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AV Homes, Inc. (NASDAQ:AVHI)

Q3 2013 Earnings Conference Call

November 7, 2013 8:30 am ET

Executives

Roger Cregg - President, Chief Executive Officer

Mike Burnett - Chief Financial Officer, Executive Vice President

Analysts

Harsha Gowda - BlueShore

Operator

Good day, ladies and gentlemen. And welcome to the AV Homes’ Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I’d now like to turn the call over to Mike Burnett. You may begin.

Mike Burnett

Thank you, Michelle. Good morning and welcome to the AV Homes third quarter 2013 earnings call. On the call today, we will discuss the operational and financial results for the third quarter ended September 30, 2013. In addition to the press release and data sheets that we filed yesterday, we have also posted supplemental slides to the Investor Relations section of our website at avhomesinc.com, highlighting trends in the business to assist you in your analysis of the results.

With me on the call today is Roger Cregg, President and Chief Executive Officer of AV Homes.

But, we before begin, let me remind you that this conference call and the webcast contains forward-looking statements within the meaning of the U.S. federal securities laws, which may include information regarding the plans, intentions, expectations, future financial performance or future operating performance of AV Homes. Forward-looking statements are based on the expectations, estimates, or projections of management as of the date of this news release. Although, our management believes these expectations, estimates or projections are to be reasonable as of the date of this call. 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 reports on Form 10-Q for the periods ended March 31 and June 30, 2013 and in our other filings with the Securities and Exchange Commissions, which are available on www.sec.gov.

AV Homes disclaims any intention or obligation to update or other revise any forward-looking statements to reflect subsequent events and circumstances, except to the extent required by applicable law.

With that, I will now turn the call over to Roger for a discussion of the business results.

Robert Cregg

Thank you, Mike. Good morning, everyone and welcome to the AV Homes third quarter conference call and thank you for joining us today.

I would like to take a moment to introduce Mike Burnett, the company’s new Chief Financial Officer, who is joining me on this call this morning and who joined the company as of mid-October. Welcome Mike.

I would also like to take the opportunity to thank Tina Johnston for her significant contributions to AV Homes over the past several years. Tina will be leaving the organization for another opportunity and we wish her great success on her new endeavor.

Now on to the quarter. We are very pleased with our progress and results for the third quarter. Our results reflect stronger momentum including improved orders, closings, revenues, margins, overhead leverage and backlog. We are making progress on the key initiatives that will improve our operational efficiencies and effectiveness as we continue to set our sights on our return to profitability.

As we reported for the third quarter, we achieved revenue growth of 83% from homes delivered. Increased home units delivered by 79%, closing on 147 homes in the quarter compared to 82 homes in the prior year quarter. And increased our backlog by 17% compared to the prior year quarter with 233 units or approximately $58 million in backlog.

During the third quarter, we grew our net new orders by 5% year-over-year, net new orders in our active adult communities increased 103% versus the prior year quarter mainly attributable to the increasing interest by active adult buyers despite the choppy and uncertain market conditions during the quarter and our added active adult community at Vitalia at Tradition in Port St. Lucie, Florida.

In addition, our primary residential orders decreased by 58% 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. And now just beginning to fill our land pipeline, by developing our previously owned land, in addition to acquiring new land positions.

As I have mentioned on previous calls, we are experiencing good success at Vitalia at Tradition in Port St. Lucie, Florida. We reintroduced the community in mid-February and has now posted 62 net sales year-to-date at the end of September with 23 net sales in the third quarter.

At our Solivita active adult community, we had 30 net sales in the third quarter increasing over 50% compared to the order levels in the third quarter of 2012. In the Phoenix market, our active adult community CantaMia at Australia sold 88 homes year-to-date compared with selling a total of 62 homes all of last year.

In addition, we sold 26 homes in the third quarter just above the pace achieved in the second quarter of 2013. These results are still far from what we need from communities of this size but we are encouraged by the continued improvement in both traffic and orders.

Gross margins continue to improve posting an increase of 790 basis points in the third quarter versus the same period last year, with our focus on selectively raising prices and reducing house costs, we are realizing margin improvements on certain floor plans 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 our operations. We continued to make progress leveraging our homebuilding SG&A expense ratio and on a conversion basis, we improved from 22% of homebuilding revenues from homes delivered in the third quarter of 2012 to 9% in the third quarter of 2013.

