M.D.C. Holdings Announces 2018 Third Quarter Results

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Strong performance highlighted by a 31% year-over-year increase in home sale revenues, a 140 basis point expansion of home sales gross margins and a 90 basis point improvement in SG&A rate during the third quarter of 2018.

November 1, 2018 6:02 AM EDT

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DENVER, Nov. 1, 2018 /PRNewswire/ -- M.D.C. Holdings, Inc. (NYSE: MDC) announced results for the third quarter ended September 30, 2018.

Larry A. Mizel, MDC's Chairman and Chief Executive Officer, stated, "MDC turned in another strong performance in the third quarter of 2018, highlighted by a 31% year-over-year increase in home sale revenues, a 210 basis point expansion in home sales gross margins excluding impairments and a 90 basis point improvement in our SG&A rate. We continued to see solid demand for our homes, as evidenced by our order pace of 2.7 homes per community per month, which was similar to the same quarter a year ago. After steady home price appreciation during the past few years and recent interest rate increases, national new home sales have slowed during the third quarter, relative to the robust increases seen during the past few years. This is an expected part of a housing cycle. However, we believe that our industry still has the potential for continued expansion, given the strength of the underlying fundamentals."

Mr. Mizel continued, "We continue to position our company for targeted growth, with an emphasis on growing our presence in the affordable market segment. Our affordable product communities have delivered above average order paces and gross margins over the last several quarters, and we believe that this trend will continue. With our mix shift to more affordable product and our expectation for 10% growth in active community count at the end of 2018, we feel that we are in a great position to take market share and grow our operations."

2018 Third Quarter Highlights and Comparisons to 2017 Third Quarter

Home sale revenues up 31% to $766.0 million from $584.9 million

Average selling price of homes delivered up 9% to $483,600

Pretax income of $67.4 million vs. $89.7 million in 2017 third quarter

$52.2 million gain on investments in 2017 third quarter vs $3.0 million gain in 2018 third quarter
Excluding gain on investments, pretax income increased 72% to $64.4 million from $37.5 million

Net income of $53.4 million, or $0.93 per diluted share, down 13% from $61.2 million or $1.07 per diluted share*

Effective tax rate of 20.8% vs. 31.8%

Gross margin from home sales up 140 basis points to 17.7% from 16.3%

$11.1 million impairment charge in 2018 third quarter vs. $4.5 million in 2017 third quarter
Excluding impairments, gross margins increased 210 basis points to 19.2% from 17.1%

Selling, general and administrative expenses as a percentage of home sale revenues ("SG&A rate") improved by 90 basis points to 10.9% from 11.8%
Dollar value of net new orders of $581.2 million vs. $596.7 million in 2017 third quarter

Unit net orders increased 2% to 1,290
Monthly sales absorption pace of 2.67

Lot purchase approvals increased by 16% to 2,878 lots in 34 communities

* Per share amount for the 2017 third quarter has been adjusted for the 8% stock dividend declared and paid in the 2017 fourth quarter

2018 Outlook – Selected Information

Backlog dollar value at September 30, 2018 up 6% year-over-year to $1.80 billion

Gross margin from home sales in backlog at 9/30/2018 roughly even with 2018 third quarter closing gross margin (excluding impairments) of 19.2%
Backlog conversion ratio (home deliveries divided by beginning backlog) for the fourth quarter estimated to be in the 45% to 47% range

Active subdivision count at 9/30/2018 of 158, up 3% year-over-year and 5% from 12/31/2017

Targeting a 10% year-over-year increase in active subdivision count by year end (from 151 at 12/31/2017 to at least 166 at 12/31/2018)

Lots controlled of 25,011 at 9/30/2018, up 32% year-over-year
Quarterly dividend of $0.30 ($1.20 annualized) declared in October 2018, up 30% year-over-year (after adjusting for 8% stock dividend in December 2017)
Estimated effective tax rate for the fourth quarter of 2018 between 17% and 19%

Includes expected benefits related to changes in tax methods

About MDC

M.D.C. Holdings, Inc. was founded in 1972. MDC's homebuilding subsidiaries, which operate under the name Richmond American Homes, have built and financed the American Dream for more than 200,000 homebuyers since 1977. MDC's commitment to customer satisfaction, quality and value is reflected in each home its subsidiaries build. MDC is one of the largest homebuilders in the United States. Its subsidiaries have homebuilding operations across the country, including the metropolitan areas of Denver, Colorado Springs, Salt Lake City, Las Vegas, Phoenix, Tucson, Riverside-San Bernardino, Los Angeles, San Diego, Orange County, San Francisco Bay Area, Sacramento, Washington D.C., Baltimore, Orlando, Jacksonville, South Florida, Seattle and Portland. The Company's subsidiaries also provide mortgage financing, insurance and title services, primarily for Richmond American homebuyers, through HomeAmerican Mortgage Corporation, American Home Insurance Agency, Inc. and American Home Title and Escrow Company, respectively. M.D.C. Holdings, Inc. is traded on the New York Stock Exchange under the symbol "MDC." For more information, visit www.mdcholdings.com.

