The New Home Company Inc.
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Greetings, ladies and gentlemen. And welcome to The New Home Company First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]It is now my pleasure to introduce your host Mr. Drew Mackintosh, of Investor Relations. Thank you. You may go ahead.

[Drew Mackintosh:]

Good morning. Welcome to The New Home Company's earnings conference call. Earlier today, the company released its financial results for the first quarter of 2020. Documents detailing these results are available in the Investor Relations section of the company's website at nwhm.com.Before the call begins, I'd like to remind everyone that certain statements made in the course of this call, which are not historical facts, are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10-K and in its quarterly reports on Form 10-Q. The company undertakes no duty to update these forward-looking statements that are made during the course of this call.Additionally, non-GAAP financial measures may be discussed in this conference call. Reconciliations to these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through The New Home Company's website and in its filings with the SEC.Hosting the call today is Larry Webb, Executive Chairman; Leonard Miller, President and Chief Executive Officer; and John Stephens, Chief Financial Officer.With that, I will now turn the call over to Larry.

[Larry Webb:]

Thanks Drew and good morning to everyone joining us on the call today. First and foremost, I would like to express my sincere gratitude to all the men and women who are on the front lines and combating this pandemic. And also my condolences those who have been personally affected by the virus. We are truly all in this together. The coronavirus pandemic has forced the world to adapt to a new way of living and doing business. For The New Home Company this is not working from home for many of our employees adapting our construction practices to comply with social distancing guidelines and shifting more of our sales, design and marketing efforts to our online customers. While these changes have added a layer of complexity to our day-to-day lives, we understand how important it is for all of us to adhere to these guidelines set forth by the CDC and government and public health agencies so that we can stop the spread of the virus and keep our team members, customers and trade partners safe.The shelter-in-place mandates instituted in our market have no doubt made it more difficult to market our homes, limiting the amount of interaction we can conduct in our communities. Fortunately, The New Home Company has had technology initiatives aimed at enhancing our ability to interact with prospective buyers on the Internet. These online tools allow us to communicate with prospective buyers as they shop for a home, conduct interactive virtual tours of our model homes and generate sales leads for a more targeted approach. All of these approaches were in place prior to the pandemic, which made our transition relatively smooth one. Our leadership team is has been through several downturns over the years and knows how to adjust the difficult environments. As soon as the severity of the pandemic became apparent, we started taking the necessary steps to reduce overhead expenses, curtail lands investment, limits back homes under construction and focus on generating cash from operations.Big picture, this was an extension of our playbook from 2019 a year in which we generated $121 million of cash flow from operations and reduced our net leverage by 980 basis points. In the first quarter of 2020, we generated over $17 million of cash flow from operations ending the quarter with $88 million in cash and nothing drawing on our bank credit facility. The preservation of our capital is our number one operating priority for the foreseeable future. And the actions we took in 2019 and in the first quarter of 2020 reflect that. While we face many challenges as an industry as a result of this pandemic, I am optimistic about housings long-term trajectory given the demographic shifts occurring in this country. And the undersupplied nature of the housing stock. I also believe that people's attitudes and preferences for housing will change as a result of this virus in ways that will ultimately benefit our industry. There are more to previous downturns. There will be opportunities on the other side of this. And we are working hard to make sure that The New Home Company will be able to take advantage of those opportunities.Now I'd like to turn it over to Leonard who will provide more detail on the current state of our operations.

[Leonard Miller:]

