WLH
#Thanks, Bill.
As Bill mentioned, we've seen a very strong start to our spring selling season.
As compared to last year, this year's selling season really came out of the gate strong with a solid orders number for January, up 38% year-over-year.
We are particularly pleased with the acceleration of our monthly absorption pace as the quarter progressed, with the rate increasing sequentially each month starting at 4 in January, 4.3 in February and an absorption pace of 4.7 in March, averaging [4.4] (corrected by company after the call) sales per month for the quarter.
The strong sales pace continued into April, where our sales pace was 4.5 homes per community on net new home orders of 481, up 11% over what was by far our most difficult comparable from last year.
As Bill touched on, our focus on the entry-level buyer is really driving this orders growth as we continue to see the most favorable demand dynamics and pricing power at our lowest price point projects in our various markets.
In nearly all of our markets we experienced significant year-over-year improvement in absorption pace for our entry-level product ---+ and in three of our divisions, including Northern California, Arizona and Washington, achieved an absorption pace of over 7 homes per community per month for entry-level product.
On a companywide basis, our entry-level product produced a sales pace of 5 sales per community per month, well above the company average for the quarter and an increase over 4.4 for the same period last year.
Our first-time move-up product offerings have also performed extremely well for us this year, outperforming last year's first quarter sales pace by a full one sale per community per month.
Across the board, each of our product segments ---+ from luxury and second-time move-up to the lower-priced products ---+ demonstrated improvements in absorption pace during this year's first quarter as compared to last year.
We continue to balance this strong pace with opportunistic price increases.
During the first quarter, we increased prices at approximately 80% of our active selling communities.
In all, our dollar value of orders for Q1 was $603 million, up 33% over the prior year.
On a trailing 12-month basis, the dollar value of orders was $1.9 billion, up 28% over the previous 12-month period and up 55% over a 2-year period.
While I'm pleased with the performance of each of our divisions during the first quarter, I think there are several in particular worth highlighting.
First, our Colorado division recorded 144 net new home orders, a 136% improvement over last year.
Denver continues to be a dynamic market with strong employment and lower levels of new-home inventory.
In addition, our strategy to move to product with a price point well below the median new-home price has been well received, particularly at our Avion at Denver Connection master-planned community, where pricing starts below $300,000.
We continue to see robust sales activity in our Washington division with net absorption of 6.6 sales per community and net new home orders of 179, an 18% increase over last year.
We're also seeing significant pricing power with double-digit same-store home price appreciation year-over-year.
Our Washington division continues to maintain a focus on creative product solutions, including townhomes and small lot detached offerings to maintain affordable new home solutions in this very dynamic and tight supply market.
Our Nevada division has demonstrated significant signs of improvement over last year.
Net new home orders for the quarter were up 42% to 109 units, with each product segment absorbing at a pace above 3 sales per community per month for the quarter, including our fastest absorbing luxury product in the company.
Closings in Nevada were also up 54% year-over-year during Q1.
In Texas, we currently have 20 active selling communities and offer a range of new detached homes targeting the entry-level and first-time move-up buyer.
Central Texas' vibrant local economy driven by a large and diversified employer base across tech and other professional sectors continues to exhibit strong demand for housing.
Our entry-level focus on new homes priced below $300,000 continues to outperform the overall new home market on an absorption basis.
Our monthly absorption rate in Texas has been approximately 4 sales per community since the date of acquisition.
The Inland Empire market, which includes legacy <UNK> communities as well as communities acquired through the RSI Acquisition on March 9 have performed exceptionally well year-to-date.
We've seen absorption rates in the Inland Empire that are almost double that of the coastal markets at approximately 6 sales per community per month since the start of the year.
Overall, our backlog conversion rate for stand-alone <UNK> was 80% for the quarter, which reflects a significant improvement from the 68% conversion rate we experienced in the first quarter of 2017.
With our spec/start strategy, we're able to meet the demand of needs-based buyers that want to move in quickly and have shorter escrows, and better manage our cycle times, direct construction costs and deliveries on a more consistent basis.
