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Text: 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 third quarter 2020 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.
M.D.C. Holdings posted another quarter of strong operating results, highlighted by year-over-year home sales revenue growth of 33%, homebuilding operating margin expansion of 370 basis points and net income growth of 96%.
Net new order growth for the quarter increased 73% as compared to last year on a sales pace of 6.1 homes per community per month.
These results underscore the excellent homebuilding fundamentals we are currently experiencing across our markets and demonstrate our ability to grow our operations while continuing to improve our profit margins.
Homes increasingly serve as offices, classrooms and places of entertainment for the family, and as a result, people have gravitated to a living environment then can be accommodated in this new reality.
While this trend has been a positive development for the overall housing market, it has been particularly beneficial to the new home market for several reasons.
First, there is a limited existing inventory for consumers to choose from.
According to the National Association of Realtors, total housing inventory at the end of September totaled 1.4 million units, which was down 19% from a year ago and represents less than a three-month supply of homes.
Second, a newly constructed home gives consumers the peace of mind that they will be living in a home that no one else has lived in, which is a real selling point for many families during these uncertain times.
Supplementing the demand we've experienced as the pandemic, is the demographic shift toward home buying that we believe will serve as the tailwind for industry moving forward.
Millennials are increasingly aging into their prime home buying years, while baby boomers and empty nesters are looking to downsize into homes that fit their new lifestyles.
MDC is well positioned to take advantage of these demographic shifts due to our strategic focus on opening communities with affordable products.
Homebuyers of all ages are looking for value when it comes to buying a home, and we have found ways to accommodate the desires through more efficient floor plans, while the combination of lower rates and pandemic-related buying has spurred demand across all product types, we believe the more affordable segments of the market will be the most resilient over time.
We have been fortunate in having a deep bench at MDC.
And to that end, I am pleased that Rebecca Givens has agreed to step into Michael's role as Senior Vice President and General Counsel.
On the operations side, David Viger has moved into the important role as Chief Operating Officer of our homebuilding operations.
Anthony Berris has been promoted to President of our Financial Service operations.
And Dawn Huth has taken on additional responsibilities as Senior Vice President of National Finance.
All of these individuals have proven themselves to be highly capable leaders during their time at MDC, and I look forward to them contributing to our continued success in the future.
Finally, I'd like to congratulate David Mandarich, who has been elected as President and Chief Executive Officer of the Company.
David has been associated with the Company since 1977, most recently as our President and Chief Operating Officer.
And he is widely regarded as one of the most skilled leaders within the homebuilding industry.
His move into the CEO role is a key step in the evolution of our Company.
And I look forward to continued collaboration with him on strategic directions of the Company.
David will be participating with me in our earning calls going forward.
We experienced strong topline growth for the quarter as home sale revenues increased by 33% year-over-year to $1 billion.
Homebuilding operating margin improved by 370 basis points from the prior year quarter, resulting in a 109% increase in pre-tax income from our homebuilding operations to $101.7 million.
In addition, our financial services pre-tax income increased $10.3 million, or 73%.
The increase was due to our mortgage business, which continued to benefit from a higher interest rate lock volume and increased capture rate and better net interest income on loans originated during the quarter.
As a result, net income increased 96% to $98.9 million, or $1.49 per diluted share for the third quarter of 2020.
Our tax rate increased from 19.5% to 21.5% for the 2020 third quarter.
The increase in rate was primarily due to changes in the estimated amount of energy tax credits to be received during the respective quarters.
For the fourth quarter, we currently estimate a 25% tax rate, excluding any discrete items.
Homes delivered increased 25% year-over-year to 2,147, driven by an increase in the number of homes we had in backlog to start the quarter, and to a lesser extent, an increase in our backlog conversion rate.
The average selling price of homes delivered during the quarter increased 6% to about $466,000.
The 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 Nevada to Southern California.
We are anticipating home deliveries for the fourth quarter of 2020 to reach between 2,400 and 2,600 units.
Backlog conversion for the fourth quarter will be significantly lower than the fourth quarter of 2019 as a result of the considerable year-over-year increase in orders during the 2020 third quarter, many of which are unlikely to deliver this year.
We expect the average selling price for 2020 fourth quarter unit deliveries to again exceed $460,000.
Gross margin from home sales improved by 170 basis points year-over-year to 20.5%.
While we have seen an increase in certain building costs, most notably lumber, as a result of the pandemic and other factors, we have been successful to this point in recouping these increased costs through home price increases.
This has resulted in improved gross margins on both build-to-order and speculative home deliveries across each of our homebuilding segments.
Gross margin from home sales for the 2020 fourth quarter is expected to approach 21%, excluding impairments and warranty adjustments.
We continued to demonstrate solid operating leverage during the third quarter as our SG&A expense as a percentage of home sale revenues decreased 200 basis points year-over-year to 10.4%.
Our total dollar SG&A expense for the 2020 third quarter increased $10.9 million year-over-year, mostly due to variable commissions and marketing expenses that increased in line with our 33% increase in home sale revenues during the period.
