Harbor Custom Development, Inc. (NASDAQ:HCDI) Q1 2023 Earnings Call Transcript May 15, 2023

Harbor Custom Development, Inc. misses on earnings expectations. Reported EPS is $-9.39 EPS, expectations were $-5.46.

Operator: Thank you for standing by, and welcome to the Harbor Custom Development Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session from previously submitted questions will follow the formal presentation. 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; and Lance Brown, Chief Financial Officer; and Jeff Habersetzer, Chief Operating Officer. I will now turn the conference over to Mr. Brown. Please go ahead.

Lance Brown: Thank you, operator, and thank you all for joining us today. Welcome to Harbor Custom Development’s first quarter 2023 earnings conference call. During our discussion today, we will be referring to our earnings press release and presentation 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.harborcustomhomes.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 today are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements involve a number of risks, uncertainties and other factors that could 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 statements. 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.

Sterling Griffin: Thank you, Lance, and thanks to everyone for joining the call today. We appreciate your continued support of Harbor custom development. Before I talk about the first quarter, I would like to begin by updating everyone on our recent announcement regarding my upcoming retirement and our executive transition plan. As was disclosed in our recent press release and corresponding 8-K, I’ll be retiring from my position as Chief Executive Officer, President and Chairman of the Board of Directors effective as of July 12, 2023. I will continue to support the Company serving as a non-executive strategic advisor through January 12, 2025. Jeff Habersetzer our current Chief Operating Officer, General Counsel and Corporate Secretary is expected to be named as interim Chief Executive Officer and interim President.

Jeff has been instrumental in taking Harbor public, growing our business and leading operations, including the shift and focus on multifamily and the significant progress we have made with the construction rent up and recent purchase and sale agreements for those assets. Jeff’s operational legal background in the real estate industry and in-depth knowledge of Harbor’s operations makes him the ideal person for the job and I’m confident in the direction future of the Company under his leadership. Lance Brown, our current Chief Financial Officer is expected to take on an expanded role and be appointed interim Chief Operating Officer, while maintaining his current position as Chief Financial Officer to help facilitate a smooth transition and continuity of our operational leadership.

I would like to conclude on this topic by expressing a heartfelt thank you to all of our employees, customers, suppliers, business partners and shareholders for their support these past years. Harbor would not be what it is today without each of you. Now, let’s shift focus on our first quarter earnings. In the first quarter of 2023, four real estate market conditions caused by rising interest rates resulted in weaker sales volume, lower prices and decreased net income for the Company. We were cautiously optimistic heading into 2023 with the potential sales of our first few multifamily projects would provide for increased revenue during the quarter. However, the uncertainty in interest rates has significantly decreased multifamily sales across our principal market area and most areas of the country during the quarter as buyers struggle to obtain suitable project financing.

From a cost perspective, we expect project related costs to remain elevated in the near-term. However, we remain optimistic that land costs, material costs, and labor costs will begin returning toward pre-pandemic levels. Land costs, along with certain materials, particularly lumber for example, have recently demonstrated year-over-year declines. We partially offset the unfavorable impact these events had on our business. We took further action to control costs, curtail discretionary, spending and improve operational efficiencies during the quarter. Efforts to shift our inventory and enhance our focus on multifamily housing continued to advance. Multifamily projects now represent approximately 64% of our total real estate assets. Our team has made significant progress advancing several of our multifamily projects and completed construction on Pacific ridge and winds down during the first quarter.

Additionally, we executed a purchase and sale agreement for Mills Crossing, a purchase price of approximately $14.3 million. We expect the transaction to close in late June and contribute to second quarter revenue. We observed meaningful rent up at our Pacific Ridge, Belfair and Wyndstone communities located in western Washington during the first quarter. We also monetize 11 lofts in our Winding Lane Community in California. We continue to see demand in our Texas market and are expanding our position through a partnership with Austin-based general contractor Wurzel Builders. During the quarter, we sold homes and our La Ventana and Siena Creek subdivisions. We also continued to progress the construction of homes in Summit Rock and Siena Creek with the expectation that several of these new homes will go on the market in the second quarter of 2023.

