UCP's (UCP) CEO Dustin Bogue on Q2 2014 Results - Earnings Call Transcript

Aug.11.14 | About: UCP, LLC (UCP)


Q2 2014 Earnings Conference Call

August 11, 2014, 05:00 PM ET


Rodny Nacier - Investor Relations, ICR

Dustin Bogue - President and Chief Executive Officer

William La Herran - Chief Financial Officer


Alan Ratner - Zelman & Associates

Anjani Vedula - Deutsche Bank

Trey Morrish - Citi

Brendan Lynch - Sidoti & Company


Greetings and welcome to the UCP second quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the conference over to, Mr. Rodny Nacier of ICR. Thank you Mr. Nacier, you may now begin.

Rodny Nacier

Good afternoon, and welcome to UCP's second quarter 2014 earnings conference call. Earlier today the company released its financial results for the quarter. The related press release and SEC filings are available in the Investor Relations section of the company's website at www.unioncommunityllc.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of the call constitute forward-looking statements and may not be based on historical information. The forward-looking statements are based on management's current expectations and beliefs and they are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements.

I refer you to the company's filings made with the SEC for more detailed discussions of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that are made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on the call today. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of certain non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Hosting the call today is Dustin Bogue, UCP's President and Chief Executive Officer; and Will La Herran, the company's Chief Financial Officer.

With that, I will now turn the call over to Dustin.

Dustin Bogue

Good afternoon, everyone. We appreciate you joining us today. In my remarks, I will discuss our second quarter 2014 results and operating metrics, provide some color on our West Coast business and an update on our recent Southeast expansion with our Citizens acquisition. Then Will is going to provide some commentary on our quarterly performance and financials. After our prepared remarks, we will open up the call to your questions.

During the second quarter 2014, we significantly expanded our operations with a solid increase in our revenues, deliveries and backlog. We successfully completed the acquisition of Citizens Homes, which established our presence in the Southeast and provides us an additional scalable platform for growth.

We further strengthened our land pipeline, while also remaining opportunistic with our land sales and to extract additional value from our well-located lots. We achieved all of this, while leveraging our cost base to deliver a profitable quarter due to our team's hard work and dedication to improving our overall operations.

We are pleased with the progress we are making towards our target of doubling our revenue and community count in 2014, and we believe our results are reflective of that effort.

In the second quarter, our homebuilding revenue grew to $50 million, up $29.1 million compared to a year ago, largely driven by 98% organic growth year-over-year in our West Coast operations. On a sequential quarter basis, we increased our homebuilding revenue by 97% from the first quarter of 2014.

We are encouraged by the positive momentum in our business compared to the first quarter, and we are confident that housing will continue and sustain long-term recovery, especially in our core West Coast and Southeast markets, where the fundamental dynamics for housing remain quite positive.

All of our markets remain supply constraints and jobs to permit ratios in our markets are well above the national average, supporting a favorable tailwind for demand. Amid this positive backdrop, we are strengthening our presence across our markets and expanding into new and proven areas with our robust pipeline of new communities.

In our second quarter closings, approximately 41% came from our Central Valley region, approximately 25% came from our Bay Area region and 27% came from our Southeast region. During the quarter, we also began closing homes in Seattle as expected, and we remain on track in Southern California to begin closing homes in the fourth quarter of 2014.

Following the modest improvement in buyer demand we experienced as we moved through the first quarter, we saw orders accelerate in the second quarter through June. Combined with our expanded community count, we increased our second quarter orders to 133 compared to 59 in the same quarter of 2013 and 84 in the first quarter of 2014. In the west, we nearly doubled our orders to 109, in addition to 24 orders in the Southeast.

As a result, we increased our backlog 59% to 124 homes compared to 78 in the same quarter of 2013. At the end of the quarter, we had 26 opening communities compared to nine opening communities at the end of the same quarter last year and 12 opening communities at the end of March.

In the west, we ended the quarter with 11 opening communities compared to 12 last quarter. Into the end of the quarter, we closed out one community and sold one community. Immediately following the quarter close, we opened one community in Seattle market and one in Southern California, and we continue to open additional communities during the third and fourth quarters.

