Landsea Homes Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to the Landsea Homes Corporation 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Drew McIntosh. Thank you. You may begin.

Speaker 1

Good morning, and welcome to Lansing Homes 4th quarter and full year 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. Lansing 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 Lansing Homes in its filings with the Securities and Exchange Commission. Accordingly, forward looking statements should not be relied upon 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.

Speaker 1

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 Lansing Home's website and in its SEC filings. Hosting the call today are John Ho, Lansing's Chief Executive Officer Mike Foursome, 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 for the Q4, provide a recap of our accomplishments in 2023, discuss the current state of our homebuilding operations and our outlook. Nancy Homes delivered another quarter of strong profitability in the 4th quarter, generating net income of $12,500,000 or $0.33 per diluted share. We came in above our stated guidance for full year deliveries, thanks to a strong 4th quarter push by our construction teams to get homes closed by year end. We also experienced a significant year over year improvement in order activity and this momentum has carried into the new year with orders up 28% for the 1st 8 weeks of 2024 compared to the same period in 2023. I realize that most of you on this call are more focused on our company's future performance rather than our past accomplishments.

Speaker 2

I think it's worth reviewing some of our achievements from 2023 as they provide the foundation of what's to come for our company. In February, we launched Landsee Title, which along with Landsee Mortgage allows us to offer our homebuyers a comprehensive suite of financial services when purchasing their home. It also enables us to maximize efficiencies throughout the home buying experience by controlling the quality and timing of the title and closing process. Having a broad array of financial services to offer to buyers is crucial during this era of mortgage rate uncertainty and getting Landscape Title up and running was a key component of this. In March, we announced the relocation of our company's headquarters to Dallas, a move that put us in a better position logistically to manage our expanding homebuilding footprint and that signaled our intention to grow Landsea's presence in the state of Texas.

Speaker 2

We follow through on this intent earlier this year by entering into a definitive agreement to buy Dallas Fort Worth based and Terrace Homes which will give us 19 actively selling communities and a strong pipeline of almost 3,000 lots in the market. We expect Antero's will be a transformative transaction for our company and credit our relocation to the area as being an important factor in sourcing and closing this deal. In the summer, we completed a series of capital markets transactions that greatly benefited our company. We executed 2 secondary share offerings on behalf of large shareholders, 1 in June and 1 in August that reduced the level of concentration in our shareholder base and increased the flow of our stock. Both offerings were well received by the market and we successfully placed the shares with a stable base of traditional institutional investors.

Speaker 2

In July, we entered into a note purchase agreement with various investors, including BlackRock and Angelo Gordon that provided for the private placement of $250,000,000 aggregate principal amount of senior notes due in 2028. This transaction provided us with much needed capital to pursue our growth initiatives, while limiting our exposure to the fluctuation in interest rates. In October, we established a presence in Colorado for the acquisition of certain assets of Richfield Homes. Colorado has been one of our top new market targets for some time and to acquire a successful homebuilding operation with a solid management team was a real win for us. Throughout the year, we also allocated a portion of our capital to buying back stock.

Speaker 2

In total, we repurchased roughly 3,600,000 shares at an average price of $9.46 thereby reducing our shares outstanding by 9% as compared to the end of 2022. All these actions we took in 2023 were aligned with our goals of rapidly scaling our operations in a profitable manner, establishing a path to better returns and creating value for all our shareholders. Our year end book value per share was 17.88 dollars and our tangible book value per share was $16 an increase of 11.4% from a year ago. We believe we are in a good position to take advantage of the positive housing fundamentals we see in our market today. I'm proud of what we have achieved in 2023 and believe we are on our path to greater success in the future.

Speaker 2

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

Speaker 3

Thanks, John. We made great strides in the Q4 of 2023, both in terms of selling and closing homes and this momentum has carried into 2024. Net new orders for the Q4 were

Operator

up

Speaker 3

3 52% year over year on a sales pace of 2.2 homes per community per month. Since the start of the new year, our sales pace has accelerated to 2.8 in January and 3.1 through the 1st 2 weeks of February. Incentives peaked during the month of October and have been steadily declining ever since, currently trending at 3% to 5% of base prices. While this is higher than historical norms, we do see incentives trending lower in our markets. For the full year of 2023, orders were up 28% to $1947 and the dollar value increased 16% to 1,100,000,000 dollars Also, we increased our average selling community count year over year 12% organically to 59.

