the decreased average selling price as we saw an increase in the percentage of fourth quarter closings coming from our Phoenix, Orlando markets, which both have average selling prices well below the company average. This is the result of strong order activity throughout 2019 in a higher backlog conversion level than forecasted for the quarter in these markets. Looking forward to the first quarter of 2020, we are targeting home closings between 1,550 and 1,650 units, which would result in a backlog conversion rate roughly in the 41% to 43% range compared to the 46% backlog conversion rate we achieved in the first quarter of 2019. The potential for a lower conversion rate is primarily a result of the strong sales activity we experienced during the fourth quarter, as these homes are in our quarter end backlog, but most are unlikely to close in the first quarter. Additionally, we believe our average selling price should remain above $450,000 for the first quarter of 2020 based on an assumption that our mix of closings should remain relatively consistent with the fourth quarter. Turning to Slide 7. You can see that our gross margin from home sales improved by 40 basis points year-over-year to 18.5%. This increase was driven by a $9.7 million year-over-year reduction in inventory impairments partially offset by lower margins in our California markets and a shift in mix to our Phoenix and Orlando markets, which had Q4 closing gross margins below the company average. With that said, we have seen improving margins in these markets due to increased market demand especially for our more affordable homes. Phoenix, in particular, has benefited from this mix shift, and as a result, ended 2019 with an average gross margin of homes in backlog that exceeded the company average. Relative to Q3, our gross margin decreased by 30 basis points. Similar to our year-over-year performance, the decrease can be attributed to lower margins in our California markets and a shift in mix to our Phoenix market. For the first quarter of 2020, we estimate that our gross margin for home closings should reach between 18.8% and 19.2%, excluding impairments and warranty adjustments. The expected increase from Q4 to Q1 is a result of strong order activity during the second half of 2019, which allowed us to increase pricing in the majority of our communities. At the end of 2019, the estimated average gross margin of our homes in backlog was modestly higher than at the end of 2018, which is an encouraging sign for 2020. As always, note that the gross margin level we actually realize in future periods could be impacted by cost increases, cancellations, price or incentive changes, impairments, reserve estimates and other factors. With the 25% increase in our home sale revenues, our operating leverage improved significantly year-over-year. Specifically, SG&A as a percent of home sales revenues decreased 110 basis points to 9.8%. Our total dollar SG&A expense for the 2019 fourth quarter was up $11.7 million from the 2018 fourth quarter. This increase was primarily due to variable components of our SG&A expense, such as a $6.8 million increase in our commission expense. Our marketing expense increased by $4.1 million, which was largely due to the amortization of deferred marketing costs and master marketing fees, both of which are driven at least in part by higher home closings. Looking forward to the first quarter of 2020, we currently estimate our general and administrative expense to be roughly at $46 million, which would be about even with the expense we just recognized in the fourth quarter. However, our actual results for the first quarter could differ from this estimate for a variety of reasons, such as changes in the amount and timing of various accruals. The dollar value of our net orders increased 51% year-over-year to $685 million, driven by a 49% increase in unit net orders and a 2% increase in average selling price. The demand for our more affordable product lines remained strong during the fourth quarter of 2019, accounting for 61% of our net new orders compared with 54% a year ago. This increase was largely attributable to the continued success of our Seasons Collection, which accounted for 46% of our net new orders in the 2019 fourth quarter compared with 36% a year ago. Our monthly absorption rate of 2.8 was a 28% increase from the 2018 fourth quarter and was our highest fourth quarter absorption pace since 2005. The improvement occurred both in more affordable and traditional product categories, and the largest year-over-year percentage increases were in Phoenix, Seattle, Colorado and both Northern and Southern California. Our fourth quarter net orders further benefited from a 16% year-over-year increase in average active subdivisions. As Larry alluded to earlier, our sales activity to this point in January has exceeded our expectations. We anticipate significant year-over-year growth for January, similar to what we saw during the back half of 2019 once the month is complete. We ended the quarter with an estimated sales value for our homes in backlog of $1.75 billion, which was up 22% year-over-year on the strength of our new order activity in the second half of the year. The average selling price in backlog was down about 5% year-over-year, driven by decreases in most markets, in line with our more affordable home focus. As I mentioned earlier, the estimated average gross margin of our homes in backlog at the end of 2019 was modestly higher than at the end of 2018, which is an encouraging sign for 2020. Active subdivision count was 185 to end the 2019 fourth quarter, up 11% from 166 a year ago, in line with the expectation we set at the beginning of the year. As I've mentioned during the past couple of calls, we don't see much opportunity for an increase in our active subdivision count for