Q1 2021 New Home Company Inc Earnings Call
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Greetings and welcome to the New home company's first quarter 2021 results conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
Operator assistance during the conference. Please press Star zero on your telephone keypad.
This conference is being recorded.
I'd now like to turn the conference over to your host drew Mackintosh from Mackintosh Investor Relations. Thank you you may begin.
Good morning, welcome to the New home Company earnings Conference call earlier today. The company released its financial results for the first quarter of 2021 documents detailing. These results are available in the Investor Relations section of the company's website at <unk> H M Dot com.
Before the call begins I'd 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 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.
Undertakes no duty to update these forward looking statements that are made during the course of this call.
<unk> non-GAAP financial measures may be discussed on this conference call.
Conciliation to these non-GAAP financial measures to the most comparable measures.
In accordance with GAAP can be accessed through the new home company website and in its filings with the SEC.
Hosting the call today is Larry Webb Executive Chairman, Leonard Miller, President and Chief Executive Officer, and John Stephens, Chief Financial Officer.
That I will now turn the call over to Larry.
Thanks, Joe and good morning to everyone joining us on the call today.
2021 is off to a great start for the new home company as we made significant progress on a number of fronts in the first quarter.
Net new orders for the quarter increased 114% year over year, thanks to a 120% improvement in absorption pace.
The $4 four monthly sales per community. We have reached during the quarter was a record for our company and was driven by the ongoing supply demand imbalance, we continue to see in our markets.
As well as by excellent market positioning of our communities.
Our sales pace could have been even higher for the quarter were it not for our own strategic decision to meter sales in an effort to better manage our backlog cash.
Capture potential cost increases and raise prices.
We ended the quarter with a backlog dollar value.
$423 million also a record for our company.
Taken together with our closings from the first quarter, we now have approximately 95% of our anticipated deliveries for 2021, either already closed or in backlog.
Which gives us great visibility into our revenue expectations for the year and.
And it allows us to operate from a position of strength with our future sales efforts.
According to a recent analysis from credit back the U S housing market is $3 8 million single family home short of what it needed to meet the country's demand.
This means that based on the current run rate of $1 2 million single family housing starts.
It would take over three years of new home construction just to reach equilibrium.
The supply deficit. This country patients is due to years of Hungary building following the financial crisis combined with the emergence of millennials and other buyer demographics is real driving forces in the housing market.
Given these factors we believe the fundamental backdrop for new home construction will be positive for some time.
We continued to make progress on our efforts to diversify our company during the quarter, both from a geographic and price point perspective.
Earlier in the year, we announced our entry into the Denver market with the acquisition of epic homes.
Our unique and innovative homebuilder with a strong well established presence in the market.
Denver exhibits many of the qualities, we look for in a new market, including excellent quality of life are young and vibrant population steady job growth and rising income levels.
We are excited about bringing epic homes founder Chris.
And her team into the new home company Board as they share many of the same operating philosophies, we have including an emphasis on quality construction innovative design and customer satisfaction.
In terms of our market position, we continue to reap the rewards from our strategic decision to move down the price point spectrum at our communities.
After years of repositioning our company. We believe we have found the right balance between our passion per unique award winning new home design and our customers' desire for an attainable new home price.
New more affordably priced communities, we've opened over the last several quarters.
It's been extremely well received in their respective markets and the interest translated into significant improvements to our absorption pace and gross margin profile as we achieved a 570 basis point year over year improvement to our home sales gross margin in the quarter to 17.
One per se.
These are exciting times to be a homebuilder in the new home company is well positioned to take advantage of the positive fundamental drivers that exist today.
With that I'd like to turn it over to Leonard who will provide more detail on our operational performance this quarter.
Thanks, Larry and good morning to everyone I am extremely pleased with the way our teams executed in the first quarter, leading to significant improvements to our profitability and a substantial increase in our backlog.
As Larry mentioned, we are seeing elevated demand trends across all of our price points and geographies.
<unk> continued to have a sense of urgency when looking for a home due to the lack of available supply in both the existing and new home markets.
This urgency is creating an even wider gap between the supply and demand putting us and other builders in a great position to raise prices at our communities and continue to grow our margins.
While we are in an enviable position when it comes to selling costs, a red hot market like this can present its own challenges from an operational standpoint.
The supply chain per building materials is being stretched in many markets.
Creating a lag between sales and starts.
Suppliers are implementing price increases in an effort to stay ahead of raw material cost.
Labor is also getting more expensive and stretched thin.
