Q4 2020 New Home Company Inc Earnings Call
Greetings and welcome to the New home company fourth quarter, 'twenty and 'twenty results Conference call. At this time, all participants are in a listen only mode. They paid and what should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
On my pleasure to introduce your host drew Mackintosh Investor Relations. Please go ahead Sir.
Good morning, welcome to the New home Company 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 on the Investor Relations section of the company's website and W. H M Dot com.
And for the call begins I would like to remind everyone that certain statements made and of course of this call which are not historical facts are forward looking statements and involve risks and uncertainties and discussion of such risks and uncertainties and other important factors that could cause cause actual operating results to differ materially from those and the forward looking statements are deep.
Sales in the company's filings made with the M. S E C.
And its most recent annual report on form 10-K, and and 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 reckon.
Reconciliations of these non-GAAP financial measures for the most comparable measures prepared in accordance with GAAP can be accessed through the new home Companys website and in its filings with the SEC.
Hosting the call today, Larry Webb Executive Chairman.
Leonard Miller, President and Chief Executive Officer, and John Stephens, Chief Financial Officer.
With that I'll now turn the call over to Larry.
Good morning, and thank you for joining us today for a review of the New home company fourth quarter and full year results.
I will start out by giving an overview of some other highlights from the quarter and the year, one and 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 three 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.
And 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 and we have made progress on all three fronts.
The evidence of our migration to lower price points can be seen in the 17% decline and average sales price in 2020.
And especially in our backlog, where the average sales price stood at $576000 at year end.
It can also be seen in the sales success, we experienced from the second half for the year.
And that's our absorption pace picked up considerably and response to our new affordably priced community openings.
There is significant pent up demand for affordable housing and the markets and which we build and we are now well positioned to capitalize on this neat.
While the move to lower average selling prices will present, a headwind from a revenue perspective in the short term.
The longer term benefits for 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 and much better shape and where we started.
Our debt to capital ratio at the end of 2020 stood at $55 four per cent and our net debt to capital ratio was 41%.
Representing 820 basis point improvement from the end of 2019.
We generated 93 million and operating cash flow for the year.
Which is a considerable amount for a company our size.
The headway, we made on generating cash during the year allowed us to extend the term and our revolving credit facility.
And refinance our senior notes due 2022 to a maturity date from 2025.
These actions have put us on a much more solid financial foundation and.
And has given us.
Ability to refocus our efforts to growing the company.
In terms of our gross margin profile, we are really starting to see the benefits of our product repositioning and our renewed emphasis on price discipline.
Our adjusted homebuilding gross margin, which excludes interest and impairments expanded 260 basis points year over year to $19 four per site in the fourth quarter of 2020.
And the margins on homes and backlog are even better.
The response to our new community openings has been tremendous and we are taking advantage of this demand with periodic price increases. We believe we are on a great position to start the new year, and expect continued order momentum and pricing power and it stays ahead of costs.
Our optimism for the future is bolstered by the favorable industry dynamics that currently exist today.
The combination of limited existing housing supply low interest rates and pent up demand driven by demographic forces and.
And a heightened emphasis on home ownership brought about by the pandemic has resulted from an incredible opportunity for our industry.
And there was a real need for additional housing in this country and home builders of all sizes are poised to benefit as a result.
We accomplished a lot and 2020.
And believe that we can build on these achievements in 2021.
The improvements we made to our new home offerings, and our balance sheet and our margin profile have us well positioned to take advantage of the positive industry dynamics and Eric in place today.
With that I'll turn it over and a winner for more detail on our operations.
Thanks, Larry and good morning day, everyone.
And new home company generated strong order activity and 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 up three seven homes per community, the highest and our company's history.
The demand we experienced was broad based both from a geographic and product standpoint, which allowed us to raise prices and 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, and 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 and 88% increase and 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 has 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 for land pipeline.
Fortunately, we are and a great position to make the necessary investments to grow our company. Thanks to the improvements we made to the balance sheet over the last year.
In the meantime, we are focused on making sure we maximize the value of every phase release that comes out of our existing communities.
