for joining the after lunch session. My name is Buck Horne. If you haven't met me before, I'm the Raymond James home building and housing analyst. Cover home builders, apartment REITs, single-family rentals, timber, a few other things along the way as well. I've known Bob Martin for quite some time, well over a decade now, I think, going back. That's right. We've got MDC Holdings. If you aren't familiar with MDC, they build under the Richmond American brand of homes, so it's a little different. We can walk through the company's background. Bob is gonna do probably about a 5-10-minute presentation, company overview, give you a quick update, and then we'll dive into some Q&A. If you guys have any questions along the way, feel free to fire those out as well. We'll get you all up to speed on all these interesting things happening in the home building world. With that, I'm gonna turn it over to Bob, who's the CFO of MDC Holdings. Great. Thank you, Buck. Appreciate it. It's great to be here at the conference, and thanks to everyone who is attending in person and those on the webcast. Like Buck said, we'll go through about the first 10 slides here and then switch it over for plenty of time for Q&A. I will start with slide 2, forward-looking statements. Definitely take note of those, but then switch quickly over to company overview on slide 3. We are MDC Holdings, founded in 1972 by Larry Mizel, who continues to serve as our Executive Chairman, and David Mandarich, who is currently our President and Chief Executive Officer, came on board in 1977 to start the home building operations. Of course, that is primarily what we do today, is home building, along with mortgage operations, insurance, and title. We have built more than 240,000 homes in our history, so plenty of experience there. We build in 34 markets in 16 states, primarily focused on the West. About 85% of our closings over the last 12 months occurred in the western half of the U.S. But we do have a growing presence in the eastern half of the country as well. From a market share standpoint, those 34 markets, 25 of those are in the top 50 MSAs, and then about half of those, 13 of the 25, we do have a top 10 position in. Those that we're not top 10 in, those are great opportunities for growth, especially given that we have a very strong balance sheet. We're investment-grade rated by Fitch and Standard & Poor's, which is very unique in the home building space for a builder of our size. So just delving into some recent financial highlights, starting with 2021 and 2022, we had record revenues and near record pre-tax income in both of those years. A great time to be a home builder. As you switch to 2023, that story changed a little bit. It's been a bit tougher for most income statement metrics. You can see the metrics that are in red there along the right. R eally, that pertains to the rise in interest rates that we saw over the last 18 months. However, there's a lot of good news on this slide, particularly as it relates to gross orders. Orders have turned positive year-over-year. Cancellations have dropped precipitously as our consumers have gotten used to a higher interest rate environment. And I would also say, we are very much helped by the notion that there is not much existing supply of inventory in the market. Why isn't there existing supply? Because interest rates are up significantly, and those consumers who are in a 3%-4% mortgage really don't want to give up that mortgage and put their house on the market. The other thing you'll note on this slide is our spec inventory is up significantly, up 148% year-over-year, and that's simply houses that we've built, but we've not yet sold. That increase is intentional. We have shifted from primarily a build-to-order strategy to a spec inventory strategy, and we've deliberately built these units in preparation for the spring selling season in 2024. This will be the first spring selling season that we have that intentional spec inventory in place. We're excited to bring that to market. Just a couple things here on what I call the MDC difference, what really makes us different amongst our peers. First of all, is we've really designed our balance sheet, our operations for success through the housing cycle. It is a cyclical industry, and it all starts with a strong balance sheet. Featured on our strong balance sheet is a very disciplined 2-3-year supply of land. So we're looking to generate our profits through home building operations, the actual process of building the house versus speculating in land, which is the riskier part of the business. Also with that strong balance sheet, $1.8 billion in cash, which exceeds our debt balance, $2.9 billion of total liquidity. We don't have any senior note maturities until 2030, and our average senior note maturity is 18 years, by far the highest in the industry. So a lot of strength on balance sheet. That strength has allowed us to be very consistent in how we deploy capital, particularly our dividend. Back to shareholders. Since 1994, we've had an uninterrupted dividends. We've paid it at or an increasing level since 1994. The most recent dividend, $0.55 per share for the latest quarter, easily producing the highest dividend yield in the industry. The 2nd category, as you look