These are all good problems to have and are indicative of an upwardly trending market, but taken together they can lead to real challenges with customers and suppliers.
Fortunately the new home company has seasoned operators in each of our markets, who have great relationships with our trade partners and have the experience to work through these issues.
Currently our biggest challenge is matching starts with sales in the first quarter, we sold 283 homes, while starting 238.
The imbalance occurred despite implementing multiple price increases while limiting sales releases in an effort to meter sales we.
We have continued to work hard to close the gap between sales and starts.
And I am happy to report that we are back to an equilibrium on a year to date basis as of today.
In terms of market color, it's hard to overstate how good the sales environment is and all of the areas in which we build.
Our California locations continue to perform well for us Despite media reports of an exodus from this day.
We are seeing continued strength from higher price coastal areas.
As well as migration into more inland locations in both northern and southern parts of the state H.
A trend that benefits us given our presence in the areas like the inland Empire, Sacramento and the Central Valley.
And Arizona buyers have really responded positively to all of our active communities in the market and we are enjoying significant pricing power, though the operational challenges I mentioned earlier are probably the most pronounced in this market.
And whilst the Emperor has only been a part of our company is geographic footprint for a few months now.
We are encouraged by how the communities in that market have been performing.
In light of the overall improvements we have seen across all of our markets including.
Including the strong order momentum and a substantial backlog at the end of the quarter. We have raised our full year guidance for both revenue and home sales gross margin for 2021.
And we believe we are in a great position to turn a profit this year.
Looking ahead, we believe we have the pieces in place to achieve our internal goal of double digit return on equity for 2022 based on our current projections.
While there are a number of factors that may have an impact on our ability to achieve this goal, including the trajectory of mortgage rates cost inflation potential supply chain disruptions and the general economic environment, we own or control all of the lots we expect to deliver next year.
We are encouraged by how the market is trending and where our active communities are currently performing from both a sales and margin perspective.
Now I'd like to turn it over to John who.
Who will provide more detail on our financial performance this quarter and give an update on our outlook for the remainder of the year.
Thank you Leonard and good morning to everyone on the call.
For the 2021 first quarter, we generated pretax income of $1 million, which included approximately $1 million of transaction costs incurred in connection with the acquisition of epic columns.
In the prior year first quarter, we generated $18 $4 million pre tax loss.
Which included $16 $3 million in abandonment and joint venture impairment charges.
Excluding the acquisition transaction costs for 2021, and the charges for 2020.
We generated an adjusted pre tax income of $2 million in the 2021 first quarter.
Compared to an adjusted pre tax loss of $2 1 million in the prior year.
Net income for the 2021 quarter was $2 6 million or <unk> <unk> per diluted share compared to a net loss of $8 5 million per 42 per diluted share in the prior year period.
Adjusted net income for the 2021 first quarter before acquisition costs and a deferred tax asset remeasurement expense related to the acquisition of epic homes was $1 5 million or <unk> <unk> per diluted share as compared to an adjusted net loss of $1 $1 million from <unk> per diluted.
Share in the prior year period, before abandonment and joint venture impairment charges, and a deferred tax asset remeasurement benefit.
Our home sales revenue for the first quarter was $94 million as compared to $96 million in the prior year period.
The slight year over year decrease was attributable to a 28% decrease in average selling price as we continue to diversify and move down in price point, which was substantially offset by a 36% increase in deliveries during the quarter.
We updated our guidance to reflect the impact of epic homes and estimate the 2021 second quarter home sales revenue to be between $125 $135 million.
And our average selling price to be approximately $675000 for the second quarter.
For the full year 2021, we estimate home sales revenue of approximately $475 million to $495 million at an average selling price of approximately $625000.
As Larry mentioned, we made substantial progress with our gross margins during the quarter as demonstrated by the 570 basis point increase to 17, 1% as compared to 11, 4% a year ago.
And margins were up 230 basis points sequentially from the 2024th quarter.
The year over year improvement was driven by our ability to meaningfully raised home prices.
A 230 basis point reduction in capitalized interest costs included in cost of sales.
And a mix shift of the homes, we delivered in the 2021 first quarter, including more deliveries at one higher margin move up community in Sacramento.
The 2021 first quarter also included $295000 of purchase accounting adjustments related to the acquisition of epic homes, which represented a 30 basis point reduction of our Q1 gross margins.
Excluding interest in cost of sales are.
Our adjusted gross margin from home sales for the 2021 first quarter was 21, 3% as compared to 17, 9% in the prior year.