Forward-Looking Statements

Certain statements in this release, including any statements regarding our business, financial condition, results of operation, cash flows, strategies and prospects, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of MDC to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (1) general economic conditions, including changes in consumer confidence, inflation or deflation and employment levels; (2) changes in business conditions experienced by MDC, including cancellation rates, net home orders, home gross margins, land and home values and subdivision counts; (3) changes in interest rates, mortgage lending programs and the availability of credit; (4) changes in the market value of MDC's investments in marketable securities; (5) uncertainty in the mortgage lending industry, including repurchase requirements associated with HomeAmerican Mortgage Corporation's sale of mortgage loans (6) the relative stability of debt and equity markets; (7) competition; (8) the availability and cost of land and other raw materials used by MDC in its homebuilding operations; (9) the availability and cost of performance bonds and insurance covering risks associated with our business; (10) shortages and the cost of labor; (11) weather related slowdowns and natural disasters; (12) slow growth initiatives; (13) building moratoria; (14) governmental regulation, including the interpretation of tax, labor and environmental laws; (15) terrorist acts and other acts of war; (16) changes in energy prices; and (17) other factors over which MDC has little or no control. Additional information about the risks and uncertainties applicable to MDC's business is contained in MDC's Form 10-Q for the quarter ended September 30, 2018, which is scheduled to be filed with the Securities and Exchange Commission today. All forward-looking statements made in this press release are made as of the date hereof, and the risk that actual results will differ materially from expectations expressed in this press release will increase with the passage of time. MDC undertakes no duty to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent filings, releases or webcasts should be consulted.

M.D.C. HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands, except per share amounts)
	(Unaudited)
Homebuilding:
Home sale revenues	$	766,027	$	584,947	$	2,123,323	$	1,796,046
Land sale revenues		-		1,340		-		2,938
Total home and land sale revenues		766,027		586,287		2,123,323		1,798,984
Home cost of sales		(619,248)		(485,147)		(1,722,283)		(1,493,166)
Land cost of sales		-		(1,259)		-		(2,672)
Inventory impairments		(11,098)		(4,540)		(11,848)		(9,390)
Total cost of sales		(630,346)		(490,946)		(1,734,131)		(1,505,228)
Gross profit		135,681		95,341		389,192		293,756
Selling, general and administrative expenses		(83,523)		(69,102)		(236,435)		(206,109)
Interest and other income		1,953		54,548		5,586		59,722
Other expense		(1,128)		(618)		(2,562)		(1,635)
Other-than-temporary impairment of marketable securities		-		-		-		(51)
Homebuilding pretax income		52,983		80,169		155,781		145,683

Financial Services:
Revenues		19,611		17,464		60,018		54,516
Expenses		(9,408)		(8,849)		(27,850)		(25,247)
Interest and other income		4,234		925		6,619		3,142
Other-than-temporary impairment of marketable securities		-		(29)		-		(160)
Financial services pretax income		14,437		9,511		38,787		32,251

Income before income taxes		67,420		89,680		194,568		177,934
Provision for income taxes		(14,028)		(28,517)		(38,513)		(60,651)
Net income	$	53,392	$	61,163	$	156,055	$	117,283

Other comprehensive loss related to
available for sale securities, net of tax		-		(23,175)		-		(19,245)
Comprehensive income	$	53,392	$	37,988	$	156,055	$	98,038

Earnings per share:
Basic	$	0.94	$	1.09	$	2.77	$	2.10
Diluted	$	0.93	$	1.07	$	2.72	$	2.07

Weighted average common shares outstanding:
Basic		56,171,619		55,782,389		56,023,996		55,623,225
Diluted		57,226,659		56,809,208		57,029,715		56,428,247

