The New Home Company Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Greetings and welcome to The New Home Company's First Quarter 2018 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Drew Mackintosh, Investor Relations. Thank you. You may begin.

[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 2018. 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 uncertainty. 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 on this conference call. Reconciliations of 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, Chief Executive Officer; and John Stephens, Chief Financial Officer. Also on the call is Leonard Miller, Chief Operating 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. The New Home Company made great strides in the first quarter 2018, posting strong year-over-year delivery growth, while continuing to diversify the company both graphically and demographically. Home deliveries in the quarter increased 56% as compared to the first quarter of last year. Thanks to a healthy beginning backlog and solid execution by our construction teams. In addition, net new home orders increased 12% and had an absorption of 2.8 per month. Order growth would likely have been more pronounced had we not experienced delay that pushed some community openings later in the quarter and in some cases into the second quarter. Fortunately we've been able to work through these delays and saw an acceleration in sales activity in April to a monthly absorption rate of 3.4, resulting in year-over-year order growth 71% in the month. April 2018 represented the highest sales volume in company's history. While one month does not constitute a trend, we are very pleased with the recent pick up in connectivity and are optimistic about maintaining this \momentum for the remainder of the spring selling season. Two of our newest projects ICON, Silverleaf and Seville at Park Place represent our first foray into two new sub markets for our wholly owned business. ICON Silverleaf, which opened at the end of the first quarter is a collection of 72 luxury single single-story condominiums within the DC Ranch master plan at Scottsdale Arizona. Seville the start of our Inland Empire expansion, opens in April and features 75 detached single- family homes in Ontario, California. These two communities help diversify our company from a Geographic perspective, while staying true to our strategy of building unique and differentiated homes in highly desirable locations. We continue to diversify our company from a pricing standpoint. It's evidenced by the lower average selling prices of homes delivered and in backlog at the end of the quarter. The housing shortage in California has created a huge opportunity for builders that can find a way to build homes in desirable locations at affordable price points. We had success addressing this market in the first quarter and look forward to this approach becoming a bigger part of our company as the year unfolds. In terms of overall business conditions, we continue to see areas of strength in each of our markets. The Bay area was stronger from a demand perspective as each of our communities in the market generated healthy sales space during the quarter, which in turn allowed us to raise prices in a number of instances. Housing fundamentals in Sacramento continue to improve as we saw solid order trends at many of our communities in both our wholly owned and joint venture businesses. Our net orders in Southern California were lower than we would apply in the quarter, but we believe this is more a function of the aforementioned community delays rather than an indication of overall markets softness. Their success is exemplified by our affordably priced to serve our community in the Rancho Mission Viejo master plan and our Amethyst community at Great Park, which were particular stand outs during the quarter, both of which are priced below $1 million. Finally, the Greater Phoenix market continues to exhibit strong housing fundamentals. And we have seen solid interest in activity in our newly opened communities, ICON, Silverleaf in Scottsdale and our single-family detached community, Belmont and Gilbert, both of which are being presold without the benefit of fully merchandized models. . With that I'd like to turn it over to John for more detail on the numbers from the quarter.

[John Stephens:]