Including the impact of purchase accounting adjustments for epic homes, we estimate both our second quarter and full year 2021 gross margin to be between 16.0 and 16, 2%.
Which is up between 20% to 50 basis points from our previous guidance for the full year.
Our SG&A rate as a percentage of home sale revenues for the first quarter was 15, 9% versus 14, 1% in the year ago period.
The higher SG&A rate in 2021 was largely the result of approximately $1 million in transaction costs related to the acquisition of epic homes, which consisted primarily of a tail insurance premium related to previously closed homes that we expense directly to G&A during the quarter.
In addition, G&A expenses allocated to fee building cost of sales decreased $767000.
For the 2021 second quarter, we estimate our SG&A rate to be between 12, 8% and 13, 3% and for the full year 2021, we estimate our SG&A rate to be between 13, 2% and 13, 5%, including the epic homes transaction cost.
Yes.
Excluding the acquisition transaction costs, we estimate our adjusted SG&A rate for the full year to be between 13 <unk> and.
From 13, 3%, which represents a 30% to 50 basis point improvement from our previous full year guidance.
We ended the quarter with 23 active communities, which is which was a 5% increase compared to the prior year first quarter and included three Colorado communities.
During the second quarter, we anticipate opening three new communities and closing out of seven communities, which we expect will result in 19 active communities at the end of Q2.
We estimate that we will end the year with approximately 21 active communities.
For the 2021 second quarter we.
We estimate our fee building revenue to be between $4 $6 million.
And estimate between 15% and $20 million of fee revenue for the full year 2021, we.
We anticipate increasing our revenues and profits in this segment in 2022.
During the quarter, we delivered the final homes from our last active homebuilding joint venture and no longer owner control any lots for homes through any joint venture.
Our income from joint ventures during the 2021 first quarter was $174000.
Compared to a loss of $1 9 million in the prior year.
The 2021 first quarter JV income resulted primarily from the release of the completion reserve related to satisfying a holdback condition related to Atlanta sales that occurred in 2020.
Our effective tax rate for the 2021 first quarter was unusually high at approximately 45% as a result of the relatively nominal pretax income amount that was impacted by certain discrete items.
Including the Remeasurement of our state deferred tax assets.
Stemming from a lower expected future state income tax rate from the addition of Colorado to our operations.
For the full for the full year 2021.
We are estimating a blended effective tax rate of approximately 26% to 27% based on the current federal statutory rate and the current estimated revenue contributions by state.
Turning to our liquidity and balance sheet, we generated $2 5 million in operating cash flow during the 2021 first quarter.
We spent $40 million on land and land development.
Including $27 million of land acquired in connection with the acquisition of epic homes.
And issued an additional $35 million of senior notes.
In an effective yield of six 4% 3%.
We ended the quarter with $115 million in cash and cash equivalents $280 million in debt and had no borrowings outstanding under our $60 million revolving credit facility.
We anticipate spending between $130 $160 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.
The new home company continues to benefit from a lack of housing supply and the emergence of new entrants into the housing market.
These two factors are driving demand to new heights, and while interest rate movements and other factors may impact our business in the short term.
We believe they will not change the upward trajectory debt.
New industries on over the long term.
We have spent the last few years repositioning our company to benefit from such a market, making our new home offerings more affordable and more appealing to the millennial H buyer.
This strategic shift has played a significant role in the financial and operational improvements we've made in the last few quarters.
We believe we can continue to make further improvements to our performance, which should put us on a path to profitability. This year and next with the goal of double digit returns on equity in 2022.
Given our current lot position are favorable market positioning and the significant industry tailwind we see today.
We feel these goals are well within reach.
I have often stated on these calls but the future is bright.
Well I really believe the future is now.
Finally, I'd like to thank all of our team members, who are getting us where we are today.
Thanks to you our company has evolved into a much more diversified builder with wholly owned operations and a number of markets and price points.
We are in a much better position than at any other time in our company's history.
And I am really appreciative of your average.
That concludes our prepared remarks, and now we'd like to open it up for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please as we poll for questions.
Our first question comes from the line of Alan Ratner with Zelman <unk> Associates. Please proceed with your question.
Hey, guys. Good morning, congrats on the strong quarter and glad to hear you're all doing well.
So first question I would love to.
Digging a little bit more on the epic acquisition in the quarter.
I'm just curious why first off why epic.
I imagine you probably looked at looked at a number of potential deals and you chose epic and Y, Colorado, specifically versus the other alternative of obviously.