In addition, having move-in ready inventory for buyers creates an opportunity for us to capitalize on the sense of urgency that buyers may have in an environment of rising interest rates.
For the first quarter, we sold and closed 25% more specs than last year's first quarter and they represented 33% of all homes closed during the quarter.
Our average sales price of homes closed during the first quarter was approximately $503,000, down 15% sequentially, driven by geographic mix as well as the addition of lower-priced communities associated with closings in RSI projects for the three weeks at the end of the quarter.
ASPs for <UNK>iam <UNK> Homes standalone business was approximately $530,000.
We continue to experience very healthy year-over-year same-store price appreciation, which averaged 8% per homes closed during the quarter.
Our average community count for the first quarter was 84, up slightly from the 82 average communities during the first quarter of 2017.
The high level of demand in our attractive Western markets can make it difficult to replace communities fast enough to keep up with the timing of closeouts, but we continue to bring new communities online in each of our markets and this is, of course, bolstered by our acquisition of RSI.
As of March 31, we were selling out of 105 active sales locations.
We expect to open approximately 45 communities during the remainder of 2018, and continue to expect to be selling out of approximately 125 new home communities by the end of 2018.
For a discussion on our financial results, I'll turn the call over to <UNK> before wrapping up with some commentary and our outlook for the remainder of 2018 and strategic initiatives going forward.
Thank you, Matt.
Total homebuilding revenue for the first quarter of 2018 was $372 million, up 44% year-over-year from $259 million in the year-ago period.
The increase in home sales revenue was driven by a 48% increase in the number of homes delivered and partially offset by a 3% decrease in ASP to approximately $503,000 per home as Matt mentioned.
During the first quarter, our homebuilding gross profit increased to $65 million, up 61% compared to the first quarter of 2017; and adjusted homebuilding gross profit grew were 63% to $85 million.
GAAP gross margins for the first quarter were 17.5%, a 190 basis point improvement from the year-ago quarter.
Excluding closings associated with the RSI Acquisition, homebuilding gross margins for stand-alone <UNK> was 17.8%, an increase of 220 basis points year-over-year.
Our adjusted homebuilding gross margin percentage was 22.7% during the first quarter as compared to 20.1% in the first quarter of 2017.
Our sales and marketing expense for the quarter was 6.1% of homebuilding revenue as compared to 5.7% in the year-ago quarter.
The increase is primarily driven by the impact of the adoption of accounting rule ASC 606, adopted on January 1, 2018, requiring the company to record certain selling costs that were previously recorded as cost of sales to sales and marketing expense.
General and administrative expenses were 6.6% of homebuilding revenue compared to 7.3% in the first quarter of 2017.
The dollar amount of our general and administrative expense increased during the quarter over the prior-year period due in part to increased headcount from the RSI Acquisition.
These combined for a total SG&A expense of 12.7% for the quarter, an improvement from 13% in the year-ago period, excluding one-time transaction expenses.
Income from our financial services group was $0.9 million, up from $0.2 million in the first quarter of 2017.
As discussed on previous calls, financial services remains an area of focus for us, and we are excited about bringing in Brian Hale to run the group, which Matt will touch on in greater detail.
Adjusted pre-tax income for the quarter was $18.5 million, and adjusted EBITDA was $41.7 million, up 169% and 108%, respectively, over last year's first quarter.
During the quarter, we spent $3.1 million in pre-tax dollars on transaction expenses related to the RSI Acquisition.
We anticipate approximately $1 million of additional transaction-related expenses to be recorded in the coming quarter.
Our provision for income taxes was $2.8 million during the first quarter for an effective tax rate of approximately 18% for the quarter.
The lower-than-expected tax rate was driven by certain one-time tax benefits that were recorded during the quarter.
We are still expecting a tax rate for the remainder of 2018 of approximately 24%.
Income attributable to noncontrolling interests was $4.3 million during the quarter as we had a higher number of deliveries from certain joint venture communities in the quarter than in the prior year.
