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#Thank you, Candice.
Good morning, and thank you for joining us today to discuss <UNK>iam <UNK> Homes' financial results for the three months ended March 31, 2017.
By now, you should have received a copy of today's press release.
If not, it's available on the company's website at www.lyonhomes.com.
The press release also includes a reconciliation of non-GAAP financial measures used therein.
In addition, we are including an accompanying slide presentation that you can refer to during the call.
You can access these slides in the Investor Relations section of the website.
Before we continue, please take a moment to read the company's notice regarding forward-looking statements, which is shown in Slide 1 in the presentation and included in the press release.
As explained in the notice, this conference call contains forward-looking statements, including statements concerning future financial and operational performance.
Actual results may differ materially from those projected in the forward-looking statements, and the company does not undertake any obligation to update them.
For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings.
With us today from management are <UNK> <UNK>
<UNK>, Executive Chairman and Chairman of the Board; Matt <UNK>, President and Chief Executive Officer; and <UNK> <UNK>, Senior Vice President and Chief Financial Officer.
Now I'd like to turn the call over to <UNK> <UNK>.
Thanks, <UNK>.
We're very pleased to have started this year with strong orders and absorption momentum.
Net new home orders for the first quarter were 865, up 26% year-over-year, representing our 24th consecutive quarter of year-over-year growth.
Even more encouraging is the acceleration of our monthly absorption pace as the year has progressed, with the rate increasing sequentially each month and averaging 3.5 sales per community per month for the quarter.
That momentum strengthened into April, where our sales pace was 4.8 homes per community, generating new orders of 432, up 48% over April of 2016.
Our dollar value of orders for Q1 was $453 million, up 35% over the prior year.
On a trailing twelve month basis, the dollar value of orders was $1.5 billion, up 21% over the previous twelve month period and up 71% over a two year period.
We ended the quarter with dollar value in backlog of $634 million, up 34% over March 31, 2016.
Units in backlog increased 24% year-over-year to 1,099 homes at quarter-end.
ASP of homes in backlog as of the end of the first quarter was $577,000, up 8% from the first quarter of 2016, and 11% higher than the ASP of homes closed in this year's first quarter.
As of the end of April, our backlog grew to 1,318 units with an associated dollar value of $756 million.
A driver of our strong orders performance was the significant progress on our community count growth year-to-date.
Community count averaged 82 during the first quarter, up 19% year-over-year, increasing to 90 average selling communities in the month of April, as a result of opening 13 new home communities during the first three months of the year.
Our community count ramp was coupled with strong absorption and demand from our recent openings, as well as our existing communities, with meaningful year-over-year absorption rate improvement in March and April.
As we've gained sales momentum through the spring selling season, we have experienced pricing power across our markets, raising prices at 2/3 of our communities during the first quarter.
The combination of these positive supply and demand dynamics, successful opening of new strategic projects, and the pricing power we're experiencing in many of our markets, is yielding gross margin expansion with our current GAAP gross margins in backlog of 18%.
We had anticipated that the first quarter would be the lightest quarter of the year from a deliveries, gross margin and revenue perspective, and the actual results achieved in those metrics were driven by several factors.
Our backlog conversion for the fourth quarter of 2016 had exceeded our expectations, especially in the month of December, and throughout the first quarter we experienced disruptive weather conditions in many of our markets, in particular, torrential rainfall in Seattle, Portland and Northern California, which affected the mix of deliveries achieved.
Our first quarter deliveries totaled 499 homes, down 8% year-over-year.
Our average sales price for homes closed during the quarter was $518,700, up 8% year-over-year and, when combined with our unit deliveries, translated into home sales revenue of $259 million, down slightly from $261 million in the first quarter of 2016.
In addition, our financial results for the first quarter were below our expectations, primarily due to a delay in the closing of 25 units at one of our projects in California, which had been included in our prior guidance for the first quarter and now has been recognized in Q2.
Despite the backdrop of challenging weather, we've been able to get our new communities open to capitalize on the favorable market demand dynamics.
We've maintained our spec/start strategy, and while inclement weather has increased cycle times in a number of our markets, we've been successful in getting enough starts on the ground to be on track to meet our annualized delivery goals.
As of the end of April, we have delivered or started construction on over 3,000 homes.
The underlying fundamentals of the business and market dynamics remain strong, and our overall growth story for the year remains intact.
