William Lyon Homes (WLH) Q3 2019 Earnings Call Transcript

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William Lyon Homes (WLH)
Q3 2019 Earnings Call
Nov 21, 2019, 4:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the third-quarter 2019 William Lyon Homes earnings conference call. My name is Daniel and I will be your operator today. At this time, all participants are in listen-only mode. This call is being recorded and will be available for replay through November 29, 2019, starting this afternoon for approximately one hour after the completion of this call.

[Operator instructions] Now, I'd like to turn the call over to Mr. Larry Clark, Investor Relations for the company. Please go ahead, Mr. Clark.

Larry Clark -- Investor Relations

Thank you, operator. Good afternoon and thank you for joining us today to discuss William Lyon Homes' financial results for the three months ended September 30, 2019. The company's press release regarding such results was filed on November 6, 2019 and is available on the company's website. The press release also includes a reconciliation of non-GAAP financial measures used therein.

Before we continue, please take a moment to read the company's notices regarding forward-looking statements. Important additional information and where to find it, and participants in the merger solicitation, which is included in the press release related to the announcement of this call. As explained in the notice, this conference call may contain 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 Matt Zaist, president and chief executive officer; and Colin Severn, senior vice president and chief financial officer. Now I'd like to turn the call over to Matt Zaist.

Matt Zaist -- President and Chief Executive Officer

Thank you, Larry. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. As you know, the company's previously scheduled third-quarter 2019 financial results conference call was postponed in light of the concurrent announcement on November 6th of the company's entry into a definitive merger agreement under which William Lyon Homes will become part of Taylor Morrison Home Corporation, subject to the terms of that agreement. This transaction at completion will create the nation's fifth largest homebuilder and a combined company would be positioned as a top-five builder in 16 of the combined company's 23 markets across the US.

As you can imagine, there was a tremendous amount of work required leading up to such an announcement outside of day-to-day business operations, especially with respect to senior executives and regional management. All things considered, we are pleased with our financial performance for the third quarter with strong bottom line results driven by our improving homebuilding gross margins and profitability from our ancillary business operations, including financial services and our new mixed-use redevelopment business. From a monthly sales rate prospective in Q3 2019, we saw similar rates of absorption in July and September as we did the prior year at 2.8 sales per community in each of those respective months. We saw a dip in August to a slower than anticipated 2.5 sales per community, which led to the differential in our overall results compared to expectations.

Total new home orders were 940 for the quarter, down 6% from the third quarter of 2018. We continue to see the strongest performance from the entry level and first time move up buyers segments, selling at a monthly pace of 3.3 sales per community and 2.6 sales per community respectively, which combined represented 82% of our third quarter closings and 85% of our backlog at the end of the quarter. These consumers seem to be responding well to our communities that offer attainable housing at or below market median prices. We delivered 995 homes during the quarter, generating homebuilding revenue of approximately $465 million, both down moderately when compared to the year-ago quarter.

The slower sales pace in the first part of August led to lower than expected number of spec deliveries for the quarter. Contributing to our financial results for the quarter was a strong contribution from our financial services platform. As discussed previously, the company has launched ClosingMark Financial Group, a wholly owned subsidiary offering a full suite of financial services, including title, agency, and mortgage services for our homebuyers and other retail customers. During the third quarter, we completed the integration of our existing mortgage joint venture operations and loan pipeline into this platform under the ClosingMark Home Loans brand.

In total, our financial services segment recorded income of $3.7 million for the third quarter, up from $500,000 in the third quarter of last year. Additionally, we've been working on a mixed-use redevelopment platform as a compliment to our home building operations. And during the third quarter we recorded our first multifamily apartment sale, which generated a profit of $4.3 million. Our gross margins for the quarter, excluding a one-time inventory charge, which Colin will discuss later was 16.5% up 50 basis points sequentially from the second quarter of this year.

Excluding previously capitalized interest, our adjusted homebuilding gross margin percentage was 20.6% up 30 basis points sequentially. Adjusted pre-tax income for the quarter was $30.8 million and adjusted net income available to common stockholders was $16.1 million or $0.41 per diluted share. All showing meaningful improvement for the second quarter. Moving on to our markets.

Highlights for the quarter included our Arizona, Texas, and Colorado operations, which continue to perform well and experienced absorption rate in excess of the company average. Our California operations achieved an overall absorption case that was consistent with the third quarter of last year. The Pacific Northwest and Nevada lagged the overall company average from a sales pace perspective. But we are pleased with the improvements that we've seen with product repositioning, as well as the senior management changes we've implemented in Nevada and Oregon, and the new community openings which we feel will improve operating results as we move into 2020.