Turning to our joint ventures, we sold the remaining lots and the Russel Ranch partnership and force them to a third party and book income for $25 million and the quarter.
This transaction will also generate a net tax refund of approximately $10 million and effectively and our involvement and joint ventures.
This is a very positive development for our company.
Is it frees us from further capital commitments and removes a layer of uncertainty about our operations and allows us to focus on growing our wholly owned and fee building business.
With respect to our fee building operations, we continue to view this segment as a way to grow earnings with little to no capital investment.
While fee building revenue declined in the fourth quarter as a result of the wind down of our arrangement with the Irvine company.
We are in talks with several entities that have expressed an interest and establishing b building agreements.
Given the need for additional housing stock, whether it be for sale or for rent and we believe there will be lots of opportunities for us to grow this business.
The new home company enters 2021, and a position of strength.
Thanks to our substantial backlog and improving margin profile and a strong fundamental outlook.
We are selling from a position of strength and most of our communities given our solid pricing power and and ability to stay ahead of cost.
We no longer have JV exposure, which will allow us to focus our capital needs on growing our wholly owned operations.
And we have a much improved liquidity position to secure new land deals.
We now have a great opportunity to improve our profitability and deliver better returns for our shareholders.
With that I'd like to turn it over to John for more detail on our results from the quarter and our outlook for the new year.
Thank you Leonard and good morning to everyone on the call.
For the 2024th quarter, we generated a pretax loss of $1 3 million compared to a $7 million pre tax loss and a year ago period.
For 2024th quarter included an $8 million debt charge related to the refinance of our 2022 senior notes.
Our pre tax income for the fourth quarter, excluding the debt charge was $6 $7 million.
Net loss for the quarter, including the debt charge was $1 2 million or seven cents per diluted share compared to a net loss of $3 million or <unk> 15 per diluted share and the prior year period.
Excluding the debt charged and the current period and $10 $1 million and impairment charges and the prior year period.
Adjusted net income for the 2024th quarter was $4 $8 million or 26 cents per diluted share and.
As compared to $3 $1 million for 15 cents per diluted share and the prior year period.
Okay.
Our home sales revenue for the fourth quarter was $135 $4 million.
<unk> to $173 9 million and the prior year period.
The 22% decrease was attributable to a 17% decrease and average selling price.
And two $720000.
And a 6% decrease and deliveries attributable to fewer completed spec homes available to sell and close during the quarter.
The decrease in average selling price continues as we diversify and moved down and price points and all our markets and especially in Arizona, where we delivered the first homes of our affordable communities during the quarter.
We estimate for 2021 first quarter home sales revenue to be between 80 and $85 million.
And our average selling price to be approximately $675000 for the first quarter.
And then continued to decrease sequentially as we move down and price point through the balance of the year.
For the full year 2021, we estimate home sales revenue of approximately $410 million to $440 million.
And on average selling price of approximately $600000.
We've made significant progress with our margins over the last several quarters through higher pricing and absorption rates. Our gross margin for the 2024th quarter was 14, 8% versus seven 8% and the prior year period.
The 2019 fourth quarter gross margin, excluding inventory impairments were up $6 $6 million was 11, 6%.
The 320 basis point improvement and gross margin excluding the prior year impairments was primarily due to better pricing power a mix shift and a 60 basis point decrease and capitalized interest included in cost of sales.
In addition, our gross margins and backlog at year end.
We're approximately 100 basis points higher than our fourth quarter results.
Excluding interest and cost of sales and impairments our adjusted gross margin from home sales was $19 four per cent for the fourth quarter.
As compared to 16, 8% on a year ago period.
Based on the mix of homes currently and our backlog, we estimate our first quarter gross margin to be between 16, 5% and 17%.
For the full year 2021, we expect our gross margins to be between 15, 5% and 16%.
The higher gross margins and the first quarter as a result of a mix shift by one successful move up community and Sacramento.
Our SG&A rate as a percentage of home sales revenue for the fourth quarter was 12% versus nine 9% and a year ago period.
The higher SG&A rate in 2020 was largely the result of lower home sales revenue.
And to a lesser extent higher broker commissions, and a $400000 reduction and G&A expenses allocated to the fee building cost of sales.
