The New Home Company LLC (NYSE:NWHM)
Q1 2016 Earnings Conference Call
April 29, 2016 11:00 AM ET
Drew Mackintosh - Investor Relations
Lawrence Webb - Chairman and Chief Executive Officer
John Stephens - Chief Financial Officer
Alan Ratner - Zelman & Associates
Mike Dahl - Credit Suisse
Jason Marcus - JPMorgan
Will Randow - Citigroup
Alex Barron - Housing Research Center
Greetings and welcome to the New Home Company’s First Quarter 2016 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.
It’s now my pleasure to introduce your host, Mr. Drew Mackintosh, from Investor Relations. Thank you. You may begin.
Good morning and welcome to the New Home Company’s earnings conference call. Earlier today, the company released its financial results for the first quarter of 2016. Documents detailing these results are available in the Investor Relations section of the company’s website at NWHM.com.
Before the call begins, I would like to remind everyone that certain statements made in the course of this call, which are not historical facts are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company’s filings made with the SEC, including in its most recent Annual Report on Form 10-K and in its Quarterly Report on Form 10-Q. The company undertakes no duty to update the forward-looking statements that are made during the course of this call.
Additionally, non-GAAP financial measures may be discussed in this conference call. Reconciliations to these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the company’s New Home Company’s website and in its filings with the SEC.
Hosting the call today is Larry Webb, Chief Executive Officer; and John Stephens, the company’s Chief Financial Officer.
With that, I will now turn the call over to Larry.
Thank you, Drew, and good morning to everyone who has joined us today, as we review our first quarter results and provide some color on the outlook for our business moving forward.
As we discussed on our previous call, we know the first quarter would be as slowest of the year. While our operational performance over this period resulted in a slight loss for the quarter, we believe the forward-looking aspects of our business point to much stronger results in the future. Net new orders increased 124% in the quarter, and dollar value of homes in backlog grew 183%, as compared to last year.
In addition, our wholly-owned active community count grew 150% year-over-year to end of period at 10 [ph]. These positive developments leave us well-positioned to achieve our goals for 2016 and beyond. Last December, we raised nearly $50 million through an equity offering with an eye towards growing our wholly-owned business. We put the proceeds from that offering and move on to work in the first three months of 2016, as we invested over $85 million in land and land deposits during the quarter.
In past years, we would have had the securities deals we had joint venture arrangements, thereby sharing the potential return on investment with a financial partner. Thanks to the completed follow-on offerings and the funds available under our unsecured revolving credit facility. We were able to do these deals on our own, giving us strong pipeline of communities that will fuel future growth for our company.
With that, here is an update of our operations and the markets in which built. We experienced strong traffic in sales and our newly opened Cressa community in the Portola Springs masterplan in Irvine. Clients have responded positively to Cressa’s relatively affordable price point, great location, and access to high-quality schools. We’ve got 10 contracts in the two months when the community was opened during the quarter at an average sales price of just over $1 million.
The average two sales per month for our two communities in Orchard Hills masterplan in Irvine. Client’s favorite higher-priced trendy homes during the quarter, which carry an average selling price north of $2.5 million. Combined, the two communities represent 17% of our backlog at the end of the quarter. We sold our final [ph] three homes in our Fiano community in January at an average sales price of $4.5 million, and delivered one home during the quarter.
While Fiano was no longer an actively selling community for us, it will make a significant contribution to our bottom line for the next few quarters, as it currently accounts for over $120 million in backlog earlier. We expect to deliver the remaining 27 homes in 2016. Repricing in a standout community like Fiano was a difficult task. However, we believe we have more than achieved this with our two soon to be opened communities in the Crystal Cove masterplan along the Newport Coast.
These two communities will offer 55 total homes sites with panoramic views of the Pacific Ocean and surrounding canyon landscape, with initial pricing in the $4 million to $5 million. We expect to be selling our finished models by early June. However, the branch is already building about these exclusive communities and the initial interest we have ever seen has been outstanding. In summary, our six Irvine communities are performing at or above expectation,s as we head into the Spring. This success bodes well for the future.