Net income available to common stockholders during the first quarter was $8.3 million or $0.21 per diluted share based on 39.9 million fully diluted shares.
Excluding the impact of the RSI transaction costs, adjusted net income to common stockholders was $10.9 million or $0.27 per diluted share.
For the first quarter, our land acquisition spending, excluding the acquisition of RSI Communities, was approximately $130 million and horizontal spend was $50 million for a total land spend of a $180 million.
As of the end of the quarter, our total lot count of owned and controlled lots was 28,800, which is comprised of 56% entry-level product, 27% first-time move-up product and 12% Ovation active adult product which is representative of how we see our product mix evolving over the coming years.
Now turning to our balance sheet.
As Bill mentioned, during the quarter we successfully completed a high-yield bond offering issuing $350 million of 6% senior notes due in 2023, which were used in part to finance a portion of the RSI Acquisition and also to repay all of our $150 million of 5 3/4% senior notes that were due in 2019.
With this financing, our next senior note maturity is in August of 2022.
As of March 31, 2018, our total debt to book capitalization was 60.4%, which is in line with Q1 of 2017, and up from 54.5% at the end of 2017 but primarily driven by the RSI Acquisition.
Our net debt to net book capitalization was 59.5% at quarter end, up from the 49.6% at December 31.
As Bill mentioned earlier, we expect to end 2018 with key leverage statistics in line with 2017.
And now, I'll turn it back to Matt.
All right, thanks, <UNK>.
Before we open the call up to your questions, I'd like to provide some additional information regarding our outlook for the coming quarter, remainder of the year as well as some long-term strategic goals.
The strong start to 2018 positions us well to achieve our goals for the year and our expectations for the full year on a combined basis, including new home deliveries of approximately 4,400 to 4,750 units, home sales revenue of approximately $2.2 billion to $2.3 billion and pre-tax income before noncontrolling interest of approximately $175 million to $185 million, inclusive of RSI transaction expenses and purchase accounting.
For the second quarter of 2018, we expect our backlog conversion rate to be between 70% and 75%.
Our average sales price is expected to be approximately $480,000, based primarily on geographic and product mix.
We anticipate GAAP gross margins of 17.4% to 17.6%.
Also during the second quarter, we expect income attributable to noncontrolling interest to be approximately $4 million.
For Q2, we anticipate our SG&A percentage to be approximately 11% to 11.2%.
This is a bit higher than a year ago based on ASC 606 from a sales and marketing perspective, as well as increased headcount on the G&A side due to the growth ramp in both RSI divisions, as well as costs associated with the financial services side of the business, which we'll talk about shortly.
As is typical, we'd expect to see the SG&A percentage to improve throughout the back half of the year.
With next week marking the 5-year anniversary of our IPO, I think it's important to reflect on how far we've come as a company, but more importantly, where we want to go.
Five years ago we were selling out of 22 communities in 4 states and coming off a year of 950 closings with an average sales price of $275,000.
Today, our footprint and product mix have substantially changed into a significantly more diverse and operationally efficient company, operating in 9 divisions across 7 states and over 100 active selling communities.
While we can all take an enormous amount of pride in what we've accomplished, we must continue to focus on how we see ourselves evolving and maturing over the next several years.
Based on the current economic and demographic fundamentals we're experiencing in our markets, we feel the next few years should be positive for our industry and for us, specifically as a company.
We remain focused on the integration of our recent acquisition of RSI as well as the organic growth of our other existing divisions.
Additionally, we remain steadfast in how we can continue to improve shareholder value and returns over the coming years while continuing to strengthen the company's balance sheet.
On the heels of completing the RSI Acquisition, our next strategic goal is to improve and build out our financial services business.
As we announced earlier this year, we have hired Brian Hale to lead this business segment.
Brian is a 35-year veteran in the mortgage business and one of the most recognized and well-respected executives in the industry.
Our initial objective will be to continue to enhance the mortgage side of the business while expanding into title, escrow and other settlement services as a means to deliver a better customer experience while simultaneously improving earnings and return on equity.
