The New Home Company Inc.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Greetings and welcome to The New Home Company First Quarter 2015 Earnings 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rodny Nacier, Investor Relations. Thank you. You may begin.

[Rodny Nacier:]

Good morning. We would like to thank you for joining us today for The New Home Company's first quarter 2015 earnings conference call. Today's conference call is hosted by Larry Webb, the Company’s Chief Executive Officer, and Wayne Stelmar, the Company’s Chief Financial Officer. This morning we distributed a press release detailing our first quarter financial results, which can be found in the Investor Relations section of our website at thenewhomecompany.com. We expect to file our Form 10-K today after the close of the market. During our call today, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements includes statements regarding expected performance, especially expectations with respect to revenue, gross margins, operating income and expenses, cash flow and liquidity as well as non-GAAP financial measures, operational expectations including community count, number of new community openings and home deliveries and the role of fee building in our overall business plan. These statements which may occur during our prepared remarks or during the question-and-answer session maybe identified by words such as expect, should, anticipate, intend, estimates, believes or similar expressions that are used in connection with any discussion of future financial and operating performance. As a reminder, forward-looking statements represent management’s current estimates and the Company assumes no obligation to update any forward-looking statements in the future. We encourage you to review the Company’s past and future filings with the SEC including, without limitation, the Company’s Form 10-K which identifies the specific risks that may cause actual results or events to differ materially from those described in these forward looking statements. With that, I will now turn the call over to our CEO, Larry Webb.

[Larry Webb:]

Thank you for joining us today for our first quarter 2015 earnings conference. I will provide a summary of operating and financial highlights for the quarter and then Wayne will discuss additional details on our financial results and balance sheet. After our prepared remarks, we will open the call to your questions. Overall 2015 is off to a great start. As we mentioned duri9ng our last call, this is in year of implementation and operational excellence for The New Home Company. The success achieved during the fourth quarter of 2014 continue as we further realize the benefits of our operating platform. Our wholly owned operations increased dramatically, which led to an improved SG&A. In addition we more than doubled our JV income. All of these positive factors combined with our emphasis on maximizing return on equity contributed an increase in EPS of $0.28. Big picture, the efforts we made during the past year are just beginning to reach fruition. As we continue to bring new well positioned housing programs and master plan communities to the market, our results will speak for themselves. Since the beginning of the year, we've seen rising demand in most of our markets. Coastal and infield California continue to exhibit strong economic fundamentals and offer a favorable environment for a wide range innovative home concept. We ended the quarter with a dramatically improved backlog in both wholly-owned and JV operations. Our fee building also delivered another quarter of growth to establish The New Home Company as one of the leading homebuilders in Orange County. We ended the quarter with 13 actively selling communities include four wholly-owned and nine only by our JV’s. Our new community opening pipeline remains on track. For the end of March, we opened a Arantine, a JV community located in California. In April we opened two additional communities including 20 Oaks located in 1000 Oaks and [Oliva a JV community located in San Juan] [ph]. During the next four months, we will open seven additional wholly-owned communities throughout the State. Moving to our operating results, overall we had another very positive quarter. Homebuilding revenues expanded more than 10 times to $56 million. During the quarter, our wholly-owned backlog dollar value expanded more than five times that $83 million as a result of an increase in our pace of new home orders and a higher ASP at homes in backlog. In the first quarter, fee building revenues grew over a 100% to $47 million. Our fee building activities continue to provide attractive returns and increased visibility in our core Orange County market as well as access to the best trade partners. In our JVs we continue to participate in the ownership of larger, more unique sites in some of the strongest markets in the U.S. Total revenues in our JVs increased more than three times to $81 million for the first quarter. We are also especially pleased to report another quarter of lot deliveries from JVs, which added $30 million of revenue at a very attractive gross margin above 26%. During the quarter we begin delivering improved lots from our Cannery JV. The total JV backlog dollar value of $216 million from five different pipeline of homes and lots which will enable us to deliver strong results in 2015 and beyond. Now I’d like to talk about something that is very important to me personally and to our company. In April we were awarded with the Award for best customer service from multiple division builders throughout the United States and Canada, but even more significant is that we’ve received this award three times in a row. We are very proud of this achievement as well as proud of the employees of The New Home Company who make it happen. As I said before, we believe 2015 will be a year of ongoing implementation and positive growth. Our first quarter progress highlights the strengths of our master planned community development expertise and strategic relationships with land owners. As we look forward to the balance of the year, our primary focus remains to grow our business, enhance our profitability and to continue to increase our return on equity. We are on a track to open seven additional wholly-owned communities in Premier California markets through yearend for a combined total of 10 new community openings for the full year. We're committed to executing our strategy in all facets of our operations and expect to deliver our growth and net income objectives for the full year. I will now turn the call over to our CFO, Wayne Stelmar to provide additional details on our financial results.