We're getting our new communities open and they've been well received by the home buying public.
We've pushed pricing where we can across all of our markets to capitalize on the significant demand.
And as I said, we're getting our houses started.
Overall, we feel we have good visibility into our deliveries universe, expect backlog conversion and gross margin to improve as we move throughout the balance of the year.
For a discussion on our financial results, I'll turn the call over to <UNK> before wrapping up with some commentary on our outlook for the remainder of 2017.
Thank you, Matt.
As Matt mentioned, total homebuilding revenue for the first quarter of 2017 was $259 million, down slightly from $261 million in the year-ago period.
The decline was driven by an 8% decrease in deliveries to 499 homes, compared to 543 in the first quarter of 2016, offset by an increase in the average sales price of homes delivered to $518,700, up 8% from the prior year.
During the quarter, our homebuilding gross margin percentage on a GAAP basis was 15.6%, compared to 17.7% in the year-ago period.
Our adjusted homebuilding gross margin percentage was 21.1% during the first quarter, compared to 24.7% in the year-ago period.
The decline in gross margins year-over-year was driven by project and geographic mix.
Our gross margins for Q1 came in a bit lower than expectations due to the timing of deliveries from one particular project, as Matt mentioned, which had gross margins well above the Company average.
We believe that our Q1 gross margins represent a low point and we expect to see sequential improvement in the second quarter and meaningful lift through the back half of the year.
Our sales and marketing expense was 5.7% of homebuilding revenue, consistent with the first quarter of 2016 on a percentage basis.
General and administrative expense was 7.3% of homebuilding revenue compared to 6.8% in the year-ago period, due in part to a slight increase in G&A expense on a dollar basis and a slight decrease in homebuilding revenue.
These combined for a total SG&A expense of 13% for the quarter compared to 12.5% in the first quarter of 2016.
Income from our unconsolidated mortgage joint ventures decreased to approximately $250,000 from $1.2 million in the prior period, due primarily to costs associated with the internalization of the loan fulfillment teams in our primary venture, which impacted financial contribution in the current quarter.
We expect contributions from this venture in Q2 to return to normalized levels, and based on our plans for increased size and scale, this revised venture structure will enhance profitability going forward.
We recorded a benefit from income taxes during the first quarter of $5.6 million.
We expect our tax rate in future quarters to be approximately 34% to 35%.
On an adjusted basis, excluding the $14.1 million loss on extinguishment of debt, pretax income was $6.9 million for the quarter and net income was $4.1 million, or $0.11 per diluted share on a fully diluted share count of 38.4 million shares.
We recorded GAAP net loss available to common stockholders of $10 million for the quarter, or $0.27 per share, primarily driven by the debt extinguishment cost mentioned earlier.
Our adjusted EBITDA for the quarter was $22.5 million.
For the first quarter, our land acquisition spend was $55 million and horizontal spend was $19 million for a total land spend of $74 million.
For 2017, consistent with our guidance on last quarter's call, we expect $210 million to $220 million of land acquisition spend and horizontal spend of approximately $140 million to $150 million for a total land spend of approximately $350 million to $370 million for the full year.
Now turning to our balance sheet.
We ended the quarter with $1.8 billion in real estate inventories, $2 billion in total assets, total equity of $749 million and cash of $39.5 million.
Total liquidity as of March 31 was approximately $120 million.
As of March 31, 2017, our total debt to book capitalization was 60.1%, down by approximately 100 basis points from last year.
Our net debt to net book capitalization was 59.2% at quarter end, down from 60.2% at the end of first quarter of 2016 and up slightly from 57.6% at December 31.
As we move through the coming quarters, we look forward to continuing to make improvement on our balance sheet metrics and achieving our long-term leverage goals.
Now I'll turn it back over to Matt.
Thanks, <UNK>.
Before we open up the call to your questions, I'd like to provide some additional information regarding our outlook for the remainder of the year.
For the second quarter, we expect our backlog conversion rate to be between 73% and 77% and that ASPs will be in line with first quarter closing ASPs.
On last quarter's call, we laid out our expectation for sequential improvement in homebuilding gross margins in Q2 over the first quarter, with a meaningful pickup in the back half of the year.
We currently project homebuilding gross margins for the second quarter to be in the mid-16% range.
