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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 companys actual performance are set forth in the companys third 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 generated net income of $146 million or $1.99 per diluted share in the third quarter of 2021, driven by a combination of strong revenue growth, continued price increases and improving overhead leverage.
Our home sales gross margin of 23.5% represented a 300 basis points improvement over the prior year period as our new home pricing stayed ahead of cost inflation.
We also made further improvements to our fixed cost leverage as our SG&A expense fell 80 basis points year-over-year to 9.6%.
We are extremely pleased with our financial results this quarter, particularly in light of the supply chain issues that continue to affect our industry.
Order activity remained healthy during the quarter at 4.1 sales per community per month.
This represents the second highest third quarter order pace for the company in the last 15 years.
Buyers continue to be drawn to our more affordable price new home offerings, which allow for personalization through our build-to-order strategy.
We believe this operating model is a more prudent and capital-efficient way to run the business and leads to better risk-adjusted returns over time.
We also believe that results in fewer cancellations as homebuyers naturally become more invested in their purchase when they played an active role in designing and furnishing their home.
This is an important differentiator for our company, particularly in light of the lengthening cyclical times.
From a capital standpoint, MDC continues to be in great financial shape.
We ended the quarter with a debt-to-capital ratio of 39.7% and a net debt-to-capital ratio of 23.7%.
During the quarter, we issued $350 million of senior notes due in 2061 [phonetic] 0:05:40 at an interest rate of 3.966 and made a tender offer for over $120 million of our senior notes due 2024, which carry an interest rate of 5.5%.
And while the early retirement of debt resulted in a $12.2 million charge this quarter, we now have a lower cost of capital and a debt maturity schedule that extends out 40 years.
Our total liquidity position at the end of the quarter stood at just over $2 billion, giving us plenty of capital to scale our operations in the coming years.
It will also allow us to continue paying our industry leading dividend, which currently stands at $2 per share on an annualized basis.
As Larry mentioned, we continue to see robust demand for our homes across our geographic footprint.
With the West region posting the best order pace during the quarter at 4.9 homes per community per month, followed by the East at 3.7 and our Mountain region at 3.0.
Pricing remained firm within our communities, and we did not win this any widespread use of incentives or discounting in our markets as each of the segments posted home sales gross margins in excess of 20%.
As our existing operations continue to thrive, we have started to move into new markets that exhibit similar strong housing fundamentals.
Earlier this year, we announced our expansion to Boise and Nashville.
And in this quarter, we are pleased to announce our entry into Austin, Texas and Albuquerque, New Mexico.
We have land deals in place in both markets and look forward to establishing profitable operations in the years to come.
As we head into the end of the year, MDC is focused on delivering homes and backlog while setting the stage for additional growth in 2022.
Our lots owned and controlled at the end of the third quarter increased by 37% year-over-year, giving us a great opportunity to capitalize on the positive housing fundamentals in our markets.
We have several new communities scheduled to open in the coming quarters, which Bob will give in more detail in a moment.
While we expect the current supply chain issues to persist for the foreseeable future, we also expect the current demand drivers to remain in place as well, giving us a great opportunity to finish the year on a high note and build on our success in 2022.
As a result, we are optimistic about the future of our company.
During the third quarter, we generated net income of $146 million or $1.99 per diluted share, representing a 48% increase from the third quarter of 2020.
Home sale revenues grew 26% year-over-year to $1.26 billion, while gross margin from home sales improved by 300 basis points.
The growth in home sale revenues and margin expansion resulted in a 62% increase in pre-tax income from our homebuilding operations to $165.2 million.
As Larry mentioned, we accelerated the retirement of $123.6 million of our unsecured notes due in January 2024 through a cash tender offer during the quarter.
The retirement resulted in a loss of $12.2 million, which is included in homebuilding pre-tax income.
Financial services pre-tax income increased 13% year-over-year to $27.5 million.
All of our financial services companies benefited from the increased volume of our homebuilding operations during the quarter.
Our mortgage company also benefited from a $3.5 million gain recognized on the sale of conventional mortgage servicing rights during the period.
This increase was mostly offset by increased competition in the primary mortgage market, increased compensation-related costs and a temporary decrease in our capture rate.
Our tax rate increased from 21.5% to 24.3% for the 2021 third quarter.
The increase in rate was primarily due to a decrease in tax windfalls recognized upon the vesting and exercise of equity awards, which was partially offset by a year-over-year increase in home energy tax credits.
For the remainder of the year, we currently estimate an effective tax rate of approximately 24.5%, excluding any discrete items and not accounting for any potential changes in tax rates or policy.
Homes delivered increased 13% year-over-year to 2,419 during the third quarter, driven by an increase in the number of homes we had in backlog to start the quarter.
Our ability to convert backlog and closings continues to be negatively impacted by increasing permitting times and labor and material shortages.
As a result, we saw cycle times increase by approximately two weeks sequentially from the second to third quarter of 2021.
The number of homes delivered during the quarter was below our previously estimated range of 2,500 to 2,700 units and was a direct result of the extended cycle times that we experienced.
The average selling price of homes delivered during the quarter increased 12% to about $520,000.
The increase was a result of price increases implemented across the majority of our communities over the past 12 months.
For the fourth quarter, we are anticipating home deliveries to reach between 27,300 units, with an average selling price between $530,000 and $540,000.
Gross margin from home sales improved by 300 basis points year-over-year to 23.5%.
We experienced improved gross margin from home sales across each of our segments, with our West segment showing the largest increase year-over-year as well as having the highest absolute level overall.
