The New Home Company Inc.
Q1 2017 Earnings Call Transcript

Published: 29 Apr 2017

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to The New Home Company First Quarter 2017 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]. Please not this conference is being recorded. I would now like to turn the conference over to The New Home's, Chief Executive Officer, Larry Webb. Thank you, you may begin.

[Drew Mackintosh:]

Good morning. Welcome to the New Home Company's earnings release conference call. Earlier today, the Company released its financial results for the first quarter of 2017. Documents detailing these results are available in the Investor Relations section of the Company's Web site 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. Additionally, non-GAAP financial measures may be discussed on this conference call. Reconciliation 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 Web site and in its filings with the SEC. Hosting this call today is Larry Webb, Chief Executive Officer, and John Stephens, Chief Financial Officer. With that, I will now turn the call over to Larry.

[Larry Webb:]

Good morning, everyone and thanks for joining us on the call today. I am very pleased to announce that 2017 is off to a great start for the New Home Company. We are ahead of our projections on all fronts. Both revenues and profits for the first quarter are up, resulting in earnings of $0.04 per diluted share. Orders for our wholly-owned business grew 125% on a year-over-year basis came to 14% increase in community count and a significant acceleration in our sales per community. Equally encouraging was the fact that the strong order trends we experienced during the quarter were broad based both in terms of geography and price point. The healthy order activity in the quarter resulted in a backlog dollar value of $314 million; the highest quarter ending backlog in our Company's history. These results are a testament to the strong housing fundamentals in the markets in which we deal and to the unique differentiated nature of our communities and homes. Telephony track record of creating good paying jobs and its ongoing lack of available housing supply has created a significant need for additional housing in the state and we are in a great position to help fill that need. As we stated in the past, the New Home Company is actively expanding its product portfolio to include more affordable priced options to complement its existing home offerings and address a deeper repo of buyers. We saw encouraging trends at several of our more affordable priced communities during the first quarter. And we believe that this bodes well for the rollout and similarly priced communities later this year. We have established ourselves as a category leader in the move up in the segments within our markets, and we are confident that we can do the same at lower price points. With that I’ll turn to some color on our results for the quarter. Our monthly order pace in Southern California was 2.3 homes per community. Our classic community in the Portola Springs master plan in Irvine priced in the low $1 million price range with again the standout performer in the quarter, posting the best sales pace of any of our wholly owned communities. We’ve experienced great success at this relatively affordable Orange County community since its opening and have been gradually increasing prices along the way. Demand was also strong for our luxury products in Southern California during the quarter as well. We sold six homes each at our two communities along the Newport coast, Pearl Canyon and Coral Crest, which feature average selling price of $4.3 and $7.4 million respectively. These two communities have been a real home run for the Company and will contribute a significant portion of our revenues and profits this year. We’ve only one remaining homes site available between the two communities and that going to deliver all of these homes in 2017. The sales pace at our two communities at Orchard Hills in Irvine, Amelia and Trevi it's at of north of $2 million on average also picked up nicely in the quarter. Our monthly order pace in Northern California was a robust 3.3 homes per community, which is a considerable improvement over last year. Much of this improvement can be attributed to three communities in the Bay Area, Emerson, The Landing and HighWire, which were not opening in the first quarter of 2016. Emerson in Santa Clara has been a particular standout for us, both from an order and margin prospective. We are taking advantage of the elevated level of demand in the Bay Area by raising prices on a number of home sites. The spring selling season is also off to a good start in the Sacramento market, particularly at the more affordable price points. Our Avalon Series at our Cannery master plan posted the best sales pace of all of Northern California communities, powered by our Chaparral community on the east side of the market. Similar to the Bay Area, we are selectively pushing prices in the Sacramento market in places where we feel there is some additional demand. Now I’ll turn it over to John for more detail on numbers.

