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AVHI > SEC Filings for AVHI > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for AV HOMES, INC.

Form 10-Q for AV HOMES, INC.


4-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
($000's omitted, except share and per share data)


Executive Overview
We are engaged in the business of homebuilding, community development and the sale for third-party development of land in Florida, Arizona and North Carolina. We also engage to a limited degree in other real estate activities, such as the operation of amenities. We manage our business through three reportable segments:
the development, sale and management of active adult communities;
the development and sale of primary residential communities; and
the sale of commercial, industrial or other land.

For the three months ended June 30, 2014, we derived 54% of our revenues from active adult, 45% of our revenues from primary residential, and 1% of our revenues from the commercial, industrial and other land segments, respectively. For the six months ended June 30, 2014, we derived 46% of our revenues from active adult, 37% of our revenues from primary residential and 17% of our revenues from commercial, industrial and other land segments, respectively.

Our primary business is the development of land and the construction and sale of primary residences for people of all ages, including active adults. Our current homebuilding sales activities include existing locations in Florida, Arizona and North Carolina, with additional communities in the pipeline for each state. While we have historically generated more than half of our homebuilding revenues from our active adult community segment, we have invested and intend to continue to invest in our primary residential community segment in order to provide us with a diversified and well-balanced portfolio. We generate a smaller portion of our revenues from the sale of land from our portfolio of legacy land holdings that we sell in favorable market conditions. While we have in the past acquired land with the intention to resell to developers and other third parties, we now purchase land for the purpose of developing communities and will opportunistically sell non-core commercial and industrial assets, as well as scattered lot positions and land assets, that are in excess of our needed supply in a given market.

Solivita and Vitalia at Tradition, our active adult communities in Central Florida, and CantaMia in Goodyear, Arizona, currently serve as our flagship communities as we pursue the active adult segment. In addition, we are adding active adult communities in Raleigh-Durham, North Carolina and Mesa, Arizona, named Creekside at Bethpage and Encore at Eastmark, respectively. These communities will broaden our geographic footprint and product offering, and should provide us with future participation in the longer term growth of demand from the wave of Baby Boomers entering their retirement years.

Our current selling community count includes 18 locations, 14 in Florida and four in Arizona, with additional communities in the pipeline for both states and North Carolina. Our current closing community count include 14 locations, 12 in Florida and two in Arizona, with additional communities in the pipeline for both states and North Carolina.

The primary residential market is a segment that we continue to invest in to create a more diversified portfolio that mitigates cyclical impact over time. In the second half of 2013, we acquired over 800 lots in five new communities in the Phoenix market and expect to begin home sales and construction on these lots in late 2014 along with current building in our existing communities in the Phoenix market. Additionally, we are building out our existing communities in Central Florida and our lot positions within the newly acquired Royal Oak Homes and are expanding into a new market in North Carolina. Replacement lot positions may require new acquisitions of developed lots or platted or unplatted undeveloped land, or we may decide to develop current land holdings, depending on market conditions within the submarket of these assets.

Factors affecting our results of operations

Our business is significantly influenced by a number of factors that affect our revenues, costs and capital expenditures, including those described below. In managing our business and the influence of these factors, we track several key operating metrics described below. This discussion includes forward-looking statements that are based on our current expectations. See ''Risk factors'' and ''Cautionary statement regarding forward-looking statements.''

Revenue factors

General market conditions. Demand for housing in the United States is driven by a variety of factors including, among other things population growth, household income, mortgage rates, affordability, consumer confidence and employment levels. The supply of available housing varies from time to time based on a number of factors, including, among other things, home starts, inventories of existing homes available for sale and activities of speculative investors. Various housing indices have shown significant improvement in recent periods, with a downturn in the first quarter of 2014 as compared to the fourth quarter of 2013, that we believe was primarily driven by inclement weather in the northeastern United States. New home sales experienced volatility in the second half of 2013 as consumers adjusted to higher home prices and an increase in mortgage interest rates. While we believe that higher interest rates are inevitable and may have a moderating effect on demand and


pricing, we believe this impact will be outweighed by the other factors driving increased sales activity as overall new home sales remain low compared with historical levels. We believe that any sustained rise in interest rates will be indicative of a stronger macroeconomic environment that will support a continued recovery in the homebuilding industry.