Thank you, Larry and good morning. As we anticipated the first quarter of 2018 was light from a volumes and revenue perspective as we continue to open new communities, transition our offerings to more affordably priced products and build up our backlog coming off a very strong fourth quarter. As such, we generated a net loss of $640,000 or $0.03 per diluted share for the 2018 first quarter compared to net income of $846,000 or $0.04 per diluted share in the prior year period. The small net loss in the first quarter was consistent with our expectations. The year-over-year decrease and net income was primarily due to 120 basis point decline in gross margin,120 basis point increase in selling and marketing expenses as a percentage of home sales revenue due to a ramp up in new communities and a decrease in the fee building revenues and margin. These items were partially offset by a 14% increase in home sales revenue and an income tax benefit related to the pretax loss and discrete tax items related primarily to the reinstatement of energy tax credits for 2017. Home sales revenues for the first quarter was up 14% to $79 million compared to 69 million in the prior year period. The year-over-year increase was driven largely by 56% increase in deliveries which was partially offset by 26% lower average selling price of $946,000, stemming from our strategy to expand our portfolio to include more affordably priced products and increase our community count. The change in average selling price was most pronounced in Southern California where our ASP was down 49% to $1 million versus $2 million a year ago. This decrease was largely due to a mix shift with deliveries that force communities ASPs priced below $750,000 in the 2018 first quarter as compared to none in the 2017 first quarter. Based on homes in our backlog that are scheduled to deliver, we expect to see a sequential pick up in our average selling price to roughly $1.2 million for the 2018 second quarter before dipping back down again in the back half of the year, which will result in a full year 2018 average selling price of between $975,000 to $1million. Our gross margin for home sales for the first quarter was 12.3% as compared to 13.5% in the prior year period. The year-over-year decline in our gross margin was primarily due to a product mix shift and 120 basis points increase in interest in cost of sales due to higher borrowing cost in 2018 versus the year ago period. Excluding interest in cost of sales, our gross margin from home sales for the 2018 first quarter was 15.7%, flat with the prior year first quarter. We expect our second quarter gross margins to be approximately 12% as we close out some of our lower margin communities and before we see the benefits from some of our newer communities, which are expected to generate higher margins. Our SG&A rate as a percentage of home sales revenue for the first quarter was 15.9% as compared to 14.5% in the prior year period. The 140 basis point increase was primarily due to higher selling and marketing cost related to the ramp up of opening new communities, higher co-broker commissions and a lower amount of G&A expenses allocated to the fee building business. For the full year 2018, we expect our SG&A rate to be in the mid to high 10% range. For the second quarter we expect our SG&A rate to be in the 12.5% to 13% range. Our share of joint venture income for the 2018 first quarter was $335,000 compared to 306,000 in the prior year period. The majority of our JV income was generated from our Mountain Shadows community in Paradise Valley in the Phoenix metro area. Net new orders for the 2018 first quarter were up 12% over the prior year largely resulting from 13% higher average community count. Our monthly sales absorption rate for the 2018 first quarter was flat with the prairie or period at 2.8 sales per community. Our monthly absorption rate in Northern California came in at a solid 3.5 sales per community up marginally over the prior year and our monthly sales absorption rate in Southern California was flat with the prior year at 2.3 sales per community. The number of homes in our backlog at the end of the quarter was up 39% over the prior year period and our any backlog value totaled $228 million. Our average home price in backlog at the end of the 2018 first quarter was $1.1 million as compared to 2.1 million a year ago. The lower ASP and backlog is consistent with our strategy to expand our product portfolio to more affordably priced product, combined with the close out of our two luxury communities at Crystal Cove and Newport Coast during 2017. Our fee building revenue for the first quarter was $44 million as compared to 56 million a year ago. Our fee building gross margin for the quarter was 1.1 million as compared to 1.7 million in the prior year period. The lower year-over-year fee building gross margin was due to a reduction in fee revenues and a change in the fee building business arrangement with one large customer. In April, the company entered into a new fee building arrangement with a Southern California builder to build out the balance of their portfolio which consists of approximately 170 lots. With this new arrangement and an anticipated increase in construction activity at our existing fee building communities, we are raising our guidance for fee building revenue to between $120 million and $150 million for the full year 2018. In addition, we anticipate 50 basis points increase in our fee building gross margin to approximately 3%. As of March 31, 2018, we own or control over 6,500 lots, which included nearly 2,900 lots for our wholly owned business, approximately 2,600 lots through joint ventures and about 1,000 fee building lots. Of the 2,900 lots controlled through our wholly owned business approximately 60% were controlled through option contracts. With respect to our cash flows and balance sheet, we ended the quarter with $91 million in cash, 459 million in real estate inventories and 319 million in debt. During the first quarter we purchased approximately $42 million in land and expect to spend about 225 million for the full year 2018. We had no borrowings outstanding under our 200 million unsecured revolving credit facility as of the end of the quarter and had a gross debt to capital ratio of 55.1% and a net debt to capital ratio of 46.7%. Now I'd like to provide you with an update on our full year guidance as well as some additional color regarding the second quarter. For the full year of 2018, we're anticipating the following, home sales revenue of between 600 million and 640 million, we lower the top end of our revenue guidance due to the timing of some new community openings and as stayed on our last earnings call, our home sales revenue will be very back and loaded with approximately two thirds of our revenues expected to be generated in the second half of the year, with approximately 45% expected to deliver in the fourth quarter. Gross margin from home sales are expected to be in the range of 14.5% to 15%. As noted in our previous earnings call, we expect our gross margins to be lower in the first half of the year and improve in the second half as more new communities come online and start contributing to the bottom line. We're projecting full year joint venture income of about $1.5 million. We are currently projecting our full year effective income tax rate to be approximately 28.5% including discrete items. We expect to end the year with 19 wholly owned communities and six JV communities. For the second quarter of 20118, we're estimating home sale revenues of between $100 million to $120 million, fee building revenue of between $30 million and $40 million, joint venture income of approximately 200,000 and quarter ending community count of 20 for our wholly owned business and seven for our joint venture business. I will now turn the call back to Larry for his for his concluding remarks.

