Q4 2021 MDC Holdings Inc Earnings Call

Good day and welcome to M. D. C Holdings 2021 fourth quarter earnings Conference call. All participants will be listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

Speaker 1: Good day and welcome to NBC Holdings 2021 Fourth Quarter Earnings Conference call. All participants will be listened only mo.

Speaker 1: Should you need assistance, please signalling conference specialists by pressing star, then zero, on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.

On your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

Speaker 1: To ask a question, you may press star than one on your telephone keypad. Do a draw your question, please press star than two.

Withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Derrick Kimberly Vice President and corporate controller. Please go ahead.

Speaker 1: Please note, this event is being recorded. I would now like to turn the conference over to Derek Kimmerley, Vice President and Corporate Controller. Please go ahead.

Speaker 1: Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings 2021 fourth quarter earnings conference call.

Thank you good morning, ladies and gentlemen, and welcome to MDC Holdings' 2021 fourth quarter earnings Conference call.

Speaker 1: On my call with me today, I have Larry Meisel, Executive Chairman, David Mandridge, Chief Executive Officer, and Bob Martin, Chief Financial Officer.

On the call with me today, I have Larry Mizel Executive Chairman.

David <unk>, Chief Executive Officer, and Bob Martin Chief Financial Officer.

Speaker 1: At this time, all participants are in a listen-only mode. After finishing our prepare remarks, we will conduct a question and answer session at which time we request the participants limit themselves to one question and one follow-up question.

At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we request that participants limit themselves to one question and one follow up question.

Speaker 1: Please note that this conference is being recorded and will be available to replace.

Please note that this conference is being recorded and will be available for replay.

Speaker 1: For information on how to access the replay, please visit our website at mdcholdings.com.

For information on how to access the replay please visit our website at MDC Holdings Dot com.

Speaker 1: Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the private security's litigation reform act of 1995.

Before turning the call over to Larry and David It should be noted that certain statements made during this conference call, including those related to Mdc's business.

<unk> condition.

Results of operation cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

Speaker 1: These statements involve known and unknown risks, uncertainties, and other factors that may cause the company's actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking certain particular symptoms, including incoherence, unclear as the service system says it'll provided

These statements involve known and unknown risks uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.

Speaker 1: These and other factors that could impact the company's actual performance are set forth in the company's 2021 Form 10K, which is expected to be filed with the SEC today.

These and other factors that could impact the company's actual performance are set forth in the company's 2021 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.

Speaker 1: It should also be noted that SEC regulation G requires that certain information accompany the use of non-depth financial measures.

Speaker 1: Any information required by Regulation G is posted on our website with our webcast.

Any information required by regulation G is posted on our website with our webcast slides.

Speaker 1: And now I will turn the call over to Mr. Meisel for his opening remarks.

And now I will turn the call over to Mr. Michael for his opening remarks.

Speaker 2: Good morning and thank you for joining us today as we go over our results for the fourth quarter and full year of 2021. Given update on current business conditions and provide some insight into the future of our company.

Good morning.

And thank you for joining us today as we go over our results for the fourth quarter and full year 2021.

Given update on current business conditions and provide some insight into the future of our company.

Speaker 2: MDC Holdings reported earnings of $2.21 per diluted share in the fourth quarter of 2021, capping a strong year of profitability in which earnings per share grew by more than 50% as compared to the previous year.

M D C Holdings report.

Or did earnings.

$2.21 per diluted share in the fourth quarter of 2021, capping a strong year of profitability in which earnings per share grew by more than 50% as compared to the previous year.

Speaker 2: Home sales revenues grew 22% for the quarter on a 4% increase in unit closings and a 17% rise in average selling price.

Home sales revenues grew 22% for the quarter on a 4% increase in unit closings and a 17% rise in average selling prices.

Speaker 2: Home sales gross margins expanded to 23.5% in the quarter, representing a 150 basis point improvement over the prior year quarter.

Home sales gross margins expanded to 23, 5% in the quarter reps.

Representing a 150 basis point improvement over the prior year quarter.

Speaker 2: We continue to benefit from the strong demand in our markets, which has allowed us to stay ahead of cost increases. A trend we expect to continue into 2022.

We continue to benefit from the strong demand in our markets, which has allowed us to stay ahead of cost increases a trend we expect to continue.

In 2022.

Speaker 2: Sales activity during the quarter remained consistently above the normal sales patterns for this time of year, resulting in an absorption pace of 4.5 orders per community per month.

Sales activity during the quarter.

Remained consistently above the normal sales patterns for this time of year.

<unk> and then the absorption pace.

4.5 orders per community per month, we.

Speaker 2: We continue to see healthy demand from a wide array of buyers in our market.

We continue to see healthy demand from a wide array of buyers in our markets.

Speaker 2: driven by strong local economies, rising incomes, and favorable demographics.

Driven by strong local economies rising incomes and favorable demographics.

Speaker 2: Equally important has been the ongoing lack of existing supply which has fueled the need for new home construction. According to the National Association of Relators, total housing inventory at the end of December amounted to 910,000 units.

Equally important has been the ongoing lack of existing supply, which has fueled the need for new home construction.

According to the National Association of Realtors.

Total housing inventory at the end of December amounted to 910000 units.

Speaker 2: down 14% from one year ago.

Down 14% from one year ago.

Speaker 2: This amount of unsold inventory represents a 1.8-month supply at the current sales pace, a level that is well below what would be considered equilibrium for normal housing markets.

This amount.

So inventory represents a 1.8 months supply.