As of March 31, 2023, our backlogs of fully executed contracts were $16.2 million compared to $20.7 million as of March 31, 2022. The slight decrease is primarily due to the majority of our fee build projects being completed and the continued shift in strategy to focus on multifamily projects. I want to also highlight the actions we took to strengthen our financial position, as we navigate near-term uncertainty. A stock split combined with the restructuring of the BankUnited loan agreement, provided us with the necessary foundation to build on our strategic objectives. Furthermore, these actions supported our company in regaining compliance with the NASDAQ Capital Markets continued listing standards. We believe this development has the potential to broaden our opportunities to attract investment capital, strategic partners and project financing to achieve our goals and continue to execute on our long-term strategy of rebuilding value for our shareholders.

I will now turn the call back Lance Brown, our Chief Financial Officer to further discuss our financial details.

Lance Brown: Thank you, Sterling. Before I review the financial results in greater detail, I wanted to convey my gratitude for the Harbor team’s dedication as we navigate this challenging economic environment. Sales in the first quarter decreased to $9.2 million as compared to $28.6 million in the prior year period. Decrease in sales was primarily driven by decreases in developed lot sales of $6.6 million, home sales of $6.2 million, entitled land sales of $4.5 million and fee billed revenue of $2.4 million compared to the prior year period. These decreases were partially offset by $0.4 million of rental revenue earned from multifamily projects during the first quarter. The decrease in developed lots and entitled land sales was primarily driven by a decreased buyer demand in our California and Washington market.

As expected, fee build revenue decreased during the quarter as those projects continue to near completion. Decrease in home sales was primarily attributed to the sale of homes in our Washington market in the prior year period and the lack of completed inventory available during the first quarter of 2023. Texas home sales were relatively consistent year-over-year. Our gross loss for the first quarter was $2 million compared to gross profit of $6.1 million in the prior year period. Gross margin loss was 22.3% compared to a gross profit margin of 21.2% in the first quarter of 2022. The gross loss for the quarter was primarily due to the non-recurrence of power margin entitled land sales that occurred in the prior year period, lower gross profit and gross margins on homes and developed lot sales during the first quarter.

The recording of impairment charges totaling $1.6 million related to our Pacific Ridge multifamily project, as well as our Darkhorse and Bunker Ranch communities, and a decrease in fee build gross profit and gross margin. Our operating expenses during the first quarter decreased by $0.9 million to $2.9 million compared to $3.8 million in the prior year. The decrease in total operating expenses can be primarily attributed to our continued focus on reducing expenses across the business. These efforts included reductions in professional fees of $0.3 million, insurance expense of $0.2 million, depreciation expense of $0.2 million and stock compensation expense of $0.2 million. Net loss for the first quarter was $4.9 million compared to net income of $1.6 million in the prior year period.

The decline in net income during the first quarter of 2023 was primarily attributable to lower sales, as compared to the significant prior year sales in our California and Washington markets and the $1.6 million of impairment charges recorded in the first quarter of 2023. Net loss attributable to common stockholders for the first quarter of 2023 was $6.8 million, a $9.39 basic loss per share, compared to net loss attributable to common stockholders a 0.4 million or $0.56 basic loss per share for the first quarter of 2022. EBITDA for the first quarter of 2023 decreased from $3.5 million in the prior year period to a loss of 4.5 million. Excluding the impact of stock compensation and other nonrecurring items, adjusted EBITDA for the first quarter increased to a loss of $4.4 million, compared to adjusted EBITDA of $3.9 million in the prior year period.