Demographic trends. As a substantial part of our business focuses on the active adult population, demographic trends have an impact on our results of operations. We believe that we will benefit from the longterm growth in demand for active adult communities as a result of the Baby Boomer generation entering their retirement years.

Cost factors

Subcontractors. Substantially all of our construction work is done by third-party subcontractors with our company acting as the general contractor. Our costs of using subcontractors is significantly influenced by the cost and availability of skilled labor in the markets where we operate.

Raw materials. We use drywall, cement, steel, lumber, and insulation, among other things, in the construction of our homes. Our subcontractors contract with third parties for these raw materials. From time to time, there may be shortages in these raw materials during periods of strong demand for housing that could cause delays in and increase our costs of home construction, which in turn could negatively affect our operating results.

Homebuilding expenses. Selling, general and administrative expenses are included in Homebuilding Expenses and are comprised of expenses not directly associated with the acquisition of lots and construction of homes, such as advertising, expenses associated with operating model homes, and salaries and commissions of sales personnel.

Corporate expenses. Corporate general and administrative expenses are included in General and Administrative Expenses and include costs associated with our executive, marketing, finance, accounting, legal, information services and human resources functions at the corporate level.

Other factors

Inflation. We may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. While we attempt to pass on to our customers increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins and net income could be adversely affected.

Working capital. Our business is capital intensive and requires or may require expenditures for land and infrastructure development, housing construction, funding of operating deficits, real estate taxes, HOA deficits and interest expense, as well as potential new acquisitions of real estate and real estate-related assets. We manage our inventory levels through monitoring land development and home starts. We believe our efforts to opportunistically sell land that we have decided not to develop will help reduce and diversify land holdings and associated carrying costs.

Key operating metrics

Contracts signed. Net contracts signed for a given period represents the number of contracts we have entered into with homebuyers for the purchase and sale of homes, less the number of contracts that were cancelled in the same period. We consider a home sales contract cancelled when the customer terminates the contract.

Home starts. Home starts is the number of new homes on which we have started construction in a given period. Home starts are monitored by management in order to minimize the time between contract signing and closing.

Closings. Closings represents the number of home sales closed in the period. We recognize revenue equal to the sales price of a home when the sales are closed and title passes to the purchasers.

Backlog. Backlog is the number of homes we are building that are under contract for sale that have not closed as of the end of the period being presented. The dollar value of backlog is the revenue anticipated to be realized at closing equal to the purchase price provided in the applicable contract. Backlog is an important indicator of home closings and homebuilding revenues in future periods.


Average sales price. Average sales price represents total revenue for a given period divided by the number of closings for such period.

Seasonality

Our quarterly operating results generally fluctuate by season. We typically experience the highest new home order activity in the winter and spring months, although new order activity is also highly dependent on the number of actively selling communities and the timing of new community openings and closings as well as other market factors. We may experience higher liquidity demands during the first half of the calendar year as we incur the costs associated with new construction resulting from the increased sales volume. If, due to construction delays or other reasons, we are unable to deliver our expected number of homes in the second half of the calendar year, our full year results of operations may be adversely affected.

