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Harbor Custom Development, Inc. (HCDI)·Q4 2022 Earnings Summary

Executive Summary

  • Q4 2022 was severely impacted by non-recurrence of high-margin lot/land sales, impairments, and fee-build overruns: Sales fell 81.8% to $4.8M, gross margin was (104.5)%, and net loss was $(10.6)M; EBITDA loss was $(11.9)M and Adjusted EBITDA loss was $(8.5)M .
  • Year-over-year compares are stark: Q4 2021 sales were $26.3M, gross margin 41.2%, net income $5.6M, and Adjusted EBITDA $8.3M; the swing reflects the absence of large developed lot sales and project-specific impairments/overruns .
  • BankUnited covenant breaches prompted a waiver conditioned on monthly $0.6M principal reductions (redirecting preferred dividends), restrictions on new project closings, and enhanced collateral, materially tightening near-term flexibility .
  • Management emphasized ongoing pivot to multifamily and cost control; they expect 2023 rent-up/near-completion milestones to improve operations and shareholder value, but near-term headwinds (rates, demand, delays) remain significant .

What Went Well and What Went Wrong

What Went Well

  • Strategic pivot toward multifamily with rent-up beginning: “As we near completion of construction and continue to make progress with the rent up of our first wave of multi-family projects, we believe 2023 will be a new chapter…” .
  • Continued confidence in diversified portfolio and cost control measures to navigate uncertainty: “We also enacted significant cost control measures which better positions us to navigate near-term uncertainty” .
  • Full-year home sales gross profit increased vs. 2021, partially offsetting declines elsewhere, reflecting pricing/mix strength in Texas .

What Went Wrong

  • Massive Q4 deterioration versus prior year: sales down 81.8%, gross margin (104.5)%, net loss $(10.6)M; driven by absence of high-margin lot sales, $2.4M impairment on Pacific Ridge, $1.2M Winding Lane impairment, and $1.3M fee-build overruns .
  • Operating expenses rose to $4.2M in Q4 (88% of sales) due to bad debt ($1.2M Horizon Tract Q note) and higher compensation, despite lower sales base .
  • Covenant failures triggered restrictive waiver terms: monthly $0.6M principal reductions, no repurchases, 25% of net proceeds to lender, and lender consent for closing new projects—constraining capital allocation and growth execution near term .

Financial Results

Quarterly progression (oldest → newest)

MetricQ2 2022Q3 2022Q4 2022
Sales ($USD Millions)$10.3 $11.7 $4.8
Gross Margin (%)(18.8)% 3.7% (104.5)%
Net Income ($USD Millions)$(4.51) $(3.41) $(10.64)
EPS Basic ($USD)$(0.46) $(0.37) $(17.47)
EBITDA ($USD Millions)$(4.90) $(3.19) $(11.89)
Adjusted EBITDA ($USD Millions)$(4.78) $(3.07) $(8.53)

Year-over-year (Q4 2021 → Q4 2022)

MetricQ4 2021Q4 2022
Sales ($USD Millions)$26.34 $4.80
Gross Margin (%)41.2% (104.5)%
Net Income ($USD Millions)$5.63 $(10.64)
EPS Basic ($USD)$5.14 $(17.47)
EBITDA ($USD Millions)$8.00 $(11.89)
Adjusted EBITDA ($USD Millions)$8.29 $(8.53)

Segment drivers (Q4 2022 YoY change vs Q4 2021)

CategoryYoY Change ($USD Millions)
Developed lots$(18.6)
Fee build revenue$(1.3)
Entitled land$(0.9)
Home sales$(0.8)

Additional KPIs and items (Q4 2022)

MetricValue
Operating Expenses ($USD Millions)$4.2
Other Income (Expense) ($USD Millions)$(3.9)
Adjusted EBITDA margin (%)(177.7)%
Cash & Equivalents at 12/31/22 ($USD Millions)$9.67
Total Debt: Construction Loans (net) at 12/31/22 ($USD Millions)$107.48
Revolving Line (net) at 12/31/22 ($USD Millions)$24.36