Speaker 3

We would expect to see this similar organic growth of 10% to 15% in our existing divisions before adding the Antares Homes acquisition. We continue to see healthy demand in all of our markets and across buyer demographics, driven by lack of existing supply and a resilient economy. Consumers appear to have adjusted to the new normal mortgage rates exceeding 7%, though a majority of our buyers still opt for some form of financing incentive to lower their monthly payments. The lack of existing home supply remains a tailwind for our industry as buyers seek the selection and quality that the new home market affords. Many of these buyers are looking for quick move in options we have responded by increasing the amount of spec inventory that's available at our communities.

Speaker 3

Although we have a very few standing inventory at any one time in any community, we have started the homes needed to close in the next couple of quarters and are actively selling into this production. In terms of building conditions, we believe the worst of the supply chain issues that plagued our industry are behind us as build times have returned to pre COVID levels. This improvement coupled with our strategic shift to more spec inventory should help boost inventory turnover and cash flow generation. We remain committed to growing our size and scale in each of our markets while remaining disciplined with our underwriting standards. We ended the year with over 11,000 lots with a breakdown of 41% owned and 59% controlled, in line with our targeted mix.

Speaker 3

Our goal is to build on existing momentum we have generated in Florida, Arizona, California and Colorado, while making a big push to further establish in Texas. The recent acquisition of Antares gives us a running start in the efforts to penetrate the Dallas Fort Worth market, while our active community pipeline in Austin continues to grow and should start contributing sales and closings to our company's total beginning in the Q1 of this year. In summary, I am pleased with our team's execution in the Q4 and I'm proud of the milestones we hit in 2023. I concur with John that 2023 was a transformative year for the company and we will be reaping the benefits of these accomplishments for years to come. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial performance this quarter and give some preliminary guidance for 2024.

Speaker 4

Thank you, Mike, and good morning, everyone. As Mike and John mentioned, we are very pleased with our performance in the quarter, achieving net income of $12,500,000 or $0.33 per diluted share. This compares to net income of $25,600,000 or $0.62 per diluted share last year. For the year, we generated net income of $29,200,000 or $0.75 per diluted share and $1,200,000,000 in revenue on 2,123 deliveries, which exceeded our stated guidance of between 2,021 100 deliveries. 4th quarter home sales revenue was $380,000,000 a 9% decrease over Q4 of 2022 based on 6% lower volume and 4% lower average selling price.

Speaker 4

This decline was partially attributable to a lack of contribution from New York and Texas, which added 18 homes for $29,000,000 in the Q4 of 2022. As we have been discussing on the past few calls, our Texas operations should begin deliveries from their new communities in late Q1 or early Q2. In the quarter, we also closed on $18,000,000 in lot sales and other revenue for a total revenue of $398,000,000 We were excited to enter the Colorado market this quarter and this new division contributed 11 closed homes for $7,400,000 During the quarter, Florida represented 44% of our deliveries and 35% of our home sales revenue. California represented 30% of deliveries and 45 percent of our home sales revenue and Arizona made up the majority of the difference with 24% of the deliveries and 19% of the home sales revenue. In 2024, we will see ramped up contribution from Colorado as we have a full year of deliveries and anticipate having our new DFW segment contributing starting in the Q2 following our closing of the Antares Home acquisition.

Speaker 4

Home sales gross margin was 15.9% for the quarter and 20.8% on a fully adjusted basis. As the 10 year treasury spiked to 5% last fall, the cost of mortgage buy down incentives increased significantly. We saw this also decrease significantly towards the end of December and it has remained more stable in the Q1 of this year. Incentives during 2023 averaged between 5% 6% of our home sales revenue, a sizable increase from 2022 levels. We expect incentive levels to remain elevated in 2024 with the actual cost fluctuating with the overall mortgage rate environment.

Speaker 4

Buying down to a 5.99% level seems to be the sweet spot today's environment and can range from 3% to 5% depending on the underlying mortgage rate. Our SG and A expense came in at 15% of home sales revenue for the year, up 2 20 basis points from 2022. As we have discussed on previous calls, we are confident that we can begin to see the leverage from the public company infrastructure we put in place as our delivery run rate grows. With both the Richfield and Antares acquisition, we will leverage the existing corporate overhead and staff and we will see an overall improvement in this ratio. For the year, we expect an overall improvement of 150 to 200 basis points in our SG and A efficiency with this being more back end loaded as we realize the effects of increased deliveries in volume from Colorado and DFW.

