Landsea Homes Corporation (LSEA) on Q4 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, greetings. And welcome to the Landsea Homes Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Drew Mackintosh. Please go ahead. Drew Mackintosh: Good morning, and welcome to Landsea Homes fourth quarter of 2022 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 its 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 and 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. You should not place undue reliance on these forward-looking statements and 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 in Landsea Homes's 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. John Ho: Good morning, and thank you for joining us today as we go over our results for the fourth quarter and full year 2022 and give our thoughts on the outlook for our industry and our company. Landsea Homes generated total revenue of over $1.4 billion and pretax income of $101 million and earnings of $1.70 per diluted share for fiscal year 2022, all records for our company. We closed 2,370 homes during the year, representing a 45% increase over 2021 and expanded home sales gross margin by 290 basis points to 20.4%. We also returned capital to our shareholders in an earning accretive manner through our share repurchase program and increased our book value per share by 20% to $16.04. We achieved these financial and operational milestones while growing our presence in key homebuilding markets, maintaining a strong balance sheet. I want to thank all our team members for their contributions to this record-setting year and applaud them for overcoming the operational challenges our industry faced while executing on our business plan. While 2022 was a record-setting year in terms of profitability, it was also a year in which the demand environment became more challenging due to a rapid rise in mortgage rates and a subsequent decline in home buyer confidence. This change in market dynamics caused buyers who are in the market for a new home to become more cautious and prompted buyers in our backlog to cancel their purchase contract. As a result, our net new order activity in the third and fourth quarters dropped off significantly as compared to the prior year. We believe this is a natural reaction to the sudden change in affordability brought by the rise in interest rates and have taken action through the use of incentives and price adjustments to regain momentum on the sales front. Fortunately, we have begun to see some improvement in market conditions starting in December, and this carried into the New Year. We expect near-term demand conditions to remain volatile and subject to changes in mortgage rates and other macro factors. However, we are encouraged by the success of our sales efforts to start the year. In response to the more uncertain demand environment, we have placed an increased emphasis on cost reduction, balance sheet strength and cash flow generation. In terms of cost reductions, we are proactively negotiating with our suppliers, vendors and contractors to make sure that the prices we are paying reflect the new market realities. We have experienced significant input cost inflation over the last few years and expect those trends to reverse as the current slowdown works its way through the homebuilding ecosystem. We're also working on establishing more favorable vendor agreements with our national suppliers that factor in our increased size and scale. While land prices typically take longer to adjust during a market correction, we remain disciplined with our land acquisition efforts and have walked away from several current transactions and are prepared to walk away from option agreements should they no longer meet our hurdle rates. We have also made changes to our overhead cost structure, reducing headcount by approximately 8%, which would improve our operational efficiency and expense leverage. As we announced earlier this week, we are relocating our corporate headquarters to Dallas, Texas, from Southern California, a move that should provide cost savings over time that will allow us to operate more effectively as a national homebuilder. This move should also signal our commitment to growing our homebuilding presence in that state. With respect to the balance sheet, we ended the year at the low end of our targeted debt-to-cap range at 41.6%. We also had $141 million in cash and $160 million available under our revolving credit facility, giving us plenty of liquidity to operate from a position of strength. We also extended the term of our credit facility pushing out the maturity date to 2025. Our current plan calls for a reduction in land acquisition and development relative to 2022, which would put us in a great position to generate cash from operations, giving us additional optionality to pay down debt, reinvest in our operations should more favorable opportunities arise or return capital to shareholders. Our Board of Directors recently approved extending our $10 million share repurchase authorization, giving us the added option of buying our stock with excess cash. We accomplished a lot in 2022 from both a strategic and financial standpoint that has poised us well to continue to drive our homebuilding operations to the next level. We've established a presence in some of the best markets in the country and have quickly scaled our operations, thanks to great execution by our teams, our affordable product focus and the appeal of our high-performance homes. Our strong financial condition gives us the stability to operate with confidence during uncertain times and take advantage of opportunities should they arise. As a result, I remain very confident in the future of Landsea Homes. With that, I'd like to turn the call over to Mike, who will provide more detail on our operations. Mike Forsum : Thanks, John, and good morning to everyone on the call. Landsea Homes closed 703 homes in the fourth quarter of 2022, representing a 32% increase over the fourth quarter of 2021 and taking our total homes closed for the year to 2,370. Our teams did an excellent job throughout the quarter communicating with buyers