The following table provides a comparison of certain financial data related to our operations for the three and six months ended June 30, 2014:


                                       Three Months                       Six Months
                                   2014             2013             2014             2013
Operating income (loss):
Active adult communities
Revenues
Homebuilding                  $     25,687     $      8,385     $     40,019     $     18,606
Amenity                              1,906            1,771            3,923            3,556
Expenses
Homebuilding                        20,506            6,964           31,647           15,215
Homebuilding Selling, General
and Administrative                   3,903            2,692            7,473            5,273
Amenity                              2,008            2,054            3,818            4,107
Segment operating income
(loss)                               1,176           (1,554 )          1,004           (2,433 )

Primary residential
Revenues
Homebuilding                        22,738           11,739           34,008           21,672
Amenity                                524              810            1,051            1,419
Expenses
Homebuilding                        19,123            8,934           28,560           16,630
Homebuilding Selling, General
and Administrative                   3,372            1,677            5,468            3,223
Amenity                                468              749            1,043            1,387
Segment operating income
(loss)                                 299            1,189              (12 )          1,851

Commercial and industrial and
other land sales
Revenues                               520            6,577           16,226            8,882
Expenses                               294            4,392           12,238            5,257
Segment operating income               226            2,185            3,988            3,625

Other operations
Revenues                                72              181               85              438
Expenses                                13              115               45              184
Segment operating income                59               66               40              254

Operating income                     1,760            1,886            5,020            3,297

Unallocated income
(expenses):
Interest income and other               70               93              173              102
Equity loss from
unconsolidated entities                 (6 )            (15 )             (5 )            (78 )
Corporate general and
administrative expenses             (3,852 )         (4,292 )         (8,248 )         (7,997 )
Interest expense                         -           (1,763 )           (111 )         (3,536 )
Other real estate expenses            (225 )           (577 )           (714 )         (1,215 )
Loss before income taxes            (2,253 )         (4,668 )         (3,885 )         (9,427 )
Income tax expense                       -                -                -                -
Net income attributable to
non-controlling interests     $        (36 )   $          -     $       (329 )   $          -
Net loss attributable to AV
Homes                         $     (2,289 )   $     (4,668 )   $     (4,214 )   $     (9,427 )

We reclassified commission expense in the table above from "Homebuilding" to "Homebuilding Selling, General and Administrative." Below is a summary of the amounts reclassed for the time periods presented:


                                         Three Months      Six Months
                                         2014     2013    2014     2013
Commission expense--Active Adult         $871     $297   $1,428    $759
Commission expense--Primary Residential  $952     $610   $1,462   $1,088

Data from closings for the active adult and primary residential homebuilding segments for the three and six months ended June 30, 2014 and 2013 is summarized as follows:

                                                  Number of                    Average Price Per
For the three months ended June 30,                 Units        Revenues            Unit
2014
Active adult communities                               101     $    25,636     $           254
Primary residential                                     90          22,741     $           253
Total                                                  191     $    48,377     $           253
2013
Active adult communities                                34     $     8,385     $           247
Primary residential                                     48          11,739     $           245
Total                                                   82     $    20,124     $           245

                                                  Number of                    Average Price Per
For the six months ended June 30,                   Units        Revenues            Unit
2014
Active adult communities                               157     $    39,943     $           254
Primary residential                                    134          33,985     $           254
Total                                                  291     $    73,928     $           254
2013
Active adult communities                                73     $    18,606     $           255
Primary residential                                     90          21,672     $           241
Total                                                  163     $    40,278     $           247

First Half 2014 Highlights

During the first half of 2014, we continued to execute our strategic and operational business plan through (i) the continued deployment of existing capital into land and lot acquisitions, as well as the acquisition of homebuilder operations, (ii) the development of existing land and lot positions, in addition to the construction of homes for sale, (iii) the strong increase in the number of homes sold and closed, (iv) the sale of non-core asset positions, and (v) the successful completion of raising additional debt capital for continued growth and operational opportunities.

3 Months Ended June 30, 2014

Consolidated Results
Overall revenue increased by $21,984 or 75% during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Homebuilding and amenity revenue increased by $28,150 or 124% compared to the second quarter of 2013, partially offset by a $6,057 decrease in land sales. The increase in homebuilding and amenity revenue was driven by a 133% in units closed and a 3% increase in th average sales price for homes sold. Land sales are highly variable from quarter to quarter and large fluctuations are not unexpected. Homebuilding and amenity expenses increased by $26,355 or 114%, consistent with the increase in revenue. The average gross margin on land sales during the three months ended June 30, 2014 was approximately 43% compared to approximately 33% during the same period in 2013.