Acquiring more land in your existing markets and perhaps trying to grow the local market share more southern California, and Arizona. So we'd love just to hear the thought process and why I think was the right fit.
Yes.
Alan This is Larry.
We've been considering expansion in the other markets for the last couple of years and we've taken our time.
Wanted to make sure the company was <unk>.
And we're financially strong position.
And so first first we.
Wanted to reach.
Lowering leverage when we wanted to be having better sales stronger backlog all the things that we are at now.
We look at every market on the western from Denver West.
And.
We chose Denver first because.
We felt it.
Net market with strong demographics were good all three.
Three of US John Leonard denying him a lot of experience with the Denver market, we have Atlanta connections in Denver marketplace, having all work there.
Epic.
Chose after looking at a large number of builders primarily because.
Chris Presley and her team.
And the kind of home stay we're building.
Her reputation within the industry and.
The new.
The results in that day, we're getting.
And even though they were a small private builder and we felt that they had a terrific upside.
Before I turn it over to Leonard.
Your second point, which.
Would we be precluding, our own markets and we felt financially we can be in the markets. We're in and focus on land there as well as standard and so we think we have the best of all worlds.
Financially, we're stronger Denver is a great place to be we got an a player and were still have the ability.
To buy and expand in our existing markets.
Yes, I think Larry you covered them all.
Everything I said, but it starts with the market fundamentals, but it's always all about getting on the operator.
Chris that's a wonderful reputation in Denver per brand really aligns well with the new home company that focuses on the customer quality and design so that aligned very well. She focuses on our key people I think the other part of it is the size of the transaction a fit very well for the company. She has three.
Neighborhoods that are currently open that are performing well and well know a masterplan is a four scheduled to open here in the next 90 days so that was attractive and then the thought of.
If we werent really going into a position we would be taking development or entitlement risk. We bought a company that had over 100 million orders of backlog.
Community for performing well, so and it was accretive transaction to the company. So it just aligned on all fronts for us.
Great No I appreciate both of your your thoughts and insight on that so it seems like it seems like a great deal at the right time so congrats.
Second question that I'd love to also ask a little bit about your comments on kind of the start pace and the fact that it was lagging the sales pace during the first quarter, but you can kind of caught up here so far.
Through April.
Is that a function of you guys being more aggressive and intentionally limiting the sales to kind of let the production catch up or have you actually seen your start pace accelerating thus far into April.
Yes. Good question I would say that really over the last six months. We've generally tried to do anything we could choose slowdowns sales for a lot of different reasons, but probably perfect equilibrium for us is to start for home sell for owns and close to four homes a month somewhere in that.
Neighborhood, and we don't want to set our trade partners up to fail at the end of the day with how our labor is stretched we have long term relationships with our trade partners and so really that was we were really targeting that type of absorption in the market has just been so strong and I've never seen a mark.
But we're really demand is so far out in front of supply so.
At the end of the day, we just basically during the first quarter did everything that we could do to do that the positive trend is really our starts in April or <unk> of what our sales are trending. So we're in a good position today, where we feel were in equilibrium sales.
Leonard.
By that.
<unk> comment does that mean start to actually doubled or heavier sales cut in half I am just trying to figure out what the what the numbers are.
Obviously, it's a little bit of a different application.
Sales of backed off and Thats intentional so got it I think it would be a mistake to focus on absorption rate because when you look at the numbers of homes just to give you. Some example, we have over 20 active neighborhoods, we've been generating for the last six eight weeks of having less than 10 homes released an unsold across the company.
So it's very intentional we want to make sure that we capture all cost increases continue to grow our gross margins at the same time start to have ramped up so it's a combination of low yes, Alan I would just like to add really quick to that point.
That obviously, our sales absorption pace for Q1 was $4 four is how we calculate it.
And Wouldnt expect to see that growth rate through the balance of the year just like Leonard said, we we have a pretty deep backlog now and it's really making sure we stay in equilibrium going forward and just sort of what's available for sale.
So something in the three range be more realistic assuming demand stays thanks wrong as it is.
Yes, I think thats, a good kind of assumption sort of based on where we're at and where the backlog is today.
Okay, perfect Alright, guys. Thanks, a lot good luck.
Welcome to you.
Our next question comes from the line of Scott.
With Hudson with assistance of please proceed with your question.
Hey, guys. Good morning, great job and got to see things are turning positive.
Thank you.
I wanted to ask about the acquisition in Denver.
Colorado.
First of all is it in Denver or is it somewhere else and second of all.
On the Asps it seems like.
I'm getting an ASP.