As we move past the peak of the spring selling season, we continue to manage our spec home construction process very carefully and currently have 132 spec homes under construction, which when compared to our sales goal is conservative and reasonable. Additionally, our cancellation rate was 8.9% for the second quarter of 2014.

Based on the 108 West Coast loans that we've closed through our preferred lenders, we have been able to attract high-quality buyers with FICO scores averaging approximately 730. Roughly 55% of our homes are sold to move-up or move-down buyers, approximately 25% of our homes were first-time buyers, approximately 10% retirees and approximately 8% were buyers who recently re-entered buyer pool. Of these buyers, 50% financed their homes through conventional financing, 16% financed their homes through FHA, 12% were cash buyers and 11% financed their homes through other financing means.

As a growing company, our long-term prospects are highly attractive. However, given the current size of our growing base, quarterly trends may continue to be dynamic as is consistent with most companies in an early ramp up phase. As we have mentioned in the past, our growth is not likely to be linear. However, over the long-term, we do expect to achieve G&A leverage, which will further enhance our profitability.

While we are able to scale our delivery from the second quarter with limited corporate G&A increases, we remain focused on controlling cost and improving our gross margins, as we continue to grow and become a more efficient home builder. To that end, we expect our margins to improve, as the average age of our communities increases, and we are also working to improve our gross margin through improved sourcing and production efficiencies, as we continue to gain operational scale.

Moving to our land activities for the quarter. We remain focused and dedicated to identifying and acquiring the most desirable areas in our operating markets. During the second quarter, we improved our already strong land and lot position, while maintaining our disciplined investment strategy.

As of the quarter end, our lot position was 5,695 versus 5,380 lots at the end of 2013. Since 2013, we have largely shifted our monetization strategy to home building operations, but remain well-positioned to capitalize on opportunities to sell our finished lots at attractive returns.

We are a homebuilder with significant land development expertise, and there will likely be a component of our revenue from land development over time. During the quarter, we sold 149 lots for $12.1 million. In our experience, land sales tend to fluctuate from quarter-to-quarter, but we have the inventory in place and the expertise to maximize value from our land positions as opportunities arise.

I'd now like to provide you with an update and some additional color on our Citizens acquisition. As of April 10, we completed our previously announced acquisition of Citizens Homes, marking our entry into the Southeast, specifically the Carolinas and Tennessee, with a seasoned group of homebuilding operators.

In addition to Citizens assets significantly expands our geographic presence and advances our long-term growth strategy. We have begun to execute our plan in our Southeast markets, which well we believe will deliver significant upside to our revenue and profits in the coming years.

For the balance of 2014, we will be focused on repositioning our footprint, as we close our older communities and integrate our Citizens assets into our platform to generate synergies. On a pro forma basis in 2014, we expect flat growth in the Southeast, as we reestablished our position and enhance our pipeline to deliver meaningful growth.

Our Southeast platform is scalable, and combined with UCP's strong balance sheet, we have the necessary tools to accelerate growth and capitalize on opportunities in these highly attractive markets longer-term. During the second quarter, our owned and controlled lots increased by 202 lots, net of deliveries, and we have 15 new communities in the Southeast, which we have already started develop.

We expect to continue strategically reinvesting proceeds in the new land and communities, which we plan to begin opening in 2015. We believe that this transaction will be accretive to earnings in a material way in late 2015, as we benefit from increased scale exposure to the new high growth markets and Citizens experienced team of operators.

Along with our highly experienced regional team, we are excited to further establish our foundation for sustained growth on our Southeast markets to supplement the company's rapidly evolving West Cost operations.

In closing, our team is encouraged by our strong operating momentum in the second quarter and we are excited to continue delivering on our growth plans, while enhancing our profitability. We are rapidly expanding our communities in the West and strategically positioning ourselves for growth in the East. With our strategy firmly in place, we are committed to improving our growth trajectory, while also enhancing our profitability, as we grow our business.

Now, I'd like to turn the call over to Will, to provide some information on the quarter's performance.

William La Herran

Thank you, Dustin. Before I begin, I'd like to remind everyone that our second quarter results are impacted by the inclusion of our Citizens Home acquisition that closed on April 10, 2014, which are not reflected in our results for the comparable quarter in 2013.

