MHO
#Thank you very much and thank you for joining us.
Joining me on the call today is <UNK> <UNK>, our CEO and President; Tom Mason, EVP; <UNK> <UNK>, COO of our Mortgage company; Ann Marie Hunker, VP and Corporate Controller; and <UNK> <UNK>, Senior VP.
First to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public items with you directly.
And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call.
Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call.
With that, I'll turn the call over to <UNK>.
Thanks, <UNK>.
Good afternoon everyone and thank you for joining our call to review our third quarter results.
We were very pleased with our third quarter results as we had solid results on many fronts.
We achieved continued growth and profitability in the third quarter with record-high third quarter revenue of $363.5 million, which is a 10% increase over the third quarter of 2014.
Pre-tax income in the third quarter was $26.5 million, a 19% improvement from last year's third quarter.
Net income for the quarter was $15.6 million or $0.51 per diluted share, representing a 14% increase over 2014 third quarter.
Our growth in revenue was driven by a 9% increase on our average closing price to $349,000 a home and we delivered 994 homes during the quarter, which is an increase of 1% from last year's third quarter.
The increase in average sales price from last year was driven by a combination of the mix in our communities, as well as pricing increases in certain locations.
During the quarter, we achieved gross margins of 21.5%, which is an improvement of 80 basis points from a year ago.
As a result, our third quarter operating margin improved to 8.3% from 7.5% a year ago.
In a few minutes, <UNK> will discuss our margins and returns on a little more detail, but at this point let me just say this.
Our third quarter gross margins of 21.5% were down slightly from the second quarter margins of 21.8% as well as the first quarter margins of 21.7%.
This slight decline was mostly due to mix.
During the quarter, our SG&A came in at 13.2% which is the same as a year ago.
Year-to-date, we have improved our SG&A ratio by 50 basis points and expect continued improvement going forward as we grow our revenues.
We have continued to experience some delays and challenges in both land development and home construction in many of our markets, primarily related to the availability as well as cost of labors and subcontractors.
Today, delays on the home construction side approximate roughly five days.
It doesn't sound like much, but it does equate to a week of business.
On the land development side, though very inconsistent from market-to-market the delays were probably slightly more than a month.
The good news, however, is that we do not believe these conditions change markedly for better or for worse during the quarter.
And, at least from a pricing standpoint, we've generally been able to raise prices to offset increases in construction costs.
Overall, new home sales in most of our markets remained healthy during the quarter, which is generally a slower season for home sales than the spring months.
We were able to increase our new contracts by 11% over last year, largely due to the opening of 42 new communities this year, through the end of the quarter.
We have increased our community count by 11% from 2014's year-end and remain on track, as stated in our release, to increase community count by 15% during 2015.
Our backlog sales value also increased, up 27% from a year-ago to $657 million with a record high average selling price of $367,000.
Our financial services business segment also continued to perform very well with pre-tax income of $4.4 million during the quarter, which represents a 31% improvement from last year.
Year-to-date, we have earned $14.3 million from our financial services business and in a few moments, <UNK> <UNK> will review this in more detail.
Our balance sheet and liquidity remained strong with $583 million of shareholders equity and ratio of net debt to capital of 50% at the end of the quarter.
Looking ahead, we expect to continue expanding our community count and growing our market share.
And we will remain focused on continued improvement in both income as well as returns.
Before turning it over to <UNK>, let me give a little bit more specific information on our three regions.
First; the Southern region, which is comprised of our two Florida and four Texas markets.
In the Southern region, we had 377 closings for the quarter, which represented 38% of our total volume.
New contracts in the Southern region increased 22% year-over-year.
We are achieving solid results in both of our Florida markets which are Orlando and Tampa and we have been growing our position in each of these markets.
In Tampa and Orlando sales were strong during the quarter and we expect both of these markets to perform well for us for the remainder of the year.
