William Lyon Homes Reports Fourth Quarter and Record Full Year 2018 Results

Full Year Homebuilding Revenue of $2.1 Billion, Highest in Company History; Deliveries of 4,186 Homes

Fourth Quarter Homebuilding Revenue of $657.4 Million; Gross Margin of 18.8%; Deliveries of 1,311 Homes

William Lyon Homes WLH, a leading homebuilder in the Western U.S., announced results for its fourth quarter and year ended December 31, 2018.

2018 Fourth Quarter Highlights (Comparison to 2017 Fourth Quarter)

• Net income available to common stockholders of $34.3 million, or $0.89 per diluted share, compared to $11.8 million, or $0.30 per diluted share in the prior year
  • Excluding $2.0 million of project abandonment costs and $1.0 million of gain from extinguishment of debt, adjusted net income available to common stockholders, net of income tax, was $35.1 million, or $0.91 per diluted share, compared to $34.9 million, or $0.89 per diluted share in the prior year.
• Pre-tax income of $54.5 million
• New home deliveries of 1,311 homes, up 24%
• Home sales revenue of $657.4 million, up 5%
• Average sales price (ASP) of new homes delivered of $501,400 versus $589,100
• Homebuilding gross margin percentage of 18.8%
• Adjusted homebuilding gross margin percentage of 23.4%
• Net new home orders of 756, up 13%
• Units in backlog of 1,041, up 27%
• Dollar value of homes in backlog of $479.0 million, up 11%
• SG&A percentage of 10.7%
• Adjusted EBITDA of $79.8 million

2018 Full Year Highlights (Comparison to 2017 Full Year)

• Net income available to common stockholders of $91.6 million, or $2.32 per diluted share, compared to $48.1 million, or $1.24 per diluted share in the prior year
  • Excluding $3.9 million of transaction expenses, $2.0 million of project abandonment costs and $1.0 million of gain from extinguishment of debt, adjusted net income available to common stockholders, net of income tax, was $95.5 million, or $2.42 per diluted share, compared to $85.3 million, or $2.21 per diluted share in the prior year.
• Pre-tax income of $145.8 million
• New home deliveries of 4,186 homes, up 29%
• Home sales revenue of $2.1 billion, up 16%
• ASP of new homes delivered of $497,300 versus $554,200
• Homebuilding gross margin percentage of 18.2%
• Adjusted homebuilding gross margin percentage of 23.1%
• Net new home orders of 4,133, up 24%
• SG&A percentage of 11.2%
• Adjusted EBITDA of $250.1 million

"Overall, 2018 was a successful and record-setting year for the Company, as we delivered 4,186 homes, up 29%, and achieved homebuilding revenues of $2.1 billion, up 16%, both the highest in the Company's history," said Matthew R. Zaist, President and Chief Executive Officer. "Earlier in the year we completed our strategic acquisition of RSI, giving us additional exposure to the first-time home buyer segment and expanding our footprint into one of the best new home markets in the country in Central Texas.

"We, along with the rest of the homebuilding industry, experienced a challenging environment in the fourth quarter of 2018. 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. As a result, we sold and closed fewer spec homes in the fourth quarter than we had expected, and we also experienced a higher cancellation rate in certain of our markets, which led us to fall short of our deliveries and revenue expectations for the quarter. On the positive side, homebuilding gross margins were at the high end of our expectations, sales and marketing percentage was in-line with expectations as were G&A dollars on an absolute basis, though the percentage was higher than our forecast due to decreased leverage on lower revenue."

Mr. Zaist continued, "While the disruption we experienced in October and November caused us to fall short of our internal forecasts, we are incrementally encouraged by December's rebound in sales activity, which demonstrated significant sequential improvement with an absorption pace up 21% over November. This sequential improvement continued into January, where we saw a more historically representative level of traffic and sales. If traditional trends hold true in terms of spring selling season evolution, we would expect to see some acceleration moving into the next couple of months, although we are taking a more cautious view this year until the selling season plays out."

Operating Results

Home sales revenue for the fourth quarter of 2018 was $657.4 million, as compared to $623.3 million in the year-ago period, an increase of 5%. The increase was driven by a 24% increase in deliveries to 1,311 homes, compared to 1,058 in the fourth quarter of 2017, partially offset by a 15% year-over-year decline in the average sales price of homes closed.

Homebuilding gross margin percentage for homes closed during the fourth quarter of 2018 was 18.8%, up 60 basis points from 18.2% in the third quarter of 2018.

Net new home orders for the quarter were 756, up 13% from 672 in the fourth quarter of 2017. The overall increase in net new home orders was driven by an increase in community count to 117 average sales locations, from 80 in the year-ago period.

The dollar value of homes in backlog was $479.0 million as of December 31, 2018, an increase of 11%, compared to $433.0 million as of December 31, 2017. The increase was driven by a 27% increase in units in backlog to 1,041 from 822 in the year-ago period. The average sales price of homes in backlog decreased to $460,100 from $526,800 in the prior year, due to the number of homes in backlog at our Central Texas division of 234 homes at an average sales price of $261,700.

