Harbor Custom Development Inc (HCDI) 2022 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Harbor Custom Development, Inc. fourth quarter and full year 2022 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce today's presenters, Sterling Griffin, CEO, President, and Chairman of the Board; Lance Brown, Chief Financial Officer. I will now turn the conference over to Mr. Brown. Please go ahead.

Thank you, operator. And thank you all for joining us today. Welcome to Harbor Custom Development's fourth quarter and full year 2022 earnings conference call. During our discussion today, we will be referring to our earnings press release and presentations that were made available prior to the call. The release and presentation can be found in the Investor Relations section of the Harbor website at www.harborcustomdev.com.

Before we begin, I would like to remind everyone that today's call includes forward-looking statements. Any forward-looking statements contained in the earnings release, earnings presentation, or discussed on the call today are subject to the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and other factors that can cause actual results to differ materially from these forward-looking statements.

Specifically, included are statements regarding our industry and our outlook. Please see our recent SEC filings, which identify the principal risks and uncertainties which could affect future performance. We assume no obligation to update any forward-looking statement.

In addition, we will be discussing or providing certain non-GAAP financial measures today, including EBITDA adjusted EBITDA, and adjusted EBITDA margin. Please see the appendix of our earnings presentation for a reconciliation of these non-GAAP measures to their most direct comparable GAAP measure. I would now like to turn the call over to Sterling.

Thank you, Lance, and thanks to everyone for joining the call today. We appreciate your continued support of Harbour Custom Development. Following our normal cadence, I'm going to share broader comments on the macro environment and our performance during the year before turning the call to Lance Brown, Harbor's Chief Financial Officer, to review the financial results. After Lance concludes. I'll provide a few closing remarks before we answer the previously submitted questions.

Throughout 2022, we observed mortgage interest rates rise at a record pace. This dynamic resulted in significant deterioration of the housing market as consumer confidence and affordability were unfavorably impacted. These market challenges in addition to increased costs throughout our supply chain that we incurred, contributed to weaker sales volume, lower prices, project cancellations, and lower net income during the fourth quarter and full year.

Furthermore, as affordability tightened throughout the year in response to rising interest rates, buyers hesitated and the market decelerated. This triggered the cancellation of certain projects previously under contract, including the cancellation of the sale of our Punta Gorda property during the fourth quarter. For context, Punta Gorda went under contract in October of 2022 and was expected to close in December 2022. However, it fell through due to the buyer canceling the contract.

We experienced other meaningful buyer cancellations in the second and third quarters as well with sales contracts for portions of our semi-annual property. While these purchase and sale agreements were canceled in 2022, we still own the properties and continue to market them to other potential buyers.

While we remain committed to our strategy focused on multifamily housing market, the transition of resources to multifamily construction and development in western Washington also weighed heavily on our 2022 operating results. Projected apartment sales for 2022 were not realized due to construction delays caused by supply chain disruption, skilled labor shortages, and delays with city inspections and permitting.

In addition, our performance was further impacted by the industry-wide decline in sales due to the rapidly changing lending environment caused by interest rate increases. To mitigate the impact of these challenges on our business, we began implementing certain market adjustments during the second half of the year. To help improve overall affordability, we introduced new pricing strategies and increased incentives across the majority of our markets.

While we expect project costs remain elevated in the near term, we are optimistic that land costs, material costs and labor costs will begin returning towards pre-pandemic levels during the latter part of 2023. We are already seeing some evidence of this as land costs in certain materials, particularly lumber, are declining year over year.

On February 17, 2023, we announced that our shareholders approved a reverse stock split of our common stock. On March 6, 2023, we effected a 1-for-20 reverse stock split. This transaction increased our stock price. And on March 20, 2023, the company regained compliance with the NASDAQ listing rule 5550(a)(2). The reverse stock split also provided the company available shares to access the capital markets if needed as we manage through uncertain times.