Moving onto Northern California trying to remain steady in our two communities in our Cannery masterplan, averaging 2.5 sales per month. We experienced better traffic in sales at the higher-priced Sage community just increased competition as well as price point moderately impacted our sales efforts at Heirloom. We believe that the slowdown is temporary and expect traffic in sales to pick up at Heirloom once the promotional activity from competitors lies down.
We continue to see consistent buyer traffic at our Woodbury community in Lafayette. However, our sales efforts have been hampered by the lack of an open-model for our Terrace flats product line, and [indiscernible] should be opened soon, which will give us a better platform in which to sell.
On a positive note, Woodbury was recently named Community of the Year by the Bay Area Building Industry Association. Along the way, our Bay area division is the second time in four years was selected as Builder of the Year. These accolades further validate in notion that The New Home Company is the leader when it comes to community development and new home design.
In summary, our efforts in the quarter have laid the foundation for a solid 2016 and beyond.
Now, I’ll turn it over to John for more detail on the notes.
Thank you, Larry, and good morning. As Larry just noted, and as I mentioned on our last quarterly call, our first quarter results were scheduled to be the lightest quarter for 2016 from both the revenue and earnings perspective, due to the anticipated low delivery volumes and the mix of deliveries expected to be pulled through.
For the first quarter of 2016, the company generated a net loss of $814,000, or $0.04 per diluted share, compared to net income of $4.6 million, or $0.28 per diluted share in the prior year period. The year-over-year change in net income and earnings per share was largely due to a 25% decrease in home sales revenue, a 240 basis point decline in gross margin, a $1.9 million decrease in income from joint ventures, and an increase in SG&A expenses related to higher community count, and the expected growth in our wholly-owned business.
Homebuilding revenues for the quarter was $42 million from the delivery of 28 homes. Deliveries were essentially flat with the prior year period. Our average selling price for the quarter was down 22% from the prior year period to $1.5 million, due to a mix shift in deliveries, which included a higher percentage of deliveries from our Sacramento division.
We expect our average selling price to move up sequentially over the next three quarters, as we convert more of our higher-priced backlog with the second quarter estimated to be up approximately 5% to 10% from the first quarter. For the full-year, we expect our ASP to be down approximately 5% to 10%, as compared to the full-year of 2015.
As outlined in our earnings release, as of January 1, 2016, we started amortizing certain capitalizable selling and marketing costs out of the cost of home sales line item and into selling and marketing expenses. These costs consist of certain model setup costs, such as model home design, model home décor and landscaping, and sales office and design studio set up. Many other homebuilders treat these costs as selling and marketing expenses.
So in order to be more consistent with our peer group with respect to gross margin and SG&A percentages, as well as to classify such costs more consistently with their characteristics, we made the change in classification during the quarter. As a result of this change, we reclassified $871,000 of these costs in the 2015 first quarter to be consistent with our current year presentation, which resulted in a 160 basis point increase in our gross margin percentage, and a 150 basis point increase in our SG&A rate.
For the full-year 2015, the gross margin percentage increased 180 basis points and the SG&A rate increased 170 basis points. We provided a supplemental schedule in the back of our earnings press release to provide the applicable reclassifications for all periods in 2015 for informational purposes.
Our gross margin from home sales for the 2016 first quarter was 13.3%, as compared to 13.7% in the prior year period, adjusted for the reclassification noted earlier. The year-over-year decline was primarily the result of a mix shift and deliveries. We estimate that our second quarter gross margin will be relatively consistent with the first quarter. However, we expect our gross margins to improve for the full year in a 100 basis point range as compared to the 2016 first quarter based on the anticipated mix of deliveries.
Our SG&A rate as the percentage of home sales revenue for the first quarter was 20.4% versus 10.3% in the prior year period. The year-over-year increase was driven by higher selling and marketing expenses related to a 150% higher active community count increase G&A to support the growth in our wholly-owned business and a lower absolute level of home sales revenue as compared to the prior year.
Based on our current revenue assumptions for 2016, we expect to see continued improvement in our SG&A rate for each quarter sequentially as we move through the year. Our net new orders were up 124% to 56 homes, compared to 25 homes in the prior year quarter. The increase was drive by the growth in our active selling communities as our monthly sales absorption rate was 1.8 per community versus 2.1 in the prior year period.