Our long-term goal for this group and its related businesses is to account for approximately 10% of the company's pre-tax income by 2020.
We also anticipate continuing to invest in systems and technology to achieve a better customer home buying experience.
This will ultimately lower our sales and marketing expenses through highly efficient and targeted advertising and reduce outside broker commission expenses by appealing to a consumer base, which is willing to purchase directly if given access and transparency to data ---+ when, where and how they want it.
You'll see our desktop and mobile websites morph over the balance of this year and into next, with increased functionality which will help remove hurdles to the consumer quickly, finding the home that best suits their needs.
It will provide us with integration into our new CRM platform, enabling us to capturing more information about our prospective homebuyers and create a more personalized connection with them throughout the home buying process.
Geographically, and from a land pipeline perspective, we feel that we are well-positioned to see growth out of our newly expanded footprint.
Our increased allocation of both entry-level and Ovation active adult lots will enable us to continue our growth and deliveries over the coming years.
When we look at our footprint, we feel that with reasonable expectations we can grow to approximately 5,500 to 6,000 deliveries by 2020.
As Bill touched on earlier, we continue to be focused on our balance sheet goals following our acquisition.
While we anticipate our year-end 2018 leverage ratios to be consistent with year-end 2017, we know we must continue to take strides to show improvement as we move through the balance of this cycle.
Our goal by 2020 is for debt to book capitalization to be at or below 40%, with net debt to be below that target.
Those goals include significant growth in shareholders' equity through accretion of earnings, as well as paying down our most expensive debt, our $350 million 7% notes, well in advance of their maturity date in 2022, as it becomes callable at par starting next year.
It's been an extremely busy start to 2018, and I'd like to thank all the <UNK>iam <UNK> Homes team members, including a number of new faces that have joined us through the RSI Acquisition, for all of their hard work and dedication toward the achievement of our goals.
We're extremely excited about the future of <UNK>iam <UNK> Homes, and we look forward to an exciting 2018 and the coming years.
I'd now like to open up the call to your questions.
Operator, we're ready for the first question.
Yes, Mike, it's Matt.
As we said, we gave you a rolled-up guide for Q2, which obviously includes, on a GAAP basis, RSI and the purchase accounting effect.
We still see the full year inclusive of purchase accounting to be slightly up year-over-year on a consolidated basis.
I think as we've laid out for you guys, we've given you where we see revenue, pre-tax and units.
Obviously, quarter by quarter, we'll give you short-term guides.
I think, encouraged obviously by the start of the year from a sales perspective, as well as the ability to raise pricing at 80% of our communities, as well as the same-store guide that we've given.
So nothing's changed from that perspective.
Well, I think on a pre-tax basis Mike, transaction expenses in Q1 were $3.1 million and <UNK> indicated about another $1 million here in Q2.
Relative to the purchase accounting, I don't think that we've got anything that we're going to guide you to.
I think we're going to keep it focused on the GAAP side.
Well, Mike, I think relative to your first part of your question, relative to financial services, right, it is going to be a ramp.
And I think we've got kind of what we have been doing, which is fairly minimal over the last couple of years, bringing Brian on, and Brian's got a defined strategy as to how we go about executing and implementing those.
I think 2018 will be a year that we'll look to implement as much as we can.
We're starting to realize some of the benefits in '19, with 2020 really being where we expect to see the full flow through.
So I think it's reasonable to expect 2019 to be incrementally positive over '18 from a financial services perspective.
But obviously, we wouldn't expect it to leap all the way to kind of that 10% of pre-tax goal quite by '19.
I think relative to the SG&A guide, I don't think that's something that we're going to be giving specific long-term guidance on, at this point in time.
I think, obviously as we've talked to investors post the acquisition, they'd want to understand what the increased footprint means for us.
Obviously, we were very upfront about the fact that we're willing to take leverage up a bit to do the transaction, but it tends on bringing it back down.
And so I think the areas that we've focused on are the areas we're comfortable giving some longer-term guide at this point.
Yes, a good question.
It's something that we certainly take a look at.