For second quarter 2014, our total consolidated revenue including homebuilding and land development and our general contractor revenue that we conduct in the Southeast was $63.6 million compared to $27.7 million in the second quarter last year, an increase of approximately 129.4%.

Consolidated revenues from our West Coast operations was approximately $53.4 million for the quarter, a year-over-year increase of 92.8% and the Southeast contributed revenue of approximately $10.2 million.

For the second quarter 2014, our homebuilding revenue increased $29.1 million to $50 million from $20.9 million as compared to the same period last year. Revenue from our West Coast homebuilding operations increased 97.6% compared to the same quarter last year to approximately $41 million. In our Southeast operations, we contributed homebuilding revenue of $8.7 million plus $1.5 million revenue from our general contractor business conducted by that region.

The growth in homebuilding revenue was primarily attributable to an increase in home deliveries from 57 homes in the year-ago quarter to 138 during the second quarter 2014, including home deliveries of 101 homes in our West Coast and 37 in the Southeast.

The average selling price during the quarter was approximately $362,000 as compared to approximately $367,000 during the same period last year. The slight difference year-over-year resulted from a change in our regional and project mix. As we move forward, we expect the addition of our mix of deliveries from Citizens to lower our average reported price, as home prices across the Southeast markets are on average lower than on our West Coast.

For example, in the second quarter, approximately 27% of our home closings were derived from our Southeast markets with an ASP of approximately $235,000. This compares to an ASP of approximately $287,000 in the Pacific Northwest, approximately $325,000 in our Central Valley region and approximately $583,000 in our Bay Area communities.

Our ASP and backlog was 6.3% lower at the end of the quarter of 2014 compared to the same period last year. We expect regional dynamics, I just discussed, and timing of deliveries to continue to influence our reported ASP from period-to-period. During the second quarter of our land sales were $12 million as compared to $6.8 million in the same period last year, as a result of 149 lots delivered during the quarter compared to 54 in the prior quarter.

Since 2013 and continuing into 2014, our efforts have been much more focused on growing our homebuilding revenues versus land sales. While we will continue to focus our efforts on our homebuilding operations to drive future growth, we do expect to continue selling land opportunistically.

For the second quarter on an adjusted basis, our homebuilding gross margin was 19.9% compared to 22.6% for the same period last year, primarily attributable to increase buyer incentives on homes closed during the period and higher cost associated with ramping up our new communities due to factors such as introductory pricing, value engineering and community appreciation, which have been typically more heavily weighted toward the first several phases of any given project.

In an environment where our community count is more than doubling on a year-over-year basis, these factors related to new community concentration can represent a significant drag on our gross margin.

Sales and marketing expense as a percentage of total revenue was 5.9% as compared to 7.6% last year. This was primarily the result of a decrease in delivery transaction cost per home, which more than offset additional sales and marketing headcount to support our higher number of selling communities and additional advertising cost related to new community openings.

G&A expense for the quarter was 10.9% as a percentage of sales compared to 19.2% during the same period last year. The improvement in our G&A margin reflects favorable operating leverage on our expanded community count and home deliveries, which more than offset additional cost related to operating as a public company and $1.1 million of stock-based compensation as communicated in our IPO perspectives. The addition of Citizens added approximately $838,000 of G&A for the second quarter 2014.

We are working hard to improve our gross margins and extract additional operating leverage on our SG&A, as we grow our business and integrate our Southeast operations. UCP's net income for the quarter was approximately $1.3 million compared to a net operating loss of $1.1 million in the same period last year, largely reflecting higher revenues and our tight focus on controlling SG&A.

We ended the second quarter with a well-positioned balance sheet to support our growth initiatives and investments for the full year. At the end of the second quarter, we held $39.2 million in cash and had $46.9 million of debt.

The Citizens transaction was strategically structured with an upfront purchase price of $14 million, and Citizens is eligible to receive additional earn-out payments from UCP about to $6 million in aggregate based on performance over the next five years. We funded the upfront portion of the purchase price using cash on hand.

As of June 30, 2014, we had availability of approximately $44 million on our existing lines of credit. It's our intention to maintain our financial flexibility, as we grow our company.

Before we conclude, I would like to reiterate and expand upon our Southeast operations. At the current time, our Southeast operations encompass offices and activities in Charlotte and Raleigh, North Carolina; Nashville, Tennessee; and Myrtle Beach and Hilton Head, South Carolina.