[Wayne Stelmar:]

Thank you, Larry and good morning. We begin 2015 with strong results and are five highlights from the quarter I would like to emphasize. First, we achieved a significant increase in EPS to $0.28 driven by our increases in our home building, land development and fee building activity. Second, total revenues increased to $103 million or over 300%. Third backlog dollar value fully owned communities increased more than five time $83 million. Four, the backlog dollar value of housing and land development JVs increased over a 100% to $216 million and fifth SG&A as a percentage of home sales revenue improved dramatically to 8.8%. I’ll now provide an overview of our first quarter results. Quarter, total revenue grew to $103 million from $26 million in the prior year period. We reported net income of $4.6 million or $0.28 per share. For the first quarter, home sales revenue was $56 million from 29 deliveries compared to $5 million from 10 deliveries in the prior year period. The growth at Home sales revenue was a result of a significant increase and the average selling price of homes delivered to $1.9 million compared to $505,000 in the prior year period. Our ASP growth reflect a shift to deliveries from Amelia and Trevi Communities located in Irvine, which had an average sales price of $2.4 million. As I mentioned last quarter, ASPs and home deliveries are expected to very quarter-over-quarter as we bring new communities to the market during 2015. The ASP of our actively selling communities ranges from $420,000 to $3.5 million. As a result of the growth in home sales revenue or SG&A percentage declined significantly in the first quarter to 8.8% compared to the prior year period of 53%. Our Home building gross margin in the first quarter was 14.1% compared to 21.2% in the prior year period. The change in gross margin was due to a shift in the mix of homes delivered to the Irvine communities noted above. As a reminder we acquired these loss under favorable option structure was generated strong return on the company's invested equity. At the end of the first quarter, there were 37 homes in backlog from four communities representing $83 million of backlog dollar value and average of $2.2 million. In the first quarter, fee building revenue also increased significantly to $47 million compared to $21 million in the prior year period primarily due to the increased number of homes under construction. Management fees from JVs also increased to $3 million from $1.7 million in the prior year period due to an increase in JV delivered. Our fee building gross margin in the quarter was $2.9 million compared to $1.1 million in the prior year period. The increase in Management fees from JV drove the fee building gross margin to 6.1% compared to 5.2% in the prior year period. The fee building business remains attractive to us as we continue to generate meaningful income, identify strategic relationship and expand activity in our core markets. Moving on to our JV’s, the JV structure continues to provide as an opportunity to earn an economic return in excess of capital percentage as well as significant management fees. As a remainder the results of our unconsolidated JV’s are not included in our results that are reported in equity and net income of unconsolidated joint ventures in our financial statements. At the end of the quarter we had ownership interest in 12 JV’s including eight home buildings and four land development with