As a result of our increased order activity, the dollar value of our backlog was up 183% over the prior year to $234 million. This solid backlog positions us well for a stronger finish for the back half of the year. Our fee building revenues for the quarter, which includes management fees earned from our joint venture, was down slightly from the prior year at $43 million versus $47 million. The decrease was due to fewer fee building starts compared to last year as well as lower management fees resulting from fewer joint venture home deliveries and lower land sales revenue.
The fee building business continues to be an attractive segment of our operating platform as it provides incremental profits and returns, while leveraging our overhead with minimal invested capital. Our share of joint venture income for the first quarter was essentially breakeven as compared to income of $1.9 million in the prior year period.
The year-over-year change was primarily due to lower land sales revenue, a land sales gross margin to a lesser extent fewer joint venture home deliveries. As of the end of the quarter, we owned or controlled approximately 6,000 lots, which included approximately 1,500 lots from our wholly-owned business, 3,300 lots through JVs and 1,200 in fee building lots.
Moving onto our balance sheet, we put a substantial portion of our capital rework during the quarter by increasing our real estate inventories by nearly $125 million as a result of investing approximately $85 million in land and deposits as well as increased construction activity related to our larger backlog in growing wholly-owned business.
We ended the quarter with $54 million in liquidity, which included $44 million in cash and $10 million in available loan commitments. We ended the quarter with the $195 million in indebtedness, which resulted in a net debt to cap ratio of 40.5%. In addition, we are in discussions with our bank group now and are looking to increase the size of our unsecured revolving credit facility and extending the maturity date by year. We anticipate to have this completed in May.
Now I’d like to update you on our guidance for 2016. As described in our earnings release, we are maintaining our full-year guidance for 2016, except for a slight modification in our year-end community count as follows: home sales revenue of $450 million to $500 million, fee building revenue of $100 million to $120 million.
And income from unconsolidated joint ventures of $10 million to $12 million, but delivery in revenue activity for 2016 is still expected to be heavily backend loaded with the second half of the year estimated to represent approximately 75% of our full-year home sales revenue and the fourth quarter representing approximately 50% of our full-year home sales revenue.
Home sales revenue for the second quarter is expected to be up from the first quarter and about 50% of the full-year estimated range. With respect to community count, we now anticipate opening approximately eight new wholly-owned communities during 2016 and closing up five, ending the year with 13 active communities. Six of these openings are slated for the first two quarters of the year with the remaining two scheduled for the fourth quarter. In addition, we also planned to open five new JV communities late in the third quarter.
I’ll now turn the call back to Larry for his concluding remarks.
Thanks John. In conclusion, I’m very pleased with the progress we made this quarter. The increases we made to our backlog, community account and land investments, put us on a path in more growth and better results. The land deals, we put under contract during the quarter will be a great addition to our existing operations and I’m excited about the contribution they were made to our accounts.
As a reminder, we will be hosting an Investor event on May 24 and 25 in Newport Beach, which will future presentation from senior management and key operational leaders as well as a tool of some local communities. In our short history, The New Home Company has set a slightly different path from our peers. This investor event is a great opportunity to meet our team and see for your self.
That includes my compared remarks, and we will now be happy to take your questions.
Thank you ladies and gentlemen. We would now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alan Ratner, Zelman & Associates. Please go ahead.
Hey guys, good morning. Good morning, Larry. Good morning, John.
My questions related to the land activity in the quarter, much greater than we were expecting. I think that if you look at the revolver now basically for utilize that, I know you mentioned the negotiations with your banks. But I was just curious how you think about the capital structure here? You did the secondary in December, not a ton of liquidity right now. I’m not sure if you expect to start generating some cash in the back half of the year as the deliveries pickup.
But how comfortable are you with the balance sheet, the liquidity position, do you feel like you still have some more into pursue opportunities for growth out there. And I guess we could just provide a little bit more details on the 85 million of land that you purchased in the quarter, which markets there in price points, when we should expect those deals to come to the pipeline that would be helpful? Thank you.
Alan, that’s a milestone, you know that, right. It’s a – very good questions, because when we – when Alan raised $50 million, our mantra was this, we really – we’re seeing a lot of opportunities and we didn’t wanted just have to do ventures or walk away from them.