And as we kind of look at our backlog as well as homes we've closed recently, right now our buyers are spending about 27% of their income on housing.
And we've gone back and looked historically, and even excluding prior cycle peaks, we would expect to see those numbers a bit higher than that at this point in time in the cycle.
So I think the reality is, is we look at people who are currently renting and coming in to buy a home from us.
They're typically spending north of 30% of their adjusted gross income on housing at that entry-level price point, so that 27% is pretty consistent across our divisions.
We're a little bit lower than that in Arizona and Nevada, maybe a bit higher than that in coastal California.
But we typically are seeing in some of our higher price point markets like the Bay Area, people coming in with higher down payments, to kind of keep that debt to income lower than we've historically seen.
So I think the credit statistics are telling us that our buyers, from a FICO, liquid assets as well as debt to income ratios, they can afford more housing.
I think people are being prudent.
But I think also, we've got the ability, between interest rate increases, as well as elasticity in pricing, to absorb some of that on the consumer side.
You touched on a point that I know you and I have talked about in the past, we're really seeing zero percent of our buyers use ARM products.
And I think we continue to see rates move, that would be something that we would historically look at as a little bit of a release valve for people who are focused on that front-end payment.
Going back to 2002 to 2004, which were more normalized periods of the last cycle, before we saw the meteoric rise in '05 and '06, we were seeing people, about 30% of our homebuyers put some form of ARM product in place, especially at that entry-level price point.
So we still think there are tools in the tool kit, as rates continue to rise to make sure that we can put affordable payments in front of our buyers.
Well, I would say trying to guess what is going to be the outcome of anything going on in Sacramento is not something that I want to play.
But, look, I think the reality of the situation is California's energy codes are some of the most stringent in the nation.
And even to me, existing energy codes, a high percentage of our existing product is already utilizing solar to meet those energy codes.
RSI was doing a pretty significant amount of their product as well, in the Inland Empire, with solar.
So look, it's not like we're going from potentially 0 to 100.
We're going to somewhere in between that to potentially something greater than that.
I think the cost of solar has continued to come down a bit as well.
And I think that there is some ability to push some of that forward.
Obviously to the extent we can't push it forward to our homebuyers and we don't believe that there's the ability to raise prices if costs go up, land residuals theoretically should go down.
But the land market is not necessarily 100% linear either.
I think it's one of those things that as a company, we've been focused on the fact that California has had a net zero initiative in place for a number years that we've all been working towards.
So I don't think we're talking about a situation if that passes it's automatically a net deduct to builders' short-term margins.
Thanks for taking my questions.
The first one I had, could you repeat all of the 2020 guidance that you provided.
I couldn't write it down fast enough.
Sure, <UNK>.
I think from a deliveries perspective, looking ahead, we are targeting 5,500 to 6,000 deliveries by 2020, bringing debt to cap down to 40% and really having our financial services and related businesses account for approximately 10% of total company pretax income by that time.
The next question I had.
Arizona, it looks like the community out there was down pretty meaningfully, as were the orders.
Can you remind us what the plan is there.
And are there other opportunities, were it to replicate some great success in Colorado, with moving the price point down.
Are there some other areas of the country that you might have those same opportunities.
Well, look, I think Arizona is a little bit of just being gapped out right now.
We've got a pretty significant Ovation active adult community that's going to be opening up in the second half of the year in Arizona, which will provide us, kind of a ramp back up in community count that will be pretty similar to where we were at for most of last year.
We've also mentioned on previous calls, we had a previously held large asset that was, for tax purposes, held Rancho Mercado master-planned community, which is 500 acres and 1,900 lots up in the Northwest.
We've activated that community.
We would anticipate getting to model the lots next year.
And so we do see Arizona, really, we're a little bit saddled there right now in terms of community count based on some really impressive absorption rates over the last couple of years ---+ and again, they've been focused on a lower price point product that's been extremely successful.
I think Colorado, <UNK>, you kind of hit the nail on the head, is figuring out a way to introduce product at a lower price point that has really significantly improved our absorption rates in that division.