[Larry Webb:]

Thanks John. In conclusion, I'm pleased with the progress we made this quarter. We posted delivery growth of 36% on a year-over-year basis and ended the period with 39% more homes in backlog than we had at the end of last year's first quarter. We generated new order growth of 12% in the quarter followed by order growth of 71% in April, once we got through some of the initial community opening delays. We also grew our wholly owned lot count by 75% compared to the 2017 first quarter and further diversified our business with new communities in the Inland Empire at Arizona. These investment leave us well positioned for the future and should really start to bear fruit in the second half of 2018 and all of 2019 as our newly opened community hit their stride there. Overall, the first quarter of 2018 saw a continuation of the transition towards both growth and lower home prices and represented another step forward in our company's evolution. One thing that remains constant is our passion for the business and our commitment to building unique and differentiated homes in highly desirable locations regardless of price point or market. These two tenants have served as well in our company's relatively short history and I believe they will continue to do so into the future. Finally I'd like to thank all of our team members that sharing this journey. I'm proud of what we've built here and I appreciate your efforts. That concludes my prepared remarks and now I'd like to open the call up for your questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. In the interest of time we ask that you please limit yourself to one question and one follow up and re-queue for any additional. [Operator Instructions] First question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

[Unidentified Analyst:]

Hi, thanks. Good morning. This is Gerald [ph] on from Michael. The first question I had -

[Larry Webb:]

Hey, long away.

[Unidentified Analyst:]

Hey, pretty good. Good morning. The first question I had on sales pace, you mentioned it came off to a bit of a slower floor start this year and then you had a record for the first - really high 3.4 in April. I was checking if you could break this out just a little bit more between the lower ASP communities and some of the higher end communities and any reasonable stand outs and then also just given the delay in community openings in the beginning of the year, how much of the 3.4 pace in April sort of catch up and will give you confident that this could continue through the rest of the spring selling season?

[Larry Webb:]

Sure, well, I'll go first and if anyone else is having a fire drill we're happy to help them out okay. Big picture, we - 3.4 we were very pleased with. Prior to that we're a little slower than we originally anticipated and when we look at it and break it down project by project or community by community it appears to me that our strategy that we're putting in place to get into the more affordable price ranges is a very positive thing and you can see it through our results. But let's go market by market a second, Northern California, in particular the Bay area continues to be very strong and our communities that are open there have been either meeting or exceeding our expectations. Sacramento is warming up and probably we are anticipating it's going to maintain that pace that they're at today and Southern California was a little slower initially than we expected principally in the housing programs that were above 1.3 million. Since we've opened however, more affordable pricing over the last 60 days, that's where we've seen in Southern California absorption improve. So big picture, our strategic approach to shift our housing programs makes a lot of sense, it's looking like a big stand, results we're seeing it looks very solid. John who has to be more conservative than I do that's his nature, believes, we should anticipate a sales absorption over the next couple months of somewhere in the 2.9 to 3 ranges, while we would hope to do in the next couple months. And we're pretty pleased with where things are going, so I would say the big picture, the newer more affordable pricing has had higher absorptions which is what we anticipated. And the repositioning of the company is proving to be wise move, but we won't really be seeing major results of those deliveries until the second half of the year and in the fourth quarter.