at our product mix, what we focus on building, affordability, we think is very key in this market. Affordability applies to a number of buyer demographics. The way we do it, we try not to make it the lowest common denominator. We do include a lot of great design elements. We don't take every single cost out of the home, but we do make it affordable for consumers, and that would include both consumers who are delving into homeownership for the first time, but also consumers who might be moving down and looking for a smaller, but nice, product. We do believe the millennial homeowner, or at least a potential millennial homeowner, is key to this buyer demographic. And finally, the way we build, I noted, that we have shifted from build to order to quick move-in or spec building, and that move was intentional. In this market, where interest rates are a little bit more volatile, a little bit higher now, it's important to many of our consumers that they are able to see what the price of the house is, but more importantly, the payment, and that means knowing what the interest rate is, from day 1 when they go under contract. That's really the most possible, when you're building QMIs, homes that can deliver in the next 60-90 days. We're excited to continue our process of building the QMIs, for the first time, again, having our first spring selling season with the QMI inventory in place. We do still have the ability to build to order, so if the consumer preferences do change in the future, we have the ability to adapt along with it. So that's what's happening most recently in home building and most recently with our strategy, and with that, I'll turn it over to Buck- Yeah. - for a few questions. Yeah, we'll dive in there. So, I mean, if you think back where we were this time last year, what a difference a year makes, right? I mean, this time last year, interest rates had doubled in roughly in probably record level of time, but we were seeing cancellation rates soaring. Buyers were kind of in a shell-shocked moment. The builders were probably bracing for impact or a hard landing. Everyone kinda thought home prices were gonna have to come down pretty hard and fast. Yeah. Come and sit over here. So I guess, you know, my, my first question is, if we step back and just evaluate what's happened over the past year, what have you guys learned about, you know, the markets you're in and really kind of the buyers that you serve in terms of, you know, how, how deep is the demand pool out there? Either, you know, you, you made the pivot to a, a more spec home strategy, and maybe a more, affordable entry-level product, you know. Does that also translate to the, the move-up buyer? Is there, is there enough demand at the, the move-up level, to keep supporting, you know, you know, this, this resilience that we've seen in the market? I think there is. As much as we focus on the first-time, the more affordably minded consumer, that is about 2/3 of what we do. A 1/3 of what we do is geared towards a move-up buyer. So think about larger ranch-style homes, single-story homes, RV products, what we call the UltraG arage. So huge garage bay that you can put a boat, an RV- The man cave. ... the man cave, whatever you wanna do in there, that's a move-up product. We have some product that is 4,000 square foot plus, above grade, and those sell very well and sell very profitably. And it all points to the notion that homeownership continues to be very important to our consumer base. I can remember times in the not-so-distant future where the notion was that everyone was gonna switch to a rental- Mm ... mentality, and never buy anything again. And I think we've proven over the past few years, that that's not the case. You know, certainly COVID gave people a lot of insight as to how important homeownership was to them, a space they could call their own, not crammed close in with their neighbors. And I think the importance of homeowners for U.S. families is going to be paramount at the minds of our consumers for some period of time. Well, clearly, people want the house. They want the single family lifestyle. Yeah. You know, the question, of course, is affordability and, you know, are we, are these people stretching every last dollar to get into this house, or... What have we seen in terms of changes in, or have you seen changes in household income or changes in credit quality? What's their ability to, you know, sustainably afford the homes that they're buying? Well, I think, a couple of things there. First of all, when you think about, a millennial type of buyer, you've got buyers who have waited, a period of time to enter into homeownership, so they have had the ability to further their careers, enter into periods of time where, incomes are greater, assets are greater. We still have, as much as 10% of our home buyers who are paying cash, any given, quarter, for houses. So I think there is a lot of strength, still out there, for the U.S. consumer, to buy houses. We try to even out what's happened with interest rates, dampen the impact on the consumers by offering special financing, which decreases the payment for most of our consumers. In that way, even when we've seen spikes, sudden spikes in interest rates, we've been able to, again, dampen that impact