Landsea Homes Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Landsea Homes Corporation First Quarter 2023 Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded today, Wednesday, May 3, 2023. I would now like to turn the conference over to Drew McIntosh from MacIntosh Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to Landsea Homes' Q1 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 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 and deciding whether to invest in our securities.

Speaker 1

We do not undertake any obligation to 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 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, Landse's Chief Executive Officer Mike Boursome, President and Chief Operating Officer and Chris Porter, Chief Financial Officer. With that, I'd like to turn the call over to John.

Speaker 2

Good morning, and thank you for joining us today as we go over our results the Q1 of 2023 and provide an overview of our operations. Lanthe Homes delivered strong results in the Q1, culminating in net income of $3,200,000 or earnings of $0.08 per diluted share On home sales revenue of $241,000,000 both the number of homes we delivered and the average home sales gross margin came in higher than our previously stated guidance as our teams did an excellent job of closing homes in a timely manner while holding the line on profitability. We also generated cash from operations, knowing what is typically a time when we use more cash than we bring in, which we believe is a testament to our ability to respond quickly to the changing market conditions and the flexibility of our operating models. Selling conditions improved considerably in the Q1 relative to the Q4 of 2022 As a combination of limited existing home inventory, buyer acceptance of the higher mortgage rates and more aggressive pricing at our communities led to better traffic and sales. Both order activity and cancellation rates got better as the quarter progressed, resulting in net new orders of 4.98 on a sales pace of 2.8 orders per community per month.

Speaker 2

Selling conditions remained stable into April as we generated 219 net orders on a sales pace of 3.8 for the month. From a macro perspective, we believe the new home market is in good shape. Thanks to a resilient job market, Favorable demographics and the aforementioned limited supply of existing home inventory. We continue to see motivated buyers in our markets, Our ability to offer an array of homes with attractive financing incentives makes for a compelling sales pitch. We demonstrated our ability to find the market in the Q1 with pricing adjustments, quick move in inventory and incentives And believe we can continue to do so as long as the overall housing fundamentals remain fairly consistent.

Speaker 2

Our focus remains on growing our operations in select high growth markets by attracting buyers with quality, affordable New Home Options. We believe this is the best path to achieving better economies of scale at the local level and generating higher returns for our shareholders. Our High Performance Home series continues to be a great differentiator for our company, Giving buyers the latest in smart home technology at affordable price. This is especially true for millennial and Gen Z buyers We appreciate the functionality of our home offerings and view the home as more than just a place to live. We have centered our sales efforts around these fires, understanding that they will be the primary drivers of the new home market for years to come.

Speaker 2

With respect to our balance sheet, Landse ended the Q1 in great financial shape. We grew our quarter ending cash position to approximately $140,000,000 to maintain a conservative leverage profile with a net debt to total capital ratio of 30.7%. We have an additional $150,000,000 available to us under our unsecured revolving credit facility, giving us the financial flexibility to run our business from a position of strength and pursue unique investment opportunities should they arise. We believe that maintaining a conservative balance sheet is prudent for the foreseeable future Given the uncertainties surrounding the future of mortgage rates and the economy at large, The company and the new home industry as a whole demonstrated great resiliency in the Q1 by adjusting to changing market conditions and finding ways to bring buyers back into the market. We believe the momentum we generated in the Q1 can carry into the remainder of 2023 and as a result, see a bright future ahead for Landsea Homes.

Speaker 2

With that, I'd like to turn the call over to Mike, who will provide more detail on homebuilding operations this quarter.

Speaker 3

Thanks, John, and good morning to everyone on the call. Our homebuilding operations made considerable headway in the first quarter by overcoming many of the issues facing our industry at the end of last year. We felt confident that there were many motivated buyers in our market. We also knew that there was some hesitancy associated with the perception of buying at the top of the market, both in terms of pricing and interest rates. In response to this, we pulled the necessary levers to increase buyer confidence and generate traffic at our communities.