Looking at the broader macro environment over the next several quarters, we would be naive to think these recessionary conditions will not continue to permeate the real estate sector. We have already seen interest rate increases and affordability challenges in 2023, which may continue to result in price decreases and incentives offered to customers.

We expect certain difficulties that we encountered in 2022 to persist during 2023, primarily those related to the sourcing materials, including cabinets, electrical components, and appliances. As of December 31, 2022, our backlog of land, lots, homes, and fee build was [$9.3 million]. This is a decline of [$14.4 million or 61%] from the prior year period.

The decrease in our backlog is primarily due to the substantial completion of our field projects, the strategic shift we made to multifamily and related timing to monetize those assets and the overall decline in market conditions. Subsequent to year end, we executed a purchase and sale agreement for the sale of our first multifamily property Mills Crossing for $14.25 million (sic - see Form 10-K, "$14.3 million").

While the sale is scheduled to close in the second quarter of 2023 and is expected to generate positive momentum for the year, please remember that the timing of completion for construction and sale of our projects are subject to uncertainty and change.

Our unique business model and expertise continue to underpin our confidence in our operations and our ability to generate shareholder value. We remain equipped to build to the surrounding communities' needs, including single-family homes, townhomes, and apartments. This flexibility allows us to target a wide and diverse range of customers.

While we believe the impact of higher interest rates and the inflationary environment will result in a delayed market recovery, we remain confident in our business strategy and our real estate assets. I will now turn the call back to Lance Brown, our Chief Financial Officer, to further discuss our financial details.

Thank you, Sterling. As Sterling mentioned, our strategic shift to focus more heavily on multifamily projects, resulted in the delay of converting several assets to revenue and income reflects the longer build cycle associated with multifamily projects compared to building single-family homes. Additionally, significant increases in mortgage interest rates continue to negatively impact portability and buyer confidence.

These trends together weighed on our financial performance during the fourth quarter and full year 2022. Sales in the fourth quarter decreased to $4.8 million, as compared to $26.3 million for the prior year period. A decrease in sales was primarily driven by a decrease in lots sales, $18.6 million, entitled land sales of $0.9 million, fee build revenue of $1.3 million, and home sales of $0.8 million from the same period in the prior year. The decrease in developed lots sales was mainly due to large prior year sales in Blaine, Washington, and Horseshoe Bay, Texas that did not recur in the fourth quarter 2022.

In the fourth quarter 2022, sales decreases were partially offset by $0.1 million of multifamily rents recognized during the fourth-quarter 2022. They were not present in the prior year period. Our gross loss for the fourth quarter was $5 million compared to gross profit of $10.9 million the prior year period. We had a gross margin loss of 104.5% for the three months ended December 31, 2022, compared to gross margin of 41.2% for the three months ended December 31, 2021.

The decreases in gross profit and gross margin were primarily due to an impairment loss recorded for our Winding Lane property of $1.2 million and the non-recurrence of higher-margin lots sales, resulting in an $11.9 million decrease in [lots] gross profit and 340.7% decrease in lots sales gross margin and $1.4 million decrease in fee build gross profit due to cost overruns, impairment loss recorded by our Pacific Ridge multifamily project of $2.4 million and a $0.6 million decrease in entitled land gross profit.

Our operating expenses increased to $4.2 million for the three months ended December 31, 2022, as compared to $3.5 million for the three months ended December 31, 2021. The increase in operating expenses was primarily due to the recording of the $1.2 million bad debt expense related to a note receivable from the sale of Horizon Tract Q land in March 2022. Other less significant increases to operating expense include a $0.4 million increase for compensation related costs, including payroll and benefits, $0.1 million for marketing and advertising, and $0.1 million of depreciation expense.

These increases were partially offset by decreased insurance expense of $0.3 million, professional fees of $0.3 million, $0.2 million in banking and loan fees, $0.2 million right of use expense, and $0.1 million for investor relations.

