The New Home Company Inc. (NWHM) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to The New Home Company's First Quarter 2021 Results Conference Call. It's now my pleasure to introduce your host, Drew Mackintosh, with Mackintosh Investor Relations. Thank you. You may begin.
Drew Mackintosh: Good morning. Welcome to The New Home Company's 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 nwhm.com. Before the call begins, I would 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's 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. The company undertakes no duty to update these forward-looking statements that are made during the course of this call.
Lawrence Webb: Thanks, Drew 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 120% improvement in absorption pace. The 4.4 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 stay in our markets, as well as by excellent market positioning of our communities. Our sales pace could have been even higher for the quarter, where it not for our own strategic decision to meter sales in an effort to better manage our backlog, capture potential cost increases and raise prices. We ended the quarter with a backlog dollar value of 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 allows us to operate from a position of strength with our future sales efforts. According to a recent analysis from Freddie Mac, the US housing market is 3.8 million single family homes short of what is needed to meet the country's demand. This means that, based on the current run rate of 1.3 million single family housing starts, it would take over three years of new home construction just to reach equilibrium. The supply deficit this country faces is due to years of undergoing following the financial crisis combined with the emergence of millennials and other buyer demographics as 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 continue 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, a unique an innovative home builder 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, a young and vibrant population, steady job growth and rising income levels.
Leonard Miller: Thanks, Larry and good morning, 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. Buyers continue to have a sense of urgency when looking for a home due to the lack of available supply in both existing and new home markets. This urgency is creating an even wider gap between 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 homes, a red hot market like this can present its own challenges from an operational standpoint. The supply chain for building materials is being stretched in many markets, creating a lag between sales and starts. Suppliers are implementing price increases of their own in an effort to stay ahead of raw material costs. Trade labor is also getting more expensive and stretch them. These are all good problems to have and are indicative of an upwardly trending market that 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 their trade partners and have the experience to work through these issues.
John Stephens: Thank you, Leonard and good morning to everyone on the call. For the 2021 first quarter, we generated pre-tax income of $1 million, which included approximately $1 million of transaction costs incurred in connection with the acquisition of Epic Homes. In the prior year first quarter, we generated an $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.
Lawrence Webb: Thanks, John. The New Home Company continues to benefit from the 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 movement and other factors may impact our business in the short term, we believe they will not change the upward trajectory that our industry is 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 age 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 positioning, our favorable market positioning and the significant industry tailwind received today, we feel these goals are well within reach. I have often stated on these calls that the future is bright. Well, I really believe the future is now. Finally, I'd like to thank all of our team members for getting us where we are today. Thanks to you, our company has evolved into a much more diversified builder with wholly-owned operations in a number of markets and price points. We are in a much better position than any other time in our company's history and I am really appreciative of your efforts. That concludes our prepared remarks. And now we'd like to open it up for questions.
Operator: Our first question comes from line of Alan Ratner with Zelman & Associates. Please proceed with your question.
Alan Ratner: Hey, guys, good morning. Congrats on the strong quarter and glad to hear you're all doing well. So first question, I'd love to dig in a little bit more on the Epic acquisition in the quarter. Just curious why - first off, why Epic? I imagine you probably looked at a number of potential deals and chose Epic and why 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 to hear the thought process and why Epic was right fit. A - Lawrence Webb Alan, this is Larry. We've been considering expansion into other markets for the last couple of years. And we've taken our time, wanted to make sure that company was in a much more financially strong position and so first, first we wanted to reach lower leverage, we wanted to be having better sales, stronger backlog, all the things that we are at now. We looked at every market on the western from Denver West. And we chose Denver first because we felt that the market was strong, the demographics were good, all three of us, John, Leonard and I have a lot of experience with the Denver market. We have a lot of connections in the Denver marketplace, having all worked there. Epic, we chose after looking at a large number of builders primarily because of Chris Presley and her team, and the kind of homes they were building, her reputation within the industry and the results that they were getting 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 was 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 Denver. And so we think we have the best of all worlds. Financially, we're stronger. Denver's a great place to be. We got an A player and we still have the ability to buy and expand in our existing markets.
Leonard Miller: Yeah, I think, Larry, you covered most, most everything I say, right. It starts with the market fundamentals. But it's always all about betting on the operator and Chris has a wonderful reputation in Denver. Her brand really aligns well with The New Home Company and focuses on the customer quality and design, so that aligns very well. She focuses on her people. I think the other part of it is the size of the transaction fits very well for the company. She has three neighborhoods that are currently open that are performing well in well-known masterplans. She has the fourth scheduled to open here in the next 90 days. So that was attractive. And then the thought of that we weren't really going into a position where we would be taking development or entitlement risk. You know, we bought a company that had over $100 million of backlog community that was performing well, so and it was a creative transaction to the company. So it just aligned on all fronts for us.
Alan Ratner: Great. I appreciate both of your thoughts and insight on that. So it seems like a great deal at the right time, so congrats. Second question, 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've kind of caught up here so far through April. Was 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?