Our general and administrative expense was down slightly when compared to the prior year, primarily due to a decrease in stock-based compensation that was largely offset by an increase in salaries and other compensation-related expenses.
Our overall headcount has increased by 5% year-over-year as we work to support the Company's strong growth trajectory.
For the fourth quarter of 2020, we may see our general and administrative expense increase to between $50 million and $55 million due to the 5% year-over-year increase in headcount I just mentioned, additional bonus accruals in line with strong operating results, and a potential charitable contribution to our Foundation.
As I previously mentioned, as a result of the continued expansion of our gross margin and our improved operating leverage, our homebuilding operating margin, defined as gross margin from home sales minus our SG&A rate, grew by 370 basis points year-over-year to 10.1%.
On the strength of this improvement, our last 12 months pre-tax return on equity increased 560 basis points year-over-year to 21.8%, which is our highest level in 15 years.
Let's look at our net new home order information for the quarter on Slide 9.
The dollar value of our net orders increased 89% year-over-year to $1.65 billion, and unit net orders increased by 73%, driven by a 70% increase in our monthly absorption rate to 6.1.
The average selling price of our net orders increased by 10% year-over-year, driven by price increases implemented over the past 12 months, as well as a shift in mix to California, which has our highest average price.
During the third quarter, our California markets had nearly as many net new orders as our Colorado markets.
I'd like to note that we ended the quarter with 194 active subdivisions, which is slightly higher than a year ago.
With the strong sales activity we've experienced during the third quarter, we have a number of subdivisions that are approaching closeout earlier than expected.
As a result, we anticipate roughly 185 active subdivisions at year-end.
Although this would be a decrease from the end of the third quarter, it would be unchanged from where we started the year.
On Slide 10, we provided further net new order detail by month since April.
You can see that sales activity ramped up significantly after the initial slowdown related to the COVID-19 pandemic.
We saw order activity peak during the month of August, but September remained strong and well above the prior year, even after we increased prices in most of our subdivisions.
We also saw the rate of cancellations continue to decrease as the months progressed.
We expect some seasonality to kick in during the fourth quarter.
However, October has remained very strong relative to the prior year.
Based on the activity we've seen to date, we expect our October 2020 net orders to exceed our October 2019 orders by at least 50%.
As a result of our strong sales, we ended the quarter with an estimated sales value for our homes in backlog of $3.1 billion, which was up 47% year-over-year.
The average selling price of homes in backlog increased 4% 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 now turn to land activity on Slide 12.
The number of lots we acquired this quarter increased 63% year-over-year, reflecting our confidence in market conditions and our focus on continuing to grow our business.
While the number of lots we approved earlier this year were down due to the uncertainty created by COVID-19, we approved over 3,800 lots for purchase during the third quarter of 2020.
In the end, in spite of immense volatility, the number of lots approved over the last 12 months has increased by 34% compared to the prior year period.
As a result, our total lot supply to end the quarter was 8% higher than at the same point in 2019, supporting our growth potential for future periods.
We expect to see strong lot approval and acquisition activity continue into the fourth quarter given the robust demand that we have seen in recent months and our conviction about growth prospects for housing in future years.
In summary, clearly, we are encouraged by the resilience the housing market has shown in the third quarter given the immense challenges our country has faced in 2020, and we believe that we have executed our operating strategy well in this volatile environment.
More importantly, we see an opportunity to sustain growth well into the future, supported by solid demographics and changing customer preferences.
Our current backlog, not only puts us in position for a strong end to 2020, but also provides us with the opportunity for significant year-over-year increases in home sale revenues and pre-tax income to start 2021.
With our strong balance sheet and current land pipeline, we are well positioned to grow community count significantly in 2021 and have a preliminary target of at least 10,000 home deliveries for the coming fiscal year.
We are mindful that there are many risks to achieving this target, especially with COVID-19 still impacting our daily lives.
These risks will be closely monitored as we work to grow our Company and the safety of our employees, subcontractors and customers will remain top priority.
Following our strong third quarter, our Board of Directors has declared a 21% increase in the quarterly cash dividend from $0.33 to $0.40 per share.
This represents a 33% increase from the prior year and demonstrates our commitment to rewarding our shareholders for their continued support.

user
mdc holdings sees q4 2020 home deliveries between 2,400 - 2,600.
q3 dollar value of net new orders increased 89% to $1.65 billion from $871.7 million (adds period).
sees average selling price for 2020 q4 unit deliveries exceeding $460,000 (not $460,00).
q3 earnings per share $1.49.
quarterly cash dividend of $0.40 per share declared, up 21% from prior quarter and 33% from prior year.
qtrly home sale revenues increased 33% to $1.0 billion from $750.3 million.
qtrly average selling price of deliveries up 6% to $466,000.
mizel will continue his leadership role with mdc as newly appointed executive chairman.
qtrly dollar value of ending backlog up 47% to $3.08 billion from $2.10 billion.
david d. mandarich has been appointed as new president and chief executive officer of mdc.
staci woolsey has been appointed as chief accounting officer of mdc.
sees home deliveries for 2020 q4 between 2,400 and 2,600.

assistant