And what we seen in the last four to five month is we’ve taken that money and we’ve leveraged it in the right way to I think summit a really strong future for 2017 and beyond, basically first of all what we’ve seen in the land market is since our inception we set our relationships and our history in California gave us access to deals that not everybody else had. That said, it’s a very competitive marketplace, as all of you know. And what we’ve seen in the last four months is exactly what our premise – our initial premise was. We are seeing properties that really do feel like, we’re extremely well-positioned moving forward, and let me explain what I mean by that.
First and foremost, we are now seeing prices in terms that really are attractive for our goals. As a competitive marketplace, California is tough. But people are coming to us and we believe these properties that we purchased and it’s from San Diego to the Bay Area, all up and down to stay primarily on the coastal side. All are strong and many, many, many of them have terms associated with that.
So one is, we’re seeing located projects, and two, we’re being able to do those as wholly-owned, which is terrific. Third, what we’re also seeing is, we’ve primarily been only – primarily a move-up – second move-up builder, really having the average – the largest average sales price of any publicly held builder in the market. I knew the projects are much more affordable than that, as that taken as a whole. So we’re going to see in many of our marketplaces in 2017 and 2018, we’ll still be in a move-up market, but we’re going to appeal to a much wider range of buyers.
And with that, I’ll turn it over to John to talk about our liquidity and kind of where we are in terms of the marketplace. But overall, we feel like, we’re very well-positioned.
Hey, Alan, it’s john. So in terms of our liquidities, I mean, we ended the quarter with $54 million of liquidity between cash and revolver commitments. As I mentioned, we’re in the process of – in discussions with our bank now, and expanding the size of our revolver, and that was part of our plan when we did the equity raise in December. So that’s kind of moving ahead, as we anticipated. And we’re not quite done, but we’re very close, and it looks like, we’ll be adding approximately $50 million plus or minus of additional liquidity with this increase in the facility.
In addition, we’re pushing that up for another year. So it gives us the three-year facility. Also, on that note, we plan to, as you alluded to during the call, we plan to pay down, obviously, there isn’t very lot of closings in the back-half of the year, I mentioned that 75% of our revenues will come in the back-half of the year.
So we won’t see sort of a big reduction in debt outstanding, as we kind of move towards the fourth quarter as well as generate some additional cash. Really, our backlog has grown. We can – we’re buying lots on auction. So we’re buying some of these lots as we’re moving forward and we’re getting ready to deliver them. So you’ll see sort of a little bit of a pickup in Q2, and then in Q3 and Q4, we should see our debt levels come down or cash liquidity increase, as a result of the operations, as well as the increased liquidity from the revolver.
Got it. Thanks again for a lot detail. And just a real quickly, Larry, the land you bought, was it all in California, or where there any additional deals in Phoenix this quarter?
It’s all in California, but we are looking at some very, very interesting communities in Phoenix. We’re just not quite ready to announce them. But we feel like, there’s big opportunity for us there and we’re seeing them. By second quarter, I’m sure, we’ll have some big announcements to make regarding that.
Hi, Alan, in terms of – the vast majority within Southern California in terms of we purchased so far.
Great. Thanks a lot and good luck.
Thank you. Our next question comes from the line of Mike Dahl from Credit Suisse. Please go ahead.
Hi, thanks for taking my questions. Larry, just to follow-up on a couple of those responses to Alan’s question, and maybe get a little more detail on this kind of increased range of product offerings that you’re looking at. And so can you give us a sense of, when you say more affordable move-up, clearly you’re working off of a pretty high base of some of these communities. So what are types of price ranges?
And I guess, as you shift towards that, typically, I guess, would see more competition or more builders playing in that part of the market. So how do you see the competition for that type of product specifically were that planned?
Well, as most of you know about it from our company, we have primarily focused on infill sites and coastal sites, where you get rewarded for architecture and planning. And we’re always going to have that, it’s one of our primary focus. But what we’ve also felt is that, there’s a big opportunity within the master-planned communities, particularly in Southern California to do primarily first move-up housing, and be able to compete quite well because of our architecture and because of how we treat our customers.
This project that hopefully you’ll see if you come to the Investor Day, which we just opened may impress us a perfect example. It’s a 2,000 to 2,800 square feet. It’s a first move-up home in California. It’s million dollars roughly price. And we are having significant success and we are surrounded by other builders in similar price ranges and similar sizes.
