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Edited Transcript of MDC earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 MDC Holdings Inc Earnings Call

Denver Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of MDC Holdings Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* 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

* John Lovallo

BofA Merrill Lynch, Research Division - VP

* Margaret Jane Wellborn

JP Morgan Chase & Co, Research Division - Analyst

* Stephen Kim

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, and welcome to M.D.C. Holdings 2019 Third Quarter Conference Call. All participants are in a listen-only mode. (Operator Instructions) Please also note this event is being recorded.

At this time, I would now like to turn the conference call over to Mr. Derek Kimmerle, Director of SEC Reporting. Please go ahead.

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Derek Kimmerle, M.D.C. Holdings, Inc. - Director of SEC Reporting [2]

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Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2019 third 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. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session at which time we request that participants limit themselves to one question and one follow-up question. 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 M.D.C.'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 third quarter 2019 Form 10-Q, which is scheduled to be filed with the SEC this afternoon. It should also be noted that SEC Regulation G requires that certain information accompany 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 remarks.

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Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [3]

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Good afternoon and thank you for joining us today's call as we go over our results for the third quarter 2019, discuss current market trends and provide some insight into our company's strategy and outlook. M.D.C. turned in another quarter of strong profitability generating net income of $51 million or $0.79 per diluted share for the third quarter of 2019.

The order momentum we experienced earlier this year carried into late summer and early fall as our absorption pace came in at 3.6 homes per community per month for the quarter representing a 34% year-over-year increase. This order pace, combined with a 19% rise in average community count resulted in a 58% increase in unit orders. During an exceptionally strong July and August in which we generated a sales pace of 3.8 per community, and order growth of 63%, we implemented price increases at most of our active communities in an effort to better maximize the profit per homes sold.

The combination of these price increases and normal seasonality resulted in a slightly slower pace of 3.3 homes per community in September which I would still characterize as robust for this time of year. The balance between price and pace is something we look at everyday and we will continue to manage this dynamic on a community-by-community basis to achieve optimal returns for our shareholders.

In terms of demand trends by buyer segment, we continue to see relatively better sales activity at our more affordable priced communities as compared to our higher priced communities. This trend is fairly consistent across our footprint and shows no signs of slowing down. Whether it's a young family buying for the first home or aging baby boomers looking to downsize, the demand for quality, affordable housing is unlikely to diminish in the near term as it is being driven by a demographic factors that should persist for some time.

We recognize that this shift was occurring several years ago and began to refocus our land acquisition efforts and new home designs on addressing affordability to higher density projects and more efficient floor plans. The response to our series of more affordable homes has been tremendous and we anticipate that our more affordable product will continue to grow as our per -- grow as a percentage of our overall business.

Not only have we experienced a higher absorption rate as a result of our shift to more affordable product, we also had seen a benefit to our margins. In addition, our build times have come down over the last several quarters which should enhance our return profile over time.

As far as our ongoing approach to business, we continued to adhere to our build-to-order strategy which limits the number of specs on the ground and allows us to sell higher margin options and upgrades to our design studios. We continue to manage our operations with a balance land supply, carefully weighing risk versus reward before investing in new projects.

In doing so, we have maintained a strong financial position as we ended the quartered with a net debt to capital ratio of 27% and liquidity exceeding $1.3 billion. We believe that our combination of strong profitability, operation and financial discipline and consistent return of capital to our quarterly dividends offer a compelling value to our investors.

In summary, our results for this quarter provide further evidence that our new home offerings are well received in the market and that our company is executing at a high level. The order of success we experienced over the last few quarters has resulted in a healthy backlog of homes that we anticipate will translate into significant closings in the fourth quarter and beyond.

We believe that M.D.C. is well positioned on a number of fronts and we are excited for what the future holds. With that, I'd like to turn it over to Bob for a more in-depth look at our results this quarter.

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [4]

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Thanks, Larry, and good afternoon, everyone. I think you can tell from Larry's comments that we're very excited about the success we have seen from our strategic focus on more affordable homes in our build-to-order philosophy. However, I would be remiss if I didn't acknowledge that our top and bottom line results have not yet seen the full benefit from our success. As you can see on this slide, home sale revenues decreased by 2% for the 2019 third quarter to $750.3 million and then income declined by 5% to $50.6 million or $0.79 per diluted share.

