Landsea Homes Corporation (LSEA) on Q1 2023 Results - Earnings Call Transcript
Operator: Good morning ladies and gentlemen and welcome to the Landsea Homes Corporation First Quarter 2023 Earnings Conference Call. This call is being recorded today, Wednesday, May 3, 2023. I would now like to turn the conference over to Drew Mackintosh from Mackintosh, Investor Relations. Please go ahead. Drew Mackintosh: Good morning and welcome to Landsea Homes first 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 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. 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. John Ho: Good morning and thank you for joining us today as we go over our results for the first quarter of 2023 and provide an overview of our operations. Landsea Homes delivered strong results in the first quarter, culminating in net income of $3.2 million or earnings of $0.08 per diluted share on home sales revenue of $241 million. 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, doing 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 first quarter relative to the fourth quarter 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 498 on a sales pace of 2.8 orders per community per month. 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 and 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 first quarter with pricing adjustments which move in inventory and incentives and believe we can continue to do so as long as the overall housing fundamentals remain fairly consistent. 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 and smart home technology at affordable price. This is especially true for millennial and Gen Z . 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 , understanding that they will be the primary drivers of the new home market for years to come. With respect to our balance sheet, Landsea ended the first quarter in great financial shape. We grew our quarter ending cash position to approximately $140 million to maintain a conservative leverage profile with a net debt to total capital ratio of 30.7%. We have an additional $150 million 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. Our company and the new home industry as a whole demonstrated great re-solvency in the first quarter by adjusting to changing market conditions and finding ways to bring buyers back into the market. We believe the momentum we generated in the first quarter can carry into the remainder of 2023 and as a result, see a bright future ahead for Landsea Homes. With that, I'd like to turn the call over to Mike, who will provide more detail on our homebuilding operations this quarter. Mike Forsum: 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 fire confidence and generate traffic at our communities. 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 write-downs to overcome a virus 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. Interest rate volatility, coupled with long build times have resulted in higher cancellation rates from our backlog and 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 first quarter as cancellation rates dropped significantly from the levels we experienced in the fourth 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 improve in the initial phases of the build process and we are optimistic that this will carry into all phases later this year. We are doing everything in our power to return to cycle time's 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 and the rest of the industry did a great job of re-establishing 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 has 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. 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 first quarter and give some guidance for the coming quarter. Chris? Christopher Porter: Thanks, Mike and good morning, everyone. For the first quarter, we generated $240.6 million in homebuilding revenue, a decrease of 19% from the first quarter 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 $241.7 million for the quarter compared to $36.2 million in the first quarter of last year. In the first quarter of 2022, we generated $18.3 million in lot sales and other revenue that did not occur this year. Our pretax income for the quarter was $5.7 million. 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 280 basis points from a year ago. 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 498 with an average selling price of $567,000 and a total order value of $282.5 million. Orders were up 466% sequentially from the fourth quarter of 2022 and down 22% for the first quarter 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. 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 and Florida. We will quickly move to Arizona and then when we start closing homes in Texas at our Anthem project, Landsea Title will be there from the beginning. 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 first quarter, our SG&A expense was $39.2 million or 16.3% of home sales revenue. Our G&A expense of $22.8 million was a little elevated and impacted by onetime severance charges of approximately $1 million 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 first quarter was $1.6 million which represents an effective tax rate of 28%. 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 million 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 $139.5 million in cash on hand. Now, I would like to provide some guidance for the second quarter and full year. This guidance is based on our 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 second quarter net home deliveries to 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 1,650 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. Your first question will come from Matthew Bouley at Barclays. Matthew Bouley: I wanted to ask about the spec strategy. Presumably, it was good to have spec in the ground during Q1 and maybe you had some success reselling cancellations from Q4. And I think I heard you say at the top that you're now easing off on that spec strategy; so just trying to think about that balance there. It still seems like the demand there is good. So how are you guys thinking about the spec positioning and why you're mentioning you're going to pull back a little bit? Mike Forsum: Matt, it's Mike Forsum. 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, 50-50 dirt starts, spec starts. So for example, if we have a construction release going forward in sales release, we would probably put 4 or it starts -- or 4 or 5 upward dirt starts and then the other 5, we would do it at 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. 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. But as that right now, we think that that's the proper approach. Matthew Bouley: Got it. Okay. And then that's very helpful. The second one, just jumping down to the margin side. I guess just curious, even following on to that, how would you say kind of spec versus your dirt margins are trending? And then as you look forward and I think you guided margins in Q2 to be consistent with Q1, we think about kind of incentives price and then that question on spec for margins, what are some of the pluses and minuses, I guess, that sort of get you to that flattish margin outlook? Mike Forsum: 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 is, 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? John Ho: Yes. 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 dirt start buyer that will -- by selecting their options, always results in a higher margin for us than a spec start or someone's coming in, they may not have the options that they particularly like and we'll seek discounts traditionally. Obviously, in this market, currently, they're looking for mortgage incentives. So having a heart 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 first quarter and going to the second quarter. In the second half of the year, we're going to see this improvement with the dirt start buyers and 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. Operator: Your next question will come from Carl Reichardt at BTIG. Carl Reichardt: You're doing well. I wanted Matt asked one of my margin questions. Let me ask more about geographic mix and obviously, 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 do you think about where your chest pieces are nationally? And is the forward investment as it sort of shrinks in California, is it going to be in the markets you currently occupy? Or are there new ones that make more sense for you states or city? John Ho: Carl, 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. We'll actually settle bring 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 in the last couple of years now into 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 and Florida. We're very, very interested in building and growing our Texas business 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 at growing. Mike Forsum: Sure. Thank you, John. Carl, 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 have 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, is that we do believe that, ultimately, our future, those is the expansion into these other states which we have entered into that have very long runways. 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 who have made their way through this last trauma that they have been faced with are 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&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. Carl Reichardt: And following up on that particular element of the strategy. So obviously, you pulled down your line and then pay back during the quarter, thinking about the regional bank crisis, let's talk about how that might impact homebuilding. So first, you're starting to hear private builders chat about losing capital availability and what they might do. Second, is that also happening on the land development side? And third, 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. John Ho: 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. Their ability to manage and run their businesses as they have in the past are going to be hindered. So 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 years ago, 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. 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, I haven't seen that really coming through the land yet. Chris? Christopher Porter: Carl, 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, a majority of our lots are controlled. And I would say probably a majority of our lots also come to us in terms of finished lots. We do have -- we've been very good in self-developing as well too. We obviously do that in California. We've done that in Arizona successfully and in Texas. So there are opportunities for us to do that. But 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. Carl Reichardt: Okay. I appreciate that. And can I ask one more question just on pricing and incentives. Do you have a sense of what percentage of your communities during first quarter, you might have raised base prices in not removed incentives that raised base prices in? John Ho: 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. Operator: Your next question will come from Alex Rygie at B. Riley Financial. Alex Rygiel: Gentlemen, very nice quarter. A couple of quick questions here. First, any update on what the cancellation rate looked like in April? Christopher Porter: Yes, Alex, this is Chris Porter. We continue to see improvement in the cancellation rate again and got back down into single digits for April. Alex Rygiel: Fantastic. And then California seemed a bit stronger than I would have thought. Any commentary around that, what product you're launching so on? Mike Forsum: 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 Jarque 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 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 then senate 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. Operator: There are no further questions. So I will turn the conference back to John Ho for any closing remarks. John Ho: Thank you, everyone, for joining us for our first quarter earnings call. 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.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.
