Orange County’s contingent of publicly traded homebuilders experienced a rough fourth quarter, as consumers pulled back on purchases amid rising interest rates, a volatile stock market and continued issues of affordability.
What’s more, declining foreign interest appears to be having a direct effect on dealmaking in Orange County, which along with ongo- ing national trends that are affecting most large national builders has led to two of the three OC-based companies to forecast a slowdown in earnings this year.
The fourth quarter “proved to be a challenge as potential buyers in our markets exercised a high degree of caution,” said Larry Webb, chief executive of Aliso Viejo-based New Home Co., which cautioned investors of a more “conservative outlook” for sales and profitability this year.
New Home continues “to have confidence in the fundamental drivers of our business and the quality of our home offerings,” Webb said during his company’s latest earnings call with analysts. However, the current sales dynamics could “continue for the foreseeable future,” he said.
Along with New Home Co., Irvine-based TRI Pointe Group Inc. and Newport Beach-based William Lyon Homes recently reported fourth-quarter earnings, and each company offered differing levels of caution for 2019.
Their forecasts echo rising concerns about the overall health of Southern California’s residential real estate market.
About 12,665 new and existing homes were sold in Southern California in January, a 17% drop from a year earlier and a 20% decline from December, according to a report by Irvine-based real estate data and analytics firm CoreLogic Inc. (NYSE: CLGX).
It’s the lowest monthly January figure since 2008 when 9,983 homes were sold.
Beyond larger economic issues, several homebuilders pointed to a wetter-than-normal winter in SoCal as a likely driver behind some of those recent sales declines.
CoreLogic itself posted an 11% decline in revenues during the fourth quarter to $403 million, citing a 25% drop in mortgage originations as a large factor for the lower-than-expected figure.
The company’s shares dropped 9.3% to $36.83 and a $3 billion market cap in the wake of the announcement.
What follows is a short summary of the three area homebuilders’ fourth-quarter results and their forecasts:
TRI Pointe
TRI Pointe (NYSE: TPH), the largest area builder by sales and market value, last year sold 5,071 homes—a record high for the 10-year-old firm—with an average sales price of $640,000.
It doesn’t plan to repeat that feat as it predicted 4,600 to 5,000 home sales at an average price of $610,000 to $620,000 in 2019.
While the company didn’t forecast 2019 revenue, the average analyst consensus is $3.1 billion in sales, a 4.5% decline from 2018.
Nonetheless, the company remains optimistic for the long term.
“While this recent market correction adds an element of uncertainty to our industry in the short term, we remain encouraged about the outlook over the long term thanks to the undersupplied nature of our industry, strong demographics and job growth,” Chief Executive Doug Bauer said in a statement last week.
It reported a 34% jump in profits during the fourth quarter to $99.4 million, or 70 cents per share, compared to $74 million, or 49 cents in the same period a year earlier.
Home sales revenue for the quarter ending December was flat at $1.1 billion while the average sale prices rose 2% to $649,000. Its adjusted profit of 79 cents topped analysts’ consensus, according to the Seeking Alpha website.
Last year “was also a year of two halves, as the strong sales momentum we experienced in the first part of the year dissipated in the back half of the year as buyers pulled back from the market in response to a rise in interest rates and higher home prices,” Bauer said.
The majority of the company’s portfolio is in California, including two communities in Irvine. The company had 146 active communities at the end of last year, up from 130 at the end of 2017.
Shares of the company decreased 1.3% to $13.05 and a $1.9 billion market cap in the trading session after the earnings release.
New Home Co.
New Home (NYSE: NWHM), one of OC’s biggest sellers of expensive homes since its 2009 founding, has remade itself into a builder of those more affordable the past year or so, a fact borne out by the roughly $1 million average selling price for its homes last quarter was 50% below what it was a year ago.