Net cash used in operating activities for the quarter ended March 31, 2023 was 11.6 million. The primary uses of cash during the quarter were related to the development and construction of our real estate assets, majority of which we’re focused on our multifamily projects. Our real estate assets have continued to increase to 217.8 million as of March 31, 2023. As of March 31, 2023, our real estate assets were levered approximately 60%. Additionally, during the first quarter, we affected a 1 for 20 reverse stock split on March 6th. Completion of the reverse stock split was important to maintain compliance with the minimum bid price requirement of the NASDAQ capital markets continued listing standards as Sterling highlighted earlier, The reverse split combined with the restructuring of the BankUnited loan agreement now since February enhances our ability to achieve our strategic objectives.

Following the announcement of the reverse stock split, NASDAQ capital markets informed us that the Company regained compliance with NASDAQ’s continued listing standards. We remain focused on further strengthening our balance sheet and look forward to reporting additional progress in future periods. I will now turn it back to Sterling for closing remarks. Sterling?

Sterling Griffin: Thank you, Lance. As uncertainty persists due to ongoing challenges impacting the real estate market and broader economy, we remain committed to rebuilding shareholder value and are committed to taking proactive measures to control costs and position our business for future growth. And before turning the call back to the operator, I’ve asked Jeff Habersetzer, our Chief Operating Officer and expected interim Chief Executive Officer and Interim President to say a few words. Jeff?

Q&A Session

Jeff Habersetzer: Thank you, Sterling. I’m very happy for you and I hope you will be able to enjoy spending time with your family in retirement. I am honored to take on the role of Interim CEO and Interim President and I’m grateful for the competence that you and the board in place to me. To our shareholders, while I am proud of our company and what we have accomplished to date, there is much work to be done. Our collective team is aligned extremely focused on achieving our immediate and long-term business objectives. As we move forward, my top priority is to get us back on the path to long-term stability and restore public trust in the HCDI brands. Our business objectives are within reach and by utilizing our current and future asset base, I’m confident in our ability to increase shareholder value. I look forward to a bright future for Harbor and its shareholders. With that I will turn it back to the operator.

Operator: We will now switch to the question-and-answer session. Prior to the call, inquiries were submitted to IR at harborcustomdev.com. I will now read the previously submitted questions for Mr. Griffin and Mr. Brown to respond to. Thank you to everyone who submitted questions. What was the cause for the additional impairment on Pacific Ridge and impairments on Darkhorse and Bunker Ranch? Can we expect to see impairment charges on other properties?

Operator: Will you please provide an update on what kind of margins Harbor expects to generate themselves expected to occur in 2023?

Operator: Can you provide any updates around sales of Pacific Ridge, Wyndstone, Belfair and Meadowscape?

Operator: If Harbor cannot achieve acceptable sales prices on Wyndstone, Meadowscape, Pacific Ridge and Belfair, does it have enough liquidity to continue to hold these properties and collect the rents?

Operator: Is Harbor planning to sell any assets in order to raise cash to be in a better liquidity position?

Operator: Can you remind us how much of each sales proceeds Harbor is required to pay to BankUnited?

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

Operator: Can you provide an update for your horizon Semiahmoo and Grandis Pond projects?

Operator: Is the pending Bridge View Trail PSA that was recently announced for $11 million sales price, a significant reduction from the original listing price, or is that not a proper comparison?

Operator: Can you comment on the significant stock price volatility and volume we have seen recently?

Operator: Will you please provide an update on Punta Gorda?

Operator: Is the Company looking at expansion in other states besides Washington, Texas, California and Florida?

Operator: What is the status of the Mills Crossing sale?

Operator: After downsizing land development infrastructure division, are there any other costs that can be cut to conserve cash?

Sterling Griffin: Thank you everyone for participating in today’s call. We look forward to providing additional updates soon. You can find more information regarding the Company on our Investor Relations website, www.harbercustomdev.com. For the most recent updates on company news, we encourage you to sign up for email 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 at harborcustomdev.com. Thank you again for joining us today. We appreciate your time.

Operator: Thank you. This now concludes today’s presentation. You may now disconnect your lines at this time and thank you for your participation.