Thanks Larry. I too would like to express my gratitude to all of our employees and trade partners. And I appreciate all they continue to in these challenging and uncertain times. We've implemented safety protocols at all of our offices, job sites and sales centers that stress proper health practices and promote social distancing. In mid-March we closed our sales centers to the general public and began marketing our homes by appointment only. While this move is obviously curtailed in-person visits to our communities, we continue to see good traffic levels to our website where buyers can interact with a salesperson and take virtual tours of our homes. Despite the slowdown in buying activity in all of our markets, we have not yet seen widespread use of incentives or reductions in base pricing.In addition the continued lack of existing home inventory in our markets has also likely put a floor on pricing. New Home construction has been deemed an essential activity in all of our markets with the exception of Milpitas in the Bay Area, where we stopped construction on one community in early April and just resumed construction this week. Our teams continue to do an outstanding job building and closing homes in a timely manner, while adhering to social distancing guidelines in the respective markets. Fortunately, we have not seen any material disruption in the availability of construction workers, government inspections or building materials stemming from the pandemic.For the quarter, net new orders were up 18% over the prior year on a similar increase in monthly sales absorption rate. Demand was strongest during the quarter at our more affordable entry level product which averaged a monthly sales pace of 2.7 sales per community, compared to our company-wide average of 2.0 per community. Year-over-year orders for January and February increased 32% and 82% respectively before declining 28% for the month of March. This order softness carried into April as shelter-in-place mandate and concerns over the virus weight on our sales efforts, resulting in a year-over-year net order decline of 56% and cancellations as a percentage of beginning backlog of 5.7% in April compared to 4.4% a year ago. Positively, we saw sales trends in April improve as the month progressed and we have seen that momentum continued with the last week being our best selling week since the one ending March 8.As Larry mentioned, our main operational focus during these turbulent times is the sustainability of our organization. To that end, we took decisive steps in the first quarter to preserve capital by implementing additional cost-cutting measures, curtailing the acquisition and development of land, renegotiating lot takedown arrangements and limiting the construction of spec homes. We also made the strategic decision to walk away from some projects altogether, which resulted in one-time charges of approximately $16 million this quarter, but will unburden us from additional capital outlays in the future. We believe these actions are in the company's best interest in light of the current market conditions, and will put us in a better position financially should there be a prolonged slowdown in demand.With that I'd like to turn it over to John who will provide more detail on our results from the quarter and our financial condition.

[John Stephens:]