Operating expense as a percentage of sales increased to 88% for fourth quarter of 2022, compared to 13.3% for the fourth quarter of 2021. The increase in operating expenses as a percentage of sales is primarily due to year-over-year decline in sales and the previously mentioned bad debt expense recorded in the quarter-quarter 2022.

Net loss for the three months ended December 31, 2022, was $10.6 million, as compared to net income of $5.6 million for the three months ended December 31, 2021. The decrease in net income in the fourth quarter of 2022 was primarily attributable to the decrease in sales, fee build cost overrun, impairment charges recorded for Pacific Ridge and Winding Lane. Bad debt expense recorded for the note receivable of $3.3 million other expense that resulted from the loss on the sale of equipment and $0.7 million interest expense associated with our revolving loan.

For the three months ended December 31, 2022, we had a basic loss per share of $17.47 compared to basic earnings per share of $5.14 for the three months ended December 31, 2021. EBITDA loss for the fourth quarter of 2022 was $11.9 million, compared to $8 million of EBITDA income in the fourth quarter of 2021.

Adjusted EBITDA loss in the fourth quarter of 2022 was $8.5 million, compared to $8.3 million of adjusted EBITDA income in the fourth quarter of 2021. Adjusted EBITDA as a percentage of sales was negative 177.7% for the fourth quarter of 2022, compared to 31.5% for the fourth quarter of 2021.

Now turning to full year results. Sales for the year ended December 31, 2022, decreased by 23.4% to $55.4 million, compared to $72.4 million for the year ended December 31, 2021. The decrease in sales was primarily due to a decrease of $17.3 million in develop [lots sale] and a decrease of $12.7 million in entitled land sale, partially offset by an $11 million increase in home sales and a $2.3 million increase from the fee build revenue.

Gross loss for the year ended December 31, 2022, $0.5 million, compared to gross profit of $21.9 million for the year ended December 31, 2021. Gross margin loss for the year ended December 31, 2022, was 0.8%, compared to 30.3% gross margin for the year ended December 31, 2021. The $22.4 million decrease in gross profit year over year was primarily driven by an $11.2 million decrease in lots sales gross profit, a $5.3 million decrease in fee build gross profit, $5.1 million decrease in entitled land gross profit, and a $2.4 million gross loss for multifamily, which was partially offset by a $2.2 million increase in gross profit from homes.

The decline in fee build gross profit was the result of significant cost overruns previously discussed. The gross loss for multifamily is due to a $2.4 million impairment charge recorded for our Pacific Ridge property. Lots sales and entitled land gross profits were impacted by unfavorable volumes in mix versus the prior year period and the previously discussed Winding Lane impairment loss. Gross margin was primarily impacted by the significant decrease in gross profit, partially offset by the decrease in sales.

Our operating expenses for the year ended December 31, 2022, was $16.2 million compared to $11.2 million for the year ended December 31, 2021. This $5 million increase can primarily be attributed to investments we made in our business infrastructure and personnel at the beginning of the year, bad debt expense associated with the Winding Lane and Horizon Tract Q notes and interest receivable and pre-acquisition diligence costs associated with the cancellation of our Westry Village project.

Payroll and benefit-related costs, bad debt expense, and project cancellation costs were the largest contributors to the increase in operating expenses at $1.6 million, $2.1 million, and $0.5 million respectively. Other less significant increases over the prior year period include $0.3 million of depreciation expense,$ 0.3 million in marketing and advertising, $0.3 million professional fees, and $0.1 million right of use expansion of the new corporate office.

These increases were partially offset by $0.2 million decrease in banking and loan fees, $0.1 million of insurance, $0.1 million of brokerage fees. Operating expenses as a percentage of sales for the year ended December 31, 2022, were 29.3%, compared to 15.4% for the year ended December 31, 2021.

