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AV Homes Inc. (NASDAQ:AVHI)

Q2 2013 Earnings Call

August 8, 2013 8:30 AM ET

Executives

Tina Johnston – SVP, Principal Financial Officer and Principal Accounting Officer

Roger Cregg – President and CEO

Analysts

Harsha Gowda – BlueShore

Alex Barron – Housing Research

Operator

Good day, ladies and gentlemen. Welcome to the AV Homes’ Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference is being recorded.

Now, I’ll turn the conference call over to your host Tina Johnston, Senior Vice President, Principal Financial Officer. Please begin.

Tina Johnston

Good morning everyone and thank you for joining us today. With me this morning is Roger Cregg, Chief Executive Officer of AV Homes. As a supplement to today’s call, the earnings press release filed today we have some slides posted in the Investor Relations section of our website, although we will not be reviewing these materials in detail this morning. We encourage you to reference these slides to gain deeper understanding of the trends we are seeing in our business.

Before I turn the call over to Roger, I would like to remind everyone that this conference call and the webcast contain forward-looking statements within the meaning of the U.S. federal securities laws. Which statements may include information regarding the plans, intentions, expectations, future financial performance or future operating performance of AV Homes Inc. Forward-looking statements are based on the expectations, estimates, or projections of management as of the date of this news release, the conference call and the webcast. Although, our management believes these expectations, estimates or projections to be reasonable as of the date of this conference call and webcast. Forward-looking statements are inherently subject to significant business risks, economic and competitive uncertainties or other contingencies which could cause our actual results or performance to differ materially from what maybe expressed or implied in the forward-looking statements.

Important factors that could cause our actual results or performance to differ materially from our forward-looking statements include those set forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2012, our quarterly report on Form 10-Q for the periods ended March 31, 2013 and June 30, 2013 and in our other filings with the Securities and Exchange Commissions, which filings are available on www.sec.gov. AV Homes disclaims any intention or obligation to update or revise any forward-looking statements to reflect subsequent events and circumstances, except to the extent required by applicable laws.

At this time I’ll turn the call over to Roger.

Roger Cregg

Thank you, Tina. Good morning everyone. And welcome to AV Homes’ second quarter conference call. I’m pleased to report again this quarter that we are continuing to see solid improvement in almost all aspects of our business. We are making measurable progress in many key initiatives that will improve our operational effectiveness as we continue to set our sites on a return to profitability.

During the second quarter, we grew our orders by 18% year-over-year. Closings were up 39% and units and backlog grew 51% over the same period. Orders in our active adult communities increased 114% year-over-year mainly attributable to the improved market conditions and our added active adult community at Vitalia at Tradition in Port St. Lucie, Florida. In addition, our primary residential orders decreased by 51% which is mainly attributed to the reduction in our community count as we sold out of a number of communities in the Florida and Arizona markets. These results are in par representative of the continued recovery in the housing market.

As I mentioned in the first quarter call, we’re experiencing good success of Vitalia Tradition in Port St. Lucie, Florida. We reintroduced the community in mid-February and it has now posted 39 net sales year-to-date at the end of June with 21 net sales in the second quarter. At our Solivita active adult community we have 44 net sales in the second quarter increasing 51% over the same levels in the first quarter of 2013. All indications are that the South Florida market is continuing to strengthen and we believe we are well positioned to capitalize on this trend.

Near Orlando, Bellalago our largest family oriented master planned community serving the move-up market which we opened in mid-April, sold 13 homes in the second quarter. The amenities of this lifestyle community are in place and we have a large supply of developed lots. We are experiencing good product acceptance and strong margin opportunities at Bellalago which serves the higher-priced move-up customer. In the Phoenix market, our active adult community, CantaMia at Australia sold 62 homes year-to-date with last year selling a total of 63 homes for the full year. In addition, we sold 25 homes here in the second quarter.

Gross margins continue to improve posting an increase of over 700 basis points in the second quarter versus a same period of last. With our focus on selectively raising prices and reducing house cost to structural and design changes future reductions and aggressively bidding, we are realizing some significant margin improvement on certain core plants and house designs. We are encouraged with the results of these activities and we believe we have opportunities to achieve additional cost savings in other areas of the operations.

As reported on June 19, AV Homes and TPG a private global and investment firm, reached an agreement by which TPG would make a $135 million investment into AV Homes. Under the agreement, TPG was issued approximately 2.6 million shares or approximately $37.5 million of common stock representing approximately 19.9% of the company’s outstanding common stock. In addition, TPG received approximately 700,000 shares with an initial liquidation value of $97.5 million of newly created Series A Contingent Convertible Cumulative Redeemable Preferred Stock. TPG’s ownership of the company will be approximately 42% on an as-converted basis.