The current sales pace a level that is well below what would be considered equilibrium for normal housing market.

Speaker 2: Given this lack of existing supply and favorable demand drivers in place, we believe that the near and long-term outlook for our industry remains positive.

Given this lack of existing supply of favorable demand drivers in place, we believe that the near and long term outlook for our industry remains positive.

Speaker 2: MDC is in a great position to take advantage.

D. C is in a great position to take advantage of these positive industry fundamentals as we begin the new year.

Speaker 2: of these positive industry fundamentals as we begin the new year. Thanks to our strong market positioning and our more affordable products.

Thanks to our strong market positioning.

Our more affordable product focus.

Speaker 2: In our build to order operating model, we have historically positioned our company in some of the fastest growing home building markets in the country.

Build to order operating model.

We have historically positioned our company and some of the fastest growing the home building markets in the country.

Speaker 2: areas that feature steady population growth, expanding employment centers, and rising income.

Areas that feature steady population growth.

Expanding employment centers and rising in clubs.

Speaker 2: While we cater to a wide array of buyers in our markets, we have placed a higher emphasis on the more affordable segments of the market in recent years to address the growing population of first-time buyers and the lack of supply at lower price points.

While we cater to a wide array of buyers in our markets. We have placed a higher emphasis on the more affordable segments of the market in recent years to address the growing population of first time buyers and the lack of supply.

At lower price points this more affordable product.

Speaker 2: This more affordable product focus has been on a key driver we've seen in our returns and as a result in higher margins and better asset turns.

Focus has been on a key driver.

We've seen in our returns and as a result in higher margins and better asset turns.

Speaker 2: We believe our build-to-order operating model has also contributed to our improving returns by bolstering our margins and keeping our unsold inventory levels to a minimum.

We believe our build to order operating model has also contributed to our improving returns by.

Both our margins and keeping our unsold inventory levels to a minimum.

Speaker 2: This strategy has also given us great visibility into all of our operations.

This strategy is there.

Also giving us great visibility into all of our operations and allows us to better manage cost increases.

Speaker 2: and allows us to better manage cost increases.

Speaker 2: We ended the year with 7,640 sold homes in backlog, which is 15% higher than the previous year and represents a large percentage of the homes we expect to deliver in 2022.

We ended the year with 7640 sold homes in backlog.

Which is 15% higher than the previous year and represents a large percentage of the homes, we expect to deliver in 2022.

Speaker 2: Another way in which we are well positioned for a strong 2022 is through the investments we've made in our business.

Another way in which we are well positioned for.

A strong 2022.

And Suzie investments, we've made in our business.

Speaker 2: We ended the year with 29% more lots under control than we had at the end of the previous year.

We ended the year with 29% more lots under control than we had at the end of the previous year.

Speaker 2: giving us a solid runway for community count growth in 2022.

Giving us a solid runway for community count growth in 2022.

Speaker 2: It has been a challenge to grow our active subdivision count.

It has been a challenge to grow our active subdivision count give.

Speaker 2: given the faster-than-expected closeout of existing projects and the delays associated with opening new ones.

Given the faster than expected closeout of existing projects and the delays associated with opening new ones.

Speaker 2: But we believe this trend will turn positive in 2022 and should be a nice tailwind for our sales efforts as the year progresses.

We believe this trend will turn positive in 2022.

It should be a nice tailwind for our sales efforts as the year progresses.

Speaker 2: 2021 was a great year for our industry and particularly for our company.

2021 was a great year for our industry and particularly for company.

Speaker 2: As we believe we are positioned to deliver even better results in 2022.

As we believe we are positioned to deliver even better results in 2022.

Speaker 2: thanks to our sizable backlog, the margin profile of those homes in backlog.

Thanks to our sizable backlog.

The margin profile of those homes in backlog.

Speaker 2: and the favorable housing fundamentals we continue to see in our markets.

And the favorable housing fundamentals, we continue to see in our markets.

Speaker 2: We are achieving record levels of profitability as an industry. And we are doing so with more discipline and risk mitigation than in years past. Yet the home building stocks continue to trade at low valuation.

We are achieving record levels of profitability as an industry.

And we are doing so with more discipline and.

And risk mitigation than in years past, yet the homebuilding stocks continue to trade at low valuations.

Speaker 2: We believe MDC presents a compelling investment opportunity for long-term investors who recognize this disconnect and see the value inherent in our stock.

We believe MDC presents a compelling investment opportunity.

We're long term investors who recognize this disconnect.

See the value inherent in our stock.

Speaker 2: Now I'd like to turn it over to David, who will provide more detail in our home building operate.

Now I'd like to turn.

It's over.

To David.

Who will provide more detail on our homebuilding operations.

Speaker 3: Thanks Larry, and good morning to everybody joining us on the call today. We experienced a strong continuation of strong strong demand trends from earlier in the year throughout the fourth quarter of 2021. As buyers remain motivated to own a home.

Thanks, Larry and good morning to everybody joining us on the call today.

We experienced a strong continuation of strong strong demand trends from earlier in the year throughout the fourth quarter of 2021.

As buyers remain motivated to own a home.

Speaker 3: The demand was broad-based as each of the regions post an absorption pace above 4.2 orders per community per month.

The demand was broad based as each of the regions posted an absorption pace above $4 two orders per community per month.

Speaker 3: The markets with the best absorption paces during the quarter were Orlando, Phoenix, Denver and Riverside County.

Markets with the best absorption paces during the quarter were Orlando, Phoenix, Denver, and Riverside County.

Speaker 3: In terms of profitability, our West region delivered the highest average gross margin.

