Landsea Homes Corporation (LSEA) Earnings Call Transcript & Summary

Good day, and welcome to the Landsea Homes Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Mr. Drew Mackintosh. Please go ahead.

Good morning, and welcome to Landsea Homes' third quarter of 2023 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. Landsea Homes cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These risks and uncertainties include, but are not limited to, the factors -- the risk factors described by Landsea Homes in its filings with the Securities and Exchange Commission. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and you should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Landsea Homes’ website and in its SEC filings. Hosting the call today are John Ho, Landsea's Chief Executive Officer; Mike Forsum, President and Chief Operating Officer; and Chris Porter, Chief Financial Officer. With that, I'd like to turn the call over to John.

Good morning, and thank you for joining us today as we go over our results for the third quarter of 2023, to share our outlook for the remainder of the year and discuss some exciting new developments for our company. Landsea Homes generated $258 million in home sales revenue in the third quarter on new home deliveries of 448 at an average sales price of $576,000. Home sales gross margin came in at 18.7% and net income was $8.6 million or $0.22 per diluted share. We are pleased with these financial results and believe they are reflective of our resilient new home market and our company's strong execution. Net new orders for the quarter came in at 486 on a sales pace of 2.7 homes per community per month. We saw active and engaged buyers at our communities throughout the quarter, though the upward movement in interest rates resulted in some selling softness as the quarter progressed. Fortunately, we had several sales tools at our disposal that offset the impact of higher rates and gave consumers a sense of confidence in buying their homes. In addition, our unique high-performance homes continue to set us apart from the competition and drive traffic to our communities. From a macro perspective, we believe the long-term fundamental outlook for new home construction remains positive. There continues to be a lack of existing home inventory at all price points, while the demand for housing remains strong. The economy continues to add jobs and the U.S. consumer has shown a willingness and ability to move forward with life-changing purchase decisions like buying a home despite the high interest rate environment. We have also seen broad-based home price stability in our markets, thanks in large part to the scarcity of existing home inventory. All these factors have and will continue to benefit homebuilders, particularly those with strong balance sheets and access to capital. Against this strong fundamental backdrop, Landsea has continued on its path of growing the size and scale of our operations. After the close of the quarter, we announced the acquisition of the assets and lot pipeline of Colorado-based Richfield Homes. With this acquisition, Landsea enters its seventh homebuilding market with an established presence in one of the best housing markets in the country. Similar to our previous acquisitions, we plan on growing our local market presence quickly so that we achieve better local economies of scale. We have retained Richfield's seasoned leadership team, including industry veteran and new division President Lisa Wiebelhaus, to lead these efforts and build on the success they've already achieved in the market. We expect the deal to yield a more than 20-plus percent IRR for our company and immediately be accretive to earnings and return on capital within 30 months of closing. Operationally, we expect to follow the same playbook in Colorado that we have been executing in our other markets, which is to focus on the more affordable segments of the market with a differentiated high-performance home series, employ a land-light strategy and turn our inventory quickly. We believe this is the right recipe for success in today's market, and we'll continue to look for acquisition targets that fit this model. With the continued rise in interest rates, we believe the opportunities to grow via acquisition will become more common. From a capital allocation standpoint, we feel that it is important to balance out our investments in the business with shareholder-friendly actions that signal our confidence in our company and our stock. To that end, our Board has approved a $20 million share repurchase authorization, which we plan to deploy over the next 12 months. We believe our stock is undervalued at its current share price. We look forward to buying our shares at a discount to book value, boosting our earnings per share throughout this repurchase program. Landsea is in a great position to finish the year on a strong note and carry that momentum into 2024. We have an established and growing presence in some of the best markets in the country and a product profile that caters to the largest buyer segment. Our balance sheet is in great shape, and our senior leadership team has the necessary experience and industry knowledge to compete effectively in a high interest rate environment. Given these positives, we remain excited about the future of Landsea Homes. Now I'd like to turn the call over to Mike, who will provide some additional color on our operational performance this quarter.