So, we just think, while we always do the Crystal Cove sites, those are limited resources and those are one-off deals. And within masterplans, we feel as long as is a good product segmentation that we can compete all day. And so that’s what we’re looking at.
Got it. And then so should we expect that a lot of these will be Irvine Ranch communities than when you talk about Crystal Cove also…
Well, they’re not just Irvine Ranch, but for example, we are going to be in the next phase of the Great Park and we’re going to also have housing programs in Rancho Mission Viejo. So within Orange County itself, we will be in all three of the masterplans by 2017. But really up and down the Coast, we’re just expanding our footprint, staying where lands constrained, and there’s job growth from again San Diego to the Bay Area.
Great. And my next question and kind of two-part question here relating to Crystal Cove, but also just high-end in that price point in general, exclude there is – there seems to be some concerns around it, the demand environment in coastal California at the very high-end. So first, could you just provide a little more color about anything you’re seeing and what you’re hearing back in the field on the general demand environment, as you work up to that $3 million, $4 million, $5 million price point?
And then specific to Crystal Cove opening late in 2Q, it seems like Fianos was selling something like four sales a month, pretty strong sales base for that type of price point. How are you thinking about pacing for Crystal Cove?
Well, so first of all, we have been hearing and we certainly watch our marketplace quite carefully. We heard from other builders talking about a slowness at the upper end in coastal California. I would first like to point out to everyone and particularly people on the East Coast that the definition of coastal California varies from builder to builder. I think coastal California has ocean views, okay? It’s on the Coast, okay? Irvine, as you know is a wide area and it’s a – that – it’s here – the definition is interesting.
But what we have found Fiano last year was a giant homerun. It was a homerun, because there were incredible lots and they were great – it was a great housing program. And here we are – we now – the project sold out, we have 27 that we’re building and they will be a big part of our year this year, and they’re also and they’re all in backlog and we’re very confident.
Crystal Cove will follow along. In the last 55 lots in the entire masterplan of Crystal Cove, we have incredible, I believe, new house six models, the demand has really been strong. And we really are anxious for people to come in and see what we’ve created. And we believe it is very, very reasonable for us to be able to sell three to four homes a month in each of these two housing programs through their history. We want to balance our sales pace with profitability and our return on our investment, and that’s what we’re going to do.
Through the rest of Orange County at the upper end, what we have seen is that, it’s been steady. But it hasn’t been – it has been spotty at parks. We feel that the reason I went into detail in each of our projects in Irvine is that, they are either at what we thought or they are exceeding our expectations. We know not every builder has done that, but we have.
So, I can understand that our growing market would make some people nervous. But when you’re talking about a project like Crystal Cove, they are the last 55 last for ever, with ocean or coastal views in that community. We think it’s a rare and unusual situation and we believe, we’re going to do very, very well.
Mike, let me just add just a couple of points to your comments. One on Fiano for last year, we sold at 4.5 a month at a pace during 2015. And like Larry said, we have chief community in Crystal Cove. We’re not anticipating 4.5 a month there, but something north of two, at least, per project.
And then in terms of Irvine community deals, last year, our revenues were about 73%, Irvine community deal. This year, it’s probably closer to about a 60% range, so it still would be a big piece, part of it’s delivering Fiano and then part of it’s one Crystal Cove and Cressa as Larry talked about earlier. So it’s still an important – very important part of our business. And we’ll continue to see that, as we move through 2016, and it will come down a little bit in 2017, but it will still be a significant piece of our business.
Great. Really helpful color. Thanks, guys.
Thank you. Our next question comes from the line of Michael Rehaut from JPMorgan. Please go ahead.
Good morning. It’s Jason in for Mike.
My first question is on the gross margin. So you highlighted the claim was due to a higher mix of lower-priced closings in Northern California. So just wanted to get a sense of how those gross margins compare relative to the company average, kind of what the ASP for those projects was? And how we should think about the mix there, as we progress throughout 2016? And then also, if you could just reiterate what you said for the – for your gross margin guidance, I just want to make sure, I have that?
