AV Homes Inc. (NASDAQ:AVHI)
Q2 2014 Earnings Conference Call
August 1, 2014 8:30 AM ET
Mike Burnett - EVP and CFO
Roger Cregg - President and CEO
Brendan Lynch - Sidoti
Jay McCanless - Sterne, Agee & Leach
Good day, ladies and gentleman, and welcome to the AV Homes Second Quarter 2013 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's Instructions). As a reminder this conference call is being recorded.
I would now like to turn the call over to Mr. Mike Burnett, Chief Financial Officer. Sir, you may begin.
Thank you, Candice. Good morning and welcome to the AV Homes second quarter 2014 earnings call. On the call today, we will discuss the operational and financial results for the second quarter ended June 30, 2014. Please note, that we issued a revision to the original press release last night, correcting a typographical error to the common stock and the balance sheet, and for a reclassification on the statement of cash flows related to the deferred financing costs. No other areas were impacted.
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 the web site, at avhomesinc.com, highlighting our operational trends to assist in your analysis of the results.
With me on the call today is Roger Cregg, President and Chief Executive Officer of AV Homes.
But, before we begin, let me remind you that this conference call and web cast contain forward-looking statements within the meaning of U.S. Federal Securities law, 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 this date and although management believes these expectations and projections 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 actual results or performance to differ materially from what may be 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 31st, 2013, and in our other filings with the Securities and Exchange Commission, which are available online at 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 law.
With that, I will now turn the call over to Roger for a discussion of the business results. Roger?
Thank you, Mike. Good morning everyone. Welcome and thank you for joining us on the call to review our second quarter results. It has been a busy quarter for us here at AV Homes, and an exciting first half as we closed out the month of June. We continue to improve our performance, and we are very pleased with the progress we are making, which is reflected in our results for the second quarter of 2014.
Mike will give us more specific details on the numbers, but here are some of the highlights; we had a solid second quarter, highlighted by an increase of 133% in homes delivered, 149% increase in net new orders, on an increase of 136% in units, 124% growth in homebuilding revenue, and narrowing the net loss by 50% in the second quarter of 2014 compared to the same period last year. We continue to selectively acquire and open new communities in support of our long term growth strategy, more than doubling our selling and closing communities compared to last year. Our focus on opening new communities will provide with approximately 30 selling communities, and 25 closing communities by year end, increasing from a total of eight selling and seven closing communities at year end 2013.
In addition, we ended the second quarter of 2014 with a strong financial position and adequate liquidity to support further growth opportunities, with the successfully completed issuance of $200 million five year 8.5% senior notes, and the addition of a $65 million secured revolving credit facility, both closing during the second quarter.
During the second quarter, we grew our net new orders by 149% year-over-year, on a unit increase of 136%. Net new orders in our active adult communities increased 47% versus the same quarter last year, mainly attributable to very good performance in our active adult communities, Solivita and Poinciana, Florida and Vitalia at Tradition in Port St. Lucie, Florida.
In addition our primary residential orders increased by 414%, which is mainly attributed to the increase in our community count, as we added new communities through the acquisition of Royal Oak Homes in the first quarter, in addition to newly acquired and newly developed owned communities in the second half of 2013.
Gross margins declined in the second quarter versus the same period last year, mainly as a result of the mix of homes closed in the current quarter versus last year. We had an increase in gross margins in our active adult segment, offset by a decrease in our primary segment versus the same period last year, mainly as a result of the closeout of communities last year, where we were able to increase pricing on the final lots in those communities, and the amortization of the write-up to fair value of the Royal Oak Homes inventory. We continue to focus on selectively raising prices and reducing house costs to realized margin improvements, where we have the opportunity to take them.
In the overhead expense area, we continue to gain leverage as a result of the increased revenues from quarter-to-quarter, with our homebuilding SG&A improving to 15% of homebuilding revenues from homes closed in the quarter, down from 22% in the prior year quarter. Additionally, our corporate overheads improved to 8% of homebuilding revenues from homes closed in the quarter, down from 21% in the prior year quarter. Although this is a significant improvement, driven by the increased revenue, we know we have more to do to maximize our efficiency in selling, building and managing to drive more leverage into the business.