We continue to expect a significant increase in gross margins as we move through the back half of the year, based on our significant number of backlog units and current homebuilding gross margins in backlog of 18%, as well as expectations of an increased percentage of new home orders and deliveries coming out of our strategic assets, that we've previously outlined, that have recently opened.
SG&A percentage for the second quarter is anticipated to reflect approximately 100 basis points of year-over-year improvement from Q2 of 2016.
Lastly, we expect minority interest from our homebuilding joint ventures to be between $1.5 million and $2 million for the second quarter.
Overall, we're very encouraged by the start of our year and remain focused on delivering another year of significant growth.
We believe that the early results from our new project openings and robust spring selling season year-to-date, as well as significant progress made from a production standpoint, give us good visibility into our 2017 projected performance and a high degree of confidence in our ability to achieve our full year financial and operating goals.
For the full year, we continue to expect deliveries of approximately 3,000 to 3,250 homes, home sales revenue of approximately $1.65 billion to $1.75 billion, and pretax income before minority interest of approximately $135 million to $150 million.
Thank you again for joining us today.
I'd now like to turn the call to your questions.
Operator, we're ready for the first question.
Yes, sure, <UNK>.
Look, I think that Q2, like we said, we expected to see some sequential improvement.
I think the performance that we've seen in the first quarter has been strong.
As I mentioned, we raised prices at approximately 2/3 of our communities in the first quarter.
I'd say the average price increase, if you looked at stores that were open in January through April, the average price increase has been about 3.5% on those communities that we've raised prices.
So certainly, that's part of what's contributing to the margin growth in backlog, coupled with, as we've laid out on prior calls, some key strategic assets that we're opening over the course of the first six months of this year.
And those that have opened have seen good success and significantly higher gross margins than the Company average.
Those things are really contributing to the significant pickup in the back half of the year, which is well, candidly, what we had expected to see.
I think the pace in April, obviously, is extremely strong.
And we're going to continue to use pricing as a mechanism to keep overall absorption rates in line with what we can produce on a production basis.
I would agree with that statement.
Yes, I think sales year-to-date on both of those projects have been strong.
So if I look at Bayshores, for example, we've seen year-to-date sales of about 125 homes out of that community, spread across five different product lines.
So I think good consistent demand really across each of the respective products.
Turning to River Terrace, which we've also previously highlighted, up in the Pacific Northwest, we really feel like we're starting to get our production legs underneath us.
And year-to-date on that project, we've seen almost 100 net sales out of that community as well.
So I think both of those projects are continuing to be drivers for us.
As we've mentioned on other calls too, we've recently opened our Affinity master plan for sales in Summerlin, Nevada, and just getting ready to kick off our Denver Connections project in Denver.
So we think that those communities will continue to add solid community count and continue to help absorptions as we move through the balance of the year.
The first question I had, could you could repeat what you said on the minority interest income for 2Q.
<UNK>, it's <UNK>.
We said $1.5 million to $2 million for Q2.
Okay, great.
And then just wanted to focus on Colorado.
It looked like orders were down there double-digits for the quarter, but the community count has started to tick up a little bit.
Can you give us some insight into what's happened there.
<UNK>, it's Matt.
Good question.
I think that was one of the few points in Q1 where we saw absorption rates tick down year-over-year.
We've mentioned previously we had, over the course of the last year, installed a new management team in Colorado.
And one of the things that they've taken to heart is really looking at all of our portfolio product, redesigning it to get costs down.
And for most of Q1, what we were dealing with was selling the remaining specs under the old product that we had developed.
We've been rolling out our new product, which is more efficient from a build and cycle time perspective and we think, candidly, something we're going to get paid for by the consumer relative to bed, bath count and things of that nature.
As I look at April's performance for Colorado, their absorption rate ticked up by about 30%, if I look at April's pace, compared to their monthly pace in Q1.
So I think that we should continue to see Colorado start to put some better numbers on the board and obviously, getting our Denver Connections project opened up should improve our Q2 absorption rate quite a bit there as well.
That's great.
And then one other question, and I apologize if I missed this.
I believe on the last call, you guys had said that gross margin and SG&A margin should collectively show about 100 basis points of improvement for '17 over '16.
Is that still the expectation.
Is that how we should be modeling.
Well, I think certainly, we're continuing to see leverage on the SG&A side as we move through the year.
And I think we're pretty encouraged by where we're seeing gross margins in backlog in the back half of the year.