Speaker 3

In some cases, this meant reducing base prices to more accurately reflect the new pricing environment in a given market. In other instances, this meant offering higher incentives typically in the form of rate buy downs to overcome a buyer's concern over affordability. These pricing actions proved successful as sales activity rebounded and gained momentum as the quarter progressed, allowing us to ease up on the discounting at many of our communities over the last few months. Another factor that helped our sales effort was the increased availability of Quick move in homes. We made the strategic decision at the end of last year to have more specs on the ground ahead of the spring selling season to capture a higher percentage of buyers who are looking for a quick close.

Speaker 3

Interest rate volatility coupled with long build times had resulted in higher cancellation rates From our backlog, we felt that having more homes further along in the build process would cut down on the time between sale and close. This proved to be the case in the Q1 as cancellation rates dropped significantly from the levels we experienced in the 4th quarter And we sold a higher percentage of spec homes. As the market has stabilized, we have begun to ease off on our spec starts, But we still view it as an important part of our sales efforts. With respect to building conditions, we saw limited improvement in overall cycle times in the first Quarter, however, there were signs that things were starting to get even better, particularly in the front end of the construction process. Little by little, we are seeing labor and material availability In the initial phases of the build process and we are optimistic that this will carry into all phases later this year.

Speaker 3

We're doing everything in our power to return to cycle times pre COVID levels and believe the lessons we have learned from these supply chain issues will make us a better, More efficient homebuilder in the long run. Overall, I would characterize the new home market as stable. Landsea The rest of the industry did a great job of reestablishing equilibrium in the market by finding the right levels of pricing and incentives to restore buyer confidence and drive sales activity. The lack of existing home inventory has definitely made the new home Market more attractive to prospective buyers and it's also helped providing a floor in pricing. There are still lingering issues to address With respect to build times and buyer confidence, but I am confident those will be resolved over time.

Speaker 3

As a result, I am much more optimistic about our prospects for 2023. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results for the Q1 and give some guidance for the coming quarter. Chris?

Speaker 4

Thanks, Mike, and good morning, everyone. For the Q1, we generated $240,600,000 in homebuilding revenue, a decrease of 19% from the Q1 of 2022 as we saw fewer homes delivered in Florida and California, partially offset by a 19% increase in deliveries in Arizona. Florida's average selling prices increased 14% year over year, While Arizona and California both saw decreases due to increasing incentives, we reported total revenue of $241,700,000 for the quarter compared to $316,200,000 in the Q1 of last year. In the Q1 of 2022, we generated $18,300,000 in lot sales and other revenue that did not occur this year. Our pre tax income for the quarter was $5,700,000 During the quarter, our team really balanced Sales volume, price and incentives to produce closings above our plan and hold profits with a home sales gross margin of 18.1%, a decrease of 2.80 basis points from a year ago.

Speaker 4

Our incentives in the quarter primarily focused on rate buy downs to help our customers with affordability, while attracting strong sales momentum. And as John mentioned, we are very pleased with our new order volume and the consistency produced in the quarter. Net new orders were 4.98 with an average selling price of $567,000 and a total order value of 282,500,000 Orders were up 4 66% sequentially from the Q4 of 2022 and down 22% from the Q1 of last year. The order strength was relatively balanced between Arizona, California and Florida. We also ended the quarter with an average of 59 selling communities, up 8% from a year earlier.

Speaker 4

Throughout this year, we have remained disciplined on our land acquisitions as we assess the current market conditions and ended the quarter with 11,435 Lots Under Control. 56% of these lots were under option approach As we continue to focus on our asset light strategy, the lot position represents approximately 3.5 to 4 years of supply. This year, we also began Landsea Title to further enhance our homebuyers experience. Landsea Title issued their first policies on closed homes in April in Florida. We will quickly move to Arizona and then when we start closing homes in Texas at our Anthem project, Lansing Title will be there from the beginning.