Thanks, John. Net new orders were up 89% year-over-year in the third quarter, thanks to an 80% improvement in absorption pace and a 4% rise in average community count. Order activity was strongest in our Southern California and Arizona divisions, while our Northern California division continued to lag due to affordability issues and soft employment trends in the tech sector. Our ability to offer financing incentives was a key driver of demand during the quarter as it allowed us to meet the affordability needs of our buyers. Most home shoppers are trying to solve for a monthly payment, and being able to adjust the rate associated with that payment is a big competitive advantage for homebuilders versus the existing home market. It allows us to maintain base price stability in our communities as well. As John mentioned, traffic was solid throughout the quarter but tapered off a bit from normal seasonality and adjusting rates moving higher near the end of the quarter. It is important to note that the quality of traffic we saw stayed consistent as the majority of buyers who came through our communities was motivated and resulted in solid lead conversion rates. Currently, we are seeing an increase in incentive activity from some of our bigger players in the market, which is to be expected at this time of the year. While we remain committed to meeting the market with our pricing to sustain appropriate absorption levels, we continue to monitor each of our communities individually in order not to generally overreact to short-term market shifts created by competitive year-end clearance practices. As a result, we are being strategic by being community- and lot-specific with our incentive activity rather than taking a broad brush one-size-fits-all strategy. Fortunately, we have a clear path to hitting our delivery goals for the remainder of the year, thanks to a solid quarter-ending backlog and our targeted sales approach. We saw further improvement in building conditions in the third quarter, leading to significant reduction in cycle time on a sequential and year-over-year basis. Cycle times are now approaching pre-pandemic levels, which will be a tailwind for our return profile going forward. It also allows us a return to a more balanced business model when it comes to spec homes versus to-be-built. Buyers who visit our communities can choose from either a quick move-in home or a to-be-built, which allows for more customization and typically better margins for our company. Overall, we feel really good about our business as we head into the end of the year despite the high mortgage rate environment. We continue to see motivated buyers in our markets while existing home supply remains at all-time lows. Housing fundamentals have remained positive in our existing markets, and we are excited about the opportunities that lie ahead for our new division in Colorado. Cost inflation appears to be waning and labor and material availability are the best we have seen in years. As a result, we believe the outlook for our company remains bright. With that, I would like to turn over the call to Chris, who will provide more detail on our financial results this quarter and give an update on guidance for the remainder of the year.

Thank you, Mike, and good morning, everyone. As Mike and John mentioned, we had a strong quarter, and we're pleased with the way the entire organization executed. For the third quarter, we generated $258 million in homebuilding revenue, a 21% decrease over third quarter of 2022, taking us to a total of $790 million for the first 9 months of the year. We also delivered $19 million in lot sales and other revenue, for a total revenue of $277 million. This quarter, our team delivered 448 homes with an average sales price of $576,000. Our ASPs were up 6.5% sequentially from the second quarter, but down 4% from the third quarter of last year. Excluding New York and Texas, which had deliveries last year, our ASPs were up 3.8% from the third quarter of last year. Our production was driven 26% from California, 26% from Arizona and the balance from Florida. We will start seeing the contribution from Colorado in the fourth quarter, and although it will be small to start, it will grow in 2024. Home sales gross margin was 18.7% for the quarter and 24% on a fully adjusted basis, which excludes interest in cost of homes as well as purchase price accounting. We booked $3.9 million in purchase price accounting for the quarter and have approximately $34 million remaining that we anticipate burning off over the next 18 months. Pretax income for the quarter was $12.5 million compared to $25.3 million last year. On a dollar basis, our G&A declined slightly from the second quarter as we continue to focus on improving our efficiency. SG&A as a percentage of home sales revenue was 16.4% this quarter, reflecting relatively constant fixed costs coupled with lower overall revenues compared to last year. As John mentioned, we are very pleased with our new order volume and the consistency produced in the quarter. Net new orders were 486, with an average selling price of $587,000 and a total order value of $285 million. Orders were up 89% from a year ago, and our absorption rate was 2.7 homes per community versus 1.5 in the third quarter of last year. We also ended the quarter with an average of 59 selling communities, up 4% from a year earlier. Throughout this year, we've remained disciplined on our land acquisition as we assess the current market conditions and ended the quarter with just over 11,200 lots under control. 55% of these lots were under option agreement as we continue to focus on our asset-light strategy. Our tax expense in the third quarter was $3 million, which represents an effective tax rate of 24%. Now turning to our balance sheet. We ended the third quarter with $389 million in liquidity, $144 million of which was cash and cash equivalents and $245 million was available under our revolving credit facility. During the quarter, we repurchased 1.4 million shares for $13.1 million and our tangible book value per share ended at $15.46, an increase of 3% sequentially from second quarter and up 12.8% from a year ago. Additionally, our leverage ratios remained in line with our stated policies, ending the quarter at 44% debt to total capital and 33% net debt to total capital. For the full year, we still anticipate new home deliveries to be in the range of 1,900 to 2,100 units and delivery ASPs to be in the range of $550,000 to $560,000. Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 18% range. This guidance is based on our best estimate as of today with current market conditions, and as inflation, incentives and interest rates continue to change, overall results could change accordingly. With that, we conclude our prepared remarks. And now we'd like to open the call up for questions.