capital percentages ranging from 5% to 35%. For the first quarter JV home sales revenue increased to $51 million from 54 home deliveries compared to $21 million from 30 home deliveries a year ago. Land sales revenue from JV’s during the quarter totaled $30 million from 280 lots including 65 lots we acquired for our home building operations from the Cannery JV. These lots are located in two communities and model homes are currently under construction. Home building gross margin from JV’s was 18.6% in the first quarter compared to 26.4% in the prior year period. This reduction result from the mix of homes delivered to lower margin product size. The prior year period was also heavily influenced by the closing of the final homes at Lambert Ranch. Land sales gross margin was 26.3% for the first quarter, there were lot sales in the prior year period. Our share of net income from JV’s for the first quarter was $1.9 million compared to 800,000 in the prior year period, largely due to the increase in homes delivered by our JV’s and the contribution from lot sales. The backlogs of home and lots in our JV communities continue to position us for growth. At the end of the first quarter there were 129 homes in backlog from nine communities representing a $171 million of backlog dollar value compared to a $100 million from eight communities at the end of the prior period representing $97 million of backlog dollar value. This growth arose from a higher absorption fees, the aggressively higher ASP and an increase in the average selling communities to 8.3 from 6.8. This backlog in community count positions us to recognize higher earnings from our JV’s during 2015 especially in the fourth quarter. At the end of the first quarter together with our JV we owned or controlled over 5400 lots. Of these lots supply we entered JVs owned 3760 lots and controlled an additional 1670 lots. This land remains strong and well positioned to support our growing operation. We ended the quarter with $59 million of total liquidity including $52 million in cash and $17 million available under our long commitment. We had $125 million in outstanding debt, which represented net debt to Cap ratio of 32.4%. I am also pleased to announce that yesterday we increased the borrowing capacity under our U.S. Bank credit facility from $125 million to $175 million. This increase adds additional liquidity and allows us to continue expanding and investing in opportunities to currently control our acquisition pipeline. I would now like to discuss our outlook for 2015. We're pleased with our results for the first quarter especially the growth in backlog, which will allow us to achieve our goals for this year. To that end, we're reiterating our expectation for the full year as our last call. We continue to expect EPS of $1.30 to $1.45 per share for 2015, which will be heavily weighted for the fourth quarter. This EPS outlook is based on the following assumption. 17 actively selling communities at yearend consisting of 10 wholly owned and seven JV communities. Revenue from owned communities of $230 million to $250 million, fee building revenue of $155 million to $170 million and finally equity and net income from unconsolidated joint ventures of $20 million to $23 million from a combination of homebuilding and large scale activity. Again we remind you that our results are weighted heavily towards the fourth quarter. I'll now turn the call back to Larry for his concluding remarks.