Net loss for the year ended December 31, 2022, was $16.9 million, compared to net income of $8.9 million for the year ended December 31, 2021. The decline in net income in the year ended December 31, 2022, was primarily attributable to the decline in sales and gross profit, increase in operating expenses, and increase in other expenses associated with the loss from the sale of equipment and the interest expense for the revolver loan.

For the year ended December 31, 2022, we had a basic loss per share of $35.29 compared to basic earnings per share of $8.56 for the year ended December 31, 2021. EBITDA loss for the year ended December 31, 2022, was $16.5, million compared to EBITDA income of $14.2 million for the year ended December 31, 2021.

Adjusted EBITDA loss for the year ended December 31, 2022, was $12.5 million, compared to $14.9 million adjusted EBITDA income for the year ended December 31, 2021. Adjusted EBITDA as a percentage of sales was negative 22.5% for the year ended December 31, 2022, compared to 20.6% for the year ended December 31, 2021.

We ended the year with $10.3 million of cash, which was a decrease of $16 million from the prior year end. Net cash used in operating activities for the year ended December 31, 2022, was $93.9 million, compared to $86.4 million for the year ended December 31, 2021.

The primary uses of cash during the year were related to the development and construction of our real estate assets, the majority of which were focused on our multifamily projects. Our real estate assets increased from $122.1 million for the year ended December 31, 2021, to $205.5 million for the year ended December 31, 2022.

Now I would like to give an update on our revolver loan agreement with BankUnited. As previously disclosed, as of the third-quarter 2022, Harbor failed to meet certain financial covenants and was therefore in default on the loan agreement. These covenant violations continued through the fourth quarter of 2022. Today, we are pleased to share we successfully restructured the loan and amended our loan agreement with BankUnited and are now in full compliance.

Completing this restructuring was critical for us as it allows us to confidently pursue our business objectives and move forward with lenders, industry partners, and institutional investors. Please refer to our recent Form 8-K filed on February 24, 2023, for the restructure loan amendment terms and conditions agreed to with BankUnited. With that, I will now turn the call back to, Sterling.

Thank you, Lance. Given the ongoing uncertainties impacting the real estate market at this time, we are foregoing annual guidance for fiscal year 2023 and beyond. We will reconsider providing guidance in the future when we have sufficient visibility into market conditions and a better idea of our multifamily sales timing.

We believe our strategic shift to multifamily and the cost-cutting measures implemented in the year positions us well for the future. We remain confident in our ability to adapt to and navigate the current housing cycle and emerge as a stronger player in the markets we serve. With that, I will turn it back to the operator.

Thank you. We will now switch to the question-and-answer session. Prior to the call, inquiries were submitted to IR@harborcustomdev.com. I will now read the previously submitted questions to Mr. Griffin and Mr. Brown to respond to. Thank you to everyone, who has submitted questions.

Should investors expect any reduction in listing prices on the remaining five multifamily properties for sale?

Obviously, the pricing in general for multifamily properties and they get more specific to our project. As interest rates rise, that typically result in a corresponding rise in cap rates, which in turn results in a lower valuation of a multifamily asset as buyers cost of capital to purchase our properties increase.

As part of our year-end close procedures, we reviewed each of our multifamily properties for potential impairment. In this process, we determined their specific [range] was impaired. So we took an impairment charge against that property in the fourth quarter of 2022.

As of December 31, 2022, all other multifamily properties are expected to be profitable in the current climate. Actual sales prices and profitability will depend on the market conditions at the time of sale and will be a function of cap rate, the area, and net operating income for the property.

Will you please provide an update on Harbor's inventory in the Austin and Horseshoe Bay real estate markets?

We have seven homes under construction in the Austin market, five of which are in a gated golf course community called Cimarron Hills. We anticipate selling these homes for approximately $400 per square foot. We have two other Austin-centric homes, one in Flat Rock Hills and one in Creek's Edge. These homes should generate a slightly higher price per square foot of approximately $410 to $420 upon sale.