Dividends declared per share	$	0.30	$	0.23	$	0.90	$	0.69

M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets

	September 30,		December 31,
	2018		2017
ASSETS	(Dollars in thousands, except
	per share amounts)
Homebuilding:		(Unaudited)
Cash and cash equivalents	$	360,947	$	472,957
Marketable securities		-		49,634
Restricted cash		7,866		8,812
Trade and other receivables		56,469		53,362
Inventories:
Housing completed or under construction		1,073,909		936,685
Land and land under development		1,034,025		893,051
Total inventories		2,107,934		1,829,736
Property and equipment, net		56,693		26,439
Deferred tax asset, net		36,815		41,480
Prepaid and other assets		52,988		75,666
Total homebuilding assets		2,679,712		2,558,086
Financial Services:
Cash and cash equivalents		49,979		32,471
Marketable securities		49,006		42,004
Mortgage loans held-for-sale, net		114,836		138,114
Other assets		14,637		9,617
Total financial services assets		228,458		222,206
Total Assets	$	2,908,170	$	2,780,292
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	52,070	$	39,655
Accrued liabilities		175,110		166,312
Revolving credit facility		15,000		15,000
Senior notes, net		987,617		986,597
Total homebuilding liabilities		1,229,797		1,207,564
Financial Services:
Accounts payable and accrued liabilities		54,847		53,101
Mortgage repurchase facility		90,784		112,340
Total financial services liabilities		145,631		165,441
Total Liabilities		1,375,428		1,373,005
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-		-
Common stock, $0.01 par value; 250,000,000 shares authorized; 56,614,726 and 56,123,228 issued and outstanding at September 30, 2018 and December 31, 2017, respectively		566		561
Additional paid-in-capital		1,162,924		1,144,570
Retained earnings		369,252		258,164
Accumulated other comprehensive income		-		3,992
Total Stockholders' Equity		1,532,742		1,407,287
Total Liabilities and Stockholders' Equity	$	2,908,170	$	2,780,292

M.D.C. HOLDINGS, INC.
Consolidated Statement of Cash Flows

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
	(Unaudited)
Operating Activities:
Net income	$	53,392	$	61,163	$	156,055	$	117,283
Adjustments to reconcile net income to net cash provided by (used in operating activities:
Stock-based compensation expense		2,425		1,062		8,500		3,100
Depreciation and amortization		5,454		1,501		15,406		4,205
Inventory impairments		11,098		4,540		11,848		9,390
Other-than-temporary impairment of marketable securities		-		29		-		211
Net gain on sale of available-for-sale marketable securities		-		(16,364)		-		(18,122)
Net gain on marketable equity securities		(3,004)		-		(3,129)		-
Gain on sale of metropolitan district bond securities (related party)		-		(35,847)				(35,847)
Amortization of discount / premiums on marketable debt securities, net		-		-		(366)		-
Deferred income tax expense		535		12,762		4,092		22,795
Net changes in assets and liabilities:
Trade and other receivables		(4,732)		(5,300)		(7,049)		119
Mortgage loans held-for-sale		(7,651)		5,479		23,278		48,970
Housing completed or under construction		1,919		(62,290)		(131,657)		(101,997)
Land and land under development		(65,506)		(17,635)		(149,963)		19,886
Prepaid expenses and other assets		(7,220)		(3,627)		(12,328)		(11,229)
Accounts payable and accrued liabilities		10,232		6,500		26,067		15,345
Net cash provided by (used in) operating activities		(3,058)		(48,027)		(59,246)		74,109

Investing Activities:
Purchases of marketable securities		(2,524)		(5,561)		(17,183)		(17,604)
Maturities of marketable securities		-		-		50,000		-
Sales of marketable securities		850		71,865		13,310		83,315
Proceeds from sale of metropolitan district bond securities (related party)		-		44,253		-		44,253
Purchases of property and equipment		(6,848)		(553)		(19,899)		(1,917)
Net cash provided by (used in) investing activities		(8,522)		110,004		26,228		108,047

Financing Activities:
Payments on mortgage repurchase facility, net		9,965		(4,024)		(21,556)		(49,382)
Advances on revolving credit facility		-		-		-		-
Dividend payments		(16,940)		(12,984)		(50,733)		(38,793)
Payments of deferred financing costs		-		(2,630)		-		(2,630)
Proceeds from exercise of stock options		4,024		1,199		9,859		8,503
Net cash used in financing activities		(2,951)		(18,439)		(62,430)		(82,302)

Net increase (decrease) in cash, cash equivalents and restricted cash		(14,531)		43,538		(95,448)		99,854
Cash, cash equivalents and restricted cash:
Beginning of period		433,323		343,003		514,240		286,687
End of period	$	418,792	$	386,541	$	418,792	$	386,541

Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents	$	360,947	$	351,399	$	360,947	$	351,399
Restricted cash		7,866		8,723		7,866		8,723
Financial Services:
Cash and cash equivalents		49,979		26,419		49,979		26,419
Total cash, cash equivalents and restricted cash	$	418,792	$	386,541	$	418,792	$	386,541

New Home Deliveries

		Three Months Ended September 30,
		2018					2017					% Change
		Homes	Home SaleRevenues		AveragePrice		Homes	Home SaleRevenues		AveragePrice		Homes	Home SaleRevenues	AveragePrice
		(Dollars in thousands)
	West	836	$	409,001	$	489.2	747	$	326,804	$	437.5	12%	25%	12%
	Mountain	535		272,989		510.3	359		165,726		461.6	49%	65%	11%
	East	213		84,037		394.5	211		92,417		438.0	1%	(9)%	(10)%
	Total	1,584	$	766,027	$	483.6	1,317	$	584,947	$	444.2	20%	31%	9%

		Nine Months Ended September 30,
		2018					2017					% Change
		Homes	Home SaleRevenues		Average Price		Homes	Home SaleRevenues		Average Price		Homes	Home SaleRevenues	AveragePrice
		(Dollars in thousands)
	West	2,286	$	1,120,316	$	490.1	2,180	$	959,641	$	440.2	5%	17%	11%
	Mountain	1,473		750,162		509.3	1,190		561,620		471.9	24%	34%	8%
	East	611		252,845		413.8	615		274,785		446.8	(1)%	(8)%	(7)%
	Total	4,370	$	2,123,323	$	485.9	3,985	$	1,796,046	$	450.7	10%	18%	8%

Net New Orders

	Three Months Ended September 30,
	2018						2017						% Change
	Homes	Dollar Value		AveragePrice		MonthlyAbsorptionRate *	Homes	Dollar Value		Average Price		Monthly AbsorptionRate *	Homes	DollarValue	AveragePrice	MonthlyAbsorption Rate
	(Dollars in thousands)
West	690	$	316,556	$	458.8	3.06	692	$	336,730	$	486.6	3.20	(0)%	(6)%	(6)%	(4)%
Mountain	418		206,945		495.1	2.22	381		185,766		487.6	2.43	10%	11%	2%	(9)%
East	182		57,649		316.8	2.64	197		74,219		376.7	2.35	(8)%	(22)%	(16)%	12%
Total	1,290	$	581,150	$	450.5	2.67	1,270	$	596,715	$	469.9	2.78	2%	(3)%	(4)%	(4)%
	Nine Months Ended September 30,
	2018						2017						% Change
	Homes	Dollar Value		AveragePrice		MonthlyAbsorptionRate *	Homes	Dollar Value		Average Price		MonthlyAbsorptionRate *	Homes	DollarValue	AveragePrice	Monthly AbsorptionRate
	(Dollars in thousands)
West	2,743	$	1,274,115	$	464.5	4.14	2,443	$	1,124,514	$	460.3	3.64	12%	13%	1%	14%
Mountain	1,593		814,939		511.6	3.02	1,463		704,959		481.9	3.24	9%	16%	6%	(7)%
East	579		207,394		358.2	2.78	658		271,159		412.1	2.30	(12)%	(24)%	(13)%	21%
Total	4,915	$	2,296,448	$	467.2	3.51	4,564	$	2,100,632	$	460.3	3.24	8%	9%	1%	8%

Active Subdivisions

					Average Active Subdivisions			Average Active Subdivisions
		Active Subdivisions			Three Months Ended			Nine Months Ended
		September 30,		%	September 30,		%	September 30,		%
		2018	2017	Change	2018	2017	Change	2018	2017	Change
	West	73	76	(4)%	75	72	4%	74	75	(1)%
	Mountain	64	55	16%	63	52	21%	59	50	18%
	East	21	23	(9)%	23	28	(18)%	23	31	(26)%
	Total	158	154	3%	161	152	6%	156	156	0%

Backlog

		September 30,
		2018					2017					% Change
		Homes	Dollar Value		AveragePrice		Homes	Dollar Value		AveragePrice		Homes	Dollar Value	Average Price
		(Dollars in thousands)
	West	1,908	$	939,247	$	492.3	1,610	$	820,222	$	509.5	19%	15%	(3)%
	Mountain	1,373		717,988		522.9	1,341		663,505		494.8	2%	8%	6%
	East	423		145,829		344.7	512		224,565		438.6	(17)%	(35)%	(21)%
	Total	3,704	$	1,803,064	$	486.8	3,463	$	1,708,292	$	493.3	7%	6%	(1)%

