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Executives

Bob Martin – Director, Corporate Finance & Investor Relations

Larry A. Mizel - Chairman of the Board & Chief Executive Officer

Paris G. Reece, III - Chief Financial Officer, Executive Vice President & Principal Accounting Officer

Michael Touff - Senior Vice President & General Counsel

Joe Fretz – Secretary & Corporate Counsel

Analysts

Analyst for Michael Rehaut – JP Morgan

Timothy Jones – Wasserman & Associates

Alex Barron – Agency Trading Group

James Wilson – JMP Securities

Carl Reichardt – Wachovia Securities

[Randy Raisman – Verin Asset Management]

[Alan Rattner – Fellman & Associates]

James McCanless – FTN Midwest Securities Corp.

M.D.C. Holdings, Inc. (MDC) Q1 2008 Earnings Call April 24, 2008 10:00 AM ET

Operator

Welcome to the M.D.C. Holdings 2008 first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Director of Investor Relations, Bob Martin.

Bob Martin

Good morning and welcome to our first quarter earnings conference call. Joining me today on the call are Larry Mizel, Chairman and Chief Executive Officer; Gary Reece, Executive Vice President and Chief Financial Officer; Michael Touff, Senior Vice President and General Counsel; and Joe Fretz, Secretary and Corporate Counsel.

For information on how to access the conference replay please visit our website at www.mdcholdings.com.

I will now turn the call over to Joe Fretz for a disclaimer on forward-looking statements.

Joe Fretz

Before introducing Larry Mizel and Gary Reece, forward-looking statements made during this conference call including those related to M.D.C.’s anticipated home closing, home gross margins, backlog value, revenues and profits and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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.

These and other factors that could impact the company’s actual performance are set forth in the company’s 2007 Form 10-K. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our website, www.mdcholdings.com.

I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C. Holdings.

Larry A. Mizel

Welcome to M.D.C.’s first quarter call and webcast. At the start of 2008 the home building environment in many ways resembled what we experienced in 2007 with a sluggish sales pace leading to substantial year-over-year decline in our first quarter net home orders. At the same time key differences distinguish the 2008 first quarter.

Signs of a recession have become more pronounced highlighted by three consecutive months of declining employment levels and the country is now intensely focused on the issue in the housing market with key media outlets, economists and politicians debating the ideal solution. We are not confused about our place in this market.

While encouraged by the decline in our impairment levels to their lowest level since the third quarter of 2006. We know that the market’s return to growth will take time. In the meantime we have focused on our balance sheet as we await a recovery for the homebuilding industry.

Perhaps the best measure of our progress during these difficult times is our generation of positive operating cash flow for seven consecutive quarters including over $230 million in this first quarter. As a result our cash on hand has grown to almost $1.2 billion at quarter end. With no borrowings on our homebuilding line of credit, this cash balance exceeds all of our outstanding debt by nearly 20%.

In addition we have continued to be proactively managed, our exposure to performance bonds and letters of credit related to various land development activities. Consequently our estimated cost to complete these activities was less than $50 million at March 31. Our balance sheet is one of the strongest in our industry uniquely positioning us to focus on continued business improvements in 2008. Having already taken steps to adjust our overhead structure our general and administrative expense declined year-over-year by more than 40% in the 2008 first quarter.

Going forward we believe that we can leverage our overhead and further reduce the cost of construction even when we return to growth while improving quality and customizing our homes through our unique home gallery concept. In an effort to make this vision a reality this quarter we launched a company wide initiative to transform and streamline our processes and business practices for increased efficiency in our core homebuilding disciplines.

This project is intended to create a consistent way for us to conduct business nationwide while retaining flexibility to meet the different needs of our various operating divisions. Through this effort we hope to unite our operating divisions under a unified operating strategy to drive increased profitability.

I’d now like to turn this call over to Gary Reece, our Chief Financial Officer who will describe more specific financial highlights of our first quarter.

Paris G. Reece, III

This quarter like it has over the last several has reflected a continued focus on our balance sheet with an emphasis on generating cash. Clearly as this next Slide shows we were successful in those efforts. We generated operating cash flow in the quarter of $231 million which is well above the $149 million we generated a year ago.