[John Stephens:]

Thank you, Larry and good morning. Our net income for the first quarter was $846,000 or $0.04 per diluted share compared to a net loss of $114,000 or $0.04 per diluted share in the prior year. A year-over-year net increase in our net income was primarily due to a 47% increase in total revenues, a 20 basis point improvement in our home sales gross margin and a 600 basis points reduction in our SG&A rate due to stronger operating leverage from growth in our wholly owned operations. Home sales revenue for the quarter was up 64% to $69 million largely due to a 93% increase in deliveries and was partially offset by 15% decrease in our average selling price to $1.3 million. The decrease in our average selling price was primarily attributable to a mix shift, including an increase in the number of deliveries from lower price point communities in Southern California as compared to last year. Based on the homes in our backlog that are scheduled to deliver in the second quarter, we expect our average selling price to increase sequentially by about 15% to approximately $1.5 million for the 2017 second quarter. For the full year 2017, we also expect our average selling price to be around $1.5 million, which would represent about 25% year-over-year decline largely due to a shift in delivery mix, including deliveries from three new communities with average selling prices under $750,000. Our gross margin for home sales for the first quarter was up 20 basis points over the prior year at 13.5%. The improvement in gross margin was primarily due to a change in mix, including the favorable impact of higher margins from our coastal communities in Newport Coast, California. Excluding interest and cost of sales, our gross margin from home sales for the 2017 first quarter was 15.7% versus 14.8% in the prior year period. For the second quarter of 2017, we expect our gross margin from home sales to be in the 14.5% to 15% range. And for the full year of 2017, we expect our gross margins to be in the mid 14% range. Our SG&A rate as a percentage of the home sales revenue for the first quarter was 14.5 % as compared to 20.5% in the prior year period. Year-over-year improvement was driven by the strong operating leverage from a 64% increase in home sales revenue, which was driven by significant growth in delivery volume coupled with a slight reduction in overall G&A expenses. We expect our SG&A rate to be in the high 13% range for the second quarter and the lower 10% range for the full-year. Our share of joint venture income for the first quarter was $306,000 compared to a nominal loss in the prior year period. The higher income allocation in 2017 was due to the timing of waterfall income allocations from various joint ventures and interest income from one joint venture. Net new orders for the first quarter were up 125% and represented $196 million in aggregate sales value or $1.6 million per home. Order activity was up solidly in both regions of California with Southern California up 107% and Northern California up a 141%, both on a 40% increase in community count. Our monthly sales absorption pace was up 56% over the prior year at 2.8 sales per community versus 1.8 per community in the 2016 first quarter. We ended the quarter with a record $314 million in backlog, which was up 34% over last year. Our fee building revenue for the quarter was up 30% to $56 million due to increased construction activity and included $1.2 million in JV management fees compared to $2.2 million in the prior year quarter. The lower JV management fee is consistent with the decline in JV volumes due to a shift and emphasis to wholly owned operations. Our fee building gross margin for the quarter was $1.7 million or 3% compared to $2.9 million or 4.7% in the prior year period. The lower year-over-year fee building gross margin percentage was primarily due to a reduction in JV management fees. As of March 31, 2017, we owned or controlled approximately 5,500 lots, which included approximately 1,700 lots from our wholly-owned business, nearly 3,000 through joint ventures and about 800 fee building lots. Also of note, in April, we procured five new seat build neighborhood which totaled an additional 587 lots. And on this 1,670 lots owned or controlled through our wholly owned operations 62% will control through option contracts. Controlling these substantial portions of our lots through options and take down structures is an important part of our strategy to turn our inventory quickly and stretch our capital further. Moving to our balance sheet, we ended the year with $110 million in cash, $322 million in real estate inventories and $242 million in debt. The components of our inventory at quarter end consisted of $192 million in work in process and completed homes, $87 million in land and land under development and $43 million in land deposits and pre acquisition costs. These land deposits controlled approximately $459 million in future land purchases, inclusive of the deposits. They’re scheduled to be purchased over the next few years. Also, in March 2017, we issued $250 million of 7.25% quarter senior unsecured notes due 2022 at a discount yield of 7.5%. The net proceeds from the stay due notes offering was used to pay off the balance outstanding under our unsecured revolving credit facility with the balance of the proceeds to be used for general corporate purposes. We had no borrowings outstanding under our $260 million senior unsecure revolving credit facility as of March 31, 2017 and had a gross debt to capital ratio of 49.6% and a net debt to capital ratio of 34.9%. Now I would like to reaffirm our full year guidance for 2017 along with some additional quarterly color. We're maintaining our home sales revenues of approximately $530 million to $570 million. And as previously noted, our revenues will be heavily back-end loaded with 75% of total revenues to be generated in the second half of the year and the fourth quarter estimated to be approximately 45% of the total. We're maintaining our fee building revenue of $130 million to $150 million. On a quarterly basis, we are projecting fee revenues for Q2 and Q3 to be lower than Q1 and Q4 of 2017. Also, we expect our fee building gross margin to be about 4% for the full year and may fluctuate from quarter-to-quarter based on JV management fees recognized. We’re estimating full year joint venture income of $4 million to $6 million with the second quarter being another like quarter similar to Q2 and the balance of JV income expected to be generated in the second half of the year, including about 50% in the fourth quarter. We expect to end the year with 80 wholly-owned community we expect to see a dip in the second quarter to about 10 communities as we close certain communities out and then expect it to increase in Q3 and Q4 based on our anticipated community openings. With respect to our JV's, we expect to end the year with eight active communities. I'll now turn the call back to Larry for his concluding remarks.