[John Stephens:]

Yeah, I think just to add to what Larry kind of outlined Gerald was what we saw is communities that were pre-selling without models. Once we get the modeled up and we typically see a little more of a pop and we saw a little bit that in April, so we might have been pre-selling out of a trailer. The other thing is we're building these multi-buildings that - you get up - you get buyers up on in the actual building before the models are complete. They have a better idea of sort of what they're buying, so I think that was part of it, why we saw the pop in April and again to Larry's point 3.4 was a very strong - I think as we move through Q2, we wouldn't expect it to be at the 3.4 case through the balance, but as you move later in the quarter kind of May, June, things do sort of taper a little bit, 2.9 to 3 point, I would probably feel pretty good for Q2 at this point as we sit here. Then the other thing to is, we opened four new communities during the first quarter. So two of them pushed out into the into the second quarter and then a couple of those four that we opened were open about a month late, so that had an impact on the absorption pace for that for the first quarter as well.

[Unidentified Analyst:]

Okay, that's very helpful. My second question is just turning towards raw mats and labor cost, a lot of the builders are seeing pressure and just wanted to see how that's been affecting your business. What you thought this quarter and what you kind of expect for the year?

[John Stephens:]

Yeah, we saw it in terms of total cost increases, it was kind of in the 2% to 4% range, is what we were experiencing, obviously Lumber [ph], there's been a lot of discussion about that lumber prices up. I think also with some of the tariffs were expecting that we might see a little bit of pressure there on steel and aluminum and those type of products. Having said that though, we did raise prices in about three quarters of our communities and that was anywhere in the 2% to 3% range on average, so it more than covered the cost increases.

[Unidentified Analyst:]

Hey, thank you.

[John Stephens:]

You're welcome.

[Operator:]

Thank you. Our next question comes from Thomas Maguire with Zelman & Associates. Please proceed with your question.

[Thomas Maguire:]

Hey, guys. Good morning. Just taking a step back and thinking about the longer term trajectory of the business here, we've continued to see build in lot count and just want to square that with the modest decline in community count in the back half of the year implied in guidance to your seven down storable, is that just a temporary timing issue? It with closed out or I guess probably how should think about your investment in land development and the flow through that increased lot count as we move into '19 and where that can go?

[Larry Webb:]

Well, I'm glad you mentioned that. We had one a community that will slip into first of quarter '19, so instead of a projected '20, we're going to '19, but we weren't anticipating deliveries from that community anyways. Big picture, first quarter saw us really improve our wholly owned lot count. And compared to the last year we're in a much stronger position. I also would like to reiterate that one of the ways we've been able to lever our really strong relationship with land sellers is that 60% of those lots are optioned. That allows us a lot more flexibility for any market fluctuations that could occur into the future, so I think our land position this year obviously 100%. Our deliveries are already locked in, we have 95% of next year's deliveries locked in and we feel like we're in quite a good position in the California marketplace where land is at a premium.

[Thomas Maguire:]

Got it, thanks, it's very helpful. And then just on the JV side of the business, good to see Phoenix starting to come through, we'd love to hear how that's performed relative to expectations and just so, if you could elaborate on the change in the JV guidance and whether that was timing or what's going on there?

[John Stephens:]

Yeah, the JV guidance, we brought that down a little bit. It's primarily in Phoenix, I mean we are delivering homes there at our Mountain Shadows projects in Paradise Valley, but probably not the rate that we would expected before when we started the year. I don't know Leonard, if you wanted to add anything or Larry on that front.

[Leonard Miller:]

Yeah, I mean just as - I would just add that hit a price above the million and a half luxury second home buyer, we've really seen in that market delayed absorption of 1 to 1.5 a month that we would hope that it would been a little bit better than that, competitions in that as well, so absorption is slowly going to be at hold.

[John Stephens:]

And in Phoenix, on the positive note in Phoenix we did open our new Belmont community in Gilbert and we've actually had - we just opened last week and had really good sort of activity there and we're excited about. That's a single-family detached product that we think it's more a bread and butter and we tackle it very well.

[Thomas Maguire:]

Great to hear, thanks guys.

[John Stephens:]

You're welcome.

[Operator:]

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

[Alex Barron:]

Yeah, hey guys, how are you?

[Larry Webb:]

Thank you and Alex I have to always to this, it's Alex Arron for everyone.