We will continue to improve our leverage as we execute our strategy to grow the revenue base through additional communities and home closings. As we reported with TPG, $135 million investment into AV Homes under the agreement TPG was issued approximately 700,000 shares with an initial liquidation value of $97.5 million of newly created series A contingent convertible cumulative redeemable preferred stock.

On September 18th, we held a special meeting of stockholders, at which our stockholders approved to the right to convert this series A preferred stock and the shares of common stock and approved TPGs preemptive rights to participate in future issuances of our common stock or securities convertible into or exercisable for our common stock. Following the meeting, the common stock issuable under conversion of the preferred stock was issued on September 19th and the preferred stock was cancelled.

As we discussed on the last several calls, the transaction provided us with a capital resources necessary to execute our strategy in the expansion of our operations within our own current markets in Arizona and Florida and into new high potential market such as our announced entry into the Raleigh, Charlotte market. At present time, we are filling our pipeline with potential land acquisitions planning to develop additional own properties and engage in diligence on a number of properties that will help accelerate our sales volumes and our return to profitability.

We had recently announced a number of community finished in raw land purchases along with the approving the development of our already owned land totaling approximately 1,300 lots.

We remain optimistic about the future of the housing industry recovery although we are prepared for the dynamic nature of the environment we are operating in today. We continue to pursue opportunities to grow our business and improve our profitability along with remaining flexible and response to the changing market environment.

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

Mike Burnett

Great. Thank you, Roger.

We continue to experience improved market conditions and I’m pleased to share with you our financial results for the period ended September 30th, which reflect solid improvement on a year-over-year basis.

For the quarter ended September 30, 2013, our revenues increased 22% to $35 million compared to $28.7 million during the same period in 2012. This increase was due to a significant rise in home closings partially offset by a year-over-year decrease in our land sale activities. We reduced our net loss to stockholders to $1.9 million for the quarter ended September 30, 2013, from $11.6 million loss for the same quarter in the prior year.

For purposes of calculating the per share loss this quarter, we were required to reduce the income used in the calculation by $11.9 million as a result of the conversion of the preferred stock into common that occurred in September of this year. As Roger just mentioned during his remarks, TPG made the $135 million equity investment in AV Homes in June of this year.

In order to facilitate a timely closing of that transaction, we structure the deal with the combination of common stock and preferred stock. Subsequent to the closing, shareholders then voted for the conversion of the preferred shares into common.

The economics of this transaction after the conversion of the preferred was that we issued $135 million of common stock at a price of $14.65 per share which was a 9.6% premium to the trialing 30-day average. However, for accounting purposes as contained in ASC 470-20, the convertible preferred stock contain a contingent feature that required as to quantify the intrinsic value of that feature and account for that amount as a deemed dividend. This is a non-cash item and has no net impact on total stockholder’s equity or book value. We can think of it essentially as a reclassification of amounts between retained earnings and paid in capital, all within the equity section of the balance sheet.

It also does not directly impact the income statement. It is only used for purposes of calculating earnings per share so it does increase our loss in the numerator of the loss per share calculation and accounts for $0.74 of the $0.86 per share loss in the quarter. With that in mind hopefully you can see the significant improvement in the quarter per share results compared to the $0.92 loss per share in the third quarter of 2012.

Moving on to a discussion of the operating results. In the third quarter of 2013, we closed 147 homes, generating $31.9 million of revenue. This represents an 83% increase in revenue and a 79% increase in unit volume over the same period a year ago. Our average price per unit from homes closed during the third quarter of 2013 rose to $217,000, a 2% increase from the third quarter of 2012. During the quarter, the average closing price in our active adult segment was $227,000 per unit which is consistent with the closing price in the third quarter last year.

In our primary residential segment, the average closing price per unit rose to $206,000 from $202,000 in the third quarter of 2012. This increase reflects a change in the mix of homes closed as well as our ability to raise prices over the past year in this business segment.