[Larry Webb:]

Thanks John. As you have just heard, we are clearly heading in the right direction. I am very pleased with our results in the first quarter and our market position as we head into the latter stages of the spring selling season. Both in northern and southern California housing markets appear to be on solid footing. And we have a broad array of well located communities that cater to a number of buyer segments. Coming in ahead of our projections for both revenues and profitability in the quarter puts us in a great position to achieve the goals we set for ourselves earlier this year. As a result, I am very optimistic about the future of The New Home Company. And look forward to carrying the momentum into the rest of 2017, as our business continues to evolve. Finally, I would like to thank the hard working team members of our Company for another job well done this quarter. We hold us up to higher standards and it shows through the quality of our work and the satisfaction of our customers. You are the ones who make the New Home Company a special place to work, and I am truly appreciated by your efforts. That concludes my prepared remarks. And now we will be happy to take your questions.

[Operator:]

Thank you. At this time, we’re conducting a question-and-answer session [Operator Instructions]. Our first question is from Alan Ratner with Zelman Associates.

[Alan Ratner:]

My first question on your order pace, the absorption is very strong. I am curious you mentioned strength across all your price points, and admittedly there’s big mix impact as you grow the business. I was curious if you can look at maybe some of the higher end communities that have been open for a year now. Curious how the absorptions are looking there on year-over-year basis? Are you also seeing growth within existing communities, and I would point to the high end maybe firming up here following some more sluggish activity later last year? Any numbers you can give that would be great. Thank you.

[John Stephens:]

We saw very, very strong demand actually our highest end communities during the quarter, our Crystal Cove county communities as we referenced waiting for $4 million to $7 million price point. Those were selling in the 2.5 to 3 range during the quarter at both of those communities. I guess that’s good news. The bad news is we are almost sold out there, so we have one more home left to sell at one of the communities as we stayed here today.

[Larry Webb:]

Really across the Board I would say about 50% on our absorption from last year on the upper end product. And that’s where every place, just about on our program in both -- its primarily our more expensive homes are primarily in Southern California. But so far things look good and we have best quarter for sales ever. And April has continued to be pretty solid so we feel good about where we’re at.

[Alan Ratner:]

Second question on the margin, so strong results this quarter. I think you maintain the full year guidance in the mid 14% range. I was just curious, is there any impact from that from the debt offering as far as maybe having some higher interest costs that are being capitalized that flow through in the 4Q delivery that would seemingly offset some of the strength you’re seeing on the pricing side? Or is that more mix driven more master plan deliveries et cetera.

[John Stephens:]

It's more mix driven. There is a little bit of an impact from the high yield offering that we completed earlier in the first quarter, it's probably about 50 basis points on our margins for all of 2017 Alan, which will be again more waited towards the back end of the year. Having said that, we’re comfortable in maintaining our margin guidance at 14.5% to mid 14% range for the year sort of based on what we've seen in some of the strength in this part of the year so far. And as move into next year, it's probably about 120 basis points to 130 basis points of impact on our '18 margins. But again we’re not anticipating showing a decline in our margins for next year.

[Alan Ratner:]

So just to clarify then, all else equal you would have been raising your margin guidance, had not been for the debt offering, which obviously will bear fruit in the future with the extra liquidity. But do you think you can offset that headwind?

[John Stephens:]

Correct, and I guess we're not giving the '18 margin number at this point. But as you sit here today, we're not expecting a decline even with the higher interest spots.

[Operator:]

Our next question is from Michael Rehaut of J. P. Morgan.

[Jason Marcus:]

Just going back to gross margin for a minute, and I think you had guided to a 12% heavy number for 1Q and obviously came in nicely ahead to that. So just wanted to see if there is anything other than mix that drove some of that upside, if you could talk about that that would be helpful?