Thank you Leonard and good morning. For the 2020 first quarter, we generated an $18.4 million pretax loss as compared to a $2.7 million pretax loss in the year ago period. The current quarter pretax loss included a $14 million noncash project abandonment charge related to our luxury condominium community in Scottsdale, Arizona and a $2.3 million impairment charge related to our intent to exit a land development joint venture in Southern California during the second quarter.The 2020 first quarter also included a $2.1 million income tax benefit related to the revaluation of our deferred tax asset, resulting from our ability to carry back net operating losses stemming from the passage of the CARES Act. Including these charges and the income tax revaluation benefit, we generated a net after tax loss of $8.5 million or $0.42 per diluted share. For the quarter compared to a net after tax loss of $2 million or $0.10 per deluded share in the prior year first quarter. Adjusted net loss for the 2020 first quarter after excluding these charges and the deferred tax asset re-measurement benefit was $1.1 million or $0.05 per diluted share, compared to an $830,000 adjusted net loss or $0.04 per diluted share for the 2019 first quarter after excluding severance charges.With respect to our luxury condominium project in Scottsdale, we made this strategic decision to terminate our lot option agreement and abandon the underlying improvement costs due to a number of reasons, including slower demand and future uncertainty of the impact of Covid-19 at this community and price point, combined with the substantial capital requirements necessary to complete this project. In addition, our ability to carry back net operating losses was a significant factor in our decision to forgo building out the project, which we expect will generate an estimated $4.5 million tax refund.With respect to the exit from our land development joint venture in Southern California, we have agreed in principle to sell our interest for $5.1 million in cash and exit the partnership, which resulted in us recording a $2.3 million pretax impairment charges through the joint venture line item in the first quarter. We anticipate generating an estimated tax refund of approximately $2 million from this transaction, which we expect to receive in the first quarter of 2021. In addition, we will have an option to purchase approximately 30% of the total lots from this master plan development in the future. Our home sales revenue for the first quarter exceeded the high end of our quarterly guidance by 6% coming in at approximately $96 million due to increased sales demand during the first two months of the quarter and our ability to sell and deliver spec homes during the quarter, which represented 33% of our Q1 delivery. Deliveries were up 8% year-over-year while our average selling price was down 11% coming in at $894,000 per delivery for the quarter as compared to $1 million a year ago.The decrease in our average selling price was a result of our continued transition to more affordable product. Our backlog conversion rate for the quarter was 72% as compared to 52% in the year ago period. The improvement in our backlog conversion rate was the result of our move to more affordably priced product which generally has quicker build cycles and shorter backlog periods. We ended the quarter with 174 homes in backlog down 15% from the prior year. The dollar value of our backlog at the end of the first quarter was $130 million, down 39% due to the decline in units and our shift to more affordable product as our backlog ASP was down 28% to $748,000 versus $1 million a year ago.We believe our backlog is fairly solid with 16% of the population having contingencies as of the end of the quarter. 7% of which represented homes to sell contingencies with the balance representing homes to close contingencies. Our gross margin for the 2020 first quarter was 11.4% versus 12.7% in the prior year period. The 130 basis point decline in gross margin was primarily due to higher interest costs and to a lesser extent higher incentives, which were partially offset by product mixed shift. The lower gross margins relative to our quarterly guidance was largely due to a mixed shift resulting from our ability to sell and deliver more completed spec homes at two podium construction communities in Southern California that had lower margins.Excluding interest and cost of sales, our gross margin from home sales was 17.9% as compared to 17.6% in the year ago period. Our SG&A rate as a percentage of home sales revenue for the first quarter was 14.1% versus 16.2% in the year ago period. The 210 basis point improvement from the prior year was largely the result of $1.8 million in severance charges included in the 2019 first quarter that were not incurred in the 2020 period. Excluding the 2019 first quarter severance charges, our SG&A rate was 30 basis points lower than the prior year adjusted rate of 14.4% and approximately 200 basis points better than our quarterly guidance due to better operating leverage and lower amortization of capitalized selling and marketing cost.The improved SG&A rate in 2020 was partially offset by $500,000 reduction in G&A costs that were allocated to the fee business during the 2020 first quarter as compared to the prior year. Our fee building revenue for the first quarter was $36 million as compared to $20 million in the year ago period. The higher fee revenue for the quarter was due primarily to increase construction activity at our Irvine fee building community. We do, however, anticipate that construction activity at these communities will slow in the next few quarters as a result of slower anticipated demand resulting from the coronavirus pandemic.Our effective tax rate for the first quarter was a 54% benefit compared to a 25% benefit in the year ago period. The higher benefit rate for the 2020 first quarter was largely due to our ability to carry net operating losses back five years at the higher effective federal tax rate of 35% versus the current 21% rate as a result of the CARES Act and to a lesser extent the impact of energy tax credit. We ended the quarter with 22 active communities flat with the prior year first quarter. For the balance of the year, we are planning to open approximately eight new communities, seven of which are located in Phoenix. With the exception of our expected community openings in 2020, we are withdrawing our previously issued guidance.With respect to liquidity in our balance sheet, we achieved another strong quarter of cash flow generating $17.3 million of operating cash flow. We ended the first quarter with $88 million in cash and cash equivalents, no outstandings under our revolving credit facility and $300 million in senior notes, which have a maturity date of April 1st, 2022. We spent $5 million on land during the first quarter and are expecting to spend much less for the full year 2020 than what we spent in 2019 as a result of our efforts to conserve cash until there is better visibility with respect to the economy and housing market.We were, however, able to take advantage of the unprecedented drop in our stock price and purchased over 1.2 million shares of our common stock during the first quarter for a total purchase price of $2.2 million through open market repurchases a privately negotiated transaction and a 10b5-1 plan. In addition from April 1st through May 7th, we purchased another 777,000 shares through 10b5-1 plan for an aggregate purchase price of $1.4 million which when combined with our first quarter repurchases through May 7th represented a total of 2 million shares for $3.6 million or $1.78 per share and represented 10% of our total outstanding shares since the beginning of the year.We feel purchasing our stock at these levels given where our current and projected liquidity levels will be is a much better investment than purchasing land in the near term.I will now turn the call back to Larry for his concluding remark.

[Larry Webb:]

Thanks John. In conclusion, The New Home Company took decisive action in the first quarter to ensure the safety of our employees, great partners and homebuyers during this health crisis. And to position our company to deal with the economic impact this virus will have. While the severity and duration of the pandemic is still unknown, I am confident that we have the right strategy and personnel in place to navigate the challenges ahead of us to the best of our ability. We continue to market and sell our homes to our enhanced online platform and construction activity is ongoing. Also, we are taking the necessary steps to reposition the company in ways that will benefit us over the long run and make good financial sense from a cash flow perspective.In addition, experienced leadership and strong team culture with the ability to respond quickly has always been a key in uncertain times. These are trying times for our country, but I'm optimistic about the future of The New Home Company, our industry and our nation.Finally, I'd like to thank the hard-working men and women of our company who adapted to these difficult work conditions in such a short amount of time. This pandemic is upended our daily lives and I appreciate the sacrifices you've made to continue working towards our common goals. That concludes our prepared remarks and now we'd be happy to take your questions.