Speaker 4

Having our own title company allows us to ensure the highest level of service and maximize efficiencies throughout the home buying process by controlling the quality and timing of title and closing. In the Q1, our SG and A expense was 39,200,000 or 16.3 percent of home sales revenue. Our G and A expense of $22,800,000 was a little elevated and impacted by one time severance charges of approximately $1,000,000 as we work to right size our operation and improve our efficiency. We will continue to monitor and adjust our overhead cost structure as the market evolves. Our tax expense for the Q1 was $1,600,000 represents an effective tax rate of 28%.

Speaker 4

We anticipate this normalizing back into historical rates as we progress through the year and end in the range of 22% to 23%. We ended with just under $300,000,000 in liquidity at March 31, Reflecting our strong commitment to our balance sheet. During the height of the banking crisis in March, we fully drew our revolver to ensure access to this liquidity And then repaid the amount once the crisis subsided, ending the quarter with $139,500,000 in cash on hand. Now I would like to provide some guidance for the Q2 and full year. This guidance is based on our estimate as of today with the current market conditions.

Speaker 4

As inflation and interest rates continue to change, their impact may affect our overall results. With that said, we anticipate 2nd quarter net home deliveries be in the range of 450 to 500 units and delivery average selling prices to be in the range of 510,000 to 520,000 We anticipate GAAP home sales gross margin to remain relatively consistent at around 18%. For the full year 2023, we anticipate new home deliveries to be in the range of 16 50 homes to 2,000 homes And delivery ASPs to be in the range of $540,000 to $575,000 And with that, that concludes our prepared remarks. And now we'd like to open up the call for additional questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Followed by the number 2. Your first question will come from Matthew Bouley at Barclays. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thanks for taking the question. I wanted to ask about the spec strategy. Presumably, it was good to have spec in the ground during Q1 and maybe had some success Receling cancellations from Q4. And I think I heard you say at the top that you're now easing off on that spec strategy.

Speaker 5

So just And why you're mentioning you're going to pull back a little bit? Thank you.

Speaker 3

Hey, Matt, it's Mike Foursome. Thanks for the question. I will respond by saying that generally where we're looking at our spec strategy going forward is roughly around, I would say fifty-fifty dirt starts, spec starts. So for example, if we have a construction release going forward In sales release, we would probably put 4 up for dead dirt starts or 4 or 5 up for dirt starts and then the other 5, We would do it as sort of a traditional spec release. The reason we're doing that Matt is that we are definitely seeing buyers coming back to the market Who want to be earlier in the buying process with us.

Speaker 3

They want to go to our showrooms. They want to pick out their own options. And they want to feel that they're building this house for themselves. As well, there are still some quick move in buyers that are Acting as more like resale buyers out in the marketplace. So we believe that an appropriate balance of mixture of spec and dirt starts Are appropriate going forward and we're going to continue to monitor this as the year progresses.

Speaker 3

But as of right now, we think that that's The proper approach.

Speaker 5

Got it. Okay. Thank you for that, Mike. And then That's very helpful. The second one, just jumping down to the margin side.

Speaker 5

I guess just curious, even following on to that, how would you say kind of Back versus your dirt margins are trending. And then as you look forward, and I think you guided margins in Q2 2 to be consistent. With Q1, we think about kind of incentives, price and then that Question on spec for STIRTT margins. What are some of the pluses and minuses, I guess, that sort of get you to that flattish margin outlook? Thank you.

Speaker 3

Yes, let me I'll start it and then I think John will kind of tag on to this is that As we are currently looking at the business, we do believe that our margins are better with the dirt Start because they do not include a buy down of the mortgage incentive in it. I think the question Generally as we go forward and this is a little bit of our hedging going into the remainder of the year and our spec start strategy is that as those houses Move through the cycle process and they come closer to close, will the buyer then seek additional incentives To help buy down the interest rate should it continue to go up. And with that being said, I think John more has specifics around the actual margins. Yes.

