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Text: At this time, all participants are in a listen-only mode.
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.
These and other factors that could impact the company's actual performance are set forth in the company's first quarter 2021 Form 10-Q, which is expected to be filed with the SEC today.
It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures.
MDC Holdings delivered another quarter of strong profitability in the first quarter of 2021 generating net income of $111 million or $1.51 per diluted share.
Our teams did an excellent job executing in their respective markets, leading to double-digit year-over-year increase in closings, orders and quarter-end backlog for our company.
We also expanded our home sales gross margins by 200 basis points and improved our SG&A leverage by 180 basis points.
These results are a testament to the favorable housing fundamentals that exist today as well as the strategic focus of our company, which targets the more affordable segment of the market and adheres to a build-to-order operational model.
We ended the quarter with 7,686 homes in backlog, a 65% increase over the first quarter of 2020.
On a dollar value basis, our backlog stood at $3.9 billion and represents the highest quarter end backlog value in our company's history.
This gives us great visibility into our closings for the remainder of the year and allows us to focus more on our efforts to maximize profitability with our existing sales efforts.
The demand for new homes during the quarter remained strong and continued to be broad-based in nature as we witness positive trends across the number of markets and price points.
Our unit orders increased 34% year-over-year, mainly due to the acceleration in orders per community, which averaged 5.6 per month in the quarter.
This figure could have been even higher were not for our efforts to balance orders and pricing to best manage our backlog.
We continue to see particular strength at our more affordably priced communities as homebuyers from all demographic segments look for alternatives to the lack of availability in the high cost of existing homes in most markets.
This has been a focus for ours for the last several years and the response has been incredible.
Today's homebuyers are looking to get more out of their homes than ever before.
They want something that is tailored to suit their needs, whether it be a home office, a place to exercise or an entertainment venue.
Our home offerings are intended to cater to the desire for personalization and our home galleries provide even more options for our buyers.
We believe this approach leads to a higher customer satisfaction and better results for our company over time.
Another benefit to our build-to-order model is that it's more consistent and stable to run the business.
Building out speculative inventory can be lucrative during periods of heightened demand, but it can also be a result in a glut of completed homes and a lack of pricing power when the market turns.
We feel a more prudent strategy is to start the build process once the contract is in hand.
This is part of our ongoing strategy to be a builder that operates through housing cycles rather than is consistently chasing market then.
Another way in which we operate in housing cycles is by maintaining a strong balance sheet.
Our total availability liquidity at the end of the first quarter was over $1.9 billion, with cash and cash equivalents representing over $750 million of that figure.
Our debt-to-capital ratio was 38.6% and our net debt-to-capital ratio was 22.3%.
Recently, S&P, a global rating, recognized this financial strength as well as our consistent operational performance by upgrading our credit rating to investment-grade.
Having access to low cost capital is a key ingredient for success in our industry.
And the fact that we are one of the few builders with an investment-grade rating is a competitive advantage.
Our strong balance sheet also gives us the ability to pay out an industry-leading quarterly dividend of $0.40 per share, which is up 31% from the first quarter of last year.
Returning capital to shareholders via dividends has been a hallmark for our company for years now and we believe it is a great way to attract and reward long-term shareholders.
We ended the first quarter with the largest backlog on a dollar value basis in our company's history, giving us great visibility into the remainder of the year and supporting our decision to make significant investments in land that will serve as a foundation for the growth in the coming years.
We delivered another quarter of strong profitability generating net income of $111 million or $1.51 per diluted share.
This represented a 201% increase from the first quarter of 2020.
Home sale revenues grew 49% year-over-year to over $1 billion, while homebuilding operating margin improved by 380 basis points from the prior-year quarter.
The growth in home sale revenues and margin expansion resulted in a 129% increase in pre-tax income from our homebuilding operations to $113.5 million.
In addition, our financial services pre-tax income increased to $30.8 million compared to a loss of $1.1 million in the first quarter of 2020.
The increase was driven by our mortgage business, which continues to benefit from the increased volume generated by our homebuilding operations.
Our mortgage business further benefited from a year-over-year improvement in capture rate and profit margin on loans originated.
Additionally, our financial services pre-tax income in the first quarter of 2020 was negatively impacted by $13.9 million of unrealized losses on equity securities, whereas no such loss was incurred in the first quarter of 2021.
Our tax rate decreased from 24.3% to 23.3% for the 2021 first quarter.
The decrease in rate was primarily due to an increase in the estimated amount of energy tax credits to be recognized during the year.
For the remainder of the year, we currently estimate an effective tax rate of 24%, excluding any discrete items and not accounting for any potential changes in tax rates or policy.
Homes delivered increased 41% year-over-year to 2,178, driven by an increase in the number of homes we had in backlog to start the quarter.
This was slightly below our previously estimated range of 2,200 to 2,400 closings.
From a construction standpoint, we completed enough homes to reach the top end of our range.
However, with cycle times extending by about two weeks from the fourth quarter, we had an unusually high volume of closings for the final week of March that caused a delay in the timing of certain pre-closing activities.
As a result, we moved some of our expected first quarter closings into the month of April.