[Larry Webb:]

As I am sure you can tell, both Wayne and I are proud to announce that our results for the first quarter provide a very strong start to the year. We're well positioned to build on our progress and delivery improved financial results. Our homebuilding, fee building and master plan community development allow us to lever our experience and relationships to form a powerful and unique company. I want to be very clear. We believe the outlook for The New Home Company is extremely favorable. As we move beyond 2015 we remain very confident in our ability to lever our business model to deliver consistent earnings improvement and attractive returns in our equity. With our experienced team, creative strategy and solid foundation, we look forward to expanding our operations and generating value for our shareholders. Quite simply we're closely following our plan for the future. We welcome your questions.

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ivy Zelman from Zelman and Associates.

[Ivy Zelman:]

Hey, good afternoon guys. Great quarter. Larry, you've got obviously the numbers are going are going to be very volatile just because of the size and recognizing the days you're coming off of, but what's really important is to hear your perspective about what you're seeing in end demand. Last quarter there was a lot of concern about the strengthening dollar and the impact foreign buyers, can you just give us a feel on what you're seeing from consumer demand and then also I asked a value question, but I wanted to ask you as well what you think the impact, the changes that Governor Brown is implementing on the modern usage and new home permitting approvals etcetera.

[Larry Webb:]

Sure, I actually think Ivy you've always been asking me quite good questions to go deeper into our market and not take things for granted and I actually appreciate that kind of analysis. From day one, our approach has been to provide infield sites where we're primarily competing against the resell market and so far when we opened new projects, we're still seeing solid. So I recognize that Chinese nationals clearly are being impacted but they never went out of our market and on that side, we’re really solid. On the water front, it’s something that every single person in California has to be aware of, but every project we have has water rights and we have the ability to build every home for the 5,000 plus watts we have and I’ve been somewhat of a spokesman in this area…

[Ivy Zelman:]

No go ahead, I’m sorry.

[Larry Webb:]

No that’s okay, really the New Home market is more of a solution to this, not the problem. Houses beyond -- build before 1980 use twice as much water as new houses. We lead the way in drought tolerance that we want a house. So we really think that while it's an important issue for California, we’re in fine shape.

[Ivy Zelman:]

So if you had to say what keeps you up at night, what are you worried about your company?

[Larry Webb:]

Well first of all I work with Wayne, so I never sleep all right. Really when we say operational excellence it’s exactly what we mean. We’re growing significantly and we’ve done this before, but the reality is we have to focus every day on being the best builder we can be. A year ago I would have said can we get the entitlement? Can we get to the market? Well we’ve done that and now we solved the deep political issues and now it’s on our back as master developers and homebuilders. So I worry every day about schedules, about budgets and then Wayne comes in and worries about other stuff, but we do it together.

[Ivy Zelman:]

Well good luck guys, thank you.

[Larry Webb:]

Thank you.

[Operator:]

Our next question is from Mike Dahl of Credit Suisse.

[Unidentified Analyst:]

Hi this is Antony on for Mike. Larry, Wayne congrats on the quarter and thanks for taking my question. I was wondering about any update you had on new land deals specifically about Crystal Cove, Newport, how should we think about size, revenues, and timing there?

[Larry Webb:]

Sure. We actually have tentative agreements on four Irvine company projects that as we sit here today are being documented. Two of those are in Crystal Cove, one is in Inland, Irvine and in an area called Port and the fourth one is an extension of our Orchard Hills are very successful, Orchard Hills project. We haven’t made final announcements because we’re still just papering the document, but big picture these four transactions total over $250 million in land acquisition, we are very excited about it and everything on the horizon says that these deals will reach fruition.

[Wayne Stelmar:]

And just to add Antony, each of those deals that are acquired under that favorable option structure that I noted in my prepared remarks, so we really have underwritten these things these big deals based upon very strong returns on our equity.

[Unidentified Analyst:]

Great thank you. And then just shifting gears here switching to you talked about seven new communities opening in the rest of 2015, first of all is that going to be more back half weighted or could we see more of those coming to the second quarter and then also how should we think about margin impact and order trend, order ASP for them as well?

[Wayne Stelmar:]

Again we’ve opened -- we’re opening eight new wholly uncommitted this year, the first open in April. We’re going to open two additional in the first half with the balance being really mostly third quarter. From an ASP perspective typical for us, we have one community for which the ASP will be exceeding where we are with respect to Trevi. So we will be in the three plus million and going possibly into the fours and on the lower end of that spectrum, it will be down into the 400,000 again with one community in our Davis -- in our Davis master plan. So from a gross margin perspective expectations are initially and again we have to open that community, assess demand, price, but the expectation for gross margin from these communities will be certainly broad, there is one Irvine community in there, so let’s talk about 12% for that community but the highest price point for the balance of the community then it would be kind of mid-ish to high teens gross margin.

[Unidentified Analyst:]

That's helpful. Thanks guys.

[Operator:]

Our next question is from Michael Rehaut from JPMorgan.

[Michael Rehaut:]

Thanks. Good morning everyone. Larry I’m just going to correct you from an earlier statement you made where you said that you work Wayne and I think what you meant to say is therefore you sleep well at night, not that you don’t sleep at night.