In terms of profitability, our west region delivered the highest average gross margin.

Speaker 3: with our divisions in Nevada, Arizona, and California being notably a standout.

With our divisions in Nevada, Arizona, and California, being notably a standout.

Speaker 3: As Larry mentioned, we continue to experience solid demand in all of our markets.

As Larry mentioned, we continue to experience solid demand in all of our markets.

Speaker 3: allowing us to stay ahead of cost increases and generate margin expansion. We believe our more affordable product focus has given us a longer runway for pricing power, given the outsized demand for these homes and the lack of existing supply.

Allowing us to stay ahead of cost increases and generate margin expansion.

We believe our more affordable product focus has given us a longer runway for pricing power given the outsized demand for these homes and the lack of existing supply.

Speaker 3: And while the recent rise in interest rate has had a negative impact on our stock,

And while the recent rise in interest rates has had a negative impact on our stock.

Speaker 3: So far, we have not seen it translate into a slowdown in demand for our housing.

So far we have not seen it translate into a slowdown in demand for our houses.

Speaker 3: While the sales side of the business continues to run at a high level, the construction side of the business continues to be challenged with supply chain issues, material shortages and munitions.

While the sales side of the business continues to run at a high level. The construction side of the business continues to be challenged with supply chain issues.

Material shortages and municipal delays.

Our cycle times in the fourth quarter extended by roughly two weeks relative to the third quarter.

Speaker 3: Our cycle times in the fourth quarter extended by roughly two weeks relative to the third quarter.

Speaker 3: As we experienced ongoing disruptions at various stages of the build process.

As we experienced ongoing disruptions at various stages of the build process.

Speaker 3: Our teams have done a great job working with our Cray partners to find solutions and expedite the build process we're possible.

Our teams have done a great job working with our trade partners to find solutions and expedite the build process where possible.

Speaker 3: But based on what we see in the market today, we expect these issues to persist for the future.

But based on what we see in the market today, we expect these issues to persist for the future.

Speaker 3: Fortunately, we have seen very few buyers fall out of back lock as a result of these closing delays.

Fortunately, we have seen very few buyers fall out of backlog as a result of these closing delays.

Speaker 3: We are very active in the land market in the fourth quarter of 2021, acquiring over 5,000 lots for our home building operations, bringing our total lot count to over 38,000 owned and controlled lots at the end of the year. Each of our regions are now primed for growth, with the east region adding 40 percent more lots to their year-end lot count, the west adding 30 percent, and the mountain region 22 percent.

We are very active in the land market in the fourth quarter of 2021 acquiring over 5000 lots for our homebuilding operations, bringing our total lot count over 38000 owned and controlled lots at the end of the year.

Each of our regions are now prime for growth with the east region, adding 40% more lots to their yearend lot count west, adding 30% in the mountain region, 22%.

Speaker 3: Our expansion into new markets is progressing nicely with our first community in Austin scheduled to open in the first quarter of this year. And our first community in Nashville scheduled to open in the second quarter of this year.

Our expansion into new markets is progressing nicely with our first community in Austin and scheduled to open in the first quarter of this year.

And our first community in Nashville scheduled to open in the second quarter of this year.

Speaker 3: We started selling homes and boys you this past December and expect to start delivering homes in the market in the second quarter of 2022.

We started selling homes in Boise This past December and expect to start delivering homes in the market in the second quarter of 2022.

Speaker 3: Overall, we are pleased with the performance in the fourth quarter and the way our company has positioned heading into the new year. With that, I'd like to turn it over to Bob who will provide you with more detail on our results for the fourth quarter and the full year. Thanks, David.

Overall, we are pleased with the performance in the fourth quarter and in the way our company is positioned heading into the new year with that I'd like to turn it over to Bob who will provide you with more detail on our results for the fourth quarter and the full year.

Thanks, David and good morning, everyone.

Speaker 4: We ended 2021 with another strong quarter, has pre-tax income from our home building operations increased by $51.2 million, or 36% from the prior quarter to $193.5 million.

We ended 2021 with another strong quarter as pre tax income from our homebuilding operations increased by $51 2 million or <unk>, 36% from the prior year quarter to $193 $5 million. This increase was driven by home sale revenues, which rose 22% year over year.

Speaker 4: This increase was driven by home sale revenues, which rose 22% year-to-one point four four billion, as well as our gross margin through home sales, which improved by 150 basis points to 23.5%.

<unk> four 4 billion as well as our gross margin from home sales, which improved by 150 basis points to 23, 5%.

Speaker 4: During the fourth quarter, we accelerated the retirement of remaining $126.4 million of our unsecured notes due in January 2024.

During the fourth quarter, we accelerated the retirement of the remaining $126 $4 million of our unsecured notes due in January 2024.

Speaker 4: The retirement resulted in a loss of $11.4 million, which is included in home building pre-tax income.

The retirement resulted in a loss of $11 $4 million, which is included and homebuilding pre tax income.

Speaker 4: Our financial services pre-tax income decreased to $15.6 million as our mortgage business continued to be impacted by increased levels of competition in the primary mortgage market.

Our financial services pre tax income decreased to $15 6 million as our mortgage business continued to be impacted by increased levels of competition in the primary mortgage market.

Speaker 4: Compensation-related costs also increased year-to-year, as our mortgage business has increased its head count. In order to service, our increasing number of home buyers.

Compensation related costs also increased year over year as our mortgage business has increased its head count in order to service, our increasing number of homebuyers.

Overall net income for the quarter increased 10% to $162 7 million or $2 21 per diluted share.