[Alex Barron:]

Thanks, Larry. I went through your actually both project there by bray, now that you've finished, it's looking really great, so I'm guessing sales will accelerate though. I had a question generally more 30,000 foot view, what has been sort of the percentage of buyers in California that have been foreign versus local and have you seen any shifts on that and then as you think about California have you guys seen or noticed any more marked migration patterns either out of the Bay Area into say Sacramento or out of California and to say Phoenix, anything - any comments along those lines?

[Larry Webb:]

Sure, it really varies from market to market. As many of you know Irvine in particular has been a strong hold of Asian and principally Chinese buyers. The majority of those for our whole history however has been second and third generation Chinese buyers not foreign nationals. We had seen that market continue to be steady, might be down a little, but overall pretty good. South Orange County has never really had a strong Asian influence with our new more affordable programs Rancho Mission Viejo and we are seeing a bit of a shift downward. One area though that we are very positive about it in terms of seeing an increased Chinese demand is the Inland Empire. We just opened and not just Chinese but Asian in particular, we've seen a migration into being western part of Inland Empire of Chinese buyers that makes us to quite good not just about our new Seville project, but our future communities that are going to be opening as well. In the Bay Area that we have not seen a shift, the Asian buyers in that marketplace tend to be Indians or Southeast Asians and again are probably as much techie as anything else, that markets remain strong. We've seen a small migration of just Bay Area buyers into the let's say, Central Valley and Sacramento area as prices have continued to escalate, but I would not category or categorize those or desegregate those by any ethnicity. I would just say they are buyers who are either priced out of the Bay Area or are looking for more value in Sacramento. That happened in the last up market as well in the early 2000. In Phoenix, now that we have three housing programs open, two of them are primarily aimed at Snowbird and it really - so far we've ever seen a big influx of California buyers trying to escape for tax purposes and then our third project which is first move up in Belmont that has been 100% local and very, very for kind of Phoenix area, so we have not seen an outcry. We have looked a little bit in the Reno market because there are - and we haven't started or we haven't bought anything there yet but it's something we at least start considering and that market does appear to have some California ex-pats, in particular there are some companies as well as Tesla that have relocated there, so Rhino appears to be getting some California buyers, but we're not there yet.

[Alex Barron:]

Okay, great and as it pertains to the Inland Empire and as you're moving there, you mentioned Ontario which like if I think of it as kind of A market within the Inland Empire, you mentioned the trend towards moving more affordable, can you give us a sense of kind of where the company is going? Are you are you going to stay in those type of A markets or are you going to keep moving further out and deeper down the price curve, kind of what where are you guys going to be, where is going to be your sweet spot?

[Larry Webb:]

Well, right now our focus 100% is along the fifteen quarter in the west side of the Inland Empire and that's where we're looking that's where we have land under control, that's where we're working on our 1,600 home master plan called Bedford in Corona, so we are not looking further East at this point.

[Alex Barron:]

And that master plan, are you planning on selling to other builders or it's going to be all you across the -

[Larry Webb:]

No, it's - we're in a joint venture and we are selling to other builders as well at south. The first phase, there's three housing programs that will be opening up in the summer to early fall. We'll have one of those three, but there's another 1,300 lots to go beyond that and we are very optimistic about that community and next time you're out we'd be happy to tour you and let you see it for yourself.

[Alex Barron:]

Okay, we'll pick you up on that. Thanks and good luck.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Mr. Webb for any closing remarks.

[Larry Webb:]

Thank you. As I hope you can tell, we are very confident that our transition towards more affordable housing is strategically a wise one and we're starting, just beginning to see the results of that. We know that this is the way for our company to grow and grow the correct way. We recognize that this year is primarily backordered with no net forever. But as we move forward we hope to stop that process and become much more consistent quarter-to-quarter and we'll begin to see that in '19. We also have so many new housing programs that any of you who might want to, we welcome you to come out call me, we'd want to tour you and show you what we're creating in Southern California because we think that it is as you look - we really differentiate ourselves by what we're doing. I would also like to note that we'll be at the JP Morgan conference on Tuesday, May 15 and again we welcome one on ones with any of you. We're excited about what we're accomplishing and we can hardly wait to show people what we're doing. So thank you so much.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.