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Harbor Custom Development, Inc. (HCDI)·Q3 2022 Earnings Summary

Executive Summary

  • Q3 2022 sales were $11.75M, down 34.8% year over year, with gross margin collapsing to 3.7% and EPS at $(0.37); Adjusted EBITDA fell to $(3.07)M as fee-build cost overruns and non-recurring charges weighed on results .
  • Sequentially, sales improved vs Q2 ($10.29M → $11.75M), but profitability remained deeply negative with Adjusted EBITDA margin at (26.2)% vs (46.5)% in Q2 .
  • Management cut FY22 guidance again to revenue of $61–$65M and Adjusted EBITDA loss of $(5)–$(7)M (from $80–$90M and ~break-even post-Q2; and $160M and ~$20M post-Q1), citing construction delays, financing challenges, and weaker buyer sentiment amid rising rates and affordability pressures .
  • The company disclosed it failed its BankUnited loan covenant (Interest Coverage Ratio 1.4 vs required ≥2.50 at Sep 30), a potential stock-reaction catalyst given restructuring discussions and heightened liquidity risk .

What Went Well and What Went Wrong

What Went Well

  • Sequential revenue stabilization with sales rising to $11.75M in Q3 from $10.29M in Q2, while Adjusted EBITDA margin improved from (46.5)% to (26.2)% as fee-build headwinds moderated sequentially .
  • Strategic pivot toward multifamily reiterated: “I am pleased with the development we made in our transition to focus on multifamily projects and believe this strategy will enable us to drive additional value for our shareholders.” — Sterling Griffin, CEO .
  • Nine-month sales increased 10.0% YoY to $50.6M, supported by higher home sales and fee-build revenues despite weaker entitled land sales .

What Went Wrong

  • YoY deterioration: Q3 sales fell 34.8% and gross margin plunged to 3.7% (from 39.7%) as high-margin entitled land sales did not recur and fee-build projects experienced significant cost overruns; gross profit fell from $7.14M to $0.44M .
  • Operating expenses rose to $4.52M (38.5% of sales), driven by $0.9M bad debt (Winding Lanes note), $0.5M due diligence costs (Westry Village cancellation), and higher payroll/marketing/ROU expenses, exacerbating losses .
  • Liquidity/covenant risk: Interest Coverage Ratio at 1.4 vs covenant 2.50 triggered an Event of Default potential; lender moved the loan to restructuring, increasing financing uncertainty .

Financial Results

Quarterly comparison (trend: prior two quarters and current)

MetricQ1 2022Q2 2022Q3 2022
Sales ($)$28,581,000 $10,286,400 $11,748,500
Gross Profit ($)$6,054,700 $(1,931,900) $437,700
Gross Margin (%)21.2% (18.8)% 3.7%
Operating Expenses ($)$3,839,300 $3,654,100 $4,523,800
Net Income (Loss) ($)$1,645,300 $(4,509,100) $(3,414,800)
EPS Basic ($)$(0.03) $(0.46) $(0.37)
EBITDA ($)$3,505,600 $(4,895,700) $(3,193,500)
Adjusted EBITDA ($)$3,898,200 $(4,783,400) $(3,074,400)
Adjusted EBITDA Margin (%)13.6% (46.5)% (26.2)%

Year-over-year comparison (Q3 2022 vs Q3 2021)

MetricQ3 2021Q3 2022
Sales ($)$18,010,600 $11,748,500
Gross Profit ($)$7,144,400 $437,700
Gross Margin (%)39.7% 3.7%
Operating Expenses ($)$3,322,100 $4,523,800
Net Income (Loss) ($)$3,708,400 $(3,414,800)
EPS Basic ($)$0.21 $(0.37)
EBITDA ($)$4,331,700 $(3,193,500)
Adjusted EBITDA ($)$4,527,300 $(3,074,400)

Actuals vs Wall Street estimates

MetricQ3 2022 ConsensusQ3 2022 Actual
Revenue ($)Unavailable via S&P Global (missing CIQ mapping)*$11,748,500
EPS ($)Unavailable via S&P Global (missing CIQ mapping)*$(0.37)
*Estimates context: Values retrieved from S&P Global were unavailable due to missing CIQ mapping for HCDI.