Sales and marketing expense during the fourth quarter of 2018 was 5.2% of homebuilding revenue, compared to 4.5% in the year-ago quarter, which was driven by an increase in advertising and outside broker commissions of 30 basis points combined, as well as the impact of the adoption of ASC 606 of 30 basis points. General and administrative expenses increased to 5.5% of homebuilding revenue, compared to 4.7% in the year-ago quarter.

Balance Sheet Update

The Company generated significant cash flow in the fourth quarter, enabling the Company to repay $187 million of principal amount of debt in the last three months of the year. At quarter end, cash and cash equivalents totaled $33.8 million, owned real estate inventories totaled $2.3 billion, total assets were $2.9 billion and total equity was $1.0 billion. Total debt to book capitalization was 56.6%, and net debt to net book capitalization was 55.9% at December 31, 2018, compared to 54.5% and 49.6% at December 31, 2017, respectively.

Conference Call

The Company will host a conference call to discuss these results today, Thursday, February 14, 2019 at 9:00 a.m. Pacific Time. The call will be available via both the telephone at (855) 851-4524 or (720) 634-2900, conference ID #7387966, or through the Company's website at www.lyonhomes.com in the Investor Relations section of the site.

A replay of the call will be available through February 21, 2019 by dialing (855) 859-2056 or (404) 537-3406, conference ID #7387966. A webcast replay of the call will also be available on the Company's website approximately two hours after the broadcast.

About William Lyon Homes

William Lyon Homes is one of the largest Western U.S. regional homebuilders. Headquartered in Newport Beach, California, the Company is primarily engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada, Colorado, Washington, Oregon, and Texas. Its core markets include Orange County, Los Angeles, the Inland Empire, the San Francisco Bay Area, Phoenix, Las Vegas, Denver, Portland, Seattle, Austin and San Antonio. The Company has a distinguished legacy of more than 62 years of homebuilding operations, over which time it has sold in excess of 106,000 homes. The Company markets and sells its homes under the William Lyon Homes brand in all of its markets except for Washington and Oregon, where the Company operates under the Polygon Northwest brand.

Forward-Looking Statements

Certain statements contained in this release and the accompanying comments during our conference call that are not historical information may constitute "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including, but not limited to, forward-looking statements related to: anticipated deliveries, revenue and pre-tax income, gross margin performance, backlog conversion rates, operating and financial results for the first quarter of 2019, community count growth and project performance, market and industry trends, average sale price of homes to be closed in various periods, SG&A percentage, future cash needs and liquidity, minority interest from our homebuilding joint ventures, leverage ratios and reduction strategies, land acquisition spending, and financial services and ancillary business performance and strategies. The forward-looking statements involve risks and uncertainties and actual results may differ materially from those projected or implied. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations. Further, certain forward-looking statements are based on assumptions of future events which may not prove to be accurate. Factors that may impact such forward-looking statements include, among others: changes in mortgage and other interest rates; affordability pressures; the Company's ability to successfully integrate RSI Communities' homebuilding operations with its existing operations; adverse weather conditions; the availability of labor and homebuilding materials and increased construction cycle times; our financial leverage and level of indebtedness and any inability to comply with financial and other covenants under our debt instruments; continued volatility and worsening in general economic conditions either internationally, nationally or in regions in which we operate; increased housing supply in our markets; increased outside broker costs; increased costs of homebuilding materials; changes in governmental laws and regulations and compliance, increased costs, fees and delays associated therewith; government actions, policies, programs and regulations directed at or affecting the housing market (including the Tax Cuts and Jobs Act ("TCJA"), the Dodd-Frank Act, tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies), the homebuilding industry, or construction activities; changes in existing tax laws or enacted corporate income tax rates, including pursuant to the TCJA; worsening in markets for residential housing; the impact of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals, and the applicability and sufficiency of our insurance coverage; defects in manufactured products or other homebuilding materials; utility company delays; decline in real estate values resulting in impairment of our real estate assets; volatility in the banking industry, credit and capital markets; restraints on foreign investment; terrorism or other hostilities involving the United States and other geopolitical risk as well as restrictive policies such as tariffs or capital investment restrictions; building moratorium or "slow-growth" or "no-growth" initiatives that could be implemented in states in which we operate; conditions in the capital, credit and financial markets, including mortgage lending standards and the availability and timing of mortgage financing; changes in generally accepted accounting principles or interpretations of those principles; competition for home sales from other sellers of new and resale homes; cancellations and our ability to realize our backlog; the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements; limitations on our ability to utilize our tax attributes; whether an ownership change occurred that could, under certain circumstances, have resulted in the limitation of our ability to offset prior years' taxable income with net operating losses; the timing of receipt of regulatory approvals and the opening of projects; the availability and cost of land for future development; and additional factors discussed under the sections captioned "Risk Factors" included in our annual and quarterly reports filed with the Securities and Exchange Commission. The foregoing list is not exhaustive. New risk factors may emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business.

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