Orleans Homebuilders chairman and CEO Jeffrey Orleans began the company's 2Q2008 earnings call by noting that, "December sales were a disaster." That fact, coupled with $80.2 million in inventory and land sale impairments among other charges, contributed to the company posting a net loss of $51.4 million for the quarter.
New orders fell 23% year-over-year to 284 homes, resulting in a dollar value decline of 25% from the same period a year ago. However, home building revenues for the quarter slipped only 6% from the same period last year to $144.5 million, thanks in part to a roughly 10% increase in average sales price for homes delivered in the quarter to $447,000. Cancellations crept up a couple percentage points from the previous quarter to 26%.
Orleans said the reduction in net new orders was primarily due to a steep reduction of 46% in spec home count. The decrease left the company with an average of 2.6 specs per community at the beginning of 2Q2008. Of the 248 specs on the books, most were concentrated in the company's northern and southern regions, where sales have been the strongest. Operations in those two regions include communities in Southeastern Pennsylvania; Central and Southern New Jersey; Orange County, New York; Charlotte, Raleigh, and Greensboro, N.C.; and Richmond and Tidewater, Va. In fact, sales in those two regions make up roughly 88% of the company's backlog, which increased 4% in value to $303.1 million from the same period a year ago.
This concentration of sales in the two regions also reflected management's "portfolio optimization" strategy, which includes selling off underperforming assets to generate cash and pay down bank debt. In the quarter, management closed nine land sales to shed 1,400 lots in five states, generating proceeds of approximately $32.9 million. Because the parcels had previously been impaired, management expected $25 million in tax refunds as a result of the sales. CFO Garry Herdler said 94% of the lots sold were in Florida, Illinois, and Arizona.
"These [buyers] were local developers, and those were important markets for them," Herdler said. "The magic of it was finding the right buyer."
The sales effectively marked the company's exit from the Arizona market, as well as the Palm Coast and Palm Bay areas in Florida. However, the company will maintain a position in Orlando.
Orleans also announced the closing of a $2 million land deal in January. Despite the 10 land sales in the past few months, which have brought the company's lot inventory down to roughly 8,500 lots, the company's owned-to-controlled-lot ratio remains high at 70%.
SG&A also remained elevated at roughly 17% of revenues, despite the implementation of several cost controlling measures, including a 14% reduction in headcount. Incentives and pricing pressure contributed to overall margin compression, with Orleans noting that, in the Florida and Midwest regions, "margins are nonexistent." The company rounded the quarter with $31.8 million in cash on its books.
Despite the 30-day sales drought in January, Orleans said that preliminary traffic reports from January held hope for a better 3Q2008. He said he had visited 45 job sites in the past two weeks and felt like 95% of the sales people were optimistic about sales going forward. "The mood swing since the beginning of January was encouraging," he said.
