By Thomas Kerr, CFA

NASDAQ:HCDI

READ THE FULL HCDI RESEARCH REPORT

Harbor Custom Development (NASDAQ:HCDI) reported 2nd quarter financial results which showed substantial revenue growth due to the sale of a multi-family property. Sales increased 92.9% to $19.8 million compared to sales of $10.3 million in the prior year period. The increase was primarily attributed to the sale of the Mills Crossing townhomes for $14.3 million and $1.9 million in lot sales in Texas and California. Home sales declined to $2.6 million from $8.8 million in the prior year period and fee-build revenue decreased to $263,300 from $1.5 million in the prior year period. Fee build revenue continued to decline as those projects are near completion.

Gross loss for the 2nd quarter increased to ($2.9) million compared to ($1.9) million for the prior year period. The $(1.0) million increase in gross loss was primarily due to $4.7 million of additional impairment losses recorded on the Pacific Ridge and Darkhorse properties and decrease in home profit of $1.6 million. This was partially offset by a $1.5 million gross profit at 10.2% gross margin from the sale of Mills Crossing townhomes as well as non-recurrence of significant losses from Harbor's legacy fee build projects in 2023.

Operating expenses for the 2nd quarter were $2.4 million compared to $3.7 million in the 2nd quarter 2022. The ($1.3) million decrease in operating expenses was primarily due to a reduction of general and administrative costs such as compensation costs, depreciation, insurance expense, right of use expense, and professional fees. Operating expenses as a percentage of sales for the 2nd quarter were 12.0% compared to 35.5% for the prior year period.

EBITDA loss for the 2nd quarter decreased from ($4.9) million in the 2nd quarter of 2022 to a loss of ($3.1) million. Adjusted EBITDA, which excludes the impact of stock compensation and other non-recurring costs, decreased to a loss of ($3.0) million compared to ($4.8) million in the prior year period.

Net loss in the quarter was ($4.4) million compared to ($4.5) million in the prior year period. Net loss attributable to common stockholders in the 2nd quarter 2023 was ($6.3) million, or ($3.79) loss per share compared to net loss attributable to common stockholders of ($6.4) million, or ($9.20) loss per share for the 2nd second quarter of 2022.

At the end of the 2nd quarter of 2023, the company had $8.3 million in unrestricted cash and equivalents and $597,600 in restricted cash. Total debt stood at $150.3 million and shareholders’ equity was $71.6 million. Construction loans totaled $131.8 million and real estate assets were valued at $212.1 million which is a real estate leverage ratio of 62.2%.

In May 2023, the company announced the closing of a public offering of 160,000 shares of common stock and warrants to purchase 1,790,718 shares of common stock, at a combined public offering price of $5.125 per share. The warrants have an exercise price of $0.0001 per share, are exercisable immediately upon issuance, and expire five years from the date of issuance. Gross proceeds to the company from this offering were approximately $10 million.

CEO Jeff Habersetzer stated, "Despite a challenging real estate market, we achieved notable successes in the second quarter. Sales increased 93% compared to the previous year, primarily due to the closing of the first and smallest of our multifamily projects - Mills Crossing. Additionally, we secured $10 million in gross proceeds from our public offering with H.C. Wainwright & Co. and partnered with Sound Capital to refinance phase one of Belfair View. Our apartment communities are experiencing excellent lease-up velocity, with Pacific Ridge and Wyndstone expected to reach rental stabilization soon. Our luxury Texas homes have generated significant interest, and our California lots are seeing significant momentum."

Valuation

Our primary valuation methodology is now focused on Price/Book value. Based on stockholders equity of $71,607,300 as of 6/30/23 and the stock price on that date, HCDI is selling at approximately 7.6% of stockholders’ equity which uses common shares outstanding of 1,802,295 shares. Using common shares of 2,329,322 as of 8/9/23, HDCI stock is trading at approximately 9.8% of book value.

The home builder industry Price/Book ratio has declined year-to-date due to higher interest rates and recessionary fears, yet still trades at an average Price/Book value of approximately 1.0x currently. Certain smallcap homebuilder stocks sell for below book value per share.

We lower our valuation target to $6.00, which still creates substantial upside for the stock. We believe even with volatile earnings that may be associated with real estate development companies, Harbor can continue to add earnings to shareholders equity and increase book value over time.

We are changing our 2023 estimates to account for the prevailing real estate environment and the timing of the sale of multi-family projects. We now expect 2023 revenues of $144.8 million and EPS of ($7.04).

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