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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 2020 Form 10-K, which is expected to be filed with the SEC today.
It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures.
MDC delivered strong results in the fourth quarter of 2020, highlighted by fully diluted earnings per share of $2.19, representing a 54% increase over the fourth quarter of 2019.
Home sales revenues increased 10% year-over-year, and home sales gross margin expanded 350 basis points to 22%.
We continue to experience robust demand across our homebuilding operations as the dollar value of our net new orders increased 92% for the quarter on a sales pace of 4.7 homes per community per month.
The strong order activity resulted in backlog value of $3.26 billion, our largest year-end backlog ever.
The size and quality of our backlog gives us great visibility into 2021 and allows us to enter the new year in a position of strength.
Adding to our communities' position of strength is our current financial condition.
In December, we successfully increased the size of our unsecured revolving credit facility from $1 billion to $1.2 billion.
Shortly thereafter, we issued $350 million of senior notes due in 2031 with a coupon of 2.5%, the lowest rate ever achieved by a non-investment grade company for 10-year issuance.
These two transactions greatly increased our liquidity position and improved our cost of capital putting us in a great position to grow our presence in our existing markets, and potentially expand into new ones.
With respect to new markets, I'm pleased to announce that MDC has made the strategic decision to establish a presence in Boise, Idaho.
Boise exhibits many of the characteristics we look for in a new market, such as a diverse and growing local economy, rising income levels and a strong population of buyers.
We recently signed our first lot deal in the market and expect to deliver our first home by the end of 2021.
Boise presents a great opportunity for our company and we are actively seeking similar expansion opportunities in other parts of the country.
Our goal has been to design innovative homes that allow for personalization with an eye toward better affordability and the response has been tremendous.
Several of our operation in places like California, Florida and the Pacific Northwest have reached volume levels that allow for better economics of scale, which has translated into better margin contributions for those areas, while our established positions in places like the Mountain West continues to generate strong margins and returns for our company.
In terms of broader macroeconomic factors that affect our industry, we continue to see an extremely positive landscape as we enter the new year.
We believe demand will remain in place after the threat from the virus subsides due to the sheer size of buying population and the structural shift that occurred as a result of the pandemic, which place a greater emphasis on now and where to live.
In summary, the fourth quarter of 2020 capped a remarkable year for our company, culminating in a 54% increase in our annual net income as compared to 2019.
We responded to the challenges brought about by the pandemic with heightened safety protocols, modified sales techniques and innovative operational procedures, all of which contributed to the strong rebound we experienced in the back half of the year.
These changes to our business practice required the coordinated efforts of all of our team members and I could not be more proud of how they performed.
2020 provided to be a challenging year for our country and economy, but I'm optimistic about the direction of both in the new year.
Our build-to-order business model and more affordable product focus have proven to be ideally situated for the current market conditions, and I believe this will be true going forward.
On behalf of the company, I would like to extend my sincere gratitude to our employees and sub-contractors for making 2020 an incredibly successful year in spite of the immense challenges we faced.
We ended 2020 with another strong quarter as pre-tax income from our homebuilding operations increased $48.9 million or 52% from the prior year quarter to $142.3 million.
As Larry mentioned, this increase was driven mostly by higher gross margins.
To a lesser extent, our homebuilding profits also benefited from improved home sale revenues, which increased by 10% to $1.18 billion.
Our financial services pre-tax income increased $10.2 million or 54% to $29 million.
The increase was driven by our mortgage business, which continues to benefit from the increased volume generated by our homebuilding operations.
Our mortgage business has further benefited from year-over-year improvements in capture rate and profit margin on loans originated.
As a result, overall net income increased 59% to $147.5 million or $2.19 per diluted share for the fourth quarter of 2020.
Our tax rate decreased from 17.5% to 13.9% for the 2020 fourth quarter.
The decrease in rate was primarily due to a larger benefit from federal energy efficient home tax credits in the 2020 fourth quarter due to an increase in the estimated amount of energy tax credits to be received.
For 2021, I would roughly estimate an effective tax rate of 24%, excluding any discrete items, and not accounting for any potential changes in tax rates or policy.
Turning to Slide 6.
Homes delivered increased 7% year-over-year to 2,564, driven by an increase in the number of homes, we had in backlog to start the quarter.
Backlog conversion for the quarter was significantly lower than the fourth quarter of 2019 as a result of the considerable year-over-year increase in net orders during the back half of 2020, most of which remained in backlog as of year-end.
The average selling price of homes delivered during the quarter increased 2% to about $461,000 and 61% of the units we closed were a part of our more affordable collections.
We are anticipating home deliveries for the first quarter of 2021 to reach between 2,200 and 2,400 units.
The corresponding backlog conversion will be lower than the first quarter of 2020 as a result of the strong year-over-year increase in orders during the 2020 fourth quarter and, to a degree, construction delays we are experiencing in certain markets as a result of the pandemic.
We expect the average selling price for 2021 first quarter deliveries to be between $470,000 and $480,000.
Gross margin for home sales improved by 350 basis points year-over-year to 22%, which is our best gross margin in over a decade.
We experienced improved gross margin from home sales across each of our segments on both build-to-order and spec home deliveries, driven by price increases implemented across nearly all of our communities over the past 12 months.
Home deliveries in the first quarter of 2021 will be negatively impacted by the lumber price increases experienced in the latter half of 2020.