Corporate general and administrative expenses decreased by $440 to $3,852 for the three months ended June 30, 2014 compared to the same period in 2013. As a percentage of total revenue, general and administrative expenses improved to 8% for the three months ended June 30, 2014 compared to 15% for the same period in 2013. The decrease as a percent of revenue was driven by the significant increase in revenue, while containing our costs.

Interest expense decreased $1,763 or 100% for the three months ended June 30, 2014 compared to the same period in 2013. The decrease in interest expense is primarily attributable to an increase in the amount of interest we capitalized to land under development and homes under construction in the second quarter of 2014 as compared to the second quarter of 2013. Interest costs incurred, prior to capitalization, remained consistent with the prior year at $2,356 for 2014 as compared to $2,326 in the second quarter of 2013.

Net loss for the three months ended June 30, 2014 was $2,289 or $0.10 per share compared to $4,668 or $0.36 per share for the three months ended June 30, 2013. The decrease in net loss for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to a decrease in operating loss, a decrease in interest expense, and a decrease in other real estate expenses.

Homebuilding Operations

Homebuilding revenue, which is revenue from home closings, increased 140% from $20,124 to $48,377 for the three months ended June 30, 2014 compared to the same period in 2013 due to a 133% increase in closings and a 3% increase in average sales price. In the active adult segment, revenues increased $17,251 or 206% over the prior period driven by a 197% increase in units closed due to higher absorption at our three existing active adult communities, predominantly in Florida, and improved market conditions. The primary residential revenues increased $11,002 or 94% over the prior period due to a 88% increase in units closed due to an increase in the number of communities in which we had closings from four to 11 and improved market conditions.

Gross margin from combined home closings decreased by 300 basis points from 21% to 18% for the three months ended June 30, 2014 compared to the same period in 2013. Gross margin from active adult homebuilding increased by 300 basis points from 17% to 20% for the three months ended June 30, 2014 compared to the same period in 2013 due to improved market conditions. Gross margin from primary residential homebuilding decreased by 800 basis points from 24% to 16% for the three months ended June 30, 2014 compared to the same period in 2013 due primarily to the write-up to fair value of inventory acquired in the Royal Oak acquisition of $1,114, or 490 basis points. Additionally, the mix of homes sold in Arizona had a negative impact on margins as we closed out of higher margin communities in 2013 and are starting into newer communities which have lower initial margins. Capitalized interest included in cost of sales for the active adult and primary residential segments was $578 and $147, respectively, for the three months ended June 30, 2014 and was $194 and $227, respectively, for the same periods in 2013.

Homebuilding selling, general and administrative expenses as a percentage of homebuilding revenue improved to 15% for the three months ended June 30, 2014 from 22% for the same period in 2013, primarily driven by favorable cost leverage in the active adult segment. Homebuilding selling, general and administrative expenses for the active adult segment as a percentage of homebuilding revenue improved to 15% for the three months ended June 30, 2014 compared to 32% for the same period in 2013 due to the increased revenue, while we are containing our costs. Homebuilding selling, general and administrative expenses for the primary residential segment as a percentage of homebuilding revenue was 15% and 14% for the three month periods ended June 30, 2014 and 2013, respectively. Improvements in cost leverage from the increased revenue were offset by the costs incurred to start up new selling communities which are not yet generating revenue.

Amenity net loss for the three months ended June 30, 2014 and 2013 remained consistent at $46 and $222, respectively.