the first half of 2020, relative to where we ended in 2019. However, we are optimistic about the potential for growth in the second half of 2020 based on land that we already control. Our goal is to drive our ending active community count higher for a third consecutive year in 2020. But at this time, the magnitude of a potential increase is uncertain. The number of lots we approved this quarter increased by over 200% year-over-year. This acceleration of activity reflects our confidence in market conditions and our focus on continuing to grow our business whereas during the fourth quarter of last year, the direction of our business was less certain. On the strength of these lot approvals, the total number of lots we controlled at the end of the year was 18% higher than a year ago and at its highest level in more than a decade. For the 2019 fourth quarter, we acquired 3,292 lots for roughly $235 million, and we spent an additional $118 million on development costs. Approximately 35% of the lots acquired in the fourth quarter were finished lots. Net homebuilding debt-to-capital was 21.5% at the end of the fourth quarter, demonstrating our firm commitment to maintaining a strong balance sheet. Furthermore, our liquidity to end the 2019 fourth quarter was at $1.51 billion, providing us with significant resources to fund continued growth. As to start 2020, we've improved the balance sheet even more, with a $300 million issuance of 10-year senior notes at a rate of 3.85%, the lowest for senior notes in our history. Earlier on the call, Larry mentioned the significant progress MDC has made across a variety of metrics over the past 5 years. Notably, 2019 was the third highest net income year on record for MDC. That performance put us in a position to reward our shareholders through a 10% increase in our dividend declared just a few days ago. And the outlook is right to start the year with higher backlog value, higher backlog gross margin and higher active community count, all points to the potential for increased top and bottom line results in 2020. With that, I will now turn the call back to the operator for our question-and-answer session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first speaker is from Stephen Kim from Evercore. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [2] -------------------------------------------------------------------------------- Steve Kim, Evercore. Good quarter. First, just a housekeeping. Bob, the tax credit that you saw, I think you said $6.5 million. I just want to clarify, that was $6.5 million that you've registered for 2019 and 6.5% for 2018? And what are you looking for in 2020? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [3] -------------------------------------------------------------------------------- Yes, I guess, in aggregate, the impact on the income tax line was $6.5 million, and that accounts for both 2018 and 2019. And I guess the impact on 2020 will really be -- will really depend on what closing has come through and where they come through. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [4] -------------------------------------------------------------------------------- Right. So probably something in the $3 million to $4 million range is pretty reasonable, I assume? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [5] -------------------------------------------------------------------------------- Yes. All else equal, that would be reasonable. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [6] -------------------------------------------------------------------------------- Yes. Can you talk about the gross margins? And in particular, I'm curious as to what sort of caused you to miss about what your expectation was that you gave just a few months ago. And then the flip side of that is that the guide, obviously, looks pretty good. Maybe you can help us by sharing with us how the components of gross margins are kind of looking, if there's anything worth talking about in terms of trends or inflation, either picking up or moderating within materials or labor or land. -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [7] -------------------------------------------------------------------------------- Yes. And to be clear, what we talked about in the last call is the backlog gross profit margin being higher than the closings that we just have recognized in Q3, and that continues today. And in fact, the differential is even greater, the backlog gross profit margin at the end of the year relative to where we ended Q4. So we did take a further step this quarter in saying definitively that we think it's going to go up to that 18.8% to 19.2% range for Q1 based upon what we see right now. I think as far as the reasoning for it, when you look at what has happened with our closings, first of all, we've had a significant increase year-over-year in our closing, it's 31% and 25% increase in our revenues. So a great thing because we got 110 basis points of extra operating leverage. Now it just so happens that a big part of that increase is occurring in markets like Phoenix and Orlando, where we've been a little bit smaller in the past few years, especially relative to Colorado and Nevada. So the good news is those markets are becoming more relevant to us. We're getting better market share in those markets, which is a great thing for operations overall. And I think, temporarily, because the margins in those markets have been a little bit lower than the company average because they have been a little bit lower in scale, it has caused a little bit of a dip in our margins. But those margins are improving in those markets. And as I commented on earlier, the backlog gross profit margin in Phoenix, for example, is now well in excess of the company average. So no longer will it be a drag on our margins, all