Good morning. Welcome to day two of our 16th annual JP Morgan Homeb uilding and Building Products Conference. My name is Michael Rehaut. I'm the senior analyst covering the home builders and building product names for JP Morgan's Equity Research department. W e have with us, MDC Holdings and CFO, Bob Martin. Bob, welcome, appreciate your participation today. My pleasure. Great to be here. We're going to use this time for. The presentation format will be a fireside chat. I have a bunch of questions lined up, but we also have the ability to field questions from the audience. For those dialed in and listening, if you'd like to submit a question, you can do so through the conference dashboard on the website. Click on the Ask A Question icon, and happy to pass that along to Bob during the, you know, during the time we have. I'm gonna kick it off with some, you know, industry-level questions and then dive a little bit more into MDC specific. You know, first off, we always just kind of have been asking all the builders here just to comment a little bit on demand trends. Specifically, you know, obviously everyone's seen a nice improvement in demand year to date. How would you characterize the recent improvement in demand, either being, you know, more consistent with seasonality, normal seasonality, or maybe something a little stronger than normal this time of year? You know, any comments on how those trends have continued into May? Sure. I would say, the sales trends, the order trends, in the first quarter, were stronger than normal seasonality. We were coming off of a pretty tough patch in the back half of 2022, with demand, first of all, being lower because of the shock of rising interest rates. Also, because we had cancellations that came through with pretty significant velocity because of that rise in rates. That combination really made Q3 and Q4 of last year a tough one for the company. Bouncing off of that, we saw cancellations reduce in Q1. I think we saw a resilient consumer, one that had started to get really more used to the notion of higher interest rates. That,, coupled with really a shortage of inventory out there in the market, made Q1 bounce in a bigger way than normal relative to Q4. As we noted on our last call, April was another good month, much like March was. As for May, haven't made a whole lot of comments there. I think it's reasonable to assume that we'll see some of the normal seasonality coming in to May with consumers busy with things like the end of school, graduation, starting to think about vacations for the summer, is typically a normal trend for this time of year. Right. You know, alongside that, you know, obviously, people are also very much focused on pricing trends. You know, we've heard a little bit about, you know, during the past earning season, some price increases coming back into the market, maybe reduced incentives. Maybe you could kind of walk us through, you know, for MDC, what's been the peak to trough adjustment in price, as well as, you know, where you know, how bad incentives got as a percentage of price and where you are today? Yeah. For incentives, that's where a lot of it came through. We in Q4 went as high as about 12% incentives as a percentage of our base price. Since then, as reported for Q1, that dropped to 8%, so a 400 basis point improvement. The caveat to that is we did do some base price adjustments in many of our communities at the start of Q1. In about 45% of our communities, we made base price reductions. As the quarter progressed, however, we were able to realize some increases later on in the quarter. By the end of the quarter, all in all, I think we've increased in about 45% of our communities as well. It's, it's kind of a tale of two cities. You know, certainly making adjustments in Q4, early in Q1, and then towards the back part of Q1, seeing some ability to again, raise prices in a number of our communities. The incentives where you said 12% of price in 4Q, 8% in 1Q, is that on orders or closings? That was on orders. Okay. You know, the base price reductions that you did earlier in the quarter, in the first quarter, you know, what type of magnitude was that on average and, you know, for the 45% of communities that you made those adjustments? The average for Q1, I guess if you look at the price decreases towards the front end of the quarter, in the communities where we did decreases probably around 4% on base. When you look at the increases later on in the quarter, about 3%. Okay. Great. Very helpful. You know, I think another big area of focus right now in general and, you know, with MDC, it's been an area of focus as well, is affordability. You know, over the years, you've shifted your product portfolio pretty hard towards that area through Seasons and other, you know, initiatives. How do you see current levels of affordability today? You know, what steps are you taking as a company, you know, from a price point standpoint, to address affordability over the next year or two? Well, as you indicated, we have had that focus for a while. You know, really since 2016, 2017, we made a concerted effort to move our portfolio towards more affordable product. That came in the form of product directly. The Seasons product is our most significant example of that. We have other product lines that address affordability as well versus our traditional series, which we still do just in less volume today than maybe five or six years ago. The other way that we've really tapped into affordability is location where we build. That includes a bigger presence within existing markets, for example, coastal