Some higher-end OC projects outside Irvine are still feeling the effects of the tenuous market for pricey homes; the company said it has reduced prices and has taken an impairment charge on its Topaz project in Rancho Mission Viejo and the Marywood Hills development in Orange, where “we wish the pricing was a little bit higher,” Webb said.
Elsewhere in OC, a high-end home in Irvine is “selling fine” and the company’s Covenant Hills project in South OC, with prices in the $2 million range is “selling well with healthy margins,” Webb said.
The influence of foreign buyers—or lack thereof lately—in OC’s new home market is playing a big part in local market dynamics, Webb said.
In Southern California, Orange County and “even more significantly Irvine, the foreign buyer and principally, the Chinese foreign buyer, first and second generations, made up 75% to 80% of the marketplace” the past few years, Webb told analysts.
In the second half of 2018, “that buyer group was reduced significantly,” he said.
New Home’s recent transition to more affordable offerings meant that foreign buyers weren’t as big a part of the company’s business last year, Webb said.
However, their absence shrinks the overall pool of buyers as a whole, “making each sale more difficult to come by,” said Webb.
Between the slowdown in sales and impairments in some pricier offerings, New Home reported a loss of $16.2 million, or 80 cents per share, as sales declined 29% to $229.7 million.
The company forecasts first-quarter revenue between $100 million to $115 million; a year ago, it reported $123.2 million. One analyst is predicting 2019 sales will fall 9.5% to $604 million.
In the two trading sessions following the mid-February earnings announcement, New Home shares dropped 19% to $5.59 and a $111.3 million market cap.
William Lyon Homes
William Lyon Homes (NYSE: WLH) ended up with record 2018 sales; it was the first year that annual sales for the company topped $2 billion, and last year’s total of $2.1 billion in sales was up 16% year-over-year, according to executive chairman Bill H. Lyon.
Like the other builders, the year ended with a thud, as fourth-quarter earnings fell short of internal and external forecasts.
“We, along with the rest of the homebuilding industry, experienced a challenging environment in the fourth quarter of 2018,” Chief Executive Matthew Zaist said during a call with analysts.
“In October and November 2018, we experienced homebuyer demand levels that were less than what we had anticipated, as mortgage interest rates increased and consumer confidence waned, along with increased stock market volatility,” Zaist said.
The company reported quarterly revenue rose 5.6% year-over-year to $659.6 million, missing the consensus estimate of $713.1 million. It reported adjusted profit of 91 cents a share, also missing the $1.09 consensus estimate.
Similar to New Home, William Lyon offered incentives on its projects during the fourth quarter to meet demand.
In Southern California, the firm is struggling with rising cancellation rates in the Inland Empire—an area expected to be an increased source of business going forward since last year’s acquisition of Newport Beach-based RSI Communities—Zaist noted.
Closer to home, William Lyon’s first “active adult” housing project in OC, a 244-unit development in Cypress that’s run under the Ovation product line, “is one of the best performing projects in the company,” according to Zaist.
There’s more room for optimism, particularly locally, according to Zaist, who notes a sales uptick in recent weeks, which is causing the company to be “incrementally encouraged.”
William Lyon will be opening OC’s most closely watched new home community this year, a 536-home project at Irvine’s Great Park Neighborhoods called Novel Park.
Sales are likely to start in April or May for its Novel Park master plan community, which has seven product types starting at around $400,000, the lowest price for a new home project the city’s seen in years.
Zaist said his company has an interest list topping 4,500 people for Novel.
“We’re excited to get it into the marketplace, and our construction teams are working hard to put us in a position to get there,” said Zaist, noting the challenges of building and selling in the rainy local weather of late.
“Our spring selling season is still upon us.”
While the company didn’t give a revenue forecast, analysts are expecting the company to grow. The consensus of three analysts is first-quarter sales will climb 9.9% to $410.1 million in the first quarter and 6.3% to $2.16 billion for the year.
After William Lyon’s fourth-quarter results were released, shares didn’t move significantly. The company has a market value of about $540 million.