You'll see in the coming slides that the strategies we have put in place are becoming more pronounced in our operating results putting us on the verge of significant top and bottom line growth in coming quarters. First, on Slide 5, I will focus on the components of home sale revenues. The number of homes we delivered improved by 8% year-over-year driven by a 7% increase in the number of homes we had in backlog to start the quarter. Our backlog conversion rate was 40%; right in the middle of the expected rates for Q3 that we discussed in our previous call and in line with 40% achieved a year ago.

However, the increase in units delivered was more than offset by 9% decrease in our average selling price. This decrease was in line with our strategic focus as 62% of our closings came from product lines that we characterized as our more affordable offerings as compared with 49% a year ago. The decrease is also within the range we outlined on our prior earnings call. Geographically, we also had a temporary spike in the number of closings coming from Nevada. This is the results of the utility company delays that shifted closings per number of more affordable units in Nevada from Q2 to Q3. We also had a low number of closings from our more expensive subdivisions in Southern California during Q3.

Looking forward to the fourth quarter, we are targeting our backlog conversion rate to reach approximately 50% compared to the 49% backlog conversion rate we achieved in the fourth quarter of 2018. If achieved, a 50% backlog conversion rate would be our highest in more than four years.

Also, our Q4 average selling price should rebound somewhat to roughly $450,000 as the mix of closings in Southern California and Nevada shifts back to more typical levels. If we achieve both the backlog conversion rate and average selling price targets for Q4, we would generate quarterly home sale revenues exceeding $1 billion for the first time since 2006; yielding a year-over-year increase of approximately 20%.

We are optimistic about our potential to reach these targets given that we already have the backlog in place. However, there is risk to achieving them as the majority of the units will close in the back half of the quarter so any construction or financing delays could push deliveries into 2020. The targeted conversion rate, and average selling price, also assumes that overall market conditions remain favorable; similar to what we've recently experienced.

Turning to Slide 6. You can see that our gross margin from home sales was up 110 basis points year-over-year to 18.8%. This increase was driven by an $11.1 million year-over-year reduction in inventory impairments; partially offset by lower margins on spec homes, particularly in our California markets.

Relative to Q2, our gross margin decreased 70 basis points. This is partially explained by the absence of any positive warranty adjustments which added 20 basis points in gross margin in Q2. Also, we saw a shift in the mix of our closings, away from our Northern California and Colorado markets which were our highest margin markets in the third quarter.

There's always the possibility for some short-term volatility in our gross margins based on factors such as mix and the influence of spec inventories. However, we are encouraged by the continued help of our estimated backlog gross margin which ended the quarter at a level slightly above the 2019 third quarter gross margin of 18.8%.

As always, note that the gross margin level we actually realized in future periods could be impacted by cost increases, cancelations, price or incentive changes, impairments, reserve adjustments and other factors.

Our total dollar SG&A expense for the 2019 third quarter was up 9.2 million from the 2018 third quarter. The increase is mostly due to a $6.7 million increase in our general and administrative expense resulting from a $7.4 million year-over-year increase in stock-based compensation expense. The amount of stock-based compensation expense has been volatile from quarter-to-quarter based upon the accounting required for performance share units which are described in detail in our Form 10-Q.

For the third quarter of 2019, the expense we recognized for performance share units was at an all-time high of $8 million. This was due to the exceptionally strong sales performance we saw during the quarter which increased our backlog value significantly year-over-year and increased the likelihood that the performance conditions associated with these units would be achieved. Said another way, the high expense in this quarter was driven by the success we have had in implementing our strategic initiatives.

Our fourth quarter performance share unit expense will likely decrease by roughly $3 million compared to the expense we just recognized in the third quarter. In addition to the general administrative increase, we also had a $2.4 million increase in marketing expenses causes by additional costs incurred to open, advertise and staff our significant year-over-year increase in average active communities.

The dollar value of our net orders increased 50% year-over-year to $871.7 million; driven by a 58% increase in unit net orders that were slightly offset by a 5% decrease in average selling price. The demand for a more affordable product line remains strong during the quarter, third quarter, of 2019 accounting for 60% of our net new orders compared to 54% a year ago.

