The New Home Company Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Greetings, and welcome to The New Home Company's Fourth Quarter 2020 Results Conference Call. . It's now my pleasure to introduce your host, Drew Mackintosh, Investor Relations. Please go ahead, sir.

[Drew Mackintosh:]

Good morning. Welcome to The New Home Company's earnings conference call. Earlier today, the company released its financial results for the fourth quarter and full year 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 would 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.

[Lawrence Webb:]

Good morning, and thank you for joining us today for a review of The New Home Company's fourth quarter and full year results. I will start off by giving an overview of some of the highlights from the quarter and the year. Leonard will then give some additional color on our operations, and John will provide more detail on the numbers and our outlook. This time last year, we identified 3 key initiatives we wanted to accomplish over the course of 2020, namely to reposition the company from a product standpoint by moving down the price point spectrum to improve our balance sheet through operating cash flow generation and net debt reduction and to put the company on a path to better homebuilding profitability. Fast forward to today, and I am very pleased to report that we have made progress on all 3 fronts. The evidence of our migration to lower price points can be seen in the 17% decline in the average sales price in 2020, and especially in our backlog where the average sales price stood at $576,000 at year-end. It can also be seen in the sales success we experienced in the second half of the year, as our absorption pace picked up considerably in response to our new affordably priced community openings. There is significant pent-up demand for affordable housing in the markets in which we build, and we are now well positioned to capitalize on this need. While the move to lower average selling prices will present a headwind from a revenue perspective in the short term, the longer-term benefits of this shift will be evident in terms of improved order activity, better pricing power and enhanced returns. With respect to our balance sheet, we ended the year in much better shape than where we started. Our debt-to-capital ratio at the end of 2020 stood at 55.4%, and our net debt-to-capital ratio was 41%, representing an 820-basis point improvement from the end of 2019. We generated $93 million in operating cash flow for the year, which is a considerable amount for a company of our size. The headway we made on generating cash during the year allowed us to extend the term on our revolving credit facility and refinance our senior notes due 2022 to a maturity date of 2025. These actions have put us on a much more solid financial foundation and has given us the ability to refocus our efforts to growing the company.

[Leonard Miller:]

Thanks, Larry, and good morning to everyone. The New Home Company generated strong order activity in the fourth quarter, while continuing to make significant progress on our key initiatives. Net orders for the quarter increased 89% year-over-year on a monthly sales absorption pace of 3.7 homes per community, the highest in our company's history. The demand we experienced was broad based, both from a geographic and product standpoint, which allowed us to raise prices in over 90% of our communities during the quarter. Even with the periodic price increases we implemented, order momentum stayed consistent throughout the quarter, culminating with December being the best sales month in our company's history. The trend continued into January as net orders increased 109% when compared to January of 2020. This sales success during the quarter resulted in a 175% year-over-year increase to our unit backlog and an 88% increase in the value of our backlog. The size and quality of this backlog gives us great visibility as we head into the new year. While the robust order activity we've experienced has had a positive impact on both our unit backlog and margin outlook, it's had the opposite effect on our community count. Closeouts are occurring faster than we had anticipated. And as a result, there will be a period of community count decline as we work to replenish our land pipeline.

[John Stephens:]

Thank you, Leonard, and good morning to everyone on the call. For the 2020 fourth quarter, we generated a pretax loss of $1.3 million compared to a $7 million pretax loss in the year ago period. The 2020 fourth quarter included an $8 million debt charge related to the refinance of our 2022 senior notes. Our pretax income for the fourth quarter, excluding the debt charge, was $6.7 million.