[Operator Instructions] The first question comes with Carl Reichardt with BTIG.

So I wanted to ask first just about the acquisition in Colorado. Market there has been tough if you listen to other builders, so one could argue that this is a great time to get in. On the other hand, it could be tough for a while. So can you talk about that decision from a strategic perspective? And also maybe discuss some of the other markets you're thinking about or looking at from a forward acquisition standpoint.

Carl, this is John. I'll talk about that strategically, and then I'll have Mike also follow up. I think for us, as we've talked about it in the past, we thought that the tightening credit conditions, and certainly these high interest environments probably pinching a lot of these smaller private builders that have less access, less resources and access to capital. So it is opportunistic for us as we came across this opportunity and was able to acquire the assets primarily and then inherit the team that we thought was really well qualified, really well [indiscernible]. So it was an opportunist acquisition for us, and it's a market that we think has a long-term runway for us, supported by all the reasons why we think Denver is a great market, the demographics and so forth.

Carl, it's Mike. Just to follow-up on John, I've been in the Colorado market in one fashion or another since 1990s, and I have always really liked that market for various reasons, but I would say primarily that it does have a higher barrier to entry, which requires a little bit stronger skill set around land entitlement, land development, which I've honed my homebuilding career around those through California. And I believe it does give us a strong leverage point. We do [indiscernible] the market very well, either through my homebuilding experiences or through private equity at Starwood, where we owned land, and then through land banking. We've got a great familiarity with it. We know the markets to be in. We know the markets not to be in. And then we thought that this was an incredibly low-cost entry into that market. It was opportunistic. And then to your question, we're looking everywhere all the time. I think over the course of our 10 years of existence and then growing through acquisitions, we've become a builder of choice for that smaller private that's looking to exit. We have a whole cadre of folks out there looking on our behalf, as well as others that have inbounds that come in directly. And we got excited about this. We got excited about the platform. We got excited about their early positions, and we think that we can make a real mark there. But that doesn't mean we're not consistently looking in those markets that we talked about before in Texas, Florida. In fact, we're having really great conversations currently with folks, and we hope that we can continue to go down this path of growing our business through bolt-on M&A to continue to get the growth that we want.

I appreciate the details on those. And then for your guidance for '23 on deliveries, Chris, it's still a fairly wide range. Can you talk about the conditions that would cause you to hit the lower end versus the higher end of that range? What are the toggle points that would help you get to that top end or conversely to the bottom end over the course of the next -- what we have here, like 8 weeks?

Yes, Carl, sure. Good question. I think a lot of the uncertainty right now is revolving around incentives and mortgage buydowns and just the volatility of costs related to that. And I think that some stability in the market, there's a lot of bets that the Fed is going to hold rates steady, the 10-year's rallying today even. And so I think some steadiness within that aspect is going to give us more confidence on the upper end of there. We kept the range a little bit wider just based on mix as well as where incentives may or may not be for the year.