As I discussed on the call announcing the transactions this opportunity provides us with the capital resources necessary to expand our operations within our current markets in Arizona and Florida and into new high potential markets within the Sunbelt. At the present time, we are filling our pipeline with potential acquisitions planning to develop additional owned properties and engaged in diligence on a number of properties that will help accelerate our sales volume and our return to profitability. The $135 million capital investment by TPG not only creates a strong financial foundation for AV Homes but also provides us with greater flexibility to manage and leverage our capital resources. With this transaction, our liquidity increased to nearly $200 million. In addition, our balance sheet will delever from approximately 40% debt to total capitalization a 27% on an as-converted basis.

Here at AV Homes, we’re excited about the opportunity to grow the business and response to the changing and improving housing market environment and we look forward to improving the health of the company in the quarters and years ahead.

At this time, I like to turn the call back over to Tina Johnston, who will discuss our financial results for the second quarter in more detail. Tina?

Tina Johnston

Thank you, Roger. It’s always enjoyable to share good news. On this quarter we are happy to discuss with you encouraging results and positive year-over-year trends which reflect continued market condition improvement and operational improvements we are driving for our business.

For the quarter ended June30, 2013 our revenues increased to $29.6 million compared to $19 million during the same period in 2012. This increase was due to a significant increase in home closings and an increase in our land sale activities. We reduced our loss from $11.3 million or $0.91 per diluted share for the period ended June 30, 2012 to $4.7 million or $0.36 per diluted share for the quarter ended June 30, 2013. The second quarter 2013 loss is a result of operating income of $1.9 million been insufficient to cover our fixed and other expenses such as corporate, general and administrative expenses and interest expense.

Year-to-date, we are reporting a net loss of $9.4 million or $0.74 per share on $64.7 million of revenues as compared to a net loss of $19.8 million or $1.58 per share on $45.7 million of revenues for the same period one year ago. In the second quarter of 2013, we closed 82 homes generating $20.1 million of revenue a 50% increase in revenue and a 39% increase in unit volume over same period a year ago. Our average price per unit from homes closed during the second quarter of 2013 rose to $245,000 per unit a 7% increase from the second quarter of 2012.

During the quarter, the average closing price in our active adult segment was $247,000 per unit compared to $244,000 per unit in the second quarter of 2012. In our primary residential segment, the average closing price per unit rose to $245,000 from $205,000 in the second quarter of 2012. Both of these increases reflect the change in mix of homes closed and also our ability to raise prices during the year and we’re working to offset cost increases from our suppliers and vendors.

For the six month ended June 30, 2013 we closed 163 homes generating $40.3 million of revenue a 34% increase in closings and a 43% increase in revenue over the same period in 2012. Our average closing price per unit from the homes closed in the six months ended June 30, 2013 was $247,000 a 7% increase from the $230,000 average closing price in the same period 2012.

Our sales net of cancellations during the second quarter were up 18% from 101 units in 2012 to 119 units in 2013. We are reporting 254 net sales for the first six months of 2013 a 23% increase over the six months ended June 30, 2012. This increase in sales contributed to a 51% increase in our backlog of homes sold but not yet delivered. At June 30, 2013 our backlog was 276 units, 164 active adults and 112 primary with an aggregate contract amount of $63.2 million compared to 183 units with a value of $41.3 million at June 30, 2012.

Our home building gross margins which exclude impairments and include commission expense for the quarter ended June 30, 2013, was 17% compared to 10% in the year earlier quarter. For the six months ended June30, 2013 our gross margins were 16%, 14% from our active adults segment and 18% from our primary home building segment. The year-over-year increases in our gross margins are a result of our ability to raise sale prices throughout the past year coupled with a change in mix of homes closed and the implementation of strategies to build efficiencies in dry operations.

During the second quarter of 2013 we are reporting $6.6 million in revenue from the sale of commercial, industrial and other lands, which generated $2.2 million of net income compared to $3 million in revenue and $1.6 million in net income during the second quarter of 2012. Although our portfolio of assets includes land we hold for sale, these land sales are not core to our business and are unpredictable in terms of timing and amount. For the quarter ended June 30, 2013 our corporate, general and administrative expenses were $4.3 million fairly consistent with the $3.7 million reported in the first quarter of 2013. During the second quarter, we reported one-time expenses of just under $700,000 related to abandon public capital market transactions.