else equal, as we sit here today. So that's what I would say on that topic. Overall, I think it really is a positive that we're seeing more diversity in where our revenues are coming from, and that we're seeing the margins in each of those markets accelerate. -------------------------------------------------------------------------------- Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [8] -------------------------------------------------------------------------------- Yes, that's really encouraging. Can you talk a little bit about what you think is the components, whether it be land -- within your cost, land, labor, materials? Is there anything really to call out there, and on the labor side, people have addressed maybe some increasing labor tightness? If you could maybe fold that into a commentary. -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [9] -------------------------------------------------------------------------------- Yes. I don't see a whole lot of that, yet. I mean, clearly, with the industry doing well and a lot of builders talking about increased activity, there's a potential for that in 2020, but we've not see it come through yet. We have seen various municipalities who have started the year with increased fees or increased requirements for development work. That's driven a little bit higher cost, but not widespread at this point. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- The next question comes from John Lovallo from Bank of America. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [11] -------------------------------------------------------------------------------- The first one, Bob, on the January order strength, it sounds like it was pretty impressive and clearly encouraging. Can you just give us a feel for what the monthly comps look like even in the first quarter? I mean did February, March get a little bit more challenging from that standpoint? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [12] -------------------------------------------------------------------------------- Yes. Let me -- I'll just give you kind of what January through March of last year looked like. So in 2019, we are at 4 75 in January; 2018, it was 4 92; February, 6 47 versus 6 18; and then March, 8 34 versus 7 94. So as you went through last year, the comparisons did get tougher in that February and March were both increases year-over-year, whereas January was a year-over-year decrease in 2019. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [13] -------------------------------------------------------------------------------- Got you. That's perfect. Okay. And then maybe just going back to the gross margin in Phoenix or Orlando. I just want to make sure I understand this. So the lower gross margin that you experienced in the quarter was it -- it was due to some inefficiencies, maybe due to scale, not being optimized previously. But was there anything else that happened that would have resulted in those margins, in those regions being lower? I mean was there increased discounting there earlier on? Or is it really just a function of scale? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [14] -------------------------------------------------------------------------------- I think a lot of it is a function of scale. I think in Orlando, we are all Seasons. And that buyer sometimes requires a little bit of extra financing incentives, for example. I would think that's probably the only thing I would call out, in particular. To a lesser extent, you have that in Phoenix, but certainly in Orlando. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- The next question comes from Alan Ratner from Zelman & Associates. -------------------------------------------------------------------------------- Alan S. Ratner, Zelman & Associates LLC - MD [16] -------------------------------------------------------------------------------- Bob, I was hoping to expand a little bit more on the comments you were giving on the mix impact on margin. And I guess my question is, as you look at your '19 growth, obviously, very impressive, much stronger than the market, was there a -- perhaps strategy as the year went on, where you identify these markets, where you perhaps had some suboptimal scale and perhaps chose maybe not to be as aggressive on pushing price or lowering incentives in order to get those markets to kind of an optimal scale level? Perhaps that would maybe explain the very strong volume, perhaps a little bit of expensive margin that other builders are reporting? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [17] -------------------------------------------------------------------------------- Yes. I would say there is some truth to that. I don't think it's quite that binary that is just one or the other. We're still looking at individual subdivisions where we have really strong activity and increasing prices as appropriate. But I do think there is an importance to the local market scale. And I was actually thinking about you a little bit, Alan, because I remember in the reports past, your reports talking about that very thing. So I think it's something unique to MDC that we have a variety of markets that are a little bit lower on the scale and have that opportunity to improve in the future as we get more and more of that scale. And certainly, you can see that we're getting more and more of that scale based upon our order activity and our backlog. So I think what you're pointing to is fair. -------------------------------------------------------------------------------- Alan S. Ratner, Zelman & Associates LLC - MD [18] -------------------------------------------------------------------------------- Got it. Now that's helpful, Bob. I appreciate that. And I guess just thinking about the future now, you obviously turned your land book faster than others and you did a great job of increasing your lot count this quarter. So I'm just curious, as you look at the underwriting assumptions embedded within those recent land purchases, A, what does the competition of land look like? Is it spread out perhaps a little bit more evenly across your markets, given the fact that some of these smaller markets have grown? And what's the underlying margin assumptions within these? Is it in line or better than what you're currently delivering? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [19] -------------------------------------------------------------------------------- I would say the underlying margin assumptions are in line or better than what we're currently delivering. And I think as far as the dispersion of where those acquisitions are occurring, I think we get activity pretty much everywhere in terms of the loss that we've approved. I don't think there's anywhere where we're really saying, hey, let's put the break on. We've already grown enough. So I think each of the markets, the ones that are smaller for us are receiving some of the capital just as well as our larger markets are. -------------------------------------------------------------------------------- Alan S. Ratner, Zelman & Associates LLC - MD [20] -------------------------------------------------------------------------------- I guess what I was getting with that with Bob though, like if you look at the markets where you grew outsized this year. You mentioned Phoenix and Orlando as an example, those are now a bigger piece of your business compared to, say, Denver was a year or 2 ago. So is the current mix of your business more appropriate to think about going forward geographically? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [21] -------------------------------------------------------------------------------- Yes. As I mentioned, as you look at Q1, some of the assumptions that we've laid out for you for Q1 are based upon a mix similar to Q4, which did include lower contribution from places like Colorado and higher contribution from places like Phoenix and Orlando. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- The next question comes from Michael Rehaut from JPMorgan. -------------------------------------------------------------------------------- Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [23] -------------------------------------------------------------------------------- This is Maggie on for Mike. First, I have a broader question on gross margin. So you've talked so far about the last couple of quarters and kind of the geographic mix, how that impacted the last couple of quarters. But as you've looked into the medium and longer term in the future, how are you thinking about the impact of affordable product on margins? I mean prior to the last couple of quarters, you had seen nice improvement over the last couple of years. So do you see any additional upside from the expansion of your affordable lines? Or do you feel that you've reached kind of a steady state there where the further margin improvement would be more market-driven? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [24] -------------------------------------------------------------------------------- Well, I think if you go back 6, 7 quarters ago, the margin was higher on affordable products. That's really come in quite a bit, it's more similar to our traditional product at this point. So the increase of the percentage of units that we're doing with the affordable product wouldn't necessarily drive the margin one way or the other. It looks more as we're already at 62% affordable product in our deliveries in Q4. Previously, I talked about it could go a little bit higher than that, maybe as much as 70%. But there's not necessarily a whole lot of room to go there in terms of how much it represents of our overall mix at least from what we see right now. So I don't see it having a big impact on margin in isolation. -------------------------------------------------------------------------------- Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [25] -------------------------------------------------------------------------------- Okay. And I think you mentioned that you were able to raise prices in the majority of your communities this quarter. So could you elaborate on that a little bit? Maybe what percentage of communities or the percentage price increase on average? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [26] -------------------------------------------------------------------------------- Well, actually, the comment was the majority in the back half of 2019. And we did raise prices on about half of our communities in the fourth quarter -- just the fourth quarter, and keep in mind, obviously, it's typically lower activity in the fourth quarter. So that's not as much the focus to increase pricing. Also keep in mind that in Q3, we increased prices in 80% of our communities, like we talked about on our last call. And then as we started 2020, we've focused again on more price increases as we anticipated the spring selling season coming up. So I think you have to look at all those data points together to kind of see how we've approached it. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- The next question comes from Paul Przybylski from Wells Fargo. -------------------------------------------------------------------------------- Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [28] -------------------------------------------------------------------------------- Bob, you mentioned Phoenix gross margins were now a tailwind. I was wondering if you could add any color around where Orlando gross margin stand in relation to the company average. And then along that lines, I believe your East lots were up 36% in the quarter. Was that Orlando- or Florida-driven versus the Mid-Atlantic? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [29] -------------------------------------------------------------------------------- So on the first question, the backlog margins in Orlando are still below the company average. And, of course, Orlando is a much smaller piece of our pie. As you look at backlog, it's probably 1/3 of the size of Phoenix. So Phoenix will be more impactful at this point. Then I don't think I got the second part of your question. -------------------------------------------------------------------------------- Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [30] -------------------------------------------------------------------------------- Yes, your east region lot count, I think, it was up 36%. Was that mainly in Florida? Or was that Mid-Atlantic growth? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [31] -------------------------------------------------------------------------------- I think it was mostly Florida. -------------------------------------------------------------------------------- Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [32] -------------------------------------------------------------------------------- Okay. Okay. And then if your specs were down 15% year-over-year, any plans to kind of bring that back up as we head into the spring selling season? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [33] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34] -------------------------------------------------------------------------------- Okay. And then with rates moderating, have you seen any increased design center spend? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [35] -------------------------------------------------------------------------------- Nothing material. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- The next question comes from Jay McCanless from Wedbush Securities. Jay, is your line on mute? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [37] -------------------------------------------------------------------------------- Okay. We can barely -- we can't hear you, Jay. -------------------------------------------------------------------------------- Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [38] -------------------------------------------------------------------------------- Can you hear me now? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [39] -------------------------------------------------------------------------------- Yes, that's better. -------------------------------------------------------------------------------- Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [40] -------------------------------------------------------------------------------- Okay. Sorry about the issues here. Just talk about the strength and the move-up demand. Has that continued into January? And what are you seeing, like from a competitive standpoint of incentives on that move-up product of what you guys are doing and then also what (inaudible)? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [41] -------------------------------------------------------------------------------- Yes. I don't have a whole lot of color for January at this point, but I do think the trends were positive in the fourth quarter. The -- from an incentive standpoint, I'm not sure I have the exact details on that either, but I think we're seeing the ability to have that move-up products. The incentives be pretty moderate, and see those incentives decrease just as incentives and other product decreased over the past year. And keep in mind, when we talk about move-up products, we've moved away from some of the really big products when you talk about 4,000 square foot plus product in markets like Phoenix. We're not doing as much of that anymore. So it's a little bit of a different segment of the move-up market as well. Certainly, not focused on more of that luxury buyer, more focused on the middle of that segment. -------------------------------------------------------------------------------- Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [42] -------------------------------------------------------------------------------- Then I had a two-part question on community count. I guess the first one is, I understand that you guys aren't willing to give what you think community count would be at the end of the year, is that approaching fast from close out now? Are you are worried about selling mix up a bit faster? But then also, if we think about that community count at end of the year, is the community count still going to be producing somewhere between 60% to 70% of your units that what you guys consider affordable? Or is there going to be a huge back for the first and second move-out like in process? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [43] -------------------------------------------------------------------------------- Yes. I think for community count, kind of the short-term outlook, we see -- I think the -- sometimes we give out a number that is the number of soon-to-be inactive versus soon-to-be active. So we've got about 3 more soon-to-be inactive versus soon-to-be active. So that's kind of what tells us short term, there's not going to be a whole lot of movement. Longer term, we have roughly 150 communities that are no activity started yet, and that was 115 a year ago. So we've got about 30% increase in those communities that are, longer term, going to come online. So that's what gives us optimism for the second half of the year. In terms of the split in mix, I don't see a whole lot of difference there at this point. I think you are right, depending upon what's selling and how fast it sells that can influence the whole equation. So that's part of the reason for the