Ratios are an important metric, but our key focus is on driving to profitability. We have more to do here to close the gap, but we are working hard across the line to profitability, and keenly aware of the difference between effort and results.
As I discussed on previous calls, we continue to work our land pipeline in all of our markets, with potential land acquisition opportunities, that will help accelerate our sales volumes and enhance our return to profitability. I am confident in our strategy, and remain optimistic that our business is positioned to benefit from our internal improvements, and the recovering market conditions.
At this time, I'd like to turn the call back over to Mike, who will discuss our financial results for the second quarter in more detail. Mike?
Thanks Roger. The result for the second quarter of 2014 clearly reflect the continuation of the growth and transformation of AV Homes. We are rapidly expanding the number of communities, from which we are both selling and closing homes. This is translating into strong year-over-year revenue increases, and improvements in our SG&A margins, as we control costs and leverage our existing cost structure, which ultimately reflects in our improving bottom line.
Looking at the second quarter 2014 results, our total revenues increased 75% to $51.4 million compared to $29.5 million during the same period in 2013. This increase was due to a rise in a number of home closings, and a 3.3% increase in the average price per home, which more than offset a $6 million decrease in our land sales activities.
We recorded a net loss of $2.3 million or $0.10 per share for the quarter ended June 30, 2014, as compared to a loss of $4.7 million or $0.36 per share in the second quarter of 2013.
Focusing on the homebuilding operating results, in the second quarter of 2014, we closed 191 homes, generating $48.4 million of revenue. This represents a 133% increase in unit volume and a 140% increase in revenue over the same period a year ago. The unit growth was strong in both segments of the business. The active adult business nearly tripled compared to the prior year, and the primary residential business increased 88%. The increase in the primary residential segment, was driven by a net seven new communities opening in the current year, bringing the total number of primary residential communities with closings, to 11. The increase in the active adult segment was driven by greater velocity of [indiscernible] at each of our three active adult communities, especially in Florida.
The average price per unit from homes closed during the second quarter of 2014, rose to $253,000, a 3.3% increase for the second quarter of 2013, with pricing in both segments improving by about 3%.
As we move to a discussion of margins I'd like to point out that we have reclassified commission expense to a homebuilding SG&A from homebuilding cost of operations in our reporting, to better conform with industry practices. Accordingly, our comments and margin reflect this change for both periods presented.
Homebuilding gross margin for the quarter ended June 30th of 2014 was 18.2%, compared to 21% in the prior year period. The year-over-year decline in gross margins is primarily due to the impact of the purchase accounting write-up on the Royal Oak inventory. As a part of the purchase price allocation, the homes that are under construction at the time of the acquisition, are written up to fair market value, and accordingly the resulting gross margin when the homes are sold is minimal. This negatively impacted our margins by approximately 230 basis points during the second quarter.
After taking this impact into account, the gross margins in the primary residential segment decreased by about 300 basis points, as a result of the closing out of two high margin Arizona communities in 2013, and opening new communities with lower initial markets.
On the active adult side, gross margins increased approximately 300 basis points, due to improved margins at our Arizona community, resulting from cost reductions, and also having a greater proportion of higher margin Florida homes that closed in 2014.
Homebuilding SG&A, as a percent of revenue was 15% in the second quarter of 2014, a 670 basis point improvement from the 21.7% in Q2 of the prior year. This improvement is a direct result of effectively managing our cost base, while significantly increasing revenues in the current period. As we mentioned on last quarter's call, we expect to be able to leverage this cost base and improve our margins, as our revenues grow both this year and into next.
For the quarter ended June 30th of 2014, our corporate general and administrative expenses improved to $3.9 million or 8% of homebuilding revenue, compared to $4.3 million or 21.3% in the second quarter of 2013. This again continues to demonstrate our ability to control costs and leverage our existing cost structure, while substantially growing the business.