Speaker 4

Our tax expense for the Q4 was $5,600,000 bringing our total for the year $11,900,000 for an effective tax rate of 26.7%. This year fewer homes qualified for the new more rigorous 45L tax credits, but we expect to have the majority of our homes to qualify in 2024 and beyond. Turning to our balance sheet, we ended the 4th quarter with $431,000,000 in liquidity, dollars 169,000,000 in cash and cash equivalents and $263,000,000 in availability under our revolver. Our leverage ratios remained in line with our stated policies ending the the quarter at 44% debt to total capital and 30% net debt to total capital. Now looking forward to the Q1, we anticipate deliveries to be between $480,500 at an average sale price of $560,000 to $575,000 with GAAP gross margins of 15% to 16% and adjusted gross margins between 20% 21%.

Speaker 4

And for the full year, we anticipate new home deliveries including our Antares acquisition to be in the range of 2,500 to 2,900 units, which at the midpoint represents a 27% growth over 2023. We expect the ASPs of these deliveries to be in the range of $500,000 to 5 $25,000 Antares maintains an ASP in the low 400s, which will impact our annual ASP numbers as we add them to our portfolio. Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 17% to 18% range and adjusted gross margins to be between 21% 23% for the full year. These gross margin ranges are dependent upon assumptions in our price accounting with the Antares acquisition. We will not know the final allocations until we close the acquisition in the 2nd quarter.

Speaker 4

Also, this guidance is based on our best estimate as of today with the current market conditions. As inflation, incentives and interest rates continue to change, overall results could change accordingly. And that concludes our prepared remarks. And now I'd like to turn it over to the operator to open up the call for more questions.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Alex Rygiel with B. Riley Securities. Please proceed with your questions.

Speaker 5

Good morning, Mike, John and Chris. Very, very strong finish to the year. Congratulations.

Speaker 2

Thanks, Alex.

Speaker 5

Couple of quick questions here. First, coming back to organic growth, what did you say your organic community count growth would be again in 2024? And can you discuss what markets could see the greatest growth and what the average selling price of these new communities could look like?

Speaker 3

Sure. Let me a stab at that, Alex. It's Mike. We talked on the recorded remarks about 10% to 15% organic growth. That generally will be coming from the balance of all of our communities in the markets we're in.

Speaker 3

But I would say that if you just put numerical numbers around it, we'll continue to grow Phoenix, the Phoenix market, bringing communities online Florida certainly and then the expansion of Austin as well. And then we're sort of doing some bolt ons in California. We see the average sales price still being in the range in which we talked about in our remarks. So we don't see any big deviation around that. But as you know, from quarter to quarter depending upon mix and kind of where things are running, it could move

Speaker 6

up and down around that number.

Speaker 3

I think John has a specific number that he can share with you around that.

Speaker 2

Hey, Alex. I think our Q1 guidance is in the range of I think $550,000 to $575,000 It's primarily coming from our actively selling communities through organic growth. Our expectation is that we'll close in Terrace Homes in the Q2 of this year. They have a lower average selling price in the low $400,000 So we expect our full year average selling price to be between $500,000 525,000

Speaker 5

And secondly, could you comment on your spec strategy near term? It sounds like specs are in very high demand right now, and it sounds like you're definitely focused on that. So maybe comment on what spec inventory looks like and how it could change?

Speaker 3

Sure. It's Mike again. Yes, for sure, it's an ongoing component part of our business today as the buyer profile is looking for that quick move in because we just don't see that resale market bouncing back soon and they don't have a whole lot of options. So we're picking up a lot of that demand. That being said, it is necessitating us to get out ahead of sales with our starts and then selling into our production.

Speaker 3

So currently we're running about 20% to be built or DIRTT starts as we call them against the spec starts. And then I would say roughly we're a third, a third, a third sales going into the production cycle. So in other words, a third of our sales would be somewhere within the first early parts of the house being under construction. The second part, the last the middle third, obviously in the middle and then the last third would be those that are looking for the quick move in within 60 days. So that's generally how it breaks down.

Speaker 5

Very helpful. Thank you very much.

Speaker 3

Thanks, Alex. Thank you.

Operator

Thank you. Our next questions come from the line of Carl Reichardt with BTIG. Please proceed with your questions.

Speaker 5

Thanks. Good morning, everybody. Good morning, Carl. When in second quarter will Antares close, do you think? And then, Chris, on the 20% to I think you said 20% to 23% gross margin guide for 24% on a core and that 17%, 18% actual GAAP.

Speaker 5

What basis points of purchase accounting are you assuming between those 2? I mean, I think I'm just asking, I'm assuming it's going to be back end loaded or 3rd quarter, quarter loaded. Can you just help us a little bit about how that will lay out?