areas of California, where we were more prominent, moving more inland, to Riverside, for example, in Southern California, more inland, focused on Sacramento, for example, in Northern California versus the core Bay Area. Just one example of affordability in existing markets. Then in many of our new markets, there's four in particular that we've entered most recently, Boise, Albuquerque, Austin, and Tennessee. A lot of these new markets that we're entering, certainly they've risen in price, don't get me wrong, but relative to the rest of the country, relative to the coasts, still very affordable. We find that there's a lot of companies, a lot of people that are moving to those markets. The other thing I would also note, you know, we've been in Florida for a long time, particularly Jacksonville and Orlando. Those two markets are very affordable. We've seen our eastern operations really increase as a percentage of our overall total. Between the mid-Atlantic and Florida, we're at almost 20% of our closings coming from the East Coast operations, where historically that's been a bit lower as a percentage of our total. Just hitting some of those existing geographies that have retained a lot of affordability, such as Jacksonville and Orlando, in a heavier way. That's really helped us in the affordability quotient as well. You know, I appreciate that, and I guess part of the question though also is, you know, within the markets, even the affordable markets, you've seen a significant amount of price appreciation over the last few years. You know, I think even within those markets, you know, you have builders that are trying to scramble for, you know, lowering the actual price point over the next year or two. Are there any, you know... Obviously, the mix can change between markets, but, you know, in addition, you know, are you also looking at your product portfolio or your community count or your community portfolio in terms of adjusting, you know, the, what comes out of the ground over the next year or two? Sure. No, I think that continues to be a focus. Product-wise, you know, I talked about Seasons. Even Seasons can range, you know, traditionally, I guess, the past few years, anywhere from 1,700- 3,000 sq ft. Certainly, we've had some innovations on the Seasons line that could get that product in a lower square footage band. Something that looks more like a 1,000-1,500 sq ft. I think that's a certain possibility. You know, we've seen a lot of success with duplex product as well. That's a 1,000-1,200 sq ft product line that has also been very successful for us. That certainly is in mind as we're underwriting new products, but also as we're opening the products we already have, you know, where we're focused. Right. Makes sense. You know, I think one of the more important things that came out of your recent earnings call, Bob, was around your focus, your recent focus on spec. You know, historically, you've been, you know, more of a build- to- order builder. More recently, you've pivoted to this spec approach, with two-thirds of your gross sales in the first quarter being spec. If you maintain this approach over the near to medium term, how will this affect your financial metrics? Specifically, gross margins and returns. You know, do you plan over the next year or two to revert to your BTO strategy? Or how should we think about spec versus BTO over the medium term? Yeah, it's a great question. The first thing I would say is you're right. We have been BTO-focused for much of the past, let's call it a decade. Our senior management team, the very top two, Larry Mizel and David Mandarich, they have been at the company in home building since the 1970s. Obviously, Larry founded the company. They've done it both ways. They've done build- to- order, they've done spec. They bring a lot of experience. It is something that they are very familiar with. That's point number one. Point number two is, you know, I think, in the initial move to spec, or at least most of what we were selling on spec, really were cancellations from the backlog that was built up, especially the back half of 2021 and into the first half of 2022. Maybe not the most ideal spec, the one that we would build independently, left to our own devices. Those probably carried a bit more of an incentive because of that, and because it was more of an uncertain time in Q3 and Q4 of last year and even the first part of Q1. All that said, I think we have an opportunity to actually bring the spec margins up over time. I do believe that specs should be marginalized, a discount to build to order. Might be 200 or 300 basis points in terms of gross profit margin. Certainly, that could be offset by some efficiencies of being able to build quicker, you know, certainly relative to where we were cycle time-wise in 2022 and 2021. You should see some gains there because of the move to spec, but also because of improvements in the supply chain and the labor picture for the industry. That should more than make up for anything that we would end up sacrificing on margins. We feel really good about it. This is not for us, just a one-hit wonder for a short period of time. For us, this is a pivot. We do plan to employ a spec strategy to some degree going forward. It ebbs and flows with what the market expects. It is very much a focus for the company, and I imagine it will remain so for some period of time going forward. You know, I mean, that's interesting, Bob. I mean, I think, you know, the flip side of it is if you do plan, which it sounds like you are, planning to employ spec for a longer period of time, you know, what