and backlog and giving them the confidence to close on their home. Backlog preservation and conversion were our top priorities for the quarter and its focus helped us produce strong top line growth and cash flow from operations. It also limited our ability to be more aggressive on the sales front, which led to a disappointing order performance for the quarter. However, as John mentioned, we began to see improvement in order activity starting in December, which has carried into the New Year. Following fourth quarter's net absorption pace of 0.5 per community, our order pace improved to 1.8 per community in January and accelerated to 2.8 per community in February. Part of the demand improvement we have seen can be attributed to mortgage rates coming off their highs, but an equally important factor has been our ability to be more responsive with pricing and incentives now that we've closed out a majority of our high margin backlog. We understand that most buyers are trying to solve for a monthly payment that fits their budget. And we have been able to address their affordability needs through some combination of base price reduction and financing incentives. We believe that this is a clear sign that there is demand elasticity in our markets and that there continues to be motivated new homebuyers at the right price. We have recently seen an uptick in buyers coming from single-family rental situations who now want to own their home. Typically, these buyers want a quick close, and we have enough inventory in our communities that are at or near completion to satisfy this demand. Another positive recent development has been a noticeable improvement in the supply chain. Cycle times have come down 30 days from their peak as labor and materials availability have gotten better with the slowdown in activity. While most of this improvement is on the front end of the construction process, we are starting to see shorter lead times on key product categories that we need to get our homes closed. After years of delays and disruptions better cycle times and a more reliable supply chain will be a great tailwind for our industry and will allow us to turn our inventory more quickly. Overall, I am optimistic about the current state of our industry and the direction of our company. After two difficult quarters marked by sluggish sales and increased cancellations, we are starting to see a real shift in the marketplace. Buyers are responding to the pricing and incentive adjustments we are making, and homebuyer confidence has improved, thanks to a resilient economy and a healthy employment picture. We are excited about the future in the markets we're in, and we believe we have an opportunity to gain market share, thanks to our focus on affordability and our compelling and differentiated high-performance homes series. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results and give some guidance on our first quarter outlook. Chris Porter : Thanks, Mike, and good morning, everyone. For the fourth quarter, we generated $426 million in revenue, a 6.9% increase over 2021 as our move into Florida continued to show benefits along with increased sales from our New York and Texas operations. Pretax income for the quarter was $34.4 million, while net income was $25.6 million or $0.62 per diluted share. This compares to $49.2 million in pretax income and $38.4 million or $0.83 per diluted share in the fourth quarter of 2021. As both Mike and John discussed earlier, we faced increased incentives and price discounts as we delivered high-margin backlog during the quarter and solve for the price clearing market. Our home sales gross margin decreased 250 basis points compared to the fourth quarter of 2021 to end at 19% due primarily to these items. Homes - Just as home sales gross margin decreased 160 basis points to 23.4%. Incentives as a percentage of home sales revenue came in at slightly over 3% and were primarily the result of mortgage rate buy downs. The fourth quarter results, though solidified our record year where we delivered $1.4 billion in revenue, a 41.4% increase over 2021, pretax income of $101.1 million, a 51% increase over last year and a 39% increase in net income to $73.6 million or $1.70 per diluted share. The results were driven by strong ASP growth in Arizona, the expansion in Florida where we delivered 1,106 homes and $473 million in revenue, and our New York project providing $111.4 million in home sales revenue. Our home sales gross margin improved 290 basis points year-over-year to 20.4% and our adjusted home sales gross margin improved 430 basis points year-over-year to 26.9%. We generated 88 net new orders in the fourth quarter, down 80% from last year as we felt the impact of the sharp increase in interest rates and buyers weighted on the sideline for a more solid direction from the Federal Reserve. The overall slowdown in net orders was reflected in our absorption rate for the quarter at 0.5 homes per community. For the year, we averaged 2.4 homes per community. We ended the quarter with an average 58 selling communities, up from 35% in the fourth quarter of last year. And for the full year of 2023, we expect to grow our year-end active community count by 15% to 20% as compared to year-end 2022. To address some of the buyers' sensitivities, we have continued to work with Landsea Mortgage to address buyers' payment needs, including locking in 30-year fixed mortgages below 5% and have seen good momentum from these efforts. We also began Landsea title in early 2023 to further enhance our homebuyers' experience. 