We expect Q1 of 2021 to be the high watermark for our SG&A rate.
For the year due to lower Q1 home sales revenue and a lower allocation of G&A expenses to the fee business.
For the 2021 first quarter, we estimate our SG&A rate to be between $15 five and 16, 2%.
For the 2021 full year, we estimate our SG&A rate to be between 13, 3% and 13, 8%.
We ended the year with 23 active communities, which was a 10% increase compared to the end of 2019.
We anticipate ending 2021 first quarter with approximately 20 active communities.
And then expect a slight dip and our community count in Q2 through Q4 before bouncing back from Q1 of 2022.
For the full year 2021, we expect to open six new communities with the majority of these openings incurring and the third and fourth quarters.
And expect to close out of 11.
Communities during the year.
We estimate that we will end the year with approximately 18 active communities.
Fee building revenue for the 2024th quarter was $10 $2 million compared to $31 1 million and the prior year period.
We anticipate opening the motto complex at our new few building project and the Great Park during the first quarter of 2021.
For the 2021 first quarter, we estimate our fee building revenue to be between four and $6 million and estimate between 15 and $20 million of fee revenue for the full year 2021.
We expect to work on new field key building arrangements and are expecting to increase revenues and profits and this segment and 2022.
During the quarter, we completed the sale of the remaining lots on our Russel Ranch land development joint venture and Fulsome, California.
This transaction resulted in $4 $5 million of joint venture income for the company and wraps up all of our large land development joint ventures.
This income was partially offset by losses incurred at our mountain Shadows joint venture during the quarter, which was closed out in January 2021.
As of today the company no longer owns or controls any lots for homes through any joint ventures.
We generated $31 million and operating cash flow during the 2024th quarter and $93 million for the full year 2020.
We reduced debt by $60 million during the year increased our cash position by $28 million and.
<unk>, our net debt to capital ratio by 820 basis points as compared to the year ago period to 41%.
We ended the year with $107 million and cash and had no borrowings outstanding under our $60 million revolving credit facility.
As previously reported we extended the maturity date of our revolving credit facility to April 2023, and.
And refinanced our senior notes to October 2025 during the fourth quarter.
We also spent $31 million on land and land development during the fourth quarter.
And anticipate spending between $100 million and $125 million on land and land development for the full year 2021.
I'll now turn the call back to Larry for his concluding remarks.
Thanks, John and.
The new home company made great progress on a number of fronts in 2020, giving a 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 and the short term.
But I am very confident the structural changes we've made to our company have us on a path to better results and the future.
And 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.
And new home company is poised to build on the achievements of 2020 and the new year.
And I look forward to sharing and this success with you.
That concludes our prepared remarks, and now we'll be happy to take your questions.
Thank you and up and conducting a question and answer session, if you'd like to be placed and the question queue. Please press star one on your telephone keypad.
[noise] formation and tone will indicate your line is and the question queue. You May press star two if he'd like turbo for your question from the queue for participants using speaker equipment and it may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Alan Ratner from Zelman and associates.
And there's a lot.
Hey, guys. Good morning, Congrats on <unk> and all of the other important progress made in 2020 and.
Yeah, the exciting outlook for 'twenty, one and so my first question I'm just curious.
I appreciate all the guidance and and especially understand the community a closeout issue that I think you and a lot of other peers are facing right. Now I'm curious you know just given the Stewart and 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 a balance or discussion a little bit going forward, maybe to try to even drive margins higher.
And perhaps limit sales more so than you have already happened and I know you mentioned, you raise prices and 90% of its communities, but certainly with orders up over 100% January 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 that price versus pace discussion.
Alan net for most.
Positive first question, we've ever had and five years.
And if that we.
And I really mean and it's indicative of how strong the market is right now.
I'm going to turn it over to Atlanta, and second, but and I would like to let everyone know debt, probably my favorite business writer and the wellness, Jim Collins and he touched on something called the genius of day and.
And the reality of it is we want to have pace and profitability and and and I believe you can do that now Leonard you may respond.
Yeah.
Good morning, Alan and 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 <unk>.