This increase was largely attributable to the continued success of our seasons collection which accounted for 41% of our net new orders in the 2019 third quarter. The increase prominence of our more affordable product lines across most of our markets contributed to the year-over-year decrease in the average price of our net new orders.

Our monthly absorption rate of 3.6 was 34% increase from the 2018 third quarter and was our highest third quarter absorption pace since 2005. We saw significant increases in all three of our segments as well as in both more affordable and traditional product categories. Our third quarter 2019 unit net orders further benefited from a 19% year-over-year increase in average active subdivisions.

We ended the quarter with an estimated sales value for homes in our backlog of $2.1 billion, which was up 16% year-over-year on the strength of our new order activity in the third quarter. This backlog value, 10 and a quarter, is at its highest level since 2006 and is a key factor supporting our expectation for significant year-over-year increases in our revenue and earnings in the coming quarters.

Active subdivision account was at 190 to end the 2019 third quarter, up 20% from 158 a year ago. We saw an increased number of active subdivisions in both the East and West segments with the West segment experienced the largest increase. Active subdivisions in the Mountain segment were up only slightly year-over-year. Looking at the graph to the right, on Slide 10, the number of soon-to-be-active communities was almost the same as the number of students in the inactive communities as September 30 whereas the prior four quarters had more favorable variances.

This indicates to me, that our active subdivision account in the short term will be relatively flat compared to our active community count to end the third quarter. Nonetheless, based upon the progress we have already made, we're on track to end 2019 with community count growth of 10% or greater from where we started the year in-line with the guidance we offered to start 2019.

The number of lots we approved this quarter increased by 19% year-over-year following three consecutive quarters of year-over-year declines. This acceleration of activity reflects our confidence in market conditions given the solid sales activity we've seen so far this year.

On the strength of these lot approvals, the total number of lots we controlled at the end of the third quarter was at a high for this year and has nearly reached its highest level in more than a decade. For the 2019 third quarter, we acquired 2178 lots for roughly $164 million with an additional $109 million of spend on development costs.

Approximately 39% of the lots acquired in the third quarter were finished lots. Net homebuilding debt to capital was only 26.7% at the end of the third quarter demonstrating our firm commitment to maintaining a strong balance sheet. Furthermore, our liquidity to end the 2019 third quarter was at $1.35 billion, providing us with significant resources to fund continued growth. Given the significant growth in our backlog and active subdivision count to end the quarter, as well as our dedication to an affordability focused, build-to-order strategy, we are excited about the potential for significant year-over-year earnings growth in coming quarters. We look forward to the opportunity to continue that growth longer term as we further deploy financial resources into our markets across the country.

And with that, I will now turn the call back to the operator for our question and answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Stephen Kim with Evercore S -- ISI.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [2]

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Wanted to ask you about your land spend if I could, just for a sec? Your land spend picked up a little bit here and obviously you spent a fair amount over the last year or so, more than the last year actually, last couple of years, preparing for this big ramp in entry level which is obviously, you're in -- very much in the midst of. Was curious if you anticipate having the ability to ratchet back your land spend or if this rate we saw this quarter, call it $273 million or so, it's a pretty decent run rate for you on an ongoing basis. In other words, are you building land, a land balance here in your opinion, to accelerate growth further or is this a pretty steady rate that we could expect going forward?

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Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [3]

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Steve, I think this is a demand pull market and the market is pulling us forward and we're growing into it and we expect to participate in what is taking place and what we see happening in the markets.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [4]

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That wasn't exactly an answer to the question, I didn't think. In terms of -- from what I'm hearing you say, demand is incredibly -- it's very strong for your product and that obviously is what we're seeing in the results, but, I was curious if the amount of land reinvestment that you're making is, in your view, running at a level to help you accelerate your growth in 2020 and beyond, or if it's a level that you view as sort of steady state?

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Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [5]

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I think we're anticipating the demand to continue to grow and we expect to participate, Steve.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [6]

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And in a similar vein, Larry, you've always -- you and David, have always been very careful with the land strategy when others would be more speculative, you've always held back and I'm curious as to how you view the land parcels that you're seeing, the land deals that you're seeing crossing your desks today. Are you seeing them located further away in order to support your entry level focus or do you find that you're able to, through density, and maybe other adjustments, remain somewhat closer in -- to the -- the employment centers and so forth and still hit the price points.

