talinec holdings ltd l TEXT-Fitch affirms MDC Holdings ratings l Rediffpages | One Bookmarks | One Bookmarks

Sept 10 - Fitch Ratings has affirmed its ratings for M.D.C. Holdings, Inc. (NYSE: MDC), including the company's Issuer Default rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A complete list of rating actions follows this release. MDC's ratings are based on the company's execution of its business model in the current moderately recovering housing environment, cautious land policies and solid liquidity.

During the past cycle the company noticeably improved its capital structure, pursued conservative capitalization policies, and positioned itself to withstand the recently concluded sharp, long-lasting housing correction. Significant insider ownership of 26% aligns management's interests with the long-term financial health of MDC.

MDC underperformed relative to other low investmentgrade industrial companies in recent years in an admittedly very harsh housing environment and trailed its homebuilding peers for much of 2011 in certain metrics. However, the company has come up with an effective strategy to close its relative performance gap and move to profitability. Its financial and operating execution during the past three quarters indicates clear progress in meeting its expense containment and profitability objectives.

Builder and investor enthusiasm have for the most part surged so far in 2012, but housing metrics have not entirely kept pace. Year-over-year (yoy) comparisons have been solidly positive on a consistent basis. However, month to month the statistics (single-family starts, new home, and existing home sales) have been erratic and, at times, below expectations. In any case, year to date these housing metrics are well above 2011 levels. As Fitch has noted in the past, recovery will likely occur in fits and starts.

Fitch's housing forecasts for 2012 have been raised since early spring, but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%.

Further moderate improvement is forecast for 2013. The company employs conservative land and construction strategies. MDC's priority is to acquire finished lots using rolling options, finished lots in phases for cash or, if the potential returns justify the risk, land for development. MDC does not typically buy more than a three-year supply of land in any market and when it acquires lots, the company currently focuses on land that it can start building on within a short time.

The long-term goal is to maintain a 2.0-2.5-year supply of land, increase land under option and reduce land owned. At the end of the June 2012 quarter, MDC controlled 10,218 lots, a 14.8% decrease from the year-ago period. Approximately 85% of the total lots are owned with the remaining 15% controlled through options. This represents a 3.4-year supply of total lots controlled and a 2.9-year supply of owned land based on trailing 12-month deliveries.

The company's policy of, whenever possible, purchasing predominantly finished lots and lots available for immediate development enhances balance sheet liquidity, which has been reflected in solid inventory turnover averaging 1.4x over the 2002 to 2011 period. MDC successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. As of June 30, 2012, MDC had unrestricted cash of $298.3 million and marketable securities totaling $454.8 million compared to total debt of $744.5 million. MDC has been re-building its land position, supported by its strong liquidity.

MDC spent approximately $227 million on land and development in 2009. The company purchased about $380 million of land and expended $40 million on land development in 2010, and $280 million on land and development in 2011. Fitch estimates that MDC could spend about $250 million on land and development in 2012 and could potentially invest as much as $450 million in 2013, mostly for land purchases.