Speaker 4: Overall, net income for the quarter increased 10% to $162.7 million, or $2.21 per diluted share.

Speaker 4: For the full year, we generated net income of $573.7 million, which represents a 56% increase over the prior year and is the largest amount in MDC's history.

For the full year, we generated net income of $573 7 million, which represents a 56% increase over the prior year and is the largest amount in mdc's history.

Our tax rate increased from 13, 9% to 22, 2% for the 2021 fourth quarter the.

The increase in rate was primarily due to a larger benefit from federal energy efficient home tax credits in the 2024th quarter concurrent with an increase in the estimated amount of energy tax credits to be received.

Speaker 4: For 2022, I would roughly estimate an effective tax rate of 26.5%, which excludes any discrete items, any potential changes in tax rates or policy, and any favorable impacts from energy tax credits.

For 2022, I would roughly estimate an effective tax rate of 26, 5%.

Which excludes any discrete items any potential changes in tax rates or policy at any favorable impacts from energy tax credits.

Speaker 4: federal legislation extending the availability of tax credits for building energy efficient homes in 2022 has not yet been enacted.

Legislation extending the availability of tax credits for building energy efficient homes in 2022 has not yet been enacted.

Speaker 4: If the Section 45L tax credit is extended at its current level, our 2022 effective tax rate would be favorably impacted by approximately 150 basis points.

If the section 45 L tax credit is extended at its current level. Our 2022 effective tax rate would be favorably impacted by approximately 150 basis points.

Speaker 4: We delivered 2,663 homes during the quarter, which represented a 4% increase over the prior year.

We delivered 2663 homes during the quarter, which represented a 4% increase over the prior year. This.

Speaker 4: This increase was driven by the increased number of homes we hadn't backlogged to start the quarter.

This increase was driven by the increased number of homes, we had in backlog to start the quarter.

Speaker 4: Our backlog conversion rate remains below historical levels as we continue to experience shortages of building materials and tightness in labor markets, primarily due to the ongoing supply demand imbalance and disruption caused by the pandemic.

Our backlog conversion rate remains below historical levels as we continue to experience shortages of building materials and tightness in labor markets, primarily due to the ongoing supply demand imbalance and disruption caused by the pandemic.

Speaker 4: As a result, we have seen our construction and land development times extend both year-over-year and relative to the prior quarter.

As a result, we have seen our construction and land development times extend both year over year and relative to the prior quarter.

Speaker 4: We do not expect material or labor conditions to significantly improve in the near term.

We do not expect material or labor conditions to significantly improve in the near term.

Speaker 4: The average selling price of homes delivered during the quarter increased 17% to about $539,000.

The average selling price of homes delivered during the quarter increased 17% to about $539000.

Speaker 4: This increase was the result of price increases implemented over the past year as well as a shift in the mix of our closings from Arizona to Southern California.

This increase was the result of price increases implemented over the past year as well as a shift in the mix of our closings from Arizona to Southern California.

Speaker 4: We are anticipating home deliveries for the first quarter of 2022 of between 2,000 and 2,300 units, and we expect the average selling price of these units to be between $550,000 and $560,000.

We are anticipating home deliveries for the first quarter of 2022 between 2000 2300 units and we expect the average selling price of these units to be between 550005 hundred $60000.

Speaker 4: For the 2022 full year, assuming no improvement in our average sale to close cycle time from those experienced during the 4th quarter, we are forecasting home deliveries to reach between 10,500 and 11,000 units.

For the 2022 full year, assuming no improvement in our average sale to close cycle time from those experienced during the fourth quarter. We are forecasting home deliveries to reach between 10500 11000 units.

Speaker 4: Gross margin from home sales improved by 150 basis points year-over-year to 23.5 percent.

Gross margin from home sales improved by 150 basis points year over year to 23, 5%.

Speaker 4: While we continue to experience cost inflation, including the return of rising lumber costs, our price increases through the end of the quarter outpaced these cost pressures, which resulted in a healthy increase in our backlog margins year over year. As a result, we anticipate continued expansion in our gross margins from home sales as we move into 2022.

While we continue to experience cost inflation, including the return of rising lumber costs or price increases through the end of the quarter outpaced these cost pressures, which resulted in a healthy increase in our backlog margins year over year. As a result, we anticipate continued expansion in our gross margins from home sales.

As we move into 2022.

We are expecting our gross margin from home sales for the 2022 first quarter to increase to approximately 25% assuming no impairments or warranty adjustments. Additionally, we believe that our sequential increase is likely for the second quarter.

Just on the gross margin of homes currently in backlog.

Our total dollar SG&A expense for the 2021 fourth quarter increased $12 1 million.

From the 2024th quarter, driven by increased general and administrative expenses.

Our SG&A expense as a percentage of home sale revenues decreased 90 basis points year over year to nine 1% as we continued to benefit from improved operating leverage.

General and administrative expenses increased $13 $8 million from the prior year quarter to $60 million $67 million.

This increase primarily resulted from an increase in salary related expenses due to higher average head count as well as an increase in stock based and deferred compensation.

We currently estimate that our general and administrative expenses will be between <unk>.

$70 million and $75 million for the first quarter of 2022.

Marketing and commission expenses decreased year over year as a percentage of home sale revenues as total dollars spent was little changed even as home sale revenues moved notably higher we've been able to control. These costs effectively throughout 2021, given the backdrop of strong demand for new housing.

The dollar value of our net orders increased 9% year over year.

Two.

$143 billion driven.

Driven by a 12% increase in our average selling price.