[Lawrence Webb:]

Thanks, John. The New Home Company made great progress on a number of fronts in 2020, giving us strong momentum as we look to the future. We are really starting to see the benefit of our shift to more affordable product as evidenced by the improvement in our order pace and our gross margin profile. Our declining community count and lower average selling prices will be headwinds to our top line in the short term, but I'm very confident the structural changes we've made to our company have us on a path to better results in the future. Finally, I want to thank all of our hard-working team members for their efforts this year. We were faced with unprecedented challenges as a result of this pandemic that affected every aspect of our lives. And the fact that we were able to accomplish the goals we set for our company, in spite of these challenges, is a testament to your perseverance and strong work ethic. The New Home Company is poised to build on the achievements of 2020 in the new year, and I look forward to sharing in this success with you. That concludes our prepared remarks. And now we'll be happy to take your questions.

[Operator:]

. Our first question today is coming from Alan Ratner from Zelman & Associates.

[Alan Ratner:]

Congrats on all of the important progress made in 2020 and the exciting outlook for '21. So my first question, just curious - appreciate all the guidance and especially understand the community closeout issue that I think you and a lot of other peers are facing right now. I'm curious, just given the incredibly strong demand environment and your strong January orders. Have you or are you contemplating maybe kind of pivoting the price versus pace kind of balance or discussion a little bit going forward, maybe to try to even drive margins higher and perhaps limit sales more so than you already have been. I know you mentioned you raised prices in 90% of the communities, but certainly with orders up over 100% in January, it doesn't seem like you're really limiting that much. So I'm curious if there's anything on the horizon that could change that price versus pace discussion?

[Lawrence Webb:]

Alan, that's the most positive first question we've ever had in 5 years. If that - we - I really mean that. And it's indicative of how strong the market is right now. I'm going to turn it over to Leonard in a second, but I would like to let everyone know that primary favorite business writer in the world is Jim Collins. And he talks about something called the genius of the end and the reality of it is we want to have pace and profitability. And I believe you can do that. Now Leonard, you may respond.

[Leonard Miller:]

Yes. Alan, where I'd start is, I really don't see that there is a choice today with us or most other builders between pace and price. And what I mean by that is, really, the trade base and our trade partners are really working at max capacity, which means both us and our competitors, it's nearly impossible to get specs in the ground. So for the last several months, really what it's been all about has been a focus on margin and capturing price increases. I would say, over the last 3 months, we've limited or metered starts at over 70% of our communities and yet we're struggling to slow it down. And we're seeing that across the board. So what we're doing, right, is we're metering our sales releases the best that we can to limit starts getting out in front - too far out in front of sales, obviously, to cover potential cost increases as well as capture future appreciation. So it is all about margins. You can see that trend in both what we reported and I know that John talked about what future margins look like. Every day, we see our margins grow in our backlog, and we're really excited with the progress we're making and think we'll show it over the next several quarters.

[Alan Ratner:]

Great. That's very helpful insight and color. And my second question, maybe this one won't come across quite as positive, Larry, but I think we've been hearing from some other builders about a pretty meaningful outflow of people from California into other areas, I think, Taylor Morrison said on their call yesterday that kind of anecdotally, it feels like they're seeing like double - twice as much traffic from California in markets like Vegas and Colorado and Texas, et cetera. And I know that's been an ongoing trend, but obviously, with the bulk of your business still in California, I'm curious if you're seeing that and maybe compare and contrast California versus Arizona? And how do you think about that going forward in terms of where you're making your land investments? Are you disproportionately waiting at Arizona? Are you contemplating new market expansion or do you still have that confidence in California that this is more of a temporary phenomenon due to COVID?

[Lawrence Webb:]

Well, my response to that is really twofold. First, I've been building in California for 35 years, and the doom predictions for California have been going on for 35 years. It's still an incredibly strong market. Are we facing some challenges? Yes. But the second part is, we have made a conscious effort to get into more affordable housing. And by doing that, that's opened up our ability to a much broader range of buyers. And all you have to do is look at our sales pace in every project at every price range and you'll see the incredible positive results that we've had. So it does not mean that we are cognizant of the challenges California faces. I would also say that on one other front, our Arizona division has really taken off. And I cannot tell you that it's a result of people moving from California, but I would say our Arizona division has reached strong footing and are showing very positive results. And as a company, of course, we're looking at other markets. When we were at John Lang Homes, we grew from 3 markets to 13, and we clearly have the ability to do that. But as we sit here today, we're very proud of what we've done and where we are, and we think - I really believe the future is pretty bright for us. Leonard, can you?