That's something that I think our Pacific Northwest team has continued to do extremely well.
I would say that also has been contributing to Nevada's year-over-year improvements as well.
We opened a pretty significant mini- master plan in Summerlin that was targeted specifically at the entry-level buyer and that's performed well.
So I think that we're going to continue to look, and I think as <UNK> mentioned, we'll try to provide you guys a little bit more detailed look into the designation of kind of our lots held ---+ our lots owned and controlled, relative to the breakdown of entry-level and as well as move-up and active adult.
So we would expect to see our average square footage continue to trend down on a plan by plan basis over the coming years.
And then, I've just got a couple of more and these have to do with RSI.
As you think about where the ASP ---+ I know you all gave the guidance for 480 for 2Q, but is it going to be something in that mid-400s, as we go out and maybe even into '19, is that what you guys are planning now.
And then also, if you could give us what the base run rate should be for G&A now with the ASC 606 change plus the additional headcount from our side that both those items would be helpful.
Yes, <UNK>, it's <UNK>.
On the ASP conversation, the run rate relative to Q2 is probably what we're going to see rolling out to the rest of the year.
And then relative to your SG&A conversation, we'll see maybe 40 basis points of increase in Q1.
Part of that was just the way the mix shook out, relative to California deliveries.
I think we'll see that number being more like up 20 basis points change for the rest of the quarters through this year.
So if you factor that into your modeling, I think that would be helpful.
Yes, I think relative to RSI, I don't know that they were radically different than we were on a company average basis.
I think where we've been seeing success is as I've mentioned, we've got to do a better job utilizing technology and platforms that in particular, as we see kind of the adulting millennials really embrace some of the platforms that are out there for starting their home buying search.
If you can give people enough information and transparency I think to shop online and really understand what you are offering and get people into our sales offices before they pick up the phone and call a broker, we have our best possible opportunities to continue to bring that down.
I think the other side of it is where we're in extremely tight supply markets such as the Pacific Northwest, as well as the Bay area.
We've been continuing to push for either reduced broker co-op percentages or even a flat fee to try to bring that down.
I think a big challenge has been the fear of trying something new for some of our divisions.
But year-to-date, we've had a lot better success implementing some of those changes.
But I think a big onus is on the builder to make sure that we're putting as much information out there, so that the public can make a home buying decision, potentially even before they come into our sales offices.
So look, it's something that over the course of the next couple of years, you're going to continue to see trend down from just the viability of the external broker community.
Well, I think, obviously one of the things that we did with the RSI transaction, which is cash flow efficient was, we banked some of the longer-dated, more capital intensive assets of their business with a land banking transaction that will effectively allow us to fund the horizontal improvements and get those to finished lots.
So with a higher percentage of optioned lots moving forward as we continue to grow, we expect to be a little bit more efficient on cash flow.
I would say obviously for us, that cash flow needs to be used for really two primary purposes.
One, to fund kind of the business as we have laid out from a growth perspective, but also to chip away on leverage over the course of '19 and '20 as we've outlined.
So on a percentage basis, yes, you'd expect to see free cash flow continue to improve as operating margins continue to improve on a larger revenue base as well.
But I don't think we want to give specific year-by-year kind of cash flow generation metrics just yet.
Well, I think one of the things that we've done is, we kind of provide to you guys in our earnings deck, kind of quarter-by-quarter historical backlog conversion rates.
I think that we would anticipate some variation quarter-by-quarter.
I think that RSI's build model is fairly similar to ours.
So while we're going to expect some variability quarter-to-quarter, it's really difficult for us right now to give you a quarter-by-quarter estimated conversion rate.
But historically, for the full year, going back the last couple of years, we've averaged somewhere in the mid-70s for each quarter on a full year basis.
So we wouldn't anticipate a significant change to that this year over last year.
I think we're going to just ---+ yes, we're going to give kind of the numbers as we've presented them on a combined basis, going forward.
All right.
Thank you so much.
I'd like to thank you all for joining our call today.
We look forward to speaking to you next quarter.
Have a great one.