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 fourth quarter, our SG&A expense was $43.5 million or 10.4% of home sales revenue, a 230 basis point improvement from fourth quarter of last year. And for the full year, we had $178.6 million in SG&A expense or 12.8% of home sales revenue, a 30 basis point improvement. As John said earlier, we will continue to monitor and adjust our overhead structure as the market evolves. Our tax expense in the fourth quarter was $7.9 million, which represents an effective tax rate of 23.1%, reflecting the catch-up of the federal energy-efficient home credits. For the year, our tax effective rate was 25.1%. For 2023, we expect our tax rate to range between 25.5% and 26%. Turning to the balance sheet. We ended the quarter with a healthy $301 million in liquidity, which includes $141 million in cash and $160 million in availability under our unsecured revolving credit facility. After we paid down $80 million during the quarter, we also extended the maturity an additional year and remain committed to continue to expand our lending relationships and borrowing capacity. As John stated in his opening comments, we are focused on strengthening our balance sheet and preserving liquidity in these uncertain times. We feel this will enable us to operate from a position of strength as we move into 2023. We finished 2022 with $505.4 million in total debt and achieved net debt of $364.7 million. Our ratio of debt to capital at the end of the quarter was 41.6%, and our net debt to total capital ratio was 30%. Now I'd like to provide some guidance for the first quarter of 2023. This guidance is based on our best estimate as of today with the current market conditions as inflation and interest rates continue to change, their impact may affect our overall results. With that said, we anticipate first quarter new home deliveries to be in the range of 400 to 445 units and delivery ASPs to be in the range of $520,000 to $525,000. We anticipate GAAP home sales gross margins to be in the 17% to 18% range, reflecting continued price discounts and incentives with adjusted gross margins hovering around 21% to 23%. Now that concludes our prepared remarks. And now we'd like to open up the call for questions Operator: Thank you. [Operator Instructions] Our first question comes from the line of Alex Rygiel from B. Riley. Operator: Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Please go ahead. Operator: Thank you. Our next question comes from the line of Matthew Bouley from Barclays. Please go ahead. Operator: Thank you [Operator Instructions] our next question comes from the line of Alex Barron from Housing Research Center. Please go ahead. Operator: Thank you [Operator Instructions] Since there are no further questions, I would like to turn the conference over to John Ho, CEO, for closing comments. John Ho: Thank you, everyone, for joining our call today. We look forward to speaking to you soon at the end of our first quarter. Operator: Thank you. The conference of Landsea Homes Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.LSEA Ratings Summary
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Landsea Homes Q1 Earnings: Revenue Up, EPS Misses Estimates
Landsea Homes' First-Quarter Earnings Overview
Landsea Homes (LSEA:NASDAQ) recently unveiled its first-quarter earnings, revealing a notable increase in revenue and a mixed performance in earnings per share (EPS). Specifically, the company's revenue surged by 21.6% to $294.04 million for the quarter ending in March 2024, surpassing the Zacks Consensus Estimate of $277.3 million by 6.04%. This growth in revenue is a clear indicator of the company's ability to generate higher sales from its operations, reflecting a robust demand for its homes. However, the EPS for the same period was recorded at $0.06, marking a decline from the previous year's $0.18 and missing the consensus EPS estimate of $0.13 by 53.85%. This discrepancy in EPS performance suggests challenges in maintaining profitability levels despite the increase in revenue.
Delving deeper into the company's operational metrics, Landsea Homes demonstrated strong performance across several key areas. The company reported net new home orders of 612, which not only exceeded the average estimate of 564 by two analysts but also indicates a healthy demand for its properties. The monthly absorption rates, a measure of how quickly homes are sold in a given month, stood at 3.3%, slightly above the analysts' expectation of 3.1%. Furthermore, the backlog of homes, which represents the number of homes under contract but not yet closed, reached 624, surpassing the analysts' average estimate of 595. This backlog is a positive sign, as it points to future revenue potential. Additionally, the average sales price (ASP) of homes was reported at $579, higher than the anticipated $571.09, suggesting the company's ability to sell homes at higher prices. Revenue from home sales also exceeded expectations, reaching $292.59 million against the two-analyst average estimate of $276.65 million. These metrics collectively highlight the company's operational strength and its ability to exceed market expectations.
Despite these promising operational metrics, Landsea's stock performance has not mirrored this positive trend. Over the past month, the company's shares have seen a -13% return, underperforming against the Zacks S&P 500 composite's -4.1% change. This decline in stock performance, despite strong operational results, could be attributed to broader market sentiments or specific investor concerns about the company's future growth prospects. Currently, Landsea holds a Zacks Rank #3 (Hold), indicating that it might perform in line with the broader market in the near term. This rank suggests a neutral outlook, implying that while the company has shown strong operational performance, there may be factors that could limit its stock performance in the immediate future.
In terms of its stock market performance, LSEA is currently trading at $10.15, experiencing a decrease of 12.12% with a change of -$1.4 from its previous price. The stock has fluctuated between a low of $9.64 and a high of $11.18 today, showcasing the volatility in its stock price. Over the past year, LSEA's price has ranged from a low of $5.74 to a high of $14.91, indicating significant price movements within this period. The company's market capitalization stands at approximately $366.97 million, with a trading volume of 1,064,362 shares on the NASDAQ exchange. This trading volume reflects the level of investor interest and activity in the stock, which, combined with the stock's price movements, provides insights into the market's perception of the company's value and future prospects.