This $231 million includes approximately $90 million of income tax refunds that we received in early February. Over the last 12 months we generated an excess of $675 million in operating cash flow and as this Slide reflects we have had seven consecutive quarters of operating cash flow over which time we have generated almost $1.3 billion in cash flow.

This cash flow generation is really accomplished through true reductions in our inventory over the past seven quarters and of course here in the first quarter as you may have seen we have an increased focus on selling certain parcels of land that no longer meet our strategic objectives. We decreased as this slide shows very clearly the decline in our inventories and what’s behind it.

Our inventories at the end of the second quarter of 2006 were just short of $3.3 billion. We now have dropped that to $1 billion $250 million at the end of the first quarter of ‘08 a decline of over $2 billion. You can see that the largest decline in our inventories as this slide [inaudible] and we work in processes and land is in our land accounts.

We did see some part of this decline related to impairments on a net basis. $550 is related to impairments as we have impaired our assets since the beginning of the third quarter of 06 by almost $900 million and we have essentially turned our sold lots for which we had recognized previous impairments of about $340 million. So the net effect is $550 but that leaves is a true conversion to cash of just short of $1.5 billion.

In this first quarter of 2008 we did sell a significant number of lots, just over 800 lots which we sold for $29 million. Most of these lots were in our Arizona and California markets which had a book value of just short of $30 million. The importance of this you can see from our P&L there’s very little P&L effect from a GAAP standpoint but we did generate a tax loss in excess of $70 million through these sales.

This will also be important to us in the future as we’ve identified close to 1,700 lots at the end of the first quarter of 08 with a book value of very close to $60 million which we are holding for sale in the future. Most of these lots are in California, Arizona and Nevada.

Out lots control continued to decline both our own and optioned with continued limited risk on our option lots. The lots that we control is reflected in this Slide come down from an already one of the lowest lot supplies in the industry but we’ve dropped our lots controlled excluding work in process by almost 50% from this time last year to just over 13,000 lots. We’re down 13% from where we were at year end.

On the option lot side we have just have 3,000 lots which is down 56% from where we were last year. On these 3,000 lots we have just short of $13 million at risk with respect to those lots. Even our work in process is down over 30%. We have around 3,100 lots in process of construction of homes and we ended the quarter with less than 415 finished specs.

Of course all lots are not created equal and the lots that we do own most of them are finished or there’s limited development needed to complete them. I think as Larry had mentioned and as we said in our press release with respect to the performance bonds that we have related to remaining development we estimate we have less than $50 million remaining to spend to finish up all the work that’s required under those performance bonds.

With our lots coming down our active communities are also declining. We ended the quarter with 260 active communities which is down almost 20% from where we were a year ago. This increased cash and inventory reduction have continued to strengthen our financial position as it relates to cash in particular. As Larry mentioned we did end the quarter with $1.2 billion or just short of $1.2 billion in cash which is up 90% from where it was a year ago.

Also this cash position exceeds our public debt which is all the debt that we have outstanding by almost 20% and this cash raises our available borrowing capacity and cash position to in excess of $2.4 billion which is up 30% from where we were last year.

As it relates to operations we continue to try to drive sales but demand is still limited as evidenced by the continued large declines in our orders and backlog. This Slide reflects the decline in orders which dropped 57% from this time last year. Of course part of that obviously has to do with the reduction in the number of active communities out of which we are selling homes. We received orders during the quarter for 1,098 homes.

Gross orders being down right around 50%. Our can rate is up to 43% for the quarter from 35% last year but down substantially from the cancellation rate we experienced in the fourth quarter which was 65%. If we look at the can rate as it relates to our beginning backlog position it’s very consistent with where we were in the fourth quarter, right around 42%. In terms of our orders there’s really no single market that stands out too much because every market was down fairly significantly ranging from a 36% decline in Florida to a 79% decline in Utah. These declines were contributed to a backlog level that was down 54% from this time last year at 1,900 units. Average price in our backlog dropped 9% from $358,000 to $326,000 which is reflecting the trend that we’re seeing in the homes that we’re closing as well.

As we look at the P&L for the company here for the quarter we see that the limited demand for units has driven unit volume down, prices down which is translated into continued losses and while we have reduced G&A and impairments it’s not caught up with the steep decline in revenues.