upon the consumers and raise the rates over time, rather than having the consumer having to absorb that all at once. So there's a lot of tools at our disposal as a larger builder to help the consumer through that. Well, let's explore that just a little bit further. So, I mean, one of the key tools that large or certainly many builders have been utilizing, certainly the large public home builders, have been the mortgage rate buydown products. And there's various iterations of mortgage rate buydowns and, you know, in terms of what companies are offering and what kind of product they're associated with. Explain to us, you know, what you guys use in terms—what's your, what's your most effective incentive at the moment? And kind of also, you know, when you use a mortgage rate buydown, kind of what it is and what it is not, maybe. Sure. I think it comes in several forms. If you look across the builder space, there might be a 2-1 buydown, which is a temporary buydown for a couple of years. There are the 30-year fixed buydowns. There are ARM buydowns. So it runs the gamut of mortgage product. We have focused mostly on the 30-year- Mm-hmm type of buydown, so for- So it's a full life of a loan. Full life of the loan. They get that lower rate. We have started offering more, the ARM loans that allows, as rates have risen, for a consumer to get in for 7 years, 5 years, at a lower rate. Right now, we have 5/1 ARMs available, for some consumers at 4.875%. Mm. We got 7/6 ARMs available at 4.99% for inventory that's gonna close relatively quickly. So, a lot of forms out there, and it's been a very effective tool. Is that because more consumers are starting to think they'll have a chance to refinance later down the road, and maybe you're... Are you splitting up your pool of incentive dollars to get, you know, we can do this amount for this ARM, and you can spend the rest of it in the design studio, or how does that work? You know, we find it's mostly either the buydown or the rate or just to utilize on those closing costs, which can be onerous, depending upon what state you're in, various fees, and what have you, to be paid. It's one of those 2 categories. It's not so much the Home Galleries anymore, since we're focused- Mm a bit more on spec. Got it. I'm gonna zoom out, just I'm gonna take it out a little bit further, 'cause just one of the first questions I always get in terms of the builders right now, the inbound that we're getting is, of course: "Hey, Buck, you know, love this story, understand it. I, I just don't know if I'm buying these stocks, and it's already top of the cycle." There's already some of the... MDC not included. Some of them are already at all-new all-time highs, or probably about 10% away from a new all-time high. But the question, of course, is, you know, you know, how can we be comfortable about where we are in the cycle? And I guess the follow-up is, you know, what's different about the builders this time around in terms of their ability to... I guess, what they're trying to figure out is quantify, what's my downside risk? What's the downside of the margins or the earnings power? You know, if let's say we go through some sort of mild recession next year, what's different about the MDC business model to kinda get you through another kinda downturn? I think it's that discipline of balance sheet, the 2-3-year supply of land. So not having so much land on our balance sheet certainly insulates us for when that downside does in fact occur. You know, naturally, nothing can prevent some level of stress when times are the toughest. But if you go back to the last very dramatic, I guess, period of stress for the home building business, and in particular, was the 2007, 2008 financial crisis. Of course, you had COVID in the middle- Mm but that affected everything. For home building, that financial crisis hit head on. We came through that with flying colors. We were to cash very quickly, much as, as we are today, more cash than debt, and ready to reinvest in the business very quickly as opportunities emerged. Now, I think we continue to operate in that manner. I think other builders have been more disciplined as well. So, if we do see some stress in the inventory, less overt need for builders to pour assets out into the market. And then, of course, you have the consumers who are in a very low interest rate situation already, not wanting to put their houses on the market en masse. That was part of the problems in the Great Financial Crisis, that a lot of investors out there on the market put their inventory onto the market, and that was competition for our inventory, and we don't... I think we have that situation today. So that's one of the biggest things. And for MDC in particular, not only do we have the insulating impact of our balance sheet and the fact that we don't see a whole lot of supply coming on the market, we're also just now, as I mentioned before, shifting to a spec strategy. Most recently, our most recent quarter, our average cycle time coming through our income statement was 200 days. Recently, we've been 140 days. Just 2 years ago, 2020, I believe. When you think about 140 days, that was all under a build-to-order model, so a more complex model. So I start thinking about what we can do in terms of