Yes. For the gross margin guidance what we – what I said was, that would be fairly consistent for Q2 relative to what we did in Q1, and then for the full-year 2016 up about 100 basis point range relative to what we did in Q1, if we get some momentum, it could be a little bit better, but we’re kind of thinking about 100 basis point range at this point.
In terms of the margins, we do have a couple of communities in Sacramento that we delivered, that had a little lower margin than our company wide average. And price points are a little bit – those are clearly less than what we are on a consolidated basis. But again, we didn’t have many delivery during the quarter. So if you deliver a few of those, it does have an impact.
Okay, great. And then next question on the SG&A, obviously increased pretty materially in the first quarter due to some of the investments you made on new community opening. But just wanted to get a sense, if you’re still comfortable for the full-year with the 150 to 200 basis points of letters that you spent about last quarter? And then I know you said you expect improvement throughout the year, but if you could be a little bit more granular in terms of how you are thinking about 2Q? That would be helpful.
Are you talking about on the SG&A for Q2?
I think for the full-year, I think probably think closer to the 150 basis point kind of range on a year-over-year basis. In terms of Q2, we would expect it to come down – maybe it’s down 500, 600 basis points sort of in that range, depending again what we sort of convert and pull-through.
Long-term, we want our SG&A to be 10% 11%, 12% in that range. But as you grow your business, this is simply an anomaly right now, you’ll see that shift over the whole year. We focused very high or very strongly on our overhead and want to run a really efficient operation.
Yes. And then, Jason, just those numbers I gave you, everything has been adjusted for the reclassification we did. So that’s reflect in that – that number is that Larry kind of just mentioned sort of getting heading towards a 10% for the full-year would be the idea after the change.
Got it. Great. And then just lastly, if I could, if you could provide an update on the cost environment, labor and materials perspective, and anything you’re seeing around, and I believe that – I know that you saw last year just wanted to get an update there about your market?
Maybe, Larry, can talk about the cycle times and I can talk about cost one?
Sure. Labor is still an issue and isn’t going away, where we are that we measure it pretty carefully. It looks to us – it hasn’t – has not gotten worse. And we have added, as we have mentioned in some of our previous calls, about five to six weeks to our schedules in Northern California and probably two to four weeks in Southern California. But overall, we feel as it’s gotten our arms around this issue. And on the cost front, I’ll turn it over to John, but we – again, we’re studying this very carefully. So go ahead.
Yes. I mean, I think we have seen cost increases probably 50-50 labor and materials, framing, drywall, concrete are probably some of the areas we’ve seen it. But our pricing has pretty much covered those cost increases, Jason. So nothing significant on that front from a margin perspective.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Will Randow from Citigroup. Please go ahead.
Hi, good morning, guys.
Good morning, Will.
Just had a couple follow-ups from last set of questions, in regards to the inventory ramp up on the land side, I was kind of curious, I assume a lot of those are rolling takedown deals, so what’s kind of detail in regards to the sales production cycle? Is this kind of the inventory for the next year or we’re talking for the four years out?
Most of these are rolling option projects, which we think are great for our return on investments. We’re going to start – the first of these we’re going to get closing from 2017 and these are 2017 and 2018 deals primarily. It’s not farther out in there. These are entitle projects primarily. These are projects where we’re – as we sit here today. We either have already done the architecture or working on our architecture and ideally we will be having models going on these projects by the end of 2016 or sometime in the mid 2017.
In terms you mentioned your augmenting ASP down with these deals, can you talk about underwriting assumptions as we looked at this ramp in lots?
Yes, I mean when we look at these deals are masterplan communities, clearly we’re looking really return our capital quicker and you might take a little bit lower return on those and you would something yet to buy kind of outrun in bulk purchase and allow these masterplan communities there in, they’re very well romanticized in great coast and locations.
So I think the returns are fairly similar to what we’ve kind of been generating pointer from a revenue perspective and our earnings perspective on our current deals. We have not in anyway – we haven’t compromised any of our standards for any of these deals. And if anything the return on equity is going to be stronger as we sit here today because we got a very favorable terms on these projects.
Yes, I wasn’t suggest…
And I think one of the other thing too as Larry mentioned earlier, the fact that someone allow these price points on these deals are less than $1 million. The idea is you get a little bit of absorption on those, obviously the higher end stuff quite turn it for a fourth month, it’s probably around the two range.