[Leonard Miller:]

Yes. I mean we certainly hear it, whether it's with friends or through our sales offices, and we certainly hear it from Phoenix of people migrating in from California. At the same point, what I would say is the same dynamic is going on in places like Sacramento or the upper Central Valley, where we're seeing a flight from the bay, where we're seeing people from Orange County and Los Angeles, San Diego due to affordability, moving out to the Inland Empire. So it's an interesting dynamic. I would say, from a land investment standpoint, Phoenix by far is the most competitive land market that we operate in and where we see people are underwriting and kind of the balance of risk. So we're active there. We've tied up some positions that we're - future positions we're excited about, but we're also making additional investments in Sacramento, again, the upper Central Valley and the Inland Empire. It's just the opportunities in coastal California are limited and certainly very capital intensive.

[Operator:]

The next question today is coming from Alex Barrón from Housing Research Center.

[Alex Barrón:]

Great job on the quarter. Can you hear me okay?

[Lawrence Webb:]

Yes.

[Alex Barrón:]

Yes. I see really strong order activity and strong orders for January. So I'm having a bit of a hard time reconciling that with the revenue guidance. So I was hoping you can kind of help me out there a little bit?

[John Stephens:]

Alex, it's John.

[Lawrence Webb:]

Alex, this is Larry. Excuse me one second. Don't sound so depressed, okay? We are okay. Now, John, you can give it to him.

[John Stephens:]

Yes. Alex, yes, so that's a good question, and that's something that we've talked about with - internally with our Board. Really, what's happened is we really don't have a lot of specs. And as Leonard alluded to earlier, in terms of - our focus is really on getting our homes and backlog under construction so we can meet the delivery schedules and time frames. So with not having a lot of specs like we had really in the past couple of years, it's tough for us to sort of use the revenue for 2021 in terms of - at the upper end of the limit that we provided. There's some opportunity there. But the question is, like Leonard said earlier, if we're able to get sort of the starts in the ground in time, perhaps there's some opportunity. But our backlog coming in the year without having a lot of specs is very strong relative to our full year guidance, but that's what I would have. Leonard, do you have anything to add to that?

[Leonard Miller:]

Yes, I don't have much more. I'm sure you're - Alex, you know this, really, the last - depending on the product type, really our last opportunity to start a home and get it into this year is somewhere between May - I'm sorry, March and the end of June, maybe early July. So when you - and you also marry that with the fact that we believe in giving consumers choice and the opportunity to go into our design studio and generate additional profit and margin on that, that you take that all together, really, and if you have two plus months of backlog that are still waiting to get started, it's that whole thing. So there is limited opportunity to really push that number up this year.

[Alex Barrón:]

Got it. And then did I hear you say that you expect the ASP in the first quarter to be $675 million or did I mishear that?

[John Stephens:]

Yes, you heard that correctly.

[Alex Barrón:]

Okay. And then also, what drives the margins to be higher in the first quarter but lower for the rest of the year? It would seem with price increases and all that, that wouldn't happen. So what is happening there?

[John Stephens:]

Well, there's really a couple of things going on. But really, in Q1, it's a little bit of an aberration because we have a really low revenue number, number one. And what's being delivered in Q1, we're closing out of a higher priced margin community in Sacramento, that sort of pulled those numbers up for Q1, which is nice. We're excited about that. I think moving forward, as we move through the balance of the year, we do have a couple of communities in Northern California that are higher end that the margins are slightly below company average. And so that does pull it down a little bit as we start delivering those more expensive homes in Northern California. Having said that, Alex, we have been raising prices and trying to grab as much as we can there. And so as we move into '22, the expectation is that the margins would continue to sort of creep back up in those 2 communities.