cycling through our inventory faster, under a spec model. And I think we have the potential, given that we have the inventory now, the specs to sell, and we're building faster, it's a potential great story for returns as we go into a limited supply market in 2024- Yeah -spring selling. Turning inventory faster is always a good thing. That's a huge lever for generating outsized returns. Now that you are shifting to this spec model, and maybe that can... I don't know if that's a permanent change or if it's kind of just for this period of time, but does it change your view of how the company can buy land or option land, going forward? How do you think about the land optioning model, if you can kind of have visibility on this level of construction starts and this level of deliveries for some number of years in advance, does that change how you think about the land purchase model? We're gonna stick to a 2- 3-year supply of land. Just knowing that we don't know what we don't know. There have been plenty of times in history where something has cropped up that's been unexpected. We're not willing to bet the balance sheet. Mm I think others have tried that in the past, other builders, and a lot of those builders are no longer with us today, if they put much too much invested in the land category. So, we will stay disciplined on that front, but certainly, some of the changes we've made to our operating model should produce great potential for the company into 2024. Specifically on optioning, what's your thought process on- Yeah, options, we would love to have almost any lot that we have under option. We'd like to buy it finished. And certainly there are some mechanisms to do that out there. It's almost as if we're a victim of our own success. We've got a very low cost of capital. To put land into those kind of structures, it's very expensive, and you don't necessarily transfer the risk, meaning I'm talking about something- Mm specifically called land banking. Yeah. W ith land banking, again, very expensive to finance in that way, 1. And 2, you may have still the full development risk for that asset through completion guarantees. Any overruns in development, you may be responsible for funding. You have a deposit that you put up that may be on balance sheet. You may have a back-end payment that you owe on the back end that is not on balance sheet. You may have put up a bond for that asset- Mm essentially mean you have guaranteed that will get completed, or a surety company will come after you, or a bank will come after you to get that completion done. So there's a lot of complications, a lot of expense, and not necessarily a lot of risk transfer. Good to know. Helpful background. The other question I frequently get is about builder margins. And not to say that you guys manage to- a gross margin level. I think everyone's focused more on total returns and, and, you know, capital efficiency at this point. But I think the surprise of the year is how resilient builder margins have turned out to be this year, despite what we knew was gonna be this, you know, elevated level of incentives flowing through the model here. Your margins, again, in the Q3, continued to surprise to the upside. So I guess, you know, you know, the question is, like: Is this sustainable? Is what's driving this? Is this land that was bought pre-pandemic, that's they're still getting this, this tail benefit from? Is it lumber cost dropping off? Is it, you know, is there, is it truly sustainable efficiency? What, how do you answer a question about the margin sustainability? Yeah, for us, you know, it's not so much about the land, the long-dated land, since we're a short supply type of builder. We try not to use that kind of speculation as the source of our profits. But, some of the other things you mentioned, you know, certainly are helping. Things like lumber coming way down in price. Now, it was crazy inflated 4 times what it normally- Mm should be, because of the pandemic, and other issues. So that is helpful in the market. I think the notion that interest rates have come up, even though we found a way to productively work through it, I think for other industries, it's not been such a good story. I think it's much more difficult to make apartment deals work- Mm for example. Much more difficult to make build-for-rent work. So you have supply, supplies and labor that come from those segments of the real estate industry that now can flow into our industry. And that has the impact of potentially giving us lower prices, but also potentially reducing our cycle times because there's more availability of the labor. So things like that, I think, if you're going into it with your eyes open and really paying attention, you can take advantage of to help offset some of the margin degradation. And naturally, you know, that for all builders, margins are down year-over-year. Mm-hmm. Getting into those high 20%s that many of the builders were in, you know, ultimately, probably wasn't really sustainable. Right. But healthy margins certainly are a possibility in this kind of market where there's a low supply environment, and if you're taking advantage of the additional labor and materials that are out there. Definitely. Anybody have a question and wanna jump in? Yeah. On