The real focus is pre-tax it’s a little easier to understand as this slide shows a pre-tax loss of $77.2 million for the quarter is down substantially from the $143.7 million that we realized a year ago. Revenues are down to $406 million from the $745 down 45%. This improvement in the loss relative to last year is largely attributable to a $40 million decline in G&A. We’ve got a $20 million decline in selling expenses and almost a $90 million decline in impairments and write offs from where we were a year ago.

Now these declines were offset partially by a 43% decline in home closings where we closed 1,136 homes in the quarter with significant declines in most markets except for Maryland, Virginia primarily. Our average selling prices are down 12% to $313,000 from $356,000 a year ago. All of our markets are down in terms of average price except for Chicago which is up 30% and Colorado which is very close up slightly.

Our margins are also down to a 11.4% level. I want to talk about this a little bit more here in a second. This is a level that’s fairly consistent on a net basis with what we experienced in the fourth quarter. Also contributing to the improvement versus last year is a reduced net corporate loss. We had $4.1 million in net expenses this quarter versus $12.3 a year ago due primarily to higher interest income on our larger cash balances and lower compensation and travel costs relative to a year ago. On the other side our financial services and other segment is down slightly primarily due to lower gains of sales of mortgage loans due to the lower closing volume and also lower insurance revenues from our subcontractors due to the lower level of construction activity.

Turning to the net loss we saw an improvement but it’s significantly less favorable looking at least on its face. $72.8 million net loss relative to $4.4 million a year ago. The reason for this difference you can see that comparing the net loss to the pre-tax loss for the quarter that we really only were able to realize a $4.4 million tax benefit with respect to this loss and that is largely attributable to the effective tax rate for the quarter which is down to 5.7% which is a projection of our effective tax rate for the full calendar year relative to a tax rate applicable a year ago of over 34%.

And this reduction is largely the result of an increased deferred tax valuation allowance of $10.6 million and also as we plan to carry back losses from this year to 2006 the impact of losing the benefit of the manufacturing deduction in that year also impacts the effective tax rate. So those are the two main components behind that difference. On an earnings per share basis we’re also favorable relative to last year showing a per share loss of $1.58 versus $2.07 a year ago.

Coming back to our home gross margin I think this is an important slide because the blue bars in this Slide show the reported home gross margin. Of course interest costs are a component of that calculation. What’s happening with us is you’ve seen our inventory levels drop substantially over the last six quarters as we’ve talked previously. All of our interest that we incur are capitalized into that inventory and we have the same level of debt essentially today as we had six quarters ago but much as you can see much less inventory to capitalize that inventory against.

So what’s happening is we’re taking the cash generating from inventory reduction and investing it in earning interest income in one bucket and we’re incurring the same amount of interest capitalizing against a lower level of inventory and therefore it’s driving up the interest component in our margins. So what we tried to do is break that out here in this Slide and show you that interest as a component of margins as a percentage of revenues was 4.5% in this quarter.

This compares to 1.9% a year ago and just 2.1% in the fourth quarter alone. So if you look at our margins exclusive of interest and even some of our peers report margins in that fashion you will see that not only are we 210 basis points higher sequentially from the fourth quarter but we’re very comparable to where we were for the last three quarters and only 100 basis points lower than where we were in the first quarter of last year.

Looking at our G&A as we mentioned our G&A expenses have declined substantially from where they were last year down almost $40 million in absolute terms, down 42% relative to where we were last year primarily related to the significant downsizing that we’ve seen and the reduction in our operating divisions.

A year ago we had 21 active divisions. Today we have 12 and that has aided in the decline in our G&A. Our marketing expenses are down but not as much as our revenues. We continue in this very difficult and challenging environment to incur costs to sell homes and nevertheless our marketing expenses are down 34% from where they were last year, commissions being down 42%.

And then finally before we take some questions I wanted to touch briefly on impairments. We saw in this quarter our impairments decline to just under $55 million. That’s the lowest level that we’ve seen since the first quarter of impairments in the third quarter of 06. It’s the second consecutive sequential decline that we’ve seen in impairments and of course it goes hand in hand with the significant reduction in our inventories over this period.

The West segment continues to have the majority of the impairments. We did impair just over 2,600 lots this quarter in 94 subdivisions, 24 million of it applicable to land under development and 24 million to work in process, 6 to land held for sale and $1 million related to other assets.