In our growing Texas operation, both Dallas and Austin contributed significantly to our sales and deliveries, particularly compared with being in start-up mode in those markets a year ago.
Our sales business in San Antonio was relatively flat year-over-year and I will note that we have seen a slight pickup in sales than used to in this quarter although we continue to monitor market conditions there as job growth in Houston has slowed as has been well-documented.
The dollar value of our sales backlog in the Southern region at quarters-end was 51% higher than a year ago and we have 62 communities across our Southern region at the end of the quarter, which represents a 22% increase from last year's third quarter.
As to our four Texas divisions, we have 35 communities versus 31 a year ago and continue to be very excited about our growth opportunities throughout the Southern region.
Next is the Midwest region which is comprised of our Columbus, Ohio; Cincinnati, Ohio; Indianapolis Indiana; and Chicago, Illinois markets.
We had 363 deliveries in the third quarter, a 5% percent decrease from a year ago as those 363 closings represented 37% of the total company closings.
New contracts in the Midwest were up 5% for the quarter.
Sales backlog was up 12% from the end of the third quarter last year in dollar value and our controlled lot position in the Midwest increased 18% from a year ago.
We ended the quarter with 67 active communities across the Midwest, which is 8% more than a year ago and at the end of the quarter, demand in all four of these markets remained good.
Finally, the Mid-Atlantic region, which is, Charlotte, Raleigh North Carolina as well as DC; new contracts were up 3% for the quarter compared with a year ago and backlog value was up 22% at quarter's end from a year earlier.
We ended the quarter with 37 active communities in the Mid-Atlantic region, which is about 9% more than a year ago.
We delivered 254 homes in this region, which was 25% of total Company and this volume was down 2% from last year.
Our Charlotte operation had a particularly strong quarter, with improvement in sales and delivery and while our deliveries in Raleigh were slightly off for the quarter, Raleigh continues to be one of our best performing markets.
Demand in the DC market continues to remain a bit sluggish.
Our total controlled lots in the Mid-Atlantic region decreased 15% from last year.
And with that, I'll turn it over to <UNK>.
Thanks <UNK>.
We continue to focus on improving our profitability on our returns.
In the third quarter, our pre-tax income increased 19% on revenue growth of 10% and our pre- tax income percentage increased to 7.3% from 6.7% a year ago.
New contracts for the third quarter increased 11% to 988.
Our traffic for the quarter was up 11% and our community count was up 13%.
Our new contracts were up 10% in July, flat in August and up 25% in September.
As to our buyer profile, 38% of our third quarter sales were to first time buyers compared to 37% in 2015 second quarter and 49% of our third quarter sales were inventory homes compared to 50% in 2015 second quarter.
Our active communities were 166 at the end of the third quarter.
The breakdown by region is; 67 in the Mid-west, 62 in the South and 37 in the Mid-Atlantic.
During the quarter, we opened 14 new communities, while closing three and our current estimate is to end the year with about a 15% higher community count than we started 2015.
We delivered 994 homes in 2015's third quarter, delivering 55% of our backlog compared to 60% a year ago.
Revenue increased 10% in the third quarter compared to the same period last year, primarily as a result of an increase in the average closing price.
Our average closing price for the third quarter was $349,000, a 9% increase over last year's $320,000 and our backlog sales price is $367,000, up 10% from a year ago.
Our building cycle times for homes have been slightly higher this year than last year.
Year-to-date, our cycle times have increase about 4% and our construction and land development cost have also increased, looks like about 2% year-to-date.
Our gross margins were 21.5% for the quarter, up 80 basis points compared to last year's third quarter and we've had 21.6% in year-to-date gross margins versus 21.1% last year.
Our third quarter SG&A expenses were 13.2% of revenue, flat compared to a year-ago.
Our variable selling expenses increased as a percent of revenue by two-tenth of 1% in the third quarter compared to a year ago and our expenses associated with our increase in land inventory and higher community count increased as well.