6 Months Ended June 30, 2014

Consolidated Results

Overall revenue increased by $40,739 or 75% during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Homebuilding and amenity revenue increased by $33,748 or 75% compared to the first half of 2013. The increase in homebuilding and amenity revenue was driven by a 79% increase in units closed and a 3% increase in the average sales price for homes sold. Revenue from land sales increased by $7,344 or 83% during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This increase for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 is primarily due to the sale of a multi-family property in Arizona to a related party for $13,850 for


a gain of $2,315 in the first quarter of 2014. Homebuilding and amenity expenses increased by $32,219 or 70%, consistent with the increase in revenue. The average gross margin on land sales during the six months ended June 30, 2014 was approximately 25% compared to approximately 41% during the same period in 2013.

Corporate general and administrative expenses increased by $251 to $8,248 for the six months ended June 30, 2014 compared to the same period in 2013. As a percentage of total revenue, general and administrative expenses improved to 9% for the six months ended June 30, 2014 compared to 15% for the same period in 2013. The decrease as a percent of revenue was driven by the significant increase in revenue, while containing our costs.

Interest expense decreased $3,425 or 97% for the six months ended June 30, 2014 compared to the same period in 2013. The decrease in interest expense is primarily attributable to an increase in the amount of interest we capitalized to land under development and homes under construction in the six months ended June 30, 2014 as compared to the same period in 2013. Interest costs incurred, prior to capitalization, remained consistent with the prior year at $4,687 for the six months ended June 30, 2014 as compared to the same period in 2013.

Net loss for the six months ended June 30, 2014 was $4,214 or $0.19 per share compared to $9,427 or $0.74 per share for the six months ended June 30, 2013. The decrease in net loss for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to a decrease in operating loss, a decrease in interest expense, and a decrease in other real estate expenses.

Homebuilding Operations

Homebuilding revenue increased 84% from $40,278 to $73,928 for the six months ended June 30, 2014 compared to the same period in 2013 due to a 79% increase in closings and a 3% in average sales price. In the active adult segment, revenues increased $21,413 or 115% over the prior period driven by a 115% increase in units closed due to higher absorption at our three existing active adult communities, predominantly in Florida, and improved market conditions. The primary residential revenues increased $12,336 or 57% over the prior period due to a 49% increase in units closed due to an increase in the number of communities in which we had closings from four to 11 and improved market conditions.

Gross margin from combined home closings decreased by 200 basis points from 21% to 19% for the six months ended June 30, 2014 compared to the same period in 2013. Gross margin from active adult homebuilding increased by 300 basis points from 18% to 21% for the six months ended June 30, 2014 compared to the same period in 2013 due to improved market conditions. Gross margin from primary residential homebuilding decreased by 700 basis points from 23% to 16% for the six months ended June 30, 2014 compared to the same period in 2013 due primarily to the write-up to fair value of inventory acquired in the Royal Oak acquisition of $1,396, or 410 basis points. Additionally, the mix of homes sold in Arizona had a negative impact on margins as we closed out of higher margin communities in 2013 and are starting into newer communities which have lower initial margins. Capitalized interest included in cost of sales for the active adult and primary residential segments was $992 and $310, respectively, for the six months ended June 30, 2014 and was $454 and $397, respectively, for the same period in 2013.

Combined homebuilding selling, general and administrative expenses as a percentage of homebuilding revenue improved to 17% for the six months ended June 30, 2014 from 21% for the same period in 2013, primarily driven by favorable cost leverage in the active adult segment. Homebuilding selling, general and administrative expenses for the active adult segment as a percentage of homebuilding revenue improved to 19% for the six months ended June 30, 2014 compared to 28% for the same period in 2013 due to increased revenue, while containing our costs. Homebuilding selling, general and administrative expenses for the primary residential segment as a percentage of homebuilding revenue was 16 % and 15% for the six month periods ended June 30, 2014 and 2013, respectively. Improvements in cost leverage from the increased revenue were offset by the costs incurred to start up new selling communities which are not yet generating revenue.

Amenity net income (loss) for the six months ended June 30, 2014 improved to $113 from ($519) for the six months ended June 30, 2013.

Data from contracts signed for the active adult and primary residential homebuilding segments for the three and six months ended June 30, 2014 and 2013 is summarized as follows:

. . .

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