Harbor Custom Development, Inc. (HCDI) on Q1 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by and welcome to the Harbor Custom Development Incorporated First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session from previously submitted questions and live questions will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to introduce today’s presenters, Sterling Griffin, CEO, President and Chairman of the Board and Lance Brown, Chief Financial Officer. I will now turn the conference over to Mr. Brown.
Lance Brown: Thank you, operator and thank you all for joining us today. Welcome to Harbor Custom Development’s first quarter 2022 earnings conference call. During our discussion today, we will be referring to our earnings press release and presentation that were made available prior to the call. The release and presentation can be found in the Investor Relations section of the Harbor website at www.harborcustomhomes.com. Before we begin, I would like to remind everyone that today’s call includes forward-looking statements. Any forward-looking statements contained in the earnings release or discussed today are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. Specifically included are statements regarding our industry and our outlook for 2022. Please see our recent SEC filings, which identify the principal risks and uncertainties, which could affect future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including EBITDA, adjusted EBITDA and adjusted EBITDA margin. Please see the appendix of our earnings presentation for a reconciliation of these non-GAAP measures with our most direct comparable GAAP measure. I would now like to turn the call over to Sterling.
Sterling Griffin: Thank you, Lance. And thanks to everyone for joining the call today. We appreciate your interest in Harbor Custom Development. Our unique business model continued to deliver the first quarter of the year, with 106% increase in revenue over the first quarter of 2021. Inventory levels remain near historic lows, we expect to benefit from continued stable pricing throughout 2022. Our distinct business plan as serving multiple segments of the home buying market within a 20 to 60-minute commute of some of the nation's fastest growing regions continues to provide us with a consistent stream of revenue. Our expertise allows for a diversified product strategy that enables us to better serve a wide range of buyers adapt quickly to changing market conditions and optimize performance. We are equipped to build to the surrounding communities needs including single family homes, townhomes, condominiums, and apartments. This flexibility allows us to target a wide and diverse range of customers. Our portfolio of land lot, home plans and finishing options, coupled with the historic low inventory of residential and multifamily housing in our geographic areas, provides an opportunity for us to increase revenue and overall market share. In addition to our single family residential projects, we plan to build and sell townhomes, condominiums and apartments and anticipate the commencement or continuation of land development and construction projects. We recently announced the listing of six apartment properties in western Washington for $278 million. Those projects are Pacific Ridge middles crossing, Bell, Fairview Winstone, Tangle Wild and Bridgy trails. In addition to our diverse product portfolio, we continue to expand geographically, Western Washington remains our largest market, but we have operations in Texas, Florida and California. In Q1 of 2022, we closed our first two single family homes in the Austin, Texas MSA. We also executed several other new home contracts within a 20 to 60-minute commute to Austin, which are expected to close in the following months. Prices for the Texas Homes are averaging approximately 400 per square foot. We recently located two new office space in Tacoma, Washington. The new office space is designed with a hybrid workforce in mind and considers employment trends that arose after the COVID 19 pandemic. We continue to demonstrate strong and consistent growth delivering increased revenues each year of operation. Our compound annual growth rate for the years ended December 31 2018 through 2021 was 132.9%. And our compound annual growth rate for the first quarters ended March 31 2019 through March 31 2022 was 88.5% As of March 31 2022 are backlogs of fully executed contracts for the sale of developed residential lots and single family homes was 20.7 million compared to 19.2 million as of March 31 2021. Our fee build backlog as of March 31 2022 was 7.3 million. We did not have a feeble backlog as of March 31 2021. Our financial condition continues to improve. We made significant progress last year to strengthen our balance sheet and finished Q1 with 22.3 million of unrestricted cash up from 9 million the previous year. We continue to invest in our business to drive shareholder value. In the first quarter we announced the closing of a revolving credit facility of $25 million with Bank United. The facility provides us with the liquidity and financial flexibility to build on our already strong foundation and pursue further growth initiatives. As of March 31 2022, we had 13 million of availability on the revolving credit facility for total liquidity of $35.2 million. Despite rising interest rates and inflationary conditions, I remain confident that the stability in the single and multifamily housing markets strength of our balance sheet and our unique business model makes us well positioned to deliver on our 2022 plan and beyond. I will now turn the conference call back to Lance Brown our Chief Financial Officer to further discuss our financial details.