[Operator:]

[Operator Instructions]Our first question comes from the line of Thomas Maguire with Zelman & Associates. Please proceed with your question.

[ThomasMaguire:]

Hey, everyone. Nice job on the quarter and hope the whole team is healthy and safe. And I guess just first higher level, obviously, think the shifted dramatically and there's a lot going on and maybe even some of the price point dynamics and weaker -- the weakness with the higher end what happening before Covid that may have driven this step back from the Phoenix project that resulted in the charge, but as you look at your portfolio what makes you comfortable as investing in other areas? Is it just location? Is it price point with the higher absorptions you alluded to? Or what types of projects are getting incremental capital right now? And then just how would you -- how, what would drive you to walk away from additional projects or how do you think about that going forward?

[LarryWebb:]

Well, let me take it first guys and then this is our first virtual call, Thomas, so bear with me, all right. This is Larry. Look, let me go back -- from back to front. One of the strengths of our company has always been our relationship with land sellers and if you recall about 42% of all the land we owned or controlled were under option. One of the reasons we did that was to have flexibility when there uncertainties occurred. We feel like it's the responsible thing to do to go back to really and relook at every single one of our deals to make sure that the metrics make sense to make sure that the market factors that aren't -- were in play when we bought the property still are there today. We've actually had over the last six weeks. We've had some success at both the upper and the lower ends of the market. And so I really think it's going to be a case-by-case basis. Leonard, why don't you add some more color to that?

[LeonardMiller:]

Thanks Larry. Yes, I think, Larry, kind of nailed it but at what I would say is over the last couple years, we've really implemented a lot of procedures where we were much more disciplined in our underwriting. So regardless of whether you're talking about entry level or move up, we're not going to be willing to take heavy entitlement risk, heavy in plan development risk. We've seen much more success where we basically have identified the product going into it, know our cost and feel we're going to be much more successful. As John mentioned, we have eight new community openings. They're all that kind of FHA or conforming loan levels.We feel good about those new projects opening up. But as Larry said, there's going to be opportunities in the move up. We've seen a couple new communities that we've opened recently that have done really well in the first time in second time move up. One in Sacramento; one in Orange County. So we'll continue to focus on really returns and what will drive the best returns.

[ThomasMaguire:]

Got it and that makes a lot of sense. Then shifting gears, appreciate all the color on the monthly trends in your prepared remarks, but if we just take a step back you alluded to earlier you guys have a long history of operating across markets. And have seen cycles of consumer confidence before, obviously, today's an unprecedented situation, it's a little bit of unknown but from your seat what's driving consumers back into the market from say that the near-term trough in March or early April, you talk to kind of some recent momentum. Is it too early to call that improvement sustainable? And I guess what would you have to see to get comfortable that that was the case?And then separately, Larry, if you could just elaborate a little on the comment you made regarding the opportunity on the back end of this for a new home and maybe builders more broadly and what that could look like or what shapes that could take?

[LarryWebb:]

Sure. Well, Leonard, why don't you go first on the front end and then I'll take the back end.

[LeonardMiller:]

Sure. I think like everybody else, Thomas, we sat here and we went through basically Easter weekend and first couple weeks of the pandemic we were still writing sales, but it was what we were thinking people we've been working with for one, two, three weeks going through three qualifications and then we got through first couple weeks of April and frankly it dropped off. We weren't having a lot of activity. There was interest out there but we couldn't get consumers over the fence. In the second half of April is really where we recorded all, virtually all the net sales that we would have reported. And we had our best week last week. Our best week since March 8.So that's really encouraging. We've seen traffic, online traffic over the last two to three weeks up 3x to 4x from what we experienced in the second half of March and early April. So it seems like we're seeing people get off the past. They're getting more confidence. I think the stock markets certainly in March just rattled people. And I think we really felt that on the move up and the second time move up product segment. I think what you're seeing market wide, if you go through all California, I'll start there is certainly the inland markets are seeing more improvement than the coastal markets. All markets are improving but the inland markets are probably doing net points six ales per week for the coastal or in that point four and but so everything seems to be improving.What's surprising to us probably a little bit as we've seen the Bay Area really kind of start bouncing in the last couple week? And so that's highly encouraging as well. Hard to say I think right now where all of this goes. We're encouraged for the last three to four weeks trends, but we hope that this sustains itself but I think we're playing it week by week.