And you mentioned a interesting point for one last follow-up, in terms of return on equity, I think the thing that’s probably under appreciated with regards to The New Home Company as you guys ramp, but explain me correctly and one of those drivers was JVs and now you’re doing somewhat towards more lots which is what you discussing the idea?
I guess when you think about that, the joint venture structure really have turbo charge returns. What is kind of your thought process behind like better terms stepping down exposure to these joint ventures, other folks that kind of inhibit for operating more efficiently or can you talk about that?
Well, I think on the JV’s, we’re still going to do JVs. There is an important part of our business. We have the land development JVs, but we want to sort of feed the builder and then install lots where we can. I think the idea is what the capital that we raise, we like to kind of keep more of those returns to ourselves to the extent we can.
If there are very large deals that for example we’re doing in Phoenix, made a lot of sense to do joint venture was our on trained to the market. So we’re going to look at a kind of deals specific. What makes more sense and how the capitalize whether we do on a balance sheet, kind of balance sheet sort of handle that, or is it something we should deal with the partner and sort of diversify the risk and like you said supercharge of returns to the extent they come through and we get the promote.
One off if you measure us for example last year compared to our peers, our return on equity with one of the stronger companies in the marketplace. We want to continue to do that, return on equity is our primary focus and so it’s something we’re always concentrating on.
But fee business and the JV business both in land and home building help in that area, but also increasing your philosophy on everything helps in that area. So it will always be a focus for our company. Over time there will be fewer and fewer home building JVs, but it will still always be a part of our business.
Got it and just want to say despite stock market volatility, congratulations on the progress.
Thanks a lot. I appreciate it.
Thank you. [Operator Instructions] Our next question comes from the line of Alex Barron from Housing Research Center. Please go ahead.
Hey, good morning guys. I was wondering if you guys reclassified one of the communities from joint venture to wholly-owned because I was trying to make sense of the backlog numbers.
Yes, we did there’s a project in San Juan called Oliva that we owned wholly now that’s – and that’s part of the community count versus in the JV.
Okay, great. And then my second – my other question was, I was wondering if you guys have considered entering the biggest market, is that something as we can look at or not at this point?
Well, we have looked at it and we continue to look at it. We believe that there is an opportunity for an infield move of homebuilder in Vegas that’s design oriented. But as we sit here today, there are so many opportunities in our existing markets that it would be a distraction, somewhere down the road it’s still something we consider. But between Phoenix and our California operations, we have so much opportunity that that’s where I have the next I’d say, next six to eight months, nine months is where we’re going to focus.
Got it, okay. And Larry if I could ask a few detailed questions on some of your community opening, just kind of wondering if you can give us an update on few of these communities that I think should be opening soon or might be already target on Sherman Oaks?
Sherman Oaks, sure we can – well this – we’re going to be – we’re going to have grand opening second quarter on our two Crystal Cove projects, Sherman Oaks and our Fremont projects. The rest of our projects are abreast of our wholly-owned communities are going to be in the fourth quarter.
And then we have a large masterplan in the joint venture called McKinley Village, which will open in Sacramento in the third quarter. So we have a lot of openings for us in the future. But the biggest ones with the most impact Alex are these two Crystal Cove projects for our bottom line for both this year and next year.
So if you come we’re going to tour those projects at the Investor Day and we would love to let everyone kind of see for themselves what – why these are such unique opportunities that the magnitude of those two are bottom line are just so much more significant than anything else.
And top line.
How about a $1 million.
What about these other projects Portola Sprints Cressa, and in a Santa Clara?
Portola Springs, Cressa opened in March and did there a February has done very, very, very well and continues to do very well. Santa Clara will be opening in the fourth quarter.
Got it, okay and thanks a lot.
Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.
I want to thank all of you. We remain very positive and optimistic and feel is if the foundation is in place for us to continue to grow the right way. We have consistently said that we’re not like everybody else and that difference is a positive and a good thing and we believe that still.
I hope many, many of you could come to our Investor Day, so we can – you can meet our people and we can show you for ourselves. And we really appreciate your support in the process and we welcome our one-on-one calls with you later. So, thanks very much.
Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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