Lance Brown: Thank you Sterling. On a quarterly basis revenues increased by approximately 106% to $28.6 million for the three months ended March 31 2022. As compared to $13.9 million for the three months ended March 31 2021. The increase in revenue was primarily driven by an increase in home sales of 5.5 million, 4.5 million from entitled landfills. Fee build revenue of $2.7 million and 2.1 million from sales and developed lots. Our overall gross profit margin was 21.2% for the three months ended March 31 2022 compared to 4.4% for the three months ended March 31 2021. This increase was driven primarily by the significant gross profit margins earned on entitled land sales. Our operating expenses increased to 3.8 million for the three months ended March 31 2022, as compared to 2 million for the three months ended March 31 2021. This anticipated increase in total operating expenses is primarily attributable to the continued investment in public company infrastructure and future growth plans, including payroll related costs, professional fees, marketing and advertising, right abuse expense associated with our new corporate office, as well as stock compensation and depreciation expense. In the first quarter of 2022 operating expenses as a percentage of sales improved to 13.4% compared to 14.8% for the first quarter of 2021. The improvement in operating expenses as a percentage of sales is primarily due to the increased sales year over year, which have allowed us to scale the business at a rate that is favorable to operating expenses incurred. Net income increased to 1.6 million for the three months ended March 31 2022. As compared to a net loss of 1.5 million for the three months ended March 31 2021. The 1.6 million of net income was a new first quarter record for the company. The improvement in net income was primarily attributable to the increase in revenue and improve gross margins in 2022. For the three months ended March 31 2022 and 2021 we had basic loss per share of $0.03, and a loss per share of $0.12 respectively. EBITDA for the first quarter of 2022 was $3.5 million, compared to $0.1 million in the first quarter of 2021. While adjusted EBITDA was $3.9 million compared to $0.2 million in 2021. Adjusted EBITDA as a percentage of net sales was 13.6% for the first quarter of 2022, compared to 1.7% for the first quarter of 2021. Net cash used in operating activities for the quarter ended March 31 2022 was $9.4 million compared to cash used by operating activities of $16.9 million for the quarter ended March 31st 2021. The primary uses of cash during the quarter was related to the issuance of notes receivable of $10.7 million and the acquisition and development of real estate assets totaling $6.3 million. Our real estate assets have continued to increase to $129.1 million as of March 31 2022 from $122.1 million as of December 31 2021. As of March 31 2022, our real estate assets were delivered approximately 37%. I will now turn the call back to Sterling.
Sterling Griffin: Thank you, Lance. For 2022 we believe there will be continued stability in the single family housing and multifamily rental markets and reiterate our revenue guidance for 2022 of approximately $160 million. Our guidance implies a year-over-year revenue increase of 121%. We continue to anticipate adjusted EBITDA of approximately $20 million during 2022, which implies a 34% increase on a year-over-year basis.
Operator:
Unidentified Company Representative: Thank you operator. Our first question is, how do I convert my preferred stock or warrants into common stock.
Sterling Griffin: You can contact your broker for assistance with converting the preferred stock or exercising your warrants. And if you need further assistance, you can contact our transfer agent. You can visit the investor resources section under the investor relations tab of our website at www harbor custom homes.com to find more information on how to contact our transfer agent at Mountain Share Transfer.
Unidentified Company Representative: Thank you, Lance. Our second question. Have you experienced supply chain disruptions so far? And do you expect to have challenges in 2022?
Lance Brown: Like all builders, we have experienced some supply chain disruptions. However, we are less impacted than others because we have diversification of the products that we sell, including in Title land and develop lot which are not impacted by supply chain disruptions. Furthermore, we are always evaluating our supplier and subcontractor base to ensure we can meet demand timely.
Unidentified Company Representative: Our next question with the recent increase in the common stock price, did you see any voluntary conversions of preferred stock or exercises of the HDDIZ warrants? Can you also comment on the total fully diluted common shares that would be outstanding if all of your equity securities were converted to common stock?
Lance Brown: Yes, we recently had over 200,000 preferred shares converted to common stock and over 100,000x as of the ACD IZ warrants. And to address your second part of the question, we've included a capitalization table in the appendix of our earnings presentation, which is on our website. And as you can see, at the end of March 31 2022, there were approximately $54.8 million fully diluted shares.
Unidentified Company Representative: Okay, our next question, can you confirm that HCDI preferred stock is convertible at the option of the holder into HCDI common stock at a ratio of 5.556 common shares for each one share of preferred stock?