That completes our prepared remarks. We’d like to open the floor for questions.

Question-And-Answer Session

Operator

(Operator Instructions) We do have a question from Michael Rehaut - JP Morgan.

Analyst for Michael Rehaut – JP Morgan

Couple questions on the order pricing it looks like it actually increased sequentially to about $295,000 from $250,000. Is that primarily due to mix or is there something else going on there?

Paris G. Reece, III

Ray that is mix. The amount reflected in the previous quarter was not reflective of orders that we had taken. When we make this calculation it’s a combination of removing orders that have cancelled and bringing in orders that have been taken during the quarter and that’s the result of pulling out high priced homes that were in backlog and replacing them with lower priced homes. We had a little less of an effect this quarter and it’s really mix.

I think what’s more reflective is what you see in our backlog. There’s a fairly consistent relationship if you look back over the last period of years quarter by quarter you’ll see there’s a range of a relationship between what the price is in our backlog and what you see come through the P&L in future periods.

Analyst for Michael Rehaut – JP Morgan

Do you give anecdotal evidence of the various markets that you’re seeing? Maybe you’re seeing more of some pricing pressure in this quarter versus last quarter?

Paris G. Reece, III

Ray, that is really where the impairments come into play and I think that I would have to say that every market continued to experience some level of pressure but because we are so close to the line in terms of profitability in these Western markets that they felt it the most. That’s why we saw most of our impairments come through in those markets.

Analyst for Michael Rehaut – JP Morgan

Just continuing on the impairments they are well below our estimate and I think what other people are expecting but if pricing were to fall another 10 to 15% from here where do you thin the impairment and to the magnitude it could reach? Do you think it could reach the 07 levels again or where do you think we are in terms of impairments for you in terms of where you’re seeing your own inventory right now?

Paris G. Reece, III

Ray, I think that you’d have to look at our slide that shows where the inventories have come down from, there is just not the level to impair that we had the middle of last year. So even if pricing were to decline the same levels we don’t have the same amount at risk and so I think that’s a key point to understand here.

We’re down $2 billion from where we were when this all started. We’re down almost a full two thirds in inventory levels. You can do the math. I know that seeing some of the comments that Mike made this morning and I think that we continue to be appropriately conservative in our valuation of our inventories every quarter and we apply the same methodology every single quarter and I think that’s reflective of what we’re seeing in each one our markets.

Analyst for Michael Rehaut – JP Morgan

Lastly, what was the benefit from prior period impairments in terms of the gross margins this quarter?

Paris G. Reece, III

In terms of absolute the amount of impairments that we took on lots that we closed this quarter, with homes was about $50 million. This is for homes. That compares to about $9 million a year ago and we did not disclose in the press release the amount related to the land sales but you can extrapolate that from the information. Obviously you saw very little book gain or loss but I mentioned a $70 million plus tax loss. That’s essentially the impairments.

Analyst for Michael Rehaut – JP Morgan

I meant the benefit from prior period impairment?

Paris G. Reece, III

That’s what I’m talking about. Had we not taken the impairments on the land that was sold it would have been a $70 million loss.

Operator

We have a question from Timothy Jones - Wasserman & Associates.

Timothy Jones – Wasserman & Associates

First of all could you give me, I know your SG&A is pretty high, can you give me what your headcount is today versus last year in the peak? The full employees. There’s huge differences among builders, that’s why I want to get this.

Paris G. Reece, III

Our peak, Tim, was about 4,300.

Timothy Jones – Wasserman & Associates

And that was what, two years ago?

Paris G. Reece, III

That was two years ago. And we’re down as of the end of the year, I believe our 10-K disclosed 2,000 and of course we continue to right size as we go. You could assume that there have been further reductions from there. 4,300 to 2,00 is kind of where we are.

Timothy Jones – Wasserman & Associates

Secondly, did you say you had 3,100 homes under construction? Was that the number?

Paris G. Reece, III

Yes, sir.

Timothy Jones – Wasserman & Associates

You gave the finished, what about the unfinished specs? I’d like to have that compared to last year if you’ve got it.

Paris G. Reece, III

We had 1,340 unsold homes in total.

Timothy Jones – Wasserman & Associates

Does that include the finished or not?

