Harbor Custom Development (HCD) has filed for a small IPO by most standards, seeking to raise $15 million in an IPO of its common stock.

The firm operates as a residential homebuilder in the greater Seattle area.

HCD has grown revenue sharply in the last year due to property sales and has a significant backlog, but large layoffs or furloughs will reduce the number of potential buyers as a result of the Covid-19 pandemic.

Gig Harbor, Washington-based Harbor was founded by Mr. Sterling Griffin, who was previously Vice President of Marketing at the James S. Griffin Co. to develop and build homes in the greater Seattle region.

Below is a brief overview video of the firm's Battle Point Drive development:

Source: Kelvin Hughes

Mr. Griffin owns 91.7% of the company’s stock and the total investment to-date has been approximately $800,000.

The company primarily builds residential properties in the western Seattle metropolitan region Bremerton area south to Tacoma.

HCD handles all aspects of residential property development, from land purchase through entitlements, building, marketing and ongoing management.

At the end of 2019, the company had a backlog of nearly $15 million worth of residential development properties still to be built.

According to a 2019 market research report by Sammamish Mortgage, the median home price in the state of Washington is forecast to rise 4.6% by data firm Zillow.

The report forecast that due to the combination of low interest rates and a drop in the number of homes on the market, rising price conditions were likely to occur.

However, the outbreak of the Covid-19 coronavirus is likely to put significant downward pressure on market conditions despite the low cost of financing as the number of entry level buyers drops due to job losses.

If the pandemic wanes during the hotter summer months, the overall economy could bounce back, however the speed at which a potential rebound could occur will be a large unknown.

Harbor’s recent financial results can be summarized as follows:

  • A sharp increase in topline revenue
  • Growing gross profit but reduced gross margin
  • A swing to net income
  • Reduced negative cash flow from operations

Below are the company's most recent operational results:

Source: S-1 Filing

Source: S-1 Filing

As of December 31, 2019, Harbor had $430,000 in cash and $33.4 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($3.6 million).

Harbor intends to raise $15 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

  • Land acquisition and development
  • Debt reduction
  • Working capital

Management’s presentation of the company roadshow is not yet available. Hopefully, the firm will provide a presentation as it begins its roadshow.

The sole listed bookrunner of the IPO is ThinkEquity.

Commentary

Harbor is seeking funding to acquire additional developable land as part of a plan to expand its western Washington geographical footprint.

Additionally, management has plans to expand into other western state markets, including in Portland, OR, Denver, CO and in South Carolina.

The company’s financials show strong revenue growth in the most recent reporting period due to the sales of properties previously under development.

Residential property developers can show significant swings in revenues as projects under development for previous quarters or years come online and begin to sell.

The market opportunity in Washington state has been generally positive, assuming normal economic conditions, due to strong employment from technology firms such as Microsoft, Amazon and Boeing.

However, the state has been battered by the Covid-19 pandemic in certain areas and is already seeing the negative effects of layoffs or furloughs from Boeing, a major employer in the Sea-Tac area.

As the chart shows below, 4.7% of workers in the state of Washington have filed for unemployment benefits since the outbreak began:

U.S. unemployment insurance claims as a percentage of labor force

U.S. unemployment insurance claims as a percentage of labor force

While the company appears to be run by an experienced industry veteran, the current pandemic-influenced economic environment is a significant blow to many would-be buyers, casting doubt on the firm’s sales prospects for at least the next several quarters.

I imagine the company has delayed its IPO plans well into the latter half of 2020, if not until 2021.

I’ll provide an update when we learn more IPO details.

Expected IPO Pricing Date: To be announced.

(The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)