In the second quarter, our Southeast region recorded revenue of $10.2 million, including homebuilding revenue of $8.7 million on 37 new home deliveries at an ASP of approximately $235,000, and general contracting revenue contributed $1.5 million. For the first six months of 2014 on a pro forma basis, Citizens had revenue of approximately $20.8 million.

At the end of the quarter we had 15 of our communities in the Southeast with a backlog of 49 homes. We have five Southeast communities in the development stage, which we plan to begin opening in 2015. In the third and fourth quarter of 2014, we expect to close out five communities in the Southeast.

And as we close our older communities, we will recycle our capital into attractive land, which will fuel our land development and community growth over time in this region. As a result, in our Southeast operations for the balance of 2014 relative to 2013, on a pro forma basis, we would expect flat revenue growth and closings as we lay the initial groundwork for our future success.

With that review, I'll now pass the call back to Dustin for closing remarks.

Dustin Bogue

Again, thank you for joining us today. We made progress on many fronts during the quarter and laid the foundation to continue improving our overall operations. As we look to the second half of 2014, we believe that we are on track to meet our goals and objectives for the year. In the Southeast, our expansion is progressing as expected and our overall operating platform is well-situated to extract additional value from our growing revenue.

I would also like to express my appreciation for the hard work and diligence from all of our team. We have some of the most talented and hard working people in our industry, and I am thankful for their service and dedication. We will work hard to further improve our business and we look forward to updating you on our results in the future.

We're ready to open the call for your questions.

Question-and-Answer Session


(Operator Instructions) Our first question is from Alan Ratner of Zelman & Associates.

Alan Ratner - Zelman & Associates

Dustin, my first question, just on the lot count, I may have missed it, but what drove the big drop-off in the total lots versus the first quarter? It looks like I guess maybe there was option might you had maybe sell-through, but hoping you can go into more detail on that?

Dustin Bogue

So we have a protocol that if whether or not we have passed due diligence, we have unilateral control over the asset. It goes into our controlled category. In that particular case, we had a large asset under contract that it didn't line up from the risk rewards, so we ended up terminating the contract, thereby creating a pretty significant decrease in the controlled lot category.

Alan Ratner - Zelman & Associates

And second on the absorption rate. Given the acquisition, I want to make sure we're thinking about this correctly. It looks like in the quarter, your sales pace was around 1.6 sales per community per month, if we use the average community count of 27 that you guys had in your release. Just wanted to make sure given the Citizens deal, is that a clean number there? And if you could break that apart by region between the West and the Southeast, what that look like in the quarter, because it is a pretty big drop-off from really had been running?

Dustin Bogue

No, it's not an apples-to-apples comparison. We can't give you a ton of detail. But I think on the West Coast we're still staying pretty consistent. And as expected we've only reported a couple of months of this quarter with Citizens and as we are integrating you're going to definitely see changes in their production patterns as well. So hopefully, well, we'd expect that to increase over the -- especially latter part of the year and into next year.

Alan Ratner - Zelman & Associates

When did the acquisition officially closed from community count standpoint? Did you have all 15 communities beginning in April?

Dustin Bogue

Yes. April 10.

Alan Ratner - Zelman & Associates

But do you would expect the absorption rate to get closer to maybe the levels you were running at, maybe -- I'm sure seasonality is going to be indicative to some extent, but of course, that's two to three range you had been running at previously?

Dustin Bogue

Eventually, yes. I think our guidance thus far has been -- we expect that the Citizens contribution to be flat, similar to what it was last year for them. And so we'd expect that run rate through the end of the year with them and are hopefully increasing as we move into 2015, whereas our West Coast operations are still in that range that you're talking about.

Alan Ratner - Zelman & Associates

Sort of a flat on Citizens is referring to, both closings and absorptions, because I thought you just said that for closings?

Dustin Bogue

Well, they are the same thing, right, or similar. So you have 15 open communities, and we posted, they did about 173 units last year. So straight lining math, that's what we'd expect this year.


The next question is from Nishu Sood of Deutsche Bank.