Leonard Miller: Yeah, it is good question. I would say that really, over the last six months, we've generally tried to do anything we could just to slow down sales for a lot of different reasons. But probably perfect equilibrium for us is to start four homes, sell four homes, and close four homes a month, something somewhere in that neighborhood. And we don't want to set our trade partners up to fail. At the end of the day it is how 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. And the market is just been so strong and I've never seen a market where really demand is so far out in front of supply. So, at the end of the day, we just basically grew in the first quarter, did everything that we could do and through that the positive trend is really our starts in April or 2x of what our sales are trending. So we're in a good position today where we feel we're in equilibrium so.
Alan Ratner: Leonard, just clarify that the 2x comment. Does that mean the start actually doubled or have your sales cut in half? I'm just trying to figure out what the numbers are in because obviously it's a little bit of a different implication.
Leonard Miller: Yeah, sales have backed off and that's intentional.
Alan Ratner: Got it.
Leonard Miller: So, 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 running for the last six, eight weeks of having less than 10 homes released and 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 starts have ramped up. So it's a combination of both.
John Stephens: Yeah, and Alan, I would just like to add really quick to that point that, obviously, our sales absorption pace for Q1 was 4.4 is how we calculate it and wouldn't expect to see that rate through the balance of year. Just like Leonard said, 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.
Alan Ratner: So with something in the, like, three range be more realistic, assuming demands stays strong as it is.
John Stephens: Yeah, I think that's a good kind of assumption, sort of based on where we're at and where the backlog is today.
Alan Ratner: Okay, perfect. All right, guys. Thanks a lot. Good luck.
Leonard Miller: You are welcome.
Operator: Our next question comes from Alex Barron with Housing Research Center. Please go ahead with a question.
Alex Barron: Hey, guys, good morning. Great job and good to see things are turning positive.
Lawrence Webb: Thank you.
Alex Barron: I wanted to ask about the acquisition in Denver and Colorado. First of all, is it in Denver or is it somewhere else? And second of all, on the ASP, it seems like I'm getting an ASP of over 900,000 in the backlog but the deliveries were in the low 700, so can you guide us towards what kind of ASP to use for orders and deliveries here for this year?
John Stephens: Are you talking about for just Denver or are you talking about the whole company?
Alex Barron: The whole company you just acquired Epic Homes.
Leonard Miller: Just Denver.
John Stephens: Yeah, well, the reason - good question, Alex. The reason why our delivery ASP was lower than what you see 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 products that we have out in Aurora called and I think the other one was at Anthem in Broomfield. So of the three communities open, two of them were sort of in the 800,000 to a $1 million price point. And when you add options, it may go up from there and then , I would say anywhere from, mid fours to 550 or so range. Then you add options, it can go up from there a little bit. And then we have one new community that we're planning to open in Q2, Alex, that's also on the higher end, sort of in the, I would say, the million-dollar price point. It's a really exclusive sort of neighborhood. That's 30 lots. That's a very nice infield location in Columbine, next to a reservoir. It's called Wild Plum. We're really excited about that opportunity.
Alex Barron: Okay, great. So I guess I'll take an average of those two. Now, in terms of purchase accounting impact, is that something that will affect margins for what a quarter or two or longer than that?
John Stephens: Yeah, I think it will have a more of an impact in the next couple quarters because what we did is we obviously 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's an adjustment for all the lots that we purchased based on the purchase price, but a little more of an impact the first couple quarters and then it kind of normalizes after that.
Alex Barron: Okay. And excluding that impact, it seems like your margins were in the high point or mid-21% range this quarter but the guidance would seem to imply that margins are going to be lower the rest of the year. I'm just trying to understand what's driving that?
John Stephens: Yeah, it's really a mix issue. A light revenue quarter for Q1 for us, 93 million, I think. As you move through the balance of the year, I think we're talking about 125 to 135 for Q2 and as you move through the year, sort of in that range. So we delivered more some higher priced homes out of our Sacramento division, that will be closing - that's 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 higher cost of capital and interest costs and the like that are capitalized to the inventory. 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'd 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 20 - mid 20% to 21% before insurance. 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 top line volume, as well as bottom line earnings, and we're really excited about that.
Alex Barron: Okay. And if I could ask my 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?
Leonard Miller: Sure, Alex. This is Leonard. Good morning. It is really market by market. What I would tell you is in our Southern California and Northern California divisions, while there's 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 has 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 that's going on there, we are seeing both development timelines and cycle times in house, in construction, both growing probably to the magnitude of four 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 at the Colorado acquisition so recent, but I say it's somewhere in between. They definitely are under pressure to deliver homes. So again, it's market by market.
Alex Barron: Okay, great. Thanks a lot, and best of luck for the year.
Leonard Miller: Thank you.
John Stephens: Thank you.
Operator: And with that, ladies and gentlemen, this concludes our question-and-answer session. Now, I'd like to turn the call back over to management for closing remarks.
Lawrence Webb: Thank you. It seems to me that if when we look back 12 months and see where The New Home Company was and then look forward 12 months to where we are today, we have made amazing progress on really every front. We're more diversified. Our margins are better. We're in a stronger financial position. The company is aligned. We're in a new market, in a new marketplace. And we are in a situation where we are in a clear undersupplied housing market and the tailwind for us is very strong. I feel very positively about our management team and the work that they've done. And I really believe that we are in a wonderful position and it's only going to get better. And with that, I thank you.
Operator: This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