[LarryWebb:]

Tom as regarding coming out the other side, let's be clear everyone. We know our industry is cyclical, but along with that our industry is really about relationships and people. And our company and myself personally have spent our entire careers being the right kind of builders to be in people's communities. And we know that we will have big opportunities on the other side. And that's one of the reasons why we're preserving our cash so diligently. The key for us right now is to stay focused on our core business, but to be there for the land sellers on the other side. And I can tell you this in the early 90s also after 9/11 and then in 2009 when we started The New Home Company, in every situation of down market, we grew exponentially.And I have a lot of confidence that over the next three or four years, we'll be able to do that as well.

[Operator:]

Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.

[AlexBarron:]

Thanks. Hope you guys are all doing well. Just wanted to ask about your current long-term bond. I guess it's doing a couple years, we've seen a couple of other builders [Tech Difficulty] just wondering your thoughts around refinancing that bond?

[LarryWebb:]

John has been dying to answer a question, Alex. So --

[JohnStephens:]

Hey, Alex. Good morning. Yes, we've obviously been paying attention to the high-yield market obviously pre and post Covid and I think for us the call price was pretty expensive currently as you sit here today. It does step down over time actually steps down on October 1st and then April 1st goes to par next year. So it is something that we've talked about looked at quite extensively with bankers and the like and the thought is that we would refinance it, but today, today's where our bonds are trading and where the market is on the call price probably doesn't make sense today.But it is something that we will continue to pay attention to and work on in the future.

[AlexBarron:]

Okay. Great. And can you -- on the Phoenix, I know you guys had a number of community opening plan. Is that still on track or are you pulled off a while?

[LeonardMiller:]

No, we're still at -- Alex, this is Leonard. Good morning. We're still on track. We are really excited. We're opening up our first three communities at a community called Mosaic and they open up the last weekend of May. We have an interest list that is well over a 1,000 people. So we're really encouraged about that and then we're planning to open four additional communities by the end of the third quarter. So we're fully under development. We start four model complexes in the next 30 to 45 days. So we're really excited about finally getting these communities open. I'll just add, we have one other community that's got three additional products that will open up late September and then one in the fourth quarter.So we're really excited about that.

[Operator:]

Our next question comes from the line of [Indiscernible] with ATMR. Please proceed with your question.

[UnidentifiedAnalyst:]

Sorry I was muted. Just a quick question and thank you for all these the repurchase of stocks in the first quarter. Are you planning to extend those programs for the rest of the year or what's the plan on that and how do you see the balance between the value of buying back stocks as opposed to opening new communities or in investing in land?

[JohnStephens:]

Yes. Good morning. We just started with the value where our stock was trading and where we feel our liquidity was. That it really made a lot of sense to pick some of those shares up and at a pretty unprecedented low book value. We do have limitations both under our current authorization from the board as well as a revolver. So we want to make sure that we're purchasing the equities sort of on a measured basis but again Q1 with the dramatic shift in pricing, we felt like it was an opportunity to pick up some more and there were some bigger sellers. So we took advantage of that. Again going forward, we want to make sure we manage our liquidity and our cash appropriately, but we will continue to evaluate that as we move forward. And the various limits that we have.

[Operator:]

Ladies and gentlemen, at this time, there's no further question. I would like to turn it back to management for closing comment.

[Larry Webb:]

Thank you. We have been through a lot in our careers, but never anything like this. That said, again, homebuilding is about people. And we are very proud of our team. We're proud of how our leadership are dealing with this issue. And we remain extremely confident that we're in the right marketplaces with land that's well purchased, with houses that are well designed and we will get through this. And we'll come out the other side. We appreciate your support and we really wanted to say that we care greatly about what our country's going through and are just very proud of what we see. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, at this time, this conference is concluded. Thank you for your participation. And you may disconnect your lines at this time.