While our monthly sales absorption pace decreased slightly year over year to $4 five orders per community per month sales remained strong throughout the fourth quarter and our sales pace actually increased sequentially from the third quarter of 2021 within each of our homebuilding segments. This unseasonably strong fourth quarter demand underscores.

The current demand for new homes.

Cancellation rates remained low during the quarter at eight 7% relative to beginning backlog and 20% relative to gross orders.

Honestly higher than the prior year.

Moving to 2022, we were pleased with the order activity. We saw in January however, much like last year, we do not expect to see that typical seasonal jump in sales when comparing the first quarter of 2022 to the fourth quarter of 2021 since we did not see a typical seasonal drop off in the fourth quarter.

We ended the year with 7640 homes in backlog, which was an increase of 15% from the fourth quarter of 2020 and was our highest year end backlog unit level ever.

The estimated dollar value of homes in backlog increased 32% year over year to $4 3 billion.

This represented not only our highest year end backlog dollar value in history, but the highest ever reported as of any quarter end period.

Our current backlog provides a great base to support our full year 2022 growth goals.

As highlighted last quarter, we had a number of legacy communities on the verge of closeout. Our active subdivision count was further impacted during the quarter by the unseasonably strong order pace previously mentioned, resulting in certain communities closing out sooner than anticipated.

New community openings remained challenging in the current environment due to delays and municipal approvals and strain on the resources available to complete development work with.

With that said we are currently projecting more than 40, new communities to open for sale.

And achieved our first quarter prior to the end of the first quarter of 2022, which should push our active community count higher in the near term.

While we are forecasting double digit percentage growth in active subdivisions. During 2022, we will wait to provide further guidance on this metric until we have more visibility as to the timing of community openings scheduled to occur later in the year.

We approved for 128 lots for acquisition during the fourth quarter, bringing the total number of lots approved for the year to over 20000. This represents an increase of 54%.

Over full year 2020 approval activity.

We acquired 5304 lots during the quarter, resulting in total land acquisition and development spend for the quarter of $679 million.

For the full year, we invested $1 9 billion in land acquisition and development compared to $1 3 billion in the previous year.

As a result of our land acquisition and approval activity. Our total lot supply to end the year exceeded 38000 lots, representing a 29% increase from the prior year end.

In addition to the 11148 lots controlled via option we.

We had an additional 7408 lots under contract that are at various stages of due diligence. While these lots still require approval by our asset management committee prior to being reflected within our controlled lot count they provide a fuller picture of our current land pipeline.

We currently own all of the lots that we need to reach our anticipated 2022 delivery goals.

We also believe that we now own or control the lots necessary to drive continued growth into 2023 as well.

In summary, while 2021 was not without its challenges we were able to achieve several significant milestones as an organization including.

Delivering a record full year home sale revenues despite pressures on construction cycle times.

Continuing to expand our homebuilding gross profit margin, which increased 330 basis points year over year to 13, 4% for the 2021 full year.

<unk> record full year consolidated net income and driving record backlog dollar value levels, despite minimal community count growth during the year.

In addition, we expanded our geographic footprint during the year to cover 15 states with our strategic expansion into the Boise, Nashville, Austin and Albuquerque market.

Looking forward to 2022.

We believe it has the potential to be an even stronger year based on the dollar value in gross margin of our current backlog and the ongoing strength of demand in the housing market.

I would be remiss, if I didn't take this opportunity to thank.

All of our employees and our board of directors for an incredible year and they're instrumental role in helping to achieve all of our great accomplishments during 2021.

That concludes my prepared remarks, we will now open up the line for questions.

We will now begin the question and answer session.

Ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Please at this time, we will pause momentarily to assemble our roster.

The first question.

From depot.

Ragavan with Wells Fargo. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question.

You mentioned a wide array of you serve a wide array of demographics.

Are you seeing any concerns.

Maybe and strengthened activity across any of this buyer category.

Hi, Deepak. This is this is Bob.

I don't know if I quite caught your question.

I don't know that we've really noticed any significant differences across our buyer categories Youre right, we do service.

A lot of it from buyers whether it's.

Entry level buyers or even move down buyers.

Sometimes from the same product line.

But nothing really new to note there.

Yes.

This is David just to add on with what Bob said, we're really seeing consistent demand across the board.

Whether it's.

First time House your first move up so we're pretty happy with.

What I call a broad based recovery really across the board. So we think its pretty strong across.

All our divisions and I will tell you one of the big pain points as I think every market that we're in.

Has got really limited supply of resale houses and there's really a lot of demand. So so we really feel really good about our footprint great question.

Alright. Thanks.

My follow up is on the supply chain.

You mentioned the production clientele extended by a couple of ways.

And it looks like versus the last quarter.

Most of your peers, including yourself are not assuming any meaningful improvement on the supply chain in 2022 at all.

Probably have some on the chrome content in there but.

Should they completely take off the table any potential supply chain improvements midyear. This year at all or do you think there is still some drivers that could help.

Tom if things don't get worse from here.

I think right now we just don't have much visibility to things improving at this point and that's why we're not assuming.

That the cycle times will improve.

In 2022.

<unk>.

There is always the possibility, especially if we do see that.

Covid does not make a another resurgence things like that go in our favor.

But right now I, just think there's too much uncertainty out there.

Which is why we stay on the conservative end.

Alright, Okay. Thanks, Good luck I'll pass it on.

Thank you. Your next question. The next question comes from Michael Rehaut with Jpmorgan. Please go ahead.

Hi.

Maggie on for Mike.