<unk>, it's nearly impossible to get specs on the ground.
So for the last several months really what its been all about it's been a focus on margin and capturing price increases I would say over the last three months, we've limited our 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 as we're metering our sales releases. The best that we can do limit starts getting out and 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 and both what we reported.
And I know that John talked about what future margins looked like every day, we see our margins grow and our backlog and we're really excited with the progress we're making and think we'll showed over the next several quarters.
Great.
That's very helpful insight and color.
And my second question, maybe this one won't come across quite as positive Larry but you know I think we've got we've been hearing from some other builders about you know a pretty meaningful outflow of people from California into other other areas.
And I think Taylor Morrison and sit on their call yesterday that kind of anecdotally it feels like youre seeing like double is twice as much traffic from California, and 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 on California, I'm curious, if you're seeing that and and maybe compare and contrast, California.
Verse, Arizona and.
And how do you think about that going forward in terms of where you're making your land investments are you disproportionately weighted to Arizona are you contemplating new market expansion or do you still have that confidence and California that this is more of a temporary phenomenon due to COVID-19.
Well.
And my response to that is really twofold for.
I have been building in California for 35 years and day do.
And predictions for California have been going on and for 35 years.
It still and incredibly strong market.
Are we facing some challenges, yes, but the debt.
And from parties.
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 and every project and average price range and Youll see the incredible price.
And then for itself every day.
So it does not mean we.
We are cognizant of the challenges, California pain.
I'd also say that on.
And one other front.
Arizona Convention has really.
Paying off.
And.
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 showing very positive results.
And as a company of course, we're looking at other markets.
And we were and John Laing homes, we grew from three markets for 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.
And where we are and we think I really believe the future is pretty bright for us.
Yeah, I mean, we certainly hear it.
And whether it's with friends for.
Through our sales offices, and we certainly hear from.
Phoenix.
People migrating and form California at the same point, what I would say, it's the same demand and dynamic is going on in places like Sacramento or the upper Central Valley, where were 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.
Higher so it's.
It's an interesting dynamic I would say from a land investment standpoint.
Phoenix by force 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 and we've tied up some positions that were future positions. We're excited about but we're also making and.
Additional investments and Sacramento again, the apples upper Central Valley and inland Empire, its just the opportunities and coastal California limited.
And certainly very capital intensive.
Got it thanks, a lot guys I appreciate it good luck.
Thank you thanks Alan.
Thank you. Our next question today is coming from Alex Barron from housing Research Center and your line is now live.
Good morning, gentlemen, great job on the quarter.
And you hear me okay.
Yeah, Hey, Alex good morning.
Yeah.
Yeah, like I see really strong order activity and.
And strong.
Orders for January some on them.
Having a bit of a hard time reconciling that with.
And the revenue guidance I was hoping you can kind of help me out there a little bit.
Hey, Alex It's John Hey, Alex This is Larry to excuse me on second don't sound. So depressed okay. We are okay and.
Now gone and you can get a job yeah, Hey, Alex Yes, So thats a good question and that's something that we've talked about with internally and with our board.
And 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 is it's tough for us to sort of choose the revenue.
For 2021 in terms of at the upper end of the limit that we provided you know and there's some opportunity there but the question is like Leonard said earlier, if we're able to get sort of the starts and the ground and time, perhaps there's some opportunity but.
Our backlog coming in and the year without having a lot of specs is very strong relative to our full year guidance.
And that's what I would have come on or give any I don't have much more as I am sure. Alex you know thats 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 and I'm, sorry March and the end of June maybe early July so when you also.
Marry that with the fact that we believe and giving consumers choice and the opportunity and go into our design studio and and and.
Generate additional profit and margin on that debt.
And you take that all together really and if you have two two plus months of backlog that are still waiting to get started and it's that whole thing. So there is limited opportunity to really push that number up this year.
Got it.
And then did I hear you say that.
And that you expect the ISP and the first quarter and 675 or did I mishear that.
Yes, you heard that correctly.
Okay.
And then also what what drives the margin to be higher and the first quarter, but lower for the rest of the year.
And with price increases and all of that debt.