[Alex Barrón:]

Okay. Great. If I could ask one more, John. I know you guys in Arizona switched from doing the $1 million homes to the more affordable homes, is there an expect - is that also what's driving the price up or when are those $1 million homes, I guess, going to get delivered in Arizona?

[John Stephens:]

The $1 million homes, we had a project in Scottsdale that was a luxury condominium flats that really, we closed out at the end of the year. So moving forward, the Arizona price point will be much lower.

[Leonard Miller:]

Yes. Everything that we have opened for sale today is at $550,000 or below.

[John Stephens:]

Yes.

[Leonard Miller:]

It doesn't mean that we wouldn't look for a move up - the right move up opportunity. But having said that, we really don't have any interest to do second home podium-type age targeted product like we've done in the past there.

[John Stephens:]

And like I mentioned in the prepared remarks, Alex, we closed out of our last luxury community on the JV side in Mountain Shadows. So that's all wrapped up. Like Leonard said, we really don't have anything about $550,000 today currently open and selling.

[Alex Barrón:]

Okay. Good. Last question, if I could. Obviously, the sales piece has been really strong and lots of builders are selling out of communities a little bit sooner than expected. That said, I know you guys have been working on expanding in more affordable segment across California and Arizona. So would you expect your community count to trend down over this year or stay the same or go up?

[John Stephens:]

Yes. We expect it to trend down this year. We've projected to be about 18 communities with our current footprint today, and that would step back up really in Q1 north of 2020 - kind of the low 20s.

[Lawrence Webb:]

What I would like to emphasize, though, and I think it's a fair comment. We have seen increased absorption; increased margins and we're looking at this business as a marathon. And if that means a quarter or 2 have a slight reduction in community count, we don't think that's a bad thing necessarily. We're monitoring everything. We consistently believe we're growing and heading in the right direction in sales, in profitability, in margin and in communities. But it will take the next 2 to 3 years to consistently show that, but we are doing what we need to do.

[John Stephens:]

Yes. And just one point just to add to that, again, Alex, really the last couple of years, we were so focused on bringing our leverage down and paying down our debt and getting the extension on all of our debt facilities. So now that we've done that and taken care of that, we are very focused on redoing the pipeline. But with that pause, we take a little bit of a pause on the land side. And so our community count will grow in the future, but there's going to be a little bit of dip. But I think like Larry said, with the strong sales, that's sort of accelerated a little bit.

[Operator:]

Our next question today is coming from Jason Feintuch , a Private Investor.

[Unidentified Analyst:]

Again congratulations on such a great quarter. So it's quite attaching what I think as some of the folks mentioned. A couple of my questions were already answered, so I appreciate that. Really, the only thing I kind of had is generating a lot of cash flow now, you guys push on your debt maturities, you've got $107 million or so in cash. Can you just kind of remind us what the company expects to receive with regards to a tax refund this year? And lastly, any reason why you guys weren't a little more aggressive on the share repurchase and that given that your stock is still trading around half a book value despite what seems to be a very strong outlook for the business?

[John Stephens:]

Yes. I mean, obviously, we did sort of - our balance sheet is in a position we felt much more comfortable in our liquidity. And we need to rebuild the business now, and that's really what we're focused on. We do have a stock buyback plan in place, which you're familiar with. And we did purchase some shares during the quarter, but we need to sort of balance liquidity, leverage and sort of reinvesting in the business. So that's something that we're continuing to evaluate.

[Operator:]

Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

[Lawrence Webb:]

Thank you. Many of you have been supportive of our company for a long time, and I want to thank you for that support. And I want to let you know that we really feel positive about the direction the company is going in. If we would have had this call April of last year, we would never have been able to anticipate the kind of success consistent month-by-month success that we've had. This has been an amazing performance, and I would like to thank Leonard Miller, our CEO; and John Stephens, our CFO, who have managed this journey in an incredible fashion. And again, thank you, and we look forward to giving you more positive results quarter-to-quarter. Thanks very much.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.