First question, just on pricing and kind of how youre thinking about asp's for the year I know that you are expecting.

I think 555.

For the first quarter.

And I believe you also said that you plan to continue to stay ahead of cost increases.

As I'm looking at the average order price for the last three or so quarters, it's been relatively flat.

Im wondering how youre thinking how we should be thinking about.

Later on in the year.

And the potential.

And necessity for further price increases.

A bag, it's David I'll start and then kind of turn it over to Bob, but I think a lot of.

Sure.

Call flat pricing and not going on a bunches is really is really focusing on more of the first time house and so we're actually like we'd like to drive our average sales price down if we can but.

Some of the markets that we're very active in California, which has got an average sales price.

So what youre seeing is really intended consequences of us really focusing on first time house.

Bob what do you have to add to that and we talked.

About I think you said this $5 $50 million to $560 million in Q1.

In backlog right now I think we're at about.

563000.

Average price in backlog and Thats on $4 3 billion of total backlog, which would be up.

A big chunk of 2022 revenues, so I think.

We like.

The asps.

Right now though.

Those levels of ASP or chance of achieving.

That.

During this year, although as David notes, we're always looking for opportunities too.

Make our products more.

Affordable and I guess, the last thing I would say is just with the continued supply demand imbalance.

I continue to think that we've got a good shot at using pricing to.

To help manage our business, including helping to offset.

The cost increases that could occur during 2022.

Got it.

Thank you and then second question just.

A clarification around the community count.

Comments.

I believe you said that.

Near term there should be an increase in that you are looking for double digit growth in 2022, and I think that the prior comments last quarter.

The original expectation may have been that.

You were thinking there might be an increase from <unk> levels by the end of <unk> is it fair that because demand.

Demand has remained so strong.

That that that increase from <unk> levels might be a bit pushed out.

And kind of fair to me.

<unk> assumed.

Kind of.

Step up across all of the quarters.

Year.

Yes, just with the.

What what's gone on including more.

Sales than we anticipated in Q4, certainly that's caused some communities.

To close earlier than expected.

Having those 40 of them that were scheduled to have our first sale in in Q1, I think gives us a great shot.

At increasing our community count from where we were at the end of the year.

I guess.

We hedge a little bit.

Because there's a lot of crazy things that have happened during 2021.

A lot of volatility and nuances.

But we're in a great position as we enter the spring selling season.

Got it thank you.

The next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Yes, Thanks, a lot guys.

Bob I really appreciate you, giving us that refundable.

Our lot count with refundable options I don't think most people realize that actually at three quarters of a year's worth of.

Lots that you have on your option in.

So that was particularly the case right before the pandemic. So my guess is would it be fair to gas maybe this would be a good question would be is it fair to guess that.

Things that you were in due diligence on.

These refundable options.

For the pandemic like right before the pandemic hit it pretty much all of those subsequent to the pandemic you actually acted on and struck those options.

Or would you say that that is too optimistic.

I guess, when we're going back to right before the pandemic I think a lot of those deals that would have been in process, we kind of temporarily put on hold certainly some got canceled but in most cases I think we were able to just push them out.

And then proceed with them.

Because that demand came back so quickly right.

In in the matter of two or three months.

I think thats, what youre asking when a thought.

That is exactly what I'm asking because I think some people like reflect on your land holdings and they say well MDC doesn't have as much land or they didn't have as much sort of cheap land tied up at the beginning of the pandemic and actually it's largely there is an impact there by youre not including refundable deposit.

In your lot count so that's great.

My question relates to your SG&A, which was very good.

Despite the fact that your closings were a little on the lighter side.

And.

I guess I'm curious as to whether or not there's some things going on there in the SG&A that that.

We're benefiting you this quarter.

Could continue next year like one of the things I'm thinking about is is it possible that in this environment. You are actually seeing maybe some of your co broker commission rates coming down and things like that or are there. Other initiatives you took to sort of control overhead that resulted in a lower SG&A rate I'm talking to your combined G&A plus you're selling.

Yes, Steve This is David good morning.

I think overall, we reduced sales commissions in the last 12 months across the board.

And pretty much I think we've seen the industry pretty much change what I call outside commissions to broker reduce too.

Great.

Yes that was and there is no.

Does not your expectation that those are going to come back right.

I think with this current market I think.

Sure.

I think we're going to be pretty consistent where we're where we're at right now.

Yes, that's encouraging and then last one from me on gross margin, Bob we've seen the lumber futures going all over the place they started becoming a real problem again or concern in the late in the winter. The early part of the winter and then quick as a flash there now that back down to 934 and so my question is can you remind us how you.

Lock and lumber.

Do you kind of have to guess right or you're kind of doing it on a very frequent basis, just give us a sense for how you handle your lumber buying.

Amidst such a volatile futures market and.

Is it right to think that your margin will benefit in <unk> from lower lumber and then maybe get pressured again, a little bit in <unk> and <unk> just help us understand how it flows through.

Okay.

Steve This is David again, I'll give you kind of what I call high level, but we're not.

<unk> on lumber, we're not trying to hit it perfectly.

We've got a consistent policy, depending on which division when we lock in for either 60, or 90 days and we don't try and be.

Trey in India.

We are going to be better than the market just pass it through on a cost of goods. Bob do you have anything to add to that.

No I think Thats thats absolutely accurate.

It's relatively real time and we have.

Made the active decision not to try to hedge it one way or the other because we know at some point, we're just going to be wrong on that front.

And the impact on the gross margin through the year.

Yes, I think with.