Regarding Horseshoe Bay, we have nine homes under construction in the Summit Rock subdivision and two in the Siena Creek flat. We also anticipate generating approximately $400 per square foot on these homes. Today, we have no finished standing inventory in either the Austin market or Horseshoe Bay.

Can you provide an update for your Horizon at Semiahmoo and Grandis Pond project?

Regarding the Horizon at Semiahmoo properties, we have received preliminary flat on the [60 lots] Phase 2 subdivision and have started marketing that property. We are also marketing the multifamily [tracks RS&T], which are approximately [102] units combined.

As it relates to the Inverness property, we have started the preliminary flat process for the [63 lots] subdivision and expect that to be completed in 2023 upon which we may choose to monetize the asset at that stage as well.

Grandis Pond, it is our objective to complete the off-site engineering and the on-site civil engineering for the first neighborhoods of the project, which are approximately 120 units by year end.

Are construction loans still available in today's lending market?

Construction loans are still available in today's market. But it is more difficult and time consuming to obtain construction financing than it was in prior periods. As interest rates began to rise, so did lender diligence work. However, Harbor has ongoing relationships with several financial institutions that have financed the loans we currently have in place. And we continue to build new relationships to help ensure future financing is available when needed and at competitive prices based on the current market conditions.

Does the company need more capital financing to support planned operations?

Yes, the company often needs more capital to support our planned operations, particularly as we are growing and starting new projects. We plan to fund the majority of our projects with the construction loan and expect to contribute our equity portion for the project from cash on hand, cash generated from sales of our asset, project-level equity, and/or funds raised in the public market.

Will the company be raising money in the public markets now that the reverse stock split is complete?

Raising money in the public market is an option to us now that the reverse stock split is complete. As previously stated, we are often looking for additional capital to support our ongoing operations and upon new projects. We consider all the options available to us to meet our cash requirements in trying to utilize the best options available to us at the time to meet our needs while protecting shareholder value.

Why did the Punta Gorda sale closed in the fourth quarter and what is the current status of the project?

Buyer backed out during their feasibility contingency, although they did not provide a reason to believe their financing fell through. We have relisted the property and anticipate monetizing the asset in 2023. The good news is that we have continued to go through the entitlement process on the property while we still own it.

Now that you are in compliance with the BankUnited loan, when will you begin resuming dividend payments?

Part of our recent restructuring agreement and revolver loan amendment with BankUnited requires us to not make any dividend payments to our Series A preferred shareholders, but instead pay the amount that would have been paid in dividends to Series A preferred shareholders to BankUnited instead.

This requirement to defer the deferred dividend payments will remain in place until the BankUnited revolving loan is paid in full. And till that time, the monthly dividend payments for the Series A preferred shareholders will be accrued on our balance sheet as a liability of the company.

What is the current plan for your Darkhorse subdivision property? Will you continue to sell land in California?

It is our objective to sell all our lots in the Darkhorse and Winding Lane subdivisions in California.

How does the company intend to raise the stock price in the near term?

Our objective is to continue to execute on our business plan by generating top line sales through the monetization of our real estate assets by multifamily, homes, lots, and land. We also plan to strengthen our balance sheet with the introduction of preferred equity partners in our multifamily properties. Additionally, we plan to continue searching for value opportunities to add to our property portfolio with the goal of monetizing these projects in the future.

Thank you, everyone, for participating on today's call. We look forward to providing additional updates soon. You can find more information about the presentation and future events on our Investor Relations page under the tab Events on our website, www.harborcustomdev.com.

For the most recent updates on company news, we encourage you to sign up for e-mail notifications on the Investor Resources tab of our website. If anyone has further questions, we can be reached at (866) 744-0974 or at IR@harborcustomdev.com. Thank you again for joining us today. We appreciate your time.

This now concludes today's call. At this time, you may now disconnect.