Speaker 2

Yes. I'll comment on the closing timing and what our best estimate is. But our expectation is sometime April, May when we expect to close. I think everything is on track for that. And as it relates to our estimated sort of purchase accounting, our forecast for the full year would include deliveries that we anticipate to receive after the closing on Terrace Homes.

Speaker 2

And Chris can talk about the purchase accounting.

Speaker 4

Yes, Carl. So the best guide right now would be kind of similar to what we did with Hanover. We had $111,000,000 of purchase price accounting with Hanover, 45% of that bled through in the first year of closings. We did another 17% in year 2. We'll close Antares kind of mid year this year, right?

Speaker 4

April, May is what John said. But we would anticipate kind of very similar percentages as we use because they're very similar in structure. And right now, we won't know the final purchase price accounting until we actually close and do the full analysis. But I would anticipate it being roughly in the $80,000,000 to $90,000,000 range total and then kind of bleed through that way. And you're right, it would be more backend loaded and that's why you see the gross margin differences towards the back year.

Speaker 4

And on an adjusted gross basis, that's really one of the big changes there between adjusted and yes.

Speaker 5

Okay. And on that, so the mid May timing if we build that into our model would be the roughly correct or conservative in terms of the timing of the close?

Speaker 4

Yes. On a conservative basis, yes.

Speaker 5

Yes.

Speaker 4

I think it's kind of April May timeframe. Okay, perfect.

Speaker 5

All right. Thank you for that. Okay. And then my second question is, so last year, there was some volatility in homebuilding stocks in your stock. You bought back 9% of your shares.

Speaker 5

As you look out this year, John, and you're thinking about strategically the deployment of capital, how do share repurchases fit? Would you consider them sort of more opportunistic last year or more core to what you want to do? Excuse me, given that you're trying to grow the business, I'm thinking that an opportunity to utilize that capital in

Speaker 3

a more levered way in

Speaker 5

the market to grow the acquisition or greenfield would make some more sense for you this year? Sure.

Speaker 2

Hey, Karl. So last year, there was definitely an opportunity to repurchase shares. We had completed 2 very successful secondary offerings last year, increased our liquidity profile of the stock almost tenfold and our repurchase about 9% of outstanding shares. We repurchased them at an average price of $9.40 So you can see that was a pretty rewarding and very accretive to our overall company and earnings at that price. Growth for us is definitely one of our priorities as we've demonstrated in the Q4 when we acquired Richfield Homes and expand into Denver, Colorado and then with announcement of the De Harrah's Homes acquisition as we know.

Speaker 2

So we're certainly not trading growth for doing repurchases. But at the same time, we do believe that given the price of our stock at below book value, that is also good allocation of our capital that we'll use. And that's why at the last earnings call we had announced a new 20 $1,000,000 repurchase program that we will use this year, continue to use this year as one of the areas that we allocate capital to. So we do that see that as a consistent use of capital to do share repurchases. Certainly, we're given our price of our stock is, which is still at a discount to book value.

Speaker 2

But at the same time, we're not sacrificing it for growth. It is a balance, but we do see our ability to be able to continue to grow the business as we've shared in our guidance for the year and at the same time be consistent and do some buyback as one of the tools for us as we continue to grow and help drive share price and create more shareholder value.

Speaker 5

All right. Thank you, John. I appreciate that. I'll get back in queue. Thanks, Todd.

Speaker 2

Thanks, Kyle.

Operator

Thank you. Our next question comes from the line of Jay McCanless with Wedbush Securities. Please proceed with your questions. Jay, could you check if you're self muted, please?

Speaker 6

Yes, there we go. Sorry about that guys. Good morning, everyone.

Operator

Hey, Jay. Hey, Jay.

Speaker 6

Hey, Jay. So taking Carl's question a step further, given what we've seen with a lot of deals out there this year, does it make more sense to develop what you've already bought or there's still some compelling valuations out there to do more M and A?

Speaker 3

Hey, Jay, it's Mike. I'll start it and maybe John or Chris can kind of backfill me on this. But I think that going forward at the size of the company we are today and where our ambitions are, we're always going to have M and A as a part of our growth profile. It's not the long term solution once we've established our flags the markets and we can grow organically. But we've always said that this is a business of scale and we get into a market, we have to achieve a scale that makes us a player there.

Speaker 3

We have to have a meaningful operation to attract the best trades, be in the land game in a real way, be it some level of attractiveness to our team members and people to join our team. So we definitely feel that that's going to be something we're going to continue to do as we go forward. We think we're good at it and we think we know how to find those nuggets that are out there. It's kind of part of, I think, what is our secret sauce that we continue to be a acquirer of choice out in those marketplaces in which we're entering. We've established a strong reputation for a company that can deliver on these acquisitions and do a successful integration and then bring in the teams into the Landsea family and expand our brand.

