Harbor Custom Development Inc ended the third quarter with sales of $11.7 million despite a slowdown in the otherwise red-hot US housing market due to rising mortgage rates and a challenging environment.
The US housing market surged during the pandemic as homebound people sought new places to live, boosted by record-low interest rates. However, things have changed drastically with the average rate on the 30-year fixed mortgage, which started this year right around 3% now just above 6%.
For the period ended September 30, 2022, the Tacoma, Washington-based real estate company involved in all aspects of the land development cycle, reported a gross profit of $0.4 million, compared to $7.1 million in the third quarter of 2021. The company’s gross margin for the 3Q decreased to 3.7%, compared to 39.7% for the same quarter in 2021.
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Harbor reported a net loss of $3.4 million or loss per share of $0.37 for the quarter, compared to a net income of $3.7 million or earnings per share of $0.21 in 1Q 2021. The firm logged adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $3.1 million, compared to an adjusted EBITDA of $4.5 million in the comparable period a year earlier.
Harbor said the gross margin shrank due to the non-recurrence of higher margin entitled land sales in 2022 and a decrease in fee-build gross profit and gross margin due to significant cost overruns.
“While our 3Q results were impacted by lower sales and higher operating expenses, we continued to make progress on our strategic initiatives to support growth. I am pleased with the development we made in our transition to focus on multi-family projects,” said Harbor Custom CEO Sterling Griffin.
“Today’s market environment remains unstable. The increases in interest rates to combat inflation, combined with affordability challenges and lower buyer sentiment, have weakened demand, particularly for land, lots, and single-family homes,” he added.
Outlook for 2022
Harbor said it is revising downward its previous guidance for the 2022 fiscal year.
“These dynamics, along with their resultant uncertainty and inability to obtain cost-effective financing, as well as delays in the closing of certain multi-family projects and home sales, have caused us to revise our financial guidance downwards for the full year 2022,” said Griffin.
Harbor said revenue is expected to be in the range of approximately $61 million to $65 million.
Meanwhile, adjusted EBITDA is expected to be in the range of a loss of approximately $5 million to $7 million.
This updated guidance is based solely on real estate that is under contract and scheduled to be completed and closed in 2022, said the company.
Separately, Harbor reported that sales for the first nine months of 2022 increased by 10% to $50.6 million, compared to sales of $46 million for the first nine months of 2021.
This increase was largely due to increases in home sales of $11.5 million, fee build revenue of $3.6 million, and sales of developed lots of $1.3 million, partially offset by an $11.9 million decrease in the sales of entitled land, added the company.
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