CalAtlantic Group, Arlington Va. (NYSE:CAA) issued what is likely its last earnings report as a standalone entity late Wednesday with third quarter earnings coming in at $93.4 million, or $0.75 per diluted share, compared with net income of $132.3 million, or $0.97 per diluted share, in the prior-year quarter. It was an earnings miss; analysts were expecting a gain of $0.80 per share.
“We are pleased to report third-quarter earnings which, after excluding delivery delays from the recent hurricanes and the impact of the Weyerhauser I-joint issue, reflect operating progress and a platform that is well-positioned for 2018,” said Larry Nicholson, president and CEO. “As announced last week, we are merging our company with Lennar Corporation. We have great confidence that this merger will create a larger and even stronger company. Both management teams have already begun planning, with the initial focus on construction cost savings, systems conversions and financial services opportunities. As we begin integration planning, the cooperative spirit I see has been great.”
In its earnings release, the company stated, “During the 2017 third quarter, our operations were negatively impacted by three non-recurring events: Hurricane Harvey, impacting our Texas operations; Hurricane Irma, primarily impacting our Florida operations; and the Weyerhauser I-joist issue, impacting our Colorado, Minnesota and Philadelphia operations. These events collectively reduced our 2017 third quarter orders by an estimated 265 units, reduced our 2017 third quarter deliveries by approximately 240 units, and reduced our home sale revenues by approximately $100 million ($1,515.2 million as reported compared to $1,615.2 million on a pro forma basis).”
Revenue from home sales for the 2017 third quarter decreased 9% to $1.5 billion, as compared to the 2016 third quarter, resulting from an 8% decrease in deliveries and a 1% decrease in the company’s average home price to $448 thousand. The decrease in average home price was primarily driven by a 13% decrease in the West region, attributable to a shift in product mix. Excluding the impact of the hurricanes and the Weyerhauser I-joist issue, revenues from home sales for the 2017 third quarter decreased 3% ($1.6 billion on a pro forma basis compared to $1.7 billion for the 2016 third quarter).
Net new orders for the 2017 third quarter were down 3% from the 2016 third quarter, to 3,416 homes, with the dollar value of these orders up 6%. The company’s monthly sales absorption rate was 2.0 per community for the 2017 third quarter, down 5% compared to the 2016 third quarter and down 19% from the 2017 second quarter. The cancellation rate for the 2017 third quarter was 15%, down compared to 16% for the 2016 third quarter and up slightly from 14% for the 2017 second quarter. The company’s incentives on orders was 4.5% for the 2017 third quarter, down approximately 130 basis points compared to the 2016 third quarter, and up 10 basis points compared to the 2017 second quarter. Orders for the month ended October 31, 2017 were 1,094, up 13% over the prior year period.
The dollar value of homes in backlog increased 12% to $3.7 billion, or 7,570 homes, compared to $3.3 billion, or 7,307 homes, for the 2016 third quarter, and increased 4% compared to $3.6 billion, or 7,534 homes, for the 2017 second quarter. The increase in year-over-year backlog value was driven by the 8% increase in the average home price in our backlog, to $490 thousand and a 4% increase in units in backlog. As of September 30, 2017, the average gross margin of the 7,570 total homes in backlog was 20.6%, down 20 basis points compared to the total homes in backlog as of June 30, 2017.
CAA achieved gross margin from homes sales of 20.0% for the 2017 third quarter. The gross margin was negatively impacted by a shift in product mix and an increase in direct construction costs per home.
Selling, general and administrative expenses for the 2017 third quarter were $168.4 million, or 11.1%, as compared to $170.8 million, or 10.3%, for the 2016 third quarter. Isolating G&A from selling expenses, G&A expenses increased as a percentage of home sale revenues to 5.6% for the 2017 third quarter compared to 5.2% for the prior year period, primarily as a result of a decrease in home sale revenues, driven by the effects of the hurricanes and the Weyerhaeuser I-joist issue. Selling expenses increased as a percentage of home sale revenues to 5.5% for the 2017 third quarter compared to 5.1% for the prior year period as we continue to experience higher co-broker participation, driving an approximately 20 basis point increase compared to the prior year period. In addition, internal commissions for the 2017 third quarter were up approximately 10 basis points compared to the prior year period, driven by a timing related increase due to a large order/delivery imbalance, primarily in the West region where our orders exceeded our deliveries by 16%.
During the quarter, CAA spent $488.5 million on land purchases and development costs, compared to $387.1 million for the 2016 third quarter. It purchased $304.7 million of land, consisting of 4,043 homesites, of which 17% (based on homesites) is located in the North region, 40% in the Southeast region, 20% in the Southwest region, and 23% in the West region. As of September 30, 2017, the Company owned or controlled 67,961 homesites, of which 47,868 were owned and actively selling or under development, 15,676 were controlled or under option, and the remaining 4,417 homesites were held for future development or for sale.
The company ended the quarter with $418.5 million of available liquidity, including $83.3 million of unrestricted homebuilding cash and $335.2 million available to borrow under its $750 million revolving credit facility. The Company’s home building debt to book capitalization as of September 30, 2017 and 2016 was 46.9% and 46.4%, respectively, and adjusted net home building debt to adjusted book capitalization was 46.1%* and 44.9%*, respectively.
On October 30, 2017, CAA announced that it entered into a definitive merger agreement with Lennar Corporation (“Lennar”) pursuant to which each share of CalAtlantic stock will be exchanged for 0.885 shares of Lennar Class A common stock. CalAtlantic’s stockholders will also have the option to elect to exchange all or a portion of their shares for cash in the amount of $48.26 per share, subject to a maximum cash amount of approximately $1.2 billion. The deal is expected to close in the first calendar quarter of 2018.
As a result of the merger deal, CAA has cancelled the conference call and webcast to discuss its results for the 2017 third quarter that had previously been scheduled for Thursday, November 9th at 4:30 p.m. Eastern time.