Effectively what I'm getting at is I'm curious as to whether or not an entry level focus, by definition, pushes you a little bit more out into the fringe here at a point in the cycle which we're prob, is probably not, early.

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Larry A. Mizel, M.D.C. Holdings, Inc. - Chairman & CEO [7]

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I don't think it's late and we have for, I don't know, 40 years, plus, I've found that as long as you have money, you can buy good land. We have adequate liquidity. We are buying good land and the majority of what we're buying is right; aligned with the market demand as we see it at this time. We haven't changed any of our strategies. We're pretty consistent. We buy what we believe we need. We don't buy big parcels of land, we buy lots, not acres and it has served us well and I believe it will continue to also, Steve.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [8]

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All right. Bob, quick one for you. The backlog, the margin in backlog last quarter was a bit higher than what I -- I think it was a bit higher than what you did this quarter and so I was curious as to -- did anything surprise you in terms of the -- what ultimately closed and drove the margin that we saw this quarter?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [9]

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I think there's always a chance for some volatility in the margins and once you take out that warranty adjustment we had last quarter, we're about 50 basis points off from where we were last quarter. I think there's some mix in there. There's different things going off specs. There's nothing I would view as alarming there. We kind of view the margin picture as somewhat consistent in that kind of high 18s, low 19s level we've been over the past few quarters. I think we find it encouraging that the backlog, our gross profit margin, now, what we estimate to come out is higher than what we just closed at that [18 8]. That's always a good sign and kind of speaks to further stability in our gross profit margins.

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Operator [10]

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Your next question comes from Alan Ratner with Zelman & Associates.

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Alan S. Ratner, Zelman & Associates LLC - MD [11]

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So first one, I guess just continuing on the gross margin to be -- to be honest with you, I mean, I guess when I look at the margin and backlog and compare that to your really strong order growth, yes, I guess I'm a little surprised that there's not an ability to push that margin even a bit higher than the range you've been kind of running at through the first three quarters of the year. So maybe that's coming, I'm not sure, but, Bob or Larry, can you just talk a little bit about how you're thinking about the pace versus price equation today because when I see 60% order growth it kind of feels like maybe there's some margin being left on the table but perhaps you're seeing something else on the consumer side that give you a bit more pause as far as pushing price harder than you are today.

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [12]

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We have increased price. In the third quarter, we increased price at about 80% of our subdivisions. Relatively modest. Probably, on average, about 1% of a price increase in the -- in those subdivisions that we did increase price. So we are actively doing that. We do look at pricing on a weekly basis and make adjustments on that as necessary.

The only other thing I'd think that would factor in there is when you're on the front-end of subdivisions and, as you know, we've increased our subdivision count quite substantially this year, I think there is a tendency to try to make sure you get enough units going, especially since we built to order to make sure you've got a good enough runway for your trade. So there's some of that going on, you don't want to increase so much that you're slowing down the sales, so your subs don't have anything to work on. So there's a little bit of that.

But we're still looking at it on a weekly basis to try to make sure that balance is right.

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Alan S. Ratner, Zelman & Associates LLC - MD [13]

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Okay. That's helpful, Bob. And then on the SG&A, obviously the strong orders, understanding that there's some stock comp being triggered here, how should we think about that going forward? This step-up that we saw this quarter, is that the reasonable run rate for corporate G&A or was there somewhat of a, I guess, catch up from the first half of the year now and will that maybe pull back a little bit in subsequent quarters?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [14]

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Yes, speaking to that, just specifically to the PSU's, the performance share units, the accounting gets a little tricky. It contributes to volatility and that amount, $8 million during the quarter was at really an all-time high for us. We haven't seen that level and it was driven by really fantastic orders since the orders were so good all of the sudden the probability of those being achieved increased as well.

So what we think is going to happen is that $8 million will decrease probably by about $3 million to $5 million for Q4. We will have to evaluate it at the end of Q4 and kind of make sure everything still lines up but that's what we see right now.

So if everything else is equal, you would see a $3 million sequential reduction in the G&A.