Our sales, net of cancellations during the third quarter were up 5% from 99 units in 2012 to a 104 units in the current year. In our active adult segment, sales increased 103% year-over-year, while our primary residential segment saw a 58% decrease in sales. The increase in sales on our active adult segment reflects improved by our confidence from this market demographic. The decrease on our sales of our primary residential segment was driven by the decrease in the number of communities that we’re actively selling.

Homebuilding gross margins excluding impairments but including commission expense for the quarter ended September 30, 2013, improved to 15% from 7% in the quarter in the year earlier quarter. The year-over-year increase in our gross margin is a result of the change in mix of homes closed coupled with our ability to raise sales prices throughout the year while building efficiencies into our building process.

For the third quarter of 2013, we reported $700,000 in revenue from the sale of commercial, industrial and other land, which generated $600,000 of operating income compared to $8.7 million in revenue and $400,000 of operating income during the third 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 September 30, 2013, our corporate general and administrative expenses were $3.9 million which is fairly consistent with the $3.6 million reported in the third quarter of 2012. We did have two non-recurring items in the quarter that we noted in the press release. The first related to a development property that we own in Florida that had been previously classified as an asset held for sale.

During the third quarter of this year, we’ve made a decision to develop that land and begun construction on homes in 2014. Accordingly, we adjusted the value to reflect the fair market value of the land and reclassified it to assets held and used. This adjustment resulted in $900,000 benefit to the income statement.

Secondly, we corrected the amount of interest that was capitalized in the first half of this year to reflect the proper amount on a year-to-date basis. Of the $3.3 million of capitalized interest in the third quarter $1.6 million of that should have been recorded in the first two quarters of the year. We view these items to be non-recurring in evaluating our results for the quarter.

Turning to a discussion of the year-to-date results, we reported a net loss to common stockholders of $11.3 million for the nine months ended September 30, 2013, on $89.7 million of revenue as compared to a net loss to common stockholders of $31.4 million on $74.3 million of revenue for the same period last year.

For EPS purposes, again, we have to include the $11.9 million deemed dividend in 2013. So the year-to-date loss per share of $1.67 includes $0.85 associated with the deemed dividend compared to a loss to-date of $2.50 in 2012.

For the nine months ended September 30, 2013, we closed 310 homes generating $71.8 million of revenue, a 52% increase in our closings and 58% increase in revenue over the same period in 2012.

Our average closing price per unit from homes closed in the nine months ended September 30th, of this year was $232,000, a 4% increase from the $223,000 average closing price in the same period of last year.

For the first nine months of 2013, we generated 358 net sales, a 17% increase over the nine months ended September 30th of last year. This increase in sales also contributed to 17% increase in our backlog of homes sold but not yet delivered. At September 30, 2013, our backlog was 233 units, 167 in active adult and 67 – I’m sorry, 66 in primary. With an aggregate contract value of $58.2 million compared to 200 units with a value of $48.5 million at September 30 of 2012.

For the nine months ended September 30 of 2013, our gross margins was 16%, with 16% margins in our active adult segment and 15% margins in our primary homebuilding segment. This represents a 700 basis point year-over-year increase in our gross margin and as a result of the change in mix of homes closed along with our ability to raise sales prices throughout the past year while building efficiencies into the building process.

Lastly, turning to the balance sheet, as of September 30 of 2013, we had cash and cash equivalents of $176.2 million compared to $79.8 million at December 31 of 2012. The increase in cash primarily attributable to the TPG investment in our common stock partially offset by investments in land and other inventory which increased to $204 million from $171 million at the end of the year 2012 due to additional investments in land and lots primarily in Arizona.

Outstanding debt remained unchanged at $105 million giving us a debt to total capitalization rate of 27%. So as you can clearly see, we are well-positioned from a liquidity standpoint to continue to invest in and grow the business.

With that, I would like to turn the call back to over to the operator to open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Harsha Gowda of BlueShore. Your line is open.

Harsha Gowda - BlueShore

Good morning, gentlemen.

Roger Cregg

Good morning, Harsha.

Mike Burnett

Good morning.