happens to the Home Galleries and a lot of the fixed costs that you have in the markets? Do you kind of shut some of those down? Do you know, take some costs out of the system? If you're not employing a purely BTO strategy, it would seem like perhaps you don't need as much of that infrastructure as well. Right. No, it's a very good question. There's a couple things I would point to when we talk about that piece of it. First of all, we very much think that build- to- order can be a part of the business going forward. It will be a part of the business going forward. You know, to your point, we've set up a very good infrastructure for build- to- order, and we'll continue to utilize it. There still are a lot of consumers, even when they see, you know, very nicely designed inventory out there, they still wanna make it their own. They utilize the Home Galleries. We've assembled a great team of designers at the Home Gallery. We'll continue to utilize them for the build to order strategy, even though we're doing more spec now. The second thing I'll bring up is we really wanna do our spec inventory in a very thoughtful way. It is not a strategy that we are just trying to put down the minimum dollars available in our specs. We want them really to look and feel nice. Those designers are working on that for us. We have a concept, in fact, in our investor deck, you can see our website, slide 25, called Curated by Home Gallery. This is really, those designers working in a very thoughtful way to make sure that our specs stand tall above and beyond our competitors. Really nice finishes that we're putting into our specs to make them stand out from our consumers. We find that we are able to utilize a lot of our Home Gallery employees for that. More to come on how that works out as we get through it in future periods. You know, really, it's something that we started in earnest at the start of this year. I think it'll progress very nicely as we go through the remainder of the year. You know, we're always mindful of G&A and what the appropriate uses are of those dollars. It's always something we'll monitor. We think we've got a great thing going with our Home Gallery operations, and we're trying to make sure that we retain that uniqueness alongside our spec strategy. Right. No, appreciate that. Want to shift to land for a moment and your land strategy. Most builders prioritize increasing, you know, the option portion of their land banks due to, you know, combination, at least in their view, of driving higher returns and mitigating risk in the event of a downturn. You know, MDC, you're a little bit on the other side of that spectrum. Currently, only 13% of your land bank is optioned. That was compared to 35% prior to the downturn. You did utilize the ability to walk away from options like other builders, but you started out at a much lower place to begin with. You know, maybe you could kind of hit on why your approach is a little different in general in terms of holding a lot less from an option standpoint. You know, is that something that you might rethink going forward? Obviously, a lot of builders use the options to their advantage in the most recent period of the downfall. First of all, I think we're very, very sensitive to the risk side of things, probably more sensitive than most. We manage that by maintaining a two-three-year supply of land, which is on the low end for the industry, just to make sure we are not overexposed to what the riskiest part is of the homebuilding business, which is really the land side of the business. That's where the value tends to flow in and out of. We are very sensitive to the risk part of things, and we've managed that well over time. We do have a mind towards increasing our option percentage. What we don't do is we don't do a whole lot of land banking deals. You know, those are, I think, treated as options on builder balance sheets in their reported numbers. However, you know, very expensive to maintain those options in terms of just the rate you might be paying in terms of the deposit that you have to put up. Oftentimes, you might be on the hook for development risk. If there's development overages, you may not be able to get out of the development. If you don't want to do the option, you might have bonds up that it's facilitating the development of those options off- balance sheet. I would say, you know, the options you see for MDC are very transparent. They truly are options. I do think it is something you will see grow for the company in future periods. As we commented on our first quarter call, we do have a number of lots that are under consideration have not yet reached the point where they are approved by our Asset Management Committee. There are other builders I know that do report those as under option. We have about 2,000 more in addition to the 2,951 we most recently reported in terms of options, but an additional 2,000 beyond that that are under consideration that otherwise would add to that option count with some other builders. That is a number that is growing now, with Q1 being a stronger period of time. That, I think from time to time is a bit of the difference as well, is just that we report it slightly differently. We don't report it until our Asset Management Committee actually says that they have approved moving forward with the transaction. Right. Okay. All right. No, thank you for that. You know, maybe just shifting a little bit also to, I guess, going back, you'd mentioned some new markets, before, over the last couple of years, but how do you think about your geographic footprint as it stands today? You