Sales mix changes (Q3 2022 vs Q3 2021)

SegmentYoY Delta ($)Commentary
Entitled Land$(7.0)M Non-recurrence of high-margin land sales from Q3 2021 (57% margin)
Developed Lots$(0.8)M Lower lot sales
Homes+$0.8M Higher home sales
Fee Build+$0.8M Higher fee-build revenues but with significant cost overruns impacting margin

KPIs and balance sheet highlights

KPIQ3 2021Q2 2022Q3 2022
Operating Expenses as % of Sales18.4% 35.5% 38.5%
Adjusted EBITDA Margin (%)25.1% (46.5)% (26.2)%
Interest Coverage Ratio (Trailing 4Q)——1.4 (covenant ≥2.50)
Balance Sheet Item (Sep 30, 2022)Amount
Cash and Restricted Cash$14,305,500
Revolving Line of Credit (net of discount)$24,011,400
Construction Loans (net of discount)$83,263,500
Real Estate Inventory$179,932,800
Stockholders’ Equity$88,061,500

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($)FY 2022$80–$90M (8/15/22) $61–$65M (11/14/22) Lowered
Adjusted EBITDA ($)FY 2022~Break-even (8/15/22) $(5)M to $(7)M loss (11/14/22) Lowered
Revenue ($)FY 2022$160M (5/12/22) $61–$65M (11/14/22) Lowered significantly
Adjusted EBITDA ($)FY 2022~$20M (5/12/22) $(5)M to $(7)M loss (11/14/22) Lowered significantly
Dividend (Series A Preferred)Nov 2022—$0.167/share declared; payable Dec 20; record Nov 30 Actioned (no change to policy disclosed)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2022)Current Period (Q3 2022)Trend
Multifamily strategyListed six multifamily projects for $278M; ramping hiring to support growth “Transition to focus on multifamily projects” to drive future value Strengthening focus
Fee-build project economicsSignificant cost overruns due to inflation and record rainfall; Q2 fee-build gross margin –212.9% Fee-build cost overruns continued to pressure gross margin Headwinds persist (moderating sequentially)
Macro: rates and affordabilityStrong buyer demand drove Q1; Q2 noted changing market conditions delaying closings Rising rates and affordability challenges weakened demand; financing delays for buyers Deteriorating demand
Sales mix (entitled land)Q1: high-margin land supported margins; Q2: cancellation of key land sale (Semiahmoo) No recurrence of high-margin land sales in Q3; material YoY margin compression Less land-driven margin
Financing/liquidity—Interest Coverage Ratio covenant shortfall (1.4 vs ≥2.50); loan moved to restructuring Elevated risk
Geographic expansionFirst Texas home sales in Q1 (~$400/sq ft) Ongoing markets: WA, CA, TX, FL Stable footprint

Management Commentary

  • “While our third quarter results were impacted by lower sales and higher operating expenses, we continued to make progress on our strategic initiatives to support future growth. I am pleased with the development we made in our transition to focus on multifamily projects...” — Sterling Griffin, President & CEO .
  • “The further reduction to our revenue expectation for the full year is mostly a timing variance for projects we previously expected to close in 2022, that will likely now push into 2023… Rising interest rates and affordability challenges have resulted in buyer uncertainty and delays in buyers being able to secure financing to purchase our properties.” — Sterling Griffin .

Q&A Highlights

  • The Q3 2022 earnings call transcript could not be retrieved due to document database inconsistency. Public sources hosting the transcript include Seeking Alpha and others: .

Estimates Context

  • S&P Global consensus estimates for Q3 2022 revenue and EPS were unavailable due to missing CIQ company mapping for HCDI in the SPGI dataset (tool error). Comparisons to estimates cannot be made at this time; will update once mapping is resolved. Values retrieved from S&P Global.

Key Takeaways for Investors

  • Severe YoY margin compression due to non-recurring high-margin land sales in the prior year and fee-build cost overruns; gross margin fell to 3.7% and Adjusted EBITDA swung to a $(3.07)M loss .
  • Guidance reset: FY22 revenue cut to $61–$65M and Adjusted EBITDA to $(5)–$(7)M loss; trajectory implies 4Q closes are at risk and further deferrals to 2023 possible; monitor construction milestones and financing environment .
  • Liquidity risk rising: Interest Coverage covenant breach (1.4 vs ≥2.50) and lender restructuring discussions signal tighter credit and potential constraints; watch subsequent 8-K updates and debt terms .
  • Sequential stabilization: Q3 sales improved vs Q2 and Adjusted EBITDA margin improved sequentially, but profitability remains negative; trend suggests partial normalization from extreme Q2 fee-build losses .
  • Strategic pivot to multifamily continues; if construction completion and leasing timelines hold, 2023 mix could favor more predictable cash flows, though market conditions and financing remain key variables .
  • Operating expense control is needed: OpEx rose to 38.5% of sales driven by specific charges (bad debt, canceled project diligence); expect scrutiny of overhead and project-level risk management .
  • Preferred dividend maintained in November ($0.167/share), indicating continued commitment to preferred holders even as common equity experiences losses; watch capital allocation and equity needs .