Anjani Vedula - Deutsche Bank

This is Anjani Vedula for Nishu. Can you talk a bit more about your spec strategy? And I know you mentioned, how many specs you have last, but can you talk about how many you closed this quarter and what your plan is with the comps going forward?

William La Herran

Depending on location and geography, we tend to sell a combination of specs and dirt sales effectively. And so we don't go into that much detail on a forward looking basis or even in a rear really, but we try to manage the spec level in such a way that we provide ourselves a sufficient inventory to sell, to meet our sales goals, knowing that pretty significant percentage of what sell actually is dirt sales. So we try to be conservative and get ahead of our skies that way.

Anjani Vedula - Deutsche Bank

And then kind of my second question was about gross margins. D.B., could you about the impact of purchase accounting in the second quarter? And also, how much can we expect gross margin to be impacted by purchase accounting going forward?

Dustin Bogue

Well, we have been through the preliminary analysis as well. We've been through the preliminary analysis on that. Some of that data will be show up in our Q. That analysis has to finalized, there's some likelihood that will be finalized in Q3. So it's an ongoing process. I think we've done quite a bit work on that and that should sort of ramp up most likely in the third quarter.

Anjani Vedula - Deutsche Bank

So there wasn't that bit of an impact this quarter then?

Dustin Bogue



The next question is from Trey Morrish of Citi.

Trey Morrish - Citi

This is Trey on for Will. In your prepared remarks, you mentioned that you saw orders accelerate through June. Could you guys give us some color on July order trends on a same-store basis year-over-year, in addition to anything you could possibly give us on August?

William La Herran

We don't typically give that kind of detail. I think the second quarter was a pretty healthy quarter. We haven't seen terrible run off going forward. So we think we are on track to hit our guidance, which was double community count and double revenue for 2014.

Trey Morrish - Citi

And back on the margin idea and issue. Could you guys give us an idea on how to think about gross margins going forward? I know you mentioned ASPs further firming and brought down a little bit due to the Southeast homes exposure. But could you guys give us a way to think about the margins of the land you acquired and the homes and backlog, where you're going to see some pressure from the purchase accounting impact, and then going forward after that's washed out?

William La Herran

Well, I think that just on the homebuilding side, the 19.9 seems to us would be a good baseline. And we clearly will see on a quarter-to-quarter basis fluctuations and variability associated with that based on timing of deliveries and the mix of that projects, but fundamentally over time we expect to see that improve. The purchase price of county isn't finalized yet, so we're just there on that. With regard to land, we don't really -- land is just a series of discrete decisions. Each have their own risk return profile that we got to do a lot of different analytical and judgmental factors when we saw land. So that's just an asset-by-asset decision point.


And our final question comes from Brendan Lynch of Sidoti & Company.

Brendan Lynch - Sidoti & Company

My first question is on your land sales revenue. It was quite strong in this quarter and given your increased focused on homebuilding operations, I just want to get your thoughts on where you see that going over the next couple of quarters and couple of years?

Dustin Bogue

Well, so it's really hard to predict the land sales. It's a very opportunistic dynamic decision. Like, Will, was saying its individual discrete decisions made, similar to dialogue we've had in the past about build versus sell analysis and what's the most accretive benefit to our shareholders and that's the analysis that we do each time. We have a business plan for each asset and we go about executing the business plan as we put out. So I would expect that as we go forward, we will always have some level of land sales as part of our overall annual revenue, but it's very hard to predict exactly which and when.

Brendan Lynch - Sidoti & Company

And then my other question was on your incentive pricing. And just getting your thoughts on what we will be seeing over the next couple of quarters, as more of your communities open and some of the ones that you've recently opened are more established, and just how you approach the idea of incentive pricing?

Dustin Bogue

We don't provide a lot of data yet, going forward, so Q3, Q4 and forward. Historically, our incentives they differ by community, by sub-region and by buyer. Certain buyers have a higher incentive requirement and we try to match that and be competitive within that marketplace.

So we noted in our prepared remarks that we've got a 25% first time buyer so far this year, and that segment requires a little bit higher incentive. Whereas if you go to a move-up, move-down buyer, which occupies about 50% of our sales, they require very little, and so generally at some place in the 1% to 3% range.


Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Dustin Bogue

Thank you, again, for everybody joining us today. And we look forward to speaking to you again next quarter. Thank you.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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