Year-to-date, our SG&A percentage is 50 basis points below last year and we continue to focus on improving our efficiencies.
Interest expense increased $1 million for the quarter compared to last year and increased $2.3 million for the first nine months of 2015.
These increases reflect higher borrowing amounts and cost.
We have $17 million in capitalized interest on our balance sheet compared to $16 million a year ago.
That's about 1% of total assets.
With respect to income taxes during the quarter, we had a tax rate of 41%.
Our rate during the quarter was unfavorably impacted by changes in a future state tax rate, which reduced the value of our NOL carry forward in the State by $600,000.
Excluding this one-time impact, our effective tax rate for the quarter was 39% and we estimate that our tax rate for the remainder of this year at 39%.
Our earnings per diluted share for the quarter were $0.51 per share.
This per share amount reflects $1.2 million of dividends paid to our preferred shareholders.
Now <UNK> <UNK> will address our Mortgage Company results.
Thanks, <UNK>.
We continue to manage our balance sheet carefully focusing on investing carefully in new communities, while also managing our capital structure.
Total homebuilding inventory at September 30, 2015 was $1.1 billion, an increase of $239 million about September 30, 2014.
The increase is primarily due to higher investment in our backlog, higher community count and more finished lots.
Our land investment at September 30, 2015 is $551 million, a 29% increase compared to $426 million a year ago.
At September 30, we had $282 million of raw land and lands under development and $269 million of finished unsold lots.
We own 3,844 unsold finished lots with an average cost of $70,000 per lot and this average lot cost is 19% of our $367,000 backlog average sale price.
The market breakdown of our $551 million of unsold land is; $163 million in the Midwest, $214 million in the South, and a $174 million in the Mid-Atlantic.
Lots owned and controlled as of September 30, 2015 totaled 21,562 lots, 51% of which are owned and 49% under contract.
We own 11,073 lots, of which 33% are in the Midwest, 42% are in the South and 25% in the Mid-Atlantic.
During 2015's third quarter, we spent $83 million on land purchases and $63 million on land development for a total of $146 million.
About 60% of the purchase amount was for raw land.
Our estimate today for 2015 land purchase and development spending is $425 million to $450 million which includes the $322 million we've spent year-to-date.
At the end of the quarter, we had 360 completed inventory homes, two per community and 962 total inventory homes.
Of the total inventory; 289 are in the Midwest, 428 are in the Southern region and 245 are in the Mid-Atlantic.
And at September 30, 2014 we had 305 completed inventory homes and 999 total inventory homes.
Our financial condition continues to be strong with $583 million in equity and net debt to cap ratio of 50% and at September 30, 2015 there was a $156 million outstanding under our $400 million unsecured revolving credit facility.
That completes our presentation.
We'll now open the call for any questions or comments.
I think it's both.
I think you've nailed it pretty accurately.
I think that obviously based on the terms of the call, our investment in our new markets and so forth in the land spend that <UNK> talked about, we're bullish about housing.
We continue to believe that that conditions in our markets will get better and ---+ not to sound like a broken record, it's often uneven and a bit choppy.
Certain markets tend to get soft when others don't and then the pattern switches itself.
And we have tried to be disciplined with our margins.
We feel good about our margins.
As I said, even though they were down slightly from first and second quarter, they're relatively in line when you begin to factor out mix and so forth.
And of course, our margins are net of nearly ---+ slightly more than 4% of selling expenses.
So when you look at our margins for the quarter, at 21.5% we feel that those compare very favorably with other builders.
And one other comment I would make is that we feel pretty good about, if you look at sales this year, we were up 13% the first quarter.
We were up 8% the second quarter, we were up 11% the third quarter and we're also pretty pleased with focused on growing communities by 15% by the end of the year.
So all in all, we feel like things are pretty solid.
Probably the least active in DC and as you look at the other 12, equally active and it's very competitive.