[John Stephens:]

And I think we obviously pulled in a few more deliveries, and I think the consensus estimates had us again with a low level delivery in the first quarter, Jason, which you deliver does make a difference. We've delivered another an additional Crystal Cove community ahead of pretty good margin as well as just our Newport Coast deliveries have been pretty strong from a margin perspective. So really it's mix and our low volume number in the first quarter. As we move through the balance of the year, we get more a steady margin progression.

[Jason Marcus:]

And then moving on to the land market; just wanted to get a sense as to what you're seeing there in terms of the recent trends, competitive environment pricing? And if you could also talk a little bit about what you’re seeing in Phoenix as well?

[Larry Webb:]

Let me get Phoenix first. We just grand opened our first community in Mountain Shadows in the Paradise Valley area last weekend. And we are seeing a lot of land opportunities to Phoenix in the inner group, the inner suburbs. As we sit here today I think we have five deals – five new land deals that are in due diligence that we haven’t close don but we have under control. So in Phoenix we do see opportunities in the rest of -- in California, it's a mix bag. We are clearly working at markets; for example, England Empire for the first time. And we anticipate expanding into the Western side of England Empire in 2017 or ‘18. Orange County, the landmark is very tight. There are three large land sellers we’re in all the master plans there; and I think we're at kind of an equilibrium as to where we're be, moving forward. The Bay Area continues to be challenging to work for new land deals and we’re beginning to look to farther out of the East Bay and out to the outer suburbs now for more opportunities. And in Sacramento, we have as much as land almost as we’d like. So we're in a very strong position there.

[Jason Marcus:]

And then just last, if I could, wanted to see what you’ve been seeing with the foreign buyers since they maybe hearing those trends have been -- those trends change at all?

[Larry Webb:]

Well, if you take shot in California, I’d say that the primary driver of our Irvine projects are second and third generation agents, and they continue to be solid. In Northern California, in the Bay Area, we're seeing patients but it’s more Indian, Pakistani tech workers; again, that seems to be consistent with third and fourth quarter last year. In Sacramento it’s a very small margin and in Phoenix, it’s -- we haven’t had enough experience yet to see any foreign buyers at this point, so we're not sure. But overall, the foreign national buyer, they about a year ago, slowed down but that has never been the big driver for us. So I would say big picture things remains the same or may be getting little stronger.

[Operator:]

Our next question comes from Will Randow of Citi Group.

[Will Randow:]

You mentioned Paradise Valley but also just curious on how things are going on earlier days with your Bedford asset in Corona. I think you grand opened those in different ways; obviously, Paradise Valley with new models. What the reception look like, how you’re feeling about pricing and demand dynamics there.

[Larry Webb:]

Thanks for that question. I probably should have mentioned it sooner. We have a ground breaking at Bedford couple of weeks ago. And right after ground breaking, we had a meeting of perspective buyers from other builders and about 25 builders were represented with their seeing were land acquisition or presidents. Since that time, we begun the process of asking for offers on our first base and we’ll be receiving those in early May. I would say so far the best we can -- it's a little early to predict. But it appears at least as if we will have demand for all of our buyer segments, because we're getting an awful lot of questions from the builders. But we’ll be able to report more on that at our next call, because by then we’ll have contracts in place. But I would say the Bedford project, which for those of who don’t know, it’s roughly 1,600 master plan that we're doing in a venture with Tricon, appears to be very well located and its timing seems to be right. So we are optimistic about that.

[Will Randow:]

And then in terms of Paradise Valley with the models down, you mentioned in commentary earlier, but just curious if you add more color on what receptions been like there?

[Larry Webb:]

Again, it’s a little early, reception has been fine. We had a VIP event and a broker over the weekend. And these are pretty unique housing programs, both condominiums and detached homes price from roughly $1.5 million to $3.5 million at the basic Camelback Mountain. But it's too early to predict sales. We think we’re going to do very well but it’s just a little early for that -- any kind of reflection. But again on next call, we’ll be able to do that quite well.

[Will Randow:]

And then as a second question in terms of the Irvine area, I know you’ve already talked about demands from foreign buyers there. But overall how do you feel about demand prospect. Obviously you’re exclusively with one of the developers on key building side. Can you talk about how you’re thinking about key building revenues and earnings over the next couple of years as well?