Homes Completed or Under Construction (WIP lots)

		September 30,		%
		2018	2017	Change
	Unsold:
	Completed	129	78	65%
	Under construction	311	218	43%
	Total unsold started homes	440	296	49%
	Sold homes under construction or completed	2,835	2,591	9%
	Model homes under construction or completed	403	319	26%
	Total homes completed or under construction	3,678	3,206	15%

Lots Owned and Optioned (including homes completed or under construction)

		September 30, 2018			September 30, 2017
		LotsOwned	LotsOptioned	Total	Lots Owned	Lots Optioned	Total	Total %Change
	West	7,736	4,215	11,951	6,230	1,905	8,135	47%
	Mountain	6,020	3,648	9,668	5,078	3,092	8,170	18%
	East	1,895	1,497	3,392	1,345	1,309	2,654	28%
	Total	15,651	9,360	25,011	12,653	6,306	18,959	32%

Selling, General and Administrative Expenses

		Three Months Ended September 30,						Nine Months Ended September 30,
		2018		2017		Change		2018		2017		Change
		(Dollars in thousands)
	General and administrative expenses	$	40,237	$	33,170	$	7,067	$	116,362	$	97,831	$	18,531
	General and administrative expenses as a percentage of home sale revenues		5.3%		5.7%		(40) bps		5.5%		5.4%		10 bps

	Marketing expenses	$	18,102	$	16,445	$	1,657	$	50,888	$	48,545	$	2,343
	Marketing expenses as a percentage of home sale revenues		2.4%		2.8%		(40) bps		2.4%		2.7%		(30) bps

	Commissions expenses	$	25,184	$	19,487	$	5,697	$	69,185	$	59,733	$	9,452
	Commissions expenses as a percentage of home sale revenues		3.3%		3.3%		0 bps		3.3%		3.3%		0 bps

	Total selling, general and administrative expenses	$	83,523	$	69,102	$	14,421	$	236,435	$	206,109	$	30,326
	Total selling, general and administrative expenses as a percentage of home sale revenues		10.9%		11.8%		(90) bps		11.1%		11.5%		(40) bps

Capitalized Interest

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2018		2017		2018		2017
		(Dollars in thousands)
	Homebuilding interest incurred	$	15,641	$	13,212	$	46,905	$	39,594
	Less: Interest capitalized		(15,641)		(13,212)		(46,905)		(39,594)
	Homebuilding interest expensed	$	-	$	-	$	-	$	-

	Interest capitalized, beginning of period	$	58,227	$	62,091	$	57,541	$	68,085
	Plus: Interest capitalized during period		15,641		13,212		46,905		39,594
	Less: Previously capitalized interest included in home and land cost of sales		(16,636)		(15,087)		(47,214)		(47,463)
	Interest capitalized, end of period	$	57,232	$	60,216	$	57,232	$	60,216

Reconciliation of Non-GAAP Financial Measures

Below is a reconciliation of gross margin from home sales to gross margin from home sales excluding inventory impairments, warranty adjustments and interest in cost of sales. The table below reconciles each of these non-GAAP financial measures to gross margin as calculated based on GAAP. We believe this information is relevant and meaningful as it provides our investors and analysts with the impact that interest, warranty and impairments have on our Gross Margin from Home Sales and permits investors to make better comparisons with our competitors, who also break out and adjust gross margins in a similar fashion.

		Three Months Ended
		September 30,2018			Gross Margin %	September 30, 2017		Gross Margin %
		(Dollars in thousands)
	Gross Margin	$	135,681	17.7%		$	95,341	16.4%
	Less: Land Sale Revenues		-				(1,340)
	Add: Land Cost of Sales		-				1,259
	Gross Margin from Home Sales		135,681	17.7%			95,260	16.3%
	Add: Inventory Impairments		11,098				4,540
	Gross Margin from Home Sales Excluding Inventory Impairments		146,779	19.2%			99,800	17.1%
	Add: Warranty Adjustments		-				(425)
	Gross Margin from Home Sales Excluding Inventory Impairments and Warranty Adjustments
			146,779	19.2%			99,375	17.0%
	Add: Interest in Cost of Sales		16,636				15,087
	Gross Margin from Home Sales Excluding Inventory Impairments,
	Warranty Adjustments, and Interest in Cost of Sales	$	163,415	21.3%		$	114,462	19.6%