Paris G. Reece, III

It’s actually in the press release. 1,099 homes under construction of which 449 are finished. A year ago we had 1,212 of which 422 were finished.

Timothy Jones – Wasserman & Associates

One other thing, you FHA loans are only about 47% right now. Why aren’t you utilizing more FHA loans?

Paris G. Reece, III

Tim that is something that is growing significantly. A year ago it was 5%. It’s something that has been building and it doesn’t replace overnight. But we can clearly an upward trend in that loan vehicle.

Timothy Jones – Wasserman & Associates

You still have a fairly high cancellation rate, you have a very high one in the fourth quarter. Are you addressing that by cutting prices or with your strong balance sheet are you just not selling anything, just holding some things rather than sell them at a loss?

Paris G. Reece, III

Tim, we’re not holding anything. We are out there competing as best we can and we’re doing – if we have to re-price, we re-price. We believe we’re as competitive as anyone. There’s no artificial steps being taken here. It’s just a function of our level of competition.

Operator

We have a question from Alex Barron - Agency Trading Group.

Alex Barron – Agency Trading Group

I wanted to clarify something just to make sure I heard you correctly, you said that there was a $50 million benefit to gross margins this quarter?

Paris G. Reece, III

$50 million, well –

Alex Barron – Agency Trading Group

From previous impairment.

Paris G. Reece, III

We don’t really refer to it that way. We’re just stating a fact is that we in our gross margins as a component of our gross margins we have sold homes on lots for which we had previously taken $50 million of impairments. Whether you refer to that a benefit or not, it’s hard to say it’s a benefit because the selling price that’s dropped significantly is a function of the impairment itself. The impairment is only one side of it.

Alex Barron – Agency Trading Group

What I’m trying to figure out is if you hadn’t taken those impairments another way to say it would you gross income have been roughly minus $10 million this quarter then?

Paris G. Reece, III

You mean our gross profit margins?

Alex Barron – Agency Trading Group

Yes.

Paris G. Reece, III

You can make all kinds of assumptions, Alex. You don’t have one without the other. If you remove completely the effect of the impairments in the past with prices going down, yes they would have been $10 million to the negative.

Alex Barron – Agency Trading Group

We’ve seen the number of homes that are going into foreclosure rising significantly and up until recently it seemed like the banks weren’t very willing to lower their prices but it seems like now they are. I’m just wondering how that’s affecting you guys and whether that’s in some ways forcing you to lower your prices a little bit more aggressively?

Larry A. Mizel

I think that our neighborhoods where we build the quality of our product we don’t have as much of the foreclosure issue that you might have elsewhere. Most of our competition only deals with other builders versus the foreclosure market. I think that’s in different geographic locations and many times in different price points. It’s obviously a factor but it’s not a driving factor at this time.

Alex Barron – Agency Trading Group

I noticed your community count went up very slightly sequentially this quarter in a few markets. Does that just mean you are opening a few less projects or are you finding new opportunities where you maybe bought some cheaper land or something like that? How should I interpret that?

Paris G. Reece, III

There are several communities, Alex, here in Colorado that we have opened that have been on the drawing board for some time and they’re in great locations and they make sense to go forward. We did and I think we disclosed in our last conference call that we bought a community in Las Vegas at a very favorable price and we get one off opportunities like that here and there.

Obviously we haven’t spent a great deal on acquisitions with our land balances continuing to drop. There are small opportunities that we have been able to take advantage of. You can see what you’re referring to is something that’s relatively small I think and so there’s no earth shattering events taking place.

Operator

We have a question from Jim Wilson - JMP Securities.

James Wilson – JMP Securities

It’s great that you have land sales but one of the things here you were pretty tight on inventory to begin with. Obviously high cash balances, what are you seeing in land buy opportunities or anything you’ve executed on and I guess I’d even add any markets you particularly feel that affect your just outright short on inventory?

Larry A. Mizel

I think there’s probably two sides to the equation. Where we could by and the price point we could buy at reflects today’s market pricing and incentives so that’s something that we are actively looking at. I think that our inventory balance is exceptionally good.

As you can see if one assumes that new inventory is really good and existing inventory is properly valued we are doing just what we should do which is to continuously cycle through the pre-existing assets and on a perspective basis look for those opportunities to acquire new assets in line with today’s price points.