Speaker 2

We do see probably in the second half of the year, probably Improving margins, that has a lot to do with what Mike was speaking to. We always historically, it's always been a You're a start buyer that will by selecting their options always results in a higher margin for us Then a spec start where someone's coming in, they may not have the options that they particularly like and will seek discounts traditionally. Obviously, in this market currently they're looking for mortgage incentives. So having a good start buyer always has Higher margins and that's part of why our strategy in this balanced approach that Mike spoke to. We also see in the Back half of the year as we have turned over the inventory particularly in this Q1 And going to the Q2, in the second half of the year, we're going to see this improvement with these third start buyers Then also some improvements on the cost side as well too as we're flushing through the inventory that we're carrying into this year and starting new homes Into the second half for deliveries for in the second half of this year.

Speaker 5

All right. Very helpful. Thank you, John. Thanks, Mike. Good luck, guys.

Speaker 2

Thanks. Thanks.

Operator

Your next question will come from Carl Reichardt at BTIG. Please go ahead.

Speaker 6

Thanks. Good morning, guys. Hope you're doing well. I wanted to ask Matt ask one of my margin questions. Let me ask more about geographic mix.

Speaker 6

Relocating the headquarters, there's going to be a focus on sort of outside of California. Can you give me a sense sort of 3, 5 years from now, How you think about where your chess pieces are nationally? And is the forward investment as it sort of shrinks in California, is it going to be in the market

Speaker 2

Hey, Karl. This is John. I'm going to start at a little higher level and then I'm going to pass it over to Mike to talk a little bit granular. For us, moving to Dallas was a very important milestone. This is our 10th year.

Speaker 2

We're actually celebrating our 10 years as a company this year. So we believe moving to Dallas is a reflection of where our position as a company is now too. Starting out as a California builder then moving into Arizona and then the last couple of years now to Texas, Florida, we've really positioned the company to be more diversified by Coastal Company throughout the Sunbelt. So as I see our business move in the next 3 to 5 years, I see us having a more balanced portfolio that will probably be equally Appropriate in California, Arizona, Texas and Florida. Right now, we're actually pretty fairly distributed between California, Arizona In Florida, we're very, very interested in building and growing our Texas business.

Speaker 2

And I think that's pretty exciting for us because We believe this is a business of scale and we believe that Texas obviously has a lot of those attributes. So I'll turn it over to Mike to talk about some specific markets and some other things we're looking to grow in. Sure.

Speaker 3

Thank you, John. Hey, Karl. Let me begin by saying that we are absolutely thrilled with our businesses in California, both Northern California and Southern California. We have tremendous teams there that are planted their flag and we have a fantastic franchise that we will continue to nurture in the years to come. That being said though, as John said, we do believe that ultimately our future though is the Expansion into these other states, which we have entered into that have very long runways.

Speaker 3

Florida is a big market As well as Texas, we are just scratching the surface of those markets that we're now participating in and we believe that we're going to have Huge growth opportunities going forward. But we're never shy about also looking at other opportunities in expansion and growing Our business into other states. So we've been having really nice conversations as I think that many of the private builders We have made their way through this last trauma that they've been faced with or coming back to the market probably with more realistic Ideas in terms of their valuations and terms and so we're hopeful that we can also find some synthetic or M and A Opportunities to help grow not only in the markets that John described, but also in some areas that we may not be in particularly over the next 2, 3 years.

Speaker 6

Thank you, Mike and John. And following up on that particular element of the strategy, So obviously, you pulled down your line and then paid back during the quarter thinking about the regional bank crisis. Let's talk about how that might impact homebuilding. So first, are you starting to hear private builders chat about losing capital availability and what they might do? 2nd, is that also happening on the land development side?

Speaker 6

And 3rd, what percentage of your lots this year do you intend to self develop? I think it's More of them than not, but I'd just like a number there too. Thanks, Tal.

