Harbor Custom Development, Inc. (HCDI) on Q3 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. And welcome to the Harbor Custom Development, Inc. Third Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session from previously submitted questions will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sterling Griffin, CEO, President and Chairman of the Board of Harbor Custom Development, Inc.
Sterling Griffin: Thank you, operator, and thank you all of you for joining us today. Welcome to Harbor Custom Development’s third quarter earnings conference call. During our discussion today, we will be referring to our earnings press release that was distributed prior to the call. The release can be viewed in the Investor Relations section of the Harbor website under the sub-header Press Releases/News 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 commented on 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 anticipated revenues for 2021 and 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. Our highlights of Q3: We are pleased to report revenues increased by approximately 131% to $18 million for the three months ended September 30, 2021, as compared to $7.8 million for the three months ended September 30, 2020. Our revenue increase in 2021 was primarily driven by an entitled land sale of $10.4 million Lennar, fee build revenue of $2.8 million from Lennar, and $28 million from the sale of developed lots. Our overall gross margin was 40% for the three months ended September 30, 2021 compared to 8% for the three months ended September 30, 2020. The increase was primarily driven by gross profit margin on land sales of 57% and lot sales of 36%. Our operating expenses increased by 127% to $3.3 million for the three months ended September 30, 2021, as compared to $1.5 million for the three months ended September 30, 2020. This anticipated increase in total operating expenses is primarily attributable to the continued investment in public company infrastructure and personnel to support our future growth plans. For the three months ended September 30, 2021 and 2020, we had net income of $3.7 million and a net loss of $0.4 million, respectively. The improvement in net income was primarily attributable to an increase in revenue and improved gross margins in 2021. For the three months ended September 30, 2021 and 2020, we had basic earnings per share of $0.21 compared to a loss per share of $0.10 for 2020. Net cash used in operating activities for the nine months ended September 30, 2021 was $79.6 million compared to $9.9 million for the nine months ended September 30, 2020. The primary use of cash was for the acquisition and development of real estate assets of $82.8 million in 2021 and $8.3 million for the same period in 2020. Our real estate assets have increased to $105.5 million as of September 30, 2021 from $20.4 million as of December 31, 2020. We are extremely pleased to report continuously strong earnings and have again achieved profitability during the third quarter of 2021. If the real estate market conditions continue to be characterized by severe shortage of residential inventory, low interest rates and urban flight, we anticipate operating profitably on an annual basis for the foreseeable future. As Chief Executive Officer, I’m thrilled with our continued momentum. Our distinct development approach of serving multiple segments of the home-buying market and providing developed lot inventory for national public builders continues to provide us with a consistent and diverse stream of revenue. This further validates our business strategy, which is rooted in disciplined analysis and efficient operations that have propelled the Company forward. To further our business objectives, I am pleased to welcome Lance Brown as Chief Financial Officer to the Harbor team. His experience as a highly successful financial executive of a publicly traded company in our industry provides both, the expertise and financial leadership to support Harbor’s rapid expansion into the nation’s fastest growing metro regions.
Lance Brown: Thank you, Sterling, for the introduction and warm welcome. I am thrilled to join the Harbor team. I believe my prior experience working with the public emerging growth company will allow me to partner with the leadership team to continue building and enhancing the public company infrastructure. It’s a good time to be in the homebuilding industry. Demand is high, the job market is strong and interest rates are low. It is clear we have a skilled and dedicated team that can drive positive results. I am excited to see the year-over-year growth in revenue and net income in the quarter. I see significant upside to this business and look forward to being an effective steward of the Company assets, assisting in optimizing our capital structure and supporting the business with growth initiatives.