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance (Q3 update)ActualChange
Revenue ($USD Millions)FY 2022~$80–$90 ~$61–$65 $55.4 Lowered; actual below range
Adjusted EBITDA ($USD Millions)FY 2022~Break-even ~$(5) to $(7) loss $(12.48) Lowered; actual worse than range
Capital Allocation / Dividends2023 until loan repaidPreferred dividends ongoing (pre-issue) [implied]Redirect $0.6M monthly to lender; 25% of net proceeds to lender; no repurchases Waiver terms in effect Restricted
New Project Closings2023 until loan repaidNormal course (pre-issue) [implied]Lender consent required for any new closings Waiver terms in effect Restricted

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2: Q2 2022)Previous Mentions (Q-1: Q3 2022)Current Period (Q4 2022)Trend
Supply chain and construction delaysFee-build overruns driven by inflation and record rainfall in Western Washington Delays in multifamily/home closings; inability to obtain cost-effective financing Delays in multifamily construction; impairment on Pacific Ridge; continued overruns Persistent/negative
Interest rates and buyer demandChanging market conditions impacted closings Rate hikes and affordability weakened demand for land/lots/homes Rising rates and decreased buyer demand cited as key headwinds Negative
Multifamily pivot and rent-upExpect multiple projects completed/renting in H2 2022 (Mills Crossing rent-up) Transition focus to multifamily; positioning for 2023 Near completion of first wave; progressing rent-up; confidence in 2023 chapter Progressing
Liquidity and covenants—Failed covenant disclosed Oct 28, 2022 Covenant waiver with monthly principal reductions and consent requirements More restrictive
Fee-build economicsSignificant cost overruns driving gross loss Continued significant overrun impact Additional Q4 overruns ($1.3M) Ongoing issue

Management Commentary

  • “Our fourth quarter and full-year 2022 results came in below internal expectations. Challenges in the market environment include supply chain disruption… rising interest rates, and overall decreased buyer demand. Despite these challenges, we made strategic progress transitioning focus towards our multi-family projects… We also enacted significant cost control measures…” — Sterling Griffin, President & CEO .
  • “As we near completion of construction and continue to make progress with the rent up of our first wave of multi-family projects, we believe 2023 will be a new chapter for Harbor Custom Development.” — Sterling Griffin .

Q&A Highlights

  • The public call was held March 31, 2023, with prepared remarks reiterating Q4 results (gross loss $(5.0)M; gross margin loss (104.5)%) and drivers; the discussion focused on impairments, fee-build overruns, and multifamily timing .
  • Waiver terms and liquidity constraints were a central topic given covenant breaches, including monthly principal reductions, limitations on new project closings, and redirection of preferred dividends to debt service .
  • Management’s tone emphasized near-term caution with confidence in multifamily rent-up as the path to operational improvement in 2023 .

Estimates Context

  • S&P Global consensus estimates for Q4 2022 and FY 2022 revenue/EPS/EBITDA were unavailable due to missing CIQ mapping for HCDI in our SPGI dataset; we could not retrieve comparable Wall Street consensus benchmarks for this quarter. Values retrieved from S&P Global were unavailable.
  • Given the absence of consensus, investors should anchor comparisons on internal guidance updates (Q2 and Q3 revisions) and actuals versus those ranges .

Key Takeaways for Investors

  • The quarter’s collapse versus prior year was primarily the non-recurrence of large developed lot sales plus project impairments and fee-build overruns; this is structural (mix) and operational (execution) rather than a single one-off .
  • Covenant waiver terms materially constrain capital allocation (dividends/repurchases) and new project closings, increasing execution risk until the loan is repaid or terms are renegotiated .
  • Multifamily rent-up and project completion are the key 2023 catalysts; milestones could improve cash generation and margins if execution aligns with timelines .
  • Cost controls are underway, but fee-build economics and weather/macro sensitivity remain risks; monitor overruns and project-level gross margins closely .
  • Actual FY 2022 revenue ($55.4M) and Adjusted EBITDA loss ($(12.48)M) missed both initial and revised guidance ranges, implying near-term estimate resets and elevated skepticism in the market until sustained progress is demonstrated .
  • Liquidity discipline will be critical; restrictions and monthly principal payments heighten sensitivity to asset sale timing and rent-up pace .
  • Trading implications: near-term sentiment likely tied to execution on multifamily rent-up and any updates to lender agreements; any positive project closings or lender accommodations could be upside catalysts, while further delays/overruns would be negatives .