And that wouldn't happen and so what what has happened.
Well, there's really a couple of things going on but really in Q1, it's a little bit and an aberration, because we havent really low revenue number and our mobile.
Revenue number and number one and what what's being delivered in Q1 were closing out of a higher price Mark.
Margin community and.
And Sacramento and sort of pulling those numbers up for Q1, which is nice we're excited about that I think moving forward as you move through the balance of the year. We did have a couple of communities.
And northern California that are higher and debt.
And 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 and 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 'twenty. Two the expectation is that the margins would continue to sort of creep back up and those two communities.
Okay.
Great.
For the ask one more John I know, you guys and Arizona switched from doing that.
And homes to them.
For more affordable homes.
Is there and is that also what's driving the price up for it went when are those million dollar homes, I guess want to get delivered.
Well.
The million dollar homes, we had a project and Scottsdale and that was it.
Luxury condominium flats debt really we closed out at the end of the year. So moving forward the Arizona price point will be much lower yes, everything that we have opened for sale today is at $5 50 or below it doesn't mean that we wouldn't look for it to move up the right move up opportunity, but having said that we really don't have any.
Interest to do second home podium tier type H targeted fraud product like we've done in the past there and.
And like I mentioned on the prepared remarks Alex.
And we closed out of our last luxury community on the JV side and mountain Shadows. So that's all wrapped up like Leonard said, we really don't have anything above $5 50 today right from the open and selling.
Okay. Good.
One last question and that's like I said.
Obviously, the you know.
And the sales pace and it's been really strong and and lots of builders are selling other convenience a little bit sooner than expected.
That said I know you guys have been.
And on expanding and more affordable segments across California, and Arizona. So would you expect your community count to trend down.
Over this year or stay the same or go up.
Yeah, we expect it to trend down this year.
We projected to be about 18 communities with our current footprint today and that would.
Step back up really in Q1, north of 22000 and kind of a low twenties.
I would like to emphasize though and I think and some fair comment.
Uh huh.
We have seen increased absorption increased margins.
And we're looking at this business and America.
And if that means a quarter or two.
Slide.
Reduction in community count.
We don't think Thats, a bad day necessarily we're monitoring everything.
We consistently believe we're growing and heading in the right direction in sales and profitability and margin and and community.
But it would have.
Take the next two to three years consistently shown but we are doing what we need to do yeah, and just one point just to add to that again, Alex really the last couple of years, we were so focused on.
And 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 to ensure that we are very focused on rebuilding the pipeline, but with with that pause, which take a little bit of a pause on the land side and so our community count will grow and the future.
But there is going to be a little bit of a dip and I think like Larry said with the strong sales thats perfect and accelerated a little bit.
Alright, great and I wish you best of luck guys. Thanks.
Thanks, Alex Thank you.
Thank you. Our next question today is coming from Jason and Tucker private Investor Your line is non life.
Hey, guys. Thank you and again, congratulations on such a great quarter for sure.
And quite spectacular I think and some other folks mentioned.
Couple of my questions were already answered so I appreciate that.
And really the only thing I kind of average.
And so generating a lot of cash flow now.
You guys pushed out and your debt maturities, you got $107 million or so and cash.
Can you just kind of remind us what the company expects to receive a with regards to a tax refund this year.
And lastly, any reason why you I just want a little more aggressive on the share repurchase scan that get them on your stock is still trading around and have a book value.
And what seems to be a very strong outlook for the business.
Yeah, I mean, obviously, we did we did sort of our balance sheet and our positioning we feel much more comfortable and 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 youre familiar with and.
We did 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'll continue to evaluate.
Alright, guys Thats, all I have again, congratulations and thank you.
Very much. Thank you. Thank you we've reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.
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.
If we would have had this call April of last year.
We would never have been able to anticipate the kind of success and fish.
Months by months success, we've had.
This is Ben and amazing.
<unk> performance and I would like to.
Leonard Miller, our CEO and John Stephens, our CFO, who have managed.
This journey and and incredible fashion and again thank you.
And we look forward to giving you more positive results from quarter to quarter. Thanks very much.
Thank you for that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.