In spite of these minor delays, we remain confident in reaching our full-year target range for closings of between 10,000 and 11,000 units.
For the second quarter, we are anticipating home deliveries to reach between 2,500 and 2,700 units.
We continue to see lower backlog conversions year-over-year as a result of considerable year-over-year increases in net orders and, to a lesser extent, increased cycle times.
We believe that cycle times could increase further due to longer lead times for various building products and high demand for labor required to build homes.
The average selling price of homes delivered during the quarter increased 6% to about $478,000.
This increase was the result of price increases implemented across the majority of our communities over the past 12 months as well as a shift in the mix of homes closed from Arizona and Florida to Southern California and the Mid-Atlantic.
We expect the average selling price for our 2021 second quarter unit deliveries to approximate $500,000.
Gross margin from home sales improved by 200 basis points year-over-year to 21.9%.
We experienced improved gross margin from home sales across each of our segments on build-to-order and spec home deliveries, driven by price increases implemented across nearly all of our communities over the past 12 months.
Gross margin from home sales also benefited from a 40-basis-point improvement in our capitalized interest in cost of sales as a percentage of the home sale revenues, which is a great example of how our business continues to benefit from increasing scale.
We continue to closely monitor building costs, which have increased as a result of the pandemic.
However, we have been successful to this point in offsetting most of these increased costs through home price increases.
Gross margin from home sales for the 2021 second quarter is expected to be approximately 22.5%, assuming no impairments or warranty adjustments.
We continued to benefit from improved operating leverage during the first quarter as our SG&A expense as a percentage of home sale revenues decreased 180 basis points year-over-year to 11%.
General and administrative expenses increased $12.1 million due to increases in compensation-related expenses, including higher average headcount during the quarter.
For each of the remaining quarters of 2021, we currently estimate that our general and administrative expense to be at or above the $57 million we just recognized during the first quarter.
Marketing expenses increased $4.3 million due to variable marketing costs such as deferred selling amortization and master marketing fees as well as increased online advertising costs.
Our commission expenses as a percentage of home sale revenues decreased 20 basis points as we have taken steps to control these costs during this period of strong demand for new housing.
As previously mentioned, our homebuilding operating margin, defined as gross margin from home sales, minus our SG&A rate, grew by 380 basis points year-over-year to 10.9%.
On the strength of this improvement, as well as the success of our mortgage operations, our last 12 months pre-tax return on equity increased by more than 1,000 basis points year-over-year to 27.6%.
Let's look at our net new home order information for the quarter on Slide 9.
The dollar value of our net orders increased 50% year-over-year to $1.64 billion and unit net orders increased by 34%, driven by a 30% increase in our monthly absorption rate to 5.6.
As David mentioned, demand continued to be broad based in nature with particular strength at our more affordably priced communities.
Also, as previously noted, our net new home orders for the first quarter could have been even higher were it not for our efforts to balance orders and pricing to best manage our backlog.
The average selling price of our net orders increased by 12% year-over-year, driven by price increases implemented over the past 12 months as well as decreased sales incentives.
We ended the quarter with 186 active subdivisions and expect this number to remain relatively consistent throughout the second quarter before seeing growth in our active subdivision count during the second half of the year.
The average selling price of homes in backlog increased 9% due to price increases implemented over the past 12 months, decreased incentives and a shift in mix to California.
These factors were slightly offset by a shift in mix to lower-priced communities, consistent with our ongoing strategy of offering more affordable home plans.
I will turn now to land activity on Slide 11.
We approved 4,347 lots for acquisition during the quarter, a 108% increase from the prior-year, reflecting our confidence in market conditions and our focus on continued growth.
We acquired 3,231 lots during the quarter across 60 subdivisions, which is a 90% increase from the prior year.
This included the acquisition of our first lots within our newly formed division in the Boise market.
Land acquisition and development spend for the quarter totaled $358.7 million.
As a result of our recent land acquisition and lot approval activity, our total lot supply to end the quarter exceeded 32,000 lots, representing an 18% increase from the prior-year.
We believe that this lot supply, combined with continued lot approval and acquisition activity, provides us with a solid platform to meet our growth targets.
In summary, we are pleased with our start to 2021 and believe that housing backdrop remains favorable as we look forward to the rest of the year.
We are mindful that there are many risks to achieving our goals for 2021.
With that said, we are confident that our talented employees across the country will continue to be successful in mitigating these risks as we work to execute our strategic plan.
With respect to the pandemic, we are encouraged by the increase in vaccinations occurring in the United States and other parts of the world.
However, we are keenly aware that much uncertainty remains.
As such, we remain firmly committed to ongoing safety protocols that keep our customers, subcontractors and employees safe.

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q1 earnings per share $1.51.
qtrly home sale revenues grew 49% year-over-year on a 41% increase in closings and 6% rise in average selling prices.
qtrly home sale revenues increased 49% to $1.04 billion from $697.1 million.
sees home deliveries for 2021 q2 between 2,500 and 2,700.
sees average selling price for 2021 q2 unit deliveries of approximately $500,000.
sees full year 2021 home deliveries between 10,000 and 11,000.

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