Lance Brown: Yes, that's correct. The conversion is at the option of the holder and the ratio of 5.556 to one is accurate.
Unidentified Company Representative: The next question we have, what other MSAs are you looking to expand into?
Lance Brown: Currently, we're looking at the no income tax states, such as Texas, Florida, Tennessee, and of course, Washington state. These are some of the fastest growing states in the country that have a significant in migration of businesses and people moving to them. We want to be in these areas where there is significant growth that allow us to execute on our business plan.
Unidentified Company Representative: Thank you. Our next question that we have gotten in, how many of the previously announced apartment listings totaling 278 million are under contract or sold?
Lance Brown: At this time, none are under contract. The projects are in various varying stages of construction and are expected to sell over the next 24 months.
Unidentified Company Representative: So the next question we have received is what gross margins do you expect to achieve with the recent multifamily listings in Washington that totaled $278 million in sales.
Lance Brown: So if market conditions remained consistent, we would expect gross margins in the mid-20% range.
Unidentified Company Representative: Thank you. Okay. Does the company plan to do another stock buyback?
Lance Brown: We haven't announced another buyback to date. But it's a distinct possibility. We are constantly considering ways to utilize our capital to increase shareholder value and could end that could include a purchasing some of our outstanding securities.
Unidentified Company Representative: Thank you. Our next question that we have. Can you explain where all the revenue came from this quarter? There seems to be around 13 million unexplained?
Lance Brown: Sure. So if you think about the segment, reporting and how revenues will break down, approximately $12.2 million came from home sales. 9 million from the belt lots, 4.5 million from entitle land, 2.7 million from VBelt and a roughly 30,000 from construction materials.
Unidentified Company Representative: Thank you, Lance. Our next question that we have received, did I understand that 200,000 preferred shares got converted?
Lance Brown: Yes, that's correct.
Unidentified Company Representative: Thanks. Thank you. Our next question we've gotten in please comment on the valuations on apartment projects. Has interest rates impacted valuations.
Sterling Griffin: Yes, interest rates will obviously impact valuations as cap rates rise. However, in western Washington where our apartment prices are located, rents have escalated at such a significant rate that the impact on the cap rates rising have been negligible to date. No significant change to the market place. Confident that the listed prices currently. Thank you Sterling, the next question that we’ve gotten in significant changes to the marketplace.
Unidentified Company Representative: Thank you, Sterling. The next question that we have gotten in it appears you now look for 1501 locks at Grandis, not 997.
Lance Brown: Okay, I see that question. I'm trying to understand that the Grandis Pond master plan was approximately 997. Lots, I don't know that it was ever 1500. So again, if you use the number of 1000 lots, you're going to be in the very close to what that will look like in the future.
Sterling Griffin: And I think the differential may be East Campus, West Village and a couple of the other control properties that led to speak to Grandis Pond directly it's the 997 units.
Lance Brown: Correct. I think someone might have added some of our other projects to that.
Unidentified Company Representative: Thank you. Okay, our next question that we've gotten in. Have you completed the first share buyback?
Sterling Griffin: Yes, we have completed the first share buyback that happened in Q4 of 2021.
Unidentified Company Representative: Okay, the next question I have is, given your adjusted revenue guidance in 2021 from $80 million to a range of $70 million to $80 million. How can we trust your current guidance of $160 million?
Lance Brown: Okay, so when developing guidance, the company uses course current market conditions product pipeline timing to estimate revenues. The company employs its best efforts to communicate accurate and up to date information as well as was the case last year we adjusted guidance when new information became available at this time we reaffirm our current guidance of approximately $160 million in revenue.
Unidentified Company Representative: Okay. Have you seen any slowdown and traffic or sales cadence given recent rise in mortgage rates?
Sterling Griffin: I'll take I'll take that one. So, doing most of our single family home sales now in the Austin Texas market which is red hot. We closed our first two homes in the quarter, and we have another nine that are under contract and we really haven't seen an impact thus far on those Austin Texas Homes.
Unidentified Company Representative: Alright, thank you. That's all the questions.
Lance Brown: Thank you, everyone, for participating in today's call. We do look forward to providing additional updates soon. You can find more information about the presentation and future events on our Wester -- on our Investor Relations page, under the tab events on our website, harborcustomhomes.com. For the most recent updates on company news, we encourage you to sign up for email notifications on the investor resources tab of our website.
Operator: Thank you. This does conclude our conference. You may disconnect your lines at this time and thank you for your participation.