Turning to net new orders, the number of new sales contracts signed that have cancellations during the second quarter, were up 136% to 281 units, from 119 units signed in the same period of 2013. The number of contracts signed in our primary residential segment, were up significantly, due to the increase in number of selling communities to 18 from eight a year ago, driven by the Royal Oak acquisition. The active adult sales growth also continued, with a 47% increase compared to the second quarter of last year, with growth at each of our existing communities.
On a value basis, net new orders increased 149% in the second quarter of 2014, to $72.5 million from $29.1 million in the prior period, with active adult increasing 70% to $34.8 million and primary residential generating more than a four-fold increase to $37.8 million. The strong sales performance, along with our acquisition, has increased our backlog significantly to 480 units and $124 million, from 276 units and $63 million at the end of the second quarter of 2013.
Moving on to the balance sheet, as of June 30, we had cash and cash equivalents, including restricted cash of $224.1 million, compared to $148.7 million at December 31st of 2013. We continue to invest in the business through land and lot purchases of approximately $4 million, land development of approximately $16 million and home construction costs of about $32 million.
In addition to the $65 million senior secured credit facility that we put in place during the second quarter, we also completed a $200 million offering of 8.5% senior notes due in 2019, providing increased liquidity to our capital structure.
At June 30th, we did not have any balance outstanding on the credit facility, and our total debt balance was $300 million. Our debt-to-total capitalization rate at the end of the second quarter was 51.4%. Net debt to net book capitalization was 21.1%, and from an asset coverage perspective, inventory plus cash to total debt was 1.9 times.
From June of 2013 through June of 2014, we have raised $400 million of debt and equity capital, while creating an appropriate capital structure to accommodate our growth strategy, we remain committed to managing the capital structure in a conservative manner, while maintaining an acceptable overall cost of capital.
In conclusion, our second quarter results continue to show strong top line growth, both sequentially and year-over-year. Gross margins are in the low 20% range without the effects of the purchase accounting. We continue to demonstrate significant reductions in SG&A, as a percent of revenue through leveraging the cost base, both at the division level, as well as the corporate level, and we have narrowed the net operating loss this quarter, and have established a well capitalized balance sheet to be able to execute against our growth strategy.
As a reminder, our outlook for the full year 2014 includes the following; we expect to have approximately 30 communities engaged in selling homes and approximately 25 communities engaged in closing home sales at December 31, 2014. We expect closings in the range of 975 units to 1,050 units, with an average selling price of approximately $250,000. Land sell revenue is expected to be between $26 million and $28 million with an aggregate gain on sales between $7 million and $8 million, and pre-tax income should be in the range of breakeven to a modest loss.
With that, I'd like to turn the call back over the operator, to open the lines for questions.
Thank you. (Operator Instructions). And our first question comes from the line of Brendan Lynch of Sidoti. Your line is now open.
Brendan Lynch - Sidoti
Good morning Roger. Good morning Mike.
Brendan Lynch - Sidoti
My first question is just on your market, and I was hoping you could just give us some color on what you're seeing in Arizona and Florida and North Carolina.
Okay. I think all of them are a little bit different. We are not actually into a full gauged selling in North Carolina, but watching the market very carefully there and still sums into a very solid market, especially in the Charlotte market. We don't have really anything going on in Raleigh right now, as we are continuing to develop our active adult community there.
Phoenix definitely is a market that, right now is, still in a slowdown. I think we've heard a lot of that from a lot of the major builders. There is definitely lot of competition here. Some of the anecdotal things that you hear out there is that, roughly there was a 110 new communities open this year. I think you have to keep that in context of basically, they expect about 150 to 160 to roll off in the next 12 months as well. So even though there is a lot starting up, there are a lot closing out. So its not like there is a huge glut that came on the market, although inventory is definitely up.