Harsha Gowda - BlueShore

Hi, Roger. So a quick question for you, tell me if I’m interpreting the results correctly. First of all, congratulations on the great performance but it looks like the lack of – the big improvement in active adult sales especially versus primary residential, is that really due to I guess, being a little short on capacity versus the peaking interest rates or anything like that because the improvement in active adult that’s pretty big – very stupendous improvement. So am I interpreting that, right?

Roger Cregg

Yes. What we’ve seen Harsha is, certainly active adults starting to come back, so I’m very pleased with that. As I mentioned, our traffic patterns have been increasing and the order rates have increased.

On the flip side of that, the strategy was to basically just focus on active adults so therefore there wasn’t a lot of focus on the primary side. So the lack of capacity on that side it’s certainly on a year-to-year comparative basis has hurt us. And that’s where, we are also bolstering our efforts to add land, first doing develop lots and then we’ve also bought some raw lots as well or raw land to develop to kind of feel that balance ourselves to be able to play in both segments.

Harsha Gowda - BlueShore

Okay, great. So, I can interpret it as -- this improvement that we see in active adults could have occurred also in primary residential, if we were, if that capacity was available and now that’s being remedied by these recent acquisitions and the development of more communities in areas that you already own land. Is that right?

Roger Cregg

Yes. I mean pretty much last year in Florida, we had Bella Pointe which we’re basically sold out of now. And although we’re adding other water view down there in Florida as well a 527 lot community. That would be something to take the replacement of Bella Pointe, but it certainly wasn’t on a timely basis.

Again, the position of the company and the capital investment strategy is a little bit different now with the infusion of cash, gives us the opportunity to now really try to take that on. But yes, you’re absolutely correct. We did experience some slowdown as others did pretty well documented now in the industry with the interest rate backup and then some of the prices that have gone but overall it’s really driven by the lack of capacity as you mentioned.

Harsha Gowda - BlueShore

Oh, I think, it will -- probably it’s going to be a good problem next year as prices will go up, so I’m not complaining about it. So it sounds to me that active adult is back that huge jump, we were talking about earlier this year and last year about the lag, would you say that lag has now disappeared and now that active adult is back in force?

Roger Cregg

I would say not fully. No, I think there is still a lot of cautious purchasing by the home owners today. Certainly confidence is extremely important in this environment. And I would say not fully back but we’re seeing progress there. We’ve made some changes in the things that we do.

We certainly changed our product offering in same of the active adult communities that we have. So we’ve done a lot to try to market ourselves a little bit differently. We’re doing well here in the Phoenix market against our competition. We’ve got a very good value in the project that we have in CantaMia and we feel good about that.

We’ve changed our product offering that helped us with the cost side of it as well. But I think all of those things have helped a little bit, but I would not say that the active adult has seen a huge resurgence at this point. Moderately coming back but again confidence is important.

Harsha Gowda - BlueShore

That’s a great sign with a 100% growth that there is still a lot more to come. What’s your target debt to capitalization ratio?

Roger Cregg

We’re at a growth number now of 27%. I think I’m not uncomfortable with 40% quite frankly but we will have to see what the opportunities are as we move forward. So again we’re not really setting a parameter on that at this point. I think, as we move forward into probably 2015, it will be a lot more important to us. But at this point, we’re well-satisfied with where we are and there is still room to move up.

Harsha Gowda - BlueShore

Fantastic. And, lastly the decrease in sequential gross margin, is that due to the lack of land sales basically?

Roger Cregg

Yes, land sales, part of it, mixes always part of it. We get such a low base in the number of unit that we are closing. We’re still working off the backlog in that as well. So things that were being sold six, seven months ago, again are coming through the backlog but land is part of it. But, it’s also mix going on in the business as well.

Harsha Gowda - BlueShore

Okay, fantastic. And let me just say, I think what you guys are doing is amazing and I love to see these acquisitions. So keep up the great job and we look forward to a more and more improvement. Thank you very much.

Roger Cregg

Thanks Harsha.

Operator

(Operator Instructions) I’m showing no further questions at this time. I’d like to turn the call back over to Roger Cregg, CEO.

Roger Cregg

Once again, thank you for joining us on the call this morning. We look forward to updating you on our progress in the fourth quarter conference call. Have a great day everybody. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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