As a result, the gross margin for home sales for the 2021 first quarter is expected to be approximately 21.5% assuming no impairments and no warranty adjustments.
This would still be 150 [Phonetic] basis points higher than the prior year.
Additionally, we currently expect that gross margin for the remainder of the year will improve from our 21.5% estimate for Q1.
Our total dollar SG&A expense for the 2020 fourth quarter increased $12.8 million from the 2019 fourth quarter.
General and administrative expenses increased $7.1 million due to an increase in stock-based compensation expense related to performance-based awards, consulting fees related to energy tax credits recognized during the quarter, and a $2.2 million charitable contribution approved by our Board of Directors during the quarter.
The increase in marketing and commission expenses was due to variable selling and marketing expenses that increased in line with the 10% increase in home sale revenues during the period.
Looking forward to the first quarter of 2021, we currently estimate our general and administrative expense to be approximately $55 million, which is a slight increase from what we just recognized in the fourth quarter.
This increase is primarily due to increased headcount as we continue to prepare for growth in 2021.
In the fourth quarter alone, we saw a 5% increase in our headcount.
As always, our actual results for the first quarter may differ from our estimate for a variety of reasons, such as changes in the amounts or timing of various accruals.
Let's take a look at Slide 9.
The dollar value of our net orders increased 92% year-over-year to $1.32 billion and unit net orders increased by 72%, driven by a 67% increase in our monthly absorption rate to 4.7.
The average selling price of our net orders increased by 12% year-over-year, driven by price increases implemented over the past 12 months.
Demand was broad-based from both a geographical and product perspective during the quarter.
We experienced significant year-over-year increases in our absorption pace in each of our markets, as well as on both more affordable and traditional product types.
Our net new orders remained strong through each month of the fourth quarter and were well above the prior year.
In addition, our cancellation rates were also lower than last year.
Sales through January also remained strong and are significantly above the prior year.
However, we do not expect to see the typical seasonal jump in sales when comparing the first quarter of 2021 to the fourth quarter of 2020 due to the unseasonably high orders that occurred in the fourth quarter.
Moving on to backlog on Slide 10.
As a result of the strong sales we just discussed, we ended the quarter with an estimated sales value for our homes in backlog of $3.26 billion, which was up 87% year-over-year and, as Larry mentioned, was our highest year-end backlog dollar value ever.
The average selling price of homes in backlog increased 7% 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 our lower-priced communities consistent with our ongoing strategic focus on our more affordable home plan.
As Bob just previously noted, backlog conversion for the first quarter of 2021 will be lower than the first quarter of 2020.
This is largely the result of the construction status of our homes in backlog as of year-end.
Only 38% of homes in backlog at December 31, 2020 had reached the frame stage of construction compared to 52% of homes in backlog at December 31, 2019.
We ended 2020 with 194 active subdivisions, up 5% from 185 at the end of 2019.
For 2021, we are currently targeting an active subdivision increase of at least 10% year-over-year.
Naturally, our actual active subdivision count to end 2021 may differ from this target for a variety of reasons, such as the timing of community close-outs and delays opening new communities due to the impact of the pandemic.
We acquired 4,976 lots during the quarter, a 51% increase from the prior year, reflecting our confidence in market conditions and our focus on continued growth for our company.
We spent $359 million on land acquisition and $124 million on land development during the period, making our total land spend $483 million.
As a result of our recent land acquisitions, our total lot supply to end the year was 8% higher than at the end of 2020, nearly reaching the 30,000 lot mark.
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 for 2021.
In summary, while 2020 presented many challenges, the resilience of the housing market afforded us the opportunity to deliver one of our strongest years ever.
Our build-to-order model and focus on affordability continue to prove successful during these unprecedented times.
Looking forward to 2021, we believe it has the potential to be an even stronger year based on the dollar value and gross margin of our current backlog and the ongoing strength of demand.
To that end, our current target for home deliveries in 2021 is between 10,000 and 11,000 units.
From a strategic perspective, we remain focused on continuing to expand our operating margin, as well as growing our homebuilding operations in 2021.
As previously mentioned, we are targeting a 10% increase in active subdivisions during the year, and we are expanding our geographic footprint with the addition of the Boise market.
In anticipation of this growth, we increased our liquidity to roughly $1.7 billion at the end of the year and further enhanced that liquidity with our $350 million senior note issuance in January.
Even with a solid balance sheet and a strong demand environment, risk continue to exist that could impact the execution of our strategic initiatives for 2021.
These risks will be closely monitored as we work to grow our company and the safety of our employees, subcontractors and customers will remain a top priority.
Last week, we were pleased to announce that our Board of Directors declared a $0.40 per share cash dividend and a special 8% stock dividend.
This demonstrates our continued commitment to rewarding our shareholders for their ongoing support.

user
q4 earnings per share $2.19.
qtrly home sale revenues increased 10% to $1.18 billion from $1.07 billion.
qtrly average selling price of deliveries up 2% to $461,000.
qtrly dollar value of net new orders increased 92% to $1.32 billion from $684.9 million.
backlog dollar value at december 31, 2020 up 87% year-over-year to $3.26 billion.
sees full year 2021 home deliveries between 10,000 and 11,000.
sees home deliveries for 2021 q1 between 2,200 and 2,400.

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