Speaker 3

Sure. I'll take a first stab at it. And Chris, I don't know if you want to backstop any of this. But I think we are definitely seeing stress that's in the private builder market In terms of their banking relationships and now their inability to do any spec starts. I mean, I think that's what definitely has happened to them More than others that are financed in a different capacity in a more institutional way.

Speaker 3

Their ability to manage and run their businesses as they have in the past Are going to be hindered. So with that being said, they are seeking and we have been sought out to see ways in which we can assist them Or looking at a way of buying them that had gone dormant really most of last year frankly. So we're pretty I don't want to say excited because it doesn't sound very nice, but we're optimistic that we're going to be seeing some opportunities that we saw a few Whereby we can jump in and make some acquisitions that are very strategic to what we're doing. On the land side, We haven't seen a lot of capitulation. I think generally around the country coming out of the GFC, those land Developers that survived are pretty solvent, savvy and patient.

Speaker 3

So what we've really seen mostly is not A reduction in price on lots, but maybe more of terms that are beneficial to us, beneficial to their communities In that there's probably more of an alignment that if we all do well, I mean, if we do well, we all do well. And that's kind of the proposition as opposed to Us getting any kind of stress by or them being able to get some big premium because they have lots available. In some cases, yes, there's anecdotally if you have finished lots, you can, but get pay up for that. But Generally haven't seen that really coming through the land yet. Chris?

Speaker 3

John? Hi, Carl.

Speaker 2

To answer your question about Capital availability on the land side, there definitely is a tighter market in terms of availability of call it ADC loans For land and land development. For us, majority of our lots are controlled. And I would say probably majority of our lots Also come to us in terms of finish slots. We do have we've been very good in self developing as well too. We obviously do that in California.

Speaker 2

We've done that in Arizona successfully and Texas. So there are opportunities for us to do that. With our current strategy, we're about 40% owned, 60% finished. We tend to have more of our majority of our lots are finished lots.

Speaker 6

Great. I appreciate that. Thank you for disabusing me of my notion. And can I ask one more question just on pricing and incentives? Do you have a sense of what percentage of your communities during Q1 you might have raised base

Speaker 3

Roughly Around 10% to 15% of our communities, we have been able to get some incremental price increases going forward. Most have been stabilized at current pricing and incentives, which is driving traffic and sales volume. But for the most part, any reduction in pricing or increasing of incentives through our business has ceased.

Speaker 6

Okay, super. I appreciate it. Thanks for all the detail guys.

Speaker 2

Sure. Thanks, Carl.

Operator

Your next question will come from Alex Rygiel at B. Riley Financial. Please go ahead.

Speaker 3

Good morning, gentlemen. Very nice quarter.

Speaker 7

A couple of quick questions here. First, any update on what

Speaker 4

Yes, Alex, this is Chris Porter. We continue to see improvement And the cancellation rate again and got back down into single digits for April.

Speaker 7

Fantastic. And then California seemed a bit stronger than I would have thought. Any commentary around that, what product you're launching, so on?

Speaker 3

Alex, this is Mike. Yes, as I said earlier, we're really happy about Our California performance particularly coming into the New Year, I believe that our positioning in the Inland Empire and out in San Joaquin County, Northern California With our price points is really touching a sweet spot in terms of demand. I think we're seeing those buyers that retreated to SFR are now coming back out again realizing that rates aren't going to drop a whole lot more and pricing isn't going to get Deteriorated a whole lot more and that incentives are what they are and that we are in a nice position to Absorb that demand as it's coming to the market today. So, yes, Southern California, particularly Northern California as well have been outstanding this quarter.

Speaker 4

Great. Thank you very much.

Operator

There are no further questions. So I will turn the conference back to John Ho for any closing remarks.

Speaker 2

Thank you everyone for joining us for our Q1 earnings Carl, we look forward to speaking with you again in the quarter.

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.

Remove Ads
Powered by Quartr
Earnings Conference Call
Landsea Homes Q1 2023
00:00 / 00:00
Remove Ads