Traffic still seems very good. There are serious buyers that are out there. So they are not just out kicking the tires. The resale inventory in the market, we have seen come down, and that's not too bad. It has been down about 9% year-over-year, which represents about roughly 3.5 to 4 months worth of supply.
Expectations though reducing in the market, as there is pressure on the price. Some of the things I have seen written up in the market is they are expecting prices to be down, roughly between 1% and 3% from the beginning of the year. We do see a difference in our active adult, we have been able to raise prices there selectively, and so there is a difference between that and the primary side of the business. There is certainly a speculative you know that was out there, definitely puts more pressure on the price overall.
Permits in the market, again it has been running probably on an annualized basis in the 12,000 range, and so again, it didn't really go to zero, but there is still some healthy movement out there, and still optimistic but not as much as everybody expected. I think the projections earlier in the year were somewhere about 17,000 to 18,000 permits, and so down. The upside of that is, we haven't seen a lot of pressure on the cost side, so we have seen that competitiveness helps us on the margin side as well.
Looking at Florida, definitely seeing some competitive pressures, because there are builders, many of them trying to go for volume. I think the market is a little bit slower there, but there is still a lot of discipline. There is not a lot of advertised incentives, but people are doing more on the co-broke side, where their commissions are a little bit higher. Not necessarily advertising a lot of incentives, but definitely dealing with them at the table, and so they are really kind of off-market, if you will, from that perspective.
West side of Orlando is a little bit more competitive, but again, the traffic is slower, but you're seeing a lot more qualified serious buyers out there, and we are taking advantage of where we can, to raise prices, and we are seeing more of that on the active adult side, as I mentioned, certainly in the Florida market, we have got the two communities there, Solivita and Vitalia. We got new product that we introduced there. We have been able to rationalize some of the pricing on the house cost side, that's helped us on the margin, and then as we gain momentum, being able to push price a little bit.
So that's the general overview of the market as we see at this moment.
Brendan Lynch - Sidoti
That's great. Thank you for the detail. Could you just give us a little color as well on how the integration process is going with Royal Oak, and what you need to do still to incorporate them into your business model?
Yeah, going very well. Doing exactly what they said they would do. We have not really combined the organization with Florida. Its not like we had a lot of people sitting around, with nothing to do with this type of growth. So definitely, its an add, but very leverageable. There aren't a lot of positions that we would say would be redundant, given the size of the business and the volume and the growth that we are seeing in the opening of communities. But we are working on the back office type integration things, that's going very well. We are working on the systems side of it. We have shared ideas on cost savings from the purchasing side, what we are doing on the house costs side, trying to leverage a little bit more of that on the vendor's side, but they are two different businesses almost, and distinct from that perspective. There wasn't really a lot of overlap. They are more concentrated on the primary side from Royal Oak, and we are heavily concentrated from the active adult side, with a little bit more effort into the primary side.
We have been moving ourselves into the Jacksonville market, so we are expanding into that market as well. But I would say overall, we are very pleased with the transaction and the efforts we've made here, with Royal Oak, and again, great management team and doing extremely well today.
Brendan Lynch - Sidoti
Great. Thank you very much for the color and congrats on the progress you've made.
Thank you. (Operator Instructions). And our next question comes from the line of Jay McCanless of Sterne, Agee. Your line is now open.
Jay McCanless - Sterne, Agee & Leach
Good morning everyone. Wanted to find out first, so you said on the primary side, you're seeing some increases in discounting and incentives. Can you quantify that, are we talking 3% of the purchase price, 5%, what are you seeing right now?
Its in the low range. I mean, people aren't being overly aggressive, but they are really going more for volume, and probably looking a little less at the margin impact today. I think, its much lower than what everybody expected, and so I would tell you maybe in the 1% to 5% range is probably what we are seeing on the discounting on the incentives. And then on some of the co-broke, you're seeing some of the builders pushed out a little bit more to 6%. So there are selective communities that could do it more on [ph], but I would tell you that its not really concentrated with one or two builders we are seeing across the market.