As of June 30, 2013 we have cash and cash equivalents of $196.4 million compared to $79.8 million at December 31, 2012. The increase in cash is primarily attributable to the TPG investment in our common and preferred stock offset in part by losses from our home building operations, investments in new and existing operations and our fixed cost including interest payments assuming that no significant adverse changes in our business occurred we anticipate the aggregate cash on hand, cash flow generated through home building and related operations and sales of commercial, industrial and other lands will provide sufficient liquidity to fund our ongoing business opportunity – operations.

At this time I’d like to ask Tyron to begin to assemble the question and answer queue. Tyron?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Harsha Gowda of BlueShore. Your line is open.

Harsha Gowda – BlueShore

Good morning.

Roger Cregg

Good morning, Harsha.

Harsha Gowda – BlueShore

Hi. So, I notice that the cancellation rate is slightly improving, are you seeing – are you still seeing a lot of difficulty in financing is that still being – is it a big issue still?

Roger Cregg

I would say it’s not a big issue, again we’re not doing a lot of entry level product. So, that’s where I think more of the stress is coming today.

Harsha Gowda – BlueShore

Okay.

Roger Cregg

Some of the cancellations actually in some of our markets specifically in Florida, we’re actually being proactive to try to continue to adjust those and are moving fast enough in the backlog. And that gives us an opportunity actually we sell the house for actually more. So, we’re seeing some improvement in that and sometimes we’re in between 300 and 600 basis point improvement for you able to resell the home today. So, it’s almost back to where it was in 2004 and 2005 where if you had a cancellation actually you could sell the house for more than you had sold it before.

Harsha Gowda – BlueShore

Another question in light of that. Considering how much cash is on the books and how low the leverage levels are. Are you guys thinking about setting up if possible a mortgage subsidiary or something like that to facilitate more closings and maybe get some of that upside.

Roger Cregg

I would say not at this time, just given the size of the business quite frankly with the support of mortgage operation. Today, there is lot more risk in the regulatory area on that side of it as well. So, certainly not something I think we’ll get into in the short-term.

Harsha Gowda – BlueShore

Could you give a rough idea of how many homes you have to be selling, think about doing something like that on an annual basis?

Roger Cregg

At this point, hadn’t really to think about trying to branch up and see it around mortgage.

Harsha Gowda – BlueShore

Okay.

Roger Cregg

Right now we’ve got a couple of suppliers that we’re working with mortgage companies in both markets at Florida and Arizona that we’re almost treating that as that we had their own mortgage company with folks in our branches.

Harsha Gowda – BlueShore

Okay.

Roger Cregg

So, it’s working out pretty well from our relationship standpoint today.

Harsha Gowda – BlueShore

Okay. Again, I notice that there was some acquisitions of land and I guess developments, are you just beginning the process, do you see a real pickup in the near term?

Roger Cregg

Well we got as I mentioned the pipeline we’re working on so certainly we have money, lot more people knocking your door. So, since the transaction we’ve had flurry of activity to begin to expand our view on projects. So, yes we’re continuing to expand that in – well into the future.

Harsha Gowda – BlueShore

Okay, great. And that was my last question. And thank you for putting out that presentation, that extra information is great. Thank you.

Roger Cregg

Thanks, Harsha.

Operator

Thank you. (Operator Instructions) Next question is from Alex Barron of Housing Research. Your line is open.

Alex Barron – Housing Research

Good morning.

Roger Cregg

Hello.

Alex Barron – Housing Research

I guess, I was – you mentioned something about the community count being down being part of the unit for the orders. So, can you give us a breakdown of what that was for the primary and active adult this quarter versus last year?

Roger Cregg

Yeah, we – I think we did that in the prepared script and actually the orders were up, the split was different when I mentioned that. We’re actually down about 50%, 51% in the primary because we had a number of communities runoff especially here in Phoenix. And then we’re up about a 114% in the active adult. So net we’re actually up but masking the increase in the active adult was drop off in the primary and that was basically a function of the capital that the company had over the last two years being capital constrained and not expanding significantly into the primary business area. So, that was the driver behind those.

Alex Barron – Housing Research

Right. But what was the community count from the primary side this quarter versus last year?

Roger Cregg

Yeah. We have been giving community counts, Alex. Again, they’re so small I mean if you look at the website you can see it but we had probably two or three of them fall off in Phoenix. And we added one or two in Florida at this point.

Alex Barron – Housing Research

Okay. And I guess I notice the cancellation rate in primary was 44%, you think some of that was related to the interest rate increase that we saw at the end of the quarter?

Roger Cregg

No, not really. Again, we haven’t – again we’re not large enough I guess to see a very big impact from that. We got some seasonal movement in there on the active adult side but I would say more of it is driven because we created the cancellations by trying to move people out of the backlog so that quite frankly if they weren’t meeting the criteria, the pace in getting results up to get the house closed we would force the cancellation. So, some of those were directly driven by us. And again, as I mentioned we could get 300 to 600 basis points on a resale, so we capitalize on that and again this environment is a lot different than it had been in the last four, five years especially in the Florida market it gives us an opportunity to recapture more margin on the resale.