And the strategy of our land really hasn't changed where we're intensely focused as a first, second and third priority on getting what we call from premier locations.
Hopefully, you can get them on a finished lot basis but if it takes developing them ourselves and we're able to manage the risk appropriately, we do that.
As <UNK> said, about 60% of our deals were at Raleigh during the quarter and that's close to about where we are company-wide right now.
We haven't changed our underwritings in terms of the minimum hurdles from a return standpoint, which is all influenced by expected margin and pace based upon conditions the way they are now, not based upon what we think might happen to conditions going forward.
But it's very competitive and Orlando and ---+ Orlando, Charlotte, Tampa, Austin all of them are quite competitive.
But we're looking to grow in all of our markets.
The one that we're most concerned about because of just in general, sluggishness of it is DC and we're probably being a bit more cautious there right now.
I don't know that, I'll let <UNK> take, maybe, how it might differ from region to region.
That's an average.
In some markets, it's two or three days; in other markets, it might be for four or five or six days.
It averages out to about five.
If you look at 994 closings during the quarter, sometimes one week doesn't sound like a lot, but it can equate to 50, 60, 80 closings.
I'm not saying that's exactly how many had impacted, but certainly, it did have an impact and I'm not sure if that answers your question.
It is, like <UNK> said, it's kind of just market dependent.
If you look, for instance, at Dallas and Charlotte, trained labor has been a little bit of an issue.
When you start looking at Austin and Dallas it's again, kind of been concrete labor and mason.
So markets are a little bit different, but again, we think that [cyclical] time has been about 4% or so, which is about a week to us.
It doesn't ---+ I want to emphasize something I said.
Look, it could change tomorrow, but as of right now, it doesn't seem like it's getting any worse.
We feel like it's gotten settled into about where it is.
The situation has been more acute in terms of delays on the land development side.
Obviously, land development is a seasonal business and weather can certainly have a very significant impact on land development much more so that it would have on home construction generally and everybody likes talk about the weather but there have been contractor delays there as well.
There is contractor shortages.
We really haven't changed our strategy.
Oftentimes it's deals driven.
About 20% or so of our business is probably ---+ maybe a little more than that right now, but close to 20% is attached town homes, which typically will bring the price down somewhat, but we have not launched any major new product initiatives with smaller houses designed ---+ at any significant way designed to appeal, perhaps to some first-time homebuyer.
We're watching that market carefully.
There are signs that that may be unhooking itself in some markets.
Historically, pre-2000, back in the early 2000s and 1990s, we were very, very strong with sub-2000 square foot houses in markets and if and when that market does come back, I've got every confidence that we'll be able to react at that time, but at least in terms of today, when you look at our mix, it really hasn't changed a whole lot.
Every market is a little bit different <UNK>.
Our spec policy really hasn't changed much.
We're about the same number as we were a year ago, about the same as far as completed specs.
It's just the local deal you are always trying to bring in subs that maybe from one market to another that makes sense.
You try to make sure that they understand and appreciate the volume that we can give them the certainty of the payment et cetera, but each market is a little bit different.
You can comment in a lot of different ways.
And it's very hard to manage it.
I mean, I think we're doing a really good job of managing it, but there is no easy answer.
Five years ago or three years ago, I should say when we were coming out of the housing recession, every builder was talking about how one of their big initiatives was to become better and smarter and reduce cycle time and that was certainly a big priority here as well, but when you look at ---+ as housing has begun to come back and you look at the strength of the apartment market, a lot of people used to build houses or build an apartment, they're easier to build.
Every one of them is the same and houses require a little bit more time any maybe complexity.
So you manage it.
As we said twice during this call, we've lost about five days and I'd rather have us pick-up five days than lose five days, but I think we're doing a pretty good job managing it.
It has had an impact.
Well, when you look, in general, way our business is, as you close the motels in the fourth quarter, [all we see is] revenues up.