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Operator [15]

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Your next question comes from John Lovallo with Bank of America.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [16]

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Maybe just to go back to Alan's question for a second on the gross margin, I mean, even without pushing price further, I mean just thinking about the volume that's coming through in the fourth quarter; the price increases that already have been announced and then just the improved mix that should happen sequentially. It does feel like fourth quarter gross margin should be better than just slightly better sequentially. I'm just trying to understand if we're missing something here?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [17]

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I mean you see what's out there. I mean the best thing to look at is our backlog that we've kind of shared with you and right now what's in backlog is slightly better than what we just closed. So I'll leave it at that for now. No doubt, I hope you're right.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [18]

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Okay. Fair enough. If we think about the lots that were purchased in the third quarter and kind of the pace that's going on there which is pretty encouraging, we think. Is it fair to assume, and I don't know how far you want to go out in 2020, but is it fair to assume that in 2020 you can still see pretty decent community count growth?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [19]

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Yes, I think that's certainly a possibility. I think we certainly have work to do on it. I mentioned in my prepared remarks that the soon to be active versus soon to be inactive, it's almost dead even. So that kind of means short term, there's not as much of an opportunity to increase our community count. But as you get a little bit later in 2020, I still think it's possible to increase. So stay tuned on that, I think we still need to see what happens here in Q4 to get a better view of how that might look in 2020.

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Operator [20]

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Your next question comes from Michael Rehaut with JP Morgan.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [21]

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This is actually Maggie on for Mike. First, I wanted to ask about the -- your move-up segment. Obviously, you saw strong demand, really strong demand, across the quarter and you said that the entry level was performing better than the move up and that's what we've heard from everybody else. But I was wondering if you could talk a little bit about the market dynamics and the competition that you were seeing in some of your markets there?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [22]

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Yes, I think for the move-up, things like reduction interest rate certainly helps that category as well. Just as we saw an increase in absorption rate for more of that affordable consumer, we also saw an increase in the absorption rate for the traditional more move-up type of consumer as well. So I think even though the overall absorption rate for that consumer is a little bit lower than like our seasons collection, the gross margin is a little bit lower than our seasons collection, I still think that that group is doing better.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [23]

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Okay. And I apologize if I missed this during the prepared remarks but can you give us the percentage of orders and closings for seasons this quarter versus last year?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [24]

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Yes, for orders I believe we were at 60% versus 54% last year and I think for closings it was 62% versus 49%.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [25]

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Okay.

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [26]

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And that was affordable overall, I should say.

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Operator [27]

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Your next question comes from Truman Patterson with Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [28]

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Just wanted to follow-up on that prior question, you all said 60% of orders this quarter were towards the affordable product versus 54% last year. Has this shift towards the affordable product, is this largely finished or do you think you guys have more rotation to go?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [29]

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Yes, when we initially talked about it, we talked about 50% to 60% being the right kind of range. I could see it going a little bit higher, it could load up more towards 65% to 70% range but I think it has flattened out a little bit. We still want some exposure to a more traditional buyer. It just doesn't grow as quickly.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [30]

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All right. I was hoping you could possibly discuss, it might be a little difficult to dissect, but maybe qualitatively discuss the margin profile on some of your newer entry level communities verse those that have been open a year or two. I'm really hoping to understand whether competition on the entry-level land market is intensifying and driving up costs and this is possibly impacting gross margins near term.

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [31]

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Yes, it is tough to split up. I will say, you've heard it from a lot of builders that focus on the more affordable consumer. So I think it's certainly a factor. There is more competition out there. I would not say at this point that it's necessarily driven up costs a lot and I will say, we certainly benefit from a built-to-order strategy and that makes us a bit distinct on how we operate maybe insulates us a little bit; allows us to get into some better land positions, into master plans where some others might not be able to get into.

So I think that story is still playing out and we're glad to have a head start on tending to the more affordable consumer.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [32]

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Okay. And then hoping for clarity on your September orders. I believe you all suggest in the prepared remarks that the absorption pace in September took a step back relative to July and August. Just looking for clarity. That was purely due to you all pushing pricing, correct? Not deterioration in market conditions or anything like that?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [33]

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Yes, I mean 33 in September, I think, is pretty good. So it's hard to call that anything that resembles poor market conditions. So yes, it comes after we had increased or during the time when we were increasing pricing in 80% of our subdivisions. So I still think that is quite healthy.