One should assume that we have a reasonable amount of deal flow since we are as highly liquid as we currently are that those persons wishing to sell land know that we have the desire and the ability to transact. I think as we see the year continue those opportunities probably the difference between the bid and the ask will come together a little bit more. Meanwhile we are very patient and will continue to grow our cash balances.

James Wilson – JMP Securities

Maybe I could just add one bit, any incremental new lot purchases made or the count thereof on the first quarter?

Larry A. Mizel

Not material.

Operator

We have a question from Carl Reichardt - Wachovia Securities.

Carl Reichardt – Wachovia Securities

I’m struggling a little bit with the, I’m hesitant to use this word, but vagueness around the concept of business procedures and practices on transforming them. Can you give me something a little more concrete as to specifically what you’re working on that you think over the next three to five years will improve some aspect of the income statement that we could bank on and model?

Paris G. Reece, III

No.

Larry A. Mizel

Do you know as they say you can watch it, it’ll come through the financials on a perspective basis if we do a good job?

Operator

We have a question from Randy Raisman - Verin Asset Management.

Randy Raisman – Verin Asset Management

Just a little curious about the shift in sentiment. It seems like when we met with a bunch of builders back in February at an industry conference I didn’t get the sense that things were stable but that they were stabilizing and from going through some of the results it seems like that’s not the case. I just wanted to get your take on that and also just what you think happens with home prices from here as we get deeper into the cycle.

Larry A. Mizel

I think that the market is extremely transparent with all the information that comes between the analysts, the reporting of the public companies, the government and every other source it seems as though the market is continuing at this level. All of us will have better input as we go through the second quarter. I think we’ll have a lot more transparency on telling the tone and the direction.

The first quarter pretty much is history. What’s going to happen on a perspective basis I think each company is approaching it to whatever way and to the extent of their own capacity. The markets continue to be difficult. They continue to be very, very competitive and we are very focused on executing the most efficient structure in light of today’s market. I think we will have better transparency here in a couple months but right now we’re all waiting for spring selling season. Notice I said waiting.

Operator

We do have a question from Alan Rattner- Fellman & Associates.

Alan Rattner – Fellman & Associates

I have a quick question about your reduction in inventory and is relates to community count. If I look back at your community count versus the peak, it’s down about 15% or so whereas you lot count is down roughly 70% from the peak.

I’m wondering is there a period looking forward maybe at the end of 08 or 09 when that decline in community count catches up and you’re basically faced with a number of communities coming off line and not enough projects in the pipeline to replace them?

Paris G. Reece, III

I think that there is going to come a period when the community count will start to decline at an accelerated pace. With the lower levels of orders that we’ve experienced and the lower levels of closings it has I think prolonged the life of a number of communities.

We’re not adding a lot of new communities right now because we aren’t buying a lot of new lots. The presumption that that means that we don’t have enough to replace them I think that’s not really the objective right now. Our objective is to bring the community count down and to look for opportunities at the right time and place to grow it which is not now.

We will handle that growth strategically and you’ll see it come through and it will lag a bit behind what you will see probably first in our public filing since we do disclose a great deal of information you’ll see the lots under option grow, you’ll see the lots owned grow and followed by that you’ll see community count up.

Alan Rattner – Fellman & Associates

I can certainly understand the patience with regard to entering the land market. So are you prepared basically to wait a period of time looking forward where probably your market share in certain markets dips below where you’ve historically run as you replenish and talking about that lag, do you expect that share to dip down temporarily?

Larry A. Mizel

We expect our market share probably to dip up, not down.

Operator

We have a question from James McCanless - FTN Midwest.

James McCanless – FTN Midwest Securities Corp.

I wanted to follow up on the market share question and your competitor’s call that just finished, they discussed how they were seeing smaller competitors in their markets begin to disappear and they felt like that should increase their share going forward. Are you seeing the same things in your markets?

Larry A. Mizel

I think it’s pretty much across the country that when builders’ construction loans are higher than their net proceeds as they liquidate their inventories whether it’s standing inventory of completed homes or even land, they’re faced with the situation of either coming with cash to pay off the construction loan or the bank agreeing to a short payoff even for the builder.