So you hope to get more leverage in the fourth quarter and you tend to get the lower closings and the least amount of leverage in the first quarter.
But as <UNK> said, we continue to focus on the SG&A line.
There wasn't really anything that jumped up that much in the third quarter with the exception that variable selling was up two-tenths.
Having more investments leads to more real estate taxes and HOA fees and those type of things.
Opening more communities drive some of those selling expenses also, but as our volume, hopefully, continues to increase, [directly] we'll get that leverage as far as at the SG&A and the operating line.
Don't make any estimates as far as the gross profit line.
Our GPs have been pretty much flat the first three quarters, which we feel pretty good about and it's 50 basis points year-to-date better than last year.
We continue to focus on that, but no projections as far as the GP line.
That's a really---+ there's no specific answer on that.
Every deal is different, but I don't know whether it's changed, it would have been the same answer a year ago and year ago and year ago and that is that every deal is different.
Smaller deals, you turn it through quicker than you do larger deals.
We don't generally take on larger deals like we used to, but typically the day ---+ I mean, this is very, very general, but the day that you buy a piece of raw ground, it takes about six months to develop an initial phase and then another 90 days beyond that to get open for business.
So this is so rough and dirty it's probably not worth the words I'm using to describe it, but it's about a nine month process from the time you buy the land until you begin to open for sale and sometime it can be ---+ that time is stretched because of all the things we talked about earlier on the call, but a lot of deals are stretching out a year.
But if you look at our land position <UNK>, as you know, we like to own a two to three year supply with about a year of those being finished lots and today we own a little under 4000 finished lots and then we own like another 7000 either raw or under development.
So we're in really good shape for 2016 and also a fair amount of 2017.
So we feel really good about our land position, we try to be all about premier locations.
We think that means more to customers, being in the better school districts, near the better shopping, near the better transportation.
We'd love to be on little more land like as everybody would, but if we have to develop those premier sites, we will do that knowing it takes more time and you take development risk in most of those situations.
But again, on those raw land deals and deals we develop the hurdle rates also are higher to make sure we get rewarded for that.
But overall, we feel pretty good about our land position.
Just one more thing I'd add, just to answer than and to underscore what <UNK> said, I think, comparatively speaking, we have a very healthy land position.
We own just a little bit over 11,000 lots, control another 10,000 on top of that and when you look at what our growth goals have been and what they are going forward, I think we're in really good shape and I think it's managed very well with over half of the owned and controlled off the books.
No, it has not.
I think <UNK> is going to answer this one.
Yeah, hi <UNK>, this is <UNK>.
We've given some indication in our 10-Qs as to where we think the peak will be this year and it's been close to ---+ we had said it could be as high as $209 million.
At this point, we've generally said it's probably not quite that high, it's probably more in the $175 million range.
We were around $150 million outstanding at the end of September.
There is a lot of swing week-by-week $10 or $20 million.
So that's really the only comment we made and we certainly don't have any suggestion out there for next year, but we did announce that we increase the commitment level on it to $400 million from $300 million and that was really just largely to give us extra comfort to get us through the foreseeable future.
And with the current debt structure that we have I mean we feel very comfortable with it.
I missed the last part of your question, you said to comment on the Houston market and what was the (multiple speaker).
Yes, most of which you said is true.
The Houston market has been negatively impacted by the decline in oil prices.
It remains, for the most part, a very healthy economy in terms of the macro economy.
I believe that it's still the largest new home sale market in the United States though not quite as robust as people expected it to be a year ago at this time.
It has affected our business slightly to be sure, particularly as you get into the first and second move up.
I think that's more impacted than the lower price points there and it's ---+ I'd say the market is in a very average condition right now based upon what it was.
It was quite hot for a while, but we remain bullish about it long-term.
We think it's a very healthy market in terms of the economy and homebuilding in particular.
Thanks very much for joining us.
Look forward to talking to you next quarter.