your land ownership, you know how you say you have a low inventory of land, what are you seeing in pricing, and how do you- what's your outlook for, you know, when you- internally, what do you- how are you guys budging that, or what are you seeing in the marketplace currently, and, how you outlook for that as well? Yeah, I think it's a competitive market amongst the public builders. I think you've seen less competition from private builders. It's just tougher for them to get the land financed, so that's helpful. I think you'll see land prices rise alongside home price increases. Typically, there's a little bit of a lag to it, but that's typically how it tracks. So I think there's plenty of land available for the public builders. I think you're seeing some deals that formerly were intended for build for rent, for example, that are now flowing into the build for sale market 'cause that really doesn't work on a build for rent basis anymore. It can't get financed. Mm-hmm. I think that's helped offset some of the potential for land price increases. In terms of the outlook, we think it'll continue to correlate very strongly to the price of housing. Anybody else wanna jump in? I was gonna ask one quick one about going back to the cycle time reductions. You're talking about, you know, bringing that down, like, to 140 days. I mean, there's an enormous amount of potential cash flow benefit, you know, taking that out of the work in process- Mm-hmm line item, you know, above and beyond, like, you know, just the organic growth of community count growth and higher deliveries next year, you'll get you know, some significant cash flow benefits. As you said, your next closest debt maturity is, like, what, 2030 at this point, something like that? 2030. 2030. The balance sheet's net debt-free at this point anyway. What are, what are you gonna do with the cash? It's kinda the que- Like, if, if, if this, you know, plans out, obviously, Larry loves the dividend, but do you ever think of, of there's a day and time where, where you'll approve a stock buyback plan? Yeah, the dividend is very important to us. In terms of stock buybacks, we have an authorization outstanding, 4 million shares, but we have not chosen that route for a long period of time. So that's always in our quiver of arrows, but it's not something that we've done in recent time. Naturally, the biggest thing we wanna do is reinvest back into home building assets and grow the business. Keeping in mind that we've got some markets that are very new to us, Nashville, Albuquerque, Boise, Austin, new to us within the last 3 or 4 years, and that we really wanna get to scale, and that takes capital. T hose are the kind of opportunities we really want to invest in, even though the buyback remains an option if we should so choose. Noted. And I have to ask, I'll try to- Of course. Always, you know, It's always a tradition. That's right. So what do you think is kinda the game plan for kinda sustainable organic growth? Is there a pace at which you want to kind of steadily grow the delivery, you know, the production capacity of the company, and/or, you know, you have the dry powder now. Do you think more M&A opportunities with maybe smaller regional private guys? Is that outlook kinda changing over the course of 2024? Yeah, it seems like, especially for those smaller builders, there's a lot of pressure- Mm on their business now. It's just a lot more expensive to finance what they've done. You go back a couple of years, the money was very cheap, allowed them to grow quickly, and now that is not a certain horizon for many of those competitors, small competitors at this point. So I wouldn't be surprised to see some of those smaller builders get acquired, just realizing that it's too risky, too expensive, having to subject their owners to things like personal guarantees, not an enviable position to be in. So I think all those reasons point to why there certainly could be some consolidation of those smaller builders. Y ou guys are the leading builder in Denver and Colorado. I'd say Colorado at large. It's, you know, your largest market position by far. How is Denver holding up? You know, we've heard there's been a lot of community count growth in the area in terms of... Is it, you know, there not a lot of resale supply, though, so I guess, you know, what's the, what's the dynamic in the Colorado markets looking like these days? Yeah, it's, it's been a great market for us. We have great land positions, great relationships with subcontractors, and that's really made the difference for us. It's gotten a lot more expensive, so it starts to get some of those comparisons to places like California. Mm. But it's not quite there yet in terms of the affordability spectrum or lack thereof, like California. So I still think you see people move to Colorado for lifestyle. A lot of great companies in Colorado continues to be a destination, and with the relationships and land positions we have there, it's gonna be a great market for us, we think, for some time to come. Well, we'll have to end it there. Thank you guys for joining us for the afternoon session. Bob, thank you so much for your time and coming down and doing this session for us. So thank you, everybody. We'll talk to you soon. Thanks, Buck.