[Larry Webb:]

Well, John has been working at that pretty consistently because it is a solid part of our business. And John why don’t you talk about what you see for the next couple of years.

[John Stephens:]

As I mentioned in my prepared remarks, we did just to procure five new neighborhoods, we’re going to be -- the general process around in Irvine; and that’s just under 600 lots. But in terms of our revenue guidance, we talked about 130 to 150. In the first quarter, it was very strong and it’s tied to really their building cycle when they -- their fiscal year ends at June 30th. So it’s a little bit different than ours cycle in Q2 and Q3 it’s typically a little lower. But moving forward, we would expect as we move on to like 2018 for example and beyond, probably in the same range that we’re anticipating for this year. Based on what we know today, the communities that we’ve been awarded and in the once that we’re working on.

[Larry Webb:]

On the sales side there, the Irvine Company seems to have a solid program and are pretty consistent month-in and month-out regarding selling homes. They are clearly at least three month per project that we’ve seen and new ones obviously we don’t know about it. But big picture, we don’t anticipate the fee business to increase beyond what we are able to see as a solid pretty consistent form of income force.

[John Stephens:]

Yes, for the next couple of years, it looks pretty solid.

[Operator:]

[Operator Instructions] Our next question is from Alex Barron from Housing Research Center.

[Alex Barron:]

I wanted to ask about the Phoenix market, just to enquire when you guys are expecting; maybe first delivery and also how many projects you guys have in the works right now?

[Larry Webb:]

As I mentioned, our first community just opened and we expect to begin to get closings in the fourth quarter. But it’ll just be the beginning of that and we’ll close a lot more from Mount Shadows community in 2018. In regards to future programs, we think we will be able to increase our closings in the second half of ‘18, but not until then. So we get a Nova -- we felt that it was the right way to go for our Company in the Phoenix market. We've been building a platform, the good news is we have a great operator in Pat Moroney, has a good team. But the bad news is it takes a couple of years to get going. So we’ll be -- now the second half of '18 we’ll be starting to do more communities and in '19 I think we can hope to be around 200 houses a year.

[John Stephens:]

And you will have, as Larry indicated, we’ll have some deliveries from the JV this year definitely in the third quarter maybe at one or two in Q2. But as we move into next year ,we’ll get deliveries again in the back half of the year primarily fourth quarter loaded out of a couple of communities in 2019 again assuming we, you get these deals that we have in deals just for now across the base line. You might have three or four communities delivering on a wholly owned basis in 2019.

[Alex Barron:]

And then obviously congrats on the success and the fast sell out of Crystal Cove, that's the amazing community. But I'm wondering once that sells out, is there anything else in the pipeline that could potentially look similar or to replace it in terms of ASP or what we expect be the drop off in 2018 because that's no longer there?

[Larry Webb:]

Well, absolutely the ASP will drop off. And I know from what you recall on the last call, part of it is clearly because there are no more ocean view in Southern California, but also we've had this pretty close strategy for about the last 18 months. So it would be in go forward about the deeper markets and we're going to be welcoming 11 new projects this year and six of them will be placed under 750,000. So we anticipate that by the end of '18 every sales price would be somewhere under $1 million [multiple speakers] Yes, it could be.

[John Stephens:]

And in terms of the community openings, we've open one and we have 11 more to open this year. So it’ll be 12, as Larry said six of the next 11 will be under 750 and then we open our under 750 this year this year.

[Alex Barron:]

Are many of those expected to be at higher margins outside of the round ranch where you have been outside do the [multiple speakers]…

[John Stephens:]

Yes, we would expect the gross margin percentage to be higher than the Company wide average. But again a lot of the mast plan communities that we have like a Irvine or New Port, no obviously built that out and they have a much higher proportion of revenues. But as move forward into the outer years, we would expect our margins to improve as we go down price point.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Larry Webb for some closing remarks.

[Larry Webb:]

Thank you. We really appreciate all of your support. And we really do believe that the first quarter was solid and indicative of a strong turning towards good marketplace. And one I am going to remember is that again we’re opening a lot of new projects and we expect the majority of our earnings to be rewarded this year again. But we are optimistic about what we’re creating here, and we're excited about the opportunities that are in front of us. So thank you very much.

[Operator:]

Thank you. This concludes the teleconference. You may disconnect your lines, at this time. And have a wonderful day.