Alex Barron – Housing Research

Okay. And in terms of I guess expectations for a community openings, what do you guys have in the pipeline for the next remainder of the year and then next year?

Roger Cregg

Well, we’ve not given any accounts on that yet we’re right in the process as I mentioned looking at – building out our pipeline, we’re looking at a number of communities already. We’ve actually got contracts on a number of them but we’re still working that side of it, it’s been just over 40 days or so since we’ve had the capital from TPG. So, we’re being deliberate about how we go about it and right at this point we’re not giving an projection on those. But, we are working on it as I mentioned diligently.

Alex Barron – Housing Research

Got it. Okay. Thanks again.

Roger Cregg

Thanks, Alex.

Operator

Thank you. We have a follow-up from Harsha Gowda of BlueShore. Your line is open.

Harsha Gowda – BlueShore

Hi, Roger. So, I notice that there is a lot of activity in points on – I was just reading how once your college is looking to open a campus and I know the hospital is up in running. Do you see that increasing commercial, industrial sales going down in the next few quarters? And also let bring on some of the land that’s been unused or even I guess that’s not developable currently into the developable bucket?

Roger Cregg

Yeah, land is looking better and better all the time with the prospects of the highway coming in there. The commercial side is going to be hit less there is activity around that but it’s just a hit in this opportunity for us. I think the bigger opportunity is to continue to build out some of the property down there that we had (inaudible) and intended for sale. So, we’re working on a couple of new parcels down there. In the Bellalago area, yeah as we mentioned we opened up a couple of new parcels there as well for the primary business. So, we’re seeing a lot more activity there. We’re very pleased with the market. I think if you look at some of the market studies that they’ve been out there is going to be less and less developed land in that area and there is not a lot of land right now readily available to be opened in the next couple of years. So, I think we’re sitting with a very great opportunity there with a land that we had and be able to convert that. So, again we are working very hard in that area and that’s one of the areas that was constrained from a capital standpoint on investment and again with the opportunity here with the new financing we’re looking at building those out.

Harsha Gowda – BlueShore

Great, great. Thank you.

Operator

Thank you. We have a question from Rick (inaudible). Your line is open.

Unidentified Analyst

Hi, good morning, Roger. I was just curious this quarter, it looks like this is the first time we’ve really seen an acceleration in the active adult side of the business. I’m just wondering if you could give a little more color there and also how that in turn relates to your expectations for future community development. Thanks.

Roger Cregg

Yeah, thanks Rick. I think yeah we saw traffic has been better this year. Even through the summer in the warmer periods especially here in the Phoenix area we saw traffic and typically during this weather when you see people coming through they’re serious buyers. I think there is more confidence in the consumer on the active adult side certainly the first part of the year and the capital markets, the stock market performed well. I think are feeling – they’re feeling better about their investments. So that helps as well. More activity in housing so as we begin to see move-up buyers coming to the market in the existing like the active adult I think a little bit more if it is to try to get out there and buy. So, we’re very pleased with where we are certainly it’s 94 for backward it should be at this point. But progress every single month that we see is very important to us. So, we’re very pleased with what we’ve seen so far.

Unidentified Analyst

And then just a follow-up Roger. As that in any way shape or change your plans for sort of the mix of new developments in community openings going forward?

Roger Cregg

Well, we’re looking at both like I had mentioned before, we are going to have a business that does primary in active adults. Certainly, when you look at the overhead structure and ability to whether movements in the patterns of the cyclical nature of both of those give us a good foundations to continue to stay profitable and manage the business that effectively drives both sides of that. I think we’ve got couple of projects that we’re looking at for the active adult so we’re still very much pushing on that side of it. The primary business we’re concentrating on that right now to try to fill in the gaps where we fallen off where we had more closings in those communities to try to both to that backup. And we’ll see where the market goes from there but again we’re feeling very good about our positioning here and the strategy going forward but we’re going to be playing in both and we’re looking at both opportunities now in the active adult as well as the primary segment.

Unidentified Analyst

Okay, thanks. Nice quarter.

Roger Cregg

Thanks, Rick.

Operator

Thank you. I’m showing no further questions at this time. I like to turn the call over to Roger Cregg for any closing remarks.

Roger Cregg

I like to thank everybody for joining us for the second quarter. We look forward to speaking with you in the third quarter. And thank you for joining us this morning. Bye, now.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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