But again, we are not seeing it, if you pick one builder, you couldn't say that they were doing it in every one of their communities. I think just really looking out there, their pace is in select communities and trying to drive those. But it seems to be a little bit prevalent this quarter, it started last quarter, but this quarter has picked up just a little bit more. But its not really over the top. I don't think people are dropping stuff, as if this was the end. But a little bit of disappointment, but again, not a lot of advertising incentives as I mentioned. They are really dealing with them kind of one of one with the customers, and -- but that's what we are hearing thus so far.
Jay McCanless - Sterne, Agee & Leach
That's great. Thank you. Secondly, congratulations on placing the debt and getting the facility together. Just wondered if there were may be one or two questions or one or two focus items as you were talking to the debt investors, that they were concerned about it, they want to learn about, and what you guys talked to them in relation to those issues?
I think Jay, the major thing was really, from a company standpoint, the size of our business, quite frankly, but I think we have a lot of credibility with the investment community, and I think that certainly showed well with the amount of ability we have got from people getting into the transaction. And I think just barely at show me type of thing, again, not giving a lot of projections, we did give this year. And again, growing the business from 300 to 500 to 1,000 and beyond in a short period of time, is definitely something that got people's attention. But I think they understood the organization, the ability of the management to be able to execute. And so, I think that was probably it. Certainly a lot of questions around the industry and the choppiness of it, but our active adult business certainly supplements our primary business, and we didn't really have a primary business, so that's really what we are building out, from the strategy that was set, prior management team. I think those were the real centers around it, but I think from a management perspective, we got a lot of attention and confidence in the investors from that standpoint.
Jay McCanless - Sterne, Agee & Leach
Great. And then on active adult, its encouraging to hear that you're raising prices, can you give us any color on whether you've been able to carry that into July, and what if, any pushback, you are getting from that active adult buyer?
Again, this business, as you look for momentum to be able to do that, you also help to create a sense of urgency. Of course, on the other hand, you have to be careful, because when you have very large communities like these, you could stall them out, and the last thing you want to do is, get to a point where you've stalled that, where you have to go back to your backlog, and that was pretty prevalent in the 2006 and through 2008-2009 timeframe in the industry.
I think, we do look at the value we provide relative to the competition that we are up against in our markets, and I think today, we saw the very good value equation, and I think enhancing that customer experience, with that as well, in our communities on the active adult side is going very well. And so today, I think even in this market, in Phoenix, its 110 degrees. We get people here looking at active adult communities. We know they are serious buyers, and you know, we can compete with the best of them in both markets.
So we are pleased with that. Again, we are not doing outsized increases, but $1,000, $2,000 here and there, well we can do it. Select models, not all of them across the board. Again, that gives us the ability to be very selective, and also surgically go at it, versus just doing it in a very broad-brushed approach that, basically could hurt you on a volume specific basis from the models that you have on the offering.
Jay McCanless - Sterne, Agee & Leach
Got it. Got it. And then last question I wanted to ask, any update on the Poinciana parkway and how the progress is going there?
Yes, parkway is going along. We get pictures of it from the air and its doing very well. Looks like its coming on. We will be finished in 2016, but the funding was all put in place, at the end of last year, in December of 2016. They broke ground in December of 2013, and so that's progressing very well. And I think that's going to bode well for that entire geographical area there, that opens that corridor up from south of Orlando down and be very good for our positioning there, in both the primary side, and the active adult side.
Jay McCanless - Sterne, Agee & Leach
Okay. Great. Thanks guys.
Thank you. Our next question comes from the line of Alex Barron of Housing Research Center. Your line is now open. Mr. Barron, please check your mute button. Okay, and I am showing no further questions at this time. I would now like to turn the call back over to Mr. Roger Cregg, President and Chief Executive Officer for any closing remarks.
Thank you, Candice. Once again, I would like to thank you for joining us on this morning's call. We appreciate your time and interest in AV Homes, and we look forward to updating you on our progress on the third quarter conference call. Have a great day and weekend everybody. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day everyone.
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