The New Home Company Inc. (NYSE: NWHM), Aliso Viejo, California, on Friday reported a net loss of $2.0 million, or $(0.10) per diluted share, including $1.8 million of pretax severance charges, for the 2019 first quarter ended March 31. The loss compares with a net loss of $0.6 million, or $(0.03) per diluted share, in the prior year period. Analysts polled by Dow Jones were expecting a loss of $0.08 per share.
Home sales revenue for the 2019 first quarter increased 25% to $99.2 million, compared to $79.4 million in the prior year period. The increase in home sales revenues was driven by an 18% increase in deliveries and a 6% increase in average selling price to $1.0 million. The higher year-over-year average selling price was impacted by mix, including pulling forward first deliveries from our higher-priced Icon community in Scottsdale, Arizona, where the average price topped $2.2 million.
Gross margin from home sales for the 2019 first quarter was 12.7% as compared to 12.3% in the prior year period. The 40 basis point increase was primarily due to a mix shift, which was partially offset by higher interest costs and incentives. Adjusted homebuilding gross margin for the 2019 first quarter, which excludes interest in cost of home sales, was 17.6%*, compared to 15.7%* in the prior year period.
SG&A expense ratio as a percentage of home sales revenue for the 2019 first quarter was 16.2% versus 15.9% in the prior year period. The 30 basis point increase in the SG&A rate was primarily due to severance charges and higher amortization of capitalized selling and marketing costs related to a higher community count in the 2019 first quarter, and to a lesser extent, an amortization expense benefit in the 2018 first quarter in connection with adopting Accounting Standards Codification 606. These decreases were partially offset by improved leverage from higher home sales revenue and lower compensation expenses. Excluding severance charges, the SG&A rate was 14.4%, a 150 basis point improvement as compared to the 2018 first quarter.
Net new home orders for the 2019 first quarter decreased 21% to 112 homes due to a slower monthly sales absorption rate, partially offset by an increase in average selling communities. The monthly sales absorption rate for the Company was 1.7 for the 2019 first quarter, compared to 2.8 for the prior year period. The 39% decrease in the monthly absorption rate was due to weaker buyer demand as compared to the prior year; however, New Home reported a 42% sequential increase in the monthly absorption rate during the 2019 first quarter as compared to the 2018 fourth quarter. It ended the 2019 first quarter with 22 active communities as compared to 18 at the end of the 2018 first quarter, a 22% increase.
The dollar value of the company's wholly owned backlog at the end of the 2019 first quarter was $212.6 million and totaled 204 homes, compared to $228.1 million and 210 homes in the prior year period. The decrease in backlog dollar value resulted primarily from lower net new orders and a 4% lower average selling price of the homes in backlog at the end of the 2019 first quarter.
Fee Building Projects
Fee building revenue for the 2019 first quarter was $19.7 million, compared to $43.8 million in the prior year period. The decrease in fee revenues was largely due to lower construction activity in Irvine, California, due to lower demand levels in that submarket. Management fees from joint ventures and construction management fees from third parties, which are included in fee building revenue, increased to $1.3 million for the 2019 first quarter as compared to $1.0 million for the 2018 first quarter. Fee building gross margin for the 2019 first quarter was $0.4 million versus $1.1 million in the prior year period. The reduction in fee building margin was largely the result of lower fee building revenue and a $0.4 million decrease in management fees from joint ventures, which was partially offset by $0.7 million in construction management fees from third parties earned in the 2019 first quarter.
Unconsolidated Joint Ventures (JVs)
The company’s share of joint venture income for the 2019 first quarter was $0.2 million as compared to $0.3 million in the prior year period, with the majority of the income generated from the Company's Mountain Shadows luxury community in Paradise Valley, Arizona. At the end of 2019 and 2018 first quarters, our joint ventures had six and seven actively selling communities, respectively.
The company's effective tax rate related to the income tax benefit for the 2019 first quarter was 25.0% as compared to 56.9% in the 2018 first quarter. The decrease is attributable to discrete items which resulted in a $0.4 million benefit in the 2018 first quarter primarily related to energy credits and a $0.3 million provision in the 2019 first quarter related to stock compensation and state tax rate changes.
As of March 31, 2019, the company had real estate inventories totaling $563.1 million and owned or controlled 2,743 lots through its wholly owned operations (excluding fee building and joint venture lots), of which 1,090 lots, or 40%, were controlled through option contracts. The company ended the 2019 first quarter with $41.9 million in cash and cash equivalents and $399.6 million in debt, of which $84.0 million was outstanding under its $200 million revolving credit facility. As of March 31, 2019, the company had a debt-to-capital ratio of 62.8% and a net debt-to-capital ratio of 60.1%.
During March 2019, the company repurchased and retired $5.0 million of its 7.25% Senior Notes due 2022 for a cash payment of approximately $4.5 million, which resulted in a $0.4 million pretax gain on the early extinguishment of debt.
The company repurchased 153,916 shares of its common stock for approximately $1.0 million during the 2019 first quarter. The purchases were made under a previously announced stock repurchase plan with a remaining purchase authorization of $5.4 million as of March 31, 2019.
The company's current estimate for the 2019 second quarter is as follows:
- Home sales revenue of $110 - $130 million
- Fee building revenue of $15 - $20 million
- Home sales gross margin of 12.0% - 12.5%
“Lower interest rates, moderating home prices, and improvement in the equity markets helped spur buyer demand and order activity during the first quarter, with March being the strongest month,” said Larry Webb, chairman and CEO of The New Home Company. “While sales demand and first quarter absorption rates were lower than the prior year first quarter, absorption rates were up 42% over the fourth quarter which led to a 62% sequential increase in net new orders. In addition, we made progress on our diversification strategy and increased home sales revenue by 25%, deliveries by 18%, and home sales gross margins by 40 basis points over the prior year first quarter.”
Webb continued, “We remain focused on repositioning our portfolio to include more affordable product where we believe sales demand is deeper and sales pace is more robust. We opened three new communities during the quarter with base pricing below $600,000 and anticipate opening three more during the second quarter at similar price points. In addition, we took steps to right-size our operations and cost structure by reducing headcount to better align our business with recent demand levels.”