Everyone thinks of short payoffs on foreclosed homes but we’re now entering a period of time where there’s short payoffs for just regular construction loans for just regular builders. One of the things that the financial markets are just now focusing on these massive amount of losses that the banking industry has taken has really been on securities versus the actual loss incurred on real estate lending and as that beings to percolate up from the land caused by foreclosures and deficiencies and other problems not only in the residential market but in the commercial market.

You’re going to see a complete change and that change – I will get to the answer – that change affects a lender broadly defined attitude toward real estate lending. So if they happen to have a few clients that get away on a reasonable basis as a general statement whether it’s the largest banks in the country or the regionals or the local banks we read a lot about the need for capitalization.

The one thing I think is clear they’re not going to put new liquidity back into the real estate lending for some period of time which is a normal cycle which has happened many times in the past. If another builder has commented that they expect their market share to increase I think that is probably reasonable because a substantial amount of the private builders and maybe even some of the public builders it will be a complete adjustment period that will substantially especially at the beginning of the turn reduce the availability of competition to be in the marketplace and that will be something special for those that have been able to navigate through these difficult times.

James McCanless – FTN Midwest Securities Corp.

If I could take it a step further, has the situation that you described that’s occurring right now, has it increased or decreased M.D.C.’s buying power and bargaining ability when you go to your lumber suppliers, your shingle suppliers, your subs? How is that relationship developing and are things improving for you on that front?

Larry A. Mizel

Yes, they are.

James McCanless – FTN Midwest Securities Corp.

If we should expect declining impairments going forward, should we also expect less or no deferred tax asset valuation allowances going forward as well or do those two not have that relationship?

Paris G. Reece, III

It’s not necessarily a direct relationship. What you’re seeing is the effect of maximizing the carry back benefit with respect to 2006. That’s what’s creating the additional impairment are the valuation allowance this year, think whether – and by the way we did not say that impairments will continue to decline.

All we’re saying is that the assets to which impairments would apply are on a substantial declining curve. Whether it’s impairments in the future or whether it is operating losses the net effect of what you’re seeing is there is no further carry back capacity for that and therefore the tax benefits associated with those losses whether they’re related to impairments or operating losses will have a valuation allowance against the tax benefit.

Operator

We have a question from Alex Barron - Agency Trading Group.

Alex Barron – Agency Trading Group

I’ve noticed that it seems the bulk of your impairments have come from the West division and I’m just curious as to how do we explain why there haven’t been greater impairments in Florida and mid-Atlantic given that those markets seem to be under similar pressure?

Paris G. Reece, III

I think a couple of things, our investments in assets, we do lay this out in the 10-K pretty explicitly, our investment in land in those markets you’ll see that our investment in Florida is relatively nominal. Our investment in mid-Atlantic while it’s been substantial we’ve also seen the level of price declines have not been as dramatic in that market as we’ve seen in the West. So we have not necessarily seen the level of run up as dramatic. The level of investments are heavily weighted to Nevada, Arizona and California and that’s why we’ve seen the most amount of impairments there.

Operator

The final question comes from Timothy Jones - Wasserman & Associates.

Timothy Jones – Wasserman & Associates

You have a question about the difference of early this year and now, one I think is the freezing up of mortgages by the banks. They’re really tightening up on everybody, retailers and everybody. How much of an effect is that having on your business?

Paris G. Reece, III

Tim, it’s hard to tell what the direct line would be.

Timothy Jones – Wasserman & Associates

Secondly, have you gotten any benefit from the recent raising of the limits for government borrowing? Have you taken advantage of that in some of your higher price markets?

Larry A. Mizel

Yes, we have.

Paris G. Reece, III

We have, Tim. We’ve seen an increase in loans not only lots pipeline but closings where we’ve had mortgages for people who would not have previously qualified under the old limits.

Timothy Jones – Wasserman & Associates

Other than California and Washington, D.C., any other markets you’re doing it in?

Paris G. Reece, III

Those are the two big ones obviously, but I think it’s affected positively most of our markets.

Operator

There are no further questions at this time.

Bob Martin

We would like to thank you again for joining our call today. We look forward to having the opportunity to speak with you in a few months following the announcement of our 2008 second quarter results.

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Source: M.D.C. Holdings, Inc. Q1 2008 Earnings Call Transcript
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