caution. -------------------------------------------------------------------------------- Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [44] -------------------------------------------------------------------------------- Got it. But the mix you think (inaudible) close out. But the mix in terms of that entry-level versus move-up product should be fairly similar to what we're seeing right now. -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [45] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- The next question comes from Buck Horne from Raymond James. -------------------------------------------------------------------------------- Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [47] -------------------------------------------------------------------------------- Congrats on the strong results. And I just wanted to talk maybe a little bit about your spec strategy going into the spring, given the visibility of the demand you have earlier in the year right now and obviously, the accelerated land spend and you got the higher -- the success of the Seasons and their absorption rate. Would it make sense to toggle up your back home starts into the spring time? Or how do you think about potentially putting to more starts in the ground ahead of spring selling season? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [48] -------------------------------------------------------------------------------- I think right now, we've got plenty of units in backlog that we need to start. In fact, to start the year, our -- the percentage of houses that are started in our backlog is a little bit lower than a year ago. So I think that provides plenty of work for our subcontractors. And I think to the extent that we try to employ the spec strategy on top of that, it might only serve to diminish what we're getting for those who are already in backlog. So I think we're going to stick with our strategy and really focus on whether or not we can improve our cycle times for those buyers in backlog and increase our backlog conversion rate. -------------------------------------------------------------------------------- Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [49] -------------------------------------------------------------------------------- Okay. That's helpful. And certainly, with the success of -- and having the backlog in start of the year is so much higher, as we think about any sort of incentive plans or stock comp for 2020, should we think about that in the SG&A outlook for the coming year? Anything that would be significantly higher year-over-year? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [50] -------------------------------------------------------------------------------- I think for the entire year, there's nothing that leads me to believe that right now. I know that the compensation committee has not finalized those plans for 2020 yet. So that's an asterisk to that statement. -------------------------------------------------------------------------------- Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [51] -------------------------------------------------------------------------------- Okay. If I can sneak one last one in, and it's just do you have any thoughts on the effective tax rate for 2020 with the tax credits extended? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [52] -------------------------------------------------------------------------------- Well, I think without the tax credits, you might be kind of in that 25% to 26% type of range. So without discrete items, we've considered those tax credits to be a discrete item and kind of going back to Steve Kim's question earlier, that $3 million to $4 million of gross tax impact over the course of the entire year is probably the best estimate that you could use at this point. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from Alex Barron from Housing Research Center. -------------------------------------------------------------------------------- Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [54] -------------------------------------------------------------------------------- Yes. Bob, I wanted to ask, you gave us kind of a range for expected average price this quarter. Is it reasonable to expect that this could be the high for the year and it would trend lower as your mix continues to move towards more affordable homes? -------------------------------------------------------------------------------- Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [55] -------------------------------------------------------------------------------- With -- in fourth quarter, with already 62% as affordable and having already seen some mix shift to Phoenix and Orlando, it might move down slightly, but we don't see it moving too far below $450,000. -------------------------------------------------------------------------------- Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [56] -------------------------------------------------------------------------------- Got it. And so okay, you said entry level where affordable is now 62%. Okay. I think that's what I got for now. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin, Chief Financial Officer, for any closing remarks. -------------------------------------------------------------------------------- Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [58] -------------------------------------------------------------------------------- This is Larry. I'd like to thank everyone for joining our fourth quarter earnings call. On behalf of our management team, I'd like to thank our Board, our employees or subcontractors and all of our other stakeholders who made MDC's success possible in 2019. We look forward to speaking with everyone again following the release of our first quarter 2020 earnings. Have a great day, everyone. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.