Over 900000 in the backlog, but the deliveries were in the low seven hundreds so continue guidance towards what kind of ASP per unit four.
For orders and deliveries here for this year.
Are you talking about for just Denver or are you talking about the whole company.
Yes, the whole company you just acquired epic comps.
Yeah, well the reason good question, Alex the reason why our <unk>.
Delivery ASP was lower than what you've seen in the backlog is really we delivered I think four homes during the quarter and I believe three of them were from the more affordable product debt.
We have up in Aurora co pay temporary and I think the other one was enhanced them.
In Broomfield so.
Of the three communities open.
Two of them are sort of in the eight.
<unk> 800000 per $1 million price point, and when you add options that may go up from there and then paid in Paris, I would say anywhere from.
Mid mid fours.
$5 50, or so range and then you.
You had options that can go up from there a little bit.
And then we have one new community we have one new communities that will be we are planning to open in Q2 Alex.
That's also on the higher end sort of in the I would say the $1 million of price point, it's a really exclusive sort of neighborhood.
Debt 30 lots debt.
Very nice infill location in Columbine.
Next to our reservoir, it's called Wild Plum that we're really excited about that opportunity.
Okay, great. So I guess I'll take an average of those two now in terms of free.
Accounting impact is that something that will.
Will affect margins for what a quarter or two are lumpier than that.
Yes, I think it will have a more of an impact in the next couple of quarters because what we did is we havent see wrote up the backlog for homes that were further along in the production process that we're going to be delivering in the next six months or so obviously there was a there is an adjustment for all of the lots that we purchase based on the purchase price, but a little more of an impact the first cup.
Quarters, and then it kind of normalizes after that.
Okay and then excluding.
That impact it seems like your margins were in the.
And high quality mid 21% range this quarter, but the guidance would seem to imply that margins are going to be lower than the rest of the year.
Just trying to understand what's driving that.
Yeah, really it's really a mix issue light revenue quarter for Q1 for us at $93 million I think as we move through the balance of the year I think we're talking about 125 to $1 35 for Q2 and as you move through the year sort of in that range. So we delivered.
More some higher price homes out of R. R.
Sacramento Division that will be closing this nearly closed out so it's really a mix issue on a lower revenue number and then obviously we are pulling in the Denver acquisition, where their margins are a little bit lower than the other divisions because of the purchase accounting and the fact that she had.
Cost of capital and interest costs and the like that are capitalized to the inventories. We believe that moving forward our margins will improve there as we continue to look at pricing there and have.
A little better cost of capital for that division than what they had previously and I would say one other thing that if you've kind of exclude our Denver operations, our margins and backlog were 17% plus on a GAAP basis and that would be north of.
Two mid 20% to 21% before interest so again, the $100 million of backlog for Colorado did have.
A little bit of an impact on our margins moving forward, but it's going to add topline volume.
Volume.
As well as bottom line earnings and we're really excited about that.
Okay, and if I could ask one last one.
Have you guys experienced.
I guess, what I would call longer delivery times due to some type of supply chain disruptions and anything you can comment along those lines.
Sure Alex This is Leonard good morning.
It's really market by market, what I would tell you is in our southern California, Northern California divisions.
While there is pressures there again, we've worked with our trade partners in some cases up to 15% to 20 years. So we've been able to maintain our cycle times to date and really haven't lost anything Arizona is a completely different story.
And that market when you as you know well when you look at the permit growth.
And all of the activity Thats going on there we are seeing both development timelines and cycle times in house.
Construction, both growing probably be the magnitude of 4% to six weeks, we've seen an increase in cycle times. So that's our most challenging market and then again, we're kind of.
The Colorado acquisition, so recent but I'd say, it's somewhere in between the gasoline are under pressure to deliver homes.
So again, it's market by market.
Okay, great. Thanks, a lot and best of luck for the year.
Thank you. Thank you.
And with that ladies and gentlemen. This concludes our question and answer session and I will now like to turn the call back over to management for closing remarks.
Thank you it.
It seems to me that.
When we look back 12 months, Inc.
See where the new home company was and then look forward 12 months to where we are today, we have made amazing progress.
Every front.
We're more diversified our margins our banner we are in a stronger financial position. The company is aligned where a new market a new marketplace.
And we are.
In a situation, where we are in a clear under supplied housing market.
And the tailwind for us it's very strong.
I feel very positively about our management team and the work that they've done.
I really believe net.
We are in a wonderful position and it's only going to get better.
And with that thank you.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
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Sure.
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