Speaker 3

So from that standpoint, I would expect to continue to see us, I think John always says about once a year or so. That doesn't mean that that's absolute, but we continue to see as we've grown forward an acquisition at least once a year and probably will continue to do so. Jay,

Speaker 2

I would one thing that I would add to that is, in our acquisitions, in our growth through M and A, and also our organic growth when we go buy land, we always maintain a very strict financial discipline. So just despite the credible growth that we've had, we still maintain leverage ratios mid-40s, net debt to cap ratios in the low-30s. So with that growth in M and A that we look to do, we will always maintain within those stated financial policies just because we think that's prudent. And when we acquired the Hanover Family Builders last year in January, we're very quickly able to reduce our leverage within 9 to 12 months. And we expect the same within Terez Homes as well.

Speaker 6

Okay, great. Thank you for that. The second question I had, Chris, I lost track when you were talking about the SG and A outlook for 2024. Could you give me that guidance or where you think it might go again?

Speaker 4

Yes. So I would expect overall just kind of down and dirty about 150 basis points to 200 basis points improvement overall on that ratio by the end of the year. So if you look at 23 compared to 24, I would see us being able to improve that ratio by that amount. A lot of it has to do with, right, you've got the full ramp up of Richfield coming in and then depending on when we close on the Antares acquisition as well, the volume from that and help offset some of those costs because we'll add additional costs in there.

Speaker 6

Okay. That's great. And the last one I had, nice to see the acceleration and absorption from January into February, especially with mortgage rates moving against you. I guess, is that did you have to incentivize to drive that growth? Or is it just the lack of existing homes out there or pushing people into the communities?

Speaker 3

Jay, this is Mike. Yes, we're still incentivizing although in any decreasing way as we go into the New Year. So we've been pretty excited for that result. But there's no way of getting around it and it's out there in the industry and we're all doing the same in terms of our mortgage buy downs. But we definitely have seen an active resurgence in buyer demand coming into the New Year.

Speaker 3

So we'll see it sort of as a mix between incentives, mortgage buy downs and then a continuation of the fact that we're providing a solution to those that are looking for housing in a short period of time through our spec start strategy with those component parts in there to continue to go. So it's a strong start to the selling season and we're feeling real confident that continue for a bit.

Speaker 6

Okay. That's great. Thanks for taking my questions.

Operator

Thanks, Jay. Thank you. Our next question has come from the line of Carl Reichardt with BTIG. Please proceed with your questions.

Speaker 5

Thanks, Griffin, me and again, guys. So Jay asked one of my questions, but the other one, Mike, can you talk about if you can differentiate between what you determine is sort of first time buyer entry level product versus your other product in your markets. In Q4 and into Q1 so far, have you seen any kind of a significant relative alteration in absorption rate between those two products? Has one improved more than the other year over year? Or have they been pretty consistent in terms of their improvement?

Speaker 3

Yes. I think they're fairly consistent. There's different ways of motivating that buyer profile for sure,

Speaker 6

where the, what

Speaker 3

I call pure entry level homebuyer who is seeking housing that is affordable, is really being driven by strong incentives to get their monthly payments down. It's a monthly payment game in that area. If you are trending in sort of the first time move up, it's a little bit more of a value play for them. They're less mortgage rate sensitive, but timing, is important to them. They usually have a housing need that needs to be solved fairly quickly.

Speaker 3

And so that's where the spec strategy comes into play. So for us, we have this really interesting look at our industry in terms of the dynamics from San Francisco Bay Area to Orlando, Florida and everything in between. And so I think they all kind of play themselves in their local markets. But for the most part, you're toggling between again actual incentives, mortgage rate buydowns and deliverability in a specific period of time. And if you can find that perfect sweet spot in there, you're continuing to drive absorptions.

Speaker 3

And again, as we've always said, is that we believe this is a business of momentum. You have to continue to have activity at all your communities. We strive to be around 3 net per month at all of our communities. Some are lower, some are higher. But we're always pursuing kind of that absorption rate as we go forward.

Speaker 3

And it's a weekly adjustment to make sure that that continues to happen.

Speaker 5

Okay. I appreciate that. Thank you, Mike.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to John Ho for closing remarks.

Speaker 2

Thank you for everyone on the call. We look forward to speaking with you next quarter.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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