Companywide our dollar value of orders for the third quarter of 2019 was approximately $432 million, down 5% year over year. The year-over-year decline was driven primarily by a lower ASP of orders due to mix, including a higher percentage of orders from our operations in Texas and Arizona, and fewer orders from Northern California, as well as the product repositioning to lower priced products in markets like Nevada and the Pacific Northwest. Backlog conversion rate for the quarter was 78%, which reflects the 600-basis-point improvement over last year's third quarter, driven by our continued commitment to our specs start strategy. Average community count for the third quarter was 114, down slightly from 116 average communities during the prior-year quarter.

The company continued to be focused on development of its new communities and driving toward achievement of its community count growth goals for mid 2020 as articulated on last quarter's conference call. For discussion on our financial results, I'll turn the call over to Colin.

Colin Severn -- Senior Vice President and Chief Financial Officer

Thank you, Matt. Total homebuilding revenue for the third quarter of 2019 was $465 million as compared to $534 million in the year-ago period. The decrease in home sales revenue was due to a 6% decrease in the number of homes delivered and an 8% decline in ASP. As we mentioned in previous quarters, our mix to a higher concentration of deliveries in Texas and Arizona was primarily driven the decrease in ASP.

ASP at the end of the third quarter was approximately 449,000 and slightly lower than the ASP of homes closed during the most recent quarter, again primarily driven by geographic and product mix. Gross margins for the third quarter including one-time inventory charge of 6.6 million, included in cost of sales related to closeout projects. Homebuilding gross profit excluding this charge was 77 million during the quarter, compared to 97 million in the third quarter of 2018, resulting in a gross margin percentage of 16.5%. Our adjusted homebuilding gross profit, excluding interest, as well as the charge above was 96 million.

Our adjusted homebuilding gross margin percentage was 20.6% during the third quarter. Our sales incentives as a percentage of revenue for our homes closed during the third quarter were 2.7%, down from a second quarter level of 2.9%. Our sales and marketing expense for the third quarter was 5.4% of homebuilding revenue, flat when compared to the year-ago quarter, despite lower homebuilding revenue, primarily due to operational efficiencies and savings across all divisions. General and administrative expenses were flat year over year on an absolute dollar basis.

However, as a percentage of homebuilding revenue, G&A expenses increased to 6.5% compared to 5.6% in the year-ago quarter. This combined for a total SG&A expense of 11.9% of revenue for the third quarter, compared to 11% in the prior-year period. As Matt mentioned, during the third quarter we completed the integration of our existing mortgage joint venture operations and loan pipeline into our wholly owned ClosingMark platform. ClosingMark generated 3.4 million of income and our unconsolidated mortgage joint ventures recorded income of 0.3 million for a total combined financial services income of 3.7 million for the quarter, up from 500,000 in the third quarter of last year.

Included in other income for the quarter was profit of 4.3 million related to our first multifamily apartment sale from our ancillary businesses that Matt mentioned previously. On July 9, 2019 we closed on a $300 million senior notes offering at a coupon rate of 6.625%. The proceeds from the offering were used to redeem a majority of the $350 million 7% senior notes due 2022 on August 15, 2019. In conjunction with the transaction, the company recorded a loss on extinguishment of debt, net of tax of 1.4 million.

Provision for income tax was 4.8 million or an effective tax rate of 21.5%. This compares to 9 million or 22% in the year-ago period. Adjusted pre-tax income for the quarter was 30.8 million after adjusting for the inventory charge and the loss on extinguishment of debt compared to 40.8 million in the year-ago period. Net income attributable to non-controlling interest was 8 million during the third quarter as compared to 5.3 million in the prior year.

Net income available to common stockholders during the third quarter was 9.5 million or $0.24 per diluted share based on 39.2 million fully diluted shares. Adjusted net income was 16.1 million, or $0.41 per diluted share. Our land acquisition spend for the third quarter was $85.5 million, including land acquisition and horizontal development costs. At the end of the quarter, our total lots owned and controlled were 29,242.

Options lots accounted for 48% of our total lot inventory. Now turning to our balance sheet. We ended the quarter with $2.3 billion in owned real estate inventories, $3 billion in total assets and total equity of $1 billion. At the end of the quarter, our total liquidity was approximately $248 million, including our cash balance and the availability under our revolving credit facility.

Our total debt to book capitalization was 57.7% at the end of the quarter, and our net debt to net book capitalization was 56.9%. Now I'll turn it back to Matt for closing remarks.

Matt Zaist -- President and Chief Executive Officer

Thanks, Colin. This concludes our call today. I'd like to thank you all for joining. I'd also like to thank all of you who have followed William Lyon Homes over the past six years.

We look forward to updating you on the proposed transaction. Have a great day. Goodbye and adios.

Duration: 14 minutes

Call participants:

Larry Clark -- Investor Relations

Matt Zaist -- President and Chief Executive Officer

Colin Severn -- Senior Vice President and Chief Financial Officer

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