Richmond American Homes' parentMDC Holdings (
) is building itself back to health as the housing market
But it still has a ways to go to reach its peak in the
pre-crash glory years.
The high mark was in 2005. That year, the company's stock hit
89.63 while revenue was closing in on the $5 billion mark.
Earnings soared to more than $11 a share.
This year, analysts expect earnings to reach $2.23, up 74%
from last year, and for revenue to hit $1.7 billion, a 41% gain
over last year.
Shares were recently trading down, as were a lot of
homebuilders on the heels of a string of mortgage-rate increases
that may have caused loan applications to fall.
But the Mortgage Bankers Association said Wednesday mortgage
applications rose for the first time in four weeks even as the
30-year fixed rate edged up to 4.15%.
After losing money for two years and seeing sales plummet even
longer, the Denver-based homebuilder has posted five straight
quarters of profits.
The first quarter was off to a smashing start: Earnings soared
from 4 to 45 cents a share on revenue of $332 million, which was
up 77% from last year.
CEO Larry Mizel gushed in early May's quarterly report that
the absorption rate of new home orders per active community was
"our highest level since 2006."
He told analysts that buyers are "excited and interested and
they want to buy a home, like, right now."
MDC is heavily concentrated in Western markets, where prices
have climbed the sharpest in the country.
The company's average selling price for homes closed in the
quarter was $325,000, up 9% from a year earlier.
Average selling prices in Colorado and California were above
the company average. Closings in the two states more than
Arizona, Nevada and Washington state logged even stronger
double-digit price gains.
But will buyers want to keep buying if prices and interest
rates keep climbing?
Builders in markets that have appreciated the most may have to
adjust product and pricing to keep buyers coming, says Alex
Barron, senior research analyst with the Housing Research
If rates go higher, buyers might look to smaller homes or
settle for fewer upgrades, he says. That could impact builders'
"If your interest rate goes up from 3.5% to 4% that means your
purchasing power goes down by about 6% or 7%," Barron said.
On the other hand, he says, demand for homes is high and
should stay that way as long as interest rates stay relatively
low. He sees demand rising at least through 2016, when he expects
supply (now low) and demand to reach equilibrium.
"We should be building 800,000 single-family new homes a year
and right now it's a little over 400,000," Barron said.
"If interest rates go up, people still need a place to live.
They'll just have to pay less," he said, drawing the analogy of
buying a hamburger instead of a steak.
MDC's typical mix has been evenly divided between first-time
and move-up buyers, but lately that's shifted to more move-up
buyers. The mix is now 60%-40% in favor of move-up buyers, Chief
Financial Officer John Stephens said in the recent conference
MDC delivered 1,018 homes in the quarter, up 64% from the year
Net new orders totaled 1,300 homes, a 22% gain.
The backlog stood at 1,927 homes, up 30% and valued 45% higher
than last year.
Higher prices and deliveries helped lift MDC's gross margin to
17.4% from 14.1% a year earlier. Management predicted higher
gross margins for the rest of 2013.
Their margin guidance was "significant since the company
rarely offers forward looking statements," Deutsche Bank analysts
pointed out in a recent report.
In a review of building earnings in that May 31 report, the
analysts wrote that MDC's margins should rise as a result of
"more deliveries from land development, increased spec sales and
generally better pricing conditions."
The number of MDC's active subdivisions was down 6% from the
end of December to 139 as higher-than-expected sales resulted in
various communities selling out sooner than expected. Also, some
of the newest ones weren't yet considered active.
But CEO Mizel stated that many of the new subdivisions added
over the past few quarters have recently opened, which will
result in a higher active count in the second quarter.
MDC recently expanded its Richmond American Homes operations
into South Florida, where it plans to open a community of
two-story homes in Boca Raton in the fourth quarter. It already
has growing operations in Jacksonville and Orlando.
Lots owned and under option in the first quarter rose 11% from
December to more than 12,700 lots.
MDC has enough land supply to last a little more than three
years, among the lowest of publicly traded builders, pointed out
KeyBanc Capital Markets in a recent report.
) has 7.9 years of owned lot supply;D.R. Horton (
) has 6.4 years, the report noted.
In a rising land market, "If you have short supply you are
going to be forced to pay up for land," Barron said. "But short
supply could be a good thing when the market starts to slow down
and you want to have more flexibility."
He says MDC's challenge is to "keep an adequate supply of
MDC's conservative management team "has managed to do pretty
well through ups and downs of the market," Barron said.
"They don't have too much debt and they're not overly
leveraged," he said. "They have a lot of cash sitting on their
balance sheet. If they find interesting opportunities, they can