Sterling Griffin: Thank you, Lance. As you mentioned, the market continues to be defined by strong housing demand and significant shortage of inventory in nearly every major metropolitan market in the U.S. The lack of developed lot inventory nationally has provided us a significant opportunity to acquire an offer loss to the nation’s largest builders at excellent margins. We will continue to look for land acquisition opportunities in our current markets and in new metro regions for the purpose of monetizing those assets early in the development cycle. Over the past year, we have seen a substantial push in the build to rent or BTR investment model. This strategy has been widely endorsed by institutional investment entities and is defined as the construction of new single family homes for rental purposes. As we follow this new category in our markets, we are encouraged as it takes potential competition of new construction products off the market, while further exacerbating the shortage of new homes for purchase. The effects of COVID-19 continue to buoy the housing industry. Harbor Custom Development has benefited directly from urban flight to the suburbs where we acquire the majority of our real estate assets. We anticipate this trend continuing. Driven by COVID-19, the telework movement has exploded. As a result, there’s a growing need for new single family housing in the suburbs that can offer dedicated office, fitness and recreational space. We are well-positioned to capitalize on the opportunities presented to us in the market today and look forward to finishing 2021 with strong results. I would now like to turn the call over to Jeff Habersetzer, our Chief Operating Officer, to discuss organizational development.
Jeff Habersetzer: Thank you, Sterling. Harbor has experienced a significant increase in the number of projects in production, as evidenced by our many real estate acquisitions in 2021. Consequently, management has responded accordingly to improve organizational capabilities and depth through key new hires. As we welcome Lance Brown to the team, we have also added several other roles, including Corporate Counsel, Director of Architecture, Director of Horizontal Development, and additional operational support. These additions to our experienced team give us the capacity and breadth to execute our increased production schedules. Additionally, given the current competitive work environment, we are proud to announce that we have experienced minimal turnover at the corporate level in our operations department. This speaks volumes to our company culture and thriving work environment. Operationally, we are well-positioned to execute on our increased production schedule and growth outlook. I’ll now hand things back to Sterling to discuss guidance.
Sterling Griffin: Thank you, Jeff. We provided guidance that we expected to generate approximately $80 million in revenues in 2021. Today, based on our contracted properties, potential home sales and fee build revenue, we anticipate that number to be between $70 million and $80 million at year-end. We have several properties contracted for sale prior to year-end and others currently in the early contract stage for the same period, which will ultimately determine our 2021 revenues. We do anticipate our fourth quarter revenues and net income to exceed our third quarter results. Guidance for 2022 remains the same at approximately $160 million. We will now switch to the question-and-answer period. Prior to the call, inquiries were submitted to IR@harborcustomdev.com and we’ve prepared statements to the following questions. Thank you to everyone who submitted questions.
A - Sterling Griffin: And our answer is, we are very pleased with our current relationship with Lennar and will continue to discuss potential projects with them. In addition, we also speak to several national and regional builders on a regular basis and anticipate announcing further entitled land sales prior to year-end. The second question was, why does Harbor offer multiple price points and product types, instead of just focusing on one demographic? Our answer is, we believe being product agnostic provides us great flexibility and a diverse product line in our target markets. We are equipped to build to the surrounding communities needs from 1 plus million luxury homes to first time homebuyer townhomes and condominiums. This flexible business model provides us a competitive advantage and clearly differentiates us from our peers. The third question was, how has the supply chain environment impacted HCDI? And, what are your thoughts looking forward? And our answer is, in 2021, we were not severely impacted by supply chain disruptions, primarily because of our significant sales of entitled land and developed lots. All builders including us feel the disruption to some degree. However, our exposure is mitigated because we are not focused on one product category.
Sterling Griffin: Thank you, everybody, for participating on today’s call. We look forward to providing additional updates soon. If you would like to learn more about Harbor Custom Development, I’ll be presenting at the Q4 Virtual Investor Summit tomorrow at 10:15 a.m. Pacific Time. You can find more information about the presentation on our Investor Relations page under the tab Events, our website harborcustomhomes.com. I hope you can join us tomorrow. If anyone has further questions, we can be reached at 866-744-0974 or at IR@harborcustomdev.com. Thank you everyone for joining us today. We appreciate your time.
Operator: This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.