With cycle times, where they are I think for the previous increase we saw some of the.

The peak increases coming through in Q4.

Which is part of the reason why we're we're seeing some bigger.

Sure.

Some better margins going into Q1.

Great.

Thanks, a lot.

Okay.

The next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions.

First look.

Right tiers have have clearly grabbed hold of the market I'm just hoping you can give us some interest rate sensitivity to your backlog and potential cancellations now that the 30 year mortgages up 50 bps or so in short order and.

Bigger picture.

Hoping that you can give some commentary about the depth of the buyer pool.

Larry and David I think you mentioned strong strong demand trends.

I think investors right now are fearful that the fed looks like they're clearly raising rates and we will see a replay of the back half of the year of 2018.

Just hoping you can give us some thoughts as to whether or not this cycle might look different compared to prior cycles.

Truman This is David I'll start off and then turn it over to Bob, but clearly and Larry and I 45 years when rates start moving up a little bit generally we see a lot of demand.

People come in and say hey, they want to buy a house now get the price locked in.

Get it and get a mortgage rates.

On the other side we stress.

First our backlog.

So we know what our backlog can take on an increase in interest rate and if we've got some people that are close.

Work with them.

Lock in their rates so that they're in so they can afford the house.

Bob would you have to add to that.

Nothing at this point, David Thank you captured it well.

Great question.

Okay. Thanks.

Thanks for that and then.

On the fourth quarter closings came in a little bit below your guide I'm, just hoping you can help us understand.

Any major product categories or regions or metros that might've caused the cycle times to extend further throughout the quarter.

It was really broad based and.

It was.

A little here and a little there depending on which market better cycle time has moved up.

I will tell you all of our people our suppliers our subcontractors our superintendents division presidents are doing absolutely everything they can to make sure the houses get done.

And get to get done what we call Richmond ready, which is a full move in and punch them in good shape. So we really feel good about the process, even though we missed a few closings at the end of the quarter.

Alright, thank you.

The next question comes from Alan Ratner with Zelman <unk> Associates. Please go ahead.

Hey, guys. Thanks for taking my questions.

So I think last quarter, Bob you might have said that you werent necessarily intentionally limiting sales, but you really aimed to be able to start a house I think within 60 or 90 days and writing a contract.

Our buyer experience standpoint, as well as from a cost perspective.

Admittedly surprised to see your orders as strong as they were in the quarter and up sequentially because even to your point cycle times did extend during the fourth quarter. So I am curious if you could talk a little bit about where you are in kind of that that thought process.

Are you now selling maybe towards the higher end of that range, where the homes arent necessarily starting.

Within 70 to 80 90 days or.

Are the delays youre seeing maybe more kind of in the later stages of the construction process and thats not limiting your ability to to sell houses.

This is David I'll start off and kind of turn it over to Bob but really our processes, we'd like to start a house in plus or minus 60, 90 days and one of the things that we have done is we've pre planned a lot of houses that kind of shorten our.

Our period of time to pick up a building permit from from either the county or the city. So so I think our processes have got a little sharper a little little loan little quicker, but we really.

Watch top side any products that are sold not started that.

Could be.

90 days or more which is pretty limited.

Bob what do you have to add to that.

Yes, I think Thats right I think it's actually been.

A fairly good story on the starts front, we've been able to start them on time, but as you alluded to Alan on the backend.

Really.

We saw some limitations and that's why we were a little bit below.

The low end of our range.

This quarter.

Because of that.

If you look at.

What what we project.

Four.

Our closings.

In Q1 <unk>.

The midpoint of the range, we're really only projecting that we're going to close right around 60% of those houses that have achieved the.

The frame stage of construction.

Or better.

Whereas a year ago.

We were able to convert about 86%. So you can you can see kind of the shift of even those that have gotten.

Beyond frame and.

And how many we expect to close.

In Q1 versus a year ago.

Alan This is David I would like to add one other thing that all of US builders are experiencing is what I call municipal slowdowns on inspections.

Especially with Covid so across the board we're seeing.

The finals of the framework.

Whatever it is from there from the municipalities being a little bit slower.

And that certainly has slowed our cycle time down a little bit.

Great and I appreciate the color from both of you on that that's helpful.

Second question I'd love to drill in a little bit in terms of what youre seeing in the land market.

You mentioned that the lot count up 29% year over year sequentially. The growth did slow a little bit from what you had been running at the last four or five quarters I know, there's a lot of lumpiness in that so I'm not reading too much into that but.

How are you thinking about land underwriting today, what type of inflation are you seeing and have you.

Changed any of your underwriting assumptions given any of the changes we've seen in the marketplace, whether it's higher rates, whether its absorption cycle times et cetera.

And I'll, let Bob add onto this but we have not changed our underwriting over the years.

And we're seeing what I call a decent deal flow to us certainly the deal flow is as.

It is better than what we saw.

Four and five.

And I think the whole industry is a lot more disciplined in the last couple of years and I think builders are looking for a builder margin based on today's absorptions at today's cost.

So.

I think the industry is pretty damn disciplines, which I feel real good about.

I guess the response to the question I would have to that comment Dave just on today's absorptions are phased absorptions are incredibly strong from a historical perspective, so what does that mean if.

Terms of the performance on these deals if absorptions.

Don't remain at these levels, maybe still remain healthy from an absolute standpoint, but not as strong as they are today, what does that mean for how these sales performance.

Well, what we try and do is not say to ourselves the room to absorb eight a month, okay and wherein you absorbed four months, even though we're seeing some some absorptions that are pretty robust. So we try to stay very disciplined.