know, with the recent, you know, softness and pullback in the, in the housing market over the last couple of quarters, two, three quarters, has it caused you to reassess where you operate today? You know, perhaps in terms of exiting any of your smaller, you know, presumably less profitable markets? No, it doesn't. I think those are huge opportunities for growth, for us. It's somewhat unique to MDC in a lot of ways in that we are a smaller company. You know, we're in the top 10 builders. You know, we're not, we're not the biggest of the bigs. That gives us a lot of growth opportunities, relative to some of our competitors who are already in some of these markets and might be bigger already. We think it makes a ton of sense in terms of diversification. It's an opportunity for us to grow, potentially in an outsized way, relative to some of our larger peers. You know, I would note that our balance sheet, we think, is every bit as strong as many of those larger peers. You know, we are an investment-grade company. We have $1.6 billion of cash, in fact, more cash than debt as of the end of Q1. We don't have any debt coming due till 2030. we have a lot of capacity to really invest in these markets and not a whole lot of kind of pressing needs for the cash that would make us of a mindset that we need to get out of those markets. Even though you're absolutely right, they haven't grown as much as we would like them to, just given what happened in the back half of last year. Now with a little bit more stability showing itself in Q1, they are markets that we're very much committed to and very much a part of our growth story. Great. No, that makes sense. Thank you. Also, you know, curious with the recent volatility in the banking industry and the regional bank side. Has that recent stress caused any opportunity or created or led to any opportunities, in terms of possible acquisitions of, on the land side or even smaller private builders? Yeah, I don't think we've seen a ton of that surface yet. I think we've seen, you know, in different markets, land, come down in price, to a degree, terms, get better. I would not say that's necessarily a widespread phenomenon, especially with the market getting a little bit better, in Q1. It's really been here and there opportunities. It wouldn't surprise me to see that weakness in some of our banking infrastructure manifest itself in terms of essentially a shorter supply of land that's out there, potentially more competition in the future, just with the financing of the development of that land being a bit more scarce, all else equal, given what the banking industry has been through. Right. Last question I have here, and again, for those that are dialed in, if you'd like to submit a question, this is actually, we did get an inbound question, and it kind of dovetails with my last question. You know, it has to do with balance sheet and capital allocation. You know, the question we had from the audience is, you know, given the strong balance sheet and shares that are below tangible book value, you know, why doesn't the company look at share repurchases as a viable alternative for capital allocation, as opposed to, you know, I think over history you've been more steadfast in growing your dividend as opposed to really not doing much in terms of share buyback. Yeah. I guess hitting the dividend first. It is our dividend story, something that we are very proud of. If you look at our presentation materials, our investor deck, we talk about industry-leading dividend yield, about 5%, triple the next closest competitor, even more than that. Right now we're paying $0.50 per share per quarter, so $2 on an annualized basis. It's been a very consistent dividend since 1994. Since we really started the program, it has been paid, or at the same rate or an increasing rate ever since we started the program. That's part of the reason we focus on the dividend. We find that there are a lot of shareholders out there who really appreciate the consistency of the dividend payment. The dividend payment comes with some favorable tax treatment potentially from an income standpoint for our consumers. Certainly, we're aware of that. I think there are a lot of shareholders who really value the notion that we've been able to be very consistent and even increase our dividend. In terms of the other ways of allocating capital, of course, there is the growth of the company. That's certainly very much in our minds all the time, especially now, given that Q1 showed some great signs for us. Of course, the buyback. If we had completely shut the door on buybacks, we wouldn't have a program outstanding. We do have a program outstanding, so we could buy back shares at any time. That option is not off the table. I think as you've alluded to, as the inbound question alluded to, we have not executed on that plan in some time. Certainly, we acknowledge it. As we report in our K's and Q's every quarter, we do have a program outstanding. It is something that is in our arsenal. Right. Okay. Fair enough. Appreciate the time, Bob, as always. That concludes this session. We have no more questions in the queue as well. Again, I want to thank you for your participation in the conference. Great to see you. We will resume. We have a short break coming up. We'll resume the conference at 10:55 A.M. with Fortune Brands Innovations, followed by KB Home. After a lunch break, we'll have Taylor Morrison, PGT Innovations, and Forestar Group. Bob, thanks again, and thanks to everyone at MDC for being with us today. We'll talk to you soon. Great. Thank you, Mike. Appreciate it. Thank you.