The New Home Company Inc., Aliso Viejo (NYSE: NWHM) on Friday reported et income of $4.3 million, or $0.21 per diluted share, for the 2017 third quarter. The gain compares to a profit of $5.5 million, or $0.27 per diluted share in last year’s quarter. Analysts were expecting a gain of $0.16 per share.
The year-over-year decrease in net income was primarily attributable to an 8% decline in home sales revenue, a 120 basis point increase in selling and marketing expenses as a percentage of home sales revenues, and decreases in fee building revenues and joint venture income. These items were partially offset by an 80 basis point improvement in home building gross margin to 16.3%.
Total revenues for the quarter were $157.9 million, compared to $177.9 million in the prior year period. Home sales revenue for the 2017 third quarter decreased 8% to $114.6 million, compared to $125.1 million in the prior year period. The decrease in home sales revenue was driven primarily by a 35% decrease in the average selling price of homes delivered to $1.4 million, which was partially offset by a 40% increase in deliveries. The decrease in average selling price was primarily due to a product mix shift, including a higher proportion of deliveries from Northern California operations, where the average selling price was $781,000. Additionally, Southern California’s 2017 third quarter average selling price decreased 31% to $2.0 million due to contributions from communities with lower price points, consistent with the strategic broadening of the product portfolio.
Gross margin from home sales for the 2017 third quarter was 16.3% versus 15.5% in the prior year period. The 80 basis point improvement in home sales gross margin was primarily due to a change in mix, including more volume from higher-margin communities located in Santa Clara in the Bay Area and in Crystal Cove in Newport Coast. Adjusted gross margin from home sales for the 2017 third quarter, which excludes interest in cost of home sales and inventory impairments, was 18.4%* compared to 16.5%* in the prior year period.
SG&A as a percentage of home sales revenue for the 2017 third quarter was 11.6% versus 10.0% in the prior year period. The increase in the SG&A was primarily attributable to higher selling and marketing costs, driven by an increase in spend related to the ramp up of new communities, higher co-broker commissions and model operating costs, and to a lesser extent, lower home sales revenue.
Net new home orders for the 2017 third quarter were up 27% to 81 homes, compared to 64 homes in the prior year period. The monthly sales absorption pace was up 47% during the 2017 third quarter to 2.5 sales per average selling community, compared to 1.7 in the prior year period. The improvement in the absorption rate was driven by solid order activity in both Southern and Northern California. As a result of increased sales activity and the timing of opening new communities, quarter end selling communities were down 8% from the prior year, ending the 2017 third quarter with 12 active communities compared to 13 at the end of the prior year period. This slight decline was consistent with expectations, and the company said it anticipates opening five new communities in the 2017 fourth quarter.
The dollar value of the Company’s wholly owned backlog at the end of the 2017 third quarter was up 14% year-over-year to $330.6 million and totaled 182 homes, compared to $290.2 million and 129 homes in the prior year period. The increase in backlog dollar value primarily related to the increase in net new home orders, which was partially offset by a 19% decline in average selling price in backlog. The decrease was consistent with the company’s strategy to expand its product portfolio to include more affordable price points.
Fee building revenue for the 2017 third quarter decreased 18% to $43.3 million, compared to $52.8 million in the prior year period. The decrease was primarily due to a decrease in fee building construction activity. Fee building gross margin was $1.5 million, or 3.5%, compared to $1.9 million, or 3.7%, in the prior year period. Management fees from joint ventures were $1.3 million during the 2017 third quarter compared to $1.5 million in the prior year period.
The company’s share of joint venture income for the 2017 third quarter was $0.1 million, compared to $0.5 million in the prior year period. This decrease was due to lower joint venture net income due to a decrease in joint venture lot sales and lower gross margins from joint venture home sales. The decrease in joint venture gross margins was due to increased deliveries in the 2017 third quarter from four lower-margin Sacramento communities. In the 2016 third quarter, joint venture gross margins were higher due to higher-margin deliveries from the Orchard Park project in the Bay Area, which delivered its last home in the 2017 first quarter.
Joint venture net income totaled $0.4 million, compared to $2.4 million in the prior year period. Joint venture home sales revenues totaled $45.2 million, compared to $19.7 million in the prior year period, while joint venture land sales revenues totaled $0.6 million for the 2017 third quarter, compared to $14.8 million in the prior year period.
At the end of both the 2017 and 2016 third quarter, joint ventures had eight active selling communities. Net new home orders from joint ventures for the 2017 third quarter increased 23% to 43 homes as compared to 35 homes in the prior year period. The dollar value of homes in backlog from unconsolidated joint ventures at the end of the 2017 third quarter was $69.8 million from 83 homes, compared to $85.3 million from 88 homes in the prior year period.
As of September 30, the company had real estate inventories totaling $478.5 million, of which $362.1 million represented work-in-process and completed homes (including models), $75.2 million in land and land under development, and $41.3 million in land deposits and pre-acquisition costs. The company owned or controlled 2,203 lots through its wholly owned operations (excluding fee building and joint venture lots), of which 1,356 lots, or 62%, were controlled or under option. It ended the 2017 third quarter with $62.4 million in cash and cash equivalents and had no borrowings outstanding under its $200.0 million revolving credit facility. The company ended the quarter with $318.5 million in debt outstanding (net of unamortized discount, premium and debt issuance costs), a debt-to-capital ratio of 55.7%, and a net debt-to-capital ratio of 50.3%.
The company issued guidance for the 2017 fourth quarter:
Home sales revenue of $260 – $280 million
Fee building revenue of $20 – $30 million
Income from unconsolidated joint ventures of $1 – $1.5 million