So I'd have no problem with you modeling that kind of spread, <UNK>.
Yes, good point.
I think when you look at Washington, we talked a bit about that last year, we really got gapped out last year in Washington.
I think that's a market that's continued to see really good demand dynamics.
We really dealt last year with horizontal development delays, as well as municipality delays relative to entitlements, and have been able to replace the community count that we had last year with new communities that, candidly, have better segmentation, better appeal to the first-time buyer - heavily weighted towards attached from a product standpoint.
And I think the absorption in demand there has been significant.
We've increased price there on every one of our communities and, candidly, had the biggest price increases across the company and yet, absorptions continue to be extremely strong.
What we've got to balance out a little bit in Washington is just the fact that it has rained like a son of a gun over the course of this year.
I think we had over 60 days of rain in first quarter in Seattle.
And while our guys do a heck of a job of getting houses started and doing a lot of work in the rain, they don't make umbrellas big enough to put a house underneath them.
And you can't quite finish them until the weather gets a little bit better.
So we are really excited about the demand trends there and, certainly, what we're doing on a pricing basis.
And I think the production will continue to catch up.
But yes, just a great market for us.
Well, look, we're four months into the year.
I think as we laid out for you, we've got the low end of our production range either closed or started for this year, and that's certainly a better place than where we were a year ago.
But I think there's still a lot of work left to get done this year.
And as we move through maybe the midpoint of the year, that's probably a better time for us to tighten up any sort of guidance ranges.
At this point in time, though, we feel comfortable with the reiteration of what we had laid out for you at the beginning of the year.
Okay.
Well, with no ---+ sorry.
Operator, do we have anybody else in the queue.
Just wanted to dig in a little more on the April order trends and ultimately for 2Q.
So looking at the slide deck and the monthly comparisons, last year, it looks like June was a very strong month.
If I remember correctly, I think you had some community openings and some strong absorptions in that period.
So in relation to the strong order pace, the strong absorption pace put up in April, when thinking about that in the context of the full quarter, would you anticipate some moderation as you face those more difficult comparisons as we get into the June period, for instance.
Or do you think about it more as the strong absorption pace showing a bit more sustainability.
<UNK>, I think it's a good question.
On slide 3 of our slide deck, we intentionally lay out for everybody the year-over-year, month-by-month trends.
Look, it's certainly very difficult to project where future demand from a new orders perspective comes.
I think that both March and April have been very encouraging from an absorption perspective.
Last year, we did see May dip off as it relates to April and compared to June.
This year's May is, again, really only four weekends in the month, so I would probably expect May's overall absorptions to be a bit softer than April's, like last year.
As we think about June, we do have some new community openings that are still scheduled for the balance of Q2.
It's just really hard for us to predict total absorption rates.
We've got what our absorption rates were each of May and June last year.
Not sure that we would anticipate things being radically different from an absorption rate standpoint, but we do believe that we would anticipate some benefit coming from a larger average community count over the course of the second quarter.
Got it.
That's very helpful.
And I guess just following up on the community count point.
Just in relation to the 82 communities in 1Q and that ramping up to 90 in April, can you give a sense of the markets that maybe saw more of that outsized growth in the month of April.
And then as you mentioned, with some of the anticipated communities through the remainder of the quarter, any notable differences geography-wise, where those might be flowing through.
Well, I think the community count growth really has come from Colorado and the Pacific Northwest.
And so balancing those two, we've seen stronger absorption rates out of the Pacific Northwest than, say, Colorado.
But we're encouraged by some of the new openings that we have in Colorado.
So I think those things have kind of an overall net neutral mix.
We did get a bit of a pop from opening for sales our Affinity project in Nevada.
So overall, you've got a mix of our higher-absorbing markets, as well as our more muted-absorbing markets.
Our projections are that community count's going to hold pretty stable over the course of the quarter, somewhere in that high 80s to 90 range, with new openings coming on, as well as some closeouts rolling off.
So we don't anticipate a lot of volatility relative to community count, which is an improvement over years past.
Great.
And last, just a very quick clarification because I missed it.
Can you reiterate the backlog conversion guidance for 2Q.
Yes.
<UNK>, we'd indicated 73% to 77% for Q2 based on our Q1's ending backlog.
Thank you.
I'd like to thank all of you for joining us on our call today.
And we look forward to speaking with you next quarter and providing you updates on our progress.
Have a great day.