Next question comes with Jay McCanless with Wedbush.

Just trying to think a little bit ahead to '24. You've got the Colorado acquisition. Austin is going to be coming online. Maybe could you talk in rough numbers what we should think about for community count growth looking into next year just with all the different things that you have going on?

Jay, this is John. I'll start with that and then maybe hand it over to Chris to talk about community count. We are excited about the new opening of our communities in Austin. And then with acquisition of Colorado Richfield Homes, they have 3 actively selling communities right now, which we'll start seeing some of those deliveries in this fourth quarter. As it relates to 2024, I think we probably share the same, I would say, thoughts about the market, a lot of uncertainty as it relates to interest rates, the amount of incentives we have to offer around there. So we haven't given any guidance on 2024. As it relates to community growth, I mean I think that remains unchanged.

Yes, I would agree, Jay, the Colorado acquisition, there's 3 communities there today, you can see them out on our website. We would expand those communities. And then Austin, we're -- we've said that we think that we'll start with 3 communities and then continue to grow it. So I would see that growth in community count to be relatively consistent with where we thought in 2023, at the up 10% to 15% range.

Okay. That's great. And then, Mike, I wanted to dive in a little bit to your comments that labor availability, materials availability is the best you've ever seen. That's pretty encouraging given where the industry was 2 years ago. I guess what -- you already talked about how declining cycle time gives you better cash flow, but maybe from a product perspective, maybe talk about what other options this gives you. And if things are this good, does this give you more incentive to go out and find more builders? I just -- I think there's a lot we could draw from that comment. So maybe if you could dig down on that a little bit, please.

Sure, Jay. I would say as a point of clarification that I believe that labor and materials are the best probably since our pre-pandemic levels. We're getting back to a normalization of our business and the execution and flow. So that's super encouraging, as well as costs seem to be reigning themselves in. So from that standpoint, on that side, we're really happy with the trajectory of things. What it does, though, for us generally, and it's again, our strategy, our business model, is it moves us a little bit more towards dirt starts. And dirt starts are always better in the sense that allows us to create a relationship with our customer, allows them to customize their house a little bit more to the way that they want it. It vests them more in the house and the final outcome. We do collect more deposits because they have to put deposits down on options that they're taking. So we believe that it's a deeper and more secured transaction by doing dirt starts. And with dirt starts and with higher cycle times you're kind of closing the gap of, where the industry was moving towards the spec level type of build to shrink the distance between sale and close, this is happening more organically by the virtue of the fact that we can get our cycle times down. And so we're seeing that roughly right now, where we're seeing more buyers coming to the market looking to do a dirt acquisition versus a spec quick move-in acquisition -- or close, I should say. So from our standpoint, we think that that's a good healthy thing that's happening, and we like the normalization, and we think it's just -- it's building a stronger business for us.

That's great. And then, Chris, if we could talk about, I think you said 18%, approximately 18% for the full year gross margin. I guess, is most of that mortgage rate buydowns and the cost of those, or is there something else we need to talk about as it relates to pricing power and you all's ability to push price right now?

No, I think that it's primarily related to the mortgage incentives that I was mentioning earlier and just incentives in general to continue to push that demand through. If you look at kind of our base business year-over-year, ASPs were up 4%, if you exclude New York and Texas, which didn't deliver in this quarter. And so I think that that shows some pricing within the portfolio. But I think margin-wise, a lot of it is just based around the incentives that we're seeing.

The next question comes with Alex Rygiel with B. Riley.

Could you talk a bit about how you're helping your buyers find lower mortgages?

Yes. Chris, do you want to...?