[Larry Webb:]

Thank you, Michael. I hate when people defend Wayne, Mike. But you’re absolutely right, I hate study -- our 18 years together has been really terrific partnership and you’re obvious, I know you are not allowed to tell jokes on these but I’m very proud to work with Wayne and he does let me sleep at night. So you’re right.

[Michael Rehaut:]

That is right, that’s right. So Wayne so therefore I set myself up so I can ask you some more granular questions on guidance and that will see at least directionally hopefully you can help us out. So the gross margins for the quarter on the wholly owned business came in right in line with what we’re looking for and I think kind of similar to maybe the direction you’re pointing us to from last quarter. I think as we spoke last quarter we are expecting that to the gross margins to improve throughout the rest of the year maybe into the high teens and I just wanted to ask if that was an outlook that we can still work off of.

[Wayne Stelmar:]

Well our revenue for 2015 certainly up to the point it has been dominated by Amelia and Trevi as we make our way through the balance of the year, Amelia and Trevi are still going to be dominating the revenue certainly in the second, third quarters that’s really what we’re all about. When we get to the fourth quarter, we have we begin to feel that effects of the new community that opened the distributional setting but again one of those is that very high end community in Newport Coast of Pacific Ridge. So I would tell you that margins for second and third quarters will be three bucks slightly just because Amelia and Trevi as we make through the life cycle to get more great prices or more in the profit participation. So we get into the fourth quarter I think we’re really going to see the effects of both the new Irvine community as well as the initial closing from the first phases of the six other additional communities. So guidance I think we’re very comfortable with kind of the mid-ish teens guidance for the fourth quarter.

[Michael Rehaut:]

Great that’s helpful and I guess just turning to little bit bigger picture in the past you’ve talked to the possibility of expanding into some new markets and I know as in your prior company you operated a much broader footprint. So any thoughts or updates in terms of where you’re in that process if that is something that at this point perhaps you’re more focused on executing the project that you have or if you are accelerating or is there any progress in terms of efforts, in terms of looking at other markets in California or other Western markets outside of California?

[Larry Webb:]

Well really Michael the question has kind of it is kind of two fold, it is true that we have put out primary focus on our existing three markets but remember we’re a young public company. We're less than a year and half old. When Wayne and I worked together at Laing to be one of the three or four largest private builders in the whole United States. We want -- 13 divisions across the U.S. we are delivering nearly 3,000 homes. We know how to do this and we felt it was very important to one, do what we say we’re going to do to show our investors that when we make projections, we meet them. So that's where we were focused, but as we move forward we are considering Western United States, other markets outside of California. We work seriously at markets in the Phoenix, Las Vegas, Denver areas as well as Seattle. And I would say once we're very confident that we’re on the proper footings in California, then we're going to look further upside, we know we’ll grow the business. So we just want to make sure, we do it the right way.

[Michael Rehaut:]

Great, thanks a lot Larry.

[Operator:]

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

[Alex Barron:]

Hey good morning and great job guys. I wanted to see if you could give us some idea on the buildings that you guys are opening geography wise where they are going to be and when you talk about seven communities for example the one that you have in Valencia that is different part, is that considered one community or they are four?

[Larry Webb:]

Alex now let me respond to that, the answer to the last question our Villa Metro project is 315 homes of which 22 are live work, the remaining three are spread roughly 190 to 100 homes per community. So we count that as four communities. And to answer your first question, we expect to open up this eight new communities, we opened as I mentioned the first community in an area called Thousand Oaks which is went through county, we have two of them opened in Southern California. We have the Pacific Ridge community that I talked about previously. So those are the two in Southern California, when you look at the remaining communities, there will be four in Sacramento and then two in the Bay Area. When I think Sacramento two of those will be in the Davis Master Plan that I mentioned on the call.

[Alex Barron:]

Okay. Great.