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Operator [34]

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(Operator Instructions) Your next question comes from Buck Horne with Raymond James.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [35]

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Just continuing on that trend. Any chance you'd be willing to characterize how October demand is shaped up, if there's been any sort of other response to the price increases that were put in, in September? Any color on October so far?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [36]

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I mean I think October is shaping up good. I think similar to previous months. We're expecting significant year-over-year increase in the number of net new orders in October versus a year ago.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [37]

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Okay. And in -- I just noticed your mix of option land seems to be going down at a fairly quick pace, I guess option lot controls are down 20% or better year-over-year. Is there something going on? Is it getting more difficult to find additional deals to put under option? Is that a function of the competition out there or how do you think about the right mix of putting land on the balance sheet versus what you can do and find options out there to keep the community count growing?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [38]

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Yes, I know you know that if we could have everything under option, finish rolling options, we would love to do that. It's just not available in a lot of our markets without putting up really high deposits or doing something else that maybe makes the transaction really not off balance sheet even if it appears to be.

I think there's a lot more deals now that do require development. In fact, I think of what we approved, it's roughly 80% that requires development. So it's just harder to get kind of pure options done when that's the case.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [39]

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Okay. That's helpful and then just one last quick one. Just geographically just going through the margins, any markets you'd call out as just particularly strong or any places that are showing signs of softening at the moment and, I guess, also just curious about Colorado in particular, just is there any way to help boost the absorption rates even further in Colorado just given the affordability challenges there?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [40]

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Yes, I would say overall Phoenix has been a standout for us in terms of what they've been able to do. I think the affordability of the market, of a very solid deployment of our more affordable product out there has done some wonders for that market. On the other end, California, in particular in the more expensive realm, that continues to be a bit softer.

From a Colorado standpoint, I'd say Colorado is fairing just fine right now. One of the things that we have put into place in Colorado is our urban duplex product. It was just in a subdivision or two, and I think that is expanding in Colorado. So I think that is another step of affordability in this, in the Colorado market. So we're hopeful that that will give some relief to the affordability picture out here.

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Operator [41]

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Your next question comes from Alex Barron with Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [42]

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So generally a lot of people say that the entry level sector is a little bit more price sensitive. I'm just trying to understand, are these price increases that you guys put through intentionally to slow down the market because you can't keep up with the production or is it just to try to raise margins? But I mean what is that going to do to orders? I guess I'm just trying to see if you can help me walk through your thinking here?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [43]

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Yes, I mean I think you have the bullet point on still strong September, 3.3 absorption rate even though we've been focused on increasing prices to some degree. I mean you're always going to look at the price versus pace dynamic and we look at it on a subdivision by subdivision basis. We don't put out [edicts] across our markets and say it absolutely has to be one way or the other. We want our managers focused on all three of those aspects. Where is your production at, where is your pace at and where is your pricing at. So I don't think there is just one thing out there that you can focus on.

Now I will say as far as increasing prices go, first of all, it's relatively modest; about a 1% increase in those 80% that we did show increases in. But we -- remember, we're catering to the consumer at -- a consumer that's looking for affordability but we're not looking to go to the bottom of the barrel, generally speaking, we've kept our product a little bit nicer. We allow for a build-to-order product. So we feel like we attract both a consumer who's maybe a first time consumer but also a move-down consumer and somebody who maybe has a -- maybe a little bit more money to spend just because they want the build-to-order aspect that we're able to offer.

So that's something to keep in mind on as well when you talk about how the price increases relate to M.D.C. specifically.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [44]

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Okay. And what were the -- I guess the incentives as a percentage of closings or as a percentage of revenues this quarter versus a year ago?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [45]

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Let's see, incentives I think roughly 550 basis points. A year ago, it might have been just north of 400.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [46]

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And last quarter?

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [47]

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Last quarter would have been right around that kind of 550 basis points.

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Operator [48]

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Thank you. There are no further questions at this time. I would now like to turn the conference back over to Mr. Bob Martin for any closing remarks.

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Robert Nathaniel Martin, M.D.C. Holdings, Inc. - Senior VP, CFO & Principal Accounting Officer [49]

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Thank you and I appreciate the participation on today's call. At this point, we will end the conference call and look forward to speaking with you again following the report on our Q4 earnings.

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Operator [50]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.