Yes, sure. Yes, Alex, as you know, we've got a partnership with NFM mortgage to brand under Landsea mortgage. So we have the tagline "Landsea Mortgage Powered by NFM," and they have access to all of our buyers. And we work with them on just creating the mortgage programs and also doing mortgage incentives through there. So we'll do either the buydowns -- and primarily it's 30-year fixed is what we're seeing out there. We still haven't seen a lot of movement on the variable rate or the 15-year. But primarily it's all around a 30-year that we're able to, as everybody is, buy in bulk and then use that as an incentive towards closing costs and towards the mortgage. And so that's primarily what we're doing is using our mortgage company.

And then can you talk a bit about if you're seeing any opportunities to raise base prices, and then give us a quick update on sort of the trends in October relative to September.

Sure. Alex, this is Mike. I'll jump on that one. We are actually, in some cases, raising prices. Not aggressively, but I think that we're doing it thoughtfully, prudently where and when we can, so that, one, we're locking in our backlog, because they feel like they're at a community that's doing well. We're seeing that in places in Florida as well as Arizona and in Southern California. That seems to be our strongest markets right now, and we're able to do that. In further note, I think what we're really at a point right now, Alex, is that it's really a business of monthly payment as opposed to absolute price. And so the toggling to keep absorptions up are really around what Chris was talking about, the ability to buy down mortgage interest rates such that the monthly payment is more affordable against the backdrop of the credit or the homeowners' ability to qualify. There does not seem to be a real hesitation or resistance out there in terms of absolute pricing from our buyer profile that's coming through. It's just making sure that they know that, and they're comfortable that, they have a monthly payment that they can afford and be, again, comfortable with.

Next question comes from Carl Reichardt with BTIG.

So as your mix is changing here over time, do you, Mike, have sort of a normalized sort of absorption rate per month that you think the company should be targeting overall? And I ask that just because I know the mix moves around quite a bit, and at the entry level, you'd be trying to target, say, 1 a week, 4 a month; higher end it's going to be more like 3. So I'm just trying to get a sense of, in your head, roughly what you think a normalized absorption pace would be for the company as it's currently constituted?

I think that we aspire, Carl, to be in that 3 to 3.5 net absorption rate per community. That is ideal. And I think that generally, over the -- my course of time in the business, that seems to be the sort of organic natural absorption, where you're not pricing too low or not pricing too high, and that's where you should be. Although there's seasonality that comes into play, so if you're going through the summer, you may be dipping down into the 2s as you're kind of moving through the summer lulls and then you'll have some spiking that may take you even sort of naturally higher as you start to get kind of maybe a little bit of energy and some greater momentum into the market. But if you look at the course of a community from beginning to end, if you're hitting that 3 to 3.5 through it on average, you've done a really great job and you got a really healthy community, and I think you've optimized everything along the way.

Okay. Perfect. And then you have a couple of smaller peers who had talked about developers who had deals sold to small builders, so finished lot deals that then dropped, and so these publics have had a chance to go and pick up finished lots, not at great prices, but at least there's availability. You had some larger peers say that's not happening at all. Where do you guys see -- and obviously, with the acquisition in Colorado, there's some positive element -- but where do you see overall this land market? Are opportunities showing up more than they had because of private builder distress or higher cost of capital, or is that really not happening as you see it?

Yes. That's actually a really great question, Carl, because what we're seeing is, in some of our markets, Florida and Arizona specifically, opportunity has come our way where we are talking to single-family-for-rent, build-to-rent builders who can't get financing that have acquired properties, and were backfilling into infill there with some smaller bite-sized type of communities that are gappers in our business that are filling some holes between quarter-to-quarter or month-to-month. We really like those because they're finished lots, they're ready to go, price points are right in our wheelhouse, and they're in locations that we probably wouldn't be looking at because of just efficiency's sake. So we actually have talked and looking at and getting close to a handful of those in those locations. So that's really what we're seeing right now. I think the most [ stress ] is really on that sort of private, build-to-rent builder out there that is struggling to find financing to get them all the way through that project.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to John Ho for any closing remarks. Please go ahead.

Thank you, everyone, for joining us today, and we look forward to speaking to you after the fourth quarter again.

This concludes today's meeting. Thank you for attending today's presentation. You may now disconnect.