Harbor Custom Development, Inc.

Thank you for standing by and welcome to the Harvard Custom Development Incorporated fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session from previously submitted questions will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to introduce today's presenters. Sterling Griffin, CEO, President, and Chairman of the Board, and Lance Brown, Chief Financial Officer. I will now turn the conference over to Mr. Brown. Please go ahead.

Thank you, operator, and thank you all for joining us today. Welcome to Harbor Custom Development's fourth quarter and full year 2022 earnings conference call. During our discussion today, we will be referring to our earnings press release and presentation that were made available prior to the call. The release and presentation can be found in the Investor Relations section of the Harbor website at www.harborcustomdev.com. Before we begin, I would like to remind everyone that today's call includes forward-looking statements. Any forward-looking statements contained in the earnings release, earnings presentation, or discussed on the call today are subject to the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from these forward-looking statements. Specifically included are statements regarding our industry and our outlook. Please see our recent SEC filings, which identified the principal risks and uncertainties which could affect future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including EBITDA, adjusted EBITDA, and adjusted EBITDA margin. Please see the appendix of our earnings presentation for a reconciliation of these non-GAAP measures to their most direct comparable GAAP measure. I would now like to turn the call over to Sterling.

Thank you, Lance, and thanks to everyone for joining the call today. We appreciate your continued support of Harbor Custom Development. Following our normal cadence, I'm going to share broader comments on the macro environment and our performance during the year before turning the call to Lance Brown, Harbor's Chief Financial Officer, to review the financial results. After Lance concludes, I'll provide a few closing remarks before we answer the previously submitted questions. Throughout 2022, we observed mortgage interest rates rise at a record pace. This dynamic resulted in significant deterioration of the housing market. as consumer confidence and affordability were unfavorably impacted. These market challenges, in addition to increased costs throughout our supply chain that we incurred, contributed to weaker sales volume, lower prices, project cancellations, and lower net income during the fourth quarter and full year. Furthermore, as affordability tightened throughout the year in response to rising interest rates, buyers hesitated and the market decelerated. This triggered the cancellation of certain projects previously under contract, including the cancellation of the sale of our Punta Gorda property during the fourth quarter. For context, Punta Gorda went under contract in October of 2022 and was expected to close in December 2022. However, it fell through due to the buyer canceling the contract. We experienced other meaningful buyer cancellations in the second and third quarters, as well with sales contracts for portions of our semiama property. While these purchase and sale agreements were canceled in 2022, we still own the properties and continue to market them to other potential buyers. While we remain committed to our strategy focused on the multifamily housing market, the transition of resources to multifamily construction and development in western Washington also weighed heavily on our 2022 operating results. Projected apartment sales for 2022 were not realized due to construction delays caused by supply chain disruption, skilled labor shortages, and delays with city inspections and permitting. In addition, our performance was further impacted by the industry-wide decline in sales due to the rapidly changing lending environment caused by interest rate increases. To mitigate the impact of these challenges on our business, we began implementing certain market adjustments during the second half of the year. To help improve overall affordability, we introduced new pricing strategies and increased incentives across the majority of our markets. While we expect project costs to remain elevated in the near term, we are optimistic that land costs, material costs, and labor costs will begin returning towards pre-pandemic levels during the latter part of 2023. We're already seeing some evidence of this as land costs and certain materials, particularly lumber, are declining year over year. On February 17th, 2023, we announced that our shareholders approved a reverse stock split of our common stock. On March 6th, 2023, we effected a one for 20 reverse stock split. This transaction increased our stock price and on March 20th, 2023, the company regained compliance with the NASDAQ listing rule 55502. The reverse stock split also provided the company available shares to access the capital markets if needed as we manage through uncertain times. Looking at the broader macro environment over the next several quarters, we would be naive to think these recessionary conditions will not continue to permeate the real estate sector. We have already seen interest rate increases and affordability challenges in 2023, which may continue to result in price decreases and incentives offered to customers. We expect certain difficulties that we encountered in 2022 to persist during 2023, primarily those related to the sourcing of materials, including cabinets, electrical components, and appliances. As of December 31st, 2022, our backlog of land, lots, homes and fee build was 9.3 million. This is a decline of 14.4 million or 61% from the prior year period. The decrease in our backlog is primarily due to the substantial completion of our fee build project. The strategic shift we made to multifamily and related timing to monetize those assets and the overall decline in market conditions. Subsequent to year end, we executed a purchase and sale agreement for the sale of our first multifamily property, Mills Crossing, for $14,250,000. While the sale is scheduled to close in the second quarter of 2023 and is expected to generate positive momentum for the year, please remember that the timing of completion for construction and sale of our projects are subject to uncertainty and change. Our unique business model and expertise continue to underpin our confidence in our operations and our ability to generate shareholder value. We remain equipped to build the surrounding community's needs, including single-family homes, townhomes, and apartments. This flexibility allows us to target a wide and diverse range of customers. While we believe the impact of higher interest rates and the inflationary environment will result in a delayed market recovery, we remain confident in our business strategy and our real estate assets. I will now turn the call back to Lance Brown, our Chief Financial Officer, to further discuss our financial details.