[Larry Webb:]

Alex we’ve always said that it’s less than number of lots we have in and we have over 5000 owned or controlled and it’s more our location and everywhere in these locations for Newport Beach in the south to Lafayette in the north are in really strong markets and in without heavy competition from outside new builders. So we are excited about where we are opening projects and we feel that the results would speak for themselves.

[Alex Barron:]

Okay great and then specifics and focus on the joint venture a bit that you guys have nine communities opened right now and you said you expect to have seven by the end of the year. So I know we are not taking 2016 yet but just conceptually is that point or that is the joint venture they are continuing to decrease as time goes by and you are going to grow the fully owned or is that joint venture is going to continue to grow in the similar or larger sizes 2016 and beyond, what – how are you guys thinking about this joint venture?

[Wayne Stelmar:]

We are actually thinking about the ventures and really too deeply. The housing ventures were the transaction we get very off early on like as a private company, those we expect to one off and we expect revenue from our housing ventures in 15, so we exceed that in 16 and 17 really to run off. So when we look at the land development revenue, the land development joint venture, those ventures really have their first activity in the fourth quarter of 14, activity in 15. We expect more lot sales in 15 from the Bedford Ranch and the [indiscernible] joint venture. So housing ventures we expect to decline in 16, land development joint venture activity start to increase in 15.

[Larry Webb:]

When we have always said that we were going to use the majority of the proceeds from the IPO to do more wholly owned communities, but it is clear that our set up for we had JV owned, JV Master Plans, wholly owned housing projects and fee business it is different than other home builders and you know what we are kind of comfortable with that. We clearly are going to focus on more wholly owned but we now chose to doing a one off special JV but our focus is just as Wayne said and we’re pretty confident that is a more balanced approach for the kind of builder we are.

[Alex Barron:]

Can I ask another one in the joint venture?

[Larry Webb:]

Sure.

[Alex Barron:]

Okay. So the way I try to go about estimating the contribution from the joint ventures is, I look at the net income of joint ventures and then which in this case was $10.8 million and then you guys reported $1.8 million as the share of what goes on in the income statement. So is that a fair way to look at it and then as we look at the drop off in the residential side of it, are you guys finding on adding any more or is just basically what’s already on the book, what is going to be running off as time goes by?

[Wayne Stelmar:]

Let me -- I can answer the last question first. Larry mentioned that we look at every asset and underwrite the real estate asset, that we describe the best way to capitalize it, but we believe it's too big for balance sheet. We're obviously joint venture capital. So it’s really a decision that for us is based upon maximizing our return on equity. To answer your first question you can’t -- the relationship between first quarter net income and joint venture revenue is not something that’s easily measured because each one of the joint ventures has a different waterfall -- economic waterfall. And as we make our way through the life cycle of each of the bankers we get into that final promoted layer. So again you really have to understand each of the 12 ventures and model the economic that come from them.

[Larry Webb:]

And we recognize that it was a more difficult to model, but our company matures and as I hope all of you analyst gain confidence in our projections we feel like this is a great way to turbo charge earnings and to grow our business and it is more difficult, but we’re very confident, it’s a good approach for our company.

[Alex Barron:]

Right, yeah I guess just the main question is, you guys gave a number for the joint venture income for this year and I’m just trying to figure out is that something that over time is going to pull down or favor us the same -- that fall I was trying to get at.

[Wayne Stelmar:]

Well again as I mentioned the housing ventures will begin to wind down into ’16, land development ventures will begin to have additional lot sales through '16 and at this point, I really can’t provide much more guidance than that.

[Alex Barron:]

Okay. That’s fair. Thanks.

[Operator:]

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

[Larry Webb:]

I’d like to thank all of you for your questions and your thought. As I said before and I’m going to continue to say we believe that the future is bright for us. We have an enthusiastic group of people here and we’re excited about taking advantage of what we think is an improving California market. And so thanks very much and if any of you have additional questions, we’re happy to talk one-on-one with you, but thanks a lot and stay tuned, the best is yet to come.

[Operator:]

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.