Take a look at what I call.

A nice absorption rate not what I'd call. It crazy absorption rates that you might have.

In the last couple of quarters.

Okay. So today's absorption is maybe a little bit on the longer term today over the last few years you mean.

Yes, we try to flatten it out a little bit and the other thing. We're doing is we're assuming longer cycle times in our underwriting.

To the extent that you did see absorption rates come down a little bit.

You would you would hope that's also accompanied by.

Somewhat of a decrease in cycle time, So I think there's gives and takes there.

As the market move forward moves forward.

If.

You see some.

Some normalization of some of those figures.

Makes sense thanks for the time.

Sure.

The next question comes from Jay Mccanless with Wedbush. Please go ahead.

Hey, Thanks for taking my questions.

Another one on the community count and kind of the outlook for this coming year.

Is it all I guess your hesitancy, Bob based on the amount of Closeouts that you had during.

The fourth quarter or has the traffic in demand because of what David was talking about with higher rates have you all seen just a really strong surge in orders and traffic.

That may pull down near community capital faster than you anticipated.

I don't know that Thats I think we saw a good level.

In January at a level that we're pleased with.

But with.

40, plus communities coming online in Q1, we feel pretty good about.

Where.

Active community count is growing.

Okay.

And then on pricing and I apologize if you guys already gave the stat out what what percentage of your communities were able to raise price during the quarter and as you think about the price increases that are coming from some other suppliers not just lumber, but other inputs.

Do you feel like you can raise price efficiently enough to stay in front of that or how are you feeling about pricing as we move into 'twenty two.

We probably increased price and about two thirds of our communities.

Kind of beginning community count during the quarter, which is pretty darn good for a.

The fourth quarter.

Okay and then just.

These incremental price increases ex lumber.

Are you feeling about your ability to stay in front of those and pricing.

Current contracts that you are taking.

Yes, I think the average.

Kind of increase in those communities.

That's right around 3% so call it.

15 or 16.

I think thats a good amount.

Of increase to manage.

Some cost increases going forward.

And then the last one and this made.

Community Count maybe too small, but just what is going to see are you expecting any type of gross margin headwind as you move as you increase the number of sales and closings in these organic communities or is it just too small to matter at this point.

When you say the sales and closings in these organic yes, sorry, the newer markets Nashville, Albuquerque et cetera.

I think it's too small to matter at this point I think typically.

<unk>.

We will get some level of lower margins to start and then it'll.

The increase from there in our newer markets, but typically it's too small to matter against the whole.

Okay, Alright sounds good thanks for taking my questions.

Sure thing.

Again, if you have a question. Please press Star then one.

The next question comes from Alex Barron with the housing Research Center. Please go ahead.

Thanks, guys and great job on the quarter.

I wanted to ask.

If we were to get somewhat of a.

Of a repeat of 2018 with rates moving up.

The playbook.

Year to year.

You have some some way to lower or introduce more affordable houses to offset.

The increase in the mortgage rate.

Alex This is David.

I think what we're really seeing is maybe when somebody comes in.

And they look at interest rates and maybe it was looking at 2600 square foot house, maybe they say well listen maybe I can live with a 2200 square foot house.

And so we're seeing a little of that.

But quite frankly these interest rates are really pretty modest increases.

Increases in <unk> and.

I think.

We're driving as these more affordable product and doing more subdivisions.

In Florida, Thats more affordable so we feel pretty good about.

What we're achieving here.

<unk>.

And Bob I don't know if you have anything to add to that.

Yes, I mean I think the other thing is I think about is we're seeing incomes.

Rice for a lot of our consumers as well so that helps to offset natural naturally there is.

There's a lot of inflation out there.

Including housing, but it's not.

In a vacuum.

Relative to incomes.

So I think there is there is that and then David alluded to people go into a smaller house and I would say when we look at the average.

Size of the house that we are selling right now.

It's not really skewed to the lower end, we're still seeing kind of pretty consistent.

Square Footages, so it's not like our consumer has gone to the bottom of the barrel in terms of affordability for product that's already out there.

The other thing I get in.

Yes.

The other thing we're seeing is we have seen some inflation on people who have an existing houses.

If they are in a condo or a townhouse and they're saying hey, I want to move up to a single family House. So we're seeing some few blips real equity movement.

That's a good point.

Yes, no. Those are those are good points and I guess I wasn't meaning so much what has happened year to date, but just kind of thinking ahead, six or 12 months from now.

Everybody's talking about the fed raising four of five seven times and what impact that might have but.

My second question was in these newer markets like Idaho and Texas.

What do you guys see the ramp up in the community being like a year from now.

Well I'll start and then I'll, let Bob follow up but I think in these new markets.

<unk>.

We're getting started we feel real good about deal flow and but like Bob said earlier, it's going to be pretty small for for 2022.

And we're hoping that is more meaningful for 2023 and 2024.

Yes, I think.

But between all of those markets. The four markets just given the lead times for getting development work done in certain of the markets.

Combined with some finished lot communities.

If we get too I.

I guess 10, plus active communities across all of those so those markets combined we'd be pretty happy.

By the end of this year.

Okay, and then just one last one Bob do you happen to have the starts number for the quarter and what it was a year ago.

I do just one moment.

While I pull that up.

So for Q4 of 2021.

We were at 2534.

And a year ago it was 2792.

Thank you very much and best of luck.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Bob Martin for any closing remarks.

Thank you all for being on the call today.

We look forward to having you on the call again.

After we report our Q1 2022 earnings.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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Yeah.

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Okay.