These improvements were driven by price increases implemented across nearly all of our communities over the past year, which have been partially offset by increased building material and labor costs.
While we have seen lumber prices decrease in recent months, we continue to experience cost pressures on other building materials and labor costs.
Gross margin from home sales for the 2021 of fourth quarter is expected to increase to between 23.5% and 24%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2021 third quarter increased by $16.5 million from the 2020 third quarter, driven primarily by increased general and administrative expenses.
Our SG&A expense as a percentage of home sale revenues decreased 80 basis points year-over-year to 9.6%.
General and administrative expenses totaled $59.9 million during the third quarter due to increases in compensation related expenses, including increased bonus and stock-based compensation accruals.
We currently estimate that our general and administrative expenses will grow to between $65 million and $70 million for the fourth quarter of 2021.
Marketing expenses increased $900,000 as a result of increased master marketing fees relating to increased closings volume.
However, marketing expenses as a percentage of home sale revenues were down 50 basis points year-over-year as we were able to continue limiting advertising expenses in this high demand environment.
Our commission expense as a percentage of home sale revenues decreased 60 basis points year-over-year as we have taken steps to control these costs during this period of strong demand for new housing.
The dollar value of our net orders decreased 21% year-over-year to $1.31 billion due to a 32% decrease in unit net orders.
This decrease was driven by a 33% year-over-year reduction in our monthly sales absorption pace.
Our sales absorption pace for the third quarter of 2021 was a healthy 4.1 orders per community per month.
While this represented a year-over-year decrease from the third quarter of 2020, it was a 14% increase from the pre pandemic levels experienced in the third quarter of 2019.
The year-over-year decrease in our sales absorption pace was due to the return of more normal seasonal patterns as well as our efforts to moderate sales activity, as we have mentioned on prior calls.
Overall, we believe demand levels remained highly favorable during the third quarter.
Were also pleased with the start of the fourth quarter from a demand standpoint based on the net orders weve seen to this point in October.
The average selling price of our net orders increased 16% year-over-year as we have raised prices across most of our communities over the past 12 months.
While price increases slowed during the third quarter, pricing remained firm and continues to more than offset the higher input costs related to building materials and labor.
Looking at backlog metrics on slide 11.
The dollar value of homes in backlog increased 38% year-over-year despite the decrease in third quarter activity.
While cycle times remain the biggest challenge to our backlog conversion efforts, we believe we are well positioned entering the fourth quarter with construction started on 84% of our backlog and 42% at frame stage of construction or beyond.
We approved 5,892 lots for acquisition during the quarter, representing a 54% increase year-over-year.
This brings the total number of lots approved for acquisition during the year to 15,978 lots and marks the third time in the last four quarters, our approval activity exceeded to 5,000 lots.
We closed on 3,214 lots during the third quarter, which included about a 100 finished lots within our first subdivision in Austin, Texas.
Total land acquisition and development spend for the quarter was $420 million.
As a result of our land acquisition and approval activity, our total lot supply to end the quarter was nearly 37,000 lots, representing a 37% increase from the prior year quarter.
In addition, 34% of our lot supply was controlled via option as of period end.
We believe that this lot supply, combined with the continued lot approval and acquisition activity, provides us with a solid platform for growth in 2022 and beyond.
Our active subdivision count was at 203 to end the quarter, up 5% from 194 a year ago.
We saw an increased number of active subdivisions in both the East and West segments with the East segment experiencing the largest increase.
Active subdivisions in the Mountain segment were down 8% year-over-year.
Were actively selling out of our first Boise subdivision as of quarter end.
And with the acquisition of finished lots in Austin during the third quarter, we expect to be open for sales in this new market by the end of the year.
New community openings remain challenging in the current environment due to delays in municipal approvals and the strain on the available resources to complete development work.
Also, we have a number of legacy communities on the verge of closing out, as you can see from the number of soon to be inactive communities as of September 30, 2021.
This indicates that our active subdivision account could decrease over the next few months as we work to open and begin selling out of our new communities.
Due to this potential short-term volatility in our active subdivision count, we are not reiterating any year-end guidance for this metric.
However, we do expect to see an increase from our 203 active communities at the end of the third quarter before we reached the end of the 2022 first quarter in time for the spring selling season.
While we expect further active subdivision growth from that point through the end of 2022, we will wait to provide further guidance until we have more visibility as to the timing of these community openings.
In summary, we are pleased with our financial results for the third quarter and believe the housing backdrop remains favorable.
While we expect the current supply chain issues to continue in the near term, our current backlog and land position have us poised for continued growth into 2022.
Our financial position remains strong with over $2 billion of total liquidity and a net debt-to-capital ratio of 23.7% as of quarter end, providing us with the ability to continue to grow our business and invest in our new markets.
Without their efforts, we would not be in the position we are today, poised to deliver more than 10,000 new homes to our homebuyers for the 2021 full year.

user
compname says q3 home sale revenue up 26% to $1.26 bln.
qtrly home sale revenue increased 26% to $1.26 billion from $1 billion.
qtrly average selling price of deliveries up 12% to $519,900.
qtrly dollar value of net new orders decreased 21% to $1.30 billion from $1.65 billion.
q3 earnings per share $1.99.
quarter-end dollar value of ending backlog up 38% to $4.24 billion from $3.08 billion.
sees projected home deliveries for 2021 q4 between 2,700 and 